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Wintrust Financial Corporation (NASDAQ:WTFC)

Q4 2013 Results Earnings Call

January 22, 2014, 11:00 AM ET

Executives

Edward Wehmer - President and Chief Executive Officer

David Dykstra - Senior Executive Vice President and Chief Operating Officer

David Stoehr - Executive Vice President and Chief Financial Officer

Lisa Pattis - Executive Vice President, General Counsel and Corporate Secretary

Analysts

Jon Arfstrom - RBC Capital Markets

Brad Milsaps - Sandler O'Neill

Herman Chan - Wells Fargo

David Long - Raymond James

Stephen Geyen - D.A. Davidson

Emlen Harmon – Jefferies

Chris McGratty – KBW

Steve Scinicariello - UBS

Operator

Welcome to Wintrust Financial Corporation's 2013 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.

Following a review of the results by Edward Wehmer, Chief Executive Officer and President; and David Dykstra, Senior Executive Vice President and Chief Operating Officer, there will be a formal question-and-answer session.

The company's forward-looking assumptions are detailed in the fourth quarter's earnings press release and in the company's most recent Form 10-K and Form 10-Q on file with the SEC.

I will now turn the conference call over to Edward Wehmer. Please go ahead.

Edward Wehmer

Thank you very much. Good morning everybody, and welcome to our fourth quarter earnings call. Our guess is that about 90% of you are sitting somewhere where it's snowing right now including us. Well, welcome the winter. With me as always are Dave Dykstra, our Chief Operating Officer; Dave Stoehr, our Chief Financial Officer; and Lisa Pattis, our General Counsel.

We will conduct this call with the same format that we have in the past. I will provide some general comments about the quarter and our record breaking year. Then I'll turn it over to Dave Dykstra who will bring you detail on other income and other expense items. Then back to me for some summary comments and some talks about the future, and then there'll be some time for question and answers.

Let's start with the full year, which was a pretty good one. Net income rose to $137 million or $2.75 a share. The increase is of 23% and 19% respectively. This is on top of the 2012, which was also a record year.

Total assets grew to $18.1 billion. Total loans grew $1 billion or around 10%. Total deposits grew only 2% this year, and that's as you -- people who follow us know that's normally low for Wintrust.

We really strived this year to get an efficient balance sheet. We let higher rate CDs run off during the course of the year. We didn't lose household. We actually gained households throughout the year in pretty much all of our locations, but this resulted in a steady margin and better deposit composition for us going forward.

DDA is now approaching 20% of total deposits. And again, those of you who have followed us for a while know that it wasn't too long ago that number was stuck at about 9%; again a tribute to the middle market lending that -- initiative that we adopted a number of years ago.

Our net overhead ratio year-over-year stayed constant at about 1.6% and normally credit improved markedly during the year. Provisions were down $30 million, charge-offs down $19 million, NPAs were down $27 million to be about 85 basis points compared to 103 basis points, TDRs reduced $27 million. We were able to take specific reserves of about $6.9 million out year-to-year, little less in the fourth quarter.

Reserve loss, if you look at -- take the covered loans out is about 85 basis points and this is indicated in the back of the press release with -- and again, people say that may be low, but if you look at how we break out, it's about one and a quarter of our core loans and about 23 basis points on our mix lending. Our mix lending portfolios continue to perform very well as they related to credit losses and have done so during the -- during cycles.

So, we feel very good about where we are on our coverage ratio which is the highest, it's been -- coverage of non-performing assets which is the highest, it's been since the beginning of the cycle. These are very good trends and we hope they will continue. We want to get back to our credit metrics that we experienced prior to this cycle. And we think we should be able to do that due to a good diversification of our portfolio and that's our plan and hopefully this will continue in the coming year.

It was a good year for more of these banking, revenues were basically flat for 2012. 2012 was a record year. We expect mortgages to slow in the first quarter next year, but we think it will be better than peers and still will be able to show good profits on that business, although it's cyclical, but we feel very good about how we're positioned in that business.

It was a terrific year for our wealth management operation. Revenues were up $11 million. Some of this was due obviously due to favourable market, but assets under administration grew from $15 billion at the end of last year to $18 billion at the end of this year.

Our proprietary funds which you can find on Morningstar actually have been performing extremely well. Great Lake's Advisers is the name under those and if you have a chance, you should look them up, but that bodes well. We think that this business is going to start growing even faster going forward, given the results of those funds, given the cross-sell opportunities that we have, we continue to grow our commercial lend, our retail base around the City of Chicago but they are doing extremely well.

It was a real good year too for both divisions of our initiatives. This is our premium finance mix business which is our major business. Life loans were up around $200 million year-over-year and property and cash will be up $180 million, the total growth of $380 million.

Interestingly, property and casualty average ticket size rolls during the course of the year and in December reached about $27,000, which is normal than we had experienced in normal rate market. So that bodes really well for the coming year, as you remember those loans turn over extremely quickly, nine months, so there can be some built-in loan growth there if we're able to continue with the number of tickets; which is the number of tickets? Again, we're up very nicely, so we continue to gain market share in that business.

During the year we opened 13 net new branches. The number of -- we acquired 12 branches. We opened six, with a total of 18. We closed two that were the acquired branches. We closed two existing branches that we had and remember, we took them all again in our second federal acquisition earlier in the year and sold those three branches that came along with that to a group that is doing very well with that business. So, all-in-all, it was a great year in 2014, lots of good momentum and we're positioned well for 2013, we're positioned well for 2014.

Now, for the fourth quarter. Net income of $35.3 million or $0.70 a share compared to $0.61 in the fourth quarter of 2012. It would've been a much better quarter if not for the $3.3 million loss that we had to take on our Bank of America security, preferred security, which we have had in our portfolio for a number of years due to the Volcker Rule. Dave will discuss this idiocy later in his comments.

Net interest -- the margin fell by four basis points due to a little excess liquidity on average. We had the fuller vortex, we kind of do balance sheet vortex here and if you want, average-to-average quarter-over-quarter and you look at total loans, and then when I say total loans, I'm including loans out for sale and covered loans, on an average basis we're down $117 million during the course of the year -- the quarter, pardon me.

But we had a lot of growth at the end of quarter, which seems to be the case these days and if you go period end to period end, that number was up $246 million with core loans increasing, core loans being those without loans held for sale and covered loans increasing $316 million or 10%. But $90 million of that related to the Diamond Bank acquisition, which we accomplished in the quarter.

So we feel it's a good head start in 2014. Our pipelines remain very strong and consistently strong and already we’re off to a good start in 2014. There was some spill over from December into January and we’re off to a very good start. Feel good about that.

We have reported to you earlier and talked about the fact that our margin is going to stay relatively caps and [up 3.5% or down 3.5%] depending on the excess liquidity that we have. As you know, we don’t make any money, if the little money if any on excess liquidity and again we’re trying to manage that very well and not bring a bunch a business on, it's just going to be expensive until such time as rates move, which we think will continue to happen.

So, we are outplaying within that band and we’re playing at the higher end of that band and have every expectation we should be able to continue to do that. As much in credit improved market, we in the quarter, we’ve never had bad credit -- as bad credit a credit as compared to our peer group, but we've been getting even better I think if you look.

We’re driving those numbers down. We do want to get back to our credit metrics that we report in prior to the cycle taking place. And this quarter we recorded provision of $3.8 million versus $11 million. Specific reserves did drop as we cleaned a lot of this out. So we cleared out a number of bad assets. OREO expenses were flat. We want to continue to make that type of progress going forward and as I said, get back to where we are -- where we were.

All-in-all, I think it was a very good quarter from our perspective. We’re getting better credit, is a good thing and we hope that we can continue that. Mortgages were off a little bit, which hurt our top line, but that’s to be expected, but we think we’re very well situated for 2014 and I really like where we stand.

I’ll turn over to Dave now to talk a little bit of other income and other expenses.

Dave Dykstra

Thanks Ed. As normal, I’ll just touch on the non-interest income and non-interest expense sections, briefly non-interest income. Our wealth management revenue increased slightly to $16.3 million for the fourth quarter of 2013 from $16.1 in the third quarter this year and improved by $2.6 million when compared to a year ago quarter of $13.6. Brokerage revenue was down slightly, but relatively stable at $7.2 million compared to the third quarter of this year, while trust and asset management revenue showed a slight increase to $9.1 million of revenue from the $8.7 million recorded in the prior quarter.

Turning to mortgage banking, mortgage banking revenue declined by approximately 25% to $19.3 million in the fourth quarter of this year from $25.7 million recorded in the prior quarter and was down about 44% from the $34.7 million recorded in the year ago quarter.

The company originated $742 million of mortgage loans in the fourth quarter compared to $941 million of loans originated in the prior quarter and $1.2 billion originated a year ago quarter. The fourth quarter showed relatively strong volume related to the purchase to home equity, which represented 70% of the fourth quarter of the volume, which was very similar to the percentage of purchased volumes in the third quarter of this year.

The value of the mortgage servicing right portfolio rose to $8.9 million as of the end of the year compared to $8.6 million at the end of third quarter. As of year-end 2013 the volume to mortgage servicing rights increased to 93 basis points as a percentage of the amount serviced.

Further mortgage origination volumes will obviously be impacted by interest rates on the strength of the housing market as Ed noted and as we noted in the press release, we believe that the fundings in the first quarter will be down slightly, but should rebound nicely in the second quarter as seasonal home sales picked up assuming rate stay relatively low.

One other thing I’d like to point out relative to the volume contributed by the Surety acquisition that we closed on in October of last year. The fourth quarter did not include a full quarter of their volume. Loans that were locked by Surety and were in their pipeline when we closed were actually closed in Surety’s name and accrued to their benefit. So the volume that we’ve recorded for Surety this year was really just the applications we started to take and that we locked and that we actually funded in the fourth quarter.

So, the fourth quarter was a little wide on the revenue side there, simply because we needed to begin the build the book-of-business and did close loans funded. First quarter of 2014 will obviously have a full quarter of activity related to that acquisition.

Fee from covered call options totalled $1.9 million from the fourth quarter of 2013 compared to just $285,000 in the previous quarter and $2.2 million recorded in the fourth quarter of last year. As we've mentioned before, we consistently utilized these fees from covered cost to supplement the total return on the treasuries and agencies that we've held to hedge and mitigate margin pressures caused during the period of declining interest rates.

Trading losses totalled $278,000 during the fourth quarter of this year compared to trading losses of $1.7 million in the third quarter and $120,000 a year ago quarter. Trading losses in the current and prior year showed primary result of fair value adjustments related to interest rate contracts that are not designated as hedges and those are primarily interest rate cap positions that the company uses to manage interest rate risk associated with rising rates. It's interesting to note that the net impact of the trading gains and losses over the past five quarters has in the aggregate been slightly positive at net $772,000 gain.

Ed talked about security losses, they totalled $3.3 million in the fourth quarter of 2013 compared to a small security gain of $75,000 in the prior quarter and a gain of $2.6 million in the year ago quarter. The $3.3 million loss, as Ed mentioned, in the current quarter is due to other than temporary impairment charge taken related to one security as a result of the Volcker Rule.

Wintrust just had one security that was impacted by the Rule and we've won the security since 2007. It is an auction right pass-through security that is depended upon one underlying asset that being the preferred stock issued by Bank of America Corporation. So we don't believe there's any credit risk associated with this security, but it's not clear that the market value of security would recover prior to the required disposal late in July of 2015. Accordingly, we took the charge as required by the accounting rules.

We like this security and if we continue to hold it till July of 2015 we may consider regaining it for the underlying publicly traded preferred security of Bank of America Corporation, which ironically would not be precluded under the Volcker Rule and we could then retain the security.

So it's because of the legal definition of the Volcker Rule, because the security is in a trust and various other legal definitions, it falls under the Volcker Rule, but the underlying security, the only security in that trust would not be deemed to be covered by the Volcker Rule and we could hold the security.

So -- and we until July of 2015, if we have not sold the security prior to them, we may consider regaining and we'll continue to hold the security into the future. So we would have that option. We're actually hopeful that there may be additional modifications to the Volcker Rule and that's prior to July of '15, which may allow us to hold the security.

Miscellaneous non-interest income continues to be positively impacted by interest rate hedging transactions related to customer-based interest rate swaps. The company recognized $1.5 million in revenue in the fourth quarter of 2013 compared to $2.2 million in the prior and the year ago quarter. Overall, the level of miscellaneous non-interest income recorded for the quarter was consistent with the average recorded over the prior four quarters and no other significant items worth noting.

If we turn to the non-interest expense category, total non-interest expenses totalled $127 million in the fourth quarter of this year or about 2013, remained relatively flat, actually decreased $251,000 compared to the prior quarter and decreasing $2.6 million or 2% compared to the fourth quarter of 2012.

And I'd like to note that the fourth quarter expenses, just referenced included a full quarter of expenses related to the acquisition of the Diamond Bank and the acquisition of the assets of Surety Financial Services, both of which closed in October of 2013. The incremental non-interest expense related to those two acquisitions was approximately $3.3 million during the quarter.

If we look at the individual categories, salaries and employee benefits declined by $4.0 million in the fourth quarter compared to the third quarter, contributing to the net decrease was approximately $5.4 million in reduced incentive compensation and commission expense driven by a reduction in commissions related to mortgage originations and lower net expense estimates related to variable compensation incentive plans. Salaries and benefits exclusive of the incentive comp and commissions have actually declined by $373,000, except for the cost associated with the acquisitions of Diamond and Surety.

Data processing expenses declined by $53,000 in the fourth quarter compared to the third quarter, the fourth and third quarters included roughly 200,000 and 300,000 of conversion cost respectively related to the recent acquisitions. We’re getting through most of their conversions and the only one remaining now is Diamond Bank, which is expected to convert later this month.

Advertising and marketing expenses increased by $745,000 over the prior quarter as we incurred additional cost during the quarter, the increased amount of mass media marketing associated with our core Wintrust branding strategy that we use throughout the Chicago metropolitan area, as well as additional targeted marketing to some of our newer locations. We actually expect this category to moderate a bit in the future quarters.

Professional fees totalled $4.1 million in the fourth quarter, representing an increase of approximately $754,000 from the prior quarter and an increase of approximately $1 million from the year ago quarter. Now, although this quarter was a little higher than the previous quarter, it's still within the range that we’ve had over the prior five quarters. And as Ed noted in his remarks, the fourth quarter saw a significant reduction in non-performing assets and a significant amount of the increase in the current professional fees as related to the legal costs associated with copying those non-performing assets. So, now hopefully we’ll continue to reduce the non-performing assets and as that number comes down, we would expect the legal costs associated with copying those to decrease also.

The fourth quarter of 2013 saw a slight increase of $172,000 for net OREO expenses compared to the third quarter. Of the $2.7 million of OREO expenses in the current quarter, approximately 900,000 related to ongoing operating expenses, which are remaining cost related to valuation, reserves and net losses on the sale of OREO.

Page 41 of the earnings release provides detail on the activity and on the composition of the OREO portfolio, which decreased approximately $4.8 million and stands at $50.5 million at December 31, 2013 from $55.3 million at the end of the prior quarter.

So, for non-interest income and non-interest expense I think those were the highlights. There is one additional item that I’d like to cover unrelated to other income and other expense and that’s related to the tangible equity unit. As we mentioned in the last quarter, the tangible equity units that were issued in December of 2010 converted to common stock in December of 2013. The tangible equity units convert at the lowest conversion rate and added 6.133 million shares to our outstanding stock at the end of the year.

We have accounted for those as we mentioned previously, they were in our common share equivalents and they are now all in our outstanding share count. So it’s simply moving the shares from common share equivalents to outstanding shares. There’s no additional equity raised, no additional capital that flows through the equity section. On the EPS calculation, included approximately 2.5 months of these units as common share equivalents and approximately half months in outstanding shares.

So going forward, the shares will just be outstanding and their common share equivalent amounts will be reduced for the EPS calculation. And some of you may know that the short interest in the company’s stock decreased significantly at the end of December, but we believe this was primarily related to holders of the TEUs that had shorted the stock to arbitrage their position.

So, with those remarks, I will conclude and turn it back over Ed.

Edward Wehmer

Thank you, Dave. Maybe now our market capital still operate on the different industries that show up out there. It hasn't been right on many of them for a long time but was a confusion transaction to some folks, but one that was very beneficial to our shareholders in terms of raising capital at the time we did. So, all-in-all that was the TEUs and the convertibles that we used were a success and added to shareholder value.

In summary, I feel real good about where we are right now. We’re coming off of two good years. Those of you who remember us since long ago, we used to put up 15%, 20% growth numbers. In the last two years, we’ve been able to do that, and hopefully that we’ll able to do that in the future.

Our loan pipelines remained strong as I mentioned and consistently strong. Pull-through rates remained very good. A bit of new news for you, we consistently look for opportunities to continue to diversify our portfolio and specifically our niche asset portfolio.

We have over the past four, five years, we’ve looked I think every leasing company in the galaxy and leasing is a business -- equipment leasing is one that we wanted to get into. We have not really filed one that stood us culturally, that we really like there that was priced probably. So, we made the decision to go ahead and start one on our own.

So, in fact we are beginning the year, Wintrust Capital is up and running in the direction of Frank Cirone, a long time leasing executive and we're going to build it our way, slow and steady with our rules and the way we do business and we're excited about that. We think over the next three or four years we can build up $0.5 billion portfolio that will continue to diversify us. It was a good year of burning asset and hopefully develop other business as we go forward. So we feel good about that and where we're going in that scenario.

The organization still has a great deal of operating leverage inherent in the system and our acquisition pipeline continues to be -- defensive acquisition pipeline continues to be very strong. The plan for 2014 stay the course, slow and steady is going to win this race. We're not going to change the risk profile of this organization, and as such, we'll be very selective on what we do, how we do it, and as I said, slow and steady will win the race. The acquisition pipeline is at its full, but we have no assurance that these will all come to fruition, but there are interesting opportunities there that we tend to explore.

We're looking at balanced growth this year. If you do acquisitions, you get growth and they come with inherent expenses. You build expenses for that growth and then you have to cut them down based on the operating strategies that -- the operating synergies you can bring out of them. The other side with the -- the operating leverage that we have the trade-off is to grow at maybe higher, a little higher cost of funds but without a commensurate increase in expenses as we do have the overhead and the infrastructure to support a lot of growth with the under-expensed base that we have.

So our approach this year is going to be a balanced approach. The acquisitions give you strategic opportunities and all-in-all get you into markets cheaper than the normal opportunity, but at the same time, we need to leverage our organic growth -- our infrastructure will look better through organic growth.

So our growth is going to balanced in that regard, but all of that's going to depend again on earning assets and our ability to generate earning assets under our conditions; in other words, within our loan policies and our pricing parameters that we adhere strictly to. Those are our circuit breakers. If the market moves outside of those, that will slow us down a bit, but we're not going to chase assets. It's just not the way we do business.

So we feel good about where we are. Hopefully you do too and this was a very good year for us that we're proud of. We're proud of how we've come through this cycle and adding shareholder value throughout and you can be assured of our continued performance and that like going forward.

So with that, we can now open up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Jon Arfstrom with RBC Capital Markets. Your line is open.

Jon Arfstrom - RBC Capital Markets

Thanks. Good morning.

Edward Wehmer

Hello, Arf.

Jon Arfstrom - RBC Capital Markets

It is snowing here, by the way. Question on loan growth, you gave us a Diamond number which obviously helped later in the quarter in terms of the period end, but help us understand the difference between the averages and the period end. And when you talk about pull-through on loan growth, I'm assuming you're saying that a lot of what you saw in your quarter end is pull-through to Q1, is that a fair assumption?

Edward Wehmer

The latter one first. No, the pull-through is the pull-through off of the pipeline, Jon. Our pipeline that runs over $1 billion and most of it weighted through the next 60 days on weighted average basis that bring down a little bit over the next 60, 90. There's weighted average in terms of waiting. There's some probability to close, but our pull-through rate has been relatively consistent off of the -- off of the pipeline reports.

So it relates to the Vortex, the balance sheet Vortex on the assets and the loan side, if you go period end to period end, core loans were up $316 million, covered loans were down $70 million, mortgages held-for-sale were up $26 million for a total of $272 million of aggregate loans period end over period end.

However, if you just take the averages, core loans were up $117 million, covered loans were down $48, mortgages held-for-sale were down $186 million. So, on an average basis, we were down $117 million on a quarter-versus-quarter on average loans.

So, yeah, it was all pushed towards the end of the quarter and I think the graph that we showed in the press release indicates that we have this phenomena I think started in June, the same sort of thing where we had a lot of growth towards the end of the quarter and it just bodes well for -- you saw what happened in September after that where we had good average loan growth and that like through to the bottom line.

And that being said, we had also mentioned we're off to a good start, a lot of it was spill over from December into January. So we're off to a pretty good start in January and hopefully that will continue.

Jon Arfstrom - RBC Capital Markets

Okay. Okay, that helps. And then, in terms of the mortgage production, I think in the release you talked about down slightly in Q1. And then Dave, you discussed how the Surety production wasn't there. What kind of erosion are we talking about in Q1? And yeah, I guess in general, when you think about the overall production levels of the company are you thinking that we bounce in Q2, Q3 and Q4 when it just becomes more production driven, or how do you think about that throughout the year?

David Dykstra

Well, I think in the first quarter, I guess it was defined slightly as probably somewhere in the 10% plus or minus range, but it's sort of what we see right now as far as where applications are at. Clearly, that could change. We'll see more applications than or somebody could fall off, but that's sort of where we're looking at right now.

And then, we just -- second quarter tends to be a stronger quarter just simply because there's more home buying now. So we anticipate that to go up and that -- our sense is that's going up. We also -- we continue to look to hire new producers and bring new teams on and to talk on the banking side, there are companies, as we said before, that we are looking at to see whether we can pick up similar to Surety type of transaction.

And so, we would hope to build it throughout the course here. Clearly, my crystal ball doesn’t go out to third or fourth quarter as far as interest rates, but given what we know now and where the rates are now, we would expect it to pop up in the second and the third quarters from where we stand right now.

Jon Arfstrom - RBC Capital Markets

Okay. And commissions and bonuses should bounce on the production?

David Dykstra

Yeah. Commissions, obviously commissions will go up with higher production. It was one of the things in the fourth quarter, some of the fixed cost that came with Surety, I mean a lot of it is variable, but there are some fixed costs and we simply weren't able to leverage that completely because some of that volumes stayed back with them, with their pipeline, so it took us a quarter to really ramp their volume on. So the profitability of that transaction will get better in the first quarter, but as clearly commissions will go up, the volumes go up.

Edward Wehmer

Yeah. There's still some expense for to give at the mortgage company. They did a reasonable job. They're dealing with this -- with the decline in volume, but one other unintended expense that came through or again it's part of this Dodd-Frank stuff is that we have to say, we used to pay mortgage brokers just a commission, and now under new rules you have to pay them minimum wage and even if they don't produce.

So we had a number of producers out there that tend to do a lot of volume and so we picked up some expense on that and now we just had a call that hurt a little bit even though some people are out of the job because of that. But there are things like that that we pop through that they are helping -- will continue to help in the first quarter the expense side of that business also.

Jon Arfstrom - RBC Capital Markets

Okay. All right. Thank you.

Operator

Our next question comes from Brad Milsaps with Sandler O'Neill. Your line is open.

Brad Milsaps - Sandler O'Neill

Hey. Good morning.

David Dykstra

Hi Brad.

Brad Milsaps - Sandler O'Neill

Ed or Dave, just and I apologize if I missed this, but it looked like there was a fair amount of build-up in the liquidity management assets. Can you guys touch on that maybe briefly and kind of what you foresee in that category over the next couple of quarters?

David Dykstra

Yeah. There was a little bit of build-up in the quarter. We had some -- we obviously had some excess liquidity and we put a little bit of that to work depending the growth in the loans rather than letting it sit idle, we buy not earning anything. So we did a little bit more investing and I won't say it's substantial related to our balance sheet, but we just put a little bit of liquidity to work.

Brad Milsaps - Sandler O'Neill

Okay. So more -- we don't see the breakdown, but more of that just sort of will be sitting in fed funds have waiting for loans to fund this quarter?

David Dykstra

No look, if it was in fed funds or at the Fed, we've got those broken out on the balance sheet, so these were more securities, some agencies that we purchased.

Brad Milsaps - Sandler O'Neill

Okay. Great. And then secondly, Ed you touched on the M&A pipeline continuing to look good. You had a couple of deals last year, just kind of curious what’s the biggest impediment right now as you’re talking to folks? I know, you expect to be active, but just trying to get a sense of kind of what you think you might be able to pull off in 2014?

Edward Wehmer

That's a 64,000 question, really no impediments. I think a lot of -- there’s a lot of wait and see. Things are getting better and some of these banks are getting better. And we have discussions with them and we had to just wait three months, because I got this stuff happening. And also I think that there seemed one large transactions that was done here in town that was a pretty good multiple, and seller’s expectations are little bit high.

So, people just wanted to put some time in, because things are getting a little bit better for them and want to put a little bit more time in there. But all said and done, I still think and it seems to be holding true that it's going to be really hard for banks under a $1 billion to thrive in this great new world that we’re in, not just because of regulatory costs, but because of the inability to generate earning assets in a way that -- in a safe way in categories that they are comfortable with. And the fact that they can’t get anything out on the liquidity portfolio doesn’t help them either as for the near future.

So, I think that it’s going to come. It just people want to take a little extra time, clean up their balance sheets a little bit more. Again, as you saw with us and I think some of our other competitors that they are being able to clean a little bit quicker. So I think the same things are occurring there.

But that being said, lots of opportunities out there Brad and we will continue to make sure that they make sense strategically that we take a balanced approach with core growth and growth by acquisitions. But as I always say, you have to take what the market is giving you. Right now relatively speaking these deals get us in the markets at less than it would cost by long end and with a toehold then it would be by going de novo.

There's great because of our community bank orientation. There's great cultural fits out there and -- so we want to take advantage of it. We don’t want to over pay anybody. We want to pay fairly and at the same time we’d like to grow organically and in fact taking advantage of a lot of this infrastructure that we have. And there’ll be a time when these acquisitions fall away in the next two or three years and which time we’ll look to organic growth and that will be a good move for us also. So, we just got to be balanced and think what the market gives us and take each deal as they come.

Brad Milsaps - Sandler O'Neill

Okay. Thank you, guys.

Operator

Our next question comes from Herman Chan with Wells Fargo. Your line is open.

Herman Chan - Wells Fargo

Thanks. A question on the -- regarding the loan ratio, it looks like that metric is back pre-crisis levels. Do you think the reserve coverage has room to decline further and future loan growth is weighted more towards some of your niche lending opportunities and also commercial lending? Thanks.

David Dykstra

If that were the case, yes, it would go down just because of the niche loan portfolio, especially premium finance and 23 basis points -- 25 basis point coverage, that more than doubles our charge-offs prices on those portfolios, and the one turns over really fast. Yeah, that would be the case.

But we expect to have balanced growth, our mix portfolios, again, we only want to comprise a third of our balance sheet and we’d like to get more diversification in there. Some of that new diversification like leases may have higher reserve requirements to come with it and we’re also -- we’re seeing opportunity around the commercial real estate side than in the commercial side and those right now are covered one in the quarter. So you would imagine that that one in the quarter would still need to be covered.

But our hope is that in normal environments, if you look at us now, our normal provision, if you go back and can assume and assume is a big word here, that we return to pre-crisis credit metrics, the $7 million, $8 million a quarter right around there if you were to assume those metrics, which tells us that there is still room in there once we get the house, room on the credit side, the expense of credits once we get the house and two, to clean the house and go back to those.

But there’s no assurance for that. Our portfolio has changed a bit in terms of our commercial exposure which is growing since the -- since pre-crisis. So I think that there is room there to bring credit cost down further. And I -- we just -- but it's going to be what it's going to be.

David Dykstra

Yeah. What we do in the press release, we do sort of show how we reserved against our portfolio. So, as Ed mentioned our premium finance portfolio on the commercial side and we reserve to 25 basis points on that on the life side, five basis points. And I don't know if we’ve ever been over five basis points. Knock on wood, but it’s a good portfolio, and those two categories make-up a third of our loan portfolio.

So, as Ed mentioned, we don’t want -- we’d like it keep it at a third or less and have more legs to that stool. But you can see how we build it up. On our commercial side we’re probably more like other banks out in the universe. We are just fortunate to have a fairly niche business and some other categories that really have very low historical loss rates, which helps us out.

Herman Chan - Wells Fargo

Understood. Thanks for that. And I might have missed it earlier. But can you provide numbers on the gross and weighted average loan pipeline at the end of the year?

Edward Wehmer

Yeah. Hang on, while I’ll pull it out. Gross is about $1.1 billion, weighted about $650 million.

Herman Chan - Wells Fargo

Got you. Thank you very much.

Edward Wehmer

Thanks Herman.

Operator

Our next question comes from David Long with Raymond James. Your line is open.

David Long - Raymond James

Good morning, guys.

Edward Wehmer

Hi, Dave.

David Long - Raymond James

On the loan pipeline, obviously being strong, how has the term and structure in the commercial -- in your commercial business changed over the last year and has that impacted your appetite to continue to grow that business?

Edward Wehmer

We have our circuit breakers and we don’t break up. I would say that it’s gotten a bit more natural is a way we look at it in terms of terms and some pricing, but it’s been the same pretty much for the whole year. It’s not as bad as it was when the shadow banking system was out there and during the go-go days of ’06 and ’07 and beginning of ’08. But we do see deals -- we do loose deals because of pricing structure.

At the same time, our pull-through rates [diminish], still a number of deals out there that we’re able to book and get on our terms. So, I don’t see that paradigm changing from really where it was at the beginning at the year because there’s more opportunities out there. So, I think the influx or the growth in opportunities make seem like there is more that we lose but there’s more that we win through. Does that make sense?

David Long - Raymond James

Yeah, yeah. And then in order to continue growing that in the vicinity of low double-digit or high single digit number, will you guys need to hire more or do you have the capacity which your current lending team to do that and if you do have the capacity, how much capacity do you think you have?

David Dykstra

Well, we think we’re probably about 63%, but somewhere between 60% and 65% utilized right now downtown, based on the number that these guys have they think a very discipline approach to this, the business that we want, the business that we’re to get. We call on relentlessly still we get it. There’s a lot of business we don’t want that's out there, so we can push those off to the side. And they believe and their budget show that they can continue to grow a lot of -- not a lot of it, but that being said, a lot of additional expense.

But that being said, we are always on the lookout for bringing in additional folks who can bring new relationships with them and new business with them to expedite that. We can never have enough good people and we can find guys or teams. We’re not afraid that they get overhead on and they take some about a year to pay for themselves but we’re in this for the long haul. So, we do have the capacity with the current infrastructure to continue to grow. But we are always on the lookout for other people who want to come, join our parade.

David Long - Raymond James

Okay. Great. Thanks for the colour guys.

David Dykstra

Thank you.

Operator

Our next question comes from Stephen Geyen with D.A. Davidson. Your line is open.

Stephen Geyen - D.A. Davidson

Hey, good morning. Just curious about the commercial lending, the downtown group versus what you have in the branches or outside of downtown. Have you seen change in the pipeline maybe some growth as the economy improves?

Edward Wehmer

I think that’s fair to say. And really there's no differentiation between Downtown and in the branches because we run this on a hub basis. So there's guys, there's different teams out in different branches throughout the system that all kind of report to Downtown. It's Wintrust commercial lending. And Wintrust commercial lending really are kind of reports into Downtown. So we have found; and more importantly the guys we brought over from American National have found that they are extremely effective the closer to their client they can from a geographic standpoint.

So we have the people out in the field, all part of the same coordinated calling efforts. CRM system works extremely well to make sure that we're getting the calls in that they are -- we're adequately we cover them, we can just pound these guys into submission. And so we have to convince them that they think they're having a good time, they just think they're having a good time at their existing bank and they'll have a good time when with us.

So we have seen that a bit. It comes and goes. But the marketing that we put on, the branding marketing which we're two years into has really, really worked well for us, for Wintrust commercial banking to stop them zero and grow as well as it has with good solid relationship, profitable relationships is put us on the map and we are, of course, and we are someone that people call when they are thinking about their banking now and that's didn't happen three or four years ago.

So the more we do, the more -- as we one year -- really one year left on those kind of branding strategy that we adopted a couple of years ago to bring the Wintrust name in, yet not lose our positioning on the retail side as the local alternative to the big banks. Quite frankly it's working better than I ever anticipated it would work. So I think that they've got great momentum and they have a wonderful reputation down there and their reputation is starting to precede them.

Stephen Geyen - D.A. Davidson

Okay. And maybe the last question. I'm familiar with your strategy towards fee income, but if you look at like treasury management and maybe some of the other corporate services, is there a bit of a lag effect to loan growth?

David Dykstra

Yeah. It takes three, four months before those accounts fill out. We attempt together, we usually do get full treasury management services and it does take a period of time for those -- you get the loans done and TM switches over and then they have to -- there's a cycle that takes them to totally fill out their accounts, but yes.

Stephen Geyen - D.A. Davidson

Okay. Thanks for your time.

Operator

Our next question comes from Emlen Harmon with Jefferies. Your line is open.

Emlen Harmon - Jefferies

Hey, good morning, guys.

David Dykstra

Hi, Harmon.

Emlen Harmon - Jefferies

Just on -- in the mortgage business, in terms of applications kind of what percentage of the application are Surety and could you give us a sense of just I guess -- trying to get a sense obviously, as you noted the closing hit this quarter, but trying to get a sense of what the contribution from Surety will be on a go-forward basis versus your legacy business?

David Dykstra

Historically it's been about 25% if you went back year-over-year-over-year and looked at what they've done in their recent quarters before it bottomed. They had typically run at about 25% of our volume. So I would anticipate that not probably the -- as we grow the rest of the Wintrust mortgage, that percentage may come down as we had producers in other areas, so say 20% of our volume plus or minus.

Emlen Harmon - Jefferies

Got it. Okay. So it sounds like based on what you've seen so far the production is kind of in line with history.

David Dykstra

Yes. And then we're pleased with, obviously as I mentioned, we didn't get the first couple months of full revenues out of them because what was lost in their pipeline accrued to them, but they are producing and steadily producing and we're happy with the transaction.

Emlen Harmon - Jefferies

Got it. Thanks. And then Ed, notable that you guys have increased the branch count by kind of 13 this year, whereas we see a lot of your peers kind of pulling out of some of their branch locations. How are you leading into new markets with those branch openings? I know historically you tended to lead more with deposit products. I knew that the funds of unique assets that you guys have, but just kind of curious as to how you're approaching new markets these days, whether there is more of a commercial spend, a commercial banking spend on that.

Edward Wehmer

Yeah. Well, of the branches that we did acquire, we brought in 13, six of which were new branches, de novo branches. And we usually put tried and true methods we'd used in the past to bring in accounts from there because we were starting at a zero base. So we need to build that up. And so we offer bundle account packages and outsource specials to start building up momentum in those.

The 12 of the branches are -- excuse me, closed to some 10 in that -- well, let's see, 10, seven of that acquired branches obviously came with a book of business already. And we take a different approach to that marketing because they have cannibalization issues and the like and some of these branches we acquired are pretty big relatively speaking. So two different approaches, but the de novo ones, the tried and true method we've always used, leading with deposit products and go from there.

We're still chomping at the bit, and then all depend on loan demand obviously and by acquisitions at company. Most of the acquisitions we bring in come with about 50% liquidity which we need to stock up. So we'll stock that up before we will go out and push the deposit through the existing branch deposit growth.

What we have put in place this year the five-year plan, if you remember going back before the crisis, we were one or two in markets pretty much every town we were in both in deposit share and rooftops covered. We have a five-year plan in place. So each of our locations to make -- to obtaining that positioning in some of these new branches. We think between acquisitions and this balanced growth we're taking, we can start on that approach. They all do have a base to work with, so the marketing is a little bit different, but our goal is to be one or two in market share.

There we needed to start taking advantage of some of this operating leverage that we have on our system. Now that could be derailed if we get a once in a lifetime deal that comes with a lot of liquidity. We may have to slow that down to three or four months, but it's a balanced approach. We have to take what the market gives us and in order to build shareholder value. But that's always in our quiver for a time when maybe the acquisitions fall away. And so profitable growth you can do acquisition or through de novo or through growing our existing banks and leveraging that infrastructure is in our future. I like both of those options.

Emlen Harmon - Jefferies

Got it. Thanks a lot for taking the questions.

Operator

Our next question comes from Chris McGratty with KBW. Your line is open.

Chris McGratty - KBW

Hi. Good morning. As you grew the non-covered loan book by 9% in 2013 and net interest income was up about 6%, so wondering if you could offer kind of how this dynamic plays out in '14. And then particularly interested in how the near-term margin trend might be, especially your security deals up a bit and your liquidity management assets still pretty well yielding, thanks.

David Dykstra

Well, we expect to have the same loan growth, good solid loan growth this year, if the market gives it to us and I think with all the big change in rates, we are still going to play in this band that we talked about and between 3.50% is a base uptown or downtown, and may be if the mix gets a little better, if we can take off those are higher rate, we could see -- we could break above that [3.60%], but we continue to -- rates are going to go up and we continue to position our balance sheet as indicated by the gaps that we -- non-hedged gaps we have on our books, but we continue to push variable rate loans.

So we continue to know that rates are going to go up at a point in time, but we need to be prepared for that. That is I always say the proverbial beach ball underwater. So, when that goes if we have a 200 basis point favorable shift, that's a very good thing for us.

You get half the results off our gap table, the other half will come from the decompression that takes place because of the way we are funded. Being funded conventionally with -- and pretty much a 100% core funding, there are -- you will get better spreads on those and of course with somebody who is funded strictly to institutional funds of the money markets out there, where those are going to go almost basis point for basis point up, we should be able to lag better and that lagging plus that decompression will help the margin in a rising rate environment.

So we can keep our own volumes up and the like. I think that we can hold the margin where it is, may be improve it a little bit and have -- if we are able to keep it efficient and not having a lot of liquidity out there, we should be able to hold tight, but in any event, net interest income, which is really the important thing could growth nicely.

Chris McGratty - KBW

Okay. And just on the efficiency, I mean you’ve been hovering kind of mid 60s, I know you look at the overhead ratio, but mid 60s efficiencies adding to the mortgage business. Outside, really moving in rates, this year maybe next year, is kind of mid-ish 60s kind of fair maybe trending at a little bit from here in terms of efficiency ratio?

Edward Wehmer

Yes, I think it's fair. Really depends on where -- let’s say, we do no acquisitions this year. Market moves away from us and we turn to organic growth and that organic growth will cost us a little more on the cost to fund side, but not on other expense side. That would improve our efficiency ratio.

When you buy these things, you do get a head start strategically and make a lot of sense. But you come with a lot of expenses there, which you are having is part of that growth. Now long-term, that’s a good thing, it will be profitable. The other growth is as profitable also.

So it’s just going to be that balanced approach one of which helps your efficiency ratio, the other doesn’t. If you go and if you just look at the banks where the bank operates really in the high 50s, it’s really those other -- the wealth management, the mortgage business to drive that up, drive the rest of the efficiency ratio up. So there’s a lot of moving parts here that we manage them down at that level of the operating companies. I think our best bank is operating what Dave, in the low 40s.

David Dykstra

Yes, low 40s or high 30s, just depending on where the margin settles in?

Edward Wehmer

So, if some of the younger banks don’t, that’s part of that infrastructure that we build up in that leverage. So, it will depend on where our growth comes from, but it certainly has a tendency to get better organic growth, but acquisition pretty drive all the cost out and make them optimize that will probably add to your efficiency ratio. So, yes, you can say mid 60s might make some sense if you do balance growth maybe drop in a little bit and if you do more organic growth it will go down a little bit.

Chris McGratty - KBW

All right. That’s helpful. Thanks a lot.

Operator

Thank you. And our final question comes from Steve Scinicariello with UBS. Your line is open.

Steve Scinicariello - UBS

Good morning everyone.

Edward Wehmer

Hello Steven.

Steve Scinicariello - UBS

I just wanted to follow-up on the expense side of the equation. Good to see those holding in and even going down a little bit this quarter. Just kind of curious, is there any opportunity kind of drive that down a little bit more or should we kind of think of this level as like a decent base line kind of level?

Edward Wehmer

Well, no, we’re hoping. As I said, there's operating leverage there, but like I said in my comments, on the legal professional fees, the high end of the range this quarter and we cleared up the non-performing assets. So that number I think was elevated and we would hope that it would come down now.

It could be that we clear out of similar number next quarter and some of those would carry some expenses, but we actually think that that number should come down. Diamond Bank will get converted this quarter and they will have all the banks converted and hopefully that as we can start to grab some leverage out there, that actually -- some of the other occupancy expenses and a lot of snow here in Chicago, we had a lot of snow removal charges in December, but you may have to actually a small number, but it adds into it.

So I do think that we can get leverage out of the system and reduce it and not get into specifically projecting out each line on a call like this, but again OREO expenses should continue to go down as we reduce those and there are operating cost there on top like I said in my comments, so there is what $900,000 that we would expect that to come down over time. And so, yes, we think that we can get more leverage out of the system.

Steve Scinicariello - UBS

No, perfect, perfect. And to me the bigger picture takeaway here is the amount of operating leverage that you guys have built into the systems, so even if you have -- we shouldn’t probably expect expense growth at the same level especially relative to revenue growth as we look into '14. Is that kind of the big picture message also?

Edward Wehmer

Barring acquisitions.

Steve Scinicariello - UBS

Right, right.

Edward Wehmer

That grows a little bit, but expense control is very important to us, but we do have to operate these and we -- we are acquiring this for the long haul Steven and you have to actually take what the market gives you that makes sense long term for the shareholders and that's what we are doing.

So we would like to keep the foot up and continue to put up double-digit earnings growth. As the same time add the franchise value and build into organization and I have said in the past, we are kind of getting back on the program that we are on before the crises. We'll continue to build this organization, be a growth company. Growth of profits -- continue to increase profits and shareholder value through that type of growth.

So that's what the plan in fact is and we are going to continue to follow that and take what the market gives us and unfortunately life is linear and things come and they go and they pop and you have no control, but you try to make the decisions that make sense for the organization over the long term and it's certainly not -- we are not model of dream in that regard, but we always seem to make our plans for all the wrong reasons and we'll probably continue to do so.

Unidentified analyst

Perfect. Thank you so much guys.

Edward Wehmer

Thank you. Thank you very much everybody. Sounds like we are done. Have a great -- have -- go out and shovel snow. Have a great day.

Operator

Thank you. Ladies and Gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.

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