Wintrust Financial Corp (WTFC) 2012 Q4 法說會逐字稿

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  • Operator

  • Welcome to the Wintrust Financial Corporation's 2012 fourth-quarter earnings conference call. 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-Q and Form 10-K on file with the SEC. I would now like to turn the conference call over to Mr. Edward Wehmer.

  • - President & CEO

  • Thanks very much. Welcome everybody, and thank you very much for dialing in. With me as always are Dave Dykstra, our Chief Operating Officer, and Dave Stoehr our Chief Financial Officer, and Lisa Pattis, our General Counsel. Lisa has now resorted to putting a shock collar on me so I don't say anything out of line so it will probably be a pretty boring conference call. Keeping up with our usual protocol, I'm going to make a number of general comments about the quarter and the year. David Dykstra will follow with a more detailed review of other income and other expense line items. I'll be back for some summary comments, and then we'll have plenty of time for questions.

  • The fourth quarter was pretty much a solid quarter in all respects, really without a lot of noise for Wintrust. The only noise was a loss on the extinguishment of some long-term repo debt that was offset by securities gains, from sales of securities related to that repo, $2.6 million worth of pretax gains and $2.2 million worth of losses. Other than that, the quarter was pretty clean. Quarter was highlighted by net income of $30.1 million or $0.61 a share, annualized loan growth of 12% and deposit growth of 17%. Demand deposits for checking accounts now comprise 17% of our deposit base. It wasn't too long ago, and for most of our history, that we were stuck at 9% of that base.

  • May not be bottom line valuable now, but it will be when rates eventually rise. It also evidences the success of our commercial initiative, which we started about 2.5 years ago. The margin did decline 10 basis points, but net interest income actually improved. 6 basis points of the drop related to a build up of additional liquidity during the quarter. Some of that liquidity, approximately $170 million, is designated for the second federal disposition previously reported to you, which probably will occur, we expect to occur in February.

  • Our loan pipelines remain consistently strong, with over $1.2 billion in the pipeline with a little over $800 million weighted over the next three months, and that's consistent with the pipelines that we've experienced for the past few quarters. So the loan pipelines remain consistently strong, and it's our goal to employ these excess funds in the more profitable earning assets in the upcoming periods. It indicates continued growth, however, in the franchise value of the Company, and unfortunately, matching liquidity and loan production doesn't always come hand-in-glove. It's kind of like climbing a ladder. One quarter we need liquidity, one quarter we need loans, one quarter we need liquidity. The mismatch is exacerbated in this low rate environment, so with all-in-all, we continue to build franchise values, as indicated by that excess liquidity, that we hope to get put to work.

  • Mortgage business remained strong in the quarter, with $34.7 million in gross fees versus $31 million in the third quarter, remaining other income items all showed moderate growth, other than the fact that we didn't have any bargain purchase gains during the fourth quarter this year. Expense control for the quarter was also very good. I will comment, when we get to the summary section, how important expense control is to our plans going forward in 2013 and beyond, but if you take out the $2 million increase in OREO expenses and the $2 million loss on the extinguishment of the repo, operating expenses were flat quarter three versus quarter four, and that's even including, with the addition of the Hyde Park Bank during the quarter and an increase in variable comp expenses related to mortgage and wealth management fee increases. Dave will give you more detail on these categories a bit later.

  • Credit quality improved during the fourth quarter, with total NPAs decreasing $500 million, or I wish, we would be negative then, $5 million to $180 million. Non-accrual loans decreased $5 million while 90-day accruing loans increased $5 million. All of that latter increase, those loans past-due 90 days are attributed to our commercial premium finance book, and can be attributed to Superstorm Sandy. This is the usual result when a natural disaster hits the US, Katrina being the most recent. The end result is just a time delay in collecting those loans, and historically has not resulted in any additional material, or any additional losses, and we expect this to be the case here.

  • Net charge-offs were up approximately $7 million this quarter, while other expenses were up $1.4 million. The provision for loan losses was only up $700,000, reflecting the fact that specific reserves, as opposed to general reserves, had loans decrease $7.3 million, due to the fact that we either charged off loans where we were able to resolve issues, so the overall specific reserves declined during that quarter. The table on page 28 of the press release breaks down the reserve for loan losses by loan category. As can be seen our core loan portfolio results in a reserve of about 1.31%, while our niche portfolios carry reserves of only about 29 basis points. The reserve factors used in these calculations, you can go and compare them to our historical charge-offs, and I think you will, once you triangulate on that, will come to the conclusion that we have obviously, that we are well reserved going forward.

  • As it relates to credit going forward, we actually do see light at the end of the tunnel, and it appears to be getting pretty bright. We'll see though, as it is what it is, and we're certainly not out of the woods yet, as indicated by the number of banks that we have been in just recently, and the stress that's still in the system from out there, but we think that going forward, we should be able to improve credit costs during 2013, and that we'll continue to identify and resolve assets, problem assets on an expedited basis, as we always have. Now I'll turn it over to Dave for his review.

  • - SEVP & COO

  • Thanks, Ed. I'll briefly touch on the other non-interest income and non-interest expense sections, Ed covered them in global sense. I'll get into the details a little bit more, starting with non-interest income sections. Our wealth management revenue improved slightly to $13.6 million in the fourth quarter, compared to the prior quarter of $13.3 million, and increased nicely from a year-ago level of approximately $11.7 million. Now, the increase in the wealth management revenues from the prior-year quarter came primarily from the trust and asset management business which increased $1.5 million. The new business development efforts, as well as the acquisition of the trust department from a local community bank at the end of the first quarter were the primary reasons for the increase over the prior-year quarter.

  • Mortgage banking revenues improved again to $34.7 million in the fourth quarter of 2012, from the $31.1 million recorded in the third quarter of this year, and was nearly twice as much as the $18 million recorded in the fourth quarter of last year. The Company originated and sold $1.2 billion of mortgage loans in the fourth quarter, compared to $1.1 billion of mortgage loans originated in the prior quarter, and $883 million in the year-ago quarter. The mortgage banking revenues improved as a result of the favorable rate environment, relatively strong volume and related purchased home activity again, and continued good pricing metrics in the market. The current quarter was also benefited slightly from a higher valuation in the fair market value of our mortgage servicing rights, and the value of that portfolio increased to 67 basis points from 63 basis points in the prior quarter, and was approximately $474,000 higher than the value at September 30, 2012. Obviously, future mortgage origination volumes and servicing rights will be impacted, and are sensitive to changes in interest rate, and based on what we know right now and looking at our pipelines and the continuation of this existing low rate environment, we do anticipate the first quarter of 2013 to continue to be relatively strong.

  • The Company did not complete any FDIC bank acquisitions in the fourth quarter of 2012 or 2011, and accordingly had no associated bargain purchase gains during those period, however we did have a $6.6 million bargain purchase gain in the prior period of 2012, related to the acquisition on the First United Bank in Crete, so you need to know that from a comparability standpoint. We do leave there will be more FDIC deals in the Chicago and the Milwaukee areas throughout 2013, although we certainly don't know when they will be offered. We'll continue to evaluate them and be disciplined on our approach, but we still are interested that business. Fees from covered call options totaled $2.2 million in the fourth quarter, compared to $2.1 million in the prior quarter and $5.4 million in the year-ago quarter. As we've said before, the Company has consistently utilized fees from covered call options to supplement the total return on our Treasury and agency securities, in an effort to mitigate the margin pressures caused by the low rate environment. Fees on these transactions can be impacted by market rates and market volatility conditions, and that's the reason for the fluctuation in the amount of fees that we receive on a quarter-by-quarter basis.

  • As Ed mentioned, gains on sale of available securities on trading losses netted to a $2.4 million gain during the fourth quarter. This compares to a $589,000 net loss in the third quarter of 2012, and then a $525,000 net gain in the fourth quarter of last year. The securities gains recorded in the fourth quarter were our decision to sell certain securities in conjunction with recording a $2.1 million cost for breakage fees, related to the termination of approximately $68 million of longer-term high rate repurchase agreements, really deleveraging the balance sheet, a bit and attempting improve the margin going forward. The trading losses that you'll see, the relatively small trading loss that you see in our financial statements, are a result of fair value adjustments related to interest rate contracts that we do not designate as hedges, and those are primarily interest rate cap positions that we use to manage our interest rate risk associated with rising rates on various fixed-rate longer-term running assets.

  • Miscellaneous non-interest income continues to be positively impacted by interest rate hedging transactions, related to customer-based interest rate swaps. We recognized $2.2 million in revenue in the fourth quarter, compared to $2.4 million in the third quarter of this year, and $1.6 million in the year-ago quarter. Additionally, our other non-interest income included about $373,000 in positive valuation adjustments on our limited partnership investments, that we own at the holding company, compared to $718,000 positive adjustment in the prior quarter. As we've said before, these are primarily investments related to bank stocks.

  • Additionally, the Company had benefit from an $826,000 foreign currency remeasurement gain, related to our Canadian subsidiary. It's really offsetting, coincidentally, about an $825,000 remeasurement loss in the prior quarter. If we turn to the non-interest expense categories, the non-interest expense totaled $129.5 million in the fourth quarter of 2012. This was an increase of $5 million compared to the third quarter and $10.8 million or 9% compared to the year-ago quarter.

  • If we focus on the $5 million increase in the current quarter, it can be explained broadly by three primary reasons. First, approximately $2.1 million related to the breakage fee on the termination of the repurchase agreements. Second, $1.5 million increase related to OREO expense, primarily related to higher valuation adjustments as a result of new appraisals, and the third reason is approximately $1.6 million related to the acquisitions of First United Bank which we did at the end of the third quarter, and Hyde Park Bank which we did in the middle of December. The three of those really, in the aggregate, make up the $5 million increase in the current quarter, so really X those items, as Ed mentioned, expenses were relatively flat.

  • If we dig down into the individual categories a little bit, salaries and employee benefits increased $860,000 in the fourth quarter compared to the prior quarter, and that increase can be attributed primarily to about $1.1 million of additional employee costs associated with the First United acquisition and a partial month related to the Hyde Park acquisition. The quarter also saw slightly increased commissions related to the higher levels of mortgage banking and wealth management revenues, and offsetting that was approximately $500,000 less in bonus and long term incentive program accruals based on the actual results achieved during the year, and the progress towards obtaining the Company's established long-term goals and objectives. As I mentioned the fourth quarter also saw $1.5 million increase in OREO expenses. That brings the expenses for this quarter to $5.3 million, and as we've said before, this really can fluctuate based upon appraisals that we get on properties on an ongoing basis. However, I should note, even though this amount is up, it's less than what our average was for the year.

  • If you took 2012 in total, our average quarterly expense was $5.5 million. We're at $5.3 million, still higher than we would like, but not really outside of the range of what we experienced during the course of the year. Page 40 of our earnings release provides additional detail on the activity and the composition of the OREO portfolio, which declined 7% to $62.9 million at December 31, from $67.4 million at the end of the prior quarter. If you exclude the impact of the previous $2.1 million of breakage fees that we referred to, all of the other remaining categories of non-interest income increased slightly, by about $600,000. Although there are varying levels of fluctuations in these categories, the increases can generally be associated with the two acquisitions that I previously referred to. As Ed is going to talk about the operating leverage you have in the system, it is a focus of ours going forward, and so with that, I won't spend any more time talking about that, and I'll let Ed do it in his follow-up comments.

  • - President & CEO

  • Thank you, Dave. 2012 was a record year for Wintrust, and it's the third record year out of four years. Net income increased 43%. Assets grew 10.3%, loans grew almost 11%, deposits grew 17%, tangible book value per share grew 11.5%. Credit quality improved, the number of branches increased 12% to 111 outlets in our market area. We acquired three FDIC-assisted banks, we did one assisted bank deal, we did one branch acquisition. We bought a trust department, and we bought the (inaudible) Canadian Premium Finance Company.

  • Needless to say, we're very pleased with these results. They really are the result of a continuation of strategy which we adopted in 2006. In our release, we included a number of graphs that indicate pictorially how Wintrust has done through it's five-year credit cycle. In short, compound annual growth rates of 13.3% in total assets, almost 12% in total loans, 14% in total deposits, 9% in tangible book value per share, 15% in net income, and almost 22% in pretax pre-provision income. I can't tell you, but many other banks can probably exhibit statistics like this over the last five years. They exemplify our commitment to creating long-term shareholder value, no matter what the environment is, that is our goal, and that's the goal we're going to continue to work off of as we go forward.

  • So what does it mean for 2013? Well it's no news to you folks that the prolonged zero-rate environment is going to have margins under pressure. The secret to 2013 for Wintrust will be good growth, at somewhat lower margins, without commensurate growth in operating expenses. This is our goal for 2013. There's a great deal of operating leverage still in our platform, and we plan to take advantage of this in 2013.

  • If you can put loans on it, that's just for math purposes, if you can put your earning assets on a 3% or 3.25% spread and keep your marginal expenses growth down to 1%, after-tax you're bringing that on between 1.6% and 1.8% of assets. Obviously accretive to us. That's our goal, that's our plan, so although margin may decrease, we expect net interest income will grow. Loan pipelines and loan momentum remain very good and strong. This bodes well for 2013, unless market-rate and its terms move out of our comfort zone. As you know, we have our loan policies and our profitability models act as a circuit breaker, when the market moves away from us, and we do not deviate from this. Now we've seen some of this taking place in the market, but not enough to temper our outlook at this point in time. There's a lot of business out here, and we're going to take advantage of it, and continue to grow our organization.

  • We expect credit to get better in 2013, although there are actually no assurances toward this, but what we see we like, and this will have material bottom line effects we believe, if in fact it comes true. But we will continue to identify and push out non-performing or potential non-performing assets on an expedited basis, we will not kick the can down the road, we will get ahead of the game and stay ahead of the game, and the sooner that happens, the sooner we'll be out of that, and numbers will fall to the bottom line. We're also going to continue to prepare the balance sheet for eventual rise in interest rates. Many of you have heard me talk and there hasn't been time when public debt approaches 100% of GDP, when it's not followed by double-digit inflation, for the same period as the great spend. We believe that the Fed is going to have to raise rates at some point in time. You see there's a housing shortage that's actually developing in the market, it's going to push unemployment down, fortunately, and we believe that's going to push rates up, and we continue to plan for that. That is the beach ball under water effect that we like to talk about, when rates go up it should be very good for our margin going forward, and we're preparing the balance sheet for that.

  • We expect the mortgage business to slow down in the latter half of the year. We believe when this occurs, the mortgage market will basically consolidate. When this occurs, this consolidation occurs, we stand ready to continue to build our platform, by bringing on both new producers and acquiring other platforms. As the industry consolidates, we think we can build market share and continue to keep good mortgage revenues going forward. As Dave mentioned, 33%, I think, in the fourth quarter of our business was purchase business, and that's usually a slow purchase month in the fourth quarter, but we've been working very hard to get a diversity in our production base and we do that through how we price things basically, but we're trying to push things through to get more and more alliances with the real estate market, so that we can rely more on home purchases, because we think that market will take off. So on a mortgage business again, we think the margins, the conventional, the refis are going to drop off, and when that happens, the market will consolidate and we stand ready to take advantage of that.

  • We expect in 2013 and beyond continued good growth in our wealth management business, as we continued to cross-sell into our ever-growing banking population. We're going to continue to look for niche and specialty asset platforms, with high-earning assets and continue to diversify our portfolio. We think that there will be FDIC deals this year, but they will be probably few and far between, and come at less volume than we have seen in the past. Those that do occur will probably be subject to very competitive bidding. Many of our competitors are in much better shape than they were, and we believe that the market will pick up, and the competition for those deals will pick up, so we will play the game but we will be prudent. Having done more, and as many FDIC deals as anybody else in the country, we have learned from our experience that there's explosions in compost piles out there, and you have to be very careful in terms of how you price these things and what you find when you get there. There's a reason these banks fail, and we'll be very disciplined and use our experience to go after them. But that being said that could lead us to not being as successful as we have in the past, but that doesn't mean we won't play the game.

  • Unassisted deal opportunities are going to be plentiful. We've reported to you before that we were getting about one inbound call or rebound call from somebody who had inbounded before, about every 10 days. Believe it or not, since the election, we have been averaging about one a week. We still go out, we do our reviews, and there is still stress in the market, and we still keep in touch with folks, but we firmly believe that banks in these metropolitan areas between zero and $1 billion really are coming out of this cycle very tired, their ability to generate earning assets, the regulatory burden, it's just not fun for them anymore, and they can't generate the returns that they are used to generating. People are basically tired, and we think that we are, and most of these banks are community bank oriented sorts of folks. Our cultures line up directly. We believe we're the acquirer of choice for these, and we will continue to be very active and very discerning as we continue to build out the geography that still remains two hours from Rosemont, Illinois so we believe we will have a very active year in this regard.

  • So with that all being said, we look forward to 2013. We can sit on our laurels and then 2012 for about five minutes until the rock rolls back down the hill, and like Sisyphus, now it's a bigger rock, and we have to push it back up the hill this year, but we think we're well-positioned to do that. Look forward to the opportunities that are going to present themselves in 2013. So with that, I think we can turn it over to questions.

  • Operator

  • (Operator Instructions)

  • Our first question comes from the line of Steve Scinicariello with UBS.

  • - Analyst

  • Good, just a couple quick ones for you. So as you look at the dislocated asset pipeline for 2013, the best gauge that you have, how much do you think it's going to be tilted towards these organic growth, and how much tilted towards bolting on more of these platforms, or business lines?

  • - President & CEO

  • That's a good question. I think that was asked yesterday by your good friend Jon Arfstrom. I think you can look at the historical, our historical numbers, as it relates to that. We are back to our pre-2006 growth metrics and we expect every bank, every bank charter to grow $70 million to $75 million a year, which brings us to about $1 billion worth of organic growth in the system right now, maybe a little more, maybe a little bit less, all tempered by our ability to generate earning assets.

  • I would expect that everything on top of that would come through opportunities on the acquisition side, either FDIC or unassisted. Again, they are lined up like planes over O'Hare again, and so we think that organic growth will be anywhere between $900 million and $1.2 billion and that everything else would be through acquisition. So on the niche side of things we continue to look at earning asset platforms to diversify the balance sheet. We have found a couple of nice ones that related to -- that were retail oriented, just to tell you how the regulations affect us. We shied away from them. We figure that any retail-oriented niche program where you can make any money, it's only a matter of time before the CFPB comes down and tells you that you can't do it, and we're not willing to take that risk.

  • So we're looking more on the commercial side of things and we will continue to do that throughout the course of the year, because it's really all going to boil down to the generation of earning assets. As indicated by this quarter, you can build a lot of liquidity and not make any money on it in this rate environment, so you have to be able to be asset-driven and generate earning assets, and we'll be very active in trying to diversify that platform but continuing to grow throughout our franchise. We've got great momentum on the core loan side of the business. Our commercial guys are really hitting the cover off the ball, and have succeeded beyond my wildest dreams when we embarked on this 2.5 years ago. The Wintrust name, for not being known in Chicago three years ago, by design, is now, as my kids say welcome to the 90s, Mr. Banks, in everybody's Rolodex. It's the top of everybody's Rolodex, I guess I should say on their contacts right now. But we have a great reputation in the market. We've got great momentum in the market, we've got great people, we've got a great plan to execute and so earning assets, being asset-driven is critical to everything that we do here, and we will continue to do that in a diversified fashion. Hope I answered your question.

  • - Analyst

  • Oh, definitely. That's great color. and then the only other one I had for you is just given the massive amount of build in the liquidity management assets like you said, just climbing the ladder, but with these things approaching 16%, 17% of total assets, what's the right level? And assuming it's a little bit below that, as you look ahead, into this kind of repricing environment, do you see that core 10-ish or less basis points of just repricing headwind, that you then have to grow through, as we look going forward? Just trying to gauge kind of what you're up against in terms of a margin headwind.

  • - President & CEO

  • Well, margin headwinds are going to be there, and it's so exacerbated by the rate environment that we're in. I feel like we're playing the football game constantly in the red zone, we don't have a lot of field to play with here. But as I mentioned when I ran through that quick example, it's going to be hard for the margin to go up without getting some niche assets that are some FDIC-related assets, but net interest income we think will flourish this year, and without the commensurate increase in expenses, so we believe that we actually can help our metrics materially, but the margin will be down doing it. So you can focus on the margin or you can focus on absolute dollars and us employing the leverage that we have built into the system.

  • Every one of our operating subsidiary heads has an objective this year to keep their expense growth on a same-store approach, so notwithstanding acquisitions or the like less than 1%. 1% or less. That's the goal this year. Everybody has got it. That's built into their budgets, so we can do that, yes, we might have the margins like everybody else is going to be under pressure, but the net interest income itself will drive and improve our metrics, so that and improved credit quality should bode well for us this year. We're also working very hard, Dave mentioned, we've been putting on a series of interest rate caps like laddering them in, going forward, to continue to prepare the balance sheet for higher rates. We're not going to be able, I can't fight nature here. It is what it is, the market is what it is, but we can make more money this year. And we expect to but we can prepare ourselves for when rates go up and get that beach ball underwater effect, so can't fight City Hall but we can certainly work around it, and make more money.

  • - Analyst

  • Sounds great. Thanks so much.

  • Operator

  • Our next question comes from the line of Jon Arfstrom with RBC Capital Markets.

  • - Analyst

  • The number of Wehmerisms on this call are at an all-time high so I'll throw one back at you on expenses. I believe you used the term, ring the [chamois], in the past on expenses. Is it time to do that, Ed, or is this just kind of trying to trim back the rate of growth and you may get more aggressive later? I just want to understand where you are in your thought process on expenses.

  • - President & CEO

  • Well, we have to get more out of what we have, Jon, that's the issue. We will be divesting of Second Federal in February, that will alleviate some expenses. We do have a number of the deals we did last year coming up for conversion in subsequent quarters, which is allows us to cut expenses once that's done. We don't, we aren't the type of guys that do massive risk. But we try when we do those things, to make sure that, through attrition, we're able to place those people who would be displaced by when we're doing these conversions that we can take advantage of that.

  • So we think there's lots of places that can cut expenses that we can be very careful. We think that our expense base can support a lot more growth than we have, so we just got to be very careful. We are not -- last year, we did a number of programs to maintain, to control, and to reduce expenses. I think our expense ratios are pretty darn good right now at each of the operating companies, but there's a lot of leverage built in. So I don't know if I answered your question. Dave, do you want to comment on that?

  • - SEVP & COO

  • Yes, I think what Ed said is correct. We do have two conversions with First United coming up in May, and Hyde Park coming up in February and once we're through that, that will help us integrate those a little bit better and reduce some costs. There's also leverage if you look in the premium finance side of the equation. For a little over a year now, the market every month is hardened from a premium perspective where rates are higher than they were in the prior year month, and if we can take our average ticket size and increase it 10% or 20%, and we're really, we've come off the all-time low since the market started to harden. And our average ticket size is around $22,000, it bottomed out around $20,000, but in the last hard market it was up around $40,000, so if we can just go up 10% or 20% and get those numbers up to $27,000 or $28,000 which is sort of a long term average for us, we can do all of that with no additional overhead, and can put on $300,000, $400,000, $500,000 of additional or $1 million of additional loans and so there's a lot of leverage built in the premium finance side but we have to wait for that market to harden a little bit.

  • And then on the bank credit side, it says we're there. Our efficiency ratio, as we have talked before, tend to be a little bit higher in periods of large mortgage originations, because that business is a much higher efficiency ratio business than the banking business in general, and also our wealth management operation, we have a fairly large wealth brokerage operation relative to other companies our size and that tends to operate at a higher efficiency ratio also, but we will continue to grow into this infrastructure. and there's plenty of growth opportunities, as Ed said. Our plate has never been fuller with people wanting to talk to us right now.

  • - President & CEO

  • Two things, Jon. We invest money before we go into something. Our SBA program, we've got 16 people in our SBA department right now that we just put into place 13 months ago, 14 months ago. They've moved up to be I think one or two in the State in terms of their production in SBA, where we're making a hard push there. But that's the type of leverage these investments that we made, investments that we made in our downtown office where we've got 50-plus commercial officers and all of the support people, they're operating at about 50% capacity right now as they build this portfolio, so there's a lot -- that's what I mean about capacity. We've made investments on the earning asset side and growing the business, where we have a lot of capacity that we can grow without commensurate increases in expense, and we'll have some expense cuts coming from when we convert and do those other things that we can use also. So it is driven home to every CEO, pretty much every time I talk to them, which is, you can understand how pleasant they find that.

  • - Analyst

  • That's the pudding in the plumbing quote I believe, building for future growth, I understand that. Just the statement, that's the holy grail and that's the one thing that I know you know frustrates investors is the expense base, so I'm happy to hear that, because people want to see those returns come up. And I guess that brings the second question is just on the credit costs. A couple of quarters ago, you talked about a light at the end of the tunnel and you said you hope it's not a train. It doesn't seem like that's the case. Are you seeing anything out there on credit that upsets you, or do you think that this is finally the time where the credit costs are going to start to come down?

  • - President & CEO

  • Well we would hope for the latter, Jon, and that's what we think is going happen. We've been very aggressive and we've not kicked the can down the road in any way, shape or form. You haven't -- not that there's anything wrong with this, but you haven't seen this have to resort to a loan sale, where we have to sell a bunch of loans at 50% of cost. We haven't had to do that. We've dealt with our issues, we've identified them quickly, we've kicked them out. We haven't played any games, not saying anybody else is, all I'm saying is that we take them one at a time, we identify them, and we push them out.

  • At this point in time, our non-performers are at 1%, and you could see if you could take a barometer, you would say, boy, you released a lot of reserves, which means a lot of that stuff was pushed out. So we are very hopeful that -- we think that there's $40 million pre-tax built into when we return to our normalized levels of charge-offs and credit costs, so the sooner we get there, the better. I think you have seen good progress year-over-year-over-year, and hopefully this will be a very, very good year in that regard. We don't see anything, but you never know. You never know what's going to pop up.

  • And I don't like to say it because then people try to manage to it, and I don't want people to manage to it. You've got a problem, bring it up, let's get it out of here. We put a number out there I'll find people working around it and manage to it, and we might have problems down the road. That's a management style that has people kicking the can down the road, and that's not what we do. We feel pretty good about where it's going. We think we're in pretty good shape in that regard, but that's an upside for us, and we feel good about that upside. That's about all I can say.

  • - Analyst

  • Okay, thank you.

  • Operator

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

  • - Analyst

  • Dave or Ed, maybe I'll approach the expense question a little differently. You had $489 million of reported expenses this year. Given all your commentary, should we be thinking down expenses in 2013? I know the mortgage is variable, or should we think of the rate of growth being low single digit in this year?

  • - SEVP & COO

  • Well, my crystal ball on mortgage rates is not clear. Clearly we think it's going to be strong in the first quarter and probably into the second quarter as the home buying season heats up. Beyond that, my crystal ball is not clear. I think we would think that it would ease off towards the end of the year, and if that happens, certainly commissions and the variable pay go down there. And so, barring any other acquisitions, then I think you would think that you could keep the expense growth certainly into the single digits, because you'd lose some of that expenses, and as Ed said, we're trying to maintain on same-store sales 1% growth rates. And now we do have a couple, we have acquisitions in 2012 that occurred that will have a full year of 2013, and so you have to build those in. Yes, I would think that if you look at it that way, you could keep it certainly in the single digits.

  • - Analyst

  • Okay, maybe on the growth perspective, in terms of the quarter, I would say, generally speaking, the commercial loan growth in the Midwest has been, I think, a surprise to most of us on the positive. Ed, can you comment on where the growth is coming from? Obviously, the economy is not growing, but can you maybe talk about sources of growth, whether it be larger banks or peers?

  • - President & CEO

  • The majority is coming from larger banks, I would say, especially in the commercial middle market area, they dominate that, and we've been able to pick up a lot from you name it. Probably I would say in proportion to their market share in Chicago, is where they're coming from. Smaller banks really don't have a lot you can take right now, so the commercial side, that's where it's coming from. In Chicago, our market area is what, one of the biggest economies in the world when you think about it, and there's a ton of business out there, and we think we're just scraping the tip of the iceberg right now. And we've had, we bought in over 1,100 new middle market commercial relationships in the 2.5 years that we've been at this, and over the next three or four years, that number could triple for us.

  • And it's just one at a time, our approach is different. We don't just scatter things to the wind. Our guys downtown will every year, and they update it every quarter will take a census of the middle market companies in our market area, and will decide which ones we're going to go after, and then we are absolutely relentless until we get them, and so if you look at those numbers, we think going forward, we will continue to have good success in that regard. The rest of the business itself, we bring in finance, we continue to grow on the property and casualty side, I think the number of units again was up almost double digit, which it has been for the past three years. We're finally seeing some increase in, as Dave said, in the average ticket sizes, which we think will continue to increase through some of the disasters that have occurred and put some pressure on the insurance market, but the workman's comp area, I think workman's comp they're having loss ratios of 115%, 120%. And for workman's comp company to actually make money they have to be about 92%, so you'll see this pressure on that and we think that bodes very well for us also.

  • Believe it or not, the dirty word real estate, and maybe a little construction is coming back. If any of you heard me give that economics talk, there's a chart that we show that shows lagging birth rate versus housing starts, and you're getting -- and housing starts are kicking up because the lagging -- the area under the curve between lagging birth rates and housing starts is absolutely huge, and you're seeing it in the Chicago area and probably in most of the metro areas you are from, where rents are going up because there's not enough homes to buy and you're starting to see some pick up in that homebuilding again. We're trying to find a way to get it safely, and not too much get into that business, but link it with our mortgage business also, a one shot sort of thing. Construction ahead loans, and we're working on that also. So where we get the business, we're taking it proportionately from our competitors, it's just taking market share, but I think this year you're going to start seeing some growth, and although our line utilization is not higher than it was in the fourth quarter, it wasn't higher than it was before, I think you'll start seeing that happen based upon what some of our clients are saying, the business is actually picking up.

  • - Analyst

  • Great. Last one, on the mortgage, obviously QM came out late in the year. Can you talk about what any impact that may have on your business with the IO issue?

  • - SEVP & COO

  • You broke up there a little bit. The qualified mortgage issue?

  • - Analyst

  • Yes, and the amount of interest-only loans that either originated, or that are on your books and whether it could impact your business in the mortgage going forward?

  • - SEVP & COO

  • Yes, we don't do much in the way of interest-only at all. I mean you may do a few of those in the banks for a well-known customer that has a unique business model where it doesn't fit into the nice square box that's out there, but it's not a big part of our business at all.

  • - Analyst

  • Okay, thanks a lot.

  • Operator

  • Our next question comes from the line of Stephen Geyen with Stifel Nicolaus. Your line is open.

  • - Analyst

  • Just curious about, Ed, you mentioned the pricing in that you'll step out of the markets, are those markets where pricing is outside of your range or outside the comfort zone? And maybe if you could talk a little bit about if you're seeing of that and where it's a little more prevalent versus others and where the pricing is still more favorable?

  • - SEVP & COO

  • In our market area you're talking about or just in general by class?

  • - Analyst

  • By class.

  • - SEVP & COO

  • Probably there is pricing that's most competitive for the larger middle market companies that have a lot of cash balance, wealth management and treasury management services. Those guys are golden, and people really compete for those deals. If you're out doing smaller commercial real estate deals or smaller business loans, those yields are still holding up fairly well, but it's the $10 million, $15 million, $20 million middle market commercial loan where people are very competitive on those loans right now.

  • - Analyst

  • Can you give us a sense of pricing, what the pricing looks like now, or the spread now versus where they were maybe 12 months ago?

  • - President & CEO

  • Depends on the deal. I don't think they've, 12 months ago, I don't think they've moved. There's some deals if they get hot, the spreads are going down to 1.75, maybe 1.5 on really hot deals. But there are some institutions in town that are trying to buy some business and will do that. We've been able to keep our spreads pretty good, relatively speaking, and again, our profitability model is pretty simple, and it falls outside the profitability model, we won't do the deal, there's got to be the future business. They say, we'll get all this future business, we better look at that pretty hard, but I would say that they really have not moved that much in the last 12 months, that would be my guess.

  • - Analyst

  • Okay.

  • - President & CEO

  • It's 12 months like this.

  • - Analyst

  • Sure. Next question, you gave some nice information on the pipeline and just thoughts on the outlook over the next three to six months or so, on loan growth. In the press release, you talked about a lot of the growth coming near the end of the quarter, and maybe if you could provide just a little bit more color on that, do you think it's related to the election or some other factors and kind of any thoughts on how its progressed heading into the first quarter?

  • - President & CEO

  • Well there's still some pent-up demand from the first quarter that rolled over. I think a lot of it did depend on the election. The last two weeks of the year we were very busy closing loans, and some of that did spill over into the first part of the year. As to why, a lot of it was the election, and I think some of it was the fiscal cliff, which the $5 million, $10 million gift thing was an issue for some folks, a lot of people, a lot of attorneys were busy on that, a lot of people were busy on that, so things just kind of get pushed off until the end of the quarter for whatever reason. Usually the last two weeks of the quarter kind of slow down a bit, but it was frantic around here getting deals pushed through and getting deals done, but it did carry over.

  • First quarter, I'm glad to have the carryover because first quarter we should have good momentum build up but then it slows down just a little bit. February is a throwaway month, as people are waiting to get calendar year-end guys with their audits are done or their financials come in, and you wait for that to do approvals and get things done. So then it picks up back March, April, May, it picks up very hard, but I think you can anticipate the same sort of growth that we've had in those line items, this quarter or within 2013, as we had in 2012, so the pipelines really have not deviated much quarter-to-quarter and our pull through rates are still, they've dropped a little bit, but not enough to be concerning.

  • - Analyst

  • And last question, really just a question about the margin, just curious where the pressure might come from, if it's going to be both on the loan side and security side? I guess the liquidity management assets were down, the yield was down about 8 basis points quarter to quarter. And I guess you have a portion or I look at it is a portion that are very short-term in order to fund near-term loan growth and then a piece maybe longer term, and then just curious about that longer-term piece. Is there still some, as those reprice, is there still likely some pressure on that piece that's a little bit longer term?

  • - President & CEO

  • I think that the decrease in the liquidity management assets is mostly a mix issue. We just had a lot more that was short. We didn't put more into a longer-term bucket, so I think it was a mix issue that drove that number down a little bit. That's where you see the overall liquidity effect on the margin. We're not excited about putting things out long term. Our long term thought is that rates are going to go up, and I don't want to be in a position to have all sorts of offsets against my capital because I went long with $500 million, $600 million that could help me today, when the long term it's going to turnaround and whack my capital pretty hard, and I don't want to be there. I think we played this for the long term. I think that the fixation on the margin just kind of makes me laugh. I fixate on making money, and we always have, so I'm fixated on net interest income, and if the margin does go down a bit, but I make a lot more net interest income and position myself for what the eventual rise in rates, I think I'm doing, we as Wintrust are doing the right thing by our shareholders.

  • So I wouldn't expect to see us make a major investment go along right now. It's just not going to happen and if we do build up more liquidity, we will have to cut our rates, and we'll try to manage our cost of funds to keep that liquidity down, but it's a juggling game. I remember the first two quarters of last year, we were climbing the other side of the ladder trying to find liquidity, so you just got to manage it every day and go forward. But I don't see us going long, and if we end up, if we are growing and we don't have the assets to put them into, we're going to have to temper our growth, because if we just do liquidity, you'll see the liquidity assets go down even more, the rate on those, and it will hurt your margin even more. So we've got to keep climbing the ladder and we have to take it a rung at a time.

  • - SEVP & COO

  • Only thing I'd add, Stephen, is you asked about the pressure on it. As we've talked about in our remarks, we do this covered call program where we add to the yield on the securities, and in the three months ended December 31, our liquidity management asset interest was $9.8 million and we also had a little over $2 million of call option income that we look at those two together. But because we were in that program, a lot of our longer term agencies have been called away, and we reinvest them at lower rates so that one of the reasons you see that our short-term investment portfolio, our investment portfolio total is a little bit less than our peers, is because we've had that pressure down on it because of securities that have already been called away. So most of our longer-term agencies are near today's rates, because they recently been called away, but you have to remember the offset to that is that we've been making $2 million a quarter roughly on covered call income, which has supplemented the return on that portfolio.

  • - Analyst

  • Okay, thank you.

  • Operator

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

  • - Analyst

  • Just wanted to follow-up on the net interest income comments. I know you mentioned you thought net interest income could flourish this year, despite margin compression. You're up about 13% in 2012 and your loans were up about a $1.3 billion. I know there's some acquisitions in there, so it gets a little muddled, but you thought it could grow about $900 million to $1.2 billion in 2013, however you'll be entering the year with a lower margin in 2013 versus 2012, your margin in 2012 was up about 7 basis points. Do you feel like you need to grow even faster than that, $1 billion or $1.2 billion to even maintain the NII or is it also going to be a function of getting some deals in there as well? I know that's a bunch of questions in one, but just trying to square some of those comments up.

  • - President & CEO

  • I think NII will go up. We grow $1 billion dollars, net interest income will obviously go up. The margin may be down a bit, but the quarrel of it is, we will continue to increase our interest rate sensitivity position, to make sure that when rates go up, that we get that beach ball underwater effect. But the growth, the actual growth is going to depend on our ability to put it out into earning assets. If for some reason, the market moved away from us, let's say rates and terms really get goofy, we go back to 2005 and 2006 and 2007, our circuit breakers will kick in and our loan production will stop. I mean we're not, you know us well enough to know that we're pretty disciplined on that, and we're not going to move. If that's the case, our growth could slow down a bit as it did back when we were in the local build before, and 2006, 2007, and 2008. But we don't see that happening right now.

  • We actually believe if we can grow organically at that $1.2 billion, and let's say if you put it out at the spread of 3%, obviously your net interest income will go up, and less than a 100 basis points in marginal expenses that go along with that and that would be pretty accretive to our metrics in terms of ROA, and to our bottom line. And then, if you prepare the balance sheet at the same time for rising rates on that bigger base, you'll be better off when rates go up. I think they've got to go up at some point in time, as a student of history as I said, when they go up, they are going to go up pretty big I think. So even a 4% rise in rates, you can calculate the numbers based on what we give you, what that would do to our margin, so it's a long term play. That's our play for this year, but we think that the net -- you can run the numbers on a 3.25 spread on $1.2 billion growth, average it out, less than 100 basis points in marginal expenses, that should be pretty good for us.

  • - Analyst

  • Okay, great. Thank you.

  • Operator

  • Our next question comes from the line of Peyton Green with Sterne, Agee. Your line is open.

  • - Analyst

  • I guess my comment is, maybe it's not what you decide to do with the portfolio that really matters in terms of the duration, but why have $850 million or so of it in a negative spread? I guess in looking at the Federal Home Loan Bank advances and the notes payable and other borrowings, you've effectively got $815 million at 217 average cost against liquidity management assets at an average benefit of 133, and the simplest thing would be to get rid of that. That relationship has been true for three or four years now, just why not operate with a smaller more profitable balance sheet?

  • - SEVP & COO

  • Well, we did some of that in this quarter by getting rid of the repo transactions. Part of the way you manage the balance sheet is you've got to prepare yourself for any eventuality, and we have positioned our balance sheet for a rise in interest rates, and--

  • - Analyst

  • But its been that way for three or four years now. Why not work it through, I mean if the loans are a good portion variable, why not extend it, why not use more derivatives instead of upside down bond trades or borrowings against the liquidity management asset portfolio? I mean I guess I just don't understand why have that much of your balance sheet or equity losing money on a quarter to quarter basis year in year out?

  • - President & CEO

  • Let's go back. Year in year out? Peyton, in the first two quarters of last year, we were struggling to find liquidity, our loan demand was so strong. If we had done the opposite, if we had embarked on shrinking that we would have been really upside down on liquidity and growth. So just because we have a little excess liquidity this time, because we put a bank out and we have to save $170 million to divest of Second Federal. Next quarter, if insurance rates harden, it turns the other way, and then I've got a liquidity issue. So you have to look at it, and I understand what you're saying, it looks on paper like you could shrink the bank, you could blow those things out, take your loss on it and have no liquidity. Well, then I'm back in the same ballgame, and I've got to go long anyhow to keep my interest rate sensitivity where it is.

  • You bring up a good point. We discuss it a lot, but it fluctuates every quarter. I mean literally, we were scrambling at the end of the first two quarters of last year to get liquidity on our books. You can look at brokered funds that popped up, and so I see what you're saying and we have done some of that this year, and we'll continue, or last year we'll continue to look at that, but we're managing the overall balance sheet and the overall interest rate sensitivity position and we'll keep looking at it. But appreciate your thoughts and I know you're consistent. At least you're consistent, Peyton.

  • - Analyst

  • Well I know, but my question is this. If you have $3 billion in liquidity management assets really underearning, let's just take it as 20% of earning assets, what does that number really have to be to be liquidity management, I guess is my question.

  • - President & CEO

  • Around 20% in there, depending on what the rest of your balance sheet looks like, but the regulators are, we still think liquidity is important. Who knows what's going to happen? We've always run at 85% to 90% loan to deposit when other guys are at 110% and 120%. We actually have to keep that liquidity and the regulators are looking at liquidity very -- with a hard look, and that's about the number that you have to keep, Peyton. And if in fact our loan-to-deposit ratio were to fall to 70% and we were sitting on all of that, your argument has a lot more merit then, and it's something we would consider, but now its managing the overall balance sheet, and I know it looks simple on the top, but we'll continue looking at it and --

  • - SEVP & COO

  • There is a cost of that too. You may have a 20-$30 million loss to get out of the Federal Home Loan Bank and you do change your interest rate risk sensitivity in that regard, and nobody's crystal ball is perfect there. You sell those things and take a $20 million, $30 million pre-tax loss and interest rates could change the next day and people would say well that was pretty stupid that you sold those. So we try to manage it in a holistic approach, we understand it, we look at it and talk about it a lot. $400 million of Federal Home Loan Banks say some of those will be maturing, we are letting other wholesale funds run-off. We did, as you saw, eliminate the longer term repos this quarter, and so we do try to balance all this stuff out running the balance sheet from a holistic risk perspective, including forward-looking interest rate risk and liquidity risk.

  • - President & CEO

  • It's just a big bond swap when you look at it. We look at those numbers ever every quarter and how they relate to GAAP and we run the bond swap numbers on exactly what you're talking about, and how it relates to GAAP, how it relates to liquidity and it's something we do look at, Peyton, and we will continue to do so.

  • - Analyst

  • I guess the last only two other comments that I'd make is if earning assets are up roughly $1.2 billion year-over-year in the fourth quarter, liquidity management assets are actually down $100 million so you actually did leverage the liquidity a bit. If you grow loans $1 billion, do you have to add to the liquidity management assets to keep your liquidity profile going forward? I guess that's question one, and then how sticky do you think your non-interest bearing deposits are? Because they grew about over 500 million over the prior year at about $2.3 billion which is materially different than how you used to exist.

  • - President & CEO

  • Oh, yes, well we think they're very sticky, as a matter of fact, some of them are still filling out. Certainly some of that stuff will go to work, and that will lead to additional lending, so it's kind of a win-win. When you put the cash to work, then your line usage will go up too. We would all be happy if that occurred, but the rate of growth that we have, it takes a good four or five months to fill out the balances of our new clients as they come in, so we believe it's very sticky, they're tied into treasury management, and we expect that number to continue to grow. I think it would be nice, its grown consistently every quarter since we started this commercial initiative, and we anticipate good success this year in the commercial initiative and continued increases. We love to get that number to 19%, 20% and when rates go up, that's terrific for us.

  • Your first question if you do grow or if you grow more than that and loans are higher, yes, then we have to go back and look for liquidity. We have liquidity in our policies, in the regulatory guidelines, the regulators, everything is numeric these days, so they have their numbers as they relate to liquidity. We manage to our own thoughts of liquidity and to their numbers, so if your loan to deposit ratio were to go to 95%, you'll have to go out and get more deposits or find more liquidity. We keep a lot of capacity for brokered funds. We don't have a lot for a bank our size. We've only used them really for asset liability management purposes. Up until the first two quarters last year we had to use them for liquidity purposes, but we keep a lot of sources available for liquidity so we can manage it on a quarter by quarter basis. But certainly if your loan to deposit ratio went up, you'll have to find more liquidity to keep everybody happy.

  • - Analyst

  • I guess so we keep the liquidity management assets at let's just say around 20% or can you push it down to 17% or 16% of the earning asset base going forward?

  • - President & CEO

  • I think that 20% number is probably within 2 percentage points one way or another. Depending on what's going on I think it's probably -- 20% is middle of the road.

  • - SEVP & COO

  • We've always said you can look at the balance sheet. We're a pretty plain vanilla bank, 85% to 90% loan to deposit, we might go a little bit above that, but that's how we've run the Company since the beginning.

  • - Analyst

  • Okay, so it's still a pretty good assumption. Okay, great. Thank you.

  • Operator

  • Our next question comes from the line of Herman Chan with Wells Fargo Securities. Your line is open.

  • - Analyst

  • Wanted to ask a question on reserves. 91 BPs of total loans to reserve ratio is pretty close to pre-crisis level, of let's say 70-80 basis points. Should we expect the reserve coverage to drift toward or even below pre-crisis levels, considering Wintrust now has a different loan composition with less commercial Real Estate but more commercial and premium finance? Thanks.

  • - President & CEO

  • The calculation is so mechanical these days, but if you go to page 28 of the press release, it's all a function of almost what, really very close to what they're proposing right now, the FASB is one of the methods the FASB had but now that they're talking about more, which is not a lot given the thought of historical losses. And if you were to, if you looked at our page 28 where we break out the reserves by category, you can see that 131 basis points is basically the core portfolio, and 29 basis points is the niche portfolio. Take those numbers and go back a couple pages and apply it to our historical loss ratios, and you'll see that they make a lot of sense. So to the extent that credit gets better and losses go down, it will take some time, but those historical losses will work their way through the system, and we go back to our normal loss ratios on commercial real estate and the like, you will get back down to those numbers. It's just a very mechanical calculation that we have to go through to get there, and it's -- that's your historical charge-offs, apply that to the balances in that account, add your specific reserves and there you got it. So if losses get better, I would imagine that the reserve will go along with that.

  • - Analyst

  • Got it. And a question specifically on comp expense. After a pick up in comp in Q3, it was pretty flattish in Q4. Based on your comments on operating leverage, do we expect that $75 million, $76 million level as a base heading into 2013, even assuming continued balance sheet growth?

  • - President & CEO

  • Well, good question, but a lot of that comp relates to -- the mortgage market being as hot as it is, basically you know, you're paying out commissions of 40% to 50% on your volumes there. So that comp expense number, you have to take out the variable compensation as it relates to mortgages, and the brokerage side of wealth management, because obviously that's variable. But once you do that from an operating run rate, in the first quarter you get raises that come through, we average 2% to 2.5%, but you're going to have those conversions will take place in the first quarter, and the divestiture in Second Federal in February, which will alleviate costs from us, so I guess it's a good enough start base, but you have really got to go backwards and all depends on what the variable comp is.

  • - SEVP & COO

  • It really does. We've got Hyde Park which will go on for a full quarter, but we have Second Fed coming off and the like. But mortgages will probably be less this year, and we say that every year and we'll see where rates go, but if the mortgages come off, the variable comp will come down a little bit. But it's a pretty decent range to hang in. We're really trying to hold the line on sellers and grow into the leverage, so depending on what we do from an acquisition perspective, would be the only reason you'd see significant change from that.

  • - Analyst

  • Got it.

  • - SEVP & COO

  • Other than the mortgages.

  • - Analyst

  • Okay, got it and one final question. I did notice a pullback in Canadian commercial premium finance loans in the quarter. Can you point to anything specifically in terms of performance there?

  • - President & CEO

  • No, well I think they're doing fine. Their bigger months are in the middle part of the year and some of those pay off. The levels have trended down a little bit, but it's not for lack of anything structurally happening there. It's just when their larger months are, so it's a little bit of seasonality from that perspective.

  • - Analyst

  • Great, thanks for taking my questions.

  • Operator

  • Our next question comes from the line of John Moran with Macquarie Capital. Your line is open.

  • - Analyst

  • This is [Mike Ka] from John's team. Just a quick question on mortgage banking. How quickly do you think you can ramp down sort of the mortgage banking variable cost in terms of -- as volumes come down in the later half of 2013?

  • - President & CEO

  • Excellent question. The $64,000 question that I keep pounding our mortgage Company with. The ability to accordion our expenses with volume has been, in our planning, has been at the top of our list. Approximately 23% to 24% of our operating costs are outsourced right now, so we've got specific parameters to keep our level of quality up, or how much we can throughput our own system. When we go over that, we go and we outsource it so 23% of that business is outsourced, so that drops off right away, once that volume drops off.

  • If you consider that around 40% of our volume is, on average, is purchases, and purchases should stay relatively constant with some seasonality to it, as long as this market picks up, so 60% of it is refi. If half of that business goes away it's 30%, I've got 23% I can drop off at that point in time, plus we have plans to bring it down. So we are on this, we drill it, we test it, and it is certainly a major factor, and we got caught in this 1.5 years ago and it took us three months to get our ducks in line so we gave back about a month's worth of earnings because we weren't able to accordion fast enough. So we have the SWAT team on this that will make sure that we can keep expenses in line with volumes going forward.

  • - Analyst

  • Okay, thanks and just one more question. Can you just give us a sense of how much your REO expense is related to revaluation of properties and how much is carrying cost?

  • - SEVP & COO

  • The majority of it was revaluation, carrying cost was maybe $1.5 million to $2 million or so.

  • - Analyst

  • Great. Thanks a lot.

  • Operator

  • Our final question is a follow-up from Peyton Green, with Sterne, Agee. Your line is open.

  • - Analyst

  • Thank you very much.

  • - President & CEO

  • We usually do these follow-ups over a beer someplace.

  • - Analyst

  • I know, I know. On the expense side, in thinking about the hypothetical that you gave, if you grew $1 billion you'd hope to keep the expenses to 1%. That would imply 2% growth in expenses year-over-year all else equal, which I know not else is going to be equal. But historically, that's not been really something the Street has seen you all do. Maybe you can talk a little bit just about -- I mean, are you going to limit yourself from taking advantage of opportunities going forward, and harvest the investments you've made over the past couple of years as you reentered the more stable and slightly growing economy? Or I guess just give a little bit of color on that.

  • - President & CEO

  • Sure, well we qualified that statement by saying with same-store sales. In other words, if we get an opportunity to acquire a branch or acquire a bank, that certainly will add to our expense numbers. So what we're saying is, the current operations that we have right now, less than 1% and we certainly, if an opportunity comes up, we're not going to be shy about taking advantage of that if it's going to be accretive to us, but we have so much leverage built up, like in the SBA world and the commercial world, and a number of the branches that we have that we can grow out of without doing that, without adding expenses. We feel good about our ability to make that happen on a same-store approach if you will.

  • It certainly will not limit us from taking advantage of opportunities. We are serial builders, as you know, and we will continue to build the organization and not be afraid to put the plumbing in if we see an opportunity to go forward, but that's the plan that relates to marginal business going forward. Anything above that, if we were to buy something that would hopefully be accretive right out of the box to us, so an earning asset generator, or another bank, that they would actually add to the bottom line. We don't like doing unaccretive deals. We never have. We just don't like that.

  • - Analyst

  • Sure.

  • - President & CEO

  • So I had to qualify it that way.

  • - Analyst

  • No, I guess I was just I mean because the two messages are slightly different. They're both positive to operating leverage, but on the same-store sales it's half the expense growth as the hypothetical. We grow $1 billion, I guess, I think I'm hearing you. I understand it better now, thank you.

  • - President & CEO

  • Well, we need to end this conference call, because if I keep talking, the stock keeps going down. I think that we're not going to -- I'm not going to report record earnings anymore if the stock goes down, but I'm just kidding. Thank you very much for listening in, and we'll talk to you all later. Thank you.

  • Operator

  • Ladies and gentlemen this does conclude your conference. You all may disconnect and have a good day.