Wintrust Financial Corp (WTFC) 2013 Q4 法說會逐字稿

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 bike 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.

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, so welcome to winter.

With me 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 we will 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 thoughts about the future. And then there will 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, increases of 23% and 19% respectively. This is on top of 2012, which was also a record year.

Total assets grew to $18.1 billion. Total loans were $1 billion, or around 10%.

Total deposits grew only 2% this year, and that, 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 households. 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.

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

Our net overhead ratio year-over-year stayed constant about 1.6%. And importantly, credit improved markedly during the year. Provisions were down $30 million, charge-offs down $19 million, and PAs 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, a little less in the fourth quarter.

Reserve to loans is, if you look at, take the covered loans out, was about 85 basis points. And this is indicated in the back of our press release. With -- and again, people say that may be low, but if you look at how we break it out, it's about 1.25 of our core loans and about 23 basis points on our niche lending. Our niche lending portfolios continue to perform very well as they relate to credit losses and have done so through the cycle. So we feel very good about where we are on the coverage ratio, which is the highest it's been -- coverage of nonperforming assets, which is the highest it's been since the beginning of the cycle. These are really 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 our good diverse tradition of our portfolio. And that's our plan and hopefully this will continue in the coming year.

It was a good year for mortgage banking because revenues were basically flat with 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 we will be able to show good profits on that business. I know it's cyclical, but we feel very good about how we are positioned in that business.

It was a terrific year for our Wealth Management operation. Revenues were up $11 million. Some of this is due obviously to the favorable 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 Lakes Advisors is the name under those, and if you have a chance, you should look them up, but that bodes well. We think 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 and our retail base around the city of Chicago. But they are doing extremely well.

It was a really good year too for both divisions of our niche businesses, of our premium finance niche business, which is our major business. Our LIFO loans were up around $200 million year-over-year and property and casualty were up $180 million with total growth of $380 million.

Interestingly, property and casualty average ticket size rose during the course of the year and in December reached about $27,000, which is the normal that we had experienced in the 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 tickets, which the number tickets again were up very nicely. So we continue to gain market share in that business.

During the year, we opened 13 net new branches. The number -- we acquired 12 branches, we opened six for a total of 18. We closed two of the acquired branches which were close to existing branches that we had. And remember, we took a Mulligan on the second Federal acquisition earlier in the year, and sold those three branches and 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 are positioned well for -- during 2013, we are 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 a Bank of America security, preferred security, which we have had in our portfolio for a number of years, due to the Voelkel rule. Dave will discuss this idiocy later in his comments.

Net interest margin fell by 4 basis points due to a little excess liquidity on average. We had the polar vortex here. We kind of have a little balance sheet vortex here. If you want average-to-average quarter-over-quarter and you looked at total loans, and when I'd say total loans, I'm including loans held for sale and covered loans, on an average basis, we are down $117 million during the course of the year -- or the quarter, pardon me. But we had a lot of growth at the end of the 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 to that related to the Diamond Bank acquisition which we accomplished in the quarter. So, it gives us a good head start in 2014.

Our pipelines remain very strong and consistently strong, and already we are off to a good start in 2014. There was some spillover from December into January, and we are off to a very good start, feel good about that.

We had reported to you earlier and talked about the fact that our margin is going to stay relatively constant off of 3.5%, up 10 or down 10, depending on the excess liquidity that we have. As you know, we don't make any money -- little money, if any, on excess liquidity. And again, we're trying to manage that very well and not bring a bunch of business on that is just going to be expensive until such time as rates move, which we think will continue to happen. So we are playing 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 markedly in the quarter, I mean you never had bad credit -- as bad a credit as compared our peer group, but we've been getting even better I think if you look. We are driving those numbers down. We do want to get back to our credit metrics that we were reporting prior to the cycle taking place. And this quarter, we recorded a provision of $3.8 million versus $11 million. Specific reserves did drop as we cleaned a lot of things 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 were.

All in all, I think it was very good quarter from our perspective. Getting better credit is a good thing, and we hope that we can continue that. Mortgages were off a little bit, which hurt our topline, but that's to be expected. And but we think we are very well situated for 2014, and I really like where we stand.

I'm going to turn it over to Dave now to talk a little bit about our income and other expenses.

Thanks Ed. As normal, I'll just touch on the noninterest income and noninterest expense sections briefly.

Noninterest income, our Wealth Management income increased slightly to $16.3 million for the fourth quarter of 2013 from $16.1 million in the third quarter this year, and improved by $2.6 million when compared to the year-ago quarter of $13.6 million. Brokerage revenue was down slightly but relatively stable at $7.2 million compared to the third quarter this year, while customer 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 purchased home activity which represented 70% of the fourth quarter of their volume, which was very similar to the percentage of purchased volume 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 the third quarter. As of year-end 2013, the value of the mortgage servicing rights increased to 93 basis points as a percentage of the amount serviced. Future 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 rates 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 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 light on the revenue side there simply because we needed to begin to build the book of business and get those loans funded. The first quarter of 2014, we will obviously have a full quarter of activity related to that acquisition.

Fees from covered call options totaled $1.9 million in 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 utilize these fees from covered calls to supplement the total recurrent on the treasuries and agencies that we held to hedge and mitigate margin pressures caused during a period of declining interest rates.

Trading losses totaled $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 years were primarily a 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 a net $772,000 gain.

Ed talked about security losses. They totaled $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 an other than temporary impairment charge taken related to one security as a result of the Voelker ruling. Wintrust just had one security that was impacted by the rule, and we've owned this security since 2007. It is an option rate pass-through security that is dependent 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 the security would recover prior to the required disposal date in July of 2015. Accordingly, we took the charge as required by the accounting rules.

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

So because of the legal definition of the Voelker rule, because of securities in the Trust and various other legal definitions, it falls under the Voelker rule. But the underlying security, the only security in that Trust, would not be deemed to be covered by the Voelker rule and we could hold the security.

So when we get to July of 2015, if we have not sold the security prior to then, we may consider redeeming it and continue to hold the security into the future. So we would have that option. We are actually hopeful that there may be additional modifications to the Voelker rule enacted prior to July of 2015 which may allow us to hold the security.

Miscellaneous noninterest 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 noninterest 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 noninterest expense category, total noninterest expenses totaled $127 million in the fourth quarter of this year, of 2013. It 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.

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 noninterest 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 this net decrease was approximately $5.4 million in reduced incentive compensation and commission expense driven by a reduction in commissions related to mortgage origination 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 costs 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 approximately $200,000 and $300,000 of conversion costs respectively related to the recent acquisitions. We are getting through most of the 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 costs during the quarter to increase the 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 totaled $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. And 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 the amount performing assets and a significant amount of the increase in the current professional fees was related to legal costs associated with collecting those nonperforming assets. So, hopefully, we'll continue to reduce the nonperforming assets, and as that number comes down, we would expect the legal costs associated with collecting those to decrease also.

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

Page 41 of the earnings release provides detail on the activity and 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 noninterest income and noninterest expense, I think those are the highlights.

There's one additional item that I would like to cover unrelated to other income and other expense, and that's related to the tangible equity units. As we mentioned last quarter, the tangible equity units that were issued in December of 2010 converted to common stock in December of 2013. Tangible equity units converted 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 equivalent, and they are now all in our outstanding share count. So it is simply moving the shares from common share equivalents to outstanding shares. There's no additional equity rates, no additional capital that flowed through the equity section.

The EPS calculation included approximately 2.5 months of these units as common share equivalents and approximately 0.5 months in outstanding shares. So going forward, these shares will just be outstanding, and the common share equivalent amounts will be reduced for the EPS calculation.

And some of you may notice that the short interest in the company's stock decreased significantly at the end of December. 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 to Ed.

Thank you Dave. Maybe now our market cap will show up right on the different industries that show up out there. It hasn't been right on many of them for a long time, but for the confusion and transaction of some folks but it was 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 really good about where we are right now. We're coming off of two good years. Those of you who remember us from long ago, we used to put up 15%, 20% growth numbers, and in the last two years we've been able to do that, and hopefully we will be able to do that in the future.

Our loan pipelines remain strong, as I mentioned, and consistently strong. Pullthrough rates remain really good.

A bit of new news for you, you know, we consistently look for opportunities to continue to diversify our portfolio, and specifically our niche asset portfolio. We have, over the past four or five years, we've looked at I think every leasing company in the galaxy. And leasing is a business. Equipment leases is one that we want to get into, but we never really found one that fit us culturally, that we really liked, or that was priced properly. So we made a decision to go ahead and start one on our own. So in effect, at the beginning of the year, Wintrust Capital is up and running under the direction of Frank Cirone, a long time leasing executive. We are going to build it our way, slow and steady, with our rules, and the way we do business. And we are excited about that. We think over the next three or four years, we can build up a $0.5 billion portfolio that will continue to diversify us, give us a good year of earning assets and hopefully develop into other business as we go forward. So we feel good about that and where we are 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 -- potential acquisition pipeline continues to be very strong.

The plan for 2014, stay the course. Slow and steady is going to win this race. We are not going to change the risk profile of this organization, and as such, we will 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, as I said, is full, but there is no assurance that these will all come to fruition. But there are interesting opportunities here we want to explore.

We are 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 or the operating synergies you can bring out of them.

The other side, with the operating leverage that we have, the trade-off is to grow at maybe 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 only expense base that we have.

So our focus this year is going to be a balanced approach. The acquisitions give you strategic opportunities that all in all gets you into markets cheaper than a de novo opportunity. But at the same time, we need to leverage our organic growth -- our infrastructure a little bit better through organic growth. Our approach is going to be balanced in that regard, but all of it is going to depend, again, on earning assets and our ability to generate earning assets. And there are 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. We are not going to chase assets; that'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 are proud of. We are proud of how we've come through this cycle, and adding shareholder value throughout, and you can be assured of our continued performance in that light going forward. So with that, we can open it up for questions.

(Operator Instructions). Jon Arfstrom, RBC Capital Markets.

Thanks. Good morning. It is snowing here, by the way.

A question on loan growth. You gave us the 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 loan growth, I'm assuming you're saying that a lot of what you saw in your quarter end is pulled through to Q1. Is that a fair assumption?

The latter one first. No, the pullthrough is the pullthrough off of the pipeline. Our pipeline runs over $1 billion, and most of it weighted through the next 60 days on a weighted average basis. That brings it down a little bit over the next 60, 90 days. Weighted average in terms of weighting is a probability of close. But our pullthrough rate has been relatively consistent off of the pipeline reports.

So, as it relates to the vortex, the balance sheet vortex on the asset side and on 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 million. Mortgages held for sale were down $186 million. So on an average basis we were down $117 million quarter versus quarter on average loans.

So, yes, 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 had this phenomenon I think start 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 fell right through to the bottom line. And that being said, and as I also mentioned, we are often good start. A lot of it was spillover from December into January. So, we are off to a pretty good start in January, and hopefully that will continue.

Okay, that helps. And then in terms of the mortgage production, when 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 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 and it just becomes more production-driven, or how do you think about that throughout the year?

I think, in the first quarter, I guess I would define slightly as probably somewhere in the 10% plus or minus range, but that's sort of what we see right now as far as where applications are at. Clearly, that could change. We get more applications in or somebody could fall out, but that is sort of where we're looking at right now.

And then we just -- the second quarter tends to be a stronger quarter, just simply because there's more home buying out there. So we anticipate that to go up, and our sense is that's going up.

We also, w continue to look to hire new producers and bring new teams on. Just like on the banking side, there are companies, as we've said before, that we are looking at to see whether we can pick up similar to a Surety type of transaction. And so we would hope to build it throughout the course of the year. Clearly, my crystal ball doesn't go out to the 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.

Okay. And commissions and bonuses should bounce along with production?

Yes. Commissions, obviously commissions would go up with higher production. That was one of the things in the fourth quarter. Some of the fixed costs 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 volume stayed back with them with their pipeline. So it took us a quarter to really ramp their volume up. So, the profitability of that transaction will get better in I think the first quarter, but clearly commissions will go up as the volumes go up.

Yes, there is still some expense work to do at the mortgage company. They did a reasonable job dealing with the decline in volume, but there was one other unintended expense that came through. I'll just say it because, again, it's part of this Dodd-Frank stuff, is that we have to pay -- 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've had a number of producers out there that didn't do a lot of volume, and so we picked up some expense on that. And now we just had to call the hurdle a little bit even though -- so people are out of a job because of that. But there are things like that that we talked through that will continue to help in the first quarter the expense side of that business also.

All right, thank you.

Brad Milsaps, Sandler O'Neill.

Good morning. Ed or Dave, just 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?

There was a little bit of build up in the quarter. We obviously had some excess liquidity and we put a little bit of that to work pending the growth in the loans rather than letting it sit idly by not earning anything. So we did a little bit more investing there. I wouldn't say substantial relative to our balance sheet, but just put a little bit in the liquidity to work.

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

If you 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.

Okay, great. And then secondly, 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 what you think you might be able to pull off in 2014.

The $64,000 question. Really no impediments. I think there's a lot of wait and see. Things are getting better and some of these banks are getting better, and you have discussions with them that -- you know, let's just wait three months because I've got this stuff happening. And also, I think they're seeing their one large transaction that was done here in town that was a pretty good multiple, and sellers' expectations are a little bit high. So people just wanted to put some time in because things are getting a little bit better for them, and wanted 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 $1 billion to thrive in this brave new world that we are in not just because of regulatory costs, but because of the inability to generate earning assets in a way that -- a safe way in categories that they're comfortable with. And the fact that they can't get anything out of the liquidity portfolio doesn't help them either. That's for the near future.

So I think that it's going to come. It's 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, we are being able to clean them a little bit quicker. So I think the same thing is occurring there. But that being said, there's 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've got to take what the market is giving you. Right now, relatively speaking, these deals get us into markets at less than it would cost by (inaudible) 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 overpay anybody. We want to pay fairly and at the same time, we'd like to grow organically and start taking advantage of a lot of this infrastructure that we have in here.

There will be a time when these acquisitions fall away in the next two or three years and at which time we will revert back to organic growth, and that will be a good move for us also. So, we've just got to be balanced and take what the market gives us and take each deal as they come.

Okay. Thank you guys.

Herman Chan, Wells Fargo.

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

If that was the case, yes it would go down just because of the niche loan portfolio that especially (inaudible) have 23 basis point, 25 basis point coverage, that more than doubles our charge leverages on those two portfolios, and the one turns over really fast. Yes, that would be the case.

But we expect to have balanced growth. Our niche 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 ERISAs may have higher reserve requirements that come with it.

And we are also, we are seeing opportunity on the commercial real estate side and the commercial side and those right now are covered at 1.25. So, you would imagine that that 1.25 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 still room in there once we get the house -- room on the credit side, the expensive credits, once we get the house, continue to clean the house and go back to those. But there's no assurance of that. Our portfolio has changed a bit in terms of our commercial exposure, which has grown since pre-crisis. So, I think that there is room there to bring credit costs down further but it's going to be what it's going to be.

What we do is in the press release, we do sort of show how we've reserved against our portfolio. So as Ed mentioned, our premium finance portfolio on the commercial side and we reserve at 25 basis points on that on the life side 5 basis points. I don't know if we've ever been over 5 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 would like to keep it at a third or less and add more legs to that stool. But you can see how we build up. On our commercial side, we are probably more like other banks out in the universe. We just are fortunate to have a fairly large niche business and some other categories that really have very low historical loss rates, which helps us out.

Understood, thanks for that. And I might've missed it earlier, but can you provide numbers on the gross and weighted average loan pipeline at the end of the year?

Yes. Hang on while I pull it up. Gross is about $1.1 billion, weighted about $650 million.

Got you. Thank you very much.

David Long, Raymond James.

Good morning guys. 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?

We have our circuit breakers and we don't break them. I would say that it's gotten a bit more unnatural is the way we look at it in terms of terms and some pricing. But you know, 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 during the go-go days of 2006 and 2007 and the beginning of 2008. But we do see deals -- we do lose deals because of pricing structure.

At the same time, our pullthrough rates (inaudible) there are still a number of deals out there that we are able to book and get on our terms. So, I don't see that paradigm changing from where it was at the beginning of the year because there's more opportunities out there. So, I think the influx or the growth in opportunities makes it seem like there's more to lose, but there's more that we win, too. Does that make sense?

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

We think we are probably about 60% to 63%, somewhere between 60% and 65% utilized right now down south. Based on the numbers that these guys -- we take a very disciplined approach to this. The business that we want, the business that we are going to get, we call on, we are relentless until we get it. There's a lot of business we don't want that's out there that we -- so we can push those off to the side. And they believe and their budgets show that they can continue to grow at not a lot of expense. 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. You can never have enough good people, and if we can find guys or teams, we are not afraid to take that overhead on and it takes them about a year to pay for themselves. But we are in this for the long haul. So, we do have the capacity with our current infrastructure to continue to grow, but we are always on the lookout for other people who want to come join our parade.

Okay, great. Thanks for the color, guys.

Stephen Geyen, D.A. Davidson.

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 a change in the pipeline, maybe some growth, as the economy improves?

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 report to downtown. It's Wintrust commercial lending. And Wintrust commercial lending really all 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 get from a geographic standpoint. So we have put people out in the field all part of the same coordinated calling efforts, CRM system, works extremely well to make sure that we are getting the calls in, that we are adequate, we cover them, we can just pound these guys into submission. And so we have to convince them that they think they are having a good time. They just think they are having a good time at their existing bank, and they'll have a better time over with us. So we have seen that a bit. It comes and goes, but the marketing that we put on, the branded marketing which we are two years into, has really, really worked well for us. For Wintrust Commercial Banking to stop from zero and grow as well as it has its good solid relationship, profitable relationships, has put us on the map. And we are a force and we are someone that people call when they are thinking about their banking now. That didn't happen three or four years ago.

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

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

Yes. It takes three, four months before those accounts fill out. We attempt to get it and usually do the 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.

Okay. Thanks for your time.

Emlen Harmon, Jefferies.

Good morning guys. Just in the mortgage business, in terms of applications, kind of what percentage of the applications are Surety? And could you give us a sense of just I guess trying to get a sense obviously as you noted, the closing don't all 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.

Historically, it's been about 25% if we went back year-over-year-over-year and looked at what they have done and the recent quarters before we bought them. They had typically run at about 25% of our volume. So I would anticipate that they will probably be -- as we grow the rest of the Wintrust mortgage, that percentage may come down as we add producers in other areas. So say 20% of our volume plus or minus.

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

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

Got it, thanks. And 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 and use that to fund some of the unique assets that you guys. I would just be kind of curious as to how you're approaching new markets these days, whether there's more of a commercial banking spin on that?

Yes. 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've used in the past to bring in accounts from there because we are starting at a zero base. So we need to build that up, and so we offer bundled account packages and all sorts of specials to start building up momentum in those. 12 of the branches are (inaudible) closed too, so 10 net. Well let's see. 10 -- seven 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 it all depends on loan demand obviously, and by acquisitions of the company. Most of the acquisitions we bring in come with about 50% liquidity which we need to sop up. So we will sop that up before we will go out and push the deposit through the existing branch deposit growth.

But we have put in place this year a five-year plan. If you remember, going back before the crisis, we were one of two (inaudible) market share in pretty much every town we were in both deposit share and rooftops covered. We have a five-year plan in place for each of our locations to obtain that positioning in some of these new branches. We think, between acquisitions and this balanced growth we are taking, we can start on that approach. They all do have a base to work with, so their marketing is a little bit different. But our goal is to be one or two in market share there.

And we need to start taking advantage of some of this operating leverage that we have in the 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 for three or four months, but it's a balanced approach and we have to take what the market gives us in order to build shareholder value but that's always an arrow 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.

Got it. Thanks a lot for taking my questions.

Chris McGratty, KBW.

Good morning. Ed, you grew the noncovered loan book by 9% in 2013, and net interest income was up about 6%. I was wondering if you could offer kind of how this dynamic plays out in 2014. And then particularly I'm interested in how the near term margin trend might be, especially with securities yield up a bit and your liquidity management assets still pretty low yielding. Thanks.

Well, we expect to have the same loan growth, do good solid loan growth this year if the market gives it to us. And I think, without a big change in rates, we're still going to play in this band that we talked about. Between 350 as a base, up 10 or down 10. And maybe if the mix gets a little better or leasing takes off, there's a higher rate, we could see -- we could break above that 360. But we continue -- rates are going to go up and we continue to position our balance sheet, as indicated by the caps, the non-hedged caps we have on our books, by we keep continue to push variable-rate loans, so we continue to know that rates are going to go up at a point in time and we need to be prepared for that. That is, as we say, the proverbial beach ball underwater. So, when that goes, if we have a 200 basis point parallel shift, that's a very good thing for us. You get half the results off our GAAP table. The other half will come from decompression the takes place because of the way we are funded. Being funded conventionally with -- and pretty much 100% core funding, there are -- we will get better spreads on those. And of course, as somebody who is funded strictly through 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 decompression will help the margin in a rising rate environment.

So, we can keep growing volumes up and the like. I think we can hold the margin where it is, maybe improve it a little bit and have -- if we are able to keep it efficient and not have 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 grow nicely.

Okay. And just on the efficiency, you have been hovering kind of mid-60s%. I know you look at the overhead ratio, but mid-60% efficiency adding to the mortgage business, outside of really a movement in rates this year, maybe next year, is kind of middish 60s% kind of fair, maybe trending down a little bit from here in terms of efficiency ratio?

I think it's fair. It really depends on where -- let's say we do no acquisitions this year. The market moves away from us, and we turn to organic growth, and that organic growth will cost us a little more on the cost of funds side, but not on the other expense side, that would improve our efficiency ratio.

When you buy these things, you do get a head start and strategically they make a lot of sense, but you come with a lot of expenses then that you are adding as part of that growth. Now, long-term, that's a good thing and 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, if you just look at the banks where the bank operations are really in the high 50s%, it's really those others, the wealth management and the mortgage business that drives that up, drive the rest of the efficiency ratio up. So there's a lot of moving parts here, but we manage them down at the level of the operating companies. I think our best bank is operating, what, Dave, in the low 40s%?

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

Yes. So, some of the other banks don't. That's part of that infrastructure that we built up, that leverage. So it will depend on where our growth comes from, where -- but it certainly has a tendency to get better with organic growth, but an acquisition to drive all of the costs out and make it and optimize that will probably add to your efficiency ratio. So yes, you could say mid-60s% might make some sense if you do balanced growth, maybe drop it a little bit. And if you do more organic growth, it's will go down a little bit.

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

Steve Scinicariello, UBS.

Good morning, everyone. 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 to kind of drive that down a little bit more, or should we kind of think of this level as like a decent baseline kind of level?

No, we are hoping. As I said, there's operating leverage there. But like I said in my comments, the legal professional fees (technical difficulty) the high end of the range this quarter, and we cleared out quite a few in nonperforming assets. So, that number I think was elevated and we would hope that would come down. Now, it could be that we clear out a similar number next quarter and some of those would carry some expenses, but we actually think that number should come down. Diamond Bank will get converted this quarter and then we'll have all the banks converted and hopefully we can start to drive some leverage up out there.

Actually, some of the other occupancy and expenses -- there's been a lot of snow here in Chicago, so we have a lot of snow removal charges in December. But that's 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 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 costs there, like I said in my comments, of about $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.

Sounds perfect. Perfect. And to me, the bigger picture take-away here is the amount of operating levers that you guys have built into the system. So even if you've got -- we shouldn't probably expect expense growth at the same level, especially relative to revenue growth, as we look into 2014. Is that kind of the big picture message also?

Barring acquisitions.

Right.

That throws you a little bit for a loop. But yes, expense control is very important to us, but we do have to operate these. And we are planning this for the long haul. And you have to let's say take what the market gives you that makes sense long-term for the shareholder. And that's what we're doing.

So, we'd like to continue to put up double-digit earnings growth. At the same time, they have the franchise value and built the organization. I said in the past we're kind of getting back on the program that we were on before the crisis where -- continue to build this organization, be a growth company. Grow profits, continue to increase profits, and shareholder value through that type of growth. So that's what the plan in fact is and we're going to continue to follow that and take what the market gives us. And unfortunately, life isn't 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 a model dream in that regard, but we always seem to make our plans for all the wrong reasons and we will probably continue to do so.

Perfect, thank you so much guys.

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

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and have a wonderful day.