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spk01: Welcome to Wintrust Financial Corporation's fourth quarter and full year 2022 earnings conference call. A review of the results will be made by Edward Wehmer, founder and chief executive officer, Tim Crane, president, David Dykstra, vice chairman and chief operating officer, and Richard Murphy, vice chairman and chief lending officer. As part of their reviews, the presenters may make reference to both the earnings press release and the earnings release presentation. Following their presentations, there will be a formal question and answer session. During the course of today's call, Wintrust management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Actual results could differ materially from the results anticipated or projected in any such forward-looking statement. The company's forward-looking assumptions could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent Form 10-K and any subsequent filings with the SEC. Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded. I will now turn the call over to Mr. Edward Wehmer.
spk07: Thank you very much. Welcome, everybody, to our fourth quarter of the year-to-date 2022 earnings call. With me always is Dave Dykstra, our chief operating officer. The stars are, what are you, Dave?
spk08: CFO.
spk07: CFO. Tim Crane, the president. Rich Murphy, our head credit guru. And Kate Bogey, our general counsel. Now, the same format as we've been doing in the past. I'm going to get some general comments regarding results for both the quarter and the year in total. Turn it over to Tim Crane for more detail on the balance sheet. And then to Dave Dyches, who's going to discuss the income statement in detail. Rich Murphy is going to talk about credit. And back to me for some summary comments about the future. We'll have some time for questions. We finished the year very well. It's a great year for us. Beach ball jumped up. It's still on its way up. Earnings for the year are 509, almost $510 million, up almost 10% from the previous year. Blue earnings per share for the quarter are 144, 145 million. compared to 142 million, 143 million in the third quarter, and about 99 million in the fourth quarter of 2021. Millions per share, 223 for the quarter, 802 for the year, compared to 758 for the previous year. Pre-tax, pre-provision income, it was a record for us, I think, 243 versus 206 for the year. 780 versus 579. And the prospects were good for this to continue on its way up. It was a margin, finished at 373, 317 for the year, up from 335 in the third quarter for 38 basis points and 59 basis points year-to-date at 317. And then we expect to... Approach 4% coming this next quarter. Tim will talk about all that. Turn on assets around 1% for the year, $1.10 for the quarter. Turn on equity of $12.72, $11.41 for the year. And the local value rose to $61 a share compared to $59.64 for the quarter of 2021. Again, It was a very good year for us. If you look at the balance sheet, to some extent, the assets rubbed nicely for the year. The loans rubbed about $1 billion, with about almost $700 million over average. So we'll be able to work that going forward. The margin, as Tim will discuss, Tim and Dave will discuss trying to hedge it a little bit to maintain our downside risk. It makes sense as rates go up. The next move will be down at some point, and we're adjusting the balance sheet for that. Tim will talk about that. Credit side credit is still remarkably good. Murph will talk about that, but we'll point out that if you look at the real numbers, the quarter was actually down for the quarter. because of about $17 million of FIFCO life loans that got hung up in waiting for the money to come back. When you look at the FIFCO portfolio, you have to understand that all that money that's out there that we show is past due has been confirmed as going to be returned. So credit was actually better than it was before, and I feel very good about that. I'll now turn it over to...
spk08: Tim? All right. How about the balance sheet? That's good. Thanks, Ed. I'd like to highlight a few balance sheet items, and I'll also comment on several items likely to be of interest, including the continued impact of rising rates on the margin expectations. The approximately billion dollars of growth for the fourth quarter was 11% loan growth on an annualized basis, which continues to be spread nicely across all major loan categories. As noted in the release, period end loan balances were $630 million higher than the quarter average, which will help our first quarter 2023 results. Going forward, while we remain encouraged by stable loan pipelines, we believe there is some evidence of a modest slowdown in market loan demand. Loan growth in the mid to high single digits on an annualized basis remains a reasonable expectation given the current economic uncertainty. Rich will speak to loans in more detail in just a few minutes, but a couple of notes on the provision and on our allowance. Of the $48 million in provision, approximately two-thirds is related to a modest deterioration in the CISO macroeconomic factors, and only one-third is related to our growth and portfolio changes that occurred during the quarter. To be clear, we are not signaling a change in our credit performance. With respect to our allowance of 91 basis points of total loans, it's important to note that excluding our historically low-loss niche loans, primarily the premium finance loans, Our allowance is 142 basis points of total core loans. You can see that on Table 12 of the press release where we provide some detail. Deposit growth for the quarter was approximately $105 million. The continued rise in rates is clearly making deposit gathering more challenging. The cost of deposits are rising and nominal changes in deposit mix are occurring. Interest-bearing deposit costs of 130 basis points for the fourth quarter were up 66 basis points. We anticipate continued increases in both the Fed funds rate and the rates associated with the bank's loan and deposit activity. Increases in loan yields, however, at this point in the cycle, continue to exceed the change in deposit costs given our asset-sensitive position. Our deposit betas and the increase in deposit costs to date are in line with our expectations. Currently, the beta on our interest-bearing deposits is approximately 25%. We anticipate an interest-bearing deposit beta of approximately 40% to 45% over the full cycle of interest rate changes. Our securities book was up $1.5 billion in the quarter, as we believe yields are becoming more attractive and represent the opportunity for reasonable longer-term returns. At year-end, liquidity remains strong with approximately $2.5 billion of cash on the balance sheet. As discussed last quarter, our securities book is split almost equally between available for sale and held in maturity. While the AFS valuation swings during the year were significant, as Ed pointed out, the bank's tangible book value was up for both the fourth quarter and the year to $61 a share. Those of you who follow us know that the tangible book value per share is an important metric for us. It has increased every year since going public in 1996. With respect to rate sensitivity in the margins, Although our GAAP position is trending down, we remain asset sensitive and well positioned to continue to benefit from rising interest rates. We believe each 25 basis point increase in the Fed funds rate at this point in the cycle will result in approximately $30 million in pre-tax net interest income on an annualized basis and an improvement in the margin of five to eight basis points. Note this is down slightly from our prior positioning. To be more specific on the margin, As Ed mentioned, it was 373 in the fourth quarter, an improvement of 38 basis points. With rates rising, we continue to achieve and in some cases exceed the margin improvement discussed or projected on our prior calls. At this point, depending on the impact of competition for deposits and the pace of additional Fed increases, we believe our margin will approach 4% at some point during the first quarter and has not yet peaked. Conversely, while we clearly benefit from rising rates, as discussed on our last call, the bank entered into several interest rate collars in the third quarter of 2022. Further, early in this quarter, first quarter of 23, the bank entered into additional derivatives contracts with the intent of reducing the variability of the margin in a lower, lower interest rate environment. Our approach has been to leg into these contracts, and we anticipate that additional activity on this front is likely. You can see Table 8 in the press release for more information on our gap position. As you know, we also view our mortgage business as a natural hedge as it has proven to perform well in lower rate environments when margins tend to be pressured. For the fourth quarter, capital ratios were stable to up slightly and remain appropriate given our risk profile. And with the higher net interest margin and currently forecasted loan growth, the company's earnings are projected to result in organic improvement to our capital levels in the coming quarters. With that, I'll turn it over to Dave.
spk10: Great. Thanks, Tim. As usual, I'll cover some of the noteworthy income statement categories, starting with net interest income. Tim and Ed have referenced some of these numbers, but we'll just go through it in detail. For the fourth quarter of 2022, net interest income totaled $456.8 million. That was an increase of $55.4 million as compared to the third quarter of 22. and an increase of $160.8 million as compared to the fourth quarter of last year. The $55.4 million increase in net interest income as compared to the prior quarter was due to an increase in the net interest margin and loan growth. The 38 basis point improvement in the margin brought it to 3.73% in the fourth quarter. A beneficial increase of 84 basis points on the yield on earning assets and a 22 basis point increase in the net free funds contribution Combined with the negative impact of a 68 basis point increase on the rate paid on liabilities resulted in that improved net interest margin. The increase in the yield on earning assets in the fourth quarter as compared to the prior quarter was primarily due to an 87 basis point improvement on loan yields and higher liquidity management asset yields as the company earned higher short-term yields on its interest-bearing deposits held at banks and its investment securities portfolio. TAB, Mark McIntyre, The increase in the rate paid on interest bearing liabilities in the fourth quarter, as compared to the prior quarter was driven by 66 basis point increase in the rates paid on the interest bearing deposits TIM already went through the deposit beta so I will. TAB, Mark McIntyre, Let you refer to his comments on that turning to the provision for credit losses when trust recorded a provision for credit losses of 47.6 million dollars in the fourth quarter. TAB, Mark McIntyre, Compared to provision of $6.4 million in the prior quarter. and a $9.3 million provision expense recorded in the year-ago quarter. The higher provision expense in the fourth quarter was primarily a result of less favorable macroeconomic environment conditions, including wider projected credit spreads and less favorable commercial real estate price index data included in the economic forecast that we use. Stronger loan growth also contributed to provision expense for the quarter. Rich will talk about credit in more detail, but I should note that the current quarter's net charge-offs, the mix of classified loans, and the delinquency data all remain relatively stable or better and really pretty good. So those factors really did not have a significant impact on the level of the fourth quarter's provision for credit losses expense. And as Tim said, the larger expense level is not a signaling of any specific issues. It's really a function of the macroeconomic forecast that we use in our CECL models. Turning to other non-interest income and non-interest expense. In the non-interest income section, our wealth management revenue was down $2.4 million from the prior quarter. and was at the level of $30.7 million for the quarter. Decline in revenues for this quarter were primarily related to less fees associated with our tax-deferred like-kind exchange business, which had been very strong in the prior quarters and slowed just a bit in the fourth quarter. Consistent with overall industry trends and the impact of relatively higher home mortgage rates, our mortgage banking operation experienced a revenue decline of $9.8 million from the third quarter, due to lower loan origination volumes and lower production margins during the quarter. We expect mortgage origination volumes to continue to be low in the first quarter due to the rate environment and the seasonal purchasing trends, but it's still an important part of our business and we expect it to pick up some volume when the spring buying season starts in the second quarter. The company recorded net losses on investment securities of approximately $6.7 million during the fourth quarter compared to a $3.1 million net loss in the prior quarter as market conditions and equity valuations continue to affect a portion of our securities portfolio. Other non-interest income totaled $19.3 million in the fourth quarter, which was up $3.5 million from the amount recorded in the prior quarter. The contributing reason for the increase in this category is that the company recorded approximately $1.1 million of higher BOLI income, which was primarily related to higher earnings on BOLI investments that support certain deferred compensation plan benefits. And so I should note that that $1.1 million increase in the BOLI income has a similar offsetting increase in compensation expense during the quarter. So they sort of net, as far as net income goes, but there is an increase in both those categories for the quarter. Additionally, prior quarter had a negative valuation adjustment of approximately $2 million on our early buyout loans, certain early buyout loans, whereas the prior quarter, the prior quarter had a $2 million negative valuation on the early buyout loans, whereas the current quarter had an insignificant adjustment. Turning to non-interest expenses, Non-interest expenses totaled $307.8 million in the fourth quarter and were up a little over $11 million when compared to the prior quarter total of $296.5 million. The primary reason for the increase was due to higher compensation-related expenses and a variety of other less significant contributing factors. Salaries and employee benefits expense increased by approximately $4.2 million in the fourth quarter as compared to the prior quarter of the year. Bill Meyer- Relative to the prior quarter, the increase of $2.8 million of higher salaries expenses and $2.3 million of higher employee benefits expense were the primary causes. Bill Meyer- As to the higher salaries expenses, it was caused by $1.8 million of increased deferred compensation costs. Bill Meyer- As I mentioned, partially related to the underlying BOLI investments, where we recorded the income on the other non-interest income part of the income statement. And on the employee benefits side, those are almost exclusively related to higher health insurance claims during the quarter. So elevated in the fourth quarter generally as people try to use up some of their health benefits before the deductibles reset. Also, although a smaller change from the quarter, commissions and incentive compensation was slightly lower as mortgage banking commissions were reduced, although we did have some higher benefits. bonus and long-term incentive compensation accruals for the quarter related to the higher earnings level, but the net was a reduction in that category. Advertising and marketing expenses decreased by $2.3 million in the fourth quarter compared to the prior quarter. As we've discussed on previous calls, this category of expenses tends to be lower in the fourth and first quarters of the year due to to less marketing and sponsorship expenditures related to various major and minor league baseball sponsorships and less summertime sponsorship events that we obviously don't do in the wintertime. Professional fees increased by approximately $1.7 million in the fourth quarter. These fluctuations were primarily related to some consulting services that we utilized in conjunction with the implementation of various new programs financial and customer-related processing systems. Other miscellaneous expense increased by $4.8 million during the quarter, which included a $1.1 million additional charitable contributions and a variety of other normal operational fluctuations, none of which I think are worth noting for this call. Our efficiency ratio declined to 55%. for the fourth quarter from 58% in the third quarter as our expenses did not increase at a rate commensurate with the increase in revenue. And with that, I will turn it over to Rich to cover credit.
spk09: Thanks, Dave. As noted earlier, credit performance for the fourth quarter was very solid from a number of perspectives. As detailed on slide 8 of the deck, loan growth for the quarter was $1 billion, or 11% annualized, an outstanding result. And similar to the past few quarters, we continue to see loan growth across the portfolio. Specifically, commercial real estate grew by $373 million. Commercial loans, bolstered by a strong quarter in leasing, grew by $290 million. Commercial premium finance had another solid quarter, up $136 million. And residential real estate loans were up $137 million. Year over year, we saw total loan growth of $5 billion, or 15% net of PPP loans. A very productive 2022. As noted on our prior earnings calls, we continue to see very solid momentum in our core CNI and CRE portfolios. Pipelines have been very strong throughout the year, and we saw that materialize into increased outstandings over the past several quarters. In addition, ongoing disruptions within the competitive banking landscape continue to work to our benefit. Also, commercial premium finance had a very strong 2022 with increased outstandings of close to $1 billion year over year. We anticipate this momentum will continue into 2023. While we are optimistic about loan growth for this year, we would anticipate that the pace of growth may trend closer to the middle of our guidance of mid to high single digits for a number of reasons. While WinTrust Life Finance grew by $1.1 billion during 2022, the rapid increases in rates during the past year have affected that pace of growth. This portfolio grew $86 million in the fourth quarter versus $396 million in the third quarter. We would anticipate this slower rate of growth will continue in this higher rate environment. Also, increases in commercial line utilization, excluding leases and mortgage warehouse lines, as detailed on slide 17, have flattened during the fourth quarter, possibly reflecting a more cautious business sentiment. As a result, while we continue to be diligent about the possibility of a business recession, we believe our diversified portfolio and position within the competitive landscape will allow us to grow within our guidance of mid to high single digits and maintain our credit discipline. From a credit quality perspective, as detailed on slide 16, we continue to see strong credit performance across the portfolio. This can be seen in a number of ways. Non-performing loans remain stable at 26 basis points, or $101 million, compared to $98 million in the third quarter. And as Ed noted earlier, of this total, $17 million was related to Wintrust Life Loans, which went 90 days past maturity. Roughly half of these loans have since been paid off, the balance of which are fully secured, and we would anticipate full repayment from the carrier shortly. Overall, NPLs continue to be at very low levels, and we are still confident about the solid metrics in the portfolio. Charge-offs for the quarter were 5.1 million or five basis points, up slightly from the previous quarter. Charge-offs for 2022 totaled 20.3 million or five basis points. Finally, as detailed on slide 16, we saw stable levels in our special mention and substandard loans, with no meaningful signs of additional economic stress at the customer level. That concludes my comments on credit, and I'll turn it to Ed to wrap up.
spk07: Thanks, Murph. You know, year-end is always a good time to review not just the fourth quarter and the year-to-date, but whether to review the entire body of work over a longer period of time versus our stated goals that the companies had. Let's go back 10 years. In our case, you go back 30 years, results versus peers would be about the same. Increasing tangible book value we think is extremely important, one of the goals we always look at. As Tim noted earlier, We've increased it every year since we went public. Eight-year CAGR of 8% is pretty good. Even last year, it had been kind of tough, but we still were up above. We were positive. Earnings growth, 16% on a 10-year CAGR. Asset growth, 12%. Dividends paid, 22%. Stock price, only 9%. Go figure. During 10 years under review, we saw a bit of everything, high rates, low rates, pandemics, you name it. WinTrust has thrived during all of these. It's a testament to our business model. We employ the people who work at WinTrust. When rates were low, our mortgage company helped pick up the slack of the net interest margin compression that occurred. The lower rates went, the more we increased our positive gap. Rates have risen. Mortgage has died down. I say this because I'm often asked, well, you're a mortgage bank. No, we're not. It's just part of what we do. This is an orchestra here, not a combo. This is a big orchestra with all sorts of different parts. At times, they all kick in. At times, they don't kick in. Mortgage is still an extremely important offering that we have, but... It's not doing well now, but it will do well as rates come back down. Now, with the margin up, we're embarking on, as Tim mentioned, locking in this increased margin for a longer period of time. All of the above has been accomplished by maintaining our exceptional credit statistics. How many natural concentrations killed has also served us well both in the deposit and the asset side. Extremely well diversified, and there's something that always works when something isn't working. We're a growth company that takes what the market gives us. Acquisitions or organic growth have both worked very well for us. Based on all the above and many more points, one has to wonder why we consistently trade at a discount to our peers. I have to put that in there. I'm sorry. As of future, you can expect more of the same. Our margins should continue to increase as the remainder of the asset portfolio reprices and liability costs increase at a lesser rate. Marginal is in our future. She will be locking in that higher margin. As we mentioned, today's comments is already underway. Home pipelines are still strong, but a bit lower than historically, as Merck pointed out. And we keep our guidance the same, but are focusing on the lower side of that. Credit stats are stellar, but we're prepared for additional hemorrhoid attacks by the folks at Moody's, which we had one this quarter. Adversities are still being evaluated in all aspects of our business. Pricing is still an issue, especially given our stock price. Now it's acquisition of Rothschild's American business on track for a first or second quarter closing. In short, we like where we stand. With all that, I think we can assure our best efforts going forward. We will be consistently good. We're all major owners of this. Our networks are tied up in this company. We're not going to do anything stupid. In fact, we hope to thrive no matter what the economic cycle is and where we're at in it. To ensure our best efforts in this, and time for some questions, please.
spk01: As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Again, that's star 1-1 on your telephone to ask a question. Please stand by while we compile the Q&A roster. Thank you. Our first question comes from the line of John Armstrong of RBC Capital Markets. Your question, please.
spk05: You guys hear me all right? Yeah.
spk07: How are you, John?
spk05: Hey, good. John Armstrong from RBC. You guys, the numbers look good here. The one that surprised me a little bit was the provision, and it seems like you've touched on it and alluded to it. But what do you want the message for us to be going forward with? It feels like it's going to pull back. It feels like it pulls back with a little bit slower loan growth as well. But do you guys view this as more of a one-time step up and we go back to a normal pace? Or how should we think about that?
spk10: Well, I think, John, the CECL, as you know, is sort of a life of loan concept. And, you know, if we have loan growth, you know, the provision will go up. But if the economic scenario stayed exactly the same, you'd have, you know, no additional provision in the next quarter per se for that. So it really depends if the if if the if you know in the economists obviously change their forecast frequently. But if that forecast gets better next quarter, you could expect it that the provision to come down. If it gets worse, you know it would probably stay elevated, so it's really a function of where the economy is going. But as as Tim and Rich and Ed and I have all said, there's nothing specific here that we're pointing to that we think is a current problem in the portfolio. This is just how you know. commercial real estate price index forecast and how, you know, BAA credit spreads and GDP and all those forecasts got, you know, moderately worse in the forecast that we, economic forecast we use. So it really is a function of the CECL modeling and not a function of us seeing deterioration in our credit. So If you can tell me where that crystal ball is next quarter as far as economic forecasts, you could know which way our vision is probably going to go.
spk05: Okay. Okay. So it really wasn't any heavier weighting by you? It was just more of the output? Yeah. Yeah. Yeah.
spk07: Okay.
spk05: I'm sure that'll be in the transcript, Ed. Okay. The other question I have is on the margin. I think I understand what you guys are saying, but if the Fed, it feels like you're trying to protect downside, but if the Fed bumps a couple more times and then holds it for a while, what could happen to your margin? You guys are talking about a 4% level, but then, Ed, you kind of alluded to floating a little bit higher above 4%. What do you think about the margin outlook in that kind of a scenario where the Fed is not cutting?
spk07: Well, they're raising, it should be, as Tim said, $30 million on an annual basis per quarter. Eventually, we've been lagging on the deposits. Eventually, that's going to catch up to that overall beta. We still have a lot of assets that are repricing right now. You know, if you think about premium finance business, that reprices over a course of a year. There are other assets that do the same. We're monitoring this very carefully as we leg into these derivatives to help maintain the margin. So it's hard to say where it's going to be. It depends on some of the derivatives we give up. We give up some upside to protect the downside. But I think that depending on how rates go, margin will continue to go up. If we can protect something in the 375 to 4% range long term, depending on where rates are that'd be a good thing, but it's going to take a lot more derivatives to do that. And we're not really good at market timing. So we'll, you know, when that happens, the mortgages will kick in and life will be good again in that, in that regard. And so we kind of have some internal hedges too, but Tim, you want to talk about that?
spk08: Yeah. I think John, in general, we would expect the margin to sort of top out after the fed stops raising rates. And so again, you know, whether that's a quarter or two or whether we moderate that with some, you know, thoughtful decisions around the derivatives, you know, that's kind of what we're thinking.
spk10: But, yeah, John, this is Dave. You know, I think what we've said here is that we expect the margin to approach four, and if the Fed raises some more, it may pop a little over four. But then we think, you know, given existing competitive pressures and the existing yield curve that, if they stop raising, that we can kind of hold it there if all else be unstable. Because as Ed said, we have a lot of asset beta left too. Everyone talks about the deposit betas, but if you look at our life insurance premium finance portfolio, as you know, those reset once a year. And if you go back a year, They're based generally off of a 12-month LIBOR or a 12-month Treasury rate, and those rates were, you know, 58 basis points a year ago. If you look at the page 25 of our earnings release, you know, those rates are up over 400 basis points. So there's a lot of repricing that happens there. The property and casualty premium finance loans are fixed-rate loans, and so they reprice over the course of a year. So that's a third of our portfolio that has pretty good asset beta changes left that we think will substantially offset the deposit beta. So we feel like we can kind of hold the margin if they go higher and then plateau. Okay.
spk05: All right. That's all very helpful, guys. I appreciate it. Thank you.
spk07: You're welcome.
spk01: Thank you. Our next question comes from the line of David Long of Raymond James. Your question, please, David.
spk04: Good morning, everyone.
spk07: How are you doing, David?
spk04: Good, good. You know, you guys bucking the trend here on the deposit side, showing deposit growth. A lot of the banks continue to have outflows. What are your expectations on the deposit flows? And then also, you know, mixed shift hasn't changed too much, as you alluded to. Do you see much mix shifting coming in the next couple of quarters?
spk08: Yeah, David, it's Tim. The deposit activity has been lumpy, both in and out, I would add. We've been pretty disciplined with our pricing and cautious about getting ahead of the market. We're responding to promotional activity to retain our clients, and frankly, we've got some higher deposit costs built into our projections. You know, we think we operate in good markets with a lot of deposit potential. We've typically outperformed our peers in terms of growth. Even though we're one or two in deposit share in many of our markets, we still only have 6%, 7%, 8% overall growth in Chicago and Milwaukee. So our multi-charter brand and approach we think will help us, and we think we're holding our own. I'd add sort of an interesting fact here. During the last quarter, or two quarters rather, we've helped clients purchase almost a billion dollars worth of short-term treasuries that previously had been held at deposits at the bank. And as the gap between deposit pricing and treasuries starts to narrow again, you know, we expect we'll get an opportunity at some of that money. But we don't, I mean, we'll protect the mix as best we can. Clearly people are moving out of DDA in some cases for the rates in money markets or savings or CD products. Um, so I think, you know, that's possible that'll continue, but I can tell you we're intensely focused on adding deposits and relationships, and we still think we've got, you know, terrific market opportunities. So, um, we're going to hold our own and stay at it.
spk04: Good. Thanks, Tim. And then, you know, my follow up here relates to the amount of cash you have versus deposits. A lot of your peers don't have much cash and they've really had to increase FHLB borrowings and use of higher cost CDs, you know, your cash, as I see it, is down to just under 6% of deposits. You're up over 10% at September 30th. You know, do you monitor that? Is that something that you have a target you want to keep above a certain cash level just in case you do get some deposit runoff and you don't have to chase yields?
spk10: Yeah, I think we're sort of comfortable where the cash is now. If you remember last quarter, the third quarter, we had a billion dollars extra sitting in cash because we had done some borrowings at the Federal Home Loan Bank that we had indicated we would invest at the beginning of the quarter, and we did that. So I think if you look at it, we were in the high threes, and then we went to the high twos. If you adjust for that billion dollars that we invested shortly earlier, after the end of the third quarter, and now we're around $2 billion. We like that position. We sort of focus on a loan-to-deposit ratio of 85 to 90. We're slightly over that, but still in a range we're comfortable with. And then we were lagging on investing that securities portfolio in the past. We just thought investing in the 1% range was not that prudent, and so we were patient and then we've invested now that rates are higher and we think that part of the remixing of the balance sheet to protect against down rates is to invest in some of the longer term securities now for a portion of the balance sheet. So I think we like where we're at right now as far as the mix of cash, securities and loans and as we grow that mix will probably stay about the same.
spk07: Yeah, liquidity has always been very important to us and You can expect our deposit costs to go up, but we have a lot of room there, given the 40% beta we talked about. We're not there yet. At the same time, the asset should move, and the real tricks could be protecting the margin when this peaks out and, you know, a black swan hits, and it's going to drop like a rock, no matter what the environment is, and you have to be prepared for that, too. We are constantly looking at it, and liquidity is extremely important to us. People forget Continental Bank went under because of liquidity, not because of credit. It was the largest bank failure at the time. And liquidity is still important to us. We monitor it very, very carefully.
spk04: That's great. Thanks for the call, guys. Appreciate it.
spk01: Thank you. Our next question comes from the line of Chris McGrady of KBW. Your line is open, Chris.
spk03: Hey, good morning. Thanks.
spk01: Hey, Chris.
spk03: How are you doing? Dave, the 4% margin, roughly, that you're talking about, I guess, what does that map to in terms of loan yields? You've got the premium finance book that's kind of got a backward lag, but Is it somewhere in like the mid-six? It feels like it's kind of somewhere in the mid-six. Is this kind of where your loan yields are going to go?
spk10: You know, probably mid-six is approaching seven right now, I would say. But if rates keep going up and the mix of the business changes, I mean, that's a variable. But we don't give specific guidance, but that's the right zip code. Okay.
spk03: And then there was a comment in the press release that just talked about additional improvements in efficiency. Maybe you could throw a little bit more color around that. You're obviously in a good spot in, you know, exiting the year in the mid-50s, but how would you think about that ratio playing out, appreciating that mortgages in recessionary levels? Thanks.
spk10: Yeah, so, you know, mortgage, you know, lower mortgages obviously help the efficiency ratio, but, you know, the expense side of the equation, you know, it we'll have some additional expenses in 23. You know, the FDIC rates are up. You know, compensation costs will go up a little bit as we push through salary raises and the like later this quarter. But, you know, I think with the inflation and the FDIC and those sorts of things, you know, generally you're probably, you know, slightly above mid single digit growth and expenses, and if you add on the acquisition we're planning, it's probably high single digits expense growth for the entire year. First quarter probably doesn't grow too much on the expense side, we don't think, but then as we add in the acquisition, when that closes, That'll add to it, and then salaries will kick in. But the margin is going to increase substantially, and we think that mid-50 efficiency ratio we have probably drifts down closer to 50, and we'll try to even do better than that. But the increase in the revenue will more than offset the expenses as we look at now to continue to drive that efficiency ratio lower.
spk07: We continue to look at cutting costs also in different areas, mortgage area being one. If you look at the net overhead ratio, which I like to look at, it was a lot higher this quarter, but you take out that security loss get closer to that 1.5. We have to grow. We have to grow also. We have to invest in growing the bank, which is part of the increase in expenses. Hopefully that growth will get that overhead ratio back below 1.5. Hard to do without mortgages kicking in, but between the acquisition of Rothschild and additional asset growth, We'd like to get that number down below 1.5. I know that'll help the efficiency ratio also, but I never concentrated on the efficiency ratio. Now it's doing well. We're all, yeah, efficiency ratio's good. There's a margin and stuff, but the net overhead ratio, we need to continue to get below 1.5, and we're working very hard to do that. Just one more.
spk03: Dave, on the covered calls, obviously that number's been bouncing around, but how active are you going to be there? And, Angus, maybe help us with what makes it go on either side?
spk10: Well, a couple of causes, you know, as you know, we do those, you know, again, to protect against a down rate environment. It adds a return on those securities. And if you're doing them on mortgage backs, the rates of all the securities pay off fairly quickly. And so you get that extra revenue. And our analysis has been over a long period of time that you're better off by writing the calls and getting that revenue. And even if you have to reinvest, it's usually a better trade. But as I talked about a little bit earlier when we were talking about the liquidity position, you know, we invested, you know, a billion dollars of that liquidity into securities in the fourth quarter. and wrote some calls against that. And you can see on our balance sheet those were called and we reinvested them at a decent rate here in the first quarter. So it depends on volatility and it depends on where the yield curve's at. But, you know, it's a little bit outsized from normal given the size of the investment purchases that we had. But, you know, my guess is that in a normal environment, that number is somewhere in the $2 million to $10 million range, and it really drives a lot off of volatility. So it's hard to tell until you get to the point where you invest in securities what the yield curve shape is and what the market volatility is. But somewhere in that range would seem reasonable to me.
spk01: Thank you. Our next question comes from the line of Terry McEvoy of Stevens. Your line is open, Terry.
spk11: Hi, thank you. Terry McEvoy from Stevens. Hi, good morning. Maybe first off, Dave, thanks for reminding me of the repricing opportunities of the loan portfolio. And in 23, I think it's something I overlooked. So I appreciate that. And maybe for a question circling back, I think it was John's question. on protecting the margin. And, Ed, you kind of threw out 375 to 4%. I just want to make sure, is that the floor of this strategy you think can produce? And, you know, if rates go down 100 basis points or all the way back to zero, I just think that's an important kind of comment there, and I want to make sure I understand what you were saying there.
spk08: Yeah, just to give you, Terry, a little bit more detail, I mean, we've entered into a combination of collars and some received fixed swaps with terms out three to five years. And obviously, the impact of those instruments depends on the interest rate scenario. So, you know, we're trying to take some steps to improve a marginal low or lower interest rate environment, but it depends on the scenario how much impact there's going to be. The other thing, though, is it's just not these instruments. If you look at Table 8, you can see that in various scenarios, both up and down, we've sort of reduced the variability of the net interest income. And so we're mindful of trying to operate independent of the interest rate environment at a higher level.
spk10: Terry, I'd add in there, I mean, that would sort of be the goal, but we're not going to do all of the derivatives all at one time. We're going to leg into this diversity as far as the length of these derivative contracts, as far as how much fixed rate loans you put on the books. at what strike price these swaps or collars have. You know, they all matter. And I always tell people, you know, our crystal ball isn't perfect. And if you go back 18 months, I think maybe the outlook for increases in rates was 25 basis points. So the economists that put out these forecasts aren't perfect either. So we're trying to protect the margin. And so we're going to leg into it. So depending on what the curve is and where we can buy the swaps going forward as we leg into it from, you know, diversifying the risk perspective, You know, we'd like to be able to lock in into the, you know, upper threes to 4%, but it really sort of is dependent upon, you know, how fast rates move and where that longer end of the curve settles out at. So it's a lofty goal. We're not saying we've locked that in yet, but that's what we'd like to do if the market sort of allows us to do that over time with these derivatives.
spk11: I appreciate all that. Yep.
spk10: Yeah, I was going to say, it's great. I mean, these are sort of unprecedented interest rate margins for us right now. You know, we have not been at 4% in our history, and so, you know, and we've prepared for it, and we've managed for it, and we're enjoying that, and we just would like to attempt to maintain it going forward through balance sheet positioning and derivatives, but we're going to link into it.
spk11: Yeah, keep that beach ball up in the air, I understand. And then maybe a follow-up. This is a follow-up. Maybe just expand upon, you know, I think you hinted earlier, just market dislocation, disruption. You're benefiting from that. Where specifically you're seeing that? Maybe some hiring efforts and within that budget, expense budget for 2023, do you kind of factor in some hiring from the disruption? Thank you.
spk08: The answer is yes. We're continuing to benefit from disruption from competitors we've talked about on prior calls. Obviously, when relationship managers feel like they can't take care of their clients, we look like a good home. We'll continue to pursue those opportunities as they arise, but it's not a large team or a number you're going to see pop on the financials in a single dose.
spk06: Thank you.
spk10: always taking advantage of market disruption, even from existing players that have disruption internally. So that's been part of our DNA since the beginning of WinTrust, so we plan to keep doing it.
spk06: Okay.
spk01: Thank you. Our next question comes from the line of Ben Gerlinger of Hubby Group. Your line is open, Ben.
spk02: Thanks, guys. Most of the questions around the margin have been answered. It reminds me of an adage my dad used to say, you can't go broke by taking profits. And it makes sense. You're willing to take a little off the upside table to protect the downside. So in essence, you're kind of manufacturing, to some degree, a revenue line. But when you think about revenue relative to expenses. Let's say there is that kind of the downside scenario economically or a black swan event. Is there anything in the non-interest expense that you can cut abruptly or anything to that extent that you kind of match out the two?
spk10: Well, on the non-interest expense side, we're kind of a growth company, so we don't plan to cut. But as Ed said, the big factor there is And we saw this in the past when rates dropped precipitously with the Black Swan event, is that the mortgages kick in dramatically. We had a couple quarters before rates went up where we had record net income quarters, and it's because the mortgage business kicked in. So it's really shifting the mix of the business from spread business, if that would happen dramatically, to non-interest income business, which would be the mortgage side. So that's the biggest factor, I would say. And It's a business strategy. We think we need to be in the mortgage business because we're not going to send our customers to some other financial institution for a mortgage. And if we think we're going to do it, we'll do it with scale. And then we'll do it because we always want to be asset sensitive. And we've said this on other calls. The degree of asset sensitivity changes, but you always want to be asset sensitive because if you do have inflation, then your expenses are going to go up. And then how do you cover that increase in expenses? And for a bank like us, it's getting more in the margin. So you should always say asset sensitive, be able to cover the inflationary costs. And if that's the case, then the mortgage business is a natural business catch. And so that's how we look at it.
spk02: Gotcha. Okay. That's helpful on the strategy. And then some of your larger competitors have national deals or are involved with other M&A activities themselves, which gives you guys the opportunity to take such clients and share the market space. Is there anything you're targeting specifically in terms of loan growth with that regard? I get that you guys are all encompassing banks. You do a lot for a lot of people. but knowing that your competitors are kind of involved with integrations themselves outside of the Chicagoland area, is there anything that you guys are approaching for 23 in terms of a strategy to be offensive?
spk09: You know, we always see opportunities. Larger banks always have various things that they're getting involved with, whether they're pulling out of a particular asset class or, you know, changes in some of their staffing or, you know, and those really, we have been the steady, provider in all these different asset classes that we're in. So the line we use around here is that we don't jerk the wheel, that we try to be very consistent in the way we underwrite, the way we price, the way we go to market. And as a result, we saw this the back half of this year where certain banks were trying to change the way that their balance sheets looked, and we were able to take advantage of those. So Our job is just to be very consistent, very steady, and over the 30-plus years that Winters has been in existence, that's really been our model is to take what is available in the marketplace, and usually that's as a result of the bigger banks doing things like you refer to.
spk07: For example, one of the largest banks, the largest bank in Chicago, has stated they're going to do a safe deposit box system. That's an opportunity for us because a lot of people still like safe deposit boxes. We got them. They don't cost much to run. We are now offering, we're going to be offering free safe deposit boxes for a period of time to get new people in. Little things like that mean a lot to people. It's a pain in the neck for them to change banks, but the big banks seem to step on it themselves and allow us the opportunity to work through that stuff and We have great products, as indicated by the Greenwich Awards and the J.D. Power Award we won. We won three of those, I guess, the last five, four or five years. And people like what they have. Word of mouth helps, too. So we think that they keep opening the door for us. We're going to take advantage of it.
spk02: Gotcha. I appreciate the call, guys. Thank you.
spk01: Mm-hmm. Thank you. Our next question comes from the line of Brandon King of Truist. Your line is open, Brandon.
spk00: Hey, good morning.
spk01: Good morning.
spk00: How are you? Good, good. I had a question on mortgage. I was curious, what was the production margin in the fourth quarter? And has that bottomed in your view and outlook?
spk10: Yeah, you know, the production margin was hovering down closer to 1% in the fourth quarter. We expect in the first quarter here it's 1.5% is sort of a reasonable range, which is clearly lower than normal. But you also have to understand, you know, the production is very low right now. As we showed in the slide deck, you know, the originations for sale were just a little over $400 million. So, Actually, the majority of our revenue in the mortgage business now is a servicing income of, you know, roughly, you know, $11 million. So first quarter, we expect to be slow again, although, you know, applications are still coming in. There's still purchase activity out there and, you know, a little bit of refinance activity. But, you know, over 80% of that $400 million is really purchase volume. But it's competitive out there as people are just trying to get the vines in, so it's squeezing the production margins. So very small, but it has become such a small piece of the revenue stream given these higher rates and seasonality in the last couple of quarters. I think we're about as low as we're going to go as far as the production revenue. I think we'll continue to at least have what we have now. And as I said on my comments, I think as we get into the second quarter and the buying season picks up and people get a little bit more used to the new level of mortgage rates and digest them, I think we'll start to see pickup in the second and third quarters.
spk07: Okay. That's gravy for us, too. That's just gravy with a higher rate environment. That's just gravy.
spk00: Yes, I agree. I agree. Okay. And then on the deposit strategy, I saw a lot of deposits came out of savings, deposit growth came from savings and CDs. I was curious if you could provide details on your CD strategy as far as what prices you booked them at in the fourth quarter and as far as terms, six months, three months, et cetera.
spk08: Yeah. You know, rates are trending up, particularly as promotional rates toward 4%. Most clients are still not willing to go long. So you're seeing, you know, terms from nine months through call it two years, but most of it kind of around a year. And the alternative is there are obviously promotional money market and savings rates that are also available for people that don't want to lock into a term product.
spk10: Yeah, and the other thing I think I'd point you to is on table two of our earnings release, we do show the CD rates by maturity. So you can kind of see how they roll off. Most of them right now are plus or minus 2% on average. But the promotional rates are as Tim talked about.
spk00: Okay. And then for 2023, how confident are you in your ability to generate operating deposits and DDAs? for this year? Do you think you're expecting very little growth from those categories and those interest bank accounts?
spk08: Well, no, we're working awfully hard to continue to add clients. And as we bring new clients on, you know, they bring deposits that include their operating business. We've talked on prior calls about, you know, how nicely our treasury management business is performing. And so, again, it's lumpy as there's kind of large inflows and outflows, but We plan to continue to add clients and deposits.
spk00: Okay. That's all I have. Thank you. Thank you. Thank you.
spk01: Thank you. Our next question comes from Jeff Rulis of D.A. Davidson. Your question, please, Jeff.
spk12: Thanks. Good morning. Lauren's question, housekeeping items. On the expense side, I think you alluded to a mid-single-digit expectation for the full year. I think you're about 4% for 2022, which is pretty good in the inflationary environment. But what was the expectation again for 2023?
spk10: Well, I was saying probably, you know, mid to high single digits, so the middle of that range sort of just normally. And with an acquisition, it probably gets into the high single digits for the full year. First quarter will probably be less because, you know, the acquisition, pending acquisitions, If it's in there, it'll be the end of the first quarter or early second quarter, but so it won't have much impact. And some of the increases are later in the year, as we talked in our comments, the second and the third quarters tend to be higher for certain expense categories, particularly sponsorships and marketing. And then Salary costs, you know, we do salary increase effective February 1st, so that will impact a little bit in the first quarter, but more so the second quarter. So, you know, probably not a lot of growth in the first quarter, but as the year goes on for all those other reasons, you know, probably mid to high single digits. But again, we would expect that with the leverage and the growth in the balance sheet and with the higher margin, more than offset that expense growth.
spk12: Right. I guess we get back into your comments on the efficiency ratio still seeing improvement despite a reasonably higher expense run rate. Just to catch up on the margin again, did you have a December average for the month?
spk10: Yeah, we don't really haven't disclosed that. We don't want to get in the position of doing that. I think what you can see is in the past, We told you we'd be around 370 for the fourth quarter and we were, and I think we're pretty confident in our guidance for the full quarter of the first quarter. So I think we'll leave it at that.
spk12: Okay, fair enough. I don't know. Just the last one on the, on the tax rate, any expectation that that's going to change anywhere off of 27%, 27, 27 and a half. Is that a reasonable assumption for 23?
spk10: Yeah, 26.5 to 27 is a reasonable assumption. It bounced around a little bit because of what we noted in the press release with the $2 million expense in the third quarter and $1.7 million of that reversing in the fourth quarter related to some minimum taxes with our Canadian stuff. But, you know, you take those out and 26.5 to 27 seems like a reasonable rate.
spk00: Got it. Thank you.
spk01: Thank you. Thank you. At this time, I'd like to turn the call back over to Edward Wehmer for closing remarks, sir.
spk07: Yeah, thanks, everybody, for listening in. You know, our mascot here is Sisyphus, and the rock rolls down the hill at the end of the year, and we've got to push it back up this year. We've got everybody who's got their shoulders in, which will be a big rock, but we're going to make it. So if you have any other questions, please contact any of the speakers today and We'll talk to you again pretty soon, so thank you.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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