Q1 2022 Wintrust Financial Corp Earnings Call
Okay.
Welcome to win Trust financial Corporation's first quarter 2022 earnings conference call.
Review of the results will be made by Edward Weymer, 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 answer session.
During the course of today's call when Trust 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 statements.
The company's forward looking assumptions that could cause the actual results to differ materially from the information discussed during the call are detailed in our earnings press release and in the company's most recent Form 10-K and any subsequent filings on file with the FCC.
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.
Now I'll turn the conference over to Mr. Edward Weymer. Thank you very much welcome everybody to our first quarter 'twenty two earnings call with me as always are Dave Dykstra, Dave Star, Kate bogie, who was remote.
So I don't have the shack colleran, so I'm in great shape for today, Tim Crane and.
Which murphy.
Go with the same format as you always do I'm going to give some general comments regarding our results short turn it over to Tim for more detail on the balance sheet, Dave Dykstra will follow with some details on income statement and rich Murphy will comment on credit.
And then back to reserve for some summary comments and thoughts about the future from.
Some questions after that.
All in all it is a very good quarter.
And what pretty much according to plan and so of course, they see muted compared to prior quarters.
Last year, we had approximately $1 billion per quarter.
And $2 billion in the fourth quarter.
We know that would probably have the $2 billion of growth is going to be transitory.
I like inflation, but really transitory.
Added to the a few big customers, who experienced large liquidity events at the end of the year just turned out to be a case.
It appears we are back on $1 billion gross level per quarter as well.
Well, just a little over 100 million Bucks.
Total assets.
Interest income and the margin both improved as expected 10 basis points of the margin Science P. P P and $3 million net interest income despite two fewer days in the quarter.
At each stage with approximately $3 million plus or minus.
The quarter was that increase occurred late in the quarter. So we expect to see further benefits going forward each quarter poised to increase should provide up to $50 million of interest income on an annualized basis.
Well positioned for future rate increases.
Loans grew at the upper end of our guidance around 9%. So it was very diversified pipelines remain extremely strong.
It keeps saying credit cant get any better but it does appear and npls remain extremely low.
N P. Npls fell 17 million $57 3 million or a point once you present, a total loans NPA has decreased $15 million to $63 5 million or one 3% total assets.
Credible numbers from $50 billion bank.
I do say so myself.
Hard to get much better, but we will continue to try it.
They will discuss other income in detail I wanted to make one comment and whether you count MSR valuation increases or decreases.
They are important very important part of our planning we've seen this quarter basically offset the OCI effect higher rate on our tangible book value worked according to plan.
Wealth management fees continue to grow.
Expenses were.
So it was pretty much benign.
The numbers side of things I can repeat everything but.
$127 $4 million, 29% over the fourth quarter.
Diluted earnings per share of $2.07.
Pretax pre provision of 134 O three.
Anyhow, I'm, sorry, 170, 776 pre tax pre provision pre.
Provision of $130 million earnings per share of $2 13.
Pre.
Pre provision and.
Margin of $2 61.
We feel pretty good about where we are right now.
And.
With that I'm going to turn over Tim.
I just wanted to cover a special details on the balance sheet go ahead, Tim great.
Great. Thanks, Ed.
In addition to the 800 million and then the 9% loan growth important to note that period end loan balances. Excluding PPP, we're over $500 million ahead of the quarter average, which should help our second quarter results.
A P. P. P loans continue to run down as they are forgiven and at roughly $250 million at quarter end. They are no longer material and will largely be gone by mid year.
Going forward, while encouraged by growing pipelines, we believe that loan growth in the mid to high single digits on an annualized basis remains a reasonable expectation given the uncertainty surrounding the macroeconomic outlook.
Ed mentioned deposit growth of approximately $125 million for the quarter. This was influenced by a handful of very large client outflows related in most cases to funds that came to us in the fourth quarter and then left in the first quarter essentially in and out transactions that crossed to year end.
Absent those outflows organic deposit growth continued as expected.
During the second quarter, we continue to watch deposit levels and expect some continued volatility from a typically large commercial transactions.
Interest bearing deposit costs of 22 basis points for the quarter was down two basis points from year end and likely represents the low point of the cycle.
While competitor deposit pricing remains muted.
We are starting to see increases in the most rate sensitive of the deposit categories and.
An example would be municipal deposits that track some of the state investment indices.
On the investment front with rates, increasing we deployed some liquidity during the quarter total investments were up approximately 1.2 billion.
Remaining patient in deploying our excess liquidity continues to benefit the bank as rates continue to rise at quarter end liquidity remains strong with an excess of $4 billion yet to be deployed.
Of note our securities book of $6 $5 billion, it's approximately 40%, 47% available for sale, 53% held to maturity.
The rapid rise in rates resulted in unrealized losses on the E. S. S securities that combined with dividends and net of the bank's earnings resulted in a small 30 cent reduction in tangible book value.
On a percentage basis. This is one half of 1% of the year end tangible book.
As rising rates and rate sensitivity remain a topic of interest.
I want to read or reiterate some of what we discussed on the last quarter's call first we remain very asset sensitive and well positioned to benefit from rising rates as shown in our presentation materials, 80% of our loans reprice or mature within a year.
To reinforce Ed's earlier comments, we're early in the rate cycle.
We continue to believe each 25 basis point increase in rates will generate approximately $40 million to $50 million and pretax net interest income on an annualized basis and approximately a 10 basis point improvement in the margin.
To be more specific on the margin for.
For the quarter the margin improved six basis points on a reported basis 10 points excluding PPP.
On our last call, we suggested that the consensus rate forecast.
Could result in a margin approaching 3% by year end.
With more current projections, it's likely we will meet that target much earlier than anticipated and may approached 325 by year end.
On the capital front, there was very little change in the bank's capital S earnings supported the quarter's growth capital remains appropriate on a risk adjusted basis.
Lastly, we continue to be pleased by our market momentum and.
In past quarters, we've highlighted the recognition the bank received from Greenwich regarding the satisfaction of our commercial clients. This quarter. We learned the bank was ranked highest in retail customer satisfaction by J D power and associates for Illinois.
For six consecutive years, we ranked first or second in customer satisfaction, something we're proud of and it speaks to the strength of our retail banking franchise.
With that I'll hand, it over to Dave.
Great. Thanks, Tim.
As usual I'll cover some of the noteworthy income statement categories, starting with the net interest income for the first quarter of 2022 net interest income totaled $299 $3 million and this was an increase of $3 $3 million as compared to the prior quarter and an increase of $37 $4 million as compared to the first quarter of <unk>.
'twenty one.
The components of the $3.3 million increase in net interest income as compared to the prior quarter are as follows $16.7 million of the increase related to earning asset growth and an improvement in the net interest margin.
With that increase offset by approximately $6 $7 million less net interest income due to two fewer days in the quarter and another $6 $7 million decreased due to the less P. P. P interest income in the quarter.
The margin improved six basis points from the prior quarter to 2.61% a beneficial decline of three basis points for the rates paid on liabilities combined with a three basis point increase on the yield on earning assets resulted in the improved net interest margin.
The increase in the yield on earning assets in the first quarter as compared to the prior quarter was primarily due to the impact of investing a portion of our short term liquid assets into longer term higher yielding securities during the quarter, resulting in an overall yield on our liquidity management assets, increasing by 26 basis points.
The decrease in the rate paid on interest bearing liabilities in the first quarter of <unk> 22, compared to the prior quarters driven by a two basis point decrease in the rate paid on interest bearing deposits, primarily due to lower repricing of time deposits.
I think it's important again to note that the net interest income expanded despite less interest income from the P. P P portfolio and the two fewer days in the quarter.
And also the net interest margin, excluding the impact of the PPP portfolio increased by 10 basis points.
Turning to the provision for credit losses, when trust recorded a provision for credit losses of $4 $1 million compared to a provision of $9 $3 million from the prior quarter and a $45.3 million negative provision recorded in the year ago quarter.
Provision expense in the first quarter was driven largely by loan growth, excluding PPP loans of approximately $796 million.
Set by a small decrease in net charge offs and an improvement in our loan portfolio characteristics during the quarter, including improving loan risk rating migration.
Rich Murphy will cover credit quality in additional detail in just a few minutes.
Turning to the other noninterest income and noninterest expense sections in the noninterest income section our wealth management revenue declined by $1 $1 million to a level of $31.4 million in the first quarter this compared to $32.5 million in the prior quarter, but was up 7% from the.
The amount recorded in the prior year.
The slight decline in revenue source was negatively impacted by lower equity market valuations, which impact the pricing on a portion of our managed asset accounts.
<unk> was slightly lower brokerage trading activity and associated revenue, but all in all it was still a strong quarter for our wealth management Division and we're pleased with the results there.
Consistent with overall industry trends and the impact of higher home mortgage rates, our mortgage banking operations saw lower loan origination volumes during the first quarter with lock adjusted origination volumes down approximately 24%.
This production volume was less than the guidance, we provided in the prior quarter earnings release due to the substantial rise in mortgage rates subsequent to that time.
Our mortgage banking revenue actually increased $24 $1 million to $77 $2 million from the first quarter of 'twenty. Two revenue was higher in the current quarter, primarily due to a positive valuation adjustment on our portfolio of mortgage servicing rights.
This was offset by lower lock adjusted origination volume in a compressed production margins.
The company recorded a positive $43 4 million dollar valuation adjustment in the first quarter of 2022 related to the mortgage servicing rights compared to a positive valuation adjustment of $6.7 million in the prior quarter.
The company purposefully buildup its servicing portfolio for the last few years in order to not only maintain the customer relationship but to provide an economic hedge against the impact of rising rates on the loan origination revenue.
Although point in time, MSR valuation changes and fluctuations in quarterly origination volumes rarely work is perfect hedges.
The general relationship was effective this quarter and helped the company maintained strong overall mortgage banking revenue as the economy transitions to a higher rate environment.
The sharp and rapid increase in interest rates during the quarter that benefited the MSR valuation and other segments of the company introduced headwinds, though that impacted the mortgage production volume and margins the impact of the volatility on secondary marketing results as well as competitive pressures were the drivers of the lower production margin reported during the quarter.
Looking forward to the second quarter based on the current pipeline activity and the market conditions, we expect mortgage originations to be very similar to the origination volumes experienced in the first quarter with production margins in the 2% to 2.25% range.
Other noninterest income totaled $18 $6 million from the first quarter, which was relatively stable with the $18 2 million recorded in the prior quarter.
Turning to noninterest expenses, they totaled 284 million in the first quarter of 2022 and were relatively consistent with the prior quarter total of $283 $4 million.
Looking back over the last six quarters total noninterest expenses have remained in a very tight band ranging from $281 million to $286 $9 million in the current quarter lands well within that range. So the company has been able to control. The overall noninterest expenses despite significant growth in the balance sheet.
Over that time horizon.
Despite the consistent level managed expenses over a handful of categories showed varian set up that I'll address.
Salaries and employee benefit expense increased by $5 $2 million from the first quarter as compared to the fourth quarter of last year. The current quarter increases, primarily primarily related to $1 $9 million of higher commissions and incentive compensation program expense due to higher accruals for our long term and short term incentive compensation.
Grams associated with the increased earnings level.
Additionally, approximately $2 $9 million of the increase was related to employee benefit expenses, which were due to higher payroll taxes and four one K match contribution accruals, which tend to be elevated in the first quarter of the year.
Advertising and marketing expenses decreased by $2 $1 million from the first quarter.
The decrease relates primarily to.
Reduced level of mass media and digital advertising campaign costs.
The miscellaneous expense category totaled $23 $1 million in the first quarter compared to $24 3 million in the fourth quarter, representing a decrease of $1 $2 million and this decrease was primarily impacted by a lower level of travel and entertainment expenses.
Other than those expense categories, just discussed no other expense category had a change of more than 900000 and all of those expense categories. In the aggregate were down by approximately $1 $1 million compared to the fourth quarter of 'twenty or 'twenty, one the net overhead ratio a measure of operational efficiency. So in at 1%, which is down 21 base.
This points from the one point to 1% recorded in the fourth quarter the ratio benefited from increased mortgage banking revenue.
And I should note the efficiency ratio improved to 61% in the first quarter from 66% in the prior quarter, which was aided by an improving net interest margin and gains on the MSR portfolio during the quarter.
In summary, core fundamentals were strong with growth in pretax pre provision income.
And expansion of the net interest income despite PPP loan reductions and the fewer days in the quarter improved net overhead and efficiency ratio strong loan pipelines and very good credit quality metrics. So with that I'll conclude my comments and turn it over to rich Murphy to discuss credit.
Thanks, Dave.
As noted earlier.
And Dave credit performance for the first quarter was very solid from a number of perspectives as detailed on slide seven of the deck loan growth for the quarter net of Pvp was just under 800 million or 9% annualized.
Equally as important and similar to the past few quarters, we saw loan growth across the portfolio, specifically life insurance premium finance loans, which were up $311 million core CRE loans, which were up $245 million commercial premium finance loans, which were up $82 million.
And residential real estate in core C&I loans, both showed solid growth.
Year over year, we saw a total loan growth of $5 1 billion or 17% net of PPP loans. This total included $578 million of agency finance loans acquired from Allstate.
That portfolio by the way continues to perform very well relative to the initial business case, which we have laid out previously.
As noted on our prior earnings call. We continue to see very solid momentum in our core C&I and CRE portfolios.
<unk> have been strong throughout this past four quarters and we saw them does that materialize into increased outstandings during the past several quarters.
We continue to be optimistic about loan growth for the remainder of 2022 for a number of reasons. Our core pipelines continue to be very strong with solid momentum in Q1 line utilization as detailed on slide 19 continues to trend up from 37, 36, 7% to 41% when netting out our mortgage warehouse.
Lines, we anticipate that this trend will continue.
Also on Slide 19, you will see the business expansion and inflation pressures have resulted in many customers requesting increases to their credit facilities to help finance these costs.
And also winter slight finance had another strong quarter growing their portfolio by 17% on an annualized basis. This momentum has been strong for several quarters and we believe it should continue through the better part of 2022.
As a result, while macroeconomic conditions may pose a heightened level of uncertainty we are reaffirming our loan growth guidance of mid to high single digit growth.
From a credit quality perspective, as Ed pointed out hard to get much better and is detailed on slide 18, we continue to see that this performance again was across the portfolio and it can be seen in a number of metrics nonperforming loans decreased from $74 4 million or 21 basis points to $57 3 million or <unk> 16 basis.
Points.
A meaningful part of this reduction came from the sale of an $11 million portfolio of loans, the majority of which were nonperforming.
Npls continue to be at record low levels and roughly half of where we were this time last year.
Charge offs for the quarter were at $2 5 million approximately 400000 of which was a result of the loan sale I just mentioned.
As we continue and we continue to see reductions in our special mention and substandard loans.
Customers continue to recover from the pandemic.
That concludes my comments on credit and I'll turn it back to Ed to wrap up thanks, guys suffice it to say.
We like where we're positioned.
If all the Prognosticators are correct down rate increases should continue to perform extremely well looking forward to seeing that beach ball again, it's been a long time.
Credit stats are terrific as murph says can be hard to get them better we're going to continue to try and continue to call the portfolio for potential problems.
Kind of scary that you can have one loan committed almost double your NPA is right now but.
We are.
We are we keep looking deep and we're going to continue to do that loan demand should remain strong through the year.
<unk> should increase line usage numbers pipelines remained strong across the board.
Acquisition opportunities it picked up a bit <unk> expectation is still a bit of a detriment, though and you can count on us not do anything stupid in that regard.
We are proud of the entire one trust crew and they're hurting the J D Power award yet again.
Read somewhere that our numbers would have put us in second place in the entire nation.
Color that we're winning seven Greenwich Awards.
Again granted towards.
For commercial the commercial banking side of the equation.
Wonder if you have to one way people back anywhere Butler.
Trust.
This with the market disruption bodes well for continued organic growth.
So ours, you'll be assured of our best efforts. We appreciate all.
While we will support and the time for some questions. Thank you very much.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of David Long of Raymond James Your question. Please.
Good morning, everyone, Hi, David how are you.
I am doing well. Thank you can use a little bit better weather here in Chicago, Dallas, If you can help with that that would be great.
How about this I'll take care of this weekend how's that.
That sounds spectacular. Thank you I appreciate it.
So a question I wanted to ask about sort of the topic, one NASCAR the expenses mortgage banking revenue or the volume it sounds like it's going to be coming down and I think Dave you discussed that sort of a $280 million to $90 million range and expenses can you stay there and does the you know the lower mortgage volume.
Does that allow you to keep the expenses in that range for a little bit longer period.
Yes, well, it's a good question I do think the market as volumes come down the mortgage expenses will will come down some more we keep working on that so there is.
Some.
Positive.
Expense numbers that come out of that.
As you know I'll, let you go into the second and third quarters with our marketing expenses tend to go up a little bit because of the baseball season sponsorships.
Just the community sponsorships, we're doing that in the summertime and TNT tends to go up and we gave raises that go into effect in February . So there are some there are some increases in expenses that we might see in the second quarter, we do.
Mortgage expenses will will come down.
Certainly attempting to control the other expenses so there might be.
Pat.
Sure.
The overall increase but it shouldn't be.
Okay.
Extraordinary.
Maybe they bump up a little bit but.
Can we can we keep them in that range, possibly but might.
It might be just a little.
I think you have to look at the net overhead ratio, which we expect to be very wrong between that for only about 125 to 130.
Somewhere in that zone.
So we start with 1% in the first quarter to probably be around $130 35, I think twice a year would be a good number yes.
We think if you took out the MSR you gave us this quarter.
Look at the rest of that.
Excluding that valuation would be in that 130 to 135 range. So we think that that's that's reasonable as you have to.
Understand that we do think the revenue in that scenario goes up quite a bit too with the margin increase so we still think that we have good operating leverage and we will have growth on the balance sheet.
Got it got it cool and then.
As it relates to the rate hikes.
The beach ball being released here and should see some acceleration in the net interest income.
Much of that falls to the bottom line will almost all of that falls to the bottom line or does that allow you to.
To take on any additional projects or are there any other expenses that you'd have to add with it.
With several rate hikes.
Put a wildcard as it relates to wages.
Inflation raging right now.
We will have to wait and see.
How that plays out, but I would imagine that our mid year.
We usually don't like to do a lot of midyear increases, but I think that youre going to have to keep everybody happy and in Lyon and me, we got out of good things going on here.
Lets all do our people, we got to keep our people happy because again theres a lot of poaching going on out there as we speak but.
Very deep bench here, and we're able to fill where we could do get poached.
The disrupted markets, helping a little bit there too in terms of being able to bring people in.
I guess I would.
I mean, the other thing I mean people ask us all the time well if you make more money will you just <unk>.
Invest a lot more into technology and some of those other initiatives.
I think the answer.
Our approach on that is we've always sort of had a rolling three year initiatives planned in technology.
Plan and investments to continue to increase the.
The mobile and digital.
<unk> fits that our customers see in our.
Our teams pretty full up from a resource capacity executing on that plan. So are there things at the margin you might spend on it if you have it maybe but not insignificant because.
Please full doing the things we plan to do anyway.
Got it. Thank you that's all I have I appreciate the time guys.
Thank you.
Thank you. Our next question comes from Chris Mcgratty of <unk> W. Please go ahead.
Hey, good morning.
Hey, Ed.
Maybe a question on just the overall rate profile.
Looking at our conference call this morning about banks.
Reaping the benefit but also taking down some of the rate sensitivity.
As we get rates priced in any thoughts about adding some swaps to just to mitigate some of it.
You made out of the downside.
Yes.
The futures market is projecting cuts in a couple of years, we're going to raise and then we're gonna apparently cuts I was wondering if you is there a scenario where you would just mitigate some of the volatility.
That's the plan.
And finally in a position where we again can maybe more macro rates go up and down.
But they're pretty expensive right now we were we were fortunate to win rates were really low for CIT.
Put on some.
Some derivatives have been have been helpful. There will be helpful to us as rates continue to go up but.
Kind of expensive right now, but we continue to look at that and understand its a vulnerability for US right now and we will continue to evaluate that try to time the market a little bit.
And we also I'll comment on that well.
No I think that was right I mean, it's a little bit odd that we're a month into the first increase and we're already talking about decreases we've got.
And another eight or so increase as planned the market projects more into 2023 so.
We look at it everyday Chris.
I would just say you can go back and look at our prior 10-K and 10-Q disclosures we.
We have in the past put on forward starting.
Derivative transactions to address that kind of a situation looking at the overall interest.
Great sensitivity of our entire balance sheet, if you see those sort of opportunities sometimes.
The cheapest way to address that in the short run is a derivative contract and we certainly have done.
Done those in the past so we are looking at both things.
We'll keep you apprised, if we do it.
Okay.
Maybe one more your growth outlook has been.
I would say consistently strong above peers.
You run the capital structure more optimized than some of your preliminary interested given given the outlook for growth and the remix of the balance sheet.
And also the concerns in the economy.
Is there a scenario, where you just proactively come to market and and just shore up the balance sheet, even further to just to.
Make the capital position gives you more flexibility.
Well, we've always talked about.
About this in the past.
We look at we like to be very efficient on our capital structure, we actually like leverage in our capital structure, we like having preferred and sub debt, we have and still have some old trust preferreds that are very.
Efficient for us.
And so for US it's sort of where do you think growth is going to go if you look at this quarter.
We supported the growth.
And if you look.
Going forward at these rate increases come through and your profitability goes off if you stay in this mid to high single digit loan growth area. We can support that loan growth. So I think what we need to just do is look and see what's the outlook for growth if it becomes sort of super sized.
Then then the app to be opportunistic and raise capital to support that growth. We've always been a growth company. So we would look to do that but but currently the earnings are supporting the growth and we'll just continue to monitor.
Alright, thank you.
Yes.
Thank you. Our next question comes from John Armstrong of RBC capital markets. Your line is open.
Johnny.
Good morning, guys.
Maybe start with with Tim Your comment I hate to ask the question, but your comment on the 325 margin by year end, what kind of rate assumptions are baked in.
So that commentary, yes, John we've got two.
200 basis points from this point forward in 2022, So 100, roughly 100 in the second quarter and 50 and the two ensuing quarters.
Your guess is as good as ours as to what it actually turns out to be.
Right Okay.
And then I guess the flip side of that question is.
And that kind of an environment. How do you guys think about deposit pricing and deposit growth can deposit growth match loan growth and that kind of an environment. What about you guys, having to really take up deposit rates.
Well, we probably will have to bring up deposit rates to attract some stuff, but that's built into our overall plan here al and then built an attempt to swag It Tim gave us margin numbers.
Momentum is still pretty good on the deposit side here and the growth side.
We haven't had a market product in a long time because.
Stuck just came to US basically we just did a lot of.
Oh.
<unk>.
Name recognition stuff in.
In the past, we always in market products and allergy abated, the marketing products again and.
See how that goes but.
It will cost a little bit more to grow we always say that but I think we're far away.
It's far away by the asset sensitivity on the asset side.
Okay, Yeah that makes sense.
We haven't we haven't seen much market reaction. So other than deposits that are sort of attached to indices at this point.
He seems to have been pretty disciplined.
Okay got it.
And I guess more of the elephant in the room is just on mortgage.
And Tim to your point, whether or not 200 basis points comes through but.
How would you guys think through.
That kind of a rate hike impact on production volumes with our mortgage company and kind of what's the strategy to deal with higher mortgage rates.
Well.
Right.
Disconnect a little bit between 200 on the spot.
Yes, I don't different parts of the curve so.
So we consistently have.
Bringing in.
300 million or so or $400 million of applications per month.
We expect to refinance those or will fall off they were so close to 50 50 in the second quarter, but my guess is that's going to be more 60%, 70% purchase.
We position ourselves really well and try to service the purchase market.
And do that out of our retail load.
Patients in with our local people being involved in the communities.
Realtors NOI consults, we still think that rates are.
<unk> got our first mortgage at nine or 10%, we'd still think 5% mortgages not going to stop the purchase activity and so we think we will gain more than our fair share of the purchase market.
So.
We still think that we can maintain the volumes that we have right now.
We'll see if there's a supply of inventory.
Inventory.
Houses as is hurting that a little bit to I think you could have more volume if it there was more supply out there, but we believe we will pick up on the purchase side lose on the refinance side, but I think right now based on what we know even with these sort of 5% level mortgages.
We can maintain the production volume.
And even though John even if it doesn't.
Yeah.
When rates fall again people will be back.
The China market home equity loans again as the cycle is.
The values go up using home equity all rates go down then they refinance again.
So we expect lower rates.
That's why we're positioned we are for our margin goes up substantially.
To cover the mortgage side of the equation, so I think that.
Yeah, it's working according to plan the won't always be perfect.
The margin should cover a lot of the other.
Problems in the <unk>.
And that and the drop in mortgage business in <unk>.
I'll make it up when I look I think what the market gives you like I always say.
It's been great to go down because your mortgages as rates go up it gives you other opportunities so.
So it was structured like we are.
And I think I think you have to think about.
That interplay that Ed talked about about the margin on the mortgage but.
We have built into the revenue right now you know 10 or $11 million of servicing income Yeah, and then if you look at those projections the production income.
As with say 2000 $25 million a quarter, but you know.
That's not fall into the bottom line, because you have commissions and other expenses. So the impact of the mortgage business now from a volatility perspective should be rather low going forward.
And.
And should it be sort of dwarfed by the changes in.
The overall rate environment, and the earning asset base related improvements there.
Okay. That's a good point.
Yes.
<unk>.
Clearly the balance pulled through this quarter, but I think.
Dressing in the mortgage thing helps so I appreciate it guys. Thanks.
<unk>.
Thank you. Our next question comes from Terry Mcevoy of Stephens. Your line is open.
Good morning, everyone.
Perry.
Maybe a follow up on John's question.
What are your thoughts about holding more mortgages on the balance sheet now that rates are higher.
And then while I'm kind of on the balance sheet, just maybe talk about future deployment of excess liquidity into the investment securities portfolio.
Yes, I can talk a little bit about the arms, we are seeing more arm production in the marketplace right now.
We do have some opportunity to hold more this last quarter as I kind of pointed out in my remarks.
We did we did hold a little more rosy.
Going forward I think you'd probably see a very similar amount that we would hold.
Probably for the second quarter.
Typically we will do that in footprint.
As opposed to more of the national.
Products, but generally speaking I think that there is an opportunity there and we really like the space I mean, we had.
In our earlier years, we had a lot of <unk> on our books.
Over the past number of years, we've had a.
Substantial loan growth in other areas and we really didnt most people on a 30 year fixed and so we didn't so to ed's point, we take what the market gives us and right now.
More arm production gives us that opportunity.
Yes, and then I guess on the on the <unk>.
Securities portfolio.
We ended up.
$1 billion to securities more at the end of the first quarter versus the fourth quarter. So we did put some of those securities to work and you can see the impact of the margin positively.
These rate increases will also help on the short term liquidity.
Earning there so for the time being.
We're still going to be cautious and.
Opportunistic opportunistic and replace the runoff maybe invest a little bit more but we're not going to we're not going to dive into the deep end and put all three or $4 billion of excess liquidity to work right now hopefully we'll start some of that up with loan production and then it will.
We'll continue to slowly leg into what I think.
Okay.
And then as a follow up question Ed in the press release, you talked about gaining new market share I was wondering if you could expand on that is that kind of Chicago and Milwaukee is that some of your national businesses and what's behind that statement all of the above.
I think.
Plenty of room for us to continue to grow in Chicago in our defined market area, we have a number of branches.
<unk>.
Preparing for opening right now.
We're only what six 7% of the market as it stands so.
Chase and.
Bofa and BMO will have to look out because we are covered for them I'm sure. They're all shaking in their boots right now but.
Sure.
Now I'll, probably high tech of the base, but or something but.
Plenty of room for us to grow here.
I think we can capitalize on the.
On the awards, we continue to get in terms of service and I said why would you make any place else.
We give the best service bar none.
Our approach works in that regard the high touch high Tech stuff works.
It works really well.
But across the board we expect.
To have continued growth.
And all of our products and services.
Continued market share.
<unk>.
We expect that every year anyhow so.
And make any sense.
It did yes, I appreciate the color and it's nice to hear it it's broad based market share gains. Thank you.
Thank you. Our next question comes from Nathan race of Piper Sandler. Please go ahead.
Yes, hi, guys.
Question on <unk>.
Balance sheet dynamics I appreciate some of the noninterest.
Bearing deposit outflows was somewhat transitory in the quarter, but also curious if thats a function of some of your commercial clients kind of sifting through all of the excess liquidity levels are.
Accumulated over the last couple of years.
As they work through those liquidity levels.
Maybe perhaps expects more go.
Meaningful increase in line utilization.
It was only up maybe half a percent or so in the first quarter. So I'm just trying to think about what the increase in line utilization potential.
Potential maybe factors into that high single digit loan growth outlook for this year.
British I hear that yeah.
As I pointed out in my comments I do think Thats.
Nice tailwind that we have I think as we pointed out in the last.
Several calls line utilization through the pandemic and over the last several quarters was definitely muted.
Now we are seeing our if you just look at our asset base lending group.
As they work through the request from our customers in terms of rising supply costs rising raw material costs.
You're definitely seeing utilization start trending up we're also seeing expansion of <unk>.
The lines that are out there and you can see that in the.
What we included in our.
Release, showing that there are more and more customers coming in looking for expanded line facilities. So.
It's a good story for us and I think that over the course of the rest of the year. It is going to be a real nice tailwind.
Nate to the first part of your question the deposit run out was really related more to a handful of large businesses that sold as opposed to a drawdown of liquidity. Although clearly there was a lot of liquidity in the system and we continue to watch how.
Some of our commercial clients manage their deposits, but the fourth quarter was was more isolated incident type situation.
Okay.
Understood I appreciate that color and changing gears and thinking about.
Mortgage expenses.
Dave What do you think about kind of what you described.
A year or so ago, when we saw a pretty decent decline in volumes in the second quarter of last year, you spoke to the potential for the commission line related to mortgages stepped down by about $8 million or so.
That a fair kind of starting point as well to think about the commission line into the second quarter within the context of what you spoke to in terms of just the overall expense run rate.
Starting in <unk>.
If.
Origination volumes stay the same in the second quarter as the first quarter.
And in the end.
In the fourth quarter origination volumes.
Kind of look at those relative to where they were.
In the prior quarter.
It came down.
A little bit but.
<unk>.
I would expect them.
The first quarter was down from the fourth quarter. The way it went through that Youll see a little bit of a reduction in commissions, but benefit flattens out and we stay stable I don't think youre going to see a dramatic decline because of the production will be the same so.
I think youll see us a slight decline in the second quarter and the commissions line just because of the production dynamics, but then it should level level out and we'll have to see where production goes into the third and the fourth quarters.
Understood.
But just generally speaking there is a lagging your mortgage related expenses compared to the revenue.
Yes.
Look the revenue based upon a lot of production and the probability of close but we don't.
And that includes.
The net revenue numbers, so it sort of includes that.
The discounted cash flow of the net revenue, we do that on a lot basis, but the commission expense doesn't flow through in total loans actually close.
Understood I appreciate all the color. Thank you guys.
Thank you. Our next question comes from Michael Young of Truth Securities. Your question. Please.
Hey, Thanks for taking the question, it's great to see the strong growth again in the insurance book, both life and property and casualty I know some of those areas, particularly life will start to reprice into that higher 12 month LIBOR is that ever resulting some choke off of demand.
And either the lifeblood or at the property and casualty book as rates rise.
That's interesting.
In my opinion, not really because the crediting rate goes up too because they get in the insurance policies.
So the credit rate goes up on the insurance policies as spreads still the same that they make out okay.
<unk>.
So if a guy who's going to take one of these policies out on your let's say.
Our second <unk> policy.
New.
You may have in getting a credit rate of.
5% before.
<unk>.
And PE III, she had net too on that.
Now youre going to get six or seven and pay for it so.
Long as that spread is there.
<unk> actually contracted before.
They are actually probably going to expand a little bit over time, so we make it would make this product more.
<unk>.
Attractive I think so.
So we still see in rates really don't have an impact on the commercial premium finance book at all so.
That's more.
Insurance premiums and whether you are having.
Catastrophes or whatever it is going on in the insurance rates and interest rates really don't impact that.
Commercial premiums.
Side at all.
Talking to some of our customers in the life side.
They will tell you that.
There could be some effect with rising rates and particularly as Ed points out. If you don't have that crediting rate change of that arbitrage gets maybe a little bit squeezed, but.
You are seeing.
Much more popularity of the product in general much more awareness out there. So we think that there is.
It's a very viable market and we will continue to do well through this year as rates continue to rise.
But obviously that is something that we're going to keep an eye on but.
That product as you've seen has seen dramatic uptick year over the course of the last couple of years and I think it goes beyond just where the rate markets are.
Where we might see a problem is in terms of competition.
Somebody will jump in and they try to steal market share.
They think its an easy deal. So it's not an easy business you have to have.
Real expertise we've got there that's the value add we give is that expertise we have in terms of structuring. These.
<unk> got in trouble the IRS audit places.
If you do it the wrong way.
Guys you jump in I think it's easy it Ain't easy so.
I would expect that would be a bigger issue than the market itself is competition coming in fighting over a basis point or two but.
Most people are pretty happy with the service, we give and.
And the knowledge that we're doing it right as opposed to some people or we have to jump back in and take it over and fix it and Thats a real pain in the deck, we should be.
We should get paid for those and we do.
They leave us and they come back they.
We have to fix it so.
It's not an easy business it seems like it is but it ain't.
Okay. Thanks for that.
Other question just on the deposit side is there any interest to term out any deposits kind of earlier in the rate hike cycle to give more benefit later on or.
I know you've got a lot of Cds kind of rolling through it pretty low pricing right now with a lot of those just roll off kind of how are you guys thinking about that book.
Yes, I mean I think.
I guess, there's two parts to that the retail client base is usually pretty aware of rates and so our CD book is down to 9% of our deposits essentially.
We think they'll start to Wade back into Cds, depending on the rates that get offered.
But you Gotta go pretty you got to go substantially higher to get people lack right now they know rates are going up and again, we're still pretty well.
The futures market and the expectations for a lot higher rates, there really isn't much higher rates yet in the banks and so we haven't seen anybody say theyre ready yet.
But we'll watch for it and as there's opportunities, we'll certainly take those but.
You see some people out there now with for example, 1% rates around a year and then they don't seem to be getting much traction.
So.
Okay. Thank you very much.
Thank you. Our next question comes from Ben Garlinger of <unk>. Your line is open.
Hey, good morning, guys.
Or how are you.
I'm doing well thank you.
And David I know you guys are always have great color commentary.
For the broader economics.
But when you guys think about kind of the mom and pop ins lower levels C&I.
I really think the global geopolitical events, Ukraine or anything to that extent only has a lot of impact on the day to day operations are not nearly the extent that inflation dose. So when you think about just their operations. They are demanding for loans combating inflation do you think that there's any sense that they might be.
Tightening the range or potentially increasing loans, a sharp the balance sheets or kind of how how the lower level C&I market is operating in today's environment.
The loan guidance for high <unk> or mid to high single digits is pretty.
Clear, but is there anything that could increase that upside of additional.
Talent added to the team.
I think I think.
<unk> is a big deal right now.
That supply chain, so kind of jazz so.
We see people getting costs.
Small producers, even or getting their cost they are able to pass them through.
That's inflation.
The cycle is here the spiral was here.
Yes, it would be very careful in terms of us getting more of that business yes.
Yes, we're always looking for more of that this small business very important to us.
We're number one in Illinois.
And the SBA loans.
Very important to us and we're starting to expand that but Richard I'll comment.
You hit the nail on the head I think generally speaking most of our customers would report that they've been able to.
Take those costs and move them through and pass them, along and Theyre doing pretty well I think overall the consumer is.
Pretty healthy right now and so demand across the board is in pretty good shape, whether it's housing or auto or any area that you can look at and so a lot of the customers that we finance are supplying.
Lower end suppliers in that space and so generally speaking I think they are feeling pretty good I think as Ed pointed out where the channel and the bigger challenges are.
Just inflation.
Wage pressure and having to battle that and trying to find good talented people thats, probably the number one concern that people express to US I think what youre seeing is in a lot of spaces, where people are really focused on efficiencies now they are looking more in automation they want to spend the money and just try it.
Make do with less and that's where we can help a lot our leasing group as reported by the activity in that area.
A lot of this line utilization is for people, making the spend to get more efficient and ultimately I think it's probably a pretty good thing, but in the meantime, it's hard because people have to get through this period, where.
Talent is very expensive and hard to find talent is a big part right now.
Especially we don't have a lot of hospitality at all.
Have restaurants in light, but.
People can't get people to work there.
<unk>.
I know that was out of our whole home in Georgia since ahead of the Sea Island companies.
They are 400 positions opened right now they can't fill.
They can't bring people in from out of the country like they used to it in the high season and the like.
So it's really kind of jazzed right now in terms of that so we.
We see a lot of that which means people will have to pay more to get people to come in.
That's inflation cycle.
Yes.
I said like a year and half ago as any transitory once it gets golar, it's hard to stop.
But I think this was this.
I think a lot of people getting freaked out about an inverted yield curve right now hey, that's a false positive right now because of the government is still buying treasuries keep their cost down.
So I think those rates are artificially.
In good shape.
Is that really true. So we don't we don't see that right now.
As an issue.
But let me first say that we do but.
You'll see the price bottomed money is out there prices are being accepted.
Oil is a big issue in terms of commuting and what have you but.
Just going to cost more to live.
Our collateral Reagan said.
Places the price you pay for Olive Garden. This stuff's going to gives you. They said was free.
Got it that's great.
And then.
Thinking on the same vein of talent.
From an inflation perspective with talent and then also in Chicago.
Noteworthy deal every other year, so that pretty much the gift that keeps on giving to win trust.
Because you guys have a great mousetrap. So when you guys think about.
Talent and the people of Hydro wind trust kind of shopping there.
Resumes so to speak in some of the free agency.
As expectations for lender compensation to come over to win trust appropriate are people looking for two months and then kind of how you just approaching the market disruption in terms of additional talent as David Richard I'll handle that.
Well.
As we've talked about.
We've talked about in the past the disruption obviously continues to help us in theirs.
A time lag and to your comment three or four events that continue to be beneficial to us.
I don't think we're seeing anything.
Atypical for commercial lenders and compensation, we do see obviously, the broader inflation related activities, but.
We think we're a good home for lenders.
I think we would take very good care of customers and for a lot of our lenders that's their primary concern so.
I think we will continue to benefit as the.
Disruption continues to work its way through the market, we've seen a lot of the lower levels.
We run a credit analyst program of 30, <unk> 30, 35 people every year come through.
After two years.
Crawford God awful amount of money to go away, however want to come back when it's done.
They realize that they will.
The Golden Goose, but.
Rich will comment.
I would say exactly what Tim said.
Where we brought in a lot of people out of some of the because of the market disruption over the course of the last couple of years and.
When you talk to those bankers about the culture and the fit what they would say is this is their number one job is keeping their customers happy and so our job is to make sure that we have the systems in place we have the credit process in place and we can deliver what we say because thats just been I think a bit of a <unk>.
Check out there in the marketplaces, there's been acquisitions in different cultures come in and.
Went up when it banker feels.
Sure about ability to deliver.
Way more motivation than anything else and so we've been able to.
I think keep our bankers and our customers happy by just keeping a very core philosophy of.
Consistency and Thats, just not what we've seen in the marketplace at all so Fortunately, we've been able to hold onto our bankers pretty well.
Alright, Thats great I appreciate it thanks guys.
Thank you again to ask a question. Please press star one on your Touchtone telephone again Thats Star one on your Touchtone telephone to ask a question.
Our next question comes from.
Casey Haire of Jefferies. Please go ahead.
Thanks, Good morning, guys. So I wanted to follow up on the on the loan growth outlook.
The pipeline is sound.
Pretty strong.
I heard you correctly, you said they are building.
Just wondering if you could quantify what the 331 pipeline looks like versus year end.
We don't we took the some of the pipeline commentary out of that just because it's just always a.
There's some timing issues and some other things that go into it and so we just really are focusing on the loan growth guideline guidance, but.
Generally speaking.
<unk> building is the right term, we did see good momentum here in the first quarter and as we go into the second quarter and that momentum really is again pretty broad based we're seeing it in CRE and C&I, we're seeing it in some of these line increases.
We're being asked to provide so generally speaking I would stick with that but getting beyond in terms of the specifics and we're trying to get away from that and really focus on the loan growth guidelines specifically.
Okay understood.
Understood and just just to clarify.
The fed hike forecast.
You said 200 200 basis points is that is that what you expect the fed to be at by year end.
Versus the 50 bps level, we are at today or are you expecting 200 basis points of hikes incremental hikes between now and Youre right.
200 basis points from here 100 in the second quarter.
250 basis point changes in quarters, three and four.
And whether that again, whether that happens or not.
Who knows.
Alright.
Our thought on that is 40% to $50 million per 25 basis point increase in so.
You pick your scenario and apply the math and go from there.
And obviously as we get into future quarters, we will have started to realize some of that benefit and so the base will change over time, but we're.
Again still early in the real cycle of rates changing here.
Thank you at this time I would like to turn the call back over to Edward <unk> for closing remarks, Sir.
Everybody for listening in and.
We appreciate your support of any other questions.
Please feel free to.
Contact me or Dave Dykstra, Rich Murphy, Tim Crane talked again in a quarter if not before.
Bringing on spring and let's go Cubs.
Sachs. Thank you.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Sure.
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Okay.