Q3 2022 Wintrust Financial Corp Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Welcome to win Trust financial Corporation's third quarter 2022.
Earnings Conference call.
A review of the results will be made by.
Edward Weymer, founder and Chief Executive Officer.
Jim Green 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 presentation, there will be a formal question and 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 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 conference call over to Mr. Edward Weimer.
Thank you very much welcome everybody to our third quarter earnings call.
With me are Dave Dykstra, Dave Stoehr K bogey.
General Counsel, Tim Crane and rich Murphy.
At the same format as usual.
In general comments regarding our results.
Turn it over to Tim Crane will give detail on the balance sheet the margin.
Dave Dykstra, then will discuss other income and other other expense in detail, which probably will then discuss credit.
To me for some summary comments and thoughts about the future.
Time for questions.
First of all I will tell you I did survive my back surgery.
I had a couple of months, which probably a couple of weeks, which is part of the reason for the number has been as good as they are this quarter.
But all is well here and.
Uh huh.
It was my demise have been greatly exaggerated so back in the saddle.
For the quarter income of 143 million Bucks up 51% for.
For our second quarter.
Diluted earnings per share of 221 or over.
$1 up 48% from the previous quarter.
On a pretax pre provision basis I think there is a record for us.
$206 million.
Our net interest margin of $3 35 is.
We were up nicely the beach ball is coming out.
Some worry that the beach ball might be suffering from the bands.
So fast so oven.
Keep an eye on that though.
Current assets 112 current equity of 12 31.
Tangible equity of 15.
The overhead ratio is up a little bit, but we expected.
<unk>.
That overall basis year to date, it's 135, but 153 this quarter is.
Dave will discuss we.
It takes pfizer compensation because of our other quarters going.
Let's see.
Credit spread which Robert will talk about that but.
We did have one large credit come in.
Basically that took up a lot of the.
Thanks, Ed.
A lot of the more all of the increase really so we did have a couple bigger ones roll off too but.
But we think that's adequately covered which I'll talk about that.
Assets, we closed at $52 4 billion.
Loans were up $1 billion or more of 750.
Do you think of <unk>.
Average versus quarter end with.
We start this quarter with a nice head start in <unk>.
Everything looks good going forward in that period from that.
Regard.
It was up $204 million.
We will need to start pushing deposit is very hard to keep up with our low growth, but we've got a lot of ideas. There they are being instituted as we speak.
For a lower cost deposits to come in.
With that I'm going to turn it over to Tim.
Tim.
Great way great. Thanks, Ed.
A couple of balance sheet items, and then several items of interest, including the continued impact of rising rates on margin expectations.
You mentioned, the $1 $1 billion of loan growth, that's 12% annualized and importantly, it's spread nicely across all loan categories.
In addition, the period end loan balances at also mentioned $735 million higher than the quarter average, which will help our fourth quarter results.
We're encouraged by stable loan 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 economic outlook.
The $200 million worth of deposit growth.
Affected by the rapid rise in rates combined with fed balance sheet actions, it's making deposit gathering more challenging in the cost of deposits are rising.
Interest bearing deposit costs of 64 basis points for the quarter were up 36 basis points and will continue to trend up.
We obviously anticipate continued increases in both the fed funds rate and the rate associated with the bank's loan and deposit activities.
Increases in loan yields at this point of 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.
We anticipate an interest bearing deposit beta of approximately 40% over the full cycle and are currently operating below that level.
Our Securities book remained essentially unchanged in the quarter at quarter end liquidity remains strong with approximately $4 billion of interest bearing cash on the balance sheet.
In the fourth quarter, we deployed approximately $1 billion of the excess liquidity into higher yielding securities with attractive spreads.
As we discussed last quarter, our Securities book is approximately 47% available for sale and 53% held to maturity.
During the quarter the rise in interest rates resulted in an additional tax adjusted unrealized loss of approximately $142 million on the HFF securities.
While that's material the tangible book value of 50, 842 remained stable compared to this time last year.
With respect to rate sensitivity in the margin.
First although our GAAP position is down slightly we remain asset sensitive and well positioned to benefit from continued rising rates.
As a reminder, and this is outlined on page seven of the presentation.
Approximately 80% by dollars of our loans reprice or mature within a year.
Second as we experience increasing rates, we continue to believe each 25 basis point increase in the fed funds rate will generate approximately $40 million in pretax net interest income on an annualized basis.
To be more specific on the margin Ed mentioned that 335 that was up 42 basis points for the quarter with rates rising rapidly we've exceeded the margin improvement that we've discussed are projected on prior calls.
At this point, depending mostly on the impact of competition for deposits. We believe a margin in excess of $3 70 as possible for the fourth quarter with the margin approaching 4% at some point during the first quarter also depending on the pace and magnitude of fed funds increases.
Perhaps worth noting during the quarter the bank entered into several interest rate collars.
These collars with terms between three and five years essentially provide some margin protection in the event that rates fall again to very low levels.
For the quarter capital ratios were stable to down slightly but remain appropriate given our risk profile and.
And as we also discussed last quarter with higher rates and more typical loan growth. The company's earnings are projected to result in organic improvement to capital levels in the coming quarters.
Overall, a pretty clean quarter and with that I'll turn it over to Dave.
Alright, Thanks, Tim ill cover the noteworthy income statement categories, starting with net interest income for the third quarter of 2022 net interest income totaled $401 $4 million that was an increase of $63 $6 million as compared to the prior quarter and an increase of 100.
$14 million as compared to the third quarter of 'twenty one.
The $63 $6 million increase in net interest income as compared to the prior quarter was primarily due to an increase in the net interest margin and loan growth. The net interest margin as Ed and Tim referred to improved 42 basis points from the prior quarter to $3 35.
The beneficial increase of 67 basis points on the yield on earning assets and a 12 basis point increase in the net free funds contribution combined with a 37 basis point increase for the rates paid on liabilities resulted in the improved margin the increase in the yield on earning assets in the third quarter as compared to the prior quarter was primarily due to a 60.
Nine basis point improvement in loan yields and higher liquidity management asset yield as a company earned higher short term rates on interest bearing deposits held at banks.
The increase in the rate paid on interest bearing liabilities in the third quarter as compared to the prior quarter was driven by a 36 basis point increase in the rate paid on interest bearing deposits.
Turning to the provision for credit losses winter recorded provision for credit losses of $6 $4 million compared to a provision of $24 million in the prior quarter and a $7 9 million negative provision recorded in the year ago quarter.
Provision expense was lower in the third quarter, partly as a result of providing for strong, but lower loan growth compared to the second quarter.
The lower level of net charge offs and improvement in the mix of classified loans and that was offset slightly by changes in various macroeconomic factors.
Rich Murphy will cover credit, which continues to be good in additional detail in just a few minutes.
Turning to noninterest income and noninterest expenses in the noninterest income section our wealth management revenue was up $1 8 million to $33 1 million from $31 4 million in the prior quarter and up from $31 5 million recorded in the year ago quarter, given the volatile market conditions, we're pleased with that.
<unk>, which was aided by strong activity in our 10 31 exchange business.
Consistent with overall industry trends and the impact of higher home mortgage rates, our mortgage banking operations saw the anticipated lower loan origination volume during the third quarter as such mortgage banking revenues decreased by $6 $1 million.
From.
From the second quarter.
'twenty two.
Sure.
And looking forward on our current pipeline activities, we expect mortgage origination volumes to be lower in the fourth quarter and we just experienced in the third quarter due to the higher rate environment and seasonal purchasing trends. However, the impact of any such decline on net earnings is expected to be small.
Very small relative to the anticipated growth in net interest income.
The company recorded net losses on investment securities of $3 $1 million during the third quarter compared to net losses of $7 8 million in the prior quarter.
As the market decline in equity valuations continue to affect a portion of our securities portfolio.
Other noninterest income totaled $15 $9 million in the third quarter, which was up.
$2 million from the amount recorded in the prior quarter. The primary reason for the increase in this category is that the company recorded $2 $5 million of losses in the second quarter of this year associated with the sale and anticipated sale of two properties, which did not obviously occur again in this quarter. Additionally, the <unk>.
We realized $1 $3 million of lower swap fee revenue in the third quarter relative to the prior quarter.
On the noninterest expense side of the house and our noninterest expenses totaled $296 5 million in the third quarter and were up 3% or approximately $7 $8 million when compared to the prior quarter total of $288 $7 million.
The primary reason for the increase was due to higher compensation related expenses.
Salaries and employee benefits expense increased approximately $8 $8 million in the third quarter as compared to the second quarter and.
And relative to the prior quarter, the increase related to $5 million of higher salary expense and $4 $3 million of increased accruals associated with their incentive compensation programs. The higher salary expense was primarily caused by mid year compensation increases, which included the effect of raising the companys minimum wage in August .
This year.
The increase in the commissions and incentive compensation expense was due to higher accruals for both long term and short term incentive compensation programs relative to the prior quarter and this was really associated with the increase in the company's profitability and that effect upon the planned design.
These increases were offset somewhat by lower level of mortgage banking commissions due to the declining mortgage loan origination volume.
Other than those categories I just discussed all other expense categories taken together were well controlled and were actually down by approximately $1 million compared to the second quarter. The decrease was impacted by a variety of relatively normal operational fluctuations none that I think are worth noting for this call.
As Ed mentioned, the net overhead ratio a measure of operational efficiency stood at 153% for the third quarter, which was relatively stable when compared to the ratio of 151 in the prior quarter.
On a year to date basis, the net overhead ratio stood at 135%.
Additionally, the company's efficiency ratio declined below 60% to 58, 4% in the third quarter as expenses did not increase at a rate commensurate with the increase in revenue. So in summary, the core fundamentals were strong strong loan growth expanding margin solid pipelines, good credit quality metrics and I think we're set up good for the few.
Quarters, so with that I'll conclude my comments and turn it over to rich Murphy to discuss credit.
Thanks, Dave.
Noted earlier credit performance for the third quarter was very solid from a number of perspectives as detailed on slide seven of the deck loan growth for the quarter was $1 1 billion or 12% annualized and outstanding results and similar to the past few quarters, we continue to see loan growth across the portfolio, specifically life insurance premium finance continue to see very solid grew.
As balances increased $396 million.
Commercial premium finance also had a very strong quarter with loans up $172 million C&I loans increased by $212 million in commercial real estate grew by $171 million.
Year over year, we saw total loan growth of approximately $6 billion or 18% net of PPP loans.
As noted on prior earnings calls, we continue to see very solid momentum in our core C&I and CRE portfolios pipelines have been very strong throughout the year and we saw that materialize into increased outstandings during the past several quarters.
In addition, disruptions within the competitive banking landscape continue to work to our benefit.
We continue to be optimistic about loan growth for the remainder of 2022 in early 2023 for a number of reasons.
Our pipelines continue to be very strong through Q3 with solid momentum going into Q4.
Commercial line utilization, excluding leases and mortgage warehouse lines as detailed on slide 16, continuing to trend up and we anticipate this trend will continue.
Also on Slide 16, you will see the business expansion inflation pressures and resulted in many customers requesting increases increases to their credit facilities to help finance these costs.
And both first insurance funding in winter US life Finance had another impressive quarter. This momentum has been strong for several quarters and we believe it should continue into 2023.
As a result, while we acknowledge increased concerns about possible 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 maintained our credit discipline.
From a credit quality perspective as detailed on slide 15, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics nonperforming.
Nonperforming loans increased from $72 million or 20 basis points to 90 $98 million or 26 basis points roughly the same level. We experienced at the end of Q3, 2021, where npls were $90 million or 27 basis points.
The increase in Npls during the quarter came from two factors.
One loan totaling 25 million within our franchise finance portfolio moved to nonperforming status. This loan had been a rated credit for some time as the borrower experienced challenges from extended COVID-19, shutdowns and most recently by rising wage and commodity costs. While these factors have affected other restaurant operators within our portfolio. We believe this situation is isolated.
And our franchise finance customers continue to perform well.
Also we experienced a $10 million increase in npls in our commercial premium finance portfolio portfolio, resulting from a handful of loans over 90 days past due at quarter end. We are secured on these zones and anticipate repayment from the unearned premium shortly.
Overall npls continue to be a very low levels and we are still confident about the solid credit metrics of the portfolio.
Charge offs during the quarter were $3 2 million or three basis points down from the previous quarter year to date charge offs totaled $15 million or six basis points.
Finally, as detailed on slide 15, we saw significant improvement in our special mentioned substandard loans with no meaningful signs of economic stress at the customer level.
That concludes my comments on credit and now I will turn it back to Ed to wrap up thanks rich.
All in all I think the future looks very bright for us.
Notwithstanding what could happen in the markets et cetera.
So it was a black swan that jumps in someplace, but.
I like where we sit right now.
We should see continued margin improvement as previous rate increases.
Through our balance sheet and income statement.
Additional rate increases should also benefit our earnings going forward.
As we mentioned we've begun area in some hedges to protect the downside.
Rates go down very quickly.
Credit remained stellar in loan demand remains good across the board.
Sacrifice, our normal conservative credit standards are making sure we get paid for the risk.
We continue to benefit from market disruption.
The acquisition market remains continuing to rent so when we're looking.
We are looking as normal for opportunities in all our businesses.
Dilution is still a four letter word for us.
I think that sooner or later.
People are going to have to.
Sure thing about where theyre going to end up and where the right guys for a lot of people.
Wealth management is.
Doing well because of the <unk>.
Our diversified nature of our.
Earnings in our wealth management is serving us well the market turns.
Our wealth manager should do extremely well.
We like where we stand so as you can be sure our best efforts and we appreciate your support.
All I can do some questions. Thank you very much.
Yes.
As a reminder to ask a question Youre running to press Star one one on your telephone please standby, while we compile the Q&A roster.
Our first question comes from the line of John Armstrong of RBC capital markets.
John Ostrom your line is open.
Hey, guys.
Hey, <unk> good how about you.
<unk> Dream everyday good you sound good.
Can you can you guys talk a little bit about the comment.
You talked about some deposit strategies to have funding grow.
Along with loan growth, it's been a struggle for some of your peers, but just curious what youre thinking on that.
Tim I'll, let you answer that yes.
Yes, John .
We grew deposits less than we normally would in the quarter. It's obviously become more price sensitive in the market, but we continue to add relationships. The disruption will continue to help us.
We're working on kind of some more niche deposit related activities that we think might bear some fruit but.
We're currently at 89% loan to deposit, which is well within our target range, we've got ample liquidity and could fund several more quarters of unbalanced growth if we get it.
If loan growth proves to be strong after that which would probably be really good news.
We'd be funding those loans at closer to the higher market marginal rates, but.
Our intent is to grow deposits and more importantly grow relationships and the disruption is helping us.
We're encouraged to date that.
The percentage of deposits that are not interest bearing have stayed pretty stable at about a third of deposits and we're off to a good start in the fourth quarter.
Okay. Good that's helpful. And then I guess the other side of the balance sheet to maybe this is one for you Dave but.
You talked about putting some of the cash to work and having a plan to do more of that can you talk a little bit more about what youre doing there and give us an idea of what you did during the quarter and what kind of yields you are seeing.
Yes, I mean, as we stated in the press release, we put about $1 billion of liquidity to work in the fourth quarter.
Those were invested in mortgage backed securities and don't recall, the exact to the basis point yield, but it was at a 5.5% sort of range. So.
So we've added some securities we didn't do any really in the third quarter, we stayed relatively flat as far as growth goes.
Our investments but.
We did we did have some additional federal home loan bank funding, where we locked in some lower rates and basically are getting a spread on those that would be accretive to our ROA.
Okay.
Yes.
I guess going forward, maybe what youre asking is beyond that do we do we expect to invest a lot in securities and I think the answer probably is.
Not a lot because we have good loan demand so for us we're going to fund loan demand and use that liquidity to do that.
I would expect that.
Securities Arent going to grow dramatically from here going forward.
We run at 85% to 90% loan to deposits.
So any growth, we get youre going to have southern going into securities going forward.
Okay. Okay.
<unk>.
Some of your peers have really been beat up.
And it doesn't seem like a bigger issue for you, but that was what the question was around as well. So I appreciate it thanks guys.
Great. Thanks, John .
Thank you. Our next question comes from David Long of Raymond James Your line is open David long.
Thank you Hey, guys glad to hear your surgery went well and hope your physical therapy is going just as well.
Let me do I got I got 10 days.
Before I can really do anything but.
I'll be at it.
Please stick with it.
Just.
On the lending side I know it sounds like your pipeline is still very good and you guys are are anxious and have an appetite to continue to lend but are there any segments that you may be pulling back on at this point that may seem a little bit more risky than others.
Rich.
Yes, I think.
And as always said our loan policies are we keep them very conservative we don't change it we don't.
I would say, we don't like to jerk the wheel.
Pulling it out of different categories, but.
I would think one of the areas that would be probably impacted the most would be.
Sorry.
As rates go up it just makes it tougher and tougher to.
Have these projects that we're looking at underwriting just requires more and more equity so it'll be interesting to see how that goes and clearly in the past as you know David we.
The CRE space, we already have.
A number of years ago really worked our appetite down for retail I'd say office is another area that we are focused on pretty dramatically but.
Overall, we're still seeing good demand in multifamily and in.
Industrial although again I think it's going to start to feel some of the challenges here of higher higher borrowing costs. So.
But generally speaking we're still feeling pretty good about the other areas I think premium finance will continue to do very well.
Through next year.
C&I demand as we talked about with what's going on in the.
Competitive landscape in Chicago, I think we continue to be a really good opportunity for borrowers.
And customers, bringing over their relationships, but.
That would be the only area that would jump out at me as being heavily affected and something that is we're focusing on them pretty pretty consistently we don't do a lot of consumer lending which is helpful.
We have home equity, but generally speaking that the extent of most of our consumer lending.
Got it.
Recall the <unk>.
<unk> strategy in the commercial real estate way back when.
So so cool thanks for that answer and then.
Texas capital announced they're selling their premium finance business the truest during the quarter and just within your own premium finance business can you talk about whether that is a good opportunity for you guys to gain some market share or not.
Yes, David it's Dave Thanks, Ryan.
Gently.
We think that if you if you lose a competitor in the space. That's good for us and so I think generally people thought in the P&C space before big players to be a private company out of Kansas City Truest Us in Texas capital, So if Texas capital. So it's a true as you now.
Have one less competitor in that in that group before so I think generally that's positive for us number of our agents and brokers multiple premium finance providers and so if for instance, they were using.
Texas capital and tourists then they.
They're going to have to find another provider and we would be a likely candidate for that and then to a certain extent <unk> also got an insurance agent and broker business and some of our agents and brokers don't like to direct business to a competitor. So we think marginally that helps us a little bit too since we are not in the insurance brokerage business.
So we don't.
Present that.
Competition against some of our clients. So generally speaking I mean, it's a competitive industry you've got to fight for every client, but we think it should be a positive just because of one less competitor in the marketplace.
Okay, I will step back and let someone else jump in.
Thank you thanks.
Thank you. Our next question comes from the line Nathan race Piper Sandler.
Please go ahead Nathan race.
Hey, guys good morning.
Hey, Nathan.
And just on the mortgage outlook from here, obviously, some compression in the gain on sale.
Margin here.
Third quarter, so Dave maybe just curious how youre kind of thinking about that margin going forward.
All the adjustments and corrections that are going on.
Industry today.
Yes.
As I said in my comments I think the volume will be down a little bit because of the seasonality and the increased rates.
The margins are sort of clanking, along what I would think would be the bottom right now so I don't expect those to go down much further.
We don't I think as you point out we don't do correspondent or wholesale side, a lot of the adjustment for some of our peers out there. They do a lot more correspondent, which I think drags that margin down quite a bit ours is all.
Retail on with and we did we don't deal in those other.
Pillars of the mortgage business.
I would think that the margin would be about the same on lower volume and so.
Revenue.
Ex MSR valuations, etc revenues production revenue will be down slightly but again once you take out the commissions the expenses on taxes the impact of that is going to be negligible relative to the increase in net.
Net interest income.
Okay, Great and then just changing gears and thinking about the deposit outlook just going back to the earlier question curious just in terms of you guys have the ability to kind of defend the deposit base and you can actually grow it. Unlike most peers. Thus far is at three two earning season.
The deposit growth youre seeing largely from existing clients or are you guys seeing more opportunities to grow deposits in light of all the acquisition related disruption across the Chicago land area. These days.
Tim I can handle that yes made its really both I mean, the disruption is certainly helpful and as we bring clients over.
Aim for a full relationship which would include the deposit business, but.
We're sensitive to the deposit book and the excess funds that all of our clients have and will compete with for those with everybody in the market. So it's both.
Okay got it and just lastly, do you guys have an updated range in terms of where you want your loan deposit ratio to settle out into next year.
In light of maybe perhaps tamping down on some growth just to maybe keep that loan to deposit ratio within a more comfortable range going forward.
Yes.
We've said 85 to low nineties.
We would change that.
For normal operating conditions.
And our preferred range Nate curve.
Every year that we've been a public company going back to 96.
We're comfortable there.
Okay, Great I will step back.
You guys, taking the questions and all the color.
Thank you.
Thank you again to ask a question. Please press star one one on your telephone again Thats Star one one on your telephone to ask a question. Our next question comes from the line of Terry Mcevoy Stephens, Inc.
Your line is open. Please go ahead, Sir macro good morning, first off that glad the surgery went well and gosh I can't imagine a wind trust call without you. So.
I just wanted to get that out there.
So from a I guess first question as you think about that 4% margin in the first quarter of next year and the upside to revenue does that make you rethink your expense budget all for next year and can you push back at all on some of the concerns that banks spend away. This higher NII on expenses next year.
Well in those areas.
I think that we have.
Three year plan for technology investments and alike, and we will stick to that and we're not going to spend like drunken sailors and all I think.
We'll have continue to see pressures on labor costs next year, but that is not a function of.
Spending.
The money, we make on the margin just.
Randomly so we're going to try to control the expenses as best we can as if the margin didn't increase and we will continue to invest in technology and expand the franchises as we normally would could there.
Maybe be a marginal project out there that maybe it was on hold that we would throw into the kitty, possibly but it wouldn't be material.
Yes, I think that's right Dave.
I think that.
Have you really careful on your expenses going forward because <unk>.
Comes up could come down.
<unk>.
Although we're doing some things to hedge the.
The downside risk of rates falling again.
The fed is so active and somebody hiccup someplace.
We've got our asses handed to us in rates again.
Can't afford to have that in.
No were very hard on that but the fact is that.
I think that our prospects for growth are very good.
I think the growth will help mitigate a lot of these expenses.
Because youre going to have increases in labor and what have you, they're not going to get them back at the end of the day.
We're going to have to build that and I think we've got to grow through it so.
Pure organic growth and hopefully the acquisition market will come around again.
But we've always been able to work through and take what the market gives us and we'll continue to do that.
Our reputation.
And the.
The market in Chicago being somewhat sell kind of in turmoil with changes going on.
The opportunities for us here is still very good.
Geographic expansion.
In our market and our desired marketplaces also very good.
Note that we are opening up we've opened up.
Loan production office and soon to be branch in.
Indiana.
Northwest, Indiana, which is good for us.
Please refer to buy somebody there, but we will sell to us.
As we had worms, nobody likes suite arms or something but.
We're going to make that go into that market I think I think that the way we our culture.
We operate the organization.
And the way, we present ourselves to our customers as indicated by the J D Power Awards, we get in the <unk>.
Brad towards we get.
We will sell.
So it's very nicely under these new communities.
Very transportable I should say, so we hope to be able to grow through it and that.
That would be the plan.
Okay.
And then as a follow up and I'm a bit over my skis here could you maybe talk about the decision to use the collar, where you've got to establish a floor and a cap versus just a straight up swap.
What type of protection do you have there just so I can understand the decision and then going forward do you think that down rate scenario, which went from $6 nine to negative three 9% do you expect that to continue to trend down over the coming quarters through the use of additional swaps or collars.
Dave or Tim.
Yes, we haven't disclosed.
The outside parameters.
Parameters of those aren't but will put them in we'll put that detail into into the.
Q, Terry, but but generally speaking, it's probably mid threes to low fours as far as where the cap would kick in and then.
In.
Mid to high twos for some of the flu.
Florida.
They would kick in but we will give the specifics.
In the 10-Q.
And go through that.
Just a start on that so we're trying to predict protect the downside and the thought is.
If you sell the.
The cap on that it helps to pay for the downside.
Downside protection and because we're still asset sensitive given up a few basis points on the upside is worth paying for the downside protection.
Great. Thank you.
Thank you. Our next question comes from the line of Chris Mcgratty of <unk>. Your line is open. Please go ahead, Chris Mcgratty I'm wondering if you could just started if you had the September margin and also the spot deposit cost at the end of the quarter.
And no we haven't disclosed those Chris.
I think what we're going with the margin as we expect it to be north of $3 70 in the fourth quarter and so.
You can probably sort of draw a straight line. If you look at where we went from second quarter to third quarter end.
The guidance, we gave for the fourth quarter.
Okay, and then the approaching four in Q1.
Obviously, it's much better than what markets are expecting.
I guess, maybe a question around peak margins are peak NII growth. How are you thinking about just if the fed stops early next year, how much of a lag there'll be on the deposit center side.
What youre doing to kind of protect that rollover.
Yeah and then.
Chris.
Assumption right now is for another 150 basis points worth of.
Fed funds increases probably 75% in November and then <unk>.
75% at some point after that.
At those levels, we get the approach to 4% during the first quarter.
I think as the fed stops raising rates, it's more likely that the loan and asset repricing will mitigate deposit increased costs, which have lagged somewhat.
So theres lots of moving parts, but but the low four range is certainly reasonable given the current forecast.
Things change, we will move accordingly.
So so low fours after the first quarters.
Based on that assumption is what you are communicating okay. Thank you.
Thank you. Our next question comes from Brandon King of Truest. Your line is open. Please go ahead Brandon King.
Thank you and good morning.
Good morning, Brian .
Yes, So I had a question on the reserve currently ACO day, 83 basis points and I know, it's higher than it was.
Pre C suite and the day one seats sold.
Curious.
What is your level of comfortable.
With that going into kind of.
Economic environment deteriorating and if you think that's <unk>.
Adequate for a more severe recession or how high it can go.
But we obviously think its adequate.
If we look at our models.
One of the things.
Need to understand is that.
At 83 basis points incorporates.
Over a third of our balance sheet and premium finance loans and life loans or.
Historically, if you look at it is zero losses in the P&C portfolio has relatively low losses. So if you. If you look at table 12 of our press release, if you look at our core loans, we have 126 basis points.
The reserve associated with those but clearly with the seasonal modeling and the work that we do on that we think it's adequate when.
When you go back to the eight or nine timeframe.
We were profitable.
All of those years and generally have lower losses than our peers, we think were conservative.
We monitor it we do.
<unk> deep into our portfolio and look for trends and right now we feel comfortable with where it's at but you do cause people to that.
Maybe you don't follow us closely and they need to understand that that number is lower than some of our peers. Because we have a third of our portfolio and very low risk low loss asset classes.
Okay.
And then following that I'm not sure if you disclosed kind of the weightings, but there is some sort of <unk>.
Qualitative overlay in particular that you think kind of gives you more comfort with that reserve level unless you put on based off of the calculation with the seasonal model.
Yeah, we don't disclose the difference between quantitative and qualitative factors out there, but I think everybody has a qualitative process factored into ours generally as a qualitative process based on quantitative analysis and input from the lines, but.
<unk> and <unk>.
To answer the question is we're very comfortable with our reserve levels.
Alright.
Thanks for taking my questions.
Thank you.
Thank you at this time I would like to turn the call back over to Ed <unk> for closing remarks, Sir.
Thanks, everybody for dialing in today.
Well, it's hard to January if not before via any other questions. Please call, Dave Tim or for myself, we'd be happy to respond to them.
<unk> fourth quarter.
We'll talk to you again in January thanks, so much and.
Have a great holiday season.
This already so thanks, a bunch everybody.
And this concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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