Q4 2022 Wintrust Financial Corp Earnings Call

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 their presenters may make reference to both the earnings press release and the earnings release presentation.

Following their presentations there will be a formal question and answer session.

During the course of today's call 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 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.

Now I'll turn the call over to Mr. Edward Weymer.

Thank you very much welcome everybody to our fourth quarter.

In 2022 earnings call.

With me always is Dave Dykstra.

Two hovering officer.

What are your daiwa.

CFO.

Tim Crane, President Rich Murphy.

It's critical.

Full year General counsel.

At the same format as we have been doing in the past.

Or maybe just some general comments.

Results for both the quarter and the year in total turn it over to Tim Crane for more detail on the balance sheet.

And then too.

It actually is going to discuss the income statement in detail, which might lead you to talk about credit and back to me for some summary comments about the future.

Some time for questions.

We finished the year very well.

It's a great year for us.

Paul jumped up it's on its way up.

Earnings for the year of 590, <unk> almost $510 million up almost 10.

10% from the previous year.

Diluted earnings per share of.

So the Florida 140, $445 million grew to 142 million $43 million in the third quarter.

But $99 million in the fourth quarter of 2021.

Earnings per share to <unk> 23 for the quarter.

Two for the year compared to 758.

For the previous year.

On a pretax pre provision income was a record for us I think $2 43.

206.

For the year of 780 versus <unk> 79.

And the.

Prospects will do for this to continue on its way up.

Margin finished at $3 73.

<unk> seen for the year.

From $3 35 in the.

Third quarter.

38 basis points.

So Kristina 80 basis points year to date to $3 17.

And then we expect to.

Approach, 4% coming this nice quarter, Tim will talk about all of that.

Current assets around 1% for the year 110 for the for.

For the quarter current equity of $12 seven to <unk> 41 for the year.

And we will value rose to 61 Bucks a share.

<unk> to $59 64.

Fourth quarter 2021.

Again.

It was a very good year for us.

If you look at the <unk>.

To some extent.

This is rob nicely for the year.

Yes.

Loans are up to about $1 billion was about almost $700 million.

Over average.

So we'll be able to.

Towards that going forward.

Margin as Tim will discuss Timothy.

Tim and Dave will discuss.

Turning to hedge it a little bit to make sure to maintain our.

Downside risks could make sense as rates go up.

The next one will be down at some point.

We are adjusting the balance sheet for that Tim will talk about that.

Credit side credit so remarkably good.

Mark will talk about that but we'll point out that.

If you look at the real numbers quarter was actually down for the quarter.

Because of that.

$17 million of.

Physical life loans.

Hung up.

Waiting for the money they come back they only the physical portfolio you have to understand that.

All of that money that's out there that we chose.

Past due.

Been confirmed there is going to be returns so.

It was actually better than it was before.

Very good about that I'll now turn it over to.

Tim Alright, although the balance sheet. That's good thanks, Ed I'd like to highlight a few balance sheet items.

Comment on several items likely to be of interest, including the continued impact of rising rates on the margin expectations.

The approximately $1 billion of growth for the fourth quarter was 11% loan growth on an annualized basis.

Continues to be spread nicely across all major loan categories.

As noted in the release period end loan balances were $630 million higher than the quarter average, which will help our first quarter 2023 results.

Going forward, while we remain encouraged by stable loan pipelines. We believe there is some evidence of a modest slowdown in market loan demand.

Growth in the mid to high single digits on an annualized basis remains a reasonable expectation given the current economic uncertainty.

Rich will speak to loans in more detail in just a few minutes, but a couple of notes on the provision and on our allowance.

Of the $48 million and provision approximately two thirds is related to a modest deterioration in the seasonal macroeconomic factors and only one third is related to our growth and portfolio changes that occurred during the quarter to be clear we are not signaling a change in our credit performance.

With respect to our allowance of 91 basis points of total loans.

It's important to note that excluding our historically low loss niche loans, primarily the premium finance loans. Our allowance is 142 basis points of total core loans you can see that on table 12 of the press release, where we provide some detail.

Deposit growth for the quarter was approximately $105 million.

Continued rise in rates is clearly, making deposit gathering more challenging the cost of deposits are rising and nominal changes in deposit mix are occurring.

Interest bearing deposit costs of 130 basis points for the fourth quarter were up 66 basis points we.

We anticipate continued increases in both the fed funds rate and the rates associated with the bank's loan and deposit activity increases.

Increases in loan yields however at this point in the cycle continued to exceed the change in deposit costs, given our asset sensitive position.

Our deposit betas and the increase in deposit costs to date are in line with our expectations currently the beta on our interest bearing deposits is approximately 25%, we anticipate an interest bearing deposit beta of approximately 40% to 45% over the full cycle of interest rate changes.

Our Securities book was up 1 billion and a half in the quarter as we believe yields are becoming more attractive and represent the opportunity for reasonable longer term returns at.

At year end liquidity remains strong with approximately $2 $5 billion of cash on the balance sheet.

As discussed last quarter, our Securities book is split almost equally between available for sale and held to maturity.

While the <unk> valuation swings during the year were significant as Ed pointed out the bank's tangible book value was up for both the fourth quarter and the year to $61 a share.

Those of you who follow us know that the tangible book value per share is an important metric for us. It has increased every year since going public in 1996.

With respect to rate sensitivity in the margin.

Although our GAAP position is trending down we remain asset sensitive and well positioned to continue to benefit from rising interest rates. We believe each 25 basis point increase in the fed funds rate at this point in the cycle.

Approximately $30 million in pre tax net interest income on an annualized basis and an improvement in the margin of 5% to eight basis points. Note. This is down slightly from our prior positioning.

To be more specific on the margin as Ed mentioned that was $3 73 in the fourth quarter, an improvement of 38 basis points.

With rates rising we continue to achieve and in some cases exceed the margin improvement discussed are projected on our prior calls.

At this point, depending on the impact of competition for deposits and the pace of additional fed increases we believe our marginal approach 4% at some point during the fourth first quarter and is not yet peaked.

Conversely, while we clearly benefit from rising rates as discussed on our last call. The bank entered into several interest rate collars in the third quarter of 2022.

Further early in this quarter first quarter of 'twenty three.

Bank entered into additional derivative contracts with the intent of reducing the variability of the margin and a lower lower interest rate environment.

Our approach has been to leg into these contracts and we anticipate that additional activity on this front is likely.

You can see table eight in the press release for more information on our GAAP position.

As you know, we also view our mortgage business as a natural hedge as it is proven to perform well and lower rate environments when margins tend to be pressured.

For the fourth quarter capital ratios were stable to up slightly and remain appropriate given our risk profile.

And with the higher net interest margin currently forecasted loan growth. The Companys earnings are projected to result in organic improvement to our capital levels in the coming quarters.

With that I'll turn it over to Dave.

Great. Thanks, Tim as usual I'll cover some of the noteworthy income statement categories, starting with net interest income.

Tim.

A reference some of these numbers, but we'll just go through it in detail for the fourth quarter of 2022 net interest income totaled $456 8 million and was an increase of $55 4 million as compared to the third quarter.

<unk> 22, and an increase of $168 million as compared to the fourth quarter of last year.

$55 4 million increase in net interest income as compared to the prior quarter was due to an increase in the net interest margin and loan growth of 30.

<unk> 38 basis point improvement in the margin brought it to 373% in the fourth quarter.

A beneficial increase of 84 basis points on the yield on earning assets and a 22 basis point increase in the net free funds contribution.

Combined with the negative impact of a 68 basis point increase on the rate paid on liabilities resulted in that improved net interest margin.

The increase in the yield on earning assets in the fourth quarter as compared to the prior quarter was primarily due to an 87 basis point improvement on loan yields and higher liquidity management asset yields of the company earned higher short term yields on its interest bearing deposits held at banks and its investment securities portfolio.

The increase in the rate paid on interest bearing liabilities in the fourth quarter as compared to the prior quarter was driven by 66 basis point increase in the rates paid on interest bearing deposits Tim already went through the deposit beta so I will.

<unk>.

Let you refer to his comments on that.

Turning to the provision for credit losses, when trust recorded a provision for credit losses of $47 $6 million in the fourth quarter compared to a provision of $6 4 million in the prior quarter and a $9 3 million provision expense recorded in the year ago quarter, the higher provision expense in the fourth quarter was primarily a result of less favorable.

At macroeconomic environment conditions, including wider projected credit spreads and less favorable commercial real estate price index data.

Included in the economic forecast that we use stronger loan growth also contributed to provision expense.

For the quarter Rich will talk about credit in more detail, but I should note that the current quarter's net charge offs the mix of classified loans and the delinquency data all remained relatively stable.

Or better and really pretty good. So those factors really did not have a significant impact on the level of the fourth quarter's provision for credit losses expense and as Tim said.

This is not a segment of the larger expense level not a signaling of any specific issues. It's really a function of the macroeconomic forecast that we use in our seasonal models turning to other noninterest income and noninterest expense in the noninterest income section our wealth management revenue was down $2 4 million.

From the prior quarter.

And was at the level of $37 million for the quarter declined the revenues for this quarter were primarily related to less fees associated with our tax deferred like kind exchange business, which had been very strong in the prior quarters on slowed just a bit in the fourth quarter.

Consistent with overall industry trends and the impact of relatively higher home mortgage rates, our mortgage banking operation experienced a revenue declined $9 $8 million from the third quarter due to low lower loan origination volumes and lower production margins during the quarter we.

We expect mortgage origination volumes to continue to be low in the first quarter due to the rate environment and the seasonal purchasing trends, but it's still an important part of our business and we expect it to pick up some volume in the spring buying season starts in the second quarter.

The company recorded net losses on investment securities of approximately $6 $7 million during the fourth quarter compared to $3 $1 million net loss in the prior quarter as market conditions and equity valuations continue to affect a portion of our securities portfolio.

Other noninterest income totaled $19 3 million in the fourth quarter, which was up $3 5 million from the amount recorded in the prior quarter contributing.

Contributing reason for the increase in this category is that the company recorded approximately $1 1 million of higher bully income, which was primarily related to higher earnings on Bali investments that support certain deferred compensation plan benefits.

And so I should note that net $1 $1 million increase in the bully income has a similar offsetting increase in compensation expense during the quarter, so they've sort of net.

As far as net income goes but there is an increase in both of those categories for the quarter. Additionally.

Additionally, prior quarter had a negative valuation adjustment of approximately $2 million on our early buyout loans certain early buyout loans, whereas the prior quarter.

The prior quarter had a $2 million negative valuation on the early buyout loans, whereas the current quarter had an insignificant adjustment.

Turning to noninterest expenses.

Noninterest expenses totaled $307 8 million in the fourth quarter and were up a little over $11 million when compared to the prior quarter totaled $296 5 million. The primary reason for the increase was due to higher compensation related expenses and a variety of other less significant contributing factors salaries.

Salaries and employee benefits expense increased by approximately $4 2 million in the fourth quarter as compared to the prior quarter of the year relative to the prior quarter. The increase of $2 8 million of higher salary expenses and $2 $3 million of higher employee benefits expense were the primary causes as to the <unk>.

Salaries and expenses so.

So it's caused by $1 8 million of increased deferred compensation costs.

As I mentioned, partially related to the underlying <unk> investments and where we recorded the income on the other on the other noninterest income part of the income statement.

And.

On the benefit side.

Those are almost exclusively related to higher health insurance claims during the quarter. So elevated in the fourth quarter generally as people try to use up some of their health benefits before the deductibles reset also although a smaller change from the quarter commissions and incentive compensation was slightly lower as mortgage banking commissions were.

Although we did have some higher.

Bonus and long term incentive compensation accruals for the quarter related to the higher earnings level, but the net was a reduction in that category.

Advertising and marketing expenses decreased by $2 3 million in the fourth quarter compared to the prior quarter.

As we've discussed on previous calls this category of expenses tends to be lower in the fourth and first quarters of the year due to less marketing and sponsorship expenditures related to various major and minor league baseball sponsorships and less summertime sponsorship events that we obviously don't do in the wintertime.

Professional fees increased by approximately $1 7 million in the fourth quarter.

These fluctuations were primarily related to some consulting services that we utilized in conjunction with the implementation of various <unk>.

Financial and customer related processing systems.

Other miscellaneous expense increased by $4 $8 million during the quarter, which included a $1 1 million.

Additional charitable contributions and a variety of other normal operational fluctuations, none of which I think are worth noting for this call.

Our efficiency ratio declined to 55%.

For the fourth quarter from 58% in the third quarter as our expenses did not increase at a rate commensurate with the increase in revenue.

And with that.

I'll turn it over to rich to cover credit.

Thanks, Dave.

As noted earlier and credit performance for the fourth quarter was very solid from a number of perspectives.

Detailed on slide eight of the deck loan growth for the quarter was $1 billion or 11% annualized and outstanding result, and similar to the past few quarters, we continue to see loan growth across the portfolio specifically in commercial real estate grew by $373 million commercial loans bolstered by a strong quarter in leasing grew by $290 million commercial.

Premium finance had another solid quarter up $136 million in residential real estate loans were up $137 million.

Year over year, we saw total loan growth of $5 billion or 15% net of PPP loans, a very productive 2022.

As noted on our prior earnings calls, we continue to see very solid momentum in our core C&I and CRE portfolios pipelines have been very strong throughout the year and we saw that materialize into increased outstandings over the past several quarters. In addition, ongoing disruptions within the competitive banking landscape continue to work to our benefit.

Also commercial premium finance had a very strong 2022 with increased outstandings of close to $1 billion year over year. We anticipate this momentum will continue into 2023.

While we are optimistic about loan growth for this year, we would anticipate that the pace of growth may trend closer to the middle of our guidance of mid to high single digits for a number of reasons.

While interest life finance grew by $1 1 billion during 2022, the rapid increases in rates during the past year have affected the pace of growth.

This portfolio grew $86 million in the fourth quarter versus $396 million in the third quarter, we would anticipate the slower rate of growth will continue in this higher rate environment.

Also increases in commercial line utilization, excluding leases and mortgage warehouse lines as detailed on slide 17 have flattened during the fourth quarter, possibly reflecting a more cautious business sentiment.

As a result, while we continue to be diligent about the possibility of a business recession, we believe our diversified portfolio and position within the competitive landscape will allow us to grow within our guidance of mid to high single digits and maintained our credit discipline.

From a credit quality perspective as detailed on slide 16, we continue to see strong credit performance across the portfolio. This can be seen in a number of ways.

Nonperforming loans remained stable at 26 basis points or $101 million compared to $98 million in the third quarter and as Ed noted earlier of this totaled $17 million was related to winter us life loans, which were 90 days past maturity.

Roughly half of these loans have been since been paid off the balance of which are fully secured and we would anticipate full repayment from the carrier. Shortly overall npls continues to be a very low levels and we are still confident about the solid metrics in the portfolio.

Charge offs for the quarter were $5 1 million or five basis points up slightly from the previous quarter charge offs for 2022 totaled $20 3 million or five basis points.

Finally, as detailed on slide 16, we saw stable levels in our special mention and substandard loans with no meaningful signs of additional economic stress at the customer level that concludes my comments on credit and alternatives to Ed to wrap up thanks Murph.

And as always a good time to review not just the fourth the fourth quarter and the year to date, but.

When we review the entire body of work over a longer period of time versus our stated goals of the company is Ed.

Let's go back 10 years now.

In our case you go back 30 years results versus peers would be about the same.

Increasing tangible book value, we think is extremely important and one of the goals you always look at as Tim noted earlier.

We've increased it every year since the.

Since we went public.

Easier CAGR of 8% is pretty good.

Even last year had been kind of tough, but we still were up above.

Positive earnings.

Earnings growth.

16% 10 year CAGR.

And to grow 12% students paid 22% stock price only 9% go figure.

Okay.

10 years under review, we saw a bit of everything high rates low rates Pandemics you name it.

Winter has thrived during all of these to testament to our business model, we employ and the people who work at wind Trust when.

When rates were low our mortgage company help pick up the slack.

Net interest margin compression of the net interest margin compression that occurred.

Lower rates.

<unk>.

Lower rates went the more we increase our positive gap with the risen mortgages has died down.

I say this because I'm often.

As well you were mortgage right now we're not it's just part of what we do this is.

This is Susan orchestra here not a Campbell is a big orchestra will all sorts of different parts of the times they all kick in.

So it will kick in.

Mortgages through an extremely important thing.

Core and offering that we have but.

It.

Okay.

That's doing well now, but it will do well as rates come back down.

Now with the margin up where barking on as Tim mentioned blocky and this increased margin for a longer period of time.

Alibaba has been accomplished while maintaining our exceptional credit statistics.

However, natural concentrations kill has also served as well both on the deposit and the asset side.

Well diversified and is something that always works when something isn't working.

We're a growth company. It takes what the market gives us acquisitions organic growth or both worked very well for us.

Above and many more points one has to wonder why we consistently trade at a discount to our peers.

I'm sorry.

Hence the future you can expect more of the same.

Our margin should continue to increase as the remainder of our asset portfolio re prices and liability costs increase at a lesser rate.

Margin all forces in our future.

It will be locked in at a higher margin as we mentioned in today's comments is already underway.

Loan pipelines are still strong but have been lowered historically as mark pointed out.

And we keep our guidance the same but are focusing on the lower side of that.

It starts with stellar but we're prepared for additional hemorrhoid attack.

Hemingway attacks by the folks who Moody's.

We had one this quarter.

It was it is still being evaluated.

Because our business pricing is still an issue, especially given our stock price <unk> American business on track.

First or second quarter closing.

We like where we stand.

Yes.

With all that I think.

Sure our best efforts going forward will.

We will be consistently.

Good where all of the major owners.

Works are tied up in this company not to do anything stupid.

In fact, we hope to thrive no matter, what the economic cycle is and where we're at.

To ensure our best efforts in this end.

Time for some questions. Please.

As a reminder to ask a question you will need to press star one on your telephone again Thats Star one on your telephone to ask a question. Please standby, while we compile the Q&A roster.

Thank you our first question.

Yes.

Comes from the line of John <unk> of RBC capital markets. Your question. Please.

Yes, Jeremy Alright.

Yes, Hello, I have John John Armstrong from RBC.

Thank you guys.

The numbers look good here the one that surprised me a little bit was the provision and it seems like you've you've touched on it kind of alluded to it but what do you want the message for us to be going forward.

Feels like it's going to pull back it feels like it pulls back with a little bit slower loan growth as well, but.

Do you guys view this as more of a onetime step up when we go back to a normal pace or how should we think about that.

Yes.

Thanks, John.

So as you know is sort of a life of loan concept.

If we have loan growth the provision will go up but.

If the economic scenario stayed exactly the same you that you would have no additional provision next quarter per se for that.

So it really depends.

If the <unk>.

Economists, obviously changed our forecast frequently but.

That forecast gets better next quarter, you could expect the provision to come down if it gets worse.

Probably stay elevated so it's really a function of where the economy is going but as Tim and rich and Ed and I have all said there is nothing specific here that we're pointing to that we think is a current problem in the portfolio. This is just how.

Commercial real estate price index forecast and how.

<unk> credit spreads and GDP and on all those forecast Scott moderately worse in the forecast that we economic forecasts. We use so it really is a function of the seasonal modeling and not a function of us seeing deterioration in our credit so.

You can tell me where that Crystal ball is next quarter as far as economic forecasts, which way our provision is probably going to go.

Okay.

Really wasn't any heavier weighting by year was just more of the output.

Yes, yes.

Hemorrhoids origin.

Yes.

Okay.

Sure that will be in the transcript.

The.

Yes.

The other question I have is on the margin.

I think I understand what you guys are saying, but if the fed it feels like youre trying to predict protect downside with the fed.

Bumps a couple more times and then hold it for a while what could happen to your margin are you.

You guys were talking about a 4% level, but then you kind of alluded to falling a little bit higher above 4%.

What do you think about the margin outlook and that kind of a scenario where the fed is not cutting.

Well they are raising it will it should be as Tim said.

30 million Bucks.

On annual basis per quarter.

Eventually the.

<unk> been lagging on the pilot, we're able to lag on the deposits such as going to catch up to that overall beta.

A lot of assets that are repricing right now if you think about premium finance business that every prices over a course of the year.

Their assets to the same.

We will not will monitoring this very carefully as we leg into these.

Derivatives to help maintain the margin.

So it's hard to say, where it's going to be a pay them.

And some of the derivatives, we give up we do have some upside to protect the downside.

But I think that.

Depending on how <unk> margin will continue to go up.

If we can predict something in the $3, 75% to 4% range long term, depending on where rates are that would be a good thing.

Take a lot more derivatives to do that.

We're not really go to market timing so.

When that happens the mortgages will kick in and life will be good again, that's been there.

Regard.

So we kind of have some internal hedges too but.

Tim you want to talk about that.

Yes, I think John in General, we would expect the margin to sort of tap out after the fed stops raising rates and so.

Whether that's a quarter or two or whether we moderate that with some.

Thoughtful decisions around the derivatives.

Kind of what we're thinking.

But yes.

John This is Dave.

I think what we've said here is that we expect the margin to approach for and if the fed raises some more it may pop a little over four.

But.

Well then we think.

Given existing competitive pressures in the existing yield curve there.

If they stop raising that we can kind of hold it there.

Yes.

All else being stable because of that said, we have a lot of asset.

<unk> left to everyone talks about the deposit betas, but if you look at our life insurance premium finance portfolio as you know those reset once a year and if you go back a year Theyre based generally off of a 12 month LIBOR, our 12 month treasury rate and those rates were.

58 basis points, a year ago, if you look at the <unk>.

Page 25 of our earnings release, those rates were up over 400 basis points. So theres a lot of repricing that happens there the property and casualty premium finance loans.

Our fixed rate loans and so they reprice over a course of a year. So that's a third of our portfolio that has pretty good deposit or asset beta changes left that we think will substantially offset the deposit beta so we.

We feel like we can kind of hold the margin.

If they go higher and then plateau.

Okay, Alright, that's all very helpful guys I appreciate it thank you.

Youre welcome.

Thank you. Our next question comes from the line of.

David long of Raymond James Your question. Please David.

Good morning, everyone.

David go ahead.

You guys are bucking the trend here on the deposit side showing deposit growth a lot of the banks continue to have outflows.

What are your expectations on the deposit flows and then also mixed shift hasnt changed too much as you alluded to do you see.

Much.

Mix shifting coming in the next couple of quarters.

Yes, David it's Tim.

The deposit activity has been lumpy and both in and out I would add we've been pretty disciplined with our pricing and cautious about getting ahead of the market.

We're responding the promotional activity to retain our clients and frankly, we've got some higher deposit costs built into our projections.

We think we operate in good markets with a lot of deposit potential with typically outperformed our peers in terms of growth.

Even though we're one or two in deposit share in many of our markets. We still only have 67, 8% overall growth in Chicago and Milwaukee So.

Our multi charter brand and approach.

Think will help us and we think we're holding our own.

I'd add sort of an interesting fact here during the last quarter or two quarters, rather we help clients purchased almost $1 billion worth of short term treasuries that previously had been held as deposits at the bank and as the gap between deposit pricing and treasuries starts to narrow again, we expect we will get an opportunity at that some of that money.

But.

We don't I mean, we will protect the.

The mix as best we can clearly people are moving out of DDA in some cases for the rates in money markets or savings are CD products.

So I think that's possible that will continue but I can tell you we're intensely focused on adding deposits and relationships and we still think we've got terrific market opportunity. So.

We're going to hold our own and stay at it.

Good Thanks, Tim and then my follow up here relates to the amount of cash you have versus deposits a lot of your peers don't have much cash and they've really had to increase our.

<unk> borrowings and use of higher cost Cds.

Your cash as I see it is down to just under 6% of deposits you're up over 10% at September 30th.

Do you monitor that is that is that something that you that you have a target you want to keep above a certain cash level. Just in case, you do get some deposit run off and you don't have to chase yields.

Yes, I think we're sort of comfortable where the cash is now.

Last quarter the third.

Third quarter, we had.

$1 billion extra sitting in cash because we had we had done some borrowings at the federal home loan bank that we had indicated we would invest it at the beginning of the quarter and we did that so.

I think if you look at it we were in the high.

High Threes and then we went to the high twos, if you adjust for that $1 billion that we invested currently.

After the end of the third quarter, an hour around $2 billion, we like that position, we sort of we sort of focus on.

Loan to deposit ratio of 85 to 90, we're slightly over that but still in a range of comparable with.

And then we were we were.

Lagging on investing in that securities portfolio in the past, we just investing in the 1% range was not that prudent and so we were patient and then we have invested now that rates are higher and then we think that's part of the remixing of the balance sheet to protect against down rates is to invest in some of the longer.

Term securities model for a portion of the balance sheet. So we think I think we like where we're at right now as far as the mix of cash securities and loans and as we grow that mix will probably stay about the same liquidity has always been very important to us.

You can expect our deposit cost to go up but we have a lot of room there.

40% beta we've talked about we're not there yet.

At the same time the assets should move in.

The real trick is going to be protecting the.

The margin when this peaks out.

Black Swan hits, and it's going to drive like Iraq.

Matter, what the environment is.

And you have to be prepared for that too. So we are.

Visually we're constantly looking at it and.

Liquidity is extremely important to us.

Continental Bank went under because of liquidity that because of credit.

As the largest bank failure at the time.

<unk>.

Liquidity is still important to us we monitor it very very carefully.

Yes.

No.

That's great. Thanks for the color guys I appreciate it.

Mhm.

Thank you.

Our next question comes from the line of Chris Mcgratty of CBW. Your line is open Chris.

Hey, good morning. Thanks.

Hey, Chris How're you doing.

David.

4% margin.

Really that Youre talking about.

I guess, what does that map to in terms of loan yields.

The premium finance book that keeps kind of kind of backward lag but.

Is it somewhere in like the mid <unk>. It feels like it's kind of somewhere in the mid sixes is kind of where youre going to the loan yields are going to go.

Probably mid <unk> approaching seven right now I would say that if rates keep going up and the mix of the business changes.

The variable but thats.

We don't give guidance.

Specific guidance, but that's the right Zip code.

Yes.

And then.

There was a comment in the.

Press release, I just talked about.

Additional improvements in efficiency, maybe you could throw a little bit more color around that you're obviously in a good spot.

In the year in the mid fifties, but.

How would you think about that ratio playing out appreciating that mortgages in recessionary levels. Thanks.

Yeah, So mortgage is.

Lower mortgages, obviously help the efficiency ratio.

The expense side of the equation.

We will have some additional expenses in 'twenty three the FDIC rates are up compensation.

<unk> will go up a little.

As we pushed through.

Salary raises.

Mike.

Later this quarter, but.

I think with the inflation and the FDIC and those sorts of things and generally youre probably.

No.

Slightly above mid single digit growth in expenses and if you add on the acquisition. We're planning is probably high single digit expense growth for the entire year at first quarter, probably doesn't growth too much on the expense side, we don't think but then as we add in the acquisition.

When that closes that will add to it and then salaries will kick in.

Margin the margin is going to increase.

Substantially.

We think that the mid.

Mid 50 efficiency ratio, we have probably drifts down closer to 50.

And all credit to even do better than that but.

The increase in the revenue or more.

More than offset the expenses as we look at now.

Continuing to drive that efficiency ratio lower we continue to look at.

Cutting costs also.

In different areas.

Mortgage area being one.

We.

The only the net overhead ratio, which I like to look at it it was higher this quarter, but if you take out that security laws.

So that one five.

We have to grow we have to grow also we have to invest in growing the bank, which is part of the increase in expenses.

That growth will get off.

<unk> got our net overhead ratio back below one five.

Hard to do without mortgages kicking in but between.

The acquisition.

Rothschild and initial asset growth.

I'd like to get that number down below one five.

That will help the efficiency ratio also but.

Yes.

I never concentrated efficiency ratio that was doing well, where all the way up this way. So it's good because the margins up but.

The net overhead ratio, we need to continue to get below one five and we're working very hard to do that.

Yes, good day.

Dave on the covered calls obviously that number's been bouncing around but how active are you going to be there and then I guess, maybe help us with what makes it go on either side.

Well I'll cover cause as you know we do those.

Again to protect against a down rate environment. It adds it.

Return on those securities.

If youre doing them on mortgage backs if rates fall the securities pay off fairly quickly and so you get that extra revenue and.

Our analysis has been over a long period of time that.

You are better off by Rite aid.

Calls and getting that revenue is even if you have to reinvest its usually a better trades, but as I talked about a little bit earlier, when we were talking about the liquidity position.

We invested $1 billion.

Yes.

That liquidity into securities.

In the fourth quarter.

And wrote some calls against that and you can see on our balance sheet and those were called and we agree.

Them so.

At a decent at a decent rate is here in the first quarter. So.

It depends on volatility and it depends on where.

<unk> rates.

<unk>.

But where the yield curve that.

But.

It's a little little bit outsized from from normal given the size of the investment purchases that we have but.

My guess is that in a normal environment that number is somewhere in the $2 million to $10 million range and it really drives a lot off of volatility. So it's hard to tell until you until you get to the point, where your investment securities what the yield curve shape.

Market volatility is but somewhere in that range would seem reasonable to me.

Thank you.

Our next question comes from the line.

Terry Mcevoy Stephens Your line is open Terry.

Alright, Thanks, Terry Mcevoy from Stephens Hi, good morning.

Maybe first off Dave Thanks for reminding me of the repricing opportunities of the loan portfolio in 2003, I think it's something I overlooked I appreciate that.

Maybe a question circling back I think it was johns question on protecting the margin and Eddie kind of throughout $3, 75% to 4% I just want to make sure is is that the floor. This strategy you think can produce.

And.

If rates go down 100 basis points or all the way back to zero I. Just think that's an important kind of comment there and I want to make sure I understand what you were saying there.

Yes, just to give you carry a little bit more detail I mean, we've entered into a combination of collars and some are fee received fixed swaps with.

Terms out three to five years, and obviously the impact of those instruments depends on the interest rate scenario. So.

We're trying to take some steps to improve our margin are lower lower interest rate environment, but it depends on the scenario how much impact there is going to be.

The other thing, though is it's just not these instruments if you look at <unk>.

<unk> you can see that in <unk>.

Various scenarios, both up and down.

Sort of reduce the variability of.

The net interest income and so we're mindful of trying to operate independent of the interest rate environment at a higher level.

So.

<unk>.

I'd add in there I mean, I would sort of be the goal, but we're not going to do.

Yes.

All of the derivatives all at one time were going to leg into this diversity as far as the length of these.

<unk> contracts, so as far as how much fixed rate models, you put on the books.

At what strike prices swaps or collars have.

They all matter and I always tell people, our crystal ball isn't perfect and if you go back 18 months I think maybe the outlook for increases in rates was 25 basis points. So the economists I'll put out these forecasts aren't perfect either so we're trying to protect the margin and so we're going to leg into it so depending what the curve is and where we can buy the <unk>.

Going forward as we leg into it from diversifying the risk perspective.

We'd like to be able to lock in into the upper threes to 4%, but it really sort of is dependent upon how fast rates move and where that longer end of the curve settles out at.

That's a lofty goal, we're not saying we've locked that in yet, but thats, what wed like to do with the market sort of allows us to do that over time of these derivatives.

Yes.

Yes, I was going to say, it's great. I mean, these are sort of unprecedented interest rate.

Margins for US right now we have not been at 4% on our history and so.

And we are prepared for it and we manage for it and we're enjoying that and we just would like to.

Tempt to maintain it going forward through balance sheet position and in derivatives.

It's going to we're going to look into it.

Okay.

Keep that beach ball up in the air I understand.

And then follow up.

Just as a follow up maybe just expand upon I think you hinted earlier just market dislocation disruption you're benefiting from that.

Where specifically you're seeing that maybe some hiring efforts within that budget expense budget for 2023 do you do you kind of factor in some some some hiring from the disruption. Thank you.

Yes.

The answer is yes, we are continuing to benefit from disruption from competitors, we've talked about on prior calls.

Obviously when relationship managers feel like they can't take care of their clients, we look like a good home.

We will continue to pursue those opportunities as they arise, but it's it's not a large team or a number youre going to see pipe on the financials and a single dose.

Thank you.

Always taking advantage of market disruption even from existing players that have disruption internally so.

That's been that's been part of our DNA since the beginning of <unk>. So.

We plan to keep doing it.

Thank you our next question comes.

From the line.

Ben Garlinger hub.

<unk> group your line is open.

Alright, thanks, guys.

<unk>.

Most of the questions around the margin have been answered.

We haven't added trying to edge Society can't go broke by taking profits and that makes sense youre willing to take a little off the upside table to protect on the downside.

And once youre kind of manufacturing to some degree our revenue line, but when you think about.

Revenue relative to expenses, let's say there is that kind of the downside scenario economically or a black Swan event is there anything and then net noninterest expense that you can cut roughly or anything to that extent that you can kind of match out the two.

On the expense side I know, we're kind of a growth company. So we don't plan to cut but as Ed said at the Big factor. There is and we saw we saw this in the past when rates dropped precipitously with the black Swan event as the mortgages kick in dramatically. We had a couple of quarters before rates went up where we had.

Record net income quarters, and because of the mortgage business kicked in so it's really shifting the mix of the business from sprint business, if that would happen dramatically to noninterest income business, which we would be the mortgage side. So that's the biggest factor I would say.

It's a business strategy.

We think we need to be in the mortgage business, because we're not going to send our customer system other financial institution for our mortgage and if we think we're going to do it we'll do it with scale and then we'll do it because we always want to be asset sensitive and we said this on other calls.

Degree of asset sensitivity changes, but you always want to be asset sensitive because if you do have inflation than your expenses are going to go up and then how do you cover that increase in expenses and for a bank like us it's getting more in the margin. So you should always say asset sensitive will be able to cover the inflationary costs.

That's the case then the mortgage business is a natural business hedge and so thats, how we look at it.

Got it Okay. That's helpful on the strategy and then some early let's say larger competitors have national deals or are involved with other.

M&A activities themselves, which gives us gives you guys.

The opportunity to take some clients.

Share of the market spaces or is there anything you're targeting specifically in terms of loan growth with that regard I get that you guys are all encompassing banks do a lot for a lot of people, but knowing that your competitors are kind of involved in the integration of themselves outside of the Chicago land area and is there anything that you guys are approaching for <unk>.

Three in terms of our strategy to be offensive.

We always see opportunities.

Larger banks always have various things that they are getting involved with whether they are pulling out of a particular asset class or changes in some of their staffing or.

It was really we have been the steady provider.

Provider in all of these different asset classes that we're in so.

We use around here is that we don't jerk the wheel that we try to be very consistent in the way we underwrite the way we price the way we go to market and as a result, we.

And we saw this.

Back half of this year were.

Certain banks were trying to change the way their balance sheets looked and we were able to take advantage of those so.

Our job is just to be very consistent very steady and it just.

Over the 30 plus years that winter has been in existence, that's really been our model is to take what is available in the marketplace. The unusually that's as a result of the bigger banks doing things like you referred to.

For example, one of the large bank the largest bank in Chicago has stated that they are going to do a.

Safe deposit boxes.

That's an opportunity for us because.

People still like safe deposit box, we got them they don't cost much.

Ron.

We are now offering we're going to be offering free states about <unk> for a period of time.

New people in those things like that I mean, a lot to people.

It depend and extra them to change banks.

But the big banks seem to step on it themselves and allow us the opportunity.

Through that stuff in.

We have great products as indicated by.

The Greenwich Awards in the.

We've shown with JD J D Power Award we won.

As 313 of those against last five four or five years and people like what they hear the word of mouth ups too. So we think that there's plenty of everyday.

Keep opening the door for us we can take advantage of it.

Got you I appreciate the color guys. Thank you.

Yes.

Thank you.

Our next question comes from the line of Brandon King of Truest. Your line is open Brandon.

Hey, good morning.

Good morning, Good morning, how are you.

Good good.

On mortgage just curious what was the production margin in the fourth quarter.

And has that bottomed in your view and outlook.

Yes.

Production margin.

<unk> down closer to 1%.

The fourth quarter, we expect in the first quarter here at.

One 5% as drove a reasonable range, which is clearly lower than normal, but you also have to understand that.

Production is very low right now.

As we showed in the slide deck.

The originations for sale.

A little over $400 million so.

Actually the majority of our revenue in the mortgage business now is the servicing income.

Roughly $11 million so.

First quarter, we expect to be slow again, all the applications are still coming in theyre still purchase activity out there a little bit.

Refinance activity, but over 80% of our of that $400 million is really purchase volume.

But but it's competitive out there as we build out just trying to get the volumes and so it squeeze on the production margin so very small but.

It has become such a small piece of the revenue stream given these higher rates and seasonality in the last couple of quarters.

I think we are about as low as we are going to go as far as production revenue I think we will continue to at least have what we have now and as I said on my comments I think as we get into the second quarter and the buying season picks up and people get a little bit more used to the new level of mortgage rates and digest them.

We will start to see pick up in the second and third quarters.

Okay.

And then a gravy for us too.

This is granular at a higher rate environment Thats just gravy.

Yes, yes, yes, I agree I agree.

Okay, and then on the deposit strategy. So a large part of this came out of savings.

Deposit growth came from savings and Cds and was curious if you could provide details on your CD strategy as far as what.

Prices you booked your book demand in the fourth quarter and as far as terms six months three months et cetera.

Yes.

Rates are trending up particularly promotional rates towards 4%.

Most clients are still not willing to go along so you are seeing.

Terms from nine months through call. It two years, but most of it kind of around a year.

And the.

Innovative as there are obviously promotional money market and savings rates.

Are also available for people that don't want to lock into a term product.

And the other thing I think I'd point you to is on table two of our earnings release, we do show the CD rates by maturity. So you can kind of see how they play a.

Roll off most of them right now are plus or minus 2% on average and so.

But the promotional rates are as Tim.

<unk> talked about.

Okay, and then for 2023, how confident are you in your ability to generate operating deposits DDA.

For this year do you think.

You're expecting very little growth from those categories and those interest bearing accounts.

Well.

No.

We're working awfully hard to continue to add clients and as we bring new clients on they bring deposits that include their operating business. We've talked on prior calls about how nicely our treasury management business is performing.

So again, it's lumpy is there is kind of large inflows and outflows but.

We plan to continue to add clients and deposits.

Okay.

That's all I had thank you.

Thank you. Thank you.

Thank you. Our next question comes from Jeff for lists of D. A Davidson your question. Please Jess.

Thanks, Good morning.

Morris question.

Couple of housekeeping items.

On the expense side.

I think you alluded to.

Mid single digit expectation for the full year at about 4% for 'twenty, two which is pretty good in the inflationary environment.

What was the expectation again for 'twenty three.

Well I would say probably.

Mid to high single digits or the middle of that range sort of just normally with an acquisition of probably gets into the high single digits for the full year first quarter would probably be less because the acquisition of <unk>.

Pending acquisition.

If it's in there it will be the end of the first quarter or early second quarter.

It won't have much impact in some of the increases are later in the year as we talked in our comments the second and third quarters tend to be higher for certain expense categories.

Sponsorships and marketing and then salary costs.

We do salary increase effective February one so that will impact a little bit in the first quarter, but more so in the second quarter. So.

Probably not a lot of growth in the first quarter, but as the year goes on for all of those other reasons.

Mobley mid to high single digits, but again, we would expect that with the leverage and the growth in the balance sheet and with the higher margin.

More than offset that expense growth.

Right.

I guess, we get back into your comments on the efficiency ratio.

Still seeing improvement despite.

Reasonably yes.

Our expense run rate.

Just to catch up on the margin again did you have a December average for the month.

Yes, we don't really haven't disclosed that and so we don't want to get in a position of doing that I think what you can see as in the past.

We told you we'd be around $3 70 for the fourth quarter, and we were and I think we're pretty confident in our guidance for the full quarter of the first quarter. So I think we'll leave it at that.

Okay fair enough.

Just the last one on that.

On the tax rate any expectation that that's going to change anywhere off of 27%.

2797, five is that a reasonable assumption for 'twenty three.

Yes.

$6 five to 27 is a reasonable assumption it bounced around a little bit because of that.

What we noted in the press release with a 2 million dollar expense in third quarter and $1 $7 million of that reversing in the fourth quarter related to some minimum taxes.

With our Canadian stuff, but.

Take those out and 26, 5% to 27% seems like a reasonable rate.

Got it thank you.

Thank you.

Thank you at this time I would like to turn the call back over to Edward <unk> for closing remarks, Sir.

Yes, thanks, everybody for.

Listen in.

We are my our mascot, who assist the fluids and the rock rolls down the hill at the end of the year.

Ill push it back up this year, we got everybody got their chosen to be a big rock, but.

We're going to make it so any other questions. Please contact any of the speakers today and we'll talk to you again.

Pretty soon so thank you.

This concludes today's conference call. Thank you for participating you may now disconnect.