Wintrust Financial Corporation (NASDAQ:WTFC) Q4 2022 Earnings Conference Call January 19, 2023 11:00 AM ET
Company Participants
Edward Wehmer – Founder and CEO
Tim Crane – President
David Dykstra – Vice Chairman and COO
Richard Murphy – Vice Chairman and CLO
Dave Stoehr – Chief Financial Officer
Kate Boege – General Counsel
Conference Call Participants
Jon Arfstrom – RBC Capital Markets
David Long – Raymond James
Chris McGratty – KBW
Terry McEvoy – Stephens
Ben Gerlinger – Hovde Group
Brandon King – Truist
Jeff Rulis – D.A. Davidson
Operator
Welcome to Wintrust Financial Corporation’s Fourth Quarter and Full Year 2022 Earnings Conference Call. A review of the results will be made by Edward Wehmer, Founder and Chief Executive Officer; Tim Crane, President; David Dykstra, Vice Chairman and Chief Operating Officer; and Richard Murphy, Vice Chairman and Chief Lending Officer.
As part of their review, the presenters may make reference to both the earnings press release and the earnings release presentation. Following their presentations, there will be a formal question-and-answer session.
During the course of today’s call, Wintrust management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Actual results could differ materially from the results anticipated or projected in any such forward-looking 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.
I will now turn the call over to Mr. Edward Wehmer.
Edward Wehmer
Thank you very much. Welcome, everybody, to our fourth quarter year-to-date 2022 earnings call. With me always are David Dykstra, our Chief Operation Officer; Dave Stoehr, where are you, Dave, our CFO; Tim Crane, the President; Rich Murphy, our Head of Credit Guru; and Kate Boege, our General Counsel.
Now the same format as we have been doing in the past, I am going to give some general comments regarding results for both the quarter and the year in total, turn it over to Tim Crane for more detail on the balance sheet and then to David Dykstra is going to discuss the income statement in detail. Rich Murphy is going to talk about credit and back to me for some summary comments about the future. We will have some time for questions.
We finished the year very well. It’s a great year for us. Beach ball jumped up. It’s selling its way up, earnings for the year $509 million, almost $510 million, up almost 10% from the previous year. Grew earnings per share of fourth quarter $144 million, $145 million, compared to $142 million, $143 million in the third quarter and about $99 million in the fourth quarter of 2021, earnings per share $2.23 for the quarter, $8.02 for the year, compared to $7.58 for the previous year.
And our pre-tax pre-provision income, it was a record for us, I think, $2.43 versus $2.06 for the year of 780 versus 579. And the prospects for growth were good for this to continue our way up as the margin finished at 3.73%, 3.17% for the year, up from 3.35% in the third quarter or 38 basis points and 59 basis points year-to-date to 3.17%.
And then we expect to approach 4% coming this next quarter. Tim will talk about all that. Return on the assets around 1% for the year, 1.10% for the quarter, current equity of 12.72% up 41 basis points for the year. Tangible book value rose to $61 a share, compared to $59.64 fourth quarter 2021.
Again it was a very good year for us. If you look at the balance sheet to some extent, assets grow nicely for the year. The loan growth about $1 billion with about almost $700 million over average, so we will be able to work that going forward.
The margin, as Tim will discuss — Tim and Dave will discuss trying to hedge it a little bit to maintain our downside risk. It makes sense as rates go up. Their next move will be down at some point and we are adjusting the balance sheet for that. Tim will talk about that.
Credit side, credits are remarkably good. Rich Murphy will talk about that, but we will point out that if you look at the real numbers, the quarter was actually down for the quarter, because of about $17 million of fiscal Life loans that got hung up in waiting for the money to come back. Only the fiscal portfolio you have to understand it all that money that’s out there that we show is past due, has been confirmed is going to be returned. So credit was actually better than it was before and we feel very good about that.
I will now turn over to Tim…
Tim Crane
All right.
Edward Wehmer
… about the balance sheet.
Tim Crane
That’s good. Thanks, Ed. I’d like to highlight a few balance sheet items. I will offer a 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, which continues to be spread nicely across all major loan categories. As noted in the release, period-end loan balances were $630 million higher than the quarter average, which will help our first quarter 2023 results.
Going forward, while we remain encouraged by stable loan pipelines, we believe there is some evidence of a modest slowdown in market loan demand, loan growth in the mid-to-high single digits on an annualized basis remains a reasonable expectation given the current economic uncertainty.
Rich will speak to loans in more detail in just a few minutes, but a couple of notes on the provision and on our allowance. Of the $48 million in provision, approximately two-thirds is related to a modest deterioration in the CECL macroeconomic factors and only one-third is related to our growth and portfolio changes that occurred during the quarter. To be clear, we are not signaling a change in our credit performance.
With respect to our allowance of 91 basis points of total loans, it’s important to note that excluding our historically low loss niche loans, primarily the premium finance loans, our allowance is 142 basis points of total core loans. You can see that on table 12 of the press release where we provide some detail.
Deposit growth for the quarter was approximately $105 million. The continued rise in rates is clearly making deposit gathering more challenging. The cost of deposits are rising and nominal changes in deposit mix are occurring.
Interest-bearing deposit costs of 130 basis points for the fourth quarter were up 66 basis points. We anticipate continued increases in both the Fed funds rate and the rates associated with the bank’s loan and deposit activity.
Increases in loan yields, however, at this point in the cycle continue to exceed the change in deposit costs given our asset sensitive position. Our deposit betas and the increase in deposit costs to-date are in line with our expectations. Currently, the beta on our interest-bearing deposits is approximately 25%. We anticipate an interest-bearing deposit beta of approximately 40% to 45% over the full cycle of interest rate changes.
Our securities book was up $1.5 billion in the quarter as we believe yields are becoming more attractive and represent the opportunity for reasonable longer term returns. At year-end liquidity remained 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 AFS valuation swings during the year were significant. As Ed pointed out, the bank’s tangible book value was up for both the fourth quarter and the year to $61 a share. Those of you who follow us know that the tangible book value per share is an important metric for us. It has increased every year since going public in 1996.
With respect to rate sensitivity in the 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 will result in approximately $30 million in pre-tax net interest income on an annualized basis and an improvement in the margin of 5 basis points to 8 basis points. Note, this is down slightly from our prior positioning.
To be more specific on the margin, as Ed mentioned, it 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 or projected on our prior calls.
At this point, depending on the impact of competition for deposits and the pace of additional Fed increases, we believe our margin will approach 4% at some point during the first quarter and has not yet peaked.
Conversely, while we clearly benefit from rising rates, as discussed on our last call, the bank entered into several interest rate collars in the third quarter of 2022. Further, early in this quarter, first quarter of 2023, the bank entered into additional derivative contracts with the intent of reducing the variability of the margin in a 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 has proven to perform well in lower rate environments when margins tend to be pressured.
For the fourth quarter, capital ratios were stable to up slightly and remain appropriate given our risk profile and with the higher net interest margin and currently forecasted loan growth, the company’s earnings are projected to result in organic improvement to our capital levels in the coming quarters.
With that, I will turn it over to Dave.
David Dykstra
Great. Thanks, Tim. As usual, I will cover some of the noteworthy income statement categories, starting with net interest income. Tim and Ed referenced some of these numbers, but we will just go through it in detail.
For the fourth quarter of 2022, net interest income totaled $456.8 million. That was an increase of $55.4 million as compared to the third quarter of $22 million and an increase of $160.8 million as compared to the fourth quarter of last year. The $55.4 million increase in net interest income as compared to the prior quarter was due to an increase in the net interest margin and loan growth.
As a 38-basis-point improvement in the margin brought it to 3.73% in the fourth quarter, a beneficial increase of 84 basis points on the yield on earning assets and a 22-basis-point increase in the net free funds contribution, combined with the negative impact of a 68 basis point increase on the rate paid on liabilities resulted in that improved net interest margin.
The increase in yield on earning assets in the fourth quarter as compared to the prior quarter was primarily due to an 87-basis-point improvement on loan yields and higher liquidity management asset yields as the company earned higher short-term yields on its interest-bearing deposits held at banks and its investment securities portfolio.
The increase in the rate paid on interest-bearing liabilities in the fourth quarter as compared to the prior quarter was driven by a 66-basis-point increase in the rates paid on the interest-bearing deposits. Tim already went through the deposit beta, so I will let you refer to his comments on that.
Turning to the provision for credit losses, Wintrust 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 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 know 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 the larger expense level, it’s not a signaling of any specific issues, it’s really a function of the macroeconomic forecast that we use in our CECL models.
Turning to other non-interest income and non-interest expense. In the non-interest income section, our wealth management revenue was down $2.4 million from the prior quarter and was at the level of $30.7 million for the quarter, decline in revenues for this quarter were primarily related to less fees associated with our tax deferred like kind exchange business, which had been very strong in the prior quarters and slowed just a bit in the fourth quarter.
Consistent with overall industry trends and the impact of relatively higher home mortgage rates, our mortgage banking operation experienced a revenue decline of $9.8 million from the third quarter due to lower loan origination volumes and lower production margins during the quarter.
We expect mortgage origination volumes to continue to be low in the first quarter due to the rate environment and the seasonal purchasing trends, but it’s still an important part of our business, and we expect it to pick up some volume 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 a $3.1 million net loss in the prior quarter as market conditions and equity valuations continue to affect a portion of our securities portfolio.
Other non-interest income totaled $19.3 million in the fourth quarter, which was up $3.5 million from the amount recorded in the prior quarter. The contributing reason for the increase in this category is that the company recorded approximately $1.1 million of higher BOLI income, which was primarily related to higher earnings on BOLI investments that support certain deferred compensation plan benefits.
And so I should note that, that $1.1 million increase in the BOLI income has a similar offsetting increase in compensation expense during the quarter. So they have sort of net — as far as net income goes, but there is an increase in both those categories for the quarter.
Additionally, the prior quarter had a negative valuation adjustment of approximately $2 million on our early buyout loans — certain early buyout loans, whereas the prior quarter had a $2 million negative valuation on the early buyout loans, whereas the current quarter had an insignificant adjustment.
Turning to non-interest expenses. Non-interest expenses totaled $307.8 million in the fourth quarter and we are up a little over $11 million when compared to the prior quarter total of $296.5 million. The primary reason for the increase was due to higher compensation related expenses and a variety of other less significant contributing factors.
Salaries and employee benefits expense increased by approximately $4.2 million in the fourth quarter as compared to the prior quarter of the year. Relative to the prior quarter, the increase of $2.8 million of higher salaries expenses and $2.3 million of higher employee benefits expense were the primary causes. As to the higher salaries expenses, so it’s caused by $1.8 million of increased deferred compensation costs.
As I mentioned, partially related to the underlying BOLI investments where we recorded the income on the other non-interest income part of the income statement and on the employee benefits side, those are almost exclusively related to higher health insurance claims during the quarter, so elevated in the fourth quarter generally as people try to use up some of their health benefits before the deductibles recept.
Also although a smaller change from the quarter, commissions and incentive compensation was slightly lower as mortgage banking commissions were reduced, although we did have some higher bonus and long-term incentive compensation accruals for the quarter related to the higher earnings level, but then that 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 have 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 winter time.
Professional fees increased by approximately $1.7 million in the fourth quarter. These fluctuations were primarily related to some consulting services that we utilized in conjunction with the implementation of various new financial and customer related processing systems.
Other miscellaneous expense increased by $4.8 million during the quarter, which included a $1.1 million additional charitable contributions and a variety of other normal operational fluctuations, none of which I think are worth noting for this call.
Our efficiency ratio declined to 55% for the fourth quarter from 58% in the third quarter as our expenses did not increase at a rate commensurate with the increase in revenue.
And with that, I will turn it over Rick — to Rich to cover credit.
Richard Murphy
Thanks, Dave. As noted earlier, credit performance for the fourth quarter was very solid from a number of perspectives. As detailed on slide eight of the deck, loan growth for the quarter was $1 billion or 11% annualized, an outstanding result. And similar to the past few quarters, we continue to see loan growth across the portfolio.
Specifically, commercial real estate grew by $373 million. Commercial loans bolstered by a strong quarter and leasing grew by $290 million. Commercial premium finance had another solid quarter, up $136 million and residential real estate loans were up $137 million. Year-over-year, we saw total loan growth of $5 billion or 15% net of PPP loans, a very productive 2022.
As noted on our prior earnings calls, we continue to see very solid momentum in our core 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 Wintrust Life Finance grew by $1.1 billion during 2022, the rapid increases in rates during the past year have affected that pace of growth. This portfolio grew $86 million in the fourth quarter versus $396 million in the third quarter. We would anticipate 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 maintain our credit discipline.
From a credit quality perspective as detailed on slide 16, we continue to see strong credit performance across the portfolio. This can be seen in a number of ways. Non-performing loans remained stable at 26 basis points or $101 million, compared to $98 million in the third quarter. And as Ed noted earlier, of this total, $17 million was related to Wintrust Life loans, which went 90 days past maturity.
Roughly half of these loans have since been paid off, the balance of which are fully secured and we would anticipate full repayment from the carrier shortly. Overall, NPLs continue to be at very low levels, and we are still confident about the solid metrics in the portfolio.
Charge-offs for the quarter were $5.1 million or 5 basis points, up slightly from the previous quarter. Charge-offs for 2022 totaled $20.3 million or 5 basis points.
Finally, as detailed on slide 16, we saw stable levels in our special mention and substandard loans with no meaningful signs of additional economic stress at the customer level.
That concludes my comments on credit and I will turn it to Ed to wrap up.
Edward Wehmer
Thanks, Murph. Year end is always a good time to review, not just the fourth quarter and the year-to-date, but whether we view the entire body work over a longer period of time versus our stated goals that the company has had.
Let’s go back 10 years. Now if you go back 30 years results versus peers will be about the same. Increasing tangible book value, we think is extremely important. One of the goals we always look at, as Tim noted earlier, we have increased it every year since we went public eight-year CAGR of 8% is pretty good. Even last year, it had been kind of tough, but we still were up above — we were positive.
Earnings growth 16% at 10-year CAGR, asset growth 12%, dividends paid 22%, stock price only 9%, go figure. During 10 years under review, we saw a bit of everything, high rates, low rates, pandemics, you name it. Interest has thrived during all of these. It’s a testament to our business model. We employ in the people who work at Wintrust.
When rates were low, our mortgage company helped pick up the slack and net interest margin compression — of the net interest margin compression that occurred. Lower rates what we more increase our positive gap where the risen mortgages has died down.
I say this because I am often asked, well, you are a mortgage bank. No, we are not. It’s just is part of what we do. This is an orchestra here now at a combo. This is a big orchestra. We all sort different parts at times, they all kick in. Times say, they don’t kick in. Mortgage is an extremely important thing of important offering that we have, but it — it’s not doing well now, but it will do well as rates come back down.
Now about our — the margin up, we are embarking on, as Tim mentioned, locking in this increased margin for a longer period of time. All the above is going to accomplish by maintaining our exceptional credit statistics.
High metro concentrations kill [ph] has also served us well both in deposit and the asset side, extremely well diversified and there’s something that always works when something isn’t working.
Where growth come take what the market gives us, acquisitions organic growth or have both worked very well for us. Based all the above and many more points, one has to wonder why we consistently trade at a discount to our peers. I have to put that in there, I am sorry.
As the future you can spend more of the same. Our margin should continue to increase as the remainder of asset portfolio reprices and liability costs increased at a lesser rate. Marginal force is in our future. We will be locking at a higher margin. As we mentioned in today’s comments, is already underway.
Loan pipeline is still strong, but a bit lower than historically, as Murph pointed out, and we keep our guidance the same, but are focusing on the lower side of that. Credit stats are solid, but we are prepared for additional humeral attack by the folks at Moody’s, which we had on this quarter.
I was just thinking still being evaluated in all aspects of our business. Pricing is still an issue, especially given our stock price. Now as the acquisition of Rothschild American business on track for a first quarter or second quarter closing. In short, we like where we stand.
With all that, I think, you can sure our best efforts going forward. We will be consistently good. We are all the major owners of this. Our networks are tied up in this company. Not going to do anything stupid. In fact, we hope to thrive no matter what the economic cycle is and where we are at in it to ensure our best efforts in this.
And time for some questions, please.
Question-and-Answer Session
Operator
[Operator Instructions] Thank you. Our first question comes from the line of Jon Arfstrom of RBC Capital Markets. Your question please.
Jon Arfstrom
You guys hear me all right?
Edward Wehmer
Yeah. How are you, Jon?
Jon Arfstrom
Hey. Good. Jon Arfstrom from RBC.
Edward Wehmer
Okay.
Jon Arfstrom
You guys — the numbers look good here, the one that surprised me a little bit was the provision and it seems like you have touched on it and alluded to it, but what do you want the message for us to be going forward? It feels like it’s going to pull back. It feels like it pulls back with a little bit slower loan growth as well, but you guys view this as more of a onetime step up and we go back to a normal pace or how should we think about that?
David Dykstra
Well, I think, Jon, the CECL, as you know is sort of a life of long concept and if we have loan growth, the provision will go up. But if the economic scenario stayed exactly the same, you would have no additional provision in the next quarter per se for that.
So it really depends if the economists obviously changed our forecast frequently. But if that forecast gets better next quarter, you could expect the provision to come down, I think, gets worse, it would 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’s nothing specific here that we are pointing to that we think is a current problem in the portfolio. This is just how commercial real estate price index forecast and how credit spreads and GDP on all those forecasts got moderately worse in the forecast that we — economic forecast we use.
So it really is a function of the CECL modeling and not a function of us seeing a deterioration in our credit. So if you can tell me where that crystal ball is next quarter as far as economic forecasts, you could know which way our provision is probably going to go.
Jon Arfstrom
Okay. Okay. So it really wasn’t any heavier weighting by you. It was just more of the output from that?
Edward Wehmer
Yeah.
David Dykstra
Yes. Yeah.
Edward Wehmer
Yeah. Someone is reaching.
Jon Arfstrom
Okay. Sure that will be in the transcript, Ed.
Edward Wehmer
Yeah.
Jon Arfstrom
The — yeah, yeah, yeah. The other question I have was on the margin. I think I understand what you guys are saying, but if the Fed, it feels like you are trying to predict — protect downside, but does the Fed bumps a couple more times and then hold it for a while. What could happen to your margin, are you guys were talking about a 4% level, but then, Ed, you kind of alluded to floating a little bit higher above 4%. What do you think about the margin outlook in that kind of a scenario where the Fed is not cutting?
Edward Wehmer
Well, they are raising where it should be, as Tim said, $30 million on an annual basis per quarter. Eventually, the — we have been lagging on the private, we have been lagging on the deposits. Much is going to catch up to that overall beta.
But we still have a lot of assets that are repricing right now, if you think about premium finance business, every prices over the course of the year. The other assets do the same. We are monitoring this very carefully as we leg into these derivatives to help maintain the margin.
So it’s hard to say where it’s going to be, it depend on some of derivatives, we give up some upside to protect the downside. But I think that depending on how rates go, margin will continue to go up.
If we can predict something in the 3.75% to 4% range long-term, depending on where rates are, that would be a good thing, but it’s going to take a lot more derivatives to do that and we are not really good at market timing. So we will — when that happens, the mortgages will kick in and life will be good in that regard. So we kind of had some internal hedges, too. But Tim, do you want to talk about that?
Tim Crane
Yeah, Ed. I think, Jon, in general, we would expect the margin to sort of top 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, that’s kind of what we are thinking.
David Dykstra
Yeah. This is Dave. I think what we have said here is that we expect the margin to approach for and if the Fed raises some more, it may pop a little over for, but it’s — but then we think given existing competitive pressures and the existing yield curve that if they stop raising that we can kind of hold it there if all else being stable, because as Ed said, we have a lot of asset beta left too, everyone talks about the deposit betas.
But if you look at our life insurance premium finance portfolio, as you know, that those reset once a year. And if you go back a year, they are based generally off of a 12-month LIBOR or 12-month treasury rate and those rates were 58 basis points a year ago, if you look at the page 25 of our earnings release. Those rates are up over 400 basis points.
So there’s a lot of repricing that happens there. The property and casualty premium finance loans are fixed rate loans and so they reprice over the course of the year. So that’s a third of our portfolio that has pretty good deposit — our asset beta changes left that we think will substantially offset the deposit betas. So we feel like we can kind of hold the margin if they go higher and then plateau.
Jon Arfstrom
Okay. All right. That’s all very helpful guys. Appreciate it. Thank you.
Edward Wehmer
You are welcome.
Operator
Thank you. Our next question comes from the line of David Long of Raymond James. Your question please, David.
David Long
Good morning, everyone.
Edward Wehmer
How are you doing, David?
David Long
Good. Good. You guys bucking the trend here on the deposit side showing deposit growth, a lot of the banks continue to have outflows. What are your expectations on the deposit flows and then also mix shift hasn’t changed too much as you alluded to, do you see much mix shifting coming in the next couple of quarters?
Tim Crane
Yeah. David, it’s Tim. The deposit activity has been lumpy and both in and out I would add. We have been pretty disciplined with our pricing and cautious about getting ahead of the market. We are responding to promotional activity to retain our clients, and frankly, we have got some higher deposit costs built into our projections.
We think we operate in good markets with a lot of deposit potential. We have typically outperformed our peers in terms of growth. Even though we are one or two in deposit share in many of our markets, we still only have 6%, 7%, 8% overall growth in Chicago and Milwaukee. So our multi-charter brand and approach we think will help us and we think we are holding our own.
I’d add sort of an interesting fact here during the last quarter or two quarters, rather, we have helped clients purchase almost $1 billion worth of short-term treasuries that previously had been held at deposits at the bank and as the gap between deposit pricing and treasury starts to narrow again, we expect we will get an opportunity at some of that money.
But we don’t — I mean, we will protect the mix as best we can. Clearly, people are moving out of DDA in some cases for the rates in money markets or savings or CD products. So I think it’s possible that will continue. But I can tell you, we are intensely focused on adding deposits and relationships and we still think we have got terrific market opportunities. So we are going to hold our own and stay at it.
David Long
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 have really had to increase FHLB borrowings and use of higher cost CDs. Your cash, as I see it, is down to just under 6% of deposits, you are up over 10% at September 30th. Do you monitor that, is that something that you have a target you want to keep above a certain cash level just in case you do get some deposit runoff and you don’t have to chase yields?
Tim Crane
Yeah. I think we are sort of comfortable where the cash is now. If you remember last quarter, at the end of the third quarter, we had a $1 billion extra sitting in cash, because we had done some borrowings at the Federal Home Loan Bank that we indicated we would invest at the beginning of the quarter. We did that.
So I think, if you look at it, we were in the high 3s and then we went to the high 2s, if you adjust for that $1 billion that we invested currently after the end of the third quarter and now we are around $2 billion. We like that position. We sort of focus on a loan-to-deposit ratio of 85% to 90%. We are slightly over that fulfillment rate we are comparable with.
And then we were lagging on investing in that securities portfolio in the past. We just thought investing in the 1% range was not that prudent and so we were patient and then we have invested now that rates are higher.
And we think that part of the remixing of the balance sheet to protect against down rates is to invest in some of the longer term securities mile for a portion of the balance sheet. So I think we like where we are 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.
Edward Wehmer
Yeah. Liquidity has always been very important to us and you can expect our deposit costs to go up, but we have a lot of room there, given the 40% beta we talked about. We are not there yet. At the same time, the asset should move and the real trick is going to be protecting the margin when this peaks out in black swan hits and it’s going to drop like a rock, no matter what the environment is and you have to be prepared for that, too. So we are busy, we are constantly looking at it and liquidity is extremely important to us. Don’t forget, Continental Bank went under, because of liquidity, not because of credit. It was the largest bank failure at the time and well liquidity is still important to us. We monitor it very, very carefully.
David Long
That’s right. Thanks for the color guys. Appreciate it.
Operator
Thank you. Our next question comes from the line of Chris McGratty of KBW. Your question please, Chris.
Chris McGratty
Hey. Good morning. Thanks.
Edward Wehmer
Hi, Chris.
Chris McGratty
How are you doing? Dave, the 4% margin roughly that you are talking about, I guess, what does that map to in terms of loan yields, right? You have got the premium finance book that keeps this kind of kind of backward lag, but is it somewhere like the mid-6 — it feels like it’s kind of somewhere in the mid-6s, is this kind of where you are going to — your loan yields are going to go?
David Dykstra
It’s probably mid-6s to approaching 7 right now, I would say. But if rates keep going up and the mix of the business changes, I mean, that’s a variable, but that’s — we don’t give guidance — give specific guidance, but that’s the right zip code.
Chris McGratty
Okay. And then there was a comment in the press release that just talked about additional improvements in efficiency, maybe you could throw a little bit more color around that. You are obviously in a good spot exiting the year in the mid-50s. But how would you think about that ratio playing out, appreciating that mortgages in recessionary levels? Thanks.
David Dykstra
Yeah. So mortgage — lower mortgages, obviously, helped the efficiency ratio. But the expense side of the equation, we will have some additional expenses in 2023. The FDIC rates are up. Compensation cost will go up a little bit as we push through salary raises and the like later in this quarter.
But I think with the inflation and the FDIC and those sorts of things, generally, you are probably slightly above mid single-digit growth in expenses and if you add on the acquisition we are planning, it’s probably high single-digit expense growth for the entire year.
First quarter, it probably doesn’t grow too much on the expense side, we don’t think, but then as we add in the acquisition that — when that closes, that will add to it and then salaries will kick in margin.
The margin is going to increase substantially, and we think that mid-50 efficiency ratio we have probably drifts down closer to 50 and we will try to even do better than that. But the increase in the revenue will more than offset the expenses as we look at now to continue to drive that efficiency ratio lower.
Edward Wehmer
We continue to look at cutting costs also in different areas. Mortgage area being one. We — if you look at the net overhead ratio, which I like to look at, it was a lot higher this quarter, but if you take out that security loss, you are closer to 1.5.
We have to grow also and we have to invest in growing the bank, which is part of the increase in expenses. Hopefully, that growth will get our net overhead ratio back below 1.5. Hard to do with how mortgage is kicking in, but between the acquisition of our Rothschild and additional asset growth, we would like to get that number down below 1.5.
I know the healthy efficiency ratio also, but if — I never concentrated the efficiency ratio now it’s doing well all the way efficiencies good, because the margins up. But the net overhead ratio we need to continue to get below 1.5, and we are working very hard to do that.
David Dykstra
Yeah. The…
Chris McGratty
Just one more. Dave, on the covered calls, obviously, that number has been bouncing around. But how active are you going to be there, and I guess, maybe help us with what makes it go on either side?
David Dykstra
Well, the covered calls, as you know, we do those, again, to protect against a down rate environment. It adds a return on those securities. And if you are 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 writing the calls and getting that revenue and even have to reinvest, it’s usually a better trade.
But as I talked about a little bit earlier when we were talking about the liquidity position, we invested $1 billion of that liquidity into securities in the fourth quarter and wrote some calls against that. And you can see on our balance sheet, those were called and we invest them, so at a decent rate here in the first quarter.
So it depends on volatility, and it depends on where rates where the yield curve is at. But it’s a little bit outsized from normal given the size of the investment purchases that we had. 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 get to the point where you invest the securities, what the yield curve shape is and what the market volatility is. But somewhere in that range would seem reasonable to me.
Operator
Thank you. Our next question comes from the line of Terry McEvoy of Stephens. Your question please, Terry.
Terry McEvoy
Hi. Thanks. Terry McEvoy from Stephens.
Edward Wehmer
Hi, Terry.
Terry McEvoy
Hi. Good morning. Maybe first off, Dave, thanks for reminding me the repricing opportunities of the loan portfolio in 2023, I think, it’s something I overlooked. So I appreciate that. And maybe for a question circling back, I think, it was Jon’s question on protecting the margin, and Ed, you kind of threw out 3.75% to 4%. I just want to make sure, is that the floor of 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.
Tim Crane
Yeah. Just to give you, Terry, a little bit more detail. I mean we have entered into a combination of collars and some received fixed swaps with terms out three year to five years, and obviously, the impact of those instruments depends on the interest rate scenario. So, we are trying to take some steps to improve margin and lower, lower interest rate environment, but it depends on the scenario, how much impact there’s going to be.
The other thing, though, is it’s just not these instruments. If you look at table eight, you can see that in various scenarios, both up and down, we have sort of reduced the variability of the net interest income and so we are mindful of trying to operate independent of the interest rate environment at a higher level.
David Dykstra
Yeah. So, and Terry, I’d add in there. I mean that would sort of be the goal, but we are not going to do all of the derivatives all at one time. We are going to leg into this diversity as far as the length of these derivative contracts, as far as how much fixed rate loans we put on the books, at what strike price these swaps or collars have. They all matter.
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 that put out these forecasts aren’t perfect either. So we are trying to protect the margin and so we are going to leg into it.
So depending on what the curve is and where we can buy the swaps going forward as we leg into it from diversifying the risk perspective, we would like to be able to lock in into the upper 3% to 4%, but it really sort of is dependent upon how fast rates move and where that longer end of the curve settles out in. So it’s a lofty goal. We are not saying we have locked that in yet. But that’s what we would like to do if the market sort of allows us to do that over time with these derivatives. I mean…
Terry McEvoy
Appreciate all that — yeah.
David Dykstra
Yeah. I was going to say we feel great. I mean these are sort of unprecedented interest rate margins for us right now. We have not been at 4% in our history and so — and we prepared for it, we have managed for it and we are enjoying that and we just would like to attempt to maintain it going forward through balance sheet positioning and derivatives, but it’s going to — we are going to like into it.
Terry McEvoy
Keep that beach ball up in the air. I understand. And then maybe a follow-up — just as a follow-up, could you maybe just expand upon, I think, you hinted earlier just market dislocation disruption, you are benefiting from that, where specifically you are seeing that maybe some hiring efforts and within that budget — expense budget for 2023, do you kind of factor in some hiring from the disruption? Thank you.
Tim Crane
The answer is yes. We are continuing to benefit from disruption from competitors we have 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 not a large team or a number you are going to see pop on the financials in a single dose.
Terry McEvoy
Thank you.
David Dykstra
We always taking advantage of…
Terry McEvoy
Yeah.
David Dykstra
… market disruption even from existing players that have disruption internally. So that’s been part of our DNA since the beginning of Wintrust.
Terry McEvoy
Yeah.
David Dykstra
So we plan to keep doing it.
Edward Wehmer
Okay.
Operator
Thank you. Our next question comes from the line Ben Gerlinger of Hovde Group. Your line is open, Ben.
Ben Gerlinger
Oh! Thanks, guys. Most of the questions around the margin have been answered, but it reminds me of Ed on that just says, it can’t go broke by taking profits and it makes sense, you are going to willing to take a little off the upside table to protect the downside. So in essence, you are kind of manufacturing to some degree a revenue line, but when you think about revenue relative to expenses, let’s say, there is that kind of the downside scenario economically or Black Swan event. Is there anything in the net or the non-interest expense that you can cut abruptly or anything to that extent that you kind of match out the two?
David Dykstra
Well, on the non-interest expense side, we are kind of a growth company, so we don’t plan to cut. But as Ed said, the big factor there is and we saw this in the past when rates dropped precipitously with the Black Swan event is that the mortgages kick in dramatically.
We had a couple of quarters before rates went up, where we had record net income quarters and it’s because the mortgage business kicked in. So it’s really shifting the mix of the business from spread the business if that would happen dramatically to non-interest income business, which would be the mortgage side.
So that’s the biggest factor, I would say and it’s a business strategy. We think we need to be in the mortgage business, because we are not going to send our customers to some other financial institutions for mortgage.
And if we think we are going to do it, we will do it with scale and then we will do it, because we always want to be asset sensitive and we have said this on other calls, the degree of asset sensitivity changes.
But you always want to be asset sensitive, because if you do have inflation, then your expenses are going to go up and then how do you cover that increase in expenses and for a bank like us, it’s getting more in the margin. So you should always say asset sensitive to be able to cover the inflationary cost and that’s the case in the mortgage business it’s a natural business hedge and so that’s how we look at it.
Ben Gerlinger
Got you. Okay. That’s helpful on the strategy. And then some of your say larger competitors have national deals are involved just other M&A activities themselves, which gives me — gives you guys the opportunity to take this clients and share of the market space. Is there anything you are targeting specifically in terms of loan growth with that regard? I get that you guys are all encompassing bank, you do a lot of people, but knowing that your competitors are kind of involved with integration themselves outside of the Chicago land area. Is there anything that you guys are approaching for 2023 in terms of the strategy to be offensive?
Richard Murphy
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 and those really, we have been the steady provider in all these different asset classes that we are in.
So the line we use around here is that we don’t jerk the wheel that we try to be very consistent in the way we underwrite, the way we price, the way we go to market. And as a result, we saw this back half of this year where 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’s just over the 30-plus years that Wintrust has been in existence. That’s really our — been our model. It take what is available in the marketplace, then usually that’s as a result of the bigger banks doing things like you referred to.
Edward Wehmer
For example, one of the large banks, they got the largest bank in Chicago, stated they are going to do safe deposit boxes. That’s an opportunity for us, because people still like safe deposit box, we got them, they don’t cost much to run, we are now offering — we are going to be offering free safe deposit advice for a period of time. We get new people in.
Those things are like they mean a lot of people. It’s a panic for them to change banks. But the big banks seem to step on it themselves and allow us the opportunity to work through that stuff and we have great products, as indicated by the Greenwich awards and the with some of the…
David Dykstra
J.D. Power.
Edward Wehmer
J.D. Power award we won last three won, three of those, I guess, the last five — four years or five years and people like what they hear. We are the mouth of suites [ph]. So we think that the play they keep opening the door for us, we are going to take advantage of it.
Ben Gerlinger
Got you. Appreciate the color, guys. Thank you.
Operator
Thank you. Our next question comes from the line of Brandon King of Truist. Your line is open, Brandon.
Brandon King
Hey. Good morning.
Edward Wehmer
Good morning.
David Dykstra
Good morning.
Edward Wehmer
How are you?
Brandon King
Good. Good. I had a question on mortgage. I was curious, what was the production margin in the fourth quarter and has that bottomed in your view and outlook?
David Dykstra
Yeah. The production margin was hovering down closer to 1% in the fourth quarter. We expect in the first quarter here it 15% is sort of a reasonable range, which is clearly lower than normal. But you also have to understand the production is very low right now.
As we showed in the slide deck, the originations for sale were just a little over $400 million, so actually, the majority of our revenue in the mortgage business now as the servicing income of roughly $11 million.
So first quarter, we expect to be slow again, although applications are still coming in. There’s still purchase activity out there and a little bit of refinance activity, but over 80% of our — of that $400 million is really purchase volume. But it’s competitive out there as people are just trying to get the volumes in, so it’s squeezing the production margins.
So very small, but it has become such a small piece of the revenue stream given these higher rates and seasonality in the last couple of quarters. I think we are about as low as we are going to go as far as the 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, I think, we will start to see pickup in the second and the third quarters.
Brandon King
Okay.
Edward Wehmer
And it’s been gravy for us too. That’s just gravy with a higher rate environment. That is just gravy.
Brandon King
Yeah. Yeah. I agree. I agree. Okay. And then on the deposit strategy, I saw a lot of deposits came out of saving came — deposit growth came from savings in CDs. I was curious if you could provide details on your CD strategy as far as what prices you booked demand in the fourth quarter, and as far as terms, six months, three months, et cetera?
Tim Crane
Yeah. Rates are trending up particularly promotional rates toward 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 alternative is there are, obviously, promotional money market and savings rates that are also available for people that don’t want to lock into a term product.
David Dykstra
Yeah. And the other thing I think I’d point you to is on table two of our earnings release, we do show the CD rates by maturity. So you can kind of see how they roll off. Most of them right now are plus or minus 2% on average and so, but the promotional rates are…
Brandon King
Okay.
David Dykstra
… as Tim talked about.
Brandon King
Okay. And then for 2023, how confident are you in your ability to generate operating deposits and DDAs for this year? Do you think you are expecting very low growth from those categories and those interest-bearing accounts?
Tim Crane
Well, no, we are working awfully hard to continue to add clients and as we bring new clients on, they bring deposits that include their operating business. We have talked on prior calls about how nicely our treasury management business is performing, and so again, it’s lumpy as there’s kind of large inflows and outflows, but we plan to continue to add clients and deposits.
Brandon King
Okay. That’s all I had. Thank you.
Edward Wehmer
Thank you.
David Dykstra
Thank you.
Operator
Thank you. Our next question comes from Jeff Rulis of D.A. Davidson. Your question please, Jeff.
Jeff Rulis
Thanks. Good morning. Most question, little housekeeping items. The — on the expense side, I think, you alluded to a mid single-digit expectation for the full year. I think you are about 4% for 2022, which is pretty good in the inflationary environment. But what was the expectation again for 2023?
David Dykstra
Well, I was saying probably mid-to-high single digits to the middle of that range sort of just normally with an acquisition that probably gets to the high single digits for the full year. First quarter will probably be less, because the acquisition — pending acquisition. If it’s in there, it will be the end of the first quarter or early second quarter, but so it won’t have much impact.
And some of the increases are later in the year, as we talked in our comments, second quarter and the third quarter tend to be higher for certain expense categories, particularly sponsorships and marketing. And then salary cost, we do salary increase effective February 1st, so that will impact a little bit in the first quarter, but more so the second quarter.
So, probably not a lot of growth in the first quarter, but as the year goes on for all those other reasons, probably mid-to-high single digits. But again we would expect that with the leverage and the growth in the balance sheet and the higher margin that will more than offset that expense growth.
Jeff Rulis
Right. I guess we could back into your comments on the efficiency ratio, still seeing improvement despite a reasonably higher expense run rate. So just to catch up on the margin again, did you have a December average for the month?
David Dykstra
Yeah. We don’t really haven’t disclosed that and we don’t want to get in the position of doing that. I think what you can see is in the past. We told you we would be around 3.70% for the fourth quarter and we were, and I think, we are pretty confident in our guidance for the full quarter of the first quarter. So I think we will leave it at that.
Jeff Rulis
Okay. Fair enough. And then just the last one, on the tax rate, any expectation that that’s going to change anywhere off of 27% — 27%, 27.5%. Is that a reasonable assumption for 2023?
David Dykstra
Yeah. 26.5% to 27% is a reasonable assumption. It bounced around a little bit because of what we noted in the press release with a $2 million expense in the third quarter and $1.7 million of that reversing in the fourth quarter related to some minimum taxes with our Canadian stuff. But you take those out in 26.5% to 27% seems like a reasonable rate.
Jeff Rulis
Got it. Thank you.
David Dykstra
Thank you.
Operator
Thank you. At this time, I’d like to turn the call back over to Edward Wehmer for closing remarks. Sir?
Edward Wehmer
Yeah. Thanks everybody for listening in. We — our mask out here, yes, of course, and the rock rolls down the hill at the end of the year and we have to push it back up this year. We got everybody who got their shoulders in this will be a big rock, but we are going to make it. So if you have any other questions, please contact any of the speakers today and we will talk to you again pretty soon. So thank you.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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