Welcome to Wintrust Financial Corporation's fourth quarter and full year 2022 earnings conference call. A review of the results will be made by Edward Wehmer, Founder and Chief Executive Officer, Tim Crane, President, David Dykstra, Vice Chairman and Chief Operating Officer, and Richard Murphy, Vice Chairman and Chief Lending Officer. As part of their reviews, the presenters may make reference to both the earnings press release and the earnings release presentation. Following their presentations, there will be a formal question-and-answer session. During the course of today's call, Wintrust management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Actual results could differ materially from the results anticipated or projected in any such forward-looking 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. 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.
Thank you very much. Welcome everybody to our fourth quarter, year-to-date 2022 earnings call. With me always are Dave Dykstra, our Chief Operating Officer. What are you, Dave?
CFO.
CFO. Tim Crane, the President. Rich Murphy, our head credit guru. Kate Boege, General Counsel. Now, the same format as we've been doing in the past, I'm gonna give some general comments regarding the results for both the quarter and the year-end total. Turn over to Tim Crane for more detail on the balance sheet. On to Dave Dykstra, who's gonna discuss the income statement in detail. Rich Murphy is gonna talk about credit. Back to me for some summary comments about the future. We'll have some time for questions. We finished the year very well. It's a great year for us. Beach ball jumped up. It's still on its way up. Earnings for the year, $509 million, almost $510 million, up almost 10% from the previous year.
Fully earnings per share of, up for the 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. Our pre-tax, pre-provision income, it was a record for us, I think, $243 million versus $206 million for the year of $780 million versus $579 million. The prospects look good for this to continue on its way up.
As a margin, finished at 3.73, 3.17 for the year, up from 3.35 in the third quarter for 38 basis points and 59 basis points year to date to 3.17. We expect to approach 4% coming this next quarter. Tim will talk about all that. Return on assets around 1% for the year, 1.10 for the quarter. Return on equity of 12.72, 11.41 for the year. Book value grows to $61 a share, compared to $59.64 for the quarter of 2021. It was a very good year for us. If you look at the balance sheet to some extent, assets rub nicely for the year.
The loans rub about $1 billion with about almost $700 million of over average. We'll be able to work that going forward. The margin, as Tim will discuss, Tim and Dave will discuss, kind of hedge it a little bit to maintain our downside risk. It makes sense as rates go up, as their next move will be down at some point. We are adjusting the balance sheet for that. Tim will talk about that. Credit side, credit is still remarkably good.
Murph will talk about that. We'll point out that if you look at the real numbers, the quarter was actually down for the quarter because of about $17 million of fifth co life loans that got hung up in waiting for the money to come back. If you look at the fifth co portfolio, you have to understand that all that money that's out there that we show is past due, has been confirmed is going to be returned. Our credit was actually better than it was before, and feel very good about that. I'll now turn over to Tim.
All right.
About the balance sheet.
That's good. Thanks, Ed. I'd like to highlight a few balance sheet items. I'll also comment on several items likely to be of interest, including the continued impact of rising rates on the margin expectations. The approximately $ billion 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 in 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 federal 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%-45% over the full cycle of interest rate changes.
Our securities book was up a 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 year-end, liquidity remained strong with approximately two and a half billion dollars 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 federal 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 to 8 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 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 derivatives 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 8 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. With the higher net interest margin and currently forecasted loan growth, the company's earnings are projected to result in organic improvement to our capital levels in the coming quarters. With that, I'll turn it over to Dave.
Great. Thanks, Tim. As usual, I'll cover some of the noteworthy income statement categories, starting with net interest income. Tim and Ed have referenced some of these numbers, but we'll just go through it in detail. For the fourth quarter of 2022, net interest income totaled $456.8 million. That was an increase of $55.4 million as compared to the third quarter of 2022, 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. 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 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. 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, 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 Murphy will talk about credit in more detail, 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. Those factors really did not have a significant impact on the level of the fourth quarter's provision for credit losses expense. As Tim Crane said, this is not the larger expense level is not a signaling of any specific issues. It's really a function of the macroeconomic forecast that we use in our CECL models. Turning to other non-interest income and non-interest expense. In the non-interest income section, our wealth management revenue was down $2.4 million from the prior quarter and was at the level of $30.7 million for the quarter.
Decline in 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 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. It's still an important part of our business, and we expect it to pick up some volume and 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 continued 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. I should note that $1.1 million increase in the BOLI income has a similar offsetting increase in compensation expense during the quarter.
They sort of net, as far as net income goes, but there is an increase in both those categories for the quarter. Additionally, prior quarter had a negative valuation adjustment of approximately $2 million on our early buyout loans, certain early buyout loans, whereas the prior quarter had a $2 million negative valuation on the early buyout loans, whereas the current quarter had an insignificant adjustment. Turning to non-interest expenses. Non-interest expenses totaled $307.8 million in the fourth quarter and were up a little over $11 million when compared to the prior quarter total of $296.5 million. The primary reason for the increase was due to higher compensation-related expenses and a variety of other less significant contributing factors.
Salaries and employee benefits expense increased by approximately $4.2 million in the fourth quarter as compared to the prior quarter of the year. 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, 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 on the other non-interest income part of the income statement. On the employee benefit side, those are almost exclusively related to higher health insurance claims during the quarter.
Elevated in the fourth quarter generally as people try to use up some of their health benefits before the deductibles reset. Also, although a smaller change from the quarter, commissions and incentive compensation was slightly lower as mortgage banking commissions were reduced, although we did have some higher bonus and long-term incentive compensation accruals for the quarter related to the higher earnings level. 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 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. With that, I will turn it over to Rich to cover credit.
Thanks, Dave. As noted earlier, our credit performance for the fourth quarter was very solid from a number of perspectives. Similar to the past few quarters, we continue to see loan growth across the portfolio. Specifically, commercial real estate grew by $373 million. Commercial loans, bolstered by a strong quarter in leasing, grew by $290 million. Commercial premium finance had another solid quarter, up $136 million, and residential real estate loans were up $137 million. Year-over-year, we saw total loan growth of $5 billion or 15% net of PPP loans, a very productive 2022.
As noted on our prior earnings calls, we continue to see very solid momentum in our core 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. Commercial premium finance had a very strong 2022, with increased outstandings of close to $1 billion year-over-year. We anticipate this momentum will continue into 2023. While we are optimistic about loan growth for this year, we would anticipate that the pace of growth may trend closer to the middle of our guidance of mid to high single digits for a number of reasons.
While Wintrust Life Finance grew by $1.1 billion during 2022, the rapid increases in rates during the past year have affected that pace of growth. This portfolio grew $86 million in the fourth quarter versus $396 million in the third quarter. We would anticipate this slower rate of growth will continue in this higher rate environment. Also, increases in commercial line utilization, excluding leases and mortgage warehouse lines, as detailed on slide 17, have flattened during the fourth quarter, possibly reflecting a more cautious business sentiment. As a result, while we continue to be diligent about the possibility of a business recession, we believe our diversified portfolio and position within the competitive landscape will allow us to grow within our guidance of mid to high single digits and maintain our credit discipline.
From a credit quality perspective, as detailed on slide 16, we continue to see strong credit performance across the portfolio. This can be seen in a number of ways. Non-performing loans remained stable at 26 basis points, or $101 million, compared to $98 million in the third quarter. 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 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'll turn it to Ed to wrap up.
Thanks, Murph. You know, year-end is always a good time to review not just the fourth quarter and the year to date, but rather review the entire body of work over a longer period of time versus our stated goals that the company's had. Let's go back 10 years. In our case, you go back 30 years, results versus peers would be about the same. Increasing tangible book value we think is extremely important, one of the goals we always look at. As Tim noted earlier, we've increased it every year since we went public. Eight-year CAGR of 8% is pretty good. Even last year had been kind of tough, 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. Wintrust has thrived during all of these. It's a testament to our business model we employ and 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. The lower rates went, the more we increased our positive gap. Rates have risen, mortgages has died down. I say this because I'm often asked, "Well, you're a mortgage bank." No, we're not. It's just, it's part of what we do. This is, this is an orchestra here, not a combo.
This is a big orchestra with all sorts of different parts. At times, they all kick in. Times they don't kick in. Mortgage is still an extremely important thing of important offering that we have, but it's not doing well now, but it will do well as rates come back down. Now with the margin up, we're embarking on, as Tim mentioned, locking in this increased margin for a longer period of time. All the above has been accomplished while maintaining our exceptional credit statistics. Harry Mantral concentrations kill is also served us well both in deposit and the asset side. Extremely well diversified, and it's something that always works when something isn't working. We're a growth company that takes what the market gives us.
Acquisitions or organic growth or have both worked very well for us. Based on all the above and many more points, one has to wonder why we consistently trade at a discount to our peers. I have to put that in there. I'm sorry. As of future, you can expect more of the same. Our margin should continue to increase as the remainder of the asset portfolio prices and liability costs increase at a lesser rate. Margin of all fours is in our future. Two, we'll be locking in at higher margin. As we mentioned in today's comments, is already underway. Loan pipelines are still strong, but a bit lower than historically, as Mark pointed out, we keep our guidance the same, but are focusing on the lower side of that.
Credit stats are stellar, but we're prepared for additional hemorrhoid attacks by the folks at Moody's, which we had one this quarter. As I just said, still being evaluated in all aspects of our business. Pricing is still an issue, especially given our stock price. Balance acquisition of Rothschild's American business is on track for a first or second quarter closing. In short, we like where we stand. With all that, I think you can ensure our best efforts going forward. We'll be consistently good. We're all major owners of this. Our networks are tied up in this company. Not gonna do anything stupid. In fact, we hope to thrive no matter what the economic cycle is and where we're at in it. To ensure our best efforts in this and time for some questions, please.
As a reminder, to ask a question, you will need to press star one one on your telephone. Again, that's star one one on your telephone to ask a question. Please stand by while we compile the Q&A roster. Thank you. Our first question comes from the line of Jon Arfstrom of RBC Capital Markets. Your question, please.
You guys hear me all right?
Yeah. How are you, John?
Hey, good. Jon Arfstrom from RBC.
Hello.
You guys, the numbers look good here. The one that surprised me a little bit was the provision, and it seems like you've touched on it and alluded to it. What do you want the message for us to be going forward? Feels like it's gonna pull back. It feels like it pulls back with a little bit slower loan growth as well. Do you guys view this as more of a one-time step up and we go back to a normal pace? Or how should we think about that?
Well, I think, Jon, the CECL, as you know, is sort of a life of loan concept. You know, if we have loan growth, you know, the provision will go up. If the economic scenario stayed exactly the same, you'd have, you know, no additional provision in the next quarter per se for that. It really depends. If the, you know, economists obviously change their forecasts frequently. If that forecast gets better next quarter, you could expect it, the provision to come down. If it gets worse, you know, it would probably stay elevated. It's really a function of where the economy's going.
As Tim and Rich and Ed and I have all said, there's nothing specific here that we're pointing to that we think is a current problem in the portfolio. This is just how, you know, commercial real estate price index forecasts and how, you know, BAA credit spreads and GDP and on all those forecasts got, you know, moderately worse in the forecasts that economic forecasts we use. It really is a function of the CECL modeling and not a function of us seeing deterioration in our credit. 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 gonna go.
Okay. Okay. It really wasn't any heavier weighting by you. It was just more of the output from what.
Yeah.
Yes.
Yeah. Guys, hemorrhoids are itching.
Okay. I'm sure that'll be in the transcript, Ed. The other question I have is on the margin. I think I understand what you guys are saying, but if the Fed It feels like you're trying to protect downside. If the Fed bumps a couple more times and then holds it for a while, what could happen to your margin? Are you You guys are talking about a 4% level, 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?
Well, they're raising. Well, it should be, as Tim said, $30 million on annual basis per quarter. Eventually, the We've been able to lag on the deposits. Eventually, it's gonna catch up to that overall beta. We still have a lot of assets that are repricing right now. You know, if you think about premium finance businesses, every price is over a course of a year. There are other assets that do the same. We're monitoring this very carefully as we lag into these derivatives to help maintain the margin. It's hard to say where it's gonna be. It depends on some of the derivatives we give up, we give up some upside to protect the downside.
I think that, depending on how rates go, margin will continue to go up. If we can protect something in the 3.75%-4% range long term, depending on where rates are, that'd be a good thing. It's gonna take a lot more derivatives to do that, and, we're not really good at market timing, so You know, when that happens, the mortgages will kick in and life will be good again in that, in that regard. We kind of have some internal hedges too. Tim, you want to talk about that?
Yeah. I think, John, in general, we would expect the margin to sort of top out after the Fed stops raising rates. You know, whether that's a quarter or two, or whether we moderate that with some, you know, thoughtful decisions around the derivatives, you know, that's kind of what we're thinking.
But-
John, this is Dave. you know, I think what we've said here is that we expect the margin to approach four, and if the Fed raises some more, it may pop a little over four. we think, you know, given existing competitive pressures and the existing yield curve, that if they stop raising, that we can kind of hold it there if all, you know, all else being stable. As Ed said, you know, we have a lot of asset beta left too. You know, everyone talks about the deposit betas. If you look at our life insurance premium finance portfolio, as you know, those reset once a year. If you go back one year, they're based generally off of a 12-month LIBOR or a 12-month Treasury rate.
Those rates were, you know, 58 basis points a year ago, if you look at the page 25 of our earnings release. You know, those rates are up over 400 basis points. 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 a course of a year. 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 betas. We feel like we can kind of hold the margin if they go higher and then plateau.
Okay. All right. That's all very helpful, guys. I appreciate it. Thank you.
You're welcome.
Thank you. Our next question comes from the line of David Long of Raymond James. Your question, please, David.
Good morning, everyone.
How you doing, David?
Good. Good. You know, you guys bucking the trend here on the deposit side, showing deposit growth. A lot of the banks continue to have outflows. What are your expectations on the deposit flows? Also, you know, mix shift hasn't changed too much, as you alluded to. Do you see much mix shifting coming in the next couple of quarters?
Yeah, 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 to promotional activity to retain our clients. Frankly, we've got some higher deposit costs built into our projections. You know, we think we operate in good markets with a lot of deposit potential. We've typically outperformed our peers in terms of growth. Even though we're one or two in deposit share in many of our markets, we still only have 6%, 7%, 8% overall growth in Chicago and Milwaukee. Our multi-charter brand and approach, we think will help us, and we think we're holding our own. I'd add sort of an interesting fact here.
During the last quarter, or two quarters rather, we've helped clients purchase almost $1 billion worth of short-term Treasuries that previously had been held at deposits at the bank. As the gap between deposit pricing and Treasuries starts to narrow again, you know, we expect we'll get an opportunity at some of that money. I mean, we'll protect the mix as best we can. Clearly, people are moving out of DDA in some cases for the rates in money markets or savings or CD products. I think, you know, that's possible that'll continue. I can tell you, we're intensely focused on adding deposits and relationships, and we still think we've got, you know, terrific market opportunities. We're going to hold our own and stay at it.
Good. Thanks, Tim. You know, my follow-up here relates to the amount of cash you have versus deposits. A lot of your peers don't have much cash, and they've really had to increase FHLB borrowings and use of higher cost CDs. You know, your cash, as I see it, is down to just under 6% of deposits. You're up over 10% at September 30th. You know, do you monitor that? Is that something that you have a target you want to keep above a certain cash level just in case you do get some deposit runoff and you don't have to chase yields?
I think we're sort of comfortable where the cash is now. If, if you remember last quarter, that in the third quarter, we had a $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 at the, at the beginning of the quarter, and we did that. I think if you look at it, we were in the, you know, high threes and then we went to the high twos, if you, if you adjust for that $1 billion that we invested shortly after the end of the third quarter. Now we're around $2 billion. We like that position. We sort of, you know, we sort of focus on a loan-to-deposit ratio of 85%-90%.
We're slightly over that, but still in a range we're comfortable with. Then we were, you know, lagging on investing that securities portfolio in the past. We thought investing in the 1% rates was not that prudent. So we were patient and then we've invested now that rates are higher. 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 now for a portion of the balance sheet. I think we like where we're at right now as far as the mix of cash, securities, and loans. As we grow, that mix will probably stay about the same.
Yeah. Liquidity's always been very important to us and you can expect our deposit costs to go up, but we have a lot of room there, given the 40% beta we talked about, we're not there yet. At the same time, the assets should move, and the real trick is going to be protecting the margin when this peaks out and, you know, black swan hits, and rates are going to drop like a rock no matter what the environment is, and you have to be prepared for that, too. We are, we're vigilant, we're constantly looking at it, and liquidity is extremely important to us. People forget Continental Bank went under because of liquidity, not because of credit. It was the largest bank failure at the time. Well, liquidity is still important to us.
We monitor it very, very carefully.
That's great. Thanks for the color, guys. Appreciate it.
Mm-hmm.
Thank you. Our next question comes from the line of Chris McGratty of KBW. Your line is open, Chris.
Hey, good morning. Thanks.
Hi, Chris.
How you doing? Dave, the 4% margin, roughly that you're talking about, I guess, what does that map to in terms of loan yields? Right? You've got the premium finance book that's kind of got a backward lag. Is it somewhere in like the mid-six? It feels like it's kind of somewhere in the mid-six. Is this kind of where your loan yields are gonna go?
Yeah, it's, you know, probably mid-six to approaching 7% right now, I would say. If rates keep going up and the mix of the business changes, I mean, that's a variable, but We don't give specific guidance, but that's the right ZIP Code.
Okay. Then, there was a comment in the press release that just talked about additional improvements in efficiency. Maybe you could throw a little bit more color around that. You're obviously in a good spot in, you know, exiting the year in the mid-50s%. But, how would you think about that ratio playing out, appreciating that mortgage is in recessionary levels? Thanks.
Yeah. you know, mortgage, you know, lower mortgages obviously help the efficiency ratio. But, you know, the expense side of the equation, you know, we'll have some additional expenses in 2023. You know, the FDIC rates are up. You know, compensation costs will go up a little bit as we push through salary raises and the like later this quarter. you know, I think with the inflation and the FDIC and those sorts of things, you know, generally you're probably, you know, slightly above mid-single digit growth and expenses. If you add on the acquisition we're planning, it's probably high single digits expense growth for the entire year. At first quarter, it probably doesn't grow too much on the expense side, we don't think.
As we add in the acquisition, when that closes, that'll add to it, and then salaries will kick in. The margin is going to increase, you know, substantially. We think that, you know, that mid-50% efficiency ratio we have probably drifts down closer to 50%, and we'll try to even do, you know, better than that. The increase in the revenue will more than offset the expenses as we look at now, to continue to drive that efficiency ratio lower.
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 you take out that security loss, you're closer to that 1.5. We have to grow. 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 overhead ratio back below 1.5. Hard to do without mortgages kicking in. Between the acquisition of Rothschild and additional asset growth, we'd like to get that number down below 1.5. I know the that'll help the efficiency ratio also.
If, you know, I never concentrate on the efficiency ratio. Now it's doing well. We're all, "Oh, yeah, our efficiency ratio is good because the margin's up." The net overhead ratio, we need to continue to get below 1.5, and we're working very hard to do that.
Just one more if I could. Dave, on the covered calls, obviously that number's been bouncing around, but how active are you going to be there? I guess maybe help us with what makes it go on either side.
The covered calls, you know, as you know, we do those, to, you know, again, to protect against a down rate environment. It adds, you know, return on those securities. If you're doing them on mortgage backs, if rates fall, the securities pay off fairly quickly. So you get that extra revenue. Our analysis has been over a long period of time that, you're better off by writing the calls and getting that revenue. Even if you have to reinvest, it's usually a better trade.
As I talked about a little bit earlier when we were talking about the liquidity position, you know, we invested, you know, $1 billion of that liquidity into securities in the fourth quarter and wrote some calls against that. You can see on our balance sheet, those, you know, those were called and we rein-invested them, so it at a decent rate here in the first quarter. It depends on volatility and it depends on where rates, you know, where the yield curve is at. You know, it's a little bit outsized from normal given the size of the investment purchases that we had.
You know, my guess is that in a normal environment, that number's somewhere in the $2 -$10 million range, and it really drives a lot off of volatility. It's hard to tell until you get to the point where you invest in securities what the yield curve shape is and what the market volatility is. Somewhere in that range would seem reasonable to me.
Thank you. Our next question comes from the line of Terry McEvoy of Stephens. Your line is open, Terry.
All right. Thanks. It's Terry McEvoy from Stephens. Hi, good morning. Maybe, first off, Dave, thanks for reminding me of the repricing opportunities of the loan portfolio in 2023. I think it's something I overlooked, so I appreciate that. Maybe for a question circling back, I think it was John's question on protecting the margin. Eddie, you kind of threw out 3.75%-4%. I just wanna make sure is that the floor of this strategy you think can produce? You know, if rates go down 100 basis points or all the way back to zero? I just think that's an important kind of comment there, and I wanna make sure I understand what you were saying there.
Yeah. Yeah. Just to give you, Terry, a little bit more detail, I mean, we've entered into a combination of collars and some received fixed swaps with terms out three to five years. Obviously the impact of those instruments depends on the interest rate scenario. You know, we're trying to take some steps to improve a margin in a lower interest rate environment, but it depends on the scenario how much impact there's gonna be. The other thing, though, is it's just not these instruments. If you look at table 8, you can ee that in various scenarios, both up and down, we've sort of reduced the variability of the net interest income. We're mindful of trying to operate in independent of the interest rate environment at a higher level.
Yeah. Terry, I'd add in there, I mean, that would sort of be the goal. You know, we're not gonna do all of the derivatives all at one time. We're gonna 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, and what strike price these swaps or interest rate collars have. You know, they all matter. I always tell people, you know, our crystal ball isn't perfect. If you go back 18 months, I think maybe the outlook for increases in rates was 25 basis points. The economists that put out these forecasts aren't perfect either. We're trying to protect the margin, we're gonna leg into it.
depending on what the curve is and where we can buy the swaps, going forward as we leg into it from, you know, diversifying the risk perspective, you know, we'd like to be able to lock in into the, you know, upper 3%-4%. It really sort of is dependent upon, you know, how fast rates move and where that longer end of the curve, settles out at.
That's our goal.
... it's a lofty goal. We're not saying we've locked that in yet, but that's what we'd like to do if the market sort of allows us to do that over time with these derivatives.
I appreciate.
I mean-
Yep.
Yeah, I was gonna say, it's great. I mean, these are sort of unprecedented interest rate margins for us right now. You know, we have not been at 4% in our history. You know, it. We've prepared for it, and we've managed for it, and we're enjoying that. We just would like to attempt to maintain it going forward through balance sheet positioning and derivatives. We're gonna leg into it.
Yeah. Keep that beach ball up in the air. I understand. Maybe a follow-up.
Yeah, it is.
Just as a follow-up, maybe just expand upon, you know, I think you hinted earlier, just market dislocation, disruption, you're benefiting from that. Where specifically you're seeing that, maybe some hiring efforts. Within that budget, expense budget for 2023, do you kind of factor in some hiring from the disruption? Thank you.
The answer is yes. We're continuing to benefit from disruption from, you know, competitors we've talked about on prior calls. Obviously, when relationship managers feel like they can't take care of their clients, you know, we look like a good home. We'll continue to pursue those opportunities, as they arise, but it's not a large team or a number you're gonna see pop on the financials, you know, in a single dose.
Thank you.
We've always taken advantage of market disruption, even from existing players that have disruption internally. That's been part of our DNA since the beginning of Wintrust, so we plan to keep doing it.
Okay. Thank you. Our next question comes from the line of Ben Gerlinger of Hovde Group. Your line is open, Ben.
Hi. Thanks, guys. Most of the questions around the margin have been answered. It reminds me of an adage my dad used to say, "You can't go broke by taking profits." It makes sense you're willing to take a little off the upside table to protect the downside. In essence, you're kind of manufacturing to some degree a revenue line. When you think about revenue relative to expenses, let's say there is that kind of the downside scenario economically or a black swan event, is there anything in the non-interest expense that you can cut abruptly or anything to that extent that you kind of match out the two?
On the non-expense side, I mean, we're kind of a growth company, so we don't plan to cut. As Ed said, the big factor there is, and we saw this in the past when rates dropped precipitously with the Black Swan event, is that the mortgages kick in dramatically. We had a couple quarters, you know, before rates went up, where we had record net income quarters, and it's because the mortgage business kicked in. It's really shifting the mix of the business from spread business, if that would happen dramatically, to non-interest income business, which would be the mortgage side. 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 gonna send our customers to some other financial institution for a mortgage. If we think we're gonna do it, we'll do it with scale, and then we'll do it because we always wanna be asset sensitive. We've said this on other calls, the degree of asset sensitivity changes, but you always want to be asset sensitive because if you do have inflation, then your expenses are going to go up, and then how do you cover that increase in expenses? For a bank like us, it's getting more in the margin. You should always stay asset sensitive to be able to cover the inflationary costs. If that's the case, then the mortgage business is a natural business hedge. That's how we look at it.
Gotcha. Okay, that's helpful on the strategy. Then some of your, I'll say, larger competitors have national deals or are involved with other M&A activities themselves, which gives you guys the opportunity to take such clients and share the market space. Is there anything you're targeting specifically in terms of loan growth with that regard? I get that you guys are all-encompassing bank. You do a lot for a lot of people. Knowing that your competitors are kind of involved with integrations themselves outside of the Chicagoland area, is there anything that you guys are approaching for 2023 in terms of a strategy to be offensive?
You know, we always see opportunities. Larger banks always have various things that they're getting involved with, whether they're pulling out of a particular asset class or, you know, changes in some of their staffing or, you know. Those really, we have been the steady provider in all these different asset classes that we're in. So, you know, 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. As a result, we saw this the back half of this year where, you know, certain banks were, you know, trying to change the way their balance sheets looked, and we were able to take advantage of those.
Our job is just to be very consistent, very steady, and it just, you know, over the 30-plus years that Wintrust has been in existence, you know, that's really been our model, is to, you know, take what is available in the marketplace, and usually that's as a result of the bigger banks doing things like you refer to.
Yeah, like in, for example, one of the large banks, I think the largest bank in Chicago, has stated they're going to doing safe deposit boxes. That's an opportunity for us because a lot of people still like safe deposit boxes. We got them. They don't cost much to run. We're going to be offering free safe deposit boxes for a period of time to get new people in. Little things like that mean a lot to people. The big banks, they seem to step on it themselves and allow us the opportunity to work through that stuff. We have great products as indicated by the Greenwich Excellence Awards and the what's the other one?
J.D. Power.
J.D. Power Award we won. We won three of those, I guess, last five, four or five years. People like what they have. Word of mouth helps too. We think that, there's plenty of they keep opening the door for us. We're going to take advantage of it.
Got you. I appreciate the color, guys. Thank you.
Mm-hmm.
Thank you. Our next question comes from the line of Brandon King of Truist. Your line is open, Brandon.
Hey, good morning.
Morning.
Morning.
How are you?
Good, good. I had a question on mortgage. I was curious, what was the production margin in the fourth quarter? Has that bottomed in your view and outlook?
Yeah. You know, the production margin was hovering down closer to 1% in the fourth quarter. We expect in the first quarter here, 1.5% is sort of a reasonable range, which is clearly lower than normal. You also have to understand the, you know, the production is very low right now. I mean, as we showed in the slide deck, you know, the originations for sale were just a little over $400 million. Actually the majority of our revenue in the mortgage business now is a servicing income of, you know, roughly, you know, $11 million. First quarter, we expect to be slow again, although, you know, applications are still coming in. There's still purchase activity out there and, you know, a little bit of a refinance activity.
You know, 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. Very small, but it has become such a small piece of the revenue stream, given these higher rates and seasonality in the last couple quarters, that I think we're about as low as we're going to go as far as the production revenue. I think we'll continue to at least have what we have now.
As I said on my comments, I think as we get in the second quarter and the buying season picks up and people get a little bit more used to the new level of mortgage rates and digest them, I think we'll start to see pickup in the second and the third quarters.
Okay.
That is gravy for us too. That's just gravy with a higher rate environment. That's just gravy.
Yep. Yes. Yeah, I agree. I agree. Okay. And then on the deposit strategy, I saw a lot of deposits came out of savings, deposit growth came from savings and CDs. I was curious if you could provide details on your CD strategy as far as what prices you booked them at in the fourth quarter, and as far as terms, six months, three months, et cetera.
Yeah. You know, rates are trending up, particularly promotional rates toward 4%. Most clients are still not willing to go long, so you're seeing, you know, terms from nine months through, call it two years, but most of it kind of around a year. The alternative is there are obviously promotional money market and savings rates that are also available for people that don't wanna lock into a term product.
Yeah. The other thing I think I'd point you to is on Table 2 of our earnings release, we do show the CD rates by maturity. You can kind of see how they roll off. Most of them right now are plus or minus 2% on average. The promotional rates are, as Tim talked about.
Okay. For 2023, how confident are you in your ability to generate operating deposits in DDAs for this year? Do you think you're expecting very little growth from those categories and more in those interest-bearing accounts?
Well, no, we're working awfully hard to continue to add clients. As we bring new clients on, you know, they bring deposits that include their operating business. We've talked on prior calls about, you know, how nicely our treasury management business is performing. Again, it's lumpy as there's 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 Rulis of D.A. Davidson. Your question please, Jeff.
Thanks. Good morning.
Morning.
Just a question. A couple housekeeping items. On the expense side, I think you alluded to a mid-single-digit expectation for the full year. I think you're about 4% for 2022, which is pretty good in the inflationary environment. What was the expectation again for 2023?
I was saying probably, you know, mid to high single digits. So the middle of that range, sort of just normally. With an acquisition, it probably gets into the high single digits for the full year. First quarter will probably be less because, you know, the acquisition won't, pending acquisition, if it's in there, it'll be the end of the first quarter or early second quarter. It won't have much impact. You know, 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, particularly sponsorships and marketing.
Salary costs, we do a salary increase effective February 1st, so that will impact a little bit in the 1st quarter, but more so the second quarter. 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. Again, we would expect that with the leverage and the growth in the balance sheet and with the higher margin, that'll more than offset that expense growth.
Right. I get, you know, I guess we get back into your comments on the efficiency ratio. Still seeing improvement despite a reasonably higher expense run rate. Just to catch up on the margin again, did you have a December average for the month?
Yeah. You know, we don't haven't disclosed that. We don't wanna get in the position of doing that. I think what you can see is we've in the past, we told you we'd be around 370 for the fourth quarter. We were. I think we're pretty confident in our guidance for the full quarter of the first quarter. I think we'll leave it at that.
Okay. Fair enough. Then just the last one. On the tax rate, any expectation that that's gonna change anywhere off of 27%? 27.5%, is that a reasonable assumption for 2023?
Yeah. 26.5-27 is a reasonable assumption. It bounced around a little bit because of what we noted in the press release with the $2 million expense in the third quarter and $1.7 million of that reversing in the fourth quarter related to some minimum tax issues with our Canadian stuff. You know, you take those out and 26.5-27 seems like a reasonable rate.
Got it. Thank you.
Mm-hmm.
Thank you.
Thank you. At this time, I'd like to turn the call back over to Edward Wehmer for closing remarks. Sir?
Yeah, thanks, everybody, for listening in. You know, our mascot here is Sisyphus, and the rock rolls down the hill at the end of the year, and we gotta push it back up this year. We got everybody who got their shoulders in. It's gonna be a big rock, but we're gonna make it. If you have any other questions, please contact any of the speakers today, and we'll talk to you again pretty soon. Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.