Wintrust Financial Corp (WTFC) 2021 Q4 法說會逐字稿

Welcome to Wintrust Financial Corporation's Fourth Quarter and Full Year 2021 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 that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent Form 10-K and any subsequent filings on file with the SEC.

Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded.

I will now turn the conference call over to Mr. Edward Wehmer.

Good morning, everybody, and welcome to our fourth quarter '21 earnings call. With me always are Dave Dykstra, Dave Stoehr, Kate Boege, Tim Crane and Rich Murphy. We'll have the same format as we usually -- as we adapted earlier in the year, seems to work pretty well. I'll give some general comments regarding our results, turn it over to Tim for more detail on the balance sheet, turn over to David Dykstra who's going to talk about other income and expense and Murph will then follow-up with the discussion on credit, then back to me for some summary comments about the future and then time for questions.

As many of you already know, 12/27/21 marked the 30th anniversary of us opening our first bank. A little more than $6 million in capital raised from friends, neighbors and family. 11 hearty souls embarked on the journey, with absolutely no delusions of grandeur. Our goal was simple, to create a new type of community bank, one with combined high-touch banking with technology, i.e., high tech, high touch, to cover people and businesses in the communities we serve. All along at the center of our homegrown culture has been 4 pillars: Our shareholders, employees, customers and communities we serve.

We've not wavered from that commitment in the 30 years we've been in existence. Of course, this anniversary I have been asked many times what I'm most proud about Wintrust. Is it the 5,400 employees who make up Wintrust? I'm pretty proud of that. Is it the $50 billion of banking assets and $35 billion of wealth management assets we have amassed over the years? I'm pretty proud of that too. Is it the record earnings we have delivered over the years? yes. In fact, our stock price booked -- is it the fact that our stock price quoted century mark? I feel pretty good about that too. Many of the attributes that I'm very proud of. However, the one I'm most proud of is the fact our culture has endured over that period, culture dedicated doing the right thing for our constituents all the time. Take the blame, share the fame and avoid the shame and enjoy the game, our culture in a nutshell, have endured even though we have grown beyond our wildest dreams.

So now for the walk down memory lane, let's talk about the quarter year-to-date results. All in all, another very successful quarter. Previous calls I referred to around as $1 billion quarters. This one's different, it's a $2 billion quarter.

Assets rose $2.3 billion to $50.14 billion, 11.2% growth or $5.1 billion versus 12/31/20. Core loans, net of PPP and loans held for sale went to $34.2 billion, $2 billion for the quarter, 16.6% growth or about $4.9 billion. Deposits saw $42 billion or $2.1 billion growth for the quarter, 13.5% or $5.2 billion up since 12/31/20. Loan growth was enhanced by the purchase of portfolio of agency loans from Allstate, approximately $550 million. Tim will talk about this a little bit more.

On the balance sheet front, our strategy, which we adopted at the start of the pandemic in April 2020, of growing through the period and enhancing our interest rate sensitivity position has paid off in spades.

Mortgage and PPP loans took us through the depth of the pandemic. Our growth in core loans has more than replaced the earnings power. These assets have been extremely well positioned for higher rates that appear to be here, finally.

(inaudible). On the earnings front, we recorded a record year of $466 million or $7.58 per diluted common share. Fourth quarter recorded an income of $99 million or $1.58 per diluted common share, (inaudible) from the third quarter, mainly because of the positive provision of $9.3 million as opposed to negative provision of almost $8 million.

Positive provision was brought about by the acquisition, it's the double accounting we have to do there, and the fact that our loans have grown so nicely. Net interest income was up $8.5 million compared to Q3. Core net interest income was up $15.5 million, and it appears the PPP contribution was down $7 million.

Earning asset, well, basically loan levels, a 5 basis point decline in deposit costs with (inaudible) change. Loan pipelines remain consistently strong. Also, we started 2022 with a nice head start as ending loan balances (inaudible) $1.36 billion.

Line utilization was up a smidge. That's kind of a -- smidge is a technical term we use around here, but not close to historical averages. We will discuss -- Murph will talk about this in detail. Remains over $1 billion of loan growth if and when utilization return to normal. NIM was down slightly, 4 basis points, due to additional liquidity (inaudible) you can expect us to begin investing our excess liquidity. Penetration of our liquidity portfolio is a little over 3 years (inaudible) 6-plus years. We'll be prudent in our investment timing though. Credit quality got even better, believe it or not. Murph will also cover this in his review of credit. However, I'll note that we did conduct an asset sale noted in the release. We'll continue to (inaudible) the bad assets, potentially bad assets as soon as possible.

PTPP, pretax pre-provision, income was up approximately $5 million to $146.3 million. We expect (inaudible) nicely in 2022, especially if rates rise as anticipated (inaudible) my closing remarks. One last point I want to make is our Wealth Management business. Assets under administration were up almost $1 billion in the quarter, approximately $5.5 billion year-over-year to $35.5 billion or 18% growth rate.

Obviously, the market (inaudible) core growth in our account (inaudible) is impressive. Fee run rates (inaudible) annualized $107 million in the fourth quarter of 2021, $130 million in the fourth quarter of 2021 -- 2020, 2020. Yes, you got it. I feel like Joe Biden there. I'm not going to talk for 2 hours. Very proud of the progress we made this year. I look forward to continued growth in this area and a lot of momentum there. I'll turn it over to Tim who will take you through the balance sheet.

Great. Thanks, Ed. I'd like to highlight a couple of balance sheet items as well as comment on a couple of items likely to be of interest. The $2 billion in loan growth that Ed referenced was spread nicely across all categories. Rich will add some color to that, but it includes the $578 million of loans from the previously announced November purchase of the Allstate Agency loans. This portfolio is a very nice add to our existing agency lending business. Importantly, unlike some loan portfolio purchases that run off over time, this is a business that we believe we can continue to sustain and grow. It's also important to note that the overall loan growth does not yet include much benefit from increased line utilization where we only saw a modest improvement in the quarter.

On an annualized basis, the loan growth for the quarter, excluding the portfolio purchase and PPP was 18%, the third straight quarter at or above 15%. And Ed mentioned that the period-end loan balances were well above the quarter average balances. Obviously, PPP loans continue to run off down a little over $0.5 billion in the quarter and now total $558 million, a number we expect to decline relatively quickly with continued forgiveness activity.

Into 2022, we expect continued strong loan growth. While our guidance remains our historical mid- to high single-digit loan growth on a percentage basis, net of PPP, our short-term performance should continue to be at or above the high end of that range and likely better than peers. The $2 billion of deposit growth, just under half of that was noninterest-bearing deposits and the rest at very low cost.

As a result, interest-bearing deposit costs declined to 24 basis points. While we believe there is some continued room for decline, the changes will be smaller going forward as the majority of deposits have repriced during the low rate cycle. On the investment front, we remained very liquid with approximately $6.1 billion in liquidity at year-end and securities balance is essentially flat.

While I expect we will begin to deploy some of the liquidity in the first part of '22 at somewhat higher rates than we saw in the fourth quarter, we remain cautious about locking in low long-term yields and remain very well positioned for rates at higher levels. On that topic, anticipating a question or 2 about rising rates, we reported for several quarters that we have focused on remaining interest rate sensitive, expecting the possibility of higher rates.

That continues to be the case, and we will benefit from upward changes that the market is starting to price into the consensus forward curves. Just a couple of highlights reinforcing Ed's earlier comments, approximately 80% of our loans reprice within a year. You can see this on Page 12 of the supplemental presentation. Our spreads, simply our loan yields versus our deposit cost, improved for the third straight quarter.

Securities yields for many instruments are 20 to 50 basis higher than they were even a month ago. And while it's slightly more complicated than this, given loan floors, loan indices, deposit betas and competitor actions, we believe each 25 basis point change in rates is worth about $40 million to $50 million in pretax net interest income on an annualized basis.

And you'll see this in a paragraph on the second page of our press release. The only thing that I would add is that early in the cycle, deposit costs tend not to rise as rapidly as they may following subsequent later increases. You can obviously do the math, but our net interest margin for the quarter was down 4 basis points, attributed solely to the continued impact of more liquidity.

Absent that excess liquidity, our margin would have actually expanded by 2 basis points. Without large continued inflows, we expect the margin has bottomed and will certainly improve as rates begin to trend up. Going forward, each 25 basis point increase in rates equates to approximately a 10 basis point improvement in margin.

And if, and that's a big if, the current consensus rate forecast plays out, its conceivable margin will be around 3% at year-end. On the capital front, the bank's capital levels are down slightly as a result of the strong growth in the quarter but remain well within our targeted levels and appropriate on a risk-adjusted basis.

Lastly, we continue to be very pleased by our market momentum. Last quarter, we highlighted the favorable Greenwich ratings and the satisfaction of our commercial clients. I would add that Wintrust ended 2021 as the top SBA lender in Illinois. In terms of customer behavior, we continue to see digital usage increase nicely. In 2022, we will continue to improve on our digital offerings with a near total revamp of our consumer and small business digital services.

In addition to our high tech improvements, we will also enhance our high-touch activities with the addition of locations in Oak Park, Illinois and Rockford, Illinois, both attractive markets where Wintrust historically has had a limited presence.

As you can tell, we feel very good about where we begin 2022. And with that, I'll hand it over to Dave.

Great. Thanks, Tim. I'll cover the noteworthy income statement categories. Starting with the net interest income, some redundancy with Ed and Tim's comments here, but we'll just go through it quickly. For the fourth quarter of 2021, net interest income totaled $296 million, an increase of $8.5 million as compared to the third quarter of 2021 and an increase of $36.6 million as compared to the fourth quarter of 2020.

The $8.5 million increase in net interest income in the fourth quarter compared to the prior quarter was primarily due to average earning asset growth, which was up 17.4% on an annualized basis over the prior quarter. Net interest margin declined 4 basis points to 2.55%, a beneficial decline of 6 basis points for the rates paid on liabilities was offset by 7 basis point decline on the yield on earning assets and a 3 basis point decline in the net free funds contribution, resulting in the decline in the reported net interest margin.

The yield on earning asset decline in the fourth quarter compared to the third quarter was -- as Tim said, was almost entirely due to the short-term liquidity build that we had during the quarter. And the decline in the interest-bearing liability rate was primarily associated with a 5 basis point decline in our interest-bearing deposits, mostly due to the repricing of time deposits. It's important to note that the net interest income expanded despite the $7 million less of interest income associated with the PPP portfolio in the fourth quarter, and the net interest margin would have stayed relatively stable, excluding the impact of the PPP portfolio, and would be down only 1 basis point.

As Tim Crane mentioned, the margin was affected by this excess liquidity on our balance sheet and that the rates are higher than they were a month ago. So as we begin to deploy some of that liquidity into the market, we expect the net interest income and net interest margin to benefit from that, although we'll continue to be cautious on deploying the liquidity.

Turning to the provision for credit losses. Wintrust recorded a provision for credit losses of $9.3 million compared to a negative provision of $7.9 million in the prior quarter and a $1.2 million provision expense recorded in the year ago quarter. The provision expense in the fourth quarter was driven largely by loan growth, excluding PPP loans of approximately $2.09 billion, including loans related to the acquisition of the insurance agency lending portfolio and also increased slightly due to a small rise in net charge-offs. Offsets to those increases for the provision were improvements in the macroeconomic environment and in the loan portfolio characteristics during the quarter, including improving loan risk rating migration. Rich will cover credit quality and additional detail in just a couple of minutes.

Turning to the other noninterest income and noninterest expense sections. In the noninterest income portion of the income statement, our Wealth Management revenue increased $1 million to another record level of $32.5 million in the fourth quarter compared to $31.5 million in the third quarter and up 21% from the $26.8 million recorded in the year ago quarter.

Mortgage banking revenue saw a reasonably solid loan origination volume during the fourth quarter with lock adjusted origination volumes down approximately 22%, which was consistent with the guidance we provided in our prior quarter's earnings release.

Mortgage banking revenue decreased $2.7 million to $53.1 million in the fourth quarter. Revenue was lower in the current quarter, primarily due to the lower lock adjusted origination volume and combined with slight compression in the related production margin.

The lower production revenue was partially offset by a favorable fair value adjustment of mortgage servicing rights. The company recorded a positive $6.7 million valuation adjustment in the fourth quarter of '21 related to mortgage servicing rights compared to a decrease of $888,000 in the prior quarter.

Looking forward, based on current market conditions, we anticipate mortgage revenue, excluding any MSR valuation adjustments, to be fairly similar to the first quarter of -- fairly similar in the first quarter of 2022 as we experienced in the fourth quarter of 2021.

Obviously, the mortgage servicing rights valuation is tied closely to interest rates, and we're not going to speculate on what those may be at the end of the first quarter of 2022. But based on current market rate conditions, it would point to a higher valuation. But obviously, lots of time to go yet in the quarter.

Other noninterest income totaled $18.9 million in the fourth quarter of 2021, down approximately $4.5 million from the $23.4 million recorded in the prior quarter. The 2 primary reasons for the lower revenue in this category include $1.3 million of lower swap fee revenue and $3.7 million of lower income from investments and partnerships, which are primarily related to investments that we have to support our CRA purposes.

In the noninterest expense categories, noninterest expense stayed relatively stable with the past 5 quarters and totaled $283.4 million in the fourth quarter, up approximately $1.3 million from the $282.1 million recorded in the prior quarter. There are a handful of categories that account for the majority of the change from the prior quarter that I'll focus on, but I think it's important to put the expense growth in the context of the company growing its balance sheet by $2.3 billion during the quarter.

Salaries and employee benefits expense decreased by $3.8 million in the fourth quarter of '21 compared to the third quarter of the year. The decline is primarily related to a $7.1 million of lower compensation expense associated with the mortgage banking commissions and incentive compensation program expense in the fourth quarter relative to the third quarter, with those savings partially offset by increased staffing costs as the company continues to grow. Software and equipment expense totaled $23.7 million in the fourth quarter. That was an increase of $1.7 million as compared to the prior quarter. The increase was primarily due to accelerated depreciation related to the reduction in the useful life of certain software that has been -- that is planned to be replaced as we continue to upgrade our digital customer experience as well as increased expenses associated with upgrading our data centers and other software enhancements to support our growth, ongoing digital enhancements and cybersecurity efforts.

OREO expenses were actually negative by approximately $641,000 in the fourth quarter as the company recorded gains of approximately $843,000 on sales of OREO properties. These gains were in amounts that exceeded the aggregate cost of the OREO expenses and valuation charges on other OREO properties.

Although this expense category was negative, it was approximately $890,000 less negative than the third quarter, which also had gains on the sale of OREO properties. I think it's important to note that we've been aggressive in liquidating OREO assets in the amount of OREO on our balance sheet. At the end of the year was a mere $4.3 million compared to $13.8 million at the end of the prior quarter and $16.6 million at the end of 2020.

Other than the expense categories I just discussed, no other expense category had a change of more than $900,000 and all those other expense categories in the aggregate were up less than $2.5 million compared to the third quarter of 2021. The net overhead ratio, a measure of operational efficiency, remained relatively stable in the fourth quarter relative to the third quarter. The net overhead ratio stood at 1.21%, which is down 1 basis point from the 1.22% recorded in the third quarter, and the ratio continues to benefit from strong balance sheet growth and good mortgage banking results. The efficiency ratio also stayed relatively stable at approximately 66% in both the third and the fourth quarters of the year.

So in summary, the core fundamentals are strong with growth in pretax pre-provision net income, robust loan and deposit growth, increased net interest income despite sizable PPP loan reductions, another record wealth management revenue quarter, seasonally adjusted strong mortgage banking revenues, relatively stable net overhead efficiency ratio, strong pipelines and fantastic credit metrics. So with that, I'll turn it over to Rich.

Thanks, Dave. As noted earlier, credit performance for the fourth quarter was very solid from a number of perspectives. As detailed on Slide 5 of the deck, loan growth for the quarter, net of PPP, was just over $2 billion. As Tim noted, that number included the Allstate portfolio acquisition of $578 million, resulting in net loan growth of over $1.4 billion.

Equally as important, and similar to the third quarter, was the nature of this growth, which was spread across our loan portfolio. Specifically, Wintrust Life loans, which were up $387 million; core C&I loans, which were up $392 million; first insurance funding, which was up $239 million. In addition, the asset-based lending group, leasing and franchise teams, all showed solid growth.

This quarter's growth closed out a very productive year for Wintrust, where we saw net loan growth, excluding PPP, of $4.9 billion, $4.3 billion if you net out the Allstate acquisition, an increase of 14.6% for the year. As noted in prior earnings calls, we continue to see very solid momentum in our core C&I portfolio. Pipelines have been strong throughout the year, and we saw that materialize into increased outstandings during the past 2 quarters.

We continue to believe that ongoing market disruption and our success during PPP are the primary driving factors. We are optimistic about loan growth in 2022 for a number of reasons. Core pipelines continue to be very strong. Line utilization, as detailed on Slide 18, continues to trend up from 36% to 40% during this past year when netting out mortgage warehouse lines, and we anticipate this trend will continue.

We have seen the average loan size in our first insurance portfolio grow by over 10% this past year to 39,000 and over 40,000 in the fourth quarter. We believe these levels will continue into 2022. And Wintrust Life Finance had a very strong year, growing their portfolio by 20%. This momentum was maintained through the fourth quarter and should continue into 2022.

As a result, as Tim mentioned, we are reaffirming our loan growth guidance of mid- to high single-digit growth through 2022. But we think our short-term performance should continue to be at the higher end of that range, and we should continue to outperform our peer group.

From a credit quality perspective, as detailed on Slide 17, we continue to see solid credit performance across the portfolio. This can be seen in a number of metrics. Nonperforming loans decreased from $90 million or 27 basis points to $74 million or 21 basis points. A meaningful part of this reduction came from the sale of a $10 million portfolio of loans. The majority of these were nonperforming. NPLs continue to be at record low levels and roughly half of where they were this time last year.

Charge-offs for the quarter were $6.2 million, approximately $2 million of which was a result of the loan sale that we just discussed. And we -- as Dave pointed out, we continue to see credit risk ratings show positive migration as our customers continue to recover from the pandemic. That concludes my comments on credit, and I'll turn it back to Ed to wrap up.

Thanks, Murph. Good job. As I mentioned at the beginning of the call, our strategy has been to grow the balance sheet during the period of low rates, use our structural hedges, mortgages, i.e., mortgages to buffer the loss of net interest income until such time as balance sheet growth can offset the income loss due to lower rates.

PPP loans (inaudible) benefit add on to this strategy. All of the above will be accomplished by enhancing our interest rate sensitivity position, anticipation of higher rates, which appear in the near term -- which appear to be on the near-term horizon. We have more than covered the PPP loan runoff, which was our goal with core loans.

It's fair to say that to date the strategy has been accomplished in spades. The excellent growth we have put up over this period and the Allstate portfolio purchase has been organic -- other than the Allstate portfolio purchase has been organic. The acquisition market appears to be getting more active but seller expectations remain fairly high. We'll continue to evaluate opportunities in all areas of our business as they arise.

As you know, we take what the market gives us and right now, it's given us great organic growth. We'll continue on our historical approach of potential deals wherever it makes sense. As you all know, I'm definitely allergic to earnings and book value dilution. (inaudible) wherever the market brings us. Credit metrics are at their lowest levels in years.

Home pipelines remain consistently strong across the board. We expect this to continue to do the reputation on the market, the market disruption that is and will continue to take place. Diversified earning asset base continues to serve us well. Our line utilization should rise or inflation stay strong, should be with over $1 billion of additional loan growth if utilization returns to historical levels. Should we expect Wealth Management revenue and assets to continue with their current glide path, mortgages should continue to be meaningful but with lower contributions than in 2021.

As we mentioned in previous comments, our asset sensitivity position -- places and position to be managed with the rising rates. As Tim said, every quarter point should add $40 million to $50 million to our net interest income on annualized basis. Very much looking forward to seeing my beach ball again. It's been under water for a long time.

We have the ability to put more of our liquidity to use if and when -- as rates rise. We've already been lagging into this strategy. We're always and I've always been a growth company, and this has not changed. I direct your attention to the charts on Pages 4 through 8 in the release. The CAGR is indicated on those charts and all of our vital statistics (inaudible) our last 10 years of work. Numbers would be similar, if not better, if you went back the entire 30 years of our existence. I put this (inaudible) any other bank in the country. I'm very proud of our entire Wintrust team who works so hard to make this happen. Cannot wait to see what the next 30 years brings. With that, I'll turn over to -- for questions.

(Operator Instructions)

Our first question comes from the line of Jon Arfstrom of RBC Capital Markets.

Congrats on the 30 years, Ed, and $50 billion. That's notable.

Hard to believe, isn't it?

Hard to believe. Maybe Tim or Murph, can you talk a little bit about the kind of late growth in the quarter and what you think drove that? It's a pretty good jumping off point for Q1, but anything notable that you'd call out on that?

No, I don't think so. I think if you look back at prior year-end, you see a similar phenomenon. There is always a rush to get deals closed before year-end, C&I was up. But again, as I pointed out, it goes really across categories and there was just a big rush also in the Life Finance area. Deals closing before the end of the year.

So I don't think it's really atypical for a year-end, but it was very pronounced this year. We were -- earlier in the quarter, we are commenting that the feedback we are getting was very solid performance for the quarter, but it wasn't materializing. And then just really in December it really started to ramp up quite a bit. And I really just think it's a function of just that deadline of 12/31 and the holidays and everybody just pushing things across the line. So -- and the other thing is I think everybody was dealing with a fair amount of capacity issues from attorneys and appraisers and everybody else. And that -- there was definitely a push at the end here to get things through the pipeline. So other than that, I don't know, Tim, would you add anything?

No. I think that may be a handful of people that thinking that they were going to complete some sort of transaction trying to get it in before some tax-related activity might have come up, but that turned out not to be the case. We'll see. Turned out there is a lot of…

There's really no change in the…

A lot of scope -- things have been closer in the first quarter. So -- sorry, Jon, we missed you there.

Yes. Just -- but you're still saying no real change in the pipeline despite that strength at year-end?

No, pipeline looks pretty strong.

Okay. Tim, your comment on deposit costs not rising early in a rate hike cycle. What point do you start to think about that? Or maybe said another way, how much runway do you think you have in terms of your deposit betas?

Jon, I think it's going to be hard to tell because a lot of the market has a lot of liquidity right now. And so unlike prior cycles where people might have been a little bit higher on the loan-to-deposit scale, we'll just kind of have to see. We've seen very little deposit competition so far. And given the very low levels we start at, the betas will obviously work themselves up over the cycle.

I think, Jon -- this is Dave. I think if you look at the prior cycle, we didn't see any rates in the first 2 raises by the Fed, and you really only started to see pressure on the third rate hike of 25. So we'll have to see the size and the timing of them and what competition does. But as Tim said, with all the liquidity in the market, we wouldn't expect it to happen any faster than that. We think it could potentially -- that the betas could lag a little bit more than that given all the deposits in the system.

Yes. It seems that way. Just a quick one for you, Dave, on mortgage -- on your mortgage guidance. You're saying start with the $28 million production revenue number at servicing and then take our best shot at the MSR valuation. Is that the right way to look at it?

Yes. Or the other way is just take the $53 million of total mortgage banking revenue and back off the $6.7 million of MSRs and say that's your base. But -- just a point on that, we think -- actual closed originations, they'll probably be down just a little bit in the first quarter, but we think the pipeline will build at the end of the quarter. So if that happens, the lock adjusted origination should be fairly similar, and the revenue should be fairly similar.

Our next question comes from David Long of Raymond James.

You guys talked a little bit about the strong loan growth in the quarter. But just curious if I can get a little bit more color on, are these new relationships? Is utilization upticking? Where are these new loans coming from?

Yes. I think utilization, as we talked about, is up a little bit. Businesses are doing better and utilization is very real. We have probably a ways to go there. I think you had seen numbers closer to 50%. We're at 40%. So I think there's still lots of headroom there.

But I think in general, thinking about the different loan products, most of this is really coming as a result of market disruption in the C&I space because we -- as we've talked about in prior calls, I think we have really kind of become the bank in Chicago to go to. And you look at what's going on with CIBC and some of the changes there, you look at what's happened with MB Fifth Third and a lot of the changes there, the First Midwest acquisition. There's just a lot of things that have gone on where decisions aren't getting made locally anymore.

And we've always positioned ourselves as an opening remarks talked about. This is -- we are the -- we have always been the local alternative to the big banks. We continue to be that. And people do like that. They like being able to walk in and meet with the people who are making the credit decisions, making the people who are running the company. It is a key differentiator and most of that is resulting in these new relationships coming over. But then if you look at like the Life portfolio, that is -- that's all new relationships. I mean that is just people that really like the product, see how it fits into their estate planning. And it has become a much more popular product in the industry, and we are just capturing market share of that and getting more opportunities. So it definitely is new relationships.

Got it. And then on the deposit side, sort of the same direction here, but you had $2 billion in growth in the quarter. Is this -- are these sticky deposits? Do you expect these to stay on? I know you talked about the deposit beta, but will these deposits stay on the balance sheet? Do you expect a runoff at any point once rates start moving higher?

Well, I think of a mix issue (inaudible) but a lot just sits in demand right now. But I believe -- we don't know, basically. Will people pull a lot of money out. They all had a lot of cash, they pull it out -- pull out. Will it come back to us probably. But -- that's why we're being a little bit slow on our -- we take this into consideration as we look at the investing the excess liquidity. Tim, do you want to comment?

Yes, I think that's all right. There's probably a little bit of tax-related activity that will occur in April. There's -- obviously, people have sold some businesses that have parked money for their tax obligations. But we watch it very carefully, David, and we'll react appropriately. It was a lot of growth, a lot of growth. So…

(inaudible) this quarter.

What was that?

Seems to be hanging in there so far.

Good. Good. I may have missed this with Dave's discussion. But were there any merger and merger charges associated with the Allstate portfolio that was purchased that were baked in the operating expense number in the quarter?

Yes. It was a very small. I mean we had legal fees associated with, David. So I mean a very small amount, less than $0.5 million, so nothing significant.

Our next question comes from Terry McEvoy of Stephens.

I went back, it took you a decade to grow your deposits $2 billion. You crossed that mark in 2001, whereas you did that just in the last quarter. So congrats on the fourth quarter. I guess a couple of questions. Can you maybe -- how are you thinking about expense growth in 2022? A lot of talk of wage inflation. But then on the flip side, maybe a softer mortgage market will impact some of your salaries and benefits.

Dave?

Yes. Well, I think that context is probably correct, Terry. I think the way we look at it and it will sound like a broken record compared to prior quarters is, we try to focus on that net overhead ratio because the mortgage business, if it goes up and down, the expenses go up and down.

And so we look at the operating leverage from that perspective. It was in the low 120s the last 2 quarters. We expect to sort of hold that line a little bit. If mortgages go down, then it's possible that that trends up into the 130 range. So I think our target for net overhead ratio is still sort of in the 130 basis point range, but we expect to get leverage.

But there clearly is some pressure on wages out there. But as you said, if mortgage volumes are down, then that -- those commissions will be down and related expenses. We also have those expenses supporting spread business, right, loans and deposits. So as the spread business goes up, there's a lot of built-in growth already actually for next quarter with over $1 billion worth of ending earning assets over average.

And so those spread income will start to come through and the growth in the balance sheet will offset it. So we do think there'll be some pressure there, but we're also investing in robotic process automation in some areas. So not that that necessarily would cut a bunch of positions, but it would eliminate the need to add positions as we grow. And so we're going to be able to leverage technology and the like.

And so some of the digital enhancements we're doing are going to reduce time to complete some functions in the organization, which should also help let us leverage those technological advancements for growth. So yes, there is pressure there, but we also think there's leverage in the system. And certainly, if we don't think that our net overhead ratio targets are going up, we think we can grow into any of those sort of increases. And if there's a rate increase, then that way more than offsets any pressure that you would have on those line items.

And then just as a follow-up, your commentary on bank M&A. A few years ago, you were looking and talking about larger deals. I guess, is the message here you're going to take what the market gives you, if something pops up? Or is there a bias towards a larger transaction? And as you think about markets, would you be willing to expand into a newer market?

I really don't think we've changed. We're very opportunistic as it comes to acquisitions. I can't -- a couple of quarters ago, I thought that the big bank kind of concept, there was just chum in the water, seeing if I can get a shark up or a whale or blowfish, I don't know. But I can't imagine us doing a bigger deal right now. It drives me crazy.

You talk to people of all from $1 billion on up, they're worried about themselves and not about their shareholders, drives me nuts. I said that before, I'll say it again. But we're going to be opportunistic on it in terms of -- I can't imagine us doing a very large deal, but I can't imagine us doing a deal that either in market or expanding the market to contiguous states.

I think Northwest Indiana is still in our bucket list. We got to get there to expand in Wisconsin and in the rest of Illinois. But we only have 8% or 9% market share here in Chicago, plenty of room for us to grow here. As Tim mentioned, we're opening up a couple of new branches, new areas we're not in. There's a number of areas we're still not in, we're going to have to get to.

So we would take what the market gives us. I can't imagine we doing a big deal. But we're always looking, and we'll be very opportunistic. But as I said, I'm allergic to dilution and -– unless things got to be EpiPen, I don't think we'd do a big deal to dilute the (expletive) out of us.

It would -– it's intriguing that I could use an EpiPen on that, but we'll wait for another day.

Our next question comes from Ben Gerlinger of Hovde Group.

I was curious -- you said in your opening remarks that every rate hike equates to about 10 basis points on margin. I was curious -- since you guys are so asset sensitive, is there any part of that 10 a delayed effect? And then, for example, if the market's pricing in a hike in March, would you believe to see that 10 in the second quarter? Or is it potentially like 7 immediately and 3 following on?

Well, I guess what we'd point to is just what we said in that it's $40 million to $50 million over the next 12 months. And so I think it's going to depend on competition and other things, how fast that builds in, if it's front-end loaded or not. I think as Tim indicated and based upon an earlier question that there's probably a lag in the deposit costs rise because of all the liquidity in the market, which may be front-end loaded a little bit more that you could get an increase on your earning assets a little quicker than your deposits are going to reprice. But there are so many moving parts to the equation and what could happen with the slope of the yield curve, et cetera. But I think that general guidance is good right now, and we'll try to fine-tune it as rates go up. But I think we'll just stick with what we gave you there.

Got you. Okay. That's fair. And then when you think about hiring and the potential for talent, obviously, expenses have increased industry-wide in terms of the salary line and the guidance is or even more. Just curious how you guys approach talent and the costs associated with that? You need to see revenue associated with the talent? Or is there supporting back offices that could potentially also increase the salary line items?

Well, I can take part of that, and Dave can add. I mean, we continue to believe we're an attractive endpoint for bankers and revenue producers, and Rich talked about the disruption in the market that will drive that. Is there a little bit of pressure from a wage standpoint? Yes, I don't think that's anything atypical from our standpoint at this point. We're generally hiring commercial bankers. So we think the people are really important. They will help us continue to grow the company.

The back-office side of things, we're doing a lot to limit the number of people we would need and the ability to scale up. So there'll be some impact, but I don't think it will be outsized at this point.

Yes, I think we're always generally in the market for revenue producers. And so maybe that adds a little bit until they bring their book over with them. But if we can hire good people that produce loans, I mean we're always investing in the business, right, so we would do that if there's good people and we always have for the last 30 years. So no change in that approach.

Our next question comes from Brock Vandervliet of UBS.

I guess going back to -- I think it was David Long's question on deposit trends, you're kind of in line with other banks in terms of having vacuumed up 25 -- increased your deposit base 25%, 30% since COVID started. Have you -- have your bankers started engaging with large pools of deposits to try and get a sense of their stickiness? Or is that coming? How are you trying to be the player coach in this move into a higher rate environment?

Well, Tim is in charge of stickiness.

Yes -- sticky. It's a good question. And Brock, we actually have -- we -- our structure is kind of well positioned to do that because each of our banks can reach out to their largest clients and sort of determine what their intentions are. And as we did that in the fourth quarter, we didn't see people reporting the large outflows or large volatility. And remember, some of the deposit growth is actually consumer-based and related to new account activity and the stimulus payments and the like. But we're currently pleased that we're up to about 34%, 35% DDA. It's obviously helpful to us going forward. And a lot of it is related to the addition of new clients.

So to Ed's point earlier, we will watch for some volatility, but we still think absent all of the noise we have and would have had very, very strong deposit growth.

Got it. Okay. And separately, I've been noticing this for a couple of quarters, just in terms of wealth management. It seems like many community, even regional banks or even larger banks struggle with wealth management. It's a product. It's a line item, but it just doesn't move. Clearly, not the case here. And just if you were to kind of briefly summarize your go-to-market strategy there and why you think it's distinctive versus maybe more traditional bank wealth offerings?

Well, it took a long time to get here. The wealth management business is a tough business. And every time we thought we'd be there and need another piece. Finally, about last year, they said, all the pieces are here. I feel like (inaudible) talking about the bears at that time. Scared the hell out of me, but they've been able to go and build and grow.

I'd say their approach to market is kind of the same as ours. It's high touch, high tech. Seems to be resonating well with the clients. Our name is out there a little bit more. Our size helps, our reputation is out there and we're doing a better job of cross-selling. So I don't know we do anything different other than the fact that our products are good, our service is good, our name is good and that's how we're doing it. So one brick at a time.

Our next question comes from Chris McGratty of KBW.

Ed, you mentioned -- Dave mentioned the 3% NIM by the end of the year. I'm interested -- if the futures is right. I'm interested in what assumptions you may be making on just the mix of your balance sheet, given the elevated cash in that assumption?

Chris, it's Tim. The assumption is that we deploy a little bit of liquidity and that we continue to get the growth that we've talked about, part of it is obviously pure interest rate help as the various indices move, but they're pretty simplistic assumptions.

And the thing I think we just have to be careful is that there are bunch of deposit indices and there's competitors in the mix and a number of other factors. So we just want to be a little bit cautious in terms of forecasting what that might look like, but it's -- we're clearly positioned to benefit from rates up and expect that we'll get a nice lift.

Okay. But that doesn't assume liquidity levels go to pre-pandemic levels. That's just a slow gradual remix, right?

Yes. It's not assuming like all -- if you're wondering if it assumes all $6 billion of excess liquidity (inaudible) to work, it's not doing that. It's a slow, steady in investment.

Yes, sounds good. Maybe another question, more maybe for Ed. You guys have had a good history of having a pulse on big changes in the market. I remember the financial crisis, you guys pulled back. Everything is going really well right now. What's the wall of worry if there is one?

I don't know, we worry about everything. We're basic old-time bankers. That's why at the end of my initial comments above, you have to look at how we responded to everything from The Great Recession to the pandemic to also the 9/11. And during that period of time, we've been able to maneuver and move very, very quickly to react to that.

I think that's the same situation here. We don't know what the market is going to give us, but we're going to take what it gives us and not get greedy. We're diversified enough to know that something isn't working. We don't have to do that. We can do something else will be working. So I guess, what I worry about most is, well, the deposits stay, which I'm always worry about that. Loan quality can't be this good for I keep saying that, but we're going to continue to cull the portfolio and might even do another sale or so just to keep the numbers even lower. So I don't know, what do you guys say?

Well, I think we worry when it's rates low for long. I think the bigger concern was, was there a race to the bottom on loan pricing because it's better than Fed funds concept. I think with the perception now that rates are going up, I think people aren't going to want to lock in those low loan rates. But if for some reason we went back to a low for long rate environment, you worry that people just continue to price down the loan products.

But our pipelines and our ability to get loans on our pricing metric -- pricing matrix that we have as far as profitability, we've been able to do it. So you worried about it, but I think that worry is sort of goes away a little bit with rising rates because people don't want to lock in the lower spreads. So let's just hope they increase the rates. But competition is something we would deal with all the time. But as we saw in '06, '07, people race to the bottom on spreads and I was concerned that might happen. But I think that concern is going away now.

Yes. Chris, I maybe would add to what Dave said, I think that the old adage about the worst loans are made in the best of times. It's something that we -- the credit team here is constantly thinking about, which is when there's so much liquidity in the marketplace, you see banks doing irrational things, and we just have to be constantly mindful that there's no loan out there that we absolutely have to do. We have good loan growth. If you just can't get there because somebody else is doing something stupid, you just got to step away. And we think we've made good prudent credit decisions, but it is a very competitive market out there. And just as Ed said, credit can't stay this good forever. And time will tell.

Our next question comes from Nathan Race of Piper Sandler. Nathan?

(Operator Instructions)

Yes. Apologies there. Just going back to the excess liquidity deployment discussion. Just given the greater slope that we've seen in the yield curve of late, is there may be more of a willingness or sense of urgency to maybe put some liquidity work and higher-yielding securities in the first half of this year as opposed to maybe more of a laddered approach, particularly just given the potential for the long end of the curve to flatten out as the Fed raises short-term rates and starts to unwind its balance sheet?

That's a great question. We are going to -- we've begun (inaudible) into it a little bit. We got plenty of liquidity to do it with. So we're going to take our time, make sure that -- as somebody said earlier, make sure those deposits are going to stay. The growth is there. I worry about that a little bit. But we have so many good sources of deposits.

It's not just our retail side, but CDEC, our deferred exchange company produces a lot of deposits. Wealth management produces a lot of deposits. So we have a very good diversified deposit source. But -- anybody else?

No, I don't think there's a rush. I think we're patient, and we've been rewarded a little bit as rates have moved quite a bit in the last month or so and as we said, we're going to deploy some, but I don't think we're going to hurry.

I'd love to use it via loan growth, I mean, and deploy it that way and see where deposits take us, but that's our first choice.

Yes. We'd still like them. Deposits are your inventory. We want to get more and more deposits. I mean I have no problem with bringing on deposits and anytime liquidity, just another lever we can pull when the time is right. So we are very active in terms of getting more deposits from our customers and putting that out just because we have more inventory there.

Yes. And I think, Nathan, I don't think anybody can predict what that yield curve is going to do. So if we invested at all right now, I guarantee the conventional Ginnie Maes to go up 50 basis points the next quarter. So we're going to ladder it and see what the market gives -- I mean the market expectation for rate increases are completely different now than they were 3 quarters ago or 2 quarters ago. So I don't think anybody knows what it does. So we will take it over time, and we'll be prudent.

But as Tim says loans are the first choice and then we'll ladder into this liquidity and see where it takes us.

I personally believe in this inflation, as we said all along, is not transitory, it never was. If you're closer to a spiral that anybody wants to tell you who you are, I think quarter or half point is going to cut it personally or even a full point is going to stop right in. Way too much liquidity, the government's way too involved. So I actually believe that you're going to see even higher rates that are coming down the pike. But we will -- they are forecasted, but that's my personal opinion.

We got to just be very prudent how we lay the money out. You don't want to be a lay it all out and make a bet that way. But we're so well positioned right now to take advantage of whatever the market brings us. We're in pretty good shape. So we're going to leg into it and the timing will be somewhat does the cattle, but we'll see.

It's a great lever to have, to pull.

Yes.

Yes, definitely. I appreciate that color. On a separate topic, just thinking about mortgage-related expenses and just kind of the outlook along those lines this year. Perhaps for Dave, if mortgage volumes are maybe half of the levels that we saw in the first quarter of 2021, is it as simple as kind of looking at the incentive comp line and assume that is also reduced by half? Or have there been other kind of implementations within the mortgage cost structure that could lead that expense bucket to be maybe a little more variable than what we've seen in the past from you guys as the volumes come down?

Well, I don't think it's exactly linear. I mean the spreads in the first quarter of last year were a lot higher. So is there a spread compression that revenue goes away, but your commissions are based upon units not based on revenue. So I don't think it's linear because if you got into the higher production quarters, margins were much, much wider.

And so it's not quite linear, but if you sort of normalize the production margins, then I think you get closer to your concept. But I think you have to take into account that under Dodd-Frank, you can't pay commissions based on the revenue you generate. You have to pay commissions based on the units. And so I think you have to normalize your revenue margins.

Which is why we always push to the net overhead ratio. It's hard to know where they're going to be. But the net overhead ratio at current levels are one we're expecting $130 around.

We are 121 this quarter, but our target is really sort of the 130 to 135 range.

Yes. So If mortgages pick up, we -- that number will go down.

But the other thing you can think of, Nate, is MSR is going to play into this, too. So if rates go up and our volume is down, MSRs are going to -- valuation is going to go up. And our servicing portfolio continues to grow, and so we'll have additional revenues off of that, too. But -- so lots of moving parts there.

I know you guys don't like to count the MSRs nor do we, but fact is it does add the earnings and capital and does add -- does help on the way up and that hurts on the way down. So…

I guess I'm just kind of going back to a more normalized mortgage environment maybe in the first quarter of 2020. Incentive comp was $32 million or so. And if you guys do a similar level of volumes in the first quarter of this year, is that kind of a good level to go off? Or has there been any kind of nuances within your mortgage structure that could cause those expenses to be more variable than what we've seen in the past?

No, I don't think we've really changed our comp structure there. But you have to remember the incentive line in the press release includes bonuses and long-term incentive comp and commissions for wealth and mortgage and everything else, it's not just the mortgage line.

(Operator Instructions)

Our next question comes from the line of Michael Young of Truist Securities.

Happy 30 years, Ed. I want to call back a couple of your references and frame that into question. So (inaudible) starting off the year this year, maybe pushing more of a beachball up the hill, what areas do you want to sort of reinvest in as some of the higher rates kind of pull through and really benefit the earnings stream?

Well, we never stopped investing in the business. I mean we're a growth company, you have to invest in the business. We've always kept earnings growth, tangible book value growth in mind. So we continue to invest in the digital channels. We started that about 3 years ago. They have not done a very good job of explaining to you how much we spent, but it's been a lot of money we spent to get out there. The -- it's working because all the Greenwich Awards we won, as you can see in the earnings release. Come June, we're going to roll out a major component of DeepBlue which is full remake of the individual or the retail digital stuff.

We're in great shape to do that. But stuff is expensive. So we do monitor. We do -- we think we'll be fine. We care, we prioritize nicely. But robotics is something we're looking into, a lot of all our different businesses. It's -- you take -- you can take some of these (inaudible) procedures we go through and make them nonpeople, which should keep the people cost down and add to productivity.

We'd always look for other businesses that we get into. Added a couple of this year, smaller ones. We'll continue to do that. Diversification is still very important on both the deposit and the asset side. So we will look for other deposit sources and loan products that get out there. And our people, we'd like to keep our people happy. So -- miss anything, Dave?

No, I think that's good.

EpiPens? You're going to get some EpiPens for me?

Many EpiPens. I like poking them.

Perfect. And then my second question is just a follow-up on kind of the liquidity management asset. If we look back to like 2018, as rates were rising and reaching higher levels, it was more of a mid-teens kind of percentage of earning assets versus 23% today. And was yielding somewhere around 2.7% versus 1.09% today. So is there anything structurally changed either within the company or within the market that would prevent it from getting back to sort of those levels if we were back into that sort of rate environment in a year or 2 years from now?

It really all depends on loan growth. We always ran 85% to 90% loans to deposits. Time we got overnight, we were 92% or 93%. It made us comfortable, made other people happy. But you get to 85% or 90% loans to deposits that would bring us back down to a little bit lower levels in terms of the overall liquidity portfolio.

And I say we're about 3 years duration on all of our liquidity, including that money, including the overnight money we have. We usually close to – (inaudible) 6.5 years. So that's kind of going to be the basis of the deployment is love to get the loans back to 85% to 90%, which is our target range, but then invest after that. Does that makes sense?

Yes. No, I think it does. Just real quick on the duration you were saying at 6.5 years now. Is that?

Yes. Look historically, that's what we've been at. We're at 3, we're a little over -- we're at 3.1 now. So plenty of room to grow.

Our next question comes from Russell Gunther of D.A. Davidson.

I just have 1 follow-up on the overhead ratio discussion. So the commentary of a 120 moving towards 130 to 135, that longer-term target as mortgage normalizes. As we overlay the asset sensitivity discussion and that glide path to a 3% margin, I mean, in that scenario, do you think you can sustain around current levels or even improve upon? Or are the franchise investment in growth mode still likely to take us to that 130-ish range?

Yes. Well, the 130 doesn't really get impacted by margin because the net overhead ratio is noninterest income minus noninterest expense, and that take that result divided by average assets. And so we -- that's how we sort of break down as we look at managing the company. You manage your margin, you manage your provision cost and then you manage your net overhead sort of ratio, which is non-margin related. So the increase in rates other than potentially reducing mortgage production doesn't really have an impact on the net overhead ratio.

So we've been 120, and we're 120 this quarter with a relatively softer -- seasonally softer mortgage volume. So -- but that included an MSR adjustment. If you take that MSR adjustment out, you're up closer to 130. So the 130 sort of is today's sort of environment without an MSR benefit. And we think as we continue to grow, we should be able to uphold that or improve upon it as we get operating leverage. But a rise in rates doesn't necessarily directly impacted net overhead ratio.

If you think back it was -- 1.5% was our net overhead goal. We've been able to get more leverage into the system as we've been able to grow. And so down to 130 to 135 is not bad. That's kind of leverage we picked up by being able to handle more assets under that expense base. So as we continue to grow, next year, we came in -- not hypothetically, I don't know what will happen, but like $60 billion is not going to happen, but I would expect that moving down even more as you get more and more leverage out of it. But we shall see.

Yes. So I think the short answer is -- the only thing the rates impact on the net overhead ratio, generally speaking, is if the mortgage rates go up, then the mortgage servicing right is going to gain in value and you're probably going to put pressure on your originations. And so you just have to take that into account.

No, I appreciate it, guys. That's a great explanation. And then maybe ask a different way on the -- in that 3% margin range, do you expect to be able to demonstrate overall positive operating leverage in '22, from an [efficiency] perspective?

Yes. Yes.

We have a follow-up question from Brock Vandervliet of UBS.

Just on mortgage, I was looking through the press release here and half the volume was refi. I'm assuming that should be falling pretty fast here given the move in rates. Are you trimming expenses in that segment preparing for heavier sailing or haven't you moved in that direction yet?

Yes. We've been able to reduce staff in the mortgage area. Well, they don't show because we utilize them in a different area. Our premium finance Life business is growing so fast we needed to get some help. But we got really good people. We like to keep them involved, but we are monitoring mortgage costs.

We want to keep that fixed variable concept going. In other words, lower the fixed expense give more variable expenses. And we're accomplishing that, I believe, and we'll go from there. But -– yes, looking at all the time.

And I think, Brock, in the first quarter, we're probably thinking 60%, purchase -- 60%, 65% purchase and refi is ticking down. But even though some of the potential borrowers aren't in a position to do a refi just because of lower rates, we are seeing some cash out refis. It is a big part of the refi volume now. So people kind of using the 30-year product as they're home equity product of old.

And so that's keeping that refi volume up a little bit because there's a fair amount of cash out refis going on and people are willing to maybe even do it at a little bit higher rate because it's a 30-year AM on the loan versus a home equity line, which should be a lower AM and they keep their payments down. So we're seeing a lot of cash out refis.

Yes. You're finally within place you're going to see -- obviously, home values continue to go up, and people will go back to that pattern of they always -- and in the old days, if you look at the pattern they get a mortgage from a home equity line. We (inaudible) equity line, pay out home equity line with a new mortgage and go from there. I would imagine we're kind of getting into that period of time. That's kind of the inflationary way to do it, I guess.

Okay. And I noticed the MSR market is about 112 basis points where you're carrying that MSR asset. Just for context, back in '18 or so before rates started coming down, where was that roughly? I'm just trying to gauge what kind of ceiling we could have on that mark?

Brock, I don't have that in front of me. There was a time where those numbers were in the 130 range. So I don't know if that was 2018 or not, but they certainly could go up higher than this.

Yes, 130 to 140 makes sense. And we've got a hell a lot more than we had back then. So…

At this time, I'd like to turn the call back over to Edward Wehmer for closing remarks. Sir?

Thank you, everybody, for listening in. We'll give you our best efforts going forward. We'll continue to take what the market gives us, not get greedy, don't be stupid, do the right thing like we've always done. And again, hats off to our staff who have been through hell and back to make this happen. They do a wonderful job and keep the customers happy. And talk to you in a quarter. If you have any questions, please don't hesitate to call any of us on the call. Thank you very much. See you in the -- see you in April.

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