Earnings Call
Wintrust Financial Corp (WTFC)
Earnings Call Transcript - WTFC Q4 2021
Operator, Operator
Good morning. 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 references to both the earnings press release and 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 would now turn the conference call over to Edward Wehmer.
Edward Wehmer, Founder and Chief Executive Officer
Good morning, everybody, and welcome to our fourth quarter 2021 earnings call. With me as always are Dave Dykstra, Dave Stoehr, Kate Boege, Tim Crane and Rich Murphy. We have the same format as we usually do; it seemed to go pretty well earlier in the year. I will give some general comments regarding our results, turn it over to Tim for more detail on the balance sheet, turn it over to Dave Dykstra for other income and expense, and Rich Murphy will follow up with discussion on credit. I'll come back for some summary comments about the future and then we'll have time for questions. I think you already know 12/27/21 marked the thirtieth anniversary of us opening our first bank. Little more than $6 million in capital was raised from friends, neighbors, and family, and we embarked down the journey with absolutely no grand plan here. Our model is a simple revenue-type community bank marketed by high-touch banking combined with high-tech capability that serves people and businesses with credit reserves. All along at the center of our culture are four pillars: our shareholders, employees, customers and the communities we serve. We have not wavered from that commitment in the 30 years we've been in existence. Of course, with this anniversary we've been asked many times, and we are most proud of Wintrust. The 5,400 employees who make up Wintrust — I'm pretty proud of that. We have about $50 billion in banking assets and about $35 billion in managed assets, which we are proud of as well. The record growth we have delivered over the years is notable. In fact, our stock price has performed well, and we're proud of that too. I'm very proud, however, that one of the main drivers of our success is that our culture has endured over that period. A culture dedicated to doing the right thing for our constituents all the time: take the blame, share the favor, avoid that shame, and enjoy the game. Our culture, in a nutshell, has endured even though we have grown beyond our wildest dreams. So, now for a look back and then let's talk about the quarter and year-to-date results. Another very successful quarter; prior quarters we referred to around $1 billion quarters, but this was a $2 billion quarter. Assets grew $2.3 billion to $50.14 billion, a 22% growth or $5.1 billion versus 12/31/20. Core loans, plus PPP and loans held for sale, went to $34.2 billion, up $2 billion for the quarter, 16.6% growth or about $4.9 billion. Deposits were $42 billion, up $2.1 billion for the quarter, 13.5% or $5.2 billion versus 12/31/20. Loan growth was enhanced by the approximately $578 million from the Allstate agency portfolio acquisition; Tim will talk about this a little bit more. On the balance sheet front, our strategy, which we adopted to serve through the pandemic beginning in April 2020 of growing the portfolio and enhancing our interest rate sensitivity positioning, has paid off in spades. Mortgage and PPP loans took us through the depth of the pandemic. Our growth in core loans more than replaces earnings power lost in lower rate periods, and these assets are extremely well positioned for higher rates that appear to be here finally. In earnings, we recorded a record year of $466 million or $7.50 per diluted common share. The full quarter recorded income was $99 million or $1.58 per diluted common share. The change from the third quarter was primarily due to a positive provision of $9.3 million as opposed to a negative provision of almost $8 million. The positive provision was brought about by the acquisition and the fact that our loan growth has been robust. Net interest income was up $8.5 million compared to Q3. Core net interest income was up $15.5 million, as PPP contribution declined by about $7 million. Earning asset growth, basically loan levels, and a five basis point decline in deposit costs measured quality changes. Loan pipelines remain consistently strong; we started 2022 with a nice strong start as ending loan balances were $1.36 billion above quarter average balances. Loan utilization was up — that's kind of a technical term we use around here — and Murphy will talk about that in detail. We remain over $1 billion of loan growth and loan utilization has returned to more normal levels. NIM was down slightly, 4 basis points, due to additional liquidity; you can expect us to begin addressing our excess liquidity. We'll spread our liquidity portfolio over longer durations, closer to three years and in many cases closer to six-plus years. We'll be prudent about our investment timing. Credit quality got even better, believe it or not; Murphy will cover that in his credit review. However, I'll note that we did conduct an asset sale noted in the release. We will continue to address potentially problem assets as soon as possible. Pre-tax, pre-provision income was up approximately $5 million to $146.3 million. We expect to perform nicely in 2022, especially as rates rise, and I'll comment more on that in my closing remarks. 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. Fee run rates grew to an annualized $107 million in the fourth quarter of 2021. We're seeing momentum and expect continued growth in this area. I'll turn it over to Tim to take us through the balance sheet.
Timothy Crane, President
Great. Thanks, Ed. I'd like to highlight a couple of balance sheet items as well as comment on a couple 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%. Ed mentioned that 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 totaling $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 non-interest-bearing deposits and the rest at very low cost. As a result, interest-bearing deposit cost declined to 24 basis points. While we believe there is some continued room for decline, those changes will be smaller going forward as the majority of deposits have repriced during the low-rate cycle. On the investment front, we remain very liquid with approximately $6.1 billion in liquidity at year-end and our securities balance was essentially flat. While I expect we will begin to deploy some of the liquidity in the first part of 2022 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. Anticipating a question or two about rising rates, we have 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. A couple of highlights reinforcing earlier comments: approximately 80% of our loans reprice within a year — you can see this on page 12 of the supplemental presentation. Our spreads — our loan yields versus our deposit cost — improved for the third straight quarter. Securities yields for many instruments are 20 to 50 basis points higher than they were even a month ago. While it's slightly more complicated given loan floors, loan indices, deposit betas and competitive actions, we believe each 25 basis point change in rates is worth about $40 million to $50 million in pre-tax net interest income on an annualized basis. You'll see this referenced in the second paragraph on page two of our press release. One thing to add is that early in the cycle deposit costs tend not to rise as rapidly as they may following subsequent increases. You can obviously do the math, but our net interest margin for the quarter was down four basis points, attributed solely to the continued impact of excess liquidity. Absent that excess liquidity, our margin would have actually expanded by two 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, the consumable margin could 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 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. We will continue to improve 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 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.
David Dykstra, Vice Chairman and Chief Operating Officer
Great. Thanks, Tim. I'll cover the noteworthy income statement categories, starting with net interest income. Some redundancy with Ed and Tim's comments here, but we'll 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 a 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 assets declined in the fourth quarter compared to the third quarter 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 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 one basis point. As Tim mentioned, the margin was affected by this excess liquidity in our balance sheet and rates are higher than they were a month ago. As we begin to deploy some of that liquidity into the market, we expect net interest income and net interest margin to benefit, although we'll continue to be cautious in 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 $2.0 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 in the provision were improvements in the macroeconomic environment and in loan portfolio characteristics during the quarter, including improving loan risk rating migration. Rich will cover credit quality and additional detail in just a couple minutes. Turning to other non-interest income and non-interest expense categories: In the non-interest 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 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 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 2021 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 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 what those may be at the end of the first quarter, but based on current market rate conditions, it would point to a higher valuation, although there's still a lot of time remaining in the quarter. Other non-interest 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 two 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 hold to support our CRA purposes. Non-interest expense stayed relatively stable over the past five 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 it's important to put 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 2021 compared to the third quarter. The decline is primarily related to a $7.1 million lower compensation expense associated with 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, an increase of $1.7 million compared to the prior quarter. The increase is primarily due to accelerated depreciation related to the reduction in the useful life of certain software 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 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 exceeded the aggregate cost of 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. It's important to note that we've been aggressive in liquidating OREO assets. At the end of the year the balance 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 discussed, no other expense category had a change of more than $900,000 and all those other expense categories in 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 one 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% for both the third and the fourth quarters of the year. In summary, the core fundamentals are strong with growth in pre-tax, pre-provision net income, robust loan and deposit growth, increasing net interest income despite sizable PPP loan reductions, another record wealth management revenue quarter, seasonally adjusted strong mortgage banking revenues, a relatively stable net overhead efficiency ratio, strong pipelines and fantastic credit metrics. With that, I'll turn it over to Rich.
Richard Murphy, Vice Chairman and Chief Lending Officer
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 were up $387 million; core C&I loans were up $392 million; first insurance funding 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, or $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 outstanding balances during the past two 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 last year to $39,000 and over $40,000 in the fourth quarter. We believe these levels will continue into 2022. 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 peers. 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. Non-performing 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 which were non-performing. 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 that was a result of the loan sale that I just discussed. 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 will turn it back to Ed to wrap up.
Edward Wehmer, Founder and Chief Executive Officer
Thanks, Murphy. Good job. As I mentioned at the beginning of the call, our strategy has been to grow the balance sheet during this period of low rates, use our structural hedges like mortgages to both preserve value and protect net interest income until such time as balance sheet growth can offset the income loss due to lower rates. PPP loans were an unexpected benefit to add onto this strategy. All of the above should be accomplished by enhancing our interest rate sensitivity position in anticipation of higher rates, which appear to be on the near-term horizon. We will more than cover PPP loan run-off with core loans. It's fair to say that to date the strategy has been accomplished given the excellent growth we have put up over this period. The Allstate portfolio purchase aside, the growth has been organic. The acquisition market appears to have higher valuations and expectations; we 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 yielding great organic growth. We continue our historical approach to potential deals, but they have to make sense. You all know we are definitely allergic to earnings-at-book value dilution. We are extremely well positioned to grow as the market allows. Credit metrics are at very low levels, and pipelines remain consistently strong across the board. We expect this to continue given the market disruption that is taking place. The asset base continues to serve us well, and if line utilization returns to historical levels we could see well over $1 billion of additional loan growth. We expect wealth management revenue and assets to continue on their current trend; mortgage servicing should continue to be meaningful despite lower contributions in 2021. As Tim said, every quarter-point change in rates should add roughly $40 million to $50 million on an annualized basis to pre-tax net interest income. We're very much looking forward to seeing volumes return in some areas that have been subdued for a long time. We have the ability to put more of our liquidity to work; we're already beginning to act on that strategy. We're and have always been a growth company, and that has not changed. I would draw your attention to the charts on pages 3 and 4 in the release — the CAGR indicated on those charts shows our vital statistics and the value delivered to shareholders over the last ten years. Numbers would be similar if you went back the full 30 years of our existence. Compared to many banks in the country, I'm very proud of our entire team for making this happen. Thanks for joining us on this 30-year milestone. I'll turn it over for questions.
Operator, Operator
Our first question comes from the line of Jon Arfstrom of RBC Capital Markets. Your line is open.
Jon Arfstrom, Analyst (RBC Capital Markets)
Thanks. Good morning, guys.
Edward Wehmer, Founder and Chief Executive Officer
Hi, Jon.
Timothy Crane, President
Good morning, how are you, Jon?
Jon Arfstrom, Analyst (RBC Capital Markets)
Good. Congrats on the 30 years and $50 billion. It's notable. Maybe Tim or Murphy, 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?
Richard Murphy, Vice Chairman and Chief Lending Officer
No, I don't think so. If you look back at prior year-ends, 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, the growth goes across categories and there was just a big rush also in the life finance area to close deals before the end of the year. So I don't think it's atypical for year-end, but it was very pronounced this year. Earlier in the quarter, pipelines were strong but weren't materializing, and then in December it really started to ramp up quite a bit. I think it's a function of that 12/31 deadline, the holidays, and everyone pushing things across the line. The other factor was capacity constraints from attorneys and appraisers and others, so there was a definite push at the end to get things through the pipeline. Tim, would you add anything?
Timothy Crane, President
No, maybe a handful of people thought they were going to complete some sort of transaction for tax-related reasons and tried to get it done before year-end, but that turned out to be a smaller factor.
Jon Arfstrom, Analyst (RBC Capital Markets)
There's really no change in the portfolio — you're not seeing any — you are not seeing any…
Timothy Crane, President
Lots of things just began to close in the first quarter so…
Richard Murphy, Vice Chairman and Chief Lending Officer
Sorry, John, we missed you there.
Jon Arfstrom, Analyst (RBC Capital Markets)
Yeah, just confirming: you're still saying no material change in the pipeline despite that strength at year-end?
Richard Murphy, Vice Chairman and Chief Lending Officer
Yes.
Jon Arfstrom, Analyst (RBC Capital Markets)
Tim, your comment on deposit costs not rising early in a rate-hike cycle. At what point do you start to think about that? Or said another way, how much runway do you think you have in terms of your deposit base?
Timothy Crane, President
Jon, it's hard to tell because the market has a lot of liquidity right now. Unlike prior cycles where loan-to-deposit levels might have been higher, we'll have to see. We've seen very little deposit competition so far and given the very low starting levels, betas will obviously work themselves up over the cycle.
David Dykstra, Vice Chairman and Chief Operating Officer
This is Dave. If you look at the prior cycle, we didn't see much change in deposit costs in the first two rate hikes by the Fed, and you really only started to see pressure around the third hike. We have to see the size and timing of hikes and what competition does. But as Tim said, with all the liquidity in the market, we wouldn't expect deposit costs to rise very quickly. Betas could lag a bit given all the deposits in the system.
Jon Arfstrom, Analyst (RBC Capital Markets)
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 MSR valuations. Is that the right way to look at it?
David Dykstra, Vice Chairman and Chief Operating Officer
Yes. Or another way is take the $53 million of total mortgage banking revenue and back out the $6.7 million MSR adjustment and use that as your baseline.
Jon Arfstrom, Analyst (RBC Capital Markets)
Okay. Good. Thanks guys.
Timothy Crane, President
Just a point on that: we think actual closed originations will probably be down just a little in the first quarter, but we think the pipeline will build by the end of the quarter. So if that happens, lock-adjusted origination volume should be fairly similar and revenue should be fairly similar.
Operator, Operator
Thank you. Our next question comes from David Long of Raymond James. Please go ahead.
David Long, Analyst (Raymond James)
Good morning, everyone.
Timothy Crane, President
Good morning, David.
David Long, Analyst (Raymond James)
You guys talked a little bit about the strong loan growth in the quarter, but I'm curious if I can get a little more color: are these new relationships, is utilization upticking, where are these new loans coming from?
Richard Murphy, Vice Chairman and Chief Lending Officer
Utilization is up a little bit. Businesses are doing better and utilization is very real. We've probably got a ways to go — line utilization is around 40% net of mortgage warehouse lines, so there's still headroom. In general, most of this growth is coming as a result of market disruption in the C&I space. We've become the bank in Chicago to go to: you look at what's happened with other institutions and some changes there where decisions aren't being made locally anymore. We've always positioned ourselves as the local alternative to bigger banks, and people like being able to meet the people making the credit decisions. It's a key differentiator, and many of these are new relationships. For example, the life finance portfolio is primarily new relationships where people like the product and how it fits into their estate planning; we've been capturing market share there. So, yes, much of it is new relationships.
David Long, Analyst (Raymond James)
Got it. And then on the deposit side: you had $2 billion in growth in the quarter. Are these sticky deposits? Do you expect these to stay on? Do you expect runoff at any point once rates start moving higher?
David Dykstra, Vice Chairman and Chief Operating Officer
Well, it's a mix. There's a lot of demand right now. We can't be certain whether people will pull money out; some parked cash may be for tax obligations, for example. That's why we're being a bit cautious in how we invest our excess liquidity. We have a diversified deposit base and will watch behavior closely and react appropriately.
Timothy Crane, President
Yes, there's probably some tax-related activity in April as you noted. People have parked money for tax obligations. We watch it carefully and will react appropriately.
David Long, Analyst (Raymond James)
Good. I may have missed this with Dave’s question, but were there any merger-related charges associated with the Allstate portfolio purchase that were baked into operating expense in the quarter?
Richard Murphy, Vice Chairman and Chief Lending Officer
Yes, there were a few legal fees associated with the transaction, but it was a very small amount, less than $0.5 million, so nothing significant.
David Long, Analyst (Raymond James)
Great. Thanks guys. Appreciate it.
Operator, Operator
Thank you. Our next question comes from Terry McEvoy of Stephens. Your question please.
Terry McEvoy, Analyst (Stephens)
Hi. Good morning. How are you?
Timothy Crane, President
Very good, Terry. How have you been?
Terry McEvoy, Analyst (Stephens)
Good, thanks. I went back — it took a decade to grow your deposits $2 billion; you crossed that mark in 2001 — whereas you did that just in the last quarter. Congrats on the fourth quarter. A couple questions: how are you thinking about expense growth in 2022? There's a lot of talk about wage inflation, but on the flip side, a softer mortgage market could impact some of your salaries and benefits.
Edward Wehmer, Founder and Chief Executive Officer
Dave.
David Dykstra, Vice Chairman and Chief Operating Officer
Yes, Terry, that context is correct. We try to focus on the net overhead ratio because mortgage businesses are variable — when mortgage revenue goes up and down, expenses associated with commissions and incentives go up and down. We look at operating leverage from that perspective. The net overhead ratio was in the low 120s for the last two quarters. We expect to hold that line; if mortgages go down it’s possible the net overhead ratio trends up into the 130s. Our target for net overhead ratio is still around the 130 basis point range. There is pressure on wages out there, but if mortgage volumes are down those commission-related expenses will be lower. We are also investing in robotic process automation in some areas to reduce the need to add positions as we grow. Digital enhancements should reduce processing time and help with productivity. So yes, there's some pressure, but there's also leverage in the system and if rates increase that will more than offset pressure on those line items.
Terry McEvoy, Analyst (Stephens)
Thanks for that, Dave. And as a follow-up: your commentary on bank M&A — a few years ago you were looking at larger deals. Is the message here that you'll take what the market gives you if something pops up, or is there a bias toward a larger transaction? As you think about markets, would you be willing to expand into a newer market?
David Dykstra, Vice Chairman and Chief Operating Officer
We remain opportunistic on acquisitions. I can't imagine us doing a very large deal right now; we're generally allergic to dilution. But we can imagine doing deals that expand within markets or neighboring markets — northwest Indiana, additional parts of Wisconsin and Illinois are in our bucket list. We still have room to grow in Chicago with only about 9% market share, so there are many opportunities to expand organically. We'll take what the market gives us, but we'll be very selective.
Terry McEvoy, Analyst (Stephens)
Appreciate that. Thank you.
Operator, Operator
Thank you. Our next question comes from Ben Gerlinger of Hovde Group. Your line is open.
Ben Gerlinger, Analyst (Hovde Group)
Good morning, guys.
Timothy Crane, President
Ben, good morning.
Ben Gerlinger, Analyst (Hovde Group)
Curious: you mentioned that every rate hike equates to about 10 basis points on margin. Since you guys are asset sensitive, is any part of that 10 basis points a delayed effect? For example, if the market prices a hike in March, would you see that 10 basis points in the second quarter or is it immediate in the quarter following the hike?
David Dykstra, Vice Chairman and Chief Operating Officer
What we pointed to is $40 million to $50 million of pre-tax NII on an annualized basis for each 25 basis points change in rates. How fast that builds depends on competition and other dynamics. As Tim indicated, deposit costs may lag due to the large amount of liquidity in the market, which could front-load the benefit to earning assets a bit. But there are many moving parts: the slope of the yield curve, loan floors, deposit betas, and so on. We'll refine the estimate as rates move, but the general guidance is appropriate now.
Ben Gerlinger, Analyst (Hovde Group)
Got it. And then on hiring and talent costs: with industry-wide increases in salaries, how do you approach talent acquisition and the associated costs — do you wait to see revenue from new hires, or do you invest ahead of revenue?
Timothy Crane, President
We believe we're an attractive destination for bankers and revenue producers. There is some wage pressure, but that's not atypical. We're generally hiring commercial bankers; these hires help us grow the company. On the back-office side, we're investing in automation and systems to limit the number of additional people needed as we scale. There will be some impact, but we don't expect it to be outsized.
Ben Gerlinger, Analyst (Hovde Group)
Gotcha. Appreciate it. Thanks.
Operator, Operator
Thank you. Our next question comes from Brock Vandervliet of UBS. Your line is open.
Brock Vandervliet, Analyst (UBS)
Good morning. Thanks for taking the question. Going back to deposit trends: in line with other banks, you vacuumed up a lot of deposits since COVID started. Have your bankers started engaging with large pools of deposits to get a sense of their stickiness? How are you assessing that?
Edward Wehmer, Founder and Chief Executive Officer
Well, Tim is in charge of stickiness.
Timothy Crane, President
It's a good question, Brock. Our structure is well positioned to reach out because each of our community banks can contact their largest clients to determine intentions. As we did that in the fourth quarter, we didn't see large volatility reported. Some of the deposit growth is consumer-driven, related to new account activity and stimulus payments. We're pleased to be at about 34% to 35% DDA, which is helpful and is related to the addition of new clients. We'll watch for volatility, but absent that noise the deposit growth has been very strong.
Brock Vandervliet, Analyst (UBS)
Got it. Separately, on wealth management: many community banks struggle with it, but it seems to be a strong growth area for you. Briefly, what's your go-to-market strategy and what makes it distinctive versus more traditional bank wealth offerings?
Richard Murphy, Vice Chairman and Chief Lending Officer
We invested a lot of time building the wealth business. Over the last year, we feel all the pieces are in place. Their approach is similar to ours: high touch and high tech. Our name and reputation help, and we do a good job selling the products and services. The quality of the product and service and our reputation have driven growth — it's been a step-by-step build and practice.
Brock Vandervliet, Analyst (UBS)
Okay. Sounds good. Thank you.
Operator, Operator
Our next question comes from Chris McGratty of KBW. Please go ahead.
Chris McGratty, Analyst (KBW)
Morning. You mentioned 3% NIM by year-end if futures are right. I'm interested in the assumptions on balance sheet mix given elevated cash in that assumption. Is that assuming liquidity returns to pre-pandemic levels or a gradual mix shift?
Timothy Crane, President
Chris, the assumption is that we deploy some liquidity and continue to get loan growth. Part of the lift is pure interest-rate help as indices move, but there are other complexities. We want to be cautious forecasting. We're clearly positioned to benefit from rising rates and expect a nice lift. The assumption does not require liquidity to go fully to pre-pandemic levels; it's a gradual deployment.
David Dykstra, Vice Chairman and Chief Operating Officer
Yes, it's not assuming we invest all $6 billion of excess liquidity at once — it's a slow, steady investment approach.
Chris McGratty, Analyst (KBW)
Thanks. Maybe another question for Ed: you've navigated big changes in the market before; is there any particular worry now?
Edward Wehmer, Founder and Chief Executive Officer
I don't worry excessively. We're full-time bankers and have reacted quickly through the financial crisis and the pandemic. We'll take what the market gives us and be prudent. My main concern is deposit stability, which I'm always mindful of. Loan quality can't stay perfect forever, but we'll continue to call the portfolio and address issues proactively, possibly with asset sales if necessary. Overall, we're diversified and can pivot if parts of the market become challenged.
David Dykstra, Vice Chairman and Chief Operating Officer
I think the bigger concern when rates are low for a long period is a race to the bottom on loan pricing. With the perception that rates are rising, that concern is lessened. Competition is always present, but the worry from 2006–2007 about excessive spread compression is easing.
Richard Murphy, Vice Chairman and Chief Lending Officer
I'd add that credit teams constantly think about the old adage that the worst loans are made in the best of times. With so much liquidity and competition, we must be mindful and disciplined. There is good loan growth, but if others are doing irrational things, we simply step away. We think we've made prudent credit decisions, but credit can't remain perfect forever.
Chris McGratty, Analyst (KBW)
Great color. Thank you very much.
Operator, Operator
Our next question comes from Nathan Race of Piper Sandler. Your line is open.
Nathan Race, Analyst (Piper Sandler)
Appreciate you taking the questions. Going back to excess liquidity deployment: given the greater slope in the yield curve, is there more urgency to put liquidity to work in higher-yielding securities in the first half of the year rather than a laddering approach, particularly given potential for the long end to flatten?
David Dykstra, Vice Chairman and Chief Operating Officer
Great question. We've begun to lean into it a bit. We have plenty of liquidity to work with, so we'll take our time. We want to ensure deposits are sticky and consider other funding sources. We have diversified deposit sources including retail, wealth, and others, so we're comfortable taking a measured approach.
Timothy Crane, President
I don't think there's a rush. We've been patient and have been rewarded as rates moved up recently. We'll deploy some, but we won't hurry; laddering and measured deployment is the prudent approach.
David Dykstra, Vice Chairman and Chief Operating Officer
Deposits are inventory — we like to build them. We are very active in acquiring deposits, which gives us more levers to work with when the timing is right.
Edward Wehmer, Founder and Chief Executive Officer
I don't think anyone can predict what the yield curve will do. If we invested all at once and rates rose another 50 basis points, that would be suboptimal. We'll ladder and be prudent. Market expectations have changed materially over the last few quarters, so we'll act over time.
Richard Murphy, Vice Chairman and Chief Lending Officer
My view is that inflation is not transitory and could lead to higher rates, but we'll be measured about deployment. We're well positioned and will step in when appropriate.
Nathan Race, Analyst (Piper Sandler)
Appreciate that color. On mortgage-related expenses: in a normalized mortgage environment, are mortgage incentive comp and commissions likely to decline proportionally with volumes, or are there nuances that could make expenses more variable?
David Dykstra, Vice Chairman and Chief Operating Officer
It's not exactly linear. Commissions are based on units, not revenue, and margins were wider in higher production periods. So you can't simply scale commissions directly with revenue. Normalize production margins to get closer to expectations, but commissions are unit-based. That's why we focus on the net overhead ratio.
Nathan Race, Analyst (Piper Sandler)
Which is why you push the net overhead ratio. What is the target range again?
David Dykstra, Vice Chairman and Chief Operating Officer
We were at 1.21% this quarter; our target is roughly 1.30 to 1.35%.
Nathan Race, Analyst (Piper Sandler)
Thanks. Appreciate all the color.
Operator, Operator
Thank you. Our next question comes from Michael Young of Truist Securities. Your line is open.
Michael Young, Analyst (Truist Securities)
Thanks for taking the question and happy 30 years. Ed, as rates pull through, what areas do you want to reinvest in that will benefit the earnings stream?
Edward Wehmer, Founder and Chief Executive Officer
We never stopped investing in the business. As a growth company we have to invest. We continue to invest in digital channels; we're rolling out a major revamp of our retail digital platform in June. These efforts are expensive but necessary — robotics and process automation are other areas to improve efficiency. We also continue to pursue other business lines, deposit and loan product diversification, and invest in people. We're prioritizing investments carefully and expect to be fine.
David Dykstra, Vice Chairman and Chief Operating Officer
Nothing to add beyond that — we'll continue to invest prudently.
Michael Young, Analyst (Truist Securities)
Thanks. Quick follow-up on liquidity and duration: you mentioned duration around six-plus years — is that the duration of your liquidity portfolio now?
David Dykstra, Vice Chairman and Chief Operating Officer
We target about three years on some liquidity, but for certain portfolios the duration is closer to six-plus years. Historically, we run loan-to-deposit ratios around 85% to 90%; if we get back to those levels, we'd reduce liquidity accordingly. Today duration on invested securities is just over three years for the longer-duration component and overall liquidity duration is higher.
Michael Young, Analyst (Truist Securities)
Okay, great. Appreciate it.
Operator, Operator
Our next question comes from Russell Gunther of DA Davidson. Your line is open.
Russell Gunther, Analyst (DA Davidson)
Good afternoon, guys. One follow-up on the overhead ratio: you discussed moving from 1.21% toward the 1.30–1.35% range as mortgage normalizes. Overlay that with assets increasing and a glide path to 3% margin, do you think you can sustain or improve current levels as you scale, or will franchise investments push you toward the 1.30 range?
Timothy Crane, President
The net overhead ratio is non-interest expense less non-interest income divided by average assets, so a rise in rates doesn't directly impact the net overhead ratio except insofar as mortgage production changes. We were around 1.21% this quarter, which included an MSR adjustment; excluding that, you're closer to 1.30%. We think as we grow we can hold or improve the net overhead ratio through operating leverage. A rising-rate environment doesn't necessarily directly affect the net overhead ratio.
Russell Gunther, Analyst (DA Davidson)
In that 3% margin scenario, do you expect to show positive operating leverage in 2022?
Timothy Crane, President
Yes.
Russell Gunther, Analyst (DA Davidson)
Thanks, guys.
Operator, Operator
We have a follow-up question from Brock Vandervliet of UBS. Your question please.
Brock Vandervliet, Analyst (UBS)
Thanks for the follow-up. On mortgage: I noted that half the volume was refinance. That should fall given rising rates. Are you trimming expenses in that segment preparing for heavier scaling down, or how are you moving in that direction?
Richard Murphy, Vice Chairman and Chief Lending Officer
Yes, we've been able to reduce staffing in the mortgage area, although some personnel have been redeployed to other growing areas like premium finance life. We want to maintain the fixed-versus-variable cost balance so we can flex as volumes change. We're monitoring mortgage costs and keeping that flexibility.
Timothy Crane, President
In the first quarter we expect maybe 60% to 65% purchase originations and refi down, but there are cash-out refis which remain a part of the mix. Homeowners are using the 30-year mortgage product for cash-out and equity access, which supports some refi volume even as rates rise.
Richard Murphy, Vice Chairman and Chief Lending Officer
Home values have continued to go up and people will return to patterns of tapping equity via mortgages. You will see some of that in the mortgage mix.
Brock Vandervliet, Analyst (UBS)
I noticed the MSR market was 112 basis points where you're carrying the MSR asset. For context, back in 2018, before rates started coming down, what was that metric roughly? I'm trying to gauge ceiling potential on that mark.
Edward Wehmer, Founder and Chief Executive Officer
I don't have the exact number in front of me, Brock, but there were times when those metrics were in the $130 range. So MSR values could go higher than current levels.
Richard Murphy, Vice Chairman and Chief Lending Officer
Yes, $130 to $140 would make sense historically and could be achievable.
Brock Vandervliet, Analyst (UBS)
Okay, great. Appreciate it.
Operator, Operator
At this time, I'd like to turn the call back over to Edward Wehmer for closing remarks.
Edward Wehmer, Founder and Chief Executive Officer
Thank you everybody for listening. We'll give our best efforts going forward and continue to take what the market gives us. We'll continue to do the right thing as we've always done. Hats off to our staff — they worked hard to make this happen. They do a wonderful job keeping customers happy. If you have any questions, please don't hesitate to call any of us on the call. Thank you very much. See you in April.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.