Earnings Call Transcript - WTFC Q3 2022

Operator, Operator

Welcome to Wintrust Financial Corporation's Third Quarter 2022 Earnings Conference Call. A review of the results will be made by Edward Wehmer, Founder and Chief Executive Officer; Tim Crane, President; David Dykstra, Vice Chairman and Chief Operating Officer; and Richard Murphy, Vice Chairman and Chief Lending Officer. As part of their reviews, the presenters may make reference to both the earnings press release and the earnings release presentation. Following their presentations, there will be a formal question-and-answer session. During the course of today's call, Wintrust management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Actual results could differ materially from the results anticipated or projected in any such forward-looking statements. The company's forward-looking assumptions 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 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.

Edward Wehmer, CEO

Thank you very much. Welcome everyone to our third quarter earnings call. Joining me are Dave Dykstra, Dave Stoehr, Kate Boege, our General Counsel, Tim Crane, and Rich Murphy. We will follow the usual format; I will begin with some general comments about our results, then Tim Crane will provide details on the balance sheet and margin. Dave Dykstra will discuss other income and expenses in detail. After that, Rich Murphy will cover credit, followed by my summary comments and a look at the future, and as always, we'll have time for questions. First, I want to share that I did survive my back surgery. I was out for a couple of weeks, which is likely why our numbers are as strong as they are this quarter. But I'm back in action, and any rumors of my demise have been greatly exaggerated. For the quarter, we reported an income of $143 million, which is a 51% increase from the second quarter. Our diluted earnings per share is $2.21, a 48% rise from the previous quarter. On a pre-tax, pre-provision basis, I believe this is a record for us at $206 million. Our net interest margin has increased to 3.35%. The current assets stand at 1.12%, current equity is at 12.31%, and tangible equity is at 15%. The overhead ratio has slightly increased, which we anticipated; it stands at 1.35% year-to-date but is 1.53% for this quarter. As Dave will explain, we had to provide some additional compensation due to the strong performance this quarter. Regarding credit, Rich Murphy will give more details, but we did have one large credit that accounted for most of the increase, although we also had a couple of larger credits roll off, which we feel are adequately covered; Rich will elaborate on that. Our assets closed at $52.4 billion, while loans increased by over $1 billion, with an increase of $750 million when comparing average to quarter-end. We began this quarter with a strong start, and everything appears positive going forward. Deposits increased by $204 million. We will need to focus on increasing deposits to match our loan growth, and we are currently implementing several strategies for attracting lower-cost deposits. With that, I will turn it over to Tim.

Tim Crane, President

Great. Thanks, Ed. I want to cover a few balance sheet items and some points of interest, including the ongoing effect of rising rates on margin expectations. Ed mentioned the $1.1 billion in loan growth, which amounts to an annualized 12%, and importantly, this growth is well distributed across all loan categories. Additionally, the period-end loan balances were noted to be $735 million higher than the quarterly average, which will positively impact our fourth-quarter results. We are pleased with the stability in loan pipelines and believe that mid- to high-single-digit loan growth annually is a reasonable expectation amid the economic uncertainty. The $200 million increase in deposits has been challenged by the swift rise in rates and actions taken by the Fed, making it harder to gather deposits, and the cost of these deposits is increasing. Interest-bearing deposit costs rose by 36 basis points to 64 basis points for the quarter, and we expect this trend to continue. We also foresee further increases in the Fed funds rate and the rates tied to the bank's loans and deposits. Currently, rising loan yields are outpacing the increase in deposit costs due to our asset-sensitive positioning. Our deposit betas and the cost increase align with our forecasts, and we expect an interest-bearing deposit beta of about 40% across the entire cycle, though we are currently below that figure. Our securities portfolio remained largely unchanged this quarter. At the end of the quarter, our liquidity was solid, with around $4 billion in interest-bearing cash. Early in the fourth quarter, we invested roughly $1 billion of excess liquidity into higher-yielding securities with attractive spreads. As discussed last quarter, about 47% of our securities are available for sale, while 53% are held to maturity. During the quarter, rising interest rates led to an additional tax-adjusted unrealized loss of around $142 million on AFS securities. Nevertheless, our tangible book value of $58.42 remains stable compared to last year. Regarding margin rate sensitivity, although our GAAP position has slightly declined, we remain asset-sensitive and well-prepared to take advantage of continued rate increases. To remind you, approximately 80% by dollar of our loans are set to reprice or mature within a year, which is outlined on Page 7 of the presentation. We still believe that for every 25 basis point hike in the Fed funds rate, there is potential for about $40 million in pre-tax net interest income on an annual basis. Specifically, regarding our margin, Ed referenced the 3.35% margin, which is an increase of 42 basis points for the quarter. Given the rapid rise in rates, we have surpassed the margin improvements previously discussed. Depending largely on competitive pressures for deposits, we believe a margin above 3.70% is achievable in the fourth quarter, potentially approaching 4% during the first quarter, contingent on the timing and extent of Fed funds rate increases. It’s worth noting that, during the quarter, we entered into several interest rate collars, which offer margin protection if rates fall too low again. Capital ratios remained stable or slightly decreased but are still appropriate based on our risk profile. As mentioned last quarter, with increasing rates and more typical loan growth, we expect the company’s earnings will lead to organic capital level improvements in the upcoming quarters. Overall, it was a solid quarter. I'll now turn it over to Dave.

David Dykstra, Vice Chairman and COO

All right. Thanks, Tim. I'll cover the noteworthy income statement categories, starting with net interest income. For the third quarter of 2022, net interest income totaled $401.4 million, that was an increase of $63.6 million compared to the prior quarter and an increase of $114 million compared to the third quarter of ‘21. The $63.6 million increase in net interest income compared to the prior quarter was primarily due to an increase in the net interest margin and loan growth. The net interest margin, as Ed and Tim referred to, improved 42 basis points from the prior quarter to $3.35 million. A beneficial increase of 67 basis points on the yield on earning assets and a 12 basis point increase in the net free funds contribution combined with a 37 basis point increase in the rates paid on liabilities resulted in the improved margin. The increase in the yield on earning assets in the third quarter as compared to the prior quarter was primarily due to a 69 basis point improvement in loan yields and higher liquidity management asset yield as the company earned higher short-term rates on interest-bearing deposits held at banks. The increase in the rate paid on interest-bearing liabilities in the third quarter as compared to the prior quarter was driven by a 36 basis point increase in the rate paid on interest-bearing deposits. Turning to the provision for credit losses. Wintrust recorded a provision for credit losses of $6.4 million compared to a provision of $20.4 million in the prior quarter and the $7.9 million negative provision recorded in the year-ago quarter. The provision expense was lower in the third quarter, partly as a result of providing for strong, but lower loan growth compared to the second quarter, the lower level of net charge-offs, and improvement in the mix of classified loans, and that was offset slightly by changes in various macroeconomic factors. Rich Murphy will cover credit, which continues to be good in additional detail in just a few minutes. Turning to non-interest income and non-interest expenses. In the non-interest income section, our wealth management revenue was up $1.8 million to $33.1 million from $31.4 million in the prior quarter and up from $31.5 million recorded in the year-ago quarter. Given the volatile market conditions, we're pleased with that result, which was aided by strong activity in our 10.31 exchange business. Consistent with overall industry trends and the impact of higher home mortgage rates, our mortgage banking operations saw the anticipated lower loan origination volume during the third quarter. As such, mortgage banking revenues decreased by $6.1 million from the second quarter of ‘22. And looking forward on our current pipeline activities, we expect mortgage origination volumes to be lower in the fourth quarter than we just experienced in the third quarter due to the higher rate environment and seasonal purchasing trends. However, the impact of any such decline on net earnings is expected to be small and very small relative to the anticipated growth in net interest income. The company recorded net losses on investment securities of $3.1 million during the third quarter compared to net losses of $7.8 million in the prior quarter as the market decline in equity valuations continued to affect a portion of our securities portfolio. Other non-interest income totaled $15.9 million in the third quarter, which was up $2 million from the amount recorded in the prior quarter. The primary reason for the increase in this category is that the company recorded $2.5 million of losses in the second quarter of this year associated with the sale and anticipated sale of two properties which did not obviously occur again in this quarter. Additionally, the company realized $1.3 million of lower swap fee revenue in the third quarter relative to the prior quarter. On the non-interest expense side of the house, non-interest expenses totaled $296.5 million in the third quarter and were up 3%, or approximately $7.8 million when compared to the prior quarter total of $288.7 million. The primary reason for the increase was due to higher compensation-related expenses. Salaries and employee benefits expense increased approximately $8.8 million in the third quarter as compared to the second quarter. And relative to the prior quarter, the increase related to $5 million of higher salary expense and $4.3 million of increased accruals associated with the incentive compensation program. The higher salary expense was primarily caused by mid-year compensation increases, which included the effect of raising the company's minimum wage in August of this year. The increase in the commissions and incentive compensation expense was due to higher accruals for both long-term and short-term incentive compensation programs relative to the prior quarter, and this was really associated with the increase in the company's profitability and its effect upon the plan design. These increases were offset somewhat by a lower level of mortgage banking commissions due to the declining mortgage loan origination volume. Other than those categories I just discussed, all other expense categories taken together were well controlled and were actually down by approximately $1 million compared to the second quarter. The decrease was impacted by a variety of relatively normal operational fluctuations, none that I think are worth noting for this call. As Ed mentioned, the net overhead ratio, a measure of operational efficiency, stood at 1.53% for the third quarter, which was relatively stable when compared to the ratio of 1.51% in the prior quarter. On a year-to-date basis, the net overhead ratio stood at 1.35%. Additionally, the company's efficiency ratio declined below 60% to 58.4% in the third quarter as expenses did not increase at a rate commensurate with the increase in revenue. So in summary, the core fundamentals are strong: strong loan growth, expanding margins, solid pipelines, good credit quality metrics, and I think we're set up well for the future quarters. So with that, I'll conclude my comments and turn it over to Rich Murphy to discuss credit.

Richard Murphy, Vice Chairman and Chief Lending Officer

Thanks, Dave. As noted earlier, credit performance for the third quarter was very solid from a number of perspectives. As detailed on Slide 7 of the deck, loan growth for the quarter was $1.1 billion or 12% annualized, an outstanding result. And similar to the past few quarters, we continue to see loan growth across the portfolio. Specifically, life insurance premium finance continued to see very solid growth as balances increased $396 million. Commercial premium finance also had a very strong quarter with loans of $172 million, C&I loans increased by $212 million, and commercial real estate grew by $171 million. Year-over-year, we saw total loan growth of approximately $6 billion or 18% net of PPP loans. As noted on prior earnings calls, we continue to see very solid momentum in our core C&I and CRE portfolios. Pipelines have been very strong throughout the year and we saw that materialize into increased outstandings during the past several quarters. In addition, disruptions within the competitive banking landscape continue to work to our benefit. We continue to be optimistic about loan growth for the remainder of 2022 and early 2023 for a number of reasons. Core pipelines continue to be very strong through Q3 with solid momentum going into Q4. Commercial line utilization, excluding leases and mortgage warehouse lines as detailed on Slide 16, continued to trend up, and we anticipate this trend will continue. Also on Slide 16, you will see the business expansion and inflation pressures have resulted in many customers requesting increases to their credit facilities to help finance these costs. And both First Insurance Funding and Wintrust Life Finance had another impressive quarter. This momentum has been strong for several quarters, and we believe it should continue into 2023. As a result, while we acknowledge increased concerns about a possible recession, we believe our diversified portfolio and position within the competitive landscape will allow us to grow within our guidance of mid- to high-single digits and maintain our credit discipline. From a credit quality perspective, as detailed on Slide 15, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics. Non-performing loans increased from $72 million or 20 basis points to $98 million or 26 basis points, roughly the same level we experienced at the end of Q3 2021, where NPLs were $90 million or 27 basis points. The increase in NPLs during the quarter came from two factors. One loan totaling $25 million within our franchise finance portfolio moved to non-performing status. This loan had been a rate of credit for some time, as the borrower experienced challenges from extended COVID-19 shutdowns and most recently, rising wage and commodity costs. While these factors have affected other restaurant operators within our portfolio, we believe this situation is isolated, and our franchise finance customers continue to perform well. Also, we experienced a $10 million increase in NPLs in our commercial premium finance portfolio, resulting from a handful of loans over 90 days past due at quarter end. We are secured on these loans and anticipate repayment from the unearned premium shortly. Overall, NPLs continue to be at very low levels and we are still confident about the solid credit metrics of the portfolio. Charge-offs for the quarter were $3.2 million or 3 basis points down from the previous quarter. Year-to-date charge-offs totaled $15 million or 6 basis points. Finally, as detailed on Slide 15, we saw a significant improvement in our special mention and substandard loans with no meaningful signs of economic stress at the customer level. That concludes my comments on credit. And I'll turn it back to Ed to wrap up.

Edward Wehmer, CEO

Thanks, Rich. Overall, I believe our future looks very promising despite potential market fluctuations. There's always the possibility of unexpected events, but I'm satisfied with our current position. We anticipate ongoing margin improvement as prior rate increases impact our balance sheet and income statement. Future rate hikes should also enhance our earnings. As previously noted, we've started generating income from hedges to guard against the risk of rapid rate declines. Our credit quality remains excellent, and loan demand is strong while we maintain our traditional conservative credit standards, ensuring we are compensated for the risks involved. We're still benefiting from market disruptions. The acquisition market is sluggish, but we're exploring typical opportunities across our businesses. Dilution remains a concern for us. However, I believe that eventually, people will need to consider their future positions, and we are well-suited to assist many of them. Our wealth management segment is performing well, particularly due to the CDEC. The diversification of our wealth management earnings is advantageous. As the market shifts, our wealth managers are poised to excel. I’m pleased with our current standing. As always, we appreciate your support, and I’m happy to take questions now. Thank you very much.

Jon Arfstrom, Analyst

Yes.

Edward Wehmer, CEO

Hey, Arf. How are you doing, man?

Jon Arfstrom, Analyst

Hey. Good. How about you?

Edward Wehmer, CEO

Living the dream every day.

Jon Arfstrom, Analyst

Good. You sound good. Can you guys talk a little bit about the comment where you talked about some deposit strategies to have funding grow along with loan growth? It's been a struggle for some of your peers, but just curious what you're thinking on that.

Tim Crane, President

Yeah. Jon, we grew deposits less than we normally would in the quarter. It's obviously become more price-sensitive in the market, but we continue to add relationships. The disruption will continue to help us. We're working on kind of some more niche deposit-related activities that we think might bear some fruit. But we're currently at 89% loan-to-deposit, which is well within our target range. We've got ample liquidity and could fund several more quarters of unbalanced growth if we get it. If loan growth proves to be strong after that, which would probably be really good news. We'd be funding those loans at closer to the higher market marginal rates. But our intent is to grow deposits and more importantly, grow relationships and the disruption is helping us. We're encouraged to date that the percentage of deposits that are not interest-bearing have stayed pretty stable at about a third of deposits, and we're off to a good start in the fourth quarter.

Jon Arfstrom, Analyst

Okay. Good. That's helpful. And then I guess the other side of the balance sheet too, maybe this is one for you, Dave. But you talked about putting some of the cash to work and having a plan to do more of that. Can you talk a little bit more about what you're doing there and give us an idea of what you did during the quarter and what kind of yields you're seeing?

David Stoehr, CFO

Yeah. I mean, as we stated in the press release, we put about $1 billion of the liquidity to work in the fourth quarter. Those were invested in mortgage-backed securities. I don't recall the exact basis point yield, but it was in a 5.5% sort of range. So we've added some securities. We didn't do any really in the third quarter. We stayed relatively flat as far as growth goes for investments. But we did have some additional Federal Home Loan Bank funding, where we locked in some lower rates and basically are getting a spread on those that would be accretive to our ROA.

Jon Arfstrom, Analyst

Okay.

David Dykstra, Vice Chairman and COO

I guess, going forward, Jon, maybe what you're asking is beyond that, do we expect to invest a lot in securities? And I think the answer probably is not a lot because we have good loan demand. So first, we're going to fund loan demand and use that liquidity to do that. And so, I would expect that the securities aren't going to grow dramatically here going forward.

Edward Wehmer, CEO

We run 85% to 90% loan-to-deposits. So any growth we get, you're going to have something going in the securities going forward.

Jon Arfstrom, Analyst

Yeah. Okay. Yeah. It's just some of your peers have really been beat up on AOCI, and it doesn't seem like a bigger issue for you. But that was what the question was around as well. I appreciate it. Thanks, guys.

David Long, Analyst

Thank you. Hey, I'm glad to hear your surgery went well and hope your physical therapy is going just as well.

Edward Wehmer, CEO

Let me do it. I have 10 days before I can really take any action, but I will be on it.

David Long, Analyst

Please stick with it. Just on the lending side, I know it sounds like your pipeline is still very good and you guys are anxious and have an appetite to continue to lend. But are there any segments that you may be pulling back on at this point that may seem a little bit more risky than others?

Edward Wehmer, CEO

Rich?

Richard Murphy, Vice Chairman and Chief Lending Officer

I believe, as Ed has always mentioned, that our loan policies remain very conservative and we do not make significant changes. We prefer not to make drastic adjustments and shift between different categories. However, I think one area that might be most impacted is commercial real estate (CRE). As interest rates rise, it becomes increasingly difficult to underwrite these projects, which demand more equity. It will be interesting to monitor this situation. Historically, we've already reduced our appetite for retail in the CRE sector for several years. We are also focusing significantly on office spaces. Overall, we continue to see strong demand in multifamily and industrial sectors, although I expect they will also start to feel the pressure of higher borrowing costs. Generally speaking, we feel positive about the other sectors. I anticipate that premium finance will perform well next year. Regarding commercial and industrial (C&I) demand, given the competitive landscape in Chicago, we see a great opportunity for borrowers and customers to strengthen their relationships with us. However, commercial real estate is the primary area that stands out as being heavily impacted, and we are consistently focusing on that.

Edward Wehmer, CEO

We don't do a lot of consumer lending, which is helpful.

Richard Murphy, Vice Chairman and Chief Lending Officer

Yeah, we don't. We have home equity, but generally speaking, that's the extent of most of our consumer lending.

David Long, Analyst

Got it. No. I do recall the rope-a-dope strategy in the commercial real estate way back when. So cool. Thanks for that answer. And then, Texas Capital announced they were selling their premium finance business to Truist during the quarter. And just within your own premium finance business, can you talk about whether that is a good opportunity for you guys to gain some market share or not?

David Dykstra, Vice Chairman and COO

Hey, Ed. David, this is Dave Dykstra. I think, generally, we think that if you lose a competitor in the space, that's good for us. And so, I think generally, that's a positive for us. A number of our agents and brokers want multiple premium finance providers. And so if, for instance, they were using Texas Capital and Truist, then they're going to have to find another provider, and we would be a likely candidate for that. And then to a certain extent, Truist has also got an insurance agent and broker business, and some of our agents and brokers don't like to direct business to a competitor. So we think marginally, that helps us a little bit, too, since we are not in the insurance brokerage business. So generally speaking, I mean, it's a competitive industry. You got to fight for every client, but we think it should be a positive just because of one less competitor in the marketplace.

David Long, Analyst

Dave, I’ll take that back and someone else jump in.

Edward Wehmer, CEO

Thanks.

Nathan Race, Analyst

Hi, guys. Good morning.

Edward Wehmer, CEO

Hi, Nathan.

Nathan Race, Analyst

What's just on the mortgage outlook from here? Obviously, some compression on the gain-on-sale margin here in the third quarter. So Dave, maybe just curious how you're kind of thinking about that margin going forward in spite of all the adjustments and corrections that are going on in that industry today.

David Dykstra, Vice Chairman and COO

I think the volume will decrease slightly due to seasonality and higher rates. The margins seem to be at a lower point right now, so I don't anticipate a significant drop. As you noted, we don't engage in correspondent or wholesale lending, which affects some of our competitors' margins. We focus solely on retail, avoiding other segments of the mortgage market. Therefore, I expect the margin to remain stable despite the lower volume. When excluding MSR valuations, production revenue will see a slight decline. However, after accounting for commissions, expenses, and taxes, the overall effect will be minimal compared to the increase in net interest income.

Nathan Race, Analyst

Okay. Great. And then just changing gears and thinking about the deposit outlook, just going back to the earlier question. Curious just in terms of your guys' ability to kind of defend the deposit base and actually grow it unlike most peers thus far in the 3Q earnings season. Is the deposit growth you're seeing largely from existing clients or are you guys seeing more opportunities to grow deposits just in light of all the acquisition-related disruption across the Chicago land area these days?

Edward Wehmer, CEO

Tim, why don't you handle that?

Tim Crane, President

Yeah. Nate, it's really both. I mean, the disruption is certainly helpful. And as we bring clients over, we aim for a full relationship, which would include the deposit business. But we're sensitive to the deposit book and the excess funds that all of our clients have, and we'll compete for those with everyone in the market. So it's both.

Nathan Race, Analyst

Got it. And just lastly, do you guys have an updated range in terms of where you want your loan-to-deposit ratio to settle out into next year in light of maybe perhaps tamping down on some growth just to maybe keep that loan-to-deposit ratio within a more comfortable range going forward?

Tim Crane, President

Yeah. We've said 85% to low 90s, right? I don't think we would change that for normal operating conditions.

David Dykstra, Vice Chairman and COO

Yeah. That's been our preferred range, Nate, for every year that we've been a public company going back to '96. So we're comfortable there.

Brandon King, Analyst

Thank you. Good morning.

Edward Wehmer, CEO

Good morning, Brad.

Brandon King, Analyst

Yeah. So I had a question on the reserve. Currently, ACL is at 83 basis points. And I know it's higher than it was pre-CECL in the day 1 CECL. I'm curious, what is your level of comfort with that going into kind of an economic environment that's deteriorating and if you think that's adequate for a more severe recession or how high it can go?

David Dykstra, Vice Chairman and COO

We believe the current reserve level is adequate based on our models. It's important to note that the 83 basis points includes a significant portion of our balance sheet in premium finance loans. Historically, life loans have shown zero losses, and our property and casualty portfolio has relatively low losses as well. According to our press release, our core loans have a reserve of 126 basis points associated with them. With the CECL modeling and our ongoing assessments, we feel this level is sufficient. Looking back to the 2008-2009 period, we were profitable during those years with generally lower losses compared to our peers. We adopt a conservative approach, continuously monitoring our portfolios and analyzing trends. We are currently comfortable with our position. However, it's worth mentioning that our reserve figure is lower than some competitors because about a third of our portfolio consists of low-risk, low-loss asset classes.

Brandon King, Analyst

Okay. And then following that, I'm not sure if you disclosed kind of the weightings. But is there some sort of a qualitative overlay in particular that you think kind of gives you more comfortable with that reserve level that you put on based off of the calculation with the CECL modeling?

David Dykstra, Vice Chairman and COO

Yeah. We don't disclose the difference between quantitative and qualitative factors out there. But I think everybody has a qualitative process factored in. Ours generally is a qualitative process based on quantitative analysis and input from the lines. But I think the end answer to the question is we're very comfortable with our reserve levels.

Edward Wehmer, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Chris McGratty of KBW. Your line is open. Please go ahead, Chris McGratty.

Chris McGratty, Analyst

Wondering if you just started if you had the September margin and also the spot deposit cost at the end of the quarter?

David Dykstra, Vice Chairman and COO

Yeah. No, we haven't disclosed those, Chris. I think where we're going with the margin is we expect it to be north of 3.70% in the fourth quarter. And so, you can probably sort of draw a straight line if you look at where we went from the second quarter to the third quarter and the guidance we gave for the fourth quarter.

Chris McGratty, Analyst

It’s okay. And then the approaching 4% in Q1, obviously, that's much better than what markets are expecting. I guess maybe a question around peak margins or peak NII growth. How are you thinking about just if the Fed stops early next year? How much of a lag will be on the deposits and the side and what you're doing to kind of protect that rollover?

Tim Crane, President

Our current assumption is for another 150 basis points of Fed funds increases, likely 75 in November and another 75 later. At those levels, we expect to approach 4% in the first quarter. Once the Fed stops raising rates, we believe that the repricing of loans and assets will help mitigate the costs associated with deposit increases, which have been somewhat delayed. There are many factors at play, but the low-4% range seems reasonable based on the current forecast. If circumstances change, we will adjust accordingly.

Brandon King, Analyst

Thank you. Good morning.

Edward Wehmer, CEO

Good morning.

Brandon King, Analyst

Yeah. So I had a question on the reserve. Currently, ACL is at 83 basis points. And I know it's higher than it was pre-CECL in the day 1 CECL. I'm curious, what is your level of comfort with that going into kind of an economic environment that's deteriorating and if you think that's adequate for a more severe recession or how high it can go?

David Dykstra, Vice Chairman and COO

We believe that our current reserve of 83 basis points is adequate. It's important to note that this figure includes over a third of our balance sheet, particularly in premium finance loans, which historically have shown zero losses. Our property and casualty portfolio also demonstrates relatively low losses. According to our press release, our core loans have 126 basis points of reserves. With our CECL modeling and ongoing analysis, we find this level sufficient. Looking back to the 2008-2009 period, we remained profitable and exhibited lower losses compared to our peers. We take a conservative approach and carefully monitor our portfolios for trends. At the moment, we are comfortable with our position, though it's worth noting that our reserve ratio is lower than some competitors due to a significant portion of our portfolio being in very low-risk, low-loss asset classes.

Brandon King, Analyst

Okay. And then following that, I'm not sure if you disclosed kind of the weightings. But is there some sort of a qualitative overlay in particular that you think kind of gives you more comfortable with that reserve level that you put on based off of the calculation with the CECL modeling?

David Dykstra, Vice Chairman and COO

Yeah. We don't disclose the difference between quantitative and qualitative factors out there. But I think everybody has a qualitative process factored in. Ours generally is a qualitative process based on quantitative analysis and input from the lines. But I think the end answer to the question is we're very comfortable with our reserve levels.

Edward Wehmer, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Chris McGratty of KBW. Your line is open. Please go ahead, Chris McGratty.

Chris McGratty, Analyst

Could you provide the September margin and the spot deposit cost at the end of the quarter?

David Dykstra, Vice Chairman and COO

Yeah. No, we haven't disclosed those, Chris. I think where we're going with the margin is we expect it to be north of 3.70% in the fourth quarter. And so, you can probably sort of draw a straight line if you look at where we went from the second quarter to the third quarter and the guidance we gave for the fourth quarter.

Chris McGratty, Analyst

It’s okay. And then the approaching 4% in Q1, obviously, that's much better than what markets are expecting. I guess maybe a question around peak margins or peak NII growth. How are you thinking about just if the Fed stops early next year? How much of a lag will be on the deposits and the side and what you're doing to kind of protect that rollover?

Tim Crane, President

Yeah, Chris, our current assumption is for another 150 basis points of Fed funds increases, likely 75 in November and then 75 at a later date. With these levels, we expect to approach 4% during the first quarter. Once the Fed halts rate increases, it’s more likely that the repricing of loans and assets will help reduce the costs associated with deposit increases, which have lagged a bit. There are many factors at play, but the low-4% range is certainly reasonable based on the current forecast. If any conditions change, we'll adjust accordingly.

Brandon King, Analyst

Thank you. Good morning.

Edward Wehmer, CEO

Good morning.

Brandon King, Analyst

Yeah. So I had a question on the reserve. Currently, ACL is at 83 basis points. And I know it's higher than it was pre-CECL in the day 1 CECL. I'm curious, what is your level of comfort with that going into kind of an economic environment that's deteriorating and if you think that's adequate for a more severe recession or how high it can go?

David Dykstra, Vice Chairman and COO

We believe the current reserve level is adequate based on our models. It's important to note that the 83 basis points includes a significant portion of our balance sheet and premium finance loans. Historically, life loans have shown zero losses, and our P&C portfolio has relatively low losses as well. According to our press release, our core loans are associated with a reserve of 126 basis points. With the CECL modeling and our analysis, we feel comfortable with this level. Looking back at the 2008-2009 period, we remained profitable and experienced lower losses than our peers. We take a conservative approach, regularly monitoring our portfolios for trends. Currently, we are satisfied with our position. However, it's crucial for those who may not follow us closely to understand that our reserve number is lower than some peers because a third of our portfolio consists of very low-risk, low-loss asset classes.

Brandon King, Analyst

Okay. And then following that, I'm not sure if you disclosed kind of the weightings. But is there some sort of a qualitative overlay in particular that you think kind of gives you more comfortable with that reserve level that you put on based off of the calculation with the CECL modeling?

David Dykstra, Vice Chairman and COO

Yeah. We don't disclose the difference between quantitative and qualitative factors out there. But I think everybody has a qualitative process factored in. Ours generally is a qualitative process based on quantitative analysis and input from the lines. But I think the end answer to the question is we're very comfortable with our reserve levels.

Edward Wehmer, CEO

Thank you.

Operator, Operator

Thank you. This concludes the question-and-answer session. I will turn the call back over to Mr. Wehmer for closing remarks.

Edward Wehmer, CEO

Thanks, everybody, for dialing in today. We'll talk to you in January, if not before. If you have any other questions, please call Dave, Tim, Rich, or myself. We'll be happy to respond to them and have a fun fourth quarter. We'll talk to you again in January. Thanks so much, and have a great holiday season. It's upon us already. So thanks so much, everybody.

Operator, Operator

And this concludes the conference call. You may now disconnect.