Wintrust Financial Corp
NASDAQ:WTFC
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Wintrust Financial Corp
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Welcome to Wintrust Financial Corporation's First Quarter 2023 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 over to Mr. Edward Wehmer.
Thank you very much. Welcome, everybody to our first quarter of 2023 earnings call. You heard, with me are Tim Crane, our President and CEO in waiting; Dave Dykstra, our Vice Chair and Chief Operating Officer; Rich Murphy, our Vice Chair and Chief Lending Officer; Kate Boege, our General Counsel, who's offsite, by the way [indiscernible] may have a delay on it, but try Kate, I'm not going to say anything bad. And Dave Stoehr, our CFO.
So [indiscernible] different approach this quarter, some general comments from me. Tim will discuss operating results in detail. Dave Dykstra will discuss other income and expense in detail. Rich will discuss credit in detail. Tim Crane will talk -- his thoughts about the future, back to me for some final thoughts and time for questions.
General comments. Well, we had a record results, I chose the right time to semi-retire, but given the industry challenges arose during the quarter, just like Lloyd Bridges [indiscernible] picked the quarter to put [indiscernible] and glue. Despite the turmoil in the banking industry, we recorded net -- record net income and PPP earnings. And the challenges we faced that face the industry, our consistent conservative approach to banking helped to thrive during the times. How many times you heard me say the concentration in scale. We've always been old school in how we went after this, and that's not changing.
I believe the current challenges in the industry will open a lot of doors for us, just like in the past, industry meltdowns. For example, on Great Recession, [indiscernible] strategy resulted in record earnings albeit one of the most acquisitive companies in the country. Pandemic, general results, great results are in pandemic, PPP loans were a real plus for us. There's only spillover into a ton of new clients. I think back to the Russian ruble thing, and we've always laid selling great because of our approach. And I expect this as we will continue to do the same.
Now I'm going to turn over to Tim to talk about results.
Great. Thanks, Ed. Obviously, lots to talk about in terms of both the balance sheet and the recent industry developments. It's important to note that many of my comments, as well as Rich and Dave's to come are supported by slides that we've included in our earnings presentation that may be helpful.
First, with respect to deposits. Deposits for the quarter were down 0.4%, $184 million, essentially flat in a period where we often see some seasonal outflows. While we spent a great deal of time communicating with our clients in the days after March 10 and saw a significant shift in our deposit mix, which I'll discuss in a moment, our overall level of deposits remained very stable. In terms of additional detail, consumer deposits were actually up for the quarter, and the offset was primarily in our CDEC group, deposits related to our 1031 real estate related exchange business, and we're down in our wealth management area where we continue to see some movement to treasuries and the money market funds, presumably for both rate and insurance reasons.
Except for municipal deposits, which are in almost all cases insured or collateralized, we do not have any significant deposit concentrations. Our average deposit account size is under $70,000. We don't have any exposure to crypto deposit activity. In addition, both our Federal Home Loan Bank and total overall non-deposit borrowings were unchanged in the quarter. We didn't borrow from the Fed discount window and have no intent to use the bank term funding facility.
During the quarter, again, we saw movement from noninterest-bearing deposits to both our unique Wintrust MaxSafe product, which provides customers up to $3.75 million in insurance per account holder and other reciprocal insured products. MaxSafe deposits increased by about $1 billion during the quarter with another several hundred million dollars, primarily larger deposits moving to other reciprocal insured products.
Noninterest bearing deposits at the end of the quarter represented 26% of total deposits, a return to near pre-pandemic levels consistent with a more normal rate environment. These movements do not appear to be unique to us, but they obviously increased the cost of deposits for the quarter. Interest bearing deposit costs were $1.97, up 67 basis points.
Our interest bearing deposit beta through the first quarter was 36%. We expect the activities post March 10 will result in interest bearing deposit beta over the full cycle in excess of the 45% that we had previously projected. Currently, we're assuming a full cycle number of approximately 50%. At quarter end, fully insured or collateralized deposits totaled about 70% of total deposits, a number that continues to trend higher.
Loan growth for the quarter was about $370 million on the low end of our range. Rich will talk about loan growth, loan composition and continued strong credit performance in just a few minutes. With respect to the net interest margin, it was up 10 basis points to 3.83%. We're pleased with this result in light of the late quarter pressure on deposit costs and the negative impact of our hedging activities.
While we expect deposit cost increases and incremental mix change may continue, we believe, given the current rate environment and the continued benefit associated with the favorable repricing of our premium finance loans, as a reminder, those are about one-third of our loan book, that we'll maintain a margin of approximately 370 for the next several quarters.
Given the assumptions around our balance sheet, we remain slightly asset sensitive. An additional 25 basis point increase in rates, if that were to occur, would all else equal, provide approximately $20 million in benefit in terms of net interest income on an annualized basis. The strong earnings for the quarter produced a material increase in our capital ratios, total risk-based capital increased to 12.1%, CET1 to 9.2%. Both, we believe are appropriate on a risk-adjusted basis and should continue to expand.
Tangible book value in the quarter increased materially to $64.22 per share. Just a quick note on securities and capital, the combined unrealized pretax security losses, both available for sale and held to maturity at the end of the quarter totaled approximately $1.1 billion. If a regulatory rule change occurred, we were forced to mark our entire securities portfolio, the bank would remain well capitalized. So despite the external volatility in the latter part of March and the prospect for evolving deposit related behavior change, we continue to see very good pipelines, opportunities in the market and typical client activity. Dave?
Right. Thanks, Tim. I'll cover some of the noteworthy income statement categories, starting with net interest income. For the first quarter of 2023 net interest income totaled $458 million. That was an increase of $1.2 million as compared to the prior quarter and an increase of $158.7 million as compared to the first quarter of 2022. The $1.2 million increase in net interest income as compared to the prior quarter was primarily due to the improvement in the net interest margin that Tim talked about, partially offset by the impact of having two fewer days in the quarter.
The impact of having two fewer days relative to the fourth quarter was approximately $10 million. So in other words, one day is worth about $5 million of net interest income to us. The net interest margin improved 10 basis points from the prior quarter to 3.83%, a beneficial increase of 61 basis points on the yield on earning assets and a 17 basis point increase in the net brief funds contribution combined with a 68 basis point increase for the rate paid on the liabilities resulted in the improved margin.
The increase in the yield on the earning assets as compared to the prior quarter was primarily due to a 67 basis point improvement in loan yields and a higher liquidity management asset yield as the company earned higher short-term yields on the interest-bearing deposits held at banks and its investment securities. And the increase in the rate paid on interest-bearing liabilities in the first quarter as compared to the prior quarter, was driven by a 67 basis point increase in the rate paid on the interest-bearing deposits. Now it's interesting to note that both the loan yield increase and the deposit costs increase were both 67 basis points changes during the quarter.
We continue to believe that our relatively short term and asset-sensitive balance sheet structure can provide for margin stability as our premium finance portfolios, which comprise roughly one-third of our loan portfolio should continue to reprice upwards over the course of this year, which should substantially mitigate the rise in deposit pricing.
Also, as we discussed on prior calls, the company has been entered into interest rate derivative transaction, specifically swap and collar contracts to protect the net interest margin in a falling rate environment. Our earnings presentation deck has the details of those derivative positions, including terms and rates for your information. The impact of those derivative transactions during the quarter was to limit the net interest margin expansion by 7 basis points. In other words, the net interest margin would have expanded by 17 basis points during the quarter, rather than 10 basis points if we had not entered into those contracts. We believe it is prudent in the current environment to sacrifice some current margin expansion to mitigate the downside risk if interest rates were to decline materially in the future.
Turning to the provision for credit losses. Wintrust recorded a provision for credit losses of $23 million in the first quarter compared to a provision of $47.6 million in the prior quarter and a $4.1 million provision expense recorded in the year ago quarter. The lower provision expense in the first quarter relative to the prior quarter was primarily a result of less loan growth during the quarter and changes to the macroeconomic outlook related to projected credit spreads and commercial real estate price index data. Rich Murphy will talk about credit in just a bit, but I should note that the current quarter net charge-offs and the mix of classified loans remained relatively stable and very good and did not have a significant impact on the level of the first quarter's provision for credit losses.
Turning to the noninterest income and noninterest expense sections. Total noninterest income totaled $107.8 million in the first quarter and was up nearly $14 million when compared to the prior quarter total of $93.8 million. The primary reasons for the increase were due to an $8 million -- $8.1 million improvement in the gains and losses related to the company's securities portfolio. The company recorded a gain of $1.4 million in the first quarter of 2023 compared to a loss of $6.7 million recorded in the fourth quarter of 2022.
The quarterly fluctuation was primarily related to changes in equity valuations that affect a portion of our securities portfolio and not from sales of securities. A $2.4 million increase in fees on covered call options in the first quarter of 2023 relative to the prior quarter also contributed to the increase and a $0.9 million increase in mortgage banking revenue as production margins improved, which more than offset a slight decline in the volume of loans originated during the first quarter of the year.
We saw mortgage application volume increased slightly during each month of the first quarter and are seeing continued increases in loan application volume early in the second quarter, albeit still relatively small increases. But this should provide support to the mortgage banking revenue in the second quarter. Additionally, for your information, roughly 80% of the application volume is related to purchased home activity.
On the non-interest expense categories. Noninterest expenses totaled $299.2 million in the first quarter and were down approximately $8.7 million when compared to the prior quarter, total of $307.8 million. The primary reasons for the decrease were due to salaries and employee benefit expenses decreasing by approximately $3.6 million in the first quarter as compared to the fourth quarter of last year.
Relative to the prior quarter, the current quarter decline is primarily due to lower commissions and incentive compensation of approximately $9.7 million, largely related to lower incentive compensation accruals. The category also saw approximately $1.9 million of lower employee benefits expense due to fewer health insurance claims during the quarter. These declines were partially offset by approximately $8.1 million of increased salary expense primarily due to the impact of annual merit increases that took effect in the first quarter.
Our advertising and marketing expenses decreased by $2.3 million in the first quarter of 2023 when compared to the prior quarter. As we have discussed on previous calls, this category of expenses tends to be lower in the fourth and the first quarters of the year. Advertising and marketing expense is expected to increase in the second quarter due to our marketing and sponsorship expenditures related to various major and minor league baseball sponsorships, other summertime sponsorship events held in the communities that we serve and marketing of our brand and deposit products.
Lending expenses also declined approximately $3.2 million due to lower overall loan origination activity experienced in the first quarter. Offsetting these expense declines noted was a $1.9 million increase in FDIC insurance expense, which was primarily related to the 2 basis point increase in the assessed premiums that the FDIC began imposing on financial institutions in 2023. Other than those expense categories that I just discussed, all other expense categories in the aggregate were down by approximately $1.5 million compared to the fourth quarter of 2022.
Our efficiency ratio declined to 53% for the first quarter from 55% in the fourth quarter of 2022 as expenses did not increase at a rate commensurate with the increase in revenues. And our net overhead ratio was 1.49% in the first quarter and lower than the 1.63% in the prior quarter due to slightly higher fee income and well-controlled expenses. Looking forward, we expect fee income and noninterest expenses to increase somewhat as a result of the wealth management acquisition, which was completed at the beginning of April. We would also expect mortgage revenues and related expenses to increase slightly as springtime has since the home buying season.
Additionally, as I noted earlier, the seasonal increase in marketing sponsorships will add to that expense category. So we anticipate slightly higher wealth management mortgage revenues and slightly higher expenses in the future quarters. But depending on the mortgage volumes and balance sheet growth, we would still expect to maintain a net overhead ratio in the 1.5% to 1.6% range that we have generally experienced in the last two quarters.
So with that, I'll conclude my comments and turn it over to Rich Murphy to discuss credit.
Thanks, Dave. As noted earlier, credit performance for the first quarter was very solid from a number of perspectives. As detailed on Slide 7 of the deck, loan growth for the quarter was $369 million or 3.8% annualized. Loan growth was largely concentrated in two portfolios. Commercial real estate, which grew by $288 million, which was primarily draws on existing loans; and residential real estate, which was up $133 million.
This rate of loan growth is slower than what we have seen for some time and below our guidance of mid-to high single digits. We believe this slower growth is attributable to several factors. The first quarter is generally the slowest quarter for core loan production and is a seasonally slow quarter for the commercial premium finance portfolio. Higher borrowing costs have forced borrowers to reconsider the economics of new projects, business expansion, equipment purchases and premium finance costs and overall business sentiment, which has dropped during the past few months.
However, we continue to see solid momentum in our core C&I and CRE pipelines. Disruptions in the banking landscape continue to work to our benefit as we have seen numerous quality opportunities from other regional banks. Also, while commercial premium finance loans were down by $111 million in the first quarter, based on historic seasonality, we would anticipate that this portfolio will show solid growth in Q2. As noted in prior earnings calls, we continue to be optimistic about loan growth in 2023, but would anticipate the pace of growth may trend closer to the lower end of the guidance for a number of reasons.
The Wintrust Life Finance portfolio grew by $35 million during the first quarter of 2023 compared to a $300 million in the first quarter of 2022. The rapid increases in rates during the past year have significantly affected the pace of growth. We would anticipate the slower rate of growth will continue in this higher rate environment. And increases in commercial line utilization, excluded leases and mortgage warehouse lines continue to flatten during the first quarter, reflecting a more cautious business sentiment and higher borrowing costs.
As a result, while we continue to be diligent about and preparing for the possibility of a business recession, we believe our diversified portfolio and position within the competitive banking 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 ways. Nonperforming loans remained stable at 25 basis points or $101 million, equal to the total we saw in Q4.
Overall, NPLs continue to be at historically low levels, and we are still confident about the solid credit metrics of the portfolio. Charge-offs for the quarter were only $5.5 million or 6 basis points. And as detailed on Slide 15, we saw a stable level in our special mention in substandard loans with no meaningful signs of additional economic stress at the customer level.
Finally, as Ed mentioned, the granularity of our loan portfolio has always been a critical pillar of the Wintrust story. This can be seen clearly on Slide 7 where the portfolio has been built around commercial, CRE, premium finance and niche lending. Currently, commercial real estate loans comprise roughly a quarter of our portfolio. While we closely monitor all elements of our loan portfolio, we are paying particular attention to this segment.
Higher borrowing costs and pressure on lease rates are caused for concern, particularly in the office category. On Slide 18, we have highlighted a number of important elements of our office portfolio. Currently, this portfolio totals $1.4 billion or 13.6% of our total CRE portfolio and only 3.5% of our total loan portfolio. Of the $1.4 billion of office exposure, close to 40% is medical office or owner occupied. The average sizable loan in the office portfolio was only $1.3 million.
We have only five loans in the portfolio above $20 million. There has been significant concern about office properties located within central business districts. Our CBD exposures limited $358 million or approximately one quarter of the office portfolio. Half of this is in Chicago and half is in other cities. The bulk of the portfolio is located in suburban areas and areas outside CBDs. And portfolio performance to date has been very good, but no loans currently over 90 days is past due.
We continue to perform portfolio reviews regularly in this portfolio and have stayed very engaged with our borrowers. We are not immune for macro effects that challenges product type, but we believe our portfolio is well constructed, very granular and should perform well moving forward. As noted earlier, higher borrowing costs and pressure on lease renewals are having a meaningful effect across the CRE space. To better understand how these issues could impact our portfolio, our CRE credit team has performed a deep dive analysis on every loan over $2.5 million, which we'll be renewing between now and year-end.
This analysis, which covered 77% of all CRE loans maturing this year resulted in the following: more than 60% of these loans will clearly qualify for a renewal at prevailing rates. Roughly 25% of these results are anticipated to be paid off or will require a short-term extension at prevailing rates, and approximately 15% of the loans will require some additional attention, which could include a paydown or a pledge of additional collateral.
We have tentative agreement on renewal terms with more than half of the borrowers in this final group. Again, our portfolio is not immune from the effects of rising rates or the market forces behind lease rates, but we have been diligently identifying any potential weaknesses in the portfolio and working with our borrowers to identify the best possible outcomes.
That concludes my comments on credit, and I'll turn it back to Tim.
Thanks, Rich. Before Ed wraps up and we take a few questions, just a couple of comments. First, maybe the events of the last three weeks of March serve as a good reminder that as much as people think of banks as a commodity, we believe that's absolutely not the case. We continue to be uniquely positioned to take advantage of disruption in the market.
We frequently talk about that on these calls. Relative to many of our larger peer banks, we provide a distinctly different experience. We provide a level of service that our customers value, evidenced by the J.D. Power and Greenwich and other awards we've received. And we've stayed very disciplined with respect to credit and risk management even when some haven't.
We have a diversified mix of consumer and commercial businesses built on strong relationships. Our model has really been all about being the best alternative to the larger banks. And that opportunity continues to exist today in some ways, more than ever.
And so, I'll pause there, and Ed, I've got some wrap-up comments at the end, but that's what I've got.
Okay. Thank you, Tim. Well, you know this is my last earnings call. I'm going to miss the banter relationships I've had with all of you. This being said, I will still be involved in the foreseeable future in limited capacity as Chairman. Make no know mistake about it, though, there's only going to be one CEO, that's going to be Tim. You'll only have one guy's hands on the wheel, that will be his. I'm here to help in service. And anything I can do to help to continue to move this organization to go in the great growth it's had.
I thank all of you for your support through the ages. Other than the shorties out there, I hope you continue [indiscernible] money on Wintrust. I can ensure that Wintrust is in great hands, we'll continue to follow through [indiscernible] the issue and the best management team and people in the business. As always, you can be assured the team's best efforts in that regard.
Tim, back to you.
Great. Why don't we go ahead and open it up for questions, and I have a quick summary at the end.
Thank you. [Operator Instructions] Our first question comes from the line of Jon Arfstrom of RBC Capital Markets. Your line is open, Jon.
Thanks. Good morning, everyone.
Hey, Jon.
Ed, thanks for everything. Fun earnings calls over the last 25-or-so years. And the Wehmer-isms are priceless. So thank you for all of those.
You're welcome.
Yes. That was great. Guys, I want to ask you a little bit about the margin of 370 guidance, maybe obvious, but talk a little bit about some of the puts and takes and the factors that would drive it up or down from there? And share with us what kind of interest rate and deposit flow assumptions that you're building into that outlook?
Sure, Jon. This is Tim. Obviously, the deposit mix has been one of the changes that's put some pressure on the margin. The other, as Dave mentioned, is kind of the hedging activities that we think will provide good support for the margin in a lower rate environment. We're getting back to DDA mix that's similar to pre-pandemic. And so the hope is that, that migration slows.
But that's certainly one of the things that we're watching pretty carefully. And the other is our opportunity to grow. We think we've got really nice loan opportunities in the market right now and working hard to use our 15 charter model to grow deposits and to take advantage of some dislocation in the market. So those would be a couple of the factors. Going forward, the hedge expense is a little bit higher in terms of the 7 basis points goes to something like 15. But again, we think that's a prudent investment at this point.
We added -- we put a deck -- in the slide deck we put presentation about the swaps that we added during the quarter. But since they were only [indiscernible] part of the quarter, there was only a partial hit. So that 370 million sort of includes going from 7 to 15 basis points on that derivative position. So that's part of the equation too. But we noted this last quarter too, and I noted it in my comments, but we still have a fair amount of asset data out there to offset some of this deposit pressure that we saw.
I mean the main decrease there is really the sort of the mix shift and people moving into the interest-bearing deposits from DDA. But we do have $13 billion roughly of premium finance loans that's still reprice over the course of the year. And as that repricing occurs, that will substantially offset the deposit repricing that we expect to continue a little bit here in the future. So we hope to hold it there. It's sort of where it was at the end of the quarter, a little less than we thought because of this deposit mix, but we think we're positioned well.
And as Tim said, we really think our positioning in Chicago is wonderful. We are Chicago's bank. We win all these awards for good customer service. And we get those awards because we give good customer service. And if we go out in this environment and sell our products, we think we can grow deposits and fund this loan growth that's out there. And there's a lot of things in the mix, but we've always been able to manage through it before. So we think that 370 number we can hold and hold through the rest of the year, assuming something really dramatic doesn't happen to the yield curve.
And the rate assumption of the forward curve, is that right?
Yes. Pretty much, Jon. We're kind of thinking we'll get one more here at some point in the second quarter.
Okay. Rich, maybe for you on loan growth. Dave alluded to that as one of the keys to holding that. You talked about slower utilization, is it pre or post March 8? And how dramatically have things changed in terms of your pipelines and demand since March 8? Thanks.
Yes. Utilization, I think, really has been almost the entirety of the year. I mean we've just seen that utilization kind of just flat. We anticipated it would come up a little bit more back to more historic norms. But I think the higher borrowing costs really have put a chill on that a little bit. Again, not down dramatically, but just not recovering to the levels that we have seen historically.
In terms of overall loan demand, as I talked about, I think we have a big tailwind with the -- our property and casualty group because we can already see the fundings that are going to be coming here over the course of the rest of this year. But I think the thing that is most encouraging is our core pipeline C&I and CRE both are at very good levels.
And again, I'm not necessarily sure if it's the pie growing or -- but my suspicion is we just continue to see opportunities coming out of large banks, other regionals where they're just pulsing in and out of the market. The ability to get a timely answer has really been an issue, and our teams have been very quick to respond, and we’re just seeing continued opportunity in that space. So those are the things that I would point to as being most opportunistic about.
All right. Thanks, guys. Appreciate it.
Thank you.
Thank you. Our next question comes from the line of David Long of Raymond James. Your question please, David.
Good morning, everyone. Thanks for taking my question. Just to start out, Ed, I know you're not going away, but you will be missed on these calls going forward. Really appreciate your candor over the years. And I want to wish you the best as you hand over the reins to Tim and the rest of the team and do look forward to seeing you again some time, so congratulations.
Thank you, David.
As far as the -- thinking about the quarter here, the interest rate hedges, it looks like you maybe added a couple here in early April, puts you close to about $6 billion in notional value. Will you go much higher than that? Is there -- do you have a limit as to how high you want to go or is this sort of a -- kind of like your overall strategy to take what the market gives you here?
I think a little bit of the latter, David. We'll kind of see where the curve goes here. But as you can see from the interest sensitivity slides that we included in the deck, we're getting close to the point where we're more neutral than that. So we think these last couple were nice adds. We caught the market at a good time. And if rates start to drift downward, we've got a little bit of insurance that will help us here. So I'm sure, again, opportunistic.
Okay. And then the -- you talked about the mix getting closer to where you were pre-pandemic. Now most of the last 15 years, we've been in a zero interest rate environment outside of, what 2018 and '19 really. Can deposit -- or can non-interest-bearing deposits drop materially from here, go back to pre-GFC, 15 years ago, the average for the industry was almost half of what it's been since then. Can we go back that low or is there structural changes that won't allow non-interest-bearing deposits to go down to 15% to 16% for the industry? How do you see that?
Well, I think for us, the structural change has been the growth of our commercial businesses. And so they carry with them DDA deposits related to paying for both treasury services and excess. So I would hope that we don't go back that low and that we've got some very material differences in terms of how we looked pre-2008 or 2010. But clearly, the events of the second half of March have everybody to looking at their deposits very carefully. And so those conversations continue around the bank. But our treasury results continue to be good. And so more and more of the balances here are used to pay for treasury and other services.
Got it. Thanks. I’ll jump back in the queue. Thanks, guys.
Thank you. Our next question comes from the line of Chris McGratty of KBW. Your line is open, Chris.
Great. Echo the nice words towards Ed. in terms of the -- of course. Tim or Dave, maybe on the margin, the 370, I think, in the release in the next couple of quarters. Maybe more of a medium-term question. If the forward curve plays out and you get cut next year, like how much downside from 370 do you see?
Well, I mean, it depends on how steep you think it's going to drop, I guess. You can look at our -- like our hedges for it. We think we're fairly balanced as far as our deposits and our loans goal. We've really mitigated the upside and the downside. So we give that sensitivity in the press release. But like the derivatives, if you look at that, we probably average out in the -- on the swaps in the high 3% range. And so if rates came down 150 basis points, then those would actually start to contribute to the margin. So probably a little bit of pressure down 150 basis points.
And then after that, we hold on. But in the prior cycle when the pandemic hit and rates dropped dramatically, as you know, our margin fell into the mid-2s. We think this margin would stay in the 3s. And so we think we've mitigated some of that downside risk. But I guess it depends on the shape of the curve and the slope of it, but we're hoping to hang on to what fairly substantially with a little bit of pressure if rates drop dramatically until the mortgage could kick back in to offset that.
Okay. Great. Maybe just as a two follow-ups. I think in the past, you talked kind of high-single digit expense growth. I appreciate the color for next quarter. But just given the changes in the environment, is that still like a reasonable ZIP code for a full year? And then also, can you help us on the covered call trajectory obviously, you're pretty active there. Thanks.
Yeah. We'll have to see whether the regulators do anything dramatic that would change. But barring that, I don't think we have a different outlook for our expense structure this year. We're pleased with this quarter. There's some unique attributes that kept it lower, like the health insurance claims were down a little bit, et cetera, but -- and mortgages are sort of at their low point as far as things go.
We hope mortgages actually pick up here, which will increase the expense base, but we'll have more revenue there, too. So that's not a bad reason for the expenses to increase. But we still hold on to that for a full year. There will be some increase, as I said, in the second quarter with the acquisition and the marketing and it will probably help, insurance claims will probably normalize, et cetera. But we sort of focus on the net-net because as [indiscernible] goes up on the revenue side, the expenses go up too.
And as mortgages goes up on the revenue side, expenses go up. And so it's hard to peg that expense number specifically. So we're still targeting that net overhead ratio. And that sort of takes into account the fluctuations of those revenue streams going up and down with market conditions. But yeah, I don't see anything dramatically structurally changing here right now.
It's really the deposit cost side of the equation that had a little bit of impact this quarter with the sort of the structural mix shift there that happened. This whole situation sort of woke up the sleeping hibernating bear as far as people looking at their rates paid on deposits. And I think we've seen a substantial part of that move already. So I don't expect it to have a similar shift this quarter.
Okay. That's great. And how about the covered call outlook?
It sort of depends on where rates are at, but usually how it’s protected downside rate environment as we invest. The volatility at the beginning of this year, the covered call fee income, if you go back over time, this was a little bit of a higher level than we've seen over the prior four quarters, but there is higher volatility in the fee range is based on the volume of securities that you're right calls against, but also volatility and we saw much higher volatility. So I would expect that to be down a little bit in the second quarter because we just have -- we've been retaining a lot of those securities as liquidity just to be cautious early in the quarter. So we'll see how it plays out the rest of the quarter. But I imagine that's down a little bit, but there'll still be some.
All right. Great. Thanks.
Thank you. Our next question comes from the line of Casey Haire of Jefferies. Please go ahead, Casey.
Great. Thanks. Just one follow-up for me. The ramp scenario that you guys highlight if Fed cuts down 1%, just curious what kind of deposit beta you guys anticipate and mix under that kind of scenario, which is obviously pretty good?
Yeah. I mean I think I'm not sure I understand the nuance to your question, maybe, Casey, but we're assuming that we're going to get probably to a 50%-ish range for the full cycle here. And so sort of depends on the timing of those cuts. But as you can see in kind of the progression of those numbers -- and I want to say Table 7, Dave, is that right? We've narrowed our asset sensitivity position dramatically over the last four or five quarters here. So if that's -- if I'm not doing a good job answering your question, try again here.
No, that's right. So similar, Dave, is it similar pace on the way down as it was on the way up?
Yeah. No, down would be a little bit faster than on the way up. We'd lag on up, we would be quicker on the way down. So it would be a little bit accelerated. And I think you can see that because on the up -- we'll make 1.7% on the upside under the ramp scenario, but only 1.3% on the downside. So a little bit faster cuts in deposit rates on the downside. I don't have the exact beta for that at my fingertips, but a little bit faster.
Got you. Okay. Just one more. I think I know the answer, but I just wanted to check. With loan growth a little slower here, any appetite for share buyback?
We don't plan on it right now. We certainly have an appetite because we think -- we all believe we're undervalued here. But I think we'd like to see how this plays out a little bit. As Rich said, the loan growth was a little slower this quarter, but pipelines were higher at the end of the first quarter than they were at the end of the fourth quarter. There is good loan demand out there. So we will play this out and see how that goes. We'd rather reinvest in the business and take advantage of this disruptive market like we've done in the past. And go raise deposits and bring in new clients and expand the franchise. So I think we're going to see how that plays out first. That's always been our goal is to grow the franchise and take advantage of disruption.
Okay. Great. Ed, best wishes is in retirement. I hope you spend a lot of time in [indiscernible].
Thank you. Our next question comes from the line of Nathan Race of Piper Sandler. Please go ahead, Nathan.
Yeah. Hi, guys. Good morning. I also just want to echo everyone else's comments and wishing you well Ed as you transition in Chairman, and it's been great working with you over the years.
Thank you, Nate.
Just kind of thinking about the deposit growth outlook from here. It sounds like you guys had some nice inflows year-to-date with the MaxSafe products. So I'm curious how much of that occurred post the bank failures that we saw in early March and just kind of how our deposit flows trending quarter-to-date and just kind of the overall outlook for core deposit growth over the course of this year within the context of maybe kind of what you're seeing in terms of opportunities to add new relationships in the wake of some of the M&A-related disruption that we've seen in Chicago lately?
Yes. There were a couple of questions in there, Nate. One, with respect to MaxSafe, we were growing deposits prior to March 10, but clearly, that activity accelerated demand for sort of insurance-related products. And MaxSafe and the other reciprocal products that can handle even larger amounts, got a lot of air time and a lot of popularity. So the majority of the MaxSafe growth occurred in March. We continue to think we're really, really well positioned though. And so this is the time of the year we're kind of wrestling some tax outflows as well. We think we're kind of weathering those just fine.
Quarter-to-date, as Rich kind of inferred, the loan growth is pretty good. The deposits remain stable and we've actually paid down some of the home loan borrowings. So we're -- we think we're in a pretty good place here, and we're very focused on growing deposits and continuing to fund the loan growth.
Okay. Got it. And then just in terms of the balance sheet size from here and specifically the earning asset base, it was kind of stable quarter-over-quarter. Is that kind of a reasonable expectation to assume over the next couple of quarters as you just take securities cash flow runoff and redeploy that into kind of mid to low-single digit loan growth or how do you guys kind of think about kind of overall earning asset growth from here?
No. We sort of like where our securities positions are at. We would expect the balance sheet to grow. We're going to go off market to -- our deposit products in the communities and our consumer deposits grew during the quarter, and we expect that to continue to go on. The middle market space, we're strong in. And with the pipeline is full, we expect to bring in new customers. So our expectation is that we will grow the balance sheet through deposits, and that translates into loan growth. And not just run the securities portfolio down to fund that growth.
Total growth comment, we've got to continue to grow. If you look at we won the J.D. Power award again this year, three out of four years we won. Won another eight grant awards this year, saying our products are better than the big guys. They all have to sell here, plus our positioning as a local bank, and we have some real neat ideas about helping people move their accounts. It's a pain in the neck to move your primary account, have some great ideas out there, they're going be instituting. Again, the charters we have, we go and offer a teaser rate in the lower -- in our smaller locations not cannibalized. So I think we're in great shape in that regard. We've got to grow through it. We always do.
Okay. Great. That's helpful. And if I could just ask one more on the recently closed Rothchild (ph) acquisition. Any kind of guide rails that you guys can provide in terms of kind of the fee or expense impact or just kind of what you guys expect to have in terms of the pretax margin from those assets and team joining?
Yeah. Initially, expenses might be a little higher because as we transition them into ours, they've got some duplicate systems until we convert and the like. And so there will probably be some integration expenses. But that number is probably in the second quarter, somewhere in the $7 million, $8 million range with some of the transitional integration costs. And fees, obviously, will make a margin on that. We haven't disclosed what the fees are yet. We just -- I don't necessarily want to give away what our pricing is on those assets that we acquired. But I think you can sort of ballpark it pretty well with that background.
Yeah. Is the pretax margin just similar to what you guys currently earn on Great Lakes Advisers? Is that kind of a good proxy, Dave?
Yeah. I would think that their business -- their asset managed business would be very similar to ours. So...
Again, with the front-end implementation expense, though, so a little bit of time to get there.
Yeah. But we think great leverage of combining the systems. It was a nice add on to the assets under management and will give us leverage. So it might take us a couple of quarters to squeeze all of the integration stuff out. But we’re very excited about the acquisition. I’m very excited about the team that we’re bringing on and look forward to continue to have that be a growth area for our fee income.
Got you. That’s great. I appreciate all the color. Thanks again, guys.
Thank you.
Thank you. Our next question comes from the line of Brody Preston of UBS. Your question, please, Brody.
Yeah. Hey. Good morning, everyone. Thanks for taking my questions. Wanted to just follow-up on Nate's line of questioning on the Rothchild. Just on the expenses, you said 7% to 8%, but some of that's transitional. I guess could you help us think about as you -- once those transitional costs are out of the run rate, what do you think the go-forward run rate specifically to Rothchild -- how the Rothchild acquisition would be?
4% to 6-ish, something like that. Again, we're a whole two weeks into this in terms of our implementation activities. So...
Yeah. It just depends on how we grow that business. And if we can grow that business more, there's a little bit more expense that will go with it, but 5% plus or minus.
Got it. Okay. And then I just wanted to circle back on the swaps. I appreciate the detail on Slide 22. So I can kind of try to work through that myself. But I just want to ask if you could clarify for us like how much of the -- in the 370 margin at quarter end, how much are the swaps negatively impacting that just in terms of basis points?
It's about 7 basis points, and we would project since we added some in the first quarter that, that number would go up.
Yeah, but 7 basis points for the full first quarter.
Correct.
But that $370 million probably has...
10 to 15.
10 basis points to 15 basis points on it. So [indiscernible].
Yes. That was the number I was looking for. Thank you for that. And then I just want to ask just one last one or about to -- just on the NIBs. You guys aren't unique in this sense that the NIBs have been pressured. But I do just want to ask, do you have a good sense for like when the tide kind of could stem there? Like are you kind of close to which you would think would be the level that your customers need to keep from an operational account perspective or are you expecting to see more headwinds on non-interest-bearing going forward?
Yeah. I mean I think it's hard to say. I mean, again, we're growing the amount of DDA deposits that are required at the bank to pay for services, and we're adding commercial relationships. So is there going to be more migration? I don't know. We clearly think we've talked to most of our largest clients over the last several weeks, in some cases, more once. But it's kind of hard to say. And I don't think we're an outlier. I think we're kind of seeing what everybody else is seeing here.
Yeah. I mean our gut would sort of say it's stabilized, that there is an initial -- people paid attention to their bank accounts all of a sudden and realized that there's some interest-bearing monies they could move away or throw into MaxSafe or whatever. I think that we've probably seen the bulk of it. We actually think it's probably stabilized. But your guess is as good of mine as far as what the industry may do. But we do think that they do need this base level of accounts there to pay for fees and operate their businesses. And that's our best guess right now is a stabilized, but..
Got it. Okay. Yeah. I understand. That's tough. And then the last one I had was just, Rich, I wanted to just follow up on the detail you gave on the CRE analysis, particularly as it relates to the 25% that are anticipated to either be paid off or require a short-term extension at prevailing rates. So I think the prevailing rates part is the key, right? Like obviously, you think that in the short term, these borrowers could support a higher rate.
But it sounds like -- just the way you phrased it that you don't necessarily think these are credits that you would want on balance sheet from a longer-term extension standpoint. So could you help us think through what's going on with that 25% or you say, yes, you could afford it, but we don't necessarily think we want to keep you?
No. That's not the case at all. Those are really, I'd say, more construction loans, things like that, where we have financed and have a mini perm and long-term fixed rate loans typically are not where we want to put a lot of those assets, and there are better alternatives out in the market. So those -- that's just part of where we fit into the spectrum and CRE. So these are -- that's what we typically see all the time. Our runoff on CRE is substantial. So we would anticipate that, that will continue to be the case. And those -- these are loans that are stabilized and ready to go, and we anticipate they'll move out without a problem.
Got it. So it's really that last bucket, the 15% that require additional attention, where you're spending more of your time?
Exactly. That's our focus right now are those that because of the market dynamics we talked about rising rates and pressured leasing activity that they're not at our required debt service coverage, and so they're going to have to figure out how to either through paydowns or additional collateral or something we're going to have to figure out a better structure.
You talked to a number of them already, haven't you?
Yes. No, we're already in agreement with -- of those identified loans, we've already identified sort of the path forward for better than half of them. And generally speaking, because I think we are very thoughtful about client selection. We should be able to reach agreement on the great majority, if not all.
Got it. Thank you very much for that color. I appreciate you taking my questions.
No problem.
Thank you.
Thank you. Our next question comes from Jeff Rulis of D.A. Davidson.
Thanks, good morning. Just wanted to circle back. You talked about the optimism on the pipeline. Could you remind us what that actually is, as you entered the quarter versus where it was at the start of the year?
Yes. Yes. We haven't disclosed that, but generally, in the past, it's been running in the last few quarters just for commercial and commercial real estate, not like the premium finance and the niche businesses there -- are the residential real estate, but just the commercial and commercial real estate I think our growth pipelines have generally been in the $1.2 billion to $1.3 billion range. And I think we're more in the $1.5 billion to $1.6 billion.
And now that doesn't mean those are all going to close. That's the pipeline and timing isn't always linear. But the fact -- I look at that more as a barometer as to how is loan demand shaping up. And so it has increased in the first quarter. Now whether that all comes through or not as -- I'm not saying that that's the case. But generally, our pipelines are a good indicator of demand and future closing. So up a little bit, but still relatively stable. It's not like it went from $1.2 billion to $2.5 billion, but it inched up a little bit.
The other thing is that, as Dave pointed out, that's the core CRE and C&I. That doesn't include the leasing portfolio, which we've seen really good activity in so far this year. And as we also talked about in my comments, the commercial premium finance group where we're seeing fairly robust growth through the rest of the year. So earlier on, somebody may have said that our guidance has changed and it hasn't changed. We just had indicated that with a slower first quarter and just where the economy is, in general, we would anticipate that it's going to be to the mid or bottom end of that range of mid- to high single digits, so just a point of clarification there.
Okay. Right. That's helpful, those last comments. You sound optimistic. I think you kind of maybe hedging that a bit, just macro and a slow start. But -- so again, the guidance is mid to high, and maybe you're going to hug the mid for now, but kind of continue to update us. Helpful. Just to...
Rich mentioned this. One of the wildcards obviously, is what our competitors are doing, and that's been a little bit harder to determine over the last month than it typically is. So just another factor.
Yes. Fair enough. And just on a related front, my other question, just it sounds like you're getting some opportunities organically, but I wanted to check back in on the M&A side and your thoughts, obviously beautiful environment, but also opportunity potentially. So any thoughts on looking at whole bank or you look at more of the -- like you've done on the wealth management side, any thoughts on the acquisition front?
Right. Yes, as you recall, the last two have been non-bank, the wealth management acquisition as well as about a little over a year ago, the Allstate Agent Finance. We talked about a fair amount of sort of exploratory activity that really hasn't turned into much, because it's been tough to come to agreement with sellers. But we think that may be opening up a little bit here. We're getting a few more inbound phone calls and some more exploration. We'll continue to be opportunistic if they make sense, but we're also disciplined. And so we'll see what happens. But probably activity kind of picking up a little bit.
I would expect to continue to pick up as this whole cycle hits those $1 billion to $5 billion banks, and they have lots of problems and issues and probably through the wat of talent and as Tim said, the activity has picked up.
Got it. And congrats Ed, and look forward to the future.
Thank you.
Yes, thanks.
Thank you. Our next question comes from the line of Ben Gerlinger of Hovde Group. Your line is open, Ben.
Hi, thanks guys. Most of the questions have been asked and answered, so I appreciate all the color, but I was curious if we can just think like kind of 10,000-foot view here. Wintrust has really never had a long-term growth. You guys are in perpetual growth mode, which is good. The audits have been pretty tight to get across the industry, especially if the positive level is going down, in a point to tightening, the cost has gone up. So just in general, do you have any internal red lines in terms of loan-to-deposit ratio. I mean, if growth kind of reaccelerates, which is kind of alluded to here, where would kind of be the internal red line that we -- yes, we need to get more deposits regardless of cost?
Well, I don't know about the regardless of cost, but we think there's deposit opportunities out there. We've tried to be pretty disciplined through this cycle as rates have moved up. And we've not gotten ahead of what we believe to be the loan growth opportunities. But we're going to be working pretty hard on deposits. And we've said before, we don't want to be 100% loan to deposit. We probably don't want to be 95%. So I think you'll see us working very hard to grow deposits to try and match the loan growth.
Got you. Okay. And then when you just think, kind of, economically speaking, I know you guys were a bit ahead of the curve in terms of kind of saying that inflation is not transitory. When you guys position today, it seems like economically we're slowing down, and the Fed is likely to probably cut sometime in the next 18-months or so. Is there any area that you're intentionally rate capping in terms of growth -- or excuse me, loan growth or new areas you're kind of avoiding?
No, I don't -- I mean, Rich can chime in here, too. I don't think categorically, there's anything that we're saying we either will or won't do, but we're obviously monitoring the rate impacts on our clients. And for many of them down is good. But we'll see.
Yes. No, I agree with what Tim just said. One of the lines that we use a lot around here with our lenders is we never want to be the bank that jerks the wheel. We think that ultimately, that does a lot of institutional harm by saying we're not going to do that, we're not going to do this, because it just makes it that much more difficult to get back into it when you want to. And our general thought is just be really thoughtful about who your sponsor is, who your customer is, what the structure of the deal is how the deal is priced. It's just -- we've been at this for a long time, and we just really want to focus in on that. There's -- office is a great example. Would we do another office deal?
Absolutely, if it's structured the right way. We've got the right tenant mix, and we've got the right borrower, and we've got the right collateral structure. So it's just -- we are trying to be very thoughtful, I think, as we talked about here, the granularity of our portfolio and the way it's structured allows us that flexibility. If I had a portfolio that was 50% CRE and most of that office, I'd feel a lot different. But right now, we are just trying to be opportunistic and also be really thoughtful about keeping dry powder for our customers.
Got you. Appreciate the color. Ed, congratulations. You've build a great franchise.
Thank you.
Thank you. I would now like to turn the conference back to Tim Crane for closing remarks. Sir?
Yes. Thank you very much. As I hope you can tell, we continue to think we're very well positioned coming off sort of atypical March time frame here. And we're going to be working hard to grow deposits and take advantage of the opportunities available to us. Ed's going to get mad at me, but I do want to take one second just to remind everybody that coming off a record quarter and well positioned to the future is really a function of Ed's leadership.
And many of you on the call know Ed personally. And I hope as he transitions into a different role that you'll have a chance to catch up with him. But in 32-years, he's turned Wintrust into Chicago and Milwaukee's bank with several market-leading national businesses. And he's done it in a way that's been fun for employees, good for our communities, appreciated by our customers and we hope rewarding for those that have invested in our banks. So Ed, on behalf of the whole team, I just want to say thank you and wish you well.
Thanks, Tim. I'll be around [Multiple Speakers]
I know.
Don't screw it up.
So with that, obviously, if there are more questions, feel free to reach out to us off-line. And as Ed always says, we appreciate your support, and we'll be working hard to make sure we're moving forward here. Thanks very much.
Thanks, everybody.
This concludes today's conference call. Thank you for participating. You may now disconnect.