Wintrust Financial Corp
NASDAQ:WTFC
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Wintrust Financial Corp
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Welcome to Wintrust Financial Corporation's Second 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 Q&A 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 press on Form 10-K and any subsequent filings on file with the SEC. Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded. I will now turn the conference over to Mr. Edward Wehmer.
Thank you very much. Hello, everybody. Welcome to our second quarter earnings call. With me again are Dave Dykstra; Dave Stoehr; Kate Boege, our General Counsel; Tim Crane; and Rich Murphy. Same format as usual. I'm going to give some general comments regarding our results, turn it over to Tim Crane for more detail on the balance sheet in the second quarter. Dave Dykstra will provide detail on other income, other expense, and Rich Murphy will discuss credit. By the way, we need to refer to Murph as Captain Murphy as he is going to be crewing Wintrust's first entry into the world famous Mackinac Race, something we've been sponsoring, Chicago to Mackinac. So he's got a sales add on here and go get them. And back to me for some comments on the future and we have some time for questions.
All in all, it was a great quarter for us, but consider a transitional quarter for WTFC. Transitional in the sense will be relying less on mortgage income going forward and more on the margin income, for net income increases in the coming quarters. This has always been our design, by the way. We like to stay very positively [GAAP] so that we can -- in a higher rate environment, we are able to -- we increase the margin, the cover -- more than cover expenses that will result from the inflationary period. And that's what we're doing right now. All in all, quarter's characterized terrific loan growth across the board, $1.9 billion. Period end loans exceeded average for the second quarter by about $1.2 billion bodes well for the future quarters. Overall interest rate sensitive position allows the margin increase to $2.93, up 32 basis points from quarter one. Should we know that June's margin was closer to the 3.10%. Moving forward, we expect the margin [could] increase as previous rate increases worked their way, the balance sheet additional future rate increases occur. Net interest income increased $39 million quarter-over-quarter. Earning asset rates were up 36 basis points. Cost of funds was up 7 basis points and pre fund contribution increased 3 basis points.
Quarter was negatively impacted by security losses of approximately $8 million -- $2.5 million loss on some excess real estate, our old data center and a property which has been held for expansion and used for storage. As we said, we decided to get rid of them and be done with them. And the increase -- also by the increased provision to cover our loan growth by about $9 million to $10 million. The former of these two items negatively affected our net overhead ratio, [down] about 1.5%. If you disregard those amounts, we'd be closer to 135 target.
The [indiscernible] was somewhat muted by our work by our hedging process, our hedging strategies to work in process. Dave is going to talk about that a little bit later. Credit metrics, which we'll discuss remain -- really remain extremely healthy and terrific. Wealth management revenue held up nicely despite the markets and mortgages and our own -- and mortgages held their own considering the right environment. They will cover both fees. Recently concluded the capital offering [netted] $286 million, it was a great success for us, so our [standalone] position us for additional growth.
So on the earnings front, as you know, we made $94.5 million, $1.49 a share. Pretax preprovision of $152 million, really a good number considering where we've been and where we're going. And I think there's a [smile] chart in the package, you can read. Asset, on the balance sheet side, we're up nicely, I would say, [$118] million of increase in deposits and the capital offering helped in that. And with that, I'm going to turn it over to Mr. Crane who's going to discuss the balance sheet.
Great. Thank you, Ed. I'd like to highlight a few balance sheet items as well as expand on a couple of the numbers that you mentioned. You'll note that this will be the last quarter we referenced PPP loans as in most cases, the balances and related financial impact or reaching levels that are relatively insignificant to our results on a quarter-over-quarter basis. Obviously, the year-over-year impacts are documented in the financials. The $1.9 billion of loan growth, excluding PPP, that Ed referenced represents 22% loan growth on an annualized basis and importantly was spread across all categories. And also, as Ed mentioned, the end-of-period loans were substantially higher than the quarter average, which will help us going into the third quarter.
Going forward, while encouraged by stable pipelines, we believe that loan growth in the mid to high single digits on an annualized basis may represent a more reasonable expectation given the current uncertainty around the macroeconomic outlook. Deposit growth for the quarter was about $375 million, influenced by both seasonal tax related outflows and a very disciplined approach to pricing in the rising rate environment. Interest bearing deposit costs of 28 basis points for the quarter were up 6 basis points from the end of the first quarter and will begin to trend up with the rising rates. While the competitor deposit pricing remains very muted, we are starting to see increases in the more rate sensitive of the deposit categories. As an example, municipal deposits often track some of the state indices. In addition, we believe a large Fed increase at the meeting next week would also accelerate deposit pricing discussions in the market. For the quarter, our securities book remained essentially unchanged. We used excess liquidity to fund the strong loan growth, essentially replacing maturing securities, obviously, at a rate that's trending up. And at quarter end, liquidity remained strong with about $4 billion of interest bearing cash on the balance sheet.
As discussed last quarter, our securities book of $6.5 billion, it's about 47% available for sale, 53% held to maturity. During the quarter, the continued rise in rates resulted in an additional tax adjusted unrealized loss of $122 million on the AFS securities. Despite this reduction, tangible book value for the quarter increased to a record level. As rising rates and rate sensitivity remain a topic of interest, I want to reiterate some of what was discussed on last quarter's call. First, although our GAAP position is down slightly, we remain asset sensitive and well positioned to benefit from continued rising interest rates. As a reminder, and this is outlined in our presentation materials, approximately 80% of our loans reprice or mature within a year. Second, as we experience increasing rates, we continue to believe each 25 basis point increase in rates will generate in excess of $40 million of pretax net interest income on an annualized basis, which equates to approximately a 10 basis point improvement in margin. To be more specific on the margin, Ed mentioned $2.93 for the quarter, up 32 basis points. On our last call, we suggested that the consensus rate forecast could result in a margin approaching [$3.25] by year end. With the more current consensus projections, it's likely we'll meet that target earlier than anticipated and may approach [$3.50] by year end.
On the capital front, despite very strong loan growth, as a result of the common stock offering, capital ratios improved with the higher rates and more typical loan growth, the company's earnings are projected to result in further organic improvement to capital levels in the coming quarters. Lastly, on a nonfinancial note, the pandemic has accelerated the use of and really the importance of digital services at all banks, and we show some statistics in the presentation portion of our documents. This past weekend, we successfully completed the full replacement of the digital banking system used by our consumer and certain small business clients. This was a 15 month effort, a significant investment on the part of the company. This resulted in a very material upgrade to best-in-class feature functionality available to our clients. It should differentiate us relative to all but our largest competitors, and will only enhance the top-tier service that Wintrust banks are recognized to providing our clients. And you'll recall and also documented in our presentation some of the recognition we've received by J.D. Power as the best bank for customer service in our area.
With that, I'll turn it over to Dave.
Great. Thanks, Tim. As Ed mentioned, I'll cover some of the income statement categories that are noteworthy. Starting with the net interest income, for the second quarter of 2022, net interest income totaled $337.8 million, that was an increase of $38.5 million as compared to the prior quarter and an increase of $58.2 million as compared to the second quarter of last year. The $38.5 million increase in net interest income as compared to the prior quarter was due primarily to the net interest margin as average earning assets were essentially flat compared to the prior quarter. The net interest margin improvement of 32 basis points from the prior quarter brought us to 2.93%, a beneficial increase of 36 basis points on the yield on earning assets and a 3 basis point increase in the net free funds contribution, combined with an offsetting 7 basis point increase for the rates paid on liability resulted in the improved net interest margin. The increase in the yield on earning assets as compared to the prior quarter was primarily due to a 26 basis point improvement on the loan yields and on higher liquidity management asset yields as the company earned higher rates on bearing cash that we hold at the [FAB]. The increase in the rate paid on interest bearing liabilities in the second quarter was driven by a 6 basis point increase on the rate paid on interest bearing deposits.
Turning to the provision for credit losses. Wintrust recorded provision for credit losses of $20.4 million compared to a provision of $4.1 million in the prior quarter and a $15.3 million negative provision expense recorded in the year ago quarter. Although the provision expense was higher in the second quarter, I want to make clear that the increase was largely a result of providing for this quarter's exceptional loan growth of approximately $1.9 billion, excluding the PPP loans. So it wasn't really generated as a result of any widespread deterioration in the credit portfolio as the credit statistics remained very good, and Rich will cover that in more detail in just a few seconds -- captain Murphy will cover that in a few seconds. In the noninterest income section, our wealth management revenue was flat with the prior quarter at $31.4 million, but up slightly from $30.7 million from the year ago quarter. Given the volatility in the market, we're pleased with that result.
And consistent with overall industry trends, the impact of higher home mortgage rates, our mortgage banking operations saw a slightly lower loan origination volume during the second quarter. However, production revenue actually increased as the production margins rebounded to the range that we guided to last quarter. However, mortgage banking revenue decreased by $43.9 million from the first quarter, primarily due to the valuation changes related to the mortgage servicing rights and early buyout loans guaranteed by the US government agencies, which are also held at fair value. This quarter, the net of those two items was a $445 million -- or $445,000 benefit, whereas last quarter, that net benefit was $43.4 million. The company expects this portfolio of early buyout loans to continue to serve as a partial economic hedge of the mortgage servicing rights in future periods. There are essentially Ginnie Mae loans that are mark-to-market.
Looking forward, based on current pipeline activity and market conditions, we expect mortgage origination volumes to be lower in the third quarter than we just experienced in the second quarter. However, the impact of such a decline on net earnings is expected to be relatively small relative to the anticipated growth in our net interest income. And again, to put that in perspective, our production revenue in the second quarter was about $18 million. Servicing revenue was about $11 million. So even if there's a slight decline in the mortgage revenue from [$18 million], after you pay out the commissions and the other expenses, the net impact is -- could really only be a few million dollars, excluding any MSR valuation. So we've sort of bottomed out or bottoming out on the mortgage revenues now and the impact is going to be relatively insignificant relative to the -- what we expect to be extraordinarily good growth in the net interest income.
Turning to other categories. We recorded investment losses, as Ed mentioned, of $7.8 million during the second quarter compared to net losses of $2.8 million in the prior quarter -- related primarily to equity valuations being impacted by market conditions on a portion of our securities portfolio. Other noninterest income totaled $13.9 million in the second quarter, which was down $4.6 million from the amount recorded in the prior quarter. The primary reason for the decline in this category is the $2.5 million losses associated with the properties that Ed referred to. And additionally, the company realized $1.2 million of lower swap fee revenue in the second quarter relative to the first quarter. If we turn to noninterest expenses, they totaled $288.7 million in the second quarter and were up just 2% or approximately $4.4 million when compared to the prior quarter. The primary reason for this is the seasonal increase in our marketing costs, which were up $4.7 million and a variety of other miscellaneous increases and decreases by categories that essentially offset each other.
With that being said, I'll just cover a few of the larger changes in the noninterest expense section. First, salaries and employee benefits expense decreased by $5 million compared to the first quarter. The current quarter decrease is primarily related to lower accruals associated with our long term incentive compensation program relative to the prior quarter. Advertising and marketing expenses, as I indicated, was up $4.7 million when compared to the prior quarter. And as we've discussed on previous calls, this category of expenses tends to be higher in the second and the third quarters of the year due primarily to our marketing and sponsorship expenditures related to various major league and minor league baseball sponsorships as well as the sponsorship of summertime events held in the communities we serve, including the Mackinac Race that Ed referred to earlier.
Software and equipment expense totaled $24.2 million in the second quarter. This is an increase of $1.4 million as compared to the first quarter. The increase is due to increased expenses associated with upgrading and maintaining our IT and information security infrastructure and further investments in digital products and services, such as the upgrade that Tim just referred to. As we've done over the past few years, we continue to invest in the software and technology to enhance our customer experience and delivery systems and products, as well as invest in other systems to support our continued growth. OREO expenses increased by $1.3 million in the second quarter as the company recorded a gain of approximately $1 million from the sale of OREO property in the prior quarter and only a small OREO gain in the current quarter. Although this category increased, the total expense for the quarter was only $294,000. Lending related expenses were down approximately $2.6 million from the prior quarter, primarily as a result of lower mortgage banking related expenses and travel and entertainment expenses increased by $1.2 million over the prior quarter as the work environment continues to revert back to pre pandemic business customs and relationship managers are able to engage more routinely with clients and potential clients.
We consider the travel and entertainment activity is important to maintaining the strong loan growth that we've been achieving in the recent quarters. Other than the expense categories I just discussed and all the other categories in the aggregate were up by about $3.3 million compared to the first quarter. The increase was impacted by a variety of other operational fluctuations, including over $1 million of costs related to the conversion of our digital banking platform that Tim went over that just went live this week. The net overhead ratio, as Ed mentioned, stood at 1.51% for the second quarter and was negatively impacted by the $7.8 million of security losses and $2.5 million of the property charges. On a year-to-date basis, however, the net overhead ratio stood at 1.25%.
So in summary, the quarter actually was a solid quarter from a core fundamentals perspective. It was negatively impacted by the security and property losses and by the higher provision, but the higher provision [perversely] is good for the company as it related to strong outsized loan growth, exceptional loan growth for the quarter. Other than that, the loan growth and the expanding margin, the strong pipelines and the good credit quality really set us up very well for the future quarters. I will say, as I will sort of reiterate one thing Ed said, we are very asset sensitive. We do that by design, understanding that when rates go up, inflation probably increases too. So we would expect some increases in the noninterest expenses during the quarter. We would probably expect mortgages, as I said, to be down a little bit but we also don't expect to have the same security losses and property losses. So noninterest income probably will be relatively stable but noninterest expenses will probably rise a little bit with wage pressure in the market. But all of that will be insignificant, we think, relative to the increase in net income if the rate environment stays as is projected right now.
So with that, I will conclude my lengthy comments here and turn it over to Captain Rich.
Thanks, Dave. As noted earlier, credit performance for the second quarter was very solid from a number of perspectives. As detailed on Slide 7 of the deck, loan growth for the quarter, net of PPP, was $1.9 billion or 22% annualized and just an outstanding result. Equally as important and similar to the past few quarters, we continue to see loan growth across the portfolio. I'd like to highlight a few key elements of this growth. The second quarter is typically very strong for commercial premium finance and this quarter was no exception with loans up $604 million, up slightly from the $563 million in the second quarter of 2021. Life insurance premium finance continued to grow nicely with loans of $254 million. C&I loans, excluding PPP loans, were up $635 million, driven by asset based lending and leasing. In addition, residential real estate and core CRE loans showed solid growth. Year-over-year, we saw a total loan growth of $5.9 billion or 19% 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 this year and we saw that materialize into increased outstandings during the past several quarters.
Looking forward, we continue to be optimistic about loan growth for the remainder of 2022 for a number of reasons. Core pipelines continue to be very strong with solid momentum in Q2. Commercial line utilization, excluding leases and mortgage warehouse lines as detailed on Slide 19, continue to trend up from 37% to 41% and we anticipate this trend will continue. Also on Slide 19, you will see that business expansion and inflation pressures have resulted in many customers requesting increases to their credit facilities to help finance these costs. And as a result, we have seen the level of unused credit facilities increase. And both First Insurance funding and Wintrust Life Finance had another strong quarter and this momentum has been strong for several quarters, and we believe it will continue through the remainder of the year.
As a result, while macroeconomic conditions may cause a heightened level of uncertainty, as Tim noted, we're reaffirming our loan growth guidance of mid to high single digit growth. From a credit quality perspective, as detailed on Slide 18, we continue to see solid credit performance across the portfolio. This can be seen in a couple of metrics. While nonperforming loans increased from $57 million or 16 basis points to $72 million or 20 basis points, this is still below the NPL totals at year end or at June of 2021, which were 21 basis points and 27 basis points respectively. 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 $9.5 million or 11 basis points, up slightly from the previous quarter. Year-to-date charge offs totaled 7 basis points. And as detailed on Slide 18, we continue to see consistent levels 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
Thanks, Captain Murphy. All in all, it was a pretty good quarter for us, setting up the rest of the year very nicely. Great loan growth across the board and consistent pipelines for future growth are in place. As Murphy mentioned, credit remains benign, absolute NPAs are the dial of the last [seen], it's about 30% of the current size that we are our current size right now. We [continue] to call the portfolio for deals with cracks moving them out expeditiously, call in the first two quarters -- not last quarter but the first quarter and the fourth quarter of last year, we did some loan sales, we are looking to do some more of those. And loan demand as good as it is, why not get rid of the bad and bring in the good. Market disruption still exists and we will take full advantage of it, both on the deposit and the loan side where you read that maybe one of our competitors where some disruption is taking place and had a conversion that didn't go as well as ours did, I guess. And we're hoping to get some business out of that.
We're very well positioned for higher rates. Every quarter points [upwards] in $40 million to $50 million over the following 12 months. Increased net interest income should dwarf any increase expenses brought on by inflationary pressures. We expect the fourth quarter margin, as Tim said, be in the [3.50] to [3.60] range and to still be growing. Rates continue to move up as we anticipate they will. We continue to evaluate potential acquisitions but seller price expectations are still unrealistic in our opinion. Continued rate hikes and pressure on expenses brought out by inflation and tech investments required some of the banks, the smaller banks are looking at, should bring some reasonable as these expectations in the near future. In general, we don't like doing deals that are dilutive. So we're not going to change that approach.
In general, our customers are still seeing good things going on. Price increases are being readily accepted by our customers, some supply chain issues still exist, but the main issue remains in getting good qualified people. So our customers are feeling pretty darn good about where they are right now. Still a lot of money in the system. So we're going to be very diligent in monitoring this. We're not afraid to act of things actually do turn for the worse. We just don't see it yet. Margins to continue to slow and wealth management to continue to make progress, increasing the net interest income far away than loss of earnings from the mortgage area. Continued moderate expense growth to ensure the numbers do not that get goofy, technical term goofy, and sure like where we stand and we like our prospects for the future. With that, we appreciate your support, and you can be sure of our best efforts and time for questions.
[Operator Instructions] Our first question comes from the line of Chris McGratty of KBW.
This is Andrew Leischner on for Chris McGratty. So on the margin, you talked about hitting 350 by the end of the year. I'm just wondering why the fund rate and what your updated data assumptions going through that number and how much incremental expense that should we expect beyond that?
Well, there are a couple of parts to your question there, and I'm not even sure I heard all of it. But we're using the consensus forecast that has 75 basis points in July and then equal increases in September and December. Obviously, the July increase is most impactful to the margin for the remainder of 2022. The two latter increases meaningful for 2023. I think you had an expense question as well and Dave, I'll let you handle that one.
So the deposit betas, we still are -- as we've talked lagging right now and Tim talked about with the rate increase next week, there will probably be more pressure. But we're still looking at 40% to 50% betas ultimately on the deposit portfolio. We'll just have to see how the market reacts as far as competitive rate increases to see how fast that happens. But ultimately, that's still where we expect to be at.
And I just had one more on loan growth. You mentioned like you reiterate your mid to high single digit loan growth guidance. You're currently at about 16% annualized growth for the year so far. Is that mid to high single digits, is that for the remainder of the year or for full year '22?
For the remainder of the year. I think if you look into next quarter and the fourth quarter as much as we can see that those are kind of the estimates we have for those quarters.
And I guess with that, are there any areas that -- within the portfolio that you're expecting pullbacks in?
Pullbacks in terms of demand or pullback…
in terms of growth, yes…
Yes. I would think that with rising interest rates, you're going to see more pressure on CRE growth as it's tougher to underwrite in a higher interest rate environment. I also think that Wintrust Life is probably going to be more affected by rising interest rates as that product is much better in terms of -- in a lower interest rate environment. We also may see -- we've had some decent portfolio growth here in residential mortgages that may be affected as well. Those would be the three areas that I would highlight. But again, I don't think it's going to materially affect our guidance.
And next year, we'll be adding some products in the life insurance side. We’re doing the system on the life insurance business and we'll be able to offer lines of credit and things like that we can't offer right now. So we expect that business to continue to be vital. We continue to rework it and we're excited about the future there.
Our next question comes from the line of Terry McEvoy of Stephens.
Hope you're doing well. Maybe let's start with, I guess, the outlook for fee income. I was a little bit surprised with the resiliency in Wealth Management kind of flat quarter-over-quarter and given market conditions. And maybe, Dave, if you could just talk about some of the puts and the takes for your outlook for fees to be stable in the third quarter.
So wealth management, I mean, there probably was down a little bit as far as some of the assets under management, but we also have other pieces there with our 1031 Exchange business, our Chicago Deferred Exchange we refer to as CDEC had a really strong quarter. So that helped offset some of the pressure on the other areas of the business as some of those assets priced at the beginning of the quarter, some price at the end of the quarter. So there may still be a little bit of pressure on the wealth business, but not dramatic. So there might be some pressure there. As we said on mortgages, there might be a little pressure there based upon the application volume we're seeing now. But we don't expect to see another $7.8 million of security losses. We don't expect to see another $2.5 million worth of properties that we disposed of. So there's $10 million right there of losses that -- you can never say never, but we don't expect to have them. So I think if you work your way through all of that, then it should be relatively stable, plus or minus.
And then as a follow-up question, maybe if you could just talk about your hiring efforts given some of the market disruption. I'm not going to ask from what financial institution they may come from, but maybe what areas of the bank do you think you can add folks to given that disruption?
Terry, it's been largely on the commercial side. As we've talked about in the past when lenders get concerned about their ability to take care of their clients, they begin to explore their options. And so we continue to see disruption, some of it by announced transactions, some of it by the integration efforts that occur over time. So that tends to be more active during the kind of first two thirds of the year slows down as you get toward the end of the year. But we're excited both by some additions in the Chicago area as well as a couple in Wisconsin.
[Operator Instructions] Our next question comes from the line of David Long of Raymond James.
Deposit balances overall, you were up a little bit in the quarter, period end to period end. Just curious how you're thinking about overall deposit balances through the second half of the year? Do you think there's still some stimulus related fluff out there that could leave the bank, or are you guys growing quick enough with new funds and new clients that you can offset that and grow deposits in the back half of the year?
We think consumers remain pretty healthy, which is part of the reason we think economically, things feel okay. But the market's been very disciplined and people haven't been moving rates much. And so I think the second half of the year will depend a little bit on how some of our competitors react but less to our own devices, we would plan to continue to grow deposits, continue to add relationships. And we'll work hard to fund some of the loan growth that we think will come in the second half of the year.
David, it's like [indiscernible] loans, they need deposits, loans and deposits. We're able to keep the cost down to date, but it will be -- we're going to have to pay some those expense through premium rates to get some people in some of our younger branches. We don't have the cannibalization that. We've always done has got out with the younger ones and the newer banks or branches that -- and go out and pay up a little bit to get full relationships, and it's worked well. And now we can do it again with higher rates and kind of out of the red zone, if you will, use as a football analogy, and more field to play with. So we're going to continue to grow deposits really as quickly as we can.
Appreciate that. And then let me switch over to Captain Murphy. Reserves, still pretty healthy here. But as we're seeing some increasing risk of a potential recession, how are you thinking about the reserve level between now and the end of the year? Do you expect the reserve level as a percentage of loans to be much higher than where we are today?
Well, the reserving, as Dave pointed out, the reserve levels really are more a function of the growth as opposed to the Moody's and [Multiple Speakers]. So as of this point, we're just not seeing risk rate migration in a negative way, not saying it wouldn't happen in the back half of the year if things were to change dramatically in terms of the economic environment. But I think, really, just based at this point in time, the provisioning levels really would be dictated by growth more than the economic environment, but that could change. Clearly, there's a lot of prognostication as it relates to what the recession might look like and when it might happen. But as of this moment in time, we're just not seeing a lot of effects within our portfolio.
As you know, the allowance is based upon a life-of-loan concept with CECL. So it is what it is right now unless you see degradation in economic conditions that we think impact our portfolio, like Rich says, the provision should be based on growth.
And if I can sneak another one in here. Thinking about the net interest margin, talking 3.50% range, maybe 3.60% range. Is there a top on your net interest margin? And is there a point where maybe LIBOR is not moving as quickly as the rate hikes since LIBOR has gotten a head start here and your deposit beta catches up. So potentially, do you hit [3.60] or so and then it starts to level off?
I don't think so. And by the way, LIBOR is dead, we can't use it anymore. But I think that it gets really bad. You see rates going to 16%, I doubt that's going to happen. But I think that -- I would imagine that the -- you could top out around 4.25%, depending on how rates go, 4.25, 4.5, go back to the old days, it probably has to do with mix and demand and that sort of stuff too. So I think that we're happy where it is right now, and we're going to have to think about where we start locking it in because we don't want the downside going forward. And we're going to have the ability, I think, we haven't had since really 9/11 to hedge both sides of the earnings for a period of time so that we don't -- we're not going to end up if rates go down and to get slammed again. So already hard at work on that and use your help in picking the top. We hit the top, we want to know, and you could call and tell us…
The $350 million is really based upon the consensus forecast right now. So I mean, you could pick all sorts of different interest rate scenarios where rates, like Ed said, would go up into the teens or something and we don't expect that to happen. We're dealing with what we see right now in front of us. But certainly could go higher and deposit betas, as we talked about, are low right now, but we'll catch up at some point. So lots of moving parts but we wouldn't guide you to where we think we're at if we didn't see a clear pathway to that.
I don't think 360 is the top, I think, it’s the issue…
[Operator Instructions] Our next question comes from the line Jon Arfstrom.
Just it may not matter that much, but I heard a couple of things on the margin guide. I heard 350 by the end of the year and then I heard 350 to 360 for the fourth quarter. It may not matter [Technical Difficulty] but what are you guys really trying to say?
I think deposit costs a little bit, and we just don't know through the end of the year, but we -- again, given the consensus forecast, we think approaching 350 is certainly within range. And if deposit pricing remains pretty muted, maybe we do a little better.
And I guess the message for third quarter is a similar type step up from what we just saw, especially if we get 75 next week?
Yes.
And then I want to push you guys a little on loan growth as well. Murphy, you answered this a little bit earlier, but you guys…
Captain Murphy, please…
Captain Murphy. You did 5% in the quarter and you've got period end that's higher than average by over $1 billion. And is the message -- don't expect this kind of growth again in Q3? And it should materially slow from here, or is the message that this can continue at the current range that you're in that you just put up this past quarter?
Yes. I'd be surprised if we continued in the third quarter. We were pleasantly surprised in Q2. Part of it, as I said, was Q2 is definitely affected by the P&C portfolio being up $600 million there really drove a lot of that growth. We also saw the life portfolio and portfolio mortgages be higher than what we anticipated. The growth in P&C in the third quarter last year, I think, will be very similar to what we've seen in Q3 here, which was up but well off Q2 total. So I would be -- I do think that we'll be significantly down from where we were in Q2 because of that. But I think, again, I think we'll be in that guidance but maybe at the upper end of the range.
About $1 billion, I would say…
Yes. I mean I would say somewhere in that $1 billion number would be, but as we get 2.5 months ago…
It sounds like it's clients plus the market share shift that’s driving all of this. That's fair…
I mean, I think that's right, Jon. I mean one of the things that I kind of highlighted in my comments is that, that core C&I activity has been a real meaningful contributor to the growth, and we're seeing a lot of disruption in the marketplace and that's not going away. So that core growth is really an important part of the story.
And part of that, Jon, is our pipelines are pretty stable, but our unused commitments are up quite a bit. So as some of those commitments start to get drawn down, that's sort of a hidden growth thing outside of even our pipeline numbers. And as Rich said in his comments, we expect that unused line or that line usage to go up. So lots of good things out there. It's just sort of hard to gauge the customer activity, I don't know a linear sort of basis.
And then I understand the commentary on the strong NII growth. I think you used it -- we're just outrunning expense growth. But Dave, any other color or help in terms of how material you expect the expense pressures to be?
Well, I think the biggest area sort of is in the labor side of the equation. You may have saw that we just announced that effective August 1st, we'll take our minimum wage rate from $15 to $18 per share, and that will have some impact. We still are filling positions, open positions and making progress there, but that will continue to add. And if we really do step up earnings as we think based upon the growth and the margin expansions, we'll probably have some more incentive compensation out there, probably some offsets with some less mortgage expenses as we saw this quarter. As you saw on the lending side, those were down a couple of million dollars, that's probably a little bit more that comes out of there. But we were at 2.88%, I just don't think we'll be in the 2.80s anymore. I think that number has got to go up because of the wage inflation that's going on, but we certainly will try to control it as best as possible.
Thank you. And at this time, I'd like to turn the call back over to Ed Wehmer for closing remarks. Sir?
Thank you very much, everybody. Thanks for listening in. Well, we appreciate your support. And any questions or follow-up you want to pose to us, call any of the four of us, or Dave, me, Captain Murph and Tim. But thanks. We'll talk to you this quarter, if not before. Appreciate your support. Bye-bye.
This concludes today's conference call. Thank you for participating, and you may now disconnect.