Wintrust Financial Corp
NASDAQ:WTFC
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Wintrust Financial Corp
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Welcome to Wintrust Financial Corporation's Third Quarter 2022 Earnings Conference Call. A review of the results will be made by Edward Wehmer, Founder and Chief Executive Officer; Tim Crane, President; David Dykstra, Vice Chairman and Chief Operating Officer; and Richard Murphy, Vice Chairman and Chief Lending Officer. As part of their reviews, the presenters may make reference to both the earnings press release and the earnings release presentation. Following their presentations, there will be a formal question-and-answer session.
During the course of today's call, Wintrust management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Actual results could differ materially from the results anticipated or projected in any such forward-looking statements. The company's forward-looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release, and in the company's most recent Form 10-K and any subsequent filings with the SEC.
Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded.
I will now turn the conference call over to Mr. Edward Wehmer.
Thank you very much. Welcome everybody to our third quarter earnings call. With me are Dave Dykstra; Dave Stoehr; Kate Boege, our General Counsel; Tim Crane; and Rich Murphy. It’s the same format as usual, there’s some general comments regarding our results, turn it over to Tim Crane, who will give detail on the balance sheet and the margin. Dave Dykstra then will discuss other income and other expense in detail. Rich Murphy will then discuss credit, back to me for some summary comments and thoughts about the future and as always, time for questions.
First of all, I will tell you, I did survive my back surgery. I was out a couple of months, which probably or a couple of weeks, which is probably the reason for the numbers being as good as they are this quarter. But all is well here. And the – it was (ph) my demise been greatly exaggerated. So back in the saddle.
For the quarter, income of $143 million, up 51% for the second quarter. Diluted earnings per share of $2.21, up from a $1 (ph) -- up 48% from the previous quarter. On a pre-tax pre-provision basis, I think this is a record for us, $206 million. Our net interest margin of 3.35% is moving up nicely. The beach ball is coming up, in some way that the beach ball might be suffering from the bends coming so fast. So keep an eye on that though.
Current assets, 1.12%, current equity, 12.31%, current tangible equity, 15% (ph). The overhead ratio was up a little bit, but we expected on an overall basis year-to-date, it's 1.35% but 1.53% this quarter, as Dave will discuss, we had to take some extra compensation because of how well the quarter is going. Let's see.
Credit front, Rich Murphy will talk about that, but we did have one large credit come in. Basically, that took up a lot of the -- makes up a lot of the -- all the increase really, but we did have a couple of bigger ones roll-off too, but we think that's adequately covered, Rich will talk about that.
Assets, we closed at $52.4 billion. Loans were up $1 billion or more, up $750 million, if you think of average versus quarter-end. We started this quarter with a nice head start. And everything looks good going forward in that -- from that -- in that regard. Deposits up $204 million. We’ll need to start pushing deposits very hard to keep up with our loan growth and we've got a lot of ideas there, and they are being instituted as we speak for our lower-cost deposits to come in.
With that, I'm going to turn it over to Tim. Take it away.
Great. Thanks, Ed. A couple of balance sheet items and then several items of interest, including the continued impact of rising rates on margin expectations. Ed mentioned the $1.1 billion of loan growth that's 12% annualized and importantly, it's spread nicely across all loan categories. In addition, the period end loan balances, Ed also mentioned, $735 million higher than the quarter average, which will help our fourth quarter results.
We're encouraged by stable loan pipelines. We believe that loan growth in the mid- to high-single digits on an annualized basis remains a reasonable expectation given the uncertainty surrounding the economic outlook. The $200 million worth of deposit growth affected by the rapid rise in rates combined with Fed balance sheet actions is making deposit gathering more challenging and the cost of deposits are rising.
Interest-bearing deposit costs of 64 basis points for the quarter were up 36 basis points and will continue to trend up. We obviously anticipate continued increases in both the Fed funds rate and the rate associated with the bank's loan and deposit activities. Increases in loan yields at this point of the cycle continue to exceed the change in deposit costs given our asset-sensitive position.
Our deposit betas and the increase in deposit costs to date are in line with our expectations. We anticipate an interest-bearing deposit beta of approximately 40% over the full cycle and are currently operating below that level. Our securities book remained essentially unchanged in the quarter. At quarter end, liquidity remained strong with approximately $4 billion of interest-bearing cash on the balance sheet.
Early in the fourth quarter, we deployed approximately $1 billion of the excess liquidity in the higher yielding securities with attractive spreads. As we discussed last quarter, our securities book is approximately 47% available for sale and 53% held to maturity. During the quarter, the rise in interest rates resulted in an additional tax adjusted unrealized loss of approximately $142 million on the AFS securities. While that's material to tangible book value of $58.42 remains stable compared to this time last year.
With respect to rate sensitivity in the margin. First, although, our GAAP position is down slightly, we remain asset-sensitive and well-positioned to benefit from continued rising rates. As a reminder -- and this is outlined on Page 7 of the presentation, approximately, 80% by dollars of our loans reprice or mature within a year. Second, as we experienced increasing rates, we continue to believe each 25 basis point increase in the Fed funds rate will generate approximately $40 million in pre-tax net interest income on an annualized basis.
To be more specific on the margin, Ed mentioned the 3.35%, that was up 42 basis points for the quarter. With rates rising rapidly, we've exceeded the margin improvement that we've discussed or projected on prior calls. At this point, depending mostly on the impact of competition for deposits, we believe a margin in excess of 3.70% is possible for the fourth quarter with the margin approaching 4% at some point during the first quarter, also depending on the pace and magnitude of Fed funds increases.
Perhaps worth noting, during the quarter, the bank entered into several interest rate collars. These collars with terms between three and five years, essentially provide some margin protection in the event that rates fall again to very low levels. For the quarter, capital ratios were stable to down slightly, but remain appropriate given our risk profile. And as we also discussed last quarter, with higher rates and more typical loan growth, the company's earnings are projected to result in organic improvement to capital levels in the coming quarters.
Overall, a pretty clean quarter. And with that, I'll turn it over to Dave.
All right. Thanks, Tim. I'll cover the noteworthy income statement categories, starting with net interest income. For the third quarter of 2022, net interest income totaled $401.4 million, that was an increase of $63.6 million as compared to the prior quarter, and an increase of $114 million as compared to the third quarter of ‘21. The $63.6 million increase in net interest income as compared to the prior quarter was primarily due to an increase in the net interest margin and loan growth.
The net interest margin, as -- Ed and Tim referred to improved 42 basis points from the prior quarter to $3.35 million. A beneficial increase of 67 basis points on the yield on earning assets and a 12 basis point increase in the net free funds contribution, combined with a 37 basis point increase for the rates paid on liabilities resulted in the improved margin.
The increase in the yield on earning assets in the third quarter as compared to the prior quarter was primarily due to a 69 basis point improvement in loan yields and higher liquidity management asset yield as the company earned higher short-term rates on interest-bearing deposits held at banks. The increase in the rate paid on interest-bearing liabilities in the third quarter as compared to the prior quarter was driven by a 36 basis point increase in the rate paid on interest-bearing deposits.
Turning to the provision for credit losses. Wintrust recorded a provision for credit losses of $6.4 million compared to a provision of $20.4 million in the prior quarter and the $7.9 million negative provision recorded in the year ago quarter. The provision expense was lower in the third quarter, partly as a result of providing for strong, but lower loan growth compared to the second quarter, the lower level of net charge-offs and improvement in the mix of classified loans, and that was offset slightly by changes in various macroeconomic factors. Rich Murphy will cover credit, which continues to be good in additional detail in just a few minutes.
Turning to non-interest income and non-interest expenses. In the non-interest income section, our wealth management revenue was up $1.8 million to $33.1 million from $31.4 million in the prior quarter and up from $31.5 million recorded in the year ago quarter. Given the volatile market conditions, we're pleased with that result, which was aided by strong activity in our 10.31 exchange business.
Consistent with overall industry trends and the impact of higher home mortgage rates, our mortgage banking operations saw the anticipated lower loan origination volume during the third quarter. As such, mortgage banking revenues decreased by $6.1 million from the second quarter of ‘22.
And looking forward on our current pipeline activities, we expect mortgage origination volumes to be lower in the fourth quarter than we just experienced in the third quarter due to the higher rate environment and seasonal purchasing trends. However, the impact of any such decline on net earnings is expected to be small and very small relative to the anticipated growth in net interest income.
The company recorded net losses on investment securities of $3.1 million during the third quarter compared to net losses of $7.8 million in the prior quarter as the market decline in equity valuations continue to affect a portion of our securities portfolio.
Other non-interest income totaled $15.9 million in the third quarter, which was up $2 million from the amount recorded in the prior quarter. The primary reason for the increase in this category is that the company recorded $2.5 million of losses in the second quarter of this year associated with the sale and anticipated sale of two properties which did not obviously occur again in this quarter. Additionally, the company realized $1.3 million of lower swap fee revenue in the third quarter relative to the prior quarter.
On the non-interest expense side of the house, non-interest expenses totaled $296.5 million in the third quarter and were up 3%, or approximately $7.8 million when compared to the prior quarter total of $288.7 million. The primary reason for the increase was due to higher compensation related expenses.
Salaries and employee benefits expense increased depressingly (ph) $8.8 million in the third quarter as compared to the second quarter. And relative to the prior quarter, the increase related to $5 million of higher salary expense and $4.3 million of increased accruals associated with their incentive compensation program. The higher salary expense was primarily caused by mid-year compensation increases, which included the effect of raising the company's minimum wage in August of this year.
The increase in the commissions and incentive compensation expense was due to higher accruals for both long-term and short-term incentive compensation programs relative to the prior quarter and this was really associated with the increase in the company's profitability and that effect upon the plan design. These increases were offset somewhat by a lower level of mortgage banking commissions due to the declining mortgage loan origination volume.
Other than those categories I just discussed, all other expense categories taken together were well controlled and were actually down by approximately $1 million compared to the second quarter. The decrease was impacted by a variety of relatively normal operational fluctuations, none that I think are worth noting for this call.
As Ed mentioned, the net overhead ratio, a measure of operational efficiency, stood at 1.53% for the third quarter, which was relatively stable when compared to the ratio of 1.51% in the prior quarter. On a year-to-date basis, the net overhead ratio stood at 1.35%. Additionally, the company's efficiency ratio declined below 60% to 58.4% in the third quarter as expenses did not increase at a rate commensurate with the increase in revenue.
So in summary, the core fundamentals are strong. Strong loan growth, expanding margins, solid pipelines, good credit quality metrics, and I think we're set up good for the future 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 third quarter was very solid from a number of perspectives. As detailed on Slide 7 of the deck, loan growth for the quarter was $1.1 billion or 12% annualized, an outstanding result. And similar to the past few quarters, we continue to see loan growth across the portfolio. Specifically, life insurance premium finance continued to see very solid growth as balances increased $396 million.
Commercial premium finance also had a very strong quarter with loans of $172 million, C&I loans increased by $212 million, and commercial real estate grew by $171 million. Year-over-year, we saw total loan growth of approximately $6 billion or 18% net of PPP loans. As noted on prior earnings calls, we continue to see very solid momentum in our core C&I and CRE portfolios. Pipelines have been very strong throughout the year and we saw that materialize into increased outstandings during the past several quarters.
In addition, disruptions within the competitive banking landscape continue to work to our benefit. We continue to be optimistic about loan growth for the remainder of 2022 and early 2023 for a number of reasons. Core pipelines continue to be very strong through Q3 with solid momentum going into Q4. Commercial line utilization, excluding leases and mortgage warehouse lines as detailed on Slide 16, continued to trend up and we anticipate this trend will continue.
Also on Slide 16, you will see the business expansion and inflation pressures have resulted in many customers requesting increases to their credit facilities to help finance these costs. And both First Insurance Funding and Wintrust Life Finance had another impressive quarter. This momentum has been strong for several quarters and we believe it should continue into 2023. As a result, while we acknowledge increased concerns about a possible recession, we believe our diversified portfolio and position within the competitive landscape will allow us to grow within our guidance of mid- to high-single digits and maintain our credit discipline.
From a credit quality perspective, as detailed on Slide 15, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics. Non-performing loans increased from $72 million or 20 basis points to $98 million or 26 basis points, roughly the same level we experienced at the end of Q3 2021, where NPLs were $90 million or 27 basis points.
The increase in NPLs during the quarter came from two factors. One loan totaling $25 million within our franchise finance portfolio moved to non-performing status. This loan had been a rate of credit for some time as the borrower experienced challenges from extended COVID-19 shutdowns and most recently, by rising wage and commodity costs. While these factors have affected other restaurant operators within our portfolio, we believe this situation is isolated and our franchise finance customers continue to perform well.
Also, we experienced a $10 million increase in NPLs in our commercial premium finance portfolio, resulting from a handful of loans over 90 days past due at quarter end. We are secured on these loans and anticipate repayment from the unearned premium shortly. Overall, NPLs continue to be at very low levels and we are still confident about the solid credit metrics of the portfolio. Charge-offs for the quarter were $3.2 million or 3 basis points down from the previous quarter. Year-to-date charge-offs totaled $15 million or 6 basis points.
Finally, as detailed on Slide 15, we saw a significant improvement in our special mention and substandard loans with no meaningful signs of economic stress at the customer level.
That concludes my comments on credit. And I'll turn it back to Ed to wrap up.
Thanks, Rich. All in all, I think the future is very bright for us, notwithstanding what could happen in the markets, et cetera. I mean there's always a black swan that jumps in someplace, but I like where we sit right now. We should see continued margin improvement as previous rate increases work their way through our balance sheet and income statement. The additional rate increases should also benefit our earnings going forward.
As we mentioned, we've begun our earnings from hedges [indiscernible] to protect the downside of -- if rates go down very quickly. Credit remains stellar and loan demand remains good across the board, not sacrificing the normal conservative credit standards and are making sure we get paid for the risk. We continue to benefit from market disruption. The acquisition market remains -- continues to remain slow, but we are looking at normal opportunities in all our businesses.
Dilution is still a four letter word for us. But I think that sooner or later, people are going to have to sort of think about where they're going to end up, and we're the right guys for a lot of people. Wealth management is doing well because of the CDEC. Our diversified nature of our earnings in that -- in the wealth management is serving us well. As the market turns, our wealth managers will do extremely well. I really like where we stand. So always you can share our best efforts, and we appreciate your support.
Now I could do some questions. Thank you very much.
[Operator Instructions] Our first question comes from the line of Jon Arfstrom of RBC Capital Markets. Jon Arfstrom, your line is open.
Yes.
Hey, Arf. How are you doing, man?
Hey. Good. How about you?
Little dream every day.
Good. You sound good. Can you guys talk a little bit about the comment where you talked about some deposit strategies to have funding grow along with loan growth? It's been a struggle for some of your peers, but just curious what you're thinking on that.
Tim, I'll let you answer that.
Yeah. Jon, we grew deposits less than we normally would in the quarter. It's obviously become more price sensitive in the market, but we continue to add relationships. The disruption will continue to help us. We're working on kind of some more niche deposit related activities that we think might bear some fruit. But we're currently at 89% loan-to-deposit, which is well within our target range. We've got ample liquidity and could fund several more quarters of unbalanced growth if we get it.
If loan growth proves to be strong after that, which would probably be really good news. We'd be funding those loans at closer to the higher market marginal rates. But our intent is to grow deposits and more importantly, grow relationships and the disruption is helping us. We're encouraged to date that the percentage of deposits that are not interest-bearing have stayed pretty stable at about a third of deposits, and we're off to a good start in the fourth quarter.
Okay. Good. That's helpful. And then I guess the other side of the balance sheet too, maybe this is one for you, Dave. But you talked about putting some of the cash to work and having a plan to do more of that. Can you talk a little bit more about what you're doing there and give us an idea of what you did during the quarter and what kind of yields you're seeing?
Yeah. I mean, as we stated in the press release, we put about $1 billion of the liquidity to work in the fourth quarter. Those were invested in mortgage backed securities. I don't recall the exact to the basis point yield, but it was in a 5.5% sort of range. So we've added some securities. We didn't do any really in the third quarter. We stayed relatively flat as far as growth goes for investments. But we did have some additional Federal Home Loan Bank funding, where we locked in some lower rates and basically are getting a spread on those that would be accretive to our ROA.
Okay.
[Multiple Speakers] I guess, going forward, Jon, maybe what you're asking is beyond that, do we expect to invest a lot in securities? And I think the answer probably is not a lot because we have good loan demand. So first, we're going to fund loan demand and use that liquidity to do that. And so, I would expect that the securities aren't going to grow dramatically here going forward.
We run 85% to 90% loan-to-deposits. So any growth we get, you're going to have something going in the securities going forward.
Yeah. Okay. Yeah. It's just some of your peers have really been beat up on AOCI, and it doesn't seem like a bigger issue for you. But that was what the question surrounded -- was around as well. I appreciate it. Thanks, guys.
Yeah.
Thanks, Jon.
Thank you. Our next question comes from David Long of Raymond James. Your line is open, David Long.
Thank you. Hey, I'm glad to hear your surgery went well and hope your physical therapy is going just as well.
Let me do it. I got 10 days to -- before I can really do anything, but I'll be on it.
Please stick with it. Just on the lending side, I know it sounds like your pipeline is still very good and you guys are anxious and have an appetite to continue to lend. But are there any segments that you may be pulling back on at this point that may seem a little bit more risky than others?
Rich?
Yeah. I think, as Ed always said, our loan policies are -- we keep them very conservative. We don't change it. We don't -- as I always say, we don't like to jerk the wheel and pull in and out of different categories. But I would think one of the areas that would be probably impacted the most would be CRE. As rates go up, it just makes it tougher and tougher to have these projects that we're looking at underwriting, which just requires more and more equity. So it will be interesting to see how that goes.
And clearly, in the past, as you know, David, we -- in the CRE space, we already have -- a number of years ago, really worked our appetite down for retail. I'd say office is another area that we are focused on pretty dramatically. But overall, we're still seeing good demand in multifamily and in industrial, although, again, I think it's going to start to feel some of the challenges here of higher borrowing costs.
So -- but generally speaking, we're still feeling pretty good about the other areas. I think premium finance will continue to do very well through next year. C&I demand, as we talked about with what's going on in the competitive landscape in Chicago, I think we continue to be a really good opportunity for borrowers and customers bring over their relationships. But that would be the only area that would jump out at me as being heavily affected and something that is -- we're focusing on pretty consistently.
We don't do a lot of consumer lending, which is helpful.
Yeah, we don't. We have home equity, but generally speaking, that's the extent of most of our consumer lending.
Got it. No. I do recall the rope-a-dope strategy in the commercial real estate way back when. So cool. Thanks for that answer. And then, Texas Capital announced they were selling their premium finance business to Truist during the quarter. And just within your own premium finance business, can you talk about whether that is a good opportunity for you guys to gain some market share or not?
Hey, Ed. David, this is Dave Dykstra. I think, generally, we think that if you lose a competitor in the space, that's good for us. And so, I think generally people thought of in the P&C space, the four big players to be a private company out of Kansas City, Truist, us and Texas Capital. So if Texas Capital sells to Truist, you now have one less competitor in that group of four. So I think, generally, that's a positive for us. Number of our agents and brokers want multiple premium finance providers. And so if, for instance, they were using Texas Capital and Truist, then they're going to have to find another provider, and we would be a likely candidate for that.
And then to a certain extent, Truist has also got an insurance agent and broker business, and some of our agents and brokers don't like to direct business to a competitor. So we think marginally, that helps us a little bit, too, since we are not in the insurance brokerage business. So we don't represent that competition against some of our clients. So generally speaking, I mean, it's a competitive industry. You got to fight for every client, but we think it should be a positive just because of one less competitor in the marketplace.
Dave, I’ll take that back and someone else jump in.
Thank you.
Thanks.
Thank you. Our next question comes from the line of Nathan Race of Piper Sandler. Please go ahead, Nathan Race.
Hi, guys. Good morning.
Hi, Nathan.
What's just on the mortgage outlook from here? Obviously, some compression on the gain-on-sale margin here in the third quarter. So Dave, maybe just curious how you're kind of thinking about that margin going forward in spite of all the adjustments and corrections that are going on in that industry today.
Yeah. Well, as I said in my comments, I think the volume will be down a little bit because of seasonality and the increased rates. The margins are sort of clanking along what I would think would be the bottom right now. So I don't expect those to go down much further. We don't -- I think as you point out, we don't do correspondent or wholesale. So a lot of the adjustment -- for some of our peers out there, they do a lot more correspondent, which I think drags that margin down quite a bit.
Ours is all retail, and we don't deal in those other pillars of the mortgage business. So I would think that the margin would be about the same on lower volume. And so revenues – ex-MSR valuations, et cetera., revenues -- production revenue will be down slightly. But again, once you take off the commissions, the expenses and taxes, the impact of that is going to be negligible relative to the increase in the net interest income.
Okay. Great. And then just changing gears and thinking about the deposit outlook, just going back to the earlier question. Curious just in terms of your guys' ability to kind of defend the deposit base and actually grow it unlike most peers thus far in the 3Q earnings season. Is the deposit growth you're seeing largely from existing clients or are you guys seen more opportunities to grow deposits just in light of all the acquisition related disruption across the Chicago land area these days?
Tim, why don't you handle that?
Yeah. Nate, it's really both. I mean the disruption is certainly helpful. And as we bring clients over, we aim for a full relationship, which would include the deposit business. But we're sensitive to the deposit book and the excess funds that all of our clients have, and we'll compete with -- for those with everybody in the market. So it's both.
Got it. And just lastly, do you guys have an updated range in terms of where you want your loan-to-deposit ratio to settle out into next year in light of maybe perhaps tamping down on some growth just to maybe keep that loan-to-deposit ratio within a more comfortable range going forward?
Yeah. We've said 85% to low 90s, right? I don't think we would change that kind of for normal operating conditions.
Yeah. That's been our preferred range, Nate, for every year that we've been a public company going back to '96. So we're comfortable there.
Okay. Great. I’ll step back. Appreciate you guys taking the questions and all the color.
Thank you.
Thank you. [Operator Instructions] Our next question comes from the line of Terry McEvoy of Stephens Inc. Your line is open. Please go ahead, Terry McEvoy.
Good morning. First off, I'm glad the surgery went well. And gosh, I can't imagine a Wintrust call without you. So I just wanted to get that out there. So from a -- I guess first question, as you think about that 4% margin in the first quarter of next year and the upside to revenue, does that make you rethink your expense budget all for next year and can you push back at all on some of the concerns that banks spend away this higher NII on expenses next year?
Well, Terry, this is Dave. I think that we have a three year plan for technology investments and the like, and we'll stick to that. And we're not going to spend like [indiscernible]. I think that we'll have -- continue to see pressures on labor costs next year, but that is not a function of spending the money we make on the margin just randomly. So we're going to try to control the expenses as best we can as if the margin didn't increase. And we'll continue to invest in technology and expand the franchise as we normally would. Could there maybe be a marginal project out there that maybe was on hold that we would throw into the kitty? Possibly, but it wouldn't be material.
Yeah. I think that's right, Dave. And I think that we're really careful on new expenses going forward because what comes up could come down. And although, we're doing some things to hedge the downside risk of rates falling again, the Fed is so active and somebody hiccups someplace, and we got our asses handed to us in rates again. We can't afford to have that and we work very hard on that.
But the fact is that -- I think that our prospects for growth are very good. I think the growth will help mitigate a lot of these expenses. Because you're going to have increases in labor and what have you. They're not going to go back at the end of the day. We're going to have to build that in. I think we've got to grow through it. So the organic growth or, hopefully, the acquisition market will come around again. But we've always been able to work through it and take what the market gives us, and we'll continue to do that.
I think our reputation and the market in Chicago being somewhat silicon in turmoil with changes going on, I think the opportunities for us here are still very good. Geographic expansion in our market -- in our desired marketplace is also very good. I should note that we're opening up a -- or we've opened up a loan production office and soon-to-be branch in Indiana -- West Indiana, which is good for us.
Look, it ever to buy somebody there, but nobody will sell to us. And the seed worms or -- they'll be like Sweden worms or something, but we're going to make it going to that market. I think that the way we -- our culture, the way we operate the organization, the way we present ourselves to our customers indicated by the J.D. Power awards we get and the awards we get will sell -- sells very nicely into these new communities at very transportable, I should say. So we hopefully will grow through it, and that would be the plan.
And then as a follow-up, and I'm a bit over my skis here, could you maybe talk about the decision to use the collar, where you've got to establish a floor and a cap versus just a straight-up swap? What type of protection do you have there? Just so I can understand the decision. And then going forward, do you think that down rate scenario, which went from 6.9% to negative 3.9%, do you expect that to continue to trend down over the coming quarters through the use of additional swaps or collars?
Dave or Tim?
Yeah. We haven't disclosed with the outside parameters of [Technical Difficulty] but we'll put that detail into the Q, Terry. But generally speaking, it's probably mid-3s to low-4s as far as where the cap would kick in. And then in the mid- to high-2s for some of the floors where they would kick in, but we'll give the specifics in the 10-Q and go through that. It's just a start on that. So we're trying to protect the downside. And the thought is, if you sell the cap on that, it helps to pay for the downside protection. And because we're so asset sensitive, giving up a few basis points on the upside is worth paying for the downside protection.
Great. Thank you.
Thank you. Our next question comes from the line of Chris McGratty of KBW. Your line is open. Please go ahead, Chris McGratty.
Wondering if you just started -- if you had the September margin and also the spot deposit cost at the end of the quarter?
Yeah. No, we haven't disclosed those, Chris. I think where we're going with the margin is we expect it to be north of 3.70% in the fourth quarter. And so, you can probably sort of draw a straight line if you look at where we went from second quarter to third quarter and the guidance we gave for the fourth quarter.
It’s okay. And then the approaching 4% in Q1, obviously, that's much better than what markets are expecting. I guess maybe a question around peak margins or peak NII growth. How are you thinking about just if the Fed stops early next year? How much of a lag will be on the deposits and the side and what you're doing to kind of protect that rollover?
Yeah. I mean, Chris, we're -- our assumption right now is for another 150 basis points worth of Fed funds increases, probably 75 in November and then 75 at some point after that. At those levels, we get the approach to 4% during the first quarter. I think as the Fed stops raising rates, it's more likely that the loan and asset repricing will mitigate deposit increase costs, which have lagged somewhat. So there's lots of moving parts, but the low-4% range is certainly reasonable given the current forecast. And if things change, we'll move accordingly.
Okay. So low-4s after the first quarter is -- based on that assumption is what you're communicating. Okay. Thank you.
Thank you. Our next question comes from Brandon King of Truist. Your line is open. Please go ahead, Brandon King.
Thank you. Good morning.
Good morning, Brad.
Yeah. So I had a question on the reserve. Currently, ACO is at 83 basis points. And I know it's higher than it was pre-CECL in the day 1 CECL. I'm curious, what is your level of comfort with that going into kind of an economic environment that's deteriorating and if you think that's adequate for a more severe recession or how high it can go?
Well, we obviously think it's adequate, and that's we've stated if we look at our models. One of the things you need to understand is that, that 83 basis point incorporates over a third of our balance sheet and premium finance loans. And life loans are -- historically, if you look at it, at zero losses. And the P&C portfolio has relatively low losses. So if you look at Table 12 of our press release, if you look at our core loans, we have 126 basis points of reserve associated with those. But clearly, with the CECL modeling and the work that we do on that, we think it's adequate.
We go back to the '08-'09 time frame, we were profitable in all of those years and generally had lower losses than our peers. We think we're conservative. We monitor it. We deep -- dive deep into our portfolios and look for trends. And right now, we feel comfortable with where it's at. But if you do -- there's people that maybe don't follow us closely. They need to understand that, that number is lower than some of our peers because we have a third of our portfolio in very low-risk, low-loss asset classes.
Okay. And then following that, I'm not sure if you disclosed kind of the weightings. But is there some sort of a qualitative overlay in particular that you think kind of gives you more comfortable with that reserve level that you put on based off of the calculation with the CECL modeling?
Yeah. We don't disclose the difference between quantitative and qualitative factors out there. But I think everybody has a qualitative process factored in. Ours generally is a qualitative process based on quantitative analysis and input from the lines. But I think the end answer to the question is we're very comfortable with our reserve levels.
Thanks for taking my questions.
Thank you.
Thank you.
Thank you. At this time, I'd like to turn the call back over to Ed Wehmer for closing remarks. Sir?
Thanks, everybody, for dialing in today. We'll talk to you in January, if not before. If you have any other questions, please call Dave, Tim, Rich or myself. We'll be happy to respond to them and be a fun fourth quarter. We'll talk to you again in January. Thanks so much, and have a great holiday season. It's upon us already. So thanks so much, everybody.
And this concludes participating, you may now disconnect.