Chris McGratty: Okay. And then there was a comment in the press release that just talked about additional improvements in efficiency, maybe you could throw a little bit more color around that. You are obviously in a good spot exiting the year in the mid-50s. But how would you think about that ratio playing out, appreciating that mortgages in recessionary levels? Thanks.
David Dykstra: Yeah. So mortgage — lower mortgages, obviously, helped the efficiency ratio. But the expense side of the equation, we will have some additional expenses in 2023. The FDIC rates are up. Compensation cost will go up a little bit as we push through salary raises and the like later in this quarter. But I think with the inflation and the FDIC and those sorts of things, generally, you are probably slightly above mid single-digit growth in expenses and if you add on the acquisition we are planning, it’s probably high single-digit expense growth for the entire year. First quarter, it probably doesn’t grow too much on the expense side, we don’t think, but then as we add in the acquisition that — when that closes, that will add to it and then salaries will kick in margin.
The margin is going to increase substantially, and we think that mid-50 efficiency ratio we have probably drifts down closer to 50 and we will try to even do better than that. But the increase in the revenue will more than offset the expenses as we look at now to continue to drive that efficiency ratio lower.
Edward Wehmer: We continue to look at cutting costs also in different areas. Mortgage area being one. We — if you look at the net overhead ratio, which I like to look at, it was a lot higher this quarter, but if you take out that security loss, you are closer to 1.5. We have to grow also and we have to invest in growing the bank, which is part of the increase in expenses. Hopefully, that growth will get our net overhead ratio back below 1.5. Hard to do with how mortgage is kicking in, but between the acquisition of our Rothschild and additional asset growth, we would like to get that number down below 1.5. I know the healthy efficiency ratio also, but if — I never concentrated the efficiency ratio now it’s doing well all the way efficiencies good, because the margins up. But the net overhead ratio we need to continue to get below 1.5, and we are working very hard to do that.
David Dykstra: Yeah. The
Chris McGratty: Just one more. Dave, on the covered calls, obviously, that number has been bouncing around. But how active are you going to be there, and I guess, maybe help us with what makes it go on either side?
David Dykstra: Well, the covered calls, as you know, we do those, again, to protect against a down rate environment. It adds a return on those securities. And if you are doing them on mortgage backs, if rates fall, the securities pay off fairly quickly. And so you get that extra revenue and our analysis has been over a long period of time that you are better off by writing the calls and getting that revenue and even have to reinvest, it’s usually a better trade. But as I talked about a little bit earlier when we were talking about the liquidity position, we invested $1 billion of that liquidity into securities in the fourth quarter and wrote some calls against that. And you can see on our balance sheet, those were called and we invest them, so at a decent rate here in the first quarter.
So it depends on volatility, and it depends on where rates where the yield curve is at. But it’s a little bit outsized from normal given the size of the investment purchases that we had. But my guess is that in a normal environment that number is somewhere in the $2 million to $10 million range and it really drives a lot off of volatility. So it’s hard to tell until you get to the point where you invest the securities, what the yield curve shape is and what the market volatility is. But somewhere in that range would seem reasonable to me.
Operator: Thank you. Our next question comes from the line of Terry McEvoy of Stephens. Your question please, Terry.
Terry McEvoy: Hi. Thanks. Terry McEvoy from Stephens.
Edward Wehmer: Hi, Terry.
Terry McEvoy: Hi. Good morning. Maybe first off, Dave, thanks for reminding me the repricing opportunities of the loan portfolio in 2023, I think, it’s something I overlooked. So I appreciate that. And maybe for a question circling back, I think, it was Jon’s question on protecting the margin, and Ed, you kind of threw out 3.75% to 4%. I just want to make sure, is that the floor of this strategy you think can produce and if rates go down 100 basis points or all the way back to zero, I just think that’s an important kind of comment there and I want to make sure I understand what you were saying there.
Tim Crane: Yeah. Just to give you, Terry, a little bit more detail. I mean we have entered into a combination of collars and some received fixed swaps with terms out three year to five years, and obviously, the impact of those instruments depends on the interest rate scenario. So, we are trying to take some steps to improve margin and lower, lower interest rate environment, but it depends on the scenario, how much impact there’s going to be. The other thing, though, is it’s just not these instruments. If you look at table eight, you can see that in various scenarios, both up and down, we have sort of reduced the variability of the net interest income and so we are mindful of trying to operate independent of the interest rate environment at a higher level.
David Dykstra: Yeah. So, and Terry, I’d add in there. I mean that would sort of be the goal, but we are not going to do all of the derivatives all at one time. We are going to leg into this diversity as far as the length of these derivative contracts, as far as how much fixed rate loans we put on the books, at what strike price these swaps or collars have. They all matter. I always tell people, our crystal ball isn’t perfect, and if you go back 18 months, I think, maybe the outlook for increases in rates was 25 basis points. So the economists that put out these forecasts aren’t perfect either. So we are trying to protect the margin and so we are going to leg into it. So depending on what the curve is and where we can buy the swaps going forward as we leg into it from diversifying the risk perspective, we would like to be able to lock in into the upper 3% to 4%, but it really sort of is dependent upon how fast rates move and where that longer end of the curve settles out in.
So it’s a lofty goal. We are not saying we have locked that in yet. But that’s what we would like to do if the market sort of allows us to do that over time with these derivatives. I mean
Terry McEvoy: Appreciate all that — yeah.
