Q2 2021 WesBanco Inc Earnings Call
Bookable well capitalized standards.
Furthermore, as can be seen on slides 8 and 10 of our earnings presentation. Our key ratio has also remained favorable to peer bank averages.
The successful execution of our growth and diversification plans during the last decade has transformed our institution and.
The majority of our organization is now on higher growth markets.
Further as a result of our company wide focus on controlling discretionary expense utilization of technology to gain operating efficiencies and optimization efforts, we have been able to leverage these savings to make investments in both our company and employees to support.
The 1 where opportunities while maintaining our efficiency ratio in the mid 50% range.
Throughout the year, so far we have made more than 20 revenue producing hires across our organization.
And our markets to strengthen our teams and enhance our ability to leverage growth opportunities once they fully return.
These individuals.
<unk> have been concentrated in our commercial and residential groups as well as wealth management on.
I'm, especially excited about our new residential mortgage lending team and northern Virginia.
Right now waiting on the necessary approvals to operate in the state but are excited about this beachhead in Virginia.
Future of day, most of the banking industry near term loan growth continues to be difficult to predict as our local economies and commercial customers still have a significant amount of excess liquidity to work through as well as the inability of some companies to quickly meet rebounding demand due to worker in inventory supply chain constraints.
This.
Somewhat liquidity has continued to impact commercial line of credit utilization, which we believe is bottoming out at the lowest level on a quarterly.
Quarterly average and 10 years at 31, 5%.
Compounding this scenario has been a continuation on the commercial real estate projected pay offs via a very aggressive secondary market where we.
<unk> against a more than $100 million year over year increase in pay offs to approximately $190 million this quarter alone.
That said, we have begun to realize a pickup in commercial loan demand as both our second quarter gross production in the June 30 pipeline are up a couple of percentage points from last year in.
In fact, our commercial on.
Experience is at its highest level in a year at approximately $760 million with nearly 45% of that from our Maryland, and Kentucky markets.
Our residential mortgage loan origination team has continued to perform well and be a bright spot as production during the second quarter was roughly $330 million down Joe.
Just 10% from a year ago, representing the fifth consecutive quarter production greater than $325 million.
Further.
We continue our efforts to keep more residential mortgages on our balance sheet and a return to a more historic 50% level as compared to the approximate 30% average during the prior 3.
Pipeline.
We believe that our diversified revenue engines combined with experienced teams make us well positioned to take advantage of future growth opportunities.
Over the long term, we anticipate mid to upper single digit loan growth driven by our expansion into Maryland and Kentucky.
As I've mentioned before we remain focused on.
Quarter to capital allocation to provide financial flexibility and support of our long term growth opportunities.
We're also returning capital to our shareholders.
In addition to the 3.1% increase in our dividend earlier. This year, we purchased approximately 1.5 million shares or roughly 2.2% of our common stock.
On the open market during the second quarter. These.
These repurchases represented about 45% of our existing authorizations.
Furthermore, we are on the final stages of converting our core operating system.
Ibs platform.
This platform will provide additional products and services for our customers and improved operational.
<unk> I firmly.
Believe that the last couple of years with our investments in the mid Atlantic region and the nearly completed core system conversion, we have solidified our evolution into a strong regional financial services institution that is supported by several unique competitive advantages.
Now I'd like to turn the call over to Bob Young our.
So for an update on our second quarter financial results and an outlook for 2021 Bob.
Thanks, Todd and good morning, everyone. During the second quarter, we experienced a continuation of the low interest rate environment as well as significant amounts of excess liquidity, which were mitigated somewhat by continued strong residential mortgage.
<unk>.
Our robust stock market strong discretionary expense controls, while making important growth oriented investments.
And an improvement in the macroeconomic forecasts and qualitative adjustments utilized under the current expected credit losses accounting standard.
As a result of higher noninterest income lower.
Our operating expenses.
And on negative provision for credit losses more than offsetting lower net interest income as compared to both prior year and prior quarter. We reported improved GAAP net income available to common shareholders of $68.1 million and earnings per diluted share of $1 on 1 for the 3 months ended June.
June 32021.
Excluding restructuring and merger related charges results were $1 <unk> per share for the quarter as compared to just 7 last year.
As a result second quarter returns on average assets on average tangible equity on a similar basis improved to 162% in 17.
2.7% respectively for the 6 months ended June 32021, we reported GAAP net income available to common shareholders of $138.6 million and earnings per share earnings per diluted share of $2.6.
Excluding restructuring and merger related charges results were $2.9 per share.
Current year to date period as compared to <unk> 48 last year and.
And as Todd mentioned, PTP and common returns were strong for both the 3 and 6 month periods.
Total assets of $17 billion as of June 30 increased 1.3% year over year due mainly to growth in the securities portfolio.
Share for the from excess liquidity related to additional stimulus funds received by our customers and their higher personal savings, which more than offset lower portfolio loans totaled.
Total portfolio loans decreased 6.5% year over year to $10.4 billion due primarily to forgiveness of $662 million of SB.
<unk> payroll protection program loans, and lower residential real estate and consumer loans exclude.
Excluding PPP loans total loans decreased 4.1% year over year, and 7% sequentially, reflecting higher than anticipated commercial real estate pay offs continued lower commercial line of credit utilization and.
And the impact of selling a higher percentage of 1 to 4 family residential mortgage originations in the secondary market. During the last 12 months as compared to our historical average of around 50% and that is our near term target.
Here for the second half of 2021.
Strong deposit growth continues to be a key story.
Sorry for Wesbanco as total deposits increased 9.3% year over year to $13.3 billion due primarily to the aforementioned stimulus and increased personal savings.
Total demand deposits were up 14% year over year, Furthermore, reflecting the strong growth and resulting available excess.
We continued to strengthen our balance sheet by reducing higher cost Cds Federal home loan bank borrowings and short term borrowings, which declined 17, 9% 72, 2% and 65, 4% year over year, respectively for a total higher cost funding reduction.
<unk> have some $1.4 billion.
Key credit quality metrics, such as nonperforming assets past due loans and net loan charge offs as percentages of total portfolio loans have remained at relatively low levels and very favorable to peer bank averages those between with.
With assets between 10, and 25 billion for the prior 4 quarters, reflecting improved macroeconomic factors and our seasonal calculation the allowance for credit losses specific to total portfolio loans at June 32021 was $147 million or 136 percentage of total loans.
Score when excluding SBA PPP loans, 143% of total portfolio loans.
These improvements also resulted in a negative provision for credit losses of 21 million for the second quarter excluded from the allowance for credit losses and related coverage ratio, our additional fair market value adjustments on previously.
Card loans, representing 31 basis points of total loans.
The net interest margin of 3.2% per second quarter of 2021 decreased 15, and 20 basis points, respectively from the first quarter of 2021, and the second quarter of 2020, primarily due to the lower interest.
We acquired <unk> as well as a mix shift of higher securities to approximately 23% of total assets. The investment securities portfolio increased $1 billion year over year as a result of higher cash balances from additional stimulus funds received by our customers and their higher personal savings that increased total deposits and.
And overall balance sheet liquidity.
Reflecting the significantly lower interest rate environment, we aggressively reduced our deposit rates and borrowings throughout the past year, which has helped to lower the cost of our total interest bearing liabilities by 50% to 31 basis points for the second quarter.
Included in this figure our deposit.
Funding cost of just 17 basis points or 12 basis points. If you include noninterest bearing deposits.
Noninterest income for the quarter ended June 32021 was $36.1 million an increase of 9.9% year over year, primarily due to a net gain on other real estate owned on other.
Assets and higher electronic banking and trust fees, which were partially offset by lower other income and net securities gains.
Sales on these items are included in last night's earnings release.
Across a number of fee income categories. We are seeing the benefit of organic growth and a return to a more normal operating environment.
We are seeing nice organic growth on our trust business, which realized record AUM levels of $5.5 billion and our other wealth management businesses in particular securities brokerage and private banking, which are benefiting from unrestricted access to our financial centers.
Lastly, residential mortgages continue to be a great story.
US as our teams continue to take advantage of their opportunities to gain share across all of our markets.
Origination dollar volume for the second quarter of 2021 was $330 million 2 thirds of which was purchased or constructing construction money and as Todd indicated that now represents the fifth consecutive.
<unk> 4 with total originations above $325 million.
Total operating expenses remain well controlled as demonstrated by our year to date efficiency ratio of 50, 533%.
Which represents a year over year improvement of 129 basis points.
As Todd mentioned, we are committed.
To positioning our company for long term sustainable growth, while we continue to focus appropriately on expenses, we have been able to redeploy some of these savings from our various efficiency and optimization efforts to make the necessary investments in both our company and employees to support future growth opportunities.
Excluding restructuring.
And merger related expenses noninterest expense for the 3 months ended June 32021 decreased $2.4 million or 2.9% to $82.6 million compared to the prior year period, primarily due to lower FDIC insurance expense as well as continuing cost control measures over certain discretionary expenses.
Briefly I just wanted to touch on a couple of unique expense credits. We recorded this quarter that we do not anticipate it growing again.
These are our FDIC insurance expense, which included a $1 million refund for certain prior period reporting adjustments.
As well as other operating expenses, which included an 800000 state franchise tax.
Tax reduction due to filed return adjustments power.
However, even when adding back these adjustments, we still experienced the lowest quarter of operating expenses since the old line Bank acquisition.
As of June 32021, we reported very strong capital ratios with tier 1 risk based at 15.
Dean 1.5% tier 1 leverage 10, 42% and a total tangible equity to tangible asset ratio of 10, 3% 4%.
As Todd mentioned, we are focused on appropriately returning capital to our shareholders and during the second quarter, we repurchased approximately 1.5 million shares of our common stock in the open.
And for a total cost of $55.6 million.
At the end of the quarter, we have approximately $1.9 million shares remaining for repurchase under our existing share repurchase authorizations and any potential future share repurchases will be at Wesbanco has discretion and in accordance with securities laws also subject.
When market conditions and other factors.
So let me wrap up with some limited thoughts on our outlook for the rest of the year.
As asset sensitive bank, we remain subject to factors expected to affect industry wide net interest margin in the near term.
If market rates recently decreasing for both intermediate and longer term rates and short term rates expected.
Tomorrow at low levels for the next couple of years, we believe our GAAP net interest margin will continue to decrease a few basis points throughout the remainder of the year due to lower purchase accounting accretion, which should decrease 1 to 2 basis points, each quarter and lower earning asset yields from lower yields on new loans and securities now being.
Being a higher percentage of total assets.
However, we will continue to take the opportunity to lower our cost of funds, primarily from maturing Cds and borrowings, but I would comment that our overall transaction deposit costs are at relative floor rates at this point.
PPP loans fee accretion should have a positive impact on.
On the margin and net interest income, particularly over the next 2 quarters.
In general we continue to anticipate similar trends in noninterest revenue as we experienced during the first half of the year residential mortgage generation and associated gains on sale should remain strong, but origination volumes should begin to come down from the record.
Volumes realized the last several quarters.
A greater percentage of these will also be placed in the loan portfolio.
Service charges on deposits and electronic banking fees should continue their improvement over the last half of the year as the economy continues to reopen.
We will maintain our diligent focus on discretionary expenses while.
To make the appropriate investments for organic growth our annual midyear merit increases occur during the third quarter as well as targeted increases to certain retail employees, starting hourly wages due to the competitive hiring environment as we hire additional staff for re engaging our financial centers post pandemic.
The anticipated gross cost savings from last August's financial Center optimization plan and most of those branches were closed. This past January have now been fully realized while roughly half of those savings were utilized for employees filling open positions in other locations and expect to digital and technology spending.
Spending.
The closure of 6 additional branch locations late last week should have a minimal impact on overall costs, but benefit the continued improvement in retail efficiencies over time.
The provision for credit losses under the CSO calculation will depend upon changes to the macroeconomic forecast.
1 of those various credit quality quality metrics in general continued improvements and macroeconomic factors as well as improvements in qualitative.
COVID-19 on hospitality portfolio factors that we utilized should result in continued reductions in the allowance for credit losses, as a percentage of total loans, but.
At a slower pace of reduction as compared to the first half of the year.
Lastly, we currently anticipate our effective full year tax rate to be between 20, and 21% subject to changes in tax policy as well as our own taxable income.
We are now ready to take your questions operator would.
As we review the instructions.
Ladies and gentlemen at this time, if you would like to ask a question. Please press star and then 1 using a touch tone telephone.
To withdraw your question you May press Star 2.
If you are using a speaker phone, we do ask that you please pick up.
The handset before pressing on numbers to ensure the best sound quality.
Once again that is star and then 1 to ask a question will.
We will pause momentarily to assemble the roster.
Yes.
And our first question today comes from Casey.
Are you pleased from Piper Sandler. Please go ahead with your question.
Hey, good morning.
Casey.
First Bob just wanted to make sure. We're on the same page with respect to Pvp. This quarter what were the fees you reported this quarter and then what is the remaining.
Deferred origination.
We witnessed that you have from the mountains.
So we have $17.5 million remaining.
Casey.
PPP income and we anticipate that about $10 million of that.
It should be taken through the last half of the year, but it really depends upon.
On the pace of forgiveness.
On the PPP benefit in the second quarter was 5 basis points.
That's about half of what it was in the first quarter.
Some of the loans forgiven during this quarter were the 2 million plus loans, which have the smallest fee rate.
And that was about as I said 115 million.
<unk>.
We have remaining as of the end of the quarter at some $544 million in loans and the average balance.
For this quarter was some $754 million.
And the average for the first quarter was 700.
Third $75 million.
The amount of fees taken during the second quarter were just under $6 million Casey.
And the bulk of that about 3 quarters of that would have been round 1 related PPP fees the rest round.
Round 2.
Is that okay, yes, yes.
Helpful. Thank you. Thank you.
Just turning to the mortgage I appreciate the comments on the originations. This quarter. Just wondering do you have the percentage that you were selling into the secondary market and then also maybe just some comments around how the gain.
Gain on sale margin third and whether there any hedging gains that might have helped to boost the number this quarter.
In terms of hedging gains the bulk of the hedging gains were recorded in March.
Just due to the change in.
Rates at that point in time.
And.
Hedging gains were offset at that point in time by a larger amount of loans in the held for sale category. We worked hard to clean that out in the second quarter and reduced the risk going forward of.
Interest rate volatility on our loans held for sale.
<unk> portfolio and you'll see that that came down.
Here at the end of the quarter from now.
I don't know 750 million at the end of first quarter that down to less than.
$50 million here at the end of the second quarter.
We did.
Did sell on the in the second quarter.
Particularly the first.
Couple of months of the second quarter above 60% into the secondary market in the month of June and as I've said in my notes.
We sold just over 50% in the month of June and we're currently targeting about a 50.50 split going forward.
<unk>.
To be held in the portfolio, primarily 15 years, we don't put 30 year mortgages in the portfolio and then those are sold in the secondary market.
We still did experience some some good.
Mortgage banking income per loans sold so our margin was over 3%.
In the first quarter it was higher because of the hedging gains at the end of the particularly at the end of the.
First quarter.
Is that responsive okay.
Net is thank you Bob and thanks for the call.
Our next question comes from.
Loans, Steven Duong from RBC capital markets. Please go ahead with your question.
Good morning, Steven Hey, good morning, Good morning, guys.
Just on the PPP again, I know, it's a bit hard to predict but I guess, what's your sense.
Given the activity that youre seeing so far on the cadence of the forgiveness for the next few.
Or do you expect.
On the majority would be forgiven by the end of the year. We're looking at this kind of going into the first or second quarter next year.
No I actually anticipate we're going to see a fair amount of forgiveness in the last half of the year and then in the second quarter, we saw about $327 million.
Forgiven.
And as I said, we have at the end of the quarter some.
$560 million, which includes deferred fees $5.44.
Is the net PPP balance so we have.
About 6200 loans yet to go the bulk of those.
R&D less than 150000 you.
You might have seen this morning, the SBA came out with.
Some additional.
Language around how to engage directly through the SBA for individuals and companies that want to get their PPP forgiveness sooner rather than later on.
I think that might.
Might be an advantage going forward, probably not on anybody's forecast. It's just came out but it's still a very simple application whether it goes through the bank on file directly with the SBA and so we are pushing hard with our lenders.
Calling individuals and small businesses to get.
To apply for forgiveness.
Because in some cases the first round in.
Individuals would be subject to.
Repayment beginning in September of this year.
So we really expect the bulk of the first round.
On a PPP customers to be gone.
Then in terms of the year and then remember that Steven the second round has a 5 year.
Life to it.
And while those will also restart or startup.
Amortization later this year.
On the amortization on a monthly basis is lower for the customer.
By the end just because it's a 5 year maturity. Nonetheless, we do expect the bulk of those to go by the end of the year. We are currently expecting of that $17.5 million Thats left and PPP deferred fees that we'll work our way about 2 thirds of that by the end of the year.
Okay, Great really appreciate the color on that Bob.
Customers and then maybe just on the margin.
If we were to strip out the PPD in the quarter.
And on <unk>.
Quiddity and everything is at 305 margin, where you guys are at when you take everything out.
Well on a core basis.
On this accounting would take it down to 3.
The P. P. This quarter was 5 basis points I provided.
The average balance if you need that in your model.
And so that takes it to.
I believe our disclosure was 295.
So on the first quarter, we had a 304.
The net of those 2 factors I think it will go down a couple of bps.
Here in the third quarter, but still remain above $2.90.
I think it will.
Be in that general ballpark over the next few quarters.
Recall, we do have loans that do re.
Purchase we had as we said last year, we had 3 consecutive quarters of really the same margin and so we continue to have 5 year maturing.
Or repricing loans, particularly those from old line.
That will re price at lower yields going forward, but nonetheless.
Our guidance is in that.
<unk> or our thoughts are in that.
Low to mid 200, ninety's stripped of PPP and purchase accounting.
Okay.
On the liquidity this quarter was.
That was 10 basis points is that correct yes.
Yes about 7 basis points of that.
Would be the mix shift towards investments and then 3 basis points additional liquidity for the quarter.
The total impact of the excess liquidity.
4.
Both quarters really the first 2 quarters of the year is 10 to 12 basis points.
Basically.
That basis points for an additional $100 million of cash on on that line item. So just wanted to break that out between the mix shift on investments and then additional liquidity over the first quarter.
From the March stimulus as well as just continued.
2 both in deposits.
Got it thanks Todd.
And.
I was just looking at your.
Yes.
On the commercial pay offs that are coming off so I think he has been in the range of.
Around the $3.20 to 25.
Great for new yields coming on is that.
Fair to kind of see that kind of like the run rate for now in the next few quarters, if the rate environment doesn't change.
It is.
I'm actually going to that page. So I apologize if you hear a couple of pages.
Shuffling here.
<unk>.
Sure.
And of course, when you when you are looking forward to again find it.
Okay.
We're about 75 basis points down on.
On roll off versus what's going on but the 325 is a good marker for for new loans going on.
Got it got it.
Alright, and then you had mentioned that 800000.
On transfer tax reduction when did that occur.
On the P&L.
Where does that occur and so thats franchise taxes not transfer.
Okay.
So.
Where does that occur it occurs in other operating expenses.
Youll see in the 10-Q that actually we breakout the miscellaneous.
Tax expense line.
From other operating expenses.
But that's where it is today when you're looking at the earnings release.
Got it.
And then I guess just from an overall perspective, you guys cats.
You did a good job I thought on the expense side given.
The rate environment, how difficult. It is right now I know you have the merit increase.
Coming into the third quarter.
Do you think you can keep.
I know you are targeting the mid fifties do you think you can keep it maybe below the mid fifties as we go through next year.
I think that on efficiency ratio.
I think that will depend a lot on what happens with the yield curve and we feel pretty comfortable with the expense levels. The next.
3 quarters in the mid eighties range, the 82 number and changed that we posted I.
I think we've indicated there's about $1.8 million or so in kind of 1 time benefits there that wont be there future quarters. So that that mid <unk> range is something that we're working hard on youre going to get some additional efficiencies.
With our core conversion, but we're also redeploying that into hiring commercial lenders and wealth managers and people like that to get the growth we want.
But.
I feel much more comfortable with the expense number the efficiency ratio again, it's going to depend upon the yield curve.
Cooperating for us because we we faced.
Based on the same trend as everybody else does.
Understood I appreciate the pad that's it from me. Thank you.
Sure.
And our next question comes from William Wallace from Raymond James. Please go ahead with your question good.
Thanks, Hey, good morning.
Todd on your prepared remarks, you talked about.
<unk> I think I wrote down 31, 5% credit line utilization and that being at historic lows.
Are you seeing any change yet in your commercial customer behavior around their deposit accounts are you seeing spend start to increase is there any indication that that would give.
You confidence that those utilizations could.
Bounce back up in the second half of the year.
I would say.
I am seeing that things have bottomed I'd say with regard to the usage as well as probably the cash cash take up utilization and things like that.
Out there talking to our commercial customers.
So its been a fair amount from our time doing that.
They're pretty confident of things, but not to the point, where they're making they're making big investments real estate sizeable different real estate market seems to bounce back, but on the C&I side still a little bit more conservative so.
We haven't seen that take up.
Yet in the line or any significant take up in deposits.
I would expect youre going to see the deposits come down before you start to see the line usage go up and hopefully that happens in the next the next quarter or so.
Okay great.
And <unk>.
Maybe just kind of following.
<unk> on this this kind of concept of of excess liquidity.
And your modeling.
Do you do you think that this this liquidity stays on balance sheet and you deploy it in some manner, whether that's into the loan portfolio or our continued bond purchases or.
Do you.
More likely that that we start to see liquidity leave the system.
I think I think quite frankly, because there is so much liquidity out there they've actually started to make sure. We're focusing on on net new account growth because I think you can kind of get misled by big deposit growth with everybody, but at the same.
It's got to make sure you grow on market share as well too so and part of the reason I'm doing that is because you would expect some net liquidity to leave over time I mean, it should be spent right. It's been used for stimulus.
PPP and everything else. So it should be being spent and I expect that it will be.
Bent over over time.
We are focused on on growth.
Same time on growth and have a lot of meetings on that putting a lot of efforts into that at the same time.
Working hard to maintain the credit quality and credit standards that we have we see opportunities out there we see growth opportunities out there.
But in a lot of cases, particularly on the real estate side, either coming with with terms that are much more aggressive on pre pandemic.
<unk>.
So sticking with relationship deals and.
We're working hard with those customers that are.
On the right things.
But.
We see opportunities out there. We're just we're just not capitalizing on all of them at this point because of.
The structure of some of those deals that were that we're seeing out there.
No we.
We don't want to put a significant amount of money into it into securities because those aren't the greatest yielding things and there are some banks that are going strong into that there are other banks from big banks that are just sitting back and kind of waiting for rates to rise.
I would say, we're a little more in between on that where we see opportunity we'll rates rise 10 year on year.
Your Roes.
A month or 2 ago on its come back down now, but where we see opportunities to be able to put some money to work at a decent return, we'll do that but no big wholesale strategy changes to me, it's going to be loan growth per second and third.
And then.
We've got some other uses for for some of the liquidity.
<unk> in terms of things, we can still prepay not prepay, but when.
When some of these federal home loan bank borrowings come up.
Use them for that as well too. So we're we've got a fair amount of that coming up over the next year.
Okay. That's helpful.
There's been a lot of kind of I would say it seems.
Maybe guarded optimism about loan growth in the second half of the year.
On a core basis, excluding noise from PPP and when you talk about the sort of core net interest margin expectations, what kind of loan growth does that assume in the back half of the year. We're talking low single digits flat in can you just kind of help us think about the moving.
Parts.
Yes, I think with with the production again production's up highest point in the last year. Our pipeline is high the highest point in the last year and product pipeline is up 18% over the the end of the first quarter. So I feel good I feel good on that I think I think that we're hitting on the cylinders, we need to hit on the big Big on known why is.
Commercial real estate pay offs, because the liquidity we talked about earlier.
Sitting out in the secondary market to so those guys are coming on are really aggressively and taken property, sometimes even before they are stabilized.
And I don't I don't know what that what that that number is going to be in the third and fourth quarters. If you just normalize real.
This pay offs last quarter and assume we had a similar quarter that we had in the past that's a $102 million Delta difference and that would have taken us from a.
I think it was a negative <unk> 7 loan growth ex PPP for the quarter that would have taken us up to I don't know what a positive <unk> 3 still nothing to jump up and down about but it would have been.
Real estate up.
So I just don't know what's going to happen with that if you don't if I think if you get commercial real estate pay offs go into more normalized levels. On these are again, our secondary market payoffs for the most part.
Then we could see a flat to up.
Loan growth number, but it has got another another really heavy month in commercial real estate pay offs.
Positive that could impact that.
Okay. Thank you for all that Todd and then just 1 last question.
On on buybacks you bought it back brought back a nice chunk in the second quarter.
How aggressive might you continue to be with the stock trading where it currently is.
Yeah.
The reason to anticipate that you wouldn't be just as aggressive.
On the third quarter and.
Had there been any purchases quarter to date.
Yeah, I'll, let Bob talk about the purchases quarter to date, because he and his group are managing that and watching that we did have the can be 5.1 data on that.
Is there any allow us to continue to purchase turned back on blackout. So I know that was that was occurring.
We still have even I think when we run through this authorization.
We've.
Even with the buybacks with the earnings that we've had we continue to build capital even with the buyback activity. So we're already.
1 of the top couple on our peer group on capital levels, and we run a lower risk weighted asset level than our than our peers, so having a low risk profile, but more capital.
We know we've got the opportunity to return capital to our to our shareholders through a variety of means over the next couple of years. So we will run through this authorization and we will obviously.
Obviously be having capital discussions with our board later this year, but we recognize the fact that we're in a very robust capital position and.
That.
That's something that we've got to work on.
Yes, so we did buyback.
Basically the same pace in the month of July under Todd mentioned that tend.
5 we haven't done that in the past by through blackout and so we did.
Engage that for the first time on.
That did allow us to continue to.
Move towards the remaining amount that's outstanding so.
At the end of the quarter was $1.9 million wallet share.
Shares remaining on.
<unk> from.
At the end of July it will be somewhere.
Half million dollars half a million shares less than that and so we'll continue the pace going forward is as I mentioned in my prepared remarks.
It's a great opportunity on a dollar cost average in terms of the price of the aggregate.
Thank you that's very helpful. I appreciate it I'll step out.
Our next question comes from Steve Moss from B Riley Securities. Please go ahead with your question.
Hi, good morning.
Todd maybe stepping back from all the numbers a little bit you're talking about a very competitive environment out there and just kind of curious.
Is it permanently right or are you seeing more competition on structure. These days.
Wondering how that's affecting your thinking here.
Yes, the thing Thats, a little concerned and as we're starting to see it on structure.
Rates are.
Been competitive for a while and I saw a pretty good sized deal.
<unk> done for we didn't do it.
It but it was.
2% fixed for 25 years.
Or real estate projects with no guarantees no equity those kinds of things and apparently they are getting done.
So.
Concerning me a little bit I think we're still seeing our opportunities and we're very much a relationship bank.
So I think.
<unk> got those relationships will continue to build on them.
But 1 of the things.
Like is that we keep our we keep our credit standards pretty consistent throughout.
Regardless of what's going on with the ups and ups and downs and I think I think the customers appreciate that.
So we're not we're not going to change our.
We will file to get some growth we think we can get the growth and we think we're well positioned on the right markets, but it's a little it's a little.
Frothy right now in terms of what I'm, what I'm seeing out there.
Just what those transactional borrowers it's kind of go to 5 banks.
That's just not really our cup of tea.
Right Okay.
And then in terms of just thinking about the overall balances, but environment could you get to stabilization in terms of loan balances later this year and I realize pipeline is up and that's obviously a positive but just kind of Boston, it's pretty significant.
I think I think he could again.
The answer.
I gave the why was the pen on the pay offs in the secondary market.
On the impact that it's having on if it's having there if you kind of remove that headwind.
Then I think you could see some some really nice nice growth because I think there is strong.
A strong economy and things are definitely moving forward and coming out of the coming out of the pandemic.
We had acquired into Kentucky markets, primarily Louisville, Lexington, Northern Kentucky at the end of the high growth markets at Kentucky, and then the Maryland markets with the field on bank acquisition, a year and a half ago.
And part of that was to get us to have a bigger part of our bank in higher growth markets and that's we're seeing pipeline increase across.
But its more accentuated in Maryland in Kentucky, and we're seeing more loan bookings in those markets as well too. So to me that starts to kind of validate why we went to those markets.
But prior to the pandemic, we were kind of a low single digit to mid single digit grower and having acquired into.
Those markets coming out of the pandemic into a more normalized environment.
I would expect that we'd like to see us at the mid to upper single digit growth numbers. So that we would have changed the growth profile of the company through the acquisitions, while still keeping the strong core legacy deposit base that we have I mean to me that's the real value proposition that we have and the value proposition.
On a going into those other markets as well too. So I think that thesis will play out.
I'm pretty confident of that but we are we are going to be limited somewhat by what's going on with the secondary market in the amount of liquidity that's out there I think.
We will get our share of the growth when it when it comes I just don't know exactly when.
Thats going on.
Great Okay.
And then in terms of.
Question for Bob here, and I apologize if I missed it Paul.
The rate on the securities purchased this quarter.
The book yield was.
130.
And.
Cash flowing through prepayments.
Or maturities is about 90 basis points higher than that around $2.20 or so.
Okay.
Okay. That's helpful. Thanks, and then in terms of just the.
Looking at the reserve ratio.
<unk>.
Good reserve release here again this quarter.
Wondering what's the potential for getting back towards that day 102026 on reserve call. It 90.80 bps.
Overtime here.
Yes.
I'll jump in there and Bob May want to make some additional comments on it as well.
He mentioned in his comments that.
We would expect the reserve to continue to come down, but at a lower pace than we had a pretty big.
Pretty big reductions in the first and second quarter, but we think we can feel very appropriate.
And we're still right at peer levels, maybe a little bit above peer levels on on the reserve that we've got.
2 now today.
We would expect that to continue to come down over the next few quarters unless something significant happens with <unk>.
Variant or something like that which we're not it's out there, but we're not seeing that impact business at this point.
But we would expect it to continue to come down, but I think what will end up happening though.
Right.
How long it takes to get back to where it would have been on day, 1 seasonal I think is a very interesting question.
I think theres a lot of room for it to continue to reduce.
But I think you've also got to look at how does the pandemic change things like office portfolio and stuff like that.
We.
Too many issues there to speak of.
But we're conservative bank you guys know that you follow us so we'll be we'll be 1 of the last to get rid of it.
Final piece of the reserve just because we are going to want to hold it to make sure that there isn't any any issues anywhere else that pop up.
But I think the contour of it's.
We don't have on your to be continued to be down, but it may it may take us a year or 2 to get back to.
On the pre pandemic.
Day, 1 levels, but that could happen quicker than that too.
Yes.
You're right Todd.
We were.
I think at 88 basis points on day 1.
12, 31 of <unk> 19, we were I want to say on the mid fifties.
Just because of all the acquisitions, we have done over the years.
So I think Steve that.
I don't think we're going to get.
Down into.
Mid to high Eighty's anytime soon but I do think we're going to get closer to 1 sooner than we would have projected just 3 months ago and our guidance on the.
On the prepared remarks was that we might still see some negative provisions, but a lesser amount than the first.
And it kind of makes mathematical sense.
And then just to plug into the model.
I don't have a good sense for.
How much above zero, if any we would experience next year, but.
I, just think on a $17 billion balance sheet with 10.
$1 billion in loans, it's reasonable to assume some some provision going forward and some minor level of charge offs, but.
Still I think getting down closer to that 1% or 110 kind of mark is.
As.
It's something that we could be begin to see in our forecast.
To close we move into 2 that late 2022 in early 2023.
Okay.
And then last 1 from me just on M&A have been a number of transactions in various markets of yours, just kind of curious updated thoughts there.
And what's the level of discussion.
So are you guys.
Yes, that's a good question, we've been saying pretty consistently the last couple of years 2020 was all about old line and old line Bank.
Get the conversion done and get things assimilated, which we did and that's gone very well 2.
2021, this year was going to be about our own core conversion.
<unk>.
We're right on top of that here in the third quarter.
A lot of effort auto work has gone into that very very significant amount of work.
So we're getting ready to be past that here in the fairly near future.
With the capital levels that we have in the.
Year on a half to 2 years since.
Since our old line Bank acquisition, we could start.
Looking around or entertaining opportunities I haven't yet.
We don't have anything near term, but kind of really want to stay focused on the core.
Conversion and coming through the pandemic, okay, but it seems like both of those are either done or.
Be done and start to make some some marketing trips.
We don't feel like we need to do anything because as I mentioned earlier about the acquisitions, we made in the past.
To get into some of those higher growth markets and we want to continue to execute.
Upon that higher trust wealth management securities people things like that and so on.
Tuckey in Maryland market. So we think we've got some good organic growth opportunities without doing it.
Any M&A.
But if we found the right opportunity.
That would be similar to what you've seen us do in the past then we.
We would we would I think be in a position to entertain something.
Something like that later this year or into 2022.
2023, but currently not looking at anything.
Alright, great. Thank you very much sure.
Our next question comes first Stuart Lotz from <unk>. Please go with your question.
As Stuart Hey, guys good morning.
Most of my questions.
I have been answered at this point.
Maybe just 1 more on credit it looks like your criticized and classified held pretty steady this quarter.
But all overall NPA as were lower and net charge offs. I guess you had net recoveries. This quarter. How quickly do you think you'll be able to work down those down.
Balances.
How does that kind of play into future reserving levels. Thanks.
Yeah sure. Good question, yes. The CNC was has been pretty flat to last the last quarter or 2.
Again, we're being really conservative here in terms of how we're looking at this.
At the.
The portfolio's I'll take hospitality is 1.
Our mix of.
What we what we look for in terms of debt service coverage and liquidity as you come out of the pandemic that portfolio was all liquidity a.
A year ago 9 months ago.
Now youre down in much more of weightings.
Towards debt service eventually get it back to.
Traditional risk grading process associated with that.
So we continue to work through that but the anticipation would be is that we would see improvement.
Over the next couple of quarters of fairly meaningful improvement over the next several quarters on.
On the CMC side.
And it does have an impact obviously on the reserve to some degree so I think it'll be a.
A benefit a little bit of a tailwind on reserve.
Releases because of what's in the CNC bucket any charge offs are weighted net recoveries actually this quarter and.
I know a number of banks of posts.
Are the same and I look at our Npa's.
And being at 25 basis points and delinquency, where it's at.
It's hard to it's hard to see any.
Any kind of losses in the portfolio quite frankly.
But still got to get through the other side of this.
Pandemic.
And the lasting impact of.
On the hospitality it looks good.
Does look good on I would expect.
A lot of those be moving a lot of them have already quite frankly started to move.
But we're just being we're just being careful on it and.
Greeting.
We think is appropriate.
Okay.
And Bob I guess, you have the percentage that is related to hospitality of that of the $456 million.
Hi.
Believe I believe its around 120.
I'd have to I'd have to double check that I don't know John if you have got that or not.
And it's 2025% or so loans.
No I'm sorry, that's that's that's not that's not right we'll.
I'll have to get back to you on that but it's it's the majority I would tell you 2 thirds.
Or a little bit more of the C&C would be we'd be hospitality related.
Okay.
Great.
And maybe just 1 more from me obviously.
Appreciate all the color on growth expectations this year as well as from the PPP numbers.
<unk> seen a number of your peers elect to sell their remaining PPP balances.
Focus on organic growth opportunities outside of that.
Is that something you would entertain.
Something that you've looked at doing you selected against doing that so far.
Would just love any any any thoughts there. Thanks.
Yeah, we've elected against doing it obviously at this point I mean, we've got.
So what are the nice things about being a I guess I'd say a community.
Our emerging regional bank was we picked up a number of prospects through the PPP process to and want to continue to try to leverage those into full relationships in that.
Sell them off to somebody else so.
That would be our thought is to continue to mine that and try to turn them into long term long term customers.
Correct.
Yeah.
Thanks for taking my questions guys sure.
Our next question comes from Brody Preston from Stephens, Inc. Please go ahead with your question.
Judy.
Hey, good morning, everyone. How are you good.
Good.
Some of my questions have been asked.
By now, but I would just have a couple of lingering ones.
Maybe just on the expenses, Bob just a couple of points of clarification.
So.
Once the once the forgiveness of SBA is completed I guess I'm trying to gauge.
What the potential.
Central expense benefits might be so do you have a sense for what the ongoing PPP related costs and an N E. R. Currently.
My recollection is.
We're paying about $110 per loans forgiven.
Through the automated.
Portal that goes from a third party.
Technology provider direct to the SBA.
So it kind of depends upon.
How many hundreds of loans are forgiven in any 1 month, we've had months with a couple hundred thousand dollar bill from.
From FY house, and other months, where it's been 100.
So in that ballpark.
John.
You know obviously with the core conversion I think Todd has mentioned this.
But.
We're going to an account base charge as opposed to an asset based charge there'll be a little bit of an overlap that we're trying to estimate here.
Here in the third quarter from the prior.
Methodology.
But.
But I actually think that that.
<unk> might be enough to offset what remains on PPP in terms of costs.
Now the PPP costs also included a $250 origination fee.
And then a portion of our lenders time, but those.
Thousands upfront were deferred.
Both round, 1 and round 2 and they net against the deferred fees is there come back Peru on net interest income so some on substance not a big impact from that.
Really I think are the larger impact will come from the.
The conversion over to the new.
F I S core platform Ibs.
And.
We're also on the process of converting our our mobile and Internet and digital platforms at the same time so.
Looking forward to having that behind us.
On 8.
As what we said were the 1 time items this quarter.
From those 2 franchise tag.
And FDIC refund I'm on.
So that kind of puts you in the $84 million range.
And so you know.
With with increases to our employees this summer.
That kind of puts us in a little bit.
Above that level that we experienced as adjusted for the second quarter.
Got it. Thank you for that and I know you said there are minimal, but do you happen to know what the cost savings on the 6 branch closures are.
Well, we assume that most of that would get <unk>.
Reinvested back into the franchise unlike.
The 'twenty, 1 or 'twenty 2 from last year, where we assumed about half of that.
We've already experienced in the restructuring charge about $700000 of lease termination fees.
We think there'll be another couple of 3.4.
The dollar's worth of onetime expenses over the next couple of quarters between the core and.
The branch closures.
But in terms of savings I, just don't anticipate.
That you should.
Put any any of that due to the images.
4 million immateriality of the 6 branch closures and wanting to reinvest those back into both digital banking as well as.
Our employees themselves.
Those folks are going to go to other branches any loans, yes, that's <unk> when I was going to make because we're we're fighting the same struggled everybody is going to get employees things like that so.
Employees from those branches have been consolidated or absorbing into other areas.
Got it Okay, and then last 1 from me.
Bob I thought I caught something in the prepared remarks, but I might have missed it regarding this but on slide 5.
I appreciate the disclosures you gave around the fixed versus variable.
Some of the commercial loan portfolio. So you guys. Thanks, Thank you to John for that.
But I wanted to ask of the $2.5 billion that you'd call out.
As far as you mentioned, 65% of those are currently at their floor levels do you happen to know the number of hikes that would be needed to get them off.
Low powers.
Yeah.
As a matter of fact.
The bulk of that and so thats in billion 6 in the rated floor is around 4% similar to last quarter.
And.
Their fluids of that would be 75 basis points or less.
And then remainder at <unk>.
More than 75 basis points Theres also some that are not related to rate, but related to time to repricing.
Brody.
And Thats.
Give or.
So a little bit it's about 25% of that of that total.
Got it. Thank you very much for taking my questions I appreciate it.
Okay.
Yeah.
Our next question comes from Russell Gunther from D. A Davidson. Please go ahead with your question.
Hey, good morning, guys good morning.
Just a couple of follow ups. Please on the.
The loan growth side of thing Todd you mentioned, a number of revenue hires more recently.
For those from the commercial lending side are they fully ramped up on boarded and reflected in the pipelines you've mentioned or based on timing.
And getting.
<unk> fully up to speed and bringing over book because theres some upside if they get on board.
There's some ramp up there and are those because those that we've hired this year on the commercial side and also the.
Some of the Securities people, it's part of the wealth management, but we put securities people series 7.
Broker people in the markets as well too and we've got a couple of hires in our newer growth markets there.
That's kind of really tied to the.
Unrestricted on lobby access, which we did.
About a month and a half ago, so they're numbers that really jumped to actually where it sits on the strongest numbers we've had in a couple.
In that area since the.
Lobbies have been on restricted so that's in the process of.
Ramping up as well too.
On the mortgage loan originators same thing I've mentioned, the northern Northern Virginia opportunities with.
A couple of people we've hired there.
<unk>.
Theyre just just.
No.
We're still going through the approvals for <unk> and things like that but they are just coming on just in the process of coming on board so haven't even seen.
Gross production from them, so I would expect to see.
Some lift.
Okay, Great. That's very helpful and then just.
A follow up on the expense side of things you mentioned, the core conversion, bringing efficiencies in that curve.
Ongoing or a third quarter event or those efficiencies that you expect to drop to the bottom line a day reflected in the mid <unk> range for the next couple of quarters that you talked about or based on timing does any of that spill into 2020.
It does it's included in the kind of the mid Eighty's number we've been realizing some of those really over the last year as.
As we've started to automate a number of things we had.
We had.
A number of.
Let's say people in the items processing area I think we have.
It doesn't people on there at 1 point were down to 1 or 2 because it's been automated so we've been able to reduce staff.
On through retirements things like that.
Head of.
The core the core conversion. So some of those expenses are already built in and I think longer term, where the real benefit will.
It will come in as Bob mentioned, we're kind of charged a processing fee in the future on a per customer basis. So I think that will really zero in on getting very strongly focused on the profitability of each customer versus in the past just being charged off of the asset size.
There's a number of things along with the core conversion comes.
Stepped up imaging capabilities. So we're not transporting paper all over the organization, that's going to drop down really significantly in.
In the organization.
We're adopting zelle as a.
Payment source versus our own payment.
<unk>.
Homegrown thing that we have put in place.
So theres a number of efficiencies that are operating in there too and I also think longer term, where theres going to be a benefit on the revenue side is now you've got all these systems that are all talking to each other where in the past by the systems didn't talk to each other so from <unk> to use the term artificial intelligence, because it's kind of a catch all but in terms of being able to target.
What's the next best product for our customer based upon your knowledge of their transaction data and what are their needs going to be and making sure you operationalize that information and put it in the hands of the people meeting with the customers we've greatly enhanced our ability to do that with this core conversion.
1 of them.
Most obvious things that it's done.
As we go to real time activity and we don't have that today. So if you want to go and take a picture of your deposit.
Put it in your in your accounts through your phone and then go to your ATM. It doesn't show up until the next day.
Once you do this core conversion, it's all going to be real time, and that's table Stakes and nowadays so some of these things.
Things that I think we're going to really improve the customer experience, they're going to improve efficiencies on the cost side and improve revenue, but I don't see any huge cost coming out because of it I just think it's going to allow us to be more efficient overtime.
Okay, great. Thanks for your thoughts guys Thats. It from me I did have a follow up question.
Earlier about the percentage of hotel loans that were in the CNC bucket and.
Hotels are about 40%, 40% of C&C loans, I think I mentioned, 2 thirds and if that's not accurate it's $40 to 40%.
And our next question comes from Daniel Cardenas.
Card Dana from Boenning and Scattergood. Please go ahead with your question.
Good morning, guys.
Welcome back everybody doing.
Good to be back I appreciate all the good information as they get re engaged on the story here. So just a couple quick follow up questions.
I think Todd you had mentioned that you were beginning.
Beginning to see perhaps some weakness.
And structural the structural.
Components of the loan portfolios just wondering if that's kind of coming more from the smaller companies.
That you compete against or is it the bigger companies or is it a combination.
True.
Yes, it's more what I've seen is more on the larger larger side.
I think part of it is some of the smaller deals they are much more relationship oriented right. So you get a couple.
A couple of million dollar loans.
Tend to be the bank <unk> bank involved in that but you get up to the larger 10.
$15 million to $20 million 20.
$25 million type of loans.
But.
Yeah.
A little more competition, there and I think some of the things that we're seeing there just a little surprising.
But it's mostly on the larger transactions.
And.
We're fighting our way through it.
We'll do what we've done in the past on that and went over those relationships that wont be relationships and those that don't we won't.
But I think that also allows us to hang on to our customers that we've got because we're a relationship bank.
On our customers want to do something we tend to do it with them versus them talking to buy banks since he has got the best price.
We are the best structure or the least risky structure I guess I should say.
We.
We tend to stick to our knitting over the long haul.
Got it got it.
And then just on the M&A side and I understand it.
Could be a year or more off before you.
Actually do.
<unk> transaction, but given given your current size.
The size parameter of institution that you would be looking to acquire in June.
Graphically is there any 1 area that you would potentially focus on.
We still like the 6 hour drive time from Wheeling, which has kind of been our approach in the past.
Another bill getting the card, let's see the markets, you'll see the see the employees and Thats et cetera drive time seems to work well for us. So it would be in markets that we're already in today.
The Columbus, Cincinnati, Louisville, Lexington, Pittsburgh area.
The Maryland, Maryland markets.
All of those areas.
Yes.
Be higher growth type of markets and areas you'd want to get bigger in.
In Virginia.
It would be within a 6 hour drive time, Indianapolis not a lot of opportunities Indianapolis, but those are all markets that would be within that 6 hour drive time as well too.
So it would be probably the only kind of new markets that we're not in today that we'd probably be looking.
Hard at.
And size wise it would be anything.
Up to.
25% of our size or so I think as what we've done in the past as we've gotten bigger that number goes that number goes up.
So that's kind of our.
Our our focus.
Okay. Thank you on that.
Last question I think when I when I left you guys last there was a lot of talk about.
Our cracker facility going up.
In Ohio.
Can you give me an update on that end.
If they are not going to build on what kind of impact do you think that's going to have on on the economy there.
Yes.
Intubated.
It seems to get hot in terms of discussions.
On natural gas prices are up and it tends not to be hot discussion on when it's going down, but it's still a possibility.
Some are indicating that there's been a lot of investments made already and it's probably going to happen.
The question.
<unk> is when when will that happen.
The cracker plant up and be.
Beaver County up in.
Pittsburgh.
Nearing completion, Bob that's not too far from where 2022. It goes online and we have very strong market share in Beaver County, courtesy of the ESB acquisition.
So we hope.
<unk>.
On the cracker plants down theyre willing happens but.
It's not.
It would be additive to what we have already.
But it's pretty it's pretty healthy pretty strong community.
On the Wieland area in and around the Wieland area on our legacy markets are used ups and downs.
Based upon just different things that are.
Happening with with commodity prices, so they tend not to get overbuilt.
When things get announced so if it happens it will be a great additive push for all of us.
If it doesn't happen then it won't but there is a fair amount of activity in deposit flows into the bank through homeowners that are collecting royalty.
Payments is up significantly.
We're seeing the benefits of it on the deposit side.
Great Thats, all I have for <unk>.
Hey, Thanks, guys. Thanks.
Okay.
And ladies and gentlemen, with that we will be ending today's question and answer session I would like to turn the floor back over.
Could you talk Boston for any closing remarks.
Real quickly I want to thank everyone for joining us today, and hopefully we will get a chance to see each other here in person at 1 of our future upcoming investor events, we'll get a chance to hopefully get on our dance card together, but please enjoy yourselves stay safe for the rest of the summer.
And ladies and gentlemen, with that we'll conclude today's presentation. We do thank you for joining you may now disconnect your lines. Thank you.
Yes.
Okay.