Q3 2021 WesBanco Inc Earnings Call
[music].
Good morning, and welcome to the West Banco third quarter 2021 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions.
I ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two please limit yourself to a couple of questions and you can reenter the queue to allow others to ask.
Please note. This event is being recorded I would now like to turn the conference over to John <unk> Investor Relations. Please go ahead.
Thank you Andrew.
And welcome to Wesbanco, Inc. 's third quarter 2021 earnings conference call.
Leading the call today are Todd Austin, President and Chief Executive Officer, Bob Young Senior Executive Vice President and Chief Financial Officer, and Dan Weiss Senior Vice President and Chief Accounting Officer.
Today's call archive of which will be available on our website for one year contains forward looking information.
Cautionary statements about this information and reconciliations of non-GAAP measures.
Earnings related materials issued yesterday afternoon.
As well as our other SEC filings and Investor materials.
These materials are available on the Investor Relations section of our website Wesbanco Dot com.
All statements speak only as of October 27, 2021, and West Bengal undertakes no obligation to update them.
I would now like to turn the call over to Todd.
Thank you John and good morning, everyone.
On today's call, we'll review our results for the third quarter of 2021 and provide an update on our operations in 2020 one outlook.
Key takeaways from the call today are.
Whats Banco remains a well capitalized financial institution with solid liquidity strong balance sheet solid credit quality.
We're committed to expense management, while we continue to make the appropriate investments, including strategic hires across our organization and markets to enhance our ability to leverage our growth opportunities.
And we remain focused on ensuring a strong organization for our shareholders and will continue to appropriately return capital to them through both long term sustainable earnings growth and effective capital management.
We're pleased with our performance during the third quarter as we delivered solid pretax pre provision earnings and manage discretionary expenses.
For the quarter ending September 32021, we reported net income available to common shareholders of $45 4 million and diluted earnings per share up 70 cents.
When excluding merger and restructuring charges.
On the same basis pre tax pre provision income was $57 8 million or 60.4 million when excluding settlement costs with respect to the pending resolution of the lawsuit of $2 6 million that we incurred during the quarter. We reported strong pretax pre provision return on assets and average tangible equity of 1.3.
4% and $14 seven 3% respectively.
Reflecting our strong legacy of credit and risk management are key credit quality ratios remained at low levels and our regulatory capital ratios remained well above the applicable well capitalized standards as well as remain favorable to peer bank averages.
The significant amount of excess liquidity across our local economies combined with the supply chain and labor constraints continue to temporarily impact loan growth.
So far this year, we've generated nearly 1.3 billion in new commercial loan production with 35% of that occurring during the third quarter.
Our commercial pipeline is building again and approaching $600 million with more than a third of that pipeline coming from our more recently acquired higher growth markets in Maryland and Kentucky.
Further our residential mortgage pipeline remained strong which bodes well for originations the next couple of quarters.
While up slightly from last quarter commercial line of credit utilization is still about 12 percentage points or so below the historical mid to upper 40% range as companies have excess liquidity or delay growth opportunities due to supply issues.
We continue to experience high commercial real estate project payoffs via an aggressive secondary market that is flushed with liquidity searching for yield and offering very generous rates and terms or purchasing projects outright due to a strong cap rate based valuations.
Through the first nine months of this year, we've had more than $630 million of commercial real estate project payoffs far outpacing the $450 million, we experienced during 2020 and the 500 million we experienced during the full year of 2019.
So while we expect our commercial real estate projects to go to the secondary market for permanent financing, it's been happening at a much earlier point in their projected timelines, creating a short term mismatch with our new production to offset the run off.
We anticipate commercial real estate payoffs to be slightly elevated during the fourth quarter before returning to a much more historical numbers to around $85 million a quarter range during next year.
On the positive side, we generated more than $90 million of new construction loans during the third quarter, which will fund over the next 12 to 18 months.
Our key investment, we're making is the investment in our employees as they are critical to our long term growth and success during the third quarter, we redeployed some of the savings from our optimization efforts to raise the hourly wage in order to retain and attract which is having a positive impact in.
In addition, we continue to formulate plans to make strategic hires across the organization and markets to enhance our ability to leverage growth opportunities once they fully return.
Throughout the year. So far we have made more than 35 revenue producing hires in key markets across our organization in order to strengthen our teams and enhance our ability to leverage future growth opportunities.
These hires have been concentrated in our commercial lending residential lending and wealth management groups.
Our new residential mortgage loan production office in Northern Virginia, which I mentioned in July has hit the ground running producing approximately 5% of our originations during the quarter.
In addition to ongoing efforts to add wealth management personnel in our Metro markets. We are implementing plans to hire an additional 20 commercial lenders whether individuals or teams over the next year or so.
These hiring plans are focused on both our existing metro markets and potential new metro markets that would be adjacent to our existing franchise footprint.
We believe that our diversified revenue engines and footprint combined with our experienced teams and hiring plans make us well positioned to take advantage of future growth opportunities and over the long term, we still anticipate mid to upper single digit loan growth.
I remain proud of our entire organization is remain diligently focused on serving the financial needs of our customers and our communities throughout the pandemic the reopening of our economies and throughout the completion of our core banking software system conversion.
For the second year in a row, we have been named to Newsweek's magazine's ranking of the best banks, which recognize those institution that best serve their customers needs.
This great accolade followers, when we received a few months ago, where we were named for the third consecutive time, one of the world's best banks on customer satisfaction.
These recognitions are a testament to the hard work and dedication of our employees are focused on our better banking pledge to deliver superior customer service and our efforts to provide our customers with high quality products and services and the ability to access them when it best meets their schedule, whether in person or through our full range digital platform.
I would also like to congratulate our community development team led by our retail either with the receipt of the a B a foundation community commitment award for community and economic development.
This prestigious National award for their strong performance and outreach with our new market loan program as well as recognition of our strong community banking roots.
Through our new markets loan program and other innovative programs. Our goal is to promote meaningful community driven investments and fund a wide variety of business, providing critical and social commercial services to low income communities.
Lastly on.
And on August 2nd we completed the conversion of our core banking software system to F. I S is ibs platform. This was an important project that involved hundreds of employees across our organization to ensure its success.
This dynamic platform provides improved operational efficiencies capabilities for growth opportunities, including partnerships with fintech and enhanced products and services for our customers.
Just some of the digital enhancements include the national person to person payments networks Zelle, which we are now on.
Enhanced security measures.
Robust personal financial management tools to allow who can't account aggregation budgeting and spending targets and the ability to stop or release payments online.
As I said before I am firmly believed that during the last couple of years with our investments in Kentucky, and the mid Atlantic region, and our new core operating system, we have solidified our evolution into a strong regional financial services company that is supported by several unique competitive advantages.
I'd now like to turn the call over to Bob Young our CFO for an update on our third quarter financial results and the current outlook for the fourth quarter of 2021 Bob.
Thank you Josh good morning.
I have a bit of a cold so.
I'll try to stay focused here you might hear a bit of a raspy voice.
During the third quarter, we experienced a continued low interest rate environment negatively impacting margin.
And we retain significant amounts of excess liquidity.
And that was somewhat mitigated by continued strong residential mortgage origination volumes and discretionary expense controls.
Thank you to make important growth oriented investments.
And also experienced improvements in both the macroeconomic forecasts and qualitative factors utilized.
In our seasonal accounting standards for the allowance for credit loss calculation.
As noted in last Night's earnings release, we reported improved GAAP net income available to common shareholders of $41 9 million.
And earnings per diluted share of <unk> 64 cents for the three months ended September 32021.
Excluding restructuring and merger related charges results were <unk> 70 per share for the quarter as compared to <unk> 66 last year.
The nine months ended September 30, we reported GAAP net income available to common shareholders of $185 million and earnings per diluted share of $2.71.
Again, excluding restructuring and merger related charges results were $2 79 per share for the current year to date period as compared to $1 14.
Since last year.
Also pre tax pre provision income and related returns have been very strong on a year to date basis, although somewhat lower for the quarter due to a reduced net interest margin affecting net interest income and somewhat higher expenses.
Total assets of $16 9 billion as of September 32021 increased two 1% year over year due mainly to growth in the securities portfolio from excess liquidity related to higher cash balances from our customers' receipt of various stimulus program.
Pits as well as higher personal savings.
Total portfolio loans decreased nine 8% year over year to $9 9 billion due primarily to forgiveness of $940 million of SBA payroll protection program loans 278 million of which occurred during the third quarter as well as a higher level of commercial real estate loan.
Pay offs.
Excluding PPP loans total loans decreased four 9% year over year, and one 8% sequentially, reflecting the previously noted commercial real estate payoffs continued lower commercial line of credit utilization and the impact of selling a higher percentage of one to four family.
Residential mortgage originations into the secondary market.
The unusually high CRE payoffs impacted total loan growth by approximately two percentage points and the residual impact of the sale of a higher percentage of residential mortgages.
During the first few months of 2021 was almost another two percentage points.
Strong deposit growth continues to be 18 story as total deposits increased 10% year over year to $13 4 billion due to the previously mentioned stimulus related program funds received by our individuals and business customers and continued higher levels of personal savings totaled.
And deposits were up 16, 5% year over year.
More reflecting the strong growth in resolving available excess liquidity, we've continued to strengthen our balance sheet by reducing higher cost certificates of deposit federal home loan bank borrowings and short term borrowings, which declined 27% 73, 7% and 61% year.
Over year, respectively for our total higher cost funding reduction of one 2 billion.
Key credit quality metrics, such as non performing assets criticized and classified loans and net loan charge offs as percentages of total portfolio loans have remained at low levels and favorable to peer bank averages as measured with those with total assets between 10 and 25 billion in recent.
Quarters further we have experienced very low annualized net charge offs to average loans of just one basis point on a year to date basis.
The net interest margin of three point O, 8% for the third quarter of 2021 increased 23 basis points year over year, primarily due to the lower interest rate environment as well as the mix shift of securities to approximately 23% of total assets versus 17% last year.
The investment Securities portfolio increased $1 1 billion year over year as a result of the higher cash balances from our customers higher personal savings, creating extra liquidity to invest.
And this additional cash liquidity negatively impacted the margin by approximately eight basis points for the quarter and a similar amount year to date.
Reflecting the significantly lower interest rate environment, we have reduced all posted deposit rates, including certificates of deposits throughout the past year, which helped to lower our deposit funding cost 12 basis points year over year to 14 basis points for the third quarter of 2021 or nine basis points, when including noninterest bearing.
Deposits.
Across a number of fee income categories. We are seeing the benefit of organic growth and a return to a more normal operating environment.
Noninterest income for the quarter ended September 30 was $32 8 million a decrease of five 4% year over year, primarily due to lower mortgage banking income down some $3 9 million to $4 6 million from the record level recorded in the prior year period, which was primary.
Due to selling the lower percentage of loans to the secondary market. This particular quarter as well as lower gain on sales spreads.
During the third quarter, we sold about 40% of loans into the secondary market versus 75% last year on total originations of $382 million.
About 60% of that was either purchase money or construction.
We pivoted to holding more mortgage loan originations during the second quarter and portfolio loans were up during the quarter as compared to the second quarter as a result.
Reflecting new team hires and overall higher demand, we have now experienced the sixth consecutive quarter of above $300 million in mortgage loan production.
We also continue to see nice organic growth across our wealth management businesses, including trust up 13, 4% for the quarter Securities brokerage up 13, 9% for the quarter and private banking all of which are benefiting from the current market environment as well as unrestricted access.
Two our financial centers to hold one on one client meetings.
Finally, <unk> was up 2027, 2% due to additional mortality benefits of about 700000 as well as an additional tranche of purchased bully.
Which.
Added an additional $200000 for the quarter.
Total operating expenses remained well controlled as demonstrated by a year to date efficiency ratio of 57%. While we continue to focus a broker on expenses, we have redeployed some of the savings from our various efficiency and optimization efforts to make the necessary.
<unk> and our technology and digital banking platforms as well as our employees to support future growth opportunities.
Excluding restructuring and merger related expenses noninterest expense for the three months ended September 32021 increased $3 9 million or four 5% to $90 2 million compared to the prior year period.
Primarily due to $2 6 million of settlement costs with respect to the pending resolution of a lawsuit.
Within other operating expenses as well as higher salaries expense.
When excluding the settlement costs, our operating expenses for the quarter were $87 6 million, which included an additional one 4 million in the health care costs as compared to the second quarter.
Salaries and wages, primarily increased year over year due to higher short term incentive and stock related compensation expense, which somewhat offset lower salary expense from a lower base of fulltime equivalent employees as branch closures and back office savings were realized.
We have successfully balanced the management of full time equivalent employee counts with necessary annual merit increases as well as the recent increase in base hourly wages.
As of September 32021, we reported strong capital ratios of tier one risk based capital of 14.18% tier one leverage at 10, 1% steady one of 12, 91% and total risk based capital of $16 three 8% as well.
As a tangible common to tangible assets ratio of nine 1% 2%.
During the third quarter, we repurchased approximately two 1 million shares of our common stock on the open market for a total cost of $71 3 million.
And as of September 30, approximately 296 million shares remain for repurchase under the existing share repurchase authorization.
I might mention that since the end of the quarter through last night, we have repurchased an additional approximate.
<unk> 7 million shares at a total cost of about $24 million.
Well, let me just provide some wrap up thoughts and our current outlook for.
For the fourth quarter as an asset sensitive bank do remain subject to factors expected to affect industry wide net interest margins in the near term.
We continue to believe that our GAAP net interest margin will decrease a few basis points during the fourth quarter due to lower purchase accounting accretion lower PPP net fee accretion and lower earning asset yields on new loans and securities.
While we anticipate some continued reduction in deposit and borrowing costs at Cds, reprice and borrowings or paid off transaction costs are at relative floor levels. So there just is not as much room to lower overall liability costs.
As previously announced we did pay off $25 million of acquisition related subordinated debt in the third quarter and have recently announced our intention to pay off another 35 billion in the fourth quarter, which was inherited from the old line bank merger in 2019.
In total savings from these two payoffs will approximate $2 $8 million annualized.
In general we continue to anticipate similar trends in both noninterest income and noninterest expense absent the settlement costs as we experienced during the third quarter of 2021.
Based on the quarter and pipeline residential mortgage origination should also remained strong during the fourth quarter and we continue to intend to place a relatively higher percentage of these loans into the residential loan portfolio as compared to earlier in the year.
The provision for credit losses under Cecil will mostly dependent on changes to the macroeconomic forecast and qualitative factors related to hotels and the COVID-19 pandemic.
As well as various credit quality metrics, including potential charge offs criticized and classified loan levels delinquencies as well as other portfolio changes.
But in general all continued improvements in macroeconomic and other noted factors should result in a continued reduction in the allowance for credit losses as a percentage of total loans overtime.
With lower levels of provision releases as compared to earlier this year.
Share repurchase activity will depend upon pricing levels and volume restrictions under existing SEC guidance as well as current remaining repurchase authorizations.
Lastly, we currently anticipate our our effective full year tax rate.
Maybe between 20, and 21% subject to changes in tax legislation deductions and credits and taxable income levels.
We are now ready to take your questions. Operator would you. Please review the instructions.
Yes. Thank you we will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from Brody Preston of Stephens, Inc. Please go ahead.
Good morning Brody.
Hey, good morning, everyone can you hear me yeah.
Alright, great. Thanks, and thanks for taking my questions I'll try to be brief here.
Just wanted to get some additional color on the C&I pay downs was.
Was there a common theme among them in terms of.
Geography industry and customer profile.
No I would say too.
We're pretty generous in terms of how we categorize C&I you noticed we talked in our.
Prepared remarks about $250 million worth of commercial real estate loans go into the secondary market a lot of that showing up in the bin the CNI classification line item because of the way we categorize things.
The C&I line usage actually was up a little bit during the third quarter and our net loan balances in the C&I was actually up a little bit in July and August a couple of million dollars.
So it's those if those C&I loans that we categorize as more commercial real estate based upon percentage of ownership and things like that.
But it's really it's commercial real estate loans going to the secondary markets or properties, just being sold outright because of the cap rates. That's what's driving that's what's driving that number as opposed to maybe some of our peers would categorize C&I, primarily as lines of credit and equipment loans and owner occupied and stuff like that so we're going to look at that for.
Future reporting periods, but that's that's really the commercial real estate.
Going to the secondary market showing up in that number.
Okay great.
And then you know.
The core loan yields actually holding up fairly well, but when I look at the roll on roll off Delta that you guys provide on the commercial side, it's about 60 basis points. So how do you see core loan yields kind of trending for the for the book yields.
Going forward in.
Our kind of new origination yields on the month of October coming on just given the leg up in the 10 year in the belly of the curve sure sure Bob I'll pass that to you.
Okay.
Sorry, I just wanted to get off mute there.
<unk>.
At this point that that 60 basis points as you reference.
He is going to be lower than that we've already seen a pretty significant leg down in terms of repricing.
And while we do have a lot of loans as I've indicated in the past that have floor rates and so.
There's some opportunity there for subject for repricing as well as renegotiation of some of those rates.
I do believe that 60 basis points Delta will come down for two reasons, one what's repricing.
In the portfolio is at a lower rate number one and number two as you point out Brody.
New loans are going on here.
Here in the fourth quarter at slightly higher rates.
So.
That number that's in the <unk>.
In the Powerpoint is a combination of new loan pricing as well as loans repricing in the existing portfolio and if you have something repricing now at $2 50 over LIBOR.
Or the new silver spread then.
You are going to get something less than 3%, but relative to new loan pricing.
Our target remains between three and 325% for new loans.
Got it and if I could just sneak one more in before I hop back into the queue you referenced how.
Well, you've taken down the aisle for hlv borrowings Bob.
The 200 or so that you have remaining what what is the maturity schedule look like and you know would you look to kind of get rid of the rest of them are smoking.
Yeah.
There really isn't that much for us to do an early redemption I do note that we have the old line.
Sub debt coming off I think between that and the old why ceb's update sub debt that we paid off in September.
Those are two critical pay offs realm.
Relatively expensive debt they had repriced in the $4 60 area 470 <unk>.
So that certainly will be helpful going forward, but in terms of the federal home loan bank borrowings there is another $25 million in the fourth quarter and Theres about $125 million.
All of 2022, and then just some some.
Residual borrowings that reprice in 'twenty three so not much after 'twenty two.
Great. Thank you very much for taking my questions. Thanks.
The next question comes from Casey Whitman with Piper Sandler. Please go ahead hi.
Hey, good morning.
Maybe turning to expenses.
So you know if we call core expenses $8 million or so this quarter. It sounds like that might be a pretty good run rate for you going forward or do you think you know theres a possibility we could get back to the mid eighties, just due to lower health care costs or savings from the core conversion or just 88 million sort of a run rate.
I'll, let I'll, let Bob dive in and provide some more color. It does it we kind of hit the pandemic low point I think in the second quarter with regard to expenses and there were a lot of one time things that went in our favor on on that so I think what youre seeing with the health care cost be in the $1 4 million in the third quarter.
Number I'm not sure that's going to repeat itself, but you've got another half million or so worth of.
The salary increases and stuff that are that we did that would that would start to flow through so I think I think we're back close to kind of what we were at kind of pre pandemic you know.
And that that.
Eight range or something like that we will see how that plays out but that's.
I don't think that's probably upper eighties is not a bad number to look at Bob do you have any more color to that.
Well I'll just do it.
Say that we did experienced throughout the year higher equipment and digital software costs digital banking costs I should say.
Also the PPP program itself generates.
A lot of costs upfront, which we differ and so thats part of net deferred fees, but they're also backend costs on the forgiveness side.
For every loan that is forgiven, we pay something like $125.
Through the Fintech platform that we use and so that that's part of that as well and just you know higher electronic banking usage, a visa debit card usage all of that goes into it.
That.
Higher digital banking cost.
But we do have all of that priced into the <unk> charge on a monthly basis going forward.
We do anticipate that as compared to the way we paid that bill in the past and we were on a different court system.
With that we will see some savings.
Just in terms of how much we're paying on a monthly basis for each.
Count processes, almost all of these digital and Internet banking costs other than visa are included in one month like charged per account so.
I think there was a fair amount of that came through expenses here in the second and third quarter. Although we did re class some of it into merger related and restructuring restructuring I should say.
And so.
So I think Todd right.
We would be guiding particularly with the salary increase.
The hourly wage increase.
To that 80 788 million dollar number.
Here in the short term.
Mhm, and what a reasonable expectation for growth off of that in 2020 to be Frank the low single digits or.
Is that.
Yeah is that is that a reasonable outlook.
Yeah I just from from my perspective, I look at it. So you know we don't as you know, we don't give guidance out in future years, and things are going to focus more on ratios and things like that but.
We get two things what's been working in our favor one thing maybe.
Working against a little bit Bob Bob mentioned.
<unk>.
Kind of the ability to scale it at a lower cost because of the new Fas system that were on Ibs and the per customer charge versus asset size charge. So that'll help us over the longer term keep keep expenses down.
But we are investing right on the revenue side. So I want wanted to make sure that we're really well positioned to resume resumed the loan growth and get to that mid to upper single digit loan growth number that's something we're extremely focused on.
So you know the the addition of another 20 or so hires things like that we're going to we're going to invest in the franchise.
In order to get to growth that we want to get in a in the markets. We're in so that'll have a little bit of expense.
But at the same time I think the core operating system will will bring some expenses down over time as as well yes.
Okay.
Last question for me, but the $4 5 million restructuring charge is that mostly related to the core systems conversion and are there any sort of other nonrecurring charges and you can expect fourth quarter or are you pretty much done with those.
But Bob you might jump in on that but that's really it those are a lot of the contract termination costs and things like that associated with switching the core.
But that should that should be in the third quarter.
Yes. Thank you a few branch a branch lease cost determinations casing from the six branches that we closed in July.
But the bulk of that.
He is related to the core conversion and is over.
Okay, I'll, let someone else jump on thank you.
Yeah.
The next question comes from Russell Gunther with D. A Davidson. Please go ahead.
Hi, Russell Hey, good morning, guys, Hey, good morning, Bob.
So it sounds like you have some visibility into next quarter. The pay downs are going to remain elevated here.
Curious if you guys can extend that at all in the next.
Coming quarters, any confidence that you'll return to that $85 million more normalized rate in the first half of next year.
Yes, I mean that that's what our anticipation is right now it's hard it's hard to project out quarter to quarter.
Did not see the.
The high level of commercial real estate payoffs in the third quarter, we move new we knew was going to be high, but we didn't always going to be as high as it was I think a lot of other banks have made the same comments.
In terms of things that went to the secondary secondary market.
You know right now looking at the fourth quarter.
We don't see huge numbers, there, but we didn't see huge numbers there at the beginning of the last quarter either right. So.
I would expect that some of the aggressiveness I am seeing.
Particularly with.
The Freddie and Fannie I mean, they're doing.
It's amazing I don't know if you've heard this from others, but I mean, we've seen five year interest only.
Loans that are 75% loan to value 10 years interest only on the loans that are less than 70% loan to value.
We've seen projects, taking not just before stabilization we've seen them taken during construction.
So we're kind of competing against the government here as an industry and they're doing some things that we just don't think it makes sense.
So I don't know how long that's going to continue there's a lot of liquidity, there, but maybe not as much.
What I would what I would say kind of you've heard a number of banks talk about protecting the integrity of the balance sheet and I think that's the important thing to be doing right now, but it's.
There's just some crazy things that are going on out there and fixed rates for long periods of time under two 5%.
So we're trying to be prudent about what we're doing.
But with the high cap rates that are out there you can't blame customers from just taken a property in just selling it outright.
And liquefied and then turning around and investing it somewhere else down the road so.
I don't I don't blame the customers for doing what they're doing I think it's smart.
But at the same time.
That it's temporary it's short lived just don't know whether it's this quarter or next quarter or when it's going to stop.
But at some point in time I think it will.
I'll return to a more normalized level, so you're really looking hard at the you know.
The new construction loans that were booking that'll be funding over the next 12 months to 18 months.
And we have.
Four of $500 million worth of construction.
Construction loans on the books that have not completely funded yet so we've got that dynamic working for us.
But we also have a very aggressive secondary market that seems to want to get into the construction business. So I think that that's going to be interesting to see how that interplay interplay works out.
Understood very helpful. Todd Thank you.
You reiterated the longer term goal of a mid to upper single digit loan growth number.
I'm just curious given the.
Goalpost of adding 20 commercial lenders in existing and adjacent Metro markets do you think that type of production.
Added is enough to kind of get you to the low end given the other headwinds that we discussed.
Yes, I think I think so.
Because we're doing a number of things operationally to speed up speed up our process and become more efficient. So you know we went through the PPP loan program.
We.
Used up.
A company called numerator.
It kind of helped us automate that whole thing and were looking to use that on a broader basis throughout our company for non commercial real estate related loans. So we should be able to turn loans around really quick.
And that's going to be a huge lift in productivity for our existing lending staff.
But I would also mentioned to that.
Over the last 18 months or so we did a.
Core conversion with the bank.
Just acquisition we ever made.
Was that within that last 18 to 24 month time period.
And then we did our own core upgrade.
From a core that we run for 45 years and in doing all of that.
Boats and everything I mean, that's a heavy lift and it was a heavy lift for our employee base.
So those are behind US now so now we can kind of look forward.
In terms of I think increasing the productivity level of our existing people not only because of the technology improvements that we've implemented.
But now we're able to focus them externally as opposed to you got to get through seven training classes before Friday type of thing that <unk> been dealing with for the last year and a half because of the new core conversion. So the 20 people.
If we can find more we'll do more.
But I think that'll be a part of it but a big part of it is going to be just the productivity lift that we would expect to see out of our existing staff.
Okay.
Thank you for your thoughts guys I will jump back in the queue.
Thanks.
The next question comes from Catherine Mealor with <unk>. Please go ahead.
Hi, Catherine.
Good morning.
Circle back on growth and it looks like.
Excuse me the residential mortgage portfolio in fact get a little bit in this quarter. We saw modest growth do you think we've hit a bottom in the residential mortgage portfolio and you'll start to see more growth there, which I think may help just kind of.
At least.
Okay support loan portfolio, given that we felt that the paydowns on the commercial real estate at least next quarter, yes.
We actually third quarter was our second best production quarter ever and residential mortgage lending and pretty close to our first best.
I think it was a year earlier, so we feel like we're doing a really good job on the residential mortgage side.
With the production level and Bob mentioned, where you were holding a little more on our balance sheet.
Now and that's providing more growth orientation as well too, but we continue.
Continue to invest I mean, the 30, or so 35 or so people that we hired over the last year in revenue producing roles 16, or 17 of those were mortgage loan originators. The rest were commercial bankers.
And then I think what I mentioned in my prepared comments in Northern Virginia that team that we bought on did about 5% of our overall mortgage production.
We would expect to continue to invest in in the business and to continue to grow it but you can.
I feel good about.
The performance that the team has had.
And then I would assume with that you'll have.
Lower levels of transformational market was fee income once you keep on the balance sheet.
It's still less than secondary market. So.
But as an offset to the lower mortgage on fee for service terms of it feels like that everyone. After this quarter.
What's the what's the normalized level that you feel coupon returns around sort of Thompson from both Darren and look back.
No I don't think that turnabout.
And then kind of look back on 2019.
And kind of adjust to those levels or how should we think about normalized circumstances banking, yes, Bob Bob and Dan might have some color on that to the pandemic.
Well first of all you're right on the residential mortgage side than what we put on our books. So the lesson and secondary market fees that we would have.
But the pandemic changed a lot of things the acceleration of digital.
<unk> was fairly significant Fortunately for us Durbin was far enough in the rearview mirror. It was couple of years ago. So it's not in any of our run rates or comparisons in terms of comparing to pre durbin.
But the acceleration and just the digital.
Usage by the customer base.
<unk> has been really positive for us I think.
The other thing to think about longer term and what we're really trying to invest in with our our insurance product and having that be digital in fee income associated with that is.
I think.
Banks in general were going to be facing this.
Your changes in overdrafts fees going going forward you see some of the big players and even big players some of the larger regionals or mid sized regionals now that are coming out in and kind of.
Attacking that with different programs and things in.
I think thats something we got to think about maybe not over the next year or two but definitely over the next five six years.
What's the kind of the fee income sources that are going to offset that and we think insurance is a big part of that.
But digital adoption is.
Something that we think is going to continue it's not going to go back to the way. It was pre pandemic I. Just I think you may see some more branch visits than you had during the pandemic, but so much has shifted online we really think that that's going to be the channel Bob Dan What would you add to that.
I would just say that.
<unk>.
We were.
Uh huh.
Happy to service charges saw an increase this quarter because really we've been saying publicly with all of the liquidity that are in that is in People's accounts really there hasnt been the propensity to use overdrafts.
Capability that our folks have.
To a greater degree.
So it was nice to see that and as compared to.
Last year, we were.
<unk> seen a nice.
This growth rate.
And particularly just since the first and second quarter of this year.
And Todd did talk about electronic banking fees.
That's.
Both due to.
An adjustment to a new settlement provider.
As well as just higher usage here in the quarter. So I do think that both of those run rate going forward and Todd did mentioned this but I did in my script wealth management really has seen some nice growth and continue to experience that.
Here in the third quarter as well of course, some of that's market related but really are seeing some good pull through.
Our main wealth management business is now securities brokerage trust and private banking relative to customer additions.
And then my last question is just a big picture profitability question.
I'm sure that the efficiency ratio well.
For a little bit in the near term as you add on new lenders before they're fully ramped up in U and a return to a better growth rate it was there.
What kind of band do you put on the efficiency ratio, where youll be comfortable bringing that up too.
And what they do with limitations on yourself with expense grant.
And so when you can start to see some better revenue growth.
Yes, that's a great. It's a great question you know, it's how much do you load.
<unk> delivered into the expense com to get the revenue generation out of it and.
Bob and I, and Dan and I and I will be looking very closely at just positive operating leverage we've always tried to drive that.
So that within within the year that we're making the expense we're getting a good positive operating leverage turn on that you would expect to get that on lenders.
That youre hiring into the organization and whatnot, even if they've got non solicits for a year or so they still want to be productive and be able to grow in and I also think that the productivity lift that we ought to get because of the new system and being past the pandemic and all the training that everything is going to help us dramatically be able to keep the.
Patiency ratio down to a reasonable level.
I think I look at it and say, we've always been in kind of the top third.
Our best third so to speak inefficiency ratio I'd like to continue to stay there I don't know what the yield curve is going to do I. Just don't have much of a clue for that so it's hard to it's hard to peg a number we've always said we wanted to stay in the mid fifties and we've been able to do that as we went up and over $10 billion in and all that so.
As.
The market continues to move forward.
What's going to be the normalized you know good rate good rate used to be mid fifties as that's still what it's going to be I think the yield curve is going to drive an awful lot of an awful lot of that so it's hard to it's hard to pick a number but I would say, we're really focused on obviously is the quality of the balance sheet, which I think we've really done a good job with that.
Prune the portfolio over a number of years and that's impacted growth to some extent as we've.
Kind of right sized our indirect portfolio in multifamily and hotel and things like that.
Those are behind us so.
So we don't have things that we're trying to shrink or anything like that going forward everything is kind of in the growth mode.
And with the markets. We're in now because of the acquisitions in Kentucky and in Maryland, We're coming out of the pandemic in a much different situation than we were in six or seven years ago with regard to growth markets and people in growth markets.
And the low cost deposit base that we've got.
It doesn't seem to add a lot of value right now because everybody's got rates the slow start rising.
We've got you.
Sub back three years ago in 2018, we really outperformed the market significantly because our deposit costs don't go up.
As rates start to go up and that all falls to the bottom line for us.
And those those deposit.
<unk> continue to go up.
I think natural gas is going to be the transition fuel for quite a while I think we're all starting to see that that bodes really really well for this franchise.
In terms of we don't lend into it but the deposit benefits the wealth management benefits of it.
So I look at all those things together and I feel really bullish about where we are in the future, particularly with the new corn everything that we've got so those things that we can control I think we're going to do a good job with it but I just don't know where the long term rates are going to be.
We'd get the rates up over 2% on the 10 year.
The spread between the two and the five year to to grow then.
I think it's possible to stay in the fifties.
If the yield curve doesn't.
Cooperate though.
I'm not sure you're going to see many banks.
That are going to be there, but we're going to continue to invest in growth and this is a growth franchise that we've been saying that for a long time. That's why we made the acquisitions that we made and we know that's you know that's that's what we got approved so we're not going to be penny wise and pound foolish. So long answer, but I thought I'd just get that out there.
Great. Thank you very much.
The next question comes from Steve Moss with B Riley Securities. Please go ahead.
Good morning, everybody just seems associate sitting in for him today, just a quick question on credit here MPA. It came down criticize loans came down as well this quarter.
But the reserves seems to still be holding strong.
Curious what is the timeline there to get things back to that day, one reserve ratio.
Sort of what's the pathway to get there.
Yes, I think with the timing on reserve releases, you know everybody's kind of in different places on that I think.
I think we released like 10 cents more on reserves in the second quarter. Then then the market was thinking and maybe even more in the first quarter unless this quarter. So everybody's got their own kind of contour to this based upon their own seasonal calculations and assumptions.
So I kind of look at where you're at from a.
One loss reserve perspective, and were like $1 37.
And.
The peer groups like 125 to $1 30, So we're right there with the peer group.
Even though how we got there and how they got there it's all it's all different.
But well end up in about the same place right now so we would expect as credit continues to improve.
To improve and continues to strengthen I mean, we're seeing the revpar on hospitality now in line with where it was in 2019.
So that's that's good that really that bodes bodes well for the future.
We would expect that.
You would continue to have that count towards the trend in downward downward reserves.
But I'm hopeful that in the next year, we're also putting loan growth on and obviously you want to reserve for new loan growth as well too so how that all how that all sorts out.
I think we've said in the past is not just us, but the industry that you know.
Maybe the end of end of next year end of 'twenty two into 'twenty three.
See kind of getting back to today, one seasonal but then you also got to look at what's the office portfolio going to look like nationwide and stuff like that so there are things that will happen over the next 12 months to 18 months maybe.
Maybe don't seem to be big issues, but things people are going to keep their eye on.
So I don't know when you get back down to that one or one one number but we tend to think of year year and a half from now probably be back to where we don't have anything unusual thats being reserved for because of pandemic or unusual losses.
Alright Thats helpful.
Most of my questions have already been asked so I'll ask my last one here on capital you've already noted the to date.
Amount of share repurchases I think I missed that number I was curious if I could get that again and I'm sort of curious if that run rate holds beyond this quarter and into 2022 for repurchases as well.
Bob.
Yes, so what I said in the script as an addition here in the month of October.
Through yesterday was just under <unk>.
Seven.
700000 shares so let's say that.
And.
I would say hey, that's.
In October that's really at a similar pace to what we experienced in the second quarter as we ramp that up.
Here more recently is the price increase.
Under our <unk> program it automatically dialed back.
The amount of purchases on a daily basis.
As we move from blackout and how it can be five to the regular repurchase program.
We will be judicious relative to pricing levels against tangible book value opportunities for the internal rate of return on the repurchase program.
And as I said in my script.
Volume.
Going forward would depend upon the pricing and the opportunity in the market.
To buyback shares under the SEC limit so.
That's as much as I would guide to at this point.
Awesome. Thank you.
Is it for me.
The next question comes from Steven Duong with RBC capital markets. Please go ahead.
Hey, good morning, guys.
Just back on the service charges.
The improvement is that largely from NSF fees.
No one believed that jump in clarity.
You want to but.
700000 that was related to just the.
Timing associated with.
How things were collected and one on core system versus the other as we switched over so it was more just a recognition of income versus anything anything changed there and it it'll be at this run rate going forward.
Yes.
Todd that would be electronic Steve and that was the electronic banking fee line item that Todd was referring to.
Okay.
As the service charges, there were really no significant rate increases as part of the conversion.
There are some account movements back and forth.
So there could be a little bit related to that.
I think the overdraft product was used to a greater degree.
In the third third quarter.
Remains to be seen with peoples liquidity at that will hold true in the fourth quarter with holiday spending.
Projected to be up quite dramatically over last year.
So we'll see how that that works out, but as I said in.
In an earlier question I think it was Catherine.
We were encouraged by the increase in.
At least for the next quarter or two believe that that should should run rate.
Yes.
Okay I appreciate that.
Does it.
So did it surprise you at all that.
The overdrafts ops.
Option.
More of your.
Depositors were taking that given the level of deposits that there are that you guys have with them.
I I was personally surprised yes Todd.
I think some of that is again.
A little bit to conversion to the new system.
The applicability of <unk>.
Artificial intelligence to limit supply to each customer's account, but.
Todd.
Might've been a record year.
No no I think that's I think that's right. It's a more intelligent system. So to speak. So you know your limits are really based upon your experience with the bank versus here.
Everybody gets the same type of numbers. So I think it's really more of a advantage to the to the customers that need to use it that they get they get the amounts that they need versus.
Amounts that might just be standard for everybody.
Got it got it.
The electronic banking fees is that where you record your interchange fees.
Yes.
Okay all right.
And just.
On just on your margin I guess, Bob if we were to leave.
Exclude the PPP impact the purchase accounting and also just this excess liquidity.
Rate hike level do you think would get your margin to be basically neutral stabilize.
Well that's a 64000 dollar question is why.
Well I had to ask that.
You go off into the Sunset so.
I'm trying to get Dan on USA, and the areas boys, but.
On the subject of the margin going forward I think it's.
First of all we were down a few basis points from what we thought during the last earnings call admittedly and that's really just due to the additional liquidity we've experienced on the balance sheet.
All of that is either going into lower yielding securities. That's down 75 to 85 basis points from what's rolling out of the securities portfolio to what's rolling in.
On average we were about 126 with new security purchases.
In the quarter, so stock coming off two two and a quarter going into an average of $1 26.
We will have an impact on the margin and so there was there was more of that.
More amortization as well on existing securities.
From prior purchases premiums.
But.
It's just the additional cash you saw an additional $300 million in cash quarter over quarter.
That's it that five to 10 basis points basically.
And as I identified in the script, Steve and that represents about an eight basis point between that.
The additional securities and the additional cash about an eight basis point reduction.
A reduction in the margin that's not much different than what others are reporting but in answer to your question.
It really depends upon what liquidity does going forward.
We are encouraging some larger institutional customers that they have other opportunities to invest to take those opportunities to Ghana.
Frank back.
Paying them 10 basis points versus us, earning 10 basis points no impact on no value to the margin.
I'm not suggesting that's going to have a large impact going forward, but I do think in this.
Low to mid eighties area again, depending upon.
Customer liquidity.
That that is pretty much as low as I think the portfolio is going to go we still do have some repricing in the loan portfolio from old line's portfolio, particularly that that five to seven year fixed rate loans.
But we have offsets as I mentioned during my script in the CD area.
And borrowings whether they be the sub debt being paid off or federal home loan bank that should offset that.
For the most part.
No I appreciate that Bob and I guess, maybe just on the CD.
The cost is 49 bps. This quarter just curious what are you guys offering.
On average right now for your CD product and is there an opportunity I mean, given the level of liquidity that you guys have can you just.
Get down just say like it's.
10, or 20 basis points in and let the customer choose if they want us would move it over into a money market or savings account.
Really haven't seen a lot of that over the last year. It's the only line item in deposits that's down.
And really that's we've been below market on a posted rate offerings for some time with Cds.
Just as we continue to see this influx of cash and so a lot of customers are going short in the money market or savings accounts and not reinvesting you asked what those average rates are and they are in the <unk>.
1% to 25 basis.
Point range on average should be lower than that for six months Cds, a little bit higher for I'd say, a two or three year CD. So really do think there is.
Five or $600 million of repricing Securities I'm, sorry Cds.
It's still an opportunity to see that line item you can see how much it has come down over the past year.
In the margin in that in the press release, so there's still some opportunity. There. In addition to what I mentioned on borrowings.
Right right I appreciate that Bob and I guess with the 2025 days.
2025.
You are offering.
Our people rolling into the new Cds are they.
Willing to go.
I don't want to lock my money in for six months or a year and move it into your other products.
We experienced about 60% to 65% CD renewal.
I don't think Thats past efforts.
The industry so.
Again, let's say two thirds of our customers are back into the same CD.
They are not really changing maturities and then the rest are either taking it to other places where they're putting it in their money market or savings or checking account.
And I appreciate you guys, taking my call. My question. Thank you. Thank you. Thanks, Stephen for the Shout out looking forward to Dan.
Taking my place here.
Thank you.
And the last questioner will be William Wallace with Raymond James. Please go ahead.
Hello.
Good morning, guys.
Most of the questions that I had have been asked but I did want to just circle back on an expense is.
Last quarter, you were suggesting I believe mid eighties run rate. So this quarter talking about <unk> $87 million to $88 million run rate. It seems like I don't know kind of a relative.
Relatively large.
Bump up in one quarter and so I'm just wondering if you could.
Tell me.
And from your own presented position what changed isn't really all is it just the salary increases or was there something else in there that you weren't anticipating.
Will you be backing out the settlement cost rate legal settlement costs.
Right.
About.
We talked about $1 four.
It was related to the health care increase which wasn't known at the beginning of the quarter.
But we think that.
That was a big number I may not be repeated.
But then.
The hourly salary increase as well too was another happening so there's a couple of million dollars.
Right right there.
That kind of bridge that gap that was not anticipated at that at that time period.
I think $85 million, yeah, that's where we're at kind of going forward.
Bob mentioned, probably 87% 88 because of the investment in people that we're gonna make but.
A lot of banks had to pivot during the third quarter with regard to people just in order to retain them and be able to fill open positions and keeping everything function in the way you want it to function.
You had to go out and raise raise salaries for people. So that showed up in the third quarter not just the hourly rates, but we did it we did it for some other positions as well too so it's.
I don't want just talking up to inflation, but there's a good chunk of it.
That's in there that.
It was recognized during the third quarter that was stronger than what we would've expected at the end of the second quarter Bob.
You would add anything to that.
While we do anticipate a little bit higher marketing spend here in the fourth quarter as compared to the last couple of quarters of run rate.
We've been kind of guiding to that throughout the year, but hadn't really experienced it but do anticipate.
A little bit more here.
Fourth quarter.
And then.
Related to discretionary expenses, we just anticipate that post pandemic.
There are more meetings with customers there are more opportunities for business meals and entertainment as compared to the last couple of quarters. So we are anticipating that you'll see a little bit more return to 2019 run rate spend in terms of.
Travel and other general administrative costs.
But and the FDIC insurance remember, we had a pretty significant credit that we experienced there in the second quarter end.
So that's that.
That was back to its normal level here.
In the third quarter at about 1 billion too.
And miscellaneous taxes, which are down in other operating.
<unk>.
About 900000 dollar reduction in the second quarter.
We had some of that in the third quarter as well.
As we filed tax returns.
So not anticipating that to continue here in the fourth quarter. Those are just two or three factors that I would add some additional detail to charge mentioned on the salary and benefits side.
But theres about $2 million. So you know that showed up that.
Because of the health care expense and the salary increases that.
Had we known that at the end of the end of the second quarter. We would have built it in probably said something in the 80 788 range.
I think but we really tried to address that in some other areas I mean, if we look at our pre tax pre provision.
Excluding.
The restructuring costs in the settlement costs and all of that so the pretax pre provision excluding restructuring and settlement of $60 2 million and that was pretty much right on overall consensus so we felt that.
From a profitability standpoint, we met the overall consensus.
The consensus.
Even with the higher expense level, if we found ways to cover that through the growth in and some other fees like trust fees and stuff like that to offset it but that.
80, 788 is probably a better number to use going forward unless something really unusual were to happen one way or the other which we don't anticipate right now.
Okay, and maybe just to kind of.
Re ask a question that Casey asked earlier, so if so if some of these.
Some of the pressure that's driving this kind of higher higher guide is coming from the the wage increases.
Is it.
Is it possible that you maybe have gotten ahead of some of the annual Cola adjustments that you that you would have made earlier in the year and such that next year's growth rate could be maybe lower than your typical inflationary pressure growth.
Yeah, I mean, we've typically used a 3% merit increase rates across the board and tried to find ways to manage to that or better than that.
Historically.
That's that's increases based upon performance being here, but also inflationary expectations in that site I think as you're looking at now. This is the whole question is it's what we're seeing is a transitory or is it permanent right you get people at $1 $52 raise.
Youre not going to take it back so.
There is there is hum.
A certain element of this inflation that I think is permanent and it's becoming permanent.
But it's something we'll have to look at as we get to the end of the year in the first quarter of next year and in terms of what are the inflation expectations. What is going on and do we do we stay with typical 3% that we've used for years I think every bank I've been with for the last 30 years has used the same 3%.
Or does that get does that get adjusted.
A lot of it has to do with.
What are others are going to do right. So I mean, you're competing not just against other banks, but.
Mcdonald's in Arby's in gas stations in Walmart and everybody is out there putting bonuses out in raising hourly wages.
We'll see if that continues through the fourth quarter and into the first quarter I don't I don't have a lot of visibility to that to that right now but.
It would be nice if we if we got ahead of it the cool adjustments a little bit, but I'm I'm not so sure at this point.
Okay, Alright, Thanks, and then.
On the legal settlement.
I don't I don't recall seeing any legal matters disclosed in the financials that correct me, if I'm wrong, but.
Yes, I guess I guess, it's a relatively large settlement if there hasn't been a disclosure of the suit. Prior can you can you give us any you know understanding you probably can't say much about it but any indication as to the nature of the suite itself and was it a out of a relationship that was acquired or legacy.
No I would just I would just say you know.
Be respectful of the process kind of where we're at with it that's why we put it in is pending because we've got it all all ironed out, but you don't want to get everything signed and officially done and all that but I would tell you that it's very typical of what <unk> seen with a lot of other institutions.
Over the last year I think a matter of fact, I think there may be several hundred institutions that are going through this kind of the same process.
So it's nothing out of the ordinary or unusual with with regard to that.
I will tell you is that the settlement it's global.
And it's across all of our markets right. So that would be that would be the end of it but you know I don't want to get into specifics, but there.
It's very typical of what Youre seeing a lot of other banks report.
Okay. Thanks, and Bob you say Youre looking forward to Dan being on these calls, but I think youre going to Miss us as much as program. This year I'll stop there thanks guys.
Okay.
Thank you Wally.
I have.
I will just say I really enjoyed working with all of you over the years and I appreciate your kindness and.
I do Miss seeing you in <unk>.
Life setting so.
Maybe there'll be opportunities for that down the road I'm not sure but.
70 notes on the beach so to speak.
I do want to thank Bob for his 20 plus years of service. He has just done a great job for us and he has done a really nice job getting Dan already as well too and Bob still going to be around <unk>.
Consulting capacity.
Got a lot of respect for him and what he's done and what he is going to help us with in the future as well through during the during the transition. So I just wanted to make that comment.
Hope we have the opportunity to see you all at an upcoming conference seems like more of these are being done in person that with them.
Pleased about I know, we're gonna be in Arizona next week at one and we've got others planned down the road so.
Excited about getting a chance to see people face to face again. Thank you for your time today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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