Q4 2021 WesBanco Inc Earnings Call
Good morning, and welcome to the West Bank of fourth quarter 2021 earnings conference call. All participants will be in listen only Mount should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then.
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I would now like to turn the conference over to John <unk> Senior Vice President of Investor Relations. Please go ahead.
Thank you.
Good morning, along the West Bancorp, Inc. Fourth quarter 2021 earnings Conference call.
Leading the call today are Todd Clawson, President and Chief Executive Officer, and Dan White, Executive Vice President and Chief Financial Officer.
Today's call an archive of which will be available on our website for one year contains forward looking information.
Cautionary statements.
This information and reconciliations of non-GAAP measures are included in our 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 must anchor dotcom.
All statements speak only as of January 26, 2022.
Banco undertakes no obligation to update them.
I would now like turn the call over to Todd.
Todd.
Thank you John and good morning, everyone.
On today's call, we'll review our results for the fourth quarter of 2021 and provide an update on our operations in 2022 outlook.
Key takeaways from our call today are Wes Banco remains a well capitalized financial institution.
The solid liquidity strong balance sheet and solid credit quality.
We're committed to expense management, while continuing to make appropriate investments, including strategic hires across our organization and markets to enhance our ability to leverage growth opportunities and we remain well positioned for continued success.
And are excited about our growth opportunities for the upcoming here.
What's Banco had another successful year during 2021 as we remain focused on ensuring a strong organization for our shareholders and continue to appropriately return capital to them through both long term sustainable earnings growth and effective capital management.
Through the successful execution of our well defined strategies, we generated solid annual net income as well as pretax pre provision earnings while remaining well capitalized financial institution with a strong balance sheet and solid credit quality.
For the quarter ending December 30th 2021 we reported net income available to common shareholders of $51.8 million and diluted earnings per share of 82 cents when excluding after tax merger and restructuring charges.
On the same basis for the full year, we reported net income available to common shareholders of $237 $4 million and diluted earnings per share of $3.62 and strong returns on average assets and average tangible equity.
1.4% and $15 two 2% respectively.
Further, reflecting our strong legacy of credit and risk management are key credit quality ratios remained at low levels and our regulatory capital ratios remain well above the applicable well capitalized standards as well as remaining comparable or favorable to peer bank averages.
Throughout 2021 we accomplished several milestones and continue to receive numerous national accolades that resulted from our strong performance operational strengths and community focus.
I'd be remiss, if I did not congratulate our employees for these recognitions as they are a testament to their hard work and dedication.
To highlight a few.
With Banco remains a leader in and an advocate for its communities, we continually look for ways to expand our outreach and involvement.
In addition to our existing women's symposium events, we launched a diversity equity and inclusion council that is focused on three key initiatives leadership development and boy education and community development.
Due to the extraordinary efforts of hundreds of employees, we completed the conversion of our core banking software system to F. I S is ibs platform, which positions us well from a technology perspective.
What's Banco Bank. Once again was named to Forbes magazine's 2021 list of the best banks in America coming in as the country's 12th Best Bank.
Our community Development Corporation was nationally recognized by the American Bankers Association Foundation for its commitment to our communities through our new markets alone and other programs.
For the third year in a row, we were named one of the world's best banks, which was based upon customer satisfaction and consumer feedback as we received very high scores for satisfaction.
Customer service.
Financial advice and digital services.
We were again named in Newsweek magazine's second annual ranking of America's Best banks, which recognizes those banks that best serve their customers needs.
Our focus firmly remains on organic growth potential within our markets. However, total loan growth continues to be heavily influenced by commercial real estate payoffs commercial line of credit utilization and S. P. A P. P P loan forgiveness.
Despite these headwinds will continue to adhere to our credit strategy and make prudent long term decisions for our shareholders and will not buy loan portfolios or syndications in order to show loan growth as the long term credit strategic risks from such a strategy are significant.
Reflecting the still significant amount of excess liquidity across our local economies combined with supply chain and labor constraints commercial medic credit utilization of approximately 35% remains below the historical mid to upper 40% range.
Despite continuing to experience high commercial real estate project payoffs via an aggressive secondary market, we have begun to see a decline in the amount of projects, leaving.
While a significant decline from the record 265 million recorded during the third quarter payoffs for the fourth quarter totaled $160 million, which was still about $75 million above our historical quarterly range.
Fact, when adjusting for the outsized fourth quarter payoffs total sequential loan growth would have been flat.
Furthermore, we still anticipate commercial real estate payoffs to decline through the next quarter or two towards our historical $85 million quarterly range.
Reflecting the strong performance of our residential lending group, we generated a record $1.4 billion worth of mortgage originations during 2021 .
Further as we executed on our plans to keep more of these loans on our balance sheet, we realized nice sequential growth in residential loans are 4% non annualized during the fourth quarter.
While down from the record level in 'twenty 'twenty. One we currently anticipate residential lending remained relatively strong in 2022 and will continue to retain more of the originations on our balance sheet.
During 2021 we also generated $1 $8 billion of new commercial loan production with roughly 30% of that occurring during the fourth quarter.
Our year end commercial pipeline stood at approximately $580 million with our mid Atlantic and Kentucky markets, representing about 35% of that figure.
Further through the first half of January the commercial pipeline has remained strong and increased to about $700 million.
Well not relaxing our strong credit underwriting standards. We are currently refining initiatives to help retain certain commercial real estate loans instead of letting them head to the still aggressive secondary market.
Were our strongest customers, we're looking to provide bridge financing options that would allow us to keep these high quality projects on our balance sheet for an additional few years as opposed to them being refinanced in the secondary market.
While we're not immune from the general staffing and inflationary pressures affecting our industry and overall economy, we remain committed to expense management.
Reflecting the adoption of our digital services by our customers, we consolidated 28 of our financial centers into others nearby during the last 12 months and we continue to regularly review our footprint for additional opportunities for optimization.
Moreover, we are focused on controlling discretionary costs, while actively encouraging our revenue producers to pursue new business.
As I mentioned last quarter, a key investment we're making is the investment in our employees as they are critical to our long term growth and success.
The raise in the hourly wage that we implemented has already helped to improve retention as well as provide a boost and morale.
More we continue to push forward on our plans for strategic hires to enhance our ability to leverage growth opportunities once they fully return.
During 2021 we made more than 45 revenue producing hires within our key markets in commercial lending.
Residential lending wealth management, including Trust insurance Securities and brokerage.
We're making steady progress on our plan to hire an additional 20 commercial lenders whether individuals or teams over the next 12 months to 18 months.
As a reminder, this plan is focused on both our existing metro markets and potential new metro markets suggestions, Jason to our existing franchise footprint.
We have engaged recruiting firms in each of our metro areas as well as Cleveland, Indianapolis, and Nashville, and are encouraged by their efforts to date.
We have solidified our evolution into a strong regional financial services institution and believes that our distinct growth strategies and unique long term advantages combined with our experienced teams hiring plans make us well positioned to take advantage of future growth opportunities, while we remain well positioned for continued success.
We will continue to make appropriate investments to further enhance our position and we're excited about our growth opportunities for the upcoming year.
I would now like to turn the call over to Dan Weiss, our CFO for an update on our fourth quarter financial results and current outlook for 2020 to Dan.
Thanks, Todd and good morning.
During the year, we recognized record trust assets record mortgage production and record demand deposit levels, while maintaining our disciplined expense management posture we.
We continued to make important growth oriented investments and experienced improvements in the seasonal reserve for both macroeconomic forecast and qualitative adjustments.
While the continued low interest rate environment and excess liquidity negatively impacted our margin we are optimistic about the future direction of rates and loan growth opportunities ahead.
As noted in Yesterdays earnings release, we reported improved GAAP net income available to common shareholders of $51 6 million and earnings per diluted share of <unk> 82 cents for the fourth quarter of 2021.
Excluding restructuring and merger related charges results were also 82 per share for the quarter as compared to 76 cents last year.
For the 12 months ended December 31, 2021 we reported GAAP net income available to common shareholders of $232 1 million and earnings per diluted share of $3.53.
Excluding restructuring and merger related charges results were $237 4 million or $3 62 per share for the current year to date period as compared to $127 1 million or $1 88 per share last year.
Total assets of $16 9 billion as of December 31, 2021 included total portfolio loans of $9 7 billion and total securities. A 4.0 billion total securities increased 48, 1% year over year, due mainly to excess liquidity related to higher customer cash balances.
As for various government stimulus programs.
And higher personal savings.
Loan balances for the fourth quarter of 2021 reflected the continuation of both P. P. P.
Loan forgiveness and elevated commercial real estate pay offs.
P. P P loan balances in the fourth quarter declined $109 million with just under $163 million remaining and we recognized $4 3 million in accretion for the quarter with $6 1 million of accretion remaining.
Commercial real estate payoffs during the fourth quarter totaled $160 million, which remained above our historical average of $85 million. However, payoffs did decline as expected from the approximately $260 million recorded during the third quarter. This higher level of payoffs as compared to our historical average.
Negatively impacted total loan growth by approximately one percentage point.
When excluding P. P. P loans total portfolio loans decreased four 9% year over year, and 7% sequentially or when adjusting for higher commercial real estate pay offs sequential loan growth was flat.
Strong deposit growth continues to be a key story as total deposits increased both sequentially and year over year to $13 6 billion driven by growth in total demand deposits, which represent approximately 59% of total deposits.
We continued to use excess liquidity to strengthen our balance sheet by reducing higher cost Cds F. H L b borrowings and sub debt, which in total declined 1 billion or 33% year over year.
Key credit quality metrics, such as non performing assets criticized and classified loans.
Net charge offs as percentages of total portfolio loans have remained at low levels and as shown on slide 11 are favorable to peer bank averages in recent quarters. In fact total loans past due and criticized and classified loans as percentages of total loans were lower compared to both the third quarter and the prior year period.
As were nonperforming assets as a percentage of total assets.
Further net charge offs to average loans were just two basis points for the year, representing a four basis point decline from the prior year.
The net interest margin in the fourth quarter came in at 297% decreasing 34 basis points year over year, primarily due to the lower interest rate environment as well as a mix shift on the balance sheet to more securities, which now represent approximately 24% of total assets versus 17%.
Sent last year.
Further additional cash cash held on the balance sheet negatively impacted the net interest margin by approximately 13 basis points for the quarter.
Reflecting the low interest rate environment, we reduced the cost of total interest bearing liabilities by 25 basis points year over year to 20 basis points as we've lowered deposit rates, including certificates of deposit and continued to reduce FH L. B borrowings and paid off $60 million in high cost sub debt.
Turning to noninterest income for the fourth quarter of 2021 was $30 7 million a decrease of six 1% year over year, primarily due to lower mortgage banking income from our continued efforts to retain more residential mortgages on the balance sheet.
Residential mortgage originations of $383 million during the fourth quarter represented the second best quarter on record while the amount retained increased from 35% last year to approximately 70% in the fourth quarter. In fact during 2021 total residential mortgage originations were a record.
One 4 billion with approximately 55% purchase or construction money.
While we remain committed to expense management as demonstrated by our year to date efficiency ratio of 58, 2%. We continue to make the appropriate investments in our company as we focus on the organic growth potential within our markets.
Excluding restructuring and merger related expenses noninterest expense in the fourth quarter of 2021 increased <unk> 5 million less than 1% to $88 1 million compared to the prior year period.
Salaries and wages benefitted from lower fulltime equivalent head count and increased $1 3 million or three 3% year over year due to higher securities broker and residential mortgage originator commissions from organic growth.
In conjunction with our core banking software conversion. Please note the movement of approximately $1 million of quarterly online banking costs from other operating expenses to equipment and software expense in the fourth quarter and going forward.
As of December 31st.
2021, we reported strong capital ratios with tier one risk based capital of 14 point O, 5% tier one leverage of 10 point O, 2% CET, one of $12 seven 7% and total risk based capital of $15 nine 1% as well as a tangible common equity to tangible asset ratio of eight <unk>.
92% during.
During the fourth quarter, we repurchased approximately one 6 million shares of our common stock on the open market for a total cost of $54 7 million and for the 12 months period, we repurchased five 2 million shares which represents approximately 8% of shares outstanding from the beginning of 2021.
As of December 31, 2021, approximately one 4 million shares remained available for repurchase under the existing share repurchase authorization.
Since then and through January 20th we've repurchased an additional 250000 shares at a total cost of $9 $2 million.
Now I'll provide some thoughts on our current outlook for 2022.
We remain an asset sensitive bank and subject to factors expected to affect industry wide net interest margins in the near term, including a relatively flat spread between the two year and 10 year treasury yields and the current overall lower interest rate environment.
We are currently modeling 325 basis point increases in the fed's target federal funds rate during May July and November of 2022.
Until those potential rate increases begin to provide benefit we anticipate that our GAAP net interest margin may continue to decrease a basis point or two per quarter due to lower purchase accounting accretion and lower earning asset yields.
We anticipate some margin accretion in the first half of 2022 from PPP loan forgiveness as the remaining balance is expected to run off by mid year. Likewise, the remaining net deferred fees of $6 1 million are expected to accrete income by midyear as well.
In general we currently anticipate similar trends in noninterest revenue as we experienced during 2021.
Residential mortgage originations should remain strong, but at lower levels than the record volumes realized during 2021. In addition, we continue to anticipate retaining a greater portion on our balance sheet, reflecting.
The potential rising rate environment.
Commercial loan swap fee income, which totaled roughly $6 million during 'twenty 'twenty. One should continue to be relatively strong trust fees, which are influenced by trends in equity and debt markets should benefit from organic growth securities brokerage revenue should continue to improve slowly through organic growth and potential expansion within.
And our mid Atlantic market, which was delayed due to the pandemic.
Electronic banking fees and service charges on deposit will most likely be similar to the second half of 2021.
Similar to the rest of the industry, we're not immune from inflationary pressures during 2022, but we will maintain our diligent focus on discretionary expense management.
That said, we will continue to make prudent investments in our current employees.
New hires and technology platforms in order to remain competitive and help drive organic growth. We are still planning our annual midyear merit increases and currently anticipate somewhat higher marketing spend during 2022 to supplement our focus on organic growth.
Overall, we currently anticipate operating expenses to be up modestly during 2022 from the $88 1 million reported in the fourth quarter due to the factors mentioned above.
Predominantly investments in our people and general inflationary pressures.
The provision for credit losses under the Cecil will likely depend upon changes to the macroeconomic forecast and qualitative factors as well as various credit quality metrics, including potential charge offs criticized and classified loan balances delinquencies and other portfolio changes in general continued improvements in the.
<unk> and other noted factors should result in a continued reduction in the allowance for credit losses as a percent of total loans during 2022, but at lower levels of quarterly reserve releases as compared to 2021.
Share repurchase activity is expected to continue at a relatively similar pace as 2021 subject to pricing levels volume restrictions and future share repurchase authorizations last.
Lastly, we currently anticipate our full year effective tax rate to be between 17% and 19% subject to changes in tax legislation deductions and credits in taxable income levels.
We are now ready to take your questions. Operator would you. Please review the instructions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys, we ask that you limit yourself to two or three questions. If you have additional questions you may reenter the queue and to withdraw from the question queue. Please press Star then two.
The first question comes from Russell Gunther of D. A Davidson. Please go ahead.
Hey, good morning, guys. Good morning Russell.
<unk>.
Could we start on the margin outlook. Please I appreciate the thoughts in terms of.
Core trends until the fed begins to move but could you guys take a stab at quantifying the impact from each of those 25 basis point hikes, you anticipate and if you could touch on deposit beta assumptions that would be really helpful. Thank you.
Sure sure glad to do that opt in to handle the margin question.
Todd Ah Yeah. So obviously, we are an asset sensitive bank and we expect to benefit from a rising rate environment due to our asset sensitivity as well as our historical lower betas.
Just to put some of this into perspective, we're holding about seven 5% right now of cash on the balance sheet that will reprice immediately also about 65% of our commercial portfolio is variable.
About 30% or so of that variable will reprice as well immediately so.
There is some benefit there certainly on the front end, we've also got about $1 6 billion.
Our variable rate loans that are currently priced at their floors. The average floor is right around 383%.
And about 75% of that.
Would reprice with three rate increases.
25% of that re prices with the first rate increase.
As it as it relates to betas, we saw back in 2018.
When rates increase the last time.
We maintained a much lower beta than our peers generally speaking it was sub 20% and today I would say with costs cost of deposits being 13 basis points.
Just eight basis points, when when including noninterest bearing deposits and with a with a loan to deposit ratio of about 73%.
Excess balance sheet liquidity cash representing about seven 5% of our balance sheet I think theres a lot of runway to allow deposit rates to continue at their current levels.
So.
Really.
I hope that that kind of answers the question.
Yeah, no very comprehensive I appreciate it and then.
Just switching gears for my follow up to the expense side of things so.
Our commentary there is up modestly from the <unk> run rate.
Does that anticipate any.
Action from an expense initiative perspective.
Whether that's additional branch rationalization beyond what you've done the last 12 months is there anything to do there.
If not could you just help ring fence sort of what that.
Yeah could be from from current levels.
Yeah, I'd be glad to answer that.
We do have additional branch optimization strategies, we're continuously looking at rationalizing the branch network, we made a big announcement.
For us I guess in the third quarter of last year. When we said we were going to do 20 or 25, and we did that.
I would say, we're looking at another 10 or so branches that we would probably rationalize here over the next quarter.
A quarter or two.
We're not making big announcements about in putting putting names on it and all that kind of stuff. It's just something we do in the ordinary course of business. So we would expect.
Another probably 10 or so branches to be consolidated as the as the year progresses and we identify those.
Great. Thanks for taking my questions guys sure.
The next question is from Casey Whitman of Piper Sandler. Please go ahead.
Hey, good morning Casey.
Good morning.
Sorry, if I missed this in your prepared remarks, but did you guys give an outlook for our loan growth over the next you know.
A couple of quarters years.
Sorry, if I missed it.
No. We didnt I mean, I think our long term trend is still mid to upper single digit so what we'd like to be I think we see that the trends heading in the right direction I mean, the pipeline trends are up quite a bit.
Actually they are up a little bit over pipelines, a little bit over 20% bigger now than it was just at the end of the year. So nice movement in the last in the last month.
The commercial real estate loans that are going into the secondary market has slowed considerably I would expect that to continue.
To slow this quarter still be maybe a little bit elevated from our historical run rate.
Probably improved over the fourth the fourth quarter and.
I think that coupled with kind of some of our strategies to retain.
Some of those commercial real estate loans, rather just let them go to the secondary market try to try to retain some of those within our risk standards.
For a period of time, if you look at all of that together, coupled with they're just kind of the core.
Continued economic recovery well not a straight line, it's generally moving in the right direction.
We would expect to get positive trends on the on the loan side given those those actions and also our recruiting efforts as well too so.
I think as we get later in the year, we will see that it's hard to predict you know, we don't give out guidance anyway over the next couple of quarters, because it's based upon things that haven't happened yet.
But feel relatively good about the things that are going on and I think the key here too is working really hard to stay within our risk.
Parameters, we had.
Gosh $200 million in the fourth quarter of really pretty solid credit tenant loans.
That we passed on that just wear out of footprint west of the Mississippi type of things.
There were good loans in.
If we had done those that would have been 5% home growth, but that just doesn't fit with our risk parameters. So we.
We passed on them because I think we want to make sure that we're doing the right things long term for the company and that <unk>.
Reacting to a quarterly number but you know on a $10 billion balance sheet. It doesn't take many loans to move the number from a half a percent negative half a percent positive I mean, it's it's two or three decisions. So we feel like we're right, where we need to be but we would anticipate.
Loan growth materializing as we get later in the year and we're focused on it. We know that's you know that's the key question people have with regard to to Wesbanco.
And as you look at the elevated pay downs, which I appreciate have come down I mean are you seeing any big differences across various markets or are there certain markets that kind of stood out for the pay downs.
I would say no.
Most of our real estate that would go to the secondary market or in our urban urban areas right. So that's where the bigger projects are as opposed to or the rural parts of our footprint, but it would be Louisville, Lexington, Columbus Cincinnati Pittsburg.
And then the mid Atlantic markets, that's where we would typically typically see see the pay downs occurring in.
I think as rates are backing up a little bit or going up a little bit I think that'll maybe keep some things from going to the secondary market and also just the nature of the mix of the portfolio right. I mean had heavy paydowns last year. So at some point that that you reach that that balanced threshold, where that which is going to go to the market went in I think it pulled a lot forward.
Until last year in terms of things go into the secondary market early secondary market is still aggressive.
Did some research with our head of commercial real estate before this call and asked them kind of what he's seeing out there in the secondary and he's still there they're getting aggressive there fighting back there.
With rates going up they're reducing the margin that they are accepting.
So we're still battling battle in the secondary market, but I think where we're winning that battle.
And I, just think that the metrics of the portfolio and the math works that that that which was going to leave us is gone and we're continuing to originate construction loans and the pipeline there looks pretty good too.
Okay. Thanks for taking my question and I'll, let someone else I'm sure. Thank you.
The next question is from Brian Preston of Stephens. Please go ahead.
Hey, good morning, everyone, Hi, Barry Good morning, and nice the nice to have you on the range for the first call.
Good to be here.
So I guess I just wanted to circle back.
Todd on the loan growth.
Commentary I think.
If I'm wrong, but you said that the pipeline is 20% bigger today than it was at year end is that correct, yes, I think like $580 million up to $700 million.
Okay can you give us a sense for what the what the pipeline looks like in terms of.
C&I mix, where CRE, just because I know the CRE.
Prepayments and Paydowns have been a bit of a drag.
Yeah.
But I think pretty pretty balanced probably representative of our portfolio as a whole, we got 15% to 20% of our portfolio as C&I and then a good chunk as real estate. So I think the pipeline is somewhat representative.
Of that it's granular and it's across all markets.
I think that's a real positive wishing I can't see any of our markets that.
Our our outliers in terms of having issues or challenges or anything like that.
They all seem to be doing okay and.
You'd be impacted a little bit.
Aggressiveness I think on the people borrowing on their their C&I lines still it's a little bit depressed.
Just the supply chain issues and things like that but I really see that improving as we get later in the year and hopefully we would get back to a more normalized level of of line usage, that's not showing up in our pipeline. Obviously those are just the ones that are on the books that would just.
<unk> be used.
But the pipeline I would expect it to continue to build as.
As we get as.
As we get later in the years as well too I mean, we've got some campaigns out there we had in the fourth quarter to generate additional loan volume our lenders are back out on the streets meeting with customers.
Continuing to recruit lenders get interviews later today myself for additional lenders in the franchise and we had talked about.
L. P OS that are close to markets that we're in now.
A nashville or in Northern Virginia, we've already got a residential.
Our residential mortgage lending team in northern Virginia. So we're continuing to move forward on those things they take a quarter or two to materialize, but I think that in and of itself will build the pipeline as well.
Understood understood.
And then maybe just on securities.
You guys continue to have success in deposits and the cash continues to grow on balance sheet.
You were a little bit more aggressive earlier in the year on unsecured these purchases.
I guess, where do you envision.
Security is growth from here, just given all the excess liquidity.
Yeah, I mean, we're around 20, 24% or so.
The balance sheet to be in securities and we think that's probably a good range to look at.
We're not looking at bid building Big Securities book here, and even this low rate environment that we're in but it's one of the reasons why we put more of the resi portfolio on our on our balance sheet in the last quarter or so is because it's it's our credit we underwrote it we understand it.
But you know we want to we want to use some of that liquidity as well too. So I think we will keep the powder dry with the expectation that we would get a loan growth that would that would eat that up but I also at the same time don't see us taking the securities portfolio down significantly I think our teams have done a pretty good job of when they can get a little bit of yield without taking too much duration risk.
They'll take advantage of that but I would put us in a cautious camp.
With regard to.
Wanting to deploy deploy a lot of cash into securities right. Now I think we will run at a loan to deposit ratio that.
Should get better obviously during the course of the year through through loan growth, but.
Also with that low deposit beta that we have I mean, I can't see anything in the near future that would cause us to.
To raise deposit rates I mean, we didn't raise deposit much of anything in 2018.
I can't even begin to think of when we would want to start considering raising deposit rates. So.
We'll have a lot of opportunity I think for a.
Margin improvement as as rates go up and then with net interest margin as balances go up as rates go up and I think that that's going to be the key door executing on.
And that part of it that we can control this year.
Got it and do you happen to know what the duration of the securities portfolio is and what percent of the book is floating rate.
Dan do you have that available, yes, Brody the duration is four and a half years.
And the variable portion is approximately 17% of the portfolio about $700 million.
Okay.
Dan I guess, maybe I should have been a little bit more specific because I think a quarter of your book is HTM. So do you know what the duration on the <unk> portfolios.
Yeah, It's it's all in a F S. It's yes.
<unk>.
No no the duration the duration of the <unk> portfolio My apologies, it's it's okay. There.
It's it is it's closer to four 5% it's right its right in line.
<unk> was a little a little longer.
And then a F S but.
S is yeah, right around four and a half.
Alright, and then if I could sneak one more in Todd It was nice to see the deposit service charges that.
Normalized this quarter and so it's a bit of a two part question you all don't have big exposure to overdrafts at all I think it's like.
Turning to third quarter at least it was like about like 0.6% of revenue.
And so I guess with that not being much of a headwind do you expect to see deposit service charges continue to then normalize back towards maybe 2019 ish.
Kind of levels and then separately you know I know I know, it's only a small portion but are you doing anything on overdraft that we should be aware of kind of reduce that for your for your customers.
I think on just just activity in general as you get more just economic activity people people out and about and obviously as deposit balances.
Come down over over time, as well too that generates that generates additional additional service charges.
But so we would expect it to continue to rise gradually over it over time is just as the bank grows as well too.
Specifically with regard to overdraft charges, we continue to talk to a customer survey our customers kind of look at trends that are going on in the industry and try to make sure that we're staying on top of value provided versus.
The costs and things like that so we continue to evaluate I don't have any any thing to announce with regard to that.
We feel good about about where we're at as a bank and you are right you highlighted its not a big percentage of our of our of our earnings stream anyway, but it is something that we continue to monitor.
Great. Thanks for taking my questions sure.
The next question is from Steve Moss of B Riley FBR. Please go ahead.
Good morning.
Morning, maybe just.
Yeah.
In terms of on the reserve I hear you guys in terms of just for the reserve bleed just kind of curious as to how you guys are thinking about where the allowance.
Two loans could bottom out.
Overtime.
Sure Dan do you want to handle that.
Sure Todd Yeah. So if we think about the reserve right now we're at one point to 7% exclude.
Excluding PPP loans.
And I would say that probably the absolute bottom.
Would be where are we where we started when we adopted seesaw, which was 88 basis points lounge.
Allowance coverage ratio there and.
And if you if you recall that at that time I believe the unemployment forecast for the next two years was right around three and a half three five to three 6% for the for the for the upcoming two years. So that's about as probably as good as it gets.
When when we adopted six or 88 basis points.
I would say that.
Dependent upon.
The recovery dependent upon the Covid factors dependent upon.
The higher some of the higher risk portfolios.
That we have and how they are.
Yep.
Perform over the next year will really kind of determine where.
Where that where that lands, but theres certainly a downward trajectory.
And you obviously saw a pretty pretty significant negative provision this quarter at $13 6 million compared to a negative $2 million in the third quarter.
And really a lot of that is just the continued improvement that we're seeing it at the borrower level and some of those higher risk portfolios a lot of the financial metrics are just.
They're at or near pre pandemic levels.
Which is which is really a great story and so.
Yeah.
Aye.
We're really the CSO model projects that that momentum.
Forward, so that's kind of hopefully that that kind of answers the question there.
And I would add to that too if can't look where we were at a year ago relative to peer group on reserve.
I think we were five or 10 basis points higher than the peer group and that's where we're at today right. So everybody has different assumptions that happened during the course of the last year I think we really still out in the second quarter.
Not so much in the third quite a bit in the fourth but we all ended up in kind of the same spot rates. So well you know it.
The 120 527 that were at today.
We get surveys it appears they're all around 1.2 or so so we feel like we're right in line with that.
And we're conservative I guess I know, we're a conservative company and go back to a year two years ago actually now.
When we started putting in deferred loans out there remember we went out we had a 2021 or 22% the portfolio deferred because we were active we went out there right away with our customers I'm happy to say that I don't know.
Don't really have much of anything on deferral anymore, we got one or two loans, but I think that's it everything's pain.
<unk> agreed and would.
And come back really really strong so we try to be conservative you see that in our in our underwriting and you see that and how we approach our business.
But from a reserve standpoint to Dan's point, we continue to see it moving lower.
You, who knows if we get another variant to get different things that happen hopefully, we don't get into a recession anytime soon we don't anticipate those kinds of things. So barring that it should continue to trend lower but I would imagine we would trend lower in line with the industry.
Okay. That's helpful. And then just on M&A, just curious as to any updated thoughts you may have.
It has a level of chatter going.
That person's a buyback here.
Sure sure Yeah, they're more.
More activity, obviously people talking to each other and whatnot I would tell you I'm fairly firmly focused on.
Answering the organic growth story and organic growth question, we've acquired into other markets over the last 678 years that were higher growth markets in our legacy markets and we really want to emphasize the organic growth reasons behind doing that so I don't want it I really don't want to confuse that story by throwing a merger in the mix and all of a sudden it's.
What does that do to your numbers for a year or two because I feel like we've got we've got a good story.
That will be able to execute on here over the next year or two so I really want to stay focused on that.
But having having said that we've got plenty of capital. We've also got our core upgrade that was done last year I think we're positioned if the right thing came along we could do it but we're not looking for it. So we're not actively out there trying to find a deal but.
If things come across the transom I think we're prepared to take a look but it sure isn't a priority for us at this point.
Okay. Thank you very much I appreciate all color.
Sure.
The next question is from Stuart Lotz of K B W. Please go ahead.
Hey, guys good morning Stuart.
Most of my questions have been asked but just Todd I wanted to circle back to your commentary on potential <unk>.
L P O and Nashville.
I'm curious is that a is that a conversation that has been in the works for a while and maybe how far along are we all wish that in outside of Northern Virginia are there any other markets such as Charlotte.
Or maybe Philadelphia that you would potentially look at for for another.
Team lift out or entrance.
Entrance fee <unk>.
Yeah, we're really not looking too far.
We're not going into those other other markets because there are markets, we don't really understand and they're kind of a ways away I mean, I was president of fifth Third's Nashville operation for several years, So I've got kind of the market.
To some degree.
But theres a lot of banks I think that are trying to establish L. P OS in Nashville right now.
So it's early early in the process. What we've done is we've engaged recruiting firms to help us in Nashville in Northern Virginia in Indianapolis and Cleveland. So those are kind of the markets that we're looking at also.
President of a bank in Cleveland for a few years, so its mostly markets that we know and they're close to where we've been historically, they're markets that we could someday.
Spanned from an M&A standpoint in there, but the strategy is to develop a bunch of loan production offices, it's just to get to know a market a little bit better that we might think longer term, we could be a bigger player in the bank did the same thing you know 10 12 years ago with Pittsburgh established an L. P O in Pittsburgh and then we ended up doing two acquisitions over the last 10 years in Pittsburgh.
That's that's what's going to keep us kind of tight geographically to a nashville or two in Indianapolis or Cleveland or northern Virginia, because those are markets that we kind of view as real.
Close to markets that we're already already in so it's early but this is also the right time to be talking to teams and individuals because they're about to get their payout today and everybody kind of becomes a free agent for a period of time.
Looking around so we want to capitalize on that hopefully will have some more to talk about on that in the second quarter.
Great that's great color.
And then maybe just one more kind of bigger picture profitability question.
I appreciate the expense guidance for kind of modest growth this year.
As we think about.
If we start to see you kind of you know.
While were low reserve releases in.
And maybe inflect.
Core core.
Core net interest income I mean, where do you see your efficiency ratio kind of trending from here.
We are back above 60 for the first time in several quarters.
And then maybe from a P. P R standpoint.
Back in 2019, you were.
Around 170 range Youre down to about 120 today do you think we've kind of reached the bottom from a core earnings standpoint, there and where.
Or should we use.
Do you think we'll have to wait for several rate hikes to really see meaningful improvement.
Yeah, I would say with regard to the efficiency ratio.
Obviously dependent upon the shape of the yield curve and and you know we're all facing the same thing with regard to that we want to see a steepening of the yield curve I would say on the efficiency ratio.
We want to make sure we're in the top half for the best half of.
Of the of the industry as you mentioned we are above.
The fifties rent into the 60 range and I think that's because of the shape of the yield curve. Some degree loan growth as well too. So I would say top half of the industry was where we want to where we want to be.
But I think the efficiency ratio is going to be determined a big degree based upon things that we can't control or predict at this point in time, so those things that we can control like our expenses.
Loan growth to some degree and.
And margin management is where we'll focus but.
I think 90% of what's going to drive the efficiency ratios is gonna be maybe 80% is going to be based upon what happens to the yield curve over the next year or two so we'll try to make sure that we stay efficient clearly, but we want to be in the top half of their peer group.
Alright, Thanks for taking my questions sure. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Todd <unk> for closing remarks.
Sure. Thank you.
Overall, our earnings are good our capital levels are good our liquidity is good our expenses are good I think we're making the right investments in technology I think we're returning capital to our shareholders appropriately we.
We do agree organic loan growth as our challenge at this point and we're addressing it but we're going to do so while keeping within our historic risk profile and I hope that's the message you got from us today.
I want to thank you for your time look forward to speaking with you in the near future at one of our upcoming Investor events. Please stay safe and have a good day. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.