Q1 2022 WesBanco Inc Earnings Call
Good morning, and welcome to West Banco Inc. First quarter 2022 earnings conference call.
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I would now like to turn the conference over to John I know.
Senior Vice President Investor Relations and public relations.
Please go ahead.
Thank you good morning, and welcome to Wesbanco, Inc. 's first quarter 2022 earnings conference call.
Leading the call today are Todd Austin, President and Chief Executive Officer, Dan Weiss 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 about 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 <unk> com.
All statements speak only as of April 27, 2022.
<unk> undertakes no obligation to update them.
I would now like to turn the call over to Todd Todd.
Thank you John and good morning, everyone.
On today's call, we're going to review our results for the first quarter of 2022.
And provide an update on our operations and current 2022 outlook.
He takeaways from the call today are.
Banco remains a well capitalized financial institution, which was enhanced by our tier two capital raise and continued to return capital to our shareholders.
We continue to make appropriate investments, including strategic hires and our new loan production offices to enhance our ability to leverage growth opportunities while remaining focused on expense management.
The successful execution of our strategies has positioned us well for continued success and we are excited about our growth opportunities.
We're pleased with our performance during the first quarter of 2022, as we reported net income available to common shareholders of $42 $9 million and diluted earnings per share of <unk> 70 cents when excluding after tax mergers and restructuring charges.
We exhibited strong expense management as our operating expenses were roughly consistent with a year ago period.
Furthermore, we enhanced our capital position to provide further financial flexibility, while also enhancing shareholder value through effective capital management, which includes the appropriate balance of share repurchases dividends and M&A.
While M&A is still not a major focus for us we remain opportunistic and if we found the right opportunity that fit our well defined strategy, We would act upon it.
During the first quarter, we successfully completed a tier two capital raise.
Through a public offering of $150 million of 10 year.
Our fixed to floating rate subordinated debt.
Priced at 375%.
In addition, our board of directors approved the adoption of a new stock repurchase plan for the purchase of up to an additional $3 2 million shares of Wesbanco common stock as.
As well as a 3% increase in our quarterly dividend, which was our 15th increase since 2010.
We also repurchased approximately 1.7 million shares of our common stock on the open market during the quarter.
The combination of these efforts reflected our commitment to returning capital to our shareholders.
As I've said previously our focus remains firmly on the organic growth potential within our markets, but we will carefully balance the risk reward proposition between growth and credit quality.
As you have clearly demonstrated our credit strategy continues to generate strong metrics and loan portfolios and enables us to make prudent long term decisions for our shareholders.
Driven by our residential mortgage and commercial loan portfolios, which generated annualized loan growth of 10, 6% and two 9% respectively. We reported total loan growth of 3.6% annualized when excluding S. P. A P. P P loans.
The growth in our residential loan portfolio reflects both our efforts to retain more loans on our balance sheet and continued relative strength in originations.
Total commercial loan growth was driven by both our commercial real estate portfolio. Despite continued high pay offs and our C&I portfolio. Despite line utilization still roughly 10 percentage points below our historical range.
Our residential lending group, we continue to see good growth from our team of mortgage loan originators as their books of business have shifted significantly to home purchases and construction, which accounted for approximately 75% of the originations during the first quarter.
As of March 31st our residential mortgage pipeline, while down slightly from a year ago has grown to approximately $215 million an increase of 33% from the fourth quarter.
Further we will continue to prudently add additional originators in particular within our newest markets of Northern Virginia, Nashville in Indianapolis, which I will comment upon in a few minutes.
In fact, our office in Northern Virginia has accounted for approximately 15% of mortgage origination volumes for the last few quarters.
The combination of our solid pipeline and new loan production offices, which will ramp up over the coming months bode well for our residential lending program. This year.
We also continue to see good production from our commercial lending teams.
Based on our strong commercial pipeline as we entered the first quarter. These experienced teams generated gross loan production of roughly $640 million during the first quarter nearly double the year ago period.
In addition, they have continued to seek new business opportunities, which has helped our commercial pipeline reached a record $990 million as of March 31st in nearly 70% increase from the pipeline at year end with our mid Atlantic region accounting for approximately 28% of our current pipeline.
We continue to make appropriate long term investments, including strategic hires and our new loan production offices to enhance our ability to leverage growth opportunities while remaining focused on expense management.
Regarding costs associated with these investments we continue to review our financial Center network to find opportunities for both improvements and optimization.
Reflecting the adoption of our digital services by our customers as well as the proximity of another location of ours. We have recently identified 11 more locations across our markets that could be consolidated allowing us to fund the strategic investments.
As I mentioned last quarter, we made more than 45 revenue producing hires during 2021 and implemented a plan to hire an additional 20 commercial lenders over the next 12 months to 18 months in both our existing and adjacent Metro markets.
To date, we've accomplished 50% of the school, including a lender in our Akron canton market they'll be focused on the Cleveland area.
We also hired a new director of commercial and industrial lending.
In this new role. This season later, we'll develop our CNI infrastructure plan leads strategic initiatives around developing products.
And identified necessary resources and internal changes required to enhance this business segment.
We also recently announced the opening of two new loan production offices, one each in the Nashville Indianapolis areas.
On March 1st we announced the opening of our Nashville Office, which will initially focus on residential lending as we hired a very experienced individual who has a lot of success building mortgage teams throughout his career.
Then on April 18th we announced the opening of our Indianapolis office, which will focus on both commercial and residential lending as we have hired two commercial lenders and our residential sales manager.
In fact, this new commercial team has already started to get own opportunities within the first week.
We are excited about the long term growth opportunities of these two new offices.
These investments continue to enhance our evolution into a strong regional financial services institution.
It is built upon distinct growth strategies unique long term advantages and a strong credit and risk culture.
Furthermore, none of this would be possible if not for the hard work dedication and passion of our employees.
I'm extremely proud of our entire organization is our employees have adhered to our community banking roots by focusing on providing top tier service to our customers.
Their efforts have allowed us to receive numerous national accolades so far this year.
We were recognized by Forbes as one of the best Banks in America based upon financial performance and an independent survey of our employees voted US one of America's best midsize employers, reflecting our efforts to create an environment, where they're supported and positioned to succeed.
In fact, we were the only midsized bank in the country to receive top 10 honors for both employee satisfaction and financial success.
Lastly for the fourth consecutive year Wesbanco was named one of the best banks in the world and our ranking based on customer satisfaction and consumer feedback.
The culmination of all these accolades and our employees living our better banking pledge daily allowed us to be recognized as one of America's most trustworthy companies by Newsweek through an independent survey of U S residents.
This has truly been a great start to the year.
I would now like to turn the call over to Dan Weiss, our CFO for an update on our first quarter financial results and current outlook for 2022 Dan.
Thanks, Todd and good morning during the quarter, we recognized record trust fees record securities brokerage revenue and record demand deposit levels as well as positive sequential quarter loan growth, while maintaining our discipline over expenses.
We continued to make important growth oriented investments and experienced improvements in the seasonal reserve from a macroeconomic forecasts and we believe our balance sheet is well positioned for future loan growth and we look forward to margin improvement as rates rise.
As noted in Yesterdays earnings release, we reported improved GAAP net income available to common shareholders of $41 6 million and earnings per diluted share of <unk> 68 for the first quarter of 2022, excluding restructuring and merger related charges results were 70 cents per share for the quarter as compared to $1.06.
Last year.
It's important to note that the first quarter of 2021 was favorably impacted by a negative provision of $22 1 million net of tax or <unk> 33 per share.
Total assets of $17 1 billion as of March 31, 2022 included total portfolio loans of $9 7 billion and total securities of $4 1 billion.
Total securities increased 13, 3% year over year, due mainly to excess liquidity related to our customers higher personal savings.
Loan balances for the first quarter reflected the continuation of both SBA PPP loan forgiveness and elevated commercial real estate pay offs, partially offset by efforts to keep more one to four family residential mortgages on the balance sheet as well as sequential quarter commercial loan growth.
Commercial real estate payoffs during the first quarter continued to decline as expected totaling approximately $136 million and we expect these payoffs to continue to decline throughout 2022.
As Todd mentioned, the real story this quarter was the sequential quarter loan growth.
As of March 31, 2022, total portfolio loans, excluding P. P. P loans increased three 6% annualized when compared to December 31st 2021, due to growth from both commercial and residential real estate loans.
Commercial real estate increased 3% annualized quarter over quarter, and commercial and industrial excluding P. P. P loans increased 2.5% annualized.
Strong deposit growth continues to be a key story.
Total deposits increased both sequentially and year over year to $13 8 billion driven by growth in total demand deposits, which represent approximately 59% of total deposits as well as growth in savings. We continued to use excess liquidity to strengthen our balance sheet by reducing higher cost Cds and wholesale.
<unk>, which in total declined 654 million or 33% year over year.
The net interest margin in the first quarter was 2.95% decreasing 32 basis points year over year, primarily due to the low interest rate environment as well as the mix shift on the balance sheet to more securities, which now represent approximately 24% of total assets versus 21% last year.
Further additional cash held on the balance sheet negatively impacted the net interest margin by approximately 15 basis points for the quarter.
Reflecting the low interest rate environment, we reduced the cost of total interest bearing liabilities by 18 basis points year over year to 19 basis points as we lowered deposit rates, including certificates of deposit and continued to reduce higher cost F. H O P borrowings.
Despite record trust fee income and record Securities brokerage income this quarter noninterest income for the first quarter of 2022 was $30 4 million down eight 5%, primarily due to lower swap fee income and lower mortgage banking income from our continued efforts to retain more residential mortgages on the balance sheet.
Reflecting the rising rate environment, and general lack of inventory residential mortgage originations declined 17% year over year to 271 million during the first quarter with mortgage refinancing representing 26% of production compared to 57% in the first quarter of last year.
<unk>.
Furthermore, the amount retained on our balance sheet increased from 40% of originations last year to approximately 75% this quarter, which we expect to return to a more historical 50% range over time.
As I mentioned, we prudently manage our expense base in order to make appropriate investments in support of long term organic growth potential within our both our existing and new adjacent markets. For example, we utilized the.
The expense savings from our branch optimization efforts to fund our recent loan production office strategy as well as our hiring of key revenue producing personnel across our markets.
Excluding restructuring and merger related expenses noninterest expense for the first quarter of 2022 increased <unk> 5 million less than 1% to 86 million compared to the prior year salary.
Salaries, and wages, which increased 2 million or five 5% compared to the prior year reflect our new hire strategy normal merit increases and the hourly wage increase that we implemented last year, partially offset by lower deferred loan origination costs as.
As compared to the linked fourth quarter expenses of $88 1 million expenses were down $2 1 million do their salaries reduced from lower day, count and reductions in health care pension and market adjustments on the deferred compensation plan.
Turning to capital we continue to maintain strong regulatory capital ratios as both consolidated and bank level regulatory capital ratios are well above the applicable well capitalized standards.
And we enhanced our capital structure during the quarter with the issuance through a public offering of $150 million of fixed to floating rate sub debt, which qualifies as tier two capital.
Our solid capital position allowed us to continue to return capital to our shareholders through both a one cent dividend increase and the repurchase of approximately one 7 million shares during the first quarter.
As of March 31, 2022 we reported tier one risk based capital of $13, two 5% tier one leverage of $9 six 7% CET one of 12 point of 1% and total risk based capital of $16, three 2% as well as tangible common equity to tangible asked.
Its ratio of 792%.
Due to the rising rate environment, the impact on our tangible common equity ratio from unrealized losses on our available for sale portfolio, which are recognized in our accumulated other comprehensive income reduced the tangible common equity ratio by 61 basis points or approximately 7% we.
We believe we are well positioned given our held to maturity portfolio makes up 28% of the securities portfolio further 25% of our available for sale portfolio is variable rate, which is less sensitive to rising rates, resulting in a lesser impact to OCI.
Now I'll provide some thoughts on our current outlook for the remainder of 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 rising rate environment. We're currently modeling 175 basis points of increases in the federal funds rate.
With the expectation that we will seek to 50 basis point increases over the next three fed meetings.
Our GAAP net interest margin in the second quarter is expected to remain flat due to lower purchase accounting accretion and lower P. P. P accretion offset by improvements in earning asset yields as rate increases begin to make an impact.
We anticipate some margin accretion from PPP loan forgiveness, and the majority of the remaining balance to run off by mid year, including the remaining net deferred fees of $2 9 million that would accrete to income.
Furthermore, we expect the low deposit beta benefit that we experienced during the last rising rate environment, roughly four years ago from our core deposit funding base to provide similar benefits in the expected rising rate environment. This year and anticipate our betas to be lower compared to peers as they have been historically.
Our static Alco models indicate in an immediate 100 basis point rate shock scenario net interest income increased five 3% while in a 200 basis point immediate rate shock scenario, an 11% increase.
Residential mortgage originations should remain strong due to our new loan production offices and hiring initiatives, but at lower levels than the record volumes realized during 2021. In addition, we continue to anticipate selling approximately 50% into the secondary market.
Trust fees, which are seasonally higher during the first quarter and securities brokerage revenue should continue to benefit from organic growth electronic banking fees and service charges on deposits will most likely remain in a similar range as the last few quarters.
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.
We will continue to make long term growth investments through our L. P O and hiring strategies, most of which will be funded by the anticipated expense savings from our branch optimization efforts we.
We are planning our annual midyear merit increases and currently anticipate somewhat higher marketing spend during 2022 to supplement our focus on organic growth.
Overall operating expenses will continue to be impacted by the factors just mentioned predominantly investments in our loan production offices and people as well as general inflationary pressures and we're comfortable with the current consensus range for operating expenses.
The provision for credit losses under Cecil will 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 future loan growth.
And general reductions in the allowance as a percentage of total loans will depend on the possibility of continued improvements in industries impacted by Covid unemployment.
Unemployment rates and other macroeconomic factors, including increases in interest rates and inflation expectations.
Share repurchase activity is expected to continue at a relatively similar pace as during the first quarter subject to pricing levels volume restrictions and future share repurchase authorizations.
Lastly, we currently anticipate our full year effective tax rate to be between 18% 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.
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If at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two please limit questions to one and a follow up and then you can return to the queue.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Casey Whitman with Piper Sandler. Please go ahead.
Hey, good morning.
Good morning.
Yeah.
I guess first.
Dan just the commentary you just made around the margin, especially in the second quarter maybe.
Can you walk us through what that means for the core margin for that quarter I'm not sure what you're assuming for.
Accretion income and I think he just gave a P. P. P number that should be around $2 9 million, if I heard correctly, but so does that assume.
Core margin is somewhat flat as well or maybe can you just done that down for us.
Yeah sure Casey.
So I think that probably the best way to to work off their subs I'm, referring to GAAP margin here. So if we kind of maybe just quickly compare.
The first quarter GAAP margin of 295.
Compared to the fourth quarter margin of 297.
If we exclude 15 basis points from both purchase accounting accretion, which was eight basis points in the quarter and P. P. P, which was another seven basis points, we get down to kind of our what we call core margin. Excluding P. P. P that comes in right at a two.
2.8 O percent that compares to $2 seven 9% in the fourth quarter. So we're actually up a basis point on on a core basis.
And we expect second quarter margin on the same basis to really be kind of a couple of basis points higher when you exclude purchase accounting accretion and P. P. P accretion. So a couple of basis points rolling off one purchase accounting a P. P. P. A couple basis points of improvement on the on the core.
And.
I think you know when you when you think about this there are a couple of things that factor into this first the interest expense on the sub debt will have will weigh on second quarter margin relative to the first quarter. So that's a 375% on $150 million that really.
It was only in play for two weeks in the first quarter and then also you can see on slide four we're still seeing.
You know that loan run off is coming off a right around 3.74% and it's a new loans are coming on right around 3.33%.
So we're continuing to see kind of that mix that that 40 basis point spread we'll call. It has come down from the fourth quarter and even from the third quarter of last year and we expect in the second quarter for the spread there to Ted tightened quite a bit.
But those would kind of be I guess kind of the the headwinds if you will to why we wouldn't see something more.
No more than two basis points in the in the second quarter.
But maybe third quarter, we could see more of a list I guess without the sub debt and you hadn't seen but that's the loan yield spread yet.
Yeah, Yeah, yeah, yeah, absolutely so yeah, the real pick up in our margin comes really in the back half of the year third quarter and fourth quarters.
A particular once the rate increases are fully baked in for a period of three full months.
That's when we really expect to see the improvements so you're.
Right now you know just to kind of ballpark it let's call it.
For every 25 basis point.
For every 25 basis point increase in rates, we're projecting between a kind of a three to five basis point improvement in in the quarterly margin. After it's been in place after that 25 basis points has been in place for a full three months, there's a lot of our loans re price every three months so.
And that's on a quarterly basis. So if you think about.
For rate increases or 100 basis points, an increase in the second quarter kind of.
Shows itself in the third quarter.
Okay.
I appreciate that thank you.
Just your comments around expenses with article by all the.
New hires.
Branch closures or sorry, when you were talking about sort of the consensus range, you're talking about the full year 2022 to look at or the quarterly.
Range going forward being somewhere in the range consensus accordingly, okay.
Okay, I will let someone else jump on thank you.
The next question comes from Karl Shepard with RBC capital markets. Please go ahead.
Good morning, guys How's everyone doing morning, good morning.
Yeah.
I wanted to start I guess with a question on the loan pipeline.
Record levels and up that's good.
I wanted to ask if you could expand a little bit on the color I respect that the new hires are contributing in some of the efforts in your newer markets too, but more curious than in an update on general customer sentiment demand and kind of any shift in thinking among your borrow base tomorrow.
Three months.
Yeah, I'll answer that is to start up.
If we get a.
The pipeline right now just under just under a $1 billion I wish I could say it was 1 billion, but it's like 980 $990 million.
So it's hovering right around that which are as you mentioned is up significantly from where it was in the fourth quarter and we'd never quite frankly seen pipeline numbers are as big as we have right now.
But it's pretty much across the footprint, but we are seeing the outsized our pipeline opportunities and are in our newer markets kind of acquired into higher growth markets, Maryland mid Atlantic market being at the top of that that list and then also in some of our at Kentucky markets as well too and we're glad to see that because that's the reason for going into those market.
Was to take.
Take our bank from a kind of a historical low mid single digit grower to eventually a mid upper single digit growers. So we're seeing that the growth there that we would expect to see.
I would say.
We're starting to see opportunities from people that we've hired in the past because of this hiring has been going on for over over a year. We mentioned, we're about 50% of the way through.
Our 20 or so hires over the next 12 to 18 months, if a really good about the people we brought on board, but they came on during the mid to latter part of the first quarter after they've gotten incentives and bonuses and things like that where they were and then they've come over to us.
So we would expect to see that be additive to the pipeline from here.
And I guess in response to the last part of the question in terms of what do we see in across the footprint I.
I would say I think sentiment is good I think sentiments very very positive we do see supply challenges out there labor supply challenges on the part of the of a number of businesses.
But I think they're looking through that and looking at this as temporary.
Inventory builds seem to be going on even though.
We did see growth in C&I were still about 10.
10 a M.
Basis points or so below the kind of the average were 10% below the average line usage that we would've seen pre pandemic. So we think that lyft has yet are yet to come and I think everybody's watching inflationary pressures and trying to figure out whether or not they can pass those on in.
And they're in their sales prices and whatnot, so they're kind of figuring that out but overall I would say it's been it's been really positive and we're not hearing a lot of negative signs are really in any parts of our of our footprint.
Okay. That's helpful and then I guess one follow up.
You mentioned the progress on new hires and kind of the seasonality of getting that done.
Year end.
I think you're implying it but fair to say that there's a lot of capacity among.
Who has come aboard here tended to deliver.
Yeah.
Yes.
A quarter or two quarters or is it more of a yearend poultry I guess on that production or.
No we would expect them to produce a pretty quickly to the loan production office in Northern Virginia was last July or so that we got that going in and that's been representing about 15% of our quarterly companywide production in residential mortgage.
So that came on really really quickly.
And with the new hires and in Nashville, and and I think we mentioned in our prepared remarks, and Indianapolis already starting to see deal flow on the commercial side. So we would expect to see that build throughout the second and third quarters and then B P.
Part of our permanent run rate going forward.
Okay, great. Thanks for the help sure.
The next question comes from Stuart Lotz with Kb doubling please go ahead.
Hey, guys good morning good.
Morning, Stuart Good morning Stuart.
I appreciate all the color on the <unk>.
Hence outlook.
But you know as I think about you know the 86 million run rate this quarter.
You know expense savings from the 11 branch closures that you you identified and I think that that match your commentary last quarter.
Just help me kind of piece together.
How we get from the 86 million to you know kind of the higher I guess you know what consensus is implying on the expense run rate closer.
Closer to you know 88 or 89 million per quarter.
Yeah, Dan maybe maybe you want to go through that I mean, some of it's just a lower benefit expense.
In the first quarter that you know, we're not you're not going to see most likely in the second quarter.
But we are bringing on more people and we do have midyear merit increases and things like that that'll that'll take place but.
A lot of it's really kind of a you know.
What we're looking at in the first quarter not not a typical not a typical run rate as you would typically have in the first quarter Dan.
Yeah, Yeah, it's Stuart so if we kind of maybe the best way to walk through this is to think about how expensive, new particularly on salaries and wages and employee benefits on a linked quarter basis kind of from fourth quarter's numbers to the first quarter, so kind of focusing in on on salaries and wages.
Here as compared to the linked fourth quarter salaries and wages were down about $1.5 million.
So there's really two drivers there first the day count that we that we mentioned in the earnings release that that accounted for about $900000 right Theres just two fewer days in the first quarter versus the fourth quarter. Okay.
And then the second would be.
Lower mortgage broker commissions, they were down about five to $600000. So.
Naturally due to the lower volumes, you know lower production volumes on the mortgage side, so that that kind of more or less covers the the salary side and of course as Todd mentioned.
The hiring initiatives and even the hires that we've made to date in the first quarter.
Aren't fully baked in for a full quarter right.
And then if we look at benefits. They were also about $1.7 million lower and there's really a again kind of three drivers there first market adjustments on the equity securities in our deferred compensation plan moved about $900000 downward and you can actually see the offset.
Set in securities gains losses in noninterest income so those move inverse to each other so there's those equity securities were down 900000, and you can see kind of the loss on the net interest income side and then it it actually kind of reflects as a credit to employee benefits of 900.
Awesome.
Within within that one.
The third or the second piece or the second component here is pension expense. It was down about $400000 and this is really due to the funded status of our plan and the projected return on plan assets.
And this is kind of a fully baked in benefit that we'll see about $400000 per quarter of benefit of lower pension expense quarterly.
For for the rest of 2022.
And then kind of the all other employee benefits I would say were down 300000, and there were there were two two main drivers. There first we saw lower health care relative to the fourth quarter fourth quarter was actually exceptionally higher and first quarter is always seasonally lower.
Or just because you've got employees that are still kind of working through their deductibles.
Also we changed to providers as well change to a different P. P. O. That's supposed to be a little a little bit more cost friendly there.
And then also.
You know that that was parse that those employee benefit or health care expenses were partially offset by.
The seasonally higher unemployment social security and 401K match, that's due to the timing of a 2021 bonuses that are paid in the first quarter. So you see some seasonality there.
So kind of offsetting some of the the health care expense were just higher recruiting associated with with our hiring initiatives. So that kind of I think helps to explain the kind of the delta relative to fourth quarter and a lot of those those factors are.
Yeah.
With the hiring that we that we have in place and the plans we expect to see us.
That's the kind of return back to kind of cover the spread if you will through hiring.
That's that's that's very helpful and I guess my follow ups.
Regarding capital and your outlook for the buyback.
Sure Thank God.
This quarter, the $1 7 million, it's got about $2 9 million left in your current authorization, but just given the thinner TCE how comfortable are you bring that lower if we do get another Aoc I hit next quarter and maybe would you look at possibly re upping that authorization.
If you are where you exhausted the mid year.
Just any any color there thanks.
Yes.
Go ahead Scott.
That's right your Eagle Ford.
I would just say you know as it as it relates to share buyback in my prepared comments I mentioned, we are anticipating a similar levels of buyback here in the second quarter and that's of course subject to pricing volumes capital levels liquidity and timing, but Ah.
I think from a from a TCE perspective, Ah Theres, a theres a couple of factors at play here.
We think that.
The the rising rate environment is going to be a significant benefit to the bank. We also view that TCE is as a deterioration is temporary versus permanent and we really don't plan to sell any a F. S securities.
Securities, So really there's going to be any impact to interest income.
If we did see a similar a similar.
Impact that that was 61 basis points this quarter, given where we are at on the curve.
I'm a sensitivity analysis that we've performed it would take about 100 basis points of increase in AR at let's say the 10 year to see about a 50 basis point decline in our TCE ratio. So that kind of provides us I think some some installation in <unk>.
Generally speaking.
Our capital targets longer term or to have a TCE ratio right around seven 5%, we're still running.
At 42 basis points.
Above that are certainly the OCI impact is getting us down closer at a at a faster rate, but we're pretty comfortable with where we're at and.
What exposure there is there.
Right Yeah.
Yeah, and then he answered it did very very well and as we do we do like to have a slightly more capital than peers, just our conservative nature.
We'll continue to take that into consideration in evaluating buyback activity.
Yeah.
Great. Thanks for taking my questions sure.
The next question comes from Russell Gunther with D. A Davidson.
Please go ahead.
Good morning, Rusty Hey, good morning, guys. Good morning.
Just wanted to circle back to the loan growth commentary.
Very solid result, very strong commentary and Todd you touched on.
The strategic goals of migrating from the low to mid to the mid to upper single digit range I guess based on the start to the year.
A lot of what we've already discussed is that a goal you think you can achieve this year.
Well I guess the way I'd answer that is that the long term plan as you know the mid mid to upper single digit growth because that's why we went into the markets that we did and did the acquisitions that we did.
And we are pleased to see that and I think if we had a more normalized typically $85 million a quarter kind of commercial real estate payoffs to the secondary market. We were up above that 130 536 million or so if we had a more normalized $85 million, we actually would have been around five 5% annualized loan growth for the <unk>.
For the quarter. So we feel good about the numbers that we're getting to know we did put a little more resi on the books than we probably would and in the future, but we feel like we're starting to approach that mid to upper single digit of some of those other things were to normalize.
I guess, the big wildcard on that as you know the commercial real estate loans go into the secondary market would need to continue to come down we expect them to but you know our growth overall would be be somewhat dependent upon that.
And then also you know what happens with the with the economic growth overall.
If economic growth slows you know I'm not sure we see a recession, but if you know if there is a slowdown that occurs.
They're going to be an impact on on the lending overall. So those are some of the things that we really just don't have a lot of a lot of control over that's why I like to say that the.
Mid to longer term view is to be in that mid to upper single digit because than that.
It takes the variables that we can't control out of it and the strategic things that we're doing to get the longer term growth starts to show through.
Searched through through overtime, something I will mentioned, we were very careful about making sure that we're maintaining our credit profile with with the growth that we're seeing in the pipelines that we have as you guys know we don't.
<unk> portfolios, we want to originate everything that's on our books, because we like our like our credit underwriting and we're not adjusting our credit profile at all to manufacture or loan growth or anything like that so but with a solid pipelines, we have with what we expect on the commercial real estate.
Payoffs just to start to decline the L. P O as we talked about.
We do expect there to be good high quality growth going forward, but I can't I can't speak to the the variables around economic growth overall, our plan and going to the markets that we went into because we acquired into markets that were slightly higher growth than the national average and in our legacy markets maybe didn't grow as much.
As the the national markets did but as you guys know strong strong deposit franchise Trust franchise. I mean, we can make a lot of money in our legacy markets, but to layer on some of those growth markets to get a higher <unk>.
Both product profile associated with it we feel like we've done we've done that and now we want to see that flow through over the next several quarters next several years kind of validate that that overall strategy.
I appreciate your thoughts there Tom Thank you for that and then.
My follow up you know along the same lines you mentioned.
Kind of halfway through the targeted hires for this year and the Nashville Indianapolis L. P O.
Are you in the.
Newer markets, where you want to be in those new hires with bulk up there or are there contemplated other L. P o's and if so just a reminder of what would be attractive.
Yeah, we're not really looking at other appeals at this point you know we we identified.
Northern Virginia last year, where there were identified Nashville, and in Indianapolis, where they are now you know we already have a team in Akron Canton, which is 20 minutes south of Cleveland. So we're kind of building that out a little bit too, but those are the markets that we like and with the liquidity, we have and those are more.
Our kits that are close enough to markets that we're already in that we feel comfortable with them.
Spent most most of my career in Cleveland and spent time in Nashville, and had oversight of Indianapolis.
Our board perspective, and stuff, so theyre not unknown markets.
To me and other people on the team, but we're comfortable with those because we can get the car we can drive to them and you know they are markets that we could get bigger in at some point in the in the future through.
Through potential M&A like we did in Pittsburgh set up an L. P O. There for a number of years 10, 15 years ago, and then did two two acquisitions stability to build that into our markets I could see that happening and some of the markets, where we have the L. P. O right now, but we don't have any plans to go to St Louis or Atlanta or something.
Something like that and continue to do more L. P. O S. We're in the markets, we want to be in right now.
Yeah.
That's very helpful. Thank you guys for taking my questions sure.
The next question comes from Steve Moss with B Riley Securities. Please go ahead.
And certainly again.
Sportsmen sitting in for him today, a lot of my questions have unfortunately been knocked out but since the asset sensitivity seems to be a big key here. So I'm. Just curious if you guys can roll through some of that.
Deposit beta assumptions as well as just curious if we could get an update on the.
Duration of the securities portfolio as well.
Sure Dan do you want to handle that.
Yeah, So I'll take your duration on the securities portfolio first.
Total total duration on the entire portfolio, including both the F. S. H T. M is four eight years.
E. F. S is four six years H T. M is five four years.
It's probably important to note here as well that.
Hum.
About 26% of the available for sale portfolio.
Is a floating rate.
So that is going to reprice much faster certainly than than something that's fixed rate there and that's also been kind of a key component or driver to helping us.
With the deterioration in TCE and the OCI much less of an impact on Sci.
On available for sale.
Portfolio, given that about 26% of our of the F. S portfolio is floating rate.
As it relates to betas generally speaking.
You kind of go back and look to where we were back in 2018, we saw we experienced about a 20% beta work anticipating a similar level over over the cycle.
But would anticipate kind of.
Early on probably no no change in deposit rates.
And as we get later in the cycle are we would begin to kind of probably see betas, a bit higher than than than 20%, but through the cycle.
20% beta is kind of what we've what we've modeled in and that's what we've experienced in the past.
If you think about.
Today, we've got a loan to deposit ratio of 71% our target is right around 95%.
We've got excess balance sheet liquidity cash kind of representing about 8% of of the balance sheet. So we do have a pretty long runway to allow deposit rates to continue at their current levels.
But I do think that the betas are going to be a little bit harder.
Harder to predict.
In this cycle, particularly kind of given the anticipated speed of of rate increases, so, but that's where we stand today.
And our ASEAN legacy footprint I mentioned earlier.
We're in shale shale country.
He brought up as you guys know so.
We do get 15, 20 $25 million a month worth of deposits flowing into our bank.
Just by opening the doors and turn on the lights on.
It's pretty pretty.
Amazing.
To watch it but its there its very consistent it is somewhat dependent upon price of natural gas when she goes on that was up.
But we we benefit a lot from that and Dan mentioned the loan to deposit ratio.
Almost 70% range, we have a lot of room there, but we're also continue to get a significant amount of deposit for the organization and that's that's pretty much that's going to continue I mean, that's I think that's a decade multi decade.
Of benefit that we're that we're gonna have so we're aware of that as well too and that gives us the ability to have a lower deposit beta.
And it is as we've said that was a big benefit to us in the last rising rate cycle to go back to 2018, you saw the benefit that that that played out for a for us and we're hoping that to replay again as Dan mentioned, it's a little different animal this time because of the rapid increases.
That are expected to happen, but I think the same dynamics going to play.
Play out we would be one of them.
The last two to really need to go in there and start to raise deposit rates and will continue to be selective where we need to with you know certain certain customers and making sure. We're taking care of our customers, but in general I think youll see the same thing from US you saw in the last time the rates went up.
Thank you very helpful and I guess the last question for me is gonna be like you guys have a nice pipeline here.
You guys have gone through a lot of how you plan on harvesting that I'm sort of curious how our role on yields holding up nowadays and if there's any changes there.
Yeah, Dan I know you've got a slide on that you mentioned that a little bit already in terms of.
The difference between what's coming on versus what's coming off and if you want to handle that again, yeah. Yeah. So if you. If you look at slide four you can see that the the bottom the bottom graph on the left hand side.
During the quarter, we saw roll off coming off right around $3 74.
And loans coming on right around 3.33% I would tell you that yeah.
Yeah, that's that's the average for the quarter here.
Here just in the month of in the month of March we saw that about four or five basis points higher.
So right around $3 37 338.
Rolling on.
Okay Awesome. Thank you very helpful and great quarter. Thank.
Thank you.
<unk>.
The next question comes from Brody Preston with Stephens, Inc. Please go ahead.
Good morning, Dan Good morning, everyone.
Brody.
Hey, I just wanted.
To ask Dan just on the on the on that commercial that's library you go into the commercial loan portfolio mix.
Could you just.
The 64% that's variable rate you have the you have the repricing schedule there is that.
I guess is that you know like the contractual kind of repricing schedule I guess I'm trying to tease out how much of the 64% variable rate.
As floating rate in nature, meaning that it kind of repricing immediately or is that what's implied by that.
6% that's up three months there, yes, you are.
You're exactly right, but it's 46% that's that's the portion 46% of the variable rate loans will reprice within three months, that's just the repricing term.
Got it okay.
Okay.
And I didn't know I did have one follow up on the on the yield question, but it related more to your the LPR as a charterer on out or are you doing any I.
I guess is there any difference in the competitive nature of those markets. Obviously Nashville is a pretty archaic that are causing you to kind of.
No.
Maybe you have to.
Reduce here.
<unk> or except in our spreads on pricing.
Let's say the northern Virginia, when we've got the most experience with because it's been up since July of last year and my answer would be no.
It's competitive but all our markets seem to be seem to be very very competitive still early on Nashville and.
Indianapolis, but.
My expectation would be it would be similar competitiveness to what we're seeing in other parts of the footprint. When you look at Cincinnati for example, it's probably one of the most competitive markets in the country given the number of banks and good banks that are that are located there and the population base and whatnot. So I wouldn't expect.
Their markets to be more competitive I know with when I was done in Nashville for a couple of years. It was a good competitive market. Obviously, it's changed since I've been there, but I wouldn't expect it to be more competitive than any of our other markets. If it is.
We believe we would adjust probably on the price side, we wouldn't we're not going to go into those markets with a different risk appetite, we're going to keep the same risk appetite and if we did have to adjust we would adjust on price, but at this point, we haven't seen that we've needed to do that and I would be surprised if we did.
Got it and Todd I did want to follow up on that.
What you just said on the.
On the natural gas and shale customers that you have just given you know some of the upward swings in AR and natural gas prices that you see in those royalties that your customers you've seen in those fixed kind of pricing.
And do they kind of adjust at any point you know within the contracts life I'm just looking at it.
It's kind of a.
There is any flexibility in there it's a little bit of a perfect storm for you guys because you've got another source.
Outsized noninterest bearing deposit growth just from the price swings alone.
Typically what you see when the leases are.
Initially done and again these are homeowners right that we don't financer or banks.
Natural gas companies or anything like that but you know when the leases are struck theres a bonus payment that that's made and then there's the other royalty P fees I mean, the bonus payment just kind of behind it that was done a number of years ago and then they typically would have a five year or so time period is associated with that so that.
They get a chance to renegotiate it probably.
Several times over the.
The life of it.
The fracking that's going on so there could be more of an upside opportunity there, but I think what we've seen most is that it's based upon the.
B the throughput right. So it's really the amount of.
Natural gas thats being taken out of the ground multiplied by whatever that that that current prices that's going on so we see a trend up and then we see a trend down and we've been through a couple of different up and down cycles.
<unk> seen over the last eight to 10 years and I think on the low side, maybe got down as low as $4 million to $5 million a month and then we're up probably at the higher end of it now you know in the $20 million to $25 million a month range. So it moves back and forth between that but I don't expect there to be any big changes one way or the other on that.
If there are new leases that come on kind of the way. It works is they've got a drill drill within five years or they lose they lose the right to the to the lease.
A lot of the drilling companies.
I'm more focused on profitability now than they were in the past, but with natural gas prices up and the demand for natural gas kind of as a transition fuel being as strong as it is there just seems to be a lot more activity not just in terms of price going up.
But in terms of our expectations that the fracking companies are going to make are going to make more more money and I think when that happens the band owners make more money too because they get higher royalties.
Got it okay, and if I could just sneak one last one and then how much of the increase in taxable security yields was due to lower premium amortization.
Oh, that's a that's a tough one I I do not.
Front of me.
I I can't or yeah, I don't have that one.
That's okay.
I'll follow up if I feel like I really need it thanks guys.
Thank you.
The next question comes from Daniel Cardenas with Boenning and Scattergood. Please go ahead.
Good morning, guys again.
And again most of it most of my questions have been asked and answered just a just a couple of small follow ups.
As it relates to.
The $990 million.
Pipeline that you have at the end of the first quarter.
What what's your anticipated conversion rate on that and how does that compare to historical conversion rates.
Yeah, well I think with regard to the.
Let's put it on the pipeline unless we are we feel pretty confident about it.
We have a separate pipe Dream report, which is a lot bigger but the pipe pipeline report is those things that we would expect it to be a pretty high level of pull through on.
And we will do.
Chairman, we did last year in terms of it was the year before when originations like 1 billion, 7% to $2 billion or so in commercial loans. So I think when you look at that.
I think the pipe the pull through would be well above 50%.
And I would imagine I would imagine that would that would continue.
So we keep the pipeline up at $900 million and over $1 billion.
Continue to roll that through the year and you know it.
I hope that we would we would convert about 50% of that maybe maybe quite a bit above 50% of that actually.
Okay.
Just.
A quick question on the fee income the bully number that we saw this quarter how.
How much of how much of that was related to the death benefit.
Dan do you have that $1 9 million.
Okay.
Alright, that's all I have.
I'll step back. Thank you guys. Thanks, Dan Thanks.
The next question comes from Dave Bishop with Hovde Group. Please go ahead.
Hey, good morning, gentlemen.
Good morning.
Hey.
Similar to most others, Mike most of my questions been.
Asked and answered, but one follow up question in terms of the hiring outlook here I think you said you're halfway through.
Given the strong.
Production growth and a strong pipeline.
Any chance you might.
Up your your hiring targets as you move through the year from that 'twenty to get closer back to the 2021 level.
Yeah, I think you know talent you can find good talent you take take all the good talent that you can you can fine so I.
I think we feel like we're on a bit of a roll here I think some of the accolades that we got to we mentioned some of the third party accolades on things I think has helped us because it has gotten us known maybe in some markets that people didn't know who west bank, who it was.
In Nashville, Indianapolis markets like that and now they do so I'm, hoping that that continues to build and we would bring on additional inch but you would you would see the production from that rate and so we focus a lot on positive operating leverage and as long as we feel like we can get positive operating leverage.
And see that demonstrated through our hires then we would continue to do that I would like nothing more than to <unk>.
Come out a year from now and be able to say, maybe we were a little higher on a.
Salary expense than we thought, but we were significantly higher on loan growth and fee income I think that's a good story.
From a positive operating leverage standpoint.
But I think we did get some success in the first quarter because of the timing.
Associated with things, but we also are continuing to talk to a number of good people and I think we'll have.
Fleet, the rest of our hiring plan in the second third and fourth quarters.
But we're growing bank, we're growing company.
I'm not going to stop.
Stop the the teams from hiring a good person or a good team if they can come on and they can they can produce for us because I think that's in the long term best health of the of the company.
Got it appreciate the color sure.
This concludes our question and answer session I would like to turn the conference back over to Todd Carlson for any closing remarks.
Great. Thank you I appreciate everyone joining us today.
I know, we're doing more in person conferences and visits and things now than we were over the last year or two I'm, hoping to get a chance to see many of you in person. Many of you haven't met Dan Weiss, yet our CFO in person. So looking forward to doing that as well too and please continue to stay states have a good day and I appreciate your.
Interest in our story.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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