Q2 2022 WesBanco Inc Earnings Call
Good morning, and welcome to the West Banco second quarter 2022 earnings Conference call.
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I would now like to turn the conference over to John Ionone Senior Vice President Investor Relations. Please go ahead Sir.
Thank you good morning on the West Bancorp, Inc. Second quarter 2022 earnings Conference call.
Leading the call today are part of Boston, President and Chief Executive Officer.
As 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.
Missionary statements about this information and reconciliations of non-GAAP measures are included in our Orange related materials issued yesterday afternoon.
As well as our other SEC filings and Investor materials. These are.
Materials are available on the Investor Relations section of our website Wesbanco dotcom.
Statements speak only as of July 27th 2022.
<unk> undertakes no obligation to update them.
I would now like to turn the call over to Todd Todd.
Okay.
Thank you John and good morning, everyone.
On today's call, we will review our results for the second quarter of 2022.
Provided an update on our operations and perhaps 2022 outlooks.
He takeaways from our call today are.
West Banco remains a well capitalized financial institution with a strong balance sheet and solid credit quality metrics.
We continue to make appropriate strategic investments to enhance our ability to leverage long term growth opportunities while remaining focused on expense management.
The successful execution of our strategies built upon our unique long term advantages and strong credit and risk culture has positioned us well for future opportunities.
So supporting our teams as they generate very strong sequential quarter loan growth.
We are very pleased with our performance during the second quarter of 2022.
As we continue to demonstrate the success of our operational strategies implemented in the past few years.
The quarter ended June 32022, we reported net income available to common shareholders of $43 million and diluted earnings per share of <unk> 67 cents.
When excluding after tax merger and restructuring charges.
We exhibited strong expense management.
Operating expenses have remained roughly consistent the last few quarters and our capital position remains strong and continues to provide financial flexibility.
Enhancing shareholder value through effective capital management, which includes the appropriate balancing share repurchases dividends and M&A.
Well M&A is still not a major focus for us we remain opportunistic and if we found the right opportunity at the appropriate price that fit our well defined strategy, We would act upon it.
The key story this quarter was the strength of our balance sheet as we demonstrated year over year growth in both total deposits, which increased five 3% when excluding certificates of deposit.
And total loans, which increased three 8% when excluding SBA PPP loans.
Furthermore, we reported very strong sequential quarter loan growth of nearly 22% annualized it was broad based across our markets and loan categories.
This strong growth demonstrates the successful execution of our expansion into higher growth markets, including Kentucky and Maryland.
Ability to hire top tier commercial and mortgage loan officers across our footprint.
The growth in our residential loan portfolio reflects both our efforts to retain more loans on our balance sheet. During the first half of the year and continued relative strength in originations.
Total commercial loan growth, which was 21% annualized was driven by both our commercial real estate and C&I portfolios.
We continue to see good production from our commercial lending teams based upon a record commercial pipeline of $990 million at March 31.
Commercial teams generated gross loan production of roughly $740 million during the second quarter.
C&I line utilization, which has improved slightly to approximately 37% is still roughly eight percentage points below our historical range.
Well, we do not anticipate similar sequential loan growth. The next few quarters. Our teams continue to find new business opportunities, which has helped our commercial pipeline remained relatively strong at approximately $825 million as of June 30, with roughly 30% of that pipeline in Kentucky in Maryland.
That said, we remain committed to our mid to upper single digit growth target over time, as our recent strategic investments and lenders and loan production offices begin to generate positive operating leverage.
In addition, we.
We continue to invest in our residential lending programs, which we have built for long term sustainable growth.
We did not overstaff during the refinance boom in the last two years in fact, we continue to make strategic hires across our footprint as our residential mortgage team easily served the refinance demand and then pivoted to home construction and purchases, which accounted for approximately 90% of our second quarter originations.
While many other residential mortgage providers as opposed to significant decreases in originations and subsequently adjusted their operations. Our strong team has resisted the national trends.
Our team originated $328 million of mortgages during the second quarter, which was a 21% increase from the first quarter and comparable to the level of a year ago.
Our residential mortgage production should remain relatively strong in the near term based upon our quarter end pipeline of approximately $170 million.
Our hiring efforts.
During the first half of the year.
We've added 11 mortgage loan officers, including two strong leaders and our new Indianapolis and Nashville offices will be building a high quality teams over the next few months.
I'd like to provide a quick update on the strategic investments, we have been making which we are funded through discretionary expense control and managing our financial center footprint.
As of today, we have accomplished our plan to hire an additional 20 commercial lenders with the hiring of 14 during the first six months and an additional 10 that will start with us over the coming months.
Further we continue to be tactical with hiring additional top performers as opportunities arise.
New loan production offices in Cleveland, Indianapolis, Nashville in Northern Virginia are being well received.
As they continue to build our commercial and residential lending teams, we look forward to their contributions to our loan growth and operating leverage in coming quarters.
As I've said previously our focus remains firmly on organic growth potential within our markets, but we will carefully balance the risk reward proposition between both growth and credit quality.
We 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.
We believe that the strong foundation, we have developed supported by our unique long term advantages positions us well for future opportunities.
Yeah.
I remain extremely proud of our entire organization as our employees continue to live and breathe, our better banking pledge as they strive daily to provide top tier service to our customers.
Their efforts through the past year, which included our core banking system conversion.
I just received numerous national accolade, so far this year.
Following closely are being the only midsized bank in the country to received top honors for both employee satisfaction and financial success as well as being named one of America's most trustworthy companies and being voted one of the world's best banks by our customers.
We're honored to be recognized by our customers for our trust and service.
What spinnaker was privileged to have recently been voted the number one bank in Ohio, and then number two banking Kentucky. These.
These rankings were based on customer satisfaction and feedback as we received strong scores across the survey, including high scores for trust.
Branch services and terms and conditions.
Customer service.
Digital services and financial advice.
Top rankings are a strong testament to the outstanding efforts and dedication of our employees.
I'd now like to turn the call over to Dan Weiss, our CFO for an update on our second quarter financial results and outlook for 2022.
Thanks, Todd and good morning.
During the quarter, we recognized strong sequential quarter loan growth robust residential mortgage originations are solid deposit base that grew year over year and nice improvement in our net interest margin, while maintaining discipline over expenses, we continue to make important growth oriented investments to support long term loan growth and we.
Additional margin improvement as the recent fed rate increases begin to impact interest income on earning assets.
As noted in Yesterdays earnings release in the second quarter, we reported improved GAAP net income available to common shareholders of $40 3 million and earnings per diluted share of 67 cents.
And net income up $81 8 million and earnings per share of $1.34 for the six month period.
Excluding restructuring and merger related charges results for the three and six months ending June 32022 were 67, and $1 36 per share respectively, as compared to $1 36, and $2 nine per share last year, respectively.
It is important to note that the second quarter of 2021 was favorably impacted by a negative provision of $16 6 million net of tax or 25 cents per share and the first six months of 2021 were favorably impacted by a negative provision of 39 million net of tax or 58 cents per <unk>.
Sure.
Total assets of $16 8 billion as of June 32022 included total portfolio loans of $10 2 billion and total securities of $4 2 billion total securities increased seven 7% year over year due mainly to excess liquidity related tour customers higher personal savings.
Loan balances for the second quarter of 2022 reflected strong performance by our commercial and consumer lending teams and efforts to keep more one to four family residential mortgages on the balance sheet, partially offset by the continuation of SBA PPP loan forgiveness.
As Todd mentioned the real story this quarter was the broad based loan growth, we generated on a quarter over quarter basis as of June 30th 2022, total portfolio loans. Excluding P. P. P loans increased three 8% year over year due to strong growth in real estate loans.
Further total loan growth on a sequential basis, a five 4% or 21, 8% annualized was broad based and reflected the strength of our lending teams and markets.
Strong deposit levels remain a key story as total deposits, which did decrease sequentially increased year over year to $13 6 billion. Despite CD run off of $379 million.
This growth was driven by total demand deposits, which represent approximately 59% of total deposits as well as growth in savings and in fact noninterest bearing deposits represented a record 35% of total deposits as of June 32022.
The net interest margin in the second quarter, a three point O, 3% increased eight basis points sequentially, which reflects the 125 basis point increase in their federal funds rate during the last three months as well as our successful deployment of excess cash through loan and securities growth.
We're especially pleased with the quarter over quarter increase in our core margin from 2.81% to $2, 93%, which excludes purchase accounting accretion of eight and six basis points and SBA PPP loan accretion of seven and four basis points respectively.
This 13 basis point improvement was greater than anticipated due to the 125 basis point increase in the fed funds rate during the second quarter compared to our prior expectation of 75 to 100 basis points of increase.
The margin improvement was also driven by deploying excess cash to support our second quarter loan growth.
To the rising rate environment that we experienced during 2018, we're beginning to see the pricing advantage of our robust like can see deposit base.
Our total deposit beta on a year to date basis was a negative 3% as compared to the 150 basis point increase in fed funds rate. So far this year, while still in the early stages. We believe this bodes well for us in the coming quarters as we should be so again lag rising deposit rates.
For the second quarter of 2020 to noninterest income of 27 billion was down $9 1 million year over year, due primarily to lower mortgage banking income, which decreased $6 5 million and a $1 3 million dollar net loss and other assets, which compared.
Two of $4 million net gain in the prior year period.
While mortgage originations of $328 million were roughly flat to the year ago period as well its up 21% sequentially mortgage banking income was lower as we retained 80% of production on the balance sheet due to customer preferences for adjustable rate products as well as construction, which are not available.
Into the secondary market.
The net loss in other assets reflects the change in the fair value of underlying equity investments held by West Banco Community Development Corporation compared to a net gain on the same investment in the prior year period.
And lastly, it should be noted that the net securities losses reflected a $1 $2 million loss on equity securities in the deferred compensation plan, while at the same 1.2 million reduces employee benefits expense to reflect the decline in the obligation to the plant.
Turning to expenses during the second quarter, we continued to diligently manage our discretionary expenses and financial Center network in order to make important growth oriented investments to support long term loan growth.
Excluding restructuring and merger related expenses noninterest expense for the three months ended June 30th 2022 totaled 87 million, a five 3% year over year increase and a one 2% increase from the first quarter of this year.
Salaries and wages increased $3 8 million or 10, 1% compared to the prior year due to higher salaries expense related to.
Normal merit increases and the hourly wage increase that we implemented last year lower deferred loan origination costs and higher bonus and stock option accruals and as I mentioned employee benefits included a $1 $2 million credit related to the deferred compensation plan, which is offset in net securities losses.
Despite slowing down share repurchase compared to the prior two quarters, we continued to return capital to our shareholders through the repurchase of approximately $1 1 million shares during the second quarter. In addition to the quarterly shareholder dividend going forward, our capital position remains strong and combined with approximately.
Currently one 8 million shares remaining under the existing share repurchase authorization.
Will allow us to be opportunistic on future share repurchases subject to pricing levels volume restrictions and future share repurchase authorizations.
As of June 32022, we've reported tier one risk based capital of $12 four 9% tier one leverage of $9 five 1% CET one of 11, three 1% and total risk based capital of $15 four O percent as well as tangible common equity to tangible assets ratio of seven.
Five 8%.
Now I'll provide some thoughts on our current outlook for the second half of 2022.
We remain an asset sensitive bank and currently modeling fed funds to peak at three 5% in the fourth quarter and hold steady through 2023 generally speaking we expect the 125 basis point increase in fed funds in the second quarter to benefit the third quarter margin by approximately 25.
Five to 30 basis points or roughly five basis points for each 25 basis point hike.
In the fourth quarter and thereafter for each 25 basis point rate hike. We currently model the quarterly net interest margin to benefit between two and four basis points per hike as deposit pricing begins to move.
We expect purchase accounting accretion to be five to six basis points per quarter and lower P. P. P accretion offset by improvements in earning asset yields as rate increases continue to make an impact.
As I mentioned, we expect a low deposit beta benefit from our core deposit funding base to provide similar benefits in a rising rate environment. This year and anticipate our betas to be lower compared to peers as they have performed historically.
Further we see opportunity in the coming quarters to remix the balance sheet by reinvesting cash flows from the securities portfolio into higher earning loans.
Residential mortgage originations should remain strong due to our new loan production offices in northern Virginia, Nashville, and Indianapolis as well as our hiring initiatives supporting our pipeline. However production will remain.
At lower levels than the record volumes realized during 2021, while it's dependent on origination production, we expect to move over time to selling approximately 50% into the secondary market subject to customer preferences and pricing.
Trust fees, which were impacted by fluctuations in the equity and fixed income markets 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.
While we maintain our diligent focus on discretionary expense management, we are not immune from the nationwide inflationary pressures as well as the need to attract and retain employees as expected the biggest impact from inflation and our strategic investments will primarily be reflected across salaries and wages.
Floyd benefits occupancy and equipment.
In addition to our hiring of commercial and residential lenders. We are implementing an increase in the minimum hourly wage for our employees during the third quarter that will add approximately 600000 per quarter above and beyond a more normal merit pool.
Based on these efforts to strengthen our employee base for long term growth combined with normal merit increases implemented this summer higher seasonal health care and occupancy expenses. We currently anticipate a similar quarter over quarter increase in operating expenses from second quarter to third quarter as we incurred last year.
Got.
In the 6% to 8% range.
The provision for credit losses under Cecil will depend upon the changes to the macroeconomic forecast in qualitative factors as well as various credit quality metrics, including potential charge offs criticized and classified loan balances delinquencies and future loan growth.
In 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 rates and other macroeconomic factors, including increases in interest rates and inflation expectations.
Lastly, we currently anticipate our full year effective tax rate to be between 18, and a half and 19, 5% subject to changes in tax legislation deductions and credits and taxable income levels.
We are now ready to take your questions. Operator would you. Please review the instructions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Our first question will come from Karl Shepherd with RBC capital markets. Please go ahead.
Good morning, Hey, good morning, everybody.
Good good.
I guess I wanted to start here on loan growth. It was obviously, a very strong quarter for you guys.
I heard the commentary around moderating a little bit next quarter, but can you help unpack that a little bit.
I'd, just like to drill down to on a kind of potential for further increases in line utilization.
Kind of the mix of mortgage production going forward grants that come on the balance sheet and then some of the CRE payoffs and new hires as well.
The CRE payoffs have moderated as we would've expected, but they were pretty high we know when rates were lower you know the second third and fourth quarters of last year.
Second quarter of this year was $100 million. They went to the secondary market and we think $85 million to a $100 million is kind of a normal quarterly run rate for us I think the rate increases.
So that down a little bit things go into the secondary market plus I think the heavy amount going into the secondary market kind of pulled things.
I guess forward into last year, so I think that $100 million rate going forward, it's probably not a bad bad right to be looking at to get more normalized utilization.
<unk> C&I is up and we mentioned in our commentary still about a.
8% or so below where we think it's more normalized so we think there's some upside.
They're obviously, if we hit a recession that could impact it a little bit, but we think in a normalized environment theres the ability to go up.
To another 8% there.
And I.
I think with regard to the residential mortgage we do we did put more on the balance sheet.
Partly because of you know as rates went up the people wanted arms and there were a lot of construction lending that was going on and that tends to stay on our balance sheet, but we expect that and we're already seeing that start to move back down towards a more normalized 50% range now that may take a couple of quarters to get completely back to.
But it's not our plan to put 80% of our production on our books I think longer term youre going to see us return back to where we were in that probably 50% to 60%.
Range of of.
What's being put on our books. So we haven't changed our model. There. It was just we decided to put more on for awhile and customers wanted construction and and arms as rates started to go up long term you know, we've really been working to build towards and we were happy to see the commercial loan growth that we had in the second quarter. We know people have been waiting for that.
We really think that to five you know kind of mid to upper single digit five 7%, 8% range long term is kind of where we think the organic growth rate is for our company that's in a normalized environment.
And Curt will look at any any one quarter it might have a quarter. That's that's not great in a quarter, that's really really excellent, but when you look at it that average unit over time, we think we've really tried hard to do is position the company from historical kind of low to mid single digit grower up to a mid to upper single digit grower with the app.
Acquisitions in Kentucky, and the acquisitions in the Maryland market, there were a higher growth rate companies. So.
So we feel that's materializing now and that was part of the plan and that's why we went to those markets, we really didn't see a tremendous amount of production.
<unk> from some of the new hires yet because they they came out of what we got 10 10 commercial lenders coming on this quarter.
And then the other commercial lenders that we brought on another 14 or so in the first six months of the year. Some of them are starting to produce but you know, they're just getting ramped up right now so I wouldn't say that.
The large loan growth in the second quarter was due significantly to new hires I think it was just due to market dynamics and the strong pipeline that I saw their peers with similar type of results.
So I'm really looking forward to the lift we're going to get with the new hires that have come on board. Another mortgage loan originators really good leaders on the residential mortgage side that was hired in Nashville, and Indianapolis and we think that's going to bode well for the just the long term trajectory of organic growth, which again I would like to think we'd be in the mid <unk>.
Upper single digits, but that's going to depend on the economy, that's going to depend upon a lot of things.
But in a normalized environment, that's where we'd expect to be.
Yeah.
Okay. That's helpful. And then maybe one for Dan and I'll step back, but I know you touched upon this in the prepared and it sounds like kind of five basis points of margin benefit from each hike right now.
Could you just kind of reiterate when that trails off to two to four and kind of are you seeing any indication of that or is that just kind of your.
Base assumption going into kind of a higher rates higher rates.
Yeah. So I would say you know the five basis points per 25 basis point rate hike.
It would be more related to.
The hikes that occurred in the second quarter as those are fully reflected.
In our loan pricing.
We expect to see those then kind of translate into interest income and margin improvement in the third quarter.
So theres those hikes that occur in the third quarter and currently we're projecting.
75 basis points today and another 50.
Timber those hikes.
It really take effect in the fourth quarter, just given the fact that most of our about 50% of our variable rate loans re price.
Every three months so when those hikes take effect, we expect by the time, we get to that fourth quarter. When we talked in prepared commentary about a two to four basis point margin improvement for each 25 basis point rate hike and not more related to the fact that we do expect deposit cost to begin to impact.
To begin to rise and impact that.
The incremental improvement in margin as we go forward.
Okay. Thanks for the help.
Yeah.
Our next question will come from Steve Moss with B Riley. Please go ahead.
Yeah.
Good morning, Steve.
Good morning, maybe just starting off.
Maybe just start off.
On the deposit side curious.
How you guys are thinking about deposit betas.
Obviously it thank you.
Not much in terms of sensitivity in the short term but.
Maybe how you guys are thinking about it as kind of moderate moderate your expectations for asset sensitivity with later rate hikes.
I'll start off and then I'll, let Dan Dan jump in too we've got obviously very low deposit beta we saw that through the last rate hike cycle in last several rate hikes cycles quite frankly.
This one's a little different right because rates are going up really fast. So it's kind of hard to look back at prior cycles and expect things to repeat the same way I think everything is going to get accelerated a little bit.
But we would still anticipate.
Lagging.
The markets, but probably.
<unk> not been able to like forever, obviously, because we're going to be impacted by the same thing everybody else is we really didn't see much of any.
Deposit.
D non CD run off between the first and the second quarter.
$120 million or so, but what happened that was just one big customer that's rate sensitive that's in and out periodically.
So really not any material change in deposit.
Declines, but we're watching it alright, so we're watching it real close I think historically, we would've taken multiple quarters.
Before we thought we would need to raise at all and we may need to move sooner than that.
But you get 75, or 100 basis points today and more more rates rate increases down the road, but we're gonna wait were going to wait and see until it starts to impact of the balance sheet, a little bit until we've got the luxury to do that with all the shale related deposit flows in natural gas prices hitting records and I mean, we've got an abundance of deposit flows.
It is up into the organization. So we can afford to be patient.
But we're not immune so we know we'll have to address it over time, Dan anything you'd add.
Thank you I think you covered it I mean deposit costs increased just one basis point from first quarter second quarter, so really not seeing much there.
Given we are projecting fed funds to peak at $3 50.
So that would be 325 basis points of increase effectively in 2022, and if you were to just use a simple algebra.
Apply a 20% beta to a 325 basis point increase.
That's about a 65% increase in cost deposits when.
When that takes effect.
Yeah.
As you said it could be.
Over some some longer time horizon.
Okay, I appreciate that color and maybe just.
Following up on the deposit inflows from shale.
Curious you know with natural gas running nine Bucks you know how strong are those deposits. These days.
Yeah.
They've typically been as high as <unk>.
15% to $25 million in a quarter when rates are up when rates are low maybe maybe $4 million to $5 million. So we're in the upper upper range of that right now with.
<unk>.
With with where natural gas prices are right now so $15 million to $25 million a quarter.
Okay, and then just on loan growth here I'm curious.
Where you know what.
I'm sorry on loan pricing, just curious where was loan pricing this quarter and what are you seeing now given all the rate volatility.
Yeah. So.
If you look on I believe it's slide six you can see that we are weighted average rate for loans put on the books here in the second quarter was $3 seven 8%.
If you.
Look at just what was put on in June we came in right around four point of 2%.
So we're continuing to see that the increases and of course.
We're pretty optimistic about.
The direction, obviously with the rate increases we do have.
As well about $2 $2 billion of loans that are.
Reprice every three months as I as I mentioned thats about a half of our variable rate.
Portfolio.
And those also repriced upward about 80 basis points here in the second quarter and would expect those to continue to reprice as as we see rate increases.
Yeah.
Okay great.
That's very helpful and just one.
One last thing in terms of just on unexpected here I'm, sorry, if I missed it but did you guys provide an expense outlook for the third quarter.
We did we said in the prepared commentary about 6% to 8%, which is pretty consistent with what we experienced last year moving from second quarter or third quarter, there's quite a bit of seasonality there.
Pretty normal things like that.
75% of the carve the increase really is related to investments in people, so employee salaries and wages employee benefits.
Salaries for example are going to be impacted this year by just the normal merit increases I mentioned in my.
Our prepared commentary, we're expecting about a $600000 quarterly increase from minimum wage increase across all of our markets.
And that's kind of above and beyond the typical.
<unk> pool.
We've also got a number of.
Revenue producing hires in the second quarter that weren't fully baked in to the second quarter that will impact third quarter and then we've got a number of hires coming in revenue producers in the third quarter.
Which obviously are not in the second quarter. So.
Theres also an extra day in the third quarter and that adds about a half a million dollars. So just that alone and then you look at employee benefits. The one thing I would point out there are employee benefits as I mentioned in the prepared comments.
<unk> included a $1 $2 million credit one it's related to our deferred compensation plan as the equity securities were down that credit runs through employee benefits. So if you were to normalize employee benefits.
In the second quarter, you would add that $1 2 million back to.
The expense run rate so between that and then just kind of seasonally higher.
Health care expenses that just something we've seen on a historical basis third quarter tends to be the highest quarter on healthcare just based on the timing of employee deductibles. So those those items are really the drivers of the call. It 6% increase and then I would just add and this is a little smaller number here but.
Net occupancy had about $600000 in kind of nonrecurring credits. So you know.
I would I would probably add 600000 back there as well.
Okay Awesome appreciate all the color. Thank you very much guys. Thank you.
Yeah.
Again, if you have a question. Please press Star then one.
Yeah.
Our next question will come from Catherine Mealor with <unk>. Please go ahead.
Hey, good morning, how are you good.
Good morning, great.
Wanted to just go back to Steve I don't know if you provided any commentary on your fee guidance, but just curious how youre thinking about the outlook for the back of the year. It seems like service charges have been read.
Bounding, but obviously you've got some other headwinds, but just how youre thinking about the.
Thank you.
Yeah. So.
These are very much dependent upon.
Trust fee income.
And that's going to be dependent on the equity markets.
So yeah that that'll be very much dependent on kind of where things ended up that was a very difficult to predict I would tell you that.
Relative to the first quarter first quarter typically is higher than any other quarter, just because we've got about $700000 or so in tax preparation fees.
I would say.
If we expect the equity markets to continue at the pace of rate where they are at we would expect probably trust fees to be in a similar range to where they were in the second quarter I think the other service charges on deposit electronic banking fees expect those to be pretty pretty consistent.
Third to the second quarter and the other big.
Big item would be mortgage banking.
Income, we retained 80% of production here in the second quarter.
And that's very much dependent on customer preferences and in pricing and as Todd mentioned.
That's very much customers today seem to really be interested in those adjustable rate products.
We had you know of our production.
$328 million that was about 42% of that was construction.
So construction can be sold into the secondary market.
And then there was like I said, a lot of adjustable rate products, which generally are sold into the secondary market. So some of it has to do with customer preferences.
Yeah, we would like to see we'd like to eventually kind of get back.
Back to that 50, 50, or 60 40 mix that we've kind of.
Historically run out but.
But right now, we're just kind of taking what the market gives us and.
Today, it's a little bit heavier on the portfolio side.
Yes, we're benefiting on loan growth and the interest income that that kicks off of that so.
I would say.
We don't give really forward guidance on this but given given the trends I would I would expect mortgage banking income to be pretty similar to second quarter, maybe a little higher.
So I think I think that's great.
Yeah.
Yes that makes perfect sense, okay, great and then I kind of reserve you have seen some continued releases of the reserve over the past couple of quarters.
Where do you think you ended out at what point you may have to start increasing or is there just given kind of the macro environment any.
Or you can give us on what your cash scenario weightings look like today under Cecil.
Yeah, Dan get into the details on that.
We had quite a bit of loan growth in the second quarter and we.
We would have had much more of a reserve release had it not been for that loan growth, which is good I like the loan growth is likely to continue that to happen in reserve for that.
But we saw improving.
Factors that really really helped across the board in our portfolio, which would have indicated a pretty healthy reserve release.
But then the loan growth pretty much offset that which is good.
Which is which is good.
Kind of a color yeah. The only the only thing I would add just you can see there's a nice waterfall on slide nine that kind of shows the moving pieces.
As you can see a pretty.
You know a nice decline in the qualitative factors as Todd mentioned, most mostly related to Covid type.
Items, hospitality et cetera, seeing improvement, there, which is great great to see.
And as Todd mentioned kind of the offset to the improvement there with second quarter loan growth.
As well as we did add in kind of some deterioration in the macroeconomic factors, particularly the unemployment. So we're taking a slightly more negative view on unemployment in the baseline forecast. So baseline forecast today are kind of projecting unemployment to be around three 6%, let's call it and we.
We waited in a slightly more negative forecast gets us up around 4% or so so that was kind of the other the other piece and effectively the two.
The two offset to end up with kind of a pretty consistent reserve around $117 million.
<unk> did I imagine other banks to say the same thing too I mean, we're at 1.15.
You know if you want to put the marks you know from other acquisitions I think that's another 21 basis points, Oh, you're getting down to pretty low levels right. So I think that the big reserve build and then the Big Reserve release, I think we're nearing the end of that and particularly if we have decent loan growth, which I would expect.
And.
Probably not going to be.
The reserve release position, I wouldn't think norton or nor with many others.
And when you say if you look at the seasonal build is more of that impacted by the changes in unemployment versus GDP. It feels like today sounds like negative GDP decline.
You'll probably see that unemployment is still uncertain, whether we're going to start to see that.
Is that a fair assessment.
Yes, the primary driver of our seasonal reserve is unemployment GDP.
Theres not a significant factor, it's a consideration, but it's unemployment is the primary driver of the quantitative model.
Okay. That's great alright, Thank you and also congrats to you Todd on your retirement.
Oh. Thank you I appreciate that I'm excited to have Jeff come on board, we'll have them sitting in on some earnings calls in attending some some visits and.
Yes, I'm excited I'm excited to get them on board here and.
Looking forward to the next phase of my life will have a.
A nice overlap of a year year and a half or so so we'll be working together pretty closely.
Great Guy great background and.
No no change in strategy or plans you will just continue to move along.
Alright, very good looking forward to working with them great. Thanks, great quarter.
Thanks.
Our next question will be Manuel none of us with D. A Davidson. Please go ahead.
Good morning.
Alright, I just wanted to.
I just wanted to think a little bigger picture.
If rates.
Rates are at $3 50 by year end.
What would be the timing for kind of a peak NIM given your beta assumptions is that kind of first half of 'twenty three.
And I know that good backup assets will still be repricing up.
Just kind of your thoughts on that concept.
Yes, so oh.
Again.
Try to not to give too much forward guidance here, but.
Yeah, I would say a NIM peak would probably be may.
Maybe more back half of 'twenty three.
If you know, but there's so much uncertainty and there's so much movement in rates.
Kind of who knows what's going to happen between now and.
At the end of the third quarter, let alone the.
The back half of 'twenty three so thats.
I mean, if everything moves steady steady as she goes I think we I think we would see kind of that it would be more back half of 'twenty, three where we will see.
Peak in them.
Yeah.
That makes sense and this is also assuming that $3 50 stays across 23.
Who knows what can happen there.
And then this next question might be a little tougher to us.
How should we think about the new hires that are coming on in the back half of this year, what you've already done so far this year on the unexpected.
Can you kind of give a framework for expense growth I guess, it's hard to get too specific without giving an exact guidance, but kind of how should we think about new hires coming in and expense growth next year.
Yeah.
Dan May add some additional on this as well too.
You know we want to again be in that mid to upper single digit loan growth rate longer term. So having key hires in key places is going to be important to us but.
We're also doing a lot of top grading right. So we've got Underperformers and markets were addressing those two.
It's not going to offset all of the increase but it'll offset a good portion of the increase in additional people coming onboard so more I guess more more production per dollar of FTE, which drives positive operating leverage is a big focus of that so you know with some of the heavy hires in <unk>.
Some of the higher growth markets I think they would they would tend to be strong producers for us. So.
Again, the key there is positive operating leverage we'd recognize you can't you can't just stay in a flat expense environment forever and expect to grow your bank and I think people you know they want to see growth out of west Banco we want to see growth as well too. So it's needed investments that would take place. So I would expect the United Dan mentioned earlier.
You'll see the increase.
In the third quarter as people come onboard and those that were in the second quarter.
Will be onboard for a full quarter in the third quarter, but that again should be more than.
Offset by the additional additional revenues.
I would say that the hiring plan that we had in place again higher 2025 commercial lenders I mean, we're basically there so you're not going to see an additional 25 hired in the next six months and things like that.
We kind of got to where we needed to get to but we will continue to hire one there one here, particularly in the <unk> as they as.
As they build as they build out the lenders when we bring them on board again, a lot of them have non solicits for a year or so we want them to respect that.
And they'll still be bringing business then obviously in the markets, but then they would really start to accelerate in the second year of that residential mortgage originators, a little bit differently. They tend to they tend to start producing a lot more quickly.
And given some of the hires we did in northern Virginia, a year ago and some of the other.
Markets, they're already producing and I.
I think that's what our plan was even though the market may soften for residential mortgage our hope would be to outrun that.
Through additional hires.
So that we'd be able to stay flat on on residential mortgage loan production.
Even though the market's down 25% or 30% were not because of the additional hires we've made and that was very much part of the plan. So I think you've seen an influx of talent.
We'd like to continue to add more talent over time, but not at the levels that we did in the first six months steps that's not our that's not our plan Dan would you add anything else to that I think you've covered it well okay.
Thank you very much.
Thank you.
There are no remaining questions at this time and with that we will conclude our question and answer session I would like to turn the conference back over to Todd Clawson for any closing remarks.
Great. Thank you I appreciate everyone's time today and hope you guys are all staying healthy and Dan and I and Jeff and John .
We will all be out in some of the conferences coming up here in the fall and winter months and looking forward to getting a chance to see each other in person again. Thank you have a great week.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.