Q1 2023 WesBanco Inc. Earnings Call
Good morning, and welcome to the West Banco Incorporated's first quarter 2023 earnings conference call.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to John <unk>. Please go ahead.
Thank you good morning, and welcome to Wesbanco, Inc. 's first quarter 2023 earnings conference call.
Leading the call today are Todd Clawson, President and Chief Executive Officer, Jeff Jackson, Senior Executive Vice President and Chief operating Officer, and Dan Weiss.
<unk>, 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 Wesbanco Dot com.
All statements speak as only April 25th 2023, and West Banco 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 will review our results for the first quarter of 2023 and provide an update on our operations and current 2023 outlook.
He takeaways from the call today are.
Solid financial performance demonstrated by loan growth and discretionary cost control.
Key credit quality metrics have remained at low levels and favorable to peer bank averages.
We remain well capitalized with solid liquidity and a strong balance sheet with capacity to fund loan growth.
And we are well positioned for near term success, while continuing to make appropriate long term growth oriented investments.
We're pleased with our performance during the first quarter of 2023.
We demonstrated the earnings power.
Capital.
Liquidity, they're performing well amidst a quarter of broader industry volatility driven by financial institutions with different operating models than ours.
We reported loan growth, while maintaining credit quality and delivered solid pre tax pre provision net income.
We diligently manage discretionary cost, while making appropriate investments to build upon and enhance our strong markets teams and core advantages.
And we remain focused on ensuring a strong organization with solid liquidity and a strong balance sheet.
For the quarter ending March 31 2023.
We reported pretax pre provision income of 13, 2% year over year and net income available to common shareholders $42 3 million with diluted earnings per share of <unk> 71 cents when excluding after tax merger and restructuring charges.
On a similar basis the strength of our financial performance. This past quarter is further demonstrated by our return on average assets of one point or 1% and return on tangible equity of 13, 5% and our capital position continues to provide financial and operational flexibility.
While Jeff will discuss our loan growth. It is important to highlight the strength of our credit underwriting and overall conservative risk culture.
We did not chase loans or take undue risk just to report growth. We're focused on long term sustainable growth through all economic cycles.
We're achieving our strong loan growth, while maintaining our credit standards.
Again this quarter, we reported key credit quality measures. They continue to remain at low levels and favorable to all banks with assets between 10 and $25 billion.
Total loans past due as a percentage of total loans were 16 basis points down more than 50% from last year.
Nonperforming assets as a percentage of total assets have ranged from just 21% to 26 basis points the first quarter of 2020.
Lastly, criticized and classified loans as a percentage of total loans were one 6% down 208, and 74 basis points year over year and quarter over quarter, respectively.
In fact, this is the lowest level in nearly four years jetblue.
Jeff will now provide an update on our key first quarter operational topics.
Thanks, Todd we continued to effectively execute our strategic business plans as evidenced by our solid loan growth across all markets disciplined expense management and excellent credit quality reported for the first quarter.
I am pleased that the strength of our markets and lending teams combined with our L. P. O strategy continues to meet our expectations as we demonstrated total loan growth of 11, 9% year over year and 7% annualized when you compare it to December 31 2022.
Residential real estate loans continue to benefit from the retention on the balance sheet of approximately 70% of the one to four family residential mortgages originated.
Total commercial loan growth reflects the strength of our teams in markets, which we have enhanced through our hiring efforts over the past two years for.
For the first quarter total commercial loan growth was 9% year over year and 4% annualized sequentially.
Yeah.
Briefly I would like to provide some comments on the high quality of our office space loan portfolio.
Outlined on slide five of the supplemental earnings presentation.
The portfolio, which represents just 4% of the total $10 9 billion dollar.
Loan portfolio is very high quality with more than 96% of the loans in paas.
Risk categories and no nonperforming loans. The average loan size is roughly 1.5 million average LTV is 62% and the average debt service coverage is one eight times the portfolio is geographically diverse across our six state footprint and located predominantly in suburban markets.
Our commercial loan pipeline at March 31 was $1 1 billion, an increase of approximately 25% since year end as our teams continue to find business opportunities to replenish the pipeline.
Our newer markets in Kentucky, Maryland account for roughly 30% of the pipeline why are L. L. P O's and Cleveland Indianapolis, and Nashville are contributing approximately 13%.
Importantly, we have ample liquidity sources to fund loan growth.
Our deposit granularity as evidenced by our average deposits account size of $27000 reflects the trust our customers have in our 150 year heritage as a community bank.
Our loan to deposit ratio of 83, 5% provides us with ample lending capacity to support our customers as they grow.
In addition to $600 million of cash on our balance sheet as of March 31st normal remix from our securities portfolio to the loan portfolio can cover approximately 4% loan growth.
And not to mentioned cash flow from the normal low maturities and P&I payments.
While the core funding advantage of our legacy markets continue to contribute approximately $25 million a quarter, we have implemented several initiatives to help drive additional organic deposit growth.
Albeit at potentially lower cost than peers located in the major metro markets.
Through the last few years, we have executed a strategic transformation of our company into an evolving regional financial services institution with a community bank at its core.
We have done this through successful expansion, while adhering to our foundation of expense control risk management high credit standards and a strong workforce equipped with the skills to drive success.
And we will continue to adhere to that strategy as we continue to evolve.
Similar to our hiring strategy. The last couple of years, we still do expect to hire additional commercial bankers, primarily C&I this year.
We believe that continuing to add top tier talent across our robust and diverse markets is a key to our long term success.
However, we will proceed cautiously as we monitor the operating environment and will adjust our plans as appropriate.
We also expect to fund these new hires through internal efforts, including the adjustment of existing banker staffing levels.
In summary, we have distinct growth strategies with unique long term advantages balanced distribution across economically diverse major markets and a strong customer service culture combined with robust digital services that enable us to deliver efficient solutions, when where and how our clients need them.
We are focused on strengthening our diversified earnings streams for long term success with new capabilities and strategies. My transition continues to go well and I enjoy working with Todd and the team.
Back to you John .
Thanks, Jeff.
Well, what's Banco continues to be acknowledged for its soundness profitability employee focus and customer service as it continued to receive numerous national accolades over the last few months.
For the 13th time since 2010, we were named one of America's Best banks for strong capital credit quality and profitability.
For the third consecutive year, we were voted by our employees as one of the best midsize employers.
We provide an environment where employees feel valued and are provided avenues for success, while encouraging as strong customer centric focus that ensures a sound and profitable financial institution for our communities and shareholders.
I'd like to once again congratulate our entire organization as we continue to deliver large bank services with a community bank feel while providing our customers with top tier service.
Their efforts earned us for the fifth consecutive year the recognition as one of the best banks in the world based upon customer satisfaction.
We received strong scores from our customers for customer service digital services satisfaction and financial advice.
I'd now like to turn the call over to Dan Weiss, our CFO for an update on the first quarter results and our current outlook for 2023 Dan.
Thanks, Todd and good morning.
As presented in Yesterdays earnings release during the first quarter, we reported improved GAAP net income available to common shareholders of $39 8 million and earnings per diluted share of <unk> 67 cents, excluding after tax restructuring and merger related charges net income and earnings per diluted share for the first quarter were $42 3 million.
71 per share respectively, as compared to $42 9 million and 70 cents last year, respectively. It.
It is important to note that the first quarter of 2022 was favorably impacted by a negative provision of $2 8 million net of tax or approximately <unk> <unk> per share as compared to a provision increase during the first quarter of this year of approximately <unk> <unk> per share.
Therefore on a pretax pre provision basis income improved by 13, 2% year over year.
Total assets of $17 3 billion at the end of the quarter included total portfolio loans of $10 9 billion and securities of $3 7 billion.
Total portfolio loans grew both year over year and sequentially, reflecting the strength of our markets and lending teams as well as more one to four family residential mortgages retained on the balance sheet.
Reflecting the uncertainty in the economy average first quarter C&I line utilization was 32, 5% a year over year decrease of approximately 350 basis points or $25 million.
Overall, our deposit levels and recent trends reflect granularity and relative stability of our deposit base, which can be seen on slide six of the earnings presentation.
Total deposits have been impacted by interest rate inflationary pressures and the federal reserve tightening actions to control inflation, which has resulted in industry wide deposit contraction.
Core deposits were down approximately $360 million in January before remaining relatively flat through February and March.
Total deposits at the end of the first quarter were $12 9 billion down 2% or $260 million when compared to December 31, 2022, which also includes $140 million in shorter term broker deposits.
Other our demand deposits continue to represent roughly 60% of total deposits, while noninterest bearing deposits were 35% of total deposits, which is relatively consistent with the fourth quarter.
The net interest margin in the first quarter of $3 three 6% increased 41 basis points year over year, which reflects the 425 basis point increase in the fed funds rate since March 2022, as well as our successful remix of securities into higher yielding loans. The net interest margin decreased 13 basis.
<unk> points from the fourth quarter of 2022, primarily due to higher funding costs as lower cost deposits were replaced with wholesale borrowings were repriced or migrated to higher tier savings products.
As we've mentioned previously while our robust legacy deposit base provides a pricing advantage, we're not immune to the impact of rising rates on our funding sources total deposit funding costs, including noninterest bearing deposits for the first quarter of 2023 increased 28 basis points quarter over quarter to 65 basis points.
On a year over year basis, our total deposit beta was 13% as compared to the 425 basis point increase in the fed funds rate over the last 12 months, reflecting our ability to lag peers as it relates to deposit funding cost increases and also we continue to balance the cost benefit of <unk>.
Wowing, some deposit run off in the near term against the cost of repricing the entire book.
Yeah.
Noninterest income of $27 7 million in the first quarter was down $2 $7 million year over year, primarily due to lower bank owned life insurance and mortgage banking income.
And life insurance decreased $1 $9 million year over year due to higher death benefits received in the prior year period, and mortgage banking income decreased $1 5 million year over year due to a reduction in residential mortgage originations, reflecting a renewed focus on commercial loan swaps new swap fee income of 1.8.
<unk>.
Which is recorded in other income increased $1 $7 million from the prior year period.
Turning now to expenses. Despite the continued inflationary environment noninterest expenses were better than our prior expectations, excluding restructuring and merger related expenses noninterest expense for the first three months.
Ended March 31, 2023 totaled $93 million and eight 2% increase year over year, reflecting inflation higher staffing levels and associated costs and higher FDIC insurance from an increase in the minimum ray for all banks as a reminder, the fourth quarter of 2022 included a couple of large credits.
Totaling approximately $2 $5 million, which were not repeated in the expense run rate when adjusting for these credits first quarter noninterest expenses were flat to the fourth quarter.
Salaries and wages increased year over year due to the higher staffing levels, mainly revenue positions in merit increases employee benefits also increased from last year due to higher staffing as well as an increased pension expense and higher health insurance.
Equipment and software expense increase due to the planned upgrade of a third of our ATM fleet with the latest technology and general inflationary cost increases for existing service agreements.
Moving to capital we remain focused on ensuring a strong capital base. While also returning it to our shareholders through appropriate capital management.
Our capital position has remained solid as demonstrated by our regulatory ratios that are above the applicable well capitalized standards and our tangible common equity to tangible assets ratio improved 16 basis points on a sequential quarter basis to 7.44% as of March 31 2023.
Yeah.
In light of recent events, we've added slides six and seven to our supplemental earnings presentation on slide six we provide insight into the composition of our deposit base and highlight our geographically dispersed granular in rural deposit franchise, nearly 60% of our deposit base as retail.
With over 475000 deposit accounts and an average deposit size as Jeff mentioned of $27000 per depositor, when including business and public funds.
On slide seven we highlight our securities portfolio with an overall weighted average duration of five four years and weighted average yield of 2.49%. We also highlight our TCE ratio on a pro forma basis, when including the fair value Mark from held to maturity Securities which comes in at 6.86%.
We believe these metrics compare favorably with industry trends.
Regarding liquidity.
We actively manage our liquidity risk to ensure adequate funds to meet changes in loan demand unexpected outflows in deposits and other borrowings as well as take advantage of market opportunities as they arise. This is accomplished by maintaining liquid assets in the form of cash securities sufficient borrowing capacity and a stable.
Core deposit base.
Between our cash F. H LP borrowing capacity correspondent lines with other banks and Unpledged securities in the form of agencies and mortgage backed securities, which can easily be pledged.
L b or to the fed to expand our borrowing capacity, we have more than $4 5 billion and immediate liquidity.
Adding in normal principal and interest from the loan and investment portfolios through the next 12 months adds another $2 $7 billion for a total combined in excess of $7 billion in near term flexibility. Therefore, we feel we are very well positioned in any operating environment.
Yeah.
Regarding our current outlook for 2023, we currently model fed funds to peak at 5.25% during the second quarter and then hold steady through the remainder of 2023, we continue to anticipate our deposit betas to be lower than peers and generally lag the industry due to the benefit of our legacy deposit base.
We do anticipate fed tightening to continue to shrink the money supply, which will place pressure on deposit retention industrywide and result in higher overall interest expense, we expect similar trends to impact margin during the second quarter, reflecting higher funding costs and continued deposit mix.
Shift into higher yielding deposit products.
We also have actively increased loan spreads and rolled out additional incentives to the commercial lending teams to generate additional deposits.
Residential mortgage originations should remain positive relative to industry trends due to our loan production offices as well as our hiring initiatives, but down due to market conditions. Our pipeline at March 31 was approximately $100 million, which is up seasonally from the fourth quarter similar to the sequential quarter increase in.
Periods.
Trust fees will continue to benefit from organic growth as well as be impacted by the trends in the equity and fixed income markets and as a reminder, first quarter trustees are seasonally higher due to tax preparation fees.
Securities brokerage revenue should continue to benefit modestly from year over year organic growth electronic banking fees and service charges on deposits will most likely remain in a similar range as the last few quarters as they are subject to overall consumer spending behaviors.
And we still anticipate new commercial swap fee income to double the approximate $4 million that we've earned annually over the last few years.
While we remain diligent on a discretionary cost help me mitigate inflationary pressures, we intend to continue to make the appropriate growth oriented investments in support of long term sustainable revenue growth and shareholder return.
Efforts to attract and retain employees in particular commercial lenders across our metro markets remains a strategic priority that said, we recognize the challenges of the current operating environment and intend to fund. The majority of this hiring plan with internal efforts, including the adjustment of existing staffing levels and continued.
Efforts to improve efficiency the upgrade of our ATM fleet with the latest technology as well as inflationary cost increases for existing service agreements will keep equipment and software expenses in a similar range for the first quarter.
We anticipate higher pension expense of approximately $700000 per quarter with an employee benefits based on a lower projected return on plant assets FDIC insurance expense should be consistent with the first quarter due to the industry wide minimum rate increase and expect higher marketing expense in support of growth plans across our market.
Based on what we know today, we still believe our quarterly expense run rate to be in the mid $90 million range.
We believe these investments are appropriate in support of long term sustainable revenue growth and associated shareholder return and will continue to drive positive operating leverage.
The provision for credit losses under Cecil would be dependent upon 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 changes in prepayment speeds and future loan growth.
Lastly, we currently anticipate our full year effective tax rate to be between <unk> 18, and a half at 19, 5% subject to changes in tax regulations in taxable income levels.
Operator, we are now ready to take questions would you. Please review the instructions.
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In the interest of time, please limit yourself to one question and one follow up if.
If you would like to ask further questions you may reenter the question queue.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Casey Whitman from Piper Sandler. Please go ahead good morning.
Casey.
<unk>.
Dan I appreciate some of the guide you just gave are you able to put any numbers around how much margin pressure. We did see over the next few quarters and sort of what kind of cumulative deposit or funding betas, you're now assuming appreciate.
And then it's going to be better than peers, but just sort of wondering where we might see the margin bottom here.
Yeah. So I think there's a there's a number of moving parts there right. So.
Starting off maybe on the asset side.
Well, obviously, we've got you know.
About.
68% of the commercial loan portfolio is variable rate about 53% of that is going to reprice every three months okay. So.
That's been a pretty significant benefit to us we've got and we.
Actually those.
The the movement there.
From right around.
<unk>.
6.5% up to your in the quarter up to 7.15%. So saw some nice 65 basis points of improvement there.
We also as you know have about 17% of the securities portfolio is at variable rates. So we saw about 17 basis points of lift there. So those would be kind of the tailwind as it relates to any.
Future movement any future fed rate hike.
Et cetera, and we are slightly asset sensitive if you're if you're modeling in a static environment right.
But when.
When we think about the deposit side.
Costs associated.
With what we're seeing in the market right now obviously, we've been very proactive in.
Pricing public funds.
We're maintaining those very nicely we've been improves increasing that you know, there's higher tier money markets and private client funds.
And we've also increased our CD rates as well and to the extent that we're seeing any kind of runoff on the deposit side today, we're kind of you.
Leaning into our kind of our core funding advantage.
Im extent and boring than from the federal home loan bank.
So we think that in the nearer term, there's probably going to be a little bit of margin compression.
As a result, and it's really going to be primarily based on our.
Our expectations for you know what the fed has been doing with the quantitative tightening or we know that the money supply is shrinking we know that the pie is smaller and we want to make sure that we're maintaining our piece of the pie, but at the same time.
We're gonna be we're gonna be responsible with the way that we're pricing our our deposits and we're comfortable kind of.
Leaning into the F H L P borrowings.
In the nearer term with that all being said.
On a spot basis I can tell you that for the month of March our margin was right around 3.25%.
Take that for you.
As a good benchmark.
Yeah. This is Todd case, I would just add to that too I think the deposit remix that we saw in the first quarter I would anticipate seeing that continue.
Through the through the second quarter as Dan mentioned 83, 5% loan to deposit ratio we've got.
Some flexibility there to let that drift up a little bit over the next year or two.
And stay disciplined on the deposit cost side, but I do think that remix that you saw in the first quarter is probably going to continue I think the whole industry saw it and we'll see it continue as well to Fortunately for us.
We can go up and offer competitive CD rates in some of our legacy markets to generate some core funding and not have to pay.
6% rates at some of the areas, where there the banks there are 100% loan to deposit we're not in that environment. So that gives us a little bit of an advantage and as Dan says, we can lean into that to some degree.
But recognizing we don't want to give up our deposit advantage over the next year or two as well too so finding that balance I think.
It's gonna be appropriate.
But I would expect a remix to continue in the second quarter that we saw in the first quarter.
Yeah.
Okay answers my question. Thank you sure. Thank you.
Our next question comes from Karl Shepard from RBC capital markets. Please go ahead.
Hey, good morning, everybody good morning morning.
Good morning to start.
Just wanted to follow up on Casey's question I guess on the margin.
I hear you loud and clear on deposit remix kind of through the second quarter.
Any thought on that slowing as we get later into the year. If the fed is done after may.
That could be a real possibility.
I think qualified it there at the end with regard to what the fed does we don't really know right. So I think there's some uncertainty out there.
Looking for one more 25 basis point increase and then hold steady for a while and then some cuts.
But that could that could change based upon what happens with inflation and what we see over the next couple of months from us from a national standpoint.
But that could that could actually work into everyone's favor our favor as well too.
The increase was stopped and the cut start to occur later into next year, then that takes some of the some of the pressure off and you know I.
I think again, our funding advantage of really really show through and we'll be able to.
Be able to manage the deposit base, a little a little easier than we're having to if if rates continue to go up.
So I think that's a good that's a good possibility. It's hard this is not a lot of clarity into the third quarter right now.
Yeah, that's fair and I appreciate the help.
And then switching gears.
Lending.
I hear the kind of a positive comments on replenishing the pipeline, but I also noticed in the deck kind of a tick down in line utilization. So I was hoping you could kind of square those two comments and just given overview, maybe kind of what the general loan demand trends are and what youre hearing from borrowers.
Yeah, and maybe I'll answer the first part of that and then I'll throw it to Jeff and let him answer maybe the second part of it but we we.
We saw a high point in terms of line utilization, just just a hair under 45% like 44, 4% back at the end of 2019 prior to the pandemic.
And that's continued to trend down just 32 and a half as we stated in our in our comments.
And I think part of that maybe stemming from the higher interest rates that a lot of those lines are variable rates.
And with the.
The delta between the deposits, what they're getting on deposits and what theyre getting having to pay on the loan side I think that there's a lot of lines being paid down right now with with the excess liquidity. So I think that's driving some noninterest bearing deposit declines but also.
Driving down.
Line utilization as well too having said that.
We are pretty well positioned with regard to our loan portfolio for growth, Jeff do you want jump in.
Sure. Thanks, Todd Yeah, as we mentioned our pipeline is around $1 1 billion. That's near an all time high we do have a lot of projects.
They have kind of slowed down I think with rates.
You know rising, but once again, we're seeing a pretty robust pipeline and I feel really good about where we stand from a business perspective, a lot of owners and some of their banks have stopped lending so we're getting opportunities there as well.
And we are taking up our prices also as rates have risen so I think.
We're really well positioned to go forward and I have not seen any real slowdown from a business perspective for us.
Yeah, Jeff mentioned to the higher deposit are the higher loan rates, where they were up 75 to 100 basis points in terms of.
The floors on our originations over where we were just a couple of months ago. So we realized that a lot of banks are lending money out there right now we're in a position to be able to continue lending, but we're going to get paid for it right. So we want to make sure with those higher funding costs, particularly from a federal home loan bank that we've got a margin on top of.
That makes sense for us and that May impact that may impact pipelines that may impact loan growth by a percentage point or two although we're not seen it yet it might impact it by a percentage point or two but we're going to get the margin so that.
We're focused on the beta the margin beta not just the deposit beta.
That means the oil price he needs to continue to go up, particularly if the fed is going to keep raising rates.
That's great. Thanks for all that.
Sure.
Our next question comes from Catherine Mealor from K B W. Please go ahead.
Good morning Catherine.
Uh huh.
Just one more on the funding side kind of a cap on FHFA borrowing that you prefer to stay on there just trying to think about.
You may need to grow that for something a little bit more versus the.
What are you kind of thinking playing out there.
Yeah.
Yeah, Kevin So I would say.
Yeah.
High level, our maximum borrowing capacity from <unk> is about $4 6 billion and as you know we've got about $1 3 billion borrowed at this point so that leaves our remaining capacity about three three.
Theres not necessarily we don't necessarily view this as a cap I mean.
We don't have necessarily a cap I think.
We certainly would love to not borrow from the federal home loan bank and and generate our funding through low cost deposits, but you know.
It's not unusual over the years for us to be holding really on average about a $1 billion from the federal home loan Bank anyways.
Pre pandemic, we were right around $1 billion five on a smaller balance sheet.
So you know not necessarily.
You know unusual.
But I wouldn't say that we've got a cap per se.
But we obviously are continuing to monitor.
We'll continue to monitor that.
As you heard in my prepared commentary, we did take out some.
Some broker deposits, we did $140 million there that was more.
Just to kind of tap into the market to confirm that we you know that we had access to those funds and of course that obviously also from my perspective really as a wholesale borrowing.
Similar cost two two of FHL before it as well.
And that provides some additional availability if you think about it that way, but no theres not theres not specifically I wouldn't say, we have a you know.
A defined cap one on where those borrowers would be.
Okay great.
And then.
Maybe just switching over to last I understand deposits kind of thinking about the noninterest bearing next shift.
First on this just a little bit and is there any reason as you just kind of think about your deposit base and your borrowers.
Sure.
Anything.
You see within your deposit base that could make the case and we should still think kind of above.
Pre pandemic levels in terms of that percentage that interest bearing to total.
Or what's preventing that from actually the only medium and lower incentive levels or just kind of looking at noninterest bearing mix shift across the industry and there was a big discussion I think today for everybody is where these numbers are excellent.
And then any kind of commentary you can get.
Maybe whats different or special that your deposit base that may protect you there yeah. It's great question.
So my answer to that would be that we do look at kind of where we had pre pandemic rates. So we'd completed the online bank merger back in November of 2019. So we've got a good quarter comparison of our current size.
Three years ago prior to the pandemic. So you tend to look at kind.
Kind of where are we at there and in a in a normal world I guess would you revert back to that at some point in time.
There's there's pushes and pulls to that right, what I would say to pull to that would be.
You're talking about.
5%.
Maybe 6% with CD rates and things like that that are out there that's a big delta.
Versus where it was three years ago with the rates being a lot lower so you know where people are going to be more apt to.
Better utilize their cash so to speak to get a return.
We're seeing some of that with the line pay downs, but are.
Are we going to see that it is going to be different than it was three years ago, because the delta so big.
But then fighting against that is going to be I think that'll be cutting rates here at some point.
So that delta is going to start to diminish and maybe it gets back to where it was three years I don't think I'll go back that far so that could that could make the case for you you could go lower than you were pre pandemic, but I would also say that we're doing a lot of things differently now than we were then.
Because we're getting a lot better at generating.
But I would say core deposits and in having plans around that we benefited from the shale related deposits are just kind of falling into the bank and our legacy footprint. So we never had to really sharpen our pencil so to speak.
Because funding was always readily available.
But now as we kind of look through that with our loan growth in our plans and everything.
We've gotten better at being able to generate core deposits.
<unk>.
Added a pretty significant part of our commercial lending.
Incentive plan is now deposit driven whereas in prior years. It wasn't because we were focused on on loan growth and margin on the loans, but not necessarily deposits. So that's changed.
So we're getting much much better at that side of things we have.
New Treasury management products several of which are Jeff has brought to the table.
With.
What I would say more C&I related treasury management that we're going to market with that could be a real game changer for us as well too. So we're doing some things that we werent doing three years ago that I would say would allow us to operate in a higher percentage of noninterest bearing than where we were at three years ago.
So theres pushes and pulls to that we'll have to wait and see how it works out, but that's kind of the way that we see it right now and I would tend to land in the spot that I would expect higher noninterest bearing deposits as a percentage of our of our deposit base.
Where we were at three years ago, but I, just don't know where that kind of where that bottom where that floor and so where that that that point is and we'll have to just find that out over the next couple of quarters as we move through the cycle.
Great that's really helpful and maybe just looking at Cromwell.
That's some great slides in your deck on just your office portfolio in commercial real estate portfolio and then from old line, you've got D C, which is getting so much negative press.
The office landscape there, but.
Glad to see the actual piece is very small for you with much more kind of suburban Maryland. Okay. That's just give any commentary on what you're seeing particularly in that market.
Yeah.
Worried about.
Any kind of rescue theme here.
What makes you more comfortable with your with your office portfolio.
Yeah, the suburban nature of it makes us feel more comfortable we're in what I would call it.
I mean, as you know just respectfully, but tier two cities for the most part Pittsburgh Columbus Cincinnati.
Louisville, Lexington versus what I would say tier one cities like Chicago or L. A.
San Francisco and even downtown D C.
That's not really those are mass transportation markets where people.
I think theres going to be a higher percentage of people working from home.
Note or hybrid long term, so that's going to have a material impact on those.
Cities.
Not that the secondary tier two cities arent going to be impacted I think they will be but for the most part. These are all getting your car and drive to work type of markets and we're seeing that hold up better.
And then in some of the bigger cities.
The D C part of it again, if you look at our office portfolio in Maryland. It doesn't look very much like the rest of our office portfolio, it's not in downtown D. C. We're not there yet one loan.
Which is performing but that's not an office market debt.
Unfortunately old line. It was good at underwriting too and they didn't go into that market.
From an office standpoint in any big way.
So I think that that'll benefit us quite a bit and I also look at.
The the portfolio and how it matures you get about $40 million a year maturing on that office portfolio. Each of the next couple of years. So it sounds like you've got a big bubble you now all coming through and maturing at the same time or anything like that and we've also gotten very good and granular at going out and looking at those and making sure that we got good line of sight.
Right to where do we think occupancy is going to be and rates are going to be down the road right. So.
Don't see a lot, but I'd say ghost properties out there, where the rents being paid but theres no cars in the parking lot type of thing because you know what events are going to occur. If that's if that's what the portfolio is consisting of and we're not seeing a lot of that it's not reported anywhere but those are the things that we're digging into ourselves and having our lenders dig into we're reviewing every office loan.
There were a couple of million dollars to make sure. We got really good line of sight into where they're going to be 2345 years down the road. So as a result of that I feel I feel good about where we're at with it but we're not in the big tier two cities tier one cities and we're also.
Not a that's not a portfolio we're expanding at all right now.
And we think that that's probably going to be the one area for the industry they'll probably get the most scrutiny over the next five years and probably should quite frankly.
Great very helpful. Thank you.
Yeah.
Our next question comes from Russell Gunther from Stephens. Please go ahead.
Hey, good morning, guys.
Good morning, Good morning, Russell good morning.
I wanted to follow.
A follow up on the commercial lender conversation a bit you guys mentioned.
<unk> or 13% of the commercial pipeline.
A similar data point in terms of related deposit production or deposit pipeline and just trying to get a sense for.
How these hires can help you self fund this sort of high single digit growth.
Yeah, again, I'll start off and if Jeff wants to jump in he is welcome to as well.
We talk about that a lot, we actually and just spend the one driving this the last two to three months.
Is having a category on our on our pipeline that's going to show deposit.
Deposit pipeline as well too so that we have that ability to track that but we are bringing that up we're not making loans to.
Particularly commercial real estate C&I, you tend to get the deposits, but we're not making a commercial real estate loans are.
Really without a deposit existing deposit.
Part of that or requiring debt and we passed on quite a few loans in the last couple of months that didn't come with with deposit basis.
Don't have a specific breakdown by market in terms of deposit pipeline other than to say that it's attached to all of the loans that we're looking at but I would expect we're gonna have a deposit pipeline here sometime over the next couple of months, Jeff would you add anything to that.
Yeah, I would agree with what you said I would also say that our focus on hiring.
Going forward in the L. P OS or if we're going to add any additional LP OS will all be C&I based and so we would expect that to increase the percentage of L. P. O contribution to the deposit pipeline going forward based on just really focusing on C&I customers and then also increasing our treasury products and services I think we will.
So increase that deposit pipeline, but we are focused on it but I don't have the details right now.
That's very helpful. Thank you both for that and then do you have a target for C&I focused hires for this year and just imagine it might be a target rich environment for you given what sounds like still a pretty healthy appetite to lend so just kind of curious how you're approaching that.
Yeah, I guess I'll start off if Jeff or Dan.
Don't want to jump in.
Seeing that we are getting a lot of phone calls from commercial lenders teams.
That want to talk to us because of our of our funding.
We do see that as a real strength right now and something that.
There is going to allow us to build to bring on some some top talent again, we'll be careful about it we want to make sure that anybody who we bring on you know in it, particularly if its a team or something that they've got the same credit underwriting approach as we do.
And then also I mentioned earlier, an increase of 75 to 100 basis points over where we were priced things a couple of months ago. So they've got to be able to have a portfolio.
Of prospects.
They come with a non solicit going to respect that obviously.
But they have to have a target base.
Fit what we're going to want to do if we're going to use our balance sheet for that week.
We are going.
Going through a process of bringing on additional lenders on but we're also being very good.
Making sure that we're self funding as much of that if possible potentially all of that as we've done in the last couple of years with kind of a reallocation to higher growth markets based upon retirements.
Or.
Underperformers things like that and being able to get a higher return productivity per FTE dollar than we have in the past.
Great I appreciate the time. Thank you and then just a follow up would be to the office discussion.
I appreciate the color. There you guys have any observations you can share from updated appraisals in terms of <unk>.
Declines in value.
On the ring fence.
Yeah, again, I think it's going to be very very market specific.
And.
Because you don't have much in the way of any problems in the office portfolio.
You know, we haven't had to go out and get a lot of re appraisals of things done, but we do know cap rates have changed and.
Similar to what you saw on the hotel portfolio two to three years ago.
I think it is a much different environment. So I talked about that for a second I think with the hotel portfolio. It was a deep drop and then a comeback right based upon the virus and vaccines and all that kind of stuff in that portfolio is kind of back to normal with the office you've got a.
A couple of things going on right you've got the pandemic related aspect of things, but you've also got more of a structural impact that's going on with the work from home, which may be a bounce back a little bit, but I think part of that is permanent right. So, whereas I don't think hotels would be permanently impacted the office <unk>.
<unk> I think will be permanently impacted to some degree.
So I think we've got to look at it a little bit.
Little bit differently, there. So I do think having the portfolio reappraise, particularly if you have a larger properties are those start to fall down and in the risk grades.
If they're having difficulty, making making payments I do expect to see a fairly significant drop in values on those just anecdotally, we've we've seen one or two out there in the markets that you now have.
We have sold for less than liquidation value.
In terms of what liquidation value might have been just <unk>.
Six months ago, and they're selling for less than that so.
So I do think that.
There's going to be some risk, there and having having a loan to value.
At the levels, we've had in the 60% 60% range I think is going to be important because you may find yourself, 80% loan to value in two to three years on a troubled property or higher.
I appreciate the color guys. That's it for me. Thank you sure.
The next question comes from Daniel Tamayo from Raymond James. Please go ahead.
Good morning.
Hey, good morning, guys.
Yeah.
Just quickly.
Quickly on the expenses I know you've talked about the.
Being self funding majority of the the C&I lender hiring plan, but.
And then talks about that mid nineties XP.
The expense run rate here in the near term, but I'm.
I'm, just curious kind of how far out that extends in and if there is.
Kind of any cadence to the.
Increase in expenses the incremental.
On top of.
If theres any kind of additional expenses from that from that hiring program that may not be fully funded thanks.
And I think I think the 7% increase in salaries part of that was additional people coming onboard even though we self funded some of that but merit increases and whatnot and we saw obviously the inflationary impact that occurred as well too.
Not so sure we're going to see that kind of inflationary impact each year going forward because it seems to be moderating to some degree so I think that'll help them pretty.
Pretty significantly, but I do think as the franchise grows and we do want to grow the franchise you know mid to upper single digits.
Does that expense base.
Would grow commensurate with that.
I'm much more focused on the efficiency ratio.
And then just the expense number we do watch it and try to plan to it.
We do think the mid Ninety's is kind of where we're at right now as we said last quarter and I think we proved out in the most recent quarter.
But the efficiency ratio as we get bigger I think it would be would be really really important to be able to manage to that they were in the mid to upper Fifty's and you know if we're touching 60, we don't want to be touching it for terribly terribly long.
And I think our ability to generate revenue through some of the new products through some of the new hires.
I think that's going to help us a lot.
As we continue to grow as an organization, but we're also making investments right. So as we continue to make investments in the company.
That are going to be new product oriented and we bring on additional people that is going to take the number up over time, but I can't imagine it would be much greater than just the normal inflationary environment that you would see in mid to upper single digits.
Be my expectations for future out years.
Versus anything dramatic up and.
If we're gonna be 567% bigger each year going forward on $95 million $94 million.
Quarterly run rate at some point is going to cause us to under invest in the franchise and we don't want it we don't want to do that so that's.
Probably the best answer I can give you is focus on the efficiency, we're going to focus on the efficiency ratio.
And the total expense base will probably drift.
According to our to what just the normal expense growth.
As for the bank based upon.
You'd be up mid mid 5% to 7% range.
That's very helpful. I appreciate that.
And then I know you touched on this but.
Just curious you know your your assumptions in terms of.
The rate environment or stable through the year, but.
And the forward curve there are some expectations for cuts.
I'm curious how that how you think that would impact the earnings.
Earnings power of the bank.
Our deposit beta was interesting to see that really benefits us on the way up when rates go up but we also saw when rates started going back down again in a few years ago that deposit beta held up there too right. So we're able to.
Reduce our deposit costs are faster.
Then than our peer group and even though we can like it on the way up we can kind of beat it on the way down so I would expect that hopefully some of the discipline around pricing and spread and whatnot stays even in a lower rate environment.
We're getting better at pricing loans, we're getting better at managing that spread that as deposit costs would it toward a drop that should that should really benefit us.
So I think in an environment, where you've got rates coming down and I think that could be.
It could be a bonus for a number of banks I think we could be one of the banks that might be included in that but there's a lot of other variables that are going to be associated with that in terms of you know, what's what's driving the rates to go down is it if it's because.
You got something else going on in the economy that could impact your growth rates than did I would have to be taken into account.
Okay I appreciate the answers thanks, guys sure.
Our next question comes from Dave Bishop from Humpty Group. Please go ahead.
Good morning, Dave Yeah, Good morning, gentlemen.
Hey, most of my questions have been asked and answered but.
In terms of opportunities within the in the market on the lending side. There are you seeing any.
Loan segments or pockets, where maybe you're seeing some of your peers pull back from that.
Do you think might present, an opportunity, especially as you noted some of the tier two markets may not be as boom and bust is D C and some of the other bigger metro markets across your footprint.
Yeah, I think some of the some of the markets, where we're funding more of a challenge where the banks are 100, 100, and 405% loan to deposit ratio.
Were they really kind of slowed down lending across all fronts right because they're having a hard time just funding it.
We're seeing lenders from from markets like that from banks like that but we're also.
Had been seen and I think we're going to continue to see loan opportunities. We're not we're not focused on office, we're not focused on hospitality those arent focus areas of ours right now.
And we like real estate.
But we really wanted to lean into C&I and a fairly big way so a lot of the <unk>.
<unk> that I think we're seeing and that we should be able to see over the next year, hopefully youre going to be in the C&I space, because if they get clipped a little bit from their current bank debt.
Hopefully, we get we get a look at those type of things because we have capacity to lend significantly too.
Good quality C&I customers. So I think that could help us quite a bit particularly in markets in the southeast part markets in the mid Atlantic.
Where maybe the banks, just arent going to be able to lend to the extent that they want to even further good good C&I customers. So the answer would be yes, I would expect us to see opportunities from that.
Great I appreciate the color sure.
And our next question comes from Manuel Nevada from D. A Davidson. Please go ahead.
Good morning.
Hey, good morning, a lot of my questions have been answered, but I just wanted to check on.
Your pipeline kind of point to loan growth accelerated here in the second quarter, but you also had talked a little bit about.
Higher pricing.
Do you think pricing selectivity.
Tim some of that acceleration or is it the right way to think about it.
Growing faster right now.
It's a great. It's a great question, because I think as we saw in the first quarter with the pipeline being so robust.
But you know loan growth kind of being in that one 7% loan growth in the quarters like.
Would you expect to see bigger loan growth, but we didn't as a result of this I think and we've seen the pipeline while it's still good it's just under $1 billion.
As we kind of look at it at this point, but I would say that it is.
Well my own personal view I think as we increased rates and we increase the expectation on rates. So we've done. This a couple of times in the last two months as recently as yesterday, we've been out to the lenders and said, Okay. We want X spread on all new loans down I think that'll have an impact on the pipeline.
I think there are probably deals in the pipeline that.
Probably don't make sense at higher rates or the customer's going to want to pull back.
Or maybe they go somewhere else I don't know, but I think the pull through rate on the pipeline could be impacted a little bit based upon the raising of rates because again, we're gonna be judicious with our with our funding and make sure that we get paid.
If we're going to put that out to the out the door and I just don't know the impact that has on the pipeline because we have all these new lenders and others that are out there generating opportunities. So that that's a real plus that's a real positive.
But I just also personally believe that at the higher rates that will have a bit of an impact on the pipeline the pull through rate on the pipeline as projects get put on hold or a or pulled back.
Do you feel more comfortable.
Is your view that that loan growth. This year, it's going to be more first half of the year loaded or is that too soon.
Yeah.
I think it's I think it's too soon to say I really do because again, it's got.
We built a franchise over the last number of years that has put us in the markets that should grow mid to upper single digits.
And I think on a long term basis, that's where we're comfortable and thats kind of what we built the organization around any given.
Quarter is going to be going to be hard we talked about the pipeline, but we also talked about the lines line usage being paid down significantly is that going to continue to get paid down as it can go lower I don't know some of the secondary market for multifamily and things like that has really slowed down a lot.
So out of more of that sticking on the balance sheet for a little bit longer I think as.
Developers are waiting for rates to come down and Theyre going to go take it off the market. So that gives us benefit of loan growth.
Because we're not seeing that typical pay off occur.
So I think there's a lot of factors that are that are impacting that but I don't see anything at this point from our customer base and our markets that are telling us that people are concerned overly concerned about the economy and pulling back I still think they're doing business theyre just doing it in a higher rate environment and trying to factor that into.
There.
Their cost structures.
Thank you I appreciate it I appreciate the color sure.
This concludes our question and answer session I would like to turn the conference back over to Todd <unk> for any closing remarks, great well. Thank you for joining US today, we remain focused on ensuring our organization sound credit quality solid liquidity and strong balance sheet that hopefully you've come to expect from US. We think we've got the right markets.
And leadership and strategies in place to have success on a long term basis and looking forward to speaking you at an upcoming investor event. So please have a have a good day and enjoy the rest of your week.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Sure.
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Hum.
Yeah.
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Yes.