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spk02: Good morning, and welcome to the West Banco Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference over to John Iannone, Senior Vice President, Investor Relations. Please go ahead, sir.
spk04: Thank you. Good morning, and welcome to WestBanco, Inc.' 's second quarter 2022 earnings conference call. Leading the call today are Todd Glosson, President and Chief Executive Officer, and Dan Weiss, Executive Vice President and Chief Financial Officer. Today's call, an archive of which will be available on our website for one year, contains forward-looking information. Cautionary statements about this information and reconciliations of non-GAAP measures are included in our earnings-related materials issued yesterday afternoon, as well as our other SEC filings and investor materials. These materials are available on the investor relations section of our website, westbankland.com. All statements speak only as of July 27, 2022, WestBanco undertakes no obligation to update them. I would now like to turn the call over to Todd. Todd?
spk03: Thank you, John, and good morning, everyone. On today's call, we'll review our results for the second quarter of 2022 and provide an update on our operations and current 2022 outlook. Key takeaways from the call today are WestBanco 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. while also supporting our teams as they generate very strong sequential quarter-long 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 the past few years. For the quarter ended June 30, 2022, we reported net income available to common shareholders of $40.3 million and diluted earnings per share of 67 cents when excluding after-tax merger and restructuring charges. We exhibited strong expense management as our operating expenses have remained roughly consistent the last few quarters, and our capital position remains strong and continues to provide financial flexibility while enhancing shareholder value through effective capital management, which includes the appropriate balancing of share repurchases, dividends, and M&A. While M&A is still not a major focus for us, we remain opportunistic, and if we found the right opportunity 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 5.3% when excluding certificates of deposit, and total loans, which increased 3.8% when excluding SBA PPP loans. Furthermore, we reported very strong sequential quarter loan growth of nearly 22% annualized that 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, and ability to hire top-tier commercial and mortgage loan officers across our footprints. 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 our record commercial pipeline of $990 million on March 31st our commercial teams generated gross loan production of roughly $740 million during the second quarter. CNI line utilization, which has improved slightly to approximately 37%, is still roughly eight percentage points below our historical range. While we did not anticipate similar sequential loan growth the next few quarters, our teams continue to find new business opportunities, which has helped our commercial pipeline remain relatively strong at approximately $825 million as of June 30, with roughly 30% of that pipeline in Kentucky and Maryland. That said, we remain committed to our mid to upper single-digit growth target over time as our recent strategic investments in lenders and loan production offices begin to generate positive operating leverage. In addition, 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 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 have posted 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 and our hiring efforts. During the first half of the year, We've added 11 mortgage loan officers, including two strong leaders in our new Indianapolis and Nashville offices. We'll be building 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 have 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 month. Further, we continue to be tactical with hiring additional top performers as opportunities arise. Our new loan production offices in Cleveland, Indianapolis, Nashville, and Northern Virginia are being well received. As they continue to build their 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. As we have clearly demonstrated, our credit strategy continues to generate strong metrics and long 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. 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, have allowed us to receive numerous national accolades so far this year. Following closely on our being the only mid-sized bank in the country to receive top 10 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 are honored to again be recognized by our customers for our trust and service. West Banker was privileged to have recently been voted the number one bank in Ohio and the number two bank in Kentucky. These rankings were based on customer satisfaction and feedback as we've received strong scores across the survey, including high scores for trust, branch services, terms and conditions, customer service, digital services, and financial advice. These top rankings are a strong testament to the outstanding effort and dedication of our employees. I would 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. Dan?
spk08: Thanks, Todd, and good morning. During the quarter, we recognized strong sequential quarter loan growth, robust residential mortgage originations, a 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 expect additional margin improvement as the recent Fed rate increases begin to impact interest income on earning assets. As noted in yesterday's earnings release, in the second quarter we reported improved GAAP net income available to common shareholders of $40.3 million in earnings per diluted share of $0.67 and net income of $81.8 million in 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 30th, 2022, were 67 cents and $1.36 per share, respectively, as compared to $1.36 and $2.09 per share last year, respectively. It's important to note that the second quarter of 2021 was favorably impacted by a negative provision of 16.6 million net attacks, 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 $0.58 per share. Total assets of $16.8 billion as of June 30, 2022, included total portfolio loans of $10.2 billion and total securities of $4.2 billion. Total securities increased 7.7% year-over-year due mainly to excess liquidity related to our 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 PPP loans increased 3.8% year over year due to strong growth in real estate loans. Further total loan growth on a sequential basis of 5.4% 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 runoff 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, non-interest bearing deposits represented a record 35% of total deposits as of June 30th, 2022. The net interest margin in the second quarter of 3.03% 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 2.80% 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. Similar to the rising rate environment that we experienced during 2018, we're beginning to see the pricing advantage of our robust legacy 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 able to again lag rising deposit rates. For the second quarter of 2022, non-interest income of $27 million 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 net loss on other assets which compared to a $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 as 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 saleable into the secondary market. The net loss on 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 this same $1.2 million reduces employee benefits expense to reflect a decline in the obligation to the plan. 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, non-interest expense for the three months ended June 30, 2022, totaled $87 million, a 5.3% year-over-year increase, and a 1.2% 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 debt securities losses. Despite slowing down share repurchase compared to the prior two quarters, we continue 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 1.8 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 30, 2022, we've reported Tier 1 risk-based capital of 12.49%, Tier 1 leverage of 9.51%, CET1 of 11.31%, and total risk-based capital of 15.40%, as well as tangible common equity to tangible assets ratio of 7.58%. 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 3.5% 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 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 PPP 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 the 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 are impacted by fluctuations in the equity in 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, employee 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 $600,000 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 in the 6% to 8% range. The provision for credit losses under CECL will depend upon the changes to the macroeconomic forecast and qualitative factors, as well as various credit quality metrics, including potential charge-offs, criticized and classified loan balances, delinquencies, and future loan growth. 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 18.5% and 19.5%, subject to changes in tax legislation, deductions in credits, and taxable income levels. We are now ready to take your question. Operator, would you please review the instructions?
spk02: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. Please limit yourself to a few questions to allow others an opportunity. 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.
spk05: Morning, Karl. Hey, good morning, everybody. Morning. How's it going? Good. Good. I guess I wanted to start here on loan growth. It was obviously a very strong quarter for you guys. And I heard the commentary kind of around moderating a little bit next quarter. But can you help unpack that a little bit? I'd just like to drill down to kind of potential for further increases in line utilization, kind of the mix of mortgage production going forward. We're going to see that come on the balance sheet and then some of the CRE payoffs and new hires as well. Thanks.
spk03: The CRE payoffs have moderated as we would have expected. They were pretty high when rates were lower, you know, the second, third, and fourth quarters of last year. second quarter of this year was $100 million that went to the secondary market. And we think $85 million to $100 million is kind of a normal quarterly run rate for us. I think the rate increases slowed that down a little bit, things going to the secondary market. Plus, I think the heavy amount going to 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 rate to be looking at. Again, more normalized. Line utilization for CNI is up. We mentioned in our commentary, still about, you know, 8% or so below where we think it's more normalized. So we think there's some upside there. Obviously, if we hit a recession, that could impact it a little bit. But we think in a normalized environment, there's the ability to go up to another 8% there. And I think with regard to the residential mortgage, we did put more on the balance sheet, partly because as rates went up, people wanted arms, and there was 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. That may take a couple quarters to get completely back to that, but it's not our plan to put 80% of our production on our books. I think longer term, you're going to see us return back to where we were in that probably 50% to 60% range of what's being put on our books. We haven't changed our model there. We decided to put more on for a while, and customers wanted construction and arms as rates started to go up. Long term, we've really been working to build towards, and we're real 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 the $5 you know, kind of mid-upper single digit, you know, 5%, 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 you can't really look at any one quarter. You know, you might have a quarter that's not great and a quarter that's really, really excellent. But when you look at it out, averaging it over time, we think what we really try 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 acquisitions in Kentucky and the acquisitions in the Maryland market that were higher growth rate companies. So we feel that's materializing now, and that was part of the plan. That's why we went to those markets. We really didn't see a tremendous amount of production from some of the new hires yet because they came on. Well, we got 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. And I saw other peers, you know, 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, you know, 11 mortgage loan originators and really good leaders. on the residential mortgage side that we've hired in Nashville and Indianapolis. And we think that's going to bode well for just the long-term trajectory of organic growth, which, again, I would like to think would be in the mid to 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 would expect to be.
spk05: Okay. That's helpful. And then maybe one for Dan quick, 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 higher rates?
spk08: 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 those hikes that occur in the third quarter, and currently we're projecting 75 basis points today and another 50 in September, Those hikes would really take effect in the fourth quarter, just given the fact that most of our, or about 50% of our available rate loans reprice every three months. So when those hikes take effect, we expect by the time we get to that fourth quarter, we talked in prepared commentary about a two to four basis point margin improvement for each 25 basis point rate hike. And that's more related to the fact that we do expect deposit cost to begin to rise and impact that incremental improvement in margin as we go forward.
spk02: Okay. Thanks for the help.
spk03: Thank you.
spk02: Our next question will come from Steve Moss with B. Reilly. Please go ahead.
spk07: Good morning. Hey, Steve. Good morning. Maybe just starting off Maybe just start off on the deposit side. Curious how you guys are thinking about deposit. Obviously, I think you're not much in terms of sensitivity in the short term, but maybe how you guys are thinking about it as you moderate your expectations for asset sensitivity with later rate hikes.
spk03: Maybe I'll start off and then I'll let Dan jump in too. You know, we've got, obviously, a very low deposit beta. We saw that through the last rate hike cycle and the last several rate hike 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's going to get accelerated a little bit. But we would still anticipate, you know, lagging the market, but probably, you know, not be able to, you know, lag forever, obviously, because we're going to be impacted by the same things everybody else is. we really didn't see much of any deposit CD, non-CD runoff between the first and the second quarter. We had about 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, right? So we're watching it real close. I think historically we would have taken multiple quarters before we felt we would need to raise it all. We may need to move sooner than that, if you get 75 or 100 basis points today and more rates increases down the road. But we're going to wait. We're going to wait and see until it starts to impact the balance sheet a little bit and feel we've got the luxury to do that. You know, with all the shale-related deposit flows and natural gas prices hitting records, I mean, we've got an abundance of deposit flows into the organization. So we can afford to be patient, but we're not immune. So, you know, we know we'll have to address it over time. Dan, anything you'd add?
spk08: No, I think you covered it. I mean, deposit costs increased just one basis point from first quarter to second quarter, so really not seeing much there. Given we are projecting Fed funds to peak at 350, so that would be 325 basis points of increase effectively in 2022. And if you were to just use the simple algebra, apply a 20% beta to a 325 basis point increase, That's about a 65% increase in cost deposits. When that takes effect, as you said, could be over some longer time horizon.
spk07: Okay, appreciate that, Collin. Maybe just following up on the deposit inflows from shale, just kind of curious, with natural gas around $8, $9, how strong are those deposits these days?
spk03: Yeah, they've typically been as high as $15 to $25 million in a quarter. When rates are up and rates are low, maybe $4 to $5 million. So we're in the upper range of that right now with where natural gas prices are right now. So $15 to $25 million a quarter.
spk07: Okay. And then just on loan growth here, I'm curious where – 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?
spk08: Yeah, so if you look on, I believe it's slide six, you can see that our weighted average rate for loans put on the books here in the second quarter was 3.78%. If you look at just what was put on in June. We came in right around 4.02 percent. 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 reprice every three months. As I mentioned, that's about 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 we see rate increases.
spk07: Okay, great. That's very helpful. And just one last thing in terms of just on expenses here. I'm sorry if I missed it, but did you guys provide an expense outlook for the third quarter?
spk08: We did. We did in the prepared commentary about 6% to 8%, which is pretty consistent with what we experienced last year moving from second quarter to third quarter. There's quite a bit of seasonality there and pretty normal things like 75% of the increase really is related to investments in people, so salaries and wages, employee benefits, Salaries, for example, are going to be impacted this year by just the normal merit increases. I've mentioned in my prepared commentary, we're expecting about a $600,000 quarterly increase from minimum wage increase across all of our markets. And that's kind of above and beyond the typical merit 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 there's 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, employee benefits, as I mentioned in the prepared comments, included a $1.2 million credit on, 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's just something we've seen on a historical basis. Third quarter tends to be the highest quarter on health care, just based on the timing of employee deductibles. So 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 $600,000 in kind of non-recurring credits. So, you know, I would probably add $600,000 back there as well.
spk07: Okay. Awesome. Appreciate all the call. Thank you very much, guys.
spk03: Thank you.
spk02: Again, if you have a question, please press star, then 1. Our next question will come from Catherine Melor with KBW. Please go ahead.
spk01: Thanks. Good morning.
spk02: How are you? Good morning.
spk01: Great. I wanted to just go back to fees, and I don't know if you provided any commentary on your fee guidance, but just curious how you're thinking about your fee outlook for the back of the year. It seems like service charges have been rebounding, but obviously you've got some other headwinds. So just how you're thinking about fees from the second half.
spk08: Yeah. So fees are very much dependent upon trust fee income. And that's going to be dependent on the equity markets. So that will be very much dependent on kind of where things end up. Those are 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 $700,000 or so in tax preparation fees. I would say, you know, if we expect equity markets to continue at the pace right where they're 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 consistent, you know, compared to the second quarter. And the other big item would be mortgage banking income. You know, we retained 80% of production here in the second quarter. And, you know, that's very much dependent on customer preferences and pricing. And as Todd mentioned, you know, that's very much, you know, customers today seem to really be interested in those adjustable rate products. We had, you know, of our production of $328 million today, that was about 42% of that was construction. So construction can't be sold into the secondary market. And then there was, like I said, a lot of adjustable rate products, which generally aren't sold into the secondary market. So some of it has to do with customer preferences. We would like to see, would like to eventually kind of get back to that 50-50 or 60-40 mix that we've kind of historically run at. But right now we're just kind of taking what the market gives us. And you know, today it's a little bit heavier on the portfolio side. But, you know, we're benefiting on loan growth and, you know, the interest income that kicks off of that. So I would say, you know, we don't give really forward guidance on this, but given the trends, I would expect mortgage banking income to be pretty similar to second quarter, maybe a little higher. I think that's pretty good.
spk01: Yeah, that makes perfect sense. Okay, great. And then up to the reserve, you've seen some continued releases of the reserve over the past couple of quarters. What are you thinking about at what point you may have to start increasing reserves just given kind of the macro environment? And any color you can give us on what your kind of scenario weightings look like today under CECL?
spk03: Yeah, I'll let Dan get into the details on that. You know, we had quite a bit of loan growth in the second quarter, and, you know, 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. I'd like to continue that to happen and reserve for that. But, you know, we saw improving, you know, factors, you know, that really helped across the board in our portfolio, which would have indicated a pretty healthy reserve release. But then the loan growth, you know, pretty much offset that, which is good. Dan, you have more color.
spk08: Yeah, 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. And you can see a pretty, you know, a nice decline in the qualitative factors, as Todd mentioned, mostly related to COVID-19. type items, you know, hospitality, et cetera, seeing improvement there, which is great to see. And as Todd mentioned, kind of the offset to the improvement there was second quarter loan growth, as well as we did add in kind of some deterioration in the macroeconomic factors, particularly the unemployment. we're taking a slightly more negative view on unemployment than the baseline forecast. So baseline forecasts today are kind of projecting unemployment to be around 3.6%, let's call it. And, you know, we weighted in a slightly more negative forecast, gets us up around 4% or so. So that was kind of the other piece. And effectively the two, you know, the two offset to end up with kind of a pretty consistent reserve around $117 million.
spk03: Yeah, you're starting to, I imagine other banks 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. But 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, then, you know, we're probably not going to be in a heavy reserve release position, I wouldn't think, nor would nor with many others.
spk01: And when you say as you look at the CECL build, is more of that impacted by the changes in unemployment versus GDP? Because it feels like today it feels like negative GDP declines you will probably see, but unemployment, it's still uncertain whether we're going to start to see that. Is that a fair assessment?
spk08: Yeah, the primary driver of our CECL reserve is unemployment. GDP is not a significant factor. It's a consideration, but unemployment is the primary driver of the quantitative model. Okay.
spk01: That's great. Ari, thank you, and also congrats to you, Todd, on your retirement announcement.
spk03: Well, thank you. I appreciate that. Yeah, I'm excited to have Jeff come on board. We'll have him sitting in on some earnings calls and attending some visits, and yeah, I'm excited to get him on board here, and Looking forward to the next phase of my life. We'll have, you know, a nice overlap of a year, year and a half or so. So we'll be working together pretty closely. But great guy, great background, and, you know, no change in strategy or plans. He'll just, you know, continue to move it along.
spk01: Great. Great. Very good. Looking forward to working with him. Great. Thanks. Great quarter.
spk02: Thanks. Our next question will be Manuel Navas with DA Davidson. Please go ahead.
spk06: Good morning. I just wanted to think a little bigger picture. If Fed rates are at 350 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 23? I know that a good amount of assets will still be repricing up. Just kind of your thoughts on that concept.
spk08: Yeah, so again, you know, we try to not to give too much forward guidance here, but yeah, I would say a NIM peak would probably be maybe more back half of 23 if, you know, but there's so much uncertainty, there's so much movement in rates and, you know, kind of who knows what's going to happen between now and, you know, the end of the third quarter, let alone the back half of 23. So that's I mean, you know, if everything, you know, moves steady as she goes, I think we would see kind of that it would be more back half of 23 where we would see a peak in them.
spk06: That makes sense. You know, this is also assuming that 350 stays across 23. Who knows what can happen there? This next question might be a little tougher, too, is how should we think about the new hire's that are coming on in the back half of this year, what you've already done so far this year on expenses. Can you kind of give a framework for expense growth? I guess it's hard to get too specific without giving exact guidance, but kind of how should we think about these new hires coming in and expense growth next year?
spk03: 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, you know, we're also doing a lot of top grading, right? So we've got underperformers in markets. We're addressing those, too. It's not going to offset all of the increase, but it'll offset a good portion of the increase in additional people coming on board. So, you know, more, I guess, more production per dollar of FTE, which drives positive operating leverage. is a big focus of that. So with some of the heavy hires in some of the higher growth markets, I think they would tend to be strong producers for us. So again, the key there is positive operating leverage. We recognize you can't just stay in a flat expense environment forever and expect to grow your bank. And I think people, 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, you know, as Dan mentioned earlier, you'll see the increase in the third quarter. You know, as people come on board and those that were in the second quarter, you know, they'll be on board for a full quarter in the third quarter. But that, again, should be more than, you know, offset by the additional revenues. I would say that the hiring plan that we had in place, again, hired, you know, 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'll continue to hire one there, one here, particularly in the LPOs as they build out. The lenders, when we bring them on board, again, a lot of them have non-solicits for a year, so we want them to respect that. And they'll still be bringing business in, 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 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 think that was our plan was even though the market may soften for residential mortgage, you know, our hope would be to outrun that through additional hires. so that we'd be able to stay flat on residential mortgage loan production, even though the market's down 25% or 30%. We're 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. That's not our plan. Dan, would you add anything else to that? No, I think you covered it well. Okay.
spk06: Thank you very much.
spk03: Thank you.
spk02: 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 Claassen for any closing remarks.
spk03: Great. Thank you. I appreciate everyone's time today. Hope you guys are all staying healthy. And, you know, Dan and I and Jeff and John will all be out at some of the conferences coming up here in the fall and winter months. Looking forward to getting the chance to see each other in person again. Thank you. Have a great week.
spk02: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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