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spk04: Good day and welcome to the West Banco fourth 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 this event is being recorded. I would now like to turn the conference over to John Ione, Senior Vice President of Investor Relations. Please go ahead.
spk06: Thank you. Good morning and welcome to WestBanco Inc's fourth quarter 2022 earnings conference call. Leading the call today are Todd Claussen, President and Chief Executive Officer, Jeff Jackson, Senior Executive Vice President and Chief Operating 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, westbanco.com. All statements speak only as of January 25th, 2023, and West Banco undertakes the obligation to update them. I would now like to turn the call over to Todd. Todd?
spk00: Thank you, John. Good morning, everyone. On today's call, we'll review our results for the fourth quarter of 2022. and provide an update on our operations and current 2023 outlook. Key takeaways from the call today are our operational strategies and core advantages were evident throughout 2022 and were highlighted by our earning numerous national accolades. We had solid financial performance demonstrated by loan growth, debt interest margin expansion, and discretionary cost control. We remain well positioned for continued success and are excited about our future growth opportunities. WestBanco had another successful year during 2022 as we remained focused on ensuring a strong organization for our shareholders and continued to appropriately return capital to them through both long-term sustainable earnings growth and effective capital management. Through successful operational execution, we generated solid annual net income while remaining a well-capitalized financial institution with strong liquidity, balance sheet, and credit quality metrics built upon our well-defined strategies and core advantages, which will ensure success regardless of the economic environment. We are pleased with our performance during the fourth quarter of 2022 as we continued to deliver loan growth, control discretionary expenses, and maintained our reputation for credit quality. For the quarter ending December 31, 2022, we reported net income available to common shareholders of $49.7 million and diluted earnings per share of 84 cents when excluding after-tax merger and restructuring charges. On the same basis, for the full year, we reported net income available to common shareholders of $183.3 million and diluted earnings per share of $3.04. Furthermore, the strength of our financial performance this past quarter is further demonstrated by a return on average assets of 1.18% and return on tangible equity of 16.05%. And our capital position remains strong and continues to provide financial and operational flexibility. Throughout the year, we accomplished several milestones and continued to receive numerous national accolades that resulted from our performance, operational strengths, and community focus. I'd be remiss if I did not congratulate our employees for these recognitions, as they are a testament to their hard work and dedication. Just to highlight a few. West Banco remains a leader in and advocate for its communities, and we continually look for ways to expand our outreach and involvement, including the issuance of our initial sustainability report. We launched new lawn production offices in Cleveland, Indianapolis, and Nashville, complementing our existing LPOs in Akron-Canton and Northern Virginia. Based on customer satisfaction and consumer feedback, WestBanco Bank was named by Forbes as the number one bank in Ohio and the number two bank in Kentucky, including high scores for trust, branch services, terms and conditions, customer service, digital services, and financial advice. For the fourth year in a row, we were named one of the world's best banks, which was also based on customer satisfaction and consumer feedback. For the third year in a row in the top 12, WestBanco Bank was once again named to Forbes list of the best banks in America based upon growth, credit quality, and profitability. We were named to the Forbes list of America's best midsize employers, earning a spot within the top 10% of all companies recognized. as well as securing the number two spot out of 30 companies included in the banking and financial services category. In fact, we were the only mid-sized bank making the top 10 for both financial performance and employer of choice. Finally, WestBanca was recognized as one of America's most trustworthy companies, as well as being one of only 20 banks to earn this nationwide honor for three touch points of trust, customer trust, investor trust, and employee trust. The key story this quarter was the strength of our lending teams as we demonstrated strong loan growth for the third consecutive quarter combined with solid credit quality measures, which continue to remain relatively low from a historical perspective and consistent through at least the last 10 plus quarters. Reflecting the strength of our markets and lending teams, we again reported solid broad-based loan growth during the quarter. Total loan growth excluding SBA PPP loans, was 11.7% year-over-year and 4.2% or 16.8% annualized when compared to September 30, 2022, while key credit quality measures such as total loans past due and criticized and classified loans declined both year-over-year and sequentially to 0.19% and 2.34% respectively of total loans. Despite mortgage originations of just $179 million during the fourth quarter, 90% of which were either purchase or construction, residential real estate loans increased more than 20% both year over year and sequentially annualized through the retention of approximately 80% of the one to four family residential mortgages generated by our team of mortgage loan originators. Total commercial loan growth continues to benefit from our team's and markets that have been enhanced by our hiring efforts over the past two years. For the fourth quarter, total commercial loan growth was 9.6% year-over-year and 4.1% from the third quarter or 16.2% annualized. Our commercial teams continue to find new business opportunities to replenish the pipeline. In addition to new loan originations of approximately $490 million during the fourth quarter, Our commercial pipeline has remained relatively consistent since last quarter at approximately $900 million. The strength of our pipeline represents the talent of our lending teams, as well as early success from our loan production office strategy, which only account for approximately 13% of the pipeline. While we will see what the economy will provide this year, I'm encouraged about our future commercial lending prospects as our newer lenders continue to gain traction, our recent LPOs gain market share, and we hire additional lenders. Through the last few years, we have transformed our company into an evolving regional financial services institution with a community bank at its core. We have done this through the successful expansion in a higher growth market spanning six states with the majority of our company now located within these markets while adhering to our foundation of disciplined discretionary cost control, risk management, and credit standards. As we have discussed before, A key investment in support of this evolution has been and will continue to be the investment in our employees as they are critical to our long-term growth and success. During both 2021 and 2022, we focused on improving retention and boosting morale by implementing increases in the hourly wage, which was very well received. In addition, we developed plans to increase the depth and strength of our teams across our business lines and markets. We successfully executed upon these plans by hiring more than 45 revenue producers during 2021 and more than 50 during 2022 and have begun to see the growth and positive operating leverage from these investments. We will continue to enhance our evolution into a solid and sound growth story combined with our strong foundation and core advantages through an ongoing lender hiring strategy. While we will continue to evaluate existing lenders to ensure appropriate productivity, We plan to annually add high-value and productive individuals to enhance our ability to leverage growth opportunities across our markets. We remain focused on ensuring an organization with sound credit quality, solid liquidity, and a strong balance sheet. We have the right markets, teams, leadership, and strategies to provide long-term success for our shareholders, customers, and employees. We're excited about our opportunities for the upcoming year. I would now like to turn the call over to Dan Weiss, our CFO, for an update on our fourth quarter financial results and current outlook for 2023. Dan? Thanks, Todd, and good morning.
spk01: During the quarter, we recognized strong loan growth, continued stability in our credit quality measures, improvement in our net interest margin, and maintained discipline over expenses. As noted in yesterday's earnings release, during the fourth quarter, we reported improved gap net income available to common shareholders of $49.7 million, in earnings per diluted share of 84 cents and net income of 182 million in earnings per share of $3.02 for the full year. Excluding restructuring and merger related charges, results for the three and 12 months ending December 31st, 2022 were 84 cents and $3.04 per share respectively, as compared to 82 cents and $3.62 last year respectively. It's important to note that the 2021 was favorably impacted by a negative provision of 51.6 million net attacks or 79 cents per share as compared to a benefit of two cents per share during 2022. Total assets of 16.9 billion as of December 31st, 2022 included total portfolio loans of 10.7 billion and total securities of 3.8 billion. Loan balances for the fourth quarter of 2022, which grew both year over year and sequentially reflected strong performance by our commercial and consumer lending teams and more one to four family residential mortgages retained on the balance sheet. Furthermore, as we expected, commercial real estate payoffs moderated this quarter, totaling approximately $63 million. We also reclassified $86 million of consumer loans secured by residential real estate to the HELOC category to better reflect the underlying collateral. SBA PPP loans in the prior year period totaled approximately $163 million as compared to $8 million this period. Importantly, reflecting the strength of our underwriting standards, our key credit quality measures continue to remain at relatively low levels and favorable to peer averages. Robust deposit levels remain a key story, as total deposits as of December 31, 2022, were $12.2 billion, excluding CDs. essentially flat compared to the prior year, as growth in non-interest-bearing demand deposits and savings accounts offset a decline in interest-bearing demand deposit balances. Further, our non-interest-bearing deposits improved to 36% of total deposits. Total deposits at year-end were $13.1 billion, down 3.2% year-over-year due to a $407 million reduction in CDs. The net interest margin in the fourth quarter of 3.49% increased 16 basis points sequentially and 52 basis points year over year. This increase reflects our successful deployment of excess cash into higher yielding loans combined with 425 basis point increase in the federal funds rate throughout the year. Our core margin continued to increase quarter over quarter from 3.27% to 3.44%, which excludes purchase accounting accretion of five basis points for both periods, while SBA PPP loan accretion was a basis point or less for both periods. A robust legacy deposit base provides a pricing advantage as compared to peers, especially those primarily in major metro markets. We are not immune to the impact of rising rates on our funding sources. Deposit funding costs for the fourth quarter of 2022 increased 44 basis points year over year to 57 basis points or 29 basis points when including non-interest bearing deposits. This reflects a total deposit beta of 8% as compared to 375 basis point increase in the federal funds rate throughout the year, excluding December, which did not meaningfully impact the year to date average. For the fourth quarter of 2022, non-interest income of 27.8 million was down $2.9 million year over year, primarily due to lower mortgage banking income, which decreased $2.3 million due to a reduction in residential mortgage originations consistent with the industry in general and the retention of more loans on our balance sheet. Securities brokerage continued its organic growth trend as net revenues increased $1 million year over year to a record $2.6 million. Our commitment to discretionary expense control in an inflationary environment combined with loan growth and net interest margin expansion resulted in an improved efficiency ratio of 56.9%. Excluding restructuring and merger-related expenses, non-interest expense for the three months ended December 31, 2022, totaled $90.4 million, a 2.6% increase year-over-year and a 1.6% decrease sequentially. It's important to note that the fourth quarter included a couple of large credits totaling approximately $2.5 million, which are not expected to repeat in our expense run rate going forward. Within salaries and wages, there was a $1.8 million downward adjustment to bonus expense, mostly related to lower mortgage lending commissions and annual volume-based incentives. And within employee benefits, there was a $600,000 credit. related to the deferred compensation plan, which fluctuates based on movement in underlying equity securities. Adding these two items back, non-interest expenses for the fourth quarter would have been approximately $93 million. Turning to capital, during the fourth quarter, the quarterly dividend was increased from 34 cents to 35 cents per share, representing a 2.9% increase. Our capital position remains solid, as demonstrated by regulatory ratios that are above the applicable well-capitalized standards, and our tangible common equity ratio improved to 7.28% as of December 31, 2022. Now I'll provide some initial thoughts on our current outlook for 2023. We remain an asset-sensitive bank and currently model Fed funds to peak at 5% during the first quarter and then hold steady throughout the remaining quarters of 2023. We are modeling a couple basis points of margin expansion in the first quarter and hold relatively flat for the remainder of the year as deposit pricing continues to rise. We expect purchase accounting accretion to be approximately four to five basis points per quarter and no meaningful SBA PPP accretion. As I mentioned, our robust Legacy deposit base provides a pricing advantage over the industry, and we anticipate our deposit betas to continue to be lower than peers and to generally lag the industry. Residential mortgage originations should remain positive relative to industry trends due to our new loan production offices and hiring initiatives, as well as the anticipated stabilization in interest rates and should begin to rebound as the year progresses. While it is dependent on origination production, We continue to expect to move over time to selling approximately 50% into the secondary market, subject to customer preferences and pricing. Trust fees will continue to benefit slightly from organic growth, as well as be impacted by the trends in the equity and fixed income markets. As a reminder, first quarter trust fees are seasonally higher due to tax preparation. Securities brokerage revenue should continue to benefit modestly from year-over-year organic growth. Electronic banking fees and service charges on deposit will most likely remain in a similar range as the last few quarters as they are subject to overall consumer spending behaviors. In addition, we anticipate an increase in new commercial swap fee income above the approximate $4 million we've earned annually over the last few years as we have implemented improvements in our training and strategy. While we remain diligent on discretionary costs to help mitigate inflationary pressures, We intend to continue to make important growth-oriented investments in support of long-term sustainable revenue growth and shareholder return. This will include ongoing efforts to attract and retain employees, in particular commercial lenders across our metro markets, as we continue a similar hiring strategy that we implemented for 2022. We'll continue to make improvements to infrastructure, which will include upgrading about a third of our ATM fleet with the latest technology as well as other digital product enhancements. We anticipate higher pension expense of approximately $1 million per quarter within employee benefits based on an expected lower return on plant assets and expect to be impacted by the industry-wide FDIC insurance rate increase. To support our growth plans across our markets, we anticipate investing more in marketing with a focus on revenue-generating campaigns. We will also continue to evaluate our financial center network to identify cost-saving opportunities which could provide a benefit in the second half of the year. Based on what we know today, we believe our quarterly expense run rate to be in the mid $90 million range. We believe that 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 loss is under CECL. We'll be dependent upon changes to the macroeconomic forecast and qualitative factors, as well as various credit quality metrics, including potential charge-offs, criticized and classified loan balances, delinquencies, changes in prepayment speeds, and future loan growth. Lastly, we currently anticipate our full-year effective tax rate to be between 19% and 20%, subject to changes in tax legislation, deductions and credits, and taxable income levels. Operator, we are now ready to take questions. Would you please review the instructions?
spk04: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone 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 one question and one follow-up. If you have additional questions, please re-enter the queue. At this time, we will pause momentarily to assemble our roster. The first question today comes from Daniel Tomeo with Raymond James. Please go ahead.
spk02: Good morning, guys. Excuse me. Good morning, Dan. Maybe we start on... on the loan growth expectations. It's just interested in what you're seeing and what you're expecting for the coming year. And then, you know, with the loan deposit ratio still relatively low, how much you're willing to let that rise and fund from securities runoff.
spk00: Yeah. Okay. I'm glad to answer that at the end. It's obviously loan growth is going to be economy dependent, right? So a lot of, mixed signals out there right now with regard to what the economy is going to do. I think we get the GDP number this Thursday. But, you know, I think in looking at kind of our comments in the past have been upper single-digit growth rate kind of on a long-term basis is kind of what we've been striving towards and kind of feel like that's where we were last year, nearly in the upper single-digit, low double-digit range. And that's really what we're comfortable with, I think, on a longer-term basis. Yeah, pipelines continue to stay consistent, as I said in my comments as well, too. So that looks good. And I think we've built the right organization in our growth markets to be able to finally kind of achieve that path that we've been building for the last number of years on upper single-digit growth rates. So I feel good about that, but I just don't know what the economy is going to bring us right now. When I look at the deposit side of things, and Dan might want to jump in here as well too, and the loan to deposit ratio, it is an advantage that we have right now. We don't want to give that all away, obviously. We do expect to continue to have some solid loan growth over time, and the deposit base is going to need to build along with that. it wouldn't be the plan to let that run too far. But at the same time, we want to take advantage of that deposit funding advantage that we have. We'll probably get into more deposit discussions in a little bit here, I would imagine. But when we really look at deposits in general, obviously the CDs, we let those run off. We replaced those with some federal home loan bank borrowings. But we are reintroducing some CD specials nothing like you would see at some of our competitors in the higher growth markets. We think we can generate some CD business or at least slow the runoff of CDs in our legacy markets by just being a little more aggressive than we've been. But I would think that loan-to-deposit ratio may drift up a little bit more, but we really don't want to give that all away. We're comfortable in that 90% to 95% loan-to-deposit ratio over time, and when we were there few years before the pandemic. I imagine we'll get back to that point. So, you know, how quickly we get there will be dependent upon how aggressive we need to be on deposits and to really be driven by what kind of loan growth that we see. That's a long-winded answer, but that's kind of the best way I see it right now anyway.
spk02: No, that's terrific. I appreciate all the color. And maybe my follow-up just on credit quality, you've seen the reserve ratio come down here a decent amount over the last few quarters, settling around 110. You know, just curious, you know, what the big drivers are there and then what would we need to see to have reserves grow from here outside of an increase in lost content within the portfolio?
spk00: Yeah. Related to Cecil, Dan, do you want to? jump in and cover that comment?
spk01: Yeah, I would say if you look in slide nine, you can see there's a waterfall chart there that kind of shows the reserve bill in dollars. Obviously, we saw a $3.1 million provision this quarter. That's actually the first time in, I think, seven quarters that we've recorded a debit to the provision. The last seven quarters have been negative. And so I think what we've seen kind of since the pandemic, we've seen a number of qualitative factors related to some of those higher risk areas kind of continue to roll off over the last seven quarters. And we're to the point where those are more or less behind us. So the drivers of the reserve and the provisioning going forward really are going to continue to be more normalized, you know, future macroeconomic forecast, loan growth, and then, of course, you know, to the extent that we would see any charge-offs, that would also, you know, impact, you know, provisioning and reserve levels. But I think those are the drivers probably going forward, and I would say that, you know, that 3.1 million that we recognized here in the fourth quarter is, you know, probably kind of the more normal, you know, run rate going forward.
spk02: Terrific. All right. Thanks again for all the color. Thanks, Dan.
spk04: Next question comes from Carl Shepard with RBC. Please go ahead.
spk07: Hey, good morning, and thanks for taking my questions. Morning.
spk04: Morning.
spk07: I guess I wanted to start here on funding cost. And you mentioned in the prepared about not being immune to higher interest rates. Can you expand on that a little bit? And maybe where are you starting to see signs of pressure? And do you think that can ease as the Fed slows or do you think there's some expectation of kind of lagging pressure as we move through 2023?
spk00: Yeah, that's a great, that's a really great question, particularly, you know, when, you know, when will, when will the Fed start to drop rates, right? I mean, our forecast, as Dan mentioned, is to go to 5% in the first quarter and stay there throughout the year. So that's kind of what we're anticipating right now. If rates do start to drop toward the end of the year, or into 2024, I think what we saw on the last time there was a drop, we were able to continue to have that deposit advantage by being able to be aggressive in dropping our funding costs because that deposit advantage really is throughout all different rate cycles. So we would be in a position, I think, to be able to bring deposit costs down if the Fed starts dropping rates at some point in the future. I guess the question here now is we're not immune to deposit cost increase, but because of our strong core funding base, it allows us to lag. And we've had that historically, that benefit, and we're seeing it again now. Obviously, rates moved up a lot faster, a lot quicker than anybody in the industry really has seen before. So relying on betas from years ago really may not be very applicable to now. So we're watching it pretty much on a weekly, if not daily basis, what's going on with deposit costs. We've been proactive with some of our higher tier savings rates, some new CD specials, giving some pricing authorities in our markets and things like that. So we are addressing that. But how quickly we need to address that, how much we need to address that, we'll really be dependent upon what we need for loan growth, but also what we see happening in the economy here over the next month or two. And I still don't think that you'll see us on the lower side from a beta perspective of peers. We expect that advantage to continue right through the rate cycle that we're in right now.
spk07: Okay. That's helpful. And then I wanted to pivot here to talk about loan growth a little bit, too. I get that you're reluctant to provide a full year view of kind of the economy and what that might mean for loan growth, but could you help us understand the quarter a little bit better? Of the trends for 4Q, is that new offices and execution, or do you think it's also strong loan demand, or is it more moderating payoffs? Just help us break out those pieces a little bit so we can think about where to go from here.
spk00: Sure, sure. Well, about 13% of our pipeline is from the LPOs, right? So they're showing up in the pipeline, but We're not seeing really loan growth in any material way at this point from the LPOs. We should see that, I think, this year, next year, again, economy dependent. So that is something that's going to be a benefit to us. But I would not tell you that the loan growth that you saw last year from us was based upon new LPOs because that wouldn't be accurate. It was a minor part of it. I think it was more of just hiring into the markets that we've already been in. As you guys know, over the last decade or so, even longer than that, we've been acquiring into higher growth markets like Louisville, Lexington, the Mid-Atlantic markets to put a little more of a growth profile on West Banco while still keeping our core advantages on the credit and deposit side and everything else. I think this is just the fulfillment of that. At least that's the way I look at it, was we had to acquire into those markets and then assimilate those organizations and then hire additional people into those organizations And now we're seeing the benefit of that starting to show up, which is why I'm really looking at the upper single-digit loan growth going forward, is because we've been building this for quite a long time now. And I think our organization is positioned well to take advantage of that. With regard to the fourth quarter, we did get some benefit from a lower level of commercial real estate payoffs of about $60 million. And we had $160 million, I think, in the quarter before that. We expect about a $90 million, $80 to $90 million to kind of be our normal quarterly commercial real estate payoff rate. So we did get benefit from that. And as Dan said in his comments, we are putting 80% of our resi mortgage on our books as well, too. We typically would do about 50%. So, you know, I think if you were just to roll the resi mortgage back to 50% and look at that, assuming we had done that last year, you know, we would have had loan growth of about 8% or 9%. because we put more resi on that bumped us up to a little over 11%, but that's market dependent based upon what's going on with what consumers want. But that's why I really feel like we're more at an upper single-digit loan growth rate, which I think is sustainable over time. Any quarter can be up or down. A couple hundred million dollars is going to move the needle a lot with a bank our size, and you really need to look at it, I believe, on an annual basis or know two to three year basis to really get a good idea of you know what what the franchise run rate is great thanks for all the help okay thank you the next question comes from casey whitman with piper samar please go ahead hey good morning hi casey welcome back thank you morning um
spk05: I guess just moving on to thinking about capital here. First, can you touch on sort of your appetite for buybacks going forward and sort of how price sensitive you are there? And then the follow up would be just sort of give us an update on how you're viewing M&A for you guys this year.
spk00: I'll start off on the capital side and let Dan jump in on that and then I'll hit on M&A as well too. I think from a capital perspective, you know, we were watching what was going on the last couple quarters with AOCI. You know, some say it matters, some say it doesn't. But we were paying a lot of attention to it. And we did slow back the buybacks. You know, the buybacks we did do in the fourth quarter were at the early part of the fourth quarter. And part of that was because, you know, we wanted to watch and see what happened with AOCI and trying to stay in our, you know, 7%-ish type of range. but also the price to tangible book was up close to 200% or so, and we felt that was a pretty big number. I think as we look at this year, some of the things that we'll bet, I think AOCI is moderated. We all see that. We all know that. I'm not sure that's going to be as big of an impact on people's planning this year as maybe it was last year. But when I really look at the whole buyback piece of it, That's something we're going to have to evaluate. I mean, I know a lot of people are looking through AOCI. So if you look through AOCI, you know, maybe you're not at 190 or 200% of tangible book. Maybe you're at a lower number. So that's something that we'll evaluate. We haven't made up any firm decisions yet. But, you know, we still have 1.2 million share authorization. And we'll pull on that when we think it's appropriate. That could be this year. We may start doing some of that. But I think that's going to be dependent upon what we see over the next couple of months. Dan, anything else you would add on that?
spk01: No, I think you covered it well.
spk00: Okay, sorry. I took all your comments on it. On the M&A side, I would tell you that we're not actively looking at anything right now. We're doing a lot of introductions. Jeff's sitting next to me here, and he and I are making a lot of trips to the markets that we have a lot of interest in and introducing him to some key executives at some other banks, people that I've known, and he's introducing me actually to some people he's known. as well too. So we're definitely interested if the right thing were to come along. We think we've got the capital, you know, the liquidity, obviously got a new core operating system we put in place a year and a half ago now. So we feel like, you know, we would be ready to do something, but we don't feel like we need to. You know, I think with finally being able to realize the loan growth that we've been working towards for a long time, it's kind of nice to be in that position and just focus on organic growth. So we may very well just decide to do that. But also at the same time, if we had the right opportunity come along, I think we'd be prepared to act on it. But at this point, we're not actively looking at anything.
spk05: Understood. Are there particular markets that you would be most interested in, or is it sort of footprint-wide?
spk00: Yeah, I think it's the markets that we're already in and where we have LPOs, right? So part of our idea with the LPOs is to get to know some of the markets a little bit better. and then do a follow-on acquisition potentially. We did that in Pittsburgh, set up LPOs, I don't know, 15, 18 years ago, and then ended up buying two banks eventually up in that marketplace once we got to know it. So, you know, I think that outside of the existing footprint that we have, you know, we have LPOs in Northern Virginia, Indianapolis, Nashville. I think those would all be kind of interesting markets that would still be within that geographic time frame or geographic drive distance. that we're kind of looking at. So finding something that would be in those growth year markets, try to continue the story that we've been working on, which is to have us be a little higher growth profile company while still maintaining good, obviously good credit quality. Wouldn't be opposed to doing something that was in market already. If there was decent expense takeouts, branch overlap, that kind of stuff, I think that would be interesting to look at if something like that came along. The focus really is on higher growth markets, Pittsburgh, Columbus, Cincinnati, Louisville, Lexington, the suburban D.C. market. But throw Northern Virginia, throw Central Tennessee, throw Central Indiana in the mix as well, too. Those would all be areas that would be of interest to us.
spk05: Great. Appreciate it. Thanks. Thank you.
spk04: As a reminder, if you have a question, please press star then 1 to enter the question queue. The next question comes from Katherine Mueller with KBW. Please go ahead. Thanks.
spk03: Good morning.
spk00: Hi, Katherine.
spk03: I wanted to go back to the margin and funding conversation. And I know you mentioned, Todd, that you added a little bit of borrowing this quarter, but you continue to see CD balances decline, so it kind of shows FHLB over CDs. As we move into 2023, that changes, and so if we look at the balance of SHLB at quarter end, should we model that to decline a little bit as we move through the year and maybe grow CDs? Just kind of curious how you're thinking about, you know, the kind of higher cost, more wholesale-ish funding strategy to fund growth. Thanks.
spk00: Sure. Why don't I hand that off to Dan?
spk01: Yeah, so I would say, Catherine, a couple things. Obviously, you know, the securities portfolio, right now represents about 22% of our balance sheet. That's a little heavier than where we've maintained it historically. So we do expect to get some funding from that securities portfolio and reinvest into loans. So right now that's kicking off about $50 million per month, $150 million per quarter. And so that would be where the first dollar would come from. If we look towards CDs relative to FHLB borings, as Todd mentioned, we do have some CD rate specials. So we expect that that more or less will slow down some of that CD runoff. But I would say to the extent that we see, if we didn't see deposit growth, let's say, and loan growth for more than kind of that $150 million per quarter kicking out of the CDE portfolio, I think we would continue then in that case to leverage those wholesale offerings. Of course we have some other levers that we can pull, but I think today we would be, to the extent that we needed more than let's say that $150 million per quarter, plus the slowdown in CDs, we would continue to leverage those wholesale parts.
spk03: Okay, great. And I think you mentioned in your prepared remarks about – I think you said that the margin you expect to be flat for the rest of the year. Can you just circle back on your expectations for the margin this year? And I feel like everyone – is thinking about this quarter's margin as the peak. But I think you could argue that you might be different than none of your peers, just given your ability to lag funding costs. So just kind of curious how you're thinking about peaking in in the outlook.
spk01: Yeah, so the way we think about that really, and as I mentioned, a couple basis points of expansion here over the next three months or so. Certainly, we're not expecting that double-digit expansion that we saw here in the fourth quarter, 16 basis points or anything like that. But I think it'll be very much dependent on deposit inflows and outflows. Again, going back to that wholesale borrowing discussion, it'll be dependent on what loan growth looks like and how much we can fund through deposits and CD retention versus FHLB borrowings. But generally speaking, we do expect, for example, loans to continue to reprice upward in the second quarter off of those first quarter rate hikes. So we've got in our model 50 basis points of Fed fund increase in the first quarter. But we really expect the funding costs to rise as well, such that they more or less will kind of offset net to zero. And so that's where we look at kind of a stable NIM kind of in the second quarter going forward. Again, that's assuming, you know, a 5% Fed funds rate that holds stable as well throughout the year. But then once you get past, you know, second quarter, I think we've got a lot of momentum. You know, we're going to begin to reprice fixed rate loans that are maturing. We'll still have the variable rate loans that are, you know, that have repricing terms that are beyond just the three months, you know, that'll be repricing as well. And I think those tailwinds will really begin to kind of offset the rising deposit costs from a margin NII standpoint. So that's kind of how we look at the margin basically from second quarter forward, kind of a stabilizing, taking advantage of the pricing or the increase on the asset side with basically an offset on the deposit or the funding cost side.
spk00: Yeah, I mean, obviously the As mentioned earlier, the strategy eventually is to get to probably mid-90s. Who knows when that will happen down the road, obviously a waste. But we're going to be very tactical about how we do that. And that's going to be based upon things that are going to reveal themselves to us in the industry over the next couple months, the next couple of quarters. But the plan wouldn't be to keep deposit rates so low that we use up all that extra balance sheet capacity too quickly. At the same time, we want to make sure that we capitalize on the advantage that we have as well, too, and make sure that we are raising rates appropriately, not too fast, not too slow, kind of slowly let the line out, so to speak, until we start to creep up into the upper 80s and then lower 90s and then eventually mid-90s. That may take a few years to materialize. Again, that's going to be dependent in large part, I think, on what we see on the loan growth side.
spk03: And last question on the margin, how about loan, where are loan yields maybe towards the end of the quarter and new pricing as well?
spk01: Yeah, so we do have on slide four, we show kind of the new loans that are coming onto the books, coming on right around six and a quarter percent. And if you looked at kind of a spot yield For the month of December, we'll call it, loans were coming on around 679. So that's about a 55 basis point increase the month of December versus the quarter. So that's kind of about where we're at.
spk03: Great. And that's new loans coming on, not the total portfolio, of course. Correct. Great. Okay. All right. Great. Very helpful. Thank you so much.
spk01: Thank you.
spk04: The next question comes from Manuel Navas with DA Davidson. Please go ahead.
spk08: Hey, good morning. Could you add any color on what you're thinking? I know it's early stages for kind of rethinking the branch network in the back half of the year. Is that more to kind of fund investment, have it drop to the bottom line, modernize the network? Just kind of expand on any early thoughts and early goals there. Obviously, it's not set in stone yet.
spk00: Sure. The last couple of years, a number of years actually, we've been, what I would say, rationalizing the branch network or optimizing it. We build a branch here or there every once in a while, but we've been optimizing 10 to 15 branches or so a year and using those excess, I guess I would say, reduction in expenses to to fund all the above. So some of the technology spends, Dan mentioned the ATM network we're upgrading. So some of the money is going towards that. Also the new lenders that we've hired and that we anticipate hiring, the LPOs. So we've been able to redeploy those savings into those areas and really drive, I think, a significant amount of current and future positive operating leverage from those investments. We're going to continue to do that, looking at the whole branch distribution system. Obviously, we've got a big advantage in our legacy markets. I don't want to give that up, right? So those branches and some of our rural markets are important to us. Customers are important to us. Deposits are important to us. But at the same time, we want to make sure that we're balancing out the right way so that we can invest where we need to invest and still keep the efficiency ratio where we want it to be and to keep – as Dan mentioned, kind of the quarterly run rate on expenses, at least for the next couple quarters in the mid-90 range. So that's kind of the balance that we're doing. We don't know how much longer we would continue to do 10 to 15 branches a year, but again, that's somewhat dependent on M&A as well, too, and buying other banks that have a branch network that could be rationalized, too.
spk08: That's helpful. So it's kind of already in the run rate that type of savings and investment at the same time that's the right way to think about it yes okay um is if if the economy slows down a bit and you have a little bit slower than high single digits kind of near-term loan growth would that impact kind of your hiring plans or any of these somewhat like expense initiatives
spk00: Well, I would say, you know, if we see deposit costs increase quicker than we're anticipating, then I think, you know, we've got some expense things that we've talked about that we could do, you know, to try to still come through with the same net income we'd like to come through with. So we have been kicking around some ideas on the expense side that are not baked into the run rate. I'm not really ready to talk about them. They're not people related. But, you know, there are some things that we could do if the economy slowed. if we entered a more severe recession than everybody thinks we might. I think if loan growth slows down, though, the plan would not be to abandon our strategy to build capacity for loan growth. We've been doing that for a while, really building that for a while. I know that's something that's important to Jeff, as he succeeds me as well, too, is that we have that put in place. So the context that he has, the context that I have, the work that we've done over time with regard to the markets and lenders, I don't think we want to slow that down. We'd like to continue to move that forward. But we don't want to show a big expense number in any quarter or two. We want to make sure that we're getting the positive operating leverage from the teams that we're hiring, the people that we're hiring, and things like that. So that's kind of the way I guess I would answer it at this point. is that our strategy to get that upper single digit loan growth, we really don't want to abandon it. You know, obviously, if you hit a real severe recession, you know, then you really start getting more focused on cost control. But at this point, a slight recession or soft landing, maybe no recession, you know, we just think we, you know, we power right through it because we've got some good momentum going. Also, the first quarter, second quarter of the year is the time to hire lenders, you know, because they're all kind of getting their bonuses and they're all free agents at that point in time. The back half of the year is a little tougher to hire people because then you've got to, you know, obviously you've got to cover some big out-of-pocket numbers to get people to move.
spk08: Thank you. I really appreciate that, Collar. Thank you. Sure.
spk04: The next question comes from Daniel Cardenas with Channy. Please go ahead.
spk09: Good morning, guys. As we continue to talk about loan growth here, are there any categories that maybe you're approaching more cautiously now than say versus a year ago?
spk00: Well, I'd say it goes back even more than a year ago. At the start of the pandemic, obviously, we got very cautious on hospitality and office. Hospitality portfolio has come through in really great shape. No issues that we see in the office portfolio either, but that's the one everybody's watching for the next couple of years is really what happens to the office portfolio. So we're not doing much in the way of office. They would have to be really low on the value with strong guarantors with a lot of liquidity, so not a lot of office at all at this point in time. Not a lot of hospitality either, still being very cautious on that. Those would be the two areas that I would mention. We're seeing a lot of really good C&I business. A lot of the lenders that we brought on in our legacy markets have really started to bring us some nice C&I business. Commercial real estate is still a big part of who we are, but it's nice to see the C&I business as well. But outside of the two real estate categories, office and hospitality, I would say the other areas we're continuing to lend into. We don't do much in energy, as you know. We're less than 1%. energy, so that's not a factor for us, but other businesses seem to be pretty good. Excellent.
spk09: And then maybe some color in the quarterly rent rate on fee income for 23.
spk00: I'll let Dan jump in here as well. Obviously, we're impacted by the lower residential mortgage production than what we had in the past, and then obviously putting more on our books. We have benefited to some degree higher securities revenue. A lot of that's coming from the CD book, putting fixed rate annuities out there and getting the commissions off of that. So that's, I think, part of the reason why securities are up so much. And then we're seeing more business activity occurring and even consumer activity, which is driving more service charges on the consumer side. Dan, any comments you'd make on that?
spk01: The only things I would add maybe is that if you look at trust fees, first quarter trust fees will be a little higher due to the tax preparation fees. That's kind of an annual thing. And then thinking about swap fee income, that's been a pretty big focus here since Jeff's come on board and he's been very focused on that. So there's been a lot of training and strategy around how we can kind of better deploy the and, you know, kind of tap into that a little bit more. So I think that's probably going to be the other area that we'll see some lift on as we go through 2023.
spk00: Yeah, and the markets that we've acquired into, you know, again, we're still driving additional new products and, you know, training in those markets as well, too, because a number of the banks that we acquired in Kentucky and then the Mid-Atlantic market did not offer some of the things that, you know, that we offer, swaps, you know, being one of them, but... also on the trust fees and having securities reps, Series 7 as well as 6A people and branches, things like that. So there continues to be upside opportunity there, similar to what we're seeing on the loan growth side in those markets. I think we'll continue to see some better fee growth side because, again, these were new products and new businesses that we've introduced into those markets through the banks that we bought.
spk09: Okay, great. Thank you. I'll step back.
spk04: This concludes our question and answer session. I would like to turn the conference back over to Todd Klassen for any closing remarks.
spk00: Great. Thank you, and I appreciate everyone's time today. I know a lot of earnings meetings are taking place. Appreciate your joining ours. I look forward to speaking with you in the near future at one of our upcoming events as well, too. So please stay safe and have a good day. Bye-bye.
spk04: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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