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spk11: Good morning, and welcome to the WestBanco Incorporated's first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the start key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to John Ioning.
spk01: Please go ahead. Thank you. Good morning and welcome to West Banco Inc's first quarter 2023 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 as of only April 25th, 2023, and WestBanco undertakes no obligation to update them. I would now like to turn the call over to Todd. Todd? Thank you, John.
spk09: Good morning, everyone. On today's call, we will review our results for the first quarter of 2023 and provide an update on our operations and current 2023 outlook. Key takeaways from the call today are solid financial performance demonstrated by loan growth and discretionary cost control. Key credit quality metrics have remained at low levels and favorable to peer bank averages. We remain well capitalized with solid liquidity and a strong balance sheet with capacity to fund loan growth. And we are well positioned for near-term success while continuing to make appropriate long-term growth-oriented investments. We're pleased with our performance during the first quarter of 2023. We demonstrated the earnings power, capital, and liquidity to perform well amidst a quarter of broader industry volatility driven by financial institutions with different operating models than ours. We reported loan growth while maintaining credit quality and delivered solid pre-tax, pre-provision net income. We diligently managed discretionary costs while making appropriate investments that build upon and enhance our strong markets, teams, and core advantages. And we remain focused on ensuring a strong organization with solid liquidity and a strong balance sheet. For the quarter ending March 31st, 2023, we reported pre-tax pre-provision income of 13.2% year over year and net income available to common shareholders 42.3 million with diluted earnings per share of 71 cents when excluding after-tax merger and restructuring charges. On a similar basis, the strength of our financial performance this past quarter is further demonstrated by our return on average assets of 1.01% and return on tangible equity of 13.5%, and our capital position continues to provide financial and operational flexibility. While Jeff will discuss our loan growth, it's important to highlight the strength of our credit underwriting and overall conservative risk culture. We do not chase loans or take undue risk just to report growth. We're focused on long-term, sustainable growth through all economic cycles. We're achieving our strong loan growth while maintaining our credit standards. Again this quarter, we reported key credit quality measures that continue to remain at low levels and favorable to all banks with assets between $10 and $25 billion. Total loans past due, as the percentage of total loans were 16 basis points, down more than 50% from last year. Non-performing assets as a percentage of total assets have ranged from just 21 to 26 basis points since the first quarter of 2020. Lastly, criticized and classified loans as a percentage of total loans were 1.6%, down 208 and 74 basis points year-over-year and quarter-over-quarter, respectively. In fact, this is the lowest level in nearly four years. Jeff will now provide an update on our key first quarter operational topics.
spk08: Thanks, Todd. We continue to effectively execute our strategic business plans, as evidenced by our solid loan growth across all markets, disciplined expense management, and excellent credit quality reported for the first quarter. I am pleased that the strength of our markets and lending teams, combined with our LPO strategy, continues to meet our expectations. As we demonstrated total loan growth of 11.9% year over year, and 7% annualized when you compare it to December 31st, 2022. Residential real estate loans continue to benefit from the retention on the balance sheet of approximately 70% of the one to four family residential mortgages originated. Total commercial loan growth reflects the strength of our teams and markets, which we have enhanced through our hiring efforts over the past two years. For the first quarter, total commercial loan growth was 9% year over year, and 4% annualized sequentially. Briefly, I would like to provide some comments on the high quality of our office space loan portfolio. Outlined on slide five of the supplemental earnings presentation. The portfolio, which represents just 4% of the total $10.9 billion loan portfolio, is very high quality, with more than 96% of the loans in past risk categories, and no non-performing loans. The average loan size is roughly 1.5 million, average LTV is 62%, and the average debt service coverage is 1.8 times. The portfolio is geographically diverse across our six state footprint and located predominantly in suburban markets. Our commercial loan pipeline at March 31st was 1.1 billion, an increase of approximately 25% since year end. as our teams continue to find business opportunities to replenish the pipeline. Our newer markets in Kentucky and Maryland account for roughly 30% of the pipeline, while our LPOs in Cleveland, Indianapolis, and Nashville are contributing approximately 13%. Importantly, we have ample liquidity sources to fund loan growth. Our deposit granularity, as evidenced by our average deposit account size of $27,000, reflects the trust our customers have in our 150-year heritage as a community bank. Our loan-to-deposit ratio of 83.5% provides us with ample lending capacity to support our customers as they grow. In addition to $600 million of cash on our balance sheet as of March 31st, normal remix from our securities portfolio to the loan portfolio can cover approximately 4% loan growth. not to mention cash flow from the normal loan maturities and P&I payments. While the core funding advantage of our legacy markets continue to contribute approximately $25 million a quarter, we have implemented several initiatives to help drive additional organic deposit growth, albeit at potentially lower costs than peers located in the major metro markets. Through the last few years, we have executed a strategic transformation of our company into an evolving regional financial services institution with a community bank at its core. We have done this through successful expansion while adhering to our foundation of expense control, risk management, high credit standards, and a strong workforce equipped with the skills to drive success. And we will continue to adhere to that strategy as we continue to evolve. Similar to our hiring strategy, the last couple years, we still do expect to hire additional commercial bankers, primarily C&I this year. We believe that continuing to add top-tier talent across our robust and diverse markets is a key to our long-term success. However, we will proceed cautiously as we monitor the operating environment and will adjust our plans as appropriate. We also expect to fund these new hires through internal efforts including the adjustment of existing banker staffing levels. In summary, we have distinct growth strategies with unique long-term advantages, balanced distribution across economically diverse major markets, and a strong customer service culture combined with robust digital services that enable us to deliver efficient solutions when, where, and how our clients need them. We are focused on strengthening our diversified earnings streams for long-term success with new capabilities and strategies. My transition continues to go well, and I enjoy working with Todd and the team. Back to you, Todd.
spk09: Thanks, Jeff. Well, West Banco continues to be acknowledged for its soundness, profitability, employee focus, and customer service as it continued to receive numerous national accolades over the last few months. For the 13th time since 2010, we were named one of America's best banks for strong capital, credit quality, and profitability. For the third consecutive year, we were voted by our employees as one of the best midsize employers. We provide an environment where employees feel valued and are provided avenues for success while encouraging a strong customer-centric focus that ensures a sound and profitable financial institution for our communities and shareholders. I'd like to once again congratulate our entire organization as we continue to deliver large bank services with a community bank feel while providing our customers with top tier service. Their efforts earned us, for the fifth consecutive year, the recognition as one of the best banks in the world based upon customer satisfaction. We received strong scores from our customers for customer service, digital services, satisfaction, and financial advice. I'd now like to turn the call over to Dan Weiss, our CFO, for an update on the first quarter results and the current outlook for 2023. Dan?
spk04: Thanks, Todd, and good morning. As presented in yesterday's earnings release, during the first quarter, we reported improved gap net income available to common shareholders of $39.8 million and earnings per diluted share of $0.67. Excluding after-tax restructuring and merger-related charges, net income and earnings per diluted share for the first quarter were $42.3 million and 71 cents per share, respectively, as compared to 42.9 million and 70 cents last year, respectively. It's important to note that the first quarter of 2022 was favorably impacted by a negative provision of 2.8 million net of tax, or approximately 5 cents per share, as compared to a provision increase during the first quarter of this year of approximately 5 cents per share. Therefore, on a pre-tax, pre-provision basis, income improved by 13.2% year over year. Total assets of 17.3 billion at the end of the quarter included total portfolio loans of 10.9 billion and securities of 3.7 billion. Total portfolio loans grew both year over year and sequentially reflecting the strength of our markets and lending teams, as well as more one to four family residential mortgages retained on the balance sheet. Reflecting the uncertainty in the economy, Average first quarter CNI line utilization was 32.5%, a year-over-year decrease of approximately 350 basis points, or $25 million. Overall, our deposit levels and recent trends reflect granularity and relative stability of our deposit base, which can be seen on slide six of the earnings presentation. Total deposits have been impacted by interest rate inflationary pressures, and the Federal Reserve's tightening actions to control inflation, which has resulted in industry-wide deposit contraction. Core deposits were down approximately $360 million in January, before remaining relatively flat through February and March. Total deposits at the end of the first quarter were $12.9 billion, down 2%, or $260 million when compared to December 31, 2022. which also includes $140 million in shorter term broker deposits. Further, our demand deposits continue to represent roughly 60% of total deposits, while non-interest bearing deposits were 35% of total deposits, which is relatively consistent with the fourth quarter. The net interest margin in the first quarter of 3.36% increased 41 basis points year over year, which reflects the 425 basis point increase in the Fed funds rate since March of 2022, as well as our successful remix of securities into higher yielding loans. The net interest margin decreased 13 basis points from the fourth quarter of 2022, primarily due to higher funding costs as lower cost deposits were replaced with wholesale borrowings, were repriced, or migrated to higher tier savings products. As we've mentioned previously, while our robust legacy deposit base provides a pricing advantage, we're not immune to the impact of rising rates on our funding sources. Total deposit funding costs, including non-interest bearing deposits for the first quarter of 2023, increased 28 basis points quarter over quarter to 65 basis points. On a year over year basis, our total deposit beta was 13% as compared to the 425 basis point increase in the FUD funds rate over the last 12 months, reflecting our ability to lag peers as it relates to deposit funding cost increases. And also, we continue to balance the cost benefit of allowing some deposit runoff in the near term against the cost of repricing the entire book. Non-interest income of $27.7 million in the first quarter was down $2.7 million year-over-year, primarily due to lower bank-owned life insurance and mortgage banking income. Bank-owned life insurance decreased 1.9 million year-over-year due to higher death benefits received in the prior year period, and mortgage banking income decreased 1.5 million year-over-year due to a reduction in residential mortgage originations. Reflecting our renewed focus on commercial loan swaps, new swap fee income of $1.8 million, which is recorded in other income, increased $1.7 million from the prior year period. Turning now to expenses, despite the continued inflationary environment, non-interest expenses were better than our prior expectations. Excluding restructuring and merger-related expenses, non-interest expense for the first three months ended March 31, 2023, totaled $93 million, an 8.2% increase year-over-year, reflecting inflation, higher staffing levels and associated costs, and higher FDIC insurance from an increase in the minimum rate for all banks. As a reminder, the fourth quarter of 2022 included a couple of large credits totaling approximately $2.5 million, which were not repeated in the expense run rate. When adjusting for these credits, first quarter non-interest expenses were flat to the fourth quarter. Salaries and wages increased year over year due to the higher staffing levels, mainly revenue positions and merit increases. Employee benefits also increased from last year due to higher staffing, as well as an increase pension expense, and higher health insurance. Equipment and software expense increased due to the planned upgrade of a third of our ATM fleet with the latest technology and general inflationary cost increases for existing service agreements. Moving to capital, we remain focused on ensuring a strong capital base while also returning it to our shareholders through appropriate capital management. Our capital position has remained solid as demonstrated by our regulatory ratios that are above the applicable well-capitalized standards, and our tangible common equity to tangible assets ratio improved 16 basis points on a sequential quarter basis to 7.44% as of March 31, 2023. In light of recent events, we've added slides six and seven to our supplemental earnings presentation. On slide six, we provide insight into the composition of our deposit base and highlight our geographically dispersed granular and rural deposit franchise. Nearly 60% of our deposit base is retail-oriented with over 475,000 deposit accounts and an average deposit size, as Jeff mentioned, of $27,000 per depositor when including business and public funds. On slide seven, we highlight our securities portfolio with an overall weighted average duration of 5.4 years and weighted average yield of 2.49%. We also highlight our TCE ratio on a pro forma basis when including the fair value mark from held to maturity securities, which comes in at 6.86%. We believe these metrics compare favorably with industry trends. Regarding liquidity. we actively manage our liquidity risk to ensure adequate funds to meet changes in loan demand, unexpected outflows in deposits, and other borrowings, as well as take advantage of market opportunities as they arise. This is accomplished by maintaining liquid assets in the form of cash, securities, sufficient borrowing capacity, and a stable core deposit base. Between our cash, FHLB borrowing capacity, correspondent lines with other banks, and unpledged securities in the form of agencies and mortgage-backed securities, which can easily be pledged to the FHLB or to the Fed to expand our borrowing capacity, we have more than 4.5 billion in immediate liquidity. Adding in normal principal and interest from the loan and investment portfolios through the next 12 months adds another $2.7 billion for a total combined in excess of $7 billion in near-term flexibility. Therefore, we feel we are very well positioned in any operating environment. Regarding our current outlook for 2023, we currently model Fed funds to peak at 5.25% during the second quarter and then hold steady through the remainder of 2023. We continue to anticipate our deposit betas to be lower than peers and generally lag the industry due to the benefit of our legacy deposit base. We do anticipate Fed tightening to continue to shrink the money supply, which will place pressure on deposit retention industry-wide and result in higher overall interest expense. We expect similar trends to impact margin during the second quarter, reflecting higher funding costs and continued deposit mix shift into higher yielding deposit products. We also have actively increased loan spreads and rolled out additional incentives to the commercial lending teams to generate additional deposits. Residential mortgage originations should remain positive relative to industry trends due to our loan production offices as well as our hiring initiatives, but down due to market conditions. Our pipeline at March 31st was approximately $100 million, which is up seasonally from the fourth quarter, similar to the sequential quarter increase in prior periods. Trust fees will continue to benefit from organic growth as well as be impacted by the trends in the equity and fixed income markets. And as a reminder, first quarter trust fees are seasonally higher due to tax preparation fees. Securities brokerage revenue should continue to benefit modestly from year over year organic growth. Electronic banking fees and service charges on deposits will most likely remain in a similar range as the last few quarters as they are subject to overall consumer spending behaviors. and we still anticipate new commercial swap fee income to double the approximate $4 million that we've earned annually over the last few years. While we remain diligent on a discretionary cost to help mitigate inflationary pressures, we intend to continue to make the appropriate growth-oriented investments in support of long-term sustainable revenue growth and shareholder return. Efforts to attract and retain employees, in particular commercial lenders across our metro markets, remains a strategic priority. That said, we recognize the challenges of the current operating environment and intend to fund the majority of this hiring plan with internal efforts, including the adjustment of existing staffing levels and continued efforts to improve efficiency. The upgrade of our ATM fleet with the latest technology, as well as inflationary cost increases for existing service agreements, will keep equipment and software expenses in a similar range the first quarter. We anticipate higher pension expense of approximately $700,000 per quarter within employee benefits based on a lower projected return on plan assets. FDIC insurance expense should be consistent with the first quarter due to the industry-wide minimum rate increase and expect higher marketing expense in support of growth plans across our markets. Based on what we know today, we still believe our quarterly expense run rate to be in the mid $90 million range. We believe these investments are appropriate in support of long-term, sustainable revenue growth and associated shareholder return and will continue to drive positive operating leverage. The provision for credit losses under CECL will 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 18.5% and 19.5% subject to changes in tax regulations and taxable income levels. Operator, we are now ready to take questions. Would you please review the instructions?
spk11: 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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. In the interest of time, please limit yourself to one question and one follow-up. If you would like to ask further questions, you may re-enter the question queue. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Casey Whitman from Piper Sandler. Please go ahead. Good morning, Casey.
spk05: Hey, good morning. Dan, appreciate some of the guide you just gave. Are you able to put any numbers sort of around how much margin pressure we could see over the next few quarters and sort of what kind of cumulative deposit or funding betas you're now assuming appreciate that it's going to be better than peers, but just sort of wondering where we might see the margin bottom here?
spk04: Yeah, so I think there's a number of moving parts there, right? Starting off maybe on the asset side, obviously we've got about 68% of the commercial loan portfolio is variable rate. About 53% of that is going to reprice every three months. So that's been a pretty significant benefit to us. We saw actually the movement there from right around 6.5% up to, here in the quarter, up to 7.15%. So we saw some nice 65 basis points of improvement there. We also, as you know, have about 17% of the securities portfolio is a variable rate, so we saw about 17 basis points of lift there. So those would be kind of the tailwinds as it relates to any future movement, any future Fed rate hike, et cetera. And we are slightly asset sensitive if you're modeling in a static environment, right? But when we think about the deposit side, the costs associated with what we're seeing in the market right now, obviously we've been very proactive and pricing public funds. We're maintaining those very nicely. We've been increasing those higher tier money markets and private client funds. And we've also increased our CD rates as well. And to the extent that we're seeing any kind of runoff on the deposit side today, we're kind of, you know, leaning into kind of our core funding advantage to some extent and borrowing then from the Federal Home Loan Bank. So we think that in the nearer term, there's probably going to be a little bit of margin compression as a result, and it's really going to be primarily based on our expectations for what the Fed has been doing with their quantitative tightening We know that the money supply is shrinking. We know that the pie is smaller, and we want to make sure that we're maintaining our piece of the pie. But at the same time, we're going to be responsible in the way that we're pricing our deposits, and we're comfortable kind of leaning into the FHLB borings in the nearer term. With that all being said, on a spot basis, I can tell you, that for the month of March, our margin was right around 3.25%. So, you know, take that for, you know, as a good benchmark for where we're at.
spk09: Yeah, and this is Todd Case. I would just add to that, too. I think the deposit remix that we saw in the first quarter, you know, I would anticipate seeing that continue through the second quarter. As Dan mentioned, you know, 83.5% loan-to-deposit ratio. We've got some flexibility there to let that drift up a little bit over the next year or two and stay disciplined on the deposit cost side. But I do think that remix that you saw in the first quarter is probably going to continue. I think the whole industry saw it, and we'll see it continue as well, too. Fortunately for us, we can go out and offer competitive CD rates in some of our legacy markets to generate some core funding and not have to pay you know, 6% rates at some of the areas where the banks are 100% willing to deposit. We're not in that environment. So that gives us a little bit of an advantage, and as Dan says, we can lean into that to some degree. But recognizing we don't want to give up our deposit advantage over the next year or two as well, too. So finding that balance I think is going to be appropriate. But I would expect the remix to continue in the second quarter that we saw in the first quarter.
spk05: Okay, that answers my question. Thank you.
spk11: Sure. Thank you. Our next question comes from Carl Shepherd from RBC Capital Markets. Please go ahead.
spk03: Hey, good morning, everybody. Good morning. Good morning. Good morning. To start, I just want to follow up on Casey's question, I guess, on the margin. I hear you loud and clear on deposit remix kind of through the second quarter. Any thought on that slowing as we get later into the year if the Fed is done after May?
spk09: That could be a real possibility. You just, you know, I think qualified it there at the end with regard to what the Fed does. We don't really know, right? So I think there's some uncertainty out there. You know, we're looking for one more 25 basis point increase and then hold steady for a But that could change based upon what happens with inflation and what we see over the next couple of months from a national standpoint. But that could actually work into everyone's favor, our favor as well, too. If the increases stop and the cuts start to occur later in the next year, then that takes some of the pressure off. And I think, again, our funding advantage will really show through and we'll be able to be able to manage the deposit base a little easier than we're having to if rates continue to go up. So I think that's a good possibility. This is not a lot of clarity into the third quarter right now.
spk03: Yep, that's fair. I appreciate the help. And then switching gears, in terms of lending, hear the kind of the positive comments on replenishing the pipeline but i also noticed in the deck kind of a tick down and line utilization so i was hoping you could kind of square those two comments and just give an overview maybe kind of what what the general loan demand trends are and what you're hearing from borrowers yeah and and i'll maybe i'll answer the first part of that and then i'll throw it to jeff and let him answer maybe the second uh part of it but i you know we we
spk09: We saw a high point in terms of line utilization, just a hair under 45%, like 44.4% back at the end of 2019, prior to the pandemic. And that's continued to trend down to 32.5% as we stated in our comments. And I think part of that may be stemming from the higher interest rates that a lot of those lines are variable rates. And with the delta between deposits, what they're getting on deposits and what they're getting having to pay on the loan side, I think that there's a lot of lines being paid down right now with the excess liquidity. So I think that's driving some non-interest bearing deposit declines, but also driving down line utilization as well, too. Having said that, we are pretty well positioned with regard to our loan portfolio for growth. Jeff, do you want to jump in?
spk08: Sure. Thanks, Todd. Yeah, as we mentioned, our pipeline is around $1.1 billion. That's near an all-time high. We do have a lot of projects that have kind of slowed down, I think, with rates rising. But once again, we're seeing a pretty robust pipeline and feel really good about where we stand from a business perspective. A lot of owners, some of their banks have stopped lending, so we're getting opportunities there as well. and we are taking up our prices also as rates have risen. So I think we're really well positioned to go forward and have not seen any real slowdown from a business perspective for us.
spk09: Yeah, Jeff mentioned the higher loan rates. We're up 75 to 100 basis points in terms of kind of the floors on our originations over where we were just a couple of months ago. So- We realize not a lot of banks are lending money out there right now. We're in a position to be able to continue lending, but we're going to get paid for it, right? So we want to make sure with those higher funding costs, particularly from a federal and loan bank, that we've got a margin on top of that that makes sense for us. And that may impact pipelines. That may impact loan growth by a percentage point or two, although we're not seeing it yet. It might impact it by a percentage point or two, but we're going to get the margin so that – We're focused on the beta, the margin beta, not just the deposit beta. So that means the loan pricing needs to continue to go up, particularly if the Fed's going to keep raising rates. That's great. Thanks for all that.
spk03: Sure.
spk11: Our next question comes from Catherine Mueller from KBW. Please go ahead. Good morning, Catherine.
spk06: Hey, good morning. Just one more on the funding side. Is there a size of kind of a cap on FHLB borrowing that you'd prefer to stay under? Just trying to think about as we maybe grow FHLB a little bit more versus CDs, you know, where your kind of sticking point is there.
spk04: Yes, Catherine. High level, our maximum borrowing capacity from FHLB is about 4.6 billion. And as you know, we've got about 1.3 billion borrowed at this point. So that leaves our remaining capacity about 3.3. There's not necessarily, we don't necessarily view this as a cap. I mean, or we don't have necessarily a cap. I think we certainly would love to not borrow from the Federal Home Loan Bank. and and you know generate our funding through you know low-cost deposits but you know uh it's not unusual over the years for us to be holding really on average about a billion dollars from the federal home loan bank anyways um you know pre-pandemic we were right around a billion five on a smaller balance sheet um so you know not necessarily um you know unusual uh but i i wouldn't say that we've got a cap per se But, you know, we obviously are continuing to monitor, you know, we'll continue to monitor that. You know, as you heard in my prepared commentary, we did take out some broker deposits. We did $140 million there. That was more just to kind of tap into the market to confirm that we, you know, that we had access to those funds. And, of course, that obviously also, from my perspective, really is, you know, wholesale borrowing. similar cost to a FHLB boring as well. And that provides some additional availability, if you think about it that way. But, no, there's not specifically. I wouldn't say we have a defined cap on where those borings would be.
spk06: Okay, great. Maybe just switching over to – well, actually, I'm just down to deposits. I'm kind of thinking about the non-interest-bearing mix shift. I know you touched on this just a little bit, but is there any reason, as you just kind of think about your deposit base and your borrowers, is there anything that you see within your deposit base that could make the case that we should still stay kind of above, let's call it pre-pandemic levels in terms of percentage of non-interest-bearing to total? or what's preventing that from actually going maybe even lower than the pandemic levels? We're just kind of looking at managers varying mix shift across the industry, and there's a big discussion, I think, today for everybody as to where these numbers eventually go. Is there any kind of commentary you can give on maybe what's different or special about your deposit base that may protect you there?
spk09: Yeah, it's a great question. So my answer to that would be, that we do look at kind of where were we at pre-pandemic, right? So we had completed the old line bank merger back in November of 2019. So we got a good quarter comparison of our current size three years ago prior to the pandemic. So you tend to look at kind of where were we at there. And in a normal world, I guess, would you revert back to that at some point in time? There's pushes and pulls to that, right? What I would say the pull to that would be that you're talking about 5%, maybe 6% with CD rates and things like that that are out there. That's a big delta versus where it was three years ago with the rates being a lot lower. So are people going to be more apt to better utilize their cash, so to speak, to get a return? We're seeing some of that with the line paydowns, but are we going to see that Is it going to be different than it was three years ago because the delta is so big? But then fighting against that is going to be, I think the Fed will be cutting rates here at some point. So that delta is going to start to diminish, and maybe it gets back to where it was three years ago. I don't think it will go quite back that far. So that could make the case for, yeah, you could go lower than you were pre-pandemic. But I would also say that we're doing a lot of things differently now than we were then because we're getting a lot better at generating what I would say core deposits and having plans around that. We've benefited from the shale-related deposits just kind of flowing into the bank and our legacy footprint, so we never had to really sharpen our pencil, so to speak, because funding was always readily available. But now as we kind of look through that with our loan growth and our plans and everything, we've gotten better at being able to generate core deposits. We've added a pretty significant part of our commercial lending incentive plan is now deposit-driven, whereas in prior years it wasn't, because we were focused on loan growth and margin on loans, but not necessarily deposits, so that's changed. So we're getting much, much better at that side of things. We have new treasury management products, several of which Jeff has brought to the table with what I would say more CNI-related treasury management that we're going to market with that could be a real game changer for us as well, too. So we're doing some things that we weren't doing three years ago that I would say would allow us to operate at a higher percentage of non-interest bearing than where we were at three years ago. So there's pushes and pulls to that. We'll have to wait and see how it works out. But that's kind of the way that we see it right now. And I would tend to land in the spot that I would expect higher non-interest-bearing deposits as a percentage of our deposit base than where we were at three years ago. But I just don't know where that, you know, kind of where that bottom or where that floor is or where that point is. And we'll have to just find that out over the next couple of quarters as we move through the cycle.
spk06: Great. That's really helpful. And maybe just switching to credit, you added some great slides in your deck on just your office portfolio and commercial real estate portfolio. I know from old line, you've now got exposure to D.C., which is getting so much negative press, you know, about just the office landscape there. But, you know, I was glad to see that the actual D.C. piece is very small for you. It's much more kind of suburban Maryland focused. But just give any commentary on What you're seeing, particularly in that market, and what you're worried about, any kind of risk you've seen here, or alternatively, what makes you more comfortable with your office portfolio? Thanks.
spk09: Yeah, the suburban nature of it makes us feel more comfortable. We're in what I would call, I don't mean this disrespectfully, but tier two cities for the Louisville Lexington versus what I would say tier one cities like Chicago or LA San Francisco and even downtown DC that's not really those those are mass transportation markets where people I think there's going to be a higher percentage of people working from home remote or hybrid long term so that's gonna have a material impact on those those cities Not that the secondary tier two cities aren't going to be impacted. I think they will be, but for the most part, these are all get in your car and drive to work type of markets. And we're seeing that hold up better than in some of the bigger cities. The D.C. part of it, again, if you look at our office portfolio in Maryland, it does look very much like the rest of our office portfolio. It's not in downtown D.C. We're not there. We've got one loan which is performing, but That's not an office market that, fortunately, Old Line was good at underwriting too, and they didn't go into that market from an office standpoint in any big way. So I think that that will benefit us quite a bit. And I also look at the portfolio and how it matures. We've got about $40 million a year maturing on that office portfolio each of the next couple of years. So it's not like we've got a big bubble, you know, all coming through and maturing at the same time or anything like that. And we've also gotten very good and granular at going out and looking at those and making sure that we've got a good line of sight to where do we think occupancy is going to be and rates are going to be down the road, right? So don't see a lot of what I'd say ghost properties out there where the rent's being paid but there's no cars in the parking lot type of thing because you know an event's going to occur if that's what the portfolio is consisting of. We're not seeing a lot of that. It's not reported anywhere, but those are the things that we're digging into ourselves and having our lenders dig into. We're reviewing every office loan, you know, over a couple million dollars to make sure we got a really good line of sight into where they're going to be two, three, four, five years down the road. So as a result of that, I feel good about where we're at with it, but we're not in the big tier two cities or tier one cities. And we're also, it's not a, That's not a portfolio we're expanding at all right now. And we think that that's probably going to be the one area for the industry that will probably get the most scrutiny over the next five years and probably should, quite frankly.
spk06: Great. Very helpful. Thank you.
spk11: Our next question comes from Russell Gunther from Stevens. Please go ahead.
spk12: Hey, good morning, guys. Morning, Russell. Good morning. Good morning. I wanted to follow up on the commercial lender conversation a bit. You guys mentioned the LPOs are 13% of the commercial pipeline. Is there a similar data point in terms of related deposit production or deposit pipeline? I'm just trying to get a sense for how these hires can help you self-fund this sort of high single-digit growth.
spk09: Yeah. Again, I'll start off, and if Jeff wants to jump in, he's welcome to as well. We talk about that a lot. We actually, and Jeff's been the one driving this the last two to three months, is having a category on our pipeline that's going to show deposit pipeline as well, too, so that we have that ability to track that. But we are bringing that up. We're not making loans to commercial real estate. C&I, you tend to get the deposits, but we're not making commercial real estate loans really without a deposit, existing deposit deposits. part of that or requiring that. And we passed on quite a few loans in the last couple of months that didn't come with deposit basis. I don't have a specific breakdown buying market in terms of deposit pipeline other than to say that it's attached to all of the loans that we're looking at. But I would expect we're going to have a deposit pipeline here sometime over the next couple of months. Jeff, would you add anything to that?
spk08: I would agree with what you said. I would also say that our focus on hiring going forward in the LPOs or if we're going to add any additional LPOs will all be CNI-based. And so we would expect that to increase the percentage of LPO contribution to the deposit pipeline going forward based on just really focusing on CNI. customers, and then also increasing our treasury products and services, I think will also increase that deposit pipeline. But we are focused on it, but I don't have the details right now.
spk12: That's very helpful. I thank you both for that. And then do you have a target for CNI-focused hires for this year? And just imagine it might be a target-rich environment for you, given what sounds like still a pretty healthy appetite to lend. So just kind of curious how you're approaching that.
spk09: Yeah, again, I'll start off if Jeff or Dan want to jump in. We are seeing that. We are getting a lot of phone calls from commercial lenders, teams that want to talk to us because of our funding. So we do see that as a real strength right now and something that is going to allow us to be able to bring on some top talent. Again, we're being careful about it. We want to make sure that anybody we bring on, particularly if it's a team or something, that they've got the same credit underwriting approach as we do. And then also, I mentioned earlier, you know, an increase of 75 to 100 basis points over where we were pricing things a couple months ago. So, you know, they've got to be able to have a portfolio of prospects that come with a non-solicit. We're going to respect that, obviously. But they have to have a target base that's going to fit what we're going to want to do if we're going to use our balance sheet for that. We are... going through a process of bringing additional lenders on, but we're also being very good about making sure that we're self-funding as much of that as possible, potentially all of that, as we've done the last couple of years with kind of a reallocation to higher growth markets based upon retirements or underperformers, things like that, and being able to get a higher return productivity per FTE dollar than we have in the past.
spk12: Great. I appreciate it, Todd. Thank you. And then just the follow-up would be to the office discussion. Appreciate the color there. Do you guys have any observations you can share from updated appraisals in terms of, you know, declines in value? Just kind of ring sense.
spk09: Yeah, again, I think it's going to be very, very market-specific. And, you know, because we don't have, you know, much in the way of any problems in the office portfolio. You know, we haven't had to go out and get a lot of reappraisals of things done, but we do know cap rates have changed. And similar to what I think you saw on the hotel portfolio two to three years ago, I think it's a much different environment. I'll talk about that for a second. I think with the hotel portfolio, it was a deep drop and then a comeback, right, based upon the virus and the vaccines and all that kind of stuff, and that portfolio is kind of back to normal. With the office, you've got a couple things going on, right? You've got the pandemic-related aspect of things, but you've also got more of a structural impact that's going on with the work from home, which maybe it bounces back a little bit, but I think a certain part of that's permanent, right? So, whereas I don't think hotels would be permanently impacted, The office space, I think, will be permanently impacted to some degree. So I think we've got to look at it a little bit differently there. So I do think having the portfolio reappraised, particularly if you have larger properties or those that start to fall down in the risk rates, if they're having difficulty making payments, I do expect to see a fairly significant drop in values on those. Just anecdotally, we've seen one or two out there in the markets that have sold for less than liquidation value in terms of what liquidation value might have been just six months ago, and they're selling for less than that. So I do think that there's going to be some risk there. Having a loan-to-value at the levels we've at in the 60% range I think is going to be important because you may find yourself 80% loan-to-value in two to three years on a troubled property or higher.
spk12: I appreciate the color, guys. That's it for me. Thank you. Sure.
spk11: The next question comes from Daniel Tomeo from Raymond James. Please go ahead. Good morning.
spk07: Hey, good morning, guys. Good morning, guys. Just quickly on the expenses, I know you've talked about the being self-funding majority of the C&I lender hiring plan, and then talked about that mid-'90s expense run right here in the near term but I'm just curious kind of how far out that extends and if there's kind of any cadence to the increase in expenses incremental you know on top of if there's any kind of additional expenses from that from that hiring program that may not be fully funded thanks
spk09: I think, you know, with the 7% increase in salaries, part of that was additional people coming on board, even though we self-funded some of that, but merit increases and whatnot. And we saw, obviously, the inflationary impact that occurred as well, too. Not so sure we're going to see that kind of inflationary impact, you know, each year going forward because it seems to be moderating to some degree. So I think that'll help, you know, pretty significantly. But I do think as the franchise grows, and we do want to grow the franchise mid to upper single digits, that that expense base would grow commensurate with that. So I'm much more focused on the efficiency ratio than just the expense number. We do watch it and try to play into it. And we do think the mid-90s is kind of where we're at right now. As we said last quarter, and I think we proved that in the most recent quarter, But the efficiency ratio, as we get bigger, I think would be really, really important to be able to manage to, you know, that we're in the mid to upper 50s. And, you know, if we're touching 60, we don't want to be touching it for terribly, terribly long. And I think our ability to generate revenue through some of the new products, through some of the new hires, I think that's going to help us a lot as we continue to grow as an organization. But we're also making investments. right? So as we continue to make investments in the company that are going to be new product oriented, and we bring on additional people, that is going to take the number up over time. But I can't imagine it would be much greater than just the normal, you know, inflationary environment that you would see in mid to upper single digits would kind of be my expectations for future out years versus anything, you know, dramatic up. But I, you know, if we're going to be 5%, 6%, 7% bigger each year going forward, a $95 million, $94 million quarterly run rate at some point is going to cause us to underinvest in the franchise. And we don't want to do that. So that's probably the best answer I can give you is focus on the efficiency. We're going to focus on the efficiency ratio. And the total expense base will probably drift according to what just the normal expense growth rate is for the bank based upon the up mid 5% to 7% range.
spk07: That's very helpful. I appreciate that. And then I know you touched on this, but just curious, your assumptions in terms of the rate environment stable through the year, but in the forward curve, there are some expectations for cuts. Are you curious how you think that would impact the earnings power of the bank?
spk09: Yeah, with our deposit beta, it was interesting to see that really benefits us on the way up when rates go up. But we also saw, you know, when rates started going back down again a few years ago, that deposit beta held up there too, right? So we're able to, you know, reduce our deposit costs faster than our peer group. And even though we can lag it on the way up, we can kind of beat it on the way down. So I would expect that hopefully some of the discipline around pricing and spread and whatnot stays even in a lower rate environment. If we're getting better at pricing loans, if we're getting better at managing that spread, that as deposit costs were to drop, that should really benefit us. So I think in an environment where you've got rates coming down, I think that could be – could be a bonus for a number of banks. I think we could be one of the banks that might be included in that, but there's a lot of other variables that are going to be associated with that in terms of what's driving the rates to go down. If it's because you've got something else going on in the economy that could impact your growth rates, then that would have to be taken into account.
spk07: Okay, I appreciate the answers. Thanks, guys.
spk11: Sure. Our next question comes from Dave Bishop from Hovde Group. Please go ahead.
spk10: Good morning, Dave. Yeah, good morning, gentlemen. Most of my questions have been asked and answered, but in terms of opportunities within the market on the lending side there, are you seeing any loan segments or pockets where maybe you're seeing some of your peers pull back from that you think might present an opportunity, especially as you noted earlier? Some of the tier two markets may not be as boom and bust as D.C. and some of the other bigger metro markets across your footprint.
spk09: Yeah, I think some of the markets, you know, where funding is more of a challenge, you know, where the banks are 100, 100, and 405 percent loan deposit ratio, where they've really kind of slowed down lending across all fronts, right, because they're having a hard time just funding it. We're seeing lenders from markets like that, from banks like that, but we're also seeing have been seeing and I think we're going to continue to see loan opportunities. We're not focused on office. We're not focused on hospitality. Those aren't focus areas of ours right now. And we like real estate, but we really want to lean into C&I in a fairly big way. So a lot of the opportunities that I think we're seeing and that we should be able to see over the next year hopefully are going to be in the C&I space. Because if they get clipped a little bit from their current bank, that hopefully, you know, we get a look at those type of things because we have capacity to lend significantly to good quality CNI customers. So I think that could help us quite a bit, particularly in markets in the southeast, markets in the mid-Atlantic, where maybe the banks just aren't going to be able to lend significantly. to the extent that they want to, even for their good CNI customers. So the answer would be yes. I would expect us to see opportunities from that.
spk07: Great, appreciate the color.
spk09: Sure.
spk11: And our next question comes from Manuel Navas from DA Davidson. Please go ahead.
spk02: Good morning. Hey, good morning. A lot of my questions have been answered, but I just wanted to check on your pipelines. kind of point to loan growth accelerating here in the second quarter. But you also talked a little bit about higher pricing. Do you think pricing selectivity kind of dims some of that acceleration or is the right way to think about it is you're growing faster right now?
spk09: It's a great question because I think as we saw in the first quarter with the pipeline being so robust, But, you know, loan growth kind of being in that, we did 1.7% loan growth in the quarter. It's like, you know, we didn't expect to see bigger loan growth, but we didn't as a result of that. I think, and we've seen the pipeline, while it's still good, it's just under a billion as we kind of look at it at this point. But I would say that, and this is just my own personal view, I think as we increase rates and we increase the expectation on rates, and we've done this a couple of times in the last two months, as recently as yesterday, moving out to the lenders and said, okay, we want X spread on all new loans now, I think that will have an impact on the pipeline because I think there are probably deals in the pipeline that probably don't make sense at higher rates or the customer is going to want to pull back or maybe they go somewhere else. I don't know. But I think the pull-through rate on the pipeline could be impacted a little bit based upon the raising of rates because, again, we're going to be judicious with our funding and make sure that we get paid if we're going to put that out the door. And I just don't know the impact that has on the pipeline, because we have all these new lenders and others that are out there generating opportunities. So that's a real positive. But I just also personally believe that at the higher rates, that'll have a bit of an impact on the pipeline, the pull-through rate on the pipeline as projects get put on hold or pulled back.
spk02: Do you feel more comfortable Or is your view that loan growth this year is going to be more first half of the year loaded, or is that too soon to say?
spk09: I think it's too soon to say. I really do. Because, again, we've built a franchise over the last number of years that has put us in the markets that should grow mid to upper single digits. And I think on a long-term basis, that's where we're comfortable, and that's kind of what we built the organization around, any given year. quarter is going to be hard. We talked about the pipeline, but we also talked about the line usage being paid down significantly. Is that going to continue to get paid down? Is it going to go lower? I don't know. Some of the secondary market for multifamily, things like that, has really slowed down a lot. So a lot more of that is sticking on the balance sheet for a little bit longer. I think as developers are waiting for rates to come down and they're going to go take all that to the market. So that gives us a benefit of loan growth because we're not seeing that typical payoff occur. So I think there are a lot of factors that are impacting that, but I don't see anything at this point from our customer base and our markets that are telling us that people are concerned, overly concerned about the economy and pulling back. I still think they're doing business. They're just doing it in a higher rate environment and trying to factor that into their cost structures.
spk02: Thank you. I appreciate the call. Sure.
spk11: This concludes our question and answer session. I would like to turn the conference back over to Todd Clausen for any closing remarks.
spk09: Great. Well, thank you for joining us today. We remain focused on ensuring our organization sound credit quality, solid liquidity, and a strong balance sheet that hopefully you've come to expect from us. We think we've got the right markets, teams, and leadership and strategies in place to have success on a long-term basis. And I'm looking forward to speaking to you at an upcoming investor event. So please have a good day and enjoy the rest of your week. Thanks.
spk11: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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