WesBanco Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 25, 2023

There are 9 speakers on the call.

Operator

Day, and welcome to the WesBanco 4th Quarter 2022 Earnings Conference Call. All participants will be in a listen only mode. 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 Ione, Senior Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to WesBanco Inc. Q4 2022 earnings conference call. Leading the call today are Todd Clawson, President and Chief Executive Officer Jeff Jackson, Senior Executive Vice President and Chief Operating Officer and Dan Weiss, Executive Vice President and Chief Financial Officer. Today's call, an archive of which will be available on our website for 1 year, contains forward looking information.

Speaker 1

Cautionary statements, valid 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, .com. All statements speak only as of January 25, 2023, and WesBanco undertakes no obligation to update them. I would now like to turn the call over to Todd. Todd?

Speaker 2

Thank you, John. Good morning, everyone. On today's call, we'll review our results for the Q4 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, Net interest margin expansion and discretionary cost control.

Speaker 2

We remain well positioned for continued success and are excited about our future growth opportunities. WesBanco had another successful year during 2022 as we remain focused on ensuring a strong organization for our shareholders and continue 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 build 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 Q4 of 2022 as we continued to deliver loan growth, controlled 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 $49,700,000 and diluted earnings per share of $0.84 when excluding after tax merger and restructuring charges.

Speaker 2

On the same basis for the full year, we reported net income available to common shareholders of $183,300,000 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 percent 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. WesBanco 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.

Speaker 2

We launched new loan production offices in Cleveland, Indianapolis and Nashville, complementing our existing LPOs in Akron Canton and Northern Virginia. Based on customer satisfaction and consumer feedback, WesBanco Bank was named by Forbes as the number one bank in Ohio And the number 2 bank in Kentucky, including high scores for trust, branch services, terms and conditions, customer service, Digital Services and Financial Advice. For the 4th year in a row, we were named 1 of the World's Best Banks, which was also based on customer satisfaction and consumer feedback. For the 3rd year in a row in the top 12, WesBanco 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 2 spot out of 30 companies included in the Banking and Financial Services category.

Speaker 2

In fact, we were the only midsized bank making the top 10 for both financial performance and employer of choice. Finally, WesBanco 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 3 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 3rd 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.

Speaker 2

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 $179,000,000 during the Q4, 90% of which were either purchase Construction, residential real estate loans increased more than 20% both year over year and sequentially annualized through the retention of approximately 80 Percent of the 1 to 4 family residential mortgages generated by our team of mortgage loan originators. Total commercial loan growth continues to benefit from our teams and markets that have been enhanced by our hiring efforts over the past 2 years. For the Q4, total commercial loan growth was 9.6% year over year and 4.1% from the 3rd quarter or 16.2% annualized. Our commercial teams continue to find new business opportunities to replenish the pipeline.

Speaker 2

In addition to new loan originations of approximately $490,000,000 during the Q4, our commercial pipeline has remained relatively consistent since last quarter at approximately $900,000,000 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 at a higher growth market spanning 6 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.

Speaker 2

During both 2021 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 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.

Speaker 2

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 Q4 financial results and current outlook for 2023. Dan? Thanks, Todd, and

Speaker 3

good morning. 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 Q4, we reported improved GAAP net income available to common shareholders 49,700,000 and earnings per diluted share of $0.84 and net income of 182,000,000 and earnings per share of $3.02 for the full year. Excluding restructuring and merger related charges, Results for the 3 12 months ending December 31, 2022 were $0.84 $3.04 per share respectively, as compared to $0.82 $3.62 last year, respectively. It's important to note that the 2021 was favorably impacted by a negative provision of $51,600,000 net of tax or $0.79 per share as compared to a benefit of $0.02 per share during 2022.

Speaker 3

Total assets of 16,900,000,000 As of December 31, 2022, included total portfolio loans of $10,700,000,000 and total securities of 3,800,000,000 Loan balances for the Q4 of 2022, which grew both year over year and sequentially reflected strong performance by our Commercial and consumer lending teams and more 1 to 4 family residential mortgages retained on the balance sheet. Furthermore, As we expected, commercial real estate payoffs moderated this quarter, totaling approximately $63,000,000 We also reclassified $86,000,000 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 $163,000,000 as compared to $8,000,000 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 $12,200,000,000 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.

Speaker 3

Further, our non interest bearing Deposits improved to 36% of total deposits. Total deposits at year end were $13,100,000,000 down 3.2% year over year due to a $407,000,000 reduction in CDs. The net interest margin in the 4th quarter of 3.49 percent 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 4 25 basis point increase in the federal funds rate throughout the year. Our core margin continued to increase quarter over quarter from 3.27 percent to 3.44%, which excludes purchase accounting accretion of 5 basis points for both periods, while SBA PPP loan accretion was a basis point or less for both periods.

Speaker 3

Our robust legacy deposit base provides a pricing advantage as compared to Especially those primarily in major metric markets. We are not immune to the impact of rising rates on our funding sources. Deposit funding costs for the Q4 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 3 75 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 Q4 of 2022, non interest income of $27,800,000 was down $2,900,000 Year over year, primarily due to lower mortgage banking income, which decreased $2,300,000 due to in residential mortgage originations consistent with the industry in general and the retention of more loans on our balance sheet.

Speaker 3

Securities Brokerage Continued its organic growth trend as net revenues increased $1,000,000 year over year to a record $2,600,000 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 3 months ended December 31, 2022 totaled $90,400,000 a 2.6% increase year over year and a 1.6% decrease sequentially. It's important to note that the 4th quarter included a couple of large credits totaling approximately $2,500,000 which are not expected to repeat in our expense run rate going forward. Within salaries and wages, There was a $1,800,000 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.

Speaker 3

Adding these two items back, non interest expenses for the 4th quarter would have been approximately $93,000,000 Turning to capital. During the Q4, the quarterly dividend was increased from $0.34 to 0 point 3 $5 per share, representing a 2.9% 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 Q1 and then hold steady throughout the remaining quarters of 2023. We are modeling a couple of basis points of margin expansion in the Q1 and hold relatively flat for the remainder of the year as deposit pricing continues to rise.

Speaker 3

We expect purchase accounting accretion to be approximately 4 to 5 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.

Speaker 3

As a reminder, 1st 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 $4,000,000 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.

Speaker 3

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 We anticipate higher pension expense of approximately $1,000,000 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-ninety million dollars range.

Speaker 3

We believe that these investments are The provision for credit losses under CECL will be dependent upon changes to the macroeconomic forecasts and qualitative factors as well as various credit quality metrics, including potential charge offs, criticizing 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% 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?

Operator

We will now begin the question and answer session. If you have additional questions, please reenter the queue. At this time, we will pause momentarily to assemble our roster. The first question today comes from Daniel Tamayo with Raymond James. Please go ahead.

Speaker 2

Good morning, guys.

Speaker 4

Good morning, Dan. Maybe we start on the loan growth expectations. It's just interested in what you're seeing and what you're expecting for the coming year and With the loan deposit ratio still relatively low, how much you're willing to let that rise and fund from securities runoff?

Speaker 2

Yes. Okay. I'm glad to answer that, Deane. 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.

Speaker 2

I think we get the GDP number this Thursday. But 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 We were last year, nearly in the upper single digit, low double digit range. And that's Really, we're comfortable with, I think, on a longer term basis. Yes, pipelines continue to stay consistent, as I said in my comments as well, too. So that looks good.

Speaker 2

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 the upper single digit rate. 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.

Speaker 2

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, so it wouldn't be the plan to let that run too far. But at the same time, we don't 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.

Speaker 2

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 a few years before the pandemic, I imagine we'll get back to that point.

Speaker 2

So how quickly we get there will be dependent upon how aggressive we need to be on deposits and really be driven by what kind of loan growth that we see. So that's a long winded answer, but that's kind of the most that's kind of the best way I see it right now anyway.

Speaker 4

No, that's terrific. I appreciate all the color. And then maybe my follow-up, just on credit quality. You've seen the reserve ratio come down here, decent amount over the last few quarters, settling around 110. Just curious 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 loss content within the portfolio?

Speaker 2

Yes. Related to CECL, Dan, do you want to jump in and cover that comment?

Speaker 3

Yes. I would say, If you look on Slide 9, you can see there's a waterfall chart there that kind of shows the reserve build in dollars. Obviously, we saw a $3,100,000 provision this quarter. That's actually the first Time in 6, 7 quarters that we've recorded a debit to the provision Last 7 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 7 quarters and we're to the point where those are more or less behind us.

Speaker 3

So the drivers of the reserve and the provisioning going forward really are going to continue to be more normalized Future macroeconomic forecast, loan growth and then of course to the extent that we would see any charge offs that would also impact provisioning and reserve levels. But I think those are the drivers Probably going forward and I would say that that $3,100,000 that we recognized here in the 1st in the 4th quarter It's probably kind of the more normal run rate going forward.

Speaker 4

Terrific. All right. Thanks again for all the color.

Speaker 2

Thanks, Dan.

Operator

Next question comes from Karl Sheppard with RBC. Please go ahead.

Speaker 5

Hey, good morning and thanks for taking my questions.

Speaker 3

Good morning. Good morning.

Speaker 5

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 There's some expectation of kind of lagging pressure as we move through 2023.

Speaker 2

Yes. That's a great that's a really great question, particularly when When will the Fed start to drop rates, right? I mean, our forecast, as Dan mentioned, is to go at 5% In the Q1 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 We're into 2024, I think what we saw on the last time there was a drop.

Speaker 2

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.

Speaker 2

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 will 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 2.

Speaker 2

And I still don't think that you'll see us on 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.

Speaker 5

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 kind of the 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?

Speaker 5

Just help us break out those pieces a little bit so we can think about where to go from here.

Speaker 2

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 or 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 You saw last year from us, was based upon new LPOs because that wouldn't be accurate. It was a minor part of it.

Speaker 2

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 WesBanco, while still keeping our core advantages on the credit deposit 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 Not 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 Q4, we did get some benefit from a lower level Commercial real estate payoffs of about $60,000,000 and we had $160,000,000 I think in the quarter before that.

Speaker 2

So We expect about $90,000,000 $80,000,000 to $90,000,000 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 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, we would have loan growth of about 8% or 9%, because we put more resi on that bumped 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 it's 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.

Speaker 2

A couple of $100,000,000 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 2 to 3 year basis to really get a good idea of You know what the franchise run rate is.

Speaker 3

Great. Thanks for all the help. Okay. Thank you.

Operator

The next question comes from Casey Whitman with Piper Sandler. Please go ahead.

Speaker 6

Hey, good morning.

Speaker 2

Hi, Casey. Welcome back.

Speaker 7

Yes. Thank you. Good morning. 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 And then the follow-up would be just sort of give us an update on how you're viewing M and A for you guys this year.

Speaker 2

I'll start off on the capital side and let Dan jump in on that and then I'll hit on M and A as well too. But I think from a capital perspective, we were watching what was going on in the last couple of quarters with AOCI. 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.

Speaker 2

The buybacks we did do in the 4th quarter were Early part of the Q4 and part of that was because we wanted to watch and see what happened with AOCI and trying to stay in our 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 will vary, I think AOCI has 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.

Speaker 2

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, 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 We still have 1,200,000 share authorization and we'll pull on that when we think it's appropriate.

Speaker 2

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?

Speaker 3

No, I think Okay.

Speaker 2

Sorry, I took all your comments on it. On the M and A side, I would tell you that we're not actively looking at anything right now. We're doing a lot of introductions. Jeff is 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 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.

Speaker 2

We think we've got Capital, liquidity, obviously, got a new core operating system we put in place a year and a half ago now. So we feel like we would be ready to do something, but We don't feel like we need to. 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.

Speaker 2

But at this point, we're not actively looking at anything.

Speaker 7

Understood. Is there are there particular markets that you would be most interested in? Or is it sort of footprint wide?

Speaker 2

Yes. 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 2 banks eventually In that marketplace once we got to know it. So I think that the outside of the existing footprint that we have, We have LPOs in Northern Virginia, Indianapolis, Nashville.

Speaker 2

I think those would all be kind of interesting markets that would still be within that geographic Timeframe or geographic drive distance that we're kind of looking at. So finding something that would be in those growth year markets to try to continue 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, right, branch overlap, that kind of stuff. I think that It would be interesting to look at if something like that came along. But the focus really is on higher growth markets, Pittsburgh, Columbus, Cincinnati, Louisville, Lexington, the suburban DC market, but through Northern Virginia, through Central Tennessee, through Central Indiana in the mix as well too.

Speaker 2

Those would all be areas that would be of interest to us.

Speaker 7

Great. Appreciate it. Thanks.

Speaker 4

Thank you.

Operator

The next question comes from Catherine Mealor with KBW. Please go ahead.

Speaker 6

Thanks. Good morning.

Speaker 8

Hi, Catherine.

Speaker 6

Why don't you go back to the margin and funding conversation? And I know you mentioned, Todd, that You added a little bit of borrowings this quarter, but you continue to see CD balances decline, so kind of shows FHLB over CDs. But do you think As we move into 2023, that changes. And so if we look at the balance of FHLB at quarter end, should we model that To decline a little bit as of the year, maybe grow CDs, just kind of curious how you're thinking about the kind of higher cost, More wholesale ish funding strategy to fund growth. Thanks.

Speaker 2

Sure. Why don't I hand that off to Dan?

Speaker 3

Yes. So I would say, Catherine, a couple of things. Obviously, 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 $50,000,000 Per month, dollars 150,000,000 per quarter.

Speaker 3

And so that would be where the first dollar would come from. If we look towards CDs relative to FHLB borrowings, as Todd mentioned, we do have some CD grade 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 Yes. If we did see deposit growth, let's say, and loan growth were more than kind of that $150,000,000 per We're kicking out of the CD portfolio.

Speaker 3

I think we would continue then in that case to leverage those wholesale borrowings. Of course, we have Yes, 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 $150,000,000 per quarter, plus the slowdown in CDs, we would be we would continue to leverage this whole subpar.

Speaker 6

Okay, great. And then 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 Just thinking about this quarter's margin as the peak, but I think you could argue that you might be different than any of your peers just given your ability to lag funding costs. So just kind of curious how you're thinking about peaking in and the outlook?

Speaker 3

Yes. So the way we think about that really, and as I mentioned, A couple of basis points of expansion here over the next 3 months or so. Certainly, we're not expecting that double digit expansion that we saw here in the Q4, 16 basis points or anything like that. But I think it will be very much dependent on deposit inflows and outflows. Again, going back to that wholesale borrowing Discussion will be dependent on what loan growth looks like and how much we can fund through deposits and CD retention versus FHLB borrowings.

Speaker 3

But generally speaking, we do expect, for example, loans to continue to reprice Upward in the Q2 off of those Q1 rate hikes. So we've got in our model 50 basis points of Fed fund increase in the Q1, But we really expect the funding costs to rise as well such that they more or less will kind of offset Net to 0. And so that's where we look at kind of a stable NIM kind of in the second quarter going forward. And that's assuming 5% fed funds rate that holds stable as well throughout the year. But then once you get past, Call it, Q2, I think we've got a lot of momentum.

Speaker 3

We're going to begin to reprice fixed rate loans that are maturing. We'll still have the variable rate loans that have re pricing terms to reveal on just the 3 months that will be re Pricing 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 how we 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.

Speaker 4

Yes. I mean, we're going

Speaker 2

to obviously, the expansionary strategy eventually is to get to probably mid-90s. Who knows when that will happen down the road, obviously, ways. 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 themselves to us and the industry over the next couple of months, the next couple of quarters. But the plan wouldn't be Keep deposit rates so low that we use up all that extra balance sheet capacity too quickly.

Speaker 2

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, So 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 on large part, I think, on what we see on loan growth side.

Speaker 6

And last question on the margin. How about loan where loan yield maybe towards the end of the quarter and new pricing as well?

Speaker 3

Yes. So we do have on Slide 4, we show kind of the new loans that are coming On the books coming on right around 6.25%. And if you looked at kind of A spot yield for the month of December, we'll call it, loans were coming on around 6.79%. 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.

Speaker 6

Great. And that's new loans coming on not the total portfolio of course? Correct. Great. Okay.

Speaker 6

All right. Great. Very helpful. Thank you so much.

Speaker 2

Thank you.

Operator

The next question comes from Manuel Nieves with D. A. Davidson. Please go ahead.

Speaker 8

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.

Speaker 2

Sure. We've last couple of years, number of years actually, we've been, what I would say, rationalizing the branch We're 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 fund all the above. So some of the technology spends, Dan mentioned the ATM network we're upgrading.

Speaker 2

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 guess, 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.

Speaker 2

I don't want to give that up, Right. So those branches in 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 of quarters in the mid-ninety percent range.

Speaker 2

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 upon M and A as well too and buying other banks that have a branch network that could be rationalized too.

Speaker 8

That's helpful. So it's kind of already in the run rate, that type of savings And investment at the same time. Is that the right way to think about it?

Speaker 2

Yes.

Speaker 6

Okay.

Speaker 8

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?

Speaker 2

Well, I would say, if we see deposit costs increase quicker than we're anticipating, Then I think we've got some expense things that we've talked about that we could do to try to still 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 there are some things that we could do if the economy slowed, if we entered a more severe recession than everybody thinks we might or If I think if loan growth slows down though, I don't think the plan the plan would not be to abandon our strategy To build capacity for loan growth. I mean that's we've been doing that for a while, really building that for a while.

Speaker 2

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 2. 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.

Speaker 2

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 really don't want to abandon it. Obviously, if you hit a real severe recession, then you really start getting more focused on cost control. But at this point, a slight recession or soft landing, maybe no recession. We just think we power right through it because we've got some good momentum going. Also the Q1, Q2 of the year is the time to hire lenders 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 obviously, you've got to cover some big out of pocket numbers to get people to move.

Speaker 8

Thank you. I really appreciate that color. Thank you.

Speaker 2

Sure.

Operator

The next question

Speaker 5

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?

Speaker 2

Well, I'd say it goes back even more than a year ago. It's a start of the pandemic. Obviously, we got very cautious on hospitality and office. The hospitality portfolio has come through and we're 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.

Speaker 2

So we're not doing much in the way of office. It would have to be really low under 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 We're being very cautious on that. Those would be the two areas that I would mention.

Speaker 2

We're seeing a lot of really good C and I business. A lot of the lenders that we brought on in our legacy markets have really started to bring us a nice C and I business. Commercial real estate is still a big part of who we are, But it's nice to see the C and I business as well. But outside of the 2 real estate categories, office and hospitality, I would say the other areas We're continuing to lend in. So we don't do much in energy.

Speaker 2

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.

Speaker 5

Okay. Excellent. And then maybe Some color on the quarterly run rate on fee income

Speaker 8

for 2023.

Speaker 2

Yes. 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 put 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.

Speaker 2

Dan, any comments you'd make on fee income?

Speaker 3

The only things I would add maybe is that if you look at trust fees, 1st 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 and kind of tap into that a little bit more. So I think that's

Speaker 2

And the markets that we've acquired into, again, we're We're still driving additional new products and 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 we offered swaps being one of them, but also on Trust fees and having securities reps and 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.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Todd Claassen for any closing remarks.

Speaker 2

Great. Thank you. And I appreciate everyone's time today. I know a lot of earnings meetings are taking place. Appreciate your joining ours.

Speaker 2

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.

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Earnings Conference Call
WesBanco Q4 2022
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