WesBanco, Inc.
Q2 2022 Earnings Call Transcript

Published: 27 Jul 2022

[Operator:]

Good morning, and welcome to the WesBanco Second 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 that this event is being recorded. I would now like to turn the conference over to John Iannone, Senior Vice President-Investor Relations. Please go ahead, sir.

[John Iannone:]

Thank you. Good morning. And welcome to WesBanco, Inc.’s second quarter 2022 earnings conference call. Leading the call today are Todd Clossin, President and Chief Executive Officer; and Dan Weiss, Executive Vice President and Chief Financial Officer. Today’s call, the archive of which will be available on our website for one year, contains forward-looking information. Cautionary statements about this information and reconciliations of non-GAAP measures are included in our earnings-related materials issued yesterday afternoon, as well as our other SEC filings and investor materials. These materials are available on the Investor Relations section of our website, wesbanco.com. All statements speak only as of July 27, 2022, and WesBanco undertakes no obligation to update them. I would now like to turn the call over to Todd. Todd?

[Todd Clossin:]

Thank you, John, and good morning, everyone. On today’s call, we’ll review our results for the second quarter of 2022, then provided an update on our operations and current 2022 outlook. Key takeaways from the call today are WesBanco remains a well capitalized financial institution with a strong balance sheet and solid credit quality metrics. We continue to make appropriate strategic investments to enhance our ability to leverage long-term growth opportunities while remaining focused on expense managements. The successful execution of our strategies built upon our unique long-term advantages and strong credit and risk culture has positioned us well for future opportunities, while also supporting our teams as they generate very strong sequential quarter loan growth. We are very pleased with our performance during the second quarter of 2022. As we continue to demonstrate the success of our operational strategies implemented the past few years. For the quarter ended June 30, 2022, we reported net income available to common shareholders of $40.3 million and diluted earnings per share of $0.67 when excluding after tax merger and restructuring charges. We exhibited strong expense management as our operating expenses have remained roughly consistent the last few quarters. And our capital position remains strong and continues to provide financial flexibility while enhancing shareholder value through effective capital management, which includes the appropriate balancing of share repurchases, dividends and M&A. While M&A is still not a major focus for us, we remain opportunistic. And if we found the right opportunity at the appropriate price that fit our well defined strategy, we would act upon it. The key story of this quarter was the strength of our balance sheet as we demonstrated year-over-year growth in both total deposits, which increased 5.3% when excluding certificates of deposit and total loans, which increased 3.8% when excluding SBA PPP loans. Furthermore, we reported very strong sequential quarter loan growth of nearly 22% annualized. That was broad based across our markets and loan categories. This strong growth demonstrates the successful execution of our expansion into higher growth markets, including Kentucky and Maryland and ability to hire top tier commercial and mortgage loan officers across our footprints. The growth in our residential loan portfolio reflects both our efforts to retain more loans on our balance sheet during the first half of the year and continued relative strength in originations. Total commercial loan growth, which was 21% annualized was driven by both our commercial real estate and C&I portfolios. We continued to see good production from our commercial lending teams based upon our record commercial pipeline of $900 million to $90 million in March 31, our commercial teams generated gross loan production of roughly $740 million during the second quarter. C&I line utilization, which is approved slightly to approximately 37% is still roughly eight percentage points below our historical range. While we do not anticipate similar sequential loan growth, the next few quarters, our teams continue to find new business opportunities, which has helped our commercial pipeline remain relatively strong at approximately $825 million as of June 30 with roughly 30% of that pipeline in Kentucky and Maryland. That said, we remain committed to our mid to upper single-digit growth target over time as our recent strategic investments in lenders and loan production offices begin to generate positive operating leverage. In addition, we continue to invest in our residential lending programs, which we have built for long-term sustainable growth. We did not overstaff during the refinance boom, the last two years. In fact, we continue to make strategic hire across our footprint. As our residential mortgage team easily served the refinanced demand and then pivoted to home construction and purchases, which accounted for approximately 90% of our second quarter originations. While many other residential mortgage providers supposed significant decreases in originations and subsequently adjusted their operations, our strong team has resisted the national trends. Our team originated $328 million of mortgages during the second quarter, which was a 21% increase from the first quarter and comparable to the level of a year ago. Our residential mortgage production should remain relatively strong in the near-term based upon our quarter-end pipeline of approximately $170 million in our hiring efforts. During the first half of the year, we’ve added 11 mortgage loan officers, including two strong leaders in our new Indianapolis and Nashville offices who will be building high quality teams over the next few months. I’d like to provide a quick update on the strategic investments we have been making which we have funded through discretionary expense control in managing our financial center footprint. As of today, we have accomplished our plan to hire an additional 20 commercial lenders with the hiring of 14 during the first six months and an additional 10 that we’ll start with us over the coming month. Further, we continue to be tactical with hiring additional top performers as opportunities arise. Our new loan production offices in Cleveland, Indianapolis, Nashville and Northern Virginia are being well received. As they continue to build their commercial and residential lending teams, we look forward to their contributions to our loan growth and operating leverage in coming quarters. As I’ve said previously, our focus remains firmly on organic growth potential within our markets, but we will carefully balance the risk reward proposition between both growth and credit quality. As we have clearly demonstrated our credit strategy continues to generate strong metrics and loan portfolios and enables us to make prudent long-term decisions for our shareholders. We believe that the strong foundation we have developed supported by our unique long-term advantages positions us well for future opportunities. I remain extremely proud of our entire organization as our employees continue to live and breathe our better banking pledge as they strive daily to provide top tier service to our customers. Their efforts through the past year, which included our core banking system conversion have allowed us to receive numerous national accolades so far this year. Following closely, being the only mid-size bank in the country to receive top 10 honors for both employees satisfaction and financial success, as well as being named one of America’s most trustworthy companies and being voted one of the world’s best banks by our customers, we are honored to again, be recognized by our customers for our trust and service. WesBanco was privileged to have recently been voted the number one bank in Ohio, and the number two bank in Kentucky. These rankings were based on customer satisfaction and feedback as we’ve received strong scores across the survey, including high scores for trust, branch services, terms and conditions, customer service, digital services and financial advice. These top rankings are a strong testament to the outstanding effort and dedication of our employees. I would now like to turn the call over to Dan Weiss, our CFO for an update on our second quarter financial results and outlook for 2022. Dan?

[Dan Weiss:]

Thanks, Todd and good morning. During the quarter we recognized strong sequential quarter loan growth, robust residential mortgage originations, a solid deposit base that grew year-over-year and nice improvement in our net interest margin, while maintaining discipline over expenses. We continue to make important growth oriented investments to support long-term loan growth and we expect additional margin improvement as the recent fed rate increases begin to impact interest income on earning assets. As noted in yesterday’s earnings release, in the second quarter we reported improved GAAP net income available to common shareholders of $40.3 million and earnings per diluted share of $0.67 and net income of $81.8 million and earnings per share of $1.34 for the six month period. Excluding restructuring and merger related charges results for the three and six months ending June 30, 2022 were $0.67 and $1.36 per share respectively as compared to $1.36 and $2.09 per share last year respectively. It’s important to note that the second quarter of 2021 was favorably impacted by a negative provision of $16.6 million net of tax or $0.25 per share and the first six months of 2021 were favorably impacted by a negative provision of $39 million net of tax or $0.58 per share. Total assets of $16.8 billion as of June 30, 2022 included total portfolio loans $10.2 billion and total securities of $4.2 billion. Total securities increased 7.7% year-over-year due mainly to excess liquidity related to our customer’s higher personal savings. Loan balances for the second quarter of 2022 reflected strong performance by our commercial and consumer lending teams and efforts to keep more one to four family residential mortgages on the balance sheet, partially offset by the continuation of SBA PPP loan forgiveness. As Todd mentioned, the real story this quarter was the broad base loan growth we generated on a quarter-over-quarter basis. As of June 30, 2022 total portfolio loans, excluding PPP loans increased 3.8% year-over-year due to strong growth in real estate loans. Further, total loan growth on a sequential basis of 5.4% or 21.8% annualized was broad based and reflected the strength of our lending teams and markets. Strong deposit levels remain a key story as total deposits, which did decrease sequentially increased year-over-year to $13.6 billion, despite CD runoff of $379 million. This growth was driven by total demand deposits, which represent approximately 59% of total deposits as well as growth in savings. And in fact, non-interest bearing deposits represented a record 35% of total deposits as of June 30, 2022. The net interest margin in the second quarter of 3.03% increased eight basis points sequentially, which reflects the 125 basis point increase in their federal funds rate during the last three months, as well as our successful deployment of excess cash through loan and securities growth. We’re especially pleased with the quarter-over-quarter increase in our core margin from 2.80% to 2.93%, which excludes purchase accounting accretion of 8 and 6 basis points and SBA PPP loan accretion of 7 and 4 basis points, respectively. This 13 basis point improvement was greater than anticipated due to the 125 basis point increase in the fed funds rate during the second quarter, compared to our prior expectation of 75 basis points to 100 basis points of increase. The margin improvement was also driven by deploying excess cash to support our second quarter loan growth. Similar to the rising rate environment that we experienced during 2018, we are beginning to see the pricing advantage of our robust legacy deposit base. Our total deposit beta on a year to date basis was a negative 3% as compared to the 150 basis point increase in fed funds rates so far this year. While still in the early stages, we believe this bodes well for us in the coming quarters, as we should be able to again, lag rising deposit rates. For the second quarter of 2022 non-interest income of $27 million was down $9.1 million year-over-year due primarily to lower mortgage banking income, which decreased $6.5 million and a $1.3 million net loss in other assets, which compared to a $4 million net gain in the prior year period. While mortgage originations of $328 million were roughly flat to the year ago period, as well as up 21% sequentially, mortgage banking income was lower as we retained 80% of production on the balance sheet due to customer preferences for adjustable rate products, as well as construction, which are not saleable into the secondary market. The net loss and other assets reflects the change in the fair value of underlying equity investments held by WesBanco Community Development Corporation compared to a net gain on the same investment in the prior year period. And lastly, it should be noted that net securities losses reflected a $1.2 million loss on equity securities in the deferred compensation plan. While this same $1.2 million reduces employee benefits expense to reflect a decline in the obligation to the plan. Turning to expenses. During the second quarter, we continue to diligently manage our discretionary expenses and financial center network in order to make important growth oriented investments to support long-term loan growth. Excluding restructuring and merger-related expenses, non-interest expense for the three months ended June 30, 2022 totaled $87 million, a 5.3% year-over-year increase and a 1.2% increase from the first quarter of this year. Salaries and wages increased $3.8 million, or 10.1% compared to the prior year due to higher salaries expense related to normal merit increases and the hourly wage increase that we implemented last year, lower deferred loan origination costs and higher bonus and stock option accruals. And as I mentioned, employee benefits included a $1.2 million credit related to the deferred compensation plan, which is offset in debt securities losses. Despite slowing down, share repurchase compared to the prior two quarters, we continued to return capital to our shareholders through the repurchase of approximately 1.1 million shares during the second quarter in addition to the quarterly shareholder dividend. Going forward, our capital position remains strong and combined with approximately 1.8 million shares remaining under the existing share repurchase authorization will allow us to be opportunistic on future share repurchases subject to pricing levels, volume restrictions, and future share repurchase authorizations. As of June 30, 2022, we reported Tier 1 risk-based capital of 12.49%, Tier 1 leverage of 9.51%, CET1 of 11.31%, and total risk-based capital of 15.40%, as well as tangible common equity to tangible assets ratio of 7.58%. Now I’ll provide some thoughts on our current outlook for the second half of 2022. We remain an asset sensitive bank and currently modeling Fed funds to peak at 3.5% in the fourth quarter and hold steady through 2023. Generally speaking, we expect the 125 basis point increase in Fed funds in the second quarter to benefit the third quarter margin by approximately 25 basis points to 30 basis points or roughly five basis points for each 25 basis point hike. In the fourth quarter and thereafter for each 25 basis point rate hike, we currently model the quarterly net interest margin to benefit between two and four basis points per hike as deposit pricing begins to move. We expect purchase accounting accretion to be five basis points to six basis points per quarter and lower PPP accretion offset by improvements in earning asset yields as rate increases continue to make an impact. As I mentioned, we expect the low deposit beta benefit from our core deposit funding base to provide similar benefits in the rising rate environment this year and anticipate our betas to be lower compared to peers as they have performed historically. Further, we see opportunity in the coming quarters to remix the balance sheet by reinvesting cash flows from the securities portfolio into higher earning loans. Residential mortgage originations should remain strong due to our new loan production offices in Northern Virginia, Nashville, and Indianapolis, as well as our hiring initiatives supporting our pipeline. However, production will remain at lower levels than the record volumes realized during 2021. While it’s dependent on origination production, we expect to move over time to selling approximately 50% into the secondary market subject to customer preferences and pricing. Trust fees, which are impacted by fluctuations in the equity and fixed income markets and securities brokerage revenue should continue to benefit from organic growth. Electronic banking fees and service charges on deposits will most likely remain in a similar range as the last few quarters. While we maintain our diligent focus on discretionary expense management, we are not immune from the nationwide inflationary pressures, as well as the need to attract and retain employees. As expected, the biggest impact from inflation and our strategic investments will primarily be reflected across salaries and wages, employee benefits, occupancy, and equipment. In addition to our hiring of commercial and residential lenders, we are implementing an increase in the minimum hourly wage for our employees during the third quarter that will add approximately 600,000 per quarter above and beyond a more normal merit pool. Based on these efforts to strengthen our employee base for long-term growth combined with normal merit increases implemented this summer, higher seasonal healthcare and occupancy expenses, we currently anticipate a similar quarter-over-quarter increase in operating expenses from second quarter to third quarter as we incurred last year in the 6% to 8% range. The provision for credit losses under CECL will depend upon the changes to the macroeconomic forecast and qualitative factors as well as various credit quality metrics, including potential charge-offs, criticized and classified loan balances, delinquencies, and future loan growth. In general, reductions and the allowance as a percentage of total loans will depend on the possibility of continued improvements in industries impacted by COVID, unemployment rates and other macroeconomic factors, including increases in interest rates and inflation expectations. Lastly, we currently anticipate our full year effective tax rate to be between 18.5% and 19.5% subject to changes in tax legislation, deductions and credits and taxable income levels. We are now ready to take your questions. Operator, would you please review the instructions?

[Operator:]

We will now begin the question-and-answer session. Our first question will come from Karl Shepard with RBC Capital Markets. Please go ahead.

[Todd Clossin:]

Good morning, Karl.

[Karl Shepard:]

Hey, good morning, everybody.

[Dan Weiss:]

Good morning.

[Karl Shepard:]

How’s it going?

[Todd Clossin:]

Good.

[Dan Weiss:]

Good.

[Karl Shepard:]

I guess I wanted to start here on loan growth. It was obviously a very strong quarter for you guys. And I heard the commentary kind of around moderating a little bit next quarter. But can you help unpack that a little bit? I’d just like to drill down to kind of potential for further increases in line utilization kind of the mix of mortgage production going forward, grants that come on the balance sheet and then some of the CRE payoffs and new hires as well? Thanks.

[Todd Clossin:]

Yes, the CRE payoffs have moderated as we would’ve expected. They were pretty high when rates were lower, the second, third and fourth quarters of last year. Second quarter of this year, it was $100 million, that went to the secondary market. And we think $85 million to a $100 million is kind of a normal quarterly run rate for us. So I think the rate increases slowed that down a little bit. Things go into the secondary market. Plus I think the heavy amount going to the secondary market and kind of pulled things I guess forward into last year. So I think that $100 million rate going forward. It’s probably not a bad rate to be looking at again more normalized. On utilization for C&I is up, we mentioned in our commentary still about 8% or so below where we think it’s more normalized. So we think there’s some upside there obviously if we hit a recession that could impact it a little bit. But we think in a normalized environment, there’s the ability to go up to another 8% there. And I think with regard to residential mortgage, we did put more on the balance sheet partly because of this rates went up, people wanted arms and there were a lot of construction lending that was going on and that tends to stay on our balance sheet. But we expect that and we’re already seeing that start to move back down towards a more normalized 50% range that may take a couple quarters to get completely back to that. But it’s not our plan to put 80% of our production on our books. I think longer term, you’re going to see us return back to where we were in that probably 50% to 60% range of what’s being put on our books. So we haven’t changed our model there. It was just, we decided to put more on for a while and customers wanted construction and arms as rates started to go up. Long term, we’ve really been working to build towards, and we real happy to see the commercial loan growth that we had in the second quarter. We know people have been waiting for that. We really think that the 5% kind of mid to upper single digit, 5%, 7%, 8% range, long term is kind of where we think the organic growth rate is for our company. That’s in a normalized environment. And can’t really look at any one quarter, you might have a quarter that’s not great, and a quarter that’s really, really excellent. But when you look at it out, averaging it over time, we think what we really tried hard to do is position the company from historical kind of low to mid single digit grower, up to a mid to upper single digit grower with the acquisitions in Kentucky and the acquisitions in the Maryland market that were higher growth rate companies. So we feel that’s materializing now, and that was part of the plan. That’s why we went to those markets. We really didn’t see a tremendous amount of production from some of the new hires yet because they came on, well, we got 10 commercial lenders coming on this quarter. And then the other commercial lenders that we brought on another 14 or so in the first six months of the year, some of them are starting to produce, but they’re just getting ramped up right now. So I wouldn’t say that the large loan growth in the second quarter was due significantly to new hires. I think it was just due to market dynamics and the strong pipeline. And I saw other peers with similar type of results. So I’m really looking forward to the lift. We’re going to get with the new hires that have come on board, 11 mortgage loan originators, really good leaders on the residential mortgage side that we’ve hired in Nashville and Indianapolis. And we think that’s going to bode well for the – just the long-term trajectory of organic growth, which again, I would like to think would be in the mid to upper single digits, but that’s going to depend on the economy. That’s going to depend upon a lot of things. But in a normalized environment, that’s where we would expect to be.

[Karl Shepard:]

Okay. That’s helpful. And then maybe one for Dan quick and I’ll step back. But I know you touched upon this in the prepared, and it sounds like kind of five basis points of margin benefit from each hike right now. Could you just kind of reiterate when that trails off to two to four and kind of, are you seeing any indication of that or is just that just kind of your base assumption going into kind of higher rates?

[Dan Weiss:]

Yes. So I would say, the five basis points per 25 basis point rate hike would be more related to the hikes that occurred in the second quarter as those are fully reflected in our loan pricing. We expect to see those then kind of translate into interest income and margin improvement in the third quarter. So those hikes that occur in the third quarter and currently we’re projecting 75 basis points today and another 50 basis points in September, those hikes would really take effect in the fourth quarter, just given the fact that most of our are about 50% of our available rate loans reprice every three months. So when those hikes take effect, we expect by the time we get to that fourth quarter, we talk in prepared commentary about a two basis point to four basis point margin improvement for each 25 basis point rate hike. And that’s more related to the fact that we do expect deposit cost to begin to impact to begin to rise and impact that incremental improvement in margin as we go forward.

[Karl Shepard:]

Okay. Thanks for the help.

[Todd Clossin:]

Thank you.

[Operator:]

Our next question will come from Steve Moss with B. Riley. Please go ahead.

[Steve Moss:]

Good morning.

[Todd Clossin:]

Hey, Steve.

[Dan Weiss:]

Good morning

[Steve Moss:]

Maybe just starting off, maybe just start off on the deposit side, curious, how you guys are thinking about deposit. It is, obviously, I think, not much in terms of sensitivity in the short term, but maybe how you guys are thinking about it as you kind of moderate your expectations for asset sensitivity with later rate hikes?

[Todd Clossin:]

Maybe I’ll start off and then I’ll let Dan jump into. We’ve got obviously very low deposit beta. We saw that through the last rate hike cycle and last several rate hikes cycles quite frankly. This one’s a little different, right? Because rates are going up really fast. So it’s kind of hard to look back at prior cycles and expect things to repeat the same way. I think everything’s going to get accelerated a little bit. But we would still anticipate lagging the market, but probably not be able to lag forever, obviously, because we’re going to be impacted by the same things everybody else is. We really didn’t see much of any deposit, CD, non-CD runoff between the first and the second quarter. We had about 120 million or so. But what happened that was just one big customer that’s rate sensitive that’s in and out periodically. So really not any material change and deposit declines, but we’re watching it, right? So we’re watching it real close. I think historically we would’ve taken multiple quarters before we felt we would need to raise it all. We may need to move sooner than that if we get 75 basis points or 100 basis points today and more rates increases down the road. But we’re going to wait. We’re going to wait and see until it starts to impact the balance sheet a little bit and feel we’ve got the luxury to do that with all the shale-related deposit flows and natural gas prices hitting records. And I mean, we’ve got an abundance of deposit flows into the organization. So we can afford to be patient. But we’re not immune. So, we know we’ll have to address it over time. Dan, anything you’d add?

[Dan Weiss:]

No. I think you covered it. I mean, deposit costs increased just 1 basis point from first quarter to second quarter, so really not seeing much there. Given we are projecting fed funds to peak at 350. So that would be 325 basis points of increase effectively in 2022. And if you were to just use a simple algebra, apply a 20% beta to a 325 basis point increase that’s about a 65% increase in cost deposits. When that takes effect? As you said, could be over some longer time horizon.

[Steve Moss:]

Okay. Appreciate that color. And maybe just falling up on the deposit inflows from shale, just kind of curious, with natural gas around $8, $9, how strong are those deposits these days?

[Dan Weiss:]

Yes. They’ve typically been as high as $15 million to $25 million in a quarter when rates are up, when rates are low maybe $4 million to $5 million. So we’re in the upper range of that right now with where natural gas prices are right now, so $15 million to $25 million a quarter.

[Steve Moss:]

Okay. And then just on loan growth here, curious where – I’m sorry, on loan pricing, just curious, where was loan pricing this quarter and what are you seeing now given all the rate volatility?

[Dan Weiss:]

Yes. So if you look on, I believe it’s Slide 6, you can see that we – our weighted average rate for loans put on the books here in the second quarter was 3.78%. If you look at just what was put on in June, we came in right around 4.02%. So we’re continuing to see that the increases and of course, we’re pretty optimistic about the direction, obviously with the rate increases. We do have as well about $2.2 billion of loans that repriced every three months as I mentioned, it’s about half of our portfolio, and those also repriced upward about 80 basis points here in the second quarter and would expect those to continue to reprice as we see rate increases.

[Steve Moss:]

Okay, great. That’s very helpful. And just one last thing in terms of just on expenses here, I’m sorry if I missed it, but did you guys provide an expense outlook for the third quarter?

[Dan Weiss:]

Yes, we did. We said in the prepared commentary about 6% to 8% which is pretty consistent with what we experienced last year moving from second quarter to third quarter. There’s quite a bit of seasonality there and pretty normal things like – 75% of the increase really is related to investments in people. So employee salaries and wages, employee benefit, salaries for example, are going to be impacted this year by just the normal merit increases. I mentioned in my prepared commentary, we’re expecting about a $600,000 quarterly increase from minimum wage increase across all of our markets. And that’s kind of above and beyond the typical merit pool. We’ve also got a number of revenue producing hires in the second quarter that weren’t fully baked in to the second quarter that’ll impact third quarter. And then we’ve got a number of hires coming in revenue producers in the third quarter, which obviously are not in the second quarter. So there’s also an extra day in the third quarter and that adds about $0.5 million. So just that alone. And then you look at employee benefits. The one thing I would point out there employee benefits, as I mentioned in the prepared comments included a $1.2 million credit on – it’s related to our deferred compensation plan as the equity securities were down. That credit runs through employee benefits. So if you were to normalize employee benefits in the second quarter, you would add that $1.2 million back to the expense run rate, so between and then just kind of seasonally higher healthcare expenses that just something we’ve seen on a historical basis. Third quarter tends to be the highest quarter on healthcare just based on the time of employee deductible. So those items are really the drivers of the call, it 6% increase. And then I would just add and this is a little smaller number here, but net occupancy had about $600,000 in kind of non-recurring credits. So, I would probably add $600,000 back there as well.

[Steve Moss:]

Okay, awesome. Appreciate all the color. Thank you very much, guys.

[Todd Clossin:]

Thank you.

[Operator:]

Our next question will come from Catherine Mealor with KBW. Please go ahead.

[Catherine Mealor:]

Thanks. Good morning.

[Todd Clossin:]

How are you?

[Dan Weiss:]

Good morning.

[Catherine Mealor:]

Great. Wanted to just go back to fees and I don’t know if you provided any commentary on your fee guidance. But just curious how you’re thinking about your fee outlook for the back of the year? It seems like service charges have been rebounding. But obviously you’ve got some other headwinds, but just how you’re thinking about fees for the second half.

[Dan Weiss:]

Yes. So fees are very much dependent upon trust fee income and that’s going to be dependent on the equity markets, so that’ll be very much dependent on kind of where things end up. Those are very difficult to predict. I would tell you that relative to the first quarter, first quarter typically is higher than any other quarter, just because we’ve got about $700,000 or so in tax preparation fees. I would say, if we expect equity markets to continue at the pace right where they’re at, we would expect probably trust fees to be in a similar range to where they were in the second quarter. I think the other service charges on deposit, electronic banking fees expect those to be pretty consistent compared to the second quarter. And the other big item would be mortgage banking income. We retained 80% of production here in the second quarter and that’s very much dependent on customer preferences and pricing. And as Todd mentioned that’s very much – customers today seemed to really be interested in those adjustable rate products. We had of our production of $328 million that was about 42% of that was construction. So construction can’t be sold into the secondary market. And then there was, like I said, a lot of adjustable rate products, which generally aren’t sold into the secondary market. So some of it has to do with customer preferences. We would like to see – would like to eventually kind of get back to that 50-50 or 60-40 mix that we’ve kind of historically run at. But right now we’re just kind of taking what the market gives us. And today it’s a little bit heavier on the portfolio side. But we’re benefiting on loan growth and the interest income that kicks off of that. So I would say, we don’t give really forward guidance on this. But given the trends, I would expect mortgage banking income to be pretty similar to second quarter, maybe a little higher. So I think...

[Catherine Mealor:]

Okay. Great.

[Dan Weiss:]

Yes.

[Catherine Mealor:]

Yes. That makes perfect sense. Okay, great. And then up to the reserve, you’ve seen some continued releases of the reserve over the past couple of quarters. Where are you thinking about at what point you may have to start increasing reserves, just given kind of the macro environment? And any color you can give us on what your kind of scenario waitings look like today under CECL?

[Todd Clossin:]

Yes. I’ll let Dan get into the details on that. We had quite a bit of long growth in the second quarter and we would’ve had much more of a reserve release had not been for that loan growth, which is good. I like the loan growth. I’d like to continue that to happen and reserve for that. But we saw improving factors that really, really helped across the board in our portfolio, which would have indicated a pretty healthy reserve release. But then the loan growth pretty much offset that which is good. Dan, do you want to add more color?

[Dan Weiss:]

Yes. The only thing I would add, just you can see there’s a nice waterfall on Slide 9 that kind of shows the moving pieces. And you can see a pretty nice decline in the qualitative factors as Todd mentioned, mostly related to COVID type items, hospitality, et cetera, seeing improvement there, which is great to see. And as Todd mentioned, kind of the offset to the improvement there with second quarter loan growth as well as we did add in kind of some deterioration into macroeconomic factors, particularly the unemployment. So we’re taking a slightly more negative view on unemployment than the baseline forecast. So baseline forecast today are kind of projecting unemployment to be around 3.6%, let’s call it. And we waited in a slightly more negative forecast gets us up around 4% or so. So that was kind of the other piece and effectively the two offset end up with kind of a pretty consistent reserve around $117 million.

[Todd Clossin:]

Yes. You’re starting to – I imagine other banks say the same thing too. I mean, we’re at 1.15, if you want to put the marks from other acquisitions, I think that’s another 21 basis points. But you’re getting under pretty low levels, right? So I think that the big reserve build and then the big reserve release, I think we’re nearing the end of that. And particularly if we have decent loan growth, which I would expect then we probably not going to be in a heavy reserve release position, I wouldn’t think nor would many others.

[Catherine Mealor:]

And when you say, as you look at the CECL build is more of that impacted by the changes in unemployment versus GDP because it feels like – today it feels like your negative GDP decline. You will probably see, but unemployment it’s still uncertain, whether we’re going to start to see that. Is that a fair assessment?

[Todd Clossin:]

Yes. The primary driver of our CECL reserve is unemployment. GDP is not a significant factor. It’s a consideration, but unemployment is the primary driver of the quantitative model.

[Catherine Mealor:]

Okay. That’s great. All right. Thank you. And also congrats to you, Todd, on your retirement announcement.

[Todd Clossin:]

Well, thank you. I appreciate that. Yes. I’m excited to have Jeff come on board. We’ll have him sitting in on some earnings calls and attending some visits and yes, I’m excited to get him on board here and looking forward to the next phase of my life. We’ll have a nice overlap of a year, year and a half or so. So we’ll be working together pretty closely. But great guy, great background and no change in strategy or plans, he’ll just continue to move it along.

[Catherine Mealor:]

Great. Great. Very good. Looking forward to working with him. Great, thanks. Great quarter.

[Todd Clossin:]

Thanks.

[Operator:]

Our next question will be Manuel Navas with D.A. Davidson. Please go ahead.

[Manuel Navas:]

Good morning. I just wanted to think a little bigger picture. If fed rates are at 350 by year end what would be the timing for kind of a peak NIM given your beta assumptions? Is that kind of first half of 2023? I know that good amount of assets will still be repricing up. Just kind of your thoughts on that concept.

[Todd Clossin:]

Yes. So again, we try to not to give too much forward guidance here, but yes, I would say a NIM peak would probably be maybe more back half of 2023. But there’s so much uncertainty, there’s so much movement in rates and kind of who knows what’s going to happen between now and the end of the third quarter, let alone the back half of 2023. So that’s – if everything moves steady as she goes, I think we would see kind of that it would be more back half of 2023 where we would see a peak in NIM.

[Manuel Navas:]

That makes sense. This is also assuming that 350 stays across 2023, who knows what can happen there. Then this next question might be a little tougher too, how should we think about the new hires that are coming on in the back half of this year? What you’ve already done so far this year on expenses? Can you kind of give a framework for expense growth? I guess it’s hard to get too specific without giving exact guidance, but kind of how should we think about new hires coming in and expense growth next year?

[Todd Clossin:]

Yes. Dan may add in some additional on this as well, too. We want again be in that mid to upper single digit loan growth rate longer-term. So having key hires and key places is going to be important to us. But we’re also doing a lot of topgrading, right? So we’ve got underperformers and markets we’re addressing those too. It’s not going to offset all of the increase, but it’ll offset a good portion of the increase in additional people coming on board. So, I guess, more production per dollar of FTE, which drives positive operating leverage is a big focus of that. So with some of the heavy hires in some of the higher growth markets, I think they would tend to be strong producers for us. So again, the key there is positive operating leverage. We recognize, you can’t just stay in a flat expense environment forever and expect to grow your bank. And I think people, they want to see growth out of WesBanco. We want to see growth as well, too, so it’s needed investments that would take place. So I would expect, as Dan mentioned earlier, you’ll see the increase in the third quarter, as people come on board and those that were in the second quarter, they’ll be on board for a full quarter in the third quarter. But that again should be more than offset by the additional revenues. I would say that the hiring plan that we had in place, again, hired 20, 25 commercial lenders. I mean, we’re basically there, so you’re not going to see an additional 25 hired in the next six months and things like that. We kind of got to where we needed to get to, but we’ll continue to hire one there, on here, particularly in the LPOs as they build out. The lenders, when we bring them on board again, a lot of them have non-solicits for a year, so we want them to respect that. And they’ll still be bringing business in obviously in the markets, but then they would really start to accelerate in the second year of that. Residential mortgage originator is a little bit differently. They tend to start producing a lot more quickly. And given some of the hires we did in Northern Virginia a year ago and some of the other markets they’re already producing. And I think that was – our plan was even though the market may soften for residential mortgage, our hope would be to outrun that through additional hires. So that we’d be able to stay, flat on residential mortgage loan production. Even though the market’s down 25% or 30%, we’re not because the additional hires we’ve made and that was very much part of the plan. So I think you’ve seen an influx of talent. We’d like to continue to add more talent over time, but not at the levels that we did in the first six months. That’s not our plan. Dan, would you add anything else to that?

[Dan Weiss:]

No, I think you covered it well.

[Todd Clossin:]

Okay.

[Manuel Navas:]

Thank you very much.

[Todd Clossin:]

Thank you.

[Operator:]

There are no remaining questions at this time. And with that, we will conclude our question-and-answer session. I would like to turn the conference back over to Todd Clossin for any closing remarks.

[Todd Clossin:]

Great. Thank you. Appreciate everyone’s time today. Hope you guys are all staying healthy. And Dan and I and Jeff and John we’ll all be out at some of the conferences coming up here in the fall and winter months and looking forward to getting a chance to see each other in-person again. Thank you. Have a great week.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.