WesBanco, Inc.
Q1 2021 Earnings Call Transcript

Published: 2 May 2021

[Operator:]

Good day, and welcome to the WesBanco First Quarter 2021 Earnings Conference Call. Please note 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.

[John Iannone:]

Thank you, Carrie. Good morning, and welcome to WesBanco, Inc.'s First Quarter 2021 Earnings Conference Call. Leading the call today are Todd Clossin, President and Chief Executive Officer; and Bob Young, Senior Executive Vice President and Chief Financial Officer.

[Todd Clossin:]

Thank you, John, and good morning, everyone. On today's call, we're going to review our results for the first quarter of 2021 and provide an update on our operations and 2021 outlook. Key takeaways from the call today are

[Robert Young:]

Well, thanks, Todd, and good morning, everyone. During the first quarter of 2021, we experienced a continuation of the low-interest rate environment and significant amounts of excess liquidity, which were mitigated somewhat by continued strong residential mortgage origination volumes, a robust stock market, strong expense control, and an improvement in the macroeconomic forecast utilized under the current expected credit losses accounting standard. As a result of higher net interest income, lower operating expenses, and a negative provision for credit losses more than offsetting lower net interest income -- I'm sorry, higher noninterest income is what I should have said, offsetting lower net interest income as compared to the prior year and prior quarter, we reported improved GAAP net income available to common shareholders of $70.6 million and earnings per diluted share of $1.05 for the three months ended March 31, 2021. Excluding restructuring and merger related charges; results were $1.06 per share for the quarter as compared to $0.41 last year. Todd just provided you our PTPP returns. Our core returns on average assets and average tangible equity were 1.74% and 18.39% in the first quarter. In order to provide better comparability to prior year periods and to demonstrate the strength of our underlying financial results, we believe it is important to evaluate pre-tax pre-provision income, excluding restructuring and merger-related costs. In the first quarter, we reported $64.2 million in PTPP income, which increased 3.6% compared to the prior-year period. In addition, on a similar basis, we reported strong pre-tax pre-provision returns on average assets and average tangible equity of 1.57% and 16.78% for the quarter. Total assets of $17.1 billion and portfolio loans of $10.7 billion as of March 31 increased 6.6% and 3.4%, respectively, when compared to the prior-year period, due primarily to growth in the securities portfolio and cash held due to excess liquidity related to additional customer stimulus funds received as well as new round two loans from the SBA's Payroll Protection Program. Very strong deposit growth continues to be a key story for WesBanco as total deposits increased 20.3% year-over-year to $13.3 billion, due primarily to the aforementioned stimulus and SBA PPP loan funds received, increased personal savings, and lower personal discretionary spending earlier in the pandemic.

[Operator:]

We will now begin the question-and-answer session. The first question will be from Russell Gunther of D.A. Davidson. Please go ahead.

[Russell Gunther:]

Hey. Good morning, guys.

[Todd Clossin:]

Good morning, Russ.

[Russell Gunther:]

I wanted to start with the loan growth outlook, and I appreciate the glide path provided in the deck, runoff of organic kind of ex-PPP balance is something we've seen from a lot of our banks this quarter due to the excess liquidity. A bit more pronounced, I think, at WesBanco, and we're getting close to seemingly meeting the commercial runoff with new originations. But Todd, if you could provide us your thoughts on kind of when we can close that gap and expect positive organic kind of ex-PPP growth?

[Todd Clossin:]

Yes. I mean, I was looking at a lot of the others that are out there trying to compare, it looks like everybody's 6% to 8%, I guess, annualized, and we fall into that mix as well, too. It's difficult to provide a lot of near-term loan growth expectations. We still continue to think it's going to be relatively flat for a while. I don't think that view's consistent with what you're hearing from a lot of banks across the nation just because there's a lot of liquidity. And even since the last earnings call, there was a new dose of liquidity put in there for both consumers and also businesses through the PPP process. So there is an awful lot of liquidity that's out there. And we see that in our line usage as well, too. So I don't know exactly when it's going to take off. I mean GDP looks like it's going to be strong this year, but companies have got to work through that liquidity first. I think when they do, we're in a really good position to participate in that growth because of the lending teams we have and particularly now in higher growth markets because of our acquisitions. We're seeing commercial real estate payoffs again in the secondary market. Secondary market is getting to be really aggressive. We're seeing things that are getting taken out, quite frankly, during the construction phase, let alone stabilization phase. So I think that's kind of interesting to see that trend. Overall, our pipelines are up about 10% over the last quarter, but still down about 10% from kind of pre-pandemic first quarter of last year, but they're building. So I think that's good to see. Again, I think we're positioned well, I just don't know when that's going to take off again. I think we've got a little bit of time here in terms of kind of a flattish type of loan growth or consistent with what we've seen here recently, probably for most of the industry for the next few months or maybe a quarter or two.

[Russell Gunther:]

I appreciate the thoughts, Todd. And thinking out a bit more longer term, when we do finally hit that turn, so what is the expectation for organic growth out of WesBanco with the Old Line fully integrated? Is that a mid-single-digit number you're striving for? Or how are you see that shaping up?

[Todd Clossin:]

Yes, definitely. Mid to upper mid, we were kind of a low to mid-single-digit grower prior to some of our expansion, not just in the Mid-Atlantic market, but into Global Lexington markets like that as well, too, they had some traditionally some higher growth rates. So now those are all part of the fold. They're all into the bank. They're all assimilated. We've done the portfolio pruning that we typically do after acquisitions and all that. So all that's really behind us. So I would hope that coming out of the pandemic when we're in a more normalized environment, that the benefits of being in those markets, which start to show through that we would go from a low to mid-single-digit grower to a mid to upper single-digit grower would be the expectation. Mid-Atlantic market pre-pandemic was kind of a low double-digit grower. So we're not changing how they do business, and we got good strong lending teams in place there, same leadership. So we would expect -- and actually, we're seeing early signs and pipelines and things like that, that the Mid-Atlantic market and Kentucky are two of our biggest growing areas in terms of pipeline and business so far this year.

[Russell Gunther:]

That's great. Thank you. And then switching gears, before I step back, it would be on the expense side of things. So a really good result this quarter came in. Well below consensus. It sounds like there's some puts and takes going forward with higher minimum wage and midyear increases. You mentioned marketing, but then full benefit from the already identified cost saves. So could you help us with a glide path in terms of where the near-term expense base kind of shakes out over the next couple of quarters?

[Todd Clossin:]

Yes. Yes. I mean we -- in the last quarter, I think we looked at what the consensus was out there, and we said we were comfortable with it, and I would still say we're comfortable with that as well. And first quarter was lower for a number of reasons, one of which was that about $1.3 million was deferred costs related to SBA PPP loans. So that's not a long-term reduction that would be part of the run rate going forward. We do have our midyear merit increases that we're going to do. We're still being very cautious on hires, but we are, I would say, we're being aggressive on lending hiring lenders. This is the time of the year to hire them. They just got their bonuses. And if they're looking around, now is the time to do it. So we want to capitalize on that with the starting to unrestrict lobby access and things like that. We're going to have more growth with our licensed securities brokers. We're now looking to hire more of those individuals. So we've got some investments that we're going to make, nothing crazy, but we're going to make some selective investments to participate in the growth going forward. So I think the thought and the consensus was, in the past, it was kind of an $87 million, $88 million quarterly run rate. So it's hard to predict, but I wouldn't argue with that $87 million to $88 million number. I mean, we are going to have some, I would say, reopening expenses, which are a good thing, travel, entertainment, things like that, that should generate additional revenue for us. So we'll have some of those kind of more standard costs that were pretty reduced during the pandemic. We are seeing the benefit of the branch restructuring that we did in January, and those costs have come out are coming out through the second quarter here. And we also have additional branches that we're looking at, and we will be acting on here over the next couple of months. So we're not done. We're just -- we have a number of markets that we didn't address during the first round of branch consolidations, and we're looking hard at that and those should be happening here over the next couple of months or quarters.

[Russell Gunther:]

I appreciate it. You addressed kind of my follow-up, which would be the next look at the remaining branch network. So is there anything additional you can share there in terms of what markets are being targeted and then when we might expect a related announcement there? And I'll step back. Thank you.

[Todd Clossin:]

Yes. Yes, sure. Well, the markets that we didn't really look at because they were still relatively new to us, and we wanted them to stabilize for a while, the Mid-Atlantic market would be one. And then looking at some of the other markets in the Kentucky area, we kind of done Kentucky already. So primarily the mid-Atlantic market that we're taking a good hard look at right now. I mean, I don't think it would be anything that would be significant enough that would create an announcement or anything like that. It's just part of our on-going business, right? We're always looking at a number of branches, whether that's two, three, four, five on an annual basis that we consolidate, and we were doing that prior to the pandemic. We announced the one in the third quarter last year because it was a big number. It was over 20. But our traditional onesies, twosies, threesies, we'll continue to do, and we'll talk about those, obviously, in the quarterly earnings calls. But I don't see anything that's significant enough that would create a reason for an announcement.

[Russell Gunther:]

Great. Thank you, guys. That is it for me.

[Todd Clossin:]

Sure.

[Operator:]

The next question comes from Brody Preston with Stephens Inc. Please go ahead.

[Brody Preston:]

Hey. Good morning, everyone.

[Todd Clossin:]

Good morning.

[Brody Preston:]

I just wanted to ask on the trust business. You normally have -- and you saw it, but you normally have a step up from the fourth quarter to the first quarter. I just wanted to confirm that was due to tax preparation-related items?

[Todd Clossin:]

That's correct. That would factor into that market appreciation as well.

[Brody Preston:]

Okay. Got it. And then just on the mortgage front, how did originations and gain on sale margins fare in the first quarter?

[Todd Clossin:]

Bob, do you want to handle that?

[Robert Young:]

So gain on sale was down a little bit just because of the mark-to-market. We had good hedging gains, but offset a little bit by what would be a negative mark on loans held for sale, about $160 million there at the end of the quarter. So that did offset what was a very strong quarter for originations as well as associated hedging gains on the pipeline. Might also remark that in the middle of last year, we began moving some of the mortgage salaries for originators to that particular line item, gain-on-sale. And so to some degree, you see a little bit of a reduction as compared to what the normal amount would have been in prior years because of that move from salaries over. In addition to what Todd talked about on the PPP side that, of course, is not associated with the gain on sale line. Nonetheless, we do expect a strong gain on sale here in the second quarter, in the third quarter, your typical seasonal time frames, Brody, for additional activity, and we're still seeing a very strong pipeline on residential mortgage. That is part of the reason, however, why you're seeing a little bit of reduction on the loan portfolio side, as a lot of folks are still in the refinancing mode, rates haven't gone up that much. So it's a combination of both as well as purchase money and construction mortgages that we're doing. And about 50% to 60% is our expectation of the split between portfolio and gain on sale loans sold into the secondary market here in the near term going forward.

[Brody Preston:]

Great. And then I just did want to ask on the loan -- on the swap-related income, just given some of the swings in the fair value adjustments. I just want to ask what that -- I guess, where should that settle out? And what could the expectations be for that other income line item, just given the kind of large swing you had this quarter?

[Robert Young:]

So you did note that the part of that swing this quarter was due mark -- due to the mark-to-market on the existing portfolio. And it kind of creates its own hedge against what's happening in the mortgage portfolio, at least loans held for sale that would have had a negative mark at the end of the quarter as rates increased versus the current inventory and that -- in loans held for sale. On the other hand, swap income is influenced this quarter and in any quarter when rates are going up versus if you remember, rates going down in the first quarter last year that would have had a negative impact on existing swaps. But in terms of what you should be looking at net of that noise because that's hard to predict, what's happening with rates at the end of the quarter, we see very strong opportunity going forward for swap fees. We have a lot of our lenders trained on using it, using the product, rates are still fairly low where customers are interested in fixed rates going forward for five or seven years. And so net of that noise, I think a $2 million to $3 million kind of quarterly run rate is what we've been experiencing and no reason to consider that, that wouldn't be there going forward.

[Brody Preston:]

Okay. Got it. And then just on PPP, do you happen to have what the interest income component from PPP was this quarter, just in dollar terms?

[Robert Young:]

I don't. I can look it up if you give me some time. I can tell you that the deferred origination fees were $7.9 million or the fee accretion, I should say, $7.2 million of which would have been associated with PPP loans forgiven this quarter. So the bulk of that would have been for forgiven loans. I think I can find the interest income, but why don't we move on to another question.

[Brody Preston:]

Yes. Yes, that's fine. And do you happen to know what the -- I guess, just what the breakdown of PPP fees will look like moving forward, just in terms of what you have left from round one at this point and what you have for deferred fees from the most recent round?

[Robert Young:]

I would have to look that up.

[Brody Preston:]

Okay. No worries. I just had two more quick ones. On credit, what was it -- you guys kind of bucked the trend versus other banks this quarter on the criticizing classified. It was nice to see those move lower. And so I wanted to ask, is there anything specific that drove that decrease this quarter?

[Todd Clossin:]

Yes. I mean we continue to evaluate, particularly the hospitality portfolio. We're regrading that every quarter right now. So in the first quarter, we had a regrading that took place there. And because things are starting to improve, particularly during the month of March and a lot of liquidity that's out there as well, too. I think we saw the first inklings of what we expect to see going forward, and that is a number of upgrades that occurred in that portfolio. I mean there were a few that went the other way too, but predominantly upgrades. And we also had another credit or two that was able to work itself out as well. So we saw some nice movement there. Our expectation would be, as you recall from prior earnings calls, that we do look at these on a quarterly basis. And the hospitality loans would be -- I would think it being upgraded in the second and third quarter unless we see something really surprising happen, and the trends are really strong. I mean you see the same trends nationally that we read, and I would tell you we're at or above those trends. So it's pretty encouraging at this point.

[Brody Preston:]

Thanks a lot Todd. And then my last one was just on the new commercial origination yields at three 18 this quarter. I just wanted to ask, is that -- is the reduction in your origination yields more of a function of low rates? Or how much is, I guess, maybe stiffer competition, just given the low loan growth environment kind of playing into that?

[Todd Clossin:]

Yes. We're seeing more of the competition in the rate area as opposed to structure, which I think is probably the better place to see it. You don't see people doing a lot of crazy things right now. But it is competitive, it's out there. So we've seen that, particularly on some of the midsized to larger C&I and commercial real estate loans. It's where the swap income becomes really important to you as well too as well as ancillary deposit business, TM business, things like that. So we run a return on equity model on these -- the rates, the key driver of it. But I think in environments like this, if you're not already focused on deposits and other non-credit things, you really are going to be now. But the answer to your question, it's primarily a function of competitiveness.

[Brody Preston:]

Thank you for taking all my questions. I really appreciate it.

[Robert Young:]

And then I do have the answers, I think, to your questions. So $2 million was the interest income on PPP loans in the first quarter. We have about $840 million left at the end of the quarter, which is very similar to what we had with round one, once that -- once round one wrapped up last June or July. So basically, the new loans, $344 million, have kind of offset the December and first quarter runoff due to forgiveness of last year's loans. So we have, as I said, $344 million here at the end of the quarter that represents new originations, call it round three, round two, whichever -- whatever you want to call it, and then about $500 million left from last year. That's a total of $22 million left in fees and that's about one third remaining from last year and two-thirds on the new originations. I hope that's been responsive.

[Brody Preston:]

Thank you very much for that, Bob. I really appreciate it.

[Operator:]

The next question will be from Casey Whitman with Piper Sandler.

[Casey Whitman:]

Hey. Good morning.

[Todd Clossin:]

Good morning, Casey.

[Casey Whitman:]

Morning. Bob, while we're on the subject of PPP, maybe do you also have the average balance of PPP loans in the quarter? I know you gave end of period, but just wondering if you have the average balance.

[Robert Young:]

I'm sorry, I was on mute. I don't have that, but I would tell you that a lot of the new loans were being booked throughout the month of February and March. So sort of a tail on that, while a lot of the forgiveness was occurring earlier in the quarter, January and February. And then kind of the last two to three weeks, once the instructions came out on $150,000 and less forgiveness, we started to see a pretty significant amount of forgiveness there as well. And kind of like two ships passing in the night, we end up with about the same amount of forgiveness between December and March on the old program as we did book new loans, again, ending up about the same number, $840 million, is what we had last June or July. But I don't think there would be a significant difference between the period end and the average on PPP. John, do you happen to have that in your deck?

[John Iannone:]

I'm looking for it. I don't have it right yet, Bob.

[Robert Young:]

Okay. We'll get back to you on that, Casey.

[Casey Whitman:]

That makes sense, though. That's all I needed. Thank you. And maybe just trying to piece together some of the margin commentary that you already gave, Bob. I guess, first, with regards to the increase in the securities book at the end of the quarter, can you maybe give us a sense for the yield and duration you got on that?

[Robert Young:]

Well, we got more on the -- at the end of the quarter than we did back in, say, early February. Rates at that point were 1

[Casey Whitman:]

Okay. And I guess lastly for me, can you give us just more of a sense of just your thoughts around the level of liquidity between cash and securities and the timing of when we could see some of that come off, whether it's like just from deposit outflows from these PPP customers or whatnot, and how that sort of plays into your core margin guidance that you just gave?

[Robert Young:]

Yes. We do anticipate that we're going to see some runoff in what we would call surge deposits throughout the back half of the year, but we anticipate the same thing last year and instead, it continue to grow -- continues to grow here early in the second quarter yet on the deposit side. So it's very hard to say how much of that is going to disappear. We're over $17 billion, does it go back to $16.5. That's kind of what we're thinking in terms of total assets. There's going to be $1 billion worth of runoff in the investment portfolio over the next 12 months or so. Currently, we're not thinking we're going to significantly increase the size of the securities portfolio, just reinvest what is coming back at us. Basically, it's $80 million to $100 million a month as opposed to continue to grow that, but it kind of depends upon the direction of deposits. Do have a $250 million, Casey, that will be paid off in the borrowings book between now and the end of the year, most of that in the Federal Home Loan Bank line. So at this point, I would say that while we have a lot of excess cash and my guidance around what that cost us in terms of margin is probably going to be consistent for the next couple of quarters, somewhere between eight and 12 basis points a quarter is going to be related to that additional liquidity, and don't intend to run that back down to, say, $300 million, 2% of the size of the balance sheet here in the near term.

[John Iannone:]

Okay, Bob, I have the average PPP number if you need it?

[Robert Young:]

Yes, go ahead, John.

[John Iannone:]

Yes. So Casey, it's John. So Bob's patterning, he provided, is right. So for the average, the quarter is roughly -- PPP balance is roughly $775 million for the first quarter of 2021.

[Casey Whitman:]

John, sorry, did you say $725 million?

[John Iannone:]

Seven-seven-five.

[Casey Whitman:]

775. Great. Thank you.

[Operator:]

The next question will be from Steve Moss with B. Riley FBR.

[Steve Moss:]

Good morning, guys.

[Todd Clossin:]

Good morning, Steve.

[Steve Moss:]

Maybe just following up on the margin here, just in terms of purchase accounting accretion. Bob, I hear your guidance for a couple of basis points further decline each quarter for the remainder of the year. Just as we think about that going a little further out, do we think about purchase accounting basically going away by the middle of next year?

[Robert Young:]

Yes, there will be some two to three basis points per quarter, because the loan book from Old Line still has some runoff there. It was a longer average life portfolio, if you remember, Steve. So there'll still be a few basis points. And I just think, in fact, assuming that there are no larger loans paid off, we'll have two to three basis points here in the second quarter, and then it will begin patterning more toward a one basis point number as we get to the back half, the one basis point per quarter number as we get more toward the back half of the year and begin to be in that mid-single-digit area.

[Steve Moss:]

Okay. That's helpful. And then just going back to credit here, just wondering if you guys can give any color on what loan deferral balances were at quarter-end and kind of just how you're seeing any potential workouts going forward?

[Todd Clossin:]

Yes. Let me take that. Very similar to what we had at the end of the year, maybe just a hair lower, because most what's on deferral at this point would be hospitality. We don't have much of anything outside of hospitality on deferral. So we provided -- if you remember from prior calls, we provided relief. We got most of these loans done before the end of the year, and we provided the relief in a lot of cases for 12 months, but we put Springer language in there so that when they got to a certain occupancy or RevPAR or a certain liquidity level that the payments would begin again. And we would have anticipated, and we're seeing that many of them will return to payment status well before the extension runs out, really the 12-month deferral extension. So that's kind of where we're at. So it's really still hospitality. A lot of them are doing really well. Most of them are doing really well at this point. So I would anticipate that that deferral number will come down in second, third quarters because of that Springer language. But we haven't seen any new modifications, deferrals, no demand for it by anybody, including hospitality or other industries for that matter or even consumers. So it is trending exactly the way we wanted it to, but not a lot of movement in the first quarter because it was still pretty much a downtime for the hotels. And things started picking up in March. So I would expect the Springer language to kick in on a lot of them.

[Steve Moss:]

Okay. That's helpful. And then maybe just thinking about the improvement in classifieds. Todd, you kind of alluded to, you're analyzing the hotels on a quarterly basis. Just kind of curious as to how we think about the rest of the portfolio in terms of just review of criticized and classified loans. Is that more on a semiannual or annual basis, maybe when we could see further improvements in maybe therefore further reserve releases?

[Todd Clossin:]

No. I mean we're looking at pretty much all loans over $1 million on a regular scheduled basis. So yes, we look at the portfolio very, very regularly. The hotels are stepped up to quarterly just because obviously, that's an area of focus for everybody and the things are changing rapidly with regard to hospitality. But all criticized and classified loans get reviewed on a regular basis. And we report most of those over a certain size to the Board of Directors and the Executive Committee. So it gets high-level attention. But we're just -- we're seeing some really nice trends. And it's encouraging to see. If you'd have asked me a year ago, I would have expected more companies heading south by now. But they haven't. I think the PPP loans have really helped clearly and the strengthening of the economy. I think we want to keep our eyes open for and I can't point to a specific company impacted by this yet. But there's a lot of supply chain disruption out there, too. So we really want to watch that to make sure it doesn't trip up a C&I customer or somebody that's sourcing things internationally or trying to find employees locally, right? I mean, because everybody's competing against unemployment at this point to, I think, get employees. So I think some of those things could ripple through and affect some of the broader portfolio. I'm not seeing it yet. If it did happen, I don't think it would be dramatic, but it could affect the company here or there. But we are, in answer to your question, we're reviewing all loans over $1 million on a regular basis and its lines of credit and term loans.

[Steve Moss:]

Okay. Great. That's very helpful, Todd. And then just maybe one more going back toward on balance sheet liquidity and securities here. Security as a percentage of assets, just over 21%. Is that kind of the cap you want to keep it at? Or could we head back toward that 23%, 24% level we probably saw a couple of years ago?

[Todd Clossin:]

Yes. I think we -- because we had done some thrift acquisitions, it seems like six, seven years ago now, we were up in a much higher range, up in the upper 20s. And we'd always wanted to get down to the 20% range, peers, pre-pandemic, were about 17%. So I think it's still in an unusual time with liquidity, but I would venture to say that we would hover high teens, low 20s. But I wouldn't think we would take it dramatically lower or dramatically higher, at least not based upon what we see right now. Bob, would you have a different answer?

[Robert Young:]

No. I think at this point, with the additional liquidity until we see some of that runoff in terms of deposits, I think low 20s is where we're going to be, Steve.

[Steve Moss:]

Okay. Great. Well, thank you very much. I appreciate it.

[Todd Clossin:]

Sure. Thank you.

[Operator:]

The next question will be from Stuart Lotz with KBW. Please go ahead.

[Stuart Lotz:]

Hey, guys. Good morning.

[Todd Clossin:]

Good morning.

[Stuart Lotz:]

Bob, it's -- I'm actually surprised we haven't gone to the allowance yet. But Bob, if you could just give additional color on your outlook for further reserve releases this year, assuming we continue to get improvement in the -- some of the economic drivers driving your CECL model. And I think last quarter, you mentioned that your day one, you were at 1%. How quickly do you anticipate we can get back to that level if we do?

[Robert Young:]

Todd and I have regular discussions back and forth about how low will the allowance get at some point in time. And I believe we were in the low 80s when we transitioned to CECL on January the 1st last year, and you saw the increase in both the first and the second quarter. So I think it's going to head back down toward that. I believe that you're going to see a number for the industry that's going to be in the 120s at least this year, by the end of the year, maybe a little bit lower than that next year as improvements continue. Recall, Stuart, that we have a blend of the Moody's and the Fed forecasts that infuse data into our model. As those continue to come down in almost every quarter, in the case of the SEP, from the Fed and monthly from Moody's, we're seeing that continue to ratchet down in terms of the expectation for the next four to eight quarters. There are some people thinking we're going to be in the low fours here by the end of the year in terms of unemployment, who would have thought that a year ago. So there could be some additional reduction on the quantitative side in the model, Stuart. But right now, the largest benefit that we could get here over the short to intermediate-term would be on some of the qualitative factors, specifically related to COVID. There's a COVID factor that could run off over the next few quarters. Hard to say how much that would run off each quarter. But then, we also have about 8% associated with the hotel book. I think that's around $55 million total. We added a little bit to that this quarter, just under $5 million. And I think Todd and I believe that there's going to be a benefit to improvements in the operations of hotels here throughout the summer months and as we proceed through the rest of the year, that could result in that particular factor continuing to decline. There may be some exceptional hotels that we'll have to associate more of a reserve to on a 1

[Stuart Lotz:]

So it does -- it sounds like the reserve release will be a little bit more modest in the next couple of quarters. And then, how much wiggle room do you have versus taking -- kind of taking that earnings accretion from the negative reserve this year compared to kind of spreading that out over -- into 2022? And kind of the impact on earnings per share?

[Robert Young:]

Yes. Again, I would stay at a high level on that. I don't think we're in a position to say wiggle room-wise, how much of that's going to come out by the end of this year versus early next year? Transition that curve in your model to be obviously lower than what we experienced here in the first quarter. But continued improvement in macroeconomic factors and the qualitative factors will result in reductions in the overall allowance as we move forward. Todd, if you...

[Todd Clossin:]

No, you covered it. Thanks.

[Stuart Lotz:]

And one more, on the buyback. We were kind of surprised to see that you guys actually added another 1.7 million share authorization. But just given your strong capital levels and with your valuation back to one seven of tangible, how active do you think you expect to be on the buyback in the coming quarters, given the credit improvement? And any thoughts on the potential accelerated share repurchase? Just love any color there.

[Todd Clossin:]

Yes. I mean, we wanted to provide some flexibility there, because, again, we are at such strong capital levels. And we had strong capital levels heading into the pandemic, and we raised preferred, and we obviously had nice earnings as well, too. So it puts us in a really, really strong capital position. I think a couple of different ways you can use capital, right? Dividends, we increased our dividend last quarter, buybacks, M&A, which we've talked about is not something we're necessarily looking at anything right now. It could be -- could get more constructive at the end of the year or next year, but it's not a major focus of ours and again, not a near-term priority. So really, you look at repurchases, but we're going to base it off of an IRR calculation. We think there's opportunity to be proactive and selective and basically have the ability, I think, like a lot of our peers have done to buy back when they feel the timing is right. And there's been a lot of volatility up and down in bank stocks over the last really even just the last quarter down alone the last year. So we just want to be positioned to be able to do that. We're cognizant of how much capital we're carrying, and the capital is good because we have that strength. But from a shareholder-friendly perspective, we've also got to make sure we got the appropriate capital levels and buybacks would be one of those things that we would be looking at. So -- but it's all going to be IRR driven. It's going to be what's the best use of our capital at any particular point in time.

[Stuart Lotz:]

Got it. Great. And then -- sorry, just kind of one more. It sounds like you're not -- obviously not thinking about M&A until probably next year in terms of bank M&A, at least. How do you -- are you guys considering any non-bank deals? We've seen a number of those deals get announced in recent weeks and just in terms of picking up a profitable fee business or an asset generator and using some of your excess capital for that? I would love to hear your thoughts. Thanks.

[Todd Clossin:]

Yes. I mean, our focus has been on -- first of all, just, I guess, in a broader context, we wanted to make sure there was clarity around credit, right? Somebody else's balance sheet, how do you price it. So, we think we're getting closer to that each month improves. There's a lot more clarity on trying to price somebody else's balance sheet now than that was 90 days ago. So I think that hurdle is being crossed. We've got a lot of work going into our own core upgrade, and that core upgrade will be completed in the third quarter. So once we get past that core upgrade, then I think, again, with the capital position that we have, and just I think the strength of the new core we have as well, too, we could start looking at some bank and non-bank opportunities. So fee-based businesses are always something that we're open to if they fit within the risk profile. We tend not to buy those. Some of the things that are out there right now are kind of national franchises, national asset generation franchises. We tend to like to stay within our franchise, just from a risk profile perspective as opposed to trying to buy into a vertical or something like that to get loan growth. We just don't think that works long-term. But we would be open. So if there were boutique trust firms or other fee generation businesses like that, we'd be very open to that as we head toward the end of the year and definitely into next year.

[Stuart Lotz:]

Okay. Thanks for all the color. And thanks for taking my questions.

[Operator:]

The next question is from William Wallace of Raymond James. Please go ahead.

[William Wallace:]

Hi. Thanks for taking my question. I was going to maybe just try to dig down a little bit and get a couple of points of clarification. So starting on net interest margin. If we back out the purchase accounting accretion and we back out the net interest income and average loans for the PPP program, I calculate that your core NIM was about 303. And Bob, it sounds like what you're saying is that there's still some pressures to that core margin. So my question is, is that a couple of basis points a quarter for the next two to three quarters? Or is that under less pressure than the gap?

[Robert Young:]

So the gap will be influenced by the amount of loan forgiveness each quarter. I still think there's a little bit of that to go here in the second quarter. And if you picked up on what I said earlier, no one has had loans between $2 million and $10 million forgiven yet. For the industry, there's a fair amount of deferred fees remaining on that group as well. So hard to say when that will hit. But relative to the...

[William Wallace:]

Excluding all of that...

[Robert Young:]

I understand.

[William Wallace:]

Take out the purchase accounting accretion and take out the loan forgiveness.

[Robert Young:]

Yes. So recall, I also said earlier that we had about $400 million of the $900 million in growth on the security side that came in toward the end of the quarter. That will influence the margin here early in the second quarter. It will increase net interest income to some degree as compared to five to 10 basis points the Fed, but it's lower than the normal margin, say, on a normal loan-to-deposit ratio for the company. So, I would plug that into your model. We said somewhat of a reduction in terms of basis points without being specific as to whether that's two, four, whatever it is versus a few basis points and it is coming from additional reduction on the loan yield side as we book new loans in that 3.18 to 3.20 area that is in the deck versus what's coming off in the 3.70, 3.80 area. So still some repricing on that side. We have some savings yet on cost of funds, but most of that has already been factored in and won't be as much going forward as low as we are at this point.

[William Wallace:]

Okay. So could we see a core margin that starts with a two?

[Robert Young:]

Yes, because of the additional securities in the book, additional liquidity. That's very...

[William Wallace:]

Okay. I would just have thought that the securities investments would have been coming out of cash earning asset, so lower-yielding stuff going into higher yield. Even though it's low yield securities, it's still, I would have thought higher than like -- or is your cash not in the earning asset balance?

[Robert Young:]

A portion of it is, but most of it is not. The portion that's kept with the Fed would be five to 10 basis points in any one particular day.

[William Wallace:]

Okay. Thank you. That is helpful.

[Robert Young:]

You saw the waterfall. The waterfall shows that loans were down some 16 basis points. That was the contribution in the first quarter as compared to the fourth quarter. So I still think there's a little bit to go there and the mix of the balance sheet in terms of investments for the additional liquidity that the industry got in March from that additional stimulus, which was huge, $1.9 trillion, and the banks are picking up an awful lot of that. So yes, it is more accretive than sitting at the Fed. But it's -- when you look at industry loan-to-asset and loan-to-deposit ratios, it pretty much all-time lows, that's a prescription for a lower margin than what was plugged into most models at the end of the year.

[Todd Clossin:]

Yes. And I just -- I would add, Wally, I mean, you -- obviously, you see that with us, you see that with a lot of others. That's what creates the increased focus on expense management, and that's a big part of the reason why we've been so tough on expenses as well, too, is just -- we just don't have a crystal ball. We don't know where it's going to go. But if it does continue to trickle down a little bit, you can have margin compression and banks have got to find a way to deal with it.

[William Wallace:]

Understood. Thank you. And then I wanted to follow up just for clarity on the reserve conversation. So Bob, you said that your prediction was that the industry would end up kind of in the 120s by year-end. Given WesBanco's loss history and what we know as a conservative underwriting culture, I would anticipate at some point that WesBanco is going to be below the industry, but it sounds like you're saying that you're going to hit those two factors as hard as you can so that you don't have to reduce reserves that much in a quick time period, say, in the next three quarters. Am I saying that correctly? Or do you think that you could be like the industry by the end of the year?

[Robert Young:]

I think at this point, it kind of depends upon the direction of COVID and how that influences the hotel adjustment more than anything else. Wally, I would not say we're going to hit the qualitative factors more so than quantitative because if you'd ask me prior to the pandemic, I would have said the qualitative factors won't have as big of an influence on the CECL calculation as they did in the incurred model prior to 12/31 of 2019. So it is true today that the macroeconomic factors have a pretty helpful influence on the calculations in the model. And so as we pull down the qualitative factors, that will drive the ultimate conclusion as to where that reserve ends up. But I have no reason to believe that by the end of the next year that we're going to be any different than the industry relative to ending allowance. But there will be some differences in terms of who uses what forecast and over what forecast period, what are the historical losses, but I think we'll be reasonably close. Right now, the industry -- at least those that have announced so far are between 1.40 and 1.45, includes the bigs as well. So less than that for banks of our size and smaller that have adopted CECL. And some banks will get to that 1

[William Wallace:]

So if the economy opens -- if travel opens back up and the hotel portfolio returns to vacancy rates that are much more sustainable from a cash flow perspective for your hotel portfolio, is it safe to assume that the CECL model would have you going back to that 1.10 level that you were at the end of the first quarter by the end of this year?

[Todd Clossin:]

I think, Wally, it's hard to pick a number because we don't know what's going to happen. But I mean, we all think that the pre-pandemic CECL numbers were kind of that 1% range. If you talk to the credit folks, they'd probably say you're going to end up in the 100 to -- 1

[William Wallace:]

Understood. Okay. Alright. Fair enough. Thanks.

[Todd Clossin:]

Sure.

[Operator:]

And the last question will be from Steven Duong of RBC Capital Markets. Please go ahead.

[Steven Duong:]

Hey. Good morning, guys. Bob, did I -- I'm not sure if I heard you correctly, but did you say that you're still seeing a surge in deposits from your period-end balances?

[Robert Young:]

Well, net of tax payments made in April, typically, you get tax payments. But I wouldn't call it a surge, I would just call it normal growth in deposits. My point was, Steven, that we're not seeing deposits leave the franchise yet at this point other than for normal uses. I still think the personal savings rate and the desire for consumers to keep a lot of their cash is influencing bank balance sheets and deposits. Also the PPP program, to the extent that companies get forgiveness, will they be more willing to use the cash that they've retained going forward and not worried about whether they're going to get forgiveness? Will they be willing to hire more people in an economy where it's hard to hire right now? So it's hard to say whether consumers and businesses will spend the savings that they've accumulated or whether it will stay on bank balance sheets over an additional time frame. It took a long time from the last great recession for the additional deposits to build up back in 2010 and 2011 to come off bank balance sheets and for you to see significant loan growth rates. Hard to predict that this time because this is -- this recession was driven by the pandemic as opposed to the Great Financial Recession. So, I'm not saying we're going to experience the kind of deposit growth in the second quarter that we did in the first. Obviously, that was influenced by the end of the year stimulus and then the more massive stimulus here at the start of March. I was just commenting that we're not seeing it run out the door.

[Steven Duong:]

Yes. No, understood. And it seems like it's trickling in. It's all working its way. I mean even when people and companies spend, decide to spend, it's got to go somewhere in the system. So it ends up sloshing around in different bank accounts. So it seems like it could be here for quite some time, but maybe just the rate of the deposit growth may not be as much. But let's assume that this liquidity is here for some time. You have $250 million borrowings maturing at the end of the year. And so I think you have a little less than $200 million for next -- after that. Is that $200 million maturing next year, do you know?

[Robert Young:]

Yes. About $150 million of it matures next year. We don't -- we have very little maturing beyond 2022.

[Steven Duong:]

Got it. And the CDs, like I'm just curious like what's the rate that you guys are putting out there? Is there a way that you could just drive that down comparable to the rates that you're getting on your core deposits?

[Robert Young:]

Our new offering rates, Steven, have been historically for the last few years, lower than the market average. And we were certainly very successful in being able to reduce the CD rates in the Mid-Atlantic market. That was one of our strategies when we acquired Old Line because we had a lower loan-to-deposit ratio than they did. And so could blend our funding rate into that market. And then, of course, the pandemic came along. But we're already lower than peer on our CD rates. Yes, there's -- most customers are taking maturing CDs and just putting it right back into their bank savings account or checking account and waiting for opportunities down the road as opposed to putting it into the stock market or even spending it. So is there another 10 to 15 basis points there? We continue to ratchet down rates? We saw about 15 basis points of reduction in the first quarter just due to maturities versus the new blended rates going on, and most customers are just rolling off of their existing maturities to the extent that the two-thirds of customers who roll over, they're rolling over into the same maturities they were in.

[Steven Duong:]

Yes. Just curious, do you know what -- generally where your CD rates are that you're offering right now?

[Robert Young:]

They're all below 50 basis points. So most of our CD rates in that six months to two-year set of buckets, that's where most banks are seeing CD renewals and those are 15 to 25 basis points.

[Steven Duong:]

So 15 to 25, and it seems like you still have some people rolling into the CDs. I would have thought that the CD balance would have gone much lower. And so just, I guess, on the liquidity that your customers have, is there an opportunity for you to bring some of that over to your fee businesses?

[Todd Clossin:]

Yes. This is Todd. I would say definitely. I mean we've had that kind of that muscle built in our company with the shale deposits over the last number of years in terms of private banking customers, wealth management customers. And definitely, I think as these deposits have come in, there's ways to do things with them, to the extent that they're not spent or utilized. And we've got programs in place already for that on the shale area and we just roll them into other deposits. And so what we would do is we look at anything over a couple of hundred thousand dollars to make sure that we get the right investment people talking to them as well.

[Steven Duong:]

Yes. Okay. And then just last one for me. For your commercial loans with floors, how much do front-end rates need to increase by for those loans to be above their floors?

[Robert Young:]

Steven, our average floor right now on over $2 billion that have floors, it's just over 4% and about $1.6 billion are at the floor rate. So what is -- depending upon what your spread is off of LIBOR, or if you're offering Prime Plus, there's still obviously some room to go there before you get above floor rates.

[Steven Duong:]

Okay. So is that like 150 basis points?

[Robert Young:]

No, it's not that much. It's -- if your normal spread is 225 to 250 over LIBOR, what does that make it? 60 basis points, basically.

[Steven Duong:]

Okay. Yes. Understood. Now, that is it for me. I really appreciate the color on this.

[Operator:]

And this concludes our question-and-answer session. I would now like to turn the conference back over to Todd Clossin for any closing remarks.

[Todd Clossin:]

Sure. Thank you. And I appreciate the call today and your time and all the detailed questions are really good. If there were some that didn't get a chance to ask questions, please follow up with myself and Bob and John. Look forward to hopefully get a chance to see you guys at an upcoming investor event. Hopefully, we can get back out and start traveling again. Thank you.