Good morning, and welcome to the WesBanco Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

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?

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…

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…

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

Good morning, Karl.

Hey, good morning, everybody.

Good morning.

How’s it going?

Good.

Good.

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.

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…

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?

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.

Okay. Thanks for the help.

Thank you.

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

Good morning.

Hey, Steve.

Good morning

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?

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?

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.

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?

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.

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?

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.

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?

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.

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

Thank you.

[Operator Instructions] Our next question will come from Catherine Mealor with KBW. Please go ahead.

Thanks. Good morning.

How are you?

Good morning.

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.

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...

Okay. Great.

Yes.

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?

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?

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.

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.

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?

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.

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

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.

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

Thanks.

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

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.

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.

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?

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…

No, I think you covered it well.

Okay.

Thank you very much.

Thank you.

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.

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.

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