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.

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.

Thank you, John, and good morning, everyone. On today’s call, we’ll review our results for the second quarter of 2022, then provide 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 management. 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 over 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 over the last few quarters. 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. If we find the right opportunity at the appropriate price that fits 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 growth 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 our ability to hire top-tier commercial and mortgage loan officers across our footprint. 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. As of March 31, our commercial teams generated gross loan production of roughly $740 million during the second quarter. C&I line utilization, which improved slightly to approximately 37%, is still roughly eight percentage points below our historical range. While we do not anticipate similar sequential loan growth in the next few quarters, our teams continue to find new business opportunities, which have 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 over the last two years. In fact, we continue to make strategic hires across our footprint. Our residential mortgage team efficiently handled the refinance 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 experienced significant decreases in originations and subsequently adjusted their operations, our strong team has resisted the national trends. Our team originated $328 million worth 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, funded through discretionary expense control and managing our financial center footprint. As of today, we have accomplished our plan to hire an additional 20 commercial lenders, with 14 hired during the first six months and an additional 10 expected to start with us over the coming month. Furthermore, 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 the 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. Our credit strategy continues to generate strong metrics and loan portfolios, enabling 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 throughout 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 employee satisfaction and financial success, as well as being named one of America’s most trustworthy companies and 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.

Thanks, Todd and good morning. During the quarter, we recognized strong sequential 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, with 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, compared to $1.36 and $2.09 per share last year. 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 of $10.2 billion and total securities of $4.2 billion. Total securities increased 7.7% year-over-year, primarily due to excess liquidity related to our customers' higher personal savings. Loan balances for the second quarter of 2022 reflected strong performance by our commercial and consumer lending teams and efforts to retain 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-based 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. Furthermore, 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. 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, reflecting the 125 basis point increase in the 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 a 75 basis point to 100 basis point increase. The margin improvement was also driven by deploying excess cash to support our second quarter loan growth. Similar to the rising rate environment 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 negative 3%, compared to the 150 basis point increase in the 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 lag rising deposit rates again. 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, 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 in the secondary market. The net loss in 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 during the prior year period. 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, reflecting a decline in the obligation under the plan. Turning to expenses, during the second quarter, we continued to diligently manage our discretionary expenses and financial center network 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 by $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. Employee benefits included a $1.2 million credit related to the deferred compensation plan, which is offset by securities losses. Despite the slowing down of share repurchases 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 a 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 are currently modeling Fed funds to peak at 3.5% in the fourth quarter, holding 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 rise. 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 have an impact. As I mentioned, we expect the low deposit beta benefit from our core deposit funding base to provide similar benefits in this rising rate environment this year and anticipate our betas to be lower compared to peers as they have performed historically. Furthermore, we see an 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 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 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 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 hiring 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 the second quarter to the 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, qualitative factors, and various credit quality metrics, including potential charge-offs, criticized and classified loan balances, delinquencies, and future loan growth. In general, reductions in 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?

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

Hey, good morning, everybody.

Good morning.

I guess I wanted to start here on loan growth. It was obviously a very strong quarter for you guys. I heard the commentary 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 the potential for further increases in line utilization, 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 during the second, third, and fourth quarters of last year. In the second quarter of this year, it was $100 million that went to the secondary market, and we think $85 million to $100 million is kind of a normal quarterly run rate for us. I think the rate increases slowed that down a little bit. Things going into the secondary market pulled things forward into last year. So I think that $100 million rate going forward is probably not a bad rate to be looking at again more normalized. As for utilization for C&I, it’s up. We mentioned in our commentary it’s 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 believe there’s the ability to go up to another 8% there in a normalized environment. Regarding residential mortgage, we did put more on the balance sheet partly because as rates went up, people wanted ARMs, and there was a lot of construction lending that was going on. 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. It may take a couple of quarters to get completely back to that, but we didn’t 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, probably in the 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. Customers wanted construction and ARMs as rates started to go up. Long term, we’ve really been working to build towards that, and we’re really happy to see the commercial loan growth we had in the second quarter. We know people have been waiting for that. We think the 5% kind of mid to upper single digits, 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. We can’t really look at any one quarter; you might have a quarter that’s not great and a quarter that’s really excellent. But averaging it over time, we believe we tried hard to position the company from being a historically 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, which is part of the plan.

Okay. That’s helpful. And then maybe one for Dan quick and I’ll step back. I know you touched upon this in the prepared remarks, 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 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 they’re fully reflected in our loan pricing. We expect to see those translate into interest income and margin improvement in the third quarter. Those hikes that occurred in the third quarter, and currently we’re projecting a 75 basis point hike 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 loans, about 50% of our available rate loans, reprice every three months. When those hikes take effect, we expect by the time we get to that fourth quarter, we’ll see roughly a two basis point to four basis point margin improvement for each 25 basis point rate hike. That’s more related to the fact that we expect deposit costs to begin to 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 on the deposit side. I’m curious how you guys are thinking about deposits. 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 moderate your expectations for asset sensitivity with later rate hikes?

Maybe I’ll start off, and then I’ll let Dan jump in. We’ve got 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 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. 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 factors as everyone else. We 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 that was primarily due to one big customer that’s rate-sensitive and is in and out periodically. So really there were not any material changes or declines in deposits, but we’re watching it. We’re watching it closely. Historically, we would’ve taken multiple quarters before we felt we would need to raise it all, but we may need to move sooner than that if we get 75 basis points or 100 basis points today and more rate increases are down the road. We’re going to wait, observe until it starts to impact the balance sheet a little, and we feel like we’ve got the luxury to do that with all the shale-related deposit flows and natural gas prices hitting records. So we have an abundance of deposit flows into the organization, which lets us be patient. But we are not immune. We will 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 3.5, this would be about 325 basis points of increase effectively in 2022. If you were to just use simple algebra and 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 following up on the deposit inflows from shale, just 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 currently.

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 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 those increases, and of course, we’re optimistic about the direction, obviously with the rate increases. We do have about $2.2 billion of loans that repriced every three months as I mentioned; it's about half of our portfolio, and those repriced upward about 80 basis points in the second quarter and we 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 a 6% to 8% increase, 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 items like – 75% of the increase really is related to investments in people. So, employee salaries and wages, employee benefits 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 above and beyond the typical merit pool. We’ve also got several revenue-producing hires in the second quarter that weren’t fully reflected in the second quarter, and that will impact the third quarter. Additionally, there are revenue producers coming in during the third quarter, which obviously are not in the second quarter. There’s also an extra day in the third quarter that adds about $0.5 million. So just that alone, and then looking at employee benefits, the one thing I would point out regarding employee benefits is that the second quarter included a $1.2 million credit 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’d add that $1.2 million back to the expense run rate. Also, third quarter tends to see higher healthcare expenses based on the timing of employee deductibles. Those are really the drivers of the call, at 6% increase. And I’d also add that net occupancy had about $600,000 in 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.

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 as well. 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, the 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, assuming equity markets continue at pace right where they’re at, we would expect trust fees to be in a similar range to where they were in the second quarter. I think the other service charges on deposits, electronic banking fees, we expect those to be pretty consistent compared to the second quarter. Additionally, mortgage banking income will be impacted. We retained 80% of our production here in the second quarter. That’s very much dependent on customer preferences and pricing. And as Todd mentioned, customer demand seems to be focused on adjustable rate products. Of our production of $328 million, about 42% of that was construction. Construction cannot be sold on the secondary market. We can’t provide forward guidance on this, but based on current trends, I would expect mortgage banking income to be pretty similar to the second quarter, maybe a little higher.

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 the macro environment? And any color you can give us on what your scenario weightings look like today under CECL?

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

Yes. You can see there’s a nice waterfall on Slide 9 that shows the moving pieces. A pretty nice decline in qualitative factors, as Todd mentioned, mostly related to items impacted by COVID, like hospitality. We did have some deterioration in macroeconomic factors, particularly regarding unemployment. We are taking a slightly more negative view on unemployment than the baseline forecast, projecting it to be around 4%. That was one of the factors contributing to the reserve position remaining consistent around $117 million.

Yes. Other banks might be saying the same thing too. We’re at 1.15, and if you consider the marks from other acquisitions, that’s another 21 basis points. We’re getting pretty low levels. The big reserve build and release appears to be nearing an end, especially if we have decent loan growth, which I would expect. We probably won't be in a heavy reserve release position, nor would many others.

And when you say, as you look at the CECL build, is it more impacted by changes in unemployment versus GDP? Today it feels like your negative GDP decline. You will probably see. But with unemployment still uncertain, are we assessing that correctly?

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. Alright, thank you. Also, congratulations to you, Todd, on your retirement announcement.

Thank you. I appreciate that. I’m excited to have Jeff come on board. We’ll have him sitting in on some earnings calls and attending some visits, and I’m looking forward to the next phase of my life. We’ll have a nice overlap of a year, year and a half or so. We’ll be working together closely. He’s a great guy with a great background, and there’s 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.

Thank you.

Our next question will be from 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 3.50 by year-end, what would be the timing for kind of a peak NIM given your beta assumptions? Would that be the first half of 2023?

Yes. So again, we try not to give too much forward guidance here, but yes, I would say a NIM peak would probably be more back half of 2023. There’s a lot of uncertainty with movements in rates ahead.

That makes sense. This is also assuming that 3.50 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 with what you’ve already done so far this year on expenses? Can you give a framework for expense growth?

Yes. Dan may add some additional information. We want to be in that mid to upper single-digit loan growth rate longer-term. So having key hires in key places is important to us. But we’re also doing topgrading when it comes to underperformers, and addressing those in our markets. That will offset a portion of the increase, but not all the increase in additional people coming on board. More production per dollar of FTE drives positive operating leverage, which is a major focus. With heavy hires in higher growth markets, those should be strong producers for us. The key is positive operating leverage. We know you can’t stay flat in expenses indefinitely and still expect to grow your bank, which is needed in order for both us and our stakeholders to see growth. I would expect, as Dan mentioned earlier, you’ll see the increase in the third quarter as people come on board and those who were in the second quarter will be on board for a full quarter. But that should be more than offset by additional revenues. Our plan had been to hire 20, 25 commercial lenders, and we’re reaching that goal now. So you won’t see another 25 hired in the next six months. We’ve hit our target, but we’ll continue to hire selectively, particularly in the LPOs as they build out. Many lenders come on board with non-solicits for up to a year, so we want them to respect that, though they still bring in business as they ramp up. The residential mortgage originators tend to start producing more quickly; the hires we made in Northern Virginia and some of the other markets are already producing. Our strategy includes hiring additional talent, but not at the levels during the first half of the year.

No, I think you covered it well.

Thank you very much.

Thank you.

There are no remaining questions at this time. 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 all stay healthy. Dan and I, along with Jeff and John, will be out at some conferences coming up here in the fall and winter months, and I look forward to seeing everyone in person. Thank you. Have a great week.

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