Good day and welcome to the WesBanco Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to, John Iannone, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning. And welcome to WesBanco, Inc.'s fourth quarter 2022 earnings conference call. Leading the call today are Todd Clossin, President and Chief Executive Officer; Jeff Jackson, Senior Executive Vice President and Chief Operating Officer; and Dan Weiss, Executive Vice President and Chief Financial Officer. Today's call, an archive of which will be available on our website for 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 January 25, 2023, and WesBanco undertakes no obligation to update them. I would now like to turn the call over to Todd.

Thank you, John. Good morning, everyone. On today's call, we'll review our results for the fourth quarter of 2022, and provide an update on our operations and current 2023 outlook. Key takeaways from the call today are our operational strategies and core advantages were evident throughout 2022, and were highlighted by our earning many national accolades. We had a solid financial performance demonstrated by loan growth, net interest margin expansion, and discretionary cost control. We remain well-positioned for continued success and are excited about our future growth opportunities. WesBanco had another successful year during 2022 as we remained focused on ensuring a strong organization for our shareholders, and continued to appropriately return capital to them through both long-term sustainable earnings growth and effective capital management. Through successful operational execution, we generated solid annual net income while remaining a well-capitalized financial institution with strong liquidity, balance sheet, and credit quality metrics built upon our well-defined strategies and core advantages which will ensure success regardless of the economic environment. We are pleased with our performance during the fourth quarter of 2022 as we continued to deliver loan growth, controlled discretionary expenses, and maintained our reputation for credit quality. For the quarter ending December 31, 2022, we reported net income available to common shareholders of $49.7 million and diluted earnings per share of $0.84 when excluding after-tax merger and restructuring charges. On the same basis, for the full-year, we reported net income available to common shareholders of $183.3 million, and diluted earnings per share of $3.04. Furthermore, the strength of our financial performance this past quarter is further demonstrated by a return on average assets of 1.18% and return on tangible equity of 16.05%. Our capital position remained strong and continues to provide financial and operational flexibility. Throughout the year, we accomplished several milestones and continued to receive numerous national accolades that resulted from our performance, operational strengths, and community focus. I'd be remiss if I did not congratulate our employees for these recognitions as they are a testament to their hard work and dedication. Just to highlight a few, WesBanco remains the leader in and an advocate for its communities, and we continually look for ways to expand our outreach and involvement, including the issuance of our initial sustainability report. We launched new loan production offices in Cleveland, Indianapolis, and Nashville, complementing our existing LPOs in Akron-Canton and Northern Virginia. Based on customer satisfaction and consumer feedback, WesBanco Bank was named by Forbes as the number one bank in Ohio, and the number two bank in Kentucky, including high scores for trust, branch services, terms and conditions, customer service, digital services, and financial advice. For the fourth year in a row we were named one of the world's best banks, which was also based on customer satisfaction and consumer feedback. For the third year in a row in the top 12, WesBanco Bank was once again named to the Forbes list of the best banks in America based upon growth, credit quality, and profitability. We were named to the Forbes list of America's Best Midsized Employers, earning a spot within the top 10% of all companies recognized, as well as securing the number two spot out of 30 companies included in the banking and financial services category. In fact, we were the only midsized bank making the top 10 for both financial performance and employer of choice. Finally, WesBanco was recognized as one of America's most trustworthy companies, as well as being one of only 20 banks to earn this nationwide honor for three touchpoints of trust; customer trust, investor trust, and employee trust. The key story this quarter was the strength of our lending teams as we demonstrated strong loan growth for the third consecutive quarter, combined with solid credit quality measures which continue to remain relatively low from a historical perspective, and consistent through at least the last 10-plus quarters. Reflecting the strength of our markets and lending teams, we again reported solid broad-based loan growth during the quarter. Total loan growth, excluding SBA PPP loans, was 11.7% year-over-year and 4.2% or 16.8% annualized when compared to September 30, 2022. While key credit quality measures such as total loans past due and criticized and classified loans declined both year-over-year and sequentially to 0.19% and 2.34%, respectively of total loans. Despite mortgage originations of just $179 million during the fourth quarter, 90% of which were either purchase or construction, residential real estate loans increased more than 20% both year-over-year and sequentially annualized through the retention of approximately 80% of the 1-to-4 family residential mortgages generated by our team of mortgage loan originators. Total commercial loan growth continues to benefit from our teams and markets that have been enhanced by our hiring efforts over the past two years. For the fourth quarter, total commercial loan growth was 9.6% year-over-year, and 4.1% from the third quarter or 16.2% annualized. Our commercial teams continue to find new business opportunities to replenish the pipeline. In addition to new loan originations of approximately $490 million during the fourth quarter, our commercial pipeline has remained relatively consistent since last quarter, at approximately $900 million. The strength of our pipeline represents the talent of our lending teams as well as early success from our loan production office strategy which only accounts for approximately 13% of the pipeline. While we will see what the economy will provide this year, I am encouraged about our future commercial lending prospects as our newer lenders continue to gain traction, our recent LPOs gain market share, and we hire additional lenders. Through the last few years, we have transformed our company into an evolving regional financial services institution with a community bank at its core. We have done this through the successful expansion in higher growth markets spanning six states, with the majority of our company now located within these markets, while adhering to our foundation of disciplined, discretionary cost control, risk management, and credit standards. As we have discussed before, a key investment in support of this evolution has been and will continue to be the investment in our employees as they are critical to our long-term growth and success. During both 2021 and 2022, we focused on improving retention and boosting morale by implementing increases in the hourly wage, which was very well-received. In addition, we developed plans to increase the depth and strength of our teams across our business lines and markets. We successfully executed upon these plans by hiring more than 45 revenue producers during 2021 and more than 50 during 2022, and have begun to see the growth and positive operating leverage from these investments. We will continue to enhance our evolution into a solid and sound growth story combined with our strong foundation and core advantages through an ongoing lender hiring strategy. While we will continue to evaluate existing lenders to ensure appropriate productivity, we plan to annually add high-value and productive individuals to enhance our ability to leverage growth opportunities across our markets. We remain focused on ensuring an organization with sound credit quality, solid liquidity, and a strong balance sheet. We have the right markets, teams, leadership, and strategies to provide long-term success for our shareholders, customers, and employees. We're excited about our opportunities for the upcoming year. I would now like to turn the call over to Dan Weiss, our CFO, for an update on our fourth quarter financial results and current outlook for 2023.

Thanks, Todd, and good morning. During the quarter, we recognized strong loan growth, continued stability in our credit quality measures, improvement in our net interest margin, and maintained discipline over expenses. As noted in yesterday's earnings release, during the fourth quarter, we reported improved GAAP net income available to common shareholders of $49.7 million, and earnings per diluted share of $0.84, and net income of $182 million, and earnings per share of $3.02 for the full-year. Excluding restructuring and merger-related charges, results for the three and 12 months ending December 31, 2022, were $0.84 and $3.04 per share, respectively, as compared to $0.82 and $3.62 last year, respectively. It's important to note that 2021 was favorably impacted by a negative provision of $51.6 million net of tax or $0.79 per share, as compared to a benefit of $0.02 per share during 2022. Total assets of $16.9 billion as of December 31, 2022, included total portfolio loans of $10.7 billion and total securities of $3.8 billion. Loan balances for the fourth quarter of 2022, which grew both year-over-year and sequentially, reflected strong performance by our commercial and consumer lending teams and more 1-to-4 family residential mortgages retained on the balance sheet. Furthermore, as we expected, commercial real estate payoffs moderated this quarter, totaling approximately $63 million. We also reclassified $86 million of consumer loans secured by residential real estate to the HELOC category to better reflect the underlying collateral. SBA PPP loans in the prior-year period totaled approximately $163 million, as compared to $8 million this period. Importantly, reflecting the strength of our underwriting standards, our key credit quality measures continue to remain at relatively low levels and are favorable to peer averages. Robust deposit levels remain a key story as total deposits as of December 31, 2022, were $12.2 billion excluding CDs. Essentially flat compared to the prior year as growth in non-interest bearing demand deposits and savings accounts offset the decline in interest-bearing demand deposit balances. Further, our non-interest bearing deposits improved to 36% of total deposits. Total deposits at year-end were $13.1 billion, down 3.2% year-over-year due to a $407 million reduction in CDs. The net interest margin in the fourth quarter of 3.49% increased 16 basis points sequentially and 52 basis points year-over-year. This increase reflects our successful deployment of excess cash into higher yielding loans combined with a 425 basis point increase in the federal funds rate throughout the year. Our core margin continued to increase quarter-over-quarter from 3.27% to 3.44%, which excludes purchase accounting accretion of 5 basis points for both periods for SBA PPP loan accretion with a basis point or less for both periods. Our robust legacy deposit base provides a pricing advantage as compared to peers, especially those primarily in major metro markets. We are not immune to the impact of rising rates on our funding sources. Deposit funding cost for the fourth quarter of 2022 increased 44 basis points year-over-year to 57 basis points or 29 basis points when including non-interest bearing deposits. This reflects a total deposit beta of 8% as compared to a 375 basis point increase in the federal funds rate throughout the year, excluding December which did not meaningfully impact the year-to-date average. For the fourth quarter of 2022, non-interest income of $27.8 million was down $2.9 million year-over-year, primarily due to lower mortgage banking income which decreased $2.3 million due to reduction in residential mortgage originations consistent with the industry in general, and the retention of more loans on our balance sheet. Securities brokerage continued its organic growth trend as net revenues increased $1 million year-over-year to a record $2.6 million. Our commitment to discretionary expense control in an inflationary environment combined with loan growth and net interest margin expansion resulted in an improved efficiency ratio of 56.9%. Excluding restructuring and merger-related expenses, non-interest expense for the three months ended December 31, 2022, totaled $90.4 million, a 2.6% increase year-over-year and a 1.6% decrease sequentially. It's important to note that the fourth quarter included a couple of large credits totaling approximately $2.5 million which are not expected to repeat in our expense run rate going forward. Within salaries and wages, there was a $1.8 million downward adjustment to bonus expense mostly related to lower mortgage lending commissions and annual volume-based incentives. And within employee benefits, there was a $600,000 credit related to the deferred compensation plan which fluctuates based on movement in underlying equity securities. Adding these two items back, non-interest expenses for the fourth quarter would have been approximately $93 million. Turning to capital, during the fourth quarter the quarterly dividend was increased from $0.34 to $0.35 per share, representing a 2.9% increase. Our capital position remains solid as demonstrated by regulatory ratios that are above the applicable well-capitalized standards, and our tangible common equity ratio improved to 7.28% as of December 31, 2022. Now I'll provide some initial thoughts on our current outlook for 2023. We remain an asset-sensitive bank, and currently, model fed funds to peak at 5% during the first quarter and then hold steady throughout the remaining quarters of 2023. We are modeling a couple basis points of margin expansion in the first quarter and hold relatively flat for the remainder of the year as deposit pricing continues to rise. We expect purchase accounting accretion to be approximately four to five basis points per quarter and no meaningful SBA PPP accretion. As mentioned, a robust legacy deposit base provides a pricing advantage for the industry. We anticipate our deposit betas to continue to be lower than peers and to generally lag the industry. Residential mortgage originations should remain positive relative to industry trends due to our new loan production offices and hiring initiatives, as well as the anticipated stabilization in interest rates, and should begin to rebound as the year progresses. While it is dependent on origination production, we continue to expect to move, over time, to selling approximately 50% into the secondary market subject to customer preferences and pricing. Trust fees will continue to benefit slightly from organic growth, as well as be impacted by the trends in the equity and fixed income markets. As a reminder, first quarter trust fees are seasonally higher due to tax preparation. Securities brokerage revenue should continue to benefit modestly from year-over-year organic growth. Electronic banking fees and service charges on deposit will likely remain in a similar range with the last few quarters as they are subject to overall consumer spending behaviors. In addition, we anticipate an increase in new commercial swap fee income above the approximate $4 million we've earned annually over the last few years as we have implemented improvements in our training and strategy. While we remain diligent on discretionary costs to help mitigate inflationary pressures, we intend to continue to make important growth-oriented investments in support of long-term sustainable revenue growth and shareholder return. This will include ongoing efforts to attract and retain employees, in particular commercial lenders across our metro markets as we continue a similar hiring strategy that we implemented for 2022. We'll continue to make improvements to infrastructure, which will include upgrading about a third of our ATM fleet with the latest technology, as well as other digital product enhancements. We anticipate higher pension expense of approximately $1 million per quarter within employee benefits based on an expected lower return on plan assets, and expect to be impacted by the industry-wide FDIC insurance rate increase. To support our growth plans across our markets, we anticipate investing more in marketing with a focus on revenue-generating campaigns. We will also continue to evaluate our financial center network to identify cost-saving opportunities which could provide a benefit in the second half of the year. Based on what we know today, we believe our quarterly expense run rate to be in the mid $90 million range. We believe that these investments are appropriate in support of long-term sustainable revenue growth and associated shareholder return, and will continue to drive positive operating leverage. The provision for credit losses in CECL will be dependent upon changes to the macroeconomic forecast and qualitative factors as well as various credit quality metrics, including potential charge-offs, criticized and classified loan balances, delinquencies, changes in prepayment speeds, and future loan growth. Lastly, we currently anticipate our full-year effective tax rate to be between 19% and 20%, subject to changes in tax legislation, deductions in credits, and taxable income levels. Operator, we are now ready to take questions. Would you please review the instructions?

We will now begin the question-and-answer session. The first question today comes from Daniel Tamayo with Raymond James. Please go ahead.

Good morning, guys.

Morning, Dan.

Maybe we start on the loan growth expectations. Just interested in what you're seeing and what you're expecting for the coming year. And then with the loan deposit ratios still relatively low, how much are you willing to let that rise and fund from securities runoff?

I'm happy to address that, Dan. Loan growth is indeed tied to the economy, and right now we're seeing mixed signals about its direction. The GDP number will come out this Thursday, but historically, we've aimed for upper single-digit growth long-term, which aligns with where we were last year—upper single-digit to low double-digit growth. We're comfortable maintaining that long-term target. Our pipelines remain consistent, which is encouraging. We believe we have established the right organization in our growth markets to achieve the upper single-digit growth rate we've been pursuing for years. However, the uncertainty of the economy makes it difficult to predict outcomes. Regarding deposits, Dan may want to contribute here too. We currently have a favorable deposit ratio that we don't want to compromise. We anticipate solid loan growth over time, necessitating an expansion of our deposit base. Our intention is not to allow this ratio to increase excessively, but we want to make use of our deposit funding advantage. We'll delve into more discussions about deposits shortly. In terms of deposits, we've allowed some certificates of deposit (CDs) to run off and replaced them with borrowings from the federal home loan bank. We're also planning to reintroduce some CD specials, though they won't be as aggressive as those from competitors in faster-growing markets. We aim to generate some business in CDs or at least slow down the runoff in our legacy markets by being a bit more proactive than before. The loan-to-deposit ratio might increase a bit, but we prefer not to overextend ourselves. We're comfortable within a 90% to 95% loan-to-deposit ratio over time, similar to where we were before the pandemic, and I expect we can return to that level. The speed of getting there will depend on how aggressive we need to be regarding deposits, which will be driven by the loan growth we experience. That's a comprehensive answer, but that summarizes my current perspective.

No, that's terrific, I appreciate all the color. And then maybe my follow-up just on credit quality, you've seen the reserve ratio come down here a decent amount over the last few quarters, settling around 110. Just curious what the big drivers are there? And then what would you need to see to have reserves grow from here, outside of an increase in loss content within the portfolio?

Yes. We'll it's related to CECL; Dan do you want to jump in and cover that comment?

Yes, I would say if you look at slide nine you can see there's a waterfall chart there that kind of shows the reserve build in dollars. Obviously, we saw a $3.1 million provision this quarter. That's actually the first time in six, seven quarters that we've recorded a debit to the provision; the last seven quarters had been negative. I think what we've seen kind of since the pandemic, we've seen a number of qualitative factors related to some of those higher-risk areas continue to roll off over the last seven quarters. We're to the point where I think those are more or less behind us. The drivers of the reserve, the provisioning, going forward, really are going to continue to be more normalized future macroeconomic forecasts, loan growth, and then, of course, to the extent that we would see any charge-offs, that would also impact provisioning and reserve levels. But I think those are the drivers probably going forward. I would say that that $3.1 million that we recognized here in the fourth quarter is probably kind of the more normal run rate going forward total.

Terrific. All right, thanks again for all the color.

Thanks, Dan.

The next question comes from Karl Shepard with RBC. Please go ahead.

Hey, good morning, and thanks for taking my questions.

Morning.

Morning.

I guess I wanted to start here on funding cost, and you mentioned in the prepared remarks about not being immune to higher interest rates. Can you expand on that a little bit and maybe where you are you starting to see signs of pressure? And do you think that can ease as the Fed slows or do you think there's some expectation of lagging pressure as we move through 2023?

Yes, that's a really great question, particularly when will the Fed start to drop rates, right? I mean our forecast, as Dan mentioned, is to go to 5% in the first quarter and stay there throughout the year. That's kind of what we're anticipating right now. If rates do start to drop toward the end of the year or into 2024, I think what we saw the last time there was a drop, we were able to continue to have that deposit advantage by being able to be aggressive in dropping our funding costs because that deposit advantage really is throughout all different rate cycles. So, we would be in a position, I think, to be able to bring deposit costs down if the Fed starts dropping rates at some point in the future. I guess the question here now is we're not immune to deposit cost increases, but because of our strong core funding base, it allows us to lag. And we've had that historically, that benefit. And we're seeing it again now. Obviously, rates moved up a lot faster, a lot quicker than anybody in the industry really has seen before. So, relying on betas from years ago really may not be very applicable to now. So, we're watching it pretty much on a weekly, if not daily basis, what's going on with deposit costs. We've been proactive with some of our higher-tier savings rates, some new CD specials, giving some pricing authorities in our markets and things like that. We are addressing that, but how quickly we need to address that, how much we need to address that would really be dependent upon what we need for loan growth, but also what we see happening in the economy here over the next month or two. I still don't think that you'll see us on the lower side from a beta perspective of peers. We expect that advantage to continue right through the rate cycle that we're in right now.

Okay, that's helpful. And then I wanted to pivot here to talk about loan growth a little bit too. I get that you're reluctant to provide a full-year view kind of the economy and what that might mean for loan growth. But could you help us understand the quarter a little bit better, of the trends for 4Q, is that new offices and execution or do you think it's also strong loan demand or is it more moderating payoffs? Just help us break out those pieces a little bit so we can think about where to go from here?

Sure. Well, that 13% of our pipeline is from the LPOs, right? So, they're showing up in the pipeline, but we're not seeing, really, loan growth in any material way at this point from the LPOs. We should see that, I think, this year or next year, again economy-dependent. So, that is something that's going to be a benefit to us. But I would not say that the loan growth that you saw last year from us was based upon new LPOs because that wouldn't be accurate; it was a minor part of it. I think it was more of just hiring into the markets that we've already been in. As you guys know, over the last decade or so, even longer than that, we've been acquiring into higher-growth markets like Louisville, Lexington, the Mid-Atlantic markets. So, put a little more of a growth profile on WesBanco, while still keeping our core advantages on the credit deposit side and everything else. I think this is just the fulfillment of that; at least that’s the way I look at it, was we had to acquire into those markets, and then assimilate those organizations and then hire additional people into those organizations. And now we're seeing the benefit of that starting to show up, which is why, and really looking at the upper single-digit loan growth going forward is because we've been building this for quite a long time now. I think our organization is positioned well to take advantage of that. With regard to the fourth quarter, we did get some benefit from a lower level of commercial real estate payoffs of about $60 million. We had $160 million, I think, in the quarter before that. So, we expect about $80 million to $90 million to kind of be our normal quarterly commercial real estate payoff rate. We did get a benefit from that. And as Dan said in his comments, we are putting 80% of our residential mortgages on our books as well too. We typically would do about 50%. So, I think if you were just to roll the residential mortgage back to 50%, and look at that, assuming we had done that last year, we would have had a loan growth of about 8% or 9% because we put more residential on, and that bumped us up to a little over 11%, but that's market-dependent based upon what's going on with what consumers want. But that's why I really feel like we're more at an upper single-digit loan growth rate, which I think is sustainable over time. Any quarter can be up or down; a couple hundred million is going to move the needle a lot with a bank our size. You really need to look at it, I believe, on an annual basis or two to three-year basis to really get a good idea of what the franchise run rate is.

Great, thanks for all the help.

Okay, thank you.

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

Hey, good morning.

Hi, Casey, welcome back.

Yes, good morning.

Morning. I guess, as moving on to think about capital here, first, can you touch on your appetite for buybacks going forward and how price-sensitive you are there? And then the follow-up would be just sort of give us an update on how you're viewing M&A for you guys this year?

I will begin by discussing capital, and then Dan can add his thoughts before I touch on M&A. From a capital standpoint, we have been closely monitoring the situation with AOCI over the past couple of quarters; opinions vary on its significance. We chose to reduce buybacks, with the ones executed in the fourth quarter occurring early in the period. Our interest in AOCI's impact contributed to this decision, as we aimed to remain within our target range of roughly 7%. Additionally, the tangible book price approached nearly 200%, which we considered rather high. Looking ahead to this year, it seems that AOCI has stabilized, but we are uncertain about its influence on planning, especially compared to last year. Regarding buybacks, we will need to assess the situation further. Many seem to be discounting AOCI, so if we do that, the tangible book might be lower than the 190% or 200% numbers we saw recently. We haven't finalized any decisions yet, but we still have authorization for 1.2 million shares, which we will utilize when appropriate. This may occur this year, depending on what unfolds in the coming months. Dan, do you have anything else to add?

No, I think you covered it well.

Okay. Sorry to call your comments on that. On the M&A side, I would tell you that we're not actively looking at anything right now. We're doing a lot of introductions. Jeff's sitting next to me here, and he and I are making a lot of trips to the markets that we have a lot of interest in, introducing him to some of the key executives at some other banks, people that I've known. He’s introduced me actually to some people he's known as well too. So, we're definitely interested if the right thing were to come along. We think we've got the capital, the liquidity, obviously got a new core operating system we put in place a year-and-a-half ago now. We feel like we would be ready to do something, but we don't feel like we need to. I think we've finally been able to realize the loan growth that we've been working towards for a long time. It's kind of nice to be in that position and just focus on organic growth. So, we may very well just decide to do that. But also, at the same time, if we had the right opportunity come along I think we'd be prepared to act on it. But at this point, we're not actively looking at anything.

Understood. Are there particular markets that you would be most interested in or is it footprint-wide?

Yes, I believe it's the markets where we already have loan production offices. Our goal with these offices is to better understand some of these markets and then potentially pursue follow-on acquisitions. We did this in Pittsburgh, setting up loan production offices about 15 to 18 years ago before ultimately acquiring two banks in that area once we gained familiarity. Aside from our existing footprint, we have loan production offices in Northern Virginia, Indianapolis, and Nashville, and I find those markets to be particularly interesting within the geographical drive distance we are considering. We aim to identify opportunities in growth markets to enhance our growth profile while ensuring we maintain strong credit quality. I'm also open to exploring opportunities in existing markets if they present reasonable expense savings, such as branch overlaps. However, our primary focus remains on higher-growth markets like Pittsburgh, Columbus, Cincinnati, Louisville, Lexington, the suburban D.C. area, Northern Virginia, Central Tennessee, and Central Indiana, as these are all areas of interest for us.

Great, appreciate it. Thanks.

Thank you.

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

Thanks. Good morning.

Hi, Catherine.

Wanted to go back to the margin and funding conversation. And I know you mentioned, Todd, that you added a little bit of borrowing this quarter but you continue to see CD balances decline. So, kind of chose FHLB over CDs. But do you think, as we move into 2023, that changes? And so, if we look at the balance of FHLB at quarter-end, should we model that to decline a little bit at the end of the year, and maybe grow CDs, just curious how you're thinking about the higher-cost more wholesale-ish funding strategy to fund growth? Thanks.

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

I would say, Catherine, that our securities portfolio currently accounts for about 22% of our balance sheet, which is higher than our historical levels. We anticipate generating some funding from this portfolio to reinvest in loans, currently generating around $50 million per month or $150 million per quarter. That would be our initial source of funds. Regarding CDs in comparison to FHLB borrowings, as Todd mentioned, we do have some special rates on CDs, which we believe will help slow down the decline in those balances. If we experience deposit growth, we could see additional funding beyond the $150 million per quarter from the CD portfolio, allowing us to continue leveraging wholesale options. We have various strategies available, but at this moment, if we require additional funding, we plan to utilize those wholesale avenues.

Okay, great. You mentioned in your prepared remarks that you expect the margin to remain flat for the rest of the year. Can you elaborate on your expectations for the margin this year? It seems like many are viewing this quarter's margin as the highest point, but you might be positioned differently compared to your peers due to your ability to manage funding costs. I’m interested in your thoughts on reaching a peak and your overall outlook.

Yes, we believe there will be some modest growth in the margin over the next three months, but we do not anticipate the significant expansion we experienced in the fourth quarter. Our expectations will largely depend on the flows of deposits, as well as loan growth and how we can finance that through deposits compared to wholesale borrowing. We do expect loans to continue to increase in price during the second quarter due to the rate hikes from the first quarter. Our model includes a 50 basis point increase in the Fed funds rate for the first quarter, but we anticipate that funding costs will also rise, effectively balancing each other out, resulting in a stable net interest margin in the second quarter. This assumes that the Fed funds rate remains steady at 5% for the year. After the second quarter, we expect to see positive momentum as we start repricing maturing fixed-rate loans and manage variable-rate loans with longer repricing periods. These factors should help counterbalance the rising costs of deposits, allowing us to stabilize the margin and leverage pricing improvements on the asset side while managing funding costs.

Yes, our strategy is to aim for the mid 90s, but the timeline for that is uncertain. We will approach this tactically, guided by insights that will emerge in the coming months or quarters. Our intention is not to keep deposit rates so low that we exhaust our additional balance sheet capacity too quickly. At the same time, we want to capitalize on our advantages by raising rates at an appropriate pace—neither too fast nor too slow. We will gradually increase rates until we reach the upper 80s, then lower 90s, and eventually the mid 90s. This process may take a few years and will largely depend on loan growth trends.

And last question on the margin. How about loan - newer loan yields maybe towards the end of the quarter and kind of new pricing as well?

Yes, so we do have one slide for which show kind of the new loans that are coming on the books, coming out right around 6.25%. If you look at kind of a spot yield for the month of December, we call it, the loans were coming on around 6.79%. So, that's about a 55 basis point increase the month of December versus the quarter. So, that's kind of about where we are at.

Right. And that's new loans coming on, not the total portfolio of course?

Correct.

Great, okay, all right, great, very helpful. Thank you so much.

Thank you.

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

Hey, good morning. Could you add any color on what you are thinking? I know it's early stages for kind of rethinking the branch network in the back-half of the year. Is that more kind of fund investment? Have it dropped to the bottom line? Modernize the network? Just kind of expand on any early thoughts and early goals there. Obviously, it's not set in stone yet.

Sure. Over the last couple of years, a number of years actually, we have been what I would say rationalizing the branch network or optimizing it. We build a branch here or there every once in a while. But we have been optimizing 10 to 15 branches or so a year. Using those excess, I guess, I would say reduction of expenses to fund all the above. Some of the technology spend, Dan mentioned the ATM network we are upgrading. Some of the money is going towards that. Also, the new lenders that we have hired and that we anticipate hiring, the LPOs, so we have been able to redeploy those savings into those areas and really drive, I guess, a significant amount of current and future positive operating leverage from those investments. We are going to continue to do that. Looking at the whole branch distribution system, obviously, we have got a big advantage in our legacy market. So, don't want to give that up. Those branches in some of our world markets are important to us. Customers are important to us. Deposits are important to us. But at the same time, we want to make sure that we are balancing out the right way, so that we could invest when we need to invest. And still keep the efficiency ratio where we want it to be. To keep, as Dan mentioned, kind of the quarterly run rate and expenses at least for the next couple of quarters in the mid 90 range. So, that's kind of the balance that we are doing. But, I don't know how much longer we will continue to do, 10 to 15 branches a year, but again that's somewhat dependent on M&A as well too and buy other banks that have a branch network that could be rationalized too.

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

Yes.

Okay. If the economy slows down a bit and you have a little bit slower than high single-digit kind of near-term loan growth, would that impact kind of your hiring plans? Or, any of these somewhat like expense initiatives?

Well, I would say if we see deposit cost increase quicker than we are anticipating, then I think we've got some expense things that we talked about that we could do to try to still come through at the same net income we'd like to come through with. We have been kicking around some ideas on the expense that are not baked into the run rate. We are not really ready to talk about it. They are not people related. There are some things that we could do if the economy slowed if we entered a more severe recession and everybody thinks we might, or if I think loan growth slows down. The plan would not be to abandon our strategy to build capacity for loan growth. I mean, we have been doing that for a while, really building that for a while. I know that's something that's important to Jeff as he succeeds as well as that we have that put in place. So, the context that he has, the context that I have, the work that we have done over time with regard to the markets and lenders, I don't think we want to slow that down. We would like to continue to move that forward. But we don't show a big expense number in any quarter or two. We want to make sure that we are getting the positive operating leverage from the teams that we are hiring, the people that we are hiring and things like that. So, that's kind of the way I guess I would answer at this point is that our strategy to get that up a single-digit loan growth, we really don't want to abandon it. Obviously, if we hit a real severe recession, then you really start to get more focused on cost control. But at this point, slight recession or soft landing, maybe no recession, we just think power right through it because we've got some good momentum going. Also the first quarter, second quarter of the year is the time to hire lenders because they are all kind of getting their bonuses and they are all pre-agents at that point in time. The back half of the year is a little tougher for people because then you've got to cover some out-of-pocket numbers to get people to move.

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

Sure.

Good morning, guys.

Good morning.

As we continue to talk about loan growth here, are there any categories that maybe you are approaching more cautiously now than, say, versus a year ago?

Well, I would say that it goes back even more than a year ago. At the start of the pandemic, obviously, we got very cautious on hospitality and office. The hospitality portfolio has come through in a really great shape. No issues that we see in the office portfolio either. But, that's the one everybody is watching for the next couple of years, is really what happens to the office portfolio. So, we are not doing much in the way of office. It would have to be really low on the value with strong guarantors with a lot of liquidity. So, not a lot of office at all at this point in time, not a lot of hospitality either, still being very cautious on that. Those would be the two areas that I would mention. We have seen a lot of really good C&I business. Lot of the lenders that we brought on in our legacy markets have really started to bring us some nice C&I business. Commercial real estate is still a big part of who we are. But it's nice to see that the C&I business as well. But outside of the two real estate categories, office and hospitality, I would say the other areas we are continuing to lend in. We don't do much in energy, as you know; we are less than 1% energy. So, that's not a factor for us. But, other businesses seem to be pretty good.

Okay, excellent. And then, maybe some color on the quarterly run rate on fee income for '23?

I'll let Dan jump in here, as we are obviously impacted by the lower residential mortgage production than what we had in the past and obviously put more on our books. We have benefited to some degree higher securities revenue. A lot of that's coming from the CD book, putting fixed annuities out there and getting the commissions off of that. So, that's I think part of the reason why securities are up so much. And then we are seeing more business activity occurring and even consumer activity, which is driving more service charges on the consumer side. Dan, any comments you would make on fee income?

I would like to add that in the first quarter, our trust fees will be slightly higher due to tax preparation fees, which is an annual occurrence. Regarding swap fee income, that has become a significant focus since Jeff joined us, and he has been dedicated to improving it. We require more training and strategy to better utilize this opportunity. I believe this will likely be another area where we will see growth as we progress through the year.

Yes. The markets that we have acquired into, again, we are still driving additional new products and training in those markets as well too because number of the banks that we acquired in Kentucky and then the mid-Atlantic market, did not offer some of the things that we offer, swaps being one of them, but also on the trust fees and having securities reps and Series 7 as well, six to eight people in branches. Things like that. So, there continues to be upside opportunity there similar to what we are seeing on the loan growth side in those markets. I think we will continue to see some better fee growth side because again, these were new products and new businesses that we have introduced into those markets through the banks that we bought.

Okay, great. Thank you. I'll step back.

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

Great, thank you. I appreciate everyone's time today. I know a lot of earnings meetings are taking place. Appreciate your joining ours and look forward to speaking with you in the near future at one of our upcoming events as well too. So, please stay safe. And have a good day. Bye-bye.

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