Good morning and welcome to the WesBanco Inc. First Quarter 2023 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. Please go ahead.

Thank you. Good morning, and welcome to WesBanco, Inc.'s first quarter 2023 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. All statements speak only as of April 25, 2023, and WesBanco undertakes no obligation to update them. I would now like to turn the call over to Todd. Todd?

Thank you, John. Good morning, everyone. On today's call, we'll review our results for the first quarter of 2023 and provide an update on our operations and current 2023 outlook. Key takeaways from the call today are solid financial performance demonstrated by loan growth and discretionary cost control. Key credit quality metrics have remained at low levels and are favorable to peer bank averages. We remain well capitalized with solid liquidity and a strong balance sheet with the capacity to fund loan growth, and we are well-positioned for near-term success while continuing to make appropriate long-term growth-oriented investments. We're pleased with our performance during the first quarter of 2023. We demonstrated the earnings power, capital, and liquidity to perform well and miss a quarter of broader industry volatility driven by financial institutions with different operating models than ours. We reported loan growth while maintaining credit quality and delivered solid pre-tax, pre-provision net income. We diligently manage discretionary costs while making appropriate investments that build upon and enhance our strong markets, teams, and core advantages. We remain focused on ensuring a strong organization with solid liquidity and a strong balance sheet. For the quarter ending March 31, 2023, we reported pre-tax pre-provision income of 13.2% year-over-year, and net income available to common shareholders of $42.3 million with diluted earnings per share of $0.71 when excluding after-tax merger and restructuring charges. On a similar basis, the strength of our financial performance this past quarter is further demonstrated by our return on average assets of 1.01% and a return on tangible equity of 13.5%, and our capital position continues to provide financial and operational flexibility. While Jeff will discuss our loan growth, it's important to highlight the strength of our credit underwriting and overall conservative risk culture. We do not chase loans or take undue risks just to report growth. We're focused on long-term sustainable growth through all economic cycles. We are achieving our strong loan growth while maintaining our credit standards. Again this quarter, we reported key credit quality measures that continue to remain at low levels and favorable to all banks with assets between $10 billion and $25 billion. Total loans past due as a percentage of total loans were 16 basis points down more than 50% from last year. Non-performing assets as a percentage of total assets have ranged from just 21 to 26 basis points in the first quarter of 2020. Lastly, criticized and classified loans as a percentage of total loans were 1.6% down 208 and 74 basis points year-over-year and quarter-over-quarter respectively. In fact, this is the lowest level in nearly four years. Jeff will now provide an update on our key first quarter operational topics.

Thanks, Todd. We continue to effectively execute our strategic business plans as evidenced by our solid loan growth across all markets, disciplined expense management, and excellent credit quality reported for the first quarter. I'm pleased that the strength of our markets and lending teams combined with our LPO strategy continues to meet our expectations, as we demonstrated total loan growth of 11.9% year-over-year, and 7% annualized when you compare it to December 31, 2022. Residential real estate loans continue to benefit from the retention on the balance sheet of approximately 70% of the one to four family residential mortgages originated. Total commercial loan growth reflects the strength of our teams and markets which we have enhanced through our hiring efforts over the past two years. For the first quarter, total commercial loan growth was 9% year-over-year, and 4% annualized sequentially. Briefly, I would like to provide some comments on the high quality of our office space loan portfolio, outlined on Slide 5 of the supplemental earnings presentation. The portfolio, which represents just 4% of the total $10.9 billion loan portfolio, is very high quality with more than 96% of the loans in pass risk categories and no non-performing loans. The average loan size is roughly $1.5 million, average LTV is 62%, and the average debt service coverage is 1.8 times. The portfolio is geographically diverse across our six-state footprint and located predominantly in suburban markets. Our commercial loan pipeline at March 31 was $1.1 billion, an increase of approximately 25% since year-end as our teams continue to find business opportunities to replenish the pipeline. Our newer markets in Kentucky and Maryland account for roughly 30% of the pipeline while LPOs in Cleveland, Indianapolis, and Nashville are contributing approximately 13%. Importantly, we have ample liquidity sources to fund loan growth. Our deposit granularity, as evidenced by our average deposit account size of $27,000, reflects the trust our customers have in our 150-year heritage as a community bank. Our loan to deposit ratio of 83.5% provides us with ample lending capacity to support our customers as they grow. In addition to $600 million of cash on our balance sheet as of March 31, normal remix from our securities portfolio to the loan portfolio can cover approximately 4% loan growth, not to mention cash flow from the normal loan maturities and P&I payments. While the core funding advantage of our legacy markets continues to contribute approximately $25 million a quarter, we have implemented several initiatives to help drive additional organic deposit growth, albeit at potentially lower cost than peers located in the major metro markets. Through the last few years, we have executed a strategic transformation of our company into an evolving regional financial services institution with a community bank at its core. We have done this through successful expansion while adhering to our foundation of expense control, risk management, high credit standards, and a strong workforce equipped with the skills to drive success. And we will continue to adhere to that strategy as we continue to evolve. Similar to our hiring strategy, the last couple of years, we still expect to hire additional commercial bankers primarily C&I this year. We believe that continuing to add top-tier talent across our robust and diverse markets is a key to our long-term success. However, we will proceed cautiously as we monitor the operating environment, and we'll adjust our plans as appropriate. We also expect to fund these new hires through internal efforts including the adjustment of existing banker staffing levels. In summary, we have distinct growth strategies with unique long-term advantages, balanced distribution across economically diverse major markets, and a strong customer service culture combined with robust digital services that enable us to deliver efficient solutions when, where, and how our clients need them. We are focused on strengthening our diversified earning streams for long-term success with new capabilities and strategies. My transition continues to go well, and I enjoy working with Todd and the team. Back to you, Todd.

Thanks, Jeff. WesBanco continues to be acknowledged for its soundness, profitability, employee focus, and customer service, as it continued to receive numerous national accolades over the last few months. For the 13th time since 2010, we were named one of America's best banks for strong capital, credit quality, and profitability. For the third consecutive year, we were voted by our employees as one of the best midsize employers. We provide an environment where employees feel valued and are provided avenues for success, while encouraging a strong customer-centric focus that ensures a sound and profitable financial institution, work communities, and shareholders. I'd like to once again congratulate our entire organization as we continue to deliver large bank services with a community bank feel while providing our customers with top-tier service. Their efforts earned us for the fifth consecutive year the recognition as one of the best banks in the world based upon customer satisfaction. We receive strong scores from our customers for customer service, digital services, satisfaction, and financial advice. I'd now like to turn the call over to Dan Weiss, our CFO for an update on the first quarter results and a current outlook for 2023. Dan?

Thanks, Todd and good morning. As presented in yesterday's earnings release during the first quarter, we reported improved GAAP net income available to common shareholders of $39.8 million and earnings per diluted share of $0.67. Excluding after-tax restructuring and merger-related charges, net income and earnings per diluted share for the first quarter were $42.3 million and $0.71 per share respectively, as compared to $42.9 million and $0.70 last year respectively. It's important to note that the first quarter of 2022 was favorably impacted by a negative provision of $2.8 million net of tax or approximately $0.05 per share, as compared to a provision increase during the first quarter of this year of approximately $0.05 per share. Therefore, on a pre-tax pre-provision basis, income improved by 13.2% year-over-year. Total assets of $17.3 billion at the end of the quarter included total portfolio loans of $10.9 billion and securities of $3.7 billion. Total portfolio loans grew both year-over-year and sequentially reflecting the strength of our markets and lending teams, as well as more one to four-family residential mortgages retained on the balance sheet. Reflecting the uncertainty in the economy, average first quarter C&I line utilization was 32.5%, a year-over-year decrease of approximately 350 basis points or $25 million. Overall, our deposit levels and recent trends reflect granularity and relative stability of our deposit base, which can be seen on Slide 6 of the earnings presentation. Total deposits have been impacted by interest rate inflationary pressures, and the Federal Reserve's tightening actions to control inflation, which has resulted in industry-wide deposit contraction, where deposits were down approximately $360 million in January, before remaining relatively flat through February and March. Total deposits at the end of the first quarter were $12.9 billion down 2% or $260 million when compared to December 31, 2022, which also includes $140 million in shorter term brokered deposits. Further, our demand deposits continue to represent roughly 60% of total deposits, while non-interest bearing deposits were 35% of total deposits, which is relatively consistent with a fourth quarter. The net interest margin in the first quarter of 3.36% increased 41 basis points year-over-year, which reflects the 425 basis point increase in the Fed funds rate since March of 2022, as well as our successful remix of securities into higher yielding loans. The net interest margin decreased 13 basis points from the fourth quarter of 2022, primarily due to higher funding costs, as lower-cost deposits were replaced with wholesale borrowings or repriced or migrated to higher-tier savings products. As we've mentioned previously, while our robust legacy deposit base provides a pricing advantage, we're not immune to the impact of rising rates on our funding sources. Total deposit funding costs, including non-interest bearing deposits for the first quarter of 2023, increased 28 basis points quarter-over-quarter to 65 basis points. On a year-over-year basis, our total deposit beta was 13% as compared to the 425 basis point increase in the Fed funds rate over the last 12 months, reflecting our ability to lag peers as it relates to deposit funding cost increases. We continue to balance the cost benefit of allowing some deposit runoff in the near term against the cost of repricing the entire book. Noninterest income of $27.7 million in the first quarter was down $2.7 million year-over-year, primarily due to lower bank-owned life insurance and mortgage banking income. Bank-owned life insurance decreased $1.9 million year-over-year due to higher death benefits received in the prior year period, and mortgage banking income decreased $1.5 million year-over-year due to a reduction in residential mortgage originations, reflecting our renewed focus on commercial loan swaps. New swap fee income of $1.8 million, which is recorded in other income, increased $1.7 million from the prior year period. Turning now to expenses. Despite the continued inflationary environment, noninterest expenses were better than our prior expectations, excluding restructuring and merger-related expenses. Noninterest expense for the first three months ended March 31, 2023, totaled $93 million and an 8.2% increase year-over-year reflecting inflation, higher staffing levels and associated costs, and higher FDIC insurance from an increase in the minimum rate for all banks. As a reminder, the fourth quarter of 2022 included a couple of large credits totaling approximately $2.5 million, which were not repeated in the expense run rate. When adjusting for these credits, first-quarter non-interest expenses were flat to the fourth quarter. Salaries and wages increased year-over-year due to the higher staffing levels mainly revenue positions and merit increases. Employee benefits have also increased from last year due to higher staffing, as well as increased pension expense and higher health insurance. Equipment and software expenses increased due to the planned upgrade of a third of our ATM fleet with the latest technology and general inflationary cost increases for existing service agreements. Moving to capital, we remain focused on ensuring a strong capital base while also returning it to our shareholders through appropriate capital management. Our capital position has remained solid, as demonstrated by our regulatory ratios that are above the applicable well-capitalized standards and our tangible common equity to tangible assets ratio improved 16 basis points on a sequential quarter basis to 7.44% as of March 31, 2023. In light of recent events, we've added Slides 6 and 7 to our supplemental earnings presentation. On Slide 6, we provided insight into the composition of our deposit base, highlighting our geographically dispersed, granular, and rural deposit franchise. Nearly 60% of our deposit base is retail-oriented with over 475,000 deposit accounts and an average deposit size, as Jeff mentioned, of $27,000 per depositor, when including business and public funds. On Slide 7, we highlighted our securities portfolio, with an overall weighted average duration of 5.4 years and weighted average yield of 2.49%. We also highlighted our TCE ratio on a pro forma basis when including the fair value mark from held-to-maturity securities, which comes in at 6.86%. We believe these metrics compare favorably with industry trends. Regarding liquidity, we actively manage our liquidity risks to ensure adequate funds to meet changes in loan demand, unexpected outflows and deposits and other borrowings as well as to take advantage of market opportunities as they arise. This has accomplished that by maintaining liquid assets in the form of cash and securities, sufficient borrowing capacity, and a stable core deposit base, between our cash, FHLB borrowing capacity, correspondent lines with other banks, and unpledged securities in the form of agencies and mortgage-backed securities, which can easily be pledged FHLB or to the Fed to expand our borrowing capacity. We have more than $4.5 billion in immediate liquidity, adding in normal principal and interest from the loan and investment portfolios through the next 12 months as another $2.7 billion for a total combined in excess of $7 billion in near-term flexibility. Therefore, we feel we are very well-positioned in any operating environment. Regarding our current outlook for 2023, we currently model Fed funds to peak at 5.25% during the second quarter and then hold steady through the remainder of 2023. We continue to anticipate our deposit betas to be lower than peers and generally lag the industry due to the benefit of our legacy deposit base. We expect similar trends to impact margins during the second quarter, reflecting higher funding costs and continued deposit mix shift into higher-yielding deposit products. We have actively increased loan spreads and rolled out additional incentives to the commercial lending teams to generate additional deposits. Residential mortgage originations should remain positive relative to industry trends due to our loan production offices as well as our hiring initiatives, but down due to market conditions. Our pipeline at March 31 was approximately $100 million, which is up seasonally from the fourth quarter, similar to the sequential quarter increase in prior periods. Trust fees will continue to benefit from organic growth, as well as be impacted by the trends in the equity and fixed-income markets. And as a reminder, first-quarter trust fees are seasonally higher due to tax preparation fees. Securities brokerage revenue should continue to benefit modestly from year-over-year organic growth. Electronic banking fees and service charges on deposits will most likely remain in a similar range as the last few quarters as they are subject to overall consumer spending behaviors. And we still anticipate new commercial swap fee income to double the approximate $4 million that we've earned annually over the last few years. While we remain diligent on discretionary costs helping to mitigate inflationary pressures, we intend to continue to make the appropriate growth-oriented investments and supportive long-term sustainable revenue growth and shareholder return efforts to attract and retain employees. In particular, commercial lenders across our metro markets remain a strategic priority. That said, we’ve recognized the challenges of the current operating environment and intend to have fun. The majority of this hiring plan was internal efforts, including the adjustment of existing staffing levels and continued efforts to improve efficiency. The upgrade of our ATM fleet with the latest technology as well as inflationary cost increases for existing service agreements will keep equipment and software expenses in a similar range to the first quarter. We anticipate higher pension expenses of approximately $700,000 per quarter with employee benefits based on a lower projected return on plan assets. FDIC insurance expense should be consistent with the first quarter due to the industry-wide minimum rate increase and expect higher marketing expenses in support of growth plans across our markets. Based on what we know today, we still believe our quarterly expense run rate to be in the mid-$90 million range. We believe these investments are appropriate and supportive of long-term sustainable revenue growth and associated shareholder return and will continue to drive positive operating leverage. The provision for credit losses under 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 18.5% and 19.5% subject to changes in tax regulations 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. Our first question comes from Casey Whitman from Piper Sandler. Please go ahead.

Good morning, Casey.

Hey, good morning. Dan, appreciate some of the guides you just gave. Are you able to put any numbers around how much margin pressure we could see over the next few quarters and what kind of cumulative deposit or funding betas you're now assuming? Appreciate that it's going to be better than peers, but just wondering where we might see the margin bottom here?

Yes. So I think there's a number of moving parts there. Starting off maybe on the asset side, obviously, we've got about 68% of the commercial loan portfolio at variable rates, and about 53% of that is going to every three months. That's been a pretty significant benefit to us. We actually saw the movement from right around 6.5% up to year-end in the quarter up to 7.15%. So we saw some nice 65 basis points of improvement there. We also have about 17% of the securities portfolio at variable rates, so we saw about 17 basis points lift there. Those would be kind of the tailwinds as it relates to any future movement and any future Fed rate hikes, etc. We are slightly asset-sensitive if you're modeling in a static environment. Regarding the deposit side, the costs associated with what we're seeing in the market right now, obviously we've been very proactive in pricing public funds. We're maintaining those very nicely. We've been increasing there's higher tier money markets, and private client funds. We've also increased our CD rates as well. To the extent that we're seeing any run off on the deposit side today we're kind of leaning into our core funding advantage to some extent and borrowing from the Federal Home Loan Bank. We think that in the near term there’s probably going to be a little bit of margin compression as a result, primarily based on our expectations for what the Fed has been doing with their quantitative tightening. We know that the money supply is shrinking, and we want to make sure that we're maintaining our piece of the pie. But at the same time, we're going to be responsible in the way that we're pricing our deposits, and we're comfortable leaning into the FHLB borrowings in the near term. With that all being said on a spot basis, I can tell you that for the month of March, our margin was right around three and a quarter percent. So yes, take that as a good benchmark for where we're at.

This is Todd, Casey. I would just add to that the deposit remix that we saw in the first quarter. I would anticipate seeing that continue through the second quarter. We have a loan to deposit ratio of 83.5%, which gives us some flexibility to let that drift up a little bit over the next year or two and stay disciplined on the deposit cost side. I do think that remix that you saw in the first quarter is probably going to continue. The whole industry saw it, and I expect it'll continue as well. Fortunately, we can offer competitive CD rates in some of our legacy markets to generate some core funding, not having to pay 6% rates in some areas where other banks are at 100% loan to deposit. We're not in that environment. So that gives us a little bit of an advantage. And as Dan says, we can lean into that to some degree, but we recognize we don’t want to give up our deposit advantage over the next year or two as well, too. Finding that balance is going to be appropriate. But I would expect the remix to continue in the second quarter that we saw in the first quarter.

Okay, that answers my question. Thank you.

Sure. Thank you.

Our next question comes from Karl Shepard from RBC Capital Markets. Please go ahead.

Hey, good morning, everybody.

Good morning.

Good morning.

Good morning. To start, I just wanted to follow up on Casey's question, I guess on the margin. I hear you loud and clear on deposit remix through the second quarter. Any thought on that slowing as we get later into the year if the Fed is done after May?

That could be a real possibility. As you qualified it there at the end with regard to what the Fed does. We don't really know. There's some uncertainty out there. We're looking for one more 25 basis point increase and then hold steady for a while and then some cuts. But that could change based upon what happens with inflation and what we see over the next couple of months from a national standpoint. That could actually work into everyone’s favor, our favor as well, too. If the increases stop, and the cuts start to occur later in the next year, then that takes some of the pressure off. I think again, our funding advantages will really show through, and we'll be able to manage the deposit base a little easier than we've been having to if rates continue to go up. So I think that's a good possibility. It's hard to have a lot of clarity into the third quarter right now.

Yes, that's fair, I appreciate the help. And then switching gears in terms of lending. I hear the positive comments on replenishing the pipeline. But I also noticed in the deck kind of a tick down in line utilization. So I was hoping you could kind of square those two comments and just give an overview, maybe of what the general loan demand trends are and what you're hearing from borrowers?

Yes, I'll answer the first part of that, and then I'll throw it to Jeff for the second part. We saw a high point in terms of utilization, just a hair under 45%, back at the end of 2019 prior to the pandemic. It's continued to trend down to 32.5% as we stated. Part of that may be stemming from the higher interest rates that many of those lines are variable rates, with the delta between the deposits what they're getting on deposits and what they’re paying on the loan side. I think there are a lot of lines being paid down right now with the excess liquidity. So that’s driving some non-interest bearing deposit declines, but also driving down line utilization as well too. Having said that, we are pretty well positioned with regard to our loan portfolio for growth. Jeff, do you want to jump in?

Sure, thanks, Todd. Yes, as we mentioned, our pipeline is around $1.1 billion; that's near an all-time high. We do have a lot of projects that have kind of slowed down, I think with rates rising. But once again, we're seeing a pretty robust pipeline and feel really good about where we stand from a business perspective. A lot of owners from other banks have stopped lending, so we're getting opportunities there as well. We are also increasing our prices as rates have risen. So I think we're really well positioned to continue forward and have not seen any real slowdown from a business perspective for us.

Yes. Jeff mentioned the higher loan rates; we are up 75 to 100 basis points in terms of kind of the floors on our originations over where we were just a couple of months ago. We realize that not a lot of banks are lending money out there right now; we're in a position to be able to continue lending, but we're going to get paid for it. So we want to make sure that with those higher funding costs, particularly from the Federal Home Loan Bank, that we've got a margin on top of that that makes sense for us. That may impact pipelines, that may impact loan growth by a percentage point or two, although we're not seeing it yet. It might impact it by a percentage point or two, but we're going to get the margin. So that margin is our focus, not just the deposit beta but understanding the loan growth as well.

That's great. Thanks, Tom.

Sure.

Our next question comes from Catherine Mealor from KBW. Please go ahead.

Good morning, Catherine.

Hey, good morning. Just one more on the funding side. Are there any parameters on FHLB borrowings that you prefer to stay under to try to think about, as you made you grow FHLB a little bit more versus CDs where you're kind of sticking point is there?

Yes, Catherine. So I would say, high level, our maximum borrowing capacity from FHLB is about $4.6 billion. As you know, we've got about $1.3 billion borrowed at this point. So that leaves our remaining capacity at about $3.3 billion. There's not necessarily— we don't view this as a cap. I mean, we don't have a defined cap. We would love to not borrow from the Federal Home Loan Bank and generate our funding through low-cost deposits. It's not unusual for us over the years to be holding about a billion dollars from the Federal Home Loan Bank. So I'm not saying we have a cap, but we are continually monitoring that. We did take out some brokered deposits of $140 million, that was just to confirm that we had access to those funds. But I wouldn’t say we have a defined cap on where our borrowings would be.

Great. And then maybe switching over to non-interest-bearing deposits, kind of thinking about the mix shift. Is there any reason, as you think about your deposit base and your borrowers, that could make the case that we should still stay above pre-pandemic levels in terms of the percentage of non-interest-bearing to total? Or what's preventing that from going lower than pandemic levels? We're just looking at non-interest-bearing mix shifts across the industry; there is a big discussion today for everyone on where these numbers eventually go. Anything you can share on what's different or special about your deposit base that may protect you there?

It’s a great question. We do look at where we were pre-pandemic. We completed the online bank merger back in November 2019. So we got a good comparison of our current size three years ago. We’d look at where we think that could revert back to at some point. There are pushes and pulls to that. The pull would be that CD rates are now around 5% to 6%, so that's a big delta compared to where it was three years ago. So people are more apt to utilize their cash to get a return, and we are seeing some of that with line pay downs. Whether we revert back to pre-pandemic levels is hard to predict, but we are better at generating core deposits now than we were three years ago. We’ve improved quite a bit in our treasury management products and some incentivization geared toward deposit generation.

Great. That's really helpful. And switching to credit, you added some great slides in your deck about your office portfolio and commercial real estate. It's great to see that your DC exposure is minimal. Can you provide any commentary on what you're seeing, particularly in that market and what you're worried about or what makes you more comfortable with your office portfolio?

Yes. The suburban nature of our office portfolio makes us feel more comfortable. We focus on markets like Pittsburgh, Columbus, Cincinnati, Louisville, and Lexington rather than tier one cities like Chicago or LA, where the work-from-home trend is more pronounced. Those markets are more reliant on physical commuting, and we're seeing that hold up better than in more urban settings. The DC part of our office portfolio, again, does not look much like the rest of the office portfolio. It’s not in downtown DC; it’s primarily suburban. We only have one loan there, which is performing. We're not expanding into the DC market, which allows us to manage risk better. I also look at how the portfolio matures; we have about $40 million annually maturing on that office portfolio in the next few years. We are also reviewing every office loan over a couple million dollars to ensure we have a good line of sight into occupancy and rates for the future. Overall, I feel good about where we're positioned but we’re cautious about the scrutiny that will follow commercial real estate as we move forward.

Great. Very helpful. Thank you.

Sure.

Our next question comes from Russell Gunther from Stevens. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning, Russell.

Good morning.

I wanted to follow up on those commercial lender conversations you mentioned. You brought up LPOs which are 13% of the commercial pipeline. Do you have a similar data point in terms of related deposit production or deposit pipeline? I'm trying to get a sense for how these hires can help you self-fund this high single-digit growth.

Yes, I'll start, and Jeff can chime in as well. We're talking about tracking deposit pipeline alongside loans, so we have the ability to see that synergy. We won't be making loans to commercial real estate C&I without a deposit basis; we’ve passed on loans recently that didn't come with one. We expect to have a deposit pipeline over the next few months that we can start tracking. Jeff, would you like to add anything?

Yes. I would agree with what you said. Our focus going forward, especially with the LPOs, will be C&I focused. We would believe that this would increase the percentage of LPO contribution to our deposit pipeline going forward as we concentrate more on C&I customers and enhancing our treasury products and services. That should help grow that deposit pipeline.

That's very helpful. Thank you both. Also, you have a target for C&I focused hires for this year and it sounds like it might be a target-rich environment, especially since there's a healthy appetite to lend. How are you approaching that?

We are getting a lot of inquiries from commercial lenders who want to join us because of our funding advantages. We see that as a strength that allows us to bring in top talent. We're cautious though, ensuring they align with our credit underwriting tall. While we are excited about new hires, we have to balance that with a portfolio of prospects bringing the right customer base for our approach.

Great, I appreciate your time. And one final follow-up would be your observations from updated appraisals in terms of declines in value, particularly in your office portfolio. Any insights?

Yes. That’s going to be very market-specific. We’ve not had to make many updated appraisals but we’re aware that cap rates have changed. With what we’re seeing in the market, there are larger properties that have sold for less than liquidation value recently. There might be some impacts on values due to how the market has shifted, particularly regarding pandemic-related office trends. Having loan-to-value levels in the 60% range is crucial during this time of market adjustment.

Thanks for the insights. I appreciate your time.

Sure.

The next question comes from Daniel Tamayo from Raymond James. Please go ahead.

Good morning.

Hey, good morning. Just quickly on the expenses. I know you mentioned being self-funding a majority of the C&I lender hiring plan, and you noted a mid-90s expense run rate here in the near term; how far out does that extend? Is there a cadence to the incremental expense increase on top of any additional expenses from that hiring program that may not be fully funded?

I think with a 7% increase in salaries, part of that was additional people coming on board, even though we’ve self-funded some of that through merit increases and inflationary impacts. I’m not sure we will see that kind of inflationary impact annually because it seems to be moderating. However, as the franchise grows, we’d expect the expense base to correspondingly grow. I’m focused on efficiency, and our ability to grow revenue through new products and new hires should bolster our performance without enabling dramatic increases in expenses.

That's helpful. Lastly, regarding the rate environment, you talked about rates being stable through the year. There are expectations for rate cuts in the forward curve. How do you see that impacting the earnings power of the bank?

Our deposit beta benefits us on the way up while also allowing us to reduce deposit costs faster than peers in a lowering rate environment. If rates go down, it would serve our interests to manage costs wisely and maintain spreads on loans. We believe we can effectively handle the challenges posed in both rising and falling rate environments, although many variables will influence rates going forward.

Okay, I appreciate the answers. Thanks, guys.

Sure.

Our next question comes from David Bishop from Hovde Group. Please go ahead.

Good morning, Dave.

Yes. Good morning, gentlemen. Most of my questions have been asked and answered. But in terms of opportunities within the market on the lending side, are you seeing any loan segments or pockets where some of your peers are pulling back, especially as you noted, some of the tier two markets may not be as boom or bust as in DC or other bigger metropolitan areas across your footprint?

Yes. I think some of the markets where funding is more of a challenge, where banks have 100%, 104%, 105% loan-to-deposit ratios, have slowed down lending across all fronts. We’re seeing lenders from markets like that moving toward us. We’ve been seeing and will continue to see loan opportunities focused on C&I, particularly as we gain capacity for quality C&I customers. That can really help us especially in markets like the Southeast, and Mid-Atlantic, where competition is less intense by traditional lenders.

Great, I appreciate the color.

Sure.

And our next question comes from Manuel Navas from D.A. Davidson. Please go ahead.

Good morning.

Hey, good morning. A lot of my questions have been answered. I wanted to check on your pipeline pointing to loan growth accelerating here in the second quarter. You talked about higher pricing; do you think pricing selectivity might dim some of that acceleration, or is it more accurate to say you're growing faster right now?

It’s a great question. In the first quarter, our pipeline was robust, but loan growth was only 1.7%, which is less than one might expect with a pipeline as strong as ours. As we increase rates and our expectations on those rates, we might see a reduction in pull-through due to deals in the pipeline not making sense at higher rates; customers might pull back or seek different options. While the potential exists for some impact on the pipeline, we have new lenders generating opportunities, which is a positive.

Do you feel more comfortable saying that loan growth this year is going to be more front-loaded in the first half? Is it too soon to say?

I think it’s too soon to say. We built a franchise that should grow mid-to-upper single digits. Quarterly fluctuations may occur depending on various factors like line usage and project pausing. I don’t see any indications from our customer base suggesting excessive concern about the economy; they are doing business, albeit in a higher rate environment.

Thank you, I appreciate the color.

Sure.

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 for joining us today. We remain focused on ensuring our organization’s sound credit quality, solid liquidity, and a strong balance sheet that you’ve come to expect from us. We believe we have the right markets, teams, leadership, and strategies in place for long-term success. I look forward to speaking with you at upcoming investor events. Please have a good day, and enjoy the rest of your week. Thanks.

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