Good morning, and welcome to the WesBanco, Inc.'s first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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, wesbanco.com. All statements speak as of only April 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 will 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 favorable to peer bank averages. We remain well capitalized with solid liquidity and a strong balance sheet with capacity to fund loan growth. 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 amidst 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 a return on average assets of 1.01% and 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 risk just to report growth. We're focused on long-term, sustainable growth through all economic cycles. We're achieving our strong loan growth while maintaining our credit standards. 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 since the first quarter of 2020.
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. 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 continued 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 am 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 re-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 five 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 past 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 31st 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 our L.P.O.s in Cleveland, Indianapolis, and Nashville are contributing approximately 13%. 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 31st, 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 continue to contribute approximately $25 million a quarter, we have implemented several initiatives to help drive additional organic deposit growth, albeit at potentially lower costs 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.
We will continue to adhere to that strategy as we continue to evolve. Similar to our hiring strategy the last couple years, we still do 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 will 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 earnings 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. Well, 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 mid-size 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 for our 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 5th consecutive year, the recognition as one of the best banks in the world based upon customer satisfaction. We received 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 the 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. 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 six 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.
More 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. 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 the 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 were 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. Non-interest 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, non-interest expenses were better than our prior expectations.
Excluding restructuring and merger related expenses, non-interest expense for the first three months ended March 31, 2023 totaled $93 million, 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 also increased from last year due to higher staffing as well as an increased pension expense and higher health insurance.
Equipment and software expense 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. Our tangible common equity to tangible assets ratio improved 16 basis points on a sequential quarter basis to 7.44% as of March 31st, 2023. In light of recent events, we've added slide six and seven to our supplemental earnings presentation. On slide 6, we provide insight into the composition of our deposit base and highlight 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 highlight our securities portfolio with an overall weighted average duration of 5.4 years and weighted average yield of 2.49%. We also highlight 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 risk to ensure adequate funds to meet changes in loan demand, unexpected outflows and deposits, and other borrowings, as well as take advantage of market opportunities as they arise.
This is accomplished by maintaining liquid assets in the form of cash, 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 to 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 adds another $2.7 billion, for a total combined in excess of $7 billion in near-term flexibility. 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 five and a quarter percent 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 do anticipate Fed tightening to continue to shrink the money supply, which will place pressure on deposit retention industry-wide and result in higher overall interest expense. We expect similar trends to impact margin during the second quarter, reflecting higher funding costs and continued deposit mix shift into higher-yielding deposit products. We also 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 31st 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. 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.
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 a discretionary cost to mitigate inflationary pressures, we intend to continue to make the appropriate growth-oriented investments in support of long-term sustainable revenue growth and shareholder return. Efforts to attract and retain employees, in particular commercial lenders across our metro markets, remains a strategic priority. That said, we recognize the challenges of the current operating environment and intend to fund the majority of this hiring plan with 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 expense of approximately $700,000 per quarter within 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. Expect higher marketing expense 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 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 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. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. In the interest of time, please limit yourself to one question and one follow-up. If you would like to ask further questions, you may reenter the question queue. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Casey Whitman from Piper Sandler. Please go ahead.
Morning, Casey.
Hey, good morning. Dan, appreciate some of the guide you just gave. Are you able to put any numbers sort of around how much margin pressure we could see over the next few quarters and sort of what kind of cumulative deposit or funding betas you're now assuming? Appreciate that it's going to be better than peers, but just sort of wondering where we might see the margin bottom here.
I think, you know, there's a, there's a number of moving parts there, right? Starting off maybe on the asset side, obviously, we've got, you know, about 68% of the, of the commercial loan portfolio is variable rate. About 53% of that is going to reprice every three months. That's been a pretty significant benefit to us. We saw actually the movement there, from right around 6.5% up to, here in the quarter, up to 7.15%. We saw some nice, you know, 65 basis points of improvement there. We also, as you know, have, about 17% of the securities portfolio is a variable rate, so we saw about 17 basis points of lift there.
Those would be, kind of the tailwinds as it relates to any, you know, future movement, any future Fed rate hike, et cetera. We are slightly asset sensitive if you know, if you're modeling in a static environment, right? When we think about, you know, the deposit side, that, you know, the cost associated with what we're seeing in the market right now, obviously, you know, we've been very proactive in pricing public funds. You know, we're maintaining those very nicely. We've been increasing the, you know, those higher tier money markets and private client funds. We've also increased our CD rates as well.
To the extent that we're seeing, you know, any kind of runoff on the deposit side today, we're kind of, you know, leaning into kind of our core funding advantage to some extent, and borrowing then from the Federal Home Loan Bank. We think that in the nearer term, there's probably gonna be a little bit of margin compression as a result of. It's really gonna be primarily based on, you know, our expectations for, you know, what the Fed has been doing with their quantitative tightening. We know that the money supply is shrinking. We know that the pie is smaller, and we wanna make sure that we're maintaining our piece of the pie.
At the same time, you know, we're gonna be responsible with the way that we're pricing our deposits, and we're comfortable kind of, you know, leaning into the FHLB borrowings, you know, in the nearer term. With that all being said, you know, on a spot basis, I can tell you, that for the month of March, our margin was right around 3.25%. You know, take that for, you know, as a good benchmark for where we're at.
Yeah. This is Todd Clossin. I would just add to that, too. I think the deposit remix that we saw in the first quarter, you know, I would anticipate seeing that continue through the second quarter. As Dan mentioned, you know, 83.5% loan to deposit ratio. We've got some flexibility there 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 gonna continue. I think the whole industry saw it, and we'll see it continue as well, too.
Fortunately for us, you know, we can go out and offer competitive CD rates in some of our legacy markets to generate some core funding and not have to pay, you know, 6% rates at some of the areas where the banks that are 100% loan to deposit. We're not in that environment. That gives us a little bit of an advantage. As Dan says, we can lean into that to some degree, but recognizing we don't wanna give up our deposit advantage over the next year or two as well, too. Finding that balance, I think, is gonna be appropriate. 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.
Morning.
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 kind of 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 just, you know, I think qualified it there at the end with regard to what the Fed does. We don't really know, right? I think there's some uncertainty out there. You know, we're looking for one more 25 basis point increase and then hold steady for a while and then some cuts. That could, you know, 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, you know, that could actually work into everyone's favor, our favor as well, too.
If the increases stop and the cuts start to occur, you know, later, in the next year, then that takes some of the pressure off. you know, I think, again, our funding advantage will really show through, and we'll be able to manage the deposit base, a little easier than we're having to if rates continue to go up. I think that's a good possibility. It's hard. There's just not a lot of clarity into the third quarter right now.
Yep. That's fair. I appreciate the help. Switching gears. In terms of lending, I hear the kind of the positive comments on replenishing the pipeline, but I also noticed in the deck kind of a tick down in line utilization. I was hoping you could kind of square those two comments and just give an overview, maybe kind of what the general loan demand trends are and what you're hearing from borrowers?
Yeah. Maybe I'll answer the first part of that, and then I'll throw it to Jeff and let him answer maybe the second part of it. I... You know, we saw a high point in terms of line utilization, just a hair under 45%, like 44.4% back at the end of 2019, you know, prior to the pandemic. That's continued to trend down to 32.5%, as we stated in our comments. I think part of that may be stemming from the higher interest rates that a lot of those lines are, you know, variable rates.
With, you know, the delta between deposits, what they're getting on deposits and what they're having to pay on the loan side, I think that there's a lot of lines being paid down right now with the excess liquidity. I think 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 wanna jump in?
Sure. Thanks, Todd. Yeah. 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, you know, rising. 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, some of their banks have stopped lending, we're getting opportunities there as well. We are taking up our prices also, as rates have risen. I think we're really well positioned to go forward and have not seen any real slowdown from a business perspective for us.
Yeah. Jeff mentioned the higher deposit or the higher loan rates. We're 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 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 gonna get paid for it, right? We wanna make sure with those higher funding costs, particularly from 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 2, although we're not seeing it yet.
It might impact it by a percentage point or two. We're gonna get the margin, so that we're focused on the beta, you know, the margin beta, not just the deposit beta. That, that means the loan pricing needs to continue to go up, particularly if the Fed's gonna keep raising rates.
That's great. Thanks for all the help.
Sure.
Our next question comes from Catherine Mealor from KBW. Please go ahead.
Good morning, Catherine.
Thanks. Good. Hey, good morning. just one more on the funding side. Is there a size of, kind of a cap on FHLB borrowing that you'd prefer to stay under? Just trying to kinda think about as we maybe grow FHLB a little bit more versus CDs, you know, where your kind of sticking point is there?
Yes, Catherine. 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. That leaves our remaining capacity about $3.3 billion. There's not necessarily. We don't necessarily view this as a cap. I mean, or we don't have necessarily a cap. I think, we certainly would love to not borrow from the Federal Home Loan Bank and, you know, generate our funding through, you know, low cost deposits. You know, it's not unusual over the years for us to be holding really on average, about $1 billion from the Federal Home Loan Bank anyways. You know, pre-pandemic, we were right around $1.5 billion on a smaller balance sheet.
You know, not necessarily, you know, unusual. I wouldn't say that we've got a cap per se. You know, we obviously are continuing to monitor. You know, we'll continue to monitor that. You know, as you, as you heard in my prepared commentary, we did take out some broker deposits. We did $140 million there. That was more just to kind of tap into the market to confirm that we, you know, that we had access to those funds. Of course, that obviously also from my perspective, really is a, you know, wholesale borrowing, similar cost to FHLB borrowing as well. That provides some additional availability if you think about it that way. No, there's not, there's not specifically.
I wouldn't say we have a, you know, a defined cap on where those borrowings would be.
Okay, great. Well, actually, I'm gonna stay on deposits. Kind of thinking about the non-interest bearing mix shift. I know you touched on this just a little bit, but is there any reason as you just kinda think about your deposit base and your borrowers, is there anything that you see within your deposit base that could make the case that we should still stay kind of above, let's call it pre-pandemic levels in terms of percentage of non-interest bearing to total? What's preventing that from actually going maybe even lower than pre-pandemic levels? We're just kind of looking at non-interest bearing mix shift across the industry, and there's a big discussion, I think, today for everybody is where these numbers eventually go.
If there's any kind of commentary you can give on maybe what's different or special about your deposit base that may protect you there.
Yeah, It's a great question. My answer to that would be that we do look at kind of where were we at pre-pandemic, right? We'd completed the Old Line Bank merger back in November of 2019. We get a good quarter comparison of our current size, three years ago prior to the pandemic. You tend to look at kind of where were we at there and in a normal world, I guess, you know, would you revert back to that at some point in time? There's pushes and pulls to that, right? What I would say the pull to that would be that, you know, you're talking about, you know, 5%, you know, maybe 6% with CD rates and things like that that are out there.
That's a big delta versus where it was three years ago with the rates being a lot lower. You know, are people gonna be more apt to, you know, better utilize their cash, so to speak, to get a return? We're seeing some of that with the line pay downs but, you know, are we gonna see that? Is it gonna be different than it was three years ago because the delta's so big? Fighting against that's gonna be, I think the Fed will be cutting rates here at some point so that delta is gonna start to diminish and maybe gets back to where it was three years ago. I don't think it'll go quite back that far. That could make the case for, yeah, you could go lower than you were pre-pandemic.
I would also say that we're doing a lot of things differently now than we were then, because we're getting a lot better at generating, what I would say, core deposits and having plans around that. We benefited from the shale related deposits just kind of falling into the bank and our legacy footprint. We never had to really sharpen our pencil, so to speak, because funding was always, you know, readily available. Now as we kind of look through that with our loan growth and our plans and everything, we've gotten better at being able to generate, core deposits.
We've added a pretty significant part of our commercial lending incentive plan is now deposit driven, whereas in prior years it wasn't because, you know, we were focused on loan growth and margin on the loans, but not necessarily deposits. That's changed. We're getting much, much better at that side of things. We have new treasury management products, several of which Jeff has brought to the table, with what I would say more C&I related treasury management that we're going to market with that could be a real game changer for us as well too. We're doing some things that we weren't doing three years ago that I would say would allow us to operate at a higher percentage of non-interest bearing than where we were at three years ago.
There's pushes and pulls to that. We'll have to wait and see how it works out, but that's kind of the way that we see it right now. I would tend to land in the spot that I would expect higher non-interest bearing deposits as a percentage of our deposit base, than where we were at three years ago. I just don't know where that, you know, kind of where that bottom or where that floor is or where that point is, and we'll have to just find that out over the next couple of quarters as we move through the cycle.
Great. That's really helpful. Maybe just switching to credit, you added some great slides in your deck on just your office portfolio and commercial real estate portfolio. I know from Old Line you've now got exposure to D.C., which is getting so much negative press, you know, about just the office landscape there. You know, was glad to see that the actual D.C. piece is very small for you. It's much more kind of suburban Maryland focused. Can you just give any commentary on what you're seeing, particularly in that market, you know, and what you're worried about, you know, any kind of risk you see here, or alternatively, what makes you more comfortable with your with your office portfolio? Thanks.
Yeah. The suburban nature of it makes us feel more comfortable. You know, we're in what I would call, I don't mean this, you know, disrespectfully, but Tier 2 cities for the most part. Pittsburgh, Columbus, Cincinnati, Louisville, Lexington, versus what I would say Tier 1 cities like Chicago or L.A., San Francisco and even downtown D.C. That's not really. Those are mass transportation markets where people, I think there's gonna be a higher percentage of people working from home, remote or hybrid long term. That's gonna have a material impact on those cities. Not that the secondary Tier 2 cities aren't gonna be impacted. I think they will be, but for the most part, these are all get in your car and drive to work type of markets.
We're seeing that hold up better than in some of the bigger cities. The D.C. part of it, you know, again, if you look at our office portfolio in Maryland, it does look very much like the rest of our office portfolio. It's not in downtown D.C. We're not there. You know, we've got one loan which is performing, but that's not an office market that fortunately Old Line, you know, was good at underwriting too, and they didn't go into that market from an office standpoint in any big way. I think that that'll benefit us quite a bit. I also look at the portfolio and how it matures.
We've got about $40 million a year maturing on that office portfolio each of the next couple of years. It's not like we got a big bubble, you know, all coming through and maturing at the same time or anything like that. We've also gotten very good and granular at going out and looking at those and making sure that we got good line of sight to where do we think occupancy is going to be and rates are going to be down the road, right? Don't see a lot of what I'd say ghost properties out there where the rent's being paid, but there's no cars in the parking lot type of thing because you know when events going to occur, you know, if that's, if that's what the portfolio is consisting of. We're not seeing a lot of that.
It's not reported anywhere. Those are the things that we're digging into ourselves and having our lenders dig into. We're reviewing every office loan, you know, over $2 million to make sure we got really good line of sight into where they're going to be two, three, four, five years down the road. As a result of that, I feel good about where we're at with it, but we're not in the, in the big Tier 2 cities or Tier 1 cities. We're also, it's not a portfolio we're expanding at all right now. We think that that's probably going to be the one area for the industry that'll probably get the most scrutiny over the next five years and probably should, quite frankly.
Great. Very helpful. Thank you.
Sure.
Our next question comes from Russell Gunther from Stephens. Please go ahead.
Hey, good morning, guys.
Morning.
Morning, Russell.
Hey, good morning.
I wanted to follow up on the commercial lender conversation a bit. You guys mentioned it's LPOs are 13% of the commercial pipeline. Do you have a similar data point in terms of related deposit production or deposit pipeline and just trying to get a sense for, you know, how these hires can help you self-fund this sort of high single-digit growth?
Yeah. Yeah. Again, I'll start off and if Jeff wants to jump in, he's welcome to as well. We talk about that a lot. We actually and Jeff's been the one driving this the last two to three months, is having a category on our pipeline that's gonna show deposit pipeline as well too, so that we have that ability to track that. We are bringing that up. We're not making loans to typically commercial real estate. C&I, you tend to get the deposits, but we're not making any commercial real estate loans really without a deposit. Existing deposit part of that or requiring that. We passed on quite a few loans in the last couple of months that didn't come with deposit basis.
I don't have a specific breakdown by market in terms of deposit pipeline other than to say that it's attached to all of the loans that we're looking at. I would expect we're gonna have a deposit pipeline here sometime over the next couple of months. Jeff, would you add anything to that?
Yeah. I would agree with what you said. I would also say that, you know, our focus on hiring, going forward in the LPOs or if we're gonna add any additional LPOs will all be C&I based.
Awesome.
We would expect that to increase the percentage of LPO contribution to the deposit pipeline going forward based on just really focusing on C&I customers and then also increasing our treasury products and services. I think we'll also increase that deposit pipeline. We are focused on it, but I don't have the details right now.
That's very helpful. I thank you both for that. Do you have a target for C&I-focused hires for this year? Just imagine it might be a target-rich environment for you, given what sounds like still a pretty healthy appetite to lend. Just kind of curious how you're approaching that.
Yeah. I, again, I'll start off, if Jeff or Dan wanna jump in. We are seeing that. We are getting a lot of phone calls, from commercial lenders, teams, that wanna talk to us because of our funding. We do see that as a real strength right now and something that is gonna allow us to be able to bring on some top talent. Again, we're being careful about it. We wanna make sure that anybody we bring on, you know, and particularly if it's a team or something, that they've got the same credit underwriting approach as we do. Also, I mentioned earlier, you know, an increase of 75 to 100 basis points over where we were pricing things a couple months ago.
you know, they've got to be able to have a portfolio of prospects that come with a non-solicit. We're gonna respect that obviously. But they have to have a target base that's gonna fit what we're gonna wanna do if we're gonna use our balance sheet for that. We are, you know, going through a process of bringing additional lenders on, but we're also being very good about making sure that we're self-funding as much of that as possible, potentially all of that, as we've done the last couple of years with kind of a reallocation to higher growth markets based upon retirements, or, you know, underperformers, things like that, and being able to get a higher return productivity per FTE dollar than we have in the past.
Great. I appreciate it, Todd. Thank you. Then just the follow-up would be to the office discussion. Appreciate the color there. You guys have any observations you can share from updated appraisals in terms of, you know, declines in value, just kind of ring fence?
Yeah. Again, I think it's gonna be very, very market specific. You know, because we don't have, you know, much in the way of any problems in the office portfolio, you know, we haven't had to go out and get a lot of reappraisals and things done. We do know cap rates have changed. Similar to what I think you saw on the hotel portfolio two to three years ago, I think it's a much different environment. I talked about that for a second. I think with the hotel portfolio, it was a deep drop and then a comeback, right? Based upon the virus and the vaccines and all that kind of stuff, that portfolio is kind of back to normal. With the office, you've got a couple things going on, right?
You've got the pandemic related aspect of things, but you've also got more of a structural impact that's going on with the work from home, which maybe it bounces back a little bit, but I think a certain part of that's permanent, right? Whereas I don't think hotels would be permanently impacted, the office space I think will be permanently impacted to some degree. I think we've got to look at it a little bit, a little bit differently there. I do think having the portfolio reappraised, particularly if you have, you know, larger properties or those that start to fall down in the risk grades, if they're having difficulty making payments, I do expect to see a fairly significant drop in values on those.
Just anecdotally, we've seen one or two out there in the markets that, you know, have sold for less than liquidation value in terms of what liquidation value might have been just, you know, six months ago, and they're selling for less than that. I do think that, you know, there's gonna be some risk there. Having a loan to value, you know, at the levels we've at in the 60% range, I think is gonna be important because, you know, you may find yourself 80% loan to value in two to three years on a troubled property or higher.
I appreciate the color, guys. That's it for me. Thank you.
Sure.
The next question comes from Daniel Tamayo from Raymond James. Please go ahead.
Morning.
Hey, good morning, guys.
Good morning.
Just quickly on the expenses. I know you've talked about the being self-funding majority of the C&I lender hiring plan, then talked about that mid-90s expense run rate here in the near term. I'm just curious kind of how far out that extends, and if there's kind of any cadence to the increase in expenses, incremental, you know, on top of if there's any kind of additional expenses from that hiring program that may not be fully funded. Thanks.
I think, you know, with the 7% increase in salaries, part of that was additional people coming on board, even though we self-funded some of that, but merit increases and whatnot. We saw obviously the inflationary impact that occurred as well too. Not so sure we're going to see that kind of inflationary impact, you know, each year going forward because it seems to be moderating to some degree. I think that'll help, you know, pretty significantly. But I do think as the franchise grows and we do want to grow, you know, the franchise, you know, mid to upper single digits, that expense base, you know, would grow commensurate with that. I'm much more focused on the efficiency ratio than just the expense number.
We do watch it and try to plan to it. We do think the mid-90s is kind of, you know, where we're at right now, as we said last quarter. I think we proved that in the most recent quarter. The efficiency ratio as we get bigger, I think would be really, really important to be able to manage to, you know, that we're in the, you know, mid-50s to upper 50s and, you know, if we're touching 60, we don't wanna be touching it for terribly long. I think our ability to generate revenue through some of the new products, through some of the new hires, I think that's gonna help us a lot as we continue to grow as an organization.
We're also making investments, right? As we continue to make investments in the company, that are gonna be new product oriented, and we bring on additional people, that is gonna take the number up over time. I can't imagine it would be much greater than just the normal, you know, inflationary environment that you would see. Mid to upper single digits would be, kind of be my expectations for future out years, versus anything, you know, dramatic up. I, you know, if we're gonna be 5%, 6%, 7% bigger each year going forward on a $95 million or $94 million quarterly run rate, at some point, you know, is gonna cause us to under-invest in the franchise, and we don't wanna do that.
That's probably the best answer I can give you is focus on the efficiency. We're gonna focus on the efficiency ratio. The total expense base will probably drift according to what just the normal expense growth rate is for the bank based upon the up mid, you know, 5% to 7% range.
No, that's very helpful. I appreciate that.
Sure.
I know you touched on this. Just curious, you know, your assumptions in terms of the rate environment stable through the year, but in the forward curve, there are some expectations for cuts. Curious how you think that would impact the earnings power of the bank.
Yeah. With our deposit beta, it was interesting to see that really benefits us on the way up when rates go up. We also saw, you know, when rates started going back down again a few years ago, that deposit beta held up there too, right? We're able to, you know, reduce our deposit costs faster than our peer group. Even though, you know, we can lag it on the way up, we can kind of beat it on the way down. I would expect that, hopefully, some of the discipline around pricing and spread and whatnot stays even in a lower rate environment.
you know, if we're getting better at pricing loans, if we're getting better at managing that spread, that as deposits, costs were to drop, that should really benefit us. I think in a, in an environment where you've got rates coming down, I think that could be a bonus for a number of banks. I think we could be, you know, one of the banks that might be included in that. There's a lot of other variables that are gonna be, you know, associated with that in terms of, you know, what's driving the rates to go down. Is it, if it's because, you know, you got something else going on in the economy that could impact your growth rates, then that would have to be taken into account.
Okay. I appreciate the answers. Thanks, guys.
Sure.
Our next question comes from David Bishop from Hovde Group. Please go ahead.
Morning, Dave.
Good morning, gentlemen. Most of my questions have been asked and answered, but in terms of opportunities within the market on the lending side there, are you seeing any loan segments or pockets where maybe you're seeing some of your peers pull back from that, you think might present an opportunity, especially as you noted some of the Tier 2 markets may not be as boom and bust as D.C. and some of the other bigger metro markets across your footprint?
Yeah. I think some of the, some of the markets, you know, where funding is more of a challenge, you know, where the banks are 100%, 104%, 105% loan deposit ratio, where they've really kind of slowed down lending across all fronts, right? Because they're having a hard time just funding it. We're seeing lenders from markets like that, from banks like that. We're also have been seeing, and I think we're gonna continue to see loan opportunities. You know, we're not, we're not focused on office, we're not focused on hospitality. Those aren't focus areas of ours right now. We like real estate, but we really wanna lean into C&I in a fairly big way.
A lot of the opportunities that I think we're seeing and that we should be able to see over the next year hopefully are gonna be in the C&I space. Because if they get clipped a little bit from their current bank, that, hopefully, you know, we get a look at those type of things because we have capacity to lend significantly to good quality C&I customers. I think that could help us quite a bit, particularly in markets in the Southeast, part markets in the Mid-Atlantic, where maybe the banks just aren't gonna be able to lend to the extent that they want to, even for their good C&I customers. The answer would be yes. I expect us to see opportunities from that.
Great. Appreciate the color.
Sure.
Our next question comes from Manuel Navas from D.A. Davidson. Please go ahead.
Morning.
Hey, good morning. A lot of my questions have been answered, but I just wanted to check on your pipeline kind of point to loan growth accelerating here in the second quarter. You also talked a little bit about higher pricing. Do you think pricing selectivity kinda dim some of that acceleration, or is the right way to think about it is you're growing faster right now?
No, it's a great, it's a great question, because I think as we saw in the first quarter with the pipeline being so robust, you know, loan growth kind of being in that, we did 1.7% loan growth in the quarter. It's like, you know, wouldn't expect to see bigger loan growth, but we didn't as a result of that. I think we've seen the pipeline, while it's still good, it's just under $1 billion as we kind of look at it at this point. I would say that, this is just my own personal view. I think as we increase rates and we increase the expectation on rates, we've done this a couple of times in the last two months.
As recently as yesterday, we went out to the lenders and said, "Okay, you know, we want X spread on all new loans now." I think that'll have an impact on the pipeline, because I think there are probably deals in the pipeline that probably don't make sense at higher rates or the customer's gonna wanna pull back, or maybe they go somewhere else. I don't know. I think the pull through rate on the pipeline could be impacted a little bit based upon the raising of rates. Again, we're gonna be judicious with our funding and make sure that we get paid if we're gonna put that out the door.
I just don't know the impact that has on the pipeline because we have all these, you know, new lenders and others that are out there generating opportunities. That's a real plus, that's a real positive. I just also personally believe that at the higher rates, you know, that'll have a bit of an impact on the pipeline, the pull through rate on the pipeline as projects get put on hold or pulled back.
Do you feel more comfortable or is your view that loan growth this year is gonna be more first half of the year loaded, or is that too soon to say?
I think it's too soon to say. I really do. Again, you know, we've built a franchise, you know, over the last number of years that has put us in the markets that should grow, you know, mid to upper single digits. I think on a long-term basis, that's where we're comfortable, and that's kind of what we built the organization around. Any given quarter is gonna be hard. We talked about the pipeline. We also talked about the line usage being paid down significantly. Is that gonna continue to get paid down? Is it gonna go lower? I don't know. Some of the secondary market for multifamily, things like that, has really slowed down a lot.
A lot of more of that sticking on the balance sheet for a little bit longer. I think as developers are waiting for rates to come down and they're gonna go take all that to the market, that gives us a benefit of loan growth because we're not seeing that typical payoff occur. I think there are a lot of factors that are impacting that, but I don't see anything at this point from our customer base and our markets that are telling us that people are concerned, overly concerned about the economy and pulling back. I still think they're doing business. They're just doing it in a higher rate environment and trying to factor that into their, you know, their cost structures.
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. Well, thank you for joining us today. We remain focused on ensuring our organization sound credit quality, solid liquidity and a strong balance sheet that hopefully you've come to expect from us. We think we've got the right markets, teams and leadership and strategies in place to have success on a long-term basis. Looking forward to speaking to you at an upcoming investor event. Please have a good day and enjoy the rest of your week. Thanks.
Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.