WesBanco Inc
NASDAQ:WSBC
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Good day and welcome to the WesBanco, Inc. Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to, John Iannone, Senior Vice President of Investor Relations. Please go ahead.
Thank you. Good morning. And welcome to WesBanco, Inc.'s fourth quarter 2022 earnings conference call.
Leading the call today are Todd Clossin, President and Chief Executive Officer; Jeff Jackson, Senior Executive Vice President and Chief Operating Officer; and Dan Weiss, Executive Vice President and Chief Financial Officer.
Today's call, an archive of which will be available on our Web site 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 Web site, wesbanco.com. All statements speak only as of January 25, 2023, and WesBanco undertakes no obligation to update them.
I would now like to turn the call over to Todd. Todd?
Thank you, John. Good morning, everyone. On today's call, we'll review our results for the fourth quarter of 2022, and provide an update on our operations and current 2023 outlook. Key takeaways from the call today are our operational strategies and core advantages were evident throughout 2022, and were highlighted by our earning numerous national accolades. We had a solid financial performance demonstrated by loan growth, net interest margin expansion, and discretionary cost control. We remain well-positioned for continued success and are excited about our future growth opportunities.
WesBanco had another successful year during 2022 as we remained focused on ensuring a strong organization for our shareholders, and continued to appropriately return capital to them through both long-term sustainable earnings growth and effective capital management. Through successful operational execution we generated solid annual net income, while remaining a well-capitalized financial institution with strong liquidity, balance sheet, and credit quality metrics built upon our well-defined strategies and core advantages which will ensure success regardless of the economic environment.
We are pleased with our performance during the fourth quarter of 2022 as we continued to deliver loan growth, controlled discretionary expenses, and maintained our reputation for credit quality. For the quarter ending December 31, 2022, we reported net income available to common shareholders of $49.7 million and diluted earnings per share of $0.84 when excluding after-tax merger and restructuring charges. On the same basis, for the full-year, we reported net income available to common shareholders of $183.3 million, and diluted earnings per share of $3.04.
Furthermore, the strength of our financial performance this past quarter is further demonstrated by a return on average assets of 1.18% and return on tangible equity of 16.05%. And our capital position remained strong and continues to provide financial and operational flexibility. Throughout the year, we accomplished several milestones and continued to receive numerous national accolades that resulted from our performance, operational strengths, and community focus. I'd be remiss if I do not congratulate our employees for these recognitions as they are a testament to their hard work and dedication.
Just to highlight a few, WesBanco remains the leader in an advocate for its communities, and we continually look for ways to expand our outreach and involvement, including the issuance of our initial sustainability report. We launched new loan production offices in Cleveland, Indianapolis, and Nashville, complementing our existing LPOs in [Akron-Canton] [Ph] and Northern Virginia. Based on customer satisfaction and consumer feedback, WesBanco Bank was named by Forbes as the number one bank in Ohio, and the number two bank in Kentucky, including high scores for trust, branched services, terms and conditions, customer service, digital services, and financial advice.
For the fourth year in a row we were named one of the world's best banks, which was also based on customer satisfaction and consumer feedback. For the third year in a row in the top 12, WesBanco Bank was once again named to the Forbes list of the best banks in America based upon growth, credit quality, and profitability. We were named to the Forbes list of America's Best Midsized Employers, earning a spot within the top 10 percent of all companies recognized, as well as securing the number two spot out of 30 companies included in the banking and financial services category.
In fact, we were the only midsized bank making the top 10 for both financial performance and employer of choice. Finally, WesBanco was recognized as one America's most trustworthy companies, as well as being one of only 20 banks to earn this nationwide honor for three touch points of trust; customer trust, investor trust, and employee trust.
The key story this quarter was the strength of our lending teams as we demonstrated strong loan growth for the third consecutive quarter, combined with solid credit quality measures which continue to remain relatively low from a historical perspective, and consistent through at least the last 10-plus quarters. Reflecting the strength of our markets and lending teams, we again reported solid broad-based loan growth during the quarter. Total loan growth, excluding SBA PPP loans, was 11.7% year-over-year and 4.2% or 16.8% annualized when compared to September 30, 2022. While key credit quality measures such as total loans past due and criticized and classified loans declined both year-over-year and sequentially to 0.19% and 2.34%, respectfully, of total loans.
Despite mortgage originations of just $179 million during the fourth quarter, 90% of which were either purchase or construction, residential real estate loans increased more than 20% both year-over-year and sequentially annualized through the retention of approximately 80% of the 1-to-4 family residential mortgages generated by our team of mortgage loan originators. Total commercial loan growth continues to benefit from our teams and markets that have been enhanced by our hiring efforts over the past two years. For the fourth quarter, total commercial loan growth was 9.6% year-over-year, and 4.1% from the third quarter or 16.2% annualized.
Our commercial teams continue to find new business opportunities to replenish the pipeline. In addition to new loan originations of approximately $490 million during the fourth quarter, our commercial pipeline has remained relatively consistent since last quarter, at approximately $900 million. The strength of our pipeline represents the talent of our lending teams as well as early success from our loan production office strategy which only account for approximately 13% of the pipeline. While we will see what the economy will provide this year, I am encouraged about our future commercial lending prospects as our newer lenders continue to gain traction, our recent LPOs gain market share, and we hire additional lenders.
Through the last few years, we have transformed our company into an evolving regional financial services institution with a community bank at its core. We have done this through the successful expansion in a higher growth market spanning six states, with the majority of our company now located within these markets, while adhering to our foundation of disciplined, discretionary cost control, risk management, and credit standards. As we have discussed before, a key investment in support of this evolution has been and will continue to be the investment in our employees as they are critical to our long-term growth and success.
During both 2021 and 2022, we focused on improving retention and boosting morale by implementing increases in the hourly wage, which was very well-received. In addition, we developed plans to increase the depth and strength of our teams across our business lines and markets. We successfully executed upon these plans by hiring more than 45 revenue producers during 2021, and more than 50 during 2022, and have begun to see the growth and positive operating leverage from these investments. We will continue to enhance our evolution into a solid and sound growth story combined with our strong foundation and core advantages through an ongoing lender hiring strategy.
While we will continue to evaluate existing lenders to ensure appropriate productivity, we plan to annually add high-value and productive individuals to enhance our ability to leverage growth opportunities across our markets. We remain focused on ensuring an organization with sound credit quality, solid liquidity, and a strong balance sheet. We have the right markets, teams, leadership, and strategies to provide long-term success for our shareholders, customers, and employees. We're excited about our opportunities for the upcoming year.
I would now like to turn the call over to Dan Weiss, our CFO, for an update on our fourth quarter financial results and current outlook for 2023. Dan?
Thanks, Todd, and good morning. During the quarter, we recognized strong loan growth, continued stability in our credit quality measures, improvement in our net interest margin, and maintained discipline over expenses. As noted in yesterday's earnings release, during the fourth quarter, we reported improved GAAP net income available to common shareholders of $49.7 million, and earnings per diluted share of $0.84, and net income of $182 million, and earnings per share of $3.02 for the full-year. Excluding restructuring and merger-related charges, results for the three and 12 months, ending December 31, 2022, were $0.84 and $3.04 per share, respectively, as compared to $82 and $3.62 last year, respectively.
It's important to note that the 2021 was favorably impacted by a negative provision of $51.6 million net of tax or $0.79 per share, as compared to a benefit of $0.02 per share during 2022. Total assets, of $16.9 billion as of December 31, 2022, included total portfolio loans of $10.7 billion and total securities of $3.8 billion. Loan balances for the fourth quarter of 2022, which grew both year-over-year and sequentially, reflected strong performance by our commercial and consumer lending teams and more 1-to-4 family residential mortgages retained on the balance sheet. Furthermore, as we expected, commercial real estate payoffs moderated this quarter, totaling approximately $63 million.
We also reclassified $86 million of consumer loans secured by residential real estate to the HELOC category to better reflect the underlying collateral. SBA PPP in the prior-year period totaled approximately $163 million, as compared to $8 million this period. Importantly, reflecting the strength of our underwriting standards, our key credit quality measures continue to remain at relatively low levels, and is favorable to peer averages. Robust deposit levels remain a key story as total deposits as of December 31st 2022 were $12.2 billion excluding CDs. Essentially flat compared to the prior year as growth in non-interest bearing demand deposits and savings accounts offset the decline in interest bearing demand deposit balances.
Further, our non-interesting bearing deposits improved to 36% of total deposits. Total deposits at yearend were $13.1 billion, down 3.2% year-over-year due to a $407 million reduction in CDs. The net interest margin in the fourth quarter of 3.49% increased 16 basis points sequentially and 52 basis points year-over-year. This increase reflects our successful deployment of excess cash into higher yielding loans combined with 425 basis point increase in the federal funds rate throughout the year.
Our core margin continued to increase quarter-over-quarter from 3.27% to 3.44%, which excludes purchase accounting accretion of 5 basis points for both periods for SBA PPP loan accretion with a basis point or less for both periods. Our robust legacy deposit base provides a pricing advantage as compared to peers, especially those primarily in major metro markets. We are not immune to the impact of rising rates on our funding sources.
Deposit funding cost for the fourth quarter of 2022 increased 44 basis points year-over-year to 57 basis points or 29 basis points when including non-interest bearing deposits. This reflects a total deposit beta of 8% as compared to 375 basis point increase in the federal funds rate throughout the year, excluding December which did not meaningfully impact the year-to-date average.
For the fourth quarter of 2022, non-interest income of $27.8 million was down $2.9 million year-over-year, primarily due to lower mortgage banking income which decreased $2.3 million due to reduction in residential mortgage originations consistent with the industry in general, and the retention of more loans on our balance sheet. Securities brokerage continued its organic growth trend as net revenues increased $1 million year-over-year to a record $2.6 million.
Our commitment to discretionary expense control in an inflationary environment combined with loan growth and net interest margin expansion resulted in an improved efficiency ratio of 56.9%. Excluding restructuring and merger-related expenses, non-interest expense for the three months ended December 31, 2022, totaled $90.4 million. A 2.6% increase year-over-year and a 1.6% decrease sequentially.
It's important to note that the fourth quarter included a couple of large credits totally approximately $2.5 million which are not expected to repeat in our expense run rate going forward. Within salaries and wages, there was a $1.8 million downward adjustment to bonus expense mostly related to lower mortgage lending commissions and annual volume based incentives. And with an employee benefits, there was a $600,000 credit related to the deferred compensation plan which fluctuates based on movement in underlying equity securities.
Adding these two items back, non-interest expenses for the fourth quarter would have been approximately $93 million. Turning to capital, during the fourth quarter the quarterly dividend was increased from $0.34 to $0.35 per share, representing a 2.9% increase. Our capital position remains solid is demonstrated by regulatory ratios that are above the applicable well-capitalized standards and our tangible common equity ratio improved to 7.28% as of December 31st 2022.
Now I'll provide some initial thoughts on our current outlook for 2023. We remain an asset-sensitive bank. And currently, model fed funds to peak at 5% during the first quarter. And then, hold steady throughout remaining quarters of 2023. We are modeling a couple basis points of margin expansion in the first quarter and hold relatively flat for the remainder of the year as deposit pricing continues to rise.
We expect purchase accounting accretion to be approximately four to five basis points per quarter and no meaningful SBA PPP accretion. As mentioned, a robust legacy deposit base provides pricing advantage for the industry. And we anticipate our deposit betas to continue to be lower than peers and to generally lag the industry. Residential mortgage originations should remain positive relative to industry trends due to our new loan production offices and hiring initiatives, as well as the anticipated stabilization in interest rates, and should begin to rebound as the year progresses. While it is dependent on origination production, we continue to expect to move, over time, to selling approximately 50% into the secondary market subject to customer preferences and pricing. Trustees will continue to benefit slightly from organic growth, as well as be impacted by the trends in the equity and fixed income markets.
As a reminder, first quarter trust fees are seasonally higher due to tax preparation. Securities brokerage revenue should continue to benefit modestly from year-over-year organic growth. Electronic banking fees and service charges on deposit will mostly likely remain in a similar range with the last few quarters as they are subject to overall consumer spending behaviors. In addition, we anticipate an increase in new commercial swap fee income above the approximate $4 million we've earned annually over the last few years as we have implemented improvements in our training and strategy.
While we remain diligent on discretionary costs to help mitigate inflationary pressures, we intend to continue to make important growth-oriented investments in support of long-term sustainable revenue growth and shareholder return. This will include ongoing efforts to attract and retain employees, in particular commercial lenders across our metro markets as we continue a similar hiring strategy that we implemented for 2022. We'll continue to make improvements to infrastructure, which will include upgrading about a third of our ATM fleet with the latest technology, as well as other digital product enhancements.
We anticipate higher pension expense of approximately $1 million per quarter within employee benefits based on an expected lower return on plan assets, and expect to be impacted by the industry-wide FDIC insurance rate increase. To support our growth plans across our markets, we anticipate investing more in marketing with a focus on revenue-generating campaigns. We will also continue to evaluate our financial center network to identify cost-saving opportunities which could provide a benefit in the second-half of the year. Based on what we know today, we believe our quarterly expense run rate to be in the mid $90 million range.
We believe that these investments are appropriate in support of long-term sustainable revenue growth and associated shareholder return, and will continue to drive positive operating leverage. The provision for credit losses in CECL will be dependent upon changes to the macroeconomic forecast and qualitative factors as well as various credit quality metrics, including potential charge-offs, criticized and classified loan balances, delinquencies, changes in prepayment speeds, and future loan growth. Lastly, we currently anticipate our full-year effective tax rate to be between 19% and 20% subject to changes in tax legislation, deductions in credits, and taxable income levels.
Operator, we are now ready to take questions. Would you please review the instructions?
We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Daniel Tamayo with Raymond James. Please go ahead.
Good morning, guys.
Morning, Dan.
Maybe we start on the loan growth expectations, it's -- just interested in what you're seeing and what you're expecting for the coming year. And then with the loan deposit ratios still relatively low, how much are you willing to let that rise and fund from securities runoff?
Yes, okay, well, I'm glad to answer that, Dan. It's -- obviously, loan growth is going to be economy-dependent, right? So, a lot of mixed signals out there right now with regard to what the economy is going to do. I think we get the GDP number this Thursday, but I think in looking at kind of -- our comments in the past have been upper single-digit growth on a long-term basis is kind of what we've been striving towards, and feel I guess where we were last year, yearly, in the upper single-digit low double-digit range. And that's what we're comfortable with, I think, on a longer term basis. Yes, pipelines continue to stay consistent, as I said in my comments as well too, so that looks good.
And I think we've built the right organization in our growth markets to be able to finally achieve that path that we've been building for the last number of years on the upper single-digit growth rate. So, I feel good about that, but I just don't know what the economy is going to bring us right now. When I look at the deposit side of things, and Dan might want to jump in here as well too, and along the deposit ratio. It is an advantage that we have right now; we don't want to give that all away, obviously. But we do expect to continue to have some solid loan growth over time, and the deposit base we're going to need to build along with that.
So, it wouldn't be the plan to let that run too far, but at the same time we want to take advantage of that deposit funding advantage that we have. We'll probably get into more deposit discussions in a little bit here, I would imagine. But when we really look at deposits, in general, obviously the CDs, we let those run off, we replaced those with some federal home loan bank borrowings. But we are reintroducing some CD specials, nothing like you would see at some of our competitors in the higher growth markets. We think we can generate some CD business or at least slow the runoff of CDs in our legacy markets by just being a little more aggressive than we've been.
But I would think that loan-to-deposit ratio may drift up a little bit more, but we really don't want to give that all away. We're comfortable in that 90% to 95% loan-to-deposit ratio over time. And when we were there a few years before the pandemic, I imagine we'll get back to that point. So, how quickly we get there will be dependent upon how aggressive we need to be on deposits, and so really be driven by what kind of loan growth that we see. So, that's a longwinded answer, but that's kind of the best way I see it right now anyway.
No, that's terrific, I appreciate all the color. And then maybe my follow-up just on credit quality, you've seen the reserve ratio come down here a decent amount over the last few quarters, settling around 110. Just curious what the big drivers are there? And then what would you need to see to have reserves grow from here, outside of an increase in loss content within the portfolio?
Yes. We'll it's related to CECL; Dan do you want to jump in and cover that comment?
Yes, I would say if you look I slide nine you can see there's a waterfall chart there that kind of shows the reserve build in dollars. Obviously, we saw a $3.1 million provision this quarter. That's actually the first time in six, seven quarters that we've recorded a debit to the provision; the last seven quarter had been negative. And so, I think what we've seen kind of since the pandemic, we've seen a number of qualitative factors related to some of those higher-risk areas continue to roll off over the last seven quarters. And we're to the point where I think those are more or less behind us.
So, the drivers of the reserve, the provisioning, going forward, really are going to continue to be more normalized, future macroeconomic forests, loan growth, and then, of course, to the extent that we would see any charge-offs, that would also impact provisioning and reserve levels. But I think those are the drivers probably going forward. And I would say that that $3.1 million that we recognized here in the fourth quarter is probably kind of the more normal run rate going forward total.
Terrific. All right, thanks again for all the color.
Thanks, Dan.
The next question comes from Karl Shepard with RBC. Please go ahead.
Hey, good morning, and thanks for taking my questions.
Morning.
Morning.
I guess I wanted to start your expanding cost, and you mentioned in the prepared about not being immune to higher interest rates. Can you expand on that a little bit and maybe where you are you starting to see signs of pressure? And do you think that can ease as the Fed slows or do you think there's some expectation of lagging pressure as we move through 2023?
Yes, that's a really great question, particularly when will the Fed start to drop rates, right? I mean our forecast, as Dan mentioned, is to go to 5% in the first quarter, and stay there throughout the year. So, that's kind of what we're anticipating right now. If rates do start to drop toward the end of the year or into 2024, I think what we saw on the last time there was a drop, we were able to continue to have that deposit advantage by being able to be aggressive in dropping our funding costs because that deposit advantage really is throughout all different rate cycles. So, we would be in a position, I think, to be able to bring deposit costs down if the Fed starts dropping rates at some point in the future.
I guess the question here now is we -- we're not immune to deposit cost increase, but because of our strong core funding base, it allows us to lag. And we've had that historically, that benefit. And we're seeing it again now. And obviously rates moved up a lot faster, a lot quicker than anybody in the industry really has seen before. So, relying on betas from years ago really may not be very applicable to now. So, we're watching it pretty much on a weekly, if not daily basis, what's going on with deposit cists. We've been proactive with some of our higher-tier savings rates, some new CD specials, giving some pricing authorities in our markets, and things like that.
So, we are addressing that, but how quickly we need to address that, how much we need to address that would really be dependent upon what we need for loan growth, but also what we see happening in the economy here over the next month or two. And I still don't think that you'll see us on the lower side from a beta perspective of peers. We expect that advantage to continue right through the rate cycle that we're in right now.
Okay, that's helpful. And then I wanted to pivot here to talk about loan growth a little bit too. I get that you're reluctant to provide a full-year view kind of the economy and what that might mean for loan growth. But could you help us understand the quarter a little bit better, of the trends for 4Q, is that new offices and execution or do you think it's also strong loan demand or is it more moderating payoffs, just help us break out those pieces a little bit so we can think about where to go from here?
Sure. Well, that 13% of our pipeline is from the LPOs, right? So, they're showing up in the pipeline, but we're not seeing, really, loan growth in any material way at this point from the LPOs. We should see that, I think, this year or next year, again economy dependent. So, that is something that's going to be a benefit to us. But I would not say that the loan growth that you saw last year from us was based upon new LPOs because that wouldn't be accurate, it was a minor part of it. I think it was more of just hiring into the markets that we've already been in. And as you guys know, over the last decade or so, even longer than that, we've been acquiring into higher-growth markets like Louisville, Lexington, the Mid-Atlantic markets.
So, put a little more of a growth profile on WesBanco, while still keeping our core advantages on the credit deposit side and everything else, I think this is just the fulfillment of that, at least that's way I look at it, was we had to acquire into those markets, and then assimilate those organizations and then hire additional people into those organizations. And now we're seeing the benefit of that starting to show up, which is why, and really looking at the upper single-digit loan growth going forward is because we've been building this for quite a long time now. And I think our organization is positioned well to take advantage of that.
With regard to the fourth quarter, we did get some benefit from a lower level of commercial real estate payoffs of about $60 million. And we had $160 million, I think, in the quarter before that. So, we expect about $80 million to $90 million to kind of be our normal quarterly commercial real estate payoff rate. So, we did get a benefit from that. And as Dan said in his comments, we are putting 80% of our resi mortgage on our books as well too. We typically would do about 50%. So, I think if you were just to roll the resi mortgage back to 50%, and look at that, assuming we had done that last year, we would have had a loan growth of about 8% or 9% because we put more resi on, and that bumped us up to a little over 11%, but that's market-dependent based upon what's going on with what consumers want. But that's why I really feel like we're more at an upper single-digit loan growth rate, which I think is sustainable over time. Any quarter can be up or down. A couple $100 million is going to move the needle a lot with a bank our size. And you really need to look at it, I believe, on an annual basis or two to three-year basis to really get a good idea of what the franchise run rate is.
Great, thanks for all the help.
Okay, thank you.
The next question comes from Casey Whitman with Piper Sandler. Please go ahead.
Hey, good morning.
Hi, Casey, welcome back.
Thank you.
Yes, good morning.
Morning. I guess, as moving on to think about capital here, first, can you touch on your appetite for buybacks going forward and how price-sensitive you are there? And then the follow-up would be just sort of give us an update on how you're viewing M&A for you guys this year?
I'll start off on the capital side, and let Dan jump in on that, and then I'll hit on M&A as well too. But I think from a capital perspective, we were watching what was going on in the last couple quarters with AOCI, some say it matters, some say it doesn't. But we were paying a lot of attention to it. And we did slow back the buybacks. The buybacks we did do in the fourth quarter were at the early part of the fourth quarter. And part of that was because we wanted to watch to see what happened with AOCI, and trying to stay in our 7%-ish type of range. But also, the price to the tangible book was up close to 200% or so, and we felt that was a pretty big number.
I think as we look at this year, some of the things -- I think AOCI is moderated; we don't see that, we don't know that. I'm not sure that's going to be as big of an impact on peoples' planning this year, maybe it was last year. But when I really look at the whole buyback piece of it, it's something we're going to have to evaluate. I mean I know a lot of people are looking through AOCI. So, if you look through AOCI, maybe you're not at the 190% or 200% of tangible book, maybe you're at a lower number. So, that's something that we'll evaluate. We haven't made up any firm decisions yet, but we still have 1.2 million share authorization, and we'll pull on that when we think it's appropriate. That could be this year, we may start doing some of that, but I think that's going to be dependent upon what we see over the next couple of months.
Dan, anything else you would add on that?
No, I think you covered it well.
Okay. Sorry to call your comments on that.
No, I think you're good.
On the M&A side, I would tell you that we're not actively looking at anything right now. We're doing a lot of introductions. Jeff's sitting next to me here, and he and I are making a lot of trips to the markets that we have a lot of interest in, and introducing him to some of the key executives at some other banks, people that I've known. And he's introduced me actually to some people he's known as well too. So, we're definitely interested if the right thing were to come along. We think we've got the capital, the liquidity, obviously got a new core operating system we put in place a year-and-a-half ago now. So, we feel like we would be ready to do something, but we don't feel like we need to.
I think we've finally been able to realize the loan growth that we've been working towards for a long time. It's kind of nice to be in that position and just focus on organic growth. So, we may very well just decide to do that. But also, at the same time, if we had the right opportunity come along I think we'd be prepared to act on it. But at this point, we're not actively looking at anything.
Understood. Are there particular markets that you would be most interested in or is it footprint-wide?
Yes, I think it's the markets that we're already in and where we have LPOs, right? So, part of our idea with the LPOs is to get to know some of the markets a little bit better, and then do a follow-on acquisition, potentially. We did that in Pittsburg, set up LPOs 15, 18 years ago, and then ended up buying two banks, eventually, up in that marketplace once we got to know it. So, I think that the -- outside of the existing footprint that we have, we have LPOs in Northern Virginia, Indianapolis, Nashville; I think those would all be interesting markets that would still be within that geographic timeframe or geographic drive distance that we're looking at.
So, finding something that would be in those growth year markets, try to continue to story that we've been working on, which is to have us be a little higher-growth profile company, while still maintaining good -- obviously good credit quality. Wouldn't be opposed to doing something that was in market already if there was decent expense takeouts, right, branch overlap, that kind of stuff, I think that would be interesting to look at if something like that came along. But the focus really is on higher-growth markets, Pittsburg, Columbus, Cincinnati, Louisville, Lexington, the suburban D.C. market, but throw Northern Virginia, throw Central Tennessee, throw Central Indiana in the mix as well too; those would all be areas of interest to us.
Great, appreciate it. Thanks.
Thank you.
[Operator Instructions] The next question comes from Catherine Mealor with KBW. Please go ahead.
Thanks. Good morning.
Hi, Catherine.
Wanted to go back to the margin and funding conversation. And I know you mentioned, Todd, that you added a little bit of borrowing this quarter but you continue to see CD balances decline, so kind of chose FHLB over CDs. But do you think, as we move into 2023, that changes? And so, if we look at the balance of FHLB at quarter-end, should we model that to decline a little bit at the end of the year, and maybe grow CDs, just curious how you're thinking about the higher-cost more pull sale-ish funding strategy to fund growth? Thanks.
Sure. Why don't I hand that off to Dan.
Yes, so I would say, Catherine, a couple things. Obviously, the securities portfolio right now represents about 22% of our balance sheet. That's a little heavier than where we've maintained it historically. So, we do expect to get some funding from that securities portfolio and reinvest into loans. So, right now, that's kicking off about $50 million per month, $150 million per quarter. And so that would be where the first dollar would come from. If we look towards CDs as relative to FHLB borrowings, as Todd mentioned, we do have some CD rate specials. So, we expect that that, more or less, will slow down some of that CD runoff. But I would say to the extent that we see -- if we did see deposit growth, let's say, and fund growth were within that $150 million per quarter kicking out of the CD portfolio, I think we would continue then in that case to leverage the wholesale parts. Of course we have some other levers that we can pull, but I think, today, we would be, to the extent if we needed more than, let's say, that $150 million per quarter plus the slowdown in CDs, we would be -- we would continue to leverage those wholesale parts.
Okay, great. And then I think you mentioned in your prepared remarks about -- I think you said that the margin, you expect to be flat for the rest of the year. Can you just circle back on your expectations for the margin this year? And if feels like everyone is thinking about this margin -- this quarter's margin as the peak. But I think you could argue that you might be different than that of your peers, just given your ability to lag funding costs. So, just kind of curios how you're thinking about peaking [indiscernible]
Yes, so the way we think about that really, and as I mentioned, a couple basis points of expansion here over the next three months or so. Certainly, we're not expecting that double-digit expansion that we saw here in the fourth quarter, 16 basis points, or anything like that. But I think it'll be very much dependent on deposit inflows and outflows. Again, going back to that wholesale borrowing discussion, it would be dependent on what loan growth looks like and how much we can fund through deposits, and CD retention versus FHLB borrowings. But generally speaking, we do expect, for example, loans to continue to reprice upward in the second quarter off of those first-quarter rte hikes.
So, we're -- we've got in our model 50 basis points of Fed fund increase in the first quarter. But we really expect the funding cost to rise as well such that they more or less will kind of offset or net to zero. And so that's where we look at kind of a stable NIM kind of in the second quarter, going forward. Again, that's assuming a 5% Fed funds rate that holds stable as well throughout the year. But then once you get past, call it, second quarter; I think we've got a lot of momentum. We're going to begin to reprice fixed-rate loans that are maturing. We'll still have the variable rate loans that have repricing terms beyond just the three months it'll be repricing as well. And I think those tailwinds will really begin to kind of offset the rising deposit costs from a margin -- NII standpoint. So, that's how we -- that's how we look at the margin, basically from second quarter forward, a stabilizing, taking advantage of the pricing or the increase on the asset side, with basically an offset on the deposit -- or the funding cost side.
Yes, and we're going to -- obviously, the strategy gently is to get to probably mid 90s. Who knows when that will happen, down the road obviously ways, but we are going to be tactical about how we do that. And that's going to be based on things that are going to reveal themselves to us and the industry over the next couple of months, the next couple of quarters. But, the plan wouldn't be to keep deposit rates so low that we use up all that that extra balance sheet capacity too quickly. At the same time, we want to make sure that we capitalize on the advantage that we have as well too and make sure that we are raising rates appropriately. Not too fast, not too slow. Kind of slowly let the lion out so to speak until we start to creep up to the upper 80s and then lower 90s and then eventually mid 90s. That may take a few years to materialize. That's going to be dependent on large part, I think, on what we see on loan growth side.
And last question on the margin, [indiscernible] towards the end of the quarter and kind of new pricing as well?
Yes. So, we do have one slide for which show kind of a the new loans that are coming on the [indiscernible] coming on right around 6.25%. And if you look at kind of a spot yield for the month of December we call it, loans were coming around 679. So, that's about a 55 basis point increase the month of December versus the quarter. So, that's kind of about where we are at.
Right. And that's new loans coming on, not the total portfolio of course?
Correct.
Great, okay, all right, great, very helpful. Thank you so much.
Thank you.
The next question comes from Manuel Navas with D.A. Davidson. Please go ahead.
Hey, good morning. Could you add any color on what you are thinking -- I know it's early stages for kind of rethinking the branch network in the back-half of the year. Is that more kind of fund investment? Have it dropped to the bottom line? Modernize the network? Just kind of expand on any early thoughts and early goals there. Obviously, it's not -- not set in stone yet.
Sure. We've last couple of years -- number of years actually, we have been what I would say rationalizing the branch network or optimizing it. We build a branch here or there every once in a while. But, we have been optimizing 10 to 15 branches or so a year. And using those excess, I guess, I would say reduction of expenses to fund all the above. So, some of the technology spend, Dan mentioned the ATM network we are upgrading. So, some of the money is going towards that. Also, the new lenders that we have hired and that we anticipate hiring, the LPOs, so we have been able to redeploy those savings into those areas and really drive I guess a significant amount of current and future positive operating leverage from those investments. We are going to continue to do that.
Looking at the whole branch distribution system, obviously, we have got a big advantage in our legacy market. So, don't want to give that up. So, those branches and some of our world markets are important to us. Customers are important to us. Deposits are important to us. But at the same time, we want to make sure that that we are balancing out the right way, so that we could invest when we need to invest. And, still keep the efficiency ratio where we want it to be. And to keep as Dan mentioned kind of the quarterly run rate and expenses at least for the next couple of quarters in the mid 90 range. So, that's kind of the balance that we are doing. But, don't know how much longer we will continue to do, 10 to 15 branches a year but again that's somewhat dependent on M&A as well too and buy other banks that have a branch network that could be rationalized too.
That's helpful. So, it's kind of already in the run rate that type of savings and investment at the same time? That's the way to think about it?
Yes.
Okay. If the economy slows down a bit and you have a little bit slower than high single digit kind of near-term loan growth, would that impact kind of your hiring plans? Or, any of these somewhat like expense initiatives?
Well, I would say if we see deposit cost increase quicker than we are anticipating, then I think we've got some expense things that we talked about that we could do to try to still come through at the same net income we would like to come through with. So, we have been kicking around some ideas on the expense that are not baked into the run rate. We are not really ready to talk about it. They are not people related. But there are some things that we could do if the economy slowed, if we entered a more severe recession and everybody thinks we might, or if I think loan growth slows down though, the plan would not be to abandon our strategy to build capacity for loan growth. I mean we have been doing that for awhile, really building that for awhile. I know that's something that's to Jeff as he succeeds as well too as is that we have that put in place.
So, the context that he has, the context that I have, the work that we have done over time with regard to the markets and lenders, I don't think we want to slow that down. Would like to continue to move that forward. But we don't show a big expense number in any quarter or two. We want to make sure that we are getting the positive operating leverage from the teams that we are hiring, the people that we hiring and things like that. So, that's kind of the way I guess I would answer at this point is that our strategy to get that up a single digit loan growth, we really don't want to abandon it. Obviously, if we hit a real severe recession, then you really start to get more focused on cost control, but at this point, slight recession or soft landing, maybe no recession. We just think power right through it because we've got some good momentum going. Also the first quarter, second quarter of the year is the time to hire lenders because they are all kind of getting their bonuses and they are all pre-agents at that point in time. The back-half of the year is a little tougher people because then you've got a -- obviously you got to cover some out of pocket numbers to get people to move.
Thank you. I really appreciate that color. Thank you.
Sure.
The next question comes from Daniel Cardenas with Janney. Please go ahead.
Good morning, guys.
Good morning.
As we continue to talk about loan growth here, are there are any categories that maybe you are approaching more cautiously now than say versus a year ago?
Well, I would say that it goes back even more than a year ago. At the start of the pandemic, obviously we got very cautious on hospitality and office. The hospitality portfolio has come through in a really great shape. No issues that we see in the office portfolio either. But, that's the one everybody is watching for the next couple of years is really what happens to the office portfolio. So, we are not doing much in the way of office. It would have to be really low on the value with strong guarantors with a lot of liquidity. So, not a lot of office at all at this point in time, not a lot of hospitality either, still being very cautious on that. Those would be the two areas that I would mention. We have seen a lot of really good C&I business. Lot of the lenders that we brought on in our legacy markets have really started to bring us some nice C&I business.
Commercial real estate is still a big part of who we are. But, it's nice to see that the C&I business as well. But outside of the two real estate categories, office and hospitality, I would say the other areas we are continuing to lend in. So, we don't do much in energy as you know. We are less than 1% energy. So, that's not a factor for us. But, other businesses seem to be pretty good.
Okay, excellent. And then, maybe some color on the quarterly run rate on fee income for '23?
I'll let Dan jump in here as we are obviously we are impacted by the lower residential mortgage production than what we had in the past and obviously put more on our books. We have benefited to some degree higher securities revenue. Lot of that's coming from the CD book. Putting fixed annuities out there and getting the commissions off of that. So, that's I think part of the reason why securities are up so much. And then, we are seeing more business activity occurring and even consumer activity which is driving more service charges on the consumer side. Dan, any comments you would make on fee income?
The only thing that I would add maybe is that if you look at trust fees, first quarter our trust fees will be a little higher due to the tax corporation fees that's kind of an annual thing. And then, thinking about swap fee income that's been a pretty big focus here since Jeff has come on board and he has been very focused on that. So, we need a lot of training and strategy around how to kind of better deploy and kind of tap into that little bit more. So, I think that's probably going to be other area that we will see some -- as we go through…
Yes. And the markets that we have acquired into, again we are still driving additional new products and training in those markets as well too because number of the banks that we acquired in Kentucky and then the mid Atlantic market, did not offer some of the things that that we offer, swaps being one of them, but also on the trust fees and having securities reps and Series 7 as well six to eight people in branches. Things like that. So, there continues to be upside opportunity there similar to what we are seeing on the loan growth side in those markets. I think we will continue to see some better fee growth side because again these were new products and new businesses that we have introduced into those markets through the banks that we bought.
Okay, great. Thank you. I'll step back.
This concludes our question-and-answer session. I would like to turn the conference back over to Todd Clossin for any closing remarks.
Great, thank you. I appreciate everyone's time today. I know a lot of earnings meetings are taking place. Appreciate your joining ours and look forward to speaking with you in the near future in one of our upcoming events as well too. So, please stay safe. And have a good day. Bye-bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.