WesBanco, Inc. (NASDAQ:WSBC) Q2 2021 Earnings Conference Call July 28, 2021 10:00 AM ET

Company Participants

John Iannone - SVP, Investor & Public Relations
Todd Clossin - President, CEO & Director
Robert Young - Senior EVP, CFO & Group Head, Finance

Conference Call Participants

Casey Whitman - Piper Sandler & Co.
Steven Duong - RBC Capital Markets
William Wallace - Raymond James & Associates
Stephen Moss - B. Riley Securities
Stuart Lotz - KBW
Broderick Preston - Stephens Inc.
Russell Gunther - D.A. Davidson & Co.
Daniel Cardenas - Boenning and Scattergood

Operator

Good day, everyone, and welcome to the WesBanco Second Quarter 2021 Earnings Conference Call. [Operator Instructions].

At this time, I'd like to turn the conference call over to John Iannone, Senior Vice President of Investor Relations. Sir, please go ahead.

John Iannone

Thank you, Jamie. Good morning, and welcome to WesBanco, Inc.'s Second Quarter 2021 Earnings Conference Call. Leading the call today are Todd Clossin, President and Chief Executive Officer; and Bob Young, Senior Executive Vice President and Chief Financial Officer.

Today's call, an archive of which will be available on our website for 1 year, contains forward-looking information. Cautionary statements about this information and reconciliations of non-GAAP measures are included in our earnings-related materials issued yesterday afternoon as well as our other SEC filings and investor materials. These materials are available on the Investor Relations section of our website, wesbanco.com. All statements speak only as of July 28, 2021, and WesBanco undertakes no obligation to update them.

I will now turn the call over to Todd. Todd?

Todd Clossin

Thank you, John. Good morning, everyone. On today's call, we're going to review our results for the second quarter of 2021 and provide an update on our operations for the 2021 outlook. Key takeaways from today's call are: WesBanco remains a well-capitalized financial institution, solid liquidity, strong balance sheet and solid credit quality.

We continue to deliver year-over-year growth in pre-tax, pre-provision earnings, driven by our diversified growth engines and company-wide commitment to expense management, while also making appropriate investments in support of our long-term growth. And we are focused on enhancing shareholder value through both long-term sustainable earnings growth and effective capital management.

We're pleased with our performance during the second quarter as we continued to deliver pre-tax, pre-provision earnings growth. For the quarter ended June 30, 2021, we reported net income available to common shareholders of $69 million and diluted earnings per share of $1.03, when excluding merger and restructure charges.

On the same basis, pre-tax, pre-provision income of $69.4 million, grew 3.8% year-over-year, driven by strong fee income growth and disciplined cost control. And we reported strong pre-tax, pre-provision returns on average assets and average tangible equity of 1.63% and 17.5%, respectively.

Reflecting our strong legacy of credit and risk management, our key credit quality ratios remained at low levels and our regulatory capital ratios remained well above the applicable well-capitalized standards. Furthermore, as can be seen on Slides 8 and 10 of our earnings presentation, our key ratios also remained favorable to peer bank averages.

The successful execution of our growth and diversification plans during the last decade has transformed our institution in one where the majority of our organization is now in higher growth markets. Further, as a result of our company-wide focus on controlling discretionary expense, utilization of technology to gain operating efficiencies and optimization efforts, we've been able to leverage these savings to make investments in both our company and employees to support future opportunities while maintaining our efficiency ratio in the mid-50% range.

Throughout the year so far, we have made more than 20 revenue-producing hires across our organization and our markets to strengthen our teams and enhance our ability to leverage growth opportunities once they fully return. These individuals have been concentrated in our commercial and residential groups as well as wealth management. I'm especially excited about our new residential mortgage lending team in Northern Virginia. We're right now waiting on the necessary approvals to operate in the state, but we're excited about this beachhead in Virginia.

Similar to most of the banking industry, near-term loan growth continues to be difficult to predict as our local economies and commercial customers still have a significant amount of excess liquidity to work through as well as the inability of some companies to quickly meet rebounding demand due to worker and inventory supply chain constraints. This excess liquidity has continued to impact commercial line of credit utilization, which we believe is bottoming out at the lowest level, a quarterly average in 10 years at 31.5%.

Compounding this scenario has been a continuation of commercial real estate projected payoffs via a very aggressive secondary market, where we experienced a more than $100 million year-over-year increase in payoffs to approximately $190 million this quarter alone. That said, we have begun to realize a pickup in commercial loan demand as both our second quarter gross production and the June 30 pipeline are up a couple of percentage points from last year. In fact, our commercial loan pipeline is at its highest level in a year, at approximately $760 million, with nearly 45% of that from our Maryland and Kentucky markets.

Our residential mortgage loan origination team has continued to perform well and be a bright spot as production during the second quarter was roughly $330 million, down just 10% from a year ago, representing the fifth consecutive quarter production greater than $325 million.

Further, we continued our efforts to keep more residential mortgage on our balance sheet and have returned to a more historic 50% level as compared to the approximate 30% average during the prior 3 quarters. We believe that our diversified revenue engines, combined with experienced teams make us well positioned to take advantage of future growth opportunities.

Over the long term, we anticipate mid to upper single-digit loan growth driven by our expansion into Maryland and Kentucky. As I mentioned before, we remain focused on appropriate capital allocation to provide financial flexibility in support of our long-term growth opportunities while also returning capital to our shareholders.

In addition to the 3.1% increase in our dividend earlier this year, we purchased approximately 1.5 million shares or roughly 2.2% of our common stock on the open market during the second quarter. These repurchases represented about 45% of our existing authorizations.

Furthermore, we are in the final stages of converting our core operating system to FIS's IBS platform. This platform will provide additional products and services for our customers and improved operational efficiencies. I firmly believe that the last couple of years with our investments in the Mid-Atlantic region and the nearly completed core system conversion we have solidified our evolution into a strong regional financial services institution that is supported by several unique competitive advantages.

I'd now like to turn the call over to Bob Young, our CFO, for an update on the second quarter financial results and an outlook for 2021. Bob?

Robert Young

Thanks, Todd, and good morning, everyone. During the second quarter, we experienced a continuation of the low interest rate environment as well as significant amounts of excess liquidity, which were mitigated somewhat by continued strong residential mortgage origination volumes, a robust stock market, strong discretionary expense controls while making important growth-oriented investments and an improvement in the macroeconomic forecast and qualitative adjustments utilized under the current expected credit losses accounting standard.

As a result of higher noninterest income, lower operating expenses and a negative provision for credit losses more than offsetting lower net interest income as compared to both prior year and prior quarter, we reported improved GAAP net income available to common shareholders of $68.1 million and earnings per diluted share of $1.01 for the 3 months ended June 30, 2021.

Excluding restructuring and merger-related charges, results were $1.03 per share for the quarter as compared to just $0.07 last year. As a result, second quarter returns on average assets and average tangible equity on a similar basis, improved to 1.62% and 17.27%, respectively. For the 6 months ended June 30, 2021, we reported GAAP net income available to common shareholders of $138.6 million and earnings per share -- earnings per diluted share of $2.06.

Excluding restructuring and merger-related charges, results were $2.09 per share for the current year-to-date period as compared to $0.48 last year. And as Todd mentioned, PTPP income and returns were strong for both the 3- and 6-month periods.

Total assets of $17 billion as of June 30 increased 1.3% year-over-year due mainly to growth in the securities portfolio from excess liquidity related to additional stimulus funds received by our customers and their higher personal savings, which more than offset lower portfolio loans.

Total portfolio loans decreased 6.5% year-over-year to $10.4 billion, due primarily to forgiveness of $662 million of SBA Payroll Protection Program loans and lower residential real estate and consumer loans. Excluding PPP loans, total loans decreased 4.1% year-over-year and 0.7% sequentially, reflecting higher-than-anticipated commercial real estate payoffs, continued lower commercial line of credit utilization and the impact of selling a higher percentage of 1- to 4-family residential mortgage originations in the secondary market during the last 12 months as compared to our historical average of around 50%, and that is our near-term target here for the second half of 2021.

Strong deposit growth continues to be a key story for WesBanco as total deposits increased 9.3% year-over-year to $13.3 billion, due primarily to the aforementioned stimulus and increased personal savings. Total demand deposits were up 14% year-over-year. Furthermore, reflecting this strong growth and resulting available excess liquidity, we continued to strengthen our balance sheet by reducing high-cost CDs, Federal Home Loan Bank borrowings and short-term borrowings, which declined 17.9%, 72.2% and 65.4% year-over-year, respectively, for a total higher cost funding reduction of some $1.4 billion.

Key credit quality metrics such as nonperforming assets, past due loans and net loan charge-offs as percentages of total portfolio loans have remained at relatively low levels and very favorable to peer bank averages, those between -- with assets between $10 billion and $25 billion for the prior 4 quarters.

Reflecting improved macroeconomic factors in our CECL calculation, the allowance for credit losses specific to total portfolio loans at June 30, 2021, was $140.7 million or 1.36% of total loans or when excluding SBA PPP loans, 1.43% of total portfolio loans. These improvements also resulted in a negative provision for credit losses of $21 million for the second quarter.

Excluded from the allowance for credit losses and related coverage ratio, our additional fair market value adjustments on previously acquired loans, representing 31 basis points of total loans.

The net interest margin of 3.12% for the second quarter of 2021 decreased 15 and 20 basis points respectively from the first quarter of 2021 and the second quarter of 2020, primarily due to the lower interest rate environment as well as a mix shift of higher securities to approximately 23% of total assets.

The investment securities portfolio increased $1 billion year-over-year as a result of higher cash balances from additional stimulus funds received by our customers and their higher personal savings that increased total deposits and overall balance sheet liquidity.

Reflecting the significantly lower rate environment, we aggressively reduced our deposit rates and borrowings throughout the past year, which have helped to lower the cost of our total interest-bearing liabilities by 50% to 31 basis points for the second quarter. Included in this figure are deposit funding costs of just 17 basis points or 12 basis points, if you include noninterest-bearing deposits.

Noninterest income for the quarter ended June 30, 2021, was $36.1 million, an increase of 9.9% year-over-year, primarily due to a net gain in other real estate owned and other assets and higher electronic banking and trust fees, which were partially offset by lower other income and net securities gains. Details on these items are included in last night's earnings release.

Across a number of fee income categories, we are seeing the benefit of organic growth and a return to a more normal operating environment. We are seeing nice organic growth in our trust business, which realized record AUM levels of $5.5 billion and our other wealth management businesses, in particular, securities brokerage and private banking, which are benefiting from unrestricted access to our financial centers.

Lastly, residential mortgages continued to be a great story for us as our teams continue to take advantage of their opportunities to gain share across all of our markets. Origination dollar volume for the second quarter of 2021 was $330 million, 2/3 of which was purchase or construction money. And as Todd indicated, that now represents the fifth consecutive quarter with total originations above $325 million.

Total operating expenses remain well controlled and as demonstrated by a year-to-date efficiency ratio of 55.33%, which represents a year-over-year improvement of 129 basis points. Again, as Todd mentioned, we are committed to positioning our company for long-term sustainable growth. While we continue to focus appropriately on expenses, we have been able to redeploy some of these savings from our various efficiency and optimization efforts to make the necessary investments in both our company and employees to support future growth opportunities.

Excluding restructuring and merger-related expenses, noninterest expense for the 3 months ended June 30, 2021, decreased $2.4 million or 2.9% to $82.6 million compared to the prior year period, primarily due to lower FDIC insurance expense as well as continuing cost control measures over certain discretionary expenses.

Briefly, I just want to touch on a couple of unique expense credits we recorded this quarter that we do not anticipate occurring again. These are FDIC insurance expense, which included a $1 million refund for certain prior period reporting adjustments as well as other operating expenses, which included an $800,000 state franchise tax reduction due to filed return adjustments. However, even when adding back these adjustments, we still experienced the lowest quarter of operating expenses since the Old Line Bank acquisition.

As of June 30, 2021, we reported very strong capital ratios with Tier 1 risk-based at 15.15%, Tier 1 leverage 10.42% and a total tangible equity to tangible asset ratio of 10.34%.

As Todd mentioned, we are focused on appropriately returning capital to our shareholders. And during the second quarter, we repurchased approximately 1.5 million shares of our common stock in the open market for a total cost of $55.6 million.

At the end of the quarter, we have approximately 1.9 million shares remaining for repurchase under our existing share repurchase authorizations and any potential future share repurchases will be at WesBanco's discretion and in accordance with securities laws also subject to market conditions and other factors.

Let me wrap up with some limited thoughts on our outlook for the rest of the year. As an asset-sensitive bank, we remain subject to factors expected to affect industry-wide net interest margins in the near term.

With market rates recently decreasing for both intermediate and longer-term rates and short-term rates expected to remain at low levels for the next couple of years, we believe our GAAP net interest margin will continue to decrease a few basis points throughout the remainder of the year, due to lower purchase accounting accretion, which should decrease 1 to 2 basis points each quarter. And lower earning asset yields from lower yields on new loans and securities now being a higher percentage of total assets.

However, we will continue to take the opportunity to lower our cost of funds, primarily from maturing CDs and borrowings, but I would comment that our overall transaction deposit costs are at relative floor rates at this point.

PPP loan fee accretion should have a positive impact on the margin and net interest income, particularly over the next 2 quarters. In general, we continue to anticipate similar trends in noninterest revenue as we experienced during the first half of the year. Residential mortgage generation and associated gains on sale should remain strong, but origination volumes should begin to come down from the record volumes realized the last several quarters, while a greater percentage of these will also be placed in the loan portfolio.

Service charges on deposits and electronic banking fees should continue their improvement over the last half of the year as the economy continues to reopen. We will maintain our diligent focus on discretionary expenses while continuing to make the appropriate investments for organic growth.

Our annual midyear merit increases occurred during the third quarter as well as targeted increases to certain retail employees starting hourly wages due to the competitive hiring environment as we hire additional staff for reengaging our financial centers post pandemic. anticipated gross cost savings from last August's financial center optimization plan and most of those branches were closed this past January, have now been fully realized, while roughly half of those savings were utilized for employees filling open positions in other locations and expected digital and technology spending.

The closure of 6 additional branch locations late last week should have a minimal impact on overall costs, but benefit the continued improvement in retail efficiencies over time. The provision for credit losses under the CECL calculation will depend upon changes to the macroeconomic forecast as well as various credit quality metrics.

In general, continued improvements in macroeconomic factors as well as improvements in qualitative COVID-19 and hospitality portfolio factors that we utilize should result in continued reductions in the allowance for credit losses as a percentage of total loans but at a slower pace of reduction as compared to the first half of the year.

Lastly, we currently anticipate our effective full year tax rate to be between 20% and 21%, subject to changes in tax policy as well as our own taxable income.

We are now ready to take your questions. Operator, would you please review the instructions?

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question today comes from Casey Whitman from Piper Sandler.

Casey Whitman

First, Bob, just wanted to make sure we're on the same page with respect to PPP this quarter. So what were the fees you reported this quarter? And then what is the remaining deferred origination fees that you have from the rounds?

Robert Young

So we have $17.5 million remaining, Casey, of PPP income. And we anticipate that about $10 million of that should be taken through the last half of the year, but it really depends upon the pace of forgiveness. The PPP benefit in the second quarter was 5 basis points. That's about half of what it was in the first quarter. Some of the loans forgiven during this quarter were the $2 million-plus loans, which have the smallest fee rate. And that was about, as I said, $115 million.

We have remaining as of the end of the quarter, some $544 million in loans and the average balance for this quarter was some $754 million, and the average for the first quarter was $775 million. The amount of fees taken during the second quarter were just under $6 million, Casey. And the bulk of that -- about 3/4 of that would have been Round 1 related PPP fees, the rest of Round 2. Is that good?

Casey Whitman

Yes, helpful. Just turning to the mortgage. I appreciate the comments on the originations this quarter. Just wondering, do you have the percentage that you were selling to the secondary market? And then also maybe just some comments around how the gain on sale margin fared and whether there are any hedging gains that might have helped to boost the number this quarter?

Robert Young

In terms of hedging gains, the bulk of the hedging gains were recorded in March just due to the change in interest rates at that point in time. And hedging gains were offset at that point in time by a larger amount of loans in the held-for-sale category. We worked hard to clean that out in the second quarter and reduced the risk going forward of interest rate volatility on our loans held for sale portfolio, and you see that, that came down here at the end of the quarter from, I don't know, some $150 million in the first quarter to down to less than $50 million here at the end of the second quarter.

We did sell in the second quarter, particularly the first couple of months of the second quarter, above 60% in the secondary market in the month of June. And as I said in my notes, we sold just over 50% in the month of June, and we're currently targeting about a 50-50 split going forward between loans to be held in the portfolio, primarily 15 years. We don't put 30-year mortgages in the portfolio, and then those sold in the secondary market.

We still did experience some good mortgage banking income per loan sold. So our margin was over 3%. But in the first quarter, it was higher because of the hedging gains at the end of the -- particularly at the end of the first quarter. Is that responsive?

Casey Whitman

Okay, it is.

Operator

Our next question comes from Steven Duong from RBC Capital Markets.

Steven Duong

Just on the PPP again, I know it's a bit hard to predict. But I guess what's your sense, given the activity that you're seeing so far on the cadence of the forgiveness for the next few quarters? Do you expect the majority to be forgiven by the end of the year or are we looking at this kind of going into the first or second quarter next year?

Robert Young

No, I actually anticipate we're going to see a fair amount of forgiveness in the last half of the year. In the second quarter, we saw about $327 million forgiven. And as I said, we have, at the end of the quarter, some $560 million, which includes deferred fees, $544 million is the net PPP balance. So we have about 6,200 loans yet to go. The bulk of those are indeed less than $150,000.

You might have seen this morning, the SBA came out with some additional language around how to engage directly through the SBA for individuals and companies that want to get their PPP forgiveness sooner rather than later. I think that might be an advantage going forward, probably not in anybody's forecast, since it just came out.

But it's still a very simple application, whether it goes through the bank or filed directly with SBA. And so we are pushing hard with our lenders calling individuals and small businesses to get them to apply for forgiveness because in some cases, the first round individuals would be subject to repayment beginning in September of this year. So we really expect the bulk of the first round PPP customers to be gone by the end of the year.

And then remember that, Steven, the second round has a 5-year life to it. And while those will also restart or start up amortization later this year, the amortization on a monthly basis is lower for the customer just because it's a 5-year maturity. Nonetheless, we do expect the bulk of those to go by the end of the year. We are currently expecting of that $17.5 million that's left in PPP deferred fees that we'll work our way about 2/3 of that by the end of the year.

Steven Duong

Great. Really appreciate the color on that, Bob. And then maybe just on the margin, if we were to strip out the PPP in the quarter, in liquidity and everything, is the 3.05% margin where you guys are at when you take everything out?

Robert Young

Well, on a core basis, purchase accounting would take it down to 3. PPP this quarter was 5 basis points. I've provided the average balance if you need that in your model. And so that takes it to -- I believe, our disclosure was 2.95%. And so in the first quarter, we had a 3.04% net of those 2 factors. I think it will go down a couple of bps here in the third quarter, but still remain above 2.90%. And I think it will be in that general ballpark over the next few quarters. Recall, we do have loans that do reprice. We had -- as we said last year, we had 3 consecutive quarters of really the same margin.

And so we continue to have 5-year maturing or repricing loans, particularly those from Old Line that will reprice at lower yields going forward. But nonetheless, our guidance is in that or our thoughts are in that low to mid 2.90s stripped of PPP and purchase accounting.

Steven Duong

Okay. And the liquidity this quarter was -- that was 10 basis points, is that correct?

Robert Young

Yes. About 7 basis points of that would be the mix shift towards investments and then 3 basis points additional liquidity for the quarter. The total impact of the excess liquidity for both quarters, really, the first 2 quarters of the year is 10 to 12 basis points. So it's basically 2 basis points for an additional $100 million of cash on that line item. So I just wanted to break that out between the mix shift on investments and then additional liquidity over the first quarter from the March stimulus as well as just continued growth in deposits.

Steven Duong

Got it, Bob. And I was just looking at your -- the commercial payoffs that are coming off. So I think you've been in the range of around the 3.23, 3.25 mark for new yields coming on, is that fair to kind of see that kind of like the run rate for now in the next few quarters if the rate environment doesn't change?

Robert Young

It is. I'm actually going to that page. So I apologize if you hear a couple of pages shuffling here. And, of course, when you're looking for it, you can't find it. It's -- we're about 75 basis points down on roll off versus what's going on, but 3.25 is a good marker for new loans going on.

Steven Duong

Got it. All right. And then you had mentioned about $800,000 transfer tax reduction, where does that occur on the P&L?

Robert Young

Where does that occur? So it's franchise taxes, not transfer. So where does that occur? It occurs in other operating expenses. You'll see in the 10-Q that actually, we break out the miscellaneous tax expense line out from other operating expenses, but that's where it is today when you're looking at the earnings release.

Steven Duong

Got it. And then I guess just from an overall perspective, you guys kept -- did a good job, I thought, on the expense side, given the rate environment, how difficult it is right now. I know you have the merit increase coming in the third quarter, but do you think you can keep -- I know you're targeting at the mid-50s, do you think you can keep it maybe below the mid-50s as we go through next year from an efficiency ratio?

Todd Clossin

Yes, I think that will depend a lot on what happens with the yield curve, and I feel pretty comfortable with the expense levels in the next few quarters in the mid-80s range, the 82 number and change that we posted, I think, we indicated there's about $1.8 million or so in kind of onetime benefits there that won't be there in future quarters. So that mid-80s range is something that we're working hard on.

We're going to get some additional efficiencies with our core conversion, but we're also redeploying that into hiring commercial lenders and wealth managers and people like that to get the growth that we want. But that I feel much more comfortable with the expense number. The efficiency ratio, again, it's going to depend upon the yield curve cooperating for us because we faced the same trends as everybody else does.

Operator

And our next question comes from William Wallace from Raymond James.

William Wallace

Todd, in your prepared remarks, you talked about -- I think, I wrote down 31.5% credit line utilization and that being at historic lows. Are you seeing any change yet in your commercial customer behavior around their deposit accounts? Are you seeing spend start to increase? Is there any indication that, that would give you confidence that those utilizations could bounce back up in the second half of the year?

Todd Clossin

I would say I'm seeing that things have bottomed. I'd say with regard to the usage as well as probably the cash take up utilization and things like that out there talking to our commercial customers. I spent a fair amount of time doing that. They're pretty confident of things, but not to the point where they're making big investments.

Real estate side is a little different. Like real estate market seems to have bounced back. But on the C&I side, it's just still a little bit more conservative. So we haven't seen the take up yet in the line or any significant take up in deposits. But I would expect you're going to see the deposits come down before you start to see the line usage go up. And hopefully, that happens in the next quarter or so.

William Wallace

Okay. Agree. And maybe just kind of following on this kind of concept of excess liquidity. In your modeling, do you think that this liquidity stays on balance sheet and you deploy it in some manner, whether that is the loan portfolio or continued bond purchases? Or do you think it's more likely that we start to see liquidity leave the system?

Todd Clossin

I think both. It's quite frankly, because there's so much liquidity out there. We've actually started to make sure we're focusing on net new account growth because I think you can kind of get misled by big deposit growth with everybody. But at the same time, you've got to make sure you're growing market share as well, too. So and part of the reason I'm doing that is because you would expect some of that liquidity to leave over time. I mean it should be spent, right? It's been used for stimulus and PPP and everything else. So it should be being spent, and I expect that it will be spent over time.

We really are focused on growth -- loan growth and have a lot of meetings on that, putting a lot of efforts into that. At the same time, really working hard to maintain the credit quality and the credit standards that we have. We see opportunities out there. We see growth opportunities out there. But in a lot of cases, particularly on the real estate side, these are coming with terms that are much more aggressive than pre-pandemic.

So we're sticking with relationship deals, and we're working hard with those customers that are doing the right things, but we see opportunities out there. We're just not capitalizing on all of them at this point because of the structure of some of those deals that we're seeing out there.

We don't want to put a significant amount of money into securities because those aren't the greatest yielding things, and there are some banks that are going strong into that. There are other banks, some big banks that are just sitting back and kind of waiting for rates to rise.

I would say we're a little more in between on that where we see opportunity where rates rise 10-year rose a month or two ago, and it's come back down now. But where we see opportunities to be able to put some money to work at a decent return, we'll do that, but no big wholesale strategy changes. To me, it's going to be loan growth first, second, third and then we've got some other uses for some of the liquidity, too, in terms of things we can still prepay -- not prepay, but when some of these Federal Home Loan Bank borrowings come up, use them for that as well, too. So we're -- we've got a fair amount of that coming up over the next year.

William Wallace

Okay. That's helpful. And there's been a lot of kind of, I would say, it seems like maybe guarded optimism about loan growth in the second half of the year. On a core basis, excluding noise from PPP and when you talk about the sort of core net interest margin expectations, what kind of loan growth does that assume in the back half of the year? Are we talking low single digits, flat? And can you just kind of help us think about the moving parts?

Todd Clossin

Yes. I think with the production -- again, production is up highest point in the last year. Our pipeline is the highest point in the last year, and pipeline is up 18% over the end of the first quarter. So I feel good, I feel good on that. I think we're hitting on the cylinders we need to hit on -- the big unknown, Wally, is this, the commercial real estate payoffs because the liquidity we talked about earlier is sitting out in the secondary market, too. So those guys are coming in really aggressively and taking properties, sometimes even before they're stabilized.

And I don't know what that number is going to be in the third and fourth quarters. If you just normalize real estate payoffs last quarter and assume we had a similar quarter than we had in the past, that's a $102 million delta difference. And that would have taken us from a -- I think, it was a negative 0.7% loan growth ex-PPP for the quarter. That would have taken us up to, I don't know what a positive 0.3%, still nothing to jump up and down about but it would have been positive.

So I just don't know what's going to happen with that. If you don't -- if I think if you get commercial real estate payoffs going to more normalized levels, and these are, again, our secondary market payoffs for the most part then we could see a flat to up loan growth number, but if we get another really heavy month in commercial real estate payoffs that could impact that.

William Wallace

Okay. Thank you for that Todd, and then just one last question on buybacks, you bought back a nice chunk in the second quarter. How aggressive might you continue to be with the stock trading where it currently is? I mean, is it -- is there any reason to anticipate that you wouldn't be just as aggressive in the third quarter and have there been any purchases quarter-to-date?

Todd Clossin

Yes. I'll let Bob talk about the purchases quarter-to-date because he and his group are managing that and watching that. We did have the 10b5-1 [indiscernible] to allow us to continue to purchase during blackout. So I know that was occurring.

We still have -- even I think when we ran through this authorization, we've -- even with the buybacks, with the earnings that we've had, we will continue to build capital even with the buyback activities. So we're already one of the top couple in our peer group on capital levels, and we run a lower risk-weighted asset level than our peers.

So having a lower risk profile, but more capital, we know we've got the opportunity to return capital to our shareholders through a variety of means over the next couple of years. So we'll run through this authorization, and we'll obviously be having capital discussions with the Board later this year. But we recognize the fact that we're in a very robust capital position, and that's something that we've got to work on.

Robert Young

Yes. So that -- we did buy back basically the same pace in the month of July under -- Todd mentioned the 10b5, we haven't done that in the past, buy through blackout. And so we did engage that for the first time. And that did allow us to continue to move towards the remaining amount that's outstanding. So at the end of the quarter, it was 1.9 million, Wally, shares remaining. And at the end of July, it will be somewhere 0.5 million shares less than that. And so we'll continue the pace going forward, as I mentioned in my prepared remarks. It's a great opportunity to dollar cost average in terms of the price at aggregate.

Operator

Our next question comes from Steve Moss from B. Riley Securities.

Stephen Moss

Todd, maybe stepping back from all the numbers a little bit, you talked about a very competitive environment out there. Just kind of curious, is it primarily a rate or are you seeing more competition on structure these days? And kind of wondering how that's affecting your thinking here?

Todd Clossin

Yes. The thing that's a little concerning is we're starting to see it on structure. Rates are -- they've been competitive for a while. That's a pretty good size deal done for -- we didn't do it, but it was 2% fixed for 25 years or real estate projects with no guarantees, no equity, those kind of things. And apparently, they're getting done. So that's concerning me a little bit. I think we're still seeing our opportunities, and we're very much a relationship bank.

So I think where we've got those relationships, we'll continue to build on them. But one of the things I like is that we keep our credit standards pretty consistent throughout regardless of what's going on with the ups and the downs. And I think the customers appreciate that. So we're not going to not going to change our risk profile to get some growth. We think we can get the growth, and we think we're well positioned in the right markets. But it's a little frothy right now in terms of what I'm seeing out there. And just what -- you get those transactional borrowers and just kind of go to 5 banks, and that's just not really our cup of tea.

Stephen Moss

Right. Okay. And then in terms of just thinking about the overall balances in that environment, could you get to stabilization in terms of loan balances later this year? And I realize pipeline is up, and that's obviously a positive, but just kind of [indiscernible] is pretty significant to pay down.

Todd Clossin

Yes, I think you could. Again, it's -- the answer I gave to Wally was it depend a lot on the payoffs in the secondary market and the impact that it's having, if it's having there, if you kind of remove that headwind then I think you can see some really nice growth. Because I think there is a strong economy and things are definitely moving forward coming out of the pandemic.

We had acquired into Kentucky markets, primarily Louisville, Lexington, Northern Kentucky in the high-growth markets of Kentucky and then the Maryland markets with the Old Line Bank acquisition 1.5 years ago, and part of that was to get us -- to have a bigger part of our bank in higher growth markets.

And that's -- we're seeing pipeline increases across the board, but it's more accentuated in Maryland and Kentucky. And we're seeing more loan bookings in those markets as well, too. So to me, that starts to kind of validate why we went to those markets.

But prior to the pandemic, we were kind of a low single-digit to mid-single-digit grower and having acquired into those markets coming out of the pandemic into a more normalized environment, I would expect and would like to see us at the mid- to upper single-digit growth numbers. So that we would have changed the growth profile of the company through the acquisitions while still keeping the strong core legacy deposit base that we have. I mean, to me, that's the real value proposition that we have and the value proposition of going into those other markets as well, too.

So I think that thesis will play out. I'm pretty confident of that. But we are going to be limited somewhat by what's going on with the secondary market and the amount of liquidity that's out there. So I think we'll get our share of the growth when it comes. I just don't know exactly when that's going to be.

Stephen Moss

Great. Okay. And then in terms of a question for Bob here, and I apologize if I missed it. What was the rate on the securities purchased this quarter?

Robert Young

The book yield was 130 and plus cash flowing through prepayments or maturities is about 90 basis points higher than that around 220 or so.

Stephen Moss

Okay. That's helpful. And then in terms of just the -- looking at the reserve ratio here, good reserve release here again this quarter, I'm just wondering what's the potential for getting back towards that Day 1, 2020, CECL reserve, call it, 90, 88 bps over time here?

Todd Clossin

Yes, I'll jump in there. Bob may want to make some additional comments on it as well, too. He mentioned in his comments that we'd expect the reserve to continue to come down but at a lower pace. So we had a pretty big reductions in the first and second quarter, but we think we feel very appropriate. And we're still right at peer levels, maybe a little bit above peer levels on the reserve that we've got right now today.

We would expect that to continue to come down over the next few quarters, unless something significant happens with a variant or something like that, which we're not, it's out there, but we're not seeing it impact business at this point. But we would expect it to continue to come down.

I think what will end up happening, though too, how long it takes to get back to where it would have been on Day 1 CECL, I think, is a very interesting question. I think there's a lot of room for it to continue to reduce. But I think you've also got to look at how does the pandemic change things like office portfolio and stuff like that.

We don't have any issues there to speak of, but we're a conservative bank. You guys know that you follow us. So we'll be one of the last to get rid of the final piece of the reserve just because we don't want to hold it to make sure that there isn't any issues anywhere else that pop up. But I think the contour of it's going to continue to be down, but it may take us 1 year or 2 to get back to the pre-pandemic Day 1 levels, but that could happen quicker than that, too.

Robert Young

Yes. That's absolutely right, Todd. And we were, I think, at 88 basis points on Day 1. 12/31 of '19, we were, I want to say, in the mid-50s just because of all the acquisitions we have done over the years. So I think, Steve, that I don't think we're going to get down into the mid- to high-80s anytime soon, but I do think we're going to get closer to one sooner than we would have projected just 3 months ago.

And our guidance in the prepared remarks was that we might still see some negative provisions but of lesser amount than the first 2 quarters, it kind of makes mathematical sense. And then just to plug in the model, I don't have a good sense for how much above 0, if any, we would experience next year but, I just think on a $17 billion balance sheet with $10 billion in loans, it's reasonable to assume some provision going forward and some minor level of charge-offs.

But still, I think getting down closer to that 1% or 1.10% kind of mark is something that we could begin to see in our forecast as we move into late 2022 and early 2023.

Stephen Moss

Okay. Great. And then last one for me. Just on M&A, been a number of transactions in various markets of yours, just kind of curious, updated thoughts there and what's the level of discussions for you guys?

Todd Clossin

Yes. No, it's a good question. We've been saying pretty consistently in the last couple of years, 2020 was all about the Old Line and Old Line Bank. Get the conversion done and get things assimilated, which we did, and that's gone really well. 2021, this year was going to be about our own core conversion. We're right on top of that here in the third quarter and a lot of effort and a lot of work has gone into that very, very significant amount of work.

So we're getting ready to be past that here in the fairly near future and with the capital levels that we have and the 1.5 years to 2 years since Old Line Bank acquisition, we could start looking around or entertaining opportunities. I haven't yet. We don't have anything near term, but kind of really wanted to stay focused on the core conversion and coming to the pandemic okay. But that seems like both of those are either done or about to be done and start to make some marketing trips.

We don't think we need to do anything because as I mentioned earlier about the acquisitions we made in the past to get into some of those higher growth markets and we want to continue to execute upon that, higher trust, wealth management, securities people, things like that in some of the Kentucky and Maryland markets. So we think we've got some good organic growth opportunities without doing any M&A.

But if we found the right opportunity that would be similar to what you've seen us do in the past then we would, I think, be in a position to entertain something like that later this year or into 2022 or 2023. But currently not looking at anything.

Operator

Our next question comes from Stuart Lotz from KBW.

Stuart Lotz

Most of my questions have been answered at this point. Maybe just one more on credit. It looks like your criticized and classifieds held pretty steady this quarter, but overall NPAs were lower and net charge-offs, I guess, you had net recoveries this quarter. How quickly do you think you'll be able to work down those balances and how does that kind of play into future reserving levels?

Todd Clossin

Yes. Sure. Good question. Yes, the C&C was -- has been pretty flat the last quarter or 2. Again, we're being really conservative here in terms of how we're looking at this. We're looking at the portfolios. I'll take hospitality as one. And our mix of what we look for in terms of debt service coverage and liquidity. As you come out of the pandemic, that portfolio was all liquidity a year ago, 9 months ago, and now you're down in much more of weighting towards debt service, eventually get it back to a traditional risk grading process associated with that.

So we continue to walk through that, but the anticipation would be is that we would see improvement over the next couple of quarters, a fairly meaningful improvement over the next couple of quarters on the C&C side of it. And it does have an impact, obviously, on the reserve to some degree. So I think it will be a benefit, a little bit of a tailwind on reserve releases because of what's in the C&C bucket.

We didn't have any charge-offs, we did net recoveries actually this quarter. And I know a number of banks have posted the same. And I look at our NPAs and being at 25 basis points and delinquency where it's at, it's hard to see any kind of losses in the portfolio, quite frankly. But we still got to get through the other side of this pandemic and the lasting impact of it on hospitality.

It looks good. That really does look good. And I would expect a lot of those be moving -- a lot of them have already quite frankly, started to move. But we're just being careful on it and grading what we think is appropriate.

Stuart Lotz

And Bob, I guess, I mean do you have the percentage that is related to hospitality that of the $456 million?

Todd Clossin

I believe it's around $120 million. I'd have to double check that. I don't know, John, if you've got that or not. It's 20, 25 or so loans. No, I'm sorry, that's not right. We'd love to get back to you on that, but it's the majority. I would tell you, 2/3 or a little bit more of the C&C would be hospitality related.

Stuart Lotz

Okay. Great. And maybe just one more for me. Obviously, I appreciate all the color on growth expectations this year as well as some of the PPP numbers. We've seen a number of your peers elect to sell their remaining PPP balances, just to focus on organic growth opportunities outside of that. Is that something you would entertain or something that you've looked at doing and just elected against doing that so far? Would just love any thoughts there.

Todd Clossin

Yes. We would like it against doing it, obviously, at this point. I mean we've got to -- it's one of the nice things about being, I guess, I'd say a community or emerging regional bank was. We picked up a number of prospects through PPP process too and want to continue to try to leverage those into full relationships and not sell them off to somebody else. So that would be our thought is to continue to mine that and try to turn them into long-term customers.

Operator

Our next question comes from Brody Preston from Stephens Inc.

Broderick Preston

Most of my questions have been asked by now, but I just have a couple of lingering ones. Maybe just on the expenses, Bob, just a couple of points of clarification. So once the forgiveness of SBA is completed, I guess, I'm trying to gauge what the potential expense benefits might be? So do you have a sense for what the ongoing PPP-related costs in NIA are currently?

Robert Young

My recollection is that we're paying about $110 per loan forgiven through the automated portal that goes from a third-party technology provider direct to the SBA. So it kind of depends upon how many hundreds of loans are forgiven in any 1 month. We've had months with a couple of $200,000 bill from FIS and other months where it's been $100,000.

So in that ballpark, obviously, with the core conversion, I think Todd has mentioned this, but we're going to an account-based charge as opposed to an asset-based charge. There will be a little bit of an overlap that we're trying to estimate here in the third quarter from the prior methodology. But I actually think that, that difference might be enough to offset what remains on PPP in terms of costs.

Now the PPP costs also included a $250 origination fee and then a portion of our lenders time, but those costs upfront were deferred at both Round 1 and Round 2. And they net against the deferred fees as they come back through net interest income.

So some on substance. Not a big impact from that. Really, I think the larger impact will come from the conversion over to the new FIS core platform, IBS. And we're also in the process of converting our mobile and Internet and digital platforms at the same time.

So looking forward to having that behind us. $1.8 million is what we said were the onetime items this quarter from those 2 franchise tax and FDIC refund amount. So that kind of puts you in the $84 million range. And so with increases to our employees, this summer that kind of puts us in a little bit above that level that we experienced as adjusted for the second quarter.

Broderick Preston

Got it. And I know you said they are minimal, but do you happen to know what the cost savings on the 6 branch closures are?

Robert Young

Well, we assume that most of that would get reinvested back into the franchise unlike the '21 or '22 from last year where we assumed about half of that. We've already experienced in the restructuring charge about $700,000 or $800,000 of lease termination fees. We think there'll be another couple, $3 million, $4 million worth of onetime expenses over the next couple of quarters between the core and the branch closures. But in terms of savings, I just don't anticipate that you should put any of that due to the immateriality of the 6 branch closures and wanting to reinvest those back into both digital banking as well as our employees themselves. And most of those folks are going to go to other branches anyhow.

Todd Clossin

Yes, that's the point I was going to make because we're fighting the same struggles everybody is. Getting employees, things like that, so those employees from those branches to be consolidated or absorbing into other areas.

Broderick Preston

Got it. Okay. And then last one for me. Bob, I thought I caught something in the prepared remarks, but I might have missed it regarding this. But on Slide 5, I appreciate the disclosures you gave around the fixed versus variable part of the commercial loan portfolio. So I guess thank you to John for that. But I wanted to ask, of the $2.5 billion that you call out that has floors, you mentioned 65% of those are currently at their floor levels, do you happen to know the number of hikes that would be needed to get them off their floors?

Robert Young

As a matter of fact, the bulk of that -- so that's $1.6 billion and the rated floor is around 4%, similar to last quarter. And about 2/3 of that would be 75 basis points or less and the remainder at more than 75 basis points. There's also some that are not related to rate but related to time to repricing, Brody. And that's give or take, a little bit -- it's about 25% of that total.

Operator

Our next question comes from Russell Gunther from D.A. Davidson.

Russell Gunther

Just a couple of follow-ups, please. On the loan growth side of things, Todd, you mentioned a number of revenue hires more recently. For those from the commercial lending side, are they fully ramped up on-boarded and reflected in the pipeline you've mentioned or based on timing and getting fully up to speed and bringing over books? Is there some upside as they get on-boarded?

Todd Clossin

Yes, there's some ramp-up there in those that we hired this year on the commercial side and also the -- some of the securities people. It's part of wealth management, but we put securities people, Series 7 brokered people in the markets as well, too. And we've got a couple of hires in our newer growth markets there. That's kind of really tied to the unrestricting lobby access, which we did about 1.5 months ago. So their numbers have really jumped. Actually, we had some of the strongest numbers we've had in a couple of years in that area since the lobbies have been unrestricted. So that's in the process of ramping up as well, too.

On the mortgage loan originator, same thing. I mentioned the Northern Virginia opportunities with a couple of people we've hired there and they're just -- we're still going through the approvals for LPOs and things like that, but they're just -- just in the process of coming on board. So I haven't even seen any kind of growth or production from them. So I would expect to see some lift.

Russell Gunther

Okay. Great. That's very helpful. And then just a follow-up on the expense side of things. You mentioned the core conversion bringing efficiencies and that's currently ongoing or a third quarter event. Are those efficiencies that you expect to drop to the bottom line? Are they reflected in the mid-80s range for the next couple of quarters that you talked about or based on timing, does any of that spill into 2022?

Todd Clossin

Yes, it does. It's included in kind of the mid-80s number. We've been realizing some of those really over the last year as we've started to automate a number of things. We had a number of, let's say, people in the items processing area. I think we have a dozen people in there at one point. We're down to 1 or 2 because it's been automated. So we've been able to reduce staff, some through retirements, things like that ahead of the core conversion. So some of those expenses are already built in.

I think longer term, where the real benefit will come in is, as Bob mentioned, we're kind of charged to processing fee in the future on a per customer basis. So I think that will really zeroes in on getting very strongly focused on the profitability of each customer versus in the past just being charged off of the asset size. There's a number of things, along with the core conversion comes -- stepped up imaging capabilities. So we're not transporting paper all over the organization. That's going to drop down really significantly in the organization.

We're adopting Zelle as a payment source versus our own payment homegrown thing that we had put in place. So there's a number of efficiencies that are operating in there, too. And I also think longer term, where there's going to be a benefit on the revenue side is now you've got all these systems that are all talking to each other, where in the past, these systems didn't talk to each other.

So from -- I hate to use the term artificial intelligence because it's kind of a catch all. But in terms of being able to target what's the next best product for a customer based upon your knowledge of their transaction data and what are their needs going to be and making sure you operationalize that information and put it in the hands of the people meeting with the customers, we've greatly enhanced our ability to do that with this core conversion.

One of the most obvious things that it's done is we go to real-time activity and we don't have that today. So if you want to go ahead and take a picture of your deposit, put it in your accounts through your phone and then go to your ATM, it doesn't show up until the next day. Well, once you do this core conversion, it's all going to be real time.

And that's table stakes nowadays. So some of these things are things that I think are going to really improve the customer experience. They're going to improve efficiencies on the cost side and improve revenue, but I don't see any huge costs coming out because of it. I just think it's going to allow us to be more efficient over time.

I did have a follow-up question asked earlier about the percentage of hotel loans that were in the C&C bucket and hotels are about 40%. 40% Of C&C loans. I think I mentioned 2/3, and that's not accurate. It's 40%.

Operator

And our next question comes from Daniel Cardenas from Boenning and Scattergood.

Daniel Cardenas

I appreciate all the good information as I get reengaged on the story here. So just a couple of quick follow-up questions. I think, Todd, you had mentioned that you were beginning to see perhaps some weakness in the structural components of the loan portfolios. Just wondering if that's kind of coming more from the smaller companies that you compete against or is it the bigger companies? Or is it a combination of the two?

Todd Clossin

Yes. It's more of what I've seen is more on the larger side. And I think a part of it is some of the smaller deals, they're much more relationship oriented, right? So you get a couple of million dollar loan. You tend to be the bank, the only bank involved in that. But you get up to the larger $10 million, $15 million, $20 million, $25 million type of loans. You've got a little more competition there.

And I think some of the things that we're seeing in there are just a little surprising, but it's mostly on the larger transactions. And we're fighting our way through it. And I think we'll do what we've done in the past on that and win over those relationships that want to be relationships and those that don't, we won't. But I think that also allows us to hang on to our customers that we've got because we're a relationship bank.

When our customers want to do something, we tend to do it with them versus them talking to 5 banks and see who's got the best price or the best structure or the at least risky structure, I guess, I should say. We tend to stick to our knitting over the long haul.

Daniel Cardenas

Got it. And then just on the M&A side, and I understand it could be a year or more off before you actually do another transaction. But given your current size, I mean, what's the size parameter or institution that you would be looking to acquire? And geographically, is there any one area that you would potentially focus on?

Todd Clossin

We still like that 6-hour drive time from Wheeling, which has kind of been our approach in the past like we'd all get in the car, go see the markets, go see the employees. And that 6-hour drive time seems to work well for us. So it would be markets that we're already in today, the Columbus, Cincinnati, Louisville, Lexington, Pittsburgh area, Maryland markets, all those areas would be higher growth type of markets and areas you want to get bigger in.

Northern Virginia, that would be within a 6-hour drive time. Indianapolis, not a lot of opportunities, Indianapolis. But those would all be markets that would be within that 6-hour drive time as well, too. So it would be probably the only kind of new markets that we're not in today that we'd probably be looking hard at.

And size-wise, it would be anything up to 25% of our size or so, I think, is what we've done in the past. And as we've gotten bigger, that number goes up. So that's kind of our focus.

Daniel Cardenas

And then last question. I think when I left you guys last, there was a lot of talk about cracker facility going up in Ohio. Can you give me an update on that? And if they are not going to build it, what kind of impact do you think that's going to have on the economy there?

Todd Clossin

Yes. It's still being debated. It seems to get hot in terms of discussions when natural gas prices are up, and it tends not to be a hot discussion when it's going down, but it's still a possibility. Some are indicating that it's -- there's been a lot of investments made already, and it's probably going to happen. The question is when will that happen. The cracker plant up in Beaver County up and Pittsburgh, it's nearing completion. Bob, that's not too far from we are?

Robert Young

2022, it goes online. And we have a very strong market share in Beaver county. Courtesy of the ESB acquisition.

Todd Clossin

Yes. So we hope that the cracker plants down there when happens, but it's not -- it would be additive to what we have already. But it's a pretty healthy, pretty strong community in the Wheeling area and around the Wheeling area our legacy markets. We're used to ups and downs based upon just different things that are happening with commodity prices. So they tend to get overbuilt when things get announced.

So if it happens, it will be a great additive push for all of us. If it doesn't happen, then it won't. But there's a fair amount of activity in deposit flows into the bank through homeowners that are collecting royalty payments is up significantly, and we're seeing the benefits of it on the deposit side.

Operator

And ladies and gentlemen, with that, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to Todd Clossin for any closing remarks.

Todd Clossin

Yes. Just real quickly, I want to thank everyone for joining us today and hopefully we'll get a chance to see each other here in person at one of our -- the future upcoming investor events. So we'll get a chance to hopefully get on our dance cart together. But please enjoy yourself, stay safe for the rest of the summer. Thanks.

Operator

And ladies and gentlemen, with that, we'll conclude today's presentation. We do thank you for joining. You may now disconnect your lines.

Robert Young

Thank you.