WesBanco, Inc. (NASDAQ:WSBC) Q1 2023 Earnings Call Transcript

WesBanco, Inc. (NASDAQ:WSBC) Q1 2023 Earnings Call Transcript April 25, 2023

Operator: Good morning and welcome to the WesBanco Inc. First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to, John Iannone. Please go ahead.

John Iannone: Thank you. Good morning. And welcome to WesBanco, Inc.’s first quarter 2023 earnings conference call. Leading the call today are Todd Clossin, President and Chief Executive Officer; Jeff Jackson, Senior Executive Vice President and Chief Operating Officer; and Dan Weiss, Executive Vice President and Chief Financial Officer. Today’s call, an archive of which will be available on our website for one year, contains forward-looking information. Cautionary statements about this information and reconciliations of non-GAAP measures are included in our earnings-related materials issued yesterday afternoon, as well as our other SEC filings and investor materials. These materials are available on the Investor Relations section of our website, wesbanco.com. All statements speak only as of April 25, 2023, and WesBanco undertakes no obligation to update them. I would now like to turn the call over to Todd. Todd?

Todd Clossin: Thank you, John. Good morning, everyone. On today’s call, we’ll review our results for the first quarter of 2023, and provide an update on our operations and current 2023 outlook. Key takeaways from the call today are solid financial performance demonstrated by loan growth and discretionary cost control. Key credit quality metrics have remained at low levels and favorable to peer bank averages. We remain well capitalized with solid liquidity and a strong balance sheet with capacity to fund loan growth. And we are well-positioned for near term success while continuing to make appropriate long term growth oriented investments. We’re pleased with our performance during the first quarter of 2023. We demonstrated the earnings power, capital and liquidity to perform well and missed a quarter of broader industry volatility driven by financial institutions with different operating models than ours.

We reported loan growth while maintaining credit quality and delivered solid pre-tax, pre-provision net income. We diligently manage discretionary costs while making appropriate investments that build upon and enhance our strong markets, teams and core advantages. And we remain focused on ensuring a strong organization with solid liquidity and a strong balance sheet. For the quarter ending March 31, 2023, we reported pre-tax pre-provision income of 13.2% year-over-year, and net income available to common shareholders $42.3 million with diluted earnings per share of $0.71 when excluding after tax merger and restructuring charges. On a similar basis the strength of our financial performance this past quarter is further demonstrated by our return on average assets of 1.01% and return on tangible equity of 13.5% and our capital position continues to provide financial and operational flexibility.

While Jeff will discuss our loan growth, it’s important to highlight the strength of our credit underwriting in overall conservative risk culture. We do not chase loans or take undue risk just to report growth. We’re focused on long term sustainable growth through all economic cycles. We are achieving our strong loan growth while maintaining our credit standards. Again this quarter, we reported key credit quality measures that continue to remain at low levels and favorable to all banks with assets between $10 billion and $25 billion. Total loans past due as the percentage of total loans were 16 basis points down more than 50% from last year. Non-performing assets as a percentage of total assets have ranged from just 21 to 26 basis points the first quarter of 2020.

Lastly, criticize and classify loans as a percentage of total loans were 1.6% down 208 and 74 basis points year-over-year and quarter-over-quarter respectively. In fact, this is the lowest level in nearly four years. Jeff will now provide an update on our key first quarter operational topics.

Jeff Jackson: Thanks, Todd. We continue to effectively execute our strategic business plans as evidenced by our solid loan growth across all markets, disciplined expense management, and excellent credit quality reported for the first quarter. I’m pleased that the strength of our markets and lending teams combined with our LPO strategy continues to meet our expectations, as we demonstrated total loan growth of 11.9% year-over-year, and 7% annualized when you compare it to December 31, 2022. Residential real estate loans continue to benefit from the retention on the balance sheet of approximately 70% of the one to four family residential mortgages originated. Total commercial loan growth reflects the strength of our teams and markets which we have enhanced through our hiring efforts over the past two years.

For the first quarter, total commercial loan growth was 9% year-over-year, and 4% annualized sequentially. Briefly, I would like to provide some comments on the high quality of our office space loan portfolio, outlined on Slide 5 of the supplemental earnings presentation. The portfolio which represents just 4% of the total $10.9 billion loan portfolio is very high quality with more than 96% of the loans and pass risk categories and no non-performing loans. The average loan size is roughly $1.5 million, average LTV is 62% and the average debt service coverage is 1.8 times. The portfolio is geographically diverse across our six state footprint and located predominantly in suburban markets. Our commercial loan pipeline at March 31 was $1.1 billion, an increase of approximately 25% since year end as our teams continue to find business opportunities to replenish the pipeline.

Our newer markets in Kentucky and Maryland account for roughly 30% of the pipeline while LPOs in Cleveland, Indianapolis and Nashville are contributing approximately 13%. Importantly, we have ample liquidity sources to fund loan growth. Our deposit granularity as evidenced by our average deposits account size of $27,000 reflects the trust our customers have in our 150 year heritage as a community bank. Our loan to deposit ratio of 83.5% provides us with ample lending capacity to support our customers as they grow. In addition to $600 million of cash on our balance sheet as of March 31 normal remix from our securities portfolio to the loan portfolio can cover approximately 4% loan growth, not to mention cash flow from the normal loan maturities and P&I payments.

While the core funding advantage of our legacy markets continue to contribute approximately $25 million a quarter, we have implemented several initiatives to help drive additional organic deposit growth, albeit at potentially lower cost than peers located in the major metro markets. Through the last few years, we have executed a strategic transformation of our company into an evolving regional financial services institution with a community bank at its core. We have done this through successful expansion while adhering to our foundation of expense control, risk management, high credit standards, and a strong workforce equipped with the skills to drive success. And we will continue to adhere to that strategy as we continue to evolve. Similar to our hiring strategy, the last couple years, we still expect to hire additional commercial bankers primarily C&I this year.

We believe that continuing to add top tier talent across our robust and diverse markets is a key to our long term success. However, we will proceed cautiously as we monitor the operating environment, and we’ll adjust our plans as appropriate. We also expect to fund these new hires through internal efforts including the adjustment of existing banker staffing levels. In summary, we have distinct growth strategies with unique long term advantages, balanced distribution across economically diverse major markets, and a strong customer service culture combined with robust digital services that enable us to deliver efficient solutions when where and how our clients need them. We are focused on strengthening our diversified earning streams for long term success with new capabilities and strategies.

My transition continues to go well and I enjoy working with Todd and the team. Back to you, Todd.

Todd Clossin: Thanks, Jeff. Well, WesBanco continues to be acknowledged for its soundness, profitability, employee focus and customer service, as it continued to receive numerous national accolades over the last few months. For the 13th time since 2010, we were named one of America’s best banks for strong capital, credit, quality and profitability. For the third consecutive year, we were voted by our employees as one of the best midsize employers. We provide an environment where employees feel valued and are provided avenues for success, while encouraging a strong customer centric focus that ensures a sound and profitable financial institution, work communities and shareholders. I’d like to once again congratulate our entire organization as we continue to deliver large bank services with a community bank feel while providing our customers with top tier service.

Their efforts earned us for the fifth consecutive year. The recognition is one of the best banks in the world based upon customer satisfaction. We receive strong scores from our customers for customer service, digital services, satisfaction, and financial advice. I’d now like to turn the call over to Dan Weiss, our CFO for an update on the first quarter results and a current outlook for 2023. Dan?

Dan Weiss: Thanks, Todd and good morning. As presented in yesterday’s earnings release during the first quarter we reported improved GAAP net income available to common shareholders of $39.8 million and earnings per diluted share of $0.67. Excluding after tax restructuring and merger related charges net income and earnings per diluted share for the first quarter were $42.3 million and $0.71 per share respectively, as compared to $42.9 million and $0.70 last year respectively. It’s important to note that the first quarter of 2022 was favorably impacted by a negative provision of $2.8 million net of tax or approximately $0.05 per share, as compared to a provision increased during the first quarter of this year of approximately $0.05 per share.

Therefore, on a pre-tax pre-provision basis, income improved by 13.2% year-over-year. Total assets of $17.3 billion at the end of the quarter included total portfolio loans of $10.9 billion and securities of $3.7 billion. Total portfolio loans grew both year-over-year and sequentially reflecting the strength of our markets and lending teams, as well as more one to four family residential mortgages retained on the balance sheet. Reflecting the uncertainty in the economy, average first quarter C&I line utilization was 32.5%, a year-over-year decrease of approximately 350 basis points or $25 million. Overall, our deposit levels and recent trends reflect granularity and relative stability of our deposit base, which can be seen on Slide 6 of the earnings presentation.

Total deposits have been impacted by interest rate inflationary pressures, and the Federal Reserve’s tightening actions to control inflation, which has resulted in industry wide deposit contraction, where deposits were down approximately $360 million in January, before remaining relatively flat through February and March. Total deposits at the end of the first quarter were $12.9 billion down 2% or $260 million when compared to December 31 2022, which also includes $140 million in shorter term brokered deposits. Further, our demand deposits continue to represent roughly 60% of total deposits, while non interest bearing deposits were 35% of total deposits, which is relatively consistent with a fourth quarter. The net interest margin in the first quarter of 3.36%, increased 41 basis points year-over-year, which reflects the 425 basis point increase in the Fed funds rate since March of 2022.

As well as our successful remix of securities into higher yielding loans. The net interest margin decreased 13 basis points from the fourth quarter of 2022, primarily due to higher funding costs, as lower cost deposits were replaced with wholesale borings were repriced or migrated to higher tier savings products. As we’ve mentioned previously, while our robust legacy deposit base provides a pricing advantage, we’re not immune to the impact of rising rates on our funding sources. Total deposit funding costs, including non interest bearing deposits for the first quarter of 2023 increased 28 basis points quarter-over-quarter to 65 basis points. On a year-over-year basis. Our total deposit beta was 13% as compared to the 425 basis point increase in the Fed funds rate over the last 12 months, reflecting our ability to lag peers as it relates to deposit funding cost increases.

And also we continue to balance the cost benefit of allowing some deposit run off in the near term against the cost of repricing the entire book. Noninterest income of $27.7 million in the first quarter was down $2.7 million year-over-year, primarily due to lower bank owned life insurance and mortgage banking income. Bank and life insurance decreased $1.9 million year-over-year due to higher death benefits received in the prior year period, and mortgage banking income decreased $1.5 million year-over-year due to a reduction in residential mortgage originations. reflecting our renewed focus on commercial loan swaps, new swap fee income of $1.8 million, which is recorded in other income increased $1.7 million from the prior year period. Turning now to expenses.

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Despite the continued inflationary environment, noninterest expenses were better than our prior expectations, excluding restructuring and merger related expenses. Noninterest expense for the first three months ended March 31 2023 totaled $93 million and 8.2% increase year-over-year reflecting inflation, higher staffing levels and associated costs and higher FDIC insurance from an increase in the minimum rate for all banks. As a reminder, the fourth quarter of 2022 included a couple of large credits, totaling approximately $2.5 million, which were not repeated in the expense run rate. When adjusting for these credits. First quarter non-interest expenses were flat to the fourth quarter. Salaries and wages increased year-over-year due to the higher staffing levels mainly revenue positions and merit increases.

Employee benefits also increase from last year due to higher staffing, as well as an increased pension expense and higher health insurance. equipment and software expense increased due to the planned upgrade of a third of our ATM fleet with the latest tech LNG and general inflationary cost increases for existing service agreements. Moving to capital, we remain focused on ensuring a strong capital base while also returning it to our shareholders through appropriate capital management. Our capital position has remained solid, as demonstrated by our regulatory ratios that are above the applicable well capitalized standards and are tangible common equity the tangible assets ratio improved 16 basis points on a sequential quarter basis to 7.44% as of March 31 2023.

In light of recent events, we’ve added Slide 6 and 7 to our supplemental earnings presentation. On Slide 6, we provided insight into the composition of our deposit base, and highlight our geographically dispersed, granular and rural deposit franchise. nearly 60% of our deposit base is retail oriented with over 475,000 deposit accounts, and an average deposit size as Jeff mentioned, of $27,000 per depositor, when including business and public funds. On Slide 7 we highlighted our securities portfolio, with an overall weighted average duration of 5.4 years and weighted average yield of 2.49%. We also highlight our TCE ratio on a pro forma basis, when including the fair value mark from held to maturity securities, which comes in at 6.86%. We believe these metrics compare favorably with industry trends.

Regarding liquidity, we actively manage our liquidity risks to ensure adequate funds to meet changes in loan demand, unexpected outflows and deposits and other borrowings as well as take advantage of market opportunities as they arise. This has accomplished that by maintaining liquid assets in the form of cash securities, sufficient borrowing capacity, and a stable core deposit base, between our cash FHLB boring capacity correspondent lines with other banks and unpledged securities in the form of agencies and mortgage backed securities, which can easily be pledged FHLB or to the Fed to expand our borrowing capacity we have more than $4.5 billion in immediate liquidity, adding in normal principal and interest from the loan and investment portfolios through the next 12 months as another $2.7 billion for a total combined in excess of $7 billion in near term flexibility.

Therefore, we feel we are very well positioned in any operating environment. Regarding our current outlook for 2023. We currently model Fed funds to peak at 5.25% during the second quarter and then hold steady through the remainder of 2023. We continue to anticipate our deposit betas to be lower than peers and generally lag the industry due to the benefit of our legacy deposit base. We do anticipate fed tightening to continue to shrink the money supply, which will place pressure on deposit retention industrywide, and result in higher overall interest expense. We expect similar trends to impact margin during the second quarter, reflecting higher funding costs and continued deposit mix shift into higher yielding deposit products. We also have actively increased loan spreads and rolled out additional incentives to the commercial lending teams to generate additional deposits.

residential mortgage originations should remain positive relative to industry trends due to our loan production offices as well as our hiring initiatives, but down due to market conditions, our pipeline at March 31 was approximately $100 million, which is up seasonally from the fourth quarter, similar to the sequential quarter increase in prior periods. Trust fees will continue to benefit from organic growth, as well as be impacted by the trends in the equity and fixed income markets. And as a reminder first quarter trust fees are seasonally higher due to tax preparation fees. Securities brokerage revenue should continue to benefit modestly from year-over-year organic growth. Electronic banking fees and service charges on deposits will most likely remain in a similar range as the last few quarters as they are subject to overall consumer spending behaviors.

And we still anticipate new commercial swap fee income to double the approximate $4 million that we’ve earned annually over the last few years. While we remain diligent on discretionary costs helped me mitigate inflationary pressures. We intend to continue to make the appropriate growth oriented investments and supportive long term sustainable revenue growth and shareholder return efforts to attract and retain employees. In particular commercial lenders across our metro markets remains a strategic priority. That said, we’ve recognized the challenges of the current operating environment and attend to Have fun. The majority of this hiring plan was internal efforts, including the adjustment of existing staffing levels and continued efforts to improve efficiency.

The upgrade of our ATM fleet with the latest technology as well as inflationary cost increases for existing service agreements will keep equipment and software expenses in a similar range the first quarter. We anticipate higher pension expense of approximately $700,000 per quarter with an employee benefits based on a lower projected return on plan assets. FDIC insurance expense should be consistent with the first quarter due to the industry wide minimum rate increase and expect higher marketing expense in support of growth plans across our markets. Based on what we know today, we still believe our quarterly expense run rate to be in the mid $90 million range. We believe these investments are appropriate and supportive long term sustainable revenue growth and associated shareholder return and will continue to drive positive operating leverage.

The provision for credit losses under CECL will be dependent upon changes to the macroeconomic forecast and qualitative factors, as well as various credit quality metrics including potential charge offs, criticized and classified loan balances, delinquencies, changes in prepayment speeds, and future loan growth. Lastly, we currently anticipate our full year effective tax rate to be between 18.5% and 19.5% subject to changes in tax regulations, and taxable income levels. Operator, we are now ready to take questions. Would you please review the instructions?

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Q&A Session

Operator: We will now begin the question and answer session. Our first question comes from Casey Whitman from Piper Sandler. Please go ahead.

Todd Clossin: Good morning Casey.

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

Dan Weiss: Yes. So I think there’s a number of moving parts there. So you’re starting off maybe on the asset side. Obviously, we’ve got about 68% of the commercial loan portfolio is variable rate, about 53% of that is going to every three months. Okay, so that’s been a pretty significant benefit to us. We’ve gotten, we saw actually, there’s the movement there, from right around 6.5% up to year end in the quarter up to 7.15%. So saw some nice 65 basis points of improvement there. We also as you know, have about 17% of the securities portfolio is a variable rate. So we saw about 17 basis points lift there. So those would be kind of the tailwinds as it relates to any future movement, any future Fed rate, hike, etc. And we are slightly asset sensitive if you’re modeling in a static environment.

But when we think about the deposit side, the costs associated with what we’re seeing in the market right now, obviously, we’ve been very proactive and pricing public funds. We’re maintaining those very nicely. We’ve been increasing there’s higher tier money markets, and private client funds. And we’ve also increased our CD rates as well. And to the extent that we’re seeing any kind of run off on the deposit side today we’re kind of leaning into kind of our core funding advantage to some extent and boring then from the Federal Home Loan Bank. So we think that in the near term, there’s probably going to be a little bit of margin compression as a result and it’s really going to be primarily based on our expectations for what the Fed has been doing with their quantitative tightening.

We know that the money supply is shrinking, we know that the pie is smaller, and we want to make sure that we’re maintaining our piece of the pie. But at the same time we’re going to be responsible in the way that we’re pricing our deposits, and we’re comfortable kind of leaning into the FHLB borrowings in the nearer term. With that all being said on a spot basis, I can tell you that for the month of March, our margin was right, around three and a quarter percent. So, yes, take that for as a good benchmark for where we’re at.

Todd Clossin: This is Todd Casey. I would just add to that to that deposit remix, that we saw in the first quarter I would anticipate seeing that continue through the second quarters as Dan mentioned, 83.5% loan to deposit ratio, we’ve got some flexibility there to let that drift up a little bit over the next year or two. And stay disciplined on the deposit cost side. But I do think that remix that you saw in the first quarter is, is probably going to continue. I think the whole industry saw it, and we’ll see it continue as well, too. Fortunately, for us we can go up and offer competitive CD rates in some of our legacy markets to generate some core funding, not have to pay 6% rates at some of the areas where the banks that are 100% loan to deposit.

We’re not in that environment. So that gives us a little bit of an advantage. And as Dan says, we can lean into that to some degree. But recognizing we don’t want to give up our deposit advantage over the next year or two as well, too. So finding that balance, I think is going to be appropriate. But I would expect the remix to continue in the second quarter that we saw in the first quarter.

Casey Whitman: Okay, that answers my question. Thank you.

Todd Clossin: Sure. Thank you.

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

Karl Shepard: Hey, good morning, everybody.

Todd Clossin: Good morning.

Dan Weiss: Good morning.

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

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