WesBanco, Inc. (NASDAQ:WSBC) Q1 2024 Earnings Call Transcript

WesBanco, Inc. (NASDAQ:WSBC) Q1 2024 Earnings Call Transcript April 24, 2024

WesBanco, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the WesBanco First Quarter 2024 Earnings Conference Call. All participants will be in 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, Investor and Public Relations. Please go ahead.

John Iannone: Thank you. Good morning, and welcome to WesBanco, Inc.’s first quarter 2024 earnings conference call. Leading the call today are Jeff Jackson, President and Chief Executive 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 24, 2024, and WesBanco undertakes no obligation to update them. I would now like to turn the call over to Jeff. Jeff?

Jeffrey Jackson: Thanks, John, and good morning. On today’s call, we will review our results for the first quarter of 2024, and provide an update on our operations and current 2024 outlook. Key takeaways from the call today are continued, strong deposit and loan growth combined with good progress on new fee income opportunities, a sustained focus on controlling discretionary costs, we remain well-capitalized with solid credit quality and liquidity. Our first quarter results marked the strong start to 2024. We grew loans and deposits, while smartly managing borrowings, controlling costs, and advancing our efforts to diversify our revenue streams and drive non-interest income growth. For the quarter ending March 31, 2023, we reported net income available to common shareholders of $33.2 million, and diluted earnings per share of $0.56.

Furthermore, the underlying strength of our financial performance is demonstrated by our return on average tangible common equity of 11%, non-performing assets to total assets of just 0.19%, and a capital position that continues to provide financial and operational flexibility, as demonstrated by our tangible common equity ratio of 7.63%. The key story for the first quarter was our strong deposit growth that both funded loan growth and paid down borrowings on a sequential quarter basis. We reported deposit growth of 5% year-over-year, and 10% quarter-over-quarter annualized across our business, consumer, and public funds customers. This deposit growth funded both our loan growth and the 19% decrease in FHLB borrowings from the fourth quarter of 2023.

We remain encouraged by the ability of our teams to grow our deposit base. First quarter loan growth was 9% year-over-year, and 8% quarter-over-quarter annualized, which was again driven by our commercial and residential lending teams. Total commercial loans increased 9% year-over-year, and 10% sequentially annualized, driven by our banker, hiring, and loan production office strategies. Our four newest loan production offices accounted for roughly 20% of the commercial loan growth year-to-date as they continue to demonstrate a strong return on investment. Our commercial loan pipeline, as of April 15, was approximately $1.2 billion, a 69% increase from the level at year-end 2023, and roughly flat to March 31, as our teams continue to find business opportunities to replenish the pipeline that has been driving our strong loan growth.

Our pipeline highlights the strength of our commercial strategies as our banking teams are able to maintain a billion-dollar pipeline while generating high single-digit loan growth. In addition, our new loan production offices account for 29% of the current pipeline, with Tennessee continuing to represent a meaningful percentage. Based on the ongoing success of our LPOs, we continue to evaluate opportunities to expand this strategy into new metro markets adjacent to or within our footprint. Representative of the strong efforts of our teams across our markets is a nice win in our Mid-Atlantic market during the first quarter. A team comprised of commercial bankers, treasury management, and credit associates won a new business relationship from a large financial institution.

This win was led by our Mid-Atlantic leadership team, as this company is known for longstanding business partnerships and loyalty to their partners and vendors alike. After a business-focused shift by the customer’s previous bank, WesBanco earned a complete banking relationship with this premier customer that included both low-eight-figure deposits and credit facility, as well as a full suite of treasury management products and services. Because the customer’s business model is complex, it took a coordinated and collaborative effort amongst the team to provide the customer with the ideal solution that would help to optimize their business model. This is yet another example of our commitment to exceptional service and winning complete banking relationships through a deep understanding of a client’s needs.

As you heard in our customer win example, our treasury management team is partnering very well with our commercial banking team to help us win deep banking relationships. To further highlight the success of this reorganized group into a sales oriented business, they sold roughly 300 of our products and services to our business customers during the first quarter, including receivables, payables, reporting, anti-fraud, investment suite services and encouragingly several multi-card relationships. As I mentioned last quarter, we are making progress on building a strong pipeline for our new multi-card and integrated payables products, with revenue expected to begin to be generated during the second-half of 2024. Lastly, we remain diligent on managing expenses.

While some of the sequential quarter decline was due to the timing of marketing campaigns, our non-interest expenses decreased approximately $2 million from the fourth quarter. We have completed our retail transformation initiative, which focused on ensuring appropriate staffing models for all of our financial centers, including staff and hour reductions and the hiring of business bankers to drive additional growth. We have reduced retail staffing by approximately 100 people. Over the past year, through a combination of attrition and retirements and have strategically adjusted operating hours to ensure we are available at peak times for our customers and reducing or eliminating hours when customers do not need our help. As I mentioned last quarter, we are using about half of this savings to grow our business banking program and generate additional revenue through loans and deposits and merchant and treasury management fees, and are in the process of making these hires.

Furthermore, we continue to seek additional levers to pull to help efficiencies in our functions and drive positive operating leverage. These efforts are still in the early planning stages and I expect to provide updates on future calls. Our commitment to customer service, sustainable growth strategies and strong credit quality earned us yet another national accolade for this quarter. For the 14th time, WesBanco was named to the Forbes list of Best Banks in America, which evaluated 10 metrics measuring growth, credit quality and profitability for the 2023 calendar year. During a year that tested the resilience and adaptability of the banking industry, WesBanco remained a strong and sound financial institution well positioned to serve our customers, communities and shareholders.

This latest accolade reinforces the trust and confidence our customers place in their banking relationship with us, and we are proud to continue to help advance their financial journeys. I would now like to turn the call over to Dan Weiss, our CFO, for an update on our first quarter financial results and current outlook for 2024. Dan?

Daniel Weiss: Thanks, Jeff, and good morning. Just to highlight a few accomplishments, during the first quarter, we achieved strong loan growth of 8% annualized, grew deposits 10% annualized, which outpaced loan growth by almost $100 million and paid down higher cost wholesale borrowings. We also grew fee revenue and managed expenses down $2.3 million on a linked quarter basis. We are pleased to demonstrate our ability to execute on our strategic initiatives that translated meaningfully into the results for this quarter. For the quarter ending March 31, 2024, we reported GAAP net income available to common shareholders of $33.2 million or $0.56 per share. Net income available to common shareholders excluding after-tax restructuring and merger-related expenses was also $33.2 million or $0.56 per diluted share as compared to $42.3 million or $0.71 per diluted share in the prior year period.

As of March 31, total assets of $17.8 billion included total portfolio loans of $11.9 billion and securities of $3.3 billion. Total portfolio loans grew 9% year-over-year and 8% linked quarter annualized, which reflected the strength of our markets, teams, and lending initiatives. We continue to fund loan growth through a combination of deposit growth and regular cash flow from the securities portfolio. We still anticipate the pace of CRE payoffs to pick up as we progress through 2024, as interest rates remain steady and potentially decline. Residential mortgage originations totaled approximately $105 million for the first quarter, with roughly 45% of originations sold into the secondary market, as compared to $160 million and 28% respectively last year.

While residential mortgage production has been challenging in this environment, we’re encouraged to see pipelines build recently. As Jeff mentioned, we’re pleased with the deposit gathering and retention efforts of our consumer and commercial teams, as these efforts have funded roughly two-thirds of our year-over-year loan growth and more than 100% of sequential quarter loan growth. As of March 31, total deposits were $13.5 billion, up 4.8% from the prior year period and up 2.5% from December 31, 2023, or 10% annualized. Consistent with the higher interest rate environment and similar to the industry, we continue to experience some shift in the mix of our deposits. However, total demand deposits and non-interest bearing deposits as percentages of total deposits remain consistent with the percentage range prior to the pandemic.

Credit quality stability continues. The allowance coverage ratio remained flat from a year-ago at 1.09% and declined three basis points from the fourth quarter. Charge-offs were slightly elevated at 20 basis points, which was mostly related to one C&I relationship. Qualitative factors within our CECL model improved mainly due to the reduction in office portfolio loan balances resulting from the payoff of two larger office loans during the quarter. The resulting provision for credit losses was $4 million. The first quarter’s net interest margin of 2.92% decreased 10 basis points sequentially and 44 basis points year-over-year, primarily due to higher funding costs from increasing deposit costs and associated remix from non-interest bearing deposits into higher-tier money market and certificate of deposit accounts.

Total deposit funding costs, including non-interest bearing deposits for the first quarter of 2024 were 181 basis points, an increase of 20 basis points over the linked quarter. We mostly offset these higher funding costs through the reinvestment of securities into higher-yielding loans and the pay-down of higher-cost FHLB borrowings late in the quarter. Non-interest income in the first quarter totaled $30.6 million, a 10.8% increase from the prior year period that was driven by net swap fee and valuation income, service charges on deposits, and trust fees, all of which are benefiting from organic growth. Trust assets under management increased $600 million over the prior year period to $5.6 billion, resulting in 8% higher trust fee income.

Further reflecting the solid performance of our securities brokerage team, we’ve begun disclosing the quarter-end values of securities brokerage accounts, including annuities, which totaled $1.8 billion as of March 31, as compared to $1.6 billion in the prior year period. Excluding restructuring and merger-related expenses, non-interest expense for the three months ended March 31, 2024 totaled $97.2 million, down $2.3 million from the linked fourth quarter. The sequential quarter decline resulted from lower quarterly average staffing levels from efficiency improvements in the mortgage and branch staffing models. Full-time equivalent employees are down 170 from a year-ago and down 37 from the fourth quarter. Marketing was also down, compared to the linked fourth quarter due to the timing of seasonal marketing campaigns, but we expect an increase in the second quarter as we kick off spring marketing initiatives.

Other operating expense reflects various costs and fees associated with our loan growth as well as other revenue generating initiatives across a number of miscellaneous expense categories. Our capital position remains strong as demonstrated by regulatory ratios. They are above the applicable well-capitalized standards. Our tangible common equity to tangible assets as of March 31, 2024 was 7.36%. Up 19 basis points year over year or 7.05% when including unrealized losses on the held-to-maturity securities as shown on slide seven of the supplemental earnings presentation. We continue to believe that are well-positioned for any operating environment as we actively manage our liquidity risk to ensure adequate funds to meet changes in loan demand, unexpected outflows in deposits and other borrowings as well as take advantage of market opportunities as they arise.

Turning to the outlook, in the current operating environment, we expect net interest margin to stabilize in the mid-290s as our assets continue to reprice higher. Particularly through loan growth, fixed rate loan maturities, and securities runoff while funding cost also moved higher from continued deposit mix shift in the higher yielding products, but at a slower pace than what we have experienced over the past year. Trust fees should benefit modestly from organic growth and will be impacted, of course, by equity and fixed income market trends. And as a reminder, first quarter trust fees are seasonally higher due to tax preparation fees. Securities brokerage revenue is expected to remain consistent with the amount generated in the last several quarters, but could benefit modestly from organic growth.

Digital banking income, which is subject to overall consumer spending behaviors, will remain in a similar range of the last few quarters. And service charges on deposit are expected to expand modestly over 2023 from enhanced products and fee-based services. Mortgage banking will continue to be impacted by the overall residential housing market trends, but could improve if interest rates begin to move lower and we continue to see pipeline improvement. Our expectation is to sell approximately 50% or more of mortgage originations into the secondary market. Gross commercial swap fee income excluding market adjustments is expected to trend similar to 2023 in the $9 million annual range. And as Jeff detailed, we are making good progress building the pipeline for a new multi-card and integrated receivables and payables products, and continue to expect some modest benefits during the second-half of 2024.

We remain focused on disciplined expense management and have successfully transformed our financial center network to optimize branch level staffing by more than 100 retail employees since March of last year. The benefits of these cost saves were reflected in our first quarter run rate. However, we do expect to hire additional revenue producers here during the second quarter. Therefore, we anticipate salaries and wages to increase some during the second quarter and to also be impacted by mid-year merit increases but mostly impacting the back half of the year. As I mentioned, marketing will increase during the second quarter due to the timing of campaign. Software and equipment and other expense categories may be up slightly in the second quarter as we implement our strategic plans to improve long-term efficiency and revenue producing capacity.

And based on what we know, we believe our expense run rate during the second quarter of 2024 to be in the $99 million. And then, grow modestly due to annual merit increases, higher healthcare cost, and technology investments during the back-half of the year. The provision for credit losses under CECL will depend 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 fees and future loan growth. And lastly, we currently anticipate our full-year effective tax rate to be between 17.5% and 18.5% 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. [Operator Instructions] The first question comes from Daniel Tamayo with Raymond James. Please go ahead.

Daniel Tamayo: Hey, good morning, guys. Thanks for taking my question. Maybe we start first on just the deposit side. Just curious how you’re thinking about growth as it relates to, obviously deposits, but then how the loan deposit ratio may shake out going forward as well?

Jeffrey Jackson: Yes, good morning, Dan. When we look deposit growth, as you may recall, we really put a big push starting in third quarter, last year. We added incentives for our commercial bankers, and we came out with some campaigns. So, we’ve seen some nice growth third quarter, fourth quarter, and now this previous quarter related to the deposit growth. We also rolled out a new consumer checking account, WesBanco One account, that we’ve seen tremendous demand for. And so, we continue these campaigns going forward. And we feel like we’re still going to see some pretty nice growth. The other piece of it in relation to non-interest bearing, obviously we saw a very limited decline in our non-interest bearing balances in first quarter.

I think they declined about $20 million, so basically almost flat there. And we’ve put a nice focus as well on non-interest bearing deposits. So, when I look at the loan deposit ratio, I would expect this to continue to remain in that high 80s realm, because I do believe we’re going to have a pretty strong year in loan growth as well as we look at kind of mid to upper single-digit loan growth also.

Daniel Tamayo: Okay, terrific. Thanks for that color. And I guess then switching to the margin here, did you hear correctly that you said the margin is going to stabilize in the mid-290s, Dan?

Jeffrey Jackson: Yes, that’s correct.

Daniel Tamayo: Okay.

Jeffrey Jackson: That’s correct.

Daniel Tamayo: So, you’re expecting — sorry, go ahead.

Jeffrey Jackson: Yes, we’re expecting it to increase going throughout the rest of the year.

Daniel Tamayo: Okay. And any — so, there’s no — I mean that it immediately is — is it starting in the second quarter you think you’ll see a snapback of the margin, and then kind of a slow build off of that number, and stability mid-290s, and that’s assuming what in terms of non-interest bearing concentration?

Daniel Weiss: Yes, Danny, so as I said in the prepared commentary, mid-290s, that’s where we think we’ll stabilize here over the next three quarters. And in terms of non-interest bearing, included in that kind of modeling would be, despite the fact that we only saw about like, as Jeff said, $20 million — $23 million and it runoff in non-interest bearing, we are projecting or modeling, at least, between $50 million and $75 million of remix into interest bearing within that guidance. So, we get down to — from 29% in total deposits down to, call it, in that 27% range.

Daniel Tamayo: Okay, great, all right. All right, I’ll step back. Thanks for the answers, guys.

Jeffrey Jackson: Thank you.

Operator: The next comes from Mark Shutley with KBW. Please go ahead.

Mark Shutley: Hey, good morning.

Jeffrey Jackson: Good morning.

Daniel Weiss: Morning.

Mark Shutley: Just a follow-up on the margin discussion, I was wondering at what level we should expect those money market and interest bearing deposit costs to peak at before we start to see some rate cuts?

Daniel Weiss: Sure. So, what I would tell you is that we — generally speaking, until we see rate cuts, at least — and right now we’ve run a couple different scenarios, one with as many as three cuts, one with as few as zero cut. But what I would tell you is that we expect, until we see a rate cut, for there to be some continued increase, but at a slower rate than what we’ve seen on both money markets and the interest bearing deposits. We’re seeing maybe seven basis points of increase per month. And we would expect that though to slow here as we continue out throughout the quarter as most of the back book at this point has really re-priced what we’re thinking — what we’re seeing as this would be to the extent that we’re adding any additional growth in terms of money market and interest bearing deposit.

Jeffrey Jackson: Yes, the other thing I would just add quickly, obviously, if we continue to grow deposits faster than loans, we’ll continue to pay down our FHLB borrowings, which are currently at 5.5%. So, we’re definitely not bringing in new deposits anywhere near that rate, and expect to, obviously, get some benefit for that if we continue to grow deposits faster than loans.

Mark Shutley: Yes, and —

Daniel Weiss: Maybe just add on to that even further, with that $250 million in FHLB borrowings that we paid down, that was, as Jeff mentioned, 5.5%-5.6%. The new — the deposits that we brought on, the $330 million, call it, that came on at a weighted average rate right around $360 million. And a lot of that deposit growth actually occurred in the back-half of the first quarter. So, we haven’t yet — we’re going to see a benefit here into the second quarter, and beyond, to the extent we can maintain those deposit balances just because we’re saving 200 basis points, that, one, the alternative being FHLB borrowings.

Mark Shutley: Yes, that’s super helpful. And maybe just switching gears here for one more, so, you mentioned the $1.2 billion pipeline, and how a good chunk of that is LPOs. But I was wondering if you could give any additional color on maybe the loan-type mix in there and what we should be expecting, for 2024, as far as CRE and C&I growth?

Jeffrey Jackson: Sure. We’re striving, and as I’ve mentioned before, to get a 50-50 mix going forward. What I would say on the pipeline currently, I’m going to guess it’s around 60% CRE, 40% C&I. But we’re striving for 50-50 production. But I would say probably it’ll end up, by the end of the year, being a little more heavily weighted on the CRE.

Mark Shutley: Awesome. Thanks for taking my questions.

Jeffrey Jackson: Yes, thank you.

Operator: The next question comes from Russell Gunther with Stephens. Please go ahead.

Russell Gunther: Hey, good morning, guys. Wanted to just start following up on the margin discussion. If you guys could just share what you’re assumptions are for the fed funds outlook within the kind of mid-290s guide? And Dan, maybe just help quantify what that big three pricing opportunity is on the asset side this year? And lastly, just when we get cuts, if we get cuts, what that could mean to the WesBanco margin?