WesBanco Inc
NASDAQ:WSBC
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Hello and welcome to the WesBanco, Inc. Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today's event is being recorded.
I'd now like to turn the conference over to host today, John Iannone. Mr. Iannone, please go ahead.
Thank you. Good morning. And welcome to WesBanco, Inc.’s third quarter 2022 earnings conference call.
Leading the call today are Todd Clossin, President and Chief Executive Officer; Jeff Jackson, Senior Executive Vice President and Chief Operating Officer and Dan Weiss, Executive Vice President and Chief Financial Officer. Today’s call, an archive of which will be available on our 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 October 26, 2022, and WesBanco undertakes no obligation to update them.
I would now like to turn the call over to Todd. Todd?
Thank you, John, and good morning, everyone. On today's calls, we will review our results for the third quarter of 2022 and provide an update on our operations and current 2022 outlook. Key takeaways from the call today are; solid financial performance demonstrated by loan growth, net interest margin expansion, and discretionary cost control. Robust deposit base that continues to provide us with strong low cost deposit flows during a time of quickly rising interest rates and WesBanco remains a well-capitalized financial institution with strong liquidity and balance sheet and credit quality metrics.
I'd also like to introduce Jeff Jackson, our Chief Operating Officer, and my anticipated successor upon my retirement at the end of next year. Jeff's experience at both First Horizon and IBM is exceptional, and throughout his career, he has successfully built and led teams and delivered top tier results. In the few short months that we have worked together, I am proud to say that I am impressed by his knowledge, his ideas, and his energy. He is a great addition to the WesBanco family and someone who is well equipped to lead our company well into the future. Welcome, Jeff.
Thanks, Todd. I'm excited to be here. I joined WesBanco because I was impressed with the long history, strong culture and focus on the shareholders, customers, employees and communities of WesBanco. After traveling with Todd the past couple of months to visit all of our markets and meet our wonderful employees, I can honestly say that my initial impression pales to my impression now.
Our employees are truly the core strength of our company. I'm constantly impressed as they live our better banking pledge and regularly demonstrate their passion for and dedication to our customers and our communities. I look forward to working with this great team and maintaining WesBanco's success as an involving regional financial services institution. Back to Todd.
Thanks, Jeff. We are pleased with our performance during the third quarter of 2022 as we continue to deliver loan growth, controlled discretionary expenses and manage the cost of our funding sources. For the quarter ending September 30, 2022, we reported net income available to common shareholders of $50.6 million and diluted earnings per share of $0.85 when excluding after tax, merger and restructuring charges.
The strength of our financial performance this past quarter is further demonstrated by our return on average assets of 1.19% and return on tangible equity of 15.39%. In addition, our capital position remained strong and continues to provide financial flexibility while enhancing shareholder value through effective capital management.
The key story again this quarter was the strength of our balance sheet as we demonstrated growth in both loans and deposits. Total deposits increased slightly year-over-year despite the runoff of $360 million in certificates of deposit or when excluding CDs increased 3.2% year-over-year and essentially flat to the second quarter. This strength and deposits demonstrates the competitive advantage of our relatively low cost, robust legacy deposit base.
Reflecting the strength of our markets and lending teams, we again reported strong broad-based loan growth during the quarter, despite elevated commercial real estate loan payoffs of $173 million. Total loan growth, excluding SBA PPP loans was 6.5% year-over-year and 0.8% were 3.2% annualized when compared to June 30, 2022.
The growth in our residential loan portfolio reflects the retention of mortgages on our balance sheet and continued relative strength in originations. While our residential lending program is not immune to the impact of rising interest rates on home ownership as well as seasonality that is affecting the overall industry, we are confident of the group's ability to continue to outperform the industry. We have and continue to build strong teams across our footprint that have demonstrated the ability to organically grow market share. We have successfully built out the teams in our Cleveland, Indianapolis and Nashville loan production offices, and I'm excited for the opportunities they will bring.
As of September 30, the residential mortgage pipeline was approximately $110 million. Total commercial loan year-over-year over year growth of 3.4% was impacted by elevated commercial real estate payoffs, which were approximately $83 million above a more normalized historical average. When adjusting for this spike, the commercial loan growth would've been approximately 1.2% higher on both the year-over-year and non-annualized sequential basis. Further, total loan growth would've been 7.3% year-over-year and 6.5% annualized as compared to June 30.
We currently anticipate commercial real estate payoffs to return to a more historical average, if not lower during the fourth quarter as a number of those anticipated payoffs occurred during the third quarter. Our commercial teams continue to find new business opportunities to replenish our loan pipeline, which was approximately $830 million as of September 30, a slight increase from the June 30 pipeline. However, since quarter end, that pipeline has increased 9% to $900 million as of October 17.
The strength of our pipeline represents the talent of our lending teams as well as our early successes from our loan production office strategy. For example, we opened our Indianapolis LPO during April and our commercial team there has demonstrated their expertise and knowledge of the market to represent in just six months, approximately 5% of our total commercial loan pipeline.
Furthermore, we are achieving our organic loan growth through the careful balance of the risk reward proposition between growth and credit quality as we ensure a strong financial institution for our customers and shareholders. Our adherence to our historic strengths of risk management and loan underwriting remain evident through our solid credit quality measures, which continue to remain relatively low from a historical perspective and consistent through at least the last 10 quarters.
In particular, total loans pass due, non-performing loans and non-performing assets as a percentage of total loans have all primarily remained in the 0.3% to 0.4% range over that time span. In addition, I am pleased that through a lot of hard work by our teams, criticized and classified loans as a percent of total loans decreased 178 basis points year-over-year to 2.43%, which is very near our pre-pandemic percentage.
I'd like to provide a quick update on the strategic investments we have been making, which we have funded through discretionary expense control in managing our financial center footprint. Through the first nine months of the year, we have hired 30 commercial lender and 18 mortgage loan originators including 16 and seven respectively during the third quarter.
In addition, we have successfully filled out the commercial and residential lending teams in Cleveland, Indianapolis and Nashville. I look forward to the opportunities from all of our new LPOs and lenders during the coming quarters as they contribute meaningfully to the positive operating leverage of our company.
Lastly, while we have accomplished our previously announced hiring, we will continue to be tactical with hiring additional top performers as opportunities arise. For more than 150 years, we have been a source of stability, strength and trust for our customers, our communities, our employees and our shareholders. The success of our operational strategies implemented the past few years, continues to be evident and combined with our core strengths will allow us to succeed regardless of the operating environment.
I would now like to turn the call over to Dan Weiss, our CFO for an update on our third quarter financial results and current outlook for 2022. Dan?
Thanks, Todd, and good morning. During the quarter, we recognized strong improvement in our net interest margin, both year-over-year, sequential quarter loan growth, a solid deposit base that grew year-over-year and maintained discipline over expenses while executing upon our hiring plans.
As noted in yesterday's earnings release during the third quarter, we reported improved GAAP net income available to common shareholders, of $50.6 million, and earnings per diluted share of $0.85 and a net income of $132.3 million, and earnings per share of $2.19 for the nine month period. Excluding restructuring and merger-related charges, results for the three and nine months ending September 30, 2022 were $0.85 and $2.21 per share respectively as compared to $0.70 and $2.79 last year.
It is important to note that the first nine months of 2021 were favorably impacted by a negative provision of $40.5 million net of tax or $0.61 per share as compared to a benefit of only $0.06 per share during 2022.
Total assets of $16.6 billion as of September 30, 2022 included total portfolio loans of $10.3 billion and total securities of $3.9 billion. Loan balances for the third quarter of 2022, which grew both year-over-year and sequentially, reflected strong performance by our commercial and consumer lending teams and more one-to-four family residential mortgages retained on the balance sheet, partially offset by the continuation of SBA PPP loan forgiveness and elevated commercial real estate payoffs.
SBA PPP loans in the prior year period totaled $272 million as compared to only $13 million this period. Commercial real estate payoffs increased during the third quarter to approximately $173 million as compared to $98 million last quarter and $264 million last year. As Todd mentioned, we expect these payoffs to return to a more normalized historical average, if not better during the fourth quarter.
Strong deposit levels remain a key story as total deposits of $13.4 billion increase slightly year-over-year despite CD runoff of approximately $363 million. Excluding CDs, deposits were essentially flat to the quarter ending June 30, 2022, but increased 3.2% year-over-year driven by total demand deposits and savings accounts.
Further, non-interest bearing deposits as of September 30, 2022 continue to represent a record 35% of total deposits. The net interest margin in the third quarter of 3.33% increased as expected 30 basis points sequentially and 25 basis points year-over-year. This increase reflects the 225 basis point increase in a federal funds rate from March through July, as well as our successful deployment of excess cash into higher yielding loans.
Our core margin continued to increase quarter-over-quarter from 2.93% to 3.27%, which excludes purchase accounting accretion of six and five basis points and SBA PPP loan accretion of four and one basis point respectively.
Similar to the rising rate environment that we experienced during 2018, we're realizing the price advantage of our robust legacy deposit base. Our total deposit beta was just 4% for the third quarter and 0% on a year-to-date basis as compared to the 225 basis point increase in fed funds rate through July of this year. While we'll not be immune, we continue to believe we'll be able to mitigate deposit costs better than most peers.
For the third quarter of 2022, non-interest income of $32.3 million was down just $0.5 million year-over-year, primarily due to lower mortgage banking income, which decreased $3.3 million due to a reduction in residential mortgage originations consistent with the industry in general and the retention of more loans on the balance sheet. This reduction was mostly offset by higher commercial loan swap related income, which was up $1.7 million year-over-year, and $1.7 million gain on the sale of an underlying equity security held by WesBanco Community Development Corporation.
Starting to expenses, our diligent efforts to manage discretionary costs and combined with our recent margin expansion resulted in an improve efficiency ratio of 58.1%. Excluding restructuring and merger-related expenses, non-interest expense for the three months ended September 30, 2022 totaled $91.9 million, a 5.6% increase from the second quarter and just a 1.8% increase year-over-year.
As compared to the second quarter, the increase in expenses reflects the hiring of additional commercial and residential lenders, hourly minimum wage increases, mid-year merit increases, and the second quarter $1.2 million employee benefit credit.
In addition to our quarterly dividend, we continue to return capital to our shareholders by repurchasing 409,000 shares during the third quarter. Given market volatility in both debt and equity markets and the related impact to tangible common equity levels, we've continued to slow down our share repurchase strategy from the 1.1 million shares repurchased in the second quarter and currently projecting fourth quarter repurchasing to be less than the 400,000 shares repurchased during the third quarter.
Our capital position remained strong as demonstrated by regulatory ratios that are above the applicable well capitalized standards, and as of September 30, 2022, we reported tier one risk-based capital of 12.51%, tier one leverage of 9.68%, CET1 of 11.35% and total risk-based capital of 15.37%, as well as a tangible common equity to tangible asset ratio of 7.22%.
Now, I'll provide some thoughts on our current outlook for the remainder of 2022. We remain an asset sensitive bank and we're currently modeling fed funds to peak at 5% in the first quarter and hold steady through 2023. We are modeling continued margin expansion in the fourth quarter, but at a slower pace from the 30 basis point expansion experienced in the third quarter as deposit pricing begins to move.
As a general rule of thumb for each 25 basis point rate hike in the third quarter, we're currently modeling the quarterly net interest margin to benefit between two to three basis points per hike. We expect purchase accounting accretion to be approximately five basis points for the fourth quarter and no meaningful SBA PPP accretion.
As I mentioned, we expect the low deposit beta benefit from our core deposit funding base to provide a competitive advantage over the industry and anticipate our betas to be lower compared to peers and lag as they have historically. Fourth quarter residential mortgage originations should remain strong relative to industry trends due to our new loan production offices and hiring initiatives, but likely will be lower than the third quarter, reflecting seasonality. While it is dependent on origination production, we continue to expect to move over time to selling approximately 50% into the secondary market subject to customer preferences and pricing.
Trust fees, which are impacted by declines in the equity and fixed income markets are likely to be lower due to lower assets under management. Securities brokerage revenue should continue to benefit from organic growth and electronic banking fees and service charges on deposits will most likely remain in a similar range as the last few quarters.
We will continue our diligent focus on discretionary expense management to help mitigate the nationwide inflationary pressures as well as the need to attract and retain employees. The biggest impact from inflation will continue to be reflected across salaries and wages and employee benefits as well as occupancy and equipment.
Based on our efforts to strengthen our employee base for long-term growth, combined with higher seasonal healthcare and occupancy expenses, we currently anticipate fourth quarter operating expenses to be up modestly as compared to the third quarter. 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 speeds, and future loan growth.
In general, reductions in the allowances as a percentage of total loans will depend on the possibility of continued improvements in industries impacted by COVID, unemployment rates and other macroeconomic factors, including increases in interest rates and inflation expectations. Lastly, we currently anticipate our full year effective tax rate to be between 18.5% and 19%, subject to changes in tax legislation, deductions and credits and taxable income levels.
We are now ready to take your questions. Operator, would you please review the instructions?
[Operator instructions] And the first question comes from David Bishop with Hovde Group.
Good morning, David.
Yeah, good morning gentlemen. Thanks for taking my questions. Hey, I'm just curious in terms of maybe walking through the pipeline and the outlook for loan growth into the fourth quarter 2023, maybe what regions you're expecting to drive growth and where you seeing maybe the best resilience in terms of overall bar demand on both the sort of the residential and commercial side? Thanks.
Yeah, we're seeing it where we kind of expected to see it, quite frankly, our, I guess I would say newly acquired markets in the last 10 years. Markets, Maryland markets, for example, Kentucky, primarily Louisville area. We're seeing kind of outsized pipeline growth there. Our legacy markets are showing nice growth as well too. But, probably additional related to the Maryland and some of the Kentucky markets.
Also our LPOs I think we mentioned in our comments about 5% of our pipelines coming from Indianapolis now, and that LPO has only been open about six months and we're seeing nice pipeline growth and from our Nashville LPO, some significant size credits coming through our credit committee.
So really pretty much across the board, but more robust in those areas you'd expect to be growing faster. Our legacy markets are showing growth but those would be kind of more normalized growth. We benefit from deposits there, obviously significantly, but the areas we'd expect to grow are the ones that are, that are growing and really not seeing any pockets where there are any, what I would say, real problems with growth. I think everything seems to be doing okay.
Thanks. And then in terms of the maybe the deposit pricing front as your footprint obviously diversifies and grows, are there regions and pockets, maybe your legacy markets where you've got the sort of the legacy footprint and brand awareness where you can sort of lag deposit cost and I guess I'm asking are there significant differences in deposit pricing across your footprint at this point?
Yeah, there are, there are significant differences. The last time we saw a rate increase cycle was about this time in 2018, right? So this cycle rates went up a lot faster, so everything's obviously accelerated, but we're seeing some of the same trends we saw back then. We weren't in the Maryland market in 2018. We didn't get there until late in 2019, but, we're seeing differences.
I've been watching the deposit betas and others that have been reporting that are based in other geographic areas versus ours and that deposit beta for our legacy markets really showing up. Now, we want to make sure we're responsive to our customers. So, and our legacy markets, we do look at and we do address deposit pricing as we feel it's needed, but it's different in different parts of the region.
And that was, quite frankly, one of the reasons we acquired into those markets was that we thought, let's just take Maryland for example to have a bank with a $3 billion presence in Maryland and have our deposit funding associated with that. They're, they're able to use our deposits that we have in the legacy markets and lend those out. So, we make more money on every loan because we're not funding our loans from the mid-Atlantic market. We're funding our loans primarily from our legacy markets.
The same with Lexington, Louisville even Columbus Cincinnati, Pittsburgh to some extent, clearly Nashville, Indianapolis. If you look at some of the deposit pricing in some of those markets, it's pretty robust. So, we're not trying to fund the loan growth in those markets from deposits in those markets.
We're funding the loan growth in those markets from deposits in our legacy markets, which is the big competitive advantage I think we have. Having said that, we still want to be responsive to deposit pricing on our legacy markets, and we still are trying to generate deposits on a relationship basis in our higher growth areas, long growth areas. But as a general rule that was the idea behind going into those markets was to get a more growthier balance sheet to go from low single digit growth to upper single digit growth for WesBanco long term, and then to fund that with the very low deposit betas that we have.
Thanks. And one final question, maybe sort of say with that topic on the loan growth, do you still feel good about maybe the targeted upper single digit growth rate over the longer term given the competitive environment and economic backdrop? Thanks.
Yeah, we do, we really do. You don't know what kind of recession or if, we'll hit a recession or how deep it'll be in the next year or two, but kind of looking through that yeah, we're very committed to that upper single digit, that was part of our strategy all along and doing some of the things we did from an acquisition standpoint.
If you look at any quarter obviously can be bumpy for anybody, right? So I think if you look at our second quarter ex PPP on a year-over-year basis, we would've had about a 3.8% loan growth. If you look at the third quarter, the quarter we just released last night, ex-PPP on a year-over-year basis, it's 6.5%, right?
So it's getting pretty close to what I would say upper single digit. And that's kind of our plan is that on a kind of rolling quarter basis that you see that that upper single digit loan growth and particularly related to some of the commercial real estate payoffs, which abated in the second quarter came back in the third quarter, but we think are updating again because interest rates are going up.
So, that tends to whipsaw you a little bit from quarter to quarter. But kind of seeing through that on a normalized basis, we're kind of at that upper single digit growth rate right now.
[Operator instructions] And the next question comes on Daniel Cardenas with Janney Montgomery Scott.
Good morning, guys. I joined the call a little bit late, but could you maybe give us a little bit of color on the increase in your 90-day levels, on a sequential quarter basis, what was the driver there.
On the pass due?
Yes, sir.
Yeah, we went from nine basis points to 24 basis points. So it was about 15 basis point increase on the over 90-day, the 30 day to 89 day, was in line with where it was in the past and NPAs to total assets remained really low at 0.21, same as in prior quarters. The reason for the over 90-day we had three credits, quite frankly, that for administrative reasons expired and then went over 90 days. Not credit related issues, just quite frankly administrative related items that yeah, just need to be managed a little more closely. And they've since been addressed after quarter end. So they should have been done a few weeks earlier. They weren't.
So it's not an indication of any kind of credit issues or trends or anything like that. It's just administrative timing and we should have been on top of it more than we were. And they were addressed in the first couple of weeks after quarter end, and that would, that made it up the whole difference. It's the difference between a 0.09 and a 0.24 is $15 million bucks on a $10 billion balance sheet, and that $15 million was entirely made up of those three credits that just expired.
Got it. Okay, perfect. And then just kind of looking at deposit balances here on a go-forward basis what's kind of the strategy for growing deposits, just given that you're sitting at a loan to deposit ratio that I think still relatively low. Is there going to be a renewed emphasis on growing to deposit base, or are you going to kind of continue to just try to maintain it where it is?
Yeah, we really are focused on deposits and don't want to we don't want to give up that deposit advantage that we have, loan to deposit ratio 75% and with an upper single digit loan growth rate, that'll eat up, excess deposits and the loan deposit ratio will solely go up over time. So we are focused on deposits. So we are focused on gaining deposits and growing deposits, but balancing that against, the pricing pressure and pricing risk that's out there.
The 4% deposit beta that'll go up over time, we think that competitive advantage on deposit pricing will really exist through the entire cycle relative to peers, but they are going to have to go up to address what the needs are and I think just funding that loan growth that we would expect to have, we have to have a continued focus on deposits. We've let some of the CDs, things like that run off. And we've been doing that for years because we've had robust core funding that we've been able to replace that with.
But deposits are very much in focus, and while we do have such a strong legacy deposit base, I would tell you we're not -- we don't take that for granted. We're not cavalier about it. We work hard to maintain that and make sure that we're taking care of our customers with regard to that. But we're not going to have to go out and offer high price CDs and Nashville and Indie and DC and things like that in order to fund our growth.
We don't think that's something quite frankly, we should ever have to do. That's a competitive advantage that we've got. If anything, what we would do is work really hard to generate more core deposits in our legacy markets which would be cheaper than some of those higher growth markets if we needed to start generating deposits at a quicker level to fund the loan growth.
And we're also, recycling securities into in the loans as well too. Loan rates are get to be pretty good again. And our securities portfolio either, we typically carry debt around 20% of our balance sheet, and it's a little bit north of that right now. So we're recycling some of that stuff and as it matures and take the cash flows off the securities portfolio and redeploying that back in, into home growth, which we love being able to do that.
Good. And then just one quick follow-up question. On the M&A front, how are things looking in your marketplace? And would you guys get a chance to look at that, the limestone transaction?
Well, we don't talk a lot about M&A, obviously, but I'd tell you, we haven't -- we did not look at that. And I would also say that our focus is in those what I would say, higher growth areas, right, to continue the story that we've been telling for the last really 15 years or so, which is acquiring into markets that would grow faster than the national average.
So I'm really interested in those urban markets that are in our footprint, but some of the markets that might have a branch or two in an urban market, but the core franchise is really more rural or non-metro, not as high on our list.
We've got our new core operating system. It's been in place for a year now. We've got liquidity, we got capital. We have a lot of things that would allow us to do a deal. But to me, it comes down to pricing and also credit environment, right? So at this point, you're buying somebody else's underwriting. And what's that going to look like over the next year, people really don't know.
So it's just a question that's out there and something that we're cautious about headed into some type of a downturn. What's that going to look like on underwriting. And then can you price the deal the right way in a volatile environment and with things that are -- the way they are right now. So we're cautious about it. I can tell you that we're open to looking at things opportunistically, but we're currently not looking at anything.
And the next question comes from the line of Manuel Navas with D.A. Davidson.
Is there -- a lot of my questions have been answered. But just kind of thinking about the NIM as you see increases. Is there a particular stage or NIM level where you might start to think about protecting it? I know it's sad to think about when Fed funds might decline so soon, but like just kind of -- any thoughts on that idea possibly next year?
Why don't I throw that to Dan, our CFO. Dan, do you want to take that?
Yes. So I think if we -- what we're doing right now, we're modeling certainly, 75 basis point increase here Wednesday, from the Fed meeting another 50 in December and another 50 in the first quarter of next year. So from a model standpoint, we're generally anticipating with a 5% Fed funds rate, 4% 10-year for NIM to continue to kind of expand through the first half of the year and then stabilize from there on. A lot of the assumptions that go into that.
But I would say from protecting the NIM, as you know, these are in Slide 4, I believe -- Slide 5, you can see that we do have $3.1 billion of our commercial portfolio with floors, the average floor today is 3.93%. So that would also offer certainly some protection on the NIM.
That helps. Is -- just you were talking in your discussion of deposit flows a second ago, I don't think you said exactly what loan-to-deposit ratio you're kind of targeting or feel comfortable with letting it rise to? Any color there would be helpful.
Yes. I would say low- to mid-90s is kind of our optimal rate. So obviously, at 75%, we got quite a ways to go.
And this concludes the question-and-answer session. Now I'd like to turn the call over to Todd Clossin for any closing comments.
Okay. Thank you. I appreciate that. And again, thank you all for joining us today. Looking forward to speaking with you in the near future at one of our upcoming investor meetings and introduce you guys to Jeff, who will be traveling with us to future meetings. And I hope everyone has a good and safe week. Thank you.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.