Q3 2022 WesBanco Inc Earnings Call
Hello, and welcome to the West Bancorp, Inc. Third quarter 'twenty earnings Conference call.
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I'd like to turn the conference over to your host today, John Iron I'm trying now. Please go ahead.
Thank you good morning.
The West Banco Inc's third quarter 2022 earnings conference call.
Leading the call today are Todd Austin, President and Chief Executive Officer, Jeff Jackson, Senior Executive Vice President and Chief operating Officer, and Dan Weiss.
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 dotcom.
All statements speak only as of October 26, 2022.
West Bank 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 call, 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.
Patterson, our Chief operating officer, and my anticipated successor upon my retirement at the end of next year just experience that both first horizon and IBM is exceptional and throughout his career. He has successfully built in led teams and delivered top tier results and.
In the few short months that we have worked together I am proud to say that I'm impressed by his knowledge his ideas and his energy here.
He is a great addition to the West bank of family and someone who was well equipped to lead our company well into the future welcome Jeff.
Thanks, God I'm excited to be here.
I joined West Banco because I was impressed with the long history strong culture and focus on the shareholders customers employees and communities of West banker.
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.
Constantly impressed as they live are 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 what's Banco success as an evolving regional financial services institution back to Utah.
Thanks, Jeff.
We are pleased with our performance during the third quarter of 2022, as we continued to deliver on growth controlled discretionary expenses.
And manage the cost of our funding sources.
For the quarter ending September 30th 2022, we reported net income available to common shareholders are $56 million and diluted earnings per share of 85 cents 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% in return on tangible equity of $15 three 9%.
In addition, our.
Capital position remains 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.
When excluding Cds increased 3.2% year over year, and essentially flat to the second quarter.
The strength and deposits demonstrates the competitive advantage of a relatively low cost robust legacy deposit base.
Reflecting the strength of our markets and lending teams, we again reported strong broad base loan growth during the quarter. Despite elevated commercial real estate loan payoffs of $173 million.
Total loan growth, excluding SBA P. P. P loans was 6.5% year over year, and 0.8% or 3.2% annualized when compared to June 30th 2022.
The growth in our residential loan portfolio reflects the retention of mortgages on our balance sheet and continued relative strength and originations.
While a residential lending program is not immune to the impact of rising interest rates on homeownership 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 to have demonstrated the ability to organically grown market share.
We have successfully build out the teams and our Cleveland Indianapolis in Nashville loan production offices, and I'm excited for the opportunities they will ring.
As of September 30th the residential mortgage pipeline was approximately $110 million.
Total commercial one year over year growth of 3.4% was impacted by elevated commercial real estate payoffs, which were approximately $83 million above a more normalised historical average.
When adjusting for this spike the commercial loan growth would have been approximately 1.2% higher on bullets, a year over year and non annualized sequential basis.
Further total loan growth would have been seven 3% year over year, and 6.5% annualized as compared to June 30th.
We currently anticipate in 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 30th a slight increase from the June 30th pipeline. However.
However, since quarter and that pipeline has increased to 9% to $900 million as of October 17th.
The strength of our pipeline represents the talent of our lending teams as well as our early successes from our own production office strategy. For example, we opened our Indianapolis L. P O during April and our commercial team. There is demonstrated their expertise and knowledge of the market to represent in just six months approximately 5% of.
Our total commercial on 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.
Art here to our historic strengths of risk management and loan underwriting remained 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 past due nonperforming loans and nonperforming 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 to 178 basis points year over year to 2.43%, which is very near our pre pandemic percentage.
I would like to provide a quick update on the strategic investments, we had been making which we have funded through discretionary expense control and managing our financial center footprint.
Through the first nine months of the year, we have hired 30 commercial lenders 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 in Nashville.
I look forward to the opportunities for all of our new L. P OS 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.
Would now like to turn the call over to Dan Weiss are CFO for an update on our third quarter financial results and current outlook for 2022.
Dan.
Thanks Dad and good morning during the quarter, we recognize 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 maintain discipline over expenses, while executing upon or hiring plans.
As noted in yesterday's earnings release during the third quarter, we reported improved GAAP net income available to common shareholders are $56 million in earnings per diluted share of 85 cents and a net income of $132.3 million in earnings per share of $2.19 for the nine month period.
Excluding restructuring and merger related charges results for the three nine months ending September .
September 30th 2022, where 85 and $2.21 per share respectively, as compared to 70 cents 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 $45 million net attacks or 61 cents per share as compared to a benefit of only six cents per share during 2022.
Total assets of 16.6 billion as of September 30th 2022 included total portfolio loans of $10.3 billion in 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 P. P. P loan forgiveness and elevated commercial real estate.
Payoffs.
S. B a P. P P loans in the prior year period totaled $272 million as compared to only $13 million This period tomorrow.
Commercial real estate payoffs increase during the third quarter to approximately $173 million as compared to $98 million last quarter and $264 million last year.
Todd mentioned.
We expect these pay offs to return to a more normalized historical average if not better during the fourth quarter.
Strong deposit levels remain a key story is total deposits of 13.4 billion increased slightly year over year. Despite C. D run off of approximately $363 million <unk>.
Excluding C. DS deposits were essentially flat to the quarter ending June 30th 2022, but increased 3.2% year over year, driven by total demand deposits and savings accounts.
Further non interest bearing deposits as of September 30th 2022 continued 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 twenty-five basis points a year over year. This increase reflects the 225 basis point increase in the federal funds rate from March through July as well as our successful deployment of excess cash into higher yielding.
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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 P. P. P 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 are total deposit beta was just 4% for the third quarter and zero percent on a year to date basis as compared to the 225 basis point increase in fed funds rate through July .
Of this year.
I will not be immune we continue to believe will be able to mitigate deposit costs better than most peers.
For the third quarter of 2022 noninterest income of $32.3 million was down just half a million dollars a 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 low.
Owns on the balance sheet.
This reduction was mostly offset by higher commercial loan swap related income, which was up $1.7 million a year over year and at $1.7 million gain on the sale of an underlying equity securities held by West Bank of community Development Corporation.
Turning to expenses are diligent efforts to manage discretionary cos and combined with our recent margin expansion resulted in an improved efficiency ratio of 58.1% excluding.
Excluding restructuring and merger related expenses noninterest expense for the three months ended September 30th 2022, total $91.9 million or 5.6% increase from the second quarter, and just that 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 midyear merit increases and the second quarter $1.2 million employee benefit credit.
In addition to our quarterly dividend, we continued to return capital to our shareholders by repurchasing 409000 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 repurchase in the second quarter and currently projecting fourthquarter repurchasing to be less than the 400000 shares repurchased during the <unk>.
Third quarter.
R capital position remains strong as demonstrated by regulatory ratios, they're above the applicable well capitalised standards and as of September 30th 2022, We reported tier one risk based capital of 12.51 per cent tier one leverage of 968% CET one of 11.35%.
In total risk based capital a 15.37% as well as a tangible common equity to tangible asset ratio of 7.22 per cent.
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 modelling fed funds to peek 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 twenty-five 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 P. P. P accretion.
As I mentioned, we expect a low deposit beta benefit from our core deposit funding base to provide a competitive advantage over the industry and anticipate our beta has 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 in 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 per cent into the <unk>.
Secondary market subject to customer preferences in 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 in employee benefits as well as occupancy and equipment based on our efforts. This.
Strengthen our employee base for long term growth combined with higher seasonal health care 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, Underseas will depend upon changes to the macroeconomic forecasts in qualitative factors as well as various credit quality metrics, including potential charge offs criticising classified loan balances delinquencies changes in prepayment speeds and future loan growth.
In general reductions in the allowance 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, and a half 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.
Yes.
Thank you.
We will now begin the question and answer session.
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At this time, we will pause momentarily just hold on the roster.
And the first question comes from David Bishop with Hopped he grew up.
Good morning, David Yeah. Good morning, gentlemen, thanks for for taking my question.
Hey, I'm just curious.
<unk> and in terms of the maybe walking through.
The the the pipeline and the outlook for loan growth and up into the fourth quarter of 2023.
B what region, you are expecting to drive growth and where are you seeing maybe the best resilience in terms of overall borrowed demand on both the sort of the residential and commercial side.
Yeah, we're we're seeing it where we kind of expected to see it quite frankly are I guess I would say newly acquired markets in the last 10 years markets, Maryland markets. For example, Kentucky, primarily Louisville area you know we're seeing.
Outsized pipeline growth there are legacy markets or show, a nice growth as well too, but you know probably additional related to the Maryland and and some of the Kentucky markets also R. L. P. O's, particularly mentioned in her comments about five per cent of our pipelines coming from Indianapolis now and at L. P.
No. It's only been open about six months and and or see a nice pipeline growth and from our Nashville L. P. O. Some significant size credits coming through our our credit committee, so I'm 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.
Benefit from deposits, there, obviously significantly but the areas. We would expect to grow are the ones that are that are growing and really not seen any pockets, where there are any what I would say you know real real problems with with growth I think everything seems to be doing okay.
Thanks, and then in terms of the maybe the deposit pricing.
As your your footprint, obviously diverse deposit growth are there are the regents of pocket, maybe your legacy markets, where you've got the.
Sort of the the legacy.
Footprint and you know brand awareness, where you can sort of lag deposit cost.
I guess I'm asking you know are there significant differences in deposit pricing.
Across your footprint at this point yeah.
Yeah. There are there are there are significant differences I mean, 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 back then we weren't in the Maryland market in 2080, we didn't get there until late in 2019, but you know we're seeing differences. So I mean I've been watching the deposit betas and others that have been reporting that are based in other geographic areas versus ours in that department.
Beta far legacy market's really showing up now do we want to make sure we're responsive to our customers so and our legacy markets. We do look at them and we do address.
Deposit pricing as we feel it's needed, but it's different you know different parts of the region and that was quite frankly, one of the reasons. We acquired into those markets was that we thought it will just take Maryland for example.
To have a bank you know with the $3 billion presence in Maryland, and have our deposit funding associated with that.
You know, they're they're able to use our deposits that we haven't legacy markets and when those out. So you know 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.
This Cincinnati Pittsburgh to some extent clearly Nashville Indianapolis.
If you look at some of the deposit pricing and some of those markets. It's pretty robust. So we're not trying to fund their own growth in those markets from deposits in those markets, where funding alone grunted in those markets from deposits in our legacy markets, which is the the big competitive advantage I think we have having said that.
You know, we still want to be responsive to deposit price you don't our legacy markets and we still are trying to generate deposits on our relationship basis in our in our higher growth areas loan growth areas, but as a general rule that was the idea behind going into those markets was to get a more growth your balance sheet to go from low.
Single digit growth to upper single digit growth for West Banco long term and then to fund that with the very low deposit betas that we have.
[noise]. Thanks, and then one final question, maybe sort of stay with that topic envelope.
Still feel good about maybe the the targeted upper single digit growth rate over the longer term given the the competitive environment and economic backdrop. Thanks.
Yeah, we we do we really do I haven't seen you don't know what kind of recession or if you don't hit a recession or how deep it will be in the next year or two but kind of looking through that yeah. We're very 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 you know.
Any quarter, obviously can be bumpy for anybody right. So I think if you look at our second quarter X P. P. P. On a year over year basis, we would have had about a 3.8% a loan growth. If you look at the third quarter or the quarter. We just released last night X P. P. P on a year over year base.
It's 6.5 per cent right. So it's you know, it's getting pretty close to what I would say upper single digit and that's kind of our plan is that on a 10, a ruling quarter basis that you know you see that that upper single digit loan growth in.
Particularly relate.
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 abating again, because interest rates are going up. So you know that tends to whips whipsaw, you a little bit from quarter to quarter, but kind of seen through that on a normalized basis.
At that upper single digit growth rate right now.
I appreciate that color.
Sure.
Thank you and once again. Please press Star then one if you would like to ask a question.
Alright, and then that's question comes from Daniel Cardenas Janney Montgomery Scott.
Morning, guys.
During the call a little bit late but could you maybe give us a little bit of color on.
On the increase in 90 day levels on a sequential quarter basis, what was what was the driver.
In the past two.
Yes, Sir.
Yeah, we went from nine basis points to 24, so it's about 15 basis point increase on the over 90 day, the 30 to 89 day.
Was in line with where it was in the past and N P. As.
Total assets remained really low at 0.21 sameness and prior quarters up the reason for the over 90 day, Oh at three and three credits quite frankly, they're for administrative reasons expired and then went over 90 days not credit related issues, just quite frankly administrative related items that you just need to be managed to live.
More closely and and they've since been addressed after quarter and 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 of trends or anything like that is just administrative timing and.
We should've been on top of it more than we were and they were dressed in the first couple of weeks after quarter and.
That was it that made up the whole different it's different spin a point O 9.2, 450 million Bucks on a 10 billion dollar balance sheet.
And that 15 million was entirely made up of those three credits.
Expired.
Okay perfect.
And then just kind of looking at it deposit balances here on a on a go forward basis.
What's kind of the strategy.
Showing deposits just given that you're you're sitting at a a loan to deposit ratio that I think you know still relatively low.
Is there gonna 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, I mean, we we really are focused on on deposits and don't want to you know we don't we don't Wanna give up that deposit advantage that we had you know on deposit.
The ratio of 75% in within upper single digit loan growth rates.
That'll eat up you know access deposits into one deposit ratio was slowly built up over time. So we are focused on deposits. So we are focused on gaining deposits and growing deposits, but balancing that against you know the pricing pressure in pricing risk that that's out there you know the the 4% deposit beta that'll that'll go up over.
Time, we think that competitive advantage on deposit pricing will will really exists 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 that loan growth that we would expect to have we have to have a continued focus on deposits. We let some of the C DS.
Things like that run off and we've been doing that for for years, because we've had a robust core funding that we've been able to replace that with but deposits are are very much in focus and while we do have such a strong legacy deposit base I would tell you. We're not you know we don't take that for granted we're not cavalier about it we we work hard to make.
Pain that and make sure that you know, we're taking care of our our customers with with regard to that but we're not going to have to go out and and offer you know a high price C. DS in Nashville in India, and D C 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.
Yeah, that's that's a competitive advantage that that we've got it 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 quicker level to fund the loan growth and we're also.
Recycling securities.
[noise] securities into into loans as well to it won't loan rates or are you going to be pretty good again and our securities portfolio.
Typically carry that around 20 per cent of our balance sheet and it's a little bit north of that right. Now. So we're 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 the loan growth, which we love, we love being able to do that.
Good and then just one quick follow up question on on the M&A, Fred how are things looking in your marketplace.
Would you guys get a chance to look at the the limestone.
Transaction.
Well I I don't talk a lot about M&A, obviously, but I tell you. We you know we we haven't we did not look at that.
And and I would also say that our focus is and that is what I would say higher growth areas right to continue the story that we'd been telling for the last 15 years, or so which is acquiring into markets that would grow faster than the national average so I'm real interested in those urban markets.
That that are in our footprint.
But some of the markets that might have a branch or two you know in an urban market, but the core franchise is really more a more rural or non metro not not as high on our on our list you know we've got a new core operating system. That's been in place for a year now we 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 you know credit environment right. So at this point, you're buying somebody else's underwriting.
And you know what's that going to look like over the next year. If people really don't know so it's just it's just a question that's out there and something that we're cautious about you know headed into some type of a downturn, what's that going to look like an underwriting.
And then can you price a deal the right way and a volatile environments and with with things. There are you know the way they are right now so we're cautious about it.
I can tell you that we are open to looking at things Opportunistically, but we're currently not looking at anything.
Okay, great. Thank you I'll spell that.
Thank you and the next question comes from on your on novice what day Davidson.
Good morning.
Good morning.
Is there a lot of my questions have been answered, but just kind of thinking about the name as you see increases is there a particular.
Stage her name level, where you might start to think about protecting it I know it.
It's sad to think about what fed funds my declined so soon but like I'm, just kind of Ah any thoughts on that that idea, possibly next year.
Why don't I throw that said Dan R. C. F. O again, you wanted to take that.
Yeah, So I think.
If we what we're doing right now.
We're modeling.
Certainly 75% increase here Wednesday.
From the fed meeting another 50 in December and another 50 in the first quarter of next year. So.
From our models standpoint, we were generally anticipating with with a 5% fed.
Fed funds rate, 4% 10 here for an M.
Continue to kind of expand through the first half of the year and then stabilise from there they're on.
A lot of assumptions that go into that.
But I would say from protecting the him as you know this on fly Ah or I believe.
Five five you can see that we do have $3.1 billion of our commercial portfolio with for the average for today at 393. After that would also offer certainly some protection on on to them.
[noise] that that helps.
Is.
And you said you were taken in your discussions with positive loads a second ago I did I don't think.
He said exactly what loan to deposit ratio, you kind of targeting or feel comfortable with letting it rise to any color there would be helpful.
Yeah, I I would say a low to mid nineties kind of optimal right. So obviously, it's 75, we got quite a ways to go.
Perfect perfect I appreciate that I I'm I'm good for now thank you alright. Thank you.
[noise]. Thank you and this can cause the question and answer the question and I would like to send a 100 of <unk> turn to call. It a top class on Frank closing comments.
Okay. Thank you I appreciate that and 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 to Jeff who will be traveling with us.
To 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, I mean, not a central lines.
[noise].