Good day and welcome to the WesBanco Fourth Quarter 2023 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 this event is being recorded. I would now like to turn the conference over to Mr. John Iannone. Please go ahead, sir.

Thank you. Good morning and welcome to WesBanco, Inc.'s Fourth Quarter 2023 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 January 24th, 2024, and WesBanco undertakes no obligation to update them. I would now like to turn the call over to Jeff. Jeff?

Thanks, John, and good morning. On today's call, we will review our results for the fourth quarter of 2023 and provide an update on our operations and our current 2024 outlook. Key takeaways from the call today are successfully navigated industry-wide headwinds through the strength of our teams and our strategies, sustained loan deposit and fee income growth, maintain strong capital levels and key credit quality measures, focused on delivering positive operating leverage through new products and services and expense management. Despite the industry-wide headwinds caused by the Federal Reserve's record interest rate escalation, WesBanco performed well during 2023 through our continued focus on customer service and sustainable growth strategies. We achieved sustained loan, deposit and fee income growth, maintained strong capital levels and credit quality and remain focused on ensuring a strong organization for our shareholders, while investing appropriately for long-term sustainable growth. Through successful operational execution, we generated solid annual net income while remaining a well-capitalized financial institution with sound liquidity, balance sheet and credit quality metrics built upon well-defined strategies and core advantages, which will ensure success regardless of the economic environment. As we began 2024, we remain well capitalized with solid liquidity and capacity to fund loan growth, positioning us well to continue generating value for our shareholders. For the quarter ending December 31st, 2023, we reported net income available to common shareholders of $32.4 million and diluted earnings per share of $0.55. And for the full year, we reported net income available to common shareholders of $151.9 million and diluted earnings per share of $2.56, when excluding after-tax merger and restructuring charges. Furthermore, the strength of our financial performance during the past year is demonstrated by our return on tangible common equity of 13%. Nonperforming assets to total assets of just 16 basis points and…

Thanks, Jeff, and good morning. Our fourth quarter results continued to demonstrate loan and deposit growth, strong capital levels and credit quality and a stable net interest margin. For the quarter ending December 31st, 2023, we reported GAAP net income available to common shareholders of $32.4 million or $0.55 per share and $148.9 million or $2.51 per share for the full year. Net income available to common shareholders excluding after-tax restructuring and merger related expenses for 2023 was $151.9 million or $2.56 per diluted share as compared to $183.3 million or $3.04 per diluted share in the prior year period. The primary driver of year-over-year results was the impact of the higher interest rate environment, the recording of a provision expense this year as compared to a provision release in the prior year and inflation. As of December 31st, total assets of $17.7 billion included total portfolio loans of $11.6 billion and securities of $3.4 billion. Total portfolio loans grew nearly 9% year-over-year, reflecting the strength of our markets and lending teams combined with our strategic lending initiatives. We continue to use our securities portfolio to fund loan growth as the regular cash flow from the portfolio funded roughly 40% of the nearly $1 billion of loan growth during the year. Commercial real estate loan payoffs totaled $276 million during the year as compared to an anticipated annual level in the $500 million range within a more normal operating environment. As interest rates continue to stabilize and potentially decline, we anticipate the pace the CRE payoffs to pick up meaningfully as we progressed throughout 2024. Residential mortgage originations totaled approximately $690 million for the full year with roughly 43% of the originations sold into the secondary market as compared to $1 billion and 23% respectively for 2022. Our retail and…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Karl Shepard with RBC Capital Markets. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning, Karl.

I wanted to start on loan growth. It was obviously a very strong quarter for you guys. Could you talk a little bit about the production you're getting in these new markets? Just kind of the industry verticals, loan size and just anything different about what you're seeing there versus the rest of the book?

Yeah, sure. As we mentioned, we're seeing really strong loan growth from our LPOs. A lot of that is -- it's a nice mix of C&I businesses and CRE business. I would say that it's obviously a big portion of our pipeline going into this year. You know, as far as differences, you know, I would say it's no different than really what we're seeing across the rest of our footprint. It shows that, you know, obviously these LPOs are new and so there's newer -- a lot more opportunity for them to bring over their customers from other banks. And so we're seeing a nice pickup there. We expect to see continued pickup as we move forward this year. The other thing I would add is we are always evaluating opening new LPOs up. That'll be part of our strategy this year. And I think as we move forward, it's a nice cost-effective way that we continue to grow our loans by using the LPO method.

Okay. And then on the margin guidance. Dan, I was hoping you could touch a little bit on how sensitive it is to different rate scenarios. If we don't get cuts, do you still expect improvement in the second half? And if cuts come a little earlier, what would that do to the margin guidance?

Yeah, so Karl, as you know, we do, you know, try to generally maintain a pretty neutral posture, but if we think about, you know, just the kind of the headwinds and tailwinds without any cuts or with cuts, I think, kind of working off of December, I would say, you know, our spot margin came in at 2.97. And we do think that at least in terms of margin trajectory, that in the short-term that our deposit costs will come in slightly higher than our asset yields. And that'll get us into that mid to upper 2.90, you know, outlook that we provided, you know, on our prepared commentary. We'll expect deposits to continue to reprice upward, but we are seeing some noticeable decline in exception pricing and certainly to the extent that we see new deposit growth that would come on, you know, at a higher -- you know, higher than our average as well. We're also anticipating, of course, a little bit of non-interest-bearing remix as we continue into 2024, but at a much slower pace. So I would call those kind of the headwinds, you know, to margin. But if we think about tailwinds here, particularly, you know, as we think about other funding sources, for example, we do have $200 million in brokered deposits that are scheduled to roll off here, $100 million in April, $100 million in May. Those are priced at Fed funds plus 30 basis points, roughly. So that would be certainly a headwind. 70% of our CD book or about $800 million, a little more than that is repricing in the next 12 months. That's coming -- that's repricing from about 3% and 3.25%. So to the extent that we see an up or down, we can adjust from there. But…

That's great. Lots of puts and takes for sure, but it sounds like you guys have your arms around it. So, thank you very much. I'll step back.

Your next question will come from David Bishop with the Hovde Group. Please go ahead.

Yeah, good morning, gentlemen.

Hey, good morning, Dave.

Hey, Jeff. Obviously, you know, you have a focus on operating expenses. Probably some of the growth this year reflected, you know, the aggressive LPO expansion and lender hires, you know, employee benefits up. Just curious, within the compensation and maybe employee benefits, is there anything specific you can do other than maybe slowing the rate of growth to restrain that? Just curious how you're thinking this year to really, you know, keep a lid on expense growth overall.

Yeah, Dave, we're looking at everything. And, you know, we just went through a retail transformation and we're hoping to wrap that up in the next month or two. You may have seen we're down 65 employees in retail. We're looking to take down another 20. We are reinvesting some of that into the business banking space. The other thing we're looking to do is there are some processes across the bank that we're looking to see if we can make them more efficient. And then going back to the retail space, you know, we always evaluate kind of our bottom performing branches. And so we expect to do that again this year and also look at our hours as well. So I think there are couple of things we're really looking to do that. We think we can reduce expenses and become more efficient. We're always looking to do that. But I do think we have some opportunities as we move forward this year.

And remind me, in terms of the ATM fleet upgrade, is that -- are those expenses down behind you? Is that fully in the run rate?

Yeah, I would say the 50 ATMs -- the final 50 ATMs were put into place here in the fourth quarter. So they're not fully baked into the run rate. I think on my prepared commentary there, I expect somewhere around about $1 million of impact on a quarterly basis in that software and equipment line item related to basically ATMs and some other investments.

Got it. And then circling back to the margin and the funding of loans, remind us what the prospect for quarterly securities cash flow is entering 2024?

It's usually $100 million a quarter.

That's where it's still at?

Yeah, it's still $100 million a quarter. And we'll still continue to use that, obviously, to fund loan growth.

Got it. Then finally, you know, you mentioned the success, obviously, on the loan side from the new LPOs. Just curious if you're seeing any traction yet in terms of the deposit and funding side out of these new locations. Thanks and I'll hop back into the queue.

Yes, we are seeing a little bit of traction. It's more of, obviously, a loan funding. But yes, we are seeing some deposit growth there, especially as we continue to focus on expanding our C&I focus. So that's one of our main strategic goals is really to expand our C&I lending because it does bring deposits. It also brings fees, opportunities. And between that and obviously continuing our swap fees as well, as Dan mentioned, we overachieved our goal of $8 million last year. We feel like those LPOs are really driving some nice returns for us.

Great. Thank you.

The next question will come from Russell Gunther with Stephens. Please go ahead.

Hey, good morning, guys. I wanted to follow-up on the margin discussion. Dan, I appreciate all the puts and takes. Maybe just sticking with the deposit data, could you give us a sense for where you expect that to peak in the first half of the year? And then what are you assuming for the way down and what's kind of baked into your three-cut -- fed fund cut guidance for '24?

Sure. So we generally try to stay away from disclosing betas, as you know, Russell. But I would say, you know, we are anticipating the peak in deposit costs really to occur here in the first half -- in the first half of the year. But on the way down, you know, within our own modeling, we're right in that 25% range in terms of beta. And really the question -- there's a couple of questions that come to mind. One is, you know, is that an immediate -- is that immediate? Is that lagged? Is that after, you know, one or two or three cuts? And so I think that's all, you know, potentially up for debate. But what we see in our modeling is under multiple scenarios, we benefit in terms of margin. So we see deposit costs coming down at a faster rate than asset prices -- pricing.

Okay, that's great, Dan. I appreciate that. And then just switching gears for my follow-up. Jeff, I believe you mentioned the potential for new LPOs as a part of the growth strategy this year. Just any color on geographic appetite would be great.

Sure. We evaluate a lot of different geographies, but really our focus is on Tennessee continuing to fill in there. We have Nashville and Chattanooga. We would look at potentially Knoxville or continuing to fill out the Nashville and Chattanooga areas. Virginia is another expansion state for us. Richmond, Northern Virginia. And then I would say potentially in Ohio, we always look at opportunities in Ohio. Obviously, we have a good presence there in part of the state, but continue to look there as well. I would say those are our three main areas. North Carolina could be a possibility down the road, but once again, mainly either filling in where we're at or potentially continuing to move South.

All right, Jeff. That's great. Thank you, guys. That's it for me.

Thank you.

The next question will come from Daniel Tamayo with Raymond James. Please go ahead.

Hey, good morning, guys. Thanks for taking my question.

Good morning.

Hey, good morning.

Maybe just starting on, you know, you guys talked a lot about the treasury management investments as that comes online, I guess, over the course of the year and into next year. Just your thought on, you know, the ultimate goal there? Like, how big you want that contribution in terms of fee revenue? And maybe if you could put a little finer point on what may be the contribution in the back half of 2024 that you're expecting to grow off of?

Sure. You know, I think we're always looking to be less reliant on spread revenue. And so for me, targeting total fee revenue would be around 30%. That's a multi-year target. But, you know, for us, that's what we're looking to try to do. As it relates to our TM products, we mentioned we're continuing to build out the pipeline. We are getting these products in place. And so I do believe the pipeline is starting to build pretty strong. As far as the second half of the year, I don't really have -- want to give out any guidance on what that would be as far as revenue. But we think it would be pretty significant over the second half of the year. Once again, we are changing our treasury management team to be more sales like, transitioning it from more of a support operational function. And so I do believe we'll see a nice pickup in the second half of the year based on that transition and the new products and the incentives we've put together for our commercial teams.

Okay, terrific. Thanks for that. And then my second question, just on capital, you're benefiting as everyone is from lower rates here. And then, you know, assuming that we do get a soft landing or, you know, you continue to build capital, just curious your thoughts on how share repurchases could fit into the capital priorities?

Yeah, I think we look at, you know, kind of our capital deployment, kind of starting with dividends. We obviously put that at the top of our capital deployment. Then we look at obviously loan growth, then would be M&A and then would be buybacks. We're always actively out talking to other banks, but, you know, looking for different opportunities. But, you know, at this point, we're not really looking at buybacks if something may change in the back half of the year. But right now I would say it's down on the capital deployment priority list.

Okay, understood. That's it for me. Thanks guys. Appreciate it.

Thank you.

The next question will come from Catherine Mealor with KBW. Please go ahead.

Thanks. Good morning.

Hey, good morning, Catherine.

Good morning.

Maybe just start as a follow-up to the M&A comment you just made. Just talk to us about how you're thinking about M&A versus LPOs and team lift outs. It feels like that's been a little bit of a priority recently just given M&A has been slower. But what do you think it takes to get more active in M&A and what kind of potential deals would you put at the top of your strategy list?

I would lay in basically the same comments I just made about LPOs of where we're looking. Typically, it would be Tennessee, Virginia, filling-in in Ohio. And so for us, you know, our target size is usually that $2 billion to $5 billion range of asset bank. That's kind of a nice fit for us. It's, you know, 10% to 15% of our asset size. But I think it's definitely an option for us. We do have a great capital position and are in a good position to do an acquisition should one come along. So I think, you know, our history has shown that we create these LPOs to kind of test the waters in the market and then potentially do deals after that. So I would not see us changing that course. But once again, I think as you mentioned, the M&A market has been difficult. I do believe, you know, sellers are looking for interest rates to decline and so that may make it more difficult because they seemingly want to wait to see rates decline, potentially their valuations go up, but we will continue to be out there talking.

That's great. And then on credit, you know, credit just remains really strong. Just give me any outlook for how you think provisioning may trend this year. You've had a lot of negative provisions over the past couple of years. And that's starting to turn, but still really low. So just generally how you're thinking about provision cost and credit cost over the next year?

Yeah, for us related to credit, we obviously continue to look at all our portfolio to make sure they're doing well. We obviously look at office and do deep dives on our office, which is in great shape there. I would see for this year our credit provisioning and cost to continue to stay relatively the same. We have seen, like every bank, you know, you have a credit here or there, but so far we've been able to fix those credits and restructure and right size those credits based on the strength of our borrowers. Dan, you want to add anything on the provision?

Yeah. No, I think you covered it, Jeff. I mean, certainly provisioning is going to be dependent upon loan growth, is probably the biggest thing absent, you know, credit events. And wouldn't, you know, today a big portion of our provision or allowance is based on, you know, the forecast of unemployment rates. And based on those forecasts, we're not seeing anything really significantly out of the ordinary. So we're, just as Jeff said, we're kind of in that anticipating something similar to what we experienced here in '23.

And on your just commercial real estate maturities, can you give any just anecdotes or commentary on what you're seeing as, you know, some of your fixed rate CRE loans are coming due and repricing? You know, are you seeing any credit stress in those moments or, you know, just kind of rental rates big enough to kind of offset the impact of higher interest rates? Just kind of any commentary on what you're seeing just with your borrowers would be helpful.

Yeah, we have not really seen any stress. I mean, we've had, obviously, like every bank, a few deals here or there that has caused stress. But the nice thing is we've done a great job in picking the customers we lend to. And as I've said, you know, people forget that since the OA crisis, it's been a great run for real estate developers. And so fortunately for us, our customers have had a lot of liquidity. And so when we do run into a situation which has been rare, they have been able to step in and provide the additional equity to right size the refinance of the deal based on the higher rates.

Great, very helpful. Thank you.

Thank you.

The next question will come from Casey Whitman with Piper Sandler. Please go ahead.

Hey, good morning.

Good morning, Casey.

Good morning.

Good morning. So most of my questions were answered, but maybe can you walk us through the assumption you have for deposit growth this year against your comments around mid to upper single digit loan growth? How comfortable are you with the loan deposit ratio here at 88% or so -- or what do you see as the right level for WesBanco?

Yes, I do believe we will have solid deposit growth. As far as it relates to the loan to deposit ratio, you know, I could see that creeping up to near 90% to 92%. I do believe potentially our loan growth might outrun a little bit of our deposit growth. But once again, we do have the $100 million a quarter that helps fund the loan growth. So, I could see it slightly moving up because I do believe loans will outgrow deposits, but I don't think it will be by a wide margin. And I do believe the securities, $100 million a quarter will help fund that gap.

Got it. And how low are you comfortable with the securities book getting to, I guess, as a percentage of assets or is there a target range?

Yeah, Casey, it's right around 17. I would say mid-teens of, I would say, 17% of total assets is kind of probably our bottom end.

All right. Thanks.

Thank you.

[Operator Instructions] Our next question will come from Manuel Navas with D.A. Davidson. Please go ahead.

Hey, good morning. Most of my questions have been answered too. Just -- could you touch on loan growth pace across the year? Would rates kind of help accelerate it or would that pay down normalization on CRE kind of slow it, like just kind of walk me through the dynamics you're thinking on loan growth across the year?

Yeah, sure. I actually believe that with a few cuts that we have modeled, as mentioned, we're modeling three cuts. I'm not sure it would really increase pay down speeds. I think you're going to need bigger cuts. When I think about paydowns, I think about, obviously, our CRE book, but going to the permanent market. And so to me, I think, you know, a couple of cuts here or there isn't going to make it worth moving a lot of CRE to the permanent market. So for me, I think reductions in rates might help speed up our loan growth slightly. But I think if you see three 25 basis point cuts, it's not -- I don't think it impacts it either way dramatically, if that makes sense.

No, that's helpful. With the securities book, it seems like you're going to need to fund some of this loan growth with deposits. Has there been any better or has it -- has there been opportunities for any like restructuring the securities book and are you constantly thinking of that to pay down borrowings, perhaps?

Yeah. So we -- obviously we've had those discussions probably every quarter for the last six quarters. Today, there is not. We feel that, you know, we're comfortable with where the loan deposit ratio is. We're comfortable, you know, with the liquidity that we have. We don't feel that we need to necessarily, you know, enter into that kind of loss trade. And we feel that with rate cuts, we think that in the nearer term, those unrealized losses are going to improve. So, I'm little hard pressed today to go in and take a loss on -- you know, on the loss trade selling securities. I'd rather, you know, wait it out a couple more quarters and see where we're at then.

Thank you. I appreciate that. Thank you for the comments today.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jeff Jackson for any closing remarks. Please go ahead, sir.

Thank you for joining us today. During the past year, we achieved sustained loan, deposit and fee income growth while maintaining strong capital levels and credit quality. We remain committed to continuing these growth trends while leveraging new products and expense management to deliver positive operating leverage. We look forward to speaking with you in the near future at one of our upcoming investor events. Please have a good day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.