Wesbanco Inc: Form 10-Q for the period ended Sep 30, 2023

Management’s Discussion and Analysis (“MD&A”) represents an overview of the results of operations and financial condition of Wesbanco for the three and nine months ended September 30, 2023. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto.

FORWARD-LOOKING STATEMENTS

Forward-looking statements in this report relating to Wesbanco’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The information contained in this report should be read in conjunction with Wesbanco’s Form 10-K for the year ended December 31, 2022 and documents subsequently filed by Wesbanco with the Securities and Exchange Commission (“SEC”), including Wesbanco's Form 10-Q for the quarters ending March 31, 2023 and June 30, 2023, which are available at the SEC’s website, www.sec.gov (http://www.sec.gov) or at Wesbanco’s website, www.wesbanco.com (http://www.wesbanco.com). Investors are cautioned that forward-looking statements, which are not historical fact, involve risks and uncertainties, including those detailed in Wesbanco’s most recent Annual Report on Form 10-K filed with the SEC under “Risk Factors” in Part I, Item 1A. Such statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements, including, without limitation, the effects of changing regional and national economic conditions; changes in interest rates, spreads on earning assets and interest-bearing liabilities, and associated interest rate sensitivity; sources of liquidity available to Wesbanco and its related subsidiary operations; potential future credit losses and the credit risk of commercial, real estate, and consumer loan customers and their borrowing activities; actions of the Federal Reserve Board, the Federal Deposit Insurance Corporation, the SEC, the Financial Institution Regulatory Authority, the Municipal Securities Rulemaking Board, the Securities Investors Protection Corporation, the Consumer Financial Protection Bureau and other regulatory bodies; potential legislative and federal and state regulatory actions and reform, including, without limitation, the impact of the implementation of the Dodd-Frank Act; adverse decisions of federal and state courts; fraud, scams and schemes of third parties; cyber-security breaches; competitive conditions in the financial services industry; rapidly changing technology affecting financial services; marketability of debt instruments and corresponding impact on fair value adjustments; and/or other external developments materially impacting Wesbanco’s operational and financial performance. Wesbanco does not assume any duty to update forward-looking statements.

OVERVIEW

Wesbanco is a multi-state bank holding company operating through 192 branches and 183 ATM machines in West Virginia, Ohio, western Pennsylvania, Kentucky, southern Indiana and Maryland, offering retail banking, corporate banking, personal and corporate trust services, brokerage services, mortgage banking and insurance. Wesbanco’s businesses are significantly impacted by economic factors such as market interest rates, federal monetary and regulatory policies, local and regional economic conditions and the competitive environment’s effect upon Wesbanco’s business volumes. Wesbanco’s deposit levels are affected by numerous factors including personal savings rates, personal income, and competitive rates on alternative investments, as well as competition from other financial institutions within the markets we serve and liquidity needs of Wesbanco. Loan levels are also subject to various factors including construction demand, business financing needs, consumer spending and interest rates, as well as loan terms offered by competing lenders.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Wesbanco’s critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of September 30, 2023 have remained unchanged from the disclosures presented in Wesbanco’s Annual Report on Form 10-K for the year ended December 31, 2022 within the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

RESULTS OF OPERATIONS

EARNINGS SUMMARY

Net income available to common shareholders for the third quarter of 2023 was $34.3 million, with diluted earnings per share of $0.58, compared to $50.5 million or $0.85 per diluted share, for the third quarter of 2022. For the nine months ended September 30, 2023, net income was $116.5 million or $1.96 per diluted share, compared to $132.3 million or $2.19 per diluted share, for the 2022 period. As noted in the following table, net income available to common shareholders, excluding after-tax restructuring and merger-related expenses, for the nine months ended September 30, 2023, was $119.5 million or $2.01 per diluted share, as compared to $133.7 million or $2.21 per diluted share in the prior year period (non-GAAP measures).

(unaudited, dollars in thousands, except per share amounts)

(1) Non-GAAP net income excludes after-tax restructuring and merger-related expenses. The above non-GAAP financial measures used by Wesbanco provide information useful to investors in understanding Wesbanco’s operating performance and trends, and facilitate comparisons with the performance of Wesbanco’s peers.

Net interest income decreased $6.8 million or 5.5% in the third quarter of 2023 compared to the same quarter of 2022, due to the 525 basis point increase in the federal funds rate since March 2022 and the subsequent increase in funding costs which has occurred steadily throughout 2023, which, in turn, resulted in a 30 basis point decrease in the net interest margin over the same period. The increase in funding costs has been partially offset by higher yields in all earning asset categories, due to the repricing of existing loans and higher investment rates offered in the current market environment. Over the same time period, the yield on earning assets increased by a total of 113 basis points while the cost of interest bearing liabilities increased 211 basis points from increasing deposit costs and higher cost wholesale borrowings. Average loan balances increased by 10.2% from the third quarter of 2022, mainly attributable to commercial loan demand, while average securities decreased by 11.3% over the same time period as investment maturities and calls were used to partially fund the loan growth. Average deposits decreased 4.7% over the same time period as a result of interest rate and inflationary pressures and rising costs across the economy. Accretion from prior acquisitions benefited the third quarter 2023 net interest margin by two basis points, as compared to five basis points in the prior year period. For the nine months ended September 30, 2023, net interest income increased $19.1 million or 5.6% from the first nine months of 2022 for the same reasons as mentioned for the three months ended, as the deposit cost increases lagged until 2023.

Loan growth, adjustments in macroeconomic factors, and a $2.9 million specific reserve on one hospitality loan, resulted in a provision for credit losses of $6.3 million in the third quarter of 2023, as compared to a negative provision of $0.5 million in the third quarter of 2022. Annualized net loan charge-offs, as a percentage of average portfolio loans, were 0.01% and 0.04% for the third quarter of 2023 and 2022, respectively.

For the third quarter of 2023, non-interest income decreased $1.4 million or 4.3% compared to the third quarter of 2022, primarily due to a $1.5 million gain on the sale of underlying equity investments held by Wesbanco Community Development Corporation ("Wesbanco CDC") in the prior year's third quarter, which was recorded in net gains on other real estate owned and other assets. Net securities losses of $0.3 million in the third quarter of 2023 decreased $1.0 million year-over-year due to market fluctuations from equity securities in the deferred compensation plan. Offsetting these decreases somewhat are net swap fees and valuation income, which is now reflected as a line item within the consolidated income statement. Commercial swap fees increased $0.8 million from the prior year period to $2.5 million, while associated fair market value adjustments totaled $1.4 million during the third quarter, as compared to $0.8 million last year. Bank-owned life insurance increased by $0.4 million or 20.0% in the third quarter of 2023 as compared to the third quarter of 2022 due to an increase in death benefits received.

Non-interest expense, excluding restructuring and merger-related expenses, increased in the third quarter of 2023 by $5.4 million, or 5.9%, to $97.3 million, compared to the third quarter of 2022, reflecting increased salaries and wages, employee benefits, equipment and software expense and FDIC insurance. Salaries and wages increased $1.1 million, or 2.4%, from the third quarter of 2022 to the third quarter of 2023 due to higher salary expense relating to new revenue-producing hires, mostly commercial lenders, and annual merit increases. Employee benefits expense increased $1.2 million from last year's third quarter due mainly to higher health insurance costs. Equipment and software expense increased $1.0 million in the third quarter of 2023 compared to the prior year third quarter due to the planned upgrade to one-third of our ATM fleet with newer technology and general inflationary cost increases for existing service agreements. FDIC insurance expense increased by $0.7 million in the third quarter of 2023 from the third quarter of 2022 due to an increase in the minimum rate for all banks in 2023.

For the first nine months of 2023, the effective tax rate was 17.6% as compared to 18.8% for the nine months ended September 30, 2022, and the provision for income taxes decreased by $6.0 million over the same time period. Both of these decreases are due to the decrease in pre-tax income over the same period.

NET INTEREST INCOME

TABLE 1. NET INTEREST INCOME

(unaudited, dollars in thousands)

Net interest income, which is Wesbanco’s largest source of revenue, is the difference between interest income on earning assets, primarily loans and securities, and interest expense on liabilities, primarily deposits and short and long-term borrowings. Net interest income is affected by the general level of, and changes in interest rates, the steepness and shape of the yield curve, changes in the amount and composition of interest earning assets and interest bearing liabilities, as well as the frequency of repricing of existing assets and liabilities. Net interest income decreased $6.8 million or 5.5% in the third quarter of 2023 compared to the third quarter of 2022. This decrease was due to a 30 basis point decrease year over year in the net interest margin to 3.03% for the third quarter of 2023. The decrease in margin is due to higher funding costs resulting from the 525 basis point increase in the federal funds rate since March of 2022. Portfolio loans increased by 10.1% from September 30, 2022, due to strong new loan growth and strategic loan production office and lender hiring initiatives. Total purchase accounting accretion continued to decrease in the third quarter of 2023 as compared to the third quarter of 2022, as approximately two basis points of accretion from prior acquisitions was included in the third quarter 2023 net interest margin as compared to five basis points in the 2022 third quarter net interest margin. Total average deposits, excluding CDs, decreased in the third quarter of 2023 by $659.0 million or 5.2% compared to the third quarter of 2022. The cost of interest bearing deposits increased by 174 basis points and the cost of total interest bearing liabilities increased by 211 basis points from the third quarter of 2022 to the third quarter of 2023. The increase in the cost is primarily due to rate increases for interest bearing deposits in response to the general increase in overall borrowing rates in the marketplace resulting from the previously mentioned federal fund rate increases in 2022 and 2023.

Interest income increased $49.5 million or 36.9% in the third quarter of 2023 compared to the same period of 2022 and $155.5 million or 42.6% in the first nine months of 2023 compared to the same period in 2022 due to the 525 basis point increase in the federal funds rate since March of 2022. Average loan balances increased $1.0 billion or 10.2% in the third quarter of 2023 compared to the third quarter of 2022, while loan yields increased by 121 basis points during this same period to 5.46% due to the previously mentioned rising rate environment and its effect on the repricing of portfolio loans, as well as higher offered rates on new loans. Loans provide the greatest impact on interest income and the yield on earning assets as they have the largest balance and the highest yield within major earning asset categories. In the third quarter of 2023, average loans represented 72.5% of average earning assets, an increase from 68.2% in the third quarter of 2022. Average total securities balances decreased $492.6 million or 11.3% from the third quarter of 2022, and represented 24.9% of total earning assets in the third quarter of 2023. Taxable securities yields increased by 35 basis points in the third quarter of 2023 from the third quarter of 2022 due to increased rates on the variable rate portion of the investment portfolio. Tax-exempt securities yields, which are the highest yields within total securities, remained relatively flat with an increase of two basis points from the third quarter of 2022 to the third quarter of 2023.

Interest expense increased $56.3 million in the third quarter of 2023 and $136.3 million in first nine months of 2023 as compared to the same periods in 2022, due to the timing of the previously mentioned federal funds rate increases and their effect on the costs of deposits and borrowings. The cost of interest bearing liabilities increased by 211 basis points from the third quarter of 2022 to 2.52% in the third quarter of 2023. Average interest bearing deposits decreased $89.9 million or 1.0% from the third quarter of 2022. The rate on interest bearing deposits increased 174 basis points to 2.01% from the third quarter of 2022, primarily from increases in rates on interest bearing public funds, money market funds and savings deposits, which were previously near their floors, and a mix shift from non-interest bearing demand deposits into interest bearing demand deposits and certificates of deposit. Average non-interest bearing demand deposit balances decreased from the third quarter of 2022 to the third quarter of 2023 by $553.7 million or 11.6%, and were 32.5% of total average deposits at September 30, 2023, compared to 35.1% at September 30, 2022, reflecting customers' preferences in the previously mentioned interest rate environment. For the third quarter of 2023, Wesbanco's average loans to average deposits ratio was 86.8%, reflecting additional capacity to lend. The average balance of FHLB borrowings increased $1.1 billion from the third quarter of 2022 to the third quarter of 2023, due to increased loan funding demand and for liquidity purposes. Average repurchase agreements decreased $35.9 million or 24.3% from the third quarter of 2022 to the third quarter of 2023, while average subordinated and junior subordinated debt balances remained flat.

TABLE 2. AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS

(unaudited, dollars in thousands)

(1) Gross of allowance for credit losses and net of unearned income. Includes non-accrual and loans held for sale. Loan fees included in interest income on loans were $0.8 million and $1.4 million for the three months ended September 30, 2023 and 2022, respectively, and were $1.9 million and $8.0 million for the nine months ended September 30, 2023 and 2022, respectively. Additionally, loan accretion included in interest income on loans acquired from prior acquisitions was $1.0 million and $1.7 million for the three months ended September 30, 2023 and 2022, respectively, and $3.5 million and $6.2 million for the nine months ended September 30, 2023 and 2022, respectively.

(2) Average yields on available-for-sale debt securities are calculated based on amortized cost.

(3) Taxable equivalent basis is calculated on tax-exempt securities using a federal statutory rate of 21% for each period presented.

(4) Accretion on interest bearing liabilities acquired from prior acquisitions was $35 thousand and $0.2 million for the three months ended September 30, 2023 and 2022, respectively, and $0.3 million and $0.9 million for the nine months ended September 30, 2023 and 2022, respectively.

TABLE 3. RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

(unaudited, in thousands)

(1) Taxable equivalent basis is calculated on tax-exempt securities using a federal statutory tax rate of 21%.

PROVISION FOR CREDIT LOSSES – LOANS AND LOAN COMMITMENTS

The provision for credit losses – loans is the amount to be added to the allowance for credit losses – loans after net (charge-offs) recoveries have been (deducted) added to bring the allowance to a level considered appropriate to absorb lifetime expected losses for all portfolio loans. The provision for credit losses – loan commitments is the amount to be added to the allowance for credit losses for loan commitments to bring that allowance to a level considered appropriate to absorb lifetime expected losses on unfunded loan commitments. The provision for credit losses - loans and loan commitments increased to $6.3 million in the third quarter of 2023 compared to a negative provision of $0.5 million in the third quarter of 2022. While the provision increased year-over-year, the $6.3 million provision in the third quarter of 2023 was a result of continued loan growth and adjustments in regional macroeconomic factors and loan concentrations as well as a $2.9 million specific reserve on one hospitality loan. Non-performing loans were 0.26% of total portfolio loans as of September 30, 2023, decreasing from 0.32% of total portfolio loans at the end of the third quarter of 2022. Criticized and classified loans were 2.22% of total portfolio loans as of September 30, 2023, decreasing from 2.43% as of September 30, 2022, primarily due to risk rating improvements. Past due loans at September 30, 2023 were 0.22% of total portfolio loans, compared to 0.45% at September 30, 2022. Annualized net loan charge-offs were 0.03% for the nine months ended September 30, 2023, compared to 0.02% for the nine months ended September 30, 2022. Please see the Allowance for Credit Losses – Loans and Loan Commitments section of this MD&A for additional discussion.

NON-INTEREST INCOME

TABLE 4. NON-INTEREST INCOME

(unaudited, dollars in thousands)

NM = Not Meaningful

Non-interest income is a significant source of revenue and an important part of Wesbanco’s results of operations, as it represents 20.8% of total revenue for the three months ended September 30, 2023. Wesbanco offers its customers a wide range of retail, commercial, investment and electronic banking services, which are viewed as a vital component of Wesbanco’s ability to attract and maintain customers, as well as providing additional fee income beyond normal spread-related income to Wesbanco. For the third quarter of 2023, non-interest income decreased $1.4 million or 4.3% compared to the third quarter of 2022, primarily due to a $2.1 million decrease in net (loss) gain on other real estate owned and other assets and a $1.0 million decrease in net securities (losses) gains. These decreases were slightly offset by a $1.4 million increase in net swap fee and valuation income.

Trust fees increased $0.2 million or 2.9% compared to the third quarter of 2022, due to market value increases. Total trust assets were $5.0 billion at September 30, 2023 as compared to $4.6 billion at September 30, 2022. As of September 30, 2023, trust assets include managed assets of $4.0 billion and non-managed (custodial) assets of $1.0 billion. Assets managed for the WesMark Funds, a proprietary group of mutual funds that is advised by Wesbanco Trust and Investment Services, were $0.8 billion as of September 30, 2023 and September 30, 2022, respectively, and are included in managed assets. Trust fees increased $0.2 million or 1.1% in the first nine months of 2023 as compared to the first nine months of 2022.

Net swap fee and valuation income, which includes fair value adjustments, increased $1.4 million in the third quarter of 2023 compared to the third quarter of 2022, due to a higher volume of new swaps originated and increased fair value adjustments. For the three months ended September 30, 2023, new swaps executed totaled $178.1 million in notional principal, resulting in $2.5 million of fee income, compared to new swaps executed of $82.3 million in notional principal resulting in $1.6 million of fee income for the three months ended September 30, 2022. Fair value adjustments on existing swaps for the three months ended September 30, 2023 were $1.4 million as compared to $0.8 million for the three months ended September 30, 2022. For the first nine months of 2023, net swap fee and valuation income increased by $1.2 million or 19.9% from the first nine months of 2022. During this time period, gross new swap fee income increased by $4.1 million, but was offset by a $2.9 million decrease in net fair value adjustments on existing swaps.

Net securities (losses) gains include both gains and losses on investment security transactions as well as market value adjustments on Wesbanco's deferred compensation plan. For the three months ended September 30, 2023, net securities (losses) gains decreased $1.0 million compared to the same period of 2022, due to a $0.2 million decrease in market adjustments on the deferred compensation plan in the third quarter of 2023 as compared to a $0.8 million increase in market adjustments in the third quarter of 2022. These market adjustments had an offsetting effect in employee benefits expense. For the nine months ended September 30, 2023, net securities (losses) gains increased by $1.2 million from the first nine months of 2022 for the same reasons.

Mortgage banking income decreased $0.3 million or 22.4% in the third quarter of 2023 compared to the third quarter of 2022, due to lower margins on sales and increased deferred loan costs on mortgage loans. For the third quarter of 2023, total mortgage production was $165.6 million, which decreased by 29.6% from the third quarter of 2022. For the three months ended September 30, 2023, $102.0 million in mortgages were sold into the secondary market as compared to $66.6 million in the comparable 2022 period. Included in mortgage banking income above are gains of $0.6 million and $0.3 million from the fair value adjustments on mortgage loan commitments and related derivatives for the three months ended September 30, 2023 and 2022, respectively. Mortgage banking income decreased by $2.5 million or 55.6% from the first nine months of 2022 to the first nine months of 2023 for similar reasons as that for the three months ended as well as lower fair market value adjustments.

Net (loss) gain on other real estate owned and other assets decreased $2.1 million or 101.4% in the three months ended September 30, 2023 as compared to the same period in 2022, due primarily to a $1.5 million gain on sale of the underlying equity investments held by Wesbanco Community Development Corporation ("Wesbanco CDC") recorded in the third quarter of 2022. Net (loss) gain on other real estate owned and other assets increased $1.1 million in the first nine months of 2023 as compared to the same period in 2022 due to negative market value adjustments on the same investment recorded in the first and second quarters of 2022 prior to its sale in the third quarter.

NON-INTEREST EXPENSE

TABLE 5. NON-INTEREST EXPENSE

(unaudited, dollars in thousands)

Non-interest expense in the third quarter of 2023 increased $6.0 million or 6.5% as compared to the same quarter in 2022, principally from a $1.1 million increase in salaries and wages, a $1.2 million increase in employee benefits, a $1.0 million increase in equipment and software expense, a $0.7 million increase in FDIC insurance expense and other smaller increases in other expense line items.

Salaries and wages increased $1.1 million or 2.4% in the third quarter of 2023 as compared to the third quarter of 2022 due to higher salary expense related to higher staffing levels in revenue-producing positions, mainly commercial lenders, normal merit increases and stock option expense acceleration for an executive retirement. Total full time equivalent employees remained relatively unchanged from the third quarter of 2022. Salaries and wages increases were slightly offset by a reduction in bonus expense in the third quarter of 2023. Salaries and wages increased $7.4 million or 5.9% in the first nine months of 2023 as compared to the first nine months of 2022 for the same reasons.

Employee benefits expense increased by $1.2 million or 11.5% in the third quarter of 2023 as compared to the third quarter of 2022. This increase was primarily due to a $1.0 million increase in health insurance contributions and a $0.7 million increase in pension fund expenses. Employee benefits expense increased $6.9 million or 24.2% in the first nine months of 2023 as compared to the first nine months of 2022 for the same reasons.

Equipment and software costs increased $1.0 million or 13.0% in the third quarter of 2023 as compared to the third quarter of 2022, due primarily to general inflationary cost increases for existing service agreements as well as the continuation of the planned upgrade of Wesbanco's ATM fleet with newer technology. Similarly, equipment and software costs increased $3.2 million or 13.5% in the first nine months of 2023 as compared to the first nine months of 2022.

FDIC insurance expense increased $0.7 million or 30.7% in the third quarter of 2023 as compared to the third quarter of 2022 due primarily to the two basis point increase in the minimum FDIC assessment rate for all banks in the first assessment period of 2023. Similarly, FDIC insurance expense increased $3.0 million or 51.8% in the first nine months of 2023 as compared to 2022.

Restructuring and merger-related expenses totaled $0.6 million in the third quarter of 2023. These expenses were comprised mostly of severance expenses associated with the restructuring of the residential mortgage department. Restructuring and merger-related expenses increased $2.1 million in the first nine months of 2023 as compared to the first nine months of 2022 due to fixed asset write-downs and lease termination expenses associated with the closure of branches and back-office buildings from the continuation of the branch optimization strategy.

INCOME TAXES

The provision for income taxes was $7.5 million for the three months ended September 30, 2023, which is a $4.9 million decrease compared to the provision for the three months ended September 30, 2022. The provision for income taxes was $26.5 million for the nine months ended September 30, 2023, which is a $6.0 million decrease compared to the provision for the same period in 2022. The decrease in the provision for income taxes is due to a decrease in pre-tax income from the prior year period resulting in a decrease in the effective tax rate from 18.8% in the first nine months of 2022 to 17.6% in the first nine months of 2023.

FINANCIAL CONDITION

Total assets increased 2.4%, while shareholders' equity increased 0.9% and total deposits decreased 0.3% at September 30, 2023 as compared to December 31, 2022. Total securities decreased $370.6 million or 9.8% from December 31, 2022 to September 30, 2023, as investment runoff was used to fund loan growth. Total portfolio loans increased $613.1 million or 5.7% as new originations outpaced pay downs. Deposits decreased $40.9 million, or 0.3% from December 31, 2022, as decreases of 4.7% and 6.6% in demand deposits and savings deposits, respectively, were partially offset by increases of 32.8% and 13.1% in certificate of deposits and money market deposits, respectively. The overall decrease in transaction-based accounts is primarily attributable to customers' preferences as deposit rates have risen in the current market environment. Deposits were also somewhat impacted by bonus and royalty payments for Marcellus and Utica shale gas payments from energy companies in Wesbanco’s southwestern Pennsylvania, eastern Ohio, and northern West Virginia markets. Total borrowings increased $392.3 million or 35.0% during the first nine months of 2023, which was primarily due to a $420.0 million increase in FHLB borrowings and partially offset by a $28.4 million decrease in other short-term borrowings. Shareholders' equity increased $21.3 million or 0.9% from December 31, 2022, to $2.4 billion at September 30, 2023. The increase resulted primarily from net income during the current nine-month period of $124.1 million, exceeding the declaration of common and preferred shareholder dividends totaling $61.7 million and $7.6 million, respectively, and was slightly offset by a $35.5 million other comprehensive loss for the nine months ended September 30, 2023.

SECURITIES

TABLE 6. COMPOSITION OF SECURITIES (1)

(unaudited, dollars in thousands)

(1) At September 30, 2023 and December 31, 2022, there were no holdings of any one issuer, other than U.S. government sponsored entities and its agencies, in an amount greater than 10% of Wesbanco’s shareholders’ equity.

(2) Weighted average yields have been calculated on a taxable-equivalent basis using the federal statutory tax rate of 21%.

Total investment securities, which are a source of liquidity for Wesbanco as well as a contributor to interest income, decreased by $370.7 million or 9.8% from December 31, 2022 to September 30, 2023. Through the first nine months of the year, the available-for-sale portfolio decreased by $333.0 million or 13.2%, primarily due to $231.0 million in paydowns, $31.0 million in sales, $23.6 million in maturities and calls and an increase of $47.3 million in unrealized losses. The held-to-maturity portfolio decreased by $37.6 million or 3.0% due primarily to maturities and calls of municipal securities. The weighted average yield of the portfolio increased 5 basis points from 2.45% at December 31, 2022 to 2.50% at September 30, 2023, primarily due to increases in the indices tied to variable rate securities.

Total gross unrealized securities losses increased $94.3 million from $510.7 million at December 31, 2022 to $605.0 million at September 30, 2023. The increase in unrealized losses from December 31, 2022 was due to an increase in market rates in 2023 to date, causing market prices to decrease, particularly on the municipal securities segment of the portfolio. Wesbanco did not allocate any allowance for credit losses to the unrealized losses on available-for-sale debt securities at September 30, 2023. Please refer to Note 4, “Securities,” of the Consolidated Financial Statements for additional information. Wesbanco does not have any investments in private mortgage-backed securities or those that are collateralized by sub-prime mortgages, nor does Wesbanco have any exposure to collateralized debt obligations or government-sponsored enterprise preferred stocks.

Net unrealized losses on available-for-sale securities included in accumulated other comprehensive income, net of tax, as of September 30, 2023 and December 31, 2022 were $297.6 million and $261.8 million, respectively. These net unrealized pre-tax losses represent temporary fluctuations resulting from changes in market rates in relation to fixed yields in the available-for-sale portfolio, and on an after-tax basis are accounted for as an adjustment to other comprehensive income in shareholders’ equity. Net unrealized pre-tax losses in the held-to-maturity portfolio, which are not accounted for in other comprehensive income, were $212.0 million at September 30, 2023, compared to $164.2 million at December 31, 2022. With approximately 35.4% of the investment portfolio in the held-to-maturity category, the recent volatility in interest rates does not have as much impact on other comprehensive income as if the entire portfolio were included in the available-for-sale category.

Equity securities, of which a portion consists of investments in various mutual funds held in grantor trusts formed in connection with a key officer and director deferred compensation plan, are recorded at fair value. Gains and losses due to fair value fluctuations on equity securities are included in net securities gains or losses. For those equity securities relating to the key officer and director deferred compensation plan, the corresponding change in the obligation to the employee is recognized in employee benefits expense.

The corporate and municipal bonds in Wesbanco’s held-to-maturity debt portfolio are analyzed quarterly to determine if an allowance for current expected credit losses is warranted. Wesbanco uses a database of historical financials of all corporate and municipal issuers and actual historic default and recovery rates on rated and non-rated transactions to estimate expected credit losses on an individual security basis. The expected credit losses are adjusted quarterly and are recorded in an allowance for expected credit losses on the balance sheet, which is deducted from the amortized cost basis of the held-to-maturity portfolio as a contra asset. The losses are recorded on the consolidated income statement in the provision for credit losses. Accrued interest receivable on held-to-maturity securities, which was $8.8 million and $9.5 million as of September 30, 2023 and December 31, 2022, respectively, is excluded from the estimate of credit losses. Held-to-maturity investments in U.S. Government sponsored entities and agencies as well as mortgage-backed securities and collateralized mortgage obligations, which are all either issued by a direct governmental entity or a government-sponsored entity, have no historical evidence supporting expected credit losses; therefore, Wesbanco has estimated these losses at zero, and will monitor this assumption in the future for any economic or governmental policies that could affect this assumption.

Wesbanco uses prices from independent pricing services and, to a lesser extent, indicative (non-binding) quotes from independent brokers, to measure the fair value of its securities. Wesbanco validates prices received from pricing services or brokers using a variety of methods, including, but not limited to, comparison to secondary pricing services, corroboration of pricing by reference to other independent market data such as secondary broker quotes and relevant benchmark indices, review of pricing by personnel familiar with market liquidity and other market-related conditions, review of pricing service methodologies, review of independent auditor reports received from the pricing service regarding its internal controls, and through review of inputs and assumptions used in pricing certain securities thinly traded or with limited observable data points. The procedures in place provide management with a sufficient understanding of the valuation models, assumptions, inputs and pricing to reasonably measure the fair value of Wesbanco’s securities. For additional disclosure relating to fair value measurements, refer to Note 7, “Fair Value Measurement” in the Consolidated Financial Statements.

LOANS AND CREDIT RISK

Loans represent Wesbanco’s single largest balance sheet asset classification and the largest source of interest income. Business purpose loans consist of CRE loans and other C&I loans that are not secured by real estate. CRE loans are further segmented into land and construction loans, and loans for improved property. Consumer purpose loans consist of residential real estate loans, home equity lines of credit and other consumer loans. Loans held for sale generally consist of residential real estate loans originated for sale in the secondary market, but at times may also include other types of loans. The outstanding balance of each major category of the loan portfolio is summarized in Table 10.

The risk that borrowers will be unable or unwilling to repay their obligations and default on loans is inherent in all lending activities. Credit risk arises from many sources including general economic conditions, external events that impact businesses or industries, isolated events that impact a major employer, individual loss of employment or other personal hardships, as well as changes in interest rates or the value of collateral. Credit risk is also impacted by a concentration of exposure within a geographic market or to one or more borrowers, industries or collateral types. The primary goal in managing credit risk is to minimize the impact of default by an individual borrower or group of borrowers. Credit risk is managed through the initial underwriting process as well as through ongoing monitoring and administration of the portfolio that varies by the type of loan. The Bank’s credit policies establish standard underwriting guidelines for each type of loan and require an appropriate evaluation of the credit characteristics of each borrower. This evaluation includes the borrower’s primary source of repayment capacity; the adequacy of collateral, if any, to secure the loan; the potential value of personal guarantees as secondary sources of repayment; and other factors unique to each loan that may increase or mitigate its risk. Credit bureau scores are also considered when evaluating consumer purpose loans as well as guarantors of business purpose loans. However, the Bank does not periodically update credit bureau scores subsequent to when loans are made to determine changes in credit history.

Credit risk is mitigated for all types of loans by continuously monitoring delinquency levels and pursuing collection efforts at the earliest stage of delinquency. The Bank also monitors general economic conditions, including employment, housing activity and real estate values in its market. The Bank also periodically evaluates and changes its underwriting standards when warranted based on market conditions, the historical performance of a category of the portfolio, or other external factors. Credit risk is also regularly evaluated for the impact of adverse economic and other events that increase the risk of default and the potential loss in the event of default, to understand the impact on the Bank’s earnings and capital.

Commercial loan risk grades are determined based on an evaluation of the relevant characteristics of each loan, assigned at inception and adjusted thereafter at any time to reflect changes in the risk profile throughout the life of each loan. The primary factors used to determine the risk grade are the sufficiency, reliability and sustainability of the primary source of repayment and overall financial strength of the borrower. The rating system more heavily weights the debt service coverage, leverage and loan-to-value factors to derive the risk grade. Other factors that are considered at a lesser weighting include management, industry or property-type risks, payment history, collateral and personal guarantees.

TABLE 10. COMPOSITION OF LOANS (1)

(unaudited, dollars in thousands)

(1) Loans are presented gross of the allowance for loan credit losses – loans and net of unearned income, credit valuation adjustments, and unamortized net deferred loan fee income and loan origination costs.

Total portfolio loans increased $613.1 million or 5.7% from December 31, 2022, and have increased $1.0 billion or 10.1% over the past twelve months. The increase over the last twelve months was driven by a 13.2% growth in improved property loans due to increased originations and continued low prepayment rates, as well as a 19.0% increase in residential real estate balances, which also stems from low prepayment rates and construction advances, despite efforts to sell more loans into the secondary market. Land and construction loans declined by 9.0% as a large number of construction projects were completed and subsequently transferred to improved property loans, which further increased those balances. Home equity loans have increased 17.3% and commercial and industrial loans have increased 4.7% over the 12 month period, while consumer loans have decreased 24.6%.

Total loan commitments of $5.0 billion, including loans approved but not closed, increased $350.5 million or 7.6% from December 31, 2022 due primarily to increased availabilities under lines of credit and loans approved but not closed. The average line utilization percentage for the commercial portfolio was 31.1% for the three months ended September 30, 2023 compared to 34.7% for the three months ended December 31, 2022.

The commercial portfolio is monitored for potential concentrations of credit risk by market, type of lending, CRE property type, C&I and owner-occupied CRE by industry, investment CRE dependence on common tenants and industries or property types that are similarly impacted by external factors.

Loans held for sale at both September 30, 2023 and December 31, 2022 are originated residential mortgages that are committed to be sold into the secondary market. Loans held for sale increased by $9.4 million or 114.3% from December 31, 2022 due to an ongoing effort to increase the volume of fixed-rate mortgage originations, which may subsequently be sold.

NON-PERFORMING ASSETS AND LOANS PAST DUE 90 DAYS OR MORE

Non-performing assets consist of non-accrual loans, other real estate acquired through or in lieu of foreclosure, bank premises held for sale, and repossessed automobiles acquired to satisfy defaulted consumer loans.

TABLE 11. NON-PERFORMING ASSETS

(unaudited, dollars in thousands)

(1) Loans previously designated as TDRs that were also on non-accrual of $1.7 million are included in total non-accrual loans as of December 31, 2022.

(2) Wesbanco eliminated the TDR classification as of January 1, 2023 due to the adoption of ASU 2022-02.

As of the adoption of ASU 2022-02, non-performing loans consist only of non-accrual loans. Non-performing loans in prior periods also include loans that were previously designated as TDRs. Non-performing loans decreased $11.5 million or 27.9%, from December 31, 2022 due in part to this change. Non-accrual loans decreased $8.3 million or 21.8%. (Please see the Notes to the Consolidated Financial Statements for additional discussion).

The following table presents past due and accruing loans excluding non-accruals:

TABLE 12. PAST DUE AND ACCRUING LOANS EXCLUDING NON-ACCRUALS

(unaudited, dollars in thousands)

Loans past due 30 days or more and accruing interest, excluding non-accruals, increased $3.8 million or 18.0% from December 31, 2022. These loans continue to accrue interest because they are both well-secured and in the process of collection. Loans 90 days or more past due increased $3.2 million and represented 0.08% of total portfolio loans at September 30, 2023 and 0.05% at December 31, 2022. Loans 30 to 89 days past due represented 0.14% of total portfolio loans at both September 30, 2023 and December 31, 2022.

ALLOWANCE FOR CREDIT LOSSES - LOANS AND LOAN COMMITMENTS

As of September 30, 2023, the total allowance for credit losses – loans and commitments was $136.3 million, of which $126.6 million related to loans and $9.7 million related to loan commitments. The allowance for credit losses – loans was 1.12% of total portfolio loans as of September 30, 2023, compared to 1.10% as of December 31, 2022. Excluded from the allowance for credit losses and related coverage ratio are fair market value adjustments on previously acquired loans representing 0.13% of total portfolio loans at September 30, 2023. The allowance for credit losses – loans individually-evaluated increased $1.8 million from December 31, 2022 to September 30, 2023. The population of individually-evaluated loans consisted of seven loans, with a total outstanding loan balance of $27.1 million. The allowance for loans collectively-evaluated increased from December 31, 2022 to September 30, 2023 by $7.0 million. The allowance for credit losses- loan commitments was $9.7 million at September 30, 2023 as compared to $8.4 million as of December 31, 2022, and is included in other liabilities on the Consolidated Balance Sheets.

The allowance for credit losses by loan category, presented in Note 4, “Loans and the Allowance for Credit Losses” of the Consolidated Financial Statements, summarizes the impact of changes in various factors that affect the allowance for loan losses in each segment of the portfolio. The allowance for credit losses under the current expected credit losses methodology ("CECL") is calculated utilizing the probability of default (“PD”)/ loss given default (“LGD”), which is then discounted to net present value. PD is the probability the asset will default within a given time frame and LGD is the percentage of the asset not expected to be collected due to default. The primary macroeconomic drivers of the quantitative model include forecasts of national unemployment and interest rates, as well as modeling adjustments for changes in prepayment speeds, loan risk grades, portfolio mix, concentrations and loan growth. For the calculation as of September 30, 2023, the forecast was based upon a probability weighted approach which is designed to incorporate loss projections from a baseline, upside and downside economy. Due to the nonlinearity of credit losses to the economy, the asymmetry is best captured by evaluating multiple economic scenarios through a probability weighted approach. At quarter-end, national unemployment was projected to be 4.3%, and subsequently increase to an average of 4.7% over the remainder of the forecast period. Loan growth along with economic drivers of the quantitative model, including those for prepayment speed fluctuations, caused the allowance for credit losses - loans to increase from December 31, 2022 to September 30, 2023, by $8.8 million.

Criticized and classified loans were 2.22% of total portfolio loans, or $251.1 million, at September 30, 2023, decreasing from 2.34% of total portfolio loans at December 31, 2022, while the balance remained virtually unchanged. See Note 4, “Loans and the Allowance for Credit Losses” for more information.

Table 13 summarizes the allocation of the allowance for credit losses to each category of the loan portfolio.

TABLE 13. ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES – LOANS AND LOAN COMMITMENTS

(unaudited, dollars in thousands)

Although the allowance for credit losses is allocated as described in Table 13, the total allowance is available to absorb actual losses in any category of the loan portfolio. However, differences between management’s estimation of probable losses and actual net charge-offs in subsequent periods for any category may necessitate future adjustments to the allowance for credit losses applicable to the category. Management believes the allowance for credit losses is appropriate to absorb expected losses at September 30, 2023.

DEPOSITS

TABLE 14. DEPOSITS

(unaudited, dollars in thousands)

Deposits, which represent Wesbanco’s primary source of funds, are offered in various account forms at various rates through Wesbanco’s 192 financial centers. The FDIC insures deposits up to $250,000 per account owner.

Total deposits decreased $40.9 million or 0.3% during the first nine months of 2023. Savings deposits decreased 6.6% and demand deposits decreased 4.7%, while money market deposit accounts increased 13.1%. The overall decrease in transaction-based accounts is primarily attributable to interest rate and inflationary pressures and rising costs across the economy, combined with the Federal Reserve's tightening actions to control inflation which has resulted in industry-wide deposit contraction. Deposit balances were also impacted by bonus and royalty payments for Marcellus and Utica shale gas payments from energy companies in Wesbanco’s southwestern Pennsylvania, eastern Ohio and northern West Virginia markets. In addition, Wesbanco also participates in the Insured Cash Sweep (ICS®) deposit program. ICS® reciprocal balances totaled $859.1 million at September 30, 2023 compared to $580.6 million at December 31, 2022. In addition, ICS® one-way buys totaled $200.6 million at September 30, 2023 compared to none at December 31, 2022.

Certificates of deposit increased 32.8% from December 31, 2022 to September 30, 2023. Wesbanco does not generally solicit brokered or other deposits out-of-market or over the internet, but does participate in the Certificate of Deposit Account Registry Services (CDARS®) program. CDARS® balances totaled $99.3 million in outstanding balances at September 30, 2023, of which $63.7 million represented one-way buys, compared to $21.0 million in total outstanding balances, none of which represented one-way buys, at December 31, 2022. Certificates of deposit greater than $250,000 were approximately $192.1 million at September 30, 2023 compared to $133.9 million at December 31, 2022. Certificates of deposit totaling approximately $897.8 million at September 30, 2023 with a cost of 3.00% are scheduled to mature within the next 12 months. From time to time, the Bank may offer special promotions or match competitor rates on certain certificates of deposit maturities and savings products based on competition, sales strategies, liquidity needs and wholesale borrowing costs.

BORROWINGS

TABLE 15. BORROWINGS

(unaudited, dollars in thousands)

While borrowings are a significant source of funding for Wesbanco, they are less significant as compared to total deposits. FHLB borrowings increased $420.0 million from December 31, 2022 to September 30, 2023, as $1.4 billion in new advances were partially offset by $1.0 billion in maturities. The average cost of maturing FHLB advances was 5.17% during the first nine months of 2023, compared to an average cost of 5.27% for new borrowings during the first nine months of 2023.

Other short-term borrowings, which may consist of federal funds purchased, callable repurchase agreements and overnight sweep checking accounts were $106.7 million at September 30, 2023, compared to $135.1 million at December 31, 2022. There were no outstanding federal funds purchased at either September 30, 2023 or December 31, 2022.

CAPITAL RESOURCES

Shareholders' equity increased $21.3 million or 0.9% from December 31, 2022, to $2.4 billion at September 30, 2023. The increase resulted from net income during the current nine-month period of $124.1 million, exceeding the declaration of common and preferred shareholder dividends totaling $61.7 million and $7.6 million, respectively, and was slightly offset by a $35.5 million other comprehensive loss for the nine months ended September 30, 2023. Wesbanco also increased its quarterly dividend rate $0.01 per quarter to $0.35 per share in November 2022, representing a 2.9% increase over the prior quarterly rate and a cumulative 150% increase since 2010.

Wesbanco purchased a total of 162,700 shares of its common stock at a total cost of $3.7 million or $23.04 per share during the nine month period ended September 30, 2023 under the current share repurchase authorization, none of which was purchased during the three months ended September 30, 2023. These purchases included both those on the open market for general corporate purposes as well as those purchased from employees for the payment of withholding taxes to facilitate a stock compensation transaction. At September 30, 2023, the remaining shares authorized to be purchased under the last approved repurchase plan totaled 1,021,901 shares.

Regulatory guidelines require bank holding companies and commercial banks to maintain certain minimum capital ratios and define companies as “well capitalized” that sufficiently exceed the minimum ratios. At September 30, 2023, regulatory capital levels for both the Bank and Wesbanco were substantially greater than the minimum amounts needed to be considered “well capitalized” under the regulations. There are various legal limitations under federal and state laws that limit the payment of dividends from the Bank to Wesbanco. As of September 30, 2023, under FDIC regulations, Wesbanco could receive, without prior regulatory approval, a dividend of approximately $103.1 million from the Bank.

On March 26, 2020, regulators issued interim financial rule (“IFR”) “Regulatory Capital Rule: Revised Transition of the Current Expected Losses Methodology for Allowances” in response to the disrupted economic activity from the spread of COVID-19. The IFR provides financial institutions that adopt CECL during 2020 with the option to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided by the initial two-year delay (“five-year transition”). Wesbanco adopted CECL effective January 1, 2020 and elected to implement the five-year transition. Regulatory capital levels without the capital benefit at September 30, 2023 for both the Bank and Wesbanco would have continued to be greater than the amounts needed to be considered “well capitalized,” as the capital benefit approximated 11 to 15 basis points for three of the four regulatory ratios, while total risk-based capital would have been slightly higher without the transition.

The following table summarizes risk-based capital amounts and ratios for Wesbanco and the Bank for the periods indicated:

(unaudited, dollars in thousands)

(1) Minimum requirements to remain adequately capitalized.

(2) Well-capitalized under prompt corrective action regulations.

LIQUIDITY RISK

Liquidity is defined as a financial institution’s capacity to meet its cash and collateral obligations at a reasonable cost. Liquidity risk is the risk that an institution’s financial condition or overall safety and soundness is adversely affected by an inability, or perceived inability, to meet its obligations. An institution’s obligations, and the funding sources to meet them, depend significantly on its business mix, balance sheet structure, and the cash flows of its on- and off-balance sheet obligations. Institutions confront various internal and external situations that can give rise to increased liquidity risk including funding mismatches, market constraints on funding sources, contingent liquidity events, changes in economic conditions, and exposure to credit, market, operation, legal and reputation risk. Wesbanco actively manages liquidity risk through its ability to provide adequate funds to meet changes in loan demand, unexpected outflows in deposits and other borrowings as well as to take advantage of market opportunities and meet operating cash needs. This is accomplished by maintaining liquid assets in the form of securities, sufficient borrowing capacity and a stable core deposit base. Liquidity is centrally monitored by Wesbanco’s Asset/Liability Committee (“ALCO”).

Wesbanco determines the degree of required liquidity by the relationship of total holdings of liquid assets to the possible need for funds to meet unexpected deposit losses and/or loan demands. The ability to quickly convert assets to cash at a minimal loss is a primary function of Wesbanco’s investment portfolio management. Wesbanco believes its cash flow from the loan portfolio, the investment portfolio, and other sources, adequately meet its liquidity requirements. Wesbanco’s net loans to assets ratio was 64.5% at September 30, 2023 and deposit balances funded 75.5% of assets.

The following table lists the sources of liquidity from assets at September 30, 2023 expected within the next year:

(unaudited, in thousands)

(1) Projected prepayments are based on current prepayment speeds.

Deposit flows are another principal factor affecting overall Wesbanco liquidity. Deposits totaled $13.1 billion at September 30, 2023. Deposit flows are impacted by current interest rates, products and rates offered by Wesbanco versus various forms of competition, as well as customer behavior. Certificates of deposit scheduled to mature within one year totaled $897.8 million at September 30, 2023, with a weighted average cost of 3.00%, which includes jumbo regular certificates of deposit totaling $399.5 million with a weighted-average cost of 3.44%, and jumbo CDARS® deposits of $92.5 million with a weighted-average cost of 4.30%, which included $63.3 million one-way buys.

Uninsured deposits, as reported for regulatory purposes, totaled $4.0 billion at September 30, 2023, or 31% of total deposits. Uninsured deposits include $888.3 million of public funds deposits that are over the FDIC-insured limit. Wesbanco secures these public funds deposits by pledging investment securities with a market value at or above the deposit balance. Excluding these public funds, at September 30, 2023, uninsured deposits were $3.2 billion, or 24% of total deposits.

Wesbanco maintains a line of credit with the FHLB as an additional funding source. Available credit with the FHLB approximated $3.5 billion and $3.6 billion at September 30, 2023 and December 31, 2022, respectively. The FHLB requires securities to be specifically pledged to the FHLB and maintained in a FHLB-approved custodial arrangement if the member wishes to include such securities in the maximum borrowing capacity calculation. Wesbanco has elected not to specifically pledge to the FHLB otherwise unpledged securities. At September 30, 2023, the Bank had unpledged available-for-sale securities with an estimated fair value of $396.6 million, or 18.5% of the total available-for-sale portfolio. A portion of these securities could be sold for additional liquidity, or such securities could be pledged to secure additional FHLB borrowings. A significant portion of the portfolio is pledged to public deposit customers, as public deposit balances have increased significantly through the several acquisitions made since 2015. In addition, at September 30, 2023, the Bank had unpledged held-to-maturity securities with an estimated fair value of $763.4 million. Most of these securities are tax-exempt municipal securities, which can only be pledged in limited circumstances. Generally, these securities cannot be sold without tainting the remainder of the held-to-maturity portfolio. If tainting occurs, all remaining securities with the held-to-maturity designation would be required to be reclassified as available-for-sale, and the held-to-maturity designation would not be available to Wesbanco for a period of time.

Wesbanco participates in the Federal Reserve Bank’s Borrower-in-Custody Program (“BIC”) whereby Wesbanco pledges certain consumer loans as collateral for borrowings. Wesbanco did not have any BIC borrowings outstanding at September 30, 2023. Alternative funding sources may include the utilization of existing overnight lines of credit with third party banks totaling $235.0 million, none of which was outstanding at September 30, 2023, along with seeking other lines of credit, borrowings under repurchase agreement lines, increasing deposit rates to attract additional funds, accessing brokered deposits, or selling securities available-for-sale or certain types of loans. In addition, in March 2023, the Federal Reserve announced that it would make available additional funding to eligible depository institutions through the creation of a new Bank Term Funding Program ("BTFP"). The BTFP would offer loans of up to one year in length to eligible depository institutions that pledge U.S. Treasuries, agency debt and mortgage-backed securities, or other qualifying assets as collateral. As of September 30, 2023, Wesbanco has not utilized the BTFP for funding, but does have $393.7 million in par value of qualifying investment securities that could be used to access funds from the program.

Other short-term borrowings of $106.7 million at September 30, 2023 consisted of callable repurchase agreements and overnight sweep checking accounts for large commercial customers. Other short-term borrowings may also include federal funds purchased. The overnight sweep checking accounts require U.S. Government securities to be pledged equal to or greater than the average deposit balance in the related customer accounts.

The principal sources of parent company liquidity are dividends from the Bank and $268.7 million in cash on hand. There are various legal limitations under federal and state laws that limit the payment of dividends from the Bank to the parent company. As of September 30, 2023, under FDIC and State of West Virginia regulations, Wesbanco could receive, without prior regulatory approval, dividends of approximately $103.1 million from the Bank. Management believes these are appropriate levels of cash for the parent company given the current environment. Management continuously monitors the adequacy of parent company cash levels and sources of liquidity through the use of metrics that relate current cash levels to historical and forecasted cash inflows and outflows.

Wesbanco had outstanding commitments to extend credit in the ordinary course of business approximating $4.9 billion and $4.6 billion at September 30, 2023 and December 31, 2022, respectively. On a historical basis, only a portion of these commitments will result in an outflow of funds. Please refer to Note 10, “Commitments and Contingent Liabilities” of the Consolidated Financial Statements and the “Loans and Credit Risk” section of this MD&A for additional information.

Federal financial regulatory agencies have previously issued guidance to provide for sound practices for managing funding and liquidity risk and strengthening liquidity risk management practices. Wesbanco maintains a comprehensive management process for identifying, measuring, monitoring, and controlling liquidity risk, which is fully integrated into its risk management process. Management believes Wesbanco has sufficient current liquidity to meet current obligations to borrowers, depositors and others and that Wesbanco’s current liquidity risk management policies and procedures, as periodically reviewed and adjusted, adequately address this guidance.

LIBOR TRANSITION

LIBOR is a widely used short-term reference interest rate benchmark for variable rate loans and securities, borrowings, and interest rate hedge/swap transactions. In July 2017, the U.K. Financial Conduct Authority (“FCA”) announced the discontinuation of LIBOR after certain banks provided purported interest rate figures which did not truly reflect the rate at which they could borrow. In addition to FCA, as early as 2014, financial institution regulators and the Federal Financial Institutions Examination Council (“FFIEC”) began to work to develop a uniform approach to the phase-out of LIBOR because the continued reliance on LIBOR could present systematic risk to financial institutions. The Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (“AARC”) to identify alternative reference rates to LIBOR. The AARC released consultations on contractual fallback language to prepare for the transition away for LIBOR and on June 22, 2017, identified SOFR as the recommended alternative to LIBOR.

On July 1, 2020, the FFIEC issued a Joint Statement on Managing the LIBOR Transition to further explain that new financial contracts should either utilize a reference rate other than LIBOR or have robust fallback language that defines an alternative reference rate after LIBOR’s discontinuation. The FFIEC statement encouraged supervised financial institutions to continue their efforts to prepare for the change and address the risks associated with the LIBOR transition.

On November 6, 2020, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (collectively, the “Agencies”) issued a statement providing that a financial institution may use any reference rate for its loans that the financial institution determines to be appropriate for its funding model and customer needs.

Thereafter, on November 30, 2020, the Agencies issued an additional joint statement encouraging financial institutions to continue to transition away from LIBOR as soon as practicable, but no later than December 31, 2021. Given the risks associated with the use of LIBOR, the Agencies stated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks.

On March 5, 2021, the U.K. FCA and Intercontinental Exchange (“ICE”) Benchmark Administration announced that the publication of the overnight, as well as, the one, three, six, and twelve month LIBOR rates will continue through June 30, 2023, which will provide additional time to wind down or renegotiate existing contracts that reference LIBOR.

On October 20, 2021, the Agencies with the Consumer Financial Protection Bureau, National Credit Union Administration, and State Bank and Credit Union Regulators, issued an additional Joint Statement on Managing the LIBOR Transition to once again emphasize the expectation that supervised institutions with LIBOR exposure continue to progress toward an orderly transition away from LIBOR. The statement confirmed that entering into new contracts, including derivatives that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks, including litigation, operational, and consumer protection risks.

On March 15, 2022, President Biden signed the Adjustable Interest Rate (LIBOR) Act into law (the “LIBOR Act”). The LIBOR Act provides a clear and uniform federal solution for transitioning legacy contracts that either lack or contain insufficient contractual provisions addressing the permanent cessation of LIBOR by providing for the transition from LIBOR to a replacement rate and avoiding related litigation.

On December 16, 2022, the Federal Reserve Board adopted a final rule that implements the Adjustable Interest Rate (LIBOR) Act by identifying benchmark rates based on SOFR that will replace LIBOR in certain financial contracts after June 30, 2023. The final rule is substantially similar to the proposal with certain clarifying changes made in response to comments.

• For a LIBOR contract that is a derivative transaction, the “Fallback Rate (SOFR)” as defined in the 2020 IBOR Fallbacks Protocol published by the International Swaps and Derivatives Association (ISDA protocol), which incorporates the statutorily prescribed tenor spread adjustment.
• For a LIBOR contract that is an FHFA-regulated-entity contract:
• For Federal Home Loan Bank advances, the “Fallback Rate (SOFR)” as defined in the ISDA protocol; and
• For all other FHFA-regulated-entity contracts, SOFR (in place of overnight LIBOR) or 30-day compounded average SOFR published by FRBNY (“30-day Average SOFR,” in place of one-, three-, six-, or 12-month LIBOR), plus the applicable statutorily prescribed tenor spread adjustment.
• For a LIBOR contract that is a FFELP ABS, either (i) 30-day Average SOFR (for one-, six-, and 12-month LIBOR) or (ii) 90-day compounded average SOFR published by FRBNY (for three-month LIBOR), plus the applicable statutorily prescribed tenor spread adjustment.
• For all other LIBOR contracts, including consumer loans, SOFR (in place of overnight LIBOR) or term SOFR published by CME Group Benchmark Administration, Ltd. (in place of one-, three-, six-, or 12-month LIBOR), plus the statutorily prescribed tenor spread adjustment.

As early as 2018, in anticipation of the potential discontinuance of LIBOR, Wesbanco established a LIBOR transition committee to effectively manage the Company’s transition away from LIBOR in two phases. The first phase included adding additional fallback language to loan documents to allow Wesbanco to replace LIBOR with an equivalent rate index plus the margin to ensure the resulting interest rate is the same as it previously was using LIBOR. Also, as part of the first phase, Wesbanco began quoting to the Treasury Rate published by the Federal Reserve Board instead of the ICE LIBOR Swap Index (which is tied to LIBOR) when repricing certain term loans and originating new loans. The second phase consisted of working to continue to transition existing adjustable-rate loans that fluctuate monthly or periodically that are tied to LIBOR or the ICE LIBOR Swap Index. Wesbanco tracked the dollar amount and number of loans tied to LIBOR or the ICE LIBOR Swap Index, monitored current industry trends, and worked with legal counsel to ensure the smooth transition away from LIBOR. Wesbanco has not offered LIBOR for new contracts after December 31, 2021. With respect to its back-to-back swap program, Wesbanco worked with its swap counterparty customers to institute and accept the International Swaps and Derivatives Association 2020 Interbank Offered Rate Fallbacks Protocol to address LIBOR cessation in swap transactions. Moreover, Wesbanco chose 1M Term SOFR as its replacement index for new loans in the bank’s back-to-back swap program, beginning on January 1, 2022. The final step ahead of the discontinuance of LIBOR on June 30, 2023 was to transition all remaining LIBOR based loans to their appropriate replacement indexes. Ahead of the discontinuance of LIBOR, Wesbanco provided notice to its impacted customers that, for any loan rate reset occurring after the discontinuance of LIBOR, the loan rate would be determined based on a new index consistent with the LIBOR Act and recommendations from the ARRC. Following that customer communication, all necessary changes were made within the applicable loan systems. With the final step now complete, Wesbanco has concluded its transition away from LIBOR. In the coming months, the LIBOR Transition Committee will continue to meet on occasion to ensure no issues arise and to monitor any changing industry trends on the indexes used for pricing new loans.

The disclosures set forth in this item are qualified by the section captioned “Forward-Looking Statements” included in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report.

MARKET RISK

The primary objective of the ALCO is to maximize net interest income within established policy parameters. This objective is accomplished through the management of balance sheet composition, market risk exposures arising from changing economic conditions and liquidity risk.

Market risk is defined as the risk of loss due to adverse changes in the fair value of financial instruments resulting from fluctuations in interest rates and bond prices. Management considers interest rate risk to be Wesbanco’s most significant market risk. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. The consistency of Wesbanco’s net interest income is largely dependent on effective management of interest rate risk. As interest rates change in the market, rates earned on interest rate-sensitive assets and rates paid on interest rate-sensitive liabilities do not necessarily move concurrently. Differing rate sensitivities may arise because fixed rate assets and liabilities may not have the same maturities, or because variable rate assets and liabilities differ in the timing and/or the percentage of rate changes.

Wesbanco’s ALCO is an executive management committee with Board representation, responsible for monitoring and managing interest rate risk within approved policy limits, utilizing earnings sensitivity simulation and economic value-at-risk models. These models are highly dependent on various assumptions, which change regularly as the balance sheet and market interest rates change. The key assumptions and strategies employed are analyzed, reviewed and documented at least quarterly by the ALCO.

The earnings sensitivity simulation model projects changes in net interest income resulting from the effects of changes in interest rates. Forecasting changes in net interest income requires management to make certain assumptions regarding loan and security prepayment rates, call dates, changes to deposit product betas and non-maturity deposit decay rates, which may not necessarily reflect the manner in which actual cash flows, yields, and costs respond to changes in market interest rates. Assumptions are based on historical experience, current market rates and economic forecasts, and are internally back-tested and periodically reviewed by a third-party consultant. The net interest income sensitivity results presented in Table 1, “Net Interest Income Sensitivity,” assumes that the balance sheet composition of interest sensitive assets and liabilities existing at the end of the period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve, regardless of the duration of the maturity or re-pricing of specific assets and liabilities. Since the assumptions used in the model relative to changes in interest rates are uncertain, the simulation analysis may not be indicative of actual results. In addition, this analysis does not consider actions that management might employ in response to changes in interest rates, as well as changes in earning asset and costing liability balances.

Interest rate risk policy limits are determined by measuring the anticipated change in net interest income over a twelve-month period, assuming immediate and sustained market interest rate increases of 100 - 200 basis points and decreases of 100 - 400 basis points across the entire yield curve, as compared to a stable rate environment or base model. Wesbanco’s current policy limits this exposure for the noted interest rate changes to a reduction of between 7.5% - 20%, or less, of net interest income from the stable rate base model over a twelve-month period. The table below indicates Wesbanco’s interest rate sensitivity at September 30, 2023 and December 31, 2022, assuming the above-noted interest rate changes, as compared to a base model.

TABLE 1. NET INTEREST INCOME SENSITIVITY

Adjustments to relative sensitivities are due to the impact of the current lower rate and yield curve environment on base case net interest income and the related calculation of parallel rate shock changes in rising and falling rate scenarios. Additional differences typically result from changes in the various earning assets and costing liabilities mix and growth rates, as well as adjustments for various modeling assumptions. Generally, deposit betas utilized in modeling are estimated at more conservative percentages for various rate scenarios than has been the Bank’s historical experience, as a result of both competitive factors in our markets and as public funds and institutional contract terms are renewed. Deposit betas, decay rates and loan prepayment speeds are adjusted periodically in our models for non-maturity deposits and loans. Indicated model asset sensitivity in rising rate scenarios may be less than anticipated due to slower prepayment speeds, rate floors, below forecast new loan yields, spread compression between new asset yields and funding costs, mortgage-related extension risk and other factors. In a decreasing rate environment, asset sensitivity may have greater impact on the margin than currently modeled as prepayment speeds increase, customers refinance or request rate reductions on existing loans, estimated deposit betas do not perform as modeled, or for other reasons.

In addition to the aforementioned parallel rate shock earnings sensitivity simulation model, the ALCO also reviews a “dynamic” forecast scenario to project net interest income over a rolling two-year time period. This forecast is updated at least quarterly, incorporating revisions and updated assumptions into the model for estimated loan and deposit growth, expected balance sheet re-mixing strategies, changes in forecasted rates for various maturities, competitive market spreads for various products and other assumptions. Such modeling is directionally consistent with typical parallel rate shock scenarios, and it assists in predicting changes in forecasted outcomes as well as suggesting potential adjustments to management plans to assist in achieving earnings goals.

Wesbanco also periodically measures the economic value of equity (“EVE”), which is defined as the market value of tangible equity in various rate scenarios. Generally, changes in the economic value of equity relate to changes in various assets and liabilities, changes in the yield curve, as well as changes in loan prepayment speeds and deposit decay rates. The following table presents these results and Wesbanco’s policy limits as of September 30, 2023 and December 31, 2022. Changes in EVE sensitivity since year-end 2022 relate to the change in market interest rates and their impact upon the fair values of earning assets and costing liabilities.

The Bank has significant additional borrowing capacity with the FHLB of Pittsburgh, the Federal Reserve Bank of Cleveland and various correspondent banks, and may utilize these funding sources or interest rate swap strategies as necessary to lengthen liabilities, offset mismatches in various asset maturities and manage liquidity. CDARS® and ICS® deposits also may be utilized for similar purposes for certain customers seeking higher-yielding instruments or maintaining deposit levels below FDIC insurance limits. Significant balance sheet strategies to assist in managing the net interest margin in the current interest rate environment include:

• increasing total loans, particularly commercial and home equity loans that have variable or adjustable features;
• selling a percentage of longer-term residential mortgage loan production into the secondary market;
• growing demand deposit account types to increase the relative portion of these account types to total deposits;
• employing back-to-back loan swaps for certain commercial loan customers desiring a term fixed-rate loan equivalent, with the Bank receiving a variable rate;
• adjusting terms for FHLB short-term maturing borrowings to balance asset/liability mismatches; or paying them off with excess liquidity;
• using CDARS® and ICS® deposit programs to manage funding needs and overall liability mix; and
• adjusting the size, mix or duration of the investment portfolio as part of liquidity and balance sheet management strategies.

Management is aware of the significant effect that inflation or deflation has upon interest rates and ultimately upon financial performance. Wesbanco’s ability to cope with inflation or deflation is best determined by analyzing its capability to respond to changing market interest rates, as well as its ability to manage the various elements of non-interest income and expense during periods of increasing or decreasing inflation or deflation. Wesbanco monitors the level and mix of interest-rate sensitive assets and liabilities through ALCO in order to reduce the impact of inflation or deflation on net interest income. Management also controls the effects of inflation or deflation by conducting periodic reviews of the prices, costs and terms of its various products and services, as well as competitive factors, by approving new products and services or adjusting the terms and availability of existing products and services for both Wesbanco as well as its business loan customers. Over the last few quarters, inflation has been trending higher and has impacted the cost of labor and purchased goods and services. Wesbanco is also monitoring the potential impact that inflation is having on single family home construction and multifamily properties as proposed rental rate caps and controls are put in place in areas across Wesbanco’s footprint.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES— Wesbanco’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have concluded that Wesbanco’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), based on their evaluation of these controls and procedures as of the end of the period covered by this Form 10-Q, are effective to ensure that information required to be disclosed by Wesbanco in the reports it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to Wesbanco’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS— Wesbanco’s management, including the CEO and CFO, does not expect that Wesbanco’s disclosure controls and internal controls will prevent all errors and all fraud. While Wesbanco’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objective, no control system, no matter how well conceived and operated, can provide absolute assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.

CHANGES IN INTERNAL CONTROLS— There were no changes in Wesbanco's internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2023 as required to be reported by paragraph (d) of Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.