WESBANCO INC (WSBC) FY 2022 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis ("MD&A) represents an overview of the results of operations and financial condition of Wesbanco. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto. This section generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of Wesbanco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 28, 2022.

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-Qs for the prior quarters ended March 31, June 30 and September 30, 2022, respectively, and documents subsequently filed by Wesbanco which are available at the SEC’s website, www.sec.gov or at Wesbanco’s website, www.wesbanco.com. Investors are cautioned that forward-looking statements, which are not historical fact, involve risks and uncertainties, including those detailed under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. 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, the FDIC, the SEC, FINRA, the Municipal Securities Rulemaking Board, the SIPC, 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.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Wesbanco’s Consolidated Financial Statements are prepared in accordance with U.S. GAAP and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.

The most significant accounting policies followed by Wesbanco are included in Note 1, “Summary of Significant Accounting Policies,” of the Consolidated Financial Statements. These policies, along with other Notes to the Consolidated Financial Statements and this MD&A, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management has identified the allowance for credit losses, the evaluation of goodwill and other intangible assets for impairment and business combinations to be the accounting estimates that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

Allowance for Credit Losses— Under CECL, acquired loans or pools of loans that have experienced more-than-insignificant credit deterioration are deemed to be purchased credit-deteriorated (“PCD”) loans, and are grossed-up on day 1 by the initial credit estimate through the allowance as opposed to a reduction in the loan’s amortized cost. The credit mark on acquired loans deemed not to be PCD loans are reflected as a reduction in the loan’s amortized cost, with an allowance and corresponding provision for credit losses recorded in the first reporting period after acquisition through current period earnings, while the loan mark will accrete through interest income over the life of such loans. At acquisition, Wesbanco will consider several factors as indicators that an acquired loan or pool of loans has experienced more-than-insignificant credit deterioration. These factors may include, but are not limited to, loans 30 days or more past due, loans with an internal risk grade of below average or lower, loans classified as non-accrual by the acquired institution, materiality of the credit and loans that have been previously modified in a TDR. Upon adoption of this standard, acquired loans from prior acquisitions that met the guidelines under ASC 310-30 (formerly known as “purchased credit-impaired”) were reclassified as PCD loans. The accretable portion of the loan mark as of adoption date continues to accrete into interest income. However, the non-accretable portion of the loan mark was added to the allowance upon adoption, and any reversals of such mark will flow through the allowance in future periods. The loan mark on ASC 310-20 loans (“non-purchased credit-impaired”) from prior acquisitions continues to accrete through interest income over the life of such loans.

After the forecast period, Wesbanco reverts back to historical loss rates for a period of up to three years, adjusting for prepayments and curtailments, to estimate losses over the remaining life of loans. The most sensitive assumptions include the length of the forecast and reversion

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periods, forecast of unemployment and interest rate spreads and prepayment speeds. See Note 4, “Loans and Allowance for Credit Losses” for further detail.

The allowance for credit losses specific to loans reduces the loan portfolio to the net amount expected to be collected, representing the lifetime expected credit losses at the initial origination date. Similarly, an allowance for unfunded loan commitments, which is recorded in other liabilities, represents expected losses on unfunded commitments. Fluctuations in the allowance for credit losses specific to loans, the allowance for unfunded loan commitments, and the allowance for held-to-maturity debt securities are recognized in the provision for credit losses on the consolidated statement of operations. The allowance incorporates forward-looking information and applies a reversion methodology beyond the reasonable and supportable forecast. The allowance is increased by a provision charged to operating expense and reduced by charge-offs, net of recoveries. Management evaluates the appropriateness of the allowance at least quarterly. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change from period to period.

The allowance for credit loss calculation specific to loans is based on the loan’s amortized cost basis, which is comprised of the unpaid principal balance of the loan, deferred loan fees (costs) and acquired premium (discount) minus any write-downs. Wesbanco made an accounting policy election to exclude accrued interest from the measurement of the allowance for credit losses, because the Company has a robust policy in place to reverse or write-off accrued interest when the loan is placed on non-accrual, and also made an accounting policy election to reverse accrued interest deemed uncollectible as a reversal of interest income. However, Wesbanco is reserving, as part of the allowance for credit losses, for accrued interest on loan modifications under the CARES Act due to the nature and timing of these deferrals.

The allowance for credit losses specific to loans reflects the risk of loss in the loan portfolio. To appropriately measure expected credit losses, management disaggregates the loan portfolio into pools of similar risk characteristics. The Company utilizes the PD / LGD approach to calculate the expected loss for each segment, which is then discounted to net present value. PD is the probability the asset will default within a given timeframe and LGD is the percentage of the assets not expected to be collected due to default. The primary macroeconomic drivers of the quantitative model include forecasts of national unemployment and interest rate spreads. Management relies on macroeconomic forecasts obtained from various reputable sources, which may include the Federal Open Market Committee forecast and other third party forecasts from well recognized, leading economists. These forecasts can range from one to two years, depending upon the facts and circumstances of the current state of the economy, portfolio segment and management’s judgement of what can be reasonably supported. The model reversion period ranges from immediate to up to three years.

The allowance for credit losses specific to loans is calculated over the loan’s contractual life. For term loans, the contractual life is calculated based on the maturity date. For commercial and industrial (“C&I”) revolving loans with no stated maturity date, the contractual life is calculated based on the internal review date. For all other revolving loans, the contractual life is based on either the estimated maturity date or a default date. The contractual term does not include any expected extensions, renewals or modifications unless management has a reasonable expectation as of the reporting period that Wesbanco will execute a TDR with the borrower. Management assumes a loan will become a TDR if a loan has matured, has a principal balance, and has previously been partially charged-off. This assumption extends the maturity of these loans to six months beyond their respective maturity dates.

Contractual terms are adjusted for estimated prepayments to arrive at expected cash flows. Wesbanco models term loans with an annualized “prepayment” rate. When Wesbanco has a specific expectation of differing payment behavior for a given loan, the loan may be evaluated individually. For revolving loans that do not have a principal payment schedule, a curtailment rate is factored into the cash flow.

The evaluation also considers qualitative factors such as economic trends and conditions, which includes levels of regional unemployment, real estate values and the impact on specific industries and geographical markets, changes in lending policies and underwriting standards, delinquency and other credit quality trends, concentrations of credit risk, if any, volume of activity, changes in lending staff, type of collateral and the results of internal loan reviews and examinations by bank regulatory agencies. Management relies on observable data from internal and external sources to the extent it is available to evaluate each of these factors and adjusts the actual historical loss rates to reflect the impact these factors may have on probable losses in the portfolio.

Commercial loans, including commercial real estate (“CRE”) and C&I, are individually-evaluated if they have unique characteristics. Specific reserves are established when appropriate for such loans based on the net present value of expected future cash flows of the loan or the estimated realizable value of the collateral, if any.

Goodwill and Other Intangible Assets— Wesbanco accounts for business combinations using the acquisition method of accounting. Accordingly, the identifiable assets acquired, the liabilities assumed, and any non-controlling interest of an acquired business are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value recorded as goodwill. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability.

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Goodwill is not amortized but is evaluated for impairment annually, or more often if events or circumstances indicate it may be impaired. Finite-lived intangible assets, which consist primarily of core deposit and customer list intangibles (long-term customer-relationship intangible assets) are amortized using straight-line and accelerated methods over their weighted-average estimated useful lives, ranging from ten to sixteen years in total, and are tested for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable. Non-compete agreements are recognized in other assets on the balance sheet and are amortized on a straight-line basis over the life of the respective agreements, ranging from one to four years.

Wesbanco evaluates goodwill for impairment by determining if the fair value is greater than the carrying value of its reporting units. Wesbanco uses market capitalization, multiples of tangible book value, a discounted cash flow model, and various other market-based methods to estimate the current fair value of its reporting units. In particular, the discounted cash flow model includes various assumptions regarding an investor’s required rate of return on Wesbanco common stock, future loan loss provisions, future market spreads and net interest margins, along with various growth and economic recovery and stabilization assumptions of the economy as a whole. The resulting fair values of each method are then weighted based on the relevance and reliability of each respective method in light of the current economic environment to arrive at a weighted average fair value. The evaluation also considered macroeconomic conditions such as the general economic outlook, regional and national unemployment rates, and recent trends in equity and credit markets. Additionally, industry and market considerations, such as market-dependent multiples and metrics relative to peers, were evaluated. Wesbanco also considered recent trends in credit quality, overall financial performance, stock price appreciation, internal forecasts and various other market-based methods to estimate the current fair value of its reporting units. Since adopting ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350)”, the impairment charge is based on the excess of a reporting unit’s carrying amount over its fair value.

Intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized when the carrying amount of an intangible asset with a finite useful life is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the fair value of the asset. Wesbanco does not have any indefinite-lived intangible assets. As of December 31, 2022, there were no indicators of impairment related to goodwill or to intangible assets with finite useful lives.

Business Combinations— Business combinations are accounted for by applying the acquisition method. As of acquisition date, the identifiable assets acquired and liabilities assumed are measured at fair value and recognized separately from goodwill. Results of operations of the acquired entities are included in the consolidated statement of income from the date of acquisition. The calculation of intangible assets including core deposits and the fair value of loans are based on significant judgements. Core deposits intangibles are calculated using a discounted cash flow model based on various factors including discount rate, attrition rate, interest rate, cost of alternative funds and net maintenance costs.

Loans acquired in connection with acquisitions are recorded at their acquisition-date fair value with no carryover of related allowance for credit losses. Acquired loans are classified into two categories; PCD loans and non-PCD loans. PCD loans are defined as a loan or group of loans that have experienced more than insignificant credit deterioration since origination. Non-PCD loans will have an allowance established on acquisition date, which is recognized in the current period provision for credit losses. For PCD loans, an allowance is recognized on day 1 by adding it to the fair value of the loan, which is the “Day 1 amortized cost”. There is no credit loss expense recognized on PCD loans because the initial allowance is established by grossing-up the amortized cost of the PCD loan. Determining the fair value of the acquired loans involves estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considers a number of factors in evaluating the acquisition-date fair value including the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral and interest rate environment.

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EXECUTIVE OVERVIEW

Net income available to common shareholders decreased $50.1 million or 22.6% to $182.0 million in 2022 compared to 2021. Net income available to common shareholders excluding after-tax restructuring and merger-related expenses (non-GAAP measure) decreased $54.1 million or 22.8% to $183.3 million. These decreases were due in large part to the net benefit in the provision for credit losses in 2022 of $1.4 million (net of tax) compared to the net benefit in the 2021 provision of $51.6 million (net of tax). Net interest income increased $16.4 million or 3.6% from 2021, primarily due to loan growth and a rising rate environment. Non-interest income decreased $15.4 million or 11.6% in 2022 compared to 2021, driven by a $14.4 million decrease in mortgage banking income due to lower volume and the retention of more residential mortgage originations. Offsetting the overall decrease somewhat, both service charges on deposits and bank-owned life insurance increased year-over-year by $3.9 million and $1.8 million, respectively. Excluding restructuring and merger-related expenses, non-interest expense increased $8.8 million or 2.5%, driven by increases in salaries and wages, FDIC insurance and equipment and software expense.

Total assets as of December 31, 2022 remained relatively flat at $16.9 billion compared to December 31, 2021. As of December 31, 2022, total portfolio loans were $10.7 billion compared to $9.7 billion at December 31, 2021, reflecting a 10.0% increase year-over year. The loan growth funding is reflected within the decrease in cash of $842.9 million or 67.4% at December 31, 2022 compared to December 31, 2021. Criticized and classified loan balances decreased to 2.34% of total portfolio loans, as compared to 3.75% at December 31, 2021. As a result of improved macroeconomic factors, the provision for credit losses decreased to ($1.7) million for the year 2022 compared to ($64.3) million in 2021. Annualized net loan charge-offs to average loans for the full year period remained flat compared to 2021 at two basis points for 2022. In March of 2022, Wesbanco completed the issuance of $150.0 million in aggregate principal amount of subordinated debentures. The subordinated debentures have a fixed rate of 3.75% for the first five years and a floating rate for the next five years at Three Month SOFR plus a spread of 1.787%. The subordinated debentures are callable after five years, mature on April 1, 2032 and count towards Tier 2 Capital.

Wesbanco continues to maintain what we believe are strong regulatory capital ratios, as both consolidated and bank-level regulatory capital ratios are well above the applicable “well-capitalized” standards promulgated by bank regulators and the BASEL III capital standards. At December 31, 2022, Tier I leverage was 9.90%, Tier I risk-based capital was 12.33%, total risk-based capital was 15.11%, and the common equity Tier 1 capital ratio was 11.20%. Tangible equity to tangible assets decreased to 8.19% at period-end from 9.84% as of December 31, 2021, due to reduced shareholders' equity balances resulting from stock repurchases occurring throughout 2022, as well as declines in accumulated other comprehensive income.

Strong earnings enabled Wesbanco to increase the quarterly dividend to $0.34 and $0.35 per share in the first quarter and fourth quarters of 2022, respectively, the fifteenth and sixteenth increase over the last twelve years, cumulatively representing a 150% increase over that period.

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Selected financial ratios for the years ended December 31, 2022, 2021 and 2020 are presented in the table below:

(1)
See "Non-GAAP Measures" for additional information relating to the calculation of this item.

(2)
Certain items excluded from the calculation consist of after-tax restructuring and merger-related expenses.

(3)
Presented on a fully taxable-equivalent (FTE) and annualized basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 21% for all periods presented. Wesbanco believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

(4)
Trust assets are held by the Bank, in fiduciary or agency capacities for its customers and therefore are not included as assets on Wesbanco’s Consolidated Balance Sheets.

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Non-GAAP Measures

The following non-GAAP financial measures used by Wesbanco provide information that Wesbanco believes is useful to investors in understanding Wesbanco’s operating performance and trends, and facilitates comparisons with the performance of Wesbanco’s peers. The following tables summarize the non-GAAP financial measures derived from amounts reported in Wesbanco’s financial statements.

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(1) Tax effected at 21% for all periods presented.

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RESULTS OF OPERATIONS

EARNINGS SUMMARY

For the twelve months ending December 31, 2022, net income available to common shareholders was $182.0 million, or $3.02 per diluted share, compared to $232.1 million, or $3.53 per diluted share, for 2021, which included a release of provision for credit losses of $64.3 million, or $51.6 million net of tax. Net income available to common shareholders for the twelve months ended December 31, 2022 decreased 21.6% compared to 2021, while per share earnings decreased 14.4%.

For the twelve months ending December 31, 2022, net interest income increased $16.4 million, or 3.6%, reflecting a higher net interest margin resulting from the 425 basis point increase in the federal funds rate in 2022, as well as the successful deployment of excess cash into higher-yielding loans, particularly in the second half of 2022. The net interest margin increased 9 basis points to 3.20% due to the overall higher rate environment. Average loan balances decreased 2.9% in 2022, mostly due to PPP loan forgiveness and elevated levels of commercial real estate loans being refinanced in an aggressive secondary market in the earlier portions of the year, while average investment securities increased 18.1% over the same period. Total average deposits increased in 2022 by $298.7 million or 2.2% compared to 2021, due to increased personal savings. Average certificates of deposit, which have the highest overall interest cost among deposits, decreased by $359.1 million or 24.6% over the same time period.

For 2022, non-interest income decreased $15.4 million or 11.6% compared to 2021. Mortgage banking income decreased $14.4 million or 73.7% in 2022 as compared to 2021 due to the higher interest rate environment and Wesbanco retaining a higher percentage of residential real estate loans in the loan portfolio. Trust fees decreased $2.0 million from 2021 to 2022 due to a decrease in the market values of trust assets under management reducing fee income. Net securities (losses)/gains decreased $2.9 million from the prior year due mostly to the decline in the fair market value of the equity investments held in the deferred compensation plan. Somewhat mitigating these decreases, service charges on deposits increased $3.9 million from the prior year and net securities brokerage revenue increased $2.6 million due to organic growth.

The following comments on non-interest expense exclude restructuring and merger-related expenses in both years. Non-interest expense in 2022 increased $8.8 million or 2.5% compared to 2021, while the efficiency ratio increased in 2022 to 59.5% from 58.2% in 2021. The primary driver of this increase was a $12.8 million increase in salaries and wages due to higher staffing levels and merit increases. Also increasing for the year 2022 was FDIC insurance expense, which reflects the benefit to 2021's calculation from the large negative credit loss provision recognized in 2021, as well as equipment and software and marketing expenses. These increases were slightly offset by lower employee benefits expense, lower net occupancy expense and lower amortization expense on intangible assets as well as other decreases resulting from the efficiencies derived from the core systems conversion which occurred in the second half of 2021.

The provision for federal and state income taxes decreased to $44.3 million in 2022 compared to $59.6 million in 2021, due to lower pre-tax income in 2022. The effective tax rate was 18.7% and 19.7% for the years ended December 31, 2022 and 2021, respectively. Wesbanco recognized $3.5 million and $2.6 million in New Markets Tax Credits for the years ended December 31, 2022 and 2021, respectively.

TABLE 1. NET INTEREST INCOME

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 increased $16.4 million or 3.6% in 2022 compared to 2021, due to a 9 basis point increase in the net interest margin to 3.20%, as the yield on earning assets increased at a faster rate than the rate on interest bearing liabilities. The net interest margin was positively impacted from the 425 basis point increase in the federal funds rate during 2022. In addition, PPP loans contributed a total of $6.6 million in interest and fee accretion income, which equated to 3 basis points of net interest margin in 2022 as compared to $30.8 million, or 10 basis points, in 2021, which partially mitigated the margin increase. Excluding PPP loans, portfolio loans increased by 11.7% from December 31, 2021, due to higher new loan demand and

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lower levels of commercial real estate loan payoffs. Purchase accounting accretion decreased in 2022, as approximately 6 basis points of accretion from prior acquisitions was included in the 2022 net interest margin as compared to 11 basis points in the 2021 net interest margin. Total average deposits, excluding CDs, increased in 2022 by $657.8 million or 5.6% compared to 2021, due to higher personal savings balances. The cost of interest bearing deposits increased by 11 basis points and the cost of total liabilities increased by 14 basis points from 2021 to 2022. The increase in the cost is primarily due to the effect of the previously mentioned federal funds rate increases on the rates paid on interest bearing demand deposits, customer repurchase agreements, term Federal Home Loan Bank borrowings and junior subordinated debentures.

Interest income increased $28.7 million or 5.9% in 2022 compared to 2021 due to higher yields in most of the major earning asset categories. Earning asset yields were influenced positively in 2022 compared to 2021 due primarily to the previously mentioned increases in the Federal Reserve’s federal funds rate by 425 basis points in 2022. Average loan balances decreased $296.7 million or 2.9% in 2022 compared to 2021, due mostly to forgiveness of PPP loans and new loan demand not occurring until the second half of 2022. Loan yields increased by 18 basis points during 2022 to 4.19% due to the previously mentioned higher 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 2022, average loans represented 67.4% of average earning assets, a decrease from 69.8% in 2021. Liquidity from stimulus deposits was invested during 2021 and the first half of 2022 into average taxable securities balances which increased $494.7 million or 16.7% from 2021, and represented 23.1% of total average earning assets in 2022. Taxable securities yields increased by 21 basis points in 2022 due to the effect of the higher rate environment on the variable rate portion of the investment portfolio, which are typically tied to either LIBOR or SOFR. Decreased prepayments on mortgage-backed securities in the higher rate environment also further benefitted the taxable securities yields due to reduced amortization on securities purchased at a premium. Tax-exempt securities yields decreased by 22 basis points in 2022 from 2021 due to calls of legacy higher rate tax-exempt securities and purchases of newly issued lower rate securities in the first half of 2022. The average balance of tax-exempt securities, which have the highest yields within securities, have increased from 17.6% of total average securities in 2021 to 18.6% of total average securities in 2022.

Commercial loans with floors currently average 3.91% on approximately $3.3 billion or 43% of total commercial loans at December 31, 2022, as compared to $2.6 billion averaging 3.83% or 36% of commercial loans at December 31, 2021. Approximately 27% or $0.9 billion of these loans are currently priced at their floor, as compared to 63% or $1.6 billion at December 31, 2021. These loans typically do not adjust as rapidly from their current floor level as compared to loans without floors, due to the amount of the rate change as compared to the floor rate or next repricing date. In addition, in a declining rate environment, customers may request rates below existing contractual floors, which we may grant for competitive or other reasons.

Interest expense increased $12.3 million or 45.5% in 2022 as compared to 2021, due to increases in the cost of all interest bearing liability categories in the higher rate environment. The cost of interest bearing liabilities increased by 14 basis points from 2021 to 0.42% in 2022. Average interest bearing deposits remained relatively flat from 2021 to 2022 as interest bearing demand and savings deposit increases were mostly offset by a $359.1 million decrease in average certificates of deposit. The rate on interest bearing deposits increased 11 basis points to 0.27% from 2021 to 2022, primarily from increases in rates on interest bearing demand deposits, money market accounts and savings deposits in response to competitive pressures from higher market rates. Average non-interest bearing demand deposit balances increased from 2021 to 2022 by $256.2 million or 5.8%, and were 34.7% of total average deposits at December 31, 2022, compared to 33.5% at December 31, 2021, reflecting ongoing checking account marketing strategies. The average balance of FHLB borrowings decreased by $168.1 million from 2021 to 2022 due to the maturity of legacy lower-rate FHLB borrowings throughout the past twelve months being funded with excess liquidity. New higher-rate borrowings taken out in the last quarter of 2022 increased the average rate by 47 basis points to 2.27% from 1.80% in 2021. Average repurchase agreements combined with average subordinated debt and junior subordinated debt balances increased $65.1 million or 19.8% from 2021 to 2022, and their average rates paid increased by 24 and 77 basis points, respectively, over this same time period, due primarily to increases in LIBOR and SOFR, the indices upon which this variable-rate type of borrowing is priced. In addition, Wesbanco issued $150.0 million of subordinated debt in March of 2022 for capital and liquidity purposes.

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TABLE 2. AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS

(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 $8.8 million, $26.3 million and $16.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. As part of loan fees, PPP loan fees were $5.9 million, $25.3 million and $13.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. Additionally, loan accretion included in interest income on loans acquired from prior acquisitions was $8.0 million, $13.3 million and $17.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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

(3)
Taxable equivalent basis is calculated on tax-exempt securities using a rate of 21% for all periods presented.

(4)
Accretion on interest bearing liabilities acquired from prior acquisitions was $1.1 million, $3.1 million and $9.5 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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TABLE 3. RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE (1)

(1)
Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.

(2)
The yield on earning assets and the net interest margin are presented on a fully taxable-equivalent (FTE) and annualized basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 21% for all periods presented. Wesbanco believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

PROVISION FOR CREDIT LOSSES - LOANS

The provision for credit losses – loans is the amount to be added to the allowance for credit losses – loans after net charge-offs have been deducted 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 was ($1.7) million in 2022 compared to ($64.3) million in 2021 as a result of worsening macroeconomic factors over the reasonable and supportable forecast period of one year, primarily increasing the allowance for loan losses and allowance for loan commitments. Furthermore, the increase to the provision was driven by qualitative factors, which addressed the risk of rising interest rates and office portfolio concentration. Non-performing loans were 0.39% of total loans as of December 31, 2022, and decreased from 0.41% of total loans at the end of 2021. Non-performing assets were 0.40% of total loans and other real estate and repossessed assets as of December 31, 2022, decreasing from 0.41% at the end of 2021. Criticized and classified loans were 2.34% of total loans, decreasing from 3.75% as of December 31, 2021, primarily due to improvements in loans categorized as criticized or classified earlier in the pandemic. Past due loans at December 31, 2022 were 0.19% of total loans, compared to 0.36% at December 31, 2021. (Please see the Credit Quality and Allowance for Credit Losses – Loans and Loan Commitments section of this MD&A for additional discussion).

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TABLE 4. NON-INTEREST INCOME

Non-interest income is a significant source of revenue and an important part of Wesbanco’s results of operations, as it represented 19.8% and 22.5% of total revenue for 2022 and 2021, respectively. 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. Non-interest income decreased $15.4 million or 11.6% in 2022 compared to 2021, primarily due to decreases in trust fees, mortgage banking income, net securities gains (losses), and net gains on other real estate owned and other assets. The decreases were slightly offset by increases in service charges on deposits, net securities brokerage revenue and bank-owned life insurance income.

Trust fees decreased $2.0 million or 6.6% in 2022 compared to 2021, due to a decline in the market value of trust assets, which were $4.9 billion at December 31, 2022, as compared to a record $5.6 billion at December 31, 2021. As of December 31, 2022, trust assets include managed assets of $3.9 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 and $1.0 billion as of December 31, 2022 and December 31, 2021, respectively, and are included in managed assets.

Service charges on deposits increased $3.9 million or 17.3% from 2021 to 2022, and electronic banking fees, which include debit card interchange fees, increased $0.7 million or 3.5% over the same time period, reflecting increased transaction volume and general consumer spending.

Net securities brokerage revenue increased to a record $9.5 million in 2022, reflecting a $2.6 million or 38.1% increase from 2021 due to organic growth and customers' preferences for certain investment products, including fixed rate annuities, during the higher interest rate environment in 2022.

Bank-owned life insurance income increased $1.8 million or 20.1% in 2022 compared to 2021 due to an increase in mortality-related benefits received in the current period as well as an increase in the cash surrender value due to the purchase of an additional $40 million of bank-owned life insurance in the third quarter of 2021.

Mortgage banking income decreased $14.4 million or 73.7% in 2022 compared to 2021, due to a decrease in mortgage loan originations resulting from the higher interest rate environment in 2022, combined with a lower percentage of loans sold into the secondary market as more residential mortgages were retained in the loan portfolio. For 2022, total mortgage production was $1.0 billion, which was a decrease of 28.9% from total production in 2021. In 2022, $245.4 million in mortgages were sold into the secondary market at a net margin of 2.1% as compared to $750.9 million at a net margin of 2.6% in 2021. Included in mortgage banking income and the calculation of net margin noted above are gains of $3.2 million and $0.4 million from the fair value adjustments on mortgage loan commitments and related derivatives for 2022 and 2021, respectively.

Net securities (losses) gains include both gains and losses on investment security transactions, including sales and calls, as well as market value adjustments on the deferred compensation plan and other equity securities. In 2022, net securities (losses) gains decreased $2.9 million compared to 2021. There were no available-for-sale or held-to-maturity debt investment security sales in either year. Contributing to most of the overall decrease, the market value adjustments on the deferred compensation plan decreased by $2.6 million from 2021 to 2022. These market adjustments had an offsetting effect in employee benefits expense.

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Net gain on other real estate owned and other assets decreased $4.3 million in 2022 as compared to 2021, due mostly to the market value adjustments that were recognized on an investment made by Wesbanco’s Community Development Corporation in a start-up firm more than ten years ago that was acquired in 2021 by a public company. This investment was sold during 2022. The market value adjustments preceding the sale of the investment totaled losses of $1.0 million in 2022 as compared to gains of $3.8 million in 2021.

Swap fee and valuation income, which includes fair value adjustments, increased $0.6 million or 9.0% in 2022 as compared to 2021, due to an increase in new swaps originated and greater positive fair value adjustments on the swap portfolio in 2022 as compared to 2021. In 2022, new swaps executed totaled $254.3 million in notional principal resulting in $4.4 million in fee income, compared to new swaps executed totaling $158.7 million in notional principal resulting in $4.5 million in fee income in 2021. Fair market value adjustments on swaps in 2022 totaled $2.7 million as compared to $2.0 million in 2021.

TABLE 5. NON-INTEREST EXPENSE

Non-interest expense in 2022, excluding restructuring and merger-related expenses, increased $8.8 million or 2.5% compared to 2021. The primary drivers of this increase were higher salaries and wages, equipment and software costs, FDIC insurance expense and franchise and other miscellaneous taxes. These increases were slightly offset by decreases in employee benefits expense, ATM and electronic banking interchange expenses, amortization of intangible assets and other operating expenses. Restructuring and merger related expenses of $1.7 million in 2022 were associated with the branch restructuring while the restructuring and merger-related expenses in 2021 totaling $6.7 million were related to the core systems conversion and branch restructuring.

Salaries and wages increased $12.8 million or 8.3% in 2022 compared to 2021 due primarily to increases in salaries and incentive compensation expense combined with a decrease in deferred loan contra origination costs. Salary expense increased by $9.5 million in 2022 as compared to 2021 due to normal merit increases and higher staffing levels. Short term incentive expense increased $0.7 million due to overall higher performance in 2022 as compared to 2021, with the exception of the mortgage incentive compensation plan. Deferred loan contra origination costs decreased in 2022 due to lower loan origination volume, primarily in the residential real estate category.

Employee benefits expense decreased $3.3 million or 7.9% in 2022 compared to 2021 due to a $2.6 million reduction in the market adjustment on the underlying investments of the deferred compensation plan, which has an offsetting effect in net securities gains (losses) and also from a reduction in health insurance expense due to reduced claims in 2022.

Equipment and software costs increased $2.5 million or 8.3% in 2022 compared to 2021, due to the core conversion, continuous improvements in technology and communication infrastructure, and increased usage of digital banking services. Also, since the core conversion in the third quarter of 2021, approximately $1.0 million per quarter in online banking costs have been recorded in equipment and software, while in prior periods these costs were recorded in other operating expenses. Such costs are now part of the monthly core software invoice and cannot be separated as they were with a third party vendor previously.

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FDIC insurance increased $3.8 million or 90.4% in 2022 compared to 2021, due to higher quarterly assessment rates. The increase is due to less favorable financial ratios used in the rate calculation, particularly those related to high risk assets, core earnings and balance sheet liquidity. In addition, a $1.0 million refund was received in the second quarter of 2021 from prior period call report adjustments, also contributing to the increase year-over-year.

Restructuring and merger-related expenses in 2022 totaled $1.7 million, a decrease from $6.7 million incurred in 2021. The $1.7 million of expenses in 2022 were comprised of branch closure and lease termination expenses associated with the closure of 13 branches throughout 2022. The restructuring and merger-related expenses in 2021 totaling $6.7 million were comprised of $4.8 million in expenses related to the core banking software conversion, including termination fees of existing contracts, and $1.9 million in branch closure and lease termination expenses associated with the closure of 27 branches throughout 2021.

Franchise and other miscellaneous taxes increased $1.6 million or 14.8% in 2022 compared to 2021, primarily due to increases in franchise and personal property taxes across Wesbanco's footprint.

ATM and electronic banking interchange expenses decreased $2.3 million or 28.3% in 2022 as compared to 2021, due to a reduction in ACH and ATM processing charges related to a change in providers that occurred in conjunction with our core banking software system conversion in the third quarter of 2021.

Other operating expenses decreased $5.8 million or 26.5% in 2022 as compared to 2021, due to $4.5 million in legal settlement costs incurred in 2021 and due to the reclassification of online banking costs mentioned previously into equipment and software costs.

INCOME TAXES

The provision for income taxes was $44.3 million for 2022, which is a $15.3 million decrease as compared to $59.6 million in 2021. The decrease in the provision for income taxes is due in part to a decrease in the effective tax rate to 18.7% in 2022 compared to 19.7% in 2021, which is due to an increase in net tax-exempt interest income on securities and loans of state and political subdivisions and general business credits. In addition, the decrease resulted from lower pre-tax income in 2022 as compared to 2021. The decrease in pre-tax income is primarily driven by the $64.3 million negative provision for credit losses recorded in 2021, as compared to a $1.7 million negative provision for credit losses in 2022.

FINANCIAL CONDITION

Total deposits and shareholders' equity decreased 3.2% and 9.9%, respectively, while total assets remained relatively unchanged compared to December 31, 2021. Total securities decreased $242.4 million or 6.0% from December 31, 2021 to December 31, 2022, primarily driven by an increase in the net unrealized losses of available-for-sale securities of $339.4 million. The securities decrease was partially offset by the investment of excess liquidity in the first half of 2022 from increased cash balances resulting from customers' higher savings. Total portfolio loans increased $969.3 million or 10.0% in 2022 as a result of strong growth across Wesbanco's markets. Deposits decreased $434.8 million or 3.2% from year end 2021 primarily reflecting the impact of inflationary pressures and rising costs over the economy. Savings deposits and non-interest bearing demand deposits increased 7.0% and 2.4%, respectively.

Deposit balances were also somewhat impacted by bonus and royalty payments from Marcellus and Utica shale energy companies in Wesbanco’s southwestern Pennsylvania, eastern Ohio and northern West Virginia markets totaling $96.7 million and $68.9 million for the years ended December 31, 2022 and December 31, 2021, respectively. The decrease in certificates of deposit of $406.8 million is primarily due to an overall corporate strategy designed to increase and remix retail deposit relationships and reduce single-service customers with a focus on overall products that can be offered at a lower cost to Wesbanco. The decrease was also impacted by lower offered rates on certain maturing certificates of deposit and customer preferences for other non-maturity deposit types. Total borrowings increased 144.5% or $662.8 million during 2022, as loan growth increased and required additional funding generated through FHLB borrowings in the second half of 2022. Also, in March of 2022, Wesbanco completed the issuance of $150.0 million in aggregate principal amount of subordinated debentures. The subordinated debentures have a fixed rate of 3.75% for the first five years and a floating rate for the next five years at Three Month SOFR plus a spread of 1.787%.

Total shareholders’ equity decreased $266.5 million or 9.9%, compared to December 31, 2021, primarily due to the repurchase of common shares, net of restricted stock vesting activity totaling $119.1 million, the declaration of common and preferred shareholder dividends totaling $81.3 million and $10.1 million, respectively, and a $257.3 million other comprehensive loss. Shareholders' equity was positively impacted by net income of $192.1 million for the year ended December 31, 2022.

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SECURITIES

TABLE 6. COMPOSITION OF SECURITIES

(1)
Total held-to-maturity debt securities are presented on the balance sheet net of their allowance for credit losses totaling $0.2 million and $0.3 million at December 31, 2022 and December 31, 2021, respectively.

(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 $242.5 million or 6.0% from December 31, 2021 to December 31, 2022. Over the same period, the available-for-sale portfolio decreased by $484.3 million or 16.1% primarily driven by an increase in unrealized losses and increased calls of agency and municipal securities. The held-to-maturity portfolio increased by $243.8 million or 24.3% due to $337.5 million in purchases of municipal bonds. The weighted average yield of the total portfolio increased 56 basis points from 1.89% at December 31, 2021 to 2.45% at December 31, 2022, primarily due to increased higher rate security purchases and variable rate security yields increasing throughout the year.

Total gross unrealized securities losses increased $470.4 million, from $40.3 million as of December 31, 2021 to $510.7 million at December 31, 2022. The increase in unrealized losses from December 31, 2021, was due to an increase in market rates during 2022 causing market prices to decrease on the lowest yielding securities, particularly those purchased since the start of the pandemic. Wesbanco believes that none of the unrealized losses on available-for-sale debt securities at December 31, 2022 require an allowance for credit losses. Please refer to Note 3, “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.

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Net unrealized losses on available-for-sale securities included in accumulated other comprehensive income, net of tax, as of December 31, 2022 and December 31, 2021 were $261.8 million and $4.7 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) gains in the held-to-maturity portfolio, which are not accounted for in other comprehensive income, were ($164.2) million at December 31, 2022, compared to $23.6 million as of December 31, 2021. With approximately 33% of the investment portfolio in the held-to-maturity category, compared to 25% one year ago, 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.

On January 1, 2020, Wesbanco adopted CECL for the held-to-maturity investments. Upon adoption, the Company recognized $0.2 million to opening retained earnings, which represented the CECL allowance for the investment portfolio as of January 1, 2020. 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 income statement in the provision for credit losses. Accrued interest receivable on held-to-maturity securities, which was $9.5 million and $7.0 million as of December 31, 2022 and 2021, 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 recorded an allowance on held-to-maturity debt securities of $0.2 million and $0.3 million as of December 31, 2022 and 2021, respectively.

TABLE 7. MATURITY DISTRIBUTION AND YIELD ANALYSIS OF SECURITIES

The following table presents the tax-equivalent yields of held-to-maturity debt securities by contractual maturity at December 31, 2022. In some instances, the issuers may have the right to call or prepay obligations without penalty prior to the contractual maturity date.

(1)
Yields are determined based on the lower of the yield-to-call or yield-to-maturity.

(2)
Certain U.S. Government sponsored agency, mortgage-backed and collateralized mortgage securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds.

(3)
Average yields on obligations of states and political subdivisions have been calculated on a taxable-equivalent basis using the federal statutory tax rate of 21%.

Cost-method investments consist primarily of FHLB of Pittsburgh stock totaling $36.2 million and $15.9 million at December 31, 2022 and 2021, respectively, and are included in other assets in the Consolidated Balance Sheets.

Wesbanco’s municipal portfolio comprises 33.5% of the overall securities portfolio as of December 31, 2022 compared to 25.2% as of December 31, 2021, which carries different risks that are not as prevalent in other security types contained in the portfolio. The following table presents the allocation of the individual bonds in the municipal bond portfolio based on the combined ratings of two major bond credit rating agencies (at fair value):

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TABLE 8. MUNICIPAL BOND RATINGS

(1)
The lowest available rating was used when placing the bond into a category in the table.

Wesbanco’s municipal bond portfolio at December 31, 2022, consists of $384.7 million of taxable and $726.1 million of tax-exempt general obligation and revenue bonds. The following table presents additional information regarding the municipal bond type and issuer (at fair value):

TABLE 9. COMPOSITION OF MUNICIPAL SECURITIES

Wesbanco’s municipal bond portfolio is broadly spread across the United States. The following table presents the top five states of municipal bond concentration based on total fair value at December 31, 2022:

TABLE 10. CONCENTRATION OF MUNICIPAL SECURITIES

(1) Wesbanco's municipal bond portfolio contains obligations in the state of West Virginia totaling $31.2 million or 2.8% of the total municipal portfolio.

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 measurement, refer to Note 16, “Fair Value Measurement” in the Consolidated Financial Statements.

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LOANS AND LOAN COMMITMENTS

Loans represent Wesbanco’s largest balance sheet asset classification and the largest source of interest income. Commercial loans include CRE, which is further differentiated between land and construction, and improved property loans; as well as other C&I loans that are not secured by real estate. Retail loans include residential real estate mortgage loans, home equity lines of credit (“HELOC”), and loans for other consumer purposes.

Loan commitments, which are not reported on the balance sheet, represent available balances on commercial and consumer lines of credit, commercial letters of credit, deposit account overdraft protection limits, certain loan guarantee contracts, and approved commitments to extend credit. Approved commitments, which have been accepted by the customer, are included net of any Wesbanco loan balances that are to be refinanced by the new commitment. However, typically not all approved commitments will ultimately be funded.

Loans and loan commitments are summarized in Table 11.

TABLE 11. LOANS AND COMMITMENTS

(1) Includes $8.1 million and $162.7 million of SBA PPP loans at December 31, 2022 and December 31, 2021, respectively.

Total portfolio loans increased $969.3 million or 1.0% from December 31, 2021 to December 31, 2022, due to strong growth throughout the year in both the commercial real estate and residential real estate portfolios. Excluding PPP loans, total loans increased $1.1 billion or 11.7% over the last twelve months as the large majority of the remaining PPP loans were forgiven or repaid over the course of the year. Commercial real estate loans increased $522.4 million or 9.4%, as improved property increased by 8.8% and land and construction loans increased 13.2%. Commercial and industrial loans decreased $10.9 million or 0.7% due to a $154.6 million decrease in PPP loan balances; excluding PPP loans, commercial and industrial loans increased $143.6 million or 10.1%. Residential real estate loans increased $419.2 million or 24.4% and home equity loans increased $89.4 million or 14.8%, while consumer loans decreased $50.8 million or 18.3%. Portfolio loans are presented in the Consolidated Balance Sheets net of deferred loan fees and costs and discounts on purchased loans. The net deferred loan costs were $9.6 million and $3.3 million as of December 31, 2022 and 2021, respectively. Wesbanco conducts a deferred loan cost study to determine the allowable costs to be deferred over the life of the loan. Wesbanco’s deferred costs have continued to increase at a faster rate than the related customer deferred fee income causing the balance of the deferred loan costs to outweigh the deferred loan fees, primarily from home equity lines of credit, which have little fee income. Purchased loan discounts from acquisitions included in the portfolio loan balances were $18.0 million and $25.9 million as of December 31, 2022 and 2021, respectively. Loan accretion included in interest income on loans acquired from prior acquisitions was $8.0 million and $13.3 million for the years ended December 31, 2022 and 2021, respectively. As part of loan fee income for the year ended December 31, 2022, recognized PPP loan fees were $5.9 million compared to $25.3 million for the year ended December 31, 2021. At December 31, 2022, $0.2 million of unaccreted net deferred fee income remains to be recognized on the PPP loans, as compared to $6.1 million at December 31, 2021.

CRE loans at December 31, 2022 represent a significant component of the loan portfolio at 56.6% and increased 9.4% as compared to CRE balances at December 31, 2021. CRE—land and construction loan balances increased $110.0 million or 13.2% from December 31, 2021 to December 31, 2022, while CRE—improved property loans increased $412.4 million or 8.8% during the same period.

C&I loans decreased $10.9 million or 0.7% from December 31, 2021 to December 31, 2022, due to the $154.6 million decline in outstanding PPP loans. The available lines of credit within C&I loans decreased slightly from 65.5% at December 31, 2021 to 64.9% of total C&I revolving lines of credit exposure as of December 31, 2022.

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Residential real estate mortgage loans increased $419.2 million from December 31, 2021 to December 31, 2022. Wesbanco retained approximately 78% of mortgages by dollar volume originated in 2022 for the portfolio compared to 57% in 2021. As mortgage rates increase, the demand for various mortgage products and related terms changes, and thus impacts what Wesbanco is able to sell into the secondary market.

HELOC loans increased $89.4 million or 14.8% from December 31, 2021 to December 31, 2022 as $37.8 million in consumer HELOC loans that were previously classified as consumer were transferred to the HELOC segment. In addition, higher originations of HELOC products resulted from fewer customers refinancing into first mortgage loans in the higher interest rate environment.

Consumer loans decreased $50.8 million or 18.3% from December 31, 2021 to December 31, 2022 due primarily to the aforementioned loan transfer.

Total loan commitments increased $751.2 million or 19.3% from December 31, 2021 to December 31, 2022. Commitments in the total CRE portfolio increased approximately $392.3 million or 43.0%, C&I commitments increased $73.5 million or 5.7% and HELOC commitments increased $311.7 million or 35.5%.

Geographic Distribution —Wesbanco extends credit primarily within the market areas where it has branch offices, markets adjacent thereto, or markets that have a loan production office. Loans outside of these markets are generally only made to established customers that have other business relationships with Wesbanco in its markets. Loans outside of Wesbanco’s markets represented approximately 4% and 2% of total loans at December 31, 2022 and December 31, 2021, respectively. These loans consist primarily of C&I, CRE-improved property loans, residential real estate loans for second residences or vacation homes, consumer purpose lines of credit to wealth management customers, and automobile loans to family members of local customers.

The geographic distribution of the loan portfolio, excluding deposit overdraft limits and loans held for sale, is summarized in Table 12.

TABLE 12. GEOGRAPHIC DISTRIBUTION OF LOANS

(1)
Real estate secured loans are categorized based on the address of the collateral. All other loans are categorized based on the borrower’s address.

The Upper Ohio Valley Metropolitan Statistical Areas (“MSAs”) include the Wheeling, West Virginia and Weirton, West Virginia-Steubenville, Ohio MSAs. Other West Virginia locations include the Fairmont-Clarksburg and Charleston MSAs as well as communities that are not located within an MSA primarily in the northern, central and eastern parts of the state. The western Ohio MSAs include the Dayton-Springfield

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and the Cincinnati-Middletown MSAs. Other Ohio locations include communities in Ohio that are not located within an MSA, the majority of which are located in southeastern Ohio. Other Indiana locations include communities in Indiana that are not located within an MSA, the majority of which are located in southern Indiana. Other Kentucky locations include the Elizabethtown KY MSA along with other Kentucky locations that are not located within an MSA. Through the acquisition of OLBK, Wesbanco added the Baltimore-Columbia-Towson, MD MSA, Frederick-Gaithersburg-Rockville, MD MSA and Washington DC-Arlington-Alexandria, VA MSA as well as other Maryland locations. Adjacent states include parts of Delaware and Virginia that are within close proximity to Wesbanco’s markets. Outside-of-market loans consist of loans in all other locations not included in any of the other defined areas and have remained relatively unchanged over the past few years.

CREDIT RISK

The risk that borrowers will be unable or unwilling to repay their obligations is inherent in all lending activities. Repayment risk can be impacted by external events such as adverse economic conditions, social and political influences that impact entire industries or major employers, individual loss of employment or other personal calamities and changes in interest rates. This inherent risk may be further exacerbated by the terms and structure of each loan as well as potential concentrations of risk. The primary goal of managing credit risk is to minimize the impact of all of these factors on the quality of the loan portfolio.

Credit risk is managed through the initial underwriting process as well as through ongoing monitoring and administration of the portfolio. 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 focuses on the sufficiency and sustainability of the primary source of repayment, the adequacy of collateral, if any, as a secondary source of repayment, potential for guarantor support, as a tertiary source of repayment and other factors unique to each type of loan that may increase or mitigate their risk. The manner and degree of monitoring and administration of the portfolio varies by type and size of loan.

Credit risk is also managed by closely monitoring delinquency levels and trends and initiating collection efforts at the earliest stage of delinquency. Wesbanco also monitors general economic conditions, including unemployment, housing activity and real estate values in its markets. Underwriting standards are modified when appropriate based on market conditions, the performance of one or more loan categories, and other external factors. An independent loan review function also performs periodic reviews of the portfolio to assess the adequacy and effectiveness of underwriting, loan documentation and portfolio administration.

Each category of loans contains distinct elements of risk that impact the manner in which those loans are underwritten, structured, documented, administered and monitored. Customary terms and underwriting practices, together with specific risks associated with each category of loans and Wesbanco’s processes for managing those risks are discussed in the remainder of this section.

Commercial Loans —The commercial portfolio consists of loans to a wide range of business enterprises of varying size. Many commercial loans often involve multiple loans to one borrower or a group of related borrowers, therefore the potential for loss on any single transaction can be significantly greater for commercial loans than for retail loans. Commercial loan risk is mitigated by limiting total credit exposure to individual borrowers or groups of borrowers, industries and geographic markets and by requiring appropriate collateral or guarantors.

Commercial loans are monitored for potential concentrations of loans to any one borrower or group of related borrowers. At December 31, 2022 Wesbanco’s legal lending limit to any single borrower or their related interests approximated $246 million. The ten largest commercial relationships combined ranged from $662 million to $843 million during 2022. There were 20 relationships that exceeded $50 million at December 31, 2022. These large relationships generally consist of more than one loan to a borrower or their related entities. The single largest relationship exposure approximated $117 million at December 31, 2022 and consists of multiple loans to a business relationship for gasoline stations with convenience stores, which is in the retail sector.

Commercial loans, including renewals and extensions of maturity, are approved within a framework of individual lending authorities based on the total credit exposure of the borrower. Loans with credit exposure up to $1 million are approved by underwriters that are not responsible for loan origination. Loans with credit exposure greater than $1 million minimally require the approval of a commercial banking executive, and credit exposures greater than $1.5 million require approval of a credit officer that is not responsible for loan origination. In the Mid-Atlantic market, credit exposures greater than $5 million up to $15 million require approval of a credit committee comprised of senior management in the market and credit officers not responsible for loan origination. Credit exposures greater than $25 million require approval of a centralized credit committee comprised of senior and executive management, credit officers, directors, and certain other non-voting qualified persons that are not responsible for loan origination. Underwriters and credit officers do not receive incentive compensation based on loan origination volume. Commercial banking executives receive incentive compensation based on multiple factors that include loan origination, net growth in outstanding loan balances, fees, credit quality and portfolio administration requirements.

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CRE – land and construction consists of loans to finance land for development, investment, use in a commercial business enterprise, agricultural or minerals extraction, construction of residential dwellings for resale, multi-family apartments and other commercial buildings that may be owner-occupied or income-generating investments for the owner. Construction loans generally are made only when Wesbanco also commits to the permanent financing of the project, has a takeout commitment from another lender for the permanent loan or the loan is expected to be repaid from the sale of subdivided property. However, even if Wesbanco has a takeout commitment, construction loans are underwritten as if Wesbanco will retain the loan upon completion of construction. In recent years, many construction loans that did not have a takeout commitment when the loan originated have been sold or refinanced in the secondary market immediately upon completion of construction, at times, resulting in significant unscheduled loan payoffs.

CRE – land and construction loans require payment of interest-only during the construction period, with initial terms ranging from six months up to three years for larger, multiple-phase projects, such as residential housing developments and large scale commercial projects. Interest rates are often fully-floating based on an appropriate index, but may be structured in the same manner as the interest rate that will apply to the permanent loan upon completion of construction. Interest during the construction period is typically included in the project costs and therefore is often funded by loan advances. Advances are monitored to ensure that the project is at the appropriate stage of completion with each advance and that interest reserves are not exhausted prior to completion of the project. In the event a project is not completed within the initial term, the loan is re-underwritten at maturity, but interest beyond the initial term must be paid by the borrower and in some instances an additional interest reserve is required as a condition of extending the maturity. Upon completion of construction, the loan is converted to permanent financing and reclassified to CRE—improved property.

CRE – improved property loans consist of loans to purchase or refinance owner-occupied and investment properties. Owner-occupied CRE consists of loans to borrowers in a diverse range of industries and property types. Investment properties include multi-family apartment buildings, 1-to-4 family rental units, lodging and various types of commercial buildings that are rented or leased to unrelated parties of the owner.

CRE – improved property loans generally require monthly principal and interest payments based on amortization periods ranging from ten to thirty years depending on the type, age and condition of the property. Loans with amortization periods exceeding twenty years typically also have a maturity date or call option of ten years or less. Interest rates are generally adjustable after a fixed period ranging from one to five years based on an appropriate index of comparable duration. Interest rates may also be fixed for longer than five years and certain loans from acquisitions may have longer initial fixed rate terms. For certain larger loans, the borrower may be required to enter into an interest rate derivative contract that converts Wesbanco’s rate to an adjustable rate.

C&I loans consist of revolving lines of credit to finance accounts receivable, inventory and other general business purposes; term loans to finance fixed assets other than real estate, and letters of credit to support trade, insurance or governmental requirements for a variety of businesses. Most C&I borrowers are privately-held companies with annual sales up to $100 million.

C&I term loans secured by equipment and other types of collateral generally require monthly principal and interest payments based on amortization periods up to ten years depending on the estimated useful life of the collateral, with interest rates that may be fixed for the term of the loan (potentially via an interest rate derivative contract) or adjustable after a fixed period ranging from one to seven years based on an appropriate index.

Commercial lines and letters of credit are generally categorized as C&I but may also be categorized as CRE—improved property loans or CRE—land and construction if they are secured primarily by real estate. Lines of credit typically require payment of interest-only with principal due on demand or at maturity. Interest rates on lines of credit are generally fully-adjustable based on an appropriate short-term index. Letters of credit typically require a periodic fee with principal and interest due on demand in the event the beneficiary of the letter requests an advance on the commitment. Lines of credit may also include a fee based on the amount of the line that is not advanced. Lines and letters of credit are generally renewable or may be cancelled annually by Wesbanco, but may also be committed for up to three years for certain small business lines and certain letters of credit. Letters of credit may also require Wesbanco to notify the beneficiary within a specified time in the event Wesbanco does not intend to renew or extend the commitment.

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Table 13 summarizes the distribution of maturities by rate type for all commercial loans.

TABLE 13. MATURITIES OF COMMERCIAL LOANS

The primary factors considered in underwriting CRE—land and construction loans are the overall viability of each project, the experience and financial capacity of the developer or builder to successfully complete the project, market absorption rates and property values. These loans also have the unique risk that the developer or builder may not complete the project, or not complete it on time or within budget. Risk is generally mitigated by extending credit to developers and builders with established reputations who operate in Wesbanco’s markets and have the liquidity or other resources to absorb unanticipated increases in the cost of a project or longer than anticipated absorption, periodically inspecting construction in progress, and disbursing the loan at specified stages of completion. Certification of completed construction by a licensed architect or engineer and performance and payment bonds may also be required for certain types of projects. Since speculative projects are inherently riskier, Wesbanco may require a specified percentage of pre-sales for land and residential development or pre-lease commitments for investment property before construction can begin.

The primary factors that are considered in underwriting investment real estate are the debt service coverage calculation, the net rental income generated by the property, the composition of the tenants occupying the property, and the terms of leases, all of which may vary depending on the specific type of property. Other factors that are considered include the overall financial capacity of the investors and their experience owning and managing investment property.

Repayment of owner-occupied loans must come from the cash flow generated by the occupant’s commercial business. Therefore, the primary factors that are considered in underwriting owner-occupied CRE and C&I loans are the debt service coverage calculation, the historical and projected earnings, cash flow, capital resources, liquidity and leverage of the business. Other factors that are considered for their potential impact on repayment capacity include the borrower’s industry, competitive advantages and disadvantages, demand for the business’ products and services, business model viability, quality, experience and depth of management, and external influences that may impact the business such as general economic conditions and social or political changes.

The type, age, condition and location of real estate as well as any environmental risks associated with the property are considered for both owner-occupied and investment CRE. Environmental risk is mitigated by requiring assessments performed by qualified inspectors whenever the current or previous uses of the property or any adjacent properties are likely to have resulted in contamination of the property financed. Risk is further mitigated by requiring borrowers to have adequate down payments or cash equity, thereby limiting the loan amount in relation to the lower of the cost or the market value of the property, unless there are sufficient mitigating factors that would reduce the risk of a higher loan-to-value. Market values are determined by obtaining current appraisals or evaluations, whichever is appropriate or required by banking regulations based on the amount financed prior to the loan being made. New appraisals or evaluations may be obtained throughout the life of each loan to more accurately assess current market value when the initial term of a loan is being extended, market conditions indicate that the property value may have declined, and/or the primary source of repayment is no longer adequate to repay the loan under its original terms.

CRE loan-to-value (“LTV”) ratios are generally limited to the maximum percentages prescribed by Wesbanco credit policy or banking regulations, which range from 65% for unimproved land to 85% for improved commercial property. Regulatory guidelines also limit the aggregate of CRE loans that exceed prescribed LTV ratios to 30% of the Bank’s total risk-based capital. The aggregate of all CRE loans and loan commitments that exceeded the regulatory guidelines approximated $126 million or 8% of the Bank’s total risk-based capital at December 31, 2022, compared to $117 million or 7% at December 31, 2021. Regardless of credit policy or regulatory guidelines, lower LTV ratios may be required for certain types of properties or when other factors exist that increase the risk of volatility in market values such as single or special-use properties that cannot be easily converted to other uses or may have limited marketability. Conversely, higher LTV ratios may be acceptable when there are other factors to adequately mitigate the risk.

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The type and amount of collateral for C&I loans varies depending on the overall financial strength of the borrower, the amount and terms of the loan, and available collateral or guarantors. The level of pledged collateral can vary from unsecured to fully secured with various types of collateral. Unsecured credit is only extended to those borrowers and/or guarantors that exhibit consistently strong repayment capacity and the financial condition to withstand a temporary decline in their operating cash flows. Unsecured loans totaled $226 million and $393 million at December 31, 2022 and December 31, 2021, respectively. Of the unsecured loans at December 31, 2022, $8 million are SBA-guaranteed PPP loans versus $163 million at December 31, 2021. Loans can be secured by bank deposit accounts, marketable securities, working capital assets (accounts receivable and inventory), equipment or owner occupied real estate. Bank deposits and marketable securities represent the lowest risk. Marketable securities are subject to changes in market value and are monitored regularly by the bank to ensure they remain appropriately margined. Collateral other than equipment or real estate that fluctuates with business activity, such as accounts receivable and inventory, may also be subject to regular reporting and certification by the borrower and, in some instances, independent inspection and verification by Wesbanco. Loans secured by equipment or real estate may be subject to receipt of third party appraisals. Although loans can be collateral type-specific, they can also be secured by multiple property types and/or a blanket lien may be placed on all of a borrower’s assets.

Most commercial loans are originated directly by Wesbanco. Participation in loans originated by other financial institutions represents $789 million or 7.7% of total commercial loan exposure at December 31, 2022, compared to $547 million or 5.9% at December 31, 2021. Included in this total are Shared National Credits of $10 million at December 31, 2022 and $11 million at December 31, 2021. Shared National Credits are defined as loans in excess of $100 million that are financed by three or more lending institutions. Wesbanco performs its own customary credit evaluation and underwriting before purchasing loan participations. The credit risk associated with these loans is similar to that of loans originated by Wesbanco, but additional risk may arise from the limited ability to control the actions of the lead, agent or servicing institution.

The commercial portfolio is monitored for potential concentrations of credit risk including by market, CRE property type, C&I industry, loan type and loans affected by similar external factors.

Beginning in 2001 and revised in 2013, banks of a certain size are required to track C&I loan transactions designated as Highly Leveraged Transactions (“HLTs”). Loans that meet the criteria must be of a certain size, for the purpose of a buyout, acquisition or capital distributions and meet certain leverage ratios. As of December 31, 2022, Wesbanco had $39.8 million or 0.4% of total commercial loan exposure designated as HLTs, as compared to $39.5 million or 0.4% as of December 31, 2021.

The bank is monitoring the office building portfolio, as the continuing trend towards remote work has led to diminished need for dedicated office space. As of December 31, 2022, total exposure to land development and new development related to office buildings, improvements and renovation of existing structures, purchase of existing buildings and other related activities approximated $519 million or 5.0% of the total commercial loan exposure, as compared to $470 million or 5.0% of the total commercial loan exposure at December 31, 2021. There is a potential risk for office loan losses to materialize as lease agreements begin to expire and companies reduce their footprint.

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TABLE 14. COMMERCIAL EXPOSURE BY INDUSTRY