WESBANCO INC (WSBC) FY 2023 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 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 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, 2022, as filed with the SEC on February 27, 2023.

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, 2023, 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. 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.

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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 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 judgment of what can be reasonably supported. The model reversion period can range 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 expected extensions, renewals or modifications.

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 CRE and C&I that have unique characteristics, are tested individually for estimated credit losses. 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. The present value of expected future cash flows are discounted at the loan’s effective interest rate. The effective interest rate on a loan is the rate of return implicit in the loan, the loan’s observable market price, or the fair value of the collateral discounted by the estimated selling expenses, if the loan is collateral dependent. Wesbanco chooses the appropriate measurement method on a loan by loan basis for an individually evaluated loan, except for collateral dependent loans for which foreclosure of the collateral is probable. A loan is collateral dependent if repayment of the loan is to be provided solely by the underlying collateral. If the Bank determines that foreclosure of the collateral is probable, ASC 326-20 requires that the expected credit loss be based on the difference between the current fair value of the collateral discounted by the estimated selling expenses and the amortized cost basis of the financial asset. At this point, the loan would either be charged down or adequately reserved.

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Determining the appropriateness of the allowance for credit losses is complex and requires significant management judgment about the effect of matters that are inherently uncertain. Due to those significant management judgments and the factors included in the calculation, significant changes to the allowance for credit losses could occur in future periods.

Goodwill — 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. Goodwill is not amortized but is evaluated for impairment annually, or more often if events or circumstances indicate it may be impaired.

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. Wesbanco completed its annual goodwill impairment evaluation as of November 30, 2023. There were no indications of impairment as of November 30, 2023 nor December 31, 2023 as there were no significant change in market conditions, consolidated operating results or forecasted future results from November 30, 2023.

Wesbanco considered the sensitivity of significant assumptions in the impairment analysis including consideration of changes in estimated future cash flows and changes in the discount rate of the reporting units. The hypothetical sensitivity of the estimated fair value of the reporting units to an immediate and isolated increase of 100 basis points in the discount rate assumption at November 30, 2023, without consideration of any offsetting or simultaneous effects of other key assumptions, would not result in impairment, but could reduce the excess fair value over the carrying value to approximately 9%. The purpose of this sensitivity is to provide an indication of the isolated impacts of hypothetical alternative assumptions on modeled fair value estimates and is not considered probable.

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 judgments. 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

Through successful operational execution, Wesbanco generated solid annual net income, while remaining a well-capitalized institution with sound liquidity and credit quality metrics. For the twelve months ended December 31, 2023, net income available to common shareholders was $148.9 million, or $2.51 per diluted share, as compared to $182.0 million, or $3.02 per diluted share, for the twelve months ended December 31, 2022. Net income available to common shareholders excluding after-tax restructuring and merger-related expenses (non-GAAP measure) was $151.9 million, or 2.56 per diluted share for the year ended December 31, 2023. These decreases were due in large part to the higher funding costs for both deposits and borrowings, inflationary cost pressures, and the recording of provision expense as compared to the benefit of a release of provision for credit losses in the prior year. Interest income increased $197.9 million or 38.5% to $711.5 million in 2023 compared to 2022. Net interest income increased $7.0 million or 1.5% from 2022, primarily due to loan growth and a rising rate environment. Non-interest income increased $3.1 million or 2.6% in 2023 compared to 2022, driven by a $2.7 million increase in net securities gains, and a $1.0 million increase in net gains on other real estate owned and other assets. Excluding restructuring and merger-related expenses, non-interest expense increased $30.9 million or 8.7%, driven by increases in FDIC insurance, salaries and wages, employee benefits and marketing expense.

Total assets as of December 31, 2023 were $17.7 billion, an increase of 4.6% as compared to December 31, 2022. As of December 31, 2023, total portfolio loans were $11.6 billion compared to $10.7 billion at December 31, 2022, reflecting an 8.7% increase year-over year. The loan growth funding is reflected within the increase in total borrowings of $615.8 million or 73.3% at December 31, 2023 compared to December 31, 2022. Criticized and classified loan balances decreased to 2.22% of total portfolio loans, as compared to 2.34% at December 31, 2022. Annualized net loan charge-offs to average loans for the full year period increased to four basis points compared to two basis points in 2022. Deposits remained steady in 2023, increasing by 0.3% from December 31, 2022.

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, 2023, Tier I leverage was 9.87%, Tier I risk-based capital was 12.05%, total risk-based capital was 14.91%, and the common equity Tier 1 capital ratio was 10.99%.

Strong earnings enabled Wesbanco to increase the quarterly dividend to $0.36 per share in the fourth quarter of 2023, the seventeenth increase over the last thirteen years, cumulatively representing a 157% increase over that period.

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Selected financial ratios for the years ended December 31, 2023, 2022 and 2021 are presented in the table below:

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(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 ended December 31, 2023, net income available to common shareholders was $148.9 million, or $2.51 per diluted share, compared to $182.0 million, or $3.02 per diluted share. Net income available to common shareholders for the twelve months ended December 31, 2023 decreased 18.2% compared to 2022, while diluted per share earnings decreased 16.9%.

For the twelve months ending December 31, 2023, net interest income increased $7.0 million, or 1.5%, primarily due to loan growth and the benefit of rising rates on earning assets. The increase in net interest income was offset in part by a decrease in the net interest margin of six basis points to 3.14% in 2023 as compared to 2022 due to the overall higher rate environment and its effect on the rate paid on interest bearing liabilities. Average loan balances increased 10.4% in 2023, mostly due to a lower level of commercial real estate payoffs and a strong performance by the commercial and residential lending teams, while average investment securities decreased 7.4% over the same period. Total average deposits decreased in 2023 by $600.5 million or 4.4% compared to 2022, due to customer preferences in the higher interest rate environment.

For 2023, non-interest income increased $3.1 million or 2.6% compared to 2022. This increase was primarily due to an increase in net securities gains of $2.7 million, which resulted from market fluctuations of equity securities in the deferred compensation plan and a $1.0 million increase in net gains on other real estate owned and other assets from the recovery of an asset previously written off. These increases were offset somewhat by decreases in mortgage banking income and electronic banking fees, as well as negative fair value adjustments on loan swaps.

The following comments on non-interest expense exclude restructuring and merger-related expenses in both years. Non-interest expense in 2023 increased $30.9 million or 8.7% compared to 2022, while the efficiency ratio increased in 2023 to 63.6% from 59.5% in 2022. The primary drivers of this increase was a $9.9 million increase in salaries and wages due to annual merit increases and new revenue-producing hires, which were mainly commercial lenders, and a $9.1 million increase in employee benefits resulting from higher deferred compensation expense and higher health insurance expense. FDIC insurance expense, as well as equipment and software and marketing expenses, also increased from 2022. These increases were slightly offset by lower amortization expense on intangible assets.

The provision for federal and state income taxes decreased to $35.0 million in 2023 compared to $44.3 million in 2022, due primarily to lower pre-tax income in 2023. The effective tax rate was 18.1% and 18.7% for the years ended December 31, 2023 and 2022, respectively. Wesbanco recognized $3.7 million and $3.5 million in New Markets Tax Credits for the years ended December 31, 2023 and 2022, respectively.

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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 $7.0 million or 1.5% in 2023 compared to 2022, primarily due to loan growth and the benefit of rising rates on earning assets and was mitigated by a six basis point decrease in the net interest margin over the same time period. Rates were impacted from the 525 basis point increase in the federal funds rate since the first quarter of 2022. Purchase accounting accretion decreased in 2023, as approximately three basis points of accretion from prior acquisitions was included in the 2023 net interest margin as compared to six basis points in the 2022 net interest margin. Total average deposits, excluding CDs, decreased in 2023 by $510.8 million or 4.1% compared to 2022, due to increased competition for deposits during the higher rate environment. The cost of interest bearing deposits increased by 148 basis points and the cost of total liabilities increased by 183 basis points from 2022 to 2023. 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 $197.9 million or 38.5% in 2023 compared to 2022 due to higher yields in most of the major earning asset categories. Earning asset yields were influenced positively in 2023 compared to 2022 from the previously mentioned increases in the Federal Reserve’s federal funds rate of 525 basis points since the first quarter of 2022. Average loan balances increased $1.0 billion or 10.4% in 2023 compared to 2022, due to commercial hiring efforts. Loan yields increased by 117 basis points during 2023 to 5.36% 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 2023, average loans represented 72.0% of average earning assets, an increase from 67.4% in 2022. Taxable securities yields increased by 42 basis points in 2023 due to the effect of the higher rate environment on the variable rate portion of the investment portfolio, which are typically tied to SOFR. Decreased prepayments on mortgage-backed securities in the higher rate environment also further benefited the taxable securities yields due to reduced amortization on securities purchased at a premium. Tax-exempt securities yields increased by two basis points in 2023 from 2022. The average balance of tax-exempt securities, which have the highest yields within securities, increased from 18.6% of total average securities in 2022 to 19.9% of total average securities in 2023.

Interest expense increased $190.8 million in 2023 as compared to 2022, 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 183 basis points from 2022 to 2.25% in 2023. Average interest bearing deposits decreased by $208.0 million or 2.3% from 2022 to 2023. The rate on interest bearing deposits increased 148 basis points to 1.75% in 2023 as compared 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 decreased from 2022 to 2023 by $392.5 million or 8.3%, and were 33.2% of total average deposits at December 31, 2023, compared to 34.7% at December 31, 2022. The average balance of FHLB borrowings increased by $963.1 million from 2022 to 2023 due to the funding of loan growth. New higher-rate borrowings taken out in 2023 increased the average rate by 294 basis points to 5.21% from 2.27% in 2022. Average repurchase agreements combined with average subordinated debt and junior subordinated debt balances increased $2.8 million or 0.7% from 2022 to 2023, and their average rates paid increased by 181 and 147 basis points, respectively, over this same time period, due primarily to increases in SOFR, the index upon which this variable-rate type of borrowing is priced.

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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 $2.7 million, $8.8 million and $26.3 million for the years ended December 31, 2023, 2022 and 2021, respectively. As part of loan fees, PPP loan fees were $0.2 million, $5.9 million and $25.3 million for the years ended December 31, 2023, 2022 and 2021, respectively. Additionally, loan accretion included in interest income on loans acquired from prior acquisitions was $4.5 million, $8.0 million and $13.3 million for the years ended December 31, 2023, 2022 and 2021, 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 $0.5 million, $1.1 million and $3.1 million for the years ended December 31, 2023, 2022 and 2021, 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 $17.8 million in 2023 compared to ($1.7) million in 2022 as a result of loan growth as well as changes in macroeconomic conditions 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 0.23% of total loans as of December 31, 2023, and decreased from 0.39% of total loans at the end of 2022. Non-performing assets were 0.24% of total loans and other real estate and repossessed assets as of December 31, 2023, decreasing from 0.40% at the end of 2022. Criticized and classified loans were 2.22% of total loans, decreasing from 2.34% as of December 31, 2022, primarily due to improvements in loans categorized as criticized or classified during the pandemic. Past due loans at December 31, 2023 were 0.28% of total loans, compared to 0.19% at December 31, 2022. (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 20.0% and 19.8% of total revenue for 2023 and 2022, 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 increased $3.1 million or 2.6% in 2023 compared to 2022, primarily due to increases in trust fees, net securities gains (losses), and net gains on other real estate owned and other assets. The increases were slightly offset by a decrease in mortgage banking income.

Trust fees increased $0.6 million or 2.1% in 2023 compared to 2022. Trust assets of $5.4 billion at December 31, 2023, increased from $4.9 billion at December 31, 2022. As of December 31, 2023, trust assets include managed assets of $4.4 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 December 31, 2023 and December 31, 2022, and are included in managed assets.

Swap fee and valuation income, which includes fair value adjustments, decreased $0.2 million or 2.2% in 2023 as compared to 2022. The decrease was specifically due to negative fair value adjustments on the swap portfolio in 2023 resulting from the late year market rate decreases, which outweighed a record amount of new swaps originated and their associated swap fee income. In 2023, new swaps totaled $728.7 million in notional principal resulting in $9.0 million in fee income, compared to new swaps totaling $254.3 million in notional principal resulting in $4.4 million in fee income in 2022. Fair market value adjustments on swaps in 2023 totaled a negative $2.1 million as compared to a positive $2.7 million in 2022.

Mortgage banking income decreased $2.5 million or 48.3% in 2023 compared to 2022, due primarily to a decrease in fair value adjustments on mortgage derivatives and increased deferred loan costs on mortgage loans. In 2023, total mortgage production was $0.7 billion, which was a decrease of 32.0% from total production in 2022. In 2023, $293.4 million in mortgages were sold into the secondary market as compared to $227.5 million in 2022. Included in mortgage banking income are gains of $0.8 million and $3.2 million from the fair value adjustments on mortgage loan commitments and related derivatives for 2023 and 2022, respectively.

Net securities gains (losses) 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 2023, net securities gains (losses) increased $2.7 million from 2022 due to an increase in the market value adjustments on the deferred compensation plan. These market adjustments had an offsetting effect in employee benefits expense.

Net gains on other real estate owned and other assets increased $1.0 million in 2023 as compared to 2022, due primarily to the recovery of an asset that was previously written off.

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TABLE 5. NON-INTEREST EXPENSE

Non-interest expense in 2023, excluding restructuring and merger-related expenses, increased $30.9 million or 8.7% compared to 2022. The primary drivers of this increase were higher salaries and wages, employee benefits, equipment and software costs, FDIC insurance expense and other operating expenses. These increases were slightly offset by decreases in net occupancy and amortization of intangible assets. Restructuring and merger related expenses of $3.8 million in 2023 and $1.7 million in 2022 were attributable to branch restructuring that occurred in both years.

Salaries and wages increased $9.9 million or 5.9% in 2023 compared to 2022 due primarily to increases in salaries and stock compensation expense. Salary expense increased due to annual merit increases and new revenue-producing hires, mainly commercial lenders, during the past year. Stock compensation expense increased due to higher overall award levels, combined with accelerated expense that was recorded for an executive retirement. Offsetting these increases slightly was an increase in deferred loan contra origination costs in 2023 due to higher loan origination volume, primarily in commercial loans.

Employee benefits expense increased $9.1 million or 24.2% in 2023 compared to 2022 due to an increase in the market adjustment on the underlying investments of the deferred compensation plan, which has an offsetting effect in net securities gains (losses). Also attributing to the increase in 2023 was higher health insurance expense due to increased claims in 2023, as well as increased pension fund expense due to higher interest costs and other pension expenses.

Equipment and software costs increased $4.2 million or 12.8% in 2023 compared to 2022, due to continuous improvements in technology and communication infrastructure, general inflationary cost increases for existing service agreements and increased usage of digital banking services. During 2023, Wesbanco upgraded most of its ATM fleet.

FDIC insurance increased $4.3 million or 55.0% in 2023 compared to 2022, due to higher quarterly assessment rates. In 2022, the FDIC announced a two basis point increase in the minimum FDIC assessment rate for all banks, which was effective beginning in the first assessment period of 2023.

Restructuring and merger-related expenses in 2023 totaled $3.8 million, an increase from $1.7 million incurred in 2022. The $3.8 million of expenses in 2023 consisted of fixed asset writedowns, lease termination expenses and severance expenses associated with the closure of branches, back-office buildings and a restructuring of the residential mortgage department. The restructuring and merger-related expenses in 2022 totaling $1.7 million were comprised of branch closure and lease termination expenses associated with the closure of 13 branches throughout 2022.

ATM and electronic banking interchange expenses increased $1.2 million or 20.1% in 2023 as compared to 2022, due to higher ACH and ATM processing charges resulting from an increase in transaction volume.

Other operating expenses increased $3.0 million or 12.3% in 2023 as compared to 2022, due to costs associated with higher customer transactional volume and increased employee travel expenses.

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INCOME TAXES

The provision for income taxes was $35.0 million for 2023, which is a $9.3 million decrease as compared to $44.3 million in 2022. The decrease in the provision for income taxes is due in part to a decrease in the effective tax rate to 18.1% in 2023 compared to 18.7% in 2022. In addition, the decrease resulted from lower pre-tax income in 2023 as compared to 2022. The decrease in pre-tax income is primarily driven by the $17.7 million provision for credit losses recorded in 2023, as compared to a $1.7 million negative provision for credit losses in 2022, and an increase in non-interest expense.

FINANCIAL CONDITION

Total assets, deposits and shareholders' equity increased 4.6%, 0.3% and 4.4%, respectively, at December 31, 2023 compared to December 31, 2022. Total securities decreased $383.1 million or 10.1% from December 31, 2022 to December 31, 2023, as investment maturities, paydowns and calls were used to fund loan growth. Total portfolio loans increased $935.7 million or 8.7% in 2023 driven by strong performance from our commercial and residential lending teams. Total deposits increased $37.6 million or 0.3% from year end 2022 reflecting the benefit of deposit gathering and retention efforts by our retail and commercial teams. Reflecting the impact of the significant increase in the federal funds rate, there continued to be some mix shift in the composition of total deposits; however, total demand deposits continue to represent 56% of total deposits, with the non-interest bearing component representing 30%, which remains consistent with the percentage range since early 2020.

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 $104.7 million and $96.7 million for the years ended December 31, 2023 and December 31, 2022, respectively. The increase in certificates of deposit of $345.9 million is primarily due to customers' preferences during the higher interest rate environment. Total borrowings increased 54.7% or $613.5 million during 2023, as loan growth increased and required additional funding generated through FHLB borrowings.

Total shareholders’ equity increased $106.4 million or 4.4%, compared to December 31, 2022, primarily due to net income of $159.0 million for the year ended December 31, 2023, and a $35.7 million other comprehensive gain exceeding the declaration of common and preferred shareholder dividends totaling $82.9 million and $10.1 million, respectively.

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SECURITIES

TABLE 6. COMPOSITION OF SECURITIES (1)

(1)
At December 31, 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)
Total held-to-maturity debt securities are presented on the Consolidated Balance Sheets net of their allowance for credit losses totaling $0.2 million at December 31, 2023 and December 31, 2022, respectively.

(3)
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 $383.1 million or 10.1% from December 31, 2022 to December 31, 2023. Over the same period, the available-for-sale portfolio decreased by $334.8 million or 13.2% primarily driven by $315.9 million in paydowns, $31.0 million in sales and $25.3 million in maturities and calls, and was slightly offset by a decrease of $38.7 million in unrealized losses. The held-to-maturity portfolio decreased by $49.1 million or 3.9% primarily due to maturities and calls of municipal bonds. The weighted average yield of the total portfolio increased seven basis points from 2.45% at December 31, 2022 to 2.52% at December 31, 2023, primarily due to increases in the indices tied to variable rate securities.

Total gross unrealized securities losses decreased $72.4 million, from $510.7 million as of December 31, 2022 to $438.3 million at December 31, 2023. The decrease in unrealized losses from December 31, 2022 was due to the overall decrease in investment balances combined with a decrease in market rates during late 2023 causing market prices to increase on the investment portfolio. Wesbanco believes that none of the unrealized losses on available-for-sale debt securities at December 31, 2023 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, 2023 and December 31, 2022 were $233.2 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 $130.4 million at December 31, 2023, compared to $164.2 million as of December 31, 2022. With approximately 35% of the investment portfolio in the held-to-maturity category, the recent volatility in interest rates does not have as much of an impact on other comprehensive income as if the entire portfolio were included in the available-for-sale category.

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.

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 $8.8 million and $9.5 million as of December 31, 2023 and 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 recorded an allowance on held-to-maturity debt securities of $0.2 million as of December 31, 2023 and 2022, respectively.

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.

Cost-method investments consist primarily of FHLB of Pittsburgh stock totaling $62.0 million and $36.2 million at December 31, 2023 and 2022, respectively, and are included in other assets in the Consolidated Balance Sheets.

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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, 2023. 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%.

Wesbanco’s municipal portfolio comprises 35.6% of the overall securities portfolio as of December 31, 2023 compared to 33.5% as of December 31, 2022, 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):

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, 2023, consists of $386.9 million of taxable and $699.4 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

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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, 2023:

TABLE 10. CONCENTRATION OF MUNICIPAL SECURITIES

(1) Wesbanco's municipal bond portfolio contains obligations in the state of West Virginia totaling $30.1 million or 2.8% of the total municipal portfolio.

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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

Total portfolio loans increased $935.7 million or 8.7% from December 31, 2022 to December 31, 2023, due to strong growth throughout the year in both the commercial real estate and residential real estate portfolios. Commercial real estate loans increased $504.1 million or 8.3%, as improved property increased by 7.7% and land and construction loans increased 11.9%. Commercial and industrial loans increased $91.3 million or 5.8%. Retail loans also improved throughout the year, as residential real estate loans increased $298.0 million or 13.9%, home equity loans increased $39.2 million or 5.6%, and consumer loans increased $3.2 million or 1.4%. 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 $11.5 million and $9.6 million as of December 31, 2023 and 2022, 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 $13.5 million and $18.0 million as of December 31, 2023 and 2022, respectively. Loan accretion included in interest income on loans acquired from prior acquisitions was $4.5 million and $8.0 million for the years ended December 31, 2023 and 2022, respectively.

CRE loans at December 31, 2023 represent a significant component of the loan portfolio at 56.4%, a slight decrease of 0.2% as compared to CRE balances at December 31, 2022. CRE—land and construction loan balances increased $112.0 million or 11.9% from December 31, 2022 to December 31, 2023, while CRE—improved property loans increased $392.1 million or 7.7% during the same period.

C&I loans increased $91.3 million or 5.8% from December 31, 2022 to December 31, 2023. The available lines of credit within C&I loans increased slightly from 64.9% at December 31, 2022 to 67.6% of total C&I revolving lines of credit exposure as of December 31, 2023.

Residential real estate mortgage loans increased $298.0 million from December 31, 2022 to December 31, 2023. Wesbanco retained approximately 57% of mortgages by dollar volume originated in 2023 for the portfolio compared to 78% in 2022. Wesbanco sold more loans in 2023 as compared to 2022 as margins were reduced on fixed rate mortgage loans due to competitive pressures in the marketplace during the higher interest rate environment.

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HELOC loans increased $39.2 million or 5.6% from December 31, 2022 to December 31, 2023. Consumer loans increased $3.2 million or 1.4% from December 31, 2022 to December 31, 2023.

Total loan commitments increased $92.3 million or 2.0% from December 31, 2022 to December 31, 2023. Commitments in the total CRE portfolio increased approximately $155.9 million or 11.9% and C&I commitments increased $219.3 million or 16.1%, while residential real estate commitments decreased $174.1 million or 48.4% and HELOC commitments decreased $118.6 million or 10.0%.

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% of total loans at both December 31, 2023 and December 31, 2022. 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 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 and the 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.

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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, 2023 Wesbanco’s legal lending limit to any single borrower or their related interests approximated $266 million. The ten largest commercial relationships combined ranged from $826 million to $868 million during 2023. There were 24 relationships that exceeded $50 million at December 31, 2023. These large relationships generally consist of more than one loan to a borrower or their related entities. The single largest relationship exposure approximated $120 million at December 31, 2023 and consists of multiple loans to a business relationship for gasoline stations with convenience stores, which is in the real estate investment 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.

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.

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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 $165 million or 9% of the Bank’s total risk-based capital at December 31, 2023, compared to $126 million or 8% at December 31, 2022. 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.

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 $210 million and $226 million at December 31, 2023 and December 31, 2022, respectively. Loans can be secured by bank deposit

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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 $871 million or 7.7% of total commercial loan exposure at December 31, 2023, compared to $789 million or 7.7% at December 31, 2022. Included in this total are Shared National Credits of approximately $178 million at December 31, 2023 and $10 million at December 31, 2022. 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. The breakdown of CRE – improved property includes 26% owner-occupied and 74% non-owner occupied.

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, 2023, Wesbanco had $108.0 million or 1.0% of total commercial loan exposure designated as HLTs, as compared to $39.8 million or 0.4% as of December 31, 2022.

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, 2023, 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 $471 million or 4.2% of the total commercial loan exposure, as compared to $519 million or 5.0% of the total commercial loan exposure at December 31, 2022. 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