DISCUSSION AND ANALYSIS OF THE MANAGEMENT OF WESBANCO INC ON THE FINANCIAL CONDITION AND OPERATING RESULTS (Form 10-Q)
Management's Discussion and Analysis ("MD&A") represents an overview of the
results of operations and financial condition of Wesbanco for the three and nine
months ended September 30, 2021 . This discussion and analysis should be read in
conjunction with the Consolidated Financial Statements and Notes thereto.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this report relating toWesbanco'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 withWesbanco's Form 10-K for the year endedDecember 31, 2020 and documents subsequently filed byWesbanco with theSecurities and Exchange Commission ("SEC"), includingWesbanco's Form 10-Q for the quarters endedMarch 31, 2021 andJune 30, 2021 , which are available at theSEC's website, www.sec.gov or atWesbanco's website, www.Wesbanco.com. Investors are cautioned that forward-looking statements, which are not historical fact, involve risks and uncertainties, including those detailed inWesbanco's most recent Annual Report on Form 10-K filed with theSEC under "Risk Factors" in Part I, Item 1A. Such statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements, including, without limitation, the effects of changing regional and national economic conditions including the effects of the COVID-19 pandemic; changes in interest rates, spreads on earning assets and interest-bearing liabilities, and associated interest rate sensitivity; sources of liquidity available toWesbanco 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 theFederal Reserve Board , theFederal Deposit Insurance Corporation , theSEC , theFinancial Institution Regulatory Authority , theMunicipal Securities Rulemaking Board , theSecurities Investors Protection Corporation , 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 impactingWesbanco's operational and financial performance.Wesbanco does not assume any duty to update forward-looking statements.
PREVIEW
Wesbanco is a multi-state bank holding company operating through 206 branches and 203 ATM machines in WestVirginia, Ohio , westernPennsylvania ,Kentucky , southernIndiana andMaryland , offering retail banking, corporate banking, personal and corporate trust services, brokerage services, mortgage banking and insurance.Wesbanco's businesses are significantly impacted by economic factors such as market interest rates, federal monetary and regulatory policies, local and regional economic conditions and the competitive environment's effect uponWesbanco's business volumes.Wesbanco's deposit levels are affected by numerous factors including personal savings rates, personal income, and competitive rates on alternative investments, as well as competition from other financial institutions within the markets we serve and liquidity needs ofWesbanco . Loan levels are also subject to various factors including construction demand, business financing needs, consumer spending and interest rates, as well as loan terms offered by competing lenders.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Wesbanco's critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as ofSeptember 30, 2021 have remained unchanged from the disclosures presented inWesbanco's Annual Report on Form 10-K for the year endedDecember 31, 2020 within the section "Management's Discussion and Analysis of Financial Condition and Results of Operations." 33
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RESULTS OF OPERATIONS EARNINGS SUMMARY Net income available to common shareholders for the three months endedSeptember 30, 2021 was$41.9 million , with diluted earnings per share of$0.64 , compared to$41.3 million or$0.61 per diluted share, respectively, for the third quarter of 2020. Net income for the nine months endedSeptember 30, 2021 , was$180.5 million , with diluted earnings per share of$2.71 , compared to$69.2 million or$1.03 per diluted share, respectively, for the first nine months of 2020. Excluding after-tax restructuring and merger-related expenses (non-GAAP measure) in both periods, for the three months endedSeptember 30, 2021 , net income available to common shareholders was$45.4 million or$0.70 per diluted share, as compared to$44.2 million or$0.66 per diluted share, respectively, in the prior year quarter; and net income for the nine months endedSeptember 30, 2021 was$185.7 million or$2.79 per diluted share compared to$76.5 million or$1.14 per diluted share in the prior year period. For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 (unaudited, dollars in Diluted Diluted Diluted Diluted thousands, except per share Earnings
Earnings Net Earnings Net Earnings amounts) Net Income Per Share Net Income Per Share Income Per Share Income Per Share Net income available to common shareholders (Non-GAAP)(1)$ 45,406 $ 0.70 $ 44,155 $ 0.66 $ 185,685 $ 2.79 $ 76,489 $ 1.14 Less: After-tax restructuring and merger-related expenses (3,529 ) (0.06 ) (2,850 ) (0.05 ) (5,167 ) (0.08 ) (7,300 ) (0.11 ) Net income available to common shareholders (GAAP)$ 41,877 $ 0.64 $ 41,305 $ 0.61 $ 180,518 $ 2.71 $ 69,189 $ 1.03
(1) Non-GAAP net income excludes post-tax restructuring and merger transactions
expenses. The above non-GAAP financial measures used by
useful information for investors to understand
performance and trends, and facilitate comparisons with the performance of
Wesbanco's peers. Net interest income decreased$5.3 million or 4.4% in the third quarter of 2021 compared to the same quarter of 2020, reflecting lower loan yields, due to repricing of existing loans and new lower rates offered in the current market environment, lower purchase accounting related accretion and lower rates on investment securities, partially offset by lower interest on deposits and borrowings. As a result of the lower rates and a higher mix of securities versus loans to total assets, the net interest margin decreased by 23 basis points to 3.08% in the third quarter of 2021 as compared to the third quarter of 2020. Over the same time period, the yield on earning assets decreased a total of 42 basis points and the cost of interest bearing liabilities decreased 28 basis points. Average loan balances decreased by 8.5% from the third quarter of 2020, mainly attributable to forgiveness of SBA Payroll Protection Program ("PPP") loans and higher levels of commercial real estate loan payoffs, while average securities increased by 41.7% over the same time period due to excess liquidity on the balance sheet from stimulus funds received by our customers. Average deposits, excluding certificates of deposit, increased 15.3% over the same time period, due mostly to stimulus deposits and increased personal savings. Accretion from acquisitions benefited the third quarter 2021 net interest margin by 10 basis points, as compared to 18 basis points in the prior year period. Lastly, the accretion on both existing and forgiven PPP loans positively impacted the third quarter 2021 net interest margin by a net 14 basis points as compared to two basis points for the third quarter of 2020. Improved macroeconomic forecasts and certain qualitative factors utilized in the CECL calculation drove a net benefit of provision for credit losses and resulted in a negative provision of$1.7 million in the third quarter of 2021 as compared to a provision of$16.3 million in the third quarter of 2020. Annualized net charge-offs as a percentage of average portfolio loans, were 0.03% and 0.00% for the third quarter of 2021 and 2020, respectively. For the third quarter of 2021, non-interest income decreased$1.9 million or 5.4% compared to the third quarter of 2020, driven primarily by lower mortgage banking income, which decreased$3.9 million or 46.2% from the record level recorded in the prior year amount. While mortgage loan originations remained solid during the quarter, the amount sold in the secondary market decreased from approximately 75% last year to approximately 40% in the third quarter of 2021, due to a continued effort to keep more 1-to-4 family residential mortgages on the balance sheet. Trust fees increased$0.9 million or 13.4% from the third quarter of 2020 to the third quarter of 2021 due to market improvements and net organic growth. Electronic banking fees increased$0.6 million or 13.5% from last year's third quarter as we transitioned to adjusted settlement processes of a new third-party digital banking service provider. Other income decreased$1.0 million or 19.4% due to lower loan swap-related income and the sale of the debit card sponsorship business earlier this year. Non-interest expense, excluding restructuring and merger-related expenses in both periods, increased in the third quarter of 2021 by$3.9 million or 4.5%, to$90.2 million , compared to the third quarter of 2020. This year-over-year increase is primarily due to$2.6 million of settlement costs from the pending resolution of a lawsuit, which are located within other operating expenses, and higher salaries expense. Salaries and wages increased$1.2 million or 3.0% from the third quarter of 2020 to the third quarter of 2021 due to higher incentive compensation expense of$1.8 million , reflecting increased business growth and financial performance as compared to the pandemic-impacted prior year. Equipment and software expense for the third quarter of 2021 increased$1.4 million or 22.2% year-over-year, due to increased asset size, increased usage of digital banking services and SBA PPP loan forgiveness. Offsetting these increases somewhat was a decrease inFDIC insurance expense of$0.7 million or 37.0% due to improved risk factors reducing the assessment rate. 34 -------------------------------------------------------------------------------- During the third quarter of 2021, the effective tax rate was 19.3% as compared to 15.7% in last year's third quarter, and the provision for income taxes increased by$3.0 million over the same time period, primarily due to higher pre-tax income heavily influenced by the negative provision for credit losses in the third quarter of 2021 as compared to the prior year's reduced pre-tax income from a pandemic-induced higher provision for credit losses.
NET INTEREST PRODUCT
TABLE 1. NET INTEREST INCOME
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
(unaudited, dollars in
thousands) 2021 2020 2021 2020
Net interest income $ 115,275 $ 120,593 $ 347,607 $ 359,768
Taxable equivalent
adjustment to net
interest income 1,080 1,112 3,170 3,440
Net interest income,
fully taxable equivalent $ 116,355 $ 121,705 $ 350,777 $ 363,208
Net interest spread,
non-taxable equivalent 2.96 % 3.10 % 3.02 % 3.14 %
Benefit of net
non-interest bearing
liabilities 0.09 % 0.18 % 0.11 % 0.21 %
Net interest margin 3.05 % 3.28 % 3.13 % 3.35 %
Taxable equivalent
adjustment 0.03 % 0.03 % 0.03 % 0.03 %
Net interest margin,
fully taxable equivalent 3.08 % 3.31 % 3.16 % 3.38 %
Net interest income, which is Wesbanco's largest source of revenue, is the
difference between interest income on earning assets, primarily loans and
securities, and interest expense on liabilities, primarily deposits and short
and long-term borrowings. Net interest income is affected by the general level
of, and changes in interest rates, the steepness and shape of the yield curve,
changes in the amount and composition of interest earning assets and interest
bearing liabilities, as well as the frequency of repricing of existing assets
and liabilities. Net interest income decreased $5.3 million or 4.4% in the third
quarter of 2021 compared to the third quarter of 2020, due to a 23 basis point
decrease in the net interest margin to 3.08% resulting from the lower yield
environment, as the yield on earning assets decreased at a faster rate than the
rate on interest bearing liabilities. For the nine months ended September 30,
2021 , net interest income decreased by $12.2 million or 3.4% compared to the
first nine months of 2020 for similar reasons. The net interest margin decrease
was slightly mitigated by a 2.3% increase in average earning asset balances from
the third quarter of 2020, primarily from a 41.7% increase in average
securities, which were purchased with liquidity from stimulus-related
deposits. Also helping to mitigate the margin decrease, PPP loans contributed a
total of $8.2 million in interest and fee accretion income in the third quarter
of 2021. This PPP loan income positively impacted the third quarter 2021 net
interest margin by a net 14 basis points. Excluding PPP loans, portfolio loans
decreased by 4.9% from September 30, 2020 , due to lower new loan demand and high
levels of commercial real estate loan payoffs. In addition, purchase accounting
accretion decreased in the third quarter of 2021, as approximately 10 basis
points of accretion from prior acquisitions was included in the third quarter
2021 net interest margin as compared to 18 basis points in the 2020 third
quarter net interest margin. Total average deposits, excluding CDs, increased in
the third quarter of 2021 by $1.6 billion or 15.3% compared to the third quarter
of 2020, due to stimulus deposits and higher personal savings balances. The cost
of interest bearing deposits decreased by 12 basis points and total liabilities
decreased by 28 basis points from the third quarter of 2020 to the third quarter
of 2021. The decrease in the cost is primarily due to aggressive rate decreases
for interest bearing demand deposits, which include public funds, and lower
rates for certificates of deposit, customer repurchase agreements, term Federal
Home Loan Bank borrowings and junior subordinated debentures, in response to the
general decrease in overall borrowing rates in the marketplace resulting from
lower rates across the yield curve. In addition, the average balance of FHLB
borrowings decreased by $717.3 million or 71.3% from the third quarter of 2020,
as excess liquidity was used to pay off these borrowings as they matured.
Interest income decreased $12.3 million or 9.2% in the third quarter of 2021 and
$41.0 million or 10.0% in the first nine months of 2021 compared to the same
periods of 2020 due to lower yields in every major earning asset
category. Earning asset yields were influenced negatively in the third quarter
of 2021 compared to the third quarter of 2020 due primarily to decreases in the
Federal Reserve's federal funds rate by 150 basis points in 2020 and the
continuation of the low rate environment through the current period. Average
loan balances decreased $942.8 million or 8.5% in the third quarter of 2021
compared to the third quarter of 2020, due mostly to forgiveness of PPP loans
that were originated in 2020 and the first half of 2021. Loan yields decreased
by 14 basis points during this same period to 4.03% due to the previously
mentioned lower rate environment and its effect on the repricing of portfolio
loans, as well as lower offered rates on new loans. Loans provide the greatest
impact on interest income and the yield on earning assets as they have the
largest balance and the highest yield within major earning asset categories. In
the third quarter of 2021, average loans represented 67.8% of average earning
assets, a decrease from 75.8% in the third quarter of 2020. As liquidity from
stimulus deposits was invested, average taxable securities balances increased
$1.1 billion or 51.3% from the third quarter of 2020, and represented 21.4% of
total earning assets in the third quarter of 2021. Taxable securities yields
decreased by 52 basis points and tax-exempt securities yields decreased by 35
basis points in the third quarter of 2021 from the third quarter of 2020. The
continuing lower rate environment has resulted in the yield decrease for all
securities, as calls, prepayments and maturities of legacy higher-rate
securities have been replaced with purchases at lower overall market
yields. Increased prepayments on mortgage-backed securities in the lower rate
environment also further reduced the taxable securities yields due to higher
premium amortization. The average balance of tax-exempt securities, which have
the highest yields within securities, have decreased from 22.2% of total average
securities in the third quarter of 2020 to 16.8% of total average securities in
the third quarter of 2021.
35
-------------------------------------------------------------------------------- Commercial loans with floors currently average 3.93% on approximately$2.6 billion or 35% of total commercial loans atSeptember 30, 2021 , as compared to$2.3 billion averaging 4.22% or 29% of commercial loans atDecember 31, 2020 . Approximately 65% or$1.7 billion of these loans are currently priced at their floor, as compared to 69% or$1.6 billion atDecember 31, 2020 . 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 decreased$7.0 million or 53.3% in the third quarter of 2021 and$28.9 million or 56.6% in the first nine months of 2021 as compared to the same periods in 2020, due to decreases in the cost of all interest bearing liability categories, as management reduced certain deposit rates, and due to a decrease in the balance of outstanding FHLB borrowings. The cost of interest bearing liabilities decreased by 28 basis points from the third quarter of 2020 to 0.25% in 2021. Interest bearing deposits increased$784.5 million or 9.6% from the third quarter of 2020, due mostly to customers' stimulus payments. The rate on interest bearing deposits decreased 12 basis points to 0.14% from the third quarter of 2020, primarily from aggressive decreases in rates on interest bearing public funds and certificates of deposit in response to the lower market rates, which are currently near their floors. Average non-interest bearing demand deposit balances increased from the third quarter of 2020 to the third quarter of 2021 by$462.7 million or 11.4%, and were 33.4% of total average deposits atSeptember 30, 2021 , compared to 33.1% atSeptember 30, 2020 , reflecting the previously mentioned stimulus deposits, higher personal savings balances and ongoing checking account marketing strategies. The average balance of FHLB borrowings decreased$717.3 million from the third quarter of 2020 to 2021 due to the maturity of legacy higher-rate FHLB borrowings throughout the past twelve months being redeemed with excess liquidity. These maturities benefited the average rate paid, as it decreased by 53 basis points to 1.63% from the third quarter of 2020. Average other borrowings combined with subordinated debt and junior subordinated debt balances decreased$251.6 million or 43.7% from the third quarter of 2020 to 2021, and their average rates paid decreased by 22 and 20 basis points, respectively, over this same time period, due primarily to decreases in LIBOR, the index upon which this variable-rate type of borrowing is priced. The continuing low rate environment is expected to result in the core net interest margin declining a few basis points over the fourth quarter, as securities purchased toward the end of the third quarter will further negatively impact the margin. Lower anticipated earning asset yields caused by loans repricing to lower rates, rates on new loan production being lower than existing loans, security cash flows being reinvested at lower rates and decreasing purchase accounting accretion should be slightly mitigated by price reductions to deposit rates and lower wholesale funding costs. The subordinated debt payoff late in the third quarter of 2021 and the upcoming subordinated debt payoff in November, both of which were acquired in previous acquisitions, will further help to reduce the cost of interest-bearing liabilities. In addition,Wesbanco's participation in the PPP loan program is expected to positively contribute to net interest income and further mitigate the decreases in the net interest margin as SBA loan forgiveness occurs for qualifying customers and net deferred fees are accreted into income at the date of loan payoff. AtSeptember 30, 2021 , there were$10.4 million of remaining net deferred fees from PPP loans that will accrete into interest income as loans pay down or are forgiven by the SBA. 36
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TABLE 2. AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST MARGIN
For The Three Months Ended September 30, For the Nine Months Ended September 30,
2021 2020 2021 2020
Average Average Average Average Average Average Average Average
(unaudited, dollars in thousands) Balance Rate Balance Rate Balance Rate Balance
Rate
ASSETS
Bank receivables – interest bearing
0.25 % Loans, net of unearned income (1) 10,164,279 4.03 % 11,107,106 4.17 % 10,562,879 4.03 % 10,813,737 4.34 % Securities: (2) Taxable 3,210,878 1.67 % 2,121,780 2.19 % 2,856,041 1.75 % 2,328,196 2.45 % Tax-exempt (3) 650,397 3.14 % 603,835 3.49 % 610,449 3.31 % 624,278 3.50 % Total securities 3,861,275 1.91 % 2,725,615 2.47 % 3,466,490 2.03 % 2,952,474 2.67 % Other earning assets 23,646 4.23 % 56,575 6.88 % 28,494 5.11 % 65,849 6.27 % Total earning assets (3) 14,985,284 3.24 % 14,644,871 3.66 % 14,861,576 3.36 % 14,341,988 3.86 % Other assets 2,072,509 2,074,846 2,060,312 2,065,777 Total Assets$ 17,057,793 $ 16,719,717 $ 16,921,888 $ 16,407,765
LIABILITIES AND SHAREHOLDERS ‘
EQUITY
Interest bearing demand deposits$ 3,297,702 0.10 %$ 2,654,161 0.18 %$ 3,139,992 0.12 %$ 2,518,952 0.32 % Money market accounts 1,791,494 0.08 % 1,623,969 0.17 % 1,764,462 0.11 % 1,590,498 0.33 % Savings deposits 2,471,593 0.04 % 2,140,932 0.06 % 2,393,066 0.04 % 2,051,930 0.10 % Certificates of deposit 1,403,812 0.49 % 1,761,087 0.72 % 1,501,857 0.54 % 1,865,439 0.77 % Total interest bearing deposits 8,964,601 0.14 %
8,180,149 0.26% 8,799,377 0.17% 8,026,819
0.37 % Federal Home Loan Bank borrowings 289,334 1.63 % 1,006,593 2.16 % 388,518 1.85 % 1,285,266 2.18 % Other borrowings 136,028 0.10 % 383,771 0.32 % 152,450 0.17 % 361,949 0.54 % Subordinated debt and junior subordinated debt 188,276 3.67 % 192,093 3.87 % 191,018 3.73 % 194,195 4.40 % Total interest bearing liabilities (4) 9,578,239 0.25 %
9,762,606 0.53% 9,531,363 0.31% 9,868,229
0.69 % Non-interest bearing demand deposits 4,504,332 4,041,681 4,402,487 3,679,743 Other liabilities 197,916 252,917 205,309 239,797 Shareholders' equity 2,777,306 2,662,513 2,782,729 2,619,996 Total Liabilities and Shareholders' Equity$ 17,057,793 $ 16,719,717 $ 16,921,888 $ 16,407,765 Taxable equivalent net interest spread 2.99 % 3.13 % 3.05 % 3.17 % Taxable equivalent net interest margin 3.08 % 3.31 % 3.16 % 3.38 %
(1) Gross of provision for credit losses and net of unearned income. Understand
non-recognition and loans held for sale. Borrowing costs included in interest income on
the loans were
30, 2021 and 2020, respectively, and have been
the nine months have ended
loan fees, PPP loan fees have been
months ended
and
respectively. In addition, the increase in loans included in interest income on
loans acquired through previous acquisitions have been
the three months have ended
and 2020, respectively.
(2) The average yields on available-for-sale debt securities are calculated on the basis of
amortized cost.
(3) The tax base is calculated on tax-exempt securities using a
Federal statutory rate of 21% for each period presented.
(4) Accretion on interest-bearing liabilities acquired during previous acquisitions
was
2021 and 2020, respectively, and was
nine months endedSeptember 30, 2021 and 2020, respectively. 37
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TABLE 3. RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
For the Three Months For the Nine Months
Ended September 30, 2021 Ended September 30, 2021
Compared to September 30, 2020 Compared to September 30, 2020
Net Increase Net Increase
(unaudited, in thousands) Volume Rate (Decrease) Volume Rate (Decrease)
Increase (decrease) in
interest income:
Due from banks - interest
bearing $ 73 $ - $ 73 $ 408 $ (635 ) $ (227 )
Loans, net of unearned income (9,660 ) (3,658 ) (13,318 ) (8,002 ) (24,561 ) (32,563 )
Taxable securities 5,020 (3,208 ) 1,812 8,459 (13,694 ) (5,235 )
Tax-exempt securities (1) 391 (542 ) (151 ) (357 ) (928 ) (1,285 )
Other earning assets (438 ) (289 ) (727 ) (1,507 ) (492 ) (1,999 )
Total interest income change
(1) (4,614 ) (7,697 ) (12,311 ) (999 ) (40,310 ) (41,309 )
Increase (decrease) in
interest expense:
Interest bearing demand
deposits 250 (660 ) (410 ) 1,213 (4,324 ) (3,111 )
Money market accounts 67 (424 ) (357 ) 390 (2,839 ) (2,449 )
Savings deposits 42 (101 ) (59 ) 221 (975 ) (754 )
Certificates of deposit (568 ) (903 ) (1,471 ) (1,852 ) (2,791 ) (4,643 )
Federal Home Loan Bank
borrowings (3,190 ) (1,075 ) (4,265 ) (12,826 ) (2,769 ) (15,595 )
Other borrowings (130 ) (141 ) (271 ) (577 ) (685 ) (1,262 )
Subordinated debt and junior
subordinated debt (37 ) (91 ) (128 ) (103 ) (961 ) (1,064 )
Total change in interest expense (3,566) (3,395) (6,961) (13,534) (15,344) (28,878) Net increase (decrease) in interest income (1)
$ (1,048 ) $ (4,302 ) $ (5,350 ) $ 12,535 $ (24,966 ) $ (12,431 )
(1) The tax base is calculated on the tax-exempt securities using a
21% federal statutory tax rate.
PROVISION FOR CREDIT LOSSES – LOANS AND LOAN COMMITMENTS
The provision for credit losses - loans is the amount to be added to the allowance for credit losses - loans after net (charge-offs) recoveries have been (deducted) added to bring the allowance to a level considered appropriate to absorb lifetime expected losses for all portfolio loans. The provision for credit losses - loan commitments is the amount to be added to the allowance for credit losses for loan commitments to bring that allowance to a level considered appropriate to absorb lifetime expected losses on unfunded loan commitments. The provision for credit losses - loans and loan commitments decreased to($1.7) million in the third quarter of 2021 compared to$16.3 million in the third quarter of 2020, as a result of changes in the macroeconomic forecast and certain other qualitative factors. As ofSeptember 30, 2021 , the macroeconomic forecast estimated significantly lower unemployment over the reasonable and supportable forecast period of one year, as compared to the forecast utilized during the third quarter of 2020, resulting in a decrease in the allowance for loan losses and allowance for loan commitments. Non-performing loans were 0.40% of total loans as ofSeptember 30, 2021 , increasing from 0.38% of total loans at the end of the third quarter of 2020. Criticized and classified loans were 4.21% of total loans as ofSeptember 30, 2021 , increasing from 3.25% as ofSeptember 30, 2020 , primarily due to recent adjustments to the internal loan classification system, which impacted risk grades, and downgrades in the Company's hospitality loan portfolio. Past due loans atSeptember 30, 2021 were 0.44% of total loans, compared to 0.25% atSeptember 30, 2020 . Annualized net loan charge-offs increased to 0.01% for the nine months endedSeptember 30, 2021 compared to 0.08% for the nine months endedSeptember 30, 2020 . (Please see the Allowance for Credit Losses - Loans and Loan Commitments section of this MD&A for additional discussion). 38 --------------------------------------------------------------------------------
INCOME EXCLUDING INTEREST
TABLE 4. INCOME EXCLUDING INTEREST
For The Three Months Ended For the Nine Months
September 30 , Ended September 30 ,
(unaudited, dollars in thousands) 2021 2020 $ Change % Change 2021 2020 $ Change % Change Trust fees$ 7,289 $ 6,426 $ 863 13.4$ 22,069 $ 19,580 $ 2,489 12.7 Service charges on deposits 6,050 5,332 718 13.5 15,820 16,272 (452 ) (2.8 ) Electronic banking fees 5,427 4,780 647 13.5 14,853 13,100 1,753 13.4 Net securities brokerage revenue 1,965 1,725 240 13.9 5,318 4,787 531 11.1 Bank-owned life insurance 2,656 2,088 568 27.2 6,072 5,609 463 8.3 Net securities (losses) gains (15 ) 787 (802 ) (101.9 ) 740 3,577 (2,837 ) (79.3 ) Mortgage banking income 4,563 8,488 (3,925 ) (46.2 ) 16,656 17,295 (639 ) (3.7 ) Net insurance services revenue 909 1,026 (117 ) (11.4 ) 3,044 2,807 237 8.4 Debit card sponsorship income - 751 (751 ) (100.0 ) 646 2,102 (1,456 ) (69.3 ) Payment processing fees 773 669 104 15.5 2,234 2,133 101 4.7 Net gain (loss) on other real estate owned and other assets 785 (19 ) 804 NM 4,974 84 4,890 NM Net swap fee and valuation income 776 1,286 (510 ) (39.7 ) 5,386 4,134 1,252 30.3 Other 1,577 1,273 304 23.9 4,264 4,001 263 6.6 Total non-interest income$ 32,755 $ 34,612 $ (1,857 ) (5.4 )$ 102,076 $ 95,481 $ 6,595 6.9 NM = not meaningful Non-interest income is a significant source of revenue and an important part ofWesbanco's results of operations, as it represents 22.7% of total revenue for the nine months endedSeptember 30, 2021 .Wesbanco offers its customers a wide range of retail, commercial, investment and electronic banking services, which are viewed as a vital component ofWesbanco's ability to attract and maintain customers, as well as providing additional fee income beyond normal spread-related income toWesbanco . For the third quarter of 2021, non-interest income decreased$1.9 million or 5.4% compared to the third quarter of 2020, primarily due to a$3.9 million decrease in mortgage banking income, a$0.8 million decrease in net securities (losses) gains and a$0.8 million decrease in debit card sponsorship income, due to the sale of the business line earlier in 2021. The decreases were somewhat offset by a$0.9 million increase in trust fees, a$0.8 million increase in net gain (loss) on other real estate owned and other assets and a$0.7 million increase in service charges on deposits. Trust fees increased$0.9 million or 13.4% compared to the third quarter of 2020, due to market value appreciation and organic growth. Total trust assets were$5.5 billion atSeptember 30, 2021 as compared to$4.6 billion atSeptember 30, 2020 . As ofSeptember 30, 2021 , trust assets include managed assets of$4.4 billion and non-managed (custodial) assets of$1.1 billion . Assets managed for the WesMark Funds, a proprietary group of mutual funds that is advised byWesbanco Trust and Investment Services, were$1.0 billion as ofSeptember 30, 2021 and$943.6 million as ofSeptember 30, 2020 , and are included in managed assets. Service charges on deposits increased$0.7 million or 13.5% to$6.1 million in the third quarter of 2021 as compared to the same period in 2020 due to increased general consumer spending over the prior period, resulting in more eligible fee-generating transactions. For the nine months endedSeptember 30, 2021 , service charges on deposits decreased$0.5 million or 2.8% compared to the nine months endedSeptember 30, 2020 due to higher customer demand for goods and services as business conditions improved from the pandemic. Electronic banking fees, which include debit card interchange fees, increased$0.6 million or 13.5% compared to the third quarter of 2020 as we transitioned to adjusted settlement processes of a new third-party digital banking service provider. This change occurred as part of the core conversion. For the nine months endedSeptember 30, 2021 , electronic banking fees increased$1.8 million or 13.4% compared to the nine months endedSeptember 30, 2020 . Bank-owned life insurance increased$0.6 million or 27.2% compared to the third quarter of 2020 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. Net securities (losses) gains include both gains and losses on investment security transactions as well as market value adjustments on the deferred compensation plan. For the three months endedSeptember 30, 2021 , net securities (losses) gains decreased$0.8 million or 101.9% compared to the same period of 2020, due to a$0.7 million decrease in market adjustments on the deferred compensation plan. These market adjustments had an offsetting effect in employee benefits expense. For the nine months endedSeptember 30, 2021 , net securities (losses) gains decreased$2.8 million or 79.3% compared to the nine months endedSeptember 30, 2020 , due primarily to no security sales being transacted during the year 2021. Gains on security sales totaled$2.1 million for the nine months endedSeptember 30, 2020 . 39
-------------------------------------------------------------------------------- Mortgage banking income decreased$3.9 million or 46.2% in the third quarter of 2021 compared to the third quarter of 2020, asWesbanco retained more 1-to-4 family mortgages on the balance sheet. For the third quarter of 2021, mortgage production was$382.4 million , which was a decrease of 2.9% from the comparable 2020 period. For the three months endedSeptember 30, 2021 ,$149.6 million in mortgages were sold into the secondary market at a net margin of 3.1% as compared to$217.6 million at a net margin of 3.9% in the comparable 2020 period. Included in mortgage banking income and the calculation of net margin noted above are losses of($0.2) million and gains of$1.5 million from the fair value adjustments on mortgage loan commitments and related derivatives for the three months endedSeptember 30, 2021 and 2020, respectively. For the nine months endedSeptember 30, 2021 , mortgage banking income decreased by$0.6 million or 3.7% compared to the prior year period, due primarily to fair value adjustments of($4.4) million and$2.2 million for the nine months endedSeptember 30, 2021 and 2020, respectively, offsetting a$144.5 million volume increase in loans sold from the prior year period. Debit card sponsorship income, a non-essential revenue stream forWesbanco that was acquired in theOld Line Bancshares, Inc. ("OLBK") acquisition and generated$0.6 million of gross revenue in the first quarter of 2021, was sold as ofMarch 31, 2021 to another bank. The all-cash purchase price, which will be paid out on a monthly basis over a two-year period up to a maximum of$2.8 million , is based on a 50%-50% split of the monthly gross revenue earned by the purchasing bank.Wesbanco has recognized$0.8 million in revenue in 2021 following the sale, which is recorded in net gain (loss) on the sale of other real estate owned and other assets. Net gain (loss) on other real estate owned and other assets increased$0.8 million in the three months endedSeptember 30, 2021 as compared to the same period in 2020, due to a gain recognized on an investment made byWesbanco's Community Development Corporation in a start-up firm more than ten years ago that was recently acquired by a public company. Net gain (loss) on other real estate owned and other assets increased by$4.9 million in the nine months endedSeptember 30, 2021 for the same reason as discussed for the three months ended. Net swap fee and valuation income, which includes fair value adjustments, decreased$0.5 million or 39.7% in the third quarter of 2021 compared to the third quarter of 2020 due to a reduced volume of new swaps originated, resulting in less fee income. For the three months endedSeptember 30, 2021 , new swaps executed totaled$9.3 million in notional principal resulting in$0.4 million of fee income, compared to new swaps executed of$25.8 million in notional principal resulting in$0.9 million of fee income for the three months endedSeptember 30, 2020 . Fair value adjustments on existing swaps for the three months endedSeptember 30, 2021 and 2020 were$0.4 million . Net swap fee and valuation income increased$1.3 million or 30.3% in the first nine months of 2021 compared to the first nine months of 2020 due to higher fair value adjustments offsetting a reduced volume of new swaps in the year-to-date period. Fair value adjustments totaled$2.1 million in the first nine months of 2021 as compared to($2.8) million in fair value adjustments for the first nine months of 2020. NON-INTEREST EXPENSE TABLE 5. NON-INTEREST EXPENSE For The Three Months Ended For the Nine Months September 30, Ended September 30, (unaudited, dollars in thousands) 2021 2020 $ Change % Change 2021 2020 $ Change % Change Salaries and wages$ 39,497 $ 38,342 $ 1,155 3.0$ 113,822 $ 114,025 $ (203 ) (0.2 ) Employee benefits 10,658 10,604 54 0.5 30,191 31,115 (924 ) (3.0 ) Net occupancy 6,825 7,092 (267 ) (3.8 ) 20,430 20,809 (379 ) (1.8 ) Equipment and software 7,609 6,229 1,380 22.2 21,654 17,991 3,663 20.4 Marketing 1,848 1,577 271 17.2 6,033 4,282 1,751 40.9 FDIC insurance 1,227
1,948 (721) (37.0) 2,690 6,456 (3,766) (58.3) Amortization of intangible assets
2,854
3,346 (492) (14.7) 8,622 10,085 (1,463) (14.5) Restructuring and merger costs
4,467 3,608 859 23.8 6,540 9,241 (2,701 ) (29.2 ) Franchise and other miscellaneous taxes 2,369 3,803 (1,434 ) (37.7 ) 7,462 11,014 (3,552 ) (32.2 ) Consulting, regulatory, accounting and advisory fees 3,161 3,103 58 1.9 9,173 9,182 (9 ) (0.1 ) ATM and electronic banking interchange expenses 2,300 2,188 112 5.1 6,985 5,940 1,045 17.6 Postage and courier expenses 1,131 1,180 (49 ) (4.2 ) 3,714 3,768 (54 ) (1.4 ) Legal fees 1,132 812 320 39.4 2,928 2,463 465 18.9 Communications 1,051 997 54 5.4 3,071 3,241 (170 ) (5.2 ) Supplies 1,039 993 46 4.6 2,915 3,520 (605 ) (17.2 ) Other real estate owned and foreclosure expenses 180 (10 ) 190 1,900.0 148 (27 ) 175 648.1 Other 7,353 4,131 3,222 78.0 18,462 13,674 4,788 35.0 Total non-interest expense$ 94,701 $ 89,943 $ 4,758 5.3$ 264,840 $ 266,779 $ (1,939 ) (0.7 ) 40
-------------------------------------------------------------------------------- Non-interest expense in the third quarter of 2021 increased$4.8 million or 5.3% compared to the same quarter in 2020, principally from a$3.2 million increase in other operating expenses, due to$2.6 million in legal settlement costs, as well as a$1.2 million increase in salaries and wages and a$1.4 million increase in equipment and software expense. These increases were somewhat offset by a$1.4 million decrease in franchise and other miscellaneous taxes and a$0.7 million decrease inFDIC insurance expense. In the third quarter of 2021, there were$4.5 million of restructuring expenses related to the branch optimization strategy and core operating system conversion as compared to$3.6 million of restructuring and merger-related expenses related to the OLBK acquisition and branch optimization strategy in the third quarter of 2020. Excluding restructuring and merger-related expenses, non-interest expense increased$3.9 million or 4.5% from the third quarter of 2020 to the third quarter of 2021, and$0.8 million or 0.3% from the first nine months of 2020 to the first nine months of 2021. Salaries and wages increased$1.2 million or 3.0% in the third quarter of 2021 from the third quarter of 2020 due primarily to increases in incentive compensation expense. Short term incentive expense increased$1.3 million as overall higher performance in 2021 is expected as compared to 2020, along with higher incentive stock compensation expense which is up by$0.5 million from the third quarter of 2020. Commission expense increased due to increased business transactions in commission-earning business lines, such as securities brokerage and mortgage loan originations. These increases were mitigated by a 7.4% reduction in full time equivalent ("FTE") employees from the third quarter of 2020 as a result of the closure of branches at various points in 2021, as the branch optimization strategy was executed, and a temporary hiring freeze earlier in 2021. For the nine months endedSeptember 30, 2021 , salaries and wages decreased by$0.2 million or 0.2%, due primarily to the reduction in FTE employees, mostly offset by the noted increases in incentive compensation. Employee benefits expense increased$0.1 million or 0.5% in the third quarter of 2021 from the third quarter of 2020 as reduced pension expense and a reduction in the market adjustment on the underlying investments of the deferred compensation plan mitigated a$1.4 million increase in health insurance expense resulting from an increase in claims in the third quarter of 2021. Employee benefits expense decreased$0.9 million or 3.0% in the first nine months of 2021 as compared to the same period in 2020 due to a decrease in pension expense and FTEs. Equipment and software costs increased$1.4 million or 22.2% compared to the third quarter of 2020, due to the core conversion, continuous improvements in technology and communication infrastructure, an increase in asset size, increased usage of digital banking services and SBA PPP loan forgiveness fees. For the nine months endedSeptember 30, 2021 , equipment costs increased$3.7 million or 20.4% compared to the nine months endedSeptember 30, 2020 , for the same reasons as indicated for the three months ended.FDIC insurance decreased$0.7 million or 37.0% compared to the third quarter of 2020, due to certain improved large bank assessment rate risk factors, ultimately lowering the assessment rate.FDIC insurance decreased$3.8 million or 58.3% in the first nine months of 2021 as compared to the first nine months of 2020, due to a$1.0 million refund received in the second quarter of 2021 from prior period call report adjustments, as well as for the reason mentioned for the three months ended. Restructuring and merger-related expenses in the third quarter of 2021 totaled$4.5 million , an increase of$0.9 million from the third quarter of 2020. The$4.5 million of expenses in the third quarter of 2021 consisted of$3.7 million in expenses related to the core banking software conversion, including termination fees of existing contracts, and$0.8 million in branch closure and lease termination expenses associated with the closure of six branches in July as a result of the continued execution of the branch optimization strategy. The restructuring and merger-related expenses in the third quarter of 2020 totaling$3.6 million were comprised of$3.0 million in expenses relating to the branch optimization strategy announced in the prior year's third quarter along with$0.6 million in merger-related expenses associated with the OLBK acquisition. For the nine months endedSeptember 30, 2021 , restructuring and merger related expenses totaled$6.5 million as compared to$9.2 million for the nine months ended in the prior year period. The$6.5 million of expenses in the first nine months of 2021 consisted of$4.9 million in core banking software conversion expenses and$1.6 million of branch restructuring expenses, while the$9.2 million in expenses in the first nine months of 2020 consisted of$6.3 million in OLBK merger-related expenses and$2.9 million in branch restructuring expenses. Franchise and other miscellaneous taxes decreased$1.4 million or 37.7% from the third quarter of 2020, primarily due to the elimination ofKentucky bank franchise taxes effective onJanuary 1, 2021 , as well as various state franchise tax filed return accrual adjustments and associated refunds.Wesbanco is now subject toKentucky state income taxes, which are reflected within the provision for income taxes on the income statement, and is part of the Company's effective tax rate calculation. For similar reasons, franchise and other miscellaneous taxes decreased$3.6 million or 32.2% in the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 .
INCOME TAXES
The provision for income taxes was$10.7 million for the three months endedSeptember 30, 2021 , which is a$3.0 million increase compared to$7.7 million for the three months endedSeptember 30, 2020 . The increase in the provision for income taxes is due to an increase in the effective tax rate to 19.3% in the third quarter of 2021 compared to 15.7% in the third quarter of 2020. This increase resulted from higher pre-tax income primarily due to the negative provision for credit losses recorded in the third quarter of 2021, as compared to an increased provision for credit losses in the third quarter of 2020 due to the pandemic. In addition, as mentioned above,Kentucky state income taxes are now reflected within the provision for income taxes and the effective tax rate calculation for 2021. For the nine months endedSeptember 30, 2021 , the provision for income taxes was$47.4 million as compared to$11.3 million for the nine months endedSeptember 30, 2020 , reflecting the same reasons above as for the three months ended. 41
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FINANCIAL CONDITION
Total assets and deposits increased 2.8% and 8.0%, respectively, while shareholders' equity decreased 1.2%, compared toDecember 31, 2020 . Total securities increased$1.2 billion or 45.3% fromDecember 31, 2020 toSeptember 30, 2021 , primarily driven by the purchase of mortgage-backed securities and municipal obligations with additional liquidity provided by CARES Act individual and family payments, as well as deposits from small businesses obtaining loans from the PPP program. The securities' increase was partially offset by a$37.1 million decrease in unrealized gains in the available-for-sale portfolio. Total portfolio loans, excluding PPP loans, decreased$421.9 million or 4.2% as commercial, residential real estate, home equity and consumer loan pay downs outpaced new originations. Forgiveness related to the 2020 and 2021 PPP loan programs totaled$939.7 million through the first nine months of 2021. Deposits increased$993.9 million from year-end resulting from increases of 13.1%, 12.4%, and 4.7% in demand deposits, savings deposits, and money market deposits, respectively, which were partially offset by a 16.3% decrease in certificates of deposit. The growth in transaction-based accounts is primarily attributable to CARES Act stimulus funds received, increased personal savings and reduced customer spending, focused retail and business strategies to obtain more account relationships and customers' preferences for shorter-term maturities. The transaction accounts also increased from business customers obtaining loans from the PPP loan program and depositing proceeds in their checking accounts. Deposits were also somewhat impacted by bonus and royalty payments for Marcellus andUtica shale gas payments from energy companies inWesbanco's southwesternPennsylvania , easternOhio , and northernWest Virginia markets. The decrease in certificates of deposit is a result of lower overall rates and management periodically offering lower than median competitive rates for maturing certificates of deposit and customer preferences for other deposit types, which was partially offset by a$3.3 million increase in CDARS® balances. Also, certain IRA accounts were reclassified to savings account types upon the core conversion in August. Total borrowings decreased 46.2% or$454.0 million during the first nine months of 2021 as additional liquidity permitted the pay down of maturing FHLB advances by$340.1 million , coupled with an$89.4 million decrease in other short-term borrowings, and a$24.6 million decrease in subordinated debentures primarily from a$25.0 million early redemption in the third quarter. Total shareholders' equity decreased approximately$32.8 million or 1.2%, compared toDecember 31, 2020 , primarily due to a$26.9 million decrease in other comprehensive income and the repurchase of common shares totaling$128.0 million , which were partially offset by net income exceeding dividends for the period by$115.1 million . 42
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SECURITIES
TABLE 6. COMPOSITION OF SECURITIES (1)
September 30 , December
31,
(unaudited, dollars in thousands) 2021 2020
Change ($) Change (%) Equity securities (at fair value)
3.1 Available-for-sale debt securities (at fair value) U.S. Treasury 10,000 39,982 (29,982 ) (75.0 )U.S. Government sponsored entities and agencies 233,435 211,682 21,753 10.3 Residential mortgage-backed securities and
mortgage bonds guaranteed by
government sponsored entities and agencies 2,294,456 1,264,737 1,029,719 81.4 Commercial mortgage-backed securities and
mortgage bonds guaranteed by
government sponsored entities and agencies 321,549 320,098 1,451 0.5 Obligations of states and political subdivisions 109,821 115,762 (5,941 ) (5.1 ) Corporate debt securities 17,542
25,875 (8,333) (32.2) Total debt securities available for sale
51.0 Held-to-maturity debt securities (at amortized cost)U.S. Government sponsored entities and agencies $ 6,639$ 7,779 $ (1,140 ) (14.7 ) Residential mortgage-backed securities and
mortgage bonds guaranteed by
government sponsored entities and agencies 63,682 89,151 (25,469 ) (28.6 ) Obligations of states and political subdivisions 850,498 601,128 249,370 41.5 Corporate debt securities 33,101 33,154 (53 ) (0.2 ) Total held-to-maturity debt securities 953,920 731,212 222,708 30.5 Total securities$ 3,954,174 $ 2,722,395 $ 1,231,779 45.2 Available-for-sale and equity securities: Weighted average yield at the respective period end (2) 1.55 % 2.09 % As a % of total securities 75.9 % 73.1 % Weighted average life (in years) 4.5
3.4
Held-to-maturity securities: Weighted average yield at the respective period end (2) 2.98 % 3.35 % As a % of total securities 24.1 % 26.9 % Weighted average life (in years) 5.6
3.8
Total securities: Weighted average yield at the respective period end (2) 1.90 % 2.43 % As a % of total securities 100.0 % 100.0 % Weighted average life (in years) 4.7 3.5
(1) To
a transmitter, other than
for an amount greater than 10% of
(2) The weighted average returns have been calculated on a tax equivalence basis
using the federal statutory tax rate of 21%.
Total investment securities, which are a source of liquidity forWesbanco as well as a contributor to interest income, increased$1.2 billion or 45.2% fromDecember 31, 2020 toSeptember 30, 2021 , and represented 23.4% of total assets at period-end as compared to 16.6% atDecember 31, 2020 . Through the first nine months of 2021, the available-for-sale portfolio increased$1.0 billion or 51.0%, primarily due to excess liquidity from stimulus deposits and increased calls of agency and municipal securities, funding$1.7 billion in purchases of residential mortgage-backed securities and collateralized mortgage obligations. Residential mortgage-backed securities and collateralized mortgage obligations totaled 59.6% of the total investment portfolio atSeptember 30, 2021 . The held-to-maturity portfolio increased$222.7 million or 30.5% due to$307.2 million in purchases of municipal bonds. The weighted average yield of the portfolio decreased by 53 basis points from 2.43% atDecember 31, 2020 to 1.90% atSeptember 30, 2021 , due to prepayments and calls of legacy higher rate agency and municipal securities and the previously mentioned purchases at lower current market rates. Higher premium amortization was also a factor in the yield reduction. Net unrealized gains on available-for-sale securities included in accumulated other comprehensive income, net of tax, as ofSeptember 30, 2021 andDecember 31, 2020 were$18.5 million and$46.9 million , respectively. The net unrealized pre-tax gains 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 gains in the held-to-maturity portfolio, which are not accounted for in other comprehensive income, were$24.6 million atSeptember 30, 2021 , compared to$37.0 million atDecember 31, 2020 . With approximately 24% of the investment portfolio in the held-to-maturity category, the recent volatility in interest rates does not have as much impact on other comprehensive income as if the entire portfolio were included in the available-for-sale category. The decrease in unrealized gains from year-end is due to an increase in market rates over the first nine months of the year coupled with prepayments and calls of higher-rate securities, and purchases of securities at lower, current market rates. 43 -------------------------------------------------------------------------------- Equity securities, of which a portion consist 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.Wesbanco's municipal portfolio represented 24.3% of the overall securities portfolio as ofSeptember 30, 2021 compared to 26.3% as ofDecember 31, 2020 , and it 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 7. RATINGS OF MUNICIPAL BONDS
September 30, 2021 December 31, 2020
(unaudited, dollars in thousands) Amount % of Total Amount % of Total
Municipal bonds (at fair value) (1):
Investment Grade - Prime $ 98,883 10.1 $ 72,861 9.8
Investment Grade - High 723,701 73.8 511,013 68.4
Investment Grade - Upper Medium 150,439 15.3 152,704 20.4
Investment Grade - Lower Medium 3,006 0.3 3,072 0.4
Non-Investment Grade - Speculative - - - -
Not rated by either agency 4,196 0.5 7,354 1.0
Total municipal bond portfolio $ 980,225 100.0 $ 747,004 100.0
(1) The lowest available rating was used when classifying the bond in a category of
Table.
Wesbanco's municipal bond portfolio atSeptember 30, 2021 consists of$281.2 million of taxable and$699.0 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 8. COMPOSITION OF MUNICIPAL TITLES
September 30, 2021 December 31, 2020
(unaudited, dollars in thousands) Amount % of Total Amount % of Total
Municipal bond type:
General Obligation $ 697,345 71.1 $ 518,274 69.4
Revenue 282,880 28.9 228,730 30.6
Total municipal bond portfolio $ 980,225 100.0 $ 747,004 100.0
Municipal bond issuer:
State Issued $ 42,522 4.3 $ 46,843 6.3
Local Issued 937,703 95.7 700,161 93.7
Total municipal bond portfolio $ 980,225 100.0 $ 747,004 100.0
TABLE 9. CONCENTRATION OF MUNICIPAL TITLES
September 30, 2021
(unaudited, dollars in thousands) Fair Value % of Total
Pennsylvania $ 219,264 22.4
California 118,270 12.1
Ohio 104,631 10.7
Texas 69,767 7.1
Kentucky 38,893 4.0
All other states 429,400 43.7
Total municipal bond portfolio $ 980,225 100.0
(1)
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 44
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value
LOANS AND CREDIT RISK Loans representWesbanco's single largest balance sheet asset classification and the largest source of interest income. Business purpose loans consist of CRE loans and other C&I loans that are not secured by real estate. CRE loans are further segmented into land and construction loans, and loans for improved property. Consumer purpose loans consist of residential real estate loans, home equity lines of credit and other consumer loans. Loans held for sale generally consist of residential real estate loans originated for sale in the secondary market, but at times may also include other types of loans. The outstanding balance of each major category of the loan portfolio is summarized in Table 10. The risk that borrowers will be unable or unwilling to repay their obligations and default on loans is inherent in all lending activities. Credit risk arises from many sources including general economic conditions, external events that impact businesses or industries, isolated events that impact a major employer, individual loss of employment or other personal hardships as well as changes in interest rates or the value of collateral. Credit risk is also impacted by a concentration of exposure within a geographic market or to one or more borrowers, industries or collateral types. The primary goal in managing credit risk is to minimize the impact of default by an individual borrower or group of borrowers. Credit risk is managed through the initial underwriting process as well as through ongoing monitoring and administration of the portfolio that varies by the type of loan. The Bank's credit policies establish standard underwriting guidelines for each type of loan and require an appropriate evaluation of the credit characteristics of each borrower. This evaluation includes the borrower's primary source of repayment capacity; the adequacy of collateral, if any, to secure the loan; the potential value of personal guarantees as secondary sources of repayment; and other factors unique to each loan that may increase or mitigate its risk. Credit bureau scores are also considered when evaluating consumer purpose loans as well as guarantors of business purpose loans. However, the Bank does not periodically update credit bureau scores subsequent to when loans are made to determine changes in credit history. Credit risk is mitigated for all types of loans by continuously monitoring delinquency levels and pursuing collection efforts at the earliest stage of delinquency. The Bank also monitors general economic conditions, including employment, housing activity and real estate values in its market. The Bank also periodically evaluates and changes its underwriting standards when warranted based on market conditions, the historical performance of a category of the portfolio, or other external factors. Credit risk is also regularly evaluated for the impact of adverse economic and other events, such as the current COVID-19 pandemic crisis, that increase the risk of default and the potential loss in the event of default, to understand the impact on the Bank's earnings and capital. Commercial loan risk grades are determined based on an evaluation of the relevant characteristics of each loan, assigned at inception and adjusted thereafter at any time to reflect changes in the risk profile throughout the life of each loan. The primary factors used to determine the risk grade are the sufficiency, reliability and sustainability of the primary source of repayment and overall financial strength of the borrower. The rating system more heavily weights the debt service coverage, leverage and loan-to-value factors to derive the risk grade. Other factors that are considered at a lesser weighting include management, industry or property-type risks, payment history, collateral and guarantees.
TABLE 10. COMPOSITION OF LOANS (1)
September 30, 2021 December 31, 2020
(unaudited, dollars in thousands) Amount % of Loans Amount % of Loans
Commercial real estate:
Land and construction $ 824,199 8.3 $ 668,277 6.1
Improved property 4,833,687 48.6 5,037,115 46.0
Total commercial real estate 5,657,886 56.9 5,705,392 52.1
Commercial and industrial 1,435,154 14.4 1,681,182 15.4
Commercial and industrial - PPP 272,060 2.7 726,256 6.6
Residential real estate 1,655,229 16.7 1,720,961 15.7
Home equity 607,735 6.1 646,387 5.9
Consumer 285,101 2.9 309,055 2.8
Total portfolio loans 9,913,165 99.7 10,789,233 98.5
Loans held for sale 32,308 0.3 168,378 1.5
Total loans $ 9,945,473 100.0 $ 10,957,611 100.0
(1) Loans are presented gross of the allowance for loan losses – loans and
net of unearned income, credit valuation adjustments and net unamortized amount
deferred loan fee income and loan origination costs. Total portfolio loans decreased$876.1 million or 8.1% fromDecember 31, 2020 , while they decreased$1.1 billion or 9.8% over the last twelve months. Most of the loan decrease was due to the forgiveness of$939.7 million of PPP loans during the last twelve months, of which$272.1 million remain in the portfolio as ofSeptember 30, 2021 . Excluding PPP loans, total portfolio loans decreased over the last twelve months by 4.9% reflecting the higher than anticipated commercial real estate payoffs, continued low commercial line of credit utilization, and the impact of selling a higher percentage of 1-to-4 family residential mortgage originations in the secondary market. Consumer loan demand also decreased as a result of the pandemic reducing consumer spending. Slightly offsetting the total decrease was 19.4% of growth in the land and construction portfolio. This increase is due to$187.1 million of loan reclassifications out of commercial real estate in the third quarter of 2021. Commercial and industrial loans decreased 13.2%, due to lower overall demand and partially from certain reclassifications into commercial real estate. Residential real estate loans decreased 7.9% over the last twelve months, due to a greater portion of new originations sold into the secondary market and a greater portion of existing loans refinanced with other banks, while home equity loans experienced lower demand and were also refinanced into first mortgages due to customer preferences for fixed rate loans. Consumer loans declined due to pricing adjustments for indirect lending as well as refinancing or repayment of existing loans. 45
-------------------------------------------------------------------------------- Total loan commitments of$3.8 billion , including loans approved but not closed, increased$553.2 million or 17.1% fromDecember 31, 2020 due primarily to increases in availabilities under lines of credit, deposit overdrafts and contingent obligations. The line utilization percentage for the commercial portfolio was 37.0% atSeptember 30, 2021 compared to 33.9% as ofDecember 31, 2020 . The commercial portfolio is monitored for potential concentrations of credit risk by market, type of lending, CRE property type, C&I and owner-occupied CRE by industry, investment CRE dependence on common tenants and industries or property types that are similarly impacted by external factors. Loans held for sale at bothSeptember 30, 2021 andDecember 31, 2020 are originated residential mortgages that are committed to be sold into the secondary market. Loans held for sale decreased by$136.1 million or 80.8% fromDecember 31, 2020 due to additional staffing in the secondary mortgage operations area and a specific effort to accelerate the speed at which the loans are delivered to the investor, as well as more originations held in the loan portfolio in the third quarter.Wesbanco has participated in the PPP loan program as originally established by the CARES Act. As ofSeptember 30, 2021 , the Company has funded nearly 11,300 loans totaling$1.2 billion to qualifying small businesses, non-profits and organizations throughout our six-state footprint. The loans carry an interest rate of 1%, are generally for a two-year or five-year maturity, and were originated with a percentage fee paid by the SBA directly to the Bank depending on the size of the loan originated. AtSeptember 30, 2021 , remaining unaccreted fees, net of deferred origination costs, were$10.4 million . This total is comprised of$10.1 million remaining on the 2021 originated PPP loans and$0.3 million remaining on the 2020 originated PPP loans. The loans are subject to forgiveness by the SBA under certain defined circumstances, and it is anticipated a high percentage of such loans will meet such requirements (as revised) over the next few quarters, with$825.4 million of 2020 originated PPP loans, or approximately 97% of 2020 PPP loan originations and$114.3 million , or approximately 31% of 2021 PPP loan originations, having been forgiven as ofSeptember 30, 2021 .Wesbanco met the needs of the communities it serves by providing appropriate relief tailored to the individual needs of the customer, ranging from three months of interest-only for those minimally impacted, up to and including full principal and interest deferral for six months for those significantly impacted, while also providing additional tailored relief to the hospitality industry where appropriate. The relief was provided in as many as three phases depending on the circumstances. Under the CARES Act,Wesbanco modified approximately 3,550 loans totaling$2.2 billion in 2020, of which a total of$132.8 million of commercial loans, representing 1.3% of total portfolio loans remain in deferral as ofSeptember 30, 2021 . An additional$97.9 million of commercial loans had various payment terms modified in exchange for enhancements beneficial to the Bank which were permanent improvements to the credit facility. Changes include an increase in floor rates, increase in guarantors and duration of guarantees and a change in covenants. None of the aforementioned loans were considered delinquent or on non-accrual status as ofSeptember 30, 2021 .
NON-PERFORMING ASSETS AND LOANS WITH PERIODS OF 90 DAYS OR MORE
Non-performing assets consist of non-accrual loans and TDRs, other real estate acquired through or in lieu of foreclosure, bank premises held for sale, and repossessed automobiles acquired to satisfy defaulted consumer loans.
TABLE 11. NON-PERFORMING ASSETS
September 30 , December 31 ,
(unaudited, dollars in thousands) 2021
2020
Non-accrual loans: Commercial real estate - land and construction $ 145 $ 469 Commercial real estate - improved property 7,572 9,494 Commercial and industrial 5,350 3,302 Residential real estate 17,643 17,925 Home equity 5,061 5,345 Consumer 488 345 Total non-accrual loans (1) 36,259 36,880 TDRs accruing interest: Commercial real estate - land and construction - - Commercial real estate - improved property 382 655 Commercial and industrial 23 111 Residential real estate 3,012 2,779 Home equity 260 363 Consumer 30 19 Total TDRs accruing interest (1) 3,707
3 927
Total non-performing loans$ 39,966 $ 40,807 Other real estate owned and repossessed assets 293 549 Total non-performing assets$ 40,259 $ 41,356 Non-performing loans/total portfolio loans 0.40 % 0.38 % Non-performing assets/total assets 0.24 %
0.25% Non-performing assets / total loans in portfolio, other real estate and assets taken over
0.41 % 0.38 %
46
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(1) RDT on non-accumulation of
from
loans.
Non-performing loans, which consist of unrecorded loans and TORs, declined
Section 4013 of the CARES Act allows financial institutions the option to temporarily suspend certain requirements underU.S. GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. These customers must meet certain criteria, such as they were in good standing and not more than 30 days past due as ofDecember 31, 2019 , as well as other requirements. Based on this guidance,Wesbanco did not classify the COVID-19 loan modifications as TDRs, nor are the customers considered past due with regards to their delayed payments. Upon exiting the loan modification deferral program, the measurement of loan delinquency will resume where it left off upon entry into the program. ThroughSeptember 30, 2021 ,Wesbanco has offered various deferred payment schedules to commercial and retail customers impacted by the COVID-19 pandemic, depending on the type of loan and the industry-type for commercial loans. Other real estate owned and repossessed assets decreased to$0.3 million fromDecember 31, 2020 . AtSeptember 30, 2021 andDecember 31, 2020 , formal foreclosure proceedings were in process on residential real estate loans totaling$1.9 million and$1.8 million at each period, respectively. As a result of provisions of the CARES Act, certain residential real estate loans are temporarily suspended from entering foreclosure proceedings. The balance of these loans totaled$3.6 million and$2.3 million atSeptember 30, 2021 andDecember 31, 2020 , respectively.
The following table presents the receivables due and outstanding excluding non-recognition and TDR:
TABLE 12. MATURING AND ONGOING LOANS EXCLUDING NON-APPROVAL AND TDR LOANS
September 30 , December 31 ,
(unaudited, dollars in thousands) 2021
2020
Loans past due 90 days or more: Commercial real estate - land and construction $ 1,256 $ 288 Commercial real estate - improved property 2,308 2,713 Commercial and industrial 4,781 1,899 Residential real estate 1,746 2,863 Home equity 851 706 Consumer 310 377 Total loans past due 90 days or more 11,252
8,846
Loans past due 30 to 89 days: Commercial real estate - land and construction 1,731
2 858
Commercial real estate - improved property 10,494 8,948 Commercial and industrial 9,356 6,540 Residential real estate 4,980 7,490 Home equity 3,055 2,754 Consumer 3,066 3,006 Total loans past due 30 to 89 days 32,682
31,596
Total loans 30 days or more past due$ 43,934
Loans 90 days or more past due and accumulating in total portfolio loans
0.11 % 0.08 % Loans past due 30-89 days and accruing to total portfolio loans 0.33 % 0.29 % Loans past due 30 days or more and accruing interest, excluding non-accruals and TDRs, increased$3.5 million or 8.6% fromDecember 31, 2020 . These loans continue to accrue interest because they are both well-secured and in the process of collection. Loans 90 days or more past due increased$2.4 million and represented 0.11% and 0.08% of total portfolio loans atSeptember 30, 2021 andDecember 31, 2020 , respectively. Loans 90 days past due increased in the commercial and industrial category due to one$3.2 million loan. The 30 - 89 days past due category represented 0.33% of total loans atSeptember 30, 2021 and 0.29% atDecember 31, 2020 . Loans currently modified as permitted by the regulatory authorities and the CARES Act are not included in Tables 13 or 14, as they are not considered past due.
CREDIT LOSS ALLOWANCE – LOANS AND LOAN COMMITMENTS
As ofSeptember 30, 2021 , the total allowance for credit losses - loans and commitments was$143.9 million , of which$136.6 million related to loans and$7.3 million related to loan commitments. The allowance for credit losses - loans was 1.38% of total portfolio loans as ofSeptember 30, 2021 , compared to 1.72% as ofDecember 31, 2020 . Excluding PPP loans of$272.1 million , the allowance for credit losses - loans was 1.42% of total portfolio loans as ofSeptember 30, 2021 , as compared to 1.85% of total portfolio loans atDecember 31, 2020 . As per regulatory guidance, there is no calculated allowance on PPP loans due to their government guarantees by the SBA. The allowance for credit losses - loans individually-evaluated increased$11.0 million fromDecember 31, 2020 toSeptember 30, 2021 . The population of individually-evaluated loans consisted of eight hotel loans, with a total loan balance of$37.1 million . These loans were moved to individually-evaluated in the third quarter of 2021. The allowance for loans collectively-evaluated decreased fromDecember 31, 2020 toSeptember 30, 2021 by$60.2 million . The allowance for credit losses - loan commitments was$7.3 million atSeptember 30, 2021 as compared to$9.5 million as ofDecember 31, 2020 , and is included in other liabilities on the Consolidated Balance Sheets. 47 -------------------------------------------------------------------------------- The allowance for credit losses by loan category, presented in Note 4, "Loans and the Allowance for Credit Losses" of the Consolidated Financial Statements, summarizes the impact of changes in various factors that affect the allowance for loan losses in each segment of the portfolio. The allowance for credit losses under CECL is calculated utilizing the PD/LGD, which is then discounted to net present value. PD is the probability the asset will default within a given time frame and LGD is the percentage of the asset not expected to be collected due to default. The primary macroeconomic drivers of the quantitative model include forecasts of national unemployment and interest rates, as well as modeling adjustments for changes in prepayment speeds, loan risk grades, portfolio mix, concentrations and loan growth. For the calculation as ofSeptember 30, 2021 , the forecast was based upon a blend of two nationally-recognized published economic forecasts throughSeptember 30, 2021 , and was primarily driven by national unemployment and interest rate spread forecasts. At quarter-end, national unemployment was projected to peak at 4.7%, and subsequently decrease to an average of 4.0% over the remainder of the forecast period. The resurgence in leisure travel continued throughSeptember 30, 2021 , which led to improvements in debt service coverage and revenue per available room ("RevPAR") across the hotel portfolio. The improvement in the macroeconomic factors and COVID qualitative factors, including those specifically for the hospitality portfolio, caused the allowance to decrease fromDecember 31, 2020 toSeptember 30, 2021 , by$51.4 million . If forecasted projections of national unemployment remain consistent with the forecast utilized byWesbanco as ofSeptember 30, 2021 throughout the rest of the year, this may result in additional, but less significant, future quarterly decreases in the allowance for credit losses, depending upon other model variables such as qualitative factors specifically for hotels and the COVID-19 pandemic. Criticized and classified loans were 4.2% of total portfolio loans, decreasing from 4.6% atDecember 31, 2020 . Criticized and classified loans decreased$77.6 million fromDecember 31, 2020 to$417.3 million atSeptember 30, 2021 , primarily due to upgrades on certain hospitality loans. See Footnote 4, "Loans and the Allowance for Credit Losses" for more information.
Table 13 summarizes the allocation of the allowance for credit losses to each category of the loan portfolio.
TABLE 13. ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES - LOANS AND LOAN
COMMITMENTS
September 30, Percent of December 31, Percent of
(unaudited, dollars in thousands) 2021 Total 2020 Total
Allowance for credit losses - loans:
Commercial real estate - land and
construction $ 7,264 5.0 $ 10,841 5.6
Commercial real estate - improved
property 81,601 56.7 110,652 56.6
Commercial and industrial 27,201 18.9 37,850 19.4
Residential real estate 14,413 10.0 17,851 9.1
Home equity 699 0.5 1,487 0.8
Consumer 3,747 2.6 6,507 3.3
Deposit account overdrafts 1,680 1.2 639 0.3
Total allowance for credit losses -
loans $ 136,605 94.9 $ 185,827 95.1
Allowance for credit losses - loan
commitments:
Commercial real estate - land and
construction $ 3,679 2.7 $ 6,508 3.3
Commercial real estate - improved
property 318 0.2 712 0.4
Commercial and industrial 1,726 1.2 1,275 0.7
Residential real estate 1,209 0.8 955 0.5
Home equity 52 0.0 45 0.0
Consumer 306 0.2 19 0.0
Total allowance for credit losses - loan
commitments 7,290 5.1 9,514 4.9
Total allowance for credit losses -
loans and loan commitments $ 143,895 100.0 $ 195,341 100.0
Although the allowance for credit losses is allocated as described in Table 13,
the total allowance is available to absorb actual losses in any category of the
loan portfolio. However, differences between management's estimation of probable
losses and actual net charge-offs in subsequent periods for any category may
necessitate future adjustments to the allowance for credit losses applicable to
the category. Management believes the allowance for credit losses is appropriate
to absorb expected losses at September 30, 2021 .
DEPOSITS
TABLE 14. DEPOSITS
September 30, December 31,
(unaudited, dollars in thousands) 2021 2020 $ Change % Change
Deposits
Non-interest bearing demand $ 4,531,958 $ 4,070,835 $ 461,123 11.3
Interest bearing demand 3,283,444 2,839,536 443,908 15.6
Money market 1,765,480 1,685,927 79,553 4.7
Savings deposits 2,488,180 2,214,565 273,615 12.4
Certificates of deposit 1,354,252 1,618,510 (264,258 ) (16.3 )
Total deposits $ 13,423,314 $ 12,429,373 $ 993,941 8.0
48
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Deposits, which represent
Total deposits increased by$993.9 million or 8.0% during the first nine months of 2021. Interest bearing demand deposits, savings deposits, non-interest bearing demand deposits, and money market deposits increased 15.6%, 12.4%, 11.3%, and 4.7%, respectively. The growth in transaction-based accounts is primarily attributable to individual and family stimulus payments, as well as deposits from small businesses obtaining loans from the PPP program, focused retail and business strategies to obtain more account relationships and customers' overall preferences for shorter-term maturities. Deposit balances were also impacted by bonus and royalty payments for Marcellus andUtica shale gas payments from energy companies inWesbanco's southwesternPennsylvania , easternOhio and northernWest Virginia markets. Money market deposits were influenced throughWesbanco's participation in the Insured Cash Sweep (ICS®) money market deposit program. ICS® reciprocal balances totaled$647.3 million atSeptember 30, 2021 compared to$513.9 million atDecember 31, 2020 . Certificates of deposit decreased$264.3 million fromDecember 31, 2020 toSeptember 30, 2021 due primarily to the effects of 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 toWesbanco . The decline was also impacted by customer run-off of higher cost certificates of deposit from the OLBK acquisition and customer preferences for transaction account types.Wesbanco does not generally solicit brokered or other deposits out-of-market or over the internet, but does participate in the Certificate of Deposit Account Registry Services (CDARS®) program. CDARS® balances totaled$45.9 million in outstanding balances atSeptember 30, 2021 , compared to$42.6 million in total outstanding balances atDecember 31, 2020 . Certificates of deposit greater than$250,000 were approximately$329.6 million atSeptember 30, 2021 compared to$381.7 million atDecember 31, 2020 . Certificates of deposit of$100,000 or more were approximately$701.9 million atSeptember 30, 2021 compared to$843.2 million atDecember 31, 2020 . Certificates of deposit totaling approximately$893.7 million atSeptember 30, 2021 with a cost of 0.50% are scheduled to mature within the next 12 months.Wesbanco intends to continue to focus on its core deposit strategies and improving its overall mix of transaction accounts to total deposits. From time to time, the Bank may offer special promotions or match competitor rates on certain certificates of deposit maturities and savings products based on competition, sales strategies, liquidity needs and wholesale borrowing costs. BORROWINGS TABLE 15. BORROWINGS September 30, December 31, (unaudited, dollars in thousands) 2021 2020 $ Change % Change Federal Home Loan Bank Borrowings$ 208,940 $ 549,003 $ (340,063 ) (61.9 ) Other short-term borrowings 152,546 241,950 (89,404 ) (37.0 ) Subordinated debt and junior subordinated debt 167,711 192,291 (24,580 ) (12.8 ) Total$ 529,197 $ 983,244 $ (454,047 ) (46.2 ) While borrowings are a significant source of funding forWesbanco , they are less significant as compared to total deposits. During the first nine months of 2021,$340.1 million in available liquidity was used for FHLB borrowings maturities and other principal pay-downs with an average cost of 2.40%. There were no new FHLB advances during the period. Other short-term borrowings, which may consist of federal funds purchased, callable repurchase agreements, overnight sweep checking accounts, and borrowings on a revolving line of credit, were$152.5 million atSeptember 30, 2021 compared to$242.0 million atDecember 31, 2020 . The decrease in these borrowings is primarily due to an$89.4 million decrease in callable repurchase agreements and overnight sweep checking accounts. The decrease in callable repurchase agreements is due to moving certain customer relationships to interest-bearing demand deposits. There were no outstanding federal funds purchased at eitherSeptember 30, 2021 orDecember 31, 2020 .
The subordinated debt and junior subordinated debt balances decreased by
Wesbanco renewed a revolving line of credit inAugust 2021 , which is a senior obligation of the parent company, with another financial institution. This line of credit, which accrues interest at an adjusted LIBOR rate, provides for aggregate unsecured borrowings of up to$30.0 million . There were no outstanding balances at eitherSeptember 30, 2021 orDecember 31, 2020 . 49
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OFF-BALANCE SHEET ARRANGEMENTS
Wesbanco enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, letters of credit, loans approved but not closed, overdraft limits and contingent obligations to purchase loans funded by other entities. Since many of these commitments expire unused or partially used, these commitments may not reflect future cash requirements. Please refer to Note 10, "Commitments and Contingent Liabilities," of the Consolidated Financial Statements and the "Loans and Credit Risk" section of this MD&A for additional information. The allowance for credit losses includes an allowance for unfunded loan commitments. The allowance for credit losses represents the lifetime expected losses for all loans and unfunded loan commitments at the initial recognition date. 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, which also includes any necessary adjustments to the reserve for unfunded loan commitments, and such reserve is accounted for in other liabilities. 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. CAPITAL RESOURCES Shareholders' equity decreased$32.8 million or 1.2% from$2.8 billion atDecember 31, 2020 . The decrease resulted from the repurchase of common shares totaling$128.0 million , the declaration of common and preferred shareholder dividends totaling$65.1 million and$7.6 million , respectively, and a$26.9 million other comprehensive loss for the nine months endedSeptember 30, 2021 exceeding net income during the current nine-month period of$188.1 million .Wesbanco also increased its quarterly dividend rate$0.01 per quarter to$0.33 per share in February, representing a 3.1% increase over the prior quarterly rate and a cumulative 136% increase since 2010.Wesbanco purchased 3,643,656 shares of its common stock on the open market at a total cost of$128.0 million , or$35.13 per share during the nine-month period endedSeptember 30, 2021 under current share repurchase authorizations. The Board of Directors approved an additional stock repurchase plan for the purchase of up to 3.2 million shares onAugust 26, 2021 , which was in addition to prior plans that were utilized during the quarter. AtSeptember 30, 2021 , the remaining shares authorized to be purchased under the last approved repurchase plan totaled 2,960,801 shares. InFebruary 2021 ,Wesbanco granted 12,000 Total Shareholder Return Plan ("TSR") shares for the performance period beginningJanuary 1, 2021 and endingDecember 31, 2023 to certain executives. The award is determined at the end of the three-year period if the TSR ofWesbanco common stock is equal to or greater than the 50th percentile of the TSR of the peer group. The number of shares to be earned by the participant shall be 200% of the grant-date award if the TSR ofWesbanco common stock is equal to or greater than the 75th percentile of the TSR of the peer group. Upon achieving the market-based metric, shares determined to be earned by the participant become time-based and vest in three equal annual installments. OnMay 19, 2021 ,Wesbanco granted 147,200 stock options to selected officers at an exercise price of$38.78 . These options are service-based and vest 50% atMay 19, 2022 and 50% atDecember 31, 2022 . On the same date,Wesbanco issued 122,656 shares of time-based restricted stock to selected officers and directors and 17,571 shares of performance-based restricted stock to selected officers. The time-based restricted shares are service-based and cliff-vest 36 months from the date of grant. The performance-based restricted shares have a three-year performance period beginning onJanuary 1, 2022 , based onWesbanco's return on average assets and return on average tangible common equity measured for each year, compared to a national set of peer financial institutions.
At
Regulatory guidelines require bank holding companies and commercial banks to maintain certain minimum capital ratios and define companies as "well capitalized" that sufficiently exceed the minimum ratios. AtSeptember 30, 2021 , regulatory capital levels for both the Bank andWesbanco were substantially greater than the minimum amounts needed to be considered "well capitalized" under the regulations. There are various legal limitations under federal and state laws that limit the payment of dividends from the Bank toWesbanco . As ofSeptember 30, 2021 , underFDIC regulations,Wesbanco could receive, without prior regulatory approval, a dividend of approximately$253.7 million from the Bank.Wesbanco expects to continue to improve its consolidated and Bank capital ratios as necessary over time, to fund organic growth and acquisitions, primarily from retaining a majority of its earnings. OnMarch 26, 2020 , regulators issued interim financial rule ("IFR") "Regulatory Capital Rule: Revised Transition of the Current Expected Losses Methodology for Allowances" in response to the disrupted economic activity from the spread of COVID-19. The IFR provides financial institutions that adopt CECL during 2020 with the option to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided by the initial two-year delay ("five-year transition").Wesbanco adopted CECL effectiveJanuary 1, 2020 and elected to implement the five-year transition. Regulatory capital levels without the capital benefit atSeptember 30, 2021 for both the Bank andWesbanco would have continued to be greater than the amounts needed to be considered "well capitalized", as the capital benefit approximated 25 to 40 basis points for three of the four regulatory ratios, while total risk-based capital would have been slightly higher without the transition. 50
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The following table summarizes the amounts and risk-based capital ratios for
September 30, 2021 December 31, 2020
Minimum Well- Minimum Minimum
(unaudited, dollars in
thousands) Value(1) Capitalized(2) Amount Ratio Amount(1) Amount Ratio Amount(1)
Wesbanco, Inc.
Tier 1 leverage 4.00 % 5.00 % $ 1,607,960 10.10 % $ 636,839 $ 1,617,413 10.51 % $ 510,306
Common equity Tier 1 4.50 % 6.50 % 1,463,476 12.91 % 510,274 1,472,929 13.40 % 494,529
Tier 1 capital to
risk-weighted assets 6.00 % 8.00 % 1,607,960 14.18 % 680,366 1,617,413 14.72 % 659,372
Total capital to
risk-weighted assets 8.00 % 10.00 % 1,856,275 16.38 % 907,154 1,931,414 17.58 % 879,162
Wesbanco Bank, Inc.
Tier 1 leverage 4.00 % 5.00 % $ 1,605,464 10.10 % $ 635,854 $ 1,536,609 10.00 % $ 614,792
Common equity Tier 1 4.50 % 6.50 % 1,605,464 14.21 % 506,792 1,536,609 14.04 % 492,549
Tier 1 capital to
risk-weighted assets 6.00 % 8.00 % 1,605,464 14.21 % 675,723 1,536,609 14.04 % 656,732
Total capital to
risk-weighted assets 8.00 % 10.00 % 1,695,778 15.01 % 900,964 1,685,610 15.40 % 875,643
(1) Minimum requirements to remain adequately capitalized.
(2) Well-capitalized under prompt corrective action regulations.
LIQUIDITY RISK
Liquidity is defined as a financial institution's capacity to meet its cash and collateral obligations at a reasonable cost. Liquidity risk is the risk that an institution's financial condition or overall safety and soundness is adversely affected by an inability, or perceived inability, to meet its obligations. An institution's obligations, and the funding sources to meet them, depend significantly on its business mix, balance sheet structure, and the cash flows of its on- and off-balance sheet obligations. Institutions confront various internal and external situations that can give rise to increased liquidity risk including funding mismatches, market constraints on funding sources, contingent liquidity events, changes in economic conditions, and exposure to credit, market, operation, legal and reputation risk.Wesbanco actively manages liquidity risk through its ability to provide adequate funds to meet changes in loan demand, unexpected outflows in deposits and other borrowings as well as to take advantage of market opportunities and meet operating cash needs. This is accomplished by maintaining liquid assets in the form of securities, sufficient borrowing capacity and a stable core deposit base. Liquidity is centrally monitored byWesbanco's Asset/Liability Committee ("ALCO").Wesbanco determines the degree of required liquidity by the relationship of total holdings of liquid assets to the possible need for funds to meet unexpected deposit losses and/or loan demands. The ability to quickly convert assets to cash at a minimal loss is a primary function ofWesbanco's investment portfolio management.Wesbanco believes its cash flow from the loan portfolio, the investment portfolio, and other sources, adequately meet its liquidity requirements.Wesbanco's net loans to assets ratio was 57.9% atSeptember 30, 2021 and deposit balances funded 79.5% of assets.
The following table lists the sources of liquidity for the assets at
(unaudited, in thousands) Cash and cash equivalents$ 1,121,116
Securities with maturity in the following year and redeemable securities
239,028
Scheduled prepayments and prepayments on Mortgage Backed Securities and Guaranteed Mortgage Bonds (1)
693,052
Loans held for sale
32,308
Accruing loans scheduled to mature
1 160 888
Normal loan repayments
2,218,268
Total sources of liquidity expected within the next year$ 5,464,660
(1) Projected prepayments are based on current prepayment speeds.
Deposit flows are another principal factor affecting overallWesbanco liquidity. Deposits totaled$13.4 billion atSeptember 30, 2021 . Deposit flows are impacted by current interest rates, products and rates offered byWesbanco versus various forms of competition, as well as customer behavior. Certificates of deposit scheduled to mature within one year totaled$893.7 million atSeptember 30, 2021 , which includes jumbo regular certificates of deposit totaling$448.1 million with a weighted-average cost of 0.59%, and jumbo CDARS® deposits of$8.8 million with a weighted-average cost of 1.79%.Wesbanco maintains a line of credit with the FHLB as an additional funding source. Available credit with the FHLB approximated$4.0 billion and$3.6 billion atSeptember 30, 2021 andDecember 31, 2020 , respectively. The FHLB requires securities to be specifically pledged to the FHLB and maintained in a FHLB-approved custodial arrangement if the member wishes to include such securities in the maximum borrowing capacity calculation.Wesbanco has elected not to specifically pledge to the FHLB otherwise unpledged securities. AtSeptember 30, 2021 , the Bank had unpledged available-for-sale securities with an amortized cost of$1.0 billion , or 35.6% of the total available-for-sale portfolio. A portion of these securities could be sold for additional liquidity, or such securities could be pledged to secure additional FHLB borrowings. A significant portion of the portfolio is pledged to public deposit customers, as public deposit balances have increased significantly through the several acquisitions made since 2015, to a total of$1.6 billion atSeptember 30, 2021 .Wesbanco's held-to-maturity portfolio currently contains$793.2 million of unpledged securities. Most of these securities are tax-exempt municipal securities, which can only be pledged in limited circumstances. Generally, these securities cannot be sold without tainting the remainder of the held-to-maturity portfolio. If tainting occurs, all remaining securities with the held-to-maturity designation would be required to be reclassified as available-for-sale, and the held-to-maturity designation would not be available toWesbanco for a period of time. 51 --------------------------------------------------------------------------------Wesbanco participates in theFederal Reserve Bank's Borrower-in-Custody Program ("BIC") wherebyWesbanco pledges certain consumer loans as collateral for borrowings.Wesbanco did not have any BIC borrowings outstanding atSeptember 30, 2021 . Alternative funding sources may include the utilization of existing overnight lines of credit with third party banks totaling$275.0 million , none of which was outstanding atSeptember 30, 2021 , along with seeking other lines of credit, borrowings under repurchase agreement lines, increasing deposit rates to attract additional funds, accessing brokered deposits, or selling securities available-for-sale or certain types of loans. Other short-term borrowings of$152.5 million atSeptember 30, 2021 consisted of callable repurchase agreements and overnight sweep checking accounts for large commercial customers. Other short-term borrowings may also include federal funds purchased. There has been a decrease in average balances of overnight sweep checking accounts during the first nine months of 2021, primarily from the movement of overnight sweep checking accounts to transaction account deposits to reduce pledging. The overnight sweep checking accounts requireU.S. Government securities to be pledged equal to or greater than the average deposit balance in the related customer accounts. The principal sources of parent company liquidity are dividends from the Bank,$148.2 million in cash on hand, and a$30.0 million revolving line of credit with another bank, which did not have an outstanding balance atSeptember 30, 2021 .Wesbanco is in compliance with all applicable loan covenants. There are various legal limitations under federal and state laws that limit the payment of dividends from the Bank to the parent company. As ofSeptember 30, 2021 , underFDIC andState of West Virginia regulations,Wesbanco could receive, without prior regulatory approval, dividends of approximately$253.7 million from the Bank. Management believes these are appropriate levels of cash for the parent company given the current environment. Management continuously monitors the adequacy of parent company cash levels and sources of liquidity through the use of metrics that relate current cash levels to historical and forecasted cash inflows and outflows.Wesbanco had outstanding commitments to extend credit in the ordinary course of business approximating$3.7 billion and$3.0 billion atSeptember 30, 2021 andDecember 31, 2020 , respectively. On a historical basis, only a portion of these commitments will result in an outflow of funds. Please refer to Note 10, "Commitments and Contingent Liabilities" of the Consolidated Financial Statements and the "Loans and Credit Risk" section of this MD&A for additional information. Federal financial regulatory agencies have previously issued guidance to provide for sound practices for managing funding and liquidity risk and strengthening liquidity risk management practices.Wesbanco maintains a comprehensive management process for identifying, measuring, monitoring, and controlling liquidity risk, which is fully integrated into its risk management process. Management believesWesbanco has sufficient current liquidity to meet current obligations to borrowers, depositors and others and thatWesbanco's current liquidity risk management policies and procedures, as periodically reviewed and adjusted, adequately address this guidance. LIBOR TRANSITION The London Interbank Offered Rate ("LIBOR") is a widely used short-term reference interest rate benchmark for variable rate loans and securities, borrowings, and interest rate hedge/swap transactions. In July of 2017, theU.K. Financial Conduct Authority ("FCA") announced the discontinuation of LIBOR after certain banks provided purported interest rate figures which did not truly reflect the rate at which they could borrow. In addition toFCA , as early as 2014, financial institution regulators and theFederal Financial Institutions Examination Council ("FFIEC") began to work to develop a uniform approach to the phase-out of LIBOR because the continued reliance on LIBOR could present systematic risk to financial institutions.The Board of Governors of theFederal Reserve System and theFederal Reserve Bank of New York convened the Alternative Reference Rates Committee ("AARC") to identify alternative reference rates to LIBOR. The AARC released consultations on contractual fallback language to prepare for the transition away for LIBOR and onJune 22, 2017 , identified the Secured Overnight Financing Rate ("SOFR") as the recommended alternative to LIBOR. OnJuly 1, 2020 , theFFIEC issued a Joint Statement on Managing the LIBOR Transition to further explain that new financial contracts should either utilize a reference rate other than LIBOR or have robust fallback language that defines an alternative reference rate after LIBOR's discontinuation. TheFFIEC statement encouraged supervised financial institutions to continue their efforts to prepare for the change and address the risks associated with the LIBOR transition. OnNovember 6, 2020 , theBoard of Governors of theFederal Reserve System , theOffice of the Comptroller of the Currency , and theFederal Deposit Insurance Corporation (collectively, the "Agencies") issued a statement providing that a financial institution may use any reference rate for its loans that the financial institution determines to be appropriate for its funding model and customer needs. Thereafter, onNovember 30, 2020 , the Agencies issued an additional joint statement encouraging financial institutions to continue to transition away from LIBOR as soon as practicable, but no later thanDecember 31, 2021 . Given the risks associated with the use of LIBOR, the Agencies stated that entering into new contracts that use LIBOR as a reference rate afterDecember 31, 2021 , would create safety and soundness risks. OnMarch 5, 2021 , theU.K. FCA and Intercontinental Exchange ("ICE")Benchmark Administration announced that the publication of the overnight, as well as, the one, three, six, and twelve month LIBOR rates will continue to be published throughJune 30, 2023 , which will provide additional time to wind down or renegotiate existing contracts that reference LIBOR. OnOctober 20, 2021 , the Agencies with theConsumer Financial Protection Bureau ,National Credit Union Administration , andState Bank andCredit Union Regulators, issued an additional Joint Statement on Managing the LIBOR Transition to once again emphasize the expectation that supervised institutions with LIBOR exposure continue to progress toward an orderly transition away from LIBOR. The statement confirmed that entering into new contracts, including derivatives that use LIBOR as a reference rate afterDecember 31, 2021 , would create safety and soundness risks, including litigation, operational, and consumer protection risks. 52 -------------------------------------------------------------------------------- As early as 2018, in anticipation of the potential discontinuance of LIBOR,Wesbanco established a LIBOR transition committee to effectively manage the Company's transition away from LIBOR in two phases. The first phase included adding additional fallback language to loan documents to allowWesbanco to replace LIBOR with an equivalent rate index plus the margin to ensure the resulting interest rate is the same as it previously was using LIBOR. Also, as part of the first phase,Wesbanco began quoting to the Treasury Rate published by theFederal Reserve Board instead of the ICE LIBOR Swap Index (which is tied to LIBOR) when repricing certain term loans and originating new loans. The second phase consists of working to continue to transition existing adjustable-rate loans that fluctuate monthly or periodically that are tied to LIBOR or the ICE LIBOR Swap Index.Wesbanco is tracking the dollar amount and number of loans tied to LIBOR or the ICE LIBOR Swap Index, monitoring current industry trends, and working with legal counsel to ensure the smooth transition away from LIBOR. As ofSeptember 30, 2021 ,Wesbanco had a total of$1.9 billion in loans tied to either LIBOR or the ICE LIBOR Swap index, of which$1.5 billion have a maturity date afterJune 30, 2023 . As referenced above, theU.K. FCA andICE Benchmark Administration has extended the date of publication of certain tenors of LIBOR throughJune 30, 2023 , giving existing LIBOR based contracts time to mature. However, in compliance with and based upon the Agencies Joint Statements referenced above,Wesbanco will not be offering LIBOR for new contracts afterDecember 31, 2021 . Accordingly,Wesbanco has initially chosen the One Month Term Secured Overnight Financing Rate ("1M Term SOFR"), which is published by theChicago Mercantile Exchange ("CME"), as an alternative replacement rate for LIBOR.Wesbanco may also continue to utilize the Wall Street Journal Prime Rate, the Treasury Rates, and other indexes as part of its lending program. System and process updates are being made to enable the use of the 1M Term SOFR for new loan production by the end of 2021 in accordance with regulatory guidelines. At a date in the future, prior to the cessation of the publication of the one month LIBOR,Wesbanco will transition all remaining LIBOR based loans to the replacement index after notification to the impacted borrowers. With respect to its back-to-back swap program,Wesbanco worked with its swap counterparty customers to institute and accept theInternational Swaps and Derivatives Association 2020 Interbank Offered Rate Fallbacks Protocol ("ISDA 2020 IBOR Protocol") to address LIBOR cessation in swap transactions. Moreover,Wesbanco has initially chosen 1M Term SOFR as its replacement index for new loans in the bank's back-to-back swap program. The LIBOR transition committee, in consultation with market participants, expects the market for Term SOFR derivatives to be actively engaged prior to the end of 2021, allowing the program to meet the Agencies timeline ofDecember 31, 2021 . 53
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