Earnings Call Transcript - WSBC Q1 FY2026

Operator

Good day, and welcome to the West Banco First Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1, on your telephone keypad. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to John Iannone, Senior Vice President of Investor Relations. Please go ahead.

John Iannone, Head of Investor Relations

Good morning, and welcome to WestBanko, Inc.'s first quarter 2026 earnings conference call. Leading the call today are Jeff Jackson, President and Chief Executive Officer, and Dan Weiss, Senior Executive Vice President and Chief Financial Officer. Today's call, an archive of which will be available on our website for one year, contains forward-looking information. Optionary statements about this information and reconciliations of non-GAAP measures are included in our earnings-related materials issued yesterday afternoon, as well as our other SEC filings and investor materials. These materials are available on the Investor Relations section of our website, westbanco.com. All statements speak only as of April 22, 2026, and West Bank 100 takes no obligation to update them. I would now turn the call over to Jeff. Jeff?

Jeffrey H. Jackson, CEO

Thanks, John, and good morning, everyone. Today, we'll walk you through our first quarter performance and share our current outlook for the rest of 2026. There are three key takeaways from the quarter. We delivered solid year-over-year financial results. We exceeded our year one financial targets for the premier acquisition, and we stayed disciplined in executing our strategy to position West Banco for long-term success. Overall, it was a solid start to the year. Turning to our financials, for the quarter ended March 31, 2026, we reported net income available to common shareholders of $87 million, excluding merger and restructuring charges. That translated to diluted earnings per share of $0.91, up 38% from a year ago. On a similar basis, we reported pre-tax, pre-provisioned earnings of $114 million, an increase of 44% year over year. The strength of our first quarter financial performance was reflected in our returns on average assets and tangible common equity of 1.3% and 17.4% respectively. Our capital position also remains solid with a CET1 ratio of 10.7%. That gives us flexibility to support growth and navigate the operating environment ahead. As we mentioned last quarter, developers continue to seek permanent financing or the sale of properties. During the first quarter, that drove elevated commercial real estate project payoffs, which totaled $340 million during the first quarter and created a 1.4% headwind to our year-over-year loan growth. In fact, we have incurred a significant CRE payoff headwind of a billion dollars during the last nine months. Despite that headwind, our teams continue to execute at a high level. Loan growth was largely funded by deposit growth, and our commercial pipeline has reached all-time record levels. Adjusting for the payoff activity, total loans grew 3.6% year-over-year. The commercial pipeline has increased 35% since year-end to a record 1.6 billion. And in the few weeks since quarter-end, the pipeline has grown another 200 million to 1.8 billion. About 45% of that pipeline is coming from existing loan production offices and the former premier footprint. Impressively, this pipeline does not yet reflect the benefit of our recently announced South Florida expansion. That team has hit the ground running and built an initial $400 million pipeline just in a few weeks. They are on pace to grow that pipeline by a significant amount as the year progresses. Even with elevated CRE payoffs during the first half of the year, and the potential of influence of geopolitical events, we continue to expect mid-single-digit year-over-year loan growth for 2026, supported by our record pipeline and early momentum from our South Florida markets. A little over a year ago, we completed our transformative acquisition of Premier Financial, an acquisition that placed West Banco among the 50 largest publicly traded banks in the U.S. When we announced the premier acquisition in July 2024, we laid out clear financial targets for the first year, including 40% earnings per share growth, a 1.3 return on average assets, and a CET1 ratio of 9.6%, along with a tangible book value earned back in under three years. I'm pleased to say we delivered, and in many cases, exceeded our targets. Over the last 12 months, core EPS growth reached 49%, and ROAA was 1.3%. We also exceeded the pro forma CET1 ratio by more than a percentage point and shaved more than a year off the dilution earnback. As our first quarter tangible book value per share of $22.45 is well above the June 2024 figure and nearly at the year-end 2024 level. In addition, we have been making other strategic investments that demonstrate our commitment to long-term sustainable growth. We continuously invest in digital capabilities and products like WestBank01 account and Treasury Management Services to ensure we serve our customers how, when, and where they want. At the same time, we continue to optimize our physical branch network. Over the past four years, we've closed 64 locations with limited customer traffic, including 10 of them in northern Ohio that will close next month. We're selectively opening new financial centers in key markets and consolidating others into more central and higher demand locations. Our loan production office strategy continues to perform well. We've opened LPOs in high-growth markets, including Chattanooga, Indianapolis, Knoxville, Nashville, and Northern Virginia. We're seeing strong results as these teams deepen relationships and bring on new commercial clients. As these offices achieve scale, we add product capabilities locally, as well as financial centers to better serve our growing client base. Chattanooga is a great example. We opened that LPO less than three years ago, and it has generated strong relationship-driven growth. That momentum supports the opening of our first Tennessee Financial Center this week. We anticipate that several other of our LPOs will follow this pattern within the next couple of years. I'm very excited about our recent expansion into Florida, which is a thoughtful extension of our long-stated Southeastern expansion strategy. Last month, we announced the launch of our commercial banking business across key, high-growth South Florida markets, starting with Palm Beach and Broward Counties. We brought on a seasoned team of nearly 20 professionals, including market leaders, commercial bankers, credit underwriting, and a client relationship support, as well as a treasury management leader. These are attractive, high-growth markets and ones I've come to know well during my banking career. I've worked with many of these bankers before, and they consistently delivered top performance while maintaining strong credit discipline. Just as importantly, their client focus aligns well with our relationship-led approach. Our Florida expansion also provides meaningful organic growth opportunities for our strong healthcare banking vertical. As the regional business, which is primarily focused on C&I lending, develops, we will evaluate additional services and solutions, including retail financial centers, treasury, wealth management, and mortgage offerings to deliver even a greater value to our clients. I would now like to turn the call over to Dan to walk through the financials and outlook in more detail. Thanks, Jeff, and good morning.

Daniel K. Weiss, CFO

For the first quarter, we reported gap net income available by common shareholders of $84 million, or $0.88 per share. And when excluding restructuring and merger-related expenses, first quarter net income was $87 million, or $0.91 per share. To highlight a few of the first quarter's year-over-year accomplishments, we generated strong pre-tax, pre-provisioned core earnings growth of 44%, grew core earnings per share by 38%, improved the net interest margin by 22 basis points, and reduced the efficiency ratio by nearly four percentage points to 52.5%. Total assets of $27.5 billion include total portfolio loans of $19.1 billion and securities of $4.4 billion. Total portfolio loans increased 2.2% year-over-year driven by commercial real estate and home equity lending and declined slightly on a sequential quarter basis due to elevated payoffs. We expect CRE payoffs to remain slightly elevated during the second quarter, but at a lower level than the first quarter before returning to a more normal historical level during the back half of the year, totaling $700 to $900 million for the year. While very small, we ended our indirect auto program, as if not core to our organic growth strategy, and at quarter end it represented about half of the $325 million of consumer loan portfolio and anticipate that that portfolio will run off over the next three to five years. Deposits increased 2% year-over-year to $21.7 billion due to organic growth. We continue to be successful in remixing higher-cost certificates deposit into interest-bearing demand, and of our remaining $2.7 billion CD portfolio, approximately $1 billion matures in each of the next two quarters with an average rate of 3.48% and 3.2%, respectively. Our current seven-month CD rollover rate is 3.25%. Further, we started the year with $100 million in brokered deposits. $50 million paid off early in the quarter, while the last of our brokered deposits paid off on April 1st. Credit quality continues to remain stable as key metrics have remained low from a historical perspective and favorable to all banks with assets between $20 and $50 billion over the last five quarters. Criticized and classified loans as a percentage of total portfolio loans decreased $49 million or 24 basis points from the sequential quarter to 2.9%, while non-performing loans increased $53 million sequentially, primarily due to three CRE loans across different markets and property types, none of which were office. The allowance for credit losses, the total portfolio loans at the end of the first quarter was 1.1% of total loans, or $210 million. The decrease from the fourth quarter was primarily due to lower loan balances, faster prepayment speeds, and macroeconomic factors. The first quarter margin of 3.57% improved 22 basis points year-over-year through a combination of lower funding costs and higher security yields, but declined four basis points sequentially. This decrease resulted primarily from lower net loan growth, as well as modestly higher seasonal deposit contraction in the first two months of the quarter, which fully recovered by the end of March. Total deposit funding costs, including non-interest bearing deposits, declined 11 basis points year-over-year and 7 basis points quarter-over-quarter to 177 basis points. In the first quarter, non-interest income of $41.8 million increased $7.2 million, or 21% year-over-year, due primarily to the acquisition of Premier combined with organic growth. Service charges on deposit and digital banking fees improved due to increased general spending and higher transaction volumes from our larger customer base, as well as organic growth from treasury management, which generated revenue of $2.5 million in the first quarter, representing an 82% increase year over year. Reflecting record asset levels, which totaled $10.4 billion combined, trust fees and net securities brokerage revenue increased due to the addition of premier wealth clients, market value appreciation, and organic growth. Non-interest expense, excluding restructuring and merger-related costs for the first quarter of 2026, was $143 million, a 25% increase year-over-year due to the addition of the premier expense base, which was only in the WestBanco expense base for one month in the prior year period. Higher core deposit and tangible asset amortization from the acquisition and higher FDIC insurance expense due to our larger asset size. On a similar basis, operating expenses were down slightly from the sequential quarter, reflecting our focus on managing discretionary expenses and some one-time credits approximating $2 million. Please note that the first quarter does not fully reflect our strategic expansion into South Florida as the hiring occurred late in the quarter. If we turn to capital, all of our key ratios improved quarter over quarter. Our CET1 ratio is March 31st with 10.7%, which increased more than anticipated due to lower risk-weighted assets during the quarter. Based on the strategic investment that we're making in the southeast Florida and other markets, We anticipate CET1 to now build 5 to 10 basis points per quarter for the remainder of the year, putting us on pace for our 11% CET1 target by year end. Turning to the outlook, our current outlook for 2026 includes our Southeast Florida expansion, which currently totals nearly 20 individuals and is expected to achieve positive operating leverage within 12 to 15 months and be additive to our long-term financial outlook. We've removed our previous rate cuts from our modeling and currently do not anticipate any cuts or increases during the remainder of 2026. We anticipate our second quarter net interest margins to rebound into the low 360s and then continue to improve into the mid to high 360s during the second half of the year. This assumes, among other things, that the competition for loans and deposits remains stable, loan growth is fully funded by deposits, and an upward sloping yield curve. generally speaking there are no meaningful changes to our fee income outlook for the last from the last quarter trustees and securities brokerage revenue should benefit modestly from organic growth and be influenced by equity and fixed income markets and as a reminder first quarter trust fees are seasonally higher due to tax preparation fees mortgage banking should grow modestly over 2025 beginning in the spring driven by recent hiring initiatives total treasury management revenue should see increases from 2025 as the compounding effect of our services continue to expand and gross commercial swap fee income, excluding market adjustments, should be in the $8 to $10 million range. Overall, we currently anticipate our quarterly fee income to grow in the 3 to 5% range year-over-year during the remainder of 2026. While we remain focused on delivering disciplined expense management, we are making strategic investments to drive long-term value for our shareholders. We're closing 10 financial centers during May and anticipate the annual savings of approximately $2 million to begin to be realized midway through the second quarter. Salaries and wages will increase, reflecting the South Florida expansion and the annual mid-year merit increases which take effect midway through the second quarter. Occupancy expense should be flat to slightly down compared to 2025 due to our branch optimization efforts slightly offset by our branch expansion initiatives in our new and existing markets. While equipment and software expenses are expected to increase somewhat as compared to 2025 as we continue to invest in products, services, and technology to improve the customer experience and drive revenue growth. In support of our organic loan and deposit growth model and our commercial lending expansion efforts, marketing is expected to increase to approximately $4 million per quarter. And based on what we know today, we expect our expense run rate during the second quarter to approach $150 million and then to increase a couple of percentage points in the third quarter from a full quarter of mid-year merit increases. The provision for credit losses will depend on changes to the macroeconomic forecast and qualitative factors, as well as various credit quality metrics, including potential charge-offs, criticized and classified loan balances, delinquencies, changes in prepayment speeds, and future loan growth. And finally, we anticipate our full-year effective tax rate to be between 20 and 21 percent. This concludes my remarks. Operator, we're now ready to take questions.

Operator

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If any time your question has been addressed and you would like to withdraw your question, please press star then 2. Please limit yourselves to one question and one follow-up, then return to the queue. At this time, we will pause momentarily to assemble our roster. And your first question today comes from Manuel Navas with Piper Sandler. Please go ahead.

Manuel Navas, Analyst — Piper Sandler

Hey, I appreciate having us offer the comments. What are the funding expectations around the South Florida commercial lending team? And can you dive a little bit more into your ties to the area and the potential to add to that team?

Jeffrey H. Jackson, CEO

Yeah, sure. Good morning. I'll start with the ties in South Florida. As you may or may not know, I worked as the regional president in South Florida when First Horizon bought Capital Bank and really built out that team. And so I worked down there back in 2018 through essentially 2020, 2021. They were a very top-performing team. And so when the opportunity came around to bring them over to West Banco, it just seemed like a perfect partnership. As I mentioned before, I kind of put together that team back at my previous employer. And so when you look at what they can do and where they're headed, I think it's going to be one of our big growth drivers for this year. future years. We are opening up two offices, as mentioned, Palm Beach and Broward. We would also follow up with two branches as well. So when you look at the funding piece, we are expecting them to provide a significant piece of funding, their own loan growth, and that will be followed up with two branch locations, which we'd hopefully have opened by the end of the year. But overall, We feel like it's a great growth market, and I think your other piece of that question was more expansion. We are looking at other markets there in Florida. As my previous history had, I had the whole state of Florida, so we will be looking to add additional people when the right people come along. But do believe, and as I mentioned in my prepared remarks, they have a current pipeline of about $400 million, and I feel like the loan growth and the revenue opportunities there will help propel us into the future.

Manuel Navas, Analyst — Piper Sandler

I appreciate that. Diving a little bit back more deeply into the NIM outlook, can you speak to more of the components there that should drive kind of the improvement from here? Can you have deposit declines beyond CDs? What kind of current pricing levels on the loan book? Just kind of if you could walk through some of the wild cards there on the NIM.

Daniel K. Weiss, CFO

Yeah, sure, Manuel. I'll take that one. So, you know, we talked about kind of three to five basis points of NIM improvement here in the second quarter. A lot of that is really the repricing of the back books for both, you know, loans as well as securities. and then kind of an assumption that, you know, we're going to fund the majority of the deposit or the loan growth with deposits in the second quarter. As you know and as you heard in my prepared remarks, we did see a little bit of outflow here in the first quarter in deposits, which is seasonally expected. It was just a little heavier than anticipated. And we also saw about $150 million of non-interest-bearing migrated to interest-bearing. So those two things kind of, you know, combined with the loan growth, you kind of provided that headwind to first quarter margin. But if we think, you know, towards that three to five basis points, when I talk repricing, you know, we do have about $400 million fixed rate commercial loans, weighted average rate of about four and a quarter percent that will mature in the next 12 months. Those will be, you know, repricing up almost 200 basis points into the low sixes. We've also got another 400 million of variable rate loans. These are those that would be repricing 48 to 60 months roughly that would be coming due in the next 12 months. The weighted average rate there is about 3.75. five. So that's going to provide some nice tailwind as well. And if we just think about, you know, other sources, you know, securities cash flow, that's beginning to tick up a little. We're kind of projecting around $275 million in securities cash flows per quarter. And so that's going to reprice upward from kind of call it 3.3% up to about 475 to 5%, depending on, you know, where rates are. So that's another nice pickup of about 150 basis points or so. And then, of course, as I mentioned in the prepared commentary, we do have continued downward repricing of the CD book. So particularly that $1 billion of first quarter CDs that repriced down at about 40 to 50 basis points, that's going to benefit the second quarter quite a bit. Similarly, the billion dollars in the second quarter of CDs that are maturing, those are going to reprice down about 25 basis points. That will begin to benefit second quarter and really kind of fully benefit third quarter. But I think those are probably the major items. I mentioned again in the prepared commentary that we did pay down the remainder of our brokered deposits, so we had $100 million in brokered on the books at the beginning of the year. $50 million of those paid down kind of early in the first quarter, the other $50 on April 1st. So that also would provide, I believe, some nice tailwind towards that three to five basis points of margin expansion here in the second quarter.

Manuel Navas, Analyst — Piper Sandler

I appreciate that commentary. If there is rate cuts, what would that impact this progression, if at all?

Daniel K. Weiss, CFO

Yeah, so we're pretty neutral. So I would say there's, you know, not a whole lot of, you know, movement one way or the other with rate cuts. Certainly, our commercial loan portfolio is 50% of that is variable rate, repriced within three months, but we'd also be able to reprice downward our deposits, our FHLB barrings are all mostly one-month advances. And so, we think that in a rate cut scenario or a rate hike scenario, which is now potentially on the table, we would be in a great spot.

Manuel Navas, Analyst — Piper Sandler

Thank you for the commentary.

Operator

And your next question comes from Jake Siviello with DA Davidson. Please go ahead.

Jake Siviello, Analyst — DA Davidson & Co.

Hey, good morning, Jeff, Dan, and John. Hey, good morning, Jake. Wanted to touch on the uptick in NPAs. So, obviously, you mentioned that the three non-office credits were the driver. Can you provide a little bit more details in terms of what actually those credits were?

Jeffrey H. Jackson, CEO

Yes, I can. They were, as I mentioned, legacy premier credits. They're all three in three different markets. Two are multifamily. And I would tell you that we feel like we're very well collateralized there and well reserved for those three and feel like that we will be working out of those. Once again, there are three credits. I think the other piece I would highlight is the CNC did tick down back to our kind of our normal range, sub 3%, which is top in our peer group. But we are looking at those NPAs and still feel very good about working through those three credits.

Daniel K. Weiss, CFO

It's also worth kind of recognizing that those NPAs or non-accrual loans are included in the CNC total. So that 24 basis point reduction in CNC, that includes these as well. So, you know, continue to see positive momentum on the credit.

Jake Siviello, Analyst — DA Davidson & Co.

I appreciate that.

Operator

And your next question comes from Carl Shepard with RBC Capital Markets. Please go ahead.

Carl Shepard, Analyst — RBC Capital Markets

Hey, good morning, guys.

Jeffrey H. Jackson, CEO

Hey, good morning, Carl.

Carl Shepard, Analyst — RBC Capital Markets

Good morning, Carl. Congrats on getting the Florida team in place. Thank you. Because I wanted to start there. You highlighted the pipeline, I think, around $400 million. Can you help us understand maybe your expectations for, you know, how much of that you would think can close, and is that, you know, over the rest of the year, or is there a little bit longer timeline?

Jeffrey H. Jackson, CEO

Yeah, I think that they will close their first deal this month. I would hope that by the end of the quarter they would have, you know, Anywhere from, you know, this is a guess, but $100 million closed this quarter. And I would hope by the end of the year, you know, anywhere from $300 million to $500 million closed. It could be more, depending on the number of bankers we continue to add there. And that's just not loans. I mean, we would be bringing over full relationships. Once again, we hope to have a couple of depository branches open. soon. And this would also include fees and treasury management services and all those other things. But no, I think it's going to be a heavy driver for us this year. And just while we're talking about it, just to bring up, I think our overall pipeline, if I look back and compare it to last year this time, I think our pipeline last year was about a billion two. Today, we set at nearly two billion three, two billion four. So, if I look at that, and then I also look at, you know, payoffs, at least what we see today for the quarter, today, we see about 100 million plus less payoffs than we saw in first quarter. So, when I combined a much higher pipeline, less payoffs that we see today, I feel very good about where we stand from a loan growth perspective for the rest of the year.

Carl Shepard, Analyst — RBC Capital Markets

That's helpful. And then I guess just on the payoff piece, I think you just said it, but I just want to clear it up too because I know this is an area of concern. But I think last quarter you thought $600 to $800 for the full year. I think you said $700 to $900 today. So the first quarter was maybe just a little bit of pull forward of stuff you thought was going to pay off. Is that a fair way to see it? There's really not much of a change in your expectation, and obviously the pipelines are strong and the production looks solid as well.

Jeffrey H. Jackson, CEO

Yeah, 100%. Some of the payoffs moved to first quarter. As I mentioned, you know, we see this current quarter less payoffs than the first quarter of over $100 million. And, no, I think that's a perfect way to see it. The other thing I would add just the first quarter is we had a couple NDFI loans that we decided we were not going to be in that business. You know, and just to point out that we have a very, very, very small exposure, like I think less than $50 million to NDFIs. And so we chose not to do a couple of those deals in the first quarter. That could have given us some more loan growth. And then we did have a couple of deals really slide from first quarter, second quarter. So some of this is really just a timing issue with the loan growth.

Operator

Okay, great. Thank you all. Any question comes from Russell Gunther with Stevens. Please go ahead. Hey, good morning, guys.

Russell Gunther, Analyst — Stevens

Hey, good morning, Russell. Also, hey, Jeff, just following up on the pipeline discussion here. Would it be helpful to get a sense of the mix and the yield? And then just in general, how you guys are thinking about pull-through rates relative to historical level?

Jeffrey H. Jackson, CEO

Yeah, I think the mix, if I was to look at it, I would say it's probably 60-40 CRE to CNI would be my guess. And then the yields, I'm going to guess the low to mid-sixes from a loan yield perspective. Once again, I would also highlight that everything we do is a full relationship that has, you know, some level of deposits in Treasury management services. As far as the pull-through, I don't see it being any different than what we've seen in the past from adding and closing business. Obviously, the new markets will have to measure that with Florida coming on. But, once again, feel very good about where we're at, and some of this loan growth is a timing thing, and I do believe we will see strong loan growth for the rest of the year.

Russell Gunther, Analyst — Stevens

That's helpful, Jeff. Thank you. And then switching gears for my second question here would be to capital. So, CET1, roughly 10.7% today. Do you guys have a preliminary sense for the impact of the Basel III proposal on RWAs and CET1? And then would there be any shift in your appetite? to consider repurchase it.

Daniel K. Weiss, CFO

Yeah, Russell, I'll take that one. And great question. You know, we're still obviously evaluating the impact there, but, you know, preliminary estimates kind of indicate that we would see a benefit to CET1 of about 5% to 6%. And so on a, you know, a 10.7% ratio today, that's worth about 55% to 65 basis points. So that frees up about, call it, around $120 million or so in capital. And that certainly would provide opportunity to deploy, whether that be, you know, through buyback or additional growth. But I think that certainly would accelerate the buyback view. So, you know, like I said in the prepared commentary, we are building – we built capital back very quickly here in the first quarter up to 10.7. We were kind of projecting that to be closer to 10.5, and, of course, lower risk-weighted assets is what drove that extra kind of 20 basis points of CET1 here in the first quarter. But with the growth that we're anticipating from all of the things that Jeff has discussed, we expect that to slow down a little, the growth in CET1. But like I said, all of that being said, we do have today 900,000 shares available for repurchase. I think that now that we're above 10.5% our target, I think that it offers us more flexibility to evaluate how we can, you know, deploy that capital. But as Jeff said, you know, with the growth opportunity we have organically, you know, we're going to continue to evaluate there.

Russell Gunther, Analyst — Stevens

Okay. Helpful, Dan. Thank you guys for taking my questions. Thank you.

Operator

Once again, if you have a question, please press star, then one. Your next question comes from Daniel Tamayo with Raymond James. Please go ahead.