WesBanco, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Dollar figures are in millions unless otherwise noted. Unaudited consolidated results.
Business context and financial condition
WesBanco is a multi-state banking company operating 141 branches in West Virginia, Ohio and western Pennsylvania, with community banking and trust and investment services segments. The filing compares Q2 and first-half 2016 results with the same 2015 periods; balance-sheet changes are generally measured against December 31, 2015.
- At June 30, total assets were $8,397.4, down 0.9% from year-end; portfolio loans were $5,169.8, up 2.1%, while deposits were $5,928.1, down 2.3%.
- Shareholders’ equity was $1,164.4, up 3.8% from year-end. WesBanco reported regulatory capital ratios above “well capitalized” thresholds: company total risk-based capital 14.40% and Bank 13.06%.
- Total borrowings were $1,242.3, including $1,057.0 of Federal Home Loan Bank borrowings. Cash and cash equivalents were $87.6.
Results and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $59.8 | $60.8 | $119.6 | $115.8 |
| Non-interest income | $19.6 | $18.1 | $39.0 | $36.3 |
| Net income | $22.1 | $21.6 | $45.0 | $35.5 |
| Diluted earnings per share | $0.58 | $0.56 | $1.17 | $0.97 |
| Net interest margin, fully taxable-equivalent | 3.30% | 3.44% | 3.29% | 3.49% |
- Q2 net interest income declined 1.7% year over year as margin compression more than offset loan growth. First-half net interest income increased 3.3%, reflecting loan growth and the prior-year ESB acquisition, partly offset by lower margins.
- Q2 net income rose 2.2%; first-half net income rose 26.7%. First-half 2015 included substantially higher merger-related costs. Excluding after-tax merger-related expenses, management reported first-half 2016 net income of $45.4 and diluted EPS of $1.18, versus $42.6 and $1.17 in 2015 (non-GAAP).
- Q2 non-interest income increased 8.4%, helped by $0.6 of securities gains, $0.8 of commercial loan swap fee income, higher electronic banking fees and mortgage gains. First-half securities gains were $1.7 versus $0.02 in 2015. Trust fees declined, which management attributed to lower managed assets, market declines and lower estate fees.
- Reported non-interest expense was $47.4 in Q2, up 1.7%; first-half expense was $92.7, down 7.3% largely because 2015 included $10.8 of restructuring and merger-related expense. Excluding merger-related costs, management said expense increased 2.6% in Q2 and 3.2% year to date.
- Provision for credit losses was $1.8 in Q2 versus $2.7; first-half provision was $4.1 versus $4.0. Q2 net charge-offs were 0.08% of average portfolio loans, down from 0.25% a year earlier.
- Operating cash flow for the first half was $59.9 versus $34.5 in 2015. Investing activities provided $86.5, while financing activities used $145.4; cash increased $0.9 to $87.6.
Material changes, outlook and risks
- Portfolio loans increased $104.0 from year-end, with growth concentrated in commercial real estate land and construction and commercial and industrial lending. Certificates of deposit declined $127.5 and money market deposits $77.0; demand and savings deposits increased. FHLB borrowings rose $15.2.
- Credit indicators improved: non-performing loans were $41.4 (0.80% of portfolio loans), down from $44.9 (0.89%) at year-end; non-performing assets were $45.9 (0.55% of assets), down from $50.8 (0.60%). The allowance for loan losses was $43.3, or 0.84% of portfolio loans.
- Management said the low-rate environment, loan repricing and competitive pricing pressure could continue to weigh on margins; it anticipated some near-term margin decline. Its stated base expectations assumed no further short-term Federal Reserve rate increases in the remainder of 2016 or first half of 2017, while noting uncertainty around rates and economic conditions. The rate-sensitivity model projected net interest income would rise 4.1% under an immediate 100-basis-point increase and fall 3.0% under a 100-basis-point decrease over 12 months; these are model scenarios, not earnings guidance.
- On May 3, 2016, WesBanco announced an agreement to acquire Your Community Bankshares (YCB), a company with approximately $1.6 billion of assets and 33 branches. The announced transaction value was approximately $221 million; closing was expected in Q3 or Q4 2016, subject to regulatory and YCB shareholder approvals. Integration, approvals, timing, cost savings and potential disruption were identified risks. Management also described managing assets to remain below $10 billion after the acquisition to avoid certain regulatory costs.
- Energy-related lending exposure was approximately $45 million in core energy industries and a further $59 million in ancillary industries. Management noted that lower energy prices could benefit borrowers through lower costs but could also weaken activity in affected sectors.
- Liquidity sources included approximately $1.1 billion of available FHLB credit, a $225.4 million Federal Reserve line (none outstanding), and $250 million of third-party overnight lines, of which $4 million was outstanding. Certificates of deposit totaling $815.2 million were scheduled to mature within 12 months. Off-balance-sheet commitments included $1,165.2 million of credit lines, $208.8 million of approved loans not closed and $22.5 million of letters of credit; many commitments may expire unused.
- Management did not consider pending or threatened legal proceedings likely to result in a material loss. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the YCB transaction received required approvals, closed on schedule and achieved the anticipated integration, cost savings and balance-sheet objectives.
- Whether loan growth and deposit mix can sustain earnings as net interest margin faces loan repricing, competition and funding-cost pressure.
- Credit quality trends, including commercial real estate and energy-related exposures, non-performing loans, criticized/classified loans and allowance adequacy.
- Deposit retention and refinancing needs, especially the $815.2 million of certificates maturing within a year and reliance on FHLB funding.
- The sustainability of earnings excluding merger costs and one-off or variable items, including securities gains and commercial loan swap fees; review the filing’s non-GAAP reconciliation when comparing periods.