WesBanco, Inc. — Q3 2011 Form 10-Q
Business context and period: Regional bank holding company operating 112 branches in West Virginia, Ohio and western Pennsylvania, with community banking and trust and investment services segments. This unaudited report covers the quarter and nine months ended September 30, 2011; balance-sheet comparisons are to December 31, 2010. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $42.9 | $42.0 | $127.4 | $123.8 |
| Non-interest income | $14.6 | $15.0 | $44.1 | $44.6 |
| Net income | $11.0 | $9.2 | $33.2 | $25.3 |
| Diluted EPS | $0.41 | $0.34 | $1.25 | $0.95 |
| Provision for credit losses | $10.8 | $11.8 | $25.7 | $35.0 |
| Non-interest expense | $33.6 | $35.7 | $104.8 | $105.6 |
- Combined net interest and non-interest income was $57.5 million in Q3 and $171.6 million year to date, versus $57.0 million and $168.4 million, respectively, in 2010. Net income rose 20.3% for the quarter and 31.1% year to date.
- Fully taxable-equivalent net interest margin was 3.67% in Q3 and 3.69% year to date, up 6 and 11 basis points year over year. The financial statements’ non-tax-equivalent margin figures were 3.54% and 3.55%, respectively.
- At September 30, total assets were $5.50 billion, loans net of allowance were $3.19 billion, deposits were $4.36 billion, total borrowings were $475.4 million, and shareholders’ equity was $634.4 million. Total assets increased 2.6% and equity 4.5% from year-end 2010.
- Cash and due from banks was $145.5 million, versus $79.1 million at year-end. For the nine months, operating cash flow was $78.9 million; investing activities used $113.9 million and financing activities provided $101.4 million, producing a $66.4 million increase in cash.
- Deposits increased 4.4% from year-end, led by non-interest-bearing demand deposits (+14.5%), interest-bearing demand (+18.8%), and savings (+10.7%); certificates of deposit fell 5.7%. FHLB borrowings declined 30.4%. Reported capital ratios remained above regulatory minimums: holding-company Tier 1 leverage 8.69% and total risk-based capital 13.74%; bank ratios were 8.14% and 12.98%.
Changes, outlook, risks and unusual items
- Management attributed improved earnings and margin to lower funding costs, a shift toward lower-cost deposits, and repayment of higher-cost FHLB advances. Average earning assets were nearly unchanged, while interest income fell as asset yields declined; interest expense decreased 19.3% in Q3 and 23.6% year to date.
- Credit indicators were mixed. The provision declined year over year and management described credit quality as gradually improving, but nonaccrual loans rose to $56.8 million from $48.8 million at year-end. Total nonperforming loans were $84.2 million, down from $96.3 million; nonperforming assets were 1.62% of assets versus 1.95%. The allowance for loan losses fell to $55.1 million, or 1.70% of loans, from $61.1 million, or 1.86%.
- In September, WesBanco sold impaired and classified loans with a $17.2 million book value for $6.9 million, recording $10.3 million in charge-offs. The sale included $6.8 million of nonaccrual loans and $9.9 million of accruing TDRs; it contributed to lower reported problem-loan balances and the lower allowance. Year-to-date net charge-offs were $32.6 million, versus $36.8 million a year earlier.
- Non-interest income edged lower: fewer securities and mortgage-loan sale gains and lower deposit service charges were partly offset by higher trust and electronic banking fees. Non-interest expense decreased 5.8% in Q3, aided by lower employee benefits, FDIC insurance expense, and a $0.7 million recovery of an expense related to retail customer fraud. The effective tax rate increased to an estimated 19.2% from 8.9% in 2010, largely reflecting a higher share of taxable income.
- Management gave no specific earnings or growth forecast. It expected net interest margin could be slightly pressured through the remainder of 2011 as loan runoff and securities maturities were reinvested at lower rates; it did not anticipate short-term rates rising until mid-to-late 2013. The model projected net interest income down 4.1% under an immediate 100-basis-point rate decline, and up 2.2%, 2.0%, and 1.2% under immediate increases of 100, 200, and 300 basis points.
- Liquidity sources included about $1.8 billion of estimated sources within a year and approximately $1.0 billion of remaining FHLB borrowing capacity. Risks include deposit outflows and CD maturities, credit losses (especially commercial real estate), interest-rate and securities valuation changes, economic conditions, competition, fraud/cyber risks, and evolving regulation, including Dodd-Frank and Basel III. Management said current liquidity was sufficient and legal proceedings were not expected to have a material adverse effect.
- Other notable items: commitments to extend credit were $746.7 million, up from $648.8 million at year-end; $721.9 million of CDs were scheduled to mature within a year. The company increased its quarterly dividend to $0.16 per share in August. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether credit quality and nonaccrual trends improve after separating underlying performance from the third-quarter loan sale and its $10.3 million charge-off.
- Whether the reduced allowance remains adequate as problem loans, delinquencies, and commercial real estate exposures evolve.
- Whether margin and earnings can be sustained amid falling asset yields, expected low short-term rates, and upcoming deposit repricing and maturities.
- How deposit growth, the large CD maturity schedule, and reliance on callable or wholesale funding affect liquidity and funding costs.
- The ultimate impact of Dodd-Frank, Basel III, and debit-card interchange rules on capital, expenses, and fee income; management noted that impacts and implementation details remained uncertain.