WesBanco, Inc. — Q2 2021 Form 10-Q
Business context and reporting period
WesBanco is a multi-state bank holding company operating 212 branches across six states, with community banking and trust and investment services segments. This unaudited filing covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are to December 31, 2020.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net income available to common shareholders | $68.1 million | $4.5 million | $138.6 million | $27.9 million |
| Diluted EPS | $1.01 | $0.07 | $2.06 | $0.41 |
| Net interest income | $115.9 million | $119.0 million | $232.3 million | $239.2 million |
| Net interest margin, fully taxable-equivalent | 3.12% | 3.32% | 3.19% | 3.42% |
| Non-interest income | $36.1 million | $32.9 million | $69.3 million | $60.9 million |
| Non-interest expense | $83.8 million | $85.5 million | $170.1 million | $176.8 million |
- Credit provision: Q2 included a $21.0 million provision benefit, compared with $61.8 million of expense in Q2 2020. The first half recorded a $49.0 million benefit versus $91.7 million of expense in the prior-year period. Management attributed the release mainly to improved economic and unemployment forecasts and lower COVID-related qualitative adjustments.
- Balance sheet at June 30: Total assets were $17.0 billion; deposits were $13.3 billion; portfolio loans were $10.4 billion gross and $10.2 billion net of allowance; cash was $846.3 million; and shareholders’ equity was $2.78 billion.
- Funding and liquidity: Total borrowings were $641.8 million, down 34.7% from year-end. Cash and due from banks plus securities totaled about $4.73 billion. The company reported $4.2 billion of available FHLB credit capacity, no outstanding draws on its $162.1 million Federal Reserve borrowing line or $275 million of overnight bank lines, and $196.9 million of parent-company cash.
- Credit quality and capital: The loan allowance was $140.7 million, or 1.36% of portfolio loans (1.43% excluding PPP loans); nonperforming loans were $42.0 million, or 0.41% of total loans. WesBanco and its bank subsidiary reported capital ratios above regulatory well-capitalized thresholds; the bank’s common equity Tier 1 ratio was 14.71%.
- Cash flow and shareholder returns: First-half operating cash flow was $229.3 million, investing cash outflow was $734.7 million, and financing cash inflow was $446.2 million. Cash declined $59.1 million. The quarterly common dividend was raised to $0.33 per share; the company repurchased $55.6 million of shares in the first half.
Material changes versus comparable periods
- Reported earnings rose sharply year over year, principally because the credit-loss provision shifted from substantial expense in 2020 to a benefit in 2021. The comparison should not be read as equivalent growth in recurring operations.
- Net interest income fell 2.7% in Q2 and 2.9% for the first half. Lower loan and securities yields outweighed lower funding costs; the fully taxable-equivalent margin contracted 20 basis points in Q2.
- Deposits grew $888.9 million, or 7.2%, from year-end, while portfolio loans fell $432.0 million, or 4.0%. PPP forgiveness, customer loan paydowns and lower commercial line utilization contributed to the loan decline. Securities rose $1.16 billion, or 42.5%, as excess deposits were invested.
- Non-interest income increased 9.9% in Q2, including a $4.1 million gain on a long-held investment sold following the investee’s acquisition. Non-interest expense declined 2.0%; lower FDIC and franchise-tax costs more than offset higher equipment and software expense.
Outlook, risks, contingencies and unusual items
- Management expected the core net interest margin to decline by several basis points over the remainder of 2021, as securities purchases and loan repricing pressure asset yields; deposit and wholesale funding cost reductions and PPP fee accretion were expected to provide some offset. No formal EPS guidance is stated in the supplied filing text.
- Management indicated that continued favorable unemployment projections could lead to further, potentially less significant, allowance reductions, subject to changes in economic forecasts, hotel conditions and other model factors.
- COVID-19 modifications: approximately 3,553 loans totaling $2.2 billion had been modified under applicable relief provisions; $151.6 million remained in deferral at quarter-end, primarily commercial hospitality loans. These eligible modifications were not treated as past due or TDRs under the stated guidance.
- Credit exposures merit attention: commercial real estate was 54.9% of portfolio loans; hotel industry total exposure was $763.6 million, and $139.6 million of hotel loans remained in deferral. Criticized and classified loans were 4.4% of portfolio loans; management cited hospitality downgrades and changes to internal classification as factors.
- Interest-rate risk is material. The company’s model estimated net interest income would increase 4.8%, 8.8% and 13.0% under immediate +100, +200 and +300 basis-point shocks, respectively. Management cautioned that modeling assumptions and actual customer behavior may produce different results.
- Unusual items included the investment-related gain, restructuring costs for branch closures and a core-system conversion, and valuation changes on swaps and securities. Six branches closed in July 2021; management estimated $6.0 million to $6.5 million of gross phased-in annual cost savings, with about half reinvested in technology and digital services.
- Management said pending or threatened legal matters were not reasonably expected to result in a material loss. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of reported earnings and any future allowance releases are recurring, versus sensitive to economic forecasts and CECL assumptions.
- Whether the expected margin pressure, asset repricing and reinvestment yields develop as management described.
- Performance and repayment trends in hospitality and other commercial real estate, including loans emerging from COVID-related deferrals.
- Deposit persistence and liquidity needs as stimulus-related balances change, and the effect of continued securities growth and rate movements on accumulated other comprehensive income.
- Actual savings, implementation costs and operational effects from branch optimization and the planned core-system conversion.
- Share repurchases, dividend sustainability, and capital ratios after considering the CECL regulatory-capital transition.