WesBanco, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. WesBanco is a regional bank holding company operating 194 branches across West Virginia, Ohio, western Pennsylvania, Kentucky, southern Indiana and Maryland. It reports community banking and trust and investment services segments. This unaudited filing covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are to December 31, 2022.
Financial performance and condition
| Metric | Q2 2023 | Comparable period / change |
|---|---|---|
| Net interest income | $121.6 million | $112.2 million in Q2 2022, up 8.3% |
| Net interest margin | 3.15% (3.18% fully taxable-equivalent) | 3.00% (3.03% fully taxable-equivalent) in Q2 2022 |
| Net income available to common shareholders | $42.3 million; diluted EPS $0.71 | $40.2 million; diluted EPS $0.67 in Q2 2022 |
| Provision for credit losses | $3.0 million | $0.8 million provision reversal in Q2 2022 |
| Non-interest income | $31.8 million | $27.0 million in Q2 2022, up 18.0% |
| Non-interest expense | $96.4 million | $87.0 million in Q2 2022, up 10.8% |
For the six months ended June 30, net interest income was $245.9 million, versus $219.9 million in 2022; common-shareholder income was $82.2 million versus $81.8 million, and diluted EPS was $1.38 versus $1.34. Management’s non-GAAP measure excluding after-tax restructuring and merger-related costs was $84.7 million, or $1.43 per diluted share, compared with $83.1 million, or $1.36, in the prior-year half.
- Balance sheet: Assets were $17.36 billion, up 2.5% from year-end; portfolio loans were $11.13 billion, up 4.0%; deposits were $12.86 billion, down 2.1%; and shareholders’ equity was $2.46 billion, up 1.6%.
- Funding and liquidity: Cash and due from banks totaled $562.3 million. Total borrowings were $1.76 billion, up 57.2% from year-end, primarily from a $675 million increase in Federal Home Loan Bank borrowings. Management reported $3.3 billion of available FHLB credit and $235 million of overnight lines at third-party banks, with none drawn on the latter at quarter-end.
- Cash flows, first half: Operating activities provided $57.9 million; investing activities used $225.3 million; financing activities provided $321.2 million. Cash increased $153.9 million to $562.3 million.
- Credit quality: Nonperforming loans were $31.6 million, or 0.28% of portfolio loans. The allowance for loan losses was $120.2 million, 1.08% of portfolio loans; including unfunded commitments, total allowance was $130.3 million. Criticized and classified loans were 1.68% of portfolio loans, down from 2.34% at year-end 2022.
- Capital and distributions: WesBanco’s and the Bank’s regulatory capital ratios exceeded “well-capitalized” thresholds. The common dividend declared was $0.35 per share for the quarter. The filing reports 59.36 million common shares outstanding at June 30.
Material changes and management commentary
- Higher market rates lifted asset yields and interest income, but also raised funding costs. Q2 interest income increased 48.6% year over year while interest expense increased $48.3 million; the cost of interest-bearing liabilities rose 189 basis points. Average loans grew 10.8% and average deposits declined 6.1% year over year.
- Loan growth and adjustments to regional economic assumptions and loan concentrations contributed to the higher credit-loss provision. Management cited risk-rating upgrades as a primary reason criticized and classified balances declined.
- Q2 non-interest income benefited from higher swap fees, bank-owned life insurance income, securities results and a $1.1 million recovery of an asset previously written off. Mortgage banking income fell 54.7% year over year, reflecting lower margins and mortgage production, which declined 36.6%.
- Expense growth reflected higher staffing and compensation, employee benefits, FDIC insurance, technology and equipment costs. Employee benefits also included deferred-compensation plan effects that were partly offset by securities valuation movements.
- Available-for-sale securities declined $199.9 million from year-end, primarily as maturities and paydowns helped fund loan growth. At June 30, the portfolio had $349.0 million of gross unrealized losses; after-tax unrealized losses in accumulated other comprehensive loss were $264.2 million. Held-to-maturity securities had $152.2 million of pretax unrealized losses. Management attributed these losses primarily to market-rate movements, stated the securities were paying as contracted, and said it did not intend, and was not more likely than not required, to sell loss-position securities before recovery.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management describes ongoing sensitivity to interest rates, deposit competition and outflows, inflation, economic conditions, loan demand and credit performance. Its interest-rate model estimated a 5.0% increase in one-year net interest income under an immediate 200-basis-point rate rise and a 15.5% decrease under a 400-basis-point decline; the filing cautions that model assumptions may not predict actual results. Management also identifies liquidity, securities marketability, commercial real estate and consumer credit, regulatory changes, cybersecurity, fraud and competition as risks.
- Uninsured deposits were $3.9 billion, or 30% of deposits; excluding public funds secured by pledged securities, uninsured deposits were $3.0 billion, or 24%.
- Certificates of deposit totaling $646.7 million, at a weighted-average cost of 1.95%, were scheduled to mature within 12 months. Management notes that deposit flows depend on rates, competitors and customer behavior.
- Loan commitments and guarantees totaled approximately $5.1 billion. The company says many commitments are expected to expire undrawn. It reported no material loss from pending or threatened legal proceedings as reasonably possible.
- WesBanco completed its transition away from LIBOR before its June 30, 2023 discontinuance. Disclosure controls were assessed as effective, and no material changes in internal control over financial reporting were reported for the quarter.
Important facts for investors to verify
- Whether deposit trends, uninsured deposit levels and the cost or availability of wholesale funding change materially after quarter-end.
- How net interest margin and earnings respond to further rate changes, deposit repricing and loan or securities mix shifts.
- Credit performance in commercial real estate and other loan categories, including criticized/classified loans, delinquencies, charge-offs and allowance assumptions.
- The impact of unrealized securities losses on capital and liquidity, and any need to sell or pledge securities.
- Whether higher operating expenses and lower mortgage activity persist, and how much reported earnings depend on nonrecurring items such as the asset recovery and securities valuation changes.
- That nonperforming-loan comparisons with prior periods are affected by adoption of ASU 2022-02, which eliminated the TDR classification beginning January 1, 2023.