Wesbanco, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Wesbanco is a multi-state bank holding company operating 205 branches across six states, with community banking and trust and investment services segments.
Financial results and position
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Net interest income | $107.7 million | $116.5 million |
| Net interest margin, fully taxable-equivalent | 2.95% | 3.27% |
| Non-interest income | $30.4 million | $33.2 million |
| Non-interest expense | $87.5 million | $86.3 million |
| Net income | $44.1 million | $73.1 million |
| Net income available to common shareholders; diluted EPS | $41.6 million; $0.68 | $70.6 million; $1.05 |
| Operating cash flow | $47.7 million | $52.0 million |
| Total assets at period end | $17.10 billion | $16.93 billion at Dec. 31, 2021 |
| Total deposits at period end | $13.80 billion | $13.57 billion at Dec. 31, 2021 |
| Total borrowings at period end | $563.2 million | $458.7 million at Dec. 31, 2021 |
| Shareholders’ equity at period end | $2.55 billion | $2.69 billion at Dec. 31, 2021 |
Net interest income plus non-interest income was $138.1 million, down from $149.7 million year over year. The provision for credit losses was a benefit of $3.4 million, versus a $28.0 million benefit in Q1 2021. Net cash increased $118.1 million during the quarter to $1.37 billion. Net cash used in investing activities was $181.4 million; financing activities provided $251.8 million.
Loans held for investment totaled $9.73 billion, broadly unchanged from year-end; excluding PPP loans, portfolio loans increased 0.9% from year-end, or 3.6% annualized. The allowance for loan losses was $117.9 million, or 1.21% of portfolio loans (1.22% excluding PPP loans). Nonperforming loans were $37.1 million, or 0.38% of portfolio loans. Annualized net loan charge-offs were zero.
Liquidity included $1.37 billion in cash and cash equivalents and approximately $3.8 billion of available FHLB borrowing capacity. Deposits funded 80.7% of assets. Wesbanco reported regulatory capital ratios above “well-capitalized” minimums: the company’s common equity Tier 1 ratio was 12.01%, and the Bank’s was 13.21%.
Material changes versus comparable periods
- Common net income fell 41% and diluted EPS declined from $1.05 to $0.68. Management attributed weaker results to lower net interest income and non-interest income, and to a smaller credit-loss benefit than in Q1 2021.
- Net interest income declined 7.5%; the fully taxable-equivalent margin fell 32 basis points. Lower loan yields, lower PPP and acquisition-related accretion, and a greater securities mix weighed on results. Lower deposit and borrowing costs partially offset these pressures.
- Non-interest income fell 8.5%, primarily from lower swap fee and valuation income and mortgage banking income. Higher service charges, electronic banking fees and bank-owned life insurance income provided partial offsets.
- Average loans fell 10.8% year over year, mainly reflecting PPP loan forgiveness and commercial real estate payoffs. Average securities increased 40.7%, supported by deposit-related excess liquidity.
- Total deposits rose 1.7% from year-end, led by growth in savings and money market accounts; certificates of deposit fell 6.3%.
- Borrowings increased 22.8%, primarily due to a $150 million subordinated debt issuance, partly offset by repayment of maturing FHLB advances.
- Shareholders’ equity declined 5.4%, mainly because of a $106.2 million other comprehensive loss and $62.3 million of share repurchases, partly offset by earnings net of dividends. The decline in OCI primarily reflected rising-rate-related unrealized losses on available-for-sale securities.
Outlook, commentary and risks
- Outlook: Management expected the core net interest margin to stabilize in Q2 and potentially rise in the second half of 2022 if anticipated Federal Reserve rate increases occurred. Higher asset yields and reinvestment rates were expected to be partly offset by deposit repricing, higher wholesale funding costs, declining purchase-accounting accretion and the fading benefit of PPP loan fees. This is conditional commentary, not formal earnings guidance.
- Securities and rates: Gross unrealized securities losses reached $220.9 million at quarter-end, up from $40.3 million at year-end; $111.0 million of after-tax net unrealized losses on available-for-sale securities was reflected in accumulated OCI. Management characterized losses as rate-driven and temporary, and said it did not intend, nor expect to be required, to sell loss-position securities before recovery. Held-to-maturity securities had a $64.2 million pre-tax net unrealized loss.
- Credit and concentrations: Commercial real estate represented 57.2% of portfolio loans. Hospitality exposures remain a monitoring focus; individually evaluated loans included eleven hotel loans totaling $39.5 million. The allowance reflects macroeconomic forecasts and qualitative adjustments, including COVID-19 and hospitality factors. About $51.5 million of COVID-related modified loans remained in deferral at quarter-end.
- Funding and commitments: Commitments to extend credit and related guarantees totaled approximately $4.2 billion; actual funding needs may be lower because commitments can expire undrawn. Management said liquidity was sufficient, while noting deposit flows, funding access and loan demand can change.
- Other items: Wesbanco repurchased 1.72 million shares for $62.3 million during the quarter and raised its quarterly common dividend to $0.34 per share. It issued $150 million of subordinated debt at a 3.75% fixed rate for five years, then a floating rate, maturing in 2032. Eleven additional branch closures were planned later in 2022, with $1.6 million of Q1 restructuring expense related to branch optimization.
- Principal risks: Management highlighted changing economic conditions and inflation, interest-rate and spread movements, credit losses, liquidity, securities fair values, regulation, competition, cybersecurity, fraud, technology and COVID-19 effects. Approximately $1.7 billion of loans referenced LIBOR, including $1.4 billion maturing after June 30, 2023; the company selected 1M Term SOFR as an initial replacement rate and continued its transition work.
- Management stated that material loss from pending or known threatened litigation was not reasonably possible. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether deposit and loan growth continue, particularly excluding PPP balances, and how commercial real estate and hospitality credit quality develops.
- Whether margin performance follows management’s conditional outlook as market rates, deposit pricing, funding costs and PPP accretion change.
- The effect of rising rates on securities values, accumulated OCI, capital and any potential need to sell securities.
- Future credit-loss provisions, nonperforming loans, criticized and classified loans, and modified-loan performance.
- Execution and costs of planned branch closures, capital allocation through repurchases and dividends, and the subordinated debt’s future floating-rate cost.
- Progress converting LIBOR-linked contracts to replacement rates and any associated operational or customer impacts.