WesBanco, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2020. WesBanco is a multi-state banking company operating in six states. Results include Old Line Bancshares (OLBK), acquired in November 2019; comparisons with 2019 are therefore affected by the acquisition. Amounts below are unaudited and generally in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $119.0 | $98.5 | $239.2 | $196.8 |
| Provision for credit losses | $61.8 | $2.7 | $91.7 | $5.3 |
| Non-interest income | $32.9 | $31.2 | $60.9 | $58.9 |
| Non-interest expense | $85.5 | $72.0 | $176.8 | $146.4 |
| Net income | $4.5 | $44.8 | $27.9 | $85.2 |
| Diluted EPS | $0.07 | $0.82 | $0.41 | $1.56 |
| Net interest margin, fully taxable equivalent | 3.32% | 3.67% | 3.42% | 3.68% |
Q2 total revenue, calculated as net interest income plus non-interest income, was approximately $151.9 million, versus $129.6 million a year earlier. The margin and revenue comparison reflects larger balances from OLBK and PPP lending, alongside lower interest rates and higher credit-loss provisioning.
- Balance sheet at June 30: Assets were $16.76 billion, up 6.6% from year-end 2019. Portfolio loans were $11.07 billion, including $836.8 million of PPP loans; deposits were $12.19 billion, up 10.7%. Cash and due from banks was $890.3 million.
- Credit reserves and asset quality: Loan allowance was $168.5 million, or 1.52% of portfolio loans (1.65% excluding PPP loans); allowance for loan commitments was $10.7 million. Non-performing loans totaled $40.6 million, 0.37% of portfolio loans, versus $50.3 million at year-end. Loans at least 30 days past due and accruing were $67.5 million, including $36.9 million 90 days or more past due.
- Debt and liquidity: Total borrowings were $1.71 billion, down 9.8% from year-end, comprising $1.13 billion of FHLB borrowings, $390.8 million of other short-term borrowings and $192.1 million of subordinated and junior subordinated debt. The company reported $3.4 billion of available FHLB credit and a $200.6 million Federal Reserve borrowing line, neither of the latter line balances outstanding. Management stated it believed liquidity was adequate.
- Cash flows for the first six months: Operating activities provided $89.4 million; investing activities used $370.6 million; financing activities provided $936.7 million. Cash and restricted cash increased $655.5 million to $890.3 million.
- Capital: Shareholders’ equity was $2.57 billion, down 0.9% from year-end. At June 30, the company reported a 9.09% Tier 1 leverage ratio and 15.33% total risk-based capital ratio; the bank reported 8.99% and 13.56%, respectively. Both were above the filing’s well-capitalized thresholds. WesBanco elected the five-year regulatory capital transition for CECL.
Changes versus the prior comparable period
- Q2 net income fell to $4.5 million from $44.8 million, primarily amid the $61.8 million credit-loss provision, reflecting CECL and the worsened economic outlook. Q2 provision in 2019 was $2.7 million.
- Net interest income rose 20.9% in Q2, mainly from OLBK and PPP-related asset growth. Average earning assets increased 33.7%; average deposits rose 35.3%. Fully taxable-equivalent net interest margin declined 35 basis points to 3.32%, as asset yields fell more than funding costs.
- Q2 non-interest income rose 5.5%. Mortgage banking income increased to $7.5 million from $1.6 million, while deposit service charges and electronic banking fees declined 30.2% and 43.2%, respectively.
- Q2 non-interest expense increased 18.8%, primarily reflecting OLBK-related staffing, locations and operating costs. The six-month total also included $5.6 million of merger-related expense.
- CECL adoption on January 1 increased the allowance by $41.4 million and reduced retained earnings after tax by $26.6 million. At June 30, the company’s blended unemployment forecast projected a peak of 9.4% in Q4 2020.
Outlook, commentary, risks and unusual items
- No specific earnings or full-year numerical guidance was provided. Management expected the core net interest margin to decline a few basis points over the remainder of 2020, with lower asset yields partly offset by lower deposit and wholesale funding costs. PPP forgiveness and related fee recognition were expected to modestly support margin in the second half.
- WesBanco had modified approximately 3,540 loans totaling $2.1 billion under COVID-19 relief provisions; $1.9 billion remained in deferral at June 30. These qualifying modifications were not classified as TDRs or past due under applicable CARES Act and regulatory guidance. Hospitality and retail exposures were among the credit factors considered.
- Commercial exposures included $774.8 million to hotels, $471.5 million to retail businesses, and $240.2 million to restaurants. About $462.8 million of hotel loans were in deferral. The filing cautioned that pandemic duration and economic effects were uncertain and could worsen credit losses, liquidity, capital and earnings.
- Management completed an interim goodwill impairment assessment and found no impairment of goodwill carried at approximately $1.1 billion; quarterly reassessment could continue if conditions warrant.
- The company suspended open-market share repurchases in early March, after purchasing 786,010 shares for $25.0 million in the first half. It increased the quarterly dividend to $0.32 per share. A branch rationalization review was expected to conclude by year-end, and a seven-year core technology-services contract was to begin conversion later in 2020.
- Management reported no material loss from pending or threatened legal proceedings as reasonably possible. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How CECL assumptions, unemployment forecasts and COVID-related deferrals translate into future provisions, charge-offs and allowance adequacy.
- Performance and repayment outcomes for deferred loans, particularly hotel, retail, restaurant and commercial real estate borrowers.
- Whether the margin outlook, PPP fee recognition and lower deposit costs offset continued repricing pressure on earning assets.
- Deposit stability, liquidity availability and capital ratios, including the effect of PPP balances and the CECL regulatory transition.
- OLBK integration costs, the pending branch review and whether goodwill remains unimpaired as economic conditions evolve.