WesBanco, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2017. WesBanco is a regional bank holding company operating 172 branches across five states. The September 2016 acquisition of Your Community Bank (YCB) expanded the franchise into Kentucky and southern Indiana; because YCB’s results were included only from its acquisition date in 2016, year-over-year comparisons are not fully like-for-like.
Financial performance and position
- Q3 earnings: Net income was $26.4 million, up from $17.4 million; diluted EPS was $0.60 versus $0.44. Net interest income rose 19.7% to $74.3 million. Non-interest income was $20.9 million, down 0.6%.
- Nine-month earnings: Net income was $78.6 million versus $62.4 million; diluted EPS was $1.78 versus $1.61. Net interest income increased 19.5% to $217.1 million, and non-interest income rose 9.8% to $65.9 million.
- Margins: Net interest margin on a fully taxable-equivalent basis was 3.48% for Q3 and 3.45% for the nine months, compared with 3.32% and 3.30%, respectively, in 2016. Acquisition accretion contributed approximately 12 basis points to the Q3 margin.
- Credit costs and quality: Q3 provision for credit losses was $2.5 million, compared with $2.2 million. The allowance for loan losses was $45.5 million, or 0.71% of portfolio loans. Net charge-offs were 0.12% of average portfolio loans in Q3 versus 0.20% a year earlier. Nonperforming loans were 0.66% of portfolio loans, up from 0.63% at year-end 2016; nonperforming assets were 0.48% of assets, versus 0.49% at year-end.
- Balance sheet at September 30: Assets were $9.918 billion; portfolio loans were $6.373 billion; deposits were $7.101 billion; borrowings totaled $1.345 billion; and shareholders’ equity was $1.395 billion. Since year-end 2016, assets grew 1.3%, portfolio loans 2.0%, deposits 0.9%, and equity 4.0%.
- Cash flow, first nine months: Operating activities provided $93.5 million. Investing activities used $151.7 million, including net loan growth; financing activities provided $40.9 million. Cash and cash equivalents ended at $110.9 million, down $17.3 million from year-end.
- Capital and liquidity: WesBanco and the Bank exceeded regulatory “well-capitalized” thresholds; the company’s total risk-based capital ratio was 14.65% and the Bank’s was 13.31%. Management stated liquidity was sufficient. Available FHLB credit was approximately $1.6 billion; the company also reported $202.5 million of Federal Reserve borrower-in-custody capacity, none outstanding.
Material changes versus comparable periods
- Higher average loan balances, YCB assets, Federal Reserve rate increases, and acquisition-related accretion drove net interest income and margin gains. Average loans increased 17.7% year over year in Q3; management also cited 5.5% organic commercial loan growth over the prior twelve months.
- Q3 non-interest expense fell 3.2% to $55.8 million, primarily because Q3 2016 included $9.9 million of YCB restructuring and merger costs. Excluding merger-related expenses in both periods, Q3 expense increased 16.8%, largely reflecting YCB-related staffing and operating costs. Nine-month expense increased 10.5% as reported.
- Non-interest income was broadly flat in Q3: increased electronic banking fees and deposit service charges were offset largely by lower swap-related income and securities gains. Nine-month fee income benefited from the acquisition and growth in electronic banking and deposit service charges.
- Deposits shifted toward non-interest-bearing and transaction accounts, while certificates of deposit declined 10.8% from year-end. FHLB borrowings rose 4.8%, while other short-term borrowings fell 17.0%.
- Non-accrual loans increased to $35.5 million from $31.8 million at year-end; total nonperforming loans rose to $42.1 million from $39.4 million. Other real estate owned and repossessed assets declined to $5.8 million from $8.3 million.
Outlook, commentary, risks and unusual items
- Outlook: WesBanco gave no formal earnings guidance. Management anticipated one additional short-term federal funds rate increase by year-end 2017 and potentially two more in 2018, while noting that delayed increases or deposit costs rising faster than modeled could pressure future margins. Acquisition-related accretion was expected to decline through 2017.
- Strategic focus: Management aimed to grow variable-rate commercial and home-equity lending, increase transaction-account deposits, sell more residential mortgages into the secondary market, and manage the balance sheet to remain below $10 billion in assets into 2018. Crossing that threshold could trigger additional regulatory costs and requirements.
- Interest-rate sensitivity: The model projected net interest income rising 3.0%, 5.0%, 7.4%, and 10.1% under immediate rate increases of 100, 200, 300, and 400 basis points, respectively, and falling 3.0% under a 100-basis-point decrease. These are model estimates dependent on assumptions about deposit behavior, loan repricing, and prepayments, not forecasts of actual results.
- Risks: The filing highlights economic and credit conditions, interest rates and funding costs, liquidity, regulatory changes, competition, technology and cybersecurity, and market values of debt securities. Management noted that rate floors applied to about 30% of commercial loans, potentially slowing repricing in modestly rising-rate scenarios.
- Contingencies: The company was party to ordinary-course legal matters but did not consider a material loss reasonably possible. Off-balance-sheet commitments included $1.468 billion in lines of credit, $243.7 million in approved but unclosed loans, and $32.3 million in letters of credit; many commitments may expire undrawn.
- Unusual/accounting items: Q3 2016 merger expenses materially affect the reported expense and earnings comparison. A 2017 accounting-policy adoption moved $1.2 million of low-income housing investment amortization into income tax expense from operating expense. Management said several forthcoming accounting standards were not expected to have a material impact, while the expected-credit-loss standard was still under evaluation.
Most important facts for investors to verify
- How much of earnings and margin growth reflects sustainable organic performance versus YCB, purchase-accounting accretion, and interest-rate changes.
- Whether deposit repricing and funding costs erode margin as rates rise, and whether modeled rate sensitivity assumptions hold.
- Credit trends behind rising non-accrual loans and nonperforming-loan ratios, including acquired-loan exposures and allowance adequacy.
- Progress on expense control and the costs, timing, and effects of managing below the $10 billion asset threshold.
- Liquidity and funding needs, including certificate maturities, borrowing mix, and the potential drawdown of customer commitments.