WESBANCO INC quarterly report, Q3 FY2016

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WesBanco, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2016. Unless otherwise stated, dollar amounts are in millions. WesBanco is a regional bank holding company; results include Your Community Bankshares (YCB) from its September 9, 2016 acquisition date and ESB from February 10, 2015.

Financial performance and condition

  • Third-quarter earnings: Net interest income was $62.0 million, up 2.3% year over year; non-interest income was $21.0 million, up 15.6%. Net income fell to $17.4 million from $22.2 million, and diluted EPS was $0.44 versus $0.58. The quarter included $9.9 million of restructuring and merger-related expense, principally associated with YCB.
  • Nine-month earnings: Net interest income was $181.6 million versus $176.4 million; non-interest income was $60.0 million versus $54.4 million. Net income was $62.4 million versus $57.8 million, and diluted EPS was $1.61 versus $1.55. Excluding after-tax merger-related expenses, management reported net income of $69.3 million versus $64.9 million and diluted EPS of $1.79 versus $1.75; these are non-GAAP measures.
  • Margins and costs: Fully taxable-equivalent net interest margin was 3.32% in Q3 2016 versus 3.36% a year earlier, and 3.30% for the first nine months versus 3.44%. Management cited loan repricing, competitive loan pricing and the low-rate environment as pressures; higher funding costs also weighed on margin.
  • Credit: Provision for credit losses was $2.2 million in Q3 and $6.4 million year to date, versus $1.8 million and $5.8 million, respectively. Net charge-offs were 0.20% of average portfolio loans in Q3 and 0.14% year to date, down from 0.30% and 0.24%. Non-performing loans were $39.3 million, or 0.63% of portfolio loans, compared with $44.9 million, or 0.89%, at year-end 2015. The allowance for loan losses was $42.8 million, or 0.69% of portfolio loans.
  • Balance sheet: Total assets were $9.81 billion, up 15.8% from December 31, 2015; portfolio loans were $6.24 billion, up 23.1%, and deposits were $7.13 billion, up 17.6%. YCB contributed about $1.0 billion of loans and $1.2 billion of deposits. Management said organic deposits declined 2.1% over the period.
  • Debt, liquidity and capital: Total borrowings were $1.25 billion, compared with $1.23 billion at year-end; FHLB borrowings were $950.8 million. Cash and due from banks totaled $116.1 million. Management identified approximately $1.97 billion in asset-based liquidity sources expected within one year and reported substantial additional borrowing capacity. Parent-company and bank common equity tier 1 ratios were 11.07% and 11.99%, respectively; management said both entities exceeded “well-capitalized” thresholds.
  • Cash flow and shareholder returns: For the first nine months, operating cash flow was $89.2 million, investing activities provided $199.5 million, and financing activities used $259.2 million; cash rose $29.4 million to $116.1 million. Dividends declared were $0.72 per share for the period; the quarterly rate increased to $0.24 per share in February 2016.

Material changes and unusual items

  • YCB was acquired for approximately $220.5 million, funded with $177.1 million in WesBanco shares and $43.3 million in cash. The preliminary purchase allocation included $90.6 million of goodwill and $12.0 million of core deposit intangibles. YCB’s balance-sheet fair values and purchase accounting remained preliminary; its post-acquisition revenue and net income were not separately identifiable.
  • YCB issuance added 5.4 million shares. Outstanding shares at September 30 were 43.9 million, versus 38.5 million at December 31, 2015.
  • Q3 non-interest expense included $9.9 million of YCB-related merger costs. Nine-month merger-related expense was $10.6 million, compared with $11.0 million in 2015, which related to ESB. WesBanco expected approximately $2.5 million of additional merger-related expense in Q4 2016.
  • Non-interest income benefited from commercial loan swap fees and securities gains. Nine-month net securities gains were $2.3 million versus $0.1 million in 2015; management also cited $2.2 million of commercial loan swap fee income for the period.

Outlook, commentary and risks

  • Management expected the YCB asset and funding mix, together with purchase-accounting effects, to increase net interest margin by approximately 5 to 10 basis points. It anticipated one additional short-term Federal Funds rate increase in the remainder of 2016 and potentially one or two in 2017; these are management expectations, not formal earnings guidance.
  • Management said it intended to manage the balance sheet below $10 billion in assets for some period, currently anticipated through the end of 2017 or into 2018, to avoid certain costs associated with the Dodd-Frank Act.
  • Key uncertainties include successful and timely YCB integration and realization of expected cost savings or revenue synergies; interest-rate, margin and liquidity changes; credit losses; economic and competitive conditions; regulation; cybersecurity and fraud; and securities valuation. Management stated that no material loss from pending or known threatened legal proceedings was reasonably possible.
  • The filing says management’s disclosure controls were effective at the reasonable-assurance level and reports no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Track YCB integration, final purchase accounting, realized synergies, and actual merger costs against the expected additional Q4 expense.
  • Assess whether margin and earnings trends support management’s stated post-acquisition margin outlook, particularly as funding costs and deposit mix change.
  • Monitor acquired-loan performance, criticized and classified credits, past-due loans, the allowance, and commercial real estate and energy-related exposures.
  • Review deposit retention and the $862 million of certificates of deposit scheduled to mature within 12 months, alongside borrowing needs and liquidity capacity.
  • Verify the company’s progress toward its under-$10-billion asset objective and the related regulatory-cost rationale; the filing does not quantify the expected savings.