WesBanco, Inc. — Q1 2016 Form 10-Q
Business context and period. WesBanco is a regional bank holding company operating in West Virginia, Ohio and western Pennsylvania. This unaudited filing covers the three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015, and income and cash-flow comparisons are with Q1 2015. Q1 2015 included WesBanco’s acquisition of ESB, completed February 10, 2015, so year-over-year comparisons reflect different periods of acquired operations.
Financial performance and condition
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior date |
|---|---|---|
| Net interest income | $59.8 million | $55.0 million, Q1 2015 |
| Net interest margin, fully taxable equivalent | 3.29% | 3.59%, Q1 2015 |
| Non-interest income | $19.4 million | $18.2 million, Q1 2015 |
| Non-interest expense | $45.3 million | $53.4 million, Q1 2015 |
| Net income / diluted EPS | $22.9 million / $0.60 | $13.9 million / $0.40, Q1 2015 |
| Total assets | $8.57 billion | $8.47 billion, December 31, 2015 |
| Portfolio loans, gross | $5.14 billion | $5.07 billion, December 31, 2015 |
| Deposits | $6.14 billion | $6.07 billion, December 31, 2015 |
| Total borrowings | $1.22 billion | $1.23 billion, December 31, 2015 |
| Cash and cash equivalents | $168.0 million | $86.7 million, December 31, 2015 |
| Operating cash flow | $40.3 million | $36.1 million, Q1 2015 |
- Net income rose 64.7% year over year, but the comparison was materially affected by $9.7 million of merger-related expense in Q1 2015; Q1 2016 had none. Excluding those after-tax merger costs, disclosed non-GAAP net income increased 13.2% to $22.9 million, and diluted EPS was $0.60 versus $0.59.
- Net interest income grew 8.9%, supported by higher average earning assets and loan balances, but the fully taxable equivalent margin contracted 30 basis points. Management attributed pressure to asset and funding mix, lower loan and securities yields, and increased FHLB funding costs.
- Non-interest income increased 6.6%, including $1.1 million of net securities gains versus $0.02 million in Q1 2015. Trust fees declined 5.7%, partly reflecting lower assets under management.
- Non-interest expense excluding Q1 2015 merger costs rose 3.7%; revenue growth outpaced that increase, and the efficiency ratio improved to 55.52% from 58.24%.
- Quarter-end loans increased 1.4% from year-end, led by commercial real estate land and construction and commercial and industrial lending. Deposits grew 1.3%, including growth in demand and savings accounts; money market and certificates of deposit declined.
- Allowance for loan losses was $42.5 million, or 0.83% of portfolio loans, versus $41.7 million and 0.82% at year-end. Provision for credit losses was $2.3 million, compared with $1.3 million a year earlier. Net charge-offs were 0.12% of average portfolio loans, down from 0.16%.
- Non-performing loans were $43.4 million (0.85% of portfolio loans), compared with $44.9 million (0.89%) at year-end. Non-performing assets were $48.7 million, or 0.57% of assets. Loans past due 90 days or more and still accruing increased to $4.2 million from $3.1 million.
- Shareholders’ equity was $1.15 billion, up 2.1% from year-end. Regulatory capital ratios exceeded “well capitalized” thresholds: WesBanco’s total risk-based capital ratio was 14.06%, and the bank subsidiary’s was 13.12%.
- Cash increased by $81.3 million during the quarter. Investing activities used $17.1 million, including $70.5 million of net loan growth; financing activities provided $58.1 million, mainly from deposit growth. Deposits funded 71.7% of assets. Management cited $1.71 billion of expected one-year liquidity sources and approximately $1.1 billion of available FHLB credit.
Outlook, risks and notable items
- No formal earnings or revenue guidance is provided. Management expects the base-case net interest margin in the near term to remain at similar or slightly lower levels, citing the low-rate environment and flatter yield curve. Management anticipated two additional short-term federal funds rate increases later in 2016, while noting weaker first-quarter economic activity made that path less certain.
- The company’s interest-rate model indicated net interest income would increase 4.0%, 5.6% and 6.3% under immediate 100-, 200- and 300-basis-point rate increases, respectively, and decline 2.5% under a 100-basis-point decrease. Management cautioned that modeled results rely on assumptions and may not predict actual outcomes.
- On May 3, 2016, after quarter-end, WesBanco announced a definitive agreement to acquire Your Community Bankshares for an indicated value of approximately $221 million, funded with a combination of WesBanco stock and cash. The proposed acquisition of a company with $1.6 billion in assets and 36 branches was expected to close in Q3 or Q4 2016, subject to regulatory and YCB shareholder approvals. Integration, timing, cost savings and revenue synergies are uncertainties.
- Management identified risks including interest-rate changes, regional and national economic conditions, credit quality, funding and liquidity, regulatory and legislative developments, competition, technology and cybersecurity, and the possible effects of the YCB transaction. It noted potential exposure from lower coal, oil and natural-gas activity; core energy-industry loans were approximately $48 million, or 0.74% of loans, at quarter-end.
- Off-balance-sheet commitments included $1.21 billion of lines of credit, $214.0 million of approved but unfunded loans, $105.8 million of overdraft limits, and $22.7 million of letters of credit. Management stated that commitments often expire unused. It did not believe pending or threatened legal matters were reasonably likely to result in a material loss.
- Q1 unusual items included the $1.1 million securities gain and the absence of the prior-year ESB merger costs. WesBanco also declared a $0.24 quarterly dividend per share and repurchased 117,100 shares under its plans. Management expected a voluntary $7.5 million pension-plan contribution during 2016.
Important facts for investors to verify
- Whether margin pressure persists, particularly if interest rates remain low or rise more slowly than management’s assumptions, and how FHLB funding costs evolve.
- Whether loan growth, credit quality and the allowance remain consistent with management’s assumptions; monitor past-due loans, criticized/classified loans and energy-related exposures.
- How much of reported earnings growth reflects sustainable operating performance versus the prior-year merger-cost comparison and current-quarter securities gains.
- YCB transaction approvals, final consideration, closing timing, integration costs and realization of expected benefits.
- Deposit retention and repricing, including the $960.7 million of certificates of deposit scheduled to mature within 12 months, and the company’s use of borrowings to support liquidity.
- The filing states disclosure controls were effective at a reasonable-assurance level; it also notes that internal controls cannot provide absolute assurance. No material control changes were reported during the quarter.