WesBanco, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unless otherwise stated, dollar amounts below are in millions. WesBanco is a regional bank holding company operating in West Virginia, Ohio and western Pennsylvania. It completed its acquisition of ESB Financial Corporation on February 10, 2015.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net interest income | $60.8 | $48.3 | $115.8 | $95.6 |
| Provision for credit losses | $2.7 | $0.8 | $4.0 | $3.0 |
| Non-interest income | $18.1 | $18.2 | $36.3 | $35.3 |
| Non-interest expense | $46.6 | $40.3 | $100.0 | $80.4 |
| Net income | $21.6 | $18.9 | $35.5 | $35.3 |
| Diluted EPS | $0.56 | $0.64 | $0.97 | $1.20 |
- Q2 net income increased 14.6%; first-half net income increased 0.6%. Diluted EPS declined in both comparisons, principally reflecting the 9.18 million shares issued for the ESB acquisition and the resulting higher weighted-average share count.
- Management’s non-GAAP adjusted net income, excluding after-tax merger-related costs, was $22.4 million for Q2 and $42.6 million for the first half; adjusted diluted EPS was $0.58 and $1.17, respectively. The comparable 2014 adjusted figures equaled reported results.
- Net interest margin was 3.44% in Q2 and 3.49% year to date on a fully taxable-equivalent basis, versus 3.64% and 3.63% a year earlier. The filing also reports margins excluding acquisition accounting accretion and a 2014 tax-refund interest item of 3.32% and 3.38%, respectively, versus 3.57% and 3.58%.
- For the first half, operating cash flow was $34.5 million, investing cash outflow was $84.5 million, and financing cash inflow was $64.7 million. Cash and cash equivalents increased $14.7 million to $108.7 million.
Financial position, liquidity and capital
- At June 30, 2015, total assets were $8.38 billion, up 33.0% from year-end 2014; portfolio loans were $4.93 billion, deposits $6.26 billion, total borrowings $961.4 million, and shareholders’ equity $1.09 billion. Most balance-sheet growth reflected ESB.
- ESB added approximately $1.9 billion in assets and $1.25 billion in deposits at acquisition. WesBanco issued 9.18 million shares and paid cash and other consideration; preliminary purchase accounting recorded $169.3 million of goodwill. The valuation remained under review.
- FHLB borrowings rose $558.2 million from year-end, including borrowings assumed with ESB and new funding for liquidity, lending, investments and deposit runoff. Management reported $1.3 billion of available FHLB credit, a $198.1 million Federal Reserve collateralized line with no balance outstanding, and $205 million in third-party overnight lines, also unused.
- Management stated that both WesBanco and the Bank were above regulatory “well-capitalized” thresholds. At June 30, the company’s total risk-based capital ratio was 14.30% and the Bank’s was 13.56%; Tier 1 leverage ratios were 9.29% and 8.82%, respectively.
- Available liquidity sources expected within one year were estimated at $1.78 billion. Approximately $1.1 billion of certificates of deposit were scheduled to mature in the following 12 months, at an average cost of 0.64%.
Material changes and credit quality
- ESB expanded WesBanco’s western Pennsylvania presence from 16 to 38 offices. Its results are included from the acquisition date; management said separate pro forma results were not practicable because of integration.
- Loan balances increased $846.9 million from year-end, including $700.9 million from ESB; organic loan growth was reported at a 7.2% annualized rate. Deposits increased $1.21 billion, largely from ESB; organic deposits were approximately unchanged.
- Q2 net interest income rose 25.8%, primarily from larger earning-asset balances after the acquisition and organic loan growth. The margin declined as acquired and replacement securities yielded less and the post-acquisition mix included more securities and certificates of deposit. Management also cited lower funding costs.
- First-half merger and restructuring expense was $10.8 million, including $7.7 million of executive change-in-control and employee severance costs. Q2 expense was $1.1 million. Management reported temporary post-merger operating costs and anticipated cost savings following systems integration.
- First-half provision expense was $4.0 million; net charge-offs were $4.9 million, or 0.21% of average portfolio loans. Management attributed increased provision and charge-offs in part to a $1.3 million charge-down on one non-energy commercial credit and loan growth. Non-accrual loans increased to $48.2 million from $38.8 million at year-end, while non-performing loans were 1.24% of loans versus 1.25%. The allowance for loan losses was $43.4 million, 0.88% of loans; management noted that acquired loans were recorded at fair value without a carried-over allowance.
- The allowance for credit losses, including loan commitments, was $44.2 million. Criticized and classified loans were $82.9 million, or 1.68% of loans, compared with 1.99% at year-end. Management said overall credit indicators had improved, while acknowledging individual problem credits and the acquired portfolio.
Outlook, risks and contingencies
- No formal earnings guidance is provided. Management expected the effective tax rate to range from 26.5% to 27.5% for the remainder of 2015. It anticipated possible near-term margin compression from low rates, securities reinvestment and competitive loan pricing, with potential improvement if short-term rates rose; these were expectations, not assurances.
- Interest-rate sensitivity modeling projected next-12-month net interest income changes of +1.2%, +1.0% and -0.2% for immediate rate increases of 100, 200 and 300 basis points, and -1.6% for a 100-basis-point decrease. The filing cautions that results depend on assumptions about rates, prepayments and deposit behavior.
- Risks identified include regional and national economic conditions, interest rates and asset-liability sensitivity, liquidity and deposit competition, credit losses, regulatory and legislative changes, litigation, cybersecurity and fraud, technology change, and securities-market values.
- Two putative class actions related to the ESB merger were subject to a proposed settlement. A court had set a September 21, 2015 hearing for approval; approval was not assured. Plaintiffs’ counsel could seek fees, with any award to be paid by ESB or its successor or insurer. Management did not believe a material loss was reasonably possible. Management also said material losses from other ordinary-course litigation were not reasonably possible.
- Off-balance-sheet commitments included $1.11 billion of lines of credit, $333.6 million of approved but unclosed loans, $107.6 million of overdraft limits, and $26.3 million of letters of credit. The filing notes that many commitments may expire unused.
Most important facts for investors to verify
- ESB integration progress, final purchase-price allocation, and the timing and realization of projected cost savings.
- Whether margin pressure persists, especially as securities reinvestment, CD maturities, loan pricing and interest rates affect funding costs and yields.
- Credit migration and reserve adequacy, including the performance of acquired loans, rising non-accrual balances and the commercial credit charge-down.
- Deposit retention and funding mix, the cost and renewal of large CD maturities, and the continued level of FHLB borrowing.
- The outcome of the ESB-merger settlement hearing and any attorneys’ fee award.