WesBanco, Inc. — Q1 2014 Form 10-Q
Business context and reporting period
WesBanco is a multi-state bank holding company operating 120 branches in West Virginia, Ohio and western Pennsylvania, with community banking and trust and investment services segments. This summary covers the unaudited quarter ended March 31, 2014; income and cash-flow comparisons are against Q1 2013.
Financial performance and condition
| Metric | Q1 2014 / March 31, 2014 | Comparison |
|---|---|---|
| Net income | $16.4 million | $16.0 million, up 2.5% |
| Diluted EPS | $0.56 | $0.55 |
| Net interest income | $47.3 million | $46.1 million, up 2.6% |
| Net interest margin, fully taxable equivalent | 3.63% | 3.64% |
| Non-interest income | $17.0 million | $17.5 million, down 2.6% |
| Non-interest expense | $40.1 million | $40.7 million, down 1.6%; efficiency ratio was 60.6%, unchanged |
| Return on average assets | 1.08% | 1.07% |
| Operating cash flow | $24.0 million | $31.3 million |
| Total assets | $6.24 billion | $6.14 billion at Dec. 31, 2013 |
| Total deposits | $5.22 billion | $5.06 billion at Dec. 31, 2013, up 3.0% |
| Total borrowings | $222.2 million | $296.2 million at Dec. 31, 2013, down 25.0% |
| Shareholders’ equity | $761.1 million | $746.6 million at Dec. 31, 2013 |
| Regulatory capital | WesBanco total risk-based capital 14.40%; Bank 13.31% | Both described as substantially above well-capitalized minimums |
Portfolio loans were $3.89 billion, nearly unchanged from year-end. Net charge-offs were $4.1 million, or 0.43% of average portfolio loans, versus $3.0 million, or 0.34%, in Q1 2013. The allowance for loan losses was $45.5 million, 1.17% of portfolio loans, compared with 1.40% a year earlier. Non-performing loans were $50.9 million, or 1.31% of total loans, down 19.4% from $63.1 million a year earlier. Cash and due from banks increased to $175.2 million from $95.6 million at year-end.
Material changes and management commentary
- Lower funding costs supported earnings: total interest expense declined 30.0%, reflecting lower certificate-of-deposit costs and reduced borrowings. Average earning assets rose 3.1%, including 5.7% growth in average portfolio loans.
- Loan originations totaled $1.5 billion over the prior 12 months, up 8.5% from the preceding 12-month period. However, quarter-end loans dipped slightly from year-end; management cited winter-related construction delays, cautious underwriting and lower mortgage activity.
- Non-interest income fell partly because Q1 2013 included a $1.1 million bank-owned life insurance death benefit. Excluding it, management said non-interest income increased 3.9%. Trust fees rose 12.6%; mortgage loan-sale gains fell 78.4% as higher rates reduced refinancing and mortgage production.
- Reported non-interest expense declined partly because Q1 2013 included $1.2 million of merger-related costs. Excluding those costs from the prior-year comparison, expense increased 1.3%, including higher salary, occupancy and equipment costs.
- Deposits grew in demand, money-market and savings accounts, while certificates of deposit declined 2.8%. Management cited customer and marketing initiatives and initial shale-gas bonus and royalty deposits in regional markets. FHLB and other short-term borrowings were paid down using deposit growth and available cash.
Outlook, risks and contingencies
No specific earnings or revenue guidance was provided. Management’s base-case model anticipated a slight increase in net interest margin over the next 12 months. The model projected net interest income up 2.2%, 2.7% and 1.6% under immediate rate increases of 100, 200 and 300 basis points, respectively, and down 2.1% under a 100-basis-point decrease. Management cautioned that model assumptions and actual rate movements may differ; short-term rate increases were not then anticipated until later in 2015. It also noted competitive pressure on loan pricing and a decreasing contribution from Fidelity acquisition-related accretion.
- Key risks identified include economic conditions, interest rates and asset/liability repricing, credit losses, liquidity, competition, regulation, technology and cybersecurity, and securities-market values.
- At March 31, the company reported approximately $1.35 billion of identified liquidity sources expected within one year, about $1.6 billion of FHLB available credit, and additional unused borrowing lines. Management said liquidity was sufficient for current needs.
- Off-balance-sheet commitments included $963.4 million of lines of credit, $129.9 million of approved loans not closed and $22.7 million of letters of credit. Management noted that commitments may expire unused or only partly drawn.
- Management did not expect pending or threatened legal matters to materially affect the company. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- The existing $25 million parent-company revolving credit facility was not drawn; the lender could not renew it at its July 31, 2014 expiration, and WesBanco expected to seek a similar replacement facility.
Important facts for investors to verify
- Whether loan growth and net interest margin hold up amid competitive pricing, lower rates on new loans and declining acquisition-related accretion.
- Whether elevated Q1 net charge-offs—including a $1.8 million charge-off on one commercial credit—signal further credit deterioration, despite improving non-performing and criticized/classified loan measures.
- How deposit growth develops, particularly whether shale-related balances persist, and how the $803.4 million of certificates scheduled to mature within 12 months is retained or replaced.
- Whether mortgage weakness, including the effects of higher rates and Qualified Mortgage/Ability-to-Repay rules, continues to weigh on fee income and production.
- The replacement of the parent-company credit facility before its scheduled expiration and the continued availability and cost of other funding sources.