WesBanco, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Comparisons are with the corresponding 2013 periods unless otherwise noted. Balance-sheet comparisons are with December 31, 2013. Financial statement amounts below are in millions of dollars unless stated otherwise.
Business context
WesBanco is a multi-state bank holding company operating in West Virginia, Ohio and western Pennsylvania, with community banking and trust and investment services segments. Its results are affected by interest rates, regional economic conditions, credit performance and competition. The company reported 120 branches, including a new Southpointe, Pennsylvania office scheduled to open in November 2014.
Financial and operating results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $48.6 | $46.1 | $144.2 | $138.2 |
| Non-interest income | $16.7 | $17.1 | $51.9 | $52.3 |
| Non-interest expense | $39.3 | $40.0 | $119.7 | $120.3 |
| Net income | $18.2 | $15.5 | $53.5 | $48.6 |
| Diluted EPS | $0.62 | $0.53 | $1.82 | $1.66 |
| Fully taxable-equivalent net interest margin | 3.58% | 3.52% | 3.62% | 3.58% |
| Efficiency ratio | 58.5% | 61.5% | 59.3% | 60.8% |
- Quarterly net income and diluted EPS rose 17%; nine-month net income and diluted EPS each rose about 10%. Nine-month return on average assets was 1.15%, up from 1.07%.
- Net interest income increased 5.4% in Q3 and 4.3% year to date. Management attributed the gains to growth in average earning assets and lower funding costs; average loans increased 4.7% year to date.
- Credit-loss provision declined to $1.5 million in Q3 from $2.8 million and to $4.5 million year to date from $5.9 million. Net charge-offs for the first nine months were $6.9 million, versus $11.3 million.
- Non-interest income decreased 2.7% in Q3 and 0.7% year to date. Excluding the $1.4 million repurchase-agreement prepayment charge, management said it increased 5.6% and 2.0%, respectively. Trust fees and brokerage revenue increased, while deposit service charges and mortgage-sale gains declined.
- Mortgage production for the first nine months was $199.6 million, down 39.9%. The filing cites higher interest rates, reduced refinancing activity and Qualified Mortgage/Ability-to-Repay rules as contributing factors.
Financial position, cash flow and liquidity
- At September 30, total assets were $6.278 billion, up 2.2%; portfolio loans were $4.032 billion, up 3.5%; deposits were $5.102 billion, up 0.8%; and shareholders’ equity was $788.8 million, up 5.7% from year-end 2013.
- Total borrowings were $347.2 million, up 17.2%. FHLB borrowings increased to $123.4 million from $39.5 million, while other short-term borrowings fell to $117.6 million from $150.5 million. Management said new short-term FHLB funding supported normal liquidity needs and loan and investment funding.
- Cash and due from banks was $76.4 million, versus $95.6 million at year-end. For the nine months, operating cash flow was $70.2 million, investing cash outflow was $161.8 million and financing cash inflow was $72.5 million; cash declined by $19.1 million.
- Management reported $1.282 billion of identified liquidity sources expected within one year and approximately $1.6 billion of available FHLB credit. Deposits funded 81.3% of assets. The filing states that the company had sufficient liquidity to meet current obligations.
- The allowance for loan losses was $45.0 million, or 1.12% of portfolio loans, compared with $47.4 million, or 1.22%, at year-end 2013. Non-performing loans were $49.0 million (1.22% of portfolio loans) and non-performing assets were $53.7 million (0.86% of assets).
- WesBanco and its bank subsidiary were above regulatory “well-capitalized” thresholds. At September 30, the holding company’s total risk-based capital ratio was 14.62%; the bank’s was 13.30%. The quarterly dividend was $0.22 per share, up from $0.20 in Q3 2013.
Material changes, outlook and risks
- Loan balances grew $136.8 million from year-end, led by commercial and industrial, improved-property commercial real estate and home-equity lending. Certificates of deposit declined 10.1%, while demand, money-market and savings balances increased.
- A $1.4 million charge arose from prepaying a higher-rate $22.0 million repurchase agreement. Separately, the quarter included a $1.167 million net loss on other real estate owned and other assets/liabilities. The filing also reports $1.3 million of merger-related expenses in the first nine months of 2013; none were reported in the comparable 2014 period.
- No numerical earnings guidance was provided. Management described continued loan-growth and core-deposit strategies. Its interest-rate model estimated that a parallel 100-basis-point increase would raise one-year net interest income 1.6%, while a 100-basis-point decrease would reduce it 1.5%; these are model estimates subject to assumptions and limitations. Management noted short-term rate increases were not then anticipated until mid-2015.
- On October 29, 2014, WesBanco and ESB Financial Corporation announced a merger agreement valued at approximately $324.4 million. Consideration is a combination of WesBanco shares and cash. Completion, expected in the first or second quarter of 2015, is subject to shareholder and regulatory approvals. Risks include integration, realizing expected savings or synergies, and disruption to customer and other relationships.
- Other stated risks include changing economic conditions and interest rates, credit losses, liquidity and funding, regulatory and legislative changes, competition, technology and cybersecurity threats, and securities valuation. Management said material loss from pending or threatened legal proceedings was not reasonably possible. Disclosure controls were assessed as effective at the reasonable-assurance level.
Important facts for investors to verify
- Progress, approvals, consideration and integration risks for the announced ESB acquisition.
- Whether loan growth is sustained and whether commercial real estate concentrations, non-performing loans, delinquencies and the allowance remain well controlled.
- Deposit mix, certificate maturities and reliance on short-term FHLB and other borrowings as loan demand and liquidity needs evolve.
- Durability of margin improvement amid competitive loan pricing, rate movements and declining purchase-accounting accretion.
- The impact of the repurchase-agreement prepayment charge and other unusual or nonrecurring items on underlying non-interest income and earnings.