WesBanco, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019 unless noted. WesBanco is a multi-state bank holding company. The quarter includes Old Line Bancshares (OLBK), acquired in November 2019. Amounts below are in millions except per-share data and ratios.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior date |
|---|---|---|
| Net interest income | $120.2 | $98.4 in Q1 2019 |
| Net interest margin, fully taxable-equivalent | 3.54% | 3.68% in Q1 2019 |
| Provision for credit losses | $29.8 | $2.5 in Q1 2019 |
| Non-interest income | $28.0 | $27.8 in Q1 2019 |
| Non-interest expense | $91.3 | $74.4 in Q1 2019 |
| Net income / diluted EPS | $23.4 / $0.35 | $40.3 / $0.74 in Q1 2019 |
| Operating cash flow | $32.9 | $51.2 in Q1 2019 |
| Total assets | $16.00 billion | $15.72 billion at December 31, 2019 |
| Portfolio loans, gross | $10.35 billion | $10.27 billion at December 31, 2019 |
| Deposits | $11.04 billion | $11.00 billion at December 31, 2019 |
| Total borrowings | $2.11 billion | $1.90 billion at December 31, 2019 |
| Shareholders’ equity | $2.59 billion | $2.59 billion at December 31, 2019 |
Interest and dividend income was $142.4 million and interest expense was $22.3 million. Net income excluding after-tax merger costs, a company-presented non-GAAP measure, was $27.5 million, or $0.41 per diluted share, versus $42.8 million, or $0.78, in Q1 2019.
Cash and due from banks rose to $593.9 million. Net cash increased $359.1 million during the quarter; operating, investing and financing activities provided $32.9 million, $114.1 million and $212.1 million, respectively. The company increased FHLB and other short-term borrowings to bolster liquidity. Available FHLB credit was approximately $2.9 billion; a Federal Reserve borrower-in-custody line of $211.5 million and third-party overnight lines totaling $275.0 million were undrawn.
At March 31, regulatory capital ratios were 9.64% Tier 1 leverage, 12.51% common equity Tier 1 and 14.83% total risk-based capital at the holding company; management said the Bank and holding company remained above “well-capitalized” thresholds. WesBanco elected the regulatory five-year transition for CECL’s capital impact.
Material changes and notable items
- Year-over-year net income and diluted EPS fell substantially, despite a 22.2% increase in net interest income. Average earning assets grew 26.0%, mainly due to OLBK, while the fully taxable-equivalent margin declined 14 basis points as lower market rates reduced asset yields.
- Credit-loss expense rose sharply following adoption of CECL on January 1, 2020 and changes in the economic outlook. CECL adoption increased the allowance by approximately $41.4 million and reduced opening retained earnings by $26.6 million after tax. At quarter-end, the loan allowance was $114.3 million, or 1.10% of portfolio loans, versus $52.4 million at year-end under the prior methodology. The quarter’s net charge-offs were $4.7 million, or 0.18% annualized.
- Total non-performing loans were $39.8 million, down from $50.3 million at year-end; non-performing assets were $40.9 million. Past-due loans 30 days or more were 0.46% of total loans. The filing cautions that pandemic-related delinquencies and non-performing loans could rise later in 2020.
- Non-interest expense increased 22.7%, reflecting OLBK’s added employees, locations and operating costs, as well as $5.2 million of OLBK merger-related expenses (versus $3.1 million of FFKT-related expense in Q1 2019). OLBK purchase accounting and integration remained preliminary.
- Deposits rose 0.4% from year-end, while borrowings rose 11.3%. Certificates of deposit declined 5.7%. Securities fell 5.2%, including a sale of approximately $218 million of mortgage-backed securities to realize gains and add liquidity. Unrealized gains in available-for-sale securities increased.
- WesBanco repurchased approximately 786,000 shares for $25.0 million during the quarter, then suspended open-market repurchases in early March. It raised the quarterly dividend to $0.32 per share.
Outlook, management commentary and risks
- Management expected the core net interest margin to decline approximately 20–25 basis points over the remainder of 2020, with lower asset yields partly offset by reduced deposit and wholesale funding costs. Participation in the Paycheck Protection Program (PPP) was expected to contribute modestly to margin.
- Management expected an effective tax rate of approximately 17.0%–17.5% for the remainder of 2020. The interim goodwill impairment review found no impairment of approximately $1.1 billion of goodwill at March 31; management said it would continue quarterly assessments as the pandemic’s effects develop.
- Through May 4, 2020, WesBanco reported more than 1,800 commercial and business loan modifications totaling $2.0 billion, including most customers in its hotel portfolio; residential mortgage and consumer/home-equity modifications totaled $145 million and $30 million, respectively. Eligible COVID-19 deferrals of principal and/or interest could extend up to 180 days and were not treated as TDRs under the cited guidance. Separately, the company had approved more than 5,900 PPP loans totaling approximately $840 million from April 3 through May 4.
- Credit risk is material given economic uncertainty, sizable commercial real estate exposure, and the potential effects of business closures, unemployment and payment deferrals. CRE lodging exposure was approximately $707 million at quarter-end. Management’s CECL estimate used a one-year forecast that projected national unemployment peaking at 8.7%; changes in unemployment and other assumptions could materially alter expected losses.
- Other risks include interest-rate and margin sensitivity, deposit and funding outflows, market volatility and securities valuations, and pandemic-related operational and customer impacts. Management identified possible prolonged economic stress and potential effects on capital and liquidity. The filing states that no material loss from pending or threatened legal proceedings was considered reasonably possible.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Forward-looking estimates remain subject to substantial uncertainty.
Important facts for investors to verify
- How CECL assumptions and the pandemic’s economic effects change the allowance, provision, delinquencies and charge-offs in subsequent filings.
- Actual performance of COVID-19-modified loans, PPP lending and the company’s commercial real estate exposures, particularly lodging.
- Whether margin, funding costs and deposit mix track management’s outlook, and whether liquidity and regulatory capital remain adequate as customer needs evolve.
- The ongoing OLBK integration, final purchase-price allocation, merger costs and realization of any anticipated operating benefits.
- Whether the dividend and share-repurchase suspension remain appropriate as earnings, capital and liquidity develop.