WesBanco, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. WesBanco operates a multi-state banking franchise and trust and investment services business. Results include Your Community Bankshares (YCB), acquired in September 2016, so year-over-year comparisons reflect both acquisition and organic changes.
Key financial metrics
Unless otherwise noted, amounts are in millions of dollars.
| Metric | Q1 2017 / March 31, 2017 | Comparable / prior date |
|---|---|---|
| Interest and dividend income | $79.9 | $67.6 in Q1 2016 |
| Net interest income | $70.7 | $59.8 in Q1 2016 |
| Net interest margin | 3.42% fully taxable-equivalent (FTE); 3.30% reported | 3.29% FTE; 3.16% reported in Q1 2016 |
| Non-interest income | $22.9 | $19.4 in Q1 2016 |
| Non-interest expense | $54.4 | $45.3 in Q1 2016 |
| Net income / diluted EPS | $25.9 / $0.59 | $22.9 / $0.60 in Q1 2016 |
| Operating cash flow | $47.5 | $40.3 in Q1 2016 |
| Cash and due from banks | $115.1 | $128.2 at December 31, 2016 |
| Total assets | $9,800.9 | $9,790.9 at December 31, 2016 |
| Portfolio loans, net of allowance | $6,268.1 | $6,205.8 at December 31, 2016 |
| Deposits | $7,145.7 | $7,040.9 at December 31, 2016 |
| Total borrowings | $1,216.9 | $1,331.9 at December 31, 2016 |
| Shareholders’ equity | $1,359.2 | $1,341.4 at December 31, 2016 |
- Cash flow: investing activities used $40.4 million and financing activities used $20.2 million. Cash decreased $13.1 million during the quarter.
- Credit: provision for credit losses was $2.7 million; net charge-offs were 0.15% of average portfolio loans. The allowance for loan losses was $44.1 million, or approximately 0.7% of portfolio loans.
- Asset quality: non-performing loans were $46.5 million, or 0.74% of portfolio loans, and non-performing assets were $54.6 million. Regulatory capital ratios exceeded the stated “well-capitalized” thresholds; the company’s total risk-based capital ratio was 14.22% and the Bank’s was 13.06%.
Material changes versus prior periods
- Net income increased 13.2% year over year, while diluted EPS declined from $0.60 to $0.59. Average diluted shares rose to 44.0 million from 38.4 million, principally reflecting shares issued for the YCB acquisition. Excluding after-tax merger costs, management reported non-GAAP net income of $26.2 million and diluted EPS of $0.60.
- Net interest income increased 18.2%, driven by higher average loan balances, including YCB, and a 13-basis-point improvement in FTE margin. Management reported 3.2% organic loan growth year over year, with commercial loan growth of 6.7%.
- Non-interest income increased 18.0%, led by deposit service charges, electronic banking fees, mortgage loan-sale gains, and commercial loan swap income. Securities gains fell to $0.01 million from $1.1 million.
- Non-interest expense increased 19.9% (18.9% excluding merger-related costs), principally from YCB-related staffing and operating costs. Q1 merger-related expense was $0.5 million.
- From year-end, portfolio loans rose 1.0%, deposits rose 1.5%, and borrowings fell 8.6%. Non-performing loans increased from $39.4 million at year-end, mainly after three commercial real estate loans were placed on nonaccrual; the reported ratio was 0.74% versus 0.63% at year-end, but 0.85% in Q1 2016.
Outlook, commentary, risks, and unusual items
- Management said further margin expansion depends in part on additional short-term rate increases and continued loan growth and funding remixing. It anticipated two additional federal funds rate increases during the remainder of 2017 and potentially two in 2018; these are management expectations, not formal earnings guidance.
- Management was managing balance-sheet growth to remain below $10 billion in assets, currently anticipating this through year-end 2017 or into 2018, to avoid certain costs associated with crossing that threshold. It planned to balance this constraint with continued loan growth.
- Interest-rate modeling projected a 3.7% increase in one-year net interest income for an immediate +100-basis-point shock and a 3.8% decrease for a −100-basis-point shock. Results depend on assumptions about deposit repricing, prepayments, and other customer behavior; management cautioned actual results may differ.
- Liquidity sources include loan and securities cash flows, approximately $1.7 billion of available FHLB credit, a $218.7 million Federal Reserve borrowing line, and $285 million of overnight lines with correspondent banks; none of the latter two facilities was drawn at quarter-end. Management stated it believed liquidity was sufficient. A portion of securities is pledged, and selling held-to-maturity securities could jeopardize that classification.
- Credit exposures include commercial real estate concentration (46.7% of portfolio loans) and energy-related borrowers. Core energy exposure was $52.7 million; ancillary energy-industry exposure was $62.7 million. Management said most credit ratios had improved year over year, while reported non-performing loans rose from year-end.
- YCB acquisition accounting remained preliminary, with purchase accounting expected to be finalized within one year of the acquisition. The filing also notes a $0.5 million first-quarter tax-expense reclassification related to low-income housing tax-credit investments.
- WesBanco reported various ordinary-course legal proceedings but said a material loss was not reasonably possible. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether acquired and organic growth, integration savings, and expense trends support earnings after merger-related costs.
- Whether loan delinquency, nonaccrual balances, criticized/classified loans, and allowance coverage remain manageable, particularly in commercial real estate and energy exposures.
- Whether the reported margin and interest-rate sensitivity assumptions hold as rates, deposit costs, loan floors, and prepayment behavior change.
- How management’s under-$10-billion asset strategy affects loan growth, securities runoff, funding costs, and any timing of threshold-related expenses.
- Whether liquidity and capital remain adequate as deposits mature, off-balance-sheet commitments are drawn, and acquisition accounting is finalized.
- The reconciliation of reported and FTE net interest margin and the impact of the larger share count on per-share results.