WesBanco, Inc. — Q2 2014 Form 10-Q
Business context and period: Regional bank holding company operating 119 branches in West Virginia, Ohio and western Pennsylvania. This unaudited report covers the three and six months ended June 30, 2014; comparisons are to the corresponding 2013 periods unless noted. Amounts are in U.S. dollars.
Financial performance and position
- Q2 earnings: Net income was $18.9 million, up 10.9%; diluted EPS was $0.64 versus $0.58. For the first half, net income was $35.3 million, up 6.8%, and diluted EPS was $1.20 versus $1.13.
- Net interest income and margin: Q2 net interest income was $48.3 million, up 5.0%; first-half net interest income was $95.6 million, up 3.8%. Fully taxable-equivalent net interest margin was 3.64% for Q2 and 3.63% for the first half, versus 3.56% and 3.60%. A $0.5 million tax-refund interest benefit contributed 3 basis points to Q2 margin. Purchase-accounting accretion also benefited margin, at a lower rate than in 2013.
- Other income and expenses: Q2 non-interest income rose 2.9% to $18.2 million; first-half income was $35.3 million, essentially unchanged. Q2 non-interest expense increased 2.0% to $40.3 million; first-half expense was $80.4 million, up 0.2%. The first-half comparison includes $1.2 million of merger-related costs in 2013; excluding those costs, 2014 expense increased 1.7%.
- Cash flow: First-half operating cash flow was $41.4 million versus $66.0 million in 2013. Investing used $130.5 million, primarily reflecting securities purchases and loan growth; financing provided $88.0 million, including deposit growth and net FHLB borrowing activity. Cash and cash equivalents ended at $94.5 million, down $1.1 million from year-end.
- Balance sheet and funding: At June 30, total assets were $6.28 billion, up 2.2% from December 31, 2013. Portfolio loans were $3.95 billion, up $51.2 million; deposits were $5.12 billion, up $54.9 million. Total borrowings were $339.5 million, up $43.3 million; FHLB borrowings increased $99.1 million to $138.6 million, while other short-term borrowings declined $55.8 million. Shareholders’ equity was $778.6 million, up 4.3%.
- Credit quality: Provision for credit losses was $0.8 million in Q2 and $3.0 million in the first half. The allowance for loan losses was $45.7 million, or 1.16% of portfolio loans, versus 1.22% at year-end. Non-performing loans were $49.6 million (1.26% of portfolio loans), down from $51.5 million; non-performing assets were $54.7 million (0.87% of assets), down from $56.4 million. First-half net charge-offs were 0.25% of average portfolio loans versus 0.30% in 2013.
- Capital and dividends: The company and bank reported capital ratios above regulatory “well-capitalized” thresholds. WesBanco’s total risk-based capital ratio was 14.56%; the Bank’s was 13.36%. The quarterly dividend was raised to $0.22 per share in February, a 10% increase from the prior quarter.
Material changes and management commentary
- Loan growth was supported by commercial activity, including markets affected by Marcellus and Utica shale development, expanded lending resources, and business-development efforts. Average loans increased 4.9% year over year for the first half.
- Funding costs fell: management cited a 25-basis-point decline in the cost of funds, lower certificate-of-deposit balances and rates, and growth in lower-cost transaction and savings deposits. Certificates of deposit fell 5.7% from year-end, while total deposits increased 1.1%.
- Trust fees and securities brokerage revenue grew, while deposit service charges, mortgage-sale gains and securities gains declined. Mortgage production fell 45.1% year over year in the first half; management cited higher interest rates reducing refinancings and the effect of Qualified Mortgage and Ability-to-Repay rules.
- Q2 non-interest income included a $1.0 million bank-owned life insurance death benefit. Higher salaries and infrastructure-related costs contributed to expense growth; communications costs declined following a company-wide modernization, which also involved a $0.2 million equipment write-down.
- Management’s base-case model projected a slight increase in net interest margin over the next 12 months. It expected short-term rates not to rise until mid-2015 and identified loan pricing competition and mortgage prepayment/extension behavior as relevant sensitivities. These are assumptions and projections, not earnings guidance.
Liquidity, risks and contingencies
- Management stated that liquidity was adequate. It cited $1.5 billion of available FHLB credit, a $129.9 million Federal Reserve collateralized line with no balance outstanding, and $155.0 million of third-party overnight lines, also undrawn. Certificates of deposit totaling $837.2 million were scheduled to mature within 12 months.
- Off-balance-sheet commitments included $937.0 million of lines of credit, $132.5 million of approved but unclosed loans, $88.6 million of overdraft limits and $26.2 million of letters of credit. The filing cautions that commitments may not be fully drawn.
- Interest-rate risk modeling estimated net interest income changes over one year of +1.6%, +1.9% and +0.6% for immediate rate increases of 100, 200 and 300 basis points, respectively, and -2.3% for a 100-basis-point decrease. Results depend on model assumptions and are not forecasts.
- WesBanco reported various ordinary-course legal proceedings but said a material loss was not reasonably possible. Management noted that the parent company’s $25 million revolving credit line matured July 31, 2014; it expected a replacement facility to be in place. The filing also describes normal regulatory, economic, credit, competition, technology, cybersecurity and market risks.
Important facts for investors to verify
- Whether loan growth and improving credit indicators persist, particularly given commercial real estate’s approximately 49% share of portfolio loans and the regional economic exposures described.
- How the $837.2 million of certificates maturing within a year, deposit trends and increased FHLB borrowing affect funding costs and liquidity.
- Whether margin and earnings remain resilient as purchase-accounting accretion declines, loan pricing stays competitive and interest rates change.
- The durability of fee income: Q2 results included a $1.0 million insurance death benefit, while mortgage production and mortgage-sale gains declined.
- Progress on replacing the parent-company revolving credit line and any subsequent changes to liquidity, regulatory capital or legal contingencies.