Wesbanco, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Wesbanco is a regional bank holding company operating 193 branches across six states, with community banking and trust and investment services segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and condition
- Q2 earnings: Net income was $42.7 million and net income available to common shareholders was $40.2 million, or $0.67 diluted EPS, versus $70.6 million, $68.1 million and $1.01 diluted EPS, respectively, in Q2 2021. First-half common earnings were $81.8 million, or $1.34 diluted EPS, versus $138.6 million and $2.06.
- Revenue and costs: Q2 net interest income was $112.2 million, down 3.1%; non-interest income was $27.0 million, down 25.3%. Combined, these revenue components were $139.2 million versus $152.0 million a year earlier. Q2 non-interest expense rose 3.8% to $87.0 million. First-half net interest income was $219.9 million and non-interest income was $57.4 million.
- Margins: Q2 net interest margin was 3.00% on a non-taxable-equivalent basis and 3.03% fully taxable equivalent, down from 3.09% and 3.12%, respectively, in Q2 2021. First-half fully taxable-equivalent margin was 2.99%, versus 3.19%.
- Credit: Q2 provision for credit losses was a negative $0.8 million, compared with a negative $21.0 million in Q2 2021. The loan allowance was $117.4 million, or 1.15% of portfolio loans; nonperforming loans were $35.3 million, or 0.35% of portfolio loans. Criticized and classified loans were 3.14% of portfolio loans, down from 3.75% at year-end.
- Balance sheet and liquidity: At June 30, total assets were $16.8 billion, deposits $13.6 billion, portfolio loans $10.2 billion, and shareholders’ equity $2.47 billion. Deposits were essentially unchanged from year-end; loans excluding PPP grew 6.4% from year-end. Cash and due from banks was $450.0 million. Management reported $3.83 billion of expected liquidity sources over the next year and approximately $4.1 billion of available FHLB borrowing capacity.
- Debt and capital: Total borrowings were $551.5 million, up $92.9 million from year-end, largely after a $150 million subordinated debt issuance in March. The notes carry a 3.75% fixed rate for five years, then a floating rate, and mature in 2032. Wesbanco and its bank subsidiary remained above regulatory “well-capitalized” thresholds; the holding company’s total risk-based capital ratio was 15.40%.
- Cash flow and shareholder returns: First-half operating cash flow was $85.8 million; investing activities used $839.7 million and financing activities used $47.5 million. Cash declined $801.3 million to $450.0 million. Wesbanco repurchased $99.4 million of shares in the first half and declared common dividends of $0.68 per share.
Material changes versus comparable periods
- Lower loan yields, reduced PPP and acquisition-related accretion, and a higher proportion of securities contributed to lower net interest income and margin. The prior-year comparison also included substantially larger releases of credit-loss provisions, a major factor in the earnings decline.
- Non-interest income fell, principally because Q2 mortgage banking income declined 83.0% to $1.3 million as Wesbanco retained more residential mortgages on its balance sheet, and a prior-year gain on other assets became a loss. Deposit service charges increased 33.0%.
- Loans excluding PPP increased from year-end as originations exceeded repayments, while PPP forgiveness reduced reported balances. Deposits shifted toward transaction accounts as certificates of deposit declined 14.5% from year-end.
- Rising interest rates drove gross unrealized losses on securities to $362.0 million from $40.3 million at year-end. After-tax available-for-sale unrealized losses in accumulated other comprehensive income reached $175.8 million; shareholders’ equity fell 8.4% from year-end, also reflecting share repurchases and dividends.
Outlook, commentary, and risks
- Management expects the core net interest margin to increase during the rest of 2022 and potentially into 2023 if anticipated Federal Reserve rate increases occur. Loan repricing and reinvestment at higher yields may help, partly offset by deposit-rate increases, wholesale funding costs, and declining PPP and acquisition accretion. This is conditional, not formal earnings guidance.
- Management attributed the lower credit provision to improved COVID- and hospitality-related qualitative factors. It cautioned that future allowance levels depend on economic forecasts and other model factors; forecast unemployment was expected to rise from 4.0% to an average of 4.4% over the forecast period.
- Interest-rate sensitivity modeling estimated net interest income increases of 3.6%, 7.2% and 11.0% for immediate parallel rate increases of 100, 200 and 300 basis points, respectively, and a 7.3% decline for a 100-basis-point decrease. Management cautioned that results depend on assumptions and may differ from actual outcomes.
- Key risks include economic and regional conditions, interest-rate and liquidity changes, borrower credit quality, commercial real estate and hospitality exposure, securities market values, competition, regulation, fraud and cybersecurity. Approximately $1.6 billion of loans remained tied to LIBOR or the ICE LIBOR Swap Index, including $1.3 billion maturing after June 30, 2023; Wesbanco selected 1-month Term SOFR as an alternative rate.
- Wesbanco reported that material litigation loss was not reasonably possible, disclosure controls were effective, and no material changes in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- How quickly loan yields reprice against deposit costs, and whether the projected margin improvement materializes.
- Whether securities unrealized losses remain market-related and how they affect equity, liquidity, and capital under changing rates.
- Credit performance in commercial real estate, particularly hospitality, including criticized loans, deferrals, delinquencies, and allowance adequacy.
- Deposit stability and mix, upcoming certificate maturities, and the cost and availability of contingent funding.
- The effect of share repurchases, dividends, and subordinated debt on capital and per-share results.