Wesbanco, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. Wesbanco is a regional bank holding company operating in six states, with community banking and trust and investment services segments. This unaudited report covers the three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparison |
|---|---|---|
| Net income | $73.1 million; $70.6 million available to common shareholders; diluted EPS $1.05 | Net income available to common shareholders was $23.4 million and diluted EPS was $0.35 in Q1 2020 |
| Net interest income | $116.5 million | Down 3.1% from $120.2 million in Q1 2020 |
| Net interest margin | 3.27% fully taxable-equivalent | Down 27 basis points from 3.54% in Q1 2020 |
| Non-interest income / expense | $33.2 million / $86.3 million | Income up 18.6%; expense down 5.5% year over year |
| Provision for credit losses | Negative provision of $28.0 million | Compared with $29.8 million of provision expense in Q1 2020 |
| Operating cash flow | $52.0 million | $32.9 million in Q1 2020 |
| Assets / deposits | $17.06 billion / $13.29 billion | Assets up 3.8%; deposits up 6.9% from year-end |
| Portfolio loans / securities | $10.70 billion / $3.60 billion | Portfolio loans down 0.8%; securities up 32.3% from year-end |
| Allowance for loan losses | $160.0 million, or 1.50% of portfolio loans | Down from $185.8 million, or 1.72%, at year-end |
| Borrowings / shareholders’ equity | $763.6 million / $2.79 billion | Borrowings down 22.3%; equity up 1.0% from year-end |
| Regulatory capital | Wesbanco CET1 13.65%; total capital 17.58% | Both Wesbanco and the Bank were above “well-capitalized” thresholds |
Cash, cash equivalents and restricted cash ended the quarter at $759.0 million, down $146.4 million during the quarter. Investing activities used $814.0 million, chiefly reflecting securities purchases; financing activities provided $615.6 million, including $858.9 million of deposit growth. The company reported $5.6 billion in identified sources of liquidity expected within one year and approximately $4.1 billion of available FHLB borrowing capacity.
Material changes and drivers
- Common-shareholder earnings rose sharply, primarily because the credit-loss provision changed from expense to a $28.0 million benefit, reflecting improved economic forecasts. The reported increase should not be read as equivalent growth in recurring operating earnings.
- Net interest income and margin declined as asset yields fell faster than funding costs. Lower loan and securities yields and reduced acquisition-related accretion were partly offset by lower deposit and borrowing costs and PPP-related fee income.
- Non-interest income increased, driven by mortgage banking and favorable fair-value changes on customer-related interest-rate swaps. Mortgage production was $317.3 million, up 47.2% year over year; $214.6 million was sold to the secondary market.
- Non-interest expense fell partly because merger-related expenses were lower than in Q1 2020. Excluding restructuring and merger-related expenses, expense declined 0.8% year over year.
- Deposits increased substantially amid stimulus payments, PPP proceeds and higher savings. Wesbanco used excess liquidity to purchase securities, particularly mortgage-backed securities, while paying down borrowings.
- Portfolio loans decreased from year-end, with residential, home equity and consumer paydowns and lower commercial line usage exceeding some new lending. PPP loans outstanding were $823.8 million at quarter-end.
Outlook, risks and unusual items
- Outlook: Management expected the core net interest margin to decline several basis points over the remainder of 2021, as lower-yielding securities purchases, loan repricing and reduced purchase-accounting accretion were expected to outweigh some funding-cost relief. PPP forgiveness and fee accretion were expected to partially mitigate pressure. No specific earnings or revenue guidance was provided.
- Credit and COVID-19: Approximately 3,553 loans totaling $2.2 billion had been modified under COVID-related relief provisions; about $0.2 billion remained in deferral at March 31. Hospitality exposure is a notable risk: hotel loans were approximately $774 million, including $152 million in deferral. Management’s allowance assumptions included pandemic and hospitality adjustments, alongside forecast unemployment peaking at 5.8% before averaging 4.8% over the remainder of the forecast period.
- Credit indicators: Nonperforming loans were $38.1 million, or 0.36% of total loans. Criticized and classified loans were reported at 4.26% of total loans in one discussion and 4.3% of portfolio loans in another; management cited classification-system changes and hospitality downgrades as factors. The filing also reports later-quarter hospitality upgrades.
- Market and interest-rate risk: Rising rates can affect asset and liability repricing, security values and margins. Available-for-sale securities’ after-tax unrealized gains fell to $24.8 million from $46.9 million at year-end. The securities portfolio’s weighted-average yield fell to 2.10% from 2.43%, while weighted-average life increased to 4.7 years from 3.5 years.
- Operations and strategy: The company expected core-system conversion in Q3 2021 and projected $6.0–$6.5 million of gross annualized savings from branch optimization, with about half reinvested in technology and digital services. It reported $0.9 million of restructuring costs in Q1.
- Capital returns: The quarterly common dividend rose to $0.33 per share. The board authorized an additional repurchase plan for up to 1.7 million shares on April 22, 2021; the filing states total available authorizations of approximately 3.4 million shares after that approval.
- Contingencies and controls: Management said material losses from pending or threatened legal matters were not reasonably possible. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether the large negative credit-loss provision is sustainable, and how forecast changes, hospitality exposure and remaining loan deferrals affect future reserves and charge-offs.
- Whether margin pressure persists, including the effects of rates, securities reinvestment, deposit pricing, PPP fee recognition and acquisition-related accretion.
- The quality and concentration of commercial real estate and hotel exposures, including criticized/classified loan trends and the status of modified borrowers.
- Whether deposit growth remains stable and the company can manage certificate maturities, liquidity needs and securities-market exposure without materially weakening earnings or capital.
- Progress and costs for the planned core conversion and branch optimization, and actual realization of anticipated savings.
- The final scope and timing of share repurchases and dividend payments, subject to capital, liquidity and regulatory constraints.