WesBanco, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. Unaudited consolidated financial statements; dollar amounts below are in millions unless stated otherwise. WesBanco is a multi-state banking company operating in five states. Results include Your Community Bankshares (YCB), acquired September 9, 2016, so year-over-year comparisons reflect the acquisition as well as organic performance.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $72.1 | $59.8 | $142.9 | $119.6 |
| Net interest margin, fully taxable-equivalent | 3.45% | 3.30% | 3.43% | 3.29% |
| Non-interest income | $22.1 | $19.6 | $45.0 | $39.0 |
| Non-interest expense | $55.9 | $47.4 | $110.3 | $92.7 |
| Net income | $26.3 | $22.1 | $52.2 | $45.0 |
| Diluted EPS | $0.60 | $0.58 | $1.19 | $1.17 |
- Q2 net income rose about 19% and diluted EPS about 3%; first-half net income rose about 16% and EPS about 2%. The smaller per-share gains partly reflect the higher share count following YCB’s stock-funded acquisition.
- Management’s non-GAAP first-half net income, excluding after-tax merger-related expenses, was $52.5 million versus $45.4 million; corresponding diluted EPS was $1.19 versus $1.18. Q2 2017 had no merger-related expense, compared with $0.7 million in Q2 2016.
- Net interest income growth reflected larger loan balances and wider margins. Average loans were up 23.4% in Q2 year over year, mainly due to YCB; management also reported 4.1% organic loan growth over the prior 12 months. Higher asset yields more than offset increased funding costs.
- Fee income increased 12.9% in Q2 and 15.4% in the first half. Growth included electronic banking fees, deposit service charges, trust fees and mortgage-loan sale gains. First-half securities gains were lower than in 2016.
- Expenses rose 18.0% in Q2 and 18.9% in the first half, principally reflecting YCB-related staffing, branches, occupancy, technology and other operating costs. Management said additional acquisition cost savings were expected during the rest of 2017, though most personnel-related savings had followed late-2016 conversions.
Financial position, cash flow and capital
- At June 30, total assets were $9.874 billion, up 0.8% from year-end 2016; portfolio loans were $6.390 billion, up 2.3%; deposits were $7.072 billion, up 0.4%; and shareholders’ equity was $1.378 billion, up 2.7%.
- Cash and due from banks were $110.7 million, down from $128.2 million at year-end. First-half operating cash flow was $56.5 million versus $59.9 million in 2016. Investing activities used $106.0 million, largely reflecting loan growth; financing activities provided $32.1 million. Ending cash was $110.7 million versus $87.6 million at June 30, 2016.
- Total borrowings were $1.353 billion, up 1.6% from year-end: FHLB borrowings were $1.022 billion, other short-term borrowings $167.7 million, and subordinated and junior subordinated debt $164.2 million. Borrowings were 13.7% of assets. Management described deposits as the primary funding source.
- Management reported regulatory capital ratios above “well-capitalized” thresholds. At June 30, WesBanco’s Tier 1 leverage ratio was 10.09%, common equity Tier 1 was 11.44%, and total risk-based capital was 14.38%; the bank subsidiary’s corresponding ratios were 9.16%, 12.13% and 13.14%.
- Management said it believed liquidity was adequate. It cited approximately $1.6 billion of available FHLB credit, a $208.1 million Federal Reserve collateralized line with no balance outstanding, and $285.0 million in overnight correspondent-bank lines, of which $32.5 million was outstanding. Approximately $810.9 million of certificates of deposit were scheduled to mature within 12 months.
- The quarterly dividend increased to $0.26 per share in February 2017, an 8.3% increase from the prior rate. First-half declared dividends were $0.52 per share.
Credit quality, outlook and risks
- The allowance for loan losses was $44.9 million, or 0.70% of portfolio loans, versus 0.70% at December 31, 2016. First-half provision for credit losses was $5.1 million versus $4.1 million a year earlier; first-half net charge-offs were $3.8 million.
- Non-performing loans were $43.1 million, or 0.67% of portfolio loans, up from $39.4 million and 0.63% at year-end, but down from 0.80% of loans a year earlier. Non-performing assets were $49.8 million, or 0.50% of assets. Criticized and classified loans were 1.25% of loans, improved from 1.53% a year earlier. Management attributed the year-end increase in non-performing loans primarily to an acquired ESB loan placed on non-accrual.
- Management’s interest-rate model projected next-12-month net interest income increasing 4.0%, 6.8%, 9.7% and 12.0% under immediate rate increases of 100, 200, 300 and 400 basis points, respectively, and decreasing 4.2% under a 100-basis-point decline. These are model scenarios, not earnings guidance; management cautioned that assumptions may not match actual results.
- Management anticipated one additional short-term Federal Funds rate increase during the remainder of 2017 and potentially two in 2018, while noting that delayed increases or higher deposit betas could weigh on margin. It also intended to manage assets below $10 billion through the rest of 2017 and into 2018 to delay certain regulatory costs and requirements, while continuing loan growth.
- Principal disclosed risks include changing economic conditions and interest rates, credit losses, liquidity and funding availability, regulatory or legislative changes, competition, technology and cybersecurity threats, and securities-market valuations. Management said pending or threatened legal matters were not reasonably expected to result in a material loss. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
- YCB acquisition accounting was substantially complete but could still be adjusted; management expected to finalize it in the third quarter or within one year of acquisition. The acquisition added approximately $93 million of goodwill, which is not tax deductible.
Important facts for investors to verify
- Separate acquisition-driven growth from organic growth, and assess whether the expected YCB cost savings materialize.
- Track loan growth, margin trends, deposit pricing and retention, and the sensitivity of earnings to interest-rate changes.
- Monitor the increase in non-performing loans from year-end, credit performance in commercial real estate and energy-related exposures, and the adequacy of the allowance.
- Review upcoming certificate maturities, wholesale borrowing costs, available collateral and liquidity capacity.
- Confirm the final YCB purchase-price allocation and evaluate the effect of managing below the $10 billion asset threshold.