WesBanco, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 30, 2020; comparisons are primarily with Q3 and the first nine months of 2019. Unless noted, dollar amounts are USD millions. WesBanco is a multi-state banking company operating in six states. Comparisons are affected by its November 2019 acquisition of Old Line Bancshares (OLBK), which added approximately $3.0 billion in assets.
Financial results and position
| Metric | Q3 2020 | Comparable period |
|---|---|---|
| Net interest income | $120.6 | $96.1 in Q3 2019; up 25.5% |
| Net interest margin, fully taxable equivalent | 3.31% | 3.56% in Q3 2019 |
| Provision for credit losses | $16.3 | $4.1 in Q3 2019 |
| Non-interest income | $34.6 | $27.0 in Q3 2019; up 28.4% |
| Non-interest expense | $89.9 | $73.3 in Q3 2019; up 22.8% |
| Net income / diluted EPS | $41.3 / $0.61 | $37.3 / $0.68 in Q3 2019 |
- For the first nine months, net interest income was $359.8 versus $292.9; provision for credit losses was $107.9 versus $9.4; and net income was $69.2 versus $122.5. Diluted EPS was $1.03 versus $2.24.
- Excluding after-tax restructuring and merger expenses, a non-GAAP measure, Q3 net income was $44.2 and diluted EPS $0.66; nine-month results were $76.5 and $1.14. The filing reports these adjustments for comparison, not as GAAP results.
- Q3 net interest income benefited from higher average earning assets, primarily OLBK and Paycheck Protection Program (PPP) loans. Lower market rates compressed asset yields and margin; lower funding costs partly offset that pressure.
- Mortgage banking income rose to $8.5 from $2.6 in Q3 2019, reflecting higher origination and secondary-market sale activity. Service charges and electronic banking fees declined.
- Cash and due from banks was $760.3 at quarter-end. Nine-month operating cash flow was $20.6, down from $148.1 in 2019; cash increased $525.5 over the period, with financing cash flow of $733.0 and investing cash outflow of $228.2.
- At September 30, total assets were $16.55 billion, deposits $12.20 billion, total borrowings $1.37 billion and shareholders’ equity $2.73 billion. Since December 31, 2019, assets rose 5.3%, deposits 10.9% and equity 5.4%; borrowings fell 27.9%.
- Total loans were $11.12 billion, including $853.1 of PPP loans; deposits increased $1.20 billion. The loan allowance was $185.1, or 1.68% of portfolio loans (1.83% excluding PPP loans); allowance for loan commitments was $10.8.
- WesBanco issued preferred shares for net proceeds of $144.5 million. The Series A preferred stock carries a 6.75% fixed-rate reset, non-cumulative dividend. The common dividend declared was $0.32 per share for Q3.
Material changes, outlook and risks
- WesBanco adopted CECL on January 1, 2020. The day-one increase to the allowance for loans and commitments was $41.4 million, with a $26.6 million after-tax reduction to retained earnings. The nine-month provision also reflects changing COVID-19 economic forecasts; therefore, year-over-year earnings comparisons include significant credit-loss effects.
- Reported loan growth reflects OLBK and PPP. Management said that, excluding those effects, loans decreased year over year, with weaker commercial line utilization and loan demand partly offset by commercial real estate growth.
- Non-performing loans were 0.38% of total loans. Criticized and classified loans were 3.25%, up from 2.17% at year-end 2019; management cited internal risk-grade revisions and downgrades, including in hospitality. COVID-19 deferrals were not classified as past due or troubled debt restructurings when qualifying criteria were met.
- Approximately 3,553 COVID-19 loan modifications totaling $2.2 billion had been made; $0.7 billion remained in deferral at quarter-end. Hotel loans were $777.1 million, and $314.9 million of hotel loans were in deferral. Further accommodations were under development and would require customer financial information.
- Management expected the core net interest margin to decline a few basis points over the remainder of 2020, as lower asset yields and reinvestment rates were expected to be partly offset by lower deposit and wholesale funding costs. PPP forgiveness and fee accretion could support future net interest income. No formal earnings guidance is provided in the supplied filing text.
- Management said that, if its unemployment forecast remained consistent and other model inputs stayed relatively constant, future quarterly increases in the allowance could be less significant. This is conditional, not a guarantee.
- WesBanco announced optimization of 25 financial-center locations and conversion of two others to drive-up-only. It expected $6.0–$6.5 million of savings phased in during the first half of 2021 and total related charges of approximately $3.5–$4.0 million; $3.0 million was recorded in Q3.
- Management found no goodwill impairment in its September 30 interim analysis; an annual test was planned for the fourth quarter. The filing identifies COVID-19, economic deterioration, interest rates, credit losses, liquidity, market volatility, cyber risks and regulatory actions as risks. Management did not consider a material loss from pending or threatened legal matters reasonably possible.
- Liquidity sources include $760.3 million of cash, projected asset cash flows and unused borrowing facilities. The company reported $3.5 billion of available FHLB capacity, a $196.5 million Federal Reserve borrowing line and $275 million of overnight bank lines, none outstanding at quarter-end. Liquidity is subject to deposit flows, customer drawdowns and collateral availability.
Important facts for investors to verify
- How credit quality develops as COVID-19 deferrals expire, especially in hospitality, retail and other affected commercial exposures, and whether criticized loans or charge-offs rise.
- Whether the CECL allowance remains adequate as forecasts, loan performance and deferral outcomes change; review the allowance by loan segment and the $10.8 million commitment reserve.
- How much reported loan, deposit and earnings growth is attributable to OLBK and PPP, and how PPP forgiveness and remaining deferred fees affect subsequent results.
- Whether lower rates continue to pressure net interest margin, and whether deposit-cost reductions can offset asset-yield declines.
- Whether branch-optimization savings and costs meet management’s estimates, and whether the preferred-stock dividend, common dividend and capital ratios remain sustainable.