WesBanco, Inc. — Q2 2011 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2011; filed July 28, 2011. WesBanco is a multi-state bank holding company operating 112 branches in West Virginia, Ohio and western Pennsylvania. Its reportable segments are community banking and trust and investment services.
Financial and operating highlights
Unless otherwise noted, dollar amounts are in millions.
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net interest income | $43.1 | $41.1 | $84.5 | $81.8 |
| Provision for credit losses | $6.8 | $11.7 | $14.8 | $23.2 |
| Non-interest income | $15.0 | $14.6 | $29.5 | $29.6 |
| Non-interest expense | $35.7 | $34.6 | $71.2 | $70.0 |
| Net income | $11.9 | $8.2 | $22.2 | $16.1 |
| Diluted EPS | $0.45 | $0.31 | $0.83 | $0.61 |
- Management reported fully taxable-equivalent net interest margin of 3.73% for Q2 and 3.70% for the first half, up 17 and 13 basis points year over year. The statements’ non-tax-equivalent margins were 3.59% and 3.56%, respectively.
- At June 30, total assets were $5.426 billion, up 1.2% from year-end 2010; shareholders’ equity was $623.0 million, up 2.7%.
- Portfolio loans were $3.263 billion, down 0.8% from year-end; deposits were $4.221 billion, up 1.2%. Securities totaled $1.525 billion, up 6.9%.
- Six-month operating cash flow was $58.7 million, investing cash flow was negative $90.8 million, and financing cash flow was positive $36.3 million. Cash and equivalents rose $4.2 million to $83.3 million.
- Total borrowings were $541.7 million, including $226.9 million of Federal Home Loan Bank borrowings and $106.1 million of junior subordinated debt. The allowance for loan losses was $61.4 million, or 1.88% of loans.
- Capital ratios remained above regulatory minimums: WesBanco’s Tier 1 leverage ratio was 8.59% and total risk-based capital ratio 13.61%; the Bank’s corresponding ratios were 7.94% and 12.71%.
Material changes versus comparable periods
- Net income increased 44.7% in Q2 and 37.2% in the first half. Lower funding costs and improved margins, together with a lower credit-loss provision, were primary contributors.
- Interest income declined as yields fell, but interest expense fell faster: 24.2% in Q2 and 25.5% year to date. Management cited lower CD rates, more low-cost deposits, and reduced FHLB borrowings.
- Credit costs eased: first-half provision fell $8.3 million year over year; first-half net charge-offs were $15.2 million versus $19.1 million. Q2 annualized loan net charge-offs were 0.85%, compared with 1.42% a year earlier.
- Credit quality was mixed. Nonperforming assets declined to $103.5 million from $104.4 million at year-end, but nonaccrual loans rose to $62.0 million from $48.8 million; troubled debt restructurings fell to $36.4 million from $47.5 million. Nonperforming loans were 3.02% of total loans versus 2.93% at year-end.
- Non-interest income was nearly flat year to date. Higher trust and electronic banking fees and smaller real-estate-owned asset losses were offset by lower deposit service charges and securities gains. Non-interest expense rose 1.8% year to date, including marketing, compensation and other operating costs; Q2 other operating costs included retail customer fraud charges and professional fees.
- The effective tax rate for the first half rose to 20.9% from 11.6%, primarily because taxable income increased relative to tax-exempt income.
Outlook, commentary, risks and contingencies
- No specific earnings or full-year financial guidance is provided. Management expected net interest margin to be slightly negatively affected during the remainder of 2011 as loan runoff and security maturities were reinvested at lower rates; it did not expect short-term rates to rise until mid-to-late 2012.
- Interest-rate sensitivity modeling estimated next-12-month net interest income would decline 3.7% under an immediate 100-basis-point rate decrease, and increase 1.2% under a 100-basis-point increase. A gradual 200-basis-point increase over 12 months was modeled to raise net interest income 1.5%. These estimates depend on assumptions and are not forecasts.
- Liquidity sources included approximately $1.9 billion of estimated sources over the next year, $960.9 million of remaining FHLB borrowing capacity, and a $139.6 million Federal Reserve borrowing line with no amount outstanding. Certificates of deposit totaling $797.8 million were scheduled to mature within one year. Management said current liquidity was sufficient.
- Commitments to extend credit were $717.4 million; standby letters of credit were $34.8 million and affordable-housing guarantees $4.2 million. Management said many commitments are expected to expire undrawn. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect.
- Key risks include regional and national economic conditions, credit losses, interest rates and funding liquidity, regulatory changes including Dodd-Frank and Basel III, competition, technology, fraud and cyber threats. Management anticipated Dodd-Frank could reduce revenue and increase expenses, but said the full impact remained uncertain.
- Regulatory changes affecting overdraft fees had contributed to lower deposit service charges. Management also anticipated some indirect effect on electronic banking fees from debit interchange fee rules taking effect October 1, 2011.
Important facts for investors to verify
- Whether rising nonaccrual loans, particularly commercial real estate and commercial and industrial exposures, lead to further losses despite lower provisions and net charge-offs.
- How deposit pricing, the $797.8 million of near-term CD maturities, and reduced wholesale funding affect funding costs and net interest margin.
- Whether loan demand improves enough to offset portfolio runoff and lower yields, and whether management’s interest-rate sensitivity assumptions prove reliable.
- How recurring the Q2 fraud-related and professional-fee costs are, and the ongoing effect of regulatory changes on fee income.
- Capital and liquidity impacts of Dodd-Frank, Basel III, and other regulatory requirements as rules are finalized and implemented.