WesBanco, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. WesBanco is a regional bank holding company operating in West Virginia, Ohio, Pennsylvania, Kentucky and Indiana. Unless otherwise noted, financial figures below are in millions of dollars.
Financial performance and condition
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $82.3 | $72.1 | $155.5 | $142.9 |
| Non-interest income | $23.4 | $22.1 | $47.5 | $45.0 |
| Net income | $33.2 | $26.3 | $66.7 | $52.2 |
| Diluted EPS | $0.71 | $0.60 | $1.47 | $1.19 |
| Provision for credit losses | $1.7 | $2.4 | $3.9 | $5.1 |
| Non-interest expense | $63.5 | $55.9 | $118.1 | $110.3 |
- Q2 net income increased 25.9% year over year; first-half net income rose 27.7%. Excluding after-tax merger-related costs, management reported non-GAAP net income of $37.4 million ($0.80 diluted EPS) for Q2 and $71.2 million ($1.57 diluted EPS) for the first half. These adjusted figures are not GAAP measures.
- Q2 net interest margin was 3.38% on a GAAP basis and 3.43% on a fully taxable-equivalent basis, compared with 3.33% and 3.45%, respectively, a year earlier. Management attributed the slightly lower FTE margin mainly to the reduced tax-equivalent benefit on tax-exempt securities; higher funding costs were also a factor.
- At June 30, total assets were $10.95 billion, up 11.5% from year-end 2017; portfolio loans were $6.79 billion, up 7.1%; deposits were $7.67 billion, up 8.9%; and total borrowings were $1.67 billion, up 28.9%. Much of the balance-sheet expansion reflected the FTSB acquisition and securities purchases.
- Six-month operating cash flow was $66.9 million; investing cash outflow was $344.9 million, largely reflecting securities purchases; financing cash inflow was $316.0 million. Cash and cash equivalents ended the period at $155.6 million, versus $117.6 million at year-end.
- Shareholders’ equity was $1.52 billion. Regulatory capital ratios remained above “well-capitalized” thresholds: WesBanco’s total risk-based capital ratio was 15.26% and common equity Tier 1 was 12.38%; the bank’s corresponding ratios were 13.63% and 12.64%.
Material changes and notable items
- WesBanco completed its acquisition of First Sentry Bancshares (FTSB) on April 5, issuing 2,498,761 shares and paying approximately $1.0 million cash; preliminary purchase price was $108.3 million. FTSB added approximately $448.3 million in loans and $590.0 million in deposits. The preliminary allocation included $66.2 million of goodwill and $8.2 million of core deposit intangibles; acquisition accounting remains subject to finalization.
- Q2 non-interest expense included $5.4 million of restructuring and merger-related costs. First-half costs totaled $5.7 million: $5.0 million related to FTSB and $0.7 million to the pending Farmers Capital (FFKT) transaction. Excluding merger costs, Q2 expense rose 4.0% year over year, principally due to staffing and compensation.
- The effective tax rate fell to 18.1% in Q2 from 26.8%, reflecting the federal corporate tax-rate reduction to 21%; first-half effective tax rate was 17.7%.
- Net charge-offs were 0.03% of average portfolio loans in Q2, versus 0.09% a year earlier. Non-performing loans were 0.57% of portfolio loans at June 30; the allowance for loan losses was $47.6 million, or 0.70% of portfolio loans. WesBanco reported no allowance on FTSB-acquired loans at quarter-end.
- Available-for-sale securities had $36.0 million of net unrealized losses in accumulated other comprehensive income, versus $13.3 million at year-end 2017. Management attributed the change principally to market-rate movements and said it considered the losses temporary.
- The quarterly dividend was increased 11.5% to $0.29 per share in February. First-half dividends declared were $0.58 per share.
Outlook, risks and contingencies
- No formal earnings guidance was provided. Management anticipated one or two additional short-term Federal Reserve rate increases by year-end 2018, consistent with Federal Reserve and consensus expectations. Margin outcomes remain sensitive to deposit pricing, rate movements, the yield curve, and asset/liability mix.
- The merger with FFKT, announced at an approximately $378.2 million transaction value, was expected to close in Q3 2018; regulatory and shareholder approvals had been obtained. Management cautioned that integration, cost savings and revenue synergies may take longer than expected or not be fully realized.
- Management cited $791.3 million of certificates of deposit scheduled to mature within 12 months, with an average cost of 0.91%. It reported approximately $1.7 billion of available FHLB borrowing capacity, alongside other borrowing and liquidity sources, and stated that it believed liquidity was adequate.
- Key risks include changing interest rates and deposit costs, loan and securities credit quality, regional economic conditions, merger integration, competition, regulation, cybersecurity and marketability or valuation of debt securities. A future reduction in debit-card interchange revenue was expected beginning in Q3 2019 due to the Durbin Amendment.
- A shareholder lawsuit concerning FFKT merger disclosures was settled through additional disclosures; plaintiff’s counsel reserved the right to seek fees and expenses. Management stated it did not believe other pending or threatened legal matters were reasonably likely to result in a material loss.
Investor verification points
- Confirm the final FTSB purchase-price allocation, integration costs and realized cost savings; separately track the timing and terms of the FFKT merger.
- Assess whether loan growth, credit quality and the allowance remain appropriate, particularly for commercial real estate and acquired loans.
- Monitor deposit pricing and CD maturities against the substantial increase in borrowings, and verify that liquidity and funding costs remain manageable.
- Track net interest margin and sensitivity to rate changes, including the effect of tax-exempt securities and deposit betas.
- Review the securities portfolio’s unrealized losses and the effect of further interest-rate changes on accumulated other comprehensive income and tangible equity.
- Reconcile reported GAAP earnings with management’s non-GAAP earnings excluding merger-related costs.