WesBanco, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018 unless otherwise noted. WesBanco is a multi-state bank holding company operating in West Virginia, Ohio, western Pennsylvania, Kentucky, and southern Indiana. Results include the Farmers Capital Bank Corp. (FFKT) acquisition, completed in August 2018, and the FTSB acquisition; the filing attributes much of year-over-year growth to these transactions.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior date |
|---|---|---|
| Net interest income | $98.4 million | $73.3 million; up 34.2% |
| Net interest margin | 3.63%; 3.68% on a fully taxable-equivalent basis | 3.32%; 3.38% fully taxable-equivalent |
| Non-interest income | $27.8 million | $24.0 million; up 15.8% |
| Non-interest expense | $74.4 million | $54.6 million; up 36.4% |
| Provision for credit losses | $2.5 million | $2.2 million |
| Net income | $40.3 million | $33.5 million; up about 20% |
| Diluted earnings per share | $0.74 | $0.76 |
| Operating cash flow | $51.2 million | $31.9 million |
| Total assets | $12.60 billion | $12.46 billion |
| Portfolio loans, net of allowance | $7.62 billion | $7.61 billion |
| Deposits | $8.92 billion | $8.83 billion |
| Total borrowings | $1.51 billion | $1.53 billion |
| Shareholders’ equity | $2.02 billion | $1.98 billion |
Net income growth did not translate into higher reported EPS: average diluted shares rose to 54.7 million from 44.2 million, primarily reflecting acquisition-related share issuance. Excluding after-tax merger expenses, management reported non-GAAP net income of $42.8 million and diluted EPS of $0.78, up 26.9% in net income from the prior-year comparison.
Interest income rose 37.8% and interest expense 57.7% year over year. Management cited higher average earning assets, acquired loans and deposits, higher asset yields, and purchase-accounting accretion. Acquisition accretion contributed approximately 19 basis points to Q1 2019 net interest margin, versus 6 basis points a year earlier. The allowance for loan losses was $48.9 million, or 0.64% of portfolio loans; total allowance for credit losses, including commitments, was $50.8 million. Net charge-offs were 0.07% of average portfolio loans.
Cash and cash equivalents ended the quarter at $336.9 million, up from $169.2 million at year-end. Cash from investing activities was $68.9 million, compared with cash used of $462.2 million in Q1 2018; financing activities provided $47.6 million, versus $413.6 million. The filing describes liquidity sources including cash, expected loan repayments and maturities, and substantial borrowing capacity. Regulatory capital ratios exceeded “well-capitalized” thresholds: WesBanco’s total risk-based capital ratio was 16.22% and the Bank’s was 14.47%.
Material changes and notable items
- Q1 net interest margin improved year over year, while non-interest expense grew faster than revenue, primarily reflecting the FTSB and FFKT acquisitions, added staffing, intangible amortization, and integration costs. FFKT merger-related expense was $3.1 million.
- Loans were nearly flat from year-end, while deposits rose 1.0%. Borrowings declined 1.4%, including repayment of $10.3 million of junior subordinated debt. The company said it planned to redeem a further $23.2 million of acquired junior subordinated debt on May 1, 2019.
- Shareholders’ equity increased by $44.3 million, reflecting net income and a $19.8 million improvement in other comprehensive income, partly offset by $16.9 million in declared dividends. The quarterly dividend increased 6.9% to $0.31 per share.
- Under a new accounting standard, WesBanco transferred $67.4 million of callable municipal securities from held-to-maturity to available-for-sale and subsequently sold $66.1 million at a $51,000 net gain. Net unrealized losses on available-for-sale securities improved during the quarter.
Outlook, risks, and contingencies
- Management expected the core net interest margin to remain relatively flat in 2019; including purchase-accounting accretion, it expected margin to decline by 1–2 basis points per quarter. Management anticipated no Federal Reserve rate change in 2019. These are forward-looking expectations, not guarantees.
- Management noted a flat-to-inverted yield curve and expected deposit-cost pressure. Its interest-rate model projected net interest income to rise 3.0%–10.7% under immediate rate increases of 100–400 basis points, and fall 2.3%–7.3% under decreases of 100–200 basis points. Model results depend on assumptions and may not reflect actual outcomes.
- Criticized and classified loans increased to $109.1 million, or 1.42% of loans, from 1.08% a year earlier. Management attributed the increase mainly to post-acquisition loan reviews and two downgraded legacy relationships. Non-performing loans were 0.47% of total loans; management said non-performing asset measures improved year over year.
- WesBanco expected debit-card interchange fees to decrease by an estimated $2.0–$3.0 million per quarter beginning July 1, 2019, following the impact of the Durbin amendment as the company exceeded $10 billion in assets.
- The company was implementing the expected-credit-loss standard, effective for it in 2020, and anticipated an increase in its allowance upon adoption; the amount depends on economic conditions and portfolio trends. It adopted lease accounting in 2019, recognizing approximately $20 million of right-of-use assets and lease liabilities at transition.
- Off-balance-sheet commitments included $1.92 billion of lines of credit, $333.2 million of approved loans not yet closed, and $43.6 million of letters of credit. Management did not believe pending or threatened legal matters were reasonably likely to result in a material loss.
Important facts for investors to verify
- How acquisition integration, expense control, and the planned branch and staffing changes affect profitability after merger costs subside.
- Whether loan-quality migration and the $1.96 million allowance for loan commitments require additional provisioning, and the eventual impact of the 2020 expected-credit-loss standard.
- Actual net interest margin and funding costs versus management’s outlook, including deposit repricing, maturing certificates of deposit, and purchase-accounting accretion.
- The realized effect of the anticipated debit-card interchange fee reduction and other post-$10-billion regulatory costs.
- Liquidity and securities-portfolio flexibility, given pledged securities, held-to-maturity restrictions, and the volume of deposit maturities and credit commitments.