WesBanco, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; quarterly figures below refer to the fourth quarter where noted. WesBanco is a regional bank holding company operating in West Virginia, Ohio, western Pennsylvania, Kentucky and southern Indiana, with community banking and trust and investment services segments.
Business context and financial performance
- Completed the First Sentry Bancshares acquisition on April 5 and Farmers Capital Bank (FFKT) acquisition on August 20. The acquisitions expanded WesBanco’s markets and substantially increased its scale; reported year-over-year growth therefore includes acquired operations.
- Profit: Net income was $143.1 million, up 51.5% from $94.5 million in 2017. Diluted EPS was $2.92 versus $2.14. Excluding merger costs and the prior-year deferred-tax revaluation, non-GAAP diluted EPS was $3.21 versus $2.45. Fourth-quarter net income was $43.9 million and diluted EPS was $0.80.
- Revenue and margins: Net interest income rose 19.6% to $347.2 million; fully taxable-equivalent net interest margin increased to 3.52% from 3.44%. Non-interest income was $100.3 million, up 12.9%. Interest expense grew 60.7% to $67.7 million, reflecting higher rates and acquired funding.
- Costs and profitability: Non-interest expense rose 20.1% to $265.2 million, including $17.9 million of merger-related costs. Excluding merger costs, expense increased 12.5%. The reported efficiency ratio improved to 54.60% from 56.44%.
- Credit: Provision for credit losses declined to $7.8 million from $10.0 million. Net charge-offs were $3.9 million, or 0.06% of average loans, versus $8.4 million, or 0.13%, in 2017. Non-performing assets fell to $43.7 million, 0.35% of assets, from $48.7 million, 0.50%.
- Balance sheet: Assets were $12.46 billion, up 26.9%; net portfolio loans were $7.61 billion, up 20.8%; deposits were $8.83 billion, up 25.4%; and shareholders’ equity was $1.98 billion. Acquisitions were the primary growth driver. Commercial real estate represented 50.3% of portfolio loans.
- Debt and liquidity: Total borrowings, including subordinated and junior subordinated debt, were $1.53 billion, up 18.3%; deposits remained the principal funding source. Cash and cash equivalents were $169.2 million. Management reported approximately $2.3 billion of remaining FHLB borrowing capacity and $3.39 billion of expected liquidity sources over the next year. Operating cash flow was $191.6 million; investing cash flow was negative $51.9 million; financing cash flow was negative $88.1 million; cash increased $51.6 million.
- Capital and shareholder returns: CET1 was 13.14%, Tier 1 risk-based capital 15.09%, total risk-based capital 15.99%, and Tier 1 leverage 10.74%. The bank was classified as well capitalized. Dividends declared were $1.16 per share for 2018; the quarterly rate was raised to $0.31 in February 2019.
Material changes versus 2017
- The acquisitions drove much of the increases in assets, loans, deposits, fee income, staffing and costs. WesBanco issued approximately 10.4 million shares for the transactions, materially increasing shares outstanding.
- Net interest margin benefited from higher market rates, purchase-accounting accretion and FFKT’s acquired asset mix; these benefits were partly offset by higher funding costs and a flatter yield curve.
- Effective tax rate declined to 18.0% from 36.3%, partly because the federal statutory rate fell to 21% and 2017 included a $12.8 million deferred-tax remeasurement charge.
- Gross unrealized securities losses increased to $43.0 million from $26.7 million, which management attributed primarily to rising rates and characterized as temporary. Accumulated other comprehensive loss was $37.9 million at year-end.
Outlook, risks and unusual items
- Management expected 2019 core net interest margin to remain relatively flat, while total margin could decline gradually as acquisition-related purchase-accounting accretion runs off. It anticipated one federal funds rate increase around mid-2019; these are expectations, not guarantees.
- Beginning July 2019, the Durbin Amendment was expected to reduce debit interchange income by about $2.5 million per quarter. Management also anticipated annual FDIC insurance expense increasing by $1.0–$1.5 million beginning in the second quarter of 2019.
- FFKT integration was planned for completion in the first quarter of 2019. Integration execution, customer and employee retention, cost savings and revenue synergies remain risks. Goodwill was $861.9 million; management reported no impairment in 2018.
- Key exposures include commercial real estate and regional economic concentration, interest-rate and funding-cost changes, securities valuation and municipal-bond risks, competition, cybersecurity and third-party service providers, and regulatory costs. Management also highlighted LIBOR transition uncertainty.
- CECL was scheduled for adoption in 2020. WesBanco expected an increase in the allowance for credit losses at adoption, with the amount dependent on economic conditions and portfolio trends.
- Management stated that pending or threatened legal matters were not reasonably expected to result in a material loss. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management concluded controls were effective.
Most important facts for investors to verify
- How much 2018 earnings and growth came from acquisitions versus organic performance, and whether integration delivers expected benefits.
- Whether core margin, deposit costs and loan yields perform as expected as purchase-accounting accretion declines and funding reprices.
- Actual impact of the Durbin Amendment and higher FDIC assessments on fee income and expenses.
- Credit quality and concentration trends, especially commercial real estate, and the adequacy of the allowance after accounting for acquired-loan marks and future CECL adoption.
- Liquidity and funding needs, including deposit retention and upcoming certificate-of-deposit maturities, alongside capital and dividend capacity.
- Potential impairment or earnings effects from securities losses, goodwill, regulatory changes, and unresolved LIBOR-linked exposures.