WesBanco, Inc. — Q1 2018 Form 10-Q
Business context and period. WesBanco is a multi-state banking company operating in West Virginia, Ohio, western Pennsylvania, Kentucky and southern Indiana. This unaudited filing covers the three months ended March 31, 2018; income-statement comparisons are with Q1 2017, while balance-sheet comparisons are with December 31, 2017. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior date |
|---|---|---|
| Net interest income | $73.3 | $70.7 in Q1 2017; up 3.6% |
| Net interest margin, fully taxable-equivalent | 3.38% | 3.42% in Q1 2017 |
| Non-interest income | $24.0 | $22.9 in Q1 2017; up 4.8% |
| Non-interest expense | $54.6 | $54.4 in Q1 2017; up 0.3% |
| Provision for credit losses | $2.2 | $2.7 in Q1 2017 |
| Net income / diluted EPS | $33.5 / $0.76 | $25.9 / $0.59 in Q1 2017 |
| Operating cash flow | $32.4 | $47.5 in Q1 2017 |
| Total assets | $10,245.4 | $9,816.2 at December 31, 2017 |
| Deposits | $7,226.3 | $7,043.6 at December 31, 2017 |
| Total borrowings | $1,539.0 | $1,297.3 at December 31, 2017 |
| Shareholders’ equity | $1,403.0 | $1,395.3 at December 31, 2017 |
- Earnings and drivers: GAAP net income rose about 29.5% year over year. The effective tax rate fell to 17.28% from 29.09%, reflecting the federal corporate tax-rate reduction to 21%. Excluding after-tax merger costs, the company reported non-GAAP net income of $33.7 million versus $26.2 million, up 28.7%.
- Margin and funding: Net interest income benefited from higher earning-asset balances and yields, but interest expense rose 42.6% as deposit and borrowing costs increased. The fully taxable-equivalent margin declined four basis points; management attributed pressure partly to the lower tax-equivalent benefit on municipal securities after tax reform. The filing also reports a non-tax-equivalent margin of 3.32%, versus 3.30% in Q1 2017.
- Fees and expenses: Non-interest income growth included higher bank-owned life insurance income, reflecting larger death benefits, and higher trust and electronic banking fees. Mortgage banking income declined 30.3%; mortgage production was down 10.9%. Expense growth was modest; salaries rose while employee benefits fell, partly due to pension-cost presentation changes.
- Loans and credit: Portfolio loans were $6,322.5 million, down 0.3% from year-end. Commercial real estate was 47.6% of total loans. Non-performing loans were $39.2 million, or 0.62% of portfolio loans, and non-performing assets were $43.3 million, or 0.42% of assets. Net charge-offs were 0.07% of average portfolio loans, versus 0.15% in Q1 2017. The allowance for loan losses was $46.3 million, or 0.73% of portfolio loans.
- Cash flow and securities: Investing activities used $462.8 million, principally reflecting $540.6 million of available-for-sale securities purchases; financing activities provided $413.7 million. Cash and cash equivalents ended at $100.8 million. Total securities increased 20.3% from year-end to $2,748.4 million, primarily from purchases of mortgage-backed securities as WesBanco pursued assets above $10 billion.
- Liquidity, debt and capital: Deposits increased 2.6%; FHLB borrowings rose 23.1% to $1,166.9 million, helping fund securities purchases. Management identified $2,478.3 million of estimated liquidity sources expected within one year and approximately $1.6 billion of available FHLB credit. WesBanco and the Bank exceeded regulatory “well-capitalized” thresholds; consolidated total risk-based capital was 15.35% and Bank capital was 13.79%. The quarterly dividend was increased to $0.29 per share.
Material developments, outlook and risks
- On April 5, 2018, WesBanco completed its acquisition of First Sentry Bancshares, valued at approximately $107.5 million. The acquired company had approximately $705.1 million in assets excluding goodwill, $577.4 million in deposits, $459.5 million in loans and five branches. Purchase accounting was incomplete at filing, and Q1 included $0.2 million of related merger expenses.
- On April 19, 2018, WesBanco announced a definitive agreement to acquire Farmers Capital Bank Corporation, valued at approximately $378.2 million at announcement. The transaction was expected to close in Q3 or Q4 2018, subject to regulatory and shareholder approvals.
- Management anticipated two to three additional Federal Reserve rate increases by year-end 2018, broadly consistent with market expectations; this is commentary, not formal earnings guidance. Sensitivity modeling projected next-12-month net interest income increasing 2.4% to 9.0% under immediate rate increases of 100 to 400 basis points, and declining 2.7% under a 100-basis-point decrease. Results depend on assumptions, including deposit pricing and loan prepayments.
- Available-for-sale debt securities had $51.8 million of gross unrealized losses at quarter-end; $29.2 million of net unrealized losses was reflected in accumulated other comprehensive income. Management considered the losses temporary and said substantially all debt securities were above investment grade and paying as contracted. Interest-rate changes, market values and the securities portfolio’s substantial mortgage-backed exposure remain relevant risks.
- Other stated risks include integration and synergy execution for the acquisitions, deposit competition and funding costs, economic and credit conditions, interest rates and yield-curve changes, liquidity, regulatory actions, cybersecurity and technology risks. WesBanco reported that no material loss from pending or threatened legal proceedings was reasonably possible. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Key facts investors should verify
- Whether the completed First Sentry acquisition and proposed Farmers transaction meet expected integration, cost-savings and financial objectives, and their effects on capital and funding.
- Whether margin performance can withstand rising deposit and borrowing costs, changing deposit betas and the yield curve; reconcile fully taxable-equivalent and reported margin measures.
- Whether the securities portfolio’s unrealized losses, mortgage-backed exposure and municipal concentration evolve as rates and markets change.
- Whether credit quality and reserve coverage remain stable as loan growth and criticized/classified exposures change.
- Whether deposit growth and available borrowing capacity continue to support liquidity needs and commitments, including the $694.4 million of certificates of deposit scheduled to mature within 12 months.