WesBanco, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. WesBanco is a regional bank holding company operating in West Virginia, Ohio, Pennsylvania, Kentucky and Indiana. Figures below are in millions unless noted. Income comparisons are against 2018; balance-sheet comparisons are generally against December 31, 2018.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $96.1 | $89.9 | $292.9 | $245.5 |
| Provision for credit losses | $4.1 | $1.0 | $9.4 | $4.9 |
| Non-interest income | $27.0 | $26.2 | $85.9 | $73.7 |
| Non-interest expense | $73.3 | $76.1 | $219.7 | $194.2 |
| Net income | $37.3 | $32.5 | $122.5 | $99.2 |
| Diluted EPS | $0.68 | $0.64 | $2.24 | $2.11 |
- Q3 net interest income rose 6.9%; non-interest income rose 2.8%. Q3 net interest margin was 3.51% on the reported basis and 3.56% on a fully taxable-equivalent basis, versus 3.45% and 3.50%, respectively, a year earlier. YTD fully taxable-equivalent margin was 3.64%, versus 3.44%.
- Management’s non-GAAP results excluding after-tax merger expenses were Q3 net income of $38.7 million and diluted EPS of $0.71, down 5.7% and from $0.81 per share, respectively. For nine months, adjusted net income was $126.3 million, up 12.6%, while adjusted diluted EPS was $2.31 versus $2.38.
- Growth comparisons reflect acquisitions, especially Farmers Capital Bank Corporation (FFKT), acquired August 20, 2018; its results were included in WesBanco only from that date. Q3 2019 also had $1.7 million of merger-related expense, compared with $10.8 million in Q3 2018. The reported Q3 expense decrease also benefited from an FDIC assessment credit; excluding merger expenses, non-interest expense rose 9.6%.
Financial condition, cash flow and liquidity
- At September 30, total assets were $12,593.9 million, up 1.1% from year-end; portfolio loans were $7,756.8 million, up 1.3%; and total deposits were $8,664.4 million, down 1.9%. Shareholders’ equity was $2,101.3 million, up 6.2%.
- Deposits fell $167.3 million, including a $180.1 million decline in certificates of deposit, partly offset by higher savings and non-interest-bearing demand deposits. Total borrowings rose 7.1% to $1,643.0 million: FHLB borrowings increased, while subordinated and junior subordinated debt declined following $33.5 million in redemptions.
- The allowance for loan losses was $54.3 million, or 0.70% of portfolio loans, versus $48.9 million, or 0.64%, at year-end. Non-performing loans were 0.52% of portfolio loans; non-performing assets were $44.3 million, or 0.35% of total assets.
- For the first nine months, operating cash flow was $148.1 million, investing cash flow was $35.6 million, and financing cash flow was negative $108.5 million. Cash and cash equivalents ended at $244.3 million, up $75.1 million from year-end.
- Management reported regulatory capital ratios substantially above “well-capitalized” thresholds. At September 30, WesBanco’s common equity Tier 1 ratio was 13.87% and total risk-based capital ratio was 16.36%; the Bank’s were 13.64% and 14.59%, respectively. The company reported $2.2 billion of available FHLB credit capacity and $193.7 million under its Federal Reserve borrower-in-custody line, with none drawn.
Material changes, outlook and risks
- Credit provision increased, in part because borrower risk grades changed following revisions to the internal loan classification system. Criticized and classified loans rose to 2.24% of loans from 1.08% at year-end; management attributed a portion of the increase to those classification adjustments. Net charge-offs remained low at 0.04% annualized in Q3.
- Management said the company remains asset-sensitive. Its outlook anticipated a slight decline of a few basis points in core net interest margin over the rest of 2019, excluding purchase-accounting accretion, and a decline of several basis points in total margin as accretion diminishes. Its modeling assumed one 25-basis-point Federal Reserve rate cut; actual results depend on rates, deposit pricing, the yield curve and balance-sheet mix. The filing provides no specific earnings or EPS guidance.
- WesBanco expected the approximately $500 million Old Line Bancshares merger to close in Q4 2019, subject to regulatory approvals. Shareholders of both companies and West Virginia regulators had approved it. A securities-related lawsuit alleged proxy disclosure deficiencies and sought injunctive relief and damages; no preliminary-injunction motion was timely filed. The filing says the outcome and any effect on the merger could not be predicted.
- CECL was scheduled for adoption January 1, 2020. Preliminary estimates indicated a possible increase of up to 30% in the loan allowance and up to a 15-basis-point reduction in the Tier 1 risk-based capital ratio, without a regulatory-capital phase-in. Estimates remained subject to model validation and judgmental refinements, and excluded potential Old Line loans.
- Other stated risks include credit and regional economic conditions, interest-rate and liquidity exposure, merger integration and synergies, competition, regulatory changes, cybersecurity, fraud, and LIBOR transition. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting. It did not consider ordinary-course litigation losses material reasonably possible.
Investor facts to verify
- Track deposit mix and pricing, especially the $764.4 million of certificates of deposit scheduled to mature within 12 months, and assess the cost of replacement funding.
- Review credit trends and the allowance, including the effect of revised risk grades on criticized/classified loans and the higher provision.
- Confirm Old Line merger closing, integration costs, and any developments in the related lawsuit.
- Monitor CECL model validation and the eventual allowance and regulatory-capital impact; the preliminary estimates exclude Old Line loans.
- Compare future net interest margin and funding costs with management’s rate-cut assumptions and stated expectation of modest margin pressure.