WesBanco, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. Comparisons are primarily with 2018.
Business context
WesBanco is a regional bank holding company operating community banking and trust and investment services businesses across West Virginia, Ohio, western Pennsylvania, Kentucky, southern Indiana and Maryland. At year-end it had 236 branches, approximately $15.7 billion in assets and $4.7 billion in trust assets under management or administration, which are not on its balance sheet. The November 22, 2019 acquisition of Old Line Bancshares (OLBK) expanded the franchise into Maryland; OLBK contributed about $3.0 billion in assets excluding goodwill.
Key financial results
| Metric | 2019 | 2018 |
|---|---|---|
| Net interest income | $399.9 million | $347.2 million |
| Net interest margin, fully taxable-equivalent | 3.62% | 3.52% |
| Non-interest income | $116.7 million | $100.3 million |
| Provision for credit losses | $11.2 million | $7.8 million |
| Non-interest expense | $312.2 million | $265.2 million |
| Net income | $158.9 million | $143.1 million |
| Diluted earnings per share | $2.83 | $2.92 |
| Dividends declared per share | $1.24 | $1.16 |
Net income rose 11.0%, while diluted EPS fell 3.1%, reflecting the larger share count following acquisitions, particularly OLBK. Adjusted diluted EPS excluding merger-related costs and specified items was $3.06, versus $3.21 in 2018; this is a company-reported non-GAAP measure. The efficiency ratio increased to 56.68% from 54.60%.
Balance sheet, credit and liquidity
- Scale and funding: Assets were $15.72 billion, up 26.2%; deposits were $11.00 billion, up 24.6%; and net portfolio loans were $10.22 billion, up 34.3%. Growth was primarily acquisition-driven. Organic loan growth was 1.1%; organic deposits declined.
- Borrowings and capital: Total borrowings were $1.90 billion, including $1.42 billion of FHLB advances and $199.9 million of subordinated and junior subordinated debt. Regulatory capital ratios were 12.89% CET1, 12.89% Tier 1 risk-based, 15.12% total risk-based and 11.30% Tier 1 leverage. The Bank was classified as well-capitalized. Crossing $15 billion in assets meant $136.5 million of trust preferred securities no longer counted as Tier 1 capital and instead counted as Tier 2, subject to limits.
- Liquidity: Cash and cash equivalents were $234.8 million; management reported approximately $3.2 billion of remaining FHLB borrowing capacity, subject to collateral requirements. The company reported sufficient liquidity to meet obligations. Outstanding commitments to extend credit were about $3.3 billion, most of which historically do not fund.
- Credit quality: Non-performing assets were $54.5 million, or 0.35% of assets, versus $43.7 million and 0.35% a year earlier. Non-performing loans were 0.49% of portfolio loans versus 0.48%. Net loan charge-offs were 0.09% of average loans, up from 0.06%. Criticized and classified commercial loans rose to $222.5 million, or 3.0% of commercial loans; management attributed much of the increase to a more objective grading system.
- Cash flow: Operating cash flow was $163.4 million, versus $191.9 million in 2018. Investing activities provided $103.8 million, including acquisition-related cash; financing activities used $201.5 million. Cash and cash equivalents increased $65.6 million to $234.8 million.
Material changes and unusual items
- OLBK was acquired for approximately $494.0 million in stock consideration, with 13.35 million shares issued. Preliminary purchase accounting recorded $203.8 million of goodwill and $33.6 million of core deposit intangibles; valuations remained subject to finalization.
- Net interest income increased 15.2%, reflecting acquisitions, higher average earning assets and purchase-accounting accretion. The annual margin benefited from acquisition accretion, but the fourth-quarter margin fell year over year as 2019 Federal Reserve rate cuts and a flat-to-inverted yield curve pressured loan yields.
- Non-interest expense increased 17.7%, with acquisition-related costs, additional employees, occupancy and technology costs contributing. Merger-related expenses were $16.4 million in 2019 versus $17.9 million in 2018.
- Non-interest income included a $2.6 million gain from selling WesBanco’s Visa Class B shares. The Durbin Amendment interchange fee cap applied beginning July 1, 2019 and contributed to lower electronic banking fees.
- Other comprehensive income was positive $39.1 million, principally reflecting improved unrealized gains on available-for-sale securities. Goodwill was $1.1 billion; the company reported no impairment in its 2019 assessment.
Outlook, risks and contingencies
- Outlook: The filing gives no formal full-year earnings guidance. Management expected core net interest margin, excluding purchase-accounting accretion, to be broadly flat or decline slightly during 2020, assuming no further rate cuts. Additional rate cuts could pressure margin and net interest income.
- CECL: Adoption began January 1, 2020. WesBanco estimated an initial 40%–60% increase in the allowance for credit losses, including OLBK loans, and a 20–25 basis-point reduction in the Tier 1 risk-based capital ratio on a pro forma basis. Management noted that final purchase accounting and economic assumptions could change the estimate.
- Principal risks: Regional economic weakness, commercial real estate concentration, borrower defaults, interest-rate and funding-cost changes, acquisition integration, regulatory burden, cybersecurity and third-party systems, and LIBOR transition. Commercial real estate represented 55.5% of portfolio loans; management also highlighted regional energy-sector exposure.
- COVID-19: The filing identified the emerging coronavirus outbreak as a risk that could disrupt borrowers and economic growth; the filing does not quantify an impact.
- Legal and audit matters: WesBanco said material loss from pending or threatened ordinary-course proceedings was not reasonably possible. The auditor issued an unqualified opinion on the financial statements and internal control; however, management’s internal-control assessment and the auditor’s control audit excluded OLBK loans and deposits acquired late in 2019.
Important facts for investors to verify
- Whether OLBK integration, purchase accounting and expected cost savings proceed as planned, and how final valuations affect goodwill and reported earnings.
- The realized CECL allowance and capital impact compared with management’s 40%–60% and 20–25 basis-point estimates.
- Whether loan quality trends—especially non-accrual commercial loans and criticized/classified balances—worsen beyond the effects of the revised grading approach.
- How commercial real estate concentrations, regional economic conditions and any COVID-19-related borrower stress affect credit costs and collateral values.
- Whether deposit pricing, funding costs and asset repricing support the margin outlook, including the effect of further rate changes and the LIBOR transition.
- How acquisition-related expense growth, dividends and share repurchases affect operating efficiency, capital and per-share results.