WesBanco, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
WesBanco is a regional bank holding company operating 199 branches across West Virginia, Ohio, western Pennsylvania, Kentucky and southern Indiana. Its businesses include community banking and trust and investment services. Comparisons with 2018 reflect acquisitions, including FFKT (completed August 2018) and FTSB; therefore, reported growth is not solely organic.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Change / context |
|---|---|---|---|
| Net income | $44.8 | $33.2 | Up 35.1% |
| Diluted EPS | $0.82 | $0.71 | Average diluted shares rose to 54.7 million from 46.6 million |
| Net interest income | $98.5 | $82.3 | Up 19.6% |
| Non-interest income | $31.2 | $23.4 | Up 33.1%; included a $2.6 million Visa Class B share sale gain |
| Non-interest expense | $72.0 | $63.5 | Up 13.2%; acquisition-related operating costs increased |
| Net interest margin, fully taxable equivalent | 3.67% | 3.43% | Up 24 basis points |
For the first six months, net income was $85.2 million versus $66.7 million, diluted EPS was $1.56 versus $1.47, net interest income was $196.8 million versus $155.5 million, and non-interest income was $58.9 million versus $47.5 million. Management’s non-GAAP net income, excluding after-tax merger-related expenses, was $44.9 million for Q2 and $87.7 million for the first half; these measures are not GAAP results.
- Balance sheet at June 30: Total assets $12.49 billion; portfolio loans $7.74 billion; deposits $8.69 billion; total borrowings $1.57 billion; shareholders’ equity $2.07 billion.
- Period-end changes from December 31, 2018: Portfolio loans increased 1.1%; deposits decreased 1.5%; borrowings increased 2.6%; equity increased 4.8%. Deposits nevertheless were higher year over year, primarily reflecting FFKT.
- Credit: Allowance for loan losses was $50.9 million, or 0.66% of portfolio loans; provision for credit losses was $2.7 million in Q2 versus $1.7 million. Annualized net loan charge-offs were 0.05%. Non-performing loans were $38.4 million; non-performing assets were $43.4 million.
- Cash flow, first half: Operating activities provided $76.4 million; investing activities provided $78.8 million; financing activities used $130.0 million. Cash and cash equivalents increased $25.2 million to $194.4 million.
- Capital and liquidity: Common equity Tier 1 ratios were 13.83% for WesBanco and 13.73% for the bank subsidiary, both above regulatory well-capitalized thresholds. Management reported available FHLB credit of approximately $2.3 billion and no outstanding balances on its $185 million Federal Reserve borrower-in-custody line or $275 million of overnight bank lines.
Material changes and management commentary
- Q2 net interest income benefited from 11.5% growth in average earning assets, including acquired assets, and higher asset yields. The cost of interest-bearing liabilities also rose; management cited deposit and borrowing costs as offsets.
- Acquisition effects were significant: average loans increased 13.5% year over year, while organic loan growth declined 1.1%, which management attributed to lower home-equity demand, commercial real estate loans moving to secondary markets, and commercial customer deleveraging.
- Q2 non-interest income benefited from the Visa share sale and higher electronic banking fees, deposit service charges and acquired payment-processing fees. WesBanco held no additional Visa Class B shares after the sale.
- Criticized and classified loans rose to $114.2 million, or 1.48% of total loans, from 1.08% a year earlier. Management attributed the increase partly to post-acquisition loan reviews and two downgraded legacy relationships; non-performing and past-due measures remained relatively low.
- At June 30, 2019, WesBanco announced an agreement to acquire Old Line Bancshares for approximately $500.1 million in stock, subject to regulatory and shareholder approvals. Completion was expected in Q4 2019 or Q1 2020.
Outlook, risks and contingencies
- Management’s modeling assumed two 25-basis-point Federal Reserve rate reductions in the remainder of 2019. It expected core net interest margin to decline slightly by a few basis points, excluding purchase-accounting accretion; total margin could decline somewhat more as accretion diminishes. These are assumptions and expectations, not guaranteed outcomes.
- Management identified interest rates and yield-curve conditions, deposit pricing and retention, credit quality, liquidity, competition, economic conditions, cyber risk, regulation, and successful integration of Old Line as risks that could affect results. The filing cautions that actual results may differ from forward-looking statements.
- Beginning July 1, debit-card interchange fees were expected to decline by less than $2 million in Q3 and an estimated $2.5–$3.0 million per quarter beginning Q4 due to the Durbin amendment’s application to banks with assets of at least $10 billion.
- WesBanco expected adoption of the current expected credit loss standard (CECL) in 2020 could increase its allowance; the amount depends on economic conditions and portfolio trends at adoption.
- Off-balance-sheet commitments included $1.91 billion of lines of credit, $299.1 million of approved loans not yet closed, and $46.0 million of letters of credit. The company stated that commitments may expire unused. Management did not believe pending or threatened legal matters were reasonably likely to result in a material loss.
- The filing states disclosure controls were effective and reports no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of earnings and net interest margin growth is sustainable without acquired balances and purchase-accounting accretion; also monitor deposit costs and rate sensitivity.
- Whether criticized/classified loans, allowance coverage and charge-offs remain stable, particularly after acquisition-related reviews and the cited legacy loan downgrades.
- Whether expense growth, including staffing and acquired-branch costs, is offset by integration savings and revenue growth.
- The realized impact of Durbin-related interchange reductions and whether Old Line receives required approvals and integrates on expected terms and timing.
- The eventual CECL allowance impact and the liquidity implications of deposit maturities, borrowing costs and substantial off-balance-sheet commitments.