WESBANCO INC quarterly report, Q3 FY2018

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WesBanco, Inc. — Q3 2018 Form 10-Q

Business context and reporting period

Unaudited results cover the quarter and nine months ended September 30, 2018. WesBanco is a multi-state banking company operating in West Virginia, Ohio, Pennsylvania, Kentucky and Indiana. Results include First Sentry Bancshares (FTSB) from April 5 and Farmers Capital Bank Corporation (FFKT) from August 20; acquisitions materially affect year-over-year comparisons and period-end balance-sheet growth.

Financial performance and condition

  • Q3 earnings: Net income was $32.5 million versus $26.4 million a year earlier; diluted EPS was $0.64 versus $0.60. Nine-month net income was $99.2 million versus $78.6 million; diluted EPS was $2.11 versus $1.78.
  • Revenue and margin: Q3 net interest income increased 21.1% to $89.9 million; non-interest income increased 25.5% to $26.2 million. Nine-month figures were $245.5 million and $73.7 million, up 13.1% and 11.8%, respectively. Taxable-equivalent net interest margin was 3.50% in Q3, up from 3.48%; nine-month margin was 3.44% versus 3.45%.
  • Expenses and credit: Q3 non-interest expense rose 36.5% to $76.1 million, including $10.8 million of restructuring and merger-related expense. The credit-loss provision fell to $1.0 million from $2.5 million. Nine-month provision was $4.9 million versus $7.6 million.
  • Cash flow: For the first nine months, operating cash flow was $122.4 million, investing cash outflow was $84.4 million, and financing cash inflow was $118.1 million. Cash and cash equivalents increased $156.1 million to $273.7 million.
  • Balance sheet and funding: At September 30, assets were $12.60 billion, deposits $8.94 billion, portfolio loans $7.73 billion, and borrowings $1.62 billion. Compared with December 31, 2017, assets rose 28.4%, deposits 26.9%, and borrowings 24.5%, primarily reflecting acquisitions. Shareholders’ equity was $1.93 billion.
  • Credit quality and capital: Allowance for loan losses was $48.9 million, or 0.63% of portfolio loans, versus 0.71% at year-end. Non-performing loans were 0.49% of portfolio loans; annualized net loan charge-offs were net recoveries of 0.02%. WesBanco’s regulatory ratios included 12.41% common equity Tier 1 and 15.20% total capital; the bank subsidiary’s ratios were 12.65% and 13.53%, respectively. Both were above well-capitalized thresholds.
  • Liquidity and securities: Management reported $3.39 billion of expected sources of liquidity within one year and approximately $2.3 billion of available FHLB credit. Securities totaled $3.05 billion. After-tax unrealized losses on available-for-sale securities were $47.3 million, versus $13.3 million at year-end.

Material changes versus comparable periods

  • Two acquisitions expanded the company: FTSB’s purchase price was $108.3 million and FFKT’s was $428.9 million. WesBanco issued approximately 10.4 million shares in total for the transactions. Preliminary goodwill recorded was $66.8 million for FTSB and $225.1 million for FFKT; purchase accounting remained subject to final valuation.
  • Acquisition-driven growth increased average earning assets and lifted net interest income, but interest expense also rose 64.3% in Q3 as funding balances and rates increased. Q3 earning assets averaged $10.36 billion, up 18.1% year over year.
  • Management’s non-GAAP earnings excluding after-tax merger costs were $41.0 million, or $0.81 per diluted share, for Q3 and $112.2 million, or $2.38 per diluted share, for nine months. These are company-presented non-GAAP measures.
  • The federal corporate tax rate reduction contributed to a lower Q3 effective tax rate of 16.7%, versus 28.5% a year earlier; the nine-month 2018 effective rate was 17.4%.

Outlook, risks and unusual items

  • Management anticipated one further Federal Reserve rate increase by year-end 2018 and two to three 25-basis-point increases in 2019. This is management’s expectation, not formal earnings guidance. Its sensitivity model projected next-12-month net interest income increases of 1.7%–5.1% under rate increases of 100–400 basis points, and decreases of 2.0%–5.6% under rate declines of 100–200 basis points.
  • Management described possible near-term margin support from acquired FFKT assets and purchase-accounting accretion, while warning that delayed rate increases, higher deposit betas, deposit migration to higher-cost products, and rising replacement borrowing costs could pressure margin. Approximately $885.1 million of certificates of deposit mature within one year.
  • Beginning July 1, 2019, the Durbin Amendment was expected to reduce debit-card interchange revenue by approximately 50%, estimated at $2.5 million per quarter.
  • Key stated risks include successful and timely integration of FFKT and FTSB, realization of expected cost savings and revenue synergies, regional economic conditions, interest-rate and liquidity changes, credit losses, competition, regulation, cybersecurity and technology risks.
  • Loan commitments, including approved loans not yet closed, totaled approximately $2.4 billion. Management did not believe material loss from pending or threatened litigation was reasonably possible. The filing also noted that the expected adoption impact of the lease standard was recognition of approximately $15–$20 million of operating-lease right-of-use assets and liabilities.

Important facts for investors to verify

  • Track acquisition integration, final purchase-price allocations, merger costs, and whether synergies materialize.
  • Separate acquired from organic trends: management reported organic portfolio loans down 0.7% year to date and organic deposits down 0.3% from year-end.
  • Monitor margin, deposit pricing, certificate maturities, borrowing costs and the effect of future rate movements.
  • Review securities valuation exposure: available-for-sale unrealized losses increased, while management attributed loss positions mainly to market-rate changes and said it did not expect to sell the securities before recovery.
  • Assess credit performance and the allowance, including acquired loans carried at fair value without a related loan-loss allowance at quarter-end.
  • Confirm the estimated Durbin Amendment revenue impact and the timing and results of the transition to the expected-credit-loss accounting standard.