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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

FORM 10-Q

 

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                            to                            

Commission File Number 000-08467

 

WESBANCO, INC.

(Exact name of Registrant as specified in its charter)

 

WEST VIRGINIA

 

55-0571723

(State of incorporation)

 

(IRS Employer Identification No.)

 

 

 

1 Bank Plaza, Wheeling, WV

 

26003

(Address of principal executive offices)

 

(Zip Code)

 

Registrant's telephone number, including area code:  304-234-9000

 

 

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock $2.0833 Par Value

WSBC

NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

☑

 

Accelerated filer

☐

Non-accelerated filer

☐

 

Smaller reporting company

☐

 

 

 

Emerging growth company

☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).    Yes ☐ No ☑

As of July 24, 2019, there were 54,697,199 shares of WesBanco, Inc. common stock, $2.0833 par value, outstanding.

 

 

 

WESBANCO, INC.

TABLE OF CONTENTS

 

Item

No.

ITEM

Page

No.

 

 

 

 

PART I - FINANCIAL INFORMATION

 

1

Financial Statements

2

 

Consolidated Balance Sheets at June 30, 2019 (unaudited) and December 31, 2018

2

 

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018 (unaudited)

3

 

Consolidated Statements of Changes in Shareholders' Equity for the three and six months ended June 30, 2019 and 2018 (unaudited)

4

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (unaudited)

5

 

Notes to Consolidated Financial Statements (unaudited)

6

 

 

 

2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

 

 

 

3

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

 

4

Controls and Procedures

47

 

 

 

 

PART II – OTHER INFORMATION

 

1

Legal Proceedings

48

 

 

 

2

Unregistered Sales of Equity Securities and Use of Proceeds

48

 

 

 

6

Exhibits

49

 

 

 

 

Signatures

50

1

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WESBANCO, INC. CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

 

December 31,

 

(unaudited, in thousands, except shares)

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks, including interest bearing amounts of $36,390 and

   $44,536, respectively

 

$

194,355

 

 

$

169,186

 

Securities:

 

 

 

 

 

 

 

 

Equity securities, at fair value

 

 

11,817

 

 

 

11,737

 

Available-for-sale debt securities, at fair value

 

 

2,129,284

 

 

 

2,114,129

 

Held-to-maturity debt securities (fair values of $921,534 and $1,020,743,

   respectively)

 

 

900,605

 

 

 

1,020,934

 

Total securities

 

 

3,041,706

 

 

 

3,146,800

 

Loans held for sale

 

 

18,649

 

 

 

8,994

 

Portfolio loans, net of unearned income

 

 

7,737,854

 

 

 

7,656,281

 

Allowance for loan losses

 

 

(50,859

)

 

 

(48,948

)

Net portfolio loans

 

 

7,686,995

 

 

 

7,607,333

 

Premises and equipment, net

 

 

179,866

 

 

 

166,925

 

Accrued interest receivable

 

 

38,450

 

 

 

38,853

 

Goodwill and other intangible assets, net

 

 

914,678

 

 

 

918,850

 

Bank-owned life insurance

 

 

227,976

 

 

 

225,317

 

Other assets

 

 

191,978

 

 

 

176,374

 

Total Assets

 

$

12,494,653

 

 

$

12,458,632

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Non-interest bearing demand

 

$

2,481,065

 

 

$

2,441,041

 

Interest bearing demand

 

 

2,079,795

 

 

 

2,146,508

 

Money market

 

 

1,098,917

 

 

 

1,142,925

 

Savings deposits

 

 

1,670,035

 

 

 

1,645,549

 

Certificates of deposit

 

 

1,365,116

 

 

 

1,455,610

 

Total deposits

 

 

8,694,928

 

 

 

8,831,633

 

Federal Home Loan Bank borrowings

 

 

1,121,283

 

 

 

1,054,174

 

Other short-term borrowings

 

 

296,148

 

 

 

290,522

 

Subordinated debt and junior subordinated debt

 

 

156,534

 

 

 

189,842

 

Total borrowings

 

 

1,573,965

 

 

 

1,534,538

 

Accrued interest payable

 

 

6,559

 

 

 

4,627

 

Other liabilities

 

 

145,085

 

 

 

109,007

 

Total Liabilities

 

 

10,420,537

 

 

 

10,479,805

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Preferred stock, no par value; 1,000,000 shares authorized; none outstanding

 

 

—

 

 

 

—

 

Common stock, $2.0833 par value; 100,000,000 shares authorized in

  2019 and 2018, respectively; 54,697,251 and 54,604,294 shares

   issued, respectively; 54,697,199 and 54,598,134 shares outstanding, respectively

 

 

113,952

 

 

 

113,758

 

Capital surplus

 

 

1,168,212

 

 

 

1,166,701

 

Retained earnings

 

 

788,900

 

 

 

737,581

 

Treasury stock (52 and 6,160 shares  - at cost, respectively)

 

 

(2

)

 

 

(274

)

Accumulated other comprehensive income (loss)

 

 

4,113

 

 

 

(37,871

)

Deferred benefits for directors

 

 

(1,059

)

 

 

(1,068

)

Total Shareholders' Equity

 

 

2,074,116

 

 

 

1,978,827

 

Total Liabilities and Shareholders' Equity

 

$

12,494,653

 

 

$

12,458,632

 

 

See Notes to Consolidated Financial Statements.

2

WESBANCO, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

For the Three Months

Ended June 30,

 

 

For the Six Months

Ended June 30,

 

(unaudited, in thousands, except shares and per share amounts)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

96,415

 

 

$

78,538

 

 

$

191,917

 

 

$

147,671

 

Interest and dividends on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

16,444

 

 

 

14,194

 

 

 

33,175

 

 

 

25,738

 

Tax-exempt

 

 

5,142

 

 

 

5,055

 

 

 

10,684

 

 

 

9,890

 

Total interest and dividends on securities

 

 

21,586

 

 

 

19,249

 

 

 

43,859

 

 

 

35,628

 

Other interest income

 

 

1,542

 

 

 

1,101

 

 

 

2,820

 

 

 

1,904

 

Total interest and dividend income

 

 

119,543

 

 

 

98,888

 

 

 

238,596

 

 

 

185,203

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand deposits

 

 

4,314

 

 

 

3,150

 

 

 

8,259

 

 

 

5,673

 

Money market deposits

 

 

2,009

 

 

 

1,093

 

 

 

3,908

 

 

 

1,972

 

Savings deposits

 

 

678

 

 

 

227

 

 

 

1,200

 

 

 

416

 

Certificates of deposit

 

 

4,098

 

 

 

2,977

 

 

 

8,001

 

 

 

5,513

 

Total interest expense on deposits

 

 

11,099

 

 

 

7,447

 

 

 

21,368

 

 

 

13,574

 

Federal Home Loan Bank borrowings

 

 

6,287

 

 

 

5,953

 

 

 

12,624

 

 

 

10,451

 

Other short-term borrowings

 

 

1,483

 

 

 

973

 

 

 

3,039

 

 

 

1,532

 

Subordinated debt and junior subordinated debt

 

 

2,214

 

 

 

2,168

 

 

 

4,743

 

 

 

4,110

 

Total interest expense

 

 

21,083

 

 

 

16,541

 

 

 

41,774

 

 

 

29,667

 

NET INTEREST INCOME

 

 

98,460

 

 

 

82,347

 

 

 

196,822

 

 

 

155,536

 

Provision for credit losses

 

 

2,747

 

 

 

1,708

 

 

 

5,254

 

 

 

3,876

 

Net interest income after provision for credit losses

 

 

95,713

 

 

 

80,639

 

 

 

191,568

 

 

 

151,660

 

NON-INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust fees

 

 

6,339

 

 

 

5,752

 

 

 

13,454

 

 

 

12,255

 

Service charges on deposits

 

 

6,197

 

 

 

5,146

 

 

 

12,747

 

 

 

9,969

 

Electronic banking fees

 

 

7,154

 

 

 

5,728

 

 

 

13,046

 

 

 

10,558

 

Net securities brokerage revenue

 

 

1,973

 

 

 

1,809

 

 

 

3,833

 

 

 

3,479

 

Bank-owned life insurance

 

 

1,340

 

 

 

1,128

 

 

 

2,659

 

 

 

3,884

 

Mortgage banking income

 

 

1,618

 

 

 

1,670

 

 

 

2,674

 

 

 

2,776

 

Net securities gains

 

 

2,909

 

 

 

358

 

 

 

3,566

 

 

 

319

 

Net gain on other real estate owned and other assets

 

 

376

 

 

 

229

 

 

 

512

 

 

 

491

 

Other income

 

 

3,250

 

 

 

1,588

 

 

 

6,438

 

 

 

3,760

 

Total non-interest income

 

 

31,156

 

 

 

23,408

 

 

 

58,929

 

 

 

47,491

 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and wages

 

 

31,646

 

 

 

26,872

 

 

 

62,585

 

 

 

51,878

 

Employee benefits

 

 

9,705

 

 

 

7,965

 

 

 

19,694

 

 

 

14,877

 

Net occupancy

 

 

5,385

 

 

 

4,103

 

 

 

10,951

 

 

 

8,759

 

Equipment

 

 

4,818

 

 

 

4,095

 

 

 

9,651

 

 

 

8,044

 

Marketing

 

 

1,254

 

 

 

1,405

 

 

 

2,497

 

 

 

2,521

 

FDIC insurance

 

 

1,155

 

 

 

868

 

 

 

2,508

 

 

 

1,526

 

Amortization of intangible assets

 

 

2,465

 

 

 

1,312

 

 

 

4,978

 

 

 

2,397

 

Restructuring and merger-related expense

 

 

81

 

 

 

5,412

 

 

 

3,188

 

 

 

5,657

 

Other operating expenses

 

 

15,443

 

 

 

11,511

 

 

 

30,333

 

 

 

22,455

 

Total non-interest expense

 

 

71,952

 

 

 

63,543

 

 

 

146,385

 

 

 

118,114

 

Income before provision for income taxes

 

 

54,917

 

 

 

40,504

 

 

 

104,112

 

 

 

81,037

 

Provision for income taxes

 

 

10,103

 

 

 

7,335

 

 

 

18,961

 

 

 

14,339

 

NET INCOME

 

$

44,814

 

 

$

33,169

 

 

$

85,151

 

 

$

66,698

 

EARNINGS PER COMMON SHARE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.82

 

 

$

0.71

 

 

$

1.56

 

 

$

1.47

 

Diluted

 

$

0.82

 

 

$

0.71

 

 

$

1.56

 

 

$

1.47

 

AVERAGE COMMON SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

54,628,029

 

 

 

46,498,305

 

 

 

54,613,346

 

 

 

45,281,264

 

Diluted

 

 

54,733,521

 

 

 

46,639,780

 

 

 

54,724,209

 

 

 

45,417,010

 

DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.31

 

 

$

0.29

 

 

$

0.62

 

 

$

0.58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

$

67,025

 

 

$

26,893

 

 

$

127,135

 

 

$

45,904

 

 

See Notes to Consolidated Financial Statements.

3

WESBANCO, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

 

 

 

For the Three Months Ended June 30, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Deferred

 

 

 

 

 

(unaudited, in thousands, except

 

Shares

 

 

 

 

 

 

Capital

 

 

Retained

 

 

Treasury

 

 

Comprehensive

 

 

Benefits for

 

 

 

 

 

   shares and per share amounts)

 

Outstanding

 

 

Amount

 

 

Surplus

 

 

Earnings

 

 

Stock

 

 

Income (Loss)

 

 

Directors

 

 

Total

 

March 31, 2019

 

 

54,599,127

 

 

$

113,758

 

 

$

1,167,761

 

 

$

761,002

 

 

$

(229

)

 

$

(18,098

)

 

$

(1,055

)

 

$

2,023,139

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

44,814

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

44,814

 

Other comprehensive income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

22,211

 

 

 

—

 

 

 

22,211

 

Comprehensive income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

67,025

 

Common dividends declared ($0.31

   per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(16,916

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(16,916

)

Treasury shares acquired

 

 

(19,378

)

 

 

—

 

 

 

128

 

 

 

—

 

 

 

(717

)

 

 

—

 

 

 

—

 

 

 

(589

)

Stock options exercised

 

 

5,000

 

 

 

8

 

 

 

37

 

 

 

—

 

 

 

56

 

 

 

—

 

 

 

—

 

 

 

101

 

Restricted stock granted

 

 

112,450

 

 

 

186

 

 

 

(1,074

)

 

 

—

 

 

 

888

 

 

 

—

 

 

 

—

 

 

 

—

 

Stock compensation expense

 

 

—

 

 

 

—

 

 

 

1,364

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,364

 

Deferred benefits for directors- net

 

 

—

 

 

 

—

 

 

 

(4

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(4

)

 

 

(8

)

June 30, 2019

 

 

54,697,199

 

 

$

113,952

 

 

$

1,168,212

 

 

$

788,900

 

 

$

(2

)

 

$

4,113

 

 

$

(1,059

)

 

$

2,074,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

44,060,957

 

 

$

91,793

 

 

$

686,169

 

 

$

673,174

 

 

$

—

 

 

$

(47,076

)

 

$

(1,034

)

 

$

1,403,026

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

33,169

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

33,169

 

Other comprehensive loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(6,276

)

 

 

—

 

 

 

(6,276

)

Comprehensive income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

26,893

 

Common dividends declared ($0.29

   per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(13,523

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(13,523

)

Shares issued for acquisition

 

 

2,498,761

 

 

 

5,206

 

 

 

102,141

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

107,347

 

Treasury shares acquired

 

 

(15,159

)

 

 

—

 

 

 

34

 

 

 

—

 

 

 

(714

)

 

 

—

 

 

 

—

 

 

 

(680

)

Stock options exercised

 

 

19,075

 

 

 

32

 

 

 

392

 

 

 

—

 

 

 

159

 

 

 

—

 

 

 

—

 

 

 

583

 

Restricted stock granted

 

 

79,616

 

 

 

166

 

 

 

(166

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Stock compensation expense

 

 

—

 

 

 

—

 

 

 

929

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

929

 

Deferred benefits for directors- net

 

 

—

 

 

 

—

 

 

 

(461

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(8

)

 

 

(469

)

June 30, 2018

 

 

46,643,250

 

 

$

97,197

 

 

$

789,038

 

 

$

692,820

 

 

$

(555

)

 

$

(53,352

)

 

$

(1,042

)

 

$

1,524,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2019 and 2018

 

December 31, 2018

 

 

54,598,134

 

 

$

113,758

 

 

$

1,166,701

 

 

$

737,581

 

 

$

(274

)

 

$

(37,871

)

 

$

(1,068

)

 

$

1,978,827

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

85,151

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

85,151

 

Other comprehensive income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

41,984

 

 

 

—

 

 

 

41,984

 

Comprehensive income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

127,135

 

Common dividends declared

   ($0.62 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(33,832

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(33,832

)

Treasury shares acquired

 

 

(19,385

)

 

 

—

 

 

 

128

 

 

 

—

 

 

 

(717

)

 

 

—

 

 

 

—

 

 

 

(589

)

Stock options exercised

 

 

6,000

 

 

 

8

 

 

 

12

 

 

 

—

 

 

 

101

 

 

 

—

 

 

 

—

 

 

 

121

 

Restricted stock granted

 

 

112,450

 

 

 

186

 

 

 

(1,074

)

 

 

—

 

 

 

888

 

 

 

—

 

 

 

—

 

 

 

—

 

Stock compensation expense

 

 

—

 

 

 

—

 

 

 

2,439

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,439

 

Deferred benefits for directors- net

 

 

—

 

 

 

—

 

 

 

6

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

9

 

 

 

15

 

June 30, 2019

 

 

54,697,199

 

 

$

113,952

 

 

$

1,168,212

 

 

$

788,900

 

 

$

(2

)

 

$

4,113

 

 

$

(1,059

)

 

$

2,074,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

44,043,244

 

 

$

91,756

 

 

$

684,730

 

 

$

651,357

 

 

$

—

 

 

$

(31,495

)

 

$

(1,027

)

 

$

1,395,321

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

66,698

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

66,698

 

Other comprehensive loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(20,794

)

 

 

—

 

 

 

(20,794

)

Comprehensive income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

45,904

 

Common dividends declared

   ($0.58 per share)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(26,298

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(26,298

)

Adoption of accounting standard

   ASU 2016-01

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,063

 

 

 

—

 

 

 

(1,063

)

 

 

—

 

 

 

—

 

Shares issued for acquisition

 

 

2,498,761

 

 

 

5,206

 

 

 

102,141

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

107,347

 

Treasury shares acquired

 

 

(15,159

)

 

 

—

 

 

 

34

 

 

 

—

 

 

 

(714

)

 

 

—

 

 

 

—

 

 

 

(680

)

Stock options exercised

 

 

36,788

 

 

 

69

 

 

 

915

 

 

 

—

 

 

 

159

 

 

 

—

 

 

 

—

 

 

 

1,143

 

Restricted stock granted

 

 

79,616

 

 

 

166

 

 

 

(166

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Stock compensation expense

 

 

—

 

 

 

—

 

 

 

1,838

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,838

 

Deferred benefits for directors- net

 

 

—

 

 

 

—

 

 

 

(454

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(15

)

 

 

(469

)

June 30, 2018

 

 

46,643,250

 

 

$

97,197

 

 

$

789,038

 

 

$

692,820

 

 

$

(555

)

 

$

(53,352

)

 

$

(1,042

)

 

$

1,524,106

 

 

See Notes to Consolidated Financial Statements.

4

WESBANCO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

For the Six Months

Ended June 30,

 

(unaudited, in thousands)

 

2019

 

 

2018

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

$

76,370

 

 

$

66,575

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Net increase in loans held for investment

 

 

(71,557

)

 

 

(11,819

)

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

Proceeds from sales

 

 

66,095

 

 

 

81,521

 

Proceeds from maturities, prepayments and calls

 

 

174,676

 

 

 

114,206

 

Purchases of securities

 

 

(138,310

)

 

 

(625,395

)

Held-to-maturity debt securities:

 

 

 

 

 

 

 

 

Proceeds from maturities, prepayments and calls

 

 

57,383

 

 

 

37,842

 

Purchases of securities

 

 

(6,961

)

 

 

(44,656

)

Equity securities:

 

 

 

 

 

 

 

 

Proceeds from sales

 

 

3,567

 

 

 

827

 

Proceeds from bank-owned life insurance

 

 

—

 

 

 

4,772

 

Purchases of premises and equipment – net

 

 

(6,064

)

 

 

(845

)

Net cash received from acquisition

 

 

—

 

 

 

86,149

 

Sale of portfolio loans- net

 

 

—

 

 

 

12,996

 

Net cash provided by (used in) investing activities

 

 

78,829

 

 

 

(344,402

)

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

(Decrease) increase in deposits

 

 

(135,689

)

 

 

36,045

 

Proceeds from Federal Home Loan Bank borrowings

 

 

285,000

 

 

 

575,000

 

Repayment of Federal Home Loan Bank borrowings

 

 

(218,052

)

 

 

(327,142

)

Increase in other short-term borrowings

 

 

5,626

 

 

 

67,103

 

Principal repayments of finance lease obligations

 

 

(199

)

 

 

(189

)

Decrease in federal funds purchased

 

 

—

 

 

 

(3,000

)

Repayment of junior subordinated debt

 

 

(33,506

)

 

 

(8,240

)

Dividends paid to common shareholders

 

 

(32,742

)

 

 

(24,226

)

Issuance of common stock

 

 

71

 

 

 

1,035

 

Treasury shares sold - net

 

 

(539

)

 

 

(572

)

Net cash (used in) provided by financing activities

 

 

(130,030

)

 

 

315,814

 

Net increase in cash and cash equivalents

 

 

25,169

 

 

 

37,987

 

Cash and cash equivalents at beginning of the period

 

 

169,186

 

 

 

117,572

 

Cash and cash equivalents at end of the period

 

$

194,355

 

 

$

155,559

 

SUPPLEMENTAL DISCLOSURES

 

 

 

 

 

 

 

 

Interest paid on deposits and other borrowings

 

$

40,501

 

 

$

29,791

 

Income taxes paid

 

 

17,650

 

 

 

10,000

 

Transfers of loans to other real estate owned

 

 

637

 

 

 

229

 

Transfers of loans to held for sale

 

 

—

 

 

 

12,996

 

Non-cash transactions related to FTSB acquisition

 

 

—

 

 

 

107,347

 

Transfer of held-to-maturity debt securities to available-for-sale debt securities

 

 

67,393

 

 

 

—

 

Right of use assets obtained in exchange for lease obligations

 

 

19,827

 

 

 

—

 

 

See Notes to Consolidated Financial Statements.

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation — The accompanying unaudited interim financial statements of WesBanco, Inc. and its consolidated subsidiaries (“WesBanco”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018.

WesBanco’s interim financial statements have been prepared following the significant accounting policies disclosed in Note 1 of the Notes to the Consolidated Financial Statements of its 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission.  In the opinion of management, the accompanying interim financial information reflects all adjustments, including normal recurring adjustments, necessary to present fairly WesBanco’s financial position and results of operations for each of the interim periods presented. Certain prior period amounts have been reclassified to conform to the current period presentation. Such reclassifications had no impact on WesBanco’s net income and stockholders’ equity. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year.  

Recent accounting pronouncements — In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This ASU specifically aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license.  The ASU does not affect the accounting for the service element of a hosting arrangement that is a service contract.  The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.  WesBanco is currently assessing the impact of ASU 2018-15 on WesBanco’s Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” This ASU modifies ASC 715-20 to improve disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.  The guidance is effective for fiscal years ending after December 15, 2020. Early adoption is permitted.  WesBanco is currently assessing the impact of ASU 2018-14 on WesBanco’s Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU modifies the disclosure objective paragraphs of ASC 820 to eliminate (1) “at a minimum” from the phrase “an entity shall disclose at a minimum” and (2) other similar “open ended” disclosure requirements to promote the appropriate exercise of discretion of entities.  The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. WesBanco is currently assessing the impact of ASU 2018-13 on WesBanco’s Consolidated Financial Statements.

In September 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326)”, which will require entities to use a new forward-looking “expected loss” model on trade and other receivables, held-to-maturity debt securities, loans and other instruments that generally will result in the earlier recognition of allowances for credit losses.  For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities.  Entities will have to disclose significantly more information, including information they use to track credit quality by year of origination for most financing receivables. Public business entities must apply the new requirements for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which for WesBanco will be effective for the fiscal year beginning January 1, 2020.  Early adoption is permitted for fiscal years beginning after December 15, 2018. WesBanco formed a cross-functional team to oversee the implementation of this ASU, and has completed an initial data gap assessment, finalized the loan segmentation procedures, and is currently evaluating the various forecasting and modeling assumptions, including qualitative factors, that will be used to estimate the initial current expected credit loss allowance. Substantial progress has been made on the identification and staging of data, development of models, refinement of economic forecasting processes, and documentation of accounting policy decisions.  In conjunction with this implementation, WesBanco is reviewing business processes and evaluating potential changes to the control environment. Acquired loans or pools of loans that have experienced more-than-insignificant credit deterioration are deemed to be purchased credit deteriorated (“PCD”) loans, and are grossed-up on day 1 by the initial credit estimate through goodwill as opposed to the provision for credit losses. Acquired loans deemed not to be PCD loans will be adjusted to fair value through goodwill, with an allowance and corresponding provision for credit losses recorded in the first reporting period after acquisition through current period earnings, while the loan mark will accrete through interest income over the life of such loans. At acquisition, WesBanco will consider several factors as indicators that an acquired loan or pool of loans has experienced more-than-insignificant credit deterioration. These factors may include loans 30 days or more past due, loans with an internal risk grade of below average or lower, loans classified as non-accrual by the acquired institution, materiality of the credit and loans that have been previously modified in a troubled debt restructuring. Upon adoption of this standard, acquired loans from prior acquisitions that meet the guidelines under ASC 310-30 will be classified as PCD loans. The accretable portion of the loan mark as of adoption date will continue to accrete into interest income. However, the non-accretable portion of the loan mark will be added to the allowance upon adoption; while any reversals of such mark will flow through the allowance in future periods. The loan mark on ASC 310-20 loans (“the good book”) from acquisitions will continue to accrete through interest income over the life of such loans. WesBanco will perform parallel runs of the new methodology throughout the remainder of 2019 prior to adoption of the ASU.  WesBanco currently anticipates that an increase to the allowance for credit losses may be recognized upon adoption to provide for expected credit losses over the estimated life of loan and investment receivables.  The magnitude of the increase will depend on economic conditions and trends in the loan and securities portfolios at the time of adoption.

6

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which requires entities to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements.  The principal difference from previous guidance is that the lease assets and lease liabilities arising from operating leases were not previously recognized in the balance sheet.  Public business entities must apply the new requirements for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  For WesBanco, this update was effective for the fiscal year beginning January 1, 2019.  In January 2018, the FASB issued ASU 2018-01, which allows entities the option to apply the provisions of the new lease guidance at the effective date without adjusting the comparative periods presented.  In July 2018, the FASB issued ASU 2018-10, which provides narrow-scope improvements to the lease standard and ASU 2018-11, which allows entities to choose an additional transition method, under which an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under this transitional method, the entity shall recognize and measure the leases that exist at the adoption date and the prior comparative periods are not adjusted. WesBanco adopted this ASU as of January 1, 2019 using the transitional method. In addition, WesBanco utilized certain practical expedients including the following - retained the classifications of existing leases, no re-assessment to determine if existing leases have initial direct costs and utilized hindsight when determining the lease term and assessment of impairment in existing leases. WesBanco capitalized $20 million for right-of-use assets and lease liabilities, net of existing straight-line lease liabilities and unfavorable acquired lease liabilities. See additional disclosures in Note 6, “Leases”.

In August 2017, the FASB issued ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities.”   The new guidance makes more financial and nonfinancial hedging strategies eligible for hedge accounting.  It also amended the presentation and disclosure requirements and changed how companies assess effectiveness.  It was intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs.  The guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For WesBanco, this update was effective for the fiscal year beginning January 1, 2019.  Upon adoption, WesBanco reclassified $67.3 million of callable held-to-maturity municipal debt securities to available-for-sale debt securities.

In October 2018, the FASB issued ASU 2018-16, “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.” This ASU modifies ASC 815 for eligible benchmark interest rates. Due to concerns about the sustainability of the London Interbank Offered Rate (LIBOR), the Federal Reserve initiated an effort to introduce an alternative reference rate in the United States. The Overnight Index Swap (OIS) rate, which is based on SOFR is permitted as a U.S. benchmark interest rate for hedge accounting purposes. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For WesBanco, this update was effective for the fiscal year beginning January 1, 2019. The adoption of this pronouncement did not have a material impact on WesBanco’s Consolidated Financial Statements.

NOTE 2. MERGERS AND ACQUISITIONS

On August 20, 2018, WesBanco completed its acquisition of Farmers Capital Bank Corp. (“FFKT”), a bank holding company headquartered in Frankfort, KY.  On the acquisition date, FFKT had approximately $1.6 billion in assets, excluding goodwill, which included approximately $1.0 billion in loans and $239.3 million in securities.  The FFKT acquisition was valued at $428.9 million, based on WesBanco’s closing stock price on August 20, 2018, of $49.40, and resulted in WesBanco issuing 7,920,387 shares of its common stock and $37.6 million in cash in exchange for all of the outstanding shares of FFKT common stock. The assets and liabilities of FFKT were recorded on WesBanco’s Balance Sheet at their preliminary estimated fair values as of August 20, 2018, the acquisition date, and FFKT’s results of operations have been included in WesBanco’s Consolidated Statements of Income since that date.  The fair values for certain assets and liabilities acquired from FFKT on August 20, 2018 represented preliminary estimates. Based on a preliminary purchase price allocation, WesBanco recorded $220.9 million in goodwill and $37.4 million in core deposit intangibles in its community banking segment and $2.6 million in trust customer relationship intangibles in its trust and investment services segment.  None of the goodwill is deductible for income tax purposes, as the acquisition is accounted for as a tax-free exchange for tax purposes.  As a result of the full integration of the operations of FFKT, it is not practicable to determine revenue or net income included in WesBanco’s operating results relating to FFKT since the date of acquisition, as FFKT’s results cannot be separately identified.

For the six months ended June 30, 2019, WesBanco recorded merger-related expenses of $3.2 million associated with the FFKT acquisition.

The preliminary purchase price of the FFKT acquisition and resulting goodwill is summarized as follows:

 

(unaudited, in thousands)

 

August 20, 2018

 

Purchase price:

 

 

 

 

Fair value of WesBanco shares issued

 

$

391,267

 

Cash consideration for outstanding FFKT shares

 

 

37,634

 

Total purchase price

 

$

428,901

 

Fair value of:

 

 

 

 

Tangible assets acquired

 

$

1,369,536

 

Core deposit and other intangible assets acquired

 

 

39,992

 

Liabilities assumed

 

 

(1,431,663

)

Net cash received in the acquisition

 

 

230,139

 

Fair value of net assets acquired

 

 

208,004

 

Goodwill recognized

 

$

220,897

 

 

7

The following table presents the preliminary allocation of the purchase price of the assets acquired and the liabilities assumed at the date of acquisition, as WesBanco intends to finalize its accounting for the acquisition of FFKT within one year from the date of acquisition:

 

(unaudited, in thousands)

 

August 20, 2018

 

Assets acquired

 

 

 

 

Cash and due from banks

 

$

230,139

 

Securities

 

 

239,321

 

Loans

 

 

1,025,800

 

Goodwill and other intangible assets

 

 

260,889

 

Accrued income and other assets

 

 

104,415

 

Total assets acquired

 

$

1,860,564

 

Liabilities assumed

 

 

 

 

Deposits

 

$

1,330,328

 

Borrowings

 

 

71,780

 

Accrued expenses and other liabilities

 

 

29,555

 

Total liabilities assumed

 

$

1,431,663

 

Net assets acquired

 

$

428,901

 

 

The following table presents the changes in the allocation of the purchase price of the assets acquired and the liabilities assumed at the date of the acquisition previously reported as of March 31, 2019:

 

(unaudited, in thousands)

 

August 20, 2018

 

Goodwill recognized as of March 31, 2019

 

$

219,418

 

Change in fair value of net assets acquired:

 

 

 

 

Assets

 

 

 

 

Other real estate owned

 

 

(80

)

Accrued income and other assets

 

 

430

 

Liabilities

 

 

 

 

Accrued expenses and other liabilities

 

 

(1,829

)

Fair value of net assets acquired

 

$

(1,479

)

Increase in goodwill recognized

 

 

1,479

 

Goodwill recognized as of June 30, 2019

 

$

220,897

 

 

The fair value estimates for other assets and other liabilities have continued to fluctuate as the final valuations are completed. The Company expects to finalize purchase price accounting of FFKT within one year of date of acquisition.

NOTE 3. EARNINGS PER COMMON SHARE

Earnings per common share are calculated as follows:

 

 

 

For the Three Months

Ended June 30,

 

 

For the Six Months

Ended June 30,

 

(unaudited, in thousands, except shares and per share amounts)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Numerator for both basic and diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

44,814

 

 

$

33,169

 

 

$

85,151

 

 

$

66,698

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average basic common shares outstanding

 

 

54,628,029

 

 

 

46,498,305

 

 

 

54,613,346

 

 

 

45,281,264

 

Effect of dilutive stock options and other stock compensation

 

 

105,492

 

 

 

141,475

 

 

 

110,863

 

 

 

135,746

 

Total diluted average common shares outstanding

 

 

54,733,521

 

 

 

46,639,780

 

 

 

54,724,209

 

 

 

45,417,010

 

Earnings per common share - basic

 

$

0.82

 

 

$

0.71

 

 

$

1.56

 

 

$

1.47

 

Earnings per common share - diluted

 

$

0.82

 

 

$

0.71

 

 

$

1.56

 

 

$

1.47

 

 

Options to purchase 353,829 and 117,600 shares at June 30, 2019 and 2018, respectively, were not included in the computation of net income per diluted share for the three months ended June 30, 2019 and 2018, respectively, because the exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.  Options to purchase 117,600 shares at both June 30, 2019 and 2018 were not included in the computation of net income per diluted shares for the six months ended June 30, 2019 and 2018, because the exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

8

As of June 30, 2019, 40,608 contingently issuable shares were estimated to be awarded under the 2018 and 2017 total shareholder return plans as stock performance targets were met and are therefore included in the diluted calculation. As of June 30, 2019, the shares related to the 2019 total shareholder return plan were not included in the calculation because the effect would be antidilutive. Performance based restricted stock compensation totaling 30,137 shares were estimated to be awarded as of June 30, 2019 and are included in the diluted calculation.  As of June 30, 2018, 42,912 contingently issuable shares were estimated to be awarded under the 2018 and 2017 total shareholder return plans as stock performance targets were met and are included in the diluted calculation.  Performance based restricted stock compensation totaling 17,081 shares were estimated to be awarded as of June 30, 2018 and are included in the diluted calculation.  

NOTE 4. SECURITIES

The following table presents the fair value and amortized cost of available-for-sale and held-to-maturity debt securities:

 

 

 

June 30, 2019

 

 

December 31, 2018

 

(unaudited, in thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair

Value

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair

Value

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

29,705

 

 

$

76

 

 

$

—

 

 

$

29,781

 

 

$

19,882

 

 

$

3

 

 

$

(7

)

 

$

19,878

 

U.S. Government sponsored entities and

   agencies

 

 

130,578

 

 

 

4,147

 

 

 

(138

)

 

 

134,587

 

 

 

142,852

 

 

 

556

 

 

 

(1,756

)

 

 

141,652

 

Residential mortgage-backed securities and

   collateralized mortgage obligations of

   government sponsored entities and

   agencies

 

 

1,550,885

 

 

 

17,598

 

 

 

(5,441

)

 

 

1,563,042

 

 

 

1,585,864

 

 

 

2,912

 

 

 

(27,521

)

 

 

1,561,255

 

Commercial mortgage-backed securities

   and collateralized mortgage obligations

   of government sponsored entities and

   agencies

 

 

175,355

 

 

 

3,417

 

 

 

(116

)

 

 

178,656

 

 

 

171,671

 

 

 

264

 

 

 

(2,963

)

 

 

168,972

 

Obligations of states and political

   subdivisions

 

 

177,888

 

 

 

5,305

 

 

 

(15

)

 

 

183,178

 

 

 

184,057

 

 

 

2,039

 

 

 

(982

)

 

 

185,114

 

Corporate debt securities

 

 

39,695

 

 

 

499

 

 

 

(154

)

 

 

40,040

 

 

 

37,730

 

 

 

87

 

 

 

(559

)

 

 

37,258

 

Total available-for-sale debt securities

 

$

2,104,106

 

 

$

31,042

 

 

$

(5,864

)

 

$

2,129,284

 

 

$

2,142,056

 

 

$

5,861

 

 

$

(33,788

)

 

$

2,114,129

 

Held-to-maturity debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored entities and

   agencies

 

$

10,020

 

 

$

36

 

 

$

(104

)

 

$

9,952

 

 

$

10,823

 

 

$

6

 

 

$

(329

)

 

$

10,500

 

Residential mortgage-backed securities and

   collateralized mortgage obligations of

   government sponsored entities and

   agencies

 

 

136,929

 

 

 

834

 

 

 

(642

)

 

 

137,121

 

 

 

148,300

 

 

 

204

 

 

 

(4,170

)

 

 

144,334

 

Obligations of states and political

   subdivisions

 

 

720,399

 

 

 

19,566

 

 

 

(216

)

 

 

739,749

 

 

 

828,520

 

 

 

8,771

 

 

 

(4,012

)

 

 

833,279

 

Corporate debt securities

 

 

33,257

 

 

 

1,455

 

 

 

—

 

 

 

34,712

 

 

 

33,291

 

 

 

12

 

 

 

(673

)

 

 

32,630

 

Total held-to-maturity debt securities

 

$

900,605

 

 

$

21,891

 

 

$

(962

)

 

$

921,534

 

 

$

1,020,934

 

 

$

8,993

 

 

$

(9,184

)

 

$

1,020,743

 

Total debt securities

 

$

3,004,711

 

 

$

52,933

 

 

$

(6,826

)

 

$

3,050,818

 

 

$

3,162,990

 

 

$

14,854

 

 

$

(42,972

)

 

$

3,134,872

 

 

At June 30, 2019 and December 31, 2018, there were no holdings of any one issuer, other than U.S. government sponsored entities and its agencies, in an amount greater than 10% of WesBanco’s shareholders’ equity.

Equity securities, of which $8.7 million consist of investments in various mutual funds held in grantor trusts formed in connection with the Company’s deferred compensation plan, are recorded at fair value and totaled $11.8 million and $11.7 million at June 30, 2019 and December 31, 2018, respectively.

9

The following table presents the fair value of available-for-sale and held-to-maturity debt securities by contractual maturity at June 30, 2019.  In some instances, the issuers may have the right to call or prepay obligations without penalty prior to the contractual maturity date.

 

 

 

June 30, 2019

 

(unaudited, in thousands)

 

One Year

or less

 

 

One to

Five Years

 

 

Five to

Ten Years

 

 

After

Ten Years

 

 

Mortgage-

backed

securities

 

 

Total

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

29,781

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

29,781

 

U.S. Government sponsored entities and agencies

 

 

498

 

 

 

6,048

 

 

 

18,472

 

 

 

9,363

 

 

 

100,206

 

 

 

134,587

 

Residential mortgage-backed securities and

   collateralized mortgage obligations of

   government sponsored entities and

   agencies (1)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,563,042

 

 

 

1,563,042

 

Commercial mortgage-backed securities and

   collateralized mortgage obligations of

   government sponsored entities and

   agencies (1)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

178,656

 

 

 

178,656

 

Obligations of states and political subdivisions

 

 

8,108

 

 

 

53,422

 

 

 

76,671

 

 

 

44,977

 

 

 

—

 

 

 

183,178

 

Corporate debt securities

 

 

627

 

 

 

32,216

 

 

 

7,197

 

 

 

—

 

 

 

—

 

 

 

40,040

 

Total available-for-sale debt securities

 

$

39,014

 

 

$

91,686

 

 

$

102,340

 

 

$

54,340

 

 

$

1,841,904

 

 

$

2,129,284

 

Held-to-maturity debt securities (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored entities and agencies

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

9,952

 

 

$

9,952

 

Residential mortgage-backed securities and

   collateralized mortgage obligations of government

   sponsored entities and agencies (1)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

137,121

 

 

 

137,121

 

Obligations of states and political subdivisions

 

 

15,652

 

 

 

115,724

 

 

 

334,357

 

 

 

274,016

 

 

 

—

 

 

 

739,749

 

Corporate debt securities

 

 

—

 

 

 

10,913

 

 

 

23,799

 

 

 

—

 

 

 

—

 

 

 

34,712

 

Total held-to-maturity debt securities

 

$

15,652

 

 

$

126,637

 

 

$

358,156

 

 

$

274,016

 

 

$

147,073

 

 

$

921,534

 

Total debt securities

 

$

54,666

 

 

$

218,323

 

 

$

460,496

 

 

$

328,356

 

 

$

1,988,977

 

 

$

3,050,818

 

 

(1) Mortgage-backed and collateralized mortgage securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds.  

(2) The held-to-maturity debt securities portfolio is carried at an amortized cost of $900.6 million.

Securities with aggregate fair values of $2.0 billion at June 30, 2019 and December 31, 2018 were pledged as security for public and trust funds, and securities sold under agreements to repurchase. Proceeds from the sale of available-for-sale securities were $66.1 million and $81.5 million for the six months ended June 30, 2019 and 2018, respectively.  Net unrealized gains (losses) on available-for-sale securities included in accumulated other comprehensive income net of tax, as of June 30, 2019 and December 31, 2018 were $19.4 million and ($21.5) million, respectively.

The following table presents the gross realized gains and losses on sales and calls of available-for-sale and held-to-maturity debt securities, as well as gains and losses on equity securities from both sales and market adjustments from the adoption of ASU 2016-01 effective January 1, 2018 for the three and six months ended June 30, 2019 and 2018, respectively.  

 

 

 

For the Three Months

Ended June 30,

 

 

For the Six Months

Ended June 30,

 

(unaudited, in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross realized gains

 

$

106

 

 

$

5

 

 

$

348

 

 

$

12

 

Gross realized losses

 

 

(18

)

 

 

—

 

 

 

(209

)

 

 

(18

)

Net gains (losses) on debt securities

 

$

88

 

 

$

5

 

 

$

139

 

 

$

(6

)

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains recognized on securities still held

 

$

265

 

 

$

347

 

 

$

868

 

 

$

319

 

Net realized  gains recognized on securities sold

 

 

2,556

 

 

 

6

 

 

 

2,559

 

 

 

6

 

Net gains on equity securities

 

$

2,821

 

 

$

353

 

 

$

3,427

 

 

$

325

 

Net securities gains

 

$

2,909

 

 

$

358

 

 

$

3,566

 

 

$

319

 

 

10

The following tables provide information on unrealized losses on debt securities that have been in an unrealized loss position for less than twelve months and twelve months or more as of June 30, 2019 and December 31, 2018, respectively:

 

 

 

June 30, 2019

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

(unaudited, dollars in thousands)

 

Fair

Value

 

 

Unrealized

Losses

 

 

# of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

# of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

# of

Securities

 

U.S. Government sponsored entities

   and agencies

 

$

—

 

 

$

—

 

 

 

—

 

 

$

28,542

 

 

$

(242

)

 

 

7

 

 

$

28,542

 

 

$

(242

)

 

 

7

 

Residential mortgage-backed securities

   and collateralized mortgage obligations

   of government sponsored entities and

   agencies

 

 

30,301

 

 

 

(95

)

 

 

4

 

 

 

564,036

 

 

 

(5,988

)

 

 

211

 

 

 

594,337

 

 

 

(6,083

)

 

 

215

 

Commercial mortgage-backed securities

   and collateralized mortgage obligations

   of government sponsored entities and

   agencies

 

 

3,783

 

 

 

(26

)

 

 

4

 

 

 

26,655

 

 

 

(90

)

 

 

12

 

 

 

30,438

 

 

 

(116

)

 

 

16

 

Obligations of states and political

   subdivisions

 

 

609

 

 

 

(1

)

 

 

2

 

 

 

38,999

 

 

 

(230

)

 

 

76

 

 

 

39,608

 

 

 

(231

)

 

 

78

 

Corporate debt securities

 

 

7,920

 

 

 

(111

)

 

 

3

 

 

 

1,947

 

 

 

(43

)

 

 

1

 

 

 

9,867

 

 

 

(154

)

 

 

4

 

Total temporarily impaired securities

 

$

42,613

 

 

$

(233

)

 

 

13

 

 

$

660,179

 

 

$

(6,593

)

 

 

307

 

 

$

702,792

 

 

$

(6,826

)

 

 

320

 

 

 

 

December 31, 2018

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

(unaudited, dollars in thousands)

 

Fair

Value

 

 

Unrealized

Losses

 

 

# of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

# of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

# of

Securities

 

U.S. Treasury

 

$

9,972

 

 

$

(7

)

 

 

1

 

 

$

—

 

 

$

—

 

 

 

—

 

 

$

9,972

 

 

$

(7

)

 

 

1

 

U.S. Government sponsored entities

   and agencies

 

 

18,926

 

 

 

(148

)

 

 

8

 

 

 

76,385

 

 

 

(1,937

)

 

 

14

 

 

 

95,311

 

 

 

(2,085

)

 

 

22

 

Residential mortgage-backed securities

   and collateralized mortgage obligations

   of government sponsored entities and

   agencies

 

 

285,534

 

 

 

(1,862

)

 

 

44

 

 

 

922,698

 

 

 

(29,829

)

 

 

291

 

 

 

1,208,232

 

 

 

(31,691

)

 

 

335

 

Commercial mortgage-backed securities

   and collateralized mortgage obligations

   of government sponsored entities and

   agencies

 

 

9,186

 

 

 

(18

)

 

 

6

 

 

 

111,068

 

 

 

(2,945

)

 

 

14

 

 

 

120,254

 

 

 

(2,963

)

 

 

20

 

Obligations of states and political

   subdivisions

 

 

104,469

 

 

 

(439

)

 

 

207

 

 

 

303,681

 

 

 

(4,555

)

 

 

513

 

 

 

408,150

 

 

 

(4,994

)

 

 

720

 

Corporate debt securities

 

 

38,791

 

 

 

(898

)

 

 

18

 

 

 

11,452

 

 

 

(334

)

 

 

5

 

 

 

50,243

 

 

 

(1,232

)

 

 

23

 

Total temporarily impaired securities

 

$

466,878

 

 

$

(3,372

)

 

 

284

 

 

$

1,425,284

 

 

$

(39,600

)

 

 

837

 

 

$

1,892,162

 

 

$

(42,972

)

 

 

1,121

 

 

Unrealized losses on debt securities in the tables represent temporary fluctuations resulting from changes in market rates in relation to fixed yields.  Unrealized losses in the available-for-sale portfolio are accounted for as an adjustment, net of taxes, to other comprehensive income in shareholders’ equity.

WesBanco does not believe the securities presented above are impaired due to reasons of credit quality, as substantially all debt securities are rated above investment grade and all are paying principal and interest according to their contractual terms. WesBanco does not intend to sell, nor is it more likely than not that it will be required to sell, loss position securities prior to recovery of their cost, and therefore, management believes the unrealized losses detailed above are temporary and no impairment loss relating to these securities has been recognized.

Securities that do not have readily determinable fair values and for which WesBanco does not exercise significant influence are carried at cost.  Cost method investments consist primarily of FHLB of Pittsburgh, Cincinnati and Indianapolis stock totaling $54.7 million and $50.8 million at June 30, 2019 and December 31, 2018, respectively, and are included in other assets in the Consolidated Balance Sheets.  Cost method investments are evaluated for impairment whenever events or circumstances suggest that their carrying value may not be recoverable.

11

NOTE 5. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

The recorded investment in loans is presented in the Consolidated Balance Sheets net of deferred loan fees and costs, and discounts on purchased loans. Net deferred loan costs were $4.2 million and $3.2 million at June 30, 2019 and December 31, 2018, respectively. The unamortized discount on purchased loans from acquisitions was $40.1 million at June 30, 2019, including $19.0 million related to FFKT, and $49.3 million at December 31, 2018.

 

 

 

June 30,

 

 

December 31,

 

(unaudited, in thousands)

 

2019

 

 

2018

 

Commercial real estate:

 

 

 

 

 

 

 

 

Land and construction

 

$

483,046

 

 

$

528,072

 

Improved property

 

 

3,394,587

 

 

 

3,325,623

 

Total commercial real estate

 

 

3,877,633

 

 

 

3,853,695

 

Commercial and industrial

 

 

1,300,577

 

 

 

1,265,460

 

Residential real estate

 

 

1,633,613

 

 

 

1,611,607

 

Home equity

 

 

590,303

 

 

 

599,331

 

Consumer

 

 

335,728

 

 

 

326,188

 

Total portfolio loans

 

 

7,737,854

 

 

 

7,656,281

 

Loans held for sale

 

 

18,649

 

 

 

8,994

 

Total loans

 

$

7,756,503

 

 

$

7,665,275

 

 

The following tables summarize changes in the allowance for credit losses applicable to each category of the loan portfolio:

 

 

 

Allowance for Credit Losses By Category

 

 

 

For the Six Months Ended June 30, 2019 and 2018

 

(unaudited, in thousands)

 

Commercial

Real Estate -

Land and

Construction

 

 

Commercial

Real Estate

-Improved

Property

 

 

Commercial

& Industrial

 

 

Residential

Real Estate

 

 

Home

Equity

 

 

Consumer

 

 

Deposit

Overdraft

 

 

Total

 

Balance at December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

$

4,039

 

 

$

20,848

 

 

$

12,114

 

 

$

3,822

 

 

$

4,356

 

 

$

2,797

 

 

$

972

 

 

$

48,948

 

Allowance for loan commitments

 

 

169

 

 

 

33

 

 

 

262

 

 

 

12

 

 

 

226

 

 

 

39

 

 

 

—

 

 

 

741

 

Total beginning allowance for credit losses

 

 

4,208

 

 

 

20,881

 

 

 

12,376

 

 

 

3,834

 

 

 

4,582

 

 

 

2,836

 

 

 

972

 

 

 

49,689

 

Provision for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

(538

)

 

 

1,459

 

 

 

1,309

 

 

 

124

 

 

 

423

 

 

 

333

 

 

 

1,119

 

 

 

4,229

 

Provision for loan commitments

 

 

18

 

 

 

(9

)

 

 

995

 

 

 

1

 

 

 

23

 

 

 

(3

)

 

 

—

 

 

 

1,025

 

Total provision for credit losses

 

 

(520

)

 

 

1,450

 

 

 

2,304

 

 

 

125

 

 

 

446

 

 

 

330

 

 

 

1,119

 

 

 

5,254

 

Charge-offs

 

 

—

 

 

 

(285

)

 

 

(1,025

)

 

 

(679

)

 

 

(673

)

 

 

(1,344

)

 

 

(860

)

 

 

(4,866

)

Recoveries

 

 

200

 

 

 

345

 

 

 

489

 

 

 

188

 

 

 

215

 

 

 

896

 

 

 

215

 

 

 

2,548

 

Net charge-offs

 

 

200

 

 

 

60

 

 

 

(536

)

 

 

(491

)

 

 

(458

)

 

 

(448

)

 

 

(645

)

 

 

(2,318

)

Balance at June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

3,701

 

 

 

22,367

 

 

 

12,887

 

 

 

3,455

 

 

 

4,321

 

 

 

2,682

 

 

 

1,446

 

 

 

50,859

 

Allowance for loan commitments

 

 

187

 

 

 

24

 

 

 

1,257

 

 

 

13

 

 

 

249

 

 

 

36

 

 

 

—

 

 

 

1,766

 

Total ending allowance for credit losses

 

$

3,888

 

 

$

22,391

 

 

$

14,144

 

 

$

3,468

 

 

$

4,570

 

 

$

2,718

 

 

$

1,446

 

 

$

52,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

$

3,117

 

 

$

21,166

 

 

$

9,414

 

 

$

3,206

 

 

$

4,497

 

 

$

3,063

 

 

$

821

 

 

$

45,284

 

Allowance for loan commitments

 

 

119

 

 

 

26

 

 

 

173

 

 

 

7

 

 

 

212

 

 

 

37

 

 

 

—

 

 

 

574

 

Total beginning allowance for credit losses

 

 

3,236

 

 

 

21,192

 

 

 

9,587

 

 

 

3,213

 

 

 

4,709

 

 

 

3,100

 

 

 

821

 

 

 

45,858

 

Provision for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

1,465

 

 

 

(1,774

)

 

 

2,100

 

 

 

944

 

 

 

54

 

 

 

615

 

 

 

439

 

 

 

3,843

 

Provision for loan commitments

 

 

44

 

 

 

(8

)

 

 

2

 

 

 

2

 

 

 

(7

)

 

 

—

 

 

 

—

 

 

 

33

 

Total provision for credit losses

 

 

1,509

 

 

 

(1,782

)

 

 

2,102

 

 

 

946

 

 

 

47

 

 

 

615

 

 

 

439

 

 

 

3,876

 

Charge-offs

 

 

(136

)

 

 

(692

)

 

 

(616

)

 

 

(509

)

 

 

(672

)

 

 

(1,793

)

 

 

(541

)

 

 

(4,959

)

Recoveries

 

 

264

 

 

 

776

 

 

 

636

 

 

 

252

 

 

 

279

 

 

 

1,066

 

 

 

197

 

 

 

3,470

 

Net charge-offs

 

 

128

 

 

 

84

 

 

 

20

 

 

 

(257

)

 

 

(393

)

 

 

(727

)

 

 

(344

)

 

 

(1,489

)

Balance at June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

4,710

 

 

 

19,476

 

 

 

11,534

 

 

 

3,893

 

 

 

4,158

 

 

 

2,951

 

 

 

916

 

 

 

47,638

 

Allowance for loan commitments

 

 

163

 

 

 

18

 

 

 

175

 

 

 

9

 

 

 

205

 

 

 

37

 

 

 

—

 

 

 

607

 

Total ending allowance for credit losses

 

$

4,873

 

 

$

19,494

 

 

$

11,709

 

 

$

3,902

 

 

$

4,363

 

 

$

2,988

 

 

$

916

 

 

$

48,245

 

 

12

The following tables present the allowance for credit losses and recorded investments in loans by category:

 

 

 

Allowance for Credit Losses and Recorded Investment in Loans

 

(unaudited, in thousands)

 

Commercial

Real Estate-

Land and

Construction

 

 

Commercial

Real Estate-

Improved

Property

 

 

Commercial

and

Industrial

 

 

Residential

Real

Estate

 

 

Home

Equity

 

 

Consumer

 

 

Deposit

Over-

draft

 

 

Total

 

June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loans individually

   evaluated for impairment

 

$

—

 

 

$

1,479

 

 

$

11

 

 

$

12

 

 

$

8

 

 

$

1

 

 

$

—

 

 

$

1,511

 

Allowance for loans collectively

   evaluated for impairment

 

 

3,701

 

 

 

20,888

 

 

 

12,876

 

 

 

3,443

 

 

 

4,313

 

 

 

2,681

 

 

 

1,446

 

 

 

49,348

 

Allowance for loan commitments

 

 

187

 

 

 

24

 

 

 

1,257

 

 

 

13

 

 

 

249

 

 

 

36

 

 

 

—

 

 

 

1,766

 

Total allowance for credit losses

 

$

3,888

 

 

$

22,391

 

 

$

14,144

 

 

$

3,468

 

 

$

4,570

 

 

$

2,718

 

 

$

1,446

 

 

$

52,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for

   impairment (1)

 

$

—

 

 

$

5,157

 

 

$

192

 

 

$

4,922

 

 

$

922

 

 

$

74

 

 

$

—

 

 

$

11,267

 

Collectively evaluated for

   impairment

 

 

482,804

 

 

 

3,381,541

 

 

 

1,299,528

 

 

 

1,627,047

 

 

 

589,381

 

 

 

335,654

 

 

 

—

 

 

 

7,715,955

 

Acquired with deteriorated credit

   quality

 

 

242

 

 

 

7,889

 

 

 

857

 

 

 

1,644

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

10,632

 

Total portfolio loans

 

$

483,046

 

 

$

3,394,587

 

 

$

1,300,577

 

 

$

1,633,613

 

 

$

590,303

 

 

$

335,728

 

 

$

—

 

 

$

7,737,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loans individually

   evaluated for impairment

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Allowance for loans collectively

   evaluated for impairment

 

 

4,039

 

 

 

20,848

 

 

 

12,114

 

 

 

3,822

 

 

 

4,356

 

 

 

2,797

 

 

 

972

 

 

 

48,948

 

Allowance for loan commitments

 

 

169

 

 

 

33

 

 

 

262

 

 

 

12

 

 

 

226

 

 

 

39

 

 

 

—

 

 

 

741

 

Total allowance for credit losses

 

$

4,208

 

 

$

20,881

 

 

$

12,376

 

 

$

3,834

 

 

$

4,582

 

 

$

2,836

 

 

$

972

 

 

$

49,689

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for

   impairment (1)

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Collectively evaluated for

   impairment

 

 

527,737

 

 

 

3,319,672

 

 

 

1,264,560

 

 

 

1,609,177

 

 

 

599,331

 

 

 

326,063

 

 

 

—

 

 

 

7,646,540

 

Acquired with deteriorated credit

   quality

 

 

335

 

 

 

5,951

 

 

 

900

 

 

 

2,430

 

 

 

—

 

 

 

125

 

 

 

—

 

 

 

9,741

 

Total portfolio loans

 

$

528,072

 

 

$

3,325,623

 

 

$

1,265,460

 

 

$

1,611,607

 

 

$

599,331

 

 

$

326,188

 

 

$

—

 

 

$

7,656,281

 

(1) Commercial loans greater than $1 million that are reported as non-accrual or as a TDR are individually evaluated for impairment.

WesBanco maintains an internal loan grading system to reflect the credit quality of commercial loans.  Commercial loan risk grades are determined based on an evaluation of the relevant characteristics of each loan, assigned at the inception of each loan and adjusted thereafter at any time to reflect changes in the risk profile throughout the life of each loan.  The primary factors used to determine the risk grade are the reliability and sustainability of the primary source of repayment and overall financial strength of the borrower.  This includes an analysis of cash flow available to repay debt, profitability, liquidity, leverage, and overall financial trends.  Other factors include management, industry or property type risks, an assessment of secondary sources of repayment such as collateral or guarantees, other terms and conditions of the loan that may increase or reduce its risk, and economic conditions and other external factors that may influence repayment capacity and financial condition.  

Commercial real estate – land and construction consists of loans to finance investments in vacant land, land development, construction of residential housing, and construction of commercial buildings.  Commercial real estate – improved property consists of loans for the purchase or refinance of all types of improved owner-occupied and investment properties.  Factors that are considered in assigning the risk grade vary depending on the type of property financed.  The risk grade assigned to construction and development loans is based on the overall viability of the project, the experience and financial capacity of the developer or builder to successfully complete the project, project specific and market absorption rates and comparable property values, and the amount of pre-sales for residential housing construction or pre-leases for commercial investment property.  The risk grade assigned to commercial investment property loans is based primarily on the adequacy of net rental income generated by the property to service the debt, the type, quality, industry and mix of tenants, and the terms of leases, but also considers the overall financial capacity of the investors and their experience in owning and managing investment property.  The risk grade assigned to owner-occupied commercial real estate and commercial and industrial loans is based primarily on historical and projected earnings, the adequacy of operating cash flow to service all of the business’ debt, and the capital resources, liquidity and leverage of the business, but also considers the industry in which the business operates, the business’ specific competitive advantages or disadvantages, the quality and experience of management, and external influences on the business such as economic conditions. The type, age, condition, location and any environmental risks associated with a property are also considered for all types of commercial real estate.  

13

Commercial and industrial (“C&I”) loans consist of revolving lines of credit to finance accounts receivable, inventory and other general business purposes; term loans to finance fixed assets other than real estate, and letters of credit to support trade, insurance or governmental requirements for a variety of businesses.  Most C&I borrowers are privately-held companies with annual sales up to $100 million. Factors that are considered for C&I loans include the type, quality and marketability of non-real estate collateral and whether the structure of the loan increases or reduces its risk.  The overall financial condition and repayment capacity of any guarantors is also evaluated to determine the extent to which they mitigate other risks of the loan.  The following paragraphs provide descriptions of risk grades that are applicable to commercial real estate and commercial and industrial loans.

Pass loans are those that exhibit a history of positive financial results that are at least comparable to the average for their industry or type of real estate.  The primary source of repayment is acceptable and these loans are expected to perform satisfactorily during most economic cycles.  Pass loans typically have no significant external factors that are expected to adversely affect these borrowers more than others in the same industry or property type.  Any minor unfavorable characteristics of these loans are outweighed or mitigated by other positive factors including but not limited to adequate secondary or tertiary sources of repayment.

Criticized or compromised loans are currently protected but have weaknesses, which, if not corrected, may be inadequately protected at some future date.  These loans represent an unwarranted credit risk and would generally not be extended in the normal course of lending.  Specific issues, which may warrant this grade, include declining financial results, increased reliance on secondary sources of repayment or guarantor support and adverse external influences that may negatively impact the business or property.

Substandard and doubtful loans are equivalent to the classifications used by banking regulators.  Substandard loans are inadequately protected by the current repayment capacity and equity of the borrower or collateral pledged, if any.  Substandard loans have one or more well-defined weaknesses that jeopardize their repayment or collection in full.  These loans may or may not be reported as non-accrual.  Doubtful loans have all the weaknesses inherent to a substandard loan with the added characteristic that full repayment is highly questionable or improbable on the basis of currently existing facts, conditions and collateral values, and are considered non-accrual.  However, recognition of loss may be deferred if there are reasonably specific pending factors that will reduce the risk if they occur.

The following tables summarize commercial loans by their assigned risk grade:

 

 

 

Commercial Loans by Internally Assigned Risk Grade

 

(unaudited, in thousands)

 

Commercial

Real Estate-

Land and

Construction

 

 

Commercial

Real Estate-

Improved

Property

 

 

Commercial

& Industrial

 

 

Total

Commercial

Loans

 

As of June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

476,109

 

 

$

3,319,270

 

 

$

1,268,591

 

 

$

5,063,970

 

Criticized - compromised

 

 

5,794

 

 

 

52,657

 

 

 

14,785

 

 

 

73,236

 

Classified - substandard

 

 

1,143

 

 

 

22,660

 

 

 

17,201

 

 

 

41,004

 

Classified - doubtful

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

483,046

 

 

$

3,394,587

 

 

$

1,300,577

 

 

$

5,178,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

523,707

 

 

$

3,267,304

 

 

$

1,245,190

 

 

$

5,036,201

 

Criticized - compromised

 

 

2,297

 

 

 

35,566

 

 

 

13,847

 

 

 

51,710

 

Classified - substandard

 

 

2,068

 

 

 

22,753

 

 

 

6,423

 

 

 

31,244

 

Classified - doubtful

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

528,072

 

 

$

3,325,623

 

 

$

1,265,460

 

 

$

5,119,155

 

 

Residential real estate, home equity and consumer loans are not assigned internal risk grades other than as required by regulatory guidelines that are based primarily on the age of past due loans.  WesBanco primarily evaluates the credit quality of residential real estate, home equity and consumer loans based on repayment performance and historical loss rates.  The aggregate amount of residential real estate, home equity and consumer loans classified as substandard in accordance with regulatory guidelines was $20.0 million at June 30, 2019 and $22.9 million at December 31, 2018, of which $2.0 and $3.9 million were accruing, for each period, respectively. The aggregate amount of residential real estate, home equity and consumer loans classified as substandard are not included in the tables above.

Acquired FFKT Loans – In conjunction with the FFKT acquisition, WesBanco acquired loans with a book value of $1,064.8 million as of August 20, 2018.  These loans were recorded at the fair value of $1,025.8 million, with $988.3 million categorized as ASC 310-20 loans.  The fair market value adjustment on these loans of $26.0 million at the acquisition date is expected to be recognized into interest income on a level yield basis over the remaining expected life of the loans.  Loans acquired with deteriorated credit quality with a book value of $5.3 million were recorded at the fair value of $4.6 million, of which $2.4 million were accounted for under the cost recovery method in accordance with ASC 310-30 as cash flows cannot be reasonably estimated, and categorized as non-accrual. The carrying amount of loans acquired with deteriorated credit quality at June 30, 2019 was $3.1 million, while the outstanding customer balance was $3.6 million.  At June 30, 2019, no allowance for loan losses has been recognized related to the FFKT-acquired impaired loans.  Certain acquired underperforming loans with an acquired book value of $45.2 million were sold during the fourth quarter of 2018 for $32.9 million. The acquisition date fair value of the acquired loans was adjusted to the sale price resulting in no recognized gain or loss.

14

The following table provides changes in accretable yield for loans acquired with deteriorated credit quality:

 

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(unaudited, in thousands)

 

2019

 

 

2018

 

Balance at beginning of period

 

$

6,203

 

 

$

1,724

 

Acquisitions

 

 

1,300

 

 

 

—

 

Reduction due to change in projected cash flows

 

 

(960

)

 

 

(86

)

Reclass from non-accretable difference

 

 

839

 

 

 

5,877

 

Transfers out

 

 

—

 

 

 

—

 

Accretion

 

 

(2,240

)

 

 

(440

)

Balance at end of period

 

$

5,142

 

 

$

7,075

 

 

The following tables summarize the age analysis of all categories of loans:

 

 

 

Age Analysis of Loans

 

(unaudited, in thousands)

 

Current

 

 

30-59

Days

Past Due

 

 

60-89

Days

Past Due

 

 

90 Days

or More

Past Due

 

 

Total

Past Due

 

 

Total

Loans

 

 

90 Days

or More

Past Due

and

Accruing (1)

 

As of June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land and construction

 

$

482,016

 

 

$

965

 

 

$

45

 

 

$

20

 

 

$

1,030

 

 

$

483,046

 

 

$

—

 

Improved property

 

 

3,382,311

 

 

 

2,297

 

 

 

1,486

 

 

 

8,493

 

 

 

12,276

 

 

 

3,394,587

 

 

 

587

 

Total commercial real estate

 

 

3,864,327

 

 

 

3,262

 

 

 

1,531

 

 

 

8,513

 

 

 

13,306

 

 

 

3,877,633

 

 

 

587

 

Commercial and industrial

 

 

1,296,878

 

 

 

922

 

 

 

142

 

 

 

2,635

 

 

 

3,699

 

 

 

1,300,577

 

 

 

97

 

Residential real estate

 

 

1,617,430

 

 

 

5,962

 

 

 

2,449

 

 

 

7,772

 

 

 

16,183

 

 

 

1,633,613

 

 

 

1,173

 

Home equity

 

 

584,058

 

 

 

2,073

 

 

 

412

 

 

 

3,760

 

 

 

6,245

 

 

 

590,303

 

 

 

533

 

Consumer

 

 

333,279

 

 

 

1,682

 

 

 

506

 

 

 

261

 

 

 

2,449

 

 

 

335,728

 

 

 

244

 

Total portfolio loans

 

 

7,695,972

 

 

 

13,901

 

 

 

5,040

 

 

 

22,941

 

 

 

41,882

 

 

 

7,737,854

 

 

 

2,634

 

Loans held for sale

 

 

18,649

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

18,649

 

 

 

—

 

Total loans

 

$

7,714,621

 

 

$

13,901

 

 

$

5,040

 

 

$

22,941

 

 

$

41,882

 

 

$

7,756,503

 

 

$

2,634

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans included above are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accrual loans

 

$

9,310

 

 

$

1,170

 

 

$

2,169

 

 

$

20,249

 

 

 

23,588

 

 

$

32,898

 

 

 

 

 

TDRs accruing interest (1)

 

 

5,273

 

 

 

10

 

 

 

146

 

 

 

58

 

 

 

214

 

 

 

5,487

 

 

 

 

 

Total impaired

 

$

14,583

 

 

$

1,180

 

 

$

2,315

 

 

$

20,307

 

 

$

23,802

 

 

$

38,385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land and construction

 

$

526,660

 

 

$

62

 

 

$

1,350

 

 

$

—

 

 

$

1,412

 

 

$

528,072

 

 

$

—

 

Improved property

 

 

3,314,765

 

 

 

2,266

 

 

 

2,250

 

 

 

6,342

 

 

 

10,858

 

 

 

3,325,623

 

 

 

175

 

Total commercial real estate

 

 

3,841,425

 

 

 

2,328

 

 

 

3,600

 

 

 

6,342

 

 

 

12,270

 

 

 

3,853,695

 

 

 

175

 

Commercial and industrial

 

 

1,261,536

 

 

 

323

 

 

 

594

 

 

 

3,007

 

 

 

3,924

 

 

 

1,265,460

 

 

 

13

 

Residential real estate

 

 

1,593,519

 

 

 

2,717

 

 

 

5,001

 

 

 

10,370

 

 

 

18,088

 

 

 

1,611,607

 

 

 

2,820

 

Home equity

 

 

591,623

 

 

 

2,500

 

 

 

1,273

 

 

 

3,935

 

 

 

7,708

 

 

 

599,331

 

 

 

705

 

Consumer

 

 

322,584

 

 

 

2,084

 

 

 

1,007

 

 

 

513

 

 

 

3,604

 

 

 

326,188

 

 

 

364

 

Total portfolio loans

 

 

7,610,687

 

 

 

9,952

 

 

 

11,475

 

 

 

24,167

 

 

 

45,594

 

 

 

7,656,281

 

 

 

4,077

 

Loans held for sale

 

 

8,994

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

8,994

 

 

 

—

 

Total loans

 

$

7,619,681

 

 

$

9,952

 

 

$

11,475

 

 

$

24,167

 

 

$

45,594

 

 

$

7,665,275

 

 

$

4,077

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans included above are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-accrual loans

 

$

8,910

 

 

$

337

 

 

$

1,370

 

 

$

20,083

 

 

 

21,790

 

 

$

30,700

 

 

 

 

 

TDRs accruing interest (1)

 

 

5,586

 

 

 

59

 

 

 

92

 

 

 

7

 

 

 

158

 

 

 

5,744

 

 

 

 

 

Total impaired

 

$

14,496

 

 

$

396

 

 

$

1,462

 

 

$

20,090

 

 

$

21,948

 

 

$

36,444

 

 

 

 

 

(1) Loans 90 days or more past due and accruing interest exclude TDRs 90 days or more past due and accruing interest.

15

The following tables summarize impaired loans:

 

 

 

Impaired Loans

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

Unpaid

 

 

 

 

 

 

 

 

 

 

Unpaid

 

 

 

 

 

 

 

 

 

 

 

Principal

 

 

Recorded

 

 

Related

 

 

Principal

 

 

Recorded

 

 

Related

 

(unaudited, in thousands)

 

Balance (1)

 

 

Investment

 

 

Allowance

 

 

Balance (1)

 

 

Investment

 

 

Allowance

 

With no related specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land and construction

 

$

347

 

 

$

295

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Improved property

 

 

13,499

 

 

 

7,312

 

 

 

—

 

 

 

14,038

 

 

 

9,293

 

 

 

—

 

Commercial and industrial

 

 

4,086

 

 

 

2,854

 

 

 

—

 

 

 

4,610

 

 

 

3,428

 

 

 

—

 

Residential real estate

 

 

13,572

 

 

 

11,896

 

 

 

—

 

 

 

20,270

 

 

 

18,016

 

 

 

—

 

Home equity

 

 

5,247

 

 

 

4,450

 

 

 

—

 

 

 

5,924

 

 

 

5,036

 

 

 

—

 

Consumer

 

 

416

 

 

 

311

 

 

 

—

 

 

 

846

 

 

 

671

 

 

 

—

 

Total impaired loans without a specific allowance

 

 

37,167

 

 

 

27,118

 

 

 

—

 

 

 

45,688

 

 

 

36,444

 

 

 

—

 

With a specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land and construction

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Improved property

 

 

5,211

 

 

 

5,157

 

 

 

1,479

 

 

 

—

 

 

 

—

 

 

 

—

 

Commercial and industrial

 

 

194

 

 

 

192

 

 

 

11

 

 

 

—

 

 

 

—

 

 

 

—

 

Residential real estate

 

 

5,358

 

 

 

4,922

 

 

 

12

 

 

 

—

 

 

 

—

 

 

 

—

 

Home equity

 

 

990

 

 

 

922

 

 

 

8

 

 

 

—

 

 

 

—

 

 

 

—

 

Consumer

 

 

113

 

 

 

74

 

 

 

1

 

 

 

—

 

 

 

—

 

 

 

—

 

Total impaired loans with a specific allowance

 

 

11,866

 

 

 

11,267

 

 

 

1,511

 

 

 

—

 

 

 

—

 

 

 

—

 

Total impaired loans

 

$

49,033

 

 

$

38,385

 

 

$

1,511

 

 

$

45,688

 

 

$

36,444

 

 

$

—

 

(1) The difference between the unpaid principal balance and the recorded investment generally reflects amounts that have been previously charged-off and fair market value adjustments on acquired impaired loans.

 

 

 

Impaired Loans

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

 

 

Average

 

 

Interest

 

 

Average

 

 

Interest

 

 

Average

 

 

Interest

 

 

Average

 

 

Interest

 

 

 

Recorded

 

 

Income

 

 

Recorded

 

 

Income

 

 

Recorded

 

 

Income

 

 

Recorded

 

 

Income

 

(unaudited, in thousands)

 

Investment

 

 

Recognized

 

 

Investment

 

 

Recognized

 

 

Investment

 

 

Recognized

 

 

Investment

 

 

Recognized

 

With no related specific allowance

   recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land and construction

 

$

290

 

 

$

—

 

 

$

400

 

 

$

—

 

 

$

193

 

 

$

—

 

 

$

346

 

 

$

—

 

Improved property

 

 

7,287

 

 

 

—

 

 

 

10,604

 

 

 

23

 

 

 

7,955

 

 

 

—

 

 

 

11,357

 

 

 

368

 

Commercial and industrial

 

 

2,961

 

 

 

—

 

 

 

3,036

 

 

 

2

 

 

 

3,116

 

 

 

—

 

 

 

3,008

 

 

 

4

 

Residential real estate

 

 

11,845

 

 

 

—

 

 

 

18,264

 

 

 

61

 

 

 

13,902

 

 

 

—

 

 

 

18,434

 

 

 

127

 

Home equity

 

 

4,487

 

 

 

—

 

 

 

5,068

 

 

 

6

 

 

 

4,670

 

 

 

—

 

 

 

5,098

 

 

 

11

 

Consumer

 

 

337

 

 

 

—

 

 

 

758

 

 

 

2

 

 

 

448

 

 

 

—

 

 

 

823

 

 

 

5

 

Total impaired loans without a specific

   allowance

 

 

27,207

 

 

 

—

 

 

 

38,130

 

 

 

94

 

 

 

30,284

 

 

 

—

 

 

 

39,066

 

 

 

515

 

With a specific allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land and construction

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Improved property

 

 

3,645

 

 

 

14

 

 

 

1,052

 

 

 

—

 

 

 

2,430

 

 

 

28

 

 

 

1,403

 

 

 

—

 

Commercial and industrial

 

 

250

 

 

 

4

 

 

 

—

 

 

 

—

 

 

 

166

 

 

 

7

 

 

 

—

 

 

 

—

 

Residential real estate

 

 

5,000

 

 

 

60

 

 

 

—

 

 

 

—

 

 

 

3,333

 

 

 

118

 

 

 

—

 

 

 

—

 

Home equity

 

 

859

 

 

 

7

 

 

 

—

 

 

 

—

 

 

 

573

 

 

 

15

 

 

 

—

 

 

 

—

 

Consumer

 

 

89

 

 

 

1

 

 

 

—

 

 

 

—

 

 

 

59

 

 

 

2

 

 

 

—

 

 

 

—

 

Total impaired loans with a specific allowance

 

 

9,843

 

 

 

86

 

 

 

1,052

 

 

 

—

 

 

 

6,561

 

 

 

170

 

 

 

1,403

 

 

 

—

 

Total impaired loans

 

$

37,050

 

 

$

86

 

 

$

39,182

 

 

$

94

 

 

$

36,845

 

 

$

170

 

 

$

40,469

 

 

$

515

 

 

16

The following tables present the recorded investment in non-accrual loans and TDRs:

 

 

 

Non-accrual Loans (1)

 

 

 

June 30,

 

 

December 31,

 

(unaudited, in thousands)

 

2019

 

 

2018

 

Commercial real estate:

 

 

 

 

 

 

 

 

Land and construction

 

$

295

 

 

$

—

 

Improved property

 

 

11,726

 

 

 

8,413

 

Total commercial real estate

 

 

12,021

 

 

 

8,413

 

Commercial and industrial

 

 

2,854

 

 

 

3,260

 

Residential real estate

 

 

12,813

 

 

 

13,831

 

Home equity

 

 

4,886

 

 

 

4,610

 

Consumer

 

 

324

 

 

 

586

 

Total

 

$

32,898

 

 

$

30,700

 

(1) At June 30, 2019, there were three borrowers with loans greater than $1.0 million totaling $8.2 million, as compared to one borrower with a loan greater than $1.0 million totaling $3.4 million at December 31, 2018.  Total non-accrual loans include loans that are also restructured.  Such loans are also set forth in the following table as non-accrual TDRs.

 

 

 

TDRs

 

 

 

June 30, 2019

 

 

December 31, 2018

 

(unaudited, in thousands)

 

Accruing

 

 

Non-Accrual

 

 

Total

 

 

Accruing

 

 

Non-Accrual

 

 

Total

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land and construction

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

Improved property

 

 

743

 

 

 

558

 

 

 

1,301

 

 

 

880

 

 

 

1,529

 

 

 

2,409

 

Total commercial real estate

 

 

743

 

 

 

558

 

 

 

1,301

 

 

 

880

 

 

 

1,529

 

 

 

2,409

 

Commercial and industrial

 

 

192

 

 

 

—

 

 

 

192

 

 

 

168

 

 

 

169

 

 

 

337

 

Residential real estate

 

 

4,005

 

 

 

917

 

 

 

4,922

 

 

 

4,185

 

 

 

921

 

 

 

5,106

 

Home equity

 

 

486

 

 

 

436

 

 

 

922

 

 

 

426

 

 

 

198

 

 

 

624

 

Consumer

 

 

61

 

 

 

13

 

 

 

74

 

 

 

85

 

 

 

38

 

 

 

123

 

Total

 

$

5,487

 

 

$

1,924

 

 

$

7,411

 

 

$

5,744

 

 

$

2,855

 

 

$

8,599

 

 

As of June 30, 2019 and December 31, 2018, there were no TDRs greater than $1.0 million.  The concessions granted in the majority of loans reported as accruing and non-accrual TDRs are extensions of the maturity date or the amortization period, reductions in the interest rate below the prevailing market rate for loans with comparable characteristics, and/or permitting interest-only payments for longer than three months.  WesBanco had unfunded commitments to debtors whose loans were classified as impaired of $0.2 million and $0.1 million as of June 30, 2019 and December 31, 2018.

The following tables present details related to loans identified as TDRs during the three and six months ended June 30, 2019 and 2018, respectively:

 

 

 

New TDRs (1)

 

 

 

For the Three Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

 

 

 

 

 

Pre-

 

 

Post-

 

 

 

 

 

 

Pre-

 

 

Post-

 

 

 

 

 

 

 

Modification

 

 

Modification

 

 

 

 

 

 

Modification

 

 

Modification

 

 

 

 

 

 

 

Outstanding

 

 

Outstanding

 

 

 

 

 

 

Outstanding

 

 

Outstanding

 

 

 

Number of

 

 

Recorded

 

 

Recorded

 

 

Number of

 

 

Recorded

 

 

Recorded

 

(unaudited, dollars in thousands)

 

Modifications

 

 

Investment

 

 

Investment

 

 

Modifications

 

 

Investment

 

 

Investment

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land and construction

 

 

—

 

 

$

—

 

 

$

—

 

 

 

—

 

 

$

—

 

 

$

—

 

Improved Property

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total commercial real estate

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Commercial and industrial

 

 

1

 

 

 

44

 

 

 

40

 

 

 

1

 

 

 

9

 

 

 

9

 

Residential real estate

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Home equity

 

 

1

 

 

 

199

 

 

 

156

 

 

 

1

 

 

 

20

 

 

 

20

 

Consumer

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2

 

 

 

39

 

 

 

36

 

Total

 

 

2

 

 

$

243

 

 

$

196

 

 

 

4

 

 

$

68

 

 

$

65

 

(1) Excludes loans that were either paid off or charged-off by period end.  The pre-modification balance represents the balance outstanding at the beginning of the period.  The post-modification balance represents the outstanding balance at period end.

17

 

 

 

New TDRs (1)

 

 

 

For the Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

 

 

 

 

 

Pre-

 

 

Post-

 

 

 

 

 

 

Pre-

 

 

Post-

 

 

 

 

 

 

 

Modification

 

 

Modification

 

 

 

 

 

 

Modification

 

 

Modification

 

 

 

 

 

 

 

Outstanding

 

 

Outstanding

 

 

 

 

 

 

Outstanding

 

 

Outstanding

 

 

 

Number of

 

 

Recorded

 

 

Recorded

 

 

Number of

 

 

Recorded

 

 

Recorded

 

(unaudited, dollars in thousands)

 

Modifications

 

 

Investment

 

 

Investment

 

 

Modifications

 

 

Investment

 

 

Investment

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land and construction

 

 

—

 

 

$

—

 

 

$

—

 

 

 

—

 

 

$

—

 

 

$

—

 

Improved Property

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total commercial real estate

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Commercial and industrial

 

 

1

 

 

 

44

 

 

 

40

 

 

 

1

 

 

 

10

 

 

 

9

 

Residential real estate

 

 

4

 

 

 

194

 

 

 

188

 

 

 

5

 

 

 

203

 

 

 

185

 

Home equity

 

 

3

 

 

 

386

 

 

 

340

 

 

 

1

 

 

 

20

 

 

 

20

 

Consumer

 

 

1

 

 

 

15

 

 

 

13

 

 

 

4

 

 

 

45

 

 

 

38

 

Total

 

 

9

 

 

$

639

 

 

$

581

 

 

 

11

 

 

$

278

 

 

$

252

 

(1) Excludes loans that were either paid off or charged-off by period end.  The pre-modification balance represents the balance outstanding at the beginning of the period.  The post-modification balance represents the outstanding balance at period end.

The following table summarizes TDRs which defaulted (defined as past due 90 days) during the six months ended June 30, 2019 and 2018, respectively, that were restructured within the last twelve months prior to June 30, 2019 and 2018, respectively:

 

 

 

Defaulted TDRs (1)

 

 

 

For the Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

 

Number of

 

 

Recorded

 

 

Number of

 

 

Recorded

 

(unaudited, dollars in thousands)

 

Defaults

 

 

Investment

 

 

Defaults

 

 

Investment

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land and construction

 

 

—

 

 

$

—

 

 

 

—

 

 

$

—

 

Improved property

 

 

—

 

 

 

—

 

 

 

1

 

 

 

145

 

Total commercial real estate

 

 

—

 

 

 

—

 

 

 

1

 

 

 

145

 

Commercial and industrial

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Residential real estate

 

 

1

 

 

 

97

 

 

 

1

 

 

 

121

 

Home equity

 

 

—

 

 

 

—

 

 

 

1

 

 

 

7

 

Consumer

 

 

1

 

 

 

13

 

 

 

—

 

 

 

—

 

Total

 

 

2

 

 

$

110

 

 

 

3

 

 

$

273

 

(1) Excludes loans that were either charged-off or cured by period end.  The recorded investment is as of June 30, 2019 and 2018, respectively.

TDRs that default are placed on non-accrual status unless they are both well-secured and in the process of collection.  The loans in the table above were not accruing interest.

The following table summarizes other real estate owned and repossessed assets included in other assets:

 

 

 

June 30,

 

 

December 31,

 

(unaudited, in thousands)

 

2019

 

 

2018

 

Other real estate owned

 

$

4,891

 

 

$

7,173

 

Repossessed assets

 

 

82

 

 

 

92

 

Total other real estate owned and repossessed assets

 

$

4,973

 

 

$

7,265

 

 

Residential real estate included in other real estate owned at June 30, 2019 and December 31, 2018 was $1.2 million and $1.3 million, respectively.  At June 30, 2019 and December 31, 2018, formal foreclosure proceedings were in process on residential real estate loans totaling $5.8 million and $6.0 million, respectively.

18

NOTE 6. LEASES

Operating leases are recorded as a right of use (“ROU”) asset and operating lease liability, included in premises and equipment, net and other liabilities, respectively, on the consolidated balance sheet beginning January 1, 2019 when WesBanco adopted ASU 2016-02 prospectively. Operating lease ROU assets represent the right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental borrowing rate at the lease commencement date. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded primarily in net occupancy expense in the consolidated statements of comprehensive income.

Operating leases relate primarily to bank branches, office space and license agreements with remaining lease terms of generally 1 to 21 years, which include options for multiple five- and ten- year extensions, with a weighted-average lease term of 9 years. As of June 30, 2019, operating lease ROU assets and liabilities were $18.2 million and $21.2 million, respectively. The lease expense for operating leases was $0.7 million and $1.3 million for the three and six months ended June 30, 2019, respectively. The weighted average discount rate was 3.29% as of June 30, 2019.

Future minimum lease payments under non-cancellable leases with initial or remaining lease terms in excess of one year at June 30, 2019 are as follows (unaudited, in thousands):

 

Year

 

Amount

 

2020

 

$

755

 

2021

 

 

2,444

 

2022

 

 

1,713

 

2023

 

 

2,227

 

2024 and thereafter

 

 

17,686

 

Total lease payments

 

$

24,825

 

Less: Interest

 

 

(3,621

)

Present value of lease liabilities

 

$

21,204

 

 

NOTE 7. DERIVATIVES AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

WesBanco is exposed to certain risks arising from both its business operations and economic conditions.  WesBanco principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. WesBanco manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities.  WesBanco’s existing interest rate derivatives result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in WesBanco’s assets or liabilities. WesBanco manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions. A matched book is when the Bank’s assets and liabilities are equally distributed but also have similar maturities.  

Loan Swaps

WesBanco executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies.  Those interest rate swaps are simultaneously hedged by offsetting interest rate swaps that WesBanco executes with a third party, so that WesBanco minimizes its net risk exposure resulting from such transactions.  As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements of FASB ASC 815, changes in the fair value of both the customer swaps and the offsetting third-party swaps are recognized directly in earnings.  As of June 30, 2019 and December 31, 2018, WesBanco had 53 and 43, respectively, interest rate swaps with an aggregate notional amount of $320.1 million and $229.8 million related to this program.  During the six months ended June 30, 2019 and 2018, WesBanco recognized net losses of $1.1 million and net gains of $0.2 million, respectively, related to the changes in fair value of these swaps. Additionally, WesBanco recognized $1.9 million and $0.5 million of income for the related swap fees for the six months ended June 30, 2019 and 2018, respectively.

Mortgage Loans Held for Sale and Loan Commitments

Certain residential mortgage loans are originated for sale in the secondary mortgage loan market. These loans are classified as held for sale and carried at fair value as WesBanco has elected the fair value option. Fair value is determined based on rates obtained from the secondary market for loans with similar characteristics. WesBanco sells loans to the secondary market on a mandatory or best efforts basis.  The loans sold on a mandatory basis are not committed to an investor until the loan is closed with the borrower.  WesBanco enters into forward TBA contracts to manage the interest rate risk between the loan commitment and the closing of the loan.  The loans sold on a best efforts basis are committed to an investor simultaneous to the interest rate commitment with the borrower.

Fair Values of Derivative Instruments on the Balance Sheet  

All derivatives are carried on the consolidated balance sheet at fair value. Derivative assets are classified in the consolidated balance sheet under other assets, and derivative liabilities are classified in the consolidated balance sheet under other liabilities. Changes in fair value are recognized in earnings. None of WesBanco’s derivatives is designated in a qualifying hedging relationship under ASC 815.  

19

The table below presents the fair value of WesBanco’s derivative financial instruments as well as their classification on the Balance Sheet as of June 30, 2019 and December 31, 2018:

 

 

 

June 30, 2019

 

 

December 31, 2018

 

(unaudited, in thousands)

 

Notional or

Contractual

Amount

 

 

Asset

Derivatives

 

 

Liability

Derivatives

 

 

Notional or

Contractual

Amount

 

 

Asset

Derivatives

 

 

Liability

Derivatives

 

Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan Swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

320,134

 

 

$

13,281

 

 

$

14,774

 

 

$

229,778

 

 

$

4,650

 

 

$

5,081

 

Other contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate loan commitments

 

 

44,062

 

 

 

58

 

 

 

—

 

 

 

16,113

 

 

 

125

 

 

 

—

 

Forward TBA contracts

 

 

61,000

 

 

 

—

 

 

 

166

 

 

 

20,000

 

 

 

—

 

 

 

234

 

Total derivatives

 

 

 

 

 

$

13,339

 

 

$

14,940

 

 

 

 

 

 

$

4,775

 

 

$

5,315

 

 

Effect of Derivative Instruments on the Income Statement

The table below presents the change in the fair value of the Company’s derivative financial instruments reflected within the other non-interest income line item of the consolidated income statement for the three and six months ended June 30, 2019 and 2018, respectively.

 

 

 

 

For the Three Months

Ended June 30,

 

 

For the Six Months

Ended June 30,

 

(unaudited, in thousands)

Location of Gain/(Loss)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Interest rate swaps

Other income

 

$

(751

)

 

$

44

 

 

$

(1,063

)

 

$

211

 

Interest rate loan commitments

Mortgage banking income

 

 

(97

)

 

 

7

 

 

 

(67

)

 

 

143

 

Forward TBA contracts

Mortgage banking income

 

 

(518

)

 

 

(11

)

 

 

(852

)

 

 

399

 

Total

 

 

$

(1,366

)

 

$

40

 

 

$

(1,982

)

 

$

753

 

 

Credit-risk-related Contingent Features

WesBanco has agreements with its derivative counterparties that contain a provision, which provides that if WesBanco defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then WesBanco could also be declared in default on its derivative obligations.

WesBanco also has agreements with certain of its derivative counterparties that contain a provision where if WesBanco fails to maintain its status as either a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and WesBanco would be required to settle its obligations under the agreements.

WesBanco has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral with a market value of $21.3 million as of June 30, 2019.  If WesBanco had breached any of these provisions at June 30, 2019, it could have been required to settle its obligations under the agreements at the termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.

NOTE 8. PENSION & POSTRETIREMENT MEDICAL BENEFIT PLANS

The following table presents the net periodic pension cost for WesBanco’s Defined Benefit Pension Plan (the “Plan”) and the related components:

 

 

 

For the Three Months

Ended June 30,

 

 

For the Six Months

Ended June 30,

 

(unaudited, in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Service cost – benefits earned during year

 

$

560

 

 

$

707

 

 

$

1,114

 

 

$

1,406

 

Interest cost on projected benefit obligation

 

 

1,313

 

 

 

1,228

 

 

 

2,611

 

 

 

2,442

 

Expected return on plan assets

 

 

(2,211

)

 

 

(2,390

)

 

 

(4,398

)

 

 

(4,753

)

Amortization of prior service cost

 

 

6

 

 

 

7

 

 

 

13

 

 

 

13

 

Amortization of net loss

 

 

808

 

 

 

758

 

 

 

1,607

 

 

 

1,508

 

Net periodic pension cost

 

$

476

 

 

$

310

 

 

$

947

 

 

$

616

 

 

The Plan covers all employees of WesBanco and its subsidiaries who were hired on or before August 1, 2007 who satisfy minimum age and length of service requirements, and is not available to employees hired after such date.

A minimum required contribution of $4.8 million is due for 2019, which could be offset in whole or in part by the Plan’s $52.5 million available credit balance. WesBanco made a voluntary contribution of $3.0 million to the Plan in June 2019.

20

WesBanco assumed FFKT’s postretirement medical benefit plan, which covers FFKT employees who meet the service requirements.  Benefits provided under this plan are unfunded, and payments to the plan participants are made by WesBanco. The net periodic cost for the postretirement medical benefit plan totaled $59 thousand and $117 thousand for the three and six months ended June 30, 2019, respectively. The net periodic cost consisted of $115 thousand and $228 thousand in interest cost on projected benefit obligation for the three and six months ended June 30, 2019, respectively, which was partially offset by a $56 thousand and a $111 thousand benefit of prior service cost amortization for the three and six months ended June 30, 2019, respectively.

NOTE 9. FAIR VALUE MEASUREMENT

Fair value estimates are based on quoted market prices, if available, quoted market prices of similar assets or liabilities, or the present value of expected future cash flows and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions, and risk assumptions used. Therefore, fair value estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realizable in an immediate settlement of the instruments.

Fair value is determined at one point in time and is not representative of future value.  These amounts do not reflect the total value of a going concern organization. Management does not have the intention to dispose of a significant portion of its assets and liabilities, and therefore the unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows.

The following is a discussion of assets and liabilities measured at fair value on a recurring basis and valuation techniques applied:

Investment securities:  The fair value of investment securities which are measured on a recurring basis are determined primarily by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other similar securities. These securities are classified within level 1 or 2 in the fair value hierarchy.  Positions that are not traded in active markets for which valuations are generated using assumptions not observable in the market or management’s best estimate are classified within level 3 of the fair value hierarchy.  This includes certain specific municipal debt issues for which the credit quality and discount rate must be estimated.  

Loans held for sale:  Loans held for sale are carried, in aggregate, at fair value as WesBanco has elected the fair value option as of October 1, 2017.  The use of a valuation model using quoted prices of similar instruments are significant inputs in arriving at the fair value and therefore loans held for sale are classified within level 2 of the fair value hierarchy.

Derivatives:  WesBanco enters into interest rate swap agreements with qualifying commercial customers to meet their financing, interest rate and other risk management needs.  These agreements provide the customer the ability to convert from variable to fixed interest rates.  The credit risk associated with derivatives executed with customers is essentially the same as that involved in extending loans and is subject to normal credit policies and monitoring.  Those interest rate swaps are economically hedged by offsetting interest rate swaps that WesBanco executes with derivative counterparties in order to offset its exposure on the fixed components of the customer interest rate swap agreements.  The interest rate swap agreement with the loan customer and with the counterparty is reported at fair value in other assets and other liabilities on the consolidated balance sheet with any resulting gain or loss recorded in current period earnings as other income and other expense.

WesBanco enters into forward TBA contracts to manage the interest rate risk between the loan commitments to the customer and the closing of the loan for loans that will be sold on a mandatory basis to secondary market investors.  The forward TBA contract is reported at fair value in other assets and other liabilities on the consolidated balance sheet with any resulting gain or loss recorded in current period’s earnings as mortgage banking income.

WesBanco determines the fair value for derivatives using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.  WesBanco incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. 

We may be required from time to time to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP.  These adjustments to fair value usually result from the application of lower of cost or market accounting or write-downs of individual assets and liabilities.

Other real estate owned and repossessed assets:  Other real estate owned and repossessed assets are carried at the lower of the investment in the assets or the fair value of the assets less estimated selling costs.  The use of independent appraisals and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral, and therefore other real estate owned and repossessed assets are classified within level 3 of the fair value hierarchy.

21

The fair value amounts presented in the table below are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. The following tables set forth WesBanco’s financial assets and liabilities that were accounted for at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy as of June 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

 

 

 

Fair Value Measurements Using:

 

 

 

June 30,

 

 

Quoted Prices in

Active Markets

for Identical

Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

(unaudited, in thousands)

 

2019

 

 

(level 1)

 

 

(level 2)

 

 

(level 3)

 

Recurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

11,817

 

 

$

11,817

 

 

$

—

 

 

$

—

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

29,781

 

 

 

—

 

 

 

29,781

 

 

 

—

 

U.S. Government sponsored entities and agencies

 

 

134,587

 

 

 

—

 

 

 

134,587

 

 

 

—

 

Residential mortgage-backed securities and collateralized

   mortgage obligations of government agencies

 

 

1,563,042

 

 

 

—

 

 

 

1,563,042

 

 

 

—

 

Commercial mortgage-backed securities and

   collateralized mortgage obligations of government

   sponsored entities and agencies

 

 

178,656

 

 

 

—

 

 

 

178,656

 

 

 

—

 

Obligations of state and political subdivisions

 

 

183,178

 

 

 

—

 

 

 

181,576

 

 

 

1,602

 

Corporate debt securities

 

 

40,040

 

 

 

—

 

 

 

40,040

 

 

 

—

 

Total available-for-sale debt securities

 

$

2,129,284

 

 

$

—

 

 

$

2,127,682

 

 

$

1,602

 

Loans held for sale

 

 

18,649

 

 

 

—

 

 

 

18,649

 

 

 

—

 

Other assets - interest rate derivatives agreements

 

 

13,281

 

 

 

—

 

 

 

13,281

 

 

 

—

 

Total assets recurring fair value measurements

 

$

2,173,031

 

 

$

11,817

 

 

$

2,159,612

 

 

$

1,602

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities - interest rate derivatives agreements

 

$

14,774

 

 

$

—

 

 

$

14,774

 

 

$

—

 

Total liabilities recurring fair value measurements

 

$

14,774

 

 

$

—

 

 

$

14,774

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonrecurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired Loans

 

$

2,434

 

 

 

—

 

 

 

—

 

 

$

2,434

 

Other real estate owned and repossessed assets

 

 

4,973

 

 

 

—

 

 

 

—

 

 

 

4,973

 

Total nonrecurring fair value measurements

 

$

7,407

 

 

$

—

 

 

$

—

 

 

$

7,407

 

 

22

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

Fair Value Measurements Using:

 

 

 

December 31,

 

 

Quoted Prices in

Active Markets

for Identical

Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

(in thousands)

 

2018

 

 

(level 1)

 

 

(level 2)

 

 

(level 3)

 

Recurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

$

11,737

 

 

$

11,737

 

 

$

—

 

 

$

—

 

Available-for-sale debt securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

19,878

 

 

 

—

 

 

 

19,878

 

 

 

—

 

U.S. Government sponsored entities and agencies

 

 

141,652

 

 

 

—

 

 

 

141,652

 

 

 

—

 

Residential mortgage-backed securities and collateralized mortgage

   obligations of government agencies

 

 

1,561,255

 

 

 

—

 

 

 

1,561,255

 

 

 

—

 

Commercial mortgage-backed securities and collateralized mortgage

   obligations of government sponsored entities and agencies

 

 

168,972

 

 

 

—

 

 

 

168,972

 

 

 

—

 

Obligations of state and political subdivisions

 

 

185,114

 

 

 

—

 

 

 

183,611

 

 

 

1,503

 

Corporate debt securities

 

 

37,258

 

 

 

—

 

 

 

37,258

 

 

 

—

 

Total available-for-sale debt securities

 

$

2,114,129

 

 

$

—

 

 

$

2,112,626

 

 

$

1,503

 

Loans held for sale

 

 

8,994

 

 

 

—

 

 

 

8,994

 

 

 

—

 

Other assets - interest rate derivatives agreements

 

 

4,650

 

 

 

—

 

 

 

4,650

 

 

 

—

 

Total assets recurring fair value measurements

 

$

2,139,510

 

 

$

11,737

 

 

$

2,126,270

 

 

$

1,503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities - interest rate derivatives agreements

 

$

5,081

 

 

$

—

 

 

$

5,081

 

 

$

—

 

Total liabilities recurring fair value measurements

 

$

5,081

 

 

$

—

 

 

$

5,081

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonrecurring fair value measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned and repossessed assets

 

 

7,265

 

 

 

—

 

 

 

—

 

 

 

7,265

 

Total nonrecurring fair value measurements

 

$

7,265

 

 

$

—

 

 

$

—

 

 

$

7,265

 

 

WesBanco’s policy is to recognize transfers between levels as of the actual date of the event or change in circumstances that caused the transfer.  There were no significant transfers between level 1, 2 or 3 for the three and six months ended June 30, 2019 or for the year ended December 31, 2018.  

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which WesBanco has utilized level 3 inputs to determine fair value:

 

 

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

Fair Value

 

 

Valuation

 

Unobservable

 

Range (Weighted

(unaudited, in thousands)

 

Estimate

 

 

Techniques

 

Input

 

Average)

June 30, 2019

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

2,434

 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

(30.5%)/((30.5%)

 

 

 

 

 

 

 

 

Liquidation expenses (2)

 

(5.1%)/((5.1%)

Other real estate owned and repossessed assets

 

$

4,973

 

 

Appraisal of collateral (1), (3)

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

Other real estate owned and repossessed assets

 

$

7,265

 

 

Appraisal of collateral (1), (3)

 

 

 

 

 

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs, which are not identifiable.

 

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.  The range and weighted average of appraisal adjustments and liquidation expense are presented as a percent of the appraisal.

 

(3)

Includes estimated liquidation expense and numerous dissimilar qualitative adjustments by management, which are not identifiable.

23

The estimated fair values of WesBanco’s financial instruments are summarized below:

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

Carrying

 

 

Fair Value

 

 

Quoted Prices in

Active Markets

for Identical

Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

(unaudited, in thousands)

 

Amount

 

 

Estimate

 

 

(level 1)

 

 

(level 2)

 

 

(level 3)

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

194,355

 

 

$

194,355

 

 

$

194,355

 

 

$

—

 

 

$

—

 

Equity securities

 

 

11,817

 

 

 

11,817

 

 

 

11,817

 

 

 

—

 

 

 

—

 

Available-for-sale debt securities

 

 

2,129,284

 

 

 

2,129,284

 

 

 

—

 

 

 

2,127,682

 

 

 

1,602

 

Held-to-maturity debt securities

 

 

900,605

 

 

 

921,534

 

 

 

—

 

 

 

920,989

 

 

 

545

 

Net loans

 

 

7,686,995

 

 

 

7,674,887

 

 

 

—

 

 

 

—

 

 

 

7,674,887

 

Loans held for sale

 

 

18,649

 

 

 

18,649

 

 

 

—

 

 

 

18,649

 

 

 

—

 

Other assets - interest rate derivatives

 

 

13,281

 

 

 

13,281

 

 

 

—

 

 

 

13,281

 

 

 

—

 

Accrued interest receivable

 

 

38,450

 

 

 

38,450

 

 

 

38,450

 

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

8,694,928

 

 

 

8,695,779

 

 

 

7,329,812

 

 

 

1,365,967

 

 

 

—

 

Federal Home Loan Bank borrowings

 

 

1,121,283

 

 

 

1,127,210

 

 

 

—

 

 

 

1,127,210

 

 

 

—

 

Other borrowings

 

 

296,148

 

 

 

296,574

 

 

 

293,205

 

 

 

3,369

 

 

 

—

 

Subordinated debt and junior subordinated debt

 

 

156,534

 

 

 

144,410

 

 

 

—

 

 

 

144,410

 

 

 

—

 

Other liabilities - interest rate derivatives

 

 

14,774

 

 

 

14,774

 

 

 

—

 

 

 

14,774

 

 

 

—

 

Accrued interest payable

 

 

6,559

 

 

 

6,559

 

 

 

6,559

 

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

Carrying

 

 

Fair Value

 

 

Quoted Prices in

Active Markets

for Identical

Assets

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

(in thousands)

 

Amount

 

 

Estimate

 

 

(level 1)

 

 

(level 2)

 

 

(level 3)

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

169,186

 

 

$

169,186

 

 

$

169,186

 

 

$

—

 

 

$

—

 

Equity securities

 

 

11,737

 

 

 

11,737

 

 

 

11,737

 

 

 

—

 

 

 

—

 

Available-for-sale debt securities

 

 

2,114,129

 

 

 

2,114,129

 

 

 

—

 

 

 

2,112,626

 

 

 

1,503

 

Held-to-maturity debt securities

 

 

1,020,934

 

 

 

1,020,743

 

 

 

—

 

 

 

1,020,195

 

 

 

548

 

Net loans

 

 

7,607,333

 

 

 

7,422,825

 

 

 

—

 

 

 

—

 

 

 

7,422,825

 

Loans held for sale

 

 

8,994

 

 

 

8,994

 

 

 

—

 

 

 

8,994

 

 

 

—

 

Other assets - interest rate derivatives

 

 

4,650

 

 

 

4,650

 

 

 

—

 

 

 

4,650

 

 

 

—

 

Accrued interest receivable

 

 

38,853

 

 

 

38,853

 

 

 

38,853

 

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

8,831,633

 

 

 

8,836,390

 

 

 

7,376,023

 

 

 

1,460,367

 

 

 

—

 

Federal Home Loan Bank borrowings

 

 

1,054,174

 

 

 

1,051,401

 

 

 

—

 

 

 

1,051,401

 

 

 

—

 

Other borrowings

 

 

290,522

 

 

 

290,854

 

 

 

288,918

 

 

 

1,936

 

 

 

—

 

Subordinated debt and junior subordinated debt

 

 

189,842

 

 

 

174,448

 

 

 

—

 

 

 

174,448

 

 

 

—

 

Other liabilities - interest rate derivatives

 

 

5,081

 

 

 

5,081

 

 

 

—

 

 

 

5,081

 

 

 

—

 

Accrued interest payable

 

 

4,627

 

 

 

4,627

 

 

 

4,627

 

 

 

—

 

 

 

—

 

 

The following methods and assumptions were used to measure the fair value of financial instruments recorded at cost on WesBanco’s consolidated balance sheets:

Cash and due from banks:  The carrying amount for cash and due from banks is a reasonable estimate of fair value.

Held-to-maturity debt securities:  Fair values for debt securities held-to-maturity are determined in the same manner as investment securities, which are described above.

24

Net loans:  Fair values for loans are estimated using a discounted cash flow methodology.  The discount rates take into account interest rates currently being offered to customers for loans with similar terms, the credit risk associated with the loan and other market factors, including liquidity.  WesBanco believes the discount rates are consistent with transactions occurring in the marketplace for both performing and distressed loan types. The carrying value is net of the allowance for loan losses and other associated premiums and discounts.  Due to the significant judgment involved in evaluating credit quality, loans are classified within level 3 of the fair value hierarchy.

Accrued interest receivable:  The carrying amount of accrued interest receivable approximates its fair value.

Deposits:  The carrying amount is considered a reasonable estimate of fair value for demand, savings and other variable rate deposit accounts. The fair value of fixed maturity certificates of deposit is estimated by a discounted cash flow method using rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank borrowings:  The fair value of FHLB borrowings is based on rates currently available to WesBanco for borrowings with similar terms and remaining maturities.

Other borrowings:  The carrying amount of federal funds purchased and overnight sweep accounts generally approximate fair value.  Other repurchase agreements are based on quoted market prices if available.  If market prices are not available, for certain fixed and adjustable rate repurchase agreements, then quoted market prices of similar instruments are used.

Subordinated debt and junior subordinated debt:  The fair value of subordinated debt is estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements. Due to the pooled nature of junior subordinated debt owed to unconsolidated subsidiary trusts, which are not actively traded, estimated fair value is based on recent similar transactions of single-issuer trust preferred securities.

Accrued interest payable:  The carrying amount of accrued interest payable approximates its fair value.

Off-balance sheet financial instruments:  Off-balance sheet financial instruments consist of commitments to extend credit, including letters of credit. Fair values for commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit standing of the counterparties. The estimated fair value of the commitments to extend credit and letters of credit are insignificant and therefore are not presented in the above tables.

 

NOTE 10. REVENUE RECOGNITION

WesBanco adopted ASU 2014-09 as of January 1, 2018 under the modified retrospective approach and there was no material impact on WesBanco’s Consolidated Financial statements. Interest income, net securities gains (losses) and bank-owned life insurance are not in scope of ASC 606, Revenue from Contracts with Customers. For the revenue streams in scope of ASC 606 - trust fees, service charges on deposits, net securities brokerage revenue, payment processing fees, electronic banking fees, mortgage banking income and net gain or loss on sale of other real estate owned – there are no significant judgements related to the amount and timing of revenue recognition.

Trust fees: Fees are earned over a period of time between monthly and annually, per the related fee schedule. The fees are earned ratably over the period for investment, safekeeping and other services performed by WesBanco. The fees are accrued when earned based on the daily asset value on the last day of the quarter.  In most cases, the fees are directly debited from the customer account.

Service charges on deposits: There are monthly service charges for both commercial and personal banking customers, which are earned over the month per the related fee schedule based on the customers’ deposits. There are also transaction-based fees, which are earned based on specific transactions or customer activity within the customers’ deposit accounts. These are earned at the time the transaction or customer activity occurs. The fees are debited from the customer account.

Net securities brokerage revenue: Commission income is earned based on customer transactions and management of investments. The commission income from customers’ transactions is recognized when the transaction is complete. The commission income from the management of investments is earned continuously over a quarterly period.

Payment processing fees: Payment processing fees are fees earned from the bill payment and electronic funds transfer (“EFT”) services provided under the name FirstNet. The fees are derived from both the individual consumer banking transactions and from businesses or service providers through monthly billing for total transactions occurring.  These fees are earned at the time the transaction or customer activity occurs.  The fees are debited from the customers’ deposit accounts or charged directly to the business or service provider.

Electronic banking fees: Interchange and ATM fees are earned based on customer and ATM transactions. Revenue is recognized when the transaction is settled.

Mortgage banking income: Income is earned when WesBanco-originated loans are sold to an investor on the secondary market. The investor bids on the loans. If the price is accepted, WesBanco delivers the loan documents to the investor. Once received and approved by the investor, revenue is recognized and the loans are derecognized from the Consolidated Balance Sheet. Prior to the loans being sold, they are classified as loans held for sale. Additionally, the changes in the fair value of the loans held for sale, loan commitments and related derivatives are included in mortgage banking income.

Net gain or loss on sale of other real estate owned: Net gain or loss is recorded when other real estate is sold to a third party and the Bank collects substantially all of the consideration to which WesBanco is entitled in exchange for the transfer of the property.

25

The following table summarizes the point of revenue recognition and the income recognized for each of the revenue streams for the three and six months ended June 30, 2019 and 2018, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

Point of Revenue

 

For the Three Months

Ended June 30,

 

 

For the Six Months

Ended June 30,

 

(unaudited, in thousands)

 

Recognition

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue Streams

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust account fees

 

Over time

 

$

4,208

 

 

$

3,558

 

 

$

9,263

 

 

$

7,850

 

WesMark fees

 

Over time

 

 

2,131

 

 

 

2,194

 

 

 

4,191

 

 

 

4,405

 

Total trust fees

 

 

 

 

6,339

 

 

 

5,752

 

 

 

13,454

 

 

 

12,255

 

Service charges on deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial banking fees

 

Over time

 

 

499

 

 

 

462

 

 

 

967

 

 

 

869

 

Personal service charges

 

At a point in time & over time

 

 

5,698

 

 

 

4,684

 

 

 

11,780

 

 

 

9,100

 

Total service charges on deposits

 

 

 

 

6,197

 

 

 

5,146

 

 

 

12,747

 

 

 

9,969

 

Net securities brokerage revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annuity commissions

 

At a point in time

 

 

1,454

 

 

 

1,310

 

 

 

2,815

 

 

 

2,510

 

Equity and debt security trades

 

At a point in time

 

 

103

 

 

 

87

 

 

 

206

 

 

 

189

 

Managed money

 

Over time

 

 

174

 

 

 

163

 

 

 

331

 

 

 

304

 

Trail commissions

 

Over time

 

 

242

 

 

 

249

 

 

 

481

 

 

 

476

 

Total net securities brokerage revenue

 

 

 

 

1,973

 

 

 

1,809

 

 

 

3,833

 

 

 

3,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment processing fees (1)

 

At a point in time & over time

 

 

785

 

 

 

—

 

 

 

1,433

 

 

 

—

 

Electronic banking fees

 

At a point in time

 

 

7,154

 

 

 

5,728

 

 

 

13,046

 

 

 

10,558

 

Mortgage banking income

 

At a point in time

 

 

1,618

 

 

 

1,670

 

 

 

2,674

 

 

 

2,776

 

Net gain on other real estate owned and other assets

 

At a point in time

 

 

376

 

 

 

229

 

 

 

512

 

 

 

491

 

(1) Payment processing fees are included in other non-interest income.

 

 

NOTE 11. COMPREHENSIVE INCOME/(LOSS)

The activity in accumulated other comprehensive income for the six months ended June 30, 2019 and 2018 is as follows:

 

 

 

Accumulated Other Comprehensive Income/(Loss) (1)

 

(unaudited, in thousands)

 

Defined

Benefit

Plans

 

 

Unrealized

Gains (Losses)

on Debt Securities

Available-for-Sale

 

 

Unrealized Gains

on Debt Securities

Transferred from

Available-for-Sale

to Held-to-Maturity

 

 

Total

 

Balance at December 31, 2018

 

$

(16,542

)

 

$

(21,522

)

 

$

193

 

 

$

(37,871

)

Other comprehensive income before reclassifications

 

 

—

 

 

 

40,996

 

 

 

—

 

 

 

40,996

 

Amounts reclassified from accumulated other

   comprehensive income

 

 

1,129

 

 

 

(30

)

 

 

(111

)

 

 

988

 

Period change

 

 

1,129

 

 

 

40,966

 

 

 

(111

)

 

 

41,984

 

Balance at June 30, 2019

 

$

(15,413

)

 

$

19,444

 

 

$

82

 

 

$

4,113

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

$

(18,626

)

 

$

(13,250

)

 

$

381

 

 

$

(31,495

)

Other comprehensive income before reclassifications

 

 

—

 

 

 

(21,720

)

 

 

—

 

 

 

(21,720

)

Amounts reclassified from accumulated other

   comprehensive income

 

 

1,026

 

 

 

—

 

 

 

(100

)

 

 

926

 

Period change

 

 

1,026

 

 

 

(21,720

)

 

 

(100

)

 

 

(20,794

)

Adoption of Accounting Standard ASU 2016-01

 

 

—

 

 

 

(1,063

)

 

 

—

 

 

 

(1,063

)

Balance at June 30, 2018

 

$

(17,600

)

 

$

(36,033

)

 

$

281

 

 

$

(53,352

)

(1) All amounts are net of tax.  Related income tax expense or benefit is calculated using a combined Federal and State income tax rate approximating 23%.

26

The following table provides details about amounts reclassified from accumulated other comprehensive income for the three and six months ended June 30, 2019 and 2018, respectively:

 

Details about Accumulated Other Comprehensive

Income/(Loss) Components

 

For the Three Months

Ended June 30,

 

 

For the Six Months

Ended June 30,

 

 

 

Affected Line Item in the Statement

of Net Income

(unaudited, in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

Debt securities available-for-sale (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net securities losses (gains) reclassified into earnings

 

$

4

 

 

$

—

 

 

$

(38

)

 

$

—

 

 

 

Net securities gains (Non-interest income)

Related income tax (benefit) expense

 

 

(1

)

 

 

—

 

 

 

8

 

 

 

—

 

 

 

Provision for income taxes

Net effect on accumulated other comprehensive income for the period

 

 

3

 

 

 

—

 

 

 

(30

)

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities held-to-maturity (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of unrealized gain transferred from

   available-for-sale

 

 

(94

)

 

 

(66

)

 

 

(149

)

 

 

(131

)

 

 

Interest and dividends on securities (Interest and dividend income)

Related income tax expense

 

 

21

 

 

 

15

 

 

 

38

 

 

 

31

 

 

 

Provision for income taxes

Net effect on accumulated other comprehensive income for the period

 

 

(73

)

 

 

(51

)

 

 

(111

)

 

 

(100

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit plans (2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net loss and prior service costs

 

 

758

 

 

 

764

 

 

 

1,509

 

 

 

1,520

 

 

 

Employee benefits (Non-interest expense)

Related income tax benefit

 

 

(173

)

 

 

(175

)

 

 

(380

)

 

 

(494

)

 

 

Provision for income taxes

Net effect on accumulated other comprehensive income for the period

 

 

585

 

 

 

589

 

 

 

1,129

 

 

 

1,026

 

 

 

 

Total reclassifications for the period

 

$

515

 

 

$

538

 

 

$

988

 

 

$

926

 

 

 

 

(1) For additional detail related to unrealized gains on securities and related amounts reclassified from accumulated other comprehensive income, see Note 4, “Securities.”

(2) Included in the computation of net periodic pension cost. See Note 8, “Pension & Postretirement Medical Benefit Plans” for additional detail.

NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES

Commitments — In the normal course of business, WesBanco offers off-balance sheet credit arrangements to enable its customers to meet their financing objectives. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. WesBanco’s exposure to credit losses in the event of non-performance by the other parties to the financial instruments for commitments to extend credit and standby letters of credit is limited to the contractual amount of those instruments. WesBanco uses the same credit policies in making commitments and conditional obligations as for all other lending. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The allowance for credit losses associated with commitments was $1.8 million and $0.7 million as of June 30, 2019 and December 31, 2018, respectively, and is included in other liabilities on the Consolidated Balance Sheets.

Letters of credit are conditional commitments issued by banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including normal business activities, bond financing and similar transactions. Letters of credit are considered guarantees.  The liability associated with letters of credit was $0.2 million as of June 30, 2019 and December 31, 2018.

Contingent obligations to purchase loans funded by other entities include affordable housing plan guarantees, credit card guarantees, loans sold with recourse as well as obligations to the FHLB.  Affordable housing plan guarantees are performance guarantees for various building project loans.  The guarantee amortizes as the loan balances decrease.  Credit card guarantees are credit card balances not owned by WesBanco, whereby the Bank guarantees the performance of the cardholder.  

The following table presents total commitments to extend credit, guarantees and various letters of credit outstanding:

 

 

 

June 30,

 

 

December 31,

 

(unaudited, in thousands)

 

2019

 

 

2018

 

Lines of credit

 

$

1,909,282

 

 

$

1,894,030

 

Loans approved but not closed

 

 

299,081

 

 

 

258,778

 

Overdraft limits

 

 

152,207

 

 

 

153,572

 

Letters of credit

 

 

45,960

 

 

 

42,841

 

Contingent obligations and other guarantees

 

 

48,654

 

 

 

61,509

 

 

Contingent Liabilities — WesBanco is a party to various legal and administrative proceedings and claims. While any litigation contains an element of uncertainty, management does not believe that a material loss related to such proceedings or claims pending or known to be threatened is reasonably possible.

27

 

NOTE 13. BUSINESS SEGMENTS

WesBanco operates two reportable segments: community banking and trust and investment services. WesBanco’s community banking segment offers services traditionally offered by full-service commercial banks, including commercial demand, individual demand and time deposit accounts, as well as commercial, mortgage and individual installment loans, and certain non-traditional offerings, such as insurance and securities brokerage services.  The trust and investment services segment offers trust services as well as various alternative investment products including mutual funds.  The market value of assets managed or held in custody by the trust and investment services segment was approximately $4.5 billion and $4.0 billion at June 30, 2019 and 2018, respectively.  These assets are held by WesBanco in fiduciary or agency capacities for their customers and therefore are not included as assets on WesBanco’s Consolidated Balance Sheets.  

Condensed financial information by business segment is presented below:

 

 

 

 

 

 

 

Trust and

 

 

 

 

 

 

 

Community

 

 

Investment

 

 

 

 

 

(unaudited, in thousands)

 

Banking

 

 

Services

 

 

Consolidated

 

For The Three Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

$

119,543

 

 

$

—

 

 

$

119,543

 

Interest expense

 

 

21,083

 

 

 

—

 

 

 

21,083

 

Net interest income

 

 

98,460

 

 

 

—

 

 

 

98,460

 

Provision for credit losses

 

 

2,747

 

 

 

—

 

 

 

2,747

 

Net interest income after provision for credit losses

 

 

95,713

 

 

 

—

 

 

 

95,713

 

Non-interest income

 

 

24,817

 

 

 

6,339

 

 

 

31,156

 

Non-interest expense

 

 

67,957

 

 

 

3,995

 

 

 

71,952

 

Income before provision for income taxes

 

 

52,573

 

 

 

2,344

 

 

 

54,917

 

Provision for income taxes

 

 

9,611

 

 

 

492

 

 

 

10,103

 

Net income

 

$

42,962

 

 

$

1,852

 

 

$

44,814

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For The Three Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

$

98,888

 

 

$

—

 

 

$

98,888

 

Interest expense

 

 

16,541

 

 

 

—

 

 

 

16,541

 

Net interest income

 

 

82,347

 

 

 

—

 

 

 

82,347

 

Provision for credit losses

 

 

1,708

 

 

 

—

 

 

 

1,708

 

Net interest income after provision for credit losses

 

 

80,639

 

 

 

—

 

 

 

80,639

 

Non-interest income

 

 

17,656

 

 

 

5,752

 

 

 

23,408

 

Non-interest expense

 

 

60,026

 

 

 

3,517

 

 

 

63,543

 

Income before provision for income taxes

 

 

38,269

 

 

 

2,235

 

 

 

40,504

 

Provision for income taxes

 

 

6,865

 

 

 

470

 

 

 

7,335

 

Net income

 

$

31,404

 

 

$

1,765

 

 

$

33,169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

$

238,596

 

 

$

—

 

 

$

238,596

 

Interest expense

 

 

41,774

 

 

 

—

 

 

 

41,774

 

Net interest income

 

 

196,822

 

 

 

—

 

 

 

196,822

 

Provision for credit losses

 

 

5,254

 

 

 

—

 

 

 

5,254

 

Net interest income after provision for credit losses

 

 

191,568

 

 

 

—

 

 

 

191,568

 

Non-interest income

 

 

45,475

 

 

 

13,454

 

 

 

58,929

 

Non-interest expense

 

 

138,233

 

 

 

8,152

 

 

 

146,385

 

Income before provision for income taxes

 

 

98,810

 

 

 

5,302

 

 

 

104,112

 

Provision for income taxes

 

 

17,848

 

 

 

1,113

 

 

 

18,961

 

Net income

 

$

80,962

 

 

$

4,189

 

 

$

85,151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

$

185,203

 

 

$

—

 

 

$

185,203

 

Interest expense

 

 

29,667

 

 

 

—

 

 

 

29,667

 

Net interest income

 

 

155,536

 

 

 

—

 

 

 

155,536

 

Provision for credit losses

 

 

3,876

 

 

 

—

 

 

 

3,876

 

Net interest income after provision for credit losses

 

 

151,660

 

 

 

—

 

 

 

151,660

 

Non-interest income

 

 

35,236

 

 

 

12,255

 

 

 

47,491

 

Non-interest expense

 

 

110,920

 

 

 

7,194

 

 

 

118,114

 

Income before provision for income taxes

 

 

75,976

 

 

 

5,061

 

 

 

81,037

 

Provision for income taxes

 

 

13,276

 

 

 

1,063

 

 

 

14,339

 

Net income

 

$

62,700

 

 

$

3,998

 

 

$

66,698

 

 

28

Total non-fiduciary assets of the trust and investment services segment were $3.9 million (including $2.6 million of trust customer intangibles) and $1.7 million at June 30, 2019 and 2018, respectively.  All other assets, including goodwill and the remainder of other intangible assets, were allocated to the Community Banking segment.

 

NOTE 14 SUBSEQUENT EVENTS

 

On July 23, 2019, WesBanco and Old Line Bancshares, Inc. (“Old Line”), a bank holding company headquartered in Bowie, MD with approximately $3.1 billion in assets, $2.4 billion in loans, $2.4 billion deposits, $0.4 billion in stockholders’ equity and 37 branches, jointly announced that a definitive Agreement and Plan of Merger was executed providing for the merger of Old Line with and into WesBanco. On the date of the announcement, the transaction was valued at approximately $500.1 million. Under the terms of the Agreement and Plan of Merger (“Agreement”), which has been approved by that board of directors of both companies, WesBanco will exchange its common stock for Old Line common stock at closing, subject to customary conditions. Old Line options will be exchanged for WesBanco shares, as adjusted as to exercise price and number of options to take into account the fixed exchange ratio stated in the Agreement. Old Line stockholders will be entitled to receive 0.7844 shares of WesBanco common stock per each share of Old Line common stock for a total value of $29.22 per share, as of the date of the announcement. The receipt by Old Line stockholders of shares of WesBanco common stock in exchange for their shares of Old Line common stock is anticipated to qualify as a tax-free exchange. The acquisition is subject to the approvals of the appropriate banking regulatory authorities and the stockholders of Old Line and WesBanco. It is expected that the transaction will be completed in the fourth quarter of 2019 or first quarter of 2020.

29

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis (“MD&A”) represents an overview of the results of operations and financial condition of WesBanco for the three and six months ended June 30, 2019. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto.

FORWARD-LOOKING STATEMENTS

Forward-looking statements in this report relating to WesBanco’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The information contained in this report should be read in conjunction with WesBanco’s Form 10-K for the year ended December 31, 2018 and documents subsequently filed by WesBanco with the Securities and Exchange Commission (“SEC”), including WesBanco’s Form 10-Q for the quarter ended March 31, 2019, which are available at the SEC’s website, www.sec.gov or at WesBanco’s website, www.wesbanco.com.  Investors are cautioned that forward-looking statements, which are not historical fact, involve risks and uncertainties, including those detailed under “Risk Factors” in Part I, Item 1A of WesBanco’s Annual Report on Form 10-K.  Such statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements, including, without limitation, that the businesses of WesBanco and Old Line may not be integrated successfully or such integration may take longer to accomplish than excepted; the expected cost savings and any revenue synergies from the merger of WesBanco and Old Line may not be fully realized within the expected timeframes; disruption from the merger of WesBanco and Old Line may make it more difficult to maintain relationships with clients, associates, or suppliers; the effects of changing regional and national economic conditions; changes in interest rates, spreads on earning assets and interest-bearing liabilities, and associated interest rate sensitivity; sources of liquidity available to WesBanco and its related subsidiary operations; potential future credit losses and the credit risk of commercial, real estate, and consumer loan customers and their borrowing activities; actions of the Federal Reserve, the FDIC, the SEC, FINRA, the Municipal Securities Rulemaking Board, the Securities Investors Protection Corporation, and other regulatory bodies; potential legislative and federal and state regulatory actions and reform, including, without limitation, the impact of the implementation of the Dodd-Frank Act; adverse decisions of federal and state courts; fraud, scams and schemes of third parties; cyber security breaches; competitive conditions in the financial services industry; rapidly changing technology affecting financial services; marketability of debt instruments and corresponding impact on fair value adjustments; and/or other external developments materially impacting WesBanco’s operational and financial performance.  WesBanco does not assume any duty to update forward-looking statements.

OVERVIEW

WesBanco is a multi-state bank holding company operating through 199 branches and 194 ATM machines in West Virginia, Ohio, western Pennsylvania, Kentucky, and southern Indiana, offering retail banking, corporate banking, personal and corporate trust services, brokerage services, mortgage banking and insurance. WesBanco’s businesses are significantly impacted by economic factors such as market interest rates, federal monetary and regulatory policies, local and regional economic conditions and the competitive environment’s effect upon WesBanco’s business volumes.  WesBanco’s deposit levels are affected by numerous factors including personal savings rates, personal income, and competitive rates on alternative investments, as well as competition from other financial institutions within the markets we serve and liquidity needs of WesBanco. Loan levels are also subject to various factors including construction demand, business financing needs, consumer spending and interest rates, as well as loan terms offered by competing lenders.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

WesBanco’s critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2019 have remained unchanged from the disclosures presented in WesBanco’s Annual Report on Form 10-K for the year ended December 31, 2018 within the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

RESULTS OF OPERATIONS

EARNINGS SUMMARY

 

Net income for the three months ended June 30, 2019 was $44.8 million, with diluted earnings per share of $0.82, compared to $33.2 million and $0.71 per diluted share, respectively, for the second quarter of 2018.  Net income for the six months ended June 30, 2019 was $85.2 million, with diluted earnings per share of $1.56, compared to $66.7 million and $1.47 per diluted share, respectively for the six months ended June 30, 2018. Excluding after-tax merger-related expenses (non-GAAP measure) in both periods, net income and diluted earnings per share would have increased 19.9% to $44.9 million, or $0.82 per diluted share for the three months ended June 30, 2019, as compared to the prior year quarter; and net income for the six months ended June 30, 2019 increased 23.2% year-over-year to $87.7 million, or $1.60 per diluted share versus $1.57 per diluted share in the prior year period.

 

 

 

For The Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

(unaudited, dollars in thousands, except per

   share amounts)

 

Net Income

 

 

Diluted

Earnings

Per Share

 

 

Net Income

 

 

Diluted

Earnings

Per Share

 

 

Net

Income

 

 

Diluted

Earnings

Per Share

 

 

Net

Income

 

 

Diluted

Earnings

Per Share

 

Net income (Non-GAAP)(1)

 

$

44,878

 

 

$

0.82

 

 

$

37,445

 

 

$

0.80

 

 

$

87,670

 

 

$

1.60

 

 

$

71,167

 

 

$

1.57

 

Less: After tax merger-related expenses

 

 

(64

)

 

 

—

 

 

 

(4,276

)

 

 

(0.09

)

 

 

(2,519

)

 

 

(0.04

)

 

 

(4,469

)

 

 

(0.10

)

Net income (GAAP)

 

$

44,814

 

 

$

0.82

 

 

$

33,169

 

 

$

0.71

 

 

$

85,151

 

 

$

1.56

 

 

$

66,698

 

 

$

1.47

 

(1) Non-GAAP net income excludes after-tax merger-related expenses.  The above non-GAAP financial measures used by WesBanco provide information useful to investors in understanding WesBanco’s operating performance and trends, and facilitate comparisons with the performance of WesBanco’s peers.

30

Net interest income increased $16.1 million or 19.6% in the second quarter of 2019 compared to the same quarter of 2018 due to an 11.5% increase in average earning assets. In addition, the yield on earning assets has increased a total of 34 basis points since the second quarter of 2018 while there was somewhat of an offset by a 17 basis points increase in the cost of interest bearing liabilities, producing an increase in the net spread on earning assets of 17 basis points year-over-year. The net interest margin increased by 24 basis points to 3.67% in the second quarter of 2019 compared to 3.43% in the second quarter of 2018. The net interest margin benefited from increases in the Federal Reserve Board’s target federal funds rate during 2018 as well as an increase in non-interest bearing demand deposits.  The increase in the cost of interest bearing liabilities is primarily due to higher rates for interest bearing public funds, higher certificates of deposit costs and certain Federal Home Loan Bank and other borrowings. Accretion from prior acquisitions benefited the second quarter net interest margin by approximately 18 basis points, as compared to 12 basis points in the prior year period.

The provision for credit losses increased to $2.7 million in the second quarter of 2019, compared to $1.7 million in the second quarter of 2018. The increased provision is due primarily to a $40.8 million increase in criticized and classified loans as of June 30, 2019 as compared to June 30, 2018, reflecting our normal loan grade review process post-acquisition of FFKT, as well as two larger downgraded relationships in the legacy loan portfolio, as reported last quarter. Net charge-offs, as a percentage of average portfolio loans was 0.05% and 0.03% for second quarter of 2019 and 2018, respectively.

For the second quarter of 2019, non-interest income increased $7.7 million or 33.1% compared to the second quarter of 2018 driven by net securities gains, electronic banking fees, service charges on deposit and payment processing fees.  Net securities gains increased $2.6 million due to the sale of WesBanco’s Visa Class B shares. Electronic banking fees increased $1.4 million or 24.9%, service charges on deposits increased $1.1 million or 20.4%, payment processing fees increased $0.8 million or 100% and trust fees increased $0.6 million or 10.2% for the second quarter of 2019 compared to the second quarter of 2018. Payment processing fees are from a business acquired from FFKT, which provides bill payment and electronic funds transfer services for its customers. Non-interest income increased $11.4 million or 24.1% for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018.

Non-interest expense in the second quarter of 2019 increased by $8.4 million or 13.2%, compared to the second quarter of 2018, which is primarily due to the FTSB and FFKT acquisitions.  Salaries and wages increased $4.8 million or 17.8% and employee benefit expense increased $1.7 million or 21.8% compared to last year’s second quarter as full-time equivalent personnel increased 15.3% due in part to the FTSB and FFKT acquisitions as well as additions to key revenue-producing positions throughout the markets. For the second quarter of 2019, merger-related expenses were $0.1 million related to the FFKT merger as compared to $5.4 million for the second quarter of 2018 related to the FTSB and FFKT mergers.

During the second quarter, the effective tax rate was 18.40% as compared to 18.11% last year, while the provision for income taxes increased $2.8 million to $10.1 million due to higher year-over-year pre-tax income.

NET INTEREST INCOME

TABLE 1. NET INTEREST INCOME

 

 

 

For the Three Months

Ended June 30,

 

 

For the Six Months

Ended June 30,

 

(unaudited, dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net interest income

 

$

98,460

 

 

$

82,347

 

 

$

196,822

 

 

$

155,536

 

Taxable equivalent adjustment to net interest

   income

 

 

1,367

 

 

 

1,344

 

 

 

2,840

 

 

 

2,629

 

Net interest income, fully taxable equivalent

 

$

99,827

 

 

$

83,691

 

 

$

199,662

 

 

$

158,165

 

Net interest spread, non-taxable equivalent

 

 

3.32

%

 

 

3.15

%

 

 

3.33

%

 

 

3.13

%

Benefit of net non-interest bearing liabilities

 

 

0.30

%

 

 

0.23

%

 

 

0.30

%

 

 

0.22

%

Net interest margin

 

 

3.62

%

 

 

3.38

%

 

 

3.63

%

 

 

3.35

%

Taxable equivalent adjustment

 

 

0.05

%

 

 

0.05

%

 

 

0.05

%

 

 

0.06

%

Net interest margin, fully taxable equivalent

 

 

3.67

%

 

 

3.43

%

 

 

3.68

%

 

 

3.41

%

 

Net interest income, which is WesBanco’s largest source of revenue, is the difference between interest income on earning assets, primarily loans and securities, and interest expense on liabilities, primarily deposits and short and long-term borrowings.  Net interest income is affected by the general level of, and changes in interest rates, the steepness and shape of the yield curve, changes in the amount and composition of interest earning assets and interest bearing liabilities, as well as the frequency of repricing of existing assets and liabilities. Net interest income increased $16.1 million or 19.6% in the second quarter of 2019 compared to the second quarter of 2018, due to an 11.5% increase in average earning asset balances, primarily driven by the acquisition of FFKT and related net asset accretion from purchase accounting.  For the first six months of 2019, net interest income increased $41.3 million or 26.5% for the same reasons along with the acquisition of FTSB.   Average loan balances increased by 13.5% in the second quarter of 2019 from the acquisition of FFKT compared to the second quarter of 2018. Organic loan growth decreased 1.1% from last year due to lower home equity loan balances due to lower demand as a result of higher interest rates and tax changes, elevated levels of commercial real estate loans moving to the secondary market and continued deleveraging by commercial customers reflective of the current operating environment and higher cash levels from tax reform.  Total average deposits increased in the second quarter of 2019 by $1.1 billion or 14.5% compared to the second quarter of 2018, due specifically to the deposits acquired from FFKT.   The net interest margin increased by 24 basis points to 3.67% in the second quarter of 2019 from the same quarter of 2018.  The margin benefited from increases in the Federal Reserve’s target federal funds rate during 2018 and higher margins on the acquired FFKT assets, partially offset by higher funding costs and a flattening of the yield curve in 2019. Yields increased for all earning asset categories in 2019. The cost of interest bearing liabilities increased by 17 basis points from the second quarter of 2018 to the second quarter of 2019. The increase in the cost is primarily due to rate increases for larger balance customers in interest bearing demand deposits, which include public funds, and higher rates for certificates of deposit, customer repurchase agreements, short to medium-term Federal Home Loan Bank borrowings and junior subordinated debentures.  Approximately 18 basis points of accretion from FFKT and other prior acquisitions was included in the second quarter 2019 net interest margin compared to 12 basis points in the 2018 second quarter net interest margin.

31

Interest income increased $20.7 million or 20.9% in the second quarter of 2019 and $53.4 million or 28.8% in the first half of 2019 compared to the same periods of 2018 due to higher overall earning assets, particularly from the FTSB and FFKT acquisitions, and higher yields in every earning asset category.  Earning asset yields were influenced positively in the second quarter of 2019 compared to the second quarter of 2018 due to federal funds rate increases occurring through the second half of 2018.  Average loan balances increased by $914.8 million or 13.5% in the second quarter of 2019 compared to the second quarter of 2018, due to the acquisition of FFKT. Loan yields increased by 38 basis points during this same period to 5.02% from the previously mentioned federal funds rate increases and accretion from purchase accounting from the FFKT acquisition.  Loans provide the greatest impact on interest income and the yield on earning assets as they have the largest balance and the highest yield within major earning asset categories.  In the second quarter of 2019, average loans represented 70.6% of average earning assets, an increase from 69.4% in the second quarter of 2018.  Average taxable securities balances increased by $207.7 million or 9.8% from the second quarter of 2018, primarily due to the securities acquired in the FFKT acquisition. Taxable securities yields increased by 15 basis points and tax-exempt securities yields increased by 10 basis points in the second quarter of 2019 from the second quarter of 2018 due to higher market rates on all securities acquired and purchased over the last four quarters. The average balance of tax-exempt securities, which have the highest yields within securities, decreased to 24.1% of total average securities in the second quarter of 2019 compared to 26.1% in the second quarter of 2018, mostly due to the sale of lower-yielding tax-exempt municipal securities late in the first quarter of 2019.

Total portfolio loans increased $945.0 million or 13.9% over the last twelve months, while total commercial loans increased $694.4 million or 15.5%.  Loan growth was achieved through $2.5 billion in total loan originations, led by $1.6 billion in business loan originations for the past twelve months.  Loan growth was driven by the acquisition of FFKT, expanded market areas and additional commercial personnel in our core markets, partially offset by significant loan paydowns or payoffs as some loans moved into the secondary lending market by customers who refinanced their commercial real estate mortgages.

Interest expense increased $4.5 million or 27.5% in the second quarter of 2019 and $12.1 million or 40.8% for the six months ended June 30, 2019 as compared to the same periods in 2018, due primarily to increases in the balances of interest bearing liabilities from the acquisitions of FTSB and FFKT and increases in the rates paid on all interest bearing liability categories. The cost of interest bearing liabilities increased by 17 basis points from the second quarter of 2018 to 1.08% in 2019.  Average interest bearing deposits increased by $662.1 million or 11.7% from the second quarter of 2018, due to the acquisition of FFKT.  The rate on interest bearing deposits increased by 17 basis points from the second quarter of 2018, primarily from increases in rates on interest bearing public funds and for certain larger balance customers. Average non-interest bearing demand deposit balances increased from the second quarter of 2018 to the second quarter of 2019 by $456.1 million or 22.5% and were 28.2% of total average deposits at June 30, 2019, compared to 26.4% at June 30, 2018, reflecting the acquired FFKT non-interest bearing demand deposits and ongoing checking account marketing strategies. Organic average non-interest bearing demand deposits increased by $104.0 million or 5.1% during this same time period. The increase in non-interest bearing deposits reflects positively on the net interest margin, as the benefit of non-interest bearing liabilities increased by seven basis points from the second quarter of 2018 to 2019. The average balance of FHLB borrowings decreased by $172.9 million from the second quarter of 2018 to 2019; however, the average rate paid increased by 48 basis points to 2.50% over this same time period due to higher interest rates on new borrowings and the maturity of some legacy lower-rate borrowings in the first half of 2019. Average other borrowings and junior subordinated debt balances increased by $39.2 million or 8.8% from the second quarter of 2018 to 2019 due to the acquisition of FFKT, and their average rates paid increased by 43 and 38 basis points, respectively, over this same time period due to increases in LIBOR, the index upon which most of this variable-rate type of borrowing is priced. However, the increase was partially offset by a decrease in junior subordinated debt securities average balance due to a payoff of $9.2 million in the third quarter of 2018.  

32

TABLE 2. AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS

 

 

 

For The Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

Average

 

 

Average

 

 

Average

 

 

Average

 

 

Average

 

 

Average

 

 

Average

 

 

Average

 

(unaudited, dollars in thousands)

 

Balance

 

 

Rate

 

 

Balance

 

 

Rate

 

 

Balance

 

 

Rate

 

 

Balance

 

 

Rate

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due from banks - interest bearing

 

$

72,563

 

 

 

3.46

%

 

$

53,896

 

 

 

2.09

%

 

$

74,774

 

 

 

2.55

%

 

$

31,436

 

 

 

2.08

%

Loans, net of unearned income (1)

 

 

7,700,355

 

 

 

5.02

%

 

 

6,785,550

 

 

 

4.64

%

 

 

7,680,062

 

 

 

5.04

%

 

 

6,563,782

 

 

 

4.54

%

Securities: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

2,336,099

 

 

 

2.82

%

 

 

2,128,446

 

 

 

2.67

%

 

 

2,344,929

 

 

 

2.83

%

 

 

1,959,828

 

 

 

2.63

%

Tax-exempt (3)

 

 

741,371

 

 

 

3.51

%

 

 

750,138

 

 

 

3.41

%

 

 

775,845

 

 

 

3.49

%

 

 

733,970

 

 

 

3.41

%

Total  securities

 

 

3,077,470

 

 

 

2.98

%

 

 

2,878,584

 

 

 

3.05

%

 

 

3,120,774

 

 

 

2.99

%

 

 

2,693,798

 

 

 

2.84

%

Other earning assets

 

 

50,555

 

 

 

7.26

%

 

 

57,259

 

 

 

5.72

%

 

 

51,330

 

 

 

7.28

%

 

 

53,843

 

 

 

5.86

%

Total earning assets (3)

 

 

10,900,943

 

 

 

4.45

%

 

 

9,775,289

 

 

 

4.11

%

 

 

10,926,940

 

 

 

4.45

%

 

 

9,342,859

 

 

 

4.05

%

Other assets

 

 

1,588,720

 

 

 

 

 

 

 

1,143,442

 

 

 

 

 

 

 

1,572,988

 

 

 

 

 

 

 

1,115,743

 

 

 

 

 

Total Assets

 

$

12,489,663

 

 

 

 

 

 

$

10,918,731

 

 

 

 

 

 

$

12,499,928

 

 

 

 

 

 

$

10,458,602

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS'

   EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand deposits

 

$

2,139,372

 

 

 

0.81

%

 

$

1,849,035

 

 

 

0.68

%

 

$

2,134,514

 

 

 

0.78

%

 

$

1,773,813

 

 

 

0.64

%

Money market accounts

 

 

1,116,124

 

 

 

0.72

%

 

 

1,035,567

 

 

 

0.42

%

 

 

1,135,237

 

 

 

0.69

%

 

 

1,020,486

 

 

 

0.39

%

Savings deposits

 

 

1,676,477

 

 

 

0.16

%

 

 

1,367,193

 

 

 

0.07

%

 

 

1,668,160

 

 

 

0.15

%

 

 

1,327,875

 

 

 

0.06

%

Certificates of deposit

 

 

1,397,167

 

 

 

1.18

%

 

 

1,415,259

 

 

 

0.84

%

 

 

1,417,703

 

 

 

1.14

%

 

 

1,328,724

 

 

 

0.84

%

Total interest bearing deposits

 

 

6,329,140

 

 

 

0.70

%

 

 

5,667,054

 

 

 

0.53

%

 

 

6,355,614

 

 

 

0.68

%

 

 

5,450,898

 

 

 

0.50

%

Federal Home Loan Bank borrowings

 

 

1,008,027

 

 

 

2.50

%

 

 

1,180,939

 

 

 

2.02

%

 

 

1,030,396

 

 

 

2.47

%

 

 

1,109,586

 

 

 

1.90

%

Other borrowings

 

 

320,269

 

 

 

1.86

%

 

 

272,208

 

 

 

1.43

%

 

 

324,033

 

 

 

1.89

%

 

 

238,707

 

 

 

1.29

%

Subordinated debt and junior subordinated debt

 

 

164,108

 

 

 

5.41

%

 

 

172,972

 

 

 

5.03

%

 

 

176,746

 

 

 

5.41

%

 

 

168,677

 

 

 

4.91

%

Total interest bearing liabilities (1)

 

 

7,821,544

 

 

 

1.08

%

 

 

7,293,173

 

 

 

0.91

%

 

 

7,886,789

 

 

 

1.07

%

 

 

6,967,868

 

 

 

0.86

%

Non-interest bearing demand deposits

 

 

2,486,710

 

 

 

 

 

 

 

2,030,649

 

 

 

 

 

 

 

2,453,770

 

 

 

 

 

 

 

1,950,581

 

 

 

 

 

Other liabilities

 

 

131,219

 

 

 

 

 

 

 

77,873

 

 

 

 

 

 

 

132,657

 

 

 

 

 

 

 

80,681

 

 

 

 

 

Shareholders’ equity

 

 

2,050,190

 

 

 

 

 

 

 

1,517,036

 

 

 

 

 

 

 

2,026,712

 

 

 

 

 

 

 

1,459,472

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

12,489,663

 

 

 

 

 

 

$

10,918,731

 

 

 

 

 

 

$

12,499,928

 

 

 

 

 

 

$

10,458,602

 

 

 

 

 

Taxable equivalent net interest spread

 

 

 

 

 

 

3.37

%

 

 

 

 

 

 

3.20

%

 

 

 

 

 

 

3.38

%

 

 

 

 

 

 

3.19

%

Taxable equivalent net interest margin

 

 

 

 

 

 

3.67

%

 

 

 

 

 

 

3.43

%

 

 

 

 

 

 

3.68

%

 

 

 

 

 

 

3.41

%

(1) Gross of allowance for loan losses and net of unearned income.  Includes non-accrual and loans held for sale.  Loan fees included in interest income on loans totaled $0.4 million and $0.7 million for the three months ended June 30, 2019 and 2018, respectively and $0.9 million and $1.3 million for the six months ended June 30, 2019 and 2018, respectively.  Additionally, loan accretion included in net interest income on loans acquired from acquisitions was $4.7 million and $2.2 million for the three months ended June 30, 2019 and 2018, respectively, and $9.6 million and $3.4 million for the six months ended June 30, 2019 and 2018, respectively. Accretion on interest bearing liabilities from acquisitions was $0.3 million and $0.7 million for the three months ended June 30, 2019 and 2018, respectively and $0.7 million and $0.9 million for the six months ended June 30, 2019 and 2018, respectively.

(2) Average yields on available-for-sale debt securities are calculated based on amortized cost.

(3) Taxable equivalent basis is calculated on tax-exempt securities using a rate of 21% for each period presented.

33

TABLE 3. RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

 

 

 

For The Three Months Ended June 30, 2019

 

 

For the Six Months Ended June 30, 2019

 

 

 

Compared to June 30, 2018

 

 

Compared to June 30, 2018

 

(unaudited, in thousands)

 

Volume

 

 

Rate

 

 

Net Increase

(Decrease)

 

 

Volume

 

 

Rate

 

 

Net Increase

(Decrease)

 

Increase (decrease) in interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due from banks - interest bearing

 

$

120

 

 

$

224

 

 

$

344

 

 

$

537

 

 

$

88

 

 

$

625

 

Loans, net of unearned income

 

 

11,127

 

 

 

6,750

 

 

 

17,877

 

 

 

26,798

 

 

 

17,448

 

 

 

44,246

 

Taxable securities

 

 

1,434

 

 

 

816

 

 

 

2,250

 

 

 

5,338

 

 

 

2,099

 

 

 

7,437

 

Tax-exempt securities (1)

 

 

(73

)

 

 

183

 

 

 

110

 

 

 

726

 

 

 

279

 

 

 

1,005

 

Other earning assets

 

 

(76

)

 

 

173

 

 

 

97

 

 

 

(69

)

 

 

360

 

 

 

291

 

Total interest income change (1)

 

 

12,532

 

 

 

8,146

 

 

 

20,678

 

 

 

33,330

 

 

 

20,274

 

 

 

53,604

 

Increase (decrease) in interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing demand deposits

 

 

536

 

 

 

628

 

 

 

1,164

 

 

 

1,273

 

 

 

1,313

 

 

 

2,586

 

Money market accounts

 

 

91

 

 

 

825

 

 

 

916

 

 

 

244

 

 

 

1,692

 

 

 

1,936

 

Savings deposits

 

 

61

 

 

 

390

 

 

 

451

 

 

 

129

 

 

 

655

 

 

 

784

 

Certificates of deposit

 

 

(38

)

 

 

1,159

 

 

 

1,121

 

 

 

390

 

 

 

2,098

 

 

 

2,488

 

Federal Home Loan Bank borrowings

 

 

(538

)

 

 

872

 

 

 

334

 

 

 

(676

)

 

 

2,849

 

 

 

2,173

 

Other borrowings

 

 

191

 

 

 

319

 

 

 

510

 

 

 

658

 

 

 

849

 

 

 

1,507

 

Subordinated debt and junior subordinated debt

 

 

(94

)

 

 

140

 

 

 

46

 

 

 

203

 

 

 

430

 

 

 

633

 

Total interest expense change

 

 

209

 

 

 

4,333

 

 

 

4,542

 

 

 

2,221

 

 

 

9,886

 

 

 

12,107

 

Net interest income increase (decrease) (1)

 

$

12,323

 

 

$

3,813

 

 

$

16,136

 

 

$

31,109

 

 

$

10,388

 

 

$

41,497

 

(1) Taxable equivalent basis is calculated on tax-exempt securities using a tax rate of 21%.

PROVISION FOR CREDIT LOSSES

The provision for credit losses is the amount to be added to the allowance for credit losses after net charge-offs have been deducted to bring the allowance to a level considered appropriate to absorb losses incurred within the loan portfolio.  The provision for credit losses also includes the amount to be added to the reserve for loan commitments to bring that reserve to a level considered appropriate to absorb losses incurred on unfunded commitments.  The provision for credit losses increased to $2.7 million in the second quarter of 2019 compared to $1.7 million in the second quarter of 2018 due primarily to the increase in the provision for Commercial Real Estate – Improved Property.  Non-performing loans (including TDRs), and non-performing assets both improved as a percentage of total portfolio loans from June 30, 2018. Non-performing loans were 0.50% of total loans as of June 30, 2019, decreasing from 0.57% of total loans at the end of the second quarter of 2018. Non-performing assets were 0.56% of total loans and other real estate and repossessed assets as of June 30, 2019, decreasing from 0.63% at the end of the second quarter of 2018.  Criticized and classified loans were 1.48% of total loans, increasing from 1.08% as of June 30, 2018. Past due loans at June 30, 2019 and 2018 were 0.23% of total loans. Annualized net loan charge-offs increased slightly to 0.05% as of June 30, 2019 compared to 0.03% as of June 30, 2018.  (Please see the Allowance for Credit Losses section of this MD&A for additional discussion).

NON-INTEREST INCOME

TABLE 4. NON-INTEREST INCOME

 

 

 

For The Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

For the Six Months

Ended June 30,

 

 

 

 

 

 

 

 

 

(unaudited, dollars in thousands)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Trust fees

 

$

6,339

 

 

$

5,752

 

 

$

587

 

 

 

10.2

 

 

$

13,454

 

 

$

12,255

 

 

$

1,199

 

 

 

9.8

 

Service charges on deposits

 

 

6,197

 

 

 

5,146

 

 

 

1,051

 

 

 

20.4

 

 

 

12,747

 

 

 

9,969

 

 

 

2,778

 

 

 

27.9

 

Electronic banking fees

 

 

7,154

 

 

 

5,728

 

 

 

1,426

 

 

 

24.9

 

 

 

13,046

 

 

 

10,558

 

 

 

2,488

 

 

 

23.6

 

Net securities brokerage revenue

 

 

1,973

 

 

 

1,809

 

 

 

164

 

 

 

9.1

 

 

 

3,833

 

 

 

3,479

 

 

 

354

 

 

 

10.2

 

Bank-owned life insurance

 

 

1,340

 

 

 

1,128

 

 

 

212

 

 

 

18.8

 

 

 

2,659

 

 

 

3,884

 

 

 

(1,225

)

 

 

(31.5

)

Mortgage banking income

 

 

1,618

 

 

 

1,670

 

 

 

(52

)

 

 

(3.1

)

 

 

2,674

 

 

 

2,776

 

 

 

(102

)

 

 

(3.7

)

Payment processing fees

 

 

785

 

 

 

—

 

 

 

785

 

 

 

100.0

 

 

 

1,433

 

 

 

—

 

 

 

1,433

 

 

 

100.0

 

Net securities gains (losses)

 

 

2,909

 

 

 

358

 

 

 

2,551

 

 

 

712.6

 

 

 

3,566

 

 

 

319

 

 

 

3,247

 

 

 

1,017.9

 

Net gain on other real estate owned and other

   assets

 

 

376

 

 

 

229

 

 

 

147

 

 

 

64.2

 

 

 

512

 

 

 

491

 

 

 

21

 

 

 

4.3

 

Net insurance services revenue

 

 

786

 

 

 

711

 

 

 

75

 

 

 

10.5

 

 

 

1,695

 

 

 

1,602

 

 

 

93

 

 

 

5.8

 

Swap fee and valuation income

 

 

511

 

 

 

178

 

 

 

333

 

 

 

187.1

 

 

 

880

 

 

 

695

 

 

 

185

 

 

 

26.6

 

Other

 

 

1,168

 

 

 

699

 

 

 

469

 

 

 

67.1

 

 

 

2,430

 

 

 

1,463

 

 

 

967

 

 

 

66.1

 

Total non-interest income

 

$

31,156

 

 

$

23,408

 

 

$

7,748

 

 

 

33.1

 

 

$

58,929

 

 

$

47,491

 

 

$

11,438

 

 

 

24.1

 

 

34

Non-interest income is a significant source of revenue and an important part of WesBanco’s results of operations.  WesBanco offers its customers a wide range of retail, commercial, investment and electronic banking services, which are viewed as a vital component of WesBanco’s ability to attract and maintain customers, as well as providing additional fee income beyond normal spread-related income to WesBanco.  For the second quarter of 2019, non-interest income increased $7.7 million or 33.1% compared to the second quarter of 2018 primarily due to the acquisition of FFKT and securities gains.  The increase is driven by a $2.6 million increase in net securities gains, a $1.4 million increase in electronic banking fees, a $1.1 million increase in service charges on deposits, and a $0.8 million increase in payment processing fees.  For the six months ended June 30, 2019, non-interest income increased $11.4 million or 24.1% from the first six months of 2018 for similar reasons for the three months ended.

Trust fees increased $0.6 million or 10.2% compared to the second quarter of 2019 due to the acquisition of FFKT as well as market improvements and customer and revenue development initiatives. Total trust assets have increased $0.5 billion from $4.0 billion at June 30, 2018 to $4.5 billion at June 30, 2019.  At June 30, 2019, trust assets include managed assets of $3.6 billion and non-managed (custodial) assets of $0.9 billion.  Assets managed for the WesMark Funds, a proprietary group of mutual funds that is advised by WesBanco Trust and Investment Services, were $922.9 million as of June 30, 2019 and $934.9 million at June 30, 2018 and are included in managed assets.

Service charges on deposits increased $1.1 million or 20.4% for the second quarter of 2019 compared to the prior year period primarily because of the increased customer base from the FFKT acquisition. Deposits increased $1.0 billion to $8.7 billion as of June 30, 2019 as compared to $7.7 billion as of June 30, 2018. Included in service charges on deposits for the three months ended June 30, 2019 is a $0.6 million negative adjustment for dormancy fees that will be remitted to the State of Kentucky for accounts that should have been escheated in prior periods.

Electronic banking fees, which include debit card interchange fees, continued to grow, increasing $1.4 million or 24.9% compared to the second quarter of 2018 due to the higher customer base from the FFKT acquisition as well as an increased volume of debit card transactions from WesBanco’s legacy customers.  The volume increase in legacy customers is due to a higher percentage of customers using these products as well as marketing initiatives. Beginning on July 1, 2019, debit card interchange fees will decrease by less than $2 million in the third quarter of 2019 and between an estimated $2.5 - $3.0 million per quarter beginning in the fourth quarter of 2019 due to the impact of the Durbin amendment from the 2010 passage of the Dodd-Frank Act on banks with total assets of $10 billion or greater.

Bank-owned life insurance increased $0.2 million or 18.8% compared to second quarter of 2018 due to an increase in the total cash surrender value, attributable to the WesBanco legacy bank-owned life insurance policies as well as the acquired FFKT bank-owned life insurance policies.  For the six months ended June 30, 2019, bank-owned life insurance decreased by $1.2 million or 31.5% compared to the six months ended June 30, 2018 due to higher mortality proceeds in the prior period.

Mortgage banking income remained flat decreasing $0.1 million in both the second quarter of 2019 compared to the prior year period and the six months ended June 30, 2019 compared to the prior year period. For the first half of 2019, mortgage production was $257.4 million, which was an increase of 19.8% from the comparable 2018 period. For the six months ended June 30, 2019, $106.4 million mortgages were sold into the secondary market at a net margin of 2.8% as compared to $108.1 million at a net margin of 2.7% in the comparable 2018 period. Included in the mortgage banking income and the calculation of net margin noted above is a $0.8 million loss and a $0.6 million gain from the fair value adjustments on loans held for sale, loan commitments and related derivatives for the six months ended June 30, 2019 and 2018, respectively.

Payment processing fees are earned from the bill payment and electronic funds transfer (“EFT”) services provided under the name FirstNet, which was acquired from FFKT. Payment processing fee income was $0.8 million for the quarter ended June 30, 2019. There was no prior period income.

Net securities gains increased $2.6 million compared to the second quarter of 2018, due to a gain of $2.6 million on the sale of WesBanco’s Visa Class B stock in the second quarter, which was held at a zero cost basis. WesBanco holds no additional shares of Visa Class B stock. For the six months ended June 30, 2019, net securities gains increased $3.2 million from the six months ended June 30, 2018.  

35

NON-INTEREST EXPENSE

TABLE 5. NON-INTEREST EXPENSE

 

 

 

For The Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

For the Six Months

Ended June 30,

 

 

 

 

 

 

 

 

 

(unaudited, dollars in thousands)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Salaries and wages

 

$

31,646

 

 

$

26,872

 

 

$

4,774

 

 

 

17.8

 

 

$

62,585

 

 

$

51,878

 

 

$

10,707

 

 

 

20.6

 

Employee benefits

 

 

9,705

 

 

 

7,965

 

 

 

1,740

 

 

 

21.8

 

 

 

19,694

 

 

 

14,877

 

 

 

4,817

 

 

 

32.4

 

Net occupancy

 

 

5,385

 

 

 

4,103

 

 

 

1,282

 

 

 

31.2

 

 

 

10,951

 

 

 

8,759

 

 

 

2,192

 

 

 

25.0

 

Equipment

 

 

4,818

 

 

 

4,095

 

 

 

723

 

 

 

17.7

 

 

 

9,651

 

 

 

8,044

 

 

 

1,607

 

 

 

20.0

 

Marketing

 

 

1,254

 

 

 

1,405

 

 

 

(151

)

 

 

(10.7

)

 

 

2,497

 

 

 

2,521

 

 

 

(24

)

 

 

(1.0

)

FDIC insurance

 

 

1,155

 

 

 

868

 

 

 

287

 

 

 

33.1

 

 

 

2,508

 

 

 

1,526

 

 

 

982

 

 

 

64.4

 

Amortization of intangible assets

 

 

2,465

 

 

 

1,312

 

 

 

1,153

 

 

 

87.9

 

 

 

4,978

 

 

 

2,397

 

 

 

2,581

 

 

 

107.7

 

Restructuring and merger-related expenses

 

 

81

 

 

 

5,412

 

 

 

(5,331

)

 

 

(98.5

)

 

 

3,188

 

 

 

5,657

 

 

 

(2,469

)

 

 

(43.6

)

Franchise and other miscellaneous taxes

 

 

3,176

 

 

 

2,083

 

 

 

1,093

 

 

 

52.5

 

 

 

6,202

 

 

 

4,318

 

 

 

1,884

 

 

 

43.6

 

Consulting, regulatory, accounting and advisory fees

 

 

2,269

 

 

 

1,747

 

 

 

522

 

 

 

29.9

 

 

 

4,085

 

 

 

3,278

 

 

 

807

 

 

 

24.6

 

ATM and electronic banking interchange expenses

 

 

1,712

 

 

 

1,299

 

 

 

413

 

 

 

31.8

 

 

 

3,434

 

 

 

2,515

 

 

 

919

 

 

 

36.5

 

Postage and courier expenses

 

 

1,198

 

 

 

985

 

 

 

213

 

 

 

21.6

 

 

 

2,747

 

 

 

1,945

 

 

 

802

 

 

 

41.2

 

Legal fees

 

 

936

 

 

 

644

 

 

 

292

 

 

 

45.3

 

 

 

1,615

 

 

 

1,357

 

 

 

258

 

 

 

19.0

 

Communications

 

 

895

 

 

 

565

 

 

 

330

 

 

 

58.4

 

 

 

1,825

 

 

 

1,054

 

 

 

771

 

 

 

73.1

 

Supplies

 

 

1,106

 

 

 

778

 

 

 

328

 

 

 

42.2

 

 

 

2,246

 

 

 

1,465

 

 

 

781

 

 

 

53.3

 

Other real estate owned and foreclosure expenses

 

 

152

 

 

 

251

 

 

 

(99

)

 

 

(39.4

)

 

 

163

 

 

 

449

 

 

 

(286

)

 

 

(63.7

)

Other

 

 

3,999

 

 

 

3,159

 

 

 

840

 

 

 

26.6

 

 

 

8,016

 

 

 

6,074

 

 

 

1,942

 

 

 

32.0

 

Total non-interest expense

 

$

71,952

 

 

$

63,543

 

 

$

8,409

 

 

 

13.2

 

 

$

146,385

 

 

$

118,114

 

 

$

28,271

 

 

 

23.9

 

 

Non-interest expense in the second quarter of 2019 increased by $8.4 million or 13.2% compared to the same quarter in 2018, principally from the FFKT acquisition, which closed in the third quarter of 2018.  Excluding merger-related expenses, non-interest expense increased $13.7 million or 23.6%.  For the second quarter, salaries and wages increased $4.8 million, employee benefits increased $1.7 million, net occupancy increased $1.3 million, amortization of intangible assets increased $1.2 million and franchise and other miscellaneous taxes increased by $1.1 million, offset by a decrease of $5.3 million in merger-related expenses.  For the six months ended June 30, 2019, non-interest expense increased by $28.3 million or 23.9% from the first six months of 2018 for similar reasons for the three months ended.

Salaries and wages increased $4.8 million or 17.8% from the second quarter of 2018 due to increased compensation expense related to a 15.3% increase in full-time equivalent (“FTE”) employees from the FFKT acquisition and from annual merit increases in the second quarter of 2019. Employee benefits expense increased $1.7 million compared to the second quarter of 2018, primarily from a $0.8 million increase in health care costs and a $0.3 million increase in employer payroll taxes, which is primarily attributable to the increased headcount of 313 FTE employees since June 30, 2018.

Net occupancy costs increased $1.3 million or 31.2% compared to the second quarter of 2018, primarily due to increased building-related costs from the additional branches acquired in the FFKT acquisition including utilities, lease expense, depreciation, repairs and other seasonal maintenance costs. Upon core conversion of FFKT in the first quarter of 2019, WesBanco closed or consolidated six branches in Kentucky to reduce overlapping locations, which allows the Company to operate more cost efficiently and provide better facilities.

Amortization of intangible assets increased $1.2 million or 87.9% compared to the second quarter of 2018.  The FFKT acquisition added approximately $37.4 million in core deposit intangibles and $2.6 million in trust customer relationship intangibles.

Merger-related expenses in the second quarter of 2019 totaled $0.1 million related to the FFKT acquisition that closed on August 20, 2018, and decreased $5.3 million from the $5.4 million in merger-related expenses that were recorded in the second quarter of 2018 for the FTSB and FFKT acquisitions.  

Franchise and other miscellaneous taxes increased by $1.1 million or 52.5% from the same quarter of 2018 due to a $0.6 million increase in the Kentucky corporate franchise tax from the FFKT acquisition, which was headquartered in Kentucky.  Real and personal property taxes also increased by $0.3 million due to the addition of FFKT’s branches.

INCOME TAXES

The provision for income taxes increased $2.8 million or 37.7% in the second quarter of 2019 compared to the second quarter of 2018, primarily due to a $14.4 million or 35.6% increase in pre-tax income. The effective tax rate increased to 18.4% compared to 18.1% in the second quarter of 2018. For the six months ended June 30, 2019, the provision for income taxes increased $4.6 million or 32.2% as compared to the prior year period. The effective tax rate for the first half of 2019 was 18.2% compared to 17.7% in the prior year period.

36

FINANCIAL CONDITION

Total assets and shareholders’ equity increased 0.3% and 4.8%, respectively, while deposits decreased 1.5%, compared to December 31, 2018. Total securities decreased by $105.1 million or 3.3% from December 31, 2018 to June 30, 2019, primarily driven by the sale of lower yielding municipal securities and the repayment of mortgage-backed securities, which were partially offset by a $53.1 million increase in unrealized gains in the available-for-sale portfolio. Total portfolio loans increased $81.6 million or 1.1%. Deposits decreased $136.7 million from year-end resulting from a 6.2%, a 3.9%, and a 0.6% decrease in certificates of deposit, money market deposits, and demand deposits, respectively, which were partially offset by a 1.5% increase in savings deposits. The decrease in certificates of deposit is a result of periodically offering lower than median competitive rates for maturing certificates of deposit, primarily for single-service customers, and customer preferences for other deposit types, coupled with a $9.9 million decrease in CDARS® balances. The decrease in demand deposits and money market deposits was primarily attributable to initial customer run-off from the FTSB and FFKT acquisitions. Total borrowings increased 2.6% during the first six months of 2019 as FHLB new borrowings exceeded maturities by $67.1 million and other short-term borrowings increased $5.6 million, which were partially offset by $33.5 million of junior subordinated debentures redeemed during the first six months of 2019. Total shareholders’ equity increased by approximately $95.3 million or 4.8%, compared to December 31, 2018, primarily due to net income exceeding dividends for the period by $51.3 million and a $42.0 million other comprehensive income gain.

TABLE 6. COMPOSITION OF SECURITIES (1)

 

  

 

June 30,

 

 

December 31,

 

 

 

 

(unaudited, dollars in thousands)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Equity securities (at fair value)

 

$

11,817

 

 

$

11,737

 

 

$

80

 

 

 

0.7

 

Available-for-sale debt securities (at fair value)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

29,781

 

 

 

19,878

 

 

 

9,903

 

 

 

49.8

 

U.S. Government sponsored entities and agencies

 

 

134,587

 

 

 

141,652

 

 

 

(7,065

)

 

 

(5.0

)

Residential mortgage-backed securities and

   collateralized mortgage obligations of

   government sponsored entities and agencies

 

 

1,563,042

 

 

 

1,561,255

 

 

 

1,787

 

 

 

0.1

 

Commercial mortgage-backed securities and

   collateralized mortgage obligations of

   government sponsored entities and agencies

 

 

178,656

 

 

 

168,972

 

 

 

9,684

 

 

 

5.7

 

Obligations of states and political subdivisions

 

 

183,178

 

 

 

185,114

 

 

 

(1,936

)

 

 

(1.0

)

Corporate debt securities

 

 

40,040

 

 

 

37,258

 

 

 

2,782

 

 

 

7.5

 

Total available-for-sale debt securities

 

$

2,129,284

 

 

$

2,114,129

 

 

$

15,155

 

 

 

0.7

 

Held-to-maturity debt securities (at amortized cost)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored entities and agencies

 

$

10,020

 

 

$

10,823

 

 

$

(803

)

 

 

(7.4

)

Residential mortgage-backed securities and

   collateralized mortgage obligations of

   government sponsored entities and agencies

 

 

136,929

 

 

 

148,300

 

 

 

(11,371

)

 

 

(7.7

)

Obligations of states and political subdivisions

 

 

720,399

 

 

 

828,520

 

 

 

(108,121

)

 

 

(13.0

)

Corporate debt securities

 

 

33,257

 

 

 

33,291

 

 

 

(34

)

 

 

(0.1

)

Total held-to-maturity debt securities

 

 

900,605

 

 

 

1,020,934

 

 

 

(120,329

)

 

 

(11.8

)

Total securities

 

$

3,041,706

 

 

$

3,146,800

 

 

$

(105,094

)

 

 

(3.3

)

Available-for-sale and equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average yield at the respective period end (2)

 

 

2.76

%

 

 

2.78

%

 

 

 

 

 

 

 

 

As a % of total securities

 

 

70.4

%

 

 

67.6

%

 

 

 

 

 

 

 

 

Weighted average life (in years)

 

 

4.4

 

 

 

5.0

 

 

 

 

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average yield at the respective period end (2)

 

 

3.53

%

 

 

3.47

%

 

 

 

 

 

 

 

 

As a % of total securities

 

 

29.6

%

 

 

32.4

%

 

 

 

 

 

 

 

 

Weighted average life (in years)

 

 

3.7

 

 

 

4.6

 

 

 

 

 

 

 

 

 

Total securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average yield at the respective period end (2)

 

 

2.99

%

 

 

3.00

%

 

 

 

 

 

 

 

 

As a % of total securities

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

 

 

Weighted average life (in years)

 

 

4.1

 

 

 

4.2

 

 

 

 

 

 

 

 

 

(1) At June 30, 2019 and December 31, 2018, there were no holdings of any one issuer, other than U.S. government sponsored entities and its agencies, in an amount greater than 10% of WesBanco’s shareholders’ equity.

(2) Weighted average yields have been calculated on a taxable-equivalent basis using the federal statutory tax rate of 21%.

Total investment securities, which are a source of liquidity for WesBanco as well as a contributor to interest income, decreased by $105.1 million or 3.3% from December 31, 2018 to June 30, 2019.  Through the first six months of 2019, the available-for-sale portfolio increased by $15.2 million or 0.7%, while the held-to-maturity portfolio decreased by $120.3 million or 11.8% due to $67.4 million of held-to-maturity callable municipal securities being transferred to available-for-sale, with the adoption of ASU 2017-12.  WesBanco elected to use the one-time transition election to transfer these securities as they were some of the lower yielding securities in the municipal portfolio, and subsequently sold $66.1 million of these securities at a $51 thousand net gain.  The weighted average yield of the portfolio decreased by one basis point from 3.00% at December 31, 2018 to 2.99% at June 30, 2019, primarily due to increased prepayment speeds on mortgage-backed securities as market rates declined in the second quarter. During the second quarter of 2019, WesBanco recorded a $2.6 million gain on the sale of its Visa class B stock, which was held at zero cost basis. WesBanco holds no additional shares of Visa class B stock.

37

Net unrealized gains (losses) on available-for-sale securities included in accumulated other comprehensive income, net of tax, as of June 30, 2019 and December 31, 2018 were $19.4 million and ($21.5) million, respectively.  With approximately 30% of the investment portfolio in the held-to-maturity category, the recent volatility in interest rates does not have as much impact on other comprehensive income as if the entire portfolio were included in the category available-for-sale.

Equity securities, of which a portion consist of investments in various mutual funds held in grantor trusts formed in connection with a key officer and director deferred compensation plan, are recorded at fair value. Gains and losses due to fair value fluctuations on equity securities are included in net securities gains or losses.  For those equity securities relating to the key officer and director deferred compensation plan, the corresponding change in the obligation to the employee is recognized in employee benefits expense.

WesBanco’s municipal portfolio comprises 29.7% of the overall securities portfolio as of June 30, 2019 compared to 32.2% as of December 31, 2018, and it carries different risks that are not as prevalent in other security types contained in the portfolio. The following table presents the allocation of the municipal bond portfolio based on the combined S&P and Moody’s ratings of the individual bonds (at fair value):  

TABLE 7. MUNICIPAL BOND RATINGS

 

  

 

June 30, 2019

 

 

December 31, 2018

 

(unaudited, dollars in thousands)

 

Amount

 

 

% of Total

 

 

Amount

 

 

% of Total

 

Municipal bonds (at fair value) (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Moody's: Aaa / S&P: AAA

 

$

98,021

 

 

 

10.6

 

 

$

101,557

 

 

 

10.0

 

Moody's: Aa1 ; Aa2 ; Aa3 / S&P: AA+ ; AA ; AA-

 

 

592,215

 

 

 

64.2

 

 

 

654,787

 

 

 

64.3

 

Moody's: A1 ; A2 ; A3 / S&P: A+ ; A ; A-

 

 

212,664

 

 

 

23.0

 

 

 

237,847

 

 

 

23.4

 

Moody's: Baa1 ; Baa2 ; Baa3 / S&P: BBB+ ; BBB ; BBB- (2)

 

 

7,657

 

 

 

0.8

 

 

 

7,607

 

 

 

0.7

 

Not rated by either agency

 

 

12,370

 

 

 

1.4

 

 

 

16,595

 

 

 

1.6

 

Total municipal bond portfolio

 

$

922,927

 

 

 

100.0

 

 

$

1,018,393

 

 

 

100.0

 

(1) The lowest available rating was used when placing the bond into a category in the table.

(2) As of June 30, 2019 and December 31, 2018, there are no securities in the municipal portfolio rated below investment grade.

WesBanco’s municipal bond portfolio at June 30, 2019 consists of $182.8 million taxable (primarily Build America Bonds) and $740.1 million of tax-exempt general obligation and revenue bonds.  The following table presents additional information regarding the municipal bond type and issuer (at fair value):

TABLE 8. COMPOSITION OF MUNICIPAL SECURITIES

 

  

 

June 30, 2019

 

 

December 31, 2018

 

(unaudited, dollars in thousands)

 

Amount

 

 

% of Total

 

 

Amount

 

 

% of Total

 

Municipal bond type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Obligation

 

$

625,476

 

 

 

67.8

 

 

$

690,463

 

 

 

67.8

 

Revenue

 

 

297,451

 

 

 

32.2

 

 

 

327,930

 

 

 

32.2

 

Total municipal bond portfolio

 

$

922,927

 

 

 

100.0

 

 

$

1,018,393

 

 

 

100.0

 

Municipal bond issuer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State Issued

 

$

83,841

 

 

 

9.1

 

 

$

98,468

 

 

 

9.7

 

Local Issued

 

 

839,086

 

 

 

90.9

 

 

 

919,925

 

 

 

90.3

 

Total municipal bond portfolio

 

$

922,927

 

 

 

100.0

 

 

$

1,018,393

 

 

 

100.0

 

 

WesBanco’s municipal bond portfolio is broadly spread across the United States.  The following table presents the top five states of municipal bond concentration based on total fair value at June 30, 2019:

TABLE 9. CONCENTRATION OF MUNICIPAL SECURITIES

 

 

 

 

June 30, 2019

 

(unaudited, dollars in thousands)

 

Fair Value

 

 

% of Total

 

Pennsylvania

 

$

179,483

 

 

 

19.4

 

Ohio

 

 

100,090

 

 

 

10.8

 

Texas

 

 

98,586

 

 

 

10.7

 

Kentucky

 

 

55,466

 

 

 

6.0

 

Illinois

 

 

42,990

 

 

 

4.7

 

All other states (1)

 

 

446,312

 

 

 

48.4

 

Total municipal bond portfolio

 

$

922,927

 

 

 

100.0

 

(1) WesBanco’s municipal bond portfolio contains obligations in the State of West Virginia totaling $39.6 million or 4.3% of the total municipal portfolio.

38

WesBanco uses prices from independent pricing services and, to a lesser extent, indicative (non-binding) quotes from independent brokers, to measure the fair value of its securities. WesBanco validates prices received from pricing services or brokers using a variety of methods, including, but not limited to, comparison to secondary pricing services, corroboration of pricing by reference to other independent market data such as secondary broker quotes and relevant benchmark indices, review of pricing by personnel familiar with market liquidity and other market-related conditions, review of pricing service methodologies, review of independent auditor reports received from the pricing service regarding its internal controls, and through review of inputs and assumptions used in pricing certain securities thinly traded or with limited observable data points.  The procedures in place provide management with a sufficient understanding of the valuation models, assumptions, inputs and pricing to reasonably measure the fair value of WesBanco’s securities.  For additional disclosure relating to fair value measurements, refer to Note 9, “Fair Value Measurement” in the Consolidated Financial Statements.

LOANS AND CREDIT RISK

Loans represent WesBanco’s single largest balance sheet asset classification and the largest source of interest income.  Business purpose loans consist of commercial real estate (“CRE”) loans and other commercial and industrial (“C&I”) loans that are not secured by real estate.  CRE loans are further segmented into land and construction loans, and loans for improved property.  Consumer purpose loans consist of residential real estate loans, home equity lines of credit and other consumer loans.  Loans held for sale generally consist of residential real estate loans originated for sale in the secondary market, but at times may also include other types of loans.  The outstanding balance of each major category of the loan portfolio is summarized in Table 10.  

The risk that borrowers will be unable or unwilling to repay their obligations and default on loans is inherent in all lending activities.  Credit risk arises from many sources including general economic conditions, external events that impact businesses or industries, isolated events that impact a major employer, individual loss of employment or other personal hardships as well as changes in interest rates or the value of collateral.  Credit risk is also impacted by a concentration of exposure within a geographic market or to one or more borrowers, industries or collateral types.  The primary goal in managing credit risk is to minimize the impact of default by an individual borrower or group of borrowers.  Credit risk is managed through the initial underwriting process as well as through ongoing monitoring and administration of the portfolio that varies by the type of loan.  The Bank’s credit policies establish standard underwriting guidelines for each type of loan and require an appropriate evaluation of the credit characteristics of each borrower.  This evaluation includes the borrower’s primary source of repayment capacity; the adequacy of collateral, if any, to secure the loan; the potential value of personal guarantees as secondary sources of repayment; and other factors unique to each loan that may increase or mitigate its risk.  Credit bureau scores are also considered when evaluating consumer purpose loans as well as guarantors of business purpose loans.  However, the Bank does not periodically update credit bureau scores subsequent to when loans are made to determine changes in credit history.  

Credit risk is mitigated for all types of loans by continuously monitoring delinquency levels and pursuing collection efforts at the earliest stage of delinquency.  The Bank also monitors general economic conditions, including employment, housing activity and real estate values in its market.  The Bank also periodically evaluates and changes its underwriting standards when warranted based on market conditions, the historical performance of a category of the portfolio, or other external factors.  Credit risk is also regularly evaluated for the impact of adverse economic and other events that increase the risk of default and the potential loss in the event of default to understand their impact on the Bank’s earnings and capital.

TABLE 10. COMPOSITION OF LOANS (1)

 

 

 

June 30, 2019

 

 

December 31, 2018

 

(unaudited, dollars in thousands)

 

Amount

 

 

% of Loans

 

 

Amount

 

 

% of Loans

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land and construction

 

$

483,046

 

 

 

6.2

 

 

$

528,072

 

 

 

6.9

 

Improved property

 

 

3,394,587

 

 

 

43.8

 

 

$

3,325,623

 

 

 

43.4

 

Total commercial real estate

 

 

3,877,633

 

 

 

50.0

 

 

 

3,853,695

 

 

 

50.3

 

Commercial and industrial

 

 

1,300,577

 

 

 

16.8

 

 

 

1,265,460

 

 

 

16.5

 

Residential real estate

 

 

1,633,613

 

 

 

21.1

 

 

 

1,611,607

 

 

 

21.0

 

Home equity

 

 

590,303

 

 

 

7.6

 

 

 

599,331

 

 

 

7.8

 

Consumer

 

 

335,728

 

 

 

4.3

 

 

 

326,188

 

 

 

4.3

 

Total portfolio loans

 

 

7,737,854

 

 

 

99.8

 

 

 

7,656,281

 

 

 

99.9

 

Loans held for sale

 

 

18,649

 

 

 

0.2

 

 

 

8,994

 

 

 

0.1

 

Total loans

 

$

7,756,503

 

 

 

100.0

 

 

$

7,665,275

 

 

 

100.0

 

(1) Loans are presented gross of the allowance for loan losses and net of unearned income, credit valuation adjustments, and unamortized net deferred loan fee income and loan origination costs.

Total loans increased $91.2 million or 1.2% from December 31, 2018 while portfolio loans increased $945.0 million or 13.9% over the last twelve months.  Total loan growth over the last twelve months was primarily due to the acquisition of FFKT.  Total organic loans were down 1.1% year-over-year, resulting from lower home equity loan balances due to lower demand as a result of higher interest rates and tax changes, elevated levels of commercial real estate loans that moved to the secondary financing market, and continued deleveraging by commercial customers reflective of the current operational environment and higher cash levels from tax reform.    

Total loan commitments of $2.5 billion, including loans approved but not closed, increased $42.5 million or 1.8% from December 31, 2018 due primarily to loans approved but not closed.  The line utilization percentage for the commercial portfolio was 46.9% at June 30, 2019 and 47.6% at December 31, 2018.

The commercial portfolio is monitored for potential concentrations of credit risk by market, type of lending, CRE property type, C&I and owner-occupied CRE by industry, investment CRE dependence on common tenants and industries or property types that are similarly impacted by external factors.  

39

NON-PERFORMING ASSETS, IMPAIRED LOANS AND LOANS PAST DUE 90 DAYS OR MORE

Non-performing assets consist of non-accrual loans and TDRs, other real estate acquired through or in lieu of foreclosure, bank premises held for sale, and repossessed automobiles acquired to satisfy defaulted consumer loans.

TABLE 11. NON-PERFORMING ASSETS

 

(unaudited, dollars in thousands)

 

June 30,

2019

 

 

December 31,

2018

 

Non-accrual loans:

 

 

 

 

 

 

 

 

Commercial real estate - land and construction

 

$

295

 

 

$

—

 

Commercial real estate - improved property

 

 

11,726

 

 

 

8,413

 

Commercial and industrial

 

 

2,854

 

 

 

3,260

 

Residential real estate

 

 

12,813

 

 

 

13,831

 

Home equity

 

 

4,886

 

 

 

4,610

 

Consumer

 

 

324

 

 

 

586

 

Total non-accrual loans (1)

 

 

32,898

 

 

 

30,700

 

TDRs accruing interest:

 

 

 

 

 

 

 

 

Commercial real estate - land and construction

 

 

—

 

 

 

—

 

Commercial real estate - improved property

 

 

743

 

 

 

880

 

Commercial and industrial

 

 

192

 

 

 

168

 

Residential real estate

 

 

4,005

 

 

 

4,185

 

Home equity

 

 

486

 

 

 

426

 

Consumer

 

 

61

 

 

 

85

 

Total TDRs accruing interest (1)

 

 

5,487

 

 

 

5,744

 

Total non-performing loans

 

$

38,385

 

 

$

36,444

 

Other real estate owned and repossessed assets

 

 

4,973

 

 

 

7,265

 

Total non-performing assets

 

$

43,358

 

 

$

43,709

 

Non-performing loans/total portfolio loans

 

 

0.50

%

 

 

0.48

%

Non-performing assets/total assets

 

 

0.35

%

 

 

0.35

%

Non-performing assets/total portfolio loans, other real estate and repossessed assets

 

 

0.56

%

 

 

0.57

%

(1) TDRs on nonaccrual of $1.9 million and $2.9 million at June 30, 2019 and December 31, 2018, respectively, are included in total nonaccrual loans.

Non-performing loans, which consist of non-accrual loans and TDRs, increased $1.9 million or 5.3%, from December 31, 2018, primarily due to WesBanco’s normal loan grade review process post-acquisition in conjunction with two downgraded relationships in our legacy portfolio, as reported in the first quarter.  TDRs decreased slightly by $0.3 million due to normal repayments being slightly higher than additions to the category.  (Please see the Notes to the Consolidated Financial Statements for additional discussion.)  

Other real estate owned and repossessed assets decreased $2.3 million from December 31, 2018 primarily due to continued efforts to liquidate properties and write-downs on FFKT acquired other real estate owned.

The following table presents past due and accruing loans excluding non-accrual and TDRs:

40

TABLE 12. PAST DUE AND ACCRUING LOANS EXCLUDING NON-ACCRUAL AND TDRs

 

(unaudited, dollars in thousands)

 

June 30,

2019

 

 

December 31,

2018

 

Loans past due 90 days or more:

 

 

 

 

 

 

 

 

Commercial real estate - land and construction

 

$

—

 

 

$

—

 

Commercial real estate - improved property

 

 

587

 

 

 

175

 

Commercial and industrial

 

 

97

 

 

 

13

 

Residential real estate

 

 

1,173

 

 

 

2,820

 

Home equity

 

 

533

 

 

 

705

 

Consumer

 

 

244

 

 

 

364

 

Total loans past due 90 days or more

 

 

2,634

 

 

 

4,077

 

Loans past due 30 to 89 days:

 

 

 

 

 

 

 

 

Commercial real estate - land and construction

 

 

1,010

 

 

 

1,412

 

Commercial real estate - improved property

 

 

2,437

 

 

 

4,439

 

Commercial and industrial

 

 

1,064

 

 

 

878

 

Residential real estate

 

 

6,779

 

 

 

6,542

 

Home equity

 

 

2,016

 

 

 

3,344

 

Consumer

 

 

2,140

 

 

 

2,954

 

Total loans past due 30 to 89 days

 

 

15,446

 

 

 

19,569

 

Total 30 days or more

 

$

18,080

 

 

$

23,646

 

Loans past due 90 days or more and accruing to total portfolio loans

 

 

0.03

%

 

 

0.05

%

Loans past due 30-89 days and accruing to total portfolio loans

 

 

0.20

%

 

 

0.26

%

 

Loans past due 30 days or more and accruing interest excluding non-accruals and TDRs decreased $5.6 million or 23.5% from December 31, 2018.  These loans continue to accrue interest because they are both well-secured and in the process of collection.  The decrease in the 30 to 89 days past due status was primarily due to a $2.0 million decrease in the commercial real estate – improved property category and represented 0.03% of total loans at June 30, 2019 and 0.06% at December 31, 2018.  Loans past due 90 days or more decreased $1.4 million compared to December 31, 2018 and represented 0.03% of total loans at June 30, 2019 compared to 0.05% at December 31, 2018.  The continued low levels of delinquency are the result of management’s continued focus on sound initial underwriting, timely collection of loans at their earliest stage of delinquency, stable unemployment and generally improved economic conditions.

ALLOWANCE FOR CREDIT LOSSES

The allowance for loan losses of $50.9 million represented 0.66% of total portfolio loans at June 30, 2019 compared to 0.64% as of December 31, 2018 and 0.70% as of June 30, 2018.  Included in the ratio are acquired FFKT loans (recorded at fair value at the date of acquisition of $1.0 billion) and the related allowance on FFKT acquired loans of $8 thousand at June 30, 2019 recorded since acquisition. 

The allowance for loans individually-evaluated increased $1.5 million from December 31, 2018 to June 30, 2019.  The allowance for loans collectively-evaluated increased from December 31, 2018 to June 30, 2019 by $0.4 million.

The allowance for loan commitments was $1.8 million at June 30, 2019 as compared to $0.7 million at December 31, 2018, and is included in other liabilities on the Consolidated Balance Sheets. The increase in the allowance for loan commitments is due to one unfunded commitment with a credit relationship that was downgraded to classified status in the first quarter.

The allowance for credit losses by loan category, presented in Note 5, “Loans and the Allowance for Credit Losses” of the Consolidated Financial Statements, summarizes the impact of changes in various factors that affect the allowance for loan losses in each segment of the portfolio.  The allowance for all segments is impacted by changes in loan balances, as well as changes in historical loss rates adjusted for qualitative factors such as economic conditions.  The CRE and C&I segments of the portfolio are also impacted by changes in the risk grading distribution of the portfolio as well as the migration of CRE loans from land and construction to improved property upon the completion of construction.  

The loss migration rate by internal risk grade is the primary factor for establishing the allowance for all commercial loans, and the portfolio segment loss history is the primary factor for establishing the allowance for residential real estate, home equity and consumer loans.  The categorization of loans as non-performing is not as significant a factor as the loss migration rate by risk grade or the segment loss history, although certain non-performing loans that carry specific reserves are also typically considered classified under the internal risk grading system.  Criticized and classified loans were 1.48% of total loans, increasing from 1.08% at December 31, 2018. Criticized and classified loans increased $31.3 million from December 31, 2018 to $114.2 million at June 30, 2019 primarily due to the post-acquisition loan grade review process and two larger downgraded relationships in the legacy loan portfolio in the first quarter.  

Table 13 summarizes the allocation of the allowance for credit losses to each category of the loan portfolio.  The overall allowance for loans was relatively unchanged.  The allowance for commercial and industrial loan commitments increased due to the downgrade of a commercial and industrial loan with a remaining undrawn commitment balance.  

41

TABLE 13. ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES

 

(unaudited, dollars in thousands)

 

June 30,

2019

 

 

Percent of

Total

 

 

December 31,

2018

 

 

Percent of

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate - land and construction

 

$

3,701

 

 

 

7.0

 

 

$

4,039

 

 

 

8.1

 

Commercial real estate - improved property

 

 

22,367

 

 

 

42.5

 

 

 

20,848

 

 

 

42.0

 

Commercial and industrial

 

 

12,887

 

 

 

24.5

 

 

 

12,114

 

 

 

24.4

 

Residential real estate

 

 

3,455

 

 

 

6.6

 

 

 

3,822

 

 

 

7.7

 

Home equity

 

 

4,321

 

 

 

8.2

 

 

 

4,356

 

 

 

8.8

 

Consumer

 

 

2,682

 

 

 

5.1

 

 

 

2,797

 

 

 

5.6

 

Deposit account overdrafts

 

 

1,446

 

 

 

2.7

 

 

 

972

 

 

 

1.8

 

Total allowance for loan losses

 

$

50,859

 

 

 

96.6

 

 

$

48,948

 

 

 

98.4

 

Allowance for loan commitments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate - land and construction

 

$

187

 

 

 

0.4

 

 

$

169

 

 

 

0.4

 

Commercial real estate - improved property

 

 

24

 

 

 

0.0

 

 

 

33

 

 

 

0.1

 

Commercial and industrial

 

 

1,257

 

 

 

2.4

 

 

 

262

 

 

 

0.5

 

Residential real estate

 

 

13

 

 

 

0.0

 

 

 

12

 

 

 

0.0

 

Home equity

 

 

249

 

 

 

0.5

 

 

 

226

 

 

 

0.5

 

Consumer

 

 

36

 

 

 

0.1

 

 

 

39

 

 

 

0.1

 

Total allowance for loan commitments

 

 

1,766

 

 

 

3.4

 

 

 

741

 

 

 

1.6

 

Total allowance for credit losses

 

$

52,625

 

 

 

100.0

 

 

$

49,689

 

 

 

100.0

 

 

Although the allowance for credit losses is allocated as described in Table 13, the total allowance is available to absorb actual losses in any category of the loan portfolio.  However, differences between management’s estimation of probable losses and actual incurred losses in subsequent periods for any category may necessitate future adjustments to the provision for loan losses applicable to the category.  Management believes the allowance for credit losses is appropriate to absorb probable losses at June 30, 2019.

DEPOSITS

TABLE 14. DEPOSITS

 

(unaudited, dollars in thousands)

 

June 30,

2019

 

 

December 31,

2018

 

 

$ Change

 

 

% Change

 

Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing demand

 

$

2,481,065

 

 

$

2,441,041

 

 

$

40,024

 

 

 

1.6

 

Interest bearing demand

 

 

2,079,795

 

 

 

2,146,508

 

 

 

(66,713

)

 

 

(3.1

)

Money market

 

 

1,098,917

 

 

 

1,142,925

 

 

 

(44,008

)

 

 

(3.9

)

Savings deposits

 

 

1,670,035

 

 

 

1,645,549

 

 

 

24,486

 

 

 

1.5

 

Certificates of deposit

 

 

1,365,116

 

 

 

1,455,610

 

 

 

(90,494

)

 

 

(6.2

)

Total deposits

 

$

8,694,928

 

 

$

8,831,633

 

 

$

(136,705

)

 

 

(1.5

)

 

Deposits, which represent WesBanco’s primary source of funds, are offered in various account forms at various rates through WesBanco’s 199 financial centers.  The FDIC insures deposits up to $250,000 per account.

Total deposits decreased by $136.7 million or 1.5% during the first six months of 2019.  Money market deposits and interest bearing demand deposits decreased 3.9% and 3.1%, respectively, which were partially offset by non-interest bearing demand and savings deposits increasing by 1.6% and 1.5%, respectively. The growth in non-interest bearing demand deposits and savings deposits is primarily attributable to marketing, customer incentives, focused retail and business strategies to obtain more account relationships and customers’ preferences for shorter-term maturities. Deposit balances were also impacted by bonus and royalty payments for Marcellus and Utica shale gas payments from energy companies in WesBanco’s southwestern Pennsylvania, eastern Ohio and northern West Virginia markets. Money market deposits were influenced through WesBanco’s participation in the Insured Cash Sweep (ICS®) money market deposit program. ICS® reciprocal balances totaled $57.3 million at June 30, 2019 compared to $61.4 million at December 31, 2018.

Certificates of deposit decreased $90.5 million due primarily to the effects of an overall corporate strategy designed to increase and remix retail deposit relationships and reduce single-service customers with a focus on overall products that can be offered at a lower cost to WesBanco.  The decline was also impacted by customer run-off from the FTSB and FFKT acquisitions. WesBanco does not generally solicit brokered or other deposits out-of-market or over the internet, but does participate in the Certificate of Deposit Account Registry Services (CDARS®) program. CDARS® balances totaled $39.5 million in outstanding balances at June 30, 2019, of which $16.9 million represented one-way buys, compared to $49.4 million in total outstanding balances at December 31, 2018, of which $22.0 million represented one-way buys. Certificates of deposit greater than $250,000 were approximately $305.5 million at June 30, 2019 compared to $323.2 million at December 31, 2018.  Certificates of deposit of $100,000 or more were approximately $640.3 million at June 30, 2019 compared to $684.6 million at December 31, 2018.  Certificates of deposit totaling approximately $815.7 million at June 30, 2019 with a cost of 1.23% are scheduled to mature within the next 12 months.  WesBanco intends to continue to focus on its core deposit strategies and improving its overall mix of transaction accounts to total deposits.  From time to time, the Bank may offer special promotions or match competitor rates on certain certificates of deposit maturities and savings products based on competition, sales strategies, liquidity needs and wholesale borrowing costs.

42

BORROWINGS

TABLE 15. BORROWINGS

 

(unaudited, dollars in thousands)

 

June 30,

2019

 

 

December 31,

2018

 

 

$ Change

 

 

% Change

 

Federal Home Loan Bank Borrowings

 

$

1,121,283

 

 

$

1,054,174

 

 

$

67,109

 

 

 

6.4

 

Other short-term borrowings

 

 

296,148

 

 

 

290,522

 

 

 

5,626

 

 

 

1.9

 

Subordinated debt and junior subordinated debt

 

 

156,534

 

 

 

189,842

 

 

 

(33,308

)

 

 

(17.5

)

Total

 

$

1,573,965

 

 

$

1,534,538

 

 

$

39,427

 

 

 

2.6

 

 

While borrowings are a significant source of funding for WesBanco, they are less significant as compared to total deposits. During the first six months of 2019, FHLB borrowings increased $67.1 million, as $285.0 million in new advances offset $217.9 million maturities, other principal paydowns and purchase accounting amortization. WesBanco extended the maturities of approximately $285.0 million of maturing FHLB borrowings in the first six months with a prior cost of approximately 1.96%, at current short-term FHLB rates approximating 2.05% - 2.32%.

Other short-term borrowings, which may consist of federal funds purchased, callable repurchase agreements, overnight sweep checking accounts, and borrowings on a revolving line of credit, were $296.1 million at June 30, 2019 compared to $290.5 million at December 31, 2018.  The increase is primarily due to a $0.3 million increase in callable repurchase agreements, coupled with a $5.3 million increase in overnight sweep checking accounts. At June 30, 2019, there were no outstanding federal funds purchased.

Subordinated debt and junior subordinated debt were $156.5 million at June 30, 2019 compared to $189.8 million at December 31, 2018. The decrease is primarily a result of the redemption of $33.5 million in junior subordinated debt during the first six months of 2019, which were assumed in the FFKT acquisition.

WesBanco has a revolving line of credit, which is a senior obligation of the parent company, with another financial institution.  This line of credit, which accrues interest at an adjusted LIBOR rate, provides for aggregate unsecured borrowings of up to $25.0 million. There were no outstanding balances at either June 30, 2019 or December 31, 2018.  

OFF-BALANCE SHEET ARRANGEMENTS

WesBanco enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, letters of credit, loans approved but not closed, overdraft limits and contingent obligations to purchase loans funded by other entities. Since many of these commitments expire unused or partially used, these commitments may not reflect future cash requirements.  Please refer to Note 12, “Commitments and Contingent Liabilities,” of the Consolidated Financial Statements and the “Loans and Credit Risk” section of this MD&A for additional information.

CAPITAL RESOURCES

Shareholders' equity increased $95.3 million or 4.8% from $2.0 billion at December 31, 2018.  The increase resulted primarily from net income during the current six-month period of $85.2 million and a $42.0 million other comprehensive income gain, which was partially offset by the declaration of common shareholder dividends totaling $33.8 million for the six months ended June 30, 2019.  WesBanco also increased its quarterly dividend rate to $0.31 per share in February, representing a 6.9% increase over the prior quarterly rate and a cumulative 121% increase since 2010.

WesBanco purchased 15,755 shares during the six-month period ended June 30, 2019 under the current share repurchase plans. The shares were repurchased from employees for the payment of withholding taxes to facilitate stock compensation transactions. At June 30, 2019, the remaining shares authorized to be purchased under the current repurchase plans totaled 1,076,780 shares.

On February 27, 2019, WesBanco granted 12,000 Total Shareholder Return Plan (“TSR”) shares for the performance period beginning January 1, 2019 and ending December 31, 2021 to certain executives. The award is determined at the end of the three-year period if the TSR of WesBanco common stock is equal to or greater than the 50th percentile of the TSR of the peer group. The number of shares to be earned by the participant shall be 200% of the grant-date award if the TSR of WesBanco common stock is equal to or greater than the 75th percentile of the TSR of the peer group.  Upon achieving the market-based metric, shares determined to be earned by the participant become time-based and vest in three equal annual installments.

On May 15, 2019, WesBanco granted 129,850 stock options to selected officers at an exercise price of $38.93. These options are service-based and vest 50% at December 31, 2019 and 50% at December 31, 2020. On the same date, WesBanco also issued 105,545 shares of time-based restricted stock to selected officers and 16,056 shares of performance-based restricted stock to selected officers. The time-based restricted shares are service-based and cliff-vest 36 months from the date of grant. The performance-based restricted shares have a three-year performance period, beginning January 1, 2020, based on WesBanco’s return on average assets and return on average tangible common equity measured for each year, compared to a national peer group of peer financial institutions with total assets between approximately $11 billion and $25 billion. Earned performance-based restricted shares are also subject to additional service-based vesting with 50% vesting on May 15, 2023 after the completion of the three-year performance period and the final 50% vesting on May 15, 2024.

Regulatory guidelines require bank holding companies and commercial banks to maintain certain minimum capital ratios and define companies as “well capitalized” that sufficiently exceed the minimum ratios. At June 30, 2019, regulatory capital levels for both the Bank and WesBanco were substantially greater than the minimum amounts needed to be considered “well capitalized” under the regulations. There are various legal limitations under federal and state laws that limit the payment of dividends from the Bank to WesBanco. As of June 30, 2019, under FDIC regulations, WesBanco could receive, without prior regulatory approval, a dividend of approximately $137.4 million from the Bank.  WesBanco expects to continue to improve its consolidated and Bank capital ratios as necessary over time, to fund organic growth and acquisitions, primarily from retaining a majority of its earnings.

43

The following table summarizes risk-based capital amounts and ratios for WesBanco and the Bank for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

December 31, 2018

 

 

 

Minimum

 

 

Well

 

 

 

 

 

 

 

 

 

 

Minimum

 

 

 

 

 

 

 

 

 

 

Minimum

 

(unaudited, dollars in thousands)

 

Value (1)

 

 

Capitalized (2)

 

 

Amount

 

 

Ratio

 

 

Amount (1)

 

 

Amount

 

 

Ratio

 

 

Amount (1)

 

WesBanco, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage

 

 

4.00

%

 

 

5.00

%

 

$

1,284,065

 

 

 

11.09

%

 

$

463,324

 

 

$

1,258,605

 

 

 

10.74

%

 

$

468,824

 

Common equity Tier 1

 

 

4.50

%

 

 

6.50

%

 

 

1,154,065

 

 

 

13.83

%

 

 

375,533

 

 

 

1,096,105

 

 

 

13.14

%

 

 

375,254

 

Tier 1 capital to risk-weighted assets

 

 

6.00

%

 

 

8.00

%

 

 

1,284,065

 

 

 

15.39

%

 

 

500,711

 

 

 

1,258,605

 

 

 

15.09

%

 

 

500,338

 

Total capital to risk-weighted assets

 

 

8.00

%

 

 

10.00

%

 

 

1,361,925

 

 

 

16.32

%

 

 

667,615

 

 

 

1,333,503

 

 

 

15.99

%

 

 

667,118

 

WesBanco Bank, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage

 

 

4.00

%

 

 

5.00

%

 

$

1,152,551

 

 

 

9.96

%

 

$

462,642

 

 

$

1,108,600

 

 

 

9.48

%

 

$

467,939

 

Common equity Tier 1

 

 

4.50

%

 

 

6.50

%

 

 

1,152,551

 

 

 

13.73

%

 

 

377,799

 

 

 

1,108,600

 

 

 

13.30

%

 

 

375,117

 

Tier 1 capital to risk-weighted assets

 

 

6.00

%

 

 

8.00

%

 

 

1,152,551

 

 

 

13.73

%

 

 

503,732

 

 

 

1,108,600

 

 

 

13.30

%

 

 

500,156

 

Total capital to risk-weighted assets

 

 

8.00

%

 

 

10.00

%

 

 

1,230,411

 

 

 

14.66

%

 

 

671,643

 

 

 

1,183,498

 

 

 

14.20

%

 

 

666,874

 

(1) Minimum requirements to remain adequately capitalized.

(2) Well-capitalized under prompt corrective action regulations.

LIQUIDITY RISK

Liquidity is defined as a financial institution’s capacity to meet its cash and collateral obligations at a reasonable cost.  Liquidity risk is the risk that an institution’s financial condition or overall safety and soundness is adversely affected by an inability, or perceived inability, to meet its obligations. An institution’s obligations, and the funding sources to meet them, depend significantly on its business mix, balance sheet structure, and the cash flows of its on- and off-balance sheet obligations. Institutions confront various internal and external situations that can give rise to increased liquidity risk including funding mismatches, market constraints on funding sources, contingent liquidity events, changes in economic conditions, and exposure to credit, market, operation, legal and reputation risk.  WesBanco actively manages liquidity risk through its ability to provide adequate funds to meet changes in loan demand, unexpected outflows in deposits and other borrowings as well as to take advantage of market opportunities and meet operating cash needs. This is accomplished by maintaining liquid assets in the form of securities, sufficient borrowing capacity and a stable core deposit base.  Liquidity is centrally monitored by WesBanco’s Asset/Liability Committee (“ALCO”).

WesBanco determines the degree of required liquidity by the relationship of total holdings of liquid assets to the possible need for funds to meet unexpected deposit losses and/or loan demands.  The ability to quickly convert assets to cash at a minimal loss is a primary function of WesBanco’s investment portfolio management. WesBanco believes its cash flow from the loan portfolio, the investment portfolio, and other sources, adequately meet its liquidity requirements. WesBanco’s net loans to assets ratio was 61.5% at June 30, 2019 and deposit balances funded 69.6% of assets.  

The following table lists the sources of liquidity from assets at June 30, 2019 expected within the next year:

 

(unaudited, in thousands)

 

 

 

 

Cash and cash equivalents

 

$

194,355

 

Securities with a maturity date within the next year and callable securities

 

 

331,709

 

Projected payments and prepayments on mortgage-backed securities and collateralized mortgage obligations (1)

 

 

287,816

 

Loans held for sale

 

 

18,649

 

Accruing loans scheduled to mature

 

 

1,029,536

 

Normal loan repayments

 

 

2,004,119

 

Total sources of liquidity expected within the next year

 

$

3,866,184

 

(1) Projected prepayments are based on current prepayment speeds.

Deposit flows are another principal factor affecting overall WesBanco liquidity. Deposits totaled $8.7 billion at June 30, 2019. Deposit flows are impacted by current interest rates, products and rates offered by WesBanco versus various forms of competition, as well as customer behavior. Certificates of deposit scheduled to mature within one year totaled $815.7 million at June 30, 2019, which includes jumbo regular certificates of deposit totaling $381.7 million with a weighted-average cost of 1.73%, and jumbo CDARS® deposits of $24.3 million with a weighted-average cost of 1.63%.  

WesBanco maintains a line of credit with the FHLB as an additional funding source. Available credit with the FHLB approximated $2.3 billion at June 30, 2019 and December 31, 2018.  The FHLB requires securities to be specifically pledged to the FHLB and maintained in a FHLB-approved custodial arrangement if the member wishes to include such securities in the maximum borrowing capacity calculation.  WesBanco has elected not to specifically pledge to the FHLB otherwise unpledged securities. At June 30, 2019, the Bank had unpledged available-for-sale securities with an amortized cost of $398.2 million. A portion of these securities could be sold for additional liquidity, or such securities could be pledged to secure additional FHLB borrowings.  Available liquidity through the sale of investment securities is currently limited, as only approximately 19.4% of the available-for-sale portfolio is unpledged, due to the pledging agreements that WesBanco has with their public deposit customers.  Public deposit balances have increased significantly through the ESB, YCB, FTSB and FFKT acquisitions.  WesBanco’s held-to-maturity portfolio currently contains $603.9 million of unpledged securities. Most of these securities are tax-exempt municipal securities, which can only be pledged in limited circumstances. Except for certain limited, special circumstances, these securities cannot be sold without tainting the remainder of the held-to-maturity portfolio.  If tainting occurs, all remaining securities with the held-to-maturity designation would be required to be reclassified as available-for-sale, and the held-to-maturity designation would no longer be available to WesBanco for some time.

44

WesBanco participates in the Federal Reserve Bank’s Borrower-in-Custody Program (“BIC”) whereby WesBanco pledges certain consumer loans as collateral for borrowings. At June 30, 2019, WesBanco had a BIC line of credit totaling $185.0 million, none of which was outstanding.  Alternative funding sources may include the utilization of existing overnight lines of credit with third party banks totaling $275.0 million, none of which was outstanding at June 30, 2019, along with seeking other lines of credit, borrowings under repurchase agreement lines, increasing deposit rates to attract additional funds, accessing brokered deposits, or selling securities available-for-sale or certain types of loans.

Other short-term borrowings of $296.1 million at June 30, 2019 consisted of callable repurchase agreements and overnight sweep checking accounts for large commercial customers.  There has not been a significant fluctuation in the average deposit balances of the overnight sweep checking accounts during the first six months of 2019.  The overnight sweep checking accounts require U.S. Government securities to be pledged equal to or greater than the average deposit balance in the related customer accounts.  

The principal sources of parent company liquidity are dividends from the Bank, $106.6 million in cash and investments on hand, and a $25.0 million revolving line of credit with another bank, which did not have an outstanding balance at June 30, 2019.  WesBanco is in compliance with all loan covenants.  There are various legal limitations under federal and state laws that limit the payment of dividends from the Bank to the parent company. As of June 30, 2019, under FDIC and State of West Virginia regulations, WesBanco could receive, without prior regulatory approval, dividends of approximately $137.4 million from the Bank.  Management believes these are appropriate levels of cash for the parent company given the current environment.  Management continuously monitors the adequacy of parent company cash levels and sources of liquidity through the use of metrics that relate current cash levels to historical and forecasted cash inflows and outflows.

WesBanco had outstanding commitments to extend credit in the ordinary course of business approximating $2.5 billion at June 30, 2019 and December 31, 2018. On a historical basis, only a portion of these commitments will result in an outflow of funds. Please refer to Note 12, “Commitments and Contingent Liabilities,” of the Consolidated Financial Statements and the “Loans and Credit Risk” section of this MD&A for additional information.

Federal financial regulatory agencies previously issued guidance in 2009 to provide for sound practices for managing funding and liquidity risk and strengthening liquidity risk management practices. WesBanco maintains a comprehensive management process for identifying, measuring, monitoring, and controlling liquidity risk, which is fully integrated into its risk management process.  Management believes WesBanco has sufficient current liquidity to meet current obligations to borrowers, depositors and others and that WesBanco’s current liquidity risk management policies and procedures adequately address this guidance.  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The disclosures set forth in this item are qualified by the section captioned “Forward-Looking Statements” included in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report.

MARKET RISK

The primary objective of WesBanco’s Asset/Liability Committee (“ALCO”) is to maximize net interest income within established policy parameters. This objective is accomplished through the management of balance sheet composition, market risk exposures arising from changing economic conditions and liquidity risk.

Market risk is defined as the risk of loss due to adverse changes in the fair value of financial instruments resulting from fluctuations in interest rates and bond prices.  Management considers interest rate risk to be WesBanco’s most significant market risk. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. The relative consistency of WesBanco’s net interest income is largely dependent on effective management of interest rate risk.  As interest rates change in the market, rates earned on interest rate-sensitive assets and rates paid on interest rate-sensitive liabilities do not necessarily move concurrently.  Differing rate sensitivities may arise because fixed rate assets and liabilities may not have the same maturities, or because variable rate assets and liabilities differ in the timing and/or the percentage of rate changes.

WesBanco’s ALCO is a Board-level committee with both Board and executive management representation. It is responsible for monitoring and managing interest rate risk within Board-approved policy limits, utilizing earnings sensitivity simulation and shareholders’ equity economic value-at-risk models. These models are highly dependent on various assumptions, which change regularly as the balance sheet and market interest rates change. The key assumptions and strategies employed are analyzed, reviewed and documented at least quarterly by the ALCO.

The earnings sensitivity simulation model projects changes in net interest income resulting from the effect of changes in interest rates. Forecasting changes in net interest income requires management to make certain assumptions regarding loan and security prepayment rates, call dates, changes to deposit product betas and non-maturity deposit decay rates, which may not necessarily reflect the manner in which actual cash flows, yields, and costs respond to changes in market interest rates. Assumptions are based on historical experience, current market rates and economic forecasts and are internally back-tested and periodically reviewed by a third-party consultant. The net interest income sensitivity results presented in Table 1, “Net Interest Income Sensitivity,” assumes that the balance sheet composition of interest sensitive assets and liabilities existing at the end of the period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve, regardless of the duration of the maturity or re-pricing of specific assets and liabilities. Since the assumptions used in the model relative to changes in interest rates are uncertain, the simulation analysis may not be indicative of actual results.  In addition, this analysis does not consider actions that management might employ in response to changes in interest rates, as well as changes in earning asset and costing liability balances.

Management is aware of the significant effect that inflation or deflation has upon interest rates and ultimately upon financial performance.  WesBanco’s ability to cope with inflation or deflation is best determined by analyzing its capability to respond to changing market interest rates, as well as its ability to manage the various elements of non-interest income and expense during periods of increasing or decreasing inflation or deflation.  WesBanco monitors the level and mix of interest-rate sensitive assets and liabilities through ALCO in order to reduce the impact of inflation or deflation on net interest income.  Management also controls the effects of inflation or deflation by conducting periodic reviews of the prices, costs and terms of its various products and services, as well as competitive factors by approving new products and services or adjusting the availability of existing products and services.

45

Interest rate risk policy limits are determined by measuring the anticipated change in net interest income over a twelve-month period, assuming immediate and sustained market interest rate increases and decreases of 100 -  400 basis points across the entire yield curve, compared to a stable rate environment or base model.  WesBanco’s current policy limits this exposure for the noted interest rate changes to a reduction of between 10% - 20% or less of net interest income from the stable rate base model over a twelve-month period.  The table below shows WesBanco’s interest rate sensitivity at June 30, 2019 and December 31, 2018, assuming the above-noted interest rate increases as compared to a base model.  In the current interest rate environment, particularly for short-term rates, the 300 - 400 basis point decreasing changes for both years are not shown due to the unrealistic nature of results associated with short-term negative rates.

TABLE 1. NET INTEREST INCOME SENSITIVITY

 

Immediate Change in

 

Percentage Change in

 

 

 

 

 

Interest Rates

 

Net Interest Income from Base over One Year

 

 

ALCO

 

(basis points)

 

June 30, 2019

 

 

December 31, 2018

 

 

Guidelines

 

+400

 

11.5%

 

 

7.6%

 

 

(20.0%)

 

+300

 

8.9%

 

 

6.4%

 

 

(15.0%)

 

+200

 

6.1%

 

 

3.9%

 

 

(12.5%)

 

+100

 

3.2%

 

 

2.1%

 

 

(10.0%)

 

-100

 

(2.5%)

 

 

(2.1%)

 

 

(10.0%)

 

-200

 

(8.2%)

 

 

(5.8%)

 

 

(12.5%)

 

 

As per the table above, the earnings sensitivity simulation model at June 30, 2019 currently projects that net interest income for the next twelve-month period would decrease by 2.5% - 8.2% if interest rates were to fall immediately by 100 - 200 basis points, compared to a decrease of 2.1% - 5.8% as of December 31, 2018. For rising rate scenarios, net interest income would increase by between 3.2% - 11.5% if rates were to increase by between 100 - 400 basis points as of June 30, 2019, compared to increases of between 2.1% - 7.6% as of December 31, 2018. The higher asset sensitivity is due to the impact of the lower rate and yield curve environment on base case net interest income and the related calculation of parallel rate shock changes in rising and falling rate scenarios.

In addition to the aforementioned parallel rate shock earnings sensitivity simulation model, ALCO also reviews a “dynamic” forecast scenario to project net interest income over a rolling two-year time period.  This forecast is updated at least quarterly, incorporating revisions and updated assumptions into the model for estimated loan and deposit growth, expected balance sheet re-mixing strategies, changes in forecasted rates for various maturities, competitive market spreads for various products and other assumptions. Such modeling assists in predicting changes in forecasted outcomes and potential adjustments to the plan to assist in achieving earnings goals.

The balance sheet shows somewhat higher asset sensitivity as of June 30, 2019, as compared to December 31, 2018, with differences resulting from changes in the mix of, and growth in, various earning assets and costing liabilities, as well as adjustments for various modeling assumptions such as deposit beta rates, decay rates for non-maturity deposits and loan prepayment speeds. Generally, deposit betas utilized in the parallel rate shock and “dynamic” models are estimated at a higher percentage for potential rate increase scenarios than has been the Bank’s experience to date through nine federal funds rate increases over the past three and a half years for competitive factors in our market areas and as public funds and institutional contract terms are renewed. The total deposit beta for interest-bearing transaction accounts, other than certificates of deposit, was 34% or 17 basis points for the trailing twelve months. Deposit decay rates and loan prepayment speeds are adjusted periodically for loans and non-maturity deposit products. Asset sensitivity in rising rate scenarios may be less than anticipated due to slower prepayment speeds, rate floors, below forecast loan yields, spread compression between new asset yields and funding costs, mortgage-related extension risk and other factors.  Commercial loans with floors currently average 4.26% on approximately $1.5 billion or 28% of total commercial loans at June 30, 2019, as compared to $1.5 billion averaging 4.27% or 29% of commercial loans at December 31, 2018. Approximately 36% or $517.5 million of these loans are currently priced at their floor, as compared to 38% or $570.5 million at December 31, 2018. These loans typically do not adjust as rapidly from their current floor level as compared to loans without floors, due to the amount of the rate change as compared to the floor rate, or for reasons related to next repricing dates.

WesBanco also periodically measures the economic value of equity (“EVE”), which is defined as the market value of tangible equity in various rate scenarios.  Generally, changes in the economic value of equity relate to changes in various assets and liabilities, changes in the yield curve, as well as changes in loan prepayment speeds and deposit decay rates.  The following table presents these results and WesBanco’s policy limits as of June 30, 2019 and December 31, 2018, with the change since year-end related to significant changes in interest rates and their impact upon the fair values of earning assets and costing liabilities:

 

Immediate Change in

 

Percentage Change in

 

 

 

 

 

Interest Rates

 

Economic Value of Equity from Base over One Year

 

 

ALCO

 

(basis points)

 

June 30, 2019

 

 

December 31, 2018

 

 

Guidelines

 

+400

 

(4.9%)

 

 

(17.2%)

 

 

(40.0%)

 

+300

 

(3.2%)

 

 

(12.6%)

 

 

(30.0%)

 

+200

 

(1.5%)

 

 

(10.8%)

 

 

(20.0%)

 

+100

 

0.3%

 

 

(4.8%)

 

 

(10.0%)

 

-100

 

(1.9%)

 

 

2.7%

 

 

(10.0%)

 

-200

 

(6.8%)

 

 

2.3%

 

 

(20.0%)

 

 

46

The net interest margin increased 27 basis points for the first six months of 2019 to 3.68% as compared to the same period last year and 24 basis points for the second quarter to 3.67% compared to last year, while it was one basis point below the first quarter’s net interest margin of 3.68%. The increase from last year’s first half and second quarter was primarily due to increased short-term rates, higher non-interest bearing deposits, lower than projected deposit betas and the contribution from FFKT’s higher margin assets post-acquisition, plus higher purchase accounting from both 2018 acquisitions. The core net interest margin, net of purchase accounting-related accretion, was 3.49% for both the three and six month periods as compared to 3.31% last year. It was also consistent with the first quarter’s 3.49%. Currently, the federal funds market is anticipating that the Federal Reserve Board may decrease short-term rates by 25 basis points at least two times prior to year-end, which if such interest rate scenario occurs, would result in lower net interest income and margin, as the Company remains asset sensitive, suggesting that earning assets repricing downward may occur at a faster pace than reductions in deposit or borrowing rates. The current flat-to-inverted yield curve environment has reduced our base case assumption about net interest income and margin for the balance of the year as compared to expectations at year-end, which anticipated a continuing rising rate environment and a higher core margin. It is currently expected that the core net interest margin will slightly decline by a few basis points over the remainder of the year, excluding purchase accounting.  On a total basis including purchase accounting accretion, the margin may decline slightly more as such accretion diminishes over the back half of the year by an additional one to two basis points per quarter from its current mid-teens basis points level. Management’s modeling currently includes two 25 basis point decreases in the federal funds rate over the remainder of the year, which is relatively consistent with consensus economist expectations. The shape of the yield curve, changes to deposit betas or rates beyond current modeling assumptions as well as an inability to lower deposit rates in a declining rate scenario, or adjustments to the mix of earning assets and costing liabilities, may have a negative impact on management’s estimates of the future direction and level of the net interest margin.

Certificates of deposit totaling approximately $815.7 million mature within the next year at an average cost of 1.23%; replacement borrowings are currently more expensive than the average runoff rate of these certificates of deposit.  Also, maturing borrowings’ replacement rates are generally higher than the cost of the maturing borrowings’ average rate, and management may elect to lengthen the maturing borrowings’ terms at a higher cost for liquidity and asset/liability management purposes. Transaction account growth helps to control such factors and limit overall deposit costs.

The Bank has significant additional borrowing capacity with the FHLB of Pittsburgh, the Federal Reserve Bank of Cleveland and various correspondent banks, and may utilize these funding sources or interest rate swap strategies as necessary to lengthen liabilities, offset mismatches in various asset maturities and manage liquidity.  CDARS® and ICS® deposits also may be utilized for similar purposes for certain customers seeking higher-yielding instruments or maintaining deposit levels below FDIC insurance limits. Significant balance sheet strategies to assist in managing the net interest margin in the current interest rate environment include:

 

•

increasing total loans, particularly commercial and home equity loans that have variable or adjustable features;

 

•

selling a percentage of longer-term residential mortgage loan production into the secondary market;

 

•

growing demand deposit account types to increase the relative portion of these account types to total deposits;

 

•

employing back-to-back loan swaps for certain commercial loan customers desiring a term fixed rate loan equivalent with the Bank receiving a variable rate;

 

•

adjusting FHLB short-term maturing borrowings to balance asset/liability mismatches;

 

•

using the CDARS®   and ICS® deposit programs to manage funding needs and overall liability mix, and

 

•

adjusting the size, mix or duration of the investment portfolio as part of liquidity and balance sheet management strategies.  

 

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES— WesBanco’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have concluded that WesBanco’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), based on their evaluation of these controls and procedures as of the end of the period covered by this Form 10-Q, are effective to ensure that information required to be disclosed by WesBanco in the reports it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to WesBanco’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS— WesBanco’s management, including the CEO and CFO, does not expect that WesBanco’s disclosure controls and internal controls will prevent all errors and all fraud. While WesBanco’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objective, no control system, no matter how well conceived and operated, can provide absolute assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.

CHANGES IN INTERNAL CONTROLS—There were no changes in WesBanco’s internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2019 as required to be reported by paragraph (d) of Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, that materially affected, or are reasonably likely to materially affect, WesBanco’s internal control over financial reporting.

47

PART II – OTHER INFORMATION

WesBanco is involved in various lawsuits, claims, investigations and proceedings, which arise in the ordinary course of business.  While any litigation contains an element of uncertainty, WesBanco does not believe that a material loss related to such proceedings or claims pending or known to be threatened is reasonably possible.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

As of June 30, 2019, WesBanco had two active one million share stock repurchase plans. The first plan was originally approved by the Board of Directors on March 21, 2007 and the second, which is incremental to the first, was approved October 22, 2015.  Each provides for shares to be repurchased for general corporate purposes, which may include a subsequent resource for potential acquisitions, shareholder dividend reinvestment and employee benefit plans.  The timing, price and quantity of purchases are at the discretion of WesBanco, and the plan may be discontinued or suspended at any time.  

The following table presents the monthly share purchase activity during the quarter ended June 30, 2019:

 

Period

 

Total Number

of Shares

Purchased

 

 

Average

Price Paid

per Share

 

 

Total Number

of Shares

Purchased

as Part of

Publicly

Announced

Plans

 

 

Maximum

Number of

Shares that

May Yet

Be Purchased

Under the

Plans

 

Balance at March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,092,535

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 1, 2019 to April 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Open market repurchases

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,092,535

 

Other transactions (1)

 

 

20,455

 

 

$

41.08

 

 

N/A

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 1, 2019 to May 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Open market repurchases

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,092,535

 

Other transactions (1)

 

 

1,559

 

 

$

39.15

 

 

N/A

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 1, 2019 to June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Open market repurchases

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,092,535

 

Other repurchases (2)

 

 

15,755

 

 

$

37.42

 

 

 

15,755

 

 

 

1,076,780

 

Other transactions (1)

 

 

4,336

 

 

 

36.82

 

 

N/A

 

 

N/A

 

Second Quarter 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Open market repurchases

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,092,535

 

Other repurchases (2)

 

 

15,755

 

 

$

37.42

 

 

 

15,755

 

 

 

1,076,780

 

Other transactions (1)

 

 

26,350

 

 

 

40.27

 

 

N/A

 

 

N/A

 

Total

 

 

42,105

 

 

$

39.20

 

 

 

15,755

 

 

 

1,076,780

 

 

(1)

Consists of open market purchases transacted for employee benefit and dividend reinvestment plans.

 

(2)

Consists of shares purchased from employees for the payment of withholding taxes to facilitate a vested restricted stock compensation transaction.

N/A – Not applicable

48

ITEM 6. EXHIBITS

 

2.1

 

Agreement and Plan of Merger, dated as of July 23, 2019, by and between WesBanco, Inc., WesBanco Bank, Inc., Old Line Bancshares, Inc. and Old Line Bank, Inc. (incorporated by reference to Exhibit 2.1 to the Form 8-K filed by the registrant with the Securities and Exchange Commission on July 23, 2019).

 

 

 

31.1

 

Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(e) or Rule 15d-15(e).

 

 

 

31.2

 

Certification of Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(e) or Rule 15d-15(e).

 

 

 

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101

 

The following materials from WesBanco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at June 30, 2019 and December 31, 2018, (ii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018, (iii) the Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018, and (v) the Notes to Consolidated Financial Statements.

 

49

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

WESBANCO, INC.

 

 

Date: July 31, 2019

/s/ Todd F. Clossin

 

Todd F. Clossin

 

President and Chief Executive Officer

(Principal Executive Officer)

 

 

Date: July 31, 2019

/s/ Robert H. Young

 

Robert H. Young

 

Executive Vice President and Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

 

50

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

OF PERIODIC REPORT PURSUANT TO RULE 13a-15(e) or RULE 15d-15(e)

I, Todd F. Clossin, certify that:

1. I have reviewed this Report on Form 10-Q of WesBanco, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;  and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing similar functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 31, 2019

 

/s/ Todd F. Clossin

 

 

Todd F. Clossin

 

 

President and Chief Executive Officer

 

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

OF PERIODIC REPORT PURSUANT TO RULE 13a-15(e) or RULE 15d-15(e)

I, Robert H. Young, certify that:

1. I have reviewed this Report on Form 10-Q of WesBanco, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;  and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing similar functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 31, 2019

 

/s/ Robert H. Young

 

 

Robert H. Young

 

 

Executive Vice President and Chief Financial Officer

 

 

 

 

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of WesBanco, Inc. on Form 10-Q as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

 

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of WesBanco, Inc.

 

Date: July 31, 2019

 

/s/ Todd F. Clossin

 

 

Todd F. Clossin

 

 

President and Chief Executive Officer

 

 

 

Date: July 31, 2019

 

/s/ Robert H. Young

 

 

Robert H. Young

 

 

Executive Vice President and Chief Financial Officer

 

The forgoing certifications are being furnished solely pursuant to Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.