WesBanco Inc (WSBCP) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the WesBanco Second Quarter 2018 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

At this time, I would like to turn the conference over to John Iannone, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Denise.

Good morning, and welcome to WesBanco Inc.

Second Quarter 2018 Earnings Conference Call.

Our second quarter 2018 earnings release, which contains consolidated financial highlights and reconciliations of non-GAAP financial measures, was issued yesterday afternoon and is available on our website, wesbanco.com.

Leading the call today are Todd Clossin, President and Chief Executive Officer; and Bob Young, Executive Vice President and Chief Financial Officer.

Following our opening remarks, we will begin a question-and-answer session.

An archive of this call will be available on our website for 1 year.

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, 2017, and form 10-Q for the quarter ended March 31, 2018, as well as documents subsequently filed by WesBanco with the Securities and Exchange Commission which are available on the SEC and WesBanco websites.

Investors are cautioned that forward-looking statements, which are not historical fact, involve risks and uncertainties, including those detailed in WesBanco's most recent annual report on Form 10-K filed with the SEC under Risk Factors in Part 1, Item 1A.

Such statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements.

WesBanco does not assume any duty to update forward-looking statements.

Todd?

Thank you, John.

Good morning, everyone.

On today's call, we'll be reviewing our results for the second quarter of 2018.

Key takeaways from the call today are: we continue to execute upon our well-defined growth strategies that are enabling a diversified earnings stream; build upon strong credit and expense standards, which will also ensure long-term shareholder success.

We have a diligent focus on profitability, as demonstrated by record net and pretax income for the second quarter including strong expense management and credit standards.

And successful implementation of our $10 billion asset threshold and associated acquisition strategies as we completed the merger with First Sentry Bancshares including the conversion of its data processing system and received all necessary regulatory and shareholder approvals for our merger with Farmers Capital Bank Corporation.

We're pleased with our performance during the second quarter as we delivered record results by remaining focused on generating positive operating leverage and profitability through effective execution of our strategies related to long-term growth, expense management and strategic acquisitions.

Net income, excluding merger related expenses for the 3 months ended June 30, 2018, increased 42% year-over-year to $37 million, or $0.80 per diluted share.

And for the 6-month period, net income, excluding measure related expenses, increased 35% year-over-year to $71 million, or $1.57 per diluted share.

Underlying these strong results was the performance of our core businesses combined with diligent, discretionary cost control, as year-to-date income before provision for credit losses and income taxes and excluding merger-related cost increased 16% year-over-year to $91 million.

Furthermore, our year-to-date efficiency ratio improved to 216 basis points year-over-year to 54.7%, which is before any targeted cost savings from the merger with First Sentry.

Thus, we generated solid profitability ratios with the core return on average assets of 1.38% and a core return on average tangible equity of 17.9% as we continue to maintain strong regulatory capital ratios as both consolidated and bank level regulatory capital ratios were well above the applicable, well-capitalized standards promulgated by bank regulators and the Basel III capital standards.

Our long-term success remains dependent upon continued execution of our well-defined operational and growth plans.

As a reminder, our long-term growth strategy is focused on several key pillars: Building a diversified loan portfolio with an emphasis on commercial, industrial and home equity lending; increasing fee income as a percentage of total net revenues over time; maintaining a high-quality retail banking franchise; and franchise enhancing acquisitions.

And these pillars would not be possible if they were not built upon 2 strong legacies of our franchise: an unwavering focus on delivering positive operating leverage, while making necessary growth-oriented and risk-prevention investments; and maintaining our strong culture of credit quality, risk management and compliance, principles upon which our company was founded nearly 150 years ago.

Furthermore, the inherit strength of our diversification and growth strategies is how the components complement and support each other to ensure success and profitability regardless of the operating environment.

There are many ways to achieve profitability, but doing it through changing our risk profile is not one of them, especially at this point of the elongated economic expansion cycle.

We'll continue to deliver long-term profitability and shareholder value through disciplined growth, meeting customer needs efficiently and effectively and leveraging our core deposit advantage while maintaining our credit and expense standards.

During the second quarter, we continued to see strength across our key credit quality metrics, which remained at or near historic lows and realized flat year-over-year total organic loan growth through the benefits of our lending diversification strategy.

We continue to allow indirect auto loans to run off in our consumer portfolio to reduce its risk profile as this loan category does not provide the proper returns for the risk incurred.

We're also seeing a heightened level of commercial real estate loans going to the secondary market and property owners just selling properties outright due to the favorable property valuations.

These factors cost approximately 2 percentage points of loan growth, however, they were offset by strong production from our C&I and our residential lending teams, which we have developed and strengthened during the last few years.

While I would have liked to have generated more loan growth during the quarter, we're playing the loan game.

We're not going to lower our credit standards to hit an expected growth rate especially when we have untapped, other levers in our growth strategy to achieve profitability as we clearly demonstrated this quarter.

That said, our commercial and residential loan pipelines are solid in growing the quarter end, and we remain optimistic on the opportunities as we continue to diversify and strengthen the quality of our overall loan portfolio.

During the second quarter, when excluding the impact of our strategy to reduce high cost certificates of deposit, we continue to experience robust organic year-over-year deposit growth of 5%.

The generation of shale energy-related deposits in our legacy markets, which are currently in the low 8 figures each month, remain a core funding advantage that allowed us to target lending opportunities in our high growth Metropolitan markets.

While these deposits represent wealth management opportunities, it takes time to develop that side of the customer relationship.

In the meantime, the deposits resign in demand accounts which now represent 50% of deposits as compared to the 48% a year ago.

An additional benefit of our core funding advantage is helping to contain deposit costs and funding costs and thus benefiting profitability.

During the past 12 months, the cost of our total deposits, including noninterest bearing, has increased only 12 basis points as compared to fed rate increases of 75 basis points over that same time.

As I've mentioned, we remain focused on delivering profitability.

There are 2 avenues to achieving this: Expense control and revenue growth.

We are and always have done an excellent job managing discretionary costs.

Now we are targeting additional top line revenue growth through a multiphased fee income project that we initiated last year.

A few months ago, we implemented the initial phase by increasing fees on certain ATM transactions, which were below market rates such as for non-WesBanco customers who use our ATMs.

Subsequent phases to be implemented later this year and throughout 2019, will target fees that are below peer averages by moving them closer to be average implementing certain other fees has become industry standards and reducing the amount of fee waivers.

Once fully implemented, we believe the subsequent phases of the project have the opportunity to generate several million dollars of additional fee income.

Before I turn the call over to Bob, I'd like to take a few minutes to highlight our acquisition strategy and its successful execution over the last few quarters.

Last year, we announced our strategy to cross the $10 billion asset threshold and we did it exactly as we said we would do.

We anticipated crossing the threshold during 2018 via franchise enhancing acquisitions within a 6-hour drive of our headquarters through either a larger several billion-dollar asset transaction or combination of several small to midsize deals.

Last November, we announced our planned merger with First Sentry Bancshares which we subsequently consummated on April 5. And successfully completed the associated data processing and branch conversion this past weekend.

During the first quarter of this year, we began to reposition our balance sheet in anticipation of crossing $10 billion in assets.

On April 19, we announced our planned merger with Farmers Capital Bank Corporation.

Less than 3 months later, we announced the receipt of all necessary regulatory approvals, and yesterday, the shareholders of Farmers approved the merger with and into WesBanco.

The 2 mergers fit perfectly with our strategic plans by combing commercial banking institutions with a strong focus on client service and community banking as well as nicely filling in the Southern edge of our franchise between Charleston, West Virginia, and Louisville, Kentucky.

These transactions were priced appropriately, should nicely enhance shareholder value and provide a more meaningful scale in several of our existing markets.

In fact, we have grown from not having a presence in Kentucky 2 years ago to now being the ninth largest financial institution in the state.

Finally, I'd like to welcome the customers and employees of both First Sentry and Farmers to the WesBanco family.

We look forward to providing our newest customers with a broader array of banking services as well as provide new and expanded opportunities for our newest employees.

We're excited about these new opportunities to continue our emergence as a regional financial services institution with a community bank at its core that is focused on long-term profitability and soundness.

I'd now like to turn the call over to Bob Young, our Chief Financial Officer, for an update on the second quarter's financial results.

Bob?

Thanks, Todd, and good morning, everyone.

We reported strong year-over-year growth in both pretax and after-tax earnings and displayed solid expense management both quarter-over-quarter as well as year-over-year.

For the 6 months ended June 30, 2018, we reported GAAP net income of $66.7 million and earnings per diluted share of $1.47, as compared to $52.2 million or $1.19 per diluted share for the same period last year.

Excluding after-tax merger related expenses from both periods, net income increased 35.4% to $71.2 million with earnings per diluted share up $0.38 to $1.57.

Year-to-date, the core return on average assets was 1.37% and the core return on average tangible equity was 17.53%.

For the 3 months ended June 30, 2018, we reported GAAP net income of $33.2 million and earnings per diluted share of $0.71 as compared to $26.3 million and $0.60, respectively, in the prior year period.

Once again, excluding after-tax merger-related expenses, net income increased 42.2% to $37.4 million and earnings per diluted share would have increased 33.3% to $0.80.

For the first quarter, core returns on average assets and average tangible equity were 1.38% and 17.85%, respectively.

And as a reminder, the financial results for First Sentry have been included in WesBanco's results subsequent to the merger date of April 5.

Turning now to balance sheet, total assets as of June 30, 2018 grew to $10.9 billion year-over-year, reflecting approximately $700 million of assets from the acquisition of First Sentry and the first quarter increase in the securities portfolio as we refocused on growing total earning assets after the beginning of this year in relation to our crossing the $10 billion asset threshold.

Furthermore, total portfolio loans of $6.8 billion increased 6.3% compared to the prior year due to the acquisition of First Sentry.

Organic loan growth was roughly flat to the prior year period, reflecting the factors Todd mentioned earlier.

We are continuing to sell -- our strategy to sell residential mortgage originations into the secondary market.

However, we did increase the amount of 1 to 4 family mortgage loans held on our balance sheet during the second quarter, primarily due to growth in nonconforming residential loans.

Of note, the volume of our residential mortgage originations continued to be strong this quarter.

On a year-to-date basis, we have seen an 18% increase in originations, which has been much stronger than the residential mortgage market nationwide, despite a reduced percentage of refinances.

Net interest margin, which declined slightly year-over-year, continues to reflect the benefit to asset yields from the increases in the Federal Reserve Board's target federal funds rate over the past year, offset by higher funding costs and a flattening of the yield curve, which is currently in the 25 basis points to 30 basis points between the 2 and the 10-year portion of the curve, near its lowest level in more than a decade.

Also negatively impacting the margin was a 6 basis point reduction during the second quarter related to the lower tax equivalency of the state and local municipal tax-exempt securities resulting from the Tax Cuts and Jobs Act.

Excluding this reduction as well as purchase accounting accretion of 12 basis points this year for the quarter -- it's 10 basis points year-to-date, and 8 basis points in the prior year period, the core net interest margin was flat year-over-year at 3.37%.

The increase in the cost of interest-bearing liabilities is primarily due to the higher rates for interest-bearing public funds, which are primarily in interest-bearing secure demand deposits and certain federal home loan bank and other borrowings.

Total interest-bearing deposit costs were only up 17 basis points year-over-year representing just a 23% deposit beta compared to the 325 basis point federal funds rate increases since last June.

When including the growth in non-interest-bearing deposits, our total deposit funding cost has increased just 12 basis points year-over-year.

While our core deposit funding advantage will help to contain overall deposit funding costs, we still expect deposit betas to increase throughout the remainder of the year.

Lastly, we currently anticipate purchase accounting accretion to be between 8 and 10 basis points per quarter during the second half of 2018 before any impact from the upcoming Farmers merger.

Turning to fee revenue, for the quarter ended June 30, 2018, noninterest income increased 5.8% from the prior year to $23.4 million, driven by higher electronic banking fees and mortgage banking income.

Electronic banking fee income increased $0.7 million year-over-year, primarily from higher volumes and an ATM fee increase, which was associated with the fee income strategy that Todd discussed.

Despite the percentage of total residential mortgage originations sold in the secondary market declining from the trailing 12-month average of 56% due to keeping certain nonperforming loans on our balance sheet, second quarter mortgage banking income grew $0.7 million year-over-year due to a 33% increase in the total volume of originations as well as a higher gain on sale income per loan sold.

On the subject of operating expenses, as Todd highlighted, we continue to focus on improving profitability and positive operating leverage as total operating expenses continue to be well controlled during the second quarter.

Excluding merger-related expenses, noninterest expense increased $2.2 million or 4% compared to the prior year period due to higher salaries and wages.

This category increased $3.3 million, primarily due to the higher staffing levels from the acquisition of First Sentry, normal annual salary increases implemented during the quarter, higher stock-based and annual incentive plan accruals and a reallocation of pension service costs from employee benefits and according with the new accounting standards.

This increase was mostly offset by strong discretionary expense management across most other expense categories.

Our company-wide dedication to controlling costs is evident in the 216 basis point year-over-year improvement in our year-to-date core operating efficiency ratio of 54.7%.

Turning now to credit quality and capital, reflective of our strong legacy of credit and risk management, our credit quality measures have remained at or near historic lows over the last several quarters.

This strength is further evident as of June 30, 2018, where nonperforming assets, past-due loans, and criticized and classified loans decreased year-over-year as a percentage of loan portfolio as well as on an absolute dollar basis, despite the addition of approximately $450 million of total loans from the acquisition of First Sentry.

Further reflecting the high quality of the loan portfolio, the provision for credit losses decreased from $2.4 million in the second quarter of 2017 to $1.7 million in the current quarter.

Before opening the call for your questions, I would like to provide some current thoughts on our outlook for the remainder of 2018.

Despite our general asset sensitivity, we are not immune from the factors that are impacting net interest margins across the industry.

We expect a slight increase in our net interest margin during the second half of 2018 due to the acquisition of Farmers Capital, partially offset by higher anticipated deposit betas.

Regarding operating expenses, we've recently completed the data processing and branch conversion of First Sentry and so expect cost savings of approximately 38% with approximately 75% phased in during the last half of this year and the remainder attained during 2019.

We have implemented our normal midyear merit increases and continue to expect marketing expense to be consistent with the overall level in 2017 but spread somewhat more evenly across the quarters in 2018.

Lastly, we anticipate our effective full year tax rate to be approximately 17.5% to 18.5%, subject to changes in certain taxable income strategies that may be implemented, including the potential benefit from new market tax credits we announced that we have been awarded in February.

We are now ready to take your questions.

(Operator Instructions) The first question will be from Steve Moss of B. Riley FBR.

Just wanted to start off on the loan growth front.

You talked about commercial and residential loan pipelines being solid here, I guess particularly on commercial, what industries are you seeing demand for and, kind of, just talk us through expectation there?

Yes, I would say that with regard to the industries, it's pretty much across the board on the C&I side from an industry perspective.

I would tell you there is some reluctance out there on the part of businesses to pull the trigger on plant expansions, equipment, things like that.

I'm not sure what's going on with tariffs.

So there is some uncertainty out there with regard to that.

So we are seeing our share, I think, of opportunities that are coming up with our teams that are positioned in each of those markets, but not any one particular industry.

We don't lend heavily into the energy industry, some people might think because where we're relocated that, that's something that might drive a concentration, but we don't lend into it.

So that's not one.

When you look at manufacturers, you look at wholesalers, a lot of our markets with the highways that are there, you have got good distribution systems for warehousing.

So we're seeing just a general strong economy, but not a tremendous amount of borrowing, but pipelines are getting better, they're getting stronger and we're looking at lots of opportunities, just like to get people at a little more certainty out there about what the next couple of years are going to look like before they pull the trigger.

Okay, good to hear.

And then on the indirect auto, obviously, it's been running off here.

I'm wondering, is there a point or an interest rate that you expect that will turn around and, perhaps, start growing?

Yes.

Yes.

We are watching that.

It's -- you get down to a certain level.

Consumer's only 5% of our portfolio now, so the indirect is going to be a fairly small piece of the portfolio.

And at some point that'll stop and that'll stabilize on that.

But we're really focused, as we talk more and more on the home equity side.

So we're not going to take the indirect down to 0, but it will continue to -- I think continue to drop.

I think when we look at it over the next 10 years, I'd rather be particularly in the mid-west, in the mid-south, our markets, I'd rather be growing the home equity portfolio then.

A lot of banks our size that are showing growth in indirect, it's used cars and it's RVs, it's motorcycles and ATVs.

And that's not where I want to be over the next 10 years.

I'd rather be in good solid homes with home equity behind the mid-west and mid-south.

So I think that's the right strategy for us over the next 10 years.

But in answer to your original question.

There will be some balancing point, I think we may be getting close to that, but not quite there yet.

Got it.

And then third question here just on the tax rate here, sounds like it's going a bit lower relative to where it's been.

I'm wondering, Bob, is that kind of like a good range, not just for the second half of 2018, but also 2019 or could it go a little bit lower because of the new market tax credits?

Yes, the new market credits, once we phase them in over the next couple of years.

I think what we talked about when I -- when we announced those earlier this year was the fact that it had between 0.5 percentage point and 1 point percentage point impact on the effective tax rate.

I have given you a range.

It was a little bit higher this quarter, primarily because of the earnings growth in the second quarter and then annualizing that for the year.

But the new markets tax credit would have the primary impact.

When I say other taxable income strategies, that's just a caveat for normal tax planning that one would do in the state municipal tax-exempt portfolio or other strategies.

So that's a caveat only, but the range I've given you is what I'm thinking at this point.

That's prior to Farmers, but Farmers had a similar effective tax rate.

So I don't think that's going to have much of an impact on it for the rest of the year.

And the next question will be from Stuart Lotz of KBW.

Congratulations on the speedy approval of the FFKT acquisition.

Just curious when you expected that to close now for modeling purposes?

Yes.

We are stating third quarter, that's -- we're going to stick with that.

Okay.

And then just one on the expenses.

I know the conversion took place this past weekend.

Were there any of the FTSB cost saves picked into the second quarter results, or is that mainly coming through in the third and fourth quarter here?

No.

There were no cost savings on the First Sentry side in the second quarter other than the run rate of expenses they've experienced year-to-date is a little bit lower on a core basis, but not significantly.

And the $5 million we're expecting as the 38% cost savings on their $13 million a year of run rate expenses when they were independent, is expected to be 75% in the balance of this year and the rest in 2019.

Cost savings in the salaries and employee benefits line and in data processing and equipment expense lines will be starting in the middle part of this quarter.

(Operator Instructions) The next question will be from Russell Gunther of D.A. Davidson.

Follow-up on the expense question earlier.

Bob, you mentioned that typical merit step-up in 2Q, does that also follow through a bit into 3Q as well, or will that have all been absorbed in the second quarter?

It does follow through in the third quarter to some degree and the reason for that is because increases come towards the latter half of the second quarter.

And then there's, for nonexempts, those come towards the middle of the second -- third quarter start of August.

Okay.

And then just -- very good incremental improvement on the core efficiency front in, kind of, mid- 55% -- mid-50% range.

Just curious if you guys could help us out with your thoughts on sort of where this could shake out as you absorb all the cost saves of the 2 deals?

Well there's a lot of factors involved.

As you mentioned, we got a couple of deals going on.

Obviously, we got Durbin in the back half of '19.

We've also got a lot of initiatives underway with regard to continued focus on expenses and dropping expenses.

And we have a number of fee initiatives underway as well too.

So there's a lot of moving parts there.

Our plan and expectation that we've talked about over the last couple of years would be to hope to keep the efficiency ratio in the 50s, preferably in the mid-50s as we go up in over $10 billion in size and continue to grow through there.

So we're focused on it, but there's a lot of puts and takes, hard to know exactly what that's going to look like in a year and a half or 2 years from now, but we're cognizant of that ratio.

That's an important ratio inside of our company, the efficiency ratio.

But I also want to make sure, we're doing things to drive the revenue piece of it and it's not just a cost save exercise to continue to keep that where it's at.

We'll bring it down even further.

It's going to be as much about the revenue growth.

And you see that, Russel, with deposit of operating leverage this quarter.

And year-to-date, you strip out the merger-related expenses.

For us, there'll only be out 4% or $2 million to $2.5 million is pretty impressive given the amount of revenue growth.

We continue to talk about positive operating leverage as being important to the story, wealth management is an important part of that, electronic banking.

We are seeing some nice pull through on the residential mortgage side in terms of gain on sale income even though we directed a little bit more to the balance sheet this quarter.

So I think, as Todd indicated, the positive operating leverage to drive the denominator higher while holding expenses at a lower growth rate is how we plan on achieving that.

And now Durbin will kick in, in the back half of '19.

So that's -- as Todd pointed out, there are both puts and takes.

What we're trying to do is to plan for that between now and then, higher service charges to some degree and control of the discretionary operating expense lines.

Okay.

I appreciate both your thoughts on that.

Bob just had a clarifying question on the margin guide, slight increase in the back half of this year.

How should we, kind of, size that up?

Is that off of the sort of 343 base in 2Q '18?

And do you guys have any fed fund increases in the back half of the year in that guide post?

We do.

In our most-likely modeling have 2 factored in, but the current rate, purchase accounting accretion at 12 basis points, the guidance was 8 to 10 in the back half of the year.

So there's a little bit of drift south on purchase accounting that we think should be offset slightly by the asset sensitivity in there in the balance sheet.

There's fewer loans at floors than there were a year ago for instance.

But offsetting that is a comment I made about higher deposit betas we would now expect.

We were going to be able to continue to run at 23%.

Although, most of the increase so far in interest-bearing deposits has been on the public funds line.

And then in terms of total cost of funds, the maturing borrowings.

There'll be a little bit of pick up from Farmers.

We talked about that on the Farmers announcement call.

We're still finalizing our accretion there since we haven't yet closed, but there'll be some pickup from that as well.

And then keep in mind that Farmers core margin is a little bit higher than ours.

They pulled 380 in the second quarter, so there is some inherent growth from their core margin as well.

Okay, very helpful.

And then last one on the loan growth expectations for the back half of this year, you guys had, in the past, talked about a low to mid-single digits, obviously, pay down's quite a frustration for you in the industry.

But based on comments around the pipeline, is that sort of low to mid-single digit core organic growth, something you guys would expect to achieve?

I think these were on a long-term basis, yes, that would be something we'd still plan to try to be in line with that.

And we said that over the last 4 or 5 years, and you would say that over the long-term as well too.

Just don't know what the economy is going to give you over the next year or 2. I think we'll get our share of it, but I don't know what that will be.

But on a long-term basis, I think low to mid-single digit is still a pretty good idea for us to where we've been so I think it's where we'll stay.

And at this time, we will conclude our question-and-answer session.

I would like to hand the conference over to Todd Clossin for his closing remarks.

Thank you.

We remain well positioned for success as we focus on profitability through solid execution of our well-defined, long-term growth strategies, without sacrificing the legacy of our credit quality and our regulatory compliance.

Our dedication and diligence will continue, I think, to reward our shareholders through long-term value enhancement.

And I want to thank you all for joining us today and look forward to seeing you at an upcoming Investor Event.

Thank you, and have a great day.

Thank you, sir.

Ladies and gentlemen, the conference has concluded.

Thank you for attending today's presentation.

At this time, you may disconnect your lines.