Balance Sheet
Portfolio loans of $7.7 billion, as of June 30, 2019, increased 13.9% when compared to the prior year period due to the acquisition of FFKT. Reflecting continued stabilization across loan categories, total portfolio loans increased approximately 1% when compared to both the first quarter of 2019 and the fourth quarter of 2018. Total deposits increased 13.4% year-over-year to $8.7 billion due to the FFKT acquisition.
Credit Quality
Our underlying credit fundamentals continue to be reflective of our strong legacy of credit and risk management. During the second quarter of 2019, our credit quality ratios remained strong as we balanced disciplined loan origination in the current environment with our prudent lending standards. As of June 30, 2019, whilenon-performing loans andnon-performing assets remained relatively flat year-over-year on a dollar basis, they both decreased as a percentage of the portfolio. Criticized and classified loan balances increased year-over-year during the second quarter of 2019 to $114.2 million, or 1.48% of total portfolio loans, reflecting our normal loan grade review process post-acquisition and in conjunction with two downgraded relationships in our legacy portfolio, as reported last quarter. Reflecting the overall high quality of the loan portfolio, the provision for credit losses held steady as a percentage of the total loan portfolio, and annualized net loan charge-offs to average loans was five basis points.
Net Interest Margin and Income
The net interest margin for the second quarter of 2019 increased 24 basis points year-over-year to 3.67%. The net interest margin benefited from increases in the Federal Reserve Board’s target federal funds rate during 2018 and the higher margin on the acquired FFKT net assets, partially offset by higher funding costs as well as a flattening of the yield curve. The increase in the cost of interest bearing liabilities was primarily due to higher rates for interest bearing public funds, higher tier money market accounts, and Federal Home Loan Bank and other borrowings. Lastly, accretion from acquisitions benefited the second quarter net interest margin by 18 basis points, which included 3 basis points related to a prior acquisition impaired loan payment, as compared to 12 basis points in the prior year period.
Net interest income increased $16.1 million, or 19.6%, during the second quarter of 2019, as compared to the same quarter of 2018, due to a 11.5% increase in average total earning assets, primarily driven by the FFKT acquisition and related accretion from purchase accounting, as well as an overall higher net interest margin. For the six months ended June 30, 2019, net interest income increased $41.3 million, or 26.5%, due to higher average total earning assets and an overall higher net interest margin, as discussed for the three-month period comparison.
Non-Interest Income
For the second quarter of 2019,non-interest income of $31.2 million increased $7.7 million, or 33.1%, from the second quarter of 2018, driven by the FFKT acquisition and net securities gains. The associated larger customer deposit base and higher transaction volumes resulted in the year-over-year increases in electronic banking fees and service charges on deposits. Trust fees increased year-over-year primarily due to higher trust assets from the addition of FFKT’s trust business. Net securities gains reflects a $2.6 million gain from the sale of Visa Class B common stock in the current period, as compared to the prior year period. Other income increased $1.7 million primarily due to an increase in payment processing fee income and higher commercial customer loan swap income.
For the six months ended June 30, 2019,non-interest income increased $11.4 million, or 24.1%. The primary drivers of this increase were higher net securities gains, service charges on deposits, electronic banking fees, and trust fees, as discussed above, partially offset by lower bank-owned life insurance benefits due to mortality-related proceeds in the prior year period.
Non-Interest Expense
Total operating expenses continued to be well-controlled during both the three- andsix-month periods ending June 30, 2019. The FFKT cost savings of 35% announced in April 2018 remain on track for 75% of the anticipated savings to be achieved during 2019, and 100% thereafter. Focused expense savings associated with the FFKT acquisition began after the February branch and data processing conversions, and the majority of the anticipated 2019 cost savings related to personnel have occurred by the end of the second quarter.
Excluding merger-related expenses,non-interest expense for the three months ending June 30, 2019 increased $13.7 million, or 23.6%, compared to the prior year period, reflecting the FFKT acquisition. This year-over-year increase is primarily due to higher salaries and wages, employee benefits, net occupancy, and equipment costs associated with additional staffing and financial center locations from the acquisition, as well as intangibles amortization. FDIC insurance expense increased $0.3 million, or 33.1%, year-over-year due to now being assessed as a large bank with more than $10 billion in total assets. On a similar basis,non-interest expense during the first half of 2019 increased $30.7 million, or 27.3%, compared to the prior year period, reflecting the acquisitions of FTSB and FFKT.
Capital
WesBanco continues to maintain strong regulatory capital ratios as both consolidated and bank-level regulatory capital ratios are well above the applicable “well-capitalized” standards promulgated by bank regulators and the BASEL III capital standards. At June 30, 2019, Tier I leverage was 11.09%, Tier I Risk-Based capital was 15.39%, Total Risk-Based capital was 16.32%, and the Common Equity Tier 1 capital ratio (“CET 1”) was 13.83%. Tangible common equity also remained strong, increasing to 10.10% atperiod-end from 8.43% as of June 30, 2018.
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