WESBANCO INC annual report, FY2014

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WesBanco, Inc. — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing. Amounts below are U.S. dollars; financial statement amounts are in millions unless noted.

Business context

WesBanco is a regional bank holding company operating in West Virginia, Ohio and western Pennsylvania. Its businesses are community banking and trust and investment services. At year-end it had 120 banking offices, $6.30 billion in assets and $3.84 billion in trust assets under management or administration; trust assets are not included on the balance sheet.

On February 10, 2015, after the reporting period, WesBanco completed its acquisition of ESB Financial Corporation, adding approximately $1.9 billion of assets and 23 branches. The filing describes the combined company as having approximately $8.3 billion in assets and 143 offices. The acquisition is not reflected in WesBanco’s 2014 year-end balance sheet or 2014 results.

Financial performance and condition

  • Earnings: Net income was $70.0 million, up 9.5% from $63.9 million in 2013. Diluted EPS was $2.39 versus $2.18. Return on average assets improved to 1.12% from 1.05%; return on average equity was 8.97% versus 8.72%.
  • Net interest income and margin: Net interest income rose 4.2% to $193.2 million. Fully taxable-equivalent net interest margin increased to 3.61% from 3.58% (3.57% versus 3.49% excluding purchase-accounting accretion). Lower funding costs and loan growth helped offset lower loan yields.
  • Fees and expenses: Non-interest income was $68.5 million, down 1.1%; excluding a $1.4 million charge to prepay higher-cost repurchase funding, it increased $0.6 million. Trust fees rose 7.6%, while deposit service charges fell 10.0% and mortgage-sale gains fell 38.6%. Non-interest expense increased 0.4% to $161.6 million; the efficiency ratio improved to 59.59% from 60.99%.
  • Credit quality: Provision for credit losses declined to $6.4 million from $9.1 million. Net charge-offs fell to $9.3 million, or 0.23% of average loans, from $14.2 million, or 0.38%. Non-performing assets were $56.0 million, or 0.89% of assets, versus $56.4 million, or 0.92%. The allowance for loan losses was $44.7 million, equal to 1.09% of portfolio loans, compared with 1.22% a year earlier.
  • Balance sheet and funding: Assets rose 2.5% to $6.30 billion; portfolio loans grew 4.9% to $4.09 billion. Deposits declined 0.3% to $5.05 billion as certificates of deposit fell 13.7%, partly offset by growth in demand and savings deposits. Total borrowings increased 38.4% to $410.0 million, including $223.1 million of FHLB advances and $106.2 million of junior subordinated debt.
  • Liquidity and cash flow: Cash and cash equivalents were $94.0 million. Management reported approximately $1.5 billion of remaining FHLB borrowing capacity, subject to collateral requirements. Operating cash flow was $94.8 million; investing activities used $173.0 million and financing activities provided $76.6 million. Cash and cash equivalents declined $1.5 million during the year.
  • Capital and shareholder returns: WesBanco’s Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 9.88%, 13.76% and 14.81%, respectively; the Bank was reported well-capitalized. Shareholders’ equity was $788.2 million. The 2014 dividend was $0.88 per share, up from $0.78. In February 2015, the quarterly dividend was raised to $0.23.

Material changes versus 2013

  • Profitability improved, supported by higher average loan balances, a modestly wider net interest margin, lower funding expense and reduced credit-loss provision.
  • Loan growth was concentrated in commercial and industrial loans and home equity lines, consistent with management’s effort to diversify away from commercial real estate. Commercial real estate remained 47.5% of year-end portfolio loans.
  • Deposit mix shifted away from higher-cost certificates of deposit. Total deposits were slightly lower, while total borrowings rose, chiefly from short-term FHLB advances.
  • Credit indicators generally improved, although non-accrual loans increased to $38.8 million from $36.6 million, including two commercial real estate loans totaling $7.3 million placed on non-accrual in the second half.

Outlook, risks and unusual items

  • Outlook: The filing provides no specific full-year 2015 earnings or revenue guidance. Management expected the net interest margin to contract slightly through mid-year 2015, with possible improvement if short-term rates rose. It also expected approximately $12–$13 million of pre-tax ESB merger-related expenses in 2015, primarily in the first quarter, and anticipated completing customer-account and operating integrations in late April 2015.
  • Acquisition: WesBanco issued approximately 9.2 million shares and paid $37.2 million cash for ESB. Purchase accounting was preliminary and incomplete at the filing date. Integration, cost savings, revenue synergies and potential dilution are uncertain.
  • Concentration and economic exposure: Lending is concentrated in the company’s regional markets and in real estate. Management highlighted potential effects from lower oil and gas prices on shale-related activity, including lodging and related businesses. The municipal securities portfolio was approximately 39.7% of securities, with Pennsylvania the largest state concentration at 26.9% of municipal holdings.
  • Other risks and contingencies: Interest-rate and funding competition, borrower defaults, regulatory changes, cybersecurity and operational disruptions, and acquisition integration are identified risks. Two shareholder lawsuits concerning the ESB merger were subject to a proposed settlement; court approval remained a condition. Management said ordinary-course litigation was not expected to result in a reasonably possible material loss.
  • Unusual items: A $1.4 million charge related to prepayment of a $22.0 million higher-rate repurchase agreement reduced reported non-interest income. The company also recorded $1.3 million of ESB merger-related expenses in 2014. No goodwill impairment was recorded.

Important facts for investors to verify

  • Whether ESB integration, expected merger costs and anticipated synergies track management’s stated timing and expectations.
  • Post-acquisition capital ratios, share dilution, purchase-accounting adjustments and asset quality once ESB is included.
  • Whether deposit growth can support loan growth without sustained reliance on borrowings, and how rate changes affect net interest margin.
  • Credit performance in commercial real estate, shale-exposed markets and the two newly non-accrual CRE loans; also assess allowance adequacy as it declined to 1.09% of loans.
  • Whether municipal-security valuations, pension funding needs and the proposed merger-litigation settlement create material additional costs or risks.