WesBanco, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. Amounts below are in millions unless noted.
Business context and reporting period
WesBanco is a multi-state bank holding company operating in West Virginia, Ohio and western Pennsylvania. On February 10, 2015, it completed its acquisition of ESB Financial Corporation, expanding its Pittsburgh-region presence from 16 to 38 offices. ESB results are included from the acquisition date, so year-over-year and quarter-end comparisons reflect different company sizes.
Financial performance and condition
- Earnings: Net income was $13.9 million, or $0.40 per diluted share, versus $16.4 million, or $0.56, in Q1 2014. Excluding $6.3 million of after-tax merger-related expense, management reported non-GAAP net income of $20.2 million and diluted EPS of $0.59; these are non-GAAP measures, not reported results.
- Revenue and margin: Net interest income rose 16.1% to $55.0 million; non-interest income increased 6.7% to $18.2 million. Fully taxable-equivalent net interest margin was 3.59%, down from 3.63% a year earlier; the GAAP-basis margin was 3.47% versus 3.50%.
- Expenses and credit: Non-interest expense increased 33.3% to $53.4 million, including $9.7 million of restructuring and merger-related costs. Provision for credit losses fell to $1.3 million from $2.2 million. Net charge-offs were $1.7 million, or 0.16% of average portfolio loans, versus $4.1 million, or 0.43%.
- Balance sheet: Total assets were $8.23 billion, up 30.8% from year-end; portfolio loans were $4.87 billion, up 19.2%; deposits were $6.42 billion, up 27.1%; and shareholders’ equity was $1.09 billion, up 38.5%. These increases were primarily acquisition-related.
- Credit quality: Non-performing loans were $58.7 million (1.20% of total loans), compared with $50.9 million (1.25%) at year-end. Non-performing assets were $64.9 million (0.79% of assets), versus $56.0 million (0.89%). The allowance for loan losses was $44.2 million, or 0.91% of loans, excluding acquired-loan fair-value marks.
- Cash flow and liquidity: Operating cash flow was $36.1 million; investing activities provided $41.4 million and financing activities used $78.5 million. Cash and cash equivalents ended at $93.0 million, down $1.0 million during the quarter. Management cited $1.68 billion of expected one-year liquidity sources and approximately $1.7 billion of available FHLB credit.
- Borrowings and capital: Total borrowings were $651.4 million, up from $410.0 million at year-end; FHLB borrowings were $432.5 million. WesBanco’s total risk-based capital ratio was 14.92% and the Bank’s was 13.63%; both were above the stated well-capitalized thresholds. The quarterly dividend increased to $0.23 per share.
Material changes versus comparable periods
- Reported net income declined despite higher net interest income, chiefly because of ESB-related merger costs and additional acquired operations. Management said net income excluding after-tax merger costs increased 23.1% year over year.
- Net interest income benefited from higher average earning assets, including ESB, and organic loan growth, while the margin edged lower amid asset and funding mix changes and a low-rate environment.
- Loan growth included $699.0 million from ESB; legacy loans grew $88.2 million from year-end. Deposits increased $1.37 billion, including approximately $1.2 billion from ESB.
- Share count increased following issuance of 9.18 million shares for the acquisition, affecting per-share comparisons.
Outlook, commentary, risks and unusual items
- Management expected some further margin pressure until interest rates rise, citing the acquisition, low rates and competitive loan pricing. Its interest-rate model projected net interest income up 1.8%, 1.9% and 0.9% under immediate +100, +200 and +300 basis-point shocks, respectively, and down 2.4% under a -100 basis-point shock. These are model estimates, not earnings guidance.
- Management anticipated an effective tax rate of 26.5%–27.5% for the remainder of 2015. Q1’s 24.6% rate included a $0.5 million benefit from closing IRS audits for 2011 and 2012.
- Management expected additional ESB integration savings over 12–18 months; systems and branch conversions occurred April 24. It estimated 2015 acquired-loan accretion of approximately $1.9 million and acquired interest-bearing-liability accretion of approximately $2.9 million.
- ESB purchase accounting remained provisional, including valuation of certain assets, intangibles and deferred taxes. The acquisition generated $168.9 million of goodwill, which is not tax deductible.
- Risks discussed include successful and timely integration of ESB, realization of cost savings and revenue synergies, interest-rate and liquidity changes, credit losses, economic conditions, competition, regulation, technology and cybersecurity risks.
- Two shareholder lawsuits challenging the ESB merger were subject to a proposed settlement; court approval and final settlement documentation were not assured. Management stated it did not believe a material loss from these or other pending or threatened claims was reasonably possible.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether ESB integration, conversion execution and projected cost savings materialize on schedule, and how recurring expenses trend after merger charges.
- How the acquired loan and deposit portfolios perform, including provisional fair-value marks, accretion assumptions and changes in non-performing loans.
- Whether margin trends, deposit pricing and the approximately $1.2 billion of certificates of deposit maturing within one year affect earnings or funding needs.
- Whether the proposed merger-litigation settlement receives court approval and whether any fees or expenses arise.
- How reported results compare with the company’s non-GAAP merger-cost-adjusted figures; the filing provides no formal full-year earnings or revenue guidance.