WESBANCO INC quarterly report, Q3 FY2015

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WesBanco, Inc. — Q3 2015 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.

Business context

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, adding approximately $2.0 billion of assets and 23 offices and expanding its western Pennsylvania network. Accordingly, year-over-year comparisons include ESB only from the acquisition date in 2015.

Financial performance and position

  • Q3 earnings: Net interest income was $60.6 million, up 24.7% from $48.6 million. Net income rose to $22.2 million from $18.2 million, while diluted EPS declined to $0.58 from $0.62.
  • Nine-month earnings: Net interest income was $176.4 million, up 22.3%; net income was $57.8 million, up from $53.5 million. Diluted EPS was $1.55 versus $1.82. Excluding $7.2 million of after-tax merger-related costs, management reported non-GAAP net income of $64.9 million and diluted EPS of $1.75, compared with $53.5 million and $1.82 in 2014.
  • Interest margin: Fully taxable-equivalent net interest margin was 3.36% in Q3 and 3.44% year to date, compared with 3.58% and 3.62% in 2014. Management attributed the decline to lower securities and loan yields and post-acquisition balance-sheet mix, partly offset by lower deposit costs.
  • Fees and expenses: Q3 non-interest income increased 9.2% to $18.2 million; nine-month income increased 4.8% to $54.4 million. Non-interest expense rose 19.7% to $47.0 million in Q3 and 22.9% to $147.0 million year to date, including $11.0 million of nine-month merger and restructuring costs. Excluding merger-related costs, the Q3 efficiency ratio improved to 57.6% from 58.5%.
  • Credit: Provision for credit losses was $1.8 million in Q3 and $5.8 million year to date. Nine-month net charge-offs were $8.6 million, or 0.24% of average portfolio loans, versus $6.9 million at the same rate in 2014. Non-performing loans were 1.08% of loans, down from 1.25% at year-end 2014; non-performing assets were 0.70% of assets, versus 0.89%. The allowance for loan losses was $41.6 million, or 0.84% of loans; management cited an approximately 0.98% ratio excluding acquired loans recorded at fair value.
  • Balance sheet and funding: Total assets were $8.45 billion, up 34.2% from year-end 2014. Portfolio loans were $4.95 billion, up 21.1%, including $701 million acquired with ESB; management reported 5.3% annualized organic loan growth from year-end. Deposits were $6.19 billion, up 22.7%, primarily reflecting ESB. Total borrowings rose to $1.08 billion from $410.0 million, principally due to a $670.0 million increase in FHLB borrowings.
  • Cash flow and liquidity: For the first nine months, operating cash flow was $58.6 million, compared with $70.2 million in 2014; investing cash outflow was $173.5 million and financing cash inflow was $113.9 million. Cash and cash equivalents ended at $93.0 million. Management cited $1.2 billion of available FHLB credit and stated it believed liquidity was sufficient. Deposits funded 73.3% of assets.
  • Capital and shareholder returns: Shareholders’ equity was $1.12 billion, up from $788.2 million, largely due to shares issued for ESB. At September 30, WesBanco’s and the Bank’s total risk-based capital ratios were 14.47% and 13.65%, respectively; both were above the regulatory well-capitalized thresholds. The quarterly dividend was $0.23 per share.

Material changes and unusual items

  • ESB contributed substantially to balance-sheet and earnings growth, but also drove the issuance of 9.18 million shares and increased the average share count. This helps explain why reported EPS fell despite higher net income.
  • Nine-month merger-related expenses were $11.0 million, including $7.8 million of executive change-in-control and severance costs. Management said ESB was fully integrated, so it could not practicably provide separate pro forma results attributable to ESB.
  • Investment securities increased 66.6% from year-end, to $2.52 billion. The portfolio’s weighted-average yield declined to 2.86% from 3.27%, and management reported that restructuring the acquired portfolio delayed replacement purchases until June.
  • Net charge-offs included $2.5 million of charge-downs on two commercial credits. Management said other credit indicators had improved overall. Nine-month securities sale proceeds were unusually high at $570.7 million, primarily from restructuring the ESB portfolio.

Outlook, risks and contingencies

  • No specific earnings or revenue forecast was provided. Management anticipated a 26%–27% effective tax rate for the remainder of 2015. It noted that margin could contract in the low-rate environment and cited economists’ and Federal Reserve commentary anticipating a possible short-term rate increase by Q1 2016; this is not a company guarantee.
  • Interest-rate exposure is material: the company’s model projected net interest income would decline 2.7% under an immediate 100-basis-point rate decrease and increase 2.1%, 2.7% and 2.3% under immediate increases of 100, 200 and 300 basis points. Model outcomes depend on assumptions and may differ from actual results.
  • Risks identified include regional and national economic conditions, interest rates and funding availability, borrower credit quality, competition, regulation, technology and cybersecurity, and securities market values. Approximately $973.4 million of certificates of deposit were scheduled to mature within one year.
  • Off-balance-sheet commitments to extend credit, including lines, approved loans and overdraft limits, were substantial; total disclosed commitments and guarantees were approximately $1.59 billion. Management said many commitments are expected to expire unused or partially used.
  • Merger-related shareholder litigation was settled and dismissed with prejudice in September 2015; defendants denied wrongdoing. Management did not believe other pending or threatened proceedings presented a reasonably possible material loss. Disclosure controls were assessed as effective at a reasonable assurance level, and no material change in internal control over financial reporting was reported.

Important facts for investors to verify

  • How much of reported growth is sustainable organic performance versus ESB acquisition effects, purchase accounting and integration costs.
  • Whether margin pressure persists as acquired securities yield less, loans reprice, and deposits and wholesale funding costs change.
  • Credit trends behind the increase in past-due loans and charge-offs, including commercial exposures, acquired loans, and the adequacy of the allowance.
  • FHLB borrowing levels, upcoming CD maturities, liquidity capacity and the funding impact of outstanding commitments.
  • The basis and reconciliation of management’s non-GAAP adjusted earnings, and the effect of acquisition-related share issuance on per-share results.