WesBanco, Inc. — FY 2015 Form 10-K
Business context and reporting period. This filing reports the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. WesBanco is a regional bank holding company serving West Virginia, Ohio and western Pennsylvania, with community banking and trust and investment services segments. On February 10, 2015, it completed its acquisition of ESB Financial Corporation, expanding its Pittsburgh-area presence. Year-end network: 141 banking offices and approximately $3.6 billion of trust assets under management or custody, which are not included on the balance sheet.
Financial and operating performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net interest income | $237.0 million | $193.2 million |
| Non-interest income | $74.5 million | $68.5 million |
| Provision for credit losses | $8.4 million | $6.4 million |
| Non-interest expense | $193.9 million | $161.6 million |
| Net income | $80.8 million | $70.0 million |
| Diluted EPS | $2.15 | $2.39 |
| Net interest margin, fully taxable-equivalent | 3.41% | 3.61% |
| Efficiency ratio | 57.05% | 59.59% |
- Management’s non-GAAP measure of net income excluding after-tax merger-related expenses was $88.0 million, up 24.2% from $70.8 million. The filing’s non-GAAP table reports adjusted diluted EPS of $2.34 versus $2.42; the MD&A narrative gives the 2014 comparison as $2.41, so investors should reconcile the discrepancy.
- Fourth-quarter net income was $23.0 million and diluted EPS was $0.60, versus $16.5 million and $0.56 in Q4 2014.
- Net cash provided by operating activities was $88.6 million; investing activities used $210.6 million and financing activities provided $114.6 million. Cash and cash equivalents declined $7.3 million to $86.7 million. Investing cash use included loan growth and securities activity.
- At year-end, total assets were $8.47 billion, net portfolio loans $5.02 billion, deposits $6.07 billion and shareholders’ equity $1.12 billion. Total borrowings were $1.23 billion, including $1.04 billion of FHLB borrowings and $106.2 million of junior subordinated debt.
- Consolidated regulatory capital ratios were 11.66% CET1, 13.35% Tier 1 risk-based, 14.11% total risk-based and 9.38% Tier 1 leverage. The Bank also met “well-capitalized” standards.
- Liquidity measures included deposits funding 71.6% of assets, estimated FHLB borrowing capacity of approximately $1.1 billion, and $1.84 billion of identified sources of liquidity expected within one year. These sources include projected loan repayments and maturities, not solely cash on hand.
Material changes versus the prior comparable period
- ESB contributed approximately $1.9 billion of assets, $701.0 million of loans and $1.0 billion of deposits at acquisition. WesBanco issued approximately 9.18 million common shares and paid cash consideration; the acquisition materially increased average shares outstanding.
- Total assets rose 34.5%, portfolio loans 24.0%, deposits 20.1% and equity 42.4%, primarily reflecting ESB. Excluding ESB, portfolio loans grew 6.8% organically.
- Net income increased 15.4%, but reported diluted EPS fell 10.0% to $2.15, reflecting the larger share count. Net interest income rose 22.6% as earning assets expanded, while the margin contracted 20 basis points to 3.41% amid a shift toward lower-yielding securities and competitive loan pricing.
- Non-interest expense increased 20.0%, including $11.1 million of restructuring and merger-related costs, compared with $1.3 million in 2014. Management cited acquired staff and facilities as major drivers, while the efficiency ratio improved.
- FHLB borrowings increased $818.6 million to $1.04 billion, used in part to fund the securities portfolio and manage deposit certificate maturities and liquidity.
- Credit quality improved on several measures: non-performing assets declined to $50.8 million from $56.0 million, and non-performing assets to total assets fell to 0.60% from 0.89%. Net charge-offs rose to $11.1 million from $9.3 million, while the net charge-off rate was 0.23% versus 0.22%.
Outlook, commentary, risks and unusual items
- Outlook: No formal earnings guidance is provided. Management expected the near-term base-case net interest margin to remain near or slightly below the fourth-quarter level. It anticipated two additional 25-basis-point federal funds rate increases in 2016, while noting market turmoil could reduce the likelihood of rate increases.
- Interest-rate exposure: The company described its balance sheet as more asset-sensitive than in 2014. Its model estimated next-12-month net interest income would increase 3.6% with an immediate 100-basis-point rise and decline 2.7% with a 100-basis-point fall. These are model estimates based on assumptions, not forecasts.
- Credit and regional risks: Loans are concentrated in the company’s regional markets and in real estate; approximately 44.5% of portfolio loans were commercial real estate at year-end. Management highlighted lower oil and gas prices and reduced shale activity as potential risks to local borrowers, deposits and collateral values. Total exposure to core energy industries was approximately $73 million; lodging exposure in shale markets was also identified as sensitive.
- Other material exposures: Municipal bonds were approximately 34.8% of the securities portfolio. Gross unrealized securities losses were $17.7 million; management considered them temporary and reported no other-than-temporary impairment. The company reported no goodwill impairment in 2015, despite $168.5 million of goodwill added in the ESB acquisition.
- Other items: The ESB-related shareholder lawsuits were settled and dismissed with prejudice in 2015; defendants denied wrongdoing. Management did not believe other pending or threatened ordinary-course litigation presented a reasonably possible material loss. WesBanco repurchased a Treasury warrant for $2.2 million and increased its quarterly dividend to $0.23 per share during 2015; it announced a further increase to $0.24 in February 2016.
- Key risks disclosed: intense competition, regulatory and compliance costs, interest-rate and funding pressures, CRE and regional economic concentration, deposit outflows and FHLB availability, acquisition integration, cybersecurity and system disruption, and possible future capital needs. Management stated that internal control over financial reporting was effective; the independent auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the non-GAAP adjusted diluted EPS comparison for 2014 ($2.42 in the table versus $2.41 in the MD&A narrative).
- Separate ESB’s acquired contribution from organic growth, and assess integration progress, costs and the effect of acquisition-related share issuance on per-share returns.
- Track margin performance, deposit pricing and retention, certificate maturities, and reliance on FHLB borrowings as market rates change.
- Review CRE concentrations, shale-region exposures, non-performing and classified loans, charge-offs, and whether the allowance remains adequate as the acquired portfolio seasons.
- Assess securities valuation and unrealized losses, including the municipal portfolio, and confirm whether management’s assumption that losses are temporary remains supportable.
- Confirm capital and liquidity headroom, dividend capacity and any changes in regulatory requirements or the company’s outlook.