WesBanco, Inc. (WSBC) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the WesBanco Incorporated Fiscal 2015’s Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Iannone, Vice President, Investor Relations. Please go ahead sir.

Thanks Rocco. Good morning, and welcome to the WesBanco Inc's fourth quarter 2015 earnings conference call. Our fourth quarter 2015 earnings release which contains reconciliations of non-GAAP financial measures was issued yesterday afternoon and is available on our Web site, www.wesbanco.com. Leading the call today are Todd Clossin, President and Chief Executive Officer and Bob Young, Executive Vice President and Chief Financial Officer. Following our opening remarks, we will begin the question-and-answer session. An archive of this call will be available on our Web site for one year. Forward-looking statements in this report relating to WesBanco's plans, strategies, objectives, expectations, intentions and adequacy of resources are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The information contained in this report should be read in conjunction with WesBanco's Form 10-K for the year ended December 31, 2014 as well as documents subsequently filed by WesBanco with Securities and Exchange Commission including WesBanco's Form 10-Qs for the quarters ended March 31st, June 30th and September 30, 2015, which are available on the SEC and WesBanco Web sites. Investors are cautioned that forward-looking statements, which are not historical facts involve risks and uncertainties, including those detailed in WesBanco's most recent Annual Report on Form 10-K filed with the SEC under Risk Factors in Part I, Item 1A. Such statements are subject to important factors that could cause the actual results to differ materially from those contemplated by such statements. WesBanco does not assume any duty to update forward-looking statements. Todd?

Good morning everyone. I would start off by welcoming John, first conference call, Head of Investor Relations, glad to have John onboard. Welcome to WesBanco's 2015 fourth quarter earnings call. As many of you know, WesBanco is a diversified and well-balanced financial services company, built upon a strong legacy of credit and risk management. We have meaningful market share across our geographies, maintained by exceptional customer service, solid and growing fee-based businesses, led by our proprietary mutual fund family, the WesMark Funds fronts and our century old trust business. On today's call, we'll cover several operational topics and review our financial results for the fourth quarter. Before we begin, there are several important takeaways this morning. We continue to generate strong loan growth including organic growth across our markets. While we continue to see significant consumer deposit inflows in our legacy markets from land owner leasing rights to the shale gas industry, we have limited direct and indirect credit exposure to the industry. We are seeing excellent execution against our growth strategies, as we continue to manage our Bank for the long-term success of our key shareholders. And we continue to focus upon driving positive operating leverage, as indicated by our strong and improving efficiency ratio. We're pleased about our results for the quarter and the year, as well as several milestones achieved during the year. For the fourth quarter of 2015, excluding merger-related expenses, we earned net income of $23 million and fully diluted earnings per share of $0.60. Full year 2015 earnings increased 15% from last year to $81 million, supported by total loan growth of $979 million, including 7% organic loan growth when excluding the impact of the ESB merger. We continue to maintain tight discretionary expense control over our investment spend, as we prepare for crossing the $10 billion asset threshold at some point over the next several years. Its fundamental focus on expense management has allowed us to continue to improve our fourth quarter efficiency ratio to 56.3%. 2015 was a productive year. We completed our merger with ESB Financial Corporation in less than four months from deal announcement. We subsequently grew to 8.5 billion in assets, supported by approximately 300 million of organic loan growth and achieved top-10 market share in the Pittsburg, Pennsylvania MSA. We continue to grow our presence within and our commitment to our Ohio markets with the expansion and reallocation of our Central Ohio headquarters to downtown Columbus. We made tactical and significant planned hires in our key markets that have enhanced our commercial and industrial lending strategy. We are focused on returning value to our shareholders as demonstrated by the fourth quarter authorization of the new stock repurchase plan and a 4.5% dividend increase announced earlier in 2005. Since 2010, we've increased our dividend by 64%. And we continue to receive national accolades for our performance. A top-100 ranking in Bank Director magazine's 2015 Bank Performance Scorecard, a five-star rating from BauerFinancial and again named the Forbes magazine's 2016 List of America's Best Banks to name a few. The key to our lending strategy is diversification with a meaningful focus on commercial and industrial segment, while maintaining our strong credit standards. As I've mentioned on previous calls, we have invested in our commercial lending capabilities by making planned hires in our various markets. We are realizing tangible benefits associated with these investments, as we've experienced increased production per dollar of salary expense over the past few years. At December 31, 2015, our total loan portfolio grew year-over-year to $5.1 billion, underpinned by organic growth of 7%. This growth was achieved through a $1.8 billion of loan originations, an increase of nearly 30% over the prior year. Our pipelines going into 2016 remain robust and we anticipate another solid year of loan growth tempered by quarterly fluctuations of our construction loan portfolio. In addition, we continue to improve the asset quality as our non-performing assets to total loans ratio of 1.04 declined 4 basis points from September 30, 2015 and 21 basis points from December 31, 2014. Recently we met with a regional economic development organization to close these bottles of natural gas industry in our area. During 2016, we expect to see continued pipeline infrastructure construction to improve transportation of natural gas to export markets in anticipation of an eventual rebound in prices. While reduced prices have led to a slowdown in new well-drilling, investments continue to be made in the region by large energy companies. During December, we experienced a near doubling of our monthly natural gas-related consumer deposit inflows, as a large nationally known energy company bought a mineral rights leases from another company who have not yet commenced drilling on the properties, as many lease rights expire after five years if drilling is not occurred. The stronger energy players are seeing the equipment leases as a long-term investment opportunity. As of December 31, 2015 approximately 1% of our total loan portfolio was directly related to the oil, gas and coal industry. And an additional approximate 2% of our total loan portfolio was indirectly related to the ancillary businesses supporting the industry. In addition, a 2015 fourth quarter review of loans to oil, gas and coal industry was performed and did not identify any material portfolio weakness on an aggregate basis. We will continue to monitor this portfolio for potential signs of weakness going forward. In general, our efforts with shale are centered on deposit and wealth management growth as opposed to loan growth. Lastly, as I mentioned earlier, we're a diversified and well-balanced regional financial services company built upon a strong legacy of credit and risk management, which efficiently utilizes its capital for strategic growth that benefits both our customers and our shareholders. Our long-term growth is focused on five key strategies, the first of which, growing our loan portfolio with an increased focus on the commercial industrial lending, while maintaining our strong credit culture; secondarily, increasing fee income overtime through enhancing our established strengths in wealth management, insurance, private banking and other fee-based businesses. Number three, traditional retail banking services focused on customer convenience, technology delivery channels, increased cross-selling across multiple markets and increasing demand deposits. Number four, strong culture of expense management with an emphasis on the technology that streamlines in approved processes, help deliver positive operating leverage while making investments for the future. And number five, franchise expansion, be it targeted acquisitions in contagious markets within our reasonable geographic hub of our headquarters. I look forward to providing updates on our growth strategies to you on our future earnings calls. I would now like to turn the call over to Bob Young, our Chief Financial Officer for an update on our fourth quarter's financial results. Bob?

Thanks, Todd and good morning. For the 12 months ended December 31, 2015 we reported net income of 80.8 million and earnings per diluted share of $2.15, reflecting the impact of merger-related expenses. Excluding these expenses from both periods as detailed in our earnings release, net income would have increased 24.2% to 88 million with earnings per diluted share of $2.34 as compared to 2.41 for 2014 calculated on the same basis. For the year 2015, return on average assets was 99 basis points and return on average tangible equity was 13.41%, both reflecting the impact of the ESB Financial acquisition we closed earlier in the year. Excluding merger-related expenses, these ratios were 1.08% for return on average assets and 14.58% for return on average tangible equity. For the three months ended December 31st, we reported net income of 23 million and earnings per diluted share of $0.60, increases of 39.3% from 16.5 million and 7.1% from $0.36 respectively in the year earlier period. Excluding merger-related expenses from both periods as detailed in our earnings release, net income would have increased 32.7% to 23 million, while earnings per diluted share would have increased 1.7% to $0.60. For the fourth quarter, return on average assets improved slightly both sequentially and year-over-year to 1.07% and return on average tangible equity was 14.68%, up slightly from the third quarter and up 91 basis points in the year ago period. Our remaining earnings related comments will focus primarily on the fourth quarter’s results. As a reminder, our earnings release published last night contains our consolidated financial highlights and reconciliations of non-GAAP financial measures. Net interest income grew 11.6 million or 23.7% to 60.6 million in the fourth quarter, when compared to the prior year quarter as average earning assets increased 34.6%. For all of 2015, we achieved 278 million in organic loan growth or 6.8%, while for the fourth quarter, it was 115 million or 9.3% annualized from September 30th. The year-over-year organic loan growth was realized across all loan categories with home equity loans representing 22% of the overall organic growth and commercial and industrial loans, which are benefited from our recent expansion and new hires representing 15% of this growth. We also experienced a continuing shift in deposits from higher rate certificates of deposits to lower cost demand deposits. As Todd mentioned, our growth in demand deposits continues to benefit from monthly inflows, driven by shale gas royalties and lease payments and we believe this provides significant opportunity for our financial centers to cross-sell our wealth management services. In addition, deposits increased 1 billion to 6.1 billion at December 31, 2015, due to the ESB acquisition. Encouragingly, when excluding the impact of the acquisition, non-interest bearing deposits rose 11.5% year-over-year, while organic deposits excluding CDs increased 4.5%, reflecting the benefits of marketing campaigns, customer incentives and preferences and shale oil and gas related deposits. Our certificate of deposit levels continue to decline as a result of our retail sales strategy of cultivating and growing multiple relationship customers and reducing single service CD customers, as well as customer preferences for other deposit products or investment products sold by our securities brokerage unit. For the fourth quarter of 2015, the net interest margin was 3.32%, down 28 basis points year-over-year, primarily reflecting a higher percentage of investment to total earning assets and the associated lower yields on the retained securities portfolio from the ESB acquisition, as well as the impact of a low interest rate environment on the re-pricing of existing loans and competitive pricing pressures on new loans. For the full year of 2015, our net interest margin decreased 20 basis points year-over-year to 3.41% due to the same factors. We did decrease the securities portfolio by 95 million during the fourth quarter, through sales and maturities, in accordance with our previously announced longer-term strategy of decreasing the percentage of investments to total assets and deploy those proceeds into loans. For the fourth quarter, non-interest income increased 20.9% from the prior year to 20 million. This $3.5 million increase was driven by e-banking and deposit fees, trust and brokerage fees and other income. Fee-based income growth is benefiting from increased retail and business transactions, evaluation of our fee schedules and from our retail banking strategy that is transitioning our approach now from transaction-based, from sales-based activity by actively encouraging cross-selling. Also benefiting the quarter were higher net securities gains from our stated plan to reduce the securities portfolio inherited from ESB. And higher bank-owned life insurance income from a death benefit recorded during the quarter. As Todd mentioned, the expense management is one of the key to our growth and success. Through this company-wide focus on costs, we continue to generate positive operating leverage and greater efficiencies as evidenced by improvement in our efficiency ratio, decreasing by 403 basis points from the fourth quarter of last year to 56.3%. Non-interest expenses for the fourth quarter increased 11.7% year-over-year to 46.9 million or an increase of 15.2%, when excluding restructuring and merger-related expenses. The year-over-year increase in total expense was primarily driven by higher staffing levels associated with the ESB merger and the additional brands acquired. To-date, we are on-track for achieving our anticipated savings of the acquired cost base. In fact these savings are mostly reflected in our fourth quarter 2015 expense run rate. Relative to future expenses, it is important to remember that as we approach the $10 billion asset threshold with its associated increase in regulatory requirements, we will be ramping up our investment in the Company's infrastructure and compliance capabilities. However, many of these expenses such as an increase in BSA and AML staffing and capital stress testing capabilities have already been incurred over the past two years. However, we will continue to monitor and control discretionary expenses to help offset this critical investment. I would now like to turn to our asset quality and regulatory capital ratio metrics. Our overall asset quality trends continue to improve, since the closing of the ESB acquisition which occurred during the first quarter. For the three months ended December 31, our net charge-offs to average loans remained at a low 20 basis points or 2.5 million, similar to the prior year period and the provision for credit losses was 2.6 million. While non-performing loans and non-performing assets were up slightly in absolute dollars from the prior year ended period, because of the ESB acquisition. They continued to decline as a percentage of our portfolios when compared to both the prior year and sequential quarters, with NPLs to total loans of 1.04% and NPAs to total assets of 69 basis points. Lastly, both past due loans and criticized and classified loan ratios improved as percentages of the total loan portfolio. Reflecting our strong regulatory framework and diligent management of capital, we continue to report strong equity ratios. At quarter-end, our Tier I leverage capital ratio was 9.38%. Tier I risk-based capital was 13.39% and total risk-based capital was 14.15%. All of which are well above the well-capitalized standards required by bank regulators and BASEL III. Our common equity Tier I capital ratio continue to remain strong at 11.7%, significantly above the 2019 fully phased in requirement of 7%. And our tangible equity to tangible assets ratio improved to 7.95%, as compared to the third quarter of 2015 of 7.87% and the 2014 fourth quarter pre-acquisition ratio of 7.88%. Before opening the call for your questions, I would like to provide a few thoughts on 2016. We are anticipating a lower for longer interest rate environment. And at some point during this year a couple of additional 25 basis point interest rate increases by the Fed, as well as the flatter overall interest rate curve which will continue to impact our net interest margin. We anticipate mid single-digit overall loan growth and we continue to fund such growth with normal securities portfolio run off. We anticipate expenses during the first couple of quarters of 2016 should be relatively consistent with the expense run rate in the fourth quarter. Lastly, our business plan strategies have been communicated and incorporated into our business unit details and ’16 plans. And we look forward to implementing these products, technology and process improvements to support and enhance our growth efforts. With that we're now ready to answer your questions. Rocco, would you please review the instructions?

Yes, sir. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Bob Ramsey of FBR. Please go ahead.

I guess the first question I have for you -- I know you just said you expect mid single-digit loan growth, funded impart by securities runoff, just wondering sort of how close those two are going to be and how we should think about the growth in earning assets over the course of the year?

Yes, well if you look at our -- what we just mentioned was mid single-digit loan growth is kind of the anticipation of that. We do have a fair amount of securities that mature on an annual basis. So, we'd have more than we need quite frankly to fund the loan growth. So, with those maturities portfolio some would be reinvested, but the majority of that would be expected to go into loan growth.

Okay. So, then it doesn’t sound then like earning assets will be more or less flat as really the story about mix shifts into loans?

Yes, I think when you're looking at that, we'll have to see how the year progresses, a lot of it is going to depend upon the amount of loan growth and what happens from an economic standpoint, the productivity of our lenders that we brought onboard and everything else, but the thought was that overtime our balance sheet growth would be moderated by a reduction in securities portfolios, right now, it’s about 32%-33% of our balance sheet and historically we have had that down into the mid-20s. So I’d like to get it back down there, but it’s hard to put a timeline associated with that. We’re looking closer return on assets and the actual balance sheet growth is kind of our focus.

And then the balance sheet is not growing, but you are shifting that mix. That should be an additional in net interest margin I think have used higher yielding assets. Just wondering if you could talk a little bit about the net interest margin outlook in 2016 and I appreciate the interest rate scenario sort of share with us what we could expect then. But what happens to the extent there is nothing further in terms of rate changes and so how has that changed the outlook?

The current outlook would have a few basis points of increase primarily in the second half of the year as your loan growth kicks-in, spring selling season into summer those are the higher quarters we typically experience. So the couple of 25 basis point rate increase is, it’s a top off as the windows would occur some analysts say March, others say June, would factor into that equation Bob, but not significantly. You have purchase accounting influencing the numbers in 2016 just as they did in’15. We think that purchase accounting will have about 4 to 5 basis point impact on 2016 where it had about 10 basis point impact in 2015. So you have that factor as well that limits to some degree, the ability to see margin enhancement or visibility from the mix shift on the asset side from investments to loans. So we would suggest that it’s a minimal amount of overall margin growth, with or without the two increases.

Okay, got it. And so then with earning assets relatively flat and a modest amount of margin expansion, it’s probably fair to assume net interest income is flat to very slightly up from 4Q levels?

In terms of the first couple of quarters, you have day count issues so you have 91 days in both the first and second quarter of 2015 versus 92 in the third and fourth quarter, I’m not telling you anything you can’t see on the calendar for yourself.

I appreciate the leap year reminder.

I think it’s fair to say that for the first couple of quarters, the fourth quarter is a good projection as to net interest income. And then again in the back half of the year, there is expectation for net interest income growth from both the Fed funds rate increases assuming a normal yield curve environment and as well the loan growth that Todd and I talked about.

The other thing I would mention is our plan is to shift from the securities portfolio overtime to the lending portfolio we saw that happen in the fourth quarter, loans tend to carry out a better yield associated with them in the securities portfolio and we think that is going to be a positive for us for a number of years to come yet. As we shrink that securities portfolio down 10 year Treasury's right at 2 on the button right now. And we think we could do better that on the lending side. So I think you’ll see the benefits of that, we continue to execute on the loan growth that we’ve been able to achieve.

[Operator Instructions] Our next question comes from Catherine Mealor of KBW. Please go ahead.

Thank you for the additional caller on the energy treasury that was really helpful. And so now you got about 1% of the book in direct, 2% in indirect a very small. But how do you think we should think about potential impact of just a local real estate market and the impact that this might circle this market as commodity prices remain low for a longer period of time. Are there any submarkets within the Marcellus shale region that you’re monitoring more closely and have you seen any signs of weakness in any of these markets yet or is it still too early to tell?

Yes, it’s a great question. I’ll tell you that the oil and natural gas in particular, it only ramp it up for a couple of years before the slowdown prices occurred. You never saw the ramp-up in real estate prices. Now rental property prices went up, I lived through that as I was relocating here, couldn’t find a place to rent and rent is double, but housing prices did not go up, because it was always viewed that the inflow of workers from Texas to other places were temporary and eventually they’ll be going back, so they weren’t buying houses. So you didn’t see a lift in the real estate values that you thought maybe in some other markets that you might have seen worth maybe a little more long-term increase in employment. So as a result of that with some of the slowdown as a result of prices coming down in natural gas, you have not seen a corresponding drop in values as well and as we talk to talent recruit talent in here it is interesting that you see the dynamics between our economy and others around the country and we have not seen the fall off that would have been expected as a result of some of the prices coming down. So, and the other thing I would mention to you too, while a big chunk of our deposit footprint is in the Marcellus/Utica shale area, if you look at our loan portfolio, it's split, a third West Virginia, a third Pennsylvania, a third Columbus Cincinnati and the Dayton area. So it's a very diversified commercial loan -- very diversified commercial loan portfolio, very diversified residential loan portfolio. So, the consumer book on a geographic basis is very decentralized, it's not all focused right here where a good chunk obviously of the deposit related to the Marcellus and Utica shale is occurring in these markets. So, I just kind of wanted to mention that difference.

And then on -- and one thing on the expenses, Bob you mentioned that we should be some level of expense increase from some of the investments you're making as you are near the 10 million in asset market. Is there any way to frame or size how much additional cost you expect to come over the next couple of years from that?

We have internally looked at the number of risk management individuals, the number of BSA/AML for staff members, compliance members, other departments that would be directly impacted and then some of the ones that would be less so, my own finance team, our profitability team. And I had said earlier that we had acquired several of those competencies and have been already in the run rate herein at least for a portion of 2015. For instance, we had doubled our BSA/AML staff from six to approximately 12 or 13. There will be additional investments. I don't think those investments are a significant portion of the increased investments over the next two to three years. Recall that the biggest impact is going over 10 billion is the Durbin impact and to a lesser degree by change in the FDIC insurance model for banks that are over $10 billion in size. The amount of dollars associated with staff increases themselves, I think you're really looking at less than a $1 million per year.

Yes we budgeted this out Catherine for this year and next year and without getting too terribly specific, what you're talking about a dozen people between this year and next year, six this year, six next year, that would be into what we call staff risk management those type of areas that we need to build and quite frankly we’ve added that number in the last three-four years as the bank's grown. So, I don't think you're going to see anything materially different in that side. And when it comes to software and program expense, things like that that we've been building in over the last couple of years. Going forward we don't see anything terribly significant and we're also I think attacking is probably the right word, attacking expenses on the other side. So, we want to make sure, just as when we added the commercial lenders over the last year, we were taking out expenses at the same time, and I would be expecting to continue to do the same thing because the positive operating leverage and the efficiency ratio is really what's driving the decision, and that also drive the timing, quite frankly of some of the investment spend to get ready to go for 10 billion, if you don't see the margin improve, you don’t see the rate increases go up things like that, then obviously that's going to impact what we're spending on the expense side. So, all those things will work together, but we don't anticipate or plan any big quarterly jumps in expenses over the next couple of years, it'll be a more gradual increase and if we execute the way we want to and we should and the way we've been executing, the revenue growth should offset that to keep the efficiency ratio very strong. And we watch that every month, we're very attentive to that ratio.

Okay, that is very helpful…

Relative to overall expense guidance, I had said in my commentary Catherine that the first couple of quarters would show similar paces of what we experienced in the fourth quarter of 2015. We typically have midyear increases on the salary side and growth strategy relative to marketing expense. So, a little bit more than that then in the back half of the year, the third and fourth quarter.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Todd Clossin, Chief Executive Officer for any closing remarks.

All right, well thank you for joining us today. I know there're a lot of conference calls going on and there's a lot of M&A news announced in the last couple of days keeping everybody busy. But thank you for being on our call this morning. We're pleased with our performance for 2015. We’re excited about continuing to execute upon our growth strategies and we hope to see you at one of our investor events. So, have a good day. Thank you.

Thank you. This concludes today's conference. We thank you all for attending today's presentation. You may now disconnect your lines.