This post has been excerpted from a letter by Chip Rewey, Lead Portfolio Manager of the Third Avenue Small-Cap Value Fund.
WesBanco is a mid-sized, community bank with just under $10 billion in assets headquartered in Wheeling, West Virginia. Over the last twenty years, the company made some 25 acquisitions to enter the neighboring states of Ohio and western Pennsylvania. Started in 2014, the bank hired CEO Todd Clossin, who was the CEO of Midwest and Florida regions for Fifth Third Bank, to accelerate the growth. Within a year on board, Clossin made the two largest acquisitions in the company history: ESB Financial in Pittsburgh in February 2014 (a thrift with $1.9 billion in assets; paid $324MM in cash and stock) and Your Community Bankshares (YCB) in southern Indiana and Kentucky in September 2016 ($1.5 billion in assets; paid $221 MM in cash and stock). These two additions effectively lifted WSBC’s asset base by 60%, from $6.0 billion to $9.5 billion today.
WSBC met the credit culture requirement that we look for in banks. The company is a very conservative lender with strong underwriting standards and a diversified book of business. As of 1Q2017, non-performance assets account for only 0.56% of total assets and net charge-off was only 0.15% of average loans. Since its operations are in rural or small cities where there is little industrial activity, WSBC lends mostly to commercial real estate (45.8% of loans) and residential real estate mortgage (30.2% of loans). Even having large exposures to real estate lending, the average loan is small, with low loan-to-value ratio, and most are owner-occupied. Furthermore, the loans are placed in several states and in several industries.
We see several positive trends developing at WSBC. The integration of the ESB and YCB acquisitions are complete, and the benefits from cross-selling and cost savings should begin to show up in 2017 and 2018, and WesBanco is positioned to benefit from Federal Reserve rate hikes.
Further, the company made several hires to push growth in the Consumer and Industrial loan (C&I) space over the last few quarters, which should bring a more diversified loan mix versus its Real Estate lending base. These new loan officers have been a drag on expenses but should begin to contribute this year. C&I loans currently are about 17.5% of total loans, but grew 11% in 1Q2017. We think that because of the large real estate portfolio, investors could be evaluating WSBC as a thrift rather than a commercial bank, giving it a valuation discount. Higher C&I exposure would likely help diversify the portfolio and might change investors’ perception of the company. At our initial purchase cost of under $40, we see over 25% upside to our estimate of NAV.
This publication does not constitute an offer or solicitation of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this publication has been obtained from sources we believe to be reliable, but cannot be guaranteed.
The information in this portfolio manager letter represents the opinions of the portfolio manager(s) and is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed are those of the portfolio manager(s) and may differ from those of other portfolio managers or of the firm as a whole. Also, please note that any discussion of the Fund’s holdings, the Fund’s performance, and the portfolio manager(s) views are as of June 30, 2017 (except as otherwise stated), and are subject to change without notice. Certain information contained in this letter constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof (such as “may not,” “should not,” “are not expected to,” etc.) or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of any fund may differ materially from those reflected or contemplated in any such forward-looking statement. Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders.
Date of first use of portfolio manager commentary: July 17, 2017.
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Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders.