KBRA Affirms Ratings for Wesbanco, Inc.; Places Ratings for Premier Financial Corp. on Watch Upgrade Following Acquisition Announcement

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, the preferred shares rating of BBB-, and the short-term debt rating of K2 for Wheeling, West Virginia-based Wesbanco, Inc. (NASDAQ: WSBC) ("Wesbanco") following the recently proposed merger announcement with Premier Financial Corp. (NASDAQ: PFC) ("Premier Financial"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for the bank subsidiary, WesBanco Bank, Inc. The Outlook for all long-term ratings is Stable. KBRA also places on Watch Upgrade the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Defiance, Ohio-based Premier Financial Corp. In addition, KBRA places on Watch Upgrade the deposit and senior unsecured debt ratings of BBB+ and the subordinated debt rating of BBB and affirms the short-term deposit and debt ratings of K2 for the bank subsidiary, Premier Bank.

Key Credit Considerations

On July 26, 2024, Wesbanco, Inc. and Premier Financial Corp. announced that they have entered into a definitive agreement under which Wesbanco will acquire Premier Financial. With respect to deal terms, the all-stock transaction is valued at just under $1 billion, or 1.42x P/TBV (a 8% premium to PFC’s stock price at merger announcement) with an anticipated close in 1Q25. In conjunction with the merger, WSBC is completing a capital raise of $200 million at $27.50 per share (representing 8% of the combined company's shares outstanding) with a group of investors with an expected close on August 1, 2024. Pro-forma ownership is estimated to be composed of roughly 62% WSBC shareholders, 30% PFC, and 8% new shareholders. The combined company’s Board will reflect a similar composition with the addition of four PFC directors and no anticipated changes to WSBC’s executive management. Wesbanco is recognizing a 1.80% ($121 million) gross loan credit mark on PFC’s loan portfolio – a conservative mark, in our view, given PFC’s 2Q24 LLR of 1.13%. Elsewhere, the deal also includes a meaningful interest rate mark of 4.9% or $325 million on PFC’s loan book.

The pending deal is expected to create a pro-forma institution with $27 billion of assets, $21 billion of deposits, and $19 billion of loans. Moreover, the combined company will operate 250+ branch locations across a nine state footprint, including the leading deposit market share in the state of Ohio among banks less than $100 billion in assets, as well as the leading deposit market share in its home state of West Virginia among locally headquartered institutions. The addition of PFC provides geographic expansion for Wesbanco into Northern Ohio, Southern Michigan, and Northeastern Indiana. Overall, the combined institution will reflect a diversified operating footprint and maintain its focus on rural and urban markets.

Transaction due diligence appears to be adequate, with merger discussions beginning between the two companies in January 2024. In totality, WSBC reviewed 52% of PFC’s commercial portfolio, including 100% of all classified loans and NPAs, and identified ~$50 million in credit marks related to PCD loans and ~$71 million related to non-PCD loans (~$121 million total credit mark).

KBRA views the proposed transaction favorably for both WSBC and PFC. From Wesbanco’s perspective, the company is acquiring a relatively scaled institution (~$9 billion of assets) with a similar business model augmenting a diversified revenue stream with $1.5 billion in wealth management AUM/AUA (pro forma trust and wealth business growing to nearly $9 billion of AUM/AUA). The combined institution’s noninterest income levels are expected to remain solid around the 20% level. Overall, the PFC credit picture looks solid given the conservative credit culture, which has facilitated sound metrics, including NCOs and past dues (30-89 days) tracking in line with similarly situated peers. Elsewhere, WSBC’s earnings power is expected to be enhanced (assuming a successful integration and the full achievement of anticipated cost saves), with the company modeling a 1.3% 2025 ROA and an efficiency ratio of ~50%.

Regarding the benefits to PFC, the company’s somewhat narrow existing geographical footprint primarily in Northern Ohio will become meaningfully more diversified with the inclusion of WSBC’s presence in eight states. However, and perhaps more importantly, PFC’s comparatively more expensive funding profile with 20% in noninterest bearing deposits vs. 29% for Wesbanco and cost of deposits of 2.47% vs 1.95% for WSBC, will become materially more cost effective when combined with WSBC's granular, low-cost deposit base. As a reminder, KBRA views Wesbanco’s deposit franchise – one that features a greater than peer amount of consumer deposits (~54% of total) and noninterest bearing balances (29%) – as one of the strongest in our rated bank universe. WSBC’s liquidity position, at least measured by the loan-to-deposit ratio, will provide continued capacity with a pro-forma metric of 91% for the combined institution compared to 89% as of 2Q24.

A less favorable characteristic of the proposed deal, in our view, includes a significant expected decline in Wesbanco’s CET1 capital ratio (forecasted pro-forma ratio of 9.6% at deal close vs. 10.6% as of 2Q24). Historically, KBRA has viewed WSBC’s capital management positively, although the company has managed core capital below the peer rating averages more recently. In this sense, the expected 100 bp decline in Wesbanco’s CET1 ratio marks a deviation from where the metric has trended historically. Additionally, while the combined entity’s loan portfolio will be more heavily comprised of CRE with pro forma CRE concentration increasing to 299% than WSBC’s legacy book has reflected historically, as mentioned, we believe Wesbanco to be a conservative credit underwriter. While KBRA believes there is an inherent level of integration risk involved with any bank M&A transaction, such risk is somewhat mitigated by Wesbanco’s demonstrated track record as a successful acquirer.

Rating Sensitivities

The Watch Upgrade status for PFC's ratings assumes that the transaction receives the required regulatory, shareholder, and other approvals to close in a timely manner, and recognizes that Premier Financial Corp. will be merging with and into a larger and more diversified institution. Conversely, if the transaction were to be terminated, PFC’s ratings would likely be maintained at current levels assuming the transaction did not present any undue burden on overall financial performance. The affirmation of WSBC’s ratings reflects our continued favorable opinion of the company’s earnings performance and credit quality. KBRA expects Wesbanco to successfully close and integrate its proposed acquisition of PFC, and subsequent to closing, anticipates a continuation of core capital build through strong earnings as historically reflected by the company. Should the transaction be terminated, or if WSBC does build capital metrics higher post-close, the ratings may be revisited. Material degradation in the company’s earnings performance or credit quality would also be viewed negatively.

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