WesBanco, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are primarily with fiscal 2016. Dollar amounts are U.S. dollars.
Business context
WesBanco is a regional bank holding company offering community banking and trust and investment services, with operations in West Virginia, Ohio, western Pennsylvania, Kentucky and southern Indiana. At year-end it operated 172 branches and reported $9.8 billion in assets; trust assets under management or administration were approximately $3.9 billion and are not included in consolidated assets.
On November 13, 2017, WesBanco agreed to acquire First Sentry Bancshares for approximately $101.4 million. The deal was expected to close in early April 2018, subject to approvals, which the filing says were obtained in February 2018.
Financial performance and position
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Net interest income | $290.3 million | $253.3 million | Up 14.6% |
| Net interest margin, fully taxable-equivalent | 3.44% | 3.32% | Up 12 basis points |
| Non-interest income | $88.8 million | $81.5 million | Up 9.0% |
| Non-interest expense | $220.9 million | $208.7 million | Up 5.8%; excluding merger costs, up 12.5% |
| Net income | $94.5 million | $86.6 million | Up 9.1% |
| Diluted EPS | $2.14 | $2.16 | Down slightly; adjusted for specified items, $2.45 vs. $2.37 |
| Total assets | $9.82 billion | $9.79 billion | Up 0.3% |
| Portfolio loans | $6.34 billion | $6.25 billion | Up 1.5% |
| Deposits | $7.04 billion | $7.04 billion | Essentially unchanged |
| Total borrowings | $1.30 billion | $1.33 billion | Down 2.6% |
| Operating cash flow | $141.6 million | $123.1 million | Investing cash use was $77.4 million; financing cash use was $74.8 million |
- Growth in net interest income reflected higher average earning assets, including the full-year contribution from the 2016 YCB acquisition, organic loan growth and higher rates. Deposit and borrowing costs also rose.
- Fee income gains included electronic banking fees (+23.0%), deposit service charges (+12.0%) and mortgage banking income (+99.8%). Mortgage income benefited from greater secondary-market sales and higher sale margins.
- The efficiency ratio improved to 56.44% from 56.69%. Return on average assets was 0.96% versus 0.97%; return on average equity was 6.83% versus 7.13%.
- Year-end capital ratios were strong: CET1 12.14%, Tier 1 risk-based 14.12%, total risk-based 15.16% and leverage 10.39%. The Bank also met the regulatory “well-capitalized” standards.
- Cash and cash equivalents were $117.6 million. Management reported approximately $1.8 billion of remaining FHLB borrowing capacity and stated that liquidity was adequate. The company had $1.30 billion of total borrowings, including $948.2 million of FHLB advances and $164.3 million of subordinated and junior subordinated debt.
- The annual dividend was $1.04 per share, up from $0.96. In February 2018, the quarterly dividend was raised to $0.29 per share.
Material changes, unusual items and outlook
- Tax reform: The December 2017 tax law led to a $12.8 million charge to remeasure deferred tax assets. This contributed to a 36.3% effective tax rate, versus 26.4% in 2016, and depressed reported fourth-quarter net income to $15.9 million from $24.2 million a year earlier. The filing’s adjusted results exclude this charge and after-tax merger expenses.
- Acquisition and scale: The pending First Sentry deal would take WesBanco above $10 billion in assets. Management anticipated added regulatory requirements and costs, including stress testing and CFPB supervision, and warned that Durbin Amendment debit interchange limits could reduce fee income beginning in 2019. The filing also identifies heightened compliance and FDIC assessment costs as potential effects.
- Management outlook: Management anticipated three additional short-term Federal Funds rate increases by the end of 2018. It estimated that tax reform would reduce the reported fully taxable-equivalent net interest margin by approximately 6 basis points in 2018, without reducing net interest income. Further margin expansion was described as dependent on rate movements, deposit pricing, loan growth and management’s funding mix; acquisition-related purchase-accounting accretion was expected to decline during 2018. No formal earnings guidance was provided.
- Credit and concentration: Non-performing assets were 0.50% of assets, compared with 0.49%; non-performing loans were 0.68% of portfolio loans. Net charge-offs were 0.13% of average loans, versus 0.12%. Commercial real estate made up 47.1% of portfolio loans. The Bank’s CRE measures exceeded certain regulatory supervisory benchmarks, which management said were mitigated by portfolio quality and risk controls.
- Other risks: The filing highlights interest-rate and funding risk, regional economic and real-estate concentration, municipal-bond exposure, competition, cyber and operational risk, and uncertainty over CECL adoption, which was expected to begin in 2020 and could materially increase or make the allowance more volatile. Approximately 39.4% of the securities portfolio was municipal bonds.
- WesBanco reported no material litigation loss as reasonably possible. Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Completion, final terms, integration costs and expected benefits of the First Sentry acquisition, including resulting asset size and regulatory impacts.
- Whether core earnings growth supports the reported-versus-adjusted EPS difference, especially the deferred-tax remeasurement and merger-cost adjustments.
- Deposit pricing, funding mix and actual margin response as rates rise, including the expected decline in acquisition-related accretion.
- Trends in non-accrual loans, charge-offs, allowance adequacy and CRE exposure, particularly against supervisory concentration benchmarks.
- Actual liquidity availability and the maturity or repricing profile of deposits, FHLB advances and subordinated debt.
- The eventual CECL allowance impact and the effect of the new tax regime on municipal investments and other tax-related benefits.