WesBanco, Inc. — 2016 Form 10-K Summary
Business context and reporting period
WesBanco is a regional bank holding company reporting for the fiscal year ended December 31, 2016. It provides community banking and trust and investment services across West Virginia, Ohio, western Pennsylvania, Kentucky, and southern Indiana. On September 9, 2016, it acquired Your Community Bankshares (YCB), adding 34 branches in Kentucky and southern Indiana. At year-end, WesBanco operated 174 branches and reported approximately $9.8 billion in assets; trust assets under management were about $3.7 billion and are not included in balance-sheet assets.
Financial results and key metrics
Amounts below are in U.S. dollars; annual results are for 2016 compared with 2015 unless stated otherwise.
| Metric | 2016 | 2015 |
|---|---|---|
| Net interest income | $253.3 million | $237.0 million |
| Non-interest income | $81.5 million | $74.5 million |
| Net income | $86.6 million | $80.8 million |
| Diluted earnings per share | $2.16 | $2.15 |
| Net interest margin, fully taxable-equivalent | 3.32% | 3.41% |
| Efficiency ratio, excluding merger-related costs | 56.69% | 57.05% |
| Return on average assets | 0.97% | 0.99% |
| Net loan charge-offs / average loans | 0.12% | 0.23% |
- Net interest income rose 6.9%; average earning assets increased 10.0%, principally from YCB and organic loan growth, partly offset by margin compression.
- Non-interest income increased 9.4%, including higher deposit service charges, electronic banking fees, securities gains, and commercial loan swap income. Management reported that swap fee and valuation income rose $2.7 million.
- Reported non-interest expense increased 7.6% to $208.7 million, including $13.3 million of restructuring and merger-related expenses versus $11.1 million in 2015. Excluding these costs, expense increased 6.9%.
- Fourth-quarter net income was $24.2 million, or $0.55 per diluted share, versus $23.0 million, or $0.60, in fourth-quarter 2015. Fourth-quarter net interest margin improved to 3.42% from 3.32% in the third quarter.
- Cash provided by operating activities was $123.7 million; investing activities provided $194.0 million and financing activities used $276.2 million. Cash and cash equivalents increased $41.5 million to $128.2 million. These cash-flow totals reflect banking balance-sheet activity.
Balance sheet, debt, and liquidity
- Total assets were $9.79 billion, up 15.6%; portfolio loans were $6.25 billion, up 23.4%; deposits were $7.04 billion, up 16.1%. YCB was the principal driver of reported growth. Organic loan growth was 3.4%.
- Total borrowings were $1.33 billion, up 8.3%, including $968.9 million of Federal Home Loan Bank (FHLB) borrowings, $199.4 million of other short-term borrowings, and $163.6 million of subordinated and junior subordinated debt.
- Capital remained above regulatory well-capitalized thresholds: consolidated CET1 was 11.28%, Tier 1 risk-based capital 13.16%, total risk-based capital 14.18%, and Tier 1 leverage 9.81%. The Bank was also reported as well capitalized.
- Management reported $1.7 billion of remaining FHLB borrowing capacity, subject to collateral requirements, and a $219.1 million Federal Reserve Borrower-in-Custody line with no balance outstanding. It cited $2.04 billion of expected asset-based liquidity sources within one year. The company had $1.8 billion of outstanding credit commitments, not all expected to be drawn.
- Commercial real estate was 45.8% of portfolio loans; residential real estate was about 22%. The allowance for loan losses was $43.7 million, or 0.70% of portfolio loans, compared with 0.82% in 2015. Non-performing assets were 0.49% of total assets versus 0.60%.
Material changes versus the prior period
- YCB contributed approximately $1.5 billion in assets, $1.2 billion in deposits, and $1.0 billion in loans at acquisition. WesBanco issued 5.42 million shares and paid $43.3 million in cash; preliminary goodwill recorded was $92.9 million. Purchase accounting remained subject to finalization within one year of acquisition.
- Net income increased 7.3%, but diluted EPS increased only slightly, to $2.16 from $2.15, amid a larger share count following the acquisition. Excluding after-tax merger-related expenses, diluted EPS was $2.37 versus $2.34.
- The FTE net interest margin declined 9 basis points for the year. Management attributed this to higher funding costs, increased reliance on borrowings, lower loan yields, and the low-rate environment.
- Net charge-offs fell to $6.6 million from $11.1 million; non-performing loans declined to $39.4 million from $44.9 million. The allowance ratio fell partly because acquired loans were recorded at fair value without a carried-over allowance.
- Shareholders’ equity increased 19.5%, primarily from shares issued for YCB and retained earnings, partly offset by a $6.2 million other comprehensive loss. Goodwill was $573.8 million, and management reported no impairment in 2016.
Outlook, commentary, risks, and unusual items
- No formal earnings or revenue guidance is provided. Management expected the post-YCB margin to benefit by 5–10 basis points versus the first three quarters of 2016; the fourth-quarter margin rose 10 basis points sequentially. It expected purchase-accounting accretion to decline through 2017 and anticipated possible additional short-term Federal Reserve rate increases.
- Management said it was managing balance-sheet growth to remain below $10 billion in assets for a period, then anticipated through the end of 2017 or into 2018. Crossing $10 billion could bring additional regulatory supervision, stress testing, and potentially higher compliance and FDIC costs, as well as reduced debit interchange revenue.
- Key exposures include competition, interest-rate and funding-cost changes, regional economic weakness, borrower defaults, and concentration in commercial real estate and municipal securities. Municipal bonds were about 40% of the securities portfolio; management considered year-end unrealized securities losses temporary. Regional weakness in energy activity could affect local borrowers and deposits.
- The new CECL credit-loss standard was expected to materially change allowance measurement and could require a significant initial allowance increase; WesBanco had not determined the impact. Adoption was expected for fiscal 2020.
- Merger and conversion costs were $13.3 million. Other unusual or judgment-sensitive matters include YCB purchase-accounting estimates, securities valuation losses, goodwill and allowance estimates, and $0.5 million of swap fee and valuation income growth tied partly to new lender incentives and customer demand.
- Management said ordinary-course litigation was not reasonably expected to result in a material loss. The external auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How YCB integration, conversion savings, and remaining purchase-accounting adjustments affect 2017 expenses, earnings, and acquired-loan accretion.
- Whether organic loan and deposit growth continues, particularly given 2016 organic deposit declines and greater use of wholesale funding.
- Trends in net interest margin, deposit pricing, FHLB and other borrowing costs, and management’s interest-rate sensitivity assumptions.
- Commercial real estate concentrations, acquired-loan performance, allowance adequacy, and subsequent changes in non-performing assets and charge-offs.
- Whether securities losses remain temporary and whether municipal credit, call, and early-redemption risks change.
- Potential consequences of reaching $10 billion in assets, including related regulatory and cost impacts, and the eventual CECL adoption effect.
- The cash-flow statement and liquidity disclosures in context: verify the timing and availability of pledged collateral, borrowing capacity, and the draw potential of off-balance-sheet commitments.