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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 000-08467

WESBANCO, INC.

(Exact name of Registrant as specified in its charter)

 

WEST VIRGINIA   55-0571723

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

1 Bank Plaza, Wheeling, WV   26003
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: 304-234-9000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each Exchange on which registered

Common Stock $2.0833 Par Value   NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ☑    No  ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Act.    Yes  ☐    No  ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☑    No  ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☑

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer  ☑

   Accelerated filer  ☐

Non-accelerated filer  ☐

   Smaller reporting company  ☐

(Do not check if a smaller reporting company)

   Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes  ☐    No  ☑

The aggregate market value of the registrant’s outstanding voting and non-voting common stock held by non-affiliates on June 30, 2017, determined using a per share closing price on that date of $39.54, was $1,630,100,029.

As of February 20, 2018, there were 44,053,332 shares of WesBanco, Inc. common stock $2.0833 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain specifically designated portions of Wesbanco, Inc.’s definitive proxy statement which will be filed by April 30, 2018 for its Annual Meeting of Shareholders (the “Proxy Statement”) to be held in 2018 are incorporated by reference into Part III of this Form 10-K.

 

 

 


Table of Contents

WESBANCO, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

ITEM #

  

ITEM

   Page No.  
   Part I   

1

   Business      3 - 14  

1A

   Risk Factors      14 - 25  

1B

   Unresolved Staff Comments      25  

2

   Properties      25  

3

   Legal Proceedings      25  

4

   Mine Safety Disclosures      25  
   Part II   

5

  

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     26 - 28  

6

  

Selected Financial Data

     29 - 33  

7

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     34 - 79  

7A

  

Quantitative and Qualitative Disclosures about Market Risk

     80 - 85  

8

  

Financial Statements and Supplementary Data

     86 - 152  

9

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     153  

9A

   Controls and Procedures      153  

9B

   Other Information      153  
   Part III   

10

   Directors, Executive Officers and Corporate Governance      154  

11

   Executive Compensation      154  

12

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     154  

13

   Certain Relationships and Related Transactions, and Director Independence      155  

14

   Principal Accounting Fees and Services      155  
   Part IV   

15

   Exhibits and Financial Statement Schedules      156 - 162  

16

   Form 10-K Summary      156  
   Signatures      163  

 

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PART I

 

ITEM 1. BUSINESS

GENERAL

WesBanco, Inc. (“WesBanco”), a bank holding company incorporated in 1968 and headquartered in Wheeling, West Virginia, offers a full range of financial services including retail banking, corporate banking, personal and corporate trust services, brokerage services, mortgage banking and insurance. WesBanco offers these services through two reportable segments, community banking and trust and investment services. For additional information regarding WesBanco’s business segments please refer to Note 23, “Business Segments” in the Consolidated Financial Statements.

At December 31, 2017, WesBanco operated one commercial bank, WesBanco Bank, Inc. (“WesBanco Bank” or the “Bank”), through 172 branches and 160 ATM machines located in West Virginia, Ohio, western Pennsylvania, Kentucky and southern Indiana. Total assets of WesBanco Bank as of December 31, 2017 approximated $9.8 billion. WesBanco Bank also offers trust and investment services and various alternative investment products including mutual funds and annuities. The market value of assets under management of the trust and investment services segment was approximately $3.9 billion as of December 31, 2017. These assets are held by WesBanco Bank in fiduciary or agency capacities for its customers and therefore are not included as assets on WesBanco’s Consolidated Balance Sheets.

On November 13, 2017, WesBanco and First Sentry Bancshares, Inc. (“FTSB”), a bank holding company headquartered in Huntington, West Virginia entered into a definitive Agreement and Plan of Merger pursuant to which FTSB will merge with and into WesBanco. As of September 30, 2017, FTSB had approximately $658.2 million in assets excluding goodwill, with $527.6 million in total deposits and $402.4 million in total loans, and 5 branches in West Virginia The transaction will enhance WesBanco’s position in the Huntington, WV MSA. The transaction, valued at approximately $101.4 million, is scheduled to close early in the second quarter of 2018.

WesBanco offers additional services through its non-banking subsidiaries, WesBanco Insurance Services, Inc. (“WesBanco Insurance”), a multi-line insurance agency specializing in property, casualty, life and title insurance, with benefit plan sales and administration for personal and commercial clients; and WesBanco Securities, Inc. (“WesBanco Securities”), a full service broker-dealer, which also offers discount brokerage services.

WesBanco Asset Management, Inc., which was incorporated in 2002, holds certain investment securities and loans in a Delaware-based subsidiary.

WesBanco Properties, Inc. holds certain commercial real estate properties. The commercial property is leased to WesBanco Bank and to certain non-related third parties. Kentuckiana Real Estate Holdings, LLC, and Southern Indiana Real Estate Holdings, LLC, are Indiana and Kentucky limited liability corporations, and they hold certain real estate properties in those markets.

CBIN Insurance Inc. is a captive insurance company, which issues policies to WesBanco’s banking subsidiaries for certain risks that aren’t covered by the Company’s commercial insurances purchased from third-party carriers.

WesBanco has twelve capital trusts, which are all wholly-owned trust subsidiaries formed for the purpose of issuing trust preferred securities (“Trust Preferred Securities”) and lending the proceeds to WesBanco. For more information regarding WesBanco’s issuance of trust preferred securities please refer to Note 11, “Subordinated Debt and Junior Subordinated Debt” in the Consolidated Financial Statements.

AMSCO, Inc. (“AMSCO”) is a wholly-owned subsidiary of WesBanco Bank, which formerly engaged in the management of certain real estate development and construction of 1-4 family residential units through one joint venture partnership, AMS Ventures, LLC. It is in the process of winding up its business activities and will be dissolved.

 

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WesBanco Bank’s Investment Department also serves as investment adviser to a family of mutual funds, namely the “WesMark Funds”. The fund family is comprised of the WesMark Growth Fund, the WesMark Balanced Fund, the WesMark Small Company Growth Fund, the WesMark Government Bond Fund, the WesMark West Virginia Municipal Bond Fund, and the WesMark Tactical Opportunity Fund.

As of December 31, 2017, none of WesBanco’s subsidiaries were engaged in any operations in foreign countries, and only one had any transactions with customers in foreign countries. The Bank provides letters of credit internationally for certain domestic customers and provides international wire services through a third-party correspondent bank.

EMPLOYEES

There were 1,940 full-time equivalent employees employed by WesBanco and its subsidiaries at December 31, 2017. None of the employees were represented by collective bargaining agreements. WesBanco believes its employee relations to be satisfactory.

WEB SITE ACCESS TO WESBANCO’S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION

All of WesBanco’s electronic filings for 2017 filed with the Securities and Exchange Commission (the “SEC”), including this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are made available at no cost on WesBanco’s website, www.wesbanco.com, in the “About Us” section through the “Investor Relations” link as soon as reasonably practicable after WesBanco files such material with, or furnishes it to, the SEC. WesBanco’s SEC filings are also available through the SEC’s website at www.sec.gov.

Upon written request of any shareholder of record on December 31, 2017, WesBanco will provide, without charge, a printed copy of this 2017 Annual Report on Form 10-K, including financial statements and schedules, as required to be filed with the SEC. To obtain a copy of this report, contact: John Iannone, WesBanco, Inc., 1 Bank Plaza, Wheeling, WV 26003 (304) 905-7021.

COMPETITION

Competition in the form of price and service from other banks, including local, regional and national banks and financial companies such as savings and loans, internet banks, payday lenders, money services businesses, credit unions, finance companies, brokerage firms and other non-banking companies providing various regulated and non-regulated financial services and products, is intense in most of the markets served by WesBanco and its subsidiaries. WesBanco’s trust and investment services segment receives competition from commercial banks, trust companies, mutual fund companies, investment advisory firms, law firms, brokerage firms and other financial services companies. As a result of consolidation within the financial services industry, mergers between, and the expansion of, financial institutions both within and outside of WesBanco’s major markets have provided significant competitive pressure in those markets. Many of WesBanco’s competitors have greater resources and, as such, may have higher lending limits and may offer other products and services that are not provided by WesBanco. WesBanco generally competes on the basis of superior customer service and responsiveness to customer needs, available loan and deposit products, rates of interest charged on loans, rates of interest paid for deposits, and the availability and pricing of trust, brokerage and insurance services. As a result of WesBanco’s expansion into certain larger metropolitan markets, it has faced entrenched larger bank competitors with an already existing customer base that may far exceed WesBanco’s initial entry position into those markets. As a result, WesBanco may be forced to compete more aggressively for loans, deposits, trust and insurance products in order to grow its market share, potentially reducing its current and future profit potential from such markets.

 

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SUPERVISION AND REGULATION

As a bank holding company and a financial holding company under federal law, WesBanco is subject to supervision and examination by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and is required to file with the Federal Reserve Board reports and other information regarding its business operations and the business operations of its subsidiaries. WesBanco also is required to obtain Federal Reserve Board approval prior to acquiring, directly or indirectly, ownership or control of certain voting shares of other banks, as described below. Since WesBanco is both a bank holding company and a financial holding company, WesBanco can offer customers virtually any type of service that is financial in nature or incidental thereto, including banking and activities closely related to banking, securities underwriting, insurance (both underwriting and agency) and merchant banking. Assuming the acquisition of FTSB is completed, WesBanco expects increased supervision from the Federal Reserve Board due to its increased asset size and will ensure that sufficient resources are allocated to compliance so that the enhanced demands of the Federal Reserve Board are met.

As indicated above, WesBanco presently operates one bank subsidiary, WesBanco Bank, which is a West Virginia banking corporation and is not a member bank of the Federal Reserve System. It is subject to examination and supervision by the Federal Deposit Insurance Corporation (the “FDIC”) and the West Virginia Division of Financial Institutions (“WVDIF”). The deposits of WesBanco Bank are insured by the Deposit Insurance Fund (“DIF”) of the FDIC. WesBanco’s non-bank subsidiaries are subject to examination and supervision by the Federal Reserve Board and specifically, the Federal Reserve Bank of Cleveland, Ohio (“Federal Reserve”) and examination by other federal and state agencies, including, in the case of certain securities activities, regulation by the SEC, the Financial Institution Regulatory Authority, Inc. (“FINRA”), the Municipal Securities Rulemaking Board and the Securities Investors Protection Corporation. WesBanco Bank maintains one designated financial subsidiary, WesBanco Insurance, which, as indicated above, is a multi-line insurance agency specializing in property, casualty, life and title insurance, with benefit plan sales and administration for personal and commercial clients.

WesBanco is also under the jurisdiction of the SEC and certain state securities commissions for matters relating to the offering and sale of its securities. WesBanco is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. WesBanco is listed on the NASDAQ Global Select Market (the “NASDAQ”) under the trading symbol “WSBC” and is subject to the rules of the NASDAQ for listed companies.

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended (the “Riegle-Neal Act”), a bank holding company may acquire banks in states other than its home state, subject to certain limitations. The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate banking. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), banks are also permitted to establish de novo branches across state lines to the same extent that a state-chartered bank in each host state would be permitted to open branches.

Under the BHCA, prior Federal Reserve Board approval is required for WesBanco to acquire more than 5% of the voting stock of any bank. In determining whether to approve a proposed bank acquisition, federal banking regulators will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis, and the acquiring institution’s record of addressing the credit needs of the communities it serves, including the needs of low and moderate income neighborhoods, consistent with safe and sound operation of the bank, under the Community Reinvestment Act, as amended (the “CRA”).

HOLDING COMPANY REGULATIONS

As indicated above, WesBanco has one state bank subsidiary, WesBanco Bank, as well as non-bank subsidiaries, which are described further in “Item 1. Business—General” section of this Annual Report on

 

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Form 10-K. The subsidiary bank is subject to affiliate transaction restrictions under federal law, which limit “covered transactions” by the subsidiary bank with the parent and any non-bank subsidiaries of the parent, which are referred to in the aggregate in this paragraph as “affiliates” of the subsidiary bank. “Covered transactions” include loans or extensions of credit to an affiliate (including repurchase agreements), purchases of or investments in securities issued by an affiliate, purchases of assets from an affiliate, the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit, the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate, certain transactions that involve borrowing or lending securities, and certain derivative transactions with an affiliate. Such covered transactions between the subsidiary bank and any single affiliate are limited in amount to 10% of the subsidiary bank’s capital and surplus, and, with respect to covered transactions with all affiliates in the aggregate, are limited in amount to 20% of the subsidiary bank’s capital and surplus. Furthermore, such loans or extensions of credit, guarantees, acceptances and letters of credit, and any credit exposure resulting from securities borrowing or lending transactions or derivatives transactions, are required to be secured by collateral at all times in amounts specified by law. In addition, all covered transactions must be conducted on terms and conditions that are consistent with safe and sound banking practices.

The Dodd-Frank Act requires a bank holding company to act as a source of financial strength to its subsidiary bank. Under this source of strength requirement, the Federal Reserve Board may require a bank holding company to make capital infusions into a troubled subsidiary bank, and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. A capital infusion conceivably could be required at a time when WesBanco may not have the resources to provide it.

PAYMENT OF DIVIDENDS

Dividends from the subsidiary bank are a significant source of funds for payment of dividends to WesBanco’s shareholders. For the year ended December 31, 2017, WesBanco declared cash dividends to its common shareholders of approximately $45.8 million.

As of December 31, 2017, WesBanco Bank was “well capitalized” under the definition in Section 325.103 of the FDIC Regulations. Therefore, as long as the Bank remains “well capitalized” or even becomes “adequately capitalized,” there would be no basis under Section 325.105 to limit the ability of the Bank to pay dividends because it had not become undercapitalized, significantly undercapitalized or critically undercapitalized. As of January 1, 2016, WesBanco Bank and WesBanco are subject to “capital conservation buffer” rules, which require WesBanco and WesBanco Bank to have capital levels above the regulatory minimums in order to pay dividends (discussed below in connection with the Basel III initiative under “Item 1. Business—Capital Requirements”).

All financial institutions are subject to the prompt corrective action provisions set forth in Section 38 of the Federal Deposit Insurance Act (the “FDI Act”) and the provisions set forth in Section 325.105 of the FDIC Regulations. Immediately upon a state non-member bank receiving notice, or being deemed to have notice, that the bank is undercapitalized, significantly undercapitalized, or critically undercapitalized, as defined in Section 325.103 of the FDIC Regulations, the bank is precluded from being able to pay dividends to its shareholders based upon the requirements in Section 38(d) of the FDI Act, 12. U.S.C. § 1831o(d).

In addition, with respect to possible dividends by the Bank, under Section 31A-4-25 of the West Virginia Code, the prior approval of the West Virginia Commissioner of Banking would be required if the total of all dividends declared by the Bank in any calendar year would exceed the total of the Bank’s net profits for that year combined with its retained net profits of the preceding two years. Further, Section 31A-4-25 limits the ability of a West Virginia banking institution to pay dividends until the surplus fund of the banking institution equals the common stock of the banking institution and if certain specified amounts of recent profits of the banking institution have not been carried to the surplus fund.

 

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If, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice which, depending on the financial condition of the bank, could include the payment of dividends, such authority may require, after notice and hearing, that such bank cease and desist from such practice. The Federal Reserve Board has issued policy statements which provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings. Under applicable law, bank regulatory agency approval is required if the total of all dividends declared by a bank in any calendar year exceeds the available retained earnings or exceeds the aggregate of the bank’s net profits (as defined by regulatory agencies) for that year and its retained net profits for the preceding two years. As of December 31, 2017, under FDIC regulations, WesBanco could receive, without prior regulatory approval, a dividend of up to $58.7 million from WesBanco Bank. Additional information regarding dividend restrictions is set forth in Note 21, “Regulatory Matters,” in the Consolidated Financial Statements.

On February 24, 2009, the Federal Reserve Division of Banking Supervision and Regulation issued a letter providing direction to bank holding companies on the payment of dividends, capital repurchases and capital redemptions. Although the letter largely reiterates longstanding Federal Reserve supervisory policies, it emphasizes the need for a bank holding company to review various factors when considering the declaration of a dividend or taking action that would reduce regulatory capital provided by outstanding financial instruments. These factors include the potential need to increase loan loss reserves, write down assets and reflect declines in asset values in equity. In addition, the bank holding company should consider its past and anticipated future earnings, the dividend payout ratio in relation to earnings, and adequacy of regulatory capital before any action is taken. The consideration of capital adequacy should include a review of all known factors that may affect capital in the future.

In certain circumstances, defined by regulation relating to levels of earnings and capital, advance notification to, and in some circumstances, approval by the regulator could be required to declare a dividend or repurchase or redeem capital instruments.

FDIC INSURANCE

FDIC insurance premiums are assessed by the FDIC using a risk-based approach that places insured institutions into categories based on capital and risk profiles. In 2017, WesBanco Bank paid deposit insurance premiums of $3.5 million, compared to $4.0 million and $4.1 million in 2016 and 2015, respectively. The decrease from the prior years was due to the FDIC reducing its assessment rate for banks with less than $10 billion in assets as of July 1, 2016. WesBanco Bank’s capital, net income and loan quality financial ratios used to calculate the assessment rate have continually improved, leading to a decrease in the assessment rate.

Effective July 1, 2016, the FDIC issued a final rule in order to implement section 334 of the Dodd-Frank Act, which requires the FDIC to (1) raise the minimum reserve ratio for the FDIC Deposit Insurance Fund to 1.35 percent, from 1.15 percent, (2) assess premiums on banks to reach the 1.35 percent goal by September 30, 2020, and (3) offset the effect of the increase in the minimum reserve ratio on insured depository institutions with assets of less than $10 billion. The final rule imposes a quarterly surcharge on insured depository institutions with $10 billion or more in assets of 4.5 basis points applied to their assessment base (after making certain adjustments), to be assessed over a period of eight quarters. If this surcharge is insufficient to increase the reserve ratio to 1.35 percent by December 31, 2018, a one-time shortfall assessment will be imposed on institutions with total consolidated assets of $10 billion or more on March 31, 2019. WesBanco is currently not subject to the surcharge assessment. When WesBanco becomes subject to the surcharge, management currently estimates that, based on the final rule, FDIC expense will increase minimally as the surcharge is calculated only upon assets greater than $10 billion. However, the assessment factors and rates for the Bank are expected to be higher in the future once the Bank experiences four quarters over $10 billion in total assets as per its filed Bank Call Reports.

 

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CAPITAL REQUIREMENTS

The Federal Reserve Board has issued risk-based capital ratio and leverage ratio guidelines for bank holding companies. The risk-based capital ratio guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures into explicit account in assessing capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Under the guidelines and related policies, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and a leverage ratio test on a consolidated basis. The risk-based ratio is determined by allocating assets and specified off-balance sheet commitments into several weighted categories, with higher weightings being assigned to categories perceived as representing greater risk. A bank holding company’s capital is then divided by total risk-weighted assets to yield the risk-based ratio. The leverage ratio is determined by relating core capital to total assets adjusted as specified in the guidelines. The Bank is subject to substantially similar capital requirements.

The federal regulatory authorities’ risk-based capital guidelines are based upon agreements reached by the Basel Committee on Banking Supervision (the “Basel Committee”). The Basel Committee is a committee of central banks and bank supervisors and regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. In December 2010, the Basel Committee issued a strengthened set of international capital and liquidity standards for banks and bank holding companies, known as “Basel III.” In July 2013, the U.S. federal banking agencies issued a joint final rule that implements the Basel III capital standards and establishes the minimum capital levels required under the Dodd-Frank Act. The rule was effective January 1, 2015 subject to a transition period providing for full implementation on January 1, 2019.

Generally, under the applicable guidelines, a financial institution’s capital is divided into common equity Tier 1 (“CET1”), total Tier 1 and Tier 2. CET1 includes common shares and retained earnings less goodwill, intangible assets subject to limitation and certain deferred tax assets subject to limitation. In addition, under the final capital rule, an institution may make a one-time, permanent election to continue to exclude accumulated other comprehensive income from capital. If an institution does not make this election, unrealized gains and losses will be included in the calculation of its CET1. Total Tier 1 is comprised of CET1 and certain restricted capital instruments, including qualifying cumulative perpetual preferred stock and qualifying trust preferred securities, in their Tier 1 capital, up to a limit of 25% of Tier 1 capital. (See below within this section for more information regarding the capital treatment of trust preferred securities.)

Tier 2, or supplementary capital, includes, among other things, portions of trust preferred securities and cumulative perpetual preferred stock not otherwise counted in Tier 1 capital, as well as perpetual preferred stock, intermediate-term preferred stock, hybrid capital instruments, perpetual debt, mandatory convertible debt securities, term subordinated debt, unrealized holding gains on equity securities, and the allowance for loan and lease losses, all subject to certain limitations. “Total capital” is the sum of Tier 1 and Tier 2 capital. The amount of Tier 2 capital that exceeds the amount of Tier 1 capital must be excluded from the total capital calculation.

The Federal Reserve Board has established the following minimum capital levels banks and bank holding companies are required to maintain as a percentage of risk-weighted assets (including various off-balance sheet items): (i) CET1 of at least 4.5%, (ii) Tier 1 capital ratio of at least 6%, (iii) total capital ratio (Tier 1 and Tier 2 capital) of at least 8%; and (iv) a non-risk-based leverage ratio (Tier 1 capital to average consolidated assets) of 4%. The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in credit and market risk profiles among banks and financial holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Balance sheet and off-balance sheet exposures are assigned to one of several risk-weights primarily based on relative credit risk. The capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk-weightings, and other factors. Additionally, when the final capital rule is fully implemented, it will require an institution to maintain a 2.5% common equity Tier 1 capital conservation buffer over the minimum risk-based capital requirements to avoid restrictions on the ability to pay dividends, discretionary bonuses to executive

 

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officers, and engage in share repurchases. The capital conservative buffer was 1.25% for 2017, increasing to 1.875% effective January 1, 2018, and it will be the full 2.5% effective January 1, 2019.

Failure to meet applicable capital guidelines could subject a financial institution to a variety of enforcement remedies available to the federal regulatory authorities, including limitations on the ability to pay dividends, the issuance by the regulatory authority of a capital directive to increase capital, and the termination of deposit insurance by the FDIC, as well as to the measures described below under “Prompt Corrective Action” as applicable to undercapitalized institutions.

As of December 31, 2017, WesBanco’s CET1, Tier 1 and total capital to risk-adjusted assets ratios were 12.14%, 14.12% and 15.16%, respectively. WesBanco made a timely permanent election to exclude accumulated other comprehensive income from regulatory capital. As of December 31, 2017, WesBanco Bank also had capital in excess of the minimum requirements. Neither WesBanco nor the Bank had been advised by the appropriate federal banking regulator of any specific leverage ratio applicable to it. As of December 31, 2017, WesBanco’s leverage ratio was 10.39%.

As of December 31, 2017, WesBanco had $164.3 million in subordinated and junior subordinated debt on its Consolidated Balance Sheets, which includes $138.6 million of junior subordinated debt. For regulatory purposes, Trust Preferred Securities totaling $134.3 million underlying such junior subordinated debt were included in Tier 1 capital as of December 31, 2017, in accordance with regulatory reporting requirements. In 2013, the federal banking agencies amended capital requirements to generally exclude trust preferred securities from Tier 1 capital. A grandfather provision, however, permits bank holding companies with consolidated assets of less than $15 billion, such as WesBanco, to continue counting existing trust preferred securities as Tier 1 capital until they mature. The final Basel III capital rule permanently grandfathers trust preferred securities issued before May 19, 2010 for institutions of less than $15 billion in size, subject to a 25% limit of Tier 1 capital. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions. For more information regarding trust preferred securities, please refer to Note 11, “Subordinated and Junior Subordinated Debt” in the Consolidated Financial Statements.

The risk-based capital standards of the Federal Reserve and the FDIC specify that evaluations by the banking agencies of a bank’s capital adequacy will include an assessment of the exposure to declines in the economic value of the bank’s capital due to changes in interest rates. These banking agencies issued a joint policy statement on interest rate risk describing prudent methods for monitoring such risk that rely principally on internal measures of exposure and active oversight of risk management activities by senior management.

PROMPT CORRECTIVE ACTION

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires federal banking regulatory authorities to take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.

An institution is deemed to be “well-capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 8% or greater, a Tier 1 leverage ratio of 5% or greater, and a new common equity Tier 1 ratio of 6.5% or greater, and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure. An institution is deemed to be “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 6% or greater, generally a Tier 1 leverage ratio of 4% or greater, and a common equity Tier 1 ratio of 4.5% or greater, and the institution does not meet the definition of a “well-capitalized” institution. An institution that does not meet one or more of the “adequately capitalized” tests is deemed to be “undercapitalized.” If the institution has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 4%, or a Tier 1 leverage ratio that is less than 3%, it is deemed to be “significantly undercapitalized.” Finally, an institution is deemed to

 

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be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. At December 31, 2017, WesBanco Bank had capital levels that met the “well-capitalized” standards under FDICIA and its implementing regulations.

FDICIA generally prohibits a depository institution from making any capital distribution, including payment of a cash dividend, or paying any management fee to its holding company, if the depository institution would thereafter be undercapitalized. Undercapitalized institutions are subject to growth limitations and are required to submit a capital restoration plan. If any depository institution subsidiary of a holding company is required to submit a capital restoration plan, the holding company would be required to provide a limited guarantee regarding compliance with the plan as a condition of approval of such plan by the appropriate federal banking agency. If an undercapitalized institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt and/or trust preferred securities. In addition, critically undercapitalized institutions are subject to appointment of a receiver or conservator within 90 days of becoming critically undercapitalized.

GRAMM-LEACH-BLILEY ACT

Under the Gramm-Leach-Bliley Act (the “GLB Act”), banks are no longer prohibited from associating with, or having management interlocks with, a business organization engaged principally in securities activities. By qualifying as a “financial holding company,” as authorized under the GLB Act, a bank holding company acquires new powers not otherwise available to it. WesBanco has elected to become a financial holding company under the GLB Act. It also has qualified a subsidiary of the Bank as a financial subsidiary under the GLB Act.

Financial holding company powers relate to “financial activities” that are determined by the Federal Reserve Board, in coordination with the Secretary of the Treasury, to be financial in nature, incidental to an activity that is financial in nature, or complementary to a financial activity, provided that the complementary activity does not pose a safety and soundness risk. The GLB Act itself defines certain activities as financial in nature, including but not limited to: underwriting insurance or annuities; providing financial or investment advice; underwriting, dealing in, or making markets in securities; merchant banking, subject to significant limitations; insurance company portfolio investing, subject to significant limitations; and any activities previously found by the Federal Reserve Board to be closely related to banking.

National and state banks are permitted under the GLB Act, subject to capital, management, size, debt rating, and CRA qualification factors, to have “financial subsidiaries” that are permitted to engage in financial activities not otherwise permissible. However, unlike financial holding companies, financial subsidiaries may not engage in insurance or annuity underwriting; developing or investing in real estate; merchant banking (for at least five years); or insurance company portfolio investing.

DODD-FRANK ACT

The Dodd-Frank Act, enacted on July 21, 2010, and the rules implementing its provisions have resulted in numerous and wide-ranging reforms to the structure of the U.S. financial system and the enhanced regulation and supervision of WesBanco. This includes, among other things, rules to promote financial stability and prevent or mitigate the risks that may arise from the material distress or failure of a large bank holding company; enhance consumer protections; prohibit proprietary trading; and implement enhanced prudential requirements for large bank holding companies regarding risk-based capital and leverage, risk and liquidity management, stress testing, and recovery and resolution planning. The Dodd-Frank Act, including current and future rules implementing its provisions and the interpretation of those rules, have affected, and management expects will continue to affect,

 

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most of WesBanco’s businesses in some way, either directly through regulation of specific activities or indirectly through regulation of concentration risks, capital or liquidity.

Bank holding companies are subjected to increased capital requirements (discussed above under “Item 1. Business—Capital Requirements”).

The Volcker Rule and the final rules jointly issued by federal banking agencies implementing the rule’s provisions limit WesBanco’s ability to engage in proprietary trading, as well as its ability to sponsor or invest in hedge funds or private equity funds. The Volcker Rule includes certain compliance program requirements that apply to banking entities that engage in permissible proprietary trading or permitted covered fund activities. The type of compliance program required is determined based on the level of total consolidated assets held by the banking entity. Because WesBanco will have over $10 billion in assets when the FTSB acquisition is complete, WesBanco will be subject to the “standard compliance program,” which imposes additional compliance program requirements, including a requirement to maintain additional documentation specific to covered fund activities. WesBanco’s activities and investments are currently in full compliance with the Volcker Rule and its regulations and WesBanco will ensure that its compliance program meets the requirements of the “standard compliance program” upon the closing of the FTSB acquisition.

Additionally, an interim final rule was issued in January 2014 that exempts investments in certain collateralized debt obligations backed primarily by trust preferred securities from the provisions of the Volcker Rule. This interim final rule was effective April 1, 2014 and did not have a material impact on WesBanco for the year ended December 31, 2017.

Passed in 2011, the Durbin Amendment requires the Federal Reserve to limit fee charges to retailers for debit card processing. The Federal Reserve Board promulgated Regulation II (Debit Card Interchange Fees and Routing) that limits the interchange fees paid by merchants to issuers when their debit cards are used as payment. An issuer is defined as “any person that authorizes the use of the debit card to perform an electronic debit transaction.” The application of the Durbin Amendment is determined by whether the issuer, together with its affiliates, has $10 billion in assets as of the end of the calendar year preceding the date of the electronic debit transaction. An affiliate is defined as “any company that controls, or is controlled by, or is under common control with another company.” Therefore, if an insured institution issues a debit card and it, together with its affiliates, has assets exceeding $10 billion, it is subject to this rule. The rule caps debit card interchange fees (also known as swipe fees) at $0.21 plus an additional 0.05%. Previously, the average interchange fee generated $0.44 per transaction for an insured institution. Financial institutions with more than $10 billion in assets by the year-end assessment deadline are subject to the cap on interchange income in July of the following year. As a result of the FTSB acquisition WesBanco and the Bank will be subject to the requirements imposed by the Durbin Amendment because, for purposes of determining whether an issuer has $10 billion in assets, the assets of the institution and its affiliates are combined beginning in July of 2019.

Additionally, section 165(i)(2) of the Dodd-Frank Act requires annual company-run stress tests for bank holding companies with total consolidated assets of between $10 billion and $50 billion and for savings and loan holding companies and state member banks with $10 billion or more in total assets. Total consolidated assets are reported on the insured institution’s Call Report or the holding company’s Consolidated Financial Statements for Holding Companies reporting form (FR Y-9C) and calculated over the four most recent consecutive quarters. The Federal Reserve Board and FDIC promulgated rules requiring these company-run stress tests. These rules establish the testing criteria, reporting requirements, and publication deadlines for all covered institutions, and are meant to be consistent across the federal banking agencies’ respective annual stress testing rules. Once a bank crosses the $10 billion total consolidated asset threshold, it will become subject to the requirements of its applicable regulator.

The Federal Reserve Board regulates bank holding companies, and therefore, if WesBanco has total consolidated assets of over $10 billion, it will be required to conduct the Federal Reserve Board stress-tests.

 

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WesBanco Bank, a subsidiary state nonmember bank, is governed by the FDIC. Under the FDIC rule, a covered bank includes “any state nonmember bank . . . with average total consolidated assets . . . that are greater than $10 billion but less than $50 billion.” It is anticipated that after the FTSB acquisition, WesBanco Bank will have over $10 billion in average total consolidated assets, and therefore, would meet the definition of a covered bank and would be subject to the FDIC stress-test rules. Therefore, depending on how assets of the bank are reported, WesBanco could be subject to Federal Reserve Board stress tests (reported at the holding company level), and stress tests at the subsidiary insured institution level.

When the Dodd-Frank Act stress test rules apply, WesBanco must assess the potential impact of a minimum of three macroeconomic scenarios—baseline, adverse, and severely adverse—on its consolidated losses, revenues, balance sheets (including risk-weighted assets) and capital. Each scenario includes economic variables, including macroeconomic activity, unemployment, exchange rates, prices, incomes and interest rates. The adverse and severely adverse scenarios are not forecasts, but rather hypothetical scenarios designed to assess the strength and resilience of financial institutions. Additionally, WesBanco must publically disclose these test results on an annual basis. The required summary of results may be published on WesBanco’s web site or in any other forum that is reasonably accessible to the public.

All covered institutions, as defined in the final rules, with between $10 and $50 billion in total consolidated assets are required to submit the results of their yearly company-run stress tests to the respective regulator by July 31 and publish those results between October 15 and October 31. An insured institution or holding company that becomes a covered institution on or before March 31 of a given year must conduct its first annual stress test in the next calendar year after the date it becomes a covered institution. An insured institution or holding company that becomes a covered institution after March 31 of a given year must conduct its first annual stress test in the second calendar year after the date of it becoming a covered institution. Assuming the acquisition of FTSB is completed after March 31, 2018, WesBanco would first report the results of its stress tests in 2020.

As required by Section 165 of the Dodd-Frank Act, the Federal Reserve issued a rule that strengthens the supervision and regulation of large U.S. bank holding companies and foreign banking organizations by establishing a number of enhanced prudential standards. These standards include liquidity, risk management, and capital. Under the rule, a publicly traded bank holding company with $10 billion or more in consolidated assets is required to establish an enterprise-wide risk committee. The risk committee oversees risk management. The committee would need to establish a risk management framework, including policies and procedures. The new risk management requirements complement the stress testing requirements. Assuming the proposed acquisition is completed, WesBanco would be subject to the Federal Reserve Enhanced Prudential Standards. WesBanco established its enterprise-wide risk committee in April of 2017.

The Dodd-Frank Act made several changes affecting the securitization markets, which may affect a bank’s ability or desire to use those markets to meet funding or liquidity needs. One of these changes calls for federal regulators to adopt regulations requiring the sponsor of a securitization to retain at least 5% of the credit risk, with exceptions for “qualified residential mortgages.”

Publicly traded companies are required by the Dodd-Frank Act to give shareholders an advisory vote on executive compensation, and, in some cases, golden parachute arrangements. Further, SEC and NASDAQ rulemaking under the Dodd-Frank Act requires NASDAQ-listed companies to have a compensation committee composed entirely of independent directors. WesBanco’s compensation committee members currently satisfy the independence criteria. The Dodd-Frank Act also called for regulators to issue new rules relating to incentive-based compensation arrangements deemed excessive, and proxy access by shareholders.

All banks and other insured depository institutions will have increased authority to open new branches across state lines (discussed above under “Item 1. Business—Supervision and Regulation”). A provision authorizing insured depository institutions to pay interest on checking accounts will likely increase WesBanco’s interest expenses. The Consumer Financial Protection Bureau (the “CFPB”), a federal agency created by the

 

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Dodd-Frank Act, has the authority to write rules implementing numerous consumer protection laws applicable to all banks (discussed below under “Item 1. Business—Consumer Protection Laws”).

CONSUMER PROTECTION LAWS

In connection with its lending and leasing activities, all banks are subject to a number of federal and state laws designed to protect consumers and promote lending and other financial services to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act (“TILA”), the Truth in Savings Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act (“RESPA”), the Electronic Fund Transfer Act, and, in some cases, their respective state law counterparts. The CFPB has consolidated the authority to write regulations implementing these and other laws. WesBanco’s other subsidiaries that provide services relating to consumer financial products and services will also be subject to the CFPB’s regulations. As an institution with assets of less than $10 billion, WesBanco Bank has historically been examined by the FDIC for compliance with these rules. When the Bank exceeds $10.0 billion in assets for four consecutive quarters, it will come under CFPB supervision and examination. Relating to mortgage lending, the Dodd-Frank Act authorized the CFPB to issue new regulations governing the ability to repay, qualified mortgages, mortgage servicing, appraisals and compensation of mortgage lenders, all of which have been issued and have taken effect. They limit the mortgage products offered by the Bank and have an impact on timely enforcement of delinquent mortgage loans.

The Dodd-Frank Act also directed the CFPB to integrate the mortgage loan disclosures under TILA and RESPA. The CFPB issued new integrated disclosures rules (“TRID”), which became effective October 3, 2015 and have combined the prior good faith estimate and truth in lending disclosure form into a new form, the loan estimate. They have also combined the HUD-1 and final truth in lending disclosure forms into a new form, the closing disclosure. The rule is extremely complex, contains significant uncertainties as to penalties, some of which can be quite material, contains prohibitions against correcting even technical mistakes, creates uncertainty regarding last minute changes in the transaction and has triggered significant ambiguity in compliance. Thus for covered transactions and most closed-end consumer credit transactions secured by real property, the TRID rules have presented significant and ongoing challenges to real estate lenders.

Federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.

The CRA requires WesBanco Bank’s primary federal bank regulatory agency, the FDIC, to assess WesBanco Bank’s record in meeting the credit needs of the communities served by the bank, including low and moderate-income neighborhoods and persons. Institutions are assigned one of four ratings: “Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.” This assessment is reviewed when a bank applies to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch office. The Bank’s ongoing community development efforts recently culminated with the FDIC assigning the Bank an “Outstanding” rating for the Bank’s community development performance under the CRA received on February 21, 2017. The FDIC assigned this rating based on its examination of our performance from 2013 through June 30, 2016. It is the highest rating awarded by federal regulators. The Bank also received the “America Saves Designation of Savings Excellence for Banks,” a designation from America Saves that recognizes banks that went above and beyond to encourage people to save money during America Saves Week 2016. WesBanco has worked with America Saves for more than ten years, and has been an active participant in America Saves Week since its inception in 2007.

 

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SECURITIES REGULATION

WesBanco’s full service broker-dealer subsidiary, WesBanco Securities, is registered as a broker-dealer with the SEC and in the states in which it does business. WesBanco Securities also is a member of FINRA. WesBanco Securities is subject to regulation by the SEC, FINRA and the securities administrators of the states in which it is registered. WesBanco Securities is a member of the Securities Investor Protection Corporation, which in the event of the liquidation of a broker-dealer, provides protection for customers’ securities accounts held by WesBanco Securities of up to $500,000 for each eligible customer, subject to a limitation of $250,000 for claims for cash balances.

In addition, WesBanco Bank’s Investment Department serves as an investment adviser to a family of mutual funds and is registered as an investment adviser with the SEC and in some states.

On April 8, 2016, the Department of Labor (“DOL”) issued its final version of the new regulation revising the definition of a “fiduciary” with respect to the Employee Retirement Income Security Act of 1974 (hereinafter “ERISA”) and the Internal Revenue Act of 1986 (hereinafter the “Code”) (the “Fidiuciary Rule”). The new regulation categorizes persons who provide investment advice or recommendations for a fee or other compensation to ERISA retirement plans and individual retirement accounts (hereinafter “IRAs”) as fiduciaries. After a brief delay of the compliance date issued by the DOL in April 2017 (the “Delaying Rule”), the Fiduciary Rule’s mandatory compliance date was June 9, 2017. Therefore, a firm whose activities are subject to the Fiduciary Rule are now required to comply with ERISA’s fiduciary requirements, prohibited transaction restrictions and conditions for reliance on any applicable exemptions, such as the “best interest contract exemption” (“BIC Exemption”). The Delaying Rule did, however, simplify the conditions required for compliance with the BIC Exemption during a “Transition Period,” which was originally scheduled to expire on January 1, 2018. However, on August 31, 2017, the DOL proposed a new rule to extend the Transition Period until July 1, 2019. The DOL published the final rule on November 29, 2017.

The effect that the Fiduciary Rule will have on the business of the Bank is not yet determinable. Nevertheless, the Bank continues to move forward with the creation and implementation of policies and procedures necessary to ensure the Bank is in compliance with the new regulation.

ANTI-MONEY LAUNDERING INITIATIVES AND THE USA PATRIOT ACT

A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Treasury Department has issued various implementing regulations which apply certain requirements of the USA Patriot Act to financial institutions, such as WesBanco Bank and WesBanco’s broker-dealer subsidiary. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of WesBanco and its subsidiaries to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for WesBanco and its subsidiaries.

ITEM 1A. RISK FACTORS

The risks described below are not the only ones we face in our business. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition or operating results could be materially harmed.

 

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DUE TO INCREASED COMPETITION, WESBANCO MAY NOT BE ABLE TO ATTRACT AND RETAIN BANKING CUSTOMERS AT CURRENT LEVELS.

WesBanco operates in a highly competitive banking and financial industry that could become even more competitive as a result of legislative, regulatory and technological changes. WesBanco faces banking competition in all the markets it serves from the following:

 

   

local, regional and national banks;

 

   

savings and loans;

 

   

internet banks;

 

   

credit unions;

 

   

payday lenders and money services businesses;

 

   

finance companies;

 

   

online trading and robo-advisors;

 

   

financial technology companies and other non-bank lenders; and

 

   

brokerage firms serving WesBanco’s market areas.

In particular, WesBanco’s competitors include several major national financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions may have products and services not offered by WesBanco such as new payment system technologies and cryptocurrency, which may cause current and potential customers to choose those institutions. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits and range and quality of services provided. Competitively priced deposits from other banks may cause a loss of despoits to be replaced by more expensive wholesale funding. WesBanco also faces competition from financial technology (“FinTech”) companies. In addition to providing products and services traditionally offered by banks, some FinTech companies allow customers to complete financial transactions without the need for bank intermediaries. This could result in the loss of revenue from transaction fees and fewer customer accounts. If WesBanco is unable to attract new and retain current customers, loan and deposit growth could decrease, causing WesBanco’s results of operations and financial condition to be negatively impacted.

WESBANCO MAY NOT BE ABLE TO EXPAND ITS TRUST AND INVESTMENT SERVICES SEGMENT AND RETAIN ITS CURRENT CUSTOMERS.

WesBanco may not be able to attract new and retain current investment management clients due to competition from the following:

 

   

commercial banks and trust companies;

 

   

mutual fund companies;

 

   

investment advisory firms;

 

   

law firms;

 

   

brokerage firms; and

 

   

other financial services companies.

Its ability to successfully attract and retain investment management clients is dependent upon its ability to compete with competitors’ investment products, level of investment performance, client services and marketing

 

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and distribution capabilities. Due to changes in economic conditions, the performance of the trust and investment services segment may be negatively impacted by the financial markets in which investment clients’ assets are invested, causing clients to seek other alternative investment options. If WesBanco is not successful, its results from operations and financial position may be negatively impacted.

CUSTOMERS MAY DEFAULT ON THE REPAYMENT OF LOANS WHICH COULD SIGNIFICANTLY IMPACT RESULTS OF OPERATIONS THROUGH INCREASES IN THE PROVISION AND ALLOWANCE FOR LOAN LOSSES.

The Bank’s customers may default on the repayment of loans, which may negatively impact WesBanco’s earnings due to loss of principal and interest income. Increased operating expenses may result from the allocation of management time and resources to the collection and work-out of the loan. Collection efforts may or may not be successful causing WesBanco to write off the loan or repossess the collateral securing the loan, which may or may not exceed the balance of the loan.

WesBanco maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, to provide for probable incurred losses in our loan portfolio. Management evaluates the appropriateness of the allowance for loan losses at least quarterly, which includes testing certain individual loans as well as collective pools of loans for impairment. This evaluation includes an assessment of actual loss experience within each category of the portfolio, individual commercial and commercial real estate loans that exhibit credit weakness; current economic events, including employment statistics, trends in bankruptcy filings, and other pertinent factors; industry or geographic concentrations; and regulatory guidance.

WesBanco’s regulatory agencies periodically review the allowance for loan losses. Based on their assessment the regulatory agencies may require WesBanco to adjust the allowance for loan losses. These adjustments could negatively impact WesBanco’s results of operations or financial position.

ECONOMIC CONDITIONS IN WESBANCO’S MARKET AREAS COULD NEGATIVELY IMPACT EARNINGS.

WesBanco Bank serves both individuals and business customers throughout West Virginia, Ohio, western Pennsylvania, Kentucky and southern Indiana. The substantial majority of WesBanco’s loan portfolio is to individuals and businesses in these markets. As a result, the financial condition, results of operations and cash flows of WesBanco are affected by local and regional economic conditions. A downturn in these economies could have a negative impact on WesBanco and the ability of the Bank’s customers to repay their loans. The value of the collateral securing loans to borrowers may also decline as the economy declines. As a result, deteriorating economic conditions in these markets could cause a decline in the overall quality of WesBanco’s loan portfolio requiring WesBanco to charge-off a higher percentage of loans and/or increase its allowance for loan losses. A decline in economic conditions in these markets may also force customers to utilize deposits held by WesBanco Bank in order to pay current expenses causing the Bank’s deposit base to shrink. As a result the Bank may have to borrow funds at higher rates in order to meet liquidity needs. Lower oil and gas prices in prior years have reduced shale gas activity in the region, which somewhat negatively impacted local and regional economic conditions, affecting both commercial and retail customers, resulting in lower deposits and credit deterioration in the loan portfolio. While current prices for oil and gas have increased, and shale gas activity has increased, these markets are volatile and lower prices could return in the near future. These events may have a negative impact on WesBanco’s earnings and financial condition.

CURRENT MARKET INTEREST RATES AND COST OF FUNDS MAY NEGATIVELY IMPACT WESBANCO’S BANKING BUSINESS.

Fluctuations in interest rates may negatively impact the business of the Bank. The Bank’s main source of income from operations is net interest income, which is equal to the difference between the interest income

 

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received on interest-bearing assets (usually loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (usually deposits and borrowings). These rates are highly sensitive to many factors beyond WesBanco’s control, including general economic conditions, both domestic and foreign, and the monetary and fiscal policies of various governmental and regulatory authorities. WesBanco Bank’s net interest income can be affected significantly by changes in market interest rates. Changes in relative interest rates may reduce the Bank’s net interest income as the difference between interest income and interest expense decreases. As a result, the Bank has adopted asset and liability management policies to minimize the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments and funding sources. However, even with these policies in place, WesBanco cannot be certain that changes in interest rates or the shape of the interest rate yield curve will not negatively impact its results of operations or financial position. The higher interest rates in 2017 caused a decrease in fair value of certain lower-rate securities within our investment portfolio of which the unrealized losses were recorded in other comprehensive income.

In the current rising rate environment, WesBanco’s cost of funds for banking operations may increase at a faster pace than asset yields. Cost of funds also may increase as a result of future general economic conditions, interest rates and competitive pressures. The Bank has traditionally obtained funds principally through deposits and borrowings from the Federal Home Loan Bank (FHLB), correspondent banks, and other wholesale borrowing sources. As a general matter, deposits are a cheaper source of funds than borrowings because interest rates paid for deposits are typically less than interest rates charged for borrowings. If, as a result of general economic conditions, market interest rates, competitive pressures or higher deposit betas in relation to increases in federal funds rate increases, the value of deposits at the Bank decreases relative to its overall banking operations, the Bank may have to rely more heavily on borrowings as a source of funds in the future.

SIGNIFICANT DECLINES IN U.S. AND GLOBAL MARKETS COULD HAVE A NEGATIVE IMPACT ON WESBANCO’S EARNINGS.

The capital and credit markets could experience extreme disruption. These conditions result in less liquidity, greater volatility, widening of credit spreads and a lack of price transparency in certain asset types. In many cases, markets could exert downward pressure on stock prices, security prices and credit capacity for certain issuers without regard to those issuers’ underlying financial strength. Sustained weakness in business and economic conditions in any or all of the domestic or foreign financial markets could result in credit deterioration in investment securities held by us, rating agency downgrades for such securities or other market factors that (such as lack of liquidity for re-sales, absence of reliable pricing information or unanticipated changes in the competitive market) could result in us having to recognize other-than-temporary impairment in the value of such investment securities, with a corresponding charge against earnings. Furthermore, our pension assets are primarily invested in equity and debt securities, and weakness in capital and credit markets could result in deterioration of these assets, and changes in certain key pension assumptions based on current interest rates, long-term rates of return and other economic or actuarial assumptions may increase minimum funding contributions and future pension expense. If these markets were to deteriorate further, these conditions may be material to WesBanco’s ability to access capital and may adversely impact results of operations.

Further, WesBanco’s trust and investment services income could be impacted by fluctuations in the securities market. A portion of this revenue is based on the value of the underlying investment portfolios. If the values of those investment portfolios decline, the Bank’s revenue could be negatively impacted.

WESBANCO COULD BE ADVERSELY AFFECTED BY THE RECENT ADOPTION OF U.S. FEDERAL INCOME TAX REFORM.

On December 22, 2017, H.R.1, known as the “Tax Cuts and Jobs Act,” was signed into law. Among other things, the Tax Cuts and Jobs Act lowers the corporate tax rate to 21%, eliminating current brackets that have a maximum tax rate of 35%. As a result of the reduction of the corporate tax rate to 21%, companies revalued their

 

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deferred tax assets and liabilities as of the date of enactment, and any resulting tax effects will need to be accounted for in the reporting period of enactment. WesBanco has undertaken a re-valuation of its deferred tax assets and liabilities, and the net deferred tax assets were written down $12.8 million in the fourth quarter of 2017. The remeasurement should be in accordance with SEC Staff Bulletin No. 18, which provides SEC staff guidance for the applications of ASC Topic 740, Income Tax, in the reporting period in which the 2017 Tax Act was signed into law. In addition, the new law could have an adverse impact on WesBanco’s municipal bond portfolio and low income housing tax credits. Since the new law is reducing the federal income tax rate to 21%, the benefit of these investments could deteriorate as corporations’ income tax expense declines.

RISKS INHERENT IN MUNICIPAL BONDS COULD HAVE A NEGATIVE IMPACT ON WESBANCO’S EARNINGS.

As of December 31, 2017, approximately 39% of WesBanco’s total securities portfolio was invested in municipal bonds. Although WesBanco’s municipal portfolio is broadly spread across the U.S., any downturn in the economy of a state or municipality in which WesBanco holds municipal obligations could increase the default risk of the respective debt. In addition, a portion of WesBanco’s municipal bond portfolio is comprised of Build America bonds. Due to current government sequester reducing the interest subsidy that the government provides to the issuing municipalities, extraordinary redemption provisions (ERP) may be executed by the municipality if it is in their favor to do so. There is a risk that when an ERP is executed, WesBanco may not recover its amortized cost in the bond if it was purchased at a premium. Credit risks are also prevalent when downgrades of credit ratings are issued by major credit rating agencies, which are caused by creditworthiness issues of both bond insurers and the municipality itself. Credit rating downgrades to a non-investment grade level may force WesBanco to sell a municipal bond at a price where amortized cost may not be recovered. The enacted Federal tax reform legislation reduces the corporate income tax rate to 21%. The decrease in the tax rate could significantly reduce the demand of tax-exempt municipal bonds causing the current market values to decline. Rising interest rates could also cause the current market values of our municipal bond portfolio to decline as they all have a fixed interest component. Any of the above default risks, early redemption risks and credit risks could cause WesBanco to take impairment charges, which could be significant, that would negatively impact earnings.

WESBANCO MAY BE REQUIRED TO WRITE DOWN GOODWILL AND OTHER INTANGIBLE ASSETS, CAUSING ITS FINANCIAL CONDITION AND RESULTS TO BE NEGATIVELY AFFECTED.

When WesBanco acquires a business, a portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. WesBanco’s goodwill is 41% and 43% of stockholders’ equity as of December 31, 2017 and 2016, respectively. Under current accounting standards, if WesBanco determines that goodwill or intangible assets are impaired, it is required to write down the carrying value of these assets. WesBanco conducts an annual review to determine whether goodwill and other identifiable intangible assets are impaired. WesBanco completed such an impairment analysis in 2017 and concluded that no impairment charge was necessary for the year ended December 31, 2017. WesBanco cannot provide assurance that it will not be required to take an impairment charge in the future. Any impairment charge would have a negative effect on its shareholders’ equity and financial results and may cause a decline in our stock price.

WESBANCO IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND SUPERVISION.

WesBanco is subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, rather than corporate shareholders. These regulations affect WesBanco’s lending practices, capital structure, investment practices, dividend policy, operations and growth, among other things. These regulations also impose obligations to maintain appropriate policies, procedure and controls. Congress and

 

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federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect WesBanco in substantial and unpredictable ways. Such changes could subject WesBanco to additional costs, limit the types of financial services and products that could be offered, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil penalties and/or reputation damage, which could have a material adverse effect on WesBanco’s business, financial condition and result of operations.

As of December 31, 2017, WesBanco had $164.3 million in subordinated and junior subordinated debt presented as a separate category of long-term debt on its Consolidated Balance Sheets, which includes $138.6 million in junior subordinated debt. For regulatory purposes, Trust Preferred Securities totaling $134.3 million underlying such junior subordinated debt are included in Tier 1 capital in accordance with regulatory reporting requirements. On March 1, 2005, the Federal Reserve Board adopted a rule that retains trust preferred securities in Tier 1 capital, but with stricter quantitative limits and clearer qualitative standards. Under the rule, the aggregate amount of trust preferred securities and certain other capital elements is limited to 25% of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital, subject to restrictions. The Dodd-Frank Act required the federal banking agencies to develop new consolidated capital requirements applicable to bank holding companies and banks. Rules issued in 2013 generally exclude trust preferred securities from Tier 1 capital beginning in 2015, however, a grandfather provision will permit bank holding companies with consolidated assets of less than $15 billion, such as WesBanco, to continue counting existing trust preferred securities as Tier 1 capital until they mature. For bank holding companies with consolidated assets greater than $15 billion, the existing trust preferred securities would be included as Tier 2 capital until the instruments are redeemed or mature.

In addition, new international capital standards known as Basel III, which were implemented by a U.S. federal banking agencies’ joint final rule issued in July 2013, and effective January 1, 2015, further increases the minimum capital requirements applicable to WesBanco and the Bank, which may negatively impact both entities. Additional information about these changes in capital requirements are described above in “Item 1. Business—Capital Requirements.”

Regulation of WesBanco and its subsidiaries is expected to continue to expand in scope and complexity in the future. These laws are expected to have the effect of increasing WesBanco’s costs of doing business and reducing its revenues, and may limit its ability to pursue business opportunities or otherwise adversely affect its business and financial condition. The Dodd-Frank Act and other laws, as well as rules implementing or related to them, may adversely affect WesBanco. Specifically, any governmental or regulatory action having the effect of requiring WesBanco to obtain additional capital or increase short-term liquidity could reduce earnings and have a material dilutive effect on current shareholders, including the Dodd-Frank Act source of strength requirement that bank holding companies make capital infusions into a troubled subsidiary bank. Legislation and regulation of debit card fees, credit cards and other bank services, as well as changes in WesBanco’s practices relating to those and other bank services, may affect WesBanco’s revenue and other financial results. Additional information about increased regulation is provided in “Item 1. Business” under the headings “Supervision and Regulation,” “Holding Company Regulations,” “Capital Requirements,” “Dodd-Frank Act,” and “Consumer Protection Laws.”

ADDITIONAL GROWTH WILL SUBJECT WESBANCO TO ADDITIONAL REGULATION AND INCREASED SUPERVISION.

The Dodd-Frank Act imposes additional regulatory requirements on institutions with $10 billion or more in assets. WesBanco had $9.8 billion in assets as of December 31, 2017 and expects to have over $10 billion in assets with the merger of FTSB in 2018, thus WesBanco would become subject to the following:

 

   

Supervision, examination and enforcement by the CFPB with respect to consumer financial protection laws;

 

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Regulatory stress testing requirements, whereby WesBanco would be required to conduct an annual stress test (using assumptions for baseline, adverse and severely adverse scenarios);

 

   

A modified methodology for calculating FDIC insurance assessments and potentially higher assessment rates as a result of institutions with $10 billion or more in assets being required to bear a greater portion of the cost of raising the reserve ratio;

 

   

Heightened compliance standards under the Volcker Rule;

 

   

Significantly reduced debit card interchange revenue from applicability of the Durbin Amendment; and

 

   

Enhanced supervision as a larger financial institution;

 

   

Registration for its derivatives and mandatory usage of a Central Clearinghouse (CCP) for clearing.

The imposition of these regulatory requirements and increased supervision may require additional commitment of financial resources to regulatory compliance and may increase WesBanco’s cost of operations. Further, the results of the stress testing process may lead WesBanco to retain additional capital or alter the mix of its capital components.

LIMITED AVAILABILITY OF BORROWINGS AND LIQUIDITY FROM THE FEDERAL HOME LOAN BANK SYSTEM AND OTHER SOURCES COULD NEGATIVELY IMPACT EARNINGS.

WesBanco Bank is currently a member bank of the Federal Home Loan Bank (“FHLB”) of Pittsburgh, and while it retains certain short-term borrowings from the FHLB of Cincinnati from prior bank acquisitions, it is no longer considered a member bank of such FHLB. Membership in this system of quasi-governmental, regional home-loan oriented agency banks allows us to participate in various programs offered by the FHLB. We borrow funds from the FHLB, which are secured by a blanket lien on certain residential and commercial mortgage loans, and if applicable, investment securities with collateral values in excess of the outstanding balances. Future earnings shortfalls and minimum capital requirements of the FHLB may impact the collateral necessary to secure borrowings and limit the borrowings extended to their member banks, as well as require additional capital contributions by member banks. The FHLB’s rating assigned to WesBanco Bank may also negatively impact the amount of term collateral and other conditions imposed by the FHLB upon WesBanco Bank. Should these situations occur, WesBanco’s short-term liquidity needs could be negatively impacted. If WesBanco was restricted from using FHLB advances due to weakness in the system or with the FHLB of Pittsburgh, WesBanco may be forced to find alternative funding sources. If WesBanco is required to rely more heavily on higher cost funding sources, revenues may not increase proportionately to cover these costs, which would adversely affect WesBanco’s results of operations and financial position.

THE SOUNDNESS OF OTHER FINANCIAL INSTITUTIONS COULD ADVERSELY IMPACT WESBANCO.

Financial service institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. WesBanco has exposure to various industries and counterparties, and WesBanco routinely executes transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutions. As a result, a default by, or potential default by, a financial institution could result in market-wide liquidity problems, losses or other financial institution defaults. Many of these transactions could expose WesBanco to credit risk in the event of default of our counterparty or client. These losses or defaults could adversely effect on our business, financial condition, and results of operations.

WESBANCO’S FINANCIAL CONDITION AND RESULTS OF OPERATIONS DEPEND ON THE SUCCESSFUL GROWTH OF ITS SUBSIDIARIES.

WesBanco’s primary business activity for the foreseeable future will be to act as the holding company of its banking and other subsidiaries. Therefore, WesBanco’s future profitability will depend on the success and growth of these subsidiaries. In the future, part of WesBanco’s growth may come from buying other banks and

 

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buying or establishing other companies. Such entities may not be profitable after they are purchased or established, and they may lose money or be dilutive to earnings per share, particularly for the first few years. A new bank or company may bring with it unexpected liabilities, bad loans, or poor employee relations, or the new bank or company may lose customers and the associated revenue. Dilution of book and tangible book value may occur as a result of an acquisition that may not be earned back for several years, if at all.

WESBANCO’S ABILITY TO PAY DIVIDENDS IS LIMITED, AND COMMON STOCK DIVIDENDS MAY HAVE TO BE REDUCED OR ELIMINATED.

Holders of shares of WesBanco’s common stock are entitled to dividends if, when, and as declared by WesBanco’s Board of Directors out of funds legally available for that purpose. Although the Board of Directors has declared cash dividends in the past, the current ability to pay dividends is largely dependent upon the receipt of dividends from the Bank. Federal and state laws impose restrictions on the ability of the Bank to pay dividends, which restrictions are more fully described in “Item 1. Business—Payment of Dividends.” In general, future dividend policy is subject to the discretion of the Board of Directors and will depend upon a number of factors, including WesBanco’s and the Bank’s future earnings, liquidity and capital requirements, regulatory constraints and financial condition.

FUTURE EXPANSION BY WESBANCO MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS AS WELL AS DILUTE THE INTERESTS OF OUR SHAREHOLDERS AND NEGATIVELY AFFECT THE PRICE OF OUR COMMON STOCK.

WesBanco may acquire other financial institutions, or branches or assets of other financial institutions, in the future. WesBanco may also open new branches and enter into new lines of business or offer new products or services. Any such expansion of our business will involve a number of expenses and risks, which may include:

 

   

the time and expense associated with identifying and evaluating potential expansions;

 

   

the potential inaccuracy of estimates and judgments used to evaluate credit, operations, management and market risk with respect to target institutions;

 

   

the time and costs of evaluating new markets, hiring local management and opening new offices, and the delay between commencing these activities and the generation of profits from the expansion;

 

   

the risk we could discover undisclosed liabilities resulting from any acquisitions for which we may become responsible;

 

   

our financing of the expansion;

 

   

the diversion of management’s attention to the negotiation of a transaction and the integration of the operations and personnel of the combining businesses;

 

   

entry into unfamiliar markets;

 

   

the introduction of new products and services into our existing business;

 

   

the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations;

 

   

the risk that benefits such as enhanced earnings that we anticipate from any new acquisitions may not develop and future results of the combined companies may be materially lower from those estimated; and

 

   

the risk of loss of key employees and customers.

We can give no assurance that integration efforts for any future acquisitions will be successful. We may issue equity securities in connection with acquisitions, which could dilute the economic and voting interests of our existing shareholders. WesBanco has a proposed merger with First Sentry Bancshares, Inc. that is anticipated to close early in the second quarter of 2018.

 

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SUITABLE ACQUISITION OPPORTUNITIES MAY NOT BE AVAILABLE TO WESBANCO IN THE FUTURE.

WesBanco continually evaluates opportunities to acquire other businesses. However, WesBanco may not have the opportunity to make suitable acquisitions on favorable terms in the future, which could negatively impact the growth of its business. WesBanco expects that other banking and financial companies, many of which have significantly greater resources, will compete to acquire compatible businesses. This competition could increase prices for acquisitions that WesBanco would likely pursue, and its competitors may have greater resources than it does. Also, acquisitions of regulated businesses such as banks are subject to various regulatory approvals. If WesBanco fails to receive the appropriate regulatory approvals, it will not be able to consummate an acquisition that it believes is in its best interests.

HIGHER FDIC DEPOSIT INSURANCE PREMIUMS AND ASSESSMENTS COULD ADVERSELY AFFECT WESBANCO’S FINANCIAL CONDITION.

Since 2008, the economic environment caused higher levels of bank failures, which dramatically increased FDIC resolution costs and led to a significant reduction in the deposit insurance fund. In order to restore reserve ratios of the deposit insurance fund, the FDIC has in the past significantly increased the assessment rates paid by financial institutions for deposit insurance. In addition, in May 2009, the FDIC imposed a special assessment on all insured institutions, and in November 2009, it adopted a rule requiring banks to prepay their FDIC assessments for years through 2012, which accompanied a rate increase beginning in 2011. In 2016, the FDIC achieved their targeted reserve fund ratio of 1.15 percent, which allowed banks with total assets of less than $10 billion to have a reduction in costs. Banks greater than $10 billion in total assets will continue to have higher assessed rates until the reserve fund ratio reaches 1.35 percent, including a 4.5 basis point surcharge until late 2018. Additionally, when WesBanco’s total assets surpass $10 billion, under the Dodd Frank Act, to the extent the FDIC increases reserves against future losses, the increased assessments (including the above mentioned surcharge) are to be borne primarily by institutions with assets of greater than $10 billion. Per the enacted Federal tax reform legislation, FDIC insurance premiums are no longer fully deductible for federal income tax purposes for banks above $10 billion in size. Additional increases in FDIC insurance premiums and future special assessments may adversely affect WesBanco’s results of operations and financial condition.

A NEW ACCOUNTING STANDARD WILL RESULT IN A SIGNIFICANT CHANGE IN HOW WE RECOGNIZE CREDIT LOSSES AND MAY HAVE A MATERIAL IMPACT ON OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss (“CECL”) model. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current generally accepted accounting principles (“GAAP”), which delays recognition until it is probable a loss has been incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of operations.

The new CECL standard will become effective for us for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. We are currently evaluating the impact the CECL model will

 

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have on our accounting, but we expect to recognize a one-time cumulative-effect adjustment to our allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. We cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on our financial condition or results of operations.

INTERRUPTION TO OUR INFORMATION SYSTEMS OR BREACHES IN SECURITY COULD ADVERSELY AFFECT WESBANCO’S OPERATIONS.

WesBanco relies on information systems and communications for operating and monitoring all major aspects of business, as well as internal management functions. Any failure, interruption, intrusion or breach in security of these systems could result in failures or disruptions in the WesBanco customer relationship, management, general ledger, deposit, loan and other systems. While WesBanco has policies, procedures and technical safeguards designed to prevent or limit the effect of any failure, interruption, intrusion or security breach of its information systems, and also performs testing of business continuity and disaster recovery plans, there can be no absolute assurance that the above-noted issues will not occur or, if they do occur, that they will be adequately addressed.

There have been efforts on the part of third parties to breach data security at financial institutions. The ability of our customers to bank remotely, including online and through mobile devices, requires secure transmission of confidential information and increases the risk of data security breaches. Because the techniques used to attack financial services company communications and information systems change frequently (and generally increase in sophistication), often attacks are not recognized until launched against a target, may be supported by foreign governments or other well-financed entities, and may originate from less regulated and remote areas around the world, we may be unable to address these techniques in advance of attacks, including by implementing adequate preventative measures. Certain financial institutions in the United States have also experienced attacks from technically sophisticated and well-resourced third parties that were intended to disrupt normal business activities by making internet banking systems inaccessible to customers for extended periods. These “denial-of-service” attacks, if attempted, would require substantial resources to defend, and may affect customer satisfaction and behavior.

Cyber-attacks on third party retailers or other business establishments that widely accept debit card or check payments could compromise sensitive bank customer information, such as debit card and account numbers. Such an attack could result in significant costs to the bank, such as costs to reimburse customers, reissue debit cards and open new customer accounts.

The occurrence of any such failure, disruption or security breach of WesBanco’s information systems, particularly if widespread or resulting in financial losses to our customers, could damage WesBanco’s reputation, result in a loss of customer business, subject WesBanco to additional regulatory scrutiny, and expose WesBanco to civil litigation and possible financial liability. In addition, the prevalence of cyber-attacks and other efforts to breach or disrupt our systems has led, and will continue to lead, to costs to WesBanco with respect to prevention and mitigation of these risks, as well as costs reimbursing customers for losses suffered as a result of these actions. Successful attacks or systems failures at other large financial institutions, whether or not WesBanco is included, could lead to a general loss of customer confidence in financial institutions with a potential negative impact on WesBanco’s business, additional demands on the part of our regulators, and increased costs to deal with risks identified as a result of the problems affecting others. The risks described above could have a material effect on WesBanco’s business, results of operations and financial condition.

WESBANCO IS EXPOSED TO OPERATIONAL RISK THAT COULD ADVERSELY IMPACT THE COMPANY

WesBanco is exposed to multiple types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, clerical or record-keeping errors and computer or

 

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telecommunications systems malfunctions. WesBanco’s business is dependent on the processing of the ability to process a large number of increasingly complex transactions. WesBanco could be materially and adversely affected if employees, clients, counterparties or other third parties caused an operational breakdown or failure, either as a result of human error, fraudulent manipulation or purposeful damage to any of our operations or systems.

LOSS OF KEY EMPLOYEES COULD IMPACT GROWTH AND EARNINGS AND MAY HAVE AN ADVERSE IMPACT ON BUSINESS.

Our operating results and ability to adequately manage our growth are highly dependent on the services, managerial abilities and performance of our key employees, including executive officers and senior management. Our success depends upon our ability to attract and retain highly skilled and qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of this management and personnel. The loss of services, or the inability to successfully complete planned or unplanned transitions of key personnel approaching normal retirement age, could have an adverse impact on WesBanco’s business, operating results and financial condition because of their skills, knowledge of the local markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

A HIGH PERCENTAGE OF WESBANCO’S LOAN PORTFOLIO IS IN WEST VIRGINIA, OHIO, PENNSYLVANIA, KENTUCKY, AND INDIANA AND IN COMMERCIAL AND RESIDENTIAL REAL ESTATE. DETERIORATIONS IN ECONOMIC CONDITIONS IN THIS AREA OR IN THE REAL ESTATE MARKET GENERALLY COULD BE MORE HARMFUL TO THE COMPANY COMPARED TO MORE DIVERSIFIED INSTITUTIONS.

As of December 31, 2017, approximately 21% of WesBanco’s loan portfolio was comprised of residential real estate loans, and 47% was comprised of commercial real estate loans.

Inherent risks of commercial real estate (“CRE”) lending include the cyclical nature of the real estate market, construction risk and interest rate risk. The cyclical nature of real estate markets can cause CRE loans to suffer considerable distress. During these times of distress, a property’s performance can be negatively affected by tenants’ deteriorating credit strength and lease expirations in times of softening demand caused by economic deterioration or over-supply conditions. Even if borrowers are able to meet their payment obligations, they may find it difficult to refinance their full loan amounts at maturity due to declines in property value. Other risks associated with CRE lending include regulatory changes and environmental liability. Regulatory changes in tax legislation, zoning or similar external conditions including environmental liability may affect property values and the economic feasibility of existing and proposed real estate projects.

The company’s CRE loan portfolio is concentrated in West Virginia, Ohio, Pennsylvania, Kentucky and Indiana. There are a wide variety of economic conditions within the local markets of the three states in which most of the company’s CRE loan portfolio is situated. Rates of employment, consumer loan demand, household formation, and the level of economic activity can vary widely from state to state and among metropolitan areas, cities and towns. Metropolitan markets comprise various submarkets where property values and demand can be affected by many factors, such as demographic makeup, geographic features, transportation, recreation, local government, school systems, utility infrastructure, tax burden, building-stock age, zoning and building codes, and available land for development. As a result of the high concentration of the company’s loan portfolio, it may be more sensitive, as compared to more diversified institutions, to future disruptions in and deterioration of this market, which could lead to losses which could have a material adverse effect on the business, financial condition and results of operations of the company.

 

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WESBANCO MAY NEED TO RAISE CAPITAL IN THE FUTURE, BUT CAPITAL MAY NOT BE AVAILABLE WHEN NEEDED OR AT ACCEPTABLE TERMS.

Federal and state banking regulators require WesBanco and its banking subsidiary, WesBanco Bank, to maintain adequate levels of capital to support its operations. In addition, in the future WesBanco may need to raise additional capital to support its business or to finance acquisitions, if any, or WesBanco may otherwise elect to raise additional capital in anticipation of future growth opportunities. If WesBanco’s total assets were to increase to $15 billion due to acquisitions, certain trust preferred securities would no longer be included in the Tier 1 capital of the risk-based capital guidelines, although it is expected it should count as Tier 2 capital. WesBanco has $138.6 million and $137.6 million in junior subordinated debt in its Consolidated Balance Sheet as of December 31, 2017 and 2016, respectively.

WesBanco’s ability to raise additional capital for parent company or banking subsidiary needs will depend on conditions at that time in the capital markets, overall economic conditions, WesBanco’s financial performance and condition, and other factors, many of which are outside our control. There is no assurance that, if needed, WesBanco will be able to raise additional capital or unsecured debt that may count as tier 2 capital on favorable terms or at all. An inability to raise additional capital may have a material adverse effect on our ability to expand operations, and on our financial condition, results of operations and future prospects.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

WesBanco’s subsidiaries generally own their respective offices, related facilities and any unimproved real property held for future expansion. At December 31, 2017, WesBanco operated 172 banking offices in West Virginia, Ohio, western Pennsylvania, Kentucky, and southern Indiana, of which 131 were owned and 41 were leased. WesBanco also operated four loan production offices leased in West Virginia, Ohio and western Pennsylvania. These leases expire at various dates through November 2040 and generally include options to renew. The Bank also owns several regional headquarters buildings in various markets, most of which also house a banking office and/or certain back office functions.

The main office of WesBanco is located at 1 Bank Plaza, Wheeling, West Virginia, in a building owned by the Bank. The building contains approximately 100,000 square feet and serves as the main office for both WesBanco’s community banking segment and its trust and investment services segment, as well as its executive offices. The Bank’s major back office operations currently occupy approximately 90% of the space available in an office building connected via sky-bridge to the main office. This adjacent back office building is owned by WesBanco Properties, Inc., a subsidiary of WesBanco, with the remainder of the building leased to unrelated businesses.

At various building locations, WesBanco rents or makes available commercial office space to unrelated businesses. Rental income totaled $1.3 million, $0.8 million and $0.6 million in 2017, 2016 and 2015, respectively. For additional disclosures related to WesBanco’s properties, other fixed assets and leases, please refer to Note 6, “Premises and Equipment” in the Consolidated Financial Statements.

 

ITEM 3. LEGAL PROCEEDINGS

WesBanco is also involved in lawsuits, claims, investigations and proceedings, which arise in the ordinary course of business. While any litigation contains an element of uncertainty, WesBanco does not believe that a material loss related to such proceedings or claims pending or known to be threatened is reasonably possible.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

 

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PART II

 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

WesBanco’s common stock is quoted on the NASDAQ Global Select Stock Market under the symbol WSBC. The approximate number of record holders of WesBanco’s $2.0833 par value common stock as of February 16, 2018 was 6,623. The number of holders does not include WesBanco employees who have purchased stock or had stock allocated to them through WesBanco’s Employee Stock Ownership and 401(k) plan (the “KSOP”). All WesBanco employees who meet the eligibility requirements of the KSOP are included in this retirement plan.

The table below presents for each quarter in 2017 and 2016, the high and low sales price per share as reported by NASDAQ and cash dividends declared per share.

 

     2017      2016  
     High      Low      Dividend
Declared
     High      Low      Dividend
Declared
 

Fourth quarter

   $ 43.09      $ 38.09      $ 0.260      $ 43.77      $ 32.06      $ 0.240  

Third quarter

     41.42        35.49        0.260        33.09        29.78        0.240  

Second quarter

     41.77        36.49        0.260        33.47        28.89        0.240  

First quarter

     44.19        34.81        0.260        30.36        26.93        0.240  

In April 2015, WesBanco shareholders approved an increase in the number of authorized shares of common stock from 50,000,000 shares to 100,000,000 shares.

At December 31, 2017, WesBanco had twelve capital trusts, which are all wholly-owned trust subsidiaries of WesBanco formed for the purpose of issuing Trust Preferred Securities and lending the proceeds to WesBanco. The debentures and trust preferred securities issued by the trusts provide that WesBanco has the right to elect to defer the payment of interest on the debentures and trust preferred securities for up to an aggregate of 20 quarterly periods. However, if WesBanco should defer the payment of interest or default on the payment of interest, it may not declare or pay any dividends on its common stock during any such period. For additional disclosure relating to WesBanco Trust Preferred Securities, refer to Note 11, “Subordinated Debt and Junior Subordinated Debt” in the Consolidated Financial Statements.

Federal and state laws impose restrictions on the ability of the Bank to pay dividends, which restrictions are more fully described in “Item 1. Business—Payment of Dividends.”

As of December 31, 2017, WesBanco had two active one million share stock repurchase plans. The first plan was originally approved by the Board of Directors on March 21, 2007 and the second, which is incremental to the first, was approved October 22, 2015. Each provides for shares to be repurchased for general corporate purposes, which may include a subsequent resource for potential acquisitions, shareholder dividend reinvestment and employee benefit plans. The timing, price and quantity of purchases are at the discretion of WesBanco, and the plan may be discontinued or suspended at any time.

Repurchases in the fourth quarter include those for the KSOP and dividend reinvestment plans and repurchases to facilitate stock compensation transactions and related income tax withholdings.

Certain information relating to securities authorized for issuance under equity compensation plans is set forth under the heading “Equity Compensation Plan Information” in Part III, “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

 

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The following table shows the activity in WesBanco’s stock repurchase plan and other purchases for the quarter ended December 31, 2017:

 

Period

   Total Number
of Shares
Purchased
     Average Price
Paid per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
     Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans
 

Balance at September 30, 2017

              1,107,320  

October 1, 2017 to October 31, 2017

           

Open market repurchases

     —          —          —          1,107,320  

Other transactions (1)

     16,188      $ 41.79        N/A        N/A  

November 1, 2017 to November 30, 2017

           

Open market repurchases

     —          —           —          1,107,320  

Other repurchases (2)

     23        40.40        23        1,107,297  

Other transactions (1)

     1,816        40.57        N/A        N/A  

December 1, 2017 to December 31, 2017

           

Open market repurchases

     —          —          —          1,107,297  

Other transactions (1)

     938        41.42        N/A        N/A  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fourth Quarter 2017

           

Open market repurchases

     —          —          —          1,107,320  

Other repurchases (2)

     23        40.40        23        1,107,297  

Other transactions (1)

     18,942        41.66        N/A        N/A  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     18,965      $ 41.66        23        1,107,297  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Consists of open market purchases transacted for employee benefit and dividend reinvestment plans.

(2)

Consists of shares purchased from employees for the payment of withholding taxes to facilitate stock compensation transactions.

N/A—Not applicable

 

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The following graph shows a comparison of cumulative total shareholder returns for WesBanco, the Russell 2000 Index and the SNL Small Cap Bank Index. The total shareholder return assumes a $100 investment in the common stock of WesBanco and each index since December 31, 2012 with reinvestment of dividends.

 

LOGO

 

     Period Ending  

Index

   12/31/12      12/31/13      12/31/14      12/31/15      12/31/16      12/31/17  

WesBanco, Inc.

     100.00        148.24        165.76        147.19        217.28        210.73  

Russell 2000

     100.00        138.82        145.62        139.19        168.85        193.58  

SNL Small Cap Bank Index

     100.00        139.47        147.01        161.00        228.27        239.41  

 

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ITEM 6. SELECTED FINANCIAL DATA

The following consolidated selected financial data is derived from WesBanco’s audited financial statements as of and for the five years ended December 31, 2017. The following consolidated financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and the Consolidated Financial Statements and related notes included elsewhere in this report. WesBanco’s acquisitions during the five years ended December 31, 2017 include YCB on September 9, 2016 and ESB on February 10, 2015 and include the results of operations since the date of acquisition.

 

    For the years ended December 31,  

(dollars in thousands, except shares and per share amounts)

  2017     2016     2015     2014     2013  

PER COMMON SHARE INFORMATION

         

Earnings per common share—basic

  $ 2.15   $ 2.16     $ 2.15     $ 2.39     $ 2.18  

Earnings per common share—diluted

    2.14     2.16       2.15       2.39       2.18  

Earnings per common share—diluted, excluding certain items (1)(2)

    2.45     2.37       2.34       2.42       2.21  

Dividends declared per common share

    1.04     0.96       0.92       0.88       0.78  

Book value at year end

    31.68     30.53       29.18       26.90       25.59  

Tangible book value at year end (1)

    18.42     17.19       16.51       16.09       14.68  

Average common shares outstanding—basic

    44,003,208     40,100,320       37,488,331       29,249,499       29,270,922  

Average common shares outstanding—diluted

    44,075,293     40,127,076       37,547,127       29,333,876       29,344,683  

SELECTED BALANCE SHEET INFORMATION

         

Securities

  $ 2,284,822   $ 2,316,214     $ 2,422,450     $ 1,511,094     $ 1,532,906  

Loans held for sale

    20,320     17,315       7,899       5,865       5,855  

Net portfolio loans

    6,296,157     6,205,762       5,024,132       4,042,112       3,847,549  

Total assets

    9,816,178     9,790,877       8,470,298       6,296,565       6,144,773  

Deposits

    7,043,588     7,040,879       6,066,299       5,048,983       5,062,530  

Total FHLB and other borrowings

    1,133,008     1,168,322       1,123,106       303,816       190,044  

Subordinated debt and junior subordinated debt

    164,327     163,598       106,196       106,176       106,137  

Shareholders’ equity

    1,395,321     1,341,408       1,122,132       788,190       746,595  

SELECTED RATIOS

         

Return on average assets

    0.96     0.97     0.99     1.12     1.05

Return on average assets, excluding certain
items (1)(2)

    1.09     1.07       1.08       1.13       1.06  

Return on average tangible assets (1)

    1.05     1.06       1.08       1.20       1.13  

Return on average tangible assets, excluding certain items (1)(2)

    1.20     1.16       1.17       1.21       1.14  

Return on average equity

    6.83     7.13       7.62       8.97       8.72  

Return on average equity, excluding certain
items (1)(2)

    7.79     7.83       8.30       9.08       8.83  

Return on average tangible equity (1)

    12.23     12.73       13.41       15.39       15.79  

Return on average tangible equity, excluding certain items (1)(2)

    13.90     13.96       14.58       15.57       15.99  

Net interest margin (3)

    3.44     3.32       3.41       3.61       3.58  

Efficiency ratio (1)

    56.44     56.69       57.05       59.59       60.99  

Average loans to average deposits

    89.86     85.79       78.53       76.89       75.28  

Allowance for loan losses to total loans

    0.71     0.70       0.82       1.09       1.22  

Allowance for loan losses to total non-performing loans

    104.35     110.76       92.84       87.76       91.99  

Non-performing assets to total assets

    0.50     0.49       0.60       0.89       0.92  

Net loan charge-offs to average loans

    0.13     0.12       0.23       0.23       0.38  

Average shareholders’ equity to average assets

    14.04     13.60       13.04       12.48       12.00  

Tangible equity to tangible assets (1)

    8.79     8.20       7.95       7.88       7.35  

Tier 1 leverage ratio

    10.39     9.81       9.38       9.88       9.27  

Tier 1 capital to risk-weighted assets

    14.12     13.16       13.35       13.76       13.06  

 

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    For the years ended December 31,  

(dollars in thousands, except shares and per share amounts)

  2017     2016     2015     2014     2013  

Total capital to risk-weighted assets

    15.16 %     14.18     14.11     14.81     14.19

Common equity tier 1 capital ratio (CET 1)

    12.14     11.28       11.66       N/A       N/A  

Dividend payout ratio

    48.37     44.44       42.79       36.82       35.78  

Trust assets at market value (4)

  $ 3,943,519   $ 3,723,142     $ 3,625,411     $ 3,840,540     $ 3,688,734  

 

(1)

See non-GAAP Measures with this “Item 6. Selected Financial Data” for additional information relating to the calculation of this item.

(2)

Certain items excluded from the calculation consist of after-tax merger-related expenses and the net deferred tax asset re-valuation.

(3)

Presented on a fully taxable-equivalent (FTE) and annualized basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35% for each period presented. WesBanco believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

(4)

Trust assets are held by the Bank, in fiduciary or agency capacities for its customers and therefore are not included as assets on WesBanco’s Consolidated Balance Sheets.

N/A—not applicable

 

     For the years ended December 31,  

(dollars in thousands, except per share amounts)

   2017      2016      2015      2014      2013  

SUMMARY STATEMENTS OF INCOME

              

Interest and dividend income

   $ 332,424      $ 286,097      $ 261,712      $ 215,991      $ 217,890  

Interest expense

     42,129        32,767        24,725        22,763        32,403  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     290,295        253,330        236,987        193,228        185,487  

Provision for credit losses

     9,986        8,478        8,353        6,405        9,086  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for credit losses

     280,309        244,852        228,634        186,823        176,401  

Non-interest income

     88,840        81,499        74,466        68,504        69,285  

Non-interest expense

     220,860        208,680        193,923        161,633        160,998  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before provision for income taxes

     148,289        117,671        109,177        93,694        84,688  

Provision for income taxes

     53,807        31,036        28,415        23,720        20,763  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 94,482      $ 86,635      $ 80,762      $ 69,974      $ 63,925  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—basic

   $ 2.15      $ 2.16      $ 2.15      $ 2.39      $ 2.18  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—diluted

   $ 2.14      $ 2.16      $ 2.15      $ 2.39      $ 2.18  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-GAAP Measures

The following non-GAAP financial measures used by WesBanco provide information that WesBanco believes is useful to investors in understanding WesBanco’s operating performance and trends, and facilitates comparisons with the performance of WesBanco’s peers. The following tables summarize the non-GAAP financial measures derived from amounts reported in WesBanco’s financial statements.

 

     For the years ended December 31,  

(dollars in thousands, except per share amounts)

   2017     2016     2015     2014     2013  

Tangible equity to tangible assets:

          

Total shareholders’ equity

   $ 1,395,321     $ 1,341,408     $ 1,122,132     $ 788,190     $ 746,595  

Less: goodwill and other intangible assets, net of deferred tax liability

     (583,903     (586,403     (487,270     (316,914     (318,161
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible equity

     811,418       755,005       634,862       471,276       428,434  

Total assets

     9,816,178       9,790,877       8,470,298       6,296,565       6,144,773  

Less: goodwill and other intangible assets, net of deferred tax liability

     (583,903     (586,403     (487,270     (316,914     (318,161
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible assets

   $ 9,232,275     $ 9,204,474     $ 7,983,028     $ 5,979,651     $ 5,826,612  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible equity to tangible assets

     8.79     8.20     7.95     7.88     7.35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     For the years ended December 31,  

(dollars in thousands, except per share amounts)

   2017     2016     2015     2014     2013  

Tangible book value per share:

          

Total shareholders’ equity

   $ 1,395,321     $ 1,341,408     $ 1,122,132     $ 788,190     $ 746,595  

Less: goodwill and other intangible assets, net of deferred tax liability

     (583,903     (586,403     (487,270     (316,914     (318,161
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible equity

     811,418       755,005       634,862       471,276       428,434  

Common shares outstanding

     44,043,244       43,931,715       38,459,635       29,298,188       29,175,236  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible book value per share at year end

   $ 18.42     $ 17.19     $ 16.51     $ 16.09     $ 14.68  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average tangible equity:

          

Net income

   $ 94,482     $ 86,635     $ 80,762     $ 69,974     $ 63,925  

Add: amortization of intangibles, net of tax

     3,211       2,339       2,038       1,248       1,487  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before amortization of intangibles

     97,693       88,974       82,800       71,222       65,412  

Average total shareholders’ equity

     1,383,935       1,215,888       1,059,490       780,423       733,249  

Less: average goodwill and other intangibles, net of deferred tax liability

     (584,885     (516,840     (442,215     (317,523     (318,913
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average tangible equity

   $ 799,050     $ 699,048     $ 617,275     $ 462,900     $ 414,336  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average tangible equity

     12.23     12.73     13.41     15.39     15.79
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average tangible assets:

          

Net income

   $ 94,482     $ 86,635     $ 80,762     $ 69,974     $ 63,925  

Add: amortization of intangibles, net of tax

     3,211       2,339       2,038       1,248       1,487  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before amortization of intangibles

     97,693       88,974       82,800       71,222       65,412  

Average total assets

     9,854,312       8,939,886       8,123,981       6,253,253       6,109,311  

Less: average goodwill and other intangibles, net of deferred tax liability

     (584,885     (516,840     (442,215     (317,523     (318,913
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average tangible assets

   $ 9,269,427     $ 8,423,046     $ 7,681,766     $ 5,935,730     $ 5,790,398  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average tangible assets

     1.05     1.06     1.08     1.20     1.13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Efficiency Ratio

          

Non-interest expense

   $ 220,860     $ 208,680     $ 193,923     $ 161,633     $ 160,998  

Less: restructuring and merger-related expense

     (945     (13,261     (11,082     (1,309     (1,310
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense excluding restructuring and merger-related expense

     219,915       195,419       182,841       160,324       159,688  

Net interest income on a fully-taxable equivalent basis

     300,789       263,232       246,014       200,545       192,556  

Non-interest income

     88,840       81,499       74,466       68,504       69,285  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income on a fully-taxable equivalent basis plus non-interest income

   $ 389,629     $ 344,731     $ 320,480     $ 269,049     $ 261,841  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Efficiency Ratio

     56.44     56.69     57.05     59.59     60.99
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income, excluding net deferred tax asset revaluation and after-tax merger-related expenses:

          

Net income

   $ 94,482     $ 86,635     $ 80,762     $ 69,974     $ 63,925  

Add: net deferred tax asset revaluation

     12,780       —         —         —         —    

Add: after-tax merger-related expenses (1)

     614       8,619       7,203       851       851  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income, excluding net deferred tax asset revaluation and after-tax merger-related expenses

   $ 107,876     $ 95,254     $ 87,965     $ 70,825     $ 64,776  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     For the years ended December 31,  

(dollars in thousands, except per share amounts)

   2017     2016     2015     2014     2013  

Net income, excluding net deferred tax asset revaluation and after-tax merger-related expenses per diluted share:

          

Net income per diluted share

   $ 2.14     $ 2.16     $ 2.15     $ 2.39     $ 2.18  

Add: net deferred tax asset revaluation per diluted share

     0.29       —         —         —         —    

Add: after-tax merger-related expenses per diluted share (1)

     0.02       0.21       0.19       0.03       0.03  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income, excluding net deferred tax asset revaluation and after-tax merger-related expenses per diluted share

   $ 2.45     $ 2.37     $ 2.34     $ 2.42     $ 2.21  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average equity, excluding after-tax merger-related expenses and net deferred tax asset revaluation:

          

Net income

   $ 94,482     $ 86,635     $ 80,762     $ 69,974     $ 63,925  

Add: after-tax merger-related expenses (1)

     614       8,619       7,203       851       851  

Add: net deferred tax asset revaluation

     12,780       —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income, excluding after-tax merger-related expenses and net deferred tax asset revaluation

     107,876       95,254       87,965       70,825       64,776  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average total shareholders’ equity

   $ 1,383,935     $ 1,215,888     $ 1,059,490     $ 780,423     $ 733,249  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average tangible equity, excluding after-tax merger-related expenses and net deferred tax asset revaluation

     7.79     7.83     8.30     9.08     8.83
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average tangible equity, excluding after-tax merger-related expenses and net deferred tax asset revaluation:

          

Net income

   $ 94,482     $ 86,635     $ 80,762     $ 69,974     $ 63,925  

Add: after-tax merger-related expenses (1)

     614       8,619       7,203       851       851  

Add: net deferred tax asset revaluation

     12,780       —         —         —         —    

Add: amortization of intangibles, net of tax

     3,211       2,339       2,038       1,248       1,487  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before amortization of intangibles and excluding after-tax merger-related expenses and net deferred tax asset revaluation

     111,087       97,593       90,003       72,073       66,263  

Average total shareholders’ equity

     1,383,935       1,215,888       1,059,490       780,423       733,249  

Less: average goodwill and other intangibles, net of deferred tax liability

     (584,885     (516,840     (442,215     (317,523     (318,913
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average tangible equity

   $ 799,050     $ 699,048     $ 617,275     $ 462,900     $ 414,336  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average tangible equity, excluding after-tax merger-related expenses and net deferred tax asset revaluation

     13.90     13.96     14.58     15.57     15.99
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average assets, excluding after-tax merger-related expenses and net deferred tax asset revaluation:

          

Net income

   $ 94,482     $ 86,635     $ 80,762     $ 69,974     $ 63,925  

Add: after-tax merger-related expenses (1)

     614       8,619       7,203       851       851  

Add: net deferred tax asset revaluation

     12,780       —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income, excluding after-tax merger-related expenses and net deferred tax asset revaluation

     107,876       95,254       87,965       70,825       64,776  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average total assets

   $ 9,854,312     $ 8,939,886     $ 8,123,981     $ 6,253,253     $ 6,109,311  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average tangible assets, excluding after-tax merger-related expenses and net deferred tax asset revaluation

     1.09     1.07     1.08     1.13     1.06
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     For the years ended December 31,  

(dollars in thousands, except per share amounts)

   2017     2016     2015     2014     2013  

Return on average tangible assets, excluding after-tax merger-related expenses and net deferred tax asset revaluation:

          

Net income

   $ 94,482     $ 86,635     $ 80,762     $ 69,974     $ 63,925  

Add: amortization of intangibles, net of tax

     3,211       2,339       2,038       1,248       1,487  

Add: after-tax merger-related expenses (1)

     614       8,619       7,203       851       851  

Add: net deferred tax asset revaluation

     12,780       —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income, excluding after-tax merger-related expenses and net deferred tax asset revaluation

     111,087       97,593       90,003       72,073       66,263  

Average total assets

     9,854,312       8,939,886       8,123,981       6,253,253       6,109,311  

Less: average goodwill and other intangibles, net of deferred tax liability

     (584,885     (516,840     (442,215     (317,523     (318,913
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average tangible assets

   $ 9,269,427     $ 8,423,046     $ 7,681,766     $ 5,935,730     $ 5,790,398  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average tangible assets, excluding after-tax merger-related expenses and net deferred tax asset revaluation

     1.20     1.16     1.17     1.21     1.14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Tax effected at 35%

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis represents an overview of the results of operations and financial condition of WesBanco. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto.

FORWARD-LOOKING STATEMENTS

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-Qs for the prior quarters ended March 31, June 30 and September 30, 2017, respectively, and documents subsequently filed by WesBanco which are available at the SEC’s website, www.sec.gov or at WesBanco’s website, www.wesbanco.com. Investors are cautioned that forward-looking statements, which are not historical fact, involve risks and uncertainties, including those detailed under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. Such statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements, including, without limitation, that the businesses of WesBanco and FTSB may not be integrated successfully or such integration may take longer to accomplish than excepted; the expected cost savings and any revenue synergies from the merger of WesBanco and FTSB may not be fully realized within the expected timeframes; disruption from the merger of WesBanco and FTSB may make it more difficult to maintain relationships with clients, associates, or suppliers; the effects of changing regional and national economic conditions; changes in interest rates, spreads on earning assets and interest-bearing liabilities, and associated interest rate sensitivity; sources of liquidity available to WesBanco and its related subsidiary operations; potential future credit losses and the credit risk of commercial, real estate, and consumer loan customers and their borrowing activities; actions of the Federal Reserve, the FDIC, the SEC, FINRA, the Municipal Securities Rulemaking Board, the Securities Investors Protection Corporation, and other regulatory bodies; potential legislative and federal and state regulatory actions and reform, including, without limitation, the impact of the implementation of the Dodd-Frank Act; adverse decisions of federal and state courts; fraud, scams and schemes of third parties; internet hacking; competitive conditions in the financial services industry; rapidly changing technology affecting financial services; marketability of debt instruments and corresponding impact on fair value adjustments; and/or other external developments materially impacting WesBanco’s operational and financial performance. WesBanco does not assume any duty to update forward-looking statements.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

WesBanco’s Consolidated Financial Statements are prepared in accordance with U.S. GAAP and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.

The most significant accounting policies followed by WesBanco are included in Note 1, “Summary of Significant Accounting Policies,” of the Consolidated Financial Statements. These policies, along with other Notes to the Consolidated Financial Statements and this MD&A, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management has identified the allowance for loan losses and the evaluation of goodwill and other intangible assets for impairment to be the accounting estimates that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

 

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Allowance for Credit Losses—The allowance for credit losses represents management’s estimate of probable losses inherent in the loan portfolio and in future advances against loan commitments. Determining the amount of the allowance requires significant judgment about the collectability of loans and the factors that deserve consideration in estimating probable credit losses. The allowance is increased by a provision charged to operating expense and reduced by charge-offs, net of recoveries. Management evaluates the appropriateness of the allowance at least quarterly. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change from period to period.

The evaluation includes an assessment of quantitative factors such as actual loss experience within each category of loans and testing of certain commercial loans for impairment. The evaluation also considers qualitative factors such as economic trends and conditions, which includes levels of unemployment, real estate values and the impact on specific industries and geographical markets, changes in lending policies and underwriting standards, delinquency and other credit quality trends, concentrations of credit risk, if any, the results of internal loan reviews and examinations by bank regulatory agencies, the volatility of historical loss rates, the velocity of changes in historical loss rates, and regulatory guidance pertaining to the allowance for credit losses. Management relies on observable data from internal and external sources to the extent it is available to evaluate each of these factors and adjusts the actual historical loss rates to reflect the impact these factors may have on probable losses in the portfolio.

Commercial real estate and commercial and industrial loans greater than $1 million that are reported as non-accrual or as a troubled debt restructuring are tested individually for impairment. Specific reserves are established when appropriate for such loans based on the present value of expected future cash flows of the loan or the estimated realizable value of the collateral, if any.

General reserves are established for loans that are not individually tested for impairment based on historical loss rates adjusted for the impact of the qualitative factors discussed above. Historical loss rates for commercial real estate and commercial and industrial loans are determined for each internal risk grade or group of pass grades using a migration analysis. Historical loss rates for commercial real estate land and construction, residential real estate, home equity and consumer loans that are not risk graded are determined for the total of each category of loans. Historical loss rates for deposit account overdrafts are based on actual losses in relation to average overdrafts for the period.

Management may also adjust its assumptions to account for differences between estimated and actual incurred losses from period to period. The variability of management’s assumptions could alter the level of the allowance for credit losses and may have a material impact on future results of operations and financial condition. The loss estimation models and methods used to determine the allowance for credit losses are continually refined and enhanced; however, there have been no material substantive changes compared to prior periods.

Goodwill and Other Intangible Assets—WesBanco accounts for business combinations using the acquisition method of accounting. Accordingly, the identifiable assets acquired, the liabilities assumed, and any non-controlling interest of an acquired business are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value recorded as goodwill. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. As of December 31, 2017, the carrying value of goodwill and other intangibles was $573.9 million and $15.3 million, respectively, which represents approximately 41.1% and 1.1% of total shareholders’ equity, respectively. As of December 31, 2017, WesBanco’s Community Banking segment had two reporting units with Goodwill.

Goodwill is not amortized but is evaluated for impairment annually, or more often if events or circumstances indicate it may be impaired. Finite-lived intangible assets, which consist primarily of core deposit

 

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and customer list intangibles (long-term customer-relationship intangible assets) are amortized using straight-line and accelerated methods over their weighted-average estimated useful lives, ranging from ten to sixteen years in total, and are tested for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable. Non-compete agreements are recognized in other assets on the balance sheet and are amortized on a straight-line basis over the life of the respective agreements, ranging from one to four years.

WesBanco evaluated goodwill for impairment by determining if the fair value is greater than the carrying value of its reporting units. WesBanco uses market capitalization, multiples of tangible book value, a discounted cash flow model, and various other market-based methods to estimate the current fair value of its reporting units. In particular, the discounted cash flow model includes various assumptions regarding an investor’s required rate of return on WesBanco common stock, future loan loss provisions, future net interest margins, along with various growth and economic recovery and stabilization assumptions of the economy as a whole. The resulting fair values of each method are then weighted based on the relevance and reliability of each respective method in light of the current economic environment to arrive at a weighted average fair value. The evaluation also considered macroeconomic conditions such as the general economic outlook, regional and national unemployment rates, and recent trends in equity and credit markets. Additionally, industry and market considerations, such as market-dependent multiples and metrics relative to peers, were evaluated. WesBanco also considered recent trends in credit quality, overall financial performance, stock price appreciation, internal forecasts and various other market-based methods to estimate the current fair value of its reporting units. Since adopting Accounting Standards Update (“ASU”) 2017-04, “Intangibles-Goodwill and Other (Topic 350)”, the impairment charge is based on the excess of a reporting unit’s carrying amount over its fair value.

WesBanco concluded that goodwill at the reporting units was not impaired as of November 30, 2017, and also determined that goodwill was not impaired as of December 31, 2017 as there were no significant changes in market conditions, consolidated operating results, or forecasted future results from November 30, 2017, the date of the most recent goodwill impairment evaluation.

Intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized when the carrying amount of an intangible asset with a finite useful life is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the fair value of the asset. WesBanco does not have any indefinite-lived intangible assets. Intangible assets with finite useful lives as of December 31, 2017 are comprised of $15.2 million in core deposit intangibles held at the Bank and customer list intangibles of $0.1 million held at WesBanco Securities. As of December 31, 2017 there were no indicators of impairment related to intangible assets with finite useful lives.

 

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EXECUTIVE OVERVIEW

On November 13, 2017, WesBanco and First Sentry Bancshares, Inc. (“FTSB”), a bank holding company headquartered in Huntington, WV with approximately $658.2 million in assets (excluding goodwill), entered into a definitive Agreement and Plan of Merger providing for the merger of FTSB with and into WesBanco. The transaction, valued at approximately $101.4 million, is expected to close early in the second quarter of 2018.

WesBanco continued to achieve loan growth in commercial and home equity loans, maintained credit quality as the loan portfolio expanded, increased net interest income and non-interest income and enhanced operating efficiency through effective management of discretionary costs.

Net income increased $7.8 million or 9.1% to $94.5 million. Net income excluding after-tax merger-related expenses and net deferred tax asset revaluation (non-GAAP measure) increased $12.6 million or 13.2% to $107.9 million. Net interest income improved $37.0 million or 14.6%, primarily through a 10.1% increase in average earning assets from the YCB acquisition and organic loan growth and a higher net income margin of 3.44% as compared to 3.32% in 2016. Total commercial loans grew 4.0% and home equity loans grew 4.1% over the past twelve months, which more than offset targeted reductions in the consumer portfolio to reduce overall risk by increasing underwriting standards and reducing the emphasis on certain indirect lending products. Growth was achieved in certain categories of non-interest income: electronic banking fees increased $3.6 million, mortgage banking income increased $2.5 million and service charges on deposits increased $2.2 million. Excluding merger-related costs, non-interest expenses increased 12.5% compared to 2016 reflecting a full year impact of the YCB acquisition and continued preparations for the $10 billion asset threshold, partially offset by cost savings initiatives. Overall, WesBanco’s costs were well controlled in 2017 as WesBanco achieved the best efficiency ratio in the last five years of 56.44% (non-GAAP measure), a 25 basis point improvement from 2016.

Total assets as of December 31, 2017 increased $25.3 million or 0.3% compared to December 31, 2016, keeping WesBanco under the $10 billion asset threshold as of December 31, 2017. Portfolio loans of $6.3 billion increased 1.5% over the last twelve months, reflecting growth in our strategic focus categories including commercial and home equity loans. Secondary market loan sales in the residential real estate portfolio continued to increase, which reduced the amount of loans held on the balance sheet. Total deposits, excluding CDs, increased 4.0%, driven by 4.1% growth in interest bearing and non-interest bearing demand deposits, which now represent 49.3% of total deposits as of December 31, 2017.

WesBanco continues to maintain strong regulatory capital ratios after the YCB acquisition and implementation of the new BASEL III capital standards. As of December 31, 2017, Tier I leverage was 10.39%, Tier I risk-based capital was 14.12%, and total risk-based capital was 15.16% and the Common Equity Tier 1 capital ratio, was 12.14%. Both consolidated and bank-level regulatory capital ratios are well above the applicable “well-capitalized” standards promulgated by bank regulators, as well as the BASEL III capital standards. Total tangible equity to tangible assets (non-GAAP measure) was 8.79% at December 31, 2017, increasing from 8.20% at December 31, 2016, as a result of increases in shareholders’ equity at a faster pace than the increase in tangible assets.

Strong earnings and improved total capital have enabled WesBanco to increase the quarterly dividend rate 8.3% to $0.26 per share in the first quarter of 2017, the tenth increase over the last seven years, cumulatively representing a 86% increase. The dividend was increased again in February 2018 to $0.29 per share, a $0.03 per share or 11.5% increase to be paid April 2, 2018.

WesBanco Bank Community Development Corporation (“WBCDC”) was recently awarded multi-state New Market Tax Credits from the U.S. Department of Treasury’s Community Development Financial Institutions Fund totaling $40 million, which would provide a federal tax credit of $15.6 million over seven years. WBCDC’s goal is to promote meaningful, community-driven investments and fund a wide variety of businesses providing critical social and commercial services to low-income residents across the states of Indiana, Kentucky, Ohio, Pennsylvania and West Virginia.

 

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RESULTS OF OPERATIONS

EARNINGS SUMMARY

For the twelve months ending December 31, 2017, net income was $94.5 million, or $2.14 per diluted share, compared to $86.6 million, or $2.16 per diluted share, for 2016. Excluding the net deferred tax asset revaluation, as a result of the recently enacted Federal tax reform legislation, and after-tax merger-related expenses (non-GAAP measure), net income for the twelve months ended December 31, 2017, increased 13.3% to $107.9 million compared to $95.3 million for 2016. Per share earnings increased to $2.45 per diluted share for 2017 as compared to $2.37 per diluted share for 2016, an increase of 3.4%.

For the twelve months ending December 31, 2017, net interest income increased $37.0 million, or 14.6%, as average loan balances increased 15.3%, primarily due to the YCB acquisition, which closed on September 9, 2016, and the net interest margin increased 12 basis points to 3.44%. The increase in the net interest margin reflects the benefit from the increases in the Federal Reserve Board’s target federal funds rate over the past year. The increase in the cost of interest bearing liabilities is primarily due to higher rates for interest bearing demand deposits, which include public funds, and certain Federal Home Loan Bank and other borrowings. The average interest bearing deposit balances increased 20.4% from 2016 primarily due to the YCB acquisition.

For 2017, non-interest income increased $7.3 million or 9.0% compared to 2016. Service charges on deposits increased $2.2 million or 12.0% and electronic banking fees increased $3.6 million or 23.0% through a larger customer deposit base from the addition of YCB. Mortgage banking income increased $2.5 million or 99.8% due to increased secondary market sales of residential mortgage originations. The majority of these loans are being sold at a higher margin as they are now sold on a mandatory delivery basis as opposed to best efforts delivery basis. Net securities gains decreased $1.8 million or 75.9% due to agency calls in 2016.

The following comments on non-interest expense exclude merger-related expenses in both years. Non-interest expense in 2017 increased $24.5 million or 12.5%, compared to 2016. With net revenue growth of 13.2% in 2017, this positive operating leverage helped to improve the efficiency ratio in 2017 to 56.4% from 56.7% in 2016. For 2017, salaries and wages increased $13.1 million or 15.5% due to increased compensation expense related to a 12.2% increase in full-time equivalent employees, primarily late in the third quarter of 2016 from the YCB acquisition, and routine annual adjustments to compensation. Employee benefits expense increased $2.0 million or 7.1%, primarily from increased health insurance, social security contributions and other benefit plan costs resulting from a larger employee base. Increases in net occupancy and equipment were also primarily from costs related to the additional branches from the YCB acquisition and routine maintenance costs.

The provision for federal and state income taxes increased to $53.8 million in 2017 compared to $31.0 million in 2016. The increase in income tax expense was due to a $12.8 million impact from the revaluation of net deferred tax assets resulting from the recently enacted Federal tax reform legislation; a 26.0% increase in pre-tax income, and the adoption earlier this year of a new accounting standard related to low income housing tax credit investment amortization, which moved $1.2 million from other operating expense to the provision for income taxes.

 

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TABLE 1. NET INTEREST INCOME

 

     For the years ended December 31,  

(dollars in thousands)

   2017     2016     2015  

Net interest income

   $ 290,295   $ 253,330   $ 236,987  

Taxable-equivalent adjustments to net interest income

     10,494     9,902     9,027  
  

 

 

   

 

 

   

 

 

 

Net interest income, fully taxable-equivalent

   $ 300,789   $ 263,232   $ 246,014  
  

 

 

   

 

 

   

 

 

 

Net interest spread, non-taxable-equivalent

     3.17 %     3.08 %     3.19

Benefit of net non-interest bearing liabilities

     0.15 %     0.12 %     0.09
  

 

 

   

 

 

   

 

 

 

Net interest margin

     3.32 %     3.20 %     3.28

Taxable-equivalent adjustment

     0.12 %     0.12 %     0.13
  

 

 

   

 

 

   

 

 

 

Net interest margin, fully taxable-equivalent

     3.44 %     3.32 %     3.41
  

 

 

   

 

 

   

 

 

 

Net interest income, which is WesBanco’s largest source of revenue, is the difference between interest income on earning assets, primarily loans and securities, and interest expense on liabilities (deposits and short and long-term borrowings). Net interest income is affected by the general level and changes in interest rates, the steepness and shape of the yield curve, changes in the amount and composition of interest earning assets and interest bearing liabilities, as well as the frequency of repricing of existing assets and liabilities. Net interest income increased $37.0 million or 14.6% in 2017 compared to 2016, due to a 10.1% increase in average earning asset balances, primarily from the YCB acquisition, and a 12 basis point increase in the net interest margin. Loan balances increased by 1.5% in 2017, and were driven by 4.0% growth in total commercial loans and 4.1% growth in home equity loans, both strategic focus categories of WesBanco, and more than offset the targeted reductions in the consumer portfolio to reduce the overall risk profile. Total average deposits increased in 2017 by $742.0 million or 9.7% compared to 2016, while certificates of deposit, which have the highest overall interest cost among deposits, decreased by $131.0 million or 8.6%. Reflecting the benefit from multiple increases in the Federal Reserve’s target federal funds rate over the past year and the higher margin on the acquired YCB net assets, the net interest margin increased to 3.44% in 2017 compared to 3.32% in 2016. Yields increased in 2017 for most earning asset categories, more than offsetting an 11 basis point increase in the cost of interest bearing liabilities from 2016. The increase in the cost of interest bearing liabilities is primarily due to rate increases for larger balance customers in interest bearing demand deposits, which include public funds, and higher rates for certain short term and Federal Home Loan Bank borrowings. Approximately 8 basis points of accretion from prior acquisitions was included in the 2017 net interest margin compared to 7 basis points in the 2016 net interest margin.

Interest income increased $46.3 million or 16.2% in 2017 compared to 2016 due to higher average loan balances and higher yields in almost every earning asset category. Earning asset yields were influenced positively in 2017 by the 25 basis point target federal funds rate increases occurring in the first, second and fourth quarters. Average loan balances increased by $845.6 million or 15.3% in 2017 compared to 2016, primarily due to the YCB acquisition. Loan yields increased by 16 basis points during this same period to 4.28% due to higher loan yields on the acquired YCB loan portfolio and the previously mentioned federal funds rate increases. In 2017, average loans represented 72.8% of average earning assets, an increase from 69.5% in 2016. Total securities yields increased by 11 basis points in 2017 from 2016 due to lower amortization expense from paydowns on mortgage-backed securities, increases in market yields on new purchases and a higher percentage of average tax-exempt securities to total securities. The average balance of tax-exempt securities, which provide the highest yield within securities, increased 8.4% or $56.0 million over the last year, and were 31.2% of total average securities in 2017 compared to 28.5% in 2016, which helped to mitigate their 9 basis point decline as new securities yields were lower than those maturing throughout the period. While increasing 14 basis points in yield, taxable securities balances decreased 5.1% in 2017 from 2016. The securities portfolio balance was controlled by management throughout 2017 to maintain the size of the balance sheet in order to delay the financial impact of crossing $10 billion in assets.

 

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Portfolio loans increased $92.0 million or 1.5% over the last twelve months. Loan growth was achieved through $2.0 billion in total loan originations, led by $1.3 billion in business loan originations for 2017. Loan growth was driven by expanded market areas and additional commercial personnel in our core markets, offset by significant loan paydowns or payoffs as some loans moved into the secondary lending market by customers who refinanced their mortgages.

Interest expense increased $9.4 million or 28.6% in 2017 compared to 2016, due primarily to increases in the balances and rates paid on most interest bearing liability categories. The cost of interest bearing liabilities increased by 11 basis points in 2017. Average interest bearing deposits increased by $307.5 million or 6.2% from 2016, mostly due to the YCB acquisition; however, the average balance of CDs decreased $131.0 million or 8.6% from 2016. This decrease was partially due to a $30.2 million reduction in CDARS® balances from $135.2 million at December 31, 2016 to $105.0 million at December 31, 2017. In addition, average non-interest bearing demand deposits increased in 2017 by $342.9 million or 23.2% from 2016 and are now 25.7% of total average deposits, compared to 23.0% in 2016, reflecting customers’ preferences and marketing strategies. Average other borrowings and subordinated debt balances increased in 2017 by $121.4 million or 52.8% from 2016 primarily due to debt acquired in the YCB acquisition. The average rate paid on other borrowings and subordinated debt in 2017 increased by 32 and 83 basis points, respectively, from 2016 due to the higher rate borrowings assumed in the YCB acquisition, and increases in LIBOR, the index upon which most of the subordinated debt is priced. Most of these borrowings are currently variable rate. The average balance of FHLB borrowings decreased by $29.8 million in 2017 from 2016, but the average rate paid increased by 18 basis points due to higher interest rates and the replacement of some maturing shorter-term borrowings with those of a medium-term length throughout 2017.

On December 22, 2017, H.R.1, known as the “Tax Cuts and Jobs Act,” was signed into law. Among other things, the Tax Cuts and Jobs Act permanently lowers the corporate tax rate to 21% from the existing maximum rate of 35%, effective for tax years commencing January 1, 2018. As a result of the reduction of the corporate tax rate to 21%, it is anticipated that the net interest margin will be negatively impacted beginning in 2018, due to a decrease in the taxable-equivalent adjustment to net interest income. There will be no reduction to net interest income. Based on the current amount of tax-exempt interest income, the impact to the 2018 net interest margin is anticipated to be a reduction of approximately 6 basis points.

 

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TABLE 2. AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS

 

    For the years ended December 31,  
    2017     2016     2015  

(dollars in thousands)

  Average
Balance
    Interest     Average
Rate
    Average
Balance
    Interest     Average
Rate
    Average
Balance
     Interest      Average
Rate
 

ASSETS

                   

Due from banks-interest bearing

  $ 13,811     $ 118       0.85 %   $ 27,193     $ 145       0.53 %   $ 15,467      $ 27        0.17

Loans, net of unearned income (1)

    6,358,845       272,007       4.28 %     5,513,277       226,993       4.12 %     4,840,637        203,993        4.21

Securities: (2)

                   

Taxable

    1,591,149       38,630       2.43 %     1,677,128       38,490       2.29 %     1,757,288        39,314        2.24

Tax-exempt (3)

    723,019       29,983       4.15 %     667,066       28,292       4.24 %     568,671        25,791        4.54
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total securities

    2,314,168       68,613       2.96 %     2,344,194       66,782       2.85 %     2,325,959        65,105        2.80

Other earning assets

    47,548       2,179       4.58 %     45,704       2,079       4.55 %     28,721        1,614        5.61
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total earning assets (3)

    8,734,372       342,917       3.93 %     7,930,368       295,999       3.73 %     7,210,784        270,739        3.75
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Other assets

    1,119,940           1,009,518           913,197        
 

 

 

       

 

 

       

 

 

       

Total Assets

  $ 9,854,312         $ 8,939,886         $ 8,123,981        
 

 

 

       

 

 

       

 

 

       

LIABILITIES AND SHAREHOLDERS’ EQUITY

                   

Interest bearing demand deposits

  $ 1,613,451     $ 6,453       0.40 %   $ 1,340,001     $ 2,817       0.21 %   $ 1,143,965      $ 1,943        0.17

Money market accounts

    1,012,660       2,775       0.27 %     961,847       1,860       0.19 %     1,003,980        1,914        0.19

Savings deposits

    1,248,985       745       0.06 %     1,134,755       696       0.06 %     1,044,079        640        0.06

Certificates of deposit

    1,383,807       10,108       0.73 %     1,514,767       10,419       0.69 %     1,704,871        11,033        0.65
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total interest bearing deposits

    5,258,903       20,081       0.38 %     4,951,370       15,792       0.32 %     4,896,895        15,530        0.32

Federal Home Loan Bank borrowings

    965,795       13,290       1.38 %     995,644       11,985       1.20 %     591,506        5,510        0.93

Other borrowings

    187,298       1,442       0.77 %     105,735       478       0.45 %     109,165        370        0.34

Junior subordinated debt

    164,156       7,317       4.46 %     124,318       4,512       3.63 %     115,088        3,315        2.88
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total interest bearing liabilities

    6,576,152       42,130       0.64 %     6,177,067       32,767       0.53 %     5,712,654        24,725        0.43

Non-interest bearing demand deposits

    1,817,782           1,474,883           1,267,158        

Other liabilities

    76,443           72,048           84,679        

Shareholders’ equity

    1,383,935           1,215,888           1,059,490        
 

 

 

       

 

 

       

 

 

       

Total Liabilities and Shareholders’ Equity

  $ 9,854,312         $ 8,939,886         $ 8,123,981        
 

 

 

       

 

 

       

 

 

       

Net interest spread

        3.29 %         3.20 %           3.32

Taxable equivalent net interest margin (3)

    $ 300,787       3.44 %     $ 263,232       3.32 %      $ 246,014        3.41
   

 

 

   

 

 

     

 

 

   

 

 

      

 

 

    

 

 

 

 

(1)

Gross of allowance for loan losses and net of unearned income. Includes non-accrual and loans held for sale. Loan fees included in interest income on loans were $3.6 million, $2.8 million and $1.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. Additionally, loan accretion included in interest income on loans acquired from prior acquisitions was $5.9 million, $4.4 million and $3.9 million for the years ended December 31, 2017, 2016 and 2015, respectively, while accretion on interest bearing liabilities acquired from prior acquisitions was $1.4 million, $1.8 million, and $3.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.

(2)

Average yields on securities available-for-sale have been calculated based on amortized cost.

(3)

Taxable equivalent basis is calculated on tax-exempt securities using a rate of 35% for each period presented.

 

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TABLE 3. RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE (1)

 

    2017 Compared to 2016     2016 Compared to 2015  

(in thousands)

  Volume     Rate     Net Increase
(Decrease)
    Volume     Rate     Net Increase
(Decrease)
 

Increase (decrease) in interest income:

           

Due from banks—interest bearing

  $ (91   $ 64     $ (27   $ 32     $ 86     $ 118  

Loans, net of unearned income

    36,354       8,660       45,014       27,787       (4,787     23,000  

Taxable securities

    (2,027     2,168       141       (1,705     881       (824

Tax-exempt securities (2)

    2,331       (640     1,691       4,251       (1,750     2,501  

Other earning assets

    88       16       104       814       (349     465  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income change (2)

    36,655       10,268       46,923       31,179       (5,919     25,260  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in interest expense:

           

Interest bearing demand deposits

    670       2,965       3,635       366       508       874  

Money market

    103       812       915       (81     27       (54

Savings deposits

    69       (20     49       55       1       56  

Certificates of deposit

    (933     622       (311     (1,280     666       (614

Federal Home Loan Bank borrowings

    (368     1,673       1,305       4,535       1,940       6,475  

Other borrowings

    504       460       964       (12     120       108  

Junior subordinated debt

    1,647       1,158       2,805       282       915       1,197  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense change

    1,692       7,670       9,362       3,865       4,177       8,042  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income increase (decrease) (2)

  $ 34,963     $ 2,598     $ 37,561     $ 27,314     $ (10,096   $ 17,218  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.

(2)

The yield on earning assets and the net interest margin are presented on a fully taxable-equivalent (FTE) and annualized basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35% for each period presented. WesBanco believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

PROVISION FOR CREDIT LOSSES

The provision for credit losses is the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level considered appropriate to absorb probable losses in the loan portfolio. The provision for credit losses also includes the amount to be added to the reserve for loan commitments to bring that reserve to a level considered appropriate to absorb probable losses on unfunded commitments. The provision for credit losses for the year ended December 31, 2017 increased $1.5 million or 17.8% to $10.0 million. This increase is primarily the result of overall loan growth as historical loss rates and other credit quality indicators either improved or were stable. The provision for credit losses was higher than net charge-offs by $1.6 million and $1.9 million in 2017 and 2016, respectively. (Please see the “Credit Quality” and “Allowance for Credit Losses” sections of this MD&A for additional discussion).

 

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TABLE 4. NON-INTEREST INCOME

 

     For the Years Ended
December 31,
              

(dollars in thousands)

   2017      2016      $ Change     % Change  

Trust fees

   $ 22,740      $ 21,630      $ 1,110       5.1  

Service charges on deposits

     20,532        18,333        2,199       12.0  

Electronic banking fees

     19,183        15,596        3,587       23.0  

Net securities brokerage revenue

     6,672        6,449        223       3.5  

Bank-owned life insurance

     4,794        4,064        730       18.0  

Mortgage banking income

     5,053        2,529        2,524       99.8  

Net securities gains

     567        2,357        (1,790     (75.9

Net gain on other real estate owned and other assets

     658        790        (132     (16.7

Net insurance services revenue

     2,967        3,023        (56     (1.9

Swap fee and valuation income

     1,958        2,962        (1,004     (33.9

Other

     3,716        3,766        (50     (1.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest income

   $ 88,840      $ 81,499      $ 7,341       9.0  
  

 

 

    

 

 

    

 

 

   

 

 

 

Non-interest income, a significant source of revenue and an important part of WesBanco’s results of operations, was 23.4% and 24.3% of net revenues for 2017 and 2016, respectively. WesBanco offers its customers a wide range of retail, commercial, investment and electronic banking services, which are viewed as a vital component of WesBanco’s ability to attract and maintain customers, as well as providing additional fee income beyond normal spread-related income to WesBanco. Non-interest income increased $7.3 million or 9.0% compared to 2016.

Trust fees increased $1.1 million compared to 2016 as average trust assets in 2017 were higher than in 2016 due to market improvements along with customer and revenue development initiatives. As of December 31, 2017, total trust assets of $3.9 billion increased 5.9% from $3.7 billion at December 31, 2016. As of December 31, 2017, trust assets include managed assets of $3.3 billion and non-managed (custodial) assets of $0.6 billion. Assets managed for the WesMark Funds, a proprietary group of mutual funds for which WesBanco Investment Department serves as investment advisor, were $959.4 million as of December 31, 2017 and $884.1 million as of December 31, 2016 and are included in trust managed assets.

Service charges on deposits increased $2.2 million or 12.0% compared to the prior year due to the larger customer deposit base from the YCB acquisition in the second half of last year. As of December 31, 2017, deposits, excluding CDs, of $5.8 billion increased $0.2 billion from $5.6 billion as of December 31, 2016.

Electronic banking fees, which include debit card interchange fees, continued to grow, increasing $3.6 million or 23.0% compared to 2016, due to a higher volume of debit card transactions from the YCB acquisition and WesBanco’s legacy customers. The volume increase in our legacy markets is due to marketing and process initiatives as well as a higher percentage of customers using these products.

Bank-owned life insurance increased $0.7 million compared to 2016 due to two death claims in 2017. As of December 31, 2017, bank-owned life insurance cash surrender value of $192.6 million increased 2.4% from $188.1 as of December 31, 2016.

Mortgage banking income increased $2.5 million or 99.8% compared to 2016 due to increased volume and higher gain on sale margins. In the fourth quarter, WesBanco began selling mortgages on a mandatory basis as opposed to best efforts on most loans sold in the secondary market. Loans sold on a mandatory delivery basis are sold at a higher margin because the interest rate risk stays with the seller prior to the sale of the loan. To offset this risk, WesBanco enters into to be announced (“TBA”) forward contracts to counteract the movement in interest rates. Total mortgage production was $393.7 million in 2017, up 1.2% from 2016. Mortgages sold into the secondary market represented $208.7 million or 53.0% of overall mortgage loan production in 2017 compared to $167.6 million or 43.1% in 2016.

Net securities gains decreased $1.8 million or 75.9% compared to 2016 due to one agency call in 2016 resulting in a $0.9 million securities gain.

 

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Swap fee and valuation income has decreased $1.0 million or 33.9% from 2016 primarily due to the change in the valuation of the interest rate swaps.

TABLE 5. NON-INTEREST EXPENSE

 

     For the Years Ended
December 31,
              

(dollars in thousands)

   2017      2016      $ Change     % Change  

Salaries and wages

   $ 97,361      $ 84,281      $ 13,080       15.5  

Employee benefits

     29,933        27,952        1,981       7.1  

Net occupancy

     17,101        14,664        2,437       16.6  

Equipment

     16,026        14,543        1,483       10.2  

Marketing

     5,720        5,391        329       6.1  

FDIC insurance

     3,504        3,990        (486     (12.2

Amortization of intangible assets

     4,940        3,598        1,342       37.3  

Restructuring and merger-related expenses

     945        13,261        (12,316     (92.9

Franchise and other miscellaneous taxes

     8,423        6,825        1,598       23.4  

Consulting, regulatory, accounting and advisory fees

     6,857        6,270        587       9.4  

ATM and electronic banking interchange expenses

     4,510        4,297        213       5.0  

Postage and courier expenses

     3,879        3,306        573       17.3  

Supplies

     3,033        2,919        114       3.9  

Legal fees

     2,781        2,406        375       15.6  

Communications

     2,487        1,800        687       38.2  

Other real estate owned and foreclosure expenses

     1,097        1,210        (113     (9.3

Other

     12,263        11,967        296       2.5  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total non-interest expense

   $ 220,860      $ 208,680      $ 12,180       5.8  
  

 

 

    

 

 

    

 

 

   

 

 

 

Non-interest expense in 2017 increased $12.2 million or 5.8% compared to 2016, principally from the YCB acquisition, which increased assets by $1.5 billion, excluding goodwill, and added 34 offices to our branch network. In 2017, there was $0.9 million of merger-related expenses for the YCB and FTSB acquisitions and $13.3 million in 2016 for the YCB acquisition. Non-interest expense, excluding merger-related expenses, increased $24.5 million or 12.5% in 2017 as compared to 2016.

Salaries and wages increased $13.1 million or 15.5% compared to 2016, due to increased compensation expense from the acquisition, select sales personnel additions, particularly in the new Kentucky and Southern Indiana markets, and staff additions in preparation for the anticipated crossing of $10 billion in total assets. Increased short-term incentives and stock compensation also contributed to the increase. Employee benefits expense increased $2.0 million or 7.1% compared to 2016 due to the acquisition, but much of the increase was offset by lower pension costs in 2017.

Net occupancy increased $2.4 million in 2017 or 16.6% compared to 2016 principally due to increased building-related costs including utilities, lease expense, depreciation, repairs and other seasonal maintenance costs, mostly from the YCB branch locations acquired, as well as normal building maintenance and repair costs of the legacy branch network and other infrastructure needs.

Equipment costs increased $1.5 million or 10.2% compared to 2016 due to the YCB acquisition and continuous improvements in technology and communication infrastructure, software costs and origination and customer support platforms.

FDIC insurance decreased $0.5 million or 12.2% compared to 2016, despite a larger balance sheet from the YCB acquisition, due to the DIF reaching 1.15% prior to July 1, 2016, thus allowing the FDIC to institute new favorable assessment rate calculations beginning on that date for banks under $10 billion in size, as well as improved risk-based factors for the Bank.

 

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Amortization of intangible assets increased $1.3 million or 37.3% in 2017 compared to 2016 due to the YCB acquisition, which added approximately $12.0 million in core deposit intangibles and $0.8 million in non-compete agreements with former YCB executives covering a three year term.

Restructuring and merger-related expenses in 2017 were comprised primarily of $0.5 million expenses related to the finalization of YCB-related expenses earlier in the year and $0.4 million expenses related to the FTSB merger that is anticipated to close early in the second quarter of 2018 for legal and other professional fees. In 2016, the $13.3 million costs related to the YCB acquisition include $7.5 million from contract termination and conversion costs, $2.4 million from change-in-control payments and employee severance, $1.5 million in investment banking services, $0.8 million in legal expenses, $0.5 million in audit and valuation services, $0.3 million in rebranding and $0.3 million in various other expenses.

Miscellaneous taxes increased $1.6 million or 23.4% in 2017 compared to 2016 due to increases in Pennsylvania bank shares tax expense, Kentucky capital stock tax and real estate taxes in various jurisdictions. The acquisition of YCB expanded our branch network into Kentucky and Indiana.

Consulting, regulatory, accounting and advisory fees increased $0.6 million or 9.4% compared to 2016 due to certain third-party fees associated with the increased volume in loan originations, as well as consulting fees related to preparations for certain regulatory requirements, such as stress testing, for institutions that exceed $10 billion in total assets. Cost savings initiatives resulted in lower expense for this category in the last half of the year.

INCOME TAXES

The provision for federal and state income taxes increased to $53.8 million in 2017 compared to $31.0 million in 2016. The increase in income tax expense was primarily due to the $12.8 million impact from the revaluation of net deferred tax assets from the recently enacted Federal tax reform legislation and a 26.0% increase in pre-tax income. The effective tax rate increased to 36.3% compared to 26.4% for 2016 due to 8.6% for the tax reform remeasurement, the movement of low income housing tax credit amortization from other operating expenses to income tax expense for all of 2017, somewhat offset by a 1.0% increase in net tax-exempt interest income on securities of state and political subdivisions.

 

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FINANCIAL CONDITION

Total assets increased 0.3% in 2017, while shareholders’ equity increased 4.0% and deposits remained relatively unchanged, compared to December 31, 2016. Total portfolio loans increased $92.0 million or 1.5% primarily as a result of growth in strategic focus categories with commercial loans increasing 4.0% and home equity loans increasing 4.1%, which more than offset targeted reductions in the consumer portfolio. Total deposits remained virtually unchanged in 2017 as deposits increased by $2.7 million due to increases in most deposit categories being offset by a $218.8 million decrease in certificates of deposit. Interest-bearing demand deposits and non-interest-bearing demand deposits increased 5.1% and 3.2%, respectively, while savings and money market deposits increased 4.7% and 3.0%, respectively. The decrease in certificates of deposit is a result of lower rate offerings for maturing certificates of deposit and customer preferences for other deposit types. The increases in demand deposits and savings deposits were attributable to marketing, incentives paid to customers, focused retail and business strategies to obtain more account relationships, and customers’ preference for short-term maturities, coupled with initial deposits from bonus and royalty payments for Marcellus and Utica shale gas payments from energy companies in WesBanco’s southwestern Pennsylvania, eastern Ohio and northern West Virginia markets. Total borrowings decreased 2.6% during 2017, due to a decrease in short-term borrowings of $14.6 million, coupled with a reduction of $20.7 million in FHLB borrowings. Total shareholders’ equity increased by approximately $53.9 million or 4.0%, compared to December 31, 2016, primarily due to net income exceeding dividends for the period by $48.7 million and a $1.2 million gain in other comprehensive income. Also affecting retained earnings was a $5.6 million reclass between accumulated other comprehensive income and retained earnings for the adoption of Accounting Standards Update (“ASU”) 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220)”, related to the stranded tax effects resulting from the Tax Cuts and Jobs Act. The tangible equity to tangible assets ratio (non-GAAP measure) increased to 8.79% at December 31, 2017 from 8.20% at December 31, 2016, primarily as a result of the increase in shareholders’ equity at a faster pace than the increase in tangible assets.

 

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SECURITIES

TABLE 6. COMPOSITION OF SECURITIES (1)

 

    December 31,     2017-2016     December 31,  

(dollars in thousands)

  2017     2016     $ Change     % Change     2015  

Trading securities (at fair value)

  $ 7,844     $ 7,071     $ 773       10.9     $ 6,451  

Available-for-sale (at fair value)

         

U.S. Government sponsored entities and agencies

    71,843       54,043       17,800       32.9       83,505  

Residential mortgage-backed securities and collateralized mortgage obligations of government agencies

    934,922       938,289       (3,367     (0.4     1,142,014  

Commerical mortgage-backed securities and collateralized mortgage obligations of government agencies

    114,867       96,810       18,057       18.7       34,066  

Obligations of states and political subdivisions

    104,830       111,663       (6,833     (6.1     80,265  

Corporate debt securities

    35,403       35,301       102       0.3       58,593  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total debt securities

  $ 1,261,865     $ 1,236,106     $ 25,759       2.1     $ 1,398,443  

Equity securities

    5,613       5,070       543       10.7       4,626  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 1,267,478     $ 1,241,176     $ 26,302       2.1     $ 1,403,069  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Held-to-maturity (at amortized cost)

         

U.S. Government sponsored entities and agencies

  $ 11,465     $ 13,394     $ (1,929     (14.4   $ —    

Residential mortgage-backed securities and collateralized mortgage obligations of government agencies

    170,025       215,141       (45,116     (21.0     216,419  

Obligations of states and political subdivisions

    794,655       805,019       (10,364     (1.3     762,039  

Corporate debt securities

    33,355       34,413       (1,058     (3.1     34,472  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held-to-maturity securities

  $ 1,009,500     $ 1,067,967     $ (58,467     (5.5   $ 1,012,930  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities

  $ 2,284,822     $ 2,316,214     $ (31,392     (1.4   $ 2,422,450  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available-for-sale and trading securities:

         

Weighted average yield at the respective year end (2)

    2.35     2.22         2.14

As a % of total securities

    55.8     53.9         58.2

Weighted average life (in years)

    4.2       4.3           4.1  
 

 

 

   

 

 

       

 

 

 

Held-to-maturity securities:

         

Weighted average yield at the respective year end (2)

    3.85     3.76         3.94

As a % of total securities

    44.2     46.1         41.8

Weighted average life (in years)

    4.2       5.0           5.0  
 

 

 

   

 

 

       

 

 

 

Total securities:

         

Weighted average yield at the respective year end (2)

    3.01     2.93         2.90

As a % of total securities

    100.0     100.0         100.0

Weighted average life (in years)

    4.2       4.6           4.5  
 

 

 

   

 

 

       

 

 

 

 

(1)

At December 31, 2017, 2016 and 2015, there were no holdings of any one issuer, other than the U.S. government and certain federal or federally-related agencies, in an amount greater than 10% of WesBanco’s shareholders’ equity.

(2)

Weighted average yields have been calculated on a taxable-equivalent basis using the federal statutory tax rate of 35%.

 

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Total investment securities, which represent a source of liquidity for WesBanco as well as a contributor to interest income, decreased $31.4 million or 1.4% from December 31, 2016 to December 31, 2017. The overall securities decrease was due to a focus on controlling overall growth, primarily through control of the securities portfolio, in order to delay the financial impact of crossing $10 billion in assets. In addition, $9.4 million of securities were sold from the held-to-maturity portfolio in the second quarter of 2017, which resulted in $0.4 million in realized gains. These securities were all deemed to be at maturity, as less than 15% of their acquired principal balance was remaining at the time of sale.

The portfolio’s weighted average tax-equivalent yield increased in 2017 by 8 basis points, from 2.93% to 3.01%. This increase was due to multiple federal funds rate increases during 2017 that increased yields on new purchases, and also from lower amortization expense in 2017 on mortgage-backed securities resulting from lower principal paydowns.

Total gross unrealized securities losses decreased by $2.6 million, from $29.3 million at December 31, 2016 to $26.7 million at December 31, 2017. WesBanco had $664.5 million in investment securities in an unrealized loss position for less than twelve months at December 31, 2017, which decreased from $1.5 billion in the same category at December 31, 2016; however, the balance of investment securities in an unrealized loss position for more than twelve months increased from $67.5 million at December 31, 2016 to $787.1 million at December 31, 2017. The overall shift of securities to the over 12 months category was due to continued increases in federal funds rates during 2017 causing market prices to decrease on certain lower-rate securities purchased or acquired in prior years. WesBanco believes that all of the unrealized securities losses at December 31, 2017 were temporary impairment losses. Please refer to Note 4, “Securities,” of the Consolidated Financial Statements for additional information. WesBanco does not have any investments in private mortgage-backed securities or those that are collateralized by sub-prime mortgages, nor does WesBanco have any exposure to collateralized debt obligations or government-sponsored enterprise preferred stocks.

Net unrealized pre-tax losses on available-for-sale securities were $22.1 million at December 31, 2017, compared to $20.8 million at December 31, 2016. These net unrealized pre-tax losses represent temporary fluctuations resulting from changes in market rates in relation to fixed yields in the available-for-sale portfolio, and on an after-tax basis are accounted for as an adjustment to other comprehensive income in shareholders’ equity. Net unrealized pre-tax gains in the held-to-maturity portfolio, which are not accounted for in other comprehensive income, were $14.3 million at December 31, 2017, compared to $8.8 million at December 31, 2016.

 

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TABLE 7. MATURITY DISTRIBUTION AND YIELD ANALYSIS OF SECURITIES

The following table presents the amortized cost and tax-equivalent yields of available-for-sale and held-to-maturity securities by contractual maturity at December 31, 2017. In some instances, the issuers may have the right to call or prepay obligations without penalty prior to the contractual maturity date.

 

    December 31, 2017  
    One Year
or  less
    One to
Five Years
    Five to
Ten Years
    Over Ten
Years
    Mortgage-
backed and
equity
    Total  

(dollars in thousands)

  Amount     Yield
(1)
    Amount     Yield
(1)
    Amount     Yield
(1)
    Amount     Yield
(1)
    Amount     Yield
(1)
    Amount     Yield
(1)
 

Available-for-sale

                       

U.S. Government sponsored entities and agencies

  $ 10,000       1.25   $ 2,000       2.00   $ 17,000       1.81   $ 6,874       3.00   $ 36,551       2.60   $ 72,425       2.25

Residential mortgage-backed securities and collateralized mortgage obligations of government agencies (2)

    —        

—  

      —        

—  

      —        

—  

      —        

—  

     

954,115

     

2.11%

      954,115      

2.11%

 

Commercial mortgage-backed securities and collateralized mortgage obligations of government agencies (2)

    —         —         —         —         —         —         —         —         116,448       2.33     116,448       2.33

Obligations of states and political subdivisions (3)

    3,920       6.56     18,583       3.89     37,123       5.18     42,737       4.04     —         —         102,363       4.52

Corporate debt securities

    3,982       1.94     26,264       2.84     4,988       2.88     —         —         —         —         35,234       2.75

Equity securities (4)

    —         —         —         —         —         —         —         —         4,223       3.40     4,223       3.40
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 17,902       2.56   $ 46,847       3.22   $ 59,111       4.01   $ 49,611       3.89   $ 1,111,337       2.15   $ 1,284,808       2.35
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Held-to-maturity

                       

U.S. Government sponsored entities and agencies

  $ —         —       $ —         —       $ —         —       $ —         —       $ 11,465       2.10   $ 11,465       2.10

Residential mortgage-backed securities and collateralized mortgage obligations of government agencies (2)

    —         —         —         —         —         —         —         —         170,025       2.18     170,025       2.18

Obligations of states and political subdivisions (3)

    4,823       3.92     104,921       3.81     396,870       4.28     288,041       4.20     —         —         794,655       4.19

Corporate debt securities

    —         —         7,628       3.09     25,727       3.62     —         —         —         —         33,355       3.50
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total held-to-maturity securities

  $ 4,823       3.92   $ 112,549       3.76   $ 422,597       4.24   $ 288,041       4.20   $ 181,490       2.32   $ 1,009,500       3.85
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total (5)

  $ 22,725       2.85   $ 159,396       3.60   $ 481,708       4.21   $ 337,652       4.16   $ 1,292,827       2.18   $ 2,294,308       3.01
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Yields are determined based on the lower of the yield-to-call or yield-to-maturity.

(2)

Mortgage-backed and collateralized mortgage securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds. Projected maturities based on current speeds within one year, between one and five years, between five and ten years and over ten years are expected to be approximately $1.0 million, $959.9 million, $286.5 million and $41.2 million, respectively.

(3)

Average yields on obligations of states and political subdivisions have been calculated on a taxable-equivalent basis using the federal statutory tax rate of 35%.

(4)

Equity securities, which have no stated maturity, are not assigned a maturity category.

(5)

This table does not include trading securities, which consist of investments in various mutual funds held in grantor trusts formed in connection with a deferred compensation plan, are recorded at fair value and totaled $7.8 million at December 31, 2017.

 

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Table of Contents

Cost-method investments consist primarily of FHLB of Pittsburgh, Cincinnati and Indianapolis stock totaling $45.9 and $46.4 million at December 31, 2017 and 2016, respectively, and are included in other assets in the Consolidated Balance Sheets.

WesBanco’s municipal portfolio, comprised of both tax-exempt and taxable securities, totaled 39.4% of the overall securities portfolio as of December 31, 2017, and it carries different risks that are not as prevalent in other security types contained in the portfolio. The following table presents the allocation of the municipal bond portfolio based on the combined S&P and Moody’s ratings of the individual bonds:

TABLE 8. MUNICIPAL BOND RATINGS

 

    December 31, 2017     December 31, 2016  

(dollars in thousands)

  Amount     % of Total     Amount     % of Total  

Municipal bonds (at fair value) (1):

       

Moody’s: Aaa / S&P: AAA

  $ 96,253       10.5     $ 93,676       10.1  

Moody’s: Aa1 ; Aa2 ; Aa3 / S&P: AA+ ; AA ; AA-

    685,446       74.9       700,506       75.5  

Moody’s: A1 ; A2 ; A3 / S&P: A+ ; A ; A-

    125,032       13.7   &nbs