's plan to acquire NewAlbany, Ind.-based Your Community BanksharesInc. in a $221 millioncash-and-stock deal would provide the buyer entrance to Kentucky's largestcity as well as nearby growth markets in Indiana, presenting new opportunities forboth loan and fee-income growth, executives said.
And whileYour Community, which has $1.55 billion in assets,could barely tip Wheeling, W.Va.-based WesBanco, at $8.57 billion in assets, over the $10 billion inassets level, the buyer's executives said they would sell off certain securitiesto ensure the combined bank remains under the key threshold this year.
, banks face addedlevels of regulatory scrutiny, higher FDIC insurance premiums and, notably, a fee-pinchingcap on debit interchange income. WesBanco estimated a $9 million pre-tax impacton income from just the additional FDIC expenses and the interchange component,which came into play with the Durbin Amendment following the 2008 financial crisis.
WesBancoCFO Robert Young said in an interview a day after the deal was that the buyer plans to sell about$200 million in securities to stay under the $10 billion level through the end of2016. That would push off the Durbin impact until at least 2018, as it kicks inthe year following a bank's move over $10 billion.
"Soyou pick up an extra year of non-Durbin impact," Young said.
Youngsaid the sales would likely come primarily from Your Community's more than $340million securities portfolio. He said the sales could begin as soon as the two banksare "well on the way" to shareholder and regulatory approval. He saidthey would not necessarily need to wait until the deal is completed. Closing isexpected in either the third or fourth quarter.
The issueof crossing the $10 billion line "probably comes up in every deal conversationwhere that's a possibility," said Jacob Thompson, a managing director of investmentbanking at SAMCO Capital Markets who was not involved in the Your Community deal.He said added regulatory scrutiny and new rules hit banks the same whether theyare $1 over the line or $2 billion over. So a bank in WesBanco's anticipated positionat closing is wise to think carefully about how and when it grows. Many banks, hesaid, want to surge past the $10 billion mark, potentially with an acquisition,adding heft to better absorb the new costs and adding new revenue potential to offsetthe Durbin hit.
"Youwant to be in the best position you can to take on the additional regulatory burdenand all that this threshold brings into play," Thompson said.
WesBanco'sYoung said the bank would in fact prefer to "leapfrog" above $10 billion"by a material amount," perhaps to $11.5 billion or $12 billion in assets.That could likely happen with another acquisition. Young noted that WesBanco hasdone several bank and thriftdeals over the past two decades, most recently closing an acquisition in early2015, and that it is always prepared to capitalize on potential opportunities.
Youngsaid WesBanco prefers targets that are within a five- to six-hour drive of the bank'sheadquarters in West Virginia. It could look at its home state or neighboring Virginia,but he said future deals in the Midwest, including Ohio, Kentucky and Indiana, aremost likely. Any future deal would focus on markets that are ripe with growth potential,he said.
Suchpotential is what WesBanco sees in Your Community. With the deal, the bank gainsa notable presence in Louisville, Ky., along with nearby markets in Indiana thatare essentially extensions of Kentucky's largest market. "The demographicsfor Louisville, they are very attractive," Young said, noting the low unemployment,household income above the national average and population growth, projected atabout 3% over the next five years. The deal also moves WesBanco into the Kentuckymarkets of Elizabethtown and Lexington. Among community banks, Your Community ranksNo. 1 in deposit market share in Elizabethtown and No. 3 in Louisville, providingWesBanco strong bases on which to expand lending and to introduce products, fromwealth management to trust services, that Young and company expect will bolsterinterest income and fee revenue in coming years.
The targethas a relatively small presence in Lexington, but Young said WesBanco will buildon that, pushing for organic growth and potentially looking for a future acquisitionthere.
WesBancoestimated tangible book value dilution would be less than 5% at closing of the Your Community acquisition, and it estimated theearnback period would be no more than 3.5 years. Notincluding one-time charges tied to the deal, WesBanco estimated the deal would prove6% to 7% accretive to 2017 earnings and roughly 9% accretive the following year.That assumes cost savings of 35% are 75% phased in next year and fully realizedin 2018.
WesBancoPresident and CEO Todd Clossin said during a conference call to discuss the that cost-saving projectionsdo not include any plans for branch closures. The two banks' footprints do not overlapand therefore do not provide immediate opportunities to shutter branches. He saidsavings would come primarily from back-office consolidations. But he also said WesBancoroutinely studies its branch network, closing and occasionally opening new locations.
"Weare always looking at the branch structure," Clossin said.