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| WSBC > SEC Filings for WSBC > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
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-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission ("SEC"), which is 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 in WesBanco's most recent Annual Report on Form 10-K filed with the SEC under Part I, Item 1A. Risk Factors. Such statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements, including without limitation, 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 Board, Federal Deposit Insurance Corporation, the SEC, the Financial Institution Regulatory Authority and other regulatory bodies; potential legislative and federal and state regulatory actions and reform; 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 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 critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2009 have remained unchanged from the disclosures presented in WesBanco's Annual Report on Form 10-K for the year ended December 31, 2008 under the section "Management's Discussion and Analysis of Financial Condition and Results of Operations."
OVERVIEW
On March 27, 2009 WesBanco completed the purchase of all five of AmTrust Bank's Columbus, Ohio branches. As part of the agreement, WesBanco assumed all of the deposit liabilities of $596.9 million, paid a deposit premium of approximately $21.2 million and purchased, or assumed the leases of, the related fixed assets of the branches. WesBanco did not acquire loans as part of the transaction, and will operate the acquired branches under the WesBanco Bank name.
WesBanco is a multi-state bank holding company operating through 114 branches and 143 ATM machines in West Virginia, Ohio and Western Pennsylvania, offering retail banking, corporate banking, personal and corporate trust services, brokerage services, mortgage banking and insurance. WesBanco's businesses are significantly impacted by economic factors such as market interest rates, federal monetary policies, local and regional economic conditions and the competitive environment effect upon WesBanco's business volumes. WesBanco's deposit levels are affected by numerous factors including personal savings rates, personal income, and competitive rates on alternative investments, as well as competition from other financial institutions within the markets we serve and liquidity needs of WesBanco. Loan levels are also subject to various factors including construction demand, business financing needs, consumer spending and interest rates and loan terms offered by competing lenders.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
WesBanco's net income available to common shareholders for the three months ended March 31, 2009 was $4.4 million while diluted earnings per common share were $0.17, as compared to $9.5 million or $0.36 per common share for the 2008 quarter. Earnings per common share for the 2009 quarter included the full effect of the TARP preferred stock dividend of $1.1 million consummated on December 5, 2008.
Net income decreased by $4.1 million during the first quarter of 2009, as compared to the first quarter of 2008, primarily due to a $4.1 million increase in the provision for credit losses; however, the provision decreased $5.5 million from the fourth quarter of 2008 primarily due to a 41% decrease in net charge offs, partially offset by the impact on the provision of a $24.2 million increase in non-accrual loans and a $10 million increase in renegotiated loans. The provision exceeded net charge offs by $4.4 million in the first quarter of 2009 representing 187% of net charge offs, while the allowance for loan losses as a percent of total loans increased from 1.38% as of December 31, 2008 to 1.52% at March 31, 2009. This additional provision is a reflection of deteriorating economic conditions adversely impacting our market areas which have caused increases in non-performing loans and certain categories of loan delinquencies.
In the first quarter of 2009, decreases in non-interest expense and in the tax provision more than offset decreases in net interest income and non-interest income. Net interest income decreased $0.6 million or 1.6%, as compared to the 2008 first quarter, primarily due to a 5 basis point decrease in the net interest margin to 3.47%. The continued effect of lower interest rates on earning assets, the reversal of interest income related to the increase in non-performing loans and deposit rate floors beginning to mitigate the effect of lower rates on deposits resulted in the yield on earning assets declining slightly faster than the cost of funds. Non-interest income decreased $2.7 million as a result of declines in trust fees from lower market values, lower seasonal service charges on deposits, lower net gains on securities, impairment charges and increased amortization relating to mortgage servicing rights and a gain in the first quarter of 2008 relating to our relationship with VISA, partially offset by increased gains on sale of loans and improved results on sales of OREO assets. Non-interest expense
decreased by $1.8 million through the effective control of expenses resulting in improvement in many expense categories including salaries, net occupancy, marketing and restructuring and merger-related expenses. The benefits of expense reduction efforts were partially offset by a $1.1 million increase in FDIC expense, primarily due to higher assessment rates. The tax provision decreased $1.5 million due to the decline in pretax income and a lower effective tax rate of 12.1% from 19.1% in the 2008 first quarter.
NET INTEREST INCOME
TABLE 1. NET INTEREST INCOME
For the Three Months Ended
March 31,
(unaudited, in thousands) 2009 2008
Net interest income $ 38,127 $ 38,744
Taxable equivalent adjustments to net 1,892 2,046
interest income
Net interest income, fully taxable $ 40,019 $ 40,790
equivalent
Net interest spread, non-taxable equivalent 2.97% 2.99%
Benefit of net non-interest bearing 0.34% 0.36%
liabilities
Net interest margin 3.31% 3.35%
Taxable equivalent adjustment 0.16% 0.17%
Net interest margin, fully taxable 3.47% 3.52%
equivalent
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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 of, and changes in interest rates, the steepness 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 those assets and liabilities. Net interest income decreased 1.6% in the first quarter of 2009 as compared to the first quarter of 2008 due to a 5 basis point decrease in the net interest margin to 3.47%, and a small decrease in average earning assets. Lower interest rates reduced the cost of funds by 96 basis points in the 2009 quarter, but the yield on earning assets declined at a slightly faster pace, primarily due to the repricing of loans and taxable securities and the reversal of interest income related to the increase in non-accrual loans. This reversal totaled $1.1 million, of which approximately $0.8 million of interest income was accrued at December 31, 2008 Approximately $0.4 million of the total is considered an adjustment relating to the 2008 prior period for certain residential mortgage loans that were considered 90 days or more past due at year end, and were moved to non-accrual status in the first quarter of 2009. Lower interest rates over the past 18 months have generally reduced interest income at a slower pace than the effect on interest bearing liabilities, but as the lower rates continue and deposit rate floors begin to impact WesBanco, repricing of assets is having a larger impact. The margin benefited in the 2009 quarter from a 6.3% increase in average non-interest bearing deposit balances, as compared to the first quarter of 2008, the result of prior marketing campaigns focused on checking account products.
Interest income decreased by 15.5% in the first quarter as compared to the first quarter of 2008 primarily as a result of a 99 basis point decline in the yield on earning assets to 5.65%. Yields declined in nearly all investment categories, but the overall decline in yield was primary due to a 103 basis point decrease in the yield on the loan portfolio and an overall shorter portfolio average duration. The primary factor in the decrease in the loan yields was the repricing of loans over the last five quarters as a result of lower interest rates. Average earning assets were flat in the 2009 quarter compared to the 2008 first quarter; however, average loans decreased by 3.3% while other lower yielding asset classes increased due to the investment of the proceeds from the branch acquisition towards the end of the 2009 quarter. This change in the mix of earning assets also contributed to the overall decrease in yield, as current securities yields are significantly below our existing portfolio's yield prior to the investment of the net proceeds from the AmTrust deposit acquisition.
Average loan balances decreased $121.9 million for the first three months of 2009 compared to the prior year quarter primarily due to continued strategic decreases in residential real estate loans through the sale of most originations, partially offset by increases in commercial real estate due to higher volumes and reduced prepayments. Home equity loans also increased through a fourth quarter marketing campaign. Consumer loans declined due to reduced demand for automobile loans, and a strategic reduction in recreational vehicle product lending.
Interest expense decreased by 30.4% in the first quarter of 2009 as compared to the same quarter in 2008, primarily due to the decline in the average rate paid on costing liabilities for the quarter to 2.52%, while average interest bearing liabilities also decreased by 4.2%. The rate decline was due to management aggressively reducing certain interest rates on maturing CDs and MMDA accounts in order to realize a lower cost of funds during a period of reduced loan demand, while focusing marketing efforts on non-interest bearing demand deposits, and, through the fourth quarter of 2008, utilizing reasonably priced FHLB borrowings as an alternative funding source. These lower cost of funds were partially offset by a $0.3 million prior period adjustment relating to additional interest payable on repurchase agreements as of December 31, 2008. The cost of CDs and MMDA accounts declined by 144 basis points and 58 basis points, respectively, from the first quarter of 2008. This strategy also resulted in decreases in deposits through most of 2008; however, deposits increased $701.8 million in the first quarter of 2009, with $596.9 million of this increase due to the branch acquisition. Additional increases in most deposit categories were achieved in the first quarter of 2009 by growing reasonably priced deposits in certain regions as a result of somewhat reduced competition as compared to prior periods, overall stock market volatility and an increase in the national personal saving rate. Deposits were acquired through the branch network and through the national Certificate of Deposit Account Registry Services (CDARS®) program. In addition, the increase in deposits from the branch acquisition and other sources reduced the loan to deposit ratio from approximately 103% at December 31, 2008 to 85% at March 31, 2009.
TABLE 2. AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS
For the Three Months Ended March 31,
2009 2008
Average Average Average Average
(unaudited, in Balance Rate Balance Rate
thousands)
ASSETS
Due from banks -
interest bearing $ 35,902 0.01% $ 2,459 3.13%
Loans, net of
unearned income
(1) 3,598,710 5.87% 3,720,600 6.90%
Securities: (2)
Taxable 653,516 4.60% 544,974 5.33%
Tax-exempt (3) 328,275 6.59% 355,140 6.58%
Total securities 981,791 5.27% 900,114 5.81%
Federal funds sold 8,356 0.24% 31,337 2.82%
Other earning
assets 32,341 1.30% 28,842 2.86%
Total earning
assets (3) 4,657,100 5.65% 4,683,352 6.64%
Other assets 599,712 636,291
Total Assets $ 5,256,812 $ 5,319,643
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LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing demand deposits $ 432,378 0.61% $ 415,603 2.06% Money market accounts 484,425 1.04% 595,863 1.62% Savings deposits 432,432 0.50% 442,185 0.91% Certificates of deposit 1,736,511 3.13% 1,907,753 4.57% Total interest bearing deposits 3,085,746 2.08% 3,361,404 3.25% Federal Home Loan Bank borrowings 593,244 3.85% 452,337 4.07% Other borrowings 238,070 3.52% 280,738 3.85% Junior subordinated debt 111,121 5.62% 111,025 6.82% Total interest bearing liabilities 4,028,181 2.52% 4,205,504 3.48% Non-interest bearing demand deposits 514,973 484,410 Other liabilities 49,381 46,447 Shareholders' Equity 664,277 583,282 Total Liabilities and Shareholders' Equity $ 5,256,812 $ 5,319,643 Net Interest Spread 3.13% 3.16% Taxable equivalent net yield on average earning assets (3) 3.47% 3.52% |
(1) Total loans are gross of the allowance for loan losses, net of unearned income and include loans held for sale. Non-accrual loans were included in the average volume for the entire period. Loan fees included in interest income on loans totaled $1.4 million and $1.3 million for the three months ended March 31, 2009 and 2008, respectively.
(2) Average yields on available-for-sale securities are calculated based on amortized cost.
(3) 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.
TABLE 3. RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
(1)
Three Months Ended March 31, 2009
Compared to March 31, 2008
Net Increase
(unaudited, in Volume Rate (Decrease)
thousands)
Increase (decrease)
in interest income:
Due from banks -
interest bearing $ 25 $ (36) $ (11)
Loans, net of
unearned income (2,019) (9,246) (11,265)
Taxable securities 1,320 (1,022) 298
Tax-exempt
securities (2) (442) 4 (438)
Federal funds sold (96) (120) (216)
Other interest
income 23 (124) (101)
Total interest
income change (2) (1,189) (10,544) (11,733)
Increase (decrease)
in interest expense:
Interest bearing
demand deposits 82 (1,546) (1,464)
Money market
accounts (390) (742) (1,132)
Savings deposits (21) (435) (456)
Certificates of
deposit (1,793) (6,280) (8,073)
Federal Home Loan
Bank borrowings 1,349 (261) 1,088
Other borrowings (383) (215) (598)
Junior subordinated
debt 2 (330) (328)
Total interest
expense change (1,154) (9,809) (10,963)
Net interest income
decrease (2) $ (35) $ (735) $ (770)
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(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 LOAN LOSSES
The provision for loan losses is determined by management as 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 loan losses was $9.6 million for the first quarter of 2009, an increase of $4.1 million from the first quarter of 2008, but a decrease of $5.5 million from the fourth quarter of 2008. The decrease in the provision from the fourth quarter is primarily due to a 41.0% decrease in net charge offs, partially offset by a $24.2 million increase in non-accrual loans and a $10.0 million increase in renegotiated loans and their resulting impact on the estimation of the allowance for loan losses. The provision exceeded net charge offs by $4.4 million in the 2009 quarter and represented 187% of net charge offs, while the allowance for loan losses as a percent of total loans increased from 1.38% as of December 31, 2008 to 1.52% at March 31, 2009. This additional provision, and the increase in the provision from the first quarter of 2008, is a reflection of deteriorating economic conditions adversely impacting our market areas which have caused increases in non-performing assets and loan delinquencies. Economic conditions have generally worsened in the last six months and have been exacerbated more recently by a sharp increase in unemployment in nearly all of WesBanco's markets, record declines in the equity markets, and declining real estate values, particularly in our Ohio metropolitan markets of Columbus, Dayton and Cincinnati. For additional information relating to the provision for loan losses, see the "Allowance for Loan Losses" section of "Loans and Credit Risk" included in this MD&A.
NON-INTEREST INCOME
TABLE 4. NON-INTEREST INCOME
For the Three Months
Ended March 31,
(unaudited, dollars in thousands) 2009 2008 $ Change % Change
Trust fees $ 3,353 $ 4,124 $ (771) (18.7%)
Service charges on deposits 5,217 5,603 (386) (6.9%)
Bank-owned life insurance 892 860 32 3.7%
Net securities gains (losses) 142 506 (364) (71.9%)
Net gains on sales of loans 488 56 432 771.4%
Other Income
Service fees on ATM's and debit cards 1,722 1,625 97 6.0%
Net securities brokerage revenue 625 683 (58) (8.5%)
Net insurance services revenue 584 677 (93) (13.7%)
Gain (loss) on sale of other real estate owned and 58 (441) 499 (113.2%)
repossessed assets
Other (645) 1,402 (2,047) (146.0%)
Total other income 2,344 3,946 (1,602) (40.6%)
Total non-interest income $ 12,436 $ 15,095 $ (2,659) (17.6%)
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Non-interest income is a significant source of revenue and an important part of WesBanco's results of operations. 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 strategy to attract and maintain customers, as well as providing additional fee income beyond normal spread-related income to WesBanco. For the quarter ended March 31, 2009, non-interest income decreased $2.7 million or 17.6%, from the first quarter of 2008 primarily due to lower trust fee income, lower net realized gains in the securities portfolio, a decrease in service fees on deposits and a $1.6 million decrease in other non-interest income partially offset by a $0.4 million increase in gains on the sale of loans and a $0.5 million increase in gain (loss) on sale of other real estate owned and repossessed assets. For the first quarter of 2009, total non-interest income comprised 30.3% of total net revenues as compared to 31.2% for the 2008 period.
Trust fees decreased 18.7% in the first quarter of 2009 as compared to the first quarter of 2008 due to lower market-related fees for assets under management. The market value of total trust assets at March 31, 2009 was $2.3 billion as compared to $3.0 billion at March 31, 2008. Also, net realized gains on the securities portfolio were down 71.9% or $0.4 million from the first quarter of 2008.
The decrease in service charges on deposits of $0.4 million from lower overdraft
fees, was offset entirely by $0.4 million increase in net gains on the sales of
loans due to the increased volume of customer refinancing. The increase in gain
(loss) on sale of other real estate owned and repossessed assets of $0.5 million
was primarily driven by the volume of properties settled through foreclosure,
and higher losses per property recognized in the first quarter of 2008, while
activity was relatively flat through the first quarter of 2009.
Declines in other non-interest income of $2.0 million included a noncash impairment charge of $0.4 million recognized on mortgage servicing rights due to increased customer prepayment speeds and a $0.1 million increase in amortization of these rights, partially offset by a 146% increase in mortgage servicing fees or $0.1 million as a result of increased customer refinancing in the low interest rate environment. Other contributing factors to the decline include a $0.4 million loss due to a market adjustment of the deferred compensation plan for the period, a $0.3 million decrease in real estate loan servicing fees, and a $0.3 million decrease in other fees. Also, other income in 2008 included a gain of $0.4 million in first quarter relating to the mandatory sale of VISA stock.
NON-INTEREST EXPENSE
TABLE 5. NON-INTEREST EXPENSE
For the Three Months
Ended March 31,
(unaudited, dollars 2009 2008 $ Change % Change
in thousands)
Salaries and wages $ 13,167 $ 13,938 $ (771) (5.5%)
Employee benefits 4,707 4,628 79 1.7%
Net occupancy 2,744 3,088 (344) (11.1%)
Equipment 2,542 2,584 (42) (1.6%)
Marketing 756 1,169 (413) (35.3%)
Core deposit 698 1,014 (316) (31.2%)
intangible
amortization
Restructuring and 429 1,049 (620) (59.1%)
merger-related
expenses
Other operating
expenses
Miscellaneous, 1,433 1,863 (430) (23.1%)
franchise, and other
taxes
FDIC Insurance 1,254 112 1,142 1019.6%
Consulting and 1,079 1,517 (438) (28.9%)
advisory fees
. . .
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