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WSBC > SEC Filings for WSBC > Form 10-Q on 26-Apr-2013All Recent SEC Filings

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Form 10-Q for WESBANCO INC


26-Apr-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis ("MD&A") represents an overview of the results of operations and financial condition of WesBanco for the three months ended March 31, 2013. 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, 2012 and documents subsequently filed by WesBanco with the Securities and Exchange Commission ("SEC"), 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 in WesBanco's most recent Annual Report on Form 10-K filed with the SEC under "Risk Factors" in Part I, Item 1A. 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 Fidelity may not be integrated successfully or such integration may take longer to accomplish than expected; the expected cost savings and any revenue synergies from the merger of WesBanco and Fidelity may not be fully realized within the expected timeframes; disruption from the merger of WesBanco and Fidelity 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 Board, the Federal Deposit Insurance Corporation, the SEC, the Financial Institution Regulatory Authority, 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.

OVERVIEW

WesBanco is a multi-state bank holding company operating through 118 branches, one loan production office and 106 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 and regulatory policies, local and regional economic conditions and the competitive environment's 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, as well as loan terms offered by competing lenders.

On November 30, 2012, WesBanco completed its acquisition of Fidelity, headquartered in Pittsburgh, Pennsylvania. The acquisition was valued at $70.0 million and added 13 branches in the Pittsburgh area to the Bank's branch network as part of the western Pennsylvania region. WesBanco issued 2,538,460 shares of its common stock and $15.4 million in cash in exchange for Fidelity common stock. The acquisition was accounted for as a tax-free exchange for tax purposes.

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, 2013 have remained unchanged from the disclosures presented in WesBanco's Annual Report on Form 10-K for the year ended December 31, 2012 under the section "Management's Discussion and Analysis of Financial Condition and Results of Operations."

RESULTS OF OPERATIONS

EARNINGS SUMMARY

Net income for the three months ended March 31, 2013 was $16.0 million compared to $12.0 million for the first quarter of 2012, representing an increase of 33.6%, while diluted earnings per share were $0.55, compared to $0.45 per share for the first quarter of 2012, representing an increase of 22.2%. The increased earnings improved the return on average assets to 1.07% from 0.87% in the first quarter of last year and the return on average equity grew to 9.00% from 7.54%. The $4.0 million growth in net income was achieved through a 66.1% decrease in the provision for credit losses based on continued improvement in credit quality and a 10.3% improvement in net interest income through growth in average earning assets and the net interest margin. In addition, non-interest income increased 14.2% from trust, security brokerage and mortgage sale operations, and included a $1.1 million bank-owned life insurance death benefit recorded in the first quarter of 2013. Non-interest expense grew 14.3%, partially offsetting the growth in income, due to $1.2 million in merger-related expense, and increases in operating costs associated with the acquisition, as well as increases in pension expense, snow removal costs, electronic banking expense and real estate-owned expenses.


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Net interest income increased $4.3 million or 10.3% in the first quarter of 2013 compared to the first quarter of 2012 due to an increase in average earning assets, primarily through increased average loan balances. Average earning assets increased $412.2 million or 8.4% due to growth in average portfolio loan balances of $413.0 million or 12.7%, with approximately two-thirds of this growth from the western Pennsylvania region, which includes the Fidelity acquired loans. The increase in average loans mitigated the effect of the low interest rate environment, as loans provide the highest rate earning assets. In addition, the net interest margin increased by seven basis points to 3.64% in the first quarter of 2013 through an increase in loan balances and a decrease in rates paid on interest bearing liabilities. This improvement in funding costs resulted from a 41.0% reduction in higher rate average FHLB and other borrowings, primarily through maturities, a 12.7% increase in total deposits, of which 89.7% were lower cost demand, money market or savings accounts, and the lowering of rates for certain deposit types. Average total FHLB and other borrowings were 4.9% of average interest bearing liabilities in the first quarter of 2013 compared to 8.8% in the same 2012 quarter. Accretion of the purchase accounting adjustments for loans, CDs and borrowings acquired with the Fidelity merger also benefited the net interest margin in the 2013 first quarter.

WesBanco has significantly improved credit quality over the past year. Total non-performing loans were $63.1 million or 1.71% of total loans at March 31, 2013, which represents a 22.0% decrease from $81.0 million or 2.51% at March 31 of the prior year. Criticized and classified loans decreased 29.1% over the last twelve months to $168.1 million at March 31, 2013. Criticized and classified loans were 4.56% of total loans compared to 7.35% at the end of the 2012 first quarter. Improvements also occurred from year end, although at a slower pace.

Net charge-offs for the first quarter of 2013 were $3.0 million, or 0.34% of average portfolio loans, and represented the lowest charge-off level in over three years. Net charge-offs were $6.6 million or 0.82% for the first quarter of 2012. As a result of the improvement in all measures of credit quality, the provision for credit losses was $2.1 million for the first quarter of 2013 compared to $6.2 million for the same quarter of 2012. The allowance for loan losses represented 1.40% of total portfolio loans at the end of the first quarter. However, if the acquired Fidelity loans (which were recorded at fair value at the date of acquisition) were excluded from the ratio, the allowance would approximate 1.50% of the adjusted loan total compared to 1.69% at March 31, 2012.

Non-interest income in the quarter ended March 31, 2013 increased $2.2 million or 14.2% compared to the same 2012 quarter. Trust fees increased $0.3 million or 5.6% as assets under management continued to increase from customer development initiatives. Net securities brokerage revenues increased $0.4 million due to additional market coverage in the Pittsburgh area and improved production in other markets. Net gains on sales of mortgage loans increased $0.4 million due to increased volume and higher margins on sold loans. In addition, the first quarter of 2013 included a $1.1 million bank-owned life insurance death benefit.

Non-interest expense increased $5.1 million or 14.3% for the first quarter compared to the first quarter of 2012, partially due to Fidelity merger-related expenses of $1.2 million. Total non-interest expense would have increased 10.9% for the quarter without these charges, to a large extent due to the normal operating expenses of the 13 acquired Fidelity offices in the Pittsburgh area. Salaries and wages increased $1.5 million due to routine annual adjustments to compensation, increased commissions on higher loan origination and brokerage revenue and an increase in full-time equivalent employees ("FTE") required to operate the Fidelity branches and maintain two operating systems until conversion in February 2013. Personnel cost savings from Fidelity were primarily achieved by the end of the first quarter. Employee benefits expense increased $0.7 million primarily from increased pension and employee health insurance costs.

The provision for income taxes increased $1.5 million due to the significant increase in pre-tax income. A higher effective tax rate of 22.9%, compared to 21.6% for the first quarter of 2012, was also primarily due to higher pre-tax income.

NET INTEREST INCOME

TABLE 1. NET INTEREST INCOME



                                                             For the Three Months Ended
                                                                     March 31,
(unaudited, dollars in thousands)                             2013                 2012
Net interest income                                       $      46,128          $  41,830
Taxable equivalent adjustments to net interest income             1,684              1,658

Net interest income, fully taxable equivalent             $      47,812          $  43,488

Net interest spread, non-taxable equivalent                        3.37 %             3.26 %
Benefit of net non-interest bearing liabilities                    0.14 %             0.17 %

Net interest margin                                                3.51 %             3.43 %
Taxable equivalent adjustment                                      0.13 %             0.14 %

Net interest margin, fully taxable equivalent                      3.64 %             3.57 %

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 $4.3 million or 10.3% in the first quarter of 2013 compared to the first quarter of 2012 due to an 8.4% increase in average earning assets, primarily through increased average loan balances. Average earning assets increased $412.2 million due to growth in average portfolio loan balances of $413.0 million or 12.7%, with approximately two-thirds of this growth from the western Pennsylvania region, which includes the Fidelity acquired loans. The increase in average earning assets was funded primarily by increases in deposits. Total average deposits increased by $560.7 million or 12.7% from the first quarter of 2012 with approximately 80% of the increase provided by the western Pennsylvania region. Deposit increases occurred primarily in demand deposit


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accounts, with increases other than through the acquisition resulting from marketing campaigns, customer incentives, wealth management and business initiatives as well as initial deposits from Marcellus and Utica shale gas bonus and royalty payments which totaled $60 million in the first quarter. In addition, the net interest margin increased 7 basis points in the first quarter of 2013 to 3.64% compared to the first quarter of 2012. Cost of funds continued to improve due to lower offered rates on maturing certificates of deposit, an increase in balances of lower-cost products and lower balances of FHLB and other borrowings. Accretion of purchase accounting adjustments, totaling $1.8 million for loans, CDs and borrowings related to the Fidelity acquisition, also benefited the margin in the 2013 first quarter. The average rate on interest bearing liabilities declined by 33 basis points while the rate on earning assets decreased by 23 basis points in the 2013 first quarter.

Interest income increased $1.2 million or 2.3% in the quarter ending March 31, 2013 compared to the same quarter in 2012 due to the higher average earning assets, partially offset by the lower yields. Rates decreased on all significant earning asset categories from reduced rates on new and repriced assets due to competition and the lower interest rate environment. Repricing of loans and the competitive necessity of offering lower rates on quality credits in an increasingly competitive and lower interest rate environment caused a decline in loan yields of 29 basis points for 2013 year-to-date. However, the increase in average loans mitigated the effect of the low interest rate environment, as loans provide the highest rate for investment in new earning assets. In the first quarter of 2013, average loans represented 69.0% of average earning assets, compared to 66.4% in the same quarter of 2012. Securities yields decreased due to the reinvestment of funds from investment maturities, calls and sales, and additional investment purchases at current lower available interest rates, along with the acquired Fidelity investment portfolio. Taxable securities yields decreased 23 basis points in the first quarter of 2013 compared to the first quarter of 2012, while tax-exempt securities yields declined 73 basis points, due to purchases of municipals at lower rates. Because of their relative yield advantage the average balance of tax-exempts increased 15.4% over the last year. Average taxable securities decreased due to significant calls of other government agencies and prepayments in mortgage-backed and collateralized mortgage securities, somewhat offset by continued purchases of lower-premium collateralized mortgage securities. Purchases of collateralized mortgage securities minimizes the average life of the portfolio, particularly for the portion accounted for as available-for-sale, positioning the Bank for possible future increases in interest rates, while maintaining required levels of pledgable securities.

Portfolio loans increased $460.1 million or 14.3% in the twelve months ended March 31, 2013 with $312.3 million from the western Pennsylvania region and the remaining $147.8 million from other WesBanco regions, as originations continued to outpace paydowns. Separate from the western Pennsylvania region, WesBanco grew outstanding loans 4.9% from March 31, 2012 as a result of a 52.2% growth in overall loan originations from the prior year. Loan growth was achieved in commercial, commercial real estate, residential real estate and home equity lending.

In the first quarter of 2013 interest expense decreased $3.1 million or 26.0% compared to the first quarter of 2012, due to decreases in rates paid and a continued shift in the liability mix towards less expensive sources of funding, while total average interest bearing balances increased 6.1%. The average rate paid on interest bearing liabilities decreased to 0.81% in the 2013 first quarter from 1.14% in the same quarter of 2012, a 33 basis point decrease. Rates paid on deposits declined by 23 basis points due to declines in all deposit categories, as a result of management reducing offered interest rates for most products and mark-to-market accretion of the certificates of deposit acquired from Fidelity. Improvements in the deposit funding mix also lowered the cost of funds, with average certificates of deposit decreasing to 33.2% of total average deposits from 36.1% in the first quarter of last year. Average interest bearing deposits increased by $395.2 million and non-interest bearing demand deposits increased by $165.5 million from the 2012 first quarter. Average deposits increased most significantly in demand and savings product categories, even as offered rates on interest bearing accounts were reduced. Total average demand deposits, including interest bearing and non-interest bearing, increased $309.6 million or 21.9% in the 2013 first quarter compared to the first quarter of 2012. Average certificates of deposit increased by only 3.6%, primarily due to the acquisition, as WesBanco continues to focus on reducing rate offerings and growing customers with multiple banking relationships, as opposed to single service certificates of deposit customers. Deposit increases were used to pay down higher-cost maturing FHLB borrowings and certain other borrowings, significantly contributing to the reduced cost of funds. Average total FHLB and other borrowings decreased $149.2 million or 41.0%, due to maturities and paydowns, and were 4.9% of average interest bearing liabilities in the first quarter of 2013 compared to 8.8% in the same 2012 quarter.


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TABLE 2. AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS



                                                         For the Three Months Ended March 31,
                                                         2013                             2012
                                                Average         Average          Average         Average
(unaudited, dollars in thousands)               Balance          Rate            Balance          Rate
ASSETS
Due from banks - interest bearing             $    66,623           0.15 %     $    44,389           0.19 %
Loans, net of unearned income (1)               3,664,629           4.90 %       3,251,637           5.19 %
Securities: (2)
Taxable                                         1,199,706           2.48 %       1,269,255           2.71 %
Tax-exempt (3)                                    358,524           5.37 %         310,617           6.10 %

Total securities                                1,558,230           3.14 %       1,579,872           3.37 %
Other earning assets                               20,542           0.60 %          21,920           0.47 %

Total earning assets (3)                        5,310,024           4.31 %       4,897,818           4.54 %

Other assets                                      754,962                          651,344

Total Assets                                  $ 6,064,986                      $ 5,549,162

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