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WSBC > SEC Filings for WSBC > Form 10-Q on 25-Jul-2013All Recent SEC Filings

Show all filings for WESBANCO INC

Form 10-Q for WESBANCO INC


25-Jul-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 and six months ended June 30, 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"), including WesBanco's Form 10-Q for the quarter ended March 31, 2013, 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 104 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 Bancorp, Inc., ("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 June 30, 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."


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RESULTS OF OPERATIONS

EARNINGS SUMMARY

Diluted earnings per share for the second quarter ending June 30, 2013 were up 28.9% to $0.58 as compared to $0.45 for the same period last year, while net income for the second quarter was $17.0 million compared to $12.0 million for the second quarter last year, representing an increase of 41.8%. For the six month period ended June 30, 2013, diluted earnings per share totaled $1.13 as compared to $0.90 for the first half of last year, representing an increase of 25.6%, while net income for the 2013 six month period totaled $33.0 million compared to $24.0 million for 2012, representing an increase of 37.7%. The increased net income improved the return on average assets to 1.10% from 0.87% in the first half of last year. First half results have been enhanced by the acquisition in late 2012 and integration in the first quarter of 2013 of the approximate $655 million, 13 branch Fidelity.

Net interest income increased $4.4 million or 10.7% in the second quarter of 2013 compared to the same quarter for 2012, due to an 8.8% increase in average earning assets, primarily through increased average loan balances, both organic and from the Fidelity acquisition. Year-to-date, net interest income increased $8.7 million or 10.5% from last year. In addition, the net interest margin increased to 3.56% in the second quarter of 2013, from 3.53% last year, through a decrease in rates paid on interest bearing liabilities in excess of the decrease in rates earned on assets. This improvement in funding costs resulted from a 40.4% reduction in higher rate average FHLB and other borrowings, primarily through maturities, a 12.6% increase in total average deposits, of which 88.5% were lower cost demand, money market or savings accounts, and the lowering of rates for certain deposit types. Accretion of the purchase accounting adjustments for loans, CDs and borrowings acquired with the Fidelity merger also improved the net interest margin by 11 basis points year-to-date.

Credit quality has continued to improve over the past year. Total non-performing loans at June 30, 2013 were $62.3 million or 1.64% of total loans, which represents an 8.5% decrease from $68.1 million or 2.08% at June 30, 2012. Criticized and classified loans decreased 28.8% over the last twelve months to $159.1 million at June 30, 2013 from $223.3 million last year. Criticized and classified loans were 4.18% of total loans at June 30, 2013 compared to 6.82% as of June 30, 2012.

Net charge-offs for the second quarter of 2013 were $2.4 million, or 0.26% of average portfolio loans, and $5.5 million or 0.30% for the first half of the year, representing the lowest charge-off level in several years. As a comparison, net charge-offs were $6.8 million or 0.84% for the second quarter of 2012, and $13.4 million or 0.83% for the first half of last year. As a result of the improvement in all measures of credit quality, the provision for credit losses was $1.0 million for the second quarter of 2013, compared to $5.9 million for the same quarter in 2012, and $3.1 million year-to-date compared to $12.1 million last year. The allowance for loan losses represented 1.33% of total portfolio loans at the end of the second quarter. 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 1.41% of the adjusted loan total.

Non-interest income for the quarter ended June 30, 2013 increased $1.8 million or 11.5% compared to 2012, and year-to-date it was up $4.0 million or 12.8%. Service charges on deposits and electronic banking fees were up 5.8% and 9.4%, respectively, compared to the same quarter last year. Trust fees increased 13.3% for the quarter and 9.2% year-to-date, as assets under management continued to increase from customer development initiatives and overall market improvements. Total trust assets were up 9.8% year-over-year. Net securities brokerage revenues increased 47.3% and 43.4%, respectively, for the quarter and year-to-date periods. Net gains on sales of mortgage loans increased 63.0% year-to-date, and the six month period includes a $1.1 million bank-owned life insurance death benefit as part of a 61.3% increase in total BOLI income. Securities gains were lower for both the quarter and year-to-date periods due to reduced portfolio restructuring as compared to prior periods.

Non-interest expense increased $3.4 million or 9.5% for the second quarter compared to the second quarter of 2012, and $8.5 million or 11.8% for the first six months of 2013, partially due to Fidelity merger-related expenses of $1.2 million year-to-date and other normal expenses related to operating 13 additional branches. Expenses were the same as the first quarter of 2013, net of restructuring charges. Most of the back-office and other administrative savings targeted to be obtained from the merger have been accomplished by quarter-end. Salaries and wages increased 13.0% and 11.8% respectively for the quarter and year-to-date periods, due to routine annual adjustments to compensation, increased commissions on higher loan originations and brokerage revenue and an increase in full-time equivalent employees ("FTEs") of 74, primarily from the Fidelity acquisition and temporary summer help. Pre-merger, Fidelity had approximately 150 FTEs. Employee benefits expense increased primarily from increased pension and employee health insurance costs. As compared to the first quarter of 2013, most major expense categories were lower, particularly employee benefits and other real estate-owned expense. The one exception was marketing expense as our bank-wide spring campaign commenced; however, for the first half of 2013 marketing expenses were consistent with the prior year.

The provision for income taxes increased $4.2 million in the first half of 2013 compared to the prior period due to the significant increase in pre-tax income. A higher effective tax rate of 24.9% for the first half of 2013 compared to 22.0% for the same period in the prior year was also primarily due to higher pre-tax income.


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NET INTEREST INCOME

TABLE 1. NET INTEREST INCOME



                                                 For the Three Months             For the Six Months
                                                    Ended June 30,                  Ended June 30,
(unaudited, dollars in thousands)                2013             2012           2013            2012
Net interest income                           $    45,989       $ 41,540       $  92,118       $ 83,371
Taxable equivalent adjustments to net
interest income                                     1,758          1,657           3,442          3,316

Net interest income, fully taxable
equivalent                                    $    47,747       $ 43,197       $  95,560       $ 86,687

Net interest spread, non-taxable
equivalent                                           3.30 %         3.22 %          3.32 %         3.23 %
Benefit of net non-interest bearing
liabilities                                          0.13 %         0.17 %          0.14 %         0.18 %

Net interest margin                                  3.43 %         3.39 %          3.46 %         3.41 %
Taxable equivalent adjustment                        0.13 %         0.14 %          0.14 %         0.14 %

Net interest margin, fully taxable
equivalent                                           3.56 %         3.53 %          3.60 %         3.55 %

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 $4.4 million or 10.7% in the second quarter and $8.7 million or 10.5% in the first half of 2013 compared to the same periods in 2012 due to increased average earning assets, primarily through increased average loan balances. Average earning assets increased $453.8 million or 9.2% in the second quarter of 2013 and $433.2 million or 8.8% in the year-to-date period due to growth in average portfolio loan balances of $499.4 million or 15.4% in the second quarter and $456.4 million or 14.1% in the year-to-date period. Approximately two-thirds of the loan growth was from the western Pennsylvania region, which includes the loans acquired, and those subsequently originated, relating to the acquired Fidelity market area. The increase in average earning assets was funded primarily by increases in deposits. Total average deposits in the second quarter increased by $550.7 million or 12.4% from the 2012 second quarter with approximately 80% of the increase provided by the western Pennsylvania region. Deposit increases occurred primarily in demand deposit 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 $111 million in the second quarter and $171 million in the first six months. In addition, the net interest margin increased 3 basis points in the second quarter to 3.56% and 5 basis points in the first six months compared to the same periods of 2012. Cost of funds continued to decline 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 for loans, CDs and borrowings related to the Fidelity acquisition totaling $1.1 million in the second quarter of 2013 and $2.9 million year-to-date, also benefited the margin. The average rate on interest bearing liabilities declined by 32 basis points while the rate on earning assets decreased by 23 basis points in the first six months of 2013. Another benefit to the margin was the re-allocation of maturing investments into loans.

Interest income increased $1.9 million or 3.6% in the second quarter and $3.1 million or 2.9% in the first six months of 2013 compared to the same periods in 2012 due to the higher average earning assets, partially offset by the lower yields. Rates decreased on all earning asset categories from reduced rates on new and repriced assets due to lending competition and the lower interest rate environment. Repricing of loans and the necessity of offering lower rates on quality credits caused a decline in loan yields of 34 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 second quarter of 2013, average loans represented 69.4% of average earning assets, compared to 66.2% 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 13 basis points in the second quarter of 2013 compared to the second quarter of 2012, while tax-exempt securities yields declined 70 basis points, due to purchases of municipals at lower rates. Because of their relative yield advantage, the average balance of tax-exempt securities increased 20.2% over the second quarter of last year. Average taxable securities decreased due to significant calls of 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. At June 30, 2013, held-to-maturity securities represented approximately 39% of total securities with a weighted average life of 6.6 years.

Portfolio loans increased $525.6 million or 16.0% in the twelve months ended June 30, 2013, with $338.0 million from the western Pennsylvania region and the remaining $187.6 million from other WesBanco regions, as originations continued to outpace paydowns. Separate from the western Pennsylvania region, WesBanco grew outstanding loans 6.1% from June 30, 2012 as a result of a 54.0% 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 second quarter of 2013, interest expense decreased $2.6 million or 23.4% and, in the first six months of 2013, decreased $5.7 million or 24.7% compared to the same 2012 periods 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 6.4% in the second quarter and 6.2% in the first six months. The average rate paid on interest bearing liabilities decreased to 0.77% in the 2013 second quarter from 1.07% in the same quarter of 2012, a 30 basis point decrease. For the first half of 2013, the average rate paid decreased to 0.79% from 1.11% in 2012, a 32 basis point decrease. Rates paid on deposits declined by 18 basis points in the second quarter 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 32.2% of total average deposits from 34.6% in the second quarter of last year. Average


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interest bearing deposits increased by $397.5 million from the second quarter of 2012 with approximately 90% due to the acquisition, and non-interest bearing demand deposits increased by $153.2 million with approximately 40% related to the acquisition. 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 $267.9 million or 18.1% in the 2013 second quarter compared to the second quarter of 2012 with approximately 80% due to the acquisition. Average certificates of deposit increased by only 4.6%, primarily due to the acquisition, as WesBanco continued 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 $133.7 million or 39.7%, due to maturities and paydowns, and were 4.6% of average interest bearing liabilities in the second quarter of 2013 compared to 8.2% in the same 2012 quarter.

TABLE 2. AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS



                                                           For the Three Months Ended June 30,                                For the Six Months Ended June 30,
                                                          2013                             2012                             2013                             2012
                                                 Average         Average          Average         Average          Average         Average          Average         Average
(unaudited, dollars in thousands)                Balance          Rate            Balance          Rate            Balance          Rate            Balance          Rate
ASSETS
Due from banks - interest bearing              $    22,520           0.41 %     $    17,382           0.39 %     $    44,450           0.22 %     $    30,885           0.25 %
Loans, net of unearned income (1)                3,747,533           4.68 %       3,248,090           5.07 %       3,706,310           4.79 %       3,249,863           5.13 %
Securities: (2)
Taxable                                          1,201,552           2.45 %       1,311,223           2.58 %       1,200,634           2.46 %       1,290,239           2.64 %
Tax-exempt (3)                                     381,416           5.27 %         317,197           5.97 %         370,033           5.32 %         313,907           6.04 %

Total securities                                 1,582,968           3.13 %       1,628,420           3.24 %       1,570,667           3.14 %       1,604,146           3.31 %
Other earning assets                                15,197           0.71 %          20,538           0.41 %          17,855           0.66 %          21,229           0.44 %

Total earning assets (3)                         5,368,218           4.20 %       4,914,430           4.43 %       5,339,282           4.25 %       4,906,123           4.48 %

Other assets                                       704,179                          643,895                          729,240                          647,620

Total Assets                                   $ 6,072,397                      $ 5,558,325                      $ 6,068,522                      $ 5,553,743

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