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

Show all filings for WESBANCO INC

Form 10-Q for WESBANCO INC


25-Oct-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 nine months ended September 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 quarters ended March 31, 2013 and June 30, 2013, respectively, 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 paid $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 September 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 nine month period ended September 30, 2013 were up 20.3% to $1.66 compared to $1.38 for the same period last year, while net income for the 2013 nine month period was $48.6 million compared to $36.9 million for 2012, representing an increase of 31.7%. For the third quarter of 2013, diluted earnings per share totaled $0.53 compared to $0.48 for the third quarter of last year, representing an increase of 10.4%, while net income for the 2013 third quarter totaled $15.5 million compared to $12.9 million for 2012, representing an increase of 20.4%. The increased net income improved the return on average assets to 1.07% from 0.89% in the first nine months of last year. The 2013 results include the effect of the late 2012 acquisition of Fidelity.

Net interest income increased $4.4 million or 10.6% in the third quarter of 2013 compared to the same quarter for 2012, due to a 9.8% 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 $13.2 million or 10.5% from last year. In addition, the net interest margin increased slightly to 3.52% in the third quarter of 2013, from 3.51% last year. Year-to-date the margin was 3.58% compared to 3.53% in 2012. The year-to-date margin improvement was due to lower funding costs resulting from a 37.4% average reduction in higher rate FHLB advances and other borrowings, primarily through maturities, a 12.7% increase in total average deposits, with 85.4% of the increase from lower cost demand, money market or savings accounts and the repricing at lower rates of maturing CDs. Accretion of the purchase accounting adjustments for loans, CDs and borrowings acquired with the Fidelity merger also improved the net interest margin by 10 basis points year-to-date.

Credit quality has continued to improve over the past year. Total non-performing loans at September 30, 2013 were $53.6 million or 1.40% of total loans, which represents a 9.3% decrease from $59.1 million or 1.76% at September 30, 2012. Criticized and classified loans decreased 28.4% over the last twelve months to $141.3 million, or 3.68% of total loans at September 30, 2013 from $197.4 million and 5.89% last year. The decreases in non-performing loans and criticized and classified loans included the effect of a third quarter 2013 sale of classified loans with a carrying value of $9.4 million, of which $7.3 million were non-performing.

Net charge-offs for the third quarter of 2013 were $5.8 million, or 0.60% of average portfolio loans, and $11.3 million or 0.30% for the year-to-date period, compared to net charge-offs of $4.6 million or 0.54% for the third quarter of 2012, and $18.0 million or 0.55% for the first nine months of 2012. The third quarter of 2013 includes charges-offs related to the loan sale of $3.5 million which were mostly covered by existing reserves.

As a result of an improvement in all measures of credit quality, the provision for credit losses was $2.8 million for the third quarter of 2013, compared to $4.5 million for the same quarter in 2012, and $5.9 million year-to-date compared to $16.6 million last year. The third quarter provision increased $1.8 million from the second quarter of 2013 due primarily to loan growth, increases in one smaller loan specific reserve and the impact on applicable historical loss rates of charge-offs related to the loan sales in the current quarter. The allowance for loan losses represented 1.23% of total portfolio loans at the end of the third quarter 2013 compared to 1.59% last year.

Non-interest income for the quarter ended September 30, 2013 increased $1.2 million or 7.2% compared to the third quarter of 2012, and year-to-date the increase was $5.2 million or 10.9%. Trust fees increased 10.9% for the quarter and 9.7% year-to-date, as assets under management continued to increase from customer development initiatives and overall market improvements. Total trust assets were up 8.2% year-over-year. Net securities brokerage revenues increased 33.2% and 39.9%, respectively, for the quarter and year-to-date periods also due to the new business initiatives. Service charges on deposits and electronic banking fees also continued to grow in the third quarter. Net gains on sales of mortgage loans increased 16.0% year-to-date but decreased in the third quarter due to mortgages being retained during the quarter. In the third quarter there were a lower number of applications due to higher interest rates and fewer refinances. Securities gains were lower due to reduced portfolio restructuring compared to prior periods as interest rates increased.

Non-interest expense increased $3.2 million or 8.8% for the third quarter of 2013 compared to the third quarter of 2012, and $11.7 million or 10.8% for the first nine months of 2013, partially due to recurring expenses related to operating 13 additional branches acquired in the Fidelity acquisition. Most of the back-office and other administrative savings targeted to be obtained from the merger were accomplished by the end of the second quarter. Salaries and wages increased 11.7% for the third quarter and year-to-date periods compared to the same periods in 2012, due to routine annual adjustments to compensation, increased incentives and commissions on higher loan originations and brokerage revenue and an increase in full-time equivalent employees ("FTEs") of 96, primarily from the Fidelity acquisition. Employee benefit expenses increased primarily from increased pension expense and payroll taxes. Marketing costs were higher compared to 2012 due to additional marketing initiatives during 2013. Lower merger-related costs benefited both the quarter and the year-to-date period of 2013.

The provision for federal and state income taxes increased $5.6 million to $15.8 million for the nine months ended September 30, 2013 compared to $10.2 million in the comparable 2012 period. The increase in income tax expense was due to a $17.3 million increase in pre-tax income, which caused a higher effective tax rate of 24.6% compared to 21.7% for 2012.


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NET INTEREST INCOME

TABLE 1. NET INTEREST INCOME



                                                For the Three Months             For the Nine Months
                                                Ended September 30,              Ended September 30,
(unaudited, dollars in thousands)               2013             2012           2013            2012
Net interest income                          $    46,131       $ 41,694       $ 138,249       $ 125,064
Taxable equivalent adjustments to net
interest income                                    1,807          1,676           5,249           4,992

Net interest income, fully taxable
equivalent                                   $    47,938       $ 43,370       $ 143,498       $ 130,056

Net interest spread, non-taxable
equivalent                                          3.27 %         3.20 %          3.30 %          3.22 %
Benefit of net non-interest bearing
liabilities                                         0.12 %         0.17 %          0.14 %          0.17 %

Net interest margin                                 3.39 %         3.37 %          3.44 %          3.39 %
Taxable equivalent adjustment                       0.13 %         0.14 %          0.14 %          0.14 %

Net interest margin, fully taxable
equivalent                                          3.52 %         3.51 %          3.58 %          3.53 %

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 10.6% in the third quarter and $13.2 million or 10.5% in the first nine months 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 $484.4 million or 9.8% in the third quarter of 2013 and $450.4 million or 9.2% in the year-to-date period due to growth in average portfolio loan balances of $487.0 million or 14.6% in the third quarter and $466.9 million or 14.3% 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 third quarter increased by $568.8 million or 12.8% from the 2012 third quarter with approximately 70% of the increase provided by the western Pennsylvania region. Deposit increases occurred primarily in demand deposit, savings and money market 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 $72 million in the third quarter and $243 million in the first nine months. In addition, the net interest margin increased 1 basis point in the third quarter to 3.52% and 5 basis points in the first nine 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 $0.8 million or 5 basis points in the third quarter of 2013 and $3.7 million or 10 basis points year-to-date, also benefited the margin. The average rate on interest bearing liabilities declined by 31 basis points while the rate on earning assets decreased by 23 basis points in the first nine months of 2013.

Interest income increased $2.0 million or 3.9% in the third quarter and $5.1 million or 3.2% in the first nine 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 significant 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 39 basis points for the third quarter of 2013 compared to the third quarter of 2012. 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 third quarter of 2013, average loans represented 70.5% of average earning assets, compared to 67.6% 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. Taxable securities yields decreased 4 basis points in the third quarter of 2013 compared to the third quarter of 2012, while tax-exempt securities yields declined 64 basis points, due to purchases of municipals at lower rates. Because of their relative yield advantage, the average balance of tax-exempt securities increased 21.1% over the third quarter of last year. Average taxable securities decreased due to calls of government agencies and prepayments in mortgage-backed and collateralized mortgage securities, somewhat offset by 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 September 30, 2013, held-to-maturity securities represented approximately 39% of total securities with a weighted average life of 6.5 years.

Portfolio loans increased $483.6 million or 14.4% from September 30, 2012, with $319.2 million from the western Pennsylvania region and the remaining $164.4 million from other WesBanco regions, as originations continued to outpace paydowns. Separate from the western Pennsylvania region, WesBanco grew outstanding loans 4.0% from December 31, 2012 as a result of a 40.1% 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 third quarter of 2013, interest expense decreased $2.4 million or 22.7% and, in the first nine months of 2013, decreased $8.1 million or 24.1% 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 7.8% in the third quarter and 6.8% in the first nine months. The average rate paid on interest bearing liabilities decreased 30 basis points to 0.73% in the 2013 third quarter from 1.03% in the same quarter of 2012. For the first nine months of 2013, the average rate paid decreased 31 basis points to 0.77% from 1.08% in 2012. Rates paid on deposits declined by 19 basis points in the third 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 32.5% of total average deposits from 34.0% in the third quarter of last year. Average interest bearing


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deposits increased by $419.0 million from the third quarter of 2012 with approximately 80% due to the acquisition, and non-interest bearing demand deposits increased by $149.9 million with approximately 50% 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 $252.6 million or 16.7% in the 2013 third quarter compared to the third quarter of 2012 with approximately 80% due to the acquisition. Average certificates of deposit increased by only 7.7%, primarily due to the acquisition and higher CDARSŪ balances, as WesBanco continued to focus on reducing rate offerings and growing customers with multiple banking relationships, as opposed to single service certificate 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 $97.1 million or 30.9%, due to maturities and paydowns, and were 4.9% of average interest bearing liabilities in the third quarter of 2013 compared to 7.7% in the same 2012 quarter.

TABLE 2. AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS



                                                          For the Three Months Ended September 30,                             For the Nine Months Ended September 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              $      19,132            0.21 %     $    23,504           0.17 %     $      35,918           0.22 %     $    28,407           0.23 %
Loans, net of unearned income (1)                  3,814,710            4.54 %       3,327,666           4.95 %         3,742,840           4.70 %       3,275,987           5.07 %
Securities: (2)
Taxable                                            1,165,023            2.48 %       1,226,207           2.52 %         1,188,633           2.47 %       1,268,739           2.60 %
Tax-exempt (3)                                       395,705            5.22 %         326,722           5.86 %           378,684           5.28 %         318,210           5.98 %

Total securities                                   1,560,728            3.18 %       1,552,929           3.22 %         1,567,317           3.15 %       1,586,949           3.28 %
Other earning assets                                  12,838            1.50 %          18,904           0.42 %            16,164           0.88 %          20,448           0.44 %

Total earning assets (3)                           5,407,408            4.13 %       4,923,003           4.37 %         5,362,239           4.21 %       4,911,791           4.44 %

Other assets                                         710,760                           633,380                            723,014                          642,838

Total Assets                                   $   6,118,168                       $ 5,556,383                      $   6,085,253                      $ 5,554,629

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