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WSBC > SEC Filings for WSBC > Form 10-Q on 25-Jul-2014All Recent SEC Filings

Show all filings for WESBANCO INC

Form 10-Q for WESBANCO INC


25-Jul-2014

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, 2014. 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, 2013 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, 2014, 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, 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 119 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.

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, 2014 have remained unchanged from the disclosures presented in WesBanco's Annual Report on Form 10-K for the year ended December 31, 2013 within 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 June 30, 2014 was $18.9 million, compared to $17.0 million for the second quarter of 2013, representing an increase of 10.9%, while diluted earnings per share were $0.64, compared to $0.58 per share for the second quarter of 2013, representing an increase of 10.3%. For the six month period ended June 30, 2014, net income totaled $35.3 million compared to $33.0 million for the first half of last year, representing an increase of 6.8%, while diluted earnings per share totaled $1.20 as compared to $1.13 for 2013, representing an increase of 6.2%. The increase in net income improved the return on average assets to 1.15% from 1.10% in the first six months of last year. Return on assets for WesBanco remains well above first quarter 2014 peer group averages, the most recent available.

Net interest income increased $2.3 million or 5.0% in the second quarter of 2014 compared to the second quarter of 2013, due to a 2.8% increase in average earning assets through increased average loan balances and $0.5 million of other interest income related to a refund of federal income taxes. Year-to-date net interest income increased $3.5 million or 3.8% from last year. The net interest margin improved by 8 basis points to 3.64% in the second quarter of 2014 compared to 3.56% in the same quarter of 2013, while for the first six months the margin was 3.63% compared to 3.60% in 2013. The interest on the tax refund contributed 3 basis points to the margin in the second quarter and 1 basis point to the year-to-date margin in 2014. Accretion of various purchase accounting adjustments from a 2012 acquisition benefited the net interest margin throughout 2013 and the first half of 2014, but at a decreasing rate. Excluding this benefit from both years, the net interest margin increased by 13 basis points from the second quarter of 2013, from 3.48% to 3.61%, and 10 basis points from the first six months of 2013, from 3.49% to 3.59%. The improved net interest margin in the current low interest rate environment resulted partially from the aforementioned loan growth as the average rate on loans is


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higher than the average rate on securities. In addition, funding costs continued to decrease in the first six months of 2014 as a result of a 33.2% reduction in higher-rate average FHLB and other borrowings, primarily through maturities, and a 9.8% increase in lower-cost demand, money market and savings account deposits, while higher-cost CDs decreased by 9.2%. Overall average deposits increased by 3.6% year-to-date in 2014 compared to the same period in 2013.

Lower charge-offs and continued improvement in delinquent, non-performing and classified and criticized loans resulted in the provision for credit losses decreasing to $0.8 million for the second quarter of 2014 compared to $2.2 million in the first quarter of 2014, and $1.0 million in the second quarter of 2013. For the first half of 2014 the provision was $3.0 million compared to $3.1 million in the same period of 2013. The allowance for loan losses represented 1.16% of total portfolio loans at June 30, 2014, compared to 1.33% at the end of the 2013 second quarter.

Non-interest income increased $0.5 million or 2.9% for the second quarter compared to the second quarter of 2013. The increase was due, in part, to a $1.0 million bank-owned life insurance death benefit in the current quarter. In addition, trust fees increased 8.0% as assets under management continued to increase from customer development initiatives and overall market improvements. Total trust assets were $3.8 billion at June 30, 2014, representing an increase of 11.7% from $3.4 billion at June 30, 2013. Net securities brokerage revenues increased 22.1%, due to significant production increases from existing markets, the 2013 deployment of an advisor team in the Pittsburgh market, the addition of support and producing staff in several regions, as well as an increase in referrals and production from a licensed retail banker program. Service charges on deposits decreased 8.6% compared to the second quarter of 2013, due to lower overdraft fees that are affected by lower seasonal usage patterns, consistent increases in deposit levels and higher average deposits per account. Mortgage loan sale gains decreased 32.2% as increasing interest rates reduced refinancings resulting in lower mortgage activity, which was also impacted by the recently-adopted Qualified Mortgage and Ability-to-Repay rules, which have somewhat limited the Bank's product offerings. Net security gains decreased by $0.5 million. For the first half of 2014, non-interest income increased 0.2% from trends similar to the second quarter; however there was also a $1.1 million bank-owned life insurance death benefit in the first quarter of last year.

Non-interest expense increased $0.8 million or 2.0% for the second quarter compared to the second quarter of 2013. Salaries and wages increased 7.2%, due to routine annual adjustments to compensation, increased commissions on higher brokerage revenue and incentive and stock-related compensation granted during the quarter. Employee benefits expense decreased 4.9%, primarily from decreased pension expense. Other expense decreased 1.1% primarily due to reduced communications expense. For the first half of 2014, non-interest expense increased $0.2 million or 0.2% compared to the same period in 2013. Excluding 2013 merger-related expenses of $1.2 million incurred primarily in the first quarter of 2013, total non-interest expense would have increased $1.4 million or 1.7% for the first six months. Salaries and wages increased 5.6% and employee benefits decreased 7.6% in the year-to-date period. In addition, net occupancy and equipment expense increased due to higher weather-related expenses, the opening of two branches near the end of 2013, and investment in internal infrastructure in the second half of last year. Other expense decreased 1.2% primarily due to lower communication and other real estate owned expenses.

The provision for federal and state income taxes increased to $12.2 million in 2014 compared to $10.9 million in the first six months of 2013. The increase in income tax expense was due to an increase in pre-tax income which also caused a higher effective tax rate of 25.7% compared to 24.9% for 2013.

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)                2014             2013           2014            2013
Net interest income                           $    48,307       $ 45,989       $  95,631       $ 92,118
Taxable equivalent adjustments to net
interest income                                     1,850          1,758           3,673          3,442

Net interest income, fully taxable
equivalent                                    $    50,157       $ 47,747       $  99,304       $ 95,560

Net interest spread, non-taxable
equivalent                                           3.41 %         3.30 %          3.39 %         3.32 %
Benefit of net non-interest bearing
liabilities                                          0.10 %         0.13 %          0.10 %         0.14 %

Net interest margin                                  3.51 %         3.43 %          3.49 %         3.46 %
Taxable equivalent adjustment                        0.13 %         0.13 %          0.14 %         0.14 %

Net interest margin, fully taxable
equivalent                                           3.64 %         3.56 %          3.63 %         3.60 %

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 $2.3 million or 5.0% in the second quarter and $3.5 million or 3.8% in the first half of 2014 compared to the same periods in 2013 due to an increase in average earning assets through increased average loan balances and $0.5 million of other interest income related to a refund of federal income taxes. Average loan balance increases of $180.0 million or 4.9% year-to-date were funded primarily by increases in deposits as total average deposits increased by $179.9 million or 3.6% from the first half of 2013. Deposit increases occurred in all major categories except for certificates of deposit, and were the result of marketing campaigns, customer incentives, wealth management and business initiatives as well as deposits from Marcellus and Utica shale gas bonus and royalty payments. In addition, the net interest margin increased 8 basis points in the second quarter to 3.64% and 3 basis points in the first six months compared to the same periods in 2013. The interest on the tax refund contributed 3 basis points to the margin in the second quarter and 1


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basis point year-to-date in 2014. The cost of funds improved significantly, declining 25 basis points in both the second quarter and the first half of 2014 compared to the same periods in 2013 due to lower offered rates, declining average balances on maturing certificates of deposit, an increase in balances of lower-cost products and lower balances of FHLB and other borrowings. Accretion of various purchase accounting adjustments from a 2012 acquisition benefited the net interest margin throughout 2013 and the first half of 2014, but at a decreasing rate. Excluding this benefit from both years, the net interest margin increased by 13 basis points compared to the second quarter of 2013, from 3.48% to 3.61%, and 10 basis points compared to the first six months of 2013, from 3.49% to 3.59%.

Interest income decreased $0.4 million or 0.7% in the second quarter and $1.8 million or 1.7% in the first six months of 2014 compared to the same periods in 2013 due mostly to lower yields on loans, partially offset by increases in average balances of loans and higher yields on securities. Rates decreased 30 basis points in the second quarter on average loan balances from reduced rates on new and repriced assets due to the competitive necessity of offering lower rates on quality credits in an increasingly competitive and low interest rate environment. However, the increase in average loans helped to mitigate the effect of the lower rates, as rates earned on loans are higher than those on securities. In the second quarter of 2014, average loans represented 70.7% of average earning assets, compared to 69.8% in the same quarter of 2013. Total securities yields increased by 9 basis points in the second quarter due to a greater reinvestment of funds from investment maturities, calls and prepayments into tax-exempt securities, which provide the highest yield within securities. The average balance of tax-exempts increased 6.6% or $25.3 million over the last year, and was 25.7% of total average securities compared to 24.1% in the second quarter of 2013. Taxable securities yields increased 8 basis points in the second quarter of 2014 compared to 2013, while tax-exempt securities yields declined 7 basis points, due to the aforementioned purchases of municipals at current lower rates. The slowing of prepayment speeds in mortgage-backed and collateralized mortgage securities has contributed to the increase in taxable securities yields. Average taxable securities balances decreased over the last year from the prepayments in mortgage-backed and collateralized mortgage securities and calls of taxable municipal securities. These decreases were partially offset by continued purchases of lower-premium collateralized mortgage securities and 10-15 year residential mortgage pools. Purchases of collateralized mortgage securities and shorter-term mortgage pools reduce 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 pledgeable securities.

Portfolio loans increased $144.7 million in the twelve months ended June 30, 2014 as originations continued to outpace paydowns. WesBanco grew outstanding loans 3.8% as a result of $1.4 billion in loan originations over the last year. Although somewhat depressed in the first quarter of 2014 due to the challenging weather and economy, loan originations increased 28.4% in the second quarter compared to the first quarter. Loan growth was driven by increased business activity in markets impacted by Marcellus and Utica shale gas drilling, additional lending personnel, focused marketing efforts, an expanded presence in our larger urban markets and continued improvement in loan origination processes.

Interest expense decreased $2.7 million or 32.0% in the second quarter of 2014 and $5.3 million or 31.0% in the first half compared to the same periods in 2013 due to decreases in rates paid and in average interest bearing liabilities, and a continued shift in the liability mix towards less expensive sources of funding. Total average interest bearing liabilities decreased $14.2 million or 0.3% in the second quarter and $13.3 million or 0.3% in the first six months of 2014 from the same periods in 2013 due to decreases in borrowings. The average rate paid on interest bearing liabilities decreased 25 basis points in both the second quarter and the first half of 2014 compared to the same periods in 2013. Rates paid on interest bearing deposits declined by 23 basis points to 0.43% in the second quarter due to a significant decline in rates on certificates of deposit, as a result of management reducing offered rates on maturities. The average rate paid on certificates of deposit declined by 52 basis points from the second quarter of 2013, while the rates paid on other deposit types remained nearly unchanged. Improvements in the deposit funding mix also continued to lower the cost of funds, with average certificates of deposit decreasing to 27.9% of total average deposits from 32.2% in the second quarter of last year. Average interest bearing deposits increased by $60.0 million and average non-interest bearing demand deposits increased by $132.0 million from the 2013 second quarter. Average certificates of deposit decreased by 9.9% and were the only deposit category to decrease over the past year, 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, also contributing to the reduced cost of funds. Average total FHLB and other borrowings decreased $74.2 million or 36.5%, due to maturities and paydowns, and were 2.9% of average interest bearing liabilities in the second quarter of 2014 compared to 4.6% in the same 2013 quarter.


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TABLE 2. AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS



                                                         For the Three Months Ended June 30,                               For the Six Months Ended June 30,
                                                        2014                             2013                            2014                             2013
                                                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             $    24,134          0.33 %     $    22,520           0.41 %     $    37,567          0.22 %     $    44,450           0.22 %
Loans, net of unearned
income (1)                                      3,898,740          4.38 %       3,747,533           4.68 %       3,886,334          4.43 %       3,706,310           4.79 %
Securities: (2)
Taxable                                         1,176,963          2.53 %       1,201,552           2.45 %       1,159,072          2.53 %       1,200,634           2.46 %
Tax-exempt (3)                                    406,718          5.20 %         381,416           5.27 %         403,275          5.20 %         370,033           5.32 %

Total securities                                1,583,681          3.22 %       1,582,968           3.13 %       1,562,347          3.22 %       1,570,667           3.14 %
Other earning assets (4)                           10,853         21.82 %          15,197           0.71 %          11,209         11.97 %          17,855           0.66 %

Total earning
assets (3)                                      5,517,408          4.06 %       5,368,218           4.20 %       5,497,457          4.07 %       5,339,282           4.25 %

Other assets                                      702,230                         704,179                          705,703                         729,240

Total Assets                                  $ 6,219,638                     $ 6,072,397                      $ 6,203,160                     $ 6,068,522

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