WesBanco, Inc. — Q1 2013 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012 unless otherwise noted. WesBanco is a regional bank holding company operating in West Virginia, Ohio and western Pennsylvania, with community banking and trust and investment services segments. The November 2012 Fidelity acquisition added 13 Pittsburgh-area branches and materially expanded the company’s average loans and deposits.
Financial performance and condition
Amounts below are in millions except per-share data, percentages and ratios.
| Metric | Q1 2013 | Comparison |
|---|---|---|
| Interest and dividend income | $54.9 | $53.7 in Q1 2012 |
| Net interest income | $46.1 | $41.8 in Q1 2012, up 10.3% |
| Net interest margin | 3.51%; 3.64% fully taxable-equivalent | 3.43%; 3.57% fully taxable-equivalent in Q1 2012 |
| Provision for credit losses | $2.1 | $6.2 in Q1 2012 |
| Non-interest income | $17.5 | $15.3 in Q1 2012, up 14.2% |
| Non-interest expense | $40.7 | $35.7 in Q1 2012, up 14.3% |
| Net income | $16.0 | $12.0 in Q1 2012, up 33.6% |
| Diluted EPS | $0.55 | $0.45 in Q1 2012 |
| Dividends declared per share | $0.19 | $0.17 in Q1 2012 |
| Operating cash flow | $31.3 | $20.6 in Q1 2012 |
Return on average assets was 1.07% versus 0.87% a year earlier; return on average equity was 9.00% versus 7.54%. Average earning assets increased 8.4% year over year, driven mainly by loan growth, while the fully taxable-equivalent margin improved seven basis points. Lower funding costs helped offset lower asset yields.
At March 31, total assets were $6.085 billion, net portfolio loans $3.632 billion, securities $1.585 billion, deposits $5.006 billion and shareholders’ equity $724.4 million. Deposits rose 1.3% from year-end; total borrowings fell 19.8% to $295.2 million, including a 45.3% reduction in FHLB borrowings. Cash and cash equivalents were $178.3 million, up $52.7 million during the quarter. Investing activities provided $37.4 million and financing activities used $16.0 million.
The allowance for loan losses was $51.7 million, or 1.40% of portfolio loans; it would be approximately 1.50% excluding acquired Fidelity loans recorded at fair value. Net charge-offs were $3.0 million, or 0.34% of average loans, compared with $6.6 million and 0.82% in Q1 2012. Non-performing loans were $63.1 million, or 1.71% of total loans, versus $81.0 million, or 2.51%, a year earlier; they were broadly unchanged from year-end. Commercial real estate represented 49.5% of portfolio loans.
Regulatory capital ratios remained above well-capitalized thresholds: WesBanco’s total risk-based capital ratio was 14.13% and the Bank’s was 13.41%. The quarterly dividend was increased to $0.19 per share in February. Management reported available FHLB borrowing capacity of approximately $1.4 billion and estimated $1.77 billion of liquidity sources expected within the next year.
Material changes versus comparable periods
- Net income increased 33.6% year over year, supported by higher net interest income and fee income and a substantially lower credit-loss provision.
- Non-interest expense rose 14.3%, including $1.2 million of Fidelity merger-related and restructuring expense and higher ongoing costs associated with the acquired branches and operations.
- Average loans increased 12.7% year over year, with approximately two-thirds of the increase from western Pennsylvania, including acquired Fidelity loans. Despite stronger originations, quarter-end loans were down 0.3% from year-end as payoffs exceeded new production.
- Credit indicators improved substantially year over year, including lower non-performing loans, criticized and classified loans, and net charge-offs. However, non-accrual loans increased from year-end while accruing troubled debt restructurings declined.
- Q1 2013 included a $1.1 million bank-owned life insurance death benefit. Non-interest income also benefited from stronger brokerage and mortgage-sale activity.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management cautioned that the low-rate environment could pressure net interest margin through the rest of 2013 and into 2014 as loans and securities reprice or mature into lower yields and Fidelity purchase-accounting accretion diminishes. At the filing date, management did not anticipate short-term rates increasing before 2015 at the earliest.
- The company’s interest-rate model projected net interest income changes over the next year of +2.2% for an immediate 100-basis-point rise, +2.6% for a 200-basis-point rise, +1.6% for a 300-basis-point rise, and −2.2% for a 100-basis-point decline. These are model estimates dependent on assumptions, not forecasts of actual results.
- Management cited loan pricing competition, interest-rate and margin sensitivity, credit losses, regional economic conditions, liquidity and deposit competition, regulatory changes, and successful integration and realization of expected benefits from Fidelity as risks. Approximately $891.1 million of certificates of deposit were due to mature within 12 months.
- Off-balance-sheet commitments, guarantees and letters of credit totaled approximately $1.1 billion; many commitments may expire unused. Management considered liquidity sufficient for current obligations.
- A shareholder lawsuit related to the Fidelity merger had a proposed settlement subject to court approval, including a possible attorneys’ fee award. The company said it did not expect the matter to be material. Management also stated that other ordinary-course legal matters were not expected to be material.
- The filing states that disclosure controls were effective at a reasonable-assurance level and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the improvement in earnings persists after excluding the $1.1 million insurance death benefit and as Fidelity-related accretion and integration effects decline.
- Whether loan growth resumes and loan yields, deposit costs and net interest margin perform as management’s rate-sensitivity analysis assumes.
- Trends in non-accrual loans, troubled debt restructurings, criticized and classified credits, commercial real estate concentrations, charge-offs and allowance adequacy.
- Deposit retention and repricing, including the $891.1 million of certificates maturing within 12 months, and the company’s ongoing access to contingent liquidity.
- Completion and costs of Fidelity integration, realization of expected efficiencies, and resolution of the merger-related lawsuit and proposed settlement.