WesBanco, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; unaudited. WesBanco is a multi-state bank holding company operating in West Virginia, Ohio and western Pennsylvania, with community banking and trust and investment services segments.
Financial performance and position
Amounts are in millions of dollars unless noted otherwise.
- Q3 earnings: Net income was $12.9 million, up 17.2% from $11.0 million a year earlier. Diluted EPS was $0.48 versus $0.41. For the first nine months, net income was $36.9 million, up 11.2%, and diluted EPS was $1.38 versus $1.25.
- Revenue and margin: Q3 interest and dividend income was $52.3 million; interest expense was $10.6 million and net interest income was $41.7 million, down 2.8% year over year. Non-interest income rose 9.3% to $16.0 million. The net interest margin was 3.37% on a non-tax-equivalent basis and 3.51% on a fully taxable-equivalent basis; the latter was 16 basis points below Q3 2011. Nine-month net interest income was $125.1 million versus $127.4 million.
- Credit costs and asset quality: Q3 provision for credit losses was $4.5 million, compared with $10.8 million; nine-month provision was $16.6 million versus $25.7 million. Nine-month net charge-offs were $18.0 million versus $32.6 million. Non-performing loans were $59.1 million, or 1.76% of total loans, compared with $86.9 million and 2.68% at December 31, 2011. The allowance for loan losses was $53.5 million, 1.59% of total loans.
- Expenses and margins: Q3 non-interest expense increased 9.5% to $36.8 million; nine-month expense increased 3.6% to $108.5 million. Q3 pretax income was $16.4 million and net income was $12.9 million. The filing attributes expense pressure to employee benefits and $1.5 million of restructuring and merger costs.
- Balance sheet and funding: Total assets were $5.58 billion, up 0.7% from year-end 2011. Portfolio loans were $3.35 billion, up 3.5%; total deposits were $4.49 billion, up 2.1%. Shareholders’ equity was $659.3 million, up 4.0%. Total borrowings declined 18.4% to $384.6 million, including a 45.5% reduction in FHLB borrowings to $91.6 million.
- Cash flow: Nine-month operating cash flow was $64.0 million, compared with $78.9 million in 2011. Investing activities used $82.8 million and financing activities used $5.1 million. Cash and cash equivalents fell $23.9 million to $116.4 million.
- Capital and liquidity: WesBanco’s Tier 1 leverage ratio was 9.11% and total risk-based capital ratio was 14.45%; the bank subsidiary’s corresponding ratios were 8.18% and 13.13%. Management reported approximately $1.2 billion of remaining FHLB borrowing capacity and $1.61 billion of expected liquidity sources within one year. Management stated liquidity was sufficient to meet current obligations.
Changes versus comparable periods
- Year-over-year earnings improved despite lower net interest income, with reduced credit-loss provisions and increased non-interest income contributing to the increase.
- Loan growth and a shift toward demand and savings deposits supported earning-asset growth and lower funding costs. Lower asset yields nevertheless compressed the net interest margin.
- Credit indicators improved: non-performing loans, classified and criticized loans, and net charge-offs declined. The allowance fell from $54.8 million at year-end 2011 to $53.5 million.
- Demand and savings deposits increased, while certificates of deposit declined 5.6%. Securities declined 3.5% from year-end, and total borrowings declined 18.4%.
- Non-interest income gains included higher mortgage-loan sale gains, trust fees and electronic banking fees; deposit service charges declined, primarily due to lower overdraft fees.
Outlook, risks and unusual items
- Fidelity acquisition: WesBanco agreed to acquire Pittsburgh-based Fidelity Bancorp, with approximately $0.7 billion in assets and 13 branches, for $68.7 million at the then-current valuation. Consideration is 0.8275 WesBanco shares plus $4.50 cash per Fidelity share. Regulatory and Fidelity shareholder approvals were pending; closing was anticipated around December 31, 2012.
- Merger litigation: A purported Fidelity shareholder filed suit seeking, among other relief, to enjoin the acquisition and alleging fiduciary-duty and disclosure violations. WesBanco and Fidelity said they considered the allegations without merit and intended to defend the action.
- Costs and restructuring: Q3 included $0.7 million of Fidelity-related expense and $0.8 million of costs related to planned closure of six branches in Q4 2012, primarily asset write-downs and severance.
- Interest-rate outlook: Management said low rates and reinvestment of loan and securities cash flows at lower yields could pressure margins through the remainder of 2012 and into 2013; it did not anticipate short-term rates rising until 2015. Its model projected net interest income falling 3.7% under an immediate 100-basis-point rate decline, while projecting modest increases in the disclosed rising-rate scenarios.
- Key risks: The filing cites economic and credit conditions, interest rates and margin sensitivity, liquidity and deposit competition, regulatory changes, technology and cybersecurity, and the execution, integration, cost savings and relationship risks of the Fidelity merger. Basel III proposals were under evaluation; management anticipated remaining well-capitalized if proposed rules were adopted and phased in.
- Other contingencies: Management did not expect ordinary-course legal matters to have a material adverse effect. Off-balance-sheet commitments included $669.3 million of credit lines and $191.0 million of approved but not closed loans; the filing cautions that commitments may not be fully drawn.
Most important facts for investors to verify
- Fidelity merger approval, final consideration, closing timing, integration costs and outcome of the shareholder lawsuit.
- Whether loan growth and improving credit metrics continue, and whether charge-offs or non-performing loans reverse course.
- Net interest margin trends, deposit repricing and the effect of low rates and loan competition on earnings.
- Progress on the six-branch closure and whether merger and restructuring costs remain within expectations.
- Liquidity and capital ratios, including the treatment of deposit maturities, borrowing capacity and any final Basel III requirements.
- Cash generation and the continued mix shift from certificates of deposit and wholesale borrowings toward lower-cost deposits.