WesBanco, Inc. — 2011 Form 10-K
Business context and reporting period. This is an annual report for the fiscal year ended December 31, 2011, not a standalone fourth-quarter filing. WesBanco is a regional bank holding company serving West Virginia, Ohio and western Pennsylvania through community banking and trust and investment services. At year-end it operated 112 banking offices, one loan production office and 122 ATMs; trust assets under management were approximately $3.0 billion and are not consolidated assets.
Key financial results
| Metric | 2011 | 2010 |
|---|---|---|
| Net income | $43.8 million | $35.6 million |
| Diluted EPS | $1.65 | $1.34 |
| Net interest income | $169.4 million | $166.1 million |
| Net interest margin, fully taxable-equivalent | 3.66% | 3.60% |
| Provision for credit losses | $35.3 million | $44.6 million |
| Non-interest income | $59.9 million | $59.6 million |
| Non-interest expense | $140.3 million | $141.2 million |
| Net cash provided by operating activities | $108.7 million | $104.1 million |
| Cash and cash equivalents, year-end | $140.3 million | $79.1 million |
Net income rose 23.0%. Net interest income increased 2.0%, while interest income fell 5.2% and interest expense fell 22.2%; lower funding costs and a shift toward lower-cost deposits more than offset lower asset yields. The efficiency ratio improved to 59.5% from 60.9%. Return on average assets was 0.81% and return on average equity was 7.01%.
For the fourth quarter, net income was $10.6 million and diluted EPS was $0.40, compared with $10.3 million and $0.39 in fourth-quarter 2010.
Balance sheet, liquidity and capital
- Total assets were $5.54 billion, up 3.3%; deposits were $4.39 billion, up 5.3%; and shareholders’ equity was $633.8 million, up 4.4%.
- Net portfolio loans were $3.18 billion, down 1.3%; securities were $1.61 billion, up 12.8%. Commercial real estate was 51.9% of portfolio loans, and commercial loans including commercial real estate were approximately 65% of the loan portfolio.
- Total borrowings were $471.1 million, down 13.9%, including $168.2 million of FHLB advances, $196.9 million of other short-term borrowings and $106.1 million of junior subordinated debt. FHLB advances declined 33.7%.
- Management reported approximately $1.0 billion of remaining FHLB borrowing capacity, a $146.6 million Federal Reserve borrowing line with no balance outstanding, and $165.0 million of overnight correspondent-bank lines, also unused. The company stated it had sufficient liquidity to meet current obligations.
- Consolidated Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 8.71%, 12.68% and 13.93%, respectively. The Bank was also classified as well-capitalized.
- Cash dividends declared were $0.62 per share for 2011, up from $0.56. The quarterly dividend rose to $0.16 in August. The Bank could pay approximately $16.0 million in dividends to the parent without prior regulatory approval at year-end.
Material changes and credit quality
- Credit costs eased: provision for credit losses fell 20.8%; net charge-offs were $42.5 million, down 2.3%; and nonperforming assets declined 13.8% to $89.9 million, or 1.62% of assets, from $104.4 million, or 1.95%.
- Nonperforming loans were $86.9 million, or 2.68% of loans, versus $96.3 million, or 2.93%. However, non-accrual loans increased 17.7% to $57.5 million; improvement in total nonperforming loans reflected lower accruing troubled debt restructurings and the loan sale.
- The allowance for loan losses fell to $54.8 million, or 1.69% of loans, from $61.1 million, or 1.86%. Coverage of total nonperforming loans was 0.63x.
- WesBanco sold a portfolio of nonperforming loans with approximately $17.2 million book value in the third quarter; the sale contributed about $10 million of charge-offs or charge-downs. It also sold a similar-sized portfolio in 2010.
- Deposits grew mainly in demand, savings and money-market accounts; certificates of deposit declined 6.4%. Net loan balances fell despite new loan production reaching the highest level in five years, reflecting payoffs, paydowns and the nonperforming-loan sale.
Outlook, risks and unusual items
- Management said the low-rate environment could pressure net interest margin during 2012 as loans and securities reprice or mature into lower yields. It did not provide specific earnings or revenue guidance; management noted rates might not rise until possibly late 2014.
- Key risks include commercial real estate and other commercial credit exposure, regional economic weakness and falling property values, high unemployment, competitive pressure, and sensitivity of net interest income to rates. Central and western Ohio were areas of notable credit and property-value weakness.
- Management expects Dodd-Frank implementation and other regulation to reduce revenue and increase expenses over time. Basel III implementation and future capital rules could also affect required capital; the filing says the eventual impact was uncertain.
- FDIC insurance expense fell to $4.8 million from $6.7 million, reflecting revised assessment calculations. The Bank had approximately $12.1 million of prepaid FDIC assessments at year-end, with unused amounts expected to be refunded or applied to future assessments.
- Goodwill testing found no impairment in 2011. Management’s November analysis indicated the community banking reporting unit’s fair value could decline approximately 33% before further impairment analysis would be required.
- The pension plan moved from a $3.1 million funded surplus in 2010 to a $3.7 million deficit in 2011, largely reflecting actuarial losses; no minimum pension contribution was required for 2012, and any voluntary contribution had not been determined.
- Management reported no pending ordinary-course legal matter expected to be material. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether lower provisions and the decline in nonperforming assets persist, particularly given rising non-accrual loans and continued commercial real estate concentration.
- Whether net interest margin and earnings withstand low rates, asset repricing, deposit competition and the scheduled maturities of $683.6 million of certificates of deposit during 2012.
- The quality and performance of new commercial construction lending: construction and development commitments increased substantially, and commercial construction exposure more than doubled in 2011.
- How much of reported Tier 1 capital depends on grandfathered trust preferred securities, and how forthcoming capital rules may change that treatment.
- The sustainability of dividends given regulatory constraints, the Bank’s upstream dividend capacity and the parent’s reliance on subsidiary distributions.
- The realization and timing of tax credits, including New Markets Tax Credits subject to eligibility and potential recapture conditions.