WesBanco, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited consolidated results; financial amounts below are in millions unless otherwise stated. WesBanco operates community banking and trust and investment services businesses across West Virginia, Ohio, and western Pennsylvania. The prior-year comparison is affected by the November 2012 acquisition of Fidelity Bancorp.
Financial results and condition
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net interest income | $46.0 | $41.5 | $92.1 | $83.4 |
| Non-interest income | $17.7 | $15.9 | $35.2 | $31.2 |
| Non-interest expense | $39.5 | $36.1 | $80.2 | $71.7 |
| Provision for credit losses | $1.0 | $5.9 | $3.1 | $12.1 |
| Net income | $17.0 | $12.0 | $33.0 | $24.0 |
| Diluted EPS | $0.58 | $0.45 | $1.13 | $0.90 |
| Fully taxable-equivalent net interest margin | 3.56% | 3.53% | 3.60% | 3.55% |
- Q2 net income rose 41.8% and diluted EPS 28.9% year over year; first-half net income rose 37.7% and EPS 25.6%. Management reported first-half return on average assets of 1.10%, versus 0.87% in 2012.
- At June 30, total assets were $6.08 billion, net portfolio loans $3.75 billion, deposits $4.94 billion, total borrowings $367.0 million, and shareholders’ equity $726.2 million. Since year-end 2012, loans grew 3.2%, deposits decreased 0.1%, and equity increased 1.7%.
- First-half cash flows: operating activities provided $66.0 million; investing activities used $96.9 million; financing activities used $16.7 million. Cash and cash equivalents ended at $78.1 million, down $47.5 million from year-end.
- Loan growth was led by commercial and industrial lending, up $64.0 million from year-end, and residential real estate lending, up $37.7 million. Certificates of deposit fell 4.4%; savings deposits rose 4.7%. FHLB borrowings decreased 45.7%, while other short-term borrowings increased 40.3%.
- Regulatory capital ratios remained above “well-capitalized” thresholds: WesBanco total risk-based capital was 14.08%; the Bank’s was 13.18%. The allowance for loan losses was $50.4 million, or 1.33% of portfolio loans (management cited approximately 1.41% excluding acquired Fidelity loans).
Changes, management commentary, and outlook
- Profit growth reflected higher average earning assets—particularly loans, including Fidelity-related balances—and lower funding costs. First-half net interest income increased 10.5%; management attributed margin improvement partly to lower deposit and borrowing costs and $2.9 million of year-to-date Fidelity purchase-accounting accretion.
- Credit measures improved year over year: non-performing loans were $62.3 million, or 1.64% of loans, down 8.5% from June 2012; criticized and classified loans declined 28.8% to $159.1 million. First-half net charge-offs were $5.5 million, versus $13.4 million in the prior-year period. However, non-accrual loans increased to $43.1 million from $39.4 million at year-end 2012.
- Expenses rose 9.5% in Q2 and 11.8% in the first half, reflecting the additional Fidelity branches, higher staffing and employee benefits, and $1.2 million of first-half merger-related and restructuring costs. Management said most targeted back-office and administrative savings had been achieved by quarter-end.
- Management cautioned that net interest margin could be pressured through the rest of 2013 and into 2014 in a flat-rate environment, with some improvement possible if rates rise. It expected short-term rates would not increase before 2015 at the earliest and noted that Fidelity-related accretion would have less impact over time. No earnings or revenue guidance was provided.
- Interest-rate sensitivity modeling projected net interest income changes over one year of +1.3% for an immediate 100-basis-point increase, +1.1% for +200 basis points, and -1.9% for -100 basis points. Management cautioned that model assumptions may not predict actual results. Approximately $813 million of CDs mature within 12 months; available FHLB borrowing capacity was estimated at $1.4 billion.
- Available-for-sale securities’ net unrealized gains, net of tax, fell to $1.4 million from $13.0 million at year-end, primarily due to higher market rates; this contributed to lower comprehensive income and accumulated other comprehensive income. Management considered loss-position debt securities temporarily impaired and did not expect forced sales before recovery.
Risks, contingencies, and unusual items
- Key disclosed risks include merger integration and realizing expected savings, regional and national economic conditions, interest rates and funding availability, borrower credit quality, regulation, competition, technology and cybersecurity, and securities marketability and fair-value changes.
- A shareholder lawsuit related to the Fidelity merger was subject to a proposed settlement requiring court approval. WesBanco said it did not expect the settlement to be material, but approval was not assured. Management stated other pending ordinary-course legal matters were not expected to be material.
- Commitments to extend credit, loans approved but not closed, overdraft limits, and letters of credit were substantial; management noted many commitments may expire unused. It also reported that the company and Bank were in compliance with loan covenants and that management believed liquidity was sufficient.
- The first half included a $1.1 million bank-owned life insurance death benefit. The quarter included $0.7 million in securities gains; securities gains were lower than the prior-year comparison.
Important facts for investors to verify
- How much future earnings depend on Fidelity-related balance growth, purchase-accounting accretion, and the sustainability of merger cost savings.
- Whether margin pressure, loan repricing, and the pace of deposit-cost reductions develop as management expected.
- Credit trends beneath aggregate improvement, especially the rise in non-accrual loans and the commercial real estate exposures; monitor criticized/classified loans, TDRs, charge-offs, and allowance adequacy.
- Liquidity and funding developments, including large CD maturities, increased short-term borrowings, and the availability and terms of contingent funding sources.
- The final court disposition and costs of the Fidelity-merger shareholder litigation, and any material changes to regulatory capital requirements or interest-rate exposure.