WesBanco, Inc. — Second-Quarter 2012 Form 10-Q
Business context and reporting period. WesBanco is a bank holding company operating 112 branches in West Virginia, Ohio and western Pennsylvania, with community banking and trust and investment services segments. This unaudited filing covers the quarter and six months ended June 30, 2012; balance-sheet comparisons are with December 31, 2011. Amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net income | $12.0 | $11.9 | $24.0 | $22.2 |
| Diluted EPS | $0.45 | $0.45 | $0.90 | $0.83 |
| Net interest income | $41.5 | $43.1 | $83.4 | $84.5 |
| Provision for credit losses | $5.9 | $6.8 | $12.1 | $14.8 |
| Non-interest income | $15.9 | $15.0 | $31.2 | $29.5 |
| Non-interest expense | $36.1 | $35.7 | $71.7 | $71.2 |
- Margins and earnings drivers: Fully taxable-equivalent net interest margin was 3.53% in Q2 versus 3.73% a year earlier, and 3.55% for the first half versus 3.70%. Lower asset yields in the low-rate environment reduced interest income, partly offset by lower funding costs. The efficiency ratio for the first half was 60.9%, nearly unchanged year over year.
- Balance sheet at June 30: Total assets were $5,525.4; net portfolio loans $3,222.2; securities $1,595.8; deposits $4,393.8; total borrowings $439.2; and shareholders’ equity $649.1. Assets were down 0.2% from year-end, while portfolio loans increased 1.1% and deposits were nearly unchanged.
- Funding and liquidity: Borrowings declined 6.8% from year-end, including a 15.6% decline in FHLB advances. Cash and cash equivalents were $102.8. Management cited approximately $1.2 billion of remaining FHLB borrowing capacity, a $145.9 million Federal Reserve borrowing line and $165.0 million of third-party overnight lines, none outstanding. Management stated current liquidity was sufficient to meet obligations.
- Cash flows for the first half: Operating activities provided $46.3; investing activities used $43.3; and financing activities used $40.5. Cash and cash equivalents decreased $37.5, from $140.3 to $102.8. Investing cash use included a $54.9 increase in loans; financing included $8.8 of dividends paid.
- Capital: WesBanco reported a 13.11% Tier 1 risk-based capital ratio and 14.37% total risk-based ratio; its bank subsidiary reported 11.87% and 13.12%, respectively. All were above stated regulatory minimums. The company declared $0.34 per share in dividends for the first half.
Material changes versus comparable periods
- First-half net income rose 8.3% year over year; Q2 net income increased slightly, while diluted EPS remained $0.45.
- First-half net interest income declined 1.4%, reflecting lower yields despite higher average earning assets. Interest expense fell 20.1%, reflecting lower deposit rates, a more favorable deposit mix and lower FHLB borrowings.
- First-half non-interest income increased 5.7%, principally because of $1.4 million in net securities gains, compared with $0.03 million a year earlier. Electronic banking fees also grew; lower deposit service charges partly offset these gains.
- First-half provision for credit losses fell to $12.1 million from $14.8 million, and net charge-offs declined to $13.4 million from $15.2 million. Non-performing loans were $68.1 million, down from $86.9 million at year-end; the allowance for loan losses was $53.6 million, or 1.64% of loans, versus $54.8 million, or 1.69%.
- Deposit balances shifted toward non-interest-bearing demand and savings accounts, while certificates of deposit declined 6.2%. Residential real estate loans grew as the bank retained more shorter-term fixed-rate originations.
Outlook, risks, contingencies and unusual items
- Outlook: No numerical earnings or revenue guidance is provided. Management expected net interest margin could face pressure through the remainder of 2012 and into 2013, citing low rates, loan repricing and reinvestment of maturing securities at lower yields. Maturing higher-cost deposits and borrowings were expected to partly offset the pressure.
- Interest-rate risk: The company’s simulation estimated net interest income would decline 3.9% under an immediate 100-basis-point rate decrease, and rise 0.6% under a 100-basis-point increase. These are model estimates dependent on assumptions, not forecasts. Management also noted competition for quality loans and $974.1 million of commercial loans with interest-rate floors.
- Credit and other risks: Commercial real estate represented 51.6% of loans. Non-performing loans improved, but Q2 net charge-offs included $2.2 million related to selling $5.1 million of non-performing loans. Management identified risks including economic conditions, borrower credit, interest rates, liquidity, regulation, competition, technology and merger integration.
- Acquisition after quarter-end: On July 19, 2012, WesBanco announced an agreement to acquire Fidelity Bancorp for a transaction valued at approximately $70.8 million, comprising 0.8275 WesBanco shares and $4.50 cash per Fidelity share. The deal required regulatory and Fidelity shareholder approval and was expected to close in late 2012 or early 2013. Integration, cost-savings and revenue-synergy outcomes were uncertain.
- Other items: New TDRs totaled $2.6 million for the first half; $2.3 million of recently restructured loans subsequently defaulted during the period. The filing reported no pending legal matters expected to materially affect the company. Management assessed disclosure controls as effective at a reasonable assurance level and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether lower asset yields and the projected margin pressure are offset by deposit repricing, loan growth and reduced borrowing costs.
- Whether credit improvement persists, particularly in commercial real estate, and how non-performing loans, TDRs, charge-offs and the allowance evolve.
- The quality and sustainability of earnings excluding securities gains, alongside trends in deposit service charges and operating expenses.
- Fidelity Bancorp’s approval, closing, integration costs and realization of anticipated merger benefits.
- Liquidity and funding exposure, including certificate maturities, FHLB advances with call features, and the parent-company revolving credit line then being renewed.