WesBanco, Inc. — 2013 Form 10-K Summary
Business context and period. WesBanco is a regional bank holding company serving West Virginia, Ohio and western Pennsylvania through community banking and trust and investment services. This filing reports the fiscal year ended December 31, 2013; 2012 is the principal comparable period. Results include the first full year of operations following the November 2012 Fidelity Bancorp acquisition.
Financial performance and condition
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| Net income | $63.9 million | $49.5 million | Up 29.0% |
| Diluted EPS | $2.18 | $1.84 | Up 18%; share count rose following the Fidelity acquisition |
| Net interest income | $185.5 million | $168.4 million | Up 10.2% |
| Net interest margin, fully taxable-equivalent | 3.58% | 3.53% | Up 5 basis points |
| Non-interest income | $69.3 million | $64.8 million | Up 7.0% |
| Non-interest expense | $161.0 million | $150.1 million | Up 7.2%; included $1.3 million of restructuring and merger costs |
| Net charge-offs / average loans | $14.2 million / 0.38% | $22.1 million / 0.66% | Credit costs improved |
| Total assets | $6.145 billion | $6.079 billion | Up 1.1% |
| Portfolio loans, net | $3.848 billion | $3.635 billion | Up 5.8% on the reported net balance; gross portfolio loans rose 5.6% |
| Deposits | $5.063 billion | $4.944 billion | Up 2.4%; CDs declined 8.4% |
| Total borrowings | $296.2 million | $368.0 million | Down 19.5% |
| Shareholders’ equity | $746.6 million | $714.2 million | Up 4.5% |
| Regulatory capital | Tier 1 leverage 9.27%; Tier 1 risk-based 13.06%; total risk-based 14.19% | 9.34%; 12.82%; 14.07% | Bank and holding company reported well-capitalized |
Fourth-quarter 2013 net income was $15.4 million, or $0.52 per diluted share, compared with $12.7 million, or $0.46 per diluted share, in fourth-quarter 2012.
Cash flows were $111.5 million provided by operations, $164.5 million used in investing and $23.0 million provided by financing. Cash and cash equivalents decreased $30.1 million to $95.6 million. Management reported approximately $1.6 billion of available FHLB borrowing capacity and $145 million in overnight correspondent-bank lines, of which $20 million was drawn. The parent also had $27.1 million in cash and investments and an undrawn $25 million credit line.
Material changes versus 2012
- Profitability improved, supported by Fidelity-related asset growth, loan growth, lower funding costs and a smaller credit-loss provision. Return on average assets rose to 1.05% from 0.88%.
- Loan originations reached a reported record $1.6 billion, up 31.5%; portfolio loan growth centered on commercial real estate construction, commercial and industrial, and residential real estate lending.
- Credit quality strengthened: non-performing assets declined to $56.4 million, or 0.92% of assets, from $69.6 million, or 1.15%; the allowance for loan losses fell to $47.4 million, or 1.22% of loans, from $52.7 million, or 1.43%.
- Fee income increased, notably brokerage revenue (+35.7%), trust fees (+8.5%), and electronic banking fees (+7.6%). Net securities gains fell 72.2% to $0.7 million.
- Expenses increased with the ongoing cost of the acquired branches, staffing and growth initiatives, while merger-related expense declined from $3.9 million to $1.3 million. Management said targeted back-office and administrative merger savings were substantially achieved by year-end.
- Rising market rates reduced securities valuations: gross unrealized securities losses increased to $33.9 million from $1.5 million. Management characterized the losses as temporary; the available-for-sale portfolio’s net unrealized position moved from a $20.7 million gain to a $9.7 million loss before tax.
Outlook, risks and notable items
- Management expected the net interest margin to increase slightly in 2014. It noted Fidelity purchase-accounting accretion would contribute less, while loan growth and maturities of higher-cost CDs and borrowings could help offset competitive pressure on loan spreads.
- Approximately $117 million of additional commercial real estate construction commitments were expected to fund over the following 12–18 months, subject to project progress and potential paydowns.
- The quarterly dividend was increased to $0.22 per share in February 2014, payable April 1. The 2013 declared dividend was $0.78 per share. Dividend capacity depends substantially on bank-subsidiary distributions and regulatory limits.
- Key risks include regional economic and borrower-credit deterioration; commercial lending concentration (about 63% of loans); construction and multifamily exposure; intense competition and low-rate pressure on margins; municipal-bond credit, early-redemption and valuation risks; deposit runoff or higher funding costs; cyber and information-system threats; and evolving regulation.
- Basel III rules were scheduled to begin phasing in during 2015. Based on year-end 2013 balance-sheet composition, management estimated reductions of 65–75 basis points in Tier 1 and total risk-based capital ratios and 15–20 basis points in the leverage ratio, while expecting capital to remain above well-capitalized minimums.
- The Fidelity-merger shareholder lawsuit was dismissed with prejudice after court approval of a settlement in November 2013; the company said the settlement was not material. Management reported no other pending ordinary-course matters expected to be material.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of year-end.
Important facts for investors to verify
- Whether loan growth—particularly construction, multifamily and other commercial lending—continues without weakening underwriting quality or increasing delinquency and charge-offs.
- How much of the $117 million construction commitment pipeline funds, and whether projects stabilize, refinance or repay as expected.
- Whether lower credit costs and reserve levels remain appropriate as the allowance declined; consider the acquired-loan credit mark when comparing reserve coverage.
- Whether the reported temporary securities losses remain temporary, and how rate changes affect tangible equity, accumulated other comprehensive income and future earnings.
- Whether deposit growth and the shift away from CDs persist, including retention and repricing of the $796 million of CDs scheduled to mature in 2014.
- Whether 2014 margin expectations, merger savings and Basel III capital estimates are achieved; confirm the dividend remains supported by earnings, liquidity and regulatory capacity.