WESBANCO INC annual report, FY2012

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WesBanco, Inc. — 2012 Form 10-K

Reporting period: Fiscal year ended December 31, 2012; fourth-quarter figures are included where relevant. WesBanco is a regional bank holding company operating in West Virginia, Ohio and western Pennsylvania, with community banking and trust and investment services segments. On November 30, 2012, it completed its acquisition of Pittsburgh-based Fidelity Bancorp, adding 13 branches and approximately $654.9 million of assets at acquisition. Fidelity’s results are included only from the acquisition date.

Financial performance and condition

  • Earnings: Net income was $49.5 million, up 13.1% from $43.8 million in 2011. Diluted EPS was $1.84 versus $1.65. Fourth-quarter net income was $12.7 million and diluted EPS was $0.46, compared with $10.6 million and $0.40 in fourth-quarter 2011.
  • Revenue and margins: Net interest income was $168.4 million, down 0.6%; fully taxable-equivalent net interest margin declined 13 basis points to 3.53%. Non-interest income rose 8.2% to $64.8 million, including higher trust and electronic banking fees, mortgage-sale gains and securities gains. Non-interest expense increased 7.0% to $150.1 million; excluding merger and restructuring charges, it increased 4.2%.
  • Credit costs and asset quality: Provision for credit losses fell 43.7% to $19.9 million. Net charge-offs were $22.1 million, or 0.67% of average portfolio loans, versus $42.5 million, or 1.30%, in 2011. Non-performing loans declined 26.7% to $63.7 million (1.73% of loans); non-performing assets were $69.6 million (1.15% of assets). The allowance for loan losses was $52.7 million, or 1.43% of portfolio loans; management noted that including Fidelity’s credit fair-value adjustment would produce an approximate 1.62% coverage measure.
  • Balance sheet: Total assets were $6.08 billion, up 9.8%; deposits were $4.94 billion, up 12.5%; and net portfolio loans were $3.64 billion, up 14.1%. Loan growth included $313.4 million from Fidelity and $135.0 million of organic growth. Commercial real estate represented about 50% of portfolio loans; commercial loans overall were approximately 63%.
  • Funding, debt and liquidity: Total borrowings, including $113.8 million of junior subordinated debt, were $368.0 million, down 21.9%. Cash and cash equivalents were $125.6 million. Management reported approximately $1.3 billion of available FHLB borrowing capacity, plus unused Federal Reserve and correspondent-bank lines. Deposits included $890.0 million of certificates of deposit scheduled to mature in 2013.
  • Cash flow: Operating activities provided $76.8 million; investing activities provided $55.4 million; financing activities used $147.0 million. Cash and cash equivalents decreased $14.7 million to $125.6 million.
  • Capital and shareholder returns: WesBanco’s Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 9.34%, 12.82% and 14.07%, respectively; the Bank also exceeded “well-capitalized” thresholds. Shareholders’ equity was $714.2 million. Dividends declared were $0.70 per share, versus $0.62 in 2011.

Material changes versus 2011

  • Fidelity’s acquisition materially increased year-end assets, loans, deposits, goodwill and share count. WesBanco issued 2.54 million shares and paid $15.4 million cash; it recorded $38.8 million of goodwill, $4.7 million of core deposit intangibles and $3.2 million of merger expenses. The purchase-price allocation was preliminary.
  • Earnings improved chiefly because credit-loss provision declined and fee income increased, partly offset by higher operating expenses and lower net interest income. The low-rate environment reduced yields; lower funding costs only partly offset that pressure.
  • Credit indicators improved, including lower non-performing loans, criticized/classified loans and charge-offs. The allowance-to-loan ratio declined, in part because acquired loans are recorded at fair value without a transferred allowance.
  • Deposits grew by $550.4 million, including $455.0 million from Fidelity; borrowings fell by $103.1 million. Shareholders’ equity rose by $80.4 million, mainly from acquisition-related share issuance and earnings, partly offset by dividends and pension-related other comprehensive loss.

Outlook, risks and unusual items

  • Outlook: The filing gives no earnings or revenue guidance. Management expected the low-rate environment to pressure net interest margin into 2013, with short-term rates not anticipated to rise until 2014 or 2015. Maturing higher-cost CDs and borrowings were expected to partly mitigate margin pressure. Management described continued loan growth, deposit-mix improvement and balance-sheet management as priorities.
  • Key risks: Commercial real estate and other commercial-credit exposure; local economic and property-market weakness; intense competition; interest-rate and funding-cost sensitivity; acquisition integration and realization of expected benefits; liquidity and deposit-retention risk; regulatory change, including Dodd-Frank and Basel III; and operational, cybersecurity and key-person risks. Management’s allowance for credit losses and goodwill impairment assessments rely on significant estimates.
  • Acquisition and legal matters: A shareholder lawsuit challenging Fidelity merger disclosures and terms was subject to a proposed settlement requiring supplemental disclosures and court approval; the company said it did not expect the settlement to be material. Other ordinary-course litigation was not expected to be material. WesBanco also disclosed that it planned to redeem approximately $7.7 million of Fidelity-related trust preferred securities on March 15, 2013.
  • Other notable items: The company recorded $3.9 million of merger and restructuring expense, including $0.7 million associated with closing six branches. Its annual goodwill test found no impairment. The pension plan’s funded deficit increased to $11.9 million from $3.7 million, and pension-related other comprehensive loss contributed to the reduction in equity. The financial statements received an unqualified audit opinion; internal-control testing excluded Fidelity, acquired November 30, 2012.

Important facts for investors to verify

  • How Fidelity integration, final purchase accounting and subsequent operating results compare with management’s expectations.
  • Whether organic loan growth and fee-income gains can offset continued net interest margin pressure and higher expenses.
  • Whether improved credit metrics persist, particularly across commercial real estate, construction and Ohio exposures; review the allowance relative to acquired-loan accounting and non-performing assets.
  • Deposit stability and repricing around the $890.0 million of 2013 CD maturities, as well as continued access to secured and alternative funding.
  • The effect of pension assumptions and contributions, capital-rule changes, and the trust-preferred redemption on earnings and regulatory capital.
  • The status and terms of court approval for the Fidelity merger litigation settlement.