UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2012
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-08467
WESBANCO, INC.
(Exact name of Registrant as specified in its charter)
WEST VIRGINIA | 55-0571723 | |
(State of incorporation) | (IRS Employer Identification No.) | |
1 Bank Plaza, Wheeling, WV | 26003 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: 304-234-9000
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 23, 2012, there were 26,664,644 shares of WesBanco, Inc. common stock, $2.0833 par value, outstanding.
TABLE OF CONTENTS
Item |
ITEM |
Page No. |
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1 | ||||||
Consolidated Balance Sheets at June 30, 2012 (unaudited) and December 31, 2011 |
3 | |||||
4 | ||||||
5 | ||||||
Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited) |
6 | |||||
7 | ||||||
2 | Managements Discussion and Analysis of Financial Condition and Results of Operations |
27 | ||||
3 | 43 | |||||
4 | 45 | |||||
1 | 46 | |||||
2 | 46 | |||||
6 | 47 | |||||
48 |
2
PART I FINANCIAL INFORMATION
WESBANCO, INC. CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except shares) |
June 30, 2012 |
December 31, 2011 |
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ASSETS |
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Cash and due from banks, including interest bearing amounts of $2,885 and $10,929, respectively |
$ | 102,815 | $ | 140,325 | ||||
Securities: |
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Available-for-sale, at fair value |
1,023,124 | 1,016,340 | ||||||
Held-to-maturity (fair values of $607,032 and $621,472, respectively) |
572,671 | 592,925 | ||||||
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Total securities |
1,595,795 | 1,609,265 | ||||||
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Loans held for sale |
7,305 | 6,084 | ||||||
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Portfolio loans, net of unearned income |
3,275,830 | 3,239,368 | ||||||
Allowance for loan losses |
(53,610 | ) | (54,810 | ) | ||||
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Net portfolio loans |
3,222,220 | 3,184,558 | ||||||
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Premises and equipment, net |
80,668 | 82,204 | ||||||
Accrued interest receivable |
18,233 | 19,268 | ||||||
Goodwill and other intangible assets, net |
282,088 | 283,150 | ||||||
Bank-owned life insurance |
111,829 | 110,074 | ||||||
Other assets |
104,452 | 101,102 | ||||||
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Total Assets |
$ | 5,525,405 | $ | 5,536,030 | ||||
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LIABILITIES |
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Deposits: |
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Non-interest bearing demand |
$ | 759,779 | $ | 705,415 | ||||
Interest bearing demand |
728,521 | 698,114 | ||||||
Money market |
753,964 | 789,036 | ||||||
Savings deposits |
646,385 | 596,549 | ||||||
Certificates of deposit |
1,505,133 | 1,604,752 | ||||||
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Total deposits |
4,393,782 | 4,393,866 | ||||||
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Federal Home Loan Bank borrowings |
141,877 | 168,186 | ||||||
Other short-term borrowings |
191,275 | 196,887 | ||||||
Junior subordinated debt owed to unconsolidated subsidiary trusts |
106,083 | 106,066 | ||||||
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Total borrowings |
439,235 | 471,139 | ||||||
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Accrued interest payable |
4,741 | 4,975 | ||||||
Other liabilities |
38,535 | 32,260 | ||||||
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Total Liabilities |
4,876,293 | 4,902,240 | ||||||
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SHAREHOLDERS EQUITY |
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Preferred stock, no par value; 1,000,000 shares authorized; none outstanding |
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Common stock, $2.0833 par value; 50,000,000 shares authorized; 26,667,739 and 26,633,848 shares issued in 2012 and 2011, respectively; outstanding: 26,664,644 and 26,629,360 shares in 2012 and 2011, respectively |
55,558 | 55,487 | ||||||
Capital surplus |
191,926 | 191,679 | ||||||
Retained earnings |
403,746 | 388,818 | ||||||
Treasury stock (3,095 and 4,488 shares in 2012 and 2011, respectively, at cost) |
(61 | ) | (96 | ) | ||||
Accumulated other comprehensive loss |
(843 | ) | (902 | ) | ||||
Deferred benefits for directors |
(1,214 | ) | (1,196 | ) | ||||
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Total Shareholders Equity |
649,112 | 633,790 | ||||||
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Total Liabilities and Shareholders Equity |
$ | 5,525,405 | $ | 5,536,030 | ||||
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See Notes to Consolidated Financial Statements.
3
WESBANCO, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months
Ended June 30, |
For the Six Months
Ended June 30, |
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(unaudited, in thousands, except shares and per share amounts) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
INTEREST AND DIVIDEND INCOME |
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Loans, including fees |
$ | 40,957 | $ | 44,511 | $ | 82,922 | $ | 88,859 | ||||||||
Interest and dividends on securities: |
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Taxable |
8,471 | 9,431 | 17,061 | 18,139 | ||||||||||||
Tax-exempt |
3,079 | 3,046 | 6,158 | 6,032 | ||||||||||||
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Total interest and dividends on securities |
11,550 | 12,477 | 23,219 | 24,171 | ||||||||||||
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Other interest income |
38 | 54 | 85 | 109 | ||||||||||||
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Total interest and dividend income |
52,545 | 57,042 | 106,226 | 113,139 | ||||||||||||
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INTEREST EXPENSE |
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Interest bearing demand deposits |
393 | 579 | 734 | 1,211 | ||||||||||||
Money market deposits |
493 | 1,130 | 1,299 | 2,572 | ||||||||||||
Savings deposits |
200 | 349 | 495 | 837 | ||||||||||||
Certificates of deposit |
6,621 | 7,929 | 13,600 | 15,980 | ||||||||||||
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Total interest expense on deposits |
7,707 | 9,987 | 16,128 | 20,600 | ||||||||||||
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Federal Home Loan Bank borrowings |
1,288 | 2,003 | 2,665 | 4,028 | ||||||||||||
Other short-term borrowings |
1,156 | 1,188 | 2,334 | 2,370 | ||||||||||||
Junior subordinated debt owed to unconsolidated subsidiary trusts |
854 | 811 | 1,728 | 1,612 | ||||||||||||
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Total interest expense |
11,005 | 13,989 | 22,855 | 28,610 | ||||||||||||
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NET INTEREST INCOME |
41,540 | 43,053 | 83,371 | 84,529 | ||||||||||||
Provision for credit losses |
5,903 | 6,802 | 12,105 | 14,843 | ||||||||||||
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Net interest income after provision for credit losses |
35,637 | 36,251 | 71,266 | 69,686 | ||||||||||||
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NON-INTEREST INCOME |
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Trust fees |
4,258 | 4,272 | 9,011 | 9,034 | ||||||||||||
Service charges on deposits |
4,218 | 4,889 | 8,211 | 9,111 | ||||||||||||
Electronic banking fees |
2,920 | 2,523 | 5,683 | 4,807 | ||||||||||||
Net securities brokerage revenue |
1,114 | 1,088 | 2,189 | 2,184 | ||||||||||||
Bank-owned life insurance |
874 | 900 | 1,754 | 1,794 | ||||||||||||
Net gains on sales of mortgage loans |
599 | 389 | 867 | 971 | ||||||||||||
Net securities gains |
1,294 | 14 | 1,394 | 30 | ||||||||||||
Net loss on other real estate owned and other assets |
(282 | ) | (271 | ) | (250 | ) | (816 | ) | ||||||||
Other income |
899 | 1,212 | 2,356 | 2,406 | ||||||||||||
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Total non-interest income |
15,894 | 15,016 | 31,215 | 29,521 | ||||||||||||
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NON-INTEREST EXPENSE |
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Salaries and wages |
13,955 | 13,959 | 28,270 | 27,612 | ||||||||||||
Employee benefits |
4,920 | 4,249 | 10,538 | 9,405 | ||||||||||||
Net occupancy |
2,703 | 2,461 | 5,479 | 5,382 | ||||||||||||
Equipment |
2,144 | 2,145 | 4,318 | 4,444 | ||||||||||||
Marketing |
1,716 | 1,642 | 2,487 | 2,647 | ||||||||||||
FDIC insurance |
965 | 1,015 | 2,011 | 2,669 | ||||||||||||
Amortization of intangible assets |
524 | 605 | 1,061 | 1,223 | ||||||||||||
Other operating expenses |
9,157 | 9,627 | 17,585 | 17,812 | ||||||||||||
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Total non-interest expense |
36,084 | 35,703 | 71,749 | 71,194 | ||||||||||||
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Income before provision for income taxes |
15,447 | 15,564 | 30,732 | 28,013 | ||||||||||||
Provision for income taxes |
3,449 | 3,646 | 6,744 | 5,854 | ||||||||||||
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NET INCOME |
$ | 11,998 | $ | 11,918 | $ | 23,988 | $ | 22,159 | ||||||||
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EARNINGS PER COMMON SHARE |
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Basic |
$ | 0.45 | $ | 0.45 | $ | 0.90 | $ | 0.83 | ||||||||
Diluted |
$ | 0.45 | $ | 0.45 | $ | 0.90 | $ | 0.83 | ||||||||
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AVERAGE COMMON SHARES OUTSTANDING |
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Basic |
26,647,050 | 26,610,450 | 26,637,537 | 26,599,791 | ||||||||||||
Diluted |
26,650,325 | 26,611,409 | 26,640,879 | 26,601,088 | ||||||||||||
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DIVIDENDS DECLARED PER COMMON SHARE |
$ | 0.17 | $ | 0.15 | $ | 0.34 | $ | 0.30 | ||||||||
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COMPREHENSIVE INCOME |
$ | 11,481 | $ | 14,985 | $ | 24,047 | $ | 23,903 | ||||||||
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See Notes to Consolidated Financial Statements.
4
WESBANCO, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
For the Six Months Ended June 30, 2012 and 2011 | ||||||||||||||||||||||||||||||||
(unaudited, in thousands, except shares and per share amounts) |
Common Stock | Capital Surplus |
Retained Earnings |
Treasury Stock |
Accumulated Other Comprehensive Income (Loss) |
Deferred Benefits for Directors |
Total | |||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||||
December 31, 2011 |
26,629,360 | $ | 55,487 | $ | 191,679 | $ | 388,818 | $ | (96 | ) | $ | (902 | ) | $ | (1,196 | ) | $ | 633,790 | ||||||||||||||
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Net income |
23,988 | 23,988 | ||||||||||||||||||||||||||||||
Other comprehensive income: |
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Unrealized loss on available-for-sale securities |
(103 | ) | (103 | ) | ||||||||||||||||||||||||||||
Amortization of unrealized gain on transferred securities |
(512 | ) | (512 | ) | ||||||||||||||||||||||||||||
Defined benefit pension plan |
674 | 674 | ||||||||||||||||||||||||||||||
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Comprehensive income |
24,047 | |||||||||||||||||||||||||||||||
Common dividends declared ($0.34 per share) |
(9,060 | ) | (9,060 | ) | ||||||||||||||||||||||||||||
Restricted stock granted (1) |
40,050 | 71 | (198 | ) | 127 | | ||||||||||||||||||||||||||
Treasury shares acquired |
(4,766 | ) | 22 | (92 | ) | (70 | ) | |||||||||||||||||||||||||
Stock compensation expense |
405 | 405 | ||||||||||||||||||||||||||||||
Deferred benefits for directors-net |
18 | (18 | ) | | ||||||||||||||||||||||||||||
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June 30, 2012 |
26,664,644 | $ | 55,558 | $ | 191,926 | $ | 403,746 | $ | (61 | ) | $ | (843 | ) | $ | (1,214 | ) | $ | 649,112 | ||||||||||||||
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(1) An additional 33,891 common shares were issued in 2012 resulting from the restricted stock grant. |
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December 31, 2010 |
26,586,953 | $ | 55,487 | $ | 191,987 | $ | 361,513 | $ | (1,063 | ) | $ | 131 | $ | (1,192 | ) | $ | 606,863 | |||||||||||||||
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Net income |
22,159 | 22,159 | ||||||||||||||||||||||||||||||
Other comprehensive income: |
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Unrealized gain on available-for-sale securities |
2,010 | 2,010 | ||||||||||||||||||||||||||||||
Amortization of unrealized gain on transferred securities |
(751 | ) | (751 | ) | ||||||||||||||||||||||||||||
Defined benefit pension plan |
485 | 485 | ||||||||||||||||||||||||||||||
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Comprehensive income |
23,903 | |||||||||||||||||||||||||||||||
Common dividends declared ($0.30 per share) |
(7,983 | ) | (7,983 | ) | ||||||||||||||||||||||||||||
Stock options exercised |
1,775 | (13 | ) | 39 | 26 | |||||||||||||||||||||||||||
Restricted stock granted |
40,632 | (928 | ) | 928 | | |||||||||||||||||||||||||||
Stock compensation expense |
228 | 228 | ||||||||||||||||||||||||||||||
Deferred benefits for directors-net |
(11 | ) | 11 | | ||||||||||||||||||||||||||||
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June 30, 2011 |
26,629,360 | $ | 55,487 | $ | 191,263 | $ | 375,689 | $ | (96 | ) | $ | 1,875 | $ | (1,181 | ) | $ | 623,037 | |||||||||||||||
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See Notes to Consolidated Financial Statements.
5
WESBANCO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30, |
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(unaudited, in thousands) |
2012 | 2011 | ||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
$ | 46,276 | $ | 58,738 | ||||
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INVESTING ACTIVITIES: |
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Net (increase) decrease in loans |
(54,935 | ) | 9,729 | |||||
Securities available-for-sale: |
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Proceeds from sales |
42,810 | | ||||||
Proceeds from maturities, prepayments and calls |
276,664 | 171,140 | ||||||
Purchases of securities |
(327,595 | ) | (150,954 | ) | ||||
Securities held-to-maturity: |
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Proceeds from maturities, prepayments and calls |
58,668 | 42,039 | ||||||
Purchases of securities |
(40,239 | ) | (161,448 | ) | ||||
Purchases of premises and equipment - net |
(1,497 | ) | (1,349 | ) | ||||
Sale of portfolio loans - net |
2,852 | | ||||||
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Net cash used in investing activities |
(43,272 | ) | (90,843 | ) | ||||
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FINANCING ACTIVITIES: |
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(Decrease) increase in deposits |
(90 | ) | 48,970 | |||||
Repayment of Federal Home Loan Bank borrowings |
(26,191 | ) | (26,518 | ) | ||||
(Decrease) increase in other short-term borrowings |
(5,375 | ) | 6,547 | |||||
Increase in federal funds purchased |
| 15,000 | ||||||
Dividends paid to common shareholders |
(8,788 | ) | (7,711 | ) | ||||
Treasury shares (purchased) sold - net |
(70 | ) | 26 | |||||
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Net cash (used in) provided by financing activities |
(40,514 | ) | 36,314 | |||||
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Net (decrease) increase in cash and cash equivalents |
(37,510 | ) | 4,209 | |||||
Cash and cash equivalents at beginning of the period |
140,325 | 79,136 | ||||||
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Cash and cash equivalents at end of the period |
$ | 102,815 | $ | 83,345 | ||||
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SUPPLEMENTAL DISCLOSURES: |
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Interest paid on deposits and other borrowings |
$ | 23,089 | $ | 29,263 | ||||
Income taxes paid |
6,445 | 5,850 | ||||||
Transfers of loans to other real estate owned |
2,424 | 1,004 | ||||||
Transfer of loans to held for sale |
5,075 | |
See Notes to Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The accompanying unaudited interim financial statements of WesBanco, Inc. and its consolidated subsidiaries (WesBanco) have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011.
WesBancos interim financial statements have been prepared following the significant accounting policies disclosed in Note 1 of the Notes to the Consolidated Financial Statements of its 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission. In the opinion of management, the accompanying interim financial information reflects all adjustments, including normal recurring adjustments, necessary to present fairly WesBancos financial position and results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year.
Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassifications had no effect on net income.
RECENT ACCOUNTING PRONOUNCEMENTS In December 2011, the Financial Accounting Standards Board (the FASB) issued an accounting pronouncement which requires entities to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position, including instruments and transactions subject to master netting arrangements. The scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The objective of this disclosure is to enhance disclosures required by GAAP by requiring improved information about financial instruments and derivative instruments that are either offset in accordance with existing GAAP or subject to an enforceable master netting arrangement or similar agreement. This information will enable users of an entitys financial statements to evaluate the effect or potential effect of netting arrangements on an entitys financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. The pronouncement should be applied retrospectively effective for fiscal years, and interim periods within those years, beginning after January 1, 2013. The adoption of this pronouncement is not expected to have a material impact on WesBancos consolidated financial statements.
In September 2011, the FASB issued an accounting pronouncement to simplify how an entity tests goodwill for impairment by permitting an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. Under previous guidance, an entity was required to test goodwill for impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value was less than its carrying amount, then the second step of the test was performed to measure the amount of the impairment loss. Under the new accounting pronouncement an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The pronouncement was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this pronouncement did not have a material impact on WesBancos consolidated financial statements.
In June 2011, the FASB issued an accounting pronouncement that requires all non-owner changes in shareholders equity to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. In December 2011, an amendment to the June 2011 accounting pronouncement was issued which deferred the requirement that entities present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face of the financial statements. Entities should continue to report reclassifications relating to accumulated other comprehensive income consistent with the presentation requirements in effect before the June 2011 accounting pronouncement. The disclosures in the original June 2011 pronouncement that were not deferred in the December 2011 pronouncement should be applied retrospectively effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. WesBanco has adopted a single continuous statement of comprehensive income for interim periods.
In May 2011, the FASB issued an accounting pronouncement which amends the fair value measurement and disclosure requirements to achieve common disclosure requirements between U.S. GAAP and International Financial Reporting Standards. The accounting pronouncement requires certain disclosures about transfers between Level 1 and Level 2 of the fair value hierarchy, sensitivity of fair value measurements categorized within Level 3 of the fair value hierarchy, and categorization by level of items that are reported at cost but are required to be disclosed at fair value. The disclosures are to be applied prospectively effective in the first interim and annual periods beginning after December 15, 2011. The adoption of this pronouncement did not have a material impact on WesBancos consolidated financial statements.
7
NOTE 2. EARNINGS PER COMMON SHARE
Earnings per common share are calculated as follows:
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
(unaudited, in thousands, except shares and per share amounts) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Numerator for both basic and diluted earnings per common share: |
||||||||||||||||
Net income |
$ | 11,998 | $ | 11,918 | $ | 23,988 | $ | 22,159 | ||||||||
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Denominator: |
||||||||||||||||
Total average basic common shares outstanding |
26,647,050 | 26,610,450 | 26,637,537 | 26,599,791 | ||||||||||||
Effect of dilutive stock options |
3,275 | 959 | 3,342 | 1,297 | ||||||||||||
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|||||||||
Total diluted average common shares outstanding |
26,650,325 | 26,611,409 | 26,640,879 | 26,601,088 | ||||||||||||
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|||||||||
Earnings per common share - basic |
$ | 0.45 | $ | 0.45 | $ | 0.90 | $ | 0.83 | ||||||||
Earnings per common share - diluted |
$ | 0.45 | $ | 0.45 | $ | 0.90 | $ | 0.83 |
NOTE 3. SECURITIES
The following table presents the fair value and amortized cost of available-for-sale and held-to-maturity securities:
June 30, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
(unaudited, in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||||||||||
Other government agencies |
$ | 95,897 | $ | 348 | $ | (175 | ) | $ | 96,070 | $ | 197,898 | $ | 834 | $ | (12 | ) | $ | 198,720 | ||||||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations of government agencies |
707,814 | 8,400 | (488 | ) | 715,726 | 579,430 | 9,244 | (582 | ) | 588,092 | ||||||||||||||||||||||
Obligations of state and political subdivisions |
158,105 | 9,139 | (63 | ) | 167,181 | 171,782 | 8,664 | (13 | ) | 180,433 | ||||||||||||||||||||||
Corporate debt securities |
38,745 | 276 | (451 | ) | 38,570 | 45,002 | 107 | (1,043 | ) | 44,066 | ||||||||||||||||||||||
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Total debt securities |
$ | 1,000,561 | $ | 18,163 | $ | (1,177 | ) | $ | 1,017,547 | $ | 994,112 | $ | 18,849 | $ | (1,650 | ) | $ | 1,011,311 | ||||||||||||||
Equity securities |
4,747 | 830 | | 5,577 | 4,179 | 851 | (1 | ) | 5,029 | |||||||||||||||||||||||
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Total available-for-sale securities |
$ | 1,005,308 | $ | 18,993 | $ | (1,177 | ) | $ | 1,023,124 | $ | 998,291 | $ | 19,700 | $ | (1,651 | ) | $ | 1,016,340 | ||||||||||||||
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Held-to-maturity |
||||||||||||||||||||||||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations of government agencies |
$ | 198,870 | $ | 7,444 | $ | (58 | ) | $ | 206,256 | $ | 247,938 | $ | 7,223 | $ | (87 | ) | $ | 255,074 | ||||||||||||||
Other residential collateralized mortgage obligations |
451 | 11 | | 462 | 783 | 9 | (1 | ) | 791 | |||||||||||||||||||||||
Obligations of state and political subdivisions |
373,350 | 27,473 | (509 | ) | 400,314 | 342,752 | 21,459 | (138 | ) | 364,073 | ||||||||||||||||||||||
Corporate debt securities |
| | | | 1,452 | 82 | | 1,534 | ||||||||||||||||||||||||
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Total held-to-maturity securities |
$ | 572,671 | $ | 34,928 | $ | (567 | ) | $ | 607,032 | $ | 592,925 | $ | 28,773 | $ | (226 | ) | $ | 621,472 | ||||||||||||||
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Total securities |
$ | 1,577,979 | $ | 53,921 | $ | (1,744 | ) | $ | 1,630,156 | $ | 1,591,216 | $ | 48,473 | $ | (1,877 | ) | $ | 1,637,812 | ||||||||||||||
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At June 30, 2012, and December 31, 2011, there were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of WesBancos shareholders equity.
8
The following table presents the fair value of available-for-sale and held-to-maturity securities by contractual maturity at June 30, 2012. In many instances, the issuers may have the right to call or prepay obligations without penalty prior to the contractual maturity date.
June 30, 2012 | ||||||||||||||||||||||||
(unaudited, in thousands) |
One Year or less |
One to Five Years |
Five to Ten Years |
After Ten Years |
Mortgage-backed and Equity |
Total | ||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||
Other government agencies |
$ | 2,571 | $ | 15,104 | $ | 40,790 | $ | 37,605 | $ | | $ | 96,070 | ||||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations of government agencies (1) |
| | | | 715,726 | 715,726 | ||||||||||||||||||
Obligations of states and political subdivisions |
5,446 | 47,937 | 58,109 | 55,689 | | 167,181 | ||||||||||||||||||
Corporate debt securities |
3,253 | 30,474 | 1,886 | 2,957 | | 38,570 | ||||||||||||||||||
Equity securities (3) |
| | | | 5,577 | 5,577 | ||||||||||||||||||
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|
|
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|
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|
|
|
|||||||||||||
Total available-for-sale securities |
$ | 11,270 | $ | 93,515 | $ | 100,785 | $ | 96,251 | $ | 721,303 | $ | 1,023,124 | ||||||||||||
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|
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Held-to-maturity (2) |
||||||||||||||||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations of government agencies (1) |
$ | | $ | | $ | | $ | | $ | 206,256 | $ | 206,256 | ||||||||||||
Other residential collateralized mortgage obligations (1) |
| | | | 462 | 462 | ||||||||||||||||||
Obligations of states and political subdivisions |
1,177 | 7,840 | 57,128 | 334,169 | | 400,314 | ||||||||||||||||||
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Total held-to-maturity securities |
$ | 1,177 | $ | 7,840 | $ | 57,128 | $ | 334,169 | $ | 206,718 | $ | 607,032 | ||||||||||||
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|
|||||||||||||
Total securities |
$ | 12,447 | $ | 101,355 | $ | 157,913 | $ | 430,420 | $ | 928,021 | $ | 1,630,156 | ||||||||||||
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(1) | Mortgage-backed and collateralized mortgage securities, which have prepayment provisions, are not assigned to maturity categories due to fluctuations in their prepayment speeds. |
(2) | The held-to-maturity portfolio is carried at an amortized cost of $572.7 million. |
(3) | Equity securities, which have no stated maturity, are not assigned a maturity category. |
Securities with aggregate fair values of $696.9 million and $691.8 million at June 30, 2012 and December 31, 2011, respectively, were pledged as security for public and trust funds, and securities sold under agreements to repurchase. Proceeds from the sale of available-for-sale securities were $42.8 million and $0 for the six months ended June 30, 2012 and 2011, respectively. Net unrealized gains on available-for-sale securities included in accumulated other comprehensive income, net of tax, as of June 30, 2012 and December 31, 2011 were $11.2 million and $11.3 million, respectively. For the six months ended June 30, 2012 and 2011, gross security gains recognized in income were $1.4 million and $36 thousand, respectively. For the same periods, gross security losses recognized in income were immaterial.
9
The following table provides information on unrealized losses on investment securities that have been in an unrealized loss position for less than twelve months and twelve months or more as of June 30, 2012 and December 31, 2011:
June 30, 2012 | ||||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||||
(unaudited, dollars in thousands) |
Fair Value |
Unrealized Losses |
# of Securities |
Fair Value |
Unrealized Losses |
# of Securities |
Fair Value |
Unrealized Losses |
# of Securities |
|||||||||||||||||||||||||||
Other government agencies |
$ | 38,077 | $ | (175 | ) | 6 | $ | | $ | | | $ | 38,077 | $ | (175 | ) | 6 | |||||||||||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations of government agencies |
128,008 | (529 | ) | 24 | 552 | (17 | ) | 1 | 128,560 | (546 | ) | 25 | ||||||||||||||||||||||||
Obligations of states and political subdivisions |
40,560 | (572 | ) | 59 | | | | 40,560 | (572 | ) | 59 | |||||||||||||||||||||||||
Corporate debt securities |
7,985 | (96 | ) | 4 | 11,645 | (355 | ) | 4 | 19,630 | (451 | ) | 8 | ||||||||||||||||||||||||
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|||||||||||||||||||
Total temporarily impaired securities |
$ | 214,630 | $ | (1,372 | ) | 93 | $ | 12,197 | $ | (372 | ) | 5 | $ | 226,827 | $ | (1,744 | ) | 98 | ||||||||||||||||||
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December 31, 2011 | ||||||||||||||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||||||||||
(unaudited, dollars in thousands) |
Fair Value |
Unrealized Losses |
# of Securities |
Fair Value |
Unrealized Losses |
# of Securities |
Fair Value |
Unrealized Losses |
# of Securities |
|||||||||||||||||||||||||||
Other government agencies |
$ | 24,486 | $ | (12 | ) | 7 | $ | | $ | | | $ | 24,486 | $ | (12 | ) | 7 | |||||||||||||||||||
Residential mortgage-backed securities and collateralized mortgage obligations of government agencies |
133,106 | (646 | ) | 34 | 795 | (23 | ) | 2 | 133,901 | (669 | ) | 36 | ||||||||||||||||||||||||
Other residential collateralized mortgage obligations |
185 | (1 | ) | 1 | | | | 185 | (1 | ) | 1 | |||||||||||||||||||||||||
Obligations of states and political subdivisions |
14,443 | (146 | ) | 20 | 1,902 | (5 | ) | 4 | 16,345 | (151 | ) | 24 | ||||||||||||||||||||||||
Corporate debt securities |
19,763 | (145 | ) | 11 | 13,103 | (898 | ) | 5 | 32,866 | (1,043 | ) | 16 | ||||||||||||||||||||||||
Equity securities |
4 | (1 | ) | 2 | | | | 4 | (1 | ) | 2 | |||||||||||||||||||||||||
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|||||||||||||||||||
Total temporarily impaired securities |
$ | 191,987 | $ | (951 | ) | 75 | $ | 15,800 | $ | (926 | ) | 11 | $ | 207,787 | $ | (1,877 | ) | 86 | ||||||||||||||||||
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Unrealized losses on debt securities in the table represent temporary fluctuations resulting from changes in market rates in relation to fixed yields. Unrealized losses in the available-for-sale portfolio are accounted for as an adjustment, net of taxes, to other comprehensive income in shareholders equity.
WesBanco does not believe the securities presented above are impaired due to reasons of credit quality, as all debt securities are of investment grade quality and all are paying principal and interest according to their contractual terms. WesBanco does not intend to sell, nor is it more likely than not that it will be required to sell, loss position securities prior to recovery of their cost, and therefore, management believes the unrealized losses detailed above are temporary and no impairment loss relating to these securities has been recognized.
Securities that do not have readily determinable fair values and for which WesBanco does not exercise significant influence are carried at cost. Cost method investments consist primarily of FHLB of Pittsburgh and FHLB of Cincinnati stock totaling $19.7 million and $21.9 million at June 30, 2012 and December 31, 2011, respectively, and are included in other assets in the Consolidated Balance Sheets. Cost method investments are evaluated for impairment whenever events or circumstances suggest that their carrying value may not be recoverable.
10
NOTE 4. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES
The recorded investment in loans is presented in the Consolidated Balance Sheets net of deferred loan fees and costs of $2.6 million at June 30, 2012 and $3.1 million at December 31, 2011.
The following table presents the recorded investment in loans by category:
(unaudited, in thousands) |
June 30, 2012 |
December 31, 2011 |
||||||
Commercial real estate: |
||||||||
Land and construction |
$ | 158,413 | $ | 175,867 | ||||
Improved property |
1,536,632 | 1,509,698 | ||||||
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|
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Total commercial real estate |
1,695,045 | 1,685,565 | ||||||
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|
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Commercial and industrial |
420,689 | 426,315 | ||||||
Residential real estate |
662,556 | 621,383 | ||||||
Home equity |
250,988 | 251,785 | ||||||
Consumer |
246,552 | 254,320 | ||||||
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|
|||||
Total portfolio loans |
3,275,830 | 3,239,368 | ||||||
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|
|||||
Loans held for sale |
7,305 | 6,084 | ||||||
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|
|
|||||
Total loans |
$ | 3,283,135 | $ | 3,245,452 | ||||
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|
|
The following tables summarize changes in the allowance for credit losses applicable to each category of the loan portfolio:
Allowance for Credit Losses By
Category For the Six Months Ended June 30, 2012 and 2011 |
||||||||||||||||||||||||||||||||
(unaudited, in thousands) |
Commercial Real Estate - Land and Construction |
Commercial Real Estate - Improved Property |
Commercial & Industrial |
Residential Real Estate |
Home Equity |
Consumer | Deposit Overdraft |
Total | ||||||||||||||||||||||||
Balance at December 31, 2011: |
||||||||||||||||||||||||||||||||
Allowance for loan losses |
$ | 4,842 | $ | 24,748 | $ | 11,414 | $ | 5,638 | $ | 1,962 | $ | 5,410 | $ | 796 | $ | 54,810 | ||||||||||||||||
Allowance for loan commitments |
74 | 21 | 323 | 4 | 33 | 13 | | 468 | ||||||||||||||||||||||||
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|
|||||||||||||||||
Total beginning allowance for credit losses |
4,916 | 24,769 | 11,737 | 5,642 | 1,995 | 5,423 | 796 | 55,278 | ||||||||||||||||||||||||
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Provision for credit losses: |
||||||||||||||||||||||||||||||||
Provision for loan losses |
2,969 | 3,600 | 740 | 2,237 | 1,125 | 1,413 | 138 | 12,222 | ||||||||||||||||||||||||
Provision for loan commitments |
(25 | ) | (11 | ) | (99 | ) | 1 | 15 | 2 | | (117 | ) | ||||||||||||||||||||
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|||||||||||||||||
Total provision for credit losses |
2,944 | 3,589 | 641 | 2,238 | 1,140 | 1,415 | 138 | 12,105 | ||||||||||||||||||||||||
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Charge-offs |
(3,377 | ) | (4,214 | ) | (2,342 | ) | (2,288 | ) | (655 | ) | (2,017 | ) | (389 | ) | (15,282 | ) | ||||||||||||||||
Recoveries |
41 | 587 | 256 | 193 | 9 | 613 | 161 | 1,860 | ||||||||||||||||||||||||
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Net charge-offs |
(3,336 | ) | (3,627 | ) | (2,086 | ) | (2,095 | ) | (646 | ) | (1,404 | ) | (228 | ) | (13,422 | ) | ||||||||||||||||
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Balance at June 30, 2012: |
||||||||||||||||||||||||||||||||
Allowance for loan losses |
4,475 | 24,721 | 10,068 | 5,780 | 2,441 | 5,419 | 706 | 53,610 | ||||||||||||||||||||||||
Allowance for loan commitments |
49 | 10 | 224 | 5 | 48 | 15 | | 351 | ||||||||||||||||||||||||
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Total ending allowance for credit losses |
$ | 4,524 | $ | 24,731 | $ | 10,292 | $ | 5,785 | $ | 2,489 | $ | 5,434 | $ | 706 | $ | 53,961 | ||||||||||||||||
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Balance at December 31, 2010: |
||||||||||||||||||||||||||||||||
Allowance for loan losses |
$ | 4,701 | $ | 30,836 | $ | 10,793 | $ | 5,950 | $ | 2,073 | $ | 5,641 | $ | 1,057 | $ | 61,051 | ||||||||||||||||
Allowance for loan commitments |
1,037 | 285 | 65 | 1 | 14 | 2 | | 1,404 | ||||||||||||||||||||||||
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Total beginning allowance for credit losses |
5,738 | 31,121 | 10,858 | 5,951 | 2,087 | 5,643 | 1,057 | 62,455 | ||||||||||||||||||||||||
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|||||||||||||||||
Provision for credit losses: |
||||||||||||||||||||||||||||||||
Provision for loan losses |
4,893 | 3,196 | 4,138 | 1,386 | 421 | 930 | 578 | 15,542 | ||||||||||||||||||||||||
Provision for loan commitments |
(696 | ) | (275 | ) | 235 | 1 | 24 | 12 | | (699 | ) | |||||||||||||||||||||
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|
|||||||||||||||||
Total provision for credit losses |
4,197 | 2,921 | 4,373 | 1,387 | 445 | 942 | 578 | 14,843 | ||||||||||||||||||||||||
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|
|||||||||||||||||
Charge-offs |
(4,532 | ) | (4,156 | ) | (3,937 | ) | (1,992 | ) | (448 | ) | (1,840 | ) | (420 | ) | (17,325 | ) | ||||||||||||||||
Recoveries |
33 | 725 | 330 | 248 | 9 | 635 | 170 | 2,150 | ||||||||||||||||||||||||
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|||||||||||||||||
Net charge-offs |
(4,499 | ) | (3,431 | ) | (3,607 | ) | (1,744 | ) | (439 | ) | (1,205 | ) | (250 | ) | (15,175 | ) | ||||||||||||||||
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Balance at June 30, 2011: |
||||||||||||||||||||||||||||||||
Allowance for loan losses |
5,095 | 30,601 | 11,324 | 5,592 | 2,055 | 5,366 | 1,385 | 61,418 | ||||||||||||||||||||||||
Allowance for loan commitments |
341 | 10 | 300 | 2 | 38 | 14 | | 705 | ||||||||||||||||||||||||
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|||||||||||||||||
Total ending allowance for credit losses |
$ | 5,436 | $ | 30,611 | $ | 11,624 | $ | 5,594 | $ | 2,093 | $ | 5,380 | $ | 1,385 | $ | 62,123 | ||||||||||||||||
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11
The following tables present the allowance for credit losses and recorded investments in loans by category:
Allowance for Credit Losses and Recorded Investment in Loans | ||||||||||||||||||||||||||||||||
(unaudited, in thousands) |
Commercial Real Estate- Land and Construction |
Commercial Real Estate- Improved Property |
Commercial and Industrial |
Residential Real Estate |
Home Equity |
Consumer | Over- draft |
Total | ||||||||||||||||||||||||
June 30, 2012 |
||||||||||||||||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||||||||||
Allowance for loans individually evaluated for impairment |
$ | 1,675 | $ | 1,907 | $ | | $ | | $ | | $ | | $ | | $ | 3,582 | ||||||||||||||||
Allowance for loans collectively evaluated for impairment |
2,800 | 22,814 | 10,068 | 5,780 | 2,441 | 5,419 | 706 | 50,028 | ||||||||||||||||||||||||
Allowance for loan commitments |
49 | 10 | 224 | 5 | 48 | 15 | | 351 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total allowance for credit losses |
$ | 4,524 | $ | 24,731 | $ | 10,292 | $ | 5,785 | $ | 2,489 | $ | 5,434 | $ | 706 | $ | 53,961 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Portfolio loans: |
||||||||||||||||||||||||||||||||
Individually evaluated for impairment (1) |
$ | 4,933 | $ | 16,676 | $ | | $ | | $ | | $ | | $ | | $ | 21,609 | ||||||||||||||||
Collectively evaluated for impairment |
153,480 | 1,519,956 | 420,689 | 662,556 | 250,988 | 246,552 | | 3,254,221 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total portfolio loans |
$ | 158,413 | $ | 1,536,632 | $ | 420,689 | $ | 662,556 | $ | 250,988 | $ | 246,552 | $ | | $ | 3,275,830 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
December 31, 2011 |
||||||||||||||||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||||||||||
Allowance for loans individually evaluated for impairment |
$ | 1,788 | $ | 1,565 | $ | | $ | | $ | | $ | | $ | | $ | 3,353 | ||||||||||||||||
Allowance for loans collectively evaluated for impairment |
3,054 | 23,183 | 11,414 | 5,638 | 1,962 | 5,410 | 796 | 51,457 | ||||||||||||||||||||||||
Allowance for loan commitments |
74 | 21 | 323 | 4 | 33 | 13 | | 468 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total allowance for credit losses |
$ | 4,916 | $ | 24,769 | $ | 11,737 | $ | 5,642 | $ | 1,995 | $ | 5,423 | $ | 796 | $ | 55,278 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Portfolio loans: |
||||||||||||||||||||||||||||||||
Individually evaluated for impairment (1) |
$ | 10,815 | $ | 18,028 | $ | | $ | | $ | | $ | | $ | | $ | 28,843 | ||||||||||||||||
Collectively evaluated for impairment |
165,052 | 1,491,670 | 426,315 | 621,383 | 251,785 | 254,320 | | 3,210,525 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total portfolio loans |
$ | 175,867 | $ | 1,509,698 | $ | 426,315 | $ | 621,383 | $ | 251,785 | $ | 254,320 | $ | | $ | 3,239,368 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Commercial loans greater than $1 million that are reported as non-accrual or as a troubled debt restructuring (TDR) are individually evaluated for impairment. |
WesBanco maintains an internal loan grading system to reflect the credit quality of commercial loans. Commercial loan risk grades are determined based on an evaluation of the relevant characteristics of each loan, assigned at the inception of each loan and adjusted thereafter at any time to reflect changes in the risk profile throughout the life of each loan. The primary factors used to determine the risk grade are the reliability and sustainability of the primary source of repayment and overall financial strength of the borrower. This includes an analysis of cash flow available to repay debt, profitability, liquidity, leverage, and overall financial trends. Other factors include management, industry or property type risks, an assessment of secondary sources of repayment such as collateral or guarantees, other terms and conditions of the loan that may increase or reduce its risk, and economic conditions and other external factors that may influence repayment capacity and financial condition.
Commercial real estate land and construction consists of loans to finance investments in vacant land, land development, construction of residential housing, and construction of commercial buildings. Commercial real estate improved property consists of loans for the purchase or refinance of all types of improved owner-occupied and investment properties. Factors that are considered in assigning the risk grade vary depending on the type of property financed. The risk grade assigned to construction and development loans is based on the overall viability of the project, the experience and financial capacity of the developer or builder to successfully complete the project, project specific and market absorption rates and comparable property values, and the amount of pre-sales for residential housing construction or pre-leases for commercial investment property. The risk grade assigned to commercial investment property loans is based primarily on the adequacy of net rental income generated by the property to service the debt, the type, quality, industry and mix of tenants, and the terms of leases, but also considers the overall financial capacity of the investors and their experience in owning and managing investment property. The risk grade assigned to owner-occupied commercial real estate and commercial and industrial loans is based primarily on historical and projected earnings, the adequacy of operating cash flow to service all of the business debt, and the capital resources, liquidity and leverage of the business, but also considers the industry in which the business operates, the business specific competitive advantages or disadvantages, the quality and experience of management, and external influences on the business such as economic conditions. Other factors that are considered for commercial and industrial loans include the type, quality and marketability of non-real estate collateral and whether the structure of the loan increases or reduces its risk. The type, age, condition, location and any environmental risks associated with a property are also considered for all types of commercial real estate. The overall financial condition and repayment capacity of any guarantors is also evaluated to determine the extent to which they mitigate other risks of the loan. The following descriptions of risk grades apply to commercial real estate and commercial and industrial loans.
Excellent or minimal risk loans are fully secured by liquid or readily marketable collateral and therefore have virtually no risk of loss. Good or desirable risk loans are extended in the normal course of business to creditworthy borrowers that exhibit a history of positive financial results that are at least comparable to the average for their industry or type of real estate. These loans are expected to perform satisfactorily during most economic cycles and there are no significant external factors that are expected to adversely affect these borrowers more than others in the same industry. Any minor unfavorable characteristics of these loans are outweighed or mitigated by strong positive factors including but not limited to adequate secondary sources of repayment or guarantees.
Fair or acceptable risk loans have a somewhat higher credit risk profile due to specific weaknesses or uncertainties that could adversely impact repayment capacity. Loans in this category generally warrant additional attention or monitoring, or a more rigid loan structure. These loans
12
represent the maximum level of risk accepted in the normal course of lending. Specific issues that may warrant this grade include financial results that are less favorable than the average for the borrowers industry or type of real estate, cyclical financial results, loans based on projections that have a reasonable probability of being achieved, start-up businesses, construction projects, and other external factors that indicate a higher level of credit risk. Loans that are underwritten primarily on the basis of the repayment capacity or financial condition of guarantors may also be assigned this grade.
Criticized or marginal loans are currently protected but have weaknesses, which if not corrected, may inadequately protect WesBanco Bank, Inc. (the Bank) at some future date. These loans represent an unwarranted credit risk and would generally not be extended in the normal course of lending. Specific issues which may warrant this grade include declining financial results, increased reliance on secondary sources of repayment or guarantor support and adverse external influences that may negatively impact the business or property.
Substandard and doubtful loans are equivalent to the classifications used by banking regulators. Substandard loans are inadequately protected by the current repayment capacity and equity of the borrower or collateral pledged, if any. Substandard loans have one or more well-defined weaknesses that jeopardize their repayment or collection in full. These loans may or may not be reported as non-accrual. Doubtful loans have all the weaknesses inherent to a substandard loan with the added characteristic that full repayment is highly questionable or improbable on the basis of currently existing facts, conditions and collateral values. However, recognition of loss may be deferred if there are reasonably specific pending factors that will reduce the risk if they occur.
The following tables summarize commercial loans by their assigned risk grade:
Commercial Loans by Internally Assigned Risk Grade | ||||||||||||||||
(unaudited, in thousands) |
Commercial Real Estate- Land and Construction |
Commercial Real Estate- Improved Property |
Commercial & Industrial |
Total Commercial Loans |
||||||||||||
As of June 30, 2012 |
||||||||||||||||
Excellent minimal risk |
$ | 443 | $ | 382 | $ | 52,847 | $ | 53,672 | ||||||||
Good desirable risk |
23,600 | 631,539 | 166,524 | 821,663 | ||||||||||||
Fair acceptable risk |
105,245 | 740,431 | 171,433 | 1,017,109 | ||||||||||||
Criticized marginal |
16,530 | 89,427 | 16,897 | 122,854 | ||||||||||||
Classified substandard |
12,595 | 74,853 | 12,988 | 100,436 | ||||||||||||
Classified doubtful |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 158,413 | $ | 1,536,632 | $ | 420,689 | $ | 2,115,734 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
As of December 31, 2011 |
||||||||||||||||
Excellent minimal risk |
$ | 625 | $ | 448 | $ | 51,923 | $ | 52,996 | ||||||||
Good desirable risk |
40,278 | 593,563 | 185,745 | 819,586 | ||||||||||||
Fair acceptable risk |
97,077 | 727,594 | 156,459 | 981,130 | ||||||||||||
Criticized marginal |
19,701 | 107,433 | 14,061 | 141,195 | ||||||||||||
Classified substandard |
18,186 | 80,660 | 18,127 | 116,973 | ||||||||||||
Classified doubtful |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 175,867 | $ | 1,509,698 | $ | 426,315 | $ | 2,111,880 | ||||||||
|
|
|
|
|
|
|
|
Residential real estate, home equity and consumer loans are not assigned internal risk grades other than as required by regulatory guidelines that are based primarily on the age of past due loans. WesBanco primarily evaluates the credit quality of residential real estate, home equity and consumer loans based on repayment performance and historical loss rates. The aggregate amount of residential real estate, home equity and consumer loans classified as substandard in accordance with regulatory guidelines were $13.8 million at June 30, 2012 and $18.2 million at December 31, 2011, of which $2.9 and $4.2 million were accruing, for each period, respectively.
13
The following table summarizes the age analysis of all categories of loans.
Age Analysis of Loans | ||||||||||||||||||||||||||||
(unaudited, in thousands) |
Current | 30-59 Days Past Due |
60-89 Days Past Due |
90 Days or More Past Due |
Total Past Due |
Total Loans |
90
Days or More Past Due and Accruing (1) |
|||||||||||||||||||||
As of June 30, 2012 |
||||||||||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Land and construction |
$ | 152,694 | $ | 15 | $ | 353 | $ | 5,351 | $ | 5,719 | $ | 158,413 | $ | 416 | ||||||||||||||
Improved property |
1,520,114 | 2,462 | 1,734 | 12,322 | 16,518 | 1,536,632 | 98 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial real estate |
1,672,808 | 2,477 | 2,087 | 17,673 | 22,237 | 1,695,045 | 514 | |||||||||||||||||||||
Commercial and industrial |
415,707 | 630 | 884 | 3,468 | 4,982 | 420,689 | 177 | |||||||||||||||||||||
Residential real estate |
646,326 | 4,749 | 1,656 | 9,825 | 16,230 | 662,556 | 1,752 | |||||||||||||||||||||
Home equity |
247,634 | 1,430 | 304 | 1,620 | 3,354 | 250,988 | 902 | |||||||||||||||||||||
Consumer |
242,002 | 3,410 | 702 | 438 | 4,550 | 246,552 | 294 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total portfolio loans |
3,224,477 | 12,696 | 5,633 | 33,024 | 51,353 | 3,275,830 | 3,639 | |||||||||||||||||||||
Loans held for sale |
7,305 | | | | | 7,305 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans |
$ | 3,231,782 | $ | 12,696 | $ | 5,633 | $ | 33,024 | $ | 51,353 | $ | 3,283,135 | $ | 3,639 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Non-performing loans included above are as follows: |
|
|||||||||||||||||||||||||||
Non-accrual loans |
$ | 8,698 | $ | 837 | $ | 1,169 | $ | 29,248 | $ | 31,254 | $ | 39,952 | ||||||||||||||||
TDRs accruing interest (1) |
26,822 | 884 | 322 | 137 | 1,343 | 28,165 | ||||||||||||||||||||||
As of December 31, 2011 |
||||||||||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||
Land and construction |
$ | 166,322 | $ | 1,391 | $ | 127 | $ | 8,027 | $ | 9,545 | $ | 175,867 | $ | | ||||||||||||||
Improved property |
1,486,001 | 4,485 | 3,446 | 15,766 | 23,697 | 1,509,698 | 18 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial real estate |
1,652,323 | 5,876 | 3,573 | 23,793 | 33,242 | 1,685,565 | 18 | |||||||||||||||||||||
Commercial and industrial |
417,341 | 1,624 | 333 | 7,017 | 8,974 | 426,315 | 939 | |||||||||||||||||||||
Residential real estate |
601,541 | 5,742 | 1,186 | 12,914 | 19,842 | 621,383 | 2,881 | |||||||||||||||||||||
Home equity |
247,771 | 1,843 | 447 | 1,724 | 4,014 | 251,785 | 498 | |||||||||||||||||||||
Consumer |
247,736 | 4,469 | 1,030 | 1,085 | 6,584 | 254,320 | 799 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total portfolio loans |
3,166,712 | 19,554 | 6,569 | 46,533 | 72,656 | 3,239,368 | 5,135 | |||||||||||||||||||||
Loans held for sale |
6,084 | | | | | 6,084 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans |
$ | 3,172,796 | $ | 19,554 | $ | 6,569 | $ | 46,533 | $ | 72,656 | $ | 3,245,452 | $ | 5,135 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Non-performing loans included above are as follows: |
|
|||||||||||||||||||||||||||
Non-accrual loans |
$ | 12,377 | $ | 1,629 | $ | 2,818 | $ | 40,668 | $ | 45,115 | $ | 57,492 | ||||||||||||||||
TDRs accruing interest (1) |
26,893 | 1,434 | 354 | 730 | 2,518 | 29,411 |
(1) | Loans 90 days or more past due and accruing interest exclude TDRs. |
Impaired Loans A loan is considered impaired, based on current information and events, if it is probable that WesBanco will be unable to collect the payments of principal and interest when due according to the contractual terms of the loan agreement. Impaired loans generally included all non-accrual loans and TDRs.
Loans are generally placed on non-accrual status when they become past due 90 days or more unless they are both well-secured and in the process of collection. Loans may also be placed on non-accrual when full collection of principal is in doubt even if payments on such loans remain current or remain on non-accrual if they were 90 days or more past due but subsequently brought current and maintained current for at least six consecutive months.
Loans are categorized as TDRs when the Bank, for economic or legal reasons related to a borrowers financial difficulties, grants a concession to the borrower that it would not otherwise consider.
14
The following tables summarize impaired loans:
Impaired Loans | ||||||||||||||||||||||||
June 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
(unaudited, in thousands) |
Unpaid Principal Balance (1) |
Recorded Investment |
Related Allowance |
Unpaid Principal Balance (1) |
Recorded Investment |
Related Allowance |
||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Land and construction |
$ | 10,993 | $ | 9,266 | $ | | $ | 19,733 | $ | 14,731 | $ | | ||||||||||||
Improved property |
31,544 | 27,915 | | 38,629 | 34,352 | | ||||||||||||||||||
Commercial and industrial |
7,940 | 6,143 | | 11,536 | 9,078 | | ||||||||||||||||||
Residential real estate |
15,128 | 13,807 | | 18,038 | 16,221 | | ||||||||||||||||||
Home equity |
1,012 | 908 | | 1,465 | 1,331 | | ||||||||||||||||||
Consumer |
199 | 175 | | 344 | 289 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total impaired loans without a related allowance |
66,816 | 58,214 | | 89,745 | 76,002 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Land and construction |
8,574 | 2,795 | 1,675 | 2,813 | 2,813 | 1,788 | ||||||||||||||||||
Improved property |
7,108 | 7,108 | 1,907 | 8,388 | 8,088 | 1,565 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total impaired loans with an allowance |
15,682 | 9,903 | 3,582 | 11,201 | 10,901 | 3,353 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total impaired loans |
$ | 82,498 | $ | 68,117 | $ | 3,582 | $ | 100,946 | $ | 86,903 | $ | 3,353 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | The difference between the unpaid principal balance and the recorded investment generally reflects amounts that have been previously charged-off. |
Impaired Loans | ||||||||||||||||||||||||||||||||
For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||||
June 30, 2012 | June 30, 2011 | June 30, 2012 | June 30, 2011 | |||||||||||||||||||||||||||||
(unaudited, in thousands) |
Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||||||
Land and construction |
$ | 9,249 | $ | 80 | $ | 12,307 | $ | 39 | $ | 11,076 | $ | 172 | $ | 10,553 | $ | 117 | ||||||||||||||||
Improved Property |
30,151 | 162 | 34,308 | 179 | 31,551 | 282 | 33,396 | 328 | ||||||||||||||||||||||||
Commercial and industrial |
6,860 | 41 | 8,942 | 88 | 7,599 | 59 | 8,630 | 97 | ||||||||||||||||||||||||
Residential real estate |
14,946 | 60 | 14,211 | 29 | 15,371 | 134 | 14,184 | 69 | ||||||||||||||||||||||||
Home equity |
988 | | 1,134 | | 1,102 | 2 | 1,007 | | ||||||||||||||||||||||||
Consumer |
217 | 1 | 209 | 2 | 241 | 1 | 240 | 2 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total impaired loans without a related allowance |
62,411 | 344 | 71,111 | 337 | 66,940 | 650 | 68,010 | 613 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||||||||||
Land and construction |
4,188 | | 2,993 | 70 | 3,730 | | 4,698 | 82 | ||||||||||||||||||||||||
Improved Property |
7,948 | 71 | 21,402 | 245 | 7,995 | 180 | 23,375 | 453 | ||||||||||||||||||||||||
Commercial and industrial |
| | 1,840 | | | | 1,227 | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total impaired loans with an allowance |
12,136 | 71 | 26,235 | 315 | 11,725 | 180 | 29,300 | 535 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total impaired loans |
$ | 74,547 | $ | 415 | $ | 97,346 | $ | 652 | $ | 78,665 | $ | 830 | $ | 97,310 | $ | 1,148 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
The following tables present the recorded investment in non-accrual loans and TDRs:
Non-accrual Loans (1) | ||||||||
(unaudited, in thousands) |
June 30, 2012 |
December 31, 2011 |
||||||
Commercial real estate: |
||||||||
Land and construction |
$ | 5,158 | $ | 10,135 | ||||
Improved Property |
18,643 | 25,122 | ||||||
|
|
|
|
|||||
Total commercial real estate |
23,801 | 35,257 | ||||||
|
|
|
|
|||||
Commercial and industrial |
5,302 | 8,238 | ||||||
Residential real estate |
9,766 | 12,377 | ||||||
Home equity |
908 | 1,331 | ||||||
Consumer |
175 | 289 | ||||||
|
|
|
|
|||||
Total |
$ | 39,952 | $ | 57,492 | ||||
|
|
|
|
(1) | Total non-accrual loans include loans that are also restructured. Such loans are also set forth in the following table as non-accrual TDRs. |
TDRs | ||||||||||||||||||||||||
June 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
(unaudited, in thousands) |
Accruing | Non-Accrual | Total | Accruing | Non-accrual | Total | ||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Land and construction |
$ | 6,903 | $ | 2,689 | $ | 9,592 | $ | 7,410 | $ | 5,662 | $ | 13,072 | ||||||||||||
Improved Property |
16,380 | 6,871 | 23,251 | 17,318 | 8,398 | 25,716 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial real estate |
23,283 | 9,560 | 32,843 | 24,728 | 14,060 | 38,788 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and industrial |
841 | 573 | 1,414 | 839 | 2,514 | 3,353 | ||||||||||||||||||
Residential real estate |
4,041 | 1,026 | 5,067 | 3,844 | 713 | 4,557 | ||||||||||||||||||
Home equity |
| | | | | | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 28,165 | $ | 11,159 | $ | 39,324 | $ | 29,411 | $ | 17,287 | $ | 46,698 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2012, there were ten TDRs greater than $1.0 million representing $18.7 million or 47.7% of total TDRs composed of three commercial real estate land and construction loans and seven commercial real estate improved property loans, with specific reserves of $2.9 million. The concessions granted for the majority of the ten largest TDRs primarily consist of extensions of maturity, reverting from payment of principal and interest to interest only for up to one year, or a reduction in the amount of the principal and interest payment by lengthening the amortization period by not more than five years.
The following table presents details related to loans identified as TDRs during the three and six months ended June 30, 2012:
New TDRs (1) | ||||||||||||||||||||||||
For the Three Months
Ended June 30, 2012 |
For the Six Months Ended June 30, 2012 |
|||||||||||||||||||||||
(unaudited, dollars in thousands) |
Number of Contracts |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
Number of Contracts |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Land and construction |
2 | $ | 756 | $ | 756 | 2 | $ | 756 | $ | 756 | ||||||||||||||
Improved Property |
2 | 364 | 363 | 8 | 1,268 | 1,266 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial real estate |
4 | 1,120 | 1,119 | 10 | 2,024 | 2,022 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Commercial and industrial |
2 | 39 | 38 | 2 | 40 | 38 | ||||||||||||||||||
Residential real estate |
2 | 166 | 176 | 6 | 560 | 578 | ||||||||||||||||||
Home equity |
| | | | | | ||||||||||||||||||
Consumer |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
8 | $ | 1,325 | $ | 1,333 | 18 | $ | 2,624 | $ | 2,638 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Excludes loans that were either paid off or charged-off by period end. The pre-modification balance represents the balance outstanding at the beginning of the period. The post-modification balance represents the outstanding balance at period end. |
16
The following table summarizes TDRs which defaulted (defined as past due 90 days or more) during the three and six months ended June 30, 2012 that were restructured within the last twelve months prior to June 30, 2012:
Defaulted TDRs (1) | ||||||||||||||||
For the Three Months Ended June 30, 2012 |
For the Six Months
Ended June 30, 2012 |
|||||||||||||||
(unaudited, dollars in thousands) |
Number of Defaults |
Recorded Investment |
Number of Defaults |
Recorded Investment |
||||||||||||
Commercial real estate: |
||||||||||||||||
Land and construction |
| $ | | | $ | | ||||||||||
Improved property |
3 | 362 | 9 | 2,085 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial real estate |
3 | 362 | 9 | 2,085 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Commercial and industrial |
1 | 166 | 1 | 166 | ||||||||||||
Residential real estate |
| | | | ||||||||||||
Home equity |
| | | | ||||||||||||
Consumer |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
4 | $ | 528 | 10 | $ | 2,251 | ||||||||||
|
|
|
|
|
|
|
|
(1) | Excludes loans that were either charged-off or cured by period end. The recorded investment is as of June 30, 2012. |
TDRs that defaulted during the six month period and that were restructured within the last twelve months represented 5.7% of the balance at June 30, 2012. Generally these loans are placed on non-accrual status unless they are both well-secured and in the process of collection. At June 30, 2012, none of the loans in the table above were accruing interest.
The following table summarizes other real estate owned and repossessed assets included in other assets:
(unaudited, in thousands) |
June 30, 2012 |
December 31, 2011 |
||||||
Other real estate owned |
$ | 3,686 | $ | 2,786 | ||||
Repossessed assets |
232 | 243 | ||||||
|
|
|
|
|||||
Total other real estate owned and repossessed assets |
$ | 3,918 | $ | 3,029 | ||||
|
|
|
|
17
NOTE 5. FEDERAL HOME LOAN BANK BORROWINGS
WesBanco is a member of the FHLB System. WesBancos FHLB borrowings, which consist of borrowings from both the FHLB of Pittsburgh and the FHLB of Cincinnati, are secured by a blanket lien by the FHLB on certain residential mortgages and other loan types or securities with a market value in excess of the outstanding balances of the borrowings. At June 30, 2012 and December 31, 2011, WesBanco had FHLB borrowings of $141.9 million and $168.2 million, with a weighted-average interest rate of 3.87% and 3.58%, respectively. The decline in borrowings from December 31, 2011 was due to scheduled maturities. The terms of the security agreement with the FHLB include a specific assignment of collateral that requires the maintenance of qualifying mortgage and other types of loans as pledged collateral with unpaid principal amounts in excess of the FHLB advances, when discounted at certain pre-established percentages of the loans unpaid principal balances. FHLB stock owned by WesBanco totaling $19.7 million at June 30, 2012 and $21.9 million at December 31, 2011 is also pledged as collateral on these advances. The remaining maximum borrowing capacity by WesBanco with the FHLB at June 30, 2012 and December 31, 2011 was estimated to be approximately $1.2 billion and $1.0 billion, respectively.
Certain FHLB advances contain call features, which allow the FHLB to call the outstanding balance or convert a fixed rate borrowing to a variable rate advance if the strike rate goes beyond a certain predetermined rate. The probability that these advances will be called depends primarily on the level of related interest rates during the call period. Of the $141.9 million outstanding at June 30, 2012, $106.1 million in FHLB convertible advances are subject to call or conversion to a variable rate advance by the FHLB.
The following table presents the aggregate annual maturities and weighted-average interest rates of FHLB borrowings at June 30, 2012 based on their contractual maturity dates and effective interest rates:
(unaudited, dollars in thousands) Year |
Scheduled Maturity |
Weighted Average Rate |
||||||
2012 |
$ | 50,726 | 4.48 | % | ||||
2013 |
50,206 | 3.27 | % | |||||
2014 |
16,144 | 3.40 | % | |||||
2015 |
916 | 4.69 | % | |||||
2016 |
121 | 4.35 | % | |||||
2017 and thereafter |
23,764 | 4.09 | % | |||||
|
|
|
|
|||||
Total |
$ | 141,877 | 3.87 | % | ||||
|
|
|
|
The majority of the 2012 maturities are in the third quarter, and most of the 2013 maturities are in the first quarter.
NOTE 6. PENSION PLAN
The following table presents the net periodic pension cost for WesBancos Defined Benefit Pension Plan (the Plan) and the related components:
For the Three Months Ended June 30, |
For the Six Months
Ended June 30, |
|||||||||||||||
(unaudited, in thousands) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Service cost benefits earned during year |
$ | 680 | $ | 643 | $ | 1,361 | $ | 1,279 | ||||||||
Interest cost on projected benefit obligation |
966 | 907 | 1,931 | 1,803 | ||||||||||||
Expected return on plan assets |
(1,378 | ) | (1,412 | ) | (2,756 | ) | (2,808 | ) | ||||||||
Amortization of prior service cost |
12 | 15 | 23 | 29 | ||||||||||||
Amortization of net loss |
568 | 318 | 1,137 | 633 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic pension cost |
$ | 848 | $ | 471 | $ | 1,696 | $ | 936 | ||||||||
|
|
|
|
|
|
|
|
The Plan covers all employees of WesBanco and its subsidiaries who were hired on or before August 1, 2007 who satisfy minimum age and length of service requirements, and is not available to employees hired after such date.
A minimum required contribution of $5.3 million is due for 2012 which will be partially funded by the Plans $2.1 million available credit balance. No decision has been made as of June 30, 2012 relative to the level of contribution in excess of the required minimum that will be made to the Plan, if any.
18
NOTE 7. FAIR VALUE MEASUREMENT
Fair value estimates are based on quoted market prices, if available, quoted market prices of similar assets or liabilities, or the present value of expected future cash flows and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions, and risk assumptions used. Therefore, fair value estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realizable in an immediate settlement of the instruments.
Fair value is determined at one point in time and is not representative of future value. These amounts do not reflect the total value of a going concern organization. Management does not have the intention to dispose of a significant portion of its assets and liabilities and therefore, the unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows.
The following is a discussion of assets and liabilities measured at fair value on a recurring basis and valuation techniques applied:
Securities available-for-sale: The fair value of securities available-for-sale which are measured on a recurring basis are determined primarily by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities relationship to other similar securities. These securities are classified within Level 1 or 2 of the fair value hierarchy. Positions that are not traded in active markets for which valuations are generated using assumptions not observable in the market or managements best estimate are classified within Level 3 of the fair value hierarchy. This includes certain specific municipal debt issues for which the credit quality and discount rate must be estimated.
We may be required from time to time to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.
Impaired loans: Impaired loans are carried at the lower of cost or the fair value of the collateral for collateral-dependent loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The use of independent appraisals, discounted cash flow models and managements best judgment are significant inputs in arriving at the fair value measure of the underlying collateral and impaired loans are therefore classified within Level 3 of the fair value hierarchy.
Other real estate owned and repossessed assets: Other real estate owned and repossessed assets are carried at the lower of the investment in the assets or the fair value of the assets less estimated selling costs. The use of independent appraisals and managements best judgment are significant inputs in arriving at the fair value measure of the underlying collateral and therefore other real estate owned and repossessed assets are classified within Level 3 of the fair value hierarchy.
Mortgage servicing rights: The fair value of mortgage servicing rights is based on an independent valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions based on managements best judgment that are significant inputs to the discounting calculations. If the carrying value exceeds fair value, they are considered impaired and are classified within Level 3 of the fair value hierarchy as a result.
Loans held for sale: Loans held for sale are carried, in aggregate, at the lower of cost or fair value. The use of a valuation model using quoted prices of similar instruments are significant inputs in arriving at the fair value and therefore loans held for sale are classified within Level 2 of the fair value hierarchy.
19
The following tables set forth WesBancos financial assets and liabilities that were accounted for at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy as of June 30, 2012:
June 30, 2012 Fair Value Measurements Using: |
||||||||||||||||
(unaudited, in thousands) |
June 30, 2012 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Recurring fair value measurements |
||||||||||||||||
Securities available-for-sale |
||||||||||||||||
Other government agencies |
$ | 96,070 | $ | | $ | 96,070 | $ | | ||||||||
Residential mortgage-backed securities and collateralized mortgage obligations of government agencies |
715,726 | | 715,726 | | ||||||||||||
Obligations of state and political subdivisions |
167,181 | | 167,157 | 24 | ||||||||||||
Corporate debt securities |
38,570 | | 38,570 | | ||||||||||||
Equity securities |
5,577 | 3,877 | 1,700 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities available-for-sale |
$ | 1,023,124 | $ | 3,877 | $ | 1,019,223 | $ | 24 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total recurring fair value measurements |
$ | 1,023,124 | $ | 3,877 | $ | 1,019,223 | $ | 24 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Nonrecurring fair value measurements |
||||||||||||||||
Impaired loans |
$ | 6,321 | $ | | $ | | $ | 6,321 | ||||||||
Other real estate owned and repossessed assets |
3,918 | | | 3,918 | ||||||||||||
Mortgage servicing rights |
1,004 | | | 1,004 | ||||||||||||
Loans held for sale |
7,305 | | 7,305 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total nonrecurring fair value measurements |
$ | 18,548 | $ | | $ | 7,305 | $ | 11,243 | ||||||||
|
|
|
|
|
|
|
|
WesBancos policy is to recognize transfers between levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between Level 1 and 2 for the six months ended June 30, 2012. For the six months ended June 30, 2012, loans held for sale were transferred from Level 3 to Level 2 due to improvements in the valuation model, which utilizes quoted prices for similar loans.
The following tables set forth the WesBancos financial assets and liabilities that were accounted for at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy as of December 31, 2011:
December 31, 2011 Fair Value Measurements Using: |
||||||||||||||||
(unaudited, in thousands) |
December 31, 2011 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||
Recurring fair value measurements |
||||||||||||||||
Securities available-for-sale |
||||||||||||||||
Other government agencies |
$ | 198,720 | $ | | $ | 198,720 | $ | | ||||||||
Residential mortgage-backed securities and collateralized mortgage obligations of government agencies |
588,092 | | 588,092 | | ||||||||||||
Obligations of state and political subdivisions |
180,433 | | 180,386 | 47 | ||||||||||||
Corporate debt securities |
44,066 | | 44,066 | | ||||||||||||
Equity securities |
5,029 | 3,340 | 1,689 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total securities available-for-sale |
$ | 1,016,340 | $ | 3,340 | $ | 1,012,953 | $ | 47 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total recurring fair value measurements |
$ | 1,016,340 | $ | 3,340 | $ | 1,012,953 | $ | 47 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Nonrecurring fair value measurements |
||||||||||||||||
Impaired loans |
$ | 7,548 | $ | | $ | | $ | 7,548 | ||||||||
Other real estate owned and repossessed assets |
3,029 | | | 3,029 | ||||||||||||
Mortgage servicing rights |
1,311 | | | 1,311 | ||||||||||||
Loans held for sale |
6,084 | | | 6,084 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total nonrecurring fair value measurements |
$ | 17,972 | $ | | $ | | $ | 17,972 | ||||||||
|
|
|
|
|
|
|
|
20
Assets measured at fair value on a recurring basis and for which WesBanco has utilized Level 3 inputs to determine fair value were immaterial at June 30, 2012.
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which WesBanco has utilized Level 3 inputs to determine fair value:
Quantitative Information about Level 3 Fair Value Measurements | ||||||||||||||||
(unaudited, in thousands) |
Fair Value Estimate |
Valuation Techniques |
Unobservable Input |
Range /
Weighted Average |
||||||||||||
June 30, 2012: |
||||||||||||||||
Impaired loans |
$ | 6,321 | Appraisal of collateral (1 | ) | Appraisal adjustments (2 | ) | 0% to (29.0%) / (14.6% | ) | ||||||||
Liquidation expenses (2 | ) | 0% to (8.0%) / (5.4% | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other real estate owned and repossessed assets |
3,918 | Appraisal of collateral (1), (3 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Mortgage servicing rights |
1,004 | Discounted cash flow | Remaining term | 2.9 yrs to 27.3yrs / 15.6yrs | ||||||||||||
Discount rate | 9.0% to 12.0% / 9.7 | % |
(1) | Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. |
(2) | Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses are presented as a percent of the appraisal. The adjustment of appraised value is measured as the effect on fair value as a percentage of unpaid principal. |
(3) | Includes qualitative adjustments by management and estimated liquidation expenses. |
21
The estimated fair values of WesBancos financial instruments are summarized below:
Fair Value Measurements at June 30, 2012 |
||||||||||||||||||||
(unaudited, in thousands) |
Carrying Amount |
Fair Value Estimate |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||||
Financial Assets |
||||||||||||||||||||
Cash and due from banks |
$ | 102,815 | $ | 102,815 | $ | 102,815 | $ | | $ | | ||||||||||
Securities available-for-sale |
1,023,124 | 1,023,124 | 3,877 | 1,019,223 | 24 | |||||||||||||||
Securities held-to-maturity |
572,671 | 607,032 | | 606,236 | 796 | |||||||||||||||
Net loans |
3,222,220 | 3,168,829 | | | 3,168,829 | |||||||||||||||
Loans held for sale |
7,305 | 7,305 | | 7,305 | | |||||||||||||||
Accrued interest receivable |
18,233 | 18,233 | 18,233 | | | |||||||||||||||
Bank owned life insurance |
111,829 | 111,829 | 111,829 | | | |||||||||||||||
Financial Liabilities |
||||||||||||||||||||
Deposits |
4,393,782 | 4,420,933 | 2,888,650 | 1,532,283 | | |||||||||||||||
Federal Home Loan Bank borrowings |
141,877 | 146,648 | | 146,648 | | |||||||||||||||
Other borrowings |
191,275 | 191,702 | 93,116 | 98,586 | | |||||||||||||||
Junior subordinated debt |
106,083 | 56,083 | | 56,083 | | |||||||||||||||
Accrued interest payable |
4,741 | 4,741 | 4,741 | | |
December 31, 2011 | ||||||||
(unaudited, in thousands) |
Carrying Amount |
Fair Value Estimate |
||||||
Financial assets: |
||||||||
Cash and due from banks |
$ | 140,325 | $ | 140,325 | ||||
Securities available-for-sale |
1,016,340 | 1,016,340 | ||||||
Securities held-to-maturity |
592,925 | 621,472 | ||||||
Net loans |
3,184,558 | 3,068,799 | ||||||
Loans held for sale |
6,084 | 6,084 | ||||||
Accrued interest receivable |
19,268 | 19,268 | ||||||
Bank owned life insurance |
110,074 | 110,074 | ||||||
Financial liabilities: |
||||||||
Deposits |
4,393,866 | 4,420,102 | ||||||
Federal Home Loan Bank borrowings |
168,186 | 174,926 | ||||||
Other borrowings |
196,887 | 197,922 | ||||||
Junior subordinated debt |
106,066 | 56,515 | ||||||
Accrued interest payable |
4,975 | 4,975 |
The following methods and assumptions were used to measure the fair value of financial instruments recorded at cost on WesBancos consolidated balance sheets:
Cash and due from banks: The carrying amount for cash and due from banks is a reasonable estimate of fair value.
Securities held-to-maturity: Fair values for securities held-to-maturity are determined in the same manner as securities available-for-sale which is described above.
Net loans: Fair values for loans are estimated using a discounted cash flow methodology. The discount rates take into account interest rates currently being offered to customers for loans with similar terms, the credit risk associated with the loan and market factors, including liquidity. The valuation of the loan portfolio reflects discounts that WesBanco believes are consistent with transactions occurring in the marketplace for both performing and distressed loan types. The carrying value that fair value is compared to is net of the allowance for loan losses and other associated premiums and discounts. Due to the significant judgment involved in evaluating credit quality, loans are classified within Level 3 of the fair value hierarchy.
Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value.
Bank-Owned Life Insurance: The carrying value of bank-owned life insurance represents the net cash surrender value of the underlying insurance policies, should these policies be terminated. Management believes that the carrying value approximates fair value.
22
Deposits: The carrying amount is considered a reasonable estimate of fair value for demand, savings and other variable rate deposit accounts. The fair value of fixed maturity certificates of deposit is estimated by a discounted cash flow method using the rates currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank borrowings: The fair value of FHLB borrowings is based on rates currently available to WesBanco for borrowings with similar terms and remaining maturities.
Other borrowings: The carrying amount of federal funds purchased and overnight sweep accounts generally approximate fair value. Other repurchase agreements are based on quoted market prices if available. If market prices are not available, for certain fixed and adjustable rate repurchase agreements, then quoted market prices of similar instruments are used.
Junior subordinated debt owed to unconsolidated subsidiary trusts: Due to the pooled nature of these instruments, which are not actively traded, estimated fair value is based on broker prices from recent similar sales.
Accrued interest payable: The carrying amount of accrued interest payable approximates its fair value.
Off-balance sheet financial instruments: Off-balance sheet financial instruments consist of commitments to extend credit including letters of credit. Fair values for commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit standing of the counterparties. The estimated fair value of the commitments to extend credit and letters of credit are insignificant and therefore are not presented in the above table.
23
NOTE 8. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments In the normal course of business, WesBanco offers off-balance sheet credit arrangements to enable its customers to meet their financing objectives. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. WesBancos exposure to credit losses in the event of non-performance by the other parties to the financial instruments for commitments to extend credit and standby letters of credit is limited to the contractual amount of those instruments. WesBanco uses the same credit policies in making commitments and conditional obligations as for all other lending. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The allowance for credit losses associated with commitments was $0.4 million and $0.5 million as of June 30, 2012 and December 31, 2011, respectively and is included in other liabilities on the Consolidated Balance Sheets.
Letters of credit are conditional commitments issued by banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including normal business activities, bond financing and similar transactions. Letters of credit are considered guarantees. The liability associated with letters of credit is recorded at its estimated fair value of $0.1 million as of both June 30, 2012 and December 31, 2011, and is included in other liabilities on the Consolidated Balance Sheets.
Contingent obligations to purchase loans funded by other entities include affordable housing plan guarantees and credit card guarantees. Affordable housing plan guarantees are performance guarantees for various building project loans. The guarantee amortizes as the loan balances decrease. Credit card guarantees are credit card balances not owned by WesBanco, whereby the Bank guarantees the performance of the cardholder.
The following table presents total commitments to extend credit, guarantees and various letters of credit outstanding:
(unaudited, in thousands) |
June 30, 2012 |
December 31, 2011 |
||||||
Lines of credit |
$ | 642,187 | $ | 602,923 | ||||
Loans approved but not closed |
195,539 | 113,113 | ||||||
Overdraft limits |
80,472 | 85,981 | ||||||
Letters of credit |
32,367 | 37,719 | ||||||
Contingent obligations to purchase loans funded by other entities |
7,499 | 7,685 |
Contingent Liabilities WesBanco and its subsidiaries are parties to various legal and administrative proceedings and claims. While any litigation contains an element of uncertainty, management believes that the outcome of such proceedings or claims pending or known to be threatened will not have a material adverse effect on WesBancos consolidated financial position, results of operations or cash flows.
24
NOTE 9. BUSINESS SEGMENTS
WesBanco operates two reportable segments: community banking and trust and investment services. WesBancos community banking segment offers services traditionally offered by full-service commercial banks, including commercial demand, individual demand and time deposit accounts, as well as commercial, mortgage and individual installment loans, and certain non-traditional offerings, such as insurance and securities brokerage services. The trust and investment services segment offers trust services as well as various alternative investment products including mutual funds. The market value of assets managed or held in custody by the trust and investment services segment was approximately $3.1 billion and $3.0 billion at June 30, 2012 and 2011, respectively. These assets are held by WesBanco in fiduciary or agency capacities for their customers and therefore are not included as assets on WesBancos Consolidated Balance Sheets.
Condensed financial information by business segment is presented below:
(unaudited, in thousands) |
Community Banking |
Trust and Investment Services |
Consolidated | |||||||||
For the Three Months ended June 30, 2012: |
||||||||||||
Interest income |
$ | 52,545 | $ | | $ | 52,545 | ||||||
Interest expense |
11,005 | | 11,005 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income |
41,540 | | 41,540 | |||||||||
Provision for credit losses |
5,903 | | 5,903 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income after provision for credit losses |
35,637 | | 35,637 | |||||||||
Non-interest income |
11,636 | 4,258 | 15,894 | |||||||||
Non-interest expense |
33,446 | 2,638 | 36,084 | |||||||||
|
|
|
|
|
|
|||||||
Income before provision for income taxes |
13,827 | 1,620 | 15,447 | |||||||||
Provision for income taxes |
2,802 | 647 | 3,449 | |||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 11,025 | $ | 973 | $ | 11,998 | ||||||
|
|
|
|
|
|
|||||||
For the Three Months ended June 30, 2011: |
||||||||||||
Interest income |
$ | 57,042 | $ | | $ | 57,042 | ||||||
Interest expense |
13,989 | | 13,989 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income |
43,053 | | 43,053 | |||||||||
Provision for credit losses |
6,802 | | 6,802 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income after provision for credit losses |
36,251 | | 36,251 | |||||||||
Non-interest income |
10,744 | 4,272 | 15,016 | |||||||||
Non-interest expense |
33,208 | 2,495 | 35,703 | |||||||||
|
|
|
|
|
|
|||||||
Income before provision for income taxes |
13,787 | 1,777 | 15,564 | |||||||||
Provision for income taxes |
2,935 | 711 | 3,646 | |||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 10,852 | $ | 1,066 | $ | 11,918 | ||||||
|
|
|
|
|
|
|||||||
For the Six Months ended June 30, 2012: |
||||||||||||
Interest income |
$ | 106,226 | $ | | $ | 106,226 | ||||||
Interest expense |
22,855 | | 22,855 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income |
83,371 | | 83,371 | |||||||||
Provision for credit losses |
12,105 | | 12,105 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income after provision for credit losses |
71,266 | | 71,266 | |||||||||
Non-interest income |
22,204 | 9,011 | 31,215 | |||||||||
Non-interest expense |
66,254 | 5,495 | 71,749 | |||||||||
|
|
|
|
|
|
|||||||
Income before provision for income taxes |
27,216 | 3,516 | 30,732 | |||||||||
Provision for income taxes |
5,338 | 1,406 | 6,744 | |||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 21,878 | $ | 2,110 | $ | 23,988 | ||||||
|
|
|
|
|
|
|||||||
For the Six Months ended June 30, 2011: |
||||||||||||
Interest income |
$ | 113,139 | $ | | $ | 113,139 | ||||||
Interest expense |
28,610 | | 28,610 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income |
84,529 | | 84,529 | |||||||||
Provision for credit losses |
14,843 | | 14,843 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income after provision for credit losses |
69,686 | | 69,686 | |||||||||
Non-interest income |
20,487 | 9,034 | 29,521 | |||||||||
Non-interest expense |
66,122 | 5,072 | 71,194 | |||||||||
|
|
|
|
|
|
|||||||
Income before provision for income taxes |
24,051 | 3,962 | 28,013 | |||||||||
Provision for income taxes |
4,269 | 1,585 | 5,854 | |||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 19,782 | $ | 2,377 | $ | 22,159 | ||||||
|
|
|
|
|
|
Total non-fiduciary assets of the trust and investment services segment were $2.9 million and $2.6 million at June 30, 2012 and 2011, respectively. All goodwill and other intangible assets were allocated to the community banking segment.
25
NOTE 10. SUBSEQUENT EVENTS
On July 19, 2012 WesBanco and Fidelity Bancorp, Inc. (Fidelity), a Pittsburgh-based bank with $0.7 billion in assets and 13 branches, jointly announced that a definitive Agreement and Plan of Merger was executed providing for the merger of Fidelity with and into WesBanco. Under the terms of the Agreement and Plan of Merger, WesBanco will exchange 0.8275 shares of its common stock and $4.50 in cash for each share of Fidelity common stock. The receipt by Fidelity shareholders of shares of WesBanco common stock in exchange for their shares of Fidelity common stock is anticipated to qualify as a tax-free exchange. The transaction, approved by the directors of both companies, currently is valued at $70.8 million, based on the average closing price of WesBanco common stock over the 15 day period prior to announcement and Fidelitys diluted shares outstanding. The acquisition is subject to the approvals of the appropriate banking regulatory authorities and the shareholders of Fidelity. It is expected that the transaction will be completed late in the fourth quarter of 2012 or early 2013.
26
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Managements Discussion and Analysis (MD&A) represents an overview of the results of operations and financial condition of WesBanco for the three and six months ended June 30, 2012. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this report relating to WesBancos plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The information contained in this report should be read in conjunction with WesBancos Form 10-K for the year ended December 31, 2011 and documents subsequently filed by WesBanco with the Securities and Exchange Commission (SEC), including WesBancos Form 10-Q for the quarter ended March 31, 2012, which are available at the SECs website, www.sec.gov or at WesBancos website, www.wesbanco.com. Investors are cautioned that forward-looking statements, which are not historical fact, involve risks and uncertainties, including those detailed in WesBancos most recent Annual Report on Form 10-K filed with the SEC under Risk Factors in Part I, Item 1A. Such statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements, including, without limitation, that the businesses of WesBanco and Fidelity may not be integrated successfully or such integration may take longer to accomplish than expected; the expected cost savings and any revenue synergies from the merger may not be fully realized within the expected timeframes; disruption from the merger may make it more difficult to maintain relationships with clients, associates, or suppliers; the effects of changing regional and national economic conditions; changes in interest rates, spreads on earning assets and interest-bearing liabilities, and associated interest rate sensitivity; sources of liquidity available to WesBanco and its related subsidiary operations; potential future credit losses and the credit risk of commercial, real estate, and consumer loan customers and their borrowing activities; actions of the Federal Reserve Board, the Federal Deposit Insurance Corporation, the SEC, Financial Institution Regulatory Authority, Municipal Securities Rulemaking Board, Securities Investors Protection Corporation, and other regulatory bodies; potential legislative and federal and state regulatory actions and reform, including, without limitation, the impact of the implementation of the Dodd-Frank Act; adverse decisions of federal and state courts; fraud, scams and schemes of third parties; internet hacking; competitive conditions in the financial services industry; rapidly changing technology affecting financial services; marketability of debt instruments and corresponding impact on fair value adjustments; and/or other external developments materially impacting WesBancos operational and financial performance. WesBanco does not assume any duty to update forward-looking statements.
OVERVIEW
WesBanco is a multi-state bank holding company operating through 112 branches, one loan production office and 104 ATM machines in West Virginia, Ohio and western Pennsylvania, offering retail banking, corporate banking, personal and corporate trust services, brokerage services, mortgage banking and insurance. WesBancos businesses are significantly impacted by economic factors such as market interest rates, federal monetary and regulatory policies, local and regional economic conditions and the competitive environments effect upon WesBancos business volumes. WesBancos deposit levels are affected by numerous factors including personal savings rates, personal income, and competitive rates on alternative investments, as well as competition from other financial institutions within the markets we serve and liquidity needs of WesBanco. Loan levels are also subject to various factors including construction demand, business financing needs, consumer spending and interest rates, as well as loan terms offered by competing lenders.
On July 19, 2012 WesBanco and Fidelity, a Pittsburgh-based bank with $0.7 billion in assets and 13 branches, jointly announced that a definitive Agreement and Plan of Merger was executed providing for the merger of Fidelity with and into WesBanco. The transaction, approved by the directors of both companies, currently is valued at $70.8 million. The acquisition is subject to the approvals of the appropriate banking regulatory authorities and the shareholders of Fidelity. It is expected that the transaction will be completed late in the fourth quarter of 2012 or early 2013. Please see Note 10, Subsequent Events in the notes to the consolidated financial statements for additional discussion.
27
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
WesBancos critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2012 have remained unchanged from the disclosures presented in WesBancos Annual Report on Form 10-K for the year ended December 31, 2011 under the section Managements Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Net income for the six month period ended June 30, 2012, was $24.0 million compared to $22.2 million for the same period in 2011, representing an increase of 8.3%, while diluted earnings per share were $0.90, compared to $0.83 per share for the six months ended June 30, 2011. For the quarter ended June 30, 2012, net income was $12.0 million compared to $11.9 million for the second quarter of 2011, while diluted earnings per share were $0.45 for the second quarter of 2012 and 2011, as well as for the first quarter of 2012.
Net interest income decreased $1.2 million or 1.4% in the first half of 2012 and $1.5 million in the second quarter compared to the same periods in 2011 due to the low interest rate environment. However, average earning assets increased $130.9 million or 2.7% in the year-to-date period and 2.3% in the second quarter, including growth in portfolio loans, while the cost of funds continued to improve as a result of lower rates on certificates of deposit, growth in non-interest bearing and lower-cost demand deposits, and a reduction in higher cost FHLB borrowings. The net interest margin was 3.53% in the second quarter of 2012 and was relatively stable in the first two quarters of 2012 compared to the fourth quarter of 2011, but declined by 15 basis points compared to the first half of 2011, as the low interest rate environment resulted in reduced rates earned on the securities and loan portfolios.
The provision for credit losses decreased $0.9 million for the second quarter and $2.7 million for the first six months of 2012 to $12.1 million compared to the same periods of 2011, and $0.3 million compared to the first quarter of 2012. Net charge-offs in the 2012 second quarter of $6.8 million included $2.2 million relating to the sale of $5.1 million of non-performing loans; however, net charge-offs increased only $0.2 million from the first quarter of 2012 and were relatively the same as the second quarter of 2011. Year-to-date net charge-offs decreased $1.8 million to $13.4 million compared to the same period in 2011. Classified and criticized loans decreased 13.5%, non-performing loans decreased 21.6%, and loans past due 30 days or more and accruing interest, excluding non-performing loans decreased 25.0% from December 31, 2011 to June 30, 2012. Improvement in credit quality over the last four quarters resulted in the strengthening of coverage ratios while also supporting the lower provision for credit losses in the first two quarters of 2012. The allowance for loan losses to non-performing loans, and the allowance for loan losses to the total of non-performing loans and loans past due, were both at their highest levels in the last six quarters.
Non-interest income increased $1.7 million or 5.7% in the first half of 2012 and $0.9 million or 5.9% in the second quarter compared to the same periods in 2011 principally due to net security gains of $1.4 million year-to-date and $1.3 million in the second quarter. Electronic banking fees increased 18.2% in the first half and 15.7% in the second quarter of 2012 due to increased transaction volumes, and increased transaction account balances and net gain (loss) on other real estate owned improved $0.6 million in the year-to date period. These improvements were partially offset by decreases in service charges on deposits of $0.9 million in the first six months and $0.7 million in the second quarter of 2012, primarily from decreases in customer overdraft fees. Non-interest expense increased by a moderate 0.8% in the first six months of 2012 compared to the same period in 2011 as reduced FDIC insurance of $0.7 million, due to a new calculation by the FDIC effective in April of 2011, and reductions in many other expense categories were offset by increased salaries and wages due to routine annual adjustments to compensation and increased pension and health plan expense.
NET INTEREST INCOME
TABLE 1. NET INTEREST INCOME
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
|||||||||||||||
(unaudited, dollars in thousands) |
2012 | 2011 | 2012 | 2011 | ||||||||||||
Net interest income |
$ | 41,540 | $ | 43,053 | $ | 83,371 | $ | 84,529 | ||||||||
Taxable equivalent adjustments to net interest income |
1,657 | 1,640 | 3,316 | 3,248 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income, fully taxable equivalent |
$ | 43,197 | $ | 44,693 | $ | 86,687 | $ | 87,777 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest spread, non-taxable equivalent |
3.22 | % | 3.41 | % | 3.23 | % | 3.37 | % | ||||||||
Benefit of net non-interest bearing liabilities |
0.17 | % | 0.18 | % | 0.18 | % | 0.19 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest margin |
3.39 | % | 3.59 | % | 3.41 | % | 3.56 | % | ||||||||
Taxable equivalent adjustment |
0.14 | % | 0.14 | % | 0.14 | % | 0.14 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest margin, fully taxable equivalent |
3.53 | % | 3.73 | % | 3.55 | % | 3.70 | % | ||||||||
|
|
|
|
|
|
|
|
Net interest income, which is WesBancos largest source of revenue, is the difference between interest income on earning assets, primarily loans and securities, and interest expense on liabilities, comprised of deposits and short and long-term borrowings. Net interest income is affected by the general level of and changes in interest rates, the steepness of the yield curve, changes in the amount and composition of interest earning assets and
28
interest bearing liabilities, as well as the frequency of repricing and turnover of those assets and liabilities. Net interest income decreased $1.5 million in the second quarter and $1.2 million in the first half of 2012 compared to the same periods in 2011 due to the low interest rate environment and decreasing rates earned on interest bearing assets. However, average earning assets increased $109.9 million or 2.3% in the second quarter and $130.9 million or 2.7% in the year-to-date period, including growth in portfolio loans in the second quarter of 2012 resulting in nearly unchanged average loan balances in both the quarter and year-to-date periods. The increase in average earning assets was primarily through increased investments in taxable securities funded by deposit increases. Total average deposits increased by $178.5 million or 4.2% in the second quarter of 2012, primarily through increases in demand deposit accounts as a result of marketing campaigns, customer incentives and wealth management and business initiatives, although savings accounts also increased by $71.1 million in the second quarter. In addition, cost of funds continued to improve due to lower offered rates on maturing certificates of deposit, an increase in balances of lower-cost products and lower balances of higher-cost FHLB borrowings. The net interest margin was relatively stable for the first two quarters of 2012 compared to the fourth quarter of 2011, but declined by 20 basis points in the second quarter to 3.53% and 15 basis points in the first half of 2012 to 3.55% compared to the same periods of 2011. The low interest rate environment continues to result in reduced rates earned on the securities and loan portfolios, and as well a decrease in average rates paid on interest bearing liabilities. The average rate on earning assets decreased by 47 basis points while the rate on interest bearing liabilities declined by 28 basis points in the second quarter.
Interest income decreased $4.5 million or 7.9% in the second quarter and $6.9 million or 6.1% in the first six months of 2012 compared to the same periods in 2011 due to the lower yields, partially offset by the increase in average earning assets. Rates decreased on all significant earning asset categories from reduced rates on new and repriced assets due to competition and the lower interest rate environment. In addition, the percentage of earning assets invested in lower-yielding securities increased, compared to typically higher-yielding loans, although this was somewhat mitigated in the second quarter as loan balances increased from March 31, 2012. Securities yields decreased, primarily due to the reinvestment of funds from investment maturities, calls and sales at current lower available interest rates. Taxable securities yields decreased 59 basis points in the second quarter, while tax-exempt securities yields declined only 22 basis points due to the longer average life of the tax-exempt portfolio and limited maturities, calls, repricings or additions to this portfolio. In addition, spread opportunities were available in structured, lower premium collateralized mortgage securities, offsetting significant calls of other government agencies and prepayments in mortgage-backed securities, and resulting in an increase in average taxable securities. Repricing of loans and the competitive necessity of offering lower rates on quality credits in an increasingly competitive and lower interest rate environment caused a decline in loan yields of 42 basis points in the second quarter.
Portfolio loans increased $52.1 million in the second quarter compared to the first quarter of 2012 and $36.5 million compared to the prior year-end as a result of growth in commercial and commercial real estate lending in the current quarter and residential mortgage loans in both quarters of 2012. The Bank continued to retain more residential mortgage loans in the portfolio, rather than selling them to the secondary market. Loan production increased 30.6% in the first half of 2012 compared to the first half of 2011.
In the second quarter of 2012, interest expense decreased $3.0 million or 21.3% and, in the first six months of 2012, decreased $5.8 million or 20.1% compared to the same 2011 periods due to decreases in rates paid and a change in the liability mix towards less expensive sources of funding, while total average interest bearing balances were little changed. The average rate paid on interest bearing liabilities decreased to 1.07% in the second quarter and 1.11% in the year-to-date period of 2012 from 1.35% and 1.40% in the respective periods of 2011. Rates paid on deposits declined by 27 basis points in the second quarter due to declines in rates paid in all deposit categories, due to management reducing offered interest rates in all categories. Improvements in the deposit funding mix also lowered the cost of funds, with average certificates of deposit decreasing to 34.6% of total average deposits from 38.6% in the second quarter of 2011. Average interest bearing deposits increased by $67.8 million and non-interest bearing demand deposits increased by $110.6 million in the second quarter. Deposit increases were used to pay down higher-cost maturing FHLB borrowings, significantly contributing to the reduced cost of funds. FHLB borrowings were 3.5% of average interest bearing liabilities in the second quarter of 2012 compared to 3.7% in 2011. Average deposits increased significantly in most product categories other than certificates of deposit, as offered rates were reduced. A reduction in interest bearing demand was more than offset by the increase in non-interest bearing demand, providing a net increase in demand deposits of $62.7 million in the second quarter. Certificates of deposit decreased by $106.0 million in the second quarter due to reductions in rate offerings, a focus on growing customers with multiple banking relationships as opposed to single service certificates of deposit customers, and customer demand for other shorter-term deposit products as well as non-bank investment products such as annuities.
29
TABLE 2. AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||||||||
(unaudited, dollars in thousands) |
Average Balance |
Average Rate |
Average Balance |
Average Rate |
Average Balance |
Average Rate |
Average Balance |
Average Rate |
||||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||||||||||
Due from banks - interest bearing |
$ | 17,382 | 0.39 | % | $ | 36,602 | 0.27 | % | $ | 30,885 | 0.25 | % | $ | 44,952 | 0.20 | % | ||||||||||||||||
Loans, net of unearned income (1) |
3,248,090 | 5.07 | % | 3,249,625 | 5.49 | % | 3,249,863 | 5.13 | % | 3,256,821 | 5.50 | % | ||||||||||||||||||||
Securities: (2) |
||||||||||||||||||||||||||||||||
Taxable |
1,311,223 | 2.58 | % | 1,189,965 | 3.17 | % | 1,290,239 | 2.64 | % | 1,149,507 | 3.16 | % | ||||||||||||||||||||
Tax-exempt (3) |
317,197 | 5.97 | % | 302,831 | 6.19 | % | 313,907 | 6.04 | % | 297,320 | 6.24 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total securities |
1,628,420 | 3.24 | % | 1,492,796 | 3.78 | % | 1,604,146 | 3.31 | % | 1,446,827 | 3.79 | % | ||||||||||||||||||||
Other earning assets |
20,538 | 0.41 | % | 25,546 | 0.45 | % | 21,229 | 0.44 | % | 26,592 | 0.49 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total earning assets (3) |
4,914,430 | 4.43 | % | 4,804,569 | 4.90 | % | 4,906,123 | 4.48 | % | 4,775,192 | 4.91 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Other assets |
643,895 | 624,178 | 647,620 | 621,044 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Assets |
$ | 5,558,325 | $ | 5,428,747 | $ | 5,553,743 | $ | 5,396,236 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|||||||||||||||||||||||||||||||
Interest bearing demand deposits |
$ | 746,891 | 0.21 | % | $ | 519,460 | 0.39 | % | $ | 727,136 | 0.20 | % | $ | 506,091 | 0.40 | % | ||||||||||||||||
Money market accounts |
771,905 | 0.26 | % | 896,601 | 0.54 | % | 778,561 | 0.34 | % | 882,706 | 0.63 | % | ||||||||||||||||||||
Savings deposits |
639,539 | 0.13 | % | 568,462 | 0.25 | % | 626,043 | 0.16 | % | 555,599 | 0.30 | % | ||||||||||||||||||||
Certificates of deposit |
1,532,781 | 1.74 | % | 1,638,775 | 1.94 | % | 1,560,067 | 1.75 | % | 1,657,027 | 1.94 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest bearing deposits |
3,691,116 | 0.84 | % | 3,623,298 | 1.11 | % | 3,691,807 | 0.88 | % | 3,601,423 | 1.15 | % | ||||||||||||||||||||
Federal Home Loan Bank borrowings |
144,924 | 3.57 | % | 231,153 | 3.47 | % | 154,497 | 3.47 | % | 235,624 | 3.45 | % | ||||||||||||||||||||
Other borrowings |
192,097 | 2.42 | % | 186,735 | 2.55 | % | 196,164 | 2.39 | % | 187,245 | 2.55 | % | ||||||||||||||||||||
Junior subordinated debt |
106,079 | 3.24 | % | 106,046 | 3.07 | % | 106,074 | 3.28 | % | 106,042 | 3.07 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest bearing liabilities |
4,134,216 | 1.07 | % | 4,147,232 | 1.35 | % | 4,148,542 | 1.11 | % | 4,130,334 | 1.40 | % | ||||||||||||||||||||
Non-interest bearing demand deposits |
737,143 | 626,502 | 722,857 | 613,955 | ||||||||||||||||||||||||||||
Other liabilities |
38,952 | 35,059 | 38,747 | 36,904 | ||||||||||||||||||||||||||||
Shareholders Equity |
648,014 | 619,954 | 643,597 | 615,043 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Liabilities and Shareholders Equity |
$ | 5,558,325 | $ | 5,428,747 | $ | 5,553,743 | $ | 5,396,236 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Taxable equivalent net interest spread |
3.36 | % | 3.55 | % | 3.37 | % | 3.51 | % | ||||||||||||||||||||||||
Taxable equivalent net interest margin |
3.53 | % | 3.73 | % | 3.55 | % | 3.70 | % |
(1) | Gross of allowance for loan losses and net of unearned income. Includes non-accrual and loans held for sale. Loan fees included in interest income on loans totaled $1.0 million and $1.4 million for the three months ended June 30, 2012 and 2011, and $2.0 million and $2.3 million for the six months ended June 30, 2012 and 2011, respectively. |
(2) | Average yields on available-for-sale securities are calculated based on amortized cost. |
(3) | Taxable equivalent basis is calculated on tax-exempt securities using a tax rate of 35% for each year presented. |
30
TABLE 3. RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
Three Months Ended June 30, 2012 Compared to June 30, 2011 |
Six Months Ended June 30, 2012 Compared to June 30, 2011 |
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(unaudited, in thousands) |
Volume | Rate | Net Increase (Decrease) |
Volume | Rate | Net Increase (Decrease) |
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Increase (decrease) in interest income: |
||||||||||||||||||||||||
Due from banks - interest bearing |
$ | (16 | ) | $ | 8 | $ | (8 | ) | $ | (16 | ) | $ | 9 | $ | (7 | ) | ||||||||
Loans, net of unearned income |
(22 | ) | (3,532 | ) | (3,554 | ) | (182 | ) | (5,755 | ) | (5,937 | ) | ||||||||||||
Taxable securities |
898 | (1,858 | ) | (960 | ) | 2,066 | (3,144 | ) | (1,078 | ) | ||||||||||||||
Tax-exempt securities (1) |
218 | (167 | ) | 51 | 508 | (314 | ) | 194 | ||||||||||||||||
Other earning assets |
(5 | ) | (3 | ) | (8 | ) | (12 | ) | (5 | ) | (17 | ) | ||||||||||||
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Total interest income change (1) |
1,073 | (5,552 | ) | (4,479 | ) | 2,364 | (9,209 | ) | (6,845 | ) | ||||||||||||||
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Increase (decrease) in interest expense: |
||||||||||||||||||||||||
Interest bearing demand deposits |
(34 | ) | (153 | ) | (187 | ) | 208 | (685 | ) | (477 | ) | |||||||||||||
Money market accounts |
224 | (860 | ) | (636 | ) | (13 | ) | (1,260 | ) | (1,273 | ) | |||||||||||||
Savings deposits |
39 | (188 | ) | (149 | ) | 96 | (438 | ) | (342 | ) | ||||||||||||||
Certificates of deposit |
(499 | ) | (808 | ) | (1,307 | ) | (887 | ) | (1,493 | ) | (2,380 | ) | ||||||||||||
Federal Home Loan Bank borrowings |
(770 | ) | 55 | (715 | ) | (1,388 | ) | 25 | (1,363 | ) | ||||||||||||||
Other borrowings |
32 | (64 | ) | (32 | ) | 113 | (149 | ) | (36 | ) | ||||||||||||||
Junior subordinated debt |
| 43 | 43 | 1 | 115 | 116 | ||||||||||||||||||
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Total interest expense change |
(1,008 | ) | (1,975 | ) | (2,983 | ) | (1,870 | ) | (3,885 | ) | (5,755 | ) | ||||||||||||
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Net interest income increase (decrease) (1) |
$ | 2,081 | $ | (3,577 | ) | $ | (1,496 | ) | $ | 4,234 | $ | (5,324 | ) | $ | (1,090 | ) | ||||||||
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(1) | Taxable equivalent basis is calculated on tax-exempt securities using a tax rate of 35% for each year presented. |
PROVISION FOR CREDIT LOSSES
The provision for credit losses is the amount to be added to the allowance for credit losses after net charge-offs have been deducted to bring the allowance to a level considered appropriate to absorb probable losses inherent in the loan portfolio. The provision for credit losses decreased $0.9 million for the second quarter and $2.7 million for the first six months of 2012 compared to the same periods of 2011, and $0.3 million compared to the first quarter of 2012. The decrease in the provision was supported by improvement in all major credit quality metrics in the first six months of 2012. Net charge-offs in the 2012 second quarter of $6.8 million included $2.2 million relating to the sale of $5.1 million of non-performing loans; however, net charge-offs increased only $0.2 million from the first quarter of 2012 and were relatively the same as the second quarter of 2011. Year-to-date net charge-offs decreased $1.8 million to $13.4 million compared the same period in 2011. Classified and criticized loans decreased $34.9 million or 13.5%, non-performing loans decreased $18.8 million or 21.6%, and loans past due 30 days or more and accruing interest, excluding non-performing loans decreased $6.3 million or 25.0% from December 31, 2011 to June 30, 2012. (Please see the Allowance for Credit Losses section of this MD&A for additional discussion).
31
NON-INTEREST INCOME
TABLE 4. NON-INTEREST INCOME
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
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(unaudited, dollars in thousands) |
2012 | 2011 | $ Change | % Change | 2012 | 2011 | $ Change | % Change | ||||||||||||||||||||||||
Trust fees |
$ | 4,258 | $ | 4,272 | $ | (14 | ) | (0.3 | %) | $ | 9,011 | $ | 9,034 | $ | (23 | ) | (0.3 | %) | ||||||||||||||
Service charges on deposits |
4,218 | 4,889 | (671 | ) | (13.7 | %) | 8,211 | 9,111 | (900 | ) | (9.9 | %) | ||||||||||||||||||||
Electronic banking fees |
2,920 | 2,523 | 397 | 15.7 | % | 5,683 | 4,807 | 876 | 18.2 | % | ||||||||||||||||||||||
Net securities brokerage revenue |
1,114 | 1,088 | 26 | 2.4 | % | 2,189 | 2,184 | 5 | 0.2 | % | ||||||||||||||||||||||
Bank-owned life insurance |
874 | 900 | (26 | ) | (2.9 | %) | 1,754 | 1,794 | (40 | ) | (2.2 | %) | ||||||||||||||||||||
Net gains on sales of mortgage loans |
599 | 389 | 210 | 54.0 | % | 867 | 971 | (104 | ) | (10.7 | %) | |||||||||||||||||||||
Net securities gains |
1,294 | 14 | 1,280 | 9142.9 | % | 1,394 | 30 | 1,364 | 4546.7 | % | ||||||||||||||||||||||
Net losses on other real estate owned and other assets |
(282 | ) | (271 | ) | (11 | ) | (4.1 | %) | (250 | ) | (816 | ) | 566 | 69.4 | % | |||||||||||||||||
Other income: |
||||||||||||||||||||||||||||||||
Net insurance services revenue |
593 | 606 | (13 | ) | (2.1 | %) | 1,281 | 1,231 | 50 | 4.1 | % | |||||||||||||||||||||
Other |
306 | 606 | (300 | ) | (49.5 | %) | 1,075 | 1,175 | (100 | ) | (8.5 | %) | ||||||||||||||||||||
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Total non-interest income |
$ | 15,894 | $ | 15,016 | $ | 878 | 5.8 | % | $ | 31,215 | $ | 29,521 | $ | 1,694 | 5.7 | % | ||||||||||||||||
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Non-interest income is a significant source of revenue and an important part of WesBancos results of operations. WesBanco offers its customers a wide range of retail, commercial, investment and electronic banking services, which are viewed as a vital component of WesBancos ability to attract and maintain customers, as well as providing additional fee income beyond normal spread-related income to WesBanco. Non-interest income increased $0.9 million or 5.8% in the second quarter and $1.7 million or 5.7% in the first half of 2012 compared to the same periods in 2011 principally due to net security gains of $1.3 million in the second quarter and $1.4 million year-to-date. Electronic banking fees increased 15.7% in the second quarter and 18.2% in the first half of 2012 due to increased transaction volumes, and increased transaction account balances and net loss on other real estate owned improved $0.6 million in the year-to date period. These improvements were partially offset by decreases in service charges on deposits of $0.7 million in the second quarter and $0.9 million in the first six months of 2012, primarily from decreases in customer overdraft fees.
Trust fees were nearly unchanged from the second quarter of 2011. Trust assets at June 30, 2012 increased to $3.1 billion from $3.0 billion at June 30, 2011. At June 30, 2012, trust assets include managed assets of $2.5 billion and non-managed (custodial) assets of $0.7 billion. Assets managed for the WesMark funds, a proprietary group of mutual funds that are advised by WesBancos trust and investment services group, were $779.3 million as of June 30, 2012 and $771.8 million at June 30, 2011 and are included in trust managed assets.
Electronic banking fees, which include debit card interchange fees, improved by $0.4 million and $0.9 million in the second quarter and first six months of 2012 compared to the same periods in the prior year, due to a higher volume of debit card transactions which have continued to grow as customers move more towards electronic transactions. Regulatory changes, which became effective October 1, 2011 for card issuers with more than $10 billion in assets, place a cap on debit card interchange fees. Although not directly subject to the new regulations, WesBanco anticipates some market-related long-term impact on its electronic banking fees in the future from these changes.
Service charges on deposits, which are primarily customer overdraft fees, were 9.9% lower in the first half of 2012 compared to the same period in 2011 due to changes in customer behavior. Higher average customer deposit balances, usage of mobile and internet banking technologies by our customers, and changes in marketing strategies may have also had an impact.
Net losses on other real estate owned and other assets decreased $0.6 million for the six months ended June 30, 2012 compared to the same period in 2011 due to ongoing property liquidation efforts. Other real estate owned balances have increased $0.9 million since December 31, 2011, but have been reduced by almost 23% since June 30, 2011.
Gains on the sale of mortgage loans decreased by 10.7% in the first half of 2012 compared to the same period in 2011 primarily from a strategic decision to retain more residential mortgage loans with terms of 15 years or less in the portfolio instead of selling most of these originations to the secondary market. Increased mortgage production in the second quarter resulted in a $0.2 million increase in the second quarter of 2012 compared to the same period in 2011.
32
NON-INTEREST EXPENSE
TABLE 5. NON-INTEREST EXPENSE
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
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(unaudited, dollars in thousands) |
2012 | 2011 | $ Change | % Change | 2012 | 2011 | $ Change | % Change | ||||||||||||||||||||||||
Salaries and wages |
$ | 13,955 | $ | 13,959 | $ | (4 | ) | (0.0 | %) | $ | 28,270 | $ | 27,612 | $ | 658 | 2.4 | % | |||||||||||||||
Employee benefits |
4,920 | 4,249 | 671 | 15.8 | % | 10,538 | 9,405 | 1,133 | 12.0 | % | ||||||||||||||||||||||
Net occupancy |
2,703 | 2,461 | 242 | 9.8 | % | 5,479 | 5,382 | 97 | 1.8 | % | ||||||||||||||||||||||
Equipment |
2,144 | 2,145 | (1 | ) | (0.0 | %) | 4,318 | 4,444 | (126 | ) | (2.8 | %) | ||||||||||||||||||||
Marketing |
1,716 | 1,642 | 74 | 4.5 | % | 2,487 | 2,647 | (160 | ) | (6.0 | %) | |||||||||||||||||||||
FDIC insurance |
965 | 1,015 | (50 | ) | (4.9 | %) | 2,011 | 2,669 | (658 | ) | (24.7 | %) | ||||||||||||||||||||
Amortization of intangible assets |
524 | 605 | (81 | ) | (13.4 | %) | 1,061 | 1,223 | (162 | ) | (13.2 | %) | ||||||||||||||||||||
Other operating expenses: |
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Miscellaneous, franchise, and other taxes |
1,395 | 1,401 | (6 | ) | (0.4 | %) | 2,847 | 2,764 | 83 | 3.0 | % | |||||||||||||||||||||
Postage |
757 | 815 | (58 | ) | (7.1 | %) | 1,485 | 1,687 | (202 | ) | (12.0 | %) | ||||||||||||||||||||
Consulting, regulatory, accounting and advisory fees |
1,009 | 1,015 | (6 | ) | (0.6 | %) | 2,046 | 1,919 | 127 | 6.6 | % | |||||||||||||||||||||
Other real estate owned and foreclosure expenses |
818 | 771 | 47 | 6.1 | % | 1,211 | 1,502 | (291 | ) | (19.4 | %) | |||||||||||||||||||||
Legal fees |
629 | 734 | (105 | ) | (14.3 | %) | 1,316 | 1,374 | (58 | ) | (4.2 | %) | ||||||||||||||||||||
Communications |
623 | 668 | (45 | ) | (6.7 | %) | 1,281 | 1,337 | (56 | ) | (4.2 | %) | ||||||||||||||||||||
ATM and interchange expenses |
925 | 748 | 177 | 23.7 | % | 1,759 | 1,419 | 340 | 24.0 | % | ||||||||||||||||||||||
Supplies |
645 | 621 | 24 | 3.9 | % | 1,270 | 1,214 | 56 | 4.6 | % | ||||||||||||||||||||||
Other |
2,356 | 2,854 | (498 | ) | (17.4 | %) | 4,370 | 4,596 | (226 | ) | (4.9 | %) | ||||||||||||||||||||
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Total other operating expenses |
9,157 | 9,627 | (470 | ) | (4.9 | %) | 17,585 | 17,812 | (227 | ) | (1.3 | %) | ||||||||||||||||||||
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Total non-interest expense |
$ | 36,084 | $ | 35,703 | $ | 381 | 1.1 | % | $ | 71,749 | $ | 71,194 | $ | 555 | 0.8 | % | ||||||||||||||||
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Non-interest expense increased $0.4 million or 1.1% in the second quarter and $0.6 million or 0.8% in the first six months of 2012, compared to the same period in 2011. Quarter-to-date, employee benefits, net occupancy and ATM and interchange expenses increased, while FDIC insurance decreased and other expenses decreased primarily due to charges taken in 2011. Year-to-date, salaries and wages also increased $0.7 million, while other real estate owned and foreclosure expenses declined $0.3 million. Expense reductions were achieved in many other expense categories. WesBancos efficiency ratio in the first six months of 2012 remained nearly flat compared to 2011 at 60.9%.
Salaries and wages remained flat in the second quarter but increased 2.4% for the six months ended June 30, 2012 compared to 2011, primarily due to regular employee compensation increases and higher stock compensation expense. Employee benefits increased 15.8% and 12.0% for the quarter and year-to-date compared to 2011 primarily due to higher healthcare expenses and pension expense from lower pension asset growth and lower discount rate assumptions.
FDIC insurance in the second quarter of 2012 decreased slightly compared to the same period in 2011 but decreased $0.7 million year-to-date due to the new calculation of FDIC insurance expense, effective April 1, 2011.
Net occupancy for the three and six months of 2012 increased due to higher depreciation and normal seasonal factors.
Other real estate owned and foreclosure expenses decreased year-to-date due to ongoing liquidation efforts including the sale of a hospitality property in the fourth quarter of 2011 which operated at a loss in the first half of 2011.
ATM and interchange expenses, which include debit card processing fees, increased $0.2 million and $0.3 million or 24% for the three and six months ended June 30, 2012 compared to 2011 due to a higher volume of debit card transactions during the period, which have continued to grow as customers move more towards electronic transactions.
Other operating expenses in the second quarter of 2012 decreased $0.5 million, compared to the same period in 2011 primarily due to the accrual of a charge in 2011 relating to retail customer fraud, which was subsequently recovered in the third quarter of 2011.
INCOME TAXES
The provision for federal and state income taxes increased to $6.7 million in the first six months of 2012 compared to $5.9 million for the same period in 2011 due to a $2.7 million increase in pre-tax income, and a higher effective tax rate of 22.0% compared to 20.9% for the same period in 2011. The increase in the effective tax rate was primarily due to improved taxable income caused by higher earnings and less non-taxable income.
33
FINANCIAL CONDITION
Total assets decreased 0.2% in the first six months of 2012 primarily as a result of the use of cash flows to pay down borrowings. Loan production continued to increase during the quarter, which exceeded loan payoffs and pay-downs on commercial lines of credit, resulting in the net loan portfolio increase during the first six months of 2012. Deposits were nearly unchanged from December 31, 2011; however, the deposit mix changed as savings deposits and demand deposits increased 8.4% and 6.0%, respectively, while certificates of deposit and money market deposits decreased 6.2% and 4.4%, respectively. The reduction in certificates of deposit was due to anticipated reductions through lower offered rates for new and rollover certificates of deposit, and customers desire to shorten interest rate maturities. FHLB borrowings decreased 15.6% from December 31, 2011 as higher cost FHLB borrowings were paid down using available funding. Total shareholders equity increased by approximately $15.3 million, or 2.4%, compared to December 31, 2011 primarily due to net income exceeding dividends.
SECURITIES
TABLE 6. COMPOSITION OF SECURITIES (1)
(unaudited, dollars in thousands) |
June 30, 2012 |
December 31, 2011 |
$ Change | % Change | ||||||||||||
Available-for-sale (at fair value) |
||||||||||||||||
Other government agencies |
$ | 96,070 | $ | 198,720 | $ | (102,650 | ) | (51.7 | %) | |||||||
Residential mortgage-backed securities and collateralized mortgage obligations of government agencies |
715,726 | 588,092 | 127,634 | 21.7 | % | |||||||||||
Obligations of states and political subdivisions |
167,181 | 180,433 | (13,252 | ) | (7.3 | %) | ||||||||||
Corporate debt securities |
38,570 | 44,066 | (5,496 | ) | (12.5 | %) | ||||||||||
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Total debt securities |
1,017,547 | 1,011,311 | 6,236 | 0.6 | % | |||||||||||
Equity securities |
5,577 | 5,029 | 548 | 10.9 | % | |||||||||||
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Total available-for-sale securities |
$ | 1,023,124 | $ | 1,016,340 | $ | 6,784 | 0.7 | % | ||||||||
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Held-to-maturity (at amortized cost) |
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Residential mortgage-backed securities and collateralized mortgage obligations of government agencies |
198,870 | 247,938 | (49,068 | ) | (19.8 | %) | ||||||||||
Other residential collateralized mortgage obligations |
451 | 783 | (332 | ) | (42.4 | %) | ||||||||||
Obligations of states and political subdivisions |
373,350 | 342,752 | 30,598 | 8.9 | % | |||||||||||
Corporate debt securities |
| 1,452 | (1,452 | ) | (100.0 | %) | ||||||||||
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Total held-to-maturity securities |
572,671 | 592,925 | (20,254 | ) | (3.4 | %) | ||||||||||
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Total securities |
$ | 1,595,795 | $ | 1,609,265 | $ | (13,470 | ) | (0.8 | %) | |||||||
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Available-for-sale securities: |
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Weighted average yield at the respective period end (2) |
2.52 | % | 2.86 | % | ||||||||||||
As a % of total securities |
64.1 | % | 63.2 | % | ||||||||||||
Weighted average life (in years) |
3.1 | 2.8 | ||||||||||||||
Held-to-maturity securities: |
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Weighted average yield at the respective period end (2) |
4.66 | % | 4.62 | % | ||||||||||||
As a % of total securities |
35.9 | % | 36.8 | % | ||||||||||||
Weighted average life (in years) |
5.4 | 5.3 | ||||||||||||||
Total securities: |
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Weighted average yield at the respective period end (2) |
3.29 | % | 3.51 | % | ||||||||||||
As a % of total securities |
100.0 | % | 100.0 | % | ||||||||||||
Weighted average life (in years) |
3.9 | 3.7 |
(1) | At June 30, 2012 and December 31, 2011, there were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of WesBancos shareholders equity. |
(2) | Weighted average yields have been calculated on a taxable-equivalent basis using the federal statutory tax rate of 35%. |
Total investment securities, which are a source of liquidity for WesBanco as well as a contributor to interest income, decreased by $13.5 million or 0.8% from December 31, 2011 to June 30, 2012, and by $70.0 million or 4.2% from March 31, 2012. The overall portfolio decrease was attributable to a 3.4% decrease in the held-to-maturity portfolio, mostly due to paydowns on residential mortgage-backed securities, while the available-for-sale portfolio increased by 0.7%. The decrease in total securities funded the increase in loan balances. For the six months ended June 30, 2012, security sales totaled $42.8 million, and maturities, pay-downs, and calls totaled $335.3 million. These were offset by security purchases that totaled $367.8 million.
34
TABLE 7. COMPOSITION OF MUNICIPAL SECURITIES
The following table presents the allocation of the municipal bond portfolio based on the combined S&P and Moodys ratings of the individual bonds:
June 30, 2012 | December 31, 2011 | |||||||||||||||
(unaudited, dollars in thousands) |
Amount | % of Total | Amount | % of Total | ||||||||||||
Municipal bonds (at fair value): |
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AAA rating |
$ | 55,394 | 9.8 | % | $ | 52,791 | 9.7 | % | ||||||||
AA rating |
413,004 | 72.8 | % | 388,659 | 71.4 | % | ||||||||||
A rating |
67,215 | 11.8 | % | 64,125 | 11.7 | % | ||||||||||
Below an A rating (1) |
16,848 | 3.0 | % | 24,351 | 4.5 | % | ||||||||||
No rating |
15,034 | 2.6 | % | 14,580 | 2.7 | % | ||||||||||
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Total municipal bond portfolio |
$ | 567,495 | 100.0 | % | $ | 544,506 | 100.0 | % | ||||||||
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(1) | All securities noted as below an A rating are rated as investment grade. |
WesBancos municipal bond portfolio consists of both taxable (primarily Build America Bonds) and tax-exempt general obligation and revenue bonds. The following table presents additional information regarding the municipal bond type and issuer (at fair value):
June 30, 2012 | December 31, 2011 | |||||||||||||||
(unaudited, dollars in thousands) |
Amount | % of Total | Amount | % of Total | ||||||||||||
Municipal bond type: |
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General obligation |
$ | 405,988 | 71.5 | % | $ | 393,755 | 72.3 | % | ||||||||
Revenue |
161,507 | 28.5 | % | 150,751 | 27.7 | % | ||||||||||
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Total municipal bond portfolio |
$ | 567,495 | 100.0 | % | $ | 544,506 | 100.0 | % | ||||||||
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Municipal bond issuer: |
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State issued |
$ | 43,086 | 7.6 | % | $ | 45,993 | 8.4 | % | ||||||||
Local issued |
524,409 | 92.4 | % | 498,513 | 91.6 | % | ||||||||||
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Total municipal bond portfolio |
$ | 567,495 | 100.0 | % | $ | 544,506 | 100.0 | % | ||||||||
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The amortized cost of the municipal bond portfolio at June 30, 2012 and December 31, 2011 was $531.5 million and $514.5 million, respectively. The municipal bond portfolio is broadly spread across the U.S. with 60% of the portfolios fair value in the top five states of Pennsylvania, Ohio, Texas, Illinois, and West Virginia, respectively.
WesBanco uses prices from independent pricing services and, to a lesser extent, indicative (non-binding) quotes from independent brokers, to measure the fair value of its securities. WesBanco validates prices received from pricing services or brokers using a variety of methods, including, but not limited to, comparison to secondary pricing services, corroboration of pricing by reference to other independent market data such as secondary broker quotes and relevant benchmark indices, review of pricing by personnel familiar with market liquidity and other market-related conditions, review of pricing service methodologies, review of independent auditor reports received from the pricing service regarding its internal controls, and through review of inputs and assumptions used in pricing certain securities thinly traded or with limited observable data points. Additionally, a review of the credit and capacity to repay of certain non-rated securities is performed by an independent third party. The procedures in place provide management with a sufficient understanding of the valuation models, assumptions, inputs and pricing to reasonably measure the fair value of WesBancos securities. For additional disclosure relating to fair value measurements, refer to Note 7, Fair Value Measurements, in the Consolidated Financial Statements.
35
LOANS AND CREDIT RISK
Loans represent WesBancos single largest balance sheet asset classification and the largest source of interest income. Business purpose loans consist of commercial real estate (CRE) loans and other commercial and industrial (C&I) loans that are not secured by real estate. CRE loans are further segmented into land and construction loans, and loans for improved property. Consumer purpose loans consist of residential real estate loans, home equity lines of credit and other consumer loans. Loans held for sale generally consist of residential real estate loans originated for sale in the secondary market, but at times may also include other types of loans. The outstanding balance of each major category of the loan portfolio is summarized in Table 8.
The risk that borrowers will be unable or unwilling to repay their obligations and default on loans is inherent in all lending activities. Credit risk arises from many sources including general economic conditions, external events that impact businesses or industries, isolated events that impact a major employer, individual loss of employment or other personal hardships as well as changes in interest rates or the value of collateral. Credit risk is also impacted by a concentration of exposure within a geographic market or to one or more borrowers, industries or collateral types. The primary goal in managing credit risk is to minimize the impact of default by an individual borrower or group of borrowers. Credit risk is managed through the initial underwriting process as well as through ongoing monitoring and administration of the portfolio that varies by the type of loan. The Banks credit policies establish standard underwriting guidelines for each type of loan and require an appropriate evaluation of the credit characteristics of each borrower. This evaluation includes the borrowers primary source of repayment capacity; the adequacy of collateral, if any, to secure the loan; the potential value of personal guarantees as secondary sources of repayment, and other factors unique to each loan that may increase or mitigate its risk. Credit bureau scores are also considered when evaluating consumer purpose loans as well as guarantors of business purpose loans. However, the Bank does not periodically update credit bureau scores subsequent to when loans are made to determine changes in credit history.
Credit risk is mitigated for all types of loans by continuously monitoring delinquency levels and pursuing collection efforts at the earliest stage of delinquency. The Bank also monitors general economic conditions, including employment, housing activity and real estate values in its market. The Bank also periodically evaluates and changes its underwriting standards when warranted based on market conditions, the historical performance of a category of the portfolio, or other external factors. Credit risk is also regularly evaluated for the impact of adverse economic and other events that increase the risk of default and the potential loss in the event of default to understand their impact on the Banks earnings and capital.
TABLE 8. COMPOSITION OF LOANS (1)
June 30, 2012 | December 31, 2011 | |||||||||||||||
(unaudited, dollars in thousands) |
Amount | % of Loans | Amount | % of Loans | ||||||||||||
Commercial real estate: |
||||||||||||||||
Land and construction |
$ | 158,413 | 4.8 | % | $ | 175,867 | 5.4 | % | ||||||||
Improved property |
1,536,632 | 46.8 | % | 1,509,698 | 46.5 | % | ||||||||||
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|
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Total commercial real estate |
1,695,045 | 51.6 | % | 1,685,565 | 51.9 | % | ||||||||||
Commercial and industrial |
420,689 | 12.9 | % | 426,315 | 13.1 | % | ||||||||||
Residential real estate: |
||||||||||||||||
Land and construction |
11,273 | 0.3 | % | 9,654 | 0.3 | % | ||||||||||
Other |
651,283 | 19.9 | % | 611,729 | 18.9 | % | ||||||||||
Home equity |
250,988 | 7.6 | % | 251,785 | 7.8 | % | ||||||||||
Consumer |
246,552 | 7.5 | % | 254,320 | 7.8 | % | ||||||||||
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|
|||||||||
Total portfolio loans |
3,275,830 | 99.8 | % | 3,239,368 | 99.8 | % | ||||||||||
Loans held for sale |
7,305 | 0.2 | % | 6,084 | 0.2 | % | ||||||||||
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|
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Total loans |
$ | 3,283,135 | 100.0 | % | $ | 3,245,452 | 100.0 | % | ||||||||
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(1) | Loans are presented gross of the allowance for loan losses and net of unearned income, credit valuation adjustments, and unamortized net deferred loan fee income and loan origination costs. |
Total loans increased 1.2% from December 31, 2011 to June 30, 2012. CRE land and construction loans decreased $17.5 million or 9.9% as $49.4 million of loans were reclassified to CRE improved property upon completion of the projects while $31.9 million of new construction loans were funded during the period. CRE improved property loans increased $26.9 million or 1.8% as a result of the reclassification of construction loans net of unscheduled principal reductions or payoffs and decreases in non-performing loans in this category. C&I loans decreased $5.6 million or 1.3% primarily due to a reduction in the usage of lines of credit, which declined from 47% to 43% of total availability between December 31, 2011 and June 30, 2012. Residential real estate loans, including land and construction, increased $41.2 million or 6.6% due to increased loan production and managements decision to retain new 15 year fixed rate loans in the portfolio and selling fewer loans into the secondary market. Approximately 30% of all mortgage originations were sold into the secondary market in the first half of 2012, compared to 40% in the comparable 2011 period. Additionally, overall mortgage production during the six months ended June 30, 2012 increased 82% over the comparable 2011 period. Home equity lines of credit and consumer loans collectively decreased $8.6 million or 1.7% due to reduced loan demand as consumers continued to deleverage, as well as stricter underwriting standards for certain types of home equity and consumer loans. Loans held for sale increased $1.2 million due to timing differences on scheduled closings, seasonal factors influencing total volumes and increased production. All loan categories were also impacted by a continued focus on improving the overall profitability and quality of the loan portfolio through disciplined underwriting and pricing practices, as well as the current highly competitive lending market for high quality borrowers.
36
NON-PERFORMING ASSETS, IMPAIRED LOANS AND LOANS PAST DUE 90 DAYS OR MORE
Non-performing assets consist of non-accrual loans and TDRs, other real estate acquired through or in lieu of foreclosure, bank premises held for sale, and repossessed automobiles acquired to satisfy defaulted consumer loans.
TABLE 9. NON-PERFORMING ASSETS
(unaudited, dollars in thousands) |
June 30, 2012 |
December 31, 2011 |
||||||
Non-accrual loans: |
||||||||
Commercial real estate - land and construction |
$ | 5,158 | $ | 10,135 | ||||
Commercial real estate - improved property |
18,643 | 25,122 | ||||||
Commercial and industrial |
5,302 | 8,238 | ||||||
Residential real estate |
9,766 | 12,377 | ||||||
Home equity |
908 | 1,331 | ||||||
Consumer |
175 | 289 | ||||||
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|
|||||
Total non-accrual loans |
39,952 | 57,492 | ||||||
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|
|||||
TDRs accruing interest: |
||||||||
Commercial real estate - land and construction |
6,903 | 7,410 | ||||||
Commercial real estate - improved property |
16,380 | 17,318 | ||||||
Commercial and industrial |
841 | 839 | ||||||
Residential real estate |
4,041 | 3,844 | ||||||
Home equity |
| | ||||||
Consumer |
| | ||||||
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|
|||||
Total TDRs accruing interest (1) |
28,165 | 29,411 | ||||||
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|
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Total non-performing loans |
$ | 68,117 | $ | 86,903 | ||||
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|
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Other real estate owned and repossessed assets |
3,918 | 3,029 | ||||||
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|
|
|||||
Total non-performing assets |
$ | 72,035 | $ | 89,932 | ||||
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|
|||||
Non-performing loans/total loans |
2.08 | % | 2.68 | % | ||||
Non-performing assets/total assets |
1.30 | % | 1.62 | % | ||||
Non-performing assets/total loans, other real estate and repossessed assets |
2.20 | % | 2.77 | % |
(1) | TDRs on nonaccrual of $11.2 million and $17.3 million at June 30, 2012 and December 31, 2011, respectively, are included in total nonaccrual loans. |
Non-performing loans, which consist of non-accrual loans and TDRs, decreased $18.8 million from December 31, 2011 to June 30, 2012 and $12.9 million from March 31, 2012 primarily due to principal reductions and charge-offs exceeding the migration of loans into those categories and the sale of $5.1 million of non-accrual loans during the second quarter. At June 30, 2012, non-performing loans were at their lowest level since 2008. (Please see the Notes to the Consolidated Financial Statements for additional discussion.)
Other real estate owned and repossessed assets increased $0.9 million from December 31, 2011 to June 30, 2012, primarily due to the addition of one commercial property during the period.
37
The following table presents non-performing asset activity.
TABLE 10. NON-PERFORMING ASSET ACTIVITY
For the Six Months Ended June 30, 2012 | ||||||||||||||||||||||||
Accruing TDRs |
Other Real Estate and Repossessed Assets |
Total Non- Performing Assets |
||||||||||||||||||||||
Non-Accrual Loans | ||||||||||||||||||||||||
(unaudited, in thousands) |
TDRs | Other | Total | |||||||||||||||||||||
Beginning balance |
$ | 17,287 | $ | 40,205 | $ | 57,492 | $ | 29,411 | $ | 3,029 | $ | 89,932 | ||||||||||||
Activity during the period: |
||||||||||||||||||||||||
Additions to non-accrual or TDR |
95 | 6,826 | 6,921 | 1,716 | | 8,637 | ||||||||||||||||||
Foreclosed real estate |
| | | | 2,424 | 2,424 | ||||||||||||||||||
Repossessed other collateral |
| | | | 1,509 | 1,509 | ||||||||||||||||||
Charge-offs or charge-downs (1) |
(4,679 | ) | (7,783 | ) | (12,462 | ) | | (329 | ) | (12,791 | ) | |||||||||||||
Loans returned to accrual |
(197 | ) | (502 | ) | (699 | ) | | | (699 | ) | ||||||||||||||
Other real estate sold |
| | | | (1,197 | ) | (1,197 | ) | ||||||||||||||||
Repossessed assets sold |
| | | | (1,520 | ) | (1,520 | ) | ||||||||||||||||
Transfer between categories |
1,621 | | 1,621 | (1,621 | ) | | | |||||||||||||||||
Payments from loan sales |
(2,234 | ) | (618 | ) | (2,852 | ) | | | (2,852 | ) | ||||||||||||||
Principal payments / other changes, net |
(734 | ) | (9,335 | ) | (10,069 | ) | (1,341 | ) | 2 | (11,408 | ) | |||||||||||||
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|
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|
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Ending balance |
$ | 11,159 | $ | 28,793 | $ | 39,952 | $ | 28,165 | $ | 3,918 | $ | 72,035 | ||||||||||||
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(1) | Charge-offs of non-accrual loans includes $2.2 million from the sale of $5.1 million of non-accrual loans in the second quarter. |
TABLE 11. PAST DUE AND ACCRUING LOANS EXCLUDING TDRs
(unaudited, dollars in thousands) |
June 30, 2012 |
December 31, 2011 |
||||||
Loans past due 90 days or more: |
||||||||
Commercial real estate - land and construction |
$ | 416 | $ | | ||||
Commercial real estate - improved property |
98 | 18 | ||||||
Commercial and industrial |
177 | 939 | ||||||
Residential real estate |
1,752 | 2,881 | ||||||
Home equity |
902 | 498 | ||||||
Consumer |
294 | 799 | ||||||
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|
|
|||||
Total portfolio loans |
3,639 | 5,135 | ||||||
Loans held for sale |
| | ||||||
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|
|
|||||
Total loans past due 90 days or more |
$ | 3,639 | $ | 5,135 | ||||
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|
|||||
Loans past due 30 to 89 days: |
||||||||
Commercial real estate - land and construction |
$ | 292 | $ | 180 | ||||
Commercial real estate - improved property |
2,834 | 4,599 | ||||||
Commercial and industrial |
955 | 1,442 | ||||||
Residential real estate |
5,242 | 5,902 | ||||||
Home equity |
1,682 | 2,266 | ||||||
Consumer |
4,112 | 5,499 | ||||||
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|
|
|||||
Total portfolio loans |
15,117 | 19,888 | ||||||
Loans held for sale |
| | ||||||
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|
|
|||||
Total loans past due 30 to 89 days |
$ | 15,117 | $ | 19,888 | ||||
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|
|||||
Loans past due 90 days or more and accruing to total loans |
0.11 | % | 0.16 | % | ||||
Loans past due 30-89 days to total loans |
0.46 | % | 0.61 | % | ||||
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|
Loans past due 90 days or more and accruing interest excluding TDRs decreased $1.5 million or 29.1% from December 31, 2011. These loans continue to accrue interest because they are both well secured and in the process of collection. Loans past due 30-89 days decreased $4.8 million or 24.0% between December 31, 2011 and June 30, 2012 as a result of a continued focus on controlling early stage delinquency and moderate improvement in economic conditions. Total loans past due increased slightly from March 31, 2012 primarily due the delinquency of one CRE construction loan.
38
ALLOWANCE FOR CREDIT LOSSES
The allowance for loan losses decreased $1.2 million from December 31, 2011 to June 30, 2012. The allowance represented 1.64% of total loans, down from 1.69% from December 31, 2011 and March 31, 2012. The allowance for loans individually evaluated increased by $0.2 million to $3.6 million from December 31, 2011 to June 30, 2012 while the allowance for loans collectively evaluated decreased $1.4 million to $50.0 million due to lower delinquency, reduced levels of non-performing loans not individually evaluated, reduced levels of classified and criticized loans, and a continued decline in net charge-offs. The allowance for loan losses to non-performing loans, and the allowance for loan losses to the total of non-performing loans and loans past due, were both at their highest levels in the last six quarters. The improvement in credit quality resulted in the strengthening of coverage ratios and supported a lower overall allowance and a lower provision for credit losses for the three and six months ended June 30, 2012 compared to 2011.
The allowance for loan commitments from December 31, 2011 to June 30, 2012 was unchanged.
The allowance for credit losses by loan category, presented in Note 4 to the Consolidated Financial Statements, summarizes the impact of changes in various factors that affect the allowance for loan losses in each segment of the portfolio. The allowance for all segments is impacted by changes in loan balances as well as changes in historical loss rates adjusted for qualitative factors such as economic conditions. The CRE and C&I segments of the portfolio are also impacted by changes in the risk grading distribution of the portfolio as well as the reclassification of CRE loans from land and construction to improved property upon the completion of construction.
Net charge-offs in the 2012 second quarter of $6.8 million included $2.2 million relating to the sale of loans; however, net charge-offs increased only $0.2 million from the first quarter of 2012 and were flat compared to the second quarter of 2011. Year-to-date net charge-offs decreased $1.8 million to $13.4 million compared the same period in 2011. The decline in net charge-offs in the first half of 2012 and improvements in credit quality enabled a decrease in the provision for credit losses of $0.9 million and $2.7 million for the three and six months ended June 30, 2012 compared to the same period in 2011. Net annualized loan charge-offs to average loans were 0.84% for the three months ended June 30, 2012 compared to 0.85% for same period last year.
The internal risk rating is the primary factor for establishing the allowance for all commercial loans and portfolio segment loss history is the primary factor for establishing the allowance for residential real estate, home equity and consumer loans. The categorization of loans as non-performing is not as significant a factor as is the internal risk grade of the loan, although certain non-performing loans carry established specific reserves and are also typically considered classified under the Banks risk grading system. Classified and criticized loans decreased $82.5 million from June 30, 2011, and $34.9 million from December 31, 2011 from principal reductions, charge-offs, migration of certain loans back to a pass grade as a result of improved risk profiles, and orderly exits of certain loans including the sale of non-performing loans in the current quarter with a carrying balance of $5.1 million.
Table 12 summarizes the allocation of the allowance for credit losses to each category of the loan portfolio. The allowance for CRE land and construction loans decreased primarily as a result of the reduction in loans in this category. The allowance for CRE improved property loans was relatively unchanged despite an increase in loans in this category due to overall improvement in credit quality and reduced delinquency. The allowance for C&I loans declined due to a decrease in loans in this category, improvement in credit quality, and lower net charge-offs. The allowance for residential real estate loans increased due to growth in this category of loans and the allowance for home equity loans increased due to continued declines in property values in certain markets. The allowances for consumer loans and deposit overdrafts were relatively unchanged.
TABLE 12. ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
(unaudited, dollars in thousands) |
June 30, 2012 |
Percent of Total |
December 31, 2011 |
Percent of Total |
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Allowance for loan losses: |
||||||||||||||||
Commercial real estate - land and construction |
$ | 4,475 | 8.3 | % | $ | 4,842 | 8.8 | % | ||||||||
Commercial real estate - improved property |
24,721 | 45.8 | % | 24,748 | 44.8 | % | ||||||||||
Commercial and industrial |
10,068 | 18.7 | % | 11,414 | 20.7 | % | ||||||||||
Residential real estate |
5,780 | 10.7 | % | 5,638 | 10.2 | % | ||||||||||
Home equity |
2,441 | 4.5 | % | 1,962 | 3.5 | % | ||||||||||
Consumer |
5,419 | 10.0 | % | 5,410 | 9.8 | % | ||||||||||
Deposit account overdrafts |
706 | 1.3 | % | 796 | 1.4 | % | ||||||||||
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Total allowance for loan losses |
$ | 53,610 | 99.3 | % | $ | 54,810 | 99.2 | % | ||||||||
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Allowance for loan commitments: |
||||||||||||||||
Commercial real estate - land and construction |
$ | 49 | 0.1 | % | $ | 74 | 0.1 | % | ||||||||
Commercial real estate - improved property |
10 | 0.0 | % | 21 | 0.0 | % | ||||||||||
Commercial and industrial |
224 | 0.5 | % | 323 | 0.6 | % | ||||||||||
Residential real estate |
5 | 0.0 | % | 4 | 0.0 | % | ||||||||||
Home equity |
48 | 0.1 | % | 33 | 0.1 | % | ||||||||||
Consumer |
15 | 0.0 | % | 13 | 0.0 | % | ||||||||||
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|
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Total allowance for loan commitments |
351 | 0.7 | % | 468 | 0.8 | % | ||||||||||
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|
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Total allowance for credit losses |
$ | 53,961 | 100.0 | % | $ | 55,278 | 100.0 | % | ||||||||
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39
Although the allowance for credit losses is allocated as described in Table 12, the total allowance is available to absorb actual losses in any category of the loan portfolio. However, differences between managements estimation of probable losses and actual incurred losses in subsequent periods for any category may necessitate future adjustments to the provision for loan losses applicable to the category. Management believes the allowance for credit losses is appropriate to absorb probable losses at June 30, 2012.
DEPOSITS
TABLE 13. DEPOSITS
(unaudited, dollars in thousands) |
June 30, 2012 |
December 31, 2011 |
$ Change | % Change | ||||||||||||
Non-interest bearing demand |
$ | 759,779 | $ | 705,415 | $ | 54,364 | 7.7 | % | ||||||||
Interest bearing demand |
728,521 | 698,114 | 30,407 | 4.4 | % | |||||||||||
Money market |
753,964 | 789,036 | (35,072 | ) | (4.4 | %) | ||||||||||
Savings deposits |
646,385 | 596,549 | 49,836 | 8.4 | % | |||||||||||
Certificates of deposit |
1,505,133 | 1,604,752 | (99,619 | ) | (6.2 | %) | ||||||||||
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Total deposits |
$ | 4,393,782 | $ | 4,393,866 | $ | (84 | ) | (0.0 | %) | |||||||
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Deposits, which represent WesBancos primary source of funds, are offered in various account forms at various rates through WesBancos 112 branches in West Virginia, Ohio and Western Pennsylvania. Total deposits were nearly unchanged from December 31, 2011.
Demand deposits and savings deposits increased by 6.0% and 8.4%, respectively, in the first six months of 2012 due to marketing, incentive compensation and focused retail and business banking strategies to obtain more account relationships and customers preference for short-term maturities.
The decline in certificates of deposit of 6.2% is due to the effects of an overall corporate strategy designed to re-mix retail deposit relationships with a focus on overall products that can be offered at a lower cost to the Bank. The decline in certificates of deposit is also impacted by customer preferences in the current low interest rate environment and other alternatives in the marketplace. WesBanco does not typically solicit brokered or other deposits out-of-market or over the internet, but does participate in the CDARS® program, which had $225.0 million in total outstanding balances at June 30, 2012 of which $151.1 million represented one-way buys, compared to $276.6 million in total outstanding balances at December 31, 2011. Certificates of deposit greater than $250,000 were approximately $172.6 million at June 30, 2012 compared to $162.5 million at December 31, 2011. Certificates of deposit of $100,000 or more were approximately $757.2 million at June 30, 2012 compared to $797.0 million at December 31, 2011. Certificates of deposit totaling approximately $660.4 million at June 30, 2012 at an average cost of 0.97% are scheduled to mature within the next year. WesBanco will continue to focus on its core deposit strategies and improving its overall mix of transaction accounts to total deposits. From time to time the Bank may offer special promotions on certain certificates of deposit maturities and savings products based on competition, sales strategies, liquidity needs and wholesale borrowing costs, although in the current interest rate environment, certificates of deposit rate offerings are generally lower for all maturities and types compared to rates paid on existing certificates of deposit and the Bank has also recently lowered its money market and savings account rates to further improve its cost of deposits.
BORROWINGS
TABLE 14. BORROWINGS
(unaudited, dollars in thousands) |
June 30, 2012 |
December 31, 2011 |
$ Change | % Change | ||||||||||||
Federal Home Loan Bank borrowings |
$ | 141,877 | $ | 168,186 | $ | (26,309 | ) | (15.6 | %) | |||||||
Other short-term borrowings |
191,275 | 196,887 | (5,612 | ) | (2.9 | %) | ||||||||||
Junior subordinated debt owed to unconsolidated subsidiary trusts |
106,083 | 106,066 | 17 | 0.0 | % | |||||||||||
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|
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Total borrowings |
$ | 439,235 | $ | 471,139 | $ | (31,904 | ) | (6.8 | %) | |||||||
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Borrowings are currently a less significant source of funding for WesBanco compared to total deposits. During the first six months of 2012, WesBanco reduced other short-term borrowings and paid down Federal Home Loan Bank borrowings scheduled to mature utilizing funds provided by lower cost deposits or other available cash flows for their payoff. Additional maturities of Federal Home Loan Bank borrowings of $50.7 million are scheduled for the remainder of the year which will result in a further lowering of the cost of wholesale borrowings as these borrowings are paid off with available funds or renewed at lower market rates.
40
Other short-term borrowings, which consist primarily of federal funds purchased and securities sold under agreements to repurchase were $191.3 million at June 30, 2012 compared to $196.9 million at December 31, 2011. The decrease in these borrowings has occurred primarily as a result of a $3.1 million decrease in the treasury tax and loan borrowing category, coupled with a $2.5 million decrease in securities sold under agreements to repurchase. Repurchase agreements of $50.0 million are scheduled to mature in the second half of 2012. A revolving line of credit with another bank is available at the parent company. The revolving line of credit, which accrues interest at an adjusted LIBOR rate, provides for aggregate borrowings secured by a pledge of WesBancos banking subsidiary common stock of up to $25.0 million. There were no outstanding balances as of June 30, 2012 or December 31, 2011.
OFF-BALANCE SHEET ARRANGEMENTS
WesBanco enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, letters of credit, loans approved but not closed, overdraft limits and contingent obligations to purchase loans funded by other entities. Since many of these commitments expire unused or partially used, these commitments may not reflect future cash requirements. Please refer to Note 8, Commitments and Contingent Liabilities, of the Consolidated Financial Statements and the Loans and Credit Risk section of this MD&A for additional information.
CAPITAL RESOURCES
Shareholders equity was $649.1 million at June 30, 2012 compared to $633.8 million at December 31, 2011. Total equity increased due to net income during the current six month period of $24.0 million, which was partially offset by the declaration of common shareholder dividends totaling $9.1 million for the six months ended June 30, 2012.
On May 16, 2012, WesBanco granted 61,500 stock options to selected officers at an exercise price of $20.02. These options are service-based and vest 50% at December 31, 2012 and 50% at December 31, 2013. On the same date, WesBanco also granted 40,050 shares of restricted stock to selected officers. The restricted shares are service-based and vest 36 months from the date of grant.
WesBanco is subject to regulatory-promulgated leverage and risk-based capital guidelines that measure capital relative to risk-weighted assets and off-balance sheet instruments. The Bank and WesBanco maintain Tier 1, total capital and leverage ratios well above minimum regulatory levels. There are various legal limitations under federal and state laws that limit the payment of dividends from the Bank to WesBanco. As of June 30, 2012, under FDIC regulations, WesBanco could receive, without prior regulatory approval, a dividend of approximately $22.6 million from the Bank. WesBanco seeks to continue improving its consolidated and Bank capital ratios primarily from retaining a majority of its increasing earnings.
The following table summarizes risk-based capital amounts and ratios for WesBanco and the Bank for the periods indicated:
June 30, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
(unaudited, dollars in thousands) |
Minimum Value (1) |
Well Capitalized (2) |
Amount | Ratio | Minimum Amount (1) |
Amount | Ratio | Minimum Amount (1) |
||||||||||||||||||||||||
WesBanco, Inc. |
||||||||||||||||||||||||||||||||
Tier 1 leverage |
4.00 | %(3) | N/A | $ | 473,536 | 8.94 | % | $ | 211,911 | $ | 457,568 | 8.71 | % | $ | 210,108 | |||||||||||||||||
Tier 1 capital to risk-weighted assets |
4.00 | % | 6.00 | % | 473,536 | 13.11 | % | 144,475 | 457,568 | 12.68 | % | 144,335 | ||||||||||||||||||||
Total capital to risk-weighted assets |
8.00 | % | 10.00 | % | 518,781 | 14.37 | % | 288,950 | 502,800 | 13.93 | % | 288,669 | ||||||||||||||||||||
WesBanco Bank, Inc. |
||||||||||||||||||||||||||||||||
Tier 1 leverage |
4.00 | % | 5.00 | % | $ | 425,917 | 8.07 | % | $ | 211,126 | $ | 417,241 | 7.97 | % | $ | 209,339 | ||||||||||||||||
Tier 1 capital to risk-weighted assets |
4.00 | % | 6.00 | % | 425,917 | 11.87 | % | 143,534 | 417,241 | 11.62 | % | 143,672 | ||||||||||||||||||||
Total capital to risk-weighted assets |
8.00 | % | 10.00 | % | 470,885 | 13.12 | % | 287,067 | 462,268 | 12.87 | % | 287,344 |
(1) | Minimum to remain adequately capitalized. |
(2) | Well capitalized under prompt corrective action regulations. |
(3) | Minimum requirement is 3% for certain highly-rated bank holding companies. |
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LIQUIDITY RISK
Liquidity is defined as a financial institutions capacity to meet its cash and collateral obligations at a reasonable cost. Liquidity risk is the risk that an institutions financial condition or overall safety and soundness is adversely affected by an inability, or perceived inability, to meet its obligations. An institutions obligations, and the funding sources to meet them, depend significantly on its business mix, balance sheet structure, and the cash flows of its on- and off-balance sheet obligations. Institutions confront various internal and external situations that can give rise to increased liquidity risk including funding mismatches, market constraints on funding sources, contingent liquidity events, changes in economic conditions, and exposure to credit, market, operation, legal and reputation risk. WesBanco actively manages liquidity risk through its ability to provide adequate funds to meet changes in loan demand, unexpected outflows in deposits and other borrowings as well as to take advantage of market opportunities and meet operating cash needs. This is accomplished by maintaining liquid assets in the form of securities, sufficient borrowing capacity and a stable core deposit base. Liquidity is centrally monitored by WesBancos Asset/Liability Committee (ALCO).
WesBanco determines the degree of required liquidity by the relationship of total holdings of liquid assets to the possible need for funds to meet unexpected deposit losses and/or loan demands. The ability to quickly convert assets to cash at a minimal loss is a primary function of WesBancos investment portfolio management. Federal funds sold and U.S. Treasury and government agency securities maturing within three months are classified as secondary reserve assets. These secondary reserve assets, combined with the cash flow from the loan portfolio and the remaining sectors of the investment portfolio, and other sources, adequately meet the liquidity requirements of WesBanco.
Securities are the principal source of short-term liquidity for WesBanco. Securities totaled $1.6 billion at June 30, 2012, of which $1.0 billion were classified as available-for-sale, including net unrealized pretax gains of $17.8 million. The remaining securities were classified as held-to-maturity. At June 30, 2012, WesBanco had securities with a par value of approximately $12.3 million scheduled to mature within one year; however, additional cash flows may be anticipated from approximately $100.8 million in callable bonds which have call dates within the next year, from projected prepayments on mortgage-backed securities and collateralized mortgage obligations of approximately $146.3 million based on current prepayment speeds, from loans held for sale totaling $7.3 million, from accruing loans scheduled to mature within the next year of $512.0 million and from normal loan repayments anticipated to be $676.6 million within the next year. At June 30, 2012, WesBanco had $102.8 million of cash and cash equivalents, which serves as operating cash for the branches and an additional source of liquidity. Sources of liquidity within the next year listed above approximate $1.6 billion at June 30, 2012.
Deposit flows are another principal factor affecting overall WesBanco liquidity. Deposits totaled $4.4 billion at June 30, 2012. Deposit flows are impacted by current interest rates, products and rates offered by WesBanco versus various forms of competition, as well as customer behavior. Certificates of deposit scheduled to mature within one year totaled $660.4 million at June 30, 2012 which includes jumbo regular certificates of deposit totaling $182.5 million with a weighted-average cost of 1.03% and jumbo CDARS© deposits of $96.1 million with a cost of 1.11%. In addition to the historically relatively stable core deposit base, WesBanco maintains a line of credit with the FHLB as an additional funding source. Available lines of credit with the FHLB at June 30, 2012 approximated $1.2 billion, compared to $1.0 billion at December 31, 2011. At June 30, 2012, the Bank had unpledged available-for-sale securities with an amortized cost of $534.2 million, a portion of which is an available liquidity source, or could be pledged to secure additional FHLB borrowings. In addition, WesBanco participates in the Federal Reserve Banks Borrower-in-Custody Program (BIC) whereby WesBanco pledges certain consumer loans as collateral for borrowings. At June 30, 2012, WesBanco had a BIC line of credit totaling $145.9 million, none of which was outstanding. Alternative funding sources may include the utilization of existing overnight lines of credit with third party banks totaling $165.0 million, none of which was outstanding at June 30, 2012, along with seeking other lines of credit, borrowings under repurchase agreement lines, increasing deposit rates to attract additional funds, accessing brokered deposits, or selling securities available-for-sale or certain types of loans.
Other short-term borrowings of $191.3 million at June 30, 2012 consisted of callable repurchase agreements and several overnight sweep checking accounts for large commercial customers. There has not been a significant fluctuation in the average deposit balance of these overnight sweep checking accounts during 2012. The repurchase agreements require securities to be pledged equal to or greater than the instruments purchase price and may be called within the next year. The overnight sweep checking accounts require securities to be pledged equal to or greater than the deposit balance. During 2011, new regulatory guidelines permitted, for the first time, the payment of interest on certain corporate checking accounts. These regulations did not significantly impact sweep account and related deposit account balances.
The FHLB requires securities to be specifically pledged to the FHLB and maintained in a FHLB approved custodial arrangement if the member wishes to include such securities in the maximum borrowings capacity calculation. WesBanco has elected not to specifically pledge to the FHLB otherwise unpledged securities. To increase its remaining capacity, WesBanco can at any time decide to pledge a portion of its unpledged securities to the FHLB.
The principal sources of parent company liquidity are dividends from the Bank, $34.4 million in cash and investments on hand, and a $25 million revolving line of credit with another bank, which did not have an outstanding balance at June 30, 2012. This line matures at the end of July and is currently in the process of being renewed. WesBanco is in compliance with all loan covenants. There are various legal limitations under federal and state laws that limit the payment of dividends from the Bank to the parent company. As of June 30, 2012, under FDIC and State of West Virginia regulations, WesBanco could receive, without prior regulatory approval, dividends of approximately $22.6 million from the Bank.
At June 30, 2012, WesBanco had outstanding commitments to extend credit in the ordinary course of business approximating $958.1 million, compared to $847.4 million at December 31, 2011. On a historical basis, only a small portion of these commitments will result in an outflow of funds. Please refer to Note 8, Commitments and Contingent Liabilities, of the Consolidated Financial Statements and the Loans and Credit Risk section of this MD&A for additional information.
Federal financial regulatory agencies issued guidance in 2010 to provide sound practices for managing funding and liquidity risk and strengthening liquidity risk management practices. The guidance recommends that financial institutions maintain a comprehensive management process for identifying, measuring, monitoring, and controlling liquidity risk and that liquidity risk management be fully integrated into its risk
42
management process. WesBanco has completed the implementation of these policies, and management believes WesBanco has sufficient current liquidity to meet current obligations to borrowers, depositors and others as of June 30, 2012 and that WesBancos current liquidity risk management policies and procedures adequately address the recently issued guidance.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosures set forth in this item are qualified by the section captioned Forward-Looking Statements included in Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations, of this report.
MARKET RISK
The primary objective of WesBancos ALCO is to maximize net interest income within established policy parameters. This objective is accomplished through the management of balance sheet composition, market risk exposures arising from changing economic conditions and liquidity risk.
Market risk is defined as the risk of loss due to adverse changes in the fair value of financial instruments resulting from fluctuations in interest rates and equity prices. Management considers interest rate risk to be WesBancos most significant market risk. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. The relative consistency of WesBancos net interest income is largely dependent on effective management of interest rate risk. As interest rates change in the market, rates earned on interest rate sensitive assets and rates paid on interest rate sensitive liabilities do not necessarily move concurrently. Differing rate sensitivities may arise because fixed rate assets and liabilities may not have the same maturities, or because variable rate assets and liabilities differ in the timing and/or the percentage of rate changes.
WesBancos ALCO, comprised of senior management from various functional areas, monitors and manages interest rate risk within Board approved policy limits. Interest rate risk is monitored primarily through the use of an earnings simulation model. The model is highly dependent on various assumptions, which change regularly as the balance sheet and market interest rates change. The key assumptions and strategies employed are analyzed bi-monthly and reviewed and documented by the ALCO.
The earnings simulation model projects changes in net interest income resulting from the effect of changes in interest rates. Forecasting changes in net interest income requires management to make certain assumptions regarding loan and security prepayment rates, bond call dates, and adjustments to non-maturing deposit rates, which may not necessarily reflect the manner in which actual yields and costs respond to changes in market interest rates. Assumptions used are based primarily on historical experience and current market rates. Security portfolio maturities and prepayments are assumed to be reinvested in similar instruments and callable bond forecasts are adjusted at varying levels of interest rates. While management believes such assumptions to be reasonable, there can be no assurance that assumed prepayment rates, callable bond forecasts and non-maturing deposit rates will approximate actual future results. Moreover, the net interest income sensitivity chart presented in Table 1, Net Interest Income Sensitivity, assumes the composition of interest sensitive assets and liabilities existing at the beginning of the period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve, regardless of the duration of the maturity or re-pricing of specific assets and liabilities. Since the assumptions used in the model relative to changes in interest rates are uncertain, the simulation analysis may not be indicative of actual results. In addition, the analysis may not consider all actions that management could employ in response to changes in interest rates and various earning asset and costing liability balances.
Management is aware of the significant effect inflation or deflation has upon interest rates and ultimately upon financial performance. WesBancos ability to cope with inflation or deflation is best determined by analyzing its capability to respond to changing market interest rates, as well as its ability to manage the various elements of non-interest income and expense during periods of increasing or decreasing inflation or deflation. WesBanco monitors the level and mix of interest-rate sensitive assets and liabilities through ALCO in order to reduce the impact of inflation or deflation on net interest income. Management also controls the effects of inflation or deflation by conducting periodic reviews of the prices and terms of its various products and services, both in terms of the costs to offer the services as well as outside market influences upon such pricing, by introducing new products and services or reducing the availability of existing products and services, and by controlling overhead expenses.
Interest rate risk policy limits are determined by measuring the anticipated change in net interest income over a twelve month period assuming an immediate and sustained 100 and 200 basis point increase or decrease in market interest rates compared to a stable rate environment or base model. WesBancos current policy limits this exposure to a reduction of 5.0% and 12.5% or less, respectively, of net interest income from the base model over a twelve month period. The table below shows WesBancos interest rate sensitivity at June 30, 2012 and December 31, 2011 assuming both a 100 and 200 basis point interest rate change, compared to a base model. Due to the current low interest rate environment, particularly for short-term rates, the 200 basis point decreasing change is not calculated, and instead a 300 basis point rising rate environment is shown. The policy limit for an increasing 300 basis point rising rate environment is a negative 25%.
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TABLE 1. NET INTEREST INCOME SENSITIVITY
Immediate Change in Interest Rates (basis points) |
Percentage Change in | ALCO Guidelines |
||||||
Net Interest Income from Base over One Year | ||||||||
June 30, 2012 | December 31, 2011 | |||||||
+300 |
(0.5%) | 0.5% | - 25 | % | ||||
+200 |
0.3% | 1.3% | - 12.5 | % | ||||
+100 |
0.6% | 1.7% | - 5 | % | ||||
-100 |
(3.9%) | (3.5%) | - 5 | % |
As per the table above, the earnings simulation model at June 30, 2012 currently projects that net interest income for the next twelve month period would decrease by 3.9% if interest rates were to fall immediately by 100 basis points, compared to a decrease of 3.5% for the same scenario as of December 31, 2011.
For rising rate scenarios, net interest income would increase by 0.6% and 0.3%, and decrease by 0.5% if rates increased by 100, 200 and 300 basis points, respectively, as of June 30, 2012 compared to increases of 1.7%, 1.3% and 0.5% in a 100, 200 and 300 basis point increasing rate environment as of December 31, 2011.
The balance sheet is slightly less asset sensitive as of June 30, 2012, compared to December 31, 2011 due to slight duration extension as well as higher average balances in the investment portfolio, and continued changes in the deposit mix and the overall level and term of short-term borrowings. Should rates rise more rapidly and by a higher amount, which is not currently anticipated in the short term, the asset sensitivity may be somewhat neutralized due to slower anticipated prepayment speeds and extension risk associated with residential mortgages and mortgage-backed securities. In addition, variable rate commercial loans with rate floors approximated $974.1 million at June 30, 2012, which represented approximately 46% of commercial loans, with an average floor of 4.83%. In the current flat to decreasing interest rate environment, WesBanco expects that the net interest margin may be somewhat negatively impacted through the remainder of 2012 and into 2013, as short term interest rates are not anticipated to increase until later in 2014, and loan runoff and investment security maturities are necessarily reinvested at lower rates. Partially offsetting those negative factors are maturities of higher-cost borrowings and certificates of deposit scheduled over the next year, which should assist somewhat in mitigating margin compression from loan yield decreases and investment security reinvestments. The bank continues to experience pricing competition for new quality loans which may also result in reduced loan spreads that management hopes to offset with loan growth.
The Bank has significant additional borrowing capacity with the FHLB of Pittsburgh, the Federal Reserve Bank of Cleveland, and various correspondent banks, and may utilize these funding sources as necessary to mitigate the impact on our balance sheet of embedded options in commercial and residential loans and to lengthen liabilities to help offset mismatches in various asset maturities, as well as to manage short term cash needs. CDARS© deposits also continue to be used to lengthen maturities in certificates of deposit.
Current balance sheet strategies to reduce the impact of decreasing margins in a low rate environment, where asset yields continue to reduce as reinvestment of cash flows occur and liability costs are not able to be reduced in the same proportion, include:
| increasing fixed rate loans; primarily commercial and residential; |
| investing non-essential available short-term liquidity; |
| marketing programs to increase the mix of certain types of transaction accounts versus short-term certificates of deposit; |
| reinvestment of securities cash flows into a mix of short to intermediate term collateralized mortgage obligations and 10-15 year state and municipal securities; |
| paying down maturities of FHLB and other short-term borrowings with available cash, or re-borrowing at lower rates; and |
| extending deposits through the CDARS© program. |
As an alternative to the immediate rate shock analysis, the ALCO monitors interest rate risk by ramping or increasing interest rates 200 basis points gradually over a twelve month period. WesBancos current policy limits this exposure to 5.0% of net interest income from the base model for a twelve month period. Management believes that the ramping analysis reflects a more realistic movement of interest rates, whereas the immediate rate shock reflects a less likely scenario. The simulation model at June 30, 2012, using the 200 basis point increasing rate ramp analysis, projects that net interest income would increase 0.6% over the next twelve months, compared to a 2.0% increase at December 31, 2011. This lower rate of increase has been impacted by similar factors to those noted above.
WesBanco also periodically measures the economic value of equity, which is defined as the market value of tangible equity in various increasing and decreasing rate scenarios. At June 30, 2012, the market value of tangible equity as a percent of base in a 200 basis point rising rate environment indicates an increase of 10.3% compared to an increase of 12.4% at December 31, 2011. In a 100 basis point falling rate environment, the model indicates an increase of 9.5%, compared to an increase of 5.3% as of December 31, 2011. WesBancos policy is to limit such change to minus 25% for a 200 basis point change in interest rates, as long as the Tier 1 leverage capital ratio is not forecasted to decrease below 5.0% as a result of the change. Duration extension strategies in loan and securities portfolios, continued maturities of borrowings and certificates of deposit, and adding more transaction-type deposits has resulted in the reduction in equity market value. In a rising rate environment, non-interest bearing deposits and other low cost transaction accounts are worth more than in the current low interest rate environment or if rates were to drop by 100 basis points. For liabilities, this equates to a below cost fair market value as rates rise, which results in increased equity fair value.
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ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES WesBancos Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have concluded that WesBancos disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), based on their evaluation of these controls and procedures as of the end of the period covered by this Form 10-Q, are effective at the reasonable assurance level as discussed below to ensure that information required to be disclosed by WesBanco in the reports it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to WesBancos management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS WesBancos management, including the CEO and CFO, does not expect that WesBancos disclosure controls and internal controls will prevent all errors and all fraud. While WesBancos disclosure controls and procedures are designed to provide reasonable assurance of achieving their objective, no control system, no matter how well conceived and operated, can provide absolute assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.
CHANGES IN INTERNAL CONTROLS There were no changes in WesBancos internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2012 as required to be reported by paragraph (d) of Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, that materially affected, or are reasonably likely to materially affect, WesBancos internal control over financial reporting.
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WesBanco is involved in lawsuits, claims, investigations and proceedings which arise in the ordinary course of business. There are no such matters pending that WesBanco expects to be material in relation to its business, financial condition or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As of June 30, 2012, WesBanco had a current stock repurchase plan in which up to one million shares can be acquired. The plan was originally approved by the Board of Directors on March 21, 2007 and provides for shares to be repurchased for general corporate purposes, which may include a subsequent resource for potential acquisitions, shareholder dividend reinvestment and employee benefit plans. The timing, price and quantity of purchases are at the discretion of WesBanco, and the plan may be discontinued or suspended at any time. There were no repurchases during the second quarter of 2012, other than those for the KSOP and dividend reinvestment plans and repurchases from employees for the payment of withholding taxes to facilitate the vesting of restricted stock.
The following table presents the monthly share purchase activity during the quarter ended June 30, 2012:
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans |
Maximum Number of Shares that May Yet Be Purchased Under the Plans |
||||||||||||
Balance at March 31, 2012 |
583,832 | |||||||||||||||
April 1, 2012 to April 30, 2012 |
||||||||||||||||
Open market repurchases |
| | | 583,832 | ||||||||||||
Other transactions (1) |
23,824 | $ | 20.20 | N/A | N/A | |||||||||||
May 1, 2012 to May 31, 2012 |
||||||||||||||||
Open market repurchases |
| | | 583,832 | ||||||||||||
Other transactions (1) |
5,073 | $ | 20.24 | N/A | N/A | |||||||||||
June 1, 2012 to June 30, 2012 |
||||||||||||||||
Open market repurchases |
| | | 583,832 | ||||||||||||
Other repurchases (2) |
3,095 | $ | 19.88 | 3,095 | 580,737 | |||||||||||
Other transactions (1) |
2,199 | 20.48 | N/A | N/A | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Second Quarter 2012 |
||||||||||||||||
Open market repurchases |
| | | 583,832 | ||||||||||||
Other repurchases (2) |
3,095 | $ | 19.88 | 3,095 | 580,737 | |||||||||||
Other transactions (1) |
31,096 | 20.22 | N/A | N/A | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
34,191 | $ | 20.19 | 3,095 | 580,737 | |||||||||||
|
|
|
|
|
|
|
|
(1) | Consists of open market purchases transacted in the KSOP and dividend reinvestment plans. |
(2) | Consists of repurchases from employees for the payment of withholding taxes to facilitate the vesting of restricted stock. |
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31.1 | Certification of Chief Executive Officer of Periodic Report Pursuant to Rule 13a-15(e) or Rule 15d-15(e). | |
31.2 | Certification of Chief Financial Officer of Periodic Report Pursuant to Rule 13a-15(e) or Rule 15d-15(e). | |
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | The following materials from WesBancos Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets at June 30, 2012 and December 31, 2011, (ii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011, (iii) the Consolidated Statements of Changes in Shareholders Equity for the six months ended June 30, 2012 and 2011, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011, and (v) the Notes to Consolidated Financial Statements.* |
* | Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WESBANCO, INC. | ||||
Date: July 26, 2012 | /s/ Paul M. Limbert | |||
Paul M. Limbert | ||||
President and Chief Executive Officer (Principal Executive Officer) | ||||
Date: July 26, 2012 | /s/ Robert H. Young | |||
Robert H. Young | ||||
Executive Vice President and Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) |
48