WesBanco Inc (WSBCP) 2012 Q1 法說會逐字稿

Good morning and welcome to WesBanco's conference call. My name is Denise, and I will be your conference facilitator today. Today's call will cover WesBanco's discussion of results of operations for the quarter ended March 31, 2012.

Please be advised all lines have been placed on mute to prevent any background noise. (Operator Instructions). This call is also being recorded. If you object to the recording please disconnect at this time.

Forward-looking statements in this presentation relating to WesBanco's 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 herein should be read in conjunction with WesBanco's 2011 Annual Report on Form 10-K, which is available on the SEC's website, www.SEC.gov, or at WesBanco's website, www.WesBanco.com.

Investors are cautioned that forward-looking statements which are not historical fact involve risks and uncertainties, including those detailed in WesBanco's 2011 Annual Report on Form 10-K filed with the SEC under the section Risk Factors in Part 1, Item 1A.

Such statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements. WesBanco does not assume any duty to update any forward-looking statements.

WesBanco's first-quarter 2012 earnings release was issued yesterday evening and is available at www.WesBanco.com. This call will include about 15 to 20 minutes of prepared commentary followed by a question-and-answer period, which I will facilitate. An archived webcast of this call will be available at WesBanco.com.

WesBanco's participants in today's call will be Paul Limbert, President and Chief Executive Officer; Jim Gardill, Chairman of the Board; and Robert Young, Executive Vice President and Chief Financial Officer, and all will be available for questions following opening statements. Mr. Limbert, you may begin your conference.

Thank you, Denise. Good morning. Thank you for participating in WesBanco's first-quarter earnings conference call. We are pleased to be able to provide this information to all interested parties.

I would like to make some opening comments. Bob Young will provide financial highlights of the first quarter, and then Jim Gardill will moderate the question-and-answer period.

A press release detailing the results of the first quarter was issued last evening. A copy of the entire press release is available on our website. We will assume that all participants know the basics about WesBanco and we will therefore move to our discussion of the quarterly results.

First-quarter earnings per share increased to $0.45, a 15.4% increase over the prior year's $0.39 per share. Net income increased to $12 million from $10.2 million for the respective periods. Our return on average assets for the first quarter 2012 was 87 basis points and the return on the average tangible equity was 13.9%.

During the quarter we increased dividends to our shareholders by $0.01 per quarter, an increase to 6%.

During the past five quarters, we've increased our dividend by 21%. WesBanco had an excellent first quarter. We were pleased with our operating results. We have no unusual items in this first quarter. Our pretax pre-provision ROA increased slightly to 1.68%. Many of the 2011 initiatives which we've worked on during the past year are resulting in the improved operating performance.

Net revenues grew in each of the last two years and also the first quarter of 2012. Our continued efforts to restructure our balance sheet contributed to our revenue growth. Revenue-enhancing initiatives in lending and fee income-generating activities have led to the recent revenue growth.

One of the initiatives which contributed to the revenue growth was a significant increase in loan originations. Loan originations grew by approximately 60% due to the addition of some new lenders in our markets, along with being able to reduce our time spent managing classified and criticized loans and then focusing more on production. Initiatives during 2011 to improve fee income were also successful.

Electronic banking fees increased by 21% through a concerted expansion of debit card access and usage, which more than offset the decline in overdraft fee income.

Our efforts to control expenses are continuing to be successful. Other expenses are basically flat compared to the prior year. We have been able to reduce other operating expense in each of the last two years. After our history of reducing expenses, we feel good about maintaining flat expenses for the current year.

We've also seen results from our efforts to establish a private banking team, which coordinates the delivery of special products. Coordinating delivery of our wealth management products and our securities division products is now providing a more efficient distribution system along with additional customer activity. Initiatives which improve services to our customers include mobile banking, remote deposit capture, and improved Internet security options for our customers. Each of these initiatives, while improving customer products are also enhancing our internal efficiencies by allowing us to process electronic, rather than paper, transactions.

We are continuing to see deposit growth. We have seen 6% deposit growth since March 2011. This growth is organic and can be attributed to our marketing efforts and our ability to attract deposits related to the Marcellus/Utica Shale activities.

We continue to see high levels of gas exploration in our primary market areas. We see opportunities for our traditional banking products, but also for our wealth management and securities functions due to this gas exploration activities.

Loan growth has been difficult. Our loan originations again have increased by approximately 60% and our pipelines of pending loans are continuing to improve. We are maintaining our credit underwriting and pricing standards. As the industry learned during the recent recession, relaxing underwriting standards to originate more loans is not a long-term winning strategy. We are maintaining our underwriting and pricing standards at a time when we see many of our competitors relaxing their standards to originate loans.

As a reference to what I had stated earlier, we have been able to grow net interest income in each of the past two years, while maintaining our underwriting and pricing standards.

Would also like to draw your attention to the decline in our total criticized and classified loans. We have decreased these loans by 23% since last March. We have used a significant amount of personnel time and effort to reduce criticized and classified loans.

Nonperforming loans have decreased by 17%. Our coverage ratios for both nonperforming loans and criticized loans continue to improve and our at the highest levels in the past five quarters.

Our efforts to reduce these types of assets will continue during 2012. I would like Bob Young, our CFO, to discuss with you in more detail the financial results of the first quarter.

Good morning. The first quarter of 2012 produced a 17% increase in net income due to improved credit quality, higher net revenues and flat operating expenses. Earnings per share were up 15.4% to $0.45, which exceeded our consensus analyst estimate by $0.05.

Earnings strength allowed our board to approve another increase in the dividend rate to $0.17 from $0.16 in the prior quarter and $0.15 last year at this time, which amounts, as Paul said, to an overall 21% increase.

Moving to detailed performance metrics, net interest income increased $400,000 or 0.9% for the quarter even though the net interest margin decreased 10 basis points. Cost of funds decreased from 1.44% to 1.14% for the quarter, with interest-bearing deposits dropping below 1% for the first time to 92 basis points, while our successful remix away from CDs to transaction accounts continued.

Asset yields dropped 38 basis points, partially as investment securities matured and were replaced, but also due to newer loans being booked at lower rates. This is due to the continued low interest rate environment and accelerating competition for good-quality credits that we are experiencing in our markets.

A slight change in total mix would securities comprising 30% of total assets compared to 27% last year also had some influence on total asset yields.

On a positive note the margin actually grew 1 basis point from the fourth quarter as we were successful in matching declining asset yields with deposit rate decreases.

Turning to non-interest income, it was up a strong 5.6% from last year's first quarter as electronic banking fees were up 21% and real estate owned gains and losses improved by $600,000.

Service charges on deposits decreased 5%, primarily due to higher customer balances and other seasonal factors. Trustees were relatively flat as most of the equity markets' increase came towards the end of the quarter, but trust assets grew 6.4%, which should provide future fees over the next year.

Other income was up 22% due to stronger insurance services revenues, improved market valuation on deferred compensation and higher mortgage servicing income.

Net gains on mortgage loan sales decreased as more loans were held on the balance sheet.

Non-interest expense was only up 0.5% over the last year as management control of many expense categories helped keep total expenses under control, which resulted in improved operating leverage.

Salaries and benefits were up a combined 6% due to normal pay increases on a relatively flat full-time equivalent employee count, higher incentive and deferred compensation and higher pension costs.

Net occupancy and equipment expenses were down a combined 5.2% as seasonal maintenance expenses and certain contract expenses were lower, while intangible asset amortization decreased 13%, and FDIC insurance was down almost 37% due to a lower assessment schedule.

Our marketing expenses experienced lower campaign costs during the first quarter, although we do expect more normalized marketing costs as we proceed through the year.

Turning now to the balance sheet, total assets were up 4.3% from last year as higher levels of investment securities were funded by a 6.2% increase in total deposits, net of a 16.2% reduction in borrowings.

Overall, the securities portfolio, which yields a tax equivalent 3.37%, had unrealized pretax net security gains of approximately $49 million or 3% of total securities at quarter end as compared to $6 million last year at this time.

About $19 million of those gains on a pretax basis are accounted for in shareholders' equity in the category, other comprehensive income.

Given the low interest rate environment we expect for the foreseeable future we have somewhat extended duration, mostly in a combination of longer-term tax exempts and shorter CMO structures. To limit risk to capital longer-term structures are primarily in the held-to-maturity bucket.

Total deposits were up 1.8% from year end and 6.2% from last March as we have successfully shifted deposits away from term CDs to checking and savings accounts. Demand and interest-bearing demand deposits are up a combined 18% over the last year, while money market and savings accounts are up about 10%.

Low-cost transaction accounts now comprise 65% of total deposits as compared to 61% last year. Cost of interest-bearing deposits dropped to 92 basis points at quarter end from 1.20% last year. In addition, the average balance for federal home loan bank borrowings, which cost 3.38%, dropped some 32% over the last year, and now total wholesale borrowings represent just 6.6% of total average assets.

Noninterest bearing deposit balances have increased almost 23% since last March as a result of retail marketing campaigns and customer incentives as well as increased balances from the bank's business and treasury management customers.

As Paul mentioned, growth continues from the important Marcellus and Utica Shale gas regions in northern West Virginia, southwestern PA, and eastern Ohio, with tracked deposits totaling over $50 million so far this year from bonus and royalty payments that our customers have received, on top of the $125 million we discussed in our call earlier this year.

Total loans were relatively flat from last March as residential mortgage loans grew 6.8% and commercial loans were down 3.8%. Mortgage loan originations were up 90% over last year at this time with approximately 70% of new production booked in our loan portfolio versus 48% last year, as management decided to retain more high-quality loans for our portfolio at the start of 2011.

Commercial loan levels dropped due to the sale of impaired loans and exit strategies developed for certain classified and criticized credits. However, on average they were up 0.4% from the fourth quarter.

Several larger loan payoffs, mostly due to owner's property sales or loan refinancing at lower spreads in conduit and REIT markets, have also held down loan outstandings somewhat, despite the aforementioned higher commercial loan volumes.

Our customers have also reduced commercial line usage somewhat as 43% of approved lines were outstanding at quarter end as compared to 48% this time last year.

The good news is, the total commercial and industrial lines of credit have increased approximately 20% in total since last March. Also, total commercial loan production improved 57% for the quarter over the first quarter of 2011 and commitments are up year over year.

Construction loans have increased 19% in the past year, mostly in the commercial and multi-family construction project areas. Most of the higher commercial demand is experienced or has been experienced in our central Ohio and western Pennsylvania markets, as well as our core north central and northern panhandle west Virginia markets.

Year-end pipeline increases resulted in strong first-quarter production, and we continue to be optimistic about growth for the remainder of 2012 as we are seeing more opportunities for high-quality loans in the current improving economy.

Moving now to credit quality, total nonperforming loans and classified and criticized loans continue to decrease. Total nonperforming assets dropped 17.3% from last March as total of $102 million, now down to $84 million, representing 2.61% of total loans, which is also down from last year's 3.13%.

The overall reduction in nonperforming assets was primarily due to a 2011 sale of impaired loans, representing an aggregate book value of $17 million.

From yearend, nonperforming assets were down almost $6 million or 6.4%. Total 30-day or more past due loans to total loans were down from 84 basis points last year to 57 basis points at March 31, 2012. In addition, total classified and criticized loans declined by 23.5% to $237 million from last year's $310 million, and they are down some $21 million or 8% from year end.

Net charge-offs to average loans were 82 basis points annualized for the first quarter or $6.6 million below last year's first-quarter level of 1.03% or $8.3 million. And that also compares to the 2011 full-year level of 1.3%.

Actions taken last year to sell nonperforming loans and reduce REO as well as the orderly exit of other lower-quality loans are now paying off in early 2012 with lower net charge-offs, lower delinquencies, and lower nonperforming and classified credits.

Overall, the provision for credit losses decreased from $8 million last year in the first to $6.2 million this quarter. The allowance represents 1.69% of total loans at both March 31 and December 31, which covers 67% of nonperforming loans, the highest level in the last five quarters.

In conclusion, we are pleased with the operating results for this quarter. Higher operating leverage, controlled operating expenses and significant improvements to our credit quality led to the higher net income. While the industry will continue to experience some net interest margin compression in the current low interest rate environment, a factor that will affect us as well, we are hopeful that loan growth will improve throughout the year.

Enhanced managed assets in our wealth management group, which now encompasses securities brokerage as well as the new private banking initiative, should also help improve fee income.

Increasing balance sheet liquidity and overall capital strength enhances our ability to serve our customers and shareholders effectively as we move through 2012 and take advantage of an improving regional and national economy.

This does conclude our prepared commentary, and we'll now open the call for questions.

Jim Gardill, our Chairman of the Board, will moderate the Q&A session, and we will turn this call back over to Denise, our facilitator, for questions.

(Operator Instructions). Catherine Mealor, KBW.

First, on the securities yields, Bob, can you talk a little bit about what securities you're adding to the portfolio as you reinvest the cash flow and maybe what their average yield is? Just trying to get a sense as to how low we could see the securities yield fall over the next year. Thanks.

Sure, Catherine. Thank you for joining us this morning. We have been primarily purchasing CMO's in this lower interest rate environment. They typically have durations around three years.

They are typically initial payout structures, short payout structures, and in addition, to a lesser degree, tax exempt bonds, maturities typically between 10 and 15 years. Those are typically in the held-to-maturity bucket.

The securities being purchased -- the CMO's, are typically yielding between 1.85 and 2.25. And on a tax equivalent basis we're still getting over 4 on our tax-exempt bond purchases.

But there is a lot of cash flow. Over $350 million is expected over the next year, so clearly, that portfolio will ratchet down a few more basis points.

Okay. Thanks very much for the car color. And one just follow-up on the fee line, the other income was up a lot, linked quarter and year over year. What's driving that? Do you have electronic banking fees and a gain on the sale of OREO in that number?

No; they are separately broken out, Catherine. What is improving or was in the first quarter was insurance services revenue. Also, merchant services fees and a deferred compensation adjustment that's impacted by the equity markets.

Catherine, part of that electronic banking fee growth has been an emphasis in marketing over the last two years of driving more access to cards and encouraging more use of debit cards, which has grown revenue because of transaction increases.

Great. Okay. Thank you very much. Congrats on a really good quarter.

(Operator Instructions). Showing no questions in the queue, this will conclude our -- oh, we do have a question from Carter Bundy, Stifel Nicolaus.

Good morning, everyone. Could you talk a little bit about your expectations for the personnel run rate going forward?

You know we've been working on that for the last two years. And I think what we'll see with the lower interest rate environment, pension increase -- pension cost increase, but the personnel we continue to work down. And I'll let Paul speak to that because it's been an initiative of maintaining the number of employees and reducing them through efficiencies in technology and other initiatives. Paul?

Carter, I would answer this two ways. In the short term for the next quarter, we always hire a number of summer temporary help, so you will see the number spike here at June, just, but that is the summer help hires.

You will see from our history that our FTEs do spike in the summer months. So don't get too terribly excited about that number.

But in the longer run we do have a number of initiatives that we have planned for 2012 and 2013 that are going to help us continue to maintain or reduce our headcounts, our FTEs, within our organization.

We do have some relatively specific plans. And I would anticipate we would have good control over our FTE counts and our salaries and wages moving forward.

Yes, it will take me a second here to find it. I think it was about $150,000. But you have to understand that that is also offset in the employee benefits category, so it's a bottom-line neutral number. It's just the accounting for deferred compensation requires trading securities to be accounted for in fee income. And then since it is an employee benefit it goes into that category as well.

Okay. And then moving on to the funding side, your deposit costs, particularly on the CD side, have remained very, very elevated. Has that been more of a deliberate strategy, or is that something that's more of a duration issue? And how do you think about that going forward given the pressure that we would expect on the earning asset side?

Well, I guess I might answer that in two ways. On the liability side of our balance sheet, the expense of borrowings that we have is the Federal Home Loan Bank, and can't do too much with those unless we prepay. Those are some embedded costs of borrowings that we initiated a number of years ago at whatever interest rates were available at the time, and they are continuing with us. And as certain of our federal home loan bank borrowings mature, it's in effect not changing the average interest rate that we're paying on our borrowings. So, we're not seeing too much relief because a lot of those borrowings were done generally around the same time a number of years ago. Think on the deposit side, though, we are seeing some nice decreases in our costs of deposits themselves. I think you are seeing, if you break those numbers out separately, you will see a nice improvement in the cost of our retail deposits.

If I (multiple speakers)

Okay. And then just on the CD side, Paul, any more -- given the strong deposit inflows anymore thoughts on being more aggressive on lowering the CD cost portfolio?

I would just simply say we are continuing to look at it constantly.

Okay. And then final question and I'll hop off. On the borrowings, could you remind me, Bob, what you have maturing this year? I know you've got a $50 million advance coming due, I believe in 1Q '13, and I think there's another $25 million or so in mid-2012?

Yes. And there was $20 million that came off this quarter, although it was a relatively low rate. The more expensive borrowings come off in August. There is $50 million that comes off in the mid-3's. And there's another $50 million tranche that's not Federal Home Loan Bank but repo related; it comes off in the fourth quarter, mid fourth quarter and that is in the low 4's. And then finally, there is $50 million coming off again in mid to high 3's in February of next year. So, we'll have substantially reduced our total borrowings by another $150 million between now and the end of the next first quarter.

All right. Thank you all very much.

(Operator Instructions). And I am showing no additional questions at this time. I'd like to turn the conference back over to Mr. Gardill for any closing comments.

Thank you very much, Denise.

First of all, I'd just like to thank everybody for participating today. We appreciate your time and interest in WesBanco.

You know, we are pleased with the quarterly results, stronger revenue, improving credit quality metrics and lower net charge offs, we believe are all positive, and it reflects a great start to the year. So, thanks again. We appreciate your time and, thanks, Denise, for your help.

Thank you, sir. Ladies and gentlemen, the conference has now concluded. You may now disconnect your lines. Thank you for attending today's presentation.