WesBanco Inc (WSBCP) 2012 Q2 法說會逐字稿

Good morning, and welcome to the WesBanco's conference call. My name is Emily and I will be your conference facilitator today. Today's call will cover WesBanco's discussion and results of operations for the quarter ended June 30, 2012.

Please be advised all lines have been placed on mute to prevent any background noise. have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (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 and documents subsequently filed by WesBanco with the Securities and Exchange Commission, including WesBanco's Form 10-Q for the quarter ended March 31, 2012, which are 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 facts 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 second-quarter 2012 earnings release was issued yesterday evening and is available at www.wesbanco.com. This call will include about 20 to 30 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 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, Emily. Good morning, all. Thank you for participating in WesBanco's second-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 second quarter, and then Jim Gardill will moderate the question-and-answer period.

A press release detailing the results of second-quarter earnings 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.

WesBanco had an excellent second-quarter. We were pleased with our operating results. Second-quarter earnings per share were $0.45, which represents a return on average assets of 87 basis points. Net income increased to $24 million, an 8.3% improvement for the six-month period ending June 30, '12, as compared to the same period in 2011.

Our return on average assets for the first six months of 2012 was also 87 basis points, and a return on average tangible equity was 13.8%. Our pre-tax, pre-provision return on average assets was 1.66%.

Many of the 2011 initiatives, which we worked on during the past year, are resulting in improved operating performance. Initiatives which have created improvements include continued efforts to restructure our balance sheet. The restructuring has contributed to net revenue growth over the past two years, and consistent results for the first six months of -- are consistent with the results of the first six months of 2011.

Loan balances grew 50-plus-million-dollars in the second quarter. Also important was loan originations, which grew by approximately 31%, due to the addition of new lenders in some of our markets, along with being able to focus more on production. Electronic banking fees increased by 18% in the first six months through a concerted expansion of debit card access and usage, which more than offset a decline in overdraft fee income.

An initiative to establish a private banking team which coordinates the delivery of special products has had early success. Coordinating delivery of our wealth management products, our securities division products, along with commercial and retail banking products, is now providing additional new customer activities for lending, deposit, and investment management functions.

Initiatives which improved services to our customers include mobile banking, remote deposit capture, and improved Internet security option 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. Our efforts to control expenses are continuing to be successful. Noninterest expenses increased only 1% compared to the prior year, after two years of decreases. Our history of reducing expenses, we feel good about maintaining flat expenses for the current year.

We are continuing to see deposit growth. We have seen 4% deposit growth since June 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 market areas. We see opportunities for our traditional banking products, but also for our wealth management and securities functions, due to the gas exploration activities.

Loan growth has been difficult, but loan originations remain strong. We've not seen loan growth since June 30 of 2011. However, during the second quarter of 2012, loans grew by 50-plus-million-dollars. Our loan originations have increased by approximately 30%, and our pipelines of pending loans are continuing to improve.

In previous quarters, loan paydowns and payoffs have offset our strong originations. 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 and reducing rates, simply to originate more loans.

We'd like to draw your attention to the continued decline in our nonperforming assets. Since last year, total nonperforming assets have declined by $31 million or 30%. In addition, we've seen even greater declines in criticized and classified loans. Criticized and classified loans declined each of the past four quarters by a total of $82 million or 27%. Declines in both of these classifications of loans are due to the efforts of our loan officers and special assets group, to work through and with these customers through the recession, as their businesses have improved, but also from charge-offs and loan sales during the past year.

Our efforts have resulted in a reduction of nonperforming loans to total loans to just over 2%. These improvements have allowed us to reduce the loan loss provision and provide for an anticipation of continued reductions.

Last week, WesBanco announced the execution of a definitive agreement to acquire Fidelity Bancorp. The details of the transaction have been previously announced. We are pleased to have the opportunity to expand in the Pittsburgh market with a well-managed, profitable company, whose culture to serve its customers matches WesBanco's culture. We believe the combination will be accretive to 2013 earnings per share, excluding merger-related expenses.

WesBanco has been lending in the Pittsburgh market for several years, and Fidelity's branch locations will enable us to improve our service levels to our existing customers. Our relative size and product mix will enable us to provide additional lending capacity and customer convenience to existing Fidelity customers.

Fidelity's 13 branches are strategically located in markets which are projecting population growth over the next five years. The greater Pittsburgh marketplace is attractive due to its size, economic diversity, lower unemployment, and its position in the gas shale areas. We are looking forward to increasing our market share in Pittsburgh.

I would like Bob Young, our CFO, to discuss with you the financial results of the second quarter.

Good morning. Thank you, Paul. Earnings per share of the second quarter were $0.45, the same as for the second quarter of 2011, and consistent with the first quarter of this year, continuing a high-quality, relatively consistent earnings stream, while improved credit quality drove a lower loan loss provision.

Continued control of operating expenses and increased noninterest income helped to offset a reduction in the margin, with the ongoing low interest rate environment affecting total net interest income. Year-to-date, earnings per share were up 8.4% to $0.90 versus $0.83 for the first six months of 2011, due primarily to sustained earnings and a lower provision for loan losses.

Moving to detailed performance metrics, net interest income decreased $1.2 million or 1.4% for the first six months, and $1.5 million or 3.5% for the quarter, as the net interest margin declined from 3.7% to 3.55% for the six-month period. While the cost of funds decreased 29 basis points from 1.40% to 1.11% for the six months, with interest-bearing deposits dropping to 88 basis points from 1.15% last year. Asset yields dropped 43 basis points over that same time period, as investment securities matured or paid down, and were replaced by lower yielding securities; but also due to the repricing of existing loans and newer loans being booked at lower rates.

The continued low interest rate environment and accelerating competition for good quality credits has affected loan and investment yields at a faster pace than deposit and funding costs have dropped. A slight change in total mix, with average securities comprising 33% of total earning assets, as compared to 30% for the first six months of last year, also had some influence on total asset yields.

On a positive note, the margin has been relatively stable over the past three quarters in a tight range of 3.53% to 3.57%, as we have been relatively successful in matching declining asset yields with deposit rate decreases. We also do have approximately $100 million of relatively expensive funding from the Federal Home Loan Bank and the repo market, maturing in the second half of this year at an average cost of 4.28%.0 That will help to prevent more significant erosion in the margin, due to the difficult and continuing-to-decrease core deposit costs that are approaching natural 0% floors.

Turning to noninterest income, it was up a strong 5.9% from last year's second quarter and 5.7% for the six months, due to some repositioning in the securities portfolio, which resulted in a six-month year-to-date gain of $1.4 million, and also as electronic banking fees were up 18.2% year-to-date, and losses associated with real estate owned improved by $600,000.

Service charges on deposits decreased 9.9%, primarily due to higher transaction account balances and lesser customer usage of overdraft-related products. Trustees were relatively level, but trust assets grew 3.4% over the past year, which should enhance future fee income streams. Other income was relatively unchanged, while net gains on mortgage loans sales decreased somewhat, as more mortgage loans were originated for the balance sheet as opposed to secondary market.

Total noninterest expense was only up 0.8% over the last year and 1.1% for the quarter, as continued management initiatives from many expense categories helped keep total expenses under control. Salaries were only up 2.4% year-to-date, due to stable full-time equivalents, despite several ongoing revenue initiatives that have resulted in adding sales staff to our commercial and residential lending units, securities brokerage, treasury management, and private banking, while employee benefits rose 12.1% due to higher pension and healthcare costs.

Net occupancy and equipment were relatively stable on a combined basis, as seasonal maintenance expenses in certain contract expenses were lower, offsetting slightly higher depreciation expense. Intangible asset amortization decreased 13.3%, and FDIC insurance was down 24.7% from a lower assessment schedule.

Marketing experienced higher checking, electronic banking, and consumer lending campaign expenses for the second quarter -- that had been planned -- resulting in a 4.5% increase over last year, but they were down 6% year-to-date. Other operating expenses were down for the quarter and year-to-date, due to prior-year customer fraud losses and lower current-period, real estate-owned expenses and postage expense.

Balance sheet. Now turning to the balance sheet. Total assets were up 1.8% from the last year and were consistent with year-end. A higher level of loans from year-end was funded by securities and cash and other available short-term liquidity sources. Deposits were relatively unchanged, and borrowings were down 8.7%, to now equaling just 6% of total assets.

Overall, the securities portfolio, yielding a tax equivalent 3.3%, had unrealized pre-tax net security gains of approximately $52 million or 3.3% of total securities at quarter-end. $17.8 million of those gains on a pre-tax gained basis are accounted for in shareholders equity.

Given the low interest rate environment that we expect for the foreseeable future, we have opportunistically extended duration more recently to four years from 3.9 last June, mostly in a combination of longer-term tax exempt bonds and short CMO structures. To limit risk to capital, longer-term structures are primarily in a held to maturity.

While deposits were unchanged from year-end, they were up 4.1% from last June, as we continue to shift deposits away from term CDs to checking and savings accounts. Transaction accounts are up almost $100 million since year-end, as CDs were down by a like amount. Average demand deposits are up 19% over the last year, and total transaction accounts are up 12% on average. Low-cost transaction accounts comprised 66% of total deposits at the end of the quarter, as compared to 61% last year at this time.

Non-interest-bearing deposits, as well as related electronic banking activity income, continue to grow as a result of increased balances from the Bank's business and treasury management customers, and from retail marketing campaigns and related customer incentives. Growth also continued from the important Marcellus and Utica shale gas regions in Northern West Virginia, Southwestern PA, and Eastern Ohio, with tracked deposits totaling approximately $100 million so far this year from bonus and royalty payments, on top of the $125 million recorded last year.

As Paul mentioned, total loans grew this quarter from both year-end and March 31 by $51 million or 1.6% from last quarter-end, and $38 million or 1.2% from year-end. Residential mortgage loans were up 6.6% from the end of the year, while commercial loans were flat. However, commercial loans were up from March 31 by 1.4%. Mortgage loan originations were up 82% over last year at this time, with approximately 71% of new production retained in our loan portfolio versus 47% last year at this time, as management continues to book a greater portion of 15-year or less maturity, primarily conforming loans for the portfolio.

Commercial loan levels improved, despite certain nonperforming loans sold in June and a reduction in total construction loans, as an improved pipeline for commercial real estate improved property, and production increases from Central Ohio, Northern West Virginia, and Western Pennsylvania, more than offset payoffs from properties sold or construction projects completed.

Our customers also continue to reduce their commercial line usage, as 43% of approved lines were outstanding at quarter-end as compared to 47% at December 31. Total commercial loan production improved to over $300 million year-to-date or 31% higher than last year, and period-end commitments are also up from year-end. Pipelines remain strong at June 30, which should translate into continued commercial loan growth in the second half of the year, assuming moderating loan payoffs.

Relative to credit quality, total nonperforming loans in classified and criticized loans continue to decrease. Total nonperforming assets dropped 30.4% from last June's total of $103.5 million to this quarter-end's $72 million, representing now 2.2% of total loans, down from last year's 3.17%. The overall reduction in nonperforming assets was primarily due to principal reductions and net charge-offs exceeding the migration of new loans into these categories, as well as loan sales in the third quarter of last year and the second quarter of this year, representing an aggregate book value of $22.3 million. Recall that $5.1 million was this quarter's sale.

From year-end, NPAs were down $17.9 million or 20%. Total 30-day-or-more past due loans to total loans were down from 79 basis points last year to 57 basis points at June 30. In addition, total classified and criticized loans declined by 27% to $223 million from last year's $306 million, and they're also down $35 million or 13.5% from year-end.

Net charge-offs to average loans were 83 basis points annualized for the first six months or $13.4 million, which is 11.8% below last year's first-half level of 93 basis points or $15.2 million. First and second quarter of 2012 net charge-offs were relatively the same, but it is noteworthy that net charge-offs related to the second-quarter loan sale were $2.2 million of the total of $6.8 million; thus normalized charge-offs continued to decrease.

Actions taken over the past two years to sell nonperforming loans and reduce real estate-owned properties, as well as the orderly exit of other lower quality loans, are paying off here in early 2012, with lower net charge-offs, lower delinquencies, and lower nonperforming and classified credits. Overall, the provision for credit losses decreased from $14.8 million last year to $12.1 million for the first half of this year, representing an 18.2% reduction.

Provisions were about the same between the first and second quarter, at around $6 million for each period. The allowance represented 1.64% of total loans at June 30 versus 1.69% at year-end, now covering 79% of nonperforming loans, the highest level in the last six quarters.

In conclusion, we are pleased with the operating results for the quarter and year-to-date in continued tough operating environment. Control of the net interest margin as interest rates continue to set historic lows, relatively flat operating expenses, and significant improvements to credit quality, have led to higher year-to-date net income.

Loan growth in the second quarter and a strong pipeline headed into the third quarter should assist in controlling the natural net interest margin decrease in the low interest rate environment, and the industry's relative inability to continue to lower deposit costs. Wealth management initiatives and growing managed assets, securities brokerage revenues, and private banking relationships, should also help improve our total fee income.

Our strong balance sheet liquidity and overall capital strength positions us well to take advantage of organic growth opportunities, while enabling us to successfully compete to acquire the $666 million 13-branch Fidelity Savings Bank in the adjacent geographic market of Pittsburgh, which we are pleased to have announced last week. We are truly looking forward to partnering with Fidelity's management and sales teams to introduce our broader array of banking and wealth management products and services to their current and future customers.

This now concludes our prepared commentary. We will open the call for questions. Jim Gardill, Chairman of the Board, will moderate the Q&A session, and we'll turn the call back to Emily for questions.

(Operator Instructions) Catherine Mealor, KBW.

The commercial loan growth that you had picking up at the end of the quarter was really nice to see. I guess I have two questions on that. The first is, can you talk a little bit about the pricing you're seeing in your loan growth? And your loan yields did come down a little bit this quarter -- I think it was up 12 bps or so.

And then, secondly, as you see more and more growth in your commercial book, how do you plan -- or what's your strategy on the amount of residential mortgages you plan to continue to portfolio? Thanks very much.

Well, let me answer your first question in two pieces, Catherine. First, the pricing for commercial lending is really very competitive. We are seeing very, very competitive prices in the marketplace. We're seeing other banks offering rates that we're surprised to -- we continue to be surprised at the rates we're seeing other banks offer. So, we are having to lower our rates in order to match some of our competitors in order to get our business.

The second part of that, though, which is just as important, is our existing loan portfolio does continue to reprice downward, not just from new loan originations, but also from the natural repricing that goes on within the portfolio. So, there are two pieces of that that we have to consider, as we look at the average rates on our loan portfolio.

You know, there is a lot of competitors that are coming in and offering lower rates to our existing loan customers. There are times when we've had to lower rates to existing customers simply to hold on to the loan itself.

The second part of the question is mortgage loans. We monitor the mortgage loan portfolio very, very closely. We are watching how many fixed rate loans we are putting into our portfolio. There, we have some guidelines set in our minds of where we want to go with our fixed rate mortgage portfolio. We're not there yet; but when we do hit those guidelines, we'll change our focus again and sell some of those fixed rate mortgages back into the secondary market.

And I do want to reiterate, we are only putting 15-year fixed-rate mortgages on our books. And they are all conforming. So we don't put anything more than 15-year on our books at the present time.

Hopefully, that answers your questions, Catherine.

It does, thank you very much. I'll hop out and let someone else in the queue. Thanks, guys.

Thanks, Catherine.

(Operator Instructions) Carter Bundy, Stifel Nicolaus.

(multiple speakers) Could you all talk a little bit about -- jumping in on fee income here -- the service charge number this quarter was certainly not as seasonally as strong a rebound from sort of the 1Q number. Could you talk a little bit about that? It sounds like deposit balances are obviously up year-over-year. And is this really a behavior issue? Or is this something that you all are doing differently in terms of fees, et cetera?

Let me start on that, Carter, and then we can blend in Bob on the details. But basically, we are seeing some changes; as customers have stayed more liquid, account balances have stayed higher, and our service charge fee income has declined somewhat. The opposite, though, on the debit card interchange, we've had a number of initiatives to improve usage and penetration levels on debit card. And we're seeing debit card charge income up. I think trust fees were relatively stable quarter-over-quarter. And we would expect to see some continued growth with the new asset base that we've put on. That's somewhat dependent on market pricing.

Yes. I just might add, actually, we were pretty encouraged by our trust fee income in the second quarter. Now, remember, we do an awful lot of tax returns in the first quarter. We've got a lot of tax return income in the first quarter. And the fact that we were able to match the first-quarter trustees here in the second quarter was really a very -- much of a positive for us.

I think just to finalize your comment there, Carter, I think Jim highlighted that average balances, and our focus on increasing transaction accounts, has somewhat impacted the line item for service charges on deposits, more particularly overdraft fee income. And we would expect that the current run rate would continue as we move forward.

So, yes, I would agree we're beyond a little bit the first-quarter seasonal variances that you sometimes see after the Christmas season or after income tax refunds. So, as far as a model goes, I would use the current second-quarter run rate.

Okay. That's helpful. And as we think about an interest rate environment right now that we are all very aware of, how should we sort of think about the personnel line? You've done a nice job certainly managing it here sequentially. How do we think about that run rate going forward? And are there potential initiatives out there going forward, should this interest rate environment stay this depressed for this long?

We mentioned, I believe, in the first quarter conference call, Carter, that we do have initiatives underway that we fully expect to phase in. And we do expect those to assist. We continue to do an optimization analysis of our branch network. And Paul and Bob have been working on that over the last two years.

We will continue that initiative going into the third and fourth quarters. We'll also be overlaying, of course, the integration of Fidelity in this process and analysis. And that will also have an impact, we believe, in the second half of the year, as we look at staffing levels, building towards a consummation of that transaction in the fourth quarter.

So I think there will continue to be initiatives in that area that will affect staffing and expense levels. I think in the material and in the press release, we felt we could maintain flat expenses in the second half of the year.

Carter, that one thing that's up is the healthcare and the pension expenses pension, reflecting the interest rate environment and performance in 2011. So, we're actually fairly flat on the salary line item itself. Employee benefits has really created the entire increase as you combine those two together. Full-time equivalents, right around 1,400, the same as they were last year at this time, and despite the fact that we've added back some key producers in the areas that I mentioned during my scripted remarks.

Okay, great. That's very helpful. Thank you, all.

Thanks, Carter.

(Operator Instructions) Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Gardill for any closing remarks.

Thank you very much, Emily. And thanks, everyone, for participating. We feel we've gotten a good six months under our belt here, a good second quarter, and it paves the way for a solid year for 2012.

We're looking forward to consummating the Fidelity transaction and the ability to compete more effectively in a large market; very attractive economic environment that's immediately adjacent to our main headquarters and our principal market area. So, we're excited about the opportunity in Pittsburgh. We're very pleased to have Fidelity agree to join us and we look forward to that transaction. Especially given the experience we've had in Columbus and our ability to compete in larger markets, we think that will be a very attractive franchise enhancer for our Company.

We thank you again for participating and wish everybody the best.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.