EX-13 7 ex13.txt EXHIBIT 13 ---------- Consolidated Balance Sheet ----------------------------------------------------------------------------- (dollars in thousands, except per share amounts) December 31, ----------------------- 2001 2000 ----------------------------------------------------------------------------- Assets Cash and due from banks $ 81,563 $ 72,796 Due from banks - interest bearing 712 620 Securities: Held to maturity (fair values of $242,558 and $198,534, respectively) 240,953 196,102 Available for sale, carried at fair value 517,517 350,287 ----------------------- Total securities 758,470 546,389 ----------------------- Loans, net of unearned income 1,539,695 1,590,702 Allowance for loan losses (20,786) (20,030) ----------------------- Net loans 1,518,909 1,570,672 ----------------------- Premises and equipment 50,252 53,147 Accrued interest receivable 16,290 15,725 Other assets 48,258 50,788 ----------------------- Total Assets $2,474,454 $2,310,137 ======================= Liabilities Deposits: Non-interest bearing demand $ 244,422 $ 234,265 Interest bearing demand 245,447 260,058 Money market 406,727 359,039 Savings 252,438 249,830 Certificates of deposit 764,424 767,169 ----------------------- Total deposits 1,913,458 1,870,361 ----------------------- Other borrowings 279,131 159,317 Accrued interest payable 7,313 8,438 Other liabilities 16,351 13,515 ----------------------- Total Liabilities 2,216,253 2,051,631 ----------------------- Shareholders' Equity Preferred stock, no par value; 1,000,000 shares authorized; none outstanding --- --- Common stock ($2.0833 par value; 50,000,000 shares authorized; 20,996,531 shares issued) 43,742 43,742 Capital surplus 58,663 59,464 Retained earnings 230,924 218,539 Treasury stock (3,142,034 and 2,428,591 shares, respectively, at cost) (76,183) (62,009) Accumulated other comprehensive income (fair value adjustments) 3,560 (365) Deferred benefits for directors and employees (2,505) (865) ----------------------- Total Shareholders' Equity 258,201 258,506 ----------------------- Total Liabilities and Shareholders' Equity $2,474,454 $2,310,137 ============================================================================= See Notes to Consolidated Financial Statements. E-20 Consolidated Statement of Income ----------------------------------------------------------------------------- (dollars in thousands, except per share amounts) For the years ended December 31, -------------------------------- 2001 2000 1999 ----------------------------------------------------------------------------- Interest Income Loans, including fees $126,230 $128,591 $117,508 Securities: Taxable 25,692 24,297 27,269 Tax-exempt 10,330 8,974 10,182 -------------------------------- Total interest on securities 36,022 33,271 37,451 -------------------------------- Federal funds sold 1,687 1,217 902 -------------------------------- Total interest income 163,939 163,079 155,861 -------------------------------- Interest Expense Interest bearing demand deposits 3,920 5,026 4,418 Money market deposits 14,006 16,462 13,653 Savings deposits 4,671 5,264 5,936 Certificates of deposit 43,632 43,689 38,545 -------------------------------- Total interest on deposits 66,229 70,441 62,552 Other borrowings 10,125 9,111 6,679 -------------------------------- Total interest expense 76,354 79,552 69,231 -------------------------------- Net Interest Income 87,585 83,527 86,630 Provision for loan losses 5,995 3,225 4,295 -------------------------------- Net interest income after provision for loan losses 81,590 80,302 82,335 -------------------------------- Non-Interest Income Trust fees 11,504 12,226 10,582 Service charges on deposits 9,182 8,097 6,820 Other income 2,596 2,243 6,800 Net securities gains 1,306 810 379 -------------------------------- Total non-interest income 24,588 23,376 24,581 -------------------------------- Non-Interest Expense Salaries and wages 27,926 28,217 28,238 Employee benefits 5,915 5,092 7,107 Net occupancy 3,998 3,844 3,478 Equipment 5,913 6,439 6,300 Other operating 21,142 20,891 22,690 -------------------------------- Total non-interest expense 64,894 64,483 67,813 -------------------------------- Income before provision for income taxes 41,284 39,195 39,103 Provision for income taxes 12,282 12,271 11,465 -------------------------------- Net Income $ 29,002 $ 26,924 $ 27,638 ================================ Earnings per share $1.60 $1.41 $1.37 Average shares outstanding 18,123,851 19,092,927 20,229,524 ============================================================================= See Notes to Consolidated Financial Statements. E-21 Consolidated Statement of Changes in Shareholders' Equity (dollars in thousands, except per share amounts) For the years ended December 31, 2001, 2000, and 1999 ---------------------------------------------------------------------------------------------- Accumulated Deferred Common Stock Other Benefits for -------------------- Capital Retained Treasury Comprehensive Directors & Shares Amount Surplus Earnings Stock Income Employees Total --------------------------------------------------------------------------------------------------------------------------------- January 1, 1999 20,660,235 $43,742 $60,283 $198,782 $(9,421) $ 3,610 $ (513) $296,483 --------------------------------------------------------------------------------------------------------------------------------- Net income 27,638 27,638 Net fair value adjustment on securities available for sale - net of tax effect (11,066) (11,066) -------- Comprehensive income 16,572 Cash dividends: Common ($.88 per share) (17,912) (17,912) Stock issued for acquisitions 422,916 (182) 12,153 11,971 Treasury shares purchased-net (1,293,226) 32 (37,043) (37,011) Borrowing on ESOP debt (350) (350) Deferred benefits for directors-net (89) (89) --------------------------------------------------------------------------------------------------------------------------------- December 31, 1999 19,789,925 43,742 60,133 208,508 (34,311) (7,456) (952) 269,664 --------------------------------------------------------------------------------------------------------------------------------- Net income 26,924 26,924 Net fair value adjustment on securities available for sale - net of tax effect 7,091 7,091 -------- Comprehensive income 34,015 Cash dividends: Common ($.895 per share) (16,893) (16,893) Treasury shares purchased-net (1,221,985) (669) (27,698) (28,367) Payment on ESOP debt 350 350 Deferred benefits for directors-net (263) (263) --------------------------------------------------------------------------------------------------------------------------------- December 31, 2000 18,567,940 43,742 59,464 218,539 (62,009) (365) (865) 258,506 --------------------------------------------------------------------------------------------------------------------------------- Net income 29,002 29,002 Net fair value adjustment on securities available for sale - net of tax effect 5,584 5,584 Net securities gains reclassified into earnings - net of tax effect (770) (770) Cumulative effect of accounting change for derivative financial instruments - net of tax effect 558 558 Net fair value adjustment on derivatives - net of tax effect (1,301) (1,301) Net derivative gains reclassified into earnings - net of tax effect (146) (146) ------- Comprehensive income 32,927 Cash dividends: Common ($.92 per share) (16,617) (16,617) Treasury shares purchased - net (713,443) (801) (14,174) (14,975) Borrowings on ESOP debt - net (1,572) (1,572) Deferred benefits for directors - net (68) (68) ---------------------------------------------------------------------------------------------------------------------------------- December 31, 2001 17,854,497 $43,742 $58,663 $230,924 $(76,183) $ 3,560 $(2,505) $258,201 ==================================================================================================================================
There was no activity in Preferred Stock during the years ended December 31, 2001, 2000 and 1999. See Notes to Consolidated Financial Statements. E-22 Consolidated Statement of Cash Flows ----------------------------------------------------------------------------- (in thousands) For the years ended December 31, -------------------------------- Increase (Decrease) in Cash and Cash Equivalents 2001 2000 1999 ------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 29,002 $ 26,924 $ 27,638 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,919 5,229 5,488 Net amortization and accretion (472) 371 1,366 Provision for loan losses 5,995 3,225 4,295 Gains on sales of securities - net (1,306) (810) (379) Gain on sale of credit card portfolio --- --- (3,561) Deferred income taxes (232) (70) 323 Other - net (1,390) 395 476 Net change in: Interest receivable / payable (1,690) 2,209 (1,289) Other assets and other liabilities 1,862 1,021 (2,453) ----------------------------- Net cash provided by operating activities 36,688 38,494 31,904 ----------------------------- Cash Flows from Investing Activities: Securities held to maturity: Proceeds from maturities and calls 29,502 28,408 50,357 Payments for purchases (74,121) (11,436) (49,778) Securities available for sale: Proceeds from sales 65,014 65,246 47,772 Proceeds from maturities and calls 170,328 50,598 129,216 Payments for purchases (393,312) (99,115) (83,400) Acquisitions, net of cash --- --- 2,809 Proceeds from the sale of credit card portfolio --- --- 18,789 Decrease (increase) in loans 45,768 (70,203) (143,142) Purchases of premises and equipment - net (2,207) (2,220) (10,243) Purchase of bank-owned life insurance --- (4,400) --- ----------------------------- Net cash used by investing activities (159,028) (43,122) (37,620) ----------------------------- Cash Flows from Financing Activities: Increase (decrease) in deposits 43,097 56,360 (3,133) Increase (decrease) in other borrowings 119,814 (14,136) 38,748 Dividends paid (16,737) (17,167) (17,752) Treasury shares purchased - net (14,975) (28,367) (37,011) ----------------------------- Net cash provided (used) by financing activities 131,199 (3,310) (19,148) ----------------------------- Net increase (decrease) in cash and cash equivalents 8,859 (7,938) (24,864) Cash and cash equivalents at beginning of year 73,416 81,354 106,218 ----------------------------- Cash and cash equivalents at end of year $ 82,275 $ 73,416 $ 81,354 ============================= Supplemental Disclosures: Interest paid on deposits and other borrowings $ 77,479 $ 77,279 $ 69,735 Income taxes paid 12,736 12,410 13,135 =====================================================================================
See Notes to Consolidated Financial Statements. E-23 Notes to Consolidated Financial Statements ----------------------------------------------------------------------------- (dollars in thousands, except per share amounts) Note 1: Accounting Policies WesBanco, Inc. ("WesBanco") is a bank holding company offering a full range of financial services, including trust, mortgage banking, insurance and brokerage services, through offices located in West Virginia and Eastern Ohio. WesBanco's only defined business segments are community banking and trust and investment services. The significant accounting principles employed in the preparation of the accompanying consolidated financial statements are summarized below: Principles of consolidation: The Consolidated Financial Statements of WesBanco include the accounts of WesBanco and its wholly-owned subsidiaries. Material intercompany transactions and accounts have been eliminated. Business combinations: Business combinations, accounted for using the purchase method of accounting, include the results of operations of the acquired business from the date of acquisition. Net assets of the companies acquired were recorded at their estimated fair value as of the date of acquisition. Business combinations, accounted for using the pooling of interests method of accounting, require the assets, liabilities and stockholders' equity of the merged entity to be retroactively combined with WesBanco's respective accounts at recorded value. Reclassification: Certain prior year financial information has been reclassified to conform to the presentation in 2001. The reclassifications had no effect on net income. Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and cash equivalents: For the purpose of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold. Generally, federal funds are sold for one day periods. Securities: Securities Available for Trading: WesBanco did not have a trading portfolio during the two years ended December 31, 2001. Securities Held to Maturity: Securities consisting principally of debt securities, which are purchased with the positive intent and ability to hold until their maturity, are stated at cost, adjusted for amortization of premiums and accretion of discounts. Securities Available for Sale: Debt securities not classified as trading or held to maturity, and marketable equity securities not classified as trading, are classified as available for sale. These securities may be sold at any time based upon management's assessment of changes in economic or financial market conditions, interest rate or prepayment risks, liquidity considerations and other factors. These securities are stated at fair value, with the fair value adjustment, net of tax, reported as a component of accumulated other comprehensive income. Other than temporary declines in value on these securities are recognized in results of operations. Gains and Losses: Net realized gains and losses on sales of securities are included in non-interest income. The cost of these securities sold is based on the specific identification method. The gain or loss is determined as of the trade date. Amortization and Accretion: Amortization of premiums and accretion of discounts are included in interest on securities on a constant yield basis. Loans and loans held for sale: Interest is accrued as earned on loans except where doubt exists as to collectability, in which case recognition of income is discontinued. Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. A loan is considered impaired, based on current information and events, if it is probable that WesBanco will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Impaired loans include all non-accrual and renegotiated loans, as well as loans internally classified as substandard or doubtful (as those terms are defined by banking regulations) that meet the definition of impaired loans. WesBanco recognizes interest income on non-accrual loans on the cash basis. Loan origination fees and certain direct costs are amortized as an adjustment to the yield over the estimated lives of the related loans. Allowance for loan losses: The allowance for loan losses is maintained at a level considered adequate by management. The allowance is increased by provisions charged to operating expense and reduced by loan losses, net of recoveries. Management's determination of the adequacy of the allowance is based on evaluation of the loan portfolio, as well as prevailing economic conditions, past loan loss experience, current delinquency, changes in the character of the loan portfolio, specific problem loans and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. While management has allocated the allowance to different loan categories, the allowance is general in nature and is available for the loan portfolio in its entirety. E-24 Premises and equipment: Premises and equipment are stated at cost less accumulated depreciation, and depreciated over their estimated useful lives using either the straight-line or an accelerated method. Useful lives are revised when a change in life expectancy becomes apparent. Maintenance and repairs are charged to expense and betterments are capitalized. Gains and losses on premises and equipment retired or otherwise disposed of are charged to expense when incurred. Other real estate owned: Other real estate owned, which are reported in other assets, consists primarily of properties acquired through, or in lieu of, loan foreclosures. Valuations are performed periodically and the real estate is carried at the lower of cost or appraised value, less estimated costs to sell. Mortgage servicing rights: Mortgage servicing rights, which are reported in other assets, are amortized in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage loans. Capitalized mortgage servicing rights are evaluated for impairment based on the fair value of those rights. Goodwill: The excess of the purchase price over net identifiable tangible and intangible assets acquired in a purchase business combination (goodwill) is included in other assets. Goodwill is amortized on a straight-line basis over varying periods not exceeding 20 years. Derivatives: Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payments without the exchange of the underlying notional amount, on which interest payments are calculated. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge or cash flow hedge. Currently, all of WesBanco's hedges have been designated as cash flow hedges. For derivative instruments that are designated and qualify as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Net interest received or interest paid on the effective portion of the interest rate swaps is reported as a component of interest expense in the Consolidated Statement of Income. Income taxes: Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities and their tax bases. In addition, such deferred tax asset and liability amounts are adjusted for the effects of enacted changes in tax laws or rates. Earnings per share: Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during each period. For diluted earnings per share, the weighted average number of shares for each period is increased by the number of shares which would be issued assuming the exercise of common stock options. There was no dilutive effect from the stock options and accordingly, basic and diluted earnings per share are the same. Trust assets: Assets held by the subsidiary bank in fiduciary or agency capacities for their customers are not included as assets in the accompanying Consolidated Balance Sheet. Certain trust assets are held on deposit at the subsidiary bank. Comprehensive income: Sources of comprehensive income not included in net income are limited to unrealized gains and losses (net fair value adjustments) on securities available for sale and derivatives, net of tax. Material reclassification adjustments between unrealized gains and losses from prior periods and realized gains and losses included in earnings in the current period are reflected in the presentation of comprehensive income. New accounting standards: SFAS No. 141, "Accounting for Business Combinations," requires that all business combinations be accounted for by the purchase method for business combinations initiated after June 30, 2001. SFAS No. 141 will affect how future business combinations, if undertaken, are accounted for and disclosed in the financial statements. The issuance of this statement had no effect on WesBanco's results of operations, financial position or liquidity during 2001. SFAS No. 142, "Goodwill and Other Intangible Assets," requires that goodwill and indefinite-lived intangible assets will no longer be amortized but will be subject to impairment tests, at least annually. Intangible assets determined to have finite lives will continue to be amortized over their estimated useful lives and also continue to be subject to impairment testing. WesBanco adopted the provisions of this standard as of January 1, 2002, its effective date. Application of the non- E-25 Note 1: Accounting Policies (continued) amortization provisions of this statement is expected to reduce non- interest expense by approximately $1,300 in 2002 as compared to 2001. SFAS No. 142, as part of its adoption provisions, requires a transitional impairment test to be applied to all goodwill and other indefinite-lived intangible assets within the first half of 2002 and any resulting impairment loss be reported as a change in accounting principle. Management has performed a preliminary transitional impairment test on its goodwill assets and at this time does not expect an impairment loss to be recorded in 2002 as a result of this test. WesBanco currently does not have any other indefinite-lived intangible assets on its balance sheet. Note 2: Completed Business Combination On April 30, 1999, WesBanco completed its acquisition of the Heritage Bank of Harrison County. The acquisition was accounted for using the purchase method of accounting. WesBanco issued 422,916 shares of common stock valued at $12,621 and recorded $8,206 in goodwill. Heritage reported total assets of $33,049 as of April 30, 1999. Note 3: Securities The following tables summarize amortized cost and fair values of held to maturity and available for sale securities: Held to Maturity -------------------------------------------------------------------------------------------------- December 31, 2001 December 31, 2000 ------------------------------------------------- ---------------------------------------------- Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------------------ U.S. Treasury and Federal Agency securities $ 1,001 $ 17 --- $ 1,018 $ 4,357 $ 99 --- $ 4,456 Obligations of states and political subdivisions 221,866 2,839 $1,251 223,454 173,771 2,492 $159 176,104 Other securities 18,086 --- --- 18,086 17,974 --- --- 17,974 ------------------------------------------------------------------------------------------------ Total $240,953 $ 2,856 $1,251 $ 242,558 $ 196,102 $ 2,591 $159 $198,534 ======================================================================================================================== Available for Sale -------------------------------------------------------------------------------------------------- December 31, 2001 December 31, 2000 ------------------------------------------------- ---------------------------------------------- Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------------------ U.S. Treasury and Federal Agency securities $300,948 $ 6,617 $ 315 $ 307,250 $ 205,264 $ 1,803 $ 799 $206,268 Obligations of states and political subdivisions 11,905 239 68 12,076 12,871 59 23 12,907 Mortgage-backed & other securities 191,511 1,820 398 192,933 127,708 126 987 126,847 ------------------------------------------------------------------------------------------------ Total debt securities 504,364 8,676 781 512,259 345,843 1,988 1,809 346,022 Equity securities 5,740 499 981 5,258 4,988 325 1,048 4,265 ------------------------------------------------------------------------------------------------ Total $510,104 $ 9,175 $1,762 $ 517,517 $ 350,831 $ 2,313 $2,857 $350,287 ========================================================================================================================
The following table summarizes amortized cost and estimated fair value of securities by maturity: December 31, 2001 --------------------------------------------- Held to Maturity Available for Sale ----------------------- ------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value ------------------------------------------------------------------------------ Within one year $ 18,759 $ 19,003 $ 13,935 $ 14,130 After one year, but within five 44,679 46,009 279,956 282,967 After five years, but within ten 95,454 95,896 205,999 210,724 After ten years 82,061 81,650 10,214 9,696 --------------------------------------------- Total $240,953 $242,558 $510,104 $517,517 ============================================================================== Mortgage-backed securities are assigned to maturity categories based on estimated average lives. Available for sale securities in the after 10 year category include securities with no stated maturity. Other securities with prepayment provisions are categorized based on contractual maturity. Securities with par values aggregating $356,219 at December 31, 2001 and $293,138 at December 31, 2000 were pledged to secure public and trust funds. Gross security gains of $1,331, $849, and $404 and gross security losses of $25, $39 and $25 were realized for the years ended December 31, 2001, 2000 and 1999, respectively. E-26 Note 4: Loans The following table is a summary of total loans: December 31, ------------------------- 2001 2000 ---------------------------------------------------------------------------- Commercial $ 569,193 $ 546,136 Real estate - construction 37,676 36,007 Real estate - residential 614,586 651,924 Consumer, net of unearned income 312,718 354,244 Loans held for sale 5,522 2,391 ------------------------- Loans, net of unearned income $1,539,695 $1,590,702 ============================================================================ The following table represents changes in the allowance for loan losses: For the years ended December 31, -------------------------------- 2001 2000 1999 ----------------------------------------------------------------------------- Balance, beginning of year $20,030 $19,752 $19,098 Allowance for loan losses of acquired banks --- --- 192 Allowance for loan losses allocated to sold credit cards --- --- (450) Provision for loan losses 5,995 3,225 4,295 Charge-offs (5,838) (4,095) (4,718) Recoveries 599 1,148 1,335 ----------------------------- Net charge-offs (5,239) (2,947) (3,383) ----------------------------- Balance, end of year $20,786 $20,030 $19,752 ============================================================================= The following tables summarize loans classified as impaired: December 31, ----------------- 2001 2000 --------------------------------------------------------------------------- Non-accrual $ 4,030 $ 5,561 Renegotiated 3,756 417 Other classified loans: Doubtful --- --- Substandard 6,355 11,513 ----------------- Total impaired loans $14,141 $17,491 ================= Impaired loans with a related allowance for loan losses $12,813 $16,381 Allowance for loan losses allocated to impaired loans 4,878 6,511 =========================================================================== For the years ended December 31, -------------------------------- 2001 2000 1999 ----------------------------------------------------------------------------- Average impaired loans $13,572 $14,466 $17,173 Amount of contractual interest income on impaired loans 392 306 334 Amount of interest income recognized on a cash basis 339 179 77 ============================================================================= Most lending occurs with customers located within West Virginia and Eastern Ohio. No significant concentration of credit risk exists by industry or by individual borrower. WesBanco has no significant exposure to any foreign loans. Note 5: Premises and Equipment Premises and equipment include: December 31, Estimated ------------------- useful life 2001 2000 --------------------------------------------------------------------------- Land and improvements (3-10 years) $ 12,735 $ 12,828 Buildings and improvements (4-50 years) 53,216 53,696 Furniture and equipment (2-25 years) 42,716 41,149 ------------------- 108,667 107,673 Less - accumulated depreciation (58,415) (54,526) ------------------- Total $ 50,252 $ 53,147 =========================================================================== E-27 Note 6: Certificates of Deposit Certificates of deposit in denominations of $100 thousand or more totaled $161,636, and $136,331 as of December 31, 2001 and 2000, respectively. Related interest expense was $7,485 in 2001 and $6,335 in 2000. At December 31, 2001, the scheduled maturities of total certificates of deposit are as indicated in the table. 2002 $417,625 2003 231,353 2004 91,801 2005 10,286 2006 and thereafter 13,359 ------------------------------- Total $764,424 =============================== Note 7: Repurchase Agreements and Other Borrowings Federal funds purchased and securities sold under agreements to repurchase represent short-term borrowings which generally mature within one year from the transaction date. Other borrowings consist principally of advances with the Federal Home Loan Bank ("FHLB"). These borrowings are collateralized by FHLB stock and a blanket collateral agreement which assigns a security interest in capital stock, deposits, mortgage loans and securities. At December 31, 2001, WesBanco had $106,889 outstanding in FHLB borrowings with a weighted average yield of 5.1%. The table summarizes FHLB maturities. 2003 $ 60,000 2004 44,900 2012 1,700 2021 289 ------------------- Total $106,889 =================== Information concerning securities sold under agreements to repurchase is summarized as follows: For the years ended December 31, -------------------------------- 2001 2000 1999 ----------------------------------------------------------------------------- Outstanding balance at year end $142,278 $108,026 $107,795 Average balance during the year 138,728 112,071 113,008 Maximum month end balance during the year 162,926 129,195 123,817 Average interest rate at year end 2.00% 5.79% 4.45% Average interest rate during the year 3.56 5.68 4.48 ----------------------------------------------------------------------------- Note 8: Employee Benefit Plans Defined Benefit Pension Plan and Other Postretirement Plans: At December 31, 2001, substantially all employees were participants in the WesBanco Defined Benefit Pension Plan ("the Plan"). The Plan covers those employees who satisfy minimum age and length of service requirements. Benefits of the Plan are generally based on years of service and employee's compensation during the last five years of employment. The Plan's funding policy has been to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Retirees and active employees, who were hired prior to March 30, 1998, are provided a postretirement contributory health insurance and death benefit plan. For reported years 2001 and 2000, the health insurance benefit was $0.1 per month and the death benefit was $7.5. Net periodic pension and other postretirement cost for the Plan includes the following components: For the years ended December 31, ------------------------------- 2001 2000 1999 ----------------------------------------------------------------------------- Service cost - benefits earned during year $ 1,214 $ 1,064 $ 1,138 Interest cost on projected benefit obligation 2,121 1,956 1,873 Expected return on plan assets (3,204) (2,986) (2,474) Net amortization and deferral (559) (638) (35) Prior service costs --- --- --- ----------------------------------------------------------------------------- Net periodic pension and other postretirement (earnings) cost $ (428) $ (604) $ 502 ============================================================================= The following tables summarize the activity in the projected benefit obligation and Plan assets: For the years ended December 31, -------------------- 2001 2000 ----------------------------------------------------------------------------- Projected benefit obligation, at beginning of year $ 26,877 $ 24,002 Service cost 1,214 1,064 Interest cost 2,121 1,956 Benefits paid (1,505) (2,084) Change in interest rate assumptions 227 371 Actuarial loss 1,389 1,568 ----------------------------------------------------------------------------- Projected benefit obligation, at end of year $ 30,323 $ 26,877 ============================================================================= E-28 For the years ended December 31, ------------------- 2001 2000 ---------------------------------------------------------------------------- Fair value of plan assets, at beginning of year $ 37,199 $ 34,685 Actual return on assets (3,076) 4,598 Contributions --- --- Benefits paid (1,505) (2,084) ---------------------------------------------------------------------------- Fair value of plan assets, at end of year $ 32,618 $ 37,199 ============================================================================ Plan assets consist of debt and equity securities which include U.S. Agency and Treasury issues, corporate bonds and notes, listed common stocks including shares of WesBanco common stock (comprising less than 10% of Plan assets) and short-term cash equivalent instruments. The following table sets forth the Plan's funded status and the asset reflected in the Consolidated Balance Sheet: December 31, ----------------- 2001 2000 ------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation $ 2,295 $10,322 Unrecognized prior service cost (1,238) (1,239) Unrecognized net gain (loss) 1,875 (6,586) Unrecognized obligation --- 7 -------------------------------------------------------------------------- Net pension asset $ 2,932 $ 2,504 ========================================================================== Actuarial assumptions used in the determination of the projected benefit obligation in the Plan are as follows: For the years ended December 31, -------------------------------- 2001 2000 1999 ----------------------------------------------------------------------------- Weighted average discount rates 7.50% 7.90% 8.25% Rates of increase in compensation levels 4.00 4.50 4.50 Weighted average expected long-term return on assets 8.75 8.75 8.75 ----------------------------------------------------------------------------- KSOP (Employee Stock Ownership and 401(k) Plan): Substantially all employees are included in the WesBanco KSOP Plan (the "KSOP"). The KSOP consists of a non-contributory employee stock ownership (ESOP) and a 401(k) Plan. The 401(k) provision allows WesBanco to make matching contributions based upon an employee's contribution, subject to regulatory limitations. As of December 31, 2001, the KSOP held 831,128 shares of WesBanco stock, of which 745,394 shares were allocated to specific employee accounts and 85,734 shares were unallocated. During 2000, WesBanco's ESOP renewed a revolving line of credit with WesBanco Bank, Inc. Conditions in the loan agreement provide for a revolving line of credit in the aggregate amount of $2,000 to facilitate purchases of WesBanco common stock in the open market. The loan bears interest at a rate equal to the lender's base rate and requires annual repayments of principal equal to 20% of the outstanding balance at January 1 of each year. The loan has a final maturity date of 5 years from date of inception. The revolving line of credit had an outstanding balance of $1,572 and $0 at December 31, 2001 and 2000, respectively. Total contributions to the KSOP for the three years ended December 31, 2001, 2000 and 1999 were $1,040, $1,052 and $996, respectively. Key Executive Incentive Bonus & Option Plan: The Key Executive Incentive Bonus & Option Plan, which was started in 1998, is a non- qualified plan that includes three components, an Annual Bonus, a Long-Term Incentive Bonus and a Stock Option component. The three components allow for payments of cash, or a mixture of cash and stock, or granting of stock options, depending upon the component of the plan in which the award is earned through the attainment of certain performance goals. Performance goals are established by WesBanco's Board of Directors. Compensation expense incurred in 2001, 2000 and 1999 for the Annual Bonus component of the plan was $504, $436 and $348, respectively. During 2001, awards for the Long-Term Bonus component of $43 were made to specific employees. There were no awards or payments made for the Long-Term Bonus component of the plan during 2000 and 1999. The Stock Option component provides for granting of stock options to eligible employees. During 2001, the Board of Directors provided for the issuance of 159,924 shares of common stock for this component of the grant at an option price of $20.74, which approximated fair market value on the date of the grant. These options vest over a three-year period and have no performance provisions. During 1998 and again in 2000, 28,000 shares were granted at an option price of $29.50 and $22.00 per share, respectively, which approximated fair market value on the date of the grants. Vesting of these options is based upon achievement of performance goals, which include improvements in earnings per share. E-29 Note 8: Employee Benefit Plans (continued) Vested shares totaled 96,860, 34,218 and 15,552 at December 31, 2001, 2000 and 1999, respectively. Employees generally have a ten year period to exercise the vested options. No options have been exercised. There were no shares forfeited in 2001 or 2000 and 3,113 shares were forfeited in 1999. All granted options become immediately vested in the event of a change in control of WesBanco. WesBanco accounts for stock options in accordance with APB Opinion No. 25 "Accounting for Stock Issued to Employees". For the 2001 grant, since the exercise price was equal to the market price, no compensation expense was recognized under APB No. 25. Using the expense recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," compensation expense of $546 in 2001 would have been recognized on the 2001 grant. For the 1998 and the 2000 grants, compensation expense of $105, $172 and $45 was recognized for the years 2001, 2000 and 1999, respectively. Fair value per share of $10.25, $11.24 and $7.24 for the 2001, 2000 and 1998 options, respectively, were estimated using the Black- Scholes option pricing model. Assumptions used in this model for the 2001, 2000 and 1998 options, included a weighted-average expected life of 10 years, risk free interest rates of 5.49%, 6.22% and 5.49%, respectively, dividend yield of 0%, and volatility factors of 23.4%, 21.6% and 18.1%, respectively. Note 9: Other Operating Expense Other operating expense consists of the following: For the years ended December 31, -------------------------------- 2001 2000 1999 ----------------------------------------------------------------------------- Professional fees $ 3,883 $ 3,568 $ 3,766 Marketing 1,933 2,339 2,315 General administrative 945 1,035 1,194 Supplies 1,790 2,106 1,993 Postage 2,002 1,758 1,804 Communication 1,767 2,229 1,996 Miscellaneous taxes 3,405 3,170 3,323 Goodwill amortization 1,313 1,535 1,389 Other 4,104 3,151 4,910 ---------------------------- Total $21,142 $20,891 $22,690 ============================================================================= Note 10: Income Taxes A reconciliation of the federal statutory tax rate to the reported effective tax rate is as follows: For the years ended December 31, -------------------------------- 2001 2000 1999 ----------------------------------------------------------------------------- Federal statutory tax rate 35% 35% 35% Tax-exempt interest income (9) (7) (7) State income taxes 3 4 4 Other - net 1 (1) (3) --------------------- Effective tax rate 30% 31% 29% ============================================================================= The provision for income taxes consists of the following: For the years ended December 31, -------------------------------- 2001 2000 1999 ------------------------------------------------------------------------------ Current: Federal $10,356 $ 9,936 $ 9,612 State 2,158 2,406 2,067 Deferred: Federal (201) 16 (282) State (31) (87) 68 ------------------------- Total $12,282 $12,271 $11,465 ========================= Tax expense applicable to net gains on securities transactions $ 529 $ 332 $ 153 ============================================================================= E-30 Deferred tax assets and liabilities are comprised of the following: December 31, 2001 2000 1999 ----------------------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $ 8,029 $ 7,538 $ 7,358 Compensation and benefits 418 487 663 Net operating loss carryforward 338 410 337 Tax effect of fair value adjustments on securities available for sale --- 214 4,844 Other (132) (128) 33 ------------------------- Gross deferred tax assets 8,653 8,521 13,235 ------------------------- Deferred tax liabilities: Tax effect of fair value adjustments on securities available for sale and derivatives (2,363) --- --- Depreciation (1,366) (1,288) (1,628) Purchase accounting adjustments (431) (452) (472) Accretion on securities (401) (344) (138) ------------------------- Gross deferred tax liabilities (4,561) (2,084) (2,238) ------------------------- Net deferred tax assets $ 4,092 $ 6,437 $10,997 ========================================================================== Note 11: Disclosures About Fair Value of Financial Instruments Fair value estimates of financial instruments are based on the present value of expected future cash flows, quoted market prices of similar financial instruments, if available, 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. The aggregate fair value of amounts presented does not represent the underlying value of WesBanco. Management does not have the intention to dispose of a significant portion of its financial instruments and, therefore, the unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows. The following table represents the estimates of fair value of financial instruments: December 31, --------------------------------------------- 2001 2000 --------------------- ---------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------------------------------------------------------------------------------------------- Financial assets: Cash and short-term investments $ 82,275 $ 82,275 $ 73,416 $ 73,416 Securities held to maturity 240,953 242,558 196,102 198,534 Securities available for sale 517,517 517,517 350,287 350,287 Net loans (including loans held for sale) 1,518,909 1,537,068 1,570,672 1,553,688 Financial liabilities: Deposits 1,913,458 1,928,572 1,870,361 1,873,083 Other borrowings 279,131 281,957 159,317 158,386 Interest rate swap loss 2,122 2,122 --- --- ============================================================================================
The following methods and assumptions are used to estimate the fair value of like kinds of financial instruments: Cash and short-term investments: The carrying amount for cash and short-term investments is a reasonable estimate of fair value. Short-term investments consist of federal funds sold. Securities: Fair values for securities are based on quoted market prices, if available. If market prices are not available, then quoted market prices of similar instruments are used. Net loans: Fair values for loans with interest rates that fluctuate as current rates change are generally valued at carrying amounts. The fair values for residential mortgage loans are based on quoted market prices of securitized financial instruments, adjusted for remaining maturity and differences in loan characteristics. Fair values of commercial real estate, construction and consumer loans are based on a discounted value of the estimated future cash flows expected to be received. The current interest rates applied in the discounted cash flow method reflect rates used to price new loans of similar type, adjusted for relative risk and remaining maturity. For non-accrual loans, fair value is estimated by discounting expected future principal cash flows only. E-31 Note 11: Disclosures About Fair Value of Financial Instruments (continued) Loans held for sale: The carrying amount for loans held for sale is a reasonable estimate of fair value. 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. Other borrowings: For federal funds purchased and repurchase agreements, which represent short-term borrowings, the carrying amount is a reasonable approximation of fair value. For longer term FHLB advances, fair value is based on rates currently available to WesBanco for borrowings with similar terms and remaining maturities. Interest Rate Swaps: Fair values for interest rate swaps are estimated by obtaining quotes from brokers. The fair value adjustments, recorded in the other liabilities section of the Consolidated Balance Sheet represent the amount WesBanco would receive or pay to terminate the agreement considering current interest rates. Off-balance sheet financial instruments: Off-balance sheet financial instruments consist of commitments to extend credit and 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 immaterial and therefore not presented in the above table. Note 12: 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. WesBanco had various commitments outstanding to extend credit approximating $251,423 and $187,616 and letters of credit of $18,263 and $7,415 as of December 31, 2001 and 2000, respectively. WesBanco's exposure to credit losses in the event of non- performance by the other parties to the financial instruments for commitments to extend credit and 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. 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. During 2001, WesBanco entered into interest rate swap agreements that effectively converted $125,000 of its prime rate based money market deposit accounts to a fixed-rate basis for an average term of 6.24 years, thus reducing the impact of rising interest rates on future interest expense. At December 31, 2001, the notional amount of the swap agreements was $122,230 with WesBanco receiving a weighted average variable rate of 2.42% and paying a weighted average fixed rate of 4.37%. At December 31, 2001, net fair value adjustments on interest rate swap agreements reflected unrealized pretax net losses of $2,122, which, based on current market rates, may be reclassified from accumulated other comprehensive income to earnings during 2002. Fair value adjustments represent temporary fluctuations resulting from changes in market rates in relation to the average fixed pay rate and projected variable receive rate over the remaining term of the derivative. If derivatives are held to their respective maturity dates, no fair value gain or loss is realized. During 2000, all outstanding interest rate swap agreements were terminated, generating a deferred gain of $1,046 which is reported as a component of other comprehensive income. The deferred gain is being amortized, using the interest method, over the remainder of the original term of the terminated swap agreements ending in September of 2006. WesBanco realized $244 and $135 of interest rate swap gains during 2001 and 2000, respectively. WesBanco will realize $213 of interest rate swap gains during 2002. The table summarizes the 2001 changes in accumulated other comprehensive income resulting from derivatives: ---------------------------------------------------------------------------- Balance at December 31, 2000 --- Cumulative effect of adopting SFAS No. 133 on January 1, 2001 $ 558 Net deferred gains on derivatives reclassified into earnings (146) Net interest paid on the effective portion of derivatives reclassified into earnings 627 Net change in fair value on the ineffective portion of derivatives reclassified into earnings --- Net change in fair value on the effective portion of derivatives (1,928) -------- Balance at December 31, 2001 $ (889) ============================================================================ E-32 Contingent Liabilities: WesBanco and its affiliates 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 WesBanco's consolidated financial position. Note 13: Transactions With Related Parties Some officers and directors (including their affiliates, families and entities in which they are principal owners) of WesBanco and its subsidiaries are customers of those subsidiaries and have had, and are expected to have, transactions with the subsidiaries in the ordinary course of business. In addition, some officers and directors are also officers and directors of corporations, which are customers of the bank and have had, and are expected to have, transactions with the bank in the ordinary course of business. In the opinion of management, such transactions are consistent with prudent banking practices and are within applicable banking regulations. Indebtedness of related parties aggregated approximately $62,288, $48,157, and $49,425 as of December 31, 2001, 2000 and 1999, respectively. During 2001, $170,270 in related party loans were funded and $156,139 were repaid. Note 14: Regulatory Matters WesBanco (Parent Company) is a legal entity separate and distinct from its subsidiaries. There are various legal limitations on the extent to which WesBanco's banking subsidiary may extend credit, pay dividends or otherwise supply funds to WesBanco. Certain restrictions under Federal and State law exist regarding the ability of a certain subsidiary to pay dividends to WesBanco. Approval is required if total dividends declared by a bank subsidiary, in any calendar year, exceeds net profits for that year combined with its retained net profits for the preceding two years. In determining to what extent to pay dividends, a bank subsidiary must also consider the effect of dividend payments on applicable risk-based capital and leverage ratio requirements. During the first quarter of 2001 and the second quarter of 2000, Federal and State regulatory agencies granted approval to declare special dividends to WesBanco for the purpose of funding share repurchase plans. As of December 31, 2001 and 2000, WesBanco's banking subsidiary could not have declared any dividends to be paid to WesBanco without prior approval from regulatory agencies. During the first quarter of 2002, Federal and State regulatory agencies granted approval to WesBanco's banking subsidiary to pay a $30,000 special dividend to WesBanco. Federal Reserve regulations require depository institutions to maintain cash reserves with the Federal Reserve Bank. The average amounts of required reserve balances were approximately $29,017 and $26,951 during 2001 and 2000, respectively. WesBanco is subject to various regulatory capital requirements (risk-based capital ratios) administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on WesBanco's financial results. All banks are required to have core capital (Tier 1) of at least 4% of risk-weighted assets, total capital of at least 8% of risk-weighted assets, and a minimum Tier 1 leverage ratio of 3% of adjusted quarterly average assets. Tier 1 capital con- sists principally of shareholders' equity, excluding unrealized gains and losses on securities available for sale and derivatives, less goodwill and certain other intangibles. Total capital consists of Tier 1 capital plus the allowance for loan losses subject to limitation. The regulations also define well-capitalized levels of Tier 1, total capital, and Tier 1 leverage as 6%, 10%, and 5%, respectively. WesBanco and its banking subsidiary were categorized as well-capitalized under the Federal Deposit Insurance Corporation Improvement Act at December 31, 2001 and 2000. There are no conditions or events since December 31, 2001 that management believes have changed WesBanco's well-capitalized category, and the merger with American Bancorporation (See Note 17 Subsequent Event (Unaudited) - Acquisition of American Bancorporation) would not lower rates below such levels. The following table summarizes risk-based capital amounts and ratios for WesBanco and its bank subsidiary: December 31, ----------------------------------- 2001 2000 ---------------- ---------------- Amount Ratio Amount Ratio ----------------------------------------------------------------------------- WesBanco, Inc. Tier 1 Leverage $ 235,726 9.62% $ 238,636 10.46% Tier 1 Capital to Risk-Weighted Assets 235,726 14.09 238,636 14.36 Total Capital to Risk-Weighted Assets 256,512 15.34 258,666 15.56 WesBanco Bank, Inc. Tier 1 Leverage $ 226,059 9.28% $ 228,080 10.09% Tier 1 Capital to Risk-Weighted Assets 226,059 13.57 228,080 13.94 Total Capital to Risk-Weighted Assets 246,826 14.81 248,104 15.14 ----------------------------------------------------------------------------- E-33 Note 15: Condensed Parent Company Financial Statements Presented below are the condensed Balance Sheet, Statement of Income and Statement of Cash Flows for the Parent Company: Balance Sheet December 31, ---------------------- 2001 2000 ----------------------------------------------------------------------------- Assets Cash and short-term investments $ 5,746 $ 4,640 Investment in subsidiaries (at equity in net assets) 255,237 255,525 Securities available for sale, carried at fair value 14,974 14,137 Other assets 483 670 ---------------------- Total Assets $ 276,440 $ 274,972 ====================== Liabilities Borrowings $ 13,272 $ 11,500 Dividends payable and other liabilities 4,967 4,966 ---------------------- Total Liabilities 18,239 16,466 Shareholders' Equity 258,201 258,506 ---------------------- Total Liabilities and Shareholders' Equity $ 276,440 $ 274,972 ============================================================================= Statement of Income For the years ended December 31, -------------------------------- 2001 2000 1999 ----------------------------------------------------------------------------- Dividends from subsidiaries $ 33,550 $ 30,000 $ 21,133 Income from securities 735 838 748 Other income 109 225 618 ---------------------------- Total income 34,394 31,063 22,499 ---------------------------- Total expense 1,981 1,781 1,474 ---------------------------- Income before income tax benefit and undistributed net income (excess dividends) of subsidiaries 32,413 29,282 21,025 Income tax benefit (631) (476) (404) ---------------------------- Income before undistributed net income of subsidiaries 33,044 29,758 21,429 Undistributed net income (excess dividends) of subsidiaries (4,042) (2,834) 6,209 ---------------------------- Net Income $ 29,002 $ 26,924 $ 27,638 ============================================================================= Statement of Cash Flows For the years ended December 31, -------------------------------- 2001 2000 1999 ----------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 29,002 $ 26,924 $ 27,638 Excess dividends (undistributed net income) of subsidiaries 4,042 2,834 (6,209) Decrease in other assets 37 2,547 28,133 Other - net (1,667) 148 3,128 ---------------------------- Net cash provided by operating activities 31,414 32,453 52,690 ---------------------------- Cash flows from investing activities: Securities available for sale: Proceeds from sales 405 4,252 --- Proceeds from maturities and calls 265 1,285 4,778 Payments for purchases (963) (977) (693) Acquisitions and additional capitalization of subsidiaries (75) (650) (2,000) ---------------------------- Net cash provided (used) by investing activities (368) 3,910 2,085 ---------------------------- Cash flows from financing activities: Borrowings (payments) on ESOP debt - net 1,572 (350) 350 Increase in borrowings 200 9,500 2,000 Purchases of treasury stock - net (14,975) (28,367) (37,011) Dividends paid (16,737) (17,167) (17,752) ---------------------------- Net cash used by financing activities (29,940) (36,384) (52,413) ---------------------------- Net increase (decrease) in cash and cash equivalents 1,106 (21) 2,362 Cash and short-term investments at beginning of year 4,640 4,661 2,299 ---------------------------- Cash and short-term investments at end of year $ 5,746 $ 4,640 $ 4,661 ============================================================================= E-34 Note 16: Business Segments WesBanco operates two reportable segments: community banking and trust and investment services. WesBanco's 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. The trust and investment services segment offers trust services as well as various alternative investment products including mutual funds and annuities. The market values of assets under management of the trust and investment services segment were $2,808,862, $3,099,441, and $3,087,610, for the years ended December 31, 2001, 2000 and 1999, respectively. These assets are held by WesBanco's affiliate, WesBanco Bank, Inc. in fiduciary or agency capacities for their customers and therefore are not included as assets on WesBanco's Consolidated Balance Sheet. Presented below are the condensed Statements of Income for WesBanco's business segments: Trust and Community Investment Banking Services Consolidated ----------------------------------------------------------------------------- For the year ended December 31, 2001 Interest income $163,939 --- $163,939 Interest expense 76,354 --- 76,354 ---------------------------------- Net interest income 87,585 --- 87,585 Provision for loan losses 5,995 --- 5,995 ---------------------------------- Net interest income after provision for loan losses 81,590 --- 81,590 Non-interest income 13,084 $11,504 24,588 Non-interest expense 58,042 6,852 64,894 ---------------------------------- Income before income taxes 36,632 4,652 41,284 Provision for income taxes 10,421 1,861 12,282 ---------------------------------- Net income $ 26,211 $ 2,791 $ 29,002 ============================================================================= For the year ended December 31, 2000 Interest income $163,079 --- $163,079 Interest expense 79,552 --- 79,552 ---------------------------------- Net interest income 83,527 --- 83,527 Provision for loan losses 3,225 --- 3,225 ---------------------------------- Net interest income after provision for loan losses 80,302 --- 80,302 Non-interest income 11,150 $12,226 23,376 Non-interest expense 57,846 6,637 64,483 ---------------------------------- Income before income taxes 33,606 5,589 39,195 Provision for income taxes 10,035 2,236 12,271 ---------------------------------- Net income $ 23,571 $ 3,353 $ 26,924 ============================================================================= For the year ended December 31, 1999 Interest income $155,861 --- $155,861 Interest expense 69,231 --- 69,231 ---------------------------------- Net interest income 86,630 --- 86,630 Provision for loan losses 4,295 --- 4,295 ---------------------------------- Net interest income after provision for loan losses 82,335 --- 82,335 Non-interest income 13,999 $10,582 24,581 Non-interest expense 61,801 6,012 67,813 ---------------------------------- Income before income taxes 34,533 4,570 39,103 Provision for income taxes 9,637 1,828 11,465 ---------------------------------- Net income $ 24,896 $ 2,742 $ 27,638 ============================================================================= E-35 Note 17: Subsequent Event (unaudited) - Acquisition of American Bancorporation On March 1, 2002, WesBanco completed the acquisition of American Bancorporation ("American") and the merger of American's affiliate, Wheeling National Bank, Wheeling, West Virginia, with and into WesBanco's affiliate, WesBanco Bank, Inc. WesBanco and American entered into a definitive Agreement and Plan of Merger on February 22, 2001. Under the terms of the definitive Agreement and Plan of Merger, WesBanco exchanged 1.1 shares of WesBanco common stock for each share of American's common stock outstanding based upon a fixed exchange rate. WesBanco issued 3,442,641 shares of common stock valued at $70,540, in a transaction accounted for under the purchase method of accounting. Of the total shares issued in the transaction, 3,119,071 shares were issued from Treasury shares and the remainder were from authorized, but previously unissued shares. WesBanco's merger with American creates a single bank holding company with approximately $3.2 billion in total assets and 75 banking offices. The combination expands WesBanco's market share in the tri-state area and includes expansion into new markets with an office in Washington, Pennsylvania, an office in Cambridge, Ohio and four offices in Columbus, Ohio. WesBanco is in the process of obtaining valuations of certain tangible and intangible assets as of the acquisition date. Accordingly, the allocation of the purchase price is subject to refinement. Under the new accounting standard, SFAS No. 142, "Goodwill and Other Intangible Assets," a core deposit intangible is separated from goodwill and amortized over its remaining useful life. The core deposit intangible, amortization of which is non- deductible for tax purposes, approximates $15,000 with an estimated useful life of ten years. Goodwill approximates $30,000 and is not subject to amortization, but will be periodically evaluated for possible impairment. Goodwill and the core deposit intangible, recognized as a result of this transaction, will be allocated to WesBanco's community banking segment. The following is a condensed balance sheet of the acquired entity (American) as of December 31, 2001: ----------------------------------------------------------------- Assets Cash and cash equivalents $ 17,667 Available for sale securities 286,152 Net loans 355,778 Other assets 32,270 -------- Total Assets $691,867 ======== Liabilities Deposits $475,584 Other borrowings 155,266 Other liabilities 5,210 Subordinated debentures 12,650 -------- Total Liabilities 648,710 Shareholders' Equity 43,157 -------- Total Liabilities and Shareholders' Equity $691,867 ======== E-36 Management's Responsibility for Financial Statements ----------------------------------------------------------------------- The financial statements and the information pertaining to those statements are the responsibility of management. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States, applied on a consistent basis. The accounting systems of WesBanco and its subsidiaries include internal controls and procedures which provide reasonable assurance as to the reliability of the financial records. Internal controls are generally supported by written policies and procedures. WesBanco's internal audit function performs audits of operations, reviews procedures, monitors adherence to corporate policies and submits written audit reports to the Audit Committee. The Audit Committee of the Board of Directors is composed of only independent directors. The Audit Committee meets regularly with management, internal audit and independent auditors to review accounting, auditing and financial matters. The internal auditors, Federal and State examiners, and Ernst & Young LLP have full access to the Audit Committee to discuss any appropriate matters. The financial statements have been audited by Ernst & Young LLP, independent auditors. Their accompanying report is based on an audit conducted in accordance with auditing standards generally accepted in the United States. /s/ Paul M. Limbert /s/ Robert H. Young Paul M. Limbert Robert H. Young President and Chief Executive Officer Executive Vice President and Chief Financial Officer Report of Ernst & Young LLP, Independent Auditors ----------------------------------------------------------------------- Shareholders and Board of Directors WesBanco, Inc. We have audited the accompanying consolidated balance sheets of WesBanco, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of WesBanco, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of WesBanco, Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP February 1, 2002 Pittsburgh, Pennsylvania E-37 Condensed Quarterly Statement of Income (in thousands, except per share amounts) 2001 Quarter ended ---------------------------------------------------------- Annual March 31 June 30 September 30 December 31 Total ------------------------------------------------------------------------------------- Interest income $40,905 $41,340 $41,563 $40,131 $163,939 Interest expense 19,969 19,642 19,519 17,224 76,354 --------------------------------------------------------- Net interest income 20,936 21,698 22,044 22,907 87,585 Provision for loan losses 900 1,123 2,327 1,645 5,995 --------------------------------------------------------- Net interest income after provision for loan losses 20,036 20,575 19,717 21,262 81,590 Non-interest income 6,000 6,053 6,150 6,385 24,588 Non-interest expense 15,044 16,187 16,260 17,403 64,894 --------------------------------------------------------- Income before income taxes 10,992 10,441 9,607 10,244 41,284 Provision for income taxes 3,587 3,141 2,601 2,953 12,282 --------------------------------------------------------- Net income $ 7,405 $ 7,300 $ 7,006 $ 7,291 $ 29,002 ========================================================= Earnings per share $0.40 $0.40 $0.39 $0.41 $1.60 ------------------------------------------------------------------------------------- 2000 Quarter ended ---------------------------------------------------------- Annual March 31 June 30 September 30 December 31 Total ------------------------------------------------------------------------------------- Interest income $39,326 $40,361 $41,573 $41,819 $163,079 Interest expense 18,469 19,316 20,893 20,874 79,552 --------------------------------------------------------- Net interest income 20,857 21,045 20,680 20,945 83,527 Provision for loan losses 567 880 732 1,046 3,225 --------------------------------------------------------- Net interest income after provision for loan losses 20,290 20,165 19,948 19,899 80,302 Non-interest income 5,547 5,737 5,424 6,668 23,376 Non-interest expense 15,942 15,995 16,260 16,286 64,483 --------------------------------------------------------- Income before income taxes 9,895 9,907 9,112 10,281 39,195 Provision for income taxes 2,965 3,226 2,724 3,356 12,271 --------------------------------------------------------- Net income $ 6,930 $ 6,681 $ 6,388 $ 6,925 $ 26,924 ========================================================= Earnings per share $0.35 $0.35 $0.34 $0.37 $1.41 -------------------------------------------------------------------------------------
E-38 Management's Discussion and Analysis of the Consolidated Financial Statements ----------------------------------------------------------------------------- Management's Discussion and Analysis represents an overview of the results of operations and financial condition of WesBanco, Inc. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto. Forward-looking statements in this report 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. Investors are cautioned that such forward-looking statements, which are not historical fact, involve risks and uncertainties. Such statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements, including without limitation, the effect of changing regional and national economic conditions; changes in interest rates; credit risks of commercial, real estate, and consumer loan customers and their lending activities, actions of the Federal Reserve Board and Federal Deposit Insurance Corporation, legislative and Federal and State regulatory actions and reform, or other unanticipated external developments materially impacting WesBanco's operational and financial performance. WesBanco does not assume any duty to update forward-looking statements. Table 1. Five Year Selected Financial Summary (dollars in thousands, except per share amounts) December 31, ----------------------------------------------------------- 2001 2000 1999 1998 1997 ---------------------------------------------------------------------------------------------- Per share information: Dividends $ 0.92 $0.895 $ 0.88 $ 0.84 $0.786 Book value at year end 14.46 13.92 13.63 14.35 13.97 Average common shares outstanding 18,123,851 19,092,927 20,229,524 20,867,193 20,461,742 Selected balance sheet information: Total securities $ 758,470 $ 546,389 $ 567,928 $ 680,550 $ 629,218 Net loans 1,518,909 1,570,672 1,503,694 1,353,920 1,321,640 Total assets 2,474,454 2,310,137 2,269,726 2,242,712 2,211,543 Total deposits 1,913,458 1,870,361 1,814,001 1,787,642 1,779,867 Total shareholders' equity 258,201 258,506 269,664 296,483 287,995 Selected ratios: Return on average assets 1.21% 1.18% 1.23% 1.26% 1.18% Return on average equity 11.28 10.42 9.85 9.55 8.99 Dividend payout 57.50 63.47 64.23 61.76 63.90 Average equity to average assets 10.70 11.30 12.47 13.16 13.15 Trust assets, market value at year end $2,808,862 $3,099,441 $3,087,610 $2,774,906 $2,099,821 ---------------------------------------------------------------------------------------------- For the years ended December 31, -------------------------------------------------------------- Summary statement of income: 2001 2000 1999 1998 1997 ---------------------------------------------------------------------------------------------- Interest income $163,939 $163,079 $155,861 $162,718 $157,790 Interest expense 76,354 79,552 69,231 73,925 70,005 -------------------------------------------------------- Net interest income 87,585 83,527 86,630 88,793 87,785 Provision for loan losses 5,995 3,225 4,295 4,392 5,574 -------------------------------------------------------- Net interest income after provision for loan losses 81,590 80,302 82,335 84,401 82,211 Non-interest income 24,588 23,376 24,581 25,715 17,701 Non-interest expense 64,894 64,483 67,813 68,308 65,182 -------------------------------------------------------- Income before income taxes 41,284 39,195 39,103 41,808 34,730 Provision for income taxes 12,282 12,271 11,465 13,495 9,519 -------------------------------------------------------- Net income $ 29,002 $ 26,924 $ 27,638 $ 28,313 $ 25,211 ======================================================== Earnings per share $1.60 $1.41 $1.37 $1.36 $1.23 ======================================================== Core earnings (1) $ 29,742 $ 27,966 $ 26,525 $ 25,468 $ 25,645 Core earnings per share (1) 1.64 1.46 1.32 1.28 1.25 ----------------------------------------------------------------------------------------------
(1) Excludes goodwill amortization, net securities gains, and non-recurring items. E-39 Earnings Summary WesBanco's 2001 financial performance was highlighted by increases in net interest income, deposit activity charges and net securities gains. These positive factors were partially offset by a decline in trust revenue and an increase in the loan loss provision. Earnings for 2001 were $29.0 million or $1.60 per share compared to $26.9 million or $1.41 per share in 2000. Core earnings per share for 2001 increased 12.3% to $1.64 compared to $1.46 in 2000. Core earnings, which excludes amortization of goodwill, net securities gains and non-recurring items, increased to $29.7 million compared to $28.0 million in the prior year. Non-recurring items consisted of $0.2 million of acquisition-related costs for 2001. There were no items classified as non-recurring in 2000. WesBanco's key earnings performance ratios also improved in 2001. Earnings performance reflected a return on average assets of 1.21% and a return on average equity of 11.28% for the year ended December 31, 2001, compared to 1.18% and 10.42%, respectively, for 2000. Results of Operations Net Interest Income Taxable equivalent net interest income, which is WesBanco's largest revenue source, is the difference between interest income on earning assets (loans, securities and federal funds sold) and interest expense paid on liabilities (deposits and borrowings). Taxable equivalent net interest income is affected by the general level of interest rates, changes in interest rates, and changes in the amount and composition of interest earning assets and interest bearing liabilities. Taxable equivalent net interest income for 2001 increased $4.8 million or 5.4% in comparison to 2000. As shown in Table 2, the taxable equivalent net interest margin was 4.17% in 2001 compared to 4.14% in 2000. The Federal Reserve lowered the target federal funds rate 475 basis points in 2001 compared to an increase of 100 basis points in 2000. During 2001, WesBanco lowered its base lending rate to 4.75% from 9.50% in the prior year. The overall decline in interest rates in 2001 and the short-term interest rate sensitivity of interest bearing liabilities favorably impacted WesBanco's taxable equivalent net interest margin. Average earning assets increased $104.1 million or 4.9%, while average interest bearing liabilities increased $99.3 million or 5.5%. Table 3 presents the impact of these changes in volume and rate on the components of taxable equivalent net interest income. GRAPH: Net Interest Margin %* 2001 4.17% 2000 4.14% 1999 4.39% 1998 4.46% 1997 4.66% *Taxable equivalent. Taxable equivalent interest income increased $1.6 million or 0.9% for 2001 compared to 2000. The increase in taxable equivalent interest income was primarily due to an increase in the volume of average earning assets, which was partially offset by decreases in yields. The taxable equivalent yield on average earning assets decreased to 7.58% in 2001 from 7.88% in 2000. This decline was due to the general reduction in interest rates combined with a shift in volume from higher-yielding loans into securities with lower yields. GRAPH: Net Interest Income* (in millions) 2001 $93.1 2000 $88.4 1999 $92.1 1998 $94.0 1997 $92.7 *Taxable equivelant. Interest expense decreased $3.2 million or 4.0% for 2001 compared to 2000. As shown in Table 2, the decrease in interest expense resulted from a decrease in the rate paid on average interest bearing liabilities to 4.03% in 2001 from 4.43% in 2000, which was partially offset by a total volume increase of 5.5%. The decrease in the rate paid on average interest bearing liabilities was attributable to significant interest rate reductions on other borrowings comprised mainly of repurchase agreements and FHLB borrowings and money market accounts comprised primarily of prime rate based products. During 2001, customers shifted out of savings accounts and long-term certificates of deposit and invested in short-term certificates of deposit and money market accounts. Average other borrowings increased $90.2 million or 58.2% reflecting growth primarily in average FHLB borrowings of $57.0 million. The change in the composition of the interest bearing liabilities was the result of the decline in interest rates during 2001. E-40 Table 2. Average Balance Sheet and Net Interest Analysis For the years ended December 31, ----------------------------------------------------------------------------------------- 2001 2000 1999 ------------------------------ --------------------------- -------------------------- Average Average Average Average Average Average (dollars in thousands) Volume Interest Rate Volume Interest Rate Volume Interest Rate ------------------------------------------------------------------------------------------------------------------------------ Assets Loans, net of unearned income (1) $1,559,145 $126,230 8.10% $1,556,195 $128,591 8.26% $1,441,172 $117,508 8.15% Securities(2): Taxable 425,006 25,692 6.05 374,302 24,297 6.49 436,501 27,269 6.25 Tax-exempt (3) 209,268 15,892 7.59 182,516 13,806 7.56 204,697 15,665 7.65 ----------------------------------------------------------------------------------------- Total securities 634,274 41,584 6.56 556,818 38,103 6.84 641,198 42,934 6.70 Federal funds sold 42,421 1,687 3.98 18,703 1,217 6.51 17,905 902 5.04 ----------------------------------------------------------------------------------------- Total earning assets (3) 2,235,840 $169,501 7.58% 2,131,716 $167,911 7.88% 2,100,275 $161,344 7.68% Other assets 167,593 156,062 151,053 ----------------------------------------------------------------------------------------- Total assets $2,403,433 $2,287,778 $2,251,328 ========================================================================================= Liabilities and Shareholders' Equity Interest bearing demand deposits $ 245,712 $ 3,920 1.60% $ 247,753 $ 5,026 2.03% $ 238,777 $ 4,418 1.85% Money market deposits 374,100 14,006 3.74 352,084 16,462 4.68 337,643 13,653 4.04 Savings deposits 252,606 4,671 1.85 265,723 5,264 1.98 297,759 5,936 1.99 Certificates of deposit 776,852 43,632 5.62 774,607 43,689 5.64 725,555 38,545 5.31 ----------------------------------------------------------------------------------------- Total interest bearing deposits 1,649,270 66,229 4.02 1,640,167 70,441 4.29 1,599,734 62,552 3.91 Other borrowings 245,390 10,125 4.13 155,149 9,111 5.87 144,774 6,679 4.61 ----------------------------------------------------------------------------------------- Total interest bearing liabilities 1,894,660 $ 76,354 4.03% 1,795,316 $ 79,552 4.43% 1,744,508 $ 69,231 3.97% Non-interest bearing demand deposits 228,936 215,393 207,520 Other liabilities 22,759 18,645 18,615 Shareholders' equity 257,078 258,424 280,685 ----------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $2,403,433 $2,287,778 $2,251,328 ========================================================================================= Taxable equivalent net interest margin (3) $ 93,147 4.17% $ 88,359 4.14% $ 92,113 4.39% ==============================================================================================================================
(1)Total loans are gross of allowance for loan losses, net of unearned income, and include loans held for sale. Non-accrual loans were included in the average volume for the entire year. Loan fees included in interest on loans are not material. (2)Average yields on securities available for sale have been 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. Table 3. Rate Volume Analysis of Changes in Interest Income and Interest Expense (1) 2001 Compared to 2000 2000 Compared to 1999 ------------------------------- ----------------------------- Net Increase Net Increase (in thousands) Volume Rate (Decrease) Volume Rate (Decrease) -------------------------------------------------------------------------------------------------------- Increase (decrease) in interest income: Loans, net of unearned income $ 330 $(2,691) $(2,361) $ 9,486 $ 1,597 $11,083 Taxable securities 3,141 (1,746) 1,395 (4,005) 1,033 (2,972) Tax-exempt securities (2) 2,031 55 2,086 (1,681) (178) (1,859) Federal funds sold 1,084 (614) 470 42 273 315 --------------------------------------------------------------- Total interest income change 6,586 (4,996) 1,590 3,842 2,725 6,567 --------------------------------------------------------------- Increase (decrease) in interest expense: Interest bearing demand deposits (41) (1,065) (1,106) 170 438 608 Money market deposits 980 (3,436) (2,456) 600 2,209 2,809 Savings deposits (252) (341) (593) (635) (37) (672) Certificates of deposit 126 (183) (57) 2,690 2,454 5,144 Other borrowings 4,257 (3,243) 1,014 506 1,926 2,432 --------------------------------------------------------------- Total interest expense change 5,070 (8,268) (3,198) 3,331 6,990 10,321 --------------------------------------------------------------- Net interest income increase (decrease)(2) $1,516 $ 3,272 $ 4,788 $ 511 $(4,265) $(3,754) ========================================================================================================
(1)Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis. (2)Taxable equivalent basis is calculated on tax-exempt securities using a tax rate of 35% for each year presented. E-41 Results of Operations (continued) Provision For Loan Losses The provision for loan losses in 2001 increased to $6.0 million compared to $3.2 million in 2000. Net charge-offs increased to $5.2 million compared to $2.9 million in 2000. Net charge-offs as a percentage of average total loans increased to 0.34% in 2001 from 0.19% in 2000. The increases in the provision and net charge-offs were primarily due to the recessionary economic environment that existed in the region's economy during 2001. For additional information on the allowance for loan losses, see the "Allowance for Loan Losses" section included in this Management's Discussion and Analysis. Non-Interest Income Excluding net securities gains, 2001 non-interest income increased $0.7 million or 3.2% from 2000. A decrease in trust income was exceeded by increases in deposit activity revenue and other income. Trust fees decreased $0.7 million or 5.9% compared to 2000. The decline was primarily due to a general reduction in the market value of trust assets and lower estate settlement income. The market value of trust assets at December 31, 2001 was $2.8 billion, a decrease of $291 million from December 31, 2000. Deposit activity revenue increased approximately $1.1 million or 13.4% due to increases in fees connected with customer deposit activities, debit cards and ATMs. GRAPH: Non-Interest Income* to Average Assets 2001 1.02% 2000 0.99% 1999 0.92% 1998 0.87% 1997 0.81% *Excludes net securities gains and non-recurring items. Other income increased by approximately $0.4 million or 15.7% compared to 2000 as the result of increased income from real estate loans originated for sale in the secondary market. Net securities gains increased $0.5 million or 61.2% in 2001 due primarily to gains realized on called U.S Agency securities. Non-Interest Expense Non-interest expense increased $0.4 million or 0.6% compared to 2000. This consistency with the prior year reflects the continued improvement in internal operating efficiencies resulting from the consolidation of WesBanco's four banking affiliates and mortgage company affiliate into a single bank charter during 2000 and management's ongoing efforts to control operating costs. WesBanco's efficiency ratio improved to 54.3% in 2001 from 56.7% in 2000. GRAPH: Non-Interest Expense* to Average Assets 2001 2.68% 2000 2.82% 1999 3.01% 1998 2.96% 1997 3.06% *Excludes goodwill amortization and non-recurring items. Employee benefit costs increased $0.8 million or 16.2% compared to 2000, primarily due to a $0.7 million increase in health insurance costs. Salaries and wages declined slightly (approximately 1%) in 2001 as normal salary increases were offset by reduced staffing levels. Full-time equivalent employees, on average, declined to 993 for 2001 compared to 1,055 for 2000. Other non- interest expense categories, in total, approximated the level of the prior year. Decreases in technology and telecommunication costs associated with the administration of WesBanco's wide area network were offset by increases in consulting fees, general maintenance of branch facilities and processing costs associated with increased transaction volume at ATMs. Income Taxes Although WesBanco's pretax income increased $2.1 million to $41.3 million in 2001 from $39.2 million in 2000, the provision for income taxes remained constant at $12.3 million for both years. This circumstance was caused by an increase in non-taxable income in 2001 which lowered the effective tax rate to 30% for 2001 from 31% for 2000. Federal income tax expense increased $0.2 million to $10.2 million in 2001 from $10.0 million in 2000. WesBanco's West Virginia affiliates are subject to a state corporate net income tax, which is based upon federal taxable income, with certain modifications. The statutory West Virginia tax rate was 9.0% for 2001 and 2000. West Virginia income tax, included in the provision for income taxes, was $2.1 million for 2001 compared to $2.3 million for 2000. WesBanco's offices located in Ohio are subject to an Ohio franchise tax, rather than a corporate income tax. Ohio franchise taxes are included in other operating expense. E-42 Financial Condition Securities Securities increased $212.1 million between December 31, 2000 and December 31, 2001. As shown in Table 4, available for sale securities, at fair value, representing 68.2% of total securities at December 31, 2001, increased $167.2 million or 47.7%. Held to maturity securities, representing the remaining 31.8% of total securities, increased $44.9 million or 22.9% during 2001. At December 31, 2001, the average yield of the available for sale portfolio was 5.75% with an average maturity of 2.7 years. For the same period, the average taxable equivalent yield of the held to maturity portfolio was 6.94% with an average maturity of 6.6 years. During 2001, securities available for sale and held to maturity increased as purchases significantly exceeded sales, maturities, paydowns and calls. Throughout the year, WesBanco purchased Federal Agency, municipal, corporate and mortgage-backed securities to take advantage of favorable market rate opportunities enhanced by a relatively steep yield curve. Unrealized pre-tax gains/losses on available for sale securities (fair value adjustments) totaled $7.4 million market gain as of December 31, 2001 compared to a $0.5 million market loss as of December 31, 2000. These fair value adjustments represent temporary fluctuations resulting from changes in market rates in relation to average yields in the available for sale portfolio. WesBanco can impact the magnitude of the fair value adjustment by managing both the volume of securities classified as available for sale and average maturities. If securities are held to their respective maturity dates, no fair value gain or loss would be realized. GRAPH: Securities (in millions) 2001 $762 2000 $546 1999 $568 1998 $681 1997 $629 Securities represent a source of liquidity for WesBanco. During 2001, securities with a total carrying value of $199.8 million either matured or were called. In addition, $65.0 million of available for sale securities were sold during 2001. Table 4. Composition of Securities December 31, ------------------------------ (in thousands) 2001 2000 1999 ------------------------------------------------------------------------------------- Securities held to maturity (at amortized cost): U.S. Treasury and Federal Agency securities $ 1,001 $ 4,357 $ 13,346 Obligations of states and political subdivisions (1) 221,866 173,771 182,005 Other securities 18,086 17,974 17,902 ---------------------------- Total securities held to maturity 240,953 196,102 213,253 ---------------------------- Securities available for sale (at fair value): U.S. Treasury and Federal Agency securities 307,250 206,268 189,593 Obligations of states and political subdivisions (1) 12,076 12,907 18,298 Mortgage-backed and other securities (2) 198,191 131,112 146,784 ---------------------------- Total securities available for sale 517,517 350,287 354,675 ---------------------------- Total securities $758,470 $546,389 $567,928 =====================================================================================
(1) There are no individual securities included in obligations of states and political subdivisions or other securities, which individually or in the aggregate exceed ten percent of shareholders' equity. (2) Other securities, classified as available for sale, include equity interests in business corporations. E-43 Financial Condition (continued) Table 5. Maturity Distribution and Yield Analysis of Securities December 31, 2001 ----------------------------------------------------------------------- After One But After Five But Within One Year Within Five Years Within Ten Years After Ten Years --------------- ----------------- ---------------- --------------- (dollars in thousands) Amount Yield* Amount Yield* Amount Yield* Amount Yield* ------------------------------------------------------------------------------------------------------- Securities held to maturity: U.S. Treasury and Federal Agency securities $ 1,001 6.37% --- --- --- --- --- --- Obligations of states and political subdivisions (1) 17,758 7.23 $ 44,679 7.22% $ 95,454 6.89% $ 63,975 7.04% Other securities (2) --- --- --- --- --- --- 18,086 5.89 ----------------------------------------------------------------------- Total held to maturity 18,759 7.18 44,679 7.22 95,454 6.89 82,061 6.79 ----------------------------------------------------------------------- Securities available for sale (3): U.S. Treasury and Federal Agency securities 9,998 5.73 157,804 4.73 133,146 6.53 --- --- Obligations of states and political subdivisions (1) 3,384 6.14 5,913 6.32 1,578 7.43 1,030 12.26 Mortgage-backed and other securities (4) 553 5.56 116,239 5.98 71,275 5.87 9,184 3.72 ----------------------------------------------------------------------- Total available for sale 13,935 5.82 279,956 5.28 205,999 6.31 10,214 4.58 ----------------------------------------------------------------------- Total securities $32,694 6.60% $324,635 5.55% $301,453 6.49% $ 92,275 6.54% =======================================================================================================
* Yields are calculated using a weighted average yield to maturity. (1)Average yields on obligations of states and political subdivisions have been calculated on a taxable equivalent basis. (2)Other held to maturity securities include securities with no stated maturity date. (3)Average yields on securities available for sale have been calculated based on amortized cost. (4)Mortgage-backed securities, which have prepayment provisions, are assigned to maturity categories based on estimated average lives. Loans Accounting policies related to loans and the allowance for loan losses are deemed to be critical accounting policies. In addition to the discussion herein, see the significant accounting policies in Note 1 of the Consolidated Financial Statements. Loan Portfolio The loan portfolio, which represents WesBanco's largest asset classification is a significant source of interest income and fee income. Elements of the loan portfolio are subject to differing levels of credit and interest rate risk. Loans decreased $51.1 million or 3.2% between December 31, 2000 and December 31, 2001. WesBanco experienced growth in commercial loans during 2001, however, that growth was more than offset by decreases in the consumer and residential real estate loan portfolios. Commercial loans increased $23.1 million or 4.2% compared to the prior year. The commercial loan portfolio includes both secured and unsecured short-term loans to finance working capital, as well as longer term loans to finance fixed assets, including commercial real estate. Commercial loan demand remained strong throughout the year despite a weakening economy. This demand was fueled in part by lower interest rates, which resulted in many businesses and investment property owners proceeding with planned expansions, acquiring new properties, or refinancing existing debts. Most of the increase in commercial loans is attributable to new loans secured by real estate projects or investment properties. Residential real estate loans decreased $37.3 million or 5.7% compared to the prior year. Residential real estate loans include conventional mortgages to purchase or refinance personal residences and one-to-four family rental properties, as well as home equity lines of credit that are secured by first or second liens on residences. WesBanco originates mortgage loans for its own portfolio as well as loans sold in the secondary market. Lower interest rates throughout the year resulted in an increase in mortgage refinancing activity. Conventional mortgage loans decreased $49.0 million or 8.7% compared to the prior year. This decrease was due to scheduled repayment of loans, but also reflects WesBanco's decision to reduce exposure to fixed interest rates on new loans originated near the bottom of the interest rate cycle by selling current originations in the secondary market. Mortgage loans originated for sale increased 25.9% to $63.6 million in 2001 compared to $50.5 million in 2000. Decreases in conventional mortgage loans held in the portfolio were partially offset by growth in home equity lines of credit, which increased $11.7 million or 13.5% compared to the prior year. Home equity lending has been a significant source of loan growth as consumers use the equity in their residences to improve their homes, consolidate debts and for other purposes. E-44 Table 6. Composition of Loans December 31, ------------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 ---------------- ---------------- ---------------- ---------------- ------------------ % of % of % of % of % of (dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ---------------------------------------------------------------------------------------------------------------- Commercial $ 569,193 37% $ 546,136 34% $ 521,450 34% $ 484,269 35% $ 438,055 33% Real estate - construction 37,676 2 36,007 2 31,742 2 46,033 3 37,743 2 Real estate-residential 614,586 40 651,924 41 630,939 41 520,393 38 521,222 39 Consumer 312,775 20 354,352 22 329,763 22 313,490 23 334,671 25 Loans held for sale 5,522 1 2,391 1 9,753 1 9,280 1 11,705 1 ------------------------------------------------------------------------------------------ Total loans $1,539,752 100% $1,590,810 100% $1,523,647 100% $1,373,465 100% $1,343,396 100% ================================================================================================================
Loans are presented gross of allowance for loan losses and unearned income on consumer loans. Loans held for sale, which consists solely of mortgage loans originated for sale in the secondary market, increased $3.1 million compared to the prior year. This increase reflects the increase in secondary market loan volume which continued through the end of the year. WesBanco enters into sales commitments at the time these loans are funded. Real estate-construction loans, which include both commercial and residential properties, increased $1.7 million or 4.6% compared to the prior year. Construction loans are influenced by many factors, including the number of housing starts and the volume of new commercial projects. The increase at December 31, 2001 was primarily due to new residential construction activity. Consumer loans decreased $41.6 million or 11.7% compared to the prior year. Consumer loans consist of indirect loans originated through automobile dealers and other types of secured and unsecured direct loans to individuals for consumer purposes. The decrease in consumer loans reflects WesBanco's decision to tighten lending standards for indirect automobile lending, competition from automobile manufacturers offering low-interest rate or zero-percent financing, a slowdown in the regional economy, and the economic effects associated with the decline of the steel industry in the Northern Panhandle of West Virginia. Off-balance sheet commitments consist of available balances under lines of credit and letters of credit. These commitments to extend credit increased $74.7 million or 38.3% between December 31, 2000 and December 31, 2001. This increase is attributed to growth in commercial and home equity lines of credit. Commercial lines of credit and letters of credit are generally renewable or may be cancelled annually. Loan commitments that are available beyond one year consist of home equity and other personal lines of credit, certain real estate construction loans, and other commercial lines of credit. Loan commitments, regardless of the duration of availability, are cancelable by WesBanco under certain circumstances. Table 7. Loan Commitments December 31, 2001 -------------------------------------------- For One One Year to Over (in thousands) Year or Less Five Years Five Years ------------------------------------------------------------------------ Lines of credit: Commercial $136,596 $29,096 $ 2,354 Consumer and residential real estate 3,388 --- 79,989 Letters of credit 18,263 --- --- -------------------------------------------- Total $158,247 $29,096 $82,343 ======================================================================== Credit Risk Inherent Risks: The risk that borrowers will be unable to repay their obligations and default on loans is inherent in all lending activities. WesBanco's 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 both through the initial underwriting process as well as through ongoing monitoring and administration of the loan portfolio. WesBanco's credit policies establish, among other things, underwriting guidelines for all types of loans; lending authorities; limitations on credit exposure to individual borrowers or groups of borrowers, as well as loan type, industry, and geographic concentrations; and loan portfolio administration procedures. Exceptions to credit policy require careful evaluation of the additional risks associated with each exception and the factors that mitigate those risks. Underwriting guidelines require an appropriate evaluation of the repayment capacity and general creditworthiness of each borrower; requirements for down payments or borrower's equity; the adequacy of collateral, if any, to secure the loan including current market appraisals or other valuations of collateral; and other factors unique to each loan that may increase or mitigate its risks. Individual lending officers may approve loans up to specified limits, which vary by type of loan. Loans above individual officers' limits require approval of the Chief Credit Officer, a loan committee, or the Board of Directors, depending on the amount of credit exposure to the particular borrower. These approval requirements also apply to renewals, extensions and modifications of loan terms. E-45 Financial Condition (continued) WesBanco extends credit to individuals for various consumer purposes, which include installment loans to purchase automobiles, residential mortgage loans, construction loans, home equity lines of credit, and other personal loans. WesBanco also extends credit to businesses of all types to purchase assets, including investment properties, finance expansion, construct facilities or provide working capital. Consumer loans are a homogeneous group of loans, generally smaller in amount, which are not concentrated in a specific market area and are spread over a larger number of diverse individual borrowers. The maximum term for automobile loans and other types of personal loans generally do not exceed 72 months. Risks in this segment of the portfolio include the impact of a general economic downturn, an isolated adverse event that impacts a major employer, and collateral values that depreciate faster than the repayment of the loan balance. Residential real estate loans, while typically larger in amount compared to personal loans, have many of the same characteristics and are also affected by economic conditions which may influence real property values. Conventional mortgage loans that are held in the loan portfolio have terms ranging from 15 to 30 years depending on whether the interest rate is fixed or adjustable, with a maximum of 15 years for fixed rate loans. Borrowers are generally required to have adequate down payments or equity in the property. Loan requests that exceed the loan-to-value guidelines set forth by established credit policies generally must be supported by private mortgage insurance. Home equity lines of credit are secured by first or second liens on real estate up to 100% of the value of the property net of any first lien mortgage. Commercial loans are often for substantially larger amounts and the potential for loss on any one loan can be significant. Commercial loans secured by real estate are generally structured to fully amortize over terms ranging from 15 to 25 years depending on the type of property. Loans with amortization periods of more than 20 years will generally also have a maturity of 10 years or less. This includes loans that are secured by properties used in the operation of a borrower's business and loans that are secured by income producing rental properties. Commercial loans that are not secured by real estate have shorter terms and include revolving lines of credit that mature within one year or less. Loans secured by equipment and other types of personal property have terms that generally do not exceed 10 years. Real estate-construction loans are generally made only when WesBanco also commits to the permanent financing of the project or residence, or has a takeout commitment from another lender for the permanent loan. Commercial loans are not concentrated in any single industry but reflect a broad range of businesses located primarily within WesBanco's market areas. There are no significant loans made to customers outside WesBanco's general market areas unless the borrower also has significant other non-lending relationships with WesBanco. The risk of loss with all lending is mitigated by obtaining collateral to secure loans. Unsecured loans represent less than 5% of total loans. WesBanco's exposure to credit losses in the event of non- performance by the other parties to the financial instruments for commitments to extend credit and 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. Table 8. Maturity Distribution of Loans December 31, 2001 ------------------------------------------- After One In One Year through After (in thousands) Year or Less Five Years Five Years -------------------------------------------------------------------------- Commercial $128,765 $ 86,213 $140,843 Commercial real estate 27,817 19,195 166,360 Real estate - construction 7,863 489 29,324 ------------------------------------------ Total $164,445 $105,897 $336,527 ========================================== Fixed rates $ 42,669 $ 52,086 $ 76,133 Variable rates 121,776 53,811 260,394 ------------------------------------------ Total $164,445 $105,897 $336,527 ========================================================================== Excludes consumer, residential mortgage and loans held for sale. External Risks: In addition to the inherent risks discussed above, economic conditions and other external factors beyond WesBanco's control can adversely impact credit risk. In addition to the general downturn in the economy, the Upper Ohio Valley has been significantly impacted by the difficulties facing the steel industry, which continues to be threatened by foreign imports and other factors. Two of the ten largest integrated steel companies in the United States are headquartered in the Upper Ohio Valley and are major employers in that part of WesBanco's market. One of these companies has been operating under Chapter 11 of the Bankruptcy Act since November 2000 and its employees have taken temporary, but significant, reductions in wages, while the other company significantly reduced its workforce during 2001. As of December 31, 2001, WesBanco had no material direct credit exposure to steel companies. However, WesBanco extends credit to consumers employed in the steel industry and to businesses that provide products or services to the industry. In addition, a number of other businesses not directly associated with the industry could be adversely impacted by a significant loss of employment. Approximately 40% of WesBanco's total loan portfolio is comprised of borrowers located in the Upper Ohio Valley. It is not possible to ascertain the impact that continued difficulties in the steel industry may have on these customers and their ability to repay. On March 5, 2002, President Bush initiated tariffs on most steel imports in an effort to restore the strength and profitability of the steel industry. E-46 Risk Monitoring: Subsequent to loan origination, the process used to measure and monitor credit risk depends on the type of loan. Monitoring the level and trend of delinquent loans is a basic practice for all loan types. Underwriting standards may also be changed when appropriate. Credit risk in the consumer loan and residential real estate portfolios is also managed by monitoring market conditions that may impact groups of borrowers or collateral values. Credit risk in the commercial loan portfolio is managed by periodic reviews of large borrowing relationships, monitoring the portfolio for potential concentrations of credit, and monitoring each borrower's compliance with applicable loan covenants. WesBanco maintains a loan grading system that categorizes commercial loans according to their level of credit risk. These grades encompass six categories that define each borrower's ability to repay their loan obligations and other factors that affect the quality of the loan. All commercial loans are assigned a grade at their inception, and grades are regularly reviewed and evaluated. When the risk of a loan increases beyond that which is considered acceptable in the assigned grade, its grade is adjusted to reflect the change in risk. The loan grading system provides management with an effective early warning system of potential problems, assists in identifying adverse trends and evaluating the overall quality of the portfolio, and facilitates evaluating the adequacy of the allowance for loan losses. Classified loans are those loans that exhibit clear and defined weaknesses that may jeopardize their repayment in full. Loans are classified as "substandard" when they are no longer adequately protected by adequate net worth and paying capacity of the borrower or value of the collateral. Substandard loans are characterized by the possibility that WesBanco may sustain some loss. Loans are classified as "doubtful" when the risk that a loss may occur has increased, or at least a portion of the loan may require charge-off. Classified loans include some loans that are delinquent or on non- accrual status and may also include loans whose terms have been renegotiated. Classified loans are tested for possible impairment at least quarterly. WesBanco also maintains a loan review process, independent of the loan origination function, to evaluate the quality of the loan portfolio and the effectiveness of credit administration. The loan review process also identifies areas that may require additional management attention, evaluates the adequacy of loan documentation, provides written reports to management regarding compliance with lending policies, and validates the reliability of the grading system. The loan review function reports to the Audit/Loan Committee of the Board of Directors. The loan review process also identifies areas that may require additional management attention, evaluates the adequacy of loan documentation, provides written reports to management regarding compliance with lending policies, validates the reliability of the grading system, and reviews management's analysis of the allowance for loan losses. Non-performing Assets and Other Impaired Loans: Non-performing assets consist of non-accrual and renegotiated loans and other real estate owned acquired through foreclosure. Other impaired loans include loans that are internally classified as substandard or doubtful. Loans are placed on non-accrual status, when in the opinion of management, doubt exists as to collectability. All banks must conform to the policies of the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency which state that banks may not accrue interest on any loan on which either the principal or interest is past due 90 days or more unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual, interest income may be recognized as cash payments are received. Loans are categorized as renegotiated when WesBanco, for economic or legal reasons related to a borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. Concessions that may be granted include a reduction of the interest rate, the amount of accrued interest, or the face amount of the loan; as well as an extension of the maturity date or the amortization schedule. Non-performing assets and other impaired loans decreased $3.6 million or 17.0% compared to the prior year. This decrease is the result of a reduction in non-accrual and other impaired loans offset by an increase in renegotiated loans. Commercial loans in the amount of $4.6 million that were classified as other impaired loans at December 31, 2000 were renegotiated during 2001. Renegotiated commercial loans of $1.1 million were paid off during the year. Total non-performing loans and other impaired loans as a percentage of total loans decreased to 0.9% at December 31, 2001 compared to 1.1% at December 31, 2000. Loans past due 90 days or more increased $3.9 million or 59.5% compared to the prior year, with the increase primarily due to higher delinquency in consumer and residential real estate loans. E-47 Financial Condition (continued) Table 9. Non-performing Assets, Other Impaired Loans and Loans Past Due 90 Days or More December 31, ------------------------------------------------- (dollars in thousands) 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------ Non-accrual: Consumer $ 31 $ 56 $ 36 $ 128 $ 105 Real estate 143 361 2,923 1,673 1,999 Commercial 3,856 5,144 1,199 8,687 6,309 ------------------------------------------------ Total 4,030 5,561 4,158 10,488 8,413 ------------------------------------------------ Renegotiated: Consumer 21 36 3 --- 46 Real estate --- --- 27 695 1,070 Commercial 3,735 381 783 --- 1,307 ------------------------------------------------ Total 3,756 417 813 695 2,423 ------------------------------------------------ Total non-performing loans 7,786 5,978 4,971 11,183 10,836 Other real estate owned 3,215 3,424 3,512 3,486 5,620 ------------------------------------------------ Total non-performing assets 11,001 9,402 8,483 14,669 16,456 ================================================ Other impaired loans: Commercial 6,355 11,513 8,706 5,285 3,765 Real estate --- --- --- --- --- ------------------------------------------------ Total other impaired loans 6,355 11,513 8,706 5,285 3,765 ------------------------------------------------ Total non-performing assets and other impaired loans $17,356 $20,915 $17,189 $19,954 $20,221 ================================================ Ratio of non-performing loans to loans outstanding 0.51% 0.38% 0.33% 0.81% 0.81% Ratio of non-performing assets to total assets 0.44% 0.41% 0.37% 0.65% 0.74% Ratio of non-performing loans and other impaired loans to loans outstanding 0.92% 1.10% 0.90% 1.20% 1.09% ================================================ Past due 90 days or more: Consumer $ 4,101 $ 1,891 $ 1,219 $ 1,184 $ 1,611 Real estate 4,206 1,984 1,637 1,453 599 Commercial 2,189 2,706 3,176 4,317 1,121 Total past due 90 days ------------------------------------------------ or more $10,496 $ 6,581 $ 6,032 $ 6,954 $ 3,331 ============================================================================== Allowance for Loan Losses: The allowance for loan losses is available to absorb losses in the loan portfolio. The allowance is reduced by losses, net of recoveries, and increased by charging a provision to operations to maintain the allowance at a level determined appropriate by management. There can be no assurance that WesBanco will not sustain credit losses in future periods, which could be substantial in relation to the size of the allowance. The adequacy of the allowance for loan losses is evaluated quarterly, which includes testing certain loans for impairment. Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review. Reserves are allocated to individual loans based on management's estimate of the borrower's ability to repay the loan given the availability of collateral, other sources of cash flow, and legal options available to WesBanco. Historical loss rates are applied to other commercial loans not specifically reserved. The loss rates are derived from a migration analysis, which computes the net charge-off experience sustained on loans according to their internal risk grade. Residential real estate and consumer loans are not individually risk graded. Reserves are established for each pool of these loans based on the expected net charge-offs. The loss rates are based on the average net charge- off history by loan category. Management also evaluates factors such as economic conditions, changes in underwriting standards or practices, delinquency and other trends in the portfolio, specific industry conditions, loan concentrations, the results of recent internal loan reviews or regulatory examinations, and other relevant factors that may impact the loan portfolio. Management relies on certain types of observable data, such as employment statistics, trends in bankruptcy filings, and external events that impact particular industries, to determine whether loss attributes exist at the balance sheet date that will lead to higher than historical losses in any segment of the portfolio. E-48 Table 10. Allowance for Loan Losses For the years ended December 31, -------------------------------------------- (dollars in thousands) 2001 2000 1999 1998 1997 ----------------------------------------------------------------------------- Beginning balance - Allowance for loan losses $20,030 $19,752 $19,098 $20,261 $19,102 Allowance for loan losses of acquired (sold) banks-net --- --- 192 (37) 269 Allowance for loan losses allocated to credit cards --- --- (450) --- --- Provision for loan losses 5,995 3,225 4,295 4,392 5,574 Charge-offs: Commercial 2,182 1,474 2,024 1,933 1,016 Real estate 352 137 204 515 254 Consumer 3,304 2,484 2,490 3,952 4,523 -------------------------------------------- Total charge-offs 5,838 4,095 4,718 6,400 5,793 -------------------------------------------- Recoveries: Commercial 198 348 479 522 314 Real estate 17 29 64 39 90 Consumer 384 771 792 321 705 -------------------------------------------- Total recoveries 599 1,148 1,335 882 1,109 -------------------------------------------- Net charge-offs 5,239 2,947 3,383 5,518 4,684 Ending balance - Allowance for loan losses $20,786 $20,030 $19,752 $19,098 $20,261 ============================================ Ratio of net charge-offs to average total loans outstanding for the period 0.34% 0.19% 0.23% 0.41% 0.35% Ratio of the allowance for loan losses to total loans outstanding at the end of the period 1.35% 1.26% 1.30% 1.39% 1.51% Ratio of the allowance for loan losses to non-performing loans 2.67x 3.35x 3.97x 1.71x 1.87x ----------------------------------------------------------------------------- The allowance for loan losses at December 31, 2001 was 1.35% of total loans compared to 1.26% at December 31, 2000. Net charge-offs for 2001 increased 77.8% to $5.2 million compared to $2.9 million for 2000. Net losses increased in 2001 as the result of increased consumer bankruptcies, increased impairment of certain commercial loans, and a downturn in the regional economy. Allocation of the allowance among the various segments of the loan portfolio is set forth in Table 11. The allocation of the allowance did not change significantly between December 31, 2000 and December 31, 2001. While management has allocated the allowance to different loan categories, the allowance is general in nature and is available for the loan portfolio in its entirety. Table 11. Allocation of the Allowance for Loan Losses December 31, ----------------------------------------------- (in thousands) 2001 2000 1999 1998 1997 --------------------------------------------------------------------------- Commercial $15,384 $15,855 $15,792 $13,929 $13,740 Real estate - residential 739 885 749 611 634 Consumer 4,663 3,290 3,211 4,558 5,887 ----------------------------------------------- Total $20,786 $20,030 $19,752 $19,098 $20,261 =========================================================================== Deposits and Other Borrowings Deposits, WesBanco's primary source of funds, increased $43.1 million or 2.3% between December 31, 2000 and December 31, 2001. Non-interest bearing demand deposits increased $10.2 million or 4.3% and money market accounts increased $47.7 million or 13.3%, while interest bearing demand deposits decreased by $14.6 million or 5.6%. The balances in savings deposits and certificates of deposit did not change significantly between December 31, 2000 and December 31, 2001. As interest rates fell during 2001, customers shifted deposits into the competitively- priced prime rate money market products and short-term certificates of deposit. Table 12. Maturity Distribution of Certificates of Deposit $100,000 or More December 31, ------------------------ (in thousands) 2001 2000 --------------------------------------------------------------- Maturity: Under three months $ 34,484 $ 25,060 Three to six months 25,687 14,632 Six to twelve months 33,006 33,729 Over twelve months 68,459 62,910 ------------------------ Total $161,636 $136,331 =============================================================== Interest expense on certificates of deposit of $100,000 or more was approximately $7,485 in 2001, $6,335 in 2000, and $7,206 in 1999. E-49 Financial Condition (continued) Other borrowings, which include FHLB borrowings, customer repurchase agreements and federal funds purchased, increased $119.8 million or 75.2% during 2001. FHLB borrowings increased to $106.9 million, repurchase agreements increased to $142.3 million and federal funds purchased increased to $29.9 million. WesBanco utilized the proceeds from the additional other borrowings to maintain adequate balance sheet liquidity and purchase securities at favorable market rates. Capital Resources Shareholders' equity at December 31, 2001 remained consistent with the level at December 31, 2000. Dividends and purchases of treasury stock were offset by 2001 net income and an increase in accumulated other comprehensive income, resulting primarily from fair value adjustments. Treasury stock was purchased in accordance with WesBanco's stock repurchase plans and totaled 815,317 shares during 2001. As of December 31, 2001, 418,383 shares of WesBanco common stock remained authorized to be purchased under the current one million share stock repurchase plan, which began on March 21, 2001. The shares are purchased for general corporate purposes, which may include potential acquisitions, 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. Strong and consistent earnings coupled with a high level of capital have enabled WesBanco to continue to increase dividends per share. Effective with the first quarter of 2001, WesBanco increased its quarterly dividend per share 2.2% to $0.23 from $0.225. For 2001, dividends increased to $0.92 per share compared to $0.895 per share in the prior year. This dividend increase represented the sixteenth consecutive year of dividend increases at WesBanco. The 2001 dividend per share payout ratio was 57.5%. WesBanco is subject to risk-based capital guidelines that measure capital relative to risk-weighted assets and off-balance sheet instruments. WesBanco, and its banking subsidiary, maintain Tier 1, Total Capital and Leverage ratios well above minimum regulatory levels. See Note 14 of the Consolidated Financial Statements for more information on capital amounts, ratios and minimum regulatory requirements. Market and Liquidity Risk The prime objective of WesBanco's asset/liability management function is to maintain consistent growth in 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: Management considers interest rate risk WesBanco's most significant market risk. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of WesBanco's 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. One method that management utilizes to measure interest rate risk is an earnings simulation model, which analyzes net interest income sensitivity to changing interest rates. The model takes into consideration numerous assumptions regarding cash flow, repricing characteristics, prepayment factors and callable bond forecasts at varying levels of interest rates. Since these assumptions are uncertain, the simulation analysis should not be relied upon as being indicative of actual results. The analysis may not consider all actions that WesBanco could employ in response to changes in interest rates. WesBanco's Asset/Liability Management Committee ("ALCO"), which includes senior management and reports to the Board of Directors, monitors and manages interest rate risk within Board approved policy guidelines. The current interest rate risk policy guidelines are determined by measuring (using the earnings simulation model) the anticipated change in net interest income over a 12-month horizon assuming an immediate and sustained 200 basis point increase or decrease in market interest rates. WesBanco's current policy establishes a guideline for this exposure of +/- 5.0% of net interest income for a 12-month horizon. Table 13 shows WesBanco's annual interest rate sensitivity at December 31, 2001 and December 31, 2000, assuming this 200 basis point interest rate change and a 100 basis point interest rate change. Table 13. Net Interest Income Sensitivity Percentage Change in Change in Net Interest Income Interest Rates ---------------------------------------- ALCO (basis points) December 31, 2001 December 31, 2000 Guidelines ----------------------------------------------------------------------------- +200 0.4% - 4.6% +/- 5.0% - 200 - 5.4% 2.0% +/- 5.0% +100 1.6% - 1.8% N/A - 100 - 1.6% 2.2% N/A ----------------------------------------------------------------------------- E-50 Another method that WesBanco uses to manage its interest rate risk is a rate sensitivity gap analysis shown in Table 14. Gap analysis measures the maturity and repricing relationships between rate sensitive assets and rate sensitive liabilities at a specific point in time. Table 14. Interest Rate Sensitivity Analysis - GAP Analysis December 31, 2001 ------------------------------------------------------------------- Under Three Six Nine Over Three To Six to Nine Months to One (in thousands) Months Months Months One Year Year Total ------------------------------------------------------------------------------------------------------------- Rate Sensitive Assets Due from banks/interest bearing $ 712 --- --- --- --- $ 712 Securities (1) 17,972 $ 3,853 $ 7,079 $ 3,790 $ 718,363 751,057 Loans 366,186 133,271 134,008 133,405 772,825 1,539,695 -------------------------------------------------------------------- Total rate sensitive assets 384,870 137,124 141,087 137,195 1,491,188 2,291,464 -------------------------------------------------------------------- Rate Sensitive Liabilities Money market deposit accounts 286,412 3,338 3,268 3,191 110,518 406,727 Savings and NOW accounts 497,885 --- --- --- --- 497,885 Certificates of deposit 152,496 105,561 75,759 83,809 346,799 764,424 Federal funds purchased 30,000 --- --- --- --- 30,000 Other borrowings 138,469 2,562 233 15 107,852 249,131 --------------------------------------------------------------------- Total rate sensitive liabilities 1,105,262 111,461 79,260 87,015 565,169 1,948,167 --------------------------------------------------------------------- Interest rate sensitivity gap $ (720,392) $ 25,663 $ 61,827 $ 50,180 $ 926,019 343,297 ===================================================================== Cumulative interest rate sensitivity gap $ (720,392) $(694,729) $(632,902) $(582,722) $ 343,297 --- ==============================================================================================================
(1) Securities are categorized above by expected maturity at amortized cost. As shown in Table 14, the liability sensitive position in the under three month horizon is primarily a result of $497.9 million in savings and NOW account balances. Interest rates on these deposit instruments are subject to periodic adjustment at management's discretion. Other factors contributing to the liability sensitive position include the continued growth in money market deposit accounts, $100,000 and over certificates of deposit and short-term borrowings. In order to reduce the exposure to interest rate fluctuations, WesBanco utilized interest rate swap agreements during 2001. At December 31, 2001, the notional value of interest rate swap agreements outstanding was $122.2 million. WesBanco also manages the level of its fixed rate residential real estate loan portfolio. Long-term fixed rate real estate loans are routinely sold to the secondary market through WesBanco's mortgage banking division. Liquidity Risk: Liquidity is defined as the degree of readiness to convert assets into cash with minimum loss. Liquidity risk is managed through WesBanco's 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 WesBanco's 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 WesBanco's investment portfolio management. Federal funds sold, commercial paper and U.S. Treasury and Federal 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 asset-funded liquidity. At December 31, 2001, WesBanco had approximately $32.7 million in securities scheduled to mature within one year compared to $46.1 million in the prior year. Additional asset-funded liquidity is provided by the remainder of the available for sale securities portfolio, cash and cash equivalents. In addition to the securities portfolio, WesBanco's banking subsidiary maintains a line of credit with the FHLB as an additional funding source. Available lines of credit at December 31, 2001 and December 31, 2000 approximated $551.8 million and $578.2 million, respectively. At December 31, 2001, WesBanco had $395.4 million of unpledged securities that could be used for collateral or sold. The principal source of parent company liquidity is dividends from WesBanco's banking subsidiary, WesBanco Bank, Inc. There are legal limitations on the ability of WesBanco Bank, Inc. to pay a dividend to the parent company. See Note 14 of the Consolidated Financial Statements for more information on dividend restrictions between the Parent Company and WesBanco Bank, Inc. Additional Parent Company liquidity is provided by the Parent's security portfolio as well as a line of credit with WesBanco Bank, Inc. E-51 Market and Liquidity Risk (continued) At December 31, 2001, WesBanco had outstanding commitments to extend credit in the ordinary course of business approximating $251.4 million compared to $187.6 million at the end of the prior year. On a historical basis, only a small portion of these commitments will result in an outflow of funds. WesBanco also has planned additions to fixed assets of approximately $2.5 million during 2002. Management believes WesBanco currently has sufficient liquidity to meet current obligations to borrowers, depositors and others. Comparison of 2000 Versus 1999 Net income for 2000 was $26.9 million or $1.41 per share compared to $27.6 million or $1.37 per share in 1999. For the same comparative period, core earnings per share, excluding goodwill amortization, net securities gains and non-recurring items, increased 10.6% to $1.46 from $1.32. Non-recurring items recorded in the Statement of Income included a pretax gain of $3.6 million on the sale of credit card receivables in 1999. Taxable equivalent net interest income decreased $3.8 million or 4.1% from 1999 to 2000 reflecting a trend consistent with the banking industry during the year. This trend was the direct result of competitive pricing pressure to adjust rates on loan and deposit products. As shown in Table 2, the taxable equivalent net interest margin declined during 2000 in comparison to 1999. The taxable equivalent net interest margin was 4.14% compared to 4.39% in 1999 while average earning assets increased 1.5% during 2000. Taxable equivalent interest income increased $6.6 million or 4.1% for 2000 compared to 1999. The increase was due to increases in average loan volume and yields, partially offset by decreases in average securities volume. Interest expense increased $10.3 million or 14.9% from 1999. Table 2 shows that the increase resulted from an increase in rates paid on average interest bearing liabilities to 4.43% from 3.97% and volume increases in average interest bearing liabilities of 2.9%. The provision for loan losses was $3.2 million in 2000 compared to $4.3 million in 1999. Net charge-offs for 2000 decreased 12.9% to $2.9 million compared to $3.4 million for 1999. Non-interest income, excluding net securities gains and the gain on the sale of the credit card portfolio in 1999, increased 9.3% to $22.6 million for 2000 compared to $20.6 million for 1999. Trust revenue increased $1.6 million or 15.5%. The growth in trust revenue was due to increases in the number of accounts under administration, increases in investment advisory fees and an increase in the market value of trust assets. Deposit activity charges increased $1.3 million or 18.7%. Conversely, other income decreased by $1.0 million in 2000 due to the significant reduction of credit card activity fees related to the 1999 sale of the credit card portfolio. Non-interest expense for 2000 decreased 4.9% to $64.5 million compared to $67.8 million for 1999. The majority of the decrease related directly to a reduction in wages and benefits, which declined 5.8% or $2.0 million. This reduction resulted from the consolidation of WesBanco's four banking affiliates and mortgage company into a single bank in January of 2000, and decreases in post-retirement expense and health insurance costs. Also, other operating expense declined 7.9% or $1.8 million primarily as the result of the significant reduction of credit card processing costs. E-52