EX-13 3 ex13.txt EXHIBIT 13 ---------- Consolidated Balance Sheet ---------------------------------------------------------------------------- (dollars in thousands, except per share amounts) December 31, ----------------------- 2002 2001 ----------------------------------------------------------------------------- Assets Cash and due from banks $ 80,101 $ 81,563 Due from banks - interest bearing 984 712 Federal funds sold --- --- Securities: Held to maturity (fair values of $514,735 and $242,558, respectively) 499,161 240,953 Available for sale carried at fair value 694,735 517,517 ---------------------- Total securities 1,193,896 758,470 ---------------------- Loans, net of unearned income 1,820,885 1,539,695 Allowance for loan losses (25,080) (20,786) ---------------------- Net loans 1,795,805 1,518,909 ---------------------- Premises and equipment 55,725 50,252 Accrued interest receivable 20,024 16,290 Goodwill and other intangible assets 58,830 18,878 Other assets 91,866 29,380 ---------------------- Total Assets $3,297,231 $2,474,454 ====================== Liabilities Deposits: Non-interest bearing demand $ 301,262 $ 244,422 Interest bearing demand 276,131 245,447 Money market 508,062 406,727 Savings deposits 357,290 252,438 Certificates of deposit 957,211 764,424 ---------------------- Total deposits 2,399,956 1,913,458 ---------------------- Federal Home Loan Bank borrowings 343,324 106,889 Other borrowings 175,634 172,242 Accrued interest payable 7,939 7,313 Other liabilities 32,557 16,351 Company obligated mandatory redeemable capital securities of subsidiary trusts holding solely debentures of the Corporation 12,650 --- ---------------------- Total Liabilities 2,972,060 2,216,253 ---------------------- 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; 21,319,348 and 20,996,531 shares issued, respectively) 44,415 43,742 Capital surplus 52,855 58,663 Retained earnings 246,148 230,924 Treasury stock (857,603 and 3,142,034 shares, respectively, at cost) (20,482) (76,183) Accumulated other comprehensive income 4,305 3,560 Deferred benefits for directors and employees (2,070) (2,505) ---------------------- Total Shareholders' Equity 325,171 258,201 ---------------------- Total Liabilities and Shareholders' Equity $3,297,231 $2,474,454 ============================================================================ See Notes to Consolidated Financial Statements. E - 2 Consolidated Statement of Income ---------------------------------------------------------------------------- (dollars in thousands, except per share amounts) For the years ended December 31, --------------------------------- 2002 2001 2000 ----------------------------------------------------------------------------- Interest Income Loans, including fees $124,912 $126,230 $128,591 Securities: Taxable 34,670 25,692 24,297 Tax-exempt 15,969 10,330 8,974 -------------------------------- Total interest on securities 50,639 36,022 33,271 -------------------------------- Federal funds sold 604 1,687 1,217 -------------------------------- Total interest income 176,155 163,939 163,079 -------------------------------- Interest Expense Interest bearing demand deposits 1,685 3,920 5,026 Money market deposits 12,890 14,006 16,462 Savings deposits 3,852 4,671 5,264 Certificates of deposit 38,481 43,632 43,689 -------------------------------- Total interest on deposits 56,908 66,229 70,441 Federal Home Loan Bank borrowings 11,879 4,497 1,946 Other borrowings 3,768 5,628 7,165 -------------------------------- Total interest expense 72,555 76,354 79,552 -------------------------------- Net Interest Income 103,600 87,585 83,527 Provision for loan losses 9,359 5,995 3,225 -------------------------------- Net interest income after provision for loan losses 94,241 81,590 80,302 -------------------------------- Non-Interest Income Trust fees 11,526 11,504 12,226 Service charges on deposits 10,818 9,182 8,097 Other income 3,617 2,596 2,243 Net securities gains 1,891 1,306 810 -------------------------------- Total non-interest income 27,852 24,588 23,376 -------------------------------- Non-Interest Expense Salaries and wages 31,329 27,926 28,217 Employee benefits 7,894 5,915 5,092 Net occupancy 5,012 3,998 3,844 Equipment 6,854 5,913 6,439 Other operating 23,043 20,907 20,891 Merger-related expenses 2,515 235 --- -------------------------------- Total non-interest expense 76,647 64,894 64,483 -------------------------------- Income before provision for income taxes 45,446 41,284 39,195 Provision for income taxes 10,620 12,282 12,271 -------------------------------- Net Income $ 34,826 $ 29,002 $ 26,924 ================================ Earnings per share $1.70 $1.60 $1.41 Average shares outstanding 20,459,122 18,123,851 19,092,927 Dividends per share $0.935 $0.92 $0.895 ============================================================================= See Notes to Consolidated Financial Statements. E - 3 Consolidated Statement of Changes in Shareholders' Equity ----------------------------------------------------------------------------- (dollars in thousands, except per share amounts) For the years ended December 31, 2002, 2001, and 2000 -------------------------------------------------------------------------------------------- Accumulated Deferred Common Stock Other Benefits for -------------------- Capital Retained Treasury Comprehensive Directors & Shares Amount Surplus Earnings Stock Income Employees Total ============================================================================================================================= January 1, 2000 19,789,925 $43,742 $60,133 $208,508 $(34,311) $(7,456) $ (952) $269,664 -------------------------------------------------------------------------------------------- Net income 26,924 26,924 Change in accumulated other comprehensive income 7,091 7,091 --------- Comprehensive income 34,015 Cash dividends: Common ($.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 Change in accumulated other comprehensive income 3,925 3,925 --------- Comprehensive income 32,927 Cash dividends: Common ($.92 per share) (16,617) (16,617) Treasury shares purchased - net (713,443) (801) (14,174) (14,975) Borrowings on ESOP debt - net (1,572) (1,572) Deferred benefits for directors - net (68) (68) -------------------------------------------------------------------------------------------- December 31, 2001 17,854,497 43,742 58,663 230,924 (76,183) 3,560 (2,505) 258,201 -------------------------------------------------------------------------------------------- Net income 34,826 34,826 Change in accumulated other comprehensive income 745 745 --------- Comprehensive income 35,571 Cash dividends: Common ($.935 per share) (19,602) (19,602) Treasury shares purchased - net (834,640) (170) (19,787) (19,957) Shares issued for acquisition 3,441,888 673 (5,638) 75,488 70,523 Payment on ESOP debt 543 543 Deferred benefits for directors - net (108) (108) -------------------------------------------------------------------------------------------- December 31, 2002 20,461,745 $44,415 $52,855 $246,148 $(20,482) $ 4,305 $(2,070) $325,171 =============================================================================================================================
There was no activity in Preferred Stock during the years ended December 31, 2002, 2001 and 2000. See Notes to Consolidated Financial Statements. E - 4 Consolidated Statement of Cash Flows ----------------------------------------------------------------------------- (in thousands) For the years ended December 31, -------------------------------- Increase (Decrease) in Cash and Cash Equivalents 2002 2001 2000 ==================================================================================== Cash Flows from Operating Activities: Net Income $ 34,826 $ 29,002 $ 26,924 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 5,671 4,919 5,229 Net (accretion) and amortization (394) (472) 371 Provision for loan losses 9,359 5,995 3,225 Gains on sales of securities - net (1,891) (1,306) (810) Gains on sales of loans - net (535) (594) (195) Deferred income taxes 391 (232) (70) Loans originated for sale (54,826) (63,613) (40,301) Proceeds from the sale of loans originated for sale 56,159 61,616 47,858 Other - net 575 (1,390) 395 Net change in: Interest receivable / payable (1,268) (1,690) 2,209 Other assets and other liabilities (638) 1,862 1,021 --------------------------------- Net cash provided by operating activities 47,429 34,097 45,856 --------------------------------- Cash flows from investing activities: Securities held to maturity: Proceeds from maturities and calls 117,683 29,502 28,408 Payments for purchases (268,094) (74,121) (11,436) Securities available for sale: Proceeds from sales 274,067 65,014 65,246 Proceeds from maturities and calls 134,852 170,328 50,598 Payments for purchases (405,774) (393,312) (99,115) Acquisition, net of cash 24,464 --- --- (Increase) decrease in loans 58,351 48,359 (77,565) Purchases of premises and equipment - net (4,138) (2,207) (2,220) Purchase of bank owned life insurance (40,000) --- (4,400) --------------------------------- Net cash used in investing activities (108,589) (156,437) (50,484) --------------------------------- Cash flows from financing activities: Increase in deposits 18,621 43,097 56,360 Increase (decrease) in FHLB borrowings 77,911 73,177 (649) Increase (decrease) in other borrowings 2,303 46,637 (13,487) Dividends paid (18,890) (16,737) (17,167) Treasury shares purchased - net (19,957) (14,975) (28,367) Other (18) --- --- --------------------------------- Net cash provided by (used in) financing activities 59,970 131,199 (3,310) --------------------------------- Net increase (decrease) in cash and cash equivalents (1,190) 8,859 (7,938) Cash and cash equivalents at beginning of year 82,275 73,416 81,354 --------------------------------- Cash and cash equivalents at end of year $ 81,085 $ 82,275 $ 73,416 ================================= Supplemental Disclosures: Interest paid on deposits and other borrowings $ 74,524 $ 77,479 $ 77,279 Income taxes paid 11,425 12,736 12,410 Summary of business acquisition: Fair value of assets acquired $ 684,389 --- --- Stock issued for the purchase of American Bancorporation common stock (70,523) --- --- Fair value of liabilities assumed (644,509) --- --- --------------------------------- Goodwill recognized $ (30,643) --- --- ====================================================================================
See Notes to Consolidated Financial Statements. E - 5 Notes to Consolidated Financial Statements -------------------------------------------------------------- Note 1: Accounting Policies WesBanco, Inc. ("WesBanco") is a bank holding company offering a full range of financial services, including trust and investment services, mortgage banking, insurance and brokerage services, through offices located in West Virginia, Central and Eastern Ohio, and Western Pennsylvania. WesBanco's 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. Intercompany transactions and accounts have been eliminated. Business combinations: In June of 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations". Business combinations initiated after June 30, 2001 are required to be accounted for by the purchase method. Under the purchase method, net assets of the business acquired are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the income statement from the date of acquisition. Reclassification: Certain prior year financial information has been reclassified to conform to the presentation in 2002. 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: Securities held principally for resale in the near term are carried at fair value, with unrealized gains (losses) reflected in current operating results. WesBanco did not have a trading portfolio during the two years ended December 31, 2002. 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 separate component of accumulated other comprehensive income. 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. Prior unrealized gains (losses) are recorded through other comprehensive income and reversed when gains or losses are realized or an impairment charge is recorded. Other-than-temporary impairment charges on securities held to maturity and securities available for sale are recognized in securities gains and losses on the income statement. Other-Than-Temporary Impairment Losses: Declines in the fair value of investment securities below cost are evaluated for other-than-temporary impairment losses on a quarterly basis. Impairment losses for declines in value of fixed maturity investments and equity securities below cost attributable to issuer-specific events are based upon all relevant facts and circumstances for each investment and are recognized when appropriate in accordance with Staff Accounting Bulletin 59, SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and related guidance. For fixed maturity investments with unrealized losses due to market conditions or industry- related events where WesBanco has the positive intent and ability to hold the investment for a period of time sufficient to allow a market recovery, declines in value below cost are not assumed to be other-than-temporary. 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. E - 6 Note 1: Accounting Policies (continued) 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 certain loans internally classified as substandard or doubtful (as those terms are defined by banking regulations) that meet the definition of impaired loans. WesBanco generally recognizes interest income on non- accrual loans on the cash basis after recovery of principal is reasonably assured. Certain consumer loans are not placed on non-accrual, and instead are charged down to the net realizable value at 120 days past due for closed-end loans and 180 days past due for open-end revolving lines of credit. When repossession of collateral on secured consumer loans is assured and in process, the charged down balance is reclassified to other assets. Residential real estate loans are generally not placed on non-accrual, and instead are charged down to the net realizable value of the collateral at 180 days past due. Loan origination fees and certain direct costs are deferred and amortized into interest income or expense, as an adjustment to the yield, over the life of the loan using the level yield method. When a loan is paid off, the unamortized net origination fees are immediately recognized into income or expense. 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 factors, 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. 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 and repossessed assets: Other real estate owned and repossessed assets, which are reported in other assets, are carried at the lower of cost or their estimated current fair value, less estimated costs to sell. Other real estate owned consists primarily of properties acquired through, or in lieu of, loan foreclosures. Other real estate owned also includes bank premises held for sale. Repossessed assets consist primarily of automobiles acquired to satisfy defaulted consumer loans. Subsequent declines in fair value, if any, and gains or losses on the disposition of these assets, are charged to current operations. Goodwill and other intangible assets: Goodwill represents the excess of the purchase price over net identifiable tangible and intangible assets acquired in a purchase business combination. Other intangible assets represent purchased assets that have no physical property but represent some future economic benefit to its owner and are capable of being sold or exchanged on their own or in combination with a related asset or liability. On January 1, 2002, WesBanco adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Under the provisions of SFAS No. 142, goodwill is no longer amortized into the income statement over an estimated life, but rather is tested at least annually for impairment. Intangible assets, which have finite lives, continue to be amortized over their estimated useful lives and also continue to be subject to impairment testing. WesBanco's other intangible assets have finite lives and are amortized on a declining balance basis over an average life not exceeding 10 years. Prior to the adoption of SFAS No. 142, WesBanco's goodwill was 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 E - 7 received or interest paid on the effective portion of the interest rate swaps is reported as a component of interest income or expense in the Consolidated Statement of Income. Income taxes: WesBanco and its subsidiaries file a consolidated federal income tax return. The provision for income taxes included in the consolidated statements of income includes both federal and state income taxes and is based on income in the financial statements, rather than amounts reported on WesBanco's income tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date. 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 consist of unrealized gains and losses (net fair value adjustments) on securities available for sale and derivatives, and additional minimum pension liability, net of tax. New accounting standards: In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with finite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets, and how and when to measure impairment on long- lived assets and how to account for long-lived assets that an entity plans to dispose of either through sale, abandonment, exchange, or distribution. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed". SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Management has evaluated the impact of this statement and has determined that there is no material effect on WesBanco's financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which establishes financial accounting and reporting for costs associated with exit or disposal activities such as a sale or termination of a business line, the closure of business activities in a particular location, or a change in management structure, to be recorded as a liability at fair value when it becomes probable the cost will be incurred and no future economic benefit will be gained by the company for such cost. Applicable costs include employee termination benefits, contract termination costs, and costs to consolidate facilities or relocate employees. SFAS No. 146 supersedes EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity," which in some cases required certain costs to be recognized before a liability was actually incurred. This statement is effective for disposal activities initiated after December 31, 2002. Management has evaluated the impact of this statement and has determined that there is no material effect on WesBanco's financial position or results of operations. In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial Institutions", which clarifies FASB No. 142. SFAS No. 147 became effective upon issuance and requires companies to cease amortization of unidentified intangible assets associated with certain branch acquisitions and reclassify these assets to goodwill. SFAS No. 147 also modifies SFAS No. 144 to include in its scope long-term customer-relationship intangible assets and thus subject those intangible assets to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions required for other long-lived assets. Management has evaluated the impact of this statement and has determined that there is no material effect on WesBanco's financial position or results of operations. In December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which provides guidance on how to transition from the intrinsic value method of accounting for stock- based employee compensation under APB 25 to SFAS No. 123's fair value method of accounting, if a company so elects. Certain provisions of this statement are effective for fiscal years ending after December 15, 2002. E - 8 Note 1: Accounting Policies (continued) The following table illustrates the effect on net income and earnings per share if the fair value method has been applied to all outstanding and unvested awards in each period: For the years ended December 31, -------------------------------- (dollars in thousands, except per share amounts) 2002 2001 2000 ============================================================================= Net income as reported $34,826 $29,002 $26,924 Less: Stock based compensation expense under fair value based method - net of tax* 581 391 103 ------------------------- Pro forma net income $34,245 $28,611 $26,821 ========================= Pro forma earnings per share $1.67 $1.58 $1.40 ============================================================================= * Assumes expense is amortized over a three year vesting period. The following table sets forth the significant assumptions used in calculating the fair value of the grants under the Black-Scholes option pricing model: For the years ended December 31, -------------------------------- 2002 2001 2000 ============================================================================= Weighted-average life 6 Years 10 Years 10 Years Risk free interest rates 3.22% 5.49% 6.22% Dividend yield 4.02 --- --- Volatility factors 28.77 23.40 21.62 Fair value of the grants $4.83 $10.25 $11.24 ============================================================================= WesBanco is currently evaluating the alternative methods under this pronouncement and has not determined the effect, if any, on its consolidated results of operations, financial position, or cash flows. Note 2: Completed Business Combination WesBanco completed the acquisition of American Bancorporation on March 1, 2002. The acquisition was accounted for using the purchase method of accounting. 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 common stock outstanding based on a fixed exchange ratio. WesBanco issued 3,441,888 shares of common stock valued at $70.5 million. Of the total shares issued in the transaction, 3,119,071 shares were issued from treasury shares and the remaining shares from authorized, but previously unissued shares. As of the acquisition date, American had total assets of approximately $678 million, deposits of $466 million and shareholders' equity of $44 million. Total goodwill and core deposit intangibles recognized in 2002 as the result of this transaction were $30.6 million and $11.1 million, respectively. Goodwill and core deposit intangibles were allocated to WesBanco's community banking segment. Under the new accounting standards, SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets", a core deposit intangible is separated from goodwill and amortized over its remaining useful life. Amortization of the American core deposit intangible has a weighted average remaining useful life of 8 years. The remaining goodwill intangible is not subject to amortization but will be evaluated annually for possible impairment. The following table represents pro forma combined results of operations of WesBanco and American as if the business combination had been completed as of the beginning of each respective period: For the years ended December 31, -------------------------------- (in thousands, except per share amounts) 2002 2001 2000 ============================================================================= Net interest income $107,093 $107,604 $106,112 Net Income 34,829 33,489 33,046 Earnings per share 1.66 1.55 1.47 ============================================================================= In 2002, WesBanco recorded merger-related expenses totaling $2.5 million, all relating to the American acquisition. Included in the total were $1.7 million in severance payments, $0.4 million in data conversion and equipment expense, $0.2 million in marketing expenses and $0.2 million in other merger-related expenses, all of which were accrued and paid during 2002. E - 9 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, 2002 December 31, 2001 --------------------------------------------- ------------------------------------------- Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value Cost Gains Losses Value ================================================================================================================ U.S. Treasury and Federal Agency securities $ 86,144 $ 1,511 --- $ 87,655 $ 1,001 $ 17 --- $ 1,018 Obligations of states and political subdivisions 382,752 14,224 $(161) 396,815 221,866 2,839 $(1,251) 223,454 Other debt securities 30,265 --- --- 30,265 18,086 --- --- 18,086 ------------------------------------------------------------------------------------------ Total $ 499,161 $ 15,735 $(161) $514,735 $240,953 $2,856 $(1,251) $242,558 ================================================================================================================ Available for Sale ------------------------------------------------------------------------------------------ December 31, 2002 December 31, 2001 --------------------------------------------- ------------------------------------------- Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value Cost Gains Losses Value ================================================================================================================ U.S. Treasury and Federal Agency securities $ 354,487 $ 8,207 --- $362,694 $300,948 $6,617 $ (315) $307,250 Obligations of states and political subdivisions 7,951 249 $ (48) 8,152 11,905 239 (68) 12,076 Mortgage-backed & other debt securities 309,830 8,111 (50) 317,891 191,511 1,820 (398) 192,933 ------------------------------------------------------------------------------------------ Total debt securities 672,268 16,567 (98) 688,737 504,364 8,676 (781) 512,259 Equity securities 5,322 730 (54) 5,998 5,740 499 (981) 5,258 ------------------------------------------------------------------------------------------ Total $ 677,590 $ 17,297 $(152) $694,735 $510,104 $9,175 $(1,762) $517,517 ================================================================================================================
The following table summarizes amortized cost and estimated fair value of securities by maturity: December 31, 2002 ---------------------------------------------- Held to Maturity Available for Sale --------------------- --------------------- Estimated Estimated Amortized Fair Amortized Fair (in thousands) Cost Value Cost Value ============================================================================= Within one year $ 43,058 $ 43,615 $ 80,795 $ 81,400 After one year, but within five 114,823 118,802 333,138 341,257 After five years, but within ten 136,812 142,620 253,578 261,221 After ten years 204,468 209,698 10,079 10,857 --------------------------------------------- Total $ 499,161 $ 514,735 $ 677,590 $ 694,735 ============================================================================= Mortgage-backed securities are assigned to maturity categories based on estimated average lives. Available for sale securities in the after ten year category include securities with no stated maturity. Other securities with prepayment or call provisions are categorized based on contractual maturity. Securities with par values aggregating $374.9 million and $356.2 million at December 31, 2002 and 2001, respectively, were pledged to secure public and trust funds. Gross security gains of $3.2 million, $1.3 million and $0.8 million and gross security losses of $1.3 million, $25 thousand and $39 thousand were realized for the years ended December 31, 2002, 2001 and 2000, respectively. E - 10 Note 4: Loans and the Allowance for Loan Losses The following table is a summary of total loans: December 31, ------------------------ (in thousands) 2002 2001 ======================================================================= Commercial $ 306,071 $ 271,269 Commercial real estate 504,902 342,337 Residential real estate 569,095 501,916 Home equity lines of credit 117,964 98,400 Consumer 318,129 320,251 ----------------------- Total portfolio loans 1,816,161 1,534,173 Loans held for sale 4,724 5,522 ----------------------- Loans, net of unearned income $1,820,885 $1,539,695 ======================================================================= The following table represents changes in the allowance for loan losses: For the years ended December 31, -------------------------------- (in thousands) 2002 2001 2000 ============================================================================= Balance, beginning of year $20,786 $20,030 $19,752 Allowance for loan losses of acquired bank 3,903 --- --- Provision for loan losses 9,359 5,995 3,225 Charge-offs (9,716) (5,838) (4,095) Recoveries 748 599 1,148 ----------------------------- Net charge-offs (8,968) (5,239) (2,947) ----------------------------- Balance, end of year $25,080 $20,786 $20,030 ============================================================================= The following tables summarize loans classified as impaired: December 31, ------------------ (in thousands) 2002 2001 ============================================================================= Non-accrual $ 7,480 $ 4,030 Renegotiated 2,646 3,756 Other impaired loans 11,249 6,355 ----------------- Total impaired loans $21,375 $14,141 ================= Impaired loans with a related allowance for loan losses $16,343 $12,813 Allowance for loan losses allocated to impaired loans 4,675 4,878 ============================================================================= For the years ended December 31, -------------------------------- (in thousands) 2002 2001 2000 ============================================================================== Average impaired loans $19,908 $13,572 $14,466 Amount of contractual interest income on impaired loans 574 392 306 Amount of interest income recognized on a cash basis 357 339 179 ============================================================================== Most lending occurs with customers located within West Virginia, Central and Eastern Ohio and Western Pennsylvania. No significant concentration of credit risk exists by industry or by individual borrower. WesBanco has no significant exposure on any foreign loans. Note 5: Premises and Equipment Premises and equipment include: December 31, Estimated ------------------------ (in thousands) useful life 2002 2001 ======================================================================== Land and improvements (3-10 years) $ 15,163 $ 12,735 Buildings and improvements (4-50 years) 52,564 53,216 Furniture and equipment (2-25 years) 27,224 42,716 ------------------------ Total Cost 94,951 108,667 Less - accumulated depreciation (39,226) (58,415) ------------------------ Total premises and equipment $ 55,725 $ 50,252 ======================================================================== Depreciation and amortization expense of premises and equipment charged to operations for the years ended December 31, 2002, 2001, and 2000 was $5.7 million, $4.9 million and $5.2 million, respectively. The decrease in the E - 11 total cost of premises and equipment and the related accumulated depreciation, year over year, is the result of the retirement of fully depreciated assets. WesBanco has operating leases for certain land, office locations and equipment. Leases that expire are generally renewed or replaced by other leases. Rental expense pertaining to these leases was $0.9 million, $0.4 million and $0.3 million, for the years ended December 31, 2002, 2001, and 2000, respectively. Future lease payments under operating leases at December 31, 2002 are as follows: (in thousands) ================================================================= 2003 $ 936 2004 835 2005 715 2006 486 2007 166 2008 and thereafter 90 ------- Total future minimum lease payments $ 3,228 ================================================================= Note 6: Goodwill and Other Intangible Assets Upon the adoption of SFAS No. 142 on January 1, 2002, WesBanco ceased amortizing its goodwill, which decreased noninterest expense and increased net income in 2002 as compared to 2001 and 2000. In 2002 WesBanco capitalized $30.6 million in goodwill and $11.1 million in core deposit intangibles in connection with the American acquisition. These core deposit intangible assets will be amortized over their estimated useful lives of 8 years. The following table shows the pro forma effects of applying SFAS No. 142 to the 2001 and 2000 periods. For the years ended December 31, (dollars in thousands, except per -------------------------------- share amounts) 2002 2001 2000 ======================================================================== Goodwill: Reported net income $34,826 $29,002 $26,924 Add back: Goodwill amortization --- 1,313 1,535 --------------------------- Adjusted net income $34,826 $30,315 $28,459 =========================== Earnings per share: Reported net income $1.70 $1.60 $1.41 Add back: Goodwill amortization --- .07 .08 --------------------------- Adjusted net income $1.70 $1.67 $1.49 ======================================================================= Amortization expense on core deposit intangibles totaled $1.8 million for the year ended December 31, 2002. Amortization on finite-lived intangible assets is expected to total $1.4 million, $1.3 million, $1.0 million, $0.9 million and $0.7 million in 2003, 2004, 2005, 2006, and 2007, respectively. Note 7: Certificates of Deposit Certificates of deposit in denominations of $100 thousand or more were $214.6 million and $161.6 million as of December 31, 2002 and 2001, respectively. Related interest expense was $7.4 million in 2002 and $7.5 million in 2001. At December 31, 2002, the scheduled maturities of total certificates of deposit are as follows: (in thousands) ====================================================== 2003 $ 529,848 2004 213,854 2005 92,446 2006 84,884 2007 31,722 2008 and thereafter 4,457 --------- Total $ 957,211 ====================================================== Note 8: Federal Home Loan Bank Borrowings WesBanco is a member of the Federal Home Loan Bank of Pittsburgh (the "FHLB"). The FHLB borrowings are secured by a blanket lien by the FHLB on certain residential mortgage loans or securities with a market value at least equal to the outstanding balances. The remaining maximum borrowing capacity with the FHLB at December 31, 2002 was approximately $589.4 million. At December 31, 2002 and 2001 WesBanco had FHLB borrowings of $343.3 million and $106.9 million, with a weighted average cost of 4.2% and 5.1%, respectively. E - 12 Note 8: Federal Home Loan Bank Borrowings (continued) The following table summarizes the FHLB maturities at December 31, 2002 based on contractual dates: (in thousands) ============================================================= 2003 $ 85,200 2004 44,900 2005 30,332 2006 10,013 2007 49,219 2008 and thereafter 123,660 --------- Total $ 343,324 ============================================================= Note 9: Other Borrowings Other borrowings consist of federal funds purchased, securities sold under agreements to repurchase, treasury tax and loan notes, and a revolving line of credit. These instruments represent short-term borrowings, generally maturing within one year from the transaction date. In 2002, WesBanco entered into a revolving one year, variable rate line of credit agreement with a commercial bank permitting the parent company to borrow a maximum aggregate amount of $20.0 million. Interest incurred on other borrowings amounted to $2.9 million, $5.6 million and $7.2 million, for the years ended December 31, 2002, 2001, and 2000, respectively. Other borrowed funds are summarized as follows: December 31, ------------------------------- (in thousands) 2002 2001 2000 ============================================================================= Federal funds purchased $ 19,000 $ 30,000 $ 15,000 Securities sold under agreement to repurchase 143,994 140,558 106,165 Treasury tax and loan notes and other 2,440 1,684 4,440 Revolving line of credit, parent company 10,200 --- --- ------------------------------- Total $ 175,634 $ 172,242 $ 125,605 ============================================================================= Information concerning securities sold under agreements to repurchase is summarized as follows: For the years ended December 31, --------------------------------- (dollars in thousands) 2002 2001 2000 ============================================================================== Outstanding balance at year end $143,994 $140,558 $106,165 Average balance during the year 143,305 138,728 112,071 Maximum month end balance during the year 156,592 162,926 129,195 Average interest rate at year end 1.81% 2.00% 5.79% Average interest rate during the year 1.86 3.56 5.68 ============================================================================== Note 10: Company Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trust Holding Solely Debentures of the Corporation On March 1, 2002, WesBanco assumed $12.65 million of 8.5% Company Obligated Manditorily Redeemable Capital Securities of Subsidiary Trust ("Trust Preferred Securities") in connection with the American acquisition. In April 1998, American created a statutory business trust under Delaware law for the purpose of issuing the Trust Preferred Securities. The proceeds from the sale of the Trust Preferred Securities, as well as proceeds from the issuance of common securities to American, were utilized by the trust to invest in $13.04 million of 8.5% Junior Subordinated Debentures ("the Debentures") of American. The Debentures represent the sole assets of the trust. The Trust Preferred Securities, which have a stated value and liquidation preference of $10 per share, are registered on the NASDAQ Stock Market under the symbol WSBCP (formerly AMBCP). Interest on the Trust Preferred Securities is cumulative and payable quarterly in arrears. WesBanco has the right to optionally redeem the Debentures on or after April 30, 2003, at 100% of the stated liquidation amount plus accrued and unpaid distributions, if any, to the redemption date. Proceeds from any redemption of the Debentures would cause a mandatory redemption of the Trust Preferred Securities and the common securities having an aggregate liquidation amount equal to the principal amount of the Debentures redeemed. The Debentures mature on April 1, 2028. The Trust Preferred Securities are presented as a separate category of long-term debt on the Consolidated Balance Sheet. For regulatory purposes, the Trust Preferred Securities are included in Tier I Capital in accordance with regulatory reporting requirements. The interest incurred on these Trust Preferred Securities for the year ended December 31, 2002 amounted to $0.9 million. E - 13 Note 11: Employee Benefit Plans Defined Benefit Pension Plans and Other Postretirement Plans: At December 31, 2002, 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 the 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 historical years of service, but also for benefits expected to be earned in the future. Retirees and certain active employees are provided a postretirement non-contributory health insurance and death benefit plan. For reported years 2002 and 2001, the health insurance benefit was $0.1 thousand per month and the death benefit was $7.5 thousand. Net periodic pension cost for the Plan includes the following components: For the years ended December 31, -------------------------------- (in thousands) 2002 2001 2000 ============================================================================= Service cost - benefits earned during year $ 1,243 $ 1,214 $ 1,064 Interest cost on projected benefit obligation 2,193 2,121 1,956 Expected return on plan assets (2,800) (3,204) (2,986) Net amortization and recognized loss (45) (559) (638) --------------------------- Net periodic pension cost (earnings) $ 591 $ (428) $ (604) ============================================================================= The following tables summarize the activity in the projected benefit obligation and Plan assets: For the years ended December 31, ------------------- (in thousands) 2002 2001 ============================================================================= Projected benefit obligation, at beginning of year $30,323 $26,877 Service cost 1,243 1,214 Interest cost 2,193 2,121 Benefits paid (1,689) (1,505) Change in interest rate assumptions --- 227 Actuarial loss 2,818 1,389 ------------------ Projected benefit obligation, at end of year $34,888 $30,323 ============================================================================= For the years ended December 31, ------------------- (in thousands) 2002 2001 ============================================================================= Fair value of plan assets, at beginning of year $32,618 $37,199 Actual return on assets (3,674) (3,076) Contributions 1,271 --- Benefits paid (1,689) (1,505) ------------------ Fair value of plan assets, at end of year $28,526 $32,618 ============================================================================= 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: For the years ended December 31, ------------------- (in thousands) 2002 2001 ============================================================================= Plan assets in excess (less than) projected benefit obligation $ (6,362) $ 2,295 Unrecognized prior service cost (1,091) (1,238) Unrecognized net loss 11,065 1,875 ------------------- Prepaid pension cost $ 3,612 $ 2,932 ============================================================================= E - 14 Note 11: Employee Benefit Plans (continued) The following table shows the amounts recognized in the Consolidated Financial Statements: For the years ended December 31, ------------------- (in thousands) 2002 2001 ============================================================================= Prepaid pension cost $ 3,612 $ 2,932 Additional minimum liability (4,925) --- Accumulated other comprehensive income 4,925 --- ------------------- Net amount recognized on balance sheet $ 3,612 $ 2,932 ============================================================================= Actuarial assumptions used in the determination of the projected benefit obligation in the Plan are as follows: For the years ended December 31, -------------------------------- 2002 2001 2000 ============================================================================== Weighted average discount rates 6.75% 7.50% 7.90% Rates of increase in compensation levels 3.75 4.00 4.50 Weighted average expected long-term return on assets 8.50 8.75 8.75 ============================================================================== On March 1, 2002, WesBanco became the plan administrator of the American non-contributory Defined Benefit Pension Plan. Prior to the acquisition, American had frozen all benefit accruals in its pension plan and fully vested all participants in the benefits accrued to them. As of December 31, 2002, the American plan had a projected benefit obligation of $0.9 million, which was equal to the fair value of the plan assets, and a prepaid pension cost of $0.3 million recognized on the balance sheet. Post-merger activity in the American plan for 2002 included net periodic pension costs of $44 thousand and plan contributions of $34 thousand. WesBanco has no plans to merge the American pension plan with any of the WesBanco employee benefit plans. KSOP (Employee Stock Ownership and 401(k) Plan): Substantially all employees are included in the WesBanco KSOP Plan. The KSOP plan consists of a non-contributory employee stock ownership (ESOP) and a 401(k) Plan. The 401(k) provisions require WesBanco to make matching contributions based upon an employee's contribution, subject to regulatory limitations. For 2002, WesBanco matched 50% of the first 2% of an employee's contribution and 25% of the next 2%. As of December 31, 2002, the Plan held 641,983 shares of WesBanco stock, of which 560,532 shares were allocated to specific employee accounts, and 81,451 shares were unallocated. Dividends earned on unallocated shares are used to pay interest on the ESOP loan. Dividends on allocated shares are distributed to employee accounts. During 2000, WesBanco's ESOP renewed a revolving line of credit with an affiliated lender. Conditions in the loan agreement provide for a revolving line of credit in the aggregate amount of $2.0 million 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 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 $1.0 million, $1.6 million and $0 at December 31, 2002, 2001 and 2000, respectively. Total contributions to the KSOP for the three years ended December 31, 2002, 2001 and 2000 were $0.9 million, $1.0 million and $1.1 million, respectively. American maintained a profit sharing 401(k) savings plan. On March 1, 2002 the American profit sharing 401(k) savings plan was closed to new contributions and participants and all eligible American participants were automatically enrolled in the WesBanco 401(k) plan. As of January 1, 2003, this plan was merged into the WesBanco, Inc. 401(k) plan. Key Executive Incentive Bonus & Stock Option Plan: The Key Executive Incentive Bonus & Option Plan, which commenced 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 2002, 2001 and 2000 for the Annual Bonus component of the plan was $0.5 million, $0.5 million and $0.4 million, respectively. During 2002, 2001,and 2000 awards in the amounts of $50 thousand, $43 thousand and $0, respectively, for the Long- Term Bonus component were made to specific employees. The Stock Option component provides for granting of stock options to eligible employees. During 2002 the Board of Directors provided for the issuance of 206,000 shares of common stock for this component of the Plan at an option price of $23.96. These options vest over a three-year period and have no performance provisions. During 2001 and 2000, 159,924 and 28,000 shares, respectively, were granted at an average option price of $20.88 and $22.00 per share, respectively. WesBanco accounts for stock options in accordance with APB Opinion No. 25 "Accounting for Stock Issued to Employees". Under APB No. 25, the 2002 and 2001 stock options were granted at prices equal to fair market value at the E - 15 date of the grants, and accordingly, no compensation expense was recognized. All granted options become immediately vested in the event of a change in control of WesBanco. The following table shows the shares activity in the Option Plan: For the years ended December 31, ------------------------------------------------------------------------ Weighted Avg. Weighted Avg. Weighted Avg. Exercise Price Exercise Price Exercise Price 2002 Per Share 2001 Per Share 2000 Per Share ================================================================================================================ Outstanding at beginning of the year 212,811 $22.03 52,887 $25.53 24,887 $29.50 Granted during the year 206,000 23.96 159,924 20.88 28,000 22.00 Exercised during the year --- --- --- --- --- --- Forfeited during the year 1,392 20.74 --- --- --- --- ------------------------------------------------------------------------- Outstanding at end of the year 417,419 $22.99 212,811 $22.03 52,887 $25.53 ------------------------------------------------------------------------- Exercisable at year end 226,778 $22.90 96,860 $23.31 34,218 $27.45 ================================================================================================================
The following table shows the average remaining life of the stock options at December 31, 2002: Weighted Avg. Average Remaining Options Exercise Contractual Years issued Outstanding Price Years ========================================================================== 1998 24,887 $29.50 3.50 2000 28,000 22.00 4.92 2001 158,532 20.88 7.85 2002 206,000 23.96 9.90 ---------------------------------------- Total 417,419 8.40 ========================================================================= Note 12: Other Operating Expense Other operating expense consists of the following: For the years ended December 31, -------------------------------- (in thousands) 2002 2001 2000 ============================================================================== Professional fees $ 4,139 $ 3,883 $ 3,568 Marketing 1,924 1,933 2,339 General administrative 1,128 945 1,035 Supplies 2,075 1,790 2,106 Postage 2,351 2,002 1,758 Telecommunication 2,322 1,767 2,229 Miscellaneous taxes 3,642 3,405 3,170 Goodwill amortization --- 1,313 1,535 Core deposit intangible amortization 1,810 --- --- Other 3,652 3,869 3,151 --------------------------------- Total $ 23,043 $ 20,907 $ 20,891 ============================================================================== Note 13: Income Taxes Reconciliation from the federal statutory income tax rate to the effective tax rate is as follows: For the years ended December 31, ------------------------------- 2002 2001 2000 ============================================================================= Federal statutory tax rate 35.0% 35.0% 35.0% Tax-exempt interest income from securities of states and political subdivisions - net (11.9) (8.9) (7.9) State income taxes 2.5 3.4 3.8 Other - net (2.2) 0.3 0.4 ---------------------------- Effective tax rate 23.4% 29.8% 31.3% ============================================================================= E - 16 Note 13: Income Taxes (continued) The provision for income taxes applicable to income before taxes consists of the following: For the years ended December 31, -------------------------------- (in thousands) 2002 2001 2000 ============================================================================== Current: Federal $ 8,425 $ 10,356 $ 9,936 State 1,804 2,158 2,406 Deferred: Federal 441 (201) 16 State (50) (31) (87) -------------------------------- Total $ 10,620 $ 12,282 $ 12,271 ============================================================================== The following income tax amounts were recorded in shareholders' equity as an element of other comprehensive income: For the years ended December 31, ------------------------------- (in thousands) 2002 2001 2000 ============================================================================= Securities and derivative transactions $ 2,054 $ 2,577 $ 4,630 Minimum pension liability (1,970) --- --- --------------------------- Total $ 84 $ 2,577 $ 4,630 ============================================================================= Deferred tax assets and deferred tax liabilities consist of the following: December 31, -------------------------- (in thousands) 2002 2001 2000 ============================================================================= Deferred tax assets: Allowance for loan losses $ 9,569 $ 8,029 $ 7,538 Compensation and benefits 2,369 418 487 Net operating loss carryforward --- 338 410 Deferred loan fees and costs 510 --- --- Purchase accounting adjustments 1,790 --- --- Tax effect of fair value adjustments on securities available for sale --- --- 214 Other 37 --- 10 ------------------------- Gross deferred tax assets 14,275 8,785 8,659 ------------------------- Deferred tax liabilities: Tax effect of fair value adjustments on securities available for sale and derivatives (4,134) (2,363) --- Depreciation (988) (1,366) (1,288) Purchase accounting adjustments --- (431) (452) Accretion on securities (939) (401) (344) Deferred loan fees and costs --- (24) (138) Other --- (108) --- ------------------------- Gross deferred tax liabilities (6,061) (4,693) (2,222) ------------------------- Net deferred tax assets $ 8,214 $ 4,092 $ 6,437 ============================================================================= WesBanco determined that it was not required to establish a valuation allowance for deferred tax assets since management believes that the deferred tax assets are likely to be realized through a carryback to taxable income in prior years, future reversals of existing taxable temporary differences and, to a lesser extent, future taxable income. Note 14: 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. E - 17 The following table represents the estimates of fair value of financial instruments: December 31, ----------------------------------------------- 2002 2001 --------------------- ---------------------- Carrying Fair Carrying Fair (in thousands) Amount Value Amount Value ================================================================================= Financial assets: Cash and short-term investments $ 81,085 $ 81,085 $ 82,275 $ 82,275 Securities held to maturity 499,161 514,735 240,953 242,558 Securities available for sale 694,735 694,735 517,517 517,517 Net loans (including loans held for sale) 1,795,805 1,825,435 1,518,909 1,537,068 Financial liabilities: Deposits 2,399,956 2,411,652 1,913,458 1,928,572 Federal Home Loan Bank borrowing 343,324 357,876 106,889 109,631 Other borrowings 175,634 175,783 172,242 172,326 Company obligated mandatory redeemable capital securities of subsidiary trust 12,650 12,713 --- --- Derivatives: Interest rate swaps (5,835) (5,835) (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 personal 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. 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 Federal Home Loan Bank advances, fair value is based on rates currently available to WesBanco for borrowings with similar terms and remaining maturities. Derivatives: 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. E - 18 Note 15: Comprehensive Income The components of comprehensive income are as follows: For the years ended December 31, ------------------------------- (in thousands) 2002 2001 2000 ============================================================================= Net income $ 34,826 $ 29,002 $ 26,924 Other comprehensive income - net of tax: Net fair value adjustment on securities available for sale 6,469 5,584 7,091 Net securities gains reclassified into earnings (582) (770) --- Cumulative effect of accounting change for derivative financial instruments --- 558 --- Net fair value adjustment on derivatives (2,051) (1,301) --- Net derivative gains reclassified into earnings (136) (146) --- Minimum pension liability (2,955) --- --- ------------------------------ Other comprehensive income 745 3,925 7,091 ------------------------------ Comprehensive income $ 35,571 $ 32,927 $ 34,015 ============================================================================= Note 16: Commitments and Contingent Liabilities Commitments: In the normal course of business, WesBanco offers off-balance sheet credit arrangements to enable its customers to meet their financing objectives. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. WesBanco has various commitments outstanding to extend credit approximating $262.0 million and $251.4 million and standby letters of credit of $29.1 million and $18.3 million as of December 31, 2002 and 2001, 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 standby letters of credit is limited to the contractual amount of those instruments. WesBanco uses the same credit policies in making commitments and conditional obligations as for all other lending. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Expected losses on such commitments are recorded in other liabilities. 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. 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 17: Derivatives WesBanco may enter into interest rate swap agreements to manage its own risks arising from movement in interest rates. During 2001, WesBanco had entered into interest rate swap agreements that effectively converted $125.0 million of its prime based money market deposit accounts to a fixed-rate basis for an average term of 5.24 years, thus reducing the impact of rising interest rates on future interest expense. At December 31, 2002 and December 31, 2001, the notional amount of the swap agreements was $110.5 million and $122.2 million, respectively, with WesBanco receiving a weighted average variable rate of 2.16% and 2.42%, and paying a weighted average fixed rate of 4.37%. At December 31, 2002 net fair value adjustments on interest rate swap agreements reflected unrealized pretax net losses of $5.8 million. 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 dates, no fair value gain or loss is realized. During 2000, all then outstanding interest rate swap agreements were terminated, generating a deferred gain of $1.0 million, which was 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 amortized $0.2 million and $0.2 million of interest rate swap gains during 2002 and 2001, respectively. WesBanco will realize $0.2 million of interest rate swap gains during 2003. E - 19 The following table summarizes the 2002 changes in the accumulated other comprehensive income resulting from derivatives: (in thousands) ============================================================================= Balance at December 31, 2001 $ (889) Net deferred gains on derivatives reclassified into earnings (136) Net interest expense on the effective portion of derivatives reclassified into earnings 1,419 Net change in fair value on the effective portion of derivatives not reclassified into earnings (3,470) --------- Balance at December 31, 2002 $ (3,076) ============================================================================= Note 18: Transactions With Related Parties Certain directors and officers (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, certain directors are also directors or officers 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 $52.7 million, $62.3 million and $48.2 million as of December 31, 2002, 2001, and 2000, respectively. During 2002, $163.7 million in related party loans were funded and $173.3 million were repaid. Note 19: 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 bank 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 2002 and 2001, 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, 2002 and 2001, WesBanco's banking subsidiary, could not have declared any dividends to be paid to WesBanco without prior approval from regulatory agencies. Federal Reserve regulations require depository institutions to maintain cash reserves with the Federal Reserve Bank. The average amounts of required reserve balances were approximately $25.5 million and $29.0 million during 2002 and 2001, 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 consists 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, 2002 and 2001. There are no conditions or events since December 31, 2002 that management believes have changed WesBanco's well-capitalized category. The following table summarizes risk-based capital amounts and ratios for WesBanco and its bank subsidiary: December 31, ----------------------------------- 2002 2001 ---------------- --------------- (dollars in thousands) Amount Ratio Amount Ratio ============================================================================= WesBanco, Inc. Tier 1 Leverage $274,660 8.53% $235,726 9.62% Tier 1 Capital to Risk-Weighted Assets 274,660 12.95 235,726 14.09 Total Capital to Risk-Weighted Assets 299,740 14.13 256,512 15.34 ---------------------------------- WesBanco Bank, Inc. Tier 1 Leverage $274,864 8.56% $226,059 9.28% Tier 1 Capital to Risk-Weighted Assets 274,864 13.01 226,059 13.57 Total Capital to Risk-Weighted Assets 299,936 14.20 246,826 14.81 ============================================================================= E - 20 Note 20: 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, --------------------- (in thousands) 2002 2001 ============================================================================= Assets Cash and short-term investments $ 5,617 $ 5,746 Investment in subsidiaries: Banking 337,514 248,746 Nonbank 6,075 6,491 Securities available for sale carried at fair value 12,366 14,974 Other assets 1,298 483 -------------------- Total Assets $ 362,870 $ 276,440 ==================== Liabilities Borrowings $ 18,728 $ 13,272 Company obligated mandatorily redeemable capital securities of subsidiary trust holding solely debentures of the Corporation 12,650 --- Dividends payable and other liabilities 6,321 4,967 -------------------- Total Liabilities 37,699 18,239 Shareholders' Equity 325,171 258,201 -------------------- Total Liabilities and Shareholders' Equity $ 362,870 $ 276,440 ============================================================================= Statement of Income For the years ended December 31, -------------------------------- (in thousands) 2002 2001 2000 ============================================================================== Dividends from subsidiaries: Banking $30,000 $33,000 $30,000 Nonbank 650 550 --- Income from securities 508 735 838 Other income 101 109 225 --------------------------- Total income 31,259 34,394 31,063 Total expense 3,236 1,981 1,781 --------------------------- Income before income tax benefit and undistributed net income (excess dividends) of subsidiaries 28,023 32,413 29,282 Income tax benefit (1,190) (631) (476) --------------------------- Income before undistributed net income of subsidiaries 29,213 33,044 29,758 Undistributed net income (excess dividends) of subsidiaries 5,613 (4,042) (2,834) --------------------------- Net Income $34,826 $29,002 $26,924 ============================================================================= Statement of Cash Flows For the years ended December 31, ------------------------------- (in thousands) 2002 2001 2000 ============================================================================= Cash flows from operating activities: Net income $34,826 $29,002 $26,924 Excess dividends (undistributed net income) of subsidiaries (5,613) 4,042 2,834 (Increase) decrease in other assets (100) 37 2,547 Other - net 872 (1,667) 148 --------------------------- Net cash provided by operating activities 29,985 31,414 32,453 --------------------------- Cash flows from investing activities: Securities available for sale: Proceeds from sales 194 405 4,252 Proceeds from maturities and calls 3,345 265 1,285 Payments for purchases (500) (963) (977) Additional capitalization of subsidiaries (400) (75) (650) --------------------------- Net cash provided by (used in) investing activities 2,639 (368) 3,910 --------------------------- Cash flows from financing activities: Borrowings (payments) on ESOP debt - net (543) 1,572 (350) Increase in borrowings 6,000 200 9,500 Purchases of treasury stock - net (19,957) (14,975) (28,367) Dividends paid (18,890) (16,737) (17,167) Other 637 --- --- --------------------------- Net cash used by financing activities (32,753) (29,940) (36,384) --------------------------- Net increase (decrease) in cash and cash equivalents (129) 1,106 (21) Cash and short-term investments at beginning of year 5,746 4,640 4,661 --------------------------- Cash and short-term investments at end of year $ 5,617 $ 5,746 $ 4,640 ============================================================================= E - 21 Note 21: 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 and individual demand and time deposit accounts and 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 $2.3 billion, $2.8 billion and $3.1 billion, at December 31, 2002, 2001 and 2000, 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 (in thousands) Banking Services Consolidated ============================================================================== For the year ended December 31, 2002 Interest income $176,155 --- $176,155 Interest expense 72,555 --- 72,555 -------------------------------- Net interest income 103,600 --- 103,600 Provision for loan losses 9,359 --- 9,359 -------------------------------- Net interest income after provision for loan losses 94,241 --- 94,241 Non-interest income 16,326 $11,526 27,852 Non-interest expense 69,781 6,866 76,647 -------------------------------- Income before income taxes 40,786 4,660 45,446 Provision for income taxes 8,756 1,864 10,620 -------------------------------- Net Income $ 32,030 $ 2,796 $ 34,826 ============================================================================= 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 ============================================================================= E - 22 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 Vice Executive Officer 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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP January 24, 2003 Pittsburgh, Pennsylvania E - 23 Condensed Quarterly Statement of Income ------------------------------------------------------------------------------ (in thousands, except per share amounts) 2002 Quarter ended ---------------------------------------------------------------- Annual March 31 June 30 September 30 December 31 Total ======================================================================================================== Interest income $40,869 $45,566 $44,986 $44,734 $176,155 Interest expense 16,616 18,915 18,798 18,226 72,555 ---------------------------------------------------------------- Net interest income 24,253 26,651 26,188 26,508 103,600 Provision for loan losses 2,239 1,760 2,757 2,603 9,359 ---------------------------------------------------------------- Net interest income after provision for loan losses 22,014 24,891 23,431 23,905 94,241 Non-interest income 7,104 6,657 6,641 7,450 27,852 Non-interest expense 17,780 19,884 19,330 19,653 76,647 ---------------------------------------------------------------- Income before income taxes 11,338 11,664 10,742 11,702 45,446 Provision for income taxes 3,270 2,986 1,782 2,582 10,620 ---------------------------------------------------------------- Net Income $ 8,068 $ 8,678 $ 8,960 $ 9,120 $ 34,826 ================================================================ Earnings per share $0.42 $0.41 $0.43 $0.44 $1.70 ========================================================================================================
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 ========================================================================================================
E - 24 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 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. Application of Critical Accounting Policies & Estimates WesBanco's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions and judgements that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgements are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgements. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgements and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgements are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The most significant accounting policies followed by WesBanco are included in Note 1 to the Consolidated Financial Statements. These policies, along with other Notes to the Consolidated Financial Statements and in this Management's Discussion and Analysis, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and goodwill and other intangible assets to be the accounting estimates that require the most subjective or complex judgements, and as such could be most subject to revision as new information becomes available. The allowance for loan losses represents management's estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgements and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, consideration of current economic trends and conditions, and other relevant factors, all of which may be susceptible to significant change. See Note 1 of the Consolidated Financial Statements along with the Loans and Credit Risk section located in this Management's Discussion and Analysis for a description of the methodology used to determine the allowance for loan losses and a discussion of the factors affecting the amount of the allowance for loan losses. SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets," establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At December 31, 2002, WesBanco had core deposit intangibles of $9.3 million subject to amortization and goodwill of $49.5 million, which was not subject to periodic amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. WesBanco's goodwill relates to the value inherent in the banking industry and that value is dependent upon WesBanco's ability to provide quality, cost effective services in a competitive marketplace. As such, goodwill value is supported ultimately by revenue that is driven by the volume of business transacted. A decrease in earnings resulting from a decline in customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. SFAS No. 142 requires an annual evaluation of goodwill for impairment. The fair value of WesBanco and the implied fair value of goodwill at the respective reporting unit level are estimated using discounted cash flow methodologies and industry comparable information. WesBanco has concluded that the recorded value of goodwill was not impaired as a result of the evaluation. E - 25 Table 1. Five Year Selected Financial Summary (dollars in thousands, except per share amounts) December 31, -------------------------------------------------------------------- 2002 2001 2000 1999 1998 ================================================================================================================== Per share information: Dividends $0.935 $ 0.92 $0.895 $ 0.88 $ 0.84 Book value at year end 15.89 14.46 13.92 13.63 14.35 Average common shares outstanding 20,459,122 18,123,851 19,092,927 20,229,524 20,867,193 Selected balance sheet information: Total securities $1,193,896 $ 758,470 $ 546,389 $ 567,928 $ 680,550 Net loans 1,795,805 1,518,909 1,570,672 1,503,694 1,353,920 Total assets 3,297,231 2,474,454 2,310,137 2,269,726 2,242,712 Total deposits 2,399,956 1,913,458 1,870,361 1,814,001 1,787,642 Total shareholders' equity 325,171 258,201 258,506 269,664 296,483 Selected ratios: Return on average assets 1.13% 1.21% 1.18% 1.23% 1.26% Return on average equity 10.95 11.28 10.42 9.85 9.55 Dividend payout 55.00 57.50 63.47 64.23 61.76 Average equity to average assets 10.29 10.70 11.30 12.47 13.16 Trust assets, market value at year end $2,295,737 $2,808,862 $3,099,441 $3,087,610 $2,774,906 ==================================================================================================================
For the years ended December 31, -------------------------------------------------------------------- Summary statement of income: 2002 2001 2000 1999 1998 ================================================================================================================== Interest income $176,155 $163,939 $163,079 $155,861 $162,718 Interest expense 72,555 76,354 79,552 69,231 73,925 -------------------------------------------------------------------- Net interest income 103,600 87,585 83,527 86,630 88,793 Provision for loan losses 9,359 5,995 3,225 4,295 4,392 -------------------------------------------------------------------- Net interest income after provision for loan losses 94,241 81,590 80,302 82,335 84,401 Non-interest income 27,852 24,588 23,376 24,581 25,715 Non-interest expense 76,647 64,894 64,483 67,813 68,308 -------------------------------------------------------------------- Income before income taxes 45,446 41,284 39,195 39,103 41,808 Provision for income taxes 10,620 12,282 12,271 11,465 13,495 -------------------------------------------------------------------- Net Income $ 34,826 $ 29,002 $ 26,924 $ 27,638 $ 28,313 -------------------------------------------------------------------- Earnings per share $1.70 $1.60 $1.41 $1.37 $1.36 ==================================================================================================================
Earnings Summary Earnings for 2002 were $34.8 million or $1.70 per share compared to $29.0 million or $1.60 per share in 2001. The results for 2002 reflect the acquisition of American Bancorporation ("American") on March 1, 2002. Please see Note 2 of the Consolidated Financial Statements for additional information on the acquisition. WesBanco's 2002 financial performance was highlighted by growth in net interest income, improved operating efficiencies and a reduction in the effective tax rate. These positive factors were partially offset by an increase in the provision for loan losses. Excluding the impact of certain adjusting items, primarily merger-related expenses, net securities gains, asset disposal losses, and goodwill amortization for 2001, core earnings per share would have been $1.74 or $35.6 million for the year ended December 31, 2002, compared to $1.64 or $29.7 million for the same period in 2001. See Table 2 for a reconciliation of core earnings to GAAP earnings. Return on average assets was 1.13% and return on average equity was 10.95% for the year ended December 31, 2002, compared to 1.21% and 11.28%, in 2001, respectively. [GRAPH] Core Earnings Per Share* 1998 $ 1.28 1999 $ 1.32 2000 $ 1.46 2001 $ 1.64 2002 $ 1.74 * Excludes amortization of goodwill, merger-related expenses, net securities gains and net losses on sale of assets. E - 26 Earnings Summary (continued) Table 2. Reconciliation of Core Earnings To GAAP Earnings For the years ended December 31, ----------------------- (dollars in thousands, except per share amounts) 2002 2001 ============================================================================= Net income $34,826 $29,002 Less: Net gains on securities and net losses on sale of assets 863 726 Plus: Merger-related expenses 1,635 153 Amortization of goodwill - 1,313 ----------------------- Core earnings $35,598 $29,742 ======================= Net income per share $1.70 $1.60 Less: Net gains on securities and net losses on sale of assets 0.04 0.04 Plus: Merger-related expenses 0.08 0.01 Amortization of goodwill - 0.07 ----------------------- Core earnings per share $1.74 $1.64 ============================================================================= 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) adjusted for the stated tax rates. 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 2002 increased $19.1 million or 20.5% in comparison to 2001. The overall increase in net interest income was primarily related to average earning assets, increasing $619.6 million or 27.7% and average interest bearing liabilities, increasing $567.4 million or 29.9%. These average balance sheet increases were primarily related to the acquisition of American. Partially offsetting the increase in net interest income due to balance sheet growth was a decline in the taxable equivalent net interest margin to 3.93% in 2002 compared to 4.17% in 2001. As interest rates fell to historic lows during 2002, factors contributing to the decline in net interest margin included narrowing interest rate spreads between loan and deposit products, increases in loan refinancings, changes in the composition of earning assets and shortening maturities in the securities portfolio in anticipation of rising interest rates later in 2002. Table 4 presents the impact of these changes in volume and rate on the components of tax equivalent net interest income. [GRAPH] Net Interest Income* in millions ------------------- 1998 $ 93.96 1999 $ 92.11 2000 $ 88.40 2001 $ 93.15 2002 $112.20 * Taxable equivalent Taxable equivalent interest income increased $15.3 million or 9.0% for 2002 compared to 2001. 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 6.47% in 2002 from 7.58% in 2001. The decline in the taxable equivalent yield was due to lower-margin acquired net assets of American, an increase in securities with lower yields, commercial loan and residential mortgage refinancings at historically low interest rates, the continued run off in higher-yielding but less profitable indirect automobile lending, and reduced commercial loan demand due to uncertain economic conditions in the business sector. Interest expense decreased $3.8 million or 5.0% from 2001. As shown in Table 3, the decrease in interest expense resulted from a decline in the rate paid on average interest bearing liabilities to 2.95% in 2002 from 4.03% in 2001, which was partially offset by a total volume increase of 30.0% in 2002. The decrease in the rate paid on average interest bearing liabilities was attributable to significant interest rate reductions on interest bearing deposits as well as lower rates on new FHLB borrowings and other borrowings comprised mainly of repurchase agreements and federal funds purchased. During 2002, customers shifted out of savings accounts and long-term certificates of deposit and invested in money market accounts. Average other borrowings increased $181.3 million of which $150.0 million related to FHLB borrowings assumed in the American acquisition. [GRAPH] Net Interest Margin %* ---------------------- 1998 4.46% 1999 4.39% 2000 4.14% 2001 4.17% 2002 3.93% * Taxable equivalent E - 27 Table 3. Average Balance Sheet and Net Interest Analysis For the years ended December 31, -------------------------------------------------------------------------------------------------- 2002 2001 2000 -------------------------------- -------------------------------- -------------------------------- 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) $1,789,078 $124,912 6.98% $1,559,145 $126,230 8.10% $1,556,195 $128,591 8.26% Securities: (2) Taxable 703,308 34,670 4.93 425,006 25,692 6.05 374,302 24,297 6.49 Tax-exempt (3) 327,331 24,568 7.51 209,268 15,892 7.59 182,516 13,806 7.56 --------------------------------------------------------------------------------------------------- Total securities 1,030,639 59,238 5.75 634,274 41,584 6.56 556,818 38,103 6.84 Federal funds sold 35,683 604 1.69 42,421 1,687 3.98 18,703 1,217 6.51 --------------------------------------------------------------------------------------------------- Total earning assets (3) 2,855,400 $184,754 6.47% 2,235,840 $169,501 7.58% 2,131,716 $167,911 7.88% --------------------------------------------------------------------------------------------------- Other assets 235,070 167,593 156,062 --------------------------------------------------------------------------------------------------- Total Assets $3,090,470 $2,403,433 $2,287,778 =================================================================================================== Liabilities and Shareholders' Equity Interest bearing demand deposits $ 267,944 $ 1,685 0.63% $ 245,712 $ 3,920 1.60% $ 247,753 $ 5,026 2.03% Money market 468,696 12,890 2.75 374,100 14,006 3.74 352,084 16,462 4.68 Savings deposits 352,333 3,852 1.09 252,606 4,671 1.85 265,723 5,264 1.98 Certificates of deposit 946,425 38,481 4.07 776,852 43,632 5.62 774,607 43,689 5.64 --------------------------------------------------------------------------------------------------- Total interest bearing deposits 2,035,398 56,908 2.80 1,649,270 66,229 4.02 1,640,167 70,441 4.29 Other borrowings 416,085 14,730 3.54 245,390 10,125 4.13 155,149 9,111 5.87 Trust preferred securities 10,603 917 8.65 --------------------------------------------------------------------------------------------------- Total interest bearing liabilities 2,462,086 $ 72,555 2.95% 1,894,660 $ 76,354 4.03% 1,795,316 $ 79,552 4.43% --------------------------------------------------------------------------------------------------- Non-interest bearing demand deposits 279,560 228,936 215,393 Other liabilities 30,762 22,759 18,645 Shareholders' Equity 318,062 257,078 258,424 --------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $3,090,470 $2,403,433 $2,287,778 =================================================================================================== Taxable equivalent net interest margin (3) $112,199 3.93% $ 93,147 4.17% $ 88,359 4.14% =================================================================================================================================
(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 period. 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 4. Rate Volume Analysis of Changes in Interest Income and Interest Expense (1) 2002 Compared to 2001 2001 Compared to 2000 --------------------------------- ------------------------------ Net Increase Net Increase (in thousands) Volume Rate (Decrease) Volume Rate (Decrease) ============================================================================================================= Increase (decrease) in interest income: Loans, net of unearned income $17,291 $(18,609) $(1,318) $ 330 $(2,691) $(2,361) Taxable securities 14,402 (5,424) 8,978 3,141 (1,746) 1,395 Tax-exempt securities(2) 8,864 (188) 8,676 2,031 55 2,086 Federal funds sold (235) (848) (1,083) 1,084 (614) 470 ------------------------------------------------------------------- Total interest income change 40,322 (25,069) 15,253 6,586 (4,996) 1,590 ------------------------------------------------------------------- Increase (decrease) in interest expense: Interest bearing demand deposits 327 (2,562) (2,235) (41) (1,065) (1,106) Money market 3,083 (4,199) (1,116) 980 (3,436) (2,456) Savings deposits 1,909 (2,728) (819) (252) (341) (593) Certificates of deposit 8,363 (13,514) (5,151) 126 (183) (57) Other borrowings 6,490 (968) 5,522 4,257 (3,243) 1,014 ------------------------------------------------------------------- Total interest expense change 20,172 (23,971) (3,799) 5,070 (8,268) (3,198) ------------------------------------------------------------------- Net interest income increase (decrease)(2) $20,150 $ (1,098) $19,052 $ 1,516 $ 3,272 $ 4,788 =============================================================================================================
(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 - 28 Results of Operations (continued) Provision For Loan Losses The provision for loan losses in 2002 increased to $9.4 million compared to $6.0 million in 2001. Net charge- offs increased to $9.0 million compared to $5.2 million in 2001. As shown in Table 13, net charge-offs as a percentage of average total loans increased to 0.50% in 2002 from 0.34% in 2001. The increase in the provision resulted from increases in loan delinquencies, non-performing loans, rising consumer loan losses and to a lesser extent from growth in the loan portfolio associated with the American acquisition. For additional information see the Allowance for Loan Losses section of Loans and Credit Risk included in this Management's Discussion and Analysis. Non-Interest Income Excluding net securities gains, 2002 non-interest income increased $2.7 million or 11.5% from 2001. The increase related primarily to growth in fee income earned on deposit accounts acquired in the American transaction. Trust fees remained consistent at $11.5 million for the years ended December 31, 2002 and 2001 with managed mutual fund asset fees and higher estate fees helping to offset the impact of reduced market values. The market value of trust assets at December 31, 2002 was $2.3 billion, a decrease of $513.1 million or 18.3% from December 31, 2001, primarily related to reduced equity market values. [GRAPH] Non-Interest Income* to Average Assets ----------------------- 1998 0.87% 1999 0.92% 2000 0.99% 2001 0.97% 2002 0.86% * Excludes net securities gains. Deposit activity revenue increased approximately $1.6 million or 17.8% compared to 2001 due to increases in income connected with customer deposit activities, debit cards and automatic teller machines. Other income increased by approximately $1.0 million or 39.3% compared to 2001 as a result of an increase in the net cash surrender value of bank owned life insurance and benefits paid on these policies. Bank owned life insurance increased from $10.5 million at December 31, 2001 to $62.9 million at December 31, 2002, with $11.7 million added through the American acquisition. An additional investment of $40.0 million was made during December 2002. Net securities gains increased $0.6 million or 44.8% in 2002 primarily from sales of U.S. Agency securities to improve liquidity and reposition the securities portfolio primarily after the acquisition of American. In 2002, WesBanco recognized $0.9 million in other-than-temporary impairment losses on investment securities. Non-Interest Expense Non-interest expenses, excluding amortization of goodwill and merger-related expenses, increased $10.8 million or 17.0% from 2001. The increase was related primarily to expansion of internal operations, personnel and new banking offices acquired in the American transaction. WesBanco's efficiency ratio improved to 53.44% in 2002 from 54.25% in 2001. Salaries and wages increased $3.4 million or 12.2% in 2002 primarily due to the additional employees acquired in the American transaction as well as normal salary increases. Employee benefit costs increased $2.0 million or 33.5% compared to 2001, primarily due to the increase in employees. Full-time equivalent employees increased to 1,156 as of December 31, 2002 compared to 1,003 as of December 31, 2001. In addition, pension and health care costs were significant contributors to higher employee benefit expense. Contributing to the rise in pension expense during 2002 were reduced pension asset values and a lower pension liability discount rate assumption. The decline in pension asset values and discount rate resulted in WesBanco recording a $3.0 million charge, net of tax, to other comprehensive income. WesBanco anticipates a significantly higher pension expense of approximately $1.8 million in 2003 as a result of these factors and a reduced long-term rate of return assumption. [GRAPH] Non-Interest Expense* to Average Assets ------------------------ 1998 2.96% 1999 3.01% 2000 2.85% 2001 2.64% 2002 2.40% * Excludes amortization of goodwill and merger-related expenses. In other non-interest expense categories, the increase in net occupancy expense was principally due to the integration of American's branch facilities. The increase in equipment and other operating expense resulted from a rise in technology-related expenses as WesBanco integrated American's operations into its core banking and computer network systems. Technology costs impacted a number of expense categories including equipment maintenance agreements, consulting services and data-line communication charges. During 2002, operating expenses were increased by core deposit intangible amortization of $1.8 million associated with the American acquisition. Additionally, WesBanco ceased amortization of goodwill in accordance with the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. Prior to adoption of the new standard, annual E - 29 goodwill amortization approximated $1.3 million. See Notes 1, 2 and 6 of the Consolidated Financial Statements for more information on the accounting for goodwill and core deposit intangibles. Merger-related expenses increased $2.3 million compared to 2001 due to severance payments, data systems conversion costs, and other merger-related expenses associated primarily with the American acquisition. Income Taxes Although WesBanco's pretax income increased $4.2 million to $45.4 million in 2002 from $41.3 million in 2001, the provision for income taxes decreased by 13.5% to $10.6 million in 2002. This decline in the provision was caused by an increase in state and municipal tax exempt income primarily due to a $118.1 million increase in average tax exempt investment securities, the majority of which was acquired in the American acquisition, as well as additional purchases throughout the year. The effective tax rate was further reduced by certain prior years' favorable tax settlements. All of these factors lowered the effective tax rate to 23% for 2002 from 30% for 2001. For 2003, it is currently anticipated that the effective tax rate will approximate 20%. The decrease in the estimated 2003 effective tax rate reflects an expected increase in state and municipal tax exempt income and the purchase of additional bank owned life insurance. Federal income tax expense decreased $1.3 million to $8.9 million in 2002 from $10.2 million in 2001. 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 2002 and 2001. West Virginia income tax, included in the provision for income taxes, was $1.7 million for 2002 compared to $2.1 million for 2001. The West Virginia provision was reduced by $0.4 million for prior years' tax settlements resolved in 2002. WesBanco's offices located in Ohio are subject to an Ohio franchise tax, rather than a corporate income tax. Ohio franchise taxes included in other operating expense increased to $0.5 million in 2002 compared to $0.2 million in 2001, primarily due to an increase in the Ohio assets acquired from American. Financial Condition Securities Securities, which represent a source of liquidity for WesBanco, increased $435.4 million between December 31, 2001 and December 31, 2002, of which approximately $277.6 million of the increase was due to the American acquisition. As shown in Table 5, available for sale securities, at fair value, representing 58.2% of total securities at December 31, 2002 increased $177.2 million or 34.2%. Held to maturity securities, representing the remaining 41.8% of total securities increased $258.2 million or 107.2% during 2002. At December 31, 2002 the average yield of the available for sale portfolio was 4.94% with an average maturity of 2.2 years. For the same period, the average yield of the held to maturity portfolio was 6.30% with an average maturity of 5.0 years. [GRAPH] (in millions Securities ---------------- 1998 $ 681 1999 $ 568 2000 $ 546 2001 $ 758 2002 $ 1,194 During 2002, securities available for sale and held to maturity increased as purchases of $673.8 million significantly exceeded sales, maturities, paydowns and calls of $526.6 million. These purchases placed an increased amount of lower yielding securities on the balance sheet, which decreased the yield on taxable securities from 6.05% in 2001 to 4.93% in 2002 and decreased, on a tax equivalent basis, the yield on tax exempt securities from 7.59% in 2001 to 7.51% in 2002. The decrease in the yield on investment securities in 2002 was partially offset by the increased tax efficiency gained through the $118.1 million increase in the volume of tax exempt securities from 2001 to 2002. Unrealized pre-tax gains/losses on available for sale securities (fair value adjustments) was a $17.1 million market gain as of December 31, 2002 compared to a $7.4 million market gain as of December 31, 2001. 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 is realized. During 2002 securities with a total carrying value of $252.5 million either matured or were called. In addition, $274.0 million of available for sale securities were sold during 2002. E - 30 Financial Condition (continued) Table 5. Composition of Securities December 31, ---------------------------------- (in thousands) 2002 2001 2000 ======================================================================================= Securities held to maturity (at amortized cost): U.S. Treasury and Federal Agency securities $ 86,144 $ 1,001 $ 4,357 Obligations of states and political subdivisions (1) 382,752 221,866 173,771 Other securities 30,265 18,086 17,974 --------------------------------- Total securities held to maturity 499,161 240,953 196,102 --------------------------------- Securities available for sale (at fair value): U.S. Treasury and Federal Agency securities 362,694 307,250 206,268 Obligations of states and political subdivisions (1) 8,152 12,076 12,907 Mortgage-backed and other securities (2) 323,889 198,191 131,112 --------------------------------- Total securities available for sale 694,735 517,517 350,287 --------------------------------- Total securities $1,193,896 $758,470 $546,389 =======================================================================================
(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 interest in business corporations. Table 6. Maturity Distribution and Yield Analysis of Securities December 31, 2002 -------------------------------------------------------------------------------------------------- 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 $ 26,990 3.21% $ 59,154 3.23% - - - - Obligations of states and political subdivisions (1) 16,068 7.36 55,669 7.11 $136,812 6.86% $174,203 6.98% Other securities (2) - - - - - - 30,265 3.25 -------------------------------------------------------------------------------------------------- Total held to maturity 43,058 4.76 114,823 5.11 136,812 6.86 204,468 6.43 -------------------------------------------------------------------------------------------------- Securities available for sale: (3) U.S. Treasury and Federal Agency securities 69,451 3.94 222,224 4.66 62,812 6.34 - - Obligations of states and political subdivisions (1) 3,192 6.17 3,771 6.55 498 9.10 490 10.12 Mortgage-backed and other securities (4) 8,152 4.19 107,143 4.91 190,268 5.11 9,589 4.24 -------------------------------------------------------------------------------------------------- Total available for sale 80,795 4.05 333,138 4.76 253,578 5.42 10,079 4.52 -------------------------------------------------------------------------------------------------- Total securities $123,853 4.30% $447,961 4.85% $390,390 5.93% $214,547 6.34% ===================================================================================================================================
* 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 and Credit Risk Loan Portfolio The loan portfolio is WesBanco's single largest balance sheet asset classification and the largest source of interest income. WesBanco's loan portfolio consists of five major categories of lending as set forth in Table 7. Certain amounts have been reclassified from the manner in which they were presented in previous years to enhance this discussion and analysis. The risk that borrowers will be unable or unwilling to repay their obligations and default on loans is inherent in all lending activities. In addition to this inherent risk, economic conditions and other factors beyond WesBanco's control can adversely impact credit risk. 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 that varies by category. WesBanco's credit policies establish standard underwriting guidelines for each type of loan and require an appropriate evaluation of the credit characteristics of each borrower. This evaluation includes their repayment capacity; the adequacy of collateral, if any, to secure E - 31 the loan, including current market appraisals or other valuations; and other factors unique to each loan that may increase or mitigate its risk. The downturn in the general economy that began late in 2000 extended through 2002 and has impacted WesBanco's loan portfolio, both in terms of new lending activity and credit quality. In addition to the general downturn, the Upper Ohio Valley continues to be significantly impacted by the difficulties facing the steel industry, which remains 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. One of these companies has been operating under Chapter 11 of the Bankruptcy Act since November 2000. Both companies have also significantly reduced their workforce. As of December 31, 2002, 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 steel industry could be adversely impacted by a significant loss of employment. Approximately 45% of WesBanco's loan portfolio is comprised of borrowers located in the Upper Ohio Valley. It is not possible to accurately predict the impact that continued difficulties in the steel industry may have on these customers and their ability to repay their obligations. [GRAPH] (in millions) Total Loans ---------------- 1998 $ 1,373 1999 $ 1,523 2000 $ 1,591 2001 $ 1,540 2002 $ 1,821 Table 7. Composition of Loans December 31, ------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------------- -------------- ----------------- ---------------- ---------------- % of % of % of % of % of (dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ===================================================================================================================== Loans: Commercial $ 306,071 17% $ 271,269 18% $ 268,633 17% $ 276,383 18% $ 263,374 19% Commercial real estate 504,902 28 342,337 22 315,933 20 268,808 18 240,992 18 Residential real estate 569,095 32 501,916 33 554,373 35 563,279 37 482,703 35 Home equity 117,964 6 98,400 6 86,427 5 64,277 4 48,350 3 Consumer 318,129 17 320,251 21 362,945 23 340,946 22 328,320 24 ------------------------------------------------------------------------------------------ Total portfolio loans 1,816,161 100 1,534,173 100 1,588,311 100 1,513,693 99 1,363,739 99 Loans held for sale 4,724 --- 5,522 --- 2,391 --- 9,753 1 9,280 1 ------------------------------------------------------------------------------------------ Total Loans $1,820,885 100% $1,539,695 100% $1,590,702 100% $1,523,446 100% $1,373,019 100% ====================================================================================================================
Loans are presented gross of allowance for loan losses and net of unearned income on consumer loans. Commercial and Commercial Real Estate: The commercial loan category consists of loans to a wide variety of businesses and includes revolving lines of credit to finance accounts receivable, inventory and other working capital requirements, and term loans to finance fixed assets other than real estate, as well as loans guaranteed by the United States Small Business Administration. Lines of credit are generally renewable or may be cancelled by WesBanco annually. Term loans secured by equipment and other types of collateral have terms that are consistent with the purpose of the loan and generally do not exceed ten years. The commercial real estate category consists of loans to finance properties that are used in the borrowers' businesses and loans to finance investor-owned rental properties. Commercial real estate loans generally have repayment terms ranging from 10 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. Commercial loans increased $34.8 million or 12.8% between December 31, 2001 and December 31, 2002. This increase is attributed primarily to approximately $35.0 million of commercial loans acquired from American, which was offset by a modest decline in commercial lending over the course of the year. Despite record low interest rates, commercial loan growth was dampened by continued economic weakness in WesBanco's primary market areas. Commercial real estate loans increased $162.6 million or 47.5% between December 31, 2001 and December 31, 2002. This increase is attributed to approximately $140.0 million of commercial real estate loans acquired from American and $22.6 million of growth in commercial real estate lending. Demand for commercial real estate was stronger in 2002 than other types of commercial loans as investors looked to the real estate market as a source of higher returns on investment than were available in the equity and bond markets. Record low interest rates also fueled a significant amount of refinancings of commercial real estate thereby lowering rates earned on this type of loan. Included in commercial real estate loans are commercial construction loans totaling $11.1 million at December 31, 2002 and $3.9 million at December 31, 2001. Construction loans are generally made only when WesBanco also commits to the permanent financing of the commercial project or residence, or has a takeout commitment from another lender for the permanent loan. This increase in construction loans is primarily attributed to WesBanco's entry into the Columbus, Ohio market as a result of the American acquisition. E - 32 Financial Condition (continued) Table 8. Maturity Distribution of Commercial and Commercial Real Estate Loans December 31, 2002 ------------------------------------------------------- After One In One Year through After (in thousands) Year or Less Five Years Five Years Total ============================================================================= Commercial $ 143,370 $ 72,028 $ 90,673 $ 306,071 Commercial real estate 49,507 82,507 372,888 504,902 ------------------------------------------------------ Total $ 192,877 $ 154,535 $ 463,561 $ 810,973 ====================================================== Fixed rates $ 26,574 $ 67,766 $ 63,184 $ 157,524 Variable rates 166,303 86,769 400,377 653,449 ------------------------------------------------------ Total $ 192,877 $ 154,535 $ 463,561 $ 810,973 ============================================================================= Credit risk in the commercial and commercial real estate categories is mitigated by limiting total credit exposure to individual borrowers or groups of borrowers, industries, property types and geographic markets, and by taking collateral where appropriate. The type and amount of the collateral varies from loan to loan depending on the financial strength of the borrower, the amount and terms of the loan, and the collateral available to be pledged by the borrower. Credit risk in commercial real estate is further mitigated by requiring the borrowers to have adequate down payments or equity in the property, thereby limiting the amount of the loan in relation to the appraised value of the property. Credit risk in the commercial and commercial real estate categories is managed by performing regular periodic reviews of borrowing relationships over a predetermined amount subsequent to their origination, verifying each borrower's compliance with applicable loan covenants, and monitoring the overall portfolio for levels of concentration. Risk in the commercial real estate category is also managed by periodic site visits and inspections of collateral properties and monitoring the factors in each of WesBanco's markets that influence real estate collateral values. WesBanco maintains a loan grading system that categorizes commercial and commercial real estate loans according to their level of credit risk. This grading system encompasses six categories that define each borrower's ability to repay their loan obligations and other factors that affect the quality of each 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. WesBanco categorizes commercial and commercial real estate loans by industry using the North American Industry Classification System, or NAICS. WesBanco also categorizes commercial real estate loans by property type. The commercial and commercial real estate portfolio is not concentrated in any single industry or property type, but reflects a broad range of businesses across all sectors of the economy. Tables 9 and 10 set forth information pertaining to commercial loans, including those secured by real estate, by industry sector and commercial real estate loans by property type. Table 9. Commercial and Commercial Real Estate Loan Distribution by Industry December 31, 2002 ------------------------------------------------------- Largest Average Balance Outstanding % of % of Loan To a Single (dollars in thousands) Balance Total Capital Balance Obligor ============================================================================= Accommodation $ 70,185 9% 22% $260 $ 6,500 Construction 63,281 8 19 84 5,936 Education 23,099 2 7 537 11,761 Government 22,158 2 7 74 2,431 Healthcare 46,685 6 14 125 5,332 Manufacturing 32,734 4 10 162 2,551 Real estate 218,631 27 67 172 16,180 Retail 102,145 13 31 166 7,094 Services 95,763 12 29 122 8,851 Wholesale 30,937 4 10 138 3,000 Other 105,355 13 32 57 10,434 ------------------------------------------------------ Total $ 810,973 100% ============================================================================= E - 33 Table 10. Commercial Real Estate Loan Distribution by Property Type December 31, 2002 ------------------------------------------------------- Largest Average Balance Outstanding % of % of Loan For a Single (dollars in thousands) Balance Total Capital Balance Property ============================================================================= 1-to-4 family rentals $ 41,381 8% 13% $ 57 $ 468 Apartment buildings 66,835 13 21 400 7,573 Hotels and motels 25,336 5 8 1,206 6,500 Industrial property 35,140 7 11 338 3,507 Land-improved 21,480 4 7 140 1,206 Land-unimproved 11,165 2 3 107 1,238 Multiple or mixed use 53,971 11 17 457 11,952 Office buildings 64,563 13 20 336 2,663 Retail space 61,542 12 19 303 5,070 Other 123,489 25 38 101 10,434 ----------------------------------------------------- Total $ 504,902 100% ============================================================================= Commercial and commercial real estate loans are made to borrowers that are primarily located within WesBanco's market areas. There are no significant loans to businesses, or to finance real estate projects located outside WesBanco's market areas unless the borrower also has significant other loan, deposit or trust relationships with WesBanco. Most commercial and commercial real estate loans are originated directly by WesBanco. At times, WesBanco may also purchase or participate in commercial loan syndications originated by other lending institutions, including Shared National Credits, which are defined by banking regulatory agencies as lending arrangements with three or more participating financial institutions and credit exceeding $20 million in the aggregate. WesBanco conducts its own customary credit evaluation before purchasing or participating in these loans. The risks associated with syndicated loans are similar to those of directly originated commercial loans, however, additional risk may arise from limited ability to control actions of the syndicate due to WesBanco's limited voting percentage in the syndicate. Participation in syndicated loan transactions, including Shared National Credits, totaled $8.9 million at December 31, 2002 and $9.3 million at December 31, 2001. Residential Real Estate: The residential real estate category consists primarily of mortgage loans to purchase or refinance personal residences located primarily within WesBanco's market areas. WesBanco originates conforming and non-conforming mortgages to be held in its portfolio. Non- conforming mortgages represent loans that do not meet all of the documentation standards for sale in the secondary market. Residential real estate loans have terms ranging up to 30 years. Interest rates on residential real estate loans may be fixed for up to 15 years. Fifteen-year fixed rate residential real estate loans totaled approximately $142.0 million at December 31, 2002 compared to $125.0 million at December 31, 2001. The remainder of the portfolio has interest rates that adjust from one to five years. Residential real estate loans increased $67.2 million or 13.4% between December 31, 2001 and December 31, 2002. This increase is the result of $100.7 million in residential real estate loans acquired from American net of a general decrease in the portfolio throughout the year, which reflected prepayments of both higher fixed rate and adjustable rate mortgages as customers sought to capitalize on record low interest rates. Also included in residential real estate loans are residential construction loans totaling $11.9 million at December 31, 2002 and $8.4 million at December 31, 2001. Residential construction loans are influenced by a number of factors, including new housing starts and consumer confidence in the general condition of the economy. This increase is attributable to an increase in housing starts despite the general weakness in the economy and stronger than expected demand for new housing in all of WesBanco's markets. Credit risk in the residential real estate category is mitigated by requiring borrowers to have adequate down payments or equity in the property, thereby limiting the amount of the loan in relation to the appraised value of the property. Loan requests that exceed the loan-to-value guidelines set forth by credit policy generally must be supported by private mortgage insurance. Credit risk in this category is managed by monitoring delinquency levels and trends, and the factors in each of WesBanco's markets that influence real estate collateral values. None of WesBanco's residential real estate loans would be considered "sub-prime" as that term is commonly used in the industry. Home Equity: The home equity category consists of revolving lines of credit to consumers secured by first or second liens on residential real estate located primarily within WesBanco's market areas. Most home equity lines of credit are available to the borrower as a revolving line of credit for up to 15 years, at which time the outstanding balance is required to be repaid over a term of not more than 7 years. Some home equity lines of credit are available to the borrower for an indefinite period of time but may be cancelled by WesBanco under certain circumstances. E - 34 Financial Condition (continued) Home equity lines of credit increased $19.6 million or 19.9% between December 31, 2001 and December 31, 2002. This increase is attributed to approximately $15.0 million of home equity lines acquired from American and $4.6 million of growth, as consumers continued to take advantage of increased equity in their homes and the low interest rate environment to consolidate debt or obtain cash for other purposes. Credit risk in this category is mitigated and monitored in much the same manner as described for residential real estate. Home equity lines are generally limited to an amount in relation to the value of the property net of the first mortgage, if any. None of WesBanco's home equity lines of credit would be considered "sub-prime" as that term is commonly used in the industry. Consumer: The consumer category consists of installment loans originated directly by WesBanco and, indirectly through dealers to finance purchases of automobiles, boats and other recreational vehicles, and lines of credit used by consumers that are either unsecured or secured by collateral other than real estate. Consumer loans are a homogeneous group of loans, generally smaller in amount, which spread over a larger number of diverse individual borrowers. The maximum term for automobile loans and other installment loans generally does not exceed 72 months. Consumer lines of credit are generally available for an indefinite period of time as long as the borrower's credit characteristics do not materially or adversely change; however, WesBanco may cancel such lines under certain circumstances. Consumer loans decreased $2.1 million or 0.7% between December 31, 2001 and December 31, 2002. This decrease is net of approximately $56.0 million of consumer loans acquired from American, and reflects WesBanco's tightening of credit standards for indirect automobile lending along with competition from zero-percent or low interest rates offered by large domestic automobile manufacturer finance companies. Credit risk in the consumer category includes the impact of a general economic downturn, an isolated adverse event that impacts a major employer, individual loss of employment or other personal calamities, and collateral values that depreciate faster than the repayment of the loan balance. Credit risk in this category is mitigated by continuously monitoring delinquency levels and trends, pursuing collection efforts at the earliest stage of delinquency, and continually evaluating underwriting standards to determine to the extent possible those credit characteristics that predict credit performance. None of WesBanco's consumer loans would be considered "sub-prime" as that term is commonly used in the industry. Loans Held For Sale: The loans held for sale category consists solely of residential real estate loans originated for sale in the secondary market. Residential real estate loans originated for sale in the secondary market decreased 13.8% to $54.8 million in 2002 compared to $63.6 million in 2001, reflecting WesBanco's emphasis on originating residential real estate loans for its own portfolio to counter rapidly increasing prepayments. Loans held for sale decreased $0.8 million or 14.5% between December 31, 2001 and December 31, 2002. Credit risk in this category is mitigated by entering into sales commitments with secondary market purchasers of the loans at the time the loans are to be funded. WesBanco does not service these loans after they are sold in the secondary market. Loan Commitments: Loan commitments, which are not reported on the balance sheet, consist of available balances under commercial lines of credit, home equity and other consumer lines of credit, commercial and residential construction loans, and commercial and standby letters of credit. Commercial lines of credit and letters of credit are generally renewable or may be cancelled annually by WesBanco. Home equity and other consumer lines of credit are generally available to the borrower beyond one year. Construction loan commitments are generally available to the borrower for up to one year but may extend beyond one year for certain types of projects. All loan commitments are cancelable by WesBanco regardless of their duration under certain circumstances. Table 11. Maturity Distribution of Loan Commitments December 31, 2002 ------------------------------------------------------- For One One Year to Over (in thousands) Year or Less Five Years Five Years Total ============================================================================= Lines of credit: Commercial $ 97,158 $ 21,182 --- $ 118,340 Commercial real estate 35,080 8,121 --- 43,201 Residential real estate 4,357 --- $ 19 4,376 Home equity 5,143 424 83,671 89,238 Consumer --- --- 6,815 6,815 Letters of credit 24,070 4,401 617 29,088 ---------------------------------------------------- Total $ 165,808 $ 34,128 $ 91,122 $ 291,058 ============================================================================= Total commitments to extend credit increased $21.4 million or 7.9% between December 31, 2001 and December 31, 2002. This increase is attributed to loan commitments acquired from American and growth in home equity and commercial construction lines of credit, which were partially offset by reduced demand for commercial lines of credit. E - 35 Non-Performing Assets, Impaired Loans and Loans Past Due 90 Days or More: Non-performing assets consist of non-accrual and renegotiated loans, other real estate owned acquired through or in lieu of foreclosure and bank premises held for sale and repossessed automobiles acquired to satisfy defaulted consumer loans. Other impaired loans include certain loans that are internally classified as substandard or doubtful. Except for certain consumer and residential real estate loans as discussed in the Notes to the Consolidated Financial Statements, loans are placed on non-accrual status when they become past due 90 days or more unless the loans are both well secured and in the process of collection. When a loan is placed on non-accrual, interest income may not be recognized as cash payments are received. Non-accrual loans increased $3.5 million or 85.6% between December 31, 2001 and December 31, 2002. This increase is the result of $2.0 million of non-accrual loans acquired from American and the reclassification of a $1.3 million commercial real estate loan that was classified as renegotiated at December 31, 2001. Loans are categorized as renegotiated when WesBanco, for credit 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. Renegotiated loans decreased $1.1 million or 29.6% between December 31, 2001 and December 31, 2002. This decrease resulted from the partial write-down and transfer to non-accrual of a commercial real estate loan referred to above, net of a $1.6 million commercial real estate loan that was renegotiated in 2002. Other real estate owned and repossessed assets increased $1.0 million or 31.0% between December 31, 2001 and December 31, 2002. Other real estate owned acquired through or in lieu of foreclosure declined due to aggressive marketing of foreclosed properties throughout the year. Repossessed assets increased as defaults on consumer automobile loans rose sharply during the year. Other impaired loans increased $4.9 million or 77.0% between December 31, 2001 and December 31, 2002. This increase is attributed to loans acquired from American and economic weakness that has caused financial stress among business borrowers generally. Loans past due 90 days or more and still accruing interest increased $1.5 million or 14.7% between December 31, 2001 and December 31, 2002, reflecting higher delinquency in residential real estate loans and smaller balance commercial loans. Certain loans in this category may also be included in other impaired loans. Table 12. Non-performing Assets, Other Impaired Loans and Loans Past Due 90 Days or More December 31, ----------------------------------------------- (dollars in thousands) 2002 2001 2000 1999 1998 ============================================================================= Non-accrual: Commercial $ 3,598 $ 2,598 $ 1,048 $ 1,053 $ 4,748 Commercial real estate 3,519 1,258 4,096 2,711 5,391 Residential real estate 301 143 361 358 221 Consumer 62 31 56 36 128 ----------------------------------------------- Total 7,480 4,030 5,561 4,158 10,488 ----------------------------------------------- Renegotiated: Commercial --- --- --- 783 --- Commercial real estate 2,633 3,735 381 27 695 Consumer 13 21 36 3 --- ----------------------------------------------- Total 2,646 3,756 417 813 695 ----------------------------------------------- Total non-performing loans 10,126 7,786 5,978 4,971 11,183 Other real estate owned and repossessed assets 4,213 3,215 3,424 3,512 3,486 ----------------------------------------------- Total non-performing assets 14,339 11,001 9,402 8,483 14,669 ----------------------------------------------- Other impaired loans: Commercial 6,965 2,230 4,060 2,577 1,075 Commercial real estate 4,284 4,125 7,453 6,129 4,210 ----------------------------------------------- Total other impaired loans 11,249 6,355 11,513 8,706 5,285 ----------------------------------------------- Total non-performing assets and other impaired loans $25,588 $17,356 $20,915 $17,189 $19,954 =============================================== Percentage of non-performing assets to total loans outstanding and other real estate owned 0.79% 0.71% 0.59% 0.56% 1.07% ----------------------------------------------- Percentage of non-performing loans and other impaired loans to loans outstanding 1.17% 0.92% 1.10% 0.90% 1.20% ----------------------------------------------- Past due 90 days or more: Commercial $ 1,460 $ 720 $ 1,164 $ 547 $ 3,050 Commercial real estate 3,766 1,469 1,542 2,629 1,267 Residential real estate 4,688 4,206 1,984 1,545 1,453 Home equity 344 490 148 92 --- Consumer 1,847 3,611 1,743 1,219 1,184 ----------------------------------------------- Total past due 90 days or more $ 12,105 $ 10,496 $ 6,581 $ 6,032 $ 6,954 ============================================================================= E - 36 Financial Condition (continued) Allowance for Loan Losses: The allowance for loan losses represents management's estimate of probable losses inherent in the loan portfolio. The allowance is reduced by charge-offs, net of recoveries, and increased by charging a provision to operations to maintain the allowance at the level determined appropriate by management. Management evaluates the adequacy of the allowance at least quarterly, which includes testing certain individual loans as well as collective pools of loans for impairment. This evaluation includes an assessment of actual loss experience within each category of the portfolio, individual commercial and commercial real estate loans that exhibit credit weakness; current economic events, including employment statistics, trends in bankruptcy filings, and other pertinent factors; industry or geographic concentrations, and regulatory guidance. Allocations of the allowance are made for loans in each category of the portfolio that are not specifically reserved based on historical loss rates with appropriate adjustments to reflect changing economic conditions, delinquency and non- performing loan trends, and other relevant factors. Allocations based on historical loss rates for commercial and commercial real estate loans are derived from a migration analysis, which computes losses sustained on loans according to their internal risk grade. Specific reserves are established for individual commercial and commercial real estate loans that are deemed impaired pursuant to SFAS No. 114. The determination of specific reserves takes into consideration anticipated future cash flows available to pay the loan and/or the estimated realizable value of collateral, if any. Management relies on observable data from internal and external sources to evaluate each of these factors, adjust assumptions and recognize changing conditions to reduce differences between estimated and actual observed losses from period to period. Table 13. Allowance for Loan Losses For the years ended December 31, ------------------------------------------- (dollars in thousands) 2002 2001 2000 1999 1998 =========================================================================================== Beginning balance - Allowance for loan losses $20,786 $20,030 $19,752 $19,098 $20,261 Allowance for loan losses of acquired (sold) banks - net 3,903 --- --- 192 (37) Allowance for loan losses allocated to (sold) credit cards --- --- --- (450) --- Provision for loan losses 9,359 5,995 3,225 4,295 4,392 Charge-offs: Commercial 1,888 1,389 806 1,890 1,443 Commercial real estate 2,207 793 668 134 490 Residential real estate 328 352 137 204 515 Home equity 172 36 39 --- --- Consumer 5,121 3,268 2,445 2,490 3,952 ------------------------------------------- Total charge-offs 9,716 5,838 4,095 4,718 6,400 ------------------------------------------- Recoveries: Commercial 243 49 314 457 405 Commercial real estate 37 149 34 22 117 Residential real estate 86 17 29 64 39 Home equity 2 --- --- --- --- Consumer 380 384 771 792 321 ------------------------------------------- Total recoveries 748 599 1,148 1,335 882 ------------------------------------------- Net charge-offs 8,968 5,239 2,947 3,383 5,518 ------------------------------------------- Ending balance - Allowance for loan losses $25,080 $20,786 $20,030 $19,752 $19,098 =========================================== Ratio of net charge-offs to average loans: Commercial 0.55% 0.50% 0.22% 0.75% 0.54% Commercial real estate 0.45 0.20 0.19 0.03 0.12 Residential real estate 0.04 0.06 0.02 0.03 0.10 Home equity 0.14 0.04 0.05 --- --- Consumer 1.42 0.84 0.48 0.51 1.11 ------------------------------------------- Total 0.50% 0.34% 0.19% 0.23% 0.41% =========================================== Ratio of the allowance to total loans 1.38% 1.35% 1.26% 1.30% 1.39% ===========================================================================================
The allowance increased $4.3 million or 20.7% between December 31, 2001 and December 31, 2002 and represented 1.38% of total loans at December 31, 2002 compared to 1.35% at December 31, 2001. In addition to the increase in loans acquired from American, the allowance was also increased to reflect increased delinquency in all categories of the portfolio, increased levels of non-performing commercial and commercial real estate loans, rising consumer and commercial loan losses, and continued uncertainty in the economy. Net charge-offs increased $3.7 million or 71.2% between December 31, 2001 and December 31, 2002. This increase reflects a $1.3 million write-down of a commercial real estate loan, higher losses on small business loans that were adversely impacted by the economic downturn, higher losses on consumer loans attributed to an increase in personal bankrupt- E - 37 cies, and the overall increase in the portfolio for loans acquired from American. Net charge-offs as percentage of average loans rose to 0.50% for 2002 compared to 0.34% for 2001, which is consistent with or below the average for WesBanco's peers based on available peer group data. The allocation to the commercial category increased $2.5 million or 36.0% between December 31, 2001 and December 31, 2002. The allocation to the commercial real estate category increased $0.6 million or 7.4% between December 31, 2001 and December 31, 2002. Adjusted for the $1.3 million write-down of one loan as previously discussed, which amount was allocated at December 31, 2001, the allocation to the commercial real estate category increased $1.9 million or 27.5%. These increases are consistent with increased levels of non-performing and impaired loans, more conservative assumptions about future cash flows and the values of collateral when determining specific reserves on individual impaired loans, and the general increase in the portfolios from American. The allocations to these two categories did not increase in direct proportion to the respective increase in loans outstanding in each category because of the added protection afforded by the collateral for commercial real estate loans compared to commercial loans. Even though consumer loans decreased overall, the allocation to the consumer category increased $1.0 million or 20.8% between December 31, 2001 and December 31, 2002 primarily due to increased loss rates, personal bankruptcies and an increasing trend of defaults by borrowers with otherwise satisfactory credit characteristics at the time of default. Table 14. Allocation of the Allowance for Loan Losses December 31, -------------------------------------------- (in thousands) 2002 2001 2000 1999 1998 ============================================================================= Commercial $ 9,473 $ 6,963 $ 7,418 $ 7,519 $ 6,845 Commercial real estate 9,046 8,421 8,437 8,273 7,084 Residential real estate 800 680 731 723 591 Home equity 106 59 154 26 20 Consumer 5,655 4,663 3,290 3,211 4,558 -------------------------------------------- Total allowance for loan losses $25,080 $20,786 $20,030 $19,752 $19,098 ============================================================================= Although WesBanco has improved its migration and other loss prediction models to enhance the accuracy of estimating probable losses, higher allocations for all loan categories also reflects estimated probable but undetected losses due to the inherent imprecision in loss estimation models or techniques. Management believes the allowance for loan losses is sufficient to absorb probable losses. However, future adjustments to the allowance may be necessary due to changes in economic conditions, loss rates, and other portfolio trends. Deposits Deposits, WesBanco's primary source of funds, increased $486.5 million or 25.4% between December 31, 2001 and December 31, 2002 the majority of which was related to American. Deposit growth for the year ended December 31, 2002, compared to the corresponding period in 2001, consisted of deposits acquired from American as well as increases in money market deposit accounts and interest bearing demand deposits. [GRAPH] (in millions) Deposits ------------------- 1998 $ 1,788 1999 $ 1,814 2000 $ 1,870 2001 $ 1,913 2002 $ 2,400 For 2002, non-interest bearing demand deposits increased $56.8 million or 23.3%, money market accounts increased $101.3 million or 24.9%, and interest bearing demand deposits increased by $30.7 million or 12.5%. As interest rates fell during 2002, customers shifted balances out of certificates of deposits and savings account products in favor of competitively priced short-term money market products. The interest rate paid on interest bearing deposits decreased from an average of 4.02% in 2001 to 2.80% in 2002. Table 15. Maturity Distribution of Certificates of Deposit $100,000 or More December 31, ------------------------ (in thousands) 2002 2001 ============================================================================= Maturity: Under three months $ 36,818 $ 34,484 Three to six months 33,936 25,687 Six to twelve months 35,495 33,006 Over twelve months 108,369 68,459 ------------------------ Total $ 214,618 $ 161,636 ============================================================================= Interest expense on certificates of deposit of $100,000 or more was approximately $7,443 in 2002, $7,485 in 2001 and $6,335 in 2000. E - 38 Financial Condition (continued) Borrowings FHLB borrowings increased $236.4 million or 221.2% for the year ended December 31, 2002, with $150.0 million of the increase attributable to the American transaction. During 2002, WesBanco added FHLB borrowings of $86.4 million, utilizing the proceeds to purchase Federal agency and tax-exempt securities. As of December 31, 2002, WesBanco had $343.3 million outstanding in FHLB borrowings with a weighted average interest rate of 4.21%. WesBanco uses FHLB borrowings to lengthen maturities of shorter-term borrowings in the current low interest rate environment and to purchase securities when advantageous yield spread opportunities arise. Other borrowings, which include, federal funds purchased, securities sold under repurchase agreements, treasury tax and loan notes, and a revolving line of credit increased $3.4 million or 2.0% during 2002. WesBanco utilized the proceeds from the additional other borrowings to maintain adequate balance sheet liquidity. Capital Resources Shareholders' equity increased to $325.2 million at December 31, 2002 from $258.2 million at December 31, 2001. The increase was primarily due to the issuance of treasury stock used in the American acquisition. In accordance with the board of directors approved stock repurchase plans, WesBanco purchased treasury stock totaling 928,201 shares during 2002. As of December 31, 2002, 491,401 shares of WesBanco common stock remained authorized to be purchased under the current one million- share stock repurchase plan, which began on June 20, 2002. 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. [GRAPH] Return on Equity ---------------- 1998 9.55% 1999 9.85% 2000 10.42% 2001 11.28% 2002 10.95% Strong and consistent earnings coupled with a high level of capital have enabled WesBanco to continue to increase dividends per share. Effective with the second quarter of 2002, WesBanco increased its quarterly dividend per share 2.2% to $0.235 from $0.23. For 2002, dividends increased to $0.935 per share compared to $0.92 per share in the prior year. This dividend increase represented the seventeenth consecutive year of dividend increases at WesBanco. The 2002 dividend per share payout ratio was 55.0%. 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 19 of the Consolidated Financial Statements for more information on capital amounts, ratios and minimum regulatory requirements. Market and Liquidity Risk The primary objective of WesBanco's asset/liability management function is to maximize net interest income within established policy parameters. This objective is accomplished through the management of balance sheet composition, market risk exposures arising from changing economic conditions, and liquidity risk. Market Risk: Market risk is defined as the risk of loss due to adverse changes in the fair value of financial instruments resulting from fluctuations in interest rates and equity prices. Management considers interest rate risk 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. WesBanco's Asset/Liability Management Committee ("ALCO"), comprised of senior management, monitors and manages interest rate risk within Board approved policy limits. Interest rate risk is monitored primarily through the use of an earnings simulation model. The model is highly dependent on assumptions, which change regularly as the balance sheet and interest rates change. The key assumptions and strategies employed are analyzed regularly and reviewed by ALCO. The earnings simulation model projects changes in net interest income resulting from the effect of changes in interest rates. The model requires projections from management on how the balance sheet may change over time given different interest rate assumptions. Loan and deposit growth assumptions along with yields and rates on new loans and deposits are derived from management forecasts and historical analysis. Mortgage loan prepayment speeds are derived from industry guidelines and historical prepayment experience. Non-time deposit growth and rate assumptions are based on historical patterns. Securities portfolio maturities and prepayments are assumed to be reinvested in similar instruments and callable bond forecasts are adjusted at varying levels of interest rates. E - 39 Interest rate risk policy limits are determined by measuring the anticipated change in net interest income over a 12-month period assuming an immediate and sustained 200 basis point increase or decrease in market interest rates compared to a stable rate model. WesBanco's current policy limits this exposure to +/- 5.0% of net interest income for a 12-month period. Table 16 shows WesBanco's interest rate sensitivity at December 31, 2002 and 2001 assuming both a 200 and 100 basis point interest rate change, compared to a stable-rate model. Since management believes that a 200 basis point decline in market interest rates is unlikely, an alternative 100 basis point change was evaluated by ALCO. The earnings simulation model projects net interest income for the next 12-month period would decrease by approximately 1.1% if interest rates were to rise immediately by 200 basis points. Net interest income would decline by approximately 0.1% if interest rates were to decline by 100 basis points. Since the assumptions used in modeling changes in interest rates 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. Table 16. Net Interest Income Sensitivity Percentage Change in Change in Net Interest Income Interest Rates ---------------------------------------- ALCO (basis points) December 31, 2002 December 31, 2001 Guidelines -------------------------------------------------------------------------- +200 -1.10% 0.4% +/- 5.0% -200 N/A -5.4% +/- 5.0% +100 0.02% 1.6% N/A -100 -0.10% -1.6% N/A ========================================================================== Another method that WesBanco uses to manage its interest rate risk is a rate sensitivity gap analysis shown in Table 17. Gap analysis measures the maturity and repricing relationships between rate sensitive assets and rate sensitive liabilities at a specific point in time. Table 17. Interest Rate Sensitivity - GAP Analysis December 31, 2002 --------------------------------------------------------------------- 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 $ 984 --- --- --- --- $ 984 Securities (1) 43,401 $ 30,459 $ 33,632 $ 16,361 $1,052,898 1,176,751 Loans 468,989 162,718 164,191 164,949 860,038 1,820,885 ---------------------------------------------------------------------- Total rate sensitive assets 513,374 193,177 197,823 181,310 1,912,936 2,998,620 ---------------------------------------------------------------------- Rate Sensitive Liabilities Money market deposit accounts 400,444 2,933 2,966 2,998 98,721 508,062 Savings and NOW accounts 15,009 15,049 15,089 15,165 573,109 633,421 Certificates of deposit 162,942 188,504 111,882 66,520 427,363 957,211 Federal funds purchased 19,000 --- --- --- --- 19,000 Federal Home Loan Bank Borrowings 10,050 25,050 50,050 50 258,124 343,324 Other borrowings 142,154 7,536 2,738 2,221 1,985 156,634 Company obligated mandatory redeemable capital securities of subsidiary trusts holding solely debentures of the Corporation --- --- --- --- 12,650 12,650 ---------------------------------------------------------------------- Total rate sensitive liabilities 749,599 239,072 182,725 86,954 1,371,952 2,630,302 --------------------------------------------------------------------- Interest rate sensitivity gap $(236,225) $ (45,895) $ 15,098 $ 94,356 $ 540,984 $ 368,318 --------------------------------------------------------------------- Cumulative interest rate sensitivity gap $(236,225) $(282,120) $(267,022) $(172,666) $ 368,318 --- ==========================================================================================================
(1) Securities are categorized above by expected maturity at amortized cost. As shown in Table 17, the liability sensitive gap position in the under three month time horizon is primarily the result of continued growth in WesBanco's prime rate money market deposit product. Interest rates on these deposits change in relation to WesBanco's base lending rate. Other factors contributing to the short-term liability sensitive gap position include growth in $100,000 and over certificates of deposit and short-term borrowings. The interest rate sensitivity of savings and NOW accounts is based on historical trends analyzed over the past two years. WesBanco's ALCO evaluates various strategies to reduce the exposure to interest rate fluctuations. These strategies, at December 31, 2002, emphasize increasing asset sensitivity in anticipation of rising interest rates. Among the strategies evaluated is the continued utilization of interest rate swap agreements. At December 31, 2002, interest rate swap agreements with notional values totaling $110.5 million were used to effectively convert a portion of prime rate money market deposits to a fixed-rate basis. Other strategies evaluated by ALCO include managing the level of residential real estate loans through sales of long-term fixed rate real estate loans to the secondary market, shortening maturities in the securities portfolio and emphasizing growth in long-term certificate of deposit products. E - 40 Market and Liquidity Risk (continued) 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, U.S. Treasury and Federal Agency Securities maturing within three months, and money market mutual funds 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, 2002, WesBanco had approximately $123.9 million in securities scheduled to mature within one year compared to $32.7 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. During December 2002, WesBanco utilized proceeds from the sale of securities to purchase approximately $40 million in bank owned life insurance. 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, 2002 and December 31, 2001 approximated $589.4 million and $551.8 million, respectively. At December 31, 2002, WesBanco had $779.5 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. There are legal limitations on the ability of WesBanco Bank, Inc., WesBanco's banking subsidiary, to pay a dividend to the parent company. See Note 19 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 available lines of credit with a commercial bank and WesBanco Bank, Inc. totaling $9.8 million at December 31, 2002. At December 31, 2002, WesBanco had outstanding commitments to extend credit in the ordinary course of business approximating $262.0 million compared to $251.4 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 $2.0 million during 2003. Management believes WesBanco has sufficient liquidity to meet current obligations to borrowers, depositors and others. Comparison of 2001 Versus 2000 Net income for 2001 was $29.0 million or $1.60 per share compared to $26.9 million or $1.41 per share in 2000. Core earnings per share increased 12.3% to $1.64 for the year ended December 31, 2001 compared to $1.46 for 2000. Core earnings, which excludes amortization of goodwill, tax effected net securities gains and merger-related expenses, increased 6.4% to $29.7 million for 2001 compared to $28.0 million for 2000. Taxable equivalent net interest income increased $4.8 million or 5.4% from 2000 to 2001. The net interest margin increased to 4.17% in 2001 compared to 4.14% in 2000, while average earning assets increased $104.1 million or 4.9% during 2001. The overall decline in interest rates during 2001 and the short-term interest rate sensitivity of interest bearing liabilities favorably impacted WesBanco's taxable net interest margin. Taxable equivalent interest income increased $1.6 million or 0.9% for 2001 compared to 2000. The increase was due to increases in average securities volume, partially offset by decreases in yields on loans and securities. Interest expense decreased $3.2 million or 4.0% from 2000. The decrease resulted from a decline in rates paid on average interest bearing liabilities to 4.03% from 4.43% which was partially offset by average volume increases of 5.5%. The provision for loan losses was $6.0 million in 2001 compared to $3.2 million in 2000. Net charge-offs for 2001 increased 77.8% to $5.2 million compared to $2.9 million for 2000. The increases in the provision and net charge- offs were primarily the result of a downturn in the regional economy. Non-interest income for 2001, excluding net securities gains, increased 3.2% to $23.3 million compared to $22.6 million for 2000. Trust revenue decreased $0.7 million or 5.9%. The decline was primarily due to a general reduction in the market value of trust assets and lower estate settlement income. Deposit activity charges increased $1.1 million or 13.4% primarily as the result of increased overdraft income and increased ATM interchange income. Non-interest expense for 2001 increased $0.4 million to $64.9 million compared to $64.5 million for 2000. During 2001, WesBanco successfully controlled total operating expenses, resulting in a less than 1% increase over the 2000 level. E - 41