.
.
.
5
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<Table>
<Caption>
December 31,
-------------------------
2003 2002
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 88,021 $ 80,101
Due from banks -- interest bearing 3,189 984
Federal funds sold 17,000 --
Securities:
Held to maturity (fair values of $449,746 and $514,735,
respectively) 434,226 499,161
Available for sale, carried at fair value 766,883 694,735
- ---------------------------------------------------------------------------------------
Total securities 1,201,109 1,193,896
- ---------------------------------------------------------------------------------------
Loans held for sale 1,741 4,724
- ---------------------------------------------------------------------------------------
Total portfolio loans, net of unearned income 1,931,797 1,816,161
Allowance for loan losses (26,235) (25,080)
- ---------------------------------------------------------------------------------------
Net portfolio loans 1,905,562 1,791,081
- ---------------------------------------------------------------------------------------
Premises and equipment 53,232 55,725
Accrued interest receivable 18,247 20,024
Goodwill 49,868 49,868
Core deposit intangible, net 7,933 9,310
Bank-owned life insurance 66,001 62,916
Other assets 33,103 28,602
- ---------------------------------------------------------------------------------------
TOTAL ASSETS $3,445,006 $3,297,231
- ---------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Non-interest bearing demand $ 328,337 $ 301,262
Interest bearing demand 307,925 276,131
Money market 563,295 508,062
Savings deposits 352,324 357,290
Certificates of deposit 930,201 957,211
- ---------------------------------------------------------------------------------------
Total deposits 2,482,082 2,399,956
- ---------------------------------------------------------------------------------------
Federal Home Loan Bank borrowings 361,230 343,324
Other borrowings 217,754 175,634
Trust preferred securities and junior subordinated debt 30,936 12,650
- ---------------------------------------------------------------------------------------
Total borrowings 609,920 531,608
- ---------------------------------------------------------------------------------------
Accrued interest payable 5,793 7,939
Other liabilities 28,775 32,557
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,126,570 2,972,060
- ---------------------------------------------------------------------------------------
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 shares issued) 44,415 44,415
Capital surplus 52,900 52,855
Retained earnings 263,080 246,148
Treasury stock (1,577,884 and 857,603 shares, respectively,
at cost) (38,383) (20,482)
Accumulated other comprehensive income (loss) (1,864) 4,305
Deferred benefits for directors and employees (1,712) (2,070)
- ---------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 318,436 325,171
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,445,006 $3,297,231
- ---------------------------------------------------------------------------------------
</Table>
See Notes to Consolidated Financial Statements.
E-3
6
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<Table>
<Caption>
For the years ended December 31,
--------------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans, including fees $115,311 $124,912 $126,230
Securities:
Taxable 32,249 34,670 25,692
Tax-exempt 17,722 15,969 10,330
- ---------------------------------------------------------------------------------------
Total interest on securities 49,971 50,639 36,022
- ---------------------------------------------------------------------------------------
Federal funds sold 234 604 1,687
- ---------------------------------------------------------------------------------------
Total interest income 165,516 176,155 163,939
- ---------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest bearing demand deposits 998 1,685 3,920
Money market deposits 10,879 12,890 14,006
Savings deposits 1,893 3,852 4,671
Certificates of deposit 30,969 38,481 43,632
- ---------------------------------------------------------------------------------------
Total interest on deposits 44,739 56,908 66,229
Federal Home Loan Bank borrowings 13,932 11,879 4,497
Other borrowings 2,398 2,851 5,628
Junior subordinated debt 1,443 -- --
Trust preferred securities -- 917 --
- ---------------------------------------------------------------------------------------
Total interest expense 62,512 72,555 76,354
- ---------------------------------------------------------------------------------------
NET INTEREST INCOME 103,004 103,600 87,585
Provision for loan losses 9,612 9,359 5,995
- ---------------------------------------------------------------------------------------
Net interest income after provision for loan losses 93,392 94,241 81,590
- ---------------------------------------------------------------------------------------
NON-INTEREST INCOME
Trust fees 11,629 11,526 11,504
Service charges on deposits 11,874 10,818 9,182
Bank-owned life insurance 3,129 1,310 413
Other income 3,820 2,307 2,596
Net securities gains 2,778 1,891 1,306
- ---------------------------------------------------------------------------------------
Total non-interest income 33,230 27,852 25,001
- ---------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and wages 32,946 31,329 27,926
Employee benefits 10,397 7,894 6,277
Net occupancy 5,543 5,012 3,998
Equipment 7,155 6,854 5,913
Core deposit intangible 1,377 1,810 --
Other operating 24,136 21,233 20,958
Merger-related expenses 256 2,515 235
- ---------------------------------------------------------------------------------------
Total non-interest expense 81,810 76,647 65,307
- ---------------------------------------------------------------------------------------
Income before provision for income taxes 44,812 45,446 41,284
Provision for income taxes 8,682 10,620 12,282
- ---------------------------------------------------------------------------------------
NET INCOME $ 36,130 $ 34,826 $ 29,002
- ---------------------------------------------------------------------------------------
Earnings per share $1.80 $1.70 $1.60
Average shares outstanding 20,056,849 20,459,122 18,123,851
Dividends per share $0.96 $0.935 $0.92
- ----------------------------------------------------------------------------------------------------
</Table>
See Notes to Consolidated Financial Statements.
E-4
7
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<Table>
<Caption>
For the years ended December 31, 2003, 2002 and 2001
----------------------------------------------------------------------------------------------
Accumulated Deferred
Common Stock Other Benefits for
-------------------- Capital Retained Treasury Comprehensive Directors &
Shares Amount Surplus Earnings Stock Income Employees Total
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
JANUARY 1, 2001 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 ($.935 per share) (19,602) (19,602)
Treasury shares purchased -- net (834,640) (170) (19,787) (19,957)
Shares issued for acquisition 3,441,888 673 (5,638) 75,488 70,523
Payment on ESOP debt 543 543
Deferred benefits for
directors -- net (108) (108)
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2002 20,461,745 44,415 52,855 246,148 (20,482) 4,305 (2,070) 325,171
- ---------------------------------------------------------------------------------------------------------------------------------
Net income 36,130 36,130
Change in accumulated other
comprehensive income (6,169) (6,169)
--------
Comprehensive income 29,961
Cash dividends: Common ($.96 per
share) (19,198) (19,198)
Treasury shares purchased -- net (720,281) 45 (17,901) (17,856)
Payment on ESOP debt 450 450
Deferred benefits for
directors -- net (92) (92)
- ---------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 19,741,464 $44,415 $52,900 $263,080 $(38,383) $(1,864) $(1,712) $318,436
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
There was no activity in Preferred Stock during the years ended December 31,
2003, 2002 and 2001.
See Notes to Consolidated Financial Statements.
E-5
8
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(in thousands)
<Table>
<Caption>
For the years ended December 31,
-----------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2003 2002 2001
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 36,130 $ 34,826 $ 29,002
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 5,826 5,671 4,919
Net amortization (accretion) 4,983 (394) (472)
Provision for loan losses 9,612 9,359 5,995
Gains on sales of securities -- net (2,778) (1,891) (1,306)
Gains on sales of loans -- net (1,497) (535) (594)
Deferred income taxes (364) 391 (232)
Increase in cash surrender value of bank-owned life
insurance (3,085) (795) (412)
Loans originated for sale (39,186) (54,826) (63,613)
Proceeds from the sale of loans originated for sale 43,667 56,159 61,616
Other -- net 341 575 (1,390)
Net change in:
Other assets and interest receivable (2,713) 489 3,252
Other liabilities and interest payable 4,694 (1,600) (2,668)
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 55,630 47,429 34,097
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities held to maturity:
Proceeds from maturities, prepayments and calls 98,480 117,683 29,502
Payments for purchases (32,803) (268,094) (74,121)
Securities available for sale:
Proceeds from sales 160,579 274,067 65,014
Proceeds from maturities, prepayments and calls 465,009 134,852 170,328
Payments for purchases (717,335) (405,774) (393,312)
Acquisition, net of cash -- 24,464 --
(Increase) decrease in loans (125,417) 58,351 48,359
Purchases of premises and equipment -- net (3,248) (4,138) (2,207)
Purchase of bank-owned life insurance -- (40,000) --
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (154,735) (108,589) (156,437)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 83,602 18,621 43,097
Increase in Federal Home Loan Bank Borrowings 19,357 77,911 73,177
Increase in other borrowings 51,119 13,303 31,637
Increase (decrease) in federal funds purchased (9,000) (11,000) 15,000
Redemption of trust preferred securities (12,650) -- --
Issuance of junior subordinated debt 30,936 -- --
Dividends paid (19,278) (18,890) (16,737)
Treasury shares purchased -- net (17,856) (19,957) (14,975)
Other -- (18) --
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 126,230 59,970 131,199
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 27,125 (1,190) 8,859
Cash and cash equivalents at beginning of year 81,085 82,275 73,416
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 108,210 $ 81,085 $ 82,275
- -------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Interest paid on deposits and other borrowings $ 64,658 $ 74,524 $ 77,479
Income taxes paid 7,880 11,425 12,736
Transfers of loans to other real estate owned 1,799 2,469 1,269
Summary of business acquisition:
Fair value of assets acquired -- $ 684,041 --
Stock issued for the purchase of American Bancorporation
common stock -- (70,523) --
Fair value of liabilities assumed -- (644,509) --
- -------------------------------------------------------------------------------------------------
Goodwill recognized -- $ (30,991) --
- -------------------------------------------------------------------------------------------------
</Table>
See Notes to Consolidated Financial Statements.
E-6
9
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 72 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 the 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 2003. 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 years ended December 31, 2003 and 2002.
Securities Held to Maturity: Securities consisting principally of debt
securities, which are purchased with the positive intent and ability to be held
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.
Amortization and Accretion: Amortization of premiums and accretion of discounts
are included in interest on securities on a constant yield basis.
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. Declines in the value of investment securities
that are considered other-than-temporary are recorded in net security gains
(losses). 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.
In November 2003, the Emerging Issues Task Force ("EITF") issued EITF Issue
No. 03-1, "The Meaning of Other-than-Temporary Impairments", which is effective
for years ending after December 15, 2003. This issue requires companies to
provide additional disclosures on investment securities with declines in fair
value that have existed for less than twelve months and those declines that have
existed for over twelve months, as well as information leading to the conclusion
that the impairments are not other-than-temporary.
LOANS AND LOANS HELD FOR SALE: Loans are generally reported at the principal
amount outstanding, net of unearned income. Interest is accrued as earned on
loans except where doubt exists as to collectability, in which case recognition
of income is discontinued. Loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate.
A loan is considered impaired, based on current information and events, if
it is probable that WesBanco will be unable to collect the scheduled payments of
principal and interest when due according to the contractual terms of the loan
agreement. Impaired loans include all non-accrual and renegotiated loans, as
well as 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
E-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10
NOTE 1: ACCOUNTING POLICIES (CONTINUED)
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 represents management's
estimate of probable losses inherent in the loan portfolio. Determining the
amount of the allowance requires significant judgement about the collectibility
of loans and the factors that deserve consideration in estimating probable
credit losses. The allowance is increased by a provision charged to operating
expense and reduced by charge-offs, net of recoveries. Management evaluates the
adequacy of the allowance at least quarterly. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to
significant change.
Larger commercial and commercial real estate loans that exhibit observed
credit weaknesses and are deemed to be impaired pursuant to SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" are subject to individual
review. Where appropriate, reserves are established for these loans based on the
present value of expected future cash flows available to pay the loan and/or the
estimated realizable value of the collateral, if any. Reserves are established
for the remainder of the commercial and commercial real estate loans based on a
migration analysis, which computes historical loss rates on loans according to
their internal risk grade. The risk grading system is intended to identify and
measure the credit quality of all commercial and commercial real estate loans.
Homogenous loans, such as consumer, residential real estate and home equity
loans are not individually risk graded. Reserves for homogenous loans are based
on average historical loss rates for each category. Historical loss rates for
all categories of loans are calculated for multiple periods of time ranging from
the most recent quarter to the past three years. Historical loss rates may be
adjusted to reflect factors that, in management's judgement, impact expected
loss rates such as changing economic conditions, delinquency and non-performing
loan trends, changes in internal lending policies and credit standards, and the
results of examinations by bank regulatory agencies and WesBanco's internal loan
review staff.
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. The evaluation of the allowance also takes into
consideration the inherent imprecision of loss estimation models and techniques
and includes general reserves for probable but undetected losses in each
category of loans. While WesBanco continually refines and enhances the loss
estimation models and techniques it uses to determine the appropriateness of the
allowance for loan losses, there have been no material substantive changes to
such models and techniques compared to prior periods. While management allocates
the allowance to different loan categories, the allowance is general in nature
and is available to absorb credit losses for the entire loan portfolio.
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
current operations 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 foreclosures. Other real estate owned may also include former 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: WesBanco may from time to time enter into derivative financial
instruments, primarily interest rate swap agreements to manage its own risks
arising from movement in interest rates and to facilitate asset/liability
management strategies. 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
E-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11
component of accumulated other comprehensive income and reclassified into
earnings in the same period or periods during which the hedged transaction
affects earnings. Net interest received or interest paid on the effective
portion of the interest rate swaps is reported as a component of interest income
or expense in the Consolidated Statements of Income.
INCOME TAXES: 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 due to 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. The dilutive effect from
the stock options was immaterial 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 Sheets. 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 for the year ended December
31, 2002, additional minimum pension liability, net of tax.
NEW ACCOUNTING STANDARDS: 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 Opinion No. 25,
"Accounting for Stock Issued to Employees", to the fair value method of
accounting under SFAS No. 123, "Accounting for Stock-Based Compensation", if a
company so elects. WesBanco has elected to continue to account for stock-based
compensation under APB Opinion No. 25.
The following table illustrates the effect on net income and earnings per share
if the fair value method had been applied to all outstanding and unvested awards
in each period:
<Table>
<Caption>
For the years ended December 31,
----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Net income as reported $36,130 $34,826 $29,002
Stock based compensation expense under fair value based
method -- net of tax(1) 457 581 391
- ------------------------------------------------------------------------------------------------
Pro forma net income $35,673 $34,245 $28,611
- ------------------------------------------------------------------------------------------------
Earnings per share as reported $1.80 $1.70 $1.60
- ------------------------------------------------------------------------------------------------
Pro forma earnings per share $1.78 $1.67 $1.58
- ------------------------------------------------------------------------------------------------
</Table>
(1) Assumes expense is amortized over a three year vesting period
The fair values of stock options granted were estimated at the date of grant
using the Black-Scholes option-pricing model. The following table sets forth the
significant assumptions used in calculating the fair value of the grants:
<Table>
<Caption>
For the years ended December 31,
--------------------------------
2003 2002 2001
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Weighted-average life N/A 6 Years 10 Years
Risk-free interest rates N/A 3.22% 5.49%
Dividend yield N/A 4.02 --
Volatility factors N/A 28.77 23.40
Fair value of the grants N/A $4.83 $10.25
- ----------------------------------------------------------------------------------------------
</Table>
N/A = During 2003, no stock options were granted by the Board of Directors.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133
on Derivative Instruments and Hedging Activities". The Statement is effective
for contracts entered into or modified after September 30, 2003 and for hedging
relationships designated after September 30, 2003. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The adoption of this Statement did not have a significant
impact on WesBanco's financial condition, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within the
Statement's scope as
E-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12
NOTE 1: ACCOUNTING POLICIES (CONTINUED)
a liability. The adoption of this Statement did not have a significant impact on
WesBanco's financial condition, results of operations or cash flows.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits", that improves
financial statement disclosures for defined benefit plans. The change replaces
existing SFAS No. 132 disclosure requirements for pensions and other
postretirement benefits and revises employers' disclosures about pension plans
and other postretirement benefit plans. It does not change the measurement of
recognition of those plans required by SFAS No. 87, "Employers' Accounting for
Pensions" and SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits".
SFAS No. 132 (revised 2003) retains the disclosure requirements contained in the
original SFAS No. 132, but requires additional disclosures about the plan
assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans. SFAS No.
132 (revised 2003) is effective for annual and interim periods with fiscal years
ending after December 15, 2003. WesBanco has adopted the revised disclosure
provisions.
In November 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Others." FIN No. 45 requires a guarantor to make
additional disclosures in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of the interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
while the provisions of the disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of FIN No. 45 did not have a material impact on WesBanco's financial
condition, results of operations or cash flows.
In January 2003 and December 2003, the FASB issued FIN No. 46 "Consolidation
of Variable Interest Entities" ("VIE's"), an interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", and FIN No. 46-R,
a revision of FIN No. 46. Both FIN No. 46 and FIN No. 46-R address the
consolidation of entities whose equity holders have either (a) not provided
sufficient equity at risk to allow the entity to finance its own activities or
(b) do not possess certain characteristics of a controlling financial interest.
FIN No. 46 and FIN No. 46-R require the consolidation of these VIE's by the
primary beneficiary of the entity. The primary beneficiary is the entity, if
any, that is subject to a majority of the risk of loss from the VIE's
activities, entitled to receive a majority of the VIE's residual returns, or
both. FIN No. 46 and FIN No. 46-R apply immediately to variable interests in
VIE's created or obtained after January 31, 2003. For variable interests in a
VIE created before February 1, 2003, FIN No. 46 and FIN No. 46-R apply to VIE's
no later than the end of the first reporting period ending after March 15, 2004.
The interpretations require certain disclosures in financial statements issued
after January 31, 2003.
WesBanco has adopted the provisions under the criteria established by FIN
No. 46 and FIN No. 46-R. Accordingly, WesBanco has de-consolidated two of its
wholly owned trust subsidiaries created after January 31, 2003, which issued
junior subordinated debt to WesBanco. The result was to recognize WesBanco's
investment in the common stock of each trust subsidiary in other assets and to
report the amount of junior subordinated debt issued by WesBanco to its trust
subsidiaries in the liability section of the Consolidated Balance Sheet. Prior
to FIN No. 46, WesBanco eliminated the investments in all of its trust
subsidiaries and reported trust preferred securities in the liability section of
WesBanco's Consolidated Balance Sheet. Management has evaluated its investments
in low-income housing partnerships and determined that consolidation of these
investments is not required. The implementation of FIN No. 46 and FIN No. 46-R
did not have a significant impact on WesBanco's financial condition, results of
operations 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 transaction, WesBanco exchanged 1.1 shares of WesBanco
common stock for each share of American common stock outstanding based on a
fixed exchange rate. 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 remainder was 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 $31.0 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:
<Table>
<Caption>
For the years ended
December 31,
--------------------
(in thousands, except per share amounts) 2002 2001
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Net interest income $107,093 $107,604
Net income 34,829 33,489
Earnings per share 1.66 1.55
- ----------------------------------------------------------------------------------
</Table>
E-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
13
In 2003, WesBanco recorded merger-related expenses totaling $0.3 million,
all relating to severance payments from the American acquisition. 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.
NOTE 3: SECURITIES
The following tables summarize amortized cost and fair values of held to
maturity and available for sale securities:
<Table>
<Caption>
HELD TO MATURITY
---------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 December 31, 2002
----------------------------------------------- -----------------------------------------------
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 $ 39,574 $ 609 -- $ 40,183 $ 86,144 $ 1,511 -- $ 87,655
Obligations of states and
political subdivisions 369,816 15,448 $(537) 384,727 382,752 14,224 $(161) 396,815
Other debt securities 24,836 -- -- 24,836 30,265 -- -- 30,265
- ---------------------------------------------------------------------------------------------------------------------------------
Total $434,226 $16,057 $(537) $449,746 $499,161 $15,735 $(161) $514,735
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
AVAILABLE FOR SALE
---------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 December 31, 2002
----------------------------------------------- -----------------------------------------------
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 $387,322 $2,744 $(2,647) $387,419 $354,487 $ 8,207 -- $362,694
Obligations of states and
political subdivisions 18,208 36 (300) 17,944 7,951 249 $ (48) 8,152
Corporate securities 6,965 67 -- 7,032 19,575 416 (23) 19,968
Mortgage-backed securities 348,640 2,013 (2,573) 348,080 290,255 7,695 (27) 297,923
- ---------------------------------------------------------------------------------------------------------------------------------
Total debt securities 761,135 4,860 (5,520) 760,475 672,268 16,567 (98) 688,737
Equity securities 4,761 1,647 -- 6,408 5,322 730 (54) 5,998
- ---------------------------------------------------------------------------------------------------------------------------------
Total $765,896 $6,507 $(5,520) $766,883 $677,590 $17,297 $(152) $694,735
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
The following table summarizes amortized cost and estimated fair value of
securities by maturity:(1)
<Table>
<Caption>
DECEMBER 31, 2003
----------------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
----------------------------- -----------------------------
AMORTIZED ESTIMATED FAIR AMORTIZED ESTIMATED FAIR
(IN THOUSANDS) COST VALUE COST VALUE
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Within one year $ 46,608 $ 47,383 $124,484 $124,385
After one year, but within five 61,776 64,745 415,533 414,311
After five years, but within ten 154,326 161,524 210,246 211,008
After ten years 171,516 176,094 15,633 17,179
- ----------------------------------------------------------------------------------------------------------------------------
Total $434,226 $449,746 $765,896 $766,883
- --------------------------------------------------------------------------------------------------------
</Table>
(1) 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 $439.9 million and $374.9 million at
December 31, 2003 and 2002, respectively, were pledged to secure public and
trust funds. Proceeds from the sale of available for sale securities were $160.6
million, $274.1 million and $65.0 million for the years ended December 31, 2003,
2002 and 2001, respectively. Gross security gains of $3.1 million, $3.2 million
and $1.3 million and gross security losses of $0.3 million, $1.3 million and $25
thousand were realized for the years ended December 31, 2003, 2002 and 2001,
respectively.
E-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14
NOTE 3: SECURITIES (CONTINUED)
The following table shows the fair value and gross unrealized losses on
investment securities, aggregated by investment category, the number of
securities in each category and length of time that the individual securities
have been in a continuous loss position:
<Table>
<Caption>
DECEMBER 31, 2003
--------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
---------------------------------- -------------------------------- --------
FAIR UNREALIZED # OF FAIR UNREALIZED # OF FAIR
(DOLLARS IN THOUSANDS) VALUE LOSSES SECURITIES VALUE LOSSES SECURITIES VALUE
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
U.S. Treasury and Federal Agency
securities $204,152 $(2,647) 45 -- -- -- $204,152
Obligations of states and
political subdivisions 29,269 (779) 83 $1,916 $(58) 8 31,185
Mortgage-backed & other debt
securities 214,932 (2,573) 56 -- -- -- 214,932
- ------------------------------------------------------------------------------------------------------------------
Total debt securities 448,353 (5,999) 184 1,916 (58) 8 450,269
Equity securities -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total temporarily impaired
securities $448,353 $(5,999) 184 $1,916 $(58) 8 $450,269
- ------------------------------------------------------------------------------------------------------------------
<Caption>
DECEMBER 31, 2003
-----------------------
TOTAL
-----------------------
UNREALIZED # OF
(DOLLARS IN THOUSANDS) LOSSES SECURITIES
- -------------------------------- -----------------------
- -------------------------------- -----------------------
U.S. Treasury and Federal Agency
securities $(2,647) 45
Obligations of states and
political subdivisions (837) 91
Mortgage-backed & other debt
securities (2,573) 56
- --------------------------------------------------------------------
Total debt securities (6,057) 192
Equity securities -- --
- --------------------------------------------------------------------------------
Total temporarily impaired
securities $(6,057) 192
- --------------------------------------------------------------------------------------------
</Table>
WesBanco believes that the unrealized securities losses are all considered
temporary impairment losses due to $450.2 million of the fair value of the
securities presented having fixed interest rates which causes their fair value
to fluctuate in response to prevailing market interest rates. WesBanco has the
ability and intent to hold these investment securities until the market value
recovers or the investment securities mature or are called by the issuer. The
single largest loss on any one security in the "Less than 12 months" category is
$0.2 million and $18.0 thousand in the "12 months or more" category.
NOTE 4: LOANS AND THE ALLOWANCE FOR LOAN LOSSES
The following table is a summary of total loans:
<Table>
<Caption>
December 31,
-------------------------
(IN THOUSANDS) 2003 2002
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Loans:
Commercial $ 369,786 $ 306,071
Commercial real estate 623,243 504,902
Residential real estate 577,362 569,095
Home equity lines of credit 111,981 117,964
Consumer, net of unearned income 249,425 318,129
- ---------------------------------------------------------------------------------------
Total portfolio loans(1) 1,931,797 1,816,161
Loans held for sale 1,741 4,724
- ---------------------------------------------------------------------------------------
Total loans, net of unearned income $1,933,538 $1,820,885
- ---------------------------------------------------------------------------------------
</Table>
(1) Included in the above loan categories were unamortized net deferred loan
fees of $3.1 million and $1.5 million at December 31, 2003 and 2002,
respectively.
The following table represents changes in the allowance for loan losses:
<Table>
<Caption>
For the years ended December 31,
----------------------------------
(IN THOUSANDS) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Balance, beginning of year $25,080 $20,786 $20,030
Allowance for loan losses of acquired bank -- 3,903 --
Provision for loan losses 9,612 9,359 5,995
Charge-offs (9,127) (9,716) (5,838)
Recoveries 670 748 599
- ------------------------------------------------------------------------------------------------
Net charge-offs (8,457) (8,968) (5,239)
- ------------------------------------------------------------------------------------------------
Balance, end of year $26,235 $25,080 $20,786
- ------------------------------------------------------------------------------------------------
</Table>
The following tables summarize loans classified as impaired:
<Table>
<Caption>
December 31,
-------------------
(IN THOUSANDS) 2003 2002
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Non-accrual $ 8,262 $ 7,480
Renegotiated 653 2,646
Other impaired loans 6,031 11,249
- ---------------------------------------------------------------------------------
Total impaired loans $14,946 $21,375
- ---------------------------------------------------------------------------------
Impaired loans with a related allowance for loan losses $ 7,990 $16,343
Allowance for loan losses allocated to impaired loans 2,561 4,675
- ---------------------------------------------------------------------------------
</Table>
E-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
15
<Table>
<Caption>
For the years ended December 31,
----------------------------------
(IN THOUSANDS) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Average impaired loans $20,493 $19,908 $13,572
Amount of contractual interest income on impaired loans 502 574 392
Amount of interest income recognized on a cash basis 263 357 339
- ------------------------------------------------------------------------------------------------
</Table>
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 to foreign loans.
NOTE 5: PREMISES AND EQUIPMENT
Premises and equipment include:
<Table>
<Caption>
December 31,
Estimated ---------------------
(in thousands) Useful Life 2003 2002
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Land and improvements (3-10 years) $ 15,240 $ 15,163
Buildings and improvements (4-50 years) 52,767 52,564
Furniture and equipment (3-15 years) 30,007 27,224
- ----------------------------------------------------------------------------------------------------
Total cost 98,014 94,951
Less -- accumulated depreciation (44,782) (39,226)
- ----------------------------------------------------------------------------------------------------
Total premises and equipment $ 53,232 $ 55,725
- ----------------------------------------------------------------------------------------------------
</Table>
Depreciation and amortization expense of premises and equipment charged to
operations for the years ended December 31, 2003, 2002, and 2001 was $5.7
million, $5.7 million and $4.9 million, respectively.
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 operating leases was $1.0 million, $0.9 million and
$0.4 million, for the years ended December 31, 2003, 2002, and 2001,
respectively. WesBanco also has certain contingent operating leases for
equipment that have a minimum required payment in addition to a payment based
upon usage and transactions, as well as certain contingent operating leases
whose payment is solely based on usage. WesBanco's operating lease expense for
contingent rentals based on usage or transactions was $0.4 million, $-0- and
$-0-, for the years ended December 31, 2003, 2002 and 2001, respectively.
Future minimum lease payments under operating leases at December 31, 2003 are as
follows: (in thousands)
<Table>
<Caption>
YEAR AMOUNT
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
2004 $1,068
2005 991
2006 805
2007 516
2008 295
2009 and thereafter 84
- -----------------------------------------------------------------------
Total future minimum lease payments(1) $3,759
- -----------------------------------------------------------------------
</Table>
(1) Includes stipulated minimum payments on contingent rentals and excludes any
contingent rentals based solely on usage or transactions.
NOTE 6: GOODWILL AND CORE DEPOSIT INTANGIBLE
WesBanco's Consolidated Balance Sheet reflects goodwill of $49.9 million at
December 31, 2003 and 2002. In 2002, WesBanco capitalized $31.0 million in
goodwill and $11.1 million in core deposit intangibles in connection with the
American acquisition. The core deposit intangible is being amortized over a
weighted average life of approximately 8 years. Amortization expense on core
deposit intangibles totaled $1.4 million and $1.8 million for the years ended
December 31, 2003 and 2002, respectively. The remaining goodwill intangible is
not subject to amortization but is evaluated annually for possible impairment.
Based on an evaluation performed in 2003, WesBanco's recorded goodwill and core
deposit intangible was not impaired.
Core deposit intangible amortization for each of the next five years is as
follows: (in thousands)
<Table>
<Caption>
YEAR AMOUNT
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
2004 $1,154
2005 957
2006 802
2007 677
2008 573
- -----------------------------------------------------------------------
</Table>
E-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16
NOTE 6: GOODWILL AND CORE DEPOSIT INTANGIBLE (CONTINUED)
Upon the adoption of SFAS No. 142 on January 1, 2002, WesBanco ceased
amortizing its goodwill. The following table shows the pro forma effects of
applying SFAS No. 142 to the following periods:
<Table>
<Caption>
For the years ended December 31,
----------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Goodwill:
Reported net income $36,130 $34,826 $29,002
Add back: goodwill amortization -- -- 1,313
- ------------------------------------------------------------------------------------------------
Adjusted net income $36,130 $34,826 $30,315
- ------------------------------------------------------------------------------------------------
Earnings per share:
Reported earnings per share $1.80 $1.70 $1.60
Add back: goodwill amortization -- -- .07
- ------------------------------------------------------------------------------------------------
Adjusted earnings per share $1.80 $1.70 $1.67
- ------------------------------------------------------------------------------------------------
</Table>
NOTE 7: CERTIFICATES OF DEPOSIT
Certificates of deposit in denominations of $100 thousand or more were
$228.6 million and $214.6 million as of December 31, 2003 and 2002,
respectively. Related interest expense on certificates of deposit of $100
thousand or more was $6.8 million in 2003 and $7.4 million in 2002.
At December 31, 2003, the scheduled maturities of total certificates of deposit
are as follows: (in thousands)
<Table>
<Caption>
YEAR AMOUNT
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
2004 $395,450
2005 229,041
2006 177,189
2007 96,349
2008 27,826
2009 and thereafter 4,346
- -------------------------------------------------------------------------
Total $930,201
- -------------------------------------------------------------------------
</Table>
NOTE 8: FEDERAL HOME LOAN BANK BORROWINGS
WesBanco is a member of the Federal Home Loan Bank of Pittsburgh (the
"FHLB"). 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, 2003 and 2002 was $790.8 million and $589.4 million,
respectively. At December 31, 2003 and 2002 WesBanco had FHLB borrowings of
$361.2 million and $343.3 million, respectively, with a weighted average rate of
3.58% and 4.21%, respectively.
The following table summarizes the FHLB maturities at December 31, 2003 based on
contractual dates: (dollars in thousands)
<Table>
<Caption>
SCHEDULED WEIGHTED
YEAR MATURITY AVERAGE RATE
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
2004 $ 69,900 3.61%
2005 64,975 2.75
2006 45,010 2.77
2007 59,462 3.03
2008 -- --
2009 and thereafter 121,883 4.57
- --------------------------------------------------------------------------
Total $361,230 3.58%
- -------------------------------------------------------------------------------------------
</Table>
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. Securities sold under agreements to
repurchase with certain WesBanco Bank Inc. customers are secured by investment
securities equal to the fair value of the repurchase agreement. WesBanco may be
required to provide additional collateral based on the fair value of the
underlying securities. 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 $2.4 million, $2.9 million and $5.6
million, for the years ended December 31, 2003, 2002, and 2001, respectively.
E-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
17
Other borrowed funds are summarized as follows:
<Table>
<Caption>
December 31,
----------------------------------
(IN THOUSANDS) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Federal funds purchased $ 10,000 $ 19,000 $ 30,000
Securities sold under agreements to repurchase 169,937 143,994 140,558
Treasury tax and loan notes and other 37,817 2,440 1,684
Revolving line of credit, parent company -- 10,200 --
- ------------------------------------------------------------------------------------------------
Total $217,754 $175,634 $172,242
- ------------------------------------------------------------------------------------------------
</Table>
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<Table>
<Caption>
December 31,
----------------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Outstanding balance at year end $169,937 $143,994 $140,558
Average balance during the year 160,942 143,305 138,728
Maximum month-end balance during the year 187,799 156,592 162,926
Average interest rate at year end 1.30% 1.81% 2.00%
Average interest rate during the year 1.37 1.86 3.56
- ------------------------------------------------------------------------------------------------
</Table>
NOTE 10: TRUST PREFERRED SECURITIES AND JUNIOR SUBORDINATED DEBT
On March 1, 2002, WesBanco assumed $12.65 million of 8.50% Company Obligated
Manditorily Redeemable Capital Securities of Subsidiary Trust ("Trust Preferred
Securities") in connection with the American acquisition. On June 30, 2003,
WesBanco redeemed all of the 8.50% Junior Subordinated Deferrable Interest
Debentures held by WesBanco Capital Trust I, by redeeming 1,265,000 shares of
its outstanding 8.50% Cumulative Trust Preferred Securities. A total of $12.65
million of Trust Preferred Securities were redeemed at a price of $10.00 per
share. In connection with the redemption in the second quarter of 2003, WesBanco
included in other operating expenses the write-off of $0.6 million in
unamortized issuance costs related to the original issuance of these Trust
Preferred Securities.
In June of 2003, WesBanco formed WesBanco, Inc. Capital Trust II and
WesBanco, Inc. Capital Statutory Trust III (the "Trusts"). These Trusts were
formed for the purpose of issuing $30.0 million in trust preferred securities
through two pooled trust preferred programs. The Trust Preferred Securities were
issued and sold in private placement offerings. The proceeds from the sale
thereof were invested in Junior Subordinated Deferrable Interest Debentures (the
"Junior Subordinated Debt") issued by WesBanco. All proceeds from the sale of
the Trust Preferred Securities and the common securities issued by the Trusts
are invested in Junior Subordinated Debentures, which are the sole assets of the
Trusts. The Trusts pay dividends on the Trust Preferred Securities at the same
rate as the distributions paid by WesBanco on the Junior Subordinated Debentures
held by the Trusts. Both Trusts provide WesBanco with the option to defer
payment of interest on the debentures for an aggregate of 20 consecutive
quarterly periods. Should this option be utilized, WesBanco may not declare or
pay dividends on its common stock during any such period. Undertakings made by
WesBanco with respect to the Trust Preferred Securities constitute a full and
unconditional guarantee by WesBanco of the obligations of the Trust Preferred
Securities.
WesBanco adopted the provisions of FIN No. 46 in the fourth quarter of 2003.
As a result, WesBanco deconsolidated its special purpose trusts which were
formed for the issuance of trust preferred securities to outside investors,
because it does not absorb a majority of the expected losses or residual returns
of the trusts. These Trusts were previously consolidated because they were
controlled by WesBanco through a majority voting interest. The effect of such
deconsolidation was to remove the Trust Preferred Securities from WesBanco's
Consolidated Balance Sheet, recognize WesBanco's junior subordinated debt
obligations to the special purpose trusts, and record each of WesBanco's equity
investments in the common stock of the special purpose trusts as an other asset.
The junior subordinated debt obligations and equity investments were previously
eliminated in consolidation.
The Junior Subordinated Debentures are presented as a separate category of
long-term debt on the Consolidated Balance Sheet. For regulatory purposes, the
Federal Reserve Bank currently allows bank holding companies to include trust
preferred securities up to a certain limit of Tier 1 Capital. The Trust
Preferred Securities provide the issuer with a unique capital instrument that
has a tax deductible interest feature not normally associated with the equity of
a corporation.
The following table shows WesBanco's Trust Subsidiaries with outstanding Trust
Preferred Securities as of December 31, 2003:
<Table>
<Caption>
TRUST JUNIOR STATED OPTIONAL
PREFERRED COMMON SUBORDINATED MATURITY REDEMPTION
(IN THOUSANDS) SECURITIES SECURITIES DEBT DATE DATE
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
WesBanco, Inc. Capital Trust II(1) $13,000 $410 $13,410 6/30/2033 6/30/2008
WesBanco, Inc. Capital Statutory Trust III(2) 17,000 526 17,526 6/26/2033 6/26/2008
- ---------------------------------------------------------------------------------------------------------------------
Total trust preferred securities $30,000 $936 $30,936
- ---------------------------------------------------------------------------------------------------------------------
</Table>
(1) Fixed rate of 5.80% through June 30, 2008 and three month LIBOR plus 3.15%
thereafter
(2) Fixed rate of 5.55% through June 26, 2008 and three month LIBOR plus 3.10%
thereafter
The interest expense incurred on these Trust Preferred Securities and Junior
Subordinated debt for the years ended December 31, 2003, 2002, and 2001 amounted
to $1.4 million, $0.9 million and $0, respectively.
E-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
18
NOTE 11: EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLAN AND OTHER POSTRETIREMENT PLANS: At December 31,
2003, 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 service to date, but also for those expected to be earned in the future.
WesBanco uses a December 31 measurement date for its Defined Benefit Pension
Plan.
Retirees and certain active employees hired prior to March 31, 1998 are
provided a postretirement non-contributory health insurance and death benefit
plan. Payments are made directly from the Plan. For reported years 2003 and
2002, the health insurance benefit was $0.1 thousand per month and the death
benefit was $7.5 thousand. The expense and liability are included in the pension
tables below.
The following tables summarize the activity in the projected benefit obligation:
<Table>
<Caption>
For the years ended
December 31,
-------------------
(IN THOUSANDS) 2003 2002
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Projected benefit obligation, at beginning of year $34,888 $30,323
Service cost 1,453 1,243
Interest cost 2,394 2,193
Benefits paid (1,792) (1,689)
Actuarial loss 3,778 2,818
Plan amendment 31 --
- ---------------------------------------------------------------------------------
Projected benefit obligation, at end of year $40,752 $34,888
- ---------------------------------------------------------------------------------
</Table>
The following table summarizes the change in Plan assets:
<Table>
<Caption>
For the years ended
December 31,
-------------------
(IN THOUSANDS) 2003 2002
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Fair value of Plan assets, at beginning of year $28,526 $32,618
Actual return on assets 6,321 (3,674)
Employer contributions 1,784 1,271
Benefits paid (1,792) (1,689)
- ---------------------------------------------------------------------------------
Fair value of Plan assets, at end of year $34,839 $28,526
- ---------------------------------------------------------------------------------
</Table>
The following table sets forth the Plan's funded status and the asset reflected
in the Consolidated Balance Sheet:
<Table>
<Caption>
December 31,
-------------------
(IN THOUSANDS) 2003 2002
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Plan assets (less than) projected benefit obligation $(5,913) $(6,362)
Unrecognized prior service cost (914) (1,091)
Unrecognized net loss 9,999 11,065
- ---------------------------------------------------------------------------------
Prepaid pension cost $ 3,172 $ 3,612
- ---------------------------------------------------------------------------------
</Table>
The following table shows the amounts recognized in the Consolidated Financial
Statements:
<Table>
<Caption>
December 31,
-------------------
(IN THOUSANDS) 2003 2002
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Prepaid pension cost $ 3,172 $ 3,612
Additional minimum liability -- (4,925)
Accumulated other comprehensive income -- 4,925
- ---------------------------------------------------------------------------------
Net amount recognized on balance sheet $ 3,172 $ 3,612
- ---------------------------------------------------------------------------------
</Table>
The following table shows a comparison of the projected and accumulated benefit
obligations to the fair value of Plan assets:
<Table>
<Caption>
December 31,
-------------------
(IN THOUSANDS) 2003 2002(1)
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Projected benefit obligation $40,752 $34,888
Accumulated benefit obligation 34,520 29,839
Fair value of Plan assets 34,839 28,526
- ---------------------------------------------------------------------------------
</Table>
(1) At December 31, 2002, the accumulated benefit obligation exceeded the fair
value of Plan assets.
E-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
19
Net periodic pension cost for the Plan includes the following components:
<Table>
<Caption>
For the years ended December 31,
----------------------------------
(IN THOUSANDS) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Service cost -- benefits earning during year $ 1,453 $ 1,243 $ 1,214
Interest cost on projected benefit obligation 2,394 2,193 2,121
Expected return on Plan assets (2,362) (2,800) (3,204)
Net amortization and recognized loss 739 (45) (559)
- ------------------------------------------------------------------------------------------------
Net periodic pension cost (earnings) $ 2,224 $ 591 $ (428)
- ------------------------------------------------------------------------------------------------
</Table>
Actuarial assumptions used in the determination of the projected benefit
obligation in the Plan are as follows:
<Table>
<Caption>
For the years ended
December 31,
-------------------
2003 2002
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Weighted average discount rates 6.25% 6.75%
Rates of increase in compensation levels 4.00 3.75
- ---------------------------------------------------------------------------------
</Table>
Actuarial assumptions used in the determination of the net periodic benefit cost
in the Plan are as follows:
<Table>
<Caption>
For the years ended
December 31,
-------------------
2003 2002
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Weighted average discount rates 6.75% 6.75%
Rates of increase in compensation levels 3.75 3.75
Weighted average expected long-term return on assets 8.50 8.50
- ---------------------------------------------------------------------------------
</Table>
The expected long-term rate of return for the Plan's total assets is based on
the expected return of each of the Plan asset categories, weighted based on the
median of the target allocation for each class.
PENSION PLAN INVESTMENT POLICY AND STRATEGY: The investment policy as
established by the Pension Committee, to be followed by the Trustee, is to
invest assets based on the target allocations shown in the table below. The
assets will be reallocated periodically by the Trustee based on the ranges set
forth by the Pension Committee to meet the target allocations. The investment
policy will be reviewed periodically to determine if the policy should be
changed. The Plan assets will be invested with the principal objective of
maximizing long-term total return without exposing Plan assets to undue risks,
taking into account the Plan's funding needs and benefit obligations. Assets
will be invested in a balanced portfolio composed primarily of equities, fixed
income and cash or cash equivalent money market investments.
A maximum of 10% may be invested in any one stock. Foreign stocks may be
included, either through direct investment or by the purchase of mutual funds,
which invest in foreign stock. Although most of the portfolio will be invested
in large capitalization stocks, up to 25% of the equity portfolio may be
invested in NASDAQ stocks. WesBanco common stock can represent up to 10% of the
total market value. Corporate bonds selected for purchase must be rated BAA1 or
BBB+ or higher. No more than 10% shall be invested in bonds or notes issued by
the same corporation. There will be no limit on the holdings of U.S. Treasury or
Federal Agency Securities. A maximum maturity of 10 years will be permitted. At
December 31, 2003 the Plan's equity securities included 118,300 shares of
WesBanco common stock with a fair market value of $3.3 million, which represents
9.5% of the Plan's total assets. At December 31, 2002, the Plan's equity
securities included 118,300 shares of WesBanco common stock with a fair market
value of $2.8 million, which represented 9.7% of the Plan's total assets.
Dividends received on WesBanco stock held by the plan were $0.1 million for each
of the years ended December 31, 2003 and 2002.
The following table sets forth the Plan's weighted-average asset allocations by
asset category:
<Table>
<Caption>
For the years ended
TARGET December 31,
ALLOCATION --------------------
FOR 2004 2003 2002
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
ASSET CATEGORY:
Equity securities 50-75% 58% 73%
Debt securities 25-50% 30 25
Real estate 0% -- --
Other 0-25% 12 2
- -------------------------------------------------------------------------------------------------------
Total 100% 100%
- -------------------------------------------------------------------------------------------------------
</Table>
E-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
20
NOTE 11: EMPLOYEE BENEFIT PLANS (CONTINUED)
CASH FLOWS:
The following table sets forth information about the expected cash flows for the
pension plan: (in thousands)
<Table>
<Caption>
EMPLOYER CONTRIBUTIONS AMOUNT
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
2004 $1,900
- -----------------------------------------------------------------------
</Table>
The following table sets forth the estimated future benefit payments reflecting
expected future service: (in thousands)
<Table>
<Caption>
YEAR AMOUNT
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
2004 $ 1,443
2005 1,461
2006 1,466
2007 1,539
2008 1,654
2009-2013 11,457
- ------------------------------------------------------------------------
</Table>
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, 2003, the
American plan had a projected benefit obligation of $0.8 million, which was
equal to the fair value of the plan assets, and a prepaid pension cost of $21
thousand recognized on the balance sheet. Net periodic pension costs in the
American plan for 2003 were $7 thousand and plan contributions were $112
thousand. The measurement date of the American Plan was October 1, 2003.
WesBanco has no plans to merge the American pension plan with any of the
WesBanco employee benefits 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. Employer contributions to the
ESOP are made at the discretion of WesBanco's Board of Directors. The 401(k)
provisions provide for WesBanco to make matching contributions based upon an
employee's contribution, subject to regulatory limitations. For 2003, WesBanco
matched 50% of the first 4% of an employee's contribution. For 2002, WesBanco
matched 50% of the first 2% of an employee's contribution and 25% of the next
2%.
As of December 31, 2003, the KSOP held 644,369 shares of WesBanco stock, of
which 589,333 shares were allocated to specific employee accounts, and 55,036
shares with a market value of $1.5 million were unallocated. WesBanco's KSOP was
committed to release 23,441 shares as of December 31, 2003. Shares are released
based on a formula, which considers the amount of principal and interest paid on
the ESOP loan for a given period over the principal and interest to be paid for
that period and all future periods. Dividends earned on unallocated shares are
used to pay interest on the ESOP loan and for the three years ended December 31,
2003, 2002 and 2001 totaled $47 thousand, $73 thousand and $68 thousand,
respectively. Dividends on allocated shares are distributed to employee
accounts. Total contributions to the KSOP for the three years ended December 31,
2003, 2002 and 2001 were $0.9 million, $0.9 million and $1.0 million,
respectively.
During 2000, WesBanco's ESOP established 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 $0.6 million, $1.0 million and $1.6 million at
December 31, 2003, 2002 and 2001, respectively. Interest expense paid by
WesBanco's ESOP was $47 thousand, $83 thousand and $134 thousand at December 31,
2003, 2002 and 2001, 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 December 31, 2002, this plan and
assets totaling $1.4 million were merged into the WesBanco 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, 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 2003, 2002 and 2001 for the Annual Bonus
component of the plan was $0.7 million, $0.5 million and $0.5 million,
respectively. During 2003, 2002 and 2001 awards in the amounts of $58 thousand,
$50 thousand and $43 thousand, 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 2003, no stock options were granted by the Board of
Directors. During 2002 and 2001, 206,000 and 159,924 shares, respectively, were
granted at an average option price of $23.96 and $20.88 per share, respectively.
These options vest over a three-year period and have no performance provisions.
WesBanco accounts for all stock options in accordance with APB Opinion No.
25 "Accounting for Stock Issued to Employees". Under APB Opinion No. 25, the
2002 and 2001 stock options were granted at prices equal to fair market value at
the 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.
E-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
21
The following table shows the share activity in the Option Plan:
<Table>
<Caption>
For the years ended December 31,
------------------------------------------------------------------------------------
WEIGHTED Weighted Weighted
AVERAGE EXERCISE Average Exercise Average Exercise
2003 PRICE PER SHARE 2002 PRICE PER SHARE 2001 PRICE PER SHARE
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of the year 417,419 $22.99 212,811 $22.03 52,887 $25.53
Granted during the year -- -- 206,000 23.96 159,924 20.88
Exercised during the year (18,667) 21.41 -- -- -- --
Expired during the year (9,579) 28.87 -- -- -- --
Forfeited during the year (4,333) 20.74 (1,392) 20.74 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of the year 384,840 $23.21 417,419 $22.99 212,811 $22.03
- ---------------------------------------------------------------------------------------------------------------------------------
Exercisable at year end 316,172 $22.72 226,778 $22.90 96,860 $23.31
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
The following table shows the average remaining life of the stock options at
December 31, 2003:
<Table>
<Caption>
WEIGHTED AVG.
AVERAGE REMAINING
OPTIONS EXERCISE CONTRACTUAL
YEAR ISSUED OUTSTANDING PRICE YEARS
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
1998 15,998 $29.50 4.12
2000 18,000 22.00 6.33
2001 144,842 20.88 7.30
2002 206,000 23.96 8.90
- --------------------------------------------------------------------------------------------------------
Total 384,840 7.98
- --------------------------------------------------------------------------------------------------------
</Table>
NOTE 12: OTHER OPERATING EXPENSE
Other operating expense consists of the following:
<Table>
<Caption>
For the years ended December 31,
----------------------------------
(IN THOUSANDS) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Professional fees $ 4,395 $ 4,139 $ 3,934
Marketing 2,398 1,924 1,933
General administrative 1,293 1,128 945
Supplies 1,705 2,075 1,790
Postage 2,448 2,351 2,002
Telecommunication 2,219 2,322 1,767
Miscellaneous taxes 3,697 3,642 3,405
Goodwill amortization -- -- 1,313
Other 5,981 3,652 3,869
- ------------------------------------------------------------------------------------------------
Total $24,136 $21,233 $20,958
- ------------------------------------------------------------------------------------------------
</Table>
NOTE 13: INCOME TAXES
Reconciliation from the federal statutory income tax rate to the effective tax
rate is as follows:
<Table>
<Caption>
For the years ended December 31,
----------------------------------
2003 2002 2001
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Federal statutory tax rate 35.0% 35.0% 35.0%
Tax-exempt interest income on securities of state and
political subdivisions -- net (13.4) (11.9) (8.9)
State income taxes, net of federal tax effect 0.9 2.5 3.4
Bank-owned life insurance (2.4) (1.0) (1.0)
All other -- net (0.7) (1.2) 1.3
- ------------------------------------------------------------------------------------------------
Effective tax rate 19.4% 23.4% 29.8%
- ------------------------------------------------------------------------------------------------
</Table>
E-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
22
NOTE 13: INCOME TAXES (CONTINUED)
The provision for income taxes applicable to income before taxes consists of the
following:
<Table>
<Caption>
For the years ended December 31,
----------------------------------
(IN THOUSANDS) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Current:
Federal $8,407 $ 8,425 $10,356
State 639 1,804 2,158
Deferred:
Federal (310) 441 (201)
State (54) (50) (31)
- ------------------------------------------------------------------------------------------------
Total $8,682 $10,620 $12,282
- ------------------------------------------------------------------------------------------------
</Table>
The following income tax amounts were recorded in shareholders' equity as
elements of other comprehensive income:
<Table>
<Caption>
For the years ended
December 31,
------------------------------
(IN THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Securities and derivative transactions $(5,661) $ 2,054 $2,577
Minimum pension liability 1,970 (1,970) --
- --------------------------------------------------------------------------------------------
Total $(3,691) $ 84 $2,577
- --------------------------------------------------------------------------------------------
</Table>
Deferred tax assets and deferred tax liabilities consist of the following:
<Table>
<Caption>
December 31,
------------------------------
(IN THOUSANDS) 2003 2002 2001
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $10,036 $ 9,569 $ 8,029
Compensation and benefits 461 2,369 418
Net operating loss carryforward -- -- 338
Deferred loan fees and costs 1,122 510 --
Purchase accounting adjustments 1,311 1,790 --
Fair value adjustments on securities available for sale
and derivatives 1,549 -- --
Other 284 37 --
- --------------------------------------------------------------------------------------------
Gross deferred tax assets 14,763 14,275 8,785
- --------------------------------------------------------------------------------------------
Deferred tax liabilities:
Fair value adjustments on securities available for sale
and derivatives -- (4,134) (2,363)
Depreciation (1,313) (988) (1,366)
Purchase accounting adjustments -- -- (431)
Accretion on securities (1,345) (939) (401)
Deferred loan fees and costs -- -- (24)
Other -- -- (108)
- --------------------------------------------------------------------------------------------
Gross deferred tax liabilities (2,658) (6,061) (4,693)
- --------------------------------------------------------------------------------------------
Net deferred tax assets $12,105 $ 8,214 $ 4,092
- --------------------------------------------------------------------------------------------
</Table>
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-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
23
The following table represents the estimates of fair value of financial
instruments:
<Table>
<Caption>
December 31,
-------------------------------------------------
2003 2002
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
(IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and short-term investments $ 108,210 $ 108,210 $ 81,085 $ 81,085
Securities held to maturity 434,226 449,746 499,161 514,735
Securities available for sale 766,883 766,883 694,735 694,735
Net loans (including loans held for sale) 1,907,303 1,930,236 1,795,805 1,825,435
Financial liabilities:
Deposits 2,482,082 2,496,842 2,399,956 2,411,652
Federal Home Loan Bank borrowings 361,230 368,351 343,324 357,876
Other borrowings 217,754 217,830 175,634 175,783
Trust preferred securities and junior subordinated debt 30,936 27,154 12,650 12,713
Derivatives:
Interest rate swaps (4,277) (4,277) (5,835) (5,835)
- ---------------------------------------------------------------------------------------------------------------
</Table>
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.
FEDERAL HOME LOAN BANK BORROWINGS: For Federal Home Loan Bank borrowings, fair
value is based on rates currently available to WesBanco for borrowings with
similar terms and 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.
TRUST PREFERRED SECURITIES AND JUNIOR SUBORDINATED DEBT: Due to the pooled
nature of these instruments, which are not actively traded on an equity market,
the 2003 estimated fair value is based on a price obtained from a broker on a
recent similar transaction. For 2002 the fair value amount is based on the
quoted market price.
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-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
24
NOTE 15: COMPREHENSIVE INCOME
The changes in accumulated other comprehensive income are as follows:
<Table>
<Caption>
For the years ended December 31,
----------------------------------
(IN THOUSANDS) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Net Income $ 36,130 $34,826 $29,002
Securities available for sale:
Net change in unrealized gains (losses) on securities
available for sale (13,365) 10,694 9,230
Related income tax (expense) benefit(1) 5,279 (4,224) (3,646)
Net securities (gains) losses reclassified into earnings (2,793) (962) (1,273)
Related income tax expense (benefit)(1) 1,103 380 503
- ------------------------------------------------------------------------------------------------
Net effect on other comprehensive income for the
period (9,776) 5,888 4,814
- ------------------------------------------------------------------------------------------------
Cash flow hedge derivatives:
Cumulative effect of accounting change on derivative
financial instruments -- -- 923
Related income tax (expense) benefit(1) -- -- (364)
Net change in unrealized gains (losses) on derivatives 1,261 (3,389) (2,150)
Related income tax (expense) benefit(1) (498) 1,338 849
Net derivative (gains) losses reclassified into earnings (184) (226) (243)
Related income tax expense (benefit)(1) 73 89 96
- ------------------------------------------------------------------------------------------------
Net effect on other comprehensive income for the
period 652 (2,188) (889)
- ------------------------------------------------------------------------------------------------
Minimum pension liability:
Net change in minimum pension liability 4,925 (4,925) --
Related income tax expense (benefit)(1) (1,970) 1,970 --
- ------------------------------------------------------------------------------------------------
Net effect on other comprehensive income for the
period 2,955 (2,955) --
- ------------------------------------------------------------------------------------------------
Total change in other comprehensive income (loss) (6,169) 745 3,925
- ------------------------------------------------------------------------------------------------
Comprehensive income $ 29,961 $35,571 $32,927
- ------------------------------------------------------------------------------------------------
</Table>
(1) Related income tax expense (benefit) is calculated using a combined Federal
and State income tax rate approximating 40%.
The activity in accumulated other comprehensive income for the years ended
December 31, 2003, 2002 and 2001 is as follows:
<Table>
<Caption>
Net Unrealized Gains
(Losses) on Derivative
Unrealized Gains Instruments Used in
Minimum Pension (Losses) on Securities Cash Flow Hedging
(in thousands) Liability Available for Sale Relationships Total
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- $ (365) -- $ (365)
Period change, net of tax -- 4,814 $ (889) 3,925
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- $ 4,449 $ (889) $ 3,560
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- $ 4,449 $ (889) $ 3,560
Period change, net of tax $(2,955) 5,888 (2,188) 745
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $(2,955) $10,337 $(3,077) $ 4,305
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $(2,955) $10,337 $(3,077) $ 4,305
Period change, net of tax 2,955 (9,776) 652 (6,169)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 -- $ 561 $(2,425) $(1,864)
- ---------------------------------------------------------------------------------------------------------------------
</Table>
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'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 would be recorded in other
liabilities and were $0 as of December 31, 2003 and 2002.
E-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
25
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. Standby letters of
credit are considered guarantees in accordance with the criteria specified by
FIN No. 45, which was adopted on January 1, 2003. After that date, WesBanco
issued new or modified standby letters of credit with an aggregate contract
amount of $4.7 million. The guarantee liability associated with these new or
modified standby letters of credit is carried at the estimated fair value of $33
thousand and is included in other liabilities on the Consolidated Balance Sheet
as of December 31, 2003.
The following table presents total commitments and letters of credit
outstanding:
<Table>
<Caption>
December 31,
-------------------
(IN THOUSANDS) 2003 2002
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Commitments to extend credit $325,722 $261,970
Standby letters of credit 31,579 29,088
- ---------------------------------------------------------------------------------
</Table>
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 from time to time enter into derivative financial instruments,
primarily interest rate swap agreements, to manage its own risks arising from
movements in interest rates and to facilitate asset/liability management
strategies.
During 2001, WesBanco entered into interest rate swap agreements, designated
as cash flow hedges, that effectively converted $125.0 million of its variable
rate prime based money market deposit accounts to a fixed-rate basis, with an
average term of 7 years, thus reducing the impact of rising interest rates on
future interest expense.
At December 31, 2003 the net fair value adjustments on interest rate swap
agreements recorded as a liability on the Consolidated Balance Sheet reflected
unrealized pretax net losses of $4.3 million. These unrealized net losses may be
classified from accumulated other comprehensive income to earnings during 2004
as interest payments are made to the counterparties based on current market
rates. 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. For
2003 and 2002 there was no hedge ineffectiveness recorded on the income
statement for these transactions.
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 of interest rate swap gains during both 2003 and 2002. WesBanco will
realize $0.2 million of interest rate swap gains during 2004.
The following table details the interest rate swaps and their associated
hedged liability outstanding at December 31, 2003 and 2002:
<Table>
<Caption>
Swap Fixed Swap Variable
(dollars in thousands) Swap Notional Interest Rate Interest Rate
Derivative Type Maturity Hedged Liability Amount Fair Value Range Range
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003
- -------------------
PRIME BASED MONEY
INTEREST RATE SWAP 2008 MARKET DEPOSIT ACCOUNTS $ 98,451 $(4,277) 3.85% TO 4.73% 1.80% TO 2.20%
- -------------------------------------------------------------------------------------------------------------------------
December 31, 2002
- -------------------
Prime based money
Interest Rate Swap 2008 market deposit accounts $110,520 $(5,835) 3.85% to 4.73% 1.91% to 2.34%
- -------------------------------------------------------------------------------------------------------------------------
</Table>
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 WesBanco Bank, Inc. and have had, and are expected to
have, transactions with WesBanco Bank, Inc. 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 $28.9 million, $52.7 million and $62.3
million as of December 31, 2003, 2002, and 2001, respectively. During 2003,
$28.6 million in related party loans were funded, $31.3 million were repaid and
$21.1 million were no longer considered related party interests.
E-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
26
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 certain subsidiary to pay dividends to WesBanco.
Approval is required if total dividends declared by a bank subsidiary, in any
calendar year, exceeds net profits for that year combined with its retained net
profits for the preceding two years. In determining to what extent to pay
dividends, a bank subsidiary must also consider the effect of dividend payments
on applicable risk-based capital and leverage ratio requirements. During the
first quarter of 2003 and 2002, 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, 2003 and 2002, 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 $6.7 million and $25.5 million during 2003 and 2002,
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, 2003 and 2002. There are no conditions or events since
December 31, 2003 that management believes have changed WesBanco's
well-capitalized category.
Recently, the Federal Reserve has noted that FIN No. 46 may have
implications on how trust preferred securities are reported on bank holding
companies' financial statements. In addition, SFAS No. 150 issued earlier in
2003 provides accounting guidance that reflects the reporting of trust preferred
securities. In response, the Board of Governors of the Federal Reserve System
issued a supervisory letter on July 2, 2003 instructing bank holding companies
to continue to include the trust preferred securities in their Tier 1 capital
for regulatory capital purposes until notice is given to the contrary. The
Federal Reserve may or may not allow institutions to continue to include trust
preferred securities in Tier 1 capital for regulatory capital purposes. As of
December 31, 2003, assuming WesBanco was not allowed to include in Tier 1
capital the $30.0 million in trust preferred securities issued by WesBanco, Inc.
Capital Trust II and WesBanco, Inc. Capital Statutory Trust III WesBanco's Tier
1 leverage capital ratio would have been 7.87%, and would still significantly
exceed the regulatory required minimums for capital adequacy purposes. If the
WesBanco, Inc. Capital Trust II trust preferred securities are no longer allowed
to be included in Tier 1 capital, WesBanco would be permitted to redeem the
trust preferred securities without penalty, while the WesBanco, Inc. Capital
Statutory Trust III would result in an early redemption penalty.
The following table summarizes risk-based capital amounts and ratios for
WesBanco and its bank subsidiary:
<Table>
<Caption>
December 31,
-----------------------------------
2003 2002
WELL ---------------- ----------------
(dollars in thousands) Minimum(1) Capitalized(2) AMOUNT RATIO Amount Ratio
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
WESBANCO, INC.
Tier 1 Leverage N/A N/A $292,487 8.76% $274,660 8.53%
Tier 1 Capital to Risk-Weighted Assets N/A N/A 292,487 13.31 274,660 12.95
Total Capital to Risk-Weighted Assets N/A N/A 318,723 14.50 299,740 14.13
WESBANCO BANK, INC.
Tier 1 Leverage 4.0% 5.0% $273,729 8.23% $274,864 8.56%
Tier 1 Capital to Risk-Weighted Assets 4.0% 6.0% 273,729 12.51 274,864 13.01
Total Capital to Risk-Weighted Assets 8.0% 10.0% 299,960 13.71 299,936 14.20
- -----------------------------------------------------------------------------------------------------------------
</Table>
(1) Minimum requirements to remain adequately capitalized
(2) Well capitalized under prompt corrective action regulations
E-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
27
NOTE 20: CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the Condensed Balance Sheets, Statements of Income and
Statements of Cash Flows for the Parent Company:
BALANCE SHEETS
<Table>
<Caption>
December 31,
--------------------
(IN THOUSANDS) 2003 2002
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
ASSETS
Cash and short-term investments $ 12,949 $ 5,617
Investment in subsidiaries -- Banking 328,719 337,514
Investment in subsidiaries -- Nonbank 5,918 6,075
Securities available for sale carried at fair value 6,609 12,366
Other assets 1,633 1,298
- ----------------------------------------------------------------------------------
TOTAL ASSETS $355,828 $362,870
- ----------------------------------------------------------------------------------
LIABILITIES
Borrowings $ 579 $ 18,728
Junior subordinated debt 30,936 12,650
Dividends payable and other liabilities 5,877 6,321
- ----------------------------------------------------------------------------------
TOTAL LIABILITIES 37,392 37,699
SHAREHOLDERS' EQUITY 318,436 325,171
- ----------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $355,828 $362,870
- ----------------------------------------------------------------------------------
</Table>
STATEMENTS OF INCOME
<Table>
<Caption>
For the years ended December 31,
----------------------------------
(IN THOUSANDS) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Dividends from subsidiaries -- Banking $40,000 $30,000 $33,000
Dividends from subsidiaries -- Nonbank -- 650 550
Income from securities 250 508 735
Other income 115 101 109
- ------------------------------------------------------------------------------------------------
Total income 40,365 31,259 34,394
Total expense 3,342 3,236 1,981
- ------------------------------------------------------------------------------------------------
Income before income tax benefit and undistributed net
income (excess dividends) of subsidiaries 37,023 28,023 32,413
Income tax benefit (1,287) (1,190) (631)
- ------------------------------------------------------------------------------------------------
Income before undistributed net income of subsidiaries 38,310 29,213 33,044
Undistributed net income (excess dividends) of subsidiaries (2,180) 5,613 (4,042)
- ------------------------------------------------------------------------------------------------
NET INCOME $36,130 $34,826 $29,002
- ------------------------------------------------------------------------------------------------
</Table>
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
For the years ended December 31,
----------------------------------
(IN THOUSANDS) 2003 2002 2001
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 36,130 $ 34,826 $ 29,002
Excess dividends (undistributed net income) of
subsidiaries 2,180 (5,613) 4,042
(Increase) decrease in other assets (972) (100) 37
Other -- net 253 872 (1,667)
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 37,591 29,985 31,414
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available for sale:
Proceeds from sales 4,022 194 405
Proceeds from maturities and calls 2,710 3,345 265
Payments for purchases (50) (500) (963)
Acquisitions and additional capitalization of subsidiaries -- (400) (75)
- ------------------------------------------------------------------------------------------------
Net cash provided (used) in investing activities 6,682 2,639 (368)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on ESOP debt -- net (450) (543) 1,572
Increase (decrease) in borrowings (17,700) 6,000 200
Extinguishment of junior subordinated debt (12,650) -- --
Issuance of junior subordinated debt 30,936 -- --
Purchases of treasury stock -- net (17,856) (19,957) (14,975)
Dividends paid (19,278) (18,890) (16,737)
Other 57 637 --
- ------------------------------------------------------------------------------------------------
Net cash used in financing activities (36,941) (32,753) (29,940)
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 7,332 (129) 1,106
Cash and short-term investments at beginning of year 5,617 5,746 4,640
- ------------------------------------------------------------------------------------------------
Cash and short-term investments at end of year $ 12,949 $ 5,617 $ 5,746
- ------------------------------------------------------------------------------------------------
</Table>
E-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
28
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
demand, individual demand and time deposit accounts as well as commercial,
mortgage and individual installment loans. The trust and investment services
segment offers trust services as well as various alternative investment products
including mutual funds and annuities. The market value of assets under
management of the trust and investment services segment was approximately $2.8
billion, $2.3 billion and $2.8 billion, at December 31, 2003, 2002 and 2001,
respectively. These assets are held by WesBanco's affiliate, WesBanco Bank, Inc.
in fiduciary or agency capacities for its customers and therefore are not
included as assets on WesBanco's Consolidated Balance Sheets.
Presented below are the condensed Statements of Income for WesBanco's business
segments:
<Table>
<Caption>
Trust and
Community Investment
(in thousands) Banking Services Consolidated
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2003
- ---------------------------------------------------------------------------------------------------
Interest income $165,516 -- $165,516
Interest expense 62,512 -- 62,512
- ---------------------------------------------------------------------------------------------------
Net interest income 103,004 -- 103,004
Provision for loan losses 9,612 -- 9,612
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 93,392 -- 93,392
Non-interest income 21,601 $11,629 33,230
Non-interest expense 74,280 7,530 81,810
- ---------------------------------------------------------------------------------------------------
Income before income taxes 40,713 4,099 44,812
Provision for income taxes 7,042 1,640 8,682
- ---------------------------------------------------------------------------------------------------
Net Income $ 33,671 $ 2,459 $ 36,130
- ---------------------------------------------------------------------------------------------------
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 13,497 $11,504 25,001
Non-interest expense 58,455 6,852 65,307
- ---------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------
</Table>
E-26
29
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 outside 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.
Independent auditors provide an objective review of management's discharge
of its financial responsibilities relating to the preparation of the financial
statements. The independent auditor's report is based on an audit performed in
accordance with auditing standards generally accepted in the United States. This
report expresses an informed judgement as to whether management's financial
statements present fairly, in conformity with accounting principles generally
accepted in the United States, WesBanco's financial position, results of
operations and cash flows.
<Table>
/s/ Paul M. Limbert /s/ Robert H. Young
Paul M. Limbert Robert H. Young
President and Chief Executive Officer Executive Vice President and Chief Financial Officer
</Table>
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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
January 28, 2004
Pittsburgh, Pennsylvania
E-27
30
CONDENSED QUARTERLY STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<Table>
<Caption>
2003 QUARTER ENDED
----------------------------------------------------------
ANNUAL
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Interest income $41,905 $40,619 $41,925 $41,067 $165,516
Interest expense 17,063 16,540 14,825 14,084 62,512
- -----------------------------------------------------------------------------------------------------------------
Net interest income 24,842 24,079 27,100 26,983 103,004
Provision for loan losses 1,980 2,479 2,499 2,654 9,612
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 22,862 21,600 24,601 24,329 93,392
Non-interest income 8,247 8,268 8,010 8,705 33,230
Non-interest expense 20,055 20,885 20,429 20,441 81,810
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 11,054 8,983 12,182 12,593 44,812
Provision for income taxes 2,165 1,242 2,390 2,885 8,682
- -----------------------------------------------------------------------------------------------------------------
Net Income $ 8,889 $ 7,741 $ 9,792 $ 9,708 $ 36,130
- -----------------------------------------------------------------------------------------------------------------
Earnings per share $0.44 $0.38 $0.49 $0.49 $1.80
- -----------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
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
- -----------------------------------------------------------------------------------------------------------------
</Table>
E-28
31
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. The information contained in this report should be read in
conjunction with WesBanco's most recent annual report filed with the Securities
and Exchange Commission on Form 10-K for the year ended December 31, 2003, as
well as Form 10-Q for the prior quarters ended September 30, 2003, June 30, 2003
and March 31, 2003, which are available at the SEC's website, www.sec.gov or at
WesBanco's website, www.wesbanco.com. Investors are cautioned that
forward-looking statements, which are not historical fact, involve risks and
uncertainties. 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, spreads on earning assets and
interest-bearing liabilities, and associated interest rate sensitivity; sources
of liquidity available to the parent company and its related subsidiary
operations; potential future credit losses and the credit risk of commercial,
real estate, and consumer loan customers and their borrowing activities; actions
of the Federal Reserve Board, Federal Deposit Insurance Corporation, the
Securities and Exchange Commission, the National Association of Securities
Dealers and other regulatory bodies; potential legislative and federal and state
regulatory actions and reform; competitive conditions in the financial services
industry; rapidly changing technology affecting financial services, and/or other
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 AND 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 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 allowance for loan
losses to be the accounting estimate that requires 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
losses inherent in the loan portfolio. Determining the amount of the allowance
is considered a critical accounting estimate because it requires significant
judgement about the collectibility of loans and the factors that deserve
consideration in estimating probable credit losses. The allowance is increased
by a provision charged to operating expense and reduced by charge-offs, net of
recoveries. Management evaluates the adequacy of the allowance at least
quarterly. This evaluation is inherently subjective as it requires material
estimates that may be susceptible to significant change.
Larger commercial and commercial real estate loans that exhibit observed
credit weaknesses and are deemed to be impaired pursuant to SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" are subject to individual
review. Where appropriate, reserves are established for these loans based on the
present value of expected future cash flows available to pay the loan and/or the
estimated realizable value of the collateral, if any. Reserves are established
for the remainder of the commercial and commercial real estate loans based on a
migration analysis, which computes historical loss rates on loans according to
their internal risk grade. The risk grading system is intended to identify and
measure the credit quality of all commercial and commercial real estate loans.
Homogenous loans, such as consumer, residential real estate and home equity
loans are not individually risk graded. Reserves for homogenous loans are based
on average historical loss rates for each category. Historical loss rates for
all categories of loans are calculated for multiple periods of time ranging from
the most recent quarter to the past three years. Historical loss rates may be
adjusted to reflect factors that, in management's judgment, impact expected loss
rates such as changing economic conditions, delinquency and non-performing loan
trends, changes in internal lending policies and credit standards, and the
results of examinations by bank regulatory agencies and WesBanco's internal loan
review staff.
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. The evaluation of the allowance also takes into
consideration the inherent imprecision of loss estimation models and techniques
and includes general reserves for probable but undetected losses in each
category of loans. While WesBanco continually refines and enhances the loss
estimation models and techniques it uses to determine the appropriateness of the
allowance for loan losses, there have been no material substantive changes to
such models and techniques compared to prior periods. While management allocates
the allowance to different loan categories, the allowance is general in nature
and is available to absorb credit losses for the entire loan portfolio.
E-29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
32
TABLE 1. SIX YEAR SELECTED FINANCIAL SUMMARY
<Table>
<Caption>
For the years ended December 31,
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE INFORMATION:
Dividends $0.96 $0.935 $0.92 $0.895 $0.88 $0.84
Book value at year end 16.13 15.89 14.46 13.92 13.63 14.35
Average common shares outstanding 20,056,849 20,459,122 18,123,851 19,092,927 20,229,524 20,867,193
SELECTED BALANCE SHEET INFORMATION:
Total securities $1,201,109 $1,193,896 $ 758,470 $ 546,389 $ 567,928 $ 680,550
Net loans 1,907,303 1,795,805 1,518,909 1,570,672 1,503,694 1,353,920
Total assets 3,445,006 3,297,231 2,474,454 2,310,137 2,269,726 2,242,712
Total deposits 2,482,082 2,399,956 1,913,458 1,870,361 1,814,001 1,787,642
Total shareholders' equity 318,436 325,171 258,201 258,506 269,664 296,483
SELECTED RATIOS:
Return on average assets 1.08% 1.13% 1.21% 1.18% 1.23% 1.26%
Return on average equity 11.38 10.95 11.28 10.42 9.85 9.55
Dividend payout 53.33 55.00 57.50 63.47 64.23 61.76
Average equity to average assets 9.46 10.29 10.70 11.30 12.47 13.16
TRUST ASSETS, MARKET VALUE AT YEAR END $2,771,656 $2,295,737 $2,808,862 $3,099,441 $3,087,610 $2,774,906
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
For the years ended December 31,
----------------------------------------------------------------------------
SUMMARY STATEMENTS OF INCOME: 2003 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Interest income $165,516 $176,155 $163,939 $163,079 $155,861 $162,718
Interest expense 62,512 72,555 76,354 79,552 69,231 73,925
- ----------------------------------------------------------------------------------------------------------------------
Net interest income 103,004 103,600 87,585 83,527 86,630 88,793
Provision for loan losses 9,612 9,359 5,995 3,225 4,295 4,392
- ----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 93,392 94,241 81,590 80,302 82,335 84,401
Non-interest income 33,230 27,852 25,001 23,376 24,581 25,715
Non-interest expense 81,810 76,647 65,307 64,483 67,813 68,308
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 44,812 45,446 41,284 39,195 39,103 41,808
Provision for income taxes 8,682 10,620 12,282 12,271 11,465 13,495
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 36,130 $ 34,826 $ 29,002 $ 26,924 $ 27,638 $ 28,313
- ----------------------------------------------------------------------------------------------------------------------
Earnings per share $1.80 $1.70 $1.60 $1.41 $1.37 $1.36
- ----------------------------------------------------------------------------------------------------------------------
</Table>
OVERVIEW
(Bar Chart)
TOTAL ASSETS
(in million)
<Table>
<Caption>
99 00 01 02 03
$2,270 $2,310 $2,474 $3,297 $3,445
</Table>
WesBanco is a multi-state bank holding company presently operating through
72 banking offices and 105 ATM machines in West Virginia, Central and Eastern
Ohio and Western Pennsylvania, offering retail banking, corporate banking,
personal and corporate trust services, brokerage services, mortgage banking and
insurance. Economic factors such as market interest rates, local and regional
economic conditions and the competitive environment influence WesBanco's
business volumes.
The historic low interest rates during 2003 contributed to a reduction in
WesBanco's net interest margin and limited net interest income growth throughout
the year. WesBanco experienced increased loan and investment security
prepayments resulting in lower earning asset rates on the reinvestment of these
cash flows. Strong commercial loan growth during 2003 as well as a reduction of
rates on deposit products, the redemption and new issuance of trust preferred
securities at lower interest rates and the repricing of certain Federal Home
Loan Bank borrowings at current market rates helped to stabilize net interest
income. These actions offset the impact of margin compression experienced
earlier in 2003 by WesBanco and the banking industry and helped contribute to
WesBanco's record earnings.
Total investment securities increased slightly while cash flows from the
portfolio due to calls, maturities and prepayments for the year doubled over the
levels experienced in 2002. The increase in cash flows resulted in the
reinvestment of these cash flows into lower yielding investment securities
throughout 2003.
Total loans increased as a result of strong growth in commercial lending,
which was partially offset by a decline in consumer lending. WesBanco has
experienced growth in commercial and commercial real estate loans as a result of
a greater focus on new business development in all markets. Residential real
estate loans increased due to higher volumes of new loans originated, combined
with a slowing of prepayments on higher fixed rate and adjustable rate mortgages
as record mortgage refinancing volumes were reduced in the latter half of 2003.
WesBanco expects growth opportunities to continue in commercial and mortgage
lending during 2004.
E-30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
33
Total deposit growth was driven by increases in non-interest bearing demand
deposits, interest bearing demand deposits and money market accounts, which was
somewhat offset by a slight decrease in savings accounts and a decrease in
certificates of deposit as customers continued to favor non-maturity types of
deposit products in anticipation of rising interest rates. In 2004, WesBanco
will focus on lower cost transaction accounts and continue to conservatively
price its certificates of deposit to further reduce its funding costs, although
with deposit rates at artificial floors further rate reductions may be
increasingly difficult to implement.
Asset quality improved throughout 2003 as non-performing and impaired loans
showed a marked decrease, which was highlighted by the sale of certain
underperforming loans in the fourth quarter. A general upswing in economic
conditions also contributed to improvement in overall credit quality, although
it may still be too early to conclude that the downturn that began in 2000 has
clearly changed direction, particularly in our core West Virginia markets.
WesBanco also experienced a somewhat reduced level of charge-offs, normalized
for the charge-offs related to the fourth quarter asset sale, due to increased
collection efforts and improved collateral values on repossessed automobiles.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Earnings for 2003 were $36.1 million or $1.80 per share compared to $34.8
million or $1.70 per share in 2002. 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 2003 financial performance was highlighted by growth in
the loan portfolio, a reduction in interest expense, increased non-interest
income and a decrease in the effective tax rate. These positive factors were
partially offset by a lower margin caused by margin compression, which was
experienced by the banking industry as a whole throughout 2003, and an overall
increase in operating expenses, which was partially due to the inclusion of a
full year of American's results and a significant increase in employee benefits
expense. Return on average assets was 1.08% and return on average equity was
11.38% for the year ended December 31, 2003, compared to 1.13% and 10.95%, in
2002, respectively.
NET INTEREST INCOME
(Bar Chart)
NET INTEREST INCOME
(in million)
<Table>
<Caption>
99 00 01 02 03
$86.6 $83.5 $87.6 $103.6 $103.0
</Table>
Net interest income, which is WesBanco's major 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 short
and long term borrowings). Net interest income, which comprised 75.6% of total
revenues for 2003 compared to 78.8% for 2002, is affected by the general level
of interest rates, the steepness of the yield curve, changes in interest rates,
and changes in the amount and composition of interest earning assets and
interest bearing liabilities.
Net interest income for 2003 decreased $0.6 million or 0.6% in comparison to
2002. The net interest margin decreased to 3.66% for the year ended December 31,
2003 compared to 3.93% for 2002, primarily due to the sustained low interest
rate environment, which caused rate compression between loan and deposit
pricing. Loan and investment security prepayments resulted in lower earning
asset rates on the reinvestment of these cash flows. These factors were
partially offset by the volume of average earning assets increasing $215.9
million or 7.6%, compared to 2002. WesBanco's actions during 2003 to reduce the
cost of funds through the reduction of rates on deposit products, the redemption
and new issuance of trust preferred securities at lower interest rates as well
as the maturity and renewal of certain Federal Home Loan Bank borrowings at
current market rates, contributed to lower second half of the year funding
costs. Table 3 presents the impact of the changes in volume and rate on the
components of tax equivalent net interest income.
Interest income decreased $10.6 million or 6.0% for 2003 compared to 2002.
The decrease in interest income was primarily due to a decrease in the yield on
earning assets, which was partially offset by an increase in the volume of
average earning assets. As shown in Table 2, the taxable equivalent yield on
average earning assets decreased to 5.70% in 2003 from 6.47% in 2002. The
decrease in average yields was due to the current low interest rate environment,
the reinvestment of cash flows from accelerated prepayments on the investment
portfolio into securities with lower yields and existing loans repricing at the
current low interest rates, as well as lower new loan rates. This was mitigated
somewhat by loan growth, which improved overall earning asset yields as compared
to security offerings.
Interest expense decreased $10.0 million or 13.8% for 2003, compared to
2002. As shown in Table 2, the average rate paid on interest bearing liabilities
for 2003 decreased 63 basis points to 2.32%, compared to 2.95% for 2002. The
decrease in rates paid on interest bearing liabilities was partially offset by
the volume of average interest bearing liabilities increasing $236.7 million or
9.6% compared to 2002. The decrease in rates paid on interest bearing
liabilities was primarily due to WesBanco lowering rates on deposit products
throughout 2003, the redemption and new issuance of lower rate trust preferred
securities, and the maturity and renewal of certain Federal Home Loan Bank
borrowings at lower market rates. These actions taken by WesBanco in 2003
contributed to lower funding costs over the short term. During 2003, customers
continued to favor variable rate deposit products over fixed rate certificates
of deposit. Certificates of deposit, which comprise 43.2% of total interest
bearing deposits and 69.2% of the total interest expense paid on deposits,
represent a more expensive funding source for WesBanco. In 2004, $395.5 million
in certificates of deposit are scheduled to mature. If interest rates remain
relatively flat, these deposits should continue to reprice downward throughout
2004 based upon WesBanco's current certificate of deposit offering rates.
E-31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
34
TABLE 2. AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS
<Table>
<Caption>
For the years ended December 31,
---------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------- ------------------------------- -------------------------------
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) $1,845,311 $115,311 6.25% $1,789,078 $124,912 6.98% $1,559,145 $126,230 8.10%
Securities:(2)
Taxable 832,516 32,249 3.87 703,308 34,670 4.93 425,006 25,692 6.05
Tax-exempt(3) 372,991 27,265 7.31 327,331 24,568 7.51 209,268 15,892 7.59
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities 1,205,507 59,514 4.94 1,030,639 59,238 5.75 634,274 41,584 6.56
Federal funds sold 20,451 234 1.14 35,683 604 1.69 42,421 1,687 3.98
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets(3) 3,071,269 $175,059 5.70% 2,855,400 $184,754 6.47% 2,235,840 $169,501 7.58%
- ---------------------------------------------------------------------------------------------------------------------------------
Other assets 283,971 235,070 167,593
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets $3,355,240 $3,090,470 $2,403,433
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing demand
deposits $ 286,432 $ 998 0.35% $ 267,944 $ 1,685 0.63% $ 245,712 $ 3,920 1.60%
Money market 542,002 10,879 2.01 468,696 12,890 2.75 374,100 14,006 3.74
Savings deposits 358,461 1,893 0.53 352,333 3,852 1.09 252,606 4,671 1.85
Certificates of deposit 957,759 30,969 3.23 946,425 38,481 4.07 776,852 43,632 5.62
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 2,144,654 44,739 2.09 2,035,398 56,908 2.80 1,649,270 66,229 4.02
Federal Home Loan Bank
borrowings 355,960 13,932 3.91 264,363 11,879 4.49 87,672 4,497 5.13
Other borrowings 175,909 2,398 1.36 151,722 2,851 1.89 157,718 5,628 3.57
Trust preferred securities
and junior subordinated
debt 22,260 1,443 6.48 10,603 917 8.65 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 2,698,783 62,512 2.32% 2,462,086 72,555 2.95% 1,894,660 76,354 4.03%
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing demand
deposits 301,033 279,560 228,936
Other liabilities 37,933 30,762 22,759
Shareholders' Equity 317,491 318,062 257,078
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $3,355,240 $3,090,470 $2,403,433
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.38% 3.52% 3.55%
Taxable equivalent net
interest margin(3) $112,547 3.66 $112,199 3.93 $ 93,147 4.17
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(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 income
on loans are not material.
(2) Average yields on securities available for sale have been calculated based
on amortized cost.
(3) The yield on earning assets and the net interest margin are presented on a
fully taxable-equivalent (FTE) and annualized basis. The FTE basis adjusts
for the tax benefit of income on certain tax-exempt loans and investments
using the federal statutory tax rate of 35% for each period presented.
WesBanco believes this measure to be the preferred industry measurement of
net interest income and provides relevant comparison between taxable and
non-taxable amounts.
TABLE 3. RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST
EXPENSE(1)
<Table>
<Caption>
2003 COMPARED TO 2002 2002 Compared to 2001
--------------------------------- ---------------------------------
NET INCREASE Net Increase
(IN THOUSANDS) VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest income:
Loans, net of unearned income $ 3,831 $(13,432) $ (9,601) $17,291 $(18,609) $(1,318)
Taxable securities 5,739 (8,160) (2,421) 14,402 (5,424) 8,978
Tax-exempt securities(2) 3,352 (655) 2,697 8,864 (188) 8,676
Federal funds sold (210) (160) (370) (235) (848) (1,083)
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income change(2) 12,712 (22,407) (9,695) 40,322 (25,069) 15,253
- ---------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in interest expense:
Interest bearing demand deposits 557 (1,244) (687) 327 (2,562) (2,235)
Money market 1,816 (3,827) (2,011) 3,083 (4,199) (1,116)
Savings deposits 66 (2,025) (1,959) 1,909 (2,728) (819)
Certificates of deposit 456 (7,968) (7,512) 8,363 (13,514) (5,151)
Federal Home Loan Bank borrowings 3,729 (1,676) 2,053 5,780 1,602 7,382
Other borrowings 414 (867) (453) (207) (2,570) (2,777)
Trust preferred securities and junior subordinated debt 803 (277) 526 917 -- 917
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense change 7,841 (17,884) (10,043) 20,172 (23,971) (3,799)
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income increase (decrease)(2) $ 4,871 $ (4,523) $ 348 $20,150 $ (1,098) $19,052
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Changes to rate/volume are allocated to both rate and volume on a
proportionate dollar basis.
(2) The yield on earning assets and net interest margin are presented on a fully
taxable-equivalent (FTE) and annualized basis. The FTE basis adjusts for the
tax benefit of income on certain tax-exempt loans and investments using the
federal statutory tax rate of 35% for each period presented. WesBanco
believes this measure to be the preferred industry measurement of net
interest income and provides relevant comparison between taxable and
non-taxable amounts.
E-32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
35
PROVISION FOR LOAN LOSSES
The provision for loan losses is determined by management as the amount to
be added to the allowance for loan losses after net charge-offs have been
deducted to bring the allowance to a level considered appropriate to absorb
probable losses in the loan portfolio. For additional information see the
Allowance for Loan Losses section of Loans and Credit Risk included in this
Management's Discussion and Analysis. The provision for loan losses in 2003
increased to $9.6 million compared to $9.4 million in 2002 primarily due to
changes in the size and composition of the loan portfolio in relation to
historical loss experience.
NON-INTEREST INCOME
Non-interest income increased by $5.4 million or 19.3% compared to 2002.
Deposit activity revenue increased $1.1 million or 9.8% compared to 2002,
primarily due to growth in deposit activity fees from an increase in deposit
accounts and a new fee schedule, as well as an increase in Automated Teller
Machine ("ATM") income and higher debit card interchange income. Bank owned life
insurance income increased by approximately $1.8 million or 138.9% compared to
2002 as a result of an additional $40.0 million investment made during December
2002.
Trust fees increased $0.1 million or 0.9% compared to 2002 reflecting higher
equity valuations, new account relationships, and to a lesser extent a new fee
schedule for certain account types applied late in 2003. The market value of
trust assets at December 31, 2003 was $2.8 billion, an increase of $475.9
million or 20.7% from December 31, 2002. The increase occurred primarily in the
second half of the year due to a recent recovery in valuations in the equity
markets.
In 2003, WesBanco sold $5.8 million of underperforming commercial real
estate loans as part of management's focus on reducing credit risk and improving
the quality of the loan portfolio. WesBanco recorded charge-offs of $1.2 million
to the allowance for loan losses and included in other income a gain of $0.9
million on one loan that had been previously charged-down to less than its
selling price. As WesBanco had previously established reserves for these loans,
the sale did not have a material impact on the provision for loan losses. For
additional information, see the Allowance for Loan Losses section of
Loans and Credit Risk included in this Management's Discussion and Analysis.
(Bar Chart)
Non-interest income To Average Assets
<Table>
<Caption>
99 00 01 02 03
NON-INTEREST INCOME
TO AVERAGE ASSETS 1.09% 1.02% 1.04% 0.90% 0.99%
</Table>
Net securities gains increased $0.9 million or 46.9% in 2003, compared to
2002, as WesBanco sold certain mortgage-backed securities and callable agency
securities exhibiting high prepayment rates, and to a lesser extent certain
securities later in 2003 that would indicate extension risk in a rising rate
environment. In 2003, WesBanco recognized $0.1 million in "other than temporary"
impairment losses on certain publicly traded equity and corporate bond
investments compared to impairment losses of $0.9 million recorded in 2002.
NON-INTEREST EXPENSE
WesBanco continues to make the necessary strategic investments in its
products and services, technology systems, and its branch and ATM network in
order to increase its competitive presence in the market areas it serves as well
as exploring expansion into new market areas. Accordingly non-interest expenses
increased $5.2 million or 6.7% over 2002, a portion of which was related to a
full year of expenses from the March 2002 American Bancorporation acquisition.
WesBanco's efficiency ratio on a GAAP basis was 56.12% in 2003 compared to
54.73% in 2002.
(Bar Chart)
Non-interest expense to Average Assets
<Table>
<Caption>
99 00 01 02 03
NON-INTEREST EXPENSE
TO AVERAGE ASSETS 3.01% 2.82% 2.72% 2.48% 2.44%
</Table>
Salaries and wages, which comprise the largest component of operating
expenses, increased $1.6 million or 5.2% in 2003 primarily due to normal salary
increases and additional production-related incentive compensation. Employee
benefit costs increased $2.5 million or 31.7% compared to 2002, primarily due to
a $1.6 million increase in pension costs, an increase of $0.3 million in health
care costs and a $0.3 million increase in payroll taxes, which rise in relation
to salaries and wages. The pension expense increase in 2003 was due to reduced
pension asset values and interest rate factors experienced in 2002. At year end
2003, increased pension contributions and improving pension asset values allowed
WesBanco to reverse a minimum pension liability of $3.0 million, net of tax, to
other comprehensive income, which reduced a similar charge recorded to other
comprehensive income in 2002. WesBanco anticipates pension expense of
approximately $2.3 million in 2004, consistent with 2003. Health care expense
increased $0.3 million in 2003 compared to 2002, primarily due to rising health
care costs.
Full-time equivalent employees decreased to 1,124 as of December 31, 2003
compared to 1,156 as of December 31, 2002.
For 2003, other non-interest expense increases were experienced in the
following areas: $0.5 million in occupancy expense due to higher maintenance
costs, $0.5 million in marketing expenses from an expanded marketing campaign, a
$0.6 million write-off of unamortized trust preferred securities issuance costs
related to the early redemption of $12.65 million in trust preferred securities
in June 2003, and a $0.6 million increase in the amortization of expenses
associated with investments in low-income housing tax credit projects. These
increases were offset in 2003 by a $2.3 million decrease in merger expenses
related to the American acquisition.
During 2003, WesBanco recorded $1.4 million in core deposit intangible
amortization associated with deposits acquired in the American acquisition, down
from $1.8 million in 2002. The decrease was due to the core deposit intangible
being amortized on a declining balance basis over its estimated average life.
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 goodwill amortization
approximated $1.3 million. See Notes 1, 2 and 6 of the Consolidated Financial
Statements for more information on accounting for goodwill and core deposit
intangibles.
In 2003, WesBanco acquired the naming rights for a 10-year period to the
Wheeling Civic Center, a multi-function sports arena, which officially changed
the name to "WesBanco Arena". The overall 10-year cost to WesBanco is $2.1
million or approximately $0.2 million per year. The annual cost of $0.2 million
represents a reallocation of WesBanco's overall marketing budget.
E-33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
36
INCOME TAXES
The provision for income taxes decreased by $1.9 million or 18.2% in 2003
compared to 2002. The decline in the provision was caused by a $1.8 million
increase in state and municipal tax-exempt interest income and a similar
increase in income on bank-owned life insurance. These factors lowered the
effective tax rate to 19.4% for 2003 from 23.4% for 2002. In 2002 the effective
tax rate was reduced by certain prior years' favorable tax settlements. For
2004, it is currently anticipated that the effective tax rate will approximate
19.5%.
(Bar Chart)
Effective tax rate
<Table>
<Caption>
99 00 01 02 03
EFFECTIVE TAX RATE 29.3% 31.3% 29.8% 23.4% 19.4%
</Table>
Federal income tax expense decreased $0.8 million to
$8.1 million in 2003 from $8.9 million in 2002 primarily
due to an increase in tax exempt income. 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 2003 and 2002. West Virginia income
tax, included in the provision for income taxes, was $0.6
million for 2003 compared to $1.7 million for 2002. This decrease was primarily
due to certain strategic business and tax-planning initiatives implemented in
early 2003. The West Virginia provision was reduced by $0.4 million in 2002 for
prior years' tax settlements resolved in 2002.
WesBanco's offices located in Ohio are subject to an Ohio franchise tax
based on capital, which is assessed on capital at the beginning of the year,
rather than a corporate net income tax. Ohio franchise taxes are included in
other operating expense.
FINANCIAL CONDITION
SECURITIES
Securities, which represent a source of liquidity for WesBanco, increased
$7.2 million between December 31, 2003 and December 31, 2002. As shown in Table
4, available for sale securities, at fair value, representing 63.8% of total
securities at December 31, 2003 increased $72.1 million or 10.4%. Held to
maturity securities, representing the remaining 36.2% of total securities
decreased $64.9 million or 13.0% during 2003. At December 31, 2003 the average
yield of the available for sale portfolio was 3.90% with an average maturity of
3.3 years. For the same period, the average yield of the held to maturity
portfolio was 6.52% with an average maturity of 4.9 years.
(Bar Chart)
Total Securities
(in million)
<Table>
<Caption>
99 00 01 02 03
TOTAL SECURITIES $568 $546 $758 $1194 $1201
</Table>
During 2003, securities available for sale and held to maturity increased as
purchases of $750.1 million exceeded cash flows from sales, maturities, paydowns
and calls of $724.1 million. These purchases along with the reinvestment cash
flows from sales, maturities, paydowns and calls into lower yielding securities,
coupled with the increased premium amortization on mortgage backed securities
and collateralized mortgage obligations due to elevated prepayment rates
decreased the yield on taxable securities to 3.87% in 2003 from 4.93% in 2002
and decreased, on a tax equivalent basis, the yield on tax exempt securities to
7.31% in 2003 from 7.51% in 2002. The decrease in the yield on investment
securities in 2003 was partially offset by the increased tax efficiency gained
through the $45.7 million increase in the average volume of tax exempt
securities from 2003 to 2002.
At December 31, 2003, total unamortized premium and total unamortized
discount on the investment portfolio, as a percentage of the total investment
portfolio, was 0.88% and 1.68%, respectively. Total premium on the investment
portfolio, which relates primarily to collateralized mortgage obligations and
mortgage-backed securities in the available for sale portion of the investment
portfolio, is subject to increased amortization in times of accelerated
prepayments. The premium amortization on the investment portfolio recorded as a
reduction to interest income for 2003 was $7.2 million compared to $2.7 million
in 2002. The discount on obligations of states and political subdivisions, which
have longer average maturities, comprises 93.5% of the total discount and in a
rising rate environment is relatively constant due to WesBanco accreting the
discount to the maturity date of the security. The discount accretion on
obligations of states and political subdivisions is only impacted if the
securities are called by the issuer. Discount accretion on the investment
portfolio recorded into interest income for 2003 was $1.7 million compared to
$1.6 million in 2002.
WesBanco recorded unrealized pre-tax gains on available for sale securities
of $1.0 million as of December 31, 2003 compared to a $17.1 million gain as of
December 31, 2002. These unrealized gains represent temporary fluctuations
resulting from changes in market rates in relation to average yields in the
available for sale portfolio. WesBanco may impact the magnitude of the fair
value adjustment by managing both the volume and average maturities of
securities that are classified as available for sale as well as the portion of
new investments allocated to this category versus the held to maturity
portfolio. If these securities were held to their respective maturity dates, no
fair value gain or loss would be realized. During 2003 securities with a total
carrying value of $563.5 million either matured or were called compared to
$252.5 million in 2002, which is indicative of the high prepayment rates
experienced throughout 2003. In addition, $160.6 million of available for sale
securities were sold during 2003 compared to $274.1 million in 2002.
E-34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
37
TABLE 4. COMPOSITION OF SECURITIES
<Table>
<Caption>
December 31,
-----------------------------------
(IN THOUSANDS) 2003 2002 2001
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Securities held to maturity (at amortized cost):
U.S. Treasury and Federal Agency securities $ 39,574 $ 86,144 $ 1,001
Obligations of states and political subdivisions(1) 369,816 382,752 221,866
Other debt securities 24,836 30,265 18,086
- -------------------------------------------------------------------------------------------------
Total securities held to maturity 434,226 499,161 240,953
- -------------------------------------------------------------------------------------------------
Securities available for sale (at fair value):
U.S. Treasury and Federal Agency securities 387,419 362,694 307,250
Obligations of states and political subdivisions(1) 17,944 8,152 12,076
Mortgage-backed securities 348,080 297,923 178,916
Corporate and other securities(2) 13,440 25,966 19,275
- -------------------------------------------------------------------------------------------------
Total securities available for sale 766,883 694,735 517,517
- -------------------------------------------------------------------------------------------------
Total securities $1,201,109 $1,193,896 $758,470
- -------------------------------------------------------------------------------------------------
</Table>
(1) There are no individual securities included in obligations of states and
political subdivisions or other securities, which individually or in the
aggregate exceed ten percent of shareholders' equity.
(2) Other securities, classified as available for sale, include equity interests
in business corporations.
TABLE 5. MATURITY DISTRIBUTION AND YIELD ANALYSIS OF SECURITIES
<Table>
<Caption>
DECEMBER 31, 2003
-----------------------------------------------------------------------------
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 $ 37,077 3.39% $ 2,497 2.67% -- -- -- --
Obligations of states and political
subdivisions(1) 9,531 7.06 59,279 7.06 $154,326 6.79% $146,680 6.81%
Other securities(2) -- -- -- -- -- -- 24,836 1.89
- -------------------------------------------------------------------------
Total securities held to maturity 46,608 4.14 61,776 6.88 154,326 6.79 171,516 6.07
- -------------------------------------------------------------------------
Securities available for sale:(3)
U.S. Treasury and Federal Agency
securities 109,665 2.84 216,042 3.72 61,615 5.37 -- --
Obligations of states and political
subdivisions(1) 221 6.50 2,935 4.31 4,434 5.04 10,618 5.72
Mortgage-backed securities(4) 8,638 4.05 195,551 3.97 144,197 4.08 254 3.11
Corporate and other securities(2) 5,960 3.24 1,005 4.28 -- -- 4,761 2.98
- -------------------------------------------------------------------------
Total securities available for sale 124,484 2.95 415,533 3.84 210,246 4.48 15,633 4.88
- -------------------------------------------------------------------------
Total securities $171,092 3.27% $477,309 4.23% $364,572 5.46% $187,149 5.98%
- -------------------------------------------------------------------------
</Table>
* 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 using the federal statutory tax
rate of 35%.
(2) Other securities include securities with no stated maturity date.
(3) Maturity amounts and 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.
E-35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
38
LOANS AND CREDIT RISK
LOAN PORTFOLIO
<Table>
<Caption>
(Bar Chart)
Total Loans
(in millions)
99 00 01 02 03
--------- -------- -------- -------- --------
$ 1,523 $1,591 $1,540 $1,821 $1,934
</Table>
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 6.
Total loans increased $112.7 million or 6.2% between December 31, 2003 and
December 31, 2002 as a result of substantial growth in commercial lending, which
was partially offset by a decline in consumer lending. As a result, WesBanco's
loan portfolio at December 31, 2003 is more weighted toward commercial lending
compared to the portfolio's mix at December 31, 2002.
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 the inherent risk of a change in repayment capacity, economic
conditions and other factors beyond WesBanco's control can adversely impact
credit risk. Each category of lending also entails certain distinct elements of
risk, which are explained further in each section of this Management's
Discussion and Analysis.
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
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 the loan, including current market appraisals or
other valuations; and other factors unique to each loan that may increase or
mitigate its risk.
The primary factors that are considered in determining the repayment
capacity of commercial borrowers include their historical and projected earnings
and cash flow, capital resources, liquidity and leverage. Other factors such as
the industry in which the business operates, its competitive advantages and
disadvantages, management, environmental risks and other external influences are
also evaluated to determine their potential impact on repayment capacity.
Debt-to-income ratios and credit bureau scores are the primary factors that are
considered in determining the repayment capacity of consumer borrowers,
including residential real estate and home equity loans.
TABLE 6. COMPOSITION OF LOANS
<Table>
<Caption>
December 31,
------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------------ ------------------ ------------------ ------------------ ------------------
% OF % of % of % of % of
(DOLLARS IN THOUSANDS) AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Loans:
Commercial $ 369,786 19% $ 306,071 17% $ 271,269 18% $ 268,633 17% $ 276,383 18%
Commercial real estate 623,243 32 504,902 28 342,337 22 315,933 20 268,808 18
Residential real estate 577,362 30 569,095 32 501,916 33 554,373 35 563,279 37
Home equity 111,981 6 117,964 6 98,400 6 86,427 5 64,277 4
Consumer 249,425 13 318,129 17 320,251 21 362,945 23 340,946 22
- ------------------------------------------------------------------------------------------------------------------------------------
Total portfolio loans 1,931,797 100 1,816,161 100 1,534,173 100 1,588,311 100 1,513,693 99
Loans held for sale 1,741 -- 4,724 -- 5,522 -- 2,391 -- 9,753 1
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans $1,933,538 100% $1,820,885 100% $1,539,695 100% $1,590,702 100% $1,523,446 100%
- ------------------------------------------------------------------------------------------------------------------------------------
</Table>
Loans are presented gross of the allowance for loan losses, net of unearned
income on consumer loans and unamortized net deferred loan fees.
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
("SBA"). Most commercial lines of credit are renewable or may be cancelled by
WesBanco annually. However, lines of credit may also be committed for more than
one year when appropriate. 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, including 1-to-4 family rental properties and multi-family
apartment buildings. 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
date or an option to call the loan of 10 years or less.
Commercial loans increased $63.7 million or 20.8% and commercial real estate
loans increased $118.3 million or 23.4% between December 31, 2003 and December
31, 2002. These increases are attributed primarily to increased loan demand in
WesBanco's market areas, increased calling efforts on prospective commercial
customers, new and repositioned lending personnel and improved penetration of
new markets in Southwestern Pennsylvania and Central Ohio. Commercial loan
demand was stronger in the second half of 2003 as the general economy began to
exhibit signs of rebounding from the downturn that began late in 2000 and
extended through 2002. Demand for commercial real estate loans was also strong
throughout 2003 as investors continued to seek opportunities for higher returns
on investments in real estate than the rates of return that have been available
in the equity and bond markets. Record low interest rates coupled with
borrowers' expectations of less frequent rate adjustments also fueled a
significant amount of refinancing activity thereby lowering and extending the
duration of rates earned on commercial real estate loans.
E-36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
39
TABLE 7. MATURITY DISTRIBUTION OF COMMERCIAL AND COMMERCIAL REAL ESTATE LOANS
<Table>
<Caption>
DECEMBER 31, 2003
------------------------------------------------------
AFTER ONE
IN ONE YEAR THROUGH AFTER FIVE
(IN THOUSANDS) YEAR OR LESS FIVE YEARS YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Commercial $166,986 $ 89,720 $113,080 $369,786
Commercial real estate 60,191 96,334 466,718 623,243
- ------------------------------------------------------------------------------------------------------------------
Total $227,177 $186,054 $579,798 $993,029
- ------------------------------------------------------------------------------------------------------------------
Fixed rates $ 27,999 $ 76,548 $ 77,675 $182,222
Variable rates 199,178 109,506 502,123 810,807
- ------------------------------------------------------------------------------------------------------------------
Total $227,177 $186,054 $579,798 $993,029
- ------------------------------------------------------------------------------------------------------------------
</Table>
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
borrowers to have adequate down payments or equity in the property, thereby
limiting the amount of the loan to generally not more than 80% of the appraised
value of the property, unless there are sufficient mitigating factors that would
reduce the risk of a higher loan to value ratio. Lower loan to value ratios may
be required for certain types of properties, or when factors exist that may
increase the potential volatility of the market value of the collateral.
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 to inspect collateral properties and monitoring
the factors in each of WesBanco's markets that influence real estate 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 diverse range of businesses and property types
across all sectors of the economy. Tables 8 and 9 set forth information
pertaining to commercial loans, including those secured by real estate, by
industry sector and commercial real estate loans by property type, respectively.
Growth in commercial and commercial real estate loans during 2003 did not
materially change the industry or property type mix of the portfolio.
TABLE 8. COMMERCIAL AND COMMERCIAL REAL ESTATE LOAN DISTRIBUTION BY INDUSTRY
SECTOR
<Table>
<Caption>
DECEMBER 31, 2003
-------------------------------------------------------------
AVERAGE LARGEST BALANCE
OUTSTANDING % OF % OF LOAN TO A SINGLE
(DOLLARS IN THOUSANDS) BALANCE TOTAL CAPITAL BALANCE OBLIGOR
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Accommodation $ 64,093 6% 20% $241 $10,137
Construction 75,726 8 24 95 3,980
Education 48,195 5 15 803 7,582
Government 25,953 3 8 92 1,841
Healthcare 54,613 5 17 124 2,552
Manufacturing 38,949 4 12 110 1,923
Real estate 318,540 32 100 208 12,294
Retail 104,947 11 33 143 1,850
Services 99,783 10 31 100 8,234
Wholesale 38,911 4 12 110 3,726
Other 123,319 12 39 81 7,771
- ------------------------------------------------------------------------------------------------------------------
Total $993,029 100%
- -------------------------------------------------------------------------
</Table>
E-37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
40
TABLE 9. COMMERCIAL REAL ESTATE LOAN DISTRIBUTION BY PROPERTY TYPE
<Table>
<Caption>
DECEMBER 31, 2003
-------------------------------------------------------------
AVERAGE LARGEST BALANCE
OUTSTANDING % OF % OF LOAN FOR A SINGLE
(DOLLARS IN THOUSANDS) BALANCE TOTAL CAPITAL BALANCE PROPERTY
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
1-to-4 family rentals $ 63,903 10% 20% $ 68 $ 962
Apartment buildings 81,761 13 26 457 5,570
Hotels and motels 20,435 3 6 1,277 6,268
Industrial property 31,964 5 10 340 3,376
Land-improved 23,956 4 8 159 2,127
Land-unimproved 14,477 2 5 106 2,960
Multiple or mixed use 67,452 11 21 613 12,294
Office buildings 87,524 14 27 421 8,000
Retail space 60,279 10 19 316 4,762
Other 171,492 28 54 159 10,137
- ------------------------------------------------------------------------------------------------------------------
Total $623,243 100%
- -------------------------------------------------------------------------
</Table>
Commercial and commercial real estate loans are generally made to borrowers
that are primarily located within WesBanco's market areas. There are no
significant loans to businesses or loans 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. Loans to small to mid-size
businesses represent approximately 75% of the commercial loan portfolio. The
average balance of commercial loans was less than $100,000 and the average
balance of commercial real estate loans approximated $200,000 at December 31,
2003.
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 $31.3 million at December 31, 2003 and $8.9 million at
December 31, 2002. This increase is primarily the result of WesBanco's
participation in loans originated by other financial institutions in the Central
Ohio market.
Included in commercial real estate loans are commercial construction loans
totaling $33.0 million at December 31, 2003 and $11.1 million at December 31,
2002. This increase is primarily attributed to residential housing development
activity in the Central Ohio market. Commercial real estate construction loans
are generally made only when WesBanco also commits to the permanent financing of
the project, has a takeout commitment from another lender for the permanent
loan, or the loan is expected to be repaid from the sale of subdivided property.
This type of loan has a unique risk that the builder or developer may not be
able to complete the project within a designated period of time or within
budget. This risk is mitigated by generally limiting commercial real estate
construction activity to established developers who operate in WesBanco's
geographic markets, periodically inspecting construction in progress, and
disbursing funds only upon completion of specified stages of each project.
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. 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 as 30 year fixed rate mortgages are
generally sold in the secondary market. The remainder of the portfolio has
interest rates that adjust between one to five years. None of WesBanco's
residential real estate loans would be considered "sub-prime" as that term is
commonly used in the industry.
Residential real estate loans increased $8.3 million or 1.5% between
December 31, 2003 and December 31, 2002. This modest increase reflects the
prepayment of both higher fixed rate and adjustable rate mortgages as customers
sought to capitalize on record low interest rates. Fifteen-year fixed rate
residential real estate loans totaled approximately $180.0 million at December
31, 2003 compared to $142.0 million at December 31, 2002. This increase in fixed
rate loans is attributable to the significant amount of refinancing that
occurred throughout 2003 as consumers sought to lock in their rates at the
historically low levels that prevailed for much of the year. The average balance
of residential real estate loans approximated $56,000 at December 31, 2003.
During 2003, WesBanco also purchased $10.1 million in 15-year fixed-rate
residential real estate loans, in a pool, which has similar characteristics as
WesBanco's current residential real estate portfolio and are geographically
located in central Pennsylvania.
Included in residential real estate loans are residential construction loans
totaling $9.5 million at December 31, 2003 and $11.9 million at December 31,
2002. This decrease is attributable to a general slowing of housing starts in
the latter part of the year. 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 type of loan has a unique risk that the
builder may not be able to complete the residence within a designated period of
time or within budget.
Credit risk 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
E-38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
41
credit policy generally must be supported by private mortgage insurance. Credit
risk is also managed by monitoring delinquency levels and trends and economic
and other factors that influence real estate values in each of WesBanco's
markets. Construction risk is mitigated by evaluating the builder's reputation
and capacity to complete each project, periodically inspecting construction in
progress, and disbursing funds only upon completion of specified stages of each
project.
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.
Home equity lines of credit decreased $6.0 million or 5.1% between December
31, 2003 and December 31, 2002. This decrease is attributed to many homeowners
consolidating their home equity balances when they refinanced their first
mortgage as well as a general decrease in usage of available lines. The average
home equity line of credit balance was less than $30,000, and outstanding
balances of home equity lines generally range from 55 to 60 percent, on average,
of total home equity line of credit commitments. 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 $68.7 million or 21.6% between December 31, 2003
and December 31, 2002. This decrease is primarily attributed to competition from
zero-percent or low interest rate financing offered by large domestic automobile
manufacturer finance companies, but also reflects WesBanco's tightening of
credit standards for indirect automobile lending in 2002.
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 15.1% to $46.5 million in 2003 compared to $54.8 million in 2002. This
decrease primarily reflects WesBanco's emphasis on originating residential real
estate loans for its own portfolio to counter rapidly increasing prepayments.
Loans held for sale decreased $3.0 million or 63.1% between at December 31, 2003
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, which has the effect of minimizing the amount of
such loans that are included in the portfolio at any point in time. 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. However, lines of credit and letters of credit
may also be committed for more than one year when appropriate. 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 10. MATURITY DISTRIBUTION OF LOAN COMMITMENTS
<Table>
<Caption>
DECEMBER 31, 2003
----------------------------------------------------
FOR ONE ONE YEAR TO OVER
(IN THOUSANDS) YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Lines of credit:
Commercial $126,697 $11,684 $ 15,497 $153,878
Commercial real estate 41,503 7,386 11,995 60,884
Residential real estate 161 -- 4,635 4,796
Home equity 6,077 297 89,976 96,350
Consumer 7,643 1,518 653 9,814
Letters of credit 26,313 4,649 617 31,579
- ------------------------------------------------------------------------------------------------------------------
Total $208,394 $25,534 $123,373 $357,301
- ------------------------------------------------------------------------------------------------------------------
</Table>
E-39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
42
Total commitments to extend credit increased $66.2 million or 22.8% between
December 31, 2003 and December 31, 2002. This increase is attributed to growth
in commercial and commercial real estate construction lines of credit,
consistent with the overall growth in those types of loans during the year, and
to a lesser extent by an increase in the availability of home equity lines of
credit due to decreased usage of these accounts.
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 repossessed
automobiles acquired to satisfy defaulted consumer loans. Other impaired loans
include certain loans that are internally classified as substandard or doubtful.
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.
Except for certain consumer and residential real estate loans as discussed in
the Notes to the Consolidated Financial Statements, when a loan is placed on
non-accrual, interest income may not be recognized as cash payments are
received.
Loans are categorized as renegotiated when WesBanco, for economic or legal
reasons related to a borrower's financial difficulties, grants a concession to
the borrower that it would not otherwise consider. Concessions that may be
granted include a reduction of the interest rate, the amount of accrued
interest, or the face amount of the loan; as well as an extension of the
maturity date or the amortization schedule.
WesBanco considers loans that are classified as substandard or doubtful
because of a borrower's diminished repayment capacity to be impaired when they
are not fully secured by collateral. Such loans continue to accrue interest,
have not been renegotiated, and may or may not have a record of delinquent
payments.
TABLE 11. NON-PERFORMING ASSETS, OTHER IMPAIRED LOANS AND LOANS PAST DUE 90 DAYS
OR MORE
<Table>
<Caption>
December 31,
---------------------------------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Non-accrual:
Commercial $ 4,093 $ 3,598 $ 2,598 $ 1,048 $ 1,053
Commercial real estate 3,901 3,519 1,258 4,096 2,711
Residential real estate 266 301 143 361 358
Consumer 2 62 31 56 36
- ----------------------------------------------------------------------------------------------------------------
Total 8,262 7,480 4,030 5,561 4,158
- ----------------------------------------------------------------------------------------------------------------
Renegotiated:
Commercial -- -- -- -- 783
Commercial real estate 653 2,633 3,735 381 27
Consumer -- 13 21 36 3
- ----------------------------------------------------------------------------------------------------------------
Total 653 2,646 3,756 417 813
- ----------------------------------------------------------------------------------------------------------------
Total non-performing loans 8,915 10,126 7,786 5,978 4,971
Other real estate owned and repossessed assets 2,907 4,213 3,215 3,424 3,512
- ----------------------------------------------------------------------------------------------------------------
Total non-performing assets 11,822 14,339 11,001 9,402 8,483
- ----------------------------------------------------------------------------------------------------------------
Other impaired loans:
Commercial 3,935 6,965 2,230 4,060 2,577
Commercial real estate 2,096 4,284 4,125 7,453 6,129
- ----------------------------------------------------------------------------------------------------------------
Total other impaired loans 6,031 11,249 6,355 11,513 8,706
- ----------------------------------------------------------------------------------------------------------------
Total non-performing assets and other impaired loans $17,853 $25,588 $17,356 $20,915 $17,189
- ----------------------------------------------------------------------------------------------------------------
Non-performing loans as a percentage of total loans 0.46% 0.56% 0.51% 0.38% 0.33%
Non-performing assets as a percentage of total assets 0.34 0.43 0.44 0.41 0.37
Percentage of non-performing assets to total loans
outstanding and other real estate owned and repossessed
assets 0.61 0.79 0.71 0.59 0.56
Percentage of non-performing loans and other impaired
loans to loans outstanding 0.77 1.17 0.92 1.10 0.90
- ----------------------------------------------------------------------------------------------------------------
Past due 90 days or more:
Commercial $1,349 $ 1,460 $ 720 $1,164 $ 547
Commercial real estate 1,100 3,766 1,469 1,542 2,629
Residential real estate 3,858 4,688 4,206 1,984 1,545
Home equity 290 344 490 148 92
Consumer 1,198 1,847 3,611 1,743 1,219
- ----------------------------------------------------------------------------------------------------------------
Total past due 90 days or more $7,795 $12,105 $10,496 $6,581 $6,032
- ----------------------------------------------------------------------------------------------------------------
</Table>
Non-performing loans, which are defined as non-accrual and renegotiated
loans, decreased $1.2 million or 12.0% between December 31, 2003 and December
31, 2002. The prolonged downturn in the general economy, which began late in
2000 and extended throughout 2002 and into the current year, placed significant
pressure on many businesses and generally resulted in increased levels of non-
E-40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
43
performing loans throughout 2003. The decrease in non-performing loans at
December 31, 2003 is primarily the result of the sale in the fourth quarter of
$4.9 million of certain commercial real estate loans that were included in this
category.
Other real estate owned and repossessed assets decreased $1.3 million or
31.0% between December 31, 2003 and December 31, 2002. Other real estate owned
acquired through or in lieu of foreclosure and repossessed assets decreased due
to aggressive marketing of foreclosed properties and auctioning of repossessed
automobiles throughout the year.
Other impaired loans decreased $5.2 million or 46.4% between December 31,
2003 and December 31, 2002. This decrease is due to improvement in the financial
condition and repayment capacity of certain borrowers whose loans were
previously considered to be impaired, as well as reduction in the balance of
certain loans to less than the fair value of their collateral.
Loans past due 90 days or more and still accruing interest decreased $4.3
million or 35.6% between December 31, 2003 and December 31, 2002. These
decreases reflect primarily the results of increased collection efforts for all
types of loans when they become past due 30 days and more effective
administration of underperforming commercial and commercial real estate loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses increased $1.2 million or 4.6% between
December 31, 2003 and December 31, 2002. This increase reflects management's
estimate of probable losses associated with economic conditions in the Upper
Ohio Valley, and the change in the mix of the loan portfolio due to growth in
commercial and commercial real estate loans and the continued reduction in
consumer loans. Economic factors that influence the allowance for commercial and
commercial real estate loans include weaknesses in certain sectors of the
economy, such as the lodging, healthcare, transportation and construction
industries, as well as lower occupancy rates for office buildings and retail
space in certain markets. Economic factors that influence the allowance for
consumer loans include increased personal bankruptcies and defaults by consumers
that had otherwise satisfactory credit characteristics at the time of default.
Management's assessment of these factors warranted an increase in the allowance
despite decreases in non-performing and other impaired loans during the period.
Please refer to Note 1 of the Consolidated Financial Statements and "Application
of Critical Accounting Policies and Estimates" in this Management's Discussion
and Analysis for additional information.
TABLE 12. ALLOWANCE FOR LOAN LOSSES
<Table>
<Caption>
For the years ended December 31,
---------------------------------------------------
(DOLLARS IN THOUSANDS) 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Beginning balance -- Allowance for loan losses $25,080 $20,786 $20,030 $19,752 $19,098
Allowance for loan losses of acquired (sold) banks-net -- 3,903 -- -- 192
Allowance for loan losses allocated to (sold) credit
cards -- -- -- -- (450)
Provision for loan losses 9,612 9,359 5,995 3,225 4,295
Charge-offs:
Commercial 2,613 1,888 1,389 806 1,890
Commercial real estate 1,402 2,207 793 668 134
Residential real estate 293 328 352 137 204
Home equity 43 172 36 39 --
Consumer 4,776 5,121 3,268 2,445 2,490
- ----------------------------------------------------------------------------------------------------------------
Total charge-offs 9,127 9,716 5,838 4,095 4,718
- ----------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 126 243 49 314 457
Commercial real estate 39 37 149 34 22
Residential real estate 30 86 17 29 64
Home equity -- 2 -- -- --
Consumer 475 380 384 771 792
- ----------------------------------------------------------------------------------------------------------------
Total recoveries 670 748 599 1,148 1,335
- ----------------------------------------------------------------------------------------------------------------
Net charge-offs 8,457 8,968 5,239 2,947 3,383
- ----------------------------------------------------------------------------------------------------------------
Ending balance -- Allowance for loan losses $26,235 $25,080 $20,786 $20,030 $19,752
- ----------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs to average loans by loan type:
Commercial 0.78% 0.55% 0.50% 0.22% 0.75%
Commercial real estate 0.25 0.45 0.20 0.19 0.03
Residential real estate 0.05 0.04 0.06 0.02 0.03
Home equity 0.04 0.14 0.04 0.05 --
Consumer 1.57 1.42 0.84 0.48 0.51
- ----------------------------------------------------------------------------------------------------------------
Total ratio of net charge-offs to average loans 0.46% 0.50% 0.34% 0.19% 0.23%
- ----------------------------------------------------------------------------------------------------------------
Allowance for loan losses to total loans 1.36% 1.38% 1.35% 1.26% 1.30%
Allowance for loan losses to total non-performing loans 2.94X 2.48x 2.67x 3.35x 3.97x
Allowance for loan losses to total non-performing loans
and loans past due 90 days or more 1.57X 1.13x 1.14x 1.59x 1.80x
- ----------------------------------------------------------------------------------------------------------------
</Table>
Despite a rebound in the general economy that contributed to commercial and
commercial real estate loan growth in 2003, the Upper Ohio Valley continues to
be adversely impacted by the difficulties facing the steel industry, which
remains threatened by foreign imports, employee benefit legacy costs, and other
factors. Two of the ten largest integrated steel companies in the United States
are headquartered
E-41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
44
in the Upper Ohio Valley. Both of these companies operated under Chapter 11 of
the Bankruptcy Act for much of 2003 and have significantly reduced their
workforces. As of December 31, 2003, WesBanco had no material direct credit
exposure to the steel industry. 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 to
borrowers located in the Upper Ohio Valley.
Historical net charge-off rates are also a significant factor used in
evaluating the adequacy of the allowance. Net charge-offs decreased $0.5 million
or 5.7% between December 31, 2003 and December 31, 2002. Net charge-offs as a
percentage of average loans for the year 2003 remained virtually unchanged from
2002 levels. An increase in commercial loan charge-offs primarily attributed to
small business loans and a single borrower in the transportation industry was
offset by a reduction in commercial real estate charge-offs. Commercial real
estate charge-offs for 2003 included $1.0 million attributed to the charge-down
of certain non-performing loans upon their being transferred to loans held for
sale. Commercial real estate charge-offs for 2002 included a $1.3 million
charge-down of a non-performing loan, which was also transferred to loans held
for sale in 2003. All of these loans were subsequently sold in the same quarter
that they were transferred to the held for sale category. The excess of the
selling price over the remaining book balance of the loan that was charged-down
in 2002, which is essentially a recovery, was recorded as a gain in accordance
with current accounting pronouncements. WesBanco had previously established
reserves for all of the loans that were sold, therefore, the sale had no
material impact on the provision for loan losses. Consumer loan charge-offs
decreased as a result of increased collection efforts and improvement in resale
values of repossessed automobiles compared to the prior year. However, consumer
loan charge-offs as a percent of that category of loans increased for the second
consecutive year due to the decline in average consumer loans and general
economic conditions. Residential real estate and home equity charge-offs are not
significant in relation to total credit losses.
TABLE 13. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<Table>
<Caption>
December 31,
-----------------------------------------------
(IN THOUSANDS) 2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Commercial $ 9,852 $ 9,473 $ 6,963 $ 7,418 $ 7,519
Commercial real estate 10,660 9,046 8,421 8,437 8,273
Residential real estate 749 800 680 731 723
Home equity 223 106 59 154 26
Consumer 4,751 5,655 4,663 3,290 3,211
- -------------------------------------------------------------------------------------------------------------
Total allowance for loan losses $26,235 $25,080 $20,786 $20,030 $19,752
- -------------------------------------------------------------------------------------------------------------
</Table>
The amount allocated to commercial and commercial real estate loans
increased between December 31, 2003 and December 31, 2002 as a result of
applying historical loss rates, adjusted to reflect economic conditions to
higher balances in each of those categories of loans. Similarly, the amount
allocated to consumer loans decreased between December 31, 2003 and December 31,
2002 despite higher historical loss experience because of lower balances in that
category of loans. While management allocates the allowance to different loan
categories, the allowance is general in nature and is available to absorb credit
losses for the entire loan portfolio.
Management believes the allowance of $26.2 million is appropriate to absorb
probable credit losses associated with the loan portfolio at December 31, 2003.
However, probable losses associated with the economic conditions described above
is difficult to accurately measure and future adjustments to the allowance may
be required to the extent such losses are realized to a greater extent than is
currently estimable.
DEPOSITS
<Table>
<Caption>
Total Deposits
(in millions)
99 00 01 02 03
--------- -------- -------- -------- --------
$ 1,814 $1,870 $1,913 $2,400 $2,482
</Table>
Deposits, WesBanco's primary source of funds, increased $82.1 million or
3.4% between December 31, 2003 and December 31, 2002. For 2003, non-interest
bearing demand deposits increased $27.1 million or 9.0%, interest bearing demand
deposits increased by $31.8 million or 11.5% and the largest increase was
reflected in money market accounts, which grew $55.2 million or 10.9%, as
customers continued to favor non-maturity types of deposit products in
anticipation of rising interest rates. Savings accounts and certificates of
deposit decreased $5.0 million or 1.4% and $27.0 million or 2.8%, respectively,
compared to December 31, 2002.
The average rate paid on interest bearing deposits for 2003 decreased to
2.09% compared to 2.80% for 2002, as WesBanco reduced interest rates on deposit
products throughout the year in response to the low interest rate environment.
In 2004, WesBanco will focus on lower cost transaction accounts and continue to
conservatively price its certificates of deposit to further reduce its funding
costs, although with deposit rates at artificial floors it may be difficult to
implement further rate reductions.
TABLE 14. MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT $100,000 OR MORE
<Table>
<Caption>
December 31,
--------------------
(IN THOUSANDS) 2003 2002
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Maturity:
Under three months $ 24,294 $ 36,818
Three to six months 22,032 33,936
Six to twelve months 39,788 35,495
Over twelve months 142,504 108,369
- ----------------------------------------------------------------------------------
Total $228,618 $214,618
- ----------------------------------------------------------------------------------
</Table>
Interest expense on certificates of deposit of $100,000 or more was
approximately $6,815 in 2003, $7,443 in 2002 and $7,485 in 2001.
E-42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
45
BORROWINGS
Federal Home Loan Bank ("FHLB") borrowings increased $17.9 million or 5.2%
at December 31, 2003 compared to December 31, 2002. At December 31, 2003,
WesBanco had $361.2 million outstanding in FHLB borrowings with a weighted
average interest rate of 3.58% compared to 4.21% at December 31, 2002. The
decrease in the average rate was primarily due to the maturity of $85.2 million
in FHLB borrowings throughout 2003, which carried an average rate of 4.06%.
These maturities were replaced with $100.0 million in new FHLB borrowings at
various dates throughout 2003, which have an average rate of 1.95%. FHLB
borrowings have maturities ranging from the years 2004 to 2021. In 2003,
WesBanco entered into a commitment with the FHLB to borrow $40.0 million late in
the first quarter of 2004 at a fixed rate of 3.06%. This commitment will allow
WesBanco to replace $40.0 million in maturing FHLB fixed rate and mid-term fixed
rate borrowings that currently carry a weighted average rate of 5.07%. WesBanco
uses term FHLB borrowings as a general funding source and to more appropriately
match certain assets, as an alternative to shorter term wholesale borrowings.
WesBanco periodically analyzes overall maturities of certain FHLB borrowings and
may restructure such borrowings through prepayments, which may cause WesBanco to
incur a prepayment penalty or by utilizing interest rate swaps through the
derivatives market.
Other borrowings, which include federal funds purchased, securities sold
under repurchase agreements, treasury tax and loan notes and a revolving line of
credit, increased $42.1 million or 24.0% during 2003. WesBanco utilized the
proceeds from the additional other borrowings to improve balance sheet
liquidity.
In June 2003, WesBanco redeemed all of the 8.50% Junior Subordinated
Deferrable Interest Debentures held by WesBanco Capital Trust I, by redeeming
1,265,000 shares of its outstanding 8.50% Cumulative Trust Preferred Securities.
A total of $12.65 million of trust preferred securities were redeemed at a price
of $10.00 per share plus accrued and unpaid interest. Also in June of 2003,
WesBanco created two new trusts, WesBanco, Inc. Capital Trust II and WesBanco,
Inc. Capital Statutory Trust III, which issued $30.9 million of junior
subordinated debt to WesBanco. Please refer to Note 10 of the Consolidated
Financial Statements for additional information.
CONTRACTUAL OBLIGATIONS
The following table presents, as of December 31, 2003, significant fixed and
determinable contractual obligations by payment date. The payment amounts
represent those amounts contractually due to the recipient and do not include
accrued interest, unamortized premiums or discounts, or other similar carrying
value adjustments. Further discussion of the nature of each obligation is
included in the referenced note to the Consolidated Financial Statements.
TABLE 15. CONTRACTUAL OBLIGATIONS
<Table>
<Caption>
DECEMBER 31, 2003
----------------------------------------------------------------
CONTRACTUAL OBLIGATION PAYMENTS DUE BY PERIOD
----------------------------------------------------------------
FOOTNOTE LESS THAN ONE TO THREE TO MORE THAN
(IN THOUSANDS) REFERENCE ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS TOTAL
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Deposits without a stated maturity -- $1,551,881 -- -- -- $1,551,881
Certificates of deposit 7 395,450 $406,230 $124,175 $ 4,346 930,201
Federal Home Loan Bank borrowings 8 69,900 109,985 59,462 121,883 361,230
Other borrowings 9 217,754 -- -- -- 217,754
Junior subordinated debt 10 -- -- -- 30,936 30,936
Senior executive retirement plans and
severance agreements -- 62 220 129 524 935
Operating leases 5 1,068 1,796 811 84 3,759
Future benefit payments under pension
plans 11 1,443 2,927 3,193 11,457 19,020
- --------------------------------------------------------------------------------------------------------------------
Total $2,237,558 $521,158 $187,770 $169,230 $3,115,716
- --------------------------------------------------------------------------------------------------------------------
</Table>
WesBanco's future benefit payments under pension plans represents the
estimated amounts based on actuarial assumptions and does not necessarily
represent the actual contractual cash flows that may be required by WesBanco in
the future. See Note 11 of the Consolidated Financial Statements for more
information on employee benefit plans.
WesBanco also enters into interest rate swap agreements, which requires
quarterly cash payments to counterparties depending on changes in interest
rates. These interest rate swap agreements are carried at fair value on the
Consolidated Balance Sheet with the fair value representing the net present
value of expected future cash payments based on market interest rates as of the
balance sheet date. The fair values of the contracts change daily as market
interest rates change. Since the interest rate swap liabilities recorded on the
balance sheet at December 31, 2003 do not represent the amounts that may
ultimately be paid under these contracts, these liabilities are not included in
the table of contractual obligations presented above. See Notes 1 and 17 of the
Consolidated Financial Statements for more information on derivatives.
OFF-BALANCE SHEET ARRANGEMENTS
WesBanco is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. See Note 16 of the Consolidated Financial Statements for
additional information regarding the WesBanco's off-balance sheet arrangements
and the Loans and Credit Risk section of this Management's Discussion and
Analysis.
E-43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
46
CAPITAL RESOURCES
Shareholders' equity decreased to $318.4 million at December 31, 2003 from
$325.2 million at December 31, 2002. The decrease was primarily due to the net
purchase of $17.9 million in treasury stock in 2003, the payment of $19.2
million in dividends and a $6.2 million decrease in accumulated other
comprehensive income, which was partially offset by current year earnings of
$36.1 million. The change in other comprehensive income was primarily due to the
$9.8 million, net of tax, increase in the unrealized net losses on investment
securities and the reversal of a $3.0 million minimum pension liability charge
recorded in 2002, due to recovering pension asset values.
In accordance with the stock repurchase plans approved by the Board of
Directors, WesBanco purchased 830,659 shares during 2003 at an average price of
$24.72 per share. As of December 31, 2003, 661,117 shares of WesBanco common
stock remained authorized to be purchased under the current one million-share
stock repurchase plan, which began on April 17, 2003. The shares are purchased
for general corporate purposes, which may include potential acquisitions,
dividend reinvestment and employee benefit plans. The timing, price and quantity
of purchases are at the discretion of WesBanco, and the plan may be discontinued
or suspended at any time.
Strong and consistent earnings coupled with a high level of capital have
enabled WesBanco to continue to increase dividends per share. Effective with the
first quarter of 2003, WesBanco increased its quarterly dividend per share 2.1%
to $0.24 from $0.235. For 2003, dividends increased to $0.96 per share, or 2.7%
on an annualized basis, compared to $0.935 per share in the prior year. This
dividend increase represented the eighteenth consecutive year of dividend
increases at WesBanco. The 2003 dividend per share payout ratio was 53.3%
compared to 55.0% in 2002.
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.
<Table>
<Caption>
Return on Equity
99 00 01 02 03
--------- -------- -------- -------- --------
9.85% 10.42% 11.28% 10.95% 11.38%
</Table>
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. Certain shortcomings are
inherent in the methodologies used in the earnings simulation model. Modeling
changes in net interest income requires making certain assumptions regarding
prepayment rates, callable bonds, and adjustments to non-time deposit interest
rates which may or may not reflect the manner in which actual yields and costs
respond to changes in market interest rates. Prepayment assumptions and
<Table>
<Caption>
TABLE 16. NET INTEREST INCOME SENSITIVITY
PERCENTAGE CHANGE IN
CHANGE IN NET INTEREST INCOME FROM BASE
INTEREST RATES ------------------------------------- ALCO
(BASIS POINTS) DECEMBER 31, 2003 DECEMBER 31, 2002 GUIDELINES
-------------------------------------------------------------------
-------------------------------------------------------------------
+200 -3.04% -1.10% +/-5.0
+100 -0.39% +0.02% N/A
Flat -- -- --
-100 -1.59% -0.10% N/A
-------------------------------------------------------------------
</Table>
adjustments to non-time deposit rates at varying levels of interest rates are
based primarily on historical experience and current market rates. Security
portfolio maturities and prepayments are assumed to be reinvested in similar
instruments and callable bond forecasts are adjusted at varying levels of
interest rates. While we believe such assumptions to be reasonable, there can be
no assurance that assumed prepayment rates, callable bond forecasts and non-time
deposit rate changes will approximate actual future results. Moreover, the net
interest income sensitivity chart presented in Table 16 assumes the composition
of interest sensitive assets and liabilities existing at the beginning of the
period remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration of the maturity or repricing of specific assets
and liabilities. 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.
E-44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
47
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 or base model. WesBanco's current policy limits this exposure
to +/-5.0% of net interest income from the base model for a 12-month period.
Table 16 shows WesBanco's interest rate sensitivity at December 31, 2003 and
December 31, 2002 assuming both a 200 and 100 basis point interest rate change,
compared to a base model. Since management believes that a 200 basis point
decline in market interest rates is unlikely, only a 100 basis point change was
evaluated by ALCO. The earnings simulation model projects that net interest
income for the next 12-month period would decrease by approximately 0.39% and
3.04% if interest rates were to rise immediately by 100 and 200 basis points,
respectively. Net interest income would decrease by approximately 1.59% if
interest rates were to decline by 100 basis points. At December 31, 2003,
WesBanco's increased exposure to rising interest rates was impacted by
assumptions to slowdown prepayment speeds on loans and securities, reduce
callable bond forecasts and increase rate sensitivity on certificates of deposit
products that offer a one-time rate adjustment at any time during the product's
term.
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:
<Table>
<Caption>
DECEMBER 31, 2003
-----------------------------------------------------------------------
UNDER THREE SIX NINE
THREE TO SIX TO NINE MONTHS TO OVER
(IN THOUSANDS) MONTHS MONTHS MONTHS ONE YEAR ONE YEAR TOTAL
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS
Due from banks-interest bearing $ 3,189 -- -- -- -- $ 3,189
Federal funds sold 17,000 -- -- -- -- 17,000
Securities(1) 12,362 $ 63,255 $ 44,648 $ 50,827 $1,029,030 1,200,122
Loans 484,485 136,979 127,409 140,577 1,044,088 1,933,538
- ------------------------------------------------------------------------------------------------------------------
Total rate sensitive assets 517,036 200,234 172,057 191,404 2,073,118 3,153,849
- ------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES
Money market deposit accounts 467,694 2,787 2,723 2,667 87,424 563,295
Savings and NOW accounts 20,423 21,094 21,787 22,505 574,440 660,249
Certificates of deposit 138,944 110,300 83,212 62,994 534,751 930,201
Federal Home Loan Bank Borrowings 40,000 -- 25,000 4,900 291,330 361,230
Other borrowings 201,390 15,730 371 263 -- 217,754
Junior subordinated debt -- -- -- -- 30,936 30,936
- ------------------------------------------------------------------------------------------------------------------
Total rate sensitive liabilities 868,451 149,911 133,093 93,329 1,518,881 2,763,665
- ------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap (351,415) 50,323 38,964 98,075 554,237 $ 390,184
- ------------------------------------------------------------------------------------------------------------------
Cumulative interest rate sensitivity gap $(351,415) $(301,092) $(262,128) $(164,053) $ 390,184 --
- ------------------------------------------------------------------------------------------------------------------
</Table>
(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, 2003 emphasized
increasing asset sensitivity in anticipation of rising interest rates. Among the
strategies evaluated were the continued utilization of interest rate swap
agreements and the evaluation of the level and the possible prepayment of
borrowings. At December 31, 2003, interest rate swap agreements with notional
values totaling $98.5 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 its fixed rate 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 and lower cost
transaction based accounts.
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 and U.S. Treasury and Federal Agency
Securities maturing within three months are classified as secondary reserve
assets. These secondary reserve assets, combined with the cash flow from the
loan portfolio and the remaining sectors of the investment portfolio, and other
sources, adequately meet the liquidity requirements of WesBanco.
E-45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
48
Securities are the principal source of liquidity in total assets. Securities
totaled $1.2 billion at December 31, 2003, of which $766.9 million were
classified as available for sale. At December 31, 2003, WesBanco had
approximately $171.1 million in securities scheduled to mature within one year
compared to $123.9 million in the prior year. Due to the current low interest
rate environment, additional cash flows may be anticipated from approximately
$113.9 million in callable bonds, which have call dates within the next year.
Cash and cash equivalents of $108.2 million at December 31, 2003, also serve as
additional sources of liquidity.
Deposit flows are another principal factor affecting overall bank liquidity.
Deposits totaled $2.5 billion at December 31, 2003. Deposit flows are impacted
by current interest rates, products and rates offered by WesBanco versus its
competition, as well as customer behavior. Certificates of deposit scheduled to
mature within one year totaled $395.5 million at December 31, 2003, which
includes $86.1 million in certificates of deposit with balances of $100,000 or
more. In addition to the relatively stable core deposit base, WesBanco's banking
subsidiary maintains a line of credit with the FHLB as an additional funding
source. Available lines of credit with the FHLB at December 31, 2003 and
December 31, 2002 approximated $790.8 million and $589.4 million, respectively.
At December 31, 2003, WesBanco had $740.2 million of unpledged securities that
could be used for collateral or sold, excluding FHLB blanket liens on WesBanco's
mortgage-related assets.
The principal source of Parent Company liquidity is dividends from
WesBanco's banking subsidiary. There are various legal limitations under Federal
and State laws that limit the payment of dividends from WesBanco Bank, Inc.,
WesBanco's banking subsidiary, 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, available lines of
credit with an independent commercial bank and WesBanco Bank, Inc., totaling
$27.5 million at December 31, 2003 as well as the issuance of $30.9 million in
junior subordinated debt in 2003.
At December 31, 2003, WesBanco had outstanding commitments to extend credit
in the ordinary course of business approximating $325.7 million compared to
$262.0 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 $6.5 million during 2004.
Management believes WesBanco has sufficient liquidity to meet current
obligations to borrowers, depositors and others.
COMPARISON OF 2002 VERSUS 2001
Net income for 2002 was $34.8 million or $1.70 per share compared to $29.0
million or $1.60 per share 2001. Return on average assets was 1.13% for the year
ended December 31, 2002, compared to 1.21% in 2001, and return on average equity
was 10.95% for 2002, compared to 11.28% in 2001. The results for 2002 reflect
the acquisition of American Bancorporation ("American") on March 1, 2002.
Net interest income for 2002 increased $16.0 million or 18.3% compared to
2001. The net interest margin decreased to 3.93% in 2002 compared to 4.17% in
2001, which was partially offset by average earning assets increasing $619.6
million or 27.7% during 2002. The margin decrease resulted from a combination of
factors, including lower-margin acquired net assets of American, rate
compression between loan and deposit products, commercial and residential
mortgage refinancing at historically low interest rates, as well as 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 income increased $12.2 million or 7.5% for 2002
compared to 2001. The increase was due to increases in average securities
volume, partially offset by decreases in yields on loans and securities.
Interest expense decreased $3.8 million or 5.0% from 2001. Table 2 shows that
the decrease resulted from a decrease in rates paid on average interest bearing
liabilities to 2.95% from 4.03% which was partially offset by average volume of
interest bearing liabilities increasing $567.4 million or 29.9% in 2002.
The provision for loan losses was $9.4 million in 2002 compared to $6.0
million in 2001. Net charge-offs for 2002 increased 71.2% to $9.0 million
compared to $5.2 million for 2001. This increase reflects 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 bankruptcies, the
overall increase in the portfolio for loans acquired from American and a partial
write down of one large commercial real estate loan.
Non-interest income for 2002 increased 11.4% to $27.9 million for 2002
compared to $25.0 million for 2001. Trust fees remained consistent at $11.5
million for both 2002 and 2001, with managed mutual fund asset fees and higher
estate fees helping to offset the impact of $0.5 billion reduction in the market
values of trust assets under management. Deposit activity charges increased $1.6
million or 17.8% primarily as the result of growth in deposit accounts due to
the American transaction as well as increases in ATM income and debit card
interchange income.
Non-interest expense for 2002 increased $11.3 million to $76.6 million
compared to $65.3 million for 2001. The increase was related primarily to
expansion of internal operations, personnel and new banking offices acquired in
the American transaction. In addition, pension and health care costs were
significant contributors to higher employee benefit expense, as well as
increased merger-related expenses recorded in 2002 relating to the American
acquisition.
E-46