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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
--------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-8467
------
WESBANCO, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
West Virginia 55-0571723
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1 Bank Plaza, Wheeling, WV 26003
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
304-234-9000
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or, for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated
filer as defined by Rule 12b-2 of the Exchange Act. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
WesBanco had 20,010,917 shares outstanding at July 31, 2003
WESBANCO, INC.
TABLE OF CONTENTS
-----------------
ITEM # ITEM PAGE NO.
- ------ ---- --------
PART I - FINANCIAL INFORMATION
------------------------------
1 Financial Statements and Accompanying Notes 3-13
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-27
3 Quantitative and Qualitative Disclosures About
Market Risk 27-29
4 Controls and Procedures 29
PART II - OTHER INFORMATION
---------------------------
1 Legal Proceedings 29-30
2 Changes in Securities and Use of Proceeds 30-31
3 Defaults Upon Senior Securities 31
4 Submission of Matters to a Vote of Security Holders 31
5 Other Information 32
6(a) Exhibits 32
6(b) Reports on Form 8-K 33
Signatures 34
Exhibits-Certifications Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 E-1 - E-2
Exhibits-Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 E-3
2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. - Financial Statements
- ------------------------------
Consolidated Balance Sheets at June 30, 2003 and December
31, 2002, and Consolidated Statements of Income for the three and
six months ended June 30, 2003 and 2002, Consolidated Statements
of Changes in Shareholders' Equity and Consolidated Statements of
Cash Flows for the six months ended June 30, 2003 and 2002 are
set forth on the following pages.
On March 1, 2002, WesBanco, Inc. ("WesBanco") completed the
acquisition of American Bancorporation ("American") and the
merger of American's affiliate, Wheeling National Bank, with and
into WesBanco's affiliate, WesBanco Bank, Inc. As of the date of
the acquisition, American had total assets of approximately $678
million that represented 28% of WesBanco's pre-acquisition total
assets.
In the opinion of the management of WesBanco, all
adjustments, consisting of normal recurring accruals necessary
for a fair presentation of the financial information referred to
above for such periods, have been made. The results of
operations for the three months and six months ended June 30,
2003 are not necessarily indicative of what results may be
attained for the entire year.
For further information, refer to WesBanco's Annual Report
on Form 10-K for the year ended December 31, 2002, which includes
the 2002 Annual Report to Shareholders, and includes consolidated
financial statements and footnotes thereto.
3
WESBANCO, INC.
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------
(dollars in thousands, except par value amount)
June 30, December 31,
2003 2002
----------- ------------
(Unaudited)
ASSETS
Cash and due from banks $ 100,436 $ 80,101
Due from banks - interest bearing 1,282 984
Federal funds sold --- ---
Securities:
Held to maturity (fair values of $489,440 and
$514,735, respectively) 466,634 499,161
Available for sale, carried at fair value 801,973 694,735
----------- -----------
Total securities 1,268,607 1,193,896
----------- -----------
Loans, net of unearned income 1,838,830 1,820,885
Allowance for loan losses (25,578) (25,080)
----------- -----------
Net loans 1,813,252 1,795,805
----------- -----------
Premises and equipment, net 54,974 55,725
Accrued interest receivable 18,743 20,024
Goodwill 49,520 49,520
Core deposit intangible, net 8,650 9,310
Bank-owned life insurance 64,511 62,916
Other assets 31,007 28,950
----------- -----------
Total Assets $ 3,410,982 $ 3,297,231
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing demand $ 308,299 $ 301,262
Interest bearing demand 287,505 276,131
Money market accounts 549,766 508,062
Savings deposits 360,948 357,290
Certificates of deposit 962,315 957,211
----------- -----------
Total deposits 2,468,833 2,399,956
----------- -----------
Federal Home Loan Bank borrowings 365,338 343,324
Other borrowings 155,564 175,634
Accrued interest payable 6,947 7,939
Other liabilities 65,561 32,557
Trust preferred securities 30,000 12,650
----------- -----------
Total Liabilities 3,092,243 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 52,878 52,855
Retained earnings 253,096 246,148
Treasury stock (1,292,025 and 857,603
shares, respectively, at cost) (31,043) (20,482)
Accumulated other comprehensive income 1,481 4,305
Deferred benefits for directors and employees (2,088) (2,070)
----------- -----------
Total Shareholders' Equity 318,739 325,171
----------- -----------
Total Liabilities and Shareholders' Equity $ 3,410,982 $ 3,297,231
=========== ===========
See Notes to Consolidated Financial Statements.
4
WESBANCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------
(Unaudited, dollars in thousands, except per share amounts)
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
-------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
INTEREST INCOME
Loans, including fees $ 28,108 $ 32,552 $ 56,855 $ 62,570
Securities:
Taxable 8,047 8,705 16,644 16,279
Tax-exempt 4,357 4,132 8,821 7,273
-------- -------- -------- --------
Total interest on securities 12,404 12,837 25,465 23,552
-------- -------- -------- --------
Federal funds sold 107 177 204 313
-------- -------- -------- --------
Total interest income 40,619 45,566 82,524 86,435
-------- -------- -------- --------
INTEREST EXPENSE
Interest bearing demand deposits 280 482 584 948
Money market accounts 3,037 3,328 5,935 6,425
Savings deposits 615 1,141 1,309 1,957
Certificates of deposit 8,065 9,923 16,782 19,426
-------- -------- -------- --------
Total interest on deposits 11,997 14,874 24,610 28,756
Federal Home Loan Bank
borrowings 3,653 3,081 7,222 5,011
Other borrowings 585 685 1,192 1,399
Trust preferred securities 305 275 580 367
-------- -------- -------- --------
Total interest expense 16,540 18,915 33,604 35,533
-------- -------- -------- --------
Net interest income 24,079 26,651 48,920 50,902
Provision for loan losses 2,479 1,760 4,459 3,999
-------- -------- -------- --------
Net interest income after
provision for loan losses 21,600 24,891 44,461 46,903
-------- -------- -------- --------
NON-INTEREST INCOME
Trust fees 2,615 2,735 5,597 5,850
Service charges on deposits 3,007 2,805 5,703 5,096
Bank-owned life insurance 827 250 1,618 416
Other income 472 608 1,245 1,132
Net securities gains 1,347 509 2,353 1,683
-------- -------- -------- --------
Total non-interest income 8,268 6,907 16,516 14,177
-------- -------- -------- --------
NON-INTEREST EXPENSE
Salaries and wages 8,091 8,110 16,051 15,396
Employee benefits 2,561 2,007 5,043 3,962
Net occupancy 1,341 1,256 2,831 2,358
Equipment 1,818 1,909 3,636 3,292
Core deposit intangible amortization 368 554 660 722
Other operating 6,614 5,583 12,535 10,566
Merger-related expenses 92 715 184 1,781
-------- -------- -------- --------
Total non-interest expense 20,885 20,134 40,940 38,077
-------- -------- -------- --------
Income before provision for
income taxes 8,983 11,664 20,037 23,003
Provision for income taxes 1,242 2,986 3,407 6,257
-------- -------- -------- --------
Net Income $ 7,741 $ 8,678 $ 16,630 $ 16,746
======== ======== ======== ========
Earnings per share $ 0.38 $ 0.41 $ 0.82 $ 0.83
Average shares outstanding 20,122,685 21,213,306 20,243,813 20,121,032
Dividends per share $ 0.24 $ 0.235 $ 0.48 $ 0.465
See Notes to Consolidated Financial Statements.
5
WESBANCO, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------
(Unaudited, dollars in thousands, except per share amounts)
Accumulated Deferred
Common Stock Other Benefits for
---------------------- Capital Retained Treasury Comprehensive Directors &
Shares Amount Surplus Earnings Stock Income/(Loss) Employees Total
- -------------------------------------------------------------------------------------------------------------------------
December 31, 2001 17,854,497 $43,742 $58,663 $230,924 $(76,183) $ 3,560 $( 2,505) $ 258,201
- -------------------------------------------------------------------------------------------------------------------------
Net income 16,746 16,746
Change in accumulated other
comprehensive income 1,659 1,659
---------
Comprehensive income 18,405
Cash dividends:
Common ($.465 per share) (9,856) (9,856)
Treasury shares purchased -
net of sales (251,384) (195) (5,857) (6,052)
Stock issued for
acquisition 3,441,888 673 (5,638) 75,488 70,523
Deferred benefits
for directors - net (46) (46)
- -------------------------------------------------------------------------------------------------------------------------
June 30, 2002 21,045,001 $44,415 $52,830 $237,814 $ (6,552) $ 5,219 $ (2,551) $ 331,175
=========================================================================================================================
- -------------------------------------------------------------------------------------------------------------------------
December 31, 2002 20,461,745 $44,415 $52,855 $246,148 $(20,482) $ 4,305 $ (2,070) $ 325,171
- -------------------------------------------------------------------------------------------------------------------------
Net income 16,630 16,630
Change in accumulated other
comprehensive income (2,824) (2,824)
---------
Comprehensive income 13,806
Cash dividends:
Common ($.48 per share) (9,682) (9,682)
Treasury shares purchased -
net of sales (434,422) 23 (10,561) (10,538)
Deferred benefits for
directors - net (18) (18)
- -------------------------------------------------------------------------------------------------------------------------
June 30, 2003 20,027,323 $44,415 $52,878 $253,096 $(31,043) $ 1,481 $ (2,088) $ 318,739
=========================================================================================================================
See Notes to Consolidated Financial Statements.
6
WESBANCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
(Unaudited, dollars in thousands)
For the Six Months Ended
Increase in Cash and Cash Equivalents June 30,
- -----------------------------------------------------------------------------
2003 2002
Cash Flows From Operating Activities: ---------- ----------
Net income $ 16,630 $ 16,746
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,915 2,691
Net amortization (accretion) 2,414 (1,307)
Provision for loan losses 4,459 3,999
Net gains on sales of securities (2,353) (1,683)
Gain on sale of loans-net (290) (294)
Deferred income taxes (1,010) (55)
Increase in cash surrender value of
bank-owned life insurance (1,595) (427)
Loans originated for sale (19,739) (22,196)
Proceeds from the sale of loans originated for sale 20,200 26,094
Other - net 235 201
Net change in:
Interest receivable 1,281 937
Other assets and other liabilities 33,152 2,786
Interest payable (992) (1,103)
--------- --------
Net cash provided by operating activities 55,307 26,389
--------- --------
Cash Flows From Investing Activities:
Securities held to maturity:
Proceeds from maturities and calls 53,128 49,307
Payments for purchases (20,293) (175,042)
Securities available for sale:
Proceeds from sales 96,028 217,042
Proceeds from maturities and calls 296,969 45,282
Payments for purchases (504,525) (178,041)
Acquisition-net of cash --- 24,464
Purchase of loans (10,148) ---
(Increase) decrease in net loans (13,092) 39,668
Purchases of premises and equipment - net (2,357) (2,709)
--------- --------
Net cash provided by (used in) investing activities (104,290) 19,971
--------- --------
Cash Flows From Financing Activities:
Increase in deposits 69,744 19,341
Increase in Federal Home Loan Bank borrowings 22,830 4,489
Increase (decrease) in other borrowings (1,070) 13,205
Decrease in federal funds purchased (19,000) (30,000)
Redemption of trust preferred securities (12,650) ---
Proceeds from the issuance of trust
preferred securities 30,000 ---
Dividends paid (9,700) (9,015)
Treasury shares purchased - net of sales (10,538) (6,052)
Other --- (18)
--------- --------
Net cash provided by (used in) financing activities 69,616 (8,050)
--------- --------
Net increase in cash and cash equivalents 20,633 38,310
Cash and cash equivalents at beginning of period 81,085 82,275
--------- --------
Cash and cash equivalents at end of period $ 101,718 $120,585
========= ========
Supplemental disclosure of non-cash items
Interest paid on deposits and other borrowings $ 34,596 $ 36,635
Income taxes paid 3,980 6,900
Summary of business acquisition:
Fair value of assets acquired --- $684,389
Stock issued for the purchase of
American Bancorporation common stock --- (70,523)
Fair value of liabilities assumed --- (644,509)
--------- --------
Goodwill recognized --- $ (30,643)
========= =========
See Notes to Consolidated Financial Statements.
7
WESBANCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------
Note 1 - Accounting Policies
- ----------------------------
Basis of presentation: The accompanying unaudited consolidated interim
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the
United States for complete financial statements. The consolidated
financial statements include the accounts of WesBanco and its wholly-owned
subsidiaries. Significant intercompany transactions have been eliminated
in consolidation. The accounting and reporting policies followed in the
presentation of these financial statements are consistent with those
applied in the preparation of the 2002 Annual Report of WesBanco, Inc. on
Form 10-K. In the opinion of management, adjustments necessary for a fair
presentation of financial position and results of operations for the
interim periods have been made. Such adjustments are of a normal and
recurring nature.
Reclassification: Certain prior year financial information has been
reclassified to conform to the presentation at June 30, 2003. The
reclassifications had no effect on net income.
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.
Earnings per share: Basic earnings per share are 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 assumes the exercise of stock options.
There was no dilutive effect from the stock options and accordingly, basic
and diluted earnings per share are the same.
New accounting standards: In November 2002, the Financial Accounting
Standards Board ("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, the FASB issued Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities" ("VIEs"), an interpretation
of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to improve financial reporting of special purpose and other
entities. In accordance with FIN No. 46, business enterprises that
represent the primary beneficiary of another entity by retaining a
controlling financial interest in that entity's assets, liabilities and
results of operating activities must consolidate the entity in its
financial statements. Prior to the issuance of FIN No. 46, consolidation
generally occurred when an enterprise controlled another entity through
voting interests. Certain VIEs that are qualifying special purpose entities
subject to the reporting requirements of Statement of Financial
8
Accounting Standard ("SFAS")No. 140 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" will not be required
to be consolidated under the provisions of FIN No. 46. The consolidation
provisions of FIN No. 46 apply to VIEs entered into after January 31, 2003,
and for preexisting VIEs in the first interim reporting period after
June 15, 2003.
With respect to other interests in entities subject to FIN
No. 46, including low income housing investments, the
adoption of FIN No. 46 is not expected to have a material
impact on the consolidated financial statements. However,
WesBanco has determined that the provisions of FIN No. 46
may require deconsolidation of WesBanco's recently created
subsidiary grantor trusts, which in June 2003 issued $30.0
million of mandatorily redeemable preferred securities from
these grantor trusts in two pooled trust preferred
transactions. In the event of a deconsolidation, the
grantor trusts may be deconsolidated and the junior
subordinated debentures of WesBanco owned by the grantor
trusts would be disclosed. The trust preferred securities
currently qualify as Tier 1 capital of WesBanco for
regulatory capital purposes. In July 2003, the Federal
Reserve Board issued a supervisory letter indicating that
trust preferred securities currently will continue to
qualify as Tier 1 capital for regulatory purposes until
further notice. The Federal Reserve Board has also stated
that it will continue to review the regulatory implications
of any accounting treatment changes and will provide
further guidance, if necessary. However, as of June 30,
2003, assuming WesBanco was not allowed to include the
trust preferred securities in Tier 1 capital, WesBanco
would still significantly exceed the regulatory required
minimums for capital adequacy purposes. No other impact of
significance on WesBanco's results of operations, financial
condition or cash flows is expected from the adoption of
FIN No. 46.
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 Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", to
SFAS No. 123, "Accounting for Stock-Based Compensation" fair value method
of accounting, if a company so elects. This statement is effective for
fiscal years ending after December 15, 2002.
At June 30, 2003, WesBanco has a stock-based option plan. WesBanco
currently accounts for this plan under the recognition and measurement
principles of APB Opinion No. 25. While SFAS No. 123 provides transitional
guidance to those companies electing the fair value method of accounting,
WesBanco has not yet determined whether it will adopt such methodology and
fair value recognition.
The following table illustrates the pro forma net income and earnings
per share if WesBanco had applied the fair value recognition provisions
of SFAS No. 123, to stock-based employee compensation.
(Unaudited, dollars in thousands, except per share amounts)
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
---------------- -----------------
2003 2002 2003 2002
------- ------- ------- -------
Net income as reported $ 7,741 $ 8,678 $16,630 $16,746
Stock based employee compensation
expense under the fair value
based method - net of tax (131) (148) (263) (295)
------- ------- ------- -------
Pro forma net income $ 7,610 $ 8,530 $16,367 $16,451
======= ======= ======= =======
Earnings per share as reported $ 0.38 $ 0.41 $ 0.82 $ 0.83
Pro forma earnings per share $ 0.38 $ 0.40 $ 0.81 $ 0.82
9
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 June 30, 2003 and
for hedging relationships designated after June 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 is not
expected to 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 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003, WesBanco's third
quarter of fiscal 2003. 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 a
liability. In accordance with SFAS No. 150, WesBanco has classified its
trust preferred securities issued in June 2003 as a liability. Such early
adoption is permitted under SFAS No. 150.
Note 2 - Completed Business Combination
- ---------------------------------------
On March 1, 2002, WesBanco completed the acquisition of American and
the merger of American's affiliate, Wheeling National Bank, Wheeling, West
Virginia, with and into WesBanco's affiliate, WesBanco Bank, Inc. Under
the terms of the transaction, WesBanco exchanged 1.1 shares of WesBanco
common stock for each share of American common stock. A total of 3,441,888
shares of WesBanco common stock valued at $70.5 million were issued to fund
the transaction. The transaction was accounted for using the purchase
method of accounting. As of the acquisition date, American had total
assets of approximately $678 million, deposits of $466 million and
stockholders' equity of $44 million.
The following table presents pro forma combined results of operations
of WesBanco and American as if the business combination had been completed
as of the beginning of 2002.
(unaudited, in thousands, except per share amounts)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net Interest Income $ 24,079 $ 26,651 $ 48,920 $ 54,395
Net Income 7,741 8,678 16,630 16,749
Earnings Per Share 0.38 0.41 0.82 0.79
Note 3 - 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. The market value
of assets under management of the trust and investment services segment was
approximately $2.5 billion at June 30, 2003 and $2.3 billion at December
31, 2002. These assets
10
are held by WesBanco's affiliate, WesBanco Bank,
Inc. in fiduciary or agency capacities for their customers and therefore
are not included as assets on WesBanco's Consolidated Balance Sheet.
The following table provides selected financial information for the
segments of WesBanco:
(unaudited, dollar in thousands)
Trust &
Community Investment
Banking Services Consolidated
For the three months ended June 30, 2003: --------- ---------- ------------
Net interest income $ 24,079 --- $ 24,079
Provision for loan losses 2,479 --- 2,479
Non-interest income 5,653 $ 2,615 8,268
Non-interest expense 19,206 1,679 20,885
Provision for income taxes 868 374 1,242
Net income 7,179 562 7,741
For the three months ended June 30, 2002:
Net interest income $ 26,651 --- $ 26,651
Provision for loan losses 1,760 --- 1,760
Non-interest income 4,172 $ 2,735 6,907
Non-interest expense 18,472 1,662 20,134
Provision for income taxes 2,557 429 2,986
Net income 8,034 644 8,678
(unaudited, dollars in thousands)
Trust &
Community Investment
Banking Services Consolidated
For the six months ended June 30, 2003: --------- ---------- ------------
Net interest income $ 48,920 --- $ 48,920
Provision for loan losses 4,459 --- 4,459
Non-interest income 10,919 $ 5,597 16,516
Non-interest expense 37,306 3,634 40,940
Provision for income taxes 2,622 785 3,407
Net income 15,452 1,178 16,630
For the six months ended June 30, 2002:
Net interest income $ 50,902 --- $ 50,902
Provision for loan losses 3,999 --- 3,999
Non-interest income 8,327 $ 5,850 14,177
Non-interest expense 34,705 3,372 38,077
Provision for income taxes 5,266 991 6,257
Net income 15,259 1,487 16,746
Note 4 - Goodwill and Core Deposit Intangible
- ---------------------------------------------
WesBanco's Consolidated Balanced Sheet reflects total goodwill assets
of $49.5 million at June 30, 2003 and December 31, 2002, respectively. In
2002, WesBanco capitalized $30.6 million in goodwill and $11.1 million in
core deposit intangibles in connection with the American acquisition.
Amortization of the American core deposit intangible has a weighted average
remaining useful life of 8 years. Amortization expense of the core deposit
intangible was $0.3 million for the second quarter of 2003 and $0.7 million
for the six months ended June 30, 2003.
11
Core deposit intangible amortization for each of the next five years is as
follows:
(Unaudited, dollars in thousands)
Year Amount
----------------- ----------
Remainder of 2003 $ 740
2004 1,256
2005 1,042
2006 878
2007 742
Note 5 - Other Comprehensive Income
- -----------------------------------
The changes in accumulated other comprehensive income are as follows:
(Unaudited, dollars in thousands)
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
--------- --------- --------- --------
Securities available for sale:
Net fair value adjustment on
securities available for sale $ 657 $ 11,961 $ (1,742) $ 5,493
Net securities gains
reclassified into earnings (1,177) (524) (2,182) (1,662)
--------- ---------- --------- --------
(520) 11,437 (3,924) 3,831
--------- ---------- --------- --------
Cash flow hedge derivatives:
Net fair value adjustment
on derivatives (542) (1,801) (388) (1,002)
Net derivative gains
reclassified into earnings (47) (53) (95) (110)
--------- ---------- --------- --------
(589) (1,854) (483) (1,112)
--------- ---------- --------- --------
Net unrealized gain (loss) (1,109) 9,583 (4,407) 2,719
Tax effect 280 (3,795) 1,583 (1,060)
--------- ---------- --------- --------
Change in accumulated other
comprehensive income (loss) $ (829) $ 5,788 $ (2,824) $ 1,659
========= ========== ========= ========
Note 6 - 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 issued by WesBanco (the "Junior Subordinated
Debentures"). 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. 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.
12
The following table provides information on the issuances of trust
preferred securities by WesBanco during the six months ended June 30, 2003:
Trust
Preferred Stated Optional
(Unaudited, dollars in thousands) Securities Maturity Redemption
Issued Date Date Interest rate
--------- --------- ---------- -----------------------------------------
WesBanco, Inc. Capital Trust II $ 13,000 6/30/2033 6/30/2008 Fixed rate of 5.80% through June 30, 2008
and three month LIBOR plus 3.15% thereafter
WesBanco, Inc. Capital Statutory
Trust III 17,000 6/26/2033 6/26/2008 Fixed rate of 5.55% through June 26, 2008
and three month LIBOR plus 3.10% thereafter
---------
Total trust preferred securities $ 30,000
=========
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. 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.
Interest incurred on the trust preferred securities for the second
quarter and first half of 2003 was $0.3 million and $0.6 million,
respectively.
13
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ----------------------------------------------------------------------------
The following discussion and analysis presents in further detail the
financial condition and results of operations of WesBanco and its
subsidiaries. This discussion and analysis should be read in conjunction
with the consolidated financial statements and notes presented in this
report.
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, 2002, as well as
Form 10-Q for the prior quarter ended 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 and Federal Deposit
Insurance Corporation; 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.
Critical accounting policies: WesBanco's critical accounting policies
involving the more significant judgments and assumptions used in the
preparation of the consolidated financial statements as of June 30, 2003,
have remained unchanged from the disclosures presented in WesBanco's Annual
Report on Form 10-K for the year ended December 31, 2002 under the section
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Earnings Summary
----------------
Comparison of the Quarters and Six Months Ended June 30, 2003 and 2002
----------------------------------------------------------------------
WesBanco's earnings per share for the second quarter of 2003
were $0.38, compared to $0.41 for the second quarter of 2002. For the first
six months of 2003 earnings per share were $0.82, compared to $0.83 for the
first six months of 2002. Net income for the second quarter of 2003 was
$7.7 million compared to $8.7 million for the second quarter of 2002. Net
income for the first half of 2003 was $16.6 million compared to $16.7
million for the first half of 2002. The financial results include the March
1, 2002 acquisition of American. As of the acquisition date, American's
total assets approximated $678 million, which represented 28% of WesBanco's
pre-acquisition total assets. A total of 3,441,888 shares or 19% of pre-
acquisition shares outstanding of WesBanco common stock were issued to fund
the transaction. WesBanco's return on average assets measured 0.93% for the
second quarter and 1.01% for the six months ended June 30, 2003, compared
to 1.09% and 1.15% for the corresponding periods in 2002. Return on
average equity decreased to 9.69% for the second quarter and 10.41% for the
six months ended June 30, 2003, compared to returns of 10.55% and 11.04%
for the second quarter and six months ended June 30, 2002, respectively.
14
TABLE 1: AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
Three months ended June 30, Six months ended June 30,
--------------------------------------- ---------------------------------------
2003 2002 2003 2002
(dollars in thousands) ------------------- ----------------- ------------------ ------------------
Average Average Average Average Average Average Average Average
Volume Rate Volume Rate Volume Rate Volume Rate
ASSETS ------------------- ------------------ ------------------ ------------------
Loans, net of unearned income (1) $ 1,819,403 6.20% $ 1,855,188 7.04% $ 1,817,922 6.31% $ 1,752,259 7.20%
Securities: (2)
Taxable 838,206 3.84% 707,944 4.92% 811,925 4.10% 636,284 5.12%
Tax-exempt (3) 364,154 7.36% 337,184 7.54% 367,955 7.38% 296,520 7.55%
------------------- ------------------ ------------------ ------------------
Total securities 1,202,360 4.91% 1,045,128 5.76% 1,179,880 5.12% 932,804 5.89%
Federal funds sold 36,042 1.20% 40,830 1.74% 34,619 1.18% 37,551 1.67%
------------------- ------------------ ------------------ ------------------
Total earning assets (3) 3,057,805 5.63% 2,941,146 6.51% 3,032,421 5.79% 2,722,614 6.68%
------------------- ------------------ ------------------ ------------------
Other assets 290,681 243,584 288,852 219,028
----------- ----------- ----------- -----------
Total Assets $ 3,348,486 $ 3,184,730 $ 3,321,273 $ 2,941,642
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing demand deposits $ 283,563 0.40% $ 270,113 0.72% $ 280,175 0.42% $ 261,202 0.73%
Money market accounts 536,682 2.27% 463,779 2.88% 525,705 2.28% 443,262 2.92%
Savings deposits 363,794 0.68% 378,411 1.21% 361,034 0.73% 339,577 1.16%
Certificates of deposit 971,923 3.33% 993,994 4.00% 971,968 3.48% 920,898 4.25%
------------------- ------------------ ------------------ ------------------
Total interest bearing deposits 2,155,962 2.23% 2,106,297 2.83% 2,138,882 2.32% 1,964,939 2.95%
Federal Home Loan Bank borrowings 354,410 4.13% 271,194 4.56% 348,572 4.18% 218,740 4.62%
Other borrowings 162,214 1.45% 149,244 1.84% 164,950 1.46% 146,610 1.92%
Trust preferred securities 15,159 8.07% 12,650 8.73% 13,912 8.41% 8,527 8.68%
------------------- ------------------ ------------------ ------------------
Total interest bearing
liabilities 2,687,745 2.49% 2,539,385 2.99% 2,666,316 2.54% 2,338,816 3.06%
------------------- ------------------ ------------------ ------------------
Non-interest bearing demand deposits 298,609 286,583 294,478 269,455
Other liabilities 41,603 28,712 38,367 27,485
Shareholders' Equity 320,529 330,050 322,112 305,886
----------- ----------- ----------- -----------
Total Liabilities and
Shareholders' Equity $ 3,348,486 $ 3,184,730 $ 3,321,273 $ 2,941,642
=========== =========== =========== ===========
Taxable equivalent net yield
on average earning assets(3) 3.44% 3.93% 3.55% 4.04%
======= ====== ======= =======
(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) Taxable equivalent basis is calculated on tax-exempt securities, using
the federal statutory tax rate of 35% for each period presented.
TABLE 2:RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
Three months ended June 30, Six months ended June 30,
2003 compared to 2002 2003 compared to 2002
(dollars in thousands) ------------------------------ -----------------------------------
Net Increase Net Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------------------------------ -----------------------------------
Increase (decrease)
in interest income:
Loans, net of unearned income $ (616) $ (3,828) $(4,444) $ 13,318 $ (19,033) $ (5,715)
Taxable securities 27,590 (28,248) (658) 15,291 (14,926) 365
Tax-exempt securities (1) 3,867 (3,642) 225 3,293 (1,745) 1,548
Federal funds sold (19) (51) (70) (23) (86) (109)
------------------------------ -----------------------------------
Total interest income change (1) 30,822 (35,769) (4,947) 31,879 (35,790) (3,911)
------------------------------ -----------------------------------
Increase (decrease)
in interest expense:
Interest bearing demand deposits 679 (881) (202) 424 (788) (364)
Money market accounts 9,546 (9,837) (291) 5,041 (5,531) (490)
Savings deposits (42) (484) (526) 763 (1,411) (648)
Certificates of deposit (217) (1,641) (1,858) 6,078 (8,722) (2,644)
Federal Home Loan Bank borrowings 7,499 (6,927) 572 5,260 (3,049) 2,211
Other borrowings 1,327 (1,427) (100) 869 (1,076) (207)
Trust preferred securities 508 (478) 30 292 (79) 213
------------------------------ -----------------------------------
Total interest expense change 19,300 (21,675) (2,375) 18,727 (20,656) (1,929)
------------------------------ -----------------------------------
Taxable equivalent net interest
income increase (decrease) (1) $ 11,522 $ (14,094) $ (2,572) $ 13,152 $ (15,134) $ (1,982)
============================== ===================================
Increase (decrease)in taxable
equivalent adjustment (14) 288
-------- ---------
Net interest income (decrease) (1) $(2,558) $(2,270)
======== =========
(1) Taxable equivalent basis is calculated on tax-exempt securities, using
the federal statutory tax rate of 35% for each period presented.
15
Net Interest Income
-------------------
Net interest income, which is WesBanco's largest revenue source, is
the difference between interest income on earning assets (loans, securities
and federal funds sold) and interest expense paid on liabilities (deposits
and borrowings). Net interest income comprises 74.8% of total revenues for
the six months ended June 30, 2003. Net interest income is affected by the
general level of interest rates, changes in interest rates, and changes in
the amount and composition of interest earning assets and interest bearing
liabilities.
Net interest income decreased $2.6 million or 9.7% and $2.0 million
or 3.9% compared to the second quarter and first half of 2002. The primary
cause for the decrease in net interest income was the net interest margin
decreasing to 3.44% and 3.55% for the second quarter and first half of
2003, compared to 3.93% and 4.04% for the corresponding periods in 2002.
The decrease in net interest income was partially offset by the volume of
average earning assets increasing $116.7 million or 4.0% and $309.8
million or 11.4%, compared to the second quarter and first half of 2002.
The margin decrease resulted from a combination of factors, including the
American acquisition with its lower overall net interest margin, increased
loan and investment security prepayments and the sustained low interest
rate environment which has caused rate compression between loan and deposit
pricing. Due to the low interest rate conditions, WesBanco's earning assets
are repricing at an accelerated rate compared to the repricing of interest
bearing liabilities, which may result in an additional reduction in the net
interest margin. WesBanco has taken steps to minimize the impact of this
reduction, by decreasing rates on certain deposit products, shortening the
maturities of certain long-term borrowings and reducing short-term
liquidity instruments. However, with rates approaching historical lows,
combined with the most recent Federal Reserve rate cut, it has become
increasingly more difficult to reduce deposit rates.
Interest income decreased $4.9 million or 10.9% and $3.9 million or
4.5% compared to the second quarter and first half of 2002. As shown in
Tables 1 and 2, the yield on average earning assets for the second quarter
in 2003 and the first half of 2003 decreased 88 and 89 basis points to
5.63% and 5.79%, respectively, compared to the corresponding periods in
2002. The decrease in the rates on average earning assets was partially
offset by volume increases of $116.7 million or 4.0% and $309.8 million or
11.4%, for the second quarter of 2003 and the first half of 2003,
respectively, compared to the corresponding periods in 2002. The volume
increases were primarily the result of increases in average investments and
loans as well as the American acquisition. 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.
Interest expense decreased $2.4 million or 12.6% for the second
quarter of 2003 and $1.9 million or 5.4% for the first half of 2003,
compared to the corresponding periods in 2002. As shown in Tables 1 and
2, the average rate paid on interest bearing liabilities for the second
quarter of 2003 and the first half of 2003 decreased 50 and 52 basis points
to 2.49% and 2.54%, respectively, compared to the corresponding periods in
2002. The decrease in the interest bearing liabilities rate was primarily
due to WesBanco lowering rates on certain deposit products, which was
partially offset by volume increases of $148.4 million or 5.8% and $327.5
million or 14.0%, for the second quarter of 2003 and the first half of
2003, respectively, compared to the corresponding periods in 2002.
16
Non-interest Income
-------------------
Non-interest income, excluding net securities gains, increased $0.5
million or 8.2% and $1.7 million or 13.4% compared to the second quarter
and first half of 2002. The increase is related to growth in deposit
activity fees, increases in ATM and debit card interchange income, an
increase in bank-owned life insurance income and, in addition, for the six
month period, the American acquisition. Trust fees decreased $0.1 million
or 4.4% and $0.3 million or 4.3% compared to the second quarter and first
half of 2002. The decrease was primarily due to lower equity valuations,
somewhat offset by new account relationships and growth in the WesMark
funds. The market value of trust assets under management increased to
approximately $2.5 billion at June 30, 2003 which was up from $2.3 billion
at both December 31, 2002 and March 31, 2003, due to a recent recovery in
valuations in the equity markets. Net securities gains increased $0.8
million for the second quarter of 2003 and $0.7 million for the first half
of 2003, compared to the corresponding periods in 2002, as WesBanco sold
certain agency mortgage-backed securities and collateralized mortgage
obligations with recent high prepayment rates in order to reposition the
investment portfolio to take advantage of current market opportunities.
Non-interest Expense
--------------------
Non-interest expense for the second quarter and first half of 2003
increased $0.7 million or 3.7% and $2.9 million or 7.5% compared to the
corresponding periods in 2002, respectively. The increase in non-interest
expenses for the first half of 2003 in comparison to the first half of 2002
was impacted by the March 1, 2002 acquisition of American. In addition to
the incrementally higher operating expenses due to American, WesBanco
experienced a $0.8 million increase in pension costs and a $0.2 million
increase in health insurance costs as well as a $0.3 million increase in
marketing expenses. Assuming the American acquisition had occurred on
January 1, 2002, non-interest expenses would have increased approximately
$0.9 million or 2.2% for the first half of 2003 compared to the
corresponding period last year. The increase in the second quarter
comparison consisted primarily of an increase in salary and employee
benefit expenses of $0.5 million resulting from rising health insurance and
pension costs. The increase in these costs was partially offset by a
reduction in staffing levels as average full-time equivalent employees
decreased to 1,140 in the second quarter of 2003 from 1,170 in the second
quarter of 2002.
During the first half of 2003, three branches were closed through
consolidation with nearby locations. WesBanco is currently evaluating
additional branch restructurings and anticipates three to five
branch sales or closings throughout the remainder of the year. Associated
with these branch restructurings, WesBanco is looking to reduce total salary
expense through attrition and a severance program.
Included in non interest expense were merger related expenses of
$0.1 million and $0.2 million recorded in the second quarter and first half
of 2003, compared to $0.7 million and $1.8 million, for the corresponding
periods in 2002, all of which related to the American acquisition. In June
of 2003 WesBanco included in other operating expense the write-off of $0.6
million in unamortized issuance costs associated with the redemption of the
$12.65 million in trust preferred securities.
The efficiency ratio, on a GAAP basis, was 60.20% and 58.33% for the
second quarter and first half of 2003, compared to 56.27% and 55.19% for
the corresponding periods in 2002.
17
Income Taxes
------------
TABLE 3: Reconciliation of Income Tax Rates
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
2003 2002 2003 2002
--------- ----------- --------- --------
Federal statutory tax rate 35.0% 35.0% 35.0% 35.0%
Tax-exempt interest (16.2) (11.8) (14.8) (10.5)
State income tax, net
of federal tax effect (0.3) 3.3 0.7 3.4
Bank-owned life insurance
income (3.2) (0.9) (2.8) (0.7)
All other, net (1.5) - (1.1) -
--------- ----------- --------- --------
Effective tax rate 13.8% 25.6% 17.0% 27.2%
========= =========== ========= ========
WesBanco's federal and state income tax expense decreased $1.7 million or
58.4% and $2.9 million or 45.5% compared to the second quarter and first
half of 2002. The decline in the effective tax rate, as noted in Table 3,
was primarily due to an increase in state and municipal tax-exempt interest
income and income on bank-owned life insurance, as well as the
implementation of other strategic business and tax planning initiatives.
For the remainder of 2003, management believes, subject to the continuation
and realization of current tax strategies, that the effective tax rate
should approximate 17% to 18%.
Financial Condition
-------------------
Total assets of WesBanco were $3.4 billion as of June 30, 2003, an
increase of $113.8 million or 3.4%, compared to total assets as of December
31, 2002. The increases were primarily in the cash and due from banks and
investment securities areas as well as an increase in loans. Total
liabilities of WesBanco were $3.1 billion as of June 30, 2003, an increase
of $120.2 million or 4.0%, compared to December 31, 2002. The increase was
primarily due to growth in total deposits as well as increases in trust
preferred securities and other liabilities.
Securities
----------
TABLE 4: Composition of Securities June 30, December 31,
(dollars in thousands) 2003 2002
------------ ------------
Securities held to maturity (at amortized cost):
- ------------------------------------------------
U.S. Treasury and Federal Agency securities $ 62,196 $ 86,144
Obligations of states and political subdivisions 380,553 382,752
Other debt securities 23,885 30,265
------------ ------------
Total securities held to maturity (fair value
of $489,440 and $514,735, respectively) 466,634 499,161
------------ ------------
Securities available for sale (at fair value):
- ----------------------------------------------
U. S. Treasury and Federal Agency securities 350,829 362,694
Obligations of states and political subdivisions 14,673 8,152
Corporate securities 6,688 19,968
Collateralized mortgage obligations 210,028 43,280
Mortgage-backed securities 213,426 254,643
Equity securities 6,329 5,998
------------ ------------
Total securities available for sale
(amortized cost of $788,751 and $677,590
respectively) 801,973 694,735
------------ ------------
Total securities $1,268,607 $1,193,896
============ ============
18
Total investment securities increased $74.7 million or 6.3% at June
30, 2003, compared to December 31, 2002. The increase in investment
securities was primarily due to growth in core deposits. Additional
security purchases were funded by fixed rate, intermediate term Federal
Home Loan Bank borrowings. At June 30, 2003, the average yield of the
available for sale portfolio was 3.90% with a weighted average life of 1.9
years, compared to 4.94% and 2.2 years at December 31, 2002. For the same
period, the average yield of the held to maturity portfolio was 6.40% with
a weighted average life of 4.8 years, compared to 6.30% and 5.0 years at
December 31, 2002. The decrease in the weighted average life was primarily
due to increased prepayments on collateralized mortgage obligations and
mortgage-backed securities. Cash flows from the portfolio due to calls,
maturities and prepayments increased to $350.1 million for the first half
of 2003, compared to $94.6 million for the first half of 2002. The
reinvestment of these cash flows into lower yielding securities, along with
increased premium amortization on mortgage backed securities and
collateralized mortgage obligations due to elevated prepayment rates, has
decreased the portfolio's yield for the first half of 2003 to 5.12%,
compared to 5.75% for the year ended December 31, 2002 and the first
quarter's 5.35%. WesBanco has primarily replaced its called and sold
securities with lower yielding, intermediate term collateralized mortgage
obligations and mortgage-backed securities with average durations
approximating two years and yields approximating 100 basis points lower
than the replaced assets. At June 30, 2003, total unamortized premium and
discount on the investment portfolio, as a percentage of the total
investment portfolio, was 1.00% and 1.58%, 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. Total discount on the
investment portfolio relates primarily to the obligations of states and
political subdivisions and is accreted into income over the life of the
securities. The premium amortization on the investment portfolio recorded
as a reduction to interest income for the second quarter and first half of
2003 was $ 2.0 million and $3.3 million, respectively, compared to $0.6
million and $1.0 million for the corresponding periods in 2002. Discount
accretion on the investment portfolio recorded into income for the second
quarter and first half of 2003 was $0.4 million and $0.9 million,
respectively, compared to $0.5 million and $0.8 million for the
corresponding periods in 2002.
Unrealized pre-tax gains and losses on available for sale securities
(fair value adjustments) reflected a $13.2 million market gain as of June
30, 2003, compared to a $17.1 million market gain as of December 31, 2002.
These fair value adjustments represent temporary fluctuations resulting
from changes in market rates in relation to average yields in the available
for sale portfolio. WesBanco may somewhat 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.
19
Loans and Credit Risk
---------------------
TABLE 5: Composition of Loans
Percent Percent
(dollars in thousands) June 30, of December 31, of
2003 Total 2002 Total
------------------------ -----------------------
Commercial $ 323,026 17.6% $ 306,071 16.8%
Commercial real state 548,024 29.8 504,902 27.7
Residential real estate 576,390 31.3 573,819 31.5
Home equity 113,201 6.2 117,964 6.5
Consumer 278,189 15.1 318,129 17.5
------------------------ -----------------------
Loans, net of unearned income $1,838,830 100.0% $1,820,885 100.0%
------------------------ -----------------------
Total loans increased $17.9 million or 1.0% at June 30, 2003 compared
to December 31, 2002 as a result of strong growth in commercial lending
activity, which was offset by a decline in consumer loans. Commercial
loans increased $17.0 million or 5.5%, while commercial real estate loans
increased $43.1 million or 8.5%. These increases are a result of a greater
focus on new business development in all markets which was achieved by
adding new lenders in key markets such as Columbus, Ohio and Western
Pennsylvania and renewed efforts in existing West Virginia markets.
Residential real estate loans increased $2.6 million or 0.4% despite rapid
prepayments of both higher fixed rate and adjustable rate mortgages.
WesBanco originated $111.0 million in new residential real estate loans for
its portfolio during the first half of 2003 compared to $76.7 million
during the same period in 2002. The $111.0 million in new originations for
the first half of 2003 were evenly divided between 15-year fixed-rate and
adjustable rate loans. The majority of the adjustable rate mortgages have
initial rates that are fixed for up to five years and have repricing
frequencies ranging from one to five years, thereafter. In June 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. Residential real estate loans originated
for sale in the secondary market decreased 21.7% to $23.1 million for the
first half of 2003 compared to $29.5 million for the same period in 2002,
reflecting WesBanco's focus on originating residential real estate loans
for its own portfolio to counter rapidly increasing prepayments. Home
equity loans decreased $4.8 million or 4.0% due to normal fluctuations in
the usage of home equity lines and reductions due to homeowner refinancing
of both their first mortgage and home equity line. Consumer loans decreased
$39.9 million or 12.6% primarily as a result of the continued planned
reduction in indirect automobile lending, coupled with strong competition
from automobile manufacturing finance companies offering low or zero
interest rate loans primarily in the new car segment. The yield on loans
continues to decrease due to lower rates on new loans and scheduled or
negotiated repricing of existing loans at current historic low market
rates.
WesBanco enters into various commitments to extend credit in the
normal course of business, which are accounted for in accordance with
generally accepted accounting principles. Those instruments include
revolving lines of credit to businesses and consumers as well as letters of
credit that involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the financial statements.
Since many of those commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. WesBanco adheres to the same credit policies in making such
commitments as it does for on-balance sheet instruments, which includes
requiring collateral or other security to support financial instruments with
off-balance sheet
20
credit risk. WesBanco's exposure to credit losses on such commitments is
limited to the contractual amount of those instruments. Expected losses
on such commitments are recorded in other liabilities.
Commitments for lines of credit were $320.4 million at June 30, 2003
compared to $262.0 million at December 31, 2002. This increase is
primarily due to growth in operating lines of credit to businesses and
commercial real estate construction loans. Commitments for letters of
credit were $30.7 million at June 30, 2003 and $29.1 million at December
31, 2002. The expected losses recorded by WesBanco for these guarantees
were insignificant at June 30, 2003.
TABLE 6: Non-performing Assets and Loans Past Due 90 Days or More
June 30, December 31,
(dollars in thousands) 2003 2002
----------- --------------
Non-accrual loans $ 14,867 $ 7,480
Renegotiated loans 663 2,646
----------- --------------
Total non-performing loans 15,530 10,126
Other real estate owned and
repossessed assets 3,862 4,213
----------- --------------
Total non-performing assets 19,392 14,339
Other impaired loans 6,488 11,249
----------- --------------
Total non-performing assets and
other impaired loans $ 25,880 $ 25,588
=========== ==============
Loans past due 90 days or more $ 8,091 $ 12,105
=========== ==============
Non-performing loans as a percentage of
total loans 0.84% 0.56%
Non-performing assets as a percentage of
total assets 0.57% 0.43%
Non-performing assets as a percentage of
total loans, other real estate
owned and repossessed assets 1.05% 0.79%
Non-performing loans and loans 90 days
or more past due as a
percentage of total loans 1.28% 1.22%
Non-performing loans, excluding loans past due 90 days or more,
increased $5.4 million or 53.4%, compared to December 31, 2002. Of the
total increase, $3.8 million represents commercial real estate loans to the
lodging industry as that sector of the economy has been particularly
impacted by a decrease in both business and leisure travel. At June 30,
2003, total loans to the lodging industry represented 2.3% of total loans,
approximately 9.1% of which were non-performing. The remaining $1.6
million increase in non-performing loans is comprised of smaller credits,
which are not within any single industry and reflect the impact of economic
conditions on those businesses. Non-performing loans as a percentage of
total loans increased to 0.84% at June 30, 2003, compared to 0.56% at
December 31, 2002. Loans past due 90 days or more decreased $4.0 million
or 33.2%, compared to December 31, 2002 as a result of certain loans
migrating to non-performing status, increased collection efforts and
charge-offs.
WesBanco considers all non-performing loans to be impaired. In
addition, WesBanco also categorizes certain other commercial loans as
impaired under SFAS No. 114. Such other impaired loans at June 30, 2003
were $6.5 million compared to $11.2 million at December 31, 2002. This
decrease reflects $2.8 million in loans moving to non-accrual status, $1.4
million in loans that are no longer considered to be impaired and $0.6
million in normally occurring repayments.
WesBanco monitors the overall quality of its loan portfolio and off-
balance sheet commitments through various methods. Subsequent to loan
origination, the process used to measure and monitor credit risk depends on
the type of
21
loan. Monitoring the level and trend of delinquent loans is a
basic practice for all loan types. Credit risk in the residential real
estate, home equity and consumer portfolios is also managed by monitoring
market conditions that may impact groups of borrowers or collateral values.
Credit risk in the commercial and commercial real estate loan portfolio is
managed by monitoring the portfolio for potential concentrations of credit
and monitoring borrower compliance with applicable loan covenants. Credit
risk is also monitored by an independent loan review function which
performs, among other procedures, reviews of large commercial loans within
90 days of origination, periodic reviews of commercial loan relationships
and consumer loan credit quality trends, charge-offs and compliance with
underwriting guidelines. Underwriting standards are adjusted when
appropriate.
TABLE 7: Allowance for Loan Losses
(dollars in thousands) For the Six Months Ended
June 30,
---------------------------
2003 2002
---------- ----------
Balance, at beginning of period $ 25,080 $ 20,786
Allowance for loan losses of acquired bank - 3,903
Charge-offs:
Commercial (1,576) (416)
Commercial real estate (186) (1,650)
Residential real estate (215) (76)
Home equity (23) (58)
Consumer (2,243) (2,495)
---------- ----------
Total Charge-offs (4,243) (4,695)
---------- ----------
Recoveries:
Commercial 63 109
Commercial real estate 10 9
Residential real estate 23 2
Home equity - 2
Consumer 186 166
---------- ----------
Total Recoveries 282 288
---------- ----------
Net loan charge-offs (3,961) (4,407)
Provision for loan losses 4,459 3,999
---------- ----------
Balance, at end of period $ 25,578 $ 24,281
========== ==========
Annualized net loan charge-offs to average
loans outstanding 0.44% 0.51%
Allowance for loan losses to total loans 1.39% 1.32%
Allowance for loan losses to total non-
performing loans (times) 1.65 2.21
Allowance for loan losses to total
non-performing loans and
loans past due 90 days or more (times) 1.08 1.11
The allowance for loan losses represents management's estimate of
probable losses inherent in the loan portfolio. The allowance is reduced
by charge-offs, net of recoveries, and increased by charging a provision to
operations to maintain the allowance at the level determined appropriate by
management.
Management evaluates the adequacy of the allowance for loan losses at
least quarterly. The allowance is the sum of various components. One
component is based on a review of individual loans for which impairment is
estimated in accordance with SFAS 114. Individual loans are tested for
impairment based on their internal risk grade. The other
22
components are for collective impairment of pools of loans that are estimated
in accordance with SFAS 5. The collective impairment components include
amounts based on historical loss experience with appropriate adjustments to
reflect changing economic conditions, delinquency and non-performing loan
trends, changes in risk associated with lending to certain industries, and
other relevant factors. Historical loss experience for commercial and
commercial real estate loans is derived from a migration analysis, which
computes losses sustained on loans according to their internal risk grade.
Historical loss experience for residential real estate, home equity and
consumer loans is derived for each of those categories of loans in total,
or for specific types of loans within those categories that contain similar
risk characteristics. Each component of collective impairment is supported
by relevant observable data relating to existing conditions. There have
been no material changes in the observable data used by management to
estimate loss between December 31, 2002 and June 30, 2003.
The allowance for loan losses was $25.6 million or 1.39% of total
loans at June 30, 2003, compared to $25.1 million or 1.38% of total loans
at December 31, 2002 and $24.3 million or 1.32% at June 30, 2002. The
allowance as a percentage of total loans has increased throughout 2003
primarily due to the extended downturn in the economy contributing to
heightened levels of non-performing loans. The provision for loan losses
increased $0.7 million or 40.9% for the second quarter of 2003 and $0.5
million or 11.5% for the first half of 2003, compared to the corresponding
periods in 2002. The increase in the provision is attributable to
commercial and commercial real estate loan growth, the current economic
environment and higher non-performing loans. The allowance currently
provides coverage of 1.65 times non-performing loans and 1.08 times non-
performing loans plus loans past due 90 days or more. Net loan charge-offs
for the first half of 2003 decreased $0.4 million or 10.1% compared to the
same period in 2002 primarily due to a reduction in consumer loan losses.
Net loan charge-offs as a percentage of average total loans on an annualized
basis for the second quarter and first half of 2003, were 0.53% and 0.44%
respectively, compared to 0.37% and 0.51%, for the corresponding periods in
2002.
TABLE 8: Allocation of the Allowance for Loan Losses
(dollars in thousands) Percent Percent
June 30, of December 31, of
2003 Total 2002 Total
--------- -------- ------------ --------
Commercial $ 7,346 28.7% $ 9,473 37.8%
Commercial real estate 12,362 48.3 9,046 36.1
Residential real estate 1,025 4.0 800 3.2
Home equity 226 0.9 106 0.4
Consumer 4,619 18.1 5,655 22.5
--------------------- ----------------------
Total allowance for
loan losses $ 25,578 100.0% $ 25,080 100.0%
===================== ======================
Changes in the allowance between December 31, 2002 and June 30, 2003
reflect overall changes in the composition and risk characteristics of each
category of the loan portfolio. The decrease in the allocation to
commercial loans is primarily attributable to charge-offs taken in 2003 on
loans previously reserved for impairment. The increase in the allocation to
commercial real estate loans is due to the significant growth in that
category coupled with increased non-performing loans which necessitated
higher general reserves and reserves for individually impaired loans. The
decrease in the allowance for consumer loans is primarily due to decreases
in loans in that category and, to a lesser extent, improvement in
historical loss experience on those loans.
23
Deposits
--------
Total deposits increased $68.9 million or 2.9% at June 30 2003,
compared to December 31, 2002. Deposit growth, from December 31, 2002,
reflected increases in all deposit categories. Money market accounts, which
grew $41.7 million or 8.2%, represented the largest single increase as
customers continue to favor WesBanco's competitively-priced money market
product. The average rate paid on deposits for the first half of 2003
decreased to 2.32%, compared to 2.95% for the first half in 2002, as
WesBanco reduced interest rates on most of its deposit products. Additional
rate reductions for core deposit products, including interest bearing
demand, savings and money market accounts were implemented in the third
quarter of 2003 in response to the recent Federal Reserve rate cut.
However, the current low interest rate environment may make it difficult
to implement further deposit rate reductions needed to match asset yields
which continue to reduce due to the prime rate decrease and increased
security prepayments. Also, a third quarter money market account product
restructuring, intended to lower its overall cost may result in a reduced
growth rate as compared to growth over the last year.
Borrowings and Trust Preferred Securities
-----------------------------------------
Federal Home Loan Bank ("FHLB") borrowings increased $22.0 million or
6.4% at June 30, 2003 compared to December 31, 2002. At June 30, 2003, FHLB
borrowings had a weighted average interest rate of 4.01% compared to 4.21%
at December 31, 2002. FHLB borrowings have maturities ranging from the
years 2003 to 2021 and are generally 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. WesBanco uses FHLB borrowings to
lengthen the maturities of shorter-term interest bearing liabilities in the
current low interest rate environment.
WesBanco is evaluating the possibility of restructuring its longer-
term, higher rate FHLB borrowings, which were acquired in the American
acquisition, to determine the most effective method of reducing interest
costs. WesBanco may incur prepayment penalties based on the current fair
value of these borrowings if this restructuring is implemented.
Other borrowings, which include repurchase agreements, federal funds
purchased, treasury tax and loan notes and at the parent company level, a
commercial bank line of credit, decreased $20.1 million or 11.4% to $155.6
million for the six months ended June 30, 2003, compared to December 31,
2002, primarily due to a $19.0 million decrease in federal funds purchased
and a $10.2 million decrease in the commercial bank line of credit, which
was partially offset by an $8.5 million increase in repurchase agreements.
In the second quarter of 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. In June of 2003, WesBanco also created two new trusts,
WesBanco, Inc. Capital Trust II and WesBanco, Inc. Capital Statutory Trust
III, which issued $30 million of Floating Rate Preferred Securities. Please
refer to Note 6, "Trust Preferred Securities", for additional information.
24
TABLE 9: FHLB Maturities:
Balance at Average
(dollars in thousands) June 30, 2003 Rate
------------- ----------
2003 $ 50,000 4.62%
2004 44,900 4.96%
2005 40,155 3.50%
2006 45,011 2.77%
2007 61,857 3.02%
2008 and thereafter 123,415 4.55%
------------- ----------
Total $ 365,338 4.01%
============= ==========
TABLE 10: Other borrowed funds:
(dollars in thousands)
June 30, December 31,
2003 2002
------------------------
Federal funds purchased $ --- $ 19,000
Securities sold under agreement to repurchase 152,504 143,994
Treasury tax and loan notes and other 3,060 2,440
Revolving line of credit, parent company --- 10,200
---------- ----------
Total $ 155,564 $ 175,634
========== ==========
Capital Resources
-----------------
At June 30, 2003 shareholders' equity totaled $318.7 million
compared to $325.2 million at December 31, 2002. First half of 2003
activity reflects net income of $16.6 million less dividends paid to
shareholders totaling $9.7 million and net treasury share purchases of
$10.6 million. Accumulated other comprehensive income decreased $2.8
million to $1.5 million at June 30, 2003. Book value increased to $15.92
per share from $15.89 per share at December 31, 2002.
In the first half of 2003, WesBanco repurchased a total of 480,876
shares through its current stock repurchase plan at an average cost of
$24.28 per share. As of June 30, 2003, WesBanco had repurchased a total of
989,475 shares, with an additional 10,525 shares remaining for repurchase
through the current one million-share stock repurchase plan approved by the
Board on June 20, 2002.
On April 17, 2003, WesBanco announced the adoption of a new stock
repurchase plan, to be implemented after all shares from the previous plan
have been acquired, to begin repurchasing up to an additional one million
shares of WesBanco common stock representing approximately 4.9% of
outstanding shares on the open market. The shares will be available for
general corporate purposes, which may include future acquisitions, the
shareholder dividend reinvestment plan and employee benefit plans. The
timing, price and quantity of purchases under these programs are at the
discretion of WesBanco and may be discontinued or suspended at any time.
25
TABLE 11: Capital Adequacy Ratios
Regulatory Requirements
-----------------------
Well June 30, December 31,
Minimum Capitalized 2003 2002
------- ----------- -------- ------------
WesBanco, Inc.
- --------------
Tier I leverage capital 4.0% N/A 8.70% 8.53%
Tier I risk-based capital 4.0% N/A 13.43% 12.95%
Total risk-based capital 8.0% N/A 14.64% 14.13%
WesBanco Bank, Inc.
- -------------------
Tier I leverage capital 4.0% 5.0% 7.64% 8.56%
Tier I risk-based capital 4.0% 6.0% 11.82% 13.01%
Total risk-based capital 8.0% 10.0% 13.03% 14.20%
WesBanco is subject to risk-based capital guidelines that measure
capital relative to risk-adjusted assets and off-balance sheet financial
instruments. At June 30, 2003, and December 31, 2002, WesBanco's affiliate
bank, WesBanco Bank, Inc., also exceeded the minimum regulatory levels and
was considered to be "well-capitalized" under FDICIA. There are no conditions
or events that have occurred since June 30, 2003, that management believes
may have changed WesBanco Bank's "well-capitalized" categorization.
Recently, the Federal Reserve has become aware 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 this year 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 I capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve will
review the regulatory implications of any accounting treatment changes and,
if necessary or warranted, provide further appropriate guidance. The
Federal Reserve may or may not allow institutions to continue to include
trust preferred securities in Tier I capital for regulatory capital
purposes. As of June 30, 2003, assuming WesBanco was not allowed to
include the $30.0 million in trust preferred securities issued by WesBanco,
Inc. Capital Trust II and WesBanco, Inc. Capital Statutory Trust III in
Tier I capital, WesBanco 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 I capital, WesBanco would be permitted to redeem the trust
preferred securities, without penalty, while the WesBanco, Inc. Capital
Statutory Trust III would carry an early redemption penalty.
Liquidity Risk
--------------
Liquidity is defined as the degree of readiness to convert assets into
cash with minimal 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. Bank and
Parent Company liquidity ratios are monitored by WesBanco's Asset/Liability
Management Committee ("ALCO"). WesBanco determines the degree of
required liquidity by the relationship of total holdings of
26
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 an important consideration of WesBanco's investment
portfolio management. Federal funds sold, and all securities maturing within
three months are classified as sources of liquid assets. These liquid assets,
combined with the cash flow from the loan portfolio and the remaining
sectors of the investment portfolio, deposit growth and other sources,
adequately meet the liquidity requirements of WesBanco.
Securities are the principal source of asset-funded liquidity.
Securities totaled $1.3 billion at June 30, 2003, of which $802.0 million
were classified as available for sale. At June 30, 2003, WesBanco had
approximately $46.7 million in securities scheduled to mature within one
year. Due to the current low interest rate environment, additional cash
flows may be anticipated from approximately $180.8 million in callable
bonds, which have call dates within the next year. Increased prepayments on
mortgage-backed securities and collateralized mortgage-backed obligations
are also expected to provide additional cash flows over the next twelve-
month period. At June 30, 2003, WesBanco had $791.6 million of unpledged
securities, excluding FHLB blanket liens, which could be used for
collateral or sold. Cash and due from banks of $101.7 million at June 30,
2003, also serve as additional sources of liquidity.
Deposits are the principal factor affecting liability liquidity.
Deposits totaled $2.5 billion at June 30, 2003. Deposit flows are impacted
by current interest rates, rates and products offered by WesBanco versus
its competition, as well as customer behavior. Certificates of deposit
scheduled to mature within one year totaled $452.6 million at June 30,
2003. In addition to the core deposit base, WesBanco's banking subsidiary
maintains a line of credit with the FHLB as an additional liability-funding
source. Available lines of credit at June 30, 2003 and December 31, 2002
approximated $830.4 million and $589.4 million, respectively.
The principal source of parent company liquidity are dividends from
WesBanco's banking subsidiary. There are various legal limitations under
Federal and State laws regarding the payment of dividends from WesBanco
Bank, Inc., WesBanco's banking subsidiary, to the parent company. WesBanco
obtained a $40.0 million upstream dividend from WesBanco Bank, Inc., in the
second quarter of 2003 with approval from the Federal Reserve. No further
dividends are projected to be declared for the remainder of 2003 and a
portion of 2004 without Federal Reserve approval. Additional Parent Company
liquidity is provided by the Parent's investment security portfolio,
available lines of credit with an independent commercial bank and WesBanco
Bank, Inc., as well as the issuance of trust preferred securities.
Management believes that WesBanco has sufficient liquidity to meet
current obligations to borrowers, depositors and others.
Item 3. - Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
Market risk is defined as the risk of loss due to adverse changes in
the fair value of financial instruments due to 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.
27
WesBanco's 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.
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 adjustments to non-time deposit
rates at varying levels of interest rates are based primarily on historical
experience. Security portfolio maturities and prepayments are assumed to
be reinvested in similar instruments and callable bond forecasts are
adjusted at varying level 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 12 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.
TABLE 12: Net Interest Income Sensitivity
Percentage Change in
Change in Net Interest Income from Base
Interest Rates -------------------------------- ALCO
(basis points) June 30, 2003 December 31, 2002 Guidelines
--------------------------------------------------------------------
+200 +0.99% -1.10% +/- 5.0%
Flat --- --- ---
+100 +1.13% +0.02% N/A
-100 -2.16% -0.10% N/A
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 12 shows WesBanco's interest rate
sensitivity at June 30, 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 increase by approximately 0.99% if interest rates
were to rise immediately by 200 basis points. Net interest income would
decline by approximately 2.16% if interest rates were to decline by 100
basis points.
WesBanco's ALCO evaluates various strategies to reduce the exposure to
interest rate fluctuations. Among these strategies evaluated is the
utilization of interest rate swap agreements. These interest rate swap
agreements, purchased at various times in 2001 are currently used to
effectively convert a portion of prime rate money market deposits to a
fixed-rate basis. The notional value of interest rate swap agreements
outstanding was approximately $104.3 million at June 30,
28
2003 compared to $110.5 million at December 31, 2002. Related market losses
of $3.7 million, net of tax, at June 30, 2003 and $3.4 million, net of tax,
at December 31, 2002, are recorded in other comprehensive income.
Current strategies initiated by ALCO to stabilize the net interest
margin in the current low interest rate environment include reducing the
cost of funds by adjusting rates on short-term certificates of deposit,
savings, NOWs and money market accounts. During the second half of 2003,
WesBanco will also evaluate methods to reduce interest costs on long-term
FHLB borrowings. Loan growth will continue to be an important strategy
throughout the remainder of the year as WesBanco focuses on commercial loan
growth in its new market areas.
Item 4. - Controls and Procedures
- ---------------------------------
Our management evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) under the Securities and Exchange Act of 1934) as of the end of the
period covered by this report. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that as of the
end of the quarterly period covered by this report, our disclosure controls
and procedures are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and regulations and are
operating in an effective manner.
No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of
1934) occurred during the fiscal quarter ended June 30, 2003 that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. - Legal Proceedings
- ---------------------------
On March 1, 2002, WesBanco consummated its acquisition of American
Bancorporation through a series of corporate mergers. At the time of the
consummation of this transaction, American Bancorporation was a defendant
in a suit styled Martin, et al. v. The American Bancorporation Retirement
Plan, et al., under Civil Action No. 5:2000-CV-168 (Broadwater), presently
pending in the United States District Court for the Northern District of
West Virginia. WesBanco has essentially become the principal defendant in
this suit by reason of the merger. This case involves a class action suit
against American Bancorporation by certain beneficiaries of the American
Bancorporation Defined Benefit Retirement Plan (the "Plan") seeking to
challenge benefit calculations and methodologies used by the outside Plan
Administrator in determining benefits under the Plan which was frozen by
American Bancorporation, as to benefit accruals, some years ago. The Plan
had been the subject of a predecessor action in a case styled American
Bancorporation Retirement Plan, et al. v. McKain, Civil Action No. 5:93-CV-
110, which was also litigated in the United States District Court for the
Northern District of West Virginia. The McKain case resulted in an Order
entered by the District Court on September 22, 1995, which directed
American Bancorporation to follow a specific method for determining
retirement benefits under the Plan. American Bancorporation has asserted
that they have calculated the benefits in accordance with the requirements
of the 1995 Order. The purported class of plaintiffs now asserts that they
are not bound by the 1995 Order since they were not parties to that
proceeding and are seeking a separate benefit determination. The District
Court in the current case has substantially limited the class of plaintiffs
to a group of
29
approximately 37 individuals and has granted partial summary judgment
to significantly reduce the scope and extent of the underlying case.
The Judge handling the case is a military reservist and has been
called to active duty and there is some uncertainty as to the timeframe for
proceedings in the matter. It is not believed that the case presents any
material risk of exposure to WesBanco though, as with any litigation
matter, there are uncertainties in the outcome of the proceeding which
cannot be determined with any degree of certainty.
On August 1, 2002, WesBanco was named in a lawsuit filed by a former
loan customer of the WesBanco's banking subsidiary over a failed purchase
of an ambulance service enterprise operated by a local hospital.
WesBanco's banking subsidiary was subsequently substituted as the named
defendant in the case now styled Matesic v. WesBanco Bank, Inc, et al.,
Civil Action No. 02-C-293(M), pending in the Circuit Court of Ohio County,
West Virginia. The suit alleges numerous counts and claims against
multiple defendants over the purchase and subsequent failure of the
ambulance service. WesBanco's banking subsidiary did make a loan to the
plaintiff's company which became delinquent and the bank did recover a
portion of the loan through liquidation of pledged collateral. Allegations
of fraudulent conduct and tortuous interference are alleged against
WesBanco's banking subsidiary. The case is currently in its discovery
phase. The broad and sweeping nature of the alleged conduct makes it
difficult to assess the substance of Complaint. The bank intends to
vigorously defend the suit and believes that there is no merit to the
allegations of the Complaint.
WesBanco is also involved in other lawsuits, claims, investigations
and proceedings which arise in the ordinary course of business. There are
no such other matters pending that WesBanco expects to be material in
relation to its business, financial condition or results of operations.
Item 2. - Changes in Securities and Use of Proceeds
- ---------------------------------------------------
On June 19, 2003, WesBanco Capital Trust II formed by WesBanco under the
laws of Delaware, issued a $13.0 million Junior Subordinated Note, due June
30, 2033, to a statutory trust which issued 13,000 shares of trust
preferred securities with a liquidation value of $13.0 million, based upon
this note and a guarantee from WesBanco. In connection with the issuance
of the trust preferred securities WesBanco Capital Trust II issued 410
common securities to WesBanco with a liquidation value of $0.4 million.
The Trust Preferred Securities were issued and sold in a private placement
offering. Interest is payable quarterly at a rate of 5.80% for the first
five years ("no call period"), which will then reset quarterly beginning on
June 30, 2008 and thereafter, at a rate equal to the three-month LIBOR
index plus 3.15%. The note matures on June 30, 2033, and may be redeemed on
or after June 30, 2008, without penalty, after the no call period. The
note and trust preferred securities provide that WesBanco has the right to
elect to defer the payment of interest on the note and trust preferred
securities for up to an aggregate of 20 quarterly periods. However, if
WesBanco should defer the payment of interest or default on the payment of
interest on the debenture, it may not, among other things, declare or pay
any dividends on its common stock during any such period. The net proceeds
received by WesBanco will be used to reduce outstanding indebtedness, fund
the current stock repurchase plan and for general working capital purposes.
The trust preferred securities were sold to Trapeza CDO III, LLC. A
discount in the amount of $0.3 million was earned by Trapeza CDO III, LLC
in connection with the private placement. This private placement was
limited to a single institutional investor which qualified as an
"accredited investor" as defined in Rule 501(a) of Regulation D. The
issuance
30
of the note and the related trust preferred securities was exempt
from registration under the Securities Act of 1933, as amended (the
"Securities Act").
On June 26, 2003, WesBanco, Inc. Capital Statutory Trust III formed by
WesBanco under the laws of Connecticut, issued a $17.0 million
Fixed/Floating Rate Junior Subordinated Deferrable Interest Debenture due
June 26, 2033, to a statutory trust which issued 17,000 shares of trust
preferred securities with a liquidation value of $17.0 million, based upon
this debenture and a guarantee from WesBanco. In connection with the
issuance of the trust preferred securities WesBanco, Inc. Capital Statutory
Trust III issued 526 common securities to WesBanco with a liquidation
value of $0.5 million. The trust preferred securities were issued and sold
in a private placement offering. Interest is payable quarterly at a rate of
5.55% for the first five years, which will then reset quarterly beginning
on June 26, 2008 and thereafter, at a rate equal to the three-month LIBOR
index plus 3.10%. The debenture matures on June 30, 2033, and may be
redeemed on or after June 30, 2008, without penalty, after the no call
period. The debenture and trust preferred securities provide that WesBanco
has the right to elect to defer the payment of interest on the debenture
and trust preferred securities for up to an aggregate of 20 quarterly
periods. However, if WesBanco should defer the payment of interest or
default on the payment of interest on the debenture, it may not declare or
pay any dividends on its common stock during any such period. The net
proceeds received by WesBanco will be used to reduce outstanding
indebtedness, fund the current stock repurchase plan and for general working
capital purposes.
The trust preferred securities were sold to Preferred Term Securities
X, Ltd. A discount in the amount of $0.5 million was earned by FTN
Financial Capital Markets and Keefe, Bruyette & Woods, Inc. in connection
with the private placement. This private placement was limited to a single
institutional investor, which qualified as an "accredited investor" as
defined in Rule 501(a) of Regulation D. The issuance of the debenture and
the related trust preferred securities was exempt from registration under
the Securities Act
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.
Item 3. - Defaults Upon Senior Securities
- -----------------------------------------
Not Applicable
Item 4. - Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
Not Applicable
31
Item 5. - Other Information
- ---------------------------
On July 22, 2003, WesBanco Bank, Inc. (the "Bank"), the wholly-owned
banking subsidiary of WesBanco, Inc., entered into an informal agreement
with the Federal Reserve Bank of Cleveland and the West Virginia Department
of Banking (the "regulatory agencies") to improve and strengthen the Bank's
"Bank Secrecy Act" (the "BSA") controls and procedures. The Bank will work
closely with the regulatory agencies over the next several months to
develop a written plan to improve its BSA record-keeping and reporting
procedures, implement an enhanced customer due diligence program, improve
its internal compliance procedures and audit testing of the processes and
controls, and engage an independent third party to complete an audit of
such newly-implemented controls and procedures.
The informal agreement requires periodic and ongoing reporting of the
Bank's written plan and implementation thereof until all corrections
required under the terms of the informal agreement are completed to the
satisfaction of the regulatory agencies. The informal agreement imposes no
other regulatory restrictions.
Item 6(a). - Exhibits
- ---------------------
4.1 Junior Subordinated Indenture dated June 19, 2003 entered into between
WesBanco, Inc., as issuer and The Bank of New York, as Trustee
4.2 Amended and Restated Declaration of Trust of WesBanco, Inc. Capital
Trust II
4.3 Form of Common Securities Certificate of WesBanco, Inc. Capital Trust
II (included as an exhibit to Exhibit 4.2)
4.4 Form of Preferred Securities Certificate of WesBanco, Inc. Capital
Trust II (included as an exhibit to Exhibit 4.2)
4.5 Guarantee Agreement between WesBanco, Inc. and The Bank of New York
4.6 Indenture dated June 26, 2003 entered into between WesBanco, Inc., as
issuer and U.S. Bank National Association, as Trustee
4.7 Amended and Restated Declaration of Trust of WesBanco, Inc. Capital
Statutory Trust III
4.8 Form of Capital Security Certificate of WesBanco, Inc. Capital
Statutory Trust III (included as an exhibit to Exhibit 4.7)
4.9 Form of Common Security Certificate of WesBanco, Inc. Capital
Statutory Trust III (included as an exhibit to Exhibit 4.7)
4.10 Guarantee Agreement between WesBanco, Inc. and U.S. Bank National
Association
10.1 Employment agreement with Peter Jaworski
31.1 Chief Executive Officer's Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Chief Financial Officer's Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Chief Executive Officer's and Chief Financial Officer's Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32
Item 6(b). - Reports on Form 8-K
- --------------------------------
On July 1, 2003 WesBanco, Inc. furnished a Form 8-K, in accordance
with general instruction B.2. of Form 8-K. The information was furnished
and shall not be deemed filed for the purposes of Section 18 of the
Securities Exchange Act of 1934. Press Release dated July 1, 2003;
Announcing the redemption of all 8.5% Junior Subordinated Deferrable
Interest Debentures and the receipt of $30 million from two pooled Trust
Preferred Transactions.
On July 17, 2003, WesBanco, Inc. furnished a Form 8-K, in accordance
with general instruction B.2. of Form 8-K. The information was furnished
and shall not be deemed filed for the purposes of Section 18 of the
Securities Exchange Act of 1934. Press Release dated July 17, 2003;
containing the earnings for the six months ended June 30, 2003.
On July 30, 2003, WesBanco, Inc. furnished a Form 8-K, in accordance
with general instruction B.2. of Form 8-K. The information was furnished
and shall not be deemed filed for the purposes of Section 18 of the
Securities Exchange Act of 1934. Representatives of the Registrant
conducted a presentation to a group of analysts and investors at the
Community Bank Conference in New York City sponsored by Keefe, Bruyette, &
Woods, Inc. ("KBW") at the Metropolitan Club, in New York City, NY, on July
30 and 31, 2003. This Registrant will present on Thursday, July 31, 2003,
at approximately 1:55 P.M. EST. The conference will be web cast on the KBW
website, www.kbw.com.
33
SIGNATURES
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESBANCO, INC.
/s/ Paul M. Limbert
Date: August 13, 2003 --------------------------------
Paul M. Limbert
President and Chief Executive Officer
/s/ Robert H. Young
Date: August 13, 2003 --------------------------------
Robert H. Young
Executive Vice President and Chief
Financial Officer