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EX-23 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ERNST & YOUNG LLP - WESBANCO INCdex23.htm
EX-21 - SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT - WESBANCO INCdex21.htm
EX-24 - POWER OF ATTORNEY - WESBANCO INCdex24.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - WESBANCO INCdex311.htm
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - WESBANCO INCdex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - WESBANCO INCdex312.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

 

¨ 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 000-08467

WESBANCO, INC.

(Exact name of Registrant as specified in its charter)

 

WEST VIRGINIA   55-0571723

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

1 Bank Plaza, Wheeling, WV   26003
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: 304-234-9000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each Exchange on which registered

Common Stock $2.0833 Par Value   NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Act.    Yes  ¨    No  þ

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  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer  ¨    Accelerated filer  þ
Non-accelerated filer  ¨    Smaller reporting company  ¨
(Do not check if a smaller reporting company)   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes  ¨    No  þ

The aggregate market value of the registrant’s outstanding voting common stock held by non-affiliates on June 30, 2010, determined using a per share closing price on that date of $16.85, was $414,584,999.

As of February 28, 2011, there were 26,586,953 shares of WesBanco, Inc. common stock $2.0833 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain specifically designated portions of WesBanco, Inc.’s definitive proxy statement which will be filed by April 30, 2011 for its 2011 Annual Meeting of Shareholders (the “Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

 

 

 


Table of Contents

WESBANCO, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

ITEM #

  

ITEM

   Page No.  
   Part I   

1

  

Business

     3 - 12   

1A

  

Risk Factors

     13 - 19   

1B

  

Unresolved Staff Comments

     19   

2

  

Properties

     19   

3

  

Legal Proceedings

     20   

4

  

Reserved

     20   
   Part II   

5

  

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     21 - 23   

6

  

Selected Financial Data

     24 - 26   

7

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     27 - 78   

7A

  

Quantitative and Qualitative Disclosures about Market Risk

     78 - 82   

8

  

Financial Statements and Supplementary Data

     83 - 133   

9

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     134   

9A

  

Controls and Procedures

     134   

9B

  

Other Information

     134   
   Part III   

10

  

Directors, Executive Officers and Corporate Governance

     135   

11

  

Executive Compensation

     135   

12

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     135   

13

  

Certain Relationships and Related Transactions, and Director Independence

     136   

14

  

Principal Accounting Fees and Services

     136   
   Part IV   

15

  

Exhibits and Financial Statement Schedules

     137 - 142   
  

Signatures

     143   

 

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Table of Contents

PART I

 

ITEM 1. BUSINESS

GENERAL

WesBanco, Inc. (“WesBanco”), a bank holding company incorporated in 1968 and headquartered in Wheeling, West Virginia, offers a full range of financial services including retail banking, corporate banking, personal and corporate trust services, brokerage services, mortgage banking and insurance. WesBanco offers these services through two reportable segments, community banking and trust and investment services. For additional information regarding WesBanco’s business segments, please refer to Note 24, “Business Segments” in the Consolidated Financial Statements.

At December 31, 2010, WesBanco operated one commercial bank, WesBanco Bank, Inc., (“WesBanco Bank” or the “Bank”) through 112 offices, one loan production office and 132 ATM machines located in West Virginia, Ohio, and Western Pennsylvania. Total assets of WesBanco Bank as of December 31, 2010 approximated $5.4 billion. WesBanco Bank also offers trust and investment services and various alternative investment products including mutual funds and annuities. The market value of assets under management of the trust and investment services segment was approximately $2.9 billion as of December 31, 2010. These assets are held by WesBanco Bank in fiduciary or agency capacities for its customers and therefore are not included as assets on WesBanco’s Consolidated Balance Sheets.

WesBanco offers additional services through its non-banking subsidiaries, WesBanco Insurance Services, Inc., (“WesBanco Insurance”) a multi-line insurance agency specializing in property, casualty and life insurance, and benefit plan sales and administration for personal and commercial clients; and WesBanco Securities, Inc., (“WesBanco Securities”), a full service broker-dealer, which also offers discount brokerage services.

WesBanco Asset Management, Inc., which was incorporated in 2002, holds certain investment securities in a Delaware-based subsidiary.

WesBanco Properties, Inc. holds certain commercial real estate properties. The commercial property is leased to WesBanco Bank and to non-related third parties.

WesBanco, Inc. has eight capital trusts, which are all wholly-owned trust subsidiaries of WesBanco formed for the purpose of issuing trust preferred securities (“Trust Preferred Securities”) and lending the proceeds to WesBanco. For more information regarding WesBanco’s issuance of trust preferred securities please refer to Note 12, “Junior Subordinated Debt Owed to Unconsolidated Subsidiary Trusts” in the Consolidated Financial Statements.

WesBanco Bank’s Investment Department also serves as investment adviser to a family of mutual funds, namely the “WesMark Funds”. The fund family is composed of the WesMark Growth Fund, the WesMark Balanced Fund, the WesMark Small Company Growth Fund, the WesMark Government Bond Fund, and the WesMark West Virginia Municipal Bond Fund.

As of December 31, 2010, none of WesBanco’s subsidiaries were engaged in any operations in foreign countries, and none had transactions with customers in foreign countries.

EMPLOYEES

There were 1,377 full-time equivalent employees employed by WesBanco and its subsidiaries at December 31, 2010. None of the employees were represented by collective bargaining agreements. WesBanco believes its employee relations to be satisfactory.

 

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WEB SITE ACCESS TO WESBANCO’S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION

All of WesBanco’s electronic filings for 2010 filed with the Securities and Exchange Commission (the “SEC”), including this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are made available at no cost on WesBanco’s website, www.wesbanco.com, in the “About Us” section through the “Investor Relations” link as soon as reasonably practicable after WesBanco files such material with, or furnishes it to, the SEC. WesBanco’s SEC filings are also available through the SEC’s website at www.sec.gov.

Upon written request of any shareholder of record on December 31, 2010, WesBanco will provide, without charge, a printed copy of its 2010 Annual Report on Form 10-K, including financial statements and schedules, as required to be filed with the SEC. To obtain a copy of the 2010 Annual Report on Form 10-K, contact: Linda Woodfin, WesBanco, Inc., 1 Bank Plaza, Wheeling, WV 26003 (304) 234-9201.

COMPETITION

Competition in the form of price and service from other banks, including local, regional and national banks and financial companies such as savings and loans, internet banks, credit unions, finance companies, brokerage firms and other non-banking companies providing various regulated and non-regulated financial services and products, is intense in most of the markets served by WesBanco and its subsidiaries. WesBanco’s trust and investment services segment receives competition from commercial banks, trust companies, mutual fund companies, investment advisory firms, law firms, brokerage firms and other financial services companies. As a result of consolidation within the financial services industry, mergers between, and the expansion of, financial institutions both within and outside West Virginia have provided significant competitive pressure in WesBanco’s major markets. Some of WesBanco’s competitors have greater resources and, as such, may have higher lending limits and may offer other products and services that are not provided by WesBanco. WesBanco generally competes on the basis of customer service and responsiveness to customer needs, available loan and deposit products, rates of interest charged on loans, rates of interest paid for deposits, and the availability and pricing of trust, brokerage and insurance services. As WesBanco has expanded into new, larger Ohio metropolitan markets, it faces entrenched large bank competitors with an already existing customer base that may far exceed WesBanco’s initial entry position into those markets. As a result, WesBanco may be forced to compete more aggressively for loans, deposits, trust and insurance products in order to grow its market share, potentially reducing its current and future profit potential from such markets.

SUPERVISION AND REGULATION

As a bank holding company and a financial holding company under federal law, WesBanco is subject to supervision and examination by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) under the Bank Holding Company Act of 1956 (“BHCA”), as amended, and is required to file with the Federal Reserve Board reports and other information regarding its business operations and the business operations of its subsidiaries. WesBanco also is required to obtain Federal Reserve Board approval prior to acquiring, directly or indirectly, ownership or control of certain voting shares of other banks, as described below. Since WesBanco is both a bank holding company and a financial holding company, WesBanco can offer customers virtually any type of service that is financial in nature or incidental thereto, including banking and activities closely related to banking, securities underwriting, insurance (both underwriting and agency) and merchant banking.

As indicated above, WesBanco presently operates one bank subsidiary, WesBanco Bank. The Bank is a West Virginia banking corporation and is not a member bank of the Federal Reserve System. It is subject to examination and supervision by the Federal Deposit Insurance Corporation (“FDIC”) and the West Virginia Division of Banking. The deposits of WesBanco Bank are insured by the Deposit Insurance Fund (“DIF”) of the FDIC. WesBanco’s nonbank subsidiaries are subject to examination and supervision by the Federal Reserve

 

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Board and examination by other federal and state agencies, including, in the case of certain securities activities, regulation by the SEC, the Financial Institution Regulatory Authority (“FINRA”), Municipal Securities Rulemaking Board and the Securities Investors Protection Corporation. WesBanco Bank maintains one designated financial subsidiary, WesBanco Insurance Services, Inc., which, as indicated above, is a multi-line insurance agency specializing in property, casualty and life insurance, and benefit plan sales and administration, for personal and commercial clients.

WesBanco is also under the jurisdiction of the SEC and certain state securities commissions for matters relating to the offering and sale of its securities. WesBanco is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. WesBanco is listed on the NASDAQ Global Select Market (“NASDAQ”) under the trading symbol “WSBC” and is subject to the rules of the NASDAQ for listed companies.

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal Act”), as amended, a bank holding company may acquire banks in states other than its home state, subject to certain limitations. The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate banking. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), banks are also permitted to establish de novo branches across state lines to the same extent that a state-chartered bank in each host state would be permitted to open branches.

Under the BHCA, prior Federal Reserve Board approval is required for WesBanco to acquire more than 5% of the voting stock of any bank. In determining whether to approve a proposed bank acquisition, federal banking regulators will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis, and the acquiring institution’s record of addressing the credit needs of the communities it serves, including the needs of low and moderate income neighborhoods, consistent with safe and sound operation of the bank, under the Community Reinvestment Act (“CRA”) and its amendments.

HOLDING COMPANY REGULATIONS

As indicated above, WesBanco has one state bank subsidiary, WesBanco Bank, as well as nonbank subsidiaries, which are described further in “Item 1. Business—General” section of this Annual Report on Form 10-K. The subsidiary bank is subject to affiliate transaction restrictions under federal law, which limit “covered transactions” by the subsidiary bank with the parent and any nonbank subsidiaries of the parent, which are referred to in the aggregate in this paragraph as “affiliates” of the subsidiary bank. “Covered transactions” include loans or extensions of credit to an affiliate (including repurchase agreements), purchases of or investments in securities issued by an affiliate, purchases of assets from an affiliate, the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit, the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate, certain transactions that involve borrowing or lending securities, and certain derivative transactions with an affiliate. Such covered transactions between the subsidiary bank and any single affiliate are limited in amount to 10% of the subsidiary bank’s capital and surplus, respectively, and, with respect to covered transactions with all affiliates in the aggregate, are limited in amount to 20% of the subsidiary bank’s capital and surplus, respectively. Furthermore, such loans or extensions of credit, guarantees, acceptances and letters of credit, and any credit exposure resulting from securities borrowing or lending transactions or derivatives transactions are required to be secured by collateral at all times in amounts specified by law. In addition, all covered transactions must be conducted on terms and conditions that are consistent with safe and sound banking practices.

The Dodd-Frank Act requires a bank holding company to act as a source of financial strength to its subsidiary bank. Under this source of strength requirement, the Federal Reserve Board may require a bank holding company to make capital infusions into a troubled subsidiary bank, and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. A capital infusion conceivably could be required at a time when WesBanco may not have the resources to provide it.

 

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PAYMENT OF DIVIDENDS

Dividends from the subsidiary bank are a significant source of funds for payment of dividends to WesBanco’s shareholders. For the year ended December 31, 2010, WesBanco declared cash dividends to its common shareholders of approximately $14.9 million.

Under the prompt corrective action provisions set forth in Section 38 of the Federal Deposit Insurance Act (“FDI Act”) and implementing regulations set forth in Section 325.105 of the FDIC Regulations, immediately upon a state non-member bank receiving notice, or being deemed to have notice, that the bank is undercapitalized, significantly undercapitalized, or critically undercapitalized, as defined in Section 325.103 of the FDIC Regulations, the bank is precluded from being able to pay dividends to its shareholders based upon the requirements in Section 38(d) of the FDI Act, 12. U.S.C. § 1831o(d).

However, as indicated elsewhere in this discussion, as of December 31, 2010, WesBanco Bank was “well capitalized” under the definition in Section 325.103 of the FDIC Regulations. Therefore, as long as the Bank remains “well capitalized” or even becomes “adequately capitalized,” there would be no basis under Section 325.105 to limit the ability of the Bank to pay dividends because it had not become undercapitalized, significantly undercapitalized or critically undercapitalized.

In addition, with respect to possible dividends by the Bank, under Section 31A-4-25 of the West Virginia Code, the prior approval of the West Virginia Commissioner of Banking would be required if the total of all dividends declared by the Bank in any calendar year would exceed the total of the Bank’s net profits for that year combined with its retained net profits of the preceding two years. In addition, Section 31A-4-25 limits the ability of a West Virginia banking institution to pay dividends until the surplus fund of the banking institution equals the common stock of the banking institution and if certain specified amounts of recent profits of the banking institution have not been carried to the surplus fund.

If, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice which, depending on the financial condition of the bank, could include the payment of dividends, such authority may require, after notice and hearing, that such bank cease and desist from such practice. The Federal Reserve Board has issued policy statements which provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings. Additional information regarding dividend restrictions is set forth in Note 22, “Regulatory Matters” in the Consolidated Financial Statements.

On February 24, 2009 the Federal Reserve Division of Banking Supervision and Regulation issued a letter providing direction to bank holding companies on the payment of dividends, capital repurchases and capital redemptions. Although the letter largely reiterates longstanding Federal Reserve supervisory policies, it emphasizes the need for a bank holding company to review various factors when considering the declaration of a dividend or taking action that would reduce regulatory capital provided by outstanding financial instruments. These factors include the potential need to increase loan loss reserves, write down assets and reflect declines in asset values in equity. In addition, the bank holding company should consider its past and anticipated future earnings, the dividend payout ratio in relation to earnings, and adequacy of regulatory capital before any action is taken. The consideration of capital adequacy should include a review of all known factors that may affect capital in the future.

In certain circumstances, defined by regulation relating to levels of earnings and capital, advance notification to, and in some circumstances, approval by the regulator could be required to declare a dividend or repurchase or redeem capital instruments.

 

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FDIC INSURANCE

FDIC insurance premiums are assessed using a risk-based approach by placing all insured institutions into one of four categories based on their level of capital and risk profile. In 2009, WesBanco Bank paid deposit insurance premiums that were significantly higher than those paid in 2008. The rate increase was largely due to the FDIC raising rates for the first quarter of 2009 and then, effective April 1, raising rates again. The Bank also exhausted the remaining balance of its one-time assessment credit with its payment for the first quarter 2009.

In May 2009, the FDIC imposed its final rule on a special assessment as of June 30. This special assessment was collected September 30, 2009 and impacted the Bank’s second quarter expenses by $2.6 million.

In November 2009, the FDIC adopted a final rule requiring banks to prepay their estimated quarterly assessments for the fourth quarter of 2009, as well as all of 2010, 2011 and 2012 on December 30, 2009 along with their regular third quarter assessment. The assessment rate was based on the bank’s total base assessment rate as of September 30, 2009. The rate was increased for 2011 and 2012, and a 5% annual growth rate in the deposit base was assumed. WesBanco Bank paid $24.1 million on December 30, 2009 to satisfy the requirements of this rule, with the portion related to the years 2010 – 2012 recorded as a prepaid expense, to be amortized on an actual, pro rata basis over those three years. The actual assessments corresponding to 2010 of $6.2 million did not materially differ from the prepaid estimates.

Various changes under the Dodd-Frank Act require the FDIC to change how deposit insurance premiums are calculated. Notably, the size of the DIF is increased and the assessment base is expanded to include all liabilities (i.e., all assets minus tangible equity) rather than deposits only. Assessment rates are expected to decrease as the size of the DIF increases. These changes are expected to be more advantageous to community banks that are not as highly dependent upon borrowings to fund their operations, as compared to larger banks.

CAPITAL REQUIREMENTS

The Federal Reserve Board has issued risk-based capital ratio and leverage ratio guidelines for bank holding companies. The risk-based capital ratio guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures into explicit account in assessing capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Under the guidelines and related policies, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and a leverage ratio test on a consolidated basis. The risk-based ratio is determined by allocating assets and specified off-balance sheet commitments into four weighted categories, with higher weightings being assigned to categories perceived as representing greater risk. A bank holding company’s capital is then divided by total risk-weighted assets to yield the risk-based ratio. The leverage ratio is determined by relating core capital to total assets adjusted as specified in the guidelines. The bank is subject to substantially similar capital requirements.

Generally, under the applicable guidelines, a financial institution’s capital is divided into three tiers. “Tier 1,” or core capital, includes common equity, noncumulative perpetual preferred stock excluding auction rate issues, and minority interests in equity accounts of consolidated subsidiaries, less goodwill and, with certain limited exceptions, all other intangible assets. Certain bank holding companies, however, may include certain trust preferred securities that underlie junior subordinated debt in their Tier I capital. (See below within this section for more information regarding the capital treatment of trust preferred securities.) In addition, bank holding companies may include cumulative preferred stock in their Tier 1 capital, up to a limit of 25% of such Tier 1 capital.

“Tier 2,” or supplementary capital, includes, among other things, portions of trust preferred securities and cumulative preferred stock not otherwise counted in Tier I capital, as well as limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations. Institutions that must incorporate market risk exposure into their risk-based capital requirements may also have a third tier of capital in the form of restricted short-term unsecured subordinated debt.

 

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“Tier 3 capital” consists of subordinated debt that meets certain conditions, including being unsecured, being fully paid up, having an original maturity of at least two years, and not being redeemable before maturity without prior Federal Reserve Board approval. The Federal Reserve Board requires bank holding companies that engage in trading activities to adjust their risk-based capital ratios to take into consideration market risks that may result from movements in market prices of covered trading positions in trading accounts, or from foreign exchange or commodity positions, whether or not in trading accounts, including changes in interest rates, equity prices, foreign exchange rates or commodity prices. Any capital required to be maintained under these provisions may consist of new “Tier 3 capital.” “Total capital” is the sum of Tier 1, Tier 2 and Tier 3 capital.

The Federal Reserve Board and the other federal banking regulators require that all intangible assets, with certain limited exceptions, be deducted from Tier 1 capital. Under the Federal Reserve Board’s rules, the only types of intangible assets that may be included in (i.e., not deducted from) a bank holding company’s capital are originated or purchased mortgage servicing rights, non-mortgage servicing assets, and purchased credit card relationships, provided that, in the aggregate, the amount of these items included in capital does not exceed 100% of Tier 1 capital.

Under the risk-based guidelines, financial institutions are required to maintain a risk-based ratio, which is total capital to risk-weighted assets, of at least 8%, of which at least 4% must be Tier 1 capital. The appropriate regulatory authority may set higher capital requirements when an institution’s circumstances warrant.

The Federal Reserve Board has established a minimum ratio of Tier 1 capital to total assets of 3.0% for strong bank holding companies rated composite “1” under the new RFI/C (D) (“Risk Management,” “Financial Condition,” “Impact,” “Composite Rating” and “Depository Institution”) components rating system for bank holding companies, and for certain bank holding companies that have implemented the Board’s risk-based capital measure for market risk. For all other bank holding companies, the minimum ratio of Tier 1 capital to total assets is 4.0%. Banking organizations with supervisory, financial, operational, or managerial weaknesses, as well as organizations that are anticipating or experiencing significant growth are expected to maintain capital ratios well above the minimum levels. Moreover, higher capital ratios may be required for any bank holding company if warranted by its particular circumstances or risk profile. In all cases, bank holding companies should hold capital commensurate with the level and nature of the risks, including the volume and severity of problem loans, to which they are exposed. The Federal Reserve Board has also indicated that it will consider a “tangible Tier 1 capital ratio” (deducting all intangibles) and other indications of capital strength in evaluating proposals for expansion or new activities. More recently, in its February 24, 2009 supervisory letter, the Federal Reserve Board noted that a BHC’s predominant form of tangible capital should be common equity.

The bank regulatory agencies have established special minimum capital requirements for equity investments in nonfinancial companies. The requirements consist of a series of marginal capital charges that increase within a range from 8% to 25% of the adjusted carrying value of the equity investments as a financial institution’s overall exposure to equity investments increases as a percentage of its Tier 1 capital. At December 31, 2010, capital charges relating to WesBanco’s equity investments in nonfinancial companies were immaterial.

Failure to meet applicable capital guidelines could subject a financial institution to a variety of enforcement remedies available to the federal regulatory authorities, including limitations on the ability to pay dividends, the issuance by the regulatory authority of a capital directive to increase capital, and the termination of deposit insurance by the FDIC, as well as to the measures described below under “Prompt Corrective Action” as applicable to undercapitalized institutions.

As of December 31, 2010, WesBanco’s Tier 1 and total capital to risk-adjusted assets ratios were 11.94% and 13.20%, respectively. As of December 31, 2010, WesBanco Bank also had capital in excess of the minimum requirements. Neither WesBanco nor the Bank had been advised by the appropriate federal banking regulator of any specific leverage ratio applicable to it. As of December 31, 2010, WesBanco’s leverage ratio was 8.35%.

 

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As of December 31, 2010, WesBanco had $106.0 million in junior subordinated debt on its Consolidated Balance Sheets presented as a separate category of long-term debt. For regulatory purposes, Trust Preferred Securities totaling $103.0 million underlying such junior subordinated debt were included in Tier 1 Capital as of December 31, 2010, in accordance with regulatory reporting requirements. On March 1, 2005, the Federal Reserve Board adopted a rule retaining trust preferred securities in Tier 1 capital, but with stricter quantitative limits and clearer qualitative standards. Under this rule, after a transition period initially set to expire on March 31, 2009 but extended to March 31, 2011, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25 percent of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit could be included in Tier 2 capital, subject to restrictions.

The Dodd-Frank Act requires the federal banking agencies to develop consolidated capital requirements applicable to bank holding companies and banks. These new requirements must be at least as stringent as those currently applicable to banks, meaning that trust preferred securities will generally be excluded from Tier 1 Capital. A grandfather provision, however, will permit bank holding companies with consolidated assets of less than $15 billion, such as WesBanco, to continue counting existing trust preferred securities as Tier 1 Capital until they mature. WesBanco currently believes substantially all of its Trust Preferred Securities will remain in Tier 1 capital. For more information regarding trust preferred securities, please refer to Note 12, “Junior Subordinated Debt Owed to Unconsolidated Subsidiary Trusts” in the Consolidated Financial Statements.

The risk-based capital standards of the Federal Reserve Board and the FDIC specify that evaluations by the banking agencies of a bank’s capital adequacy will include an assessment of the exposure to declines in the economic value of the bank’s capital due to changes in interest rates. These banking agencies issued a joint policy statement on interest rate risk describing prudent methods for monitoring such risk that rely principally on internal measures of exposure and active oversight of risk management activities by senior management.

The federal regulatory authorities’ risk-based capital guidelines are based upon agreements reached by the Basel Committee on Banking Supervision (the “Basel Committee”). The Basel Committee is a committee of central banks and bank supervisors and regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. In December 2010, the Basel Committee issued a strengthened set of international capital and liquidity standards for banks and bank holding companies, known as “Basel III.” The Basel III reforms are supported by the U.S. federal banking agencies and will increase both the quantity and quality of capital banks and bank holding companies are required to hold. Regulators in each participating country will be expected to implement Basel III beginning January 1, 2013.

When Basel III is fully phased-in on January 1, 2019, banks and bank holding companies will be required to maintain: (i) a minimum Tier 1 common equity ratio of at least 4.5 percent, (ii) a minimum Tier 1 capital ratio of at least 6 percent, (iii) a minimum total capital ratio (Tier 1 and Tier 2 capital) of at least 8 percent; and (iv) a non-risk-based minimum leverage ratio (Tier 1 capital to average consolidated assets) of 3 percent. Although not presented as a minimum requirement, banks and bank holding companies will not be able to pay dividends unless they have an additional “capital conservation buffer” equal to a Tier 1 common equity ratio of 2.5 percent. Adding the capital conservation buffer on top of the minimums, banks and bank holding companies will generally need a Tier 1 common equity ratio of 7 percent, a Tier 1 capital ratio of 8.5 percent, and a total capital ratio of 10.5 percent. Under Basel III, regulators would also be able to impose a “countercyclical capital buffer” during periods of excessive credit growth. The countercyclical capital buffer would be an additional Tier 1 common equity ratio of up to 2.5 percent. Under Basel III, regulatory adjustments to common equity will generally be eliminated by January 1, 2018, although an exception will permit a portion of mortgage servicing rights to continue being treated as common equity.

 

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WesBanco cannot predict the precise timing or final form of forthcoming capital regulations that could be applicable to WesBanco or their impact on WesBanco. Capital requirements that may arise from regulations issued under the Dodd-Frank Act, Basel III, or some other initiative could increase the minimum capital requirements applicable to WesBanco and its subsidiaries.

PROMPT CORRECTIVE ACTION

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires federal banking regulatory authorities to take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.

An institution is deemed to be “well-capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level for any capital measure. An institution is deemed to be “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and generally a Tier 1 leverage ratio of 4% or greater and the institution does not meet the definition of a “well-capitalized” institution. An institution that does not meet one or more of the “adequately capitalized” tests is deemed to be “undercapitalized.” If the institution has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3%, or a Tier 1 leverage ratio that is less than 3%, it is deemed to be “significantly undercapitalized.” Finally, an institution is deemed to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. At December 31, 2010, WesBanco Bank had capital levels that met the “well-capitalized” standards under FDICIA and its implementing regulations.

FDICIA generally prohibits a depository institution from making any capital distribution, including payment of a cash dividend, or paying any management fee to its holding company, if the depository institution would thereafter be undercapitalized. Undercapitalized institutions are subject to growth limitations and are required to submit a capital restoration plan. If any depository institution subsidiary of a holding company is required to submit a capital restoration plan, the holding company would be required to provide a limited guarantee regarding compliance with the plan as a condition of approval of such plan by the appropriate federal banking agency. If an undercapitalized institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized institutions may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt and/or trust preferred securities. In addition, critically undercapitalized institutions are subject to appointment of a receiver or conservator within 90 days of becoming critically undercapitalized.

GRAMM-LEACH-BLILEY ACT

Under the Gramm-Leach-Bliley Act (the “GLB Act”), banks are no longer prohibited from associating with, or having management interlocks with, a business organization engaged principally in securities activities. By qualifying as a “financial holding company,” as authorized under the GLB Act, which WesBanco has done, a bank holding company acquires new powers not otherwise available to it. As indicated above, WesBanco has elected to become a financial holding company under the GLB Act. It also has qualified a subsidiary of the Bank as a financial subsidiary under the GLB Act.

Financial holding company powers relate to “financial activities” that are determined by the Federal Reserve Board, in coordination with the Secretary of the Treasury, to be financial in nature, incidental to an activity that is financial in nature, or complementary to a financial activity, provided that the complementary activity does not pose a safety and soundness risk. The GLB Act itself defines certain activities as financial in nature, including

 

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but not limited to: underwriting insurance or annuities; providing financial or investment advice; underwriting, dealing in, or making markets in securities; merchant banking, subject to significant limitations; insurance company portfolio investing, subject to significant limitations; and any activities previously found by the Federal Reserve Board to be closely related to banking.

National and state banks are permitted under the GLB Act, subject to capital, management, size, debt rating, and CRA qualification factors, to have “financial subsidiaries” that are permitted to engage in financial activities not otherwise permissible. However, unlike financial holding companies, financial subsidiaries may not engage in insurance or annuity underwriting; developing or investing in real estate; merchant banking (for at least five years); or insurance company portfolio investing.

DODD-FRANK ACT

On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which contains numerous and wide-ranging reforms to the structure of the U.S. financial system. Portions of the Dodd-Frank Act are effective at different times, and many of the provisions are general statements directing regulators to draft more detailed rules. Although the full scope of the Dodd-Frank Act’s impact remains somewhat unclear, management expects that it will, over time, reduce revenue and increase expenses.

As a bank holding company, WesBanco will be subjected to increased capital requirements (discussed above under “Item 1. Business—Capital Requirements”). A provision known as the Volcker Rule will limit WesBanco’s ability to engage in proprietary trading, as well as its ability to sponsor or invest in hedge funds or private equity funds. A provision known as the Lincoln Rule will prevent WesBanco Bank from engaging in certain swap transactions unless they are carried out through a separately capitalized affiliate. Increased restrictions also will apply to transactions with and among WesBanco subsidiaries (discussed above under “Item 1. Business—Holding Company Regulations”), and the Federal Reserve Board will have increased authority to examine and take enforcement action against WesBanco and its subsidiaries that are not banks.

The Dodd-Frank Act makes several changes affecting the securitization markets, which may affect WesBanco’s ability or desire to use those markets to meet funding or liquidity needs. One of these changes calls for federal regulators to adopt regulations requiring the sponsor of a securitization to retain at least 5 percent of the credit risk, with exceptions for “qualified residential mortgages.”

As a publicly traded company, WesBanco will be required to give shareholders an advisory vote on executive compensation, and, in some cases, golden parachute arrangements. The Dodd-Frank Act also calls for regulators to issue new rules relating to compensation committee independence, incentive-based compensation arrangements deemed excessive, and proxy access by shareholders.

WesBanco Bank and other insured depository institutions will have increased authority to open new branches across state lines (discussed above under “Item 1. Business—Supervision and Regulation”). A provision authorizing insured depository institutions to pay interest on checking accounts will likely increase WesBanco’s interest expenses. A new government agency, the Bureau of Consumer Financial Protection (“Consumer Bureau”), will have the authority to write rules implementing numerous consumer protection laws applicable to all banks (discussed below under “Item 1. Business—Consumer Protection Laws”).

CONSUMER PROTECTION LAWS

In connection with its lending and leasing activities, WesBanco Bank is subject to a number of federal and state laws designed to protect consumers and promote lending and other financial services to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Electronic Fund Transfer Act, and, in some cases, their respective state law counterparts. The Consumer Bureau created by the Dodd-Frank Act will have consolidated authority to write

 

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regulations implementing these and other laws. WesBanco’s other subsidiaries that provide services relating to consumer financial products and services will also be subject to the Consumer Bureau’s regulations. As an institution with assets of less than $10 billion, WesBanco Bank will continue to be examined by the FDIC for compliance with these rules. Relating to mortgage lending, the Dodd-Frank Act requires new disclosures, verification, and restrictions, some of which are expected to limit the creation of variable-rate mortgages. In addition, the Dodd-Frank Act requires the Federal Reserve Board to write rules to limit debit card interchange fees to those “reasonable and proportional” to the cost of transactions. Even though the limits on debit card interchange fees will apply only to institutions with more than $10 billion in assets, market forces may limit debit card interchange fees as a source of revenue for all banks, including smaller banks like WesBanco Bank.

Federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.

The CRA requires WesBanco Bank’s primary federal bank regulatory agency, the FDIC, to assess the WesBanco Bank’s record in meeting the credit needs of the communities served by the bank, including low and moderate-income neighborhoods and persons. Institutions are assigned one of four ratings: “Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.” This assessment is reviewed when a bank applies to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch office. WesBanco Bank’s current CRA rating is “Outstanding.”

SECURITIES REGULATION

WesBanco’s full service broker-dealer subsidiary, WesBanco Securities, is registered as a broker-dealer with the SEC and in the states in which it does business. WesBanco Securities also is a member of FINRA. WesBanco Securities is subject to regulation by the SEC, FINRA and the securities administrators of the states in which it is registered. WesBanco Securities is a member of the Securities Investor Protection Corporation, which in the event of the liquidation of a broker-dealer, provides protection for customers’ securities accounts held by WesBanco Securities of up to $500,000 for each eligible customer, subject to a limitation of $250,000 for claims for cash balances.

In addition, WesBanco Bank’s Investment Department serves as an investment adviser to a family of mutual funds and is registered as an investment adviser with the SEC and in some states.

ANTI-MONEY LAUNDERING INITIATIVES AND THE USA PATRIOT ACT

A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (“USA Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department has issued various implementing regulations which apply various requirements of the USA Patriot Act to financial institutions, such as WesBanco Bank and WesBanco’s broker-dealer subsidiary. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of WesBanco and its subsidiaries to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for WesBanco and its subsidiaries.

 

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ITEM 1A. RISK FACTORS

The risks described below are not the only ones we face in our business. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition or operating results could be materially harmed.

DUE TO INCREASED COMPETITION, WESBANCO MAY NOT BE ABLE TO ATTRACT AND RETAIN BANKING CUSTOMERS AT CURRENT LEVELS.

WesBanco operates in a highly competitive banking and financial industry that could become even more competitive as a result of legislative, regulatory and technological changes. WesBanco faces banking competition in all the markets it serves from the following:

 

   

local, regional and national banks;

 

   

savings and loans;

 

   

internet banks;

 

   

credit unions;

 

   

finance companies; and

 

   

brokerage firms serving WesBanco’s market areas.

In particular, WesBanco Bank’s competitors include several major national financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions may have products and services not offered by WesBanco, which may cause current and potential customers to choose those institutions. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits and range and quality of services provided. If WesBanco is unable to attract new and retain current customers, loan and deposit growth could decrease causing WesBanco’s results of operations and financial condition to be negatively impacted.

WESBANCO MAY NOT BE ABLE TO EXPAND ITS TRUST AND INVESTMENT SERVICES SEGMENT AND RETAIN ITS CURRENT CUSTOMERS.

WesBanco may not be able to attract new and retain current investment management clients due to competition from the following:

 

   

commercial banks and trust companies;

 

   

mutual fund companies;

 

   

investment advisory firms;

 

   

law firms;

 

   

brokerage firms; and

 

   

other financial services companies.

Its ability to successfully attract and retain investment management clients is dependent upon its ability to compete with competitors’ investment products, level of investment performance, client services and marketing and distribution capabilities. Due to changes in economic conditions, the performance of the trust and investment services segment may be negatively impacted by the financial markets in which investment clients’ assets are invested, causing clients to seek other alternative investment options. If WesBanco is not successful, its results from operations and financial position may be negatively impacted.

 

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CUSTOMERS MAY DEFAULT ON THE REPAYMENT OF LOANS WHICH COULD SIGNIFICANTLY IMPACT RESULTS OF OPERATIONS THROUGH INCREASES IN THE PROVISION AND ALLOWANCE FOR LOAN LOSSES.

The Bank’s customers may default on the repayment of loans, which may negatively impact WesBanco’s earnings due to loss of principal and interest income. Increased operating expenses may result from the allocation of management time and resources to the collection and work-out of the loan. Collection efforts may or may not be successful causing WesBanco to write off the loan or repossess the collateral securing the loan, which may or may not exceed the balance of the loan.

WesBanco maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, to provide for probable incurred losses in our loan portfolio. Management evaluates the adequacy of the allowance for loan losses at least quarterly, which includes testing certain individual loans as well as collective pools of loans for impairment. This evaluation includes an assessment of actual loss experience within each category of the portfolio, individual commercial and commercial real estate loans that exhibit credit weakness; current economic events, including employment statistics, trends in bankruptcy filings, and other pertinent factors; industry or geographic concentrations; and regulatory guidance.

WesBanco’s regulatory agencies periodically review the allowance for loan losses. Based on their assessment the regulatory agencies may require WesBanco to adjust the allowance for loan losses. These adjustments could negatively impact WesBanco’s results of operations or financial position.

ECONOMIC CONDITIONS IN WESBANCO’S MARKET AREAS COULD NEGATIVELY IMPACT EARNINGS.

WesBanco Bank serves both individuals and business customers throughout West Virginia, Ohio and Western Pennsylvania. The substantial majority of WesBanco’s loan portfolio is to individuals and businesses in these markets. As a result, the financial condition, results of operations and cash flows of WesBanco are affected by local and regional economic conditions. A downturn in these economies could have a negative impact on WesBanco and the ability of the Bank’s customers to repay their loans. The value of the collateral securing loans to borrowers may also decline as the economy declines. As a result, deteriorating economic conditions in these markets could cause a decline in the overall quality of WesBanco’s loan portfolio requiring WesBanco to charge-off a higher percentage of loans and/or increase its allowance for loan losses. A decline in economic conditions in these markets may also force customers to utilize deposits held by WesBanco Bank in order to pay current expenses causing the Bank’s deposit base to shrink. As a result the Bank may have to borrow funds at higher rates in order to meet liquidity needs. These events may have a negative impact on WesBanco’s earnings and financial condition.

CURRENT MARKET INTEREST RATES AND COST OF FUNDS MAY NEGATIVELY IMPACT WESBANCO’S BANKING BUSINESS.

Fluctuations in interest rates may negatively impact the business of WesBanco Bank. The Bank’s main source of income from operations is net interest income, which is equal to the difference between the interest income received on interest-bearing assets (usually loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (usually deposits and borrowings). These rates are highly sensitive to many factors beyond WesBanco’s control, including general economic conditions, both domestic and foreign, and the monetary and fiscal policies of various governmental and regulatory authorities. WesBanco Bank’s net interest income can be affected significantly by changes in market interest rates. Changes in relative interest rates may reduce the Bank’s net interest income as the difference between interest income and interest expense decreases. As a result, the Bank has adopted asset and liability management policies to minimize the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments and funding sources. However, even with these policies in place, WesBanco cannot be certain that changes in interest rates or the shape of the interest rate yield curve will not negatively impact its results of operations or financial position.

 

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WesBanco’s cost of funds for banking operations may increase as a result of general economic conditions, interest rates and competitive pressures. The Bank has traditionally obtained funds principally through deposits and wholesale borrowings. As a general matter, deposits are a cheaper source of funds than borrowings because interest rates paid for deposits are typically less than interest rates charged for borrowings. If, as a result of general economic conditions, market interest rates, competitive pressures or otherwise, the value of deposits at the Bank decreases relative to its overall banking operations, the Bank may have to rely more heavily on borrowings as a source of funds in the future.

SIGNIFICANT DECLINES IN U.S. AND FOREIGN MARKETS COULD HAVE A NEGATIVE IMPACT ON WESBANCO’S EARNINGS.

The capital and credit markets have experienced extreme disruption in recent years. These conditions resulted in less liquidity, greater volatility, widening of credit spreads and a lack of price transparency in certain asset types. In many cases, the markets have exerted downward pressure on stock prices, security prices and credit capacity for certain issuers without regard to those issuers’ underlying financial strength. Sustained weakness in business and economic conditions in any or all of the domestic or foreign financial markets could result in credit deterioration in investment securities held by us, rating agency downgrades for such securities or other market factors that could result in us having to recognize other-than-temporary impairment in the value of such investment securities, with a corresponding charge against earnings. Furthermore, our pension assets are primarily invested in equity and debt securities, and weakness in capital and credit markets could result in deterioration of these assets which may increase minimum funding contributions and future pension expense. If the markets deteriorate further, these conditions may be material to WesBanco’s ability to access capital and may adversely impact results of operations.

Further, WesBanco’s trust and investment services income could be impacted by fluctuations in the securities market. A portion of this revenue is based on the value of the underlying investment portfolios. If the values of those investment portfolios decline, the Bank’s revenue could be negatively impacted.

WESBANCO MAY BE REQUIRED TO WRITE DOWN GOODWILL AND OTHER INTANGIBLE ASSETS, CAUSING ITS FINANCIAL CONDITION AND RESULTS TO BE NEGATIVELY AFFECTED.

When WesBanco acquires a business, a portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. Under current accounting standards, if WesBanco determines goodwill or intangible assets are impaired, it is required to write down the carrying value of these assets. WesBanco conducts an annual review to determine whether goodwill and other identifiable intangible assets are impaired. WesBanco completed such an impairment analysis in 2010 and concluded that no impairment charge was necessary for the year ended December 31, 2010. WesBanco cannot provide assurance that it will not be required to take an impairment charge in the future. Any impairment charge would have a negative effect on its stockholders’ equity and financial results and may cause a decline in our stock price.

ACQUISITION OPPORTUNITIES MAY NOT BE AVAILABLE TO WESBANCO IN THE FUTURE.

WesBanco continually evaluates opportunities to acquire other businesses. However, WesBanco may not have the opportunity to make suitable acquisitions on favorable terms in the future, which could negatively impact the growth of its business. WesBanco expects that other banking and financial companies, many of which have significantly greater resources, will compete to acquire compatible businesses. This competition could increase prices for acquisitions that WesBanco would likely pursue, and its competitors may have greater resources than it does. Also, acquisitions of regulated business such as banks are subject to various regulatory approvals. If WesBanco fails to receive the appropriate regulatory approvals, it will not be able to consummate an acquisition that it believes is in its best interests.

 

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WESBANCO IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND SUPERVISION.

WesBanco is subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect WesBanco’s lending practices, capital structure, investment practices, dividend policy, operations and growth, among other things. These regulations also impose obligations to maintain appropriate policies, procedure and controls. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect WesBanco in substantial and unpredictable ways. Such changes could subject WesBanco to additional costs, limit the types of financial services and products that could be offered, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil penalties and /or reputation damage, which could have a material adverse effect on WesBanco’s business, financial condition and result of operations.

As of December 31, 2010, WesBanco had $106.0 million in junior subordinated debt presented as a separate category of long-term debt on its consolidated balance sheets. For regulatory purposes, Trust Preferred Securities totaling $103.0 million underlying such junior subordinated debt are included in Tier 1 capital in accordance with regulatory reporting requirements. On March 1, 2005, the Federal Reserve adopted a rule that retains trust preferred securities in Tier 1 capital, but with stricter quantitative limits and clearer qualitative standards. Under the rule, after a transition period that was originally set to end on March 31, 2009 but has since been extended to March 31, 2011, the aggregate amount of trust preferred securities and certain other capital elements will be limited to 25 percent of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital, subject to restrictions. The Dodd-Frank Act requires the federal banking agencies to develop new consolidated capital requirements applicable to bank holding companies and banks. These rules will generally exclude trust preferred securities from Tier 1 Capital. A grandfather provision will permit bank holding companies with consolidated assets of less than $15 billion, such as WesBanco, to continue counting existing trust preferred securities as Tier 1 Capital until they mature.

The rule is not expected to have an impact on WesBanco’s Tier 1 capital; but if WesBanco issued additional trust preferred securities, they would not count as Tier 1 Capital. Furthermore, if WesBanco incurs material operating losses, WesBanco’s Tier 1 capital ratio may be negatively impacted. WesBanco’s earnings may also be negatively impacted due to prepayment penalties associated with the redemption of certain of the trust preferred securities.

In addition, new international capital standards known as Basel III are expected to further increase the minimum capital requirements applicable to WesBanco and WesBanco Bank, which may negatively impact WesBanco and the Bank. Additional information about these and other expected changes in capital requirements are in “Item 1. Business—Capital Requirements.”

Regulation of WesBanco and its subsidiaries is expected to continue to expand in scope and complexity in the future. These laws are expected to have the effect of increasing WesBanco’s costs of doing business, reducing its revenues, and may limit its ability to pursue business opportunities or otherwise adversely affect its business and financial condition. The Dodd-Frank Act and other laws, as well as rules implementing or related to them, may adversely affect WesBanco. Specifically, any governmental or regulatory action having the effect of requiring WesBanco to obtain additional capital could reduce earnings and have a material dilutive effect on current shareholders. Legislation and regulation of debit card fees, credit cards and other bank services, as well as changes in WesBanco’s practices relating to those and other bank services, may affect WesBanco’s revenue and other financial results. Additional information about increased regulation is provided in “Item 1. Business” under the headings “Supervisions and Regulation,” “Holding Company Regulations,” “Capital Requirements,” “Dodd-Frank Act,” and “Consumer Protection Laws.”

 

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WesBanco is also subject to tax laws and regulations promulgated by the United States government and the states in which it operates. Changes to these laws and regulations or the interpretations of such laws and regulations by taxing authorities could impact future tax expense and the value of deferred tax assets.

LIMITED AVAILABILITY OF BORROWINGS AND LIQUIDITY FROM THE FEDERAL HOME LOAN BANK SYSTEM AND OTHER SOURCES COULD NEGATIVELY IMPACT EARNINGS.

WesBanco Bank is currently a member bank of the FHLB of Pittsburgh, and retains certain short-term borrowings from the FHLB of Cincinnati from prior bank acquisitions, but is no longer considered a member bank of such FHLB. Membership in this system of quasi-governmental, regional home-loan oriented agency banks allows us to participate in various programs offered by the FHLB. We borrow funds from the FHLB, which are secured by a blanket lien on certain residential mortgage loans or securities with collateral values in excess of the outstanding balances. Current and future earnings shortfalls and minimum capital requirements of the FHLB may impact the collateral necessary to secure borrowings and limit the borrowings extended to their member banks, as well as require additional capital contributions by member banks. Should this occur, WesBanco’s short-term liquidity needs could be negatively impacted. Should WesBanco be restricted from using FHLB advances due to weakness in the system or with the FHLB of Pittsburgh, WesBanco may be forced to find alternative funding sources. If WesBanco is required to rely more heavily on higher cost funding sources, revenues may not increase proportionately to cover these costs, which would adversely affect WesBanco’s results of operations and financial position.

On December 23, 2008 the FHLB of Pittsburgh announced that it would suspend dividends and the repurchase of excess capital stock from its member banks in order to restore their retained earnings and/or overall risk-based capital ratios. They resumed partial repurchase of excess capital stock in October, 2010. The FHLB of Pittsburgh stock owned by WesBanco totaled $25.0 million and $26.3 million at December 31, 2010 and 2009, respectively. If the financial condition of the FHLB of Pittsburgh were to further deteriorate, the corresponding FHLB stock owned by WesBanco may be deemed a non-earning asset and could potentially be evaluated for impairment with any loss recognized through earnings.

WESBANCO’S FINANCIAL CONDITION AND RESULTS OF OPERATIONS DEPEND ON THE SUCCESSFUL GROWTH OF ITS SUBSIDIARIES.

WesBanco’s primary business activity for the foreseeable future will be to act as the holding company of its banking and other subsidiaries. Therefore, WesBanco’s future profitability will depend on the success and growth of these subsidiaries. In the future, part of WesBanco’s growth may come from buying other banks and buying or establishing other companies. Such entities may not be profitable after they are purchased or established, and they may lose money or be dilutive to earnings per share, particularly for the first few years. A new bank or company may bring with it unexpected liabilities, bad loans, or poor employee relations, or the new bank or company may lose customers and the associated revenue.

WESBANCO’S ABILITY TO PAY DIVIDENDS IS LIMITED, AND COMMON STOCK DIVIDENDS MAY HAVE TO BE REDUCED OR ELIMINATED.

Holders of shares of WesBanco’s common stock are entitled to dividends if, when, and as declared by WesBanco’s Board of Directors out of funds legally available for that purpose. Although the Board of Directors has declared cash dividends in the past, the current ability to pay dividends is largely dependent upon the receipt of dividends from WesBanco Bank. Federal and state laws impose restrictions on the ability of the Bank to pay dividends, which restrictions are more fully described in “Item 1. Business—Payment of Dividends.” In general, future dividend policy is subject to the discretion of the Board of Directors and will depend upon a number of factors, including WesBanco’s and the Bank’s future earnings, liquidity and capital requirements, regulatory constraints and financial condition.

 

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WESBANCO MAY ENCOUNTER INTEGRATION DIFFICULTIES OR MAY FAIL TO REALIZE THE ANTICIPATED BENEFITS OF ACQUISITIONS.

WesBanco may not be able to integrate any new acquisitions without encountering difficulties including, without limitation, the loss of key employees and customers, the disruption of ongoing businesses or possible inconsistencies in standards, controls, procedures and policies. Any future acquisitions may also result in other unforeseen difficulties, including integration of the combined companies, which could require significant time and attention from our management that would otherwise be directed at developing our existing business and expenses may be higher than initially projected. In addition, we could discover undisclosed liabilities resulting from any acquisitions for which we may become responsible. Further, benefits such as enhanced earnings that we anticipate from these acquisitions may not develop and future results of the combined companies may be materially lower from those estimated.

HIGHER FDIC DEPOSIT INSURANCE PREMIUMS AND ASSESSMENTS COULD ADVERSELY AFFECT WESBANCO’S FINANCIAL CONDITION.

Since 2008, the economic environment caused higher levels of bank failures, which dramatically increased FDIC resolution costs and led to a significant reduction in the deposit insurance fund. In order to restore reserve ratios of the deposit insurance fund, the FDIC has significantly increased the assessment rates paid by financial institutions for deposit insurance. In addition, in May 2009, the FDIC imposed a special assessment on all insured institutions. The FDIC has indicated that future special assessments are possible, although it has not determined the magnitude or timing of any future assessments. Additional increases in FDIC insurance premiums and future special assessments may adversely affect WesBanco’s results of operations and financial condition.

INTERRUPTION TO OUR INFORMATION SYSTEMS COULD ADVERSELY AFFECT WESBANCO’S OPERATIONS.

WesBanco relies on information systems and communications for operating and monitoring all major aspects of business, as well as internal management functions. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the WesBanco customer relationship, management, general ledger, deposit, loan and other systems. While WesBanco has policies, procedures and technical safeguards designed to prevent or limit the effect of any failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. Any disruption in the operation of WesBanco’s information systems could damage WesBanco’s reputation, result in a loss of customer business, subject WesBanco to additional regulatory scrutiny, and expose WesBanco to civil litigation and possible financial liability, any of which could have a material effect on WesBanco’s business, results of operations and financial condition.

LOSS OF SKILLED EMPLOYEES COULD IMPACT GROWTH AND EARNINGS AND MAY HAVE AN ADVERSE IMPACT ON BUSINESS.

Our operating results and ability to adequately manage our growth are highly dependent on the services, managerial abilities and performance of our key employees. Our success depends upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of this management and personnel. The unexpected loss of services of key personnel could have an adverse impact on WesBanco’s business, operating results and financial condition because of their skills, knowledge of the local markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

WESBANCO IS SUBJECT TO LENDING CONCENTRATION RISKS.

As of December 31, 2010, approximately 66.0% of WesBanco’s loan portfolio consisted of commercial loans. Commercial loans are generally viewed as having more inherent risk of default than residential mortgage or consumer loans. The repayment of these loans often depends on the successful operation of a business or the

 

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sale or development of the underlying property and as a result, is more likely to be adversely affected by adverse conditions in the real estate market or the economy in general. Also, the commercial loan balance per borrower is typically larger than that for residential mortgage loans and consumer loans, inferring higher potential losses on an individual loan basis. The deterioration of one or a few of these loans could cause a significant increase in nonperforming loans and a reduction in interest income. An increase in nonperforming loans could result in an increase in the provision for loan losses and an increase in loan charge-offs, both of which could have a material adverse effect on WesBanco’s financial condition and results of operations.

WESBANCO MAY NEED TO RAISE CAPITAL IN THE FUTURE, BUT CAPITAL MAY NOT BE AVAILABLE WHEN NEEDED OR AT ACCEPTABLE TERMS.

Federal and state banking regulators require WesBanco and its banking subsidiary, WesBanco Bank, to maintain adequate levels of capital to support its operations. In addition, in the future WesBanco may need to raise additional capital to support its business or to finance acquisitions, if any, or WesBanco may otherwise elect to raise additional capital in anticipation of future growth opportunities. Many financial institutions have sought to raise considerable amounts of capital over the last two years in response to deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors. Such overall market demand for capital may diminish WesBanco’s ability to raise additional capital if and when it is needed. Future growth in WesBanco’s earning assets at rates in excess of the rate at which its capital is increased through retained earnings would result in a reduction of WesBanco’s regulatory capital ratios. Also, future unexpected losses, whether resulting from loan losses or other causes, would reduce total capital.

WesBanco’s ability to raise additional capital for parent company or banking subsidiary needs will depend on conditions at that time in the capital markets, overall economic conditions, WesBanco’s financial performance and condition, and other factors, many of which are outside our control. There is no assurance that, if needed, WesBanco will be able to raise additional capital on favorable terms or at all. An inability to raise additional capital may have a material adverse effect on our ability to expand operations, and on our financial condition, results of operations and future prospects.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

WesBanco’s subsidiaries generally own their respective offices, related facilities and any unimproved real property held for future expansion. At December 31, 2010, WesBanco operated 112 banking offices in West Virginia, Ohio and Western Pennsylvania, and one loan production office, of which 86 were owned and 27 were leased under long-term operating leases. These leases expire at various dates through October 2027 and generally include options to renew. The Bank also owns several regional headquarters buildings in various markets that may also house certain back office functions.

The main office of WesBanco is located at 1 Bank Plaza, Wheeling, West Virginia, in a building owned by WesBanco Bank. The building contains approximately 100,000 square feet and serves as the main office for both WesBanco’s community banking segment and its trust and investment services segment. The Bank’s back office operations currently occupy approximately 80% of the space available in an office building adjacent to the main office, which is owned by WesBanco Properties, Inc., a subsidiary of WesBanco, with the remainder of the building leased to unrelated businesses.

At various building locations, WesBanco rents or looks to provide commercial office space to unrelated businesses. Rental income totaled $0.6 million for both 2010 and 2009. For additional disclosures related to WesBanco’s properties, other fixed assets and leases, please refer to Note 6, “Premises and Equipment” in the Consolidated Financial Statements.

 

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ITEM 3. LEGAL PROCEEDINGS

WesBanco is involved in lawsuits, claims, investigations and proceedings which arise in the ordinary course of business. There are no such matters pending that WesBanco expects to be material in relation to its business, financial condition or results of operations.

 

ITEM 4. RESERVED

 

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PART II

 

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

WesBanco’s common stock is quoted on the NASDAQ Global Stock Market under the symbol WSBC. The approximate number of holders of WesBanco’s $2.0833 par value common stock as of February 18, 2011 was 5,045, not including shares held in nominee positions. The number of holders does not include WesBanco employees who have had stock allocated to them through WesBanco’s KSOP. All WesBanco employees who meet the eligibility requirements of the KSOP are included in the Plan.

The table below presents for each quarter in 2010 and 2009, the high and low sales price per share as reported by NASDAQ and cash dividends declared per share.

 

     2010      2009  
     High      Low      Dividend
Declared
     High      Low      Dividend
Declared
 

Fourth quarter

   $ 19.98       $ 15.92       $ 0.140       $ 16.00       $ 11.95       $ 0.140   

Third quarter

     17.90         14.15         0.140         18.91         14.28         0.140   

Second quarter

     20.18         16.04         0.140         24.40         14.52         0.280   

First quarter

     17.40         11.90         0.140         27.74         13.46         0.280   

WesBanco, Inc. has eight capital trusts, which are all wholly-owned trust subsidiaries of WesBanco formed for the purpose of issuing Trust Preferred Securities and lending the proceeds to WesBanco. The debentures and trust preferred securities issued by the trusts provide that WesBanco has the right to elect to defer the payment of interest on the debentures 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, it may not declare or pay any dividends on its common stock during any such period.

Federal and state laws impose restrictions on the ability of the Bank to pay dividends, which restrictions are more fully described in Item 1. “Business—Payment of Dividends.”

For additional disclosure relating to WesBanco Trust Preferred Securities, refer to Note 12, “Junior Subordinated Debt Owed to Unconsolidated Subsidiary Trusts” in the Consolidated Financial Statements.

As of December 31, 2010, WesBanco had an active stock repurchase plan in which up to one million shares can be acquired. The plan was originally approved by the Board of Directors on March 21, 2007 and provides for shares to be repurchased for general corporate purposes, which may include a subsequent resource for potential acquisitions, shareholder dividend reinvestment and employee benefit plans. The timing, price and quantity of purchases are at the discretion of WesBanco, and the plan may be discontinued or suspended at any time. There were no general open market repurchases in 2010, other than those for KSOP and dividend reinvestment plans.

Certain information relating to securities authorized for issuance under equity compensation plans is set forth under the heading “Equity Compensation Plan Information” in Part III, Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

 

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The following table shows the activity in WesBanco’s stock repurchase plan and other purchases for the quarter ended December 31, 2010:

 

Period

  Total Number of
Shares
Purchased
    Average Price
Paid per Share
    Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
    Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans
 

Balance at September 30, 2010

          584,325   

October 1, 2010 to October 31, 2010

       

Open market repurchases

    —        $ —          —          584,325   

Other transactions (1)

    21,513        17.10        N/A        N/A   

November 1, 2010 to November 30, 2010

       

Open market repurchases

    —          —          —          584,325   

Other transactions (1)

    5,246        17.82        N/A        N/A   

December 1, 2010 to December 31, 2010

       

Open market repurchases

    —          —          —          584,325   

Other transactions (1)

    2,943        18.97        N/A        N/A   

Fourth Quarter 2010

       

Open market repurchases

    —          —          —          584,325   

Other transactions (1)

    29,702        17.41        N/A        N/A   
                               

Total

    29,702      $ 17.41        —          584,325   
                               

 

(1) Consists of open market purchases transacted in the KSOP and dividend reinvestment plans.

N/A—Not applicable

 

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The following graph shows a comparison of cumulative total shareholder returns for WesBanco, the Russell 2000 Index, and the SNL Small Cap Bank Index. The total shareholder return assumes a $100 investment in the common stock of WesBanco and each index since December 31, 2005 with reinvestment of dividends.

LOGO

 

     December 31,  

Index

   2005      2006      2007      2008      2009      2010  

WesBanco, Inc.

   $ 100.00       $ 114.15       $ 73.09       $ 101.30       $ 48.57       $ 77.17   

Russell 2000

     100.00         118.37         116.51         77.15         98.11         124.46   

SNL Small Cap Bank Index

     100.00         114.14         82.53         69.37         48.76         59.56   

 

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ITEM 6. SELECTED FINANCIAL DATA

The following consolidated selected financial data is derived from WesBanco’s audited financial statements as of and for the five years ended December 31, 2010. The following consolidated financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and the Consolidated Financial Statements and related notes included elsewhere in this report. WesBanco’s acquisitions during the five years ended December 31, 2010, which include Oak Hill Financial, Inc., on November 30, 2007 and five former AmTrust branches on March 27, 2009, are included in results of operations since their respective dates of acquisition.

 

    For the years ended December 31,  

(dollars in thousands, except shares and per share amounts)

  2010     2009     2008     2007     2006  

PER COMMON SHARE INFORMATION

         

Earnings per common share—basic

  $ 1.34      $ 0.70      $ 1.42      $ 2.09      $ 1.79   

Earnings per common share—diluted

    1.34        0.70        1.42        2.09        1.79   

Dividends per common share

    0.56        0.84        1.12        1.10        1.06   

Book value at year end

    22.83        22.16        24.82        21.86        19.39   

Tangible book value at year end (1)

    12.09        11.31        14.74        11.44        12.64   

Average common shares outstanding—basic

    26,579,735        26,566,133        26,551,467        21,359,935        21,762,567   

Average common shares outstanding—diluted

    26,580,293        26,567,291        26,563,320        21,392,010        21,816,573   

SELECTED BALANCE SHEET INFORMATION

         

Securities

  $ 1,426,191      $ 1,263,254      $ 935,588      $ 937,084      $ 736,707   

Loans held for sale

    10,800        9,441        3,874        39,717        3,170   

Net portfolio loans

    3,227,625        3,409,786        3,554,506        3,682,006        2,876,234   

Total assets

    5,361,458        5,397,352        5,222,041        5,384,326        4,098,143   

Deposits

    4,172,423        3,974,233        3,503,916        3,907,930        2,995,547   

Total FHLB and other borrowings

    440,991        684,915        894,695        735,313        561,468   

Junior subordinated debt owed to unconsolidated subsidiary trusts

    106,034        111,176        111,110        111,024        87,638   

Shareholders’ equity

    606,863        588,716        659,371        580,319        416,875   

SELECTED RATIOS

         

Return on average assets

    0.66     0.43     0.73     1.09     0.94

Return on average tangible assets (1)

    0.73     0.49     0.82     1.17     1.01

Return on average equity

    5.88     3.73     6.42     10.63     9.35

Return on average tangible equity (1)

    11.72     7.26     12.58     17.48     15.00

Return on average common equity

    5.88     3.16     6.48     10.63     9.35

Allowance for loan losses to total loans

    1.86     1.76     1.38     1.03     1.10

Allowance for loan losses to total non-performing loans

    0.63     0.76     1.37     1.94     1.98

Non-performing assets to total assets

    1.95     1.65     0.74     0.44     0.49

Net loan charge-offs to average loans

    1.28     1.10     0.58     0.28     0.23

Shareholders’ equity to total assets

    11.32     10.91     12.63     10.78     10.17

Tangible equity to tangible assets (1)

    6.33     5.88     7.90     5.94     6.87

Tangible common equity to tangible assets (1)

    6.33     5.88     6.44     5.94     6.87

Tier 1 leverage ratio

    8.35     7.86     10.27     9.90     9.27

Tier 1 capital to risk-weighted assets

    11.94     11.12     13.21     10.43     12.35

Total capital to risk-weighted assets

    13.20     12.37     14.46     11.41     13.44

Dividend payout ratio

    41.79     120.00     78.87     52.63     59.22

Trust assets at market value (2)

  $ 2,943,786      $ 2,668,610      $ 2,400,211      $ 3,084,145      $ 2,976,621   

 

(1) See non-GAAP Measures with this Item 6. “Selected Financial Data” for additional information relating to the calculation of this item.
(2) Trust assets are held by the Bank, in fiduciary or agency capacities for its customers and therefore are not included as assets on WesBanco’s Consolidated Balance Sheets.

 

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Table of Contents
     For the years ended December 31,  

(dollars in thousands, except per share amounts)

   2010      2009     2008      2007      2006  

SUMMARY STATEMENTS OF INCOME

             

Interest income

   $ 236,528       $ 257,364      $ 281,766       $ 236,393       $ 227,269   

Interest expense

     70,436         98,992        121,229         117,080         104,436   
                                           

Net interest income

     166,092         158,372        160,537         119,313         122,833   

Provision for credit losses

     44,578         50,372        32,649         8,516         8,739   
                                           

Net interest income after provision for credit losses

     121,514         108,000        127,888         110,797         114,094   

Non-interest income

     59,599         64,589        57,346         52,939         40,408   

Non-interest expense

     141,152         149,648        142,624         111,046         106,204   
                                           

Income before income taxes

     39,961         22,941        42,610         52,690         48,298   

Provision for income taxes

     4,350         (992     4,493         8,021         9,263   
                                           

Net income

   $ 35,611       $ 23,933      $ 38,117       $ 44,669       $ 39,035   
                                           

Preferred dividends

     —           5,233        293         —           —     
                                           

Net income available to common shareholders

   $ 35,611       $ 18,700      $ 37,824       $ 44,669       $ 39,035   
                                           

Earnings per common share—basic

   $ 1.34       $ 0.70      $ 1.42       $ 2.09       $ 1.79   
                                           

Earnings per common share—diluted

   $ 1.34       $ 0.70      $ 1.42       $ 2.09       $ 1.79   
                                           

NON-GAAP MEASURES

The following non-GAAP financial measures used by WesBanco provide information that WesBanco believes is useful to investors in understanding WesBanco’s operating performance and trends, and facilitates comparisons with the performance of WesBanco’s peers. The following tables summarize the non-GAAP financial measures derived from amounts reported in WesBanco’s financial statements.

 

     For the year ended December 31,  

(dollars in thousands)

   2010     2009     2008     2007     2006  

Tangible equity to tangible assets:

          

Total shareholders’ equity

   $ 606,863      $ 588,716      $ 659,371      $ 580,319      $ 416,875   

Less: goodwill and other intangible assets

     (285,559     (288,292     (267,883     (276,730     (145,147
                                        

Tangible equity

     321,304        300,424        391,488        303,589        271,728   

Total assets

     5,361,458        5,397,352        5,222,041        5,384,326        4,098,143   

Less: goodwill and other intangible assets

     (285,559     (288,292     (267,883     (276,730     (145,147
                                        

Tangible assets

     5,075,899        5,109,060        4,954,158        5,107,596        3,952,996   
                                        

Tangible equity to tangible assets

     6.33     5.88     7.90     5.94     6.87
                                        

Tangible common equity to tangible assets:

          

Total shareholders’ equity

   $ 606,863      $ 588,716      $ 659,371      $ 580,319      $ 416,875   

Less: goodwill and other intangible assets

     (285,559     (288,292     (267,883     (276,730     (145,147

Less: preferred shareholders’ equity

     —          —          (72,332     —          —     
                                        

Tangible common equity

     321,304        300,424        319,156        303,589        271,728   

Total assets

     5,361,458        5,397,352        5,222,041        5,384,326        4,098,143   

Less: goodwill and other intangible assets

     (285,559     (288,292     (267,883     (276,730     (145,147
                                        

Tangible assets

     5,075,899        5,109,060        4,954,158        5,107,596        3,952,996   
                                        

Tangible common equity to tangible assets

     6.33     5.88     6.44     5.94     6.87
                                        

Tangible book value:

          

Total shareholders’ equity

   $ 606,863      $ 588,716      $ 659,371      $ 580,319      $ 416,875   

Less: goodwill and other intangible assets

     (285,559     (288,292     (267,883     (276,730     (145,147
                                        

Tangible equity

     321,304        300,424        391,488        303,589        271,728   

Common shares outstanding

     26,586,953        26,567,653        26,560,889        26,547,073        21,496,793   
                                        

Tangible book value at year end

   $ 12.09      $ 11.31      $ 14.74      $ 11.44      $ 12.64   
                                        

 

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Table of Contents
     For the year ended December 31,  

(dollars in thousands)

   2010     2009     2008     2007     2006  

Return on average tangible equity:

          

Net income

   $ 35,611      $ 23,933      $ 38,117      $ 44,669      $ 39,035   

Plus: amortization of intangibles

     1,774        2,022        2,477        1,615        1,632   
                                        

Net income before amortization of intangibles

     37,385        25,955        40,594        46,284        40,667   

Average total shareholder’s equity

     605,742        641,537        594,001        420,232        417,524   

Less: average goodwill and other intangibles

     (286,875     (283,963     (271,396     (155,511     (146,364
                                        

Average tangible equity

     318,867        357,574        322,605        264,721        271,160   
                                        

Return on average tangible equity

     11.72     7.26     12.58     17.48     15.00
                                        

Return on average tangible assets:

          

Net income

   $ 35,611      $ 23,933      $ 38,117      $ 44,669      $ 39,035   

Plus: amortization of intangibles

     1,774        2,022        2,477        1,615        1,632   
                                        

Net income before amortization of intangibles

     37,385        25,955        40,594        46,284        40,667   

Average total assets

     5,416,470        5,566,183        5,224,442        4,100,797        4,161,221   

Less: average goodwill and other intangibles

     (286,875     (283,963     (271,396     (155,511     (146,364
                                        

Average tangible assets

     5,129,595        5,282,220        4,953,046        3,945,286        4,014,857   
                                        

Return on average tangible assets

     0.73     0.49     0.82     1.17     1.01
                                        

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis represents an overview of the results of operations and financial condition of WesBanco, Inc. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto.

FORWARD-LOOKING STATEMENTS

Forward-looking statements in this report relating to WesBanco’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The information contained in this report should be read in conjunction with WesBanco’s Form 10-Qs for the prior quarters ended September 30, 2010, June 30, 2010, and March 31, 2010, and documents subsequently filed by WesBanco with the SEC, 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, including those detailed under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. 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 effects 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 WesBanco 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, the FDIC, the SEC, FINRA, Municipal Securities Rulemaking Board, Securities Investors Protection Corporation, and other regulatory bodies; potential legislative and federal and state regulatory actions and reform, including, without limitation, the impact of the implementation of the Dodd-Frank Act; adverse decisions of federal and state courts; fraud, scams and schemes of third parties; internet hacking; competitive conditions in the financial services industry; rapidly changing technology affecting financial services; marketability of debt instruments and corresponding impact on fair value adjustments; and/or other external developments materially impacting WesBanco’s operational and financial performance. WesBanco does not assume any duty to update forward-looking statements.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

WesBanco’s Consolidated Financial Statements are prepared in accordance with GAAP and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.

The most significant accounting policies followed by WesBanco are included in Note 1, “Summary of Significant Accounting Policies,” of the Consolidated Financial Statements. These policies, along with other Notes to the Consolidated Financial Statements and this MD&A, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management has identified securities valuation, the allowance for loan losses and the evaluation of goodwill and other intangible assets for impairment to be the accounting estimates that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

Allowance for Credit Losses—The allowance for credit losses represents management’s estimate of probable losses inherent in the loan portfolio and future advances against loan commitments. Determining the amount of the allowance requires significant judgment about the collectability of loans and the factors that

 

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deserve consideration in estimating probable credit losses. The allowance is increased by a provision charged to operating expense and reduced by charge-offs, net of recoveries. Management evaluates the adequacy of the allowance at least quarterly. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change from period to period.

The evaluation includes an assessment of quantitative factors such as actual loss experience within each category of loans and testing of certain loans for impairment. The evaluation also considers qualitative factors such as economic trends and conditions, which includes levels of unemployment, real estate values and the impact on specific industries and geographical markets, changes in lending policies and underwriting standards, delinquency and other credit quality trends, concentrations of credit risk if any, the results of internal loan reviews and examinations by bank regulatory agencies, and regulatory guidance pertaining to the allowance for credit losses. Management relies on observable data from internal and external sources to the extent it is available to evaluate each of these factors and adjusts the actual historical loss rates to reflect the impact these factors may have on probable losses in the portfolio.

Commercial real estate and commercial and industrial loans greater than $1 million that are internally classified as substandard or doubtful, including loans that are reported as non-accrual or renegotiated are tested individually for impairment. Specific reserves are established when appropriate for such loans based on the present value of expected future cash flows of the loan or the estimated realizable value of the collateral, if any.

General reserves are established for the remainder of the loan portfolio based on historical loss rates adjusted for the impact of qualitative factors as discussed above. Historical loss rates for commercial real estate and commercial and industrial loans are determined for each internal risk grade using a migration analysis that categorizes each charged off loan based on its risk grade twelve months prior to the charge-off. Historical loss rates for residential real estate, home equity and consumer loans that are not risk graded are determined for the total of each of those categories of loans. Historical loss rates for deposit account overdrafts are based on actual losses in relation to average overdrafts for the period.

Management has determined that historical loss rates for the most recent twelve month period are generally the most indicative of probable losses inherent in the portfolio. However, management calculates annualized historical loss rates for multiple periods ranging from the most recent three to sixty months and periodically evaluates the loss rates for each of the periods to assess trends in loss rates over time.

Management may also adjust its assumptions to account for differences between estimated and actual incurred losses from period to period. While WesBanco continually refines and enhances the loss estimation models and techniques it uses to determine the appropriateness of the allowance for credit losses, there have been no material substantive changes to such models and techniques compared to prior periods. The variability of management’s estimates and assumptions could alter the level of the allowance for credit losses and may have a material impact on WesBanco’s future results of operations and financial condition. See the “Allowance for Loan Losses” section of this MD&A for more information.

Securities Valuation—An investment security is considered impaired if its fair value is less than its cost or amortized cost basis. WesBanco conducts a review each quarter of all securities which are impaired to determine if the impairment is other-than-temporary. In estimating other-than-temporary impairment losses, WesBanco considers the financial condition and near-term prospects of the issuer, evaluating any credit downgrades or other indicators of a potential credit problem, the receipt of principal and interest according to the contractual terms and WesBanco’s intent and ability not to sell or be required to sell its investment prior to recovery of cost. If WesBanco intends to sell or is required to sell the investment prior to recovery of cost, the entire impairment will be recognized in the Consolidated Statements of Income. If there is no intention or requirement to sell the security, and the impairment is to be considered other-than-temporary based on management’s review of the various factors that indicate credit impairment, the impairment must be separated into credit and noncredit portions. The credit portion is recognized in the Consolidated Statement of Income. The noncredit portion is

 

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calculated as the difference between the present value of the future cash flows and the fair value of the security and is recognized in other comprehensive income in the Consolidated Balance Sheets.

Goodwill and Other Intangible Assets—WesBanco accounts for business combinations using the acquisition method of accounting. Accordingly, the identifiable assets acquired, the liabilities assumed, and any non-controlling interest of an acquired business are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value recorded as goodwill. At December 31, 2010, the carrying value of goodwill and other intangible assets was approximately $274.1 million and $11.5 million, respectively, which represents approximately 45.2% and 1.9% of total shareholders’ equity, respectively. At December 31, 2010, WesBanco had two reporting units, community banking and insurance services, with goodwill balances of $272.6 million and $1.5 million, respectively. As WesBanco continues to acquire additional businesses, goodwill and other intangible assets subject to amortization and/or impairment testing may comprise an even larger percentage of total shareholders’ equity and in turn, increase the risk that its financial position or results of operations could be adversely impacted as discussed below.

Goodwill and intangible assets with indefinite useful lives are not amortized. Intangible assets with finite useful lives, consisting primarily of core deposit and customer list intangibles, are amortized using straight-line or accelerated methods over their estimated weighted-average useful lives, ranging from ten to sixteen years.

The carrying value of goodwill is tested at least annually for impairment on November 30th or more frequently if indicators of potential impairment are present. The evaluation for impairment involves comparing the estimated current fair value of each reporting unit to its carrying value, including goodwill. If the estimated current fair value of a reporting unit exceeds its carrying value, no additional testing is required and an impairment loss is not recorded. Otherwise, additional testing is performed and to the extent such additional testing results in a conclusion that the carrying value of goodwill exceeds its implied fair value, an impairment loss is recognized.

WesBanco uses market capitalization, multiples of tangible book value, a discounted cash flow model, and various other market-based methods to estimate the current fair value of its reporting units. The resulting fair values of each method are then weighted based on the relevance and reliability of each respective method in light of the current economic environment to arrive at a weighted average fair value. Negative trends in economic growth and challenges specific to the banking industry in recent years have resulted in fewer comparable acquisitions of healthy banks which has depressed average transaction multiples. As a result, more reliance has been placed on the discounted cash flow model. The discounted cash flow model includes various estimates including assumptions regarding an investors’ required rate of return on WesBanco common stock, future loan loss provisions, future net interest margins, along with various growth and economic recovery and stabilization assumptions of the economy as a whole. As the volume and level of activity of mergers and acquisitions of healthy banks increase, more reliance may be placed on market-based methods such as price paid to tangible book value and earnings, and less reliance may be placed on discounted cash flow projections.

WesBanco’s internal evaluation concluded that goodwill was not impaired as of November 30, 2010 for both reporting units. Based on the evaluation as of November 30, 2010, management believes that the fair value of the community banking reporting unit could decline by approximately 31% before further analysis of goodwill impairment would be required.

As of December 31, 2010, there were no significant changes in market conditions, WesBanco operating results, or forecasted future income from November 30, 2010, the date of the most recent goodwill impairment evaluation. Therefore, WesBanco has concluded that goodwill is not impaired as of December 31, 2010. If weak economic conditions continue or worsen for a prolonged period of time, the fair value of the community banking or insurance services reporting units may be adversely affected which may result in impairment of goodwill and other intangible assets in the future.

 

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Intangible assets with finite useful lives (primarily core deposit and customer list intangibles) are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized when the carrying amount of an intangible asset with a finite useful life is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the fair value of the asset. Intangible assets with finite useful lives at December 31, 2010 are comprised of $10.9 million in core deposit intangibles held at the Bank and customer list intangibles of $0.5 million and $0.1 million held at WesBanco Securities and Insurance Services, respectively.

In the event WesBanco determined that either its goodwill or finite lived intangible assets were impaired, recognition of an impairment charge could have a significant adverse impact on its financial position or results of operations in the period in which the impairment occurred. Please refer to Note 1, “Summary of Significant Accounting Policies” and Note 7, “Goodwill and Other Intangible Assets” of the Consolidated Financial Statements for additional information on goodwill and core deposit intangibles.

EXECUTIVE OVERVIEW

WesBanco achieved improved financial performance in 2010 as evidenced by a 90.4% increase in net income available to common shareholders after two years of decreases, in spite of the continuation of a challenging economic environment of high unemployment and depressed housing prices. Improvement in net interest income and many of the non-interest operating areas, a lower provision for credit losses and reduced non-interest expenses combined to provide the improved results. Return on average tangible assets(1) improved to 0.73% from 0.49% in 2009 while return on average tangible equity(1) was 11.72% as compared to 7.26% in the prior year.

Net interest income increased through focused management of rates for lending and for deposits, through balance sheet management strategies to minimize risk and reduce higher cost interest bearing liabilities, primarily certain certificates of deposit and borrowings, and due to the benefits of reduced interest expense from the lower interest rate environment. Although interest rates and loan demand remained low throughout the year, which limited the opportunity for acquiring reasonably priced loans and investments, new and repriced deposits were also significantly less expensive. Lower cost deposits combined with the maturity of higher cost FHLB borrowings significantly reduced interest expense resulting in the 4.9% increase in net interest income. Liquidity provided by loan pay downs and increases in low cost deposits were used to avoid replacement of the maturing borrowings. As a result, FHLB borrowings decreased by 48.9% in 2010 from December 31, 2009.

Lending practices, loan monitoring, workout strategies, and loss recovery programs were further strengthened in 2010 resulting in improved credit quality, lower non-accrual loans, reduced charge-offs by the fourth quarter and an 11.5% decrease in the provision for credit losses as compared to 2009. Non-accrual loans decreased $16.5 million due to the sale of $18.7 million of impaired commercial and commercial real estate loans in the second and third quarters of 2010, resulting in additional charge offs of $13.7 million, further improving the overall quality of the loan portfolio.

Non-interest expense decreased $8.5 million primarily from an organization wide effort to improve efficiency and reduce expenses in most major categories including employee benefits, professional fees, marketing and restructuring expense. These efficiencies were achieved without reducing the effectiveness of operations. However, non-interest income declined in 2010 from the prior year due to lower service charge income from new regulation affecting overdraft fees, charges relating to real estate owned and lower net securities gains, but these decreases were partially mitigated by significant improvement in trust fees, electronic banking fees, securities brokerage revenue and mortgage banking revenues.

 

 

(1) See non-GAAP Measures with Item 6. “Selected Financial Data” for additional information relating to the calculation of this item.

 

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The Bank continued its strategy in 2010 of selling most new residential mortgages to the secondary market; as a result, residential real estate loans decreased by $99.7 million. Smaller decreases occurred in commercial and consumer loans while commercial real estate was nearly unchanged. Home equity loans increased 4.0%. Loan growth continued to be challenged by economic conditions and depressed loan demand, as well as charge-offs, sales and workout strategies. However, WesBanco continues to improve underwriting standards and credit quality, and maintains a consistent focus on obtaining appropriate interest rates on new loans, to improve the profitability of the loan portfolio and reduce credit losses as the economic expansion continues.

In 2010, WesBanco improved already strong regulatory capital ratios of 8.35% tier I leverage, 11.94% tier I risk-based capital, and 13.20% total risk-based capital, all of which improved in each of the last five consecutive quarters while both consolidated and bank-level regulatory capital ratios are well above the applicable “well-capitalized” standards promulgated by bank regulators. Total tangible equity to tangible assets(1) was 6.33% at December 31, 2010, an improvement of 45 basis points from 5.88% at year-end 2009, primarily due to balance sheet management strategies and a 3.1% increase in shareholders’ equity primarily from increased retained earnings. The increase in shareholders’ equity was the result of improved operating results net of dividends declared, partially offset by decreases in other comprehensive income due to lower unrealized securities gains at year end as certain term market interest rates rose in the fourth quarter. Total dividends declared for the year were $14.9 million or 41.8% of net income.

On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which contains numerous and wide-ranging reforms to the structure of the U.S. financial system. In addition to various regulations that will be written as a result of the Dodd-Frank Act, the Dodd-Frank Act creates the Consumer Bureau, which will have consolidated authority to write regulations implementing numerous laws including those that define certain processes relating to lending, and required disclosures pertaining to various types of banking transactions. Although the full impact of the Dodd-Frank Act remains somewhat unclear, management expects, over time, that it will reduce revenue and increase expenses. A requirement that could affect 2011 results is for the Federal Reserve Board to write rules to limit debit card interchange fees to those “reasonable and proportional” to the cost of transactions. Even though the limits on debit card interchange fees will apply only to institutions with more than $10 billion in assets, market forces may limit debit card interchange fees as a source of revenue for all banks, including WesBanco Bank. For additional information on the Dodd-Frank Act, see the discussion in “Item 1. Business—Dodd-Frank Act” in this 10-K.

RESULTS OF OPERATIONS

EARNINGS SUMMARY

Net income available to common shareholders for 2010 increased 90.4% to $35.6 million from $18.7 million for 2009, while diluted earnings per common share were $1.34, as compared to $0.70 per common share for the prior year. The quarter ending December 31, 2010 was the fifth consecutive quarter of growth in net income and per share earnings on a linked-quarter basis. The growth in net income for all of 2010 was achieved through an 11.5% lower provision for credit losses, a 4.9% improvement in net interest income, higher gross revenues from the Trust, Securities and Mortgage business units totaling $3.3 million, continued cost control throughout the organization resulting in lower overall expenses, and the significant benefits of repurchasing TARP preferred shares in the third quarter of 2009. These improvements were somewhat offset by lower service charges on deposits, reduced net securities gains and increased charges relating to write downs on real estate owned.

Net interest income increased $7.7 million or 4.9% for 2010 as compared to 2009 due to the Bank’s ability to manage rates on its loans and other earning assets, while seeing significant improvement in the cost of funds

 

(1) See non-GAAP Measures with Item 6. “Selected Financial Data” for additional information relating to the calculation of this item.

 

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for both deposits and other borrowings. Net interest income has now increased for each of the past seven quarters. The net interest margin improved to 3.66% in the fourth quarter of 2010 and 3.60% for the year, an increase of 20 basis points and 24 basis points, respectively, as compared to the same periods in 2009. The average rate on interest bearing liabilities decreased by 61 basis points for the year, while the rate on earning assets declined at a much slower pace of 29 basis points. Lower rates and lower average balances on higher-rate certificates of deposit, and an increase in lower cost deposits, primarily money market accounts, all contributed to the improvement in the cost of funds. In addition, the average balance for borrowings, which generally have higher interest costs, decreased by $281.8 million or 38.7% in the fourth quarter of 2010 from the fourth quarter of 2009, through planned reductions utilizing the liquidity obtained through pay downs on loans and increased deposits. The increase in total interest bearing and non-interest bearing demand deposits was primarily due to an 11.0% increase in average non-interest bearing deposit balances as a result of retail marketing campaigns and customer incentives, as well as a focus on increasing treasury management products and services from business customers. Total borrowings, excluding junior subordinated debt, are down to 8.2% of total assets from 12.7% last year.

For 2010, the provision for credit losses decreased $5.8 million, primarily due to a better overall economic environment, and was 103% of net charge-offs for the year. Net charge-offs increased $4.3 million in 2010 as compared to the prior year, primarily due to $13.7 million of charge-offs in the second and third quarter of 2010 related to the sale of certain impaired commercial and commercial real estate loans totaling $18.7 million. Non-accrual loans at December 31, 2010 decreased $16.5 million as compared to December 31, 2009 as a result of the sale of loans and other continuing workout efforts to reduce this category of loans. However, renegotiated loans increased $32.5 million for the year primarily due to rate or other term-related modifications granted to borrowers on construction, commercial real estate and residential mortgage loans. The total allowance for loan losses was relatively unchanged as compared to December 31, 2009 and it represented 1.86% of total loans at December 31, 2010 compared to 1.76% at December 31, 2009.

Total non-interest income decreased $5.0 million for the year ended December 31, 2010 due to decreases in net security gains of $2.7 million, decreases in service charges on deposits of $3.7 million resulting from regulatory changes which led to fewer customer overdraft transactions, and $3.1 million in write-downs in other real estate owned. These write-downs were primarily for an owned hospitality-related property. Improvements in non-interest income included trust fee growth of 15.2% from new business, market improvements, and fourth quarter revisions to fee schedules. In addition, most other major non-interest operating areas increased, including a 14.3% increase in electronic banking fees, a 9.5% increase in securities brokerage income and a 37.8% increase in mortgage banking income. Non-interest expense decreased $8.5 million or 5.7% as compared to 2009. WesBanco took actions in 2010 resulting in significant reductions in costs for many expense categories, including a $1.6 million decrease in employee benefits expense from lower pension and health insurance costs, $1.0 million in professional fees, $0.9 million in marketing expense, $0.8 million in equipment expense, and $1.6 million in restructuring expenses, somewhat offset by increases in foreclosure-related property management expenses totaling $1.6 million. The reduction in restructuring expenses was primarily due to a $1.2 million charge in the fourth quarter of 2009 relating to personnel reductions and impairment on certain premises held for sale. In addition, expense reductions include a decrease in FDIC insurance of $2.1 million primarily due to a special assessment of $2.6 million levied in the second quarter of 2009.

The provision for income taxes increased $5.3 million due to the significant increase in pre-tax income and an effective tax rate in 2010 of 10.9% as compared to a negative effective tax rate in 2009 of (4.3%). The higher effective rate was due primarily to a lower percentage of tax-exempt income to total income and included certain filed return adjustments during the year.

 

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TABLE 1. NET INTEREST INCOME

 

     For the years ended December 31,  

(dollars in thousands)

   2010     2009     2008  

Net interest income

   $ 166,092      $ 158,372      $ 160,537   

Taxable-equivalent adjustments to net interest income

     6,142        7,544        7,822   
                        

Net interest income, fully taxable-equivalent

   $ 172,234      $ 165,916      $ 168,359   
                        

Net interest spread, non-taxable-equivalent

     3.27     2.93     3.19

Benefit of net non-interest bearing liabilities

     0.20     0.28     0.32
                        

Net interest margin

     3.47     3.21     3.51

Taxable-equivalent adjustment

     0.13     0.15     0.17
                        

Net interest margin, fully taxable-equivalent

     3.60     3.36     3.68
                        

Net interest income, which is WesBanco’s largest source of revenue, is the difference between interest income on earning assets, primarily loans and securities, and interest expense on liabilities (deposits and short and long-term borrowings). Net interest income is affected by the general level and changes in interest rates, the steepness and shape of the yield curve, changes in the amount and composition of interest earning assets and interest bearing liabilities, as well as the frequency of repricing of those assets and liabilities. Net interest income increased $7.7 million or 4.9% in 2010 as compared to 2009 due to increases in the net interest margin resulting from WesBanco’s successful management of rates on the loan portfolio and other earning assets, while seeing significant improvement in the cost of funds for both deposits and other borrowings. Net interest income has now increased for each of the past seven quarters. The net interest margin increased 24 basis points to 3.60% in 2010, as compared to the prior year due to decreases in the average rates on interest bearing liabilities, while rates on earning assets declined at a much slower pace. The net interest margin has also improved consistently since the second quarter of 2009 to 3.66% in the fourth quarter of 2010. The increase in the margin for all of 2010 was partially offset by decreases in average earning assets due to pay downs on loans and sales and maturities of securities used to fund reductions in higher cost borrowings. Lower rates on new deposits, maturities of higher rate certificates of deposit, and an increase in lower cost deposits, primarily money market and other transaction accounts, all contributed to the improvement in the cost of funds. In addition, the average balance in 2010 for borrowings, which generally have higher interest costs, decreased by $252.1 million or 31.7% from 2009 through planned reductions utilizing the liquidity obtained through pay downs on loans and increased deposits. The margin has also benefited from a 7.4% increase in average non-interest bearing deposit balances in 2010 as a result of retail marketing campaigns and customer incentives, as well as a focus on increasing treasury management products and services from business customers.

Interest income decreased 8.1% in 2010 as compared to 2009 due to lower yields and decreases in earning assets. The yield on total average earning assets decreased 29 basis points to 5.07% in 2010 from 5.36% in 2009. Rates decreased on all significant earning asset categories from reduced rates on new and repriced assets due to the lower interest rate environment throughout the last two years. In addition, the mix of earning assets invested in lower yielding securities and due from banks increased, as compared to typically higher-yielding loans. Securities yields decreased 46 basis points in 2010, primarily due to the reinvestment of funds from investment maturities and calls, and from loan prepayments, at current lower available interest rates. Taxable securities yields decreased 42 basis points while tax-exempt securities yields declined only 12 basis points due to the longer average life of the tax-exempt portfolio and limited additions to the portfolio in 2010. Securities purchase decisions in 2010 considered the increased risk in some tax-exempts, which somewhat limited investment opportunities. In addition, variable rate and government supported (Build America Bonds) rate opportunities were available in taxable securities, resulting in an increase in average taxable securities for the year. Repricing of loans and the necessity of offering lower rates on quality credits as a result of the lower interest rate environment caused a decline in loan yields of 17 basis points in 2010. The decrease in average earning assets of $159.2 million in 2010 was primarily due to a decrease in average loan balances of $161.2 million, mostly from

 

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planned reductions in residential mortgage loans, continued depressed loan demand and sales of portfolio loans. In addition, proceeds from loan principal reductions, which generally have higher yields than typical investment types, have been reinvested at lower yields, thus reducing the overall yield of the earning assets.

Average loan balance decreases are primarily due to management’s continued focus on overall profitability of the loan portfolio through disciplined underwriting and pricing practices, the continued strategic decreases in residential real estate loans through the sale of most originations and the sale of certain non-accrual commercial loans. In addition, the slow economic recovery has resulted in lower demand for new construction and development projects in our markets and reduced commercial line usage. These decreases were partially offset by increases in home equity loans through various marketing and targeted sales efforts in our branches. Write-downs, charge-offs and foreclosures have also impacted commercial balances, as well as strategic decreases in certain customer property and commercial types. Consumer loans declined due to reduced demand for automobile and other consumer loan types, other competitive bank and non-bank rate offerings and tighter underwriting standards.

In 2010 interest expense decreased $28.6 million or 28.8% as compared to 2009 due to a 61 basis point decline in the average rate paid on interest bearing liabilities and a decrease in average interest bearing liabilities of 3.1%. Rates paid on deposits declined by 50 basis points, with rates on CDs declining by 70 basis points, due to management reducing certain interest rates on renewing or rollover CDs to competitive levels in order to realize a lower cost of funds during a period of declining loan yields. This included certain high rate, single service CDs from branches acquired in 2009, which were offered lower rates to renew. In addition, average balances of CDs represented 49.3% of total average deposits in 2010 as compared to 54.8% in 2009, while money market deposit accounts (“MMDA”), with a lower rate of 0.92%, increased to 23.0% of total average deposits in 2010, as compared to 18.3% in 2009. This change in the mix of deposit types, and the reductions in higher cost borrowings, also contributed to the reduced cost of funds. The reduction in average interest bearing liabilities is due to the $252.1 million decrease in borrowings, primarily FHLB and other short term borrowings, partially offset by increases in deposits of $116.9 million. Current balance sheet liquidity from the deposit increases and loan reductions were used to pay down the higher cost maturing borrowings in 2010, further reducing interest expense. Borrowings, excluding junior subordinated debt, were 12.9% of average interest bearing liabilities in 2010 as compared to 18.3% in 2009. Deposit increases were primarily in money market accounts but also included increases in transaction and savings accounts, even as offered rates were reduced. These increases were partially offset by a $132.2 million decrease in certificates of deposit from the more aggressive reductions in rate offerings.

 

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TABLE 2. AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS

 

    For the years ended December 31,  
    2010     2009     2008  

(dollars in thousands)

  Average
Balance
    Interest     Average
Rate
    Average
Balance
    Interest     Average
Rate
    Average
Balance
    Interest     Average
Rate
 

ASSETS

                 

Due from banks-interest bearing

  $ 82,380      $ 198        0.24   $ 44,565      $ 87        0.19   $ 35,702      $ 968        2.71

Loans, net of unearned income (1)

    3,385,928        189,380        5.59     3,547,122        204,317        5.76     3,648,968        236,923        6.49

Securities: (2)

                 

Taxable

    1,015,643        35,375        3.48     991,434        38,651        3.90     522,523        28,128        5.38

Tax-exempt (3)

    270,759        17,550        6.48     326,735        21,554        6.60     328,755        22,348        6.80
                                                                       

Total securities

    1,286,402        52,925        4.11     1,318,169        60,205        4.57     851,278        50,476        5.93

Federal funds sold

    —          —          —          2,060        5        0.24     13,512        299        2.21

Other earning assets

    29,838        167        0.56     31,849        294        0.92     31,464        922        2.93
                                                                       

Total earning assets (3)

    4,784,548        242,670        5.07     4,943,765        264,908        5.36     4,580,924        289,588        6.32
                                                                       

Other assets

    631,922            622,418            643,518       
                                   

Total Assets

  $ 5,416,470          $ 5,566,183          $ 5,224,442       
                                   

LIABILITIES AND SHAREHOLDERS’ EQUITY

                 

Interest bearing demand deposits

  $ 474,979      $ 2,561        0.54   $ 455,151      $ 2,921        0.64   $ 433,661      $ 4,809        1.11

Money market accounts

    817,272        7,529        0.92     629,520        6,687        1.06     472,634        8,341        1.76

Savings deposits

    512,289        2,242        0.44     470,737        2,385        0.51     504,335        3,089        0.61

Certificates of deposit

    1,754,805        36,817        2.10     1,887,051        52,827        2.80     1,758,124        68,787        3.91
                                                                       

Total interest bearing deposits

    3,559,345        49,149        1.38     3,442,459        64,820        1.88     3,168,754        85,026        2.68

Federal Home Loan Bank borrowings

    359,010        12,721        3.54     570,008        21,849        3.83     520,636        20,659        3.97

Other borrowings

    183,542        4,774        2.60     224,649        6,971        3.10     289,541        8,401        2.90

Junior subordinated debt

    109,552        3,792        3.46     111,152        5,352        4.82     111,063        7,143        6.43
                                                                       

Total interest bearing liabilities

    4,211,449        70,436        1.67     4,348,268        98,992        2.28     4,089,994        121,229        2.96

Non-interest bearing demand deposits

    562,763            524,167            497,681       

Other liabilities

    36,516            52,211            42,766       

Shareholders’ equity

    605,742            641,537            594,001       
                                   

Total Liabilities and Shareholders’ Equity

  $ 5,416,470          $ 5,566,183          $ 5,224,442       
                                   

Net interest spread

        3.40         3.08         3.36

Taxable equivalent net interest margin (3)

    $ 172,234        3.60     $ 165,916        3.36     $ 168,359        3.68
                                   

 

(1) Total loans are gross of the 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 totaled $4.2 million, $4.6 million and $4.7 million for the years ended December 31, 2010, 2009 and 2008, respectively.
(2) Average yields on securities available-for-sale have been calculated based on amortized cost.
(3) The yield on earning assets and the net interest margin are presented on a fully taxable-equivalent (FTE) and annualized basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35% for each period presented. WesBanco believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

 

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TABLE 3. RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE (1)

 

    2010 Compared to 2009     2009 Compared to 2008  

(in thousands)

  Volume     Rate     Net Increase
(Decrease)
    Volume     Rate     Net Increase
(Decrease)
 

Increase (decrease) in interest income:

           

Due from banks-interest bearing

  $ 86      $ 25      $ 111      $ 194      $ (1,075   $ (881

Loans, net of unearned income

    (9,121     (5,816     (14,937     (6,465     (26,141     (32,606

Taxable securities

    925        (4,201     (3,276     19,917        (9,395     10,522   

Tax-exempt securities (2)

    (3,634     (370     (4,004     (137     (657     (794

Federal funds sold

    (3     (2     (5     (143     (151     (294

Other earning assets

    (18     (109     (127     11        (638     (627
                                               

Total interest income change (2)

    (11,765     (10,473     (22,238     13,377        (38,057     (24,680
                                               

Increase (decrease) in interest expense:

           

Interest bearing demand deposits

    123        (483     (360     228        (2,116     (1,888

Money market

    1,811        (969     842        2,268        (3,922     (1,654

Savings deposits

    199        (342     (143     (196     (508     (704

Certificates of deposit

    (3,499     (12,511     (16,010     4,750        (20,710     (15,960

Federal Home Loan Bank borrowings

    (7,580     (1,548     (9,128     1,910        (720     1,190   

Other borrowings

    (1,166     (1,031     (2,197     (1,983     553        (1,430

Junior subordinated debt

    (76     (1,484     (1,560     6        (1,797     (1,791
                                               

Total interest expense change

    (10,188     (18,368     (28,556     6,983        (29,220     (22,237
                                               

Net interest income increase (decrease) (2)

  $ (1,577   $ 7,895      $ 6,318      $ 6,394      $ (8,837   $ (2,443
                                               

 

(1) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.
(2) The yield on earning assets and the net interest margin are presented on a fully taxable-equivalent (FTE) and annualized basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and investments using the federal statutory tax rate of 35% for each period presented. WesBanco believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

PROVISION FOR CREDIT LOSSES

The provision for credit losses is the amount to be added to the allowance for credit losses after net charge-offs have been deducted to bring the allowance to a level considered appropriate to absorb probable losses inherent in the loan portfolio. The provision for credit losses for the year ended December 31, 2010 decreased $5.8 million or 11.5% to $44.6 million compared to $50.4 million for the year ended December 31, 2009. The provision remained elevated in 2010 due to the ongoing impact of the recession on all categories of the portfolio but the overall decrease in 2010 compared to 2009 reflects a reduction in non-accrual loans, a gradually improving economic environment, a declining historical loss trend for commercial and industrial, home equity and consumer loans, and the net impact of certain events in both years. The provision for 2010 includes approximately $6.8 million to charge-down certain non-performing loans that were sold in the second and third quarters less previously recorded reserves. The provision for 2009 included approximately $7.1 million for two losses attributable to borrower fraud. The provision for 2010 exceeded net charge-offs for the year by $1.1 million compared to $11.2 million in 2009 and increased the allowance for loan losses to 1.86% of total loans at December 31, 2010 compared to 1.76% at December 31, 2009. (Please see the Allowance for Credit Losses section of this MD&A for additional discussion).

 

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TABLE 4. NON-INTEREST INCOME

 

     For the Years Ended
December 31,
    $ Change     % Change  

(dollars in thousands)

   2010     2009      

Service charges on deposits

   $ 20,645      $ 24,372      $ (3,727     (15.3 )% 

Trust fees

     15,835        13,746        2,089        15.2

Electronic banking fees

     8,482        7,422        1,060        14.3

Net securities brokerage revenue

     4,563        4,169        394        9.5

Net insurance services revenue

     2,352        2,329        23        1.0

Bank-owned life insurance

     4,505        4,623        (118     (2.6 )% 

Net securities gains

     3,362        6,046        (2,684     (44.4 )% 

Net gains on sales of mortgage loans

     2,885        2,094        791        37.8

Net losses on other real estate owned and other assets

     (4,128     (747     (3,381     452.6

Other income

     1,098        535        563        (105.2 )% 
                                

Total non-interest income

   $ 59,599      $ 64,589      $ (4,990     (7.7 )% 
                                

Non-interest income is a significant source of revenue and an important part of WesBanco’s results of operations. WesBanco offers its customers a wide range of retail, commercial, investment and electronic banking services, which are viewed as a vital component of WesBanco’s ability to attract and maintain customers, as well as providing additional fee income beyond normal spread-related income to WesBanco. Total non-interest income for the year ended December 31, 2010 decreased $5.0 million, as compared to the same period in 2009. This decrease is due to decreases in service charges on deposits, decreases in net security gains, and $3.4 million in write-downs in other real estate owned. Improvements in non-interest income included trust fee growth of 15.2% and increases in most other major non-interest operating areas including a 14.3% increase in electronic banking fees, a 9.5% increase in securities brokerage revenue and a 37.8% increase in mortgage banking income. For the year ended December 31, 2010, non-interest income was 26.4% of total net revenues as compared to 29.0% for the comparable 2009 period, with net revenue being defined as the total of net interest income and non-interest income. Non-interest income, excluding securities gains, has also improved in each of the last three consecutive quarters in 2010.

Service charges on deposits, which are primarily comprised of customer overdraft fees, were 15.3% lower in 2010 as compared to 2009 due to changes in customer behavior and recent regulatory changes that include requirements for customers to opt in for overdraft coverage of certain types of electronic banking activities. Preceding the August 15, 2010 implementation of the new rules on existing accounts, WesBanco experienced lower daily and monthly overdraft usage patterns as average retail demand deposit balances were higher. Changes in marketing strategies and effectiveness for new demand deposit customers may have also had an impact on the decrease. While an overwhelming majority of WesBanco’s heaviest overdraft users have opted-in to continue such coverage, low response rates from infrequent users may have some impact on our ability to earn associated fees.

Trust fees improved $2.1 million as compared to 2009 due to higher market values of managed assets period over period and the implementation of a fee increase in October of 2010. The market value of trust assets under management increased from $2.7 billion to $2.9 billion from December 31, 2009 to December 31, 2010. The increase in trust assets was principally due to market gains and new business in the last twelve months. At December 31, 2010, trust assets include managed assets of $2.4 billion and non-managed (custodial) assets of $0.5 billion. Assets managed for the WesMark funds, a proprietary group of mutual funds that are advised by WesBanco’s trust and investment services group, were $748.1 million as of December 31, 2010 and $659.2 million at December 31, 2009 and are included in trust managed assets.

Electronic banking fees improved by $1.1 million in 2010 as compared to the prior year, due to a higher volume of debit card transactions during the period.

 

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Net securities brokerage revenue improved $0.4 million in 2010 as compared to 2009, as the 2009 period included only nine months of revenue from new sales representatives in the Columbus, Ohio market, who established operations in March of 2009.

Gains on the sale of loans increased in 2010 by 37.8% as compared to 2009 due to more aggressive loan pricing despite a 7% decline in residential mortgage loans sold into the secondary market over the period, while adjustments in the market value of investments in the deferred compensation plan represented the majority of the change in other non-interest income.

TABLE 5. NON-INTEREST EXPENSE

 

     For the Years Ended
December 31,
     $ Change     % Change  

(dollars in thousands)

   2010      2009       

Salaries and wages

   $ 54,452       $ 54,399       $ 53        0.1

Employee benefits

     18,315         19,957         (1,642     (8.2 )% 

Net occupancy

     10,728         10,269         459        4.5

Equipment

     9,914         10,726         (812     (7.6 )% 

Marketing

     4,187         5,094         (907     (17.8 )% 

FDIC Insurance

     6,681         8,817         (2,136     (24.2 )% 

Amortization of intangible assets

     2,729         3,110         (381     (12.3 )% 

Restructuring and merger-related expenses

     175         1,815         (1,640     (90.4 )% 

Other operating expenses:

          

Miscellaneous, franchise, and other taxes

     5,784         5,425         359        6.6

Postage

     3,516         3,626         (110     (3.0 )% 

Consulting, regulatory, and advisory fees

     3,423         4,466         (1,043     (23.4 )% 

Other real estate owned and foreclosure expenses

     3,262         1,648         1,614        97.9

Legal fees

     2,749         2,702         47        1.7

Communications

     2,731         2,959         (228     (7.7 )% 

ATM and interchange expenses

     2,669         3,387         (718     (21.2 )% 

Supplies

     2,402         2,443         (41     (1.7 )% 

Other

     7,435         8,805         (1,370     (15.6 )% 
                                  

Total other operating expenses

     33,971         35,461         (1,490     (4.2 )% 
                                  

Total non-interest expense

   $ 141,152       $ 149,648       $ (8,496     (5.7 )% 
                                  

Non-interest expense for the year ended December 31, 2010 decreased $8.5 million or 5.7% as compared to the same period in 2009. WesBanco took actions in 2010 resulting in significant reductions in costs for many expense categories, including employee benefits, equipment, marketing, professional fees and restructuring expenses, somewhat offset by increases in foreclosure-related property management expenses. In addition, the expense reductions include a decrease in FDIC insurance of $2.1 million primarily due to a special assessment of $2.6 million in the second quarter of 2009 partially offset by premium increases due to higher deposit levels.

Salaries and wages remained relatively unchanged for the year ended December 31, 2010 as compared to 2009, primarily due to a reduction in full-time equivalent employees offset by higher brokerage commissions and management bonuses. Full-time equivalent employees declined from 1,393 at December 31, 2009 to 1,377 at December 31, 2010 primarily as the result of planned efficiencies created through a reduction in overtime and other hours worked in certain retail branches and other departments. Employee benefits declined $1.6 million in 2010 compared to the prior year due to lower defined benefit pension expense and decreases in employee health insurance costs, partially offset by stock compensation expense and a market value adjustment on the deferred compensation plan.

 

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Marketing expenses declined $0.9 million in 2010 as compared to 2009 primarily due to reduced free checking promotions, which were increased in 2009 to establish greater name identity in the former AmTrust branch market area, and reduced new customer cash incentives.

WesBanco closed and consolidated two branches in the Columbus market in the third quarter of 2010; however the acquisition of five branches in March 2009 and increased maintenance and other seasonal costs in the first quarter 2010 resulted in higher net occupancy expenses of $0.5 million for the year. Restructuring and merger-related expenses declined $1.6 million from the prior period as a result of charges in 2009 relating to personnel reductions, impairment on certain premises held for sale and costs associated with the branch acquisition. Consulting expenses declined $1.0 million as compared to 2009.

ATM and interchange expenses, equipment, communications, debit card processing fees and other miscellaneous expenses all experienced declines in 2010 mostly due to WesBanco’s continued efforts to manage costs and the effects of certain contract renewals. Electronic bill pay expenses were down $0.3 million due to a one-time $0.5 million contract termination fee in 2009, while other real estate owned and foreclosure expenses were up $1.6 million due to increased foreclosure activity and related property management expenses.

INCOME TAXES

The provision for federal and state income taxes increased to $4.3 million in 2010 as compared to 2009. The increase in income tax expense was due to a $17.0 million increase in pre-tax income, and a higher effective tax rate of 10.9% as compared to (4.3%) for 2009. The increase in the effective tax rate was due primarily to higher pre-tax income and a lower percentage of tax-exempt income to total income and included certain filed return adjustments during the year.

FINANCIAL CONDITION

Total assets decreased 0.7% in 2010, while total deposits and stockholders’ equity increased 5.0% and 3.1%, respectively, as compared to December 31, 2009. The decrease in total assets was primarily the result of a $182.3 million or 5.3% decrease in portfolio loans due to continued strategic decreases in residential real estate loans and certain impaired loans, a focus on reasonable credit terms and interest spreads, and compressed demand for commercial and consumer loans as a result of the slow economic recovery. The decrease in the loan portfolio was partially offset by a $159.2 million or 11.8% increase in investment securities and cash and due from banks. The increase in total deposits was primarily a result of a 19.6% increase in money market deposits, which combined with slight increases in demand and savings deposits, offset the 3.5% decrease in certificates of deposit. The decrease in certificates of deposit was due to planned reductions of non-relationship customers acquired with a branch acquisition in 2009. The liquidity provided by the increase in deposits and decrease in the loan portfolio was partially utilized to pay down higher cost FHLB advances and other short-term borrowings by $243.9 million or 35.6% as compared to December 31, 2009. Total shareholders’ equity increased by $18.1 million primarily due to net income exceeding dividends paid to common shareholders by $20.7 million for the year, which was partially offset by a $2.8 million decrease in accumulated other comprehensive income. The decrease in accumulated other comprehensive income resulted from unrealized losses recorded in the available-for-sale securities portfolio somewhat offset by unrealized gains in the defined pension plan in 2010. The tangible equity to tangible assets (non-GAAP measure) increased to 6.33% at December 31, 2010 from 5.88% at December 31, 2009, primarily as a result of the increase in shareholders’ equity coupled with a slight decrease in tangible assets.

 

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TABLE 6. COMPOSITION OF SECURITIES (1)

 

     December 31,     2010-2009        

(dollars in thousands)

   2010     2009     $ Change     % Change     2008  

Available-for-sale (at fair value)

          

Other government agencies

   $ 363,135      $ 190,726      $ 172,409        90.4   $ 40,009   

Corporate debt securities

     25,583        2,932        22,651        772.5     3,149   

Residential mortgage-backed securities and collateralized mortgage obligations of government agencies

     353,345        698,138        (344,793     (49.4 )%      523,897   

Other residential collateralized mortgage obligations

     —          2,591        (2,591     (100.0 )%      4,150   

Obligations of states and political subdivisions

     210,808        363,619        (152,811     (42.0 )%      359,425   
                                        

Total debt securities

     952,871        1,258,006        (305,135     (24.3 )%      930,630   

Equity securities

     4,610        3,798        812        21.4     3,508   
                                        

Total available-for-sale securities

   $ 957,481      $ 1,261,804      $ (304,323     (24.1 )%    $ 934,138   
                                        

Held-to-maturity (at amortized cost)

          

Corporate debt securities

     1,451        1,450        1        0.1     1,450   

Residential mortgage-backed securities and collateralized mortgage obligations of government agencies

     202,062        —          202,062        100.0     —     

Other residential collateralized mortgage obligations

     1,224        —          1,224        100.0     —     

Obligations of states and political subdivisions

     263,973        —          263,973        100.0     —     
                                        

Total held-to-maturity securities

     468,710        1,450        467,260        NM        1,450   
                                        

Total securities

   $ 1,426,191      $ 1,263,254      $ 162,937        12.9   $ 935,588   
                                        

Available-for-sale securities:

          

Weighted average yield at the respective year end (2)

     3.46     4.57         5.51

As a % of total securities

     67.1     99.9         99.8

Weighted average life (in years)

     4.0        3.7            3.6   

Held-to-maturity securities:

          

Weighted average yield at the respective year end (2)

     4.84     9.71         9.72

As a % of total securities

     32.9     0.1         0.2

Weighted average life (in years)

     6.8        20.3            21.3   

 

NM = Not Meaningful

 

(1) At December 31, 2010, 2009 and 2008, there were no holdings of any one issuer, other than the U.S. government and certain federal or federally-related agencies, in an amount greater than 10% of WesBanco’s shareholders’ equity.
(2) Weighted average yields have been calculated on a taxable-equivalent basis using the federal statutory tax rate of 35%.

Total investment securities, which represent a source of liquidity for WesBanco as well as a contributor to interest income, increased $162.9 million, or 12.9% from December 31, 2009 to December 31, 2010. The increase in securities from year end 2009 was due primarily to the investment of cash received from increases in deposits as well as decreases in portfolio loans over the course of 2010. The securities increase for the year was most noticeable in the other government agencies and municipal securities categories, as WesBanco responded to the lower interest rate environment by investing more in variable rate government agencies and higher yielding taxable Build America municipal bonds. WesBanco does not have any material investments in private mortgage-backed securities or those that are collateralized by sub-prime mortgages, nor does WesBanco have any exposure to collateralized debt obligations or government sponsored enterprise preferred stocks.

As of April 30, 2010, available-for-sale securities with a fair value of $426.7 million were transferred to the held-to-maturity portfolio. The available-for-sale securities were transferred at fair market value at a net unrealized gain of $8.9 million recorded as a premium and included in the amortized cost of the

 

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held-to-maturity securities. The premium is being amortized over the remaining life of the securities through other comprehensive income, with no effect on net income. The securities consisted of government agency residential mortgage-backed securities and collateralized mortgage obligations, and both taxable and tax-exempt state and municipal obligations that had longer average lives or lower coupons.

The investment portfolio’s tax-equivalent yield, combining both the held-to-maturity and available-for-sale portfolios decreased from 4.57% in 2009, to 4.11% in 2010. The decrease is primarily attributable to the continuing lower interest rate environment which affected the repricing of certain municipal securities, coupled with the investment of cash into lower yielding securities. Cash flows from the portfolio due to calls, maturities and prepayments increased to $422.7 million for 2010, from $395.5 million for 2009. Higher prepayment speeds on mortgage-backed securities, coupled with a higher volume of calls and lower reinvestments on municipal securities in the lower rate environment led to the increased cash flows.

Total gross unrealized securities losses increased by $9.7 million, from $4.1 million at December 31, 2009 to $13.8 million at December 31, 2010. WesBanco had $530.8 million in investment securities in an unrealized loss position for less than 12 months at December 31, 2010, which was a significant increase from the $292.7 million for the same category at December 31, 2009, primarily due to late year increases in interest rates and municipal bond spreads. In addition, at December 31, 2010, WesBanco had $1.0 million in investment securities in an unrealized loss position for more than 12 months which was a reduction from the $15.9 million for the same category at December 31, 2009. WesBanco believes that all of the unrealized securities losses at December 31, 2010 were temporary impairment losses due to changes in market rates in relation to fixed yields with no credit impairment issues. Please refer to Note 3, “Securities,” of the Consolidated Financial Statements for more information.

Net unrealized pre-tax gains on available-for-sale securities were $7.8 million at December 31, 2010, as compared to $20.8 million at December 31, 2009. These net unrealized pre-tax gains represent temporary fluctuations resulting from changes in market rates in relation to fixed yields in the available-for-sale portfolio, and on an after-tax basis are accounted for as an adjustment to other comprehensive income in shareholders’ equity. The decrease in the net unrealized gains is primarily due to late 2010 increases in interest rates.

 

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TABLE 7. MATURITY DISTRIBUTION AND YIELD ANALYSIS OF SECURITIES

 

    December 31, 2010  
    Within One Year     After One But
Within Five Years
    After Five But
Within Ten Years
    After Ten Years  

(dollars in thousands)

  Amount     Yield (1)     Amount     Yield (1)     Amount     Yield (1)     Amount     Yield (1)  

Available-for-sale (at amortized cost): (2)

               

Other government agencies

  $ 162,427        2.20   $ 77,943        2.05   $ 54,000        2.76   $ 72,780        4.08

Corporate debt securities

    9,735        0.85     14,040        2.58     2,000        6.00     —          —     

Residential mortgage-backed securities and collateralized mortgage obligations of government agencies (3)

    31,655        4.48     294,444        2.71     17,640        2.70     1,048        5.59

Obligations of states and political subdivisions (4)

    64,028        6.38     81,153        5.92     32,953        5.76     30,064        5.40

Equity securities

    —          —          —          —          —          —          3,787        6.85
                                                               

Total available-for-sale securities

  $ 267,845        3.42   $ 467,580        3.15   $ 106,593        3.74   $ 107,679        4.56
                                                               

Held-to-maturity (at amortized cost)

               

Corporate debt securities

    —          —          —          —          —          —          1,451        9.71

Residential mortgage-backed securities and collateralized mortgage obligations of government agencies (3)

    4,957        4.25     192,637        3.78     4,346        4.40     122        3.43

Other residential collateralized mortgage obligations

    —          —          1,224        4.61     —          —          —          —     

Obligations of states and political subdivisions (4)

    12,164        5.90     33,462        5.63     98,148        5.70     120,199        5.46
                                                               

Total held-to-maturity securities

  $ 17,121        5.43   $ 227,323        4.03   $ 102,494        5.64   $ 121,772        5.51
                                                               

Total securities

  $ 284,966        3.54   $ 694,903        3.44   $ 209,087        4.67   $ 229,451        5.06
                                                               

 

(1) Yields are calculated assuming all securities purchased at a discount accrete to maturity, and those purchased at a premium amortize to call date.
(2) Maturity amounts and average yields on securities available-for-sale have been calculated based on amortized cost.
(3) Mortgage-backed and collateralized mortgage securities, which have prepayment provisions, are assigned to maturity categories based on estimated average lives or repricing information.
(4) Average yields on obligations of states and political subdivisions have been calculated on a taxable-equivalent basis using the federal statutory tax rate of 35%.

Cost method investments consist primarily of FHLB stock totaling $28.0 million and $30.9 million at December 31, 2010 and 2009, respectively, and are included in other assets in the Consolidated Balance Sheets. On December 23, 2008 the FHLB of Pittsburgh announced that it would suspend dividends and the repurchase of excess capital stock from its member banks until further notice. During 2010, the stock repurchase suspension was lifted on a limited basis. The FHLB of Pittsburgh stock owned by WesBanco does not have a readily determinable fair value and is recorded as a cost method investment totaling $25.0 million and $26.3 million at December 31, 2010 and 2009, respectively, and is held primarily to serve as collateral on FHLB borrowings. Although the FHLB of Pittsburgh has suspended dividends and limits the repurchase of excess capital stock, they are meeting their current debt obligations, have continued to exceed all required capital ratios, and have remained in compliance with statutory and regulatory requirements. Accordingly, as of December 31, 2010, WesBanco believes that sufficient evidence exists to conclude that its investment in FHLB stock was not impaired. At December 31, 2010, WesBanco held excess capital stock of $6.6 million that remains to be repurchased by the FHLB of Pittsburgh. In February 2011, the FHLB of Pittsburgh repurchased an additional $1.2 million of excess capital stock.

 

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Due to the suspension of dividends on FHLB of Pittsburgh stock, WesBanco has not recognized any dividend income on FHLB of Pittsburgh for the years ended December 31, 2010 or 2009. Additionally, the Bank owned $2.9 million and $4.6 million of FHLB of Cincinnati stock at December 31, 2010 and 2009, respectively, which paid a cash dividend at an annualized rate of 4.37% in 2010 totaling $0.2 million and a cash dividend of $0.3 million in 2009, representing an annualized rate of 4.63%.

TABLE 8. COMPOSITION OF MUNICIPAL SECURITIES

The following table presents the fair value of the municipal bond portfolio based on the combined S&P and Moody’s ratings of the individual bonds:

 

     December 31, 2010     December 31, 2009  

(dollars in thousands)

   Amount      % of Total     Amount      % of Total  

Municipal bonds:

          

AAA rating

   $ 44,277         9.4   $ 78,008         21.5

AA rating

     311,792         66.3     130,914         36.0

A rating

     55,703         11.8     97,210         26.7

Below an A rating

     38,321         8.2     29,616         8.1

No rating

     20,069         4.3     27,871         7.7
                                  

Total municipal bond portfolio

   $ 470,162         100.0   $ 363,619         100.0
                                  

WesBanco’s municipal bond portfolio consists of both taxable (primarily Build America Bonds) and tax-exempt general obligation and revenue bonds. As of December 31, 2010, $346.4 million or 73.7% were categorized as general obligation bonds and $123.8 million or 26.3% were categorized as revenue bonds. At December 31, 2009, $286.4 million or 78.8% were categorized as general obligation bonds and $77.2 million or 21.2% were categorized as revenue bonds.

In addition, at December 31, 2010, $54.1 million or 11.5% of the municipal bond portfolio consisted of state issued bonds, and $416.1 million or 88.5% were locally issued, approximately the same as the totals at December 31, 2009. The portfolio is broadly spread across the U.S., with bonds totaling 57% in the top five states of Ohio, Pennsylvania, Illinois, Texas, and West Virginia, respectively.

LOANS AND CREDIT RISK

Loans represent WesBanco’s single largest balance sheet asset classification and the largest source of interest income. Business purpose loans consist of commercial real estate (“CRE”) loans and other commercial and industrial (“C&I”) loans that are not secured by real estate. Consumer purpose loans consist of residential real estate loans, home equity lines of credit and other consumer loans. Loans held for sale generally consist of residential real estate loans originated for sale in the secondary market, but at times may also include other types of loans. The outstanding balance of each major category of the loan portfolio is summarized in Table 9.

 

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TABLE 9. COMPOSITION OF LOANS(1)

 

    December 31,  
    2010     2009     2008     2007     2006  

(dollars in thousands)

  Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
 

Commercial real estate:

                   

Land and construction

  $ 154,841        4.7   $ 254,637        7.3   $ 230,865        6.4   $ 264,560        7.0   $ 222,149        7.6

Other

    1,602,408        48.6     1,525,584        43.8     1,468,158        40.7     1,418,115        37.8     943,674        32.4
                                                                               

Total commercial real estate

    1,757,249        53.3     1,780,221        51.2     1,699,023        47.1     1,682,675        44.8     1,165,823        40.0

Commercial and industrial

    412,726        12.5     451,688        13.0     510,902        14.2     505,541        13.4     409,347        14.1

Residential real estate:

                   

Land and construction

    7,714        0.2     8,787        0.3     15,896        0.4     26,102        0.7     32,588        1.1

Other

    600,979        18.2     699,610        20.1     841,103        23.3     949,049        25.2     863,945        29.7

Home equity

    249,423        7.6     239,784        6.9     217,436        6.0     193,209        5.1     161,602        5.6

Consumer

    260,585        8.3     290,856        8.3     319,949        8.9     363,973        9.7     274,908        9.4
                                                                               

Total portfolio loans

    3,288,676        99.7     3,470,946        99.7     3,604,309        99.9     3,720,549        98.9     2,908,213        99.9

Loans held for sale

    10,800        0.3     9,441        0.3     3,874        0.1     39,717        1.1     3,170        0.1
                                                                               

Total loans

  $ 3,299,476        100.0   $ 3,480,387        100.0   $ 3,608,183        100.0   $ 3,760,266        100.0   $ 2,911,383        100.0
                                                                               

 

(1) Loans are presented gross of the allowance for loan losses and net of unearned income, credit valuation adjustments, and unamortized deferred loan fee income and loan origination costs.

Total portfolio loans decreased $182 million or 5.3% between December 31, 2009 and December 31, 2010 as all categories of the portfolio were impacted by decreased demand attributed to the prolonged recession or to strategic management decisions to limit or reduce certain types of lending. Loan growth in all categories of the portfolio was also tempered by disciplined underwriting and management’s focus on maintaining credit quality and obtaining appropriate interest rates and spreads on new loans.

Total CRE loans decreased $23 million or 1.3% and the composition of the CRE portfolio also changed over the course of the year. CRE land and construction loans, which also includes residential housing development loans decreased $100 million or 39.2% while other CRE loans increased $77 million or 5.0%. A significant amount of the offsetting change from land and construction to other CRE is attributable to over $120 million of CRE construction projects being completed and converted to permanent financing during the year. Conversely, new CRE construction loans originated in 2010 decreased significantly and represented only $21 million of CRE land and construction loans at December 31, 2010. The decrease in new CRE construction activity was partially due to reduced demand and the bank’s limits on this type of lending other than for high quality owner occupied or pre-leased commercial projects. In addition, residential housing development loans decreased $10 million or 24.1% as management also avoided financing new projects due to the overall decline in housing markets. While other CRE loans benefited from the reclassification of completed construction projects, origination of new loans to purchase or refinance existing properties declined in 2010 as a result of overall economic conditions while planned exits and the sale of distressed CRE loans also contributed to a reduction in the other CRE category.

C&I loans decreased $39 million or 8.6% as loan demand remained soft due to economic conditions and a general reduction in business activity. Residential real estate loans other than land and construction decreased $99 million or 14.1% primarily due to continued intentional reduction in the retention of fixed rate residential real estate loans throughout most of the year. Residential land and construction loans are not material in relation to total residential real estate loans, but also decreased $1 million or 12.2% due to fewer new housing starts. Home equity lines of credit were a source of modest loan growth despite declining home values and stricter underwriting standards for the second consecutive year, increasing $10 million or 4.0% due to successful marketing strategies. Consumer loans decreased $30 million or 10.4% primarily due to reduced demand as consumers continued to deleverage as well as stricter underwriting standards for certain types of consumer loans.

 

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Loan commitments, which are not reported on the balance sheet, consist of available balances on lines of credit, letters of credit, deposit account overdraft protection programs, certain loan guarantee contracts, and approved commitments to extend credit. This includes unused commitments that are available to be advanced to the borrower for CRE construction loans, C&I lines and letters of credit, home equity and other consumer lines of credit. Approved commitments to extend credit are reported net of any WesBanco loan balances that are to be refinanced by the new loans. Loan commitments are summarized in Table 10.

TABLE 10. COMPOSITION OF LOAN COMMITMENTS

 

    December 31,  
    2010     2009     2008     2007     2006  

(dollars in thousands)

  Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
 

Commercial real estate:

                   

Land and construction

  $ 61,014        8.9   $ 77,169        10.3   $ 117,569        15.3   $ 119,802        16.1   $ 69,341        12.1

Other

    73,079        10.6     109,900        14.7     74,465        9.7     90,991        12.2     71,449        12.5
                                                                               

Total commercial real estate

    134,093        19.5     187,069        25.0     192,034        24.9     210,793        28.3     140,790        24.6

Commercial and industrial

    249,048        36.2     255,469        34.1     281,013        36.5     266,286        35.9     215,557        37.6

Residential real estate

    6,740        1.0     3,015        0.4     5,473        0.7     7,116        1.0     9,429        1.6

Home equity

    200,310        29.1     195,943        26.1     193,038        25.1     177,462        23.9     144,082        25.1

Consumer

    14,610        2.1     21,222        2.8     21,416        2.8     22,990        3.1     13,055        2.3

Deposit overdraft limits

    81,142        11.8     81,125        10.8     74,582        9.7     52,947        7.1     50,143        8.8
                                                                               

Total portfolio commitments

    685,943        99.6     743,843        99.2     767,556        99.6     737,594        99.3     573,056        100.0

Loans held for sale

    2,945        0.4     5,882        0.8     2,704        0.4     4,874        0.7     —          0.0
                                                                               

Total loan commitments

  $ 688,888        100.0   $ 749,725        100.0   $ 770,260        100.0   $ 742,468        100.0   $ 573,056        100.0
                                                                               

Letters of credit included above

  $ 35,794        5.2   $ 34,488        4.6   $ 36,793        4.8   $ 55,116        7.4   $ 44,168        7.7
                                                                               

Total portfolio loan commitments decreased $61 million or 8.1% between December 31, 2009 and December 31, 2010 primarily due to the previously discussed completion of CRE construction projects and reduction in new construction lending activity.

CRE construction loan commitments are generally available to the borrower for a period of time that is sufficient to complete construction and allow for the sale or lease-up of the project upon completion. Therefore, CRE construction loan commitments generally extend beyond one year depending on the scope of the project and the anticipated sale or lease-up period. C&I lines and letters of credit are generally renewable or may be cancelled annually by the bank but may also be committed for more than one year when appropriate. Owner-occupied residential real estate construction loan commitments are generally available for one year but may extend beyond one year depending on the size of the dwelling. Home equity and other consumer lines of credit are generally available to the borrower beyond one year. All loan commitments are cancelable by the bank regardless of their duration under certain circumstances.

Overdraft protection limits are established for demand deposit accounts that meet the criteria for eligibility and represent potential loan balances. While these limits generally permit automatic advances when sufficient collected balances are not available, such advances are subject to the bank’s discretion and may be suspended or cancelled at any time.

Credit Risk—The risk that borrowers will be unable or unwilling to repay their obligations and default on loans is inherent in all lending activities. Credit risk arises from many sources including general economic conditions, external events that impact businesses or industries, isolated events that impact a major employer,

 

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individual loss of employment or other personal calamities and changes in the value of collateral. Credit risk is also impacted by a concentration of exposure within a geographic market or to one or more borrowers, industries or collateral types. The primary goal in managing credit risk is to minimize the impact of default by an individual borrower or group of borrowers.

WesBanco extends credit to borrowers that are primarily located within the market areas where the bank has branch offices. There are no material loans in relation to the total portfolio to commercial borrowers that do not conduct business within the bank’s market or to finance commercial real estate located outside of the bank’s market areas unless the borrower also has significant other loan, deposit, trust or other business relationships with the bank. WesBanco may make consumer loans, including residential real estate and home equity lines of credit to established customers for second residences or vacation homes that are located outside of the bank’s market. The approximate geographic distribution of the loan portfolio excluding deposit overdraft limits is summarized in Table 11.

TABLE 11. GEOGRAPHIC DISTRIBUTION OF LOAN PORTFOLIO

 

    December 31, 2010  
     Commercial
Real Estate
Land &
Construction
    Commercial
Real Estate
Other
    Commercial
and
Industrial
    Residential
Real Estate
    Home
Equity
    Consumer     Total
Portfolio
Loans
 

Wheeling, WV MSA

    7     10     25     16     23     18     15

Weirton, WV—Steubenville, OH MSA

    3     4     5     2     5     4     4

Morgantown, WV MSA

    4     6     8     7     6     4     6

Fairmont-Clarksburg, WV MSA

    4     3     4     8     6     8     5

Parkersburg, WV—Marietta, OH MSA

    11     7     9     5     8     6     7

Charleston, WV MSA

    2     3     3     3     3     3     3

West Virginia Other

    3     3     10     6     6     11     6

Columbus, OH MSA

    42     21     11     6     6     5     15

Dayton-Springfield, OH CSA

    7     6     1     7     8     3     5

Cincinnati-Middletown, OH MSA

    7     13     4     13     12     2     11

Southeast, OH Non-MSA

    2     8     4     15     11     9     8

Ohio Other

    2     3     1     3     3     6     3

Pittsburgh, PA MSA

    1     3     5     0     0     1     2

Pennsylvania Other

    2     8     8     3     2     13     7

States Adjacent to Market

    3     1     0     2     1     2     1

Outside of Market

    0     1     2     4     0     5     2
                                                       

Total

    100     100     100     100     100     100     100
                                                       

Most loans, except for indirect consumer loans originated by automobile and recreational vehicle dealers and other sellers of consumer goods, are originated directly by the bank. WesBanco may also participate in CRE and C&I loans, including Shared National Credits or purchased pools of residential real estate loans originated by other lending institutions. Shared National Credits are defined as loans in excess of $20 million that are financed by three or more lending institutions. WesBanco conducts its own customary credit evaluation before purchasing or participating in these loans. The risks associated with purchased loans are similar to those originated by the bank; however, additional risk may arise from limited ability to control actions of the lead, agent or servicing institution.

 

 

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Credit risk is managed through the initial underwriting process as well as through ongoing monitoring and administration of the portfolio that varies by the type of loan. The bank’s credit policies establish standard underwriting guidelines for each type of loan and require an appropriate evaluation of the credit characteristics of each borrower. This evaluation includes the borrower’s primary source of repayment capacity; the adequacy of collateral, if any, to secure the loan; the potential value of personal guarantees as secondary sources of repayment, and other factors unique to each loan that may increase or mitigate its risk.

All loans, including renewals and extensions thereof are approved within a framework of progressive individual lending authorities based on the loan amount for consumer purpose loans and the total credit exposure of the borrower for business purpose loans. Business purpose loans with total credit exposure generally less than $500,000 and all consumer purpose loans are approved by underwriters that are not responsible for business development or loan origination. Business purpose loans to borrowers with total credit exposure in excess of $1.5 million minimally require the approval of a credit officer that is not responsible for business development or loan origination. Credit exposures in excess of $7.5 million require approval of a credit committee. Loans of all types that contain one or more exceptions to credit policy may only be approved by designated underwriters, senior business unit managers or credit officers within their respective levels of authority.

Credit bureau scores are also considered when evaluating consumer purpose loans. However, the bank has not historically updated credit bureau scores for consumer borrowers subsequent to when loans are made to determine changes in their credit history. WesBanco generally does not originate sub-prime loans as a business strategy. However, the bank does at times extend consumer purpose loans to borrowers that may have one or more characteristics of a sub-prime borrower. These loans are generally made only when the credit risk associated with the sub-prime characteristics of the borrower are properly justified and mitigated by other factors such as acceptable co-makers, additional collateral, or deposit and other non-lending relationships of the borrower with the bank and are made on terms that are appropriate for their higher level of risk. Such loans are not material in relation to the aggregate of all types of consumer loans.

Consumer purpose loans are a homogeneous group, generally consisting of standardized products that are smaller in amount and spread over a larger number of individual borrowers. WesBanco does not maintain current information about the industry in which consumer borrowers are employed. While such information is obtained when each loan is made, it often becomes inaccurate with the passage of time or as borrowers change employment during the term of their loans. Instead, WesBanco estimates potential exposure based on consumer demographics, market share, and other available information when there is a significant risk of loss of employment within an industry or a significant employer in any of the bank’s markets. The bank generally does not risk grade consumer purpose loans other than as required by the regulatory uniform classification guidelines. To management’s knowledge, there are no concentrations of employment that would have a material adverse impact on consumer purpose loans. However the current economic environment has resulted in higher unemployment throughout the bank’s market which increases the risk in the loan portfolio.

Many smaller business loans have the same risk characteristics as consumer loans; however business loans can also be significantly larger in amount and contain terms and conditions that are unique to each transaction. The bank maintains a loan grading system that categorizes business loans according to their level of credit risk. Risk grades are intended to reflect each borrower’s ability to repay their loan obligations and other factors that affect the quality of each loan. All business loans are assigned a grade at their inception and adjusted thereafter at any time to reflect changes in the risk profile throughout the life of each loan. Loans to borrowers with total credit exposure of $1 million or more are generally reviewed at least annually to validate the continued appropriateness of the assigned risk grade. Periodic reviews include evaluating the borrower’s continued capacity to repay, the continued adequacy of collateral, if any, the ability of guarantors to provide a secondary source of repayment, and verification of compliance with applicable loan covenants. To facilitate regular reviews of repayment capacity, borrowers are required to furnish periodic financial statements and other information depending on the size and type of loan, such as accounts receivable aging reports for a revolving line of credit and rent rolls for investment CRE.

 

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Credit risk is mitigated for all types of loans by continuously monitoring delinquency levels and pursuing collection efforts at the earliest stage of delinquency. The bank also monitors general economic conditions, including employment, housing activity and real estate values in its market. The bank also periodically evaluates and changes its underwriting standards when conditions indicate that a change is warranted based on market conditions, the historical performance of a category of the portfolio, or other external factors. Credit risk is also regularly evaluated for the impact of adverse economic and other events that increase the risk of default and the potential loss in the event of default to understand their impact on the bank’s earnings and capital. An independent loan review function also performs periodic reviews of the portfolio to assess the adequacy and effectiveness of the bank’s portfolio monitoring systems, and the accuracy and timeliness of risk grades assigned to business loans.

Each type of loan may also entail certain distinct elements of risk that impact the manner in which those loans are underwritten, monitored, and administered. Elements that are distinct to the underwriting of each type of loan are further explained throughout this section of MD&A.

Commercial Real Estate—CRE consists of loans to purchase, construct or refinance owner-occupied and investment properties. Owner-occupied properties consist of loans to borrowers in a diverse range of industries but may include special purpose or single use types of facilities. Investment properties include 1-to-4 family rental units, multi-family apartment buildings, and other facilities that are rented or leased to unrelated parties of the owner. Construction and development loans include loans to finance land acquisition and development, construction of residential dwellings for resale, and construction of commercial buildings which may be owner-occupied or for investment. Construction loans are generally made only when the bank also commits to the permanent financing of the project, has a takeout commitment from another lender for the permanent loan, or the loan is expected to be repaid from the sale of subdivided property.

Construction and development loans require payment of interest only during the construction or development period, which can range from as short as six months to up to three years for larger, multiple phase projects such as residential housing developments and large scale commercial projects. Interest rates may be fully floating based on an appropriate index but may also be structured in the same manner as the interest rate that will apply to the permanent loan upon completion of construction. Interest reserves are generally established as part of the initial underwriting of the project to provide for payment of interest during the construction period.

TABLE 12. MATURITIES OF COMMERCIAL REAL ESTATE LAND AND CONSTRUCTION LOANS AND COMMITMENTS

 

     December 31, 2010  

(in thousands)

   In One
Year or
Less
     After One
Year
Through
Five Years
     Over Five
Years
     Total  

Fixed rate loans

   $ 24,664       $ 12,057       $ 1,340       $ 38,061   

Variable rate loans

     37,394         21,779         57,607         116,780   
                                   

Total commercial real estate loans

   $ 62,058       $ 33,836       $ 58,947