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EX-31.1 - SECTION 302 CEO CERTIFICATION - WESBANCO INCex311.htm
EX-32.1 - SECTION 906 CEO & CFO CERTIFICATION - WESBANCO INCex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - WESBANCO INCex312.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549

FORM 10-Q

(Mark One)
 
x
     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011
   
¨
     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 of incorporation)
(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
 
 
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes 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 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.

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

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

As of April 26, 2011, there were 26,593,510 shares of WesBanco, Inc. common stock, $2.0833 par value, outstanding.
 


 
WESBANCO, INC.
 
 
TABLE OF CONTENTS
 
     
Item No.
ITEM
Page No.
     
 
PART I - FINANCIAL INFORMATION
 
1
Financial Statements
 
 
Consolidated Balance Sheets at March 31, 2011 (unaudited) and December 31, 2010
3
 
Consolidated Statements of Income for the three months ended March 31, 2011 and 2010 (unaudited)
4
 
Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2011 and 2010 (unaudited)
5
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)
6
 
Notes to Consolidated Financial Statements
7
     
2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
     
3
Quantitative and Qualitative Disclosures About Market Risk
37
     
4
Controls and Procedures
39
     
 
PART II – OTHER INFORMATION
 
1
Legal Proceedings
40
     
2
Unregistered Sales of Equity Securities and  Use of Proceeds
40
     
6
Exhibits
41
     
 
Signatures
42


2


PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESBANCO, INC. CONSOLIDATED BALANCE SHEETS
   
 
March 31,
December 31,
(unaudited, in thousands, except shares and per share amounts)
2011
2010
     
ASSETS
   
Cash and due from banks, including interest bearing amounts of $13,712 and $21,894, respectively
 $            97,076
 $             79,136
Securities:
   
     Available-for-sale, at fair value
             935,600
              957,481
     Held-to-maturity (fair values of $531,581 and $465,902, respectively)
             531,284
              468,710
              Total securities
          1,466,884
           1,426,191
Loans held for sale
                 4,087
                10,800
Portfolio loans, net of unearned income
          3,243,244
           3,288,676
Allowance for loan losses
             (61,440)
              (61,051)
              Net portfolio loans
          3,181,804
           3,227,625
Premises and equipment, net
               84,952
                85,928
Accrued interest receivable
               21,599
                20,536
Goodwill and other intangible assets, net
             284,941
              285,559
Bank-owned life insurance
             107,397
              106,502
Other assets
             120,112
              119,181
Total Assets
 $       5,368,852
 $        5,361,458
     
LIABILITIES
   
Deposits:
   
     Non-interest bearing demand
 $          611,496
 $           591,052
     Interest bearing demand
             511,168
              481,129
     Money market
             887,803
              854,836
     Savings deposits
             558,800
              530,701
     Certificates of deposit
          1,642,942
           1,714,705
              Total deposits
          4,212,209
           4,172,423
Federal Home Loan Bank borrowings
             232,247
              253,606
Other short-term borrowings
             168,014
              187,385
Junior subordinated debt owed to unconsolidated subsidiary trusts
             106,042
              106,034
              Total borrowings
             506,303
              547,025
Accrued interest payable
                 6,035
                  6,559
Other liabilities
               32,327
                28,588
Total Liabilities
          4,756,874
           4,754,595
     
SHAREHOLDERS' EQUITY
   
Preferred stock, no par value; 1,000,000 shares authorized; none outstanding
                      -
                       -
Common stock, $2.0833 par value; 50,000,000 shares authorized; 26,633,848 shares issued in 2011
   
    and 2010; outstanding: 26,593,510 and 26,586,953 shares in 2011 and 2010, respectively
               55,487
                55,487
Capital surplus
             191,919
              191,987
Retained earnings
             367,766
              361,513
Treasury stock (40,338 and 46,895 shares in 2011 and 2010, respectively, at cost)
                  (919)
                (1,063)
Accumulated other comprehensive income
               (1,101)
                     131
Deferred benefits for directors
               (1,174)
                (1,192)
Total Shareholders' Equity
             611,978
              606,863
Total Liabilities and Shareholders' Equity
 $       5,368,852
 $        5,361,458
 
See Notes to Consolidated Financial Statements.
 
 
3

 
WESBANCO, INC. CONSOLIDATED STATEMENTS OF INCOME
     
 
For the Three Months Ended
 
March 31,
(unaudited, in thousands, except shares and per share amounts)
2011
 
2010
INTEREST AND DIVIDEND INCOME
     
   Loans, including fees
 $       44,348
 
 $          48,375
   Interest and dividends on securities:
     
       Taxable
            8,708
 
               9,111
       Tax-exempt
            2,986
 
               2,994
           Total interest and dividends on securities
          11,694
 
             12,105
   Other interest income
                 56
 
                    85
           Total interest and dividend income
          56,098
 
             60,565
INTEREST EXPENSE
     
     Interest bearing demand deposits
               503
 
                  670
     Money market deposits
            1,572
 
               1,943
     Savings deposits
               488
 
                  602
     Certificates of deposit
            8,050
 
             10,160
              Total interest expense on deposits
          10,613
 
             13,375
     Federal Home Loan Bank borrowings
            2,026
 
               4,334
     Other short-term borrowings
            1,182
 
               1,178
     Junior subordinated debt owed to unconsolidated subsidiary trusts
               801
 
               1,045
              Total interest expense
          14,622
 
             19,932
NET INTEREST INCOME
          41,476
 
             40,633
     Provision for credit losses
            8,041
 
             11,500
Net interest income after provision for credit losses
          33,435
 
             29,133
NON-INTEREST INCOME
 
 
 
     Trust fees
            4,762
 
               4,058
     Service charges on deposits
            4,222
 
               5,317
     Electronic banking fees
            2,284
 
               1,915
     Net securities brokerage and insurance services revenue
            1,721
 
               1,852
     Bank-owned life insurance
               895
 
                  944
     Net securities gains
                 17
 
               1,405
     Net losses on other real estate owned and other assets
              (545)
 
             (1,530)
     Other income
            1,148
 
               1,080
              Total non-interest income
          14,504
 
             15,041
NON-INTEREST EXPENSE
     
     Salaries and wages
          13,585
 
             13,214
     Employee benefits
            5,224
 
               4,997
     Net occupancy
            2,921
 
               3,060
     Equipment
            2,300
 
               2,604
     Marketing
            1,005
 
                  630
     FDIC insurance
            1,654
 
               1,605
     Amortization of intangible assets
               618
 
                  699
     Restructuring and merger-related expenses
                  -
 
                  200
     Other operating expenses
            8,184
 
               8,385
              Total non-interest expense
          35,491
 
             35,394
Income before provision for income taxes
          12,448
 
               8,780
     Provision for income taxes
            2,208
 
                  870
NET INCOME
 $       10,240
 
 $            7,910
EARNINGS PER COMMON SHARE
     
Basic
 $           0.39
 
 $              0.30
Diluted
 $           0.39
 
 $              0.30
AVERAGE SHARES OUTSTANDING
 
 
 
Basic
   26,589,013
 
      26,567,653
Diluted
   26,590,410
 
      26,568,172
DIVIDENDS DECLARED PER COMMON SHARE
 $           0.15
 
 $              0.14
 
See Notes to Consolidated Financial Statements.
 
 
4


WESBANCO, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
                 
For the Three Months Ended March 31, 2011 and 2010
 
 
       
Accumulated
   
           
Other
Deferred
 
(unaudited, in thousands, except
Common Stock
Capital
Retained
Treasury
Comprehensive
Benefits for
 
 shares and per share amounts)
Shares
Amount
Surplus
Earnings
Stock
Income (Loss)
Directors
Total
January 1, 2011
    26,586,953
 $    55,487
 $   191,987
 $    361,513
 $  (1,063)
 $                    131
 $       (1,192)
 $    606,863
Net income
     
         10,240
     
         10,240
Other comprehensive income (1)
         
                   (1,232)
 
          (1,232)
      Total comprehensive income
             
           9,008
Common dividends
               
     declared ($0.15 per share)
     
         (3,987)
     
          (3,987)
Stock options exercised
             1,775
 
             (13)
 
            39
   
                26
Restricted stock granted
             4,782
 
           (105)
 
          105
   
                 -
Stock compensation expense
   
               68
       
                68
Deferred benefits for directors- net
   
             (18)
     
                18
                 -
March 31, 2011
    26,593,510
 $    55,487
 $   191,919
 $    367,766
 $     (919)
 $                (1,101)
 $       (1,174)
 $    611,978
                 
                 
                 
January 1, 2010
    26,567,653
 $    55,487
 $   192,268
 $    340,788
 $  (1,498)
 $                 2,949
 $       (1,278)
 $    588,716
Net income
     
           7,910
     
           7,910
Other comprehensive income (1)
         
                    3,567
 
           3,567
      Total comprehensive income
             
         11,477
Common dividends
               
       declared ($0.14 per share)
     
         (3,720)
     
          (3,720)
March 31, 2010
26,567,653
 $    55,487
 $   192,268
 $    344,978
 $  (1,498)
 $                 6,516
 $       (1,278)
 $    596,473

(1) Other comprehensive income in 2010 and 2011 consists primarily of the net change in unrealized gains and losses in available-for-sale securities.
 
 

See Consolidated Notes to Financial Statements.
 
 
5
 

WESBANCO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
   
 
For the Three Months Ended
 
March 31,
(unaudited, in thousands)
2011
2010
NET CASH PROVIDED BY OPERATING ACTIVITIES
 $          30,527
 $            24,242
INVESTING ACTIVITIES:
   
Securities available-for-sale:
   
     Proceeds from sales
                      -
               66,025
     Proceeds from maturities, prepayments and calls
             70,856
             104,996
     Purchases of securities
           (51,739)
           (115,255)
Securities held-to-maturity:
   
     Proceeds from maturities, prepayments and calls
             21,827
                      -
     Purchases of securities
           (85,344)
                      -
Net decrease in loans
             36,740
               25,828
Purchases of premises and equipment – net
                 (540)
                  (153)
Net cash (used in) provided by investing activities
              (8,200)
               81,441
FINANCING ACTIVITIES:
   
Net increase in deposits
             39,823
               67,457
Proceeds from Federal Home Loan Bank borrowings
                      -
               20,000
Repayment of Federal Home Loan Bank borrowings
           (21,257)
             (99,268)
Decrease in other short-term borrowings
           (19,258)
               (7,226)
Decrease in federal funds purchased
                      -
               (5,000)
Dividends paid to common shareholders
              (3,721)
               (3,720)
Treasury shares sold – net
                     26
                      -
Net cash used in financing activities
              (4,387)
             (27,757)
Net increase in cash and cash equivalents
             17,940
               77,926
Cash and cash equivalents at beginning of the period
             79,136
               82,867
Cash and cash equivalents at end of the period
 $          97,076
 $          160,793
SUPPLEMENTAL DISCLOSURES:
   
Interest paid on deposits and other borrowings
 $          15,146
 $            21,822
Income taxes paid
               1,500
                      -
Transfers of loans to other real estate owned
                   539
                 1,340
 
 
 
See Notes to Consolidated Financial Statements.
 
 
6

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION— The accompanying unaudited interim financial statements of WesBanco, Inc. (“WesBanco”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010.

WesBanco’s interim financial statements have been prepared following the significant accounting policies disclosed in Note 1 of the Notes to the Consolidated Financial Statements of its 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission.  In the opinion of management, the accompanying interim financial information reflects all adjustments, including normal recurring adjustments, necessary to present fairly WesBanco’s financial position and results of operations for each of the interim periods presented.  Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year.

RECENT ACCOUNTING PRONOUNCEMENTS— In July 2010, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement to improve disclosures about the credit quality of financing receivables and the allowance for credit losses.  Companies are required to provide more information about the credit quality of their financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators disaggregated by portfolio segment and class.  The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure.  Required disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010, while required disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010.  Required disclosures specifically related to troubled debt restructurings were deferred in an accounting pronouncement issued in January 2011.  The effect of this pronouncement is included in these notes to the financial statements, and the adoption of this pronouncement did not have a material impact on WesBanco’s consolidated financial statements.

In April 2011, the FASB issued an accounting pronouncement which clarifies when a loan modification or restructuring is considered a troubled debt restructuring.  The guidance is effective for the first interim period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  For purposes of measuring impairment on newly-considered impaired receivables an entity should apply the guidance prospectively in the first interim period beginning on or after June 15, 2011.  The disclosures relating to troubled debt restructurings will be required in the first interim period beginning on or after June 15, 2011.  The adoption of this pronouncement is not expected to have a material impact on WesBanco’s consolidated financial statements.

In January 2010, the FASB issued an accounting pronouncement to improve disclosures about fair value measurements which requires new disclosures on transfers into and out of Level 1 and 2 measurements of the fair value hierarchy and requires separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures relating to the level of disaggregation and inputs and valuation techniques used to measure fair value.  It was effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which was effective for fiscal years beginning after December 15, 2010.  The adoption of this pronouncement did not have a material impact on WesBanco’s consolidated financial statements.


NOTE 2. EARNINGS PER COMMON SHARE
 
Earnings per common share are calculated as follows:
 
       
For the Three Months Ended
       
March 31,
(unaudited, in thousands, except shares and per share amounts)
   
2011
 
2010
Numerator for both basic and diluted earnings per common share:
         
Net income
     
 $         10,240
 
 $         7,910
             
Denominator:
           
Total average basic common shares outstanding
     
     26,589,013
 
   26,567,653
Effect of dilutive stock options
     
              1,397
 
               519
Total diluted average common shares outstanding
     
     26,590,410
 
   26,568,172
             
Earnings per common share - basic
     
 $             0.39
 
 $           0.30
Earnings per common share - diluted
     
 $             0.39
 
 $           0.30

7
 
 
NOTE 3. SECURITIES

The following table presents the fair value and amortized cost of available-for-sale and held-to-maturity securities:
 
     
March 31, 2011
 
December 31, 2010
       
Gross
Gross
Estimated
   
Gross
Gross
Estimated
     
Amortized
Unrealized
Unrealized
Fair
 
Amortized
Unrealized
Unrealized
Fair
(unaudited, in thousands)
Cost
Gains
Losses
Value
 
Cost
Gains
Losses
Value
Available-for-sale
                 
 
Other government agencies
 $    364,717
 $      1,017
 $  (5,582)
 $    360,152
 
 $            367,150
 $          1,436
 $         (5,451)
 $            363,135
 
Corporate debt securities
        22,677
             16
         (212)
         22,481
 
                   25,775
                    12
               (204)
                   25,583
 
Residential mortgage-backed securities and collateralized mortgage obligations of
government agencies
      329,069
        7,973
         (819)
       336,223
 
                 344,787
              9,412
               (854)
                 353,345
 
Obligations of state and political subdivisions
      208,862
        4,264
       (1,271)
        211,855
 
                  208,198
              4,321
               (1,711)
                  210,808
Total debt securities
      925,325
      13,270
     (7,884)
        930,711
 
 $            945,910
 $         15,181
 $        (8,220)
 $            952,871
 
Equity securities
           4,140
           749
             -
           4,889
 
                      3,787
                823
                     -
                       4,610
Total available-for-sale securities
 $   929,465
 $    14,019
 $  (7,884)
 $   935,600
 
 $            949,697
 $       16,004
 $        (8,220)
 $            957,481
Held-to-maturity
                 
 
Corporate debt securities
 $        1,452
 $         67
 $         -
 $         1,519
 
 $                1,451
 $               90
 $                 -
 $                1,541
 
Residential mortgage-backed securities and
collateralized mortgage obligations
of government agencies
       254,014
        1,657
        (306)
       255,365
 
                 202,062
               1,721
                   (14)
                 203,769
 
Other residential collateralized mortgage
obligations
           1,058
             13
             -
            1,071
 
                       1,224
                    14
                     -
                       1,238
 
Obligations of state and political subdivisions
      274,760
        1,858
     (2,992)
       273,626
 
                 263,973
                973
            (5,592)
                 259,354
Total held-to-maturity securities
 $    531,284
 $    3,595
 $  (3,298)
 $     531,581
 
 $            468,710
 $         2,798
 $        (5,606)
 $            465,902
Total securities
 $ 1,460,749
 $    17,614
 $  (11,182)
 $  1,467,181
 
 $         1,418,407
 $       18,802
 $      (13,826)
 $         1,423,383
 
At March 31, 2011, and December 31, 2010, there were no holdings of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of WesBanco’s shareholders’ equity.
 
The following table presents the maturity distribution of available-for-sale and held-to-maturity securities at fair value:
 
 
March 31, 2011
 
 
 
After One But
 
After Five But
 
 
   
(unaudited, in thousands)
Within One Year
 
Within Five Years
    Within Ten Years    After Ten Years  
Total
Available-for-sale
                 
  Other government agencies
 $                131,298
 
 $               76,909
 
 $                68,345
 
 $              83,600
 
 $           360,152
  Corporate debt securities
                       3,466
 
                  15,189
 
                     3,826
 
                        -
 
               22,481
  Residential mortgage-backed securities and
                     
 
                
 
                   
 
                  
 
            
  collateralized mortgage obligations of
               
  government agencies (1)
  17,333     280,451     37,125      1,314      336,223
  Obligations of states and political subdivisions
                     61,429
 
                  80,990
 
                   44,711
 
                 24,725
 
             211,855
  Equity securities
                            -
 
                          -
 
                          -
 
                   4,889
 
                 4,889
           Total available-for-sale securities
 $                213,526
 
 $             453,539
 
 $              154,007
 
 $            114,528
 
 $           935,600
Held-to-maturity (2)
                 
  Corporate debt securities
 $                              -
 
 $                           -
 
 $                           -
 
 $                1,519
 
 $                1,519
  Residential mortgage-backed securities and
               
  collateralized mortgage obligations of
               
  government agencies (1)
                       2,366
 
                212,432
 
                          81
 
                 40,486
 
             255,365
  Other residential collateralized mortgage
               
  obligations (1)
                            -
 
                    1,071
 
                          -
 
                        -
 
                 1,071
  Obligations of states and political subdivisions
                     15,290
 
                  38,525
 
                 115,689
 
               104,122
 
             273,626
          Total held-to-maturity securities
 $                  17,656
 
 $             252,028
 
 $              115,770
 
 $            146,127
 
 $           531,581
Total securities
 $                231,182
 
 $             705,567
 
 $              269,777
 
 $            260,655
 
 $        1,467,181
(1) Mortgage-backed and collateralized mortgage securities, which have prepayment provisions, are assigned to maturity categories based on estimated average
    lives or repricing information.
(2) The held-to-maturity portfolio is carried at an amortized cost of $531.3 million.
 
 
8

 
Securities with aggregate par values of $661.0 million and $621.4 million at March 31, 2011 and December 31, 2010, respectively, were pledged as security for public and trust funds, and securities sold under agreements to repurchase.  Proceeds from the sale of available-for-sale securities were $66.0 million for the three months ended March 31, 2010.  There were no sales from the portfolio for the three months ended March 31, 2011.   Net unrealized security gains on the available-for-sale portfolio were $6.1 million and $7.8 million for March 31, 2011 and December 31, 2010.  These unrealized gains were recognized in other comprehensive income, net of tax.  For the three months ended March 31, 2011, gross security gains were $22,000 and gross losses of $5,000 were recorded due to the write down of one equity security.  For the three months ended March 31, 2010, gross security gains on available-for-sale securities were $1.4 million with no realized losses.

The following table provides information on unrealized losses on investment securities that have been in an unrealized loss position for less than twelve months and twelve months or more as of March 31, 2011 and December 31, 2010:
 
 
March 31, 2011
 
 Less than 12 months
 12 months or more
 Total
 
Fair
Unrealized
# of
Fair
Unrealized
# of
Fair
Unrealized
# of
(unaudited, dollars in thousands)
Value
Losses
Securities
Value
Losses
Securities
Value
Losses
Securities
Other government agencies
 $    233,337
 $   (5,582)
           28
 $          -
 $         -
           -
 $   233,337
 $    (5,582)
           28
Corporate debt securities
       16,968
         (212)
             6
             -
            -
           -
       16,968
         (212)
             6
Residential mortgage-backed securities and
collateralized mortgage obligations of
government agencies
     159,682
       (1,110)
           27
          573
           (15)
             1
     160,255
       (1,125)
           28
Obligations of states and political subdivisions
     190,494
     (4,249)
         206
          342
           (14)
             2
     190,836
      (4,263)
         208
          Total temporarily impaired securities
 $    600,481
 $  (11,153)
         267
 $        915
 $       (29)
             3
 $   601,396
 $  (11,182)
         270
                   
 
 December 31, 2010
 
 Less than 12 months
 12 months or more
 Total
 
Fair
Unrealized
# of
Fair
Unrealized
# of
Fair
Unrealized
# of
(unaudited, dollars in thousands)
Value
Losses
Securities
Value
Losses
Securities
Value
Losses
Securities
Other government agencies
 $       190,252
 $         (5,451)
21
 $                  -
 $                 -
                    -
 $      190,252
 $       (5,451)
                    21
Corporate debt securities
              20,033
               (204)
                     8
                      -
                     -
                    -
             20,033
                (204)
                      8
Residential mortgage-backed securities and
collateralized mortgage obligations of
government agencies
               97,174
               (855)
                  20
                  578
                   (13)
                      1
             97,752
                (868)
                    21
Obligations of states and political subdivisions
           223,324
            (7,290)
                255
                  342
                   (13)
                     2
           223,666
             (7,303)
                 257
          Total temporarily impaired securities
 $       530,783
 $      (13,800)
                304
 $              920
 $              (26)
                     3
 $      531,703
 $     (13,826)
                 307
 
Unrealized losses in the table represent temporary fluctuations resulting from changes in market rates in relation to fixed yields.  Unrealized losses in the available-for-sale portfolio are accounted for as an adjustment to other comprehensive income in shareholders’ equity.

WesBanco does not believe the securities presented above are impaired due to reasons of credit quality, as substantially all debt securities are of investment grade quality and all are paying principal and interest according to their contractual terms. WesBanco does not intend to sell, nor is it more likely than not that it will be required to sell, loss position securities prior to recovery of their cost, and therefore, management believes the unrealized losses detailed above are temporary and no impairment loss relating to these securities has been recognized.

Securities that do not have readily determinable fair values and for which WesBanco does not exercise significant influence are carried at cost.  Cost method investments consist primarily of Federal Home Loan Bank (“FHLB”) stock totaling $26.1 million and $28.0 million at March 31, 2011 and December 31, 2010, respectively, and are included in other assets in the Consolidated Balance Sheets.  Cost-method investments are evaluated for impairment whenever events or circumstances suggest that their carrying value may not be recoverable.
 
In 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.  However, the FHLB of Pittsburgh announced on October 28, 2010 that the suspension on the repurchase of excess capital stock would be partially lifted, and future excess capital stock repurchases would be reviewed on a quarter-to-quarter basis.  The suspension of dividends was not affected by the announcement. The FHLB of Pittsburgh stock owned by WesBanco totaling $23.8 million and $25.0 million at March 31, 2011 and December 31, 2010, respectively, does not have a readily determinable fair value and is recorded as a cost method investment in other assets on the Consolidated Balance Sheet, and is held primarily to serve as collateral on FHLB borrowings.  Although the FHLB of Pittsburgh has suspended dividends and only partially lifted the suspension on 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 March 31, 2011, WesBanco believes that sufficient evidence exists to conclude that its investment in FHLB stock was not impaired.  At March 31, 2011, WesBanco held excess capital stock of $6.8 million that remains to be repurchased by the FHLB of Pittsburgh.  The FHLB of Pittsburgh stock declined from December 31, 2010 to March 31, 2011 due to stock repurchases during the period.
 
 
9

 
NOTE 4. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

The recorded investment in loans is presented in the Consolidated Balance Sheets net of deferred loan fees and costs of $3.1 million at March 31, 2011 and December 31, 2010.

The following table summarizes changes in the allowance for credit losses applicable to each category of the loan portfolio.
 
 
 For the Three Months Ended
 
 
    March 31,  
March 31,
 
2011
 
 2010
 
 Commercial
                 
 
 Real Estate -
 Commercial
               
 
 Land and
 Real Estate -
 Commercial
 Residential
 Home
 
 Deposit
 
 
 
(unaudited, in thousands)
Construction
Other
& Industrial
Real Estate
Equity
Consumer
Overdraft
Total
 
Total
Balance at beginning of year:
                   
   Allowance for loan losses
 $     4,701
 $  30,836
 $   10,793
 $    5,950
 $   2,073
 $   5,641
 $   1,057
 $ 61,051
 
 $           61,160
   Allowance for loan commitments
        1,037
           285
             65
               1
            14
            2
           -
      1,404
 
                    195
Total beginning allowance for credit losses
        5,738
        31,121
      10,858
        5,951
      2,087
     5,643
      1,057
   62,455
 
              61,355
Provision for credit losses:
 
 
 
 
 
 
 
 
 
 
   Provision for loan losses
        5,480
         (860)
        1,873
         1,197
          381
        576
          40
     8,687
 
               11,500
   Provision for loan commitments
         (376)
         (260)
            (10)
              (1)
              1
           -
           -
       (646)
 
                       -
Total provision for credit losses
        5,104
       (1,120)
        1,863
         1,196
         382
        576
          40
      8,041
 
               11,500
Charge-offs
      (4,352)
       (1,834)
         (894)
         (997)
       (256)
    (1,085)
       (173)
    (9,591)
 
             (7,740)
Recoveries
               3
           495
           153
           232
             7
        307
          96
      1,293
 
                   705
   Net charge-offs
      (4,349)
       (1,339)
          (741)
         (765)
       (249)
       (778)
         (77)
    (8,298)
 
             (7,035)
Balance at end of year:
                   
   Allowance for loan losses
        5,832
      28,637
       11,925
        6,382
      2,205
     5,439
      1,020
    61,440
 
             65,625
   Allowance for loan commitments
           661
             25
             55
             -
            15
            2
           -
        758
 
                    195
Total ending allowance for credit losses
 $    6,493
 $  28,662
 $    11,980
 $    6,382
 $   2,220
 $   5,441
 $   1,020
 $ 62,198
 
 $         65,820
 
The following table presents the allowance for credit losses and recorded investments in loans by category:
 
     
 Allowance for Credit Losses and Recorded Investment in Loans
   
     
 March 31,
 
December 31,
     
2011
 
2010
     
 Commercial
                 
     
 Real Estate-
 Commercial
 Commercial
 Residential
           
     
 Land and
 Real Estate-
 and
 Real
 Home
 
 Over-
     
(unaudited, in thousands)
Construction
Other
Industrial
Estate
Equity
Consumer
draft
Total
 
Total
Allowance for credit losses:
                   
 
Allowance for loans individually evaluated for impairment
 $         1,805
 $             6,517
 $       2,054
 $                  -
 $                 -
 $                 -
 $          -
 $         10,376
 
 $                     10,430
 
Allowance for loans collectively evaluated for impairment
            4,027
              22,120
           9,871
            6,382
           2,205
           5,439
   1,020
             51,064
 
                          50,621
 
Allowance for loan commitments
                 661
                       25
                 55
                   -
                  15
                    2
            -
                   758
 
            1,404
Total allowance for credit losses
 $         6,493
 $          28,662
 $      11,980
 $        6,382
 $        2,220
 $        5,441
 $  1,020
 $         62,198
 
 $                    62,455
                         
Portfolio loans:
                   
   
Individually evaluated for impairment
           11,498
              45,323
           8,152
                   -
                   -
                   -
          -
            64,973
 
                         76,358
   
Collectively evaluated for impairment
        150,475
        1,533,604
       399,115
       597,267
      248,203
      249,607
            -
       3,178,271
 
                 3,212,318
Total portfolio loans
 $     161,973
 $    1,578,927
 $  407,267
 $   597,267
 $   248,203
 $   249,607
 $         -
 $  3,243,244
 
 $               3,288,676
 
WesBanco maintains an internal loan grading system to reflect the credit quality of commercial loans.  Commercial loan risk grades are determined based on an evaluation of the relevant characteristics of each loan, assigned at the inception of each loan and adjusted thereafter at any time to reflect changes in the risk profile throughout the life of each loan.  The primary factors used to determine the risk grade are the reliability and sustainability of the primary source of repayment and overall financial strength of the borrower.  This includes an analysis of cash flow available to repay debt, profitability, liquidity, leverage, and overall financial trends.  Other factors include management, industry or property type risks, an assessment of secondary sources of repayment such as collateral or guarantees, other terms and conditions of the loan that may increase or reduce its risk, and economic conditions and other external factors that may influence repayment capacity and financial condition.

Commercial real estate consists of loans to purchase, construct or refinance owner-occupied and investment properties.  Factors that are considered in assigning the risk grade vary depending on the type of property financed.  The risk grade assigned to construction and development loans is based on the overall viability of the project, the experience and financial capacity of the developer or builder to successfully complete the project, project specific and market absorption rates and comparable property values, and the amount of pre-sales for residential housing construction or pre-leases for commercial investment property.  The risk grade assigned to commercial investment property loans is based primarily on the adequacy of net rental income generated by the property to service the debt, the type, quality, industry and mix of tenants, and the terms of leases, but also considers the overall financial capacity of the investors and their experience in owning and managing investment property.  The risk grade
 
 
10
 
 
assigned to owner-occupied commercial real estate and commercial and industrial loans is based primarily on historical and projected earnings, the adequacy of operating cash flow to service all of the business’s debt, and the capital resources, liquidity and leverage of the business, but also considers the industry in which the business operates, the business’s specific competitive advantages or disadvantages, the quality and experience of management, and external influences on the business such as economic conditions.  Other factors that are considered for commercial and industrial loans include the type, quality and marketability of non-real estate collateral and whether the structure of the loan increases or reduces its risk.  The type, age, condition, location and any environmental risks associated with a property are also considered for all types of commercial real estate.  The overall financial condition and repayment capacity of any guarantors is also evaluated to determine the extent to which they mitigate other risks of the loan.  The following descriptions of risk grades apply to commercial real estate and commercial and industrial loans.
 
Excellent or minimal risk loans are fully secured by liquid or readily marketable collateral and therefore have virtually no risk of loss.  Good or desirable risk loans are extended in the normal course of business to creditworthy borrowers that exhibit a history of positive financial results that are at least comparable to the average for their industry or type of real estate.  These loans are expected to perform satisfactorily during most economic cycles and there are no significant external factors that are expected to adversely affect these borrowers more than others in the same industry.  Any minor unfavorable characteristics of these loans are outweighed or mitigated by strong positive factors including but not limited to adequate secondary sources of repayment or guarantees.

Fair or acceptable risk loans have a somewhat higher credit risk profile due to specific weaknesses or uncertainties that could adversely impact repayment capacity.  Loans in this category generally warrant additional attention or monitoring, or a more rigid loan structure.  These loans represent the maximum level of risk accepted in the normal course of lending.  Specific issues that may warrant this grade include financial results that are less favorable than the average for the borrower’s industry or type of real estate, cyclical financial results, loans based on projections that have a reasonable probability of being achieved, start-up businesses, construction projects, and other external factors that indicate a higher level of credit risk.  Loans that are underwritten primarily on the basis of the repayment capacity or financial condition of guarantors may also be assigned this grade.

Criticized and classified loans are equivalent to the classifications used by banking regulators.  Criticized or marginal loans are currently protected but have weaknesses, which if not corrected, may inadequately protect the Bank at some future date.  These loans represent an unwarranted credit risk and would generally not be extended in the normal course of lending.  Specific issues which may warrant this grade include declining financial results, increased reliance on secondary sources of repayment or guarantor support and adverse external influences that may negatively impact the business or property.

Substandard loans are inadequately protected by the current repayment capacity and equity of the borrower or collateral pledged, if any.  Substandard loans have one or more well-defined weaknesses that jeopardize their repayment or collection in full.  These loans may or may not be reported as nonaccrual.  Doubtful loans have all the weaknesses inherent to a substandard loan with the added characteristic that full repayment is highly questionable or improbable on the basis of currently existing facts, conditions and collateral values.  However, recognition of loss may be deferred if there are reasonably specific pending factors that will reduce the risk if they occur.

The following table summarizes commercial loans by their assigned risk grade:
 
         
 Commercial Loans by Internally Assigned Risk Grade
         
 As of March 31, 2011
 
       
 Commercial
     
         
 Real Estate-
 Commercial
 
 Total
 
       
 Land and
 Real Estate-
 Commercial
 Commercial
(unaudited, in thousands)
       
Construction
Other
& Industrial
Loans
Excellent - minimal risk
       
 $                    550
 $                    170
 $               49,519
 $               50,239
Good - desirable risk
       
                   36,138
                588,094
                 163,433
                787,665
Fair - acceptable risk
       
                   82,512
                762,488
                 155,696
              1,000,696
Criticized - marginal
       
                   21,246
                 138,520
                   12,994
                 172,760
Classified - substandard
       
                   21,527
                  89,655
                  25,625
                 136,807
Classified - doubtful
       
                          -
                          -
                          -
                          -
     Total
       
 $              161,973
 $          1,578,927
 $             407,267
 $           2,148,167
 
 
11

         
 Commercial Loans by Internally Assigned Risk Grade
         
 As of December 31, 2010
 
       
 Commercial
     
         
 Real Estate-
 Commercial
 
 Total
 
       
 Land and
 Real Estate-
 Commercial
 Commercial
(unaudited, in thousands)
       
Construction
Other
& Industrial
Loans
Excellent - minimal risk
       
 $                         559
 $                         170
 $                  55,203
 $                    55,932
Good - desirable risk
       
                               28,592
                             597,484
                              168,574
                             794,650
Fair - acceptable risk
       
                               75,446
                               776,115
                               147,616
                              999,177
Criticized - marginal
       
                                 26,411
                              136,677
                                 16,817
                              179,905
Classified - substandard
       
                               23,833
                                91,962
                                24,516
                                140,311
Classified - doubtful
       
                                         -
                                         -
                                         -
                                         -
     Total
       
 $                 154,841
 $               1,602,408
 $                412,726
 $              2,169,975
 
Residential real estate, home equity and consumer loans are not assigned internal risk grades other than as required by regulatory guidelines that are based primarily on the age of past due loans.  The aggregate amount of residential real estate, home equity and consumer loans classified as substandard in accordance with regulatory guidelines and accruing were $4.0 million at March 31, 2011 and $6.6 million at December 31, 2010, with non-accrual loans representing $13.0 million and $11.7 million, for each period respectively.

The following table summarizes the age analysis of all categories of loans.  Nonaccrual, renegotiated and other impaired loans which are also set forth separately in this footnote are included in the following table according to their payment status, some of which are current as to payment status.
 
 
Age Analysis of Loans
 
As of March 31, 2011
             
 90 Days
       
 90 Days
   
 or More
   
 30-59 Days
 60-89 Days
 or More
 Total
 Total
 Past Due
(unaudited, in thousands)
Current
Past Due
Past Due
Past Due
Past Due
Loans
and Accruing
Commercial real estate:
             
   Land and construction
 $       153,713
 $        2,859
 $           168
 $         5,233
 $           8,260
 $       161,973
 $             148
   Other
       1,555,149
           5,214
           1,640
          16,924
            23,778
       1,578,927
                570
      Total commercial real estate
       1,708,862
           8,073
           1,808
          22,157
            32,038
       1,740,900
                718
Commercial and industrial
          395,864
              873
           2,716
            7,814
            11,403
          407,267
                125
Residential real estate
          576,682
           6,228
           3,082
          11,275
            20,585
          597,267
             2,574
Home equity
          245,113
           1,215
              124
            1,751
              3,090
          248,203
                863
Consumer
          244,516
           3,797
              540
               754
              5,091
          249,607
                589
Total portfolio loans
       3,171,037
         20,186
           8,270
          43,751
            72,207
       3,243,244
             4,869
Loans held for sale
              4,087
                 -
                 -
                  -
                    -
              4,087
                   -
Total loans
 $    3,175,124
 $      20,186
 $        8,270
 $       43,751
 $         72,207
 $    3,247,331
 $          4,869

 
Age Analysis of Loans
 
As of December 31, 2010
             
 90 Days
       
 90 Days
   
 or More
   
 30-59 Days
 60-89 Days
 or More
 Total
 Total
 Past Due
(unaudited, in thousands)
Current
Past Due
Past Due
Past Due
Past Due
Loans
and Accruing
Commercial real estate:
             
   Land and construction
 $       150,190
 $           429
 $           311
 $         3,911
 $           4,651
 $       154,841
 $             277
   Other
       1,579,400
           4,365
           2,956
          15,687
            23,008
       1,602,408
                692
      Total commercial real estate
       1,729,590
           4,794
           3,267
          19,598
            27,659
       1,757,249
                969
Commercial and industrial
          401,400
           3,530
           1,370
            6,426
            11,326
          412,726
                  95
Residential real estate
          588,212
           2,084
           5,704
          12,693
            20,481
          608,693
             4,535
Home equity
          245,471
           1,665
              633
            1,654
              3,952
          249,423
             1,126
Consumer
          253,407
           4,898
           1,122
            1,158
              7,178
          260,585
                958
Total portfolio loans
       3,218,080
         16,971
         12,096
          41,529
            70,596
       3,288,676
             7,683
Loans held for sale
            10,800
                 -
                 -
                  -
                    -
            10,800
                   -
Total loans
 $    3,228,880
 $      16,971
 $      12,096
 $       41,529
 $         70,596
 $    3,299,476
 $          7,683
 
 
12

Impaired Loans — Impaired loans consist of nonaccrual loans, renegotiated loans and other impaired loans.

Loans are generally placed on non-accrual status when they become past due 90 days or more unless they are both well-secured and in the process of collection.

Loans are categorized as renegotiated or troubled debt restructured when WesBanco, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider.  Concessions that may be granted include a reduction of the interest rate below the current market interest rate, the amount of accrued interest, or the principal amount of the loan.  These loans remain on accrual status as long as they continue to perform in accordance with their modified terms.  Loans may be removed from renegotiated status or troubled debt restructured after they have performed according to the renegotiated terms for a period of time if the interest rate under the modified terms is at or above market, or they may move to non-accrual if they do not perform in accordance with the loans’ modified terms.

Other impaired loans consist of loans that are internally classified as substandard or doubtful that have not been placed on non-accrual or renegotiated but are not fully secured by the value of the collateral or the observable market price for the loan is less than its outstanding balance.  Other impaired loans may include loans for which a specific reserve is established and acquired loans for which a credit valuation adjustment was recorded at the time of acquisition.  Other impaired loans exhibit some adverse credit characteristics but continue to accrue interest because they are generally paying current.

The following table summarizes impaired loans:
 
March 31,
 
December 31,
 
2011
 
2010
 
Unpaid
 
 
Average
Interest
 
 
 
 
Principal
Recorded
Related
Recorded
Income
 
Recorded
Related
(unaudited, in thousands)
 Balance
 Investment
 Allowance
 Investment (1)
 Recognized (1)
 
 Investment
 Allowance
With no related allowance recorded:
               
     Commercial real estate:
 
 
 
 
 
 
 
 
          Land and construction
 $       17,412
 $         11,873
 $                   -
 $               9,460
 $                    78
 
 $      7,047
 $            -
          Other
37,727
34,486
                  -
33,029
149
 
31,571
               -
     Commercial and industrial
10,382
8,964
                  -
8,485
9
 
8,006
               -
     Residential real estate
16,235
14,978
                  -
14,555
40
 
14,131
               -
     Home equity
1,263
1,117
                  -
936
                        -
 
755
               -
     Consumer
               270
                 236
                  -
                     269
                        -
 
            302
               -
Total impaired loans without a related allowance
          83,289
            71,654
                  -
                66,734
                     276
 
       61,812
               -
With an allowance recorded:
               
     Commercial real estate:
 
 
 
 
 
 
 
 
          Land and construction
            5,186
              5,186
             1,805
                  8,581
                       45
 
       11,976
         3,716
          Other
          23,088
            23,088
             6,517
                27,698
                     240
 
       32,308
         5,663
     Commercial and industrial
            5,930
              5,930
             2,054
                  5,018
                       95
 
         4,106
         1,051
Total impaired loans with an allowance
          34,204
            34,204
           10,376
                41,297
                     380
 
       48,390
       10,430
Total impaired loans
 $     117,493
 $       105,858
 $        10,376
 $           108,031
 $                  656
 
 $  110,202
 $    10,430
(1) The average recorded investment and interest income were calculated for the three months ended March 31, 2011.
     
 
The following tables present the recorded investment in renegotiated and non-accrual loans:
 
 
 Renegotiated Loans
 
 March 31,
 December 31,
(unaudited, in thousands)
2011
2010
Commercial real estate:
   
   Land and construction
 $                   4,827
 $                   10,764
   Other
                    28,147
                      33,122
      Total commercial real estate
                    32,974
                      43,886
Commercial and industrial
                          342
                             73
Residential real estate
                      3,267
                        3,443
Home equity
                             -
                             -
Consumer
                            53
                             81
Total
 $                 36,636
 $                   47,483
 
 
13

 
 
 Non-accrual Loans
 
 March 31,
 December 31,
(unaudited, in thousands)
2011
2010
Commercial real estate:
   
   Land and construction
 $                   8,874
 $                     4,391
   Other
                    27,225
                      24,833
      Total commercial real estate
                    36,099
                      29,224
Commercial and industrial
                    10,461
                        7,933
Residential real estate
                    11,711
                      10,688
Home equity
                      1,117
                           755
Consumer
                          183
                           220
Total
 $                 59,571
 $                   48,820
 
WesBanco had unfunded commitments to debtors whose loans were classified as impaired of $0.7 million and $1.4 million at March 31, 2011 and December 31, 2010, respectively.

The following table summarizes other real estate owned and repossessed assets included in other assets:
 
           
 
March 31,
December 31,
(unaudited, in thousands)
2011
2010
Other real estate owned
 $               5,308
 $                 7,724
Repossessed assets
                      246
                       345
Total other real estate owned and repossessed assets
 $               5,554
 $                 8,069

NOTE 5. FEDERAL HOME LOAN BANK BORROWINGS  

WesBanco is a member of the FHLB System.  WesBanco’s FHLB borrowings, which consist of borrowings from both the FHLB of Pittsburgh and the FHLB of Cincinnati, are secured by a blanket lien by the FHLB on certain residential mortgage and other loan types or securities with a market value in excess of the outstanding balances of the borrowings.  At March 31, 2011 and December 31, 2010 WesBanco had FHLB borrowings of $232.2 million and $253.6 million, respectively, with a weighted-average interest rate of 3.65% and 3.64%, respectively.  The decline in borrowings from December 31, 2010 was due to scheduled maturities.  The terms of the security agreement with the FHLB include a specific assignment of collateral that requires the maintenance of qualifying mortgage and other types of loans as pledged collateral with unpaid principal amounts in excess of the FHLB advances, when discounted at certain pre-established percentages of the loans’ unpaid principal balances. FHLB stock owned by WesBanco totaling $26.1 million at March 31, 2011 and $28.0 million at December 31, 2010 is also pledged as collateral on these advances. The remaining maximum borrowing capacity by WesBanco with the FHLB at March 31, 2011 and December 31, 2010 was estimated to be approximately $962.6 million and $1.0 billion, respectively.

Certain FHLB advances contain call features, which allow the FHLB to call the outstanding balance or convert a fixed rate borrowing to a variable rate advance if the strike rate goes beyond a certain predetermined rate. The probability that these advances will be called depends primarily on the level of related interest rates during the call period.  Of the $232.2 million outstanding at March 31, 2011, $106.0 million in FHLB convertible advances are subject to call or conversion to a variable rate advance by the FHLB.

 The following table presents the aggregate annual maturities and weighted-average interest rates of FHLB borrowings at March 31, 2011 based on their contractual maturity dates and effective interest rates:
 
(unaudited, dollars in thousands)
Scheduled
Weighted
Year
Maturity
Average Rate
2011
 $      63,128
3.82%
2012
         76,581
3.64%
2013
         50,458
3.28%
2014
         16,249
3.40%
2015
               942
4.69%
2016 and thereafter
         24,889
4.10%
Total
 $   232,247
3.65%
 
 
14

NOTE 6. PENSION PLAN

The following table presents the net periodic pension cost for WesBanco’s Defined Benefit Pension Plan (the “Plan”) and the related components:

   
For the Three Months Ended
   
March 31,
(unaudited, in thousands)
 
2011
 
2010
Service cost – benefits earned during year
 
 $            636
 
 $             574
Interest cost on projected benefit obligation
 
               896
 
                867
Expected return on plan assets
 
          (1,396)
 
           (1,184)
Amortization of prior service cost
 
                 15
 
                (29)
Amortization of net loss
 
               315
 
                300
Net periodic pension cost
 
 $            466
 
 $             528
 
The Plan covers all employees of WesBanco and its subsidiaries who were hired on or before August 1, 2007 who satisfy minimum age and length of service requirements, and is not available to employees hired after such date.

A minimum required contribution of $2.6 million is due for 2011 which will be funded by the Plan’s available credit balance.  No decision has been made as of March 31, 2011 relative to the level of contribution in excess of the required minimum that will be made to the Plan, if any.


NOTE 7. FAIR VALUE MEASUREMENTS

Certain assets and liabilities are measured at fair value on a recurring or nonrecurring basis.  The following is a discussion of these assets and liabilities and valuation techniques applied to each for fair value measurement:

Securities: The fair value of securities available-for-sale which are measured on a recurring basis are determined primarily by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other similar securities. These securities are classified within level 1 or 2 of the fair value hierarchy.  Positions that are not traded in active markets for which valuations are generated using assumptions not observable in the market or management’s best estimate are classified within level 3 of the fair value hierarchy.  This includes certain specific municipal debt issues.

Mortgage servicing rights:  The fair value of mortgage servicing rights is based on an independent valuation model that calculates the present value of estimated net servicing income.  The valuation model incorporates assumptions based on management’s best judgment that are significant inputs to the discounting calculations.  If the carrying value exceeds fair value, they are considered impaired and are classified within level 3 of the fair value hierarchy as a result.

Impaired loans:  Impaired loans are carried at the lower of cost or the fair value of the collateral for collateral-dependent loans.  Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable.  The use of discounted cash flow models and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral and impaired loans are therefore classified within level 3 of the fair value hierarchy.

Other real estate owned and repossessed assets:  Other real estate owned and repossessed assets are carried at the lower of the investment in the assets or the fair value of the assets less estimated selling costs.  The use of management’s best judgment is a significant input in arriving at the fair value measure of the underlying collateral and therefore other real estate owned and repossessed assets are classified within level 3 of the fair value hierarchy.

Loans held for sale:  Loans held for sale are carried, in aggregate, at the lower of cost or fair value.  The use of a valuation model and management’s best judgment are significant inputs in arriving at the fair value and therefore loans held for sale are classified within level 3 of the fair value hierarchy.

The following tables set forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis by level within the fair value hierarchy:
 
 
15

 
   
March 31, 2011
   
Fair Value Measurements Using:
 
Asset at Fair
Quoted Prices in
Active Markets
for Identical
Assets
Significant Other
 Observable
 Inputs
Significant
Unobservable
Inputs
(unaudited, in thousands)
  Value
(Level 1)
(Level 2)
(Level 3)
Securities - available-for-sale
       
   Other government agencies
 $            360,152
 $                        -
 $            360,152
 $                        -
   Corporate debt securities
                  22,481
                           -
                  22,481
                           -
   Residential mortgage-backed securities and
     collateralized  mortgage obligations of
     government agencies
               336,223
                           -
               336,223
                           -
   Obligations of state and political subdivisions
               211,855
                           -
               211,809
                          46
   Equity securities
                    4,889
                    3,182
                    1,707
                           -
Total securities - available-for-sale
 $            935,600
 $                 3,182
 $            932,372
 $                      46
 
The Company’s policy is to recognize transfers between levels as of the actual date of the event or change in circumstances that caused the transfer.  There were no transfers between levels 1 and 2 for the three months ending March 31, 2011.
 
   
December 31, 2010
   
Fair Value Measurements Using:
 
Asset at Fair
Quoted Prices in
Active Markets
for Identical
Assets
Significant Other Observable
Inputs
Significant
Unobservable
 Inputs
(unaudited, in thousands)
  Value
(Level 1)
(Level 2)
(Level 3)
Securities - available-for-sale
       
   Other government agencies
 $              363,135
 $                        -
 $              363,135
 $                        -
   Corporate debt securities
                   25,583
                           -
                   25,583
                           -
   Residential mortgage-backed securities and
     collateralized mortgage obligations of
     government agencies
                 353,345
                           -
                 353,345
                           -
   Obligations of state and political subdivisions
                 210,808
                           -
                 210,740
                          68
   Equity securities
                     4,610
                     2,884
                     1,726
                           -
Total securities - available-for-sale
 $              957,481
 $                  2,884
 $              954,529
 $                       68
 
The following table presents additional information about assets measured at fair value on a recurring basis and for which WesBanco has utilized level 3 inputs to determine fair value:
 
   Other residential      
 
collateralized
Obligations of
   
 
mortgage
state and political
   
(unaudited, in thousands)
obligations
subdivisions
Equity securities
Total
For the Three Months ended March 31, 2011:
       
Beginning balance
 $                            -
 $                           68
 $                          -
 $                   68
   Total gains and losses
       
      included in other comprehensive income
                               -
                               -
                             -
                       -
   Settlements
                               -
                             (22)
                             -
                    (22)
Ending balance
 $                            -
 $                           46
 $                          -
 $                   46
         
For the Three Months ended March 31, 2010:
       
Beginning balance
 $                           33
 $                      1,401
 $                       242
 $              1,676
   Total gains and losses
       
      included in other comprehensive income
                                3
                              11
                             -
                      14
   Settlements
                            (13)
                             (60)
                             -
                    (73)
Ending balance
 $                           23
 $                      1,352
 $                       242
 $              1,617
 
 
16
 
 
We may be required from time to time to measure certain assets at fair value on a nonrecurring basis in accordance with generally accepted accounting principles.  These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets.  For assets measured at fair value on a nonrecurring basis, the following table provides the level of valuation assumptions used to determine each adjustment in the carrying value of the related individual assets or portfolios:

 
 
Fair Value Measurements Using:
 
Assets at Fair
Quoted Prices in
Active Markets
for Identical
Assets
Significant Other Observable
Inputs
Significant
Unobservable
Inputs
(unaudited, in thousands)
  Value
(Level 1)
(Level 2)
(Level 3)
March 31, 2011
       
Impaired loans (1)
 $              23,828
 $                        -
 $                        -
 $              23,828
Other real estate owned and repossessed assets (2)
                    5,554
                           -
                           -
                    5,554
Mortgage servicing rights (3)
                    1,433
                           -
                           -
                    1,433
Loans held for sale (4)
                    4,087
                           -
                           -
                    4,087
December 31, 2010
       
Impaired loans (1)
 $                37,960
 $                        -
 $                        -
 $                37,960
Other real estate owned and repossessed assets (2)
                     8,069
                           -
                           -
                     8,069
Mortgage servicing rights (3)
                     1,675
                           -
                           -
                     1,675
Loans held for sale (4)
                   10,800
                           -
                           -
                   10,800
(1)  
Represents the carrying value of loans for which adjustments are based on the appraised value and management’s judgment of the value of collateral.
(2)  
Other real estate owned and repossessed assets are carried at the lower of the investment in the assets or the fair value of the assets less estimated selling costs.
(3)  
Represents the carrying value of mortgage servicing rights whose value has been impaired and therefore carried at their fair value as determined from independent valuations.
(4)  
Loans held for sale are carried, in aggregate, at the lower of cost or fair value.
 
 
17
 
 
NOTE 8. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates of financial instruments are based on the present value of expected future cash flows, quoted market prices of similar financial instruments, if available, and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions, and risk assumptions used. Therefore, fair value estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realizable in an immediate settlement of the instruments.

Fair value is determined at one point in time and is not representative of future value.  These amounts do not reflect the total value of a going concern organization. Management does not have the intention to dispose of a significant portion of its financial instruments and, therefore, the unrealized gains or losses should not be interpreted as a forecast of future earnings and cash flows.

The following table represents the estimates of fair value of financial instruments:
 
 
             
March 31,
 
December 31,
             
2011
 
2010
             
Carrying
Fair
 
Carrying
Fair
(unaudited, in thousands)
Amount
Value
 
Amount
Value
Financial assets:
         
   
Cash and due from banks
 $        97,076
 $        97,076
 
 $        79,136
 $        79,136
   
Securities available-for-sale
         935,600
         935,600
 
         957,481
         957,481
   
Securities held-to-maturity
         531,284
         531,581
 
         468,710
         465,902
   
Net loans
      3,181,804
      3,023,130
 
      3,227,625
      3,070,061
   
Loans held for sale
             4,087
             4,087
 
           10,800
           10,800
   
Accrued interest receivable
           21,599
           21,599
 
           20,536
           20,536
   
Bank owned life insurance
         107,397
         107,397
 
         106,502
         106,502
Financial liabilities:
         
   
Deposits
      4,212,209
      4,233,590
 
      4,172,423
      4,201,934
   
Federal Home Loan Bank borrowings
         232,247
         237,979
 
         253,606
         263,983
   
Other borrowings
         168,014
         169,912
 
         187,385
         189,094
   
Junior subordinated debt
         106,042
           67,934
 
         106,034
           55,397
   
Accrued interest payable
             6,035
             6,035
 
             6,559
             6,559
 
The following methods and assumptions were used to estimate the fair value of financial instruments:

Cash and due from banks — The carrying amount for cash and due from banks is a reasonable estimate of fair value.

Securities — Fair values for securities are based on quoted market prices, if available. If market prices are not available, then quoted market prices of similar instruments are used.  If quoted prices of similar instruments are not available, the fair value is generated from model-based techniques using assumptions not observable in the market.

Net loans — Fair values for loans are estimated using a discounted cash flow methodology.  The discount rates take into account interest rates currently being offered to customers for loans with similar terms, the credit risk associated with the loan and market factors, including liquidity.  In the current market environment for loans, investors are generally requiring a much higher rate of return than the return inherent in loans if held to maturity given the general lack of market liquidity. The valuation of the loan portfolio reflects discounts that WesBanco believes are consistent with transactions occurring in the marketplace for both performing and distressed loan types. The carrying value that fair value is compared to is net of the allowance for loan losses and other associated premiums and discounts.
 
Loans held for sale — Loans held for sale are carried, in aggregate, at the lower of cost or fair value.

Accrued interest receivable — The carrying amount of accrued interest receivable approximates its fair value.

Bank-Owned Life Insurance — The carrying value of bank-owned life insurance represents the net cash surrender value of the underlying insurance policies, should these policies be terminated.  Management believes that the carrying value approximates fair value.

Deposits — The carrying amount is considered a reasonable estimate of fair value for demand, savings and other variable rate deposit accounts. The fair value of fixed maturity certificates of deposit is estimated by a discounted cash flow method using the rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank borrowings — For FHLB borrowings, fair value is based on rates currently available to WesBanco for borrowings with similar terms and remaining maturities.

Other borrowings — Fair values for federal funds purchased and repurchase agreements are based on quoted market prices, if available. If market prices are not available, then quoted market prices of similar instruments are used.
 
Junior subordinated debt owed to unconsolidated subsidiary trusts — Due to the pooled nature of these instruments, which are not actively traded on an equity market, estimated fair value is based on broker prices from recent similar sales.
 
 
18
 

Accrued interest payable — The carrying amount of accrued interest payable approximates its fair value.

Off-balance sheet financial instruments — Off-balance sheet financial instruments consist of commitments to extend credit including letters of credit. Fair values for commitments to extend credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit standing of the counterparties. The estimated fair value of the commitments to extend credit and letters of credit are insignificant and therefore not presented in the above table.


NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES

Commitments — In the normal course of business, WesBanco offers off-balance sheet credit arrangements to enable its customers to meet their financing objectives. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. WesBanco’s exposure to credit losses in the event of non-performance by the other parties to the financial instruments for commitments to extend credit and standby letters of credit is limited to the contractual amount of those instruments. WesBanco uses the same credit policies in making commitments and conditional obligations as for all other lending. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The allowance for credit losses associated with loan commitments was $0.8 million and $1.4 million as of March 31, 2011 and December 31, 2010 respectively, and is included in other liabilities on the Consolidated Balance Sheets.

Letters of credit are conditional commitments issued by banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including normal business activities, bond financing and similar transactions. Standby letters of credit are considered guarantees.  The liability associated with standby letters of credit is recorded at its estimated fair value of $0.1 million as of both March 31, 2011 and December 31, 2010, respectively, and is included in other liabilities on the Consolidated Balance Sheets.

Affordable housing plan guarantees are performance guarantees for various building project loans.  The guarantee amortizes as the loan balances decrease.

The following table presents total commitments to extend credit, guarantees and various letters of credit outstanding:
 
 
March 31,
December 31,
(unaudited, in thousands)
2011
2010
Commitments to extend credit
 $       697,548
 $          648,839
Standby letters of credit
             35,733
               35,794
Affordable housing plan guarantees
               4,226
                 4,255
 
In addition to the commitments above, WesBanco Bank Community Development Corporation (“WBCDC”), a wholly-owned subsidiary of WesBanco Bank, Inc. has made a $1.0 million commitment to an investment company in order to provide investments in early stage companies in the State of Ohio.

CONTINGENT LIABILITIES—WesBanco and its subsidiaries are parties to various legal and administrative proceedings and claims. While any claim contains an element of uncertainty, management believes that the outcome of such proceedings or claims pending or known to be threatened will not have a material adverse effect on WesBanco’s consolidated financial position.
 
 
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NOTE 10. BUSINESS SEGMENTS

WesBanco operates two reportable segments: community banking and trust and investment services. WesBanco’s community banking segment offers services traditionally offered by full-service commercial banks, including commercial demand, individual demand and time deposit accounts, as well as commercial, mortgage and individual installment loans, and certain non-traditional offerings, such as insurance and securities brokerage services.  The trust and investment services segment offers trust services as well as various alternative investment products including mutual funds.  The market value of assets of the trust and investment services segment was approximately $3.1 billion and $2.8 billion at March 31, 2011 and 2010, respectively.  These assets are held by WesBanco in fiduciary or agency capacities for their customers and therefore are not included as assets on WesBanco’s Consolidated Balance Sheets.

Condensed financial information by business segment is presented below:
     Trust and
 
 
Community
Investment
 
(unaudited, in thousands)
Banking
Services
Consolidated
For the Three Months ended March 31, 2011:
     
Interest income
 $           56,098
 $               -
 $             56,098
Interest expense
              14,622
                  -
                14,622
Net interest income
              41,476
                  -
                41,476
Provision for credit losses
                8,041
                  -
                  8,041
Net interest income after provision for credit losses
              33,435
                  -
                33,435
Non-interest income
                9,742
            4,762
                14,504
Non-interest expense
              32,914
            2,577
                35,491
Income before provision for income taxes
              10,263
            2,185
                12,448
Provision for income taxes
                1,334
               874
                  2,208
Net income
 $             8,929
 $         1,311
 $             10,240
       
For the Three Months ended March 31, 2010:
     
Interest income
 $           60,565
 $               -
 $             60,565
Interest expense
              19,932
                  -
                19,932
Net interest income
              40,633
                  -
                40,633
Provision for credit losses
              11,500
                  -
                11,500
Net interest income after provision for credit losses
              29,133
                  -
                29,133
Non-interest income
              10,983
            4,058
                15,041
Non-interest expense
              32,940
            2,454
                35,394
Income before provision for income taxes
                7,176
            1,604
                  8,780
Provision for income taxes
                   228
               642
                     870
Net income
 $             6,948
 $            962
 $               7,910
 
Total non-fiduciary assets of the trust and investment services segment were $2.6 million and $1.5 million at March 31, 2011 and 2010, respectively.  All goodwill and other intangible assets were allocated to the community banking segment.
 
 
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ITEM 2. 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. 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-K for the year ended December 31, 2010 and documents subsequently filed by WesBanco with the Securities and Exchange Commission (“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 in WesBanco’s most recent Annual Report on Form 10-K filed with the SEC under “Risk Factors” in Part I, Item 1A.  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 Federal Deposit Insurance Corporation, the SEC, Financial Institution Regulatory Authority, 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.


OVERVIEW

WesBanco is a multi-state bank holding company operating through 112 branches and 126 ATM machines in West Virginia, Ohio and Western Pennsylvania, offering retail banking, corporate banking, personal and corporate trust services, brokerage services, mortgage banking and insurance. WesBanco’s businesses are significantly impacted by economic factors such as market interest rates, federal monetary and regulatory policies, local and regional economic conditions and the competitive environment’s effect upon WesBanco’s business volumes.  WesBanco’s deposit levels are affected by numerous factors including personal savings rates, personal income, and competitive rates on alternative investments, as well as competition from other financial institutions within the markets we serve and liquidity needs of WesBanco. Loan levels are also subject to various factors including construction demand, business financing needs, consumer spending and interest rates and loan terms offered by competing lenders.


APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

WesBanco’s critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2011 have remained unchanged from the disclosures presented in WesBanco’s Annual Report on Form 10-K for the year ended December 31, 2010 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 
RESULTS OF OPERATIONS

EARNINGS SUMMARY

Net income for the three months ended March 31, 2011 was $10.2 million as compared to $7.9 million for the first quarter of 2010, representing an increase of 29.5%, while diluted earnings per share were $0.39, as compared to $0.30 per share for the first quarter of 2010.

Net interest income increased $0.8 million or 2.1% in the first quarter as compared to the first quarter of 2010 due to the management of rates on loans and other earning assets, while significantly improving the funding mix to reduce overall cost of funds for both deposits and other borrowings.  The net interest margin improved to 3.67% in the first three months of 2011, an increase of 10 basis points as compared to the first quarter of 2010, and it was also slightly higher than the 2010 fourth quarter rate of 3.66%.  The average rate on interest bearing liabilities decreased by 47 basis points, while the rate on earning assets declined at a slower pace of 34 basis points. Lower offered rates on maturing, higher-rate certificates of deposit, an increase in lower-cost transaction account products such as non-interest bearing checking and money market accounts and utilization of liquidity from increased deposits and loan balance reductions to reduce higher cost borrowings all contributed to the improvement in the cost of funds.

The provision for credit losses decreased $3.5 million in the first quarter as compared to the same quarter of 2010 and decreased $1.6 million as compared to the fourth quarter of 2010. The allowance for loan losses was relatively unchanged at March 31, 2011 as compared to December 31, 2010 and was 1.89% of total loans as compared to 1.86% at December 31, 2010 and 1.91% at March 31, 2010.  Net charge-offs increased $1.3 million in the first quarter as compared to the first quarter of 2010, and $1.7 million as compared to the fourth quarter of 2010, but remain significantly below average quarterly net charge-offs over the last two years.  Non-accrual loans at March 31, 2011 decreased $8.9 million compared to March 31, 2010, but increased $10.8 million from the fourth quarter of 2010.  The increase in non-accrual loans did not have a material effect on the allowance or provision for credit losses because loans that migrated to non-accrual during the quarter were previously classified and in certain instances also reported as renegotiated, and adequately reserved in prior periods.  Total classified and criticized loans at March 31, 2011 decreased
 
 
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$32.2 million compared to March 31, 2010 and $10.6 million compared to the fourth quarter of 2010.  Renegotiated loans increased $7.4 million compared to March 31, 2010, but decreased $10.8 million from the fourth quarter of 2010.
 
Non-interest income decreased $0.5 million or 3.6% as compared to the first quarter of 2010 principally due to a $1.4 million decline in net security gains and a $1.1 million decline in service charges on deposits resulting from regulatory changes which led to fewer customer overdraft transactions.  However, these decreases were mostly offset by a $0.7 million or 17.4% increase in trust fees from new business and market value improvements, and a $1.0 million improvement in net losses on other real estate owned and a $0.4 million increase in electronic banking fees.

In the first quarter, non-interest expense was relatively unchanged as compared to the first quarter of 2010.  Salaries, wages and employee benefits increased $0.6 million due to regular compensation increases late in the first quarter of 2010 and increased health and other employee insurance costs, while marketing expense increased $0.4 million from promotions focused on growing demand deposits and home equity loans.  These increases were offset by decreases in occupancy and equipment expense due to reductions in required seasonal maintenance and decreases in depreciation expense and restructuring costs.  Non-interest expense decreased in many other categories as WesBanco continued to improve the expense structure and efficiency of its operations.
 
 
NET INTEREST INCOME

TABLE 1. NET INTEREST INCOME
 
                   
For the Three Months Ended
                   
March 31,
(unaudited, dollars in thousands)
     
2011
2010
Net interest income
     
 $           41,476
 $           40,633
Taxable equivalent adjustments to net interest income
     
                1,608
                1,612
Net interest income, fully taxable equivalent
     
 $           43,084
 $           42,245
Net interest spread, non-taxable equivalent
     
3.33%
3.23%
Benefit of net non-interest bearing liabilities
     
0.20%
0.21%
Net interest margin
     
3.53%
3.44%
Taxable equivalent adjustment
     
0.14%
0.13%
Net interest margin, fully taxable equivalent
     
3.67%
3.57%
 
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, comprised of deposits and short and long-term borrowings.  Net interest income is affected by the general level of and changes in interest rates, the steepness 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 and turnover of those assets and liabilities.  Net interest income increased $0.8 million or 2.1% in the first quarter of 2011 as compared to the first quarter of 2010 due to the management of rates on loans and other earning assets, while significantly improving the funding mix to reduce overall cost of funds for both deposits and other borrowings.  Average earning assets were nearly unchanged.  The net interest margin improved to 3.67% in the first three months of 2011, an increase of 10 basis points as compared to the first quarter of 2010, and was also slightly higher than the 2010 fourth quarter rate of 3.66%.  The average rate on interest bearing liabilities decreased by 47 basis points, while the rate on earning assets declined at a slower pace of 34 basis points. Lower offered rates on maturing, higher-rate certificates of deposit, and an increase in lower-cost transaction account products such as non-interest bearing checking and 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 $230.3 million or 35.0% in the first quarter of 2011 from the first quarter of 2010.  Total borrowings, excluding junior subordinated debt, dropped to 7.5% of total assets from 11.0% at March 31, 2010.  In addition, average non-interest bearing deposit balances increased 11.7% as a result of retail marketing campaigns and customer incentives, as well as increased balances of the Bank’s business customers.  Part of the growth in deposits is attributed to deposits received from customers participating in Marcellus shale gas lease and royalty payments in our northern West Virginia markets.

The yield on total average earning assets decreased 34 basis points to 4.92% from 5.26% in the first quarter of 2010.  Rates decreased on all significant earning asset categories from reduced rates on new and repriced assets due to management of offered rates and the lower interest rate environment. In addition, the percentage of earning assets invested in lower yielding securities increased, as compared to typically higher-yielding loans.  Securities yields decreased 78 basis points, primarily due to the reinvestment of funds from investment maturities and calls, and from loan payments, at current lower available interest rates.  Taxable securities yields decreased 83 basis points while tax-exempt securities yields declined only 29 basis points due to the longer average life of the tax-exempt portfolio and limited additions to this portfolio.  Recent securities purchase decisions have considered the increased risk premium associated with tax-exempt bonds, which somewhat limited investment opportunities.  In addition, variable rate and government supported (Build America Bonds during 2010) rate opportunities were available in taxable securities, resulting in an increase in average taxable securities.  Repricing of loans and the competitive necessity of offering lower rates on quality credits in an increasingly competitive and lower interest rate environment caused a decline in loan yields of 17 basis points. In addition, during a period where customer loan demand and the economic environment limited loan growth opportunities, 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 over the past year are primarily due to management’s continued focus on overall profitability and quality 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 business and consumers remaining cautious, leading to lower demand for new development projects in our markets and reduced commercial line usage. Write-
 
 
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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 continued tighter underwriting standards leading to lower approval rates.

In the first quarter of 2011, interest expense decreased $5.3 million or 26.6% as compared to the first quarter of 2010 due to a 47 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 36 basis points primarily due to a 38 basis point decline in rates paid on CDs, due to management reducing certain interest rates on renewing and new CDs to competitive levels in order to realize a lower cost of funds during a period of declining loan yields.  Improvements in the mix of deposit accounts also contributed to the improved cost of funds, with average CDs decreasing to 40.1% of total average deposits, from 44.2% in the first quarter of 2010, while all other account types increased to 59.9%.  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 $235.4 million decrease in borrowings, primarily FHLB, partially offset by increases in interest bearing deposits of $105.8 million. Current balance sheet liquidity from the deposit increases and loan reductions were used to pay down the higher cost maturing borrowings, further reducing interest expense.  Borrowings, excluding junior subordinated debt, were 10.4% of average interest bearing liabilities as compared to 15.5% in 2010.  Deposits increased significantly in every category other than CDs with the largest increase in money market accounts, even as offered rates were reduced.  Certificates of deposits decreased by $96.3 million due to the aggressive reductions in rate offerings and customer demand for other deposit products.
 
TABLE 2. AVERAGE BALANCE SHEETS AND NET INTEREST MARGIN ANALYSIS
 
         
For the Three Months Ended March 31,
         
2011
2010
         
Average
Average
Average
Average
(unaudited, dollars in thousands)
       
 Balance
Rate
 Balance
Rate
ASSETS
               
Due from banks - interest bearing
       
 $        53,396
0.15%
 $       93,515
0.14%
Loans, net of unearned income (1)
       
      3,264,097
5.51%
     3,456,171
5.68%
Securities: (2)
               
  Taxable
       
      1,108,599
3.14%
        918,329
3.97%
  Tax-exempt (3)
       
         291,747
6.30%
        279,432
6.59%
    Total  securities
       
      1,400,346
3.80%
     1,197,761
4.58%
Federal funds sold
       
                   -
           -
                  -
         -
Other earning assets
       
           27,650
0.52%
          30,506
0.69%
    Total earning assets (3)
       
      4,745,489
4.92%
     4,777,953
5.26%
Other assets
       
         617,876
 
        636,388
 
Total Assets
       
 $   5,363,365
 
 $  5,414,341
 
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
             
Interest bearing demand deposits
       
 $      492,572
0.41%
 $     459,145
0.59%
Money market accounts
       
         868,659
0.73%
        746,671
1.06%
Savings deposits
       
         542,593
0.36%
        495,874
0.49%
Certificates of deposit
       
      1,675,482
1.95%
     1,771,825
2.33%
    Total interest bearing deposits
       
      3,579,306
1.20%
     3,473,515
1.56%
Federal Home Loan Bank borrowings