WESBANCO INC

INTEREST RATES ON WESBANCO’S OUTSTANDING FINANCIAL INSTRUMENTS MIGHT BE SUBJECT TO CHANGE BASED ON REGULATORY DEVELOPMENTS.

LIBOR and certain other “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences, which cannot be predicted. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The Federal Reserve Board has identified the Secured Overnight Financing Rate (SOFR) as the preferred reference rate alternative to LIBOR for hedge accounting purposes. If LIBOR ceases to exist or if the methods of calculating LIBOR change from current methods for any reason, interest rates on our floating rate obligations, loans, deposits, derivatives, and other financial instruments tied to LIBOR rates, as well as the revenue and expenses associated with those financial instruments, may be adversely affected. Further, any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of our floating rate obligations, loans, deposits, derivatives, and other financial instruments tied to LIBOR rates.

The new CECL standard will become effective for WesBanco for the fiscal year beginning January 1, 2020. WesBanco formed a cross-functional team to oversee the implementation of this ASU, and has completed an initial data gap assessment, finalized the loan segmentation procedures, and is currently evaluating the various forecasting and modeling assumptions, including qualitative factors, that will be used to estimate the initial current expected credit loss allowance. Substantial progress has been made on the identification and staging of data, development of models, refinement of economic forecasting processes, and documentation of accounting policy decisions. In conjunction with this implementation, WesBanco is reviewing business processes and evaluating potential changes to the control environment. WesBanco plans to perform several parallel runs of the new methodology in 2019 prior to adoption of the ASU. WesBanco currently anticipates that an increase to the allowance for credit losses will be recognized upon adoption to provide for the expected credit losses over the estimated life of the financial assets. The magnitude of the increase will depend on economic conditions and trends in the loan portfolio at the time of adoption.

WesBanco relies on software developed by third party vendors to process various transactions. These transactions include, but are not limited to, general ledger, payroll, employee benefits, trust record keeping, loan and deposit processing, merchant processing, and securities portfolio management. While WesBanco performs a review of controls instituted by the vendors over these programs in accordance with industry standards and performs its own testing of user controls, WesBanco must rely on the continued maintenance and improvement of these controls by the third party, including safeguards over the security of customer data. In addition, WesBanco maintains backups of key processing output daily in the event of a failure on the part of any of these systems. Nonetheless, WesBanco may incur a temporary disruption in its ability to conduct its business or process its transactions or incur damage to its reputation if the third party vendor, or the third party vendor’s subcontractor, fails to adequately maintain internal controls or institute necessary changes to systems. Such disruption or breach of security may have a material adverse effect on WesBanco’s business, financial condition, and results of operations.

Total portfolio loans increased $1,314.8 million or 20.7% from December 31, 2017 to December 31, 2018, primarily due to the acquisitions of FTSB and FFKT. Total organic loans were down 1.3% year-over-year, when excluding the consumer loan portfolio de-emphasis strategy, or down 1.7% in total. The year-over-year decline in total organic loan growth resulted from targeted reductions in the consumer portfolio to reduce its risk profile, lower home equity loan balances due to lower demand as a result of higher interest rates and tax law changes, elevated levels of commercial real estate loans moving to an aggressive secondary financing market, and continued deleveraging by commercial customers reflective of the current operating environment and higher cash levels from tax reform. Portfolio loans are presented in the Consolidated Balance Sheets net of deferred loan fees and costs, and discounts on purchased loans. The net deferred loan costs were $3.2 million and $1.6 million as of December 31, 2018 and 2017, respectively. WesBanco conducts a deferred loan cost study to determine the allowable costs to be deferred over the life of the loan. In the most recent study, WesBanco’s deferred costs have increased at a faster rate than the related customer deferred fee income causing the balance of the deferred loan costs to outweigh the deferred loan fees primarily from home equity lines of credit, which have little fee income. Purchased loan discounts included in the portfolio loan balances were $49.3 million and $21.9 million as of December 31, 2018 and 2017, respectively. Loan accretion included in interest income on loans acquired from prior acquisitions was $11.7 million and $5.7 million for the years ended December 31, 2018 and 2017, respectively.

The net interest margin increased 8 basis points year-over-year and 29 basis points for the fourth quarter of 2018 vs. last year’s fourth quarter. The tax-exempt securities portfolio tax-equivalent rate adjustment from 35% to 21% caused a reduction in the overall net interest margin by 6 basis points. However, with increased short-term rates, higher non-interest bearing deposits, low deposit betas and the contribution from FFKT’s higher margin assets post-acquisition, plus higher purchase accounting from both 2018 acquisitions, the margin has recovered that adjustment and improved overall from last year. The core net interest margin, net of purchase accounting-related accretion, for 2018 was 3.38% vs. 3.36% for 2017, adjusted by 14 and 8 basis points of accretion, respectively, and for the fourth quarter it was 3.49% vs. 3.37% last year, adjusted by 23 and 6 basis points of accretion, respectively, which reflected the higher margin net assets from the FFKT acquisition and associated purchase accounting. It is currently expected that the net interest margin in 2019 will remain relatively flat on a core basis, and on a total basis including purchase accounting accretion, will decline slowly throughout the year from an expected level of mid-teen basis points in purchase accounting accretion in the first quarter, and declining over the second thru fourth quarters by 1 – 2 basis points per quarter. Management currently anticipates that one federal funds rate increase may occur in mid-year 2019, relatively consistent with market, Federal Reserve Board and consensus economist expectations. A delay in implementing further rate increases, as well as the shape of the yield curve, increases to deposit betas beyond our current modeling assumptions, or adjustments to the mix of earning assets and costing liabilities, may have a negative impact on management’s estimates of the future direction and level of the net interest margin.