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WesBanco, Inc. (NASDAQ:WSBC)

Q3 2013 Earnings Call

October 23, 2013 11:00 AM ET

Executives

Paul Limbert – President and CEO

Robert Young – EVP and CFO

Jim Gardill – Chairman

Analysts

Stephen Scouten – Keefe Bruyette & Woods

William Wallace – Raymond James

Michael Burn – Macquarie Capital

Operator

Good morning, and welcome to WesBanco’s Conference Call. My name is Marlene and I will be your conference facilitator today. Today’s call will cover WesBanco’s discussion of results of operations for the third quarter ended September 30, 2013. Please be advised all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. (Operator Instructions) Please note this call is also being recorded. If you object to the recording, please disconnect at this time.

Forward-looking statements in this presentation 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 herein should be read in conjunction with WesBanco’s 2012 Annual Report on Form 10-K and other reports which are available on 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, included those details in WesBanco’s 2012 Annual Report on Form 10-K filed with the SEC under the section 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. WesBanco does not assume any duty to update any forward-looking statements.

WesBanco’s third quarter 2013 earnings release was issued yesterday and is available at www.wesbanco.com. This call will include about 20 to 30 minutes of prepared commentary, followed by a question-and-answer period, which I will facilitate. An archived webcast of this call will be available at wesbanco.com.

WesBanco’s participants in today’s call will be Paul Limbert, President and Chief Executive Officer; Jim Gardill, Chairman of the Board; and Robert Young, Executive Vice President and Chief Financial Officer. And all will be available for questions following the opening statements.

Mr. Limbert, you may begin your conference sir.

Paul Limbert

Thank you, Marlene. Good morning everyone. Thank you for choosing to participate in WesBanco’s third quarter 2013 earnings conference call. We are pleased that you have joined us this morning to hear about WesBanco’s excellent operating results. I would like to make some opening comments. Bob Young, our CFO, will provide financial highlights. And then, Jim Gardill, our Chairman, will moderate the question-and-answer period.

A press release detailing the results of the third quarter and the year-to-date was issued last evening. A copy of the entire press release is available on our website. We will assume that all participants are familiar with WesBanco and we can begin our discussion of the third quarter financial results.

WesBanco had an excellent third quarter and year-to-date results. The ROA for the third quarter was 1.01%, and the year-to-date ROA was 1.07%. The return on tangible equity was 16.4%. These ratios include the expenses incurred relating to the Fidelity merger, but still represent above peer group returns.

Net income for year-to-date 2013, represents an increase of 32% from the year-to-date 2012. These results have allowed us to raise our quarterly dividend for a second time in 2013 to $0.20 or a 5% increase. Our dividend has been increased six times in the last 11 quarters. The increased earnings was provided by improvements in net interest income, revenue growth, significant loan growth, continued improvement in credit quality and control of other operating expenses. Bob Young will provide additional details relating to the improvements.

Our acquisition of Fidelity has been fully integrated. Now we have turned our attention to improving our market position in Pittsburg. We’re continuing the process of visiting existing customers and hiring additional revenue producing employees. To-date, we’ve added to the Pittsburg market, treasury management, private banking, securities brokerage representatives and additional lending staff. Additional lenders include both one to four family residential mortgage originators and commercial loan officers. Hiring of additional revenue producers has already begun to show its benefits.

In addition to having a new market from which we can generate growth, we have seen a significant amount of activity coming from the natural gas activities in the Marcellus and Utica shale areas. During 2012, we saw deposits from customers exceed $225 million for our customers and release bonus and royalty payments.

Payments from these large national organizations continue to be deposited during 2013, totaling over $243 million year-to-date this year. We’ve experienced growth in total deposits and have been working to strategically shift deposits towards non-interest DDA accounts, which has helped to offset the anticipated declines in certificates of deposits. The declines in certificates of deposits is due to planned reductions in single service customers and customers moving money to short-term accounts until interest rates improve.

Non-interest DDA balances have grown at an annualized rate of 6.5% during 2013. In addition, growth of investment management services to many of the individuals with their new found wealth has resulted in assets under management to grow to over $3.5 billion as of September 30, 2013. Wealth management revenues are also continuing to grow, increasing 9.7% this year.

We’ve been asked about the lending we have done to the natural gas industry and its related companies. We do not lend to the large national drilling companies. However, we are lending to the second and third tier companies which are providing support services, or contractors who are assisting in building the related infrastructure.

Sometimes it is very difficult to determine if the lending we are doing to an existing customer is directly related to a specific job that they maybe completing for a gas related organization.

The important part is this new industry is significant, has generated loan volume to regional support services for drilling and pipeline expansion, and is expected to bring long-term benefits to the region and to WesBanco.

In addition to the shale gas region, the activity level in the three major urban areas provide significant opportunities for WesBanco to grow organically. We’ve already talked about Pittsburgh, but Columbus, Ohio is also a strong market. Columbus has recovered from the recession, and statistics show employment now exceeds pre-recession levels.

We are seeing a significant number of new projects in the city and in the neighboring communities. Cincinnati is recovering at a slower pace, but has pockets of development activity. We continue to add lenders to these markets with 12 new lenders added to the Pittsburgh, Columbus and Cincinnati markets during 2013.

Commercial loan originations in these markets, that is Pittsburgh, Columbus and Cincinnati, exceed 100% of the goals year-to-date established for these markets. These urban markets along with our less populated markets give us excellent diversity and growth opportunities. We are not dependent on any one market area for our organic growth.

Last year, we closed six smaller branches in market areas which did not provide growth potential. During 2013, we have finalized plans and have received regulatory approval to open three new branches; two in Columbus which will open in the fourth quarter of 2013, and one just south of Pittsburgh, which will open in the second quarter of 2014. These new branches which are located in our existing market areas should provide additional growth opportunities.

Loan balances have increased by 4% from the prior year-end and loan originations remains strong in the third quarter. Loan originations approximate $1.3 billion for the year-to-date 2013, and that number exceeds the entire 2012 loan originations.

Payoffs and pay-downs offset our strong originations. However, we see this activity as a healthy aspect of our portfolio. As noted in many financial institutions third quarter releases, WesBanco has also experienced a significant decline in mortgage applications which along with an increase in balance sheet retention to mortgage loans as a result of the lower gains in the sales of mortgages.

In the third quarter, mortgage applications have fallen by 36% compared to the second quarter of 2013, due to the reduction in refinances which is caused by the higher interest rates.

Our overall success at loan originations is attributable to the efforts of our lending officers enhancing relationships with existing customers, core customer demand, the improving economic conditions in our market areas and the continued addition of new lenders.

Credit quality continues to improve with non-performing loans declining to 1.4% of total loans. Reductions in the charge-offs, non-performing assets, criticized and classified loans and delinquencies have all contributed to the continued decline in the provision for loan losses.

During the third quarter, WesBanco continued to reduce its non-performing loans through the loan sale. The loan sold which totaled $9.4 million resulted in charge-offs of $3.5 million which were mostly covered by existing reserves.

WesBanco has done an excellent job in growing revenue faster than expenses. For the nine months, revenue growth approximated $18 million, with contributions from every function of the bank. The increase was due in part to the Fidelity acquisition, but also resulted from the planning and sales efforts of each market and each function. Expense growth approximated $12 million, resulting in a net new revenue of $6 million for WesBanco. We have been very pleased with that net new revenue growth.

As you can see from our numbers, WesBanco is continuing its strong earnings performance. We are optimistic about our ability to compete in our respective marketplaces. We have a strong capital base and strong earnings which will allow us to take advantage of the opportunities which we originate during 2013.

Because of our strong position, we continue to reinvest earnings back into our franchise to upgrade customer facilities and services and reinvest to train and find talented employees. We continue to look for acquisitions, but believe we can be selective since our organic growth can be obtained from our diverse marketplaces.

We have been following the Basel III capital requirements. Community Banks have relatively minimal changes from current regulations. WesBanco’s preliminary computations indicate that we will be able to meet all new guidelines by the respective due dates.

I would like Bob Young, our CFO, to discuss with you in more detail the financial results of the quarter and year-to-date 2013. Bob?

Robert Young

Thank you, Paul. Good morning all. Earnings per share for the third quarter as Paul indicated were $0.53, up from $0.48 last year, an increase of 10.4%. GAAP net income was $15.5 million versus $12.9 million, up 20.4%.

For the nine months, earnings per share were strong $1.66 per share as compared to $1.38 for the first nine months of last year, that’s up some 20.3%. Net income was $48.6 million versus $36.9 million for the same comparable period, up 31.7%. If you were to exclude merger-related and restructuring expenses, net of tax for both nine month periods, net income was up some 30.4% and earnings per share 18.3%.

Continued improvements in credit quality contributed to the increase in earnings, along with the positive operating leverage of net revenue growth outpacing expenses as Paul just mentioned. The nine month period continued to show positive operating leverage post-Fidelity acquisition with total revenue growth exceeding expenses.

The Fidelity acquisition and improved cost of funds helped to improve the net interest margin and pre-tax pre-provision earnings were 1.69% for both periods. Earnings per share, was up by a lesser percentage than net income due to the 2.5 million common shares that were issued last year for the Fidelity acquisition.

Return on average assets and return on average equity are significantly ahead of last year’s results, and core operating efficiency is right around 60%. Return on tangible equity increased to 16.4%, which puts us in a high performing tier of similar size banks.

Turning to the income statement in detail. Net interest income increased $4.4 million or 10.6% in the third quarter and $13.2 million or 10.5% for the first nine months of 2013 compared to the same period in 2012, due to increased average earning assets primarily through increased average loan balances.

Average earning assets increased $484 million or 9.8% in the third quarter of 2013 and $415 million or 9.2% in the year-to-date period due to growth in average portfolio loan balances of $487 million or 14.6% in the third quarter and $467 million or 14.3% in the year-to-date period.

Approximately two-thirds of this loan growth was from the Western Pennsylvania region which includes the loans acquired and as well as those subsequently originated relating to the acquired Fidelity market area. The increase in average earning assets was funded primarily by increases in deposits. Total average deposits in the third quarter increased by $569 million or 12.8% from the 2012 third quarter, with approximately 70% of this increase provided by the Western Pennsylvania region, again mostly related to the acquisition.

Deposit increases occurred primarily in the demand deposit, savings in money market accounts, with increases out of them through the acquisition resulting from marketing campaigns, customer incentives, wealth management and business initiatives, as well as, as Paul mentioned initial deposits from Marcellus and Utica shale gas, bonus and royalty payments with still some $72 million in the third quarter and $243 million year-to-date.

In addition, the net interest margin increased one basis point in the third quarter to 3.52% and five basis points in the first nine months compared to the same periods in ‘012. Cost of funds continued to decline due to lower offered rates on maturing CDs and increase in balances of lower cost products and lower balances of Federal Home Loan Bank and other borrowings.

Accretion of purchase accounting adjustments for loans, CDs and borrowings related to the Fidelity acquisition totaled $0.8 million or five basis points in the third quarter and $3.7 million or 10 basis points year-to-date, which obviously benefited the margin.

The average rate on interest bearing liabilities declined by 31 basis points, while the rate on earning assets decreased by 23 basis points for the first nine months. While low interest rates have affected the yields on both investments and loans, and competition has impacted rates and spreads on new loans, WesBanco has been able to mostly match such reductions with deposit transaction account mixed increases by some 3.9% since year-end and reduced borrowing in CD costs.

Certificates of deposit at an average cost of 1.36% for the past quarter versus 1.70% last year continue to reprice downward with some $900 million or 55% of total CDs scheduled to mature in the next 12 months at an average cost of 1.35%

Also approximately $290 million of retail CDs will mature in the last three months of this year at an average cost of a much higher 2.33%. This should result in a CD portfolio, the cost approximately 1.1% to 1.2% as we enter 2014, which will obviously have a positive impact on the margin if all other factors remain the same. Depending upon the rate and pace of future interest rate increases and loan growth assumptions, given the company’s current slight asset sensitivity, we expect that the core margin excluding the impact of lower accretion will remain about the same over the next few quarters.

Non-interest income increased $1.2 million or 7.2% in the third quarter and $5.2 million or 10.9% in the first nine months, compared to the same period in ‘12. It was $0.6 million lower than the second quarter due to lower securities gains. Trust fees increased 10.9% in the third quarter and 9.7% in the first nine months, as assets under management continue to increase over last year from customer development initiatives and overall market improvements.

Net securities brokerage revenues increased some 33.2% and 39.9% respectively for the quarter and year-to-date periods, also due to new business initiatives. Service charges on deposits and electronic banking fees also continued to grow in the third quarter. Net gains on sales and mortgage loans increased 16% year-to-date, but decreased in the third quarter due to a greater proportion of mortgage production some 75% being retained in the portfolio during the quarter and lower refinances.

Securities gains were lower due to reduced portfolio restructuring compared to prior periods as interest rates rose. In addition, 2013 non-interest income included a $1.1 million Bank Owned Life Insurance benefit earlier this year.

Turning to expenses, they increased some $3.2 million or 8.8% in third quarter and $11.7 million or 10.8% year-to-date compared to the same periods in 2012, primarily due to expenses related operating 13 additional branches acquired in the Fidelity acquisition. Expenses were relatively unchanged as compared to the second quarter of 2013. Salaries and wages increased $1.7 million in the third quarter of 2013 and $5.1 million year-to-date, due to routine annual adjustments to compensation. Increased commissions and higher loan originations and brokerage revenue, and an increase of some 96 in full-time equivalent employees, primarily to operate the Pittsburg franchise.

Pre-merger, Fidelity had approximately 160 full-time equivalents and about 60 of those were eliminated after data conversion and other projects were completed. Employee benefits expense increased $0.3 million for the quarter and $1.9 million year-to-date, primarily due to higher payroll taxes and higher pension expense. Net occupancy and equipment increased for both quarter and year-to-date periods due to the increased depreciation and other maintenance costs mostly again relating to the Fidelity acquisition.

Marketing expenses for the nine month period of $4 million increased some 22.3% over the comparable prior year period due to the addition of the Pittsburg metropolitan market and marketing campaigns targeting non-interest bearing checking accounts and debit card usage. And I just what explained, there is some timing to our marketing campaigns and so that was particularly occurred here in the third quarter.

FDIC insurance decreased some $0.2 million or 5.3% year-to-date, despite the addition of Fidelity’s deposits and other liabilities, while amortization of intangibles increased $0.2 million or 10.3% year-to-date as a result of the acquired core deposit intangible. The year-to-date restructuring and merger-related expenses of $1.3 million includes some $0.3 million related to systems conversion, $0.4 million in employee severance, $0.2 million in accounting and valuation charges, and $0.4 million of various other expenses. And all this compares to some $1.5 million incurred in same time last year.

Finally on expenses, other operating expenses were up 14.5% for the quarter and 8.3% for the year, as real estate owned and foreclosure expenses were up for the quarter, but remained flat year-to-date, and ATM and debit card interchange expenses increased for the quarter and year-to-date due to a higher volume of debit card transactions as our demand deposits grew over the last year.

Let’s turn to the balance sheet for a minute. Total assets increased just 1%, while shareholders’ equity increased 3.2% compared to the end of last year. Net loans increased 4.2% compared to the end of the last year, as loan originations and resulting outstanding outpaced pay downs. Deposits increased 2.4%, primarily due to a 4.8% increase in demand deposits, a similar increase in savings deposits and a 1.3% increase in money markets which were slightly offset by a small increase in CDs due to the effects of an overall corporate strategy designed to increase and remix retail deposit relationships.

The decline is also impacted by lowered offered rates on maturing CDs and customer preferences for other non-maturity deposit types. The increases in demand, savings and money market deposits that are primarily result of marketing campaigns, customer incentives, additional wealth management deposits, and treasury management and other business banking initiatives for commercial customers.

Deposits also benefited from customers receiving bonus and royalty payments from natural gas companies operating in the Marcellus and Utica shale formations in the tri-state area as we mentioned earlier. Federal Home Loan Bank borrowings decreased 46% from December 31 as higher cost maturing borrowings were liquidated using available funding provided by the increase in lower cost deposits.

Total shareholders’ equity increased by approximately $22.5 million or 3.2% due to net income exceeding dividends for the period by $31.6 million and a $3 million increase in capital stock and surplus resulting primarily from employee benefit plan transactions, which was partially offset by a reduction in unrealized gains on an available for sale securities of $13.2 million due to the rising rate environment.

Turning to lending, residential mortgage loan production was up 32 % from last year’s first nine months with $332 million of total production. About 67% of this was held in the portfolio and the rest sold in the secondary market. Purchase money versus refinance mix was about 56% to 44%. The third quarter skewing more towards purchase money at 68%. The pipeline of loan applications at quarter end was $52 million; down significantly from the second quarter’s $92 million as a result of industry-wide lower refinance volumes. Commercial loan production volumes were up 49% year-over-year at almost $800 million as the upper Ohio Valley, Columbus and Pittsburg market teams led the way.

Our new team in Pittsburg produced almost $115 million in commercial production year-to-date. Commercial line usage for the quarter was 44%, similar to the last quarter. Commercial originations were strong enough to overcome $137 million of investor owned commercial real estate abnormal pay downs year-to-date with approximately $16 million of this occurring in the third quarter, representing sales of properties or refinancings into competitive, conduit or permanent financing markets on a non-recourse long-term amortization basis.

Updating now on credit quality. Total non-performing assets dropped from last September’s total of $63 million to $59 million, representing 1.53% of total loans and OREO down from last year’s 1.88%. Strategies such as loan sales and workouts, principle reductions and net charge-offs exceeding the migration of new loans into these categories have benefited the overall improvement in non-performing assets over the past few quarters.

Non-accrual loans are up slightly over the past year by $3.9 million, but accruing TDRs are down by $9.4 million to more than offset this slight non-accrual increase. Overall delinquency and criticized and classified loans are also down over the past year, and delinquencies are particularly lower from year-end after the Fidelity acquisition, due to enhanced collection procedures applied to their client base.

The allowance for credit losses represented 1.23% of total loans at September 30 compared to 1.43% at prior year-end. If the Fidelity acquired loans, which were recorded at fair value at their acquisition date were excluded from these ratio, the allowance would approximate 1.30% of this adjusted loan total. The overall improvement in credit quality supported the reduction in the allowance and a lower provision expense for the nine months ended September 30.

Third quarter provision increased some $1.8 million from the second quarter due primarily to loan growth, increases in certain specific reserves, and to a lesser extent the impact on applicable historical loss rates of charge-offs related to the loan sales in the current quarter.

Net charge-offs in the third quarter of 2013 including the sale related charge-offs were $5.8 million or 0.6% of average portfolio loans and $11.3 million or 0.3% for the year-to-date period, compared to some $4.6 million in net charge-offs or 54 basis points for the third quarter of last year and $18 million or 55 basis points for the first nine months of 2012. The loan sale related charge-offs and I think Paul mentioned this earlier, were some $3.5 million of the total, mostly covered by existing reserves.

Tangible equity to tangible assets was 7.13% at September 30 as compared to 6.77% at year-end. Tier-1 leverage ratio increased to 9.27% and total risk-base was at 14.23%. Tangible book value per share increased almost 6% to $14.13 from year-end’s $13.34.

As Paul mentioned in initial reviews, the final Basel III rules as applied to community banks indicate we will remain not only well capitalized for eventual implementation in 2015, but also ahead of the so called capital conservation buffer rules.

We are pleased with our first nine months performance in what continues to be a tough operating environment and are certainly pleased as well with the completion of our integration of the Fidelity franchise. Loan growth has helped us hold the net interest margin, while cost of funds has continued to decrease.

Our wealth management businesses have contributed a lot of the growth in non-interest income as has service charge and electronic fee income. Our focus continues to be on improving the operating business and our metro market shares.

Our strong balance sheet liquidity and overall capital strength, positions us to be able to take advantage of market-related organic and acquisition-related growth opportunities as they present themselves.

This concludes our prepared commentary now and we will now open the call for questions. Jim Gardill, Chairman of the Board, will moderate the Q&A session and we’ll turn the call back to the facilitator for those questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) At this time, we will pause momentarily to assemble our roster. Our first question is from Stephen Scouten from KBW in Georgia. Please go ahead.

Stephen Scouten – Keefe Bruyette & Woods

Yes, hi guys. Thanks for taking my questions here.

Jim Gardill

Good morning, Steve.

Stephen Scouten – Keefe Bruyette & Woods

Couple of quick ones just on the salaries, the higher salary this quarter. Is that predominantly from production and incentive income that was seen as a carryover from last quarter or are there any other drivers there, because I guess it looks like actual headcount was down yet again quarter-over-quarter?

Jim Gardill

Steve, it is. And I’ll let Bob give you some particulars on that, but the higher incentives on the loan production drove part of that. We also have headcounts as we’ve added sales personnel in the quarter that we detailed on loan originators and commercial loan officers.

Robert Young

Our average full-time equivalent count for the quarter – this quarter, Steve, versus the third quarter of last year, 13.90 last year, 14.71 this quarter. And again that’s primarily due to the additional employees from Fidelity. We had our normal round of compensation adjustments which typically had around 3%. And as Jim mentioned, increased brokers commission expense as our brokerage commission revenues were up over 40%. So mortgage originations were also up and those commissions are reflected there as well. Similar factors in the year-to-date, Steve.

Stephen Scouten – Keefe Bruyette & Woods

Okay, that makes sense. And then I know last quarter you had said you’ve added 12 new lenders year-to-date and then we’re hoping to add maybe 12 more. And then you said, you did add more, but I wasn’t sure if I heard a specific number. Did you have any clarity on the exact amount of additional lenders that were hired?

Jim Gardill

Yes, we’re stuck at the 12.

Stephen Scouten – Keefe Bruyette & Woods

Okay.

Jim Gardill

And what happened is we continue that lenders, but we had some resignations during the quarter also. So that caused us to be still at that net 12.

Stephen Scouten – Keefe Bruyette & Woods

Okay. And then I guess, the last question I had was just in regards to the C&I and CRE loan balances. It looks like those were both down quarter-over-quarter on an end of period basis. Just wondering if you could lend any color there as to what’s going on in those specific classifications, if there is any change in market trends that you are seeing or anything like that?

Robert Young

Two things. And Paul you can jump in if you want. Remember I mentioned the $16 million in what we call unusual pay downs in the third quarter. Most of that is in the CRE classification, although some of that’s offset by construction loans which are also in the same classification moving from an unfinished capacity over to permanent financing on the CRE side.

Also although I mentioned that C&I had approximately the 44% usage as compared to the second quarter, we did noticed that our line usage rate for certain mortgage warehouse lines were down in the third quarter and that’s to be expected given the lower refinance volumes in the industry. So those are the two primary factors affecting those two line items.

Paul Limbert

And if there are some pay downs that were noted in Bob’s comments is also a significant part. We did have $60 million in payoffs and pay downs that Bob had noted. We still are seeing pay downs, payoffs being very significant in our portfolio. And again we don’t view those negatively. We view those as the right way of lending to excellent customers who are doing the right things with their asset. So but we continue to see that kind of activity. The kind of what markets are very active.

Jim Gardill

I think generally speaking we’re pretty well pleased with the 4% growth year-to-date slightly above that on an annualized basis that would equate close to 6% and while the rate is also in the third quarter is compared to the second, is primarily related to the aforementioned pay downs. A lot of our pipeline are construction related loans and they all come online here as those construction projects continue to play out over the next few months.

Stephen Scouten – Keefe Bruyette & Woods

Okay. Thanks guys. I appreciate the color.

Paul Limbert

All right, Steve. Thank you.

Operator

Our next question is William Wallace, Raymond James from Virginia. Please go ahead.

William Wallace – Raymond James

Good afternoon gentlemen, or morning from [indiscernible].

Jim Gardill

Good morning, Wally. How are you?

William Wallace – Raymond James

I am good. Thank you. Just bisecting the line, but a little bit more on the residential side, was that growth driven by new originations during the quarter or did you transfer from out of held for sale?

Paul Limbert

No, it’s the former not the later.

Jim Gardill

Right.

Paul Limbert It’s all on originations, Wally.

William Wallace – Raymond James

Okay.

Paul Limbert

Production was stronger year-over-year even though it’s slowed down towards the end of the third quarter.

William Wallace – Raymond James

Great. And so can you tell me a little bit about the nature of those? Are those variable rate or fixed rate?

Paul Limbert

They are – it’s a combination of variable rate and 15-year fixed rate.

William Wallace – Raymond James

And…

Jim Gardill

30s [ph] get sold in the secondary. Anything above 15 years, we sell into the secondary market, Wally.

William Wallace – Raymond James

Okay. And Paul in your prepared commentary you talked about continuing to invest earnings and do the business. And as analysts, as we look at our model, how should we think about how new cost dollars will be replaced by revenue dollars or how long do you expect that those investments payoff from a revenue perspective?

Paul Limbert

Well that one is a hard question Wally, and I can make a stab at answering it, but it’s only going to be my guess, it’s not going to be based on any hard facts here. But as we are reinvesting, and particularly commercial loan officers, the length of time that it takes to get a commercial loan officer to actually put a significant number of loans on the books is probably at least six to nine month timeframe. And we are focusing in on adding commercial lenders in as part of our reinvestment.

So that’s a relatively long timeframe to get them productive. We are also adding private banking folks and security folks to our organization. The recurrence for those kinds of individuals is much shorter, probably four to six months kind of timeframes. So it does take a while from the time of hiring till the time we really see revenue growth. And it’s very much different depending upon who – what type of people we are hiring and what type of products they are selling. Very difficult question.

William Wallace – Raymond James

Well, I appreciate the [indiscernible] that was actually very helpful. Thank you. That was my last question.

Jim Gardill

All right. Thank you, Wally.

Operator

Our next question is John Moran from Macquarie. Please go ahead.

Michael Burn – Macquarie Capital

Good morning guys. This is actually Michael Burn in for John.

Jim Gardill

Okay, Mike. Good morning.

Michael Burn – Macquarie Capital

Just a quick question. Can you just sort of give a little more detail on the reasoning behind your decision to retain the one to four family loan this quarter, and maybe just your sort of appetite for that going forward?

Paul Limbert

Well actually that decision was made several quarters ago. Towards the end of last year, we were looking at our planning for 2013, and actually made that decision to increase the number of loans, one to four family mortgage loans we were putting in our portfolio. There are two primary reasons for that. First was simply we were looking for loan growth and certainly one of the ways that we can generate additional loan growth. And I think the second important issue is we wanted to act like a community bank for the mortgage customers that we have and all those mortgage customers in our portfolio so that we could cross-sell them with other bank services.

We felt that we could – the asset sensitivity of our organization or the asset liability management sensitivity of our organization could handle the added duration of the 15 years, particularly because the duration in our investment portfolio was so short. So we felt we could handle the duration. We felt that it was an important customer service and we certainly needed to add additional loans to our portfolio for ‘13. So that decision was really made several quarters ago.

Jim Gardill

I think it gives you stable sources of revenue and interest income to offset some of the volatility in the commercial loan portfolio that you see with the payoffs?

Michael Burn – Macquarie Capital

Okay, that’s helpful. And then just sort of to remind you, so you mentioned that commercial line usage was flat, sort of on the linked quarter basis, but the mortgage warehouse lines were a bit lower on the usage. Does that imply sort of other loan types or initial [ph] pipeline usage was up, and if so, can you just give a little more detail on it?

Paul Limbert

Yes, I think a couple of things, and I’ll let Bob speak in particular, Mike, but basically if we were putting more C&I loans on the books, but it’s the sequence of drawing down against those lines. The mortgage line usage was down because of demand with our warehouse lenders or borrowers in that case. And so we’re seeing some impact on the draw. I don’t have a specific number. Bob, any thoughts on that?

Robert Young

Yes, I don’t know either, but I can tell you that the mortgage warehouse business – it’s only a small portion of our overall C&I business. This isn’t as material as you’ve heard from other banks. It is a business that we inherited from Fidelity and we do hope to grow in the future, but we have noticed that those lines as those particular mortgage companies primarily in the Pittsburg market have seen lower demand obviously that line usage is down.

I am not giving you color on commercial lines. This is just straight C&I lines, and talking about 44% as compared to the second quarter. That is up from this time last year at about 39% to 40%. So I think if you want to argue that we didn’t have – obviously, we didn’t have the Fidelity lines before the end of the year, and looking backwards, I think that does portend a trend of higher usage in the marketplace, possibly some of that related to the growth in Marcellus in our marketplace.

Michael Burn – Macquarie Capital

Okay. Thanks a lot, guys.

Paul Limbert

Thanks, Mike.

Operator

(Operator Instructions) Please hold while we poll for any final questions. Having no further questions, this concludes our question-and-answer session. I would like to turn conference back over to Mr. Jim Gardill for any closing remarks.

Jim Gardill

Thank you, Marlene. We appreciate the participation by everyone on this morning’s call. We’re very pleased with the 20% increase in earnings per share year-to-date and the 30% increase in net income year-to-date. With our return on average assets over 1% we think it was a very strong performance. We certainly had some impact with our loan sale, but as we’ve said in previous quarters, we’re really trying to blend for the strategic long-term strength of the corporation and we had an opportunity to do that this quarter and that seemed like the smart thing to do for the long-term of this company. So we appreciate everyone’s participation. Thank you very much this morning.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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