WesBanco, Inc. (WSBC) CEO Todd Clossin on Q1 2019 Results - Earnings Call Transcript

Apr. 17, 2019 8:18 PM ETWesBanco, Inc. (WSBC)
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WesBanco, Inc. (NASDAQ:WSBC) Q1 2019 Earnings Conference Call April 17, 2019 3:00 PM ET

Company Participants

John Iannone - VP of IR

Todd Clossin - President and CEO

Bob Young - EVP and CFO

Conference Call Participants

Catherine Mealor - KBW

Austin Nicholas - Stephens

Steve Moss - B. Riley FBR

Casey Whitman - Sandler O'Neill

Russell Gunther - Davidson


Good afternoon, and welcome to the WesBanco First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I'd now like to turn the conference over to John Iannone, Vice President of Investor Relations. Please go ahead, sir.

John Iannone

Thank you, Cole. Good afternoon and welcome to WesBanco, Inc’s first quarter 2019 earnings conference call. Our first quarter 2019 earnings release, which contains consolidated financial highlights and reconciliations of non-GAAP financial measures, was issued yesterday afternoon and is available on our website at wesbanco.com.

Leading the call today are Todd Clossin, President and Chief Executive Officer; and Bob Young, Executive Vice President and Chief Financial Officer. Following our opening remarks, we will begin a question-and-answer session. An archive of this call will be available on our website for one year.

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, 2018, as well as documents subsequently filed by WesBanco with the Securities and Exchange Commission, which are available on SEC and WesBanco websites.

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 can cause actual results to differ materially from those contemplated by such statements. WesBanco does not assume any duty to update forward-looking statements.


Todd Clossin

Thank you, John. Good morning everyone. On today's call, we’ll be reviewing our results for the first quarter of 2019. Key takeaways from the call today are. We are ensuring a strong organization for our shareholders, customers and employees supported by strong underlying fundamentals, including our core deposit funding advantage as you remain diligently focused on credit quality, profitability, and positive operating leverage.

We're pleased with WesBanco's performance during the first quarter of 2019, as we work to ensure a strong organization for our shareholders. When excluding merger costs, net income increased 27% to $43 million or $0.78 per diluted share. These earnings generated strong profitability ratios for the quarter but core return on average assets and average tangible equity of 1.39% and 16.56% respectively.

We continue to maintain strong regulatory capital ratios as both consolidated and bank level regulatory capital ratios are well above the applicable, well-capitalized standards promulgated by bank regulators in the Basal III capital standards. In addition, record earnings achieved during 2018 combined with our strong regulatory capital and liquidity positions and solid execution on our well-defined long-term operation and growth strategies enabled us to increase quarterly cash dividends by 6.9% or $0.02 to $0.31 per share during February. This was the 12th increase during the last nine years, representing accumulative increase of 121%.

Our long-term success is depended upon continued execution of our well-defined operational and growth plans, as we remained both disciplined and balanced to ensure stability and success on cost cycles. We are focused on long-term sustainable and profitable growth. We'll not sacrifice on long-term shareholder value for near-term gains. As such, I'm very pleased with the strong quarterly trend in asset quality measures as they reflect a consistent, high-quality of our overall loan portfolio.

While we typically stress the importance of yielding loan growth over the rolling first quarter period in order to mitigate the impact from quarterly fluctuations in the construction portfolio due to repayments and seasonality, I'd like to discuss our sequentially quarter loan growth in light of the comments we made during our fourth quarter 2018 earnings call. In particular, we mentioned that we were at the end of the targeted reductions in our consumer portfolio related to its risk-return profile, also the anticipated that the aggressive commercial real estate payoffs during 2018 will begin to moderate and we are encouraged that our commercial pipeline going to into 2019 will better than we have experienced going in 2018.

During the first quarter, these statements have begun to prove true as total portfolio loans were flat when compared to the fourth quarter of 2018 or up 0.5% when annualized. This positive result reflects the anticipated stabilization across loan categories. Our residential mortgage program continues to be a bright spot as overall production as well as the pipeline continued to be strong across all of our markets, up into direct fee income as well as growth in our portfolio loans.

The strength of our commercial pipeline that we saw early in the quarter remains and helped to grow commercial and industrial loans approximately 1% quarter-over-quarter, we remained confident in our ability to deliver the low to mid single-digit total loan growth over the long-term.

Finally, we continue to make appropriate investments in fee and loan opportunities including additional C&I lenders, mortgage loan officers, private bankers and securities brokerage representative new hires, and building out our online lending application capabilities. Furthermore, we've recently hired the new Managing Director who will responsible for planning and directing WesBanco Securities and WesBanco Insurance including the near and long-term possibility in growth of these fee-based businesses.

With our 30 plus year of securities experience and insurance where they get experience and success in the world of banking, I'm excited about the opportunities for these businesses. Effective today current Director and Vice Chairman, Christopher Chris, succeeded Jim Gardill as Chairman of the Board of Directors for real action due to the Company director's retirement policy.

While Jim will remain General Counsel for the bank holding company, I'd like to extend the appreciation to the entire WesBanco family to Jim where his own service on the Board of Directors and his dedication to our success. For 45 years, Jim has providing key experienced and sound council that has enabled the corporation to grow from a small West Virginia based bank into an emerging regional financial institution with the community banks at its core.

In addition, I'm pleased to be able to continue my working relationship with Chris and his new role as chairman of the board. His diversified business and accounting background management experience and long-term active participation on the board will ensure his successes our chairman.

Before turning the call over for review of our financials, I wanted to highlight a few recent accolades to demonstrate the fact that WesBanco prior itself on delivering large bank capabilities with the community bank feel financial institution through its customer centric model that delivers a strong financial institution for both our shareholders and our customers. We continue to be nationally recognized for our performance, strength and credit quality.

Building upon being named one of America's best thanks for the time by leading financial magazine earlier this year, we were just named S&P Global Market Intelligence's best performing regional bank ranking for 2018 as the number 16 bank. This ranking focused on profitability, asset quality and loan growth including average tangible common equity, and net charge offs as a percentage of average loans, efficiency ratio and net margin for 87 eligible institutions with assets between $10 billion and $50 billion.

Lastly, we received another accolade, one of which I'm extremely proud because it was based on customer satisfaction and consumer feedback. WesBanco was named to Forbes Magazine's inaugural ranking of the world's best bank, earning number seven ranking in the United States based upon solid scores across the survey, including very high scores for general satisfaction, trust and customer services.

This recognition is a testament to the hard work and dedication of all of our employees as they focus on our better-banking pledge to deliver superior customer service and strive to maintain the premier financial institution for our customers.

I would now like to turn the call over to Bob Young, our Chief Financial Officer for an update on our first quarter financial results. Bob?

Bob Young

Thanks, John. Good afternoon, everyone. We indeed reported strong year-over-year profitability, while displaying solid credit quality and expense management this quarter. For the three months ended March 31, 2019, we reported GAAP net income a $40.3 million and earnings per diluted share of $0.74, as compared to $33.5 million and $0.76 respectively in the prior year period.

Excluding after tax merger-related expenses from both periods, net income increased 26.9% to $42.8 million and earnings per diluted share increase 2.6% to $0.78, reflecting the additional shares issued for last year's two acquisitions. And just as a reminder, financial results for First Sentry and Farmers Capital have been included in WesBanco's results subsequent to their 2018 merger days of April 5th and August 20, 2018, respectively.

Total Assets as a March 31, 2019, grew to $12.6 billion year-over-year, reflecting approximately $2.3 billion of assets from the First Sentry and Farmers Capital acquisitions. Total portfolio loans of $7.7 billion increased 21.3% compared to the prior year due to both acquisitions. As Todd mentioned, we realized some stabilization across several loan categories during the first quarter, which led to overall flat loan growth on a sequential basis.

In addition, total loan production was up about 20% from last year's first quarter. Regarding our strong residential mortgage loan program, originations during the quarter were up some 16% year-over-year driven by home purchases and construction lending across our footprint. While saleable residential mortgage originations continue to represent around the 60% range of total originations, we've also seen continued growth in 1-to-4 family mortgage loans primarily jumbo and private banking loans held on our balance sheet as they grew 5% organically year-over-year.

Total deposits increased 23.4% year-over-year to 8.9 billion due to the acquisitions as well as organic transaction account growth driven by our legacy footprint that sits on top of the Marcellus and ready Utica shale formations. This core advantage is hard to replicate as shale energy-related deposits continue to be in a low eight figure range each month.

These deposits which help drive the 4.8% year-over-year organic growth in non-interest bearing demand deposits help to maintain a loan to deposit ratio in the high 80% range. They also aided profitability due to a lower than industry average deposit beta of just 24% or 18 basis points during the past year or 16% and 12 basis points, if including the impact of non-interest bearing deposit growth.

The net interest margin for the first quarter of 2019 increased 30 basis points year-over-year to 3.68%, reflecting the benefit from the increase in Federal Reserve Board's targeted federal funds rate during 2018 as well as the higher margin on the acquired Farmers Capital net assets. These benefits were partially offset by higher overall funding cost as well as a continued flattening of the yield curve.

Purchase account accretion from the acquisitions benefited the first quarter of 2019's net interest margin by approximately 19 basis points as compared to 6 basis points in the prior year period and 23 basis points in the fourth quarter of last year. Approximately 3 basis points of accretion in the first quarter was the result of a payoff of a prior acquisitions impaired loan. Excluding purchase accounting accretion, the core net interest margin increased 17 basis points year-over-year from 3.32% last year to 3.49% and it was flat sequentially to the fourth quarter of 2018.

For the quarter ended March, 31 2019 non-interest income increased 15.8% from the prior year to 27.8 million driven mostly by the First Sentry and Farmers acquisitions. The associated larger customer base and higher transaction volumes resulted in increases in electronic banking fees and deposit service charges. Trust fees increased year-over-year primarily due to a $500 million increase in trust assets to 4.5 billion from the addition of Farmers Capital trust -- Farmers Capital's trust business as well as organic growth. Indeed rebounding nicely from the equity markets decrease in the fourth quarter.

Lastly, other income increased 1.0 million primarily due to an increase in payment processing fee income from a business inherited from Farmers Capital as well as loan swap fees. We continue to demonstrate strong profitability and positive operating leverage through successful execution of our strategies as well as controlling discretionary costs even with the inclusion of two acquisition operating expenses. The Farmers Capital brands and data processing conversions occurred during February, and focused expense savings began later in the quarter.

Our expense management efforts are demonstrated by a relatively stable efficiency ratio of 55.9%. Excluding merger-related expenses, non-interest expense increased 17.0 million or 31.3%, compared to the prior year period. This year-over-year increase is reflective of the two acquisitions and their associated staffs and locations, which were the primary reasons for the increases in salaries and wages, employee benefits, net occupancy and equipment costs, as well as intangibles amortization.

Employee benefits expense was impacted by a $0.6 million market adjustment in the deferred compensation plan obligation, which is mostly offset in the net securities gains and non-interest income, and 0.7 million in higher seasonal payroll taxes, as well as higher healthcare and pension costs. FDIC insurance expense increased 0.7 million or 105.6% year-over-year, due to the bank now being assessed as a large bank with more than 10 billion in total assets.

During the first quarter of 2019, our credit quality ratios remain strong as we balanced disciplined loan origination in the current environment with our prudent lending standards. In fact, we reported continued strength across key credit quality metrics, including non-performing assets past due loans, the provision for credit losses, and net loan charge offs, as most of these measures remained at or near historic lows.

Criticizing classified loan balance did increase during the first quarter to 109 million or 1.42% of total portfolio loans as part of our normal loan rate review process post acquisition for Farmers Capital and in conjunction with two downgraded relationships in our legacy portfolio. The downgraded loans were from different industries and no trends were evident.

In addition, we continue to maintain strong regulatory capital ratios, as both consolidated and bank level ratios grew this quarter, and significantly exceeded both well capitalized standards and peer ratios. Even after the early redemption of an inherited trust preferred security from Farmers Capital for $10 million with another $22.5 million of trust to be redeemed during the second quarter.

Now before opening the call for your questions, I would like to provide some current thoughts on our outlook for the remainder of the year, which remain relatively consistent with our outlook provided on last quarter's earnings call. Since we remain somewhat asset sensitive, we are not immune from the factors that are affecting net interest margins across the industry including the current very flat spread between the 2-to 10-year treasury yield, treasury yields and an overall low long-term rate environment.

We believe that our core deposit funding advantage, combined with our low loan to deposit ratio will help to maintain overall deposit funding costs. We do not currently anticipate much overall change in our core net interest margin during the balance of the year, as compared to the first quarter. However, we do expect somewhat lower purchase accounting accretion, which will reduce the stated margin a few basis points overall.

We still anticipate purchase accounting accretion to be in the mid-teens during 2019 declining at a pace of 1 to 2 basis points per quarter. Regarding operating expenses, we remain on pace to achieve the remaining 25% of the anticipated First Sentry cost savings of 38% during 2019 and expect to achieve the planned 35% Farmers Capital cost savings with 75% of those realized this year and the remainder in 2020.

We are planning our typical midyear merit increases and still expect margin expense to be higher than in 2018 quarterly run rate, reflecting additional marketing spend in our various markets as well as our 25% larger company size. Furthermore, FDIC insurance expense will continue to be high during 2019 as compared to 2018 due to now being assessed as a large bank with more than 10 billion in assets, before the potential application of small bank credits to be received once the FDIC insurance fund exceeds 1.38%, which is currently expected by mid-year.

Most credit quality measures have been at or near historical lows over last several periods and as such, variability from quarter-to-quarter may occur. That said we do expect our overall credit quality measures to remain strong during 2019. We currently anticipate our effective full year tax rate to be approximately 18% to 19% subject to changes in certain taxable income strategies.

Lastly, during the second half of 2019, we will begin to incur the impact from the Durbin Amendment on interchange fee income which is currently anticipated to reduce fee income by approximately $2.5 million per quarter, and that will have a slight negative influence on the efficiency ratio as a result.

We are now ready to take your questions. Operator, would you please review the instructions?

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question today comes from Catherine Mealor with KBW. Please go ahead with your question.

Catherine Mealor

I wanted to start first on growth. Todd, you mentioned that, you've seen some stabilization in loan growth this quarter and are still reiterating your low-to mid single-digit growth over the long-term was how you said it. So, I guess my question to you is. Do you feel like we had flat loan growth this quarter, which of course is better than the decline we saw a little bit last year? So, do you feel like the pipeline is strong enough to where we'll actually see growth in the loan portfolio this year or there is still some dynamics within the portfolio that you feel like could keep the portfolio more flat this year?

Todd Clossin

When I look at the things have been pretty consistent, it's been the growth in the pipeline, as Bob mentioned, coming into this year was stronger than coming in the last year. So, the growth in the pipeline production on the monthly quarterly basis has all been relatively consistent over the last year or two. The headwinds which we talked about in the comments, are which really being impacting it. And I think with the last couple of quarters, actually, the consumer portfolio has really the indirect piece. The other piece is where we're looking to continue to grow, but the indirect piece has stabilized.

We're not seeing a lot of movement one way or the other on that which is good that's where we want to see it. And then the amount of loans go under the secondary market thing like that on the commercial real estate side, multifamily projects, things like that have got back in line with where they were historically on kind of quarterly run rate. So, those headwinds have subsided while the consistency of the production and pipeline has continued on. So, as a result of that, that's what provided the stabilization in the first quarter.

When I look out going forward, it's interesting, it's such a -- it's still, we're still small bank right with the loan portfolio and everything. A $20 million loan is a 1% annualized loan on the annual basis. So, you get 2 or 3 loans that close in the C&I portfolio or commercial real estate portfolio, and you got low single-digit annualized growth. You don't get those one quarter. They come the next quarter, you're flat, right. So, it really comes down to sometimes just a couple of loans, and whether they close in March or whether they close in April.

So, it's hard on any one quarter-to-quarter to say whether we're going to have a single to low digit, mid digit growth rate that we've historically had. I am very confident long term that we're going to have that, but it's going to bounce around from quarter-to-quarter. We could see a high single-digit loan growth rate in the quarter and then followed by a low one and then nothing, just flat for a quarter because of the lumpiness of the business.

So, not trying to be evasive, but that's just kind of how I try to work with it. I feel really good about where we're at with lending teams, the people we hired, the stability that we got in a lot of our areas. The pipelines, the economy seems to be rolling along. I don't see any big headwinds there. So, my expectation would be is that we will return there sooner rather than later. But again, it's pretty granular when you look at it on a quarter-by-quarter basis.

Catherine Mealor

And then now maybe turning to the margin -- and then turning to the margin. So, the -- totally appreciate the yield curve right now, but as I look at and your deposit betas are have been incredible. But as I look at your loan yields, you actually saw some really nice improvement in your loan yield throughout last year. If I look at it this quarter, totally on the accreditable yield, there still I think it was about 6 bips increase. So, how do you think about -- are there still levers within your loan portfolio whether it's still kind of a lag impact of higher rate? Although, we're not expecting rate hikes this year, I mean, how much of a lag you think we still have within the portfolio to still get some upward movement on your loan yield, as we move through the year despite the weather curve looks like now?

Todd Clossin

Let me take that Catherine. First of all, I wouldn't think on the residential mortgage side, there's a lot of upside because mortgage rates are indeed down over the last year. It depends upon the mix of fixed and variable there, and again, whether you're selling to secondary market or not. But I think really what you're getting at is, is the business loans and that disclosure. And I've said this in a couple of different forums, but we are still a company that includes floors in our commercial loans. We have about $1.5 billion of balances with floors, but only about a third of that is actually at the floor.

And typically it's at the floor, not because the calculated rate is at or below the floor. It's because of the timing of the next re-pricing. We still do a fair amount of 2, 3 and 5 year fixed rate lending and those typically have floors in them. And so, there is still some inherent pick up depending upon what rates do because of the timing of the next re-pricing. And indeed when I look at loans that re-priced this past quarter and that was over $1 billion worth, I think what I would attribute that increase in business loans too is the re-pricing that occurred in those loans that had a timing this quarter for re-pricing.

Even though, those loans that are variable on our 3 or 6 month time frame, they would have been as the calendar turned in the January, a fair amount of re-pricing both in the C&I portfolio as well as commercial real estate. So, I think those are couple of factors. I also think that, if one wanted to predict the potential for a down rate environment, we're not there yet. But we realized that fed fund future may indicate that, that I think we are well protected by having a lot of those loans re-priced longer. So, it would present them from re-pricing down in that kind of environment. So I think that’s part of the reason stripping out as you did the accretion as to why you saw an increase this quarter in the business loan yield.


And our next question comes from Austin Nicholas with Stephens. Please go ahead with your question.

Austin Nicholas

Maybe we could just talk about deposit growth for a minute. Natural gas prices have kind of fallen to call it a three-year lows over the last couple of days here. And maybe talk about the average kind of monthly inflows you saw in the first quarter and kind of maybe where they are trending today? And would you anticipate that kind of eight digit kind of lot number to kind of slow down towards the seven digit number given what we're seeing with natural gas prices?

Todd Clossin

Yes, it's still been really tight within a tight range in that. We say low eight figure, but its 15 million or so per month and it's within a couple of million dollars that seems to be what is coming in. And even with some of the pricing going down I think production levels going up there is additional wells been drilled, things like that, I mean the production is going up while price is going down. So that maybe impacting some of it, but we haven’t seen a falloff in the deposit flows at all coming from the natural gas, the royalty payments to our home owners that live in our footprint. So, that has really helped us a lot.

And with our loan to deposit ratio, where we're at right now too, we got benefit of being disciplined around how we're aiming our rate structure which drives the whole beta by get to a mid single digit loan growth rate then we will start eating up some of that loan to deposit ratio, but we have a long way to go before I would need to really start to address any kind of rate strategy. So, we have some, I think some, ability to keep rates low for quite a while and with the Fed pausing that just should take some of the, not that you have seen a lot of pressure, but whatever pressure was there seems to be abated.

Austin Nicholas

Understood, that’s helpful and then I appreciate kind of the comments on the asset side of balance sheet from a yield perspective and getting your comments that you just mentioned, but maybe just on the public fund side, that those cost kind of are more sensitive and kind increase in the first quarter. I guess as you look at where those deposits are kind of re-pricing now, is that kind of played out? Or is there still some pressure to come from that side of the coin?

Todd Clossin

I would say a little bit of both. And where you saw the beta, the deposit costs go up, that’s where it's been. We do match the some CD rates from time to time in the branches and some things like that, but it’s the municipal deposits where those are bid out and pretty competitive. And while a lot of that has launched through already, we've done a couple of acquisitions in the last few years that we're taking the public fund business too. So, we're working through those as well too. I mean FFKT, Farmers we just closed that last August and just converted here earlier on the first quarter.

So, as we work with those customers and some of those things come up for re-pricing, we'll have to address them. They had a very low deposit cost FFKT that as well. So I would say, we're part of the way through, I think maybe most of the way through our portfolio, but partly through some of the acquired portfolio. So, I don't see it being a dramatic increase or dramatic number particularly in light of the Fed pause, but these are important customers to us in our markets, and we do a lot more with them than just public funds. So, we want to stay competitive.

Bob Young

And any follow up I would make is, that's about -- it's over a $1 billion, it's about $1.1 billion and those rates that we paid in the fourth quarter versus the first quarter were about flat. So, we didn't see an increase in the public funds rates quarter-over-quarter.

Austin Nicholas

Understood. So, I think maybe based upon your earlier comments on the margin. Is it fair to say that the kind of the expectation is kind of a flat margin kind of going into the remainder of the year just as you paired some of the flowing betas, you're obviously deposit advantage and some of the slight natural re-pricing you have in the kind of commercial side of the book?

Todd Clossin

I guess, how I would answer that is. Yes, we do expect, it's really the same guidance we provided last quarter. A relatively flat or margin, some headline reduction because purchase accounting will drop a basis pointed to per quarter. But I'm looking at that 349 consistent number for the last 2 quarters and getting some seasonality to the margin in the first quarter.

Remember you have 28 days in February, so that tends to bolster the margin. But I think right around that level throughout the rest of the year could slip a basis point or to the, because of the shape of the yield curve. I think going into the year or expectation was a little higher margin. But the reality of where we are at the end of March is a flatter margin and we don't have in our asset liability modeling any increases for the rest of the year.

Austin Nicholas

And then maybe just on expenses. Those are nicely controlled this quarter. And then maybe just specifically on the FDIC expense. Can you give us any indication of what the small bank credits would be? Should those be better offered or kind of, I guess, exercised?

Bob Young

Well, I would say, we didn't get it in time to disclose in the 10-K. So, I don't have a number in there. We haven't produced the queue yet. So, I'm not sure what we're going put it in or not. I would characterize it as several million, a few to several. So we actually have a letter from the FDIC, as most banks do now, describing what that amount is. But reason I'm being a little cagey is, I don't know what we're going to be able to use it.

It really depends upon the shape. It depends upon when the depth, the positive insurance fund gets to that level that I mentioned in my prepared remarks and when the FDIC board asked upon that. So, right now, the FDIC fund is at 1.36% and I think most people are figuring that sometime in the second or third quarter is when those credits would begin to the use. So, some of the back half year or remainder of those would be used in 2020.

Austin Nicholas

But anytime, it sounds like the one-four kind of million is a good way to think about it?

Todd Clossin

Yes, correct. And here's a comment on expenses, too. We -- with the merger, conversion being completed this quarter, we carry those expenses for the first quarter, but a lot of those employees costs are coming out here in the early second quarter, number of people that were not part of the combined organization any more. So as we said, you get 75% of those cost saves this year and that should really start to materialize in the second quarter.

Austin Nicholas

And then maybe just one last quick one just on the cost saves. Can you maybe just give us an idea of what percentage of the total cost saves in the acquisition were achieved, as you kind of exited the first quarter than otherwise starting the second quarter?

Todd Clossin

Yes, I would say with regard to a lot of the employee cost obviously don't start to materialize till after the conversion takes place and that's just was in the first quarter. We have been stay another 30 days past that, so we're not going to see much in way of employee cost reduction from the merger until we get into the second quarter. They were few here and there, but the majority of it's going to be in the second quarter.

The other cost aspects of the contracts things like that flow through fairly, fairly quickly, but a good chunk of expenses is on the employee side, which is why we said 75% would occur in 2019. But majority of that's going to be this quarter and then the following two quarters in the year offset obviously by our own merit increases and own investments that we're going to continue to make along the way as well too.

Bob Young

Another way to look at that is that we're down about 75 full time equivalents from 930 to 331. Some of those were in the fourth quarter just due to normal attrition and approaching the conversion. Some individuals would have chosen to leave before that time and in the bulk of what Todd was talking about referred in the month of March. So, by the time we run in through the payroll, we start to seeing those savings towards the end of the month and then into the second quarter.

Todd Clossin

Yes, we are confident that we're going to achieve those cost saves that we modeled at the time of the merger.


And our next question comes from Steve Moss with B. Riley FBR. Please go ahead with your question.

Steve Moss

I guess going back to the merger for a quick second in particular on securities balances, I'm wondering here with the flat to inverted curve, if the securities book will be declining here going forward.

Todd Clossin

Well, we had about $65 million of sales in the end of month of March. We, in the first quarter, moved some securities from HTM to AFS as a result of the adoption of derivatives standard that improvement standard that came over the number of it. Steve, we did reposition some securities that were in the lower maturity range of the munis where we didn't see as much value as holding longer term munis.

And so, some of those are getting replaced here in the month of April, but I think in general given where spreads are, the concept as we might have had in the budget late last year of may be adding $100 million to the securities portfolio over the course of the year, given the spread between CMOs and intermediate funding, given the higher short end just aren't as great as they were last year this time. There is probably not much time to spend in drawing.

We do have excess of cash right now. We could put some of those into securities, but we're also getting at the Federal Reserve 2.4%. So, there is not much initiative to do that and to go out with some term maturity there. So, that would be my response. You'll see a little bit of an increase here just with the reinvestment in the second quarter, otherwise pretty well flat, 3.1 bill.

Steve Moss

Okay, that's helpful. And then in terms of fee income this quarter, obviously, seasonally weaker quarter for deposit service charges. Perhaps a little bit even though I was thinking, I was just wondering between that and the electronic banking fees. Was there any unusual noise and kind of what rebound should we look for in the second quarter here?

Todd Clossin

We did have some items in there unless first quarter, I guess comparable quarter last year in terms of BOLI, some things like that, that didn't repeat themselves in the first quarter here. But, we also have some businesses like insurance you various things like they're up a little bit. But in a more opportunity, I think in the acquired markets that we have.

When I look at the other categories in terms of percentage increases, service charges on deposits as well as electronic banking fees, I think service charge off deposits were up 36%, and electronic banking fees were up 22%. Obviously, we're 25% bigger because of the acquisition.

So, I think they pace for the most part on average with that. So, if you really prepare first quarter last year, the first quarter this year, make kind of normalizing based upon the size of the Company now this year versus last year, and relate that to the percentage increase in those areas. It was pretty consistent, but it is typically a weaker quarter in the first quarter for those areas.

Steve Moss

Okay, got it. And then, obviously, it sounds like the FDIC insurance will help offset some of the Durbin impact in the second half of the year. Just wondering, if you guys have any other initiatives to try to mitigate on that impact, obviously, the acquisitions were in part tied to that, but just wondering if there's anything else you guys looking to in terms of to mitigate that?

Todd Clossin

Yes, we're always looking for ways to generate additional revenue and also focused on cost. So, I -- we don't have a specific cost initiative in place other than we're always kind of evaluating. Particularly in light of the yield curve flattening earlier this year, we start looking pretty hard, additionally hard at different expense categories and things like that there were more discretionary that we could pull down.

So, we don't have a number on that. But we are working through that and trying to quantify something that we could get for the remainder of this year on the expensive side, and we also continue to address our branch infrastructure as well to really since January 2017, or last two years. We've closed 11 branches, now six of them came through the recent merger. We consolidated branches and then close, but there were another five here we did on our own and we're going market-by-market and doing a branch rationalization study.

So, if you look at, with the fact that basically 5% of our branches over the last two years, and if you go to the five years prior to that we impacted about 10%. So, I think a good way to look at it is every five years. We're addressing about 10% of our branch network, in terms of closures, repositioning things like that. And then I think that'll create some expenses for us as well to all of those things, I think have been benefits and part of that just you want to run the organization efficiently and appropriately but we also have an eye towards Durbin.

We've done for a couple of years, pretty good idea when that was going to hit. So I don't think we've done in prior quarters have been to get ready for that, but we do have a few additional things that were in FDIC insurance. I think it will be a big help as a refund in that category and then some of the expensive things that we're looking at. I'm hoping to take a big hit out of those as well, the Durbin with those expensive initiatives.

Bob Young

I also want to mention, on the employee benefit side, again just emphasize there is about $600,000 an employee benefit related to the deferred comp adjustment. It is also shown -- doesn’t affect the bottom line because it's an offsetting entry that's made in net securities gains of about that same amount. So, we'll try to pull that out for you on a quarterly basis, but the last two quarters there has been a fair amount of volatility in the markets. You will see that we had a loss for instance in net securities gains losses in the fourth quarter that was about a $1 million and there would have been an associated entry for the same million than an employee benefit.

So when you compare one quarter, the other you see that kind of thing moving around. But absent that, I think employee benefits which would experience some higher payroll taxes in the first quarter, so security taxes on incentive come for instance and just the normal start back up at the beginning of the year should begin to normalize here and then you also have the individuals that would have left after the conversion. So, we should see some savings in that category given that was a bit of a larger increase item.

Steve Moss

And then in terms of just kind of wondering about the M&A environment. What are your thoughts about potential acquisitions, and how our discussions -- how activity and discussions these days?

Todd Clossin

Yes, I think as we said last quarter still holds true, and that is we build position to move forward if we found the right opportunities, back half for this year or sometime in 2020 or 2021. We're not in a hurry, like we need to do anything. But be in the $12.5 billion, $12.6 billion in size, obviously, we're over 10 billion but to get a little more have over and above that downside against execution risk but would benefit us, if we were few billion dollars bigger benefit us from an early prospective and everything else.

So, we were open but we meant necessarily feel anything is going to happen immediately, but there is also lot of interest phone calls, things like that they are going on between bankers and banks. Just seems to be pretty active and maybe as a results of the last quarter. I think when I talked about the fact that our pause, so to speak was coming to an end that may have triggered it. But there has been a lot of interest, but we're going to be prudent about what we just try to do or not do.


And our next question comes from Casey Whitman with Sandler O'Neill. Please go ahead with your question.

Casey Whitman

Most of my questions were answered, but maybe can you just elaborate a little bit on the jump in classified loans, maybe just how much is due to the review of the acquired loans versus down rates legacy portfolio? And then, I think you've referenced maybe the two downgrade relationships in the legacy portfolio being two different industries, maybe give us a little color as to what those industries were? That’s it thanks.

Todd Clossin

Yes, the two legacy; one was manufacturing, the other was hospitality, and completely unrelated and had been customers for many, many years. So, we don’t see any trends associated with that and those ones are well structured. So, we're watching them obviously we downgraded them, but we don’t see any trends associated with any of that. In terms of the review of post merger review and kind of line things up from a creating prospective, we do this after every merger that would have been a 7 million or so of the total. So, it's material, I mean, I guess, but not unusual. And it doesn't reflect any kind of deterioration in those credits is just lining them up against the way we evaluate grades against the financial condition of the borrower.

Bob Young

And indeed, the provision for those would go back to goodwill. It's not really a provision, but it's for the credit mark, Casey, because you're within that one year timeframe. So, we take that time to evaluate the risk rates on the acquired loans and then adjust through goodwill as necessary.


[Operator Instructions] And our next question comes from Russell Gunther with Davidson. Please go ahead with your question.

Russell Gunther

I just wanted to see if I can tie down the expense conversation a bit given the moving parts on cost saves and some of the merit increases. Is there a core efficiency ratio target or bogey you guys are striving towards or pointless to for 2019?

Todd Clossin

Yes, I'd say mid-50s and really I've used that over the last couple of years is. I wanted to get up and over 10 billion size and everything associated with that infrastructure, build increasing risk management and then dealing with Durbin and all those types of things. But still keep the efficiency ratio in the mid-50s and then we've been able to do that for decreasing expenses and other areas overtime.

So, obviously, we're going to get two quarters of Durban this year, we'll get four quarters of Durban next year, but we'll model it out. it's less than half percentage point impact on the efficiency ratio, almost a percentage point but not quite. So, I'm still feeling like we should be in mid-50s and that would be the expectation rates going forward.

Russell Gunther

And then just last for me. I've heard you loud and clear on the low-to mid-single-digit growth overtime and some of the moving parts from a loan vertical. But could you quantify for us or size up for us sort of geographic or regional sources of strength for you right now?

Todd Clossin

Yes, I don't see any aspects of our footprint that I would say are going through any kind of severe economic challenges. We moved pretty significantly into so higher growth markets over the last 5 to 7 years. And those markets have population growth, they have household income growth. And that's all still continuing and it's tracking in line with the U.S. GDP growth or slightly higher, depending upon the markets that you're in, and even some of our legacy footprints, we're in the right parts of the states that we're in, I believe. You look at Kentucky we're in global, we're in Lexington. Those are great cities. West Virginia and we're in Parkersburg, we're Wheeling, we're in Morgantown, we're in Charleston, those are really good cities.

So, we're in the parts of the states that are growing faster times than the states themselves are. So, we don't see any big economic drags anywhere at all. We continue to make investments in all of our different markets based upon allocating resources on the return that we're going to get. So, we're trying to be efficient there and to put more resources and markets that have higher growth potential, the markets that don't, but we're still investing in markets that are, they're showing some growth. And I really don't see any markets that we're in there going backward in terms of GDP growth.


And this concludes our question-and-answer session. I would like to turn the call back to Todd Clossin for any closing remarks.

Todd Clossin

Thank you. I want to reaffirm the strength of our underlying operating fundamentals. Again, we remain well positioned for success, I believe in a variety of operating environments, and we're going to continue to focus upon executing our defined growth strategies, long-term profitability that's really what our approach and what our mission is. And we're not going to sacrifice credit quality or regulatory compliance because we think those are hallmarks of our company.

Again, I want to thank you for joining us today and hope we get a chance to see some of you at upcoming investor events. Thank you.


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

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