Q4 2019 Earnings Call

licking the call to

They are taught Closson president and chief executive officer and Bob Young Executive Vice President and Chief Financial Officer following. Our opening remarks will be in a question-and-answer session took over. This call will be available on our website for 1 year forward-looking statements in this report relating to West Bank has plans strategies objectives expectations intentions wage 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 Westlife Form 10-K for the year ended December 31st, 2018 and Form 10-Q for the quarters ended March 31st, June 30th and September 30th, 2019.

As well as documents socially file that which bank go with the Securities Exchange Commission, which are available on the SEC in West Bank of websites investors are cautioned that forward-looking statements, which are not historical fact involve risks and uncertainties including those details in West Bank has most recent annual report on Form 10-K find what they filed with the SEC under risk factors one item one day such statements are subject to important factors that can cause actual results to differ materially from those contemplated by such statements. What's Bank does not assume any Duty update forward-looking statements. Well, good morning. Thank you. John on today's call will be with you in our results for the fourth quarter of 2019. He takeaways from the call today. Are we reported record net income for 2019 of $172, excluding merger-related costs Key Credit quality Metro wage.

main that low levels

We successfully consummated our merger with old line bancshares and are excited about our opportunities in the Mid-Atlantic Market. It's important to note that 75% of our projected cost States will not begin to be home until after the system's conversion that will occur at the end of the first quarter of 2020 since 2009. We've grown from 5 billion to nearly $16 billion in total assets while generating positive operating leverage that lowered our efficiency ratio, approximately 750 basis points to 56.7% during 2019 month. We accomplish this tripled in size by expanding from 3 to 6 States expanding the Midwest the Mid-South and now the Mid-Atlantic with substantial deposit market shares while maintaining balance loan and deposit distribution across this diverse Regional footprint.

This Geographic expansion was done methodically with a critical focus on shareholder return during the last four years. We've moved into too fast growing regions the Louisville Lexington in Kentucky in the Baltimore Washington DC Corridor in Maryland. In fact, we have expanded many of our Revenue generating functions into Diversified major markets with growing population and positive demographics while keeping the majority of our back office and support staffs based in our Wheeling headquarters. We focused on developing and expanding our earnings streams diversifying of our loan portfolio enhancing of our fee related businesses commercial and Industrial loans have increased nearly two hundred and sixty percent to represent 16% of life as compared to 13% ten years ago. You were a combination of Acquisitions and treat major markets hiring excellent teams and developing a full Suite of commercial prod.

we now

Provide our commercial customers the services they need to effectively and efficiently run their organizations including loan swaps money management treasury management investment and retirement money in foreign exchange services. In addition. We have made significant investments in our fee based businesses where we have added Securities brokerage license or license banking services, and we've developed a banking services as well, which is grown at a 40% compound annual growth rate since being launched in 2013.

we've grown our residential mortgage lending program and capabilities which is allowed Mortgage Banking volume to increase threefold over the last few years if we have focused on taking advantage of new markets talented mortgage origination officers in order to balance the growth between secondary Market loans and portfolios ones we've invested in scalable technology that meets the needs of our region franchise as well as the needs of our customers when and how they want those needs met years ago we implemented videoconferencing Thin Client technology and cloud-based infrastructure to allow us to operate efficiently and effectively as we've grown and we were one of the first Banks utilize Apple and Google pay and if enhance the digital offerings to our customers to include online applications for residential and small-business loans online deposit account opening P2P payment capabilities and online budgeting tools our company is evolving and will continue to evolve as we develop dead

New revenue streams in the higher growth markets are very recent recognition as the number 7 Best Bank in the country by Forbes.

Coupled with our seventh consecutive outstanding CRA rating demonstrate our continued commitment to our customers and our communities during this evolution.

We are proud of our long Rich history. We're excited about our future opportunities as we continue to transform our institution to meet the needs of our customers with the Community Bank feel. I'd like to turn the call over to Jeff young our CFO for an update on the fourth. Quarter's Financial results, Bob.

Thanks. Good morning to all of you or fourth quarter earnings performance improved and was above our expectations as execution of our fundamental strategies control of deposit costs and expenses and a Christian from the old line acquisition drove improved earnings over the third quarter and assisted in our record Coronet income performance of $159 million for all of 2096 during the fourth quarter. We experience to continue declining rate environment and a relatively flat yield curve. Although it did improve somewhat later in the quarter the impact of another 25 basis-point Federal Reserve Bank short-term interest rate cut in October a pickup and Commercial Real Estate projects being refinanced or sold earlier than expected due to the current rate environment and the full quarters impact of the mandatory limits on interchange fees for large Banks above 10 billion in total assets.

for the three months

Ended December Thirty One 2019. We reported gaap and in, thirty six point four million and earnings per diluted share of $0.60 as compared to forty three point nine million in a sense respectively in the prior-year. Excluding after-tax merger-related experience expenses from both periods. Net income increased 1% of 45 and 1/2 million wage earnings per diluted share of seventy-five cents. The year-over-year decrease during per diluted share was primarily due to the additional shares issued for the old line acquisition as well as before our anticipated expense Savings in addition for the 12 months ended December Thirty One 2019. We reported gaap net income of $159 million and earnings per diluted share of $2.83 as compared to 143.1 million and $2.92 respectively in the prior-year. Excluding after-tax merger-related expenses from dead.

Both. Stay didn't come increase.

9.3% 271.8 million with earnings per diluted share of $3.06 financial results were first century and Farmers Capital have been included in West Palm Coast results subsequent to their merger dates of April 5th and August twenty 2018 respectively in the financial results for Old Line have been included in our results since it's November 22nd, 2019 merger data sets as of the end of the year of 15.7 billion increased 26.2% year-over-year due to the Old Line acquisition took a total portfolio loans of 10.3 billion increased 34.1% while total deposits increased 24.6% to eleven billion compared to the prior-year am also due to the acquisition total organic lawn growth was 1.1% year-over-year primarily and see and I and residential real estate loan categories partially offset by elevated levels of commercial.

loan payoffs

Excluding the old one acquisition and certificates of deposit which we continue to allow to run off over time. Our organic transaction account deposits increased slightly year-over-year while non-interest and demand deposits increased 2.2% during the fourth quarter. We reduced certain higher cost rates for private banking public funds institutional and repost sweep account as well as certain higher-cost CD rates in our new Mid-Atlantic market for loans. We realize strong total production during both fourth quarter as well as for the full year of two thousand and nineteen months total commercial production of approximately 1.6 billion increased 40% year-over-year and total residential real estate production increased 34% year-over-year to approximately 650 million. This growth in production was driven by the caliber of our lending teams as well as the continued strength across the diverse economies of our sixth eight foot print.

Both commercial and residential production was hired during the fourth quarter and the same period last year while you're in pipelines were also stronger than a year end 2018 at 680 million and 85 million respectively so far new Loan Production in the Mid-Atlantic Market continues at a similar Pace to what they had recorded before the acquisition welcome lending typically has long sales Cycles. We are seeing the benefits of the prior Investments. We have made in the expansion and quality of our commercial industrial lending teams and both of our online lending application capabilities earlier in 2018. These Investments contributed to 5.9% year-over-year organic growth off and I lending category.

Federal Reserve rate during the second half of 2019 have continued to both detract from and benefit our residential real estate loan categories organic home equity lending decreased 1.5% year-over-year primarily due to the low interest rate environment driving an increase in Residential Mortgage refinancing as homeowners trade. Variable-rate HELOC balances for fixed-rate first name mortgages on the flipside. The expansion of our mortgage origination teams has resulted in higher gain on sale in come up almost 41% for the year on record production as well as Thursday and loans for the loan portfolio, which grew organically 1.9% year-over-year.

In addition mortgage refinancing volume which represented about 42% of total fourth quarter production is now nearly four times the volume realized During the prior-year period application activity to date in our Mid-Atlantic Market bodes well for their contribution to 2020 Residential Mortgage Loan growth and gain-on-sale income.

To resolve the current rate environment highlighted by three recent photo Reserve interest rate Cuts. We have continued to see a pickup and Commercial Real Estate projects going to the secondary Market or selling outright earlier than expected. In fact the acceleration we experienced during the fourth quarter of 2019 was almost triple the more normalized quarterly average rate. We experienced during the first half of 2019 and exceed its two hundred million in the fourth quarter, which negatively impacted total organic fourth-quarter loan growth by approximately two percentage points. We expect the current elevated level of commercial real estate office to continue through at least the first half of 2020. However, it could last longer depending upon the interest rate environment despite the headwinds created by the low interest rate environment aggressive secondary commercial real estate market. We do expect to see a return to our normal low to mid-single-digit Total loan growth over the long term due to our new Mid-Atlantic Market the strength of our lending teams and the birth

levels of both our total commercial

And Residential Mortgage pipelines as I previously noted.

As we are sitting across our industry net interest margins are being negatively impacted by the federal reserve's Target federal funds rate during the second half of 2019 as well as the relatively flat yield curve reflecting. These industry-wide headwinds are enantiomers margin for the fourth quarter of 2019 decreased 17 basis points year-over-year the 3.55% off on one basis point on a sequential quarter basis that energies margin for the full year of 2019 was up ten basis points year-over-year to 3.62% due to the Federal Reserve term rate increases during 2018. The higher-margin farmers Capital acquired net earning assets and hire purchase accounting accretion for the full year of 19 basis points versus 2018 S14 basis points.

Excluding such purchase accounting accretion. The core margin was 3.43% for all of 2019 as compared to 3.38% in the prior year.

This accounting accretion from the Acquisitions benefited the fourth quarter and interest margin by approximately 22 basis points as compared to twenty-three basis points in the prior year. And 13 basis points to the third quarter furthermore the accretion during the fourth quarter of 2019 included four basis points of accretion from acquired loan payoffs, and approximately 6 basis points off from the old timers excluding purchase accounting accretion. We reported a core net interest margin of 3.33% down 16 basis points here of a year and ten basis points on a sequential quarter basis.

For the quarter ended December Thirty One 2019 non-interest income increased 16.1% from the prior-year to 30.8 million driven by organic growth and the old line acquisition which accounted for approximately one-third of such increase Mortgage Banking fees increased one point four million compared to last year's fourth-quarter as noted previously due to growth and Residential Mortgage origination dollar per volume and the associated Seattle approximately one-half of those origination into the secondary Market Electronic Banking fees decreased 2.3 million as compared to the fourth quarter of 2018, reflecting an approximate 2.8 million dollar quarterly impact from the limitation on interchange fees for debit card processing that resulted from the Durbin Amendment to the 2010 2000. Frank act and that was partially offset by higher point of sale and ATM transactions.

other income

Just 84.1% during the fourth quarter to 5.8 million to to hire commercial customer loan swap related income.

That's Securities gains increased 1.8 million to 0.5 million from A Loss in last year's fourth-quarter primarily from Market adjustments for the company's director and officer Deferred Compensation Plan. The treatment of this adjustment was neutral to operating income as an offsetting one point 1 million was recorded as a credit with an employee benefits expense dead.

That's Securities games for the year also includes a two point six million dollar gain in the second quarter of 2018 for the sale of our Visa class b share ownership position.

Excluding merger-related expenses not interest expense for the fourth quarter of 2019 increased 11.4 million or 16.4% to eighty 1 million compared to the page here. Primarily reflecting the old line acquisition which accounted for approximately 42% of that increase the 16% year-over-year increase is primarily due to higher salaries and wages benefits and occupancy equipment and other operating costs associated with the additional Staffing and financial center locations from the old line acquisition.

in addition salary

And wages reflect the annual mid-year Merit increases and higher incentive in stock compensation.

Employee benefits of 9.99 increased two point six million quarter-over-quarter due to a similar one point 1 million dollar reduction in Deferred Compensation Plan obligations as noted in my prayer comment about Securities games as well as higher health care expenses of 3.7 million, which is partially reflective of the 2018 Acquisitions and their impact for the full year of 2019. Lastly as mentioned last quarter. We recognized FDIC Insurance credits of approximately 0.7 million during the fourth quarter. The efficiency ratio is 53.3% for the quarter reflecting the Durban fee income cut and the inclusion of old lines expenses prior to any associated cost-savings.

Credit quality ratios remain strong at your end as we balance discipline loan origination in the current environment with prudent lending standards, as of December Thirty One 2019, both non-performing loans and non-performing assets as percentages of the portfolio and total assets at 0.49% and 0.35% respectively remained relatively low and consistency for the past several quarters. These percentages included approximately 3.8 million of non-performing loans and 0.5 million of other real estate loans from old lines.

On a positive note.

Provision for credit losses for the fourth quarter benefited from approximately 1.1 million associated with the release of the specific reserves assigned to three previously required credit impaired loans that paid off during the quarter additionally total net charge-offs for the fourth quarter included specific reserves of 2.8 million taken in Prior. For the year net charge-offs as a percentage of average loans were low 0.9% as compared to 0.6% in 2018.

WesBanco continues 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 and bazil's three capital standards during the fourth quarter of 2019 Howard Tier 1 leverage and Tier 1 risk-based Capital ratios decreased by approximately a hundred thousand points and 122 basis points respectively due to the movement of 136 and 1/2 million of trust Preferred Securities from Cheer One to tear to risk-based Capital as reported by the Dodd-Frank Act for financial institutions with total assets greater than 15 things also pro. Forma Tier 1 leverage Capital would be just below 10% If. And that's that's where used in the calculation instead of averages as required on December 19th, 2019. The board of directors authorized the adoption of a new stock repurchase Plan phone number.

purchased on the open market

Up to an additional 1.7 million shares of WesBanco common, stock representing approximately two and a half percent of outstanding shares, which is in addition to an existing plan approved in 2015 during the fourth quarter of 2019. We repurchased roughly two hundred and fifty five thousand shares of our outstanding common stock at a total cost of 9 and 1/2 million and as a grand approximately two and a half million shares remain for repurchase. We currently anticipate we will continue to repurchase shares during 2020 as permitted by Securities laws subject to conditions and other factors the timing price and quantity of any such potential repurchases will be at West Bank has discretion.

Well, I wouldn't be an accountant. If I didn't bring you up-to-date on Cecil the current expected credit loss model became effective for West Bank on January 1st, 2012 as part of our implementation process. We previously disclosed a range of up to a 30% increase in the allowance for loan losses, excluding the impact from Old Line, including our fourth quarter of 2019 acquisition of Old Line in the analysis and subject to purchase accounting adjustments. We now expect an increase of approximately 40 to 60% as of January the firm in the allowance for credit losses, including loan commitments, which represents about a twenty to twenty-five basis point decline in Tier 1 risk-based Capital if applied on a pro-forma basis as of December 31st, 2019, the ultimate impact of adoption will depend will depend on the finalization of purchase accounting and impaired loans for old line, which could impact the estimated initial adapter.

in range also the

Impact on regulatory Capital will be spread over three years as as permitted by regulatory actions taken after Cecil initial adoption.

I would not like to provide some files in our current outlook for 2020. That's a slightly asset-sensitive Bank. We are not immune for factors affecting industry margins including a relatively flat spread between the 3-month treasury yields and a continued to overall lower long-term rate environment while we continue to believe that our core deposit funding Advantage combined with our lower loan-to-deposit ratio should help boost rollover all deposit funding costs want to remind you that we did not experience a high deposit beta and rates were moving up during 2018. So our core deposit rates cannot be lowered as took the car in training ground.

Our Gap or stated managers margin for 2020 as indicated by our asset-liability model May decrease by two to three basis points per quarter do to lower purchase account application from a starting point of 2222 basis points during the first quarter of 2020 including the impact of old lines purchased. Can we are currently off getting one more Federal Reserve rate cut a 25 basis points?

in Lake

June 2020 which if such occurs would cause the margin to decrease by an additional two to four basis points in the back after year depending upon the shape and overall level of the yield curve at that time or margarine should otherwise remain relatively flat assuming we can offset any further loan yield reductions with deposit and other funding cost decreases.

We will continue to focus on expands Trends to ensure positive operating leverage while positioning the company for long-term growth. We expect to achieve the plan 31% Old Line cost savings during 2021. But approximately 75% realized by the end of 2020. We are planning for systems and Branch signage conversions to occur by the end of the first quarter and anticipated costs money to begin shortly. Thereafter typical mid-year. Merit increases will be effective across our entire organization. And in addition, we expect total marketing expenses to increase from 2019 s level reflecting additional marketing spin in our various markets and our approximate 25% larger company size furthermore FDIC Insurance expense will increase in the levels reported during the second half of 2019, which reflected the three point 1 million assessment credit. We received from the FDIC.

we also

Dissipate making additional revenue-generating hires as we enhance lending and wealth management teams and Associates support staff in our new Mid-Atlantic Market.

There is typically a lag between One Lending & Wealth Management Personnel or hired and when they begin building a revenue-generating book of business, we do currently estimate the quarterly reduction during 2026, electronic vacuum fee income from the limitation on interchange fees due to the Durbin Amendment will be relatively consistent with the impact recorded during the fourth quarter of 2019, which will continue to have a slight negative influence on the efficiency ratio is a reminder. We will anniversary the impact from the Durbin Amendment during the third quarter of 2020.

We do not anticipate it our credit quality measures will increase significantly in 2020. Although due to Prior low levels. There may be some variability from quarter-to-quarter, but it should remain comparable or slightly better to our peer institutions quarterly loan loss Provisions after adoption of Cecil will be highly dependent upon forecasted economic assumptions and other model factors such a long brought by category and term net charge-offs and changes to criticize you classified loans.

lastly we anticipated

Active for your tax rate to be approximately 19 to 20% subject to changes in certain taxable income strategies as we have now added in Maryland to our state income tax. Org chart. I'll turn it back to you. Thanks Bob before I open the call to your questions. I wanted to provide a brief update on the changes and our internal own classification methodology as we discussed last quarter as what bank was grown and transformed into a $16 institution spanning Six States. We believed it was important on a go-forward basis too heavily weighed quantitative measures wage alone risk rating process in particular debt service coverage. Therefore, we initiated a project during 2019 to review and recreate all loans under this revised methodology wage the shift in Factory utilization. That's what it was. It's not credit deterioration is what drove most of the changes in one risk ratings and Associated criticized and classified loan levels that we experienced the last few quarters dead.

We have now completed.

The majority of this regrading project you've gone through all loans greater than $1000000 and within criticized and classified as well as two grade levels above criticized and this is reflected in our fourth-quarter results for the quarter ending December 31st, 2019 are criticized and classified loan to toe bones ratio was 2.17% which included approximately $30,000 criticized the classified loans from Old Line at the coin 7 basis points sequentially from the third quarter, and it's still favorable when compared to the average of all banks with total <expletive> between 10 and 25 billion during the first quarter of 2020. We will apply the same revised methodology to the larger Old Line ones and going forward with utilizing the new methodologies during the normal course of business. I'd like to personally welcome the customers and employees of Old Line into the West Bank of family in addition to maintaining strong commitment to customer service and Community banking job.

I'm excited about our opportunities.

In the Mid-Atlantic Market as we work to build on Old lines Market presence and enhance customer relationships through new and expanded products and services. I'm thrilled to have the old line employees wage of our new Mid-Atlantic market, and I look forward to the longer-term benefits of this merger. We celebrate our hundred fiftieth anniversary this year as an emerging Regional financial institution ready to wage. Peace. Not only in the Mid-West, but also in the Mid-South in the Mid-Atlantic markets we have the markets the employees products and the infrastructure to continue our Evolution as a company. I'm not ready to take your questions Rocco. Would you please review the instructions? Yes, sir. We will now begin the question-and-answer session to ask a question. You may press star one on your touch-tone phone. If you are using the speaker phone. We asked you please pick up your handset before pressing the keys if it anytime your question has been addressed you would like to enjoy your question, please press * then two today ma'am.

First question comes from Casey Whitman Piper Sandler, please. Go ahead.

Good morning.

Just wanted to touch on the the swapping come you guys got this quarter, you know, was that higher volume just a function of demand this quarter. Was there something else to play and then just what do you think about the sustainability of those speeds? Yeah, you know, it's all driven by obviously that the shape of the yield curve and and there's a lot of demand out there on the part of customers. So it is it is a little bit bumpy quarter-to-quarter based on the size of loans and and whether it's a swap or a variable rate or fixed rate or whatever the case might be but we have we have been seen some nice Trends with that and we're just introducing it into the the mass panic market now is ex was out on some calls last week with some of their lenders and some of their their borrowers are are utilizing swaps, but that's not something that old line is offered in the past. So we think we've got some opportunity there as well, but it is going to move around a lot based upon the shape of the yield curve right now. It's in a a pretty positive pretty positive area. There also was a positive fair value adjustment associate off.

The existing book of swims sweeps swaps in addition to the higher fees for the quarter as compared to the prior quarter km.

How big was that Bob the fair value adjustment? It was $500,000. So and that was a negative adjustment in the third quarter due to the yield curve shape at that time.

Got it. Thank you and maybe help us out a little bit with the expenses. So the growth is quarter was, you know, maybe a little more than I was thinking and you know, as you mentioned you've got the FDIC expense off the marketing expenses annual Merit increases, I guess how should we think about like a good range for the quarterly run rate for expenses? Once we've got you know majority of the old line cost saves realize so, you know, we look at like the back half of 2020 or you know, maybe if you don't want to give a range just how should we think about maybe where the efficiency ratio kind of lands then Thursday? We've given prior guidance on the efficiency ratio being above the historical rate because of Durban and I think with the market being down last year, there's some some adjustment to the official ratio there as well. So I I think that fourth-quarter run rate for the efficiency ratio until we begin getting our cost-savings is is good for now as we let's start the new year in terms of

Dollars we spend some time.

Analyzing both the third quarter run rate as well as the fourth quarter run rate and and as his my want by made some adjustments that you could either agree with or not. But you know, we had I called out the, just meant which was different in the fourth quarter as compared to the third quarter. I think we suck showing additional marketing expense in the fourth quarter. That's probably going to run rate higher as compared to the total 2018. And so the the amount you see there in the fourth quarter is probably a a a fair run rate, maybe a little bit less for 2020 as we did Advanced some customer surveys and wage research work in the fourth quarter. So that's item two and then additional incentive comp. We we adjust the fourth quarter as we're going to provide an adjustment birth.

a non-officer employee

This quarter and so when you add all those items up and then you do a difference calculation on the FDIC we come up with somewhere around $74 million in the fourth quarter of our own expenses. And and Old Line has been relatively consistent at around 14. 14 and 1/2 million for the last two to three quarters. And so long that that basically puts you at $88 eighty eight point five million and then you grow it from there and the new year with a higher of rules and payroll taxes in the first quarter by Joss for the day count and a couple of other minor savings. And and so you you kind of start the year just under 90 you get some cost savings beginning in the second quarter and and as we have typically said in the past and as I got it in the script the second quarter is when we start our annual office wage.

increases with a non-exempt

Been following the third quarter. So there's that run rate difference as we proceed through the year. And so you're starting the year at around, you know, eighty-nine and ninety and and be consistent with that in the second quarter adjusted for the day count and then the third and the fourth quarters are slightly higher because of those aforementioned Merit increases for the teens.

I don't know if that's helpful or not know it is sorry in in the second quarter that you should see a slight decline though from the cost of coming in from the eighty nine million or so in the first quarter. That's that's right. You should see a slight decline in the second quarter as compared to the first quarter run rate, but you do have an extra day in the second quarter as compared to the first even when you're in the first so and and mentioned the the salary increases start basically the middle of May for the office at the quarter very helpful. I'll let someone else jump on. Thank you. Thank you.

I don't know.

Custom printing press the next even think please go ahead.

Morning everyone. How are you morning break. I just wanted to follow up on the the expenses real quick. I guess just taking all your comments that you just provided Casey. It sounds like all in we should not expect expenses to sort of bounced around between 88 to 90 million per quarter 220. Is that fair you a little bit higher the back half the year, but I do have 75% of cost Savings in by the end of the year. So, you know, that number has to get there that number has been decreased by birth a total of about thirteen million of cost savings related to Old Line and then the rest of it would be in 2021.

Okay, so I guess as I think about you know, the run-rate heading into 20-21 is it I guess that's above or below eighty eight million dollars per quarter.

Yeah, heading into Twenty-One. So I have I don't have that in front of me. But I have in the second half this year between 91 and 92 million after tip-off mid-year salary increases in stock compensation Awards. Okay. All right. Thank you very much for that and I got into the higher marketing for the 2021 year and and you've got put in a normal run rate on the FDIC insurance for the year as well. I think I I'm just re-emphasizing those two factors as being different from 2019. Okay, I guess I'm I'm telling you that 4:20, but that would run rate for twenty one, right? Okay, I guess it's real quick on the loan book. Could you remind us what percent of the loan portfolio is tied to one month Libor and what percentage is tied to Prime?

The loan book is this is our loan book. I don't have old lines yet. I can tell you old lines is primarily fixed rate. And so it will reduce our asset sensitive or we just don't have the books combined yet on an instrument by instrument level so I bear with me but 30% of our portfolio commercial portfolio is is fixed and and 70% is variable and all of the variable 48% re prices less than three months off.

And so that's a proxy for both Prime and Libor adjustment. Okay. All right. Okay, I can give you the whole the whole book but I'm primarily interested in the commercial. Yeah, that's that's right. I guess as I as I look at the the loan yield this quarter, you know, four seventy-five and think about the run-rate moving. I just wanted to get a sense for what new origination needles were across the footprint. So we have loans over the course of the Year Loans pay it off at a at a 497 rate new loans came on at a 4:33. So that gives you some idea.

Where we ended up the year? Okay.

And then just thinking about the CD book CD costs are down a little bit more than what I would have expected. Just just given the higher cost of nature of the old line portfolio. Just wanted to get a sense for what drove and what current offerings are in Legacy markets and in the newly-acquired Old Line markets.

Yeah.

I'll start Bob can add to that as well. But you know part of what we're doing is kind of managing the deposit ratio with with the deposit flow, right? So, you know, we're about ninety 3% any 3.3% of the end of the year when the deposit ratio, so we still got a little bit of room to grow me into the Year to you know of a pretty robust loan growth of hopefully we're going to get out of our Legacy wage in our Acquisitions here in the next couple of years and are low to mid-single-digit loan growth. If we did that and didn't significantly grow deposit see that start pushing the mid mid to Upper mid-month posit ratio. What we're seeing so far is in the Old Line o-line books. We want to make sure that we're taking care of some of the Strategic customers that they've got as well too. But overall we're not we're not offering kind of deposit rates that were being offered prior to the acquisition on CDs. So that is starting to have a an impact. I don't know what that's going to do volume wise, but it will start having an image.

on the

Margins to some degrees is Bob is talked about previously. So we're going to watch it on a monthly basis and nice things we have with our Legacy footprint because it's so deposit bridge and you haven't had to do a whole lot to to try to generate deposits there as a go a couple of years out and and need to raise deposits we can do so in our Legacy footprint. I think fairly easily without having to go to high-cost markets to raise raise deposits cuz we've got still some relatively low-cost deposit markets that we can use to raise deposits to continue to fund the bank long-term. So, you know, we are we are reducing CD rates in the Mid-Atlantic market across the board but being selected with regard to see customers.

Okay.

And then as I think about CD growth moving forward sort of taking a comments about being cognizant of the loan-to-deposit ratio and thinking about you know, the run off of some of those higher offer CDs. How do you sort of what what's the outlook for CD growth as we head forward and two twenty20. Is it Flatbush or do you expect to see some low single-digit growth in that four-month? Yeah, and that's a great great question. We've been able to hold off, you know trying to I guess I would say stabilize or grow the CD book cuz we haven't had to there will be a dead time will probably need to do that all over and you to focus on a growing demand deposits and still 50% of our book post-merger is is demand deposits. We realize that some point we may need to bring may need to raise some CD rates in order to get the fund our our loan growth. You want to introduce things about doing that is it's when you go into smart Legacy footprint and you and you go out there with a higher

Great, you're going to price a lot of you.

To seeing you know, your existing booking your existing deposits that aren't as CDs. So it's not a matter of you know, raising deposit rates a little bit on the side of the it costs you more on the on the The Straits the interest expense. It'll cost you more than just the amount of the increase in the CD rate. Cuz again, you're going to cannibalize some existing deposits that are going to start rolling into that. So that's why we took resisted it and used the federal Home Loan Bank a little bit more even though some of the CD rates might be a little bit lower at times than you'd be able to get from the federal One bank for a loan bank. You don't have to reprice chunk of your book by changing your interest rates going to change your interest rates on deposits, you know, again, you risk cannibalizing your existing book. So we're going to kind of balance that based upon the one to deposit ratio and I would say 1/2 mid-to-upper 90s on the loan-to-deposit ratio, then I think we're going to start getting more aggressive on the on the Seedy side and it will pick the markets. We want to do that in the markets where I think we yep.

Generate a lot of deposit growth without maybe having a significant market share in that market that way then we we can attract deposits in but you know, not not replace the book in that market. Okay, and then one last question for me, it's a bit of a two-parter, but the day one Cecil update Bob.

It's going to ask is it fair to say that the Delta between the three Q guidance and the four Q guidance is due primarily to include an old line in the in the analysis. Yes. That's exactly what it is. I've done some analysis on there and that's what you have to keep in mind is that they're coming out with a zero Reserve.

So because in purchase accounting we're eliminating their basically 8 to 9 million dollar existing allowance. So you're starting from scratch if you will and the bulk of their loans are the good life. And so there's a doubling up impact there between the credit Mark of about 1% and the initial allowance. So there's about a 17 million dollars to our guidance and at the end of the third quarter. The increase for Wesbanco alone is about a little bit less than ten million and the incorrect for 4 old lines about Seventeen million yet what I'm done with that reflecting the quality of the old line portfolio, they're coming on at basically 71 basis points while our number would be 81 basis points. So the Delta is just because of Old Line and because you're starting from zero there as opposed to having an existing dead.

52 million-dollar Reserve

Perfect at Legacy West Bank. Oh, okay. So is that yeah, that's helpful as I think about the entirety of the entire company though. It sounds like you know $7,000 is a bit of a true up from you know, a credit Mark perspective and you know shifting it to the to the reserve bucket, but just with the other Acquisitions just wanted to get a sense for what the total dollar amount was in that increase in the reserve that was coming from credit marks verse, you know, and originated perspective.

Well the bulk of the increase in West Bank of lonely, which is as I said between 8 and 10 million is all due to Prior Acquisitions where you don't have there's only about four million dollars of that $52 million related to Prior reserves or prior Acquisitions. And those are just reserves that have been booked after the acquisition on those loans so long you're adding between 8 and 10 million. It's actually a reduction in Legacy West Bank. Oh, I don't have that memorized and an increase in birth the five or so prior Acquisitions and in the last few years that we've done prior to Old Line and and you could probably think about that, you know that off the total amount again for Wesbanco is eight to ten million. All of that is related to Prior deals, but because it's a negative amount for legacy West Bank owner.

and a slightly higher amount

For the Acquisitions, it's it's probably more like of that. Let's call a 10 be more like 15 for the prior Acquisitions and -5 for legacy wage. I go it's probably thrown around too many numbers, but the thought is similar to Old Line in that what you're adding for Cecil is related to the good book club Acquisitions that basically don't have any significant reserves that have been built up since their acquisition date.

And today's next question comes from Catherine Mueller of KBW, please go ahead. Thanks. Good morning. Good morning. All right, I don't mean to beat a dead horse, but I bought a circle back to the expense guidance to make sure I'm thinking about this, right. So, um, we're coming into this quarter excluding old line at about a 74 million digit extension space and then Old Line adds about 14 and 1/2 pre cost savings. And so then if we assume and remind me of home at about 30% cost savings, is that right? Okay. So then if I do 30% of that 14 and 1/2 and then only took 75% of that, you know, maybe let's just say by the end of this year then I'm adding about 11.2 to that 74 month.

base which gets me too about

$85 million. So why would we not be ending the year at about an eighty five million dollar quarterly expense run rate versus the eighty-eight to ninety million that you mentioned or efficiencies on the Westbank. Oh side, which you know, we'll we'll have what I was guiding to was the earlier age changes you have in the $74 run rate, you'll have higher FDIC Insurance next year than if than the Run rate in the third and fourth quarters with excluding the credits.

All right, just based upon the higher side of the organization and risk factor changes in the calculation and you'll have the mid year salary increases that that you know, typically Foster into three to three and a half percent range plus stock compensation. Those are the major changes that would increase the core growth rate higher as we proceed through the year Catherine.

And there's about as I said about thirteen million of of cost savings factored into my model to get to that run rate on a quarterly basis.

Okay, so did the 85 is to less if we really need to keep your saying if we need to keep operating expenses in the high 80s then for the full year. I got expenses and like the 350 million range, which would is about 10 to 12 million higher than where consensus is right. Now. Does that feel right off?

It does to me. I'm not saying consensus is right or wrong. I'm just saying this is what our bill is. Okay. All right. All right. So what you started 19 at an expense range of kind of more on the 71 72 range too from a core base is what what's been driving maybe the underlying growth higher than perhaps. We we expected if there been more higher than it was appreciated or you know regulatory kind of cost.

Certainly as you go over 10.

And there are higher regulatory costs. We've been building risk management BSA AML and other compliance-related teams of individuals to meet regulatory expectations. But as I hinted as well in my script related to Mid-Atlantic Market, we would have done this in Kentucky in 2019 adding Revenue producers. They take a while to produce bottom line net income. And so that be the wealth management staff that we've hired and some additional commercial lenders.

Okay, and then it's totally knock on the margin, you know, I think as we were thinking about old line coming on on a core basis was just stripped out of credible yield long as we bring on Old Line. I think we had thought about all I'm being Nim enhancing just given their let that asset-sensitive and the ability to make the break down some of their deposit cost. So long has anything changed since then or or do you still believe that there's upside to the core? Margin as you can put these two balance sheets together and realize some of those enhancements was actually a month or two of core margin expansion the month of December which with the model as well as showing that the first quarter starts us off a couple of tips higher and then drink from their Catherine. So the first of all the while the loan accretion will come down slowly over a three to four-year timeframe.

the CD accretion

Comes down very fast. In fact, they'll be a significant portion of that recognized in the first half of the year and more than 50% of the total accretion recognized by the end of the year. So that that purchase counting number which starts the year 22 basis points is expected to end the year at 14 basis points.

We're also experiencing lower creation from the prior Acquisitions. They're down Encore a couple of basis points here to start the new year.

I'm sorry, they're down relative to purchase County. I shouldn't confuse the word core with with that but they're down a couple of basis points. The prior Acquisitions are.

Okay, but just all else equal you think a more stable core margin and deliver 330s is appropriate. Yes without a pack off. We have one caught in in the year so that produces a reduction in our model. But if you if you don't believe in KBW has one cut as well, but if you don't think that then the stable margin is what I said in my comments and and reaffirm and that's 3:30. All right, great. Thank you.

Our next question today comes from Steve Moss B Riley FBR, please go ahead. Good morning guys morning Steve. Just one thing on the on the margin here in particular just on the federal Home Loan Bank borrowing costs. They seemed a little bit high for the quarter to me and I just wondering, you know, when does that price lower?

Well our our billion floor and flop advances two thirds of that re prices in 2028. There still are some two 20s to 40s in there of one year or less as well as some eighteen months and two year CDs that already price this year that's factored into our our model currently. And so that just take a look here the federal Home Loan Bank should come down next year as we proceed through the year starting the year and the low two 20s and ending up a year, you know, just under 2% is that I'm not sure if you're looking at the total interest expense which is influenced by volume in addition to rate or you just require just the just the average balance sheet with the 243 rate caught my eye. So it's yep.

So that was that was helpful, Bob.

And then in terms of the the the buy back here, you know tangible Capital around call 10% Just wondering, you know any updates thoughts on targeted Capital your appetite for the buy back here. I mean, obviously I I hear such a mark conditions but kind of curious for a little more color. Yeah Berkeley we've kind of you know used our capital for Acquisitions dividends and BuyBacks, obviously with with old wine and and some of the prior Acquisitions, you know, we want to we want to simulate those twenty twenties about online. So, you know, when you look at, you know kind of the acquisition piece of that being being a couple of years out that really that really heightens the other the other uses of capital cuz we took in capital fairly fairly quickly. So, you know that that at least the BuyBacks and and the dividends so the two and a half million shares left remaining and likes our total terms of authorization.

You know we are.

We are going to be continuing to to utilize that opportunistically as as we feel needed but it's not something we've done a lot here over the last few years, but given the capital position and wage were on the sidelines been having a perspective for a little bit. We think that's inappropriate use which is why we got the authorization increased. So in terms of just thinking about you know, like with ratio, you know, do you think it's more likely to head towards 99.5 or keep it keep it steady around 10 as we think about throughout the year here.

Yeah, I would tend to say you know, I said a couple of years ago. I was happy and kind of the mid-eighties but I I would say that your nine to ten, you know in that in that range cuz we are continuing to build it but offsetting will be the buy backs. So you will probably say the 9th 9 to 10. Okay, that that helpful and then just on the I mean credit was good, but wage in terms of the charges for specifically reserved loans. Just wondering what types of loans were charged off and any color you can give their

well

They're all from prior Acquisitions ones in the nursing home business.

And yeah, they're basically commercial real estate.

Not seeing eye and there were there were three, you know during the during the quarter and and again it's interesting cuz you got our own own questions, you know kind of working through when you see a lot of questions around an increase in in charge of you know, twenty basis points. We've been a lot lower than that, but the key important thing to remember here is that these were already had specific reserves, right? So I'll take the charge off amount was already identified and reserved for so that that's why you had that if the the release but the the charge off number being these weren't surprises the dollar amount was not surprising. I kind of don't like the fact that accounting treats them as charge-offs cuz from my perspective. It's kind of a a gives you a misleading look at it, but it just the way the accounting has to work and the way the accounting has to show but there a specific reserves allocated to these that you know, we're then just covered covered the charge off amount. We don't expect that to be any kind of, you know repeatable on a regular basis.

Jesus I think what you've seen with us overall, I think was we had nine basis points and charge-offs in the last year against maybe six the year before and and I think are

Friends will continue to be should be well below the industry based on what we see what we see right now, but it was a little bit of a noisy quarter because of those three that that that that paid off okay of the plus $4 net charge-off number is related to those three credits TVs as we said in this script. All right. Thank you very much. I appreciate that. I'm sure I don't know question today comes from Russell Hunter D A Davidson, please go ahead.

Hey, good morning guys morning Russell.

A couple of quick follow-ups hear the first you so I'd start by saying I appreciate all of the color on the expense glidepath. You also commented, you know, you guys continually strive for positive operating leverage. So tying all of that together, is that something that you anticipate being able to achieve for 2020 that poor efficiency ratio ending the year lower than than the 2019 result.

I would say one of the things that you know we continue to do is continue to optimize our Branch Network as well too. I mean we've we've closed 15 branches in the last thousand years since January 2017 roughly 7% or so of our of our franchise. We're looking real hard at that in terms of you know, our Branch infrastructure. Obviously, haven't you know, 230,000 branches on a 15 billion dollar bank is a lot of branches but we benefit from a lot of rural areas where we've got, you know Branch deposits and things like that. So we're we're evaluating that we're we're looking at all of that. But I am very strongly want us to do everything we can to maintain a positive operating leverage. Not just because we're doing em, and I mean, I mean like spice very nature is going to generate positive operating leverage, but outside of that from an organic perspective. It's something that we're going to write a card is so we're looking hard at the expense side of the the branch optimization piece of it and then Thursday,

So, you know the key is.

I think particularly with with old line is to not have any bumps on the revenue production side as we as we finish the conversion and and and move forward with them. And so far that looks that looks really good and we're getting nice nice list from some of our prior Acquisitions is now as well as well to it takes a year to to kind of assimilate him through before you start seeing growth. I think that'll happen with old line, but that has been the case with our with our with our prior prior Acquisitions, but I'm still very much believe in positive operating leverage and on a long-term basis. We think that's that's very important to us and you know, having an efficiency ratio that something we can be we can be proud of even though it's it's impact a little bit by curving right now and you know, the margin had a big impact on everybody's efficiency wage last year. So it kind of everybody had the level set to a to a a new level.

Got it. Okay. Thank you Todd appreciate it. And you kind of touched on my final comment which or question?

Circling back to the loan growth expectations. You guys laid out. Just wondering if we could parse it a little bit in terms of sort of growth expectations within the newer Mid-Atlantic footprint off and what that would then imply for some of the Legacy markets and growth rates there. Yeah. I mean when I look at the loan growth overall, you know, we had from a obviously 1% off ganic bone growth, but that's with those heavy payoffs right in the things going to the secondary market and over two hundred million in the fourth quarter. So, you know, if you were to just use more of a norm is rate for that, you know, you'd be looking at around a 3% you know voted mid single-digit growth rate, but those those large commercial real estate payoffs, you know, we think that that trend is going to continue loose the first half of of this year. But when I look at the momentum that I feel we've got at Old Line and to start production overall I think is very good job.

1.6 billion in production last year, which is a 40% increase over and above the year before so from from a production standpoint. I don't see it being a big issue at all from the same perspective were up 5.9% year-over-year on an annualized growth rate. So, you know, we're getting we're getting that mid single-digit growth rate and see and I it's just the things that are going to the second a market that's a big headwind for everybody. So when I look at you know old lines portfolio, obviously, it's it's heavily real estate oriented. So they are going to have things going to the secondary Market they are going to continue to have those headwinds as as as well, but we got a lot of growth opportunities. I think we're really matters is when when does The Slowdown in things to the secondary Market occur? You know, when do the rates scenario get the pointer? When's When's the marketplace get to the point where everything that's going to go to the secondary Market or the majority of it is actually gone to the second birth.

Market, so you don't see that big. Uh

A big headwind that everybody continues to to face right now. I would tell you with you know, total of you know, six hundred million dollars or so last year that went to the secondary Market wage, you know to to to outgrow that and to show mid-single-digit loan growth with that kind of volume going to the secondary Market. I personally think that's on safe and and I think that's you know, the banks that are showing that kind of loan growth with that kind of money going to the secondary Market. You really gotta ask, what are they doing? Cuz they do think that's a real headwind that we don't want to change our updating standards just because more more loans are going to the secondary market so worse than we could do. So we're keeping discipline with regard to underwriting making sure what we're doing is smart and at some point that those those twins will Abate and and we'll start to show I think commercial real estate growth in line with the mid single-digits that we're currently seeing in the cni area. So I guess long-winded answer to your question.

But again, I was out in the Mid-Atlantic markets last week and and I feel really good about the momentum there the pipeline there and the lenders and the customers I met with you got a couple couple of loan requests just in the calls last week.

Seen some nice growth in in in Kentucky, you know, we're a couple of our Acquisitions were a few years ago one of our top growth markets right now. So I feel good about this stuff, but it's still the head winds of Fate. You know, that's going to be the it's going to be the challenge and and the pipelines for both commercial and Reggie are up over 50% from where they were at the end of 2018. So that's helpful as well.

It's very helpful. Thank you both that's it for me. Sure. This includes a question-and-answer session. I'd like to turn the conference back over to Todd Clawson from the closing remarks. I appreciate appreciate the time everyone has today and it was it was a quarter the acquisition. We got a lot of stuff going on and and with Cecil and everything else, but hoping to get a chance to see a number of you at some upcoming visits. We got off a pack scheduler the next few months in terms of being on the road doing doing investor investor visits. I want to thank you for joining us today and and again look forward to seeing you in the future. Thanks, everyone.

Thank U. Today's conference has now concluded. We thank you all for attending today's presentation. You may not disconnect your lines.