Q2 2019 Earnings Call
Hello.
And well go to the Wesbancos second quarter 2015, earners earnings and the West Bank Old line merger conference call.
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I'd now like to turn the conference over to Jonathan. Please go ahead Sir.
Thank you Keith.
Good morning, and welcome on today's call. We will first briefly review, what's Banco Inc.'s second quarter 2019 earnings.
And then discuss the proposed with Banco Inc. low old line Bancshares Inc. merger.
Leading the call today are Todd Austin, Wesbancos, President and Chief Executive Officer.
Bob Young with Bank Executive Vice President and Chief Financial Officer.
And James Cornelissen old lines, President and Chief Executive Officer.
Following the opening remarks, we will begin the question and answer session.
With Banco second quarter, 2019 earnings release, which can hate which contains consolidated financial highlights and reconciliations of non-GAAP financial measures.
Was issued yesterday afternoon as was the press release and associated Investor presentation, providing details of the proposed merger.
Both both of these documents are available on west Banco Dotcom.
This presentation contains certain forward looking statements, including certain plans expectations goals and projections.
Including statements by the benefits of the proposed merger between West Banco Inc., an old line Bancshares, Inc.
Which are subject to numerous assumptions risks and uncertainties.
In addition, the presentation to which we will be referencing today was filed last evening as part of the form 8-K and posted to Wesbanco Dot com.
Further we call your attention to pages, two and three of the presentation, which contain further details on a penny more information about the proposed merger and other important disclosures.
Actual results could differ materially from those contained or implied by such statements for a variety of factors, including.
The businesses of old West Bank going online may not be integrated successfully or such integration may take longer to accomplish unexpectedly.
The expected cost savings in any rental revenue synergies for the proposed merger may not be fully realized within the expected time frames.
Disruption from the proposed merger may make it more difficult to maintain relationships with clients associates or suppliers.
The required governmental approvals for the proposed merger.
May not be obtained on the expected terms on schedule.
All lines shareholders may not approve the proposed merger.
Changes in economic conditions movements in interest rates competitive pressures on product pricing and services.
Seth and timing of other business strategies, the nature extend and timing of governmental actions and reforms.
And extended disruption a vital infrastructure and other factors described the West Bank goes 2018 annual report on Form 10-K , all lines 2018 annual report on Form 10-K .
And documents subsequently filed by West Bank going online with the Securities and Exchange Commission.
All forward looking statements included in this call and associated presentation are based on information available at the time of the call and presentation.
In the West Bank go nor old line assumes any obligation to update any forward looking statement.
I would now is in the call over Todd Clossin, What's Bancos, President and CEO Todd.
Thanks, John .
Hi, good morning, and thank you for joining us on today's call. We're going to review our results for the second quarter 2019, as well as discuss the proposed merger with online Bancshares, Inc.
Both of which were announced yesterday evening.
This is an exciting time in the measured and thoughtful evolution and strategic diversification of West Bank.
Our results for the second quarter demonstrate our diligent focus on credit quality profitability.
And positive operating leverage to ensure a strong organization for our shareholders.
The proposed merger with old line is an example of the continued solid execution on our long term growth strategies.
We are pleased with West Bank goes performance during the second quarter of 2019.
The successful execution of our growth and diversification plans as enabled less banco to transform into an emerging regional financial institution.
Build upon a century old trust business and a 150 year old community Bank.
During the last three years, we have significantly diversified our institution into new higher growth markets with great demographics, while maintaining a crystal clear focus on expense management.
And credit quality.
As we mentioned last quarter, we continue to see improvement in certain lending headwinds we experienced during the latter half of 2018.
The targeted reductions in our indirect consumer portfolio related to its risk return profile have ended in fact, we reported 2% year over year organic growth in this category during the second quarter 2019.
Our home equity lending continues to be under pressure, primarily due to higher interest rates and the impact of last year's tax reform legislation.
Residential mortgage continues to be a bright spot for us as both total production in the pipeline are up significantly year over year resulted in strong quarterly mortgage banking fee income and a 2.8% year over year organic growth in the one to four family mortgage loans, primarily jumbo in private banking loans held on our balance sheet.
Commercial real estate pay offs experienced during 2018 have continued to moderate.
And are approaching a more normalized level.
During the second quarter, we saw strong production across our commercial loan categories and our pipelines remain solid.
Well, we typically stressed the importance of you in loan growth over a rolling four quarter period, I'd like to discuss our sequential quarter loan growth.
We continue to see stabilization across loan categories. As we generated total loan growth on a sequential quarter basis of approximately 1% or roughly 4% when annualized which was led by a 2% sequential quarter growth in the Cnine category.
The strength of our lending teams are robust pipelines and the positive early response to our newly launched online lending application capabilities supports our confidence in our ability to deliver low to mid single digit loan growth over the long term.
Lastly, we continue to bring additional talent in our organization to ensure our success is an emerging regional financial services institution.
During the last few years, we've made strategic leadership hires in our residential mortgage lending program.
Our retail franchise, and our securities and insurance businesses.
These exceptional leaders have and continued to transform their respective businesses to ensure west Banco has continued success as we grow.
Furthermore, we recently announced the hiring of our new Chief marketing officer, and individuals who brings a wealth of banking and marketing experience to west Banco from a large national bank.
His experience and insight will take our marketing strategy to the level needed for a multi state financial services institution.
As we work on being more proactive in integrated with our brand across our diverse geographies and business lines.
I'd now like to turn the call over to Bob Young our Chief Financial Officer for an update on our second quarter's financial results Bob.
Thanks, Todd and good morning to you all.
For the three months ended June Thirtyth 2019, we reported GAAP net income of $44.8 million and earnings per diluted share of 82 cents as compared to $33.2 million.71, respectively in the prior year period.
Excluding after tax merger related expenses from both periods net income increased 19.9% to 44.9 million and earnings per diluted share increased 2.5% to 82 cents, reflecting the additional shares issued for last year's two acquisitions.
The six months ended June 32019, we reported a GAAP net income of 85.2 million and earnings per diluted share of $1.56 cents as compared to 66.7 million dollar and 47 cents per share respectively in the prior year period.
Once again, excluding after tax merger related expenses from both periods net income increased 23.2% to $87.7 million and earnings per diluted share increased 1.9% to one dollar and 60 cents again, reflecting the additional shares issued for the acquisitions.
As Todd mentioned, we continued to realize stabilization across several loan categories. During the second quarter, which led to 0.9% loan growth on a sequential basis.
Total loan production was up from both the prior year quarter as well as the first quarter of this year.
Residential mortgage originations continue to be strong and the current lower interest rate environment as they were up 15% year over year, driven by home purchases and construction across our footprint as the expansion of our mortgage origination teams continue to take market share as well as our new Kentucky based origination team.
The strength of our deposit franchise has helped to maintain our loan to deposit ratio and the 87% range as well as a profitability by controlling our funding costs.
Our total deposit funding costs increased 11 basis points during the last 12 months and just 15 basis points. During the last five years. Despite nine increases in the federal reserve boards target federal funds rate.
The net interest margin for the second quarter of 2000, 2019 increased 24 basis points year over year to 3.67% while for the six month period. It was 3.68% of 27 basis points over last year.
Purchase accounting accretion from acquisitions benefited the second quarter net interest margin by approximately 18 basis points, which included three basis points related to acquire acquisitions impaired loan payment as compared to 12 basis points in the prior year period.
Excluding purchase accounting accretion we report a core net interest margin of 3.49% for the second quarter of 18 basis points year over year and stable on a sequential quarter basis.
For the quarter ended June Thirtyth 2019, noninterest income increased 33.1% from the prior year to 31.2 million driven mostly by the farmers capital acquisition.
Net securities gains reflects a $2.6 million gain from the second quarter sale of our ownership position of visa class B common stock.
Other income increased $1.7 million, primarily due to an increase in payment processing fee income from a business inherited from farmers capital as well as loan swap fees as commercial customers take advantage of this product in the current rate environment.
Furthermore, noninterest income for the six month period increased 11.4 million or 24.1% year over year, primarily driven by the first century and farmers capital acquisitions last year.
We continue to demonstrate strong profitability and positive operating leverage through successful execution of our strategies.
Focused expense savings associated with the farmers capital acquisition began after the February branch and data processing conversions.
With the majority of the anticipated 2019 cost savings related to personnel having occurred by the second quarter.
We remain on track to achieve the previous previously announced 2019 cost savings associated with the F.K. team merger.
Excluding merger related expenses noninterest expenses for the second quarter of 2019 increased 13.7 million or 23.6% compared to the prior year period due to the farmers capital acquisition and their associated retained staffing locations.
After consolidating 12.
Kentucky locations into six.
For the year to date period noninterest expenses, excluding merger related costs increased $30.7 million or 27.3% year over year, reflecting the first century and farmers capital acquisitions.
Our underlying our underlying credit fundamentals continue to be reflective of our strong legacy of credit and risk management.
Our credit quality ratios remained strong during the second quarter as we continue to balance disciplined loan origination in the current environment with our prudent lending standards.
The provision for credit losses for the second quarter was 2.7 million, reflecting growth in the loan portfolio, resulting in a triple that held steady with year end as a percentage of the total loan portfolio.
And annualized net loan charge offs to average loans were just five basis points for the second quarter.
Now I would like to provide some current thoughts on our outlook for the remainder of the year.
Which remain fairly consistent with our outlook provided on last quarter's earnings call.
Since we do remain somewhat asset sensitive we are not immune from the factors that are affecting net interest margins across the industry, including a current very flat spread between the three month T Bill to the 10 year Treasury.
And an overall low longer term rate environment.
We currently now anticipate to 25 basis point federal funds rate decreases during the second half of 2019.
Which will have a slight negative impact on both GAAP and core net interest margins.
We still anticipate purchase accounting accretion to be in the mid teens during 2019.
Declining at a pace of one to two basis points per quarter.
Thus further reducing the stated net interest margin.
We continue to expect our overall credit quality measures remain strong during 2019 and anticipate our effective full year tax rate to be approximately 18% to 19%.
As a reminder, during the second half of 2019, we will begin to incur the impact from the Durbin Amendment on interchange fee income.
Which we currently anticipate to reduced fee income by approximately two and half to $3 million per quarter.
And that will also have a slight negative influence on the efficiency ratio.
I will turn the call back over to Tom.
Great. Thanks, I appreciate that.
Our long term growth strategy is focused on several key pillars talked about this before building a diversified loan portfolio with an emphasis on commercial and industrial.
Residential mortgage and home equity lending.
Increasing fee income as a percentage of total net revenues over time.
Maintaining a high quality retail banking franchise and franchise enhancing acquisitions.
These pillars would not be possible. They were not built upon our two strong legacies of our franchise an unwavering focus on delivering positive operating leverage while also making necessary growth oriented risk prevention investments in maintaining our strong culture of credit quality risk management compliance principles upon which our company was founded nearly 150 years ago.
Furthermore, the inherent strength of our diversification and growth strategies is how the components complement and support each other to ensure success and profitability regardless of the operating environment.
The proposed merger with online brings together two high quality institutions with disciplined risk cultures and strong customer focus.
Align is a strong performing community based financial institution with excellent credit quality and a focus on commercial lending, which shares our commitment to client service and community banking.
We're pleased to be able to partner with them and provide the customers of old line with a broader array of banking services, including expanded commercial and mortgage lending capabilities as well as a myriad of wealth management solutions.
Before we review the slide deck.
I'd like to provide aligned CEO and president Jim core Nelson the opportunity to say a few words. In addition, he'll be available to answer questions. During the Q and a session Jim. Thank you.
Good morning, everyone.
I'm pleased to have the opportunity to speak with you all today.
We are excited about our merger with Wesbanco and becoming an integral part of it is nearly 150 year history as a community bank.
We expect to is the ideal partner for aligned.
Combined with treating people right their history of solid execution.
On their operation and growth strategies has led to a strong track record of operational performance in merger success.
During our 30 years old line has grown from a single branch office to 37 locations and 10 lending offices with more than 3 billion in total assets.
We are proud to say that our customers have grown with us and this holds true to our philosophy.
A partnership where we play a role in the development and prosperity of our great region.
The same can be said for our partnership with West Bank.
They are customer centric philosophy and focus on the success of the communities, which they operate is unparalleled.
Through this new partnership will be in a much stronger position to deliver improved value to our customers.
Through additional high quality products and services.
As well as growth opportunities for our employees.
The branch staff in lending teams, whom our customers have relied upon to be their local franchise advocate will continue to be there to help guide them.
In addition, I look forward to continuing my relationship as chairman of the mid Atlantic market for West Banco to help ensure a smooth transition.
And the.
Growing future and growth in the mid Atlantic market. Thank you Tom Thanks, Jim.
I'd now like to review the merger presentation, beginning with slide number five.
This merger is a strategic expansion with financially sound pricing.
The combination of our two strong companies significantly expands our franchise east into the mid Atlantic region, consistent with our stated acquisition strategy.
Online Bank shares is an approximate $3.1 billion institution headquartered in New Jersey, Maryland, with 2.4 billion in loans $2.4 billion in deposits 37 branches in 10 loan production offices.
This merger fits into our stated parameters of representing no more than 20% of our combined size.
Besides entering the state of Maryland, as the ninth largest financial institution.
This merger will gain us entry into the two fastest growing MSC stays in the mid Atlantic region.
Baltimore and Washington DC.
Both of which have great demographics and growth prospects.
In addition, pro forma total assets of approximately 16 billion will provide enhanced scale to help cover the costs associated with the Durbin Amendment.
And our infrastructure enhancements as part of crossing the $10 billion asset threshold last year.
The financial aspects the proposed merger our attractive with a greater than 20% internal rate of return.
Positive earnings accretion of 4.3% during 2020.
And 6.2% in 2021.
And the tangible book value dilution of approximately 3.8% is anticipated to be earned back in approximately 3.3 years and last but not least pro forma capital ratios will remain substantially in excess of the well capitalized guidelines.
On slide six is a summary of the key terms the proposed merger, which is expected to close during the next two to three quarters pending less banco and align shareholder and customer customary regulatory approvals.
This was a 100% stock transactions.
With the shareholders of align receiving 0.78 for four of a share of west Banco common stock for each common stock share of old livestock own.
This represents a total aggregate value of approximately $500 million based upon was bank goes closing stock price on July 22nd.
Upon completion of the merger.
Two current online directors Jim Cornelissen.
And Steve Procter are anticipated to join our board of directors and an advisory board for the mid Atlantic market will be established with Jim assuming the role of chairman of that Advisory Board.
Importantly, Mark some annual lines current Chief operating officer will join Wesbanco as our market President for the mid Atlantic market with other local leadership and key lenders also remaining in place.
In addition, there was an extensive due diligence process completed which included a review of 57% of old lines commercial portfolio as well as other internal document reviews with a focus on asset quality and bank operations.
As a result of this diligence various standard deal protections were built into the merger agreement.
Turning to slide seven.
You can see the diversified breadth of our footprint as a combined company, which radiates out from our willing headquarters within our preferred six hour drive time.
During the last three years, we have expanded west into Kentucky, and Southern Indiana, and now east in the Maryland, as we built strong market positions in economically diverse major markets with positive demographic trends.
As you can see all lines primary market area is suburban Maryland, including the dynamic in economically strong areas surrounding Baltimore and Washington DC.
On slide eight you can see how this merger meets our M&A criteria of gaining critical deposit share in our key markets of operation.
In addition to entry in the state of Maryland, with a top 10 market share. We also enter the important Washington, DC, Baltimore, and Lexington Park, and essays with strong positions.
On slide nine we highlight in more detail the strong demographics of the Baltimore and Washington, DC MSA days, including median household incomes.
Projected population growth and GDP, which makes these very attractive and high growth markets.
We believe we should be very successful in these markets through the retention of key management and personnel across all the lines footprint combined with our key advantages and Differentiators.
Our customer centric model as demonstrated by our better banking pledge and six consecutive outstanding Seery ratings will demonstrate our commitment to new customers and communities.
Our core funding advantage higher legal lending limit and Treasury management and other ancillary products will ensure the continued success of our new commercial lenders.
Further with the high incomes and associated wealth in the <unk>.
By company and the associated strong market positions across it.
This merger checks all the boxes of our stated M&A strategy.
Attractively priced and shareholder friendly.
A franchise enhancing institution within a six hour drive of our Wheeling headquarters.
Top positions in major metropolitan markets with good demographics and good prospects.
Strong management teams.
And a corporate credit and lending culture that meshes well with ours.
We have the expertise and experience throughout our organization to successfully manage in emerging small regional financial institution.
Many of our senior executives, including myself have experience at large regional lenders and fast growing markets.
One of the keys to this merger is more than just the retention of Jim Cornelissen and Mark Semanie.
In their key leadership roles at the retention of alliance talented customer facing employees.
Our newest customers will be able to continue to rely upon the individuals they have come to know and trust.
From the employees in the branches to the various specialists to the lenders.
This is a great opportunity for us to enhance the customer relationships through new and expanded products and services as well as providing enhanced career opportunities for our newest employees.
In fact, this will represent the sixth consecutive merger, where key top executives joined and stayed with west Banco in a leadership or advisory capacity, whether as a member of the board of directors.
Leading the market advisory board or serving as a market president.
This is a great calling card as it shows their passion and their belief in our ability to succeed.
Turning to slide 11.
In addition to having strong market positions and diverse major markets, we strive to maintain well balanced loan and deposit distributions across our footprint.
This slide demonstrates this focus on broad and balanced market distribution.
On a pro forma basis, Maryland will comprise approximately 24% of our loan and 22% of our deposit basis.
I'd like turn the call over to Bob Young to discuss the financial comparison, as well as deal pricing and assumptions up.
Thanks, Todd to secure additional notes and we'll get on the queue at AG on Slide 12, our summary financials for West Bank on old line Bancshares for the six months ended June Thirtyth 2019.
Hi, as you can say from this slide there our sympathies are similar and compatible organizations that are well managed has strong return and efficiency ratios and that provide many opportunities for growth online will represent about 20% of the combined organization.
Upon completion.
Furthermore, their financial performance is in the top quartile for their peers and lines up nicely with our own performance.
As Todd mentioned this is a strategic expansion with financially sound pricing.
So turning to pricing on slide 13.
Here are the metrics and key modeling assumptions for the proposed merger as Todd mentioned the deal has an internal rate of return greater than 20% well above our cost of capital hurdle. It enjoys positive earnings accretion and meets our goal of having tangible book value dilution earn back of approximately 3.3 years.
The price to tangible book value per shares 177% with a very reasonable price 2019, and 2020 analyst EPS estimates of 13.4 times and 12.2 times respectively.
And the core deposit premium up 12.6%.
As this is a new market for us we anticipate operational cost savings of approximately 31% with approximately 70, 675% phased in during 2020 and the remainder in 2021.
A majority of these savings will be from back office operational consolidations.
As there is no branch overlap between our markets currently.
There are estimated merger related expenses of about 30.4 million.
We have a gross loan credit Mark assumed a 24.4 million, it's about 1% of loans of which 75% is estimated to be accretable and a core deposit intangible assumption of 2.25%.
Amortized on an accelerated manner over 10 years.
In addition, you can see the various estimated fair value adjustments associated with the modeling most of which are informed by old lines first quarter fair value disclosure in our 10-Q.
Actual fair values will be determined at closing and we intend to redeem all lines outstanding Trups.
I'd also refinance at a cheaper cost their subordinated debt.
In late 2021.
As Todd mentioned opportunities for our fee income businesses, such as wealth management and Treasury management services were not factored into the model and do indeed represent additional revenue synergies for long term success of this transaction.
We also didn't factor in revenue synergies from reducing their more expensive wholesale funding, but we do intend to reduce.
Certain expensive borrowings and institutional deposits initially with investment securities and invested cash offsets.
There should be relatively close to the cost of liabilities, we paid off.
Turning to slide 14.
Comparing to relevant deals both nationwide and regionally.
For the regional peer select transaction since January 17 targeted Midwest based institutions with assets greater than $500 million, while the national peers focused on all stock transactions. During the last 12 months the targeted institutions also with assets greater than 500 million.
And as you can see from these ratios and numbers, we are acquiring a strong financial institution that is consistent with national and better than regional median return ratios and the pricing on this transaction is in line with comparable deals.
Finally on slide 15 pro forma capital ratios are detailed here. These projected ratios at closing indeed remain very strong.
With a tier one leverage ratio of 9.5% tier one common at 12.6% tier one risk based of 12.6% and total risk base to 14.8%. We're also projecting a 9.6% tangible common equity ratio.
I would remind you that these pro forma capital ratios assume that our remaining $130 million of existing drops will be treated during the quarter of consummation as tier two capital Todd back to you for the conclusion.
Sure.
And just to turn to slide 16.
In summary, we're excited about our merger with online.
This is a strong performing franchise with excellent credit quality commercial lending focus a top flight management team and respected physician within its communities.
During the last three years, we have significantly diversified our institution into new high growth markets with great demographics will now spans six states across the Midwest mid South and now the mid Atlantic region as a top 10 financial institution in the state of Maryland.
This is an appropriately price transaction that is strategically and financially compelling and continue to diversify our franchise and prominent major metropolitan markets.
Furthermore, there is an opportunity for increased revenue as West Bank was larger balance sheet provides higher lending authorization abilities as well as introducing additional products and services, including wealth management to the region.
We pride ourselves on delivering large bank capabilities with the community Bank field, which is one of the reasons when a key reasons. We were recently named the number seven best Bank in America by Forbes magazine.
Lets Banco has a long history of strong expense credit risk management experienced management, they can execute on our strategies.
Solid technology and back office expertise.
Good capital and liquidity strength.
We have a proven track record of successful acquisitions that meaningfully expand our franchise and its growth opportunities and we're excited to continue this trend with the successful integration of old line Bancshares.
We're pleased to welcome the customers and the employees of aligned to the West Banco family.
We are now ready to answer your questions. Operator would you. Please review the instructions.
Yes. Thank you we will now begin the question and answer session to ask a question you May Press Star then one of your telephone keypad.
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This time, we will pause momentarily to assemble the roster.
And the first question comes from Catherine Mealor with KBW.
Thanks, Good morning, and congrats.
Thanks, Ken.
All right maybe first with.
The margin outlook. Thank you Bob for your.
Im commentary on how you're thinking the margin liquid color Ray alluded to see if we could take that margin outlook and layer in old line and.
Should we think about.
We intend to leverage.
Thank you.
Can you queue Thursday loan deposit ratio in old line over 100 of high loan to deposit ratio in at any leverage that you have there to improve the margin maybe you can lower sort of all lines higher cost deposits and then better leverage.
Your balance sheet as well.
Complementary handle that.
Well capture new contract awards out of my mouth has pretty good summary of what we intend to do.
In answer to your loan to deposit question will be about 91%.
On average deposits not a 92% using period end deposits as a measuring base.
Certainly the opportunity the opportunity on the wholesale borrowing side. We think is is significant.
We also recognized Jim and Mark have done a great job in attracting both public and institutional deposit customers to their fault.
And I've I've indicated on prior calls Thats, an important strategy for us as well.
Just in the public funds arena, we have.
Between 1 billion and 1.1 billion.
Currently.
On our balance sheet, so we're going to continue to work.
Fat strategy for them and hopefully by melting.
Our pricing strategies together.
With their relationship management capabilities.
We'll be able to.
Meld that together successfully on on the pricing side going forward and we think we'll have an opportunity to do that as old line would have.
Just with the upcoming.
Rate decreases that are projected in our model and by the Federal reserve.
Turning on to the margin and I guided.
A two a little bit of a decrease in our core margin.
Going forward as well as the GAAP margin just from the standpoint of.
Continuation of reducing our purchase accounting accretion going forward by a basis point or two each quarter going into 2020 and excluding.
Through the end of this year before Cecil or any additional accretion from impaired.
Payoffs impaired loan payoffs like we experienced in the first half the year.
In answer to your question about what does it look like when you put the two together.
We're anticipating that you're going to have somewhere around.
$2.5 million to $3.9 million of Accretable income on a quarterly basis in that first year call. It 10 10 million with the caveat that obviously.
Marks and rates terminations and accretion going forward will be based upon.
Where the interest rate market is as of closing as compared to.
The marks were determined based upon really disclosures that old line made with their first quarter 10-Q.
And so that number the two most significant that impact the margin going forward of the loan Mark.
As the Accretable portion alone Mark I should say as well as the CD book.
We're anticipating that we will see a slight increase in our base case margin keeping in mind. The base case margin for us will drift a little bit.
Lower.
Based upon my remarks earlier about the enhanced purchase accounting and really a margin despite their higher cost of deposits its lines up fairly close to our core margin margin by indicates to me and we've done a.
A high level analysis of this that will be a few basis points mid single digits as what I would guide to.
On the margin in the first full year after the acquisition.
Does that answer the two questions I think you had yes, yes that was perfect in the $2 million to $3 million accretion income that was an annual number.
Quarterly quarterly 10 million, it's 10 to 11 million.
Annually as what we're looking at right now.
Sub debt.
Borrowings there is not much there most of those are short the CD book and the loan book.
Okay great.
And then maybe one follow up question is just on growth so.
I think it was kind of low single digit growth in online has been more as high single low double digit grower.
You guys in certainly this these are some really nice high growth market that youre going to enter can we is it fair to assume that you will be comfortable allowing for the old line franchise to still grow at the level that they have grown or do you feel like that growth rate may pull back just a little bit as you kind of push that you.
Thanks.
No no we don't anticipate pulling back at all again, and it will be 20% greater than 20%.
The loan growth going forward, so very important to us that the lenders are not only able to do the things. They are doing today, but we'll be able to do more good to get a bigger balance sheet and we can take bigger bites of particular deals and a lot of deals are ourselves. So we don't anticipate that pulling back at all we want to give them the lease to move forward fast to the kind of things that they've been they've been doing credit quality has been excellent. We spent a lot of time together and we know those line up very very well, so I think from an underwriting perspective.
The deals they do the kind of deals we do expertise on both sides of the equation all lines up really nice so.
The company has a great risk profile and we've got a great risk profile. So.
We're not we're not going to pull that back at all so I would tell you the low to mid single digit as you know I've been saying that for the last couple of.
Couple of years, maybe that maybe that's a little a little conservative.
Given the acquisitions in Kentucky, and now out here in the mid Atlantic markets, but.
I like to be conservative and kind of what we put out there but.
Don't read anything into that that we're going to we're going to change with these guys are doing.
Okay, great. Thank you so much and congrats.
Thank you and the next question comes from Russell Gunther with da Davidson.
Hey, good morning, guys.
Wind rose.
Actually I had a couple of questions on the on the quarter reflected.
Bob I wanted to follow up on the comments you made about the cost saves you've recognized on the most recent deal I think you said you've got.
Majority of the personnel there but.
Is there additional cost savings that you could quantify for us that you expect in the back half of this year and early 20.
Russell, what we've said is that 75% of the costs should be achieved this year and the rest next year. Some analysts supply that is though thats a 100% as of April the first others.
Our feeling that enter their model with a 100% achieved as of January Onest 20.
The kinds of things that we have yet to achieve our some software and equipment redundancies that we will be terminating over the course next few months.
Think about document retention a disaster recovery.
Those kinds of things and uncertain.
Software systems that are duplicated until sometime later this year as applications are consolidated and turned off obviously, we achieved the core conversion back in February but there are some some lingering systems that.
Where there some duplication that will occur.
Well, we will eliminate over the rest of the year telecommunications another area that we typically get a pretty significant cost savings given our very cost efficient.
Methodology, using the internet and networking capabilities.
That that has yet to be realized.
We have some supplies costs some printing costs those areas that will be recognized.
Professional fees were higher in the second quarter for us some of that remains from their platform and so those will terminate.
Or reduce over the back half of the year.
So those are the kinds of things we have yet to get.
We did you can see the numbers in the press release, we did see a reduction.
Between the third quarter and the first quarter of 2019 on personnel.
Yes, there were basically 60 to 70 individuals from farmers.
That.
But left the organization either through attrition or other large cuts after the conversion.
What you see this quarter in terms of an increase is really related to summer summer health that we typically get.
So in terms of the personnel cost savings with just a couple of exceptions.
And a little bit on the benefit side, that's pretty much all achieved.
Here by end of first quarter early second quarter.
I think I answered both of your questions do you have a follow up was that satisfactory.
No you got it Bob I appreciate that.
And then just to circle back to your comments on the tax rate for the back half of this year.
Is there a potential for any tax credits to lower that are as we look into 2020.
Any abella avail anything available to you to to lower that rate.
Todd I will take that if that's okay.
Yes go ahead Bob.
So recall, we had a $40 million award of new markets tax credits last year, an additional 25 billion this year.
Really we have yet to roll those out in any significant way and and so I expect to see in both our budget.
Expectations for 2020, as well as on a realized basis.
Additional opportunities to deploy those new markets tax credits through our main development Corporation in our rural markets.
And and so that that would give us as we roll those credits out and they become loans.
In a low to moderate income areas or in rural markets.
The first year credits, 5% the lifetime credit is 39% the offsetting a little bit.
Lower interest rate to the customer or other concessions. So we have that.
We'll have a little bit more in the low income housing tax credit side as we continue to be active there mostly for CRH purposes.
And as we mailed the two state local invisible portfolios there may be some opportunities there as well recall, we sold some muni securities the first quarter and we'll be continuing to replace those through the back half the year. Those are the three main areas that I can think of at this point.
That would cause us.
Two.
Have a slightly less.
Rate next year than than where we are this year between 18 point to an 18.4% on a year to date basis.
Very good okay. Thanks for your help with those items I want to switch back to the deal if I could so.
Yes, Todd appreciate your comments on the growth profile that old line.
And the pro forma going forward I guess could you just give us a sense for what that growth rate.
Would be in their in their market.
Is that a is that a mid single digit for them that you'd expect and then.
Within that guidance is there anything you know understanding credit quality is fairly pristine. There is there anything you'd rig ring sense is you want to manage lower.
I would say.
No there's nothing that we're looking at it from a ring fence Bruce.
And like that.
Yes, you get with the market gives you are right I mean as I think both organizations are the same in terms of.
Credit quality and.
The kind of deals.
Things like that so.
That some that some quarters like I look at things on a rolling four quarter basis, some quarters that could bump around a lot. So you can see some quarters up in double digits in some quarters in single digits, but I would think in Jim's here with me he may want to comment on it but I can see that.
The future looks looks like the past excluding merger related type of attrition that occurs from past acquisitions.
I would expect the growth rate here to be very similar to what it was in the past on the lending side I'd be disappointed if it's not maybe even maybe even greater because of the bigger balance sheet and ability to take bigger pieces of deals.
Okay, all right very good guys. Thanks for taking my questions.
Sure.
Thank you and the next question comes from Casey Whitman with Sandler O'neill.
Good morning.
Good morning.
Congrats on the deal I, just I want to be clear on the accretion guide you guys gave a two and half 3 million quarterly is that just the online piece. There is that the total accretion expected, including the accretion you are getting from previous deals.
Since the old line pace.
All right, Okay, Okay, great and maybe can you expand just a little bit more on the specific kind of fee income products that you think there's going to be the most opportunity for you guys in the mailing market.
Yes, I would say you know usually the first one that ramps up a little bit quicker. It's it's more on the lending side private banking.
Because against a pretty unique private banking products.
Physician's medical professionals and other professionals accounts attorneys I mean, it really some very attractive products that were seeing really significant growth on and some of the Kentucky markets as we introduce those over the last over the last year or two side I would see that early on.
I would also see early on swap fees.
We generate significant revenue in swap fees and I think that something that could be introduced to the market here fairly fairly quickly as well too.
I would think our insurance products through West Bank those securities as something Thats typically sold through our branch network and that's going to be significantly bigger with the 37 locations out here.
I think when you look at.
License bankers in the branches, but also.
Brokers that we got.
Rule that part of our program out here as well to anything that can generate some significant revenue for us the trust these little longer term cycle and then.
You got to build that overtime and.
They don't have that business here a bit little line.
So that's something that incrementally takes time to to build that they've got great relationships with great customers, who have those kind of needs. So I would anticipate that we would have the ability to grow that overtime as well too. So those are the things that come to mind right right off the bat that I think would be would be additive to that again, none of those none of those are in your in the model that we've been planning for the ability to to kind of as we've gotten bigger and the processes in place and the programs in place to pretty quickly scale. Those businesses. So that we're not going to try to figure out how to do it we've already got the playbook, we already know and we just we just roll it out to the to the markets and we'll start training on those and adding staff in.
Slipped areas, maybe in the branches and things like that too.
Focus.
More on home equity products and things like that they've been a great residential mortgage lending division here already.
We're going to be adding additional products to add to that I was talking to some deploys done here. This morning about that.
That will obviously increase lending capabilities, but also to extend some of that's in the secondary market would increase fee income as well too.
Got it helpful. Thank you.
Maybe just one more bigger picture as you look at your pro forma map here several markets.
You could have some opportunities any kind of skipping over so for example, if you look at northern Virginia. It just longer term any plans or hope to expand in that market or any others.
Yes, Adam acquisition or de Novo.
You know, we're pretty paced measured in terms of how we move forward and we did two mergers last year to get up in over 10.
Obviously, there is some real economics here to get to 16 or so.
In terms of covering some of the cost of covering 10, so weve been pretty acquisitive here in the last.
Couple of years, because there were some financial drivers that were important to want to do that.
We're not in any big hurry, a race to get to a certain size I want to make sure. We're we're delivering earnings per share value to me that's the one biggest determinant.
As we grow in size, we've got to continue to deliver earnings per share. If we just deliver a bigger balance sheet and then help anybody.
We need to be able to deliver earnings per share growth. So if we find opportunistic opportunities that can do that like this then we would continue to move forward on on that but not anything that would ramp up of pace or anything like that but that market with very much within a six hour drive of willing would very much be in focus.
And you were calling this the mid Atlantic region, Jim's got tremendous contacts and connections in this marketplace as well too.
So.
Why's of me to tap into his expertise.
With the banks around here over time.
So no were not coming here to do this and then be done but I also don't expect to do anything in rapid fire succession or anything like that this is a big merger for US 20% of the combined size and we will make sure you get it right.
Got it thank you for taking my questions.
Sure.
Thank you. The next question comes from Austin, Nicholas with Stephens.
Hey, everybody good morning.
Congrats on the deal.
Yeah I appreciate the commentary on the margin combined with old line.
I guess as I think about the core margin at old line around that the three.
Mid 300, Thirtys level kind of as reported today, and then year isn't that kind of or west bank or the the kind of 350 in trickling down to that maybe lower three 340 is as we as we exit the year.
Oreo or mid three Fortys can you maybe maybe just walk me through.
I guess, the how to think about the impact to that old line margin.
From the Trups redemption, and some of the balance sheet restructuring that Ken.
Can get you to your commentary of maybe the slight increase on a base case on the NIM.
I'll, let you go ahead and kind of continued margin questions you handle that.
Yes, and and Austin.
The the model includes about $350000 a year in savings I believe on an after tax basis, so associated with those 6 million our trups redemption, they've got that marked at about.
4.2, 4.3 million right now.
And then.
You will note that they issued sub debt here in 2016 course, we have some sub debt as well that we inherited from why CB unrelated to the Trups sub junior its regular sub that five year repricing on both of those tranches happens to be close to one another at the end of 2021, we'd look pretty opportunity to do something at that point in time.
That at least on their side they are 35 million.
Would be projected to save us several hundred thousand dollars.
Just because we could issue at a lower rate of course depends upon the market at that time. So those are a couple of numbers.
That actually we have in the model, but I don't have and the.
Estimate of accretion going forward my estimate of.
Margin.
Related.
The increase related to the accretion as well as the combination of the two balance sheets was that few basis points and it did not include.
The trups redemption or the sub debt refinancing and.
I guess two or three years from now so.
But we do have that in the merger model relative to the.
Overall earnings accretion that as expected hopefully that was responsive.
Was there another question.
Yes, I guess, maybe that's that's pretty helpful. It's just so the commentary on the slight increase on the base NIM that you mentioned that kind of referring to the reported NIM for West bank or is that okay, not the core and with with purchase accounting.
Got it thats perfectly because that again, that's using a pro forma as of.
We're just update us as of 630.
And it's consistent with what we have put together at 331 with the two organizations as well.
And it is with that 10 to 11 $10 million to $12 million worth of.
Total accretion as planned the first quarter, obviously that would come down.
Throughout the four quarters and then into that following year, it's kind of like a level set as of day, one using a pro forma as of 630 and again. The reminder, here is that our base case will come down.
A couple of three basis points before the end of the year.
And moving into next year, and probably there as well as well in that current interest rate environment.
Understood.
Thats really helpful. I appreciate that.
And then.
I guess just to the EPS numbers that are being used for the EPS accretion.
Estimates is that just consensus 2020, and 21 estimates or are those something different.
It is.
And then with the long term growth rate applied after 2020.
Since neither one of us provide guidance we think.
The safest thing to do is just to use in the model for those first two years 19 and 20.
And.
Yes, those first two years the consensus and then apply a long term growth rate.
Which for them is.
8% going forward.
We're a little bit.
Okay. That's really helpful. And then Todd I know in past deals the company has been pretty successful with.
With their act with the acquisitions.
Especially retaining employees and really.
Really doing a great job with that.
And I know part of that part of that strategy has involved bringing some lenders over the wall and putting retention agreements in place and I think you've disclosed in the past.
Is that is that something you I guess, we're able to do here just any commentary on maybe.
The overall kind of retention strategy.
The quick answer is yes same as we've done in the past with retention agreements. So.
Happy to to get that done and get that in place prior to announcement.
I think that the business model.
With the old line and less Banco on kind of the way, we handle lending and the way we approach things and even operationally how we do things is very similar.
I think in our past acquisitions.
Things have gone gone well.
But here is it just from an assimilation standpoint.
It's really nice.
Again, not much in the way of difference in terms of what the lenders, obviously, new platform and some new processes, but I think the transition should be very very seamless.
But we do have we do have those agreements in place.
We will work to probably get some some more.
Different levels of the organization post announcement.
Okay, Great and then just on the close date can you remind I know it says a couple of quarters or two in the.
In the release, but can you maybe just give some more details on when you'd expect to close date, and what kind of what influence that.
Yes, I mean look at our historical track record, we closed deals around four months or so after announcements obviously got a shareholder vote on both sides here, we're going to get to the regulatory approvals and all that so.
I would say that that say the next several quarters because it could be four months integrate into the holidays Thanksgiving Christmas that flow into the beginning of next year.
Depending on how things go so want to provide a little bit of.
Of leeway in there I see a lot of banks talk about a year, but a year in their press release, we're not doing that.
That would be a world outlier for us So I would think towards the end of this year beginning of next year.
Got it and then just one last one if I may on the on the tax rate I think you made some comments on what you'd expect the tax rate to be.
In.
I didn't recall it if you made an expectation for tax rate pro forma with bold line.
I did not say we've done some work on that.
We think adding in the Maryland state income tax.
And our federal.
Items would would get us basically in that same 18% to 19%.
Rate that we talk about for ourselves.
I mentioned, where we are today team today team for but our overall guidance for this year is 18 and 19.
It will probably move up a little bit closer to 19 on a pro forma basis, just given the Maryland state income tax rate is higher than our other states.
Sure makes sense, great well, thanks for taking my questions and congrats again guys on the tail.
Thank you.
Thank you and the next question comes from Steve Ross with B. Riley FBR.
Good morning, guys.
Hi, Steve.
Yes, congratulations on the deal here I guess, a couple of questions just to follow up.
Obviously, it's a large deal takes you up to over 15 billion in assets wondering does this raise the minimum size of a deal you will consider in the future Todd.
Yes, I mean, we said 20% of combined size, so as we've gotten bigger I think that.
That's fair that's fair comment.
We like to be able to.
A series of mergers and things like that so we do a merger we want to make sure. It's big enough to have an impact costs everything else in time and management focus everything required we want it to be sizable enough coming into the new market. Like this you want to make sure you're on.
We're partnering with.
With the team and the bank is going to be big enough to defend and grow.
And Thats clearly what we have what we have here so.
I would say that 20% of combined size is probably a rule of thumb.
For us going going forward.
I think thats, our comfort comfort level.
Okay. That's helpful. And then I was just wondering in terms of how this transaction came together.
Was this a negotiated transaction or was this.
But.
Yes, we will outline a number of things in the us for as we kind of go through that process.
Going to defer to that point at night, if I could.
Okay.
And then on loan growth you are obviously pretty good I'm, sorry, if I missed it but just wondering.
Geography, geographically, where are you seeing the strongest longer than particular in a scene I portfolio.
In legacy Wesbanco.
Yes.
Yes, we're seeing it.
Importantly in pretty much all of our markets is really nice to see in.
In local and some fairly nice xcede very sizeable.
I see and I relationship just here in the last few weeks.
Kind of deal that that would have been well north of.
The three times worth of the lending limit of your community Bank the bank on US here. So we're starting to see traction in.
The the Kentucky markets.
Hence the United capabilities, but maybe not the size of transactions that we would do and we continue to do well in Columbus, and Cincinnati and in the Pittsburgh marketplace, who really get lending teams there. So.
See an ice pretty much been been across the board at least more borrowing on lines of credit.
This new companies are pretty cash flush.
And.
Kind of waiting a little bit I guess to pull the trigger on different investments that there that they're making.
Unemployment seems to be one of the bigger items I hear about more from.
On borrowers they can't get enough people to go into work on the next project to expand their business. So that impacts that an X amount of borrowing on lines of credit. So I'd like to see that change over time, but really can't think of a market, where we're not doing well.
On on Cninety routines and ran please.
Thank you very much that's helpful.
Thank you and the next question comes from Daniel Cardenas with Raymond James.
Hi, good morning, guys.
Congrats on the transaction.
Just one quick question as most of my other questions have been asked and answered in terms of.
The conversion Im sorry, if I missed this but when when do you expect the conversion to take place.
Tim probably be within two to three months post closing so.
Taking my comments on the closing of that.
60, 90 days after that for the conversion.
For themselves and then we can say we have the same core Jim just mentioned it to me, which is which is going to be helpful.
All right. So then the majority of the cost saves should then begin to hit after after the conversion is done correct.
Yes, I would think.
Late first quarter early second quarter.
At this point that it depends on the closing obviously.
All right that's it for me right now thanks, guys.
Sure.
Thank you that is all the questions. We have at the present time, we would like to return the floor to talk clause on for any closing comments.
All right. Thank you appreciate everyone's time today. This morning, we are transforming into this emerging regional financial institution, but were 150 year old bank and as I mentioned in 100 year old trust function as well.
The last three years, we've done some significant expansion very diversified into these newer high growth markets with really good demographics, and but we're still maintaining our focus on expense management and credit quality I think we've been pretty consistent since we've done what we see it. So we were going to do and stayed on that path I think were positioned well for continued success and we're excited about our growth opportunities.
Thank you for joining us today and look forward to seeing you at an upcoming investor event have a good day.
Thank you.
Conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.