WesBanco, Inc. (WSBC) Q2 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the WesBanco Second Quarter 2017 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Iannone, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Denise. Good morning and welcome to WesBanco Inc.’s second quarter 2017 earnings conference call. Our second quarter 2017 earnings release, which contains consolidated financial highlights and reconciliations of non-GAAP financial measures was issued yesterday afternoon and is available on our website, www.wesbanco.com. Leading the call today are Todd Clossin, President and Chief Executive Officer and Bob Young, Executive Vice President and Chief Financial Officer. Following the opening remarks, we will begin a question-and-answer session. An archive of this call will be available on our website for 1 year. Forward-looking statements in this report relating to WesBanco’s plans, strategies, objectives, expectations, intentions and adequacy of resources are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The information contained in this report should be read in conjunction with WesBanco’s Form 10-K for the year ended December 31, 2016 and Form 10Q for the quarter ended March 31, 2017, as well as documents subsequently filed by WesBanco with the Securities and Exchange Commission, which are available in the SEC and WesBanco websites. Investors are cautioned that forward-looking statements, which are not historical fact involve risks and uncertainties, including those detailed in WesBanco’s most recent annual report on Form 10-K filed with the SEC under Risk Factors in Part 1, Item 1A. Such statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements. WesBanco does not assume any duty to update forward-looking statements. Todd?

Thank you, John. Good morning, everyone. On today’s call, we will be reviewing our results for the second quarter of 2017. Key takeaways from the quarter are, our results were supported by continued positive execution against our balance sheet remix and lending diversification strategies. We continue to maintain our strong credit quality metrics, our experience in into the Kentucky and Southern Indiana markets is progressing very well and we continue to execute upon our previously announced $10 billion asset threshold strategy. We’re pleased with our results for the second quarter, with the three months ended June 30, we earn fully diluted earnings per share of $0.60 on net income of $26 million. For the six-month we earned fully diluted earnings per share of $1.19 on net income of $52 million. We continue to generate solid returns as demonstrated by our return on average assets and average tangible equity of 1.07% and 13.74% respectively. In addition, our consolidated and bank level regulatory capital ratios are well above the applicable well-capitalized standards promulgated by bank regulators and the Basel III capital standards. As we invest to become a large organization we remain focused on expenses and maintaining a strong efficiency ratio which we believe is the best long term measure of demonstrating balanced revenue growth and disciplined expense management. While our ratio may fluctuate from one quarter to the next, we’ve maintained it in the mid 50% range for the last couple of years. The prime example of this focus is our branch rationalization strategy. We’re proud of our financial center network and its dominant share in our legacy markets which are located in the Morrow, Marcellus and Utica Shale ranges. However, as I mentioned before, we review the bottom 20% of our branches annually due to put in place improvement plans or identify those for closure. Since the beginning of the year, we have announced the closure of two locations and the relocation of another to a more high profile location that allows for additional product offerings. Our long term growth is focused on five key strategies, growing our own portfolio with an emphasis on commercial and industrial lending, increase in fee income as a percentage of total revenues overtime, providing high quality retail banking services, generating positive operating leverage and expanding our franchise. Reflecting our loan portfolio diversification strategy and the continued maturation of our commercial lending hires we generated 8.8% year-over-year organic growth in total commercial lending which drove total organic loan growth of 4.1%. Furthermore, when excluding the impact of our decision to reduce the size of certain segments of our consumer loan portfolio year-over-year organic total loan growth was 5.7%. In fact, our loan growth compares favorably on both the year-over-year and annualized basis when compared to the June 28, Federal Reserve H8 data for domestically charged commercial banks. Lastly, we remain well positioned for 2017 and continue to anticipate mid single-digit loan growth. In addition, as demonstrated by the reduction in certain segments of our consumer loan portfolio we continue to manage the risk in return of our portfolio by allocating capital to our highest opportunity areas. An example of this is our focus upon the utilization of our existing financial center network to support our home equity lending products while de-emphasizing our indirect auto product which requires additional scale to compete effectively, continuous investment and demonstrates a lower risk return profile at home equity lending. One of the hallmarks of our company is our strong credit quality. We continue to maintain our past discipline of prudently managing loan growth and focusing upon the long term success of our company. We are in the eight year of our business expansion cycle and seeing the signs of relax lending standards within our markets. We intentionally give up a few percentage points of loan growth by not chasing those relax standard as we stay true to our credit quality standards and stay within the geographic boundaries of our franchise. Having said that we continue to invest in lending talent and products that enable us to grow and compete in the segments that we target. Our commercial loan origination to the first six months of this year increased 37% versus last year reflecting our acquisition of YCB and continued execution of our loan growth strategy. We believe that our disciplined approach to credit quality, products and talent development as well as our core deposit funding advantage will be key long term differentiators for WesBanco. Another hallmark of our company is our diligence and detailed focus on the successful integration of franchise enhancing acquisitions. Our expansion into the Kentucky and Southern Indiana market is progressing very well. We have been able to maintain a very strong team of employees while also building upon that team to recent hires and commercial banking and trust areas. The former CEO of Your Community Bankshares is our market President and the two YCB Directors we added to the WesBanco Board of Directors have been immediate contributors. Furthermore we continue to see lending, trust and wealth management opportunities in these markets. And what makes me most proud is that WesBanco recently received the top retail banking customer satisfaction ranking in the global market from a major survey company. A top ranking received while going through a data processing conversion from the merger. Congratulations to our Kentucky, Southern Indiana team as well as our overall conversion team on a job well done. Finally, we are executing upon our stated strategy for crossing the $10 billion asset threshold. There are no changes to our previously communicated plans. We expect to cross the threshold sometime over the next couple of years preferably through a franchise enhancing acquisition. However, we are prepared to cross organically if we do not find the right M&A opportunity. We continue to methodically make the necessary investments and feel that we are well positioned to cross from staffing, infrastructure development and CRA perspective. I would now like to turn the call over to Bob Young, our Chief Financial Officer for an update on our second quarter financial results. Bob.

Thanks Todd and good morning everyone. Before I get into details on our performance during the second quarter, I wanted to provide just a few key highlights. We are certainly pleased with our quarterly results which included continuing to generate strong loan growth in our strategic focus categories. We are investing in becoming a larger company while carefully managing discretionary costs to generate positive operating leverage. For the six months ended June 30, 2017, we reported net income of $52.2 million and earnings per diluted share of $1.19 net of merger-related expenses. Excluding these expenses from both periods, net income would have increased 15.7% to $52.5 million with earnings per diluted share up $0.01 to a $1.19. Year-to-date the return on average assets was 1.07% and the return on average tangible equity was 13.88%. For the quarter ended June 30, we reported GAAP net income of $26.3 million and earnings per diluted share of $0.60 as compared to $22.1 million and $0.58 respectively in the prior year period. When excluding merger related expenses in the prior year period net income would have increased 16.8% and earnings per diluted share would have increased 1.7% year-over-year. For the second quarter return on average assets and return on average tangible equity were similar to the year-to-date ratios. Unless I otherwise state my remaining earnings related comments will focus on the second quarter's results and exclude the impact of restructuring and merger-related expenses in the prior year period. Turning to the balance sheet total portfolio loans of $6.4 billion as of June 30, 2017 increased $1.2 billion or 23.6% year-over-year reflecting the $1 billion in loans from the YCB acquisition as well as organic loan growth of 4.1%. Commercial real estate, commercial and industrial and home equity loan categories drove the organic loan growth and was achieved $2.2 billion in loan originations during the last 12 months, an increase of 24% from the prior 12 months period. Our loan portfolio diversification strategy which balances the risk and return of our various loan categories continues to grow well. During the quarter we generated year-over-year organic growth of 8.8% in total commercial lending and 5.1% in home equity. Regarding the residential real estate category mortgage originations which remain on plan increased in the mid single-digits year-over-year during the second quarter and when continued our approach to sell a higher percentage of this originations in the secondary market which has the benefit of producing increased fee revenue which was up 41.7% over the last year. Our prudent management of loan growth without sacrificing credit standards will help ensure the long term success of our company. Lastly, the current size of the securities portfolio at 23.1% of total assets continues to provide us the near term flexibility to continue to manage the size of our balance sheet, provide liquidity and support loan growth. Total deposits increased 19.3% to $7.1 billion at June 30. Total organic transaction account deposits excluding CDs increased 5.7% driven by organic growth of 11.9% year-over-year in interest bearing and non-interest bearing demand deposits. Moreover, demand deposits in total now represent 48.4% of total deposits. And our average loan deposit ratio for the second quarter was up to 89.5%. Turning back to net interest income and the margin now, the net interest income for the second quarter increased 20.7% year-over-year to $72.1 million due to a 14.7% increase in average earning assets and a 15 basis point increase in net interest margin. The growth in earning assets was primarily driven by the increase in average loan balances reflecting the YCB acquisition as well as organic growth. The net interest margin increase benefited from the yields on more than 90% of our earning asset is increasing year-over-year more than offsetting the 8 basis point increase in the cost of interest bearing liabilities mostly from higher rates for certain short term borrowings and interest bearing demand deposits which include our public funds. As you recall reflecting customer preferences on our own market strategies non-interest bearing deposits have continued to increase year-over-year to represent 25% of total deposits. Interestingly, on a year-to-date basis when you factor these into the costs of our total interest bearing deposits the increase in our overall deposit cost of funds is one basis point representing another benefit of our core deposit funding advantage. The second quarter net interest margin include acquisitions accretion of approximately 8 basis points from prior acquisitions as compared to 7 basis points in the year ago quarter as well as 8 basis points in the first quarter of 2017. Consistent with our prior statements core net interest margin increased three basis points on a quarter-over-quarter basis due to the 25 basis point rate increase in March as well as loan growth. Fee revenue now, for the quarter ended June 30, 2017 non-interest income increased 12.9% from the prior year to $22.1 million. This $2.5 million increase was driven by a higher electronic banking and deposit service fees reflecting a larger customer base from the addition of our new Indiana, Kentucky markets as well as higher trust fees from the improvement in equity markets, organic growth and higher estate fees. Other fee income declined year-over-year due to the prior year's quarter including higher commercial customer loan swap related income primarily from one larger commercial loan relationship in the prior year's period. Now to operating expenses. As we continue to make the appropriate investments for long term growth we remain focused on operating expenses and maintaining a strong efficiency ratio. During the quarter we reported 3 and 6 month efficiencies ratios of 57.68% and 56.84% respectively. Individual expense line items have all been impacted on a year-over-year basis due to the addition of our Indiana Kentucky markets. We also implemented our annual compensation adjustments during June. As we achieve our anticipated cost savings from the YCB merger, we continue to make some additional planned revenue producing hires in these new markets. Related to lending and wealth management growth opportunities as well as for our preparations for the $10 billion asset threshold. Lastly, I would like to highlight the year-over-year decrease in FDIC expense for both the three months and six months ended June 30th, 2017, from improved risk factors. Turning now to asset quality and capital. Overall, our credit quality continues to be strong and improves year-over-year on a percentage basis, even as we have become a much larger institution. As of June 30th, 2017, nonperforming loans including TDRs and criticizing classified loans all improved this percentage of total portfolio loans from June 30, 2016. Second quarter net charge-offs as a percentage of average portfolio loans increased by just 1 basis point year-over-year to 0.09%. But the decrease 6 basis points from the first quarter. The loss for loan losses represented 0.70% of total portfolio loans at June 30, 2017, compared to 0.84% last year with a lower number reflecting the YCB and the prior ESB acquisition. Excluding the acquired loans and related allowance as detailed in the earnings release that results in a more comparable coverage ratio to prior periods. The provision for credit loss as a percentage of total loans decreased 14 basis points year-over-year to 0.70% for the second quarter. Furthermore on a linked quarter basis to provision decreased 0.3 million. We continued to maintain strong regulatory capital ratios as our capital ratios remain well above the well capitalized standards required by bank regulators and Basel III capital standards. With our Tier 1 leverage capital ratio of 10.09%, Tier 1 risk based capital ratio of 13.36%, total risk based capital ratio of 14.38% and common equity Tier 1 capital ratio of 11.44%. Lastly, our tangible equity to tangible assets ratio improved to 8.53% as compared to 8.20% the fourth quarter of 2016, due to post acquisition retained earnings and adjustments to accumulative of the comprehensive income. This improvement returns the ratio to the level prior to the YCB acquisition which was accomplished in less than one year. Before opening the call for your questions, I would like to provide some thoughts on our current outlook for the remainder of the year. Regarding preparations for the $10 billion asset threshold, there are no changes to our previously communicated plans as Todd mentioned as we do expect to cross the threshold sometime over the next one to two years. While we are modeling one additional 25 basis point fed funds interest rate increase in September, we are currently redoing those assumptions based on recent Federal Reserve statements. In addition, it is important to remember the decline in the yield curve over the last few months, as the two year to 10 year treasury spread is declined roughly 25 basis points to below 1%. We will continue to target strong efficiency ratio as we appropriately balance the necessary investments for $10 billion planning as well as future growth. And lastly, we expect our effective tax rate for second half year remain approximately in the range of the year-to-date rate. We're now ready to take your questions. Operator, would you please review the instructions.

I would be happy to, Sir. [Operator Instructions] And the first question this morning will come from Casey Whitman at Sandler O’Neill and Partners. Please go ahead.

Good morning, Casey.

Good morning. This is Jeff Kitson on for Casey this morning. First thing I wanted to ask about is marketing cost. They were up a bit this quarter and I was hoping if you could please provide some color on that and give us a sense for what a good run rate for marketing expenses is?

Yes. As you noted, they were heavier in the quarter than typical. Part of that is just seasonality of our campaign plus some additional marketing related to the YCB acquisition and getting our presence and capabilities known in that market place as well too. So, higher than we would typically have seen.

Okay, thank you. And also you touched on this a bit in your prepared remarks about the other income item down a little bit. You mentioned that it was partially due to commercial customer loan swap fees. I was wondering what the outlook is for those fees.

That's easily were lumpy I guess. It's not a business but a fee income category of CNI in commercial real-estate and it is very dependent upon a couple of transactions a quarter. And we had a fair amount of consistency and we've been doing a few transactions every quarter but that can jump around the lot. So, when you're comparing to a bit swap fee income quarter as the same period a year ago, that's where the difference shows up. We still see activity, we still see interest based upon the yield curve and where rates are at. Customers are still looking at there. We prefer that over offering fixed rates obviously from a benefit perspective to us and in for our customers. It's hard to predict that more than 30, 60 days and your pipeline. Because it varies space upon the transactions. You're looking at in what customer preferences are. It's a fee category on a product, it was like we're going to stay in it. But it is going to move around a lot from quarter-to-quarter. But there is no, there's been no strategic decision to lessen it or anything like that. It's still a part of our arsenal for our commercial lenders working with their customers on rate management.

Got it, thank you. Thank you for that. And last question, you also touched on this in your prepared remarks, the $10 billion threshold emphasizing like you still plan to cross by M&A. I want to ask power talks have been progressing in this respect and also separately an update on where you are in terms of systems readiness and additional spend to get there.

Yes. We've been keeping with the same plan really for the last year or two in that regard. And I've got a list so to speak of banks across the footprint that we're interested in in learning more about in, in about on doing relationships and discussions with some cases for many years. So, those continue, trying to find the right opportunity at the right time at the right price that makes the most sense, cultural fit and everything else, it's something we've always been very disciplined in improving the battle. And we're going to continue to do that. So, everything's continuing to progress as we've seen before. Now, there's a lot of opportunities out to that are the right size but not the right deal or not the right price. And so, we're going to do what's in the best interest of the shareholders on a long-term basis as well. So, we'll keep our options open with regard to M&A activity and also potential opportunity to cross organically, which wouldn’t be our worst choices we mention but is an option that's on the table. We think we think we got a year or two until we need to make that decision in terms or organic crossing if we don’t find the right opportunity. But there are opportunities out there. And we are having conversations. So, the strategy there is going to continue to stay the same.

Thanks. I appreciate that. And last question, can you give us an update on where you are in terms of systems readiness and additional spend to get there in terms of crossing?

Yes. We've been planning this for a couple of years and have been very active on it and we have I would characterize it as ½ to 2/3rds of the way through spend, obviously not Durbin because we haven’t hit that yet. But in terms of other expenses associated with getting ready, building the analytics team, doing the things you need to do from a the fast perspective on software and staffing, building your BSA capabilities, making got good strength and bench strength and compliance and risk management areas. All those have been underway for long. I mean, you see some of that reflected over the last year or two. But we remain focused on taking other expenses out and focusing on the growth in revenue to keep the efficiency ratio strong as we've layered those expenses in. we have a little more to go but again I'd say we're ½ to 2/3rds of the way through that and feel very good about where we're at. With that and it continued to have ongoing discussions with our regulators about readiness but being very proactive about that and feel good about the spot that we're in right now.

Got it. Thank you very much for your time. That's all my questions I have.

Okay, thank you.

The next question will come from Austin Nicholas of Stephens. Please go ahead.

Hey guys, good morning. Thanks for taking my question.

Good morning.

Most of them have been answered but maybe just on the trust fees felt a nice growth there. What extent were those related to market conditions and to what extent was the improvement related to shale activity and checks kind of coming in from those areas.

This is Bob. Let me take the last point. We divide the initial deposits in our retail bank between the securities brokerage growth and the trust management group based upon the size of the deposit and then we have relationship officers call on those customers to see what their level of interest is in establishing a longer term trust relationship, some sort of beneficial situation with the trust for the future. Of if it's a smaller amount as I said, we have the securities brokerage work those individuals to move them from deposit products to non-deposit products. And we've had success on both of those fronts. I would say if you look year-over-year, there are three primary regions for the increase in trust fees. One would be the market improvement, two would organic growth. We continue to increase both AUM as well as custody assets in the trust department. And the third factor year-over-year would be a stake fees. They were up as well. So, I would kind of break it up a third or third or third around ballpark if you will on the trust side if you look year-over-year. Now, as I've said before if you look back to the first quarter were down 570,000. And that's primarily because in the first quarter which is always our biggest quarter of the year in trust fees, that's when we take the tax prep fees. So, otherwise we had a very good quarter, for trust fees it was above where we thought they would be and nicely ahead of the same quarter last year with 10.6% growth. And none of that as yet in the KSI market recalled they did not have a trust department and while we are adding now revenue producers in that market both in the trust as well as the investment management side and securities brokers and in the private bankers too. We'll get traction on those revenue initiatives as we proceed through the rest of the year and into next year.

And related to not trust aspect but it kind of gets to the part of the question to in terms of deposit flows from shale. We continue to see low eight figure numbers roll in. I mention that last quarter as well too. And I think that’s showing up with the 1 basis point increase in total deposit cost so far this year as we talked about in prior quarters, our theory. And it's been just a theory, now we get chance to see it play out, is that we are to be able to lag the market in that regard given the market in terms of rate increases on deposits given the strength that we get because of our geographic footprint. And our branch is located with big market shares in areas where Marcellus and Utica shale is there. And as a result of that, we don’t see some of the pressure that some of the other banks might have that aren’t in the geographic spots that we are. That has been as I think starting to show up. And hopefully we'll see that in continued quarters.

Okay, that's helpful. And then maybe just you mentioned that the eight figure inflate helping your deposit cost. Maybe just as you think about deposit costs and the deposit data's at the bank year-to-date. Have they been tracking as you expected or would you say they're better or worse than maybe you're modeling at the end of last year?

I would say better than what we were modeling. We, while we haven’t announced what our deposit betas are, they continue to increase in our modeling. Those deposit betas were informed by how much rates went up between 2004 and 2006. We are third party, take a look at betas as well as decay rates. And we also adjusted the third major factor was adjusted based upon our own by history as loan prepayments speak. So, decay rates and particularly deposit betas in as you increase rates overall, might have a negative impact if those assumptions are changed. Loan prepayments speaks however when you come off of a standard prepayment speed assumption and go to a portfolio, prepayment speed assumption what we found was that gives us more opportunities to read price assets. And that helped us to increase our asset sensitivity both in the first and the in the second quarter. But in general, if you take a look at 3 basis points year-over-year, 1 basis point quarter-over-quarter. If you want to divide that by 25 basis points or say 50 basis points and change in the last two quarters, 75 over the last three quarters, that's obviously a very low percentage.

Right.

And like I said, we are modeling a higher percentage to computer asset sensitivity and without disclosing that it’s a multiple of that that would suggest that we do believe that as rates continue to rise and come off of their all-time lows that will experience a little bit more deposit pressure in the marketplace particularly as I said the last time for our higher tier interest bearing demand deposit accounts and money market accounts. The interest bearing demand deposit is also where our public funds are typically housed on the balance sheet.

Okay, thanks, that’s helpful and then maybe just one last question going back to the expenses I know you gave some color on that but as you mentioned the marketing was higher here. Can you give any guidance on whether that number that 2.1 million comes down in the third, fourth quarter and then just more generally how should we be thinking about the overall run rate for non-interest expense?

Well, let me address again I think you heard from Todd on marketing and he acknowledged that the second quarter was a seasonally higher number. I believe I got into that back in the first quarter with a little bit higher than we had predicted. Some of that is away, the timing of various marketing strategies workout, billboard campaigns and the cost related to that but we would expect some of that to normalize not to as low a degree as the first quarter which is our seasonally lowest quarter for marketing in the year. We typically want to get home equities for instance in the second quarter in the spring selling campaign and so there wouldn’t be as much gap between the second quarter and the rest of the year as you saw between the second quarter and the first quarter. But the expectation is, it would come down a little bit in both of those quarters. Todd also mentioned that there were some hire expenses for us doing brand and image campaign, advertising in the new markets of Kentucky and Southern Indiana. And while some of that in fourth quarter would have gone to merger related expenses. There’s also ongoing campaign expenses that if you took a look at the percentage of KSI as we call it to the rest of our markets, we’re spending more than the relationship of their total loan and deposit business to our [indiscernible] bank which is about 18%. So hopefully that’s enough color. We do think we can get some cost savings in that line item in the back half of the year as compared to what we incurred in the second quarter. And then you were asking the direction about expenses a little bit or trending over the rest of the year and expenses did, as you pointed out and some other analysts overnight come in a little bit higher in the second quarter as compared to our expectations and most of that was in the marketing category and there were some other categories as well in occupancy for instance some of which is seasonal maintenance. But as to the rest of the year our prior guidance pretty much holds, I took a look at what our expectations are as compared what our expectations were at the end of the first quarter and relatively speaking that that would still hold in the third and fourth quarter of this year. We have half of our salary increases behind us, the rest will come this quarter for our non-exempt workforce and so that gets factored in but some of these other seasonal maintenance expenses that we incur in the spring season or in winter would now be behind us and as well the payroll taxes that you typically see in the first quarter.

Understood. Thanks for all the color there. I’ll hop off for other question, thank you.

The next question will come from Steve Moss of FBR, please go ahead.

Good morning, this is actually Kyle Peterson on for Steve today. Just wondering if you could talk a little bit about kind of where core margins there can when we strip away the purchase accounting accretion. I’m sure you guys got about three bips of last quarter. Is it fair to assume you guys probably get maybe about another three in the third quarter given kind of the June rate hike?

Yes, I think our prior guidance would still hold true that we expect with each 25 basis points to get a two to three basis increase. We got two core in the first quarter. We got three core in the second quarter but I would say Kyle offsetting that is the spread as I noted in my prepared remarks are lower than we anticipated in our asset liability modeling and most economists we typically use the blue chip forecast would have had a higher 10 year rate as well as spreads that would have been in the 130 to 135 basis point area between the two and the ten. And if I look this morning it’s 91 basis points. It’s been as well as 80 in the past 30 days. So spreads between short rates and longer rates do have an impact on company margins and we do take that into account on our modeling. So if the 345 as I said in the second quarter reflected three basis points of core margin and if you take out the eight basis points that would suggest with our purchase accounting it’s running around 337. If we were to get another increase later this year that would impact us next year but as to your point about June, yes, our expectation is that maybe a little bit on the lower side as opposed to a four or three basis points given my spread commentary and that would be what I would suggest for the back half of the year. I do – purchase accounting will come down so 8 basis points is anticipated to reduce by a basis point or two each quarter so I would remark that as well.

Okay and assuming kind of little bit of mix shift with funding long offering securities might at least help partially offset from the spread compression is it fair to say that?

Yes it is. We didn't decrease the portfolio as much in the second quarter I think it was down maybe 20 million or so in the first quarter so we did add a little bit back there as compared to the normal cash flows we get. We did roll some of that into the loan portfolio which was up about 78 or so million but we are going to run around that $9.9 billion area for the rest of the year in terms of that total asset. And so we will be balancing cash flows coming into the investment portfolio versus the growth in the loan portfolio in the back half of the year to assist that loan mix and assist in the margin.

Okay and the last one and then I will hop out. Just thinking on kind of $10 billion for you guys I know [indiscernible] will be patient with it and hopefully eventually you can find the right acquisition partner to cross. But in the event that you guys did elect across organically is there a kind of timing that you guys have thought about in terms of if we don't find a deal like by around sometime in 2018 and 2019 or something that you thought about when you would elect across organically?

Yes, if you look at where we are at in terms of below $10 billion as Bob said we are 100 million or so below there right now and if you were to take our securities portfolio down to more historical averages we have got $400 million, $500 million, $600 million worth of room and on the size of balance sheet loan portfolio that we have got that can run year, year and a half, two years. So we have got time to be patient. It's a pretty dynamic market out there and we think we have got a pretty good story to tell with potential partner so what we are optimistic in terms of the M&A side of it but if we did get to that time period it's not going to be in the next quarter or anything like that where you go organically. We will be very thoughtful about it and then we do have strategies around that we kicked around as well too. I think one of the benefits is going to be in the spot and we’re able to get ourselves really ready in a lot of ways look at the ROA of the bank, look at the mixed shift between securities and loans, focus I mean, really focusing on the profitability of the organization and to keep the organization, the size that it's been since the YCB merger and increasing the profitability on that same asset base and getting yourself ready from an infrastructure standpoint but also mix of balance sheet, mix of funding, all those things really, really a healthy position to go over and not stretching for asset growth at any cost in order to improve earnings per share, why you’re hurting ROA and I see that happening with a lot of different organizations or several organizations. Let's put it that way. So we have got the benefit given the position we are in right now to capitalize on it and then what we do go over even if it is organically at some point our strategies around that will be a shareholder friendly as possibly. If you look at the history of our bank it's just a very short term one to two year time period to get over this artificial $10 billion hurdle that's throw out there and will manage through it the best way possible but again with the long term view in mind of what's best for the organization and the shareholders.

Okay, great, that's all from me, thanks.

Your next question will come from Russell Gunther of D.A. Davidson. Please go ahead.

Hi, good morning guys. Most of my questions have been asked and answered just one follow-up on the expenses, Bob I appreciate you addressing what you have on the puts and takes with the takeaway being the prior guidance still hold. So could you just remind us of what that is please?

I think what we said earlier, late last year and then again repeating earlier this year was that we would have a million to a million and a half of increase in the back half of the year as compared to the run rate in the first half of the year. Now, one could argue that we pulled forward a million to a million two of that in the second quarter so the expenses in the second half of the year still guiding along that same line should be similar to slight growth rates reflecting the summer increases that have yet to come for our non-exempt workforce in the third and the fourth quarter. Again that reflects the marketing comment that I made. We still have some merger related activity to save not the category merger related expenses but we have some categories within expenses that we are still going to get some KSI savings we think in the admin area and telecommunications and possibly supplies but we still have some strategies to work out there over the remainder of the year. We are also looking at our branch network. We have a couple of branches that are being closed to re-position that should help us in the back half of the year as well.

Just one comment to make and an important to note is that we did get, we were able to achieve the salary saves that we modeled from the YCB merger from an FD and salary perspective we’ve achieved that. So we feel very good about the execution of that Bob mentioned some admin expenses on telecommunications something like that roll of here and then not too distant future but from the people side of it that's pretty well taken care off.

Very good. Thanks very much.

The next question will come from Catherine Mealor of KBW. Please go ahead.

Good morning. Again a lot of mine were answered, but I thought I’d switch topic a little bit and just see if you could provide us some thoughts on the retail sector of your theory book. How big is that exposure and are there any trends that you are seeing so far in your market?

Yes, we got questions on that quarter results and some investor trips, I think a number of banks are getting that question because it's very topical. So we went ahead and we dug into that and we looked pretty hard, pretty manual process but we did that with our credit teams over the last 60 days and as I stated in previous means, we don't have a book of business that we call a mall book of business we didn’t mean the mall that's not a business for us. As we look through our commercial real estate portfolio there were no issues, no concentration, there is no specific reserves. There is no issues like that associated with it. We even looked at script centers things like that which makes us run numbers to see if we have got what percentage of the portfolio as a certain tenant and everything else and really saw no issues. So the big box exposure that some have we don't have any concentrations to speak of it, really no, nothing we are seeing from a credit deterioration standpoint. It's a manual process and something we are going to continue to do periodically to look at but that's not been a focus of our lending growth over the last couple of decades and as a result of it it's not a big part of our balance sheet and it hasn't been part of the balance sheet of anybody we bought as well to. So we look through it and we wanted to have little more detail behind just our general comments in the past that we don't lend in that area and that detail that analysis that we did on ourselves, due diligence we did on ourselves both to that point. So we don't have the sector exposure to retail.

Helpful, thank you.

[Operator Instruction] The next question will come from Daniel Cardenas of Raymond James. Please go ahead.

Good morning guys. Just a couple of quick questions here. Maybe some color on what impact of any payoff head on the loan growth this quarter and then second you had mentioned I think in your prepared remarks that you are starting to see some loosening of standards some of your markets maybe some color there as to whether it's coming from your bigger competitors or your smaller competitors and what impact do you think that's going to have on your loan growth outlook in the back half of the year?

The second quarter it was a little wider in terms of payoffs then we were anticipating again that's very bumpy quarter to quarter that's kind of what we say we got to look at it on an annualized basis as things shift around from quarter to quarter based upon secondary market characteristics. But it was a light payoff quarter in the second quarter. On the competitive flavor I would say first off what we are seeing is a lot of price competition from I would say maybe some of the smaller banks and again we got a lot of small banks and a lot of different markets but going pretty long term on fixed rates I mean we are talking eight, ten years at a fixed rate that's lower than we want to make a loan at for the next 12 months quite frankly. And we see some of that going on that's been a little frustrating to launch but you go through that at this point of the cycle. Some of the larger transactions I think either you start to see some of the reducing in terms of recourse and percentage of guarantees that are out there. Fortunately for us a lot of our developers we work with, we have been with for a long period of time and we have got strong relationships with them. So we are able to continue to support the book of business that we have but we see at this point in the cycle, a lot of newer players in the people, the doctors and people like that they always said they want to start building office buildings and multi-family stuff because they see so much money everybody else is making and that's the time when you don't want to be financing that stuff quite frankly. So we have stayed and really worked with our core commercial real estate development customers. So part of what we are seeing is quite frankly things that don't even make it to our committee which would be the kind of those out wire opportunities that would be done by first time developers with that recourse and high percentage of spec related to some of the office projects and things like that and some of those are getting done. But not things that we are looking at so not impacting our current commercial customer base to a great extent, but you see those kind of opportunities that we don't do and that's a couple of percentage points of loan growth that we give up and we are okay with that because we are planning the long game here.

Perfect and maybe just a quick update on line utilization, so where did that number come in this quarter say versus a year ago?

It was about 5 points higher than last year, it was just under 50% in the second quarter, part of that as we have a small mortgage warehouse business and while that was a little bit higher this time last year in terms of funding other commercial lines made up the difference. And so there was growth from the mid 40s, I don’t remember the exact number for last year to about 48% funded at the end of the second quarter on commercial lines.

Perfect. All my other questions have been asked and answered. Thanks guys.

Thank you.

And this will conclude our question-and-answer session. I would like to hand the conference back over to Todd Clossin for his closing remarks.

Thank you. We are pleased with our performance to-date for 2017 as I mentioned, we continue to effectively and efficiently execute upon our strategies to maintain a strong financial institution for our shareholders. I want to thank you for joining us please enjoy the rest of your summer and hopefully we will get a chance to see you at an upcoming investor event. Thank you, have a good day.

Thank you, sir. Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation, at this time you may disconnect your lines.