WesBanco, Inc. (WSBCO) Q1 2017 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen and welcome to the WesBanco First 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 afternoon. Welcome to WesBanco, Inc.’s first quarter 2017 earnings conference call. Our first 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 as well as documents subsequently filed by WesBanco with 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 afternoon, everyone. On today’s call, we will be reviewing our operational and financial results for the first quarter of 2017. Key takeaways from our comments are our performance during the first quarter was strong and we continue to execute efficiently and effectively on our strategic growth plans. The integration of our new Indiana and Kentucky markets is progressing well. We continue to generate organic loan growth and we remain committed to driving positive operating leverage and maintaining our strong efficiency ratio. We are pleased about our results for the first quarter. Excluding merger-related expenses, we earned fully diluted earnings per share of $0.60 on net income of $26 million. In addition, we generated a core return on average assets of 1.09%, which is in line with levels we realized 6 months ago just prior to our merger with YCB. While I have stated the hallmarks of WesBanco before, I feel it’s important to reinforce them. In everything we do, we focus on our key stakeholders, customers, employees and shareholders. While we rigorously maintain our legacy and credit and risk management, we continue to invest in our long-term growth. In fact, over the last several years, we have increased the size of our organization from $6 billion to almost $10 billion and have significantly diversified our growth engines and geographically expanded our footprint. Further, this growth was achieved as we continued to improve our capital, our credit and our efficiency ratio trends. During February, we announced an 8.3% increase in our quarterly dividend rate to $0.26 per share, the 10th increase since 2010 representing overall increase of 86% during that period. 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. Our return on average tangible equity and total tangible equity to tangible asset ratios have improved to 14.03% and 8.4% respectively since the merger and conversion of YCB. It is important for our long-term success that we continue to invest in our company as we become a larger organization. Our target of $2 of return on each dollar of investment ensures that we deliver positive operating leverage on our growth strategies. We focused on maintaining a strong efficiency ratio over the long-term as we believe this is the best measure of demonstrating balanced revenue growth and disciplined expense management. While our efficiency ratio might fluctuate somewhat from quarter-to-quarter, we have improved it by nearly 500 basis points since 2012 when we expanded our Western Pennsylvania market. Furthermore, we have continued this improvement trend after our recent expansion into Indiana and Kentucky as demonstrated by our first quarter efficiency ratio of 56%, approximately 70 basis points better than the full year 2016. Our long-term growth is focused on five key strategies: growing our loan portfolio with an emphasis on commercial and industrial lending; increasing fee income as a percentage of total net revenues over time; providing high-quality retail banking services; and generating positive operating leverage and expanding our franchise. The merger with Your Community Bankshares, which converted midway through the fourth quarter, is already generating nice returns and solid earnings accretion. The integration and assimilation of our new Indiana and Kentucky markets are progressing well. We have been able to retain and assimilate key talent. We have been improving and closing a fair number of new loans these first few months post merger. In fact, because of our larger balance sheet, we have approved about a half a dozen loans with exposures greater than $10 million, something YCB would not have been able to do prior to the merger. Lastly, we continue to move forward with our plans for methodically introducing our broad array of products and services to meet the needs-based solutions of our newest customers. We are continuing to remix our balance sheet by reducing securities and increasing loans, which now represents 72% of earning assets as compared to 67% a year ago. Over the last 12 months, we have generated more than $2 billion in loan originations with our new Indiana and Kentucky markets contributing to that total. In addition, we generated 3.2% in organic loan growth year-over-year driven by C&I, CRE and home equity lending, each of which grew organically in the mid to high single-digit range. Due to our decision to sell a greater portion of our residential mortgage loan originations during the quarter, we did see slower growth in the residential real estate portfolio. In fact, when compared to recent Federal Reserve H.8 data for the first quarter on both the year-over-year and annualized basis, our organic loan growth in our focus categories, for the most part, significantly outperforming the industry. That said, our loan pipelines remain solid and we remain well-positioned for 2017. Finally, I would like to commend all of our employees, and particularly, Joe Flynn and [indiscernible] for their tireless efforts and dedication to our communities as our banking subsidiary, WesBanco Bank, was recently awarded its sixth consecutive outstanding CRE rating from the FDIC. During our nearly 150 years, we have maintained our strong community banking roots and a commitment to the success of the communities in which we do business. We are proud that once again been recognized by the FDIC for our efforts to return vital capital to all segments of the communities we serve, especially in the low and moderate income areas. I would now like to turn the call over to Bob Young, our Chief Financial Officer, for an update on our first quarter’s operational and financial results. Bob?

Thanks, Todd and good afternoon. Before I get into details on our performance during the first quarter, I just wanted to provide a few key highlights. As Todd mentioned, we are pleased with our first quarter results, which included continuing to generate strong loan growth in our strategic focus categories. We are methodically investing in becoming a larger company while carefully managing discretionary costs to generate positive operating leverage. For the quarter ended March 31, 2017, we reported GAAP net income of $25.9 million and earnings per diluted share of $0.59. Excluding merger-related expenses, net income would have been $26.2 million and earnings per diluted share of $0.60 as compared to $22.9 million and $0.60 per share last year. For the first quarter, return on average assets was 1.07% and return on average tangible equity was 14.03%, which included the impact of merger-related costs. If you exclude those costs, return on average assets would have been 1.09% and return on average tangible equity would have been 14.20%, showing some nice growth over the fourth quarter. Unless otherwise stated, my remaining earnings related comments will focus on the first quarter’s results and exclude the impact of restructuring and merger related expenses. Total portfolio loans of $6.3 billion, as of March 31, 2017, increased $1.2 billion or 22.9% year-over-year, reflecting $1.0 billion in loans from the YCB acquisition and organic loan growth of 3.2%. This organic loan growth was driven by the commercial and industrial, commercial real estate and home equity loan categories and was achieved through $2.1 billion in loan originations during the last 12 months. Regarding residential real estate, originations increased 35% year-over-year during the first quarter while the percentage of mortgage loan originations sold increased 250 basis points. While selling a greater portion of originations partially offset the organic growth in our focus loan categories, it did have the benefit of increasing fee revenue. Lastly, our focus on C&I lending continues to be demonstrated by these loans now representing 17.5% of total loans, up from 15% a year ago. As we have stated before, the securities portfolio increased as a percentage of total assets due to the acquisition of the two Western Pennsylvania thrifts over the past 5 years and we are targeting to move this percentage back into a more historical 20% plus or minus range. Therefore, during the quarter, we continue to manage the size of our securities portfolio to help fund loan growth. As a result, as of March 31, securities represented 23.4% of total assets as compared to 27.8% last year, a decrease of approximately 4 percentage points. The current size of the securities portfolio 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 16.3% to $7.1 billion at March 31, 2017. Total organic deposits, excluding CDs, increased 4.5%, driven by organic growth of 11.1% year-over-year in interest bearing and non-interest bearing demand deposits. Reflecting customer preferences, demand deposits in total now represent 48.2% of total deposits, a nearly 7 percentage point increase from the prior year. Federal Home Loan Bank borrowings, which totaled $0.9 billion at quarter end, decreased 10% since last year, as we continue to maintain flexibility with balancing maturities over the next couple of years. In addition, wholesale oriented funding from CDARS and insured cash suite money market balances have been reduced by approximately $210 million year-over-year. Turning now to the income statement, net interest income for the first quarter increased 18.2% year-over-year to $70.7 million due to a 14.1% increase in average earning assets and a 13 basis point increase in net interest margin. The growth in earning assets was driven by a 23.3% year-over-year increase in average loan balances to $6.3 billion, reflecting the YCB acquisition and 3.2% organic loan growth, highlighted by 6.7% in total commercial loan growth. The net interest margin increase benefited from the yields on more than 90% of earning assets increasing year-over-year, more than offsetting the 5 basis point increase in the cost of interest bearing liabilities from the higher percentage of and higher rates related to subordinated debt and other borrowing. Regarding the impact of acquisition accretion, the first quarter’s net interest margin included approximately 8 basis points from prior acquisitions as compared to 7 basis points in the year ago quarter and 10 basis points in the fourth quarter of 2016. For the quarter ended March 31, 2017, non-interest income increased 18.0% from the prior year to $22.9 million. This $3.5 million increase was driven by higher deposit service and electronic banking fees reflecting the larger customer base from the addition of our new Indiana and Kentucky markets as well as higher trust fees from the improvement in equity markets and higher trust assets. Net securities gains declined year-over-year due to cost of agency notes during the prior year’s quarter. Lastly, our development of new fee income streams continue to gain traction as evident by our customers’ use of our back-to-back fixed rate swap product, which resulted in $0.7 million of commercial customer loans swap related income during the first quarter of this year. As Todd mentioned, as we continue to make the appropriate investments for long-term growth, we focus on maintaining a strong efficiency ratio. During the first quarter, we reported an efficiency ratio of 56%, which is up 48 basis points from the prior year period, but down 213 basis points from the sequential quarter. On an individual expense and line item basis, all of the lines have obviously been impacted on a year-over-year basis due to the addition of our Indiana and Kentucky markets. However, we continue to make progress on our targeted cost savings. Interestingly, despite the increased staffing from the acquisition, salary and benefit cost per full-time equivalent employee is roughly flat on a year-over-year basis, a reflection of our continued efforts at expense management. The provision for income taxes increased $1.9 million or 22.2% in the first quarter of 2017 compared to the first quarter of last year due to the adoption of a new accounting standard related to low income housing, tax credit amortization, which in 2017 moved from other operating expenses to the provision for income tax. In addition, first quarter 2017 pretax income was higher. As a result, the effective tax rate increased to 29.09% compared to 27.54% in the first quarter of 2016. Now let me turn to asset quality and our regulatory capital ratio metrics. Overall, most credit ratios continued to improve year-over-year on a percentage basis. As of March 31, 2017, non-performing loans, which include TDRs and criticized and classified loans improved as a percentage of total portfolio of loans from March 31, 2016. In addition, total non-performing loans were 74 basis points of total loans, down from 85% – 85 basis points last year, rather. Criticized and classified loans improved to 1.35% of total loans from 1.65% last year. And past due loans were 22 basis points of total loans versus 31 basis points at March 31, 2016. The allowance for loan losses represented 70 basis points of total portfolio of loans at March 31, 2017, compared to 83 basis points in the prior year. However, if the acquired YCB and ESB loans, which we recorded at fair value at the date of acquisition of $1.7 billion were excluded from the ratio, the allowance would approximate 96 basis points of the adjusted loan total at March 31, 2017, compared to 1.09% prior to the 2015 ESB acquisition. The provision for credit losses increased to $2.7 million in the first quarter of 2017 compared to $2.3 million in the first quarter of 2016, due primarily to loan growth. We continue to maintain strong regulatory capital ratios as these 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 9.97%, Tier 1 risk based capital ratio of 13.21%, total risk based capital ratio of 14.22% and common equity Tier 1 capital ratio of 11.28%. Lastly, our tangible equity to tangible assets ratio improved to 8.40% as compared to 8.20% in the fourth quarter of last year, due to post acquisition retained earnings and adjustments to accumulated other comprehensive income. 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, recall that we do not anticipate any changes to our plans as we continue to methodically phase in the costs of our infrastructure build. In addition, we will continue to monitor and assess the timing and impact of crossing the threshold sometime over the next couple of years. While we would prefer to cross the threshold via a disciplined, franchise-enhancing acquisition, we will not take any options off the table, including crossing organically. In addition to the recent Fed interest rate increase, we are currently modeling two additional 25 basis point Fed interest rate increases in June and December. Also, we will continue to target a strong efficiency ratio as we appropriately balance the necessary investments for future growth. And finally, we currently expect our effective tax rate to remain in the range of the first quarter’s rate. We are now ready to take your questions. Operator, would you please review the instructions?

Thank you, Mr. Young. [Operator Instructions] And our first question will come from Russell Gunther of D.A. Davidson. Please go ahead.

Hi, good afternoon gentlemen.

Hi, Russell.

First question for me would be on the C&I growth, I wonder if you guys could just give us some color on where the new lenders stand. You brought over a bunch of C&I lenders over the last 18 months or so. Kind of how would you characterize what inning those guys are in and then just general thoughts on outlook for that loan balance throughout the rest of the year?

Yes, we are – we got probably 90% of those on board that we want to have on board, came on over the last 18 to 24 months and are slowly building up their portfolios. And really all of them to a person is doing very well and generating a significant amount of C&I volume for us across all the markets. So, we feel really good. We don’t feel like we misfired anywhere in that line. And as they continue to mature inside the organization, the portfolios tend to build, non-solicits, runoff, things like that, we expect to continue to get some nice operating leverage out of that. Expense is already embedded in our run-rate.

Alright, that’s great. Very helpful. It sounds like a lot of runway there. Maybe just parse the margin a bit for us on the quarter. Just isolate for the impact of the December hike and how that manifests itself in the margin just some of the puts and takes there. You mentioned expectations for two additional hikes this year. So, may be trends like that for us too into how additional hikes maybe more or less accretive than the last?

Well, I believe what I said Russell in the fourth quarter was that we expect that for every 25 basis points to see a couple 3 basis points of increase. And on the core basis in the first quarter, we got that. I wouldn’t change that guidance at this point relative to later in the year. As you know, the chances of a Fed Funds increase in June are now below 50%. So we will see whether that holds true. Most analysts didn’t have the March increase embedded. Obviously, we will see what the second quarter holds as we see some of the re-pricing occurring on the loan portfolio side. We have increased our deposit betas in our asset liability modeling to some degree. There has been very little pricing reaction on the cost of funds to-date other than wholesale borrowings and the TRUPs portfolio. So you can see that our cost of deposits are within a basis point of where we were last year at this time. So, we do think that as you move forward and you have more increases that the deposit betas, those sensitivities do go up. We don’t disclose the exact percentage that we are using. Most banks of our size don’t. But I am just acknowledging that we would expect generally that deposit betas would be higher, particularly for the higher tiers of deposit accounts in money market and in some of our now categories in the future. The loan yields do reflect competitive factors. We are certainly seeing that and we believe we will continue to. But I would say that about two-thirds of our commercial growth in the first quarter was variable rate in nature and that should help us moving forward. And we do expect – we will disclose this next week in the 10-Q, but you will see the table there that shows the asset sensitivity. And I would expect that would show a little bit more sensitivity to rising rates as we move forward. So, sum and substance, little higher deposit betas or reaction to a rising rate environment particularly in some of the upper tier categories, those jumbos are over $100,000 deposit account balances. But I also believe that as loans come off their floors in the commercial loan categories, which will happen as we move through the year and get another increase or two that we should see a little bit better loan yield performance. The final factor would be the remix. Certainly, we are continuing to see that on the liability side. That played out very nicely in the quarter with us paying down some more expensive borrowings and rolling into demand and demand deposit accounts for the most part thus continuing to show that mix shift that benefits us from a cost of funds perspective. And then on the asset side, as I have said before, kind of for every couple of dollars of investment maturities or prepayments, moving $1 of those into more profitable and higher yielding loans. Again, that continues to play out and we expect in the spring – the normal spring selling campaigns that we have with a normal – greater origination volumes that we typically see in the spring and summer timeframes that will manifest itself to a greater degree.

Alright, Bob. Thank you. Very helpful. Last one for me on the mortgage banking gain on sale in the quarter. Appreciate your comments on how you are managing the balance sheet there. Is that a level that we can expect going forward and was that just a core gain on sale for the number? Any MSR valuation gains in that? Just an help there would be appreciated?

There is no MSR valuation gain. We don’t have any significant mortgage servicing rights. It’s not enough to talk about as we sell currently servicing released. Relative to the guidance on mortgage banking income, again, I would say – first of all, we are up some 30% originations in the first quarter. More of that, as I said in my remarks, went to the secondary market. Mortgage lending is more purchased money-oriented as compared to refi. As you know, for us, it’s about a 75-25 split currently. As to the gain on sale itself, I would expect a little bit less gain on sale in the second quarter on a percentage basis per loans sold, just simply because there was – we had a higher negative adjustment in the fourth quarter related to movement on the mortgage loan commitment side. And so that would have reversed and became a positive, if you will, in the first quarter. So netting that out, I would think that there would be a little bit less in the second and third quarter, but it would be reflective also of stronger origination volumes and stronger sales into the secondary market.

Thanks very much. Appreciate taking my questions.

Sure.

Thank you.

The next question will come from Casey Whitman of Sandler O’Neill. Please go ahead.

Good afternoon.

Hi, Casey.

Hi. Just one follow-on question on mortgage – the mortgage banking, can you clarify – I think you said originations are up 35% year-over-year. What were they quarter-over-quarter, if you have that?

I do. Can you give me a minute?

Yes. I believe you said last quarter maybe $0.5 million was impacted by the mark-to-market adjustments. Is that accurate, too?

That is correct, yes. And so that would have been reversed in the first quarter. In the fourth quarter of 2016 – you are asking about residential mortgage volumes, right, Casey?

Yes.

Yes, we did – there was some strong carryover there as you can imagine. People were locking in rates and we were closing a lot more loans, because rates were rising. So, it was $106 million. And typically, in the first quarter, it’s a little bit lower. So it’s why I compared to last year’s first quarter rather than – there were some anomalies there in the fourth quarter, but in the first quarter of ‘17, it was $82 million.

I had also mentioned that we have been building that for a while that the purchase percentage is 74% versus the refi at 26% and volumes went from $300 million in 2015 to $375 million in 2016. And we are actively adding lenders in the new KSI markets. It was a business they were in, but they were in it in a very small way. So we have got a talent play there as well, too. And that’s Bob’s point about continuing to increase the volume as we go forward.

Okay, great. One other question, just – can you give us a little bit color on the up-tick in non-accruals this quarter?

Yes. Sure. I can do that. As a percentage basis, the bank is actually down from where it was 1 year ago, 66 basis points down to 60 basis points. So we are a bigger bank and we grew by 18%, 20%. So the dollar is going to go up. But as a percentage basis, it went down. But irrespective of that, we had three non-energy related exposures that are all in different markets, none of them YCB related. That migrated into that category. Not a trend. Not an issue. But you kind of isolated the three individual situations. But as a percentage of the overall bank, it’s actually down.

And then the only color I would provide Todd there was that one of those three that you mentioned was a loan that came from – not YCB, but a prior acquisition. It originally had been on non-accrual, but as we reviewed impaired loan accounting, we were able to take it off that status because we could at that point estimate reasonable cash flows and we can no longer on that particular loan. So all I am trying to say, it was a loan that was identified as impaired – credit impaired at the time of acquisition. Didn’t have it on non-accrual at that point and are now putting it on non-accrual. And that was about half of that total increase of just under $8 million quarter-over-quarter.

Okay, great. And Todd, I completely understand your point about the – as a percentage of total loans, I was just looking linked quarter one to make sure there wasn’t anything systematic which – or systemic, which sounds like it wasn’t. So thank you guys for the color and good quarter.

Okay. Thanks Casey.

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

Hey guys. Good morning.

Good morning.

Just on trust fees, it looks like you had a nice increase, what percentage of that was just related to the market and what maybe increased share taking or increased clients, particularly on your YCB markets?

Yes. We are just getting started in the YCB markets. We had to get the right authorization, the right powers and what not to be able to sell the services in those markets, the right licensing. And we have done that. So we are in the process of very much building the talent base in that KSI or YCB markets, Kentucky-Southern Indiana, as we refer to them. So that wouldn’t be a factor in the increase. Part of it was we don’t have a breakdown between market impact and non-market impact, although we can – actually, we can pull that together. But it was impacted by pretty strong equity market in the fourth quarter. As you might remember, it was pretty weak equity market in the first quarter, but the fourth quarter came back. And that has an implication on that. But also, just our continued penetration in our legacy markets of the trust capabilities. One of the things I would mention, as we have talked about it before, but shale related activity is up. The prices were up. There is a lot of activity up. Our deposit flows that were in the low to mid-7 digit figures are now back into the low-8 digit figures. And that’s where we were a couple of years ago. So we are seeing the benefit of that on the deposit side and we are seeing the benefit of that on the trust fee side as well, too. But we don’t have that breakdown with us today between what was the result of the market increase and what was the result of our organic increase. But we will pull that together.

And there was $113 million worth of total growth in trust assets quarter-over-quarter, Austin. We did have nice fee growth, and trust prep fees were a typical part of the first quarter trust – overall trust fees, it’s typically our best quarter of the year.

Got it, okay, that makes sense. And then organic loan growth was around 3% year-over-year, is it still fair to think about full year growth in that mid single-digit range?

Yes. We have been there in the last couple of years and don’t see any reason to kind of change our plans or thoughts around that. Again, the mix is changing with more focus on the C&I side, C&I growth I think was up 6.7% or close to 7% or so over the last year. And we did sell some additional residential mortgage, which had an impact on it as well. And some of the consumer activity that we have got there, we got an indirect portfolio. That’s about two-thirds, a little more than half of the consumer number. And that’s not a business we are emphasizing. That’s a little margin business. It’s a scale business. We are in it. We are not getting out of it, but we are not emphasizing it. So our rates are higher. So as a result of that, you tend to see a shift from that more into the home equity space. And net-net from an OpEx perspective, that has an impact on the overall growth rate. But if you strip that out, we got very solid mid single-digit loan growth.

Got it, okay, that’s helpful. And then maybe just on the accounting adjustments, is it safe to assume that that $0.5 million that got transferred from operating expenses into the tax rate, is that really just pretty flat over the future in perpetuity, so really just have that $0.5 million out of expenses and then tax rate kind of up a couple percent?

It is proportional amortization. And yes, you could assume that that is going to be a similar number in the three quarters following this one, absent any change in balance related to the low income housing tax credit portfolio.

Got it, okay, great. Well, I appreciate it.

Thank you.

[Operator Instructions] The next question will come from Bob Ramsey of FBR. Please go ahead.

Hey, good afternoon guys. This is actually Kyle Peterson on for Bob today. I was wondering if you guys could talk a little bit about your loan pipeline, just kind of any areas of strength, kind of the business lines and geographies, just so we can kind of get a sense as to how that’s shaping out right now?

Yes. We really don’t have any geographic points that I would point to the weak spots. I think we are seeing consistent growth there. And the plan from a pipeline perspective is to not just grow with the market, but to gain market share. And I think we are actually doing that in a number of the key markets that we are in. We tend to look at products by product type, concentration and geography as well, too. We continue to manage that on an overall aggregate basis. But to talent, we have got the right talent pretty much in every market. I can’t think of a market where we aren’t well prepared for growth or a market where we don’t have nice pipelines right now. We had a pretty decent quarter and the first quarter came into the year with strong pipelines. And we are going into the second quarter with pipelines we feel pretty good about as well, too. So we don’t see any changes there at all. Don’t really see any kind of economic softness or weakness or anything like that that would have an impact on the pipeline.

Okay. Yes. I guess historically, I mean you guys have I guess in past quarters you normally cited a little bit stronger growth opportunities coming in from your urban markets, is it fair to assume that kind of mix is still applicable or if you notice any kind of pickup in some of the legacy role markets as well?

Yes. I think on the loan side, I mean you have got more opportunities. And from a percentage growth perspective, but also just more opportunities because they are bigger markets in Pittsburgh and Columbus, Cincinnati, Louisville, Lexington, places like that. So we are getting our share of opportunities of looking at transactions in those markets. But in the legacy markets, we tend to have a pretty dominant market share. So we are also seeing our share of growth there as well, too. I just got back from the recent President’s trip where I would take the number of top performers on a trip every year. And it was very well represented by legacy markets, commercial lenders and legacy markets as well as commercial lenders and some of our, let’s say newer higher growth, more urban markets. So we are seeing nice growth overall. It’s kind of nice to have the big dominant market share in the legacy markets where we get a shot at everything because we are so well known and so well connected. But in some of the other urban markets, we have got a smaller market share. We got very aggressive call-in programs in place with our commercial lenders, who have been in those markets for decades, are well known. And they are also getting a look at a lot of different opportunities. So I wouldn’t put one market over the other, legacy versus urban, in terms of the growth potential. We are seeing a lot of competitive pressures, particularly in some of the urban areas. We are seeing a lot more non-recourse. We are seeing a lot of looser structures. We are seeing competitive – really competitive pricing. We having to compete with that and we are doing so effectively. Don’t see as much of that quite in your new legacy markets. So, you tend to have some nice margins in your legacy markets, but still got to be competitive there, too.

Okay, great. And then finally I guess on kind of thoughts on M&A. I know you guys have mentioned that is a potential way to cross $10 billion down the road. I assume you guys can provide little bit of an update on kind of how the integration of YCB is going and when you guys think you might have that digested and be ready to kind of take on another deal?

Yes. We just came off our shareholder meeting about 2 hours ago and that was a big part of my talking points there is job number one is focusing on making sure that the conversion and execution around that merger goes well and it has gone very well. That was converted – acquired last September, was converted last November. So we have had 4 months in conversion. We got 6 months since the acquisition. And then it continues to go very well. Talent has stayed. We have been able to retain the talent we wanted to retain. And we are looking to expand that talent. We are going to expand the growth. And from a conversion and technical aspect of the conversion standpoint, it’s gone very well as well too. And I think you can see that by the growth in the deposit numbers in the first quarter, really the first – second full quarter after a merger is completed and a pretty good-sized major for us and we are growing. We are growing the balance sheet of the bank and the loan cycle growing the balance sheet of the bank and the deposit side. So, we don’t want to take our eye off the ball in that. We didn’t acquire just to have a successful conversion and integration. We want to make sure to get revenue growth out of that and that’s the talent play. And that’s the additional business we are seeing on the lending side, because of big balance sheet. So, we are seeing lots of good opportunities for growth in those areas. Having said that, Bob did mentioned we would like to go over 10. I think we will go over 10 sometime in the next 2 years. Preferable would be to do it through an M&A event. And we are staying with kind of the same message we have had all along and that is our preference would be to do something in our geographies or close to our geographies, 5-hour kind of drive time radius of the Wheeling area and something that would be accretive, something that would be received well by the investor community and something that would allow us to cover the costs of going over 10 from a Durbin perspective. And that still tends to be the focus, but we don’t feel like we are in any rush to do that. We are ready. We feel we are ready from an infrastructure and a preparedness standpoint, but we can go over when we find the right opportunity. And this bank has always been very disciplined, has had the ability to be disciplined, because of the organic growth. And we are still in that spot and we are going to continue to stay in that spot and find the right opportunity and the right strategy, but we will be patient with that.

Okay, great. Yes, I appreciate the color. That’s all for me.

Okay, thank you.

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

Thanks. Good afternoon, everyone.

Hi.

One last follow-up on just crossing $10 million, can you give us an update on thoughts around the cost of crossing? I remember you put in your slide deck when you acquired YCB that it was about a $9 million cost between Durbin and expenses. But I know since then you have also been investing in some of that infrastructure and then you have probably had some additional Durbin expenses now that you have got YCB layered in. So, can you kind of give us an update on how you think those things will play out as you cross the $10 million mark in a year or so?

Yes. We have been layering in as you mentioned. We have been layering in the infrastructure cost. I mean, stress testing, we have been doing parts of that for several years now. We are very heavily involved in enhancing our stress testing capabilities right now. We have enhanced our compliance staff, our compliance management staff. We have increased the BSA Department though acquisition with ESB. We picked up talent there. We picked up talent on the audit side through YCB. So, as we have done these acquisitions in the past, we have kept some of the really strong individuals in those areas that we would need to have to cross the $10 billion threshold. So, we feel really good about where we are at on the talent side. And so we have already made the investments that we need to make. We have increased the analytics department by few individuals as well, too. So, all of that and the rigor around modeling, understanding the modeling and the outputs of the modeling and controlling your data and all that we are way down the path on all of those things. So, I feel pretty good about that. The FDIC cost that you talked about in the past, it looks like the fund maybe fully refunded by the time we are ready to go over $10 billion. So, we may not even have an increased cost from an FDIC perspective there. And we still feel that – from a Durbin perspective, it’s still the same number as we gave before, around $7 million, $7 million, $7.5 million for our bank in terms of the cost we would have to cover once we go over. But we are a long way down the path of the infrastructure cost. We still have a little more to go, but nothing tremendously significant and something that is our plan was to keep the efficiency ratio strong in the mid-50s as we prepare to go up through and over $10 billion and that’s continued to be the focus. We are continually taking out expenses in areas where we can with the use of technology, while at the same time, if we invest in those cash flows into the preparedness and being very thoughtful about it to keep the overall efficiency ratio strong.

Got it. Okay, that’s all for me. Thanks.

Thank you.

And the next question will come from Daniel Cardenas of Raymond James. Please go ahead.

Good afternoon, guys. Maybe if you could just give me some color on what impact, if any, pay-downs had on loan growth this quarter?

Yes, it’s great question. It was soft. We have soft quarter in terms of pay-downs. You guys kind of look at it, as we said in the past, on a rolling four-quarter basis, because the first quarter typically is somewhat soft. Fourth quarter had a little more last year because rates were going up. And I think everybody raced to the secondary market on some of those construction loans, take them out of the prominent marketplace. And we see – at this point, I mean we have more normalized environment in the second and third quarters of this year with regard to pay-downs. I mean it’s a business we are in. We like the business, because it’s got a nice ROE on it. We got nice fee income that comes off of it. But you are right, it does churn a little bit. First quarter was a little on the lighter side, particularly as compared to the fourth quarter.

Okay, good. And did I understand correctly, did you guys mentioned that you sold a portion of your residential mortgage portfolio in Q1?

No. He was just commenting that we sold a greater percentage into the secondary market and that was in my scripted remarks. But no, there was no one-time sale of a portion of the portfolio.

Got it. Okay. But you did say that you originated, what about half a dozen loans that were greater than $10 million in the YCB footprint. Is that correct?

Yes. We have approved them in various stages. Some are getting – some are close, close, closing others that are still kind of going to the process. But that’s accurate and the pipeline is a strong and we are seeing more every week.

And so kind of given – that’s probably a larger loan for those types of lenders, I mean, what’s the expertise level for that lending base in dealing with loans that are greater than $10 million?

Yes. Well, first of all, I would tell you that they have got a very talented and very experienced group of lenders in that marketplace. So that was a real strength of the acquisition was the level of talent. I thought it would be good in talking to their CEO before the acquisition, I thought it would be good. I am really impressed with the talent level that they have. But two other things I would mention, several of those are on the commercial real estate side and we have a commercial real estate expertise in our organization that’s brought to bear, even in our legacy franchise. We come across $10 million, $15 million, $20 million commercial real estate project. We get our real estate commercial team involved and they go to where that market is and help structure, help the lender underwrite, they kind of come in from an expertise standpoint. I wouldn’t call it a vertical, because the lender still keeps the loan, but we bring that expertise in from the commercial lending staff. The other thing we do too is we now have been introducing our centralized funding capabilities, which means all of our loans are funded centrally from a documentation standpoint, from a legal review standpoint, all of the loans, particularly anything of that size would be reviewed here by people that have been used to making these kind of loans for the last 10, 20 years. So, I think we have got surrounded really, really well. And we also make sure that we are continuing to train and develop those individuals by not just having the kind of the real estate experts come in on a larger transaction, but keep the lenders involved to the transaction so that they can gain some expertise as well.

Great, alright. That’s all I have for right now. Thanks, guys.

Sure.

Thank you.

The next question will be from Matt Schultheis of Boenning & Scattergood. Please go ahead.

Good afternoon.

Hi, Matt.

Just really quickly sort of a nitpicky question, did you guys have any gains that you realized for your trading securities that you had to take it to the income statement?

The trading securities portfolio is merely – well, its $7.5 million and it’s a deferred compensation plan that requires accounting as trading securities. Is that – that’s the portion you are speaking of?

Yes.

Yes. And so there are fluctuations evaluations of that portfolio need to be taken into account and income on a quarterly basis. However, as an asset and a liability they are structured as anti-trusts. And so the fee income would include the increase or decrease as we note and then the opposite side of that entry is in compensation expense. So in the – I think it was around $350,000, $400,000 in the first quarter, Matt.

Okay, thank you.

No bottom line impact.

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Todd Clossin for his closing remarks.

Alright. Thank you. We are pleased with our performance to-date during 2017, as I mentioned earlier and we remain excited about our opportunities for the rest of this year. As always, we remain committed to maintaining strong financial institution for our shareholders. And I would like to thank you all for joining us today and I hope to see at one of our upcoming investor events. So thank you and have a great day.

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