WesBanco Inc (WSBCP) 2011 Q2 法說會逐字稿

Good morning and welcome to WesBanco's conference call. My name is Sue and I will be your conference facilitator today. Today's call will cover WesBanco's discussion of results of operations for the quarter ending June 30, 2011. Please be advised all lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (Operator Instructions) This call also is being recorded. If you object to the recording, please disconnect at this time

Forward-looking statements in this presentation 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 herein should be read in conjunction with WesBanco's 2010 Annual Report on Form 10-K document sequentially filed by WesBanco with the Securities and Exchange Commission, including WesBanco's Form 10-Q for the quarter ended March 31, 2011, which are available on the SEC's website www.SEC.gov or at WesBanco's website, www.WesBanco.com.

Investors are cautioned that forward-looking statements, which are not historical fact, involve risks and uncertainties, including those detailed in WesBanco's 2010 Annual Report on Form 10-K filed with the SEC under the section 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 any forward-looking statements.

WesBanco's second-quarter 2011 earnings release was issued yesterday afternoon and is available at www.WesBanco.com.

This call will include about 15 to 20 minutes of prepared commentary followed by a question-and-answer period which I will facilitate. An archived webcast of this call will be available at WesBanco.com.

WesBanco's participants in today's call will be Paul Limbert, President and Chief Executive Officer; Jim Gardill, Chairman of the Board; and Robert Young, Executive Vice President and Chief Financial Officer, and all will be available for questions following opening statements.

Mr. Limbert, you may begin your conference.

Thank you, Sue. Good morning, all. Thank you for participating in WesBanco's quarterly earnings conference call. We are pleased to be able to provide this information to all interested parties. I would like to make some opening comments. Bob Young will provide financial highlights of the second quarter 2011, and then Jim Gardill will moderate the question-and-answer period.

A press release was issued last evening which has more details than the accompanying slides we are presenting today. A copy of that press release is available on our website.

Yesterday WesBanco reported second quarter earnings of $11.9 million or $0.45 per share as compared to $8.2 million or $0.31 per share for the second quarter of 2010. Earnings per share on a linked quarter basis were 15% greater than the first quarter 2011. Year-to-date earnings per share increased to $0.83 per share, a 36% increase over the first six months of 2010. Our return on average assets for the six-month period was 83 basis points. We did not experience any significant non-core items in the current quarter's financial performance.

We are pleased with the financial performance of WesBanco as compared to the prior year, the prior quarter and the headwinds caused by a slowly improving economy and the regulatory environment. The growth in net income was achieved by improving net interest income, lower net charge-offs, and therefore a reduced loan loss provision, improving revenues from the wealth management function, improved revenues from customer activity fees, lower losses on the disposal of ORE properties, and a concerted effort to control cost without affecting either the quality of our operations or our revenue generating capabilities.

Our non-interest income was 26% of total revenues for the second quarter. Our pre-tax, pre-provision return on average assets has improved to 1.77%, indicating strong operating results.

The first couple of slides in our presentation this quarter are a reminder of the size and scope of WesBanco. We are a commercial bank with 112 branch offices and serve a geographical area which includes Western Pennsylvania, portions of the state of West Virginia, and the southern half of the state of Ohio. We have diversified revenue sources with the insurance and securities divisions, and a significant wealth management and trust function.

Our wealth management function now manages over $3 billion in assets and has recorded gross revenue of $4.3 million for the second quarter of 2011. Our family of mutual funds, the WesMark Funds, now exceed $770 million. We are pleased with our capital position. Our capital ratios have improved in each of the last seven quarters. Tier I leverage ratio is 8.6% and is well in excess of the regulators' well-capitalized levels. And based upon our preliminary computations we anticipate having no problems complying with the BASEL III 2019 guidelines, assuming of course their eventual applicability to smaller-cap banks even without the trust preferred securities that are on our balance sheet.

As of June 30th, 2011, our tangible equity ratio has grown to 6.6% due to our earnings. We have had earnings consistently through the recession. Because of our strong capital levels and the proven ability to increase equity, we believe WesBanco is well positioned for the current economic climate and future growth.

Deposits continue to grow with average deposits increasing by 3.9% from the prior year. This deposit growth has allowed WesBanco to reduce our high-cost federal home loan bank borrowings as they mature. Average federal home loan bank borrowings have declined by approximately $200 million in the past year.

Credit issues remain in some of our market areas. Our quarterly loan loss provision while declining remains at an unacceptably high level. Charge-offs are declining but have been stubbornly consistent at historically high levels. This quarter we have seen our total non-performing assets continue their slow decline, and while our troubled debt restructuring total decreased, our non-accrual balances increased to 1.9% of loans.

Total under-performing loans are $124 million or 3.8% of total loans basically unchanged from the previous quarter. We are continuing to work with our borrowers, assisting them in working through this recession. Our historical community bank philosophy has been to work with and assist borrowers to make it through difficult economic times. We have shared the challenges of this recession with our customers, but believe that when economic times improve, those customers will emerge stronger and help drive economic growth in our communities. We are confident that as the economy recovers, our impaired loans will also decline.

Our loan to deposit ratio has declined to approximately 77% which gives us plenty of opportunity for loan growth going forward. In order to generate additional loan volume, we have hired additional commercial loan officers, mostly in the Ohio region, and have begun to transition for other loan officers from working solely on problem loans to generating additional new loan volume.

We have seen these initiatives reflected in improved loan originations in the second quarter. Gross loans grew by $20 million during the second quarter, representing a reversal of previous period declines. This growth is important since we anticipate new government regulations which will restrict all banks' abilities to maintain historical earnings opportunities.

Economic conditions in many of our markets are continuing to improve. We see West Virginia market as being very consistent, with the North Central region being very strong with a lower unemployment rate than the national average. Our market areas of West Virginia did not see a significant real estate bubble, and therefore real estate market values have not fallen as far as other markets.

We are seeing increased activity levels in [gastro] and in the Marcellus Shale regions. The Central Ohio markets are showing signs of recovery with several new real estate projects by well-established developers beginning new projects. Our Western Ohio markets, while continuing to be slow, are beginning to show signs of recovery from their decline in manufacturing.

We are pleased to report that our stock price has held its value during the second quarter. The announcement of a dividend increase in February of this year was received favorably by the markets. Our stock price appreciation year-to-date is about $0.17 from 12/31/2010, or about a 1% as compared to a Midwest group of banks as gathered by SNL Securities which had a price depreciation or a price decline of a little over 5%. Our dividend yield remains around the 3% level.

I would like Bob Young, our CFO, to discuss with you in more detail the financial results of the second quarter.

Thank you, Paul. Good morning, all. Thanks for joining us in the conference call this morning.

Second quarter improvements in net income over the same period last year were primarily the result of a 4.6% increase in net interest income due to a 17 basis point improvement in the margin and a 42% reduction in the provision for credit losses. We also saw key growth in non-interest income areas such as trust and electronic banking, while ORE losses were substantially reduced from prior periods. For the year-to-date period, improvements in net income were primarily a result of higher net interest income again due to the increasing margin and the significantly lower loan loss provision.

For further details, net interest income increased $1.9 million or 4.6% the second quarter and $2.7 million or 3.4% for the first half of '11 as compared to the same periods in 2010 due to increases in the net interest margin through disciplined pricing of loans and deposits.

Interest income from the investment portfolio has increased by 2.1% the first six months of 2011 due to an increase in average outstanding balances partially offset by a decrease in the average rates earned. In addition, significant improvements in the funding mix continue to reduce the overall cost of funds. The net interest margin improved to 3.73% in the second quarter and 3.7% for the first half of 2011, an increase of 17 and 13 basis points respectively as compared to the same period in 2010.

The average rate on interest-bearing liabilities decreased by 39 basis points in the second quarter and 42 basis points for the year-to-date period, while the rate on earning assets declined at a slower pace of 20 and 27 basis points respectively. Lower offering rates on maturing higher-rate certificates of deposit and an increase in lower-cost products including checking, money market and saving accounts all contributed to the improvement in cost of funds.

In addition, total deposits were up an average of 3.5% the second quarter over last year. While the average balance for federal home loan bank borrowings which currently cost 3.47% decreased by $175.2 million or 43% the second quarter of 2011.

Improvements in the mix of deposit accounts also contributed to the improved cost of funds which average CDs decreasing to 38.6% of total average deposits from 42.7% last year while all other account types increased to 61.4%. Average non-interest bearing deposit balances increased 13.2% the second quarter as a result of our continuing retail marketing campaigns and customer incentive programs as well as increased balances from the bank's business customers.

Overall we have successfully managed net interest income in the current low-interest rate environment through control of loan pricing spreads, improved non-interest bearing checking account totals, the repayment of higher cost borrowings, and reductions in rates paid on deposit accounts. As Paul mentioned, we would also note that in our Northern West Virginia branches particularly we are seeing deposit increases from customer receipt of Marcellus Shale gas royalties and lease payments.

Our net interest margin and efficiency ratio have both improved substantially over the past two years as we note in the attached slide deck. The margin has grown from 3.17% in the second quarter of 2009 after our last branch acquisition in Central Ohio to the 3.73% earned in the second quarter of 2011, while the efficiency ratio which was appropriately 68% that same quarter in 2009, and that included a one-time FDIC assessment the entire industry bore to the current quarter's 59.8%.

Our expense reduction efforts have contributed to this overall efficiency ratio improvement at the same time revenues have increased. Since 2009 we have successfully restructured the balance sheet and used additional liquidity from the branch acquisition and internal deposit growth to pay down higher cost liabilities or invest in higher returns, and as a result our margin has consistently improved quarter over quarter even while loan yields have decreased and loan demand until recently has been relatively flat.

In the second quarter, non-interest income increased $0.4 million as compared to the second quarter of 2010, and it was nearly unchanged for the year-to-date period as compared to last year. The quarterly increase was due to a 17.5% increase in trust fees from new business, prior year fee increases and market improvements, a 15.2% increase in electronic banking fees, and a $1 million decrease in net losses on other real estate owned.

These improvements were partially offset by decreases in service charges on deposits resulting from the 2010 regulatory changes governing automated overdraft programs which led to fewer customer overdraft transactions as well as reduced net security gains. These trends were also apparent for the year-to-date period.

Non-interest expense increased $1.1 million or 3.3% in the second quarter and $1.2 million or 1.8% for the six months of 2011 as compared to the same periods in 2010. Salaries and wages increased $0.4 million due to regular compensation increases in the current quarter. Marketing increased $0.5 million from promotions focused on growing demand deposits and consumer loans, and other operating expenses increased $1.2 million primarily due to certain expenses relating to our retail customer fraud and higher professional fees. These increases, however, were partially offset by $0.7 million in reduced FDIC insurance under a new calculation which primarily benefits community banks and will be continuing and equipment expense.

Year-to-date salaries and wages increased $0.8 million due in part to routine annual adjustments and additional lending and support hires in certain Ohio markets while marketing expense increased $0.9 million due to the aforementioned promotions and other operating expenses increased $1 million as I mentioned before, partially offset by decreases in FDIC insurance and equipment expense of $0.6 million and $0.5 million respectively.

Turning to the balance sheet now, total assets were up 1.3% from last year as increased investment opportunities were funded by net loan pay-downs and deposit increases while federal home loan bank borrowings continue to be paid down. WesBanco's $1.5 billion securities portfolio remains a source of income and liquidity for the bank, yielding 3.78% for the second quarter.

Please note the slides included on the website for further information about the portfolio's breakdown and quality. Overall the portfolio had unrealized pretax net security gains of approximately $21 million at quarter end, $11 million of which was accounted for in other comprehensive income, and that total was up substantially from year-end's $5 million. The municipal bond portion of the portfolio had an approximate $10.3 million gain at quarter end versus a loss of $2 million at year-end as spreads have tightened in that portion of the portfolio. The modified duration of the portfolio was 3.6% and the weighted average life was 4.8 years while 56% of the portfolio remains unpledged.

Deposits were up 2.6% the second quarter as compared to last year and 1.2% from year-end as all deposit categories other than CDs were up. Excluding CDs, other transaction accounts in total were up 10.3% as compared to last year. We continue to permit more expensive single-service CDs to run off as we focus on improving overall customer relationships and transaction accounts.

We also continue to see growth in treasury management and business-related deposits in 2011 due to an expansion of customer offerings, more focused customer calling efforts and incentive programs, and a greater number of calling officers. At quarter end WesBanco's loan-to-deposit ratio was 77%, as Paul mentioned earlier, and the Company's liquidity permits loan growth to be easily funded when it occurs or to be utilized to continue to pay down expensive borrowings.

Portfolio loans were down 4% over the last year due to a slowdown in loan originations, continuing focus on credit quality, strategic reductions in residential real estate loans, and exit strategies developed for certain classified or criticized credits, particularly for our Western Ohio markets.

However, we have noticed increased demand in the second quarter resulting in a slower rate of runoff and higher overall volumes of loan applications and approvals. Indeed commercial and industrial loan balances were up over year-end which is a focus for WesBanco. Total loan commitments are also up at the end of the second quarter, and we should start transitioning to higher outstandings as we proceed through the rest of 2011, particularly in commercial loans.

The commercial pipeline appears to be stronger at quarter end for new loans than in recent previous quarters partially a result of our stronger West Virginia economy and new lenders in certain of our Ohio markets. Marcellus Shale related business is also starting to develop as several recent credits have been booked or approved from industries directly related to this important economic driver for the future of our West Virginia, Eastern Ohio and Western Pennsylvania markets.

A further breakdown of the loan portfolio is included in the slide deck. In addition to the comment earlier on C&I loans, we are seeing more residential and consumer loan production related to recent marketing offerings and are keeping more of the shorter-term residential loan production on balance sheet resulting in less runoff as we have experienced over the past years when the strategy was to sell most loans into the secondary market.

Turning to credit quality, loan quality continued to improve this quarter as leading credit indicators such as 30-day or more past-due loans and classified and criticized loans decreased. Total non-performing loans including troubled debt restructurings totaled $98.5 million or 3.02% versus $96.2 million or 2.97% last quarter and 2.93% at year-end.

NPAs to total loans including ORE and repos were 3.17% versus 3.13% last quarter and flat with year-end as ORE has dropped from 8.1 million to 5 million since year-end. Total 30-day or more past-due loans were down from 0.98% at year-end to 0.79% at June 30. Non-accrual loans were up $13.2 million from year-end while troubled debt restructurings decreased $11 million.

Approximately $4.9 million of that increase in non-accrual loans represents the balance of two land development loans after charge-downs of $4.4 million in the first quarter with the remainder of the increase primarily attributed to the migration of other previously classified commercial real estate and C&I loans to non-accrual status, including certain loans previously reported as TDRs in prior periods being placed on non-accrual during the first six months of 2011. The decrease in troubled debt restructurings was primarily due to a $4.4 million loan being reinstated to its original repayment terms back in the first quarter of this year, and the migration of six loans totaling $10.3 million to non-accrual during the first half of the year.

Other real estate owned declined from December 31 to June 30, primarily from the sale of assets during the period combined with a reduction in the amount of new foreclosures. Total classified and criticized loans which are now reported in a footnote to our financial statements decreased $33.8 million as compared to June 30 of last year and $14.5 million as compared to year-end.

Net charge-offs decreased $5.2 million in the second quarter as compared to the second quarter of 2010 and $1.4 million as compared to the first quarter of this year. Net charge-offs for the first six months include $4.4 million attributable to two land development loans. Both of these loans were classified in previously reserved, and one of these loans was also reported as a troubled debt restructuring in prior quarters.

Net annualized charge-offs to average loans were 0.85% for the quarter ended June 30 compared to 1.42% for the same period last year. Overall the provision for credit losses decreased $4.9 million or 41.7% as compared to last year, and it also decreased to $1.2 million or 15.4% in comparison with the first quarter of this year. The year-to-date provision net of charge-offs slightly increased the allowance to 1.88% of total loans at June 30th as compared to 1.86% at December 31. WesBanco remains in a strong regulatory capital position with a total risk-based capital ratio of 13.61% versus 12.87% a year ago and Tier I leverage of 8.59% as compared to 8.13% last year.

As Paul mentioned, our tangible equity ratio continues to grow, ending the period at 6.59%, an increase of 32 basis points over the last year. A somewhat reduced average balance sheet size, higher earnings and a lower dividend payout ratio have contributed to the increase in shareholders' equity and capital ratios in general.

Finally, as an overall summary of the quarter, management is very pleased with the operating results. Return on average assets on a pre-tax pre-provision basis was 1.77% as compared to 1.67% last June and the same amount for the first quarter. That is also up 18 basis points since the fourth quarter of 2009.

We will continue to work on improving loan credit quality by focusing on particular workout strategies or selected sales from time to time which combined with prior internal staffing changes and policy improvements should result in improving non-performing and net charge-off ratios as the economy improves.

We are pleased to see a pickup in loan demand and improvements in our wealth management and treasury management businesses, and as Paul mentioned we are well prepared for the future implementation of BASEL III regulatory capital standards. Our liquidity and capital strength positions WesBanco to move beyond the recent recession and be able to participate in the recovery as it occurs.

This now does conclude our prepared commentary and we will open the call for questions. Jim Gardill, Chairman of the Board, will moderate the Q&A session. And I am now turning the call back over to the facilitator for questions.

(Operator Instructions) Our first question comes from Matthew Schultheis of Boenning & Scattergood.

Good morning, gentlemen.

Good morning, Matt.

I have a quick question. Actually, it's two questions, both related to your municipal bond portfolio. I was hoping that you could provide some color regarding the geographic diversity of it as well as what types of projects are in the revenue bond portion.

Matt, we can speak to that. I think there's a little more detail on the Q that will be filed tomorrow. You will find a bit more information on that. And I think in the K you got a pretty good analysis of that, and that's not changed materially since the disclosures in the 10-K that we filed earlier in the year. You'll find that a great majority of those were -- I should say a fair amount of those are concentrated in states in which we're currently operating, but they are spread throughout a number of jurisdictions, but they're all investment grade.

The five highest states as I recall them, and not necessarily in this order, are West Virginia, Ohio, Pennsylvania, Texas and Illinois. I don't recall the exact percentage in those five states, but those are the five highest concentrations. We typically don't make -- we don't buy municipal bonds at the state level. These would all be bank-qualified instruments, so they're typically for smaller municipalities and school districts in those states. I don't have a breakdown of the revenue bonds per se, Matt. What specifically was your question in that area? What was your concern?

Are we looking at sewer projects, senior housing projects, school projects, private school projects that are qualified that way? What type of revenue stream is supposed to be supporting these basically?

Yeah, you'll see that in the slide deck, Matt, we do mention that GOs are 74% of the total.

Right.

And only 26 are revenue bonds.

Right.

They're typically not private revenue bonds.

That's right.

Typically the connection --

That would be the sewer and public utility projects.

Correct.

More infrastructure.

That's typically what the revenue bonds are are dedicated revenue streams, not private industrial development bonds but public instruments.

This particular week, Matt, they're probably better than treasuries.

Well, the yields certainly are.

Right.

Okay. Well, thank you very much.

Thank you.

The next question comes from Doug Rainwater of Rodman & Renshaw.

Gentlemen, good morning.

Good morning, Doug.

Good quarter.

Thank you very much.

I'd like to, Paul, ask you a question. Mergers have obviously played a -- historically played a pretty important part in the growth of WesBanco in expanding the franchise, and I'm wondering if you could talk a little bit or maybe frame the opportunity for acquiring banks going forward. Maybe those of the sort of smaller fatigued variety may be relatively healthy but with the regulatory costs and additional burdens, etc., ones that might be looking to partner up with a quality franchise like WesBanco, I just wondered if you had any thoughts on that.

Thank you for the question. We've got a lot of thoughts on it, but let me try to summarize I think where WesBanco is at the moment. We are certainly interested in continuing our acquisition philosophy. We are always looking for candidates that might be a good fit for WesBanco. At the same time we are looking within our footprint, so at least at this point we are continuing to look either within our existing market areas or just adjacent to our market areas. We are not looking to do acquisitions in Florida or Arizona or the California markets.

We are generally looking for the better quality banks. We have not been really too interested in the FDIC assisted transactions. That being said, if there was an appropriate candidate within our market area, we would have some interest in at least taking a look at an FDIC assisted transaction. But we are generally looking for an acquisition candidate that is doing really well on their own and they are looking for a partner just simply because of regulatory issues or management succession issues type of candidate. So we are -- we have our heads up, our antennas are out and we are continually looking for potential candidates.

Paul, given the experience with -- that you've had, the I guess expertise in acquiring, can you give any sense at all about where you think for say banks that would fit those parameters, where the seller expectations might be in your mind today versus -- I certainly would think they would be lower than pre-crisis, but if they're realistic from your perspective.

Given the acquisition that we recently saw in the Pittsburgh market at two times tangible, we're worried about those kinds of numbers. We think those numbers are pretty strong and we are not looking for a transaction in that particular space as far as multiples. I think the sellers are going to have to come down with some of their expectations.

And, Doug, I think I'd comment on that supplementally. I don't think that the seller expectations are quite realistic in today's environment and the current earning opportunities for banks, so we think there will be some adjustment to that. Whether it makes for additional opportunities or makes for less opportunities over the near term will be an issue. Credit quality is also an issue for us as we work through this recession. I think we're very cautious about credit quality of institutions and their regulatory status. We think that's an important part of the ingredient, as well, so there are additional criteria that we look at in transactions in addition to the financial parameters because as Paul said the financials still have to work.

Right. Yeah, I think we'd all agree that seller expectations are a very resilient phenomenon.

Yeah.

So thank you for your thoughts on that. Appreciate it, and once again good quarter.

Thank you, Doug.

(Operator Instructions) Our next question comes from [Steven Skoden] of KBW.

Good morning, guys. Thanks for taking my call.

Good morning, Steve.

I was wondering if you guys could give me any further detail on the other operating expense line for the quarter and if whether or not that increase for the quarter represented something that would be kind of a good run rate moving forward or if there were some one-time charges in there.

I think we can give you some additional detail and there will be more detail on the Q. Just briefly though I would note in Bob's presentation he gave you some detail on that. Our annual salary adjustment occurs in the second quarter, so you will start to see some manifestation of that in the third and fourth quarters, but that's a roll-forward. It's not a one-time charge, so I think with additional detail maybe Bob or Paul could offer some color on that.

Steve, we did discuss and will be showing that in the Q tomorrow, but other operating expense included an extra million dollars' worth of charges related to retail customer fraud and other related fees in REO and foreclosure costs particularly. Those were the two key areas, other operations losses and REO expenses in other operating expenses. I also mentioned the professional fees were up quarter over quarter for similar reasons, although that's in a different account.

And those are one-time charges.

That's right.

Okay. Thanks for that detail. And one other quick point on the loan growth that you guys were able to show this quarter, do you think that with the increase in loan officers that you mentioned and commercial expansion and the residential real estate holdings that that's a trend that may continue or are you still cautious about that moving forward?

I think we're still cautious about it, Steve. There's a lot of competition for quality loans right now, and we're seeing as Paul noted some recovery in some of our key markets where there are pockets of strength. But the competition is key. We're continuing to work our commercial loan customers and our portfolio heavily so we're trying to sustain growth, and a lot of it depends on the recovery and how fast we see improvement in some of the markets in the west.

I might just add that we are seeing an opening of secondary market for some of the commercial projects also. We are seeing some of our customers being able to get longer-term financing from the secondary market for some of their projects, so we're seeing that -- the bottom of the bucket so to speak continuing to be open, and we've got to continue to run faster to make sure originations can keep up with the pay-downs and the payouts.

Great. Thank you so much, guys, for taking my call.

Thanks, Steve.

The next question comes from Carter Bundy of Stifel Nicolaus.

Good morning, everyone.

Hi, Carter. Good morning.

Great quarter just to start.

Thank you.

As I sort of look at your NPA mix right now, you have very, very little REO and wanted to get -- I guess it's sort of a two-prong question. Wanted to get your outlook on expectations for moving non-performing loans to REO. How much of that should we expect to migrate that direction? And then also your REO losses this quarter which you show in other income in the fee income stream, at least that piece of it they were very contained and wanted to sort of get your thoughts on that.

Carter, if you remember we started this process basically in October of '09 where we were really focused on problem credits and we increased our special assets group in order to work those, and the goal was to work some of them out of the bank if we felt that that was the appropriate method and there was an opportunity to do so. What you're seeing here in these numbers is a manifestation of that effort. That was a focused effort over an 18-month period, and we're seeing some manifestation of that.

And I'll let Bob maybe speak to some of the details here, but when you look at those efforts and the reduction in the ORE has I think been a success story from that concentrated effort. And as Paul mentioned, we feel comfortable enough with the progress that we're moving some of those reassigned lenders back into the production side as we continue to work through the economic cycle that we're in and we see some light at the end of the tunnel in the recovery. So, Bob, maybe a couple of details on the ORE figure.

On the loss side I assume, Carter, you're talking more about run rate there, and it was down $1 million over last year. You recall we had a hospitality related write-down in the second quarter of last year. That's primarily the delta between the second quarter of this year and the second quarter of last year. We're also consecutively down some $300,000 from losses in the first quarter.

I'm not going to suggest that at 271 that would be the number going forward, but I do think Jim's right that we're doing a better job of evaluating credits as they move into the foreclosed status and evaluating their values so there aren't as many write-downs as we move them from -- the write-downs are occurring as we move them from non-accrual into foreclosed real estate as opposed to continuing to drag through that line item going forward.

Steve had earlier asked a question about expenses, and we still are seeing ongoing expenses related to property management that are elevated. I'm not sure I would characterize those as one-time, but I think as you see REO come down from 8 million to 5 million this quarter, I think consecutively that bodes well for future expenses related to that inventory.

The other part of this, Carter, too is that we don't necessarily envision a migration to ORE of non-accrual loans. As Paul mentioned, our community bank strategy is to work with our borrowers, and working with our borrowers sometimes permits other types of exits, either through a refinance with another lender or a restructuring and a movement to where it's a viable project. And we've been quite willing to move loans out of the portfolio prior to the time that we would have to repossess them through foreclosure. So I don't necessarily see a trend in migration to ORE. We've been able to move a number of them out of the portfolio.

Okay. So I guess the idea here would be that much of that non-accrual balance will likely not migrate to REO. And then a second takeaway or a second question I had on that was, Paul, you had mentioned asset sales potentially, and if you could provide a little color on that.

Well, remember we do have a history of doing some assets sales. In the third quarter of last year we did an asset sale.

Right.

And if I would've added anything to the commentary from the previous discussion I would say that it's probably helped to hold down the ORE balances. That is -- the asset sales is something that we are continually looking at. We just are evaluating our portfolio at all times, and if it makes sense to do an asset sale we'll do it. If it doesn't then we won't do it. So we continue to look at that option. We use that option when it's -- when we feel it's to our best advantage, Carter.

Okay. And then the final question and I'll hop out of the queue here. Could you talk -- it sounds like you're generally talking about sort of firming up in some of your -- in most of your markets, particularly the Western Ohio markets. Would you still characterize Western Ohio as being the weakest market, and would you characterize it incrementally as bottoming out or getting worse?

We would still characterize it as the weakest market. Southwestern Ohio has a higher unemployment rate, and they've had the most impact on manufacturing jobs. Those are still an issue. It's still a drag on that economy, and so we anticipate that will continue to be a slow area for a while until we see some improvement in the unemployment rate.

Okay. Thank you all for all the time today.

Thanks, Carter.

The next question comes from Kenneth James of Sterne Agee.

Good morning, gentlemen.

Good morning, Ken.

Just a question on the margin, and I apologize if you touched on this in the prepared remarks. I guess I'm looking at a cost of funds that looks like it probably has some more room to move lower, but then also some loan yields that looks like they could be hard to maintain in the current rate environment and competition. Can you kind of talk about how that plays out going forward?

Well, this is Paul. Let me start and I think Bob can add some more details to this. We are watching our cost of funds very, very carefully. It is a number that we are comparing to other financial institutions. We do -- we certainly see what you are seeing in that comparison. We are trying to balance though our returns for our customers in this process. We don't want to create an outflow of customers that have multiple relationships with us through this particular time period because we know we're going to want them back at some point in time. So we are trying not to disrupt the customer base with the deposit pricing that we have. We certainly recognize that there may be opportunities for us in the future to reduce deposit pricing.

On the loan side, yeah, I do think given the interest rate scenario that we're in, given the competition that we're seeing, loan rates are going to be difficult to hold. I don't think there's any doubt about that, and I think that's a problem for the whole industry, not just WesBanco. But we are watching very closely the rates and we are trying to make sure that we deal with our customers on a one-on-one basis to try to make sure that we have a fair rate for both WesBanco and for our customer.

If I could just add to your question, Ken, or to Paul's response. I think we have done a very good job over the past year of managing loan rates despite the competitive environment. If you take a look at the year-to-date rates at 5.5% of the loan portfolio versus 5.65% last year, the three months holding at 5.50 versus the six-month rate, so it's been relatively flat the last few quarters while cost of funds continues to decrease. We've really been able to benefit the margin by a shift in cost of funds. And while that's not growing the loan portfolio yet, we certainly are making some spread on that in the form of additional investment opportunities.

If you take a look at that shift on the deposit side, I mentioned this earlier but strategically going to 62% on transaction accounts when a few years ago we had 60% or 61% in CDs is a big portion of the margin improvement over the last couple of years.

You mention the opportunity on cost of funds, and I do realize that our CDs particularly are higher than our peers at around 1.9%, and it's been relatively flat in that category the past few quarters. We did focus on that at the end of the quarter and reduced CD offering rates a few basis points. But the biggest improvement during the quarter was just the shift with higher balances in interest-bearing demand, money markets and savings accounts, and those are at much lower rates obviously.

Meanwhile we did strategically lower those rates during the quarter, and you can see that in the margin if you take a look at the three months versus last year. So it's a combination of mix shift and reducing rates, and we do have a little bit of room to go. Even on the money market today, it's still higher than peer and we have a little bit of room yet on the CDs. Part of the reason why the CDs are higher is we have been focused on trying to get some longer-term money in there to balance from an ALM perspective.

And the one other comment is that we're not growing non-accruals, and when you're not adding to non-accruals that in the quarter you do add the non-accruals typically has a small impact on the margin negatively. So by not adding to non-accruals of significance, that's been helpful as well.

We do say in our 10-Q that in a flat interest rate environment there's a few basis points risk to the margin. We've been saying that the last few quarters and yet the margin has grown and it's primarily due to management of the offering rates for loans and deposits that has kept us whole and in fact allowed us to grow that as well as the mix shift I mentioned earlier.

Okay. Thanks for the color. To what extent are loan floors helping you defend the loan yield here?

They are helping. We started that process a little more aggressively probably 18 months ago, and those floors are making a difference. It does have an impact. I think Bob maybe has a statistic or Paul on the numbers.

We've got -- Ken, to that point here I'll be very short. Rate floors -- and this is disclosed. You'll see this in the Q. We've got rate floors on about $900 million of the portfolio at the end of the quarter. We started this disclosure a couple quarters ago. It's in market risk in the Q. That's about 40% of commercial loans. The average floor rate is 5.2%, although those rates on new offerings are coming down.

I may add that that sounds all well and good, but what you have to deal with is competition. So those floor rates, they sound good but it doesn't hold quite as strongly as you might anticipate.

Yeah, I was going to ask to what extent are you feeling pressure to remove floors just to retain existing business?

You do and we experienced that and are experiencing it. Ken, the other thing is I think that's the positive thing about having a better loan demand. We're able to hold pricing better when we have more opportunity. So we can pick and choose a little bit, which we are doing, in order to maintain margin.

Okay. Thank you gentlemen very much.

Thanks, Ken.

This concludes our question-and-answer session. I would now like to turn the conference back over to Jim Gardill for any closing remarks.

Sue, thank you very much, and I appreciate your serving as a moderator today. And I wanted to appreciate everybody participating today, especially those who had questions. We do encourage that, and it is helpful to hear from you. So again thank you very much. We believe we had a very nice quarter. It was nice to see further recovery and we look forward to the balance of the year, so thank you very much for participating.

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