WesBanco Inc (WSBCP) 2012 Q4 法說會逐字稿

Good afternoon and welcome to Wesbanco's conference call. My name is Andrew, and I will be your conference facilitator today. Today's call will cover Wesbanco's discussion of results of operations for the quarter ended December 31, 2012.

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 is also being recorded. If you object to the recording, please disconnect at this time. (Operator Instructions).

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 2011 Annual Report on Form 10-K and documents subsequently filed by Wesbanco with the Securities and Exchange Commission, SEC, including Wesbanco's Form 10-Q for the quarters ended March 31, 2012; June 30, 2012; and September 30, 2012, 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 2011 Annual Report on Form 10-K filed with the SEC under the section Risk Factors in Part 1, Item 1 A. 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 fourth-quarter 2012 earnings release was issued this morning and is available at www.Wesbanco.com.

This call will include about 20 to 30 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, Andrew. Good afternoon. Thank you for participating in Wesbanco's fourth-quarter 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 fourth quarter and full year 2012 and then Jim Gardill will moderate the question-and-answer period.

A press release detailing the results of the fourth quarter and the year was issued this morning. A copy of the entire press release is available on our website. We will assume that all participants are familiar with Wesbanco and we will therefore move to our discussion of the annual and quarterly results.

Wesbanco had an excellent year and fourth quarter. Accomplishments during the year include the acquisition of Fidelity Bancorp, which we were able to close in only four months from the date of the announcement; continued reduction in the nonperforming loans and loan charge-offs; continued rationalization of our branch network; growth in loans outstanding for the year and a 30% increase in loan originations. All of these accomplishments contributed to our core operating results. Our core operating earnings were strong enough for Wesbanco to be able to maintain well-capitalized ratios even after the acquisition of Fidelity.

Bob will fill you in on the details, but net income for the year increased 13%. If we exclude the restructuring and merger-related expenses, net income increased 19%. Given our accomplishments and the growth in net income, we consider 2012 to be a very successful year for our shareholders.

On November 30, we completed the acquisition of Fidelity Bancorp and its main subsidiary, Fidelity Savings Bank. Again, we closed this transaction in approximately four months, she includes the repurchase of the Fidelity TARP shares. The short closing time was a reflection of our desire to enter the Pittsburgh market and get started expanding our franchise.

While some cost savings are being achieved, a significant portion of the cost savings will not begin until late first-quarter 2013, when the information technology systems are converted. A lot of work to restructure Fidelity's balance sheet occurred during the quarter with the sale of approximately $12 million of [unperforming] loans, sale of underperforming investments and the early redemption of non-core borrowings.

We want to start the year 2013 with a balance sheet which supports a higher net interest income for those assets.

We have also begun to hire staff to support the Wesbanco products in the Pittsburgh market. We continue to be very excited about our entry into Pittsburgh and expect with hard work we will be successful.

During the quarter, we were able to close six smaller branches in market areas which did not provide growth potential. These closures were a step in our continued evaluation of all expenses in our organization. As many observers of the industry know, the tightening of net interest margins may cause downward pressure on earnings.

We are continuing our efforts to reduce expenses in time to offset some of the net interest income declines. In fact, 2012 was the only year in the past three years that other operating expenses increased. During the years 2010 and 2011, other expenses actually decreased from the previous period. During 2012, exclusive of the merger and branch closing expenses, and, of course, wages and fringe benefits, all other expenses as a group actually decreased.

Since our employees are the reason for our success, we believe that it is important to retain our excellent staff through continued improvements in wages and fringes.

The low interest rate environment continues to impact our net interest margin. Our margin is declining, like most banks'. However, we are encouraged by the stability in our net interest income in the fourth quarter as compared to the third quarter. The improvement in net interest income was caused by the Fidelity transaction, an increase in loans outstanding and the reductions in liability rates.

We have additional borrowings and higher cost CDs maturing in 2013 which should continue the reduction in liability costs. Wesbanco does have strong liquidity and the capacity to continue to grow loans, since our loan to deposit ratio approximates 75%.

Loan growth has been difficult, but our loan originations remain very strong. Exclusive of the Fidelity transactions we have seen organic loan growth of 4% since the prior year end. Our organic loan originations have increased by approximately 30%. In previous periods loan plans and payoffs as well as actions taken to improve credit quality offset our strong originations. Our recent success at growing loans is attributable to the efforts of our lending officers, enhancing relationships with existing customers, improving economic conditions in many of our market areas and the addition of some new lenders.

We would like to draw your attention to the continued reduction in our total nonperforming assets. Since last year end, total nonperforming assets have declined by $20 million or 23%. Year end 2012 balances include $8.4 million of mortgage loans which have been reclassified as TDRs, based upon recent regulatory guidance. This guidance requires borrowers who have filed Chapter 7 bankruptcies to be reclassified as TDR loans even if the borrower has remained in a current payment status subsequent to the Chapter 7.

In addition, we have seen even greater declines in criticized and classified loans. Criticized and classified loans declined in each of the past four quarters by a total of $85 million or 33%. Declines in both of these classifications of loans are attributable to large -- in a large part to the efforts of our loan officers and special assets group working with these customers through the recessions as their individual customers' businesses have improved.

We have also used charge-offs and loan sales during the past year to reduce these balances. Our efforts have resulted in a reduction of nonperforming loans to total loans of 1.7%.

We are seeing some economic improvement in many of our market areas. The Marcellus/Utica Shale activities in our markets continued to be, to bring improved revenues to many of our local businesses. Drilling continues because of the abundance of reserves in the so-called wet gas areas. Our Columbus, Ohio market also shows improved activity with multifamily housing projects beginning construction.

Our western Ohio markets are rebounding, based upon the improvement in the auto industry. We are maintaining our underwriting and pricing standards as a part of our loan origination process. An initiative to establish a private banking team, which coordinates the delivery of special products, has had some early success. Coordinating delivery of our wealth management products, our securities division products, along with market value improvements, provided for a growth in wealth management assets to $3.2 billion. Revenue from these activities continues to grow in relationship to the growth in assets.

Initiatives which improved services to our customers include mobile banking, remote deposit capture, and improved Internet security options. Each of these initiatives, while improving customer products, are also enhancing our internal efficiencies by allowing us to process electronically rather than by paper. While many of our customers continue to want to transact their business in our branch offices, technology has resulted in the banking options for our customers.

We are continuing to see deposit growth. We have seen 2% organic deposit growth, which excludes the Fidelity acquisitions, since last year end. This growth can be attributed to our marketing efforts and our ability to attract deposits relating to the Marcellus/Utica Shale activities, offset by our efforts to control deposit cost through lower deposit rates.

We continue to see high levels of gas exploration in our market areas. We're looking forward to opportunities in Pittsburgh to market traditional banking products but also to offer wealth management and security products. We recognize that with a 75% loan to deposit ratio, loan growth is an important product to improve profitability.

I would like Bob Young, our CFO, to discuss with you in more detail the financial results of the fourth quarter and year 2012. Bob?

Thanks, Paul. Good afternoon, everyone, on the line this afternoon. I will try to get through this quickly so we have plenty of time for your questions.

As Paul indicated, earnings per share for the fourth quarter were up to $0.46 on a GAAP basis up from $0.40 last year, that's up 15% despite the merger-related and normal operating expenses that we assumed with the November 30 closing of Fidelity Bank.

GAAP net income was $12.7 million versus $10.6 million last year, which is up some 18.9%. If we were to exclude the merger-related restructuring expenses, net income was $14.2 million and EPS was a strong $0.52, up 34% and 30%, respectively, from last year.

Continued improvements in credit quality resulted in a quarterly loan loss provision lower than any quarter since prior to the recession's start. In addition, control of operating expenses and increased non-interest income helped to offset a reduction in the net interest margin and relatively flat net interest income.

Loan growth during the year and the Fidelity acquired assets helped to offset the impact and net interest income of this lower margin. For the year ended December 31, 2012, GAAP EPS was up 11.5% to $1.84 versus $1.65 for 2011 and net income was up 13.1% from $43.8 million to $49.5 million, for the same reasons as those impacting the quarter. Core net income increased to $52.1 million for the year, up 18.9%, and core EPS without the restructuring and merger-related expenses were $1.94, up a strong 17.7% over last year.

Earnings per share is up by a lesser percentage than net income due to the 2.5 million common shares issued for the Fidelity acquisition in the fourth quarter. In addition, cash paid totaled approximately $15 million for the deal, resulting in a total deal value of some $70 million plus the payoff of TARP to the US Treasury for an additional $7 million.

Total intangibles created by the deal were $43.5 million including $4.7 million for the amortizable core deposit intangible and the remainder of $38.8 million accounted for as goodwill after the mark to market of the assets and liabilities.

Net interest income increased 3.2% or $1.4 million for the fourth quarter and decreased $1 million or 0.6% for the year as the Fidelity acquisition and 4.2% organic loan growth mostly offset the impact of a lower net interest margin, which did decline from 3.66% to 3.53% for the year. However, the margin was only down 1 basis point for the quarter compared to the third quarter, and it has been consistently between 3.5% and 3.6% for the last four quarters. Management has focused during this time on balancing cost of funds decreases with the inevitable earning asset yield declines in both loan and investment portfolios as assets are repricing at maturity or renewal.

Cost of funds has decreased a total of 29 basis points from 1.22% to 93 basis points for the fourth quarter with interest-bearing deposits for the fourth quarter dropping to 75 basis points from 1% last year. However, asset yields dropped some 34 basis points over that same time period.

The continued low interest rate environment and accelerating competition for good quality credits has indeed affected loan and investment yields at a somewhat faster pace than deposit in funding costs have dropped. A slight change in total mix with average securities and other liquid assets comprising just under 33% of total earning assets as compared to less than 32% last year also had a minor influence on total asset yields.

However, helping to maintain the margin in the quarter was a maturity of $50 million in Federal Home Loan Bank advances and another $50 million in wholesale repos that, combined, cost some 4.09%. Another $50 million of Federal Home Loan Bank funding comes due in the first quarter at an average cost of 3.27%, which should help offset the asset yield compression.

Certificates of deposit at an average cost of 1.61% for the past quarter also will continue to reprice over the next couple of years with over $810 million scheduled to mature in the next 12 months at an average cost of 1.58%. In addition, certain more expensive CDs totaling $275 million will mature in the last four months of this year at an average cost of 2.74%. This should result in a CD portfolio costing approximately 1% to 1.1% by year-end 2013.

Nonetheless, we do expect the margin to experience a gradual reduction over the next couple of years, given the current extended low rate environment and the lower yielding acquired balance sheet of Fidelity.

Relative to noninterest income, it was up a strong 11.6% or $1.8 million from last year's fourth quarter and $4.9 million or 8.2% for the year. For the fourth quarter, mortgage banking, trust fees, electronic banking fees, securities brokerage and other fee income increased while year to date the most material factors were higher electronic banking, mortgage banking, gains on sale of investment securities and lower real estate-owned losses. Service charges on deposits decreased for both periods, due primarily to higher transaction account balances and reduced customer usage of overdraft-related products, offset somewhat in the fourth quarter by the one month of Fidelity Savings Bank activity.

I would also point out that trust assets growth has been strong over the last year, up some 9% from year end 2011, helping to drive the quarter-over-quarter and year-to-date revenue increase.

Total non-interest expenses were only up 4.2% on a core basis, excluding the restructuring charges of some $700,000 and $3.2 million in merger-related expense over the last year as continued management initiatives from many expense categories helped keep total expenses under control.

Salaries were up 4% year to date as normal salary increases and new hires in such categories as commercial mortgage lending, private banking, treasury management and securities brokerage combined with the December addition of 139 Fidelity employees prior to the systems conversions coming up in February, combined to produce that increase.

Employee benefits rose 24% year to date, primarily due to higher pension and healthcare costs. However, most other expense categories were flat to down for the year, even after adding in Fidelity's one one expenses.

Similar factors affected the quarter-over-quarter comparison although total expenses net of restructuring and merger-related charges were up 10.5% due to the greater impact of Fidelity on the quarter as compared to the year.

Turning now to the balance sheet, total assets were up 9.8% from last year, or $543 million, due in large part to the acquisition. Loans were up 13.8% or $448 million and deposits were up $550 million or 12.5%. However, as a result of new loan production and volume-related increases totaling 29.7%, mostly in commercial and mortgage lending, the Bank did show a 4.2% increase approximating $135 million in organic loan balances from last year end, as I mentioned earlier.

And in addition, we were up some 1% from the end of the third quarter despite our mentioning previously anticipated commercial paydowns in our third-quarter conference call, which totaled some $45 million. Deposits were up 2.2% organically from last year end. Total borrowings and junior subordinated debt were down 22% to just 6.1% of total assets from 8.5% last year end, despite the assumption of Fidelity's debt after our restructuring of their borrowings and paying off some $80 million of such borrowings.

Overall, the securities portfolio, yielding a tax-equivalent 3.09% for the quarter, had unrealized pretax net security gains of approximately 4% of the total securities balance at year end. Out of an inherited $222 million in Fidelity securities, we sold over $130 million of lower yielding or credit-impaired securities by year end, resulting in a lower-sized, high return on average asset balance sheet.

All nonagency mortgage backs, trust prefered's and most equities were sold to avoid future credit-driven portfolio issues, which has been a significant issue for Fidelity over the past few years.

We continue to shift deposits away from term CDs to checking and savings accounts. Average demand deposits are up some 17.4% over the last year and total deposits, other than CDs, are up 11.5% on average. These low-cost accounts now comprise 67% of total deposits as compared to 63% at the end of 2011.

Noninterest-bearing deposits as well as related electronic banking fee activity income continue to grow as a result of the increased balances from the Bank's business banking customers through various Treasury management initiatives as well as ongoing retail marketing campaigns. Of note, Fidelity's deposit structure was similar to Wesbanco's. Indeed, one of the attractions of the acquisition was 68% of their total deposits in categories other than CDs.

Although a savings bank by charter, they had successfully restructured their deposit composition over the years to be more banklike. During the year, growth continued from the important Marcellus and Utica Shale gas regions in our tri-state area with tracked deposits totaling over $220 million this year, from bonus and royalty payments, on top of the $125 million recorded in 2011. And I would note we have not seen any slowdown in that activity here in the fourth quarter.

Part of the attraction of Fidelity's market in suburban Pittsburgh is to add to our market-leading Community Bank position in eastern Ohio and northern West Virginia, where shale gas drilling is growing in these wet gas areas. As some additional detail to the loan growth I mentioned earlier, residential mortgage loans were up 27.7% from last year end, 11.4% of which was organic, and commercial loans were up 10.6%, 28.4% of which was organic.

Mortgage loan originations were up 52.2% over last year to $342 million with approximately 62.2% of new production retained in our loan portfolio versus 65.3% last year, as management continues to book a portion of 15-year or less maturity loans for the portfolio. Commercial loan levels increased as an expanding pipeline for commercial real estate improved property and production increases from central Ohio, northern West Virginia and western Pennsylvania more than offset payoffs from properties sold for construction projects completed.

Commercial line usage was down to less than 42% as compared to the third quarter, but commercial and industrial loans were up 12% from last year. Total commercial loan production improved to over $730 million for the year, some 25% higher than in 2011, and period end commitments have risen in accordance therewith.

Pipelines remain strong going into the new year, such that the pace of production should mostly offset our normal maturities and unscheduled paydowns.

Moving on to credit quality, total nonperforming loans and classified and criticized loans continued to decrease. Total nonperforming assets dropped from last December's total of $90 million to some $70 million, representing 1.89% of total loans and real estate owned, down from last year's 2.77%. The overall reduction in nonperforming assets was primarily due to workout strategies such as loan sales, principal reductions and net charge-offs, which exceeded the migration of new loans into these categories.

Loan sales totaled $11.3 million in the fourth quarter, all from the Fidelity portfolio, as part of management's cleanup strategy upon acquiring their loans. A total of $31 million of underperforming loans have been sold since last year-end. Loans past due 30 days or more represented 71 basis points of total portfolio loans at the end of the year compared to 77 basis points last year.

In addition, total classified and criticized loans declined by $85 million or 33% from December 31, 2011, and $25 million or 12.5% in the fourth quarter, despite the Fidelity acquisition.

Net charge-offs were $4.1 million for the fourth quarter compared to $9.9 million in the fourth quarter of 2011. Total year charge-offs were $22.1 million compared to $42.5 million for all of 2011, which represents a net charge-off rate of 60 basis points versus 1.31%.

Overall, the provision for credit losses decreased from $35.3 million last year to $19.9 million for all of 2012, equating to a 43.7% reduction. And the fourth-quarter provision was down 66% or $6.4 million to $3.3 million, the lowest quarterly level since 2007. The allowance represented 1.43% of total loans at year end, versus 1.69% at the end of 2011, now covering 83% of non-performers.

As noted in the press release, if Fidelity's credit mark of $7.8 million were to be included in the allowance instead of netted against total loans as a purchase accounting discount, the allowance would have been 1.62%. The total loan mark including interest and liquidity and a portion related to the sold loans was $12.6 million or 3.9% of total loans versus the 3.6% noted at date of announcement.

Total tangible capital represented 6.77% of total tangible assets at year end, down from 7.13% at the end of the third quarter due to the acquisition but up from last year's 6.68%. Regulatory ratios were generally higher than last year end and significantly higher than well-capitalized minimums. Tangible book value fell 6%, as predicted, due to the deal, from 14.17% at the end of the third quarter to 13.34% at year end.

The net total mark on all financial assets and liabilities was close to the estimated amount at date of announcement, resulting in relatively similar levels of intangibles. We had disclosed about $41 million of total intangibles in July and we actually came in at about $43.5 million.

In conclusion, we are very pleased with operating results for both the fourth quarter and the year and the earlier than anticipated closing of the Fidelity acquisition. Control of the net interest margin as interest rates continue to set historic lows, controlled operating expenses and significant improvements to credit quality have combined to lead to significantly higher net income. Loan growth and a strong pipeline headed into 2013 should assist in controlling the natural net interest margin [decrease] from the slow interest rate environment. An improved fee income should result from wealth management initiatives, from new and established relationships and cross-selling opportunities from retail and commercial team members for assets under management, securities brokerage and our private banking unit.

Initiatives to rightsize the Fidelity employee base post-conversion along with other planned savings should result in us achieving our previously announced cost savings goal of 35% by the end of the second quarter on a run rate basis. Our strong balance sheet liquidity and overall capital strength positions us to be able to take advantage of market-related organic and acquisition-related growth opportunities.

Our newly announced management team in Pittsburgh, working together with our corporate business leaders, will add banking and wealth management products and services to those that have been historically provided by Fidelity's sales management teams.

This does conclude our prepared commentary, and we will open the call now for questions. Jim Gardill, Chairman of the Board, will moderate this session. And we will turn the call back over to the facilitator to handle those questions.

(Operator Instructions). The first question comes from Catherine Mealor of KBW.

Paul, you mentioned that we won't see cost savings really come in from Fidelity until late first quarter. Are you all still thinking that the total amount of cost savings is about the same as you originally communicated? I think it was about 35% or just around $5.5 million. Is that still your estimated target?

Yes, that is still our estimated target. We think we will be able to achieve very, very close to that percentage of cost savings. And the reason that the cost savings really will not occur until late in the first quarter is just simply that the data processing conversion is not scheduled until mid-February. So we have got to keep their folks employed through the conversion dates.

So then would you expect for that run rate to be fully reflected maybe would you say by third quarter of 2013?

Yes, I would expect it would be the third quarter till all the expenses would settle down.

Okay, great. And then, Bob, you might have mentioned this a little bit in your prepared remarks. But can you quantify for us the amount of underperforming securities you sold and then the borrowings that you redeemed from the Fidelity merger?

Well, the borrowings were some $80 million. And, Catherine, they were mostly Federal Home Loan Bank convertible advances and wholesale structured repos. So after mark to market, they would have been on our balance sheet at just slightly below 1%. We took the opportunity of the mark to eliminate the structure involved in those borrowings and redeem them or pay them off and have, in general, replaced them with Fed funds at 25 basis points.

On the investment securities, we sold $22 million of face value of their trust preferreds, which had been marked down over the years including adjustments to other comprehensive income to about $8 million. And we ended up selling those for just over $5 million. I believe the nonagency mortgage-backed securities totaled between $5 million and $10 million, and bank equities were less than $2 million.

Thanks, really helpful. And one last question on just organic loan growth -- I think that was about 4% organically in 2012. What is your outlook for loan growth in 2013? Do you think you will keep it at about that pace or do you think we can increase that growth rate a little bit in light of Fidelity coming on board? Thanks.

Catherine, just in response to that question, our plan is to continue moving strongly on our lending products. We originated about $1.2 billion in loans in 2012 and we will set goals that will meet or exceed that. Those would be goals, of course; we don't have a crystal ball.

But we have also invested in talent, in adding new lenders to the markets to increase our opportunities. So we really do plan on focusing on loan growth in 2013.

William Wallace, Raymond James.

My first question is on margin. It looks to me like your margin may have performed better than you were expecting in the quarter, last quarter. If you had not done the Fidelity acquisition, would your margin have expanded?

Yes, it would have, primarily due to the restructuring of our own borrowings in the fourth quarter. As an example, the margin in the month of December was 3.48%, which reflects the marked Fidelity balance sheet. So we figure it had 4 to 5 basis points of impact overall.

Were there any penalties or anything associated with the restructuring? I know you had said that they matured in the quarter.

There were no penalties associated with our $100 million of borrowings. The mark to market level of the Fidelity borrowings, which was $6 million below their face, was taken into account in paying off those borrowings.

Okay, so I assume we'll have a couple basis points of pressure from the impact of another two months of the Fidelity earning assets in your mix. So let's assume it's 2 basis points, let's assume it's 3.48%. Is your budget that you can keep your margin flat, given all of the benefits that you are going to see, especially in that CB portfolio? Flat for the year?

The margin, as I mentioned in my analysis, will be slightly down. We are expecting in the low 3.40s by the end of 2012 -- 2013, sorry.

And I think, as Paul and Bob mentioned, there will be, again, downward pressure on the margin throughout the balance of the year, though there are items that we have that will mitigate that. And we will continue to deploy those in the reduction in funds cost and the reduction in borrowing costs.

Okay, moving on to credit, there was commentary and there was language in the press release about the classification of the mortgages of customers who have declared bankruptcy. You said those were put into TDR --

Yes, that's correct.

Are those put into accruing TDR?

They are.

So I look at the non-accruing balance (multiple speakers) --

Yes.

So the nonaccruing balance actually picked up. Are you seeing a negative -- negative trends where some of the other going loans that were in TDR have started to go bad?

No, we have not seen that trend. We added some of that from the Fidelity portfolio, and that's why you would see some adjustment in the balances.

And I think, Wally, of the $8 million on our own side, about $3 million of that went into nonaccrual and the other five into accruing TDR status, just to correct that.

Okay, thank you. So what is the thought on the bankruptcy process and how that would impact a borrower's willingness to stay current on their mortgage, once the process is complete?

Well, this was an accounting adjustment more than it was a credit adjustment because the change in accounting rules from the regulatory agencies. And so, we view that more as a regulatory issue than a credit issue. Our experience with the borrowers -- generally, when they reaffirm the debts, they have maintained them. When they don't reaffirm them, we have still had some maintained where they want to stay in their homes. So it's really a mixed result, Wally.

I just may add you will see this adjustment and other banks reporting on TDRs here in the fourth quarter. This is not something that is unique to Wesbanco, it's in the industry right now.

Right; no, we have seen it. When you get notice of a bankruptcy filing, and you immediately order an appraisal on the home and then adjust the carrying value of that mortgage to the new appraisal? Or will you wait until a borrower stops paying?

We usually initiate that at the time we receive the notice, Wally.

Okay, that takes --. Oh, the one last question was just a little bit of housekeeping. The $2.4 million in restructuring and merger-related expenses -- is that spread out among a couple of the line items, or do you lump that into one line item?

That's all in one line item in the press release. We break that out for you. And it's legal and investment banking expenses, primarily in the fourth quarter, and a portion of the severance and conversion-related expenses, termination fees for data processing, for instance.

We did push as much as we could back onto the Fidelity side. So what you are seeing is what the accountants have us put on our side.

And do you expect still another $600,000 or $700,000 in the first quarter related to the conversion?

We are expecting about $1 million in the first quarter.

Okay, thank you very much. Thanks, guys.

Kenneth James of Sterne Agee.

I'm curious, with some of the cleanup you did both on the loan and security side with the acquisition just how much, if any, more shrinkage in the Fidelity balance sheet we could expect from here, either from credit relationships you are targeting or just normal customer attrition from acquisition or anything like that?

We think we got most of it done in the fourth quarter.

We don't see much shrinkage moving forward, Kenneth. We're not anticipating deposit shrinkage. We have a team of people out there that, for the most part, were involved in managing Fidelity before we acquired them, coordinating with our folks here in Wheeling. And while the core deposit intangible typically does anticipate some market attrition, we are not thinking that will be significant here.

Okay, and then just thinking about expenses, particularly in the second half of the year, and if you expect to have your full cost savings by the end of the second quarter -- you guys are pretty consistently $35 million in expenses before, and that would put them at 2.5 to 3. Are we looking at $38 million kind of run rate in the second half of the year?

I'm not sure that we actually have quantified that from, I guess, a quarter-to-quarter comparison. As Paul said, we expect to achieve most of the cost saves in the third quarter. And we will see benefit costs rising in 2013, so there will be some additional costs. Bob, any further thoughts?

Yes. We're looking for somewhere between $160 million and $165 million for the year. So thinking about that by quarter -- and you are right, we would experience more of that in the first quarter and the second -- I think your run rate is reasonably close. I would probably call $39 million, $39.5 million.

Okay, and then in terms of -- was there any OREO expenses this quarter tucked away in your expenses?

Well, there is OREO expense tucked away in our expenses every quarter.

I thought I saw it broken out before, and I didn't see at this time. I could be mistaken. Sorry.

We typically do break it out in the 10-Q and 10-K.

We would probably have detail on that in the Q. Yes; I can tell you it's less than where it has been running. So when we owned a hotel in Columbus, for instance, our OREO expense was higher quarter over quarter. And so, the fourth quarter of 2011 to fourth quarter of 2012 REO expense is indeed lower. We have some other expenses, primarily electronic ranking, that does impact that other operating line.

Okay, that covers it. Thanks, guys.

(Operator Instructions). John Moran of Macquarie.

So my questions on OpEx and NIM have been pretty well handled. The one, I think -- maybe just circling back on credit, if we look at charge-offs running just south of 50 basis points, based on what you see today, is that still a good level to think about in terms of normalization, or do we drift down here somewhere closer to 40 or even south of that?

And then related to that, in terms of just provision expense, is it fair to say that at this point we are going to look to cover charge-offs and then provide for a little bit of growth, to the extent that it materializes? I just wanted to see if you guys had thoughts on that.

I think those things are generally correct. It's hard, again, to have a crystal ball. But with the continued -- if you look at the last five quarters, we have seen a steady decline in charge-offs. And that has given us some room to reduce the provision. And we will continue that effort because we have seen continuing improvement in credit quality and would plan for the same to occur in 2013.

If you look at our current 30 to 89 or 30 to 90 days, those are holding pretty well.

That's right. Now, there's always the chance of something that goes bump in the night. But at this point we are anticipating that, relatively speaking, the third and fourth quarter run rates on chargeoffs are what we are anticipating as a run rate here in 2013. One mitigating factor is that we may, in the resi and consumer portfolios as we cleaned those up from Fidelity, may initially take some additional charge-offs to the degree that they don't go back to the original mark.

And the provision of net charge-offs are historically high for us, so we think there is opportunity for continued improvement with the recovery in the economy.

Got you, thanks. Then the second one that I had was just on M&A appetite in general and maybe chatter picking up, if at all. Fidelity kind of closed. I understand that there is still an integration and some conversion to go. Once we get behind that, what are you guys thinking on that front? And do you see continued opportunity?

We continue to look at opportunities as they arise. And as we have indicated, I think, in prior calls, our focuses on growing organically and also strategically doing acquisitions where appropriate and where the timing works. So we continue to look in our markets for opportunities and will continue the effort to evaluate acquisition opportunities as they come up. So John, we do expect to continue that process.

Great, thanks for taking the questions, guys.

Carter Bundy of Stifel Nicolaus.

Bob, if you did not already quantify this, could you tell me how much the NPA increase was from Fidelity?

After --

After selling some of the nonperforming loans?

Yes, it depends upon whether you look at it pre or post mark. But the nonperforming assets that Fidelity had after the loan sale were some $10 million. And that, in addition to that, you would have past due of some $7.5 million. Now, there's mark of approximately $4 million that would come out of that. So that should give you some idea of what we have left.

So, historically, they hung up a lot -- maybe that's not the right term. But they did have a fair amount of 90-day past dues. They have a different collection philosophy than we do, and our Chief Credit Officer, who you all know and love, Pete Jaworski, does intend to focus with our work out group and our consumer collection group in getting those past dues down for Fidelity as we have successfully on our side of the ledger.

So we're going to focus on the residentials and consumers and some of these smaller business loans that have not been worked effectively by Fidelity. And we do have a separate workout team that gets involved in the larger commercials.

Okay, that's helpful. And then in terms of reserve levels, obviously they declined with purchase accounting. But how should we think about that going forward, given the improvement in credit we have seen over the last year plus?

I don't know whether you are addressing Fidelity alone or combined.

Consolidated. When we look at reserve levels now, how do you think about that number going forward? Do you continue to roll that down as credit continue to get better?

Again, I want to take you back to what I said. We would be in the low 160s if you added back the credit mark. Now, I realize this isn't an FDIC acquisition. So, you are not going to have, as an analyst, the same focus on those with and without ratios as banks that have a broader portion of their loan portfolio from an acquired FDIC acquisition.

But I think it's fair to say that where we are today, what Jim Gardill said, charge-offs equating to the provision, is where we are going to stand going forward. We do anticipate some loan growth, so you could see percentagewise a little bit lower number as compared to the total loan portfolio. But tracking the provision to the loans except in cases where there's some specific reserves is primarily what we would do.

I think, as you continue to see the quality of the loan portfolio improve, I think the accounting rules are pretty clear in what you need to do with the allowance under those circumstances.

Okay, that's helpful. And in terms of another question, with the branch closings, did you all quantify -- and I'm sorry if I missed this -- how much you would expect in savings from that?

Well, we quantified the merger with the restructuring charge. I can tell you that the net loss associated with those six branches -- and this was fully allocated, so that's not a fair way to look at it going forward. But on a fully allocated basis they were some $800,000 in the red. So if you assume that maybe 20% of that is allocated overhead, that gives you some idea of what our savings should be.

Now, we are going to redeploy some of those savings back into the franchise both in terms of additional technology initiatives, mobile banking, for instance, as well as a branch or two that we will be adding into the franchise in key locations for us.

Okay. And then finally, from a loan growth perspective, have you started to see any pickup on the asset side from the Utica Shale and from Marcellus?

I think the answer is yes, although it's pretty darn hard to quantify, Carter. We obviously don't make loans to the drilling companies, but there are third and fourth tier organizations that don't have gas necessarily in their name, that we are lending money to. We do certainly see a pickup of the velocity of cash floating around our market areas, and we are very comfortable that we are getting our fair share of the higher velocity of cash and new business opportunities that are coming from that additional funds flowing around our market area.

As we have talked in prior calls, the ancillary service level improvement has been fairly broad-based in our principal market here in the upper High Valley and in eastern Ohio and western Pennsylvania. So, Carter, what we are experiencing is hotels, motels, service companies, trucking -- all of those have had a lift which has had an impact on our customer base and on loans that we provide to those sectors.

Okay, great. Thank you all very much.

Carter, I would -- and for those also on the phone that have been reading stories in Pittsburgh here recently -- office space in Pittsburgh is down to some 14% vacancy rate, which is historically low for Pittsburgh and also one of the lowest in the country. There was a story that came out the other day that talked about employment growth over the last five years. The top five markets -- four of them were in Texas. The fifth was Pittsburgh, Pennsylvania.

There is, and I can pass it along to you, Carter, because this is public information -- there is an Ohio shale monograph that became available here this month that talks about employment growth in the Marcellus and Utica in eastern Ohio. And we are going to undertake a project to take a look at the particular NICS codes that are directly related to gas and then the ancillary ones, to try to document where some of that loan growth has come from. So we will be working on that here in the first quarter.

Great, thank you.

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

Thank you very much, Andrew. We appreciate everyone participating in today's call and appreciate the opportunity to share with you details on our financial performance for the quarter and the year. Our view is that we had an excellent year. We were able to complete a strategic acquisition that is important to the long-term growth of the franchise. We were able to achieve real revenue growth. We experienced improved credit quality. We were able to increase our dividend and growth of value of the stock year-over-year, and yet our dividend payout ratio still sits at about 38%, which puts us in a very strong competitive position vis-a-vis our peers.

So we appreciate the opportunity to share this information with you and thanks again, everyone, for participating today. That's all.

So the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.