WesBanco Inc (WSBCP) 2013 Q4 法說會逐字稿

Good morning and welcome to WesBanco's conference call. My name is Amy and I will be your conference facilitator today. Today's call will cover WesBanco's discussion of results of operations for the quarter and year ended December 31, 2013. 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.

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 2012 Annual Report on Form 10-K and other reports, 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, include risks and uncertainties, including those details in WesBanco's 2012 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 fourth-quarter 2013 earnings release was issued yesterday and is available at www.WesBanco.com. This call will include about 25 to 30 minutes of prepared commentary followed by a question-and-answer period, which I will facilitate. An archived webcast of the call will be available at WesBanco.com. WesBanco's participants in today's call will be Mr. Paul Limbert, President and Chief Executive Officer; Jim Gardill, Chairman of the Board; Todd Clossin, Executive Vice President and Chief Operating Officer; 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, Amy. Good morning. Thank you for participating in WesBanco's fourth-quarter 2013 earnings conference call. We are you have joined us this morning to hear about WesBanco's excellent operating results. I would like to make some opening comments. Bob Young, our CFO, will provide financial highlights and then Jim Gardill, our Chairman, will moderate the question-and-answer period.

Before I get started, I would like to welcome Todd Clossin to WesBanco's management team. Todd brings to WesBanco knowledge he has gained in a variety of senior management positions, including Regional President, as well as Chief Administrative Officer reporting to the CEO of 5/3 Bank. We look forward to his leadership to improve WesBanco's products and services. As all of you know, Todd will become WesBanco's President and CEO upon my retirement in April. Todd is with us this morning.

A press release detailing the results of the fourth quarter and the year 2013 was issued last evening. A copy of the entire press release is available on our website. We will assume that all participants are familiar with WesBanco and we can begin our discussion of our financial results and the year 2013.

WesBanco had an excellent year. Net income was up 29%. There were no large unusual one-time revenue or expenses other than the Pittsburgh acquisition, which resulted, of course, in certain one-time costs. The ROA for the year was 1.05% and the return on tangible equity was 15.8%. Our stock price was up 44%. Returns like these have provided the ability to raise dividends twice during 2013, further improving our returns to shareholders. Those kinds of numbers define an excellent year.

Financial results were enhanced by our continued efforts to improve the credit quality of our loan portfolio thereby reducing the provision for loan losses. Our balance sheet remix initiatives and growth in our average loans outstanding helped to improve our net interest income. I would be remiss if I did not mention the continued efforts by our operational staff to improve the day-to-day efficiencies of our organization. We integrated an acquisition during the year and our efficiency ratio remained the same.

Because the year was so successful, we need to take a few minutes and highlight a few of our 2013 accomplishments. We started the year integrating our Pittsburgh acquisition. We completed that acquisition in 2012 in approximately four months from the announcement date to the close date. However, we did not fully integrate the acquisition until the end of February 2013. The operational integration went smoothly and by the end of the first quarter, we were winding down the duplicative expenses of operating two banks.

During 2013, we began adding to the revenue-producing staff in many of our markets. We recognized through our balance sheet remix process that we need additional loan outstandings to improve our long-term earnings. We began adding mortgage and commercial lenders to our urban markets in order to generate additional loan production. We continued to add personal bankers to our Wealth Management group. We have added securities advisors to the WesBanco Securities organization and of course, we added clerical staff to make sure our customer activity was smoothly processed.

In addition to staffing was a previously described reinvestment strategy to ensure the long-term profitability of WesBanco. Our ability to reinvest in our people has provided results. Total loan production increased to over $1.6 billion, a 32% increase. Mortgage originations reached an all-time high in spite of the significant decline in refinancings during the second half of 2013.

Commercial loan production increased 43%. All of the new production increased loans outstanding by 5.6% for the year, which is a respectable increase given the reduced overall loan demand for the industry as compared to the pre-recession periods. Existing and new securities advisors were responsible for increasing net security brokerage income by 36% during 2013. In additional strategies on the Marcellus and Utica bonus and royalty payments, both Wealth Management and Securities businesses have their own initiatives and staffing to attract new customers.

New Wealth Management customers, along with the improvements in the stock market, improved our trust fees by 8.5% for the year. In 2013, initiatives to reinvest in our existing and new employees has resulted in additional interest income and non-interest income generated by WesBanco. We continued to realize significant amounts of activity coming from the natural gas in the Marcellus and Utica shale areas. Payments from the large national organizations continued to be deposited by our customers in 2013. During the year, we have seen over $300 million in bonus and royalty payments deposited into our organization.

Drilling continues at a significant pace and we are now beginning to see a more regular monthly gas royalty as new wells drilled are hooked up to the pipeline infrastructure. We have seen modest growth in deposits caused by our desire of increasing non-interest DDA balances and lower-cost transaction accounts and thereby reducing our ability and our dependency on the higher-cost CDs from 33% down to 30% of deposits. The emphasis on non-interest-bearing and low-cost transaction accounts has contributed to our stable interest margin and lower interest expense.

We have been asked about the amount of lending we have done to the natural gas industry and its related companies. We do not lend to the large national drilling companies. However, we are lending to the second or third tier companies, which are providing support services or contractors who are assisting in building the related infrastructure. Sometimes it is very difficult to determine if the lending we are doing to an existing customer is directly related to a specific job that they may be completing for a gas-related organization.

The important point is that this new business is significant, has generated loan volume to regional support services for drilling and pipeline expansions and is expected to bring long-term benefits to the region and to WesBanco.

During 2013, we continued to reconfigure our branch office network. We opened one new office in downtown Columbus, another Columbus office was opened on January 21, 2014 and we obtained approvals to construct a new branch at Southpointe in the southwestern Pennsylvania market. The design of the new offices is following customer preferences for fewer traditional teller transactions and additional opportunities to talk to our experts for alternative methods of managing their money.

We continued to upgrade our data processing capabilities and improve customer security. We recently installed a new mainframe computer system, which will improve processing speeds, increase the availability of Internet banking, and provide additional capacity for potential future acquisitions. We recently issued new debit cards to our customers who were affected by the Target data breach. We continue to offer new electronic services to our customers by providing mobile deposit capture effective January 21, 2014.

Credit quality continues to improve. Nonperforming loans to total loans are continuing to decline from a high of 2.9% as of December 31, 2010; nonperforming loans have fallen to 1.3% at the end of 2013. In each of the last three years, this percentage has decreased allowing the provision for loan losses to also decline. The total annual provision has fallen to the lowest level since 2007 contributing to our improved earnings.

Due to all the above described initiatives, we have grown revenue faster than expenses. Revenue growth, defined as interest income plus non-interest income for the year 2013, was approximately $11 million greater than the prior year while our expense is defined as interest expense plus non-interest expense were flat. We have been very pleased with the net new revenue growth. A review of our income statement for the year indicates that all functions of the bank contributed to the net revenue growth.

As you can see clearly from the 2013 results, the initiatives, which we began in 2012 and continued in 2013, along with the reinvestment in existing and new employees, has clearly resulted in our excellent results. We are optimistic about our ability to compete in our respective marketplaces. We have a strong capital base and capable, well-trained employees, which will allow us to take advantage of the opportunities we see in 2014.

Because of our strong capital and earnings, we will continue to reinvest earnings back into our franchise to upgrade customer facilities, add new technology, and hire and train talented employees. We will continue to look for acquisitions, but believe that we can be selective since organic growth can be obtained from our diverse marketplaces. We'd like Bob Young, our CFO, to discuss with you in more detail the financial results of the quarter and the year 2013. Bob?

Thank you, Paul. Good morning, all. Earnings per share for the fourth quarter of 2013 were $0.52, up from $0.46 last year, or 13%. Net income was $15.4 million versus $12.7 million last year, up 21.4%. For the year ended December 31, earnings per share was a strong $2.18 per share as compared to $1.84 for all of 2012, an increase of 18.5%. Net income was $63.9 million versus $49.5 million for the same comparable periods, up some 29%.

Excluding merger-related and restructuring expenses, net of tax for both 12-month periods, net income was up 24.4% and earnings per share 13.9%. In addition to continued improvements in credit quality, the year 2013 showed positive operating leverage with total revenue growth exceeding expense growth. Accretable yield from last year's Pittsburgh acquisition, a better mix of loans versus investments in earning assets and an improved cost of funds helped to improve the net interest margin and pretax pre-provision return on average assets was 1.67% for both periods.

Earnings per share was up by a lesser percentage than net income due to the shares issued for last year's acquisition. Both return on average assets and return on average equity are significantly ahead of last year's results and core operating efficiency is approximately 61%. Return on tangible equity for the year increased to 15.8% putting us in a high-performing tier of similar size banks based on prior-quarter peer group ratios.

Turning to the income statement, net interest income increased $4 million, or 9.1% in the fourth quarter and $17.1 million or 10.2% for the year due to increased average earning assets primarily through higher average loan balances. Average earning assets increased $322 million, or 6.5% in the fourth quarter and $421 million, or 8.5% for the year due to the prior year's fourth-quarter acquisition and growth in average organic loan balances. Approximately 66% of the total average loan growth in 2013 was attributed to the acquisition. The increase in average earning assets was funded primarily by an increase in deposits. Total average deposits in the fourth quarter increased by $436 million, or 9.4% from the same quarter last year with approximately 57% of the increase attributable to the acquisition.

Deposit increases occurred primarily in transaction account types with organic increases resulting from our marketing campaigns, customer incentives, private banking initiatives and commercial deposit growth, as well as the Marcellus and Utica shale gas bonus and royalty payments. Those totaled $66 million in the fourth quarter and over $300 million -- $311 million to be exact for the year as compared to $224 million for all of 2012.

In addition, the net interest margin increased 8 basis points in the fourth quarter to 3.58% and 5 basis points for the year, which was also 3.58%. Cost of funds continued to decline due to lower offered rates on maturing certificates of deposit, an increase in balances of low-cost products and decreased balances of Federal Home Loan Bank and other borrowings. Accretion of purchase accounting adjustments for loans, CDs and borrowings related to last year's acquisition represented 5 basis points of the net interest margin in the fourth quarter and 9 basis points for the year.

For all of 2013, the average rate on interest-bearing liabilities declined by 31 basis points while the rate on earning assets decreased by 22 basis points. CD repricing represented the bulk of the fourth-quarter improvement in the margin due to higher-cost CDs maturing and as a result cost of federal deposits was 51 basis points for the fourth quarter and slightly below that by the end of the year. Even though low interest rates have continued to affect the yields on both investments and loans and competition certainly has impacted rates and spreads on new loans, WesBanco has been able to mostly match such reductions as a result of a positive change in the mix of low-cost transaction accounts versus CDs by some 3.5% since last year-end and total transaction accounts were up some $256 million, as well as reduce costs, remaining borrowings and CDs themselves.

Total CDs had an average cost of just 1.12% for the fourth quarter versus 1.36% last quarter and 1.61% in the fourth quarter of 2012. Approximately $796 million, or 52.7% of total CDs, are scheduled to mature over the next year at an average cost of 87 basis points. Recall we talked about this in the third quarter that about $290 million of retail CDs matured in the last three months at a high cost of 2.33% allowing for the significant decrease in CD rates. Based on current assumptions, we expect the core margin will remain about the same or slightly increase over the next four quarters except for the impact of lower accretion each quarter.

Non-interest income decreased 0.6 million or 3.7% in the fourth quarter as compared to last year's fourth quarter, but, excluding security gains last year, was up 1% despite lower mortgage gain on sale income. For the year, however, total fee income was up $4.3 million, or 8.7%, due to an 8.5% increase in trust fees, higher service charges on deposits and electronic banking income, a 36% increase in securities brokerage fees and increased BOLI-related income. Trust fees have increased due to higher assets under management, customer development initiatives and the overall improved equity market.

Securities brokerage revenues increased to $6.2 million for the year due to our new Pittsburgh market, the hiring of various market production staff and a licensed banker program coordinating through our retail offices. Service charges on deposits and electronic banking fees also contributed to the fee growth. Net gains on sales of mortgage loans slowed in the fourth quarter due to lower production volumes, primarily from fewer borrower refinancings, as well as our own balance sheet retention of a greater portion of overall production. And recall in 2013, noninterest income included a $1.1 million bank-owned life insurance death benefit earlier in the year.

Noninterest expense increased $1.5 million or 3.8% for the final quarter, excluding merger-related expenses and $13.5 million or 9.2% for the year, primarily due to expenses related to operating the 13 additional branches acquired in the Pittsburgh acquisition. Expenses were up 1.8% from the third quarter of 2013. Salaries and wages increased 9.2% for the quarter and 11.1% for the year, primarily due to normal annual adjustments, increased commissions on higher loan originations and brokerage revenue and higher incentive compensation while total full-time equivalent employees were lower for the quarter but higher for the year, which relates to operating the Pittsburgh franchise.

Most back-office savings, which eliminated approximately 60 full-time equivalents from the former Fidelity franchise, were accomplished earlier in the year. Employee benefits expense decreased 2.5% for the quarter, but increased 8.4% for the year due to higher payroll taxes and pension expense. Healthcare costs were down from last year's fourth quarter and in total for the year.

Net occupancy and equipment increased for both the quarter and year-to-date periods due to increased depreciation and other maintenance costs resulting from the acquisition, as well as certain seasonal expenses. Marketing expenses were up for both the quarter and year due to the additional Pittsburgh market and increased campaign-related expenses later in 2013.

FDIC insurance was down by 4.5% for the year despite the acquisition and growth in the balance sheet due to lower overall leverage and improved risk-related factors while amortization of intangibles increased from the acquisition. Merger-related expenses of $1.3 million for the entire year of 2013 compares to $3.9 million for 2012. Other operating expenses were down 2.6% for the quarter, but up 5.3% for the year as real estate owned expenses trended lower and ATM and debit card interchange expenses increased due to the higher volumes.

Enough on the income statement, turning to the balance sheet, total assets increased 1.1% while shareholders equity increased 4.5% compared to the end of 2012. Net loans increased 5.6% as higher commercial and residential loan originations and the resulting outstandings outpaced paydowns. About $58 million of the total annual increase of $207 million occurred in the fourth quarter and loan commitments remain high as we go into 2014, up some $52 million, primarily due to higher construction loan approvals. Total loan originations were up 31.5% from 2012 with the new Pittsburgh market significantly contributing to this production. Growth was centered in commercial real estate and C&I lending.

Deposits increased 2.4% compared to the year-end 2012, primarily due to a 9.8% increase in non-interest-bearing demands, a 6.6% increase in saving deposits, an 11.2% increase in money markets while an intentional strategy to increase transaction accounts and reduce single service customers resulted in an 8.4% reduction in CDs. Total borrowings were down 20% for the year, led by Federal Home Loan Bank borrowings, which were down some 64.5% as these were liquidated using available funding provided by the increase in deposits. Total shareholders' equity increased by approximately $32.4 million or 4.5% compared to 2012 due to net income exceeding dividends for the period, an increase in capital stock and surplus resulting primarily from employee benefit plan transactions.

These factors were partially offset by an increase in treasury stock from a 190,500 share buyback consummated in December from a terminated employee benefit plan, as well as an increase in accumulated other comprehensive income -- I'm sorry -- a decrease in other comprehensive income of some $6.4 million primarily from unrealized losses on investment securities from the midyear interest rate increase. Of note, at year-end, due to better pension plan performance during the year, the other comprehensive income adjustment related to benefit plans was reduced from a loss of $21.5 million last year to only $8 million and that helped to offset the adjustment related to securities. Tangible book value increased 8.9% this year and tangible equity to total assets was up from 6.84% at the end of 2012 to 7.35% at the end of this year. Risk-based capital was at 14.2% and Tier 1 leverage at 9.3%, both well above the standards for a well-capitalized status.

In lending, residential mortgage loan production was up 13% from last year, some $392 million, despite the industrywide slowdown in the second half of the year. About 67% was held in the portfolio and the rest going to secondary markets. Purchase money versus refinance mix was about 53/47 -- 53%/47% and the fourth quarter skewed mostly towards purchase money at 64%. Commercial loan production volumes were up 43% from the prior year crossing over $1 billion for the first time as the Upper Ohio Valley, Columbus and Pittsburgh market teams led the way.

Loan outstandings grew most significantly in the Upper Ohio Valley, Southwest Ohio and North Central West Virginia markets. Our new and expanded team in Pittsburgh produced about $164 million in commercial production for the year. Overall commercial line usage was 43%, excluding construction-related lines and that is similar to the level of usage at the end of 2012. Commercial originations were strong enough to overcome large investor-owned commercial real estate paydowns from property sales or refinancings.

Moving on to credit quality, total nonperforming assets dropped from last year-end's total of $70 million to $56 million, a 19% reduction, which represents 1.45% of total loans in REO as compared to 1.89% last year. Strategies such as loan sales in each year, workouts, principal reductions and net charge-offs exceeding the migration of new loans in these categories have benefited the overall improvement. Nonperforming loans are down to 1.32% from 1.73% last year as compared to total loans, including both non-accruals and TDRs. Criticized and classified loans are also down some 21.5% and total delinquencies decreased from 75 basis points to 45 basis points.

The allowance for credit losses represented 1.22% of total loans at year-end compared to 1.43% at the end of the prior year. Excluding acquisition-related loans, the allowance would approximate 1.26% of the adjusted loan total. An overall improvement in credit quality for the year resulted in a lower need for additional provisions, which were $3.1 million for the fourth quarter and $9.1 million for the year and that compares to $3.3 million and $19.9 million for the same periods in 2012.

Net charge-offs for the quarter were $2.9 million or 0.3% of average portfolio loans, so we covered those with a provision and $14.2 million or 38 basis points for the year compared to net charge-offs of $4.1 million, or 47 basis points for the fourth quarter of 2012 and $22.1 million, or 66 basis points for all of last year.

We are pleased with our overall performance this year as the economy continues to improve, as well as the smooth integration of the Pittsburgh acquisition into our Western Pennsylvania market. While accomplishing a record year for loan production, as well as a significant growth in loan outstandings, this growth and a remix in our balance sheet accomplished over the past few years for both lending and funding sources has helped improve our net interest margin and return on average assets while capital has been managed successfully to improve our return on average equity and return on average tangible equity well above the peer median.

Our Wealth Management businesses have contributed to the growth in fee income, as well as service charge and electronic fee income sources. Our focus going forward will continue to be on improving our overall operating businesses and our metro marketshares while continuing to be mindful of efficiency. Our strong balance sheet liquidity and overall capital strength positions us to be able to take advantage of acquisition-related growth opportunities as they present themselves.

This does conclude our prepared commentary and we will now open the call for questions. Jim Gardill will moderate the Q&A session and we'll now turn the call back over to the facilitator.

(Operator Instructions). Kevin Fitzsimmons, Sandler O'Neill.

Good morning, guys.

Good morning, Kevin.

Just wanted, first of all, just to clarify the margin outlook. So from what I thought I heard, the accretion income in the fourth quarter contributed about 5 basis points. So I take that to mean the core margin is about 3.53 if we X that out and then what you are saying is you expect going forward that core margin to be the same or slightly higher and then we would think of theoretically that 5 basis point pace of accretion income as dwindling down over the next couple years. Is that a fair way to characterize it?

That is correct, Kevin. We would expect at most 3 to 4 basis points for 2014 in accretion-related income and a slightly increasing net interest margin otherwise, which comes from the continued remix in the balance sheet, our slight asset sensitivity and loan growth.

Great, great. Thanks for clarifying that, Bob. And then if I could just ask, you've mentioned a couple times in the call about being open to the idea of acquisition opportunities when they present themselves. Can you remind us what would be your ideal appetite by asset size, by market? Are you looking predominantly for in-market type of cost savings deals or are there other kind of new frontier markets adjacent to your footprint that you would look at doing deals? And then on that front, are you sensing there is a pickup in conversations or is it more of a kind of slow, steady pace of opportunity out there? Thanks.

Kevin, thanks. I guess to start with that question, you could almost say all of the above. Basically, I believe that we have indicated in the past that we would like to say stay within our principal markets. We'd like to continue to improve our marketshare in some of the larger metropolitan areas. We'd also like to look at contiguous markets that have attractive opportunities for us and so we continue to evaluate.

As far as asset size, we would look at acquisitions that primarily have synergy and so we would be looking at larger transactions, but, in certain markets, we'd look at smaller transactions where they could add marketshare. So I think it depends on the opportunity and it depends on the pricing and it depends on the impact for our shareholders and our long-term growth. So we continue to have an open mind about opportunities and we look for the right pricing and opportunity within the areas that we manage within the areas that we operate in.

Thanks, Jim. And then just on that note, are you getting a sense that this is a wave or a coming or more of just really kind of one-by-one very specific opportunities that will take time to emerge?

There seems to be more activity in the marketplace here in the last 60 to 90 days. We have looked at some transactions and opportunities. We have seen announcements on additional transactions. I think there is some regulatory pressure on some of the smaller banks. The Dodd-Frank regulations coming onboard have had an impact. We are seeing some impact on mortgage lending and compliance costs, so there are some pressures on smaller institutions, but I think there are also some almost transformative kinds of deals that are being touted out there that we have seen. So we continue to watch all of those.

Okay, thank you very much, guys.

Thank you very much, Kevin.

Scott Valentin, FBR.

Good morning and thank you for taking my question.

Good morning, Scott.

With regard to -- Bob, I think you mentioned in the operating expense line there were some true-ups, I guess some year-end normal adjustments and that came in a little bit higher than we thought. Just wondering if you could give maybe a breakout of what those kind of adjustments were and maybe an idea of what kind of core expense rate is to think about going forward?

Sure, can do that, Scott. They were primarily higher in the salary and wage line and keep in mind that we talked about a couple of new branches and while one of them didn't come online here until early January, we had the folks hired for that branch. Both those new branches are in the Columbus market, so we will produce revenue out of them going forward, but we did have those employees on hand. We had some incentive compensation true-up in the fourth quarter. As you would imagine, production levels were high throughout the year and we did true that up for some of our producers in expectation of approvals on those coming here in the first quarter.

We have two or three positions, senior-level positions in the organization -- Todd is with us here -- that are I don't want to use the word duplicate, but we have two of the same, if you will, during the transition period. So there is a little bit of that in mortgage lending, HR and the CEO office. We are hiring more producers. Paul has talked about that throughout the year. There were a couple of -- two or three additional commercial folks on hand, including the new senior lender in Cincinnati. That also impacted that and you have the full impact in the fourth quarter of wage increases for a certain portion of our nonexempt employees that dates back to August, but it is full quarter here in the fourth quarter. So those are the primary reasons. There is a little bit of securities brokerage additional commissions as well. Those are the primary reasons. There's also deferred compensation that offsets itself in non-interest income.

And Scott, just summarizing on that, because I think it is important to look at quarterly differences, we go through a succession planning process. As Bob noted, we changed the divisional leaders in mortgage and HR during the quarter, so we had a transition phase where we had senior executive officers duplicate during the quarter. We also opened the two new branches and then we added new revenue producers, as Paul had indicated in our last call, we would be adding and we won't see that revenue production until into the first quarter and second quarters of 2014. So part of the quarterly issue with expenses is a matter of timing.

Okay, that's helpful. Thank you for the color. And then just mortgage banking, like most others this quarter, was challenging for the industry. Just wondering in terms of the decline was it more volume-driven or more gain-on-sale margin-driven?

It's more volume-driven. It is gain on sale -- our gain-on-sale margins have held up very well during the year at close to 2%. So it is that and I don't know, Paul, were you going to talk about the mix on the balance sheet? Putting more on the balance sheet as well.

Okay, thank you. And then one final question. On loan yields, it's still a very competitive market pretty much in all the banks we talk to. Just wondering within your footprint any markets -- you mentioned Pittsburgh -- as being a big production area for you. Are there any markets that are maybe less competitive that you are focused on or all markets roughly the same? And then as a corollary to that, maybe new loan origination rates, where they are relative to the portfolio today, trying to get an idea of maybe how much compression is left in the loan portfolio.

Let me start with the last point first. I guess our ratio of new purchase mortgages is much higher than the industry and so we have not seen as much of a reduction and don't project as much of a reduction in our long-term mortgage originations for the coming year. The refinance boom has, of course, faded, but we have always had a higher proportion from our branch network of new finance -- new purchases. So we feel pretty strongly we will be okay there.

The other production issues on the lending, the competition is keen in all of the markets and it depends really on the players. We see different competition from either large banks or smaller banks depending on the market. We are in four large MSAs, so you do see a different level of competition. We are also in rural markets and we see a smaller player competition there. So it does vary quite a bit, Scott.

All right. Thank you.

Steven Scouten, KBW.

Hey, good morning, guys, thanks for taking my call. I missed some of the call -- I don't know if you heard, down here in Atlanta, we shut down for 1.5 inch of snow. So I know you guys wouldn't understand that up there, but --.

We heard, we heard, Steve. Thank you very much for participating.

So sorry if my phone were to cut out. But just some additional clarification on I guess expectations for production and maybe net loan growth next year. I mean obviously the $1.6 billion of originations is really impressive and I would expect with the new lenders added that we would see comparable to maybe increased production next year, but do you see any abatement in terms of kind of the runoff and so forth that compressed that net growth to that $207 million number?

I will let Paul speak to this in a second, Steve, but one of the things that we saw in the second half of the year was as rates started to move refinancings declined, so we had a little bit more stickiness in originations. So I would think that we would continue to see some improvement there. Competition for loans is still very strong and that will have an impact, but the refinancings have slowed a little bit on the commercial side. Paul?

Steve, I do anticipate our originations staying at a high level. We have a very talented lending team on staff. They have shown that they can originate loans in a very competitive marketplace. I really don't see why that would not continue into 2014. We have got a seasoned team. They are very focused. We have some new initiatives established for some of our market areas and we have a couple of new lenders that we are planning on adding to some of our market areas. So I think we've got plans in place to do very well in 2014.

Okay, great. Well, thanks, guys. I appreciate it. I think all my other questions have been covered previously. I appreciate it.

Thank you, Steve.

William Wallace, Raymond James.

Thank you. Good morning, guys.

Good morning, Wally.

I wanted to maybe dig in a little bit more on the margin commentary. There has been a couple of questions in the Q&A around it. Bob, you mentioned that you expect actually some core margin expansion, which I think is somewhat unique of what we are hearing from a lot of the other banks in the industry and you did say that you would expect some of that to be driven by a shift in the earning asset mix. So my first question would be do you have a target, maybe what portion of the earnings assets would be securities versus the higher-yielding loans?

We are anticipating that if you take a look at the growth we had this year in loans and we are not going to give you the growth number that we have in our plan for next year, but think about that level or above that, slightly above that, we would expect that the funding for that would come 50/50 from a growth in deposits and a reduction in investments. So at the end of the year, we have $1.5 billion in investments and you would expect that to run down by half of the loan growth give or take in 2014. Is that what you are getting at?

Yes, that can help me back into the answer. And then to Scott's question, would you disclose maybe where the new loans are coming on at a yield basis so we can get a sense as to how quickly you are coming to the bottom on the yields in that portfolio?

That's a tough question because it really depends upon the mix of the loans that we are in competition with other banks and the loans that we are getting from some of our less competitive market areas. And it is really going to depend upon that mix for 2014. Obviously, when we are in competition with other banks, that does drive the rates down lower. We have seen competitive rates in the marketplace as low as -- and I'm struggling getting this out of my mouth -- but as low as the low 2%s. That's not what we are anticipating we'll average for 2014, but that does give you some idea of the competitive marketplace that we are in. But I would expect our average rate to be a little lower than where we saw it in 2013, but I don't expect it to move all that much.

Wally, we do a return on equity analysis of pricing and so there are some relationship pricing models that we run, which will vary then the interest yield depending on the relationship. So as Paul says, it can vary, but with the competitive pressures, we would probably see some erosion except that may be offset by rate increases.

Yes.

So that was going to be my next question because Bob did mention your asset sensitivity position around the margin expansion commentary. Are you guys expecting that we can see short rates up?

No, we are not expecting that. We are reflecting in our model that intermediate rates do impact things like residential mortgages. There would have been significant rate compression in that portfolio over the last 18 months. We are not expecting that rate compression in 2014. While there is plenty of competition on the business loan side, we still managed to get our fair share of yield there. I wouldn't expect that to go significantly lower. Our portfolio models to be approximately the same as where we ended the year, but I would also tell you that beyond those factors, we still have room to go on the cost of funds side.

Recall I said that we had I think $750 million of repricing CDs over the next year at 87 basis points. Still room to get some improvement there and our model does anticipate that CD portfolio will continue to reduce from the 112 number that we were reporting towards the end of the year. We also have some $38 million or so of more expensive borrowings that come due in the first quarter. We are projecting savings from that as well. So that informs my comment, which you will see in the 10-K relative to slight growth in the margin going forward.

Okay. I really appreciate the additional color on the margin and then one last question on M&A. In the discussion previously, you said you would buy smaller institutions or larger institutions depending on the circumstances. Is there an institution that would be too small just no matter what the circumstance? I'm trying to get a sense how small an institution you might be willing to take the time to buy?

Again, it's hard to forecast, Wally. There are -- I mean something in the nominal $25 million to $50 million in asset size because of the cost of acquisitions. That is more of a branch transaction, but that can be done on a cash basis and can be done efficiently if it's a fill-in in a branch network. So there would be some idea looking at that, but that is not what we would consider a full M&A transaction. So we are thinking of something higher, so again, it has got to depend on the market and it has got to depend on the opportunity. We are looking at higher value deals though that have the opportunity to drive growth.

All right. Well, fair enough, guys. I appreciate your time and have a great day.

Wally, thank you very much.

Matt Schultheis, Boenning.

Hi, good morning.

Hey, Matt, good morning.

Couple of quick questions. Deposit balances were relatively flat linked quarter and I was wondering if there was municipal runoff or single customer deposit runoff in this [BD] bucket or anything else that we should be aware of?

And Matt, I will Bob speak to that in detail in just a minute, but basically if you remember our strategy was to roll off higher cost CDs. In the Fidelity transaction, we acquired a fair amount of that and so moving them into lower-cost DDA accounts and so part of that strategy you have seen a flattening of the deposits, but we have grown the non-interest-bearing deposits and the demand deposits and reduced those lower-cost CD deposits in that portfolio. Bob, additional detail?

Yes, it is really the more expensive CDs that are maturing from four and five years ago, Matt. Those 2.3% average CDs, the $290 million that came due in the fourth quarter, we certainly kept our fair share of those, but if you see from September 30 to December 31, we are down about $120 million, $125 million in that category. And while a fair amount of that parks in money market because money markets are up in the fourth quarter and as you noted the deposits are in total flat, we'll see where those folks go going forward once rates begin to increase. So Jim talked about the transaction account strategy and I think it is just simply a matter of -- some of these are single service customers who had their high rate CDs mature, so they left the bank. We also worked them through our Securities brokerage unit and some of them do transfer over there.

Okay. And a second question, your share repurchase story in the quarter, you said it was tied to a terminated employee benefit plan. I was wondering, and just refresh my memory, please, if you have an authorization for share repurchase outside of that and if so, how much is it for?

We had a 1 million share authorization that has been out there for several years. It is in the Q, Matt. You will see it detailed there and we still had ample room under that share authorization for that share repurchase program to absorb those shares.

Okay, thank you.

Thank you very much, Matt.

(Operator Instructions). Taylor Brodarick, Guggenheim Securities.

Great, thank you. I think we have touched on pretty much everything, but I had one question about I guess Wealth Management. Is there any news out about something similar to what happened across the river in Belmont County where you are expecting any type of I guess one-off major influx of bonus payments? I know you said it sounded like it would be steady-state growth, but didn't know if you were aware of anything else in your market. Thanks.

Taylor, thank you for the question. The one-off that we talked about in the spring dealt with a specific landowner group in Belmont County, Smith-Goshen Group and we did realize benefits from that. I think what Paul talked about in his commentary was the fact that we are seeing royalty payments now coming onstream in a broader area of our local market here in the Upper High Valley on both sides of the river and so those are sort of offsetting those one-time bonus payments that we saw early in the rampup, but they continue to drill primarily on the Ohio side in the Utica Shale. So they continue to lease, we continue to see royalty payments and some of the larger drilling companies have now moved in, so we are seeing some of the larger oil companies here and I would anticipate that we will see continued growth in that area. We may not see a one-time shot of $158 million in one month as we saw back in April, but, at the same time, it's continuing to be a fairly aggressive pattern.

Great. Thank you very much. I appreciate it.

Thank you, Taylor.

John Moran, Macquarie.

Good morning, guys. This is Michael Byrne in for John.

Hey, Michael, how are you?

You got in under a pseudonym, huh?

Just a quick question for you guys on provisioning. Can you just give us a sense of how you sort of think about provisioning for loan growth versus sort of releasing reserves as sort of asset quality improves? For example, do you have sort of a reserves to loan target that you guys are thinking about?

I'm not sure that we have a benchmark. I think what we continue to try to assess is where we are in the marketplace and where we see the economy in our markets. When we look at the fourth-quarter provision, it was probably level with the third-quarter provision, a little bit reduced and we will see that kind of -- I think what we talked about either last quarter or the June quarter was that we will see some lumpiness in provision as you go through the cycle. So we could anticipate some lumpiness in our provision. If you look at the annualized numbers though, there has been a steady decline in the provision and an improvement in the quality of our loan portfolio. So as far as credit quality is concerned, we continue to see those trends. We continue to see a declining provision. We continue to see improved credit quality. So I guess as far as a general statement, that is about as close as I can come.

Yes and I think relative to loan growth, there is certainly an element beyond charge-offs that we will have to consider going forward. We had a nice tailwind over the past 12 to 18 months as the credit recovery allowed us to reduce the provision. But I wouldn't think of it in terms of the old traditional, oh, we are going to provide 1% for each new dollar of loan growth. It is a factor that is probably 25%, 30% of that. Obviously depends upon what types of loans are being added, whether they are consumer or they are commercial or construction and then the rating system or the rating scale because that helps to determine the overall provision for a particular quarter.

Michael, just from an accounting standpoint, I am not sure the accounting rules allow you to provide for something you haven't done yet. So I would be very careful about thinking of the provision in them in the concept of getting ready for loan growth into the future.

Okay, great.

When the rules change in a couple years, of course, that will be different, but that is still only a proposal at FASB.

Sure, thank you.

(Operator Instructions). Showing no further questions in our queue at this time, 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, Amy. And I appreciate everybody participating in the call. We are very pleased with the 2013 numbers, a 29% increase in net income, an 18% increase in earnings per share and an ROA of 1.05%. We went through a very good year. We accomplished some succession planning that we had talked about. We completed and integrated an acquisition transaction in the Pittsburgh market. We increased loans outstanding about 5.6% and we generated $1.6 billion in production in loans. So we are very pleased with the year 2013. We thank you very much for participating in our call.

The conference has now concluded. Thank you for attending today's presentation and please disconnect your line.