WesBanco Inc (WSBCP) 2015 Q2 法說會逐字稿

Good morning, and welcome to WesBanco's conference call. My name is Denise, and I will be your conference facilitator today. Today's call will cover WesBanco's discussion of results of operations for the quarter ended June 30, 2015.

(Operator Instructions)

This call is also being recorded. If you object to the recording, please disconnect at this time.

Forward-looking statements in this report relating to WesBanco's plans, strategies, objectives, expectations, intentions and adequacy of resources are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The information contained in this report should be read in conjunction with WesBanco's Form 10-K for the year ended December 31, 2014, and documents subsequently filed by WesBanco with the Securities and Exchange Commission, SEC. Including WesBanco's Form 10-Q for the quarter ended March 31, 2015, which are available at 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 most recent annual report on Form 10-K filed with the SEC under Risk Factors in Part 1, Item 1A. Such statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements. WesBanco does not assume any duty to update forward-looking statements.

WesBanco's second-quarter 2015 earnings release was issued yesterday and is available at www.WesBanco.com. This call will include about 20 to 25 minutes of prepared commentary, followed by a question-and-answer period, which I will facilitate. An archived webcast of this call will be available on the Company's website. WesBanco's participants in today's call will be Todd Clossin, President and Chief Executive Officer; and Robert H. Young, Executive Vice President and Chief Financial Officer. And both will be available for questions following opening statements. Mr. Clossin, you may begin your conference.

Thank you, Denise. Good morning, everyone. Thank you for participating in WesBanco's second-quarter 2015 earnings call. We are pleased you have joined us this morning to hear about our operating results. Through the first full quarter since our merger with ESB, I will be making opening comments. Bob Young, our CFO, will provide some financial highlights. And I will moderate the question-and-answer period. The press release detailing the results of the second quarter was issued last evening. A copy of the entire press release is available on our website.

We completed our conversion with ESB on April 24, approximately 10 weeks after we closed the deal, and less than six months from the time the deal was announced. We are ahead of schedule regarding salary and other ESB expense saves. The ESB employees have been performing well and our being assimilated into our organization quickly. Many have now assumed expanded responsibilities in the merged organization.

WesBanco achieved an 18.5% increase in net income, excluding after-tax merger-related expenses from the second quarter of last year, and a 10.6% increase from the first quarter of this year. Our continued focus on driving positive operating leverage led to a revenue-growth number of 18.5% versus an expense-growth number of 12.8% for the quarter. These results allowed us to improve our efficiency ratio to a strong 56.1%, one of the better efficiency ratios in the industry.

Loan growth, executing ESB, stood at an annualized 7.2% rate for the first six months of 2015. Loan originations reached $825 million for the first half of 2015, as compared to $625 million during the first six months of last year, representing an increase of 32%. As I mentioned during the first-quarter earnings call, several larger construction loan payoffs were delayed slightly from Q1. Those larger payoffs did indeed occur during Q2, totalling about $62.8 million. Despite these payoffs, we still achieved a robust rate of growth of 5.8% annualized for the second quarter, which when averaged with the first quarter's 8.5% annualized growth rate, produced a combined 7.2% annualized rate for the first half of 2015.

Our loan diversification initiatives, and specifically our C&I and home equity loan types, continued to show nice results, with both growing in the double-digit range 12% and 15% annualized, respectively. Our net interest income increased for the eighth consecutive quarter due to the previously mentioned strong loan growth, offsetting a compressed margin. We did experience earning asset margin compression, as we sold approximately $579 million of ESB securities and reinvested those proceeds into securities at current market rates. While we remain slightly asset-sensitive after the portfolio restructuring, the restructuring did compress margins on a near-term basis more than was originally modeled at the time of the deal announcement.

The 10-year treasury rate declined from the fall of 2014 to the first quarter of 2015. Despite involatility, had an impact on the year-to-date overall earning asset margin of approximately 12 basis points. We delayed the reinvestment timing of some of the securities redeployment into late Q2, and were able to pick up some additional yield as rates rose temporarily. We believe in the long-term value proposition of the ESB deal, as we expect redeployed securities into higher-rate loans over time, as we have accomplished with prior mergers.

Having a top 10 Pittsburgh MSA market share -- coupled with newly hired commercial lenders, increased home equity volume and new products introduced into the former ESB markets -- is anticipated to drive increased earnings, despite the lower-than-modeled rate on the acquired securities portfolio. We achieved $0.58 earning per share on a core non-GAAP basis for the quarter, and $1.17 earnings per share on a core non-GAAP basis for the first half of the year. Those numbers include approximately $0.02 in nonrecurring salary and other operating expenses incurred from the February 10 closing date to the end of April conversion date.

The former ESB securities portfolio was also not fully invested until the end of June, which accounted for another $0.02 of earnings. Adjusting for those two items in our run rate would have put us at approximately $0.60 per share for the quarter, and $1.21 per share for the first six months of the year.

Our loan growth is running at an annualized 7% pace. Our non-interest income was up 5% annualized, compared to the same period last year. Our efficiency ratio was in the mid-50%s. Our operating leverage continues to be positive, and our credit trends continue to improve. We have solid momentum in our businesses. We continue to evaluate M&A opportunities in our footprint and in urban areas contiguous to our existing markets.

One last note to make before I turn this over to Bob Young, is that our efforts to hire C&I lenders in our urban markets continue to bare fruit, as we hired severed seasoned bankers in the Cincinnati area over the past quarter. Let me now turn it over to Bob.

Thank you, Todd. For the second quarter, earnings, exclusive of merger-related expenses, were $0.58 per share versus $0.64 last year, and compared to $0.59 for the first quarter. Year-to-date per-share earnings on the same basis were $1.17 versus $1.20 last year. Additional operating expenses from the acquisition of ESB Financial, from the February 10 merger date until the end of April when our back office systems and branches were converted to WesBanco's platform, resulted in $0.01 per share in each quarter of such expenses, beyond the noted merger-related expenses.

Second-quarter GAAP earnings were $0.56 per share, with about $700,000 of after-tax or $0.02 per share of merger-related expenses. Six-month GAAP earnings were $0.97 per share, with $7.1 million or $0.20 per share in after-tax total merger-related expenses. On a year-to-date basis, core ROA was 1.10% versus 1.15% last year. And core return on tangible common equity was 14.5% compared to 16.2% last year. These measures continue to be above the most recent published peer averages of 1.07% and 12.1%, respectively. In addition, the peer efficiency ratio was 61.6%, as compared to our core efficiency ratio of 56.2%. On a pretax pre-provision basis, return on average assets without the merger-related expenses was 1.73% year to date, versus 1.76% last year.

Turning now to the balance sheet and to net interest income changes, net interest income grew 25.8% for the quarter and 21% year to date. With the acquisition and loan growth over the past year the primary reasons for the increase. The second-quarter net interest margin decreased 20 basis points, from 3.64% to 3.44%. And it was down 14 basis points year to date, from 3.63% to 3.49%. The margin was positively influenced by purchase accounting accretion from the market to market of financial assets and liabilities. The margin, net of all purchase accounting accretion and other one-time adjustments in both periods, would have been 3.32% in the second quarter of 2015 and 3.38% year to date, as compared to 3.57% and 3.58% for the same periods in 2014.

Factors influencing the significant growth in net interest income include approximately 33.2% higher average earning assets for the quarter, which is 25.6% year to date, with about 25.7% growth in average loans. Approximately 7.8% of this average growth was organic in nature. The NIM, the net interest margin, was down primarily due to a higher percentage of investments to total earning assets as a result of the acquisition, and lower market yields on the restructured portion of the portfolio. Along with lower yields on the market to market of the retained portion of the acquired investment portfolio.

Market rates were down significantly between announcement and acquisition, which affected both mark-to-market yields, as well as what we could achieve in the market upon reinvestment of proceeds from disposed securities. An analysis of such lower available market yields versus our earlier expectations suggest the reduction impacted the margin by approximately 12 basis points for the first six months of 2015, comparing to fourth-quarter actual investment yields.

Additionally, during the approximate three months between security sales and finalizing our replacement security purchases, we lost approximately $0.02 per share in earnings from the under-invested portfolio that had not yet been fully invested. Those securities are now all fully invested. Overall loan yields were also down by 10 basis points for the quarter, as competition on new loans plus repricing of existing loans caused the decrease, net of positive yield from purchase accounting.

Cost of funds helped offset these factors, as they were down to 0.41% for the quarter versus 0.52% last year, while cost of deposits was down to 31 basis points versus 43 basis points in the prior period. While certificates of deposit comprise a greater portion of deposits after the acquisition, CDs continue to re-price downward, ending the quarter at 62 basis points versus 95 basis points last year.

Non-interest-bearing checking accounts grew 23.2% year over year, including the acquisition, and approximately 7% on an organic basis. First-half annualized deposit growth, excluding both ESB's acquisition of deposits, and CDs, was 5.2%, led by strong non-interest and interest-bearing demand growth. Portfolio loans increased $988 million or 25% over the last 12 months, with $701 million of the growth from ESB and $287 million in organic growth. For the first half of the year, organic loan growth was $146 million, which amounts to 7.2% on an annualized basis. Loan originations in the first half of $825 million were up 32% over last year. Loan growth was driven by increased business activity in our markets, additional lending personnel in our larger urban markets, as Bob mentioned earlier, focused sales calling efforts and continued improvement in loan origination processes.

In addition, we achieved our business plan goals of increasing both C&I lending and home equity lending. C&I loans, prior to adding an ESB's commercial portfolio, increased 16.9% over the past year and 12% annualized since year-end. Legacy home equity lines of credit increased 20% year over year and 15% annualized since year-end, due to consumer marketing campaigns, branch incentives and more competitive product offerings.

Turning now to non-interest income, non-interest income for the second quarter was about the same as last year, as the 2014 second quarter benefited by a BOLI death benefit of $1 million and about $200,000 in security gains. Total fee income would have increased $1 million without that extra fee income last year, which impacted second-quarter 2014 EPS by approximately $0.03.

Fee items increasing this year include: trustees up $0.3 million or 5.1%; service charges up $0.2 million or 4.2%, mostly due to incorporating ESB's customers, as well as certain fee schedule adjustments. Electronic banking fees up $0.2 million or 7%. And gains on sales of other real estate-owned and other assets up $0.3 million. Factors influencing the 2.7% six-month fee income increase include higher trust, electronic banking, mortgage banking, and gains on sales of REO and other assets -- offset somewhat by lower BOLI income and securities gains.

Turning now to non-interest expense, total expenses were up 12.8% the second quarter or $5.2 million, exclusive of $1.1 million in merger-related expenses reflecting the addition of ESB's operating expenses for the entire period. Including an extra $0.5 million or $0.01 per share personnel and IT expenses related to the late April data processing and branch conversions. For the six month period, expenses net of merger-related costs were up 10.9% or $8.8 million, reflecting approximately 4 2/3 months of acquired ESB expenses. The extra operating expenses for the six-month period totaled $1.2 million or $0.02 per share, while merger-related expenses totaled $10.8 million.

Most line items in non-interest expense were influenced from the acquisition for both three and six month periods. With salaries and wages, employee benefits and occupancy-related costs seeing the highest increases, along with amortization of intangibles and FDIC insurance from the higher asset base. However, the integration of the two banking organizations produced an improved core efficiency ratio -- down nicely to 57.1% for the six-month period as compared to 59.7% last year. And indicative of the cost savings achieved in the latter half of the quarter, down to 56.1% for the second quarter. As Todd mentioned, our overall cost savings plans are ahead of schedule to achieve the announced 50% of ESB's pre-acquisition run rate expenses. Although we continue to add business unit revenue-producing positions to support our growth targets, as well as certain risk- and compliance management-related positions, as we track closer to $10 billion in assets.

I would like to turn now to credit quality. For the quarter, net charge-offs of $3.1 million reflected a $1.3 million charge-off on a $5 million C&I credit unrelated to either the ESB acquisition or the energy industry. As a result, the provision for credit losses increased to $2.7 million for the quarter from last year's $0.8 million. And it was $4 million for the six-month year-to-date period, versus $3 million last year. Despite the increase in net charge-offs, as well as the provision, other credit quality metrics continued to improve. With criticized and classified loans down $38.5 million or 31.7% from last June, even with the acquisition adding over $12 million to criticized and classified totals in the first quarter. Non-performing loans and non-performing assets -- while up in dollars from the acquisition year over year by approximately $10 million and $11 million, respectively, were down as a ratio. As non-performing loans to total loans dropped from 1.26% to 1.24%, and NPAs dropped from 87 basis points to 80 basis points of total assets. Of note, past-due loans also declined from 33 basis points of total loans to 26 basis points this year.

Although higher for the second quarter, net charge-offs decreased to 21 basis point annualized for the six-month period, as compared to 25 basis points last year. The allowance for loan losses to total portfolio loans was 88 basis points at the end of the quarter, versus 1.16% last year, as the pre-existing allowance from ESB was not transferred under current acquisition accounting rules. However, if the acquired ESB loans recorded at fair value with an appropriate credit market the date of acquisition were excluded from the loan totals, the allowance would represent 1.03% of total loans. The credit portion of the total net loan mark represented approximately 3% of total ESB loans, amounting to about $20 million, with approximately $4 million of that allocated to impaired loans.

Shareholders' equity: shareholders' equity increased 38.9% or $306 million as of June 30 from year-end due to the issuance of stock related to the acquisition, and retained earnings, slightly offset by lower accumulated other comprehensive income, as market rates on securities resulted in lower fair market valuation for the available-for-sale portion of the investment portfolio.

The Tier 1 leverage ratio was 9.29% at quarter-end versus 9.88% at year-end. Tier 1 Risk-Based capital was 13.47% versus 13.76%. And total Risk-Based capital was 14.3% versus 14.81%. The decreases reflect the acquisition, as well as the previously announced May payoff of ESB's $36 million in junior subordinated debentures, otherwise known as TRUPs. The new Common Tier 1 ratio, known as CET 1, was a strong 11.71%, far surpassing the initial requirement of 4.5%, as well as the fully phased-in 7% requirement by 2019. Tangible equity dropped slightly from 7.88% at year-end to 7.68%, due primarily to the acquisition and the lower other comprehensive income. All ratios were higher than originally projected post-acquisition. Our strong equity ratios permitted Board declaration of a 4.5% increased April dividend of $0.01 per share, to $0.23, as well as the aforementioned ESB TRUP payoff.

In summary then, we are very pleased with our overall performance for the first half of 2015, given our focus on both the successful integration of ESB and implementation of our organic growth plans, including over 7% loan growth, and a focus on achieving the intended cost savings from the acquisition. We were also pleased to see that our ESB partners, supplemented with a recent team of lenders from another western Pennsylvania bank, helped us achieve loan growth from the former ESB markets in the second quarter. Our team in Pittsburgh is off to a great start in executing upon aggressive growth brands for the additional branches and counties now integrated into our previous western PA market locations.

This does now conclude our prepared commentary, and we will open the call for questions. Todd Clossin will moderate the Q&A session. And we will turn the call back to Denise for questions. Thank you.

(Operator Instructions)

Scott Valentin, FBR Capital Markets.

Good morning, and thanks for taking my question.

Good morning, Scott.

With regard to the margin, I think Bob mentioned the core margin was 3.32% for the second quarter. I was wondering, given the puts and takes, it sounds like -- well, I'm guessing it should be [above the lease table]. But wondering if there's any chance for upside, if you are talking about repositioning the securities portfolio -- I think the securities portfolio, it was about 30% of assets. I was just wondering what the goal is on that, if it's 25% or lower? And what the impact on the margin could be going forward?

I will let Bob handle the specifics on the margin. But just a general comment to respond to your question about the size. We at WesBanco are currently run about 25% of the balance sheet being in the securities portfolio. We are comfortable in that range; that's the range we'd like to get back to. We do not have a time period associated with that. That is obviously driven by a number of factors, such as loan growth, future acquisitions, everything else. But ideally, we'd like to get back to that 25% or so range.

Relative to the margin, Scott, as you pointed out, there is about 11 basis points of impact, year to date, or 12 in the second quarter, from purchase accounting. A lot of that is in the loan categories. Some of it is also in the CD bucket on the liability side. We project that most of that is going to continue at a similar pace throughout the rest of the year.

If you want to go back and focus on the growth rate, which was 3.49% for the six months and 3.44% for the three months, at a high level, we are thinking that the high 3.30%s, and low 3.40%s is where we would have you target at this point in time. While we have substantially completed the reinvestment strategy on the investment portfolio, some of those securities are experiencing higher prepayments, and we may see a little higher amortization on those going through the rest of the year. Some of this also depends upon our loan growth for the rest of the year. But I think in that general area, it is where we should land for the rest of the year.

Okay, that's very helpful, thanks. As a follow-up question, Todd, I think you mentioned the loan growth -- you had some payoffs that spilled over from the first quarter. I am wondering, one, where the pipeline is today versus where it was at the end of 1Q? Just to get a sense of where loan demand or loan originations are. And two, a breakdown of the urban market strategy you mentioned, where focusing on growing presence in the urban markets -- I think Columbus, Pittsburgh, Cincinnati are the three markets. What percent of loans are coming from those markets as you think about the total originations for the quarter?

Well, in answer to the first part of the question, loan originations continue to be strong, as I mentioned in my comments -- up over 30% compared to the same period last year. So we are seeing very strong robust loan growth. I think that comes from our past marketing efforts in the markets run, but also the addition of additional lenders. As I mentioned in the first quarter, we hired a large number of lenders in the last year or so, and we have added a few more in the Cincinnati market over the last quarter. And we are not done; we will continue to build on our markets farther on the C&I side.

So the originations -- feel very good about a very strong origination focus. And we are seeing that across all of our markets. We are seeing that across our legacy markets. We are seeing that across some of the larger urban markets as well. And it's really coming in a variety of different areas. The C&I focus and the home equity focus obviously are big focuses of ours. Those are growing in the double digits. And as I've mentioned before, the way to visualize it is, I want the pie of loans to get bigger, but I want the C&I and I want the home equity piece to grow faster than the rest of the pie. And that is that portfolio loan mix shift that we are seeing, that we are executing upon. That started before I got here, and I am just continuing to try to carry it forward, and accelerate it where I can.

That leads into the second part of the question, which is regard to the lumpiness quarter to quarter. In the first quarter, we had a solid quarter in originations, but we did not experience the payoffs that we were anticipating in the first quarter. But they were starting to drift into the second quarter. We had another strong quarter in originations in the second quarter -- just as strong as the first quarter. But the payoffs materialized in the second quarter, which had an impact on the second-quarter growth rate.

That is where I think it is important to look at the last six months as a better representation than either the first quarter or the second quarter by themselves. As you know, we don't give specific loan guidance going forward. But it is a lumpy business for us, as we have construction loans like a lot of other banks that tend to go to the permanent market. And that tends to be driven by that secondary market characteristics and project timing and everything else.

So I think going forward, expect to see what you have seen in the past for us at WesBanco, is mid-single-digit or so growth rates on the loan side. But from one quarter to the next, it might bounce around a little bit. And that is why I am working hard to build up the C&I book, and being so aggressive with that, is so that the peaks and valleys of the construction market tend to get balanced out a little bit. But we are seeing growth in really all of our markets, not just the big urban market. I've been very pleased -- more than pleased, quite frankly -- with the level of talent that we have been able to attract into the organization and build upon. And that is the precursor to really the whole strategy, from my perspective, of building out more C&I business and balancing out the portfolio, and becoming really a diversified financial services Company.

Okay, thanks, that was very helpful.

Sure.

William Wallace, Raymond James.

Good morning.

Thank you. Good morning, guys. My first question is a follow-up on the margin. I just want to make sure I understand the pressure related to delaying some of the reinvestment of the cash from the ESB securities. You gave it in EPS terms of about $0.02. What was the margin impact in the quarter?

It would be approximately 2 basis points per quarter.

So the 3.32% would have been 3.36% had you invested fully at the current market yields that you've got?

The 3.32% was the three-month number. Look at it versus the 3.38% -- so 3.42%. Either way you want to look at it, but, yes.

Okay. So the 4-basis point impact -- in other words, all else equal, margin will be up 4 basis points in the third quarter, on a core basis?

I think what we saw was -- to back up just a little bit -- from the time the deal was modeled, to the time we closed and everything, the 10-year treasury had dropped 84 basis point or so. The five-year treasury was down 60 basis points. We did not want to reinvest everything right at that time, because we knew it was at a low point. So we waited a little bit to reinvest, to get some of those rates going back. And they did; they popped back up again, back 10 years, back up over 2% again. And we were able to get some of that yield back.

Also, as you know, part of our portfolio is municipal securities as well, too. And the availability of those securities, you want to make sure you are buying the ones you want to buy, when you want to buy them. So it trickled out over time. But the impact of that, as Bob and our accounting teams have calculated, that it's around $0.02 for the first half of this year. And I think, Bob, your answer on the margin impact to that -- I don't think I can add anything to that.

Again, that factors into what I had said earlier about what we are targeting for margin for the rest of the year, Wally. So that number is in there.

But that was the GAAP number you were giving, right?

Right.

So what are you targeting for us the year on accretion then? Because last quarter, you said $6 million. But you are already at $4.4 million for the year. So it can't be $6 million.

The loan accretion in the second half of the year is expected to be $1.2 million. There is also accretion coming on the time deposit side, that would be in the area of $1 million to $1.3 million. Those are the two primary buckets, Wally.

Okay, thanks, that's helpful.

It's similar to the first half of the year. Said differently, the 11 to 12 basis points, depending upon whether you are looking at three months or six months, should have a similar impact this year. It will drop next year, because the time deposits have a very short life; the loans have a longer average life, depending upon prepayments.

Right. And that is a good segue to my next question, which is: you're talking about the payoffs that you had in the second quarter, and there has been some spill into the third quarter. I am curious if those payoffs -- are those coming from legacy WesBanco customers, ESB customers or at the same mix of those customers in your [view]?

They are current WesBanco customers we have been banking for a number of years. And it is the construction and our real estate numbers. They are putting up $10 million, $15 million projects. They stabilize; they go to the insurance industry, and it takes us out. Those can occur anywhere between 12 months and 24 months. We have seen that shorten up a little bit; it seems like they get these things up, and they start leasing them. And then the permanent financing is willing to come in and -- so it's hard to gauge from one quarter to the next. From one year to the next, you've got a pretty good sense. But from one quarter to the next, you don't. So you just have to fill that bucket up every quarter. And we are continuing to lend to these folks that are paying us off for their next project and their next project. And we will continue to do that as long as the economics of the projects make sense, and portfolio concentrations and credit metrics work for us.

Okay, I appreciate the color there. And then the last question is, as it relates to the trust fees and the sequential change that we saw, where it was down -- call it $500,000 or $600,000 sequentially -- is there anything going on there that is seasonal or one-time in nature?

The first quarter typically has tax fees, and that delta is almost exactly the difference between the first and second quarter. I had seen a write-up this morning -- I don't know whether it was yours, Wally, or another one, that comments on that. But we have in the past mentioned the seasonality. It may have been exacerbated a little bit more this year because of a higher fee schedule on the tax fees. But that difference between first and second quarter is an annual fees no-event.

Okay. It just looked bigger this year compared to last year. So, appreciate the color.

That's because the tax prep fees were higher this year. And that's reflected all in the first quarter. It is possible that last year, a little bit of that dribbled into the second quarter.

Okay, great. Thanks, guys, I'll hop out.

Sure. Thanks, Wally.

John Moran, Macquarie Capital

Good morning.

Quick question on the OpEx run rate. It sounds like, Bob, if we back out the $0.01, or $0.5 million or so, it is still hanging around in there in April from ESB. We'd be at a reasonably good run rate with some saves coming late in the quarter, if I heard you right? But then you mentioned plans to reinvest in revenue initiatives. If you could give us a little bit of help understanding where that may track for the back half?

Yes, and we have our normal salary increases in the middle of the year, and that impacts the salary line. But basically, we anticipated getting about $15 million in expense savings on a $30 million to $31 million cost base, all of that previously disclosed. We're well on the way towards getting that. If you figure seven to eight months of that, we are targeting $10 million of that this year, and the rest, next, in terms of run rate expectations. In terms of what we expect for the rest of the year off of the second quarter, it is $1 million a quarter lower.

Okay. And then --

Give or take. Don't focus exactly on $1 million. But it is in that kind of ballpark, if you will.

If I could just add onto that part of your same question there -- as we've brought on these additional lenders in the markets -- and it's not just lenders. We've hired licensed securities bankers, private bankers, a lot of revenue-producing folks. We continue to rationalize the business in terms of funding a lot of those expenses with a more rational approach in some of our other markets, where we're going to reallocate resources to the highest growth potential areas of the bank.

That is a big part of the discipline, and the way I want to look at things is, we want a strong operating leverage on any of the investments that we make. And part of that is to make sure that we are funding our investments with expenses we can take elsewhere out of the organization, in areas that are less productive. And I think we have done a pretty good job of that over the last year. That is part of the reason why you have not seen a lot of expense growth, even though we have been bringing on a dozen or more C&I lenders. And private banking -- we added a number of private banking people, licensed securities reps and others.

Got it. Thanks, Todd.

And to your question, John, the latter two months of the second quarter were indeed lower than the months of March and April.

Okay, that is helpful. And then, I don't want to harp on this, because it is a single credit. But the slippage there on the one sounds like it is marked at $0.75, round numbers. Can you give us a sense of what industry that is? And then as a corollary to that, are you seeing any slowdown in particularly the Marcellus part of the footprint, as commodities continue to be under pressure?

I would put it in the category of manufacturing distribution, with the single credit in that area -- isolated event, not related to anything else that we are seeing. From that perspective, there is nothing more really to say on that. It will be dealt with as we move through the process here. The second part of your question was, again, --?

I'm sorry. It was just any slowdown that you guys are noticing in some of the shale areas?

The additional drilling for additional wells, we have seen that slow down significantly as the CapEx amounts are coming down. But the existing wells continue to run very strong. And what we are finding is, people are using this slowdown in drilling activity as an opportunity to build out the pipelines. What we were seeing was, that was actually starting to -- the drilling was getting ahead of the pipeline building. You could drill the well, but you couldn't get the gas out. Now the pipeline activity infrastructure is catching up with what is going on. So if you get an increase in price again, the drilling wells will continue.

But also I would mention that the technology is continuing to improve. And actually the drop in price has probably accelerated the increase in technology, to make the existing wells even more productive and more efficient. I didn't mention it in my comments, but I've mentioned it before in prior quarters, and the same thing still holds true. We are still seeing eight-figure monthly deposit flows into our organization, directly tied to checks from the gas companies to our customers into the bank. And that has held steady for a number of months. And again, that speaks to the existing production of the wells that are already drilled.

So that number may not be increasing as it would have otherwise. But that base is still there, and these are 50-, 60-year royalty streams that we are benefiting from, because over 90% of our deposit footprint is in the Marcellus and Utica shales. So that should give us a real nice advantage, particularly now when rates rise in a rising rate environment, that we've got a steady flow of very low-cost deposits coming into the bank to fund our growth.

Sure. Thanks very much for the color.

Yes, I am not seeing anything really on the lending side related. We don't lend to the big oil and gas companies, so it has not been an impact for us. And the lower cost associated with oil, we are seeing some benefits of that in our footprint as well, too.

Great. Thanks very much.

Sure.

(Operator Instructions)

Catherine Mealor, KBW.

Good morning, everyone.

Hi, Cathy.

Now that you've got ESB fully in and the restructure mostly behind you, can you comment on how, if at all, your asset sensitivity has changed? And how you're positioned for a potential rise in rates this fall?

I'll let Bob fill in some specific information. You know, we were asset-sensitive before; we are still asset-sensitive. I would say we were slightly asset-sensitive before; we are still slightly asset-sensitive as an organization. So it had a little bit of an impact, but not a significantly material impact. Did we disclose the rate shock analysis, Bob?

It will be in the 10-Q next week, and it will be in our PowerPoint that we will post over the next couple of days. Let me just say, as Todd said, we are still slightly asset sensitive -- slightly less so than at the end of March timeframe, as a result of the completion of the investment strategy and the associated borrowings. The numbers at the end of March are similar to where we are at the end of June, Catherine.

Okay, got it. And not to belabor this, I just want to be sure I am hearing you right. The guidance that you gave on the margin to be in the high 3.30% to low 3.40%s -- is that off of the GAAP margin or the core margin?

That is off GAAP.

Okay, perfect. All right, thank you.

Sure. Thanks, Catherine.

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

All right. I would just like to thank you all for being on the call this morning. I know this is a busy week, with many companies, many banks issuing earnings releases. But appreciate your being on the call, and the questions. Thank you. Have a good week.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.