WesBanco Inc (WSBCP) 2015 Q3 法說會逐字稿

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

(Operator Instructions)

This call is also being recorded. If you object to the recording, please disconnect at any 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, as well as documents subsequently filed by WesBanco with the Securities and Exchange Commission including WesBanco's form 10-Q for the quarters ended March 31 and June 30, 2015 which are available at the SEC's website, www.SEC.gov, or 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 One, 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 third-quarter 2015 earnings release was issued yesterday afternoon 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 on today's call will be Todd Clossin, President and Chief Executive Officer; and Robert H. Young, Executive VP and Chief Financial Officer, and both will be available for questions following opening statements. Mr. Clossin, you may begin your conference.

Thank you, Danielle. Good afternoon, and thank you for participating in WesBanco's third-quarter 2015 earnings call. We're pleased you've joined us this morning to hear about our operating results. I'll be making some opening comments, Bob Young our CFO, will provide financial highlights and I'll moderate the question-and-answer period. A press release detailing the results of the third quarter was issued last evening. A copy of the entire press release is available on our website.

Our merger with ESB that was closed in February and converted in April of this year has gone very well. Expense saves remain ahead of pace and employee assimilation has been positive. Our new employees in the Western Pennsylvania area have combined with our existing lending team to now represent one of the most productive regions in our Company. We never experienced a slowdown in growth during the merger process, and we quickly added additional revenue-generating staff to capitalize upon the benefits of our newfound Top 10 size in the market.

We achieved fully diluted earnings per share of $0.58 for the third quarter of this year, as compared to $0.56 for the second quarter of this year, and $0.62 for the third quarter of last year. Our continued focus upon return on investment once again drove positive operating leverage for the quarter. These results allowed us to post a strong efficiency ratio of 57.6% for the quarter, as compared to 58.5% posted during the same quarter last year, one of the better efficiency ratios in the industry. Our loan growth, as I have referenced on previous calls, is best determined by averaging several quarters together, as planned construction pay-offs can move the numbers around significantly from quarter to quarter.

We are pleased with our year-to-date loan production of $1.3 billion as compared to the $1.0 billion produced, originated during the same period last year. These loan origination results represent a 30% increase in production over the first three quarters of this year. The third quarter was our strongest quarter of production of the year, and September was our strongest month of production all year. We experienced $77 million of planned commercial real estate pay-offs during the quarter, as developers placed construction loans into the secondary market to take advantage of long-term fixed rates ahead of an eventually rising interest rate environment.

The net of this production and pay-off activity resulted in annualized organic loan growth of 5.3% since December 31, 2014. While this mid single digit loan growth rate is in line with our historic trends, it does mask the underlying success of our loan diversification initiative. As mentioned last quarter, our loan diversification strategy, and specifically our C&I and home equity initiatives, continue to show nice results.

Solid execution against our C&I loan growth initiative resulted in 30% of our period loan production coming from the C&I category. Credit quality trends continue to remain strong, and we continue to address credit issues as they arise in the portfolio. Our non-performing loans as a percentage of total loans was 1.08% at September 30, compared to 1.24% at June 30, and 1.2% at March 31.

We had a very productive quarter on the talent side, particularly with the hiring of new C&I talent. During the quarter, we hired a Senior Lender from the Columbus, Ohio market. We hired one from the Canton, Ohio and Canton and Akron market combined, and one for the Charleston, West Virginia market. We also hired a Senior Lender in the Cincinnati area earlier this year, and several strong C&I lenders across multiple markets.

I've known the Columbus, Canton, and Cincinnati Senior Lenders for a long time, and feel we have made significant moves with these hires. The three Senior Lenders hired this quarter came from large regional banks. We built the teams we wanted to build, and we are now seeing results we expected to see.

We continue to face the same headwinds in the area of margin contraction as others, but we are staying disciplined with our ROE-based model pricing. Low rates may continue to be with us for a while, so we are focused upon staying disciplined with our asset and liability pricing, while remaining slightly asset sensitive. Bob will get into this area in more detail shortly.

Our loan production is running at record levels, and we are changing the mix of our loan growth to rely more heavily upon a more stable C&I product category. Our investments continue to pay off, as is seen by the continued positive operating leverage, and the strong upper mid 50s efficiency ratio. We had solid momentum in our loan deposit and fee generation businesses, and we are demonstrating the organic growth needed to be successful in today's environment. We continue to evaluate M&A opportunities in our footprint, and in urban areas that are contiguous to our existing markets.

I'd now like to turn it over to Bob Young to review the numbers in more detail. Bob?

Thank you, Todd. For the third quarter, net income exclusive of merger-related expenses was $22.4 million or $0.58 per share, versus $18.1 million or $0.62 last year. Year-to-date net income on the same basis was $64.9 million or $1.75 per share, versus $53.5 million or $1.82 per share last year. Core operating earnings were up 23.1% for the quarter, and 21.5% year-to-date.

Merger-related expenses for the nine-month period on an after-tax basis were $7.2 million or $0.20 per share, and less than $0.2 million for the quarter. Third-quarter GAAP net income was $22.2 million or $0.58 per share, while year-to-date it was $57.8 million or $1.55 per share. On a year-to-date basis, core return on average assets was 1.09% versus 1.15% last year, and core return on tangible common equity was 14.2% compared to 15.97% last year, similar to peer ratios. Pre-tax, pre-provision return on average assets on a core basis was 1.69% year-to-date versus 1.76% last year.

Turning to the balance sheet and net interest income now, net interest income grew $12.0 million or 24.8% for the quarter, and $32.1 million or 22.3% year to date with the acquisition. Organic loan growth and a reduced cost of funds percentage over the past year, the primary reasons for the increase. The third-quarter net interest margin decreased 22 basis points to 3.36%, and it was down 18 basis points year-to-date to 3.44%.

While the margin was influenced positively by purchase accounting accretion from the mark-to-market of financial assets and liabilities of 10 basis points for the quarter, and 10 basis points also year to date, it was down overall due to a higher percentage of investments to total earning assets from the acquisition, and lower market yields on the portfolio, as well as on loans. Market rates were down significantly between announcement of the deal and acquisition, which affected both mark-to-market yields, as well as what we could achieve in the market upon reinvestment of proceeds from the sale of acquired securities.

In addition to the mix shift in assets and a lower overall yield on investments of 41 basis points year over year, loan yields were also down by 15 basis points year to date, as competition on new loans plus repricing of existing loans caused the decrease. Cost of funds somewhat assisted in limiting these decreases, as they were only 42 basis points for the year to date versus 53 basis points last year, while cost of deposits was down to 32 basis points versus 43 basis points last year.

Certificates of deposits do comprise a greater portion of deposits post acquisition, but they continue to reprice downward, ending the quarter at just 62 basis points versus 93 basis points last year. Non-interest bearing checking accounts grew 24.6% year over year, and approximately 12.1% on an organic basis. First nine months annualized deposit growth, excluding both ESB and certificates of deposits, was 7.9%, led by strong non-interest and interest bearing demand growth.

Portfolio loans increased $919 million or 22.8% over the last 12 months, with $701 million of the growth from ESB and $218 million in organic growth. Organic loan growth was 7.1% from last September, and 5.3% year to date annualized, with approximately 30% of year to date growth in commercial and industrial loans. Strong total loan originations of $1.3 billion year to date were up over 30% from last year at the same time, with all categories up double digits.

Loan growth was driven by increased business activity in our markets, additional lending personnel in our three larger urban markets, focused sales calling efforts and internal referrals, and continued improvement in loan origination processes and systems. In addition, we are achieving our business plan goals of increasing both C&I and home equity lending, with organic C&I loan growth of 6.3% since year-end annualized, and home equity lines of credit up 19.3% over the same period. This is primarily due to consumer marketing campaigns, branch and customer incentives, and more competitive product offerings on the home equity side.

Turning now to non-interest income, for the third quarter, non-interest income was up 9.2% or $1.5 million from last year. Although the 2014 third quarter saw a realization of $1.2 million net loss on termination of an expensive repo borrowing, and $600,000 in net security gains, total fee income would have increased $1 million or 5% without those two line items in both years, driven by higher electronic banking fees, deposit service charges, and securities brokerage fees, along with mortgage gain on sale income. Factors influencing the 4.8% nine-month core fee and other income increase include the same items noted previously, along with higher trust fees.

Non-interest expense. Total non-interest expense was up 19.2% in the third quarter or $7.5 million, exclusive of $0.2 million in merger-related expenses, reflecting the addition of ESB's operating expenses and branch operations, as compared to the prior year.

For the nine-month period, expenses net of merger-related costs of $11 million, were up 13.7% or $16.3 million, reflecting almost eight months of acquired ESB expenses. Most line items in non-interest expense were influenced by the acquisition for both three- and nine-month periods, with salaries and wages, employee benefits, and occupancy-related costs seeing highest increases, along with amortization of intangibles and FDIC insurance from the higher asset base. Other operating expenses were also up for the quarter and year-to-date, due to higher customer fraud and other operations losses, electronic banking, and certain deposit product fees.

The integration of the two banking organizations produced an improved core efficiency ratio of 57.3% year to date from 59.3% last year, indicative of the cost savings achieved to date. While our overall ESB cost savings plans have been primarily achieved ahead of schedule, we continue to add revenue-producing positions to support our growth targets, as well as risk, finance, and compliance management-related positions as we approach the Dodd-Frank $10 billion asset threshold.

Turning now to credit quality. For the quarter, net charge-offs of $3.8 million reflected a $1.2 million partial charge off on a $2.7 million investor-owned commercial real estate credit previously reserved for. Year to date net charge-offs were $8.6 million or 24 basis points as compared to last year's $6.9 million or the same 24 basis points, partially a result of net charge-offs from the ESB acquisition. The provision for credit losses for the quarter was $1.8 million as compared to last year's $1.5 million, while year to date, it was $5.8 million compared to $4.5 million last year.

Other credit quality metrics continued to improve, with criticizing classified loans down to 1.65% of total loans, from last September's 2.17%. NPLs and NPAs, while up in dollars between $4 million and $6 million respectively, from the acquisition year over year, reflected a decrease in the ratios, as NPLs and total loans dropped from 122 to 108, and NPAs dropped from 86 basis points to 70 basis points. Both measures also dropped appreciably from the second quarter.

Past due loan percentages were similar on a year-over-year basis. The allowance for loan losses to total portfolio loans was 84 basis points at [9/30] versus 1.12% last year, as the pre-existing allowance from ESB was not transferred under acquisition accounting rules. However, if the acquired ESB loans recorded at fair value with an appropriate credit mark at the date of acquisition were excluded from the loan totals, the allowance would represent 98 basis points of total loans.

On the subject of shareholders equity, it increased 41.6% or $328 million from year end, due mostly to the issuance of the stock related to the acquisition, as well as growth in retained earnings. The Tier 1 leverage ratio was 9.39% at quarter end, versus 9.88% at year end. Tier 1 risk-based was 13.69% versus 13.76%, and total risk-based capital was 14.46% versus last year end's 14.81%. The decreases reflect the acquisition, as well as the previously-discussed second quarter pay off of ESB's $36 million in junior subordinated debentures.

The new common Tier 1 ratio, known as CET1 was a strong 11.93%, far surpassing both the initial requirement of 4.5%, as well as the 2019 fully phased-in 7% requirement. Despite the acquisition's impact on tangible equity, it was about the same as at year end, at 7.87%. Our strong equity ratios permitted declaration of a dividend increase of 4.5% to $0.23 per share back in April.

In summary, overall performance continues to trend nicely for the first nine months of 2015, given our focus on both the successful integration of ESB, and implementation of our organic growth plans in the current continued low interest rate environment. Organic loan growth on a year-to-date basis continues to be above 5%, and our cost savings strategies post ESB are on target, as evidenced by our lower efficiency ratio of approximately 57% year to date compared to our peers' above 60%. Our Pittsburgh market business plans are moving forward nicely with good loan origination volumes from that market to supplement higher originations in our other core markets.

This does now conclude our prepared commentary, and we will now open the call for your questions. Todd Clossin will moderate the Q&A session, and the facilitator can now coordinate those questions. Thank you.

(Operator Instructions)

The first question comes from Catherine Mealor from KBW.

Just first on growth. Had a question, maybe thinking forward.

I know the commercial real estate pay-offs are going to move the growth rate around quarter-to-quarter, but you did a lot of hiring this year. And so how should we think about just what you're expecting the core loan growth rate should be, going into next year, outside of any more of these large paydowns?

Yes, the third quarter was really pretty extraordinary on both the production side and the pay offs, in the large commercial real estate loans that went into the secondary market. It was pretty unusual.

I would tell you what you'll see going forward is a continuation of what you've seen over the last couple of years, and that is mid single digit, but there's a lot of mix going in underneath that. As you know, we're trying to really build the C&I book. It's why we did some of the hires that we did, and we're thankful to see some of the production coming from that.

I know at some point in time, rates are going to rise. At some point in time some of the commercial real estate construction projects won't be as economically feasible. That market will slow, or it will slow because the market starts to stretch a little bit. And when that starts to come down, I want to make sure we could still show really good loan growth through other initiatives, whether it be C&I or the consumer home equity loans.

Those type of things start to show through, so we're looking for a more stable loan growth that gets away from the quarter to quarter gyrations you see with the construction projects. But net of all of that, I would expect to see continued growth in the C&I and home equity portfolios, like you've seen from us over the last year or two, but low to mid single digit growth in the commercial real estate side, netting out to mid single digit.

Got it, and how is that mix shift into C&I and the HELOC portfolio impacting the yield on your loan book? Was the mix shift the primary driver, would you say, in the quarter-over-quarter compression in the loan yields?

Well Catherine, the loans are primarily decreasing on the commercial side because of repricing of existing three and five year loans. In other words, the initial term, and they are then repriced off an index to either LIBOR or the Treasury CMT. So given how low rates are today, those rates are repricing, are those loans are repricing very low. We're also finding competition for new quality credits is resulting in lower initial spreads, although we do try to maintain floors on our loans.

We've done very nicely on the home equity side for the last year and a half with our new products. That does come at a slight cost. We do have some customer as well as employee incentives for that program, and that has resulted in a slight reduction in the home equity line in terms of margins. So I think that to some degree goes to your question on mix shift, because certainly, the third quarter, most of our growth was in the categories of home equity lines and residential mortgages.

There also was some noise around the acquisition, as we lined up various loan categories from ESB and moved them around. On our balance sheet, in any particular quarter, there might have been some adjustments related to moving those loans from category to category. So we tended to focus on the bottom line relative to loan yields over the last two quarters particularly, Catherine.

Just to add-on to that, the C&I business tends to come with a lot more fee income, not credit income, TMPs and things like that, where the real estate business tends to come with more up front type of fees associated with that. But the yield on the two products, they are not that different, within 0.25% or so, whether you're doing a construction loan or whether you're doing a good quality C&I loan. So over time, I think those yields will be similar.

And we aren't seeing a slowdown on the construction side at all. It's continuing to run very strong, and while we're anticipating at some point that will soften as rates go up, or as we decide to pull out of maybe some higher rates for concentration issues, we aren't seeing a slowdown in construction.

Good, high-quality construction projects are still plentiful. We're looking at them, we're underwriting them, and we're doing them and that's building a lot of powder for the future so to speak, as those fund up over the next couple of years.

Those are also in market. We don't buy out of market loans, so I would make that comment. The other comment on the real estate loans is that we have been putting more of those on the balance sheet over the last couple of years, and we'll dial that back going forward to more gain on sale activity.

That's very helpful. I'll hop out, and let someone else jump in the queue. Thanks.

The next question comes from Bob Ramsey of FBR.

Bob, I was hoping you could talk a little bit more about the net interest margin trajectory and I think I heard you to say that there's about 10 basis points of benefit from purchase accounting accretion. I just wanted to know if any of that is accelerated accretion, or whether it's core run rate accretion? And from this level of 336, how you are thinking about the margin pressure in the fourth quarter?

Well specifically on the issue of, or on the question of add-on purchase accounting accretion, it was -- I did note that in my script it was 10 basis points of the quarter, 10 basis points year-to-date. It was 11 basis points, for instance, in the second quarter. That compares to 4 basis points in the third quarter last year.

That will drift away, if you will, a couple basis points a quarter between now and the third or fourth quarter of next year, as some of the accretion related to CDs and borrowings goes away quicker than the accretion in non-impaired loans in the loan book, for instance. So I would dial that back at a couple basis points a quarter, Bob, when it comes to purchase accounting.

Cost of funds has been relatively flat the last three to four quarters now. I don't know whether Todd mentioned it or I did. It's in the press release.

We talked about extending some borrowings. There's an extra basis point of cost in terms of total interest bearing liabilities this quarter, and extending some of the shorter-term borrowings that we had acquired either from ESB or shortly after ESB, as we were refunding the portfolio purchases on the asset side.

So we think that's protective of the margin going forward, no matter where or when interest rates go up. And in fact, our asset sensitivity due to that change this quarter, which did cost us a little bit in margin as you point out, that changed our asset sensitivity up 200 from 2.1% at the end of December to 2.7% at the end of September. So that's a bit of a protective strategy, even if we don't think rates are going to go up until some time in the second quarter.

Bottom line, it seemed to me as though by the end of the quarter, looking at the monthly run rates during the quarter that we had settled in at the mid 330s, high 330s number, and I think at this point, that's about as much as I would say. In our most likely environment, with loan growth and the shifting of assets on the asset side, that should help us as well, in terms of future margin.

Okay, so it sounds like we're relatively stable with maybe a little bit of drag from the rate environment, and losing a basis point or two of the purchase accounting?

Yes, I think the final point, I'm not sure if Todd made this, but I would suggest at least what we're looking at today, we don't expect the same level of pay-offs in the commercial side in the fourth quarter. Maybe a little bit more visibility of the current pipeline which continues to be at a very nice -- indicative of a nice growth rate.

We also, Todd pointed out, the construction loan financing, we should see some of those balances ramp up here in the fourth quarter. So we talked about the lumpiness in terms of quarter-over-quarter loan growth rate. Catherine mentioned that. That's an add-on to what I said about most likely, and this asset shift between investments and loans, and we do hope to get more visibility on that, with more of the current production falling to the bottom line.

Great. And then shifting gears, just a small question, but the other expense line seemed just to tick up this quarter. Is that just normal quarterly volatility, or was there anything unusual in that other line, that drove the quarter-over-quarter increase?

Yes, Bob there actually were a couple of things, and you can decide whether you think of this as core or not core. We had a contract termination expense for a deposit product fee, a contract of a couple hundred thousand. We had, I mentioned the customer fraud in my remarks, that was about $300,000.

We also saw some extra costs just associated with ESB and bringing their activities in, primarily in the postage and supplies category, as we were ramping up marketing campaigns in that market. So all of those affected the other operating expense category. It wasn't in REO expenses. It was basically those two or three categories.

Okay, great. Thank you for taking the questions.

The next question comes from William Wallace of Raymond James.

How you doing?

Good.

Probably beating a dead horse at this point.

We're not dead yet, Wally.

I'm just trying to figure out the margin, because what you're saying, I'm just struggling to see how we can stabilize on NIM, just given what we're seeing in the loan yield specifically. So maybe, I'm just wondering, the loan yields of the loans that paid off unexpectedly in the quarter, do you know what the yield on those loans are in the quarter were on the average yield?

I don't think the yields on those would be any different than the portfolio of business loans in general, which is about 420. They aren't paying off because of our rate structure. They're paying off because they are selling the property or they are going into the secondary market, given today's low cap rates. Taking advantage of the market while they can.

I guess I'm struggling to see where if loan yields go from 428 in the second quarter to 417 in the third quarter, how they can stabilize that quickly. Is it just purely a function of the lens that you anticipate putting on in the fourth quarter are going to shift the mix within the portfolio, enough to stabilize the yields?

Well it's mostly the latter factor, as I just said to Mr. Ramsey, I think does have an influence on us going forward. That is where we expect to get a few basis points of margin compression, enough to offset the rundown in purchase accounting accretion is from that growth, that mid single digit growth which you didn't see as much of in this third quarter because the pay off is offsetting the growth in outstandings from new originations.

So I can understand your point. You'll have to make a decision as to whether you think that is a reasonable strategy. We think it is.

And as Todd has said in the past, there will be lumpiness quarter-to-quarter depending upon what some of those commercial real estate or construction deals have completed and now been stabilized, when they go to the secondary market. I think when rates rise a little bit, you'll see less of that happening. People will keep -- will hold on to those deals longer and won't be so quick to go to the secondary market with them.

That's a good segue to the next part of my question, which is you mentioned and I think when you were answering Catherine's question, that you do have a significant portion of loans that are on floors. And I don't know how much of the portfolio is variable that's not on floors, or that's above the floors. But if the Fed only raises 25 basis points in the second quarter and then maybe another 25 or 50 over the course of the back half of the year, how much will that impact you?

Well what I can tell you is that in a rate ramp environment of 200 basis points, you're looking at very similar increase to a 100 basis point shock environment, so that's about 2%, 2.2%. So that's probably a more logical way to look at it.

We also twist and shift the curve. We bring that curve up into the low part, and then keep it where it is today in the upper part, so that in effect results in compression for some of your intermediate assets.

So we look at it in a number of different ways, but at the end of the day, you have to look at multiple pieces of balance sheet. You just can't hone in on loans or one category of deposits.

What we're saying overall is net-net, we're asset sensitive. Yes we do have floors. They are on over $600 billion of loans, we've disclosed that in prior 10-Qs, and those won't go up as much in the first 100 basis points, but there are other elements of both the asset and liability mix that help to offset that.

Thank you, Bob, and last question maybe just moving over to expenses. You mentioned that you're ahead of schedule on your ESB cost saves, but that you're investing more, not only in just production, but in back office, as it relates to approaching the $10 billion threshold. How should we think about what cost saves are left, and how much of that might be offset by continued investments in the back office, taking production staff out of the equation?

We had modeled around 50% or so in terms of salary saves, a lot of those came up front with the merger, and the thought was the rest of them would occur over time through the middle of next summer. Most of those occurring through retirements and areas like that.

Their branches are staffed more heavily than ours, so that's what we've done in prior mergers, and this one as well too. So we feel we would be where we need to be on the expense side by next summer. We're running ahead of pace with regard to that, right now.

What we're doing on the hiring of additional revenue-producing talent is very much in line with the strategy of going into that market and becoming Top 10. We did a lift out we mentioned, a lift out of -- a previous call. A lift out of a group of lenders up in the Pittsburgh area that has now turned out to be one of our most productive. There really was not a tremendous commercial lending function up there. We had one, we added to it as a result of the merger, so again, the synergies are additive when you start doing things like that.

But on an overall basis across our whole franchise, what we've been able to do is take resources that were in lower productivity areas, people would retire, move on, and replace those individuals in more productive markets, like a Cincinnati, Columbus, Pittsburgh, Charleston, some of the bigger cities. We still have good coverage in some of our other legacy markets but we were opportunistic in self funding a number of the hires that we did, not all of them, but a number of the hires.

So this has been a plan for the last year and a half. It's been very much designed in terms of the timing and when we're going to do all of this, so everything is very much on track with what we thought. But we have added on both the C&I side and the private banking side as well, to prepare us for growth for the rest of this year and into next year, which we think will materialize. But it's an investment that we made and we'll clearly have to execute upon that, but we covered a lot of those costs through being more -- reallocating existing not people, but FTEs from market to market, so to speak.

With that, we have added a couple individuals in the back room on different areas and risk management that we feel are prudent given the size that we've become and the size that we're growing to. But we're being very selective about those and Bob and I, I get a monthly payroll report I look at very closely with the HR Director, so we're trying to pace it. Trying to pace the revenue with the expense.

But we said before and I'll say it again, we don't feel we have to stroke any big checks to get to over $10 billion on the expense side, because this bank has always invested for the future, and we're in really good shape. We just need to continue to grow our infrastructure as we grow our revenue teams.

Okay so maybe another way, in the current interest rate environment, we would expect to see the efficiency ratio remain flattish? Is that fair?

Well I'd say I think the range that we've been in the last few years would be the range we would expect to be in.

Yes, I think the 56% to 58% area where we are is a good target. I gave a couple of questioners some guidance in terms of unusual items for the quarter that wouldn't be repetitive in the fourth quarter. And so that's as much as I would say, but I think the direction overall of non-interest expense is reflective of most of the cost savings. And there will be a little quarter-over-quarter bumpiness, depending on this accrual or that particular loss.

Thanks guys, I appreciate your time.

(Operator Instructions)

The next question comes from John Moran from Macquarie Capital.

Just a quick one on fees. Trust looked like it ran soft again this quarter, and I know Q2 versus Q1 suffers from some tough seasonal comps, but anything going on, on that line this quarter?

Just choppiness in the market. Obviously, we got a lot of volatility going on in the marketplace. I look at our net accounts, the new accounts opening versus the trust accounts that closed from obviously people passing away, and that's part of that business, and net-net we're growing market share. But we are going to get a lot of volatility in the third quarter obviously impacted that number, and I looked at my own portfolio and saw the changes, so I know that's impacting everybody else too.

Got it. So just more general market volatility versus anything shale related or anything, still seeing good opportunities?

Yes. It's just market value based, and it's when we charge the fees against what the market value of the portfolio is, and that will move around from quarter-to-quarter.

Okay, and then the other one that I have, just obviously it looks like originations are good, pipeline strong. But any slowdown or sort of ripple that you're seeing run through any portion of the footprint, just given that a lot of it is kind of sitting in Marcellus territory, or color that you might be able to give us, in terms of general economic indicators?

Yes, we watch it closely. We talk to a lot of our customers, as we said on prior calls, we don't lend to the big oil and gas drillers. It's less than 1% of our portfolio. What we really are doing is looking at credit metrics overall for our customers, and we are not seeing changes in the credit metrics overall.

There are a few customers we're watching that are in businesses related to that, and there is some impact, but nothing that would be deemed a credit issue. We tend to deal with stronger individuals who are weathering the storm, but we're seeing the impact, but not anything that would impact our credit metrics, or anything like that. There still is an awful lot of pipeline activity work going on around here.

Still a lot of trucks going around. Still hard to get into the restaurants. Still hard to get a place to stay for short-term housing for people we bring into town.

So a lot of the pipeline work is being done while the gas sits in the ground, I think is a lot of what's going on. But the existing wells that have been drilled, didn't ask this question, but I'll answer it any way. We're still seeing eight figure deposit flows on a monthly basis coming into the bank in our footprint, really just from the royalty payments that are being paid to our customers from the oil and gas companies. So we're continuing to see really nice flow of deposits into the bank, and that hasn't moved much in the last year, year and a half.

It's still holding very, very consistent even at these lower prices, as a result of the fact that what was being produced is still being produced. It's not growing to $20 million or $25 million a month like I think it would have if gas prices had stayed up, but it's holding pretty steady right now.

Got it. Thanks very much for taking the questions.

(Operator Instructions)

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Clossin for any closing remarks.

Great, thank you, Danielle. I appreciate your time this afternoon. I know you guys are busy, have a lot of calls in the last couple days, next couple days, but thank you for your time, and thank you for your questions.

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