WesBanco Inc
NASDAQ:WSBC
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Good day, and welcome to the WesBanco Third Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to John Iannone. Please go ahead.
Thank you, Sarah. Good afternoon, and welcome to WesBanco, Inc.’s third quarter 2019 earnings conference call. Our third quarter 2019 earnings release, which contains consolidated financial highlights and reconciliations of non-GAAP financial measures, was issued yesterday afternoon is available on our website wesbanco.com.
Leading the call today are Todd Clossin, President and Chief Executive Officer; and Bob Young, Executive Vice President and Chief Financial Officer. Following our opening remarks, we will begin a question-and-answer session. An archive of this call will be available on our website for one year.
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, 2018 and Form 10-Q for the quarters ended March 31 and June 30, 2019, as well as documents subsequently filed by WesBanco with the Securities and Exchange Commission, which are available on the SEC and WesBanco websites.
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 I, 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. Todd?
Thanks, John. Good afternoon, everyone. On today's call, we’ll be reviewing our results for the third quarter of 2019. Key takeaways in the call today are key credit quality metrics remained at, or near, historic lows, loan growth continues to demonstrate positive trends across a number of our lending categories, the pending merger with Old Line Bancshares continues to progress and is on track to be completed during the fourth quarter.
Supported by strong underlying fundamentals, we remained focused upon and well-positioned for a long-term sustainable and profitable growth on that sacrificing long-term shareholder value for near-term gains. During the quarter, we experienced the flat in a times inverted yield curve, multiple Federal Reserve interest rate cuts, revived tick up in commercial real estate projects going to the secondary market or being sold outright earlier than expected due to the current rate environment and our mandatory limitation on interchange fees for banks with more than $10 billion in total assets.
Despite these changes, we are encouraged by the continued support and strength of our distinct long-term strategies and unique advantages. When excluding the merger costs and the reflected impacts of the items I just mentioned, net income for the three months ended September 30 was $39 million or $0.71 per diluted share and for the nine-month period increased 13% to $126 million or $2.31 per diluted share. These earnings generated year-to-date core returns on average assets and average tangible equity of 1.35% and 15.42% respectively.
Overall, we believe our credit quality ratios remained strong as we balanced discipline loan origination in the current environment with our prudent lending standards and key credit quality metrics and ratios such as non-performing assets, past due loans, allowance for loan losses, and net loan charge-offs continue to remain at/or near historic lows.
I'm very pleased with the quarterly trend in our key asset quality measures as they reflect consistent high quality of our overall loan portfolio. The increase in criticized and classified loans primarily reflects changes in our internal classification methodology, which caused the reclassification of loan grades and subsequently added $2.1 million to the provision for credit losses.
It's important to note that this reclassification was not driven by credit deterioration. As a community bank, we have historically performed our loan risk rating through utilization of a number of factors both quantitative and qualitative. However, as we have grown to nearly $13 billion in assets as well as entering many new higher growth markets. We believe that was more important on a go forward basis to heavily weight quantitative measures in particular debt service coverage.
The shift in fact utilization is what drove the changes in loan risk grade ratings and associated criticized and classified loan levels. Our pending acquisition of Old Line continues to progress. We have filed all of the necessary regulatory applications and have already received approval from the West Virginia Department of Financial Institutions. We have completed our proxy statement of prospects mailing to shareholders and set the shareholder meeting dates for October 29 for both companies.
Transaction is on track to be completed during the fourth quarter of 2019, pending the additional regulatory approvals from the FITC and the state of Maryland and the shareholder meeting next week. And we anticipate that the branch and data processing conversions to occur during the first quarter of 2020.
We remain excited about our merger with Old Line and the opportunities that presents. In particular, the match up of Old Line’s market presence and loan growth with our enhanced products and services and deposit funding advantage. This combination will provide the opportunity to attract additional talent, take market share, and to be more profitable on each lending opportunity than other local competitors in the Mid-Atlantic market. WesBanco's underlying core performance during the third quarter of 2019, which was supported by our key long-term differentiators continued to perform well and within our expectations.
In addition, we're maintaining a critical focus on expense management and credit quality to historical hallmarks of our institution. On a year-to-date basis, we reported an efficiency ratio of 56.09%, which is within our long-term target of the mid-50s range despite the mandatory limitation on interchange fees. Moreover, we continued to maintain we believe our strong regulatory capital ratios as both consolidated and bank-level regulatory capital ratios are all well above the applicable well-capitalized standards promulgated by bank regulators and the BASEL III capital standards.
The successful execution of our growth and diversification plans has enabled WesBanco to continue its transformation into an emerging regional financial institution that delivers large bank capabilities with a community bank feel. Furthermore, our long-term success is dependent upon the continued execution of our plans as we remain both disciplined and balanced to ensure stability and success across to economic cycles.
We are benefiting from our deposit rich legacy footprint, which provides funding for company-wide loan growth as well as allowing higher costs certificates of deposit to mature. While total deposits excluding CDs were roughly flat year-over-year. Non-interest bearing demand deposits grew 2.7% year-over-year, primarily due to our legacy footprint and our strong market position within it.
We continue to see the stabilization across loan categories that we have experienced during the last couple of quarters. During the third quarter of 2019, we report a total loan growth in the low-single digits on both a year-over-year and sequential quarter basis for both period end, as well as quarterly averages. This growth was driven by strength across to number of our lending categories including a 21% year-over-year increase in total gross production during the third quarter.
As a result of the current rate environment highlighted by two recent Federal Reserve interest rate cuts, we have begun to again see a revive pickup in commercial real estate projects going to the secondary market or selling outright earlier than expected. In fact, the acceleration we experienced during the third quarter of 2019 was more than 50% above our expectations heading into the quarter and was comparable to the record payoff levels we experienced during the third quarter of 2018.
Despite this headwind, we record a good production during the quarter. That said, we expect a similar high level of commercial real estate payoffs during the fourth quarter of 2019. Furthermore, the fed rate cuts at both attracted from and benefited our residential real estate categories.
Home equity lending decreased 2.7% year-over-year, primarily due to the low interest rate environment driving an increase in residential mortgage refinancing as home orders trade variable rate, key lock balances for fixed rate first lean mortgages. On the flipside, this has benefited our residential mortgage business, which experienced production of nearly $200 million during the third quarter, representing 45% growth year-over-year and 20% growth quarter-over-quarter.
In addition, the refinancing volume component, the total production more than doubled when compared to both prior year and sequential quarters. Well, commercial industrial lending typically has long sales cycles. We're seeing the benefits of the prior investments we have made in the expansion and quality of our C&I lending teams and the launch of our online lending application capabilities earlier this year.
These investments contributed to 3.1% year-over-year growth and 9.7% quarter-over-quarter annualized growth in our C&I lending category. Despite the headwinds created by low interest rate environment, we remain confident in our ability to deliver low-to-mid single digit total loan growth over the long-term due to the strength of our lending teams and the record levels of both our commercial and residential mortgage pipelines as of September 30.
I would now like to turn the call over to Bob Young, our Chief Financial Officer for an update on the third quarter’s results. Bob?
Thanks, Todd, and good afternoon to our listeners. During the third quarter, our core performance continued to perform well within our expectations, while we also display positive lending trends, historically low credit quality measures and solid expense management. As Todd mentioned, during the third quarter of 2019, we experienced a flat and at times inverted yield curve from multiple Federal Reserve interest rate cuts, revived pickup in commercial estate projects going to the secondary market or being sold outright earlier than expected due to the current rate environment, and the mandatory limitation on interchange fees for banks with more than $10 billion in total assets.
For the three months ended September 30, 2019, we reported GAAP net income of $37.3 million and earnings per diluted share of $0.68 as compared to $32.5 million and $0.64 respectively in the prior year period. Excluding after-tax merger related expenses from both of these periods, net income decreased 5.7% to $38.7 million and earnings per diluted share decreased at 12.3% to $0.71 reflecting a decrease in the net interest margin as well as the additional shares issued for last year's two acquisitions.
In addition, for the nine months ended September 30, we reported GAAP net income of $122.5 million and earnings per diluted share of $2.24 as compared to $99.2 million and $2.11 respectively in the prior year period. Again, excluding after-tax merger related expenses from both periods, net income increased 12.6% to $126.3 million, while earnings per diluted share decreased 2.9% to $2.31.
As a reminder, financial results for both First Sentry and Farmers Capital have been included in WesBanco’s results subsequent to their respective merger dates of April 5 and August 20, 2018. Federal assets as of September 30, 2019 of $12.6 billion, were roughly flat year-over-year as both First Sentry and Farmers are included in both periods now.
Furthermore, total portfolio loans of $7.8 billion increased 0.4% compared to the prior year due to strength across a number of our lending categories including commercial and industrial, residential mortgage and consumer. When adjusting for the higher than anticipated commercial real estate project payoffs during the third quarter, growth across the entire loan portfolio would have been approximately 1% year-over-year or 3% quarter-over-quarter annualized.
We did realize strong total production during the third quarter, increasing 21% year-over-year and that was primarily driven by commercial and industrial, residential mortgage and commercial real estate, as well as to a lesser extent consumer and balancing properly both risk and reward.
As Todd already discussed, commercial real estate and C&I lending, as well as residential mortgage continues to be a bright spot for us. As the expansion of our mortgage origination teams continue to take market share and result in higher gain on sale fees and margins, as well as production for balance sheet growth.
While refinance origination volumes have roughly doubled, residential mortgage originations continue to be dominated by home purchases and construction across our footprint. In addition, while we experienced significant increases in quarterly mortgage banking fee income, both year-over-year and quarter-over-quarter, we also reported 2.2% year-over-year growth in one to four family mortgage loans, primarily in the jumbo on private banking loan sector, which are held on our balance sheet.
As we are seeing across our industry, net interest margins are being negatively impacted by the recent cuts, the Federal Reserve’s target federal funds rate, as well as the flat and at times slightly inverted yield curve. Our net interest margin for the third quarter of 2019 increased 6 basis points year-over-year to 3.56% reflecting the benefit of the 2008 fed rate increases – 2018 federal rate increases and the higher margin on the acquired Farmers net assets.
However, on a sequential quarter basis, the net interest margin declined by 11 basis points roughly equally reflecting those industry wide headwinds, as well as the anticipated decrease in purchase accounting accretion. Purchase accounting accretion from the acquisitions last year benefited the third quarter net interest margin by approximately 13 basis points as compared to 11 basis points in the prior year period and 18 basis points in the second quarter of this year.
And I would remind you the second quarter included 3 basis points of accretion from a larger impaired credit that paid off. Excluding purchase accounting accretion, we reported a core net interest margin of 3.43%, up 4 basis points year-over-year but down 6 basis points on a sequential quarter basis.
The year-to-date net interest margin was up 20 basis points to 3.64%, due to last year’s Federal Reserve fed funds increases the higher margin Farmers net earning assets acquired and higher purchase accounting accretion in the year-to-date period of 17 basis points versus last year’s 10 basis points.
Also helping to improve the margin over the last year is the strength of our deposit franchise, which has assisted and maintaining our loan to deposit ratio in the upper 80% range, as well as aiding profitability by controlling our funding costs. Our total deposit funding costs, which includes non-interest bearing deposits has increased as 10 basis points during the last 12 months and just 18 basis points during the last five years.
Turning now to fee income, for the quarter ended September 30, 2019, non-interest income increased 2.8% from the prior year to $27 million, driven mostly by mortgage banking income and service charges on deposits. The $1.1 million or 70.2% year-over-year increase in mortgage banking income was due to the growth in residential mortgage origination dollar volume and the associated sale of approximately one half of such volume into the secondary market.
Service charges on deposits increased $0.7 million or 11.8% year-over-year due to the increased customer base from the Farmers acquisition. While the mark-to-market of existing commercial customer loan swaps negatively impacted other income in the third quarter, we are seeing increased usage of loan swaps by our commercial customers, as they take advantage of this product in the current rate environment.
On a year-to-date basis, we have seen a 50% year-over-year increase in gross swap fee income prior to mark-to-market adjustments on the existing customer swaps book. As a reminder, this quarter also reflects the beginning of the ongoing limitation on interchange fees for debit card processing that resulted from the so-called Durbin amendment to the 2010 Dodd Frank Act.
This limitation, which first became effective for WesBanco in the quarter beginning July 1st applies to banks with more than $10 billion in total assets. And it did reduce our electronic banking fees by approximately $1.9 million as compared to the prior year period.
In addition because we recognize electronic banking fees on a one month lag, the reduction represents only two months for this initial quarter of applicability, so that the amount for future quarters should be between $2.5 million to $3.0 million.
Turning now to operating expenses, operating expenses continued to be well controlled during both the three and nine month periods ending September 30, as demonstrated by the efficiency ratio of 57.6% and 56.1% respectively. Excluding merger related expenses, non-interest expense for the third quarter of 2019 increased $6.3 million or 9.6% compared to the prior year period, reflective of the Farmers’ acquisition in the middle of last year’s third quarter and their associated staff and locations as well as annual merit increases, the hiring of several new revenue producers across our business lines and certain necessary staff additions as we have grown beyond $10 billion.
Nonetheless, total full time equivalent employees are down more than 3% from last September due to the Farmers related cost savings. During September 2019, the banking industry was notified by the FDIC that its deposit insurance fund reached a required minimum reserve ratio of 1.38% that permitted by law, the FDIC to offset current bank assessments with prior credits from 2016 to 2018 earned by banks with less than $10 billion in assets during that time period.
This allowed us to record a credit of $2.4 million from the total $3.1 million assessment credit that we were notified of earlier this year, covering the FDIC insurance expense otherwise assessable for both the second and third quarters of $1.2 million per quarter. The remaining credit of approximately $0.7 million is anticipated to be recorded during the fourth quarter.
As of September 30, both non-performing loans and non-performing assets as percentages of the portfolio in total assets have remained relatively low and consistent throughout the last five quarters. Criticized and classified loan balances increased to $174 million or 2.24% of total portfolio loans due to recent adjustments to our internal loan classification system, which impacted risk rates.
The provision for credit losses increased to $4.1 million at quarter end, of which $2.1 million was due to certain borrower downgrades to these criticized and classified categories. Annualized net loan charge offs to average loans, however, did remain low for the quarter and year-to-date periods at 4 basis points and 5 basis points respectively.
Let me wrap up with a discussion about CECL. In September 2016, FASB issued ASU 2016-13 financial instruments credit losses, which will require entities to use a new forward-looking expected loss model on trade and other receivables held-to-maturity debt securities, loans and other instruments that generally were resolved in the earlier recognition of allowances for credit losses and will be effective for the fiscal year beginning January 1, 2020.
The final role provides banking organizations, the option to phase in over a three year period, the day one adverse affects on regulatory capital that may resolve from the adoption of the new accounting standard and we are continuing to analyze as to its capital impact, although it is expected to be immaterial to our regulatory well capitalized levels.
Based on our preliminary analysis forecast or macroeconomic conditions and exposures during the time and with certain qualitative factor determination and model validation still in process, the overall day one range potential outcomes is estimated to result in an increase of up to 30% in the allowance for credit losses for the loan portfolio, resulting in an allowance total loans coverage ratio ranging from the current level of 0.7% up to 0.9%.
Upon adoption, we were also recognized an allowance for credit losses for held-to-maturity debt securities under these new accounting rules, but based on their credit quality, we do not expect their allowance for credit losses to be significant.
Before opening the call for your questions, I would like to provide some current thoughts on our outlook for remainder of the year. We will provide our thoughts in 2020 during our fourth quarter earnings call to be held in January. Since we do remain somewhat asset sensitive, we are not immune from the factors that are affecting net interest margins across the industry, which include a very flat to slightly inverted spread between the three month and 10 year treasury yields and an overall lower long-term rate environment.
We continue to believe that our core deposit funding advantage combined with our low loan to deposit ratio should help to control overall deposit funding costs, but as we didn’t increase deposit rates much, when rates were increasing, we don’t have as far to go as market rates decrease. Regarding our stated net interest margin for the fourth quarter of this year and into 2020, we still anticipate purchase accounting accretion to decline 1 basis point to 2 basis points per quarter and we are currently anticipating an additional 25 basis points federal funds rate cut during the fourth quarter. And therefore, currently believe we will experience a decrease of 3 basis points to 5 basis points for each further cut in the federal funds rate, again, depending upon the shape and overall level of the yield curve.
We also continue to believe our delinquencies, non-performing assets and net charge-off ratios should remain relatively strong in the fourth quarter. And one final note, the effective tax rate is currently expected to be in the range of 18.2% to 18.6% for the full year of 2019.
We are now ready to take your questions. Operator, would you please review the instructions?
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Casey Whitman with Sandler O’Neill. Please go ahead.
Good afternoon. Just circling back to some of your margin comments you just made, Bob, I think you said maybe 3 basis points to 5 basis points core margin impact from an additional cut. And just curious if we do get a cut in I guess next week, could we assume I guess even more compression than in the fourth quarter than that 3 basis points to 5 basis points, if a technically we have kind of two cuts impact in the quarter. Thanks.
Yes, Casey. Well, you'll note that we reduced our core margin or saw a reduction about 6 basis points in the second quarter, which would be indicative of 3 basis points per cut. Some of it's on a lag though because you have the September cut that really impacts the fourth quarter. And if there were to be a December cut that would be likewise true next year.
I think one thing that would be different would be that that the yield curve really did shift very significantly in the third quarter. For instance, at budget time, late last year, we were anticipating a 3.2% tenure yield in 2019. And you were at the low, at the end of the quarter 168, I believe ad today 180. So the shift of the yield curve downward, particularly in the valley section, the intermediate portion of the curve, I think we have found that's really impacted banks in general and certainly we're not immune from that.
But beyond that I would tell you that we're becoming more aggressive after the second cut with rate decreases in some of our larger public and institutional funds, customers, here early in the third quarter that should be reflective or reflected in the margin here in the fourth quarter. But my guidance is really thinking about if there are no increases, no decreases next year and one or two here in the fourth quarter or one this quarter, one in January. However, you want to model that, there is some reduction that would occur thereafter subject to the deposit beta that we're able to influence or some of those higher tiers in now accounts, private clients savings and for public funds and institutional customers as well as on the CD side.
All right. And then I guess my next question would be in the first quarter with Old Line, how does that remind us sort of what you're assuming the blended margin is going to be there?
Well, I'll just brief, we haven't remodeled batch. We haven't adjusted our model I should say for our earlier assumptions that we would get a few basis points of accretion from the Old Line acquisition. Hearkened back to farmers, I think we got it to mid-single digits that ended up being substantially higher than that in terms of the margin accretion last year.
I don't anticipate that kind of a pickup with Old Line. But I would tell you that they are more neutral to assets sensitivity than we are currently. They have more fixed rate term loans and the commercial side that I think would help in a declining interest rate environment. And then we have the opportunity from a revenue enhancement perspective to reduce some of their higher cost deposit rates as well.
So that's not in that, that guidance relative to purchase accounting and just blending the two balance sheets. But I think its an opportunity for us to enhance the margin when those two – when the two companies are blended together here later this quarter hopefully. Is that helpful?
It is, thank you. I'll just ask one more and let someone else jump on. Maybe this is probably for you Todd, just a little bit bigger picture question. Just all the moving parts this quarter, the impact of the challenging rate environment, Durbin higher provision, your profitability profile is down from where I'd been running over the first half of the year. So maybe just help us understand what you guys are targeting maybe in terms of ROA or ROTC or whatever you look at in 2020 with Old Line kind of what it takes to get there. Do you think you can get the ROA back to 1.3%, 1.4%, or have you said any sort of profitability targets or anything you can help us out there. Thank you.
Yes. I just – maybe just mentioned we're 1.35% now. So we are already pretty well above peer group average is on that, but we like being in that range. There would be some puts and takes. Obviously Bob mentioned some things we're going to do on the kind of repositioning in the balance sheet a little bit with our lower cost deposits. This as well as there some higher costs borrowings that they've got. So we think we've got some levers to pull there.
Obviously, one of the keys at this merger is to get home growth out of their markets as well. So I think they're trending well and I think that bodes well for us as well too. So I really think it's going to be pretty smooth. I really don't expect again, but we know today based upon interest rates and the economy inflation, economic GDP growth and all that, we wouldn't expect to be materially different. I'd still like to be able to maintain those type of ratios that that we've historically had.
There are always one, 1.2%, which is also pretty good for a banker size, very good actually. So I don't see where I see any big significant differences in terms of the level of profitability of our bank, because again they're very good well-run bank, low-50s efficiency ratio and we're still going to hit our cost takeouts there as well too. So they've got an average branch deposit size of $60 million or so. So I mean I think there's an awful lot of benefits kind of coming together for the two of them. That kind of looked at the quarter, there's some aspects of this just kind of being an emerging regional bank, right. You got $0.03 or so with Durbin impact, you got $0.02 to $0.03 or so in terms of our kind of moving into more of a quantitative approach versus qualitative approach on risk rating.
It was dysfunctions of our size and kind of I think you made really appropriate comment in your initial overview last night in terms of kind of comparing us to other banks in that $10 billion to $25 billion size range that even with our changes on the re-class. We're still very significantly below the average for the peer group on the criticized and classified. So my guess is they’ve got grading methodologies similar to the ones that were – that we've adopted.
So I don't see any kind of continued increase on a regular basis, any type of big changes in credit quality provision or anything else. So to me it's more of a just continuing the business as we've been running it. We don't have – we didn't have any downgrades our – any, I would say deterioration of any type of significant credits during the third quarter. So it's the same credit quality. It wasn't the third quarter. First and second quarter same credit quality, just we looked at based upon more quantitative focus, it'll have your focus on debt service, because I think it's very appropriate given a bank our side just going into many markets in many different states. And that costs us $0.02 this quarter.
So when I start looking at those types of things and look at what's the long-term kind of run rate, Bob mentioned the margin and kind of how we see the margin playing out for us. But I don't see anything significant wise trending that's going to be materially different post-merger and next year then, and what we're seeing today, I think it should just make us stronger and a little bit better.
And the fully facing cost savings should give us an enhancement to ROA by a few basis points off of our current run rate.
Yes.
Very helpful. Thank you, guys.
Sure.
Our next question comes from Russell Gunther with D. A. Davidson. Please go ahead.
Hi, Russell.
Hey, good afternoon, guys. The first one, Bob, bear with me a margin follow-up for you. So the incremental guide, the roughly 3 basis points to 5 basis points per cut, should we layer on top of that your guidance for purchase accounting to be down 1 basis point to 2 basis points or is that all inclusive of the purchase accounting moving parts?
No, it is not. You'll see that end market risk in the 10-Q. We would still guide to continued reduction until we get past Old Line, just in terms of where you stand today. And it really has played out as we anticipated, there were 13 basis points of core accretion here in the third quarter, was 15 in the second quarter, I believe 14 or 15 in the first quarter. So it is coming down by that leveled off. But obviously the lower you get its SKUs towards 1 basis point per quarter versus 2 basis points, as opposed to here in the third quarter was 2 basis points plus those 3 extra basis points.
The one difference in CECL that you probably understand, Russell is that those 3 extra basis points, the first and second quarter in the future on a purchase credit deteriorated loans would go through the allowance as opposed to coming through a net interest income. Although, the accretion on the good book and an acquisition will still come through net interest income. So hopefully that was responsive to your question.
Yes, very much. So thanks, Bob. And then just circling back to the risk rating change, I appreciate the color you guys are trying to share. Yes, I think there maybe was an initial jump to think about any incremental deterioration be it within a particular geography asset class energy shale. We’ve rent a lot of that troubles in that neck of the wood.
So could you give us, again, just a general sense for the asset quality outlook here and then again, just this quarterly provision in the $4 million-ish range. I mean is that a decent run rate to think about going forward?
Yes, I appreciate getting the question. The answer is no. Again, we don't see any significant deterioration across any markets or any product types or any industry classifications or anything else. And again, didn't have any deterioration of any credit of any size that's occurred in the last quarter or so. I mentioned I think two loans in the first quarter, one in the hospitality business and one in kind of a manufacturer of retail products and talked about that back in April.
And one of those has gotten better improved and it's come off the list and the other still an issue. But we're well collaterized, and have a good solid management team supporting us with that one. But I mentioned that back in the first quarter, right, so I mean there's nothing new since that. I mean there aren't any – is not any deterioration that's there. It's just a function again moving more heavily toward more quantitative measures than qualitative measures, where in the past you might've given more weight to a guarantor sport, you might've given more weight to repayment history, made payments every time for the last five years type of thing.
And we're just not going to do that given the size organization we are moving into new markets Maryland, Kentucky, places like that as well too. So we want to make sure that we've got things graded according to the way our peers are grading things. And we're viewed – we view ourselves, still view ourselves and continue to view ourselves as a very conservative underwriting organization that has a very low risk profile.
And I don't think that changes this. It's just that, again, as a large bank. We've got different criteria that we're going to implement that we're going to work through. And so I think what I would tell you is don't compare us to where we were last quarter, compare us to how we stack up against our peer group, right. So the banks that $10 to $25 billion in size, the 45 or so that are in that group, have 2.8 criticized and classified number and are 2.2, right. So we're still fairly significantly below that.
So as we go through this process, this matrix that we've put together earlier in the year, and we're in the process of implementing that during the third and fourth quarters of this year, it will be substantially complete by the end of the year. What we did in the third quarter was we looked at the biggest loans we had that were right above that criticized and classified category. So basically we took a very biased sample. They're intentionally so and put the new matrix on top of it.
So we got – we think the lion's share of majority of what was going to be impacted we picked up in the third quarter. But I think this makes us a very healthy organization long-term. And I think we took a few cents out of the quarter. By doing that to, I think benefit us on a long-term basis. And I would say the same thing with regard to, I'm not going to talk about other organizations, but I see a lot that are building their securities portfolio at very low yields and trying to outrun margin compression with growth in the balance sheet through securities. Well, that's taken money today out of your pocket.
It's probably going to hurt you in terms of performance down the road. We aren't going to do that. We're running this bank for the long-term and for the long haul. So our risk profile hasn't changed. We don't see anything that changes as a result of the risk grade classification. I think we're just – we're growing up as a bank and emerging regional financial institution. And these are all the right things to be doing and the right things to be taking.
I'm very comfortable with them and I’ll tell you that, I don't see anything different in the future with regard to the tenants of our company being a strong oriented company on a risk adjusted basis. I think our returns are significant. And I don't see any reason why that's going to change, but no deterioration at all that we're seeing across the franchise.
I appreciate your thoughts, Todd. Thank you guys for taking my question.
Sure.
Our next question comes from Catherine Mealor with KBW. Please go ahead.
Thanks. Good afternoon.
Hi, Catherine.
Hi, one more question on the re-class, the – its follow-up Russell's question, was there any certain asset class where you saw more of the re-class more than others?
No, really not. No, it wasn't related to any particular area. And then I'll give you a feel for it. For example, we might look at a credit historically that would cover debt service coverage. Let's say one to one, but we might include other income that might be in the P&L statement that might show up some years and not be there other years.
What we've done in terms of putting more emphasis on the debt service and how we guide, we would exclude that now, right. It's income, it's used to pay debt, but you're not sure it's going to show up every year, because it moves around a lot. So the change in methodology that would create a change in the risk grade, again same credit always paid things like that. But the way we would calculate a debt service coverage and more heavily weight debt service coverage would be the way that we would approach that. But there isn’t a geography or an asset class, we’re not seeing any deterioration in any areas, you don’t have much energy to begin with as you know, it’s less than 1%, but we’re not seeing anything there. We’re not seeing anything in commercial real estate, multifamily, hospitality, all of its performing well and as expected, not seeing anything on the manufacturing side. We don’t have much of a presence at all in retail. We don’t have the big box retail at all. So we really – you can see it reflected in 4 basis point charge off, that’s pretty low.
So – and our delinquencies are well controlled and well-managed too. So we just don’t see a lot there. We’ve taken some pretty proactive steps, I think is a company that are going to benefit us in the long-term. And I would also mention you too on loan growth, we’ve obviously showing low single digit, but very low single digit at 1%, about 1%, we would calculate to the heavier payoffs in the secondary market that are reaccelerated again. But we’ve also converted two banks in the last four quarters, right? That represent about 25% of the size of our bank. And we’ve gone through those as well too with the same credit – the same credit approach and we’ve been able to push some credits to some different areas.
So that’s also impacted on an annualized basis about 1%. We don’t expect that to continue, right. Because you don’t do that every year, but your first year or so after you acquire a bank, you’re going to go through and you’re going to look at those things in your loan review process. And so if I really look at kind of how am I seeing our growth rate in terms of loans, this is prior to Old Line Bancorp, I’m really looking at a 3%, 3.5% in a more normalized environment, where you’re not having the big payoffs and you didn’t just acquire 25% of your bank in the last 12 months.
So to me that’s kind of why I feel more confident about a longer term kind of low to mid single digit growth rates, not having to rely on growth in securities portfolios unless the yields on that type of stuff improve. Because I think we’re already there in terms of that growth rate, we’re just – we’re intentionally masking it by some of the things that we’re doing on exiting some credits that don’t make sense for us. What I will tell you, one of the nice things about Old Line is that very strong credit quality and operating very similar models the way that we operate.
So I wouldn’t anticipate the going through the portfolio and exiting credits over the first year like we’ve done with the last couple of acquisitions. Because these guys are pretty well lined up according to how we do things already. So long answer, but just wanted to give you some color.
No, no, that’s really helpful. And I think it’s clear that it’s not, this is more a risk weighting change in terms of your methodology now that there’s been a deterioration in any of your credits. I guess the follow-up to that is more just there hasn’t – to be clear, there hasn’t been a change necessarily in the debt service coverage ratio. That’s the one example that you’ve given. It’s more just you’re giving more of a weighting towards a certain level of debt coverage ratios that would give you a certain risk waiting for certain loans, right. There’s been no change in the debt service coverage ratios, because of weakness. It’s just the weightings towards that qualitative factor or quantitative factor has changed.
Yes. I think that’s correct, very correct. I think when you go back and you look at WesBanco’s charge-off ratio and delinquency and all that kind of stuff over the last go back even to the Great Recession in the last 10 years. And you can see how strong the performance has been on the credit quality side. I would tell you that we operate like a lot of other community banks and this is prior to my getting out of really good people that have good understanding of the markets we’re in. The people we do business with. So you rely more heavily as a community bank on repayment history, guarantor support, all those types of things. Those are all still very present in the loans that we make.
But what I’ll tell you is we are just waiting them less than we are waiting them now. So having a good strong guarantor behind the deal is still very important to us, but it may not necessarily up the grade, right, whereas in the past it might have. So it’s just more awaiting difference than anything else. But we haven’t changed ratios. I think we’re more closely following the policies that we were putting in place and the matrix we’re putting in place and I think, if I had insight into some of our peers, I’d be willing to bet it’s probably fairly similar to what they’re using right now as well too, but not a change in ratios and things just a methodology change and awaiting change.
Got it, okay. That’s really helpful. And then maybe I’ll circle back to one of the margin. Can you remind us in your loan portfolio, how much of your loan book is floating rate to immediately repricing with that funds and then fixed rate. The color on Old Lines more fixed rate loans, I think was really helpful. And just trying to think about how that marries with your portfolio.
Yes. So I do get this question quite frequently, we go out on the road Catherine. So we have a business loan book today that’s about $5.2 billion. So this is endemic to that portfolio, obviously, you have other sectors, but we don’t have that much of consumer and that’s a low average maturity, weighted average maturity. Home equities are obviously variable. Residential mortgages have typically four to five year average life.
So excluding those sectors, just looking at business about 65% to 70% of the portfolio is CRE and the rest is C&I. If you want to take total fix from both of those portfolios, you’re basically looking at about $2.5 million and then the rest is variable over some period of time. It could be immediately re-priceable off of prime or LIBOR or it could be adjustable after a period of three to five years. So without the long gating the answer and giving you all the breakdowns in variable, hopefully, that’s helpful to your question.
Okay. So $2.5 billion fixed, $2.7 billion variable on the $5.2 billion business book. All right.
I quoted that wrong. It’s more variable than that. The variable is $3.7 billion and then the rest $1.5 billion is business. Sorry.
$1.5 billion, okay.
No, that’s my fault, not yours.
Okay, got it. So $1.5 billion fixed, $3.7 billion variable, okay. So that explains why the loan yield sell as much as it did this quarter. Can you give us any kind of outlook or color around where new loan yields are coming on versus where the portfolio is today?
Well, the portfolio today is right around 4.65%, between 4.65% and 4.70%, new businesses coming on the books, generally right around that level to slightly above.
Okay. All right. Thank you for all of the clarity. Appreciate it.
[Operator Instructions] Our next question comes from Steve Moss with B. Riley FBR. Please go ahead.
Hi, good afternoon guys. I wanted to touch – ask for a commercial – C&I growth this quarter. It was pretty good and I apologize if I missed it, but just wondering what were the drivers there and the color you can give there.
Yes. It wasn’t do the increase usage on existing facilities, I can tell you that. It was a 9.7% annualized. I think just a result of the timing of deals that we’ve closed. Good teams out there, people that we’ve hired and this has been part of our longer term strategy is to get more growth through C&I and balance out the commercial real estate growth piece of it.
So it’s nice to see it coming through. I like to see it come through on a more regular basis and be in the low double digits on a pretty consistent basis. But it’s across the board all markets again and it’s new relationships that have come into the bank. I can tell you I would echo what I’ve seen other, CEO say in the last week in terms of kind of caution on the part of business customers, in terms of going out there and making capital expenditures or building inventory, whether it’s just uncertainty around tariff talks and the economy and everything else. But we do see that.
So this is market share. We’re taking market share in the C&I space. And I’m happy to see that. It was 3.3% annualized year-over-year, so – 3.3% year-over-year, it was 9.7% annualized. I’ll get real excited if I see 9.7% or 10%, four quarters in a row. Then I’ll know that we’re really clicking where we need to be. So it was a good quarter, but I’d still like to see more of that. And I think it’s a result of the teams that we’ve hired to meet. For example, in Cincinnati, we’ve got five additional C&I lenders more than we have a year ago, right. So very strong ads and hires and they’re bringing business in.
That’s helpful. And then on the expense side, just wondering if you give any color around expense expectations for the fourth quarter, excluding Old Line, if it is want to close.
Yes, let me just – I’m sorry, I’m shuffling papers, modern day CFOs be able to find this right on their iPad, right, Steve. Apologize for that. So in the fourth quarter – and we’re not ready to provide guidance yet for next year, but in the fourth quarter. So the run rate in the third quarter, we reported little bit less $72 million [indiscernible] get back to $2.4 million for the FDIC, the rest of that 700,000 would come in the fourth – the run rate on FDIC for us is about currently $1.2 million a quarter. So it gives you an idea what the normalized amount would be on that particular line item. And if you factor that in then you’d be looking at somewhere around that same $73 million, $74 million run rate here in the fourth quarter without merger related expenses. Expect to still get a few cost savings in the Farmers side, primarily in some other categories other than salaries and benefits.
I would say one of the things in the third quarter that hurt us a little bit out of the ordinary was it was a higher amount of health insurance. You pick that up by looking at the benefits line item that was higher than our expectation. We’ve seen a number of larger claims that have hit our stop loss limit and while we get insurance back on the stop loss, we are seeing some higher health insurance claims overall. But otherwise, most of the categories we’re well under control and we would expect that similar level of control to exhibit here in the fourth quarter before, we put on Old Line.
We started back actually in the first quarter, where we saw margins starting to react a little differently than what the thinking was at the end of last year. On the last year rates were still going up. And then there was a pretty abrupt about face, starting beginning of this year in terms of fed starting to look to decrease. So we knew right then, margin was going to be a question this year for the industry. So we undertook some expense initiatives back then and some of those came out pretty quickly, some of those will come out over time, but it was several million dollars in size. And then also, we don’t – we’re not going to see in the fourth quarter, what we’ve seen in terms of merit increase adjustments and things like that that would have happened in mid-year that would show up in the third quarter as well too. So we don’t anticipate those type of things in the fourth quarter.
That helps. And then one last question, just circling back to the margin. In particular purchase accounting accretion it was down 5 basis points over quarter, more than typical 1 to 2. I know it’s a bit of a day count do we think about 1 to 2 from the 13 bps this quarter?
Yes. You might have missed the comments, Steve, but we had 18 bps in the second quarter, 3 of which was a purchase credit impaired loan from a prior acquisition, that paid off. And so that picked up 3 bps. So I’m analyzing it is, you didn’t have a similar situation of third quarter, that’s 3. And then 2 bps for going from a normalize 15, call it, down to 13. So think about it in terms of 11 or 12 for the fourth quarter.
Okay, perfect. Thank you very much.
Unless, there’s something unusual. We have one more quarter and if there were another purchase credit impaired loan that would come through and pay off otherwise next year, that’ll go through the reserve as you know.
All right. Well, thank you very much Bob and Todd.
Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Todd Clossin for any closing remarks.
Thank you. The successful execution of our growth and diversification plans has enabled us to transform into a emerging regional financial institution, again, built upon century-old trust business and we’re going to be celebrating our 150th anniversary as a community bank next year. During the last three years, we’ve significantly diversified our institution into some new higher growth markets, really good demographics, maintaining a critical focus on expense management and credit quality. And we think we’re well positioned for long-term success and we do remain positive about the opportunities in the future. I want to thank you for joining us today and look forward to seeing you at an upcoming investor events. Have a good afternoon.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.