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WesBanco (NASDAQ:WSBC)
Q3 2018 Earnings Conference Call
Oct. 25, 2018 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Wesbanco third-quarter 2018 earnings conference call. [Operator instructions] Please note, this event is being recorded. At this time, I would like to turn the conference over to John Iannone, vice president of investor relations. Please go ahead, sir.

John Iannone -- Vice President Investor Relations

Thank you, Denise. Good afternoon, and welcome to Wesbanco, Inc.'s third-quarter 2018 earnings conference call. Our third-quarter 2018 earnings release contains consolidated financial highlights, reconciliations of non-GAAP financial measures, 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, 2017, and Form 10-Q for the quarters ended March 31 and June 30, 2018, 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 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. Todd?

Todd Clossin -- President and Chief Executive Officer

Thank you, John. Good afternoon, everyone. On today's call, we'll be reviewing our results for the third quarter of 2018. Key takeaways from the call today are: continued execution upon our well-defined growth strategies that are ensuring long-term shareholder value; diligent focus on profitability and positive operating leverage while maintaining our legacy of sound credit quality; the unique long-term benefit of our core funding advantage and the successful completion of our merger with Farmers Capital Bank Corporation.

We're pleased with our performance during the third quarter, as we delivered record results by remaining focused on profitability, positive operating leverage through effective execution of our strategies. Net income, excluding merger-related expenses for the three months ended September 30, 2018, increased 56% year over year to $41 million, or $0.81 per diluted share. And for the nine-month period, net income, excluding merger-related expenses, increased 42% year over year to $112 million, or $2.38 per share. The benefits of our diversification and expense management strategies on profitability is further evident through year-to-date improvements in several additional core measurements.

We delivered positive operating leverage of three times through a combination of M&A and organic growth. The efficiency ratio improved to 191 basis points from the prior year to 55%, despite the inclusion of FFKT's operating expenses since August 20 of this year. The combination of which help drive income before provision of credit losses and income taxes to $141 million, a 20% year-over-year increase. And solid profitability ratios with the core return on average assets of 1.37% and a core return on average tangible equity of 17.7%, which improved year over year by 30 and 396 basis points, respectively.

Our long-term success remains dependent upon continued execution of our well-defined operational and growth plans. As a reminder, our long-term growth strategy is focused on several key pillars: building a diversified loan portfolio with an emphasis on commercial and industrial and home equity lending, increasing fee income as a percentage of total net revenues over time, maintaining a high-quality retail banking franchise, and franchise-enhancing acquisitions. And these pillars would not be possible if they were not built upon two strong legacies of our franchise: an unwavering focus on delivering positive operating leverage, while making necessary growth-oriented and risk-prevention investments; and maintaining our strong culture of credit quality, risk management and compliance, principles upon which our company was founded nearly 150 years ago. Furthermore, the inherent strength of our diversification and growth strategies is how the components complement and support each other to ensure success and profitability regardless of the operating environment.

During the third quarter, we continued to see strength across key credit quality metrics, which remained at or near historic lows. In fact, despite the addition of $1.4 billion of loans from FTSB and FFKT acquisitions, excluding those loans held for sale, nonperforming assets, past-due loans, and criticized and classified loans all decreased year over year on both at absolute-dollar basis as well as a percentage of the total loan portfolio. I'm very pleased with this strong quarterly trend in our asset quality measures as they defect a consistent, high quality of our overall loan portfolio. Total organic loan growth was relatively flat year over year when excluding our consumer loan portfolio strategy of allowing indirect auto loan to run off to better manage that portfolio through risk return profile.

We are still experiencing a heightened level of commercial real estate loans going to the secondary market as well as property owners selling properties outright due to favorable property valuations. In addition, we have begun to see heightened deleveraging pressure from a combination of tax cuts and rising interest rates in both the home equity and commercial and industrial lending categories. The combination of these factors caused organic loan growth to decline a little bit more than 1% year over year. Our credit and risk management strategy guides our loan growth to be both disciplined and balanced to ensure sustainability and success across economic cycles.

Our approach is not to sacrifice long-term shareholder value for near-term gains. As we've said before, we will not change our credit culture to chase loan growth as we have focused on long-term, sustainable and profitable growth. During the third quarter, we again, demonstrated strong organic deposit growth, excluding CDs of more than 3%, which was driven by 5% growth in total demand deposits. This deposit growth is just one of the key strategic advantages of our legacy franchise, which sits on top of the Marsalis and Utica shale formations.

Our nearly 150-year history being the bank of generations for families in our rural markets provide distinct advantages and is hard to replicate as shale energy-related deposits continue to be in the low-8-figure range each month. This core funding advantage aids profitability while allowing us to meet demand and higher growth Metropolitan markets. These consistent, strong deposit inflows, which mainly reside in our demand accounts, have allowed us to maintain a loan-to-deposit ratio around 90%, loss of keeping our funding cost low. Interestingly, the growth we've experienced in the demand deposits, which now represents 51% of total deposits, as compared to approximately 35% five years ago.

Combined with our strategy to reduce higher cost certificates of deposit have helped to lower total deposit funding cost over the last five years by 20% to 41 basis points. On August 20th, we completed our merger with Farmers Capital Bank Corporation, roughly a month after the completion of the associated data processing and branch conversion of our acquisition of First Sentry. I'd like to formally welcome the consumer and employees of FFKT and its banking affiliate, United Bank and Capital Trust Company into the Wesbanco family. We are excited about the opportunities in Kentucky as we maintain a strong commitment to customer service in community banking.

As I mentioned earlier, one of the key pillars of our long-term growth strategy is franchise enhancing acquisitions. During the last few years, we have made significant and successful strides in our growth and diversification plans. After our expansion into Western Pennsylvania with the acquisitions of Fidelity and ESP, we've filled in the southern edge of our franchise and expanded into Kentucky's high-growth markets to become one of the state's strongest franchises. All of these transactions have enabled us to transform ourselves into a diversified, emerging regional financial institution, build upon a century-old trust business and a 150-year-old community bank.

We're excited about our opportunities as we remain focused on sound, long-term profitability. I would now like to turn the call over to Bob Young, our chief financial officer, for an update on our third-quarter financial results. Bob?

Bob Young -- Chief Financial Officer

Thanks, Todd, and good afternoon, everyone. We reported strong profitability with year-over-year growth in both pre-tax and after-tax earnings. And displayed solid expense management, both quarter over quarter as well as year over year. For the nine months ended September 30, 2018, we reported GAAP net income of $99.2 million and earnings per diluted share of $2.11, as compared to $78.6 million, or $1.07 per diluted share, for the same period last year.

Excluding after-tax merger-related expenses from both periods, net income increased 42.2% to $112.2 million, with earnings per diluted share up $0.60 to $2.38. For the three months ended September 30, 2018, we reported GAAP net income of $32.5 million and earnings per diluted share of $0.64, as compared to $26.4 million and $0.60 respectively in the prior-year period. Excluding after-tax merger-related expenses, net income increased 55.6% to $41 million and earnings per diluted share increased 35% to $0.81. And as a reminder, financial results for First Sentry and Farmers Capital had been included in Wesbanco's results, subsequent to their merger dates of April 5 and August 20, 2018, respectively.

Total assets as of September 30, 2018, grew to $12.6 billion year over year, reflecting approximately $2.3 billion of assets from the FTSB and FFKT acquisitions. Furthermore, total portfolio loans of $7.7 billion increased 21.2% compared to the prior year due to both acquisitions. Due to the organic loan growth was down slightly versus the prior-year period, reflecting the factors that Todd mentioned earlier. The strength of our residential mortgage lending program continues to drive strong loan originations that are better than the residential mortgage market nationwide as our total year-to-date originations were up 21% year over year.

Furthermore, while we continue to strategy to sell residential mortgage originations into the secondary market, as can be seen by the growth in mortgage banking fee income, we did have year-over-year organic growth of 2% during the third quarter from an increase in the amount of one- to four-family mortgage loans held on our balance sheet, primarily due to growth in certain nonconforming residential loan categories, primarily jumbo and private banking loans. Lastly, I would like to mention the loan reclassification that occurred from an internal loan review that was performed during the third quarter. This reclassification shifted approximately $107 million of acquired loans from the commercial and industrial category to the commercial real estate category due to the classification of the collateral. Despite the shift, commercial and industrial loans continue to comprise of about 17% of our total loan portfolio.

Turning now to the income statement. The net interest margin increased 2 basis points year over year, reflecting the benefit to asset yields from the increases in the Federal Reserve Board's targeted federal funds rate over the past year as well as partial quarter benefit from higher margins on the acquired FTSB and FFKT net assets. These benefits were partially offset by higher funding costs and a flat yield curve, which is currently in the 25 to 30 basis points range between the two- and the 10-year portion of the curve, similar to last quarter. Also negatively impacting the margin was a 6-basis-point reduction during the first quarter related to the lower tax equivalency at the state and local municipal tax-exempt security portfolio, resulting from the Tax Cuts and Jobs Act.

Excluding this reduction as well as purchase accounting accretion of 11 basis points this quarter and 12 basis points in the prior-year period, the quarterly net interest margin increased 10 basis points year over year and 8 basis points sequentially to 3.45%. In addition, the current quarter's margin only includes about six weeks of FFKT's higher margin net assets. The increased in the cost of interest-bearing abilities was primarily due to the higher rates for interest-bearing public funds, which are primarily interest-bearing secure demand deposits and certain Federal Home Loan Bank and other borrowings. Our legacy deposit footprint benefits profitability by helping to keep our deposit funding costs low as total interest-bearing deposit costs were only up 16 basis points year over year, representing just a 16% deposit beta compared to the four 25-basis-point Federal funds rate increases since a year ago.

Further, when including the growth in non-interest-bearing deposits, our total deposit funding cost has increased just 11 basis points year over year. While our core deposit funding advantage will help to contain overall deposit funding costs and combined with our low loan-to-deposit ratio, this should provide protection to the overall net interest margin, we do still expect deposit betas to increase as we move forward. Lastly, we anticipate purchase accounting accretion to be between 15 to 20 basis points in the fourth quarter, which includes a full quarter's impact on the Farmers merger. For the quarter ended September 30, 2018, noninterest income increased 25.5% from the prior year to $26.2 million, driven by the FTSB and FFKT acquisitions.

In addition to the larger customer base from the mergers, hoping to increase electronic banking fees and deposit service charges, we also saw a very nice increase in trust fees from a 21% increase in trust assets attained from a combination of FFKT's $600 million trust business as well as organic growth. We are excited about the opportunities for our wealth management business in Kentucky as the addition of the FFKT trust business provides significant scale and reputation to the growth projects we have implemented previously in this state. As I mentioned earlier, the strength of our residential mortgage lending program is evident in the growth of the mortgage banking income, which increased 38% year over year to $1.5 million due to higher gain on sale income per loans sold and hedging-related gains. As Todd highlighted, we continue to demonstrate strong profitability and positive operating leverage to successful execution of our growth strategies, which include controlling discretionary costs.

Excluding merger-related expenses, noninterest expense increased $9.6 million, or 17.1%, compared to the prior-year period. This year, year over year is reflective of two acquisitions and staff and branch locations, which were the primary reasons for the increase in salaries and wages, employee benefits, net occupancy and equipment costs. In addition, salaries and wages for third quarter also reflect the annual composition and adjustments for our legacy employees. Our companywide dedication to controlling costs is evident in the 148-basis-point year-over-year improvement in our core operating efficiency ratio of 55.6%, which is inclusive of FFKT's full expense base since August 20.

In addition, we have continued to realize positive operating leverage, which was three times for the year-to-date period. Representative of our strong legacy of credit and risk management, our credit quality measures have remained at or near historic lows over the last several quarters even with the addition of $1.4 billion in loans from the two acquisitions. As we continue to focus on prudent lending standards, while remaining disciplined and balanced on loan growth. In addition, we have continued to maintain strong regulatory capital ratios as both consolidated and bank level ratios are well above the well-capitalized standards.

Impressively, our third-quarter tangible common equity ratio increased from the second quarter to 8.66% despite the completion of the FFKT acquisition. Before opening the call for your questions, I would like to provide some current thoughts on our outlook for the remainder of the year. Despite our general asset sensitivity, we are not immune from the factors that are impacting net interest margins across the industry. We do expect a modest increase in our net interest margin during the fourth quarter of 2018 due to a full quarter's benefit of the acquisition of Farmers Capital, partially offset by higher anticipated deposit betas.

Regarding operating expenses, we remain on pace to achieve 75% of the anticipated First Sentry cost savings of 38% during the last half of 2018, but the remainder attained during 2019, and continue to expect to achieve the planned 35% Farmer's capital cost savings with 75% realized during 2019 and the remainder thereafter. Lastly, we anticipate our effective full year tax rate to be between 17% and 18% subject to changes in certain taxable income strategies that we could implemented in future periods and that includes the potential benefit from the New Markets Tax Credits that we were awarded earlier this year. We are now ready to take your questions. Operator, could you please review the instructions?

Questions and Answers:

Operator

I certainly will, Mr. Young. [Operator instructions] Your first question will come from Catherine Mealor of KBW. Please go ahead.

Bob Young -- Chief Financial Officer

Good afternoon, Catherine.

Catherine Mealor -- Keefe, Bruyette & Woods -- Analyst

Hey, good afternoon. Hey, I just wanted to clarify your expense -- what you said about expenses, Bob. So we still have a little bit from First Sentry to come through in the fourth quarter, it sounds like. Can you -- is there a way to put a dollar amount on that instead of a percentage?

Bob Young -- Chief Financial Officer

Well, I think I realize that's a public company that first Sentry wasn't a public complete. So you ought to be able to get prior-year information from SNL. But we basically look at their run rate as being around $2.1 million to $2.2 million a quarter of expenses that we inherited. And so if you figure 38% of that, that should be about $250,000 to $300,000 a month and then you multiply that by 75%.

So that gets you into four quarters of about $600,000, $650,000 worth of savings on First Sentry from back in April. We did convert First Sentry in July. And so we did begin to experience cost savings from back office terminations and elimination of their prior IT service company, Jack Henry, beginning late in August.

Catherine Mealor -- Keefe, Bruyette & Woods -- Analyst

OK.

Bob Young -- Chief Financial Officer

And then if you -- you do have a public company in Farmers and so that is available to you. They had about $53 million in expenses for 2017. We typically would figure about a 3% growth rate or, call it, $54 million, $54.5 million. And so you only have about one and a half months of those expenses in the third quarter.

And then you would figure the full amount of one quarter -- one quarter's worth of those expenses in the fourth quarter.

Catherine Mealor -- Keefe, Bruyette & Woods -- Analyst

OK.

Bob Young -- Chief Financial Officer

So that stands basically $4.5 million per month, give or take. No cost savings there until 2019.

Catherine Mealor -- Keefe, Bruyette & Woods -- Analyst

Got it. That was my question. So it's coming at a full run rate next quarter and then we'll start to see the cost savings coming through in the first quarter?

Bob Young -- Chief Financial Officer

Yes, I think it's fair to say that we do have some cost savings. There were already experiencing there. It's just the bulk of those savings would occur after conversion. And that's when you would also shut down the different systems.

Catherine Mealor -- Keefe, Bruyette & Woods -- Analyst

Got it. Remind we when conversion is for that?

Bob Young -- Chief Financial Officer

We're looking at Q1.

Catherine Mealor -- Keefe, Bruyette & Woods -- Analyst

OK. Great. And then, I think then just on the margin, you said early nice job holding the margin, expanding the margin in a really tough rate environment. How do you think about -- so it makes sense if we're going to see higher margin next quarter to said earlier on FFKT.

But just bigger picture, how do you think about the trajectory of your margin as we move through next year? If we get more rate hikes, but we remain in the flat-curve environment? I think we've called you sneaky asset-sensitive in the past, just given the quality of your funding base. But is the flat curve enough to kind of offset that on the asset sides in this through next year? Any kind of color there would be super helpful. Thank you.

Bob Young -- Chief Financial Officer

Well, I will take that. I obviously have the knowledge of what the margin is in the month only of September. And that would be higher than the 350 for the whole quarter, just simply based upon the fact you have a higher asset base from Farmers, or higher-margin asset base. We got into that back in the announcement.

I would refer you back to their second-quarter public release where they had a 3.88% margin. So as you relate those assets in and then you assume purchase accounting on them, that does bolster, and you saw that 7-basis-point approximate core margin increase net of purchase accounting by end of third quarter. And the reality of that is, when I'm guiding to 15 to 20 basis points of accretion in the fourth quarter and then you see that kind of core increase throughout the quarter from the Farmers' acquisition in the third quarter, you're experiencing both an increase in the margin on a core basis in the fourth quarter as well as from purchase accounting, kind of based upon what we see late stage in the third quarter. Now we do believe that we could see some additional deposit pricing pressure in the fourth quarter.

But yes, we've been very successful so far. We've highlighted some important facts for you in terms of both the increase in just total deposits related to demand deposits and now those are 51% of the total. Notice, we talked about 16% of the four increases over the last year, is our deposit beta on the interest-bearing deposit costs. But some of you -- some of the analysts are now looking at when you are in non-interest-bearing and that's been an important part of our strategy over the past few years.

Tod has highlighted that, I have as well, and that takes it down to 11%. So I think that's going to continue, but we're cognizant that we're seeing higher CD costs in the market. We're reacting, or will have to react to that. The cost increases we have had so far are not in the lower tiers of money market or in our accounts.

It's primarily the upper tiers related to the private banking deposits, corporate and institutional monies and public funds. And you would see, if you look at the repo balance and bill there, and that also shows added higher rates. So there are some customers who're moving to the repo category from the business side. Having said all that, as to how that impacts next year, I think, the fourth quarter will tell the tale.

We have previously -- this is -- three quarters ago, we talked about 2 to 3 basis points of improvement in the margin in a rising rate environment with 25 basis points per quarter. That was in a more normalized yield curve environment with a compressed yield curve environment between the two- and the 10-, or even if you want to look at the three-months LIBOR to the 10-year, I think it's lower than that on a go-forward basis. And I also say that because when you stack Fed funds rate increase on top of one another, Catherine, you have to expect that later in the series of those increases and we're seeing that this quarter, maybe a little bit last quarter, that each one has a percentage increase on the deposit beta that's higher than the prior periods. So that -- I know that that doesn't give you the answer next year.

We're suggesting as we said, a moderate increase in the margin just based upon the higher margin assets we inherited from Farmers. And they had a lower cost to funds, I would remark as well. And then the purchase accounting accretion, primarily associating with the loan portfolio.

Catherine Mealor -- Keefe, Bruyette & Woods -- Analyst

Thanks. That's absolutely very helpful, Bob. Thank you for all the color.

Operator

The next question will be from Casey Whitman of Sandler O'Neill. Please go ahead.

Casey Whitman -- Sandler O'Neill and Partners -- Analyst

Hi, good afternoon. Just more question for me on the margin here. Just your comments about accretion being 15 to 20 basis points in the fourth quarter. What's your outlook for the level of accretion next year? Like, how quickly do you think that's going to come down?

Bob Young -- Chief Financial Officer

The loan accretion does not drop that dramatically in the quarters. In 2019, we actually have a projection on that. For us, the way we estimate accretion is based upon initially our modeling in advance of the acquisition. And then we chewed that up when we get third-party valuation, and we've done that year at the end of the third quarter.

That gives us, not only what the total gross amount of loan accretion is going to be, but what the total discount is on our portfolio, but it also gives us a percentage of that that is accretable versus non-accretable. And this acquisition's case, most all of it, except for the portion associated with the loan that we are selling, is accretable. So that's a good thing for us going forward. And that accretion will last over six to seven years, but generally speaking, the guidance that I'm providing on that 15 to 20, I would take that down by 1 basis point or 2 per quarter over the 2019 time frame and some of that is Farmers and some of that's prior acquisitions.

Casey Whitman -- Sandler O'Neill and Partners -- Analyst

Got it, very helpful. And then Todd, bigger picture here, what's your appetite for additional M&A at this point?

Todd Clossin -- President and Chief Executive Officer

Yeah, I think for the next year, year and a half, as we've said set order to announce the FFKT merger, we're really in an integration time period, a lot of opportunities to take our products and services to these -- to these new markets. At the same time, we are taking, obviously, a lot of cost at this year, but a lot of cost at next year to you. So I can see some pretty exciting thing for us like in terms of cost takeout and at the same time, putting the revenue of new products in there could have some pretty strong operating leverage. So I'm really focused on that over the next year, year and a half.

And we doubled in size in the last four years. So we feel this was a good time for pause for a little bit. But still, making a lot of contacts in 2020 and things like that will be here before you know it. And so I think the next year and a half we'll move [Inaudible] but we've got plenty on our plate to work on.

Casey Whitman -- Sandler O'Neill and Partners -- Analyst

Fair enough. And I guess given those comments with the pullback and bank stocks and we've seen some mix in buyback in place. Is that something you guys would consider as a capital at this point?

Bob Young -- Chief Financial Officer

Well, we haven't had a lot of those conversations yet. The pullback's been pretty recent. But we've got a lot of uses for capital long term, and obviously, buybacks is always an option, dividends are an option. But also, again, future M&A is just a couple of years away.

So we'll have to evaluate all of that but haven't made any definite determinations on that at this point.

Todd Clossin -- President and Chief Executive Officer

And there is about 1.1 million shares in our current buyback program that's available.

Casey Whitman -- Sandler O'Neill and Partners -- Analyst

Got it. Thank you for taking my questions.

Bob Young -- Chief Financial Officer

Sure.

Operator

The next question will be from Austin Nicholas of Stephens. Please go ahead.

Austin Nicholas -- Stephens -- Analyst

Hey, guys, good afternoon.

Bob Young -- Chief Financial Officer

Hi, Austin.

Austin Nicholas -- Stephens -- Analyst

Maybe just on the loan growth on a quarterly basis, could you give us a feeling of, I guess, the total dollar amount of loans that kind of came over after being marked from FFKT? And maybe just another way, what was the kind of core quarter-over-quarter organic kind of move in the loan book?

Bob Young -- Chief Financial Officer

Yeah. I think, maybe I answer it from a little different perspective. If we've seen some of the banks are going to report some of the larger real estate pay downs, which is really what's driving a lot of the loan balance sheet growth or lack thereof, I guess, I should say. We're seeing some similar things to what I read about others that when reporting out there as well.

We have $128 million in the third quarter of commercial real estate loans that either went to the secondary market earlier than we thought or that end up just to outright sales. To give you some perspective, that's about the same number we experienced in Q1 and Q2 combined, that we saw in Q3 by itself. So we're definitely seeing the trends others are seeing. Now, I tell you that I'm talking to our commercial people and our commercial head, even that doesn't continue forever, right? It's -- you have a lot of opportunities for people that take things off balance sheet and to sell them, but at some point in time you got reached the bottom of that.

And we'll be looking at where that is. We don't think that's a trend that's going to continue indefinitely, but it definitely ha an impact on the loan growth in the third quarter. With regard to the M&A activity, and what we brought over, we could dig through that and actually get the loan amount. But you can probably -- if I'm reading through your question properly, what was the unusual payoffs.

And if you had $128 million back, you can probably get a pretty good idea of what organic loan growth would have been. We typically would see $40 million to $50 million in payoffs in a quarter. I think, we'll go to the secondary market. So $128 million, that's another $75 million headwind we faced in the third quarter that we typically wouldn't have faced a year or two ago.

Does that answer your question?

Austin Nicholas -- Stephens -- Analyst

Yeah. I think that was helpful. And then maybe I guess as you look forward and you think about the kind of trajectory of net loan growth in the fourth quarter and in '19 and excluding the acquisitions, how are you feeling about kind of net loan growth given the payoffs may be picking up a little bit? And then any kind of runoff that you may expect from the acquisitions?

Bob Young -- Chief Financial Officer

Yeah, I would say with the acquisitions, our approach has always been you do get some runoffs, but you want to outrun that, right? So through hiring C&I lenders and having a bigger balance sheet doing bigger loans in the market, if you go and you buy community bank and you do see just some customer attrition from that. My plan would be -- would just be to  outrun that through the reasons you went to that market in the first place, which is to expand the product set, use the balance sheet and everything else. So I don't really -- I don't really model internally runoff from acquisitions. But I would say, with regard to kind of some of the balance sheet dynamics that we saw in the second quarter, and obviously, moving into the third quarter, I would see that -- don't see a reason for that to subside right away.

I think a lot of the deleveraging that's going on with businesses and even consumers, least they're deleveraging on the home equity side, which I don't think is a bad thing long term, quite frankly. I think it's a pretty healthy thing for them to be doing that. I don't see those dynamic changing in the next quarter or so as well too. So to me, I think the industry, as a whole, fourth quarter is going to be more of the same from the third quarter.

But then as you get into 2019, as Dave mentioned a few minutes ago, at some point that deleveraging stops, particularly on the business side where everything that was going to the secondary market's gone, and everything that had the better cap rates that was going to get sold -- gets sold. And I think there will be an end to that. And then you'll return to more normalized loan growth at some point over the next several quarters.

Austin Nicholas -- Stephens -- Analyst

Understood. And that's -- and that's typically been in the kind of low-single digits to mid-single digits? Is that...

Bob Young -- Chief Financial Officer

Low-to-mid single digits. And also, the consumer and direct strategy, which we talked about for a couple of years, kind of, looking at the risk-return and having that run down a little bit. That's starting to even out as well too. We're not getting out of that business.

We just adjusted the risk-return profile, raised rates, improved credit standards, things like that a couple of years ago. So we're putting loans on the books, and now we seem to be putting on about as much as -- as coming off there. So that portfolio, I think, will stabilize more in the next year or two than it has in the last year or two, or we kind of intentionally run it down by [Inaudible] about $16 million a year. So about 1% of our loan portfolio a year was running off because of the indirect strategy and I think we're nearing the end of that.

Austin Nicholas -- Stephens -- Analyst

Understood. OK, great, And then just to be clear on, I guess, the FFKT, there is no real cost saves in the third-quarter numbers yet. Is that the message I was getting?

Todd Clossin -- President and Chief Executive Officer

Yeah, I think for the [Inaudible] share that's correct. So we closed August 20, so we had that in there through that part of the third quarter, and we'll have it for the fourth quarter. And we're carrying the full boat, everything's there. Even you get some attrition, people that aren't going to stay, that you're going to get [Inaudible] back just to find other jobs and go other places early anyway.

There's a little bit of that, not a lot, but a little bit of that going on. So, we're starting to see some of that, but not the significant cost saves you're going to see in the first quarter, we actually complete the conversion. And we're very good at getting the costs out. So I've got no concerns at all that we're not going to have those costs from First Sentry, the remainder of this cost out in early '19 and a good chunk of that 75% out in early parts of '19 as well.

Austin Nicholas -- Stephens -- Analyst

Great. Thanks for taking my questions, guys.

Operator

The next question will be from Steve Moss of B. Riley FBR. Please go ahead.

Zach Weiss -- B. Riley FBR -- Analyst

Hi, good afternoon.

Bob Young -- Chief Financial Officer

Hi, Steve.

Zach Weiss -- B. Riley FBR -- Analyst

This is Zach Weiss filling in for Steve today. Thanks for taking my question. In terms of fees, they came in pretty strong this quarter, I was just curious outside of the impact of First Sentry and Farmers Capital. Was there anything in particular that got those numbers higher, and maybe your outlook there moving forward? And off of that too, mortgage banking was strong relative to the industry? Any color there on what you guys are doing to get that would be appreciated? Thank you.

Todd Clossin -- President and Chief Executive Officer

Yeah. I'll tackle the mortgage piece of it, and Bob will talk about the fee side as well too, but really nice thing happening for some of us in the mortgage side. Again, with the markets we've moved into going from not having a presence in Kentucky to being the ninth-biggest bank in the state over the last two years. The banks that we bought there had very little, almost no residential mortgage focus or efforts or production.

That's an important business for us. So we've gone in there and we've put mortgage lenders -- the number of mortgage numbers has been up by 300% to 400% in, particularly in the Louisville markets and central Kentucky markets, Lexington markets, some of the stronger geographies in Kentucky. We've put mortgage loan originators there and good strong leader there who is very good at attracting talent. So we've actually have been able to kind of outrun, which is kind of coming in our way -- what we like to do in the model run -- model runoff on the commercial side.

Same thing on the residential side, and that is that we would expect the additions of staff in the productivity from that staff, get them up to the levels that we're used to seeing around the rest of our company and that flows through. So even though the national trend is mortgages are down because rates are going up, refined markets are not there anymore. We're running against that because we're adding so many mortgage loan originators that are to bringing production on that didn't exist before. So we're able to counter that trend, and I think, our originations were up 21% over the prior year.

And that's that's pretty unusual given what's going on with the mortgage market. And I would expect that to continue because we continue to look for more mortgage loan originators in Kentucky. But also Columbus, Cincinnati, Pittsburgh, Charleston, places like that, it's good business and we think we've got a good function around that. Our turnaround times are very good.

We're able to attract lenders into that market and realtors like us. So I think that should be a good story for us going forward. But on the rest of these, Bob?

Bob Young -- Chief Financial Officer

Yes, I think, swapping, just going back to last quarter, I would tell you that the other income category there was some additional swap fees as well that is where we're characterizing the Farmers a lot in business, so even though it's only a month and a half, that -- those two categories are in our income statement. In the last item in the noninterest income, called other income. Trust fees, about half of the increase of over last quarter is related to Farmers' trust department, again, for 40 days and the rest would be the organic growth that we're expressing ourselves. Service charges on deposits, that's gotten stronger for us throughout the year.

And some of that is, obviously, related to the acquisition as we layer in the strong retail deposits of Farmers. And -- and likewise, that's true in electronic banking fees, although we've seen low double-digit growth in electronic banking fees throughout the year. So those -- those are the other factors that influence the 25.5% growth year over year in noninterest income and most of the factors I just give you were related to the second-quarter -- to third-quarter increase.

Zach Weiss -- B. Riley FBR -- Analyst

Got it. Thank you very much. Just a quick follow-up on the mortgage piece. In the prepared remarks you all mentioned hedging gain.

Was just curious, I guess, how material that was or how much of that comprised of the mortgage income disclosed on the income statement?

Bob Young -- Chief Financial Officer

I can tell you in general, it's been running around $50,000 a month or so. It's something we weren't doing a year ago. But we looked at it, we valuated it, we have a very strong and experienced head of residential mortgage lending that joined us a couple of years ago. So we rolled it in place.

It's been very good for us. It's really improved the profitability and -- but they are averaging around 50 -- $50,000 a month is what we have been seeing.

Todd Clossin -- President and Chief Executive Officer

That's the pipeline hedging element of it.

Zach Weiss -- B. Riley FBR -- Analyst

Got it, that's helpful. And then last question for me. Just curious on the credit side. If there's anything that you're all seeing out there on the ground? Maybe which -- what competitors are doing, if there's anything worth noting there?

Todd Clossin -- President and Chief Executive Officer

Yeah, I think, I would tell you from our portfolio standpoint. Obviously, we feel very good about our portfolio and kind of where we're at with everything. We are seeing more opportunities, I guess, that are still getting done. But maybe with some loser structure, it seems.

I mentioned before about things going to secondment market. I am just -- I think it's so aggressive. It's really amazing to see how soon properties are going to the secondary market. And I'm just -- I'm not sure that's healthy but it's what's going on right now, but it would be very selective.

So I would tell you that our lenders kind of know what we'd like to do and what don't like to do. So some of the things I used to see, we don't see anymore, like multifamily loans, with guarantees to burn off real fast, things like that. They know we're not doing them. So we don't see them anymore.

We kind of manage the expectations of our borrowers to some degree. So I think we have pulled our horns in a little bit couple of years ago on a multifamily and on the consumer side. And I think that'll start well for us. We're really not playing in the space that I think is getting a lot of attention right now, right? So the growth in indirect and RV and motorcycle and ATV all that, the growth in multifamily and things like that.

We just are not just playing really aggressive in that market. So I just don't see a lot of those things. On the C&I side, we're keeping our credit standards where they're at. What's interesting there, though, is just the line usage that's going down.

And people are just, I'm not sure whether they're just cash [Inaudible] from tax cuts or whether there's still overhang from potential tariffs, things like that, people being just conservative or they're thinking there's going to be a recession in two to three years and they're just being careful, and maybe it's a combination of all of that. But we're just not seeing the line usage that we expected before. Our production, though, has been very good. Our production this year is right on plan, and it's just deleveraging.

And those loans that we are making, they are not just being used as much as they were being used in the past. I read an article where there's a -- a lot of banks were surveyed about losing C&I standards, and it's 100% of the banks they talked to are doing that, they didn't talk to us, we're not doing that. We've got the same credit standards regardless of the economy. And that's kind of status well, really.

Sometimes maybe it's a little out-of-favor. But I think in times like this, the market starts to come back toward where you are.

Zach Weiss -- B. Riley FBR -- Analyst

Sure. All right. Well, thank you very much.

Todd Clossin -- President and Chief Executive Officer

Sure. Thank you.

Operator

[Operator instructions] Your next question will come from Russell Elliott Gunther of D.A. Davidson. Please go ahead.

Russell Gunther -- D.A. Davidson -- Analyst

Hey, good afternoon, guys.

Bob Young -- Chief Financial Officer

Hi, Russell.

Russell Gunther -- D.A. Davidson -- Analyst

Just one follow-up for me, kind of appreciate the color you gave us on the paydowns this quarter, and your expectation that we could be looking at low- to mid-single-digit organic growth for next year. Could you just give us your thoughts given bigger presence in some high-growth markets, where that low- to mid-single-digits could come from both from an asset-class perspective and geographically speaking?

Bob Young -- Chief Financial Officer

Yeah, I would say -- well, obviously, we want to grow the business is that we're in, but special focus on C&I and home equity. I mean those are still businesses that are important to us, and we would expect those to grow. I think on -- our investor decks talks about the last number of years that company growth rate has been around 9%, I think, over the last five years. So obviously, not there today, but it will return to that level at some point, I'm sure.

So C&I and home equity is markets businesses that we really are going to continue to focus on. We still like commercial real estate. And we're just being, obviously, continue to be prudent and I would structure those and who we do business with, and make sure they got the pockets and some things like that. So when I look at geographically, really all of our markets are pretty healthy.

And that's the nice thing about having a geographic dispersion over five states is, each market will give you a something a little bit different. Obviously, our M&A strategy has been moving us into some markets that were higher growth. So I would expect, on a longer-term basis, to get more loan growth out of markets that's are growing faster. And that's part of the -- part of the approach, and part of the strategy.

So when you look at the demographics, population growth of a [Inaudible] Columbus, Cincinnati, Pittsburgh, Morgantown, parts of -- parts of West Virginia, too, our plan would be is to grow in line with that, or faster. And then continue to become more meaningful in markets that have higher growth trajectories. [Inaudible] is known as a growth company, a really good growth company that's got good solid quality credit standards as well too. So to be meaningful in markets that are growing faster, I think that's going to be a prereq that we're doing the acquisitions that we did, why we want to take that kind of settle and put our product and services and our operating philosophies into those markets so that we can kind of get that growth.

But I would tell you, if you look at the GDP growth of each of the different markets we're in, that's a pretty good indication of where we expect to get our growth. We are not stretching in any one particular market over another.

Russell Gunther -- D.A. Davidson -- Analyst

I appreciate the thoughts, guys. Everything else has been asked, so that's it for me. Thank you.

Bob Young -- Chief Financial Officer

OK.

Operator

And ladies and gentlemen, that would conclude our question-and-answer session. I would like to hand the conference back over to Todd Clossin for his final comments.

Todd Clossin -- President and Chief Executive Officer

Thank you. There are many ways, obviously, to achieve profitability. But as I mentioned several different times, doing that through changing our risk profile is just not one that we're going to do, particularly, it's the 10th year of the elongated economic cycle. But there's a lot of ways to improve profitability, right? So looking at long-term profitability and shareholder value through disciplined growth, meeting our customers' needs.

We talked about our core deposit advantage, talk about our credit quality and standards, and some of the things we're doing with regard to taking our products into other markets and taking expenses out. Like I said, there's a lot of ways to generate profitability. So I want to thank you for joining us today. And we look forward to seeing you at an upcoming investor event.

Operator

[Operator signoff]

Duration: 51 minutes

Call Participants:

John Iannone -- Vice President Investor Relations

Todd Clossin -- President and Chief Executive Officer

Bob Young -- Chief Financial Officer

Catherine Mealor -- Keefe, Bruyette & Woods -- Analyst

Casey Whitman -- Sandler O'Neill and Partners -- Analyst

Austin Nicholas -- Stephens -- Analyst

Zach Weiss -- B. Riley FBR -- Analyst

Russell Gunther -- D.A. Davidson -- Analyst

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