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Wesbanco Inc  (NASDAQ:WSBC)
Q1 2019 Earnings Call
April 17, 2019, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the WesBanco First Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation there will 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, Vice President of Investor Relations. Please go ahead, sir.

John Iannone -- Vice President of Investor Relations

Thank you, Carl (ph). Good afternoon, and welcome to WesBanco Inc's first quarter 2019 earnings conference call. Our first quarter 2019 earnings release, which contains consolidated financial highlights and reconciliations of non-GAAP financial measures was issued yesterday afternoon and 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, as well as documents subsequently filed by WesBanco with 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 can 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 and good afternoon, everyone. On today's call, we will be reviewing our results for the first quarter of 2019. Key takeaways from the call today are, we are ensuring a strong organization for our shareholders, customers and employees. Supported by strong underlying fundamentals, including our core deposit funding advantage, as we remain diligently focused on credit quality, profitability and positive operating leverage.

We're pleased with WesBanco's performance during the first quarter of 2019, as we work to ensure a strong organization for our shareholders. When excluding merger costs, net income increased 27% to $43 million or $0.78 per diluted share. These earnings generated strong profitability ratios for the quarter, with core return on average assets and average tangible equity of 1.39% and 16.56% respectively. We continue to maintain strong regulatory capital ratios, as both consolidated and bank level regulatory capital ratios are well above the applicable, well capitalized standards promulgated by a bank regulators and the BASEL III capital standards.

In addition, record earnings achieved during 2018 combined with our strong regulatory capital and liquidity positions and solid execution on our well-defined long-term operational and growth strategies enabled us to increase the quarterly cash dividends by 6.9% or $0.02 to $0.31 per share during February. This was the 12th increase during the last nine years representing a cumulative increase of 121%.

Our long-term success is dependent upon continued execution of our well-defined operational and growth plans, as we remain both disciplined and balanced to ensure stability and success across the economic cycles. We are focused on long-term, sustainable and profitable growth, we'll not sacrifice long-term shareholder value for near-term gains. As such, I am very pleased with the strong quarterly trend and asset quality measures, as they reflect the consistent high quality of our overall loan portfolio.

While we typically stress the importance of viewing loan growth over a rolling four-quarter period, in order to mitigate the impact from quarterly fluctuations in the construction portfolio, due to repayments and seasonality. I'd like to discuss our sequential quarter loan growth in light of the comments we made during our fourth quarter 2018 earnings call.

In particular, we mentioned that we were at the end of the targeted reductions in our consumer portfolio, related to its risk return profile. Also they anticipated that the aggressive commercial real estate payoffs experienced during 2018 would begin to moderate. And we're encouraged that our commercial pipeline going into 2019 was better than what we'd experienced going into 2018.

During the first quarter these statements have begun to prove true, as total portfolio loans were flat when compared to the fourth quarter of 2018 or up 0.5% when annualized. This positive result reflects the anticipated stabilization across loan categories. Our residential mortgage program continues to be a bright spot, as overall production as well as the pipeline continued to be strong across all of our markets helping the direct fee income as well as growth in our portfolio loans.

The strength of our commercial pipeline that we saw early in the quarter remains and helped to grow commercial and industrial loans approximately 1% quarter-over-quarter. We remain confident in our ability to deliver the low to mid-single digit total loan growth over the long-term. Finally, we continue to make appropriate investments in fee and loan opportunities including an additional C&I lenders, mortgage loan officers, private bankers and securities brokerage representative new hires and building out our online lending-application capabilities.

Furthermore, we recently hired a new Managing Director who'll be responsible for planning and directing WesBanco Securities and WesBanco Insurance, including the near and long-term profitability and growth of these fee based businesses. With our 30 plus year of Securities experience and Insurance regulatory experience and her success in the world of banking. I'm excited about the renewed opportunities for these businesses. Effective today, current Director and Vice Chairman, Christopher Criss succeeded Jim Gardill as Chairman of the Board of Directors, as he did not stand for reelection due to the Company Directors retirement policy. While Jim will remain General Counsel for the bank holding company. I'd like to extend the appreciation of the entire WesBanco family to Jim for his long service on the Board of Directors and his dedication to our success.

For 45 years Jim has provided key experience and sound counsel, that has enabled the corporation to grow from a small West Virginia based bank into an emerging regional financial institution with a community bank at its core. In addition, I'm pleased to be able to continue my working relationship with Chris in his new role as Chairman of the Board. His diversified business and accounting background management experience in long-term active participation on the Board will ensure his success as our Chairman.

Before turning the call over for a review of our financials, I wanted to highlight a few recent accolades that demonstrate the fact that WesBanco prides itself on delivering large bank capabilities with the community bank feel, a financial institution through its customer centric model that delivers a strong financial institution for both our shareholders and our customers. We continue to be nationally recognized for our performance, strength and credit quality. Building upon being named one of America's best banks for the ninth time by a leading financial magazine earlier this year, we were just named S&P Global Market Intelligence best performing regional bank ranking for 2018, as the number 16 bank. This ranking focused on profitability, asset quality and loan growth, including average tangible common equity and net charge-offs as a percentage of average loans, efficiency ratio and net margin for 87 eligible institutions, with assets between $10 billion and $50 billion.

Lastly, we received another accolade, one of which I'm extremely proud because it was based on customer satisfaction and consumer feedback. WesBanco was named the Forbes magazine's inaugural ranking of the World's Best Bank earning No. 7 ranking in the United States based on solid scores across the survey, including very high scores for general satisfaction, trust and customer services. This recognition is a testament to the hard work and dedication of all of our employees as they focus on our better banking pledge to deliver superior customer service and strive to maintain a premier financial institution for our customers.

I would now like to turn the call over to Bob Young, our Chief Financial Officer for an update on our first quarter financial results. Bob?

Robert Young -- Chief Financial Officer, Executive Vice President

Thanks, Todd and good afternoon, everyone. We indeed reported strong year-over-year profitability, while displaying solid credit quality and expense management this quarter. For the three months ended March 31, 2019, we reported GAAP net income of $40.3 million and earnings per diluted share of $0.74. As compared to $33.5 million and $0.76 respectively in the prior year period. Excluding after tax merger-related expenses from both periods, net income increased 26.9% to $42.8 million, and earnings per diluted share increased 2.6% to $0.78 reflecting the additional shares issued for last year's two acquisitions.

And just as a reminder, financial results for First Sentry and Farmers Capital have been included in WesBanco's results, subsequent to their 2018 merger dates of April 5 and August 20, 2018 respectively. Total Assets as of March 31, 2019 grew to $12.6 billion year-over-year, reflecting approximately $2.3 billion of assets from the First Sentry and Farmers Capital acquisitions. Total portfolio loans of $7.7 billion increased 21.3% compared to the prior year due to both acquisitions.

As Todd mentioned, we realized some stabilization across several loan categories during the first quarter, which led to overall flat loan growth on a sequential basis. In addition, total loan production was up about 20% from last year's first quarter. Regarding our strong residential mortgage loan program, originations during the quarter were up some 16% year-over-year, driven by home purchases and construction lending across our footprint. While salable residential mortgage originations continue to represent around a 60% range of total originations, we have also seen continued growth in one to four family mortgage loans, primarily jumbo and private banking loans, held on our balance sheet, as they grew 5% organically year-over-year.

Total deposits increased 23.4% year-over-year to $8.9 billion, due to the acquisitions, as well as organic transaction account growth driven by our legacy footprint that sits on top of the Marcellus and Utica shale formations. This core advantage is hard to replicate as shale energy related deposits continue to be in the low eight figure range each month. These deposits which help drive the 4.8% year-over-year organic growth in non-interest bearing demand deposits, helped to maintain a loan to deposit ratio in the high 80% range.

They also aided profitability due to a lower than industry average deposit beta of just 24% or 18 basis points during the past year or 16% and 12 basis points, if including the impact of non-interest bearing deposit growth. The net interest margin for the first quarter of 2019 increased 30 basis points year-over-year to 3.68%, reflecting the benefit from the increases in the Federal Reserve Board's targeted federal funds rate during 2018, as well as the higher margin on the acquired Farmers Capital net assets. These benefits were partially offset by higher overall funding costs, as well as a continued flattening of the yield curve.

Purchase accounting accretion from the acquisitions benefited the first quarter of 2019s net interest margin by approximately 19 basis points as compared to 6 basis points in the prior year period and 23 basis points in the fourth quarter of last year. Approximately 3 basis points of accretion in the first quarter was the result of a payoff of a prior acquisitions impaired loan.

Excluding purchase accounting accretion, the core net interest margin increased 17 basis points year-over-year from 3.32% last year to 3.49%, and it was flat sequentially to the fourth quarter of 2018. For the quarter ended March 31, 2019, non-interest income increased 15.8% from the prior year to $27.8 million, driven mostly by the First Sentry and Farmers acquisitions. The associated larger customer base and higher transaction volumes resulted in increases in electronic banking fees and deposit service charges. Trust fees increased year-over-year, primarily due to a $500 million increase in trust assets to $4.5 billion from the addition of Farmers Capital trust -- Farmers Capital's trust business as well as organic growth.

Indeed rebounding nicely from the equity market's decrease in the fourth quarter. Lastly, other income increased $1.0 million primarily due to an increase in payment processing fee income from a business inherited from Farmers Capital as well as loan swap fees. We continue to demonstrate strong profitability and positive operating leverage through successful execution of our strategies, as well as controlling discretionary costs even with the inclusion of the two acquisitions operating expenses.

The Farmers Capitals branch and data processing conversions occurred during February and focused expense savings began later in the quarter. Our expense management efforts are demonstrated by a relatively stable efficiency ratio of 55.9%. Excluding merger related expenses, non-interest expense increased $17.0 million or 31.3% compared to the prior year period. This year-over-year increase is reflective of the two acquisitions and their associated staffs and locations, which were the primary reasons for the increases in salaries and wages, employee benefits, net occupancy and equipment costs, as well as intangibles amortization.

Employee benefits expense was impacted by a $0.6 million market adjustment in the deferred compensation plan obligation, which is mostly offset in the net securities gains and non-interest income and $0.7 million in higher seasonal payroll taxes, as well as higher healthcare and pension costs. FDIC insurance expense increased $0.7 million or 105.6% year-over-year due to the bank now being assessed as a large bank with more than $10 billion in total assets.

During the first quarter of 2019, our credit quality ratios remain strong, as we balanced disciplined loan origination in the current environment with our prudent lending standards. In fact, we reported continued strength across key credit quality metrics, including non-performing assets, past due loans, the provision for credit losses and net loan charge-offs, as most of these measures remained at or near historic lows. Criticized and classified loan balance did increase during the first quarter to $109 million or 1.42% of total portfolio loans, as part of our normal loan-grade review process post acquisition for Farmers Capital and in conjunction with two downgraded relationships in our legacy portfolio. The downgraded loans were from different industries and no trends were evident.

In addition we continue to maintain strong regulatory capital ratios as both consolidated and bank level ratios grew this quarter and significantly exceeded both well capitalized standards and peer ratios, even after the early redemption of an inherited TRUP preferred security from Farmers Capital for $10 million with another $22.5 million of TRUPs to be redeemed during the second quarter.

Now before opening the call for your questions, I would like to provide some current thoughts on our outlook for the remainder of the year which remain relatively consistent with our outlook provided on last quarter's earnings call. Since we remain somewhat asset sensitive, we are not immune from the factors that are affecting net interest margins across the industry, including the current very flat spread between the two to 10 year treasury yield -- treasury yields and an overall low long-term rate environment.

We believe that our core deposit funding advantage combined with our low loan to deposit ratio, will help to maintain overall deposit funding costs. We do not currently anticipate much overall change in our core net interest margin during the balance of the year, as compared to the first quarter. However we do expect somewhat lower purchase accounting accretion, which will reduce the stated margin a few basis points overall.

We still anticipate purchase accounting accretion to be in the mid-teens during 2019 declining at a pace of 1 to 2 basis points per quarters. Regarding operating expenses, we remain on pace to achieve the remaining 25% of the anticipated First Sentry cost savings of 38% during 2019 and expect to achieve the planned 35% Farmers Capital cost savings, with 75% of those realized this year and the remainder in 2020. We are planning our typical mid-year merit increases and still expect margin expense to be higher than the 2018 quarterly run rate, reflecting additional marketing spend in our various markets, as well as our 25% larger company size.

Furthermore, FDIC insurance expense will continue to be high during 2019, as compared to 2018, due to now being assessed as a large bank with more than $10 billion in assets. Before the potential application of small bank credits to be received once the FDIC insurance fund exceeds 1.38%, which is currently expected by mid-year. Most credit quality measures have been at or near historic lows over the last several periods and as such, variability from quarter-to-quarter may occur. That said, we do expect our overall credit quality measures to remain strong during 2019. We currently anticipate our effective full year tax rate to be approximately 18% to 19%, subject to changes in certain taxable income strategies.

Lastly, during the second half of 2019, we will begin to incur the impact from the Durbin amendment on interchange fee income, which is currently anticipated to reduce fee income by approximately $2.5 million per quarter. And that will have a slight negative influence on the efficiency ratio as a result.

We are now ready to take your questions. Operator, would you please review the instructions?

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question today comes from Catherine Mealor with KBW. Please go ahead with your question.

Todd Clossin -- President and Chief Executive Officer

Good afternoon.

Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst

Thanks. Good afternoon.Wanted to start first on growth. Todd, you mentioned that you've seen some stabilization in loan growth this quarter and are still reiterating your low to mid-single digit growth over the long-term with how you said it. So I guess my question to you is, do you feel like we had flat loan growth this quarter which, of course is better than this than the decline we saw a little bit last year. So do you feel like the pipeline is strong enough to where we'll actually see growth in the loan portfolio this year? Or are there still some dynamics within the portfolio that you feel like could keep on the portfolio more flat this year? Thanks.

Todd Clossin -- President and Chief Executive Officer

Thank you. When I look at the things that have been pretty consistent, it's been the growth in the pipeline, as Bob mentioned coming into this year was stronger than coming in the last year. So the growth in the pipeline production on a monthly, quarterly basis has all been relatively consistent over the last, really the last year or two. The headwinds which we talked about in the comments are what's really been impacted. And I think with the last couple of quarters actually the consumer portfolio is really the indirect piece, the other pieces were -- we're looking to continue to grow. But the indirect piece has stabilized, we're not seeing a lot of movement one way or the other on that, which is good, that's where we want to see it.

And then the amount of loans go into the secondary markets things like that on the commercial real estate side, multi-family projects things like that, have gotten back in line with where they were historically on kind of a quarterly run rate. So those headwinds have subsided, while the consistency of the production and the pipeline has continued on. So as a result of that, that's what provided the stabilization in the first quarter. When I look out going forward, it's interesting, it's such a -- it's still -- we're still small bank, right, with the loan portfolio and everything. A $20 million loan you know is a 1% annualized, well on an annual basis. So you get two or three loans that close in a C&I portfolio or commercial real estate portfolio and you get low single digit annualized growth. You don't get those one quarter, they come the next quarter, you're flat, right. So it really comes down to sometimes just a couple of loans and whether they close in March or they close in April. So it's hard on any one quarter-to-quarter to say whether we're going to have those single to low-digit -- mid-digit growth rate that we've historically had, and I'm very confident long-term that we're going to have that, but it's going to bounce around from quarter-to-quarter.

We could see a high single digit loan growth rate in a quarter, and then followed by a low one and then -- and then nothing just flat for a quarter because of the lumpiness of the business. So not trying to be evasive but that just kind of how I try to work with it. I feel really good about where we're with the lending teams, the people we hired, the stability that we've got in a lot of our areas, the pipelines, the economy seems to be rolling along.

Yeah, I don't see any big headwinds there. So my expectation would be is that we would return there soon or rather than later. But again it's pretty granular when you look at it on a quarter-by-quarter basis.

Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst

Okay, that's really helpful. And then now maybe turning to the margin, sorry for that noise -- and then turning to the margin -- totally appreciate the yield curve right now. But as I look at and your deposit betas are have been incredible. But as I look at your loan yields, you actually thought some really nice improvement in your loan yields throughout last year.

If I look at it this quarter, pulling of the accretable yield, there was still -- I think it was about six steps increase. So how do you think about -- are there still levers within your loan portfolio to where there is still kind of the lag impact of higher rates, although we're not expecting rate hikes this year. I mean, how much of a lag we still have within the portfolio that you still get some upward movement on your loan yield as they move through the year, despite the way the curve looks right now. Thanks.

Robert Young -- Chief Financial Officer, Executive Vice President

Well let me take that Catherine. First of all I wouldn't think on the residential mortgage side, there is a lot of upside because mortgage rates are indeed down over the last year, depends upon the mix of fixed and variable there. And again, whether you're selling the secondary market or not, but I think really what you're getting at is the business loans and that disclosure. And I've said this in a couple of different forms, but we are still a company that includes floors in our commercial loans. We have about $1.5 billion of balances with floors. But only about a third of that is -- are actually at the floor. And typically, it's at the floor not because the calculated rate is at or below the floor, it's because of the timing of the next repricing. We still do a fair amount of two, three and five year fixed rate lending and those typically have floors in them. And so, there is still some inherent pick up depending upon what rates do, because of the timing of the next repricing.

And indeed when I look at loans that repriced this past quarter and that was over $1 billion worth, I think what I would attribute that increase in business loans too, is the repricing that occurred in those loans that had a timing this quarter for repricing. Even those loans that are variable on our three or six month timeframe there would have been, as the calendar turned into January, a fair amount of repricing both in the C&I portfolio, as well as our commercial real estate. So, I think those are a couple of factors. I also think that if one wanted to predict the potential for a down rate environment, we're not there yet. But we realize that, Fed funds futures may indicate that. That I think we're well protected by having a lot of those loans reprice longer. So it would prevent them from repricing down in that kind of environment.

So I think that's part of the reason stripping out as you did the accretion, as to why you saw an increase this quarter in the business loan yield.

Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst

Makes sense. Alright, great. Thank you, I'll (inaudible).

Todd Clossin -- President and Chief Executive Officer

Thank you.

Operator

And our next question comes from Austin Nicholas with Stephens. Please go ahead with your questions.

Austin Nicholas -- Stephens Inc -- Analyst

Hey guys. Hey, good afternoon. Maybe we could just talk about deposit growth for a minute. Natural gas prices have kind of fallen to, call it three year lows over the last couple of days here. And you maybe talk about the average kind of monthly inflows you saw in the first quarter and kind of maybe where they're trending today? And would you anticipate that kind of eight digit, kind of, what number to kind of slow down toward the seven digit number given that -- given what we're seeing with natural gas prices?

Todd Clossin -- President and Chief Executive Officer

Yeah, it's still been really tight -- in a tight range, in that, we say low (inaudible) figure but it's $15 million or so per month and it's within a couple of million dollars, that seems to be what is coming in. And even with some of the pricing going down, I think, production levels going up, there is additional wells being drilled, things like that, production is going up while the price is going down. So it may be impacting some of it, but we haven't seen a falloff in the deposit flows at all. Coming from the natural gas, the royalty payments to our homeowners that live in our live in our footprint. So that has really helped us a lot and then with our loan to deposit ratio we're right now -- we got the benefit of being disciplined around how we're handling our rate structures which drives the -- drives the low beta.

If I get to a mid-single digit loan growth rate then we'll start to even some of that low loan to deposit ratio, but we're a long way to go before I would need to really start to address any kind of a rate strategy. So we have some -- I think some ability to keep rates low for quite a while. And with the Fed pausing, that just -- seems takes some of the -- we were seeing a lot of pressure, but whatever pressure was there seems to have been abated.

Austin Nicholas -- Stephens Inc -- Analyst

Understood, that's helpful and then I appreciate kind of the comments on the asset side of the balance sheet from a yield perspective and getting your comments that you just mentioned, but maybe just on the public fund side, that those cost kind of are more sensitive and kind of increased in the first quarter. I guess as you look at where those deposits are kind of repricing now, is that kind of played out? Or is there still some pressure to come from that side of the coin?

Todd Clossin -- President and Chief Executive Officer

I would say a little bit of both. And where you saw the beta, the deposit costs go up, that's where it's been. We do match some CD rates from time to time in the branches and some things like that, but it's the municipal deposits where those are bid out and pretty competitive. And while a lot of that has launched through already, we've done a couple of acquisitions in the last few years that we're big in the public fund business too. So, we're working through those as well too. I mean FFKT, Farmers we just closed that last August and just converted here earlier on the first quarter.

So, as we work with those customers and some of those things come up for repricing, we'll have to address them. They had a very low deposit cost FFKT as well. So I would say, we're part of the way through, I think that's maybe most of the way through our portfolio, but partly through some of the acquired portfolio. So, I don't see it being a dramatic increase or dramatic number particularly in light of the Fed pause, but these are important customers to us in our markets, and we do a lot more with them than just public funds. So, we want to stay competitive.

Robert Young -- Chief Financial Officer, Executive Vice President

And any follow up I would make is, that's about -- it's over a $1 billion, it's about $1.1 billion and those rates that we paid in the fourth quarter versus the first quarter were about flat. So, we didn't see an increase in the public funds rates quarter-over-quarter.

Austin Nicholas -- Stephens Inc -- Analyst

Understood. So, I think maybe based upon your earlier comments on the margin. Is it fair to say that the kind of the expectation is kind of a flat margin kind of going into the remainder of the year just as you paired some of the flowing betas, you're obviously deposit advantage and some of the slight natural repricing you have in the kind of commercial side of the book?

Todd Clossin -- President and Chief Executive Officer

I guess, how I would answer that is, yes, we do expect, it's really the same guidance we provided last quarter. A relatively flat core margin, some headline reduction because purchase accounting will drop 1 basis pointed or 2 per quarter. But I'm looking at 349 consistent number for the last two quarters and get there some seasonality to the margin in the first quarter.

Remember you have 28 days in February, so that tends to bolster the margin. But I think right around that level throughout the rest of the year could slip 1 basis point or 2, because of the shape of the yield curve. I think going into the year our expectation was a little higher margin. But the reality of where we are at the end of March is a flatter margin and we don't have in our asset liability modeling any increases for the rest of the year.

Austin Nicholas -- Stephens Inc -- Analyst

Got it. Okay. That's very helpful. And then maybe just on expenses, those are nicely controlled this quarter. And then maybe just specifically on the FDIC expense, can you give us any indication of what the small bank credits would be? Should those be better offered or kind of, I guess, exercised?

Robert Young -- Chief Financial Officer, Executive Vice President

Well, I would, we didn't get it in time to disclose in the 10-K. So, I don't have a number in there. We haven't produced the queue yet. So, I'm not sure whether we're going put it in or not. I would characterize it as several million, a few to several. So we actually have a letter from the FDIC, as most banks do now, describing what that amount is. But the reason I'm being a little cagey is, I don't know what we're going to be able to use it. It really depends upon the shape. It depends upon when the depth, the positive insurance fund gets to that level that I mentioned in my prepared remarks and when the FDIC board acts upon that. So, right now, the FDIC fund is at 1.36% and I think most people are figuring that sometime in the second or third quarter is when those credits would begin to be used. So, some in the back half of the year, remainder of those would be used then in 2020.

Austin Nicholas -- Stephens Inc -- Analyst

Got it. Okay. But in the meantime it sounds like the $1.4 (ph) million is a good way to think about it?

Robert Young -- Chief Financial Officer, Executive Vice President

Yeah, correct.

Todd Clossin -- President and Chief Executive Officer

And (inaudible) comment on expenses, too. With the merger, conversion being completed this quarter, we carried those expenses for the first quarter. But a lot of those employee costs are coming out here in the early second quarter, a number of people that who are not part of the combined organization anymore. So as we said, you get 75% of those cost saves this year, and that should really start to materialize in the second quarter.

Austin Nicholas -- Stephens Inc -- Analyst

Okay, great. And then maybe just one last quick one. Just on the -- on those cost saves, can you maybe just give us an idea of what percentage of the total cost saves in the acquisition were achieved as you kind of exited the first quarter than otherwise starting in the second quarter?

Todd Clossin -- President and Chief Executive Officer

Yeah, I would say with regard to -- a lot of the employee costs, obviously, don't start to materialize till after the conversion takes place, and that just -- it was in the first quarter. We had people stay another 30 days past that. So you're not going to see much in the way of employee cost reduction from the merger until we get into the second quarter. There were a few here and there, but a majority of it is going to be in the second quarter. The other cost aspects of the contracts, things like that, flow through fairly quickly, but a good chunk of the expense is on the employee side, which is why we said 75% would occur in 2019. But a majority of that's going to be this quarter, and then the following two quarters in the year offset, obviously, by our own merit increases and our own investments that we're going to continue to make along the way as well, too.

Robert Young -- Chief Financial Officer, Executive Vice President

Another way to look at that is that we're down about 75 full time equivalents from 930 to 331. Some of those were in the fourth quarter just due to normal attrition and approaching the conversion, some individuals would have chosen to leave before that time and then the bulk of what Todd was talking about occurred in the month of March. So by the time you run them through the payroll, we start seeing those savings toward the end of the month and then into the second quarter.

Todd Clossin -- President and Chief Executive Officer

Yeah. And we're confident we're going to achieve those cost saves that we modeled at the time of the merger.

Operator

And our next question comes from Steve Moss with B. Riley FBR. Please go ahead with your question.

Stephen Moss -- B. Riley FBR -- Analyst

Good afternoon, guys.

Todd Clossin -- President and Chief Executive Officer

Good afternoon.

Stephen Moss -- B. Riley FBR -- Analyst

Just I guess going back to the margin for a quick second and in particular on securities balances, wondering here with the flat to inverted curve if the securities book will be declining here going forward.

Robert Young -- Chief Financial Officer, Executive Vice President

Well, we did -- we had about $65 million of sales in the month of March. We, in the first quarter, moved some securities from HTM to AFS as a result of the adoption of the derivatives standard, that improvement standard, I can't remember the number of it, Steve. But we did reposition some securities that were in the lower maturity range of munis (ph) where we didn't see as much value as holding a longer-term munis. And so some of those are getting replaced here in the month of April. But I think, in general, given where the spreads are, the concept as we might have had in the budget late last year of maybe adding $100 million to the securities portfolio over the course of the year, given the spreads between CMOs and intermediate funding, given the higher short end, just aren't as great as they were last year this time, there is probably not much sense in doing that. We do have an excess of cash right now. We could put some of those into securities, but we're also getting at the Federal Reserve 2.4%, so there isn't as much initiative to do that and to go out with some term maturity there. So that would be my response, you'll see a little bit of an increase here just with the reinvestment in the second quarter. Otherwise, pretty well flat, $3.1 billion.

Stephen Moss -- B. Riley FBR -- Analyst

Okay. That's helpful. And then in terms of fee income this quarter, obviously, seasonally weaker quarter for deposit service charges but perhaps a little bit weaker than what I was thinking. I was just wondering between that and electronic banking fees, was there any unusual noise? And kind of what rebound should we look for in the second quarter here?

Todd Clossin -- President and Chief Executive Officer

Yeah, we did have some items in there in the last first quarter, I guess, comparable quarter last year in terms of BOLI, some things like that, that didn't repeat themselves in the first quarter here. But we also have some businesses like insurance, securities things like that, that are up a little bit. But -- more opportunity, I think, in the acquired markets that we have. But when I look at the other categories in terms of percentage increases, service charges on deposits as well as electronic banking fees, I think service charges on deposits were up 36%.

Robert Young -- Chief Financial Officer, Executive Vice President

36%.

Todd Clossin -- President and Chief Executive Officer

36%. And electronic banking fees were up 22%. Obviously, we're 25% bigger because of the acquisition. So I think they kept pace for the most part on average with that. So if you really compare first quarter last year to first quarter this year, may kind of normalize it based upon the size of the company now this year versus last year and relate that to the percentage increase in those areas. It was pretty consistent, but it is typically a weaker quarter in the first quarter for those areas.

Stephen Moss -- B. Riley FBR -- Analyst

Okay. Got you. And then, obviously, it sounds like the FDIC insurance will help offset some of the Durbin impact in the second half of the year. Just wondering if you guys have any other initiatives to try to mitigate some of that impact. Obviously, the acquisitions were in part tied to that, but just wondering if there was anything else you guys are looking to in terms of -- to mitigate that.

Todd Clossin -- President and Chief Executive Officer

Yeah, we're always looking for ways to generate additional revenue and also focus on costs. So I -- we don't have a specific cost initiative in place other than we're always kind of evaluating, particularly in light of the yield curve flattening earlier this year. We started looking pretty hard -- additionally hard at different expense categories and things like that, they were a little more discretionary that we could pull down. So we don't have a number on that, but we are working through that and trying to quantify something that we could get for the remainder of this year on the expense save side.

And we also continue to address our branch infrastructure as well too, really since the January 2017, over the last two years, we've closed the 11 branches. Now six of them came through the recent merger where we consolidated branches and then closed six, but there were another five that we did on our own. And we're going market-by-market and doing a branch rationalization study. So if you look at -- we've impacted basically 5% of our branches over the last two years. And if you go to the five years prior to that, we impacted about 10%.

So I think a good way to look at it is, every five years, we're addressing about 10% of our branch network in terms of closures, repositioning, things like that. And I think that'll create some expense saves for us as well too. All of those things, I think, have been benefits, and a big part of that is just you want to run the organization efficiently and appropriately, but we also have an eye toward Durbin. We've known for a couple of years, a pretty good idea when that was going to hit. So a lot of the things we've done in prior quarters have been to get ready for that. But we do have a few additional things that we're -- the FDIC insurance, I think, will be a big help, the refund in that category, and then some of the expense things that we're looking at, I'm hoping to take a big hit out of those as well, the Durbin with those expense initiatives.

Stephen Moss -- B. Riley FBR -- Analyst

Okay...

Robert Young -- Chief Financial Officer, Executive Vice President

Also what I mentioned -- on the employee benefits side, again, just to emphasize, there is about $600,000 in employee benefits related to the deferred comp adjustment. It is also shown -- doesn't affect the bottom line because it's an offsetting entry that's made in net securities gains of about that same amount. So we'll try to pull that out for you on a quarterly basis. But the last two quarters, there is been a fair amount of volatility in the markets. You'll see that we had a loss, for instance, in net securities gains/losses in the fourth quarter that was about $1 million, and there would've been an associated entry for the same $1 million then in employee benefits.

So when you compare one quarter to the other, you see that kind of thing moving around. But absent that, I think employee benefits, which would experience some higher payroll taxes in the first quarter, self-security taxes on incentive comp, for instance, and just the normal start back up at the beginning of the year should begin to normalize here. And then you also have the individuals that would've left after the conversion. So we should see some savings in that category given that was a bit of a larger increase item.

Stephen Moss -- B. Riley FBR -- Analyst

Right. Okay, that's helpful. Thanks for that, Bob. And then in terms of just kind of wondering about the M&A environment, what are your thoughts about potential acquisitions? And how are discussions at -- how the activity and discussions these days?

Todd Clossin -- President and Chief Executive Officer

Yeah, I think what we said last quarter still holds true, and that is we feel that we're in a position to move forward if we found the right opportunity back half of this year or sometime in 2020 or 2021. We're not in any hurry. I don't think we feel like we need to do anything. But being in the $12.5 million, $12.6 billion in size, obviously, we're over $10 billion, but to get a little bit more heft over and above that, balance that against execution risk would benefit us -- if were a few billion dollars bigger, it would benefit us from an ROA perspective and everything else. So we're open, but we don't necessarily feel that anything is going to happen immediately. But there is an awful lot of interest, phone calls, things like that, that are going on between bankers and banks, just seems to be pretty active. It may be as a result of the last quarter, I think, when I talked about the fact -- our pause, so to speak, was coming to an end. That may have triggered it, but there is been a lot of interest, but we're going to be prudent about what we decide to do or not do.

Stephen Moss -- B. Riley FBR -- Analyst

Alright. Thank you very much.

Todd Clossin -- President and Chief Executive Officer

Okay. Thank you.

Operator

And our next question comes from Casey Whitman with Sandler O'Neill. Please go ahead with your question.

Todd Clossin -- President and Chief Executive Officer

Hi, Casey.

Casey Whitman -- Sandler O'Neill -- Analyst

Hi. Most of my questions were answered, but maybe can you just elaborate a little bit on the jump in classified loans? Maybe just how much was due to the review of the acquired loans versus downgrades of legacy portfolio? And then I think you referenced maybe the two downgraded relationships in the legacy portfolio being two different industries. Maybe give us a little color as to what those industries were? That's it. Thanks.

Todd Clossin -- President and Chief Executive Officer

Yeah, the two legacy, one was manufacturing, the other was hospitality, and completely unrelated and had been customers for many, many years. So we don't see any trends associated with that. And those loans are well structured, so we're watching them, obviously, we downgraded them, but we don't see any trends associated with any of that. In terms of the review of kind of post-merger review and kind of line things up from a grading perspective, and we do this after every merger, that would've been about $7 million or so of the total. So not -- it's material amount, I guess, but not unusual. And it doesn't reflect any kind of deterioration in those credits, it's just lining them up against the way we evaluate grades against the financial condition of the borrower.

Robert Young -- Chief Financial Officer, Executive Vice President

And indeed, the provision for those would go back to goodwill. It's not really a provision, but it's through the credit mark, Casey, because you're within that one-year time frame. So we take that time to evaluate the risk rates on the acquired loans and then adjust through goodwill, as necessary.

Casey Whitman -- Sandler O'Neill -- Analyst

Great. Thank you.

Todd Clossin -- President and Chief Executive Officer

Thank you.

Operator

(Operator Instructions) And our next question comes from Russell Gunther with Davidson. Please go ahead with your question.

Todd Clossin -- President and Chief Executive Officer

Hey, Russ.

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

Hey, good afternoon guys. Just wanted to seem like a tie down the expense conversation a bit, given the moving parts on cost saves and some of the merit increases. Is there a core efficiency ratio target or bogey you guys are striving toward or would point us to for 2019?

Todd Clossin -- President and Chief Executive Officer

Yeah, I'd say mid-50s. And really, I've used that over the last couple of years as we were -- wanted to get up and over $10 billion in size and everything associated with that, the infrastructure build, increasing risk management and then dealing Durbin and all those types of things, but still keep the efficiency ratio in the mid-50s. And we've been able to do that through decreasing expenses in other areas over time. So obviously, we're going to get two quarters of Durbin this year, we'll get four quarters of Durbin next year, but we were modeling it out, it's less than 1 percentage point impact on the efficiency ratio. Almost 1 percentage point, but not quite. So I'm still feeling like we should be in mid-50s, and that would be the expectation rate going forward.

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

That's very helpful. Thanks, Todd. And then just last for me. I heard you loud and clear on the low to mid-single-digit growth over time and some of the moving parts from a loan vertical, but could you quantify for us or size up for us sort of geographic or regional sources of strength for you right now?

Todd Clossin -- President and Chief Executive Officer

Yeah. We -- I don't see any aspects of our footprint that I would say are going through any kind of severe economic challenges. We've moved pretty significantly in these higher growth markets over the last five, seven years, and those markets have population growth, they have household income growth, and that's all still continuing, and it's tracking in line with the US GDP growth or slightly higher, depending upon the markets that you're in. Even some of our legacy footprints, we're in the right parts of the states that we're in, I believe. Look at Kentucky, we're in Louisville, we're in Lexington, so great cities. West Virginia, we're in Parkersburg, we're in Wheeling, and we're in Morgantown, we're in Charleston, those are really good cities. So we're in the parts of the states that are growing faster a lot of times than the states themselves are. So we don't see any big economic drags anywhere at all. We continue to make investments in all of our different markets based upon allocating resources on the return that we're going to get. So we're trying to be efficient there and to put more resources in markets that have higher growth potential than markets that don't, but we're still investing in market that are showing some growth. And I really don't see any markets that we're in that are going backward in terms of GDP growth.

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

Good to hear. Thanks for taking my questions guys.

Todd Clossin -- President and Chief Executive Officer

Sure.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to Todd Clossin for any closing remarks.

Todd Clossin -- President and Chief Executive Officer

Thank you. I wanted to reaffirm the strength of our underlying operating fundamentals. Again, we remain well positioned for success, I believe, in a variety of operating environments, and we're going to continue to focus upon executing on our defined growth strategies. Long-term profitability, that's really what our approach and what our mission is, and we're not going to sacrifice credit quality or regulatory compliance because we think those are hallmarks of our company. And I want to thank you for joining us today and hope we get a chance to see some of you at upcoming investor events. Thank you.

Operator

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

Duration: 52 minutes

Call participants:

John Iannone -- Vice President of Investor Relations

Todd Clossin -- President and Chief Executive Officer

Robert Young -- Chief Financial Officer, Executive Vice President

Catherine Mealor -- Keefe Bruyette & Woods Inc. -- Analyst

Austin Nicholas -- Stephens Inc -- Analyst

Stephen Moss -- B. Riley FBR -- Analyst

Casey Whitman -- Sandler O'Neill -- Analyst

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

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