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Edited Transcript of WSBC earnings conference call or presentation 17-Apr-19 7:00pm GMT

Q1 2019 WesBanco Inc Earnings Call

Wheeling Apr 20, 2019 (Thomson StreetEvents) -- Edited Transcript of WesBanco Inc earnings conference call or presentation Wednesday, April 17, 2019 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John H. Iannone

WesBanco, Inc. - Former VP of Investor & Public Relations

* Robert H. Young

WesBanco, Inc. - Executive VP & CFO

* Todd F. Clossin

WesBanco, Inc. - President, CEO & Director

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Conference Call Participants

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* Austin Lincoln Nicholas

Stephens Inc., Research Division - VP and Research Analyst

* Casey Cassiday Whitman

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Catherine Fitzhugh Summerson Mealor

Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP

* Russell Elliott Teasdale Gunther

D.A. Davidson & Co., Research Division - VP & Senior Research Analyst

* Stephen M. Moss

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the WesBanco First Quarter 2019 Earnings Conference Call. (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.

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John H. Iannone, WesBanco, Inc. - Former VP of Investor & Public Relations [2]

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Thank you, Cole. 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 1 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 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 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?

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [3]

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Thank you, John, and good afternoon, everyone. On today's call, we'll be reviewing our results for the first quarter of 2019. Key takeaways from the call today are: we're 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 continued 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 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 dividend by 6.9% or $0.02 to $0.31 per share during February. This was the 12th increase during the last 9 years, representing accumulative 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 while not sacrificing long-term shareholder value for near-term gains. As such, I'm very pleased with the strong quarterly trend in 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 4-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, we 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 had 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 continue to be strong across all of our markets, helping to drive 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 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 her 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 and 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 to demonstrate the fact that WesBanco prides itself on delivering large bank capabilities with a 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 of America's best banks for the ninth time by a leading financial magazine earlier this year, we were just named to S&P Global Market Intelligence best-performing regional bank ranking for 2018 as the #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 actually 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 #7 rank in the United States based upon solid cores -- 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?

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Robert H. Young, WesBanco, Inc. - Executive VP & CFO [4]

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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 3 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 2 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 and 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 8-figure range each month. These deposits, which helped drive the 4.8% year-over-year organic growth in noninterest-bearing demand deposits, helped to maintain a loan-to-deposit ratio in the high 80% range. They also added 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 noninterest-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 2019's 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 acquisition's 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, noninterest 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 -- Farmer -- 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 loans lock 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 2 acquisitions' operating expenses. The Farmers Capital's 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, noninterest expense increased $17.0 million or 31.3% compared to the prior year period. This year-over-year increase is reflective of the 2 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 net securities gains in noninterest income, and $0.7 million in higher seasonal payroll taxes as well as higher health care 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 remained 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 nonperforming 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 post acquisition for Farmers Capital and in conjunction with 2 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 remained 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 2- 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 quarter.

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 midyear merit increases and still expect marketing 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 midyear.

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?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today comes from Catherine Mealor with KBW.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [2]

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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 was how you said it. So I guess my question to you is do you feel like -- we have 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 there's still some dynamics within the portfolio that you feel like could keep the portfolio more flat this year?

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [3]

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Yes. And thank you. Well, 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 into 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 2. The headwinds, which we talked about in the comments, are what's really been impacting it. And I think with the last couple of quarters, actually, the consumer portfolio is really the indirect piece. The other pieces, 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 going into the secondary market, things like that on the commercial real estate side, multifamily 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. With such a -- it's still -- we're still a small bank, right, with the loan portfolio and everything. A $20 million loan is a 1% annualized loan on an annual basis. So you get 2 or 3 loans that close in a C&I portfolio or a 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 whether they close in April. So it's hard on any one quarter-to-quarter to say whether we're going to have the single to low digit -- mid-digit growth rate that we've historically had. 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 nothing, just flat for a quarter, because of the lumpiness of the business. So not trying to be evasive, but that's just kind of how I try to work with it. I feel really good about where we're at with the lending teams, the people we've hired, the stability that we've got in a lot of our areas, the pipelines, the economy seems to be rolling along. Yes, I don't see any big headwinds there. So my expectation would be -- is that we would return there sooner rather than later. But again, it's pretty granular when you look at it on a quarter-by-quarter basis.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [4]

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Okay. That's really helpful. And then now maybe turning to the margin or for the -- then turning to the margin. So the -- 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 saw some really nice improvement in your loan yields throughout last year. If I look at it this quarter, pulling out the accretable yield, there was still -- I think it was about 6 steps increase. So how do you think about -- are there still levers within your loan portfolio to where there's still kind of the lag impact of higher rate? Although, we're not expecting rate hikes this year. I mean, how much of a lag do you think we still have it in the portfolio to still get some upward movement on your loan yields as we move through the year, despite the way the curve looks right now?

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Robert H. Young, WesBanco, Inc. - Executive VP & CFO [5]

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Well, let me take that, Catherine. First of all, I wouldn't think on the residential mortgage side. There's a lot of upside because mortgage rates are indeed down over the last year. It depends upon the mix of fixed and variable there, and again, whether you're selling in 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 1/3 of that is 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 2, 3 and 5-year fixed-rate lending, and those typically have floors in them. And so there is still some inherent pickup, 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 to is the repricing that occurred in those loans that had a timing this quarter for repricing. Even those loans that are variable on a 3 or 6-month time frame, there would have been, as the calendar turned into January, a fair amount of repricing, both in the C&I portfolio as well as 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. But I think we're well protected by having a lot of those loans repriced 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.

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Operator [6]

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And our next question comes from Austin Nicholas with Stephens.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [7]

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Maybe we can just talk about deposit growth for a minute. Natural gas prices have kind of fallen to, call it, 3-year lows over the last couple of days here. And 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 8-digit kind of number to kind of slow down towards the 7-digit number, given that -- given what we're seeing with natural gas prices?

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [8]

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Yes, it's still been really tight -- within a tight range in that -- we say low 8-figure, but it's $15 million or so per month, and it's within a couple million dollars. That seems to be what is coming in. And even with some of the pricing going down, I think production level is 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 footprint. So that has really helped us a lot. And then with our loan-to-deposit ratio where we're at right now too, we've got the benefit of being disciplined around how we're handling our rate structures, which drives the low beta. If I get to a mid-single-digit loan growth rate, then we'll start to eating up some of that low loan-to-deposit ratio, but we have a long way to go before I would need to really start to address any kind of a rate strategy. Though we have some -- I think some ability to keep rates low for quite a while with the fed pausing. That's just -- seems to take some of the -- not that we were seeing a lot of pressure, but whatever pressure was there, it seems to have been abated.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [9]

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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 kind of your comments that you just mentioned. But maybe just on the public funds side, that -- those costs kind of are more sensitive and kind of increased in the first quarter, I guess. As you look out to 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?

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [10]

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I would say a little bit of both. Where you saw the beta, deposit costs go up, that's where it's been. We do match the CD rates from time to time in the branches and things like that, but it's the municipal deposits where those are bid out and pretty competitive. While a lot of that has washed through already, there have been a couple of acquisitions in the last few years that were big in the public fund business too. So we're working through those as well, too. I mean FFKT, Farmers, it was just closed out last August and just converted it here earlier in 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 did as well. So I would say, we're part of the way through, I think maybe most of the way through our portfolio, but partly through some of the acquired portfolios. I don't see it being a dramatic increase or a dramatic number, particularly in light of the fed pause, but these are important customer to us in our markets, and we do a lot more with them than just public funds. So we want to stay competitive.

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Robert H. Young, WesBanco, Inc. - Executive VP & CFO [11]

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And then a follow-up I would make is that's about a -- it's over $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.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [12]

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Understood. So -- and then 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 going kind of going into the remainder of the year, just as you paired some of the flowing betas, you're obviously deposit advantaged in some of the slight natural repricing you have in the kind of commercial side of the book?

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Robert H. Young, WesBanco, Inc. - Executive VP & CFO [13]

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I guess how I would answer that is, yes. We do expect really the same guidance that we provided last quarter. A relatively flat core margin. Some headline reduction because purchase accounting will drop a basis point or 2 per quarter. But I'm looking at that [3 49] consistent number for the last 2 quarters. And again, there is 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 a basis point or 2 because 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.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [14]

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

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Robert H. Young, WesBanco, Inc. - Executive VP & CFO [15]

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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 to 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 whether we're going to be able to use it. It really depends upon the shape, it depends upon when the DIF, deposit 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 will be used in 2020.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [16]

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

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [17]

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Yes.

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Robert H. Young, WesBanco, Inc. - Executive VP & CFO [18]

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Correct.

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [19]

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And here's a comment on expenses, too. We -- 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 are not part of the combined organization anymore more. So as we said, you get 75% of those cost saves this year, and that should really start to materialize in the second quarter.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [20]

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Okay, great. And 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?

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [21]

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Yes, 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 2 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.

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Robert H. Young, WesBanco, Inc. - Executive VP & CFO [22]

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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.

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [23]

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

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Operator [24]

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And our next question comes from Steve Moss with B. Riley FBR.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [25]

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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.

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Robert H. Young, WesBanco, Inc. - Executive VP & CFO [26]

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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 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 at this time, there's 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.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [27]

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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?

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [28]

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Yes, 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 there is 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%.

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Robert H. Young, WesBanco, Inc. - Executive VP & CFO [29]

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36%.

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [30]

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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.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [31]

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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 -- to mitigate that.

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [32]

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Yes, 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, that 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 2 years, we've closed 11 branches. Now 6 of them came through the recent merger where we consolidated branches and then closed 6., but there were another 5 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 2 years. And if you go to the 5 years prior to that, we impacted about 10%. So I think a good way to look at it is, every 5 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 towards Durbin. We've known for a couple of years, a pretty good idea when that was going to hit. So a lot of 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.

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Robert H. Young, WesBanco, Inc. - Executive VP & CFO [33]

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Also I mentioned on the employee benefits side, again, just to emphasize, there's 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 2 quarters, there's 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.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [34]

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Right. Okay, that's helpful. 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's activity and discussions these days?

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [35]

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Yes. 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 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's an awful lot of interest, phone calls, things like that, that are going on between bankers and banks, just seems to be pretty active. And maybe it's a result of the last quarter, I think, when I talked about the fact that our pause, so to speak, was coming to an end. That may have triggered it. But there's been a lot of interest, but we're going to be prudent about what we decide to do or not do.

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Operator [36]

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And our next question comes from Casey Whitman with Sandler O'Neill.

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Casey Cassiday Whitman, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [37]

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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 2 downgraded relationships in the legacy portfolio being 2 different industries. Maybe give us a little color as to what those industries were? That's it.

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [38]

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Yes, the 2 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.

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Robert H. Young, WesBanco, Inc. - Executive VP & CFO [39]

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And indeed, the provision for those would go back to goodwill. It's not really a provision, but it's through for the credit mark, Casey, because you're within that 1-year time frame. So we take that time to evaluate the risk rates on the acquired loans and then adjust through goodwill, as necessary.

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Operator [40]

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(Operator Instructions) And our next question comes from Russell Gunther with Davidson.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [41]

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I just wanted to see if I could 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 towards or would point us to for 2019?

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [42]

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Yes, 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 with 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 2 quarters of Durbin this year and we'll get 4 quarters of Durbin next year, but when 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.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [43]

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That's very helpful. 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?

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [44]

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Yes. 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 and there's some higher growth market over the last 5, 7 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 U.S. GDP growth or slightly higher, depending upon the markets that you're in. And 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, those are great cities, West Virginia, we're in Parkvale, Pittsburgh, we're in Wheeling, 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 market 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.

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Operator [45]

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

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Todd F. Clossin, WesBanco, Inc. - President, CEO & Director [46]

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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.

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Operator [47]

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