First Commonwealth Financial Corp (FCF) 2009 Q1 法說會逐字稿

I would like to welcome everyone to the First Commonwealth's first quarter earnings conference call. At this time, I will turn the call over to Rich Stimel, Communications Manager at First Commonwealth. Sir?

Thank you. As a reminder, a copy of today's earnings release can be accessed by logging on to www.fcbank.com and clicking on the Investor Relations link at the top of the page. Before we begin, I'd like to caution listeners that this conference call will contain forward-looking statements about First Commonwealth, its business, strategies and (inaudible). Please refer to our forward-looking statements disclaimer from the earnings release for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Now I would like to introduce the, President and CEO of First Commonwealth Financial Corporation, Mr. John Dolan.

Thank you, Rich, and good afternoon, all of you, and thank you for joining us on today's call. With me today is Ed Lipkus, Executive Vice President and Chief Financial Officer for First Commonwealth Financial Corporation, and Mike Price, President First Commonwealth Bank. With the release of our first quarter financial results this morning, it's obvious that the current economic environment continues to present many challenges which we must (inaudible) the external factors affecting our performance, our foundation is strong, we believe many opportunities still exist. For the first quarter of 2009, both GAAP net income and core net income decreased from the same period last year. GAAP net income declined $9.4 million primarily as a result of other than temporary impairment charges of $9.9 million on four trust preferred securities and four bank equity securities. Core net income decreased 25% from the first quarter of 2008 as a result of (inaudible) loan losses on higher and higher noninterest expenses. Noninterest expense for the first quarter increased $4.5 million over the first quarter of 2008, primarily due to higher FDIC costs, employee benefits and salaries.

Given the economic outside factors and the increase in our noninterest expense we continue to aggressively work to identify inefficiencies that may exist within our business operations. We believe a disciplined approach to this process will help us eliminate expenses associated with the inefficiencies. We're committed to reducing expenditures by $3 million with our goal to keep noninterest expenses flat over last year excluding the FDIC expense increases. Although we remain focused on controlling expenses, we're still committed to our growth strategy, and we want to make sure we're not eliminating items that are central to our long-term growth. We believe we can achieve the $3 million objective within these constraints.

The provision for loan losses increased $5.1 million compared to the same period in 2008. This year-over-year increase stems from the growth in our loan portfolio and increases in allocations to reflect current economic conditions within our portfolio. We recognize $18.5 million in net charge-offs in the first quarter which resulted in a stronger credit quality within our remaining portfolio. When you look at the asset quality of our portfolio, nonaccrual loans decreased $26.9 million from the end of the previous year. Net charge-offs of $19 million were primarily due to three commercial credit relationships which accounted for $16.3 million, or 84%, of the net credit losses in the first quarter 2009. We expect net charge-offs to return to more normal levels going forward. Two to three credits were transferred to other real estate owned, and we believe we'll see favorable outcomes due to the strong market interest we've experienced in those properties. Again, these actions resulted in a cleaner remaining portfolio. That's why we believe that the 0.93% of allowances as percent for total loans is adequate.

We added a table disclosing our loans where we're a participant. There was $9 million in nonaccrual loans at March 31st, 2009 in the participation loans, and zero were past due 90 days but still accruing. I hope you find this additional transparency helpful. Ed will provide greater detail around these numbers shortly. Although I'm disappointed in both our reported net income and core net income results I do believe our fundamentals are strong and we will emerge from this economic environment better positioned to compete within our market.

For the first quarter of 2009, our loan portfolio increased $39 million. When you think about it, even in the face of economic uncertainties, we basically added the equivalent of $500 million plus bank to our operations without purchasing a bank. We've also worked hard to achieve a nice balance between our robust loan growth and our growth we've seen in our checking and savings base. We've grown our average transaction and savings deposits by $289-- $289 million year-over-year. Progress continues to be made in the household growth as well. We grew in client households in the market where a declining population is occurring by winning customers from our competition. Throughout 2008, and most recently the first quarter of 2009, we have seen greater alignment of our small business banking group and our consumer services group.

Both business DDA and business loans are up significantly year-over-year. And there's much opportunity to be taken advantage of in terms of integrating our lines of business. Michael will delve much deeper into the lines of business performance shortly. But it basically boils down to the fact that we're fully committed to our sales and service process and the growth we expect it to produce. We expect the combination of our cost savings measures and the refinement of our sales and service processes to drive our long-term growth in a sustainable manner. I also think the very nature of the competitive landscape provides with us great opportunities for long-term growth.

The announcement of a new competitor that has entered the market to purchase 57 of the former National City Branches from PNC we feel presents a great opportunity to compete for a portion of these clients. We also believe that the National City Branches that ultimately become PNC locations will continue to provide us with additional opportunities to acquire new client households as well. All told, we anticipate that $2.2 billion of the former National City deposits are in play within a one-mile radius of existing First Commonwealth Branches.

Although numerous challenges were in front and center in the first quarter of 2009, we believe we feel pretty good about how we're positioned to deal with these challenges. We've strengthened our brand and built brand awareness and acceptance within our market. We believe this both qualitatively, through our branding and customer service surveys, and quantitatively through the continuous growth of households. We also continue to maintain a very strong customer retention rate as well as significantly higher than average account life. Mike will address these areas a little bit later as well. I guess my only comment would be now is obviously not the easiest time for banks to build their brands, but that's exactly what we're doing. Consumers appear hungry to do business with companies who take the time to know them and to do what's right for them. Building this trust is not easily done, but when it's done right the results are dramatic. To this point it would appear that the fact that we didn't take TARP funds has proved to resonate well to the people of Western Pennsylvania and helped us solidify our First Commonwealth brand in the minds of our consumers. We believe this will continue to be a strong point of differentiation.

Before I turn it over to Ed, I'd like to say that the first quarter financial results clearly demonstrate that we're not immune to economic challenges. However, we have to be conscious and thoughtful about how we prepare for and deal with these challenges. We do not anticipate that this uncertainty and these (inaudible) to leave a great opportunities-- leave open great opportunities for First Commonwealth. We're well positioned to take advantage of these opportunities as many of our competitors are forced to play defense while we're on the offense. We remain optimistic that this will lead to significant growth opportunities both organically and potentially through acquisitions in individual branches or whole banks. I'm particularly appreciative of the dedication of First Commonwealth's employees throughout these tough times. We continue to win new customers and build deeper relationships with the customers we already have the privilege of serving.

Following this path will not only lead us through the challenging times but will make us stronger when the economy does become more stable. I don't know exactly when that'll be and-- but what we're doing right now we're sure will be ready to take full advantage of the opportunity when it does occur. And now to walk you through the numbers I'd like to turn it over to Ed Lipkus. Ed?

Thank you, John, and good afternoon, everyone. The four main topics I'd like to cover in our call today would be, A asset quality, we'll go over our charge-offs and the related improvement in nonperforming loans, as well as go over the investment in our trust preferred pooles and equities and the other than temporary impairment losses we incurred. Second, I'd like to cover our loan growth for the quarter and give some color around where the growth came from. Third, I'd like to cover our 15-basis-points drop in net interest margin. And fourth, a brief discussion around the increase in noninterest expense and our decrease in noninterest income.

As John already indicated, our nonperforming assets did improve with nonaccrual loan balances declining some $26.9 million to $29 million compared to last quarter. This improvement was mainly due to taking possession of two properties in lieu of foreclosure. These properties were transferred to other real estate owned. We did charge-off $19.5 million, primarily in commercial loans in the first quarter, of which we previously reserved $14.8 million. This included a charge-off of a $4.3 million out of market participation loan in Florida, which we placed into nonaccrual last quarter. The remaining charge-offs of $15.2 million were on Pennsylvania-based loans that we provided for in prior years, which also included the large $31 million credit placed into nonaccrual in 2007. So the quality of our portfolio improved. Our allowance as a percentage of nonperforming loans improved from 94.12% at December 31st, to 142.4%.

We have possession of properties that are marketable and we have interested buyers lined up. Although the allowance as a percentage of total average loans decreased to 93 basis points, we believe that this level is sufficient, given the improvements in our asset quality and our current expectations of future credit losses, as well as the rigorous modeling that we applied to determine our reserve levels. There was no change in our loan loss methodology. Total delinquencies, including 90 days and still accruing, were 1.06% of total loans at March 31st, 2009 compared to 1.08% at March 31st, 2008. Delinquencies did increase approximately $9.5 million in the 30 to 89-day category here in the first quarter. However increase is due mainly to one $5 million commercial real estate loan participation that matured and is currently in a renewed status, and three construction loans in Pennsylvania totaling about $4 million.

We did record an $8.4 million other than temporary impairment charge on four trust preferred pooles, and a $1.5 million charge on four bank equities. We also adopted new accounting guidance which caused us to bring $6.5 million in noncredit losses on Pre TSL VII, which we wrote down last year back through retained earnings. So there was a net of tax of $4.2 million credits through retained earnings as of January 1st. So of the $9 million in other than temporary impairment charges recorded in 2008 on our trust preferred pooles, only $2.5 million was credit related. I do want to point out that any deferrals or defaults in the near term on the four pooles will likely result in an immediate credit impairment charge going forward. The table we provided in our financials provides you with additional information for excess subordination as well as the percentage of collateral that is currently in default or deferral.

At March 31st, 2009 we had nine bank equity investments in our investment portfolio. These investments totaled about $5.3 million with an unrealized loss of $255,000. There are eight local Pennsylvania-based institutions, and one Ohio-based institution in this portfolio. We did continue to build on many of the same opportunities we saw in 2008 in a our loan portfolio and we remain focused on growing both the commercial and consumer line of business. Mike's going to provide some additional color on these lines of business in a few minutes. I do want to point out that our loan growth was reported at $39 million, but if you take into consideration the transfers from nonaccrual into OREO and first quarter charge-offs, growth would have been [$81.2 million] or 7.3% (inaudible). Our loan growth in the first quarter was mainly due to increased commercial real estate originations. We did see a little bit of this growth offset by some runoff in the construction as well as the C&I portfolios.

We did provide some additional financials, as John mentioned earlier, on our participation loans. It shows that we've got about 50% of our participation loans in Pennsylvania, and half of them outside of Pennsylvania. And you'll see that a good part of those credits are two contiguous states in which we follow our customers into. Now these participation loans do include the shared national credit loans that we disclosed in the last quarter. These out of Pennsylvania participations represent approximately 13.7% of our commercial portfolio and about 8.4% of our total loan portfolio. I also want to point out that the table shows clearly that we haven't had any significant deterioration in this portfolio and speak to the present condition of the portfolio pretty positively.

On margin, net interest margin for the first quarter was 3.72%. Now that was an increase of 44 basis points from the prior year period, but it did represent a 15 basis point decrease from the fourth quarter. The tightening that we experienced during the first quarter was mainly due to yields coming down faster on assets than our ability to reduce deposit costs. And most of this decrease can be associated with (inaudible) and the fact that we had a hard time repricing our deposits much lower given the extraordinary low rate environment that we find ourselves in. The effect of the normalized LIBOR spread on the margin for the first quarter versus the fourth quarter of 2008 was approximately 11 to 13 basis points. As of March 31st, approximately 40% of our commercial loan portfolio was tied to LIBOR and 14% was tied to prime.

On noninterest expense, the core noninterest expense increased $2.7 million of 6% from (inaudible) quarter as a result of increases of $1.3 million in FDIC insurance costs and $1.2 million in health and 401(k) expenses. We also saw an increase of $316,000 in collection repossession and other real estate-owned expenses. I want to further point out that in the first quarter of 2009 we incurred a front end load cost for unemployment compensation, which we typically see every first quarter of the year, of approximately $572,000 compared to the fourth quarter of 2008. Lastly on noninterest income, excluding our impairment charges and security gains, we did see a drop this quarter of linked and year-over-year. The decreases are primarily due to lower overdraft fees due to shift in consumer behavior. We also saw lower trust income because of sharply (audio difficulties).

However, we feel key fundamentals within First Commonwealth Bank in our lines of business are sound and continue to improve. Just a couple things here. First, interestingly, net interest income is up 23% year-over-year as loans are up some $564 million. Low cost DDA and savings deposits are up on average $289 million year-over-year. We continue to supplement our funding costs by borrowing versus purchasing money with CDs. We're comfortable with the strategy because our household growth has accelerated over the last year, and we feel like we've just lost single service households, primarily rate shoppers. Second, we have improvements in sales productivity and the changing competitive landscape really are the two key reasons that we have nice core growth in commercial and consumer franchises in the first quarter.

Third, our household acquisition was above 1% in the first quarter and the mix of households continues to improve. When we call out the mix, a larger portion of our new households over the last few quarters are anchored by the all important core checking account, and we're obviously pleased with that. Fourth, we also begin some extensive brand and customer survey work. In short, our customers are very satisfied and loyal by bank standards, and particularly by big bank standards. This dovetails with what we feel is we have a lower attrition rate of households, which has been a key ingredient for our household growth. We feel that we're carrying our 2008 momentum into the first quarter of 2009. Our commercial services or corporate banking is our strongest offering, but encouragingly, consumer services or retail banking has made significant strides and the important small business capability is growing.

In wealth management, First Commonwealth Insurance Agency is now the largest portion of net income and has really made an impressive turn around in the last few years. Let me make a few brief comments about each line of business. First, in commercial services or corporate banking-- and I might add we've really gotten to a line of business mentality in the last year and really have called out each business and understand the dynamism within it. We have good financial measures here that are bolstered by a good first quarter loan growth of some $45 million.

Our commercial deposit growth was flat in the first quarter, and we feel in large part due to seasonality. Ed discussed credit quality, and I would just add that we look at the last quarter or the last year, we have a fairly rigorous internal credit rating system and we feel that the credits that we're putting on at slightly higher spreads, I might add, are of better quality than the overall credit rating of our overall portfolio. So that's good as well. In commercial banking we also have good strong household growth and we feel like our retention is high, and although our backlog is off-- off of our 2008, our pipeline continued to build through the first quarter.

Shifting gears to our second business line, consumer services or retail banking, we have some sound fundamentals in DDA and savings growth that yielded some $20 million in growth in the first quarter. We also feel we have good traction in our consumer loan growth. Our consumer loan growth perhaps doesn't appear as strong because we're running off our first mortgage portfolio, and we have been for a few years. But we're pleased with our branch base consumer loan growth. As previously mentioned, we're feeling strain in our noninterest income. Our incidence rates in overdraft and NSFs are off significantly, and similarly we're seeing the same pattern in debit card usage and also there our average dollar amounts are down as well. Consumer and small business households were up nicely through the first quarter in retail banking. Also, our consumer household growth in Pittsburgh is roughly two times the pace of our non-Pittsburgh markets. And that same number for small business is six times as great in Pittsburgh as the rest of our footprint, and so that's a good sign.

We're also seeing improved sales discipline and good year-over-year strides in sales productivity. When I talk about sales productivity, I'm talking about number of accounts. And I'll just share two numbers with you. We're up 17% year-over-year in personal DDAs through the first quarter and 58% in business DDAs. And I think this will be our second straight year of appreciable improvement here. Our two key areas of focus in retail banking are continuing to improve our service and sales culture, number one. And secondly, growing our small business capability. And we feel the small business is critical to our overall growth plans.

From a P&L perspective and factoring in the ripple effect of the business owner, small business typically accounts for almost 50% of retail banking profits, with just a sliver of the households. It is routinely 50% of noninterest bearing DDA accounts at most banks. It's also the economic growth engine of our economy and accounts for almost 50% of the private sector output. And we've made quite an investment here in our small business franchise and really expect that it will drive quality earnings growth for years to come. The early results are encouraging, as our sales productivity in small business is up significantly year-over-year. And in the portfolios, small business loans and deposits, we've really reversed years of runoff in the last two quarters.

Lastly, I would just mention our third business line, wealth management. There our insurance agency revenue was up year-over-year. Unfortunately, our trust revenue was off more due to some market declines and less assets under management. However, again, we have good household growth and our cross-sell of wealth management product is improving nicely. In all three of our core businesses we've done a solid job realigning score cards, goals and incentives with the things that really matter to shareholders. In these plans we've replaced volume with revenue, we've added balance sheet measures and we're equally weighted loans and deposits and we're also moving towards P&L measures. And this is a big deal and it builds a foundation for ongoing success. Despite the disappointing first quarter earnings we feel each core business is improving and that we're well positioned for the future. Thank you.

All right, we'll open it up for questions.

(Operator Instructions). The first question is from Damon DelMonte of KBW. Please go ahead.

Hi, good afternoon, guys, how are you?

Good, Damon, how are you?

Good, thanks. Just a couple questions regarding the current loan loss reserve level of 93 basis points. How do you kind of look at that level now that you've had those charge-offs this quarter and it came down as a result of that? How do you look at that level with the worsening economy out there? Do you feel that it'd be more prudent to maybe be building the reserve going forward, and especially if you continue to have the growth that you've seen in loans?

That's a good question. And we have a pretty disciplined process, as you know. We're required to, to determine what's the level, the appropriate level of that. This is some judgment involved. And I believe that that judgment is primarily driven by the performance of our portfolio. So we think that while-- when and if that happens, we would have to be allocating additional charges, but we feel that right now our losses probably will be more in the normal range than they have been in the past few quarters here. So until the accounting rules change, we won't be able to be making any extra adjustments in there. Ed, do you want to add anything to that?

Damon, I think it would be inappropriate for us to just start stock piling since we've always been a strict student of GAAP here. But I do want to say that our model does factor in economic deterioration, it factors, as John said, the qualities of risk in our portfolio. And we've appropriately accounted for this and we haven't changed our methodology. So we think we're adequate right now.

Given the size of your out of market exposure, have you sort of changed any of your internal rating methodology to maybe take a closer look at that? I mean given that you have exposures in states like Ohio and New York, Virginia, West Virginia, other market places that may not have held up as well as Western Pennsylvania.

I can say that the credit underwriting criteria hasn't changed in the Company. So although there's some deterioration, and this is really -- I guess it's dangerous to just broadly characterize other states deteriorating faster than Pennsylvania, or Western Pennsylvania, I think that the deals that we've gotten into were all done with the strict credit underwriting that we've applied here. And so we're not looking at it any differently than we would with our own-- in our own Western PA footprint.

Just one more question then I'll let you guys go. The loans that are in market in Pennsylvania, did you originate those, or are you just one of a couple of banks that are participating?

The ones that are showing up on that list as participations, we are the participant, not the lead. Is that, is that -- yes, that's correct.

So for like regulatory purposes, we could say that you have $764 million of shared national credits, or no?

No, those will not be shared national credits.

Okay.

This includes all participations which includes the next that we disclosed last quarter.

Okay, okay, thank you very much.

The next question is from Rick Weiss of Janney Montgomery Scott. Please go ahead.

Hey, guys.

Hi, Rick.

Hey, let me just follow up with Damon's question. When we're talking about the loan loss reserves, I just want to see if I get this right. With this three loans, the primary culprit, I guess, original balance is $39.5 million. If I take the provisions from the prior period and this period, was $16.3 million now and was $14.8 million that you had before, so you wrote it down essentially to owe-- these three loans combined, about $8.5 million, or about 22% of the original value? Am I doing this one right?

No, it doesn't sound right. When you add the -- what went into the other real estate owned, I think that that's -- the remaining values of two of the credits. And one of them we charged-off completely. So that's your primary three credits there.

Okay. All right. Let me go back to that one. Second, if wanted to just talk a little bit about the loan growth. I saw it's come back I guess more of your historical kind of level versus last year. Is that kind of-- like would you expect that kind of range for this year, like a 1% to 2% growth per quarter, something like that?

Well this quarter was just a little bit distorted because of the significant -- the $20 million charge-off. So add that back into the growth that would have been a little more normal. Ed, you want to --?

Yes, it's-- we're projecting about 7.3% annualized based on the first quarter's activities, including those charge-offs. But I think we want to talk about the pipeline what we're seeing versus last year. I think the best person to speak to that would be Mike.

Yes, the pipeline last year was unprecedented, and I would say that the pipeline is building and we're about a third -- or we're down about a third of the pipeline at this time last year, which quite frankly, is really pretty good, and we're pretty excited about.

Okay and let me talk-- just with other expenses, I guess, John I think you said you're trying to keep it relatively flat from a year ago excluding the FDIC?

That's correct.

Okay. But it looks like just on a year-over-year basis, I'm wondering what occurred there, because it looks like it did it go up even if I factor in the other expense by-- not by all that much. Was there anything else in there?

Well, yes the FDIC expense, but I'll let Ed talk about the rest of it. Ed do you want to--?

Sure. Well we''ve added some branches. We're building infrastructure with our consumer line of business to go after that small business market, so there's a little bit of increase there due to some additional salary expense, nothing significant. I can tell you we're filling positions out here faster. I think the economic conditions, although unemployment is up, we're finding that we can fill our positions that much faster, so that's actually a good news kind of thing. But our employee benefit costs are up. Medical costs are-- we're self-funding, so sometimes you're going get quarters where you just have more claims than you anticipated, and that happened here on a quarter-over-quarter-- year-over-year basis. Those are kind of high level looks there, Rick.

Right. Do you have higher pension costs too?

We don't have a pension plan.

(Inaudible) pension, okay. And the FDIC assess-- is this kind of like the excluding the idea that there might be a special assessment, would this be the kind of run rate that you would expect from-?

Yes, I think you can expect to see here, we had the FDIC put a seven basis point increase in their premium. We're losing our credits, so I think you can look at a reasonable run rate somewhere $1 million, $1.5 million a quarter here.

Okay, got you. Okay, thank you.

Thank you.

Our next question is from Mac Hodgson of SunTrust Robinson Humphrey. Please-- one moment-- please go ahead, sir.

Hey, good afternoon.

Hi, Mac.

A couple times you referred to expectations that charge-offs would return to more normal levels. I'm curious if you could elaborate, what do you consider more normalized charge-off levels?

Well I would say looking at the trends, it's somewhere closer to the 30 basis points.

Okay. And was the credit you said you charged-off completely, was that -- if I did my math right, that was not the Florida credit. Is that right, or was it the Florida credit?

It's the $4.3 million Florida credit.

Okay, so that was charged all the way down there. Okay. And another question, Ed, on the margin. Are you expecting additional pressure from here? How should we think about the margin going forward?

I'd pressure-- we're borrowing short-term at extremely low rates. We certainly don't see those borrowing rates going down any further. Competition is starting to come back on rates-- on CDs and some savings product. And so I can see margins slipping maybe a little bit here, but I think we're still seeing-- on the other hand we're seeing some decent spreads on our loan products, and we do hold our costs pretty well on our savings and money markets. We don't lead with rate. So I think you're probably going to see something, at least for the next couple quarters, in line with what we come out with in the first quarter.

Okay, great. And maybe just the last question, John, on acquisition opportunities you kind of mentioned you wanted to be in a position to take advantage. Are you seeing more opportunities? What would you be most interested in? Would it be end market, contiguous, out of market? Could you elaborate there?

Well, yes, I can give you a couple things. One, no we're not seeing a lot more interest, nobody likes evaluations. But having said that, I want to keep my eyes open because I believe that some of the banks that aren't willing to put up with the challenges are out there, and they're going to be looking for strategic alternatives. And I think that other banks are going to be looking for raising capital, methods to raise capital, and they may be interested in some branches. So right now mostly I'd be looking in footprint, and it would have to take a different dynamic because of the opportunities in front of us right now, a different dynamic in a new market with some strength to that management team before we'd be looking to move outside the market.

Okay, great. I appreciate it, thanks.

Sure.

The next question is from Matt Schultheis of Boenning & Scattergood. Please go ahead.

Well good afternoon, gentlemen.

Hey, Matt.

A quick question for you, couple quick questions. I just want to make sure I understand the impairment charge I guess tied to that Pre TSL VII. It sounds like you had to take a one-time adjustment to OC I when you adopted the accounting standards, and then you had to write it back down due to a credit issue. Is that correct?

Yes, the adjustment into the retained earnings was a positive opening adjustment of a $4.2 million after tax.

Right.

And then we had a write-down that credit impairment on Pre TSL VII in 2009's earnings.

So basically in 2008 you wrote it down and then in 2009 you got to write it down again?

Yes, FASB is doing great things.

Yes, absolutely. I'm just making sure I got that right.

Yes, that is funny.

Yes so they asked you guys so I won't (inaudible)--

We're not laughing here.

Won't put it in there. Quick question for you regarding credit metrics. You said you're expecting charge-offs, et cetera, to return to more normal levels. Why? I mean what do you see that's going to make that happen?

We don't see any chinks in the portfolio.

So it's really-- it's specific to your portfolio versus, say something you're seeing in the general economic conditions in the markets where you're competing?

That's correct. The general Western Pennsylvania is-- well, it has -- employment increased, employment-- the decrease in employment hasn't been the same as other markets. Real estate values have held up. There's a lot of things going well in our market. And then the quality of the loans that are out of the market are still very strong and these aren't your speculative land loans. And real estate-- residential construction loans and that kind of thing. So we feel that they're good quality. And again, they're not showing signs of significant stress.

Okay. I mean I'm looking at-- looking down the street there, and obviously the guys down the street are having a little bit different situation. And some of that's out of market, but overall judging from their experience, I mean it would look like the Western PA market is not holding up as well as it was, say six months ago.

I can't speak for them, but what I had heard is more of their problems are from the out of market credits, not within the footprint.

So you're-- in other words, you're seeing-- you're saying your markets still holding up, and you're-- the market overall is holding up, and you've taken care -- you've cleaned up your problem credits at this point, for the most part.

Yes, what we could do, yes.

Okay. Thank you.

Thank you, Matt.

Our next question is from Tom Alonso of Fox-Pitt Kelton. Please go ahead.

Good afternoon, guys, how is everybody doing?

Good, Tom, how are you doing?

Not too bad. So one of the-- so the loans that you moved around this quarter in the MPAs, one of those was the large credit that you had had previously disclosed, correct? You'd said that before.

Right.

Okay, so I mean is that-- is that resolved the way you thought it was going to be resolved? Or did things turn out a little better, a little worse? Just trying to get a little-- a sense of maybe how that worked out for you.

It's-- we're still resolving, and we're still cautiously remaining optimistic that we'll have a good result here.

Okay, I got you. Okay. So those are the ones obviously I guess that moved over to OREO then, got you. Okay. And then the participations which include the [snic], do you have a comparable number for the fourth balance? I think in the fourth quarter we just got just the [snics] not the participations.

Yes, the increase was about $3 million, $4 million over last-- over December's levels. So-

That's total participations.

Total participations, yes.

Okay.

So we didn't -- it didn't move much. While you're on the subject, Tom, on the participation loan schedule, I do want to point out that if you look under real estate construction, the $43.5 million number for Florida, it appears that that is overstated by $13 million. We had a $13 million Residence in loan to an Arizona company. It's a Marriott Resident Inn next to the Mayo Clinic, which is now fully built and it'll be coming out of our construction portfolio here. We just didn't classify it properly. The bar where it resides in Florida. So I just want to point that one bit of clarification out for the world to know, that we have a minor reclassification here.

So it shouldn't be in Florida or it shouldn't be in construction, or should there be an Arizona category? Is that what you're---?

Yes, it'll be-- it'll go into other. That's really, I think, our only Arizona property, and it's a Residence Inn, fully constructed, next to the Mayo Clinic and it'll be coming out of the construction portfolio shortly.

Okay, okay. All right so then on the overall increase, I mean was that run down in the out-of-state increase in the Pennsylvania piece? I mean can you give us a little bit of color as to sort of the dynamics in there?

The increase of $3 million over last quarter?

Yes, I mean did something-- did PA go up $20 million and the other piece went down $17 million or I mean-- or was it kind of all just one loan in one spot? I'm just trying to get a sense of sort of what changed. If there was growth in there, where it was. If there was growth-- more growth in the Pennsylvania piece and maybe you guys backed away from some of the out-of-state stuff or--

We're trying to get a little bit of color here. I don't think we have a lot of movement here. Hold on one second.

Sure thing.

So we have about $10 million, $15 million that decrease in the out-of-state portfolio, and the rest was an increase in the in-state. Yes. So we had more Pennsylvania activity then we-- that we had stuff paying off out-of-state, which was then funded with additional advances in-state.

Okay, so does that mean-- okay so was that by design or is that just the way it worked out? I mean are you guys purposely kind of pulling back from the out-of-state stuff given what's going on in the world these days, or is that-- it just happened to work out that way?

I think it just happened to work out that way. But a lot of these-- we follow customers that we're already familiar with, so I think that it depends on what's happening with their business as well.

Okay, that's all I had. Thanks, guys.

Thank you.

Gentlemen, at this time I show no other questions in the queue.

All right, thank you, everybody.

That does conclude today's conference. You may now disconnect your lines.