Fulton Financial Corp (FULT) 2008 Q1 法說會逐字稿

Good day and welcome everyone to the Fulton Financial first-quarter 2008 earnings results conference call. This call is being recorded.

At this time I would like to turn the call over to the Vice President and Corporate Communications Manager, Ms. Laura Wakeley. Please go ahead.

Good morning and thank you for joining us for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the first quarter of 2008. Your host for today's conference call is Scott Smith, Chairman, Chief Executive Officer and President of Fulton Financial Corporation. Joining him is Charlie Nugent, Senior Executive Vice President and Chief Financial Officer.

Our comments today will refer to the financial information included with our earnings announcement, which was released at 4:30 yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Information and then on News.

Please remember that during this webcast, representatives of Fulton Financial Corporation may make certain forward-looking statements regarding future results or future financial performance of Fulton Financial Corporation. Such forward-looking information is based upon certain underlying assumptions, risks and uncertainties. Because of the possibility of change in the underlying assumptions, actual results could differ materially from these forward-looking statements.

Risks and uncertainties that may affect future results include pricing pressures on loans and deposits; actions of bank and nonbank competitors; changes or adverse changes in economic, political or regulatory conditions; and continuation or worsening of current disruption in credit and other markets, including the lack of or reduced access to and the abnormal functioning of markets for mortgage and other asset-backed securities and for commercial paper and other short-term corporate borrowings; the impact on assets from adverse changes in the economy and in credit and other markets and resulting effects on credit risk and asset value; actions of the Federal Reserve Board; creditworthiness of current borrowers, the Corporation's success in merger and acquisition integration; and customers' acceptance of the Corporation's products and services.

Fulton Financial does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which such statements were made. Now I would like to turn the call over to your host, Scott Smith.

Good morning, everyone. Thanks for joining us. I will give you an overview of the first quarter and then Charlie will provide additional details on our financial performance. And then, as always, we will be happy to respond to your questions.

We reported earnings per share of $0.24, which is even with the first quarter of 2007, but up 9.1% over the prior quarter. The benefits of a number of key initiatives executed in 2007 can be seen in our results. These results, in what continues to be a continuing challenging economic environment, came from a combination of factors that we believe will continue to positively impact our financial performance. But as we all know, there is continued uncertainty about the future direction of this economy.

Four key things characterized the first quarter. They were loan growth, revenue generation, tight expense control and asset quality. We continued to see growth in commercial and home equity loans. A factor contributing to our home equity growth was a new product we introduced in the fourth quarter of last year called OptionLine. This product gives customers the flexibility to choose the fixed and floating-rate portions of their line. Based on early results, customers continue to respond well to this offering, and we believe the product has good growth potential.

First-quarter commercial loan growth continued at a good pace, and information from our banks indicates that the pipeline is holding steady, but is not robust. We continue to monitor asset quality very closely. Nonperforming loans increased as a result of slowing economic environments. We have analyzed our loan portfolio very carefully and have increased the loan loss reserve to provide for potential losses.

Our actual charge-offs were similar to the fourth-quarter results. As always, we will continue to watch our loan quality metrics very closely for any further deterioration, and will continue to use conservative judgment in determining our loan loss reserves.

Since home equity loans are getting so much attention lately, you should know that our loans have been underwritten by our banks and made to customers in those local markets. Conservative underwriting standards were used and we have a well-seasoned portfolio. We have not experienced significant asset quality deterioration in our home equity portfolio to date.

From a deposit standpoint, core deposit funding has been one of our greatest challenges. Deposit balances decreased in all categories despite marketing and promotional efforts throughout the holding company. We try to keep our time deposit rates both reasonable and competitive across the company at all time. Our core deposit promotional campaigns are producing an increase in our number of accounts, but we are not seeing corresponding growth in balances. We will continue to market aggressively to grow new and existing households with the expectation that deposit balances will increase over time.

Our net interest margin improved slightly on a linked-quarter basis as a result of our deposit costs falling a bit faster than our loan yields, at least for the quarter. However, with the actions we've already seen from the Fed and the likely continued actions o the downside on rates, we believe that growing net interest margin will continue to be a challenge. Let's face it, we can only decrease deposit rates so far. And frankly, we think we are about there.

The good news is that the wholesale funding costs have fallen at the same time, so continued low-cost funding is available to expand our loan portfolio. And as a result, we continue to see quality loans.

Our current strategy is to protect the balance sheet via conservative management of our asset growth and to grow capital organically via efficient operations and prudent retention of earnings. As we just announced, we are maintaining our dividend. Future changes will obviously be a function of a combination of our ability to generate capital organically to our earnings, as well as various economic factors.

Another key to our first-quarter numbers was in the mix of our non-interest income. As you may recall, this has been an area of significant focus for us for the past several years. There are three areas in particular that performed well -- cash management, merchant services and deposit account related income. We continue to expand our cash management menu, most recently with the addition of remote deposit capture. Some of our affiliate banks did not have this technology capability to offer this product in the past, so there is still good growth potential throughout our footprint.

Merchant services and debit card related revenue continue to be a reliable revenue generator as well. With the introduction last November of a corporatewide automated overdraft analysis program, we are able to pay more items presented by our customers across all channels, in addition to reducing fee waivers. Revenue generation from this initiative has exceeded our expectations. We should continue to see benefit from this program for the remainder of the year.

Despite the positives I've just mentioned, you see that our non-interest income still declined. While we don't like to see that number to down, we rest easier having completely exited the national wholesale mortgage business. Those prior sales gains were a large contributor to our non-interest income in the same quarter last year.

Our ongoing watchful eye on expenses continues to provide benefits to the bottom line. Reduction of our salary and benefit costs by over $1.1 million is a direct result of the workforce management initiatives we began in mid-2007, as well as a corporatewide focus on standardization and centralization. And we continue to make progress both in our lean process improvements and technology initiatives. These savings are more difficult to quantify, but we know our efforts will continue to improve our efficiencies.

On a related matter, late last week, we issued a separate news release announcing a new joint marketing strategy that includes the sale of our approximately $85 million credit card portfolio. The terms of this agreement will generate an initial gain this year of approximately $10 million and a subsequent revenue-sharing agreement will provide an ongoing stream of revenue from new and existing cardholders. We will continue to sell credit cards in our branches and still issue them in the name of each of our affiliate banks.

Our new strategic partner, Elan Financial Services, will provide an expanded menu for our customers, as well as the focused expertise and critical mass to help us grow our card base more effectively in the future. Elan offers a greater array of rewards-based cards which, as you know, is important in this business line.

As a result of the transaction, we will continue to generate revenue from our credit card customers and eliminate the credit and operational risk from the sold portfolio. We will also free up the capital that supported that portfolio. This transaction is good for our customers and our shareholders.

Well, I think I've touched on the most significant aspects of our first-quarter performance, so at this time, I'd like to turn the call over to Charlie Nugent for his comments. Charlie?

Thank you, Scott, and good morning everyone. Thank you for joining us today. Unless otherwise noted, comparisons are this quarter's results to the fourth quarter of 2007.

As Scott mentioned, we reported earnings per share of $0.24 for the first quarter, which was a 9% increase from the fourth quarter and flat with the first quarter of last year. Net interest income increased $2.2 million, or 1.8%. Average earning assets grew $303 million, or 2%, which included growth in loans of $213 million, or 2%, and growth in investment securities of $91 million, or 3%.

Our loan growth occurred in the commercial and commercial mortgage categories. Growth was primarily in Pennsylvania and our New Jersey market. Commercial loans grew $108 million, or 3%, with $64 million in Pennsylvania and $25 million in New Jersey.

Commercial line of credit usage increased slightly to approximately 41% at the end of March compared to 40% at the end of December, and 38% at the end of last March. Commercial mortgages increased $109 million, or 3%, with $51 million occurring in Pennsylvania and $35 million occurring in New Jersey.

Construction loans decreased $49 million, with declines occurring in all markets. Were down about $18 million in Maryland and $9 million each in Pennsylvania, New Jersey and Virginia.

Residential mortgages increased $29 million, or 3.5%, with $17 million in Pennsylvania and $12 million in Virginia. And most of this growth was in traditional adjustable-rate mortgage products. Home equity and consumer loans increased slightly, primarily due to the OptionLine product that Scott mentioned earlier.

Investment securities increased $91 million. As expectations for further market interest rate reductions increased towards the end of [2000] and the first quarter at 2008, we underwent a process of repositioning our investment portfolio and prepurchasing future cash flows. During the first quarter, we purchased $330 million in securities at an average yield of 5.15%, sold $166 million at an average yield of 3.4%, and realized a slight gain of $72,000. The result was an increase in our average investments outstanding, improved interest rate sensitivity and a higher overall portfolio yield.

At March 31, the unrealized gains attributable to the fixed-income portfolio were $22 million compared to unrealized losses of $6.6 million at December 31. Corporation realized net gains on security transactions of $1.2 million compared to net losses of $537,000 in the fourth quarter. During the first quarter, we realized $3.6 million on the redemption of 84,000 shares of Visa, as well as a $1 million gain on the sale of MasterCard stock. In addition, we recorded $3.6 million in losses related to impairment of our bank stock holdings that we deemed to be other than temporarily impaired.

Attracting and retaining reasonably priced customer deposits continued to be a challenge in the first quarter. Customer funding was down 2.2%. We have continued to use our Simply Switch promotion to generate core deposits. While the balances do not show increases, we are optimistic about its success based on new account openings. Also, our new deposit committee is working on developing additional deposit-gathering promotions.

Non-interest-bearing demand deposits declined $59 million, or 3.5%, while NOW accounts declined $36 million, or 2%. These decreases have occurred primarily in business and municipal accounts, as slower economic growth has placed pressure on cash balances.

Savings balances were relatively stable for the quarter. However, money market accounts decreased $42 million, or 3%. $18 million of the decline occurred in our Internet money market account and the remainder in business and municipal accounts.

The decline in time deposits was $84 million, or 1.8%. $50 million of that was in brokered certificates of deposit and $22 million was in the jumbo category of certificates of deposits. Our funding shortfall was covered by increases in the wholesale funding. We borrowed $209 million more in Fed funds, we took out $174 million in federal home loan bank advances, and we repoed securities equaling $123 million.

Our net interest margin for the first quarter was 3.58%, a 2-basis-point improvement from the fourth quarter. Yields on earning assets decreased 37 basis points, while the cost of interest-bearing liabilities declined 48 basis points. Going forward, we expect that further declines in interest rates would result in further margin pressure.

The provision for loan losses increased $4.4 million to $11.2 million in the first quarter. Net charge-offs were 15 basis points in both the first and fourth quarters. $4.4 million in net charge-offs this quarter was primarily in construction and real estate related loans, but diverse from a geographic standpoint. The largest single charge-off was under $750,000.

Nonperforming assets to total assets increased to 90 basis points at March 31st, compared to 76 basis points at December 31 and 40 basis points last March. Non-accrual loans increased $21 million, and other real estate increased $3.4 million. At March 31st, nonperforming loans were spread across most loan categories, with $36 million in commercial loans, $30 million in commercial mortgages, $28 million in construction loans and $25 million in residential mortgages.

Excluding security gains, our other income increased $690,000, or 2%. Trust income declined $530,000, or 5.7%, primarily due to a decline in brokerage fees. Fulton Financial Advisers, our trust and investment affiliate, is undertaking a transformation of our brokerage business from a transactional-based business to more of a relationship business model. Although this transition has put downward pressure on brokerage revenue in the first quarter, we believe it will position us for growth as we go forward.

Service charges on deposits increased $610,000, or 4.6%. Cash management fees were up $132,000, or 4%, due to growth in customer accounts. Overdraft fees increased $600,000, or 8.5%, due to the rollout of a new courtesy overdraft program on November 1 of last year. Other deposit service charges were down $120,000, or 4%. Other service charges and fees increased $190,000, or 2%. Growth in foreign currency revenues and merchant fees were offset by the seasonal decrease in debit card fees. Our currency revenues are entirely generated based on processing customer transactions.

Gains on mortgage loan sales increased $130,000, or 6%. Residential mortgage loans sold were $163 million in the first quarter, compared to $170 million in the fourth quarter. However, the spread on sales increased.

The other category increased 290,000 to $2.8 million in the first quarter, and that increase was due to gains on the sale of SBA loans, as well as other non-recurring items.

Operating expenses declined $1.8 million, or 2%. Salaries and benefits increased to $2 million, or 3.8%. Employment taxes were up $1.4 million, representing the increase that seasonally occurs between the first and fourth quarters. Total salaries were up $1 million, representing an increase in bonus plan accruals. However, base salary expense was actually down slightly. Lastly, employee benefit expense declined by $400,000, primarily due to the changes in the Corporation's retirement plans.

Occupancy and equipment expense showed a seasonal increase of $670,000, or 5%. Advertising expenditures declined $560,000, or 16%. The fourth quarter included significant expenditures related to deposit generation activities. Other operating expenses decreased $4.1 million, or 18%. After adjusting for the following items, that increases -- an increase of $88,000 or 0.5%.

The fourth quarter included the $1.5 million loss accrual related to our exposure as a member of Visa USA. As a result of Visa's public offering in the first quarter, we were able to reverse $1.4 million of this accrual.

The fourth quarter also included a $1.1 million write-off of trade name intangible assets recorded related to our recent internal bank mergers and $1 million in cost for the special review related to the Resource Mortgage operation, an additional $750,000 in costs that were expensed in the first quarter per this project.

With respect to Resource Mortgage, we recorded an additional provision for loss of $800,000 in the first quarter. Outstanding repurchase requests increased $2.7 million during the first quarter, from $19.8 million of outstanding requests at the end of the year to $22.5 million at the end of the first quarter.

Foreclosed real estate totaled $18.3 million at March 31 compared to $14.9 million at the end of the year. The majority of this other real estate in both periods was attributable to Resource Mortgage. 18 properties were added during the first quarter at a total value of $5.3 million.

Sales and other proceeds of $2 million and additional write-downs of $300,000 were taken on the portfolio. There were no significant gains or losses on the eight properties sold during the first quarter. Of the foreclosed properties held at March 31, over 70% are in Virginia or Maryland.

Total reserves were $17.8 million at March 31 compared to $18.6 million at December 31st. We believe that the reserves recorded as of the end of the first quarter for the known Resource Mortgage issues are adequate. However, continued declines in collateral values or the identification of additional loans to be repurchased could necessitate additional reserves in the future.

Our effective tax rate decreased from 28.8% in the fourth quarter to 25.9% in the first quarter. We reversed $2 million of tax reserves related to the calculation of disallowed interest on tax-free securities. This was based on a favorable outcome in a tax court case, and the Internal Revenue Service's announcement that it was not going to pursue an appeal.

Thank you for your attention and for your continued interest in Fulton Financial Corporation. Now we will be glad to answer your questions.

(OPERATOR INSTRUCTIONS) Rick Weiss with Janney.

Good morning. Scott, a question -- talking about your cost of funds and it has come down tremendously on a sequential quarter basis. I was wondering how are you able to reduce the rates on your savings in demand accounts by so much?

Well, Rick, we have been trying to be very prudent about that. As you know, it's difficult; the competition is pretty stiff out there. But I think everybody kind of recognized that rates were coming down, and there was some backoff in most competitors. And then we just were very careful about watching what the Fed was doing and trying to follow that. No major secret, just being very prudent about what we could do there.

Would you think this is about it, or like if the Fed cuts another bps, can rates -- do you still have room to cut some of those rates?

As I said, I think we are about as far as -- I mean, there is a little room Rick, but we are getting pretty close to the end in terms of getting back any rate reductions on the deposit side. There is a little room in some of the CDs.

And what has happened in the past -- whether it will this time or not I'm not certain -- but as CD rates go down even below where they are, people will tend to leave their money in their checking accounts, just waiting for a better rate. So hopefully if that happens, we will get some relief by people just sitting on some funds for a while until the rates improve.

Okay. At this point, with the mortgage backing from Resource, is that all behind, would you think? Or could you -- or is there any more adjustments to be made with the reserve?

Well, as we've said, for everything we know now, we're adequately reserved. This is -- as you know, this is a crazy world we live in right now and things can happen. But based on what we know there and what we have been able to do in analyzing all of that, as we worked our way through it, we think we've got the reserves to take care of it. But you know, there could be changes today that could impact that. But based on what we know, we are adequately reserved.

One final question. Because I would call this kind of one of your traditional, consistent quarters. Would you start looking at M&A possibilities again, going forward from here?

We have continued and will continue to look at M&A possibilities. Frankly, in this uncertain times, it is difficult to make the numbers work, when you factor in the cost of finances, given what banks are paying to raise capital now, and the uncertainty about their portfolios. Even with a lot of due diligence, it's a tricky business to do right now.

So I would say if we saw something very strategic that made sense for our shareholders, it is possible. But I wouldn't expect a lot of M&A activity for any of us in the short-term.

Okay, thank you very much.

Collyn Gilbert with Stifel Nicolaus.

Good morning. Charlie, could you just give a little bit more color as to the migration in the MPAs this quarter? You kind of ran through it, but then -- and just sort of what you are seeing in terms of potential migrations going forward.

And then also too, of the $7.7 million increase in the reserve, again remind us how much was related to Fulton versus Resource?

The count on the nonperformings, we had an increase of about $21 million in nonaccrual, and other real estate at $3.4 million. All of the increase in the other real estate were related to loans that were generated by Resource and we repurchased and now we have the property.

In the other nonperformings, they were across the different banks and different geographic areas. There was $6.4 million at Fulton Bank, our lead bank, and it was -- the primary increases were some medical equipment at a hospital and there was an office building that was put on nonaccrual. Up in the Lehigh Valley we had a $6.4 million increase that was due to a golf course and new office building. Up in northern New Jersey, it was based on a developer -- two developers, in fact. And in the Maryland market, it was also a developer that was put on nonaccrual.

But it doesn't seem like any significantly -- there are no significant ones, I don't think, and they are different banks in different areas. But a lot of it is related to real estate and construction.

Okay. Okay. And then of the reserve increase, how much was again Resource versus Fulton?

We merged Resource into Fulton Bank and --

I though you may have said what the -- that you did set aside a certain reserve or provision for Resource.

No, the provision went up throughout -- we had a nice increase in provision. It went from -- last quarter it was $6.8 million and it went up to $11.2 million. It went up slightly at Resource Bank. But generally, it's up across all the banks.

Okay, so the fact that you had, I think you had said, $2.7 million in additional repurchase requests through the Resources, you are not boosting the reserve or charge-off assumptions to that pool --?

I'm sorry, Collyn. The repurchase requests are booked in the separate reserve; it's not in the loan loss reserve. When we get repurchase requests, we book a reserve for that. And we had an increase of $2.7 million in repurchase request. When we analyzed and looked at the appraisals, we booked an additional provision for that $800,000.

Oh, okay. So the $800,000 was tied to that? And that goes right into the reserve; you don't see that come through the loan loss provision line?

No.

Okay, okay.

And then when those loans -- the loans are turned over to us, the reserves are netted against it --

Yes, okay --

-- reserves. And when it goes into ORE, it's under net also.

Okay. And what were the purchase requests in the fourth quarter?

The fourth quarter -- I think it was -- I guess it was about $4 million or $5 million. But most of that we had already identified as a result of our review at the end of the third quarter. Most of those we had known about, and they were reserved for.

The provision we booked in the fourth quarter I think was minimal, was $100,000. Because nearly everything we found out about was already reserved for.

Okay. Okay, great. Thank you.

Mac Hodgson with SunTrust Robinson Humphrey.

Good morning. Let me just follow up quickly on the last question. The $800,000, that does float through the income statement somewhere, doesn't it -- in other expenses?

Yes, yes. It goes through operating risk loss.

Okay, that is right.

And then we have a separate reserve for the repurchased loans coming in from Resource Mortgage.

Okay, got you. Scott, you made a comment in your prepared remarks about the loan pipeline being steady but not robust. I'm just trying to read into that if you think loan growth from here will be consistent with the first-quarter level or maybe just kind of compare it to where you saw it in the first quarter.

Well, I think we went into the first quarter with a fairly strong pipeline. And we have what I characterized earlier as a good pipeline but not robust. So you can draw your own conclusions. We are not overly concerned about having quality loans to book. But we are not expecting huge increases.

Okay, got you. And maybe back on the reserve again. As a percentage of loans, it went up this quarter, and I just wanted to be sure there wasn't any change in methodology or if you guys wanted to comment on plans to further build that reserve ratio going forward.

I would say we continue to use the same models. Where there are opportunities to use judgment, we are trying to be conservative. We've tried to -- where we have some problem situations, update appraisals so we can have at least the best idea about what the properties are worth. So, it's basically the same routine we've been going through.

Okay. Maybe lastly, Charlie, on the margin, I think the margin was obviously strong this quarter compared to most banks, what they've been reporting. Maybe comment on your expectations when the Fed stops cutting and starts going in the other direction, what that does from a margin standpoint.

Boy, as they cut, it's going to put pressure on the margin when it stabilizes. I think a lot is going to depend on deposit growth and how we fund our loans. Do we do it via deposit growth or do we do it via wholesale funding? It's hard to tell.

Okay.

We've been doing everything we can to try to help the margin. We repurchased a lot of securities. We had advances roll off if we kept short-term. As CDs, we've moved the rates down. We were thinking CDs wouldn't be going up in the short run, so we have been moving the rates down. But I don't see any significant improvement in the margin.

Okay, that is helpful. Thanks.

Andy Stapp with B. Riley and Company.

Good morning. Help me understand -- your provision was up substantially despite fairly flat net charge-offs. Was there a migration of watchlist loans into higher risk categories, or how much was it that or just judgmental increase, etc.?

I would say, Andy, probably a combination of all of those. I said when we get a problem situation, we've tried to get current values on real estate where it's a real estate related situation. Given the uncertainties out there, there are judgment factors in the model where we've been able -- or where we have been, we think appropriately, leaning toward the conservative side of that.

But it isn't anything specific or a specific customer. It's across the board geography; it's just general slowdown; and our anticipation of trying to factor in this uneasiness about just how the second quarter is going to unfold.

I think we are going to know a lot more June 30 than we know now. We are entering the traditional spring season for housing, and it's just very difficult to call what that is going to mean. If we get a decent spring, then that is going to help things. If we get a dull spring, then I think we've got -- and we is all of us -- have issues around real estate that are going to continue to be a problem.

So if you look at the winter, the activity wasn't terrific, but then a lot of winters, the activity in real estate isn't terrific. So we are really, really watching what is going on right now to help us decide where this is all going to go.

Okay. How did your loans past due 30 to 89 days compare quarter-to-quarter, linked-quarter basis?

You know, delinquencies, Andy, were down just 1 or 2 basis points.

Okay.

Compared to the end of December, compared to the end of the first quarter, is down, I think, 3 basis points.

Okay. And you touched a little bit on deposit pricing. Has that stayed about the same? And maybe you could also provide some color on competitive loan pricing.

Both remain very competitive. You hear talk in the press about banks being more concerned about pricing for risk and trying to get a return on it. And I think that is probably accurate in the large business market. But in the small to medium-sized businesses where we are, there is still a pretty significant competition for rate with quality credits. We all want the quality.

So I don't think we've seen a huge amount of relief there, although it is not as bad as it has been. I think everybody is in the same boat and trying to get some margins. I would say it's not as good as what I'm hearing is happening in the markets of the large corporations, but it isn't quite as tough as it has been at certain times in the middle to small business market.

On the deposit side, it varies. There seems to be a competitor in every market that seems to want money pretty bad and keeps changing. We have, as you know, pretty significant market share in some of our markets, and so as kind of the market share leader, we feel like we need to lead in pricing changes, and so we've tried to be careful to not push the whole market up by being too robust in our pricing.

We've tried some different marketing strategies to get some CD money flowing and they've had some results. But, as I said earlier, I think we are in a rate environment where CD customers are going to be difficult to move out in the maturity spectrum. But we continue to market and look at different ways to appeal to customers for deposits.

And primarily -- one of the primary ways we are doing that is just trying to get market share every place we are, and taking advantage of whatever opportunities there are out there to get market share. And that is why you see some of our marketing costs up -- we are hoping that as we penetrate those markets with larger share and as things improve, we will have a larger customer base from which we can gather deposit-related fees and more deposits.

It's a tough environment.

Okay, thank you. That is all for me.

David Darst, FTN Midwest.

Good morning. Could you give us at little more information on the wealth management changes, maybe how much of that decline was related to market values and a timeline for when you expect the new product to be complete and up and running and --?

Okay. The brokerage business that we've been in for some years, we made a strategic decision to change it from a somewhat transaction-oriented business to one of a more of a relationship. So we've changed the product mix that folks are selling, we've changed the compensation system and are taking a new approach. So that what we believe going forward is that our brokers will be managing their relationships more -- typically like we do in the rest of the Company, and that the fees will be more recurring rather than once and done.

And we've changed providers for that. We are moving from PrimeVest to Raymond James. And all of that is -- that transition, while people are getting retrained and reoriented about how their compensation system works, and the fact that the markets haven't been terrific for the past quarter -- has all impacted our revenues there.

But we suspect going forward, as we build this -- and it will take some time, because it isn't -- once we are all ready and done and it is all switched over that it then goes back to -- these revenue streams have to build. But they will be more consistent then over time is what we believe.

Scott, do you think -- will they be soft for another quarter or two?

Unless the market changes pretty dramatically.

I'm talking about the transition.

Well, I think the transition should be behind us this summer.

Okay. And then how about -- you mentioned the overdraft, increase in that income, and deposit fees. Was that product or fee increase implemented during this quarter or was that --?

November of last year.

Okay. And then could you give some color on the impairment that you took in the securities portfolio? Were those -- you're not in any funds; those are direct investments?

As you may know, or probably know, we've had a bank stock portfolio for years that has been very good to us for many, many years. Right now, all of us are -- the prices of our stock aren't where we would like them to be. And we had a few banks where we felt like the prices declined to a point where it was called permanently impaired. And by that, we didn't expect it to recover any time soon, so we wrote them down.

Okay, thanks.

Frank Schiraldi with Sandler O'Neill.

Good morning, guys. Just a couple of questions I had left. I guess, Charlie, you were talking about the breakdown in other revenues, other income. Was there some non-recurring -- or what you consider some non-recurring stuff in there that you could break out once again?

The biggest thing in there was in the other income category, Frank, we had about $200,000 in gains from SBA loan sales. That was about it.

That was about it, okay.

Yes.

And then on the tax rate, I know you had mentioned some tax credits that benefited you in this quarter. I know there was a change to the Pennsylvania tax law from '07 to '08. I'm just trying to get a sense for a good tax rate going forward. I think you've talked 30% before -- has that come down a bit or no?

You know, we had an adjustment to our tax reserves related to a recent court decision. And we had booked some reserve just in case it went the other way --. But usually, our effective tax rate over time would be about 29.7% to 30%. That is what I would use if I was modeling it.

Okay.

And for the fourth quarter, it was 28.8%.

Okay. And then finally, I'm just trying to understand some of the flow of the repurchases and repurchase requests for Resource. So you had $2.7 million in repurchase requests in the first quarter --

Yes.

-- right? And you brought $5.3 million onto the books. I guess that includes some previous repurchase requests, right?

Yes.

Okay. So now in the NPAs, is Resource production only in OREO?

No, there are $18.1 million in nonperforming loans in the nonperforming category. And there is $17.3 million in other real estate related to Resource. And the $22.5 million we have in requests are still -- we haven't taken over the loans yet.

The amounts -- that $18 million we had in nonperforming loans, that was net of the reserves, and we booked the asset. And the same for the ORE.

Okay. So it's 18 plus 3.4 in OREO, that is what is Resource now?

Well, it's $18.1 million in nonperforming loans and it's $17.3 million in ORE. And there is another $22.5 million in outstanding repurchase requests, so the total would be $57.9 million related to Resource.

Okay. And obviously, those repurchase requests have all been provided for?

Yes.

And do you just have offhand last quarter's -- at the end of December -- what those numbers were, what that total was?

Yes. it was $55.5 million.

Okay, that is helpful. I don't know if you could share with us, but is it possible to -- is there any repurchase requests come across so far in this quarter?

We usually don't get them until the end of the month.

All right. Thank you.

So we wouldn't have that. Thank you.

(OPERATOR INSTRUCTIONS) Sandra Osborne with KBW.

Good morning, guys. Just a couple of questions. First, were there any significant interest recoveries or other non-recurring items impacting the net interest margin this quarter?

No, not this quarter. But Sandra, if you do a comparison, in the fourth quarter, we had interest recoveries that would total 2 basis points. And if you go back to the first quarter of '07, we had a significant interest recovery that would have given us an extra 13 basis points back then.

Okay, thanks. And if we could just go back to credit. Can you discuss the factors driving the reserve build this quarter, and maybe give us an update on what kind of scrubbing you are doing in the construction portfolio, and to what extent you may be concerned about collateral value declines?

Let's start with the end. As far as the construction portfolio, we've been very carefully analyzing that for several quarters now. And have been, as I mentioned earlier, where we felt there were some issues getting new appraisals and trying to make sure the values that we are counting on are there. So that has been going on for some time and it continues. What was the first part of your question?

If you could just discuss the factors driving the reserve build.

As Charlie mentioned, it's just -- I think it's the slowing economy, it's across the geography that we cover. I would say more than half of it is real estate related. But there are some other -- as there always are -- some other issues out there with some commercial loans where some individual customers have issues.

But, it's not -- I guess the good news is it is fairly diverse across the footprint, which means we don't have an area or a particular portfolio where we have huge problems. The bad news is it is worse than it has been.

Okay, great. Thanks.

Gerard Cassidy with RBC Capital Markets.

Thank you, and good morning, guys. On the repurchase requests, when do you think they may expire, where you just won't be receiving those anymore? Is there a timeline that you could give us that you might see that end?

Gerard, at the beginning of last year, they were related to early payment defaults. They are all behind us because we stopped those programs related to those. But we can still have repurchase requests if they think there is buyer misrepresentation involved. So that could still come in.

I see.

We did an extensive review at the end of the third quarter and the beginning of the fourth quarter, looked through, spent a lot of money, had some very competent people come in and review the whole -- all the mortgages generated down there. And we think we have adequate reserves and we have everything identified. But you are never sure.

Sure. Regarding the OREO, when it moves into OREO, and I think you mentioned there's about 17 million of those properties in OREO now. What are you finding in terms of how long it takes to sell the properties, what the cost is to sell the properties? And then what type of price are you receiving relative to what you are carrying in that in OREO?

Gerard, it's tough to sell them over the winter. And as Scott mentioned, the spring buying season is coming. But we sold eight properties during the first quarter, and it was basically sold -- those eight properties were sold at carrying values. I don't know if that is good or that's bad, but we did sell eight properties and there were no significant gains or losses on that.

And what about the costs associated with selling eight properties? is it just the broker's commission or is there something on top of that?

Our ORE expenses are up. When we take over the properties, there's insurance, there's real estate taxes, they have to be improved a little bit. So it's having an effect on our ORE expenses. And that goes right through to the income statement.

Sure. And then finally, I noticed sequentially the improvement in the margin was helped, of course, by the funding costs coming down. And it seemed like your short-term borrowings and the advances from the Federal Home Loan Bank really came down quite nicely on a sequential basis vis-a-vis the total interest-bearing deposit costs. Also total interest-bearing deposits on an average basis look like they were down sequentially, and the borrowings were up.

Is that a strategy you're going to continue with or is that something temporary or can you share some color on the funding side?

Yes, we spread out our advances. And you are right -- we had advances mature, especially in February. They were maturing at a [5.40] rate. The borrowing rate at the Federal Home Loan Banks for a comparable advance to that would be 2.8 or 2.75%. So that is a factor in moving down that cost of funds.

And the advances are staggered out. So we have a little maturing each quarter.

Would you see the advances in short-term borrowings becoming a larger portion of the funding liabilities vis-a-vis deposits as we move through the year, or will deposits regain some growth and overtake the growth on the institutional borrowings?

I hope that we are going to have relatively good deposit growth, and I think we will -- we are more competitive with our CD rates. And if the Fed keeps on decreasing rates, they go below 2%, as Scott mentioned, we're liable to see a nice buildup in our core accounts on deposits. But we're doing everything we can to get deposits, and hopefully they will start coming in again.

But if we go out and we have to fund our loan growth with borrowings, the borrowing (technical difficulty) seem to be so cheap that it wouldn't affect our margin in mature loans.

Thank you.

There are no other questions at this time. At this point, I'll turn the conference back over to Scott Smith for any additional or closing comments.

Thank you. I'd like to thank you all for joining us today on our conference call. We hope you'll be able to be with us again for our second-quarter earnings call, which is scheduled for July 23rd at 10 AM. We will talk to you then.

Again, this does conclude today's conference. You may disconnect at any time.