Fulton Financial Corp (FULT) 2009 Q1 法說會逐字稿

Good day and welcome, everyone, to the Fulton Financial first-quarter 2009 earnings results conference call. This call is being recorded. At this time I would like to turn the call over to Vice President Corporate Communications Manager, Miss Laura Wakeley. Please go ahead.

Thank you. 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 2009. Your host for today's conference call is Scott Smith, Chairman and Chief Executive Officer of Fulton Financial Corporation. Joining him are Phil Wenger, President and Chief Operating Officer, and 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 we 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 statements reflect the Corporation's current views and expectations based largely on information currently available to its management and on its current expectations, assumptions, plans, estimates, judgments and projections about its business and its industry and they involve inherent risks, contingencies, uncertainties and other factors.

Although the Corporation believes that these forward-looking statements are based on reasonable estimates and assumptions, the Corporation is unable to provide any assurance that its expectations will in fact occur or that estimates or assumptions will be correct and actual results could differ materially from those expressed or implied by such forward-looking statements and such statements are not guarantees of future performance. The Corporation undertakes no obligation to update or revise any forward-looking statements. Accordingly, investors and others are cautioned not to place undue reliance on such forward-looking statements.

Many factors could include future financial results including, without limitation -- acquisition and growth strategies; market risk; changes or adverse developments in economic, political or regulatory conditions; a continuation or worsening of the 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 papers and other short term borrowings; the effect of competition and interest rates on net interest margin and net interest income; investment strategy and income growth; investment securities gains; declines in the value of securities which may result in charges to earnings; changes in rates of deposit and loan growth; asset quality and 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; balances of risk sensitive assets to risk sensitive liabilities, salaries and employee benefits and other expenses; amortization of intangible assets; goodwill impairment; capital and liquidity strategies and other financial and business matters for future periods.

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

Thank you, Laura, and good morning, everyone. Thanks for joining our call. As Laura mentioned, Charlie and Phil Wenger are with me here this morning and Charlie and I have some prepared remarks on the first-quarter performance and then all three of us will be happy to respond to your questions.

We reported diluted net income per share of $0.05 for the first quarter of 2009 compared to a loss of $0.58 the last quarter of '08. Of course we have a long way to go to achieve the results we are intent on delivering our shareholders. We remain hopeful that the remainder of 2009 will show improved economic activity that will help produce improving operating results.

While the quarter produced some positive trends that I will share in a moment, that optimism is quickly tempered by the ongoing challenges in our loan portfolio. As you saw, our overall asset quality showed further deterioration. Be sure that we continue to aggressively manage our nonperforming loan and charge-off challenges. We continue to deploy additional experienced people to our loan workout area.

Despite a reduction in the amount we set aside for the provision in this quarter, we are not out of the woods yet from a credit perspective. We believe that stabilization and eventual improvement in our loan quality metrics are largely contingent on a meaningful and sustainable upturn in economic activity.

You saw that our nonperforming loans net charge-offs increased from the prior quarter. Increases came mostly in the construction and commercial mortgage areas of our loan portfolio. This portfolio includes our builders and developers, sectors that continue to struggle.

As we indicated in prior calls, markets that once experienced the most rapid growth are those that are now in the most rapid decline. For us those markets are in Maryland and Virginia. Difficulties for builders and developers in those areas continue, but we are hearing a bit of optimism coming from those sectors about the spring buying season.

We continue to work closely with all of our homebuilders as we are doing with our construction and mortgage customers. These have been very trying times and we want to do all we can to manage our risk.

I wanted to say a word about our direct consumer and home equity loan portfolio. It's remarkable just how well these are holding up -- that the delinquency rates on these are holding up in face of a retracted recession and rising unemployment. Keep in mind that our lower consumer loan balances were impacted by the sale of our $85 million credit card portfolio early in 2008 as we sought to remove unsecured credit risk from our balance sheet.

Looking back the timing on the sale of that portfolio wasn't very good. We will probably see some pressure on our consumer loan outstanding balances given the increased pace of mortgage refinance activity as consumers refinance their short-term debt into mortgages.

Despite ongoing challenges -- credit challenges there are a few bright spots this quarter and the first area is that of deposit growth. Even with aggressive marketing and promotion during all of last year deposit balances remained flat largely due to a decline in our average account balances as net new accounts did increase. But in the fourth quarter we saw some deposit momentum building that continued through the first quarter.

We saw some growth in core checking and savings balances as we cross-sold CD customers into core relationships. We believed we paid reasonable rates on these deposits and were pleased to gain many new customers with whom we are building long-term relationships. Top priority throughout the branch system is to develop deeper and more profitable relationships by adding core accounts to our time deposit household. Our strategy appears to be working.

Internal metrics show a faster rate of household growth in the first quarter of 2009 compared to the same period in 2008. It's important to note that we do not include a single server certificate of deposit customer in our household account; core deposits are a prerequisite. And as we said in previous calls, we believe there are still six significant deposit market share opportunities in our market; it's up to us to capitalize on them.

We have developed more customer information and employee training around Certificates of Deposit which we believe will provide us longer term reasonably priced funding while meeting the customer's concern for FDIC insurance and preservation of capital.

While we are pleased with our strong time deposit growth, these funds come with a higher cost than overnight funds. That incremental cost combined with a reduction in our overall loan deals put additional pressure on our net interest margin, but provides us a more stable source of liquidity. Charlie will give you the details of this margin compression in his comments.

Over the last quarter we have reduced our reliance on wholesale funding because we believe this is a very good time in the cycle to be building upon our strong retail deposit base. Customers bring us total relationships that wholesale funding does not. These relationships include core deposits, loans and non-interest income-producing products and services that grow over time. That's why ensuring a superior customer experience is one of our top strategic priorities.

Another positive this quarter is the pickup in our residential mortgage loan refinancing activity and the nice boost it gave to our other income. We've seen applications more than triple in the last 60 days. In addition, we are seeing an increasing trend toward applications for purchasing of homes. Purchase money now comprises 30% of our volume.

Mortgage rates, as low as they are, combined with some of the lowest real estate prices we've seen in decades, consumers are getting the message that this may be the home buying opportunity of a lifetime. Quantify this activity for you, during the first quarter we closed on $100 million in purchase money mortgages, that pace shows no sign of slowing.

Incidentally, foreclosures in our real estate mortgage portfolio remain at the low levels we reported on our previous call. Of the 19,259 mortgages owned and serviced as of March 31, only 132 are in foreclosure. Other expenses are well-controlled, although we've reported a significant charge related to auction rate securities held in customer accounts in our wealth management subsidiary. We continue to see benefits from our past and present focus on expense control and expense reduction.

As you recall, in 2007 we made some changes to our employee benefit program, reduced our work force and consolidated a number of functions (inaudible). We look at controllable core operating expenses linked-quarter, expenses were flat. Continue to review all expenses that relate to areas (inaudible) for potential elimination, curtailment and postponement as we've done with a number of our client branches.

Thank you for your attention. Now Charlie will provide details on our first-quarter financial performance and when he concludes we will be pleased to take your questions. 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 last year. As Scott mentioned, we reported net income available to common shareholders of $8 million or $0.05 per share. As we did last quarter, we have summarized the more significant items impacting our earnings on the last page of the financial attachment to our press release.

Our core banking earnings continue to reflect the challenging economic environment. Total average earning assets increased slightly with loans growing $81 million or 1% and investments increasing $95 million or 3%.

Although total loans grew only slightly, we saw strong growth in commercial, commercial mortgage and home-equity loans. This growth was offset by declines in construction loans, residential mortgages and consumer loans. Our commercial mortgages grew $83 million or 2.1% while commercial loans grew $79 million or 2.2%. About two-thirds of the growth occurred in Pennsylvania with the remainder in New Jersey and Maryland.

As expected, we have seen our loan growth moderate in the first quarter. On an ending balance basis commercial mortgages grew 1.3% and commercial loans grew one half of 1%. Contrary to media reports, we are still very much in the lending business; however our lenders are reporting weakening demand on the commercial side.

On the retail side, longer term presidential residential mortgages are the present consumer loan of choice due to the current low interest rate environment. While we have had near record mortgage loan originations, we do not contain them on our balance sheet for interest rate risk management purposes.

Our home equity and residential mortgage portfolios both show declines in ending balances; these declines reflect the significant level of refinancing activity that occurred in the first quarter. On the funding side, total deposits grew $642 million or 6.3% with growth in all categories except for savings accounts. Most of our deposit growth was in time deposits which grew $615 million or 13%.

New certificates of deposit were issued at an average rate of approximately 2.5%. We have recently promoted a variable rate CD product that has been quite successful; the current rate on that product is 2.25% with a relationship account. Non-interest-bearing demand deposits increased $15 million or 1% and interest-bearing demand grew $26 million or 3% with personal balances making up over 80% of this growth.

In the savings category we saw growth of $10 million in personal accounts and this was offset by reductions in commercial accounts. Net interest income decreased $8.2 million or 1.6% as a result of a 23 basis point decline in our net interest margin and, to a lesser extent, the impact of having fewer days in the first quarter.

The average targeted federal funds rate and primary declined 90 basis points. We were not able to reduce our funding cost in proportion to the decline in asset yields. Yields on earning assets declined 36 basis points while the cost of interest-bearing liabilities decreased only 10 basis points. The smaller decline in funding cost also reflects a reduction in reliance on overnight wholesale funding.

While this overnight funding was replaced with higher cost certificates of deposit we maintained a preference for customer funding. We believe that customer deposits is a more stable funding source. We do expect continued pressure on the net interest margin as loans continue to reprice at the current lower rates and deposit pricing to remain competitive.

Excluding security gains and losses, our other income increased $5.2 million or 14% to $44 million. This improvement resulted from the significant increase in mortgage banking income. Total gains on the sale of mortgage loans almost tripled to $8.6 million for the first quarter. Total loans sold were $558 million with over 80% of the origination volume due to refinancings. Based on our current pipeline we are optimistic that second-quarter results will be comparable.

Service charges on deposit accounts were down $1.3 million or 8%, primarily a reflection of reduced overdraft fees which historically are about 10% less in the first quarter than the fourth quarter. In addition, cash management fees showed a slight decline as we began to see customers switch from cash management due to the lower level of interest rates.

Trust commission income increased $362,000 or 5% primarily due to growth in brokerage business. There was also a slight increase in fees from the more traditional trust business. We're glad to see new business activity offset the impact of declining market values on which the traditional trust fees are based.

The increase that you see in the other other income line is a result of the $1 million servicing asset write-down that we took last quarter -- as of the fourth quarter. Operating expenses excluding the goodwill impairment charge increased $5.5 million or 5%. Salaries and benefits show an increase of $6.5 million. However, $5 million of that increase represents bonus accruals that were reversed in the fourth quarter; also the seasonal increase in employment taxes was $1.6 million. As a result total full-time and part-time salary expense was actually down slightly.

You see an increase in the operating risk loss line in the first quarter; this includes a $6.2 million increase in the estimated fair value of our agreement to repurchase option rate securities held in customer accounts. We had reported a $4 million loss in the fourth quarter. Auction rate certificates with a par value of $92 million are still held in customer accounts as of March 31, and we expect that those certificates will be repurchased in the second quarter.

A decrease in the other other expense line reflects reductions in discretionary spending as well as a reduction in breakdowns on ORE properties. Investments on security gains were $2.9 million in the first quarter compared to losses of $28.3 million in the fourth quarter. In the first quarter we realized security gains of $5.8 million primarily related to the sale of mortgage-backed securities. These gains were offset by $2.9 million and other than temporary impairment charges.

Of these charges $1 million related to bank stocks and $1.9 million related to pool trust preferred securities. We elected to early adopt the FASB staff positions released this month. Under the new rules only the portion of unrealized losses that are deemed to be credit related is required to be recorded through earnings. During 2008 pool trust preferred securities totaling $25 million were written down to an average value of $0.38 on the dollar while cash flow modeling indicated we would recover 70% of the cash flows.

The effect of the new accounting is to write those securities back up to 77% as of January 1 through an adjustment to retained earnings as of that date. As a result our shareholders equity has been increased by $6.3 million as of January 1, representing the after-tax amount of the $9.7 million and the non-credit component of the other than temporary impairment charges recorded in 2008. However, under the new rules the 2008 income statement is not restated and that $9.7 million continues to be reflected as losses in 2008.

And during the first quarter we estimated reductions in projected cash flows for $18 million of par value of holdings. We projected that we would receive 83% of par at March 31 compared to 93% at December 31. As a result we recorded $1.9 million of other than temporary impairment charges to record this projected additional credit loss. Of this amount $350,000 is related to securities that were not previously written down and $1.6 million relates to securities that were previously written down during 2008. Under the transition rules that $1.6 million is recorded as a loss in both 2008 and 2009.

The most significant item impacting our earnings continues to be asset quality. Net charge-offs to average loans were 100 basis points in the first quarter, $30 million of net charge-offs this quarter was primarily in construction loans, it was $12 million, and commercial loans $10.6 million, with commercial real estate, residential real estate and consumer loans each at approximately $2 million in charge-offs. Of the total charge-offs 33% was in Maryland, 29% in Virginia, 19% in Pennsylvania and 15% in New Jersey.

There were seven individual charge-offs of $1 million or more with an aggregate amount of $16 million. All but one of these charge-offs were related to residential construction. Nonperforming assets to total assets increased to 1.63% at March 31 with nonperforming loans increasing $49 million. While we had increases across all loan categories, the majority was in the commercial real estate and construction categories (inaudible).

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). Frank Schiraldi, Sandler O'Neill.

Good morning, guys. Just a couple of questions here. I wondered if you could give us levels of 30 to 89 days past due in the loan portfolio, sort of quarter-over-quarter what that did?

Yes, we actually had a decrease from December 31 to March 31 in the 30 and 60 category. Most of that -- almost all of that increase actually was in the 30 day, the 60 day remained flat.

Okay. And then on the -- I'm wondering, Charlie, on the margin. It seems to me at some point there's got to be an inflection point given where your average cost of FHLB borrowings are and still the average cost of CDs up over 3%, like you said, the new variable rate CDs going out at 225. Just wondering what sort of the breakout of that borrowing stream from the FHLB and when we'll see an inflection point or your thoughts there?

Frank, we have about $1.4 billion in advances from the Federal home loan banks and their staggered out and there are some scheduled to mature this year and when they mature that will help our margin. Should help our margin.

And most of the CD growth, is that the veritable rate product?

Yes. All of our deposit categories were up nicely we thought. And a lot of it in the CDs was the variable rate product, but other CDs also increased.

Okay. And I think you mentioned that you started -- or there was a pickup or it got better in terms of deposit growth near the end of the quarter. So as far as average cost we could see that next quarter flow through?

Average cost?

As fair as the average cost of the deposits in the quarter. You saw a lot of core deposit growth at the end of the quarter, so that wasn't totally reflected in the average. Is that fair?

Yes, I don't know, Frank. I thought it was pretty evenly distributed.

Okay, okay.

I think that was the fourth quarter.

Okay, maybe I misunderstood then.

But our cost of our CDs is dropping. Of the CDs we're opening our cost is dropping on a monthly basis.

Okay. And then just finally, I just wanted to ask about the early adoption of the FASB staff positions. When you mentioned the noncredit component, Charlie, of after-tax of $6.3 million. It was my understanding that would flow through earnings. It doesn't?

The credit component dropped and the estimated cash flows between the end of the fourth quarter and the first quarter, that all flows through the -- through income and it totaled just $2 million.

I've got you. Okay, so --.

Maybe I said the wrong thing or maybe I wasn't as clear as I should have been. But only that credit component goes through earnings now. And the noncredit component, the adjustment related to last year, that just goes through retained earnings, stays until January 1. It's a little confusing.

Okay. So that noncredit component doesn't actually flow through earnings, it's just reclassified as retained earnings? Okay.

Yes, on January 1 we adjusted retained earnings by -- the write up was about $10 million, tax affected, so the retained earnings went up I think $6.6 million.

Okay. Thank you.

Thank you, Frank.

[Whitney Young], Raymond James.

Good morning. In terms of your deposit growth, I was just wondering if you are continuing to be as promotional as you were in the first quarter, if you have any plans to end some of those promotions going on. And then I have one other question after that.

Go ahead, Phil.

Well, we will continue to promote deposits and we continue to have success. The cost of those deposits are significantly lower now than they were in January, for example.

Okay, thank you. And then in terms of adopting the new accounting standards, was it just the -- I guess the second proposal on OTTI charges that you adopted or did anything to do with valuing or determining whether a market is impaired, did that have any impact on your unrealized gains or losses during the quarter? Thanks.

There are three new announcements that came out, one related to accounting for the OTTI and (inaudible) investor income or through retained earnings. There was another one related to disclose and there's another one related to determining value in the distressed market. We use the same method that we've used in the past and it's based on cash flows that we save related to the securities.

Great, thank you very much.

In the past, Whitney, we weren't relying on the brokers because we would get three brokers close, they'd be all over the place and it wouldn't make sense. But we use the SEC guidelines on 9920 and we use that to project cash flows and we're doing that the same way.

Okay, great. Thank you very much.

David Darst, FTN Equity.

Good morning. Could you comment a little further -- it sounds like in your comments you indicated there were some commercial mortgage and CRE issues emerging that maybe suffered from the construction? Could you give us some of the asset classes and discuss that a little further?

Yes, the increased non-performings quarter-to-quarter was $49 million and the breakdown of that, David, will be $18 million in commercial loans, $13.5 million in construction and $10 million in commercial mortgage.

How about (multiple speakers) just a little more detail on the type of property or the type of borrower in the C&I mortgage? Is it retail based, office, (multiple speakers)?

Actually, most of the C&I is related to the construction business. Almost of the C&I is related to the construction industry.

How about on the commercial mortgage group?

It's a little more widespread, it could be anything from a car wash to a mall shopping center type of thing.

Okay. You indicated that you would likely repurchase the remaining auction rate securities in the second quarter. Do you have an idea of what that charge would be?

No, David, we're still in the process of doing that. It's been a long drawn out process to buy those (multiple speakers) it's still a $330 million back. We made a pledge to our customers we'd buy those back if they needed them for liquidity and now we've asked them to make up their minds by May 15 whether they want to give those auction rate certificates back to us or not.

Okay. And when you originally announced that you would do that you set aside a certain percentage for the entire group.

Right.

It appears that the actual is actually a little more?

Yes, at the end of the quarter we value those and then if it's still -- we get appraisals and based on those appraisals we'll adjust that net reserve.

Okay. What discount were the most recent appraisals at?

There are 39 different -- I'm sorry, 29 different issues by different people, different levels of guarantees. And I would think if you took everything, we've had about $27 million in reserves on these and I would think it's about 8%.

Okay.

And that's from the original one through every quarter up until now.

Okay. And then how about the FDIC special assessment in the second quarter?

What about it?

Do you have the amount that you expect?

We don't have final -- if we get this legislation that the FDIC is, as you probably know, requesting this increase in line from the Treasury. And if that happens it goes from 20 basis points to 10. So until -- and there appears to be, at least in Washington, some positive feel that that will happen. So it could be anywhere from 20 to 10. There are also some other issues that are being discussed that may reduce it from that.

Okay, thank you.

We'll kind of wait to see what happens there. Hopefully it won't be much.

Gerard Cassidy, RBC.

Charlie, getting back to the write-up of your [trups], you mentioned -- I think it was a $6.6 million net write-up.

Yes, that's right.

Was any of that impairment that was taken due to noncredit reasons which you have now written up, was any of that taken through OTTI in '08?

Yes, all of it.

Oh, all of it.

Yes, and so (inaudible) remember, if there was -- if we had a trust preferred security that was at $100 and we had a $0.10 loss that would -- we'd have some credit loss there and the rules were you would have to go back to market and come up with the price and we would really break those down. I think we wrote them down to $0.38 on the dollar. And now the new rules are saying the only thing we have to put through income is the credit related losses. So we took that 38% and moved it up to $0.77 on the dollar and that was based on the cash flows.

So is it theoretical then that you could take a loss a second time for example --?

Oh, yes, it's not theoretical, we did that.

Oh my gosh.

Yes.

Wow.

(multiple speakers). We took $1.6 million last year -- we took $60 million last year, $1.6 million of that was related to marketing to market, not a credit-related loss. Then in the first quarter when we looked at cash flows we were thinking we were going to have a credit-related loss. So the rules don't make sense, we didn't write them -- was you write it back up to retained earnings and then you evaluate it again. So of that $1.9 million, $1.6 million went through in 2008 and also went through in 2009. And I don't think it's going to be a common thing. (multiple speakers). You know these new standards are good, I don't think that part is.

Right. So you're not permitted just to keep it all? Could you have not written it up at all -- I mean, the $6.6 million, could you have just left it the way it was and not have written it up?

Well, we could have for the first quarter, but in the second quarter we'd have to adopt this and you have to write it up, you have to follow the rules.

Oh wow, that's incredible. The other question I had was --.

It's better than it was.

No, that's true on a go-forward basis. That's what I'm told, it's going to be better. In your quarterly numbers you guys had an attractive gain on the sale of mortgage loans of about $8.6 million in the quarter which was up nicely from a year ago as well as year-end December. Is that a sustainable type number or is that because of the strength of the [Resi] production this quarter for the industry that you're able to have greater gains?

Very strong -- most of it was because of the refinancing and we do see that. We have a strong backlog for the second quarter. But beyond that it's hard to say.

And regarding the residential mortgage production that's been strong across the board, have you guys seen any change in that volume in the last week where it's either gone up even further or, no, it's starting to tail off?

I would say it continues to be extremely strong. We are seeing an increase in purchase mortgage requests and that our backlog right now has a higher percentage of purchase mortgage than what we have been experiencing over the last five months.

Okay. And just to clarify, I didn't hear it correctly. On the nonperforming assets that are C&I related, did you say that those were actual construction loans that were nonperforming?

They are related to the construction industry.

Oh, are they loans to construction companies not necessarily to build a project, but maybe a line of credit to a construction company?

Could be or a company that supplies the construction industry or those types of things.

I see. Are you guys seeing any deterioration? I know you've identified the residential side in the past; have you seen much nonresidential commercial real estate problems in your footprint?

We have seen an increase in the first quarter, yes. And then -- through commercial real estate, yes.

And is it because you're -- the owners of the properties are trying to refinance the properties and can't find financing? Or is it a recently completed property that cannot find financing?

I would say it's more tenants leaving is the biggest reason.

And then the final question is in this quarter did you guys do many of the so-called mini perms where your construction loan matured, the property is completed but the owner cannot find permanent financing outside of your bank and you've decided to underwrite it as a mini perm, have you done much of that?

No, no.

Okay, thank you.

Rick Weiss, Janney Montgomery Scott.

Good morning. I was just wondering if you could talk -- just to kind of follow up on some of the questions with regard to asset quality. Could you talk a little bit about maybe charge-off policy and it still looks as if with the nonperforming assets still continuing to rise and I know you're increasing the loan loss provision. When would you start to expect the charge-off ratios to start going up to a larger scale?

You mean charge-offs related to provision?

Charge-offs for on the properties or whatever. Would you start to expect that to start peaking? Or do you think you're there already?

Well, we're hopeful I guess would be the best way I could answer that, Rick.

Rick, this is Scott. We're back to where's the economy going? And as I said last year, if we have a spring things will get better, we didn't have a spring last year. If we have one this year and with the mortgage volume the way it is we could. And as you've heard before, most of our problems are related to residential construction. So if there's some relief there as folks begin to get active in that we could see some tail off. But if we don't then I think we just continue to grind it out.

Rick, those charge-offs have gone up quite a bit. Last year the annualized charge-offs were 45 basis points. If you annualize the first-quarter it's 100, right? So I mean they are going up significantly.

Well, that's true too. Yes, I was just noticing now, as well as the nonperforming assets too. Like how does that get resolved at the end of the day will you think? Is it through they get worked out or charged off or is it too early to tell?

It has been a combination and I think it will continue to be a combination of both.

Okay. I was wondering also like if on the decrease in the yield on average loans, just kind of -- because it looks like your loan mix is actually getting better. What's happening with regard to pricing? Is the competitive pressure starting to ease a little bit? Are you getting better pricing on the new loans or you just can't overcome the low interest rates?

Pricing is much better on new loans, there just aren't enough new loans right now.

Okay. And final question. On the salary line, would like a $55 million quarterly -- is that a decent run rate to use for modeling?

I think it would be, Rick.

Okay, thank you very much.

It's equal to the (multiple speakers) quarter and -- I'm sorry, Rick, I forgot one thing. In the first quarter there's an extra $1.6 million in employment taxes related to Social Security and amounts that go down. So probably we'd reduce run rate by $1.6 million I would think.

Okay, got it. Okay, thank you.

Matthew Schultheis, Boenning & Scattergood.

Could you talk a little bit about your geographic dispersion with regard to your commercial real estate portfolio in total?

We're getting that number for you.

And can you discuss maybe which geographies are seeing the most weakness?

As I mentioned earlier, the weakness is coming from the Baltimore-Washington corridor which is our Virginia franchise and Maryland franchises where we had the most run up.

I know that on the construction side, is that true for the commercial real estate as well?

The commercial real estate -- the weakness in the commercial real estate actually I would say is more in New Jersey --

Okay.

-- than any other state.

Okay. What was your FDIC expense for the first quarter versus fourth quarter?

It was $4.290 million and the fourth quarter was $1.880 million. It was up $2.4 million, it was up 125%.

Okay.

Matt, as far as the breakout by state, for the commercial real estate, 51% Pennsylvania, 29% New Jersey, 8.5% Maryland, 8% Virginia, 3% Delaware.

Okay. And one last question and I think Gerard Cassidy hit on this a little bit. He was talking about the mini perms and you guys last quarter were talking about how you were trying to help the builders move their inventory off and was wondering if you are seeing -- was your answer to his mini perm question related to your new program? In other words are you --?

No, I believe the mini perm that he was speaking of related more to commercial properties where you'd like to do five-year interest only with the idea that they get permanent financing.

Okay. Are you seeing --.

We've not done a lot of that.

So is your new construction, residential construction program that you announced last quarter, is that working?

Yes, there is interest in that and I believe it's helped us sell some properties. I wouldn't say it's going to be the answer to a lot of builders' problems, but there has been interest in that.

Is it better than expected, not as good as expected or were you kind of taking a flyer on it?

I would say it's -- well, first off it probably was February until it really got rolled out to our builders. I think it's a little early to say exactly how it's going to work. We're encouraged by the interest that our builders have shown. And we'll see what kind of results we get in the first quarter.

Okay. Thank you very much.

Matthew Clark, KBW.

Can you -- and I apologize because I hopped on a little late on the call so I don't know if you touched on this. But can you speak to the variable rate CDs that you guys offer in terms of sizing up that portfolio and offer up what the terms and structure of that product is and the repricing of it and what the products -- what rate the product is tied to, for example?

Sure. We have right now I think $450 million of balances in that product, they're 12-month CDs, the pricing has dropped 150 basis points from December to today. And the rate is really at our discretion, it's not tied to an industry.

Okay. What rate would you say or what is that current rate you tie it to or what would you suggest that you --?

I would say it's tied as much to the competitive market as anything.

Okay. And the repricing characteristics of that, is it just repriced a certain number of times during that 12 month period or --?

We have the ability to reprice at any point. We have been doing it on a monthly basis.

Okay. Is there an expectation to pull back on that product to some degree with the expectation that maybe rates don't go much lower?

Well, you know the pricing on it right now is down to the point where it -- 2.25 for a relationship customer, 2% for someone who doesn't qualify for a relationship as a relationship customer. So our growth in it has been cut back quite a bit. And I think Brian got asked a question earlier. I think he was correct, we continue to seek deposit growth but far less as in CDs now because the pricing has pulled back and more is in demand than savings.

Okay, that's helpful. Thank you.

(Operator Instructions). Collyn Gilbert, Stifel Nicolaus.

Good morning, guys. You may have covered this, so I apologize. But I just was curious to see what you're seeing in the way of loss severity in terms of the migration of going from MPA to net charge-offs and what -- the trends that you're seeing there?

It varies by asset. The closer the asset is to a finished product the less loss that you take. So, raw land is fairly severe, finished home is -- we've been very pleased with.

Okay. And as you're doing specific reserve allocations for credits that are going on the books now, what's the methodology that you're using to calculate that specific reserve?

We go to an analysis and value our collateral at worst-case, most probable and best case scenarios and we set the provision close to the worst-case.

Okay. And what would go into worst-case? Is that macro points or something specific to the individual borrower? Or a timeline for workout and just the erosion of the value over that timeline?

Yes, I think the most probable would be the current appraisal appraised value -- 75% of the current appraised value. The worst-case again depends on the asset class and what we think of the appraisal. It just really varies from loan to loan.

Okay. And Charlie, I know you commented on -- I think Rick had asked the question about the salary line going forward. But just in general, kind of a run rate on the overall expenses, what should we be using going forward?

I can try to normalize it for you, but the big question, who is the FDIC expense, (multiple speakers).

Sure.

You would have to factor that out.

Let's assume -- if it was with a 10 basis point cede that they would impose, what would that mean for cost for you guys?

10 basis points would be -- that would be about -- a little over -- between $10 million and $11 million and it would be about $0.04 a share. Yes, they're discussing a lot of things (inaudible) they're talking about half of that and they're also talking about, out of the guarantee program that the government has, the guarantee that you pay a fee to the FDIC for issuing -- guaranteeing the debt. They're thinking about taking a portion of that and applying that against what they need. So, that's a hard one to guess.

Okay. But what about the expense lines that you can control that are within the organization that you do if we take FDIC charge off the table because that's obviously not in the first quarter number.

When you look at the salaries and benefits (multiple speakers) been flat for a year if you take out unusual adjustments. Most of our discretionary spending is down, anything that we can control, marketing, travel -- everything is down. One that's up and varies is the legal ORE expense and collection expenses. So I would expect that overall expense levels would be about where they are right now I would think. But that's a tough one. You know, you have the auction rates -- I would think it's flat where it is.

Okay.

And there's some uncontrollable stuff in there -- the FDIC insurance, collection expense and stuff like that. But it's going to be offset by -- everything we had discretion on is down significantly.

Got you.

And the salaries and benefits are well controlled and they're staying flat, I would say flat, (multiple speakers).

Okay. That was all I had, thanks.

Frank Schiraldi, Sandler O'Neill.

I just had one more question I wanted to ask about. I think Charlie went over the net charge off breakout by geography. I missed that. But I wanted to ask you on Pennsylvania, the core Pennsylvania franchise, Southern PA. Is that still a bright spot? Is that still holding up better than you might have expected in terms of non-performers, in terms of problem credits and charge-offs?

Our core Pennsylvania franchise which I would include central and southeastern Pennsylvania is holding up extremely well from both a delinquency and a charge-off standpoint, extremely well. You know, Frank, 51% of our loans I think are in Pennsylvania. But it's only 19% of our charge-offs. And the nonperforming assets in Pennsylvania are -- nonperforming assets total $58 million and our total nonperformings are 269. So Pennsylvania is holding up extremely well.

Okay. Just what was that net charge-off number again in Pennsylvania? 19% of (multiple speakers)?

It was 19% of the $30 million.

Okay, thank you very much.

That does conclude today's question and answer session. At this time I would like to turn the call back over to Mr. Smith.

Thank you for joining us today and we hope you will be able to be with us again for our second quarter 2009 earnings conference call, which is scheduled for July 22 at 10 a.m. Thanks again, take care.

That does conclude today's presentation, we thank you for your participation. You may now disconnect.