Fulton Financial Corp (FULT) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fulton Financial Corporation announces first quarter earning conference call.

Today's call is being recorded.

I will now turn the call over to Ms.

Laura J.

Wakeley, Senior Vice President.

Please go ahead, Ms.

Wakeley.

Great.

Thank you.

Good morning, everyone, and thank you for joining us for our conference call and webcast to discuss Fulton Financial Corporation's earnings for the first quarter of 2012.

Your host for today's call is Scott Smith, Chairman and Chief Executive Officer of Fulton Financial.

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 PM yesterday afternoon.

These documents can be found at our website, at fult.com, by clicking on Investor Relations, and then on News.

On this call, representatives of Fulton may make forward-looking statements with respect to financial conditions, results of operations and business.

These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond Fulton's control and difficult to predict, and which could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

Fulton undertakes no obligation, other than required by law, to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

In our earnings release, we have included our Safe Harbor statement on forward-looking statements.

We refer you to this section of the release, and we have incorporated this statement into today's presentation.

For a more complete discussion of certain risks and uncertainties affecting Fulton, please see the section entitled Risk Factors, and management's discussion and analysis of financial condition and results of operations, set forth in Fulton's filings with the SEC.

Now I would like to turn the call over to your host, Scott Smith.

Good morning, and thank you, Laura.

And thank you all for joining us.

I'd like to begin with a few prepared remarks about our first quarter performance, then Phil Wenger will discuss credit, and Charlie Nugent will cover the financial details.

When we conclude, we will be happy to respond to your questions.

On previous calls and investor presentations, we have discussed our corporate priorities.

They include growth in earnings per share, increasing our return on assets, managing the net interest margin, leveraging market opportunities, steadily improving our asset quality, lowering our credit costs, and building and deploying capital effectively.

I would like to look at each one of these areas more closely in the context of our first quarter performance.

Diluted earnings per share for the first quarter came in at $0.19, up 5.6% from the $0.18 we reported last quarter, and an almost 12% improvement over the first quarter of 2011.

These results give us a good start on 2012, a year that we hope will be marked by steadily improving business and economic conditions in all of our markets.

In addition to growing earnings per share this quarter, we increased our return on assets.

A key focus is the effective management of our balance sheet.

We continue to work to maximize loan yields in a difficult competitive environment, while at the same time utilizing our branch network to attract lower cost funding.

Maximizing our asset yields without assuming undue risks while controlling deposit costs enable us to expand our net interest margin.

In the release, you saw that we had a significant increase in linked quarter non-interest income, mainly due to continued strong mortgage activity and related sales gains.

Our investment management and trust services area also contributed to our growth in other income.

Thanks to our very stable core deposit base and loyal customers, we remain highly liquid.

We are aggressively working to fully deposit back into our community to credit-worthy borrowers.

However, while overall credit demand has been steady, it cannot be characterized as robust.

The decline in our deposit balances this quarter was confined to our more costly municipal and time deposits, contributing to the net interest margin expansion I touched on earlier.

Another factor pertaining to our margin expansion this quarter was a deceleration in the pace of premium amortization on mortgage-backed securities, although that overall level still remains elevated.

We experienced good first quarter commercial and personal household account growth as a result of sector specific marketing and promotional efforts.

We just concluded a new personal checking account promotion campaign, and we will be carefully monitoring the retention and expansion of those new relationships in coming quarters.

We believe our expanded base of low-cost deposits one of our key strategic resources.

Total average loan growth for the quarter was up; and as you know, we compete in what has been and remain very good markets, and we are hearing anecdotal comments from our business customers that business conditions are gradually improving.

That improvement, however, has not yet produced the traction we need to achieve our desired levels of loan growth and net interest income.

Looking at our credit metrics, we were encouraged to see another drop in the provision and in our overall delinquency this quarter.

We also saw our construction book stabilize, after significant previous declines.

And Phil will give you the credit details.

Turning to capital, we were pleased to see an increase in our return on tangible equity, linked quarter.

As our capital position continues to strengthen, the Board regularly considers opportunities to deploy that capital.

Recognizing importance of dividends to many of our shareholders, we have increased our dividend several times, and most recently last month, bringing our dividend yield to approximately 2.7%.

We were also deploying capital back into our franchise, with new and updated branches in new and existing markets, and with the core conversion of our data processing platform that we discussed last call.

The Board periodically evaluates other potential uses of capital, including strategic acquisition opportunities and stock repurchases.

The consolidation of our two New Jersey banks continues to go very smoothly.

Our Garden State customers were already very familiar with the Fulton Bank way of doing business and with our reputation for delivering a superior customer experience.

In addition, we are better able to leverage marketing and promotional dollars in New Jersey as a result of this consolidation.

To sum up the quarter, we continue to show improved performance in a slowly improving economy.

We believe there's a great deal of pent up consumer and business demand that will fuel higher credit demand as the recovery improves overall confidence.

And our Company is very well-positioned for that future.

Last month, I announced that I will retire at the end of this year, after over 40 years in the industry.

At the same time, the Board announced that Phil Wenger will be taking the reins of the Company, working alongside an extremely capable senior management team.

Thanks to a highly developed and effective management succession program, you can expect the transition to Phil's leadership to occur smoothly and seamlessly.

He is an outstanding banker, who I had the pleasure of hiring in our management training program in the late '70s when I first came to Fulton.

And he has personally committed to our strategy, culture, core values and corporate success.

I can think of no one more qualified to lead this organization in the future.

So Phil, congratulations, and I look forward to working with you for the remainder of the year.

And would you please give us your comment on credit at this time?

> Thanks, Scott, and thanks also for your kind words.

I'm grateful for your support and for the support I receive from our management team and all our employees.

I'm truly looking forward to great success for Fulton's customers, shareholders and employees.

As I mentioned in our press release, we were pleased again to see general improvement in our credit metrics for the quarter.

Overall delinquency declined to the lowest it has been at quarter-end since the second quarter of 2008.

Emerging delinquencies, those accounts under 90 days past due, were also at 2008 levels.

We were able to reduce nonperforming loans, and our inflow of nonaccrual loans was lower than early 2008 amounts as well.

While the pace of nonperforming asset reductions is still modest, we are continuing to make progress.

As you saw in our press release, we reduced our loan loss provision to $28 million from $30 million last quarter, as a result of the gradual improvement in our credit metrics.

Now let me give you some specifics.

My comments are linked quarter, unless I indicate otherwise.

With regard to delinquencies, as you saw in the chart on page 4 of the earnings release, we saw a 19 basis point, or $24 million decrease in overall delinquency.

31 to 89 day delinquencies decreased 18 basis points.

90 day and over delinquencies declined by 1 basis point.

Delinquent loans outstanding declined in all loan types, with the exception of residential.

The increase to the commercial loan delinquency rate, as noted in the press release, is the result of a declining commercial loan outstandings, which I will comment on in a minute.

Overall, we were pleased with our quarter-end delinquency levels.

Nonperforming loans are the lowest they have been since the first quarter of 2010.

We had a moderate reduction to our nonaccrual loans, which declined from $258 million to $249 million.

Our inflows into nonaccrual loans were $37 million, a reduction from $67 million last quarter and a considerable reduction from the levels we have seen over the last several years.

The inflows to nonaccrual loans were across all loan types.

Through payments received, payoffs, as well as charge-offs and transfers to ORE, we achieved a $9 million reduction.

Nonperforming loans as reported in our press release include both nonaccrual loans as well as loans 90 days delinquent and accruing.

The $9 million reduction in nonaccrual loans was partially offset by a $6.5 million increase to 90-day accruing loans, the majority of which were in residential mortgages.

ORE increased slightly, from $31 million to $34 million, driven primarily by the addition of three New Jersey commercial properties upon which we have been working to foreclose for nearly two years.

Net charge-offs were $28 million, or 0.94% of average loans on an annualized basis, as compared to $40.6 million, or 1.3% of average loans in the fourth quarter of 2011, and 1.42% for the first quarter of 2011.

To remind everyone, last quarter we sold a portfolio of nonperforming residential mortgages that resulted in an additional $17 million of charge-offs at year-end.

This quarter, we provided $28 million for allowance for credit losses, maintained the allowance at 2.16% of loans, and increased the coverage of our nonperforming loans slightly, from 90.1% last quarter to 90.9% this quarter.

We regularly discuss construction loan balances, so let me provide you with an update.

Ending balances in the construction loan category increased by $32 million.

This is the first time since we have been discussing our construction booking detail with you that we have seen an increase.

We saw a modest increase in residential construction activity among our builder clients, who are reacting to increased housing demand in certain markets.

We also saw both our owner occupied as well as residential construction mortgage business increase slightly.

We would not expect significant increases in this loan type; however, if construction activity accelerates, our outstandings will adjust accordingly.

Troubled debt restructurings increased slightly, from $99 million to $103 million.

Of this total, $71 million, or 69%, are accruing loans versus $66 million, or 67%, last quarter.

The $4 million increase to TDRs was primarily driven by a construction loan that was restructured to reflect actual market conditions.

Now moving to loan demand and activity, we continue to experience modest loan demand, although most of our markets report increased pipelines versus the fourth quarter of 2011.

As I mentioned earlier, the decline in our ending commercial loan balances drove the slight increased to delinquency in that category.

The reduction in commercial loans includes a decline in line usage of nearly $60 million, driven primarily by lower credit needs among our commercial and industrial borrowers, who continue to conserve cash.

Our average balances reflect moderate growth.

And this quarter, our average balance growth was the highest it has been in two years.

The $53 million increase in average total loans was driven by a $71 million, or 7%, increase in residential mortgages, $63 million, or 1.4%, increase in commercial mortgages.

Partially offsetting this growth were a $52 million, or 1.4%, decrease in commercial loans and a $32 million decrease in home equity and consumer loans.

We are seeing improved conditions and sentiments in all of our markets.

New Jersey remains our most challenged market, although recent unemployment data for New Jersey reflects a greater rate of improvement than what is happening in our other four states.

Now in our residential mortgage business, activity continues to be strong.

Applications increased to $812 million versus $398 million last quarter.

Application volume is up 28% over prior quarter and 92% over the first quarter of 2011.

Although the majority of those applications, 69%, are refinance, we did see a slight shift towards purchase in our pipeline for March, which is now 65% refinance.

Last quarter our pipeline was 72% refinance.

Our current pipeline totals $458 million versus $321 million last quarter, $161 million in the first quarter of 2011.

So to summarize, we achieved moderate improvement again in our credit metrics.

We were particularly pleased with delinquency reductions, as well as lower nonaccrual additions.

Average loan balance growth increased this quarter.

And with a gradually improving economy, our seasoned teams are working hard to take advantage of market opportunities.

Now I will turn the discussion over to Charlie Nugent for his comments.

Charlie?

Okay.

Thank you, Phil, and good morning, everyone.

Thank you for joining us today.

As a Scott mentioned, we reported net income of $0.19 per share for the first quarter, an increase of $0.01, or 6%, from the fourth quarter.

Net income also improved 6% to $38 million in the first quarter.

Unless otherwise noted, comparisons are of this quarter's results to the fourth quarter of 2011.

The growth in our net income resulted primarily from an increase in other income, and a decrease in the provision for credit losses.

These improvements were offset by lower investment security gains, and increases in other expenses.

Net interest income increased slightly.

This increase resulted from our earning asset growth, and a 4 basis point expansion in our net interest margin to 3.85% in the first quarter, from 3.81% in the fourth quarter.

This improvement was offset by the impact of having one less day in the first quarter.

Prepayments on mortgage-backed securities and the resulting accelerated amortization of premiums decreased approximately $800,000, or 17%.

However, premium amortization is still at an elevated level.

Funding cost decreased further than asset yields.

The average yield in the first quarter was 4.61%, a 2 basis point decline from 4.63% in the fourth quarter.

Loan yields declined 6 basis points, to 4.94% in the first quarter from 5% in the fourth quarter.

Investment security yields saw a 3 basis point increase, to 3.36% in the first quarter.

This increase was due to the lower premium amortization on the mortgage-backed securities.

The cost of interest-bearing liabilities declined 8 basis points, to 0.99% in the first quarter.

The cost of interest-bearing deposits declined 6 basis points, to 0.67% in the first quarter.

A portion of the reduction in core deposits cost was related to municipal products.

Time deposit cost decreased 7 basis points, to 1.36% in the first quarter.

We had $764 million of time deposits mature, at a weighted average rate of 0.99%, while we put on $699 million of certificates of deposits that were issued at a rate of 0.47%.

In the second quarter, $699 million of time deposits are scheduled to mature at a rate of 0.89%.

In addition, we have $50 million of advances from the Federal Home Loan Bank scheduled to mature in the second quarter at an average rate of 2.53%, and we do not expect to renew those advances.

Average earning assets grew $52 million, or 0.3%.

The growth in average assets resulted from the $53 million increase in average loans that Phil discussed, and a $104 million, or 3.8%, increase in average investments.

These increases were offset by $105 million decline in short-term other interest-earning assets.

Average deposits decreased $220 million, with demand in savings deposits declining $88 million, or 1%, and time deposits increasing $132 million, or 3%.

Savings deposits decreased $125 million, or 4%, almost entirely in municipal accounts, largely driven by a reduction in rates paid on those accounts.

Interest bearing demand deposits were essentially unchanged in total, with increases in business accounts being offset by declines in municipal accounts.

Non-interest-bearing demand deposits increased $36 million, or 1.4%, almost entirely in personal accounts, due to the promotional efforts that Scott referred to.

Other income for the first quarter increased $5.1 million, or 11%, excluding the impact of security gains.

Mortgage banking income increased $3.8 million, or 62%, as a result of a 66% increase in the new loan commitments to $616 million for the quarter and a slight improvement in spreads, driven by persistent low interest rates.

Service charges on deposits decreased $435,000, including a $109,000, or 1%, reduction in overdraft fees, a $282,000, or 6%, reduction in deposit service charges, and a slight decrease in cash management fees.

The overdraft fee decline reflected a seasonal decrease offset by the impact of increasing the charge in the first quarter.

The decline in deposit service charges included a reduction in check image fee income, which was a new fee instituted in September of 2011, as well as a reduction in certain non-core fee categories.

Other service charges and fees decreased $229,000, or 2%, mainly due to seasonal decreases in certain fee types; these types included merchant fees and debit card fees.

Trust income grew $650,000, or 7%, including increases in both trust commissions and brokerage fees, both due to the strength of the equity markets.

The $1.3 million increase in other income reflects gains on the disposition of two branch properties and one operations facility.

Operating expenses increased $1.9 million, or 1.7%, to $110.7 million for the first quarter.

Without some of the nonrecurring type items that I will go through, our operating expenses would have been approximately $106 million in the quarter.

However, going forward, I still expect a core run rate of $107 million to $108 million, reflecting the impact of our core systems conversion plan and increasing compliance expectations.

Salaries and benefits increased $2.3 million, or 3.9%.

The increase resulted primarily from a seasonal $1.7 million increase in payroll taxes and a $930,000 increase in health insurance costs.

These were partially offset by the effect of $610,000 of severance costs incurred in the fourth quarter.

Operating risk loss increased $2.3 million during the quarter.

A $2.6 million charge was recorded to increase our reserve for potential losses related to residential mortgage loans sold, primarily due to an exposure to one specific investor program.

Under this program, we provided a credit enhancement for residential mortgages sold, whereby we are responsible for credit losses above defined levels up to specific amounts.

As of March 31, the unpaid principal balance of loans sold under the program is approximately $290 million.

And during the first quarter, credit losses under the program were projected to exceed the defined levels.

And as a result, we recorded a reserve for those expected credit losses in the first quarter.

Partially offsetting these increases were some reductions in other expense categories.

In the fourth quarter of 2011, we incurred $1.8 million of nonrecurring expenses related to the merger of our New Jersey banks.

$1.1 million of these expenses were in marketing, with the remaining expenses in the other expense category.

ORE and repossession expenses also showed improvement, decreasing $640,000, or 18%, as costs decreased $400,000 and net losses declined $240,000.

Finally, other expenses for the fourth quarter also showed a $760,000 decrease in loss on property sales.

Okay.

Thank you for your attention and for your continued interest in Fulton Financial Corporation.

Now we will be glad to answer your questions.

Thank you.

(Operator Instructions) Frank Schiraldi, Sandler O'Neill.

Good morning.

I wondered -- first question, on capital.

Following CCAR results for the larger banks, do you guys feel like you have a better sense of where Fulton is, on the capital front, in terms of what is excess capital on the balance sheet, and where you want to be, say, on a TCE basis?

Frank, this is Scott.

Yes, we do.

We are not completely there yet.

But there is certainly some important information that came out of all of that.

And we continue to stress our Company, and have ongoing discussions with the Fed about those stress tests.

And I think that provided some more guidance.

But we are not ready to make specific statements about what is excess and what is not.

Okay.

And you talked about a potential for capital return.

You mentioned repurchases.

I'm just wondering if your thinking on that has changed at all.

And then how you would rank buybacks against acquisitions and reinvestment into the franchise, in terms of use of capital?

Well, that would depend on the opportunity at hand, Frank.

So, it's hard to say one over the other.

But obviously, we think we have a good management team, and if we have an opportunity to expand and put that capital to use, and an acquisition is there and is available and is at the right price, then it is a better use of capital to invest it into the future for shareholders.

But having said that, we haven't seen any lately.

So, we will see how things develop over the Summer.

Okay.

I guess, asked another way, is a stock repurchase program -- we have seen one or two of your competitors announced them.

Is that something that is potentially could be announced ahead of the next round of stress tests with the Fed?

Or are buybacks something you'd probably want to wait until after that's completed, until 2013?

Frank, as I mentioned earlier, we are in ongoing discussions with the Fed.

We continue to update our stress tests, based on what we learned in the CCAR exercise.

And I can't give you a timing of when something might get to the point where we are ready to move or not.

And it depends on how the economy goes over the Summer.

I'm hoping for a good May this year.

We've had two bad Mays in a row.

But this year, let's hope we get a nice pick-up in the economy this Summer.

And then, that can have an impact.

So, it's difficult, really impossible, for me to tell you when we might consider a buyback.

Because when we do, then we'll do it and announce it.

But until we get to that point, it would be misleading for me to try to give you more specific direction.

Okay.

And then, just finally, I just wanted to ask a question on the margin.

Given balance sheet growth, is there more opportunity to reduce yields on some of the municipal accounts, and then allow more of that higher-yielding product to run off the balance sheet in 2Q?

Yes, Frank, we have been doing that constantly.

A lot of the municipal accounts are bid, and the rates are locked in for a certain period of time.

And we evaluate that constantly.

And are looking at those -- trying to properly price those products when the commitment expires.

Okay.

Do you have any numbers at hand, in terms of the municipal accounts that left in the quarter, where those were on a pricing basis before they left?

Not on a pricing basis, no.

No.

Okay.

All right.

Thank you.

Thanks, Frank.

Bob Ramsey, FBR.

Good morning.

I was hoping along those same lines, could you talk about your margin outlook from here, and whether you expect net interest income will stay around the same level that we are at, or it may be possible to grow it?

Bob, I can tell you everything about the first quarter.

The second quarter and out, my crystal ball is a little foggy.

But what I can tell you -- we gave you numbers about the CD repricing.

And our CDs are coming off, there's $699 million repricing.

They're coming off at 89 basis points, probably going on 50 basis points.

And we have the Federal Home Loan Bank advances repricing.

So, the cost of funds is going to continue to go down.

And the loan yields are under a little pressure.

We would think, based on the past, that they could be down 6 basis points.

And then, the investments are hard to judge, because a lot of it relates to the prepayments on the mortgage-backed securities.

And we don't know what that -- we project -- we think we project something out, but I can't tell you that, because we would be getting in late May and June, we're just making guesses.

But I would think we are going to see some margin pressure, if you plug all those things together.

Okay.

And then, I appreciated the expense guidance that you gave earlier in the call.

Just to clarify though, is that $107 million to $108 million, is that a good run rate through the rest of the year?

Or is that just this coming quarter?

Oh, boy.

You know, when we did it -- I think we gave you the run rates at the last conference call.

And we were saying $106 million or $107 million for the first quarter; $107 million or $108 million for the second; and up to $109 million for the third, and $110 million for the fourth.

But we can tell you what the run rate is.

But in this environment, it is just hard.

There are so many unusual things happening.

That's when we tell you what the run rate is, but there are just a lot of unusual things that happen that affect that.

Okay.

And I guess, in terms of these unusual items, you highlighted the losses on the credit enhancement on the loans sold.

How do you think about -- to what degree, I guess, is that fully captured this quarter?

Or are there situations where you could have further losses down the road?

Is it dictated by home prices, or what are the moving pieces there?

We think it is a pretty good portfolio.

It was a portfolio of loans that we generated, and went to the Federal Home Loan Bank.

And the FICO scores were high -- the 726; loan to value was 74%.

Very similar to the residential mortgages that we keep, and other ones that we sell to Freddie Mac and Fannie Mae.

But we don't know.

We'll do an evaluation at the end of every quarter, similar to the evaluation we do on our loan portfolio, and then come up to see if we need another reserve -- have to increase it or maybe even decrease it.

We'll do that at the end of the second quarter.

Okay.

And would home prices be the biggest driver of what that outcome looks like?

Or are there other significant factors in figuring out what losses could be?

Oh, boy.

I think it would be similar factors that we see in the regular loan portfolio.

Okay.

Thank you, guys.

It would be delinquency, on that portfolio, so --.

Okay.

Thank you.

Craig Siegenthaler, Credit Suisse.

This is actually Nick Karzon from Craig's team.

Just a quick question on OREO.

It looks like the OREO balance stepped up, but the OREO-related expenses declined a little bit.

Can you give us some color on this trend going forward?

Yes.

This is Phil.

Those expenses are very lumpy and very difficult to project.

So, overall, our balances increased slightly.

I don't think that amount of increase is really going to have any kind of impact on what those ORE expenses are.

A lot of it depends on timing of taxes and valuations.

Okay.

Thanks.

And I guess just a second question, on the securities portfolio.

There was a pretty big step-up quarter-over-quarter.

And I was wondering if this is a good run rate level going forward?

Nick, we look at that securities portfolio every day, every hour.

And we had sold some securities, $97 million at the end of the fourth quarter, and they didn't settle.

So, when they settled, we had to replace those securities, when the proceeds came in.

We also had a lot -- relatively a lot in short-term earning assets.

And we mentioned, they went down $105 million.

And we bought some additional securities because of heavy cash flows coming in, and we expect those cash flows to continue.

And then at the end of the first quarter, in March, the 10-year rate spiked.

And that has an effect on mortgage-backed securities.

It went up to 2.32%, 2.25% at the end of the quarter.

And the 10-year rate today, I think, is 1.95%.

So, those rates spiked.

So we took advantage and we bought some more securities, thinking that it was a good rate, and we're going to have heavy cash flows in the future.

So, it turned out to be a good move for us.

But what we do in that securities portfolio has been based on our [ALCO] position, and we look at it constantly.

We have a lot of good people looking at that, and doing a good job with that.

Thanks again.

Rick Weiss, Janney Montgomery Scott.

Okay.

Good morning.

Good morning, Rick.

I guess, speaking of your ALCO, are you still asset sensitive?

We are.

And we can say it on here, the asset sensitivity, that six-month gap is at [105 basis points], Rick.

So, we're still positive in that six-month gap.

And then when we do our interest-rate shocks, 100-basis point increase in rates, parallel shift to increase our net interest income by 1%, is about $5 million.

A 200-basis point increase would increase it [to] $23 million, or 4%.

We think we're still asset sensitive.

(Multiple Speakers)

I wanted to talk more about the loan growth, or lack thereof, and get more quick color there.

What is happening with respect to competition, and how are you pricing your loans compared to some of the others in the market?

Rick -- Phil Wenger.

And competition on C&I loans pricing is extremely competitive.

And we are trying to be as competitive as we can.

I guess, how do you look at it?

Is it worth cutting rates in order to keep customers?

Or is your policy generally to say -- let it go then, if the pricing is just irrational?

Well, Rick, when we price our loans, we look at overall customer profitability.

So, there are situations where we believe that it makes sense to make sure we don't lose the account, and there are situations where we are probably not as aggressive.

So, we would look at a combination of profitability of the customer, and the perceived risk that we see in the deal.

Is there more competition coming from banks that are smaller, or are the large banks coming in to --?

On the C&I side, it's everyone right now.

Okay.

I'm guessing there's really not that much new business?

It's more banks are taking -- trying to get market share from others?

That would be correct.

Okay.

I think that's what I have -- enough for me.

Thank you.

Thank you.

Collyn Gilbert, Stifel Nicolaus.

Thanks.

Good morning, gentlemen.

Good morning, Collyn.

Could you -- and if you guys touched on these things at the beginning of the call, I apologize -- but the sustainability of mortgage banking, do you think that the volumes can continue through the second quarter?

Or was this more of an anomaly just on the way things were being priced in the first quarter?

Collyn, this is Phil Wenger.

It changes quickly.

So, it's really hard to even predict out for a whole quarter.

But at the end -- to start the quarter, we still have very strong backlog.

And in the early stages of the quarter, we see demand holding up.

And it is shifting somewhat from refinance to purchase.

But, it can change really quickly.

Okay.

But from a strategic standpoint, is there anything that -- do you want to try to build that up?

I'm just trying to think about this, as it sort of aligns with net interest income.

It doesn't look like there's going to be much movement on the NII side.

So, just wondering if you would manage this line of business a little bit more aggressively?

Yes.

As we, in the past year really, have looked at adds to staff, especially on the revenue-generating side, we have been doing it in our investment management and trust, especially brokerage.

We have been doing it with C&I teams any time we can.

And we are doing it with mortgage originators.

So, we do continue to invest in this product line.

Okay.

And then, on the reserve front, are you guys in a position yet where you feel as if you can give some sort of reserve target?

I would say, at this point, no.

I think we have some really good signs, specifically with our 30- and 60-day delinquencies.

Our inflows have dropped substantially.

But the last two years, I think everyone was feeling good this time of year, and we had a slowdown in the May time frame.

So, we are still cautious.

Okay.

And then also, I think you maybe mentioned in the intro comments that I might have missed, the growth in construction, you are following some homebuilding activity?

Is that correct?

And is that sustainable, or maybe could you talk a little bit more about what is going on there?

Well, I think the comments would be similar to what I just had.

We are seeing some signs in certain markets of some increased homebuilding.

We are still being cautious on that sustainability of that.

Okay.

And is it markets in Pennsylvania, or is it along the shorelines, or are these tract developments, are these smaller fill-in developments?

I would say central Pennsylvania would be the strongest area that we have right now in our residential construction.

Okay.

And do you know what the average sale size or selling price is for these homes?

Is it in the $200,000 range, $400,000 range?

Well, I would say for the most part, it is under $300,000.

Okay.

And then just one final big-picture question.

I know, Charlie, you love it when we ask you to predict.

And you don't like to do that.

But, there is obviously a strategy that you guys employ to manage the financial performance.

And I know, Scott, you, in the past you've talked about ROA.

As you look at the business today, and the market and the dynamics going on, what are you managing to?

What is the financial metric that you guys are really looking to drive performance on?

This is Scott, Collyn.

We continue to be ROA-focused.

So, as we build capital, and think about that, we are looking a lot more towards ROE as well.

But I think we have to be disciplined through this environment.

To be focused on managing the assets that we are comfortable with the risk parameters around them, as opposed to expanding our appetite for risk.

We still, as Phil and I both have mentioned, we still have this issue with -- is this economy really fixed this time?

Is it going to continue?

Are we going to have a relapse?

And if it's fixed, are rates going up, as I think one said President thinks in the Fall?

Or are they going to wait until 2015, as some others think?

So, I think we are going to try to manage the assets that we are comfortable growing.

We're going to aggressively go after those assets, in terms of what now seems to be market share as opposed to growth.

But hopefully, as I said earlier, we get a good May this time.

And we didn't get May in February.

We have got a nice start on the Spring.

The weather gave us, I think, some help there.

We will see if that continues.

If it does, then I think you will see some nice growth in assets, and the return on them as well.

And we won't have assets we are sorry we booked because we were chasing yield in a time when the risk of doing that was at least too great for us.

Okay.

That's good.

So, continue the basics -- getting market share, managing risk effectively, and being in a position to really take advantage of whatever credit opportunities that are out there for us.

Okay.

That's very helpful.

And I don't want to take up too much more time, but just one final thing on that note.

How does M&A fit into that?

I know you have talked about it in the past.

But if it sounds to me like you want to just manage the assets you currently have, maybe taking on M&A isn't necessarily a top priority right now?

Well, frankly, there are not a lot of opportunities.

And most have been, as I've said in the past, stress situations, where again when we looked at the asset base we would have been acquiring, we were hesitant about why we would want to book those assets.

But having said that, you never know what phone call I'll get this afternoon.

And if it's a very strategic opportunity for us, both from a geographic and quality company, we are going to be looking at it.

But to-date, we haven't seen any of those.

Okay.

That's very helpful.

Thank you very much.

You're welcome.

Mac Hodgson, SunTrust Robinson Humphrey.

Good morning.

Some questions for Charlie.

Charlie, on the expense side, you mentioned a core first-quarter expenses of maybe $106 million, which I think excludes the $2.6 million contingent liability?

What else are you backing out to get to the $106 million?

Mac, the other big thing was our healthcare costs were up $930,000 higher than we think would be a normal run rate, because of some unusual medical expenses of some of our employees.

And also, the rest were -- if you take those two, that's $3.5 million.

And when our Controller's department went through, they picked up another $500,000.

So, they were thinking the unusual in there, and that is a subjective call, they were thinking it was about $4 million of that $110 million.

Okay.

Great.

And then, on your expense outlook again, I know you touched on this earlier.

Just want to be sure I understand.

The $107 million to $108 million run rate is through the rest of the year?

And does that incorporate --?

That is just the second quarter, we were thinking that was.

And then as we go forward, it will increase, maybe to around $109 million in the third quarter, and $110 million in the fourth quarter.

It is being driven by -- we are getting a lot of new regulations, and a lot more to come.

And we are hiring more compliance people.

And that is a tough one to judge how much that is going to be, how much more we are going to have to add, because we don't know all the regulations yet.

And the conversion, as we go forward, we are adding additional things -- servers and new systems to support our big conversion.

So, it is hard to estimate.

And in these volatile times, you can be hit by unusual things.

Some of them are good and some of them are bad.

So, it's hard to estimate, but that's what we think.

Okay.

That's helpful.

And you made a comment on overdraft charges.

I think you said, seasonally lower in the first quarter.

Then I think you said that was offset by an increase, and I didn't quite catch what you said.

We put an increase through in the first quarter.

We did have a small increase in our overdraft fees that went into effect on January 1.

Okay.

And Charlie, on the bond portfolio, I think you mentioned with the 10-year going up, you guys bought some bonds earlier this month.

How much did you buy?

In the quarter, we bought $585 million.

Let me give you the exact number.

Yes, it's $585 million.

And it was some -- we had sold some in the fourth quarter, and they didn't settle, and the cash didn't come in until the first quarter.

So, we reinvested that.

And we took the opportunity of -- we were having heavy cash flows coming off of the portfolio because of short and because of low rates.

So, we bought $585 million in total.

And have you bought some already in April?

Is that what you were implying about the --?

No.

There's not the -- I don't know what we did in April.

I do know, but it was $585 million in the first quarter.

Okay.

Now, short-term borrowings did go up.

So, did you fund any of that with short-term borrowings?

Some, yes.

Fed funds went up.

When we bought those, it was sort of a pre-purchase.

We knew we were going to have heavy cash flows.

We thought the rates were good, because they had spiked 40 basis points, and we took advantage of that.

Then, Phil, just a quick credit question.

I think, following the fourth quarter, when you had the elevated provision in charge-offs related to the sale of those mortgage loans, I had considered the core provision to be maybe $25 million in the fourth quarter.

So, I was a little surprised to see the provision go up from that level, and especially given your commentary on lower nonaccrual inflows and lower delinquencies.

So, is there anything unusual in the provision expense this quarter that led to that?

I don't think there was anything unusual.

We had $28 million of charge-offs.

We just weren't ready to really release provision, Mac.

So, that's how our formula worked out.

We wanted to maintain our coverage.

And we maintained our provision, and we think we have some really encouraging signs.

But as I mentioned earlier, I think we are just being somewhat cautious, in that we have been here the last two years, and we have seen slow-downs.

And so, that is where we ended up.

Okay.

And then just one last one, and I think you may have touched on this, Phil.

But the decline in commercial loans in the quarter, what was the reason for that?

We had a $60 million decline in line usage.

So, most of it was in our line usage, in our small businesses.

Still, we do not see a whole lot of increased activity there.

Okay.

I appreciate the help.

Thanks.

Russell Gunther, Bank of America Merrill Lynch.

Hello, guys.

Good morning.

Just wanted a quick follow-up on credit.

You guys gave a lot of good color -- very helpful.

With regard to that NPL inflows that you did see, I know down significantly this quarter, but what is the cause?

What is causing the problem credits to continue to move in, maybe geographically, what the breakdown might be?

And then as a follow-up, what your expectation is for NPL inflows to remain at this more benign level going forward?

This is Phil.

I'll take a stab at that.

First off, I would say New Jersey continues to be the area where we have the largest inflows.

$16 million came in from New Jersey.

So, that is our largest area.

It is still the general economic conditions that cause those inflows.

And we are very encouraged by the trend in our 30- and 60-day delinquencies, because that is, I think, a real indicator of what is going to happen.

But other than that, and other than general economic conditions, I think it is really difficult to say what is going to happen in the future.

Okay.

And then just piggybacking on that, given your cautious comments on the macro outlook, do you think there is enough momentum to be able to significantly reduce nonaccruals from here, or nonperforming loan levels from here, in the near term?

It is just really hard to say.

But we are working very hard to reduce those numbers.

We're looking at all the options that we have to reduce the amount of nonaccrual loans.

And we are going to just keep working at it.

We want to lower them as much as we can.

Got you.

And then, a nice improvement on charge-offs -- just rounding out the credit quality questions here.

With the improvement in the early stage delinquencies, your expectations for charge-offs to remain around current levels, and then any increased confidence in perhaps returning to providing below charge-offs going forward?

That is, again, really tough.

First off, charge-offs can be extremely lumpy -- if something comes along or something large that you didn't anticipate.

And I would hate to give any kind of guidance on that, because it is just really tough.

Okay.

And then, just switching gears quickly.

On -- I believe you had mentioned potentially introducing some new pricing initiatives in this current quarter.

You mentioned overdraft.

Was there anything else that was new, maybe on the retail side, and perhaps any different new products, estimated annual impact?

There were no other new fees.

And what was the other question?

Any future plans to introduce new products to generate additional fee income?

At this point, I would say no.

Our goal was to increase accounts -- households and accounts.

We are working very hard to increase core households.

And by doing that, we think we can increase the fees that are generated.

Okay.

Great.

And then just last one on the loan demand in your core Pennsylvania markets.

We heard from one of your larger peers Monday that in Pennsylvania, they're seeing some decent loan demand, and prices are holding up from a pricing and structure perspective.

Is this something that you are seeing similarly?

And they also commented that in Philadelphia, or downtown Philadelphia, the pricing and structure has weakened a little bit.

Are you seeing this anecdotally as well?

Or just some general color on your primary Pennsylvania markets, from a demand and pricing perspective.

Well, first off, I would say that our demand in Central Pennsylvania is probably a little stronger than in most of our areas.

We are not really in the city of Philadelphia.

So, I would not be able to comment to that regard.

But pricing on C&I loans, I think, is just as competitive in Pennsylvania as it is in any other market that we are in.

All right.

I appreciate all the help.

Thanks for taking my questions.

David Darst, Guggenheim Securities.

Good morning.

Phil, were you surprised in the increase in the residential NPLs this quarter, following the sale that you had in the fourth quarter?

David, as I mentioned, probably not specifically, but we did have some -- our 90-day accruing loans were up, I think, $6.5 million, which really was the increase you are talking about.

And those are all loans that we do not expect to end up as being nonaccrued loans.

So, they were nonperforming because they were over 90 days, but we are in the process of getting those out of that category.

So, I think that is really what drove that.

Okay.

And then with the $60 million of construction NPLs, could you give us the makeup of what is residential fully completed, and could be marketed this Spring?

And what the mix is of commercial?

If you give me a second, I might be able to give you the mix between commercial and residential.

I don't think I can tell you what is completed.

One second.

I don't know if you have any other questions, in the interim?

No, I think you have covered everything else.

Thank you.

I would say -- I don't have that number, David -- but most of our construction nonperforming is commercial.

But I don't have the break-out.

Is that a group of loans you think you could work out over the next six months, or will that take a longer period as well?

Well, our goal would be to work out of them next month.

(laughter) We are working hard to get rid of all of them through the best option that is available to us.

So, the timing is really hard to say.

Okay.

Thank you.

We'll take our last question from Mike Shafir of Sterne, Agee.

Good morning, guys.

Good morning.

At this point, all of my questions have been answered.

So, thank you very much for the time.

Thank you.

It does appear at this time we did not have any further questions.

I would like to turn the conference back to our speakers for any additional or closing remarks.

Hello.

This is Scott Smith, and I would like to end the call by thanking everyone for joining us today.

We hope you have been able to be with us again in the second quarter -- when we do the second quarter on Wednesday, July 18.

We will talk to you then, if not sooner.

Have a good day.

And again, that does conclude today's conference call.

We'd like to thank you for your participation.