Fulton Financial Corp (FULT) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Fulton Financial Corporation first-quarter earnings call. This call is being recorded. I would now like to turn the call over to Ms. Laura Wakeley, Senior Vice President of Corporate Communications. Please go ahead.

Thank you. Good morning and thank you all for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the first quarter of 2013.

Your host for today's call is Phil Wenger, Chairman, President, and Chief Executive Officer of Fulton, and joining him is Charlie Nugent, Senior Executive Vice President and Chief Financial Officer.

Our comments today will refer to the financial information included with our earnings announcements, which we released at 4.30 yesterday afternoon. These documents can be found on 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 Fulton's financial condition, 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 any 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 and we refer you to this section and we incorporate it into today's presentation. For a more complete discussion of certain risks and uncertainties affecting Fulton, please see the sections entitled Risk Factors and Management's Discussion & Analysis of Financial Conditions and Results of Operations set forth in Fulton's filings with the SEC.

Now I'd like to turn the call over to your host, Phil Wenger.

Thank you, Laura. Good morning, everyone. Thank you for joining us.

I have a few comments about our performance, and then Charlie will give you additional financial details. After his comments, we will both be happy to take your questions. My remarks are focused on the first quarter, unless I indicate otherwise.

EPS is a key priority. Given the continued pressure on net interest margin from this protracted low-interest rate environment, we were pleased to report diluted earnings per share of $0.20 for the first quarter, which is equal to what we earned in the fourth quarter last year. $0.20 represents an increase of 5.3% year over year.

For the first quarter, our return on assets was 0.96% and our return on tangible equity was 10.43%. Of course, ROE reflects how we utilize capital. Most recently, we have deployed capital to increase our cash dividend twice during 2002 -- or 2012 and we continue to repurchase our stock under the program that expires June 30. We have bought back 4.2 million dollars -- 4.2 million of the up to 8 million authorized shares at an average cost of $11.08.

Our goal is to complete the repurchase program in its entirety. Purchases may be made from time to time in the open market at prevailing prices as permitted by security laws and other legal requirements and subject to market conditions.

There were three areas that contributed most to our success this quarter. They include a continuation of the pace of loan growth that we saw in the fourth quarter of last year; further improvement in our asset quality, which enabled us to reduce the provision for credit losses; and a decrease in other expenses.

Looking more specifically at credit, we were again pleased to achieve meaningful average loan growth of 2.1% linked quarter, particularly since we consider quality earning asset growth a priority. The increase was driven by a combination of loans to new customers and greater credit demand from existing customers. Line commitments were up $11 million and usage increased by $18 million.

42% of our loan growth came from our existing customer base. We find our customers are borrowing for equipment and moderate expansion, perhaps a reflection of greater confidence in the economy. The remaining 58% of originations came from newly acquired relationships throughout our markets. Last year, we began to emphasize our new business development program and we continue to see tangible results from this program. In addition, our new pipeline remained strong as we enter the second quarter.

I want to give you a breakdown of our $254 million linked-quarter average loan growth by state. Pennsylvania provided $160 million, up 2.2%; New Jersey, $25 million, up 1.1%; Maryland, $7 million, up 0.6%; Virginia, $39 million, up 4.2%; and Delaware, $23 million, up 6%. New Jersey's economic recovery remains rather sluggish, but we are seeing progress.

In this difficult rate environment, margin management is an important component of our success, as well as a corporate priority. We expect to see continued pressure on asset yields and margin as long as interest rates remain at current levels. Charlie will cover this area in more detail.

This quarter, we experienced a decrease in residential mortgage activity with greater pressure on spreads, although the first quarter is normally when we see the results of the winter season. Applications stood at $701 million at the end of the quarter, compared to $728 million at year end. We closed 2,618 loans during the quarter, compared to 2,833 last quarter. Purchase activity increased from 31% to 37% of volume.

Our locked mortgage pipeline remained relatively stable at $313 million on March 31, down $10 million from year-end. Of that pipeline, 44% is purchased, a reflection of increased demand for houses and the spring buying season. Our builders remain optimistic for a strong year.

Asset quality, another corporate objective, continued to show improvement. We saw a reduction in total delinquency of $17 million from $302 million, or 2.49% at the end of the year, to $285 million, or 2.3%.

Two key areas of asset quality showed continued improvement. We were especially pleased to see 30- and 60-day delinquencies reach the lowest levels they have been since the first quarter of 2008 at $51 million and $26 million, respectively. We were also pleased to see our net charge-offs decline to $19 million. This is the lowest level of charge-offs we have seen since the third quarter of 2008.

Nonperforming assets declined to $232 million from $237 million last quarter and from $318 million at the end of the first quarter of 2012. Problem loans, which include loans rated lower than a pass rating, declined by $40 million this quarter.

Non-accrual loan generation was $45 million for the quarter, down from $55 million last quarter and on par with our average quarterly generation during 2012.

We were again able to reduce our provision for credit losses from $17.5 million to $15 million. The allowance for credit losses was 1.79% of total loans at March 31, 2013, as compared to 1.86% at the end of last quarter.

Other expenses decreased by over $5.6 million linked quarter. Reductions occurred in outside services, marketing, and operating risk loss. While we were pleased with the decreases, it did incur in expense types that can have a tendency to fluctuate from quarter to quarter, but expense management continues to be a corporate priority.

We reported lower noninterest income linked quarter, largely due to reduced spreads on residential mortgages and lower deposit account-related revenue. Charlie will give you more color on this, as well. Our net interest margin decreased 10 basis points. As you know, core deposit growth is an integral part of both funding and spread management.

Marketing and promotional activity in 2012 enabled us to grow average noninterest bearing demand deposits by almost 16% during the year. Over the same period, timed deposits decreased 16%. This change in our deposit mix over the last year helps us to mitigate margin pressure to some extent, but not enough to offset the drop in asset yields. And despite a small decrease in average core deposits linked quarter, our retail and small business account base continued to expand at a moderate pace.

And before I conclude my remarks, I want to update you on the progress of our core technology conversion. After months of preparation by our conversion teams throughout the Corporation, we are ready to begin the actual conversion process. Conversion guides have been mailed to our customers at The Columbia Bank, the first of our six banks to be converted to the new platform.

The system will more effectively help us fulfill our customer promise to care, listen, understand, and deliver. We will be better equipped to match our current and future product and service menu to the individual financial needs of our customers. Strategically, the new system contains the technology infrastructure for us to better manage data across all delivery channels and business lines. Our team members will have state-of-the-art tools that they need to ensure continued delivery of a superior customer experience.

As we indicated previously, we expect nonrecurring costs associated with the new system to increase throughout the conversion process. These nonrecurring costs are expected to total approximately $3.6 million in 2013. First-quarter conversion expense was approximately $600,000.

In addition to enhancing our customer service capabilities, we believe this technology investment will result in improved efficiencies over the next several years.

So to sum up, we, along with the rest of the industry, continued to deal with pressure on the net interest margin. That challenge will remain with us until rates begin to rise. We will continue to manage it.

Given that challenge, this quarter we were pleased to see a continuation of our loan growth, with improvement in asset quality. We believe we are managing our capital effectively and in the best interest of our shareholders, and expenses were well controlled. We continue to believe we are well positioned for the future.

At this point, Charlie will review our progress in more detail, then we would like to (multiple speakers) your questions. Charlie?

Okay, thank you, Phil, and good morning, everyone.

As Phil mentioned, we reported net income of $0.20 per share for the first quarter, which is the same as the fourth quarter of 2012. Net income decreased 2.5% to $39.2 million in the first quarter from $40.2 million in the fourth quarter. My comments are based on comparisons of this quarter's results to the fourth quarter of 2012.

The reduction in our net income resulted from decreases in both net interest income and noninterest income. These reductions were partially offset by a lower provision for credit losses, reduced noninterest expenses, and lower income tax expense.

Net interest income decreased $2.6 million, or 1.9%. Two fewer days of interest accruals in the first quarter accounted for approximately $2.3 million of this decrease. The remainder was due to the effect of a 10 basis-point decline and our net interest margin. This decline more than offset the benefit of a $363 million, or a 2.4%, increase in average interest earning assets.

Average yields on interest-earning assets decreased 15 basis points, while average cost of interest-bearing liabilities only declined 7 basis points.

Our projections forecast that margin compression will continue in the second quarter of 2013, with the net interest margin expected to be in the range of 3.44% to 3.5%.

Noninterest income for the first quarter decreased $8.3 million, or 15.7%, excluding the impact of security gains and the gain recognized on the sale of the Global Exchange Group in the fourth quarter of 2012.

Mortgage banking income decreased $4.6 million, or 36%, mainly due to lower spreads on new loan commitments. Foreign exchange income declined $2.3 million, or 86%, as a result of the Global sale. Overdraft fees decreased $1.3 million, or 14%, due to both the seasonal decrease in the number of items paid and changes in customer behavior.

In the first quarter, our net security gains were $2.5 million, as compared to $195,000 in the fourth quarter. During the quarter, realized gains included $1.4 million on sales of debt securities and $1.1 million on the sale of bank stocks.

During the first quarter, we took advantage of market conditions to sell certain debt securities that had higher-than-expected prepayment rates. Our bank stock portfolio had $6.2 million of net unrealized gains at March 31, and we will continue to realize gains where we consider it appropriate.

Noninterest expense decreased $2.6 million, or 2.3%, excluding a $3 million Federal Home Loan Bank advance prepayment penalty incurred in the fourth quarter of 2012.

Other outside service expenses decreased $1.3 million, or 31%, mainly in expenditures related to risk management and compliance. Operating risk loss decreased $861,000, or 33%, due to lower provisions for losses on potential loan repurchase obligations, and marketing expenses declined $665,000, or 26%, due to the timing of promotional campaigns. In addition to these items, the sale of Global resulted in a $1.2 million decrease in noninterest expenses.

Certain noninterest expenses were reclassified during the first quarter of 2013, and the comparable amounts in prior periods have been restated for consistency. Most notably, approximately $610,000 of expenses included in the other expense category in the fourth quarter of 2012 are now being presented with other outside services.

Our internal projections indicate that our total other expenses should be in the range of $112 million to $115 million through the second quarter of 2013. However, certain expenses, such as other real estate and repossession expenses, mortgage repurchase losses, and operating risk loss, can experience volatility based on timing or events that cannot always be reasonably predicted. Such volatility could result in expense levels being higher or lower than projected.

Our effective income tax rate was 23% in the first quarter, as compared to 30.2% in the fourth quarter of 2012. These rates were impacted by two unusual items. In the first quarter, tax expense was reduced by a $640,000 adjustment to the valuation allowance for certain state deferred tax assets. In the fourth quarter, the effective rate was inflated due to the write-down of nondeductible goodwill in connection with the Global sale. Our projections indicate that our annual effective tax rate will be in the range of 25% to 27%. Quarterly rates will vary based on the timing of credits and deductions and the level of pretax income.

Okay. 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.

Just a few questions. First, I wondered if you could talk a little bit about balance sheet management here. And then, wondering if given the asset sensitivity of the balance sheet, there is not -- or there might be more room going forward to look to fund with increased overnight borrowings or short-term borrowings to help offset margin pressures.

In terms of the balance sheet positioning, Frank, I think we are in pretty good position. And from a static gap analysis at six months, we're 6% asset sensitive, so we feel good about that.

And then, also, when we do the rate shocks, we believe we're in a good position. As rates rise, I think you're going to see our net interest income increase and hope, then, our margin, also. But we are in a position, if we want to, to borrow more in the federal -- over at federal funds market. I think we were about -- at the end of March, we were borrowing about $725 million, around there. And we could borrow a lot more that way. And we can also borrow from the Federal Home Loan Bank, if we want (technical difficulty)

But you know --

Okay.

That's a constant evaluation of our position, how big our investment portfolio should be, how much are we borrowing. And that's under constant evaluation by our Treasury people.

So it wouldn't necessarily be an active strategy going forward. It's just something, I guess, under consideration. You could always increase those levels. Is that --

We could.

-- fair? (Multiple speakers). Okay.

And then, I just wondered if you could characterize the loan growth in the quarter, the commercial loan growth in the quarter. Usage would have played into that a bit, but I'm just wondering if you would characterize it as maybe more coming into line with the pricing of where the market is or if you're just seeing greater demand.

Frank, this is Phil. And I would say it's a combination. I do think our pricing has come more in line with what is out in the market. But we are seeing greater demand from existing customers.

And as we see credits coming into our loan committee every week, we went for a long, long time where there were very little requests, very few requests for equipment, any kind of expansion, increase in lines to fund receivables and inventory. And I would say over the last six months, a large percentage of the credits we're reviewing are asking for increases to fund some sort of expansion, whether it is in short-term working capital assets or in fixed assets. So I would say a combination.

Okay. And then just finally, Charlie, I wanted to ask on the service charges on deposits and the other service charges and fees that were both down linked quarter. And you spoke about them as partially being seasonal. What are your thoughts on that decline linked quarter? Is that primarily seasonal or is it just a shift in customers -- customer activity?

Yes, Frank, I think it's a combination of both. And the fees were primarily down in the overdraft fee area, and it was down, I think as Phil mentioned, I might have mentioned, too, $1.6 million, or 14%.

It is seasonal. But if you look to the first quarter of last year, we are down about $500,000 from there. But it seems like it's not only seasonal, but a change in customer behavior where they are just not overdrawing their accounts as much.

And as far as the other deposit fees, Frank, I would say most of that is seasonal. And we tend to have that in the first quarter of every year.

Okay. It was a bit lower than the first quarter of last year, but I guess still you would think that much of that quarter-over-quarter drop is seasonality?

We do think so, yes.

Okay. That's all I had. Thank you very much.

Yes, thank you, Frank.

Bob Ramsey, FBR & Co.

Charlie, I know you gave an expense range next quarter, and I didn't catch it. Could you give me that number or that range again, please?

Bob, the low would be $112 million and the high would be $115 million. And that, of course (multiple speakers) that's what we expect. A lot of those numbers we have can be volatile, so that's our guidance, I guess, for next quarter.

Okay. And what was -- I know you all highlighted that other expenses were a lot lower this quarter. What pushed that number down as far as it was? I know there were several items that moved around in expenses.

Yes, the big drop quarter to quarter was that prepayment penalty, Bob.

Okay.

And that was a big one. And the outside service fees, that went down. That was down $1.3 million. Marketing was down $665,000. Operating risk loss related to reserves from mortgages that could be put back was down $861,000. They were the biggest ones.

Yes, I guess what I'm asking about is the drop, though, in other that went from $18.2 million to $14.9 million, if there was anything notable in that other line item or whether it is a bunch of tiny things.

I would think it's a bunch of tiny things (multiple speakers). I don't see anything real big in there.

Okay. And then, if I shift over to margin, I know you all gave a range next quarter, which suggests maybe a little bit less pressure than you all had this quarter, but not a lot less. As you head into the back half of the year, does the pace of compression improve? Or as long as rates are where they are, do you think you're down 5 to 10 bps a quarter?

I don't know. It's hard to predict when you look out. I think we gave a prediction of 3.60% for this -- I did -- in the quarter. We were wrong.

And it seems we have -- when we try to predict the investment yields and the deposit yields, it's easier. But loan yields because of pricing pressure, we were off on that. And also, we were also off on loan fees. They were down unexpectedly. It's hard to predict.

And we did projections where we took a very conservative look, and it was a 3.44%. And then we had one that was -- another projection was (technical difficulty). And a lot of it, the difference between the two had a lot to do with what we thought loan growth was going to be and also loan yields were going to be, how much were they going to come down.

And then, I guess you folded together, you all had really nice loan growth this quarter, particularly the end-of-period growth is much better than a lot of the other banks we've seen report. But with the margin pressure, the net interest income was down pretty significantly. As you look forward, given your growth expectations and your margin sensitivities there, can you grow net interest income this year or do you think you can keep it flat, or do you have a bias up or down from where we are today?

Our goal -- I'm sorry. Go ahead.

Bob, let me say a couple of things, and then Charlie can add. But you know, when you look linked quarter, the biggest decrease was actually caused in the actual net interest income. It was caused by the fact that there were two less days.

Okay.

So if there would have been the same amount of days, the decrease would not have been, I think, $300,000 to $400,000.

And so -- boy, can we grow it? Boy, that's a great challenge that we have. And we're going to do our best to, if it doesn't grow, to keep it at the lowest decrease we can. But it's a challenge that we all face out there.

We do think we're better off, we're much better off. When we look at that net interest income with our growth in our assets at a little lower yield than we had before, we're better off with that strategy than we are at a no-growth strategy and only a five basis-point drop in margin. So, we are focused on it and we are going to try our best. (Multiple speakers)

Fair enough.

That's exactly what I was going to say. (Laughter).

Great minds think alike. All right. Thank you, guys. I appreciate the color.

Thank you.

Jason O'Donnell, Merion Capital Group.

Phil, you mentioned a pickup in commercial loan demand, which is interesting. Are you seeing that shift materialize in the form of higher line utilization linked quarter?

We had -- we did -- our line utilization increased by $18 million. Our line borrowings were up $18 million. From a percentage standpoint, that is a very small increase, but I think it's the first increase we've had in line borrowings for a number of quarters.

Okay, that's helpful. And then, with respect to the mortgage banking operation, I apologize if I missed it, but what was your gain on sale margin this quarter versus the fourth quarter? And were there any MSR impairments or one-time items impacting your results?

The spread for the quarter was 1.62%. And that is the first quarter. And it was down 32% from the fourth quarter where the spread was an all-time high for us, 2.37%. So the primary reason for the drop was the drop in the spread.

Okay. And then, last one, how would you characterize the pace of decline that we're likely to see in mortgage banking revenues into the second quarter, just given the impact of seasonality that you mentioned and what we're seeing thus far in the way of refi volumes at this point?

Well, our goal would be that the mortgage would increase in the second quarter. I think the seasonality decrease, Frank, happens in the first quarter from the standpoint of home buying in January, February, and even until the weather shifts in March, it tends to be at a lower pace. I'd say the April/May/June time period is one of the stronger buying periods for new homes.

So we think that part of the volume will increase. And the refinance volume will depend highly on where rates are.

Okay, great. Thanks a lot, guys.

Casey Haire, Jefferies.

Just a question about loan pricing as it stands today. I'm curious, the production this quarter, what was the average yield on it versus the existing yield of 4.53%? How much lower?

Well, the average yield, I believe, of our new loans was about 3.50%. 3.48%, actually. The yield, though, on our loans -- that is lower than our overall yield.

Right, okay. And then, obviously the securities book was actually up a pretty decent amount this quarter, as well. Was that you guys -- I know you guys are prioritizing asset growth going forward. Was that you guys just taking advantage of a backup in rates during the quarter? Or do you guys have more appetite to grow the securities portfolio going forward?

There was a spike in rates in the 10-year rate for a couple weeks there. And the security yields improved from what they were. And we bought $330 million of securities. The average yields was a 1.52%. It seems low, but it's a lot higher than we've been seeing, so we did buy some securities.

Okay, so it was more opportunistic rather than any shift in -- you're not looking at --

That's right.

Yes, okay.

The Treasury people look at that every day and make decisions on that. And we have a lot of [cat], yes.

Casey, just to finish your first question, our overall yield on loans is 4.53%. And our new production was 3.48%.

Got you. Okay. And then, just last one on expenses, $112 million to $115 million in the second quarter here. I was a little -- it surprised me to see the comp line flat quarter to quarter, given I thought there'd be some seasonal pressures in terms of FICA and payroll taxes. I know you guys historically have in the second quarter, there's a payroll increase and there has been stock grants. Just curious if that guide level contemplates those sort of seasonal upticks.

It does. And the big thing that impressed me with our mortgage department was as the volume went down, they cut down their expenses extremely quick. Their overtime and commissions all went down $550,000. They slowed that up. They did a good job on that.

Now as far as going forward, we look at that. And the big thing, our range has gone up about $1 million across the board. And the primary reason for that is we grant our options and restricted stock grants on April 1. And the way the accounting works, usually that expense is about $800,000 a quarter. But the way the accounting works is anybody that could retire, anybody that is 60 and has 10 years of service, we have to recognize that expense right away. So that will be an extra $1.6 million in this quarter, and that is factored in. That's the primary reason for that range going up.

Got you. Thanks for taking the questions.

Thank you.

Nicholas Karzon, Credit Suisse.

First on the expense guidance, it sounded like there was $3.6 million in nonrecurring costs related to the conversion, with $600,000 in the first quarter. I was wondering how much of that is baked into the second quarter range of $112 million to $115 million?

Yes, so that would leave $3 million for the balance of the year for us. It will increase in the second quarter. We believe the highest quarter will be the third quarter, with a little tail in the fourth. So somewhere between, I would say, the total, the second quarter will be $1 million to $1.2 million, up from $600,000.

Okay, got it. That's helpful.

And then, the second question was on the gain on sale spread, which came in about 75 basis points, I guess, in the quarter. Is that something that can continue to trail down over the course of the year or do you have expectations around that?

It could trail down and it could go up. It really -- our experience has been the lower rates are, the higher our margin is.

So we did experience a time period in the first quarter where rates went up. And that did have an impact on our margins. So a lot of that will depend on what happens to rates.

Okay, thanks again for taking my questions.

Chris McGratty, KBW.

Just a question on capital. Your comments about buying the rest of the authorization by June 30 was helpful. How should we think about re-upping the authorization going forward, where your targeted capital ratios are, and maybe a comment on M&A appetite? Thanks.

In June, we will be examining where we are with capital and we will be talking to our Board about the possibilities of continuing to buy back, and that will depend on a number of factors, which would include our pace of growth and also any kind of M&A activity.

I would say on the M&A front, we would be -- until we get through this core conversion, which would hopefully be late third, early fourth quarter, we'll probably be less aggressive. And we need to stay focused as a Company on that conversion during the next two quarters. We have to get it right. And so, we are not real excited about doing a lot of things that would cause us to lose that focus in the short term.

Okay. And then, on long-term capital targets, you guys have plenty of capital. Is there a level at which you would consider going down to for the right opportunity, maybe, next year?

Well, yes, I don't know exactly what that level is. We do believe that we still have excess capital, and we have capital we need to deploy and want to deploy. So our goal over the balance of this year and into next year is to continue to be able to deploy it and reduce those levels. Where we end up, I'm not exactly sure I could give you that number right now.

All right. Thanks a lot.

Matthew Kelley, Sterne, Agee.

Just a question, as credit continues to improve, can you just remind us where you're comfortable bringing reserve coverage down to over the next year or two, as a percentage of total loans?

As a percent of loans, I think we've said in the past that [150] is probably a target we'd be shooting for.

Got it. And then (multiple speakers)

And that could (multiple speakers)

Yes.

That number could change, depending on where the economy goes and all those things. But in our minds right now, we are thinking that's the target.

Okay. And then, in addition or beyond operating risk loss and OREO expense, are there any other areas that we might see a reduction in noninterest expense levels as credit continues to heal? Any other headcount or staffing or professional fees that we should think about for positive operating leverage as credit continues to improve?

In the short term, until we get through this core conversion, I don't think there is a lot of areas that we are looking at for substantial decreases. But there are, as far as credit is concerned, legal costs, collection costs, revaluation costs, which even at the lower level this quarter are still elevated from where they've historically been.

How much are those in aggregate, those three that you just rattled off?

The aggregate of those is right now -- the OREO and repo expense is about $3 million. The legal expenses associated with that are probably $1 million to $2 million. And that's -- I would say that would be predominantly what we'd be looking at.

Okay. And then, just a question on charge-off levels, do you think we will see continued improvements in the overall net charge-off rate as we progress over the next couple of quarters?

Based on what's happening with 30- and 60-day delinquencies, we think that all our credit metrics will continue to improve. And as they do, the ability to reduce that charge-off level exists. I think at $20 million a quarter, it's still at an elevated level.

Okay, got you. And then, just going back to mortgage banking, one other quick question just to fill in some of the detail in the model, what was the servicing income? Was there an MSR write-down or was that a positive number this quarter?

We had a write-down back in the third quarter, last year. And the mortgage servicing income was a negative $166,000 for the quarter. As you know, we put the [marketing] servicing rights on there, what we think market value is, amortized them based on what we're seeing. We think we've taken a conservative approach, and it was an actual negative for the quarter of $166,000.

Okay, got you.

That's based on actual prepayments. It's no estimate. It's prepayments we're seeing now.

And do you have any commentary just on current gain on sale margins, what you're seeing on packages that are going out the door during the month of April here, relative to the $162,000?

Yes, for the first two weeks, it's a very short time period, but margins have increased in the short term.

Okay. Thanks a lot.

Matthew Keating, Barclays.

It was quite encouraging to see the period-end loan growth at 2% linked quarter for the second straight quarter.

I believe your commentary on the 4Q call was that while this was encouraging, you thought this kind of level might incorporate or might need an improvement in the economy to be sustainable. Now, after posting your second consecutive quarter of that type of growth and given where your pipeline ended the quarter, how are you thinking about pace of loan growth as we move throughout 2013?

That's another million-dollar question. I think we're encouraged by our pipeline and we're encouraged by what we hear from our customers, but we're a little cautious because of what's happened the past two years when we get into that May timeframe. There seems to have been a slowdown. So I'm still not totally prepared to say the world is going great again, but we remain encouraged.

Okay. And then, I guess, just getting back to the capital redeployment, with the share price obviously having rallied this year, how does your appetite or the Board's appetite for share repurchases changed with the stock right around book value or a little higher than book value? Does that change your appetite for repurchases at all? Thanks.

Well, there certainly is a level where our appetite would be less than it is. I think we continue to trade at what we consider to be a discount to our peers. And so, in the short term we still think that it's an attractive price.

Okay. And this is my final question, maybe for Charlie. Can you just remind us which line items the core conversion expenses run through? Is that software or does it hit any other items? Thanks.

I think some would be in outside services, some would be in software. And I think that -- and then, the third would be in the data processing line. So I think it would be split in those three.

Perfect. Thank you.

Blair Brantley, BB&T Capital Markets.

I had a question on the loan growth. The residential mortgage growth, was that -- is that stuff that typically would have been sold if the spreads have been stronger? Or is (multiple speakers) something different?

In the fourth quarter of last year, we had made a decision to hold some 10- and 15-year mortgages. We typically hold some jumbos and adjustable rates; we continue to do that.

So as we -- we really ended that program in the fourth quarter, but there was carryover, settlements on mortgages that we locked in the fourth quarter. They settled in the first quarter. So some of it would've been from that.

So going forward, we continue to hold a $10 million order of 10-year production.

Okay. Can you speak to what you're seeing out there in terms of the loan competition and pricing structure? Are there any other non-depository players coming back in that's affecting paydowns and things like that?

Well, no. On the commercial real estate side, I think we are seeing some life insurance companies getting back in or competing again for some of those assets. I'd say that's one area that we see outside of our industry where we're getting some competition again.

Are you seeing anything in terms of structure, and for the loans, is that becoming a bigger issue outside of just pricing? For new growth?

Pricing remains the predominant issue, yes.

Okay. And then on credit, what is your TDR balance for the end, the quarter-end, accruing TDR balance?

So our total TDRs at the end of the quarter were $116 million.

Okay.

And our accruing TDRs are $77 million. At the end of the fourth quarter, our accruing TDRs were $76 million, essentially unchanged.

Okay. Thank you very much.

Thank you.

At this time, there are no further questions. I would like to turn the call over to Phil Wenger for closing remarks.

I'd like to end this call by thanking everyone for joining us today. We hope you'll be able to be with us when we discuss second-quarter results in July. Thank you.

This does conclude today's conference. We thank you for your participation. You may now disconnect.