Fulton Financial Corporation (FULTP) Q1 2009 Earnings Report, Transcript and Summary

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 and Corporate Communication Manager, Ms. 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 announcements, 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 may 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 statement. Accordingly, investors and others are cautioned not to place undue reliance on such forward-looking statements. Many factors could influence future financial results, including without limitation, acquisition and growth strategies, market risks, 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 paper 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 values, balances of such risk-sensitive assets to risk-sensitive liabilities, salaries and employee benefits and other expenses, amortization of intangible assets, goodwill impairment, capital 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 at $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 results we are intent on delivering to our shareholders. We remain hopeful that the reminder 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 tampered 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 non-performing loan and charge-off challenges, continue to deploy additional experienced people to our loan workout area. In spite of reduction in the amount we set aside for the provision this quarter, we're not out of the woods yet from a credit prospective. We believe that stabilization and eventual improvement in our loan quality metrics are largely contingent on a meaningful and sustainable upturn in economic activity. We saw that our non-performing 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 most rapid decline. For us those markets are 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. Want to say a word about our direct consumer and home equity loan portfolio. It's remarkable just how well these are holding up as the delinquency rates on these are holding up in face of rise in (ph) recession and rising unemployment. Keep in mind that our lower consumer loan balances were impacted by the sale of our $85 million delinquent portfolio early in 2008, as we start to remove unsecured credit risks from our balance sheet. Looking back the timing on that sale, on that portfolio was 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 mortgaging. Despite ongoing challenges -- credit challenges there are a few bright spots this quarter. First area is that of deposit rate. 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. 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 believe we paid reasonable rates on these deposits and we are pleased to gain many new customers with whom we're 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 mix -- internal metric 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 service deposit (ph) customer in our household accounts. All deposits are predicated (ph). And as we said in previous calls, we believe that they are still significant deposit market share opportunities in the market. It's up to us to capitalize on them. We have developed more customer information and retraining our household certificate of deposits 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. That incremental cost combined with a reduction in their 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. In 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 and wholesale funding does not. These relationships include core deposits, loans, and non-interest income producing products and services that grow over time, while ensuring a superior customer experience that's our strategic priority. Another positive this quarter is the pick up in our residential mortgage and our refinancing activity. A nice boost it gave us to our income. We have seen applications more than triple in the last 60 days. In addition, we're seeing an increasing trend towards applications for purchased of our bonds, which as you know comprises 30% of our volume. Mortgage rates keep low as they're, combined with some of the lowest real estate prices we have seen in decades, consumers are getting the message that this maybe their home buying opportunity of a life time. Quantifying this activity for you during the first quarter we closed on $100 million in purchased money mortgages. That pace shows no sign of slowing. If then foreclosures in our real estate mortgage portfolio, remain at the low levels we reported at our previous call, of the 19,259 mortgages and allied services, services as of March 31st only a 132 are in foreclosure. Other expenses are well controlled, although we reported a significant charge related to auction rate security of end customer accounts in our wealth manager for the year end. We continued to see benefits from our past and are highly focus on expense control and expense reduction. As you recall on 2007, we made some changes to our employee benefit program to reduce our work force in number of functions. If we look at controllable core operating expenses, net quarter expenses were flat. We continue to review all expenses that relate to areas that have potential combination for impairments and postponing as we get better the number of our client franchise. 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?

Hey thank you, Scott and good morning everyone. Thank you for joining us today. Unless otherwise noted comparisons are this quarter's results with 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've summarized the most significant items impacting our earnings on the last page of the financial attachment to our press release. Our core banking earnings continued to reflect the challenging economic environment. Total average earning assets increased slightly with loans growing $81 million or 1%, and investment increasing $95 million or 3%. Although total loans grew only slightly, we saw a strong growth in 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 first quarter, with it ending balance bases commercial mortgages grew 1.3% and commercial allowance 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 loan return, residential mortgages are the present consumer loan of choice due to the current low interest rate environment. Well we've had near record mortgage loan originations, we do not contain (ph) them on our balance sheet for interest rate risk management purposes. Our home equity and mortgage portfolios both showed declines in ending balances. These declines reflect a significantly 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 deposits were issued at an average rate of approximately 2.5%. We've 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 $15million or 1% and interest bearing demand grew $26million or 3%. The personal balance is making up over 80% of this growth. In the savings category, we saw growth of $10 million in personal accounts. And this was all set by reductions in commercial accounts. Net-interest income decreased $8.2 million or 1.6% as a result of the 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 prime rates 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 reduction in reliance on overnight wholesale funding. While this overnight funding was replaced with higher costs certificates of deposit, we maintained a preference for customer funding. We believe that customer deposit is a more stable funding source. We do expect continued pressure on the net interest margin as well as continued re-price at the current lower rates and the 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 tippled to $8.6 million for the first quarter. Federal loans sold were 558 million with over 80% of the origination volume due to refinancing. Based on our current pipelines, we're 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 then the fourth quarter. In addition, cash management fee show a slight decline as we begin to see customers switch from cash management due to the lower level of interest rates. Trust commission income increased 352,000 or 5%, primarily due to growth in brokerage business. There was also a slight increase in fees from the more traditional trust business. We are 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 income lines is a result of the $1 million servicing asset write-down that we took last quarter and as well as the fourth quarter. Operating expenses, excluding the goodwill impairment charge, increased 5.5 million or 5%. Salaries and benefit shows 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 the 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 auction rate securities held in customer accounts. We had recorded 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 will be repurchased in the second quarter. A decrease in other expense line reflects reduction in discretionary spending as well as reduction in write-downs on available (ph) properties. Investment 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 mortgage-back securities. These gains were offset by $2.9 million in others and temporary impairment charges. Of these charges $1million related to bank stocks and $1.9 million related to pooled trust preferred securities. We elected to wholly (ph) 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 pooled 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 77 % 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 retain earnings as of that date. As result, our share-holders equity has been increased by 6.3 million as of January 1, representing the after tax amount of the $9.7 million non-credit -- in the non-credit component of the other than temporary impairments charges recorded in 2008. However under the new roles for 2008 income statement is now restated and that $ 7 million continues to be reflected as losses in 2008. During the first quarter we estimated reductions of projected cash flows of $18 million of par value of holdings. We projected that we would receive 83% at par on March 31 compared to 93% at December 31. As a result we recorded $1.9 million of other than temporary impairment charges to report 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 reported as a loss in both 2008 and 2009. The most significant item impacting our earnings continues to be asset quality. Net charge-offs of these (ph) loans were a 100 basis points in the first quarter, $30 million net charge offs this quarter was primarily in construction loans, that was 12 million and commercial loans at 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. Non-performing assets, total assets increased to 1.63% at March 31. The non-performing loans increased to $49 million. While we had increases across all loan categories, the majority was in the commercial real estate and construction category. Okay thank you for your attention and for your continued interest in Fulton Financial Corporation. Now we would be glad to answer your questions.

Thank you. (Operator Instructions). We'll go first to Frank Schiraldi with Sandler O'Neill. Frank Schiraldi - Sandler O'Neill & Partners L.P: Good morning guys.

Good morning.

Good morning. Frank Schiraldi - Sandler O'Neill & Partners L.P: Hey, just a couple of questions here. I wondered if you could give us levels of 30 to 89 days pass due in the loan portfolio, sort of quarter-over-quarter what that did?

Yeah. 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 and 60 day remained flat. Frank Schiraldi - Sandler O'Neill & Partners L.P: Okay. And then on the I wonder Charlie on the margins, seems to me at some point there has got to be an inflection point given where your average cost of FHLD borrowings are and still the average cost of CD is up over 3%. Like you said, the new variable-rate CD is going out at 225. Just wondering what sort of a break out of that borrowing stream from the FHLD and when we see sort of an inflection point? Your thoughts on that.

Frankly out of that $1.4 billion in advances from the Federal Home Loan banks and if they're staggered out and there are some schedules going through this year and when they mature that will help our margin -- should help our margin. Frank Schiraldi - Sandler O'Neill & Partners L.P: Okay and most of the CD growth, is that the variable-rate product?

Yes. Frank Schiraldi - Sandler O'Neill & Partners L.P: Okay.

All of our deposit categories were up nicely, we thought. And a lot of it in the CDs was a variable-rate product, but obviously the CDs also increased. Frank Schiraldi - Sandler O'Neill & Partners L.P: Okay and I think you mentioned that you started -- or there was a pick up or got better in terms of deposits growth near the end of the quarter as far as average cost, we could see that next quarter go through?

Average cost. Frank Schiraldi - Sandler O'Neill & Partners L.P: As far as the average cost of the deposits in the quarter you saw lot of the core deposit growth at the end of the quarter. So that wasn't totally reflected in the average. Is that fair?

I don't know. In fact I thought it was pretty evenly distributed. Frank Schiraldi - Sandler O'Neill & Partners L.P: Okay.

I think that was the fourth quarter. Frank Schiraldi - Sandler O'Neill & Partners L.P: Okay, maybe I misunderstood then.

But our cost of our CDs is dropping, while the CDs were opening, our cost is dropping on a monthly basis. Frank Schiraldi - Sandler O'Neill & Partners L.P: Okay. And then just finally I just wanted to ask about the early adoption of the FASB Staff Positions, when you mentioned the non-credit components, Charlie of after tax of 6.3 million. So it was my understanding that would flow through earnings, it doesn't?

Yeah, the credit component, the drop in the estimated cash flows between the end of the fourth quarter and the first quarter, that all flows through income, and it totaled just $2 million. Frank Schiraldi - Sandler O'Neill & Partners L.P: I got you.

But 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 non-credit component, the adjustment related to last year that just goes through the retained earnings. Frank Schiraldi - Sandler O'Neill & Partners L.P: Okay.

It's stable on January 1, so a little confusing. Frank Schiraldi - Sandler O'Neill & Partners L.P: Okay. So that non-credit point doesn't actually flow through earnings, would just be classified as retained earnings. Okay.

Yeah, on January 1, we've just classified retained earnings by the write-off has got $10 million tax effected service and earnings went up at 6.6 million. Frank Schiraldi - Sandler O'Neill & Partners L.P: Okay. Thank you.

Yeah. Thank you Frank.

We go next to Whitney Young with Raymond James.

Good morning.

Good morning.

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 kind of 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're continuing to have success. The cost of those deposits are significantly lower now than they were in January.

Okay.

Does that answer your question?

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 had any impact on your unrealized gains or losses during the quarter? Thank you.

Yeah. There are three new accomplishments that came out. One related to carrying to the OTTI, whether investment income or through retained earnings. It's not the only way to disclose and it's not the one related to determining value in this distressed market. We used the same method that was used in the past and it stays like cash flows that we have seen embedded with the securities.

All right. Thank you, very much.

In the past, Whitney we were relying on the brokers because we get free brokers close (ph) the all over the place that won't make sense. But we use the SEC guidelines on 99/20 and we use that to project cash flows and we're doing that the same way.

Okay, great. Thanks very much.

You're welcome.

We will go next to David Darst with FTN Equity.

Good morning.

Good morning David.

Could you comment a little further. It sounds like in your comments you indicated there was some commercial mortgage and CRE, issues emerging that may be suffered from the construction. Could you give us some of the asset classes and just that little bit further?

Yeah. The increase in non-performing, in quarter-to-quarter was $49 million and the breakdown of that, David would be 18 million in commercial loans, 13.5 million in constructions and 10 million in commercial mortgage.

Do you have a just a little more details on the type of property or the type of borrower in the C&I and commercial mortgage.

If is it retail based assets and it's --

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

How about on the commercial mortgage group?

It's a little more widespread, again. Could be anything from a car wash to a small shopping centre, 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 what that charge could be?

No David, we're still in the process of doing that. We are in long drawn out process to buy the 330 million back. We make a pledge for our customers we'll buy those back, if they need it for liquidity. And now we've asked them to make up their minds by May 15, whether they are going to give those auction rates get back to us or not.

Okay and when you originally announced that you would do that, you set aside a third percentage for the entire group?

Right.

But it appears that the actual is actually a little more?

Yeah, at the end of every quarter we value those and then if its still, we do get appraisals and based on this appraisals, we adjust that reserve.

Okay. What discount would the most recent appraisal have got?

No the they are different. There is 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 this and I would think it's about 8%.

Okay.

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

Okay, how about the FDIC special pertaining to the second quarter?

What about it?

Do have the amount? That you expect.

We don't have the final, if we get this legislation that the FDIC is aggressive, probably now requesting this increase in line from the Treasury and if that happens it goes from 20 basis points to 10. So until there appears to be at least in Washington, some positive feeling that would happen. It could be anywhere from 20 to 10. There also some other issues that have been discussed that may reduce if from that. So...

Okay, thank you.

We'll kind of wait to see that happened here, hopefully won't be much.

We'll take our next question from Gerard Cassidy with RBC.

Hi, guys how are you?

Hey, Gerard.

Hi, Gerard.

Charlie, get me back to the write-off of your -- perhaps you mentioned I think it was a $6.6 million net write-off?

Yeah, that's right.

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

Yeah, all of it.

Oh, all of it?

Yeah. Again so, you'll remember if we had a trust preferred security that was at a $100 and we had a $0.10 loss, that would -- we had some credit loss there and rules were you would have to go back to market and come up with good price. And we would rate those down and I think we've brought them down to $0.38 on a dollar. Now the new rules are saying the only thing you have to put through income is the credit related losses. So we took that 38% and moved it up to 70 -- $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?

Yeah, It's not theoretical; we did that.

Oh my gosh.

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

So you're not permitted just to keep it all? Could you not have 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 had to adopt this and we had to write it up, just by the rule.

Wow, that's incredible. The other question I had was

Better than the first.

Yeah -- no, that's true; on a go forward basis, that's why 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 raising production this quarter for the industry that you are able to have greater gains.

Very strong. Most of it was because of the refinancing and we did 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 has been strong across the board, have you guys seen any change in that volume in the last week or would (ph) have either gone up even further or now 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 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 non-performing assets that are C&I related, did you say that those were actual construction loans that were non-performing?

They're related to the construction industry.

Are there loans to construction companies not necessarily to build the project but may be a line of credit to a construction company?

Could be or a company that applies their construction industry or those types of things.

I see, are you guys seeing any deterioration, I know you have identified the residential side in the past, have you seen much non-residential commercial real estate problems in your footprint?

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

Yeah. Is it because you are the owners of the properties are trying to refinance the properties and can't find financing? Or is it recently completed property that cannot find financing?

I would say its more tenants leaving. That's the biggest reason.

Yeah. And then the final question is, in this quarter did you guys do many of those so called mini perms (ph) where your construction loan matured the properties is completed but the owner cannot find permanent financing outside of your bank and you've decided to underwrite it as a mini-perm?

Yeah.

Okay, thank you.

Over next to Rich Weiss with Janney Montgomery Scott.

Good morning.

Good morning Rich.

Good morning.

Scott, just got a follow-up on some of the question with regard to asset quality. Can you talk a little bit about may be charge-off policy and still looks as if in the non-performing asset's still continuing to rise. I know you are increasing the loan loss provision. When would you start to expect the charge-offs ratios to start going up on a larger scale?

You mean charge-offs related to provision?

Really charge-offs, yes for like on the properties or whatever, would you start to expect that to peeking or do you think you are there already?

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

Rick, this is Scott. We will go back to where the economy going and I said last year if we have a spring things we'll get better, we didn't have a spring last year. If we have one this year, if the mortgage volume the way it is, we could. And as you heard before, most of our problems are related to residential construction. Though if there's some relief there I suppose we will again 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. Those charge-offs have gone-up quite a bit last year. The annualize charges were 45 basis points the annualized first quarter it's a 100. I mean they have gone up enough significantly.

Yeah. I was just noticing as well as the non- performing assets, like does that get resolved at the end of the day, would you think. Is that through they 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. And I was wondering also, I guess, on the decrease in the yield on average loans, just kind of because do you think your loan mix is actually getting better placed or is it something with regard to pricing? Is the competitive pressure starting to ease a little bit or are you seeing better pricing with the new loans? Or you can overcome the low interest rates?

Pricing is much better on new loans. There are just not enough new loans right now.

Okay. And final question on the salaried line, because 55 million quarterly is that a decent run rate to use for modeling?

I think it would be Rich.

Okay. Thank you very much.

It's equal to the fourth quarter and I am sorry. In the first quarter there's an extra 1.6 million in employment taxes related to Social Security and now if it goes down, that probably would reduce the run rate by 1.6 million, I would think?

Okay got it. Okay thank you.

Thank you, Rick.

we'll go to Matthew Schultheis with Boenning & Scattergood. Matthew Schultheis - Boenning & Scattergood Inc.: Good Morning.

Good morning. Matthew Schultheis - Boenning & Scattergood Inc.: Could you talk a little bit about your geographic dispersion with regards to your commercial real estate portfolio in total.

We are getting that number for you. Matthew Schultheis - Boenning & Scattergood Inc.: And could you just discuss may be which geographies are seeing the most weakness?

Well as I mentioned earlier the weakness is coming from the bottom of Washington Carter, (ph) which is our Virginia franchisee and Maryland franchisee that's where we had the most run up. Matthew Schultheis - Boenning & Scattergood Inc.: And that includes -- I mean I know that on the constructions site, is that true for the commercial real estate as well?

Commercial real estate. The weakness in the commercial real-estate, actually I would say is more in New Jersey Matthew Schultheis - Boenning & Scattergood Inc.: Okay.

Than any other state. Matthew Schultheis - Boenning & Scattergood Inc.: Okay. What was your FDIC expense for the first quarter versus fourth quarter?

It was 4.290,000 million and the fourth quarter was 1.888,000 million. It was up 2.4 million, it was up 125%. Matthew Schultheis - Boenning & Scattergood Inc.: Okay.

And Matt, Matthew Schultheis - Boenning & Scattergood Inc.: Yeah.

As far as the break-out by state for the commercial real estate, 51% Pennsylvania; 29%, New Jersey; 8.5 for Maryland; 8, Virginia; 3, Delaware. Matthew Schultheis - Boenning & Scattergood Inc.: 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 I was wondering if you're seeing -- was you answer to his mini perm question related to your new program?

No. I think the -- I believe the mini-perm that you are speaking of is related more to the commercial properties where you like do five-year interest only with the IDA and they get permanent financing. Matthew Schultheis - Boenning & Scattergood Inc.: Okay. Are you seeing...

Not done a lot of that. Matthew Schultheis - Boenning & Scattergood Inc.: 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 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. Matthew Schultheis - Boenning & Scattergood Inc.: Is it better than expected, not as good as expected, or were you going to take a flier on it?

I would say it's well first off, it probably was February so it really got ruled out for 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. Matthew Schultheis - Boenning & Scattergood Inc.: Okay, thank you very much.

Thank you, Matt.

We'll go next to Matthew Clark with KBW. Matthew Clark - Keefe Bruyette & Woods, Inc.: Hey, good morning guys.

Good morning. Matthew Clark - Keefe Bruyette & Woods, Inc.: 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 of that portfolio and offer, what the terms and structure of that product is and the pricing of it. What the products -- what rate the product is tied to, for example?

Sure. We have right now, I think, $450 million balances in that product. For 12 month CDs, the pricing dropped 150 basis points from December to today and the rate is really at our discretion. It's not tied to an industry. Matthew Clark - Keefe Bruyette & Woods, Inc.: Okay what rate would you say -- what is that current rate you tie to or what would you suggest that you?

I would say tied as much to the competitive market as any thing. Matthew Clark - Keefe Bruyette & Woods, Inc.: Okay and the repricing characteristic of that, is a repriced at certain number times during that 12 month period or?

We have the ability to reprice at any point in time, we have been doing it on a monthly basis. Matthew Clark - Keefe Bruyette & Woods, Inc.: Okay, okay. Is there an expectation to your pull back on that product to some degree with the expectation that may be rates don't go much lower?

Well you know the pricing on it right now is down to the point where it's 2.25 for a relationship costumer, 2% for someone who doesn't qualify for a as a relationship customer. So our growth in it has been cut back quite a bit. And I think Frank had asked a question earlier, I think he was correct. We continue to see deposit growth but more or less it's been CDs now, because the pricing has pulled back and more is in demand, let's say. Matthew Clark - Keefe Bruyette & Woods, Inc.: Okay. That's helpful. Thank you.

(Operator Instructions). We will go next to Collyn Gilbert with Stifel Nicolaus. Collyn Gilbert - Stifel Nicolaus & Co.: Thanks. Good morning, guys.

Hey Collyn. Collyn Gilbert - Stifel Nicolaus & Co.: You may have covered this. I am sorry. I apologize. But I was just curious to see what you are seeing in the way of kind of loss severity, in terms of the migration going from NPA to net charge-offs and what you are the trends that you are seeing now?

It varies by asset. The closer the asset is to a finished product, the less loss that you are seeing. So all-in it's fairly severe, finished home, we have been very pleased with. Collyn Gilbert - Stifel Nicolaus & Co.: Okay, and as you are doing kind of specific reserve allocations for credits that are going on the books now? What's the methodology that you are using to calculate that specific reserve?

We go through an analysis and value our collateral, at worst case, most probable and best case scenarios and we set the provision first to the worst case. Collyn Gilbert - Stifel Nicolaus & Co.: Okay and what would go into worst case, is that a kind of macro point or something specific to the individual borrower or time lines or work out and just the sort of the erosion of the value over that time line?

Yeah, I think the most probable would be the current appraisal, 75% of the current appraised value. The worse case again depends on the asset class and what we think of the appraisal. I mean this really varies from one to the other. Collyn Gilbert - Stifel Nicolaus & Co.: Okay. And Charlie, I know you commented on, I think Richard 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?

Try to normalize the way, the big question for CIFC expense that what's, (ph) we would have to factor that out. Collyn Gilbert - Stifel Nicolaus & Co.: Sure. And then the 10 let's assume if it was a 10 basis point ceiling they will imposed. What would that mean for cost for you guys?

10 basis points would be that will be about it's a little over 10 -- between 10 and $11 million that would be about $0.04 a share. Collyn Gilbert - Stifel Nicolaus & Co.: Okay.

That's there discussed a lot of things as you are talking about, half of that and they are also talking about out of the guaranteed program that the government has, the guarantee you pay a fee to the FDIC for insurance doesn't mean that you thinking about taking a portion of that and applying that against what they need. So that's a hard one to guess? Collyn Gilbert - Stifel Nicolaus & Co.: Okay. But what about kind of the expense lines that you can control, that 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 benefit expenses it's been flat for a year. If you take out the 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 expenses, collection expenses. But I would expect that overall expense levels to be about where they are right now. But that's a tough, you have the auction rate -- I would think it's flat where it is. Collyn Gilbert - Stifel Nicolaus & Co.: Okay.

And you have some more controllable stuff in that area we have reinsurance collection expense and stuff like that but it's going to be offset by everything we had discretion on is down significantly. Collyn Gilbert - Stifel Nicolaus & Co.: Got you.

And the salaries and benefits are well controlled at this point. I would say flat. Collyn Gilbert - Stifel Nicolaus & Co.: Okay. That was all I had, thanks

Yeah. Thanks Carla (ph).

We will take the follow-up Frank Schiraldi with Sandler O'Neill. Frank Schiraldi - Sandler O'Neill & Partners L.P: I said that I had one more question. I want to ask about and I think Charlie went over the net charge-off breakout by geography. And I missed that but, I want 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 franchisee which I would include Central and Southeastern Pennsylvania is holding up extremely well, from both a delinquency and at charge-offs standpoint, extremely well. We affected 51 % of our loans and bank credit at Pennsylvania. But it's only 19% of our charge-offs and the non-performing assets in Pennsylvania are non-performing assets totaled 58 million and our total non-performing are at 269. So Pennsylvania is holding up extremely well. Frank Schiraldi - Sandler O'Neill & Partners L.P: Okay. Well, what -- just what was that net charge-off number again in Pennsylvania, 19% of --?

It was 19 % of the 30 million. Frank Schiraldi - Sandler O'Neill & Partners L.P: Okay. Thank you, very much.

Yeah. Thank you, Frank.

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

Well, thank you for joining us today. And we hope that you'll be able to be with us again for our second quarter 2009 earnings conference call, which is scheduled for July 22nd at 10:00 AM. Thanks again, take care.

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