Fulton Financial Corporation
Q1 2013 Earnings Call Transcript

Published: 17 Apr 2013

[Operator:]

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.

[Laura Wakeley:]

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 announcement, which we released at 4

[E. Philip 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 a 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 2012, and we continue to repurchase our stock under the program that expires June 30. We have bought back $4.2 million -- or 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 securities laws and other legal requirements and subject to market conditions. There were 3 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 a meaningful average loan growth, 2.1% link 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. Loan 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. We continue to see tangible results from this program. In addition, our new pipeline remains strong as we enter the second quarter. I want to give you a breakdown of our $254 million link 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 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 lock mortgage pipeline remained relatively stable at $313 million on March 31, down $10 million from year end. At 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 and other corporate objectives 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 at past rating, declined by $40 million this quarter. Nonaccrual 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, link quarter. Reductions occurred in outside services, marketing and operating risk loss. While we were pleased with the decreases, it did occur 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 link quarter, largely due to reduced spreads on residential mortgages and lower deposit account related revenue. And 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 non-interest-bearing demand deposits by almost 16% during the year. Over the same period, time deposits decreased 16%. This change in our deposit mix over the last year helped us -- helps us to mitigate margin pressure to some extent but not enough to offset the drop in asset yields. Despite a small decrease in average core deposits link quarter, our retail and small business account base continued to expand at a moderate pace. 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 6 banks to be converted to the new platform. This 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 service -- 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 a 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, good 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 take your questions. Charlie?

[Charles J. Nugent:]

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 in our net interest margin. This decline more than offset the benefit of a $363 million or 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 stocks. During the first quarter, we took advantage of market conditions to sell certain debt securities that had a 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. Non-interest expense decreased $2.6 million or 2.3%, excluding a $3 million Federal Home Loan Bank advanced 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 from 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 expenses, total other expenses, should be in the range of $112 million to $115 million for 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 2 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:]

[Operator Instructions] We'll hear first from Frank Schiraldi with Sandler O'Neill.

[Frank Schiraldi:]

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

[Charles J. Nugent:]

In terms of the balance sheet positioning, Frank, I think we're in pretty good position. And from a static GAAP analysis in 6 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'll see our net interest income increase and I hope that our margin also. But we are in a position -- if we want to borrow more from -- in the federal -- over -- federal funds market. I think we're about, at the end of March, we were borrowing about $725 million or around there, and we could borrow a lot more that way. And we can also borrow from the Federal Home Loan Bank. That's a constant evaluation of our position, how big our investment portfolio should be, how much we're borrowing, and that's under constant evaluation by our treasury people.

[Frank Schiraldi:]

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 fair?

[Charles J. Nugent:]

We could.

[Frank Schiraldi:]

Okay. And then, I just wondered if you could characterize the loan growth from 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 a greater demand.

[E. Philip Wenger:]

Frank, this is Phil. And I would say it's a combination. I do think we -- our pricing has come more in line with what's out in the market, but we are seeing greater demand from existing customers. And as we see our credits coming into our loan committee every week, we went for a long, long time where they were very little requests, very few requests for equipment, any kind of expansion, increasing lines to fund receivables and inventory. And I would say, over the last 6 months, a large percentage of the credits we're reviewing are asking for increases to fund some sort of expansion, whether it's in short-term working capital assets or in fixed assets. So I would say, a combination.

[Frank Schiraldi:]

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 link quarter and you spoke about them as being partially -- being seasonal. I mean, what are your thoughts on that decline link quarter? Is that primarily seasonal? Or is it just a shift in customers or customer activity?

[Charles J. Nugent:]

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, a $1.6 million or 14%. It is seasonal, but if you look to the first quarter of last year, we're down about $500,000 from there. So -- but it seems like it's not only seasonable but a change in customer behavior, where they're just not overdrawing their accounts as much.

[E. Philip Wenger:]

And 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.

[Frank Schiraldi:]

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?

[E. Philip Wenger:]

We do think so, yes.

[Operator:]

We'll hear next from Bob Ramsey with FBR & Co.

[Bob Ramsey:]

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?

[Charles J. Nugent:]

Bob, the low would be $112 million and the high would be $115 million. And 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.

[Bob Ramsey:]

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

[Charles J. Nugent:]

The big drop quarter-to-quarter was that prepayment penalty, Bob, 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, mortgages it could be put back. It was down $861,000. They were the biggest ones.

[Bob Ramsey:]

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

[Charles J. Nugent:]

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

[Bob Ramsey:]

Okay. And then, if I sort of shift over to margin, I know you all gave a range next quarter, which suggests maybe a little bit less pressure than you will have 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 kind of down 5 bps to 10 bps a quarter?

[Charles J. Nugent:]

I don't know. It's hard to predict when you look out. I think we gave a provision of 3.60% for this, I did, in the quarter, we were wrong. And it seems we have -- we try to predict the investment yields and the deposit yields as easier, but loan yields and 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 at 3.44% and then, we had one that was another projection was 3.50%. And a lot of it, the difference between the 2 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 up or down.

[Bob Ramsey:]

And then, I guess, as you sort of pulled it together, I mean, you all have had really nice loan growth this quarter, particularly the 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 sort of look forward given your growth expectations and your margin, sort of, sensitivities there, can you grow net interest income this year? Or do you think you can keep it flat? Or do you sort of have a bias up or down from where we are today?

[E. Philip Wenger:]

Bob, let me say a couple of things and then, I'll -- Charlie can add. When you look link quarter, the biggest decrease was actually a cost in the actual net interest income. It was caused by the fact that there were 2 less days. 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 5-basis-point drop in margin. So we are focused on it and we're going to try our best.

[Charles J. Nugent:]

That's exactly what I was going to say.

[Operator:]

And we'll take our next question from Jason O’Donnell with Merion Capital Group.

[Jason A. O’Donnell:]

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 link quarter?

[E. Philip Wenger:]

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.

[Jason A. O’Donnell:]

Okay. 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 the sale margin this quarter versus the fourth quarter? And were there any MSR impairments or onetime items impacting your results?

[Charles J. Nugent:]

The spread for the quarter was 1.62% and that's the first quarter, and it was down 32% from the fourth quarter when spread was an all-time high for us, 2.37%. So the primary reason for the drop was this drop in the spread.

[Jason A. O’Donnell:]

Okay, and then last one. How would you characterize kind of 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?

[E. Philip Wenger:]

Well, you know our goal would be that the mortgage would increase in the second quarter. I think the seasonality decrease happens in the first quarter from the standpoint of homebuying 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.

[Operator:]

We'll take our next question from Casey Haire with Jefferies.

[Casey Haire:]

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

[Charles J. Nugent:]

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

[Casey Haire:]

Right, okay. And then, obviously, the securities book was actually up, 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 sort of grow the securities portfolio going forward?

[Charles J. Nugent:]

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

[Casey Haire:]

Okay, so it's more opportunistic rather than any shift in -- I mean -- you're not looking at them...

[Charles J. Nugent:]

We -- the treasury people look at that everyday and make decisions on that and we have a lot of caveat.

[E. Philip Wenger:]

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

[Casey Haire:]

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 kind of 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 as the payroll increased and there's been stock grants. Just curious if that guide level contemplates those, sort of, seasonal upticks.

[Charles J. Nugent:]

It does and the big thing that had impressed me with FICA 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. And as far as going forward, we look at that and the big thing, our range is going 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's 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's factored in. That's the primary reason for that range going up.

[Operator:]

We'll hear next from Nicholas Karzon with Credit Suisse.

[Nicholas Karzon:]

I guess, just 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 kind of $112 million to $115 million.

[Charles J. Nugent:]

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 I -- somewhere between, I would say, the total for second quarter will be $1 million to $1.2 million, up from $600,000.

[Nicholas Karzon:]

Okay, got it, that's helpful. And then, the second question was on the, kind of, the gain on sale spread, which came in at about 75 basis points, I guess, in the quarter. Is that something that could continue to trail down over the course of the year? Or do you have expectations around that?

[Charles J. Nugent:]

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.

[Operator:]

We'll hear next from Chris McGratty with KBW.

[Christopher McGratty:]

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, kind of, where your targeted capital ratios are and maybe, a comment on M&A appetite.

[Charles J. Nugent:]

So in June, we'll be examining where we are with capital and we'll be talking to our board about the possibilities of continuing to buy back and that all will depend on a number of factors, which would include our growth, 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 2 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.

[Christopher McGratty:]

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

[Charles J. Nugent:]

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.

[Operator:]

We'll hear next from Matthew Kelley from Sterne Agee.

[Matthew Brandon Kelley:]

Just a question, as credit continues to improve, just remind us where you're comfortable bringing reserve coverage down to over the next year or 2 as a percent of total loans?

[Charles J. Nugent:]

Well, as a percent of loans, I think we said in the past that 150 is probably a target we'd be shooting for. That number could change, depending on where the economy goes and all those things. But in our minds right now we're thinking, "That's the target."

[Matthew Brandon Kelley:]

Okay. And in addition or beyond an operating risk loss and OREO expense, are there any other areas that we might see reduction in non-interest 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?

[Charles J. Nugent:]

So in the short term, until we get through this core conversion, I don't think there's a lot of areas that we're 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.

[Matthew Brandon Kelley:]

How much are those in aggregate in those 3 that you just rattled off?

[E. Philip Wenger:]

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. That's, I would say, that would be predominantly what we'd be looking at.

[Matthew Brandon Kelley:]

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

[E. Philip Wenger:]

Based on that -- what's happening with the 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.

[Matthew Brandon Kelley:]

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 a MSR write-down or was that a positive number this quarter?

[Charles J. Nugent:]

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 mortgage servicing rights on there where we think market value is amortized, and 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. That's based on actual prepayments -- just pre-payments we're seeing now.

[Matthew Brandon Kelley:]

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

[Charles J. Nugent:]

Yes, for the first 2 weeks, that's a very short time period, but margins have increased in the short term.

[Operator:]

We'll take our next question from Matthew Keating with Barclays.

[Matthew J. Keating:]

Quite encouraging to see we had period and loan growth at 2% link quarter for the second straight quarter. I believe your commentary on the 4Q call was that while this is encouraging, you thought this kind of level might incorporate or might need an improvement in the economy to be sustainable. Now after posting a second consecutive quarter with that type of growth and given where your pipeline sort of ended the quarter, how are you thinking about pace of loan growth as you move throughout 2013?

[E. Philip Wenger:]

It'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 2 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's going great again but we remain encouraged.

[Matthew J. Keating:]

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

[E. Philip Wenger:]

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 now in the short term, we still think that it's an attractive price.

[Matthew J. Keating:]

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

[Charles J. Nugent:]

I think some would be in outside services, some would be in software and I think -- and then the third would be in the data processing area -- line . So I think it would be kind of split in those 3.

[Operator:]

We'll take our next question from Blair Brantley with BB&T Capital Markets.

[Blair C. Brantley:]

I had a question on the loan growth. The residential mortgage growth, was that -- that's something that typically would have been sold if the spreads had been stronger?

[E. Philip Wenger:]

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 in adjustable rates, we continue to do that. So as we -- we really ended that program in the fourth quarter but there was carryover, settlements that when mortgages that we locked in the fourth quarter, they settled in the first quarter. Though, some of it would have been from that. So going forward, we continue to hold $10 million order of 10-year reduction.

[Blair C. Brantley:]

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

[E. Philip Wenger:]

Well, on the commercial real estate side, I think we are seeing some life insurance companies getting back in and or competing again for some of those assets. I'll say that's one area that we see outside of our industry where we're getting some competition again.

[Blair C. Brantley:]

Are you seeing anything in terms of structure and sort of wanting to do that, becoming a bigger issue outside of just pricing?

[E. Philip Wenger:]

Pricing remains the predominant issue, yes.

[Blair C. Brantley:]

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

[E. Philip Wenger:]

So our total TDRs at the end of the quarter were $116 million, and our accruing TDRs are $77 million. At the end of the fourth quarter, our accruing TDRs were $76 million, essentially unchanged.

[Operator:]

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

[E. Philip Wenger:]

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

[Operator:]

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