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Fulton Financial Corporation (NASDAQ:FULT)

Q3 2008 Earnings Call Transcript

October 22, 2008 10:00 am ET

Executives

Laura Wakeley – VP, Corporate Communications

Scott Smith – Chairman, President and CEO

Charlie Nugent – Senior EVP and CFO

Analysts

Richard Weiss – Janney Montgomery Scott

Collyn Gilbert – Stifel Nicolaus & Company

Bob Hughes – Keefe, Bruyette & Woods

Andrew Stapp – B. Riley & Company

Frank Schiraldi – Sandler O'Neill & Partners

Operator

Good day and welcome everyone to the Fulton Financial Third Quarter 2008 Earning Results Conference Call. This call is being recorded. (Operator instructions) At this time, I would like to turn the call over to Vice President, Corporate Communications Manager, Ms. Laura Wakeley. Please go ahead.

Laura Wakeley

Thank you. Good morning and thanks for joining us today. Your host for our conference call is Scott Smith, Chairman, Chief Executive Officer and President of Fulton Financial Corporation. And joining him is Charlie Nugent, who is Senior Executive Vice President and Chief Financial Officer.

Our comments today will refer to the financial information included with our earnings announcement, which we released at 4:30 yesterday afternoon. These documents can be found on our website at fult.com by clicking on ‘Investor Information’ and then on ‘News.’

Please remember that during this webcast, representatives of Fulton Financial Corporation may make certain forward-looking statements regarding future results or future financial performance of Fulton Financial Corporation. Such forward-looking information is based on certain underlying assumptions, risks, and uncertainties. Because of the possibility of change in the underlying assumptions, actual results could differ materially from those forward-looking statements.

Risks and uncertainties that may affect future results include, pricing pressures on loans and deposits, actions of bank and non-bank competitors, changes or adverse changes in economic, political or regulatory conditions, the 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 corporate borrowings, 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, actions of the Federal Reserve Board, credit worthiness of current borrowers, the Corporation’s success in merger and acquisition integration and customer’s acceptance of the Fulton Financial Corporation’s products and services. 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 would like to turn the call over to your host, Scott Smith.

Scott Smith

Thank you, Laura, and good morning, and thank you all for joining the call. We reported diluted earnings per share of $0.17 for the third quarter, a $0.02 increase over the prior quarter, but short of expectation. General economic conditions have deteriorated further in the last 90 days placing additional stress on the performance of our loan portfolios and our credit metric. While we were encouraged to see continued strength in many of our core banking operations during the quarter, these trends were not enough to offset write-downs in the investment portfolio and a significant increase in the provision for loan losses, preparation for potential – higher potential charge-off.

As much as I would like to tell you that we see a light at the end of the tunnel, we do not. As a result, we felt it was prudent to proactively increase the allowance. Builders and developers have been particularly hard hit and continue to have difficulty reducing inventory. Home appraisals continue to tend lower.

Recent retail sales numbers show a broad decline and predictions for holiday sales are weak. We expect these and other negative trends to continue into at least the early part of next year. If that’s the case, we will continue to have our share of challenges. In the current downtrend we’ve – first of fall real estate collateral values begin to erode more recently and with greater frequency because of the ripple effect of deteriorating business conditions some of our residential real estate developer borrower are not able to repay their loans according to terms. As a result of these conditions, and as we mentioned earlier, we significantly increased our reserve for loan losses.

But even in this environment loan demand and loan growth continues due to market share increases. Deposits funding for this growth has been a challenge. Our deposit growth has been flat for the last few quarters despite almost constant advertising and promotional activities. In the last few months we have seen some of the largest increases in net new account openings we have experienced in the last year. This activity has not yet translated into balance sheet growth. Recent legislative actions increasing the FDIC’s covers 250,000 and most recently covering all non-interest bearing deposits A) provide some additional impetus [ph].

Our core deposit growth is somewhat puzzling given the volatility in the equity markets as well as recent noise about net asset value on some money market (inaudible). And yet even though these problems are flat, deposit account related income remains very strong. And Charlie will cover some of the details in his discussion.

And market acquisitions of community bank competitors continue to present new growth opportunities for us. However, balancing this loan demand against our funding levels and cost of that funding can be quite challenging. In media throughout our footprint we are seeing hundreds of deposit ads, many are from out of market and out of state financial institutions that have not previously targeted our markets.

As we are able to obtain funding, we continue to respond to loan demand, but we are extremely selective and very disciplined in qualifying and underwriting new credit. I trust that you would agree that business is showing (inaudible) perform well in this environment should in all likelihood be positioned to prosper when the current cycle turns. We want to be lending to those businesses now and acquiring new relationships.

Our loan growth this quarter came largely from three areas, consumer, residential mortgage, and commercial real estate. Consumers continue to respond well to our auction line product increased late last year. These loans are branch originated and have been underwritten with conservative loan-to-value ratio. Residential mortgage growth is a result of retained adjustable rate and jumbo loans that are underwritten to our internal standards. Thus far we are not seeing any significant delinquency issues in either of these specific portfolios.

The third area, commercial real estate, is really the result of market share opportunities that I mentioned earlier. We are been asked to look at a lot of opportunities and we are accepting only those that meet our stringent credit and underwriting standards and where we can obtain significant customer relationships.

We also believe that for us to obtain the required funding, we need to offer competitive but not unreasonably high deposit rates, particularly now that the FDIC insurance ceiling has been increased. In order to stay deposit rate competitive without negatively impacting our interest margin, we are carefully monitoring our loans rating. You notice that our net interest margin held up well back in the third quarter.

We have recently adjusted our loan pricing targets across the Corporation and across all portfolios. We are redoubling our efforts to make sure we get paid commensurate with the risk inherent in a distressed market. Successfully moving loan yields up gives us greater pricing latitude on the liability side of the balance sheet.

We are fortunate to have an increasing base of non-interest income from related core banking business and as we discussed in prior calls, cost-cutting initiatives, started in 2007, continue to yield good results, and should continue to do so. As you recall, those involve centralization of Holding Company departments and reductions in salary and benefit costs.

During the quarter, we announced that we would plan – we plan to merge two of our Maryland affiliates, Hagerstown Trust and The Peoples Bank of Elkton, into the Columbia Bank, creating a state-wide franchise in the third quarter of 2009. These actions once completed will bring the total number of affiliate banks in the Holding Company to eight, down from a high of 15 approximately three years ago. Combining these banks will provide greater state-wide brand recognition and increase the marketing resource available for targeted growth in Central Maryland.

At the present time, our capital and liquidity positions remain more than adequate as defined by regulators. Be assured that we will keep a watchful eye on these metrics as economic scenarios unfold in the months ahead. We are currently evaluating the pros and cons associated with expanding our capital base through the issuance of government purchased preferred stock under the Treasury’s capital preferred share purchase program.

We are studying other newly created opportunities as well. I am optimistic about our ability of our Company withstand the most the difficult financial and economic headwinds that we have ever experienced. We all hope that recent federal legislation will restore order to domestic and global financial markets and put us back on the road to economic recovery, but we all know it will take time.

Now, I would like to turn the call over to Charlie Nugent for some additional color on the financials and when he concludes we will be happy to take your questions. Charlie?

Charlie Nugent

Yes, thank you, Scott, and good morning, everyone. Thank you for joining us today. Unless otherwise noted, comparisons are of this quarter’s results to the second quarter of 2008. As Scott mentioned, we reported earnings per share of $0.17 for the third quarter, which was $0.02 higher than the second quarter, and $0.02 lower than the third quarter of last year.

During this quarter we recorded a $10.8 million non-charge related to our investment security holdings that were determined to be other-than-temporarily impaired. On a net of tax basis, this write-down was $7 million or $0.04 per share. Approximately $2 million of this charge is related to bank stocks, $5 million was related to subordinated debt issued by Washington Mutual, $3 million was related to a pooled trust preferred issue and the remainder related to other securities.

During the second quarter of 2008 we recorded a $24.7 million impairment charge related to bank stocks. As of September 30th, our bank stock portfolio had a cost of $55.2 million and a market value of $54.3 million for an unrealized loss of approximately $900,000.

Our fixed income investment portfolio includes bank trust preferred securities with a total book value of $129 million at an estimated fair value of $96 million. We feel these reasonable – we feel that these are reasonable valuations based on the recent FASB guidelines on valuations in distressed markets. Included in this total are pooled trust preferred issue with a book value of $32 million and single or bank issued trust preferred securities of $96 million.

In addition, we hold bank issued subordinated debt with a book value of $40 million and at an estimated fair value of $32 million. The remainder of our fixed income investments is comprised of municipal bonds and agency securities.

During the third quarter we also recorded an additional $2.7 million charge related to auction rate securities held in customer accounts. During the second quarter we recorded a $13.2 million charge for this guarantee. Auction rate securities with a par value of $155 million are still held in customer accounts as of September 30th and could be purchased in the future.

The most significant item impacting our third quarter results was asset quality. The provision for loan losses increased $10 million to $26.7 million in the third quarter. Net charge-offs to average loans were 38 basis points in the third quarter. And the $11 million in net charge-offs this quarter was primarily in commercial loans (inaudible) were $3.9 million, and construction lending, which totaled $4.6 million. These charge-offs occurred throughout our footprint. There were four individual charge-offs exceeding $1 million with an aggregate amount of $6.8 million.

Non-performing assets to total assets increased 115 basis points at September 30th, with non-performing loans increasing $21 million and other real estate increasing $1.6 million. At September 30th, non-performing loans were spread across those categories. Construction loans increased $20 million to $57 million. Non-performing commercial loans increased slightly to $41 million. Commercial mortgages declined by $7 million to $32 million, and residential mortgages increased $4 million to $26 million.

Other components of earnings were relatively strong. Net interest income increased $2 million, or 2%. Total average earning assets were essentially unchanged, but the mix changed as average loans grew to $174 million, or 2%. And investment securities declined to $115 million, or 7%.

Our net interest margin was essentially unchanged at 3.74% for the third quarter. Yields on earning assets declined 14 basis points while the cost of interest-bearing liabilities decreased 15 basis points. Going forward, we expect that strong deposit competition will put pressure on our net interest margin.

On the funding side, total deposits declined $33.6 million or 0.3%. A slight increase in demand accounts was offset by declines in savings and time deposits. Declines occurred in personal accounts but were offset by growth in commercial and municipal balances. On the personal side, we were growing the number of accounts, as Scott mentioned, but we are not seeing overall balanced growth. On a non-personal side, there is some seasonal impact related to the collection of taxes by school districts. Also, we believe our business and municipal customers are being conservative and slower to move their money into investments. As you would expect, growth in customer funding is an area of significant focus for us. We continue to closely monitor balance and pricing trends, and we will continue to invest in promotions and initiatives to generate deposits.

Excluding security losses or gains, and the gain on the sale of the credit card portfolio, our other income was essentially unchanged at $40 million. We saw a strong growth in service charges on deposits of $858,000, or 6% as a result of an increase in overdraft fees. This improvement is related to the lower balances in personal accounts.

Non-deposit related fees increased $470,000, or 5%, due to continued strength in our merchant and foreign exchange businesses. These improvements were offset by declines in other fee businesses and investment management trust service income declined $345,000, or 4%. This reduction was in both brokerage and wealth management and resulted from the current unsettled equity markets.

Gains on mortgage loan sales decreased $400,000, or 15%. The volume of loans sold increased by $9 million, or 6%. However, the spread on sales decreased as pricing in the current environment tightened considerably. Operating expenses declined to $10.6 million, or 10%, mainly due to (inaudible) $0.5 million decrease in charges taken for the auction rate certificates. This charge is reflected in the operating loss line item in our financials.

Thank you for your attention and for your continued interest in Fulton Financial Corporation. Now, we will be glad to answer your questions.

Question-and-Answer Session

Operator

(Operator instructions) And we will take our first question from Rich Weiss of Janney. Please go ahead, sir.

Richard Weiss – Janney Montgomery Scott

Good morning.

Scott Smith

Good morning Rich.

Charlie Nugent

Good morning, Rich.

Richard Weiss – Janney Montgomery Scott

Hey, I was wondering if we can go right into asset quality. A couple of questions. First with construction lending, is – do you still see the trend of non-performance going up?

Scott Smith

Well, they did this quarter, Rich.

Richard Weiss – Janney Montgomery Scott

Right.

Scott Smith

You are asking about–

Richard Weiss – Janney Montgomery Scott

Yes, going forward, really –

Scott Smith

Well, as I mentioned in my comments, we don’t see economic conditions improving dramatically anytime soon, so, you know, we are trying to be prepared for additional issues there. We don’t have a number we are projecting what it’s going to be, but the longer this goes the more difficult it becomes to carry – for some folks to carry the interest cost of this. We are trying to work with them and there are times when we are looking at interest reserve and what we are looking for there is additional collateral. We have some that have put private equity, either their own or from additional investors they have been able to attract. And of course we are using the most recent appraisals we have to make any alterations in our lending commitment to those folks. But as far as the markets improving, presume in the next couple of quarters that’s difficult to project.

Richard Weiss – Janney Montgomery Scott

Okay. And would you – and I am just trying to figure were any of the construction loans charged-off in the third quarter?

Charlie Nugent

Yes, Rich, we mentioned that our charge-offs in the third quarter we had construction lending charge-offs of $4.6 million –

Richard Weiss – Janney Montgomery Scott

I think that’s grouped with the commercial, Charlie, in that table.

Charlie Nugent

I am not sure, Rich. Yes, yes they are. They are in that financial – commercial financial/agriculture. It’s in the commercial section. And, Rich, those $4.6 million we charged off in the third quarter, two of them were over $1 million. One was in New Jersey related to low income housing. And there was another one in Maryland, in the western part of Maryland, and that was $1.5 million, that was real estate development.

Richard Weiss – Janney Montgomery Scott

Okay. And would you foresee your loan loss allowance starting to rise from these levels now I guess in the past few years as you see orders did want reserves higher but now that charge-offs are starting to kick in will it be a fair assumption to say reserves will be higher in ’09 than they are today?

Charlie Nugent

Rich, it’s difficult to project the future. I wish I could, but I can't. And – but we do this detailed analysis every quarter. It was pretty comprehensive by all our loan review people, workout people and our lenders. And we put in there what we think is appropriate. So, and what we think – next quarter it’s going to be hard to guess right now. But the trends seem to be going up, so I would think that they – well how much, I don’t know.

Richard Weiss – Janney Montgomery Scott

Okay. And one other question. With regards to you non-interest bearing deposits, I think it was down 5.5% in the period end basis, but stayed pretty flat based on average balance –

Charlie Nugent

Right.

Richard Weiss – Janney Montgomery Scott

And just kind of like the – what’s the explanation for that?

Charlie Nugent

Well, I will tell you, the – it seems as we keep on opening new accounts – that it seems like the average balances that people keep in there are down. And it’s just hard to – hard for me to tell you exactly what it is.

Scott Smith

As I mentioned in my comments, Rich, we are a bit puzzled by it and we don’t have any data that can – we can give you good information about why it is. And it’s not only new accounts, it’s net new accounts that has been quite good the last couple of months. But it’s not showing up in balances and the deposits on the balance sheet.

Richard Weiss – Janney Montgomery Scott

Okay. And one final question I guess. Would you guys be interested in looking at the TARP program–?

Scott Smith

Well, as I mentioned, we are looking at everything. We haven’t made any decision yet. The details continue to come out. I think we’ve got most of them now, but we are in the process of analyzing everything that’s out there and seeing what’s applicable to us and what isn’t.

Richard Weiss – Janney Montgomery Scott

Okay. I will get off the phone, let other people ask questions. Thank you very much.

Scott Smith

You are welcome, Rich.

Operator

We will take our next question from Collyn Gilbert of Stifel Nicolaus. Please go ahead, sir.

Collyn Gilbert – Stifel Nicolaus & Company

Thanks. Good morning, if that’s okay.

Scott Smith

Good morning, Collyn.

Collyn Gilbert – Stifel Nicolaus & Company

Just a follow-up, Scott, to Rich’s question on the TARP plan. In your intro comments you had said you would look at other newly created opportunities as well. Could you just maybe give us some specifics I mean in terms of other capital – forms of capital raising or what did you mean there?

Scott Smith

Well, everything that’s out there. There is a whole list of things the Fed has provided. There is a list of things the treasury has provided, and we haven’t made any specific decisions about any of them other than some of the FDIC stuff. Of course, we have gone along with them and we have made the decision on the FDIC insurance for the DDA accounts to offer that to our customers through ’09. So that decision was made because we felt like we needed to get that message out to customers right away. But other than that, we are still – stay tuned. We will announce our decisions as we make them.

Collyn Gilbert – Stifel Nicolaus & Company

Okay, okay. And then just a question again on asset quality. Are you guys doing anything in the way of loan modifications to some of the residential borrowers that you know you might see are in trouble or approaching sort of the – kind of proactive management of these credits in anyway?

Charlie Nugent

The delinquency in our residential portfolio, not totally, but a lot comes from the issues we had with resource mortgage last year. Okay. And so those that have gotten back we have gotten back in the service years, are king of beyond the – working with customers. Now, we have some delinquency in our portfolio that was there but it’s not of any huge consequence. A lot of this – of the government related issues that you are reading about are really – apply more to the servicers that have the majority of those issues. And frankly, in – major problems are in other markets. We have some in this market and it’s there, but we have always and we’ll continue to work with any customer through a delinquency to try to work through the situation. Everybody wins more that we keep the customer in business or in the house or whatever the lending situation might be.

Collyn Gilbert – Stifel Nicolaus & Company

Okay. Are you – so, are you seeing more stress then on your commercial borrower than your consumer borrower?

Scott Smith

Yes, I would say so. As I mentioned, our consumer portfolio, the delinquencies there that the ones we originated and have run through our system are performing okay, and are not as good as they were a couple of years ago, but there was almost nothing there then.

Collyn Gilbert – Stifel Nicolaus & Company

Yes.

Scott Smith

As we mentioned, it’s coming out of commercial portfolio and there are always – as always there are different types of businesses impacted, but the area I think it gives us most hard run of course is the real estate development area.

Collyn Gilbert – Stifel Nicolaus & Company

Okay. And is that pretty much coming out of – well, I shouldn’t make the assumption, but out of Columbia franchise or is it across the–?

Scott Smith

It would be primarily in the Baltimore/Washington, Northern Virginia, and some in New Jersey.

Collyn Gilbert – Stifel Nicolaus & Company

Okay.

Scott Smith

Pennsylvania franchise is doing okay.

Collyn Gilbert – Stifel Nicolaus & Company

Okay. Thanks.

Scott Smith

You are welcome.

Operator

(Operator instructions) We’ll take our next question from Bob Hughes of KBW.

Bob Hughes – Keefe, Bruyette & Woods

Hi, good morning guys. I was hoping to maybe get a little bit more color, it seemed to me that functionally the bulk of the increase in NPLs this quarter was driven by the – by the homebuilder book. So, a couple of questions. What drove the increase in NPLs, specifically? Is it interest reserves running out and concerns over a long, hard winter with little sales activity? Is it prospective view on the collateral value declines? Could you just shed a little light on that?

Scott Smith

Well, as I mentioned, up until this quarter, we were primarily concerned about deterioration of collateral values. We began, particularly towards the end of the quarter, hearing from some developers about concerns about being able to – the long, hard winter that you referred to. And so, as I said, we are working with them. We are trying to – we encourage them to provide additional collateral so we can provide some additional support. We are encouraging and some have injected equity from their liquidity outside of the real estate development activities they have, additional investors that they can attract to it. So – and then – and that’s why we try to put the reserves up a little so we could absorb some of that – that could we have. We continue to use updated appraisals and so far they are not going up. But –

Bob Hughes – Keefe, Bruyette & Woods

Right–

Scott Smith

It got – it went from – we are concerned about the collateral to some of our customers, not all, but some of them saying I am not sure I can carry the interest cost through the winter.

Bob Hughes – Keefe, Bruyette & Woods

Are you guys expending additional interest reserves or spending additional loans on these borrowers to get them through the winter?

Scott Smith

When we can get additional collateral and/or equity support from them.

Bob Hughes – Keefe, Bruyette & Woods

Okay. But today any concerns on the collateral values have been pretty much predicated on updated appraisals and certainly no perspective here where collateral values could go?

Scott Smith

I am sorry. Last part of your question?

Bob Hughes – Keefe, Bruyette & Woods

Yes, the view and actions you have taken on the construction book are largely predicated on continuation of updated appraisals and where values are today, not necessarily predicated on any belief that collateral values can or will decline further?

Scott Smith

I don’t –we certainly don’t expect them to go up. So, yes, we – I can't tell you how much they are going down, but we in certain markets, where we think there is some more room for collateral values to decrease.

Bob Hughes – Keefe, Bruyette & Woods

Okay. I know you spent a fair amount of time talking about the deposit trends. A couple of things. It looks to me like sounded much of the balance sheet growth in the quarter was overnight borrowings. And we have got a recent 50 basis point cut. I am wondering if you could comment upon your outlook for the margin in the context of those movements?

Charlie Nugent

You know, Bob, the margins certainly benefited from the decline in the Fed funds rate, but on the wholesale funding it’s helped us but deposit costs are still – market deposit across from other banks it is still very competitive. Most of the CD’s we are seeing in our market is over 4%. So I think that the customer deposit cost are going to go up and it’s going to do put pressure on our margin as we go forward.

Bob Hughes – Keefe, Bruyette & Woods

Okay. And then perhaps one last question. Just clearly much of the runoff in your deposits in the quarter, not to tell deposits were down dramatically –

Scott Smith

Right.

Bob Hughes – Keefe, Bruyette & Woods

But came in the form of non-interest bearing. I wondered if you could comment upon trends that you’d see quarter-to-date post the increase in FDIC insurance and other stabilization act factors.

Scott Smith

We look at that every week in our (inaudible) meetings and we just see flat trends. We don’t see any growth in our deposit balances. They are basically flat.

Bob Hughes – Keefe, Bruyette & Woods

Okay.

Scott Smith

I mean I don’t think we have seen any change since the FIDC insurance was brought up.

Bob Hughes – Keefe, Bruyette & Woods

Okay. Alright. Thank you guys.

Scott Smith

You are welcome.

Operator

Our next question is from Andy Stapp of B. Riley and Company. Please go ahead.

Scott Smith

Good morning, Andy.

Andrew Stapp – B. Riley & Company

Good morning. Just on your reserve, your reserve coverage of loans is up quite a bit. Just wondering how much was that due to a change in deterioration in risk ratings versus more qualitative factors.

Scott Smith

Good morning, Andy. It’s a combination of both. As we have talked in other calls, we have this model we run things through and we use that and so we did increase the allocation – some specific allocations to certain customers. But we also did, as I mentioned earlier, the deteriorating economic situation. We held our unallocated up there as well.

Andrew Stapp – B. Riley & Company

Okay. And was there any change in your 30-to 89-day delinquencies?

Scott Smith

Any change in what, the 30–?

Andrew Stapp – B. Riley & Company

30 to 89 delinquency.

Scott Smith

Oh, 30 to 89, okay. You mean from second quarter to third quarter?

Andrew Stapp – B. Riley & Company

Right.

Scott Smith

I would say they have trended up slightly.

Andrew Stapp – B. Riley & Company

Okay. And you had some nice gains in residential mortgage loans. What was driving that?

Scott Smith

We have been booking adjustable rate loans and jumbos that – and we have been – following [ph] those. The jumbos, there really isn’t a lot of market out there for them, and I don’t want to give the impression we have done huge amounts of jumbos, but we do have high quality customers with strong credit that we are providing those two and then our adjustable to date we have decided to keep on the portfolio because the rates are recent. And again, they are underwritten to our standards – our portfolio standards, not to secondary market and are at least as strong as secondary market standards. So –

Andrew Stapp – B. Riley & Company

And your jumbos would obviously not be 30-year fixed rate stuff?

Scott Smith

That’s right. They are all five ARMS, mostly five adjustable ARMs.

Andrew Stapp – B. Riley & Company

(inaudible) ARMs as well, okay. On the pooled trusts, what tranche were they in?

Charlie Nugent

The one that we wrote down, Andy, was in the mezzanine tranche and we had 10 pools we owned and two are senior and the other eight are mezzanine. Mezzanine will be in the middle.

Andrew Stapp – B. Riley & Company

Okay. In your single issuer trusts, any other troubled banking organizations that you have like a Nat City or anything like that?

Scott Smith

No. I don’t what the definition of ‘troubled’ is. We don’t have any National City in the trust preferreds, but they are all – they all ‘A’ ratings or above except one, which is a local bank, we have a lot faith in, though it’s rated ‘Baa2’ but things can change often quick as we have seen. So – you know there a Wells Fargo back in the market, JPMorgan, BB&T, Fifth Third still rated A2. SunTrust. We have Wachovia, Rural Bank of Canada, Northern Trust, PMC [ph], Comerica, Key Corp. you can keep on – they are all I would think relatively solid banks.

Andrew Stapp – B. Riley & Company

Okay. Great, thanks.

Scott Smith

You are welcome.

Operator

(Operator instructions) Our next question is from Frank Schiraldi of Sandler O'Neill. Please go ahead.

Frank Schiraldi – Sandler O'Neill & Partners

Good morning guys.

Scott Smith

Good morning, Frank.

Charlie Nugent

Good morning, Frank.

Frank Schiraldi – Sandler O'Neill & Partners

Most of my questions have been answered actually but I guess just a couple of follow-ons here. The CD growth in the quarter that was out of the branches retails CDs or some of the brokered?

Charlie Nugent

It’s been all retail CD’s. In fact, Frank, we have had positive CD growth overall in the quarter as we actually ran off some more [ph] CD’s, brokered CD’s.

Frank Schiraldi – Sandler O'Neill & Partners

Okay and I think you said the competition is still pretty tough there. Are those still – so those are still sort of still sort of coming on the books at around 4% or–?

Charlie Nugent

Our rate is still isn’t that high yet. I don’t think we usually 3.75 maybe some – some of the banks are 4%. But most of the competitive are at very high rates relative to where we think market rates are.

Frank Schiraldi – Sandler O'Neill & Partners

Okay. I am just trying to get an idea this recent Fed cut, is – as far as the adjustable rate stuff in the commercial book, is that primarily prime or is there a lot of LIBOR in there? Any sort of kind of–?

Charlie Nugent

In the home loan portfolio, I don’t have the numbers for Columbia and I think Columbia has a lot, but there is $900 million in loans that are tied to LIBOR. And for the most part they price on the 25th of the month. And you know LIBOR is a little inflated so we are benefiting from that. On the negative side, we have Federal Home Loan Bank advances, this $400 million of those, and they price on LIBOR too, they are floating on LIBOR, so that hurts us.

Frank Schiraldi – Sandler O'Neill & Partners

Okay. And then these recent – maybe it’s not one of the – the biggest thing on your minds right now, but as far as the FDIC assessment rate hikes likely to come in, in ’09, does that change your thinking at all on the liability side as far as CD’s versus FHLB borrowing?

Charlie Nugent

Yes, the – it does, because I think there is a penalty – if your advances are 15% over your deposits there is a penalty. And if your jumbo – brokered CD’s are 10% over deposits there is a penalty. So it affects our thinking. Overall for the Corporation, we are not above those levels, but individual banks all are, so we are going to have to manage those banks a little bit different. And I don’t think we will be paying anything related to – any excess premiums because of that.

Frank Schiraldi – Sandler O'Neill & Partners

Okay.

Charlie Nugent

We paid $3 million in premiums this year. We sought some credits. Next year, we expect that to go up to $12 million.

Frank Schiraldi – Sandler O'Neill & Partners

And just one last question on the trust preferred pooled stuff. You have the – when you said book, and I know there is like say there has been some other-than-temporary impairments, so do you have just cost of that entire pooled portfolio versus where it’s being held on the books at fair value now?

Scott Smith

Yes, the – it’s $32.2 million in cost–

Frank Schiraldi – Sandler O'Neill & Partners

Okay.

Scott Smith

And fair value, Frank, it depends on – we go to different brokers and the fair value is all over the place, what they think fair value is and we try to use a model and we discount it for the changes in maybe the Fed ratings of these, we change it, we put in the liquidity adjustment. And when we do that, all the pools that we have, $32.2 million we think the value is $9.5 million less. And you know I don’t think that’s the economic value but I think it’s the value that we are using based on the new FASB 5 which just came out.

Frank Schiraldi – Sandler O'Neill & Partners

So, the $32 million is cost and then you’ve – the haircut is $9.5 million?

Scott Smith

Yes.

Frank Schiraldi – Sandler O'Neill & Partners

Okay. And it would seem to me that since the end of the quarter – since TARP program was announced that you should see some quotes if not actual bids coming up for pooled and trust preferred single issuer. Has that been the case? Are you seeing and talking to–?

Charlie Nugent

I haven’t seen it yet. You know it seemed like the pricing really changed after (inaudible) and more conservative pricing. You would think logically that a lot of tax that are deferring they are preferred dividend payments it doesn’t look logically that they would. When they differ we treat it as a default. And I would think – I don’t know, I can't predict the future, but this program of the government it would give them additional capital. Think of it additional capital, you would think they would start making their preferred dividend payments again. So I would think – I am not, I can't predict the future – I would think, in my opinion, these values should go up. Because we are not going to have (inaudible) I think they participate in that program, they are going to give additional capital and they will start making these payments because they have to make these payments before they can make the payments on the senior preferred issue in their common stock.

Frank Schiraldi – Sandler O'Neill & Partners

Right. Okay thanks.

Charlie Nugent

You are welcome.

Operator

And now, let’s have a followup question from Andy Stapp of B. Riley and Company. Please go ahead.

Andrew Stapp – B. Riley & Company

Do you participate in national share credits? If so, what extent?

Scott Smith

Limited extent, Andy. I think the technical definition is more than three banks in a deal. And they are all in-market stuff where we have customers that we share with some of the larger banks because they are just – their lending needs–

Andrew Stapp – B. Riley & Company

You told there is 12.

Scott Smith

No. It’s a part of the portfolio but it’s primarily the service customer relationships in our market where we know them and we need capacity to work with other banks to handle it.

Andrew Stapp – B. Riley & Company

Okay, okay.

Operator

Thank you, ladies and gentlemen. At this time, I would like to turn the conference over to Mr. Scott Smith. Please go ahead, sir.

Scott Smith

Well, thank you for joining us today. And I would like to end this call at this point in time and I we hope you will be able to be with us again on the – in the fourth quarter, year-end earnings conference call, which is scheduled for January 21st.10 AM. I will see you then.

Operator

This concludes today’s Fulton Financial Corporation, Fulton Financial third quarter earnings call. Thank you for joining us and have a wonderful day.

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Source: Fulton Financial Corporation Q3 2008 Earnings Call Transcript
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