Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Laura Wakeley - Vice President, Manager Corporate Communications

R. Scott Smith - Chief Executive Officer

Charles J. Nugent - Chief Financial Officer

E. Philip Wenger - President and Chief Operating Officer

Analysts

Matthew Schultheis - Boenning & Scattergood Inc.

Richard Weiss - Janney Montgomery Scott

Matthew Clark - KBW

Frank Schiraldi - Sandler O'Neill & Partners

David Darst - FTN Midwest Securities Corp.

Collyn Gilbert - Stifel Nicolaus & Company

Fulton Financial Corporation (FULT) Q4 2008 Earnings Call January 21, 2009 10:00 AM ET

Operator

Good day and welcome everyone to the Fulton Financial fourth quarter and year end 2008 earnings results conference call. This call is being recorded. At this time, I would like to turn the call over to Vice President, Corporate Communications Manager, Ms. Laura Wakeley.

Laura Wakeley

Good morning and thanks for joining us for Fulton Financial Corporation’s conference call and webcast to discuss our earnings for the fourth quarter and 2008. Your host for today’s conference call is Scott Smith, Chairman, Chairman and Chief Executive 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 www.fult.com and 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 current expectations, assumptions, plans, estimates, and protection about its business and its industry and may involve inherent risks, uncertainties, and other factors. Although the corporation believes 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, whether that its 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 guaranteed as future performance. The corporation undertakes no obligation to update or revise any forward-looking statements. Accordingly, investors and others are cautioned not to place undue reliance on such forward-looking statements. Many factors could affect financial results including 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 corporate borrowings, the impact of composition in interest rates on net interest, its margin, and net interest income, investment strategy, 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, balance of risk-sensitive assets viewed as sensitive liabilities, salary and employee benefits and other expenses, amortization of intangible assets, goodwill impairment, capital liquidity strategies, and other business matters for future periods. As mentioned before, Fulton Financial does not undertake any obligation to update any forward-looking statements to reflect circumstances or events that occur after the date under which such statements were made.

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

R. Scott Smith

Good morning everyone and thank you for joining us. Here with us this morning is Charlie Nugent, our Chief Financial Officer, and Phil Wenger, who was recently named President and Chief Operating Officer of the corporation.

Phil is a key member of our senior management team and will participate in future calls.

I would like to begin with a discussion and an overview of 2008 then Charlie will provide the financial details for the fourth quarter and for the year. When he concludes the three of us will be happy to answer your questions.

As you saw from yesterday’s news release 2008 was a difficult year for us. Every quarter brought with it one or more financial issues, some credit related, some market related, that negatively impacted our earnings. The last quarter was no exception.

These most recent issues, as well as the negative impact they had on our earnings, were significant. They included the impairment of goodwill for the Columbia Bank, the other than temporarily impaired adjustments on our pooled trust preferred securities, and the additional increase on our loan loss provision. These items were all contained in the 8-K that we filed on December 16.

Since that filing, and as noted in yesterday’s release, we recorded an additional $12.9 million OTTI write-down on our bank stock portfolio. The corporation ended the year with a loss of $0.03 per share and a loss of $0.58 for the fourth quarter.

This performance is a disappointment to me and to our senior management team. We have confronted, and continue to confront, each one of our challenges head-on. We have taken what we believe to be appropriate steps to respond to each one. However, regaining our momentum will be contingent upon the timing and the strength of a rebound in the economy.

In late December the corporation received $376.5 million from the Treasury’s Capital Purchase Program. The intent of this program is to provide fuel for economic growth by enabling healthy banks to continue to focus on lending to credit-worthy businesses and consumers.

There have been stories in the media recently regarding the recipient accountability for lending these funds. As a family of community banks, we know how important both the retail and business sectors will be to providing the necessary impetus for the economic growth in our markets.

Within those key sectors are a number of sub-segments on which we will focus our lending activities. They include the residential mortgage business, home equity lines and loans, indirect automobile financing, and small businesses, which is a sector we also view as an important source of deposit funding.

While our best intentions will not create loan demand where it does not exist, our objective to targeted marketing and promotional programs is to create greater opportunity for quality loan growth.

In addition the Capital Purchase money allows us to fill some product gaps as a result of fewer secondary markets investors. We have developed a product to help our residential builders move inventory, financed by our affiliate banks.

Please know that we have not relaxed our underwriting standards and have no intention of doing so, however, based on our projections and given the recent increase we have seen in mortgage refinancing activity, we expect our loan growth in 2009 to exceed the $376.5 million from the Treasury.

The Treasury’s investment, in conjunction with retail and wholesale funding, will be used to support and enhance all of our lending activity.

Despite the economic conditions and challenges facing us, we understand that it is our core banking business that continues to undergrid this economy on which our future success depends. That foundation includes our 3,900 dedicated, well-trained, community bankers in five states serving customers through traditionally strong markets. These same markets will eventually regain their strength, although I think we all agree it will take some time.

One of my biggest concerns as we managed through the headwinds of last year was to make sure that we didn’t let our problems take our focus off our customers, and it did not. In fact, throughout 2008 we increased our customer focus by rallying the entire company around the creation of a superior customer-experience culture.

We launched a corporate-wide service promise initiative and every employee by signed commitment pledged to care, listen, understand, and deliver his or her personal best to every customer.

We also launched a company-wide recognition program that rewards employees when they deliver on our customer service promise.

While maintaining each local affiliate’s name and community presence, we launched a corporate branding campaign across the entire footprint with the tag line, Listening Is Just The Beginning.

We will now offer more efficiency and effectively reach our customers and prospects with a consistent message throughout our branches and in the media.

On the asset side of the balance sheet, we are confining our new loans to credit-worthy borrowers, in keeping with our high underwriting standards. Changes in the competitive landscape have created an opportunity for us to price new, and some existing credits, more rationally.

I think it is important to note that our long-standing customer relationship strategy takes on even greater significance in this difficult economic environment. Our personal approach to building meaningful customer relationships includes deposit funding, fee income and related business lines, and revenue-producing retirement investment and trust services. And as a result, our balance sheet strengthens over time. We would expect to leverage our capital purchase funds many times over.

We continue to see customer deposits come in with advertising and promotion. I must say, however, that throughout 2008 obtaining rationally priced funding from the retail sector has been a significant challenge.

With our continued focus on core banking we opened five new branches, one in Maryland, two in New Jersey, one in Pennsylvania, and one in Virginia, in markets that provide significant current and future opportunities to grow households and to capture new market share.

We have increased our branch space new business development efforts in markets that have been disrupted by merger and acquisition activity and are taking advantage of market opportunities to cultivate new customers who, as a result of this economic turmoil, have a new appreciation for community banking. In fact, one of our new brand TV spots focuses exclusively on this theme.

Loan growth remained reasonably strong throughout the year. We believe that trend is the result of three factors. Market competitor turmoil, the fact that some sources of credit have disappeared, and more rational underwriting standards across the industry. Charlie will address the granularity of our portfolio on credit trends more fully in his comments.

I want to stress that we continue to actively manage the quality of our new and existing loan exposure. On new loan originations we have increased our selectivity with regard to both borrower and the business line in which the borrower operates. We are focusing on borrowers and industries that have the greatest likelihood of successfully weathering the current economic conditions.

Other actions include enhancing our ability to manage troubled assets, particularly in the home building sector. We have increased staffing levels in our special assets group by reassigning several lending officers through our work-out efforts and we have re-emphasized to all our lenders that early recognition and management of troubled credit is both a priority and an expectation.

As a result of these combined efforts we have been able to enhance loan structure on many challenges of credit. These enhancements include borrower-funded reserves, obtaining additional collateral, and additional guarantor support beyond the primary guarantor.

We continue to monitor our largest problem credits very carefully, particularly construction loans, throughout the corporation, thus creating a better form for front end problem loan management.

All of the actions I have outlined place us in a better position to manage troubled assets in this environment.

Despite the need to increase our allowance for loan losses, we continue to make quality loans, building our base for future net interest income. However, as I indicated earlier, funding this loan growth with rationally priced consumer deposits has been, and continues to be, a challenge.

In the last 90 days we have seen some traction in our deposit balances due to the introduction of a new variable-rate CD product in 2008. This product combines the convenience of liquidity of a money market account with the higher yield of a time deposit by allowing the customer to add to the CD at any time while also providing the opportunity to access their funds once each quarter.

We were also pleased with our growth in non-interest income and in deposit accounts related revenue for the year.

While we have done a good job managing and controlling our expenses, and continue to do so, cost cutting is receiving renewed emphasis because of the difficult economic conditions.

In the last few weeks of 2008 and into the beginning of the new year, we have seen a tranche increase in residential mortgage refinancing activity, which we find encouraging. We are, of course, anxious to see if that increased level of activity can be sustained. Customer application activity has tripled in the last sixty days and about half of those customers are taking cash out. While we hope they are using these funds to stimulate the economy, some are consolidating or reducing debt.

Before I turn the call over to Charlie I want to reiterate my confidence in the ability of this company and its people to meet every challenge that comes our way and our ability to emerge successfully from what continues to be a relentlessly difficult economic environment.

Every day I see our entire team pull together under adversity, helping each other when required to do more with fewer people, helping our customers through what has been for many the most financially difficult time in their lives.

I also believe that the adversity we face together will serve to make us stronger, more resilient, more efficient, and more productive in the future. However, we, along with the industry and the economy are not out of the woods yet and until we are we will respond to any future challenges just as we have to those in the past, swiftly and decisively.

I look forward to the time when I can again report to our shareholders the kind of strong financial performance that has historically been the hallmark of Fulton Financial Corporation. As we look out on the economic horizon, just when that opportunity again will present itself remains unclear.

Charles J. Nugent

Unless otherwise noted, comparisons are this quarter’s results to the third quarter of 2008.

As Scott mentioned, we reported a loss of $102.0 million, or $0.58 per share in the fourth quarter and a loss of $6.1 million, or $0.03 per share, for the full year. There are a number of significant items impacting our earnings, which we have summarized in the financial attachment to our press release and we hope that you have found that information helpful.

Our core banking earnings reflect a challenging economic environment as well as some positive trends. Net interest decreased $1.7 million, or 1.3%, as a result of a 10 basis point decline in our net interest margin.

With the recent change in Federal Funds rate we were not able to reduce funding costs in proportion to the decline in asset yields. Yields on earnings assets decreased 21 basis points while the cost of interest-bearing liabilities declined on 13 basis points.

With the current rate environment and the strong competition for deposits, we expect further margin compression in the future. Federal earnings average assets increased slightly with loans showing a strong growth of $263.0 million, or 2.3%. Investment securities decreased slightly by $38.0 million, or 1.4%.

Our commercial mortgages grew $175.0 million, or 5%, with most of the growth occurring in Pennsylvania, New Jersey, and Maryland. We believe that we are benefitting from the disruption in some of our markets caused by bank mergers. We are not currently expecting this rate of loan growth to continue.

The home equity portfolio grew $54.0 million, or 3%. This growth is entirely in home equity lines and represents both increases in line usage and new lines.

Residential mortgages grew $32.0 million, or 3%, entirely in our adjustable rate mortgage portfolio.

On the funding side total deposits grew $354.0 million, or 4%, with strong growth in certificates of deposits offset by declines in checking and savings accounts balances.

Demand and savings account balances declined $155.0 million, or 3%, with personal balances declining $126.0 million, or 4%, and non-personal balances decreasing $29.0 million, or 1%.

While we are pleased to be seeing new account growth, we are seeing lower average balances in our core accounts.

Total certificates of deposits grew $509.0 million, or 12%, which includes growth in brokers certificates of deposits of $217.0 million and jumbo certificates of deposits of $56.0 million. We have recently promoted a variable-rate CD product that has been quite successful.

Excluding security losses our other income was down slightly to $38.8 million, trust commission income continued to decrease as a result of continued stock market declines. Merchant fees and foreign currency processing fees were also down slightly.

Gains on mortgage loan sales increased $820,000, or 36%, primarily as a result of favorable mark to market adjustments on the held-for-loan security mortgage portfolio at year end.

The volume of loans sold actually decreased from $172.0 million in the third quarter to $150.0 million in the fourth quarter. Based on the current application activity, we expect mortgage sale volume to be higher in the first quarter of 2009.

Offsetting this growth was a $1.0 million impairment charge recorded on mortgage servicing rights. This amount is reflected as a reduction of servicing income included in the other income line. Our mortgage servicing asset now has a remaining balance of $7.5 million.

Operating expenses, excluding the goodwill charge, increased $1.5 million, or 1.5%. The decrease in salaries and benefits as a result of the reversal of bonus accruals of approximately $6.5 million in the fourth quarter. This expense decrease was offset by a number of items, such as increased FDIC insurance, other real estate expenses, and consulting costs.

As previously disclosed in December, we recorded a $90.0 million non-cash goodwill impairment charge related to the Columbia Bank. This charge was a result of many factors, but primarily the current credit issues which have affected Columbia’s asset quality as well as the value of bank stocks in general.

In addition, we announced that we would record an approximate $15.0 million charge for the other than temporary impairment of pooled trust preferred securities. The actual charge recorded was $12.8 million, slightly lower as a result of further guidance issued by the financial accounting board on this issue.

In addition, we recorded a charge of $12.9 million for other than temporary impairment on bank stocks. We concluded the discharge as appropriate based on continuing declines in values and lack of an expectation of significant recovery in the near term.

As of December 31, 2008, our bank stock portfolio had an adjusted cost basis of $42.8 million and a market value of $43.6 million. Our fixed income investment portfolio includes bank issued debt securities with an adjusted book value of $150.0 million and a fair value of $116.0 million. Included in this total are pooled trust preferred securities of $19.0 million, single-issued trust preferred securities of $96.0 million, and subordinated debt of $35.0 million. The remainder of our fixed income investment portfolio is primarily comprised of municipal bonds and agency-guaranteed mortgage-backed securities and CMOs.

Excluding the bank debt securities and auction rate securities, the portfolio had an unrealized gain of $43.6 million at December 31, 2008.

During the fourth quarter we also recorded an additional $3.9 million charge related to auction rate securities held in customer accounts where we have agreed to purchase those securities. The additional charge was required due to a decline in the fair value of the auction rate securities that remain in customer accounts. Auction rate securities with a par value of $104.0 million are still held in customer accounts as of December 31, 2008, and could be purchased in the future. The total charges for the year related to auction rate securities were $19.7 million.

Another significant item impacting our fourth quarter and year-to-date results is asset quality. As we discussed in December, the provision for loan losses increased $38.3 million, but $65.0 million in the fourth quarter.

Net charge-offs to average loans were 89 basis points in the fourth quarter. The $26.7 million in net charge-offs this quarter were primarily in construction loans. Those charge-offs totaled $11.9 million.

Commercial loan charge-offs totaled $5.6 million, commercial real estate $4.7 million, and residential real estate $2.8 million.

Of the total charge-offs 30% were in Virginia, 29% in Maryland, 23% in New Jersey, and 17% in Pennsylvania.

There were four individual charge-offs exceeding $1.0 million, with an aggregate amount of $12.0 million, all of which were residential construction loans.

Non-performing assets of total assets increased to 1.3% at December 31, 2008, with non-performing loans increasing $32.0 million. $23.0 million of this increase was in the construction category with about two-thirds of the total representing single-family residential construction. $9.0 million of the increase was related to commercial mortgages.

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) Your first question comes from Matthew Schultheis - Boenning & Scattergood Inc.

Matthew Schultheis - Boenning & Scattergood Inc.

You mentioned that you had a product to help builders move inventory. What is that product?

R. Scott Smith

Basically what we are doing is we are going to portfolio some mortgages. I will give you the basics and Phil Wenger can follow up a little bit. But the idea is to make mortgages more available to our customers, who are builders, to their customers who are buying their homes. And what we have agreed to do is to make up to 80% mortgages on those homes and then allow the builder to finance the other 20% if required.

Those are not saleable in the secondary market and so we have agreed to portfolio them and we will see how much we will need to portfolio.

Matthew Schultheis - Boenning & Scattergood Inc.

How has that product been received so far?

E. Philip Wenger

We’re just coming out with it but we have talked to some of our builders and I think they are very appreciative. The underwriting standards from a credit scoring aspect will still be what we consider to be fairly conservative. We think they’re good loans going on but it kind of puts a product back in play where folks who have good credit and good earnings but don’t have the down payment to buy a home.

R. Scott Smith

And there will be half to three-quarters percent premium on those, too, so we will get a little extra income on it.

Matthew Schultheis - Boenning & Scattergood Inc.

You mentioned that re-fis were up how much in the last 60 days?

R. Scott Smith

Triple.

Matthew Schultheis - Boenning & Scattergood Inc.

Why do you think that you had a decrease in business-related now and DDA said it was a $29.0 million decrease?

R. Scott Smith

We’ve done some analysis on that and what seems to be happening is that customers are, particularly retail, well, both retail and small business customers, are just keeping less cash in their deposit accounts.

Matthew Schultheis - Boenning & Scattergood Inc.

I know you are being fairly aggressive in looking for the deposit account with the loan relationships.

R. Scott Smith

In our promotion this fall we are getting nice new account openings and frankly, we’re asking the same question, why aren’t deposits going up more. And people, just relative to the pass, are keeping less there. Smaller average balances.

Matthew Schultheis - Boenning & Scattergood Inc.

And you mentioned your trust preferreds, you said you had $150.0 million book value and $116.0 million in market value.

Charles J. Nugent

That was total bank debt that was single-issue trust preferred, it was the pools, and it was subordinated debt. It was all three of those.

Matthew Schultheis - Boenning & Scattergood Inc.

And what was the geographic breakdown on the charge-offs?

Charles J. Nugent

30% were in Virginia, 29% in Maryland, 23% in New Jersey, and 17% in Pennsylvania.

Operator

Your next question comes from Richard Weiss – Janney Montgomery Scott.

Richard Weiss – Janney Montgomery Scott

How much of the charge-off totals were associated with construction loans? For the quarter?

Charles J. Nugent

For the quarter it was $11.9 million. That’s the total.

Richard Weiss – Janney Montgomery Scott

And that was four loans?

Charles J. Nugent

We just gave details on the top four and they were all construction loans.

Richard Weiss – Janney Montgomery Scott

And sticking with the construction, what kind of percentage or mix is the construction in terms of raw land or loans for development. How would you characterize most of it?

R. Scott Smith

We don’t have that number.

Richard Weiss – Janney Montgomery Scott

With the TARP program, right now it just seems like after you have taken the money, the yield that you’re getting on mortgage-backed securities has come down a lot, so how long will it take to deploy this kind of capital?

R. Scott Smith

That’s the multi-million dollar question. Obviously we have to leverage this capital to make a return for our shareholders. And that’s why we talked about isolating some certain market segments to try to increase our lending base. What we would like to do is make $3.0 billion worth of loans out of it but we’re not going to do that in any short time period.

So initially we will put it in securities and use it as best we can to get some return but hopefully as the economy picks up this goes into loans and gets leveraged.

Richard Weiss – Janney Montgomery Scott

Right now I guess it’s going to be a slower process because of what’s happening in terms of interest-earning assets and yields on those?

R. Scott Smith

Yes, slower than it would be in normal times. Now as I mentioned, we are seeing some opportunities for market share so we will get some growth that way but it’s not going to be the kind of growth that we have had in some years.

Richard Weiss – Janney Montgomery Scott

Would you be able to give any guidance on the loan loss provision, or is there any change in your methods of determining the loan loss reserve?

R. Scott Smith

No, it’s basically the same models we’ve been using over time and the numbers are just worst because the information that’s going into them is deteriorating.

Operator

Your next question comes from Matthew Clark – KBW.

Matthew Clark – KBW

Can you give us a sense for your construction exposure within your commercial portfolio in terms of how that’s performing? Types of businesses that are exposed to that industry?

R. Scott Smith

Are you talking about our non?

Matthew Clark – KBW

Non-construction loans but exposure to the construction industry within the commercial loan portfolio.

R. Scott Smith

Are you talking about builders? Or are you talking about commercial construction?

Matthew Clark – KBW

No not commercial construction. I would assume it would relate to wood-product related businesses, but it’s within the C&I portfolio. I think it’s about close to one-third. It was in a recent slide deck of yours. I’m just curious how that’s performing.

Charles J. Nugent

We have construction loans of $1.2 million and that’s about, percentage of our portfolio, that would be about 10%. And in our non-performing assets, is your question how much of the construction is non-performing?

Matthew Clark – KBW

No, that’s 6.23%. But outside of that construction book, within your commercial, your C&I.

R. Scott Smith

For example, sub-contractors?

Matthew Clark – KBW

Correct.

R. Scott Smith

I don’t know off the top of my head what that percent is but we, to date, have not experienced a lot of problems. But we are certainly watching that portion of it also.

Matthew Clark – KBW

Within the commercial loan book, I believe there is a portion of it that is reliant on the larger builders taking down lots and I’m just curious as to what you are seeing in terms of more recent activity, if there is a change, and what the appetite might be relative to the price that they’re, I’m just trying to get a sense of the willingness to buy and at what price.

E. Philip Wenger

I think we’ve seen with these large builders taking down lots, we’ve seen weakness and changing of deals since the middle of last year and the large builders tend to have the power in these deals and when they’re in developments that they don’t want to be in, they’ve been walking away. I think some of the write-downs we have have been a result of that happening. I don’t think it’s any worse now than it was five months ago.

Matthew Clark – KBW

On the single-issue trust preferreds, can you just update us on the underlying collateral there in terms of the number of issuers and the underlying performance of those issuers?

R. Scott Smith

The single issue we have $96.0 million. There are 25 issuers, nearly all of them are rated and the lowest rate is a Baa2 and most of them are between A1 and A3. They become deals like JP Morgan Chase, Wells Fargo, Banc of American, BB&T, SunTrust, PMC, Comerica, M&C, and Key Corp., those would be the major ones.

Matthew Clark – KBW

In terms of the CD promo, the relatively new one, can you update us on what the current rate is on that product? I believe it was around 3.5% late last year, and whether or not you have been able to drop that rate more recently?

R. Scott Smith

Yes, we have dropped it and it’s currently 3% for our relationship customers.

Matthew Clark – KBW

And the posted rate?

R. Scott Smith

2.75%.

Matthew Clark – KBW

Without a lot of color on what to expect from provisioning going forward but knowing that in terms of the broader economy things only deteriorating more quickly since year end, can you talk a bit about the dividend and knowing that core run rate if $0.05, but relative to the $0.15 dividend, whether or not that is something that you are considering, might consider cutting to help preserve capital or not?

Charles J. Nugent

As we announced last year, we will be considering our dividend in the third month of each quarter this year and so when March gets here we will have that discussion with the Board and make our decision at that point in time. And as we all know, a lot can happen between now and then.

It’s the Board’s decision so I am not going to speculate on what the Board will do come March but as soon as we have that decision, we will make it.

Operator

Your next question comes from Frank Schiraldi – Sandler O'Neill & Partners.

Frank Schiraldi – Sandler O'Neill & Partners

On the home equity growth in the quarter, geographically is that mostly in Pennsylvania?

R. Scott Smith

In Pennsylvania it was $23.0 million, in New Jersey it was $10.0 million, it was $12.0 million in Maryland, and Virginia was $1.6 million. Some of that is increased usage of lines. The line usage, if you want an average, is 46%. In the third quarter it was 44%. At the beginning of the year I think it was 36%. Not only new accounts but increased use of the lines.

Frank Schiraldi – Sandler O'Neill & Partners

Do you have any breakdown between increased line usage and new accounts?

Charles J. Nugent

No. I had balances and I know how much line usage went up but I don’t have the number of new accounts.

Frank Schiraldi – Sandler O'Neill & Partners

On the pooled trust preferred securities portfolio, it’s now $19.0 million. Is that the fair value?

Charles J. Nugent

The book value now is $13.3 million and the fair value would be about $3.9 million less and it is ten of them and six of them are considered other than temporarily impaired so they were written down. The other ones weren’t. And that was based on the guidance from the SEC, the 99/20 test. We went through, looked at the cash flows, looked at all the banks that are in those pools and estimated what we thought would happen in the future in terms of the bulk and the barrels and five of them were written down and five weren’t.

Frank Schiraldi – Sandler O'Neill & Partners

Of the six that were considered impaired, five of those were the ratings?

Charles J. Nugent

Five of them written down and four of them it was the ratings and it was the 99/20 cash flow analysis. One of them was still rated A3 but they saw our analysis cash flows and the banks that made up that pool, we decided to write that one down, too.

If the other ones failed, the adjustment would be $4.0 million but we’re pretty confident on the ones that we didn’t write down that we will get the cash flows. At least based on the information we have now.

Frank Schiraldi – Sandler O'Neill & Partners

And relatively speaking there’s $4.0 million left in fair value.

Charles J. Nugent

Yes.

Frank Schiraldi – Sandler O'Neill & Partners

On the ones that were impaired, can you give any detail as far as is that generally the mezzanine tranche and on the dollar what is the fair value now? What are you holding at?

Charles J. Nugent

It’s all the mezzanine tranche of everything that was written down and we wrote them down, on average, $0.38 on the dollar.

Frank Schiraldi – Sandler O'Neill & Partners

Generally speaking, are there any areas geographically that have weakened more significantly than you were expecting over the last three months? I’m wondering where you think are the most problematic areas for you from a geographical standpoint and if that includes Southern Pennsylvania now or if Pennsylvania has held in much better than the other areas?

R. Scott Smith

I would say the areas that we are concerned about haven’t changed recently and our concern has been that Baltimore/Washington corridor, I think from back a couple of quarters. That’s where the economy had the most run up and where it’s backed off some of the most.

Having said that, we’re concerned about all our markets because as you know, this slowdown in the economy has impacted every place, including some of the stronger markets in Pennsylvania. But our concerns continue to be the Northern Virginia, Maryland markets, and to some extent a little bit South Jersey. But that’s been the case since this began to slow down.

Frank Schiraldi – Sandler O'Neill & Partners

You had said you had renewed focus on cost cutting. What are thoughts on branch expansion in 2009? Are you still pushing for expansion in the Virginia market?

R. Scott Smith

We will be opening some branches and I will let Phil give you some details. But we will be opening some branches in 2009 where we are committed to do that. Frankly, we have pushed some branches that were planned for this year into 2010 just because of trying to keep costs down.

E. Philip Wenger

We are committed to five branches that we are going to be moving forward with and we have pushed back a number that we will not be doing until at least 2010 now. I think one of the five is in Virginia.

Operator

Your next question comes from David Darst - FTN Midwest Securities Corp.

David Darst - FTN Midwest Securities Corp.

Could you give us the balance of the construction that is in the Baltimore/Washington corridor? And a little bit of color of what are the largest two or three NCLs in the construction portfolio.

R. Scott Smith

This is from Columbia Bank and they’re primarily in Montgomery and Howard County but their builders would go out of that area a little bit, too. For example, they might be in Northern Pennsylvania, they might be in Southern Pennsylvania, or Northern Virginia. But the average balance down there in construction is $353.0 million.

As to the largest two or three loans, the location would be in that market and these would be residential housing projects in that market. One is in Virginia Beach.

David Darst - FTN Midwest Securities Corp.

Could you give the average size?

R. Scott Smith

I’m just looking at a report that was handed to me. Residential development, there are several of them. Some of the larger ones would be that there is a food processing, a golf course, a condo development. And the average size would be $10.0 million to $12.0 million.

David Darst - FTN Midwest Securities Corp.

Looking at the whole portfolio down there, is that the average customer relationship size as well? Or are you seeing more of your larger loans and larger relationships [break in audio]

R. Scott Smith

If you look at numbers, most would be smaller than those.

David Darst - FTN Midwest Securities Corp.

Are the smaller builders at just one or two sites or less than five being more resilient at this point?

E. Philip Wenger

I would say no. It’s just the problem is so much smaller. But across the board, I think the small builders are being hurt as far as the larger builders.

R. Scott Smith

The action, I’m told, continues to be in the lower cost houses. First-time home buyers kind of price range is where the best action is.

David Darst - FTN Midwest Securities Corp.

I guess there is more that type development throughout Howard and Montgomery County as opposed to other parts of the region?

R. Scott Smith

Yes.

David Darst - FTN Midwest Securities Corp.

Could you give us your FDIC premiums for the quarter?

Charles J. Nugent

The insurance for the quarter was $1.9 million.

David Darst - FTN Midwest Securities Corp.

Do you expect that to double in the first quarter? Or an additional $2.0 million, roughly?

Charles J. Nugent

If you look at our deposits and look at the current rates, I think we were thinking that that would go up to $14.0 million in 2009. We have credits at each one of the different banks and they’re running off and the rates are going up. When we looked at deposits, when we thought in 2009 and looked at the rate, I think we were estimating $14.0 million for FDIC insurance in 2009.

David Darst - FTN Midwest Securities Corp.

I guess that’s increasing throughout the year?

Charles J. Nugent

And that could go up more if they increase the rates, also. That was our guess. And it was finding the rate to our deposits.

Operator

Your next question comes from Collyn Gilbert – Stifel Nicolaus & Company.

Collyn Gilbert – Stifel Nicolaus & Company

I know this is a tough question to answer and I think others have tried to ask it and it boils down to the reserve and the provision. Old-age sort of reserve methodology as you have said before in the past is that you have to reserve for the problem credits that you see in your portfolio today. I guess that is where the regulatory guidelines sit. However, that looks as if that is subject to change.

The big jump in the reserve, do we assume that it is purely a function of what you see in the portfolio today? To then draw the conclusion that, obviously we are in a continuing deteriorating environment which would lead to the need to only further build the reserve, from here.

R. Scott Smith

It’s us looking at the loans individually, all the big ones, and the smaller ones on a pooled basis. But the methodology is changed but economic conditions have certainly worsened and that’s having an effect on our valuation.

Operator

There are no further questions in the queue.

R. Scott Smith

I would like to end this call by thanking everyone who joined us today. We hope that you will be able to join us again for our first quarter 2009 earnings conference call, which is scheduled for April 22 at 10:00 a.m.

Operator

This concludes today’s conference call.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Fulton Financial Corporation Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts