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Executives

Laura Wakeley - VP, Corporate Communications Manager

Scott Smith - Chairman and CEO

Phil Wenger - President and COO

Charlie Nugent - SVP and CFO

Analysts

Craig Siegenthaler - Credit Suisse

Matthew Clark - KBW

Rick Weiss - Janney

Matthew Schultheis - Boenning & Scattergood

Collyn Gilbert - Stifel Nicolaus

David Darst - FTN Equity Capital

David West - Davenport & Company

Frank Schiraldi - Sandler O'Neill

Andy Stapp - B. Riley

Jake Civiello - RBC Capital Markets

Fulton Financial Corporation (FULT) Q3 2009 Earnings Call Transcript October 21, 2009 10:00 AM ET

Operator

Good day, and welcome, everyone to the Fulton Financial third quarter 2009 earnings results conference call. This call is being recorded. At this time, I would like to turn the conference over to Vice President, Corporate Communications Manager, Ms. Laura Wakeley. Please go ahead, ma’am.

Laura Wakeley

Thank you. Good morning, and thank you all for joining us for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the third quarter of 2009.

Your host for today's call is Scott Smith, Chairman and Chief Executive Officer of Fulton Financial. Joining him are Phil Wenger, President and Chief Operating Officer; and, Charlie Nugent, Senior Executive Vice President and Chief Financial Officer.

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

Please remember that during this webcast, representatives of Fulton Financial Corporation may make certain forward-looking statements regarding future results or future financial performance of Fulton Financial Corporation. Such forward-looking statements reflect the corporation's current views and expectations based largely on information currently available to its management and on its current expectations, assumptions, plans, estimates, judgments, and projections about its business and its industry. And they involve inherent risks, contingencies, uncertainties, and other factors.

Although the corporation believes that these forward-looking statements are based on reasonable estimates and assumptions, the corporation is unable to provide any assurance that its expectations will in fact occur, or that 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 guarantees of future performance.

Many factors could affect future financial results including, without limitation, the factors listed in the Safe Harbor Section of yesterday’s earnings news release. Fulton Financial Corporation 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. And accordingly, investors and others are cautioned not to place undue reliance on such forward-looking statements.

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

Scott Smith

Thank you, Laura. And thank you, everyone, for joining us here this morning. Each of us has a few prepared remarks and then we’ll be happy to respond to your questions. I have some general comments, and then Phil will provide some details on credit, and Charlie will review our third quarter financial performance.

We reported diluted net income of $0.10 per share for the quarter. This was up from the $0.05 we reported in each of the two previous quarters. While we are encouraged by this increase, we know that there are continued economic and credit challenges that we will -- will need to be overcome. As I stated last quarter, our goal is to be ahead of the curve when the credit cycle turns more positive, and we continue to manage toward that goal.

We clearly understand our existing credit quality issues and believe we have made good progress in that regard. However, continued economic uncertainties demand that we remain vigilant and proactive in our response to potential problem loans.

During the third quarter, we experienced continued growth in core checking and savings deposits. We had particularly good growth recently in small business checking due to increased focus on this segment as a source of lower cost funding. Over the last several months, a significant portion of our certificates of deposit matured and renewed at lower rates that helped us produce a nice increase in our net interest margin this quarter. We strive to maintain a healthy balance between competitively pricing our deposits and prudently managing our net interest margin.

Earlier in the year, we promoted our variable rate certificate as a portal for new and existing customers to begin or enhance their total relationship with us. We believe our relationship building efforts at the branch level are largely responsible for helping us retain most of these time deposits, and for our continued core deposit growth. One of our challenges is to put these deposits to work at a time when investment yields are low and quality loan demand is relatively soft. In the meantime, we will continue to reduce our higher cost full sale funding as it matures, while continuing to build core deposit relationships.

I should also point out that in comparison to the second quarter of this year, we experienced a slower overall rate of deposit growth in the third quarter. We believe the pace of deposit growth could slow further for the remainder of the year. With that said however, we remain very well positioned to meet the future credit needs of our customers. While we experienced growth in total loans over the second quarter, loan demand, as well as the loan pipeline, remains relatively soft across the franchise.

We were also able to reduce our provision for loan losses slightly this quarter based on the results of our allowance allocation procedures. Despite this decrease in the provision, our total allowance for credit losses increased, since charge offs remain lower than the provision. Phil will give you more color on the credits in a few minutes.

For the first two quarters of 2009, our growth in other income was positively impacted by very strong residential mortgage volume. Toward the end of the second quarter, there was a slowdown in mortgage applications and has corresponding reduction in our sale gains that negatively impacted our other incomes in the third quarter. With the exception of these lower sales gains, most of our non-interest income categories held up well and showed increases.

Overall, expenses were again well controlled than virtually flat linked quarter. We continue to manage our expenses very prudently, a discipline that also positions the company for future earnings growth.

Capital rates ratios remain strong. We continuously evaluate our capital position. And as I said last time, our focus is on growing capital through retained earnings from profitable organic growth. Despite encountering many challenges, we have never lost sight of the success we know this company and its dedicated people are capable of creating for our shareholders. When economic growth begins to normalize and consumers and businesses see brighter days ahead, we believe we are well positioned within our markets and relative to our peer group, to show significant improvement in our earnings performance.

Thank you. This time I’ll turn the call over to Phil Wenger to talk about credits.

Phil Wenger

Thanks, Scott. Good morning. We continue to focus increased resources on working through our credit issues and to closely monitor loans across all sectors for early signs of trouble and remediation. As you know, there’s still a great deal of economic uncertainty that could impact our credit metrics going forward. Unless I indicate otherwise, my comments will focus on second to third quarter numbers.

Overall ending linked quarter loan balances increased by $102 million. This modest increase, which is a reversal from the decline we saw last quarter continues to reflect softer loan demand throughout our footprint, along with our desire to add quality credit relationships.

One of our management priorities, as I indicated in our last call, is to reduce the size of our construction loan portfolio. After a drop of $109 million from quarter one to quarter two, we dropped another 6.1% or $67 million linked quarter, bringing our total decline in construction loans to $279 million year-over-year or 21.3%. We’re making progress in reducing our overall construction exposure and will probably continue to do so, given the continued climate of little, new, or existing development and current rates of absorption. Commercial loans and commercial mortgages were up a total of $170 million.

Even though credit demand is soft, we continue to take advantage of quality, market share opportunities through our new business development efforts. As you saw on last night’s release, we recorded an additional $45 million in our provision for loan losses, down slightly from the $50 million recorded in each of the two previous quarters. That was a positive development, along with a slowing in the rate of credit deterioration, and an overall reduction in charge offs this quarter.

As of September 30, our allowance stood at 2.02% of outstanding loans, up from 1.86% at the end of the second quarter, and up from 1.2% a year ago. Linked quarter, our allowance coverage to non-performing loans increased from approximately 83% to almost 86%. Total non-performing loans increased by $14 million, down $7 million from the $21 million increase we experienced first to second quarter.

Annualized charge offs to annualized loans fell 16 basis points. As to be expected, the geographic distribution of our loans showed no change from what we recorded at midyear. 54% are in Pennsylvania, 21% in New Jersey, 13% in Maryland, 9% in Virginia and 3% in Delaware. Of our lower third quarter net charge offs number of $24.2 million, $8.5 million came from our New Jersey banks, $5.9 million from Fulton Banks, Virginia Division, $5.1 million from our Pennsylvania banks, $4 million from our Maryland bank, and $700,000 from our Delaware bank.

Looking at that same $24.2 million by loan category, we charged off $9.3 million in construction loans, $7.3 million in commercial loans, $3.4 million in consumer and leasing, $3.1 million in commercial mortgages, and $1.1 million in residential mortgages.

Of our total charge offs this quarter, $6.9 million came from five loans in excess of $1 million. One was a grocery store in New Jersey, one a Maryland townhouse project, one a residential development in Pennsylvania, and two residential developments in Fulton Banks, Virginia Division.

Total non-performing assets as of September 30 stood at $301 million with $282 million in non-performing loans and $19 million in other real estate. During the quarter, other real estate dropped from $29 million to $19 million. We do believe this $19 million of ORE is conservative and fairly represents the value of these assets. Approximately $82 million of our non-performing assets, where 27% are housed in Fulton Banks, Virginia Division, $74 million or 25% in our New Jersey banks, another $74 million in our Pennsylvania banks, $64 million or 21% are in our Maryland bank, and $7 million or 2% are in Delaware.

On September 30, our total delinquency stood at 3.32%, up ten basis points from the 3.22% we reported on June 30. 30-day delinquency decreased from 72 to 68 basis points, 60-day increased slightly from 30 to 31 basis points, and 90-day increased from 220 to 232 basis points. All loan categories showed an increase in total delinquency linked quarter with the exemption of commercial mortgages which fell from 195 to 184 basis points.

Our commercial mortgage delinquency has remained relatively stable throughout this difficult economy and while we do have performance risk in this portfolio, we do not see high re-financing risk. Our residential mortgage portfolio showed the greatest percentage increase in delinquency for the quarter, from 7.36% to 8.5%, not because of a significant increase in foreclosure activity but because of an overall decline in the size of the portfolio of about $150 million. The actual dollar rise in delinquency was $500,000.

Losses in the residential area continue to be relatively small in comparison to the overall portfolio. Construction loan delinquency increased from 10.36% to 11.37%, mainly due to the decrease in the portfolio balance that we’ve mentioned earlier. Commercial loan delinquency was up two basis points to 2.26%.

We experienced modest growth in our consumer portfolio during the quarter. However, we also saw direct consumer delinquencies rise from 136 to 169 basis points. We attribute this rise to sustained high employment and prolonged economic challenges. We do feel the delinquency under 2% in this very difficult environment reflects the quality of our consumer portfolio. As you may recall from last time, about 43% of our open-end home equity lines are first liens, with an average credit score of 744 across the entire portfolio. Also the total loan to value on the portfolio is a conservative 56%. While we have a foundation of overall very strong credit quality under our consumer sector, we don’t know what the future holds, particularly if predictions of a jobless recovery proved to be true.

Before concluding our credit discussion, it may be helpful to share anecdotal information we’re hearing from our lenders. The loan pipeline is still soft in all our markets but there is a feeling that we are at, or are beginning to come off, the bottom of real estate prices, although residential activity in prices appear to be showing more potential improvement than the commercial sector. While many other relationship managers are somewhat encouraged, their feedback cannot yet be characterized as optimistic. We are seeing hung price stabilization throughout Pennsylvania. However, New Jersey and Maryland markets remain stressed in both residential and commercial sectors.

Even if we see indications of a more pronounced economic rebound, we, along with the industry, have significant credit challenges that will not resolve themselves overnight. At the same time, we want to grow our loan portfolio with quality market share opportunities.

To summarize, we are comfortable with the reserves as we see them today, and as we do the current portfolio. We are pleased with our progress in reducing the construction book and it’s also a good sign to see our charge offs decline and the deterioration rate of the portfolio slow somewhat.

Thank you for your attention. At this time Charlie Nugent will cover details regarding our third quarter financial performance. I will be happy to respond to your more specific credit related questions in the question-and-answer session. Charlie?

Charlie Nugent

Yes. Thank you, Phil. And good morning, everyone. Thank you for joining us today.

Unless otherwise noted, comparisons are this quarter’s results to the second quarter. As Scott mentioned, we reported net income available to common shareholders of $18.3 million or $0.10 per share in the third quarter, compared to $0.05 in the second quarter. Our second quarter earnings were negatively impacted by the $7.7 million or $0.03 per share FDIC special assessment.

We are pleased to see a number of positive items impacting our earnings. These items included a 3.8% improvement in net interest income, a decline in both net charge offs and the loan loss provisions, and well controlled core operating expenses.

The $4.9 million or 3.8% improvement in net interest income was a result of an increase in our net interest margin. Our net interest margin increased 12 basis points this quarter from 3.43% in the second quarter to 3.55% in the third quarter. This increase was due to the decline in time deposit costs which were 2.97% in the second quarter, and a decrease to 2.61% in the third quarter.

Yields on our earning assets decreased only three basis points. There are significant amount of time deposits and federal home loan bank advances maturing in the fourth quarter which should have a positive impact on our net interest margin.

In the fourth quarter, $1.3 billion of time deposits mature at a weighted average rate of 2.2%, and $140 million of federal home loan bank advances matured a weighted average rate of 4.25%. Federal average earning assets decreased slightly, as Phil discussed, average loans were down $47 million or 0.4%.

On the funding side, total deposits increased $352 million or three percent with most of that growth in demand and savings account which grew $424 million or 7%. Non-interest bearing demand deposits increased by $110 million or 6%, with most of that increase occurring in business accounts. Interest-bearing demand deposits grew $64 million or 3.5% and this growth is primarily in State and municipal accounts.

In the savings category, we saw a $250 million or 11% growth. $78 million of that growth is in personal accounts, $67 million was in State and municipal accounts, and $106 million was in business accounts.

The growth in business accounts was impacted by businesses having to keep more balances on hand to offset service charges as well as the movement from our cash management products due to the current low interest rate environment. The municipal accounts are reflecting these same factors along with the seasonal impact related to the tax collection process.

Time deposits decreased $71 million or 1%. Brokered certificates of deposits declined by $174 million to $17 million in September 30th. Retail certificates of deposit increased $110 million or 2.2%. Excluding security gains, our other income declined $4.1 million or 9% to $41.2 million. This decrease is due to a decline in mortgage sale gains. Total gains on the sale of mortgaged loans were $2.8 million in the third quarter compared to $7.4 million in the second quarter. Total loans sold decreased to $588 -- $580 million from $650 million.

Other categories of income displayed solid growth. Service charges on deposit accounts were up 2% of growth in overdraft fees, and other deposit service charges offset by declining cash management fees. Cash management fees declined by $340,000 or 11% as result of customers transferring funds from our cash management program due to the low rate environment. Other service charges and fees increased 4.3% due to strong growth in both merchant fees and debit card fees. Investor Management and Trust Service income improved 4% primarily representing growth and brokerage fees. The decline that you see in the other -- other income line as a result of non-reoccurring items primarily gains on the sale of fixed assets and other real estate. These gains totaled $575,000 in the third quarter, compared to $1.1 million in the second quarter.

Operating expenses decreased $8 million or 7%. Without the impact of the $7.7 million special FDIC assessment in second quarter, our operating expenses were virtually flat. Salaries and benefits were down $1.7 million or 3%. Full and part-time salaries decreased about $200,000 partially due to staff reductions at the Columbia Bank. Employment taxes declined $440,000 as certain employees hit the ceilings on FICA and unemployment taxes. Employee benefits decreased $580,000 due to a reduction in severance cost, a change in post-retirement health care plan, and the timing of 401-K payments.

Investment security losses were $45,000 in the third quarter compared to gains of $77,000 in the second quarter. In the third quarter, realized security gains were approximately $2.7 million primarily on the sale of debt securities offset by approximately $2.7 million in other than temporary impairment charges. Of those charges, $900,000 related to bank stocks and $1.8 million related to pooled trust preferred securities.

Okay. 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

Thank you. (Operator instructions) And our first question today comes from Craig Siegenthaler of Credit Suisse.

Craig Siegenthaler - Credit Suisse

Thanks and good morning.

Charlie Nugent

Good morning, Craig.

Phil Wenger

Good morning, Craig.

Craig Siegenthaler - Credit Suisse

First, just on product quality. Should we read into the delinquency pick up this quarter in terms of having an impact in NPL growth next quarter? And especially since the level you disclosed is really a 90-day plus, which is right before a loan will go into NPL segmentation?

Phil Wenger

Craig, I believe the entire 90-day delinquent loans are in our NPL number. So we think the 30 and 60-day category are more of an indication of future NPLs.

Craig Siegenthaler - Credit Suisse

Could you disclose that level? 30 -- in other words, we have to wait for the line (inaudible) filings in a couple of weeks?

Phil Wenger

Well, we disclosed a percentage. The--

Craig Siegenthaler - Credit Suisse

Meanwhile, while you’re just looking for that, I was wondering what geography and loan class drove this pick up in the 90-day plus?

Phil Wenger

Hold on a second there, Craig. We’re getting a number for you.

Craig Siegenthaler - Credit Suisse

Okay. Thank you.

Phil Wenger

Our 30-day delinquency is totally $2 million, and 60-day is at $38 million.

Craig Siegenthaler - Credit Suisse

And do you know how they trended sequentially from the second quarter?

Phil Wenger

Yes. The 30-day dropped from, I think, 72 basis points to 68 basis points. And the 60-day increased 1 basis point from 30 to 31.

Craig Siegenthaler - Credit Suisse

And then my second question really was, what geography and loan class drove this? Was it Maryland or -- and also in terms of the loan class?

Phil Wenger

Are you speaking of delinquency?

Craig Siegenthaler - Credit Suisse

The 90-day plus delinquency, the one that picked. I was wondering what geography and kind of loan class drove that change?

Phil Wenger

It was spread across the corporation. And I\m not sure I have the -- I'll try and get that for you. Yes. Just on the 90-day delinquency, actually Pennsylvania had the highest increase, followed by Virginia and New Jersey

Craig Siegenthaler - Credit Suisse

And do you know what type of loans these were?

Phil Wenger

Yes. The largest was in the commercial loan area. And the balance was split, actually the consumer commercial mortgage and residential mortgage would be -- they were split evenly and construction mortgage was actually a little lower than the other categories.

Craig Siegenthaler - Credit Suisse

Got it. So C&I, your commercial industrial financial and agriculture bucket had highest pick up?

Phil Wenger

In the 90-day.

Craig Siegenthaler - Credit Suisse

In the 90-day. Yes.

Phil Wenger

Yes. I'm only speaking of the 90-day.

Craig Siegenthaler - Credit Suisse

All right. Great. Well, thanks for answering my questions.

Phil Wenger

Yes.

Operator

Our next question comes from Matthew Clark of KBW.

Matthew Clark - KBW

Good morning, guys.

Phil Wenger

Good morning, Matt.

Matthew Clark - KBW

The $67 million decline you had in your construction loans outstandings, it looks as though about a little over $9 million came in the form of loss. Can you give us a better sense as to that remaining portion, whether or not there is any reclassification in there? And then may be CRE or whether most, if not all of it, was just pay offs?

Phil Wenger

Matt, I do believe we had one construction loan that moved into a permanent status in CRA -- CRE that was about $15 million. But the balance for most part would have been paid downs.

Matthew Clark - KBW

Okay. You didn’t have any loan -- you didn’t have any sales -- related loan sales?

Phil Wenger

No.

Matthew Clark - KBW

Okay. Okay. And in terms of the much slower incremental increase in the construction non-accruals, up about 2%, can you give us a better sense as to what’s going on behind those numbers? If your borrowers are able to sell one and two season service, and service-to-debt here, are you seeing -- just trying to get a better sense as to why you might not be seeing a more dramatic increase here in the third quarter.

Phil Wenger

Well, I think it is due to a couple of things. As we mentioned many times, we’ve tried to identify problems very early, and especially large problems. Though -- and that doesn't mean there is still aren't some out there. Because there are, as we all know, but the -- they tend to be smaller accounts now than they had been in the past. That, combined with the -- between May and October, I think we had better than anticipated activity in the sale of both homes and lots.

Matthew Clark - KBW

Okay. Then lastly, do you guys have any TDRs? And if so, how much are they and what were they last quarter?

Phil Wenger

You know, TDRs, I think are something that we are measuring now. And currently, we have that number for you in a second.

Matthew Clark - KBW

Sure.

Phil Wenger

$42 million. $25.7 million of them -- of the $42 million are residential loans. $16.1 million are commercial.

Matthew Clark - KBW

Okay. And that number last quarter, I think we can get it from the call report. But if you have it.

Phil Wenger

We, in the past, weren’t comfortable with our number--

Matthew Clark - KBW

Okay.

Phil Wenger

So I think that this is the first time you’ll see.

Matthew Clark - KBW

Okay. And is that $42 million all accruing interest or is it in non-accrual?

Phil Wenger

There is about $9 million that are in non-accrual. And I would just add that any loan that we have that’s been delinquent, if we restructure it, it goes in non-performing status. If we have a current loan that we make, some deferral of principal or lower in interest rate somewhat, and it has not missed a payment and continues to perform, we include it in the performing category. Any loan that has had any reduction in -- or has had any forgiveness in principal or interest, would be a non-performing loan. As would any loan that has not made any payments.

Matthew Clark - KBW

Okay. And then if I may, one quick one. Do you guys plan to accrue for the prepayment of the FDIC insurance premiums in the upcoming quarter? And if so, what that amount might be?

Phil Wenger

Matt, we will, if we prepay it. But we don’t have all the details yet. And I think that will be a common industry thing when we'll get all the details. But, you know Matt, the payment -- what will be put on our balance sheet is a prepaid and amortized over a three-year period.

Matthew Clark - KBW

Right.

Phil Wenger

Yes.

Matthew Clark- KBW

All right. Thanks.

Operator

And our next question today comes from Rick Weiss of Janney.

Rick Weiss - Janney

Good morning.

Scott Smith

Good morning, Rick.

Charlie Nugent

Good morning.

Rick Weiss - Janney

I was wondering if you could give us any information with the Shared National Credit portfolio that you have? Or what came out from the recent exam?

Phil Wenger

Sure. We have 20 accounts that are classified as Shared National Credits. And total balance is currently $164 million. We have -- two of those are both delinquent and in non-performing status. They total $10 million. That did not -- that was not a result of the recent exam that those both had been identified prior. But there was really no change from the examination reports.

Rick Weiss - Janney

Okay. That’s good news, I guess. Also if you could talk a little about the reserving policy they -- for the last several quarters the provisioning has exceeded your charge-off. Would you expect that going forward, or at some point you think that provisioning will equal charge offs?

Scott Smith

Rick, this is Scott. I think we -- certainly, some day. I mean we have a process we go through that's -- that’s fairly well -- we think fairly sophisticated. And we constantly stress test the portfolios. And that's a quarterly decision as we go through that and look into the next quarter. At some point in time, it will be -- those numbers will be the same. But that that will be depending on what the stress test looks like and our evaluation of the portfolio and the economy going forward. When that occurs, we’ll know at the end of each quarter when we go through the process.

Rick Weiss - Janney

Okay. Thank you.

Scott Smith

You're welcome.

Operator

Our next question comes from Matthew Schultheis of Boenning & Scattergood

Matthew Schultheis - Boenning & Scattergood

Good morning.

Phil Wenger

Good morning.

Matthew Schultheis - Boenning & Scattergood

A couple of quick questions. You instituted a program to help clear your book of some construction loans, as I recall. You were to pay -- to finance 80% on a purchase of a home and the (inaudible) was going to How’s that program going?

Phil Wenger

Matt, I’d say we’ve had very little activity in that program.

Matthew Schultheis - Boenning & Scattergood

Okay. And your OREO decreased. I’m assuming the $10 million decrease was a function of properties being sold?

Phil Wenger

$6 million was the decrease from $25 million to $19 million.

Matthew Schultheis - Boenning & Scattergood

Okay. I had that wrong. I apologize.

Phil Wenger

And that was a function of properties being sold and--

Matthew Schultheis - Boenning & Scattergood

And did you finance those sales?

Phil Wenger

No.

Matthew Schultheis - Boenning & Scattergood

Okay.

Phil Wenger

And they were predominantly residential mortgages from our southern -- from our Virginia division of Fulton Bank.

Matthew Schultheis - Boenning & Scattergood

Okay. I think that’s it for me. Thank you very much.

Phil Wenger

You’re welcome.

Operator

Well go next to Collyn Gilbert of Stifel Nicolaus.

Collyn Gilbert - Stifel Nicolaus

Great. Thanks. Good morning, guys.

Phil Wenger

Good morning, Collyn.

Collyn Gilbert - Stifel Nicolaus

Just to start off with the question, I mean the stock is on a tear this morning. So it seems as if the market was a little surprised by the result. Were you guys surprised by the strength on the credit? I mean, did you anticipate the stabilization this quarter, the way it came in?

Scott Smith

Sure, Collyn, we knew it all along.

Collyn Gilbert - Stifel Nicolaus

I’m trying to gauge if your negative tone is a reflection of future performance or if you guys are just being very conservative.

Scott Smith

You know us, we’re very conservative.

Collyn Gilbert - Stifel Nicolaus

Yes, I know this hasn't been a whole lot of fun lately either, so. But I guess, just -- and I think, actually, so you may have touched on it in the sense that one thing that maybe -- led to the surprise was that the activity in the sales from May to October was stronger than what you had thought. But maybe just without saying yes or no, maybe give us some things that have occurred that maybe is causing the credit metrics to be better than what some of us would have thought.

Phil Wenger

Well again, we have tried to identify things early, and have tried to be aggressive. So early on, we really had a number of large credits that were moved into non-performing. I think that the pace of large credits has decreased substantially. The increase in activity, Collyn, I think is -- we think that this -- that first time home-buyer credit really spurred on or has had been extremely successful, and has been very beneficial to the residential market. And whether that continues and in what form it continues, is certainly a question at this point in time.

I think we have a little concern there. We have a little concern with the future or the outlook of interest rates, long term interest rates moving forward. So I think we want to continue to be conservative.

Collyn Gilbert - Stifel Nicolaus

Okay. As you look at your -- the non-performing bucket and assess collateral values, how have those changed in terms of expectation of loss severity rates?

Phil Wenger

I think, just very generally speaking, the loss severity has not changed that much. And we look at those -- our loans on quarterly basis, and if we need to charge them down further, we do. If we think we need to add to the provision, we do. In general, what we’ve been able to obtain in on-sales compared to what those assets or in that non-performing category, I think we’ve been very, very close. So I think we feel good about the value of those assets in the portfolio.

Collyn Gilbert - Stifel Nicolaus

Okay. Okay, that’s helpful. Could you guys talk a little bit about the loans that you’re seeing in the pipeline and just walk through some of the characteristics of the new deals that you’re seeing in terms of size and structure. I’m mostly interested on the commercial side.

Phil Wenger

Well, it's across the board. And we’re looking at mortgage share pick up, not new activity. We’re seeing C&I [ph] loans. In the commercial real estate, we have multiple -- a multitude of opportunities. We’re being extremely selective. So I think it runs across the gamut on both C&I and commercial real estate.

Collyn Gilbert - Stifel Nicolaus

Are these loans -- I mean, in terms of structure, maybe give a little bit of -- frame it in terms of LTBs, that's the service coverage average loan size?

Phil Wenger

Well in general, structure has been enhanced, I would say, in favor of the financial institutions. So we’re looking at lowering the values now by -- on the CRE side of what once would have been 80%, 65%. We’re looking at debt coverage ratios of 130, 135.

Collyn Gilbert - Stifel Nicolaus

Okay. Okay, that’s helpful. And just one final question, is there a change in the strategy at all in the residential mortgage side? It looks like the residential mortgage balances were up. But obviously, the mortgage banking, the loans that line was down. Or maybe speak a little bit to the outlook there.

Phil Wenger

I thought the balances were down. But I don't think there -- I don't think there’s been any change. I guess it would be the easiest way to answer that question.

Collyn Gilbert - Stifel Nicolaus

Okay, and maybe this quarter’s performance on -- just reflects the slowdown in activity then?

Phil Wenger

I believe it does.

Collyn Gilbert - Stifel Nicolaus

Okay. Now, that’s all I had. Thanks.

Scott Smith

Thanks, Collyn.

Operator

We’ll go next to Davis Darst of FTN Equity Capital.

David Darst - FTN Equity Capital

Good morning.

Scott Smith

Good morning, David.

David Darst - FTN Equity Capital

Phil, you indicated that New Jersey and Maryland are still showing the most stress. Other than CND, can you maybe give us a little bit more details on what type of asset classes? And maybe if there’s any change if you're elaborating on -- you indicated something about the large borrower versus small borrower. Any change in that? I looked as well.

Phil Wenger

Yes. I’m sorry. You said other than what?

David Darst - FTN Equity Capital

Construction.

Phil Wenger

Construction. Well, in New Jersey, we have a larger portfolio of commercial real estate. It is in general, a smaller, much smaller amount. So we’re seeing some weakness in New Jersey from both C&I and CRE, but they are a much smaller account. In Maryland, I think, I was still referring to prices of lodge and homes. I’m not sure that we feel that they've totally stabilized yet.

David Darst - FTN Equity Capital

How much is your lot exposure this time?

Phil Wenger

I think I'll have that for you in a second.

David Darst - FTN Equity Capital

Scott, could you comment on the charters consolidation, and if you think you have any more of those you’d like to do, and maybe some -- an outlook for expected saving?

Scott Smith

You’re referring to the Maryland consolidation we just concluded?

David Darst - FTN Equity Capital

Yes.

Scott Smith

Yes. As you may recall, we’ve bought 22 banks in the last, whatever it is, 27 years now. And so, it’s not new for us to consolidate charters as it makes sense within the market. And so we’ll continue to look at that. There are none that are eminent as we speak, but we tend to do what makes sense in the market as we evolve through the process, so. There’s no plan to make them all Fulton Banks, but there’s no plan not to.

What we found in Maryland is we had three banks that were geographically starting to push into each of those markets. We had some opportunity to save some costs as we -- we did the conversion of the data processing system down there this year as well. We hadn’t done it earlier because we had significant pre-payment penalties in the contract with the previous provider.

So the culmination of all that had us look at that whole market and what was the best way to provide, what I'll call, community to maintain the community banking brand and still reduce costs from all of that. And it made sense to them and to us, and so we did it. Future just will be that same kind of analysis as things come up. And as banks grow and get closer to one another, we’ll continue to make these kinds of decisions. But we think it’s very, very important right now to maintain the community bank in each brand, whatever you want to call it. And we’re finding that that’s helping us in our business development activities.

David Darst - FTN Equity Capital

Okay. Thanks.

Scott Smith

You're welcome.

Phil Wenger

David?

David Darst - FTN Equity Capital

Yes.

Phil Wenger

Our total outstandings on land that would have -- that would not have any vertical construction is currently $116 million. And our total horizontal and vertical construction -- the total of horizontal and vertical is $765 million, and that’s an $86 million reduction in the nine months of this year.

David Darst - FTN Equity Capital

Okay. Thank you.

Operator

We’ll go next to Whitney Young of Raymond James.

Whitney Young - Raymond James

Good morning.

Phil Wenger

Good morning, Whitney.

Scott Smith

Good morning.

Whitney Young - Raymond James

I think most of my questions have been answered. But I was wondering if you could talk a little bit more about the Pennsylvania market in terms of commercial lending. Obviously, you had some CRE loans that you brought on. And I wonder -- I was just wondering how you were able to grow that portfolio, if there was any kind of market share dynamic changes from the second quarter or earlier this year. And you mentioned that there were multitude of opportunities out there. So I was just wondering if you could elaborate on that, and also the change that you might have seen so far this year.

Scott Smith

Well, we’re getting a lot of opportunities from -- a lot of market share opportunities from customers of other financial institution. And I think they are because of a number of reasons. There have been some mergers and consolidations in our markets that have created change. And so we’re taking advantage of those when we can -- when we think it’s prudent.

Whitney Young - Raymond James

Okay. And then on the residential real estate portfolio, it looks like the link quarter -- the rate of increase and non-accruals seem to accelerate while the trend was going in the other direction for most other portfolios. How do you reconcile that with your earlier comments on the signs of stabilization, home prices in Pennsylvania, and just a general feedback you’ve been getting from your lenders about the potential for some improvements there?

Scott Smith

Well, I think its two different things that we're talking about. The stabilization in prices really has no impact on people who have lost their job and can't make their payments. That’s where the increase in delinquency and problems occur. I think the stabilization in prices is beneficial to folks who want to sell their properties or builders who are selling properties.

Whitney Young - Raymond James

Okay. And then, the other question I had was the increase in the tangible common equity ratio. Obviously, your assets are going down and you have earnings, but was any of that attributed to other comprehensive income?

Phil Wenger

Yes, Whitney, because of our lower rates. We had more appreciation in our investment portfolio, and that goes through other (inaudible) income. And that affects our tangible book value.

Whitney Young - Raymond James

Do you have a basis point impact for the third quarter?

Scott Smith

No. But Whitney, the net appreciation in our investment portfolio, we had -- at the end of June, we had $13 million net loss, and at the end of September, we had a $38 million increase. So you want basis point on that?

Whitney Young - Raymond James

That’s helpful there. And just looking at--

Phil Wenger

That looks like to me about 28 basis points. I did the--

Whitney Young - Raymond James

Twenty-eight basis points?

Scott Smith

If I did it right.

Whitney Young - Raymond James

Okay. Thank you. And then, the other thing I was wondering about is just the continued OTTI charges. And you have seen, for a lot of banks that those have really subsided where you continue to post those large losses. How much is the remaining exposure there? And do you have any idea of what the maximum future losses could be? Or maybe you could give us some details on what those securities are carried at right now?

Phil Wenger

Yes. The--

Whitney Young - Raymond James

And that's it. Thank you.

Phil Wenger

Whitney, we had $900,000 in OTTI charges related to bank stocks. And the value of our whole bank stock portfolio now is a net loss of $1.5 million. So it's going to depend on what bank stocks do going forward and our valuation of them. So I expect it's going to be significantly less going forward as opposed to what we've experienced just because of the increase in the market values and the charge offs we've taken.

The OTTI charge related to investments relates to pooled trust preferred securities. And we have $35 million in par value. And last year, we wrote them down to $14 million. And then the accounting rules changed where if the write down was related to market value and not credit impairment, we had to write them up. So we wrote them up, $10 million. And the charge -- how much we wrote of in this quarter was something we wrote off last year. And then we added it back, and we've wrote it off again. It was $1.8 million.

Right now, there's pools we have -- the book value is $22.5 million after we increased it at the beginning of the year. And the net carrying value of that on our books after you adjust it to the market is $5 million.

Whitney Young - Raymond James

Thank you so much.

Scott Smith

Thank you, Whitney.

Operator

We'll go next to David West of Davenport & Company.

David West - Davenport & Company

Good morning.

Scott Smith

Good morning, David.

Phil Wenger

Good morning.

David West - Davenport & Company

Looking at your fairly optimistic outlook for the margin given the rollovers and maturities, I was wondering, looking at the outlook for net interest income, would you expect the balance sheet to be pretty stable or probably decline a little bit further from Q3 levels?

Charlie Nugent

So much in loan demand has slacked off, and our loans are down $47 million. We increased investments on average by $20 million. So I think our earning assets would be -- would be flat. That's just hard for me to predict, but I would expect it's going to be flat.

David West - Davenport & Company

But we are reading things correctly that you'll probably look to the margin to modestly expand?

Charlie Nugent

Yes. And the reason for that is that we mentioned the $1.3 billion in CDs that are maturing. And the average rate is 2.22%. And we have $145 million in advances. And the rate on that is 4.25%. As Phil mentioned, we've had great deposit growth, so that's going to be replaced with core deposits. I would expect that margin to keep on increasing. But not at the rate it was from the second to third quarter.

David West - Davenport & Company

Very good.

Charlie Nugent

That's a guess. I had trouble with the past numbers, and I really had trouble predicting it.

David West - Davenport & Company

So do we. Any comments regarding possible repayment of the TARP preferred?

Scott Smith

We look at that -- this is Scott. We look at that at, virtually, every Board meeting. We continue to stress test the bank. We continue to talk about what's best for shareholders. And at this point, we're continuing to hold it. But that's an ongoing process that we'll be looking at. We're determined to do it in a way that's shareholder friendly. And we'll just -- that's an ongoing process. And when we decide, you'll be the first to know.

David West - Davenport & Company

Very good. And lastly, I know this is a difficult line item for anybody to guess, but the mortgage loan sale number was well down from Q1, Q2 levels. And I know there are a lot of moving parts that go into that. But do you think that the Q3 number is a reasonable run rate or do you think that was a little depressed from what you would typically expect?

Phil Wenger

I hate to say a run rate, but it did -- it changes quickly based on rates. At the end of September, our pipeline actually was 50% refinanced, 50% purchased. And I think that was a good sign. We've seen rates in the first two weeks in October dropped quite a bit. And we have seen increased activity again on the residential mortgage side. How long that lasts, I can't -- I would hate to speculate.

David West - Davenport & Company

Thanks so much.

Scott Smith

You're welcome.

Operator

We'll go next to Frank Schiraldi of Sandler O'Neill.

Frank Schiraldi - Sandler O'Neill

Good morning.

Scott Smith

Good morning, Frank.

Frank Schiraldi - Sandler O'Neill

Just most have been asked and answered but just a couple of questions here. First, I'm just wondering, after talking about home prices potentially stabilizing here and maybe getting your arms around credit, is there a renewed focus or is there now more opportunity to take a look at building out the franchise. And are you considering stuff that may come up, FDIC assisted deals. And are you looking even that might -- do something that might stretch the footprint a little bit?

Scott Smith

We have been receiving calls from the FDIC and from investment bankers that are with banks that are stressed, and we continue to look at them. Our strategy has been one of -- you know it's been very difficult as we worked our way through this -- getting our hands around our own problems. And we were not aggressively seeking others. But we -- we will continue to look at those opportunities. And if there is something that's strategic that makes sense for us, and the pricing is right for our shareholders, we'll certainly consider it. I think that's where that all stands.

Frank Schiraldi - Sandler O'Neill

I guess would it be -- would it be within the realm of possibility to say -- you know, we're in Virginia, to go a little bit farther south, say into North Carolina, something like that with an FDIC assisted deal?

Scott Smith

It's in the realm of possibility. Again, we just have to be very comfortable with it. I can say that it would probably make more sense to buy a stressed situation within footprint than moving out, because we could absorb it into one of our existing banks as opposed to try to start over with a situation that's had some difficulty. But anything is possible.

Frank Schiraldi - Sandler O'Neill

And I guess that would -- you'd continue -- you'd think about this as one of the, I guess, points that you think about when you think about paying back TARP.

Scott Smith

Say that again?

Frank Schiraldi - Sandler O'Neill

I was wondering if this part of the thought process when considering whether to pay back TARP now. The fact that you could see some opportunities on the M&A side, whether it be a FDIC assisted or other--

Scott Smith

Well, I kind of think there's separate issues. I think there's a capital base that we need maintain given our company as it exists. If we add additional banks to the company, then I think we have to look at what is our perfect capitalization of that acquisition. So I think that they're two separate issues.

I think if an acquisition became available, we have to look at what is the base of capital we need for the company as it exists. And then, given whatever the acquisition is and what comes with it, what is the capital requirements of that new company? So I think they're kind of two separate issues, if you know what I mean?

Frank Schiraldi - Sandler O'Neill

Okay. I just meant that maybe keeping more capital, more powder dry here with those opportunities possibly on the board. So maybe not necessarily a rush to pay back the TARP dollars.

Scott Smith

I guess I should. I think we look at it as two separate issues. What's appropriate given what we see in our stress testing for this company, and how that's all viewed by the regulators. And then if we need additional capital to do an acquisition, we look at that as a separate issue.

Frank Schiraldi - Sandler O'Neill

Okay. And then I'm just wondering on the trust preferred -- not the pooled but the single issuer. I think you had portfolio of about $100 million. I'm wondering where that is on fair value and if you actually had some opportunity to mark those back up in the past quarter.

Phil Wenger

We've seen appreciation at -- and -- let me see if I can tell you how much. The single issue trust preferred -- the book balance is $94.4 million. And they're marked down at $22.4 million. And that's through OCI. And the -- we've seen appreciation -- they're pretty high quality issues, J.P. Morgan, BB&T, Wells Fargo, and they have been going up. They've been going up quite a bit. Let me see if I could tell you how much.

Frank Schiraldi - Sandler O'Neill

Okay. Well I guess I can just ask one final question while you're looking out for that. Phil, I think you've -- I'm sure you did give this information already in a slightly different way, but can you just -- if you have it in front of you, the 30 to 89-days past due, it sounded like that's about $120 million now. And could you just tell me what it was last quarter, end of period.

Phil Wenger

Yes. It actually dropped slightly. It was $124 million, June 30th.

Frank Schiraldi - Sandler O'Neill

Okay. And $120 million now?

Phil Wenger

Yes.

Frank Schiraldi - Sandler O'Neill

Thank you.

Operator

We'll take our next question from Andy Stapp of B. Riley.

Andy Stapp - B. Riley

Good morning.

Scott Smith

Good morning, Andy.

Andy Stapp - B. Riley

CRE and C&I tend to be laggards in developing asset quality issues. I was just wondering how much heartburn do these asset classes give you?

Scott Smith

A lot, while our numbers in our provision and full back up, they're still huge numbers we're putting in there. So we're trying to be very vigilant about watching all of that pretty carefully, Andy.

Operator

And we'll take our next question from Gerard Cassidy of RBC Capital Markets.

Jake Civiello - RBC Capital Markets

Good morning. This is actually Jake Civiello. And I apologize if we missed this, but can you give us your regulatory capital ratios? In particular, Tier 1 ratios (inaudible) and total risk base?

Phil Wenger

You know, it's tough because we haven't done our (inaudible) 1:01:18 report. We haven't done all our risk weightings. That takes a little bit. But at June 30 -- they'd be closer to June 30 numbers. And total risk base would be -- without the capital purchase plan money, would be 11.1%. The Tier 1 risk rate would be about 8.4%.

Jake Civiello - RBC Capital Markets

Is that at June 30?

Phil Wenger

That's using the June 30 risk ratings.

Jake Civiello - RBC Capital Markets

Okay.

Phil Wenger

Because we had to break down the composition of the assets and risk, but they'd be close.

Jake Civiello - RBC Capital Markets

Sure. Okay. Thank you. That's all we have.

Phil Wenger

Can I get back to Frank? Frank Schiraldi asked a question on the individual trust preferred issues we had. And we have $94.4 million. They've appreciated in three months by $8 million, and it's 8.5%, so.

Operator

And at this time, we have no further questions in queue. I'd like to turn the conference back over to Scott Smith for closing remarks.

Scott Smith

So I'd like to end this call by thanking everyone for joining us today. We hope you'll be able to be with us again for our fourth quarter year-end 2009 earnings conference call, which is scheduled for January 20, 2010 at 10:00 am.

Operator

And that does conclude today's conference. Ladies and gentlemen, we appreciate everyone's participation today.

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Source: Fulton Financial Corporation Q3 2009 Earnings Call Transcript
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