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Fulton Financial Corporation (NASDAQ:FULT)

Q4 2009 Earnings Call

January 20, 2010; 10:00 am ET

Executives

Laura Wakeley - Vice President of Corporate Communications Manager

Scott Smith - Chairman & Chief Executive Officer

Phil Wenger - President & Chief Operating Officer

Charlie Nugent - Senior Vice President & Chief Financial Officer

Jim Shreiner - Senior Executive Vice President

Analysts

Rick Weiss - Janney

Matthew Clark - KBW

Collyn Gilbert - Stifel Nicolaus

Frank Schiraldi - Sandler O’Neill

Unidentified Participant

David West - Davenport & Co.

Matthew Schultheis - Boenning & Scattergood

Gerard Cassidy - RBC Capital Markets

Operator

Good day and welcome to the Fulton Financial fourth quarter earnings conference call and webcast. As a reminder, today’s call is being recorded. At this time, I’d like to turn the conference over to your host, Laura Wakeley; please go ahead ma’am.

Laura Wakeley

Thank you. Good morning and thank you for joining us for Fulton Financial Corporation’s conference call and webcast to discuss our earnings for the fourth quarter and year end 2009. Your host for today’s conference call is Scott Smith, Chairman, Chief Executive Officer of Fulton Financial Corporation. Joining him are Phil Wenger, President and Chief operating officer; and Charlie Nugent, Senior Executive Vice President and Chief Financial Officer.

Our comments today will refer to the financial information included with our earnings announcement, which we released at 4:30 yesterday afternoon. These documents can be found on our website at www.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 the future financial performance of the 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, plan, 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. 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 statement section of yesterday’s earnings news release. Fulton Financial does not undertake any obligation to update any forward-looking statements to reflect circumstances or events that occur after the date on which such statements were made. 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 good morning everyone, we appreciate your joining us. Charlie, Phil and I each have a few prepared remarks and then we will be happy to respond to your questions. I’d first like to share my thoughts about the year just completed, along with some additional color on the fourth quarter in particular. Then Phil will discuss credit and Charlie will provide details on our financial performance. We reported diluted net income per share of $0.31 for the year and $0.11 for the fourth quarter.

As you know, this was an improvement over 2008 and a 10% improvement over the earnings per share in the third quarter. We believe we’ve made significant progress addressing our many challenges, particularly in the credit area and positioning our company for improved future earnings performance as the economy expands. We know that 2010 will bring with it a new set of challenges.

We believe also it will bring increased opportunities for growth and improved earnings. A few things characterized the year and the quarter just completed. One that resonated for most of 2009 was our deposit growth. After slower growth in the first quarter, we ended the year very strong. The economy helped us to some extent, as customers reduced their equity investments and debt, while also spending less and saving more.

As a result core deposits grew nicely, enabling us to reduce our overall funding costs and our wholesale funding. With ample funding and strong liquidity, we stand ready to assist creditworthy borrowers with their credit needs as increased confidence in the economy translates into a more robust consumer spending and business expansion.

Although our core deposit momentum remains good as we begin the New Year, we believe competitive pressure for deposits will increase in 2010, along with renewed customer interest in improving equity markets. If the latter is true, however we should receive some benefit as our Wealth Management Group, Fulton Financial Advisors, should see some increased activity.

A significant portion of our lower cost deposit growth came from the small business sector, as a result of our placing greater emphasis on that segment from a relationship banking and promotional standpoint. It is also a segment that could help us grow in earning assets this year as the economy expands. As a result of strong core deposit trends, we showed a healthy increase in our net interest margin linked quarter.

While we do not expect upward pressure on deposit costs in the short term, we will adjust deposit rates if there is a competitive pressure to do so, particularly in markets where we have recently opened new branches. Before leaving the topic of deposits, I would like to share how pleased we are with our most recent FDIC market share data. As of June 30, we increased our market share in 70% of the counties, which we serve across our five state footprints.

A second key theme throughout 2009 was the growth in our non-interest income, largely due to the strength of our residential mortgage operation and corresponding sales gains. These gains held up well on a linked quarter basis, helped by the federal first time home buyer incentives. In the last few weeks, applications have slowed somewhat as 30 year fixed rates are now above 5%.

Our current flow of applications is now trending more toward home purchase rather than refinancing of existing mortgages. We experience to decline in cash management fees due to low rate environment as well as a reduction in merchant card revenue. Revenues from debit card activity were up. As you know, the industry is developing strategies and responses to the opt-in provisions of the new overdraft guidelines that could impact non-interest income growth in the second half of 2010.

We have projected the revenue we believe is potentially at risk as a result of these guidelines and in response, we have developed a comprehensive customer communications plan. We believe that by presenting customers with clear information regarding other alternatives to overdraft protection, we will enable them to make informed choices and also keep the impact of these new guidelines manageable.

Another key theme was our ability to effectively manage our expenses. In difficult times expense control becomes even more critical as we position ourselves for the future. I think we managed expenses effectively in 2009 and linked quarter our expenses were flat. Controlling costs is a core competency that has and continues to characterize our company.

As you know, one of our toughest challenges over the last two years has been credit quality. In the second quarter of 2009, we began to see stabilization in our credit quality metrics and saw the continuation of that stability in the third and fourth quarters. We are cautiously optimistic that we will see improvement in 2010. We did not feel it was necessary to increase the provision third to fourth quarter based on the performance of the portfolio and in light of current level of reserves.

Phil will provide all the credit details in just a moment. Before closing, I want to share some additional thoughts about where we are today, as well as our thoughts on 2010. For some time, I’ve said that despite our challenges we were working to position the company for future earnings growth and when the economy rebounds I believe we have done that. However, the pace of that recovery will have a significant bearing on the pace of our future earnings improvement.

Today, from our standpoint customers are not yet showing a great deal of confidence in the economy, as reflected in our loan growth results. Our capital position has and remains strong, in anticipation of one of your questions you should know that it is our desire to repay the $376.5 million in capital purchase program funds when we can do so in as friendly a shareholder manner as possible.

As I said the last time, we know the strong financial performance that our people in this company are capable of producing. I have no doubt we will do so again in the years ahead. We believe that 2009 could mark the beginning of our return to consistent year-over-year earnings growth that shareholders expect.

Each of our 3950 team members have faced challenge after challenge and yet their competitive spirit is remains stronger than ever as they’ve embraced our customer promise to care, listen, understand, and deliver a superior customer experience to every customer, everyday. I am proud of and grateful to each and every one of them.

In closing, it is important to note that according to the fourth quarter 2009 stock changes that we have compiled, the value of Fulton Financials stock increased almost 18% in the quarter, placing us second in the 23 member Peer Group. While we all know the past performance is not indicative of future results, I assure you that all of us are committed to working hard so this trend can continue.

Thank you for your attention. At this time, Phil will discuss credit. Phil?

Phil Wenger

Thank you, Scott. Credit quality stabilization that began in the second quarter continued through the fourth quarter. As you know from past calls, we have committed significant resources to loan review, workout, and remediation. We’re now seeing the results of this commitment. This economy remains fragile and economic uncertainty is still an issue.

While there seems to be more optimism about 2010, we continue to watch loan customers and seasonal businesses closely for any signs of deterioration, so we can take prompt remedial action as necessary. Unless I indicate otherwise, my remarks will focus on our linked quarter results.

Total loans net of unearned income were flat, a reflection of economic conditions and a lean pipeline across the portfolio. The only category showing modest growth was commercial mortgages. This was also the loan category that showed the most rapid growth for the entire year up $275 million or 7%. One of our management priorities for 2009 was to reduce our construction loan exposure.

Including the linked quarter decline of $51 million, we dropped a total of $291 million in 2009. With the low level of new and existing development activity, we would expect to see a continued decline within this category. Today, as we look across all lending categories and take into consideration the current level of economic uncertainty, we cannot be certain how strong our loan growth in earning assets will be in 2010.

Nor do we know what effect a potentially rising rate environment could have on our residential mortgage activity. From a commercial loan perspective, there are still excellent market opportunities for loan growth and relationship expansion that we can continue to pursue through our new business development efforts. At the end of the year, our allowance to net loans came in at 2.15% that is up from 2.02% at the end of third quarter and up from 1.5% at year end 2008.

Our allowance coverage to non-performing loans increased from 86% to 91% linked quarter. We kept a provision of $45 million linked quarter; since charge-offs were $29 million, our coverage ratio did improve. Non-performing loans were essentially unchanged, after seeing increases of $21 million and $14 million in the second and third quarters of 2009, respectively.

Of our $29 million in loan charge-offs for the fourth quarter, 29% came from Maryland, 26% from New Jersey, 21% from Fulton Banks Virginia Division, 22% from Pennsylvania, and 2% from Delaware. Looking at total net charge-offs this quarter by category, we charged off a $11 million in construction, $10 million in C&I, $4 million in consumer loans and leases, $2 million in residential mortgages and $2 million in commercial mortgages.

The geographic distribution of our loan portfolio has changed little since last quarter. At year end, 55% were domiciled in Pennsylvania, 21% in New Jersey, 12% in Maryland, 9% in Virginia and 3% in Delaware. Total non-performing assets stood at $305 million at year end up $4 million linked quarter. This increase was due exclusively to an increase in ORE from $19 million to $23 million.

Within our $305 million of non-performing assets at year end, approximately $91 million or 30%, are in our Pennsylvania banks, $82 million, or 27% are in our New Jersey banks; $65 million, or 22%, are in Fulton Banks Virginia Division; $59 million, or 19%, are in our now combined Maryland affiliate, and $8 million, or 2% are in Delaware. We reported a 10 basis-point up tick in total delinquency linked quarter, from 3.32% at September 30 to 3.42% at year end.

30 day delinquencies increased slightly from 68 basis points to 69 basis points and 60 day from 31 to 39 basis points and 90 day from 232 to 234 basis points. More specifically, commercial loan delinquencies increased linked quarter from 226 to 251 basis points; construction loan delinquency decreased 124 basis points, commercial mortgage delinquency increased 49 basis points.

We continue to watch our C&I, commercial real estate and construction portfolios very carefully for any further signs of deterioration. These delinquency rates do continue to compare favorably to industry benchmarks. There been articles in the national press regarding a significant rise in 60 day delinquency on prime residential mortgages across the country. While we saw a modest increase in that category of about $500,000, our 30 and 90 day delinquencies both fell linked quarter.

We saw a 4% decline in our consumer loan portfolio linked quarter, as consumers continued to deleverage. Our consumer delinquency has consistently remained under 2%. I want to provide additional color on our $4.3 billion commercial real estate portfolio. The CRE portfolio is well diversified. The average loan size for commercial real estate investment purposes is just under $500,000.

In addition, approximately 40% of our $4.3 billion in commercial real estate loans are owner occupied, which we believe further mitigates our risk. We feel that we have managed and continue to manage the commercial real estate book effectively, given the economic challenges surrounding this sector. Anecdotal information from lenders across our footprint suggests that there was little change in business conditions from third to fourth quarter.

Our new loan pipeline is lean, but steady, business expansion remains limited because the current economic uncertainties make business clients, like consumers, reluctant to move ahead with capital expenditures. On a market-by-market basis of the five states we serve, some believe that Maryland and Virginia will rebound more rapidly than Pennsylvania, New Jersey and Delaware, but we have not seen any strong trends to validate that belief.

As the economy rebounds, we will increase our new business development activity, continue to book new, high quality credits as those opportunities become available, continue to further diversify our loan portfolio, proactively address distressed credits and work to further reduce our construction exposure. In summary, while credit challenges remain, if the consensus view of some economists for improving economic conditions hold true, we would anticipate improvement in our credit quality metrics as the year 2010 progresses.

Thank you. I’d like to turn the call over to our CFO, Charlie Nugent.

Charlie Nugent

Okay, thank you Phil. Good morning everyone. Thank you for joining us today. Unless otherwise noted, comparisons are this quarter’s results to the third quarter. As Scott mentioned, we reported net income available to common shareholders of $19.3 million, or $0.11 per share in the fourth quarter, compared to $0.10 in the third quarter. We are pleased by this improvement and the positive items impacting our earnings.

These items included a 2.5% improvement in net interest income, stable asset quality and well controlled operating expenses. The $3.3 million or 2.5% improvement in our net interest income was the result of the continuing increase in the net interest margin. Our net interest margin increased 12 basis points this quarter from 3.55% in the third quarter to 3.67% in the fourth quarter.

Consistent with the trends we saw last quarter, the improvement was due to the decline in time deposit costs, which were 2.61% in the third quarter and decreased to 2.3% in the fourth quarter. Yields on earning assets declined only three basis points. There are a significant amount of time deposits and Federal Home Loan Bank advances maturing in the first quarter of 2010, which should have a positive affect on our net interest margin.

$1.3 billion of time deposits mature at a weighted average rate of 2.16% and $150 million of Federal Home Loan Bank advances mature at a weighted average rate of 3.61%. Total average earning assets decreased slightly, average loans grew $76 million or six tenths of a percent, while average investments declined $160 million or 5%. We have chosen not to reinvest all of our portfolio cash flows in the current interest rate environment. While this decision has resulted in lower net interest income in 2009, we feel that it is prudent.

On the funding side, total deposits increased $232 million or 2%, with most of that growth in demand and savings accounts, which grew $371 million or 6%. Non-interest bearing demand deposits increased $69 million or 4%, with the growth occurring primarily in business accounts. Interest-bearing demand deposits grew $87 million or 5%, with growth across all categories.

In the savings category, we saw $216 million, or 8% growth, $73 million of this growth was in personal accounts, $37 million in state and municipal accounts and $106 million in business accounts. The growth in non-personal accounts was impacted by businesses having to keep more balances on hand to offset service fees, as well as a movement from our cash management products due to the current low rate environment.

Time deposits decreased $139 million or 2.5%. Brokered certificates of deposit declined $15 million. Jumbo certificates of deposit declined $25 million and retail certificates of deposit decreased $99 million. We are, however, seeing growth in maturity categories of over one year.

Excluding security gains, our other income was flat at $41.2 million. An increase in mortgage sale gains was offset by declines in other fee areas. Total gains on the sale of mortgage loans were $3.9 million in the fourth quarter, compared to $2.8 million in the third quarter, even though loans sold decreased to $350 million from $580 million.

Service charges on deposit accounts were down slightly as a result of continued pressure on our cash management business in this current low rate environment. Other service charges and fees decreased 6%, with declines in merchant, letter of credit and ATM fees. Investment management and trust service income was down slightly, primarily representing lower brokerage revenue.

Operating expenses increased $560,000 or 0.6%. Marketing costs increased significantly due to the timing of promotions. Salaries and benefits were down $463,000 or 1%. Staff reductions at The Columbia Bank due to our third-quarter systems conversion contributed approximately $370,000 to this reduction.

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 Rick Weiss - Janney.

Rick Weiss - Janney

A question, I guess with respect to the construction loans. They decreased about, I think you said $51 million and charge-offs were about $9 million or $10 million? So that’s like $40 million, were these $40 million paid off or were they moved into I guess another loan category?

Charlie Nugent

The large majority of them were paid off.

Rick Weiss - Janney

I’m assuming there’s just not much new construction loan lending activity going on right now?

Charlie Nugent

That is correct.

Rick Weiss - Janney

Scott, one of the things too that we are kind of struggling with is, what are the regulators have in mind in terms of capital requirements? I’m wondering if you or Charlie has any insight into that, as you are part of the Fed Advisory Committee. Do you think higher capital standards are coming down the road? If so, will you be able to meet them or would you think that you may have to raise capital?

Scott Smith

That’s the question, I think of the year for all of us, Rick. I think the regulators are struggling with that whole issue. My understanding is that there are proposed guidelines being developed that are going out for comment that would be implemented year end.

So this doesn’t give us a whole lot of clarification on what is what right now, but I think it is fair to say that the capital requirements for the industry are going to be higher than they were prior to this last couple of years that we’ve gone through, but that is part of the difficulty with looking out and managing the capital position of the company it is unclear what requirements will be and whether they will be uniform across all banks or whether there will be some variation depending on the strength of the balance sheet.

Rick Weiss - Janney

I didn’t mean to paint you in the corner I don’t know how banks are going forward with their business plans for this year, but thank you very much.

Scott Smith

You’re welcome.

Operator

Your next question comes from Matthew Clark - KBW.

Matthew Clark - KBW

Would you happen to be able to give us the TDRs that you had that were not included in nonaccrual at the end of the quarter?

Charlie Nugent

Matt, I can give you information on TDRs, at the end of the third quarter; we had a total of $42 million of TDRs, 31 of which were not included, which were not past due or in non-accrual. At year end that $42 million increased to $54 million, but I do not yet have the breakout for you on what is accruing loan and what is delinquent and non-accruing and we will get that out as soon as we can. I believe that the percentage will be similar, but I do not have the exact numbers at this time.

Matthew Clark - KBW

On the CRE front thanks for the additional color within that portfolio would you also happen to be able to break down that book with retail and office and industrial, lodging, and so forth?

Charlie Nugent

At the end of the third quarter, $16 million was commercial and $26 million was residential and at the end of the fourth quarter, $16 million remains commercial and $37 million is on the residential side.

Matthew Clark - KBW

On the overall CRE book, the $4.3 billion, would you guys be able to offer some granularity there in terms of what portion of that book might be retail related, office related industrial, hotel/motel and maybe apartment, even if it is a non-owner occupied case?

Phil Wenger

Yes, I believe I can give you that in a second; Matt the report I have in front of me breaks them out as a percent of total assets, not as a percent of the CRE portfolio. So, I don’t know if you want those numbers or if you would like us to get back. Real estate rental and leasing is the highest at 2.8% and then the next highest is Ag at 2%.

We have a couple at 1.45%; one is another category and the next would be 1.24% healthcares, 1.37% retail, 0.38% wholesale trade, 0.74% manufacturing, 1.02% accommodation and food services, 0.6% construction, 0.52% arts, entertainment and recreation.

The total of that owner occupied category comes out to 13.5%. Those percentages were all owner occupied and then on the investment, which totals 21% were 6.4% office, warehouse, industrial. 2.15% recreation, 4.15% is a special purpose category; I’m not sure. 3.1% retail. Is that satisfactory?

Matthew Clark - KBW

Then last question, I think fairly straightforward is the CDs that are rolling off here in the first quarter $1.3 billion, I think at 2.16%. I guess could you give us a sense for what kind of rate offerings those might be rolling into?

Phil Wenger

Matt, based on the CD rates we’re offering, I would say about 1 3/4. That’s just a guess on where they’re going to roll, but I’d guess 1.75%. That’s just a guess and that is just based on the CD rates we are offering now.

Operator

Your next question comes from Collyn Gilbert - Stifel Nicolaus.

Collyn Gilbert - Stifel Nicolaus

Scott, just a follow-up to the capital question, so putting the unknowns of where the regulators are going with capital, can you just give us a little color as to your specific capital management strategy? I guess tying that to what metrics you’re looking at and managing to, to have you come up with the decision of either maintaining the TARP or paying back the TARP? Also maybe giving a little bit more background as to your shareholder friendly comment in terms of paying back TARP.

Scott Smith

\What we’ve said all along is we feel like we have sufficient capital, but we understand that what defines sufficient is up to definition from the regulators as we go forward.

Collyn Gilbert - Stifel Nicolaus

Just on that point. So when you say you have sufficient capital to what metric are you looking at? What levels indicate that you’re comfortable?

Scott Smith

We look at the typical ratios and now we’re adding total common equity to all of that and we have ongoing discussions with regulators about capital and their interpretation of what are appropriate. We look at where we rank ourselves compared to other banks in our peer group and that kind of gives us some sense of where we are and gives us some comfort that we have plenty of capital and of course, we look at our credit metrics and as we’ve talked about, they’ve stabilized over the last three quarters. So we feel like we’re in good shape there.

Going forward, three things have to happen for a bank to pay back TARP. First, the bank has to be certain that the worst of this issue is behind them, and it no longer needs the insurance, if you will of having that capital available. Second, the regulators have to agree to all of that and then third, it has to work and most importantly, what is good for the shareholders.

So a shareholder friendly manner, what I’m trying to say there’s that as the year progresses, and I think we will see more and more action in this TARP repayment. There was a bit of a flurry at the end of the year and our gaudiness made statements of that the TARP is sort of all going to be repaid in 2010.

I’m not sure if that’s his goal, but there appears to be some movement from the treasury to want the money repaid. So I think all of us have to look at what is the situation going to be and how much capital will be required to replace that or not and then what the timing of that should be based on the market, the stock price and things like that.

So, it is a fluid situation we have ongoing discussions with all involved and we’ll move when we think it is best for our shareholders, a lot of banks is still have the CPP money, and I don’t think there is any, if you will scarlet letter at this point in time about having it.

There some frustrations about the reporting and all of that, but that’s just part of the deal and we work through that. What we are concerned about is our shareholders and making sure that as we progress through this, if there is a decision to repay it, that we do it in a way and in a time that best helps our shareholders long term.

Collyn Gilbert - Stifel Nicolaus

So there is not necessarily, would you have a philosophical opposition to be raising capital to pay it back? I mean, as you look at kind of the balance of dilution with both forms of capital, how do you see that?

Scott Smith

We’ve done the math on what the breakeven is on short term dilution that the difference is the CPP money is short term dilution and raising additional equity is long term dilution. So, I think we have to see what our earnings do this year and get a better sense for where we need to be in terms of replacing the capital.

I don’t know that we need to build a significant amount of equity capital beyond what the new guidelines are going to be, but as I said earlier, I think they are going to be higher than they have been in the past. Whether they are higher than where we are, I think still remains to be seen.

That’s a vague answer, Collyn but we are kind of groping through this to try to make sure that we take care of our shareholders, but there could be a requirement to issue equity I mean, I don’t think we all have to face that, but we are not in a rush to do it, so we are not going to jump next week just because I’m tired of the aggravation of the reports it is what is good for the shareholders.

Collyn Gilbert - Stifel Nicolaus

Then just a question on the provision, maybe if you could give a little guidance as to what you might expect on the provision line. I know you’ve spoken to stabilization of credit, but I am just curious how you are measuring that, because I guess if you look at the kind of NPA inflows, they were actually higher in the fourth quarter. So maybe sort of tie your stabilization of credit comments to what we could expect maybe in the provision going forward.

Scott Smith

I think non-performing loans were about even quarter-to-quarter, I think we had some increase in other real estate, but when I use stabilization, when you look at the way things were deteriorating last year and into the beginning in ‘08 and in the beginning of ‘09, and then look at what’s happened second, third and fourth quarter, the real numbers in aggregate, haven’t deteriorated.

Collyn Gilbert - Stifel Nicolaus

Right, so the rate of deterioration is rising.

Scott Smith

Then as I mentioned earlier, I think we are looking at the economy. If you look at the consensus of economists and at the fed, there is an expectation of the economy is going to pick up and if that happens, then I think you can expect that to be impact our or credit quality metrics to the positive side of things. I think there is still some question in some people’s minds that is going to be the case. I think we follow it carefully, but we think our reserves are right where they need to be right now.

Collyn Gilbert - Stifel Nicolaus

Any specific guidance, perhaps, on the provision, and I mean, I’ll leave it at that.

Scott Smith

Your crystal balls as good as mine, Collyn I mean it depends on the economy.

Collyn Gilbert - Stifel Nicolaus

What’s the LTV on your commercial real estate portfolio, the average LTVs?

Charlie Nugent

Collyn, I don’t believe that we have that number off hand. Our policy is 80% loan-to-value and we make very few exceptions there. I would guess our average LTV at this point in time, would probably be in the 60% range.

Operator

Your next question comes from Frank Schiraldi - Sandler O’Neill.

Frank Schiraldi - Sandler O’Neill

Just a couple of questions, on the margin, I just had a follow-up on the CD book reprising in the first quarter, $1.3 billion in 1Q. What was roughly the CD book rollover in the fourth quarter?

Charlie Nugent

It was a little bit higher than the $1.3 billion, but not much, Frank. The rates were slightly higher.

Frank Schiraldi - Sandler O’Neill

In terms of non-performers, I wonder Phil, if there’s any color you can give just specifically on the C&I bucket and the CRE bucket linked quarter. What the new loans that you saw inflow into non-performers, just some color on those?

Phil Wenger

No. I have the information by state. I don’t have particular industries, Frank.

Frank Schiraldi - Sandler O’Neill

I’m just wondering if there’s any color in terms of particular loans flowing through, anything bulky, things like that.

Phil Wenger

It looks like the largest addition was about $5.6 million and that was on the construction side. On the C&I side, it’s not a lot, but the largest is about $2.4 million, one hotel, one Ag credit, and age restricted development. It is really a wide range and nothing real large.

Frank Schiraldi - Sandler O’Neill

So on the $5.6 million I guess that would fall under in terms of if we’re looking at the buckets that would fall under the CRE bucket or…?

Phil Wenger

No, that would be the construction.

Frank Schiraldi - Sandler O’Neill

So there was outflows in construction overall, but one of the inflows, okay. Do you have any sort of color that you can give on that loan in particular, like LTV or what that construction loan entails sort of?

Phil Wenger

No, it was a development project that didn’t sell and the owner didn’t have the liquidity to carry it.

Frank Schiraldi - Sandler O’Neill

So is it residential or…?

Phil Wenger

Yes.

Frank Schiraldi - Sandler O’Neill

Do you know of a loan-to-value on that or in terms of what you think your losses might be there or is that…?

Phil Wenger

Well, I can tell you that we did charge part of that off in our fourth-quarter charge-off numbers. We think going forward to a 75% of the new loan-to-value. We think any losses going forward would be fairly minimal.

Frank Schiraldi - Sandler O’Neill

Then just a follow-up, one of your comments earlier Scott, on small business, is SBA lending is that sort of going to be one of the growth engines of the next year or so?

Scott Smith

Small business lending will be we don’t use the SBA a lot. Some of our banks use it more than others, but we don’t have a significant volume in SBA backed guaranteed loans. We use it sparingly, but we do book a lot our bread-and-butter, is small business, so we tend to portfolio them and do they direct.

Frank Schiraldi - Sandler O’Neill

Specifically on SBA, there is no plan to increase that business line for you guys?

Scott Smith

Not unless there is some significant change there and there could be, if some stimulus money goes into that that makes it somehow more attractive, but typically, the time lag and the servicing requirements, its easier for our customers for us to do it direct and we have the liquidity to do that, so that’s been kind of our strategy there.

Frank Schiraldi - Sandler O’Neill

Then just finally, I’m just wondering in terms of the deposit fees, overdraft and NSF fees, what sort of percentage is that of the deposit fee line item?

Scott Smith

Yes, they’re looking for that.

Charlie Nugent

Is this for the quarter, Frank, or for the…?

Frank Schiraldi - Sandler O’Neill

Yes, just the quarter.

Charlie Nugent

The total for the quarter is $9,390,000.

Operator

Your next question comes from [Inaudible]

Unidentified Participant

I’m just trying to think about when margin expansion will kind of become an asset repricing story and when you think you are going to reduce your liquidity and kind of what leverage there is...

Charlie Nugent

That is going to depend on what happens with rates going forward, with the prime rates, fed funds and I can’t even guess with that.

Unidentified Participant

Then just a housekeeping question, in the previous quarters, you disclosed kind of a reserve for unfunded commitment, which I believe was $7.2 million in third quarter. I was just wondering if you have a comparable number in the fourth quarter.

Charlie Nugent

I don’t think we do, sorry. It would not be much.

Unidentified Participant

So, there’s no significant kind of increase in reserve for unfunded there and then if possible and I’m thinking that this number would be hard to estimate do you know what your redefault rate would be on your restructured loans?

Phil Wenger

Redefault rate on restructured loans.

Jim Shreiner

This is Jim Shreiner speaking for the most part on our restructured loans; we have maintained pretty much the same interest rate as long as they are accruing. So, there has been on the default rate, we are looking right now at about 22% delinquency on restructured residential mortgages.

Unidentified Participant

Do you have kind of an overall number, or do you only restructure the resi market?

Phil Wenger

We only have $16 million of restructured commercial loans and to date, there have been no defaults.

Operator

Your next question comes from David West - Davenport & Co.

David West - Davenport & Co.

I wondered, on page three, you gave some detail relative to your net realized gains and other temporary impairment charges. Wonder if you could put a little color on that, particularly on the OTTI charges, as to what specific securities that was directed toward.

Charlie Nugent

The OTTI charges on the bank stock portfolio were three bank stocks that we had and they are about $1.2 million that we wrote them down. We wrote them down to current market value. The whole bank stock portfolio now is, as of December 31, is $2.2 million, market value under book value. If you look at that, we have gross losses of $4.7 million in there and gross gains of $2.5 million. That’s the bank stock.

The other portion was related to trust pooled securities and par value on that is $34 million and the book value has been written down to $20 million. It’s made up of 10 pooled securities composed of 517 banks. We go through each one of them and evaluate what we think the credit risk is there and we write them down.

Phil Wenger

We think we use a conservative approach, but time will tell.

David West - Davenport & Co.

The gains, were those just on more traditional fixed income…?

Charlie Nugent

Yes, the gains in the portfolio nearly our entire portfolio is agency guaranteed mortgage-backed, and CMOs, and high-grade municipals and the net gain there, net gain, even backing out the trust pools and the bank stocks and all. The net gain in those is $18.8 million and the mortgage-backed and the CMOs, its $57 million net gain.

David West - Davenport & Co.

Then lastly, Charlie, I guess for you as well, the quarter’s tax rate was a little lower than I would have expected. Did you have any IRS settlements or anything that influenced that? Maybe could you comment on your outlook for the 2010 taxes?

Charlie Nugent

I don’t think so. I think the effective rate should stay about the same. The effective rate will go back as our earnings go back. I would expect this year to be around 29% or 30%.

Operator

Your next question comes from Matthew Schultheis - Boenning & Scattergood.

Matthew Schultheis - Boenning & Scattergood

A couple quick questions for you, could you talk about the impacts or whether there’s an impact of interest rate floors, either embedded or purchased on your asset side of the balance sheet? In other words, if rates go up 25 basis points, do you have enough assets that are currently priced under their floor that they are not going to reprise up anyway?

Charlie Nugent

Some of the floors we’ve put in are 4%. That would be in our modeling, but I couldn’t tell you specifically.

Matthew Schultheis - Boenning & Scattergood

I mean, do you have a ballpark dollar figure about how much of your earning assets have some sort of floor in place?

Charlie Nugent

No, I don’t. “Should we disclose that in the future?” We would have that I just don’t have it with me.

Matthew Schultheis - Boenning & Scattergood

Can you talk about the construction portfolio with regard to interest reserve and any change with regard to that relationship over the past couple of quarters?

Phil Wenger

I would say there’s no change. At this point in time, most of our developments, I believe, are customer funded and they’re funding the reserves as they go forward.

Operator

Your final question comes from Gerard Cassidy - RBC Capital Markets.

Gerard Cassidy - RBC Capital Markets

Can you guys share with us, in the commercial real estate loan growth this quarter and maybe throughout the year? What was the dollar amount, if any, of so-called mini-perms, loans that construction loans that the projects were finished, but they couldn’t find permanent financing and you guys gave them temporary commercial real estate mortgage financing?

Phil Wenger

I can tell you we did none this year, and our entire portfolio of mini-perms is extremely small. We do, I believe, have two loans that this year will mature, and both of them are performing very well.

Gerard Cassidy - RBC Capital Markets

On the fees for the service charges on deposit accounts, it looks like it came in at about $15.2 million. Can you share with us if there are any concerns should the legislation in Washington that’s been proposed about reducing customer fees, how that might impact that line item? Do you guys offer or so called free checking account, that I think the legislation is most focused on?

Phil Wenger

I think the legislation for the most part first I’d say we are concerned about any legislation, whether it’s on the fee side or any other side, but most of the proposed legislation to-date, the impact on us would be on the overdraft side.

Gerard Cassidy - RBC Capital Markets

Yes.

Phil Wenger

The feds put out guidelines that we think we can manage under those guidelines. Additional legislation would cause us to take additional steps to offset whatever income we lose.

Gerard Cassidy - RBC Capital Markets

On the insufficient funds charges, what type of impact could that have before you guys change maybe products, or are we talking 5% or 10% of total service charges, or is it greater?

Charlie Nugent

That’s hard to estimate, because people can opt in, and we can continue to charge and we have until July to get them to opt in. So it will be hard for us to give you a good estimate.

Scott Smith

Gerard, this is a populist issue that gets a lot of press. We don’t have any significant customer feedback that would indicate that the customers don’t like the overdraft protection we provide and our sense is, if we can communicate appropriately with them, they will opt into it, because they just don’t want to get told at the target that their card isn’t any good.

There may be a quarter or two to digest that, but once they get told that at the target that their card isn’t any good, they’re going to be in the branch the next day, saying, how can you fix this. So our sense and because of our closeness to our customers, our sense is that while it might be disruptive for a quarter or two, that this is not something that customers are concerned about. It’s something that people who like to talk about these things are concerned about.

Gerard Cassidy - RBC Capital Markets

What are the total, when you look at your total fees, what dollar amount is for overdraft charges for revenue?

Charlie Nugent

For the quarter, Gerard, it was $9,390,000 and for the year, it’s about $35 million, $36 million.

Gerard Cassidy - RBC Capital Markets

So that’s all overdraft charges then, the other service charges and fees?

Charlie Nugent

Yes.

Gerard Cassidy - RBC Capital Markets

Getting back to that legislation, do you guys know if once you have a customer opt in and then they go use their debit card at Starbucks and they don’t have enough money for the $4 latte, are they going to be asked at the point-of-sale terminal, whether they want to take on the fee you will charge them for overdrawing their account, or is it only a onetime opt in at the beginning of the year, and they’re not going to be asked every time that their bank account is going to be overdrawn?

Charlie Nugent

As we understand, it is a one-time opts in.

Operator

That does conclude the question-and-answer session. At this time, I’d like to turn the conference back to you Scott Smith for any additional or closing comments.

Scott Smith

Well, I would like to end the call by thanking everyone for joining us today. We hope you’ll be able to be with us again for our first quarter 2010 earnings conference call, which is scheduled for April 21 at 10 a.m. This concludes the call.

Operator

Again, that does conclude today’s conference. We thank you for your participation.

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Source: Fulton Financial Corporation Q4 2009 Earnings Call Transcript
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