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Fulton Financial Corporation (FULT)

Q2 2010 Earnings Call Transcript

July 21, 2010 10:00 am ET

Executives

Laura Wakeley – VP, Corporate Communications Manager

Scott Smith – Chairman and CEO

Phil Wenger – President and COO

Charlie Nugent – Senior EVP and CFO

Analysts

Matthew Clark – KBW Investment

Craig Siegenthaler – Credit Suisse

Frank Schiraldi – Sandler O'Neill

Rick Weiss – Janney Montgomery Scott

Bruce Harting – Barclays Capital

Travis Brown – Stifel Nicolaus

Gerard Cassidy – RBC Capital Markets

David Darst – Guggenheim Partners

David West – Davenport & Company

Kyle Kavanaugh – Palisade Capital

Matt Schultheis – Boenning & Scattergood

Operator

Good day, and welcome to the Fulton Financial second quarter earnings call. Today’s call is being recorded. At this time, I would like to turn the call over to Ms Laura Wakeley. Please go ahead.

Laura Wakeley

Good morning, and thank you for joining us for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the second quarter of 2010. Your host for today’s conference 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 Relations and then on News.

Please remember that during this webcast, representatives of Fulton Financial may make certain forward-looking statements regarding future results or the 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. 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 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 would like to turn the call over to your host, Scott Smith.

Scott Smith

Thank you, Laura, and good morning everyone, we appreciate your continued interest in our company. Phil Wenger, Charlie Nugent and I each have a few prepared remarks, and then we will be happy to respond to your questions. Our comments will focus on linked quarter results unless we specify otherwise.

We reported diluted net income per share of $0.14 for the second quarter, up $0.01 over the previous quarter. While we were pleased with this continued upward momentum, our results were tempered somewhat by a rather slow economic recovery. In the absence of a stronger economic activity, we are finding it a challenge to grow our earning assets. Consumers and businesses appear to have adjusted to lower levels of debt or have not yet reached a level of content [ph] that is conducive to increased spending and borrowing.

As you know, we redeemed our $376.5 million of treasury preferred stock in total last Wednesday July 14. The cost to carry the TARP funds from the day of our capital rate until the end of June decreased our second quarter earnings per share by approximately $0.015. Because the economy is rebounding more slowly than anticipated, we did not see the credit quality improvement we hoped for this quarter, and actually saw some deterioration in our nonperforming assets coverage ratio. However, we were somewhat encouraged by a reduction in overall delinquency that we have not seen in over two years.

Given the continued economic uncertainty, we did not feel it prudent to reduce the provision. In short, while we still see some signs of economic rebound on the horizon, the phase of that recovery is not progressing at the speed we had anticipated. As a result, we think that credit costs will remain elevated in the near term. Phil will provide a more in-depth look at credit in a few minutes.

Since business and individuals are not spending or borrowing, they continue to deleverage and save. While these practices put pressure on our net interest income and in our net interest margin, in the long run it would be healthy for everyone including the banking industry in our economy. Deposits showed good growth particularly core deposits as a result of our emphasis on building customer relationships. Our new and existing branches continued to attract funding at a very reasonable cost, which has helped our margin and enhanced our liquidity. The item that negatively impacted our margin more significantly this quarter was the overnight investment of the TARP funds awaiting repayment to the Treasury that I mentioned earlier.

As we look at our overall investment portfolio, our strategy is to stay relatively sourced in order to protect us against a significant increase in rates and to enable us to redeploy funds from the investments till our loan demand picks up. Incidentally, while we are hearing a great deal about the pressure on municipality and their debt instruments, we feel we have managed that segment of our portfolio very well and we have not experienced significant drop there.

We are pleased to see a healthy increase in other income of 8.5% during the quarter. We continue to address the changes in overdraft regulations that will occur in the third quarter, and Charlie will provide some additional details on that. As you noticed, the company has always controlled its expenses very well, it is core competency that we have developed over our history and that continues to allow us to perform relatively well compared to peers.

In summary, we feel our current level of operating expenses are appropriate for this economic environment, and believe that, as I have said several times over the course of these calls, we are positioned well for the future. Another key event in the second quarter was the positive response of the investment community to our $230 million stock option. In our April 29 News Release, we made it clear that we intended to use these proceeds to redeem the $376.5 million in Treasury preferred stock. Now that the Treasury has been repaid, we remain a well-capitalized company producing $19 million annual dividend payment to the Treasury (inaudible).

As we indicated in our July 14 release, due to the acceleration of the accretion of the remaining discount of $5.5 million, we will see an approximately $0.03 per share reduction of net income in the third quarter. We intend to begin negotiations to repurchase the warrant that will be issued to the Treasury at the time of the initial transaction.

I want to say a word about the new financial regulation, our industry and the government are just beginning a lengthy implementation process and although the Dodd-Frank Bill will have an impact on us, I think we are positioned better than some of our competitors. We do not anticipate the revenue reduction that larger banks may have experienced from having to curtail some of their business lines, and we have the critical mass to absorb the increased cost to compliance better than some of our smaller competitors. Right now everyone is working to gain a better understanding of the many provisions in the legislation but until the implementing regulations are developed, the exact impact of the law in the banking industry in full cannot be fully understood.

Another gratifying event in the second quarter was Fulton Financial Corporation being recognized by Forbes as one of the 100 Most Trustworthy Companies in the Nation. We were the only bank holding company on the mid and large cap players. During a time when the industry as a whole is trying to recover from the broad brush of negative public opinion, this recognition conducted by an objective third party could not have come at a better time. The criteria that Forbes looked at in determining the award included our corporate governance, our accounting practices, and our overall financial transparency.

Thank you for your attention, and now I would like to turn the call over to Phil Wenger for our credit discussion. Phil?

Phil Wenger

Thank you Scott. As Scott mentioned, we continue to work through the challenges that the economy has presented. The strength and speed of the recovery remain unpredictable. Our portfolio performance is impacted by both economic conditions, as well as events that occur on specific accounts. These events can include borrower defaults, charge-offs, negotiations or resolutions (inaudible). The timing and dispositions of these events can impact our quarterly numbers.

Our credit metrics are mixed for this quarter. While delinquencies improved in both the 30 and 60-day categories, our nonperforming loan portfolio increased and our charge-offs increased slightly. Given the ongoing impact of the economy on our portfolio, we determined that it was necessary to maintain the provision at the same level as in the first quarter. We continued to dedicate the necessary resources to manage these economic challenges, and to work the portfolio closely in order to mitigate potentially difficult situations.

Now, I will go through some detail of our asset quality. The comments will be linked quarter unless I indicate otherwise. Delinquencies came in at 3.63% as of June 30, 2010 as opposed to 3.72% at March 31, 2010 reflecting a 9 basis point improvement. Portfolio outstandings were basically flat with a small $21.5 million decrease. 30-day delinquencies declined 29 basis points or $35 million, and 60-day delinquencies declined 7 basis points or $8 million. Most loan categories reflected decreases in delinquency with the exception of commercial mortgages, which increased $6.4 million or 14 basis points. The increase in commercial mortgage delinquency was solely in the 90-day and over category, which increased $31 million or 71 basis points. I will cover this shortly but the increase is primarily comprised of nonperforming loans. 30 and 60-day commercial mortgage delinquencies declined 47 and 9 basis points respectively.

Nonperforming loans increased from $286 million to $317 million. The increase in nonperforming loans was $31 million or 10.8%. This increase is comprised of $31 million in commercial mortgages and as I mentioned a $3 million in residential mortgages offset primarily by a decrease of $800,000 in commercial loans, a decrease of $2 million in consumer loans, and a $400,000 decrease in construction loans. Nonperforming loans by type reflect 25% in C&I loans, 32% in commercial mortgages, 25% in construction loans, 14% in residential mortgages, 4% in consumer loans. Geographic breakdown of nonperformers shows 27% in New Jersey, 35% in Pennsylvania, 17% in Maryland, 17% in Virginia, and 4% in Delaware.

The primary factors driving the increase in nonperforming loans are ongoing economic challenges, guarantor fatigue, and weak demand for residential real estate. Two commercial mortgages account for nearly half of the $31 million increase of nonperforming loans. Both of these were housed in Pennsylvania, one a condominium development, and one a hotel. Other real estate loans decreased $550,000 to $25.7 million. Troubled debt restructuring increased by $10.5 million from $67.4 million to $77.8 million. $5.6 million of this increase was in residential mortgages, which comprised $48 million or 62% of the TDR portfolio. The remainder of the decrease was fairly evenly spread among commercial, construction, and commercial mortgage loans.

Net charge-offs were $28.9 million for the quarter ended 6/30 versus $28.3 million for the quarter ended March 31. The commercial loan net charge-offs were approximately $12 million, construction loan net charge-offs were approximately $8.7 million, and commercial mortgage net charge-offs were approximately $3.8 million. The remainder is spread among consumer and residential. In the first quarter, construction loans were approximately $20 million of the $28 million incurred off net charge-offs. The increase this quarter in commercial charge-offs was primarily driven by three accounts in New Jersey.

Allowance to loans came in at 2.35% as compared to 2.25% as of March 31. Allowance coverage to nonperforming loans as of June 30 was 88% compared to 94% as of March 31. As I said earlier, given the ongoing stress the economy has placed upon our borrowers, we determined it was appropriate to maintain that provision at $40 million for this quarter. We have continued to make good progress in reducing our exposure to the construction segment posting another meaningful reduction of $44 million bringing the total reduction in that portfolio to $376 million or 30% since the beginning of 2009.

We continue to be very selective in taking on additional business as there are number of borrowers out looking for alternatives to their current financial provider. While overall loan demand remains flat we have been successful in winning good, solid new business from well-capitalized borrowers who are weathering the storm well but are unhappy with their current institution. These are full relationship customers primarily in the C&I sector. The composition of our portfolio has not changed substantially with the exception of the reduction in construction loans.

Now, Charlie Nugent will cover the financials. Charlie?

Charlie Nugent

Okay, thank you Phil and good morning everyone. Thank you for joining us today. Unless otherwise noted, comparisons are this quarter’s results to the first quarter.

As Scott mentioned, we reported net income available to common shareholders of $26.6 million, was $0.14 per share in the second quarter compared to $0.13 in the first quarter. The improvement in our earnings reflected a $3.4 million increase in noninterest income, $3.1 million improvement in net security gains, a slight increase in our net interest income, and well controlled operating expenses. The $650,000 or one-half percent improvement of net interest income was a result of the $50 million increase in earning assets offset by a slight decline in our net interest margin. The 2 basis point decline in our margin was due to our recent common stock offering, the $226 million in equity raised was invested in short-term funds to be available for our TARP repayment. Had we been able to repay the TARP funds at the same time we did the offering, our margin would have been at 3.82%.

During the second quarter, the repricing of time deposits and borrowings to lower rates continued. Time deposit costs declined to 1.93% in the second quarter as compared to 2.08% in the first quarter. Our total cost of interest bearing liabilities decreased to 1.60% from 1.70% in the first quarter. During the second quarter, $1.3 billion of time deposits matured at a weighted average rate of 1.71%, while $1.3 billion of significant core deposits reissued at a rate of 1.2%. In the third quarter, $1.2 billion of time deposits are scheduled to mature at a rate of 1.59%.

$75 million of Federal home loan bank advances matured in the second quarter at a weighted average rate of 5.52% with a $169 million scheduled to mature in the third quarter at the rate of 4.82%. Offsetting the positive impact of the decrease in cost of funds was a 14 basis point decline in the yield on our earnings assets. Without the TARP repayment funds, the yield on earning assets only declined 2 basis points.

Total average earnings assets increased $48 million or three tenths of a percent in the first quarter. The increase in short-term funds was offset by decreases in average loans of $30 million, a one-tenth of one percent, and average advancements of $311 million or 9.7%. Sales and maturities of investment securities exceeded purchases by approximately $200 million during the quarter due to the lack of attractive investment options. Total average deposits increased $306 million or 2.5% [ph] from the first quarter. While this growth is reflective of the industry trend of consumers and businesses saving, we also believe our customer experience and commercial initiatives have enhanced our growth.

We continued to experience growth in core demand and savings accounts with average balances increasing $388 million or 5.7%. This growth was partially offset by $82 million or 1.6% decrease in average time deposits. Savings deposits grew $243 million or 8.5%. Of this amount, $133 million was in personal accounts, while $110 million was in business and municipal accounts. Noninterest bearing demand deposits increased $107 million or 5.5% almost entirely in business accounts. Interest bearing demand deposits grew $38 million or 2% and that growth is primarily in personal accounts.

Excluding net security gains, our other income for the first quarter increased $3.4 million or 8.5%. Service charges on deposits increased $1.2 million or 8.5% due mainly to an increase in overdraft fees. These fees historically declined 8% to 10% from the fourth quarter to the first quarter, and that increased to the same amount in the first quarter to the second quarter.

We know that we will have a negative impact in regulation fees [ph]. Our total annual overdraft fees from point of sale and ATM channels were approximately $11.3 million in 2009. All our customers have been sent letters regarding this change and we are in the process of personally contacting our customers to opt in. About 90% of the $11.3 million was generated by 10% on our customer base. We have contacted 40% of that group so far with a 90% opt in rate. We believe that most of our customers want this service and have demonstrated the willingness the related fees.

Our other service charges and fees grew $1.1 million or 12.3%. Debit card income increased $420,000, 14% over the first quarter levels, which are historically the lowest levels of the year. This income has shown strong growth over the past year as a result of promotional activity and the roll out of rewards program. The impact of the financial reform legislation or debit fees is unknown at this point. However we expect there will be some reduction. Merchant fee income grew due to an increase in customer accounts and volumes. ATM fees were up due to the standardization of fees across our banks. Investment management and trust services income increased $567,000 or 7% mainly in brokerage fees.

While the market continues to be uncertain, we believe we are benefitting from our transition from a transaction model to a relationship model. Mortgage sale gains decreased $300,000 or 9% as higher volumes were offset by declines and spreads. Total loans sold during the second quarter were $271 million as compared to $234 million in the first quarter. Net security gains were $900,000 in the second quarter as compared to net security losses of $2.2 million in the first quarter. Other-than-temporary impairment charges of $3 million on full trust preferred securities and $500,000 on bank stocks were more than offset by realized gains on sales of debt securities of $4.4 million.

Our investments in pooled trust preferred securities had a cost basis of $34 million and a carrying value of $13.5 million at the end of the second quarter. Our operating expenses increased $929,000 or nine tenths of a percent and there were significant increases realized in salary and employee benefit expenses, which increased $2.3 million or 4.4%, primarily due to the reversal of excess 2009 incentive accruals in the first quarter. The salary benefit increase was offset by decreases in other categories the most significant being occupancy expense which declined $1.1 million.

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

(Operator instructions) We will go first go to the line of Matthew Clark with KBW Investment. Please go ahead.

Matthew Clark – KBW Investment

Hi, good morning guys.

Scott Smith

Good morning.

Matthew Clark – KBW Investment

Can you speak to the incremental increase in commercial real estate nonaccruals up $30 million, just give us a better flavor as to what is in there, if there is anything lumpy, also the types of issues there, and any detail you can provide on the commercial real estate portfolio that might be of increasing concerns?

Charlie Nugent

Sure Matt. It was somewhat lumpy as you said. We had two accounts that represented close to half of the increase, one was a hotel, and the other a condominium development, but we did have a number of other accounts over $1 million that went on and they were really spread out both geographically and in type. They vary from a small retail building, office building to where properties that were related to C&I accounts they run or occupied, car wash development and other hotel furniture store, horse farm, it is really pretty spread out. I guess we do have some – the overall delinquency on the commercial real estate side we think is still very manageable at 3.13 [ph] the 30 and 60-day CRE delinquency did decrease. So there are some relatively positive signs there. Did that answer your question?

Matthew Clark – KBW Investment

Yes that helped, thanks. On the C&I front, lost content there, picked back up and am just curious, I think you had mentioned something about the C&I losses going higher relating to three situations but just any color there as to the type of situations.

Charlie Nugent

Yes one was a printing – the largest was a printing company. There was actually some fraud involved. The balance is pretty widespread. That was really half of the C&I losses and the rest was pretty widespread.

Matthew Clark – KBW Investment

Okay, and just for the calendar, you guys are unfortunately just above the $15 billion threshold at year end, I know you guys raised capital in the quarter and repaid subsequent to that, just curious of what your thought are and what are the troughs that you had there, and the need to replace them over the next two and a half years or so.

Charlie Nugent

We have $178 million in troughs that we have issued and they are pretty good rates we think, especially the $150 million we issued in 2006. You know we still get – our weakest capital ratio is total risk based, and they are still going to count as capital for total risk based, and the capital change has been current until I think 2013 and is phased in. We think we are just going to hold them and keep them there and see what happens. We do our projections too; the ratios would affect the leverage ratio, and the tier one ratio. When we project out, we think it is only going to affect those ratios by 30 or 40 basis points, and that is a guess of the forecast. We do not think it is going to be a big thing for us.

Matthew Clark – KBW Investment

That is good, thank you.

Charlie Nugent

You are welcome.

Operator

We will go next to the line of Craig Siegenthaler with Credit Suisse. Please go ahead.

Craig Siegenthaler – Credit Suisse

Thanks, good morning everyone. Just first on the net interest margin trends, I am just wondering, when we think about a lot of that additional liquidity leaving in early July not being there in the third quarter, I am guessing you should probably get a pretty nice step up in the net interest margin, and I know you referenced kind of 14 basis points I believe in a few places, but I am just wondering how should we think about kind of the sequential step up as stock was repaid and some of that low-yielding securities and cash moved up the balance sheet?

Charlie Nugent

Craig that is a tough question and a tough thing to estimate. Everything on our balance sheet just about reflects our margin. If we adjust it for having that TARP money for an extra two months, kind of like the double (inaudible) that should help reduce the cost of funds. And then we also have $159 million in Federal Home Loan Bank advances maturing that will pay off in all probability, and the rate on that is 4.82 [ph] or so. I think you will see the margin go up but not as significantly as it has in the past and will be driven by reductions on the cost of funds.

You mentioned the 14 basis points and you said that the 14 basis points were related to the decline and the yield on our earning assets, and 10 basis points of that was (inaudible) and if you factored that out, the yield on earning assets only declined 2 basis points, and in the last two quarters they have only declined 3 basis points each quarter. So I think we are going to see slight margin improvement not just a forecast, that is just a guess and it is hard to guess because everything affects the margin. We are definitely going to see a reduction in cost of funds.

Craig Siegenthaler – Credit Suisse

Got it and then when you think about the cyclical deposit trends here, you have really strong demand in noninterest bearing deposits, you have CD demand not necessarily weaker but you will be running those down and also CD rates are improving, when do you think we could reach kind of the end of this deposit cost improvement cycle? Do you think we have one or two quarters left or do you think it will be a bit longer –

Charlie Nugent

I have no idea. We have had strong deposit growth and I think it is just hard to do. It is my personal thinking it is based on individuals and companies, they are not having confidence in the future so I think they are saving more than they are used to, and until they start spending more, I think we are going to keep on having deposit growth. It is continuously very strong, now when that ends, I do not know; when they start spending, I do not know.

Craig Siegenthaler – Credit Suisse

Okay great, thank you for taking my questions.

Charlie Nugent

Sure.

Operator

We will go next to the line of Frank Schiraldi with Sandler O'Neill. Please go ahead.

Frank Schiraldi – Sandler O'Neill

Good morning.

Scott Smith

Good morning.

Phil Wenger

Good morning Frank.

Frank Schiraldi – Sandler O'Neill

Just a question on Charlie had mentioned $11.3 million, was that overdraft exclusively or was that also debit card fees?

Charlie Nugent

That was both.

Phil Wenger

That was only overdrafts.

Charlie Nugent

Yes, I am sorry, it was overdrafts.

Frank Schiraldi – Sandler O'Neill

Okay and then you mentioned –

Phil Wenger

It was only on the two that are –

Charlie Nugent

Yes, you know Frank, yes it was only on as we mentioned point of sale and ATM channels.

Frank Schiraldi – Sandler O'Neill

Okay, thank you it is okay.

Charlie Nugent

Sorry about that.

Frank Schiraldi – Sandler O'Neill

No, it is my fault, and then – so in addition to that I wonder if you could give us sort of debit card fees that might be –

Charlie Nugent

The debit card fees in the second quarter were $2.1 million. Debit card fees were, I am sorry, $3.3 million in the second quarter.

Frank Schiraldi – Sandler O'Neill

Have you estimated at all what sort of a business could be lost given the new I guess the interchangeable not necessarily period but –

Charlie Nugent

That is kind of mentioned in the comments we expect it to get down but we are not sure how much. I think it is up to the Federal Reserve Bank to determine how much we can charge for that. So we cannot even guess at this point.

Frank Schiraldi – Sandler O'Neill

Okay.

Charlie Nugent

Is that your understanding too?

Frank Schiraldi – Sandler O'Neill

Yes, that is my understanding that the Fed is going to have sort of nine months now to put the rules and so we are not going to know for a while but we have seen some companies come out with estimates, and I cannot remember exactly which it was, I know Bank of America had a very hot 70% to 80% so that they thought they could be in trouble given the potential new rules or whatever the new rules would be.

Charlie Nugent

Yes, we do not know.

Frank Schiraldi – Sandler O'Neill

Okay and then going back to overdraft Charlie you had mentioned – I think what you said was you have contracted 40% and 90% of those have opted in, is that right?

Charlie Nugent

Yes, we were saying that last year we generated $11.3 million in overdrafts from the point of sale and ATM channels so that is kind of addressed. We said 90% of that $11.3 million came from 10% of our customers, and we have contacted 40% of that group and so far there has been a 90% opt in rate. But also looking at all the other people that have not overdrawn their account as much as the 10%, the optimum rate for those people too are still at about 90%.

Frank Schiraldi – Sandler O'Neill

Okay so of that 40% is that 90% of that are actually responding or –

Charlie Nugent

No that is 40% that we contacted and 90% of that 40% have opted in.

Scott Smith

Yes Frank, we have had personal contact with 40% of those folks and 90% of them have opted in.

Frank Schiraldi – Sandler O'Neill

Okay that is all I have, thank you.

Operator

We will go next to the line of Rick Weiss with Janney Montgomery Scott. Please go ahead.

Rick Weiss – Janney Montgomery Scott

Hi, good morning.

Scott Smith

Good morning.

Rick Weiss – Janney Montgomery Scott

Good morning, sorry about that. I was wondering on your expenses, it came down from a year ago but is sort of running around $100 million per quarter, would that be a good run rate to use?

Charlie Nugent

Rick, we missed the beginning of that, can you –

Rick Weiss – Janney Montgomery Scott

Yes with the expenses it seems like – there is certainly control but they are down from a year ago but now they have tried a couple of quarters, they have been around $100 million or so. Is that a good run rate to use for modeling?

Charlie Nugent

When you look through all those red tape, you see fluctuations in each one of them but that would be a good run rate I would think.

Rick Weiss – Janney Montgomery Scott

Okay and then going back to my original question with the CRE nonaccruals, are the loans that are going bad, how long have you known the borrowers, are they good customers, are they fairly new loans, if you can give some color on that portfolio?

Charlie Nugent

Sure Rick. I would say that the majority of them were seasoned loans.

Rick Weiss – Janney Montgomery Scott

Okay so there have been customers that have been performing who get caught up in the economy.

Charlie Nugent

Yes that would be correct.

Rick Weiss – Janney Montgomery Scott

Okay you have expanded but it is good to know it. Thank you.

Charlie Nugent

Thanks Rick.

Operator

We will go next to the line of Bruce Harting with Barclays Capital. Please go ahead.

Bruce Harting – Barclays Capital

Good morning. The statistics you gave on the overdraft are very precise, very interesting, but I just want to make sure I understand and not to beat a dead horse. So 90% of the $11.3 million comes from 10% of your customers, and you contacted 40% of that 10% and 90% opted in. So about $4 million of the $11 million is pretty much opted in, and do you plan to contact the other 60%, and then what method you are using to have such good success?

Phil Wenger

We have set up a special call centre. We have a number of individuals who are dedicated to making telephone calls the entire day. We probably contacted almost everyone, it just takes a while to actually get to talk to someone, not like they will get him on the first call and we pretty consistently every week we talk to another 3% to 5%.

Bruce Harting – Barclays Capital

Okay.

Phil Wenger

So we are going to continue that.

Bruce Harting – Barclays Capital

Okay. So it is just a matter of human resources and time and just getting around everybody.

Phil Wenger

Yes, the biggest impediment is people being available to talk to us.

Bruce Harting – Barclays Capital

Okay. Are there obvious offsets that you think the banking industry – it seems like the big deal they announced last Friday, if you applied that math to your debit volume, we come up with sort of a $0.02 to $0.03 after tax impact, which is relatively minor but it seems like the industry does not really want to pick a fight with Congress right now, and is not talking about potential offsets, but it seems like the average debt [ph] per customer is not that high and you just got to make that income up with some other checking account fee, is that fair to say?

Scott Smith

This is Scott. I think we are going to see a lot of banks experimenting with some different strategies here. At some point in time we need to get paid for providing transaction services, and if the regulations change about how you could do that, then I think you are going to see the industry react in different ways, and we will watch that very closely and do our own analysis about what works for us. I think you will see some packaging, you will see some folks charging for various activities, so it could go back to debit card fee. There are a lot of options out there and I think once we know what the Fed’s decision is we have to sit back and say how much does that impact us and how are the ways to regain that revenue stream.

Bruce Harting – Barclays Capital

Okay. Yes, I mean it seems like why would the banking industry want to pick a fight right now and make any comments like that when you still have nine months and you do not even know what the Fed is going to do and our understanding is be away because of their good will if MBNA had to say something. But just if I may ask one more, on the provisioning strategy, you continue to build reserves even though charge-offs are pretty flat, there is a lot of moving parts within charge-offs but it seems like the real estate construction NPAs have sort of peaked, I do not know, would you agree with that? And then the two areas have continued to see some NPA increase on a linked month quarterly basis more the commercial mortgage. So is there anything specific to say about commercial mortgage and do you have a special work out team, and are you basically working with developers or the real estate owners and churn a lower rate or you are talking cutting principal? How are you working with them? For the most part, are you trying to keep the owners of the commercial real estate in that seat or you are at a point where a lot of these folks you just have to try to get the real estate away from them?

Scott Smith

We definitely have a team that is working on the portfolio. We look at every situation on a deal by deal basis, and in some cases we think it makes a lot of sense to work with folks, in other cases it does not, and we move fairly quickly. As far as the individual portfolios, I think we have said over time there are going to be variances from quarter to quarter, so I guess we are not totally convinced. We are through the full construction problems, I think there has been some slow down on the housing side so while our success has been pretty good lately, I think that is still out there.

On the commercial real estate side, we did have a couple. Obviously we had increases this quarter. We still feel good about that portfolio, about the underwriting and the overall strength, but in any given quarter, two or three accounts could have an impact in the C&I numbers, could have an impact on the construction, could have an impact on the commercial mortgages and this quarter it is I guess commercial mortgages.

Bruce Harting – Barclays Capital

Thank you.

Operator

We will go next to the line of Collyn Gilbert with Stifel Nicolaus. Please go ahead.

Travis Brown – Stifel Nicolaus

Hi, this is actually Travis Brown on for Collyn this morning. How are you guys doing?

Phil Wenger

Yes, good.

Travis Brown – Stifel Nicolaus

I know you said that overall loan demand was pretty much flat. Is there any geographies seen more activity than others or was it pretty much flat across the spectrum?

Phil Wenger

It is pretty flat across the spectrum. I think the one area that we have had showed some growth has been in Pennsylvania and our growth I think is attributed more to changes with our competitors than it is with stronger economy, and so in Pennsylvania I think we have made a little more headway in taking market share.

Travis Brown – Stifel Nicolaus

Okay, fine. Then maybe you can give us some color on the spreads you are seeing on any new commercial loans again?

Phil Wenger

Yes, the spreads as we said have been much stronger than they were in the past and I think that trend has continued.

Travis Brown – Stifel Nicolaus

I know you mentioned the transition from the transaction based or relationship based approach on the brokerage side but you may be able to enhance some of the measures that have specifically helped to build revenues there?

Phil Wenger

On the brokerage side first off we have hired in the last 12 to 18 months we have hired a number of new brokers. So our headcount of brokers is higher, and our brokerage product in general now is much more relationship based as compared to transactional base. So that helped us and I was encouraged by that growth.

Travis Brown – Stifel Nicolaus

Right when you say it is more relationship based, does that mean you are on a kind of a more over arching on the wealth management structure as opposed to just one-off brokerage, is that –

Phil Wenger

Yes.

Travis Brown – Stifel Nicolaus

Okay and then we should expect to see some continued growth there along that brokerage line.

Phil Wenger

I think that is possible.

Travis Brown – Stifel Nicolaus

Okay. And then just finally, can you just give us an update on your municipal bond exposure, I know you have touched on before.

Charlie Nugent

Yes, we have $344 million in municipal bonds and 96% of those are general obligation bonds or having more impacts (inaudible) tax and right now they are – the market value is net $10 million over the cost and you look at it very carefully and we do not see any problems there right now.

Travis Brown – Stifel Nicolaus

That is all I have. Thank you guys very much.

Charlie Nugent

You are welcome.

Operator

We will go next to the line of Gerard Cassidy with RBC Capital Markets. Please go ahead.

Gerard Cassidy – RBC Capital Markets

Thank you, good morning. Can you guys share with us the process once you contact your customers to opt in, what is the process that they have to go through to legally opt in? Is there a document they have to sign and submit to you guys or how does that work?

Charlie Nugent

Yes. Gerard, if they say yes, we sign them up on the phone if we get them on the phone that is when the problem is answering machines, so once we get them on the phone, if they say yes I want to opt in, then we opt them in.

Gerard Cassidy – RBC Capital Markets

Okay, so there is no legal signature required on a document or anything like that?

Charlie Nugent

No.

Gerard Cassidy – RBC Capital Markets

Okay. The second question is, in terms of your primary regulator, when was the last time that they had come in to see you guys for a safety and soundness exam? When we can trust for example has there a primary regulator in there right now, and I think prior to that it was late ’08 before they have been before, when was the last time you guys sent your safety and soundness exam?

Scott Smith

Gerard this is Scott, I am not sure we are permitted to give you that date frankly. We get told very carefully by regulators that all they do with us is confidential. So unless I get some kind of a nod from legal I cannot, what I can tell you is we have eight banks, so we have a lot of primary regulators and they are here all the time. It is very seldom that a month goes by that we do not have a regulator somewhere in the company.

Gerard Cassidy – RBC Capital Markets

Okay, understood, thank you very much.

Operator

We will go next to the line of David Darst with Guggenheim Partners. Please go ahead.

David Darst – Guggenheim Partners

Good morning. Could you speak in a little bit more detail on your New Jersey commercial real estate exposure, any crown that you are seeing there, I guess those were all related to an acquired bank, and then the same question for Maryland in the construction portfolio, and then do you feel like you have turned a point with the acquired banks that you got your warm around some of the issues that came up earlier in the cycle?

Phil Wenger

Okay. For our commercial portfolio, our commercial real estate portfolio in the State of New Jersey represents 28% of the total portfolio. So I believe our CRE portfolio breaks out 52.7% in Pennsylvania, 28.1% in New Jersey, 9% in Maryland, 7.8% in Virginia, 3% in Delaware. So, the commercial real estate delinquency in the State of New Jersey is 4.36%. So it is higher in New Jersey in the overall delinquency rate. And what were your other questions?

David Darst – Guggenheim Partners

I guess rather than the numbers was just more concerned – my question was regarding any trends that you are seeing in those portfolios specifically New Jersey commercial real estate and Maryland construction, those were items where you had some issues earlier in the cycle, and I wondered if you feel like you are turning a point in those markets, and you are seeing more deterioration in your core market, Pennsylvania.

Phil Wenger

We have turned – I think the Maryland construction portfolio has turned. The New Jersey CRE portfolio deterioration I think has slowed but I would not say it has turned, and we have seen some increase in parts of Pennsylvania, specifically suburban Philadelphia.

David Darst – Guggenheim Partners

Okay and then on the credit resolution front, are you beginning to see any signs that some of the earlier credits that were brought on would be able to move out in the second half of the year?

Phil Wenger

Yes we are moving some. The encouraging part is there is a lot more interest. The part that is frustrating is it just takes time to do it and so that gets very frustrating.

David Darst – Guggenheim Partners

Okay, thank you.

Operator

We will go next to the line of David West with Davenport & Company. Please go ahead.

David West – Davenport & Company

Good morning.

Phil Wenger

Good morning.

David West – Davenport & Company

First I have one comment you made you said you expect getting the short-term credit costs to remain elevated. Should we take that as an influence that you spent charge-offs to stay around current levels or possibly increase from current levels?

Scott Smith

This is Scott. I guess where we are is that as we went through the second quarter, if you just followed it correct and the macro economic news that was coming out, I think two quarters ago when we budgeted and a quarter ago when we talked we all expected the news to be more positive than it has been. Now there is still some good things happening, I see the CEOs of major corporations they are ready to spend some of their cash and there is some other things going on that have been picked up here and there. The Fed has backed off of its original forecast about 0.5% I think and some others have mixed kind of economics. So we are just being cautious here in saying this recovery is not as solid I think as it once was but we still see a recovery coming, and so we are just being cautious in terms of maintaining that reserve built at this point in time, but I would not say it is specifically done because we think there is going to be a significant increase in charge-offs but it is a comedy hard to call and all that is related to the recovery.

David West – Davenport & Company

Is the relationship from the provision to charge-offs is that likely to be determined primarily by what you see in future trends on the nonperforming assets?

Scott Smith

And in the economy too, what we are seeing specifically in our markets in what we are doing about the macro economy, it is hard to spend down a reserve when folks are still nervous about whether those recoveries were real or not.

David West – Davenport & Company

Just one more question, I just was curious what you are seeing on your commercial a lot of credit utilization, I think from the relative numbers it is probably pretty flat at this point?

Scott Smith

Yes it is flat.

David West – Davenport & Company

Thanks very much.

Scott Smith

You are welcome.

Operator

(Operator instructions) We will go next to the line of Kyle Kavanaugh with Palisade Capital. Please go ahead.

Kyle Kavanaugh – Palisade Capital

Good morning gentlemen.

Scott Smith

Good morning Kyle.

Kyle Kavanaugh – Palisade Capital

I just wanted to see, was that the hotel and condo development were they in New Jersey?

Charlie Nugent

They were in Pennsylvania.

Kyle Kavanaugh – Palisade Capital

They were in Pennsylvania.

Charlie Nugent

Suburban Philadelphia.

Kyle Kavanaugh – Palisade Capital

And I mean the hotel was basically occupancy just was not there?

Charlie Nugent

Yes.

Kyle Kavanaugh – Palisade Capital

Okay and then on the condo development was that a brand new construction?

Charlie Nugent

Yes it was.

Kyle Kavanaugh – Palisade Capital

How is the market for selling loans or trading loans right now? Is there anything there?

Charlie Nugent

There is a market, there is huge discounts.

Kyle Kavanaugh – Palisade Capital

Huge discounts.

Charlie Nugent

Yes.

Kyle Kavanaugh – Palisade Capital

You know a lot of comments about the economy and its recovery is much slower than expected, what can you do to keep performing situations, you mentioned borrower fatigue is one of the issues, what can you do, is there anything you can do other than just waiting for some other credits to fall into NPS?

Scott Smith

We work very carefully with our customers and particularly in this kind of environment to counsel them on things they can do to assure up their businesses or whatever they are and that is about the extent. I think Phil mentioned we use the term guarantor fatigue. We have some real solid guarantors in many of our liabilities. You know that years ago we have been careful to do that but at some point in time they are going to have a liquidity, and when that happens there is not a whole lot you can do. I am not trying to paint too gloomy a picture here.

We are still going to see the economy grow at 3% according to the Fed. So we will see what Bernanke has to say today but I do not think anybody is predicting a double dip recession. So I think the pace is going to be a little slower. We were in a trend where we were kind of improving a lot of those numbers every quarter, and I probably mentioned in previous calls, life is not so easy that everything is just brighter and once you are on a recovery the curb just goes straight up. There are going to be some bumps along the way and nonperforming is one of those bumps this quarter. I am not here to tell you that is an indication of what is going to happen in the future, but the economy is softer than we thought.

Kyle Kavanaugh – Palisade Capital

Thanks, that is all I have.

Charlie Nugent

You are welcome.

Operator

We will go next to the line of Matt Schultheis with Boenning & Scattergood. Please go ahead.

Matt Schultheis – Boenning & Scattergood

Good morning.

Scott Smith

Good morning Matt.

Matt Schultheis – Boenning & Scattergood

Quick question and maybe it is a little too early given the credit cycle but obviously you guys still have enough capital to repay TARP, so given you have enough capital to write through things, and as you said and I think importantly you have enough scale to absorb the cost of some of these legislative and regulatory changes coming down the pipe whereas some of your smaller competitors may not. So what does that do for you as far as the M&A picture? Are you actually seeing deals being offered, and do you have any interest in doing deals, and if so, in which geographies?

Scott Smith

There have been very few FDIC related deals in our markets and to date we have not been interested in any of those. So my suspicion is that that will be the case going forward. We might do a few here and there but the majority of those are happening as we know in other geographies. We do feel like we have a stronger capital base now and our expectation is based on what we are hearing from folks in the industry is that there will be some consolidation as you know, we have done a lot of mergers I think 22 bank mergers over the last several decades and we think we know how to do that fairly well. So if there are opportunities I think we will be at least engaged in discussions with some of those banks as they decide to take another strategic option.

So the answer is yes, we will be interested in discussing acquisitions with folks who are so minded but it is awfully hard to call when that change of attitude will happen as those times come through us. What I am hearing from bankers is that after March this year but more in 2011.

Matt Schultheis – Boenning & Scattergood

Some more geography as to where you have been focused in the past.

Scott Smith

Yes.

Matt Schultheis – Boenning & Scattergood

Thank you.

Scott Smith

We still have a lot of good markets where we do not have enough critical mass in the geographies we are in. So that is where we will be focused anyway.

Matt Schultheis – Boenning & Scattergood

Okay.

Operator

There are no further questions in queue. We would like to turn the call over to Scott Smith for any additional and closing remarks.

Scott Smith

I would like to thank you and end the call and thank everyone for joining us today. We hope you will be able to be with us again on our third quarter 2010 earnings conference call, which is scheduled for October 20, 2010 at 10 AM. Thanks again.

Operator

That concludes today’s conference call. Thank you for your participation.

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Source: Fulton Financial Corporation Q2 2010 Earnings Call Transcript
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