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Executives

Laura Wakeley - SVP & Corporate Communications Manager

Scott Smith - Chairman & Chief Executive Officer

Phil Wenger - President & COO

Charlie Nugent - Senior EVP & CFO

Analysts

Frank Schiraldi - Sandler O'Neill

Matthew Clark - KBW

Rick Weiss - G&E

Matt Schultheis - Boenning & Scattergood

David Darst - Guggenheim Securities

Bruce Harting - Barclays Capital

David West - Davenport & Company

Travis Lan - Stifel Nicolaus

Fulton Financial Corp. (FULT) Q3 2010 Earnings Call October 20, 2010 10:00 AM ET

Operator

Good day and welcome to the Fulton Financial third quarter 2010 earnings teleconference. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Laura Wakeley, Senior Vice President and Corporate Communications Manager. Please go ahead

Laura Wakeley

Thank you. Good morning. Thank you for joining us for Fulton Financial Corporation conference call and webcast to discuss our earnings for the third 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 website at fult.com by clicking on Investor Relations and then on News.

On this call representatives of Fulton may make forward-looking statements with respect to Fulton's financial conditions, results of operations and business. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond Fulton's control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

Fulton undertakes no obligation other than required by law to update or revise any forward-looking statements whether as a result of new information future events or otherwise. In our earnings release we have included our Safe Harbor statement and forward-looking statements. We refer you to this statement in the earnings release and the statement is incorporated into this presentation.

For a more complete discussion of certain risks and uncertainties affecting Fulton, please see the sections entitled risk factors and management discussion and analysis of financial condition and results of operations set forth in Fulton's filings with the SEC.

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 you being with us. Phil Wenger, Charlie Nugent and I each have some prepared remarks, and then we will respond to your specific questions. Our comments will focus on linked quarter results unless we specify otherwise.

We reported diluted net income per share of $0.16 for the third quarter, up $0.02 over the previous quarter and a 10% improvement over the same period last year. We continue this earnings momentum despite the absence of stronger economic activity.

During the quarter we saw an increase in residential mortgage lending activity along with an increase of mortgage sale gain income. Our net interest margin also improved.

There were a number of significant events that occurred during the quarter. On July 14, we redeemed our $376.5 million Treasury, deferred stock in full. Then on September 8 we repurchased the associated warrant from the Treasury. We are pleased to have both of these transactions behind us.

Two weeks ago we announced the merger of our Delaware National Bank affiliate into our largest affiliate Fulton Bank. And as we have mentioned in the previous calls, we consider merging affiliates and we believe it makes sense to do so. After the systems conversion in early December we will be operating with seven affiliates, down from a high of 15 several years ago.

During the quarter preliminary lawful capital guidelines were released. Of course there will be further definition and clarification of these requirements from the US regulatory authorities. However, our current capital appears to be well in excess of the preliminary guidelines.

Regulation E overdraft opt-in opt-out guidelines became effective on August 15. We've been experiencing this event since beginning of the year and as we expected the payment of overdraft, it does create value for our customers across all channels.

We expect to see additional opt-in and customers who did not respond initially to our opt-in notices to do so after having a point of sale or ATM transaction declined for the first time. Nevertheless, as we expected, this quarter we began to see the impact of new regulations on our non-interest income. Charlie will provide additional information in his comments.

The Dodd-Frank Act became small on July 21, in response we have established a committee of senior people who study the applicable titles under the act as well as the many rules and regulations that we will be required to implement.

Dodd-Frank could create some potential opportunity for us in the marketplace. With careful planning and strategizing as we believe we are in a better position to absorb the increase compliance cost in many smaller banks.

On a balance sheet standpoint, the third quarter saw a continuation of our strong core deposit growth particularly in the small business sector and of our very high priority market segments. We were able to reduce our cost of funds during the quarter and believe that we will be able to further reduce then as certificates of deposit mature and reprice in the fourth quarter.

While we are always glad to see an increase in our stable of retail deposit base, it is a challenge to deploy those funds profitably in this environment. Over the last 90 days we've seen little indication of an economic rebound and little change in business and consumer behavior. Both sectors continue to deleverage and we will likely continue to do so until the overall employment picture improves.

With such strong liquidity position we certainly would welcome more robust growth in quality loans. However, that is not yet the case. This quarter we were able to offset loan run-offs and charge-offs with quality new loans to the extent that our outstanding loan balances did not show a decline and net interest income increased. However, because of the continued economic headwinds and as we indicated in our last call, credit cost remained elevated. We experienced an uptick in our nonperforming loans and in overall delinquency. The provision was unchanged linked quarter and we continue to build the loan loss reserve, albeit at a slower pace this quarter.

Our economic problems and related credit issues persist. I assure you that we will be persistent in meeting those challenges and getting them resolved. So we'll provide more specifics about credit in a few minutes.

Non-interest income showed a good increase linked quarter despite the Reg-E impact that I mentioned earlier. And as you've come to expect from us, the other expenses were well controlled.

I want to say a word about mortgage foreclosure procedures since the topic has been so prominent in the press. Relatively speaking, our foreclosure activity is minimal. Moreover, it is not an assembly line like process, but just like our lending each decision to foreclose is made on a case by case basis. In addition, we have talked with our people responsible for handling our foreclosure documentation and we are satisfied that our foreclosures have been and will continue to be processed correctly.

In summary, we're still awaiting a more meaningful economic recovery. We along with the industry are challenged on many fronts right now, investment yields, fee income, earning asset growth, increased regulatory burden and persistent credit issues. Despite all of those factors we were still able to increase our earnings this quarter. I believe that is a tribute to the resolve and competitive spirit of our 3800 team members, many of them are also shareholders, together they have risen to every challenge we faced in the past and I know they will continue to do so in the future. Thank you for your attention and now I would like to turn the call over to Phil Wenger for our credit discussions, Phil?

Phil Wenger

Thank you, Scott. Second quarter recovery pace remains low, during this quarter asset quality pressures persisted. We continue to take an active approach to problem asset management, we are taking actions to deal with situations particularly in residential construction for the ability to amortize within a reasonable time period within question.

As I will discuss what the economy is impacting several segments of our portfolio to varying degrees, the construction portfolio remains our key challenge, they work to reduce this portfolio with the decline of over $435 million since the beginning of 2009 including nearly $60 million in this quarter alone.

Let me give you the specifics with regard to asset quality. My comments will be to the linked quarter unless I state otherwise. First, regarding delinquency, as you in the chart on the page six of the press release we had a 23 basis point increase in the third quarter of 2010. 30 and 60-day delinquencies were relatively flat, 98 and over account were the primary cause of the increase rising from 2.65% or $370 million to 2.87% or $343 million.

Driving this work our additions to non-accruals shall be discussed in a moment. Regarding the midst of delinquencies we saw reduction in promotional mortgage delinquency from 3.13% to 2.85%. This reduction was offset by increasing from both commercial loans and residential loans.

Commercial loan delinquencies increased from 2.58% to 3.08% of the portfolio. Increases were driven by loans with balances of $2 million and under from a variety of industry spread throughout our footprint, this reflects continued economic pressure on small business. Residential delinquencies increased from 8.36% to 9.19%.

As I mentioned the increase in overall delinquency was caused by 8.1% or $26 million increase in non-performing loans. Total non-performing loans of $343 million at the end of the quarter up from 317 million and so the end of the second quarter. In non-performing loans target, they reflected the largest increase in its construction loans. We move several larger residential development construction loans and non-accrual; two of which were current in terms of payment or where the pace of repayment or sales was not occurring and acceptable level.

We also saw increases in both commercial and residential mortgage non-performing loans as noted in the press release at 7.5 million and 6.4 million. These again are comprised of smaller cash.

Turning to the geography over non-performing portfolio, it has not changed substantially from last quarter. The construction loan challenges remain in the southern portion of our franchise specifically Virginia and Maryland. Commercial accounts are dispersed throughout footprint and represent a variety of industry that are stress given the economic challenges.

Other real estate earnings increased from $25.7 million to $30.2 million with the increase being driven by the addition of one account that is a residential construction project again in Maryland. I'd like to make a few comments about our ORE portfolio. Since the beginning of 2010, we have sold 100 ORE properties with gains of $1.607 million and losses of $1.582 million resulting in a net loss position of $25,000 reflecting what we believe is an effective process. The average time in property within our ORE portfolio during that time period was 7.8 months. Troubled debt restructuring increased from $78 million to $87 million, decreases in commercial and construction loans offset by an increase in commercial mortgages and residential loans.

Net charge-offs increased to $35.5 million from $28.9 million last quarter. $22.9 million of the total were construction loans with $19.4 million coming from four accounts, all of which were in Virginia and Maryland. Given the continued asset quality challenges, we determined it was appropriate to maintain our provision at $40 million. The net increase in total allowance for the credit losses was lower than recent quarters, reflecting our comfort with our coverage levels.

As Scott mentioned, I would like to provide some additional information about our residential mortgage foreclosure process. Much of the press has been focused on high volume servicing situations where individuals were processing thousand, several thousand foreclosure actions on a monthly basis. Unlike those situations our foreclosure actions year-to-date have averaged 32 per month. The foreclosure actions filed by us are on loans that we originate.

Our employees are responsible for collecting and reviewing a loan document, for authorizing the filing of each foreclosure action. We have reviewed our foreclosure process, we are confident that our employees are following that process. Finally regarding loan demand, it continues to be weak. Nevertheless, we continue to have success in winning new relationships. We do note that despite continued reductions in our construction loan portfolio as well as regularly scheduled amortization, our outstandings have remained stable.

Our new loan originations in the third quarter were slightly in excess of $300 million with approximately 30% coming from the C&I sector where we have focused our calling efforts or the long-term high quality relationship. These successes have offset our run off. I will hand the discussion over to Charlie Nugent for his comments. Charlie?

Charlie Nugent

Thank you Phil and good morning everyone. Thank you for joining us today. Unless otherwise noted comparisons are this quarter's results to the second quarter. As Scott mentioned we reported net income available to common shareholders of $31.5 million or $0.16 per share in the third quarter compared to $0.14 in the second quarter. The improvement in our earnings reflected a $7.2 million or 17% increase in non-interest income and a $1 million or 1% improvement in net interest income. These improvements were partially offset by $1.7 million or 1.6% increase in non-interest expenses.

Our net interest margin was 3.81% for the third quarter as compared to 3.76% for the second quarter. These reported margins were impacted by the delay between our common stock issuance in May and repayment of our TARP funds in July.

The proceeds from the stock offering were invested short term until the TARP money was repaid. Had the offering and the TARP repayment occurred simultaneously, the net interest margin for the third quarter would have been 3.83% compared to 3.82% in the second quarter.

Our total cost of interest bearing liabilities decreased to 1.48% from 1.60% in the second quarter. Time deposit costs declined to 1.82% in the third quarter as compared to 1.93% in the second quarter. During the third quarter $1.2 billion of time deposits matured at a weighted average rate of 1.59% while $1.1 billion of certificates of deposits were issued at a rate of 1.14%. In the fourth quarter $1.1 billion of time deposits are scheduled to mature at a rate of 1.40%.

Federal Home Loan Bank advances totaling a $169 million matured in the third quarter at a weighted average rate of 4.82% with $80 million scheduled to mature in the fourth quarter at a rate of 3.74%. Yields on earning assets declined 2 basis points to 5.01% in the third quarter as compared to 5.03% in the second quarter.

Average earning assets decreased $237 million, however the majority of this declines $162 million occurred in low yield and short-term assets. Average investments increased $94 million while average loans were essentially unchanged.

Total average deposits increased $161 million or 1.3% from the second quarter. While this growth is reflective of the industry trends of consumers and business of saving, we also believe our customer experience and promotional initiatives have enhanced our growth.

We continue to experience good growth in core demand and savings accounts with average balances increasing $295 million or 4%. This growth was partially offset by $133 million or 2.6% decrease in average time deposits. Noninterest-bearing demand deposits increased $61 million or 3% almost entirely in business accounts. Interest-bearing demand deposits grew $110 million or 5.4% primarily in municipal accounts due to the timing of tax collections.

Savings deposits grew $124 million or 4%. Of this amount $86 million was in personal accounts while $38 million was in business and municipal accounts. Excluding net security gains, our other income for the third quarter increased $7.2 million or 17%. The increase in other income was driven mainly by mortgage sale gains which increased $9 million or 295%.

Mortgage loans sold increased significantly to $405 million in the third quarter from $270 million in the second quarter. Because of favorable market conditions, spreads also increased significantly.

In addition, during the third quarter we reviewed our methodologies for determining the fair value of our mortgage banking pipeline, so properly recognize expected gains in the period when mortgage rates are locked in with the borrowers. This resulted in the acceleration of mortgage sale gains in the third quarter. Certainly, $3.3 million which is the penny a share, net of tax.

Service charges on deposits to create 730,000 or 4.7% due mainly to the impact of Regulation E which we began to see in August. As we had expected, we are seeing approximately $400,000 to $500,000 reduction in monthly overdraft fee income. Other services charges and fees grew 115,000 or 1% after increasing over 12% last quarter.

Merchant fees were up 123,000 or 6%. Net security gains were $1.8 million in the third quarter compared to $904,000 in the second quarter. Other than temporary impairment charges of $2.3 million on pooled-trust preferred securities and $480,000 on bank stocks were more than offset by realized gains on sales of debt and equity securities, $4.4 million and $210,000 respectively.

Our investments in pooled-trust preferred securities have a cost basis of $34 million and a carrying value of $10.9 million at the end of the third quarter. Operating expenses increased $1.7 million or 1.6%. Salaries and benefits decreased slightly $121,000 or two-tenths of the percent. This was the net effect of a $1.3 million increase in salaries and a $1.4 million decrease in benefit cost.

Salaries increased due to the normal merit increases and the impact of our annual stock compensation grants on July 1. Benefits decreased mainly due to lower health insurance cost. The other such category increased $1.7 million, mainly due to increased repossession and other real estate owned expenses. Our efficiency ratio improved to 51.7% in the third quarter, from 53.1% in the second quarter.

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

Question-and-Answer Session

Operator

Thank you. (Operators Instructions). And we will go first to Frank Schiraldi with Sandler O'Neill.

Frank Schiraldi - Sandler O'Neill

Just had a couple of questions here. First, I want to make sure I heard right, so I think you would have said TDRs went from $78 million to $87 million linked quarter?

Phil Wenger

Correct.

Frank Schiraldi - Sandler O'Neill

And if you have it, what percentage of that is non-accrual?

Phil Wenger

The total TDRs that are non-accrual, Frank is $17 million.

Frank Schiraldi - Sandler O'Neill

Then the balance…

Phil Wenger

It was $20 million last quarter.

Frank Schiraldi - Sandler O'Neill

So 17 million non-accrual and 70 million accrual at the end of the quarter.

Charlie Nugent

Yes.

Frank Schiraldi - Sandler O'Neill

Thanks and then I wonder if you could just maybe give us a little bit more color on the growth and the link quarter on [residi] construction just in terms because I think you said there were several larger so in terms of like the size of some of these loans and if it's land, its improved land like its residential lots, just a little bit more color on that if you could.

Charlie Nugent

It was primarily residential development that are improved lot but not selling at a pace that we deem to be satisfactory for four of those particular developments at total $38 million.

Frank Schiraldi - Sandler O'Neill

Total 38 million, those four?

Charlie Nugent

Yes.

Frank Schiraldi - Sandler O'Neill

So basically what is the size of one of those in terms of…

Charlie Nugent

And just to clarify the four accounts are totaled $38 million, the charge offs against them totaled $12 million so the net increase was $26 million. And the largest was $13 million and two were one was $11 million, one was $10 million and one was $5 million.

Frank Schiraldi - Sandler O'Neill

And just for example on that $13 million do you have any size of that lot like how many lots are in that one piece?

Charlie Nugent

Off the top of my head I don't have that but it's a large development.

Frank Schiraldi - Sandler O'Neill

And then I want to ask Charlie on the, talking about FHLB bonds that are going to mature in the fourth quarter. I mean given securities you know what yield you can get on securities out there and the premiums you pay would you expect to see sort of that 80 million roll off the balance sheet?

Charlie Nugent

We would, that whole 80 million will be repaid.

Frank Schiraldi - Sandler O'Neill

Okay and then I guess it's the at least you know that amount of cash flows on the securities book so we could assume securities book will continue to fall in the quarter balances?

Charlie Nugent

I am not sure its going to depend on rates and you know driven by economic conditions but the investment portfolios did give them 94 million late quarter. I wouldn’t be surprised if it went down again but I am not good at predicting.

Frank Schiraldi - Sandler O'Neill

Alright and then I just want to make sure I got a number from you correctly in terms of CD's that matured in the third quarter. Could you just go over those numbers again I think you said 1.26?

Charlie Nugent

In the third quarter Frank, we had $1.2 billion of cash deposits matured and the weighted average maturity was $1.59 billion, and then we put $1.1 billion back on and they were issued at a rate of $1.14 billion.

Frank Schiraldi - Sandler O'Neill

1.14 okay that was the number I missed, okay great thank you.

Phil Wenger

Frank this is Phil again before you signed off, the TDR's non-accrual at the end of the third quarter was actually $25 million, it went from $20 million to $25 million.

Frank Schiraldi - Sandler O'Neill

Okay so we are still talking 87 total, so minus 25 the 62 is growing. Got you, thank you.

Operator

And we will go next to Matthew Clark with KBW.

Matthew Clark - KBW

On the CD front can you update us about the CDs maturing in the fourth quarter and which rate?

Charlie Nugent

Yes, in the fourth quarter Matt, we have CDs maturing of $1.1 billion and the weighted average rate is 1.40%.

Matthew Clark - KBW

Okay, and you are assuring somewhere around that 1.40 still?

Charlie Nugent

Yes.

Matthew Clark - KBW

On the construction portfolio can you offer us some detail within that construction book as to what might be just raw land, what might be partially developed, what might be completed and so forth?.

Phil Wenger

Our raw land portfolio is now $85 million. Developed lots totaled $372 million, so the total of the two is $457 million and $91 million of the $457 million is already in non-accrual.

Matthew Clark - KBW

Then the rest of the balance there gets you to the 860 something?

Phil Wenger

Residential and commercial construction, vertical improvement.

Matthew Clark - KBW

Can you remind us your exposure to construction related businesses within the commercial portfolio, how much that is again and then just maybe talk to us about how that is performing, whether it be from a delinquency and non-accrual perspective if possible.

Scott Smith

Well, first of all that our problems are really have been centered on the land and development side. So the balance of the construction portfolio has performed fairly well. Checking to see if I can get specific numbers for you. Matt, besides the construction portfolio, we do have C&I loans totaling $350 million to construction-related businesses. And that has been performing pretty well today. I don't have specifics of delinquency numbers.

Operator

And we'll take our next question from Rick Weiss with G&E.

Rick Weiss - G&E

I was wondering if you'd talk a little more about the mortgage banking and probably, I don't really understand fully, but the early recognition and also why it jumped up so much this quarter and what to expect going forward?

Charlie Nugent

Yes Rick, we had a change in accounting treatment, our methodology before as we booked our gains when we sold the loans, and there was never a material difference between booking it when we sold it and booking it when we locked in the rate with the customers. And we like to do it based on when we sold them just because a customer locks in a rate and when the rates go one way down, he might not go through with that commitment.

But now there's a higher volume, so we decided to book it based on when the customer locks in the rate. And that's the way from an accounting standpoint, it should be done. And what it does is just we're recognizing the income in our pipeline more quickly and that we recognize $2.3 million, which was a penny no to tax. And the other part of the mortgage banking income; our volume increased to $405 million from $270 million, so we had a 50% increase in volume and our spreads went up to $218 million from $113 million, which was an increase in spreads of 92%. Pipeline continues to be strong.

Rick Weiss - G&E

So then as long as the pipeline is strong and you are not actually, say like the fourth quarter you could still see the early recognition too?

Charlie Nugent

Yes, that's right. We're just moving it up two to three months faster, and don't have any negative effect on the fourth quarter unless people walk away from their rate locks and we assume the cash (inaudible) of 70% would go through with rate locks and we think that's pretty conservative.

Rick Weiss - G&E

And also, was there any change in the economic activity whether it's in terms of deterioration or actually better origination from the beginning of the period to the end? Was there any major changes at all?

Charlie Nugent

In mortgages?

Rick Weiss - G&E

Oh no, just in terms of loan demand or in asset quality. Anything happened over this summer that materially changed from the beginning to the end?

Scott Smith

Well Rick, this is Scott. As we have been talking about this economy just stalled in May, and it hasn't changed significantly since then at least from what we can see anecdotally and from what the numbers we are getting. So as I mentioned in my comments credit cost stayed elevated because we are in this environment where there just is not enough growth to get things moving again. Now it is moving in the right directions and we hear positive things here and there about the economy but none of them add up to what I would call a significant improvement in economic conditions and as long as we have that slowness we have concerns about credit because it takes a little more momentum than what we've got now to help some of these marginal credits get themselves in a position to pay again. So, there you are.

Rick Weiss - G&E

And I guess my last question might be bit more optimistic and if you could talk about the dividend and when you see, like a dividend increase coming?

Charlie Nugent

Well, what I have been saying most of the year is several things need to happen before we can in our minds realistically look at a dividend change. One of those was repayment of the TARP and the associated line; that is happening. The other is we need to see some improvement in earnings, that happened to some extent, so that's a positive sign. We need more clarity on capital. We have some that got issued in September, I guess that gets finalized in November when they all meet and hopefully we'll get some fairly rapid response from the US regulators and our regulators in particular about what that all means to us.

And the most important I think is finally is the economy and how it impacts credit. If we get more comfortable with that expansion, albeit fairly slow, it is in track and will continue going forward that we don't have to be concerned about what it may do to credit and ultimately our capital. Then I think we can look favorably toward restoring the dividend.

So I think right now we await a little more clarity on capital requirements and a little more confidence in the economy. We know our shareholders appreciate dividends and we've always been a fairly good dividend payer and payout ratio right now is below where our historical standards were in normal times. So those things get a little more positive and I think you can look towards some improvements that I don't know, I can't give you a timeframe on that.

Operator

And we'll go next to Matt Schultheis with Boenning & Scattergood.

Matt Schultheis - Boenning & Scattergood

A quick questions for you. Can you quantify any potential cost saves that will come out of you taking your two subsidiaries, merging into them one and combining back offices, et cetera?

Phil Wenger

Well, there will be very little cost savings in that merger. I'll tell you we are national. It's one of our smaller banks and we've centralized most of those functions. So, it will not be significant cost savings.

Matt Schultheis - Boenning & Scattergood

Okay. It was not what I expected but I just wanted to make sure and as far as the mortgage banking is concerned and I understand that you are not really affected by the big service or problems that are going on. Are you seeing any decrease in requests or closure rates or purchases, particularly as people maybe having some trouble getting title insurance or purchasing OREO properties, any disruption in dollars, everything excludes ailing for you guys?

Phil Wenger

Well, regarding the purchases, there's no question that the percent of the mortgages we are underwriting now is far less for purchases, much higher for refinancing and that all happened in the May to June timeframes, when that started working. The first five months 70% of the mortgages that we underwritten were for purchases, 30% were for refinances and in the last three or four months it's completely changed and 70% are for refinances and 30% are for purchases. I would say the primary reason is a slowdown in purchase activity. We do have some situations, and title insurance has not been a problem but appraisals do cause some folks who want to purchase, it causes them not to be able to. I would not say it's significant but it definitely happens.

Matt Schultheis - Boenning & Scattergood

And do you think this pace of refill activity that you are experiencing, that the industry in general is experiencing is likely to cause significant pre-payments on your mortgage-backed securities portfolio.

Charlie Nugent

As the prepayments have increased, I am surprised they have increased more. We've been holding our earnings asset yields, I mentioned the 501, they were down 2 basis points from the second quarter. They did holding in there, I am surprised and they will come down faster.

Operator

(Operator Instructions). We will go next to David Darst with Guggenheim Securities.

David Darst - Guggenheim Securities

Phil, when you gave us the details for the raw land and raw plots, you indicated that total was $457 million. Were you attributing all of the $91 million of residential construction NPLs that you gave us to that portfolio and not commercial construction?

Charlie Nugent

Yes the $91 million that I gave you is specifically to that $457 million.

David Darst - Guggenheim Securities

Okay so then your commercial construction portfolio is performing relatively well.

Charlie Nugent

Yes absolutely.

David Darst - Guggenheim Securities

And then on the residential NPLs of $52 million, how much of that is would you consider Fulton Bank, Pennsylvania or as opposed to something that was legacy from maybe resource mortgage?

Charlie Nugent

I would say a large percent, I don't have the exact percent for you but or I may in a minute, it's from a resource mortgage would be on largest percentage.

David Darst - Guggenheim Securities

Does that increase from loans that you are still purchasing or do you actually have a portfolio of resource on balance sheet?

Charlie Nugent

We have a portfolio on balance sheet.

David Darst - Guggenheim Securities

Can you give us the amount on that portfolio?

Charlie Nugent

Give us a minute, we will check on number here.

Laura Wakeley

Do you have another question David that you want to ask while they are looking?

Charlie Nugent

Of the total $52 million, our $18 million is from the old resource of the Fulton Bank southern division.

David Darst - Guggenheim Securities

And what's the amount of the loan balances that are still outstanding from that legacy portfolio?

Charlie Nugent

$181 million.

David Darst - Guggenheim Securities

And then the $3.3 million that you called do we allocate any cost to that this quarter?

Charlie Nugent

Which $3.3 million?

David Darst - Guggenheim Securities

The $3.3 million from accelerated mortgage banking.

Charlie Nugent

No. I'd be recognizing the gains quicker and all the cost will remain the same.

David Darst - Guggenheim Securities

So that's all the number you will incur, compensation cost.

Charlie Nugent

That's already in there. The compensation costs are still in there, David. And we are just booking in the gains sooner. All the costs are at the same.

Operator

And we will go next to Bruce Harting with Barclays Capital.

Bruce Harting - Barclays Capital

The CRE portfolio seems to hold together better in the quarter any comments after the couple of loans that went bad in the second quarter there. And in terms of credit line utilization I think in my notes I think normal is in the 40s, high was in the 50s. How do you compare that credit line utilization in C&I versus CRE right now, what you are seeing there?

Charlie Nugent

Well most of the credit lines that we have with the C&I and the usage rates are remaining in the low to mid 40s. At 43% at the end of the quarter was flat and help me with the earlier questions, I'm sorry.

Bruce Harting - Barclays Capital

Well we saw couple of loans, the printing and the Vacation Entertainment Center.

Phil Wenger

Yes, as part of the CRE.

Bruce Harting - Barclays Capital

And it seems like this quarter was more of a construction lumpiness whereas any comments you can make with trends going into 4Q?

Phil Wenger

Well again I'd want to be careful because they can be lumpy and you never know what might pop up. But delinquency dropped in CRE and I think that was a good sign. We feel okay with where we are there right now. But again I want to caution that something large could come back this quarter. But right now it looks okay.

Bruce Harting - Barclays Capital

And then Scott you opened by talking about the opt-in effect of August 15th, I may have missed if you did you give any specific numbers on what you ultimately saw I think last time. We heard your presentation you said that of the people you were getting on the phone 90% or so were responding positively. Did you refresh those data points?

Phil Wenger

We continue to get 90% opt in right with the folks we talk to and we are up to 65% of the heaviest users, over 50% of next group. If you look just at the month of September and every week it seems to be improving. But if you take the net drop in revenue this September compared to last September.

It annualizes to about $4.9 million. We have taken steps to offset that, we have three phased plan we've put into place. As far as increasing our fees across all our products where we think we can and still be very competitive first stage has been put into place. That annual impact is a positive $1 million dollars.

Second phase will be put into place shortly, gives another positive $2 million and then our third phase we are going to wait and see, continue to see what happens on the over draft side because we do think it's going to improve and we wanted to see what the competition does and some other factors, but we have identified the possibility of another $4 million where we believe we could possibly if we need to increase it.

Bruce Harting - Barclays Capital

Since you seem to have a much more manageable foreclosure process and have that under control, do you have any comments on what you are seeing out in the industry or within your specific experience in database of 32 per month, any light you can shed on what percentage of folks are actually getting current again or is it a very small number and another is what percent of borrowers that go beyond say 90 days or 180 days, have any chance of getting current again or getting through the loan mod, and is that kind of overstated in the press right now, I mean any light you can shed on that. Because the debate in the marketplace seems to that there is a lot of folks in the pipeline who are at the bigger banks not being given the chance to get current or the mod just wondering if what you've seen in your experience since you have under control. Thanks.

Charlie Nugent

We try to be working with our customers or we get to the foreclosure process. Now the actual property that we foreclose on that end up at share or sale is less than the 32 but I'd hesitate to say that it's a large amount. We're working very hard with customers before we get to that point.

Bruce Harting - Barclays Capital

Any ratio you could offer? Beyond what number of days would you say it's just highly unlikely that there will be ability to become current?

Scott Smith

I really don't think so, first of all because it hasn't been a significant problem. We don't have a real granular analysis of it and I don't suspect you could project ours into others anyway.

Operator

And we'll go next to David West with Davenport & Company.

David West - Davenport & Company

Just, I guess Charlie for you, I guess on the net interest margin, net-net would you think, it seems like the [science] lead to at least stability and perhaps the potential for some increase in Q4?

Charlie Nugent

Well, a bad predicator I'll tell you, but we tried to give you every number we could. And if I look to those numbers now I would say for sure that our cost of funds are going to go down but I don't know what's going to happen for any asset yields. They've really been holding very strong and accommodation has produced nice improvements in the non-interest margin. I don't know what's going to happen in the fourth quarter. The cost of fund is going to go down and if we continue to hold the earning asset yields, it will be stable at least. Hopefully would be up.

David West - Davenport & Company

You mentioned in Q4 that $80 million of the advances mature. Is there an upcoming quarter that you know of in 2011 where there is just a significant number?

Charlie Nugent

No, after that there is a big drop off. In the first quarter there is more than I thought. In first quarter of next year is $85 million, in the second quarter its $10 million and then it really drops off. You can get this from our outgoing numbers in the SEC filings. But one more good quarter and then after that we'll be broad.

David West - Davenport & Company

Very good. Kind of turning to the mortgage banking, you indicated a pipeline that's still quite strong or the spreads you mentioned well over 200 basis point in Q3, is that type of spread still available to you?

Charlie Nugent

It is hard to tell. We try to link in the spreads but that has been high compared to what we've had in other quarters. I would expect that to be half.

David West - Davenport & Company

Lastly you mentioned obviously overall loan demand remains very muted and you talked about some of your problems coming primarily from Virginia and in Maryland. Do you see any pockets of lending encouragement and I guess particularly curious about any comments on your Pennsylvania, New Jersey markets?

Phil Wenger

I can't say we have any region that really is as any type of demand or new projects, but we are spending a lot of time and effort on taking up market share and I've said that also true across the footprint and hopefully will continue.

Operator

And we'll go next Collyn Gilbert with Stifel Nicolaus.

Travis Lan - Stifel Nicolaus

Hi, this is actually Travis Lan on for Collyn this morning. Just want to talk a little bit about the average loan yields that you are getting on the origination, I know you said you originated about $300 million this quarter and about $90 million of that was in C&I, but just kind of where these yields are coming in?

Charlie Nugent

You know Travis, I think, I don't have the number exactly but we originated a lot of loans and yields, below yields was constant between quarters, so I would say they are coming on it at the same value as we had, the same rates that we had on the books.

Travis Lan - Stifel Nicolaus

And I guess this…

Charlie Nugent

I don't have the details for that $300 million that we originated.

Travis Lan - Stifel Nicolaus

And then, can you just kind of compare a little bit about the yields on these construction loans that are rolling off? I mean what is the kind of, what are you losing on the earning asset bank?

Charlie Nugent

Well, I am not sure, but the construction loan portfolio, the overall yields afford money, so it's one of our lesser yields. So as that rolls off, it belongs to a pricing where we can come on at a higher yield.

Travis Lan - Stifel Nicolaus

Okay. And then just two more quick ones.

Charlie Nugent

Travis, the overall loan yield for the second quarter was 535 and the third quarter was 532. So the yield, the rates are pretty consistent therefore we already have in our portfolio.

Travis Lan - Stifel Nicolaus

On the mortgage banking side you said the pipeline was strong, can you kind of give us an idea of how that compares to what it looked like coming into this most recent quarter?

Charlie Nugent

I can't.

Travis Lan - Stifel Nicolaus

Okay.

Charlie Nugent

That remains strong, I know how much we have in the warehouse, but I can't remember what it was to begin with.

Travis Lan - Stifel Nicolaus

Just kind of an idea of how long, I mean once you book the loans how long do you hold them before you actually sell them on average? Do you have any idea about that?

Charlie Nugent

I would say two or three months.

Travis Lan - Stifel Nicolaus

Two or three months. Okay.

Charlie Nugent

That's not going to be a big thing anymore because we're recognizing the gains right away when we lock in the rate with the customer.

Travis Lan - Stifel Nicolaus

And then just kind of your remaining residential development and exposure to Maryland and Virginia, do you guys have those numbers?

Charlie Nugent

Yes, one second.

Laura Wakeley

Do you have another question?

Travis Lan - Stifel Nicolaus

No, that's actually it.

Laura Wakeley

Okay, just give us a second please.

Charlie Nugent

Okay for Maryland are Travis, and this is not broken out between land, development and construction this is just internal, $237 million, and Virginia its $233 million.

Operator

And we'll now take a follow-up from Frank Schiraldi with Sandler O'Neill.

Frank Schiraldi - Sandler O'Neill

Just a couple of quick follow-ups, I didn't see in the release, maybe I'm missing it but was there, I see 30 to 60 days delinquencies there, is there a 60 to 89 days that you have where you gave?

Charlie Nugent

Well, no when we referred to 30, that's the 30 to 59. And when we say 60, that's 60 to 89.

Frank Schiraldi - Sandler O'Neill

Okay so the category, where the delinquency rate is 30-60 days, that's actually 30-89 days, is that what you are saying?

Phil Wenger

The answer to you question is yes.

Frank Schiraldi - Sandler O'Neill

Just a follow up on the mortgage banking, I am just curious what would drive the margin so much higher link quarter, is it economies at scale or am I looking at the wrong way.

Charlie Nugent

We are getting better of spreads and better execution I would say, that's what normally we are doing.

Operator

Okay at this time we have no further questions on the phone line so I would to turn the conference back over to Scott Smith for any additional or closing remarks.

Scott Smith

Thank you and I would like to end the call by thanking everyone for joining us today, we are hopeful you will be able to be with us again in January. Thanks for being here today.

Operator

This concludes today's conference. Thank you for your participation.

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