Fulton Financial's (FULT) CEO Philip Wenger on Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: Fulton Financial (FULT)

Fulton Financial Corporation (NASDAQ:FULT)

Q2 2014 Earnings Conference Call

July 23, 2014 10:00 a.m. ET

Executives

Philip Wenger – Chairman, President and Chief Executive Officer

Patrick Barrett – Senior Executive Vice President and Chief Financial Officer.

Laura Wakeley – Senior Vice President, Corporate Communications

Analysts

Chris McGratty – KBW Financial

Casey Haire – Jefferies & Company

David Bishop – Drexel Hamilton

David Darst – Guggenheim Securities

Chris Jackson – Sterne Agee & Leach

Matthew Keating – Barclays

Travis Potts – FBR Capital Markets

Blair Brantley – BB&T Capital Markets

Frank Schiraldi – Sandler O'Neill

Operator

Good morning, ladies and gentlemen. Welcome to the Fulton Financial Corporation’s Second Quarter Earnings Call. This call is being recorded.

I will now turn the call over to Laura Wakeley, Senior Vice President of Corporate Communications.

Laura Wakeley

Thank you, Stephanie. Good morning everyone and thanks for joining us for our conference call and webcast to discuss earnings for the second quarter of 2014. Your host for today's conference call is Phil Wenger, and Phil is Chairman, President and Chief Executive Officer of Fulton Financial, and joining him is Pat Barrett, 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 condition, 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 which 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've included our Safe Harbor statement on forward-looking statements, and we refer you to this section, and incorporate it into today's presentation. For a more complete discussion of certain risks and uncertainties affecting Fulton, please see the sections entitled Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in our filings with the SEC. In discussing Fulton’s performance, representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with the earnings announcement we released yesterday for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures.

Now I’d like to turn the call over to your host, Phil Wenger.

Philip Wenger

Thank you, Laura. Good morning, everyone and thank you for joining us. After my prepared remarks, our Chief Financial Officer, Pat Barrett will review our financials in detail. Then we will both respond to your questions.

We reported diluted per share earnings of $0.21, down $0.01 from the first quarter and unchanged from the second quarter of last year. Our return on average assets came in at 0.94% and our return on average tangible shareholder equity was 10.3%. We were pleased to see a modest resumption of our loan growth. Linked quarter we grew lending loans by $106 million and average loans by $33 million. Our focus on quality earning asset growth continues. Commercial and small business loan pipelines increased linked quarter. That being said, our relationship managers tell us that pressure on loan pricing continues.

On the liability side of the balance sheet, we successfully implemented our promotional strategy to lock in longer CD funding to guard against rising rates. Average time deposit balances increased by 2.7%. We also saw our core deposits increase by 0.6% as a result of continued growth in core households. As long as the current interest rate and competitive environment continues, our net interest margin is likely to undergo further pressure. But we feel we are well positioned for margin expansion when interest rates rise, and Pat will provide more details in his financial discussion.

Overall asset quality improved further this quarter. We saw decreases in non-performing loans, non-accrual loans, classified and criticized loans and in overall delinquency. Total nonperforming assets fell to 0.96%. That is the first time we have seen that number below 1% since the second quarter of 2008. Our other income grew a very strong 14% linked quarter excluding security gains. All business lines contributed to this overall lift. These included mortgage banking, merchant services, deposit account related income, investment management trust services, credit and debit card income and cash management fees. We’re pleased with the $2.1 million increase linked quarter in residential mortgage income.

Applications were up 34% over the first quarter to $387 million from $288 million. And loan closings were up 41% to $242 million from $171 million last quarter. At quarter-end, purchase money accounted for 71% of our closing volume, up from 60% last quarter. Loans in process stood at $192 million, up 25% from the $154 million at the end of the first quarter. Total other expenses exceeded our prior guidance, due primarily to the acceleration of expenses associated with risk management and compliance matters.

During the quarter, we continued to aggressively build out our risk regulatory compliance and IT infrastructures. We believe we have made good progress. However, we have not attained the level of compliance that we and our regulators expect and require. Remaining deficiencies in our bank secrecy and patriot act anti-money laundering functions resulted in the recent issuance of enforcement actions. Details surrounding this were reported in our Form 8-Kfiling with the SEC last Friday, July 18. Since we knew these actions were a possibility, they were also discussed in our Form 10-K for 2013, and our 2014 the first quarter 10-Q.

How might the enforcement actions impact us? Expenses related to these ongoing regulatory and compliance initiatives will likely remain elevated in the next two quarters as we continue to accelerate our remediation work and also continue our use of outside services. It should be noted, we have incurred significant costs since the beginning of 2012 in connection with the work related to strengthening our BSA and AML compliance processes as we directed additional resources to enhance this area.

We have increased our staffing levels from 13 at the beginning of 2012 to 41 people today, increasing the annual run rate of salaries from $830,000 to $3.6 million. We expect to reach a total of approximately 50 professionals by yearend, adding another $600,000 to that annual run rate. At this point, we are reasonably confident that the total of 50 people once they’re hired and fully productive will enable us to effectively complete the build out of our BSA/AML function. We have engaged consultants to help us evaluate and strengthen our BSA and AML compliance programs. That assistance continues today as we work to address various components of the BSA processes. During this time, we have expended approximately $9 million for this outside consulting assistance. And our current expectation is that we will incur approximately $4 million to $6 million more on outside consulting expenses over the remainder of 2014. We do expect expenses from outside consulting services related to BSA and AML to decrease by approximately $5 million in 2015.

While we have been incurring these higher expenses, at the same time we’ve been actively managing other expense areas. A number of actions have been taken to reduce expenses in areas unrelated to our compliance and risk management functions. Those actions will continue. Our board, senior management team and all our team members continue to work diligently to ensure these regulatory expectations are meet. As you can imagine, we are all very anxious to get these items resolved as soon as possible.

Looking at capital, we continue to deploy our capital to enhance shareholder value. During the first quarter we completed a $4 million share repurchase program which brought the total number of shares bought back since the second quarter of 2012 to 14.1 million. This quarter we announced a new program to repurchase up to 4 million shares or 2.1% of our stock through the end of this year. We will continue to actively manage our capital.

At this time I would like to turn the call over to Pat Barrett, for his financial discussion. When he concludes we will respond to your question. Pat?

Patrick Barrett

Thank you, Phil and good morning to everyone on the call. Unless I note otherwise, quarterly comparisons will be with the first quarter of 2014. As Phil noted, earnings per diluted share this quarter were $0.21 on net income of $40 million, which represents a $2.1 million or 5.2% decrease in earnings compared to the prior period. Earnings per share was flat compared to the second quarter of 2013. The decrease in earnings resulted from higher non-interest expense, lower net interest income and an increase in the provision for loan losses, partially offset by growth in non-interest income.

Net interest income decreased $1.7 million or 1.3% due mainly to the effect of a 6 basis point decline in our net interest margin. The impact of this decline was partially offset by an additional day in the quarter which generated approximately $1.1 million in net interest income. Average yield on interest earning assets decreased 5 basis points. Average earning assets decreased $38 million or 0.2% as the decline in average investment securities of $56 million was partially offset by an increase in average loan balances of $33 million.

After steady improvement in 2013, new loan origination yields have flattened out in 2014 to a second quarter level of just below 4%, while rates on maturing loans have continued to come down and are just over 4% at this point. This has closed the negative gap between maturities and new originations to less than 10 basis points.

The average cost of interest bearing liabilities increased 2 basis points. This resulted from the success of time deposit promotions intended to lock in longer term rates. Average deposits increased $132 million or 1.1% due to a $52 million increase in demand and savings accounts and an $80 million increase in time deposits. Growth in demand in savings accounts was the result of increases in personal and business account balance increases, partially offset by a seasonal decrease in municipal account balances.

Net interest margin of 3.41% was 1 basis point below the range we provided last quarter of 3.42% to 3.46%. This resulted from lower than expected interest recoveries on nonaccrual loans, lower loan fees and lower investment in securities yields.

For the third quarter of 2014, we’re expecting continued modest compression to a range between 3.35% and 3.39%.

Provision for credit losses for the second quarter increased $1 million. While most of our credit metrics showed continued improvement, a single large credit exposure and the results of our allowance calculation indicated the need for a slightly higher provision.

Total delinquencies decreased by $2 million due to a $6 million decrease in loans 90 days or more past due, partially offset by a $4 million increase in 30 day to 90 day delinquencies.

Total classified and criticized loans declined $23 million or 3%, while net charge offs increased from $8 million to $9 million for an annualized net charge off rate for of 28 basis points as compared to 26 basis points during the first quarter. Our allowance to loans coverage ratio declined 5 basis points to 1.51% at June 30, 2014.

Turning to second quarter non-interest income, we saw a $5 million or 14% increase compared to the first quarter, excluding the impact of securities gains. Mortgage banking income increased $2.1 million due to a $550 increase on mortgage sale gains as a result of higher volumes and a $1.6 million decrease in amortization of mortgage servicing rights as prepayment rates flowed.

Other service charges and fees increased $1.6 million, including a $1.1 million seasonal increase in merchant fees. Service charges on deposits increased $841,000 or 7.2%, reversing a declining trend we’ve seen for the past three quarters.

Net investment securities gains were $1.1 million, resulting from the sale of two pooled trust preferred securities that were previously written down.

Non-interest expenses increased $6.6 million or 6% to $116.2 million for the quarter, exceeding our estimated range of $111 million to $115 million due to higher than expected outside services expense. The linked quarter increase was primarily the result of two drivers. First a $4.1 million or 7% increase in salaries and employee benefits due mainly to increases in incentive compensation accruals, health insurance healthcare costs and stock compensation expense, partially offset by a seasonal decrease in payroll taxes. Second, outside services increased $3.4 million or 90%. The majority of this increase was related to risk management and compliance initiatives, including accelerated efforts to enhance our programs for compliance. Partially offsetting these increases was a $2.1 million decrease in occupancy expense as snow removal costs decreased and we realized the benefits of a French consolidation, combined with a $1.1 million decrease in operating risk losses. We remain committed to our stated goal of expense discipline and the build out of our risk management compliance processes.

During the second quarter, we achieved $2 million of quarterly savings as result of our previously announced cost saving initiatives which helped to offset higher costs in risk management in compliance areas. While we had incurred higher than expected costs in these areas these costs in large reflected continuation and acceleration of previously planned initiatives.

Expenses will likely remain elevated for the remainder of 2014, particularly outside services and professional fees. I also I want to emphasize that there could be volatility from quarter to quarter due to the timing of services and work performed on various initiatives. And accordingly, we’ve framed our expense guidance in terms of the second half of the year.

Overall, our internal projections indicate that expenses for the remainder of 2014 will be in the range of $232 million to $238 million. As always and in addition to our projections of outside services and professional fees, run rates of certain other expenses such as other real estate errand and repossession expense and operating risk losses can experience volatility based on timing for events that can’t always be reasonably predicted.

Moving to taxes, our 25.4% effective income tax rate for the second quarter was equal to the rate in the first quarter. Consistent with our prior projections, we estimate that our annual effective tax rate will remain in the mid-20s.

And concluding briefly on capital, our ratios remain very strong with estimated tier 1 and total risk based capital at 13.3% and 14.9% respectively. As Phil said, active capital management remains a key priority for us, one that will continue to unfold.

Thank you for your attention and for your continued interest in Fulton Financial Corporation. Now we’ll be glad to answer your questions.

Question-and-Answer Session

Operator

(Operator instructions). And we go first to Chris McGratty with KBW Financial.

Chris McGratty – KBW Financial

Pat, on your prepared remarks on the expenses, I just want to make sure I heard you. Once you get through the next two quarters, it was a $5 million annual reduction in just the professional services line. Is that the right way to think about it?

Patrick Barrett

That’s right. It was Phil who mentioned that, but I think that’s the right way to think about it.

Chris McGratty – KBW Financial

Okay. And I guess with other expense initiatives that are ongoing, how should we think about kind of confidence that the BSA issues are largely behind you by the end of this year? I mean have you -- are all the systems kind of invested already? And maybe you could speak to it maybe in terms of the efficiency ratio next year.

Philip Wenger

Chris, this is Phil. And we do have some technology initiatives put into place over the next six months. And we’re working actively on those. It's really going to be I think two phase. The first phase will be starting shortly and will have little impact on the next expense standpoint. And then the second phase will be next year, and its impact from an expense standpoint should not be substantial on a quarterly basis either. And so we are as we were last year at this time, we are reviewing all expense categories again and everything is on the table. And we’ve -- our target has been on efficiency ratio to be between 60 and 65, and that’s going to be our goal for next year also.

Chris McGratty – KBW Financial

Okay, so 60% to 65% with all of this investment is kind of the way to think about it next year. Okay. On capital, you guys didn't buy stock in the second quarter. What are your limitations if any with the consent owner, and how aggressively can you buy stock kind of over the next couple quarters?

Philip Wenger

So, Chris when we heard from the regulators regarding that purchase program, the $4 million shares that we announced, I think we had one or two days that prior to the blackout beginning. And that’s why we didn’t repurchase any in the second quarter. We would have no restrictions as soon as the blackout ends this week.

Operator

And we’ll go now to Casey Haire with Jefferies.

Casey Haire – Jefferies & Company

Good morning guys. Just wanted to follow up on Chris's comments on the expense relief. So if I'm hearing this correctly, so professional services gets $5 million of relief next year. And assuming that it runs elevated in the second half; you are more or less expecting professional fees to run around $8 million or $9 million next year from the baseline of $13 million or $14 million. Is that correct?

Philip Wenger

No. First off, we are only talking about professional fees as they relate to outside services. The $9 million that we’ve expended to date that I mentioned I think half of that was in 2012, and half in 2013 and 2014. So we’re looking at outside services related to BSA this year, only this year to be in the $8 to $10 million range. And we think that number will be decreased by approximately $5 million from next year.

Casey Haire – Jefferies & Company

Okay. And then that comes down, and then the full-time employees that you hire add -- did you mentioned, Phil, was $600,000 of expense annually that would show up in the comp line?

Philip Wenger

That would be an additional 600 annually, yes from where we are right now.

Casey Haire – Jefferies & Company

Okay. And then Phil, just -- I mean, I'm sorry, Pat -- to focus in on the comp line, you kind of ran through some of the ins and outs this quarter. It did seem a little surprising to see it up this much, with incentive comp kind of driving it in a quarter where EPS is down. Can you just walk through some of the drivers and what might be, if anything, temporary this quarter?

Philip Wenger

Yeah, so just -- this is Phil. On the incentive comp, in the first quarter as we outlined in our proxy information, first the executive bonuses were reduced by 30% because of where we stood. But we had had accrued for 100%. So the first quarter incentive comp was a much lower number because of that reversal, about $2.5 million. The second quarter’s is an accrual number that at the end of the year may or may not get adjusted again. Does that add some color to that?

Casey Haire – Jefferies & Company

Yes, no that’s helpful. Thank you. And then just lastly on the NIM guide, it sounds like there’s a little bit of pressure coming here. Just curious, is this all -- is the NIM guide predicated on assume all asset yield pressure, or are you expecting funding costs to rise as well?

Patrick Barrett

I think it’s a combination of both. I think that the days of seeing declining funding costs are certainly behind us and we’ve enjoyed very flat funding costs for a number of quarters. Liquidity and liquidity preferences have remained pretty high and I think that we are gearing up for a more competitive interest environment. And focusing as always a great deal of our energy on our funding mix and feel pretty good about testing the waters and being able to lock in $200 million, $225 million of three to five year funding at the rates that we did this quarter.

Casey Haire – Jefferies & Company

Okay, and just new money yield on loan production these days versus that 4.21%?

Philip Wenger

I think we are in the 390 range, similar to last quarter.

Operator

And we’ll go now to David Bishop with Drexel Hamilton.

David Bishop – Drexel Hamilton

The increase of the 50 professionals, those are -- I just want to confirm those are, you were talking about full-time employees as you move forward for the BSA department?

Philip Wenger

That is correct.

David Bishop – Drexel Hamilton

Okay, great. And then shifting topics real quick in terms of the nature of loan growth, just curious if you can speak to some of the markets where you saw the pockets of loan growth this quarter?

Philip Wenger

So a good question, we actually saw growth in all the states that we operate in, in both ending loan growth in each State and we also saw upticks in pipelines in every area.

David Bishop – Drexel Hamilton

Got you. And then one follow-up in terms of the loan yields. So, a little bit of a pop on the construction loan yields. Anything going on there in terms of firming up pricing, increasing spreads that you are seeing in that segment?

Philip Wenger

I wouldn’t necessarily say that we are seeing increases in spreads. That really can be impacted by one or two specific deals because of the size of the portfolio.

Operator

And we go next to David Darst with Guggenheim Securities

David Darst – Guggenheim Securities

Phil, I think in the past couple quarters you talked about introducing some loan campaigns to stimulate growth. Just wondered if you had any specifics kind of around the success, or do you expect it to be more successful with the pipeline growth?

Philip Wenger

So the -- one of those is on the consumer side and I would say that our consumer pipeline right now is as large as it’s been in recent memory. We think that’s been pretty successful and then the other would be on the commercial real estate. And we think we are also seeing some success from that program.

David Darst – Guggenheim Securities

Okay. Is commercial real estate one of the areas where you are seeing more of the competition, or is it in C&I?

Philip Wenger

Well, the most intense competition is in the C&I area. I mean there’s competition in every loan-pricing category, but it’s worse in the C&I area than the commercial real estate.

David Darst – Guggenheim Securities

Okay. And then as you are working through the series of investments you've had over the past 18 months, you kind of -- the BSA part now, you’ve done stress testing, done your core system. Is any of the strength in the case to consolidate some of your subsidiary banks further?

Philip Wenger

Well, as I mentioned, we’re looking at all our expenses. And I think everything is on the table, and that would be included in the everything category.

David Darst – Guggenheim Securities

Do you have any way to frame what the cost saves could be from doing that?

Philip Wenger

Yeah. We’re going to be looking at it very closely over the next quarter. And I think we would be able to frame that out for you before the end of the year.

Operator

We go now to Matthew Kelley with Sterne, Agee.

Chris Jackson – Sterne Agee & Leach

Hi, this is actually Chris Jackson for Matthew Kelley. Just a couple of questions. Can you tell us what the utilization rate for C&I loans in the quarter was, and how does it compare to first quarter and the year-ago period?

Philip Wenger

I can. So our utilization rate was 37.7%. That’s up slightly from the first quarter when it was 37.2%. It's down. Second quarter of ‘12, we were at 41.5%. Second quarter of ‘13, we were at 38.3%.

Chris Jackson – Sterne Agee & Leach

Okay, great. Thanks. And then just one follow-up. How low could you take the loan-loss reserve coverage ratio from the 1.49% at period end?

Philip Wenger

Well, we’re still substantially ahead or higher than our peers. I think at the end of the first quarter our peer average was somewhere around 120. So I would expect that in the near terms that it could continue to go down. But it's going to -- where it ends up is just going to depend on so many different factors. But in what we see right now, I would expect in the next couple quarters it would probably go down some.

Operator

(Operator instructions). And we go now to Matthew Keating with Barclays.

Matthew Keating – Barclays

So as it relates to the BSA, the strengthening of your compliance procedures, so the 50 incremental employees, what base is that off of? Like so how many employees do you have involved in BSA compliance before you start to make these investments?

Philip Wenger

So in 2011 I think we might have been at 8. At the beginning of 2012, we had 13.

Matthew Keating – Barclays

Got you. Okay, that’s helpful. Maybe you could just explain as you sort of strengthen these systems and procedures, so obviously you add people. But from a system standpoint, is this something you contract with a third-party outsource or is it more a system you have to build yourself? How does the investment in the systems actually work in practice? Thanks.

Philip Wenger

It's a combination. So we would buy outside software and then we would tailor it to fit our specific framework.

Matthew Keating – Barclays

Okay, understood. So at least the systems cost plateau, would you think they’d plateau by the end of this year and then just stay in a run rate and then some of the professional and outside services fees as you mentioned roll off? Is that the best way to think about some of these investments that you're making on the technology side?

Philip Wenger

Actually the technology investments will be more in -- the cost will be more in 2015 than 2014. And so we’re putting in one system. We’ve started that now. You don’t start amortizing it till it’s completely up and running, which probably will be by the end of the year and then the second system probably we’ll begin amortizing in the June to September timeframe of next year.

Matthew Keating – Barclays

Okay. And I guess just generally, we have seen a lot -- a few banks mention the need to sort of strengthen BSA compliance. Is it your feeling that regulators are taking a harder line on this issue? I mean certainly that is what everyone thinks, but maybe you could just talk about whether you were surprised by this level of investment that’s required? Or do you think your peers are also facing similar type of reviews? Thanks.

Philip Wenger

Well, if you were to ask me in early 2011 would we ever have this many people in our BSA area, I would have told no way. But as we have been strengthening, we think it’s now the appropriate number. I guess you can interpret that answer any way you want to.

Matthew Keating – Barclays

No, that’s helpful. I appreciate all the color. Thank you.

Operator

And we go now to Bob Ramsey with FBR Capital Markets.

Travis Potts – FBR Capital Markets

Good morning. This is Travis Potts for Bob. I just wanted to clarify, I think you said you had $9 million to date. And I think you said that was related to the outside services. Do you have how much expenses you’ve incurred in total for the enhancements to your BSA/AML platform?

Philip Wenger

Yeah, so just to go through those numbers again. We’ve -- outside services since 2012 have been $9 million to date. We are expecting another $4 million to $6 million. So, that puts us at $14 million, $15 million on the outside services. Our salaries will increase -- from that same time period our salaries will have increased another $3.5 million. And then we would expect not all of the outside services are going to go away next year. A good chunk of them, but I would expect another $2 million to $4 million of outside services next year. If you add it all up it’s going to be I would say between $20 million and $25 million.

Travis Potts – FBR Capital Markets

Okay, thank you for the clarification. And then do you expect this enforcement order to sort of preclude you from any acquisition or any other growth activities?

Philip Wenger

Yes, I would. And we’ll get more clarification on that as we move through, but certainly in the short term the answer is yes. And if I could just add, as we’ve been saying we really didn’t anticipate being active in the acquisition area for at least the coming 12 months. I think we’ve been pretty clear in communicating that.

Operator

And we’ll go to Blair Brantley with BB&T Capital Markets.

Blair Brantley – BB&T Capital Markets

I had a question about the loans to deposit ratio, and just kind of your thoughts around that. I had a question about the loan to deposit ration and kind of what your thoughts are around it being north of 100% and any type of plans you may have to get it below that threshold.

Philip Wenger

So it is north of 100%, but barely north. We are comfortable where we are, but we don’t want to see large increases from where we are. We try to manage between that 97% to 103%.

Blair Brantley – BB&T Capital Markets

Okay. And do you expect to do any more types of deposit promotions going forward, similar to what you’ve done recently?

Philip Wenger

So our current strategy has been, our most recent strategy has been to try to extend the duration of our deposit base. And we are going to selectively continue that strategy as we move forward.

Blair Brantley – BB&T Capital Markets

Okay and then one last question regarding service charges. Obviously, they have been on a downward trend. Is that purely customer behavior? Is there anything else going on there?

Philip Wenger

That would be a primarily a customer behavior and hopefully we’ve hit the bottom and we are going to start seeing growth again.

Patrick Barrett

I’d also add that just from a lot of those line items across our income statement and in fee income particularly, a function of the amount of time people have to swipe and spend and invest in the first quarter was more than just one day less. In our markets it was several days less because of weather. So we are definitely seeing a rebound just because of the more other fingers in the air normal type of run rate of quarter end activity which is good to see.

Blair Brantley – BB&T Capital Markets

Right, but they are still down 14% year-over-year. So are we closer to a bottom then, you think, with those year-over-year kind of changes?

Philip Wenger

I think we are, yes.

Operator

We go now to Frank Schiraldi with Sandler O'Neill.

Frank Schiraldi – Sandler O'Neill

Good morning. Just two questions. Just one, just wondering your thoughts, Phil, on the other subs that you may get some sort of enforcement agreement on BSA. Just wondering your thoughts on how good a handle you think you have on what those potential consent orders could entail in terms of expense. Do you feel like that is very much baked into guidance here, or could we see potential tick-up if and when those are put in place?

Philip Wenger

We think it’s baked in. The function is a centralized function at the holding company. We think that they’ll be similar if and when they occur, but you never know.

Frank Schiraldi – Sandler O'Neill

Right. Okay. And then just on -- sorry if I missed it, but just on loan growth, expectations going forward. I believe in the past, perhaps last call, you talked about maybe a 3% to 7% annualized loan growth expectation. Is that still viable given what we have seen first half of the year? Should we maybe anticipate towards the lower end of that range, or what are your thoughts for the back half of the year here?

Philip Wenger

So we do think based on what we see today that we can still get within that range. I’d say there is a better chance that we’ll be at the lower end of the range than the higher end.

Operator

We go to Chris McGratty with KBW Financial.

Chris McGratty – KBW Financial

Yes, just a follow-up Phil. In the past we’ve talked about your (inaudible) borrowing costing almost 5%. We are a couple years removed from those conversations, but presumably the penalty may be a little bit less. Is there any -- and your capital levels are building, right? Is there any discussion about whether to take them out and to extend the duration that way?

Philip Wenger

Yeah, Chris, most of that comes due in ‘16 and ‘17 and we are looking at that again, but there still are penalties. So I’m not sure how it’s going to work out, but are still are substantial penalties. We are taking a look at it. If it makes sense we would definitely consider it, but I can’t tell you positive either way right now.

Chris McGratty – KBW Financial

Okay. And then one for Pat. The investment portfolio, how should we be thinking about the near-term size? Is it going to be used to fund loan growth or should it grow at all?

Patrick Barrett

I think we’d like to see it stay flat. We’ve had a tough time like everybody else finding yield that meets what we are looking for. But I wouldn’t expect to see it run off materially.

Operator

And with no further questions, I would like to turn the call back to you Mr. Phil Wenger.

Philip Wenger

Well, thank you all for joining us today. We hope you’d be able to be with us when we discuss third quarter results in October.

Operator

And this concludes our conference. Thank you for your participation.

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Fulton Financial (NASDAQ:FULT): Q2 EPS of $0.21 misses by $0.01. Revenue of $127.9M (-3.1% Y/Y) misses by $6.66M.