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Fulton Financial Corporation (NASDAQ:FULT)

Q3 2007 Earnings Call

October 17, 2007 10:00 am ET

Executives

Laura Wakeley - Media Contact

Scott Smith - Chairman, CEO andPresident

Charlie Nugent - Senior ExecutiveVP and CFO

Analysts

Matthew Schultheis - Ferris, Baker Watts

Gerard Cassidy - RBC Capital Markets

Frank Schiraldi - Sandler O'Neill & Partners

Bob Hughes - KBW

Mac Hodgson - Suntrust RobinsonHumphrey

Operator

Good day and welcome to today'sFulton Financial Third Quarter 2007 Earnings Conference Call and webcast. Thiscall 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 forjoining us for the Fulton Financial Corporation's conference call and webcastto discuss our earnings for the third quarter of 2007.

Your host for today's conferencecall is Scott Smith, Chairman, Chief Executive Officer and President of FultonFinancial Corporation. Joining him is Charlie Nugent, Senior Executive VicePresident and Chief Financial Officer.

Our comments today will refer tothe financial information included with our earnings announcement, which wereleased late yesterday afternoon. These documents can be found on our websiteat www.fult.com by clicking on investor information and then on news.

Please remember that during thiswebcast, representatives of Fulton Financial Corporation may make certainforward-looking statements regarding future results or future financialperformance of Fulton Financial Corporation.

Such forward-looking informationis based on certain underlying assumptions, risks and uncertainties. Because ofthe possibility of change in the underlying assumptions, actual results coulddiffer materially from these forward-looking statements. Risks anduncertainties that may affect future results include, pricing pressures onloans and deposits, actions of bank and non-bank competitors, changes in localand national economic conditions, changes in regulatory requirements, actionsof the Federal Reserve Board, credit worthiness of current borrowers, theCorporation's success in merger and acquisition integration, and customers'acceptance of the Corporation's products and services.

Fulton Financial does notundertake any obligation to update any forward-looking statements to reflectcertain instances or events that occur after the date on which such statementswere made.

Now, I would like to turn thecall over to your host, Scott Smith.

Scott Smith

Good morning and thank you forjoining us. As you saw from our news release we reported per share earnings of$0.19 for the quarter. Charlie will review the financial information in a fewminutes. I first want to tell you where we are, what we have done, and theactions we are taking to put the issues related to Resource Mortgage behind us.

This quarter's financial resultswere impacted by a $16 million charge related to the operations of ResourceMortgage. This charge was partially offset by a net gain of $1.8 million due tothe resolution of litigation, and the sale of certain assets also related toResource.

The following are the majorcomponents of that charge: $9.9 million was reserved related to $27 million inloans, where potential borrower misrepresentation exists. We received a repurchaserequest with respect to $2.4 million of these loans on October 1st. Theremaining balance is for the other loans we subsequently identified, involvingthese same individuals.

The other $13 million relates toloans that were identified through our internal quality control function. $3.6million was added to existing reserves on repurchased loans and foreclosed realestate based on updated valuations. During the third quarter, we repurchased$24 million of loans and $11 million of foreclosed real estate from thesecondary market investor.

The amount added to performingloans was $4 million net of reserves, and the amount added to nonperformingloans was $14 million net of reserves, and the amount added to foreclosed real estatewas $7 million net of reserves. $2.2 million was recorded related to new andexisting outstanding repurchase requests. On our last two calls, we discussedcharges related to early payment defaults, which we believe for the most parthave run their course. Results were decreases in property values on these earlypayment defaults, which largely reflect falling real estate values.

As we indicated during thequestion-and-answer section of our last call, secondary market purchasers mayrequest loans to be repurchased for alleged misrepresentation. At this time, weare confident both of the alleged misrepresentation situations that have beencontained and/or adequately have been reserved. The current charges reflect allthat we know at this time. As a result of these two situations and out of anabundance of caution, however, we will be conducting an additional review ofthe loans originated by Resource Mortgage. To get this review accomplished asquickly as possible, we will retain an outside consultant to assist us. Icannot provide a definitive date as to when the review will be completed, but Iassure you it will be completed as soon as possible.

It is important to note that themanagement of Resource Mortgage has been replaced and the offices giving riseto virtually all of these potential losses have been either closed or are in theprocess of being shutdown. The President of Fulton Mortgage Company nowoversees the operations of Resource Mortgage. I want to cover the preceding issueswith you first and say they had a significant effect on our third quarterresults.

Now I would like to give you myassessment of our core banking areas for the quarter. From a lendingstandpoint, we experienced good growth in both commercial loans and commercialmortgage areas. As you would expect, we experienced a slowdown in residentialconstructions and overall consumer lending. Overall, loan quality remains good.Deposit growth was flat, so we have to rely more heavily on wholesale funding byputting additional pressures on our net interest margin.

Deposit costs increased as aresult of a change in the mix. Non-interest bearing deposit balances decreased,while interest-bearing deposit balances increased. When the Fed cut rates, weadjusted our deposit rates accordingly and we will continue to do so inresponse to future Fed actions to preserve our net interest margin.

During our last call we focusedon the measures we have taken to improve our efficiency. These included areasof affiliate bank consolidation, corporate wide standardization, and centralization.You will recall that our centralization efforts enabled us to reduce ourworkforce by approximately 3% or 150 people across the company. Results ofthose very difficult decisions are evident in the decreases in our salary andbenefit costs and other related expense categories.

Activity continues in the mergerand acquisition environment. We continue to be presented with numerousopportunities and we look at each one carefully. The multiples though beingsorted are generally prohibitive in light of our required to return oninvestment goals and the desire to avoid earnings dilution. As we wait for theright opportunity, our focus on organic growth to new branches continues to be ourpriority.

That's the plan we announced forResource Bank two weeks ago. Our focus in Virginia, where we are already positioned toserve some of the best markets in the country, will be to leverage our presenceby building a stronger retail and small business franchise over the next fewyears. Involving this is the newest division of Fulton Bank, from a nationwidemortgage lender into a strong community bank of traditional funding and lendingactivity that characterize our business model.

In the other four states weserve, we will leverage opportunities created by local competitors that hasbeen acquired as well as prudently deploying new branches in markets, where webelieve, offers the greatest potential. At this point, I will turn the callover to Charlie, so he can cover the financial details of the quarter, and whenhe concludes we will be glad to take your questions.

Charlie Nugent

Okay. Thank you, Scott, and goodmorning everyone. Thank you for joining us today. Unless otherwise noted, comparisonsare this quarter's results with the second quarter. We reported earning pershare of $0.19 for the third quarter, which was a 17% decline from the secondquarter, and a 32% reduction from the third quarter of last year. On ayear-to-date basis, our earning per share was down 17% to $0.66. As Scottmentioned, we recorded additional charges of $16 million related to ourResource Mortgage banking operation.

This charge was partially offsetby a net gain of $1.8 million due to the resolution of litigation and the saleof certain assets, and this litigation, and asset sale was also related toResource Mortgage. Net interest income improved $1.5 million or 1.2%. Averageearning assets increased $388 million or 3%. Average loans grew $275 million or2.6%, while average investment securities increased $142 million or 5%.

Our loan growth of $275 millionoccurred primarily in commercial loans, which increased $109 million or 3.4%.Of that growth $63 million was in Pennsylvania,$20 million in Virginia, and $10 million eachin New Jersey and Maryland.

Commercial line of credit usagewas 38% at the end of September compared to 37% at the end of June. Commercialmortgages increased $96 million or 3%, with most of the growth in New Jersey, Virginia andPennsylvania.

Construction and consumer loanbalances remained relatively stable. Residential mortgages and home equityloans increased primarily as a result of loans repurchased and loanstransferred from held for sale, to held for investment.

Resident mortgages increased $59million or 8%, and during the third quarter approximately $15 million ofresidential mortgage loans were transferred from the held for sale category.Additionally $18 million of loans were repurchased. Most of the repurchaseloans are classified as non- performing.

Home equity loans grew $19million or 1.4% with $1.5 million of that increase representing loanstransferred from the held for sale category. Average investment securitiesincreased, due to purchases made in both the second and third quarters.

And during the third quarter wepurchased securities totaling $288 million, with an average yield of 5.93%. Thecorporation realized net losses on securities sales of $134,000 in the thirdquarter compared to net gains of $629,000 in the second quarter.

Now funding for our balance sheetgrowth was provided by both our customers and wholesale sources. Customerfunding grew $117 million, deposits grew $60 million with $100 million increaseand time. Deposits being partially offset by decrease in core deposits,non-interest bearing demand deposits declined $53 million and 3%, and this isalmost entirely in personal accounts.

NOW accounts and Super NOW accountsgrew $53 million or 3.2%, primarily in municipal accounts. Savings and moneymarket accounts decreased $40 million or 2%, mostly in personal accounts. Timedeposits grew $100 million or 2%, whereas with $40 million in retailcertificates of deposit and $60 million in jumbo certificates of deposits grewover a $100,000. Customer repurchase agreements and commercial papers increased$57 million or 9%.

Fed funds purchases grew $170million, while long-term borrowings increased $70 million and the Corporationissued a $100 million of subordinated notes during the second quarter at aneffective rate of 5.95%, and during the third quarter Federal home loan bankborrowings increased $278 million.

Our net interest margin for thethird quarter was 3.62%, an 8 basis-point decline from the second quarter.Yields on earning assets were stable, with an increase in investment yieldsoffsetting the decline in net loan yields due to the increase in nonperformingassets. Our cost of funds increased, as a result of the decline in non-interestbearing balances along with an increase in the cost of certificates of depositand long-term borrowings. The provision for loan losses increased $1.9 millionto $4.6 million in this third quarter. Net charge-offs are 8 basis points or$2.1 million in the third quarter compared to 14 basis points in the secondquarter.

Non-performing assets to totalassets increased to 69 basis points at September 30th compared to 49 basispoints at June 30th, and 31 basis points last September. The balanceincrease from the end of June was $32.8 million, of which $20 million relate toloans repurchased from investors.

Excluding security gains, ourother income increased $501,000 or 1.4%, primarily due to the decrease inmortgage banking income being offset by the gain on the resolution oflitigation and the sale of certain assets.

Gains on mortgage loan salesdeclined $1.7 million or 14%. Residential mortgage loans sold were $265 millionin the third quarter compared to $390 million in the second quarter. A $109million of the decrease was at resource mortgage, while retail sales dropped $75million and wholesale sales dropped $34 million.

The spread on sales declined to96 basis points in the third quarter from 108 basis points in the secondquarter. Investment management and trust service revenues declined $982,000 or10% primarily due to a $900,000 reduction in brokerage revenues and $100,000decrease in insurance commissions.

Service charges on deposits wererelatively flat, while other service charges and fees increased $689,000 or 9%.Now most of this growth was in the merchant fee category, where we have seencontinued strong growth.

Operating expenses increased $9.9million or 10 %. Now adjusting for the charges related to our Resource Mortgagebanking operation. The charge in the third quarter was $16 million, in thesecond quarter it was $3.4 million, and if you excluded that operating expenses,were actually down $2.7 million or 3%.

Salaries and benefits declined $3million or 5.5%, as a result of several offsetting items. And during the secondquarter an $800,000 incentive pay accrual was reversed, and severance of $1.5million was recorded, which related to the reduction of back office personnel.Adjusting for these and other nonrecurring items, salary and benefits were down$2.5 million or 4.6%, reflecting the $1.1 million impact of our workforcereduction program, as well as the $1.4 million reduction in salaries andbenefits at Resource Mortgage.

Thank you for your attention, andfor your continued interest in our Corporation. And now, we will be glad toanswer your questions.

Question-and-AnswerSession

Operator

Thank you. (Operator Instructions). And we'll go first toMatthew Schultheis of Ferris Baker Watts.

Matthew Schultheis -Ferris, Baker Watts

Good morning gentlemen.

Scott Smith

Good morning Matt.

Charlie Nugent

Good morning Matt.

Matthew Schultheis -Ferris, Baker Watts

Just wanted to double check a couple of things you talkedabout and go over some of the repurchased loans in some detail. The $2.1million recovery what line item was that in again?

Charlie Nugent

That was another income.

Matthew Schultheis -Ferris, Baker Watts

Okay.

Scott Smith

Other relative income.

Matthew Schultheis -Ferris, Baker Watts

Other, rather. Okay. To-date, what's the total dollar figureof repurchased loans and repurchased OREO with the breakdown between first andsecond?

Scott Smith

It's roughly in that around $40 million.

Matthew Schultheis -Ferris, Baker Watts

Okay. That's includes OREO first, second it's all in line?

Scott Smith

Yes. It's everything that came back and if it was delinquentit was put in non-performing loans, when we foreclosed on the property it wasmoved into other real estate loans.

Matthew Schultheis -Ferris, Baker Watts

Okay. How much of OREO is tied that $40 million right now?

Scott Smith

We have a balance of $12 million. I would thinkapproximately $9 million is tied to the repurchases. It's actually 47 million.

Matthew Schultheis -Ferris, Baker Watts

Okay. In that after your -- did you -- and is that net ofthe charge you took this quarter to that?

Scott Smith

The non-performing loans and OREOs is written down by the --in other reserves.

Matthew Schultheis -Ferris, Baker Watts

And how much again is in the non-performers related to this?

Scott Smith

$14 million.

Matthew Schultheis -Ferris, Baker Watts

Okay.

Scott Smith

I'm sorry the $14 million increase in the third quarter.

Matthew Schultheis -Ferris, Baker Watts

Right and how much does that total to over the period, overthe whole, out of the whole 40 how much ended up in that?

Scott Smith

Exactly how much -- I could say the third quarter, Matt I amnot sure about the how much was included in the first and second.

Matthew Schultheis -Ferris, Baker Watts

Okay.

Scott Smith

But I think the majority of that increase is in the thirdquarter and I think the gross amount is $40 million.

Matthew Schultheis -Ferris, Baker Watts

And how much of that?

Scott Smith

I am reaching there right now, so I will try to get back toyou on that.

Matthew Schultheis -Ferris, Baker Watts

Okay. Do you know how much that reached, non-performingloans is actually rolled into OREO at some point?

Scott Smith

What I would think, it would be that the net $9 million.

Matthew Schultheis -Ferris, Baker Watts

Okay.

Scott Smith

We haven't -- we have sold very little so far. We justreached the agreement with one investor related to the Alt-A products.

Matthew Schultheis -Ferris, Baker Watts

Okay.

Scott Smith

No income loan there. If that came back and it's -- theproperties are in the process of being foreclosed off.

Matthew Schultheis -Ferris, Baker Watts

Okay.

Scott Smith

But we haven't sold a lot yet.

Matthew Schultheis -Ferris, Baker Watts

When you looked to sell these, are you looking to kind ofblow them out quickly or do you think you will hold on to them for some timesince they are already on the balance sheet?

Charlie Nugent

We would like to get better than this as soon as we can.

Matthew Schultheis -Ferris, Baker Watts

Okay. And one last question tied to this obviously you tooka little bit of a contingent liability again for potential future repurchases.What do you think the dollar figure is on that, ballpark?

Charlie Nugent

For the repurchases in the third quarter, the total was set$5.7 million.

Matthew Schultheis -Ferris, Baker Watts

Right, but you took a contingent liability for futurerepurchases?

Charlie Nugent

Oh yeah. That was $2.2 million.

Matthew Schultheis -Ferris, Baker Watts

Right, what you think you may end up repurchasing inaggregate? I mean you put 2.2 away do you think you might after purchase another15, 10, 20?

Scott Smith

Right now that outstanding repurchase notices that we hadand foreclosed on the property. We haven't taken over the loan and its $10.7million.

Matthew Schultheis -Ferris, Baker Watts

Okay.

Scott Smith

And the reserve on that is 2-- well, the reserve on that..

Charlie Nugent

It was $10.7 million and we received $5.7 million in thethird quarter. Of that $5.7 million, $1million was due to OREO payment default. The rest $4.7 million was related toborrowers, who had misrepresented there on their loan applications and that'sreserved for -- that's reserved in a separate reserve.

Matthew Schultheis -Ferris, Baker Watts

Okay. It looks to me that net of all of these charges, butnot including net of severance your operating non-interest expense was about$92 million for the quarter, sound about right?

Charlie Nugent

I will check it quickly.

Scott Smith

Yeah. I mean, it's just the…

Charlie Nugent

It should just be, it could be that I would say that…

Matthew Schultheis -Ferris, Baker Watts

What (inaudible) at 16?

Scott Smith

The $92 million less.

Charlie Nugent

Of what we reported, but less $16 million.

Matthew Schultheis -Ferris, Baker Watts

Now, what did you and that's right. And then, what did youhave for severance again it's 1.5, I think?

Charlie Nugent

Yeah. In the second quarter, it was 1.5 and in the firstquarter it was $200,000.

Matthew Schultheis -Ferris, Baker Watts

And you had a couple of other nonrecurring non-interestexpense items, I think, could you go over those one more time? I think, youdid. I might have missed it.

Charlie Nugent

The big things I think were, just looking at salaries andbenefits were the non reoccurring things that happened in the second quarter.So, when you do a comparison get facts like those in.

Matthew Schultheis -Ferris, Baker Watts

Okay.

Charlie Nugent

And it was the [second] so $1.5 million you mentioned that was the primary one.

Matthew Schultheis -Ferris, Baker Watts

Yeah. It was a second quarter issue, not a third.

Charlie Nugent

Yeah. And then the other one was also a second quarterissue, but if you compare balances that would affect it we had some incentives,we reduced our incentive accrual by $100,000 and that was also in the secondquarter.

Matthew Schultheis -Ferris, Baker Watts

Okay. Well, thanks very much.

Charlie Nugent

And, I think that's the biggest ones, and no other onestands out in my mind. But if there is anything, I will let you know.

Matthew Schultheis -Ferris, Baker Watts

Okay. Thank you very much.

Charlie Nugent

Welcome.

Scott Smith

Good day to you Matt.

Operator

(Operator Instructions). We’ll go next to Gerard Cassidywith RBC Capital Markets.

Gerard Cassidy - RBCCapital Markets

Hi, Charlie.

Charlie Nugent

Hi, Gerard.

Gerard Cassidy withRBC Capital Markets

A question on the non-performing assets you indicated thatthey increased about $32 million to $33 million sequentially, and if I heardyou correctly, I think you said $20 million came from the Resource situation.Where is the other $12 million, how are they comprised or what was the net $12million number?

Charlie Nugent

Yes. You are right there. They are no big loans in there andit's not coming from any specific area. It's spread out through our franchiseand no big loans or nothing specific related to any of it.

Gerard Cassidy - RBCCapital Markets

Okay. And I apologize, if you already discussed this. But inthe experience you have had with the Resource loans, the first loans that camein that you've actually foreclosed upon. What should we expect to see that OREOnumber go to based upon the new loans that are being coming in are not -- thathave not been foreclosed on yet? What's a good target number for the OREO to goto?

Charlie Nugent

I had expected the things that are nonperforming related tothat will be transferring over to OREO.

Gerard Cassidy - RBCCapital Markets

Right.

Charlie Nugent

They continue to be nonperforming. And we would think thatwould be an increase of about $14 million to $15 million, after the reservesare taken out. It should be $14 million to $15 million.

Gerard Cassidy - RBCCapital Markets

Right. So, it will be up to about $26 million to $27 millionthen, if nothing is changed?

Charlie Nugent

I would say $27 million, if we don't sell anything.

Gerard Cassidy - RBCCapital Markets

Okay. And then regarding the selling of properties that youmay have already again taken in early in the process, how has that gone interms of the actual selling in the houses that you have foreclosed upon?

Scott Smith

We haven't sold very many because we just repurchased theloans in July.

Gerard Cassidy - RBCCapital Markets

Okay.

Scott Smith

And we received the loans back and we are in the process. SoI think, we've sold maybe two or three, but there is nothing meaningful. So, wecan get out of that.

Gerard Cassidy - RBCCapital Markets

Okay.

Scott Smith

If we were to monitor that, we want to really watch itbecause that will give us a good indication if our own reserves are too high ortoo low.

Gerard Cassidy - RBCCapital Markets

Right.

Scott Smith

And we feel the reserves are consolidated right now.

Gerard Cassidy - RBCCapital Markets

Okay.

Scott Smith

That would tell us.

Gerard Cassidy - RBCCapital Markets

Right.

Charlie Nugent

We will let you know on that -- we will report that at thenext conference call, when we get that information.

Gerard Cassidy - RBCCapital Markets

Is there any sense yet on what type of haircut or what kindof market value decrease is taking place in -- I know you only have a limitedamount of data on this, but is there any sense of what type of reduction invalue in the houses that are coming into OREO that you are seeing?

Charlie Nugent

Yeah, Gerard when we -- we had appraisals on theseproperties before.

Gerard Cassidy - RBCCapital Markets

Yes.

Charlie Nugent

And we wrote them down and we received new appraisals orbroker priced opinions on September 30th and the difference between the two is14%.

Gerard Cassidy - RBCCapital Markets

Okay. And finally in this area, most -- is there anyconcentration in where the houses are located in, in particular state or arethey primarily in the Southeast or are they all over the country?

Charlie Nugent

They are primarily in Marylandand Virginia.There are some in Florida.There are some in California.There are some in Minnesota and some in Michigan primarily whereResource Mortgage was operating.

Gerard Cassidy - RBCCapital Markets

Okay.

Charlie Nugent

But they went out of their area a few times.

Gerard Cassidy - RBCCapital Markets

Sure. And then one final question on the loan growth on theaverage balances when I looked at the year-over-year, it looks like you guysreported just shy of 7% loan growth and I expect that the 9 months number,which is higher close to 9%. Should we anticipate continued slowing growth inthe total loan portfolio as we enter '08 or is just now you guys are startedactually see a pick up?

Charlie Nugent

If I give my crystal ball out as cloudy I don’t know, butyou’re right the average loan growth this year you remember Columbia acquisition is not in there for fullperiod.

Gerard Cassidy - RBCCapital Markets

Okay

Scott Smith

That growth is for Columbiaand for January ’06. I think, our loan growth it’s about 7% on average. But ifyou look linked quarter it’s up 3%, when annualized first 12%

Gerard Cassidy - RBCCapital Markets

Great.

Scott Smith

It’s being driven primarily by commercial loans and we arepicking up market share and also our customers, who borrow on a lot morethrough acquisitions and plan expansion additional capital, additional workingcapital lines. And if that commercial loan grows 12%, and we think, we have astrong pipe line. So, I think, our loan growth is going to be, I don’t know,like crystal balls cloudy. But looking at these numbers, I think, our loangrowth is going to be pretty sharp.

Gerard Cassidy - RBCCapital Markets

Great. Thank you very much.

Operator

We’ll go next to Frank Schiraldi, Sandler O'Neill & Partners

Frank Schiraldi -Sandler O'Neill & Partners

Good morning guys.

Scott Smith

Good morning Frank.

Charlie Nugent

Good morning Frank.

Frank Schiraldi -Sandler O'Neill & Partners

A question on Resource as far as headcount. Could you justshare with us what the headcount was at Resource before all this startedhappening what it is today and may be how many people have been fired or howmany have left of their own accord?

Charlie Nugent

Well, we are guessing now, but it went from about 325 toabout 150 and that but amongst the top of our headgear.

Frank Schiraldi -Sandler O'Neill & Partners

Okay. Now have those people who have left there, has therebeen a bunch of people that go or is it people have left sort at the beginningof all this?

Charlie Nugent

I don’t think. I don’t think, I can comment on that(inaudible)

Frank Schiraldi -Sandler O'Neill & Partners

Okay. And is there a head or number that you expect thatheadcount to get down to or this 150 sort of what you expect going forward?

Scott Smith

I’d expect and as we evolve our plans for expansion that wetalked about there and as we build additional branches in to ‘08 and ‘09 willbe adding some focuses obviously that to facilitate that.

Frank Schiraldi -Sandler O'Neill & Partners

Okay. And as far as the 9.9 million and you talk about inthe release two situation that add up to that and I guess its 27 million inloans. How many loans are there to makeup that 27 million and when you speakthe situation is it two peoples specifically or it two offices specifically?

Scott Smith

63 loans, they are telling me and it is two offices and thatwhere we identified the problems.

Frank Schiraldi -Sandler O'Neill & Partners

Okay. Those offices have been closed and basically you arein the review process now to review all the mortgages like went through, butbasically all the mortgages of these two offices have already been scrubbed orthe paperworks has been reviewed and that okay other than this.

Scott Smith

What we have disclosed is what we know now. As I saidearlier just as abundance of caution so that we can get those behind us. We aredoing this additional analysis and we are bringing in some additional helps soto get it done frankly because we want to get our hands around this and if not,is there is anymore we don’t know that there is.

We want to identified reserve for and just as importantly wewant to get a focus of this behind us. So that we can move on to more positiveand have those folks doing what they do fact and that originating qualitymortgages and generating revenue for us. So it's time to get this behind us andwe want to try to do that with best we can. And we think the additional, someadditional help and franchise looking at the whole thing will help us do that.

Frank Schiraldi -Sandler O'Neill & Partners

I think is that sort of an aggregate number you could give.I think, last quarter you sort of said that the stuff that was coming back, youare writing down to 75%?

Charlie Nugent

I’m sorry, what's the last part of the question?

Frank Schiraldi -Sandler O'Neill & Partners

I think, last quarter you had said based on the conferencecall that you are writing stuff down to, if you sort of aggregate everything upan average of 75% of the total value of the loans coming back that you haverepurchased and you are putting them at nonperformance. So, has that numberchanged at all or is it gone down?

Charlie Nugent

We are writing down still 75% days, but the numbers arechanging because the appraisals have gone down. The more recent appraisals aredown by 14% from the last time we did the appraisals.

Frank Schiraldi -Sandler O'Neill & Partners

Okay. So, and those appraisals when you say14% those arejust the total loans that you got repurchased request on?

Charlie Nugent

Yes.

Frank Schiraldi -Sandler O'Neill & Partners

Okay.

Charlie Nugent

Yes. It's all the loans that have been put backed us sincethe nonperforming, it’s an OREO that’s repurchased request that areoutstanding. And thus far, guideline is 75 basis points, but some based on thecondition and where they are, have been written down more.

Frank Schiraldi -Sandler O'Neill & Partners

Okay. And then, when you say that $32 million NPA growthquarter-over-quarter that includes the stuff and OREO right?

Charlie Nugent

Yes.

Frank Schiraldi -Sandler O'Neill & Partners

Okay.

Charlie Nugent

Yeah. That’s nonperforming asset.

Frank Schiraldi -Sandler O'Neill & Partners

Okay. And I know, last quarter, you talked about a couple ofloans that were in non performers or projects that were going on residentialconstruction in Columbia, some smaller commercial loans in New Jersey are thosehas anything out non-performance I guess this is the question, beside therepurchases that, when over to OREO.

Scott Smith

No, I don’t think so.

Frank Schiraldi -Sandler O'Neill & Partners

Okay

Scott Smith

Okay. It's stayed stable; we put a lot of residentialmortgages gone under we repurchase in OREO area and net increased the $11million and I think its a net increase that’s all smaller loans throughout ourfranchise.

Frank Schiraldi -Sandler O'Neill & Partners

Okay. Then finally on expenses, has it sort of gone quickerthan you excepted that the quarter-to-quarter expenses then is some of that dueto, where I guess how much is that is due to lower gain on sell of mortgageloan?

Charlie Nugent

The amount that we saved from resource mortgage andexpenses, I think it’s about just in sellers and that it’s about $1.4 million.And the last from the workforce reduction program in the quarter was $1.1million.

Frank Schiraldi -Sandler O'Neill & Partners

Okay. So that $1.1

Charlie Nugent

2.5 in total. And you can, we try to give you someinformation related to non-reoccurring things in the second quarter and if youaverage those out are our salary and benefits were down 2.5 million and its4.6% length quarter. So, I think we are seeing a lot of progress there.

Frank Schiraldi -Sandler O'Neill & Partners

And so, you expect to have somemore progress as you go forward because you still expect some jobs to go awayby attrition, right. Is that correct?

Scott Smith

I think the majority of it’shappened, but there is some more that we will come and deploy it.

Frank Schiraldi - Sandler O'Neill & Partners

And then finally just, sorry onemore question on deposits. Did you seem like if the deposits that outflow wasmainly or in Virginia there was more outflow I should say than the rest of yourregions, you think that has to do and all do you think that the resourcesituation has sort of hurt core deposits down there?

Charlie Nugent

If I say, these don’t have a lotof core deposits.

Frank Schiraldi - Sandler O'Neill & Partners

Okay.

Charlie Nugent

And I don’t think, that wouldmaterially effect to corporation’s numbers, but I can look.

Frank Schiraldi - Sandler O'Neill & Partners

Okay.

Charlie Nugent

I don’t remember saying anythingin any particular affiliate other than overall trend.

Frank Schiraldi - Sandler O'Neill & Partners

Okay. Thank you.

Charlie Nugent

You’re welcome.

Scott Smith

Okay.

Frank Schiraldi - Sandler O'Neill & Partners

Yeah. I will touch basicallymaybe after and I’m just looking at these FDIC data and it looks like Virginia was little moreso than the other regions. But I will give you a call after. Thanks.

Charlie Nugent

Okay. Thank you.

Operator

(Operator Instructions). We’ll gonext to Bob Hughes of KBW.

Bob Hughes - KBW

Hi, good morning gentlemen.

Charlie Nugent

Good morning, Bob.

Scott Smith

Good morning, Bob.

Bob Hughes - KBW

Just a follow-up questions on therepurchase issues. I guess the initial issues in the first and second quarterwere largely related to early payment defaults more recently it tends to bemore of a rep and warranty issue, is that correct?

Scott Smith

Yes.

Charlie Nugent

Yes.

Bob Hughes - KBW

Maybe defaults under that, but Imean these are not early payment defaults. These are..?

Scott Smith

Correct.

Bob Hughes - KBW

Okay, great. Now the repurchasesthat you have seen so far, are these still largely associated with the 80/20program subprime stuff the resources doing or just extended beyond that now?

Scott Smith

Yeah. This is 80/20 that we had aproblem with that’s below dot was primarily related to one investor. These twoare related to other investors, and this is more of as what you have said themisrepresentation of credit default.

Bob Hughes - KBW

Okay. So, the principle buying onsort of loans that were originated that have been repurchased is 40 million, isthat correct?

Charlie Nugent

Right. Gross, yeah.

Bob Hughes - KBW

Okay, gross.

Charlie Nugent

Now that’s close.

Bob Hughes - KBW

That’s close. Okay.

Charlie Nugent

Its different I would telleverybody.

Bob Hughes - KBW

Okay. And can you give us a sensefor the volume of loans that were originated under these programs. I think itwas something around 250 million or so last year at resource in the firstquarter?

Charlie Nugent

That was the 265 million I thinkit was related to this one investor program then we had the early paymentsdefaults on. That the ones as pointed out the ones we are having the reservingfor here is primarily related to potentials borrower misrepresentation.

Bob Hughes - KBW

Right and so the plan now is tobasically scrub all the documentation of these problems that were originatedover the past couple of years to look for obvious misrepresentation in statedincome or something else?

Charlie Nugent

Correct.

Bob Hughes - KBW

Okay. And so and again if you cangive us any kind of sense of what the volume of those loans originated was forlast couple of years will be helpful. And secondly what is the tail or statueor how long do these reps and warranties last I mean is it a year, 2 years, 5years life of the loan.

Charlie Nugent

Its life of the loan for most ofthese from the practical standpoint a few years is what you would expect mostof it to be both approved.

Bob Hughes - KBW

Okay. Given the accesses, so doyou have numbers for us on the volume loans that were originated over say '05and '06?

Charlie Nugent

Yeah in '05 and '06 andyear-to-date in '07 for the retail loans don’t come in through, wholesalebrokers to come through the just a regular systems its 1.8 billion and forloans that commences the wholesale and the fee based offices down there it was2.1 billion. So, totals of sales $3.9.

Bob Hughes - KBW

Okay and that’s in '06.

Charlie Nugent

No. I’m sorry, that’s '07, '06and '05 that’s back three years.

Bob Hughes - KBW

Okay. Great. And then on aseparate topic, as I look at a lot of the banks those in the middle Atlanticregion, do you guys have more higher concentrations of construction loans someof which just come from Resource, some which just come from Columbia.

And given your commentary ondeterioration in housing values, what can you tell us about the type describingyou have done on your construction portfolio and why do these trends not arguefor some higher provisioning against our portfolio going forward?

Charlie Nugent

Well, we’ve been monitoring thoseportfolios very carefully for 18 months or two years now, as this all evolve.And our analysis indicates that the customers we are dealing with well they arehaving some difficulty moving some inventory are not in serious liquiditypositions at this point in time.

And in some cases, we havereserve for some of those, where we had some concerns about. But I think, we’vesome time to go before they did impact until the point, where the carrying costbecome derivative.

Bob Hughes - KBW

Beyond borrowers remainingcurrent with payments out of the interest reserve, have you gone out andreassessed collateral values in the construction portfolio pretty routinely andyou are comfortable that you are well secured?

Charlie Nugent

Yeah.

Bob Hughes - KBW

Okay. And then one last questionassociated with that, can you tell us what your allowance is against theconstruction portfolio today?

Charlie Nugent

I can’t tell you now, I’m sorry,I can tell you. Yeah I can. We allocate against specific loans and I’m sorry Idon’t have that with me right now.

Bob Hughes - KBW

Okay. I’m sorry to ask one morehere, but when you can finish conducting your review of documentation of loansoriginated? Should we expect an update in the quarter?

Charlie Nugent

Yeah.

Bob Hughes - KBW

Okay, all right. Thanks guys.

Scott Smith

In about just couple of comments,one, we received detailed reports from all of our areas and we are focusing onconstruction and commercial real estate. And houses are slowing especially withthe high-end, but they are selling in our areas, some of the areas we are inare pretty good, but inventories are bigger and it takes a little bit longer tosell it.

And the small priced housingseems to be going okay and we are carefully monitoring that we always do and ifyou look at provision too that we are booking 4.6 million provision against 2million and charge-offs. So we have some loan growth, but I think its also weare looking at things little bit more maybe we are allocating a little bit morethan we did this time last year when we had charge-offs of just $500,000. Ithink we are watching this as closely as we can. We are allocating as we shouldI think and the provision I think might reflect that.

Bob Hughes - KBW

No. There is no question thatthere has been a big delta in provisioning I’m sigh given the increase in MPLsand concerns about some of these factors specifically I’m surprised not seeingmore reserve building.

Scott Smith

Yeah. One thing when you lookedto non-performings we have to remember a lot of that came from the residentialmortgage repurchases and they have already been written down.

Bob Hughes - KBW

Right.

Scott Smith

They've been written down. Ithink, pretty conservatively twice, once with the original appraisal of 25% andnew appraisal of 25%. So, the stuff is coming in from the residentialmortgages, we think, we have a conservative reserve on thing.

Bob Hughes - KBW

Okay. Thanks guys.

Operator

We'll go next to Mac Hodgson,Suntrust Robinson Hump.

Mac Hodgson - Suntrust Robinson Humphrey

Yes.

Charlie Nugent

Good morning, Mac.

Mac Hodgson - Suntrust Robinson Humphrey

Couple of quick questions on thedecision to merge Resource Bank with Fulton Bank and the kind of branch plansin northern Virginia, how much will that -- let me just give us some details onthe branch expansion plans there and how much of that for year ended some ofthe expected expense savings going forward?

Charlie Nugent

The plan there we don’t have aspecific number of branches identified at this point in time. Although, we havehired a consultant to help us identify locations, and by the way throughout Virginia, Richmondand the Tidewater area are also areas, where we will be looking to do someadditional branching. So, that’s in process.

But having said that as part ofFulton Bank and then with Fulton Bank's continuing budgeting full branches itwill give that area some room to do some more additional branching and maybecutback in some of the areas other areas of Fulton, where some branching mighthave taken place that might not have quite the potential as some of these siteswill have. So, I think it works nicely into the budget without significantlyincreasing the overall costing for branches just reassign some locationsgeographically.

Mac Hodgson - Suntrust Robinson Humphrey

Okay. And you have merged someaffiliates before this one is a little bit different since its you have notwitnessed early on contagious market is there a strategy here to eventually goto one bank model or was this different and do you still kind of envision,operating where 10 or plus so subs.

Scott Smith

We have done 25 acquisitions withthe last 26 years and what we now or will have 10 banks. So what it make senseto put banks together, we will do that and we have over the years in thisparticular case it make sense so that we could speed up the process of theevolution I have talked about earlier from a mortgage banking operationsprimarily driven by that and residential developments to one that’s morediversified and have the ability to generate frankly more funding to funds it'sloan growth.

So, there is no master plan, butby a certain date to be a certain composition of facts, but when it makes senseto do so. We will do it and move accordingly. The strategy still is there to tryto maintain the brand and image and in reality the customer service of acommunity bank. That's what differentiates us from some of the larger regionalbanks and part of that process is the branding as community banks.

Mac Hodgson - Suntrust Robinson Humphrey

Okay. Thanks guys.

Operator

And we a have follow-up fromMatthew Schultheis of Ferris, Baker Watts.

Matthew Schultheis - Ferris, Baker Watts

Hi, really quick question and Ithink I know the answer to it, but is any of the provision for loan loss in thequarter the 4.6 tied to resource at all?

Charlie Nugent

I would think some, Matt. Thatwould cover back, Matt.

Matthew Schultheis - Ferris, Baker Watts

But I mean specifically into themortgages.

Charlie Nugent

No, so all of the mortgages weresold into the secondary market they are coming back.

Matthew Schultheis - Ferris, Baker Watts

Right.

Charlie Nugent

So, when they comeback, when weadjust it down, it goes through operating risk loss.

Matthew Schultheis - Ferris, Baker Watts

Okay. I wasn’t sure, if you areputting some of those into performing and then if they were non-performing…

Charlie Nugent

Well, yeah. You are right. Theresome of them are they missed maybe one payment before and now they areperforming.

Matthew Schultheis - Ferris, Baker Watts

Okay.

Charlie Nugent

And we have put them into regularloan portfolio, but it’s not a lot.

Matthew Schultheis - Ferris, Baker Watts

Okay.

Charlie Nugent

Most have moved intonon-performing assets.

Matthew Schultheis - Ferris, Baker Watts

Okay. Thank you very much.

Charlie Nugent

You’re welcome.

Operator

(Operator Instructions). We havea follow-up from Frank Schiraldi, Sandler O'Neill.

Frank Schiraldi - Sandler O'Neill & Partners

I just want to ask about themargin, it was down 8 basis points from linked quarter and I’m assuming a bigpart of that is probably the repurchases right coming back on and into earningassets?

Charlie Nugent

Frank it's not a big part, but itsome of it. We were really disappointed in our margin. The margin, we thoughthad stabilized but when we look a normalized margin came down almost the sameas what we recorded $370 to $362, it's 8 basis points, 1 basis point will bedue to the increased non-performings, 1.5% will be due to the drop in the coredeposit funding that we’ve mentioned especially in DDA, 2 basis points will becontraction from the loan growth we have been funded by CDs and borrowings, and3 basis points would be we’ve been increasing the size of our investmentportfolio, as I mentioned.

And the thing is we are trying toget more liability sensitive just to make sure that we have more of anadvantage from declining rates, and it’s not a big move, but it’s a slightadjustment. So, it’s three for the investments; two for the loan growth; 1.5for the loss at the core funding, 1% to the non-performings. So I think theother half of basis point is due to drop in loan fees.

Frank Schiraldi - Sandler O'Neill & Partners

Okay. Great, thank you.

Charlie Nugent

You're welcome.

Operator

That concludes thequestion-and-answer session. At this time Mr. Smith I would turn the conferenceback over to you for additional or closing remarks.

Scott Smith

Well, thank you all for joiningus and I will end this call today. And we hope you will be available again atthe end of the fourth quarter for our year-end conference call, which isscheduled for January. Thanks for being with us.

Operator

This concludes today'sconference. We do appreciate your participation. You may now disconnect.

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Source: Fulton Financial Q3 2007 Earnings Call Transcript

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