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Executives

Laura Wakeley - Media Contact

Scott Smith - Chairman, CEO and President

Charlie Nugent - Senior Executive VP 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 Robinson Humphrey

Fulton Financial Corporation (FULT) Q3 2007 Earnings Call October 17, 2007 10:00 AM ET

Operator

Good day and welcome to today's Fulton Financial Third Quarter 2007 Earnings Conference Call and webcast. This call is being recorded. At this time I would like to turn the call over to Ms. Laura Wakeley, please go ahead.

Laura Wakeley

Good morning. And thank you for joining us for the Fulton Financial Corporation's conference call and webcast to discuss our earnings for the third quarter of 2007.

Your host for today's conference call is Scott Smith, Chairman, Chief Executive Officer and President of Fulton Financial Corporation. Joining him is 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 late yesterday afternoon. These documents can be found on our website at www.fult.com by clicking on investor information and then on news.

Please remember that during this webcast, representatives of Fulton Financial Corporation may make certain forward-looking statements regarding future results or future financial performance of Fulton Financial Corporation.

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

Fulton Financial does not undertake any obligation to update any forward-looking statements to reflect certain instances or events that occur after the date on which such statements were made.

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

Scott Smith

Good morning and thank you for joining 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 few minutes. I first want to tell you where we are, what we have done, and the actions we are taking to put the issues related to Resource Mortgage behind us.

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

The following are the major components of that charge: $9.9 million was reserved related to $27 million in loans, where potential borrower misrepresentation exists. We received a repurchase request with respect to $2.4 million of these loans on October 1st. The remaining balance is for the other loans we subsequently identified, involving these same individuals.

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

The amount added to performing loans was $4 million net of reserves, and the amount added to nonperforming loans was $14 million net of reserves, and the amount added to foreclosed real estate was $7 million net of reserves. $2.2 million was recorded related to new and existing outstanding repurchase requests. On our last two calls, we discussed charges related to early payment defaults, which we believe for the most part have run their course. Results were decreases in property values on these early payment defaults, which largely reflect falling real estate values.

As we indicated during the question-and-answer section of our last call, secondary market purchasers may request loans to be repurchased for alleged misrepresentation. At this time, we are confident both of the alleged misrepresentation situations that have been contained and/or adequately have been reserved. The current charges reflect all that we know at this time. As a result of these two situations and out of an abundance of caution, however, we will be conducting an additional review of the loans originated by Resource Mortgage. To get this review accomplished as quickly as possible, we will retain an outside consultant to assist us. I cannot provide a definitive date as to when the review will be completed, but I assure you it will be completed as soon as possible.

It is important to note that the management of Resource Mortgage has been replaced and the offices giving rise to virtually all of these potential losses have been either closed or are in the process of being shutdown. The President of Fulton Mortgage Company now oversees the operations of Resource Mortgage. I want to cover the preceding issues with you first and say they had a significant effect on our third quarter results.

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

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

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

Activity continues in the merger and acquisition environment. We continue to be presented with numerous opportunities and we look at each one carefully. The multiples though being sorted are generally prohibitive in light of our required to return on investment goals and the desire to avoid earnings dilution. As we wait for the right opportunity, our focus on organic growth to new branches continues to be our priority.

That's the plan we announced for Resource Bank two weeks ago. Our focus in Virginia, where we are already positioned to serve some of the best markets in the country, will be to leverage our presence by building a stronger retail and small business franchise over the next few years. Involving this is the newest division of Fulton Bank, from a nationwide mortgage lender into a strong community bank of traditional funding and lending activity that characterize our business model.

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

Charlie Nugent

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

This charge was partially offset by a net gain of $1.8 million due to the resolution of litigation and the sale of certain assets, and this litigation, and asset sale was also related to Resource Mortgage. Net interest income improved $1.5 million or 1.2%. Average earning assets increased $388 million or 3%. Average loans grew $275 million or 2.6%, while average investment securities increased $142 million or 5%.

Our loan growth of $275 million occurred 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 each in New Jersey and Maryland.

Commercial line of credit usage was 38% at the end of September compared to 37% at the end of June. Commercial mortgages increased $96 million or 3%, with most of the growth in New Jersey, Virginia and Pennsylvania.

Construction and consumer loan balances remained relatively stable. Residential mortgages and home equity loans increased primarily as a result of loans repurchased and loans transferred from held for sale, to held for investment.

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

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

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

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

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

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

Our net interest margin for the third quarter was 3.62%, an 8 basis-point decline from the second quarter. Yields on earning assets were stable, with an increase in investment yields offsetting the decline in net loan yields due to the increase in nonperforming assets. Our cost of funds increased, as a result of the decline in non-interest bearing balances along with an increase in the cost of certificates of deposit and long-term borrowings. The provision for loan losses increased $1.9 million to $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 second quarter.

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

Excluding security gains, our other income increased $501,000 or 1.4%, primarily due to the decrease in mortgage banking income being offset by the gain on the resolution of litigation and the sale of certain assets.

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

The spread on sales declined to 96 basis points in the third quarter from 108 basis points in the second quarter. Investment management and trust service revenues declined $982,000 or 10% primarily due to a $900,000 reduction in brokerage revenues and $100,000 decrease in insurance commissions.

Service charges on deposits were relatively 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 seen continued strong growth.

Operating expenses increased $9.9 million or 10 %. Now adjusting for the charges related to our Resource Mortgage banking operation. The charge in the third quarter was $16 million, in the second 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 $3 million or 5.5%, as a result of several offsetting items. And during the second quarter an $800,000 incentive pay accrual was reversed, and severance of $1.5 million 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 workforce reduction program, as well as the $1.4 million reduction in salaries and benefits at Resource Mortgage.

Thank you for your attention, and for your continued interest in our Corporation. And now, we will be glad to answer your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we'll go first to Matthew 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 talked about and go over some of the repurchased loans in some detail. The $2.1 million 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 figure of repurchased loans and repurchased OREO with the breakdown between first and second?

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 delinquent it was put in non-performing loans, when we foreclosed on the property it was moved 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 think approximately $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 of the 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, over the 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 am not 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 third quarter 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 to you on that.

Matthew Schultheis - Ferris, Baker Watts

Okay. Do you know how much that reached, non-performing loans 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 just reached 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 -- the properties 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 of blow them out quickly or do you think you will hold on to them for some time since 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 took a 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 future repurchases?

Charlie Nugent

Oh yeah. That was $2.2 million.

Matthew Schultheis - Ferris, Baker Watts

Right, what you think you may end up repurchasing in aggregate? I mean you put 2.2 away do you think you might after purchase another 15, 10, 20?

Scott Smith

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

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 the third quarter. Of that $5.7 million, $1 million was due to OREO payment default. The rest $4.7 million was related to borrowers, who had misrepresented there on their loan applications and that's reserved 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, but not 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 you have for severance again it's 1.5, I think?

Charlie Nugent

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

Matthew Schultheis - Ferris, Baker Watts

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

Charlie Nugent

The big things I think were, just looking at salaries and benefits 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 quarter issue, 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 second quarter.

Matthew Schultheis - Ferris, Baker Watts

Okay. Well, thanks very much.

Charlie Nugent

And, I think that's the biggest ones, and no other one stands 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 Cassidy with RBC Capital Markets.

Gerard Cassidy - RBC Capital Markets

Hi, Charlie.

Charlie Nugent

Hi, Gerard.

Gerard Cassidy with RBC Capital Markets

A question on the non-performing assets you indicated that they increased about $32 million to $33 million sequentially, and if I heard you 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 $12 million number?

Charlie Nugent

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

Gerard Cassidy - RBC Capital Markets

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

Charlie Nugent

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

Gerard Cassidy - RBC Capital Markets

Right.

Charlie Nugent

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

Gerard Cassidy - RBC Capital Markets

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

Charlie Nugent

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

Gerard Cassidy - RBC Capital Markets

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

Scott Smith

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

Gerard Cassidy - RBC Capital Markets

Okay.

Scott Smith

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

Gerard Cassidy - RBC Capital Markets

Okay.

Scott Smith

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

Gerard Cassidy - RBC Capital Markets

Right.

Scott Smith

And we feel the reserves are consolidated right now.

Gerard Cassidy - RBC Capital Markets

Okay.

Scott Smith

That would tell us.

Gerard Cassidy - RBC Capital Markets

Right.

Charlie Nugent

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

Gerard Cassidy - RBC Capital Markets

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

Charlie Nugent

Yeah, Gerard when we -- we had appraisals on these properties before.

Gerard Cassidy - RBC Capital Markets

Yes.

Charlie Nugent

And we wrote them down and we received new appraisals or broker priced opinions on September 30th and the difference between the two is 14%.

Gerard Cassidy - RBC Capital Markets

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

Charlie Nugent

They are primarily in Maryland and Virginia. There are some in Florida. There are some in California. There are some in Minnesota and some in Michigan primarily where Resource Mortgage was operating.

Gerard Cassidy - RBC Capital Markets

Okay.

Charlie Nugent

But they went out of their area a few times.

Gerard Cassidy - RBC Capital Markets

Sure. And then one final question on the loan growth on the average balances when I looked at the year-over-year, it looks like you guys reported 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 in the total loan portfolio as we enter '08 or is just now you guys are started actually see a pick up?

Charlie Nugent

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

Gerard Cassidy - RBC Capital Markets

Okay

Scott Smith

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

Gerard Cassidy - RBC Capital Markets

Great.

Scott Smith

It’s being driven primarily by commercial loans and we are picking up market share and also our customers, who borrow on a lot more through acquisitions and plan expansion additional capital, additional working capital lines. And if that commercial loan grows 12%, and we think, we have a strong 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 loan growth is going to be pretty sharp.

Gerard Cassidy - RBC Capital 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 just share with us what the headcount was at Resource before all this started happening what it is today and may be how many people have been fired or how many have left of their own accord?

Charlie Nugent

Well, we are guessing now, but it went from about 325 to about 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 there been a bunch of people that go or is it people have left sort at the beginning of 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 that headcount 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 we talked about there and as we build additional branches in to ‘08 and ‘09 will be 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 in the release two situation that add up to that and I guess its 27 million in loans. How many loans are there to makeup that 27 million and when you speak the 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 that where we identified the problems.

Frank Schiraldi - Sandler O'Neill & Partners

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

Scott Smith

What we have disclosed is what we know now. As I said earlier just as abundance of caution so that we can get those behind us. We are doing this additional analysis and we are bringing in some additional helps so to 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 we want to get a focus of this behind us. So that we can move on to more positive and have those folks doing what they do fact and that originating quality mortgages and generating revenue for us. So it's time to get this behind us and we want to try to do that with best we can. And we think the additional, some additional 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, you are 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 conference call that you are writing stuff down to, if you sort of aggregate everything up an average of 75% of the total value of the loans coming back that you have repurchased and you are putting them at nonperformance. So, has that number changed at all or is it gone down?

Charlie Nugent

We are writing down still 75% days, but the numbers are changing because the appraisals have gone down. The more recent appraisals are down 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 are just 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 since the nonperforming, it’s an OREO that’s repurchased request that are outstanding. And thus far, guideline is 75 basis points, but some based on the condition 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 growth quarter-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 of loans that were in non performers or projects that were going on residential construction in Columbia, some smaller commercial loans in New Jersey are those has anything out non-performance I guess this is the question, beside the repurchases 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 residential mortgages gone under we repurchase in OREO area and net increased the $11 million and I think its a net increase that’s all smaller loans throughout our franchise.

Frank Schiraldi - Sandler O'Neill & Partners

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

Charlie Nugent

The amount that we saved from resource mortgage and expenses, 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 $1.1 million.

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 some information related to non-reoccurring things in the second quarter and if you average those out are our salary and benefits were down 2.5 million and its 4.6% 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 some more progress as you go forward because you still expect some jobs to go away by attrition, right. Is that correct?

Scott Smith

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

Frank Schiraldi - Sandler O'Neill & Partners

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

Charlie Nugent

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

Frank Schiraldi - Sandler O'Neill & Partners

Okay.

Charlie Nugent

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

Frank Schiraldi - Sandler O'Neill & Partners

Okay.

Charlie Nugent

I don’t remember saying anything in 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 basically maybe after and I’m just looking at these FDIC data and it looks like Virginia was little more so than the other regions. But I will give you a call after. Thanks.

Charlie Nugent

Okay. Thank you.

Operator

(Operator Instructions). We’ll go next 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 the repurchase issues. I guess the initial issues in the first and second quarter were largely related to early payment defaults more recently it tends to be more of a rep and warranty issue, is that correct?

Scott Smith

Yes.

Charlie Nugent

Yes.

Bob Hughes - KBW

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

Scott Smith

Correct.

Bob Hughes - KBW

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

Scott Smith

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

Bob Hughes - KBW

Okay. So, the principle buying on sort of loans that were originated that have been repurchased is 40 million, is that 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 tell everybody.

Bob Hughes - KBW

Okay. And can you give us a sense for the volume of loans that were originated under these programs. I think it was something around 250 million or so last year at resource in the first quarter?

Charlie Nugent

That was the 265 million I think it was related to this one investor program then we had the early payments defaults on. That the ones as pointed out the ones we are having the reserving for here is primarily related to potentials borrower misrepresentation.

Bob Hughes - KBW

Right and so the plan now is to basically scrub all the documentation of these problems that were originated over the past couple of years to look for obvious misrepresentation in stated income or something else?

Charlie Nugent

Correct.

Bob Hughes - KBW

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

Charlie Nugent

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

Bob Hughes - KBW

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

Charlie Nugent

Yeah in '05 and '06 and year-to-date in '07 for the retail loans don’t come in through, wholesale brokers to come through the just a regular systems its 1.8 billion and for loans that commences the wholesale and the fee based offices down there it was 2.1 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, '06 and '05 that’s back three years.

Bob Hughes - KBW

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

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

Charlie Nugent

Well, we’ve been monitoring those portfolios 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 are having some difficulty moving some inventory are not in serious liquidity positions at this point in time.

And in some cases, we have reserve for some of those, where we had some concerns about. But I think, we’ve some time to go before they did impact until the point, where the carrying cost become derivative.

Bob Hughes - KBW

Beyond borrowers remaining current with payments out of the interest reserve, have you gone out and reassessed collateral values in the construction portfolio pretty routinely and you are comfortable that you are well secured?

Charlie Nugent

Yeah.

Bob Hughes - KBW

Okay. And then one last question associated with that, can you tell us what your allowance is against the construction 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 I don’t have that with me right now.

Bob Hughes - KBW

Okay. I’m sorry to ask one more here, but when you can finish conducting your review of documentation of loans originated? 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 on construction and commercial real estate. And houses are slowing especially with the high-end, but they are selling in our areas, some of the areas we are in are pretty good, but inventories are bigger and it takes a little bit longer to sell it.

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

Bob Hughes - KBW

No. There is no question that there has been a big delta in provisioning I’m sigh given the increase in MPLs and concerns about some of these factors specifically I’m surprised not seeing more reserve building.

Scott Smith

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

Bob Hughes - KBW

Right.

Scott Smith

They've been written down. I think, pretty conservatively twice, once with the original appraisal of 25% and new appraisal of 25%. So, the stuff is coming in from the residential mortgages, 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 the decision to merge Resource Bank with Fulton Bank and the kind of branch plans in northern Virginia, how much will that -- let me just give us some details on the branch expansion plans there and how much of that for year ended some of the expected expense savings going forward?

Charlie Nugent

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

But having said that as part of Fulton Bank and then with Fulton Bank's continuing budgeting full branches it will give that area some room to do some more additional branching and maybe cutback in some of the areas other areas of Fulton, where some branching might have taken place that might not have quite the potential as some of these sites will have. So, I think it works nicely into the budget without significantly increasing the overall costing for branches just reassign some locations geographically.

Mac Hodgson - Suntrust Robinson Humphrey

Okay. And you have merged some affiliates before this one is a little bit different since its you have not witnessed early on contagious market is there a strategy here to eventually go to 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 with the last 26 years and what we now or will have 10 banks. So what it make sense to put banks together, we will do that and we have over the years in this particular case it make sense so that we could speed up the process of the evolution I have talked about earlier from a mortgage banking operations primarily driven by that and residential developments to one that’s more diversified and have the ability to generate frankly more funding to funds it's loan growth.

So, there is no master plan, but by a certain date to be a certain composition of facts, but when it makes sense to do so. We will do it and move accordingly. The strategy still is there to try to maintain the brand and image and in reality the customer service of a community bank. That's what differentiates us from some of the larger regional banks 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 from Matthew Schultheis of Ferris, Baker Watts.

Matthew Schultheis - Ferris, Baker Watts

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

Charlie Nugent

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

Matthew Schultheis - Ferris, Baker Watts

But I mean specifically into the mortgages.

Charlie Nugent

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

Matthew Schultheis - Ferris, Baker Watts

Right.

Charlie Nugent

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

Matthew Schultheis - Ferris, Baker Watts

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

Charlie Nugent

Well, yeah. You are right. There some of them are they missed maybe one payment before and now they are performing.

Matthew Schultheis - Ferris, Baker Watts

Okay.

Charlie Nugent

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

Matthew Schultheis - Ferris, Baker Watts

Okay.

Charlie Nugent

Most have moved into non-performing assets.

Matthew Schultheis - Ferris, Baker Watts

Okay. Thank you very much.

Charlie Nugent

You’re welcome.

Operator

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

Frank Schiraldi - Sandler O'Neill & Partners

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

Charlie Nugent

Frank it's not a big part, but it some of it. We were really disappointed in our margin. The margin, we thought had stabilized but when we look a normalized margin came down almost the same as what we recorded $370 to $362, it's 8 basis points, 1 basis point will be due to the increased non-performings, 1.5% will be due to the drop in the core deposit funding that we’ve mentioned especially in DDA, 2 basis points will be contraction from the loan growth we have been funded by CDs and borrowings, and 3 basis points would be we’ve been increasing the size of our investment portfolio, as I mentioned.

And the thing is we are trying to get more liability sensitive just to make sure that we have more of an advantage from declining rates, and it’s not a big move, but it’s a slight adjustment. So, it’s three for the investments; two for the loan growth; 1.5 for the loss at the core funding, 1% to the non-performings. So I think the other 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 the question-and-answer session. At this time Mr. Smith I would turn the conference back over to you for additional or closing remarks.

Scott Smith

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

Operator

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

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