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Fulton Financial Corporation (NASDAQ:FULT)

Q1 2008 Earnings Call

April 23, 2008 10:00 am ET

Executives

Laura Wakeley – VP, Corporate Communications Manager

Scott Smith – Chairman, CEO, President

Charlie Nugent –Senior EVP, CFO

Analysts

Rick Weiss – Janney Montgomery Scott

Collyn Gilbert – Stifel Nicolaus & Co.

Mac Hodgson – SunTrust Robinson Humphrey

Andy Stapp – B. Riley and Co.

David Darst – FTN Midwest Securities

Frank Schiraldi – Sandler O’Neill & Partners

Sandra Osborne – Keefe, Bruyette & Woods

Gerard Cassidy – RBC Capital Markets

Operator

Good day and welcome everyone to the Fulton Financial first quarter 2008 earnings results conference call. (Operator instructions). At this time I would like to turn the call over to the Vice President and Corporate Communications Manager, Ms. Laura Wakeley. Please go ahead.

Laura Wakeley

Good morning and thank you for joining us for Fulton Financial Corporation’s conference call and webcast to discuss our earnings for the first quarter or 2008. 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 was released at 4:30 yesterday afternoon. These documents can be found on our web site at fult.com by clicking on investor information and then on news.

Please remember that during this web cast 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 upon certain underlying assumptions, risks and uncertainties. Because of the possibility of change in the underlying assumptions, actual results could differ materially from those 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 or adverse changes in economic, political or regulatory conditions and continuation or worsening of current disruption in credit and other markets, including the lack of or reduced access to and the abnormal functioning of markets for mortgage and other asset backed securities and for commercial paper and other short term corporate borrowings, the impact on assets from adverse changes in the economy and in credit and other markets and resulting affects on credit risk and asset values, actions of the Federal Reserve Board, credit worthiness of current borrowers, the corporation’s success in merger and acquisition integration and customer’s acceptance of the corporation’s products and services.

Fulton Financial does not undertake any obligation to update any forward looking statements to reflect circumstances or events that occur after the date on which such statements were made. Now I’d like to turn the call over to your host, Scott Smith.

Scott Smith

Good morning everyone, thanks for joining us. I will give you an overview of the first quarter and then Charlie will provide additional details on our financial performance and then as always we’ll be happy to respond to your questions. We reported earnings per share of $0.24 which is even with the first quarter of 2007 but up 9.1% over the prior quarter. The benefits of a number of key initiatives executed in 2007 can be seen in our results. These results in what continues to be a challenging economic environment came from a combination of factors that we believe will continue to positively impact our financial performance.

But as we all know, there is continued uncertainty about the future direction of this economy. Four key themes characterized the first quarter, they were loan growth, revenue generation, tight expense control and asset quality. We continue to see growth in commercial and home equity loans, a factor contributing to our home equity growth was the new product introduced in the fourth quarter of last year called option lines. This product gives customers the flexibility to choose the fixed and floating rate portions of their lines. Based on early results, customers continue to respond well to this offering and we believe the product has good growth potential.

First quarter commercial loan growth continued at a good pace and information from our banks indicates that the pipeline is holding steady but is not robust. We continue to monitor asset quality very closely. Non-performing loans increased as a result of the slowing economic environment. We’ve analyzed our loan portfolio very carefully and have increased the loan loss reserve to provide for potential losses. Our actual charge offs were similar to the fourth quarter results. As always we will continue to watch our loan quality metrics very closely for any further deterioration and we’ll continue to use conservative judgment in determining our loan loss reserves.

Since home equity loans are getting so much attention lately, you should know our loans have been underwritten by our banks and made to customers in those local markets. Conservative underwriting standards were used and we have a well seasoned portfolio. We have not experienced significant asset quality deterioration in our home equity portfolio to date. From a deposit standpoint, core deposit funding has been one of our greatest challenges. Deposit balances decreased in all categories despite marketing and promotional efforts throughout the holding company.

We try to keep our time deposit rates both reasonable and competitive across the company at all times. Our core deposit promotional campaigns are producing an increase in our number of accounts but we are not seeing corresponding growth in balances. We will continue to market aggressively to grow new and existing households with the expectation that deposit balances will be increased over time. Our net interest margin improved slightly when on a linked quarter basis as a result of our deposit costs falling a bit faster than our loan yields, at least for the quarter.

However, with the actions we’ve already seen from the Fed and likely continued action to the downside on rates, we believe that growing net interest margin will continue to be a challenge. Let’s face it, we can only decrease deposit rates so far and frankly we think we’re about there. The good news is that the wholesale funding costs have fallen at the same time, so continued low cost funding is available to expand our loan portfolio and as a result we continue to seek quality loans. Our current strategy is to protect the balance sheet via conservative management of our asset growth and to grow capital organically via efficient operations and prudent retention of earnings. As we just announced, we are maintaining our dividend. Future changes will obviously be a function of a combination of our ability to generate capital organically through our earnings as well as various economic factors.

Another key to our first quarter numbers was in the mix of our non-interest income. As you may recall this has been an area of significant focus for us for the past several years. There are three areas in particular that performed well, cash management, merchant services and deposit account related income. We continued to expand our cash management menu, most recently with the addition of remote deposit capture. Some of our affiliate banks did not have this technology capability to offer this product in the past so there is still good growth potential throughout our footprint. Merchant services and debit card related revenue continued to be a reliable revenue generator as well.

With the introduction last November of a corporate wide automated overdraft analysis program, we are able to pay more items presented by our customers across all channels in addition to reducing fee waivers. Revenue generation from this initiative has exceeded our expectations and we should continue to see a benefit from this program for the remainder of the year. Despite the positives I just mentioned, you see that our non-interest income still declined. While we don’t like to see that number go down, we rest easier having completely exited the national wholesale mortgage business.

Those fire sale gains were a large contributor to our non-interest income in the same quarter last year. Our ongoing watchful eye on expenses continues to provide benefits to the bottom line. The reduction of our salary and benefit costs by over $1.1 million is a direct result of the workforce management initiatives we began in mid 2007 as well as our corporate wide focus on standardization and centralization. And we continue to make progress both in our lien process improvements and technology initiatives.

These savings are more difficult to quantify but we know our efforts will continue to improve our efficiency. On a related matter, late last week we issued a separate news release announcing a new joint marketing strategy that includes the sale of our approximately $85 million credit card portfolio. The terms of this agreement will generate an initial gain this year of approximately $10 million and a subsequent revenue sharing agreement will provide an ongoing stream of revenue from new and existing cardholders. We will continue to sell credit cards in our branches and still issue them in the name of each of our affiliate banks.

Our new strategic partner Elan Financial Services will provide an expanded menu for our customers as well as the focused expertise and critical mass to help us grow our card base more effectively in the future. Elan offers a greater array of rewards based cards which as you know is important in this business line. As a result of the transaction, we will continue to generate revenue from our credit card customers and eliminate credit and operation risks from the sold portfolio. We will also free up the capital that supported that portfolio. This transaction is good for our customers and our shareholders. So I think I’ve touched on the most significant aspects of our first quarter performance so at this time I’d like to turn the call over to Charlie Nugent for his comments. Charlie.

Charlie Nugent

Thank you Scott and good morning everyone. Thank you for joining us today. Unless otherwise noted comparisons are this quarter’s results to the fourth quarter of 2007. As Scott mentioned we reported earnings per share of $0.24 for the first quarter, this was a 9% increase from the fourth quarter and flat with the first quarter of last year. Net interest income increased $2.2 million or 1.8%. Average earning assets grew $303 million or 2% which included growth in loans of $213 million or 2% and growth in investment securities of $91 million or 3%.

Our loan growth occurred in the commercial and commercial mortgage categories. The growth was primarily in Pennsylvania and our New Jersey markets. Commercial loans grew $108 million or 3%, we had $64 million in Pennsylvania and $25 million in New Jersey. Commercial line of credit usage increased slightly to approximately 41% at the end of March compared to 40% at the end of December and 38% at the end of last March. Commercial mortgages increased $109 million or 3% with $51 million occurring in Pennsylvania and $35 million occurring in New Jersey. Construction loans decreased $49 million with declines occurring in all markets.

We were down $18 million in Maryland and $9 million each in Pennsylvania, New Jersey and Virginia. Residential mortgages increased $29 million or 3.5% with $17 million in Pennsylvania and $12 million in Virginia. And most of this growth was in traditional adjustable mortgage rate products. Home equity and consumer loans increased slightly, primarily due to the option loan line product that Scott mentioned earlier. Investment securities increased $91 million as expectations for further market interest rate reductions increased towards the end of 2000 and the first quarter of 2008.

We underwent a process of repositioning our investment portfolio and pre-purchasing future cash flows. And during the first quarter we purchased $330 million of securities at an average yield of 5.15%, sold $166 million at an average yield of 3.4% and realized a slight gain of $72,000. The result was an increase in our average investments outstanding, improved interest rate sensitivity and a higher overall portfolio yield. At March 31st, the unrealized gains attributable to the fixed income portfolio were $22 million compared to unrealized losses of $6.6 million at December 31st. The corporation realized net gains on security transactions of $1.2 million compared to net losses of $537,000 in the fourth quarter.

During the first quarter we realized $3.6 million on the redemption of 84,000 shares of VISA as well as a $1.0 million gain on the sale of Mastercard stock. In addition we reported $3.6 million in losses related to impairment of our bank stockholdings that we deem to be other than temporarily impaired. Attracting and retaining reasonably priced customer deposits continued to be a challenge in the first quarter. Customer funding was down 2.2%. We have continued to use our simply switch promotion to generate core deposits. While the balances do not show increases, we are optimistic about its success based on new account openings.

Also, our new deposit committee is working on developing additional deposit gathering promotions. Non-interest bearing demand deposits declined $59 million or 3.5% while now accounts declined $36 million or 2%. These decreases have occurred primarily in business and municipal accounts as slower economic growth has placed pressure on cash balances. Savings balances were relatively stable for the quarter, however money market accounts decreased $42 million or 3%. $18 million of the decline occurred in our internet money market account and the remainder in business and municipal accounts.

The decline in time deposits was $84 million or 1.8%. $50 million of that was in brokered certificate of deposits and $22 million was in the jumbo category of certificates of deposits. Our funding shortfall was covered by increases in wholesale funding. We borrowed $209 million more in Fed funds. We took down $174 million in Federal Home Loan Bank advances and we repo’d securities equally $123 million. Our net interest margin for the first quarter was 3.58%, a 2 basis point improvement from the fourth quarter. Yields on earning assets decreased 37 basis points while the cost of interest bearing liabilities declined 48 basis points.

Going forward we expect that further declines in interest rates would result in further margin pressure. The provisions for loan losses increased $4.4 million to $11.2 million in the first quarter. Net charge offs were 15 basis points in both the first and fourth quarters. The $4.4 million in net charge offs this quarter was primarily construction and real estate related loans but diverse from a geographic standpoint. The largest single charge off was under $750,000. Non-performing assets to total assets increased to 90 basis points at March 31st compared to 76 basis points at December 31st and 40 basis points last March.

Non-accrual loans increased $21 million and other real estate increased $3.4 million. At March 31st, non-performing loans were spread across most loan categories with $36 million in commercial loans, $30 million in commercial mortgages, $28 million in construction loans and $25 million in residential mortgages. Excluding security gains our other income increased $690,000 or 2%. Trust income declined $530,000 or 5.7% primarily due to a decline in brokerage fees. Fulton Financial Advisors, our trust and investment affiliate is undertaking a transformation of our brokerage business from a transactional based business to more of a relationship business model.

Although this transition has put downward pressure on brokerage revenue in the first quarter, we believe it will position us for growth as we go forward. Service charges on deposits increased $610,000 or 4.6%. Cash management fees were up $132,000 or 4% due to growth in customer accounts. Overdraft fees increased $600,000 or 8.5% due to the rollout of the new courtesy overdraft program on November 1st of last year. Other deposit service charges were down $120,000 or 4%. Other service charges and fees increased $190,000 or 2%. Growth in foreign currency revenues and merchant fees were offset by the seasonal decrease in debit card fees. Our foreign currency revenues are entirely generated based on processing customer transactions.

Gains on mortgage loan sales increased $130,000 or 6%. Residential mortgage loans sold were $163 million in the first quarter compared to $170 million in the fourth quarter, however the spread on sales increased. The other category increased $290,000 to $2.8 million in the first quarter and that increase was due to gains on the sale of SBA loans as well as other non-reoccurring items. Operating expenses declined $1.8 million or 2%. Salaries and benefits increased $2 million or 3.8%. Employment taxes were up $1.4 million representing the increase that seasonally occurs between the first and fourth quarters. Total salaries were up $1 million representing an increase in bonus plan accruals, however base salary expense was actually down slightly.

Lastly, employee benefit expense declined by $400,000 primarily due to the changes in the corporation’s retirement plans. Occupancy and equipment expense showed a seasonal increase of $670,000 or 5%. Advertising expenditures declined $560,000 or 16%. The fourth quarter included significant expenditures related to deposit generation activities. Other operating expenses decreased $4.1 million or 18%. After adjusting for the following items, that increase is of $88,000 or 0.5%. The fourth quarter included a $1.5 million loss accrual related to our exposure as a member of VISA USA.

As a result of VISA’s public offering in the first quarter, we were able to reverse $1.4 million of this accrual. The fourth quarter also included a $1.1 million write off of trade name intangible assets, recorded related to our recent internal bank mergers and a $1 million in cost for the special review related to the resource mortgager operation. An additional $750,000 in costs were expensed in the first quarter for this project. With respect to resource mortgage, we recorded an additional provision for loss of $800,000 in the first quarter.

Outstanding repurchase requests increased $2.7 million during the first quarter from $19.8 million of outstanding requests at the end of the year to $22.5 million at the end of the first quarter. Foreclosed real estate totaled $18.3 million at March 31st compared to $14.9 million at the end of the year. The majority of this other real estate in both periods is attributable to resource mortgage. 18 properties were added during the first quarter at a total value of $5.3 million. Sales and other proceeds of $2 million and additional write downs of $300,000 were taken on the portfolio.

There were no significant gains or losses on the eight properties sold during the first quarter. Of the foreclosed properties held at March 31st, over 70% are in Virginia or Maryland. Federal reserves were $17.8 million at March 31st compared to $18.6 million at December 31st. We believe that the reserves reported as of the end of the first quarter for the known resource mortgage issues are adequate, however continued declines in collateral values or the identification of additional loans to be repurchased could necessitate additional reserves in the future.

Our effective tax rate decreased from 28.8% in the fourth quarter to 25.9% in the first quarter. We reversed $2 million of tax reserves related to the calculation of disallowed interest on tax rate securities. This was based on a favorable outcome in a tax court case and the Internal Revenue Service’s announcement that it was not going to pursue an appeal. Okay, thank you for your attention and for your continued interest in Fulton Financial Corporation. Now we will be glad to answer your questions.

Question-and-Answer Session

Operator

(Operator instructions). We’ll go first to Rick Weiss with Janney.

Rick Weiss – Janney Montgomery Scott

Good morning. I’ve got a question, talking about your cost of funds has come down tremendously on a sequential quarter basis, I was wondering, how are you able to reduce the rates on your savings and demand accounts by so much?

Scott Smith

Well Rick we have been trying to be very prudent about that. As you know, it’s difficult, the competition’s pretty stiff out there but it did, I think everybody kind of recognized that rates were coming down and there was some back off in most competitors. And then we just were very careful about watching what the Fed was doing and trying to follow that. No major secret, just being very prudent about what we could do there.

Rick Weiss – Janney Montgomery Scott

Would you think this is about it, or if the Fed cuts another 25 BPs could rates [destyle root] and to cut some of those rates?

Scott Smith

Well as I said I think we’re about as far as, I mean there’s a little room Rick but we’re getting pretty close to the end in terms of getting back any rate reductions on the deposit side. There’s a little room in some of the CDs and what has happened in the past, whether it will this time or not I’m not certain, but if CD rates go down even below where they are, people will tend to leave their money in their checking accounts, just waiting for better rates. So hopefully if that happens we’ll get some relieve by people just sitting on some funds for a while until rates improve.

Rick Weiss – Janney Montgomery Scott

Okay and would you, at this point with the mortgage [bagging] from resource, is that all behind would you think or could you, or is there any more adjustments to be made with the reserve?

Scott Smith

Well as we’ve said, everything we know now, we’re adequately reserved, this is as you know, this is a crazy world we live in right now and things can happen but based on what we know there and what we’ve been able to do in analyzing all of that as we worked our way through it, we think we’ve got the reserve to take care of it. But you know there could be changes today that could impact that. But based on what we know, we’re adequately reserved.

Rick Weiss – Janney Montgomery Scott

Okay and one final question because I would call this kind of like, one of your traditional consistent quarters, would you start looking at M&A possibilities again going forward from here?

Scott Smith

We have continued and will continue to look at M&A possibilities. Frankly in these uncertain times it’s difficult to make the numbers work. And when you factor in the cost of finances given what banks are paying to raise capital now and the uncertainty about their portfolios, even with a lot of due diligence. It’s a tricky business to do right now, so I would say if we saw something very strategic that made sense for our shareholders, it’s possible, but I wouldn’t expect a lot of M&A activity for any of us in the short term.

Rick Weiss – Janney Montgomery Scott

Okay, thank you very much.

Operator

Our next question is from Collyn Gilbert with Stifel Nicolaus.

Collyn Gilbert – Stifel Nicolaus & Co.

Good morning. Charlie could you just give a little bit more color as to the migration in the NPAs this quarter. You kind of ran through it but just sort of what you’re seeing in terms of potential migrations going forward. And then also too, of the $7.7 million increase in the reserve, again remind us how much was related to Fulton versus Resource.

Charlie Nugent

The tone on the non-performings, we had an increase of about $21 million in non-accrual and other real estate of $3.4 million. All of the increase in the other real estate were related to loans that were generated by resource we repurchased and now we have the property. In the other non-performings, you know Collyn they were across the different banks and different geographic areas. There was $6.4 million at Fulton Bank, our lead bank, and it was the primary increases were from medical equipment at a hospital and there was an office building that was put on non-accrual.

Up in the Lehigh Valley we had a $6.4 million increase that was due to a golf course and office building. Up in Northern New Jersey, it was based on a developer and two developers in fact. And in the Maryland market it was also a developer that was put on non-accrual. But you know it doesn’t seem like any significantly, there are no significant ones I don’t think and they were different banks and different areas. But a lot of its related to real estate and construction.

Collyn Gilbert – Stifel Nicolaus & Co.

Okay. And then of the reserve increase, how much again was Resource versus Fulton?

Charlie Nugent

You know we merged Resource into Fulton Bank and…

Collyn Gilbert – Stifel Nicolaus & Co.

I thought you may have said, that you did set aside a certain reserve or provision for Resource.

Charlie Nugent

No, the provision went up throughout, we had a nice increase in provision, it went from last quarter it was $6.8 million, it went up to $11.2 million. You know it went up slightly at Resource Bank. But you know generally it’s up across all the banks.

Collyn Gilbert – Stifel Nicolaus & Co.

Okay so the fact that you had, I think you had said $2.7 million in additional repurchase requests through the Resource, you’re not [overlay] the reserve or charge off assumption to that pool of [overlay].

Charlie Nugent

Yeah I’m sorry Collyn the repurchase requests we booked in the separate reserve that’s not in the loan loss reserve, you know when we get repurchase requests we book a reserve for that. And we had an increase of $2.7 million repurchase requests. When we analyzed and looked at the appraisals we booked an additional provision for that $800,000.

Collyn Gilbert – Stifel Nicolaus & Co.

Okay so the $800,000 was tied to that and that goes right into the reserve, we don’t see that come through the loan loss provision line?

Charlie Nugent

No. And then when those loans are, the loans are turned over to us, the reserves are netted against it. And when it goes into ORE it’s under net also.

Collyn Gilbert – Stifel Nicolaus & Co.

Okay and what were the purchase requests in the fourth quarter?

Charlie Nugent

The fourth quarter, you know I think it was, I guess it was about $4-$5 million Collyn but most of that we had already identified as a result of our review at the end of the third quarter. Most of those we had known about and they were reserved for. The provision we booked in the fourth quarter I think was minimal, it was $100,000 because nearly everything we found out about was already reserved for.

Collyn Gilbert – Stifel Nicolaus & Co.

Okay great, thank you.

Operator

We’ll go to Mac Hodgson with SunTrust Robinson Humphrey.

Mac Hodgson – SunTrust Robinson Humphrey

Hey guys good morning. Let me just follow up quickly on the last question, the $800,000, that does flow through the income statement somewhere, doesn’t it?

Charlie Nugent

Yes, it goes through operating risk loss. And then we have a separate reserve for the repurchased loans coming in from Resource Mortgage.

Mac Hodgson – SunTrust Robinson Humphrey

Okay, gotcha. And then Scott you made a comment in your prepared remarks about the loan pipeline being steady but not robust. I’m just trying to read into that if you think loan growth from here will be consistent with the first quarter level or maybe just kind of compare it to where you saw it in the first quarter.

Scott Smith

Well I think we went into the first quarter with a fairly strong pipeline. And we have what I characterize earlier as a good pipeline but not robust. So you can draw your own conclusions from it. You know we’re not overly concerned about having quality loans to book but we’re not expecting huge increases.

Mac Hodgson – SunTrust Robinson Humphrey

Okay, gotcha. And maybe back on the reserve again, as a percentage of loans it went up you know this quarter and I just wanted to be sure there wasn’t any change in methodology or if you guys wanted to comment on plans to further build that reserve ratio going forward?

Scott Smith

I would say you know we continue to use the same models, where there are opportunities to use judgment, we’re trying to be conservative. We’ve tried to where we have the problem situations, update appraisals so that we can have at least the best idea about what the properties are worth. So it’s basically the same routine we’ve been going through.

Mac Hodgson – SunTrust Robinson Humphrey

Okay, maybe lastly Charlie on the margin I think margin was obviously strong this quarter compared to most banks, what they’ve been reporting, maybe comment you know on your expectations when you know the Fed stops cutting and starts going the other direction you know what that does from a margin standpoint.

Charlie Nugent

Boy, you know as they cut it’s going to put pressure on the margin. When it stabilizes I think a lots going to depend on deposit growth and how we fund our loans. If we do it the deposit growth or do we do it via wholesale funding. Mac, it’s hard to tell. You know we’ve been doing everything we can to try to help the margin. We purchased a lot of securities, we had advances roll off as we captured the short term as CDs we’ve moved the rates down. We were thinking CDs would be going up in the short run so we’ve moving the rates down. But I don’t see any significant improvement in the margin.

Mac Hodgson – SunTrust Robinson Humphrey

Okay, very good, that’s helpful, thanks.

Operator

Our next question is from Andy Stapp with B. Riley and Company.

Andy Stapp – B. Riley and Co.

Good morning. Help me understand you know your provision was up substantially despite fairly flat net charge offs. Just was there a migration of watch list loans into higher risk categories or how was it that or you know just judgmental increase, et cetera.

Scott Smith

I’d say again Andy probably a combination of all of that. As I said when we get a problem situation we’ve tried to get current values on real estate, where it’s a real estate related situation. Given the uncertainties out there, you know there are judgment factors in the model where we’ve been able, where we have been we think appropriately leading toward the conservative side of that. But it isn’t anything specific or a specific customer, it’s across the board, geography, it’s just general slowdown and our anticipation of trying to factor in this uneasiness about just how the second quarter is going to unfold. I think we’re going to know a lot more June 30th than we know now.

We’re entering the traditional spring season for housing and it’s just very difficult to call what that’s going to mean. If we get a decent spring then that’s going to help, if we get a dull spring then I think we’ve got and we, all of us, have issues around real estate that are going to continue to be a problem. So if you look at the winter the activity wasn’t terrific but then a lot of winters the activity in real estate isn’t terrific, so we’re really watching what’s going on right now to help us decide where this is all going to go.

Andy Stapp – B. Riley and Co.

Okay. How did your loans past due, 30-89 days compare quarter to quarter, linked quarter basis.

Charlie Nugent

You know delinquencies Andy were down just one or two basis points. Compared again to December compared to the end of the first quarter, it was down I think three basis points.

Andy Stapp – B. Riley and Co.

Okay and you touched a little bit on deposit pricing, has that stayed about the same and if you could also provide some color on competitive loan pricing.

Scott Smith

Both remain very competitive. You hear talk in the press about banks being more concerned about pricing their risk and trying to get a return on it and I think that’s probably accurate in the large business market. But in the small to medium sized businesses where we are, there’s still pretty significant competition for rate with quality credit, we all want the quality, so that, I don’t think we’ve seen a huge amount of relief there although it’s not as bad as its been. I think everybody’s in the same boat and trying to get some margin.

So I would say it’s not as good as what I’m hearing is happening in the markets of the large corporations but it isn’t quite as tough as its been at certain times in the middle to small business markets. On the deposit side, it varies, there seems to be a competitor in every market that seems to want money pretty bad and keeps changing. We have as you know a pretty significant market share in some of our markets and so the market share leader we kind of feel like we need to lead in pricing changes and so we’ve tried to be careful to not push the whole market up by being too robust in our pricing.

We’ve tried some different marketing strategies to get some CD money falling and you know they’ve had some results but as I said earlier I think we’re in a rate environment where CD customers are going to be difficult to move out in the yield or out in the maturities spectrum but we continue to market and look at different ways to appeal to customers for deposits. And primarily, one of the primary ways we’re doing that is just trying to get market share every place we are, taking advantage of whatever opportunities there are to get market share and that’s why you see some of our marketing costs up. We’re hoping that as we penetrate those markets with larger share and as things improve we’ll have a larger customer base from which we can gather deposit related fees and more deposits. It’s a tough environment.

Andy Stapp – B. Riley and Co.

Okay, thank you, that’s all for me.

Operator

We’ll go next to David Darst with FTN Midwest.

David Darst – FTN Midwest Securities

Good morning. Could you give us a little more information on the wealth management changes, maybe how much of that decline was related to market values and then a timeline for when you expect the new product to be complete and up and running.

Scott Smith

Okay. Well the brokerage business that we’ve been in for some years, we made a strategic decision to change it from a somewhat transaction oriented business to one of more of a relationship. So we’ve changed the product mix that folks are selling, we’ve changed the compensation system and are taking a new approach so that what we believe going forward is that our brokers will be managing their relationships more typically like we do in the rest of the company and that the fees will be more reoccurring rather than once and done.

And we’ve changed providers for that, we’re moving from Prime Best to Raymond James, and all of that is, it’s that transition while people are getting retrained and reoriented about how their compensation system works. And the fact that the markets haven’t been terrific for the past quarter has all impacted our revenues there. But we suspect going forward as we build it, and it will take some time because it isn’t, you know once we’re all ready and done it’s all switched over, that it then goes back to, these revenue streams have to build but they will be more consistent than over time is what we believe.

David Darst – FTN Midwest Securities

Scott do you think, will they be soft for another quarter or two?

Scott Smith

Unless the market changes pretty dramatically.

David Darst – FTN Midwest Securities

I’m talking about the transition.

Scott Smith

Well I think the transition should be behind us this summer.

David Darst – FTN Midwest Securities

Okay. And then how about you mentioned the overdraft increase to net income and deposit fees, was that product or fee increase something during this quarter or was that [overlay].

Scott Smith

November of last year.

David Darst – FTN Midwest Securities

Okay. And then could you give us some color on the impairment that you took in the securities portfolio, were those, you’re not in any funds, those are direct investments?

Scott Smith

Yeah, as you may know or probably know, we’ve had a bank stock portfolio for years that’s been very good to us for many, many years. Right now all of us, the prices of our stock aren’t where we’d like them to be and we have a few banks where we felt like the price had declined to a point where it was called permanently impaired and by that we didn’t expect it to recover any times soon so we wrote them down.

David Darst – FTN Midwest Securities

Okay, thanks.

Operator

We’ll go next to Frank Schiraldi with Sandler O’Neill.

Frank Schiraldi – Sandler O’Neill & Partners

Good morning guys. Just a couple of questions I had left. I guess Charlie you were talking about the breakdown in other revenues, other income, was there some non-recurring or what you consider non-recurring stuff in there that you could break out once again?

Charlie Nugent

The biggest thing in there was in the other income category Frank we had some, maybe about $200,000 in gains from SPA loans sales. And that was about it.

Frank Schiraldi – Sandler O’Neill & Partners

That was about it, okay. And then on the tax rate, I know you had mentioned some tax credits that benefitted you in this quarter. I know there was a change to Pennsylvania tax law from 07 to 08, I’m just trying to get a sense for a good tax rate going forward. I think you talked 30% before, has that come down a bit or no?

Charlie Nugent

We had an adjustment to our tax reserves related to a recent court decision. And we had booked some reserves just in case it went the other way and it didn’t. But usually our effective tax rate over time would be about 29.7-30%, that’s what I would use if I was modeling it. And you know for the fourth quarter it was 28.8%.

Frank Schiraldi – Sandler O’Neill & Partners

Right, okay. And then finally I’m just trying to understand some of the flow of the repurchases and repurchase requests for Resource, so you had $2.7 million in repurchase requests in the first quarter, right, and you brought $5.3 million onto the books. I guess that includes some previous repurchase requests, right?

Charlie Nugent

Right.

Frank Schiraldi – Sandler O’Neill & Partners

Okay so now in the NPAs, is Resource production only in OREO.

Charlie Nugent

No there are $18.1 million in non-performing loans in the non-performing category and there’s $17.3 million in other real estate related to Resource. And the $22.5 million we have in requests are still, we haven’t taken over the loans yet. The amounts, that $18 million we have in non-performing loans, that’s net of the reserves that we booked against it and the same for the ORE.

Frank Schiraldi – Sandler O’Neill & Partners

Okay so that’s $18 plus $3.4 in OREO, that’s what is Resource now?

Charlie Nugent

Well it’s $18.1 in non-performing loans and its $17.3 million in ORE. And there’s another $22.5 million in outstanding repurchase requests, so the total would be $57.9 million related to Resource.

Frank Schiraldi – Sandler O’Neill & Partners

Okay and obviously those repurchase requests, those have all been provided for. And you just have offhand, last quarters, what at the end of December what those numbers were, what that total was?

Charlie Nugent

Yeah it was $55.5 million.

Frank Schiraldi – Sandler O’Neill & Partners

Okay that’s helpful. And then I don’t know if you can share with us but is it possible to, is there any repurchase requests coming across so far in this quarter?

Charlie Nugent

We usually don’t get them until the end of the month. We wouldn’t have that.

Frank Schiraldi – Sandler O’Neill & Partners

Alright thank you.

Operator

(Operator instructions). We’ll go next to Sandra Osborne with KBW.

Sandra Osborne – Keefe, Bruyette & Woods

Good morning guys. Just a couple questions. First, were there any significant interest recoveries or other non-recurring items impacting the net interest margin this quarter?

Charlie Nugent

No, not this quarter. Sandra if you do a comparison, in the fourth quarter we had interest recoveries that would total two basis points and if you go back to the first quarter of 07, we had a significant interest recovery that would have given us an extra 13 basis points back then.

Sandra Osborne – Keefe, Bruyette & Woods

Okay, thanks. And if we could just go back to credit, can you discuss the factors driving the reserve build this quarter and maybe give us an update on what kind of scrubbing you’re doing in the construction portfolio and to what extent you may be concerned about collateral value declines.

Scott Smith

Let’s start with the end, as far as the construction portfolio, we’ve been very carefully analyzing that for several quarters now and have been as I mentioned earlier where we felt there was some issues getting new appraisals and trying to make sure the values that we are counting on are there. So that’s been going on for some time and it continues. What was the first part of your question?

Sandra Osborne – Keefe, Bruyette & Woods

If you could just discuss the factors driving the reserve build.

Scott Smith

Well as Charlie mentioned, I think it’s the slowing economy, it’s across the geography that we cover. I would say more than half of it is real estate related but there are some other as there always are, some other issues out there with some commercial loans were there’s some individual customers have issues. But it’s not, I guess the good news is it’s fairly diverse across the footprint, which means we don’t have an area or a particular portfolio where we have huge problems. The bad news it’s worse than it’s been.

Sandra Osborne – Keefe, Bruyette & Woods

Okay, great, thanks.

Operator

And we’ll go to Gerard Cassidy with RBC Capital Markets.

Gerard Cassidy – RBC Capital Markets

Thank you and good morning guys. On the repurchase requests, when do you think they may expire where you just won’t be receiving those anymore, was there a timeline that you could give us that you might see that end?

Scott Smith

You know Gerard at the beginning of last year they were related to early payment defaults, they’re all behind us because you know we stopped those programs related to those. But we can still have repurchase requests if they think there’s buyer misrepresentation involved, so that could still come in. So you know we did an extensive review at the end of the third quarter and the beginning of the fourth quarter, looked through, spent a lot of money, had some very confident people come in and review all the mortgages generated down there and you know we think we have adequate reserves and we have everything identified but you’re never sure.

Gerard Cassidy – RBC Capital Markets

Sure. Regarding the OREO, when it moves into OREO and I think you mentioned this, about $17 million of those properties in OREO now, what are you finding in terms of how long it takes to sell the properties, what the cost is to sell the properties and then what type of price are you receiving relative to what you’re carrying it at in OREO.

Charlie Nugent

Yeah, it’s tough to sell them over the winter and as Scott mentioned the spring buying season is coming. We sold eight properties during the first quarter and it was basically, those eight properties were sold at carrying values. I don’t know if that’s good or that’s bad, but we did sell eight properties and there were no significant gains or losses on that.

Gerard Cassidy – RBC Capital Markets

And what about the costs associated with selling eight properties, is it just the brokerage commission or is there something on top of that?

Scott Smith

The ORE expenses are up and it’s, we take over the properties, there’s insurance, there’s real estate taxes, they have to be improved a little bit. So it’s having an effect on our ORE expenses. And that just goes back, that goes right through the income statement.

Gerard Cassidy – RBC Capital Markets

Sure. And then finally, I know that sequentially the improvement in the margin was helped of course by the funding costs coming down and it seemed like your short term borrowings and the advanced from the Federal Home Loan Bank really came down quite nicely on a sequential basis vis-à-vis the total interest bearing deposit costs. Also total interest bearing deposits on an average basis looked like they were down sequentially and the other, the borrowings were up. Is that a strategy you’re going to continue with or is that something temporary or can you share some color on the funding side?

Charlie Nugent

Yeah we spread out our advances. And you’re right we had advances mature, especially in February, they were maturing at a 540 rate. And you know the borrowing rate at the Federal Home Loan Bank for comparable, that would be 2.8 or 2 and three-quarters of a percent, so that’s a factor in moving down that cost of funds. And the advances are staggered out, so we have a little maturing each quarter.

Gerard Cassidy – RBC Capital Markets

Would you see the advances and short term borrowings becoming a larger portion of the funding liabilities vis-à-vis the deposits as we move through the year or will deposits regain some growth and overtake the growth on the institutional borrowings?

Charlie Nugent

I hope that you’re going to have relatively good deposit growth and I think we will, we’re more competitive with our CD rates. And if the Fed keeps on decreasing rates, they go below 2%, as Scott mentioned, we’re liable to see a nice build up on our core count on deposits. But we’re doing everything we can to get deposits and hopefully they’ll start coming in again. But if we go out and we have to fund our loan growth with borrowings, the borrowing costs seem to be so cheap that it wouldn’t affect our margin in the short run.

Gerard Cassidy – RBC Capital Markets

Thank you.

Operator

And there are no other questions at this time, at this point I’ll turn the conference back over to Scott Smith for any additional or closing comments.

Scott Smith

Thank you. I’d like to thank you all for joining us today on our conference call, we hope you’ll be able to be with us again for our second quarter earnings call which is scheduled for July 23rd at 10:00 am. We’ll talk to you then.

Operator

Again this does conclude today’s conference, you may disconnect at any time.

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Source: Fulton Financial Corporation Q1 2008 Earnings Call Transcript
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