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Fulton Financial Corporation (NASDAQ:FULT)

Q2 2008 Earnings Call

July 23, 2008 10 am

Executives

Laura Wakeley − VP, Corporate Communications Manager

Scott Smith − Chairman, CEO, President

Charles Nugent − Senior EVP, CFO

Analysts

Richard Weiss − Janney Montgomery Scott

Collyn Gilbert − Stifel Nicolaus & Co.

Frank Schiraldi − Sandler O'Neill & Partners

Andy Stapp − B. Riley and Co.

Sandra Osborne − Keefe, Bruyette, & Woods

David Darst − FTN Midwest Securities

Operator

Good day and welcome everyone to the Fulton Financial second quarter 2008 earnings results conference call. (Operator Instructions) We are going to start today. I'm pleased to turn the floor over to the Vice President and Corporate Communications Manager, Ms. Laura Wakeley. Please go ahead.

Laura Wakeley

Thank you.

Good morning and thank you for joining us for Fulton Financial Corporation’s conference call and web cast to discuss our earnings for the second quarter of 2008. Your host for today’s conference call is Scott Smith, Chairman, CEO 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 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 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 or adverse changes in economic, political or regulatory conditions and continuation or worsening of the 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 would like to turn the call over to your host, Scott Smith.

Scott Smith

Thank you, Laura. Good morning everyone and thanks for joining us here today. After I provide a brief overview for the quarter, Charlie Nugent will discuss our financial results in detail.

Despite good results from the core banking operations that I will discuss in a moment, overall second quarter earnings were negatively impacted by three significant events: one that had positive effect on earnings and two that did not. In addition, credit quality continues to be a challenge and will likely remain so until we see stabilization in the real estate market as well as in the general economic activity.

Recent interpretations of guidelines for other than temporarily impaired assets were received late last week. Management believes that prudent implementation of these guidelines required a $25 million on cash write down of other than temporarily impaired bank stock holdings.

The other two events reported separately and filed a case (ph 00:04:25) earlier in the quarter the sale of our credit card portfolio along with the potential transfer of illiquid auction rate certificates into the investment portfolio were virtually offsetting. As a result, we reported the diluted net earnings per share of $0.15 for the quarter, which pointed out, however, that if we exclude the noise of the events by reference, we would have reported earnings per share of $0.24 due to the strength of our core banking operations. We are hopeful that we can recruit all or part of the bank stocks portfolio write down when financial − when the financial sector shows sustained upward (inaudible 00:05:02).

In related news released, our strong capital position enabled the board to maintain our quarterly cash dividends of $0.15 payable on October. We're pleased to − with the positive trends we saw on a number of core banking activities: net interest income, net interest margin, non-interest income, and non-interest expense. During difficult times, it is even more critical that we execute the banking fundamentals as well and I believe we are doing that.

I would like to comment briefly on these core areas. Total loans grew for the quarter contributing to growth in our net interest income. During our first quarter call, I said that our loan pipeline was holding steady but it was not robust. That remains the case. A bright spot in this quarter was a growth in our consumer loan portfolio as a result of continued strong customer response to our auction loan home equity loan products. Home equity loans grew 9% year over year and in the environment where we are staying continued pressure on loan quality metrics even our credit is holding up well.

Our net interest margin expanded from the first to second quarter of last year. At this time, we thought that interest margins could continue to decrease throughout 2008. Up through a combination of steady loan growth in conjunction with reasonable deposit pricing, we saw our margin expand this quarter. I do not want imply that we see further margin expansion in 2008 particularly in light of recent competitive deposit pricing.

Funding remains a continued challenge. We did see a slight shift in the mixed toward core accounts from the first and second quarters. In an effort to sustain this trend, we have and will continue to allocate significant sales of marketing resources to increasing our customer funding levels while at the same time striving to build deeper and more profitable customer relationships. But the fierce competition for deposits that I mentioned, we are carefully managing the balance between our ongoing need for funding and our desire to maintain a relatively strong net interest margin. Organic growth has been and continues to be a top priority for us.

I am (ph 00:07:10) pleased to see some key revenues and cost cutting initiatives started back in 2006 and 2007 producing meaningful results in 2008. Non-interest income growth was strong with solid contributions coming from the non-interest income growth was strong with solid contributions coming from deposit account related revenue, credit card merchant activity and interchange fees. This trend should continue for the remainder of the year. Expenses were well controlled and we continue to see positive financial results from our workforce management initiative in addition to our departmental − centralization and product standardization work.

With regard to asset quality and credit cost, we experienced significant increases in linked quarter and non-performing loans and charge offs and in the provision. Continue to work closely with our customers who are the facing the challenges of a very economic climate and keeping a watchful eye on all our loan portfolios, monitoring changes very carefully, and sticking remedial steps as soon as we see a problem developing. At the same time, we are monitoring our reserve levels to allow for potential losses. We continue to underwrite new loans in our traditional conservative credit standards. Until this economic environment improves, some of our customers, particularly real state related businesses, will continue to struggle, some more than others, depending on their individual situation and our asset quality will continue to reflect that stress. Though we get meaningful economic upturn we would not expect our loan metrics to improve. As we speak, we have new evidence that the economic conditions in our market are improving. Only time will tell what's in store going forward. Regardless of the time frame required for an upswing in this economic activity, we will remain focused on the execution of our key strategies as we strive to position our company strongly for the future. At this time, Charlie will provide details on our financial performance for the quarter and then we will both be pleased to respond to your questions. Charlie?

Charles Nugent

Okay. Thank you Scott and good morning everyone. Unless otherwise noted, comparisons on this quarter are resolved in the first quarter. As Scott mentioned, we reported earnings per share of $0.15 for the second quarter which was $0.09 or 38% lower than the first quarter and $0.08 or 35% below the second quarter of last year. During the second quarter, we reported a $27.7-million non-cash charge related to our bank stock holdings that were determined to be other than temporarily impaired. On the net of tax basis, this write down was $16 million or $0.09 per share. Excluding the impact of the charge our earnings per share were $0.24. This write off reflects the continued weakness of the banking sector as stricter interpretations of existing accounting guidance recently provided by our independent accountants. This area is highly judgmental. In the past, there has been limited objective guidance on how impairment should be assessed. In the adjusted cost basis, the bank stock portfolio is now $62 million with a market value as June 30 of $53 million.

Two other notable non-recurring transactions occurred during the second quarter. First in April, we sold our $87-million credit card portfolio resulting on a pre-tax gain of $13.9 million. In connection with the sales, we also entered into a joint marketing agreement with the purchaser under which we will earn a percentage of revenues generated in the future. The net result was a reduction in our consumer credit risk while preserving a future revenue stream.

The second transaction was offering − or offering a support to our customers to hold a liquid Ocean Right Certificates or ORCs in their trust accounts and they were with our trust subsidiary and financial advisers. I agree in the purchase of these securities from their accounts. We were required to record the estimated fair value of this guarantee which resulted in a pre-tax charge at two earnings of $13.2 million. Through the end of the second quarter, we had purchased ORCs with par value of $132.5 million from customers at a total cost of $113.7 million. These ORCs are included in our investment portfolio at their estimated fair value of $125 million. ORCs with a par value of $200 million are still held in customer accounts and could be purchased in the future.

Net interesting come increased $6 million or 4.8%. Total average earning assets were essentially unchanged but the mix changed as average loans grew $128 million or 1.1% and investment security has declined $125 million or 4%. Our net interest margin for the second quarter was 3.75%, a 17-basis point improvement from the first quarter.

Our yields on earning assets decreased 38 basis points, while the cost of interest bearing liabilities decreased 53 basis points.

Going forward, we expect that strong deposit competition will put pressure on our net interest margin. A loan growth occurred in commercial mortgages which grew a $150 or 4.2% with 73 million in Pennsylvania, 38 million in Virginia and $33 million in New Jersey. We have been able to generate the additional volume while maintaining our underwriting standards. Real estate construction loans decreased $38 million with declines of $50 million in Virginia, $11 million in Pennsylvania and $7 million in Maryland. Average commercial loans increased $38 million or 1.1% with the growth primarily in Pennsylvania at $50 million, and Maryland $ million.

Commercial line of credit usage was approximately 41% at June 30 and March 31 as compared to 37% at the end of last June. Consumer loans declined $97 million at 20% mainly as a result of selling our credit card portfolio which accounted for $70 million of the average balance decrease.

Direct and indirect consumer loans also declined $33 million. Home equity loans increased $42 million or 2.7% as a result of our auction line product. This product is primarily generated to our branch network and is generally limited to 85% loan to value ratio.

Residential mortgages increased $34 million of 4% with $21 million of that increase in Pennsylvania and $10 million in Virginia and this growth was realized in both traditional industrial rate and fixed-rate mortgages.

Investment securities decreased a $125 million as interest rates continued to decline into the second quarter of 2008. We repositioned our investment portfolio through the sale of service securities. We reinvested some of these proceeds and applied the remainder to fund our loan growth.

During the 2nd quarter we purchased $93 million of securities, an average yield about 5.25% and sold $383 million and an average yield of 5.09%. The net result of the second quarter activity was a decrease in the average investments outstanding and improved interest rate sensitivity position and a higher overall portfolio yield.

At June 30, the net unrealized loss from our debt securities was $25 million compared to a net unrealized gain of $22 million at March 31. Approximately $31 million of this $47 million change was in mortgage backed securities and collateralized mortgage obligation market values. And this resulted from treasury rates increasing and this is partially offset by tightening the mortgage spreads.

Additional decrease in the values were seen in the municipal bond portfolio which declined $6.1 million and a trust-preferred and subordinated debt values which decreased $8.7 million due to a decline in the market for a (inaudible 00:15:47) debt.

As you know, Freddie Mac and Fannie Mae have been in the news recently and like others we are following the situation very closely, as of June 30 all of the 1.6 billion in our combined mortgage backed securities and CMO portfolios, they're all Fannie Mae and Freddy Mac guaranteed issues.

In addition, we hold $90 million of callable bonds issued by the agencies, and these available for sale securities are carried at fair value with unrealized losses or gains, recognizes a component of shareholders equity.

The corporation realized net losses on security transactions of $21.6 million, compared to net gains of $1.2 million in the first quarter. The previously discussed $24.7 million charge was offset to some degree by net gains on the sale of debt and equity securities.

In the first quarter we realized $4.8 million in gains, primarily on the sale of Visa and Mastercard stock, and these gains were offset by $3.6 million under the temporary impairment charge on bank stockholdings.

Federal deposits were down $20 million or two-tenths of a percent; however recent initiatives to generate core deposits began to show results as total demand in savings deposits increased $138 million or 2.5%. Savings deposit increased $70 million or 3.3%. Non-interest bearing demand deposits grew $46 million or 2.8% and now accounts increased $22 million or 1.3%. These improvements have occurred in both personal and business accounts. Of the $159-million decline in time deposits, $143 million was in brokered CDs and $40 million was in the jumbo certificate category. These decreases were partially offset by growth in retail time deposits. Total average borrowing increased $40 million or 1%. The short term borrowings decreased 33 million and long term debt increasing $73 million. The provision for loan loss has increased $5.5 million to $16.7 million in the second quarter. Net charge offs to average loans were 33 basis points in the second quarter compared to 15 basis points in the first quarter. The $9.6 million in net charge offs this quarter were primarily in commercial loans at $4.7 million and − residential mortgages $1.7 million, and − residential mortgages $1.7 million and occurred throughout our foot print (ph 00:18:30). There were three charge offs exceeding $1 million, two related to health care equipment that totaled $2.8 million and one related to a builder that totaled $1.2 million.

Non-performing assets to total assets increased to 102 basis points at June 30 compared to 90 basis points on March 31 and 49 basis points last June. Non-performing loans increased $18 million and other real estate increased $1.8 million. At June 30, non-performing loans were spread across most categories with $40 million in commercial, $39 million in commercial mortgages, $37 million in construction, and $25 million in residential mortgages.

Excluding security losses or gains and the gain on the sale of our credit card portfolio, our other income increased $3.5 million or 9.5 %. Overdraft fees increased $950,000 or 12% and these fees are at their seasonal lowest in the first quarter. Cash management fees grew $95,000 or 3% and other deposit service charges were up $305,000 or 10%. Other service charges and fees increased $540,000 or 6%. Debit card fees grew $290,000 or 13% as a result of higher transaction volumes. Foreign currency revenues increased $180,000 or 11% also due to higher transaction volumes. Our foreign currency business consists of exchanging currency for our customers. We do not engage in any transactions for our own account. Gains from mortgage loan sales increased $359,000 or 16%. Residential mortgage loans sold were approximately $163 million in both the second and first quarters.

Rest income decreased $370,000 or 4% and this decline was primarily due to a 15% increase in brokerage fees. The other category increased $1.6 million largely as a result of a $1. 1 million of income earned under the joint marketing agreement with the purchaser of our credit card portfolio. Operating expenses increased $13.1 million or 14% mainly due to the $13.2 million charge related to the ORC situation and this charge is reflected in the operating list of risks and losses line item . Salaries and benefits decreased $914,000 or 2%. Employment taxes were down $650,000 representing the decrease that seasonally occurs between the first and second quarters. Day salaries were up slightly and benefits were essentially unchanged. Occupancy and equipment expense showed a decrease of $336,000 or 2% as a result of seasonally − seasonal decreases in utility expenses. Advertising expenditures increased $614,000 or 21% due to promotional efforts to increase poor deposits and marketing cost associated with the opening of new branches. Our other operating expenses increased $758,000 or 4% and partially due to increased expenses related to other real estate loans.

Our effective tax rate increased from 26% in the first quarter to 32% in the second quarter. In the second quarter we recorded a $1.8 million increase to the tax provision. The problem is really reflect that per − per tax assets associated with certain tax credits. In the first quarter, we reversed $2 million of tax reserves related to the calculation of disallowed interest on tax-free securities and this reversal is based on a favorable outcome in a tax fraud case. So, thank you for your attention and for your continued interest in Fulton Financial Corporation and now we will be glad to answer your questions.

Question-and-Answer Session

Operator

Thank you, gentlemen. (Operator Instructions) And we will take our first question from Ric Weiss at Janney.

Richard Weiss − Janney Montgomery Scott

Hi, I was wondering if you could talk a little a more about − I guess in terms of the charge-offs level at ramped up. Is this something kind of you would expect to see over the second half of 2008?

Scott Smith

Ric, Scott here. It is very difficult to project, as I mentioned in my comments that when I keep hearing from our folks that this is a very individualized situation. In a real estate area its development by development some are selling, some are not. So, it is awfully difficult for us to say well this is − this is a good indicator of the next two quarters. What I will say is, I am not hearing anything anecdotally and I do not have any data from our folks or from published data that would indicate we are at the bottom and that this is over and we are turning upwards and so forth.

I also don’t have any end goal information that says things are going to get a lot worse, so, that is as candid as I can be about it. To me it is very difficult to call, we’re − a lot of things happening in Washington, a lot of things happening in Wallstreet, and there’s just a lot of things could impact this one way or the other and our crystal ball is not in any clearly as you are, quite frankly.

Richard Weiss − Janney Montgomery Scott

Now I guess your (inaudible 00:24:20) have said predictions are always hard especially about the future. Let me ask you this − so, where is the problem coming from Virginia, or Maryland versus Pennsylvannia or is it kind of bigger everywhere?

Scott Smith

Its as Charlie mention that some of those healthcare related charge-offs in the first quarter were Pennsylvania and New Jersey, so the real estate market certainly is tighter in the Baltimore, Washington or the Virginia market or some other places, but at this point they are holding up.

Richard Weiss − Janney Montgomery Scott

Okay, let me switch over to the OTTI charge − anyway − I guess first were only a portion of your bank stock portfolio written down and how many bank stocks you have in that portfolio?

Scott Smith

Ric, there is a − we wrote down 25 million and we have about 65 issues that would total between a position of 500,000 and I think our biggest is about two million.

Richard Weiss − Janney Montgomery Scott

Okay.

Scott Smith

(Inaudible 00:25:27) quite a bit now. The unrealized loss at June 30 at we had cost the 62 million into wrote this down and the market value is 53 million so there is 9 million dollar unrealized loss in there and this morning, the unrealized loss now will be 5.7 million.

Richard Weiss − Janney Montgomery Scott

Okay.

Scott Smith

A little bit of a rally there the last couple of days.

Richard Weiss − Janney Montgomery Scott

Yes, yes. That’s for sure. And also do you hold any trust preferred securities or trust referred pools that may be subject to the OTTI ‘cause we’ve just seen this happening with other banks.

Scott Smith

Yes. We have 96 million in trust preferred, these are straight issues from banks but they are all highly rated. The ones we have, we have Wells Fargo, Bank of America, JP Morgan Chase and the rules right now, sometimes rules change we found out but the rules right now − if you have the intent to hold, the inability to hold these then there is no deterioration in the underlying credit, we would not have to break them down and the only change we had this order was I think that Bank of America was moved out from ‘AA’ to (inaudible 00:26:45) grade. That’s the trust for this (inaudible 00:26:48).We also have pools − pools of $35 million and a very high percentage of those who rated triple A to A3 and then we do analyses on those and we don’t − right now they are not over the temporary impairment. We do a cash flow analysis, you compare where you think the cash flow is going to be now to when you bought them and we are not seeing anything there right now.

Richard Weiss − Janney Montgomery Scott

Alright, so you are not seeing anything sort of potential hit that could impair capital or dividend or anything like that coming?

Scott Smith

Yes, not right now, but as you know all these things are unavailable for sale, all these bonds are unavailable for sale and they are already reflected in our book value and they are already reflected in our capital ratios except for the regulatory capital ratio. Regulatory capital ratio changes in debt are not in there but changes in our bank stock portfolio are.

Richard Weiss − Janney Montgomery Scott

Okay. Alright, good. Thank you very much.

Scott Smith

Thank you, Rick.

Operator

Next we will hear from Collyn Gilbert with Stifel Nicolaus.

Collyn Gilbert − Stifel Nicolaus & Co.

Good morning, guys.

Scott Smith

Hi Collyn.

Charles Nugent

Hi Collyn.

Collyn Gilbert − Stifel Nicolaus & Co.

Just a question on the ARC portfolio and Charlie you had mentioned that there’s 200 million letters still held at customer account that could be repurchased. Under what scenario would you be forced to repurchase those and is there any way we could sort of, or try to assess what the potential mark, would it be on those?

Charles Nugent

Basically the agreement with our customers has been − this is with an account which was in their mind − these were funds to be somewhat liquid. And so what we’ve done is we came this agreement with customers that if they have a legitimate need for liquidity, then we would provide that liquidity since the market sales then wasn’t able to provide that. So, we have − that’s base on our customers need for. And some had immediate need and others as you’ve seen don’t, even though it was a liquid account they did not − they don’t have specific need for it that are immediate. We will manage that with customers that as we look forward.

Collyn Gilbert − Stifel Nicolaus & Co.

Okay. So it’s a kind of hard to assess, I guess, at this point.

Scott Smith

You know, Collyn, what we book in the liability is based on buying or guaranteeing, we will buy that the whole 330 million. So we came up − it’s crucial to let with so we have trouble come up with the market value. We talked to people, we also have valuation expert evaluate what we are to work and what we booked was based on the whole 330 million.

Collyn Gilbert − Stifel Nicolaus & Co.

Okay.

Scott Smith

And then going forward, I would think this would be subject to the other temporary impairment rules again and when we buy them back, we wouldn’t have to take any further adjustments. I am not just changing the credit and all these are act by (inaudible 00:29:45).

Collyn Gilbert − Stifel Nicolaus & Co.

Okay, great. That was it, thanks.

Scott Smith

Thanks, Collyn.

Operator

Our next question will come from Frank Schiraldi at Sandler O'Neill.

Frank Schiraldi − Sandler O’Neill & Partners

Good morning guys.

Scott Smith

Good morning, Frank.

Frank Schiraldi − Sandler O’Neill & Partners

I just have a couple of questions on, first on the traps (ph 00:30:00), Charlie, are those − those are just banks in there?

Charles Nugent

Primarily banks but there’s − I think one or two Frank, and I will get back to you, if it did have an insurance company.

Frank Schiraldi − Sandler O’Neill & Partners

Insurance. Okay.

Charles Nugent

It’s really all banks but it’s a − there are a couple of insurance companies.

Frank Schiraldi − Sandler O’Neill & Partners

And then when you’re talking about the individual issue trust preferred, you’re saying basically that, and correct me if I’m wrong, I just want to make sure I heard it right that, the fair value of these things has been marked down − they’ve been marked to fair value to equity but there’s just no other than temporary impairment.

Charles Nugent

Right, that’s exactly.

Frank Schiraldi − Sandler O’Neill & Partners

Okay.

Charles Nugent

It goes to our regular accounting, equity ratios, that this will go to our regulatory ratios (inaudible 00:30:45).

Frank Schiraldi − Sandler O’Neill & Partners

Okay. And you’ve mentioned guidance coming from your accounts, is that something that came very recently?

Charles Nugent

Very recently. It’s not a new though, other than temporary impairment rules that going to round in 20 years and even very subjective and I think you have to see and try to make it more specific in 2003 or 2004 (inaudible 00:31:08). They were thinking about some specific guidelines in terms of how far they would be down and how long and they revoked that and so it stayed subjective and in recently our independent accounts have come out with more specific guidelines then we use this.

Frank Schiraldi − Sandler O’Neill & Partners

Okay And then I was just wondering if you could remind us, just in terms of non-performing − total non-performing assets including the 9 days plus past due, how much of that is resource, repurchases and what those have been written down to?

Scott Smith

In terms of repurchase request, the repurchase requests outstanding are about the same, at $22 million.

Frank Schiraldi − Sandler O’Neill & Partners

Okay.

Charles Nugent

I think we had two or three come in the total million dollars and then we were three that were transferred, and we actually took possession of the near not performing loans down and the − we sold some properties and we have a loss of 200,000 on the sale of those properties and then during the quarter, we also wrote down $800,000 in the value of the properties based on recent appraisals or based on what we thought the sale price of the house will be.

Frank Schiraldi − Sandler O’Neill & Partners

Okay, so, and those are all in, anything you brought back; you brought back in to non-performing asset?

Charles Nugent

Yes, everything we brought back − if it wasn't −, you know, this 90 days past due within to non-performing and send the process of (inaudible 00:32:48).

Frank Schiraldi − Sandler O’Neill & Partners

Okay, and on the charge-offs, you mentioned there was one bill there that was in the charge-offs, can you tell us where that was, where that builder was located?

Charles Nugent

I think it was in Maryland.

Frank Schiraldi − Sandler O’Neill & Partners

Okay.

Charles Nugent

He was based in Maryland, but he might have some buildings outside of Maryland.

Frank Schiraldi − Sandler O’Neill & Partners

Okay, and finally I was wondering if you can give us a little more color on the home equity program that you're running that's bringing in some pretty good business, is that sales recurring customers and across the footprint?

Scott Smith

Yes. This is Scott. Back in the fall, I think it was re-introduced this home equity product where the customer can − it's a line and if they choose to do so, they can fix the portion of that line, with the interest rate on it. And that's been particularly appealing to folks.

And these are all underwritten by our people in our market and it's basically our customers and it's a − one of us mentioned − we're using fairly conservative underwriting standards to do that. So, we're feeling very comfortable about that portfolio and the growth we're getting out of it, because it's a product that not every competitor has and we feel like it's − makes sense (inaudible 00:34:09) getting these relationships.

Frank Schiraldi − Sandler O’Neill & Partners

Okay, actually one last question, just trying for mailing (ph 00:34:16) purposes, as far as the sale, the credit card portfolio. I’m wondering exactly when it was done, and I'm wondering just so I can sort of figure out for the coming quarters, what sort of fees there will be.

Charles Nugent

Yes. We mentioned in our results that this quarter so far has been 1.1 million (inaudible 00:34:33) it was sold on April − oh, I think it was sold on April 14th or April 15th. They almost had a clean quarter in there.

Frank Schiraldi − Sandler O’Neill & Partners

Okay, great! Thank you.

Charles Nugent

You're welcome.

Scott Smith

Yes, thank you Frank.

Operator

(Operator instructions) We'll hear from Andy Stapp of B. Riley and Co.

Andy Stapp − B. Riley and Co.

Good morning.

Scott Smith

Good morning Andy.

Charles Nugent:

Good morning Andy.

Andy Stapp − B. Riley and Co.

The metal equipment, the two loans related to metal equipment that went bad. Can you give me some more color that you would think the medical industry would be more immune to the recessionary environment?

Charles Nugent

This equipment was equipment that's used for testing, and the reimbursement I guess it's from Medicare, changed significantly earlier in the year and as a result of that it changed the cash flow of a lot of this − of this in particular and so, that they had some difficulties paying. Now, we have to charge them off, but we're not done with it yet.

Andy Stapp − B. Riley and Co.

Okay.

Charles Nugent

This is kind of a unique situation where they kind of got the rug pulled out from under them in terms of their reimbursement, the amount they reimbursed per cap, and as a result of that they got themselves − they didn't have the volume, the net cash flow worth.

Andy Stapp − B. Riley and Co.

And how much were the charge-offs for these two loans?

Charles Nugent

One was $1.7 million, and it was in our central area, it was in Pennsylvania and the other one was up in the Lehigh Valley and that was $1.1 million.

Andy Stapp − B. Riley and Co.

1.1?

Charles Nugent

Yes, and they totaled 2.8.

Andy Stapp − B. Riley and Co.

Okay. Can you refresh my memory on your bank stock portfolios, is it primarily public companies or do you have some small community banks in there?

Charles Nugent

They are primarily in the publicly held companies, it’s almost a hundred percent and − we have a combination but primarily it's a more community banks in the areas we operate in.

Andy Stapp − B. Riley and Co.

Okay. And do you have a feel how much was it from valuation decline just − market driven versus deterioration of fundamentals for these community banks?

Charles Nugent

We go through and you know, I think it's a combination of both, to tell you the truth.

Andy Stapp − B. Riley and Co.

Okay.

Charles Nugent

What we did was we go through when − we did − but it was more subjective basis, we go through and look at their financial condition and if they had cut their dividends or if they had cut their dividend or they had significant quality problems, some other problems we would write them down right away.

And now, we are on the basic guidelines we are using now is basically how much they are under, and for how long? Our portfolios, I think is doing better than if we compare the overall performance to our portfolios in a different index, I think we are doing better than the general market index.

Andy Stapp − B. Riley and Co.

In a primarily Mid-Atlantic based?

Charles Nugent

Yes, includes Virginia and Maryland, yes.

Andy Stapp − B. Riley and Co.

Okay.

Charles Nugent

We do not want to give out the wrong expression, we wondered out a little bit too. We went outside our area − there are some on these (inaudible 00:38:22) banks in there and is a high regard for them.

Andy Stapp − B. Riley and Co.

Okay.

Charles Nugent

We have a couple − we have one big bank, we have Wells Fargo in there.

Andy Stapp − B. Riley and Co.

Okay. The OTTI guidelines you mentioned, these were provided by your outside auditor and not − this was not an AICPA pronouncement, correct?

Charles Nugent \

Still, the way we look at it − if you look at the accounting guidance it is all subjective and −

Andy Stapp − B. Riley and Co.

Okay.

Charles Nugent

Same with the SCP comments and there is (inaudible 00:39:00) we don't see anything − like a brake light test but − our accountants, and they are saying all the big four firms are going to be doing this or coming up with a more specific structure guidelines that we have been using.

Andy Stapp − B. Riley and Co.

Okay. Can you estimate the effective tax rate today for a second half of the year?

Charles Nugent

Usually it is 29% to 30%. It is only an unusual adjustment and we are going both ways.

Andy Stapp − B. Riley and Co.

Yes. Alright. Thank you.

Charles Nugent

Hey Andy. Can I just say something on this valuation of the bank’s stock portfolio?

Andy Stapp − B. Riley and Co.

Sure.

Charles Nugent

It was subjective in the past but it was in accordance with the guidelines and everybody is in agreement. And now there is a more specific guidelines that just been − and as for years and we agreed with them in that, we put the base on that.

Andy Stapp − B. Riley and Co.

Yes, understood.

Operator

Our next question today will come from Sandy Osborne − KBW.

Sandra Osborne − Keefe, Bruyette, & Woods

Good morning, guys.

Charles Nugent

Good morning, Sandy.

Sandra Osborne − Keefe, Bruyette, & Woods

Firstly, can you please speak to the large increase and other assets? Can you say increase of about like more than doubled since last year? Can you tell us what is in there?

Charles Nugent

It is primarily debt security sales that haven’t settled yet.

Sandra Osborne − Keefe, Bruyette, & Woods

Okay.

Charles Nugent

Will it be all that. I think it's all that. It’s great.

Sandra Osborne − Keefe, Bruyette, & Woods

Okay, back to resource. Do you kind of think that you are over the bubble with respect to resource, repurchase request? Would there be anything in decline?

Scott Smith

As Charlie mentioned earlier, we continue to have activity there. We still believe that the reserves that we put aside last year are adequate for that process. It is not over yet and it will be some time that it will work through all of this as we age (inaudible 00:41:12) but we are still comfortable with the reserves we have set aside last year are adequate.

Sandra Osborne − Keefe, Bruyette, & Woods

Okay, so you would anticipate further requests, you just think they are covered for them.

Scott Smith

Yes, these come in monthly.

Sandra Osborne − Keefe, Bruyette, & Woods

Okay.

Charles Nugent

Sandy in the quarter, we had three additional repurchase request that they totaled $1 million. It is slowing down from what is said in the past but its kind hard to gauge what is going happen in the future. I will be surprised if it gets any − get more than what we are getting right now.

Sandra Osborne − Keefe, Bruyette, & Woods

Okay. And on the provision? How much of that increase was driven by construction? And can you just speak of the trends we're seeing in this portfolio?

Charles Nugent

I do not know that we can answer how much was driven by construction and if the − done on a customer by custom basis. We aggregated that way and some of will be coming up with a number.

Anyway, let me talk about the trend continue to be as I mentioned earlier. Individualized in market and in some of the market were we have the most concern, there is some developments doing fine. We are also hearing that if there stronger sector of it, it is the low end and the assumption is that it is first time home buyers and they don't have to sell a house so − and they see some bargains, so they're − they're ready to − to buy and they don't have the problem of liquidating the house they're in. So, there are still things to be − there is more strength in − in that − in the market than the others but having said that, there is some high end stuff moving in certain markets and − and (inaudible 00:43:02) and we're also getting some calls from national companies starting to talk about do you have any land for sale? Now we're not ready to − (inaudible 00:43:14) to pay the price but we are interested in selling (inaudible 00:43:16). There seems to be some movement from some of the larger players to − to begin to accumulate some land again, at least interested in talking about it.

Sandra Osborne − Keefe, Bruyette, & Woods

Okay.

Charles Nugent

Anyone saying they want to be − we − in fact, I don't think it's been − (inaudible 00:43:32) by construction and equal commercial loans, commercial mortgages and some construction. The important thing is we, I think, and you'll see in our (inaudible 00:43:43) with this. We increased our unallocated through the general overall business condition from 8% to 12%.

Sandra Osborne − Keefe, Bruyette, & Woods

Okay.

Charles Nugent

We're moving up the unallocated where we haven't specifically seen anything relate to − by just increasing our overall unallocated reserves because of what we're thinking just for the general business condition.

Sandra Osborne − Keefe, Bruyette, & Woods

Okay. That's all (inaudible 00:44:08). And finally, can you discuss what your essence (ph 00:44:10) are for regulatory capital ratio is at the end of the quarter?

Charles Nugent

No, the − it's − no, the regulatory standing is hard to judge because we have weigh the assets.

Sandra Osborne − Keefe, Bruyette, & Woods

Great.

Charles Nugent

But it is kinda hard to judge. I − I, you know the Tier 1 I would think will be had at about 920.

Sandra Osborne − Keefe, Bruyette, & Woods

Okay.

Charles Nugent

And our total risk base would be 11.8.

Sandra Osborne − Keefe, Bruyette, & Woods

Alright.

Charles Nugent

The leverage ratio should be about 7.3.

Sandra Osborne − Keefe, Bruyette, & Woods

I'm sorry. What was that?

Charles Nugent

7.3

Sandra Osborne − Keefe, Bruyette, & Woods

Okay. Okay. That is all I have. Thanks guys.

Charles Nugent

Welcome.

Operator

David Darst at FTN Midwest, your line is open.

David Darst − FTN Midwest Securities

Great, good morning.

Charles Nugent

Good morning, David.

David Darst − FTN Midwest Securities

(Inaudible 00:44:54) about asking (inaudible 00:44:55) questions just let me know if they're from the transcript, but the increase in the other income, is that the present part income that's been revived (ph 00:45:07)?

Charles Nugent

Yes, that's in there and I − I think we've really been doing well on the other income categories. (Inaudible 00:45:14) except − quarter to quarter except investment trustees.

David Darst − FTN Midwest Securities

Okay, and then − then the non-performing loans, could give the balance (ph 00:45:25) of construction for residential constructions?

Charles Nugent

Yes, the non performing construction loans in there are of the total non-performing − non-performing loans were about a 146 million. Construction is 37 million.

David Darst − FTN Midwest Securities

Okay. And then, within your Oreo. I guess − how do you feel about the way or the movement of properties in the second quarter and pretty more optimistic that you could get things moving this quarter and maybe will we see a decline in net balance in the third quarter?

Charles Nugent

(Inaudible 00:46:06) we're never happy with the − with the movement of other real estate loans as I have mentioned, I think in the first quarter call, we would know a lot more about the housing market by June 30 and what we know is that it has improved a lot. So, I − I am not optimistic that we're gonna move those any quicker than we have, but you know, we're − we're working hard at it and we'll see what happens. But again, as I said earlier, I am seeing − I'm not hearing from our folks (inaudible 00:46:39) that there's a lot of new demands although −

David Darst − FTN Midwest Securities

What about within your non-performing loans. Is there a high percentage of that that you think you can recall in the next three to six months?

Charles Nugent

No, I mean is, it − it's typically that we − we would and again as I said about the overall metrics, I am not here to tell you that those things are going to improve a lot because I am sure are going to see some more going in there.

David Darst − FTN Midwest Securities

Okay.

Charles Nugent

It's just − it's − it's so cloudy it's very hard to tell. I would love to be optimistic and tell you things that earned (ph 00:47:19) but they haven't. That's quite true (ph 00:47:22).

David Darst − FTN Midwest Securities

Okay. Then − pretty comfortable if with the reserve level today or do you think it will continue to increase and you'll need to build it as (inaudible 00:47:31) continue to rise.

Charles Nugent

While, we are comfortable − what we know now, where we are now, so I think we are where we need to be as the quarter unfolds we'll see how that all materialize, maybe we’ll get lucky and we‘ll get some pay offs we didn’t expect or all those things that going to happen but there isn’t anything in the information available to us that would indicate indicates that its going to get a lot better in any time soon.

David Darst − FTN Midwest Securities

Okay. Have you given any indication of what you think your charge offs supervision might be for the rest of the year?

Charles Nugent

No, we have not.

David Darst − FTN Midwest Securities

Okay, thanks.

Charles Nugent

Okay.

Operator

At this point, we have no further question in the queue, gentlemen I’ll turn it back to you for any additional or closing remarks.

Scott Smith

I‘d like to end this call by thanking everyone for joining us today, we hope you will be able to be with us again for our third quarter earnings conference call which is scheduled for October 22 at 10:00 am. Thanks again.

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Source: Fulton Financial Corporation Q2 2008 Earnings Call Transcript
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