Fulton Financial's CEO Discusses Q1 2011 Results - Earnings Call Transcript

Transcripts

Fulton Financial (NASDAQ:FULT) Q1 2011 Earnings Call April 20, 2011 10:00 AM ET

Executives

R. Smith - Chairman, Chief Executive Officer, Member of Executive Committee and Ex-officio Member of Risk Management Committee
Charles Nugent - Chief Financial Officer and Senior Executive Vice President
E. Wenger - President, Chief Operating Officer, Director, Member of Executive Committee and Ex-officio Member of Risk Management Committee
Laura Wakeley - Media Contact

Analysts

Eric Beardsley - Barclays Capital
Craig Siegenthaler - Crédit Suisse AG
Collyn Gilbert - Stifel, Nicolaus & Co., Inc.
Frank Schiraldi - Sandler O'Neill + Partners, L.P.
Richard Weiss - Janney Montgomery Scott LLC
Mike Shafir - Sterne Agee & Leach Inc.
Matthew Clark - Keefe, Bruyette, & Woods, Inc.
Bob Ramsey - FBR Capital Markets & Co.
David Darst - Guggenheim Securities, LLC
Mac Hodgson - SunTrust Robinson Humphrey, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Fulton Financial First Quarter Earnings Conference Call. [Operator Instructions] I would now like to introduce your host for today's conference, Laura Wakeley, Senior Vice President.

Laura Wakeley

Great. Thank you, and good morning. Thank you for joining us for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the first quarter of 2011. Your host for today's conference call is Scott Smith, Chairman and Chief Executive Officer of Fulton Financial Corporation. Joining him are Phil Wenger, President and Chief Operating Officer; and 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've released at 4:30 yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations and then on News.

On this call, representatives of Fulton may make forward-looking statements with respect to Fulton's financial condition, results of operations and business. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond Fulton's control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Fulton undertakes no obligation other than required by law to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

In our earnings release, we've included our Safe Harbor statement on forward-looking statements. And we refer to you to the statement in the earnings release, and that statement is now incorporated into this presentation. For a more complete discussion of certain risks and uncertainties affecting Fulton, please see the section entitled Risk Factors and Management Discussion and Analysis of financial condition and results of operations set forth in Fulton's filings with the Securities and Exchange Commission.

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

R. Smith

Thanks, Laura, and good morning. It's nice to have you with us today. As has been our practice in the past, after Phil, Charlie and I conclude our prepared remarks, we will be happy to respond to your individual questions.

We're up to a good start. In 2011, we reported diluted net income per share of $0.17 for the first quarter, a 6.3% increase over the $0.16 we recorded in the fourth quarter of 2010. As you know, our performance over the last several years has been impacted by our asset quality challenges. During this period, we focused on positioning the company for the future, realizing that these headwinds would eventually subside as the economy improves.

This quarter, our credit challenges are certainly not behind us, but we were encouraged to see the reductions in four key metrics: Nonperforming loans, charge-offs, overall delinquency and in the provision. If the economy continues to expand at a reasonable pace, we believe we will continue to see reductions in our overall credit costs. We were also pleased to see the gross on an average basis in the CNI and Commercial Real Estate portfolios although those increases were offset by decreases in our Construction and Consumer portfolios, making overall loan growth difficult. Phil will provide you with details in credit in a few minutes.

Our solid performance this quarter reflects the basics of low core cost funding, improved interest margin, good expense control and improved operating efficiency. It is important to note that our $0.17 was achieved despite a significant link quarter reduction in residential mortgage activity and a generally unfriendly regulatory environment that seems intent on reducing our non-interest income, while simultaneously laying on an ever-increasing compliance cost.

The people in this company have always responded effectively to past challenges and I know they will do so in the future. As a team, we believe we can continue to improve our earnings performance as we get some help from the economy and as the overall confidence levels improve. However, since confidence levels have a tendency to fluctuate based on national and world events, we will be ready for any eventuality.

From a funding standpoint, our continued core deposit growth and strong liquidity enabled us to reduce our reliance on wholesale funding. We worked to achieve an optimal deposit mix that deemphasizes higher cost time deposits and that rewards customers as they expand their core banking relationship with us. These initiatives enabled us to expand our net interest margin this quarter, and we feel we can further reduce funding costs through certificate of deposit repricing in this rate of environment, but not at a pace we've seen over the last several quarters.

A segment on which we recently focused our marketing and promotional efforts has been small business. We do not disclose actual commercial growth numbers for competitive reasons. However, last month's was one of the best months we've seen for small business account growth in several years.

Today, we are offering a special small business line of credit in an attractive rate to help us increase our loan growth.

Our non-interest income is up in total year-over-year but down link quarter due to several factors: The normal seasonal trend we see in overdraft revenue and the line item most significantly impacted in this category was our mortgage sale gains.

After a strong fourth quarter last year, residential mortgage activity and related sale gains declined sharply. We expect that pending regulations to put additional pressure on non-interest income and we have developed responses to help offset that revenue impact of these regulations through deposit account-related fees in increases and reductions in account-related expenses.

Our investment management and trust services division, Fulton Financial Advisors, produced strong results this quarter due to an ongoing emphasis on reoccurring revenue and increased sales and client retention in our wealth management and retirement services area.

We expect total other expenses to drop -- We expected total other expenses to drop significantly linked quarter and they did. As you may recall, marketing expenses were up last quarter due to a number of opportunities we saw in the marketplace.

This quarter, we returned to more normal levels. Expense management has been and remains a top priority for the corporation.

Knowing how important dividends are to our shareholders, we were pleased to increase our quarterly dividend from $0.03 to $0.04, while we realized it's a modest increase in line of our past dividend payment history, it reflects our progress and our confidence in the future. The board is keenly aware of the role dividends play in investor decisions and we will be monitoring our progress closely for additional increases as opportunities in our financial performance enables us to do so.

In closing, even though we're very liquid and have never stopped lending to credit-worthy households and businesses, we need to get more traction under our loan growth. There are continued signs of an improving economy in many of our markets and we are hopeful that our focus on customer service and our gains in market share will all result in loan growth to the second half of the year. While we operate in a slow-growth environment, we will continue to carefully control our funding costs and expenses, while continuing to work diligently to further reduce our credit costs and the growth in our balance sheet with quality assets.

Thanks for your attention, and Phil Wenger will now review details on credit and talk more specifically about business conditions in our market. Phil?

E. Wenger

Thank you, Scott. As Scott indicated, we are continuing to see improvement in our asset quality. We had reductions in our key metrics of overall delinquency, charge-offs and nonperforming assets. As a result, we reduced our loan loss provision by $2 million to $38 million for the quarter.

Now, let me give you some specifics. My comments will be linked quarter, unless I indicate otherwise. First with regard to delinquency, as you saw on the chart on Page 4 of the press release, we had a 4 basis point or $6 million decline in overall delinquency. While 30-day delinquencies increased 11 basis points or $13 million, 60-day delinquencies declined 7 basis points or $8 million, and 90-day and over delinquencies declined 9 basis points or $11 million.

Total delinquency increases of $4 million in commercial loans and $8 million in commercial real estate were more than offset by reductions of $1 million in residential, $2 million in consumer, and $50 million in construction. Once again, this quarter, our total delinquency is the lowest it has been since December 2009.

Nonperforming loans also declined. Nonperforming loans decreased $11 million or 3% to $318 million from $329 million. The decline occurred in all loan types with the exception of commercial real estate, which increased modestly by $4 million. This increase was centered in our New Jersey portfolio and was comprised of 2 hospitality-related investment real estate loans. Construction nonperforming loans declined the most with a $12 million reduction.

We saw the pace of resolutions nonperforming loans improved this quarter. Last quarter, we resolved $7 million in loans over $1 million via sale and disposition of projects. This quarter, that pace increased to $16 million reflecting improved investor interest in projects we have marketed. Also recoveries increased from $1.7 million to $3.2 million. Quarter-over-quarter also reflecting improved activity and interest. While we had an increase in other real estate for the quarter of $4 million, this was not unexpected as we are moving through the cycle of taking possession of and disposing profits.

Net charge-offs were $42 million or 1.42% of average loans on an annualized basis. A decrease of $7 million from last quarter. A decline in net charge-offs for commercial mortgages of $9 million drove the reduction with other loan categories reflecting only minor changes from last quarter to this quarter.

Construction loan charge-offs represented the largest portion of the total at $13 million, even with last quarter and a significant decline from $23 million in the third quarter of 2010.

Commercial loan net charge-offs were $13 million, even with last quarter. There were 5 accounts representing charge-offs greater than $1.5 million but totaled $13 million. Of these, the largest was a construction-related business in the state of New Jersey. The remainder were real estate-related projects.

We continued to reduce construction exposure with ending balances in our Construction portfolio declining by $53 million this quarter. In December 2006 our Construction portfolio was $1.44 billion. We ended the quarter with a balance of $748 million. While we continued to support solid residential builders in performing projects, we would anticipate that this portfolio will continue to shrink until we reach a healthy equilibrium in the housing markets within our footprint.

Troubled debt restructuring totals increased to $137 million from $119 million. Of this total, $81 million or 59% are accruing loans versus $68 million or 57% last quarter.

Shifting to loan demand, we are seeing slight increase line usage among our commercial borrowers with the usage level of 44% this quarter versus 43% last quarter. We saw increases in average balances of $24 in our Commercial Loan portfolio and $20 million in our Commercial Mortgage portfolio. Average loans in the state of Pennsylvania increased to over $36 million, as we continue to have good success in areas where market share opportunities exist.

In terms of general market conditions, business sentiment and confidence are improving in Pennsylvania or showing signs of improvement in Maryland and Virginia. Conditions remain more challenged in New Jersey and Delaware.

With regards to mortgage activity, the pipeline is up slightly from last quarter at $161 million versus $154 million. This quarter, we continue to see a shift from refi [refinance] to purchase activity and the current pipeline is split 61% purchase, 39% refinance.

So in summary, while the pace of improvement is moderate. We are pleased that the metrics are moving in the right direction.

Now, I will turn the discussion over to Charlie Nugent for his comments. Charlie?

Charles Nugent

Thank you, Phil, and good morning, everyone. Unless otherwise noted, comparisons are of this quarter's results to the fourth quarter of 2010. As Scott mentioned, we reported net income of $0.17 per share from the first quarter, up 6% from the fourth quarter.

Net income was $33.8 million in the first quarter as compared to $31.5 million for the fourth quarter, a $2.3 million or 7% increase. The improvement in our net income resulted mainly from declines in the loan loss provision and in operating expenses, offset by reductions in other income and net interest income.

Pre-provision pretax earnings increased $1.6 million or 2% from $82.6 million to $84.2 million in the first quarter. Our net interest income decreased by $1.3 million or just under 1%, mainly due to the fewer number of days in the quarter. A slight decline in average earning assets was offset by an improvement in our net interest margin. Our net interest margin improved from the 3.85% in the fourth quarter to 3.91% in the first quarter.

Our total cost of interest-bearing liabilities decreased to 1.24% from 1.35% in the fourth quarter. The cost of interest-bearing deposits declined to 0.93% in the first quarter from 1.04% in the fourth quarter, with decreases in all categories.

During the first quarter, $945 million of time deposits matured at a weighted average rate of 1.31%, while $800 million of certificates of deposit were issued at a rate of 0.71%. In the second quarter of 2011, $856 million of time deposits are scheduled to mature at a rate of 1.46%.

Federal Home Loan Bank advances totaling $84 million matured in the first quarter at a weighted average rate of 3.44%, with only $10 million scheduled to mature in the second quarter at a rate of 4.92%.

Yields on average earning assets decreased slightly to 4.90% in the first quarter compared to 4.93% in the fourth quarter. Average interest-earning assets declined $128 million primarily in short-term investments. Average investments increased $66 million, while ending balances decreased $164 million. During the first quarter, sales maturities and investment securities exceeded purchases. We continuously monitor our portfolio and current investment alternatives in making purchase or sale decisions.

Average loans declined $23 million as decreases in construction and consumer loans were partially offset by increases in commercial loans, commercial mortgages and residential mortgages. Average deposits decreased $204 million with a $228 million or 4.8% decrease in time deposits, being partially offset by $24 million increase in demand and savings accounts.

Non-interest-bearing demand deposits increased $19 million or 1% almost entirely in personal accounts. Interest-bearing demand deposits increased $60 million or 3% in both business and personal accounts. Savings deposits decreased $55 million or 2% with the decline seen in both business and municipal accounts.

Our other income for the first quarter declined $4.7 million or 9.6%, excluding the impact of security gains. The reduction in other income was driven mainly by mortgage banking income, which decreased $3.4 million or 38%. We saw volumes fall off about 40% from the fourth quarter, as increasing mortgage rates resulted in a greatly reduced refinancing activity.

In addition, spreads decreased to 1.39% in the first quarter as compared to 1.69% in the fourth quarter. Service charges on deposits decreased $786,000 or 5.6% due mainly to overdrafts, which are typically lower in the first quarter.

Our service charges and fees were down $367,000 or 3% due to slight declines in merchant fees,[ph] credit fees and foreign currencies fees. Investment management and trust services income improved $378,000 or 4%, as a result of the growth in trust commissions and brokerage revenues. This is due to both slightly improved market conditions and the results of our focus on increasing our recurring revenues in the brokerage business.

Net security gains were $2.3 million in the first quarter compared to $194,000 in the fourth quarter. Other than temporary impairment charges of $1 million on pooled trust preferred securities, and $300,000 on bank stocks were more than offset by realized gains on sales of debt and equity securities. Our investment in pooled trust preferred securities had a cost basis of $34 million and a carrying value of $7.2 million at the end of the first quarter.

Operating expenses decreased by $5.5 million or 5% in comparison to the fourth quarter. Most significant reductions were in marketing, other real estate and the other expense categories.

Marketing was down $1.6 million as fourth quarter spending was elevated. We believe the first quarter level is more reflective of where we will remain for to rest of the year. Other real estate expense included lower valuation provisions, losses on sales and general expenses in the fourth quarter. This is a category that will likely display significant variances from quarter-to-quarter. The other expense line was down $2.7 million or 15%. There are nonrecurring items in each period and if you factor those out, this line item would be relatively flat at $17.5 million.

Okay. Thank you, and now, we would be glad to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Bob Ramsey with FBR Capital Markets.

Bob Ramsey - FBR Capital Markets & Co.

Hey, first question, Charlie, I know you were talking about expenses. You said that order line item was down $2.7 million but would've been flat without the nonrecurring items. Just sort of how are you guys thinking about expenses going forward? I guess, do you see that other line or an aggregate?

R. Smith

Bob, we've been tightly controlling expenses as long as we've been experiencing the recession, and our expenses were extremely low in the quarter. Total expenses were $101 million, and that we think our normal run rate for us will be slightly higher than $103 million to $104 million. We think as we look forward, we're going to continue to tightly control expenses. But the first quarter expenses are extremely low. Should...

Bob Ramsey - FBR Capital Markets & Co.

Okay. Great. And I noticed too this quarter, you guys, the TCE ratio continue to tick higher. I think last quarter you all said that in the current environment you'd like to be above 8.5%, and you certainly are there. How much of that is, I guess, related to the securities that, as you all mentioned in the release that you all did have more securities paid down in sales this quarter than your purchases, what is the kind of the plan on that front? Are you intentionally shrinking that portfolio or is it timing? And now with capital levels growing, what are your thoughts on the capital front?

Charles Nugent

The capital, the TCE, we estimate the first quarter TCE based on what we think weighted average assets are and we won't know exactly till we did the core reports. Well you're right, our TCE went up 27 basis points. So and hopefully, that will continue to increase. Investment portfolio, we're keeping relatively even. It's down quite a bit from this time last year. We're very apprehensive about investment long at this point, given where the rates are.

Bob Ramsey - FBR Capital Markets & Co.

Okay. And then maybe very last question and then I'll hop back out. But you all said that you're optimistic about loan growth in the back half of this year, which is great. Is that really a reflection of maybe some stabilization in Construction portfolio? Or you've run down a lot of what needs to be run down? Or is it more reflective of some of the improving demand in other places in the book?

E. Wenger

Bob, I think it's a combination. This is Phil. I think it's a combination of both. We do expect the construction runoff to start slowing, although that certainly did not happen in the first quarter. We're starting to see some demand in Pennsylvania. And so I think there are some opportunities moving forward. We actually besides construction, our consumer has been a challenge for us also. We ran a consumer promotion in the first quarter on our lines of credits, and we actually booked lines on the consumer side at a rate that's about 33% greater than what we've normally would. So we've booked a lot of lines. It's just the consumer is not borrowing yet but -- so when they do start borrowing, I think we've put some nice business in place and we'll be able to take advantage of that.

Bob Ramsey - FBR Capital Markets & Co.

Great. Thank you, guys.

Operator

Our next question comes from the line of Frank Schiraldi with Sandler O'Neill.

Frank Schiraldi - Sandler O'Neill + Partners, L.P.

Just a couple of questions, first point on credit, sounds like you're a bit more positive on credit and certainly showing signs of stabilization in the quarter. So this is the second quarter in a row we've seen the net charge-offs exceed the provisioning. And I'm wondering if that -- is that all it's -- in our modeling we should sort of assume that going forward? And is it going to be similar -- would you think similar level is just taking away at that reserve or maybe accelerate that?

R. Smith

Well, Frank, if we did our job right, we reserve for losses, which we're now absorbing. And if the economy continues to improve, then my expectation is that we will be eating into those reserves as we go forward because we'll be liquidating and disposing of problem credits that we reserved for. But on the front end, there won't be as much coming in that we can -- our reserves for future losses will be at a reduced level. So that's the way the cycle works. Hopefully, it continues because the economy provides us the opportunity to do that.

Frank Schiraldi - Sandler O'Neill + Partners, L.P.

Okay, fair enough. And I just missed the number, Charlie, on the CDs that repriced. I got the interest rate but the CDs a little of CDs that repriced in the first quarter, if you could just repeat that.

Charles Nugent

Yes. Frank, in the first quarter, it was $945 million.

R. Smith

Matured then repriced.

Frank Schiraldi - Sandler O'Neill + Partners, L.P.

And the FHLB, I know there's not much in the second quarter. The stuff in the first quarter that came off and then you put back on borrowings...

Charles Nugent

I'm sorry, Frank. We didn't put the -- the advances, when they matured, we paid them off.

Frank Schiraldi - Sandler O'Neill + Partners, L.P.

I mean, do you think looking forward, the margin here in the second quarter given the amount of CDs that were rolling off, in 2Q and look like they're going to be coming off actually at a higher average yield. Would you expect with all else being equal we could see sort of similar margin expansion in 2Q that we saw in the first quarter?

Charles Nugent

We're going to see margin expansion. How much? I don't know. A lot of it is going to depend on what our earning asset yields do and they really have been holding in there. They even went down by 3 basis points at the same time we're reducing cost of funds. It could be, but we expect our margin to go up. We just don't we just don't know how much. I wish we did.

Frank Schiraldi - Sandler O'Neill + Partners, L.P.

Okay. Thank you.

Operator

Our next question comes from Craig Siegenthaler from Credit Suisse.

Craig Siegenthaler - Crédit Suisse AG

Just to kind of go back on the NIM. Do you actually have the impact challenge that the NIM's facing from abnormally high NPA levels and excess, excess liquidity here too?

E. Wenger

Yes, that's in there. That would all be in there. We have over $300 million in nonperforming assets that aren't accruing. And...

Craig Siegenthaler - Crédit Suisse AG

Do you know roughly what the impact from those items are to the net interest margin?

E. Wenger

We could make an estimate, I guess, on what the rates would be on those loans, but we don't have that right now. We could estimate what the actual yields on those loans would have been if they were accruing but...

Craig Siegenthaler - Crédit Suisse AG

Got it. Well if you add back both those items and you account back for the near-term positive NIM progression you've been talking about, do you have a good sense of where the NIM should kind of settle out longer-term, a couple of years when these events normalize?

E. Wenger

Oh, boy. If you go back over time -- it's kind a hard to estimate because everything affects the net interest margin. But if you go back over time, I would think our normalized net interest margin will be a $385 million, I would think. But that's just hard to estimate.

Craig Siegenthaler - Crédit Suisse AG

And then just going back over loan growth, so you're seeing positive signs kind of in demand in Pennsylvania. You're seeing some signs on the positive kind of business segment. You're seeing construction runoff here so a little bit. Do you think we get the positive loan growth over the next quarter or is it more kind of back half weighted?

R. Smith

Well, Craig you tell me what the economy is going to look like and what consumers comps is -- I mean, it's a guessing game. As Phil said, we have a lot of things in place both to fund and to make loans to market share customers we've picked up. But they've got to want to borrow. And right now, that's still what I'd call modest.

Craig Siegenthaler - Crédit Suisse AG

All right. Great, guys. Thanks for taking my questions.

Operator

Our next question comes from Matthew Clark with KBW.

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

Can you update us on the FDIC insurance cost? Whether or not I think you guys might get some relief here in the second quarter, but I'm not sure if you mentioned that in your earlier comments but just an update there.

R. Smith

Yes, we're going to calculate the FDIC insurance differently. It's going to be done on assets less equal equity and loan-loss reserve. That should be about $1.5 million savings per quarter to us. And that's going to vary based on deposit growth, but we estimate $1.5 million a quarter starting April 1st.

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

And then on the rate sensitivity front, can you update us there and remind us. I mean we all have can see your disclosures on the K based on the shock. But can you just update us on the -- whether or not there are floors on your loans, for example, and how you see yourselves managing rates up?

R. Smith

We have some floors on the loans and we don't have many more. Most of them, we're not renewing them.

E. Wenger

We have floors on many of our lines of credit and we continue to have floors on those.

R. Smith

Interest sensitivity on that 6-month gap, the static gap -- it's a 1 10 the, so over 6 months less 10% of our assets repriced as goes to our liability. So that should give us some additional boost. And if we do the rate shocks, if we use static balance sheet for a year, and the current yield curve and increase of 1% or across the yield curve. We think that would give us another $10.3 million in net interest income and another 1.8% increase. And that's just the assumption of what balance sheet is going to be, but we think we are positioned well for rising rates.

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

Okay. And then just lastly on the M&A front, you signed the deal this morning on New England, but just curious about what you're hearing, seeing and related appetite?

R. Smith

This is Scott. I would say there has been a significant increase in the number of deals we've looked at in the first quarter as opposed to the fourth quarter. They tend to be situations where credit and capital are issues for the bank. But there's definitely an increase in the level of activity and conversations. Obviously, we haven't seen any that we felt strongly enough about to make an offering and win. So we continue to look at those very cautiously, but it hasn't been the tsunami that I think that some folks that talked about last fall that were going just be this robust growth in M&A. But there's more noise, there's more discussion. I think everybody -- I can't speak for other people. We are looking at it very carefully and making sure that if we put an offer in that we're doing it with our shareholders value in mind. I don't buy into the theory that there is some critical mass that we have to get to. We compete with trillion dollar banks so, and we compete with hundred million dollar banks. So I think we sit nicely in the middle there, and we're more focused on EPS growth than we are asset growth.

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

And what's your sense for the delay? Is it expectations are too high among sellers still? Is it that the curve is still too steep? Is it regulations have yet to be written and implemented? And what would you say the delay is?

R. Smith

Well, I think that the activity is mostly generated by folks that have issues that are difficult for them to solve themselves and that's typically credit and capital issues. I think the banks that don't have those are like a lot of you, investors, right now who are kind of waiting on the sidelines to watch the activities or the economic activities improve and for the prices to go up. And I think there's an expectation that pricing will be better in the future so banks that can wait are going to wait.

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

Okay. Thanks, guys.

Operator

Our next question comes from Mike Shafir with Sterne Agee

Mike Shafir - Sterne Agee & Leach Inc.

Oh, yes. I was just wondering, in terms of the fall off that we saw on the gain on sale piece, do you guys expect that to stabilize some? Or do you still see that running off at a pretty similar level?

Charles Nugent

The gain? I'm sorry, Mike. The gain in sale piece on what?

Mike Shafir - Sterne Agee & Leach Inc.

On the mortgage.

R. Smith

Are you talking about mortgage banking activity?

Mike Shafir - Sterne Agee & Leach Inc.

Yes.

R. Smith

Well our backlog going into the second quarter was slightly higher than our backlog going into the first quarter. And typically, home sales pickup in the springtime. Hopefully that will happen this year. So I don't think we're looking at the levels that we had during the refinance boom last year. But I do think the activity is a little stronger now than it had been in January and February. And we continue to add originators out there as we can and hopefully, that helps improve some volume as well.

Mike Shafir - Sterne Agee & Leach Inc.

And then if we just kind of turning back to the M&A conversation, is there a particular size or a place you guys would like to go in terms of the size of institutions or markets that you'd like to expand into or continue to build out?

R. Smith

Sure. We said our sweet spot is between $500 million and $2 billion. Having said that, we wouldn't eliminate any possibilities on either side of those numbers. We need critical mass in Virginia, we need critical mass between where we sit right now in Philadelphia. There are some parts of Jersey where critical mass would be helpful. So those would -- and I guess on that we would be focused into existing markets at this point in time.

Mike Shafir - Sterne Agee & Leach Inc.

Okay. Thank you very much, guys. I appreciate that update.

Operator

Our next question comes from Collyn Gilbert with Stifel Nicolaus.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

Could you just talk a bit about the dynamics of the residential mortgage growth? I mean, I know you broke it down for purchases and refis, but in terms of ARM versus 30-year fixed and then kind of what your appetite is for future portfolio volume?

E. Wenger

Well, most of the mortgages that we portfolio are ARMs. And we are keeping a small amount of 10 up to 15 years. We have no appetite to portfolio in 30-year mortgages.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

Okay. And what are the rates that you're seeing in the ARMs that you're putting on now?

E. Wenger

Well that's a good question. We don't have our ARM rates off the top of my head. So it's probably -- we can get those for you.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

Okay. And so just going forward, I mean, do we think about kind of the growth of this -- well first of all, do you anticipate growth and does that kind of factored in when you're talking about loan growth in the back of the year? And then secondarily, do we see -- should we assume that the growth rate of that ARM business will kind of more or less mirror what the market is going to give you?

E. Wenger

Yes, I think we'll mirror what the market gives us. The residential mortgage portfolio as a percent of our total loans is not that significant that it's going to drive our loan growth. So we need loan growth on that CNI side to CRE and consumer most importantly, consumer.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

Okay. And then just quickly, I know to that point, a small contribution to the overall portfolio, but what's the strategy on the leasing side? Is that a planned runoff or was there something going on specifically this quarter?

E. Wenger

Lack of volume.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

Okay. That's all I had. Thanks.

Operator

Our next question comes from Rick Weiss with Janney

Richard Weiss - Janney Montgomery Scott LLC

I was wondering if you could talk a little bit about the competition on the lending side. I know like demand's, it's hardly robust, but are you seeing competition from the big banks, small banks or just everybody?

E. Wenger

Well, Rick on that CNI side, competitions on the larger banks has increased quite a bit. And actually, it's increased from everyone. I think that's a segment that's probably shown the most demand and it's a segment that the industry has showed a lot of interest in. So competition has definitely increased across the board.

Richard Weiss - Janney Montgomery Scott LLC

And how about the pricing for your CNI product? Are you -- how does Fulton's price compared to the competition?

E. Wenger

Well, pricing in general in large CNI deals, which I would say would be $10 million and greater has become competitive. And when we price, we look at a combination of the competitive factors and also our internal profitability on the individual accounts.

Richard Weiss - Janney Montgomery Scott LLC

And in terms of underwriting standards, are they being loosened by you or anybody else? During like maybe in the last year during just a little bit too tight like giving the depth of the recession and now things are looking better so you can ease a little bit, still be prudent. I was wondering how are the underwriting standards going these days?

E. Wenger

Well, In general, I would say we have not loosened but some institutions have.

Richard Weiss - Janney Montgomery Scott LLC

Okay. And then Scott, you started off the conversation or the conference call talking about the regulators being a tougher environment these days. I was wondering if there's anything specific? Or is it just kind of your overall impression?

R. Smith

Well, I think the term I used was regulation, and I'm referring to Reg E and the Dodd-Frank and all of that. And right now, we don't know the specifics of particularly Dodd-Frank. But it appears as though there's going to be significant pressure on earnings complying with and dealing with all the regulatory environment out there. The regulators continue to be the regulators. They're doing their job of trying to make sure that we're all getting our credit issues behind us. And I hear varying comments from different banks about that, but what I was referring to in my comments was just this increased cost of compliance with all these new regulatory environment that's coming at us.

Richard Weiss - Janney Montgomery Scott LLC

Okay. Thank you very much.

Operator

Our next question comes from the line Mac Hodgson with SunTrust Robinson