Fulton Financial Corp (FULT) 2007 Q2 法說會逐字稿

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Good morning. Scott Smith here. I understand we had a technical glitch. I think we are back on line again, so I am going to start over. I'm not sure exactly where the disconnect happened, so good morning and thank you for joining us.

As you saw in our news release, we reported earnings of $0.23 for the second quarter and Charlie will review the financial details in a few minutes.

Despite a tough second quarter we are encouraged by the number of positive trends beginning to develop. Trends that we believe are the direct result of actions and initiatives we have taken to improve our earnings. These trends are important because they may potentially signal a reversal of a number of headwinds we have dealt with over the last several quarters. I am confident that all the initiatives we are implementing are paying off.

First of all, I want to share with you what we have done in the areas of consolidation, standardization and centralization. At the end of this month we will be operating 11 affiliate banks. Seven months ago we had 15. Four have been consolidated into larger affiliates because there were compelling and marketing geographic reasons to do so. We believe that we have maintained the local community bank image and service level while reducing our overhead expense.

The four affiliates now function as divisions of a larger affiliate that provide strong management expertise. These changes are not to say that we have abandoned our business model of local [economy] in local markets. We still believe in it strongly.

We are standardizing more of our products, processes and procedures across the holding company in order to simplify customer choices, and to allow us to spend more time creating a superior customer experience. We are appointing a customer experience champion in every affiliate and department to make sure that we stay in touch with what our customers want and need.

Additionally we've named a holding company employee to head up our product standardization efforts. We believe that where we have a product, process or procedure that can work universally throughout the holding company, it is in our best interest as a company to take advantage of that opportunity.

Effective July 1st, we have centralized holding company functional departments. These include human resources, marketing, accounting and others. That will reduce our workforce by approximately 2 to 3% through job elimination or attrition, something that is always difficult.

Individuals affected by job elimination were offered severance arrangements. As you saw in our release we recorded $1.5 million in severance expense this quarter as well. Savings from these staff reductions will begin to show up in the third-quarter numbers.

From the initiatives I have just mentioned and others, we expect a positive pre-tax contribution to our earnings in the amount of $1.5 million per month by the first quarter of 2008. Looking at our investment management and trust services area, we have new senior leadership in place and that unit is showing good net income growth, as a result of reductions in overhead and new business booked.

We are also seeing double-digit fee income growth in cash management and debit card-related fees. Commercial loan growth has been strong and we are encouraged by what appears to be a strong pipeline across all of our affiliates. With our loan growth, deposit growth and because our certificate of deposit pricing differential continues to decline, we saw improvement in our normalized net interest margin, again perhaps signaling a reversal in what has been a declining trend. At this point we attribute little of our margin improvement to the slightly steeper yield curves.

We are also pleased to see strong growth in (inaudible) deposits, a portion of which was in the core deposit area. That growth helped us to more effectively manage our funding costs. We believe that our de novo breaking activity and our focus on organic growth accounts for our improved deposit and loan growth.

Now that I have addressed the positives, what are the challenges going forward? One challenge that could become an opportunity is the consumer sector where we have seen sluggishness in loan growth. If we get some growth in this business line in the months ahead as the economy expands that would provide some additional lift in late '07 and into 2008.

Another challenge that we have been talking about for some time is what I believe will be a return to more historically normal asset quality metrics in the future. We believe an uptick in our nonperforming loans is inevitable as well as the need to return to a more traditional loan loss provision.

We continue to work through our resource mortgage repurchase requests. Although our total exposure has decreased considerably we set aside an additional $3.4 million in the second quarter, due to additional repurchase requests that were received. We are working with the primary investor to finalize the repurchase transaction. That repurchase will negatively impact our level of nonperforming loans later this year.

At our last call we reported that the [ALT A 8020] program at Resource Mortgage was discontinued as of February 2007. As a result of the time that has elapsed since the program was discontinued and the additional $3.4 million allocation, we believe this situation is winding down to the extent that the third quarter will reflect more normal mortgage banking activity.

As you know, gains in our bank stock portfolio have consistently been a small part of our earnings each year. Given the current valuations of bank stocks, we anticipate a reduced level of gain in the near term.

So in summary, a challenging second quarter with optimism about the future based on positive trend.

At this time, Charlie Nugent will share the second-quarter financial details with you and when he concludes we will both be happy to answer any questions you may have.

Thank you, Scott, and good morning, everyone. Thanks for joining us today. Unless otherwise noted comparisons are our this quarter's results to the first quarter.

Now as Scott mentioned, we reported earnings per share of $0.23 for the second quarter which was a 4.4% decline from the first quarter and a 15% decline from the second quarter of last year. On a year-to-date basis earnings per share was down 11.5% to $0.46 per share. Net interest income decreased $867,000 or 7/10 of 1% and during the second quarter we receive $230,000 in interest recoveries compared to $3.7 million in the first quarter with $3.3 million of those recoveries related to one customer account.

Now adjusting for these interest recoveries, net interest income increased $2.7 million, reflecting our stable total assets and an improved core net interest margin and we were really encouraged to see that. We think that is pretty good growth.

Earning assets were relatively flat with the first (technical difficulties) quarter and average loans increased $168 million or 1.6% linked quarter while average investment securities declined by $199 million or 7%.

Our loan growth of $168 million occurred primarily in commercial loans which grew $141 million or 5%. Of that growth $90 million was in Pennsylvania and $20 million in both New Jersey and Virginia. Commercial line of credit usage was 37% at the end of June compared to 38% at the end of March. Now 60% of the commercial loan growth was in floating rate category.

Commercial mortgages increased $48 million or 1.5% on a linked quarter basis with most of the growth in New Jersey, Virginia and Pennsylvania. Construction loans decreased $15 million or 1.1% with the decline coming almost entirely from the commercial side in commercial construction. Rent (inaudible) mortgages increased $8.5 million or 1.2% and this growth was primarily an adjustable rate mortgages in Pennsylvania and it was the standard adjustable products for [51, 31 arms]. Home equity loans declined $6.3 million or 4/10 of a percent and this decline was in both lines of credit and term loans.

Consumer lending was down $9.4 million or 2% and this decline was all in indirect lending, where we have chosen not to compete on interest rate.

Now during the first quarter we sold $250 million of investment securities with an average yield of 5.20%. As a result of this sale, we've realized gains of $780,000 in the first quarter. The proceeds from the sale, we used to pay down federal funds at an average cost of 5.3%. During the second quarter we purchased $285 million of securities at an average yield of 5.82%.

Now security gains declined from $1.8 million in the first quarter to $600,000 in the second quarter and gains on bank stocks decreased by $400,000 linked quarter.

On the funding side, we were pleased to see an increase of all categories of customer deposits. Total deposits increased $125.8 million or 1.2% with non-interest-bearing demand accounts [up] $35 million at 2%. We are really encouraged to see the deposit growth especially in our (inaudible) account.

We continue to emphasize both internal and external promotional activities to generate new core deposits.

Time deposits grew $69 million to 1.5% and most of this growth was from retail customers. Customer repurchase agreements and commercial paper increased $60 million or 10%; and most of this growth resulted from customer funds that were previously invested in off-balance sheet products.

Long-term borrowings increased $135 million or 9%. The Corporation issued $100 million of subordinated notes during the second quarter at an effective rate of 5.95%. Also during the first quarter, new Federal Home Loan Bank advances totaled $290 million and were taken to replace maturities over the next quarter. The rate on these advances were 4.60% and during the second quarter we borrowed an additional $135 million from the Federal Home Loan Bank at 5.2%.

Our net interest margin for the second quarter was 3.70%, there was a 4 basis point decline from the first quarter. Now this decline was the result of the significant interest recoveries that we experienced from the first quarter and our net interest margin increased 6 basis points when you factor out the nonrecurring items. This is the second quarter in a row we have seen our core margin going up; and we are really encouraged by that.

We saw an increase in our [core] loan yields from the first quarter to the second yield second quarter and the cost of our funds remain stable.

Now the provision for loan losses has increased by $2.7 million from $1 million in the first quarter. Net charge-offs increased to 14 basis points as a result of a significant charge-off related to one customer account. This charge off totaled $2.6 million. This commercial loan customer was a mortgage company, engaged in the origination of nonprime mortgages; and we have no other customers in this line of business.

Non-performing assets increased to 49 basis points at June 30th compared to 40 basis points at March 31st and 29 basis points last June. Most of the increased non-performing assets relate to various real estate loans.

Excluding security gains, our other income declined $1 million or 2.4%; and this was primarily due to a decrease in mortgage banking income and non-reoccurring real estate gains that we had in the first quarter. Now gains on mortgage loan sales declined $1.2 million or 22%. [Residential] mortgage loans sold were $390 million in the second quarter compared to $440 million in the first quarter.

A reduction in volume was entirely in the wholesale side of the mortgage business, which we have been winding down. The spread on sales declined to 108 basis points in the second quarter from 112 basis points in the first quarter.

Investment management and trust services revenues increased $453,000 or 5%. This improvement was attributable to strong results in both the trust and the brokerage areas, as well as an additional $180,000 of insurance premiums. We are pleased with these strong results.

Service charges of deposits were $598,000 and that was a 5.6% increase. Cash management fees increased $155,000 or 5.7% while overdraft and NSF fees improved $442,000 or 9%. Other deposit account service charges were flat.

Our other service charges and fees increased $466,000 or 6%. This improvement was a result of strong growth in ATMs and debit card fees as well as additional revenues from processing foreign currency transactions.

The other income categories declined $1.2 million or 30%, which represents a decline in our real estate sale gains.

Operating expenses declined $2.8 million or 2.8%, adjusting for the charges related to our mortgage banking operation. Operating expenses were down $658,000 or 1%. Salaries and benefits decreased $738,000 or 1.3%, as a result of several offsetting items and [point of] taxes which are always higher in the first quarter were down $1 million, and $800,000 accrual established in the first quarter related to the corporative corporative incentive plan was reversed in the second quarter.

Lastly, severance of $1.5 million was recorded in the second quarter related to the reduction of back office personnel.

Adjusting for these and other non-recurring items, salary and benefits were down $540,000 or 1%. This decline reflects the impact of the workforce reduction plan as Scott mentioned as well as staff reductions and resource mortgage.

Occupancy and equipment expense declined by $521,000 or 4%. This decline is due to the seasonally higher utilities and slow removal cost in the first quarter. Advertising expenses increased $581,000 or 24% as a result of the timing of commercial expenditures. The other expense line declined $2.4 million or 10% and this decline related to the resource mortgage charges.

Thank you for your attention and your continued interest in Fulton Financial Corporation and now we would be glad to respond to your questions.

(OPERATOR INSTRUCTIONS). Wilson Smith. Boenning.

I would like to follow up on your comments a little bit here, if I could. You were talking about the consolidation affiliates, taking four out. what kind of cost saves do you expect to get from that separate from just the headcount reduction? Factored in with that $1.5 million?

There are other economies that come out of that. As you mentioned, a reduction in staff. There is some back room consolidation that's become part of that efficiency and some examination costs. Charlie, what else?

A lot of accounting. A lot of staff functions are reduced. But, Wilson, the main savings that we expect from this workforce plan that Scott put in place is from the consolidation of -- all of the staff functions now being performed at the affiliates are now being performed at the holding company and that would be collections, accounting, marketing, security and human resources.

So we had savings from the foundation of charters, but we are getting more savings from the consolidation of functions and taking away from the affiliates and consolidating them at the corporate company.

Did I hear you that that is going to be $1.5 million a month that you will be (multiple speakers) for starting in January?

This will evolve over time. About half of the staff reductions are behind us but the others will be occurring mostly through attrition throughout the fall.

And Charlie, on these securities gains in the quarter, you said the $400,000 decline in bank stock gains. How much of the gain in the quarter was still due to bank stocks?

In the second quarter, the whole $600,000 were bank stock gains; and in the first quarter we had $1.8 million in gains and $1 million was in bank stock gains. So it dropped $400,000.

So the amount that you have in the second quarter, is that a reasonably good run rates, do you think?

That's hard to guess. The gain that we had were primarily related to two -- and some stock we owned in two banks in California that were taken over. So just because we are bank stocks (inaudible) I would think we would be happy if we still had gains of $600,000 a quarter.

On the non performer side, have you repurchased loans to date on the resource deal? Does that impact nonperformers in the quarter?

There's a little bit of that, Wilson, (technical difficulties) -- the repurchases that we talked about at the end of -- at the last conference call we said they were, we received $34 million in notices related to request to repurchase loans, mortgage loans. And we repurchased $8.6 million. So a little bit (inaudible).

Generally speaking, X the resource situation, how does the watchlist look and how do you feel about the past 90-day category and that sort of thing?

As a percentage of total loans, the watchlist is even with year-end. So it is up slightly. But volume or (inaudible) loans are up slightly, but as a percentage of the total loan basis it's -- as a matter of fact, exactly the same percent. So it is there but it isn't alarming anything that is going on there.

Are you seeing any fallout on the subprime side as it impacts potentially the home equity exposure that you have?

No, but the home equity -- what we have on portfolio was, is home equity loans booked by the banks through that process. So that's standard kind of underwriting that we've done for years on that side of it. (multiple speakers) Charlie?

Wilson, on the home equity side the exposure we had, I think, relates to the 80/20 stated income program that was a resource mortgage. That was -- we've stopped doing that in February. That is winding down. Hopefully that's behind us, mostly behind us.

But the exposure there is when that customer, that borrower defaults on one of the first three payments or is late, that can be put back to us. When it's put back, we are writing off that -- in that charge is a complete write-off of that home equity loans. So we have a little bit of exposure, but we think most of it is behind us.

Rick Weiss with Janney.

I guess I would like to follow up on the credit quality and, Scott, I think you said that you are seeing a comeback to more normal levels at Fulton from the past two, three years. What would be normal levels regarding charge-offs and the ratio of nonperforming assets to total loans in REO?

I think five years ago, Rick, our charge-offs were 22 basis points. I think that was -- and then it declined steadily after that. In our strategic planning, when we forecast numbers, we use 15 basis points.

So -- and I'm certainly not suggesting that this is a straight line up towards there. I think it is going to be choppy as we work our way through the quarters that are coming up. But as I have been saying for I don't know how many quarters now, this single digit or .2, .3., .6 -- .02, .03, .06 charge-off is not going to stay forever.

So we had about this time as you saw it or Charlie mentioned, it was -- the majority of it was one particular loan. So I don't know that sets a trend for the next few quarters, but we all know it is going up.

So that -- say like 15, 20 basis points for charge-offs. How about the nonperforming asset ratio? Where would you think that (multiple speakers) -- ?

For us, a high -- we are in the 60s and 70s. We do have this issue with a repurchase of these mortgages so that is going to impact it to some extent. So that will be an additional kind of burden for us there through the next few quarters as we buy those back and put them into nonperforming and then work through them.

If you exclude those (inaudible) like a 50 basis point somewhere in that range? More historical like for that?

I would say yes in that area. I am looking for -- hold on a second here. Nonperforming. If you go back five years it was 70 basis points in '02, 51 in '03, 40 in '04, 52 in '05, 50 in '06 and 54 is the five-year average. So yes I think you are in that range but I do want to remind you that we have these mortgages coming back that is going to impact that.

Right and I guess my sense is that (inaudible) be a trend for the whole industry not just on you trending up?

Yes I mean -- as we said it can't stay that good forever or you start questioning whether you are taking the appropriate risks.

Another question is with regard to your loan loss reserves because back in the day, your average was probably about 130 or 120 now on down to 1%. Would you feel the need to start providing more?

What we have done over the last several years have developed this methodology for determining a loan loss reserve based on a fairly specific formula; and we run the portfolio through that process and it comes out to what it comes out to. So we feel like where we are right now is where we should be. Given what we all expect to happen to credit, that's why we expect that provision to increase as the credit environment changes.

Now I would point out if you look at the first half, I think charge-offs and allocations were about the same if you go combine the two quarters.

Yes. So this quarter was just as you said because of the one loan and the other $2 million was -- was that just a bunch of loans in there?

Yes. The typical.

Typical. Okay. Wilson probably asked this one. I think I might have missed it. What is your total exposure on the subprime, I guess for the resource?

(multiple speakers).

Was there just a one number thing that I missed?

We've had this one -- an ongoing problem with this one program that resource and when we told -- when we put out the press release, we were going to have a $5.5 million charge. We thought at that time that the number of loans that could be returned to us was $94 million and that is if they missed one of their payments.

When we did the conference call it was down to $40 million and we were pretty confident that we had seen the worst. And we were wrong because there are a lot more defaults on the mortgages. And right now, we are in the final negotiations with Credit Suisse who is the -- it was their investor program.

We are down now where the most they can put back to us is $15.3 million. Only $600,000 of that $15.3 million is second mortgages. If the second mortgages come back we write them off right away.

So all of those loans, all that $15.3 million right now is performing. We are getting payments off. So we are pretty confident that this one program is behind us.

So we are not to expect to see in the third quarter then any charges here?

I would expect some, but not anything to be extent we are seeing (inaudible).

But you know it's hard to project the future. It's hard to project what consumers want in the to do in their mortgages and it's just going to get worse.

Yes absolutely so we know that's why you give the Safe Harbor stuff at the beginning of the call for that. Thank you very much. I appreciate it.

Bob Hughes with KBW.

Another couple of follow-ups on the resource issues. You had, I guess when you did the comps sell last quarter you had $40 million that was subjectively put back to you. And I guess what you are telling us today is that you assume that your experience will be comparable to what it had been over the prior quarter and you had more loans put back out of that $40 million than you anticipated a request?

There was a higher delinquency rate and higher rated charge-offs than we had seen in the first quarter.

So it is a combination then of worst credit experience or worst loss experience? And then somewhat higher repurchase request?

Right.

And this is all related to early payment defaults, right?

There might be some fraud in there too. It's accommodation of early payment default or fraud but the majority of it is early payment default.

Aside from the early payment default issue, do you also have some additional rapid warranty risk on these loans that will persist for an extended period of time?

The fraud issue is always there. But we haven't experienced a lot of repurchase requests because of that.

Okay. So far at least, right?

That's correct.

And I think you have provided us with the origination numbers previously. So hold off on that. Can you also give us some sense for what kind of maybe size the potential NPL increases that we might be associated with with these amounts that you will be repurchasing?

Right now, Bob, we have $41 million in request and that will be written down as they come in. I would think the non-performing assets, the total loans ratio would go up about 20 days (inaudible). But non-performing assets and total assets which is .49 now you'll probably go up to .70. That's a guess.

Okay.

When these loans come back it is going to depend on the adequacy of the reserve that we thought the charges were taken. So that would be our guess.

So with the loans that are coming back you are pretty much writing off the home equity fees?

The home equity (multiple speakers) right away and then we write the rest of the loan down to 75% of the appraised value. People (technical difficulties) Virginia have been looking at the properties. A lot of them are looking at the appraisals. But they are being written down to 75% of the value.

So we should look for some elevated charge-offs and provisioning in the second half of this year associated with this as well?

The biggest problem has been this one program at resource mortgage. About 83% of the repurchase request and about 90% of the charges were taken are related to that and we think that program is going to be behind us. We are in final negotiations with Credit Suisse on this. The most we think that can get put back, still, the exposure we have will be $15.3 million. All those lines right now we have been [totally] performing.

So they would have to miss a payment for them to come back and of that $15.3 million, $14.7 million is our first lien. So could be less of the charge-offs there. We would think.

Then looking at your increase in nonperforming loans this quarter, I think Scott referenced some miscellaneous, real estate-related credit. I was wondering if you could actually be more specific there? To what extent is maybe construction-related?

Geography-wise I think they are dispersed. Charlie, do you have that there?

Yes. I think, Bob, there is $2.5 million in the Maryland area and that is concentrated in four or five construction projects. There's obviously the residential mortgages resource and there's some loans in New Jersey. One is construction-related and the rest are related to very small commercial loans that are all below $1.2 million.

Final question. Scott, I know you referenced some revenue initiatives or to enhance revenue in the press release. I didn't hear any elaboration on that in your comments. Is there anything you can be more specific about there?

Well, some of it has do with pricing changes that we are making. Other has to do with just volume-related activity where we are doing as I think Charlie mentioned some things in the marketing area to enhance our topline revenue growth, internal sales campaigns to get our folks focused on, particularly the core area of our retail and services.

We've -- I think mentioned to this group before that back in the first quarter we began implementing a market segmentation program to make our advertising dollars a little more cost-effective; and we think that is working. As you saw our marketing expenses are up. We have increased our advertising. We think there's some opportunities in some of our markets for us to increase market share and so we are taking advantage of that.

On the commercial side, we have intensified our culling efforts for C&I lending throughout the Company because there is demand for that right now and that, as you saw, has been paying off in terms of increased volume. Did I miss anything, Charlie?

No.

I think that's the majority of it.

New branches. We have opened two every of this year and I think 12 last year. So they are beginning to pay some dividends as in terms of revenue growth because of penetrating new markets.

Collyn Gilbert. Stifel Nicholas.

Maybe I will start off with just a quick question on your comments that you just made in terms of advertising dollars and targeting markets where you think you can take away market share. Is there something specific going on in those markets that make you think you have an opportunity now that maybe you didn't have six to 12 months ago?

There's some opportunities in some of our newer markets where we have consolidate affiliates and we have some branding opportunities where those affiliates didn't have much the retail presence. So we are spending some money to get the brand out in those markets and they are in some fairly affluent markets in suburban Philadelphia and New Jersey.

There's some mergers going on and customer disruptions that can happen there so those kinds of things have some impact and give at least opportunity. We don't know for sure how that is all going to work out but there's been some acquisitions in our market that tend to change the way the customers are handled, and new people involved, and some things like that. So we think there is some opportunity there.

And of course the new branches where we are in new markets and working to get our name out there.

Do you expect the advertising budget to remain elevated like it was in the second quarter throughout the remainder of the year?

I know we have allocated some additional money to it beyond what we had originally budgeted. I can't tell you for sure if it is exactly the same as the second quarter but we are going to -- we think it is money well spent right now. So we are going to maintain some effort there.

Just in terms of the initiatives, the cost-saving initiatives, what was the -- you said 2 to 3% of the workforce, but in terms of number of employees how does that translate?

It's about 150 total. Now this is a fluid situation. We have 70 behind us and that was part of the consolidation of the back room areas. We are looking now at the rest of the Company and have set a goal for another 70 or so as turnover occurs to reallocate.

Frankly we have spent a lot of money as you may know on the technology the last few years and some of that is paying off. So we are just making sure that as turnover occurs, that we take opportunities to redefine workloads and get that number down. We have done enough work in analyzing that whole situation to believe that we can get that second number by the end of the year.

Do most of your folks know internally who is staying and who's going? Is that the (multiple speakers)

Yes. As far as where we eliminated jobs, those folks have all been -- that started in May. They have all been communicated with. Most of them are still here but that is beginning to and will begin to impact the third quarter numbers as they unwind and so forth.

As far as attrition is concerned, that will be just as it happens and from department to department and affiliate to affiliate.

Do you anticipate additional charges related to this initiative in the third or fourth quarters?

I don't think so. No. I think we've got that behind us.

Then, Charlie, just a question on the NIM. Were there no interest recoveries this quarter?

This quarter the interest recovery is at $230,000 and in the first quarter they were $3.7 million. Most of it was related to that $3.3 million from one customer. So when you factor that out and you factor out loan fees for all the payoffs, our core manager's margin and we really pay attention moved up 6 basis points. We were really happy to see that. Hopefully, that trend is going to continue.

In the core banking business there are a lot of positive trends. One is the growth of customer deposit especially be core accounts where we've had trouble -- where balances have been going down for the whole industry including us. In this quarter we saw a complete change to that. And our DDA balances, the interest rate DDA balances went up $35 million or 2%. That is a good growth rate. Especially based on recent history.

We have been using core customer deposits and CDs to fund pretty good loan growth. That is helping our margin and Scott mentioned about the differential in the CDs' repricing. About a year ago there was over a 100 basis point differential. In June it was only 38 basis points. That's the difference between the rate on the CDs maturing and the new CDs being put on and that is going to go down to 10 or 15 basis points in September.

So I can't predict the future. But looking ahead I am pretty positive about the margin.

So you -- I mean, you would imagine then as you indicated these trends are positive that we could still continue to see a bump up in the core margin over the next couple of quarters?

Yes.

(multiple speakers) Okay.

There are a lot of -- you know as well as I do there are a lot of things that affect the margin (multiple speakers). But from what we're seeing now, what we've seen for the last few quarters we're feeling pretty good.

I hate to beat a dead horse on the mortgage repurchase issue, but maybe just give a little bit of color as to what went into the formula for that $3.4 million charge. And I think maybe help us understand what assumptions you made in the first quarter that didn't prove to play out in the second quarter and how we can be certain that your comfort level in the second quarter is truly comfort level. We are not going to see additional charges in the third quarter.

Just kind of walk through the mindset behind that?

What happens when we get a repurchase notice and we (inaudible) the loans coming back because the customers missed a payment. We don't have the records for that so we based our analysis, based on the repurchase notices that we get.

What happens when that comes back if there's -- if this is -- 90% of the charge-offs relate to this one program. When we get a notice related to that program we charge off the home equity piece right away. That is 20%. And we look at the appraisal, compare it to the first mortgage and we write down the first mortgages further and we can write it down for 75% of the value.

When we looked -- and that is how we come up with that $3.4 million. The better -- the thing that gives us more confidence now and it is hard to project the future is we are almost at the end of this program. We stopped it in February. We have been negotiating and talking to Credit Suisse in more detail.

And now we are told by them they maintain the records, they pass the stuff back to us, but there's only $15.3 million left related to this program and it is all performing now. They think we think that everything that is going to be put back has been put back unless some of that $15.3 million experiences default. And if it does it could come back but the good thing about this $15.3 million it's nearly all first mortgage (inaudible).

When we did our analysis in the first quarter it was based upon the information we had then. And the number of delinquencies on those mortgages have apparently gone up, because we are getting more repurchase letters and the losses that is in this report is higher than they were before.

Okay.

And you know it is hard to estimate -- it's hard to look into the future and figure out what the consumer is going to do on some of these mortgages and are they going to miss payments. The investors have been very aggressive in pushing everything back. I wish I knew and I wish I could tell you.

Just one final question. Scott, just back to sort of the cost-saving initiative. Do you have to have a targeted efficiency goal in mind either through this initiative or just through some of the positive initiatives you have going on at the organization?

We didn't set a number out and say we have got to get to this number. What we did was do an analysis of what we could do to make the Company more efficient and of course the centralization -- and not disrupt this customer service advantage that we have. So that's when we went through and looked at some of the affiliates where, geographically, they are very close to other strongly branded affiliates and where we could push them together. And then look at the back room and say -- as we bought these banks over the years we maintained pretty much the staff intact. And then really through attrition began gradually centralizing a lot of the back room areas.

But given the current operating environment, we decided we had to speed that up and just get that behind us. When we did the math and started to come up with some of these numbers we realized it was going to have some significant impact, so we went ahead and did it.

But we didn't start out with a goal, we have got to get to this number, we just said, "What are ways we can become much more efficient as a company and yet not disrupt the customer service that we are noted for?"

Frank Schiraldi with Sandler O'Neill.

Just a couple of quick questions. On the -- Scott, you had said you don't really expect any future charges as far as the staff reduction in the next back half of the year. But you are only halfway through it right? So might there not be some --?

The plan is the rest comes with attrition. So when those folks on their own -- and you have some turnovers as the leave, they just -- there will be a through analysis of whether they need to be replaced. Based on what our kind of macro analysis indicates that there is probably 70 for 75 jobs there. So there won't be any severance to those folks because they are going to be quitting on their own or retiring or whatever.

Based alone on those staff reductions, is that what the $1.5 million in cost saved a month in '08 is based on?

No that is everything.

So that's centralizing operations as well?

That is correct.

Just one further question on the resource staff. Just wanted to make sure I understand. So there is $15.3 million that hasn't put back, that you haven't gotten requests on yet. So if there was any of that to come back then there would be further reserving potentially in the third quarter?

Correct. Yes.

Are you worried at all with -- ? I guess the stuff that you have taken back already, are you -- do you plan on selling that in bulk or do you think -- have you had bids on it? Do you think you are going to hold onto it until -- you think you can clean it up and they will start performing again?

Yes to the latter. The market for that product right now is not good. So to try to sell it doesn't seem to make a lot of sense. You know over years we have had very good people in the collections area that we have had good experience with.

So our plan is to have our people, first of all work these people through. Try to keep them in their houses and working through it and second of all to maintain the cash flow to support the loan and with the charge to where we have got them down to we think that is possible. If at some point in time in the future, we can get these seasoned and then relook, and the market has gotten a little better, we could look at a bulk sale at that point in time.

But I don't expect we are going to see that any time in the near future.

Matt Hodgson with SunTrust Robinson Humphrey.

Couple follow-up questions on resource again. Just to check my numbers. There's been $41 million I guess in repurchase requests that you have received and you only repurchased $8.6 million?

Yes.

What is the reason for the remaining $32 million or so not actually being bought back yet?

We are in the process of negotiating with the investor and when we get stuff back we think we should be getting back and -- for example somebody missed a payment last year and they missed one payment, now they are current but they are trying to push that back because they can't sell it, package it in mortgage-backed securities. We are looking at each loan and having active discussions for each one.

So that $8.6 million is in nonperforming loans at this point?

Yes.

So the expected (multiple speakers)

It's either in non-performing loans or ROE but most of it is in non-performing loans.

So they expect an increase later this year, is this going to be on the remaining $32 million. You assume you'll buy back some of those?

Yes and that's $32 million but it would be less the reserve when it comes back. We will be writing those down when they come back.

(multiple speakers). If you could go over with me again the change in the salary and benefit expense? I think you mentioned the reversal of an accrual. I didn't quite catch that.

Yes. We have an incentive program, a corporate incentive program and we had a certain number in there. At the end of the second quarter we adjusted that downward. And what was it was the reverse of an $800,000 accrual we had at the end of the first quarter.

What were the non-recurring items that were in the first quarter number? I think you mentioned employee taxes.

Yes. The big thing there was employment taxes are usually higher in the first quarter and it was about $1 million. It was the $800,000 you mentioned and the reversal of the incentive plan accrual and was $1.5 million in severance charges that we recorded in the second quarter.

But after all that was said and done the salary numbers -- salary and benefits numbers -- was still down $540,000 or 1%. And this reflects the impact of the workforce reduction program I think Scott mentioned and staff reductions and resource mortgage.

Then on, I guess, the investment portfolio. It obviously came down this quarter. Do you anticipate it continuing to come down and make any more sales or is it at a comfortable level?

In the bond portfolio?

Yes.

We sold an awful -- as I mentioned we sold $250 million in the first quarter because we bought some loan term yields were absolutely (inaudible). I mean we sold 250 million in securities and the yield was at [520] and (inaudible) big gain. So I think it is going to -- a lot of it is going to defend on what the yield curve does. And how steep that gets.

We have seen a nice increase in the yield curve from June 15th to June 30th and on. So if that continues we might put more money out longer, if not -- it is going to defend on rates.

What about on that buyback front? Did you buy back any shares during the quarter?

No. We didn't buy back any shares and we have authority to buy back 1 million shares.

What's kind of the thought process going forward with that?

Thought process is -- I guess there's been a lot of shorting of bank stocks. I think the analyst community is underweight on bank stocks. We are waiting.

Gerard Cassidy. RBC Capital Markets.

Getting back to the resource situation, has any personnel resources have been let go because of the problems here? Or are they still employed down there?

The management team is gone and that whole operation now reports through Fulton Mortgage Company and up through to Lancaster.

Second question. Are there other pieces of business [at] resource that could potentially have some problems? Not in this whole subprime area but just other loan categories that have maybe greater risks than what the traditional legacy Fulton would have?

I think they have the same -- they have the same exposure. They have a more significant concentration in real estate and real estate development kinds of lending activities than would some of the others in the holding company or the holding company in total. So we have that issue out there, but their history of asset quality in those areas has been quite good over the years.

And on their real estate development, is it primarily in the Virginia market (inaudible)?

Yes.

Another question. You mentioned about going back to maybe more historical levels on the non-performing asset ratio or net charge-off ratios. Considering that the loan loss reserve, relative to loans today, is lower than where it it historically has been for a variety of reasons, should we expect that loan loss provisions going forward will possibly equal or exceed where they were a couple of years, a number of years back? If everything else is going back to more normal levels will the provisions go there as well?

Yes. I think so. Yes.

Matthew Schultheis with Ferris Baker Watts.

I have a couple of quick questions. I am going to beat the dead horse here with regard to resource. Just a really quick one, though. What was your repurchase period on those? 90 days, six months, the obligation to repurchase?

90 days. It is 90 days from when the loan is settled, not from when the loan -- when a loan is settled with the investor. That's why it goes beyond 90 days from February, if you are wondering why that is.

Can I just add one thing to that? They don't -- when there is a payment met, we are not necessarily notified on a very quick basis with (inaudible).

I understand.

There's been delays between that mispayment and when we find out about it.

I understand. Second question. Looking from your utilization rates -- which were down a little bit, mildly -- it looks like your C&I loan growth is basically new business.

That's right. The lines of credit were down -- line of credit usage was down 1%.

Where do you think you're getting that new business from?

It's a whole variety. It is across the markets and it's and you say new business. Some of it is new loans from existing customers. Term loans and commercial mortgages and so forth. So some of it's that, but it is across the board.

Okay. It looks like your loan growth was about even throughout the quarter, but your deposit growth was pretty much accomplished early in the quarter. Is that accurate?

I'm not sure, Matt, I would (multiple speakers).

I don't -- just thinking about the numbers I don't think so.

I mean I'm comparing your ending balances of March 2007, June 2007 and looking at your average balance sheet and that just sort of looks like to me. Because when I see short-term borrowings increasing to about $1.5 [billion] as of June 30 spread between cash and due from banks, investment securities and loans, I'm wondering what your intention is with that?

In regard to the deposit balances, it is hard to look at the ending balances just because it is one day and usually that's when DDA balances are at their lowest. It can depend on how that month ends related to pension payment, Social Security and everything else.

The best thing I think is in regard to deposit balances is just look at the average. At least that is what we do. And when I'm looking at that, it looks like that growth has been consistent over the whole quarter.

In regard to borrowings, at the end of the first quarter and the beginning of the second quarter, long-term rates were extremely attractive. And we borrowed some money from the Federal Home Loan Bank at a 4.60 in the first quarter and then later on we borrowed some at a 5.16 in the second quarter.

We were just doing longer-term borrowings because we thought, there was the inverted yield curve and we thought long-term rates were extremely low. And believe it or not they were less than the overnight rates so we tried to take advantage of that.

But everything we do on the investment side and the liability side in terms of short- and long-term borrowings fit into our [ALCO] strategies. We don't think there is any risk there.

Wilson Smith. Boenning.

Thank you. My last question was answered. Thank you.

Frank Schiraldi. Sandler O'Neill.

This might be kind of tough to handicap, but sort of thinking about into the future. Do you expect to have some more or any announcements coming up as far as combining any further subsidiaries? Is that something that is ongoing and you could see in the back half of '07?

Not in short term, but we bought 25 banks over the years. So it happens and it is a matter of what makes sense in market. So there's no plan to do any short term, but we look at this all the time and our banks talk to one another and when it makes sense from the local standpoint to do it, we will do it. But right now you won't see any announcements short term.

There is one going on right now. I mean Lebanon Valley was already announced, right? That sort of -- (inaudible).

Well, that's what I was asking so there, yes. That's done. It will happen very soon.

Last question. Charlie, when you sort of -- I think you gave a guestimate on non-performers as far as the third quarter. You mentioned 70 basis points. That is just strictly considering stuff that could come back from resource?

Yes. That's exactly right. That is not a guess or a reaction. It is when these repurchase loans come back, that ratio of nonperforming assets to total assets, we think, will go from 49 basis points to about 69 or 70. That's just the numbers I am looking at now. It's not a projection.

It appears we have no further questions at this time. Mr. Smith, I would like to turn the conference back overview for any additional or closing remarks.

Yes. I just want to clarify one point. I'm not sure how I answered the question about the management changes and resource mortgage, but after we made the oversight changes there in terms of that reporting up through Lancaster, management chose to leave. We did not let them go. But that change has occurred.

Okay, I would like to end this call by thanking everyone for joining us here today. I hope you'll be able to be with us again in the third-quarter conference call which is scheduled for October 18, 2007. Thanks again.

Thank you, ladies and gentlemen. Once again, that does conclude today's conference. We do appreciate your participation.