Fulton Financial Corp (FULT) 2007 Q3 法說會逐字稿

Good day and welcome to today's Fulton Financial third-quarter 2007 earnings conference call and webcast. This call is being recorded. At this time, I would like to turn the call over to Ms. Laura Wakeley. Please go ahead.

Good morning and thank you for joining us for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the third quarter of 2007. Your host for today's conference call is Scott Smith, Chairman, Chief Executive Officer and President of Fulton Financial Corporation. Joining him is Charlie Nugent, Senior Executive Vice President and Chief Financial Officer.

Our comments today will refer to the financial information included with our earnings announcement, which we released late yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Information and then on News.

Please remember that during this webcast, representatives of Fulton Financial Corporation may make certain forward-looking statements regarding future results or future financial performance of Fulton Financial Corporation. Such forward-looking information is based on certain underlying assumptions, risks and uncertainties. Because of the possibility of change in the underlying assumptions, actual results could differ materially from these forward-looking statements.

Risks and uncertainties that may affect future results include pricing pressures on loans and deposits, actions of bank and non-bank competitors, changes in local and national economic conditions, changes in regulatory requirements, actions of the Federal Reserve Board, credit worthiness of current borrowers, the Corporation's success in merger and acquisition integration and customers' acceptance of the Corporation's product 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.

Good morning and thank you for joining us. As you saw from our news release, we reported earnings of $0.19 for the quarter -- per share earnings of $0.19 for the quarter. Charlie will review the financial information in a few minutes. I first want to tell you where we are, what we have done and the actions we are taking to put the issues related to Resource Mortgage behind us.

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

The following are the major components of that charge. $9.9 million was reserved related to $27 million in loans where potential borrower misrepresentation exists. We received a repurchase request with respect to $2.4 million of these loans on October 1. The remaining balance is for the other loans we subsequently identified involving these same individuals. The other $13 million relates to loans that were identified through our internal quality control function.

$3.6 million was added to existing reserves on repurchased loans and foreclosed real estate based on updated valuations. During the third quarter, we repurchased $24 million of loans and $11 million of foreclosed real estate from the secondary market investors.

The amount added to performing loans was $4 million net of reserves and the amount added to nonperforming loans was $14 million net of reserves. And the amount added to foreclosed real estate was $7 million net of reserves. $2.2 million was recorded related to new and existing outstanding repurchase requests.

On our last two calls, we discussed charges related to early payment defaults, which we believe, for the most part, have run their course. Reserves for decreases in property values on these early payment defaults largely reflect falling real estate values.

As we indicated during the question-and-answer section of our last call, secondary market purchasers may request loans to be repurchased for alleged misrepresentation. At this time, we are confident both of the alleged misrepresentation situations have been contained and are adequately reserved for. The current charges reflect all that we know at this time.

As a result of these two situations and out of an abundance of caution, however, we will be conducting an additional review of the loans originated by Resource Mortgage. To get this review accomplished as quickly as possible, we will retain an outside consultant to assist us. I cannot provide a definitive date as to when the review will be completed, but I assure you it will be completed as soon as possible.

It is important to note that the management of Resource Mortgage has been replaced and the offices giving rise to virtually all of these potential losses have been either closed or are in process of being shut down. The President of Fulton Mortgage Company now oversees the operations of Resource Mortgage.

I wanted to cover the preceding issues with you first since they had a significant effect on our third-quarter results. Now I would like to give you my assessment of our core banking areas for the quarter.

From a lending standpoint, we experienced good growth in both commercial loans and commercial mortgage areas. As you would expect, we experienced a slowdown in residential construction and overall consumer lending. Overall loan quality remains good.

Deposit growth was flat, so we had to rely more heavily on wholesale funding putting additional pressure on our net interest margin. Deposit costs increased as a result of a change in the mix. Non-interest-bearing deposit balances decreased while interest-bearing deposit balances increased. When the Fed cut rates, we adjusted our deposit rates accordingly and will continue to do so in response to future Fed actions to preserve our net interest margin.

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

Activity continues in the merger and acquisition environment. We continue to be presented with numerous opportunities and we look at each one carefully. The multiples being sought are generally prohibitive in light of our required return on investment goals and the desire to avoid earnings dilution.

As we await the right opportunity, our focus on organic growth through new branches continues to be a priority. That is the plan we announced for Resource Bank two weeks ago. Our focus in Virginia where we are already positioned to serve some of the best markets in the country will be to leverage our presence by building a stronger retail and small business franchise over the next few years evolving this newest division of Fulton Bank from a nationwide mortgage lender into a strong community bank with traditional funding and lending activities that characterize our business model.

In the other four states we serve, we will leverage opportunities created by local competitors that have been acquired, as well as prudently deploying new branches in markets where we believe offer the greatest potential.

At this point, I will turn the call over to Charlie so he can cover the financial details of the quarter and when he concludes, we will be glad to take your questions.

Thank you, Scott and good morning, everyone. Thank you for joining us today. Unless otherwise noted, comparisons are this quarter's results to the second quarter. We reported earnings per share of $0.19 for the third quarter, which was a 17% decline from the second quarter and a 32% reduction from the third quarter of last year. On a year-to-date basis, our earnings per share was down 17% to $0.66.

As Scott mentioned, we recorded additional charges of $16 million related to our Resource Mortgage banking operation. This charge was partially offset by a net gain of $1.8 million due to the resolution of litigation and the sale of certain assets. And this litigation and asset sale was also related to Resource Mortgage.

Net interest income improved $1.5 million or 1.2%. Average earning assets increased $388 million or 3%. Average loans grew $275 million or 2.6% while average investment securities increased $142 million or 5%.

Our loan growth of $275 million occurred primarily in commercial loans, which increased $109 million or 3.4%. Of that growth, $63 million was in Pennsylvania, $20 million in Virginia and $10 million each in New Jersey and Maryland. Commercial line of credit usage was 38% at the end of September compared to 37% at the end of June.

Commercial mortgages increased $96 million or 3% with most of the growth in New Jersey, Virginia and Pennsylvania. Construction and consumer loan balances remained relatively stable. Residential mortgages and home equity loans increased primarily as a result of loans repurchased and loans transferred from held for sale to held for investment. Residential mortgages increased $59 million or 8%.

During the third quarter, approximately $15 million of residential mortgage loans were transferred from the held for sale category. Additionally, $18 million in loans were repurchased. Most of the repurchased loans are classified as nonperforming.

Home equity loans grew $19 million or 1.4% with $1.5 million of that increase representing loans transferred from the held for sale category. Average investment securities increased due to purchases made in both the second and third quarters and during the third quarter, we purchased securities totaling $288 million with an average yield of 5.93%. The Corporation realized net losses on securities sales of $134,000 in the third quarter compared to net gains of $629,000 in the second quarter.

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

NOW accounts and Super NOW accounts grew $53 million or 3.2% primarily in municipal accounts. Savings and money market accounts decreased $40 million or 2% mostly in personal accounts. Timed deposits grew $100 million or 2% with $40 million in retail certificates of deposit and $60 million in jumbo certificates of deposit over $100,000.

Customer repurchase agreements and commercial paper increased $57 million or 9%. Fed funds purchased grew $170 million while long-term borrowings increased $70 million. And the Corporation issued $100 million of subordinated notes during the second quarter at an effective rate of 5.95% and during the third quarter, Federal Home Loan Bank borrowings increased $270 million.

Our net interest margin for the third quarter was 3.62%, an eight basis point decline from the second quarter. Yields on earning assets were stable with an increase in investment yields offsetting the decline in net loan yields due to the increase in nonperforming assets.

Our cost of funds increased as a result of the decline in non-interest-bearing balances along with an increase in the cost of certificates of deposit and long-term borrowings.

The provision for loan losses increased $1.9 million to $4.6 million in the third quarter. Net charge-offs were eight basis points or $2.1 million in the third quarter compared to 14 basis points in the second quarter. Nonperforming assets to total assets increased to 69 basis points at September 30 compared to 49 basis points June 30 and 31 basis points last September.

The balance increase from the end of June was $32.8 million of which $20 million relates to loans repurchased from investors. Excluding security gains, our other income increased $501,000 or 1.4% primarily due to the decrease in mortgage banking income being offset by the gain on the resolution of the litigation and the sale of certain assets.

Gains on mortgage loan sales declined $1.7 million to 40%. Residential mortgage loans sold were $265 million in the third quarter compared to $390 million in the second quarter. $109 million of the decrease was at Resource Mortgage where retail sales dropped $75 million and wholesale sales dropped $34 million. The spread on sales declined to 96 basis points in the third quarter from 108 basis points in the second quarter.

Investment management and trust service revenues declined $982,000 or 10% primarily due to a $900,000 reduction in brokerage revenues and a $100,000 decrease in insurance commissions. Service charges on deposits were relatively flat while other service charges and fees increased $689,000 or 9%. Now most of this growth was in the merchant fee category where we have seen continued strong growth.

Operating expenses increased $9.9 million or 10%. Now adjusting for the charges relating to our Resource Mortgage barking operation, the charge in the third quarter was $16 million. In the second quarter, it was $3.4 million. If we excluded that, operating expenses were actually down $2.7 million or 3%.

Salaries and benefits declined $3 million or 5.5% as a result of several offsetting items and during the second quarter, an $800,000 incentive pay accrual was reversed and severance of $1.5 million was reported related to the reduction of back-office personnel. Adjusting for these and other nonrecurring items, salary and benefits were down $2.5 million or 4.6% reflecting the $1.1 million impact of our workforce reduction program, as well as a $1.4 million reduction in salaries and benefits at Resource Mortgage.

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

(OPERATOR INSTRUCTIONS). Matthew Schulteis, Ferris, Baker Watts.

Good morning, gentlemen. Just wanted to doublecheck a couple of things you talked about and go over some of the repurchased loans in some detail. The $2.1 million recovery, what line item was that in again?

That was in other income -- other other income.

Other other. Okay. To date, what is the total dollar figure of repurchased loans and repurchased OREO with the breakdown between firsts and seconds?

It is roughly, Matt, around $40 million.

Okay. That includes OREO, firsts, seconds, the whole nine?

Yes, it is everything that came back and if it was delinquent, it was put in nonperforming loans. When we foreclosed on the property, it was moved into other real estate owned.

How much of OREO is tied to that $40 million right now?

We have a balance of $12 million. I would think approximately $9 million is tied to the repurchased. It is actually $8.7 million.

Okay. And that is after your -- did you take -- is that net of the charge you took this quarter?

It is written down as a -- the nonperforming loans and the ORE is it written down by the amount of the reserves.

And how much again is in the non-performers related to this?

$14 million -- oh, I'm sorry -- the $14 million increase in the third quarter.

Right. And how much does that total to over the period? Over the whole -- out of the whole $40 million, how much ended up in that?

Boy, I'm not -- I can tell you the third quarter, Matt. I am not sure about how much is included in the first and second.

Okay.

But I think the majority of that increase is in the third quarter and I think the gross amount is $40 million.

And how much of that --

That is for the writedown, so I will have to get back to you on that.

Okay. Do you know how much that has reached nonperforming loans has actually rolled into OREO at some point?

I would think it would be a net $9 million. We haven't -- we have sold very little so far. We just reached the agreement with the one investor related to the Alt-A product, the no income loan. That came back and the properties are in the process of being foreclosed on, but we haven't sold a lot yet.

And when you -- when you look to sell these, are you looking to kind of blow them out quickly or do you think you will hold on to them for some time since they are already on the balance sheet?

Boy, we would like to get rid of them as soon as we can.

One last question tied to this. Obviously you took a little bit of a contingent liability again for potential future repurchases. What do you think the dollar figure is on that?

For the repurchases in the third quarter, the total was set, $5.7 million.

Right. But you took a contingent liability for future repurchases.

Oh, yes. That was $2.2 million.

Right. What do you think you may end up repurchasing in aggregate? You put $2.2 million away, do you think you might have to purchase another 15, 10?

Right now, Matt, on outstanding repurchased notices that we haven't foreclosed on the property, we haven't taken over the loan, it is $10.7 million. And the reserve on that is -- well the reserve on that -- there is $10.7 million and we received $5.7 million in the third quarter. Of that $5.7 million, $1 million was due to early payment default. The rest, $4.7 million, was related to borrowers who had misrepresented their -- on their loan applications and that is reserved for. That is reserved in a separate reserve.

Okay. It looks to me that net of all of these charges, but not including net of severance, your operating noninterest expense was about $92 million for the quarter. Sound about right?

Let me check real quick, Matt.

Yes, I mean it's just --

It should just be -- it could be -- $92 million less than -- what we reported but [less] $16 million.

Right. Then what did you have for severance again? It was $1.5 million I think?

Yes, in the second quarter, it was $1.5 million and in the first quarter it was $200,000.

And you had a couple of other nonrecurring noninterest expense items and can you go over those one more time?

The --

I think you did. I might have missed it.

The big things I think were just looking at salaries and benefits were the nonrecurring things that happened in the second quarter. So when you do a comparison, you have to factor those in and it was the severance, $1.5 million you mentioned, that was the primary one.

That was a second-quarter issue not a third?

Yes and then the other one was also a second-quarter issue but if you compare balances (inaudible), we had some incentive -- we reduced our incentive accrual by $800,000 and that was also in the second quarter.

Okay. Well, thanks very much.

Matt, that's the biggest ones and no other ones stand out in my mind, but if there is anything, I will let you know.

Okay. Thank you very much and have a good day.

(OPERATOR INSTRUCTIONS). Gerard Cassidy, RBC Capital Markets.

Hi, Charlie. A question on the nonperforming assets. You indicated that they increased about $32 million to $33 million sequentially and if I heard you correctly, I think you said $20 million came from the Resource situation. Where did the other $12 million -- how were they comprise? What was in that $12 million number?

Gerard, there are no big loans in there and it is not coming from any specific area. It is spread out throughout our franchise and no big loans or nothing specifically related to any of it.

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

I'd expect that things that are nonperforming related to that will be transferring over to ORE. They continue to be nonperforming and we would think that would be an increase of about $14 million to $15 million. So after the reserves are taken out, it should be $14 million to $15 million.

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

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

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

We haven't sold very many because we just repurchased the loans in July and we received the loans back and we are in the process -- I think we have sold maybe two or three, but there is no nothing meaningful that we can get out of that. We want to monitor that and we want to really watch it because that will give us a good indication if our reserves are too high or too low and we feel the reserves are conservative right now. That will tell us. We will let you know when that -- we will report that at the next conference call when we get better information.

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

When we -- we had appraisals on these properties before and we wrote them down and we received new appraisals for broker price opinions on September 30 and the difference between the two is 14%.

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

They are primarily in Maryland and Virginia, but there are some in Florida, there are some in California, there are some in Minnesota and some in Michigan, primarily where Resource Mortgage was operating. But they went out of their area too at times.

True. And then one final question on the loan growth. On the average balances when I look at it year over year, it looks like you guys reported just shy of 7% loan growth and I compare that to the nine-month number, which is higher, close to 9%. Should we anticipate continued slowing growth in the total loan portfolio as we enter '08 or is this now you guys are starting to actually see a pickup?

If I get my crystal ball out, it's cloudy, I don't know. But you are right. The average loan growth this year -- remember, the Columbia acquisition is not in there for the full period [of that growth]. Put Columbia in for January '06. I think our loan growth is about 7% on average, but if you look linked quarter, it is up 3%, when annualized 12%. It is being driven primarily by commercial loans and it nets us -- we are picking up marketshare and also our customers are borrowing a lot more for acquisitions and plan expansion, additional capital, additional working capital lines. That commercial loan growth is 12% and we think we have strong pipelines, so I think our loan growth is going to be -- I don't know -- my crystal ball is cloudy, but looking at these numbers, I think our loan growth is going to be pretty strong. (inaudible).

Great, thank you very much.

Frank Schiraldi, Sandler O'Neill.

Good morning, guys. A question on Resource as far as headcount. Could you just share with us what the headcount was at Resource before sort of all this started happening, what it is today and maybe how many people have been fired or how many have left of their own accord?

We are guessing now, but it went from about 325 to about 150 and that is off the top of our heads here.

Okay. Now have those people who left -- has there been a bunch of people let go or is it people have left sort of at the beginning of all this?

I better not comment on that. They are gone.

And is there a number that you expect that headcount to get down to or is this 150 sort of what you expect going forward?

I would expect that and as we evolve our plans for expansion that we talked about there and as we build additional branches into '08 and '09, we will be adding some folks obviously to facilitate that.

Okay. And as far as the $9.9 million, you talk about in the release two situations that add up to that and I guess it is $27 million in loans. How many loans are there to make up that $27 million and when you speak of the situations, is it two people specifically or is it two offices specifically?

63 loans they are telling me and it is two offices where we identified the problems.

All right. And those offices have been closed and basically you are in the review process now to review all the mortgages that went through, but basically all the mortgages that these two offices have already been scrubbed or the paperwork has been reviewed and found okay other than these?

What we have disclosed is what we know now. As I said earlier, just as an abundance of caution so that we can get this behind us, we are doing this additional analysis and we are bringing in some additional help to get it done frankly because we want to get our hands around this and if there is any more, and we don't know that there is, we want to get it identified and reserved for. And just as importantly, we want to get the focus of this behind us so that we can move on to more positive -- and have those folks doing what they do best and that is originating quality mortgages and generating revenue for us. So it is time to get this behind us and we want to try to do that as best we can and we think the addition of some additional help and fresh eyes looking at the whole thing will help us do that.

Is there sort of an aggregate number you could give? I think -- and correct me if I'm wrong -- but I think last quarter you sort of said that the stuff that was coming back you were writing down to 75%.

I'm sorry, what was the last part of the question?

I think last quarter you had said, based on the conference call, that you were writing stuff down to, if you sort of aggregate everything up, an average of 75% of the total value of the loan. That is the loans coming back that you were repurchasing when you were putting them into nonperformers. So has that number changed at all? Has it gone down?

We are writing down still 75%, but the numbers are changing because the appraisals have gone down. The more recent appraisals are down by 14% from the last time we did the appraisals.

Okay. So those -- and those appraisals -- when you say 14%, those are just the total loans that you have gotten repurchase requests on?

Yes, it is all the loans that have been put back to us. It's a nonperforming, it is an ORE or it is repurchase requests that are outstanding. And they -- our guideline is 75 basis points, but some, based on the condition and where they are, have been written down more.

Okay. And then when you say the $32 million NPA growth quarter over quarter, that includes the stuff in OREO, right?

Yes, yes, that's nonperforming assets.

Okay. And I know last quarter you talked about a couple of loans that were in nonperformers or projects that were going on -- residential construction at Columbia and some smaller commercial loans in New Jersey. Are those -- has anything else come out of nonperformers I guess is the question besides the repurchases that went over to OREO?

No, I don't think so. It has stayed stable. We put -- a lot of residential mortgages have gone in to be repurchased and the OREs (inaudible) and the net increase is $11 million and I think it is the net increase and it is all smaller loans throughout our franchise, no big ones in there.

Okay and then finally on expense saves, has it sort of gone quicker than you expected, the quarter-to-quarter expense saves and is some of that due to -- or I guess how much of that is due to lower gain on sale of mortgage loans?

Yes, the amount that we saved from Resource Mortgage in expenses I think it is about, just in salaries and medical [scale], $1.4 million and (inaudible), the workforce reduction program in the quarter was $1.1 million.

So that 1. --?

$2.5 million is the total. And you can -- we tried to give you some information related to nonrecurring things in the second quarter and if you average those out, our salaries and benefits are down $2.5 million and it is 4.6% linked quarter, so I think we are seeing a lot of progress there.

And so you expect -- you will expect to have some more progress as you go forward because you still expect some jobs to go away by attrition, right, is that correct?

I think the majority of it has happened, but there is some more that will come into play.

And then finally -- just sorry -- one more question on deposits. It seemed like deposits -- that outflow was mainly -- or in Virginia, there was more outflow I should say than the rest of your regions. Do you think that has to do at all -- do you think the Resource situation is shorter for core deposits down there?

They don't have a lot of core deposits and I don't think that would materially affect the Corporation's numbers, but I can look. I don't remember seeing anything in any particular affiliate other than an overall trend.

Okay. Thank you. I will touch base with you maybe after and I was just looking at FDIC data and it looked like Virginia was maybe more so than the other regions, but I will give you a call after. Thanks.

(OPERATOR INSTRUCTIONS). Bob Hughes, KBW.

Good morning, gentlemen. Just some follow-up questions on the repurchase issue. I guess the initial issues in the first and second quarter were largely related to early payment defaults. More recently it seems to be more of a rep and warranty issue, is that correct?

Yes.

Yes.

Maybe EPD falls under that. These are not early payment defaults.

Correct.

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

Yes, this is the 80/20 that we had a problem with, the [low doc]. Was primarily related to one investor. These two are related to other investors and it is more of, as what you said, the misrepresentation instead of default.

Okay. So the principle balance of loans that were originated that have been repurchased is $40 million, is that correct?

Right. Gross, yes.

Gross.

Yes, that's close.

That's close. Okay.

If it's different, I will tell everybody.

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

That was -- the $265 million I think was related to this one investor program that we had the early payment defaults on. The ones, as you pointed out, the ones we are having -- that we are reserving for here is primarily related to potential borrower misrepresentation.

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

Correct.

And again, if you could give us any kind of sense of what the volume of those loans originated was over the past couple of years that would be helpful and secondly, what is the tale or statute or how long do these rep and warranty -- reps and warranties last? Is it a year, two years, five years, life of the loan?

It is life of the loan for most of these. From a practical standpoint, a few years is what we would expect most of it to be filtered through.

Okay, given the [accesses]. So do you have numbers for us on the volume of loans that were originated over say '05 and '06?

Yes, in '05 and '06 and year to date in '07 for the retail loans that don't come in through wholesale brokers that come through just the regular system is $1.8 billion and for loans that come in through the wholesale or the fee-based offices down there, it was $2.1 billion. So total sales, $3.9 billion.

Okay, and that is in '06?

No, I'm sorry. That is '07, '06 and '05, that is back three years.

Okay. Great. And then on a separate topic, as I look at a lot of the banks in the mid-Atlantic region, you guys have one of the higher concentrations of construction loans, some of which just come from Resource, some of which has come from Columbia and given your commentary on the deterioration in housing values, what can you tell us about the type of scrubbing you have done on your construction portfolio and why do these trends not argue for some higher provisioning against that portfolio going forward?

Well, we have been monitoring those portfolios very carefully for 18 months or two years now as this all evolved and our analysis indicates that the customers we are dealing with, while they are having some difficulty moving some inventory, are not in serious liquidity positions at this point in time and in some cases, we have reserves for some of those where we had some concerns about that. But I think we have some time to go before it impacts them to the point where the carrying costs become prohibitive.

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

Yes.

Okay. And then one last question associated with that. Can you tell us what your allowance is against the construction portfolio today?

I can. I can't tell you now though. I'm sorry. I can tell you -- I can't -- we allocate against specific loans and I'm sorry I don't have that with me right now.

Okay. I'm sorry to ask one more here, but when you finish conducting your review of documentation on loans originated, should we expect an update intra-quarter?

Yes.

Okay. All right. Thanks, guys.

Just a couple comments on -- we receive detailed reports from every one of our -- all our areas and we are focusing on construction and commercial real estate and houses are slowing especially at the high end, but they are selling in our areas. Some of the areas are pretty good, but inventories are bigger, it takes a little bit longer to sell it. The smaller priced houses seem to be going okay and we are carefully monitoring that. We always do and if you look at provision too, we are booking $4.6 million of provisioning against $2 million in charge-offs.

So we had some loan growth, but I think it is also we're looking at things a little bit more, maybe we are allocating them a little bit more than we did this time last year when we had charge-offs of just $500,000. So I think we are watching it as closely as we can. We are allocating as we should I think and the provision I think might reflect that.

No, there is no question that there has been a big delta in provisioning. I am just saying given the increase in NPLs and concerns about some of these sectors specifically, I am surprised we are not seeing more reserve building.

Yes, and you know one thing when you look at the nonperformings, you have to remember a lot of that came from the residential mortgage repurchases and they have already been written down. They have been written down I think pretty conservatively twice. Once with the original appraisal of 25% and new appraisal of 25%, so the stuff that is coming in from the residential mortgages, we think we have a conservative reserve on we think. Time will tell.

Okay. Thanks, guys.

Mac Hodgson, SunTrust Robinson Humphrey.

A couple of quick questions on the decision to merge Resource Bank with Fulton Bank and the kind of branch plans in Northern Virginia. How much will that -- maybe just give us some details on the branch expansion plans there and how much of that will eat into some of the expected expense savings going forward?

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

But having said that, as part of Fulton Bank and with Fulton Bank's continuing budgeting for branches, it will give that area some room to do some more additional branching and maybe cut back in some of the areas -- other areas of Fulton where some branching might have taken place that might not have quite the potential that some of these sites will have.

So I think it works nicely into the budget without significantly increasing the overall costing for branches, just reassign some locations geographically.

Okay and you have merged some affiliates before. This one is a little bit different since it is not written necessarily in contiguous markets. Is there a strategy here to eventually go to a one bank model or is this different and do you still envision operating with 10 or plus so subs?

We have done 25 acquisitions over the last 26 years and what we now or will have 10 banks. So when it makes sense to put banks together, we will do that and we have over the years. In this particular case, it made sense so that we could speed up the process of the evolution I talked about earlier from a mortgage banking operation, primarily driven by that and residential development to one that is more diversified and has the ability to generate frankly more funding to fund its loan growth.

So there is no master plan to by a certain date to be a certain composition of banks, but when it makes sense to do so, we will do it and move accordingly. The strategy still is there to try to maintain the brand and image and, in reality, the customer service of a community bank. That is what differentiates us from some of the larger regional banks and part of that process is the branding as a community bank.

Okay. Thanks, guys.

Matthew Schulteis, Ferris, Baker Watts.

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

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

Specifically to the mortgages.

No. All the mortgages were sold into the secondary market and they are coming back. So when they come back and we adjust it down, it goes through operating risk loss.

Okay. I wasn't sure if you were putting some of those into performing and then if they went nonperforming --

Well, you are right there. Some of them are -- they missed maybe one payment before and now they are performing and we have put them in the regular loan portfolio, but it is not a lot. Most have moved into nonperforming assets.

(technical difficulty)

Thank you very much.

You are welcome. One basis point would be due to the increase in nonperformings. 1.5% would be due to the drop in the core deposit funding that we mentioned and especially in DDA. Two basis points would be contraction from the loan growth we had being funded by CDs and borrowings and three basis points would be -- we have been increasing the size of our investment portfolio as I mentioned and the thing is we are trying to get more liability-sensitive just to make sure that we have more of an advantage from a decline in rates and it is not a big move, but it is a slight adjustment. So it is three for the investments, two for the loan growth, 1.5 for the loss in core funding, 1% for the nonperformings and I think the other half a basis point is due to a drop in loan fees.

Okay. Great. Thank you.

That concludes the question-and-answer session. At this time, Mr. Smith, I will turn the conference back over to you for additional or closing comments.

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

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