Fulton Financial Corp (FULT) 2009 Q3 法說會逐字稿

Good day and welcome, everyone, to the Fulton Financial third quarter 2009 earnings results conference call. This call is being recorded.

At this time, I would like to turn the conference over to Vice President and Corporate Communications Manager, Ms. Laura Wakeley. Please go ahead, ma'am.

Thank you. Good morning, and thank you all for joining us for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the third quarter of 2009. Your host for today's call is Scott Smith, Chairman and Chief Executive Officer of Fulton Financial. 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 released at 4:30 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 statements reflect the Corporation's current views and expectations based largely on information currently available to its management, and on its current expectations, assumptions, plans, estimates, judgments, and projections about its business and its industry, and they involve inherent risks, contingencies, uncertainties and other factors.

Although the Corporation believes that these forward-looking statements are based on reasonable estimates and assumptions, the Corporation is unable to provide any assurance that its expectations will, in fact, occur or that its estimates or assumptions will be correct, and actual results could differ materially from those expressed or implied by such forward-looking statements, and such statements are not guarantees of future performance.

Many factors could affect future financial results, including, without limitation, the factors listed in the Safe Harbor section of yesterday's earnings news release. Fulton Financial Corporation 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, and accordingly, investors and others are cautioned not to place undue reliance on such forward-looking statements.

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

Thank you, Laura, and thank you, everyone, for joining us here this morning. Each of us has a few prepared remarks and then we'll be happy to respond to your questions.

I have some general comments and then Phil will provide some details on credit, and Charlie will review our third quarter financial performance.

We reported diluted net income of [$0.03] per share for the quarter. This was up from the $0.05 we reported in each of the two previous quarters. While we are encouraged by this increase, we know that there are continued economic and credit challenges that will need to be overcome. As I stated last quarter, our goal was to be ahead of the curve when the credit cycle turns more positive, and we continue to manage toward that goal.

We clearly understand our existing credit quality issues and believe we have made good progress in that regard. However, continued economic uncertainties demand that we remain vigilant and proactive in our response to potential problem loans.

During the third quarter, we experienced continued growth in core checking and savings deposits. We had particularly good growth recently in small business checking due to increased focus on (technical difficulty) when this segment has a source of lower cost funding. Over the last several months, a significant portion of our certificates of deposit matured and renewed at lower rates, that helped us produce a nice increase in our net interest margin this quarter. We strive to maintain a healthy balance between competitively pricing our deposits and prudently managing our net interest margin.

Earlier in the year, we promoted our variable-rate certificate as a portal for new and existing customers to begin or enhance their total relationship with us. We believe our relationship building efforts at the branch level are largely responsible for helping us retain most of these time deposits and for our continued core deposit growth.

One of our challenges is to put these deposits to work at a time when investment yields are low and quality loan demand is relatively soft. In the meantime, we will continue to reduce our higher cost wholesale funding as it matures, while continuing to build core deposit relationships.

I should also point out that in comparison to the second quarter of this year, we experienced a slower overall rate of deposit growth in the third quarter. We believe the pace of deposit growth has slowed further for the remainder of the year. With that said, however, we remain very well-positioned to meet the future credit needs of our customers.

While we experienced growth in total loans over the second quarter, loan demand, as well as the loan pipeline, remained relatively soft across the franchise. We were also able to reduce our provision for loan losses slightly this quarter, based on the results of our allowance allocation procedures.

Despite this decrease in the provision, our total allowance for credit losses increased, since charge-offs remained lower than the provision. Phil will give you more color on credit in a few minutes.

For the first two quarters of 2009, our growth in other income was positively impacted by very strong residential mortgage volume. Toward the end of the second quarter, there was a slowdown in mortgage applications and its corresponding reduction in our sale gains that negatively impacted our other income in the third quarter. With the exception of these lower sales gains, most of our noninterest income categories held up well and showed increases.

Overall expenses were again well-controlled and virtually flat linked quarter. We continue to manage our expenses very prudently, a discipline that also positions the Company for future earnings growth. Capital ratios remain strong. We continuously evaluate our capital position, and as I said last time, our focus is on growing capital through retained earnings from profitable organic growth.

Despite encountering many challenges, we have never lost sight of the success we know this Company and its dedicated people are capable of creating for our shareholders. When economic growth begins to normalize, and consumers and businesses see brighter days ahead, we believe we are well-positioned within our markets and relative to our peer group, to show significant improvement in our earnings performance.

Thank you. At this time, I'll turn the call over to Phil Wenger to talk about credit.

Thanks, Scott, and good morning. We continue to focus increased resources on working through our credit issues and to closely monitor loans across all sectors for early signs of trouble and remediation. As you know, there's still a great deal of economic uncertainty that could impact our credit metrics going forward.

Unless I indicate otherwise, my comments will focus on second to third quarter numbers. Overall, ending linked quarter loan balances increased by $102 million. This modest increase, which is a reversal from the decline you saw last quarter, continues to reflect softer loan demand throughout our footprint, along with our desire to add quality credit relationships.

One of our management priorities, as I indicated in our last call, is to reduce the size of our construction loan portfolio. After a drop of $109 million from quarter one to quarter two, we dropped another 6.1% or $67 million linked quarter, bringing our total decline in construction loans to $279 million year-over-year or 21.3%.

We are making progress in reducing our overall construction exposure, and we'll probably continue to do so, given the continued climate of little, new or existing development and current rates of absorption. Commercial loans and commercial mortgages were up a total of $170 million.

Even though credit demand is soft, we continue to take advantage of quality, market share opportunities through our new business development efforts. As you saw in last night's release, we recorded an additional $45 million in our provision for loan losses, down slightly from the $50 million recorded in each of the two previous quarters. That was a positive development, along with a slowing in the rate of credit deterioration and an overall reduction in charge-offs this quarter.

As of September 30, our allowance stood at 2.02% of outstanding loans, up from 1.86% at the end of the second quarter and up from 1.2% a year ago. Linked quarter, our allowance coverage to nonperforming loans increased from approximately 83% to almost 86%.

Total nonperforming loans increased by $14 million, down $7 million from the $21 million increase we experienced first to second quarter. Annualized charge-offs to annualized loans fell 16 basis points.

As to be expected, the geographic distribution of our loans showed no change from what we reported at midyear. 54% are in Pennsylvania; 21% in New Jersey; 13% in Maryland; 9% in Virginia; and 3% in Delaware. Of our lower third quarter net charge-off number of $24.2 million, $8.5 million came from our New Jersey banks; $5.9 million from Fulton Bank's Virginia division; $5.1 million from our Pennsylvania banks; $4 million from our Maryland bank; and $700,000 from our Delaware bank.

Looking at that same $24.2 million by loan category, we charged off $9.3 million in construction loans; $7.3 million in commercial loans; 3.4 million in consumer and leasing; $3.1 million in commercial mortgages; and $1.1 million in residential mortgages.

Of our total charge-offs this quarter, $6.9 million came from five loans in excess of $1 million. One was a grocery store in New Jersey; one a Maryland townhouse project; one a residential development in Pennsylvania; and two residential developments in Fulton Bank's Virginia division.

Total nonperforming assets as of September stood at $301 million with $282 million in nonperforming loans, and $19 million in other real estate. During the quarter, other real estate dropped from $29 million to $19 million. We do believe this $19 million of ORE is conservatively and fairly represents the value of these assets.

Approximately $82 million of our nonperforming assets or 27% are housed in Fulton Bank's Virginia division; $74 million or 25% in our New Jersey banks; another $74 million in our Pennsylvania banks; $64 million or 21% are in our Maryland bank; and $7 million or 2% are in Delaware.

On September 30, our total delinquency stood at 3.32%, up 10 basis points from the 3.22% we reported on June 30. 30-day delinquency decreased from 72 to 68 basis points; 60-day increased slightly from 30 to 31 basis points; and 90-day increased from 220 to 232 basis points. All loan categories showed an increase in total delinquency linked quarter with the exception of commercial mortgages, which fell from 195 to 184 basis points.

Our commercial mortgage delinquency has remained relatively stable throughout this difficult economy, and while we do have performance risk in this portfolio, we do not see high refinancing risk.

Our residential mortgage portfolio showed the greatest percentage increase in delinquency for the quarter from 7.36% to 8.5% -- not because of a significant increase in foreclosure activity, but because of an overall decline in the size of the portfolio of about $150 million. The actual dollar rise in delinquency was $500,000. Losses in the residential area continue to be relatively small in comparison to the overall portfolio.

Construction loan delinquency increased from 10.36% to 11.37%, mainly due to the decrease in the portfolio balance that we've mentioned earlier. Commercial loan delinquency was up 2 basis points to 2.26%.

We experienced modest growth in our consumer portfolio during the quarter. However, we also saw direct consumer delinquencies rise from 136 to 169 basis points. We attribute this rise to sustained high unemployment and prolonged economic challenges. We do feel that delinquency under 2% in this very difficult environment reflects the quality of our consumer portfolio.

As you may recall from last time, about 43% of our open end home equity lines are first liens with an average credit score of 744 across the entire portfolio. Also, the total loan to value on the portfolio is a conservative 56%.

While we have a foundation of overall very strong credit quality under our consumer sector, we don't know what the future holds, particularly if predictions of a jobless recovery prove to be true.

Before concluding our credit discussion, it may be helpful to share anecdotal information we are hearing from our lenders. The loan pipeline is still soft in all our markets, but there is a feeling that we are at or are beginning to come off the bottom of real estate prices, although residential activity and prices appear to be showing more potential improvement than the commercial sector. While many of our relationship managers are somewhat encouraged, their feedback cannot yet be characterized as optimistic.

We are seeing home price stabilization throughout Pennsylvania. However, New Jersey and Maryland markets remain stressed in both residential and commercial sectors.

Even if we see indications of a more pronounced economic rebound, we, along with the industry, have significant credit challenges that will not resolve themselves overnight. At the same time, we want to grow our loan portfolio with quality market share opportunities.

To summarize, we are comfortable with our reserves as we see them today and as we view the current portfolio. We are pleased with our progress in reducing the construction book, and was also a good sign to see our charge-offs decline and the deterioration rate of the portfolio slow somewhat.

Thank you for your attention. At this time, Charlie Nugent will cover details regarding our third quarter financial performance. I will be happy to respond to your more specific credit-related questions in the question-and-answer session. Charlie?

Okay. Thank you, Phil, and good morning, everyone. Thank you for joining us today.

Unless otherwise noted, comparisons are this quarter's results for the second quarter. As Scott mentioned, we reported net income available to common shareholders of $18.3 million, or $0.10 per share, in the third quarter compared to $0.05 in the second quarter. Our second quarter earnings were negatively impacted by the $7.7 million, or $0.03 per share, FDIC special assessment.

We are pleased to see a number of positive items impacting our earnings. These items included a 3.8% improvement in net interest income; a decline in both net charge-offs and the loan loss provision; and well-controlled core operating expenses.

The $4.9 million or 3.8% improvement in net interest income was a result of an increase in our net interest margin. The net interest margin increased 12 basis points this quarter from 3.43% in the second quarter to 3.55% in the third quarter. This increase was due to the decline in time deposit costs, which were 2.97% in the second quarter, and they decreased to 2.61% in the third quarter.

Yields on earning assets decreased only 3 basis points. There are a significant amount of time deposits and Federal Home Loan Bank advances maturing in the fourth quarter, which should have a positive impact on our net interest margin.

In the fourth quarter, $1.3 billion of time deposits mature at a weighted average rate of 2.2%, and $140 million of Federal Home Loan Bank advances mature at a weighted average rate of 4.25%. Total average earning assets decreased slightly; as Phil discussed, average loans were down $47 million or 0.4%.

On the funding side, total deposits increased $352 million or 3%, with most of that growth in demand and savings accounts, which grew $424 million or 7%. Noninterest-bearing demand deposits increased $110 million or 6%, with most of that increase occurring in business accounts. Interest-bearing demand deposits grew $64 million or 3.5%, and this growth was primarily in state municipal accounts.

In the savings category, we saw a $250 million or 11% growth. $78 million of that growth was in personal accounts; $67 million was in state municipal accounts; and $106 million was in business accounts. The growth in business accounts was impacted by businesses having to keep more balances on hand to offset service charges, as well as a movement from our cash management products due to the current low interest rate environment. The municipal accounts are reflecting these same factors along with the seasonal impact related to the tax collection process.

Time deposits decreased $71 million or 1%; brokered certificates of deposits declined by $174 million to $17 million at September 30. Retail certificates of deposit increased $110 million or 2.2%. Excluding security gains, our other income declined $4.1 million or 9% to $41.2 million. This decrease is due to a decline in mortgage sale gains.

Total gains on the sale of mortgage loans were $2.8 million in the third quarter compared to $7.4 million in the second quarter. Total loans saw a decrease to $580 million from $650 million.

Other categories of income displayed solid growth. Service charges on deposit accounts were up 2%, with growth in overdraft fees and other deposit service charges offset by a decline in cash management fees. Cash management fees declined by $340,000 or 11% as a result of customers transferring funds from our cash management program, due to the low rate environment. Other service charges and fees increased 4.3%, due to strong growth in both merchant fees and debit card fees.

Investment management and trust service income improved 4%, primarily representing growth in brokerage fees.

The decline that you see in the other income line is the result of non-recurring items, primarily gains on the sale of fixed assets and other real estate. These gains totaled $575,000 in the third quarter, compared to $1.1 million in the second quarter.

Operating expenses decreased $8 million or 7%. Without the impact of the $7.7 million special FDIC assessment in the second quarter, our operating expenses were virtually flat.

Salaries and benefits were down $1.7 million or 3%. Part-time salaries decreased about $200,000, partially due to staff reductions at The Columbia Bank. Employment taxes declined $440,000, as certain employees hit the ceilings on FICA and unemployment taxes. Employee benefits decreased $580,000 due to a reduction in severance costs, a change in our post-retirement healthcare plan, and the timing of 401(k) payments.

Investment security losses were $45,000 in the third quarter compared to gains of $77,000 in the second quarter. In the third quarter, realized security gains were approximately $2.7 million, primarily on the sale of debt securities offset by approximately $2.7 million in other than temporary impairment charges. Of those charges, $900,000 related to bank stocks and $1.8 million related to pooled trust preferred securities.

Okay. Thank you for your attention and for your continued interest in Fulton Financial Corporation. Now we will be glad to answer your questions.

(Operator Instructions). Craig Siegenthaler, Credit Suisse.

First, just on credit quality. Should we read into the delinquency pickup this quarter, in terms of having an impact in NPL growth next quarter? And especially since the level you disclosed is really a 90-day plus, which is right before a loan would go into the NPL segmentation.

Craig, I believe the entire 90-day delinquent loans are in our NPL number. So we think the 30 and 60-day category are more of an indication of future NPLs.

Do you disclose that level? 30 -- in other words, we have to wait for the [YNAC] filings in a couple weeks?

Well, we disclosed the percentage. The --

And meanwhile, you're just looking for those, wondering what geography and loan class drove this pickup in the 90-day plus?

Hold on a second here, Craig. We're getting the number for you.

Okay, thank you.

Our 30-day delinquencies total $82 million and 60-days are $38 million.

And do you know how they trended sequentially -- for the second quarter?

Yes, the 30-day dropped from, I think, 72 basis points to 68 basis points. And the 60-day increased 1 basis point from 30 to 31.

And then my second question really was -- what geography and loan class drove this? Was it Maryland or -- in loss in terms of loan class?

Are you speaking of delinquency?

The 90-day-plus delinquency, the one that picked up. I was wondering what geography and kind of loan class drove that change.

It was spread across the Corporation, and I'm not sure I have the -- try and get that for you. That's just the 90-day -- okay. Yes, if -- just on the 90-day delinquency, actually, Pennsylvania had the highest increase, followed by Virginia and New Jersey.

And do you know what type of loans these were?

Yes, the largest was in the commercial loan area and then the balance was split. Actually, the consumer commercial mortgage and residential mortgage would be -- they were split evenly, and construction mortgage was actually a little lower than the other categories.

Got it. So C&I, your commercial, industrial, financial and agricultural bucket had the highest pickup?

In the 90-day?

In the 90-day, yes.

Yes, I'm only speaking of the 90-day.

All right, great. Well, thanks for answering my questions.

Matthew Clark, KBW.

The $67 million incremental decline that you had in your construction loan outstandings, it looks as though about a little over $9 million came in the form of loss. Can you give us a better sense as to that remaining portion, whether or not there was any reclassification in there, into maybe CRE, or whether most, if not all of it, was just payoffs?

I do believe we had one construction loan that moved into a permanent status in CRA -- or CRE, that was about $15 million; but the balance for the most part would have been paydowns.

Okay, and you didn't have any loans -- you didn't have any sales -- related loan sales?

No.

Okay. And in terms of the much slower incremental increase in the construction nonaccruals, up about 2%, I guess, can you give us a better sense as to what's going on behind those numbers? Is it your borrowers are able to sell ones and twosies, and service the debt here? Are you seeing -- just trying to get a better sense as to why you might not be seeing a more dramatic increase here in the third quarter?

Well, I think it is due to a couple of things. As we've mentioned many times, we've tried to identify problems very early and especially large problems. So -- and that doesn't mean there still aren't some out there, because there are, as we all know.

But they tend to be smaller accounts now than they had been in the past. And that, combined with the -- between May and October, I think we had better than anticipated activity in the sale of both homes and lots.

Okay. And then lastly, do you guys have any TDRs? And if so, how much are they and what were they last quarter?

You know, TBRs, I think are something that we are measuring now. And currently, we have -- have that number for you in a second -- $42 million. $25.7 million of the $42 million are residential loans; $16.1 million are commercial.

Okay. And that number last quarter? I think we can get it from the call report, but if you have it.

We, in the pass, weren't comfortable with our number, so I think this is the first time you'll see.

Okay, and is that $42 million all accruing interest or is it in non-accrual?

There is about $9 million that are in non-accrual. And I would just add that any loan that we have that's been delinquent, if we restructure it, it goes in nonperforming status. If we have a current loan that we make some deferral of principle or lower an interest rate somewhat, and it has not missed a payment and continues to perform, we include it in the performing category.

Any loan that has had any reduction in -- or has had any forgiveness in principal or interest would be a nonperforming loan, as would any loan that has not made any payments.

Okay. And then if I may, one quick one. Do you guys plan to accrue for the pre-payment of the FDIC insurance premiums in the upcoming quarter? And if so, what that amount might be.

Yes, we will if we prepay it; but we don't have all the details yet. I think that will be a common industry thing when we'll get all the details. But you know, the payment will be put on our balance sheet as a pre-paid, and amortized over the three-year period.

Right. Thanks.

Rick Weiss, Janney.

I was wondering if you can give us any information with the shared national credit portfolio that you have, or what came out from the recent exam?

Sure. We have 20 accounts that are classified as shared national credits, and total balance is currently $164 million. We have -- two of those are both delinquent and in nonperforming status. They total $10 million. That was not a result of the recent exam; those both had been identified prior. So there was really no change from the examination reports.

Okay, that's good news, I guess. Also, if we could talk a little bit about the reserving policy that for the last several quarters, the provisioning has exceeded your charge-offs. Would you expect that going forward? Or at some point do you think that provisionings will equal charge-off?

Rick, this is Scott. I think we -- certainly, some day. I mean, we have a process we go through that's fairly well -- we think is fairly sophisticated and we constantly stress test the portfolios. And that's a quarterly decision as we go through that and look into the next quarter.

At some point in time, it will be -- those numbers will be the same, but that will be dependent on what the stress test looks like, and our evaluation of the portfolio and the economy going forward. When that will occur -- we'll know at the end of each quarter when we go through the process.

Okay, thank you.

Matthew Schultheis, Boenning & Scattergood.

A couple quick questions. You instituted a program to help clear your book of some construction loans. As I recall, you were to pay -- to finance 80% on a purchase of a home, and the builder was going to finance the other 20%. How is that program going?

Matt, I'd say we've had very little activity in that program.

Okay. And your OREO decrease. I'm assuming the $10 million decrease was a function of properties being sold?

$6 million was the decrease, from $25 million to $19 million.

Okay, I had that wrong. I apologize.

And that was a function of properties being sold, and --

And did you finance those sales?

No. And they were predominantly residential mortgages from our southern -- from our Virginia division of Fulton Bank.

Okay. I think that's it for me. Thank you very much.

Collyn Gilbert, Stifel Nicolaus.

Just to start off with a question, and the stock is on a tear this morning, so it seems as if the market was a little surprised by the results. Were you guys surprised by the strength on the credit? I mean, did you anticipate the stabilization this quarter the way it came in?

Sure, Collyn, we knew it all along. (multiple speakers)

I'm trying to gauge if your negative tone is a reflection of future performance or if you guys are just being very conservative.

Well, you know us -- we're very conservative.

I know this hasn't been a whole lot of fun lately, either. So -- no, but I guess, just -- you know, and I think actually, so you may have touched on it, in the sense that one thing that maybe led to the surprise was that the activity and the sales from May to October was stronger than what you had thought. But maybe just without saying yes or no, maybe kind of give us some things that have occurred that maybe is causing the credit metrics to be better than what some of us would have thought.

Well, again, we have tried to identify things early and have tried to be aggressive. So, early on, we really had a number of large credits that were moved into nonperforming. I think that the pace of large credits has decreased substantially.

The increase in activity, Collyn, I think is -- or we think that that first-time home buyer credit really spurred on -- has been extremely successful and has been very beneficial to the residential market. And whether that continues and in what form it continues, is certainly a question at this point in time.

So we -- I think we have a little concern there. We have a little concern with the future or the outlook of interest rates, long-term interest rates moving forward. So I think we want to continue to be conservative.

Okay. As you look at your -- the nonperforming bucket and kind of assess collateral values, how have those changed? I mean, in terms of expectation of loss severity rates?

You know, I think just very generally speaking, the loss severity has not changed that much. And we look at those loans on a quarterly basis and if we need to charge them down further, we do. If we think we need to add to the provision, we do.

In general, what we've been able to obtain on sales compared to what those assets are in that nonperforming category, I think we've been very, very close. So I think we feel good about the value of those assets in the portfolio.

Okay. That's helpful. Could you guys talk a little bit about the loans that you're seeing in the pipeline, and just kind of walk through some of the characteristics of the new deals that you're seeing, in terms of, like, size and structure -- and mostly interested on the commercial side.

Well, it's across the board. We're looking at market share pickup, not new activity. We're seeing C&I loans; in the commercial real estate, we have multiple -- or a multitude of opportunities. We're being extremely selective. So I think it runs across the gamut on both C&I and commercial real estate.

Are these loans -- I mean, in terms of structure, maybe give a little bit of -- frame it, in terms of LTV, debt to service coverage, average loan size.

Well, you know, in general, structure is -- has been enhanced, I would say, in favor of the financial institution. So we're looking at loan to values now on the CRE side of what once would have been 80%, 65%. We're looking at debt coverage ratios of 130, 135.

Okay. That's helpful. And then just one final question. Is there a change in the strategy at all on the residential mortgage side? It looks like the residential mortgage balances were up, but obviously, the mortgage banking loans headline was down. Or maybe speak a little bit to the outlook there.

I thought the balances were down. (multiple speakers) I don't think there's been any change, I guess would be the easiest way to answer that question.

Okay. And maybe this quarter's performance on -- I mean, just reflects a slowdown in activity then?

I believe it does.

Okay. That's all I had, thanks.

David Darst, FTN Equity Capital.

Phil, you indicated that New Jersey and Maryland are still showing the most stress. Other than C&D, can you maybe give us a little more details on what type of asset classes? And maybe if there's been any change, when you elaborated on it, you indicated about the large borrower versus small borrower -- any change in that outlook as well?

Yes. I'm sorry, you said other than what?

Construction.

Construction. Well, in New Jersey, we have a larger portfolio of commercial real estate. It is, in general, smaller, much smaller amounts. So we're seeing some weakness in New Jersey from both C&I and CRE, but they are a much smaller accounts.

In Maryland, I think I was still referring to prices of lots and homes; I'm not sure that we feel that they've totally stabilized yet.

How much is your lot exposure at this time?

I think I'll have that for you in a second.

Could you comment on the charter consolidation and if you think you'd have any more of those you'd like to do, and maybe some [allocate] expense savings?

You're referring to the Maryland consolidation we just completed?

Yes.

Yes. As you may recall, we've bought 22 banks in the last whatever it is, 27 years now. So it's not new for us to consolidate charters as it makes sense within the market. And so we'll continue to look at that. There are none that are imminent as we speak, but we tend to do what makes sense in the market as we evolve through the process. So there's no plan to make them all Fulton Bank, but there's no plan not to.

What we found in Maryland is we had three banks that were geographically starting to push into each other's markets. We had some opportunity to save some costs, as we did the conversion of the data processing system down there this year as well. We hadn't done it earlier because we had significant prepayment penalties in the contract with the previous provider.

So the combination of all that had us look at that whole market and what was the best way to provide what I'll call community -- to maintain the community banking brand and still reduce costs from all of that. And it made sense to them and to us, and so we did it.

The future just will be that same kind of analysis -- as things come up, and as banks grow and get closer to one another, we'll continue to make those kinds of decisions. But we think it's very, very important right now to maintain the community bank in each brand, whatever you want to call it. And we're finding that that's helping us in our business development activities.

Okay, thanks.

David?

Yes.

Our total outstandings on land that would not have any vertical construction is currently $116 million. And our total horizontal and vertical construction -- the total of horizontal and vertical is $765 million. And that's an $86 million reduction in nine months of this year.

Okay, thank you.

Whitney Young, Raymond James.

I think most of my questions have been answered; but I was wondering if you could talk a little bit more about the Pennsylvania market in terms of commercial lending? Obviously, you had some CRE loans that you brought on. And I was just wondering how you were able to grow that portfolio, if there was any kind of market share dynamic changes from the second quarter or earlier this year.

And you mentioned that there were a multitude of opportunities out there. So I was just wondering if you could elaborate on that and also the change that you might have seen so far this year.

Well, we're getting a lot of opportunities from -- a lot of market share opportunities from customers of other financial institutions, and I think they're because of a number of reasons. There have been some mergers and consolidations in our markets that have created change. So we're trying to take advantage of those when we can, when we think it's prudent.

Okay. And then on the residential real estate portfolio, it looked like the linked quarter, the rate of increase in non-accruals seemed to accelerate while the trend was going in the other direction from most other portfolios. How do you reconcile that with your earlier comments on the signs of stabilization, home prices in Pennsylvania, and just the general feedback you've been getting from your lenders about the potential for some improvement there?

Well, you know, I think it's two different things that we're talking about. The stabilization and prices really has no impact on people who have lost their job and can't make their payments. That's where the increase in delinquency and problems occur. I think the stabilization in prices is beneficial to folks who want to sell their properties or builders who are selling properties.

Okay. And then the other question I had was the increase in that tangible common equity ratio. Obviously, your assets are going down and you have earnings, but was any of that attributed to other comprehensive income?

Yes, Whitney, because of the lower rates, we had more appreciation in our investment portfolio and that goes through other comprehensive income. And that affects our tangible book value.

Do you have, like, a basis point impact for the third quarter?

No, but, Whitney, the net appreciation in our investment portfolio we had at the end of June, we had a $13 million net loss. And at the end of September, we had a $38 million increase. So -- do you want basis point on that?

That's helpful there. And just looking at (multiple speakers) --

That looks like to me about 28 basis points, slightly better.

28 basis points?

Slightly better.

Okay, thank you. And then the other thing I was wondering about is just the continued OTTI charges. And you know, we've seen for a lot of banks that those have really subsided, where you continue to post those large losses. I mean, where -- how much is the remaining exposure there? And do you have any idea of what the maximum future losses could be? Or maybe you could give us some details on what those securities are carried at right now. And that's it. Thank you.

Yes, the -- Whitney, we had $900,000 in OTTI charges related to the two bank stocks. And the value of our whole bank stock portfolio now is a net loss of $1.5 million. So it's going to depend on what bank stocks do going forward and our valuation of them. So, I expect it's going to be significantly less going forward as opposed to what we experienced, just because the increase in the market values on the charge-offs taken.

The OTTI charge related to -- and (inaudible) relates to pooled trust preferred securities, and we have $35 million in par value. And last year, we wrote them down to $14 million; and then the accounting rules changed where, if the writedown is related to market value and not credit impairment, we had to write them up. So we wrote them up $10 million. And the charge -- how much we wrote off from this quarter was something we wrote off last year, and then we added it back and we wrote it off again -- it was $1.8 million.

Right now those pools we have -- the book value is $22.5 million after we increase it at the beginning of the year. The net carrying value that on our books, after you adjust it for market, is $5 million.

Thank you so much.

David West, Davenport & Company.

Looking at your fairly optimistic outlook for the margin, given the rollover of the maturities, I was wondering, kind of looking at the outlook for net interest income, would you expect the balance sheet to be pretty stable? Or probably decline a little bit further from Q3 levels?

You know [it's so much] and loan demand has slacked off, and our loans were down $47 million. We increased investments on average by $20 million, so I think our earning assets would be flat. That's just hard for me to predict; but I would expect they're going to be flat.

But you -- we are reading things correctly that you'd look for the margin to modestly expand?

Yes, and you know, the reason for that is that we mentioned the $1.3 billion in CDs that are maturing, and the average rate is [2.22%]. And we have $145 million in advances and the rate on that is 4.25%. So -- and we're -- as Phil mentioned, we've had great deposit growth. So that's why we replaced the core deposits.

I would expect that margin to keep on increasing -- but not at the rate it was from the second or third quarter.

Very good.

And that's a guess. I have trouble with the past numbers. I really have trouble predicting. (multiple speakers)

So do we. Any comments regarding possible repayment of the TARP preferred?

We look at that -- this is Scott -- we look at that at virtually every Board meeting. We continue to stress test the Bank. We continue to talk about what's best for shareholders. And at this point, we are continuing to hold it. But that's an ongoing process that we'll be looking at. We're determined to do it in a way that's shareholder-friendly. And we'll just -- that's an ongoing process. And when we decide, you'll be the first to know.

Very good. And lastly, I know this is a difficult line item for anybody to guess, but the mortgage loan sale number was well down from Q1, Q2 levels. And I know there are a lot of moving parts to go into that, but do you think that the Q3 number is a reasonable run rate? Or do you think that was a little depressed from what you would typically expect?

Well, you know that -- I hate to say a run rate, because it changes quickly. Based on rates, at the end of September, our pipeline actually was 50% refinance, 50% purchase. And I think that was a good sign.

We've seen rates in the first two weeks in October dropped quite a bit and we have seen increased activity again on the residential mortgage side. How long that lasts, I can't -- I would hate to speculate.

Thanks so much.

Frank Schiraldi, Sandler O'Neill.

Just a -- most have been asked and answered, but just a couple of questions here. First, I'm just wondering, after talking about home prices potentially stabilizing here and maybe getting your arms around credit, is there a renewed focus or is there now more opportunity to take a look at building out the franchise? And are you considering stuff that may come up, FDIC-assisted deals? And are you looking even that might do something that might stretch the footprint a little bit?

We have been receiving calls from the FDIC and from investment bankers that are with banks that are stressed, and we continue to look at them. Our strategy has been one of -- it's been very difficult as we worked our way through this, getting our hands around our own problems and we were not aggressively seeking others.

But we will continue to look at those opportunities. And if there is something that's strategic that makes sense for us, and the pricing is right for our shareholders, we'll certainly consider it. I think that's where that all stands.

I guess, would it be within the realm of possibility to say -- we're in Virginia, to go a little bit farther south, say, into North Carolina, something like that, with an FDIC-assisted deal?

It's in the realm of possibility. Again, we just have to be very comfortable with it. I can say that it would probably make more sense to buy a stressed situation within footprint than moving out, because we could absorb it into one of our existing banks as opposed to try to start over with a situation that's had some difficulty. But anything is possible.

And I guess that would -- you'd think about this as one of the, I guess, points that you think about when you think about paying back TARP?

Say that again?

Wondering if this is -- I guess this is part of the thought process when considering whether to pay back TARP now, the fact that you could see some opportunities on the M&A side, whether it be FDIC-assisted or other.

Well, you know, I kind of think they're separate issues. I think there's a capital base that we need to maintain, given our Company as it exists. If we add additional banks to the Company, then I think we have to look at what is the appropriate capitalization of that acquisition.

So I think that they're kind of two separate issues. I think if an acquisition became available, we have to look at what is the base of capital we need for the Company as it exists. And then, given whatever the acquisition is and what comes with it, what is the capital requirements of that new Company? So, I think they're kind of two separate issues, if you know what I mean.

Okay. I just thought that sort of meant that maybe keeping more capital, more powder dry here with those opportunities possibly on the board. So maybe not necessarily a rush to pay back the TARP dollars.

Like, as I said, I think we look at it as two separate issues -- what's appropriate, given what we see in our own stress testing for this Company, and how that's all viewed by the regulators; and then if we need additional capital to do an acquisition, we'd look at that as a kind of a separate issue.

Okay. And then I'm just wondering on the trust preferred -- not the pool, but the single issuer, I think you had a portfolio of about $100 million. I'm wondering where that is on fair value and if you've actually had some opportunity to mark those back up in the past quarter?

You know, we've seen appreciation in that. And let's see if I can tell you how much the -- the single issue trust preferred, the book balance is $94.4 million. And they're marked down at $22.4 million. And that's through OCI.

And we've seen appreciation -- they're pretty high quality issues, such as J.P. Morgan, BB&T; it's Wells Fargo, and they have been going up. They've gone up quite a bit. Let me see if I can tell you how much. Probably take me a minute, so.

Okay. Well, I guess I can just ask one final question while you're looking for that. Phil, I think you -- I'm sure you did give this information already and in a slightly different way, but -- can you just, if you have it in front of you, the 30 to 89-days past due, it sounded like that's about $120 million now. And could you just tell me what it was last quarter, end of period?

Yes, it actually dropped slightly. It was $124 million June 30.

Okay. And $120 million now?

Yes.

Thank you.

Andy Stapp, B. Riley.

CRE and C&I tend to be laggards in developing asset quality issues. I'm just wondering how much heartburn do these asset classes give you?

What? (multiple speakers) I mean, I -- you know, while our numbers in our provision have pulled back a little, I mean, they're still huge numbers we're putting in there. So, we're trying to be very vigilant about watching all of that pretty carefully, Andy.

Gerard Cassidy, RBC Capital Markets.

Good morning. This is actually [Jake Siviello] and I apologize if we missed this, but can you give us your regulatory capital ratios? In particular, the Tier 1 ratio on a total risk, please?

You know, it's tough because we haven't done our call report. We haven't done all our risk weightings. That takes a little bit. But at June [30] -- they'd be closer to June 30 numbers. And total risk base would be -- without the capital purchase plan money, would be 11.1%. The Tier 1 risk rate would be about 8.4%. And that was at June 30. That's usually -- that's using the June 30 risk ratings. Because we had to break down the composition of the assets in risk, but they would be close.

Sure. Okay, thank you. That's all we had.

Can I get back to Frank? Frank Schiraldi asked a question on the individual trust preferred issues we have and we have the $94.4 million. They've appreciated in three months by $8 million and it's 8.5%, so.

And at this time, we have no further questions in the queue. I'd like to turn the conference back over to Scott Smith for closing remarks.

I'd like to end this call by thanking everyone for joining us today. We hope you'll be able to be with us again for our fourth quarter year-end 2009 earnings conference call, which is scheduled for January 20, 2010 at 10:00 a.m.

And that does conclude today's conference, ladies and gentlemen. We appreciate everyone's participation today.