Fulton Financial Corp (FULT) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Fulton Financial first-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Laura Wakeley, Senior Vice President.

Great, thank you and good morning. Thank you for joining us for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the first quarter of 2011. Your host for today's conference call is Scott Smith, Chairman and Chief Executive Officer of Fulton Financial Corporation. Joining him are Phil Wenger, President and Chief Operating Officer and Charlie Nugent, Senior Executive Vice President and Chief Financial Officer.

Our comments today will refer to the financial information included with our earnings announcement, which we released at 4.30 yesterday afternoon. These documents can be found on our website at FULT.com by clicking on Investor Relations and then on News.

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

In our earnings release, we have included our Safe Harbor statement on forward-looking statements and we refer you to this statement in the earnings release and that statement is now incorporated into this presentation. For a more complete discussion of certain risks and uncertainties affecting Fulton, please see the sections entitled Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Fulton's filings with the Securities and Exchange Commission. Now, I would like to turn the call over to your host, Scott Smith.

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

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

This quarter, our credit challenges are certainly not behind us, but we were encouraged to see the reductions in four key metrics -- nonperforming loans, charge-offs, overall delinquency and in the provision. If the economy continues to expand at a reasonable pace, we believe we will continue to see reductions in our overall credit costs.

We were also pleased to see growth on an average basis in the C&I and commercial real estate portfolios. Although those increases were offset by decreases in our construction and consumer portfolios, making overall loan growth difficult. Phil will provide you with details on credit in a few minutes.

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

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

From a funding standpoint, our continued core deposit growth and strong liquidity enabled us to reduce our reliance on wholesale funding. We have worked to achieve an optimal deposit mix that deemphasizes higher cost timed deposits and then rewards customers as they expand their core banking relationship with us.

These initiatives enabled us to expand our net interest margin this quarter and we feel we can further reduce funding costs through certificate of deposit repricing in this rate environment, but not at the pace we have seen over the last several quarters.

A segment on which we recently focused our marketing and promotional efforts has been small business. We do not disclose actual commercial growth numbers for competitive reasons. However, last month was one of the best months we have seen for small business account growth in several years. Today, we are offering a special small business line of credit with an attractive rate to help us increase our loan growth.

Our noninterest income is up in total year-over-year, but down linked quarter due to several factors. The normal seasonal trend we see in overdraft revenue and the line item most significantly impacted in this category was our mortgage sale gains. After a strong fourth quarter last year, residential mortgage activity and related sale gains declined sharply. We expect the pending regulations to put additional pressure on noninterest income and we have developed responses to help offset that revenue impact of these regulations through deposit account-related fee increases and reductions in account-related expenses.

Our Investment Management and Trust Services division, Fulton Financial Advisors, produced strong results this quarter due to an ongoing emphasis on recurring revenue and increased sales and client retention in our wealth management and retirement services area.

We expected total other expenses to drop significantly linked quarter and they did. As you may recall, market expenses were up last quarter due to a number of opportunities we saw in the marketplace. This quarter, we returned to more normal levels. Expense management has been and remains a top priority for the corporation.

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

In closing, even though we are very liquid and have never stopped lending to creditworthy households and businesses, we need to get more traction under our loan growth. There are continued signs of an improving economy in many of our markets and we are hopeful that our focus on customer service and our gains in marketshare will result in loan growth in the second half of the year.

While we operate in a slow growth environment, we will continue to carefully control our funding costs and expenses while continuing to work diligently to further reduce our credit costs and the growth of our balance sheet with quality assets. Thanks for your attention and Phil Wenger will now review details on credit and talk more specifically about the business conditions in our markets. Phil?

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

Now let me give you some specifics. My comments will be linked quarter unless I indicate otherwise. First, with regard to delinquency, as you saw on the chart on page 4 of the press release, we had a 4 basis point or $6 million decline in overall delinquency. While 30-day delinquencies increased 11 basis points, or $13 million, 60-day delinquencies declined 7 basis points, or $8 million and 90-day and over delinquencies declined 9 basis points, or $11 million. Total delinquency increases of $4 million in commercial loans and $8 million in commercial real estate were more than offset by reductions of $1 million in residential, $2 million in consumer and $15 million in construction. Once again this quarter, our total delinquency is the lowest it has been since December of 2009.

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

We saw the pace of resolutions to nonperforming loans improve this quarter. Last quarter, we resolved $7 million in loans over $1 million by a sale and disposition of projects. This quarter, that pace increased to $16 million, reflecting improved investor interest in projects we have marketed. Also, recoveries increased from $1.7 million to $3.2 million quarter-over-quarter also reflecting improved activity and interest.

While we had an increase in other real estate for the quarter of $4 million, this was not unexpected as we are moving through the cycle of taking possession of and disposing of properties.

Net charge-offs were $42 million, or 1.42% of average loans on an annualized basis, a decrease of $7 million from last quarter. A decline in net charge-offs for commercial mortgages of $9 million drove the reduction with other loan categories reflecting only minor changes from last quarter to this quarter. Construction loan charge-offs represented the largest portion of the total at $13 million, even with last quarter and a significant decline of $23 million in the third quarter of 2010. Commercial loan net charge-offs were $13 million, even with last quarter.

There were five accounts representing charge-offs of greater than $1.5 million that totaled $13 million. Of these, the largest was a construction-related business in the state of New Jersey. The remainder were real estate-related projects. We continued to reduce construction exposure with ending balances in our construction portfolio declining by $53 million this quarter. In December of 2006, our construction portfolio was $1.44 billion. We ended the quarter with a balance of $748 million. While we continue to support solid residential builders in performing projects, we would anticipate that this portfolio will continue to shrink until we reach a healthy equilibrium in the housing markets within our footprint.

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

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

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

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

So in summary, while the pace of improvement is moderate, we are pleased that the metrics are moving in the right direction. Now I will turn the discussion over to Charlie Nugent for his comments. Charlie?

Thank you, Phil and good morning, everyone. Unless otherwise noted, comparisons are this quarter's results to the fourth quarter of 2010. As Scott mentioned, we reported net income of $0.17 per share for the first quarter, up 6% from the fourth quarter. Net income was $33.8 million in the first quarter as compared to $31.5 million for the fourth quarter, a $2.3 million or 7% increase.

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

Our total cost of interest-bearing liabilities decreased to 1.24% from 1.35% in the fourth quarter. The cost of interest-bearing deposits declined to 0.93% in the first quarter from 104% in the fourth quarter with decreases in all categories.

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

Federal Home Loan Bank advances totaling $84 million matured in the first quarter at a weighted average rate of 3.44% with only $10 million scheduled to mature in the second quarter at a rate of 4.92%. Yields on average earning assets decreased slightly to 4.90% in the first quarter compared to 4.93% in the fourth quarter. Average interest earning assets declined $128 million, primarily in short-term investments. Average investments increased $66 million while ending balances decreased $164 million.

During the first quarter, sales, maturities and investment securities exceeded purchases. We continuously monitor our portfolio and current investment alternatives in making purchase or sale decisions. Average loans declined $23 million as decreases in construction and consumer loans were partially offset by increases in commercial loans, commercial mortgages and residential mortgages. Average deposits decreased $204 million with $228 million, or a 4.8% decrease in timed deposits being partially offset by a $24 million increase in demand and savings accounts.

Non-interest-bearing demand deposits increased $19 million, or 1%, almost entirely in personal accounts. Interest-bearing demand deposits increased $60 million or 3% in both business and personal accounts. Savings deposits decreased $55 million, or 2%, with the decline seen in both business and municipal accounts. Our other income for the first quarter declined $4.7 million, or 9.6%, excluding the impact of security gains. The reduction in other income was driven mainly by mortgage banking income, which decreased $3.4 million, or 38%. We saw volumes fall off about 40% from the fourth quarter as increasing mortgage rates resulted in greatly reduced refinancing activity.

In addition, spreads decreased to 1.39% in the first quarter as compared to 1.69% in the fourth quarter. Service charges on deposits decreased $786,000, or 5.6%, due mainly to overdrafts, which are typically lower in the first quarter. Our service charges and fees were down $367,000, or 3%, due to slight declines in merchant fees, letter of credit fees and foreign currency fees.

Investment Management and Trust Service income improved $378,000, or 4%, as a result of the growth in trust commissions and brokerage revenues. This was due to both slightly improved market conditions and the results of our focus on increasing our recurring revenues into brokerage business.

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

Operating expenses decreased $5.5 million, or 5%, in comparison to the fourth quarter. Most significant reductions were in marketing, other real estate and the other expense categories. Marketing was down $1.6 million as fourth-quarter spending was elevated. We believe the first-quarter level is more reflective of where we will remain for the rest of the year.

Other real estate expense included lower valuation provisions, losses on sales and general expenses than the fourth quarter. This is a category that will likely display significant variances from quarter-to-quarter.

The other expense line was down $2.7 million, or 15%. There are nonrecurring items in each period and if you factor those out, this line item would be relatively flat at $17.5 million.

Okay, thank you and now, we will be glad to take your questions.

(Operator Instructions). Bob Ramsey, FBR Capital Markets.

Hey, good morning, guys. First question, Charlie, I know you were just talking about expenses and you said that other line item was down $2.7 million, but would have been flat without the nonrecurring items. Just sort of how are you guys thinking about expenses going forward? I guess either that other line or in aggregate?

We have been tightly controlling expenses as long as we have been experiencing the recession and our expenses were extremely low in the quarter. Total expenses were $101 million and we think a normal run rate for us would be slightly higher at $103 million to $104 million. We think, as we look forward, we are going to continue to tightly control expenses, but the first-quarter expenses were extremely low. Should go up (multiple speakers).

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

The capital -- the TCE -- we estimate the first-quarter TCE based on what we think weighted average assets are and we won't know exactly until we do the call reports. But you are right. Our TCE went up 27 basis points. And hopefully that will continue to increase. The investment portfolio we are keeping relatively even. It is down quite a bit from this time last year. We are very apprehensive about investing long at this point given where the rates are.

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

Bob, I think it's a combination -- this is Phil. I think it is a combination of both. We do expect the construction runoff to start slowing. Although that certainly did not happen in the first quarter. We are starting to see some demand in Pennsylvania. So I think there are some opportunities moving forward.

We actually -- besides construction, consumer has been a challenge for us also. We ran a consumer promotion in the first quarter on our lines of credits and we actually booked lines on the consumer side at a rate that is about 33% greater than what we normally would. So we booked a lot of lines. It is just the consumer is not borrowing yet. So when they do start borrowing, I think we have put some nice business in place that we will be able to take advantage of that.

Great, thank you, guys.

Frank Schiraldi, Sandler O'Neill.

Good morning, guys. Just a couple of questions. First point on credit, it sounds like that you are a bit more positive on credit and certainly showing signs of stabilization in the quarter. So this is the second quarter in a row we have seen the net charge-offs exceed the provisioning. And I am wondering if that, as analysts, in our modeling, we should sort of assume that going forward and is it going to be similar -- would you think similar levels just ticking away at that reserve or maybe accelerate that?

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

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

Yes, in the first quarter, it was $945 million matured and repriced.

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

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

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

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

Okay, thank you.

Craig Siegenthaler, Credit Suisse.

Good morning, guys. Just to kind of go back on the NIM, do you actually have the impact counted that the NIM is facing from abnormally high NPA levels and excess liquidity here too?

Yes, that is in there. That would all be in there. All the non -- we have over $300 million of nonperforming assets that aren't accruing.

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

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

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

Oh, boy. If you go back over time -- it is kind of hard to estimate because everything affects the net interest margin. But if you go back over time, I would think our normalized net interest margin would be at 385 I would think. That is just hard to estimate.

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

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

Great, guys. Thanks for taking my questions.

Matthew Clark, KBW.

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

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

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

We have some floors on the loans. We don't have them anymore. Most of them, we are not renewing them. (multiple speakers)

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

On interest sensitivity, on that six-month gap, the static gap, it is 110, so over six months, we will have 10% of our assets repriced as our liability. So that should give us some additional boost and if we do the rate shocks, if we use static balance sheet for a year and the current yield curve and increase it 1% right across the yield curve, we think that would give us another $10.3 million in net interest income and another 1.8% increase.

That's great.

And that is the assumption, so we don't know what the balance sheet is going to be, but we think we are positioned well for rising rates.

Okay. And then just lastly on the M&A front, we saw another deal here this morning up in New England, but just curious about what you are hearing, seeing and your related appetite.

This is Scott. I would say there has been a significant increase in the number of deals we have looked at in the first quarter as opposed to the fourth quarter. They tend to be situations where credit and capital are issues for the bank, but there is definitely an increase in the level of activity and conversations. Obviously, we haven't seen any that we felt strongly enough about to make an offering and win. So we continue to look at those very cautiously, but I -- it hasn't been the tsunami that I think some folks talked about last fall that we are just going to be this robust growth in M&A. But there is more noise, there is more discussion.

I think everybody -- I can't speak for other people. We are looking at them very carefully and making sure that if we put an offer in that we are doing it with our shareholders' value in mind. I don't buy into the theory that there is some critical mass that we have to get to. We compete with trillion dollar banks and we compete with $100 million banks. So I think we fit nicely in the middle there and we are more focused on EPS growth than we are asset growth.

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

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

Okay, thanks, guys.

Mike Shafir, Sterne Agee.

Yes, good morning. I was just wondering in terms of the fall-off that we saw kind of on the gain-on-sale piece, do you guys expect that to stabilize some or do you still see that running off at a pretty similar level?

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

On the mortgage.

Oh, you are talking about mortgage banking activity?

Yes.

Well, our backlog going into the second quarter was slightly higher than our backlog going into the first quarter and typically home sales pick up in the springtime. Hopefully that will happen this year. So I don't think we are looking at the levels that we had during the refinance boom last year, but I do think the activity is a little stronger now than it had been in January and February.

And we continue to add originators out there as we can and hopefully that helps improve some volume as well.

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

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

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

Collyn Gilbert, Stifel Nicolaus.

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

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

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

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

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

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

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

Lack of volume.

Okay. That is all I had. Thanks.

Rick Weiss, Janney.

I was wondering if you could talk a little bit about the competition on the lending site. I know like demand is hardly robust, but do you see competition from the big banks, small banks or just everybody?

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

And how about the pricing for your C&I product? How does Fulton price compared to the competition?

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

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

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

Okay. Hey, Scott, you started out the conversation or the conference call talking about the regulators being a tougher environment these days. I was wondering if there is anything specific or is it just kind of your overall impression.

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

Okay, thank you very much.

Mac Hodgson, SunTrust Robinson.

Good morning. Phil, a couple of credit-related questions. Do you have the dollar amount of additions to non-accrual loans in the quarter or inflows in the non-accrual?

Yes, the inflows were $72 million.

$72 million, okay. And what about -- how did potential problem loans and special mention loans trend for the fourth quarter?

They are trending down.

Is it a similar rate as we saw in NPAs, just very slight or --?

I would say it is greater than the rate that you see on the NPA reduction.

Okay. And then, Charlie, on expenses, I know you mentioned that other expenses in all levels may be $17.5 million, which is about $1.5 million or so higher than this quarter. But it seems like, with FDIC costs coming down $1.5 million or so starting in 2Q, just kind of curious why you think normal expenses should be more in the $103 million to $104 million range.

Matt, I was saying that we would be in the range of $103 million, $104 million and right now, we are at $101.6 million.

Yes, I am just curious why that is. I mean it seems like you have FDIC costs coming down. Is it OREO costs going up?

We had a recovery in there related to a mortgage. We had some tax reversals in there, lower ORE than we would expect going forward. The ORE expenses are actually down and it is a combination of things. And that is what we think it is when it is normalized.

Okay. Let me think if I had anything else. Scott, what about on the -- you mentioned kind of the dividend. I know you all raised it a penny recently. How does the Company think about the right payout ratio and what sort of things would you look for in order to make another kind of modest increase down the road?

Well, obviously, dividends get paid out of earnings, so we would have to be -- we would have to see improved earnings and we would have to be confident that there is going to be a continuation of that. So that would be first. And that would be -- also part of that decision would be a reflection of our expectation about the economy and where it is going.

As far as the rate payout ratio is concerned, historically, we were in the 40% to 50% range. Given the current environment and the regulators' thoughts about dividend payout ratios, I think that is a high -- short term, that is a high number for us to be looking at. We have been around the high 20%s to low 30%s and maybe that is where we will be looking at least short term I would say around 30%.

I mean would it be possible to have another raise this year or would you guys wait for another calendar year to pass?

We are going to look at it quarter-to-quarter. Someone asked me when we did the first quarter that we typically did our dividend raise in normal times in the first quarter of the year so was that it for the year and my response to that is not necessarily. I mean these are different times and we cut our dividend pretty dramatically during the recession. So I think we have some room to move it and if we get the right numbers coming into place, I think we can continue to move it up at least short term.

Great, thanks.

Before we move on, Collyn asked about mortgage ARM rates. I think Phil has those now.

We actually have four ARM products and our rate on them varies from 3.5% to 5.25% and our most active ARM rate would be going on the books at 4.125%.

Eric Beardsley, Barclays Capital.

Hi, good morning. I was wondering how you are positioning the securities portfolio going forward.

We are down about $400 million from this time last year. It is very short in duration we think. It is about 3.4 years and it is in structures we think that we hope won't extend or won't shorten and will keep their values. But we are very apprehensive about adding to the securities portfolio. And it is all agency securities, it is all agency guaranteed, CMOs and mortgage-backs. There is some municipals. We think they are all high grade and we think there is limited -- probably any credit risk in there and limited interest rate risk.

Are you guys looking at holding that balance where it is now or is that something you would look to decrease some more?

I don't know. It has been bouncing around a little bit and rates were low at the beginning of December and then they moved up in March and then there were down again. It is going to depend on market conditions and our overall liquidity position. Rates have really been volatile and we have been trying to take advantage of that.

And then for Phil, as you look at your reserve to loan ratio, where do you think that can get to longer term?

Well, that is a million-dollar question. But historically, I think our reserve was -- we tried to keep at 1.25. I don't see it getting back to that level in the near to midterm, but I do think we have room to drop it from its current level. So 150 to 175 or something may be doable.

Okay, great. Thanks.

(Operator Instructions). David Darst, Guggenheim Securities.

Good morning. Phil, can you give us a little bit more color around your outlook for deposit service charge income and what are some of the changes that you are making at the account level, fees or structure and then is any of that strategic and should it allow you to grow the account base?

Sure. First off, our goal would be to end up in a place on CDs where we can continue to grow core deposits and core accounts. And that certainly would be a goal of ours. We have currently put in place fee income increases across all our fee income products. We are trying to spread the pain, I guess, if you will. A number of those increases went into effect April 1. Many of them will go into effect June 1 and to date, those -- what has been put into place and what is planned to happen should generate about $8 million of increased fees. And then depending on where it all ends up, there are some additional steps that we can take if we need to.

Thank you. And then Scott, if you choose to take a path that is more organic growth focused rather than M&A, would you likely add more commercial lenders or do you have plans to maybe take some lenders or teams from other larger institutions?

Well, I think the most likely outcome is we will do a combination of organic growth and acquisitions as we work through this environment over the next couple of years. But what we have always said is that the majority of our folks need to be focused on organic growth because the M&A side of things produces better results if you are good at growing organically because once you have bought the additional bank, you need to grow it. So we are very focused on that. We are doing it via branching and as earnings increase, I think our plans are to increase our branching activities and we have done that successfully in several markets that we are in now.

That includes hiring good people and particularly in-market people when we can and we have had some luck with acquiring some commercial lenders from some competitors, as well as mortgage originators and so I think it is a combination of all the above. Retail is still an important part of the business for us and once we get branches in markets, it is important to get the right people in those as well.

So and then not to forget the Fulton Financial Advisors. That is an important part of our fee income growth. So we will be adding folks in that area. So I don't know that we are going to be totally focused on any one area. We are going to continue to try to get a diversified revenue stream coming from a mix of different market segments and doing it in existing markets where we have some marketshare opportunities because of multiple reasons and then moving into adjacent markets with branching activities that should elevate us as earnings increase.

Okay, great. Thank you.

I am showing no further questions in the queue. I would like to turn it over to Scott Smith, Chairman and CEO, for any closing remarks.

I will end the call by thanking everyone for joining us today. We hope you will be able to be with us when we discuss second-quarter earnings for 2011 on July 20 at 10 a.m. Eastern Time. Talk to you then.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.

Thank you.