Fulton Financial Corp (FULT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fulton Financial Corporation second-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.

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 second quarter of 2011.

Your host for today's conference 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 Relations and then on News.

On this call representatives of Fulton Financial may make forward-looking statements with respect to Fulton Financial's financial conditions, 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 that statement, and that is 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 SEC.

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

Thank you, Laura, and good morning everyone.

We are pleased you could join us.

After some introductory remarks I will turn the call over to Phil Wenger and Charlie Nugent to discuss credit and financial details.

We had a good second quarter, reporting diluted net income of $0.18 per share, an increase of 6% over the first quarter.

And we are encouraged by the improvement we have seen in a number of areas and we will discuss those this morning.

During this time of slower economic activity, difficult regulatory climate and uncertainty about required capital levels going forward, we are focused on improving our earnings and return on assets.

In the release you saw that we increased our ROA by 6 basis points to 0.91%.

And we are committed to managing the assets we have available to us more efficiently and profitably.

Our team members share this same commitment to growing the Company profitably and enhancing the value we create for customers and shareholders.

This is not to suggest that we will be any less concerned about the profitable return on and deployment of our capital; however, until industry regulatory capital standards are better defined ROE is difficult to meaningfully manage.

And as you know, our capital position has always been and remains strong.

On our last call we said we would consider increasing our cash dividend as business conditions and our financial performance permit, and as the Board of Directors deems prudent.

We were pleased to follow our $0.01 increase in April by the same amount again this quarter.

Our progress is also evident in our second-quarter asset quality numbers.

As Phil will discuss, we saw improvement in all our core credit metrics.

And while we still have a great deal of work ahead of us, it is very encouraging to see these across-the-board improvements.

We continue to aggressively pursue our new business development efforts with customers and prospects.

These sales efforts have enabled us to grow existing relationships and attract new ones.

As business and consumer confidence improves we would expect our work to produce increased levels of new business.

Another development during the first -- during the second quarter was a further decrease in funding costs that helped us expand our net interest margin.

As you know, there are a lot of moving parts to this number and there can, of course, be economic as well as seasonal fluctuations.

The key is that we continued to grow lower cost deposit balances, particularly in the non-interest checking category.

These are primary transaction accounts from customers and businesses that help us grow households and create new cross-selling opportunities.

We do not publish our specific household growth numbers for competitive reasons, however, we attribute our very strong year-over-year demand deposit growth and more than 6% increase in small business accounts to aggressive segment management, culling efforts and promotional activity, all parts of our ongoing growth strategy.

As you know, Dodd-Frank regulation Q changes allow financial institutions to pay interest on business accounts effective tomorrow.

We have developed several new account options for our business customers.

The impact of this change on our cost of funds is expected to be minimal in the current rate environment.

In the face of increased regulatory pressure on deposit account-related revenue, good performance from a number of our supplemental business lines helped us show a healthy increase in noninterest income.

These include Fulton Mortgage Company, merchant services, corporate services and consumer debt card activity.

Fulton Financial Advisors, our investment management and trust services area, is growing its base of recurring income as a result of a strategic change made several years ago.

Two weeks ago the Fed issued final regulations regarding interchange income.

We have a lot of -- we have done a lot of planning in anticipation of this ruling.

For all intents and purposes, it looks like the number will be $0.24 per transaction for us.

While we did get an increase from the initial number, as well as a delay in the implementation date, there still will be a negative revenue impact.

We are in the process of implementing some changes that we had planned, and additional changes we make will depend on responses and timing from competitors.

Charlie will provide greater detail in his financial discussion.

As you know, we controlled our expenses well.

Because of our good revenue growth during the quarter we were able to show improvement in our already excellent efficiency ratio.

Going forward our primary management priority is profitable, organic growth.

As I mentioned earlier, we believe the small business sector offers an excellent opportunity for continued core deposit and eventually loan growth.

We have added, and will continue to add, mortgage originators in all of our markets to leverage our outstanding reputation as a mortgage lender and to provide -- and to position ourselves to take advantage of the changing competitive landscape.

Reoccurring income from Investment Management and trust operations should continue to grow as equity markets remain a viable alternative to the current rate environment.

New branch expansion remains a priority in markets offering the greatest potential for growth and profitability.

Of course, we will continue to maximize all our noninterest income opportunities.

And since we know that one of the opportunities to improve our earnings is to reduce the loan loss provision over time, ample resources will remain committed to constantly improving our asset quality.

In summary, our goal is to continue to produce meaningful improvement in our financial performance quarter by quarter in our quest return to pre-recession earnings levels.

At this time Phil and Charlie -- I will turn it over to Phil and Charlie to provide details on second-quarter credit progress and on our second-quarter financial numbers.

When they conclude all three of us will be happy to respond to your questions.

Phil.

Thanks, Scott.

We were again pleased this quarter to achieve reductions in our core credit metrics of nonperforming loans, charge-offs and overall delinquency.

The reductions for the quarter, absent a robust economic recovery, are reflective of our ongoing efforts to reduce problem assets and maximize recovery wherever possible.

In light of this performance, we reduced our loan loss provision by $2 million for the second quarter from $38 million to $36 million.

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 in the chart on page 5 of the press release, we had a 7 basis point or $10 million reduction in overall delinquency.

30, 60 and 90 day and over delinquencies all decreased.

Increases in commercial and commercial mortgage delinquencies were more than offset by declines in residential mortgage and construction delinquencies.

Once again, this quarter our total delinquency is the lowest that it has been since December of 2009.

Nonperforming loans, which include nonaccrual loans and accruing loans over 90 days delinquent also declined.

Nonperforming loans decreased $7 million or 2% to $311 million from $318 million.

Increases in commercial and commercial mortgage nonperforming loans of $8.8 million and $5.4 million, respectively, were more than offset by reductions to residential and construction nonperforming loans of $6.8 million and $14.5 million, respectively.

The increase in commercial nonperforming loans was anticipated and was driven by the addition of two larger accounts to nonaccrual, one that was tourism related and one related to the construction sector.

Again this quarter we saw an increase in payoffs of nonaccrual loans.

Payoffs increased to $21.5 million this quarter versus $16 million in the first quarter, and $7 million in the fourth quarter of 2010.

We believe the improved pace resulted from greater investor interest in projects we have marketed.

Other real estate remained flat at $37 million.

Net charge-offs were $38.5 million versus $42.3 million in the first quarter or 1.3% of average loans on an annualized basis.

Increases in commercial as well as residential mortgage net charge-offs of $1.5 million and $2.6 million, respectively, were more than offset by reductions in construction loan and construction mortgage net charge-offs of $5.9 million and $1.6 million, respectively.

There was one charge-off in excess of $1 million associated with the nonaccrual addition I mentioned earlier.

We continued to see a decrease in our construction exposure, with ending balance in our construction portfolio declining by $66 million or 9% this quarter.

In December of 2006 our construction portfolio was $1.44 billion.

We ended the quarter with a balance of $682 million.

While we may continue to see reductions to our construction loan balances in the short term given the lack of housing demand, we have achieved a construction loan exposure level which we are comfortable with.

Troubled debt restructuring totals declined to $121 million from $137 million.

Of this total, $77 million or 63% are accruing loans versus $81 million or 59% last quarter.

There were declines across all types of TDR loans, primarily driven by payoffs or paydowns by these customers.

A new accounting standard that provides [clarified] guidance for evaluating whether a restructuring constitutes a troubled debt restructuring became effective on July 1.

The adoption of this standard did not have a material impact on Fulton, as our TDR policy is consistent with the new standard.

Now moving to loan demand and activity, the overall borrowing climate remains fairly quiet, as evidenced by our commercial line usage remaining flat with last quarter at 44%.

Average outstanding loans declined by $38 million linked quarter.

The construction loan reduction I mentioned previously has been partially offset by growth in other loan types throughout the footprint.

Commercial mortgages increased in our Pennsylvania markets, including the Lehigh Valley, Bucks, Montgomery and Lancaster counties.

Commercial loans increased nicely also in our Pennsylvania market of the Lehigh Valley, Dauphin, Berks, Bucks and Montgomery counties.

These increases are being driven by our teams and seasoned relationship managers taking advantage of market disruption and gaining solid new credit relationships.

If we exclude the impact of construction loan reductions, which was approximately $300 million over the last 18 months, our outstandings would be up by roughly 2% over that period.

General market conditions are improving in Pennsylvania, Maryland, Northern Delaware and Virginia.

Conditions remain challenging in New Jersey.

With regard to mortgage activity, applications were up from the first quarter $477 million versus $397 million.

Closings did decline to $302 million from $341 million.

However, the pipeline is up to $215 million from $161 million last quarter.

54% of the pipeline is for purchase activity.

So, in summary, while loan demand is soft we are taking advantage of good opportunities in our markets, and we are pleased with the continued incremental improvement in our credit metrics.

Now we will turn the discussion over to Charlie Nugent for his comments.

Charlie.

Thank you, Phil.

Good morning everyone.

Unless otherwise noted, comparisons are of this quarter's results to the first quarter of 2011.

As Scott mentioned, we reported net income of $0.18 per share for the second quarter, up 6% from the first quarter.

Net income was $36.4 million in the second quarter as compared to $33.9 million for the first quarter, a $2.6 million or 8% increase.

The improvement in our net income resulted mainly from increases in net interest income and other income, and a decrease in the loan loss provision.

These improvements were offset by a slight increase in operating expenses and income taxes.

Pre-provision pretax income increased 2% from $84.2 million to $85.5 million in the second quarter.

Our net interest income increased by $1.1 million or 0.4%, mainly due to one additional day in the quarter.

A slight decline in average earning assets was offset by an improvement in our net interest margin.

Our margin increased from 3.91% in the first quarter to 3.95% in the second quarter.

The total cost of our interest-bearing liabilities decreased to 1.19% from 1.24% in the first quarter.

The cost of interest-bearing deposits declined to 0.87% in the second quarter from 0.93% in the first quarter, with decreases in all deposit categories.

During the second quarter $906 million of time deposits matured at a weighted average rate of 1.47%, while $825 million of certificates of deposit were issued at a rate of 0.80%.

In the third quarter of 2011 $841 million of time deposits are scheduled to mature at an average weighted rate of 1.23%.

Yields on average earning assets declined slightly to 4.88% in the second quarter compared to 4.90% in the first quarter.

Average earning assets declined $146 million during the quarter.

Average investments decreased $180 million or 6%, and the ending balances decreased $34 million.

During the second quarter payoffs and maturities of investment securities exceeded purchases.

We continuously monitor both our portfolio holdings and current investment options in making purchase or sell decisions.

Average loans declined $38 million, as decreases in construction, commercial and consumer loans were partially offset by increases in commercial and residential mortgages.

Average deposits increased $50 million at $229 million or a 3% increase in demand and savings deposits, being offset by $179 million or a 4% decline in time deposits.

Noninterest-bearing demand deposits increased $124 million or 6% in both business and personal accounts.

Interest-bearing demand deposits grew $31 million or 1% almost entirely in personal accounts.

Saving deposits increased $74 million and 2%, primarily in municipal accounts.

Our other income for the second quarter increased $3.8 million or 9%, excluding the impact of security gains and losses.

The increase in other income was realized in most of these categories.

Service charges on deposits increased $1 million or 8%, which included a $460,000 seasonal increase in overdraft fees and a $340,000 increase in service charges.

The service charge increase were due to both growth in deposits and an increase in certain fees.

Investor management and trust service income increased $430,000 or 5% due to brokerage fees and insurance commissions.

We have been transitioning our brokerage business from a transaction-based model to relationship model to improve the level of reoccurring income.

And during the second quarter of 2011 brokerage fees were approximately $3.7 million, with more than one-third representing reoccurring revenue.

Prior to this change, which began in 2008, reoccurring brokerage revenue was negligible.

Mortgage sale gains increased $440,000 or 10% due to both an increase in new loan commitments and a slight increase in spreads.

Other fee categories seeing increases during the quarter included debit card fees, $410,000 or 10%; and merchant fees, $370,000 or 17%, both driven by increases in transaction volumes which we historically see between the first and second quarters.

The Federal Reserve recently issued revised pricing guidelines regarding interchange income on certain debit card transactions that delayed the implementation date to October 2011.

The revised pricing guidelines are higher than the original proposal, but are significantly lower than current rates.

Total debit income was $4.6 million in the second quarter.

Under the revised pricing guidelines, this income would have been approximately $2.2 million less.

To mitigate the decrease in interchange income we will have -- we will make certain changes in our fee structure, which will be implemented during the third quarter of 2011.

We expect that these changes will allow us to offset approximately 50% of the decrease in interchange income.

Additional fee increases have been identified and are being considered.

Operating expenses increased $915,000 or 1% in comparison to the first quarter.

Salaries and benefits increased $1.8 million or 3.2%.

Total full-time and part-time salaries increased $1 million or 2.6%, primarily representing merit increases.

Other real estate and repossession expenses increased $600,000 or 31% as disposition and valuation losses were $630,000 in the second quarter compared to $180,000 in the first quarter.

Other real estate gains, which are reflected in other income, were $1.6 million in the second quarter compared to $700,000 in the first quarter.

The $1.2 million increase in other expenses included a $610,000 increase in state taxes and a $450,000 increase in operating risk loss.

The state tax increase was caused by higher sales tax recoveries and other credits received in the first quarter.

The increased operating risk loss reflects recoveries of $900,000 in the first quarter compared to $500,000 in the second quarter.

Offsetting these expenses was a $1.5 million decrease in FDIC insurance expense due to the effect of a change in the assessment base from deposits to assets less tangible equity.

Marketing expense also decreased $970,000 or 34% in the second quarter due to the timing of marketing expenditures.

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.

Just first question, what drove the increase in the securities yield quarter-over-quarter?

It was primarily due to -- it was totally due to a decline in the amortization of premium, the premium on mortgage-backed and CMOs.

Got it.

So no impact to the security portfolio duration there.

No, no.

Prepayments, they were heavy in the fourth quarter.

In January -- just the month of January, we received total cash flows of $66 million, and in June it had declined to $30 million.

So it is a reduction in prepayments on mortgage-backed and CMS securities.

Got it.

Second question, can you help us identify the level of CDs that are going to reprice and mature on the third and then in the fourth quarter?

And also what the average rates are and where you're currently pricing them down to?

I'm just trying to think about the potential decline in your deposit costs.

In the third quarter we have $841 million of CDs maturing -- scheduled to mature at a rate of 1.23%.

During the second quarter we put on CDs of $825 million and the average rate was 80 basis points.

So, potentially, the difference between the two is 43 basis points.

Got it.

All right, great.

In the fourth quarter, we don't have -- I don't have that with me, but I can get it for you, it is disclosed in all our filings.

But you see a slowdown in -- a reduced rate of the rollovers.

Do you know what I mean?

Yes.

The average weighted rate, which is 123 in the third quarter will go down in the fourth quarter.

Got it.

And I have a few more, so we can follow up with that analysis after the call.

Right, okay.

Bob Ramsey, FBR.

I noticed there was a pretty big drop in the securities portfolio this quarter.

Could you just talk about -- looking at the average balance -- could you just talk about whether that is temporary or whether that reflects your reinvestment opportunities to date, just what you are thinking in terms of the size of securities book and the types of securities you did buy in the quarter?

We were down on average quarter-to-quarter $180 million.

And we constantly look at rates and they were a little volatile.

We did some buying.

If you go back a year, I think we are down $270 million.

And we are just a little apprehensive to invest in this environment, because we think that rates could go up and there wouldn't be a lot of upside for us.

I think it would help us temporarily, instead of keeping money in fed funds we would get a higher yield in the mortgage-backs.

Instead of [a quarter] we would get 240 basis points.

But we are a little apprehensive of buying right now.

And the 10-year rates are 290 -- we are just apprehensive about buying mortgage-backs or CMOs at this level.

Sure, I can understand that.

Without great loan demand out there, without sort of attractive opportunities on the securities front, as you guys' capital ratios continue to build, obviously you did increase the dividend this quarter.

Maybe just could you share some updated thoughts on capital?

You are above sort of your historical targets.

What are the uses you-all see today?

This is Scott.

As I mentioned in my comments, we can -- our strategy is to continue to profitably manage the assets we've got.

As you and Charlie just talked about, there could be some time here where they are not going to grow substantially.

So if we do that and the capital base continues, I think we still want to continue to look at the dividend.

We will do that quarterly.

And as we have said in the past, when we think it is prudent to move it up, we will do so.

There are going to be some opportunities for acquisitions as of -- as we go forward.

We will always have that option to use some of our capital that way.

Then, finally, I think once we get into a more uniform understanding of where capital ratios are going to need to be, I think then after that we might look at more significant buybacks or whatever, assuming that our ratios will be above those guidelines.

But until we get more clarity about that, I think we will be careful about our capital base.

Okay, and maybe one last question, and then I will pass it on.

But you guys had some nice margin expansion this quarter.

Obviously, with rates falling through the quarter, I know that must get sort of harder and harder.

As you look forward, do you think we are likely near peak level right now or just what are your thoughts on margin outlook?

Everything affects margin.

Craig asked about the CDs, and our time deposit costs continue to go down.

The thing that usually happens in the third quarter is we have a lot of municipalities that bank with us, and they collect their real estate taxes.

And usually from July to October we will have a pickup in municipal balances, so between $200 million to $300 million.

When that comes in that will probably go in our Fed account, and that will reduce the margin.

The yield on those assets that we are bringing in is going to be [a quarter].

That will put pressure on the margin.

So [you] reduce time deposit costs, you have this municipal money coming in that would put pressure on it.

I would think it is going -- it could go down 1 or 2 basis points or maybe stay even.

Then as we discussed with Craig, in the fourth quarter the yields -- the interest rates paid on our CDs are not as high as the ones maturing right now.

Okay, thank you guys.

Frank Schiraldi, Sandler O'Neill.

Just a couple of questions.

Scott, you mentioned in your opening remarks a focus on profitable organic growth.

I am just wondering if you could give a little bit of color on potential branch expansion, maybe to specific geography and numbers we could expect to see going forward?

Okay, well, let me do the numbers first.

That will be somewhat budget driven.

We would like to open more branches than I think the budget is going to permit, at least short-term.

But we will see how that all evolves.

But we have identified specific counties where we need more critical mass, and we have looked at what level of critical mass that needs to be in these specific counties, and now are in the process of finalizing fairly detailed plans about where we want to do branching, where we think we can get the most impact in the short term.

If you look at the map and you look where we are, you will see that we need some critical mass between where I sit right now in Philadelphia.

We need some critical mass in all parts of Virginia where we are located, parts of Maryland.

South Jersey, I think we feel like we've got good coverage there, and for the moment Delaware, although we do have some thoughts about parts of that.

And then Northern Jersey, some, but some need for additional.

So there is a lot of places.

I think if you do look at the demographics and where we have some branches, but not critical mass levels, we will go to the ones where the demographics are the best.

And then finally, wanting to put a branch out and actually getting it done can be two different things.

So it is a matter of locating the real estate, getting the appropriate municipal approvals to put a branch in there and then constructing it.

All of that is in the planning process.

We know where we want to go.

We have identified some real estate.

We will continue to do that, and then we will see what the budget permits us to do.

Is it then just maybe too early to talk about specific numbers or are you thinking -- can you quantify maybe five a year, more or less, or is it just too early to say?

Well, I think it is year-by-year.

As the October timeframe rolls around and we do budgeting -- finalized budgeting for the following year, we kind of decide at that point in time what the numbers could be.

Five would be I would think on the lower side.

But, again, it depends -- if we are looking at zero loan growth next year that is one thing.

If we are looking at some pickup in the economy, then five to ten would be a better number.

And if things get moving rather quickly, we will ramp that up.

So I would say, if I had to guess now, five to ten next year.

Okay, great.

And then I just wanted to ask -- historically acquisitions have played a big part in the overall strategy.

You mentioned acquisitions before.

Do you think that is maybe not as true going forward?

Acquisitions are very difficult.

Branches I can tell you, probably, and we can control whether we open five or six.

Acquisitions, as you know, are opportunistic.

So it will depend on what is available, who else is interested, what prices they are willing to pay, and all of that.

But we do know how to do acquisitions.

We have done them in the past, and my suspicion is we will do some in the future.

We will see how things unfold, and what is available and how strategic it is.

As we look at the situation right now, we are basically saying we are letting investment bankers know that we would like to know if there is a bank -- a footprint that is available.

We will make a -- do our analysis, and if we think it is strategic and important, then we will move forward.

If not, we will hold.

I don't know if you can share this with us, but have you to date moved forward in looking at some strategic -- we have seen some activity now in Pennsylvania and in the footprint, have you moved forward pass just the initial looking phase on anything yet?

Well, I think -- we sign a confidentiality agreement on everything that we look at, and I think given that it would be inappropriate for me to make any comment, other than investment bankers know we are interested, and we see most of the deals that happen.

Okay, all right.

Thanks, guys.

Matthew Clark, KBW.

On the loan growth front, you had some pretty meaningful runoff in the construction book, which is obviously deliberate and probably a good thing.

But can you give us a sense for the pace of decline?

It sounds like you're comfortable with the exposure here now.

I guess I am trying to get a sense for whether or not we might be able to begin to see net growth here.

The source of the growth -- I mean, growth here has been commercial real estate.

That is a decent sized portfolio for you guys.

I can't imagine you want to grow it meaningfully from here.

So just trying to get a sense for what the pipeline might look like from a loan type perspective.

This is Phil.

First, I would make a comment on the construction loan decline this quarter.

We did have two large commercial projects that converted from construction to permanent.

So that did skew that number, and that constituted about half of the decrease.

So we still do think that portfolio, the decline in that portfolio will slow -- the pace of decline will slow.

We continue to try to get solid C&I relationships throughout our footprint.

We have been most successful in Pennsylvania doing that, although we are working in all our areas to increase that portfolio.

And that will continue to be an area of emphasis.

We continue to look at good commercial real estate deals.

We believe when the consumer starts borrowing we can pick up some consumer loan outstandings also.

Okay, and how would you compare your pipeline this quarter versus last?

It is similar.

Okay.

So X the convert to perm, it looks like your CRE balances were up just, call it, 0.5% then, if you back that out.

Yes.

Then on the fee front, I know the guys have been doing some things to help mitigate Durbin.

I am just trying to get a sense for how much you may have done already in terms of mahybe raising prices on some of the products and what is left to do relative to the revenue hit you expect to take on an annual basis.

We have -- we are in the process of notifying customers of some increases that will take effect in September.

And that should offset about half of our Durbin impact -- actually a little more than half.

Then we have outlined a number of additional increases that we could do that we are going to hopefully be able to determine how they stack up from a competitive standpoint, and move forward on those when appropriate.

The updated impact from Durbin, I think previously it was, I think you thought it was $9 million to $9.5 million.

What is that number now, do you estimate?

We had said it was around $10 million.

That was based off of last year's number.

We have seen continued growth in debit interchange.

It is up about 15% this year.

So the -- where we stand now, using the initial guidelines, that $10 million actually would have been close to $12 million.

We believe that the impact with what it has been put in place is going to be $8.8 million -- around $8.8 million.

Okay, and the process of notifying customers that you said would begin in September, that would help to mitigate over 50% of that, say, $8.8 million.

I guess, how much of that is in the numbers already would you say?

Well, I would say none of those are in the numbers.

There would be a small amount.

I think service charges for the quarter might have been up around $400,000.

So that was some of the things that we had done earlier.

There were some fee increases that went into effect throughout the second quarter.

Okay, thank you.

Rick Weiss, Janney.

Can you talk just a little bit about -- was the loan growth, was there -- is it coming from other competitors or is there any kind of just growth in the market?

It is coming primarily from competitors.

Is it from the larger competitors?

Are you doing it on price or how are you managing to take business from others?

I would say it is primarily coming from larger competitors, and I don't think it is on price.

What is your feeling with regards to the core deposit growth, particularly the noninterest-bearing, will that change do you think for you or for the industry in general if interest rates start going up?

This is Scott.

I think we all suspect that some of that monies on the sidelines will get put to use -- I think we all hope it does -- as the economy improves.

But it looks like we are a few quarters away from that, at least at this point in time.

So, yes, I think both consumers and businesses have some money in DDA accounts that is either going to be invested or saved in different forms when the world changes.

The question is when is that going to happen.

Scott, do you think it is any different like today than it was when you reported March numbers in terms of that shift happening?

You mean the shift from people beginning to invest other than DDA accounts and --?

Exactly.

If you are seeing any kind of improvement at all, or is it just about the same it was three months ago?

Well, the numbers actually went up, so there is more there.

I think some of it is just, given the rate environment, either not wanting to commit to any maturity at this point in time in hopes that rates get better word, or just it is frankly not worth the effort to get a CD when the rates are where they are.

I think businesses are being cautious.

I will let Phil answer any questions, where he thinks maybe there is some mood change in terms of businesses spending money.

I would say there has not been -- just anecdotally talking to some customers I think we actually have seen some plans be put on hold again.

So I don't think there has been much change from the businesses' perspective as far as spending money.

Okay, that answers my questions.

Thank you very much.

Mike Shafir, Sterne Agee.

I was just wondering, the two relationships in the C&I and CRE buckets, the tourism and the construction, could you just quantify those?

The two combined were $11 million.

I'm sorry -- I will get you a better number -- $16 million.

The construction project, how big was that?

About a little over 5.

You guys said that ultimately you anticipated some of that and it was on the radar?

Yes, both of them were.

Just moving forward in terms of looking at that CRE portfolio and the C&I portfolio, how do you guys feel now?

Are there other stuff that is on the watchlist that you feel potentially could transition or --?

This is Scott.

I have been in this business long enough to know not to make any guesses about what could happen or not happen.

We have -- we feel like we have got our arms around where we are and we have reserved appropriately.

But the phone can be ringing right now for somebody telling him somebody just blew up.

But we don't -- we feel like we are where we need to be.

And our expectation is that credit will continue to improve over time, but it could be lumpy quarter-to-quarter because of the kinds of situations we just talked about.

So we are not -- this economy certainly isn't robust, so there are going to be some marginal customers that continue to have some issues.

Then just going back to Durbin for a minute, you said that kind of updated number you're looking at around $8.8 million potential annual impact, and then you're going to try to put some new practices in place that potentially could mitigate 50% of that loss.

They are already out.

Customers have been notified.

Okay.

We are looking at the rest of it now, to see what might be able to be done to mitigate the rest of it.

Okay, so, then potentially are we really looking more towards like a $5 million impact if things go according to plan?

Our goal is to have no impact.

If they go according to plan, it won't have any impact, but I'm not betting my life on that.

But I'm really talking about your plan and not the government's plan.

Well, what -- we can't be totally out of the competitive market, so we have got to -- we have got some time now.

So I think it is going to be a little while until some of the banks show their hands.

So we have to work through this and stay competitive so that we don't lose customers over it.

But if we get the opportunity from a competitive standpoint to make some of these other changes, we will, and we will be back to zero.

But I don't think that is likely in the next couple of quarters.

I may think it may take some time to work through that.

Thanks a lot.

I appreciate all that clarity, guys.

Collyn Gilbert.

Just to follow-up quickly on Mike's questions about the two C&I loans.

So the $11 million hotel, what -- could you just give up a little bit more color, maybe the geography of it, sort of the scale of it that you are seeing like a larger loan?

This is Scott.

First of all, we didn't say it was a hotel.

We said it was in the tourist industry.

For customer confidentiality reasons, I just don't want to get into a lot of detail, because people in the market could start putting two and two together.

I think we owe it to the customer to just say it was basically in the tourist business, and it was something that we saw deteriorating and prepared for, and now we've got it behind us.

When did you first put it on the watchlist, both of those credits?

I don't know that we know that.

It has been a while.

Okay.

Then, Scott, just your comment about the M&A environment.

It seems as if your language would suggest you are more open to the M&A then perhaps you were coming off of the first quarter.

Is that a function of feeling more comfortable where Fulton and kind of Fulton's core business is, or is that a function of being more reactive to the market around you?

I am not sure that my mood has changed all that much.

I think we have always said that we don't want to miss a strategic opportunity that exists.

We have not been aggressively pursuing acquisitions from an outreach standpoint.

But we constantly look at, as I talked earlier, about critical mass in important markets and how we might achieve it.

And our planning includes where we think branching is the best option and where acquisition is the best option.

The acquisition market has changed a little in terms of volume since we last talked.

So I guess maybe I am reflecting that -- if that volume continues then the likely likelihood of us doing something might be a little higher than where it was when we were only seeing a deal or two a quarter, and those were fairly stressed situations.

It is impossible to predict what could happen, but we are certainly not going to pass up an opportunity to do something that is very strategic and important for the Company.

But, having said that, we haven't seen any yet.

Okay, that is helpful.

Then just one final question.

The mortgage banking revenue this quarter came in higher than certainly what I was expecting.

What is your outlook there?

Are you still seeing good application flow?

Do you expect that flow to continue?

Our backlog is up, and we are seeing good in-flows right now.

It is a combination, again, of purchased and refinance.

So it looks okay right now, but that area changes quickly, depending on rates.

Okay, so for right now though the trend is still positive and still just as strong as you saw in the second quarter?

Yes, it is.

Okay, that is all I had.

Thanks, guys.

Eric Beardsley, Barclays Capital.

I just wondering, you were talking about how you're still waiting for clarity on regulatory capital.

I am just wondering if you could share any thoughts on how those discussions have evolved?

It seems like some of the larger banks are getting somewhere clarity, and maybe how that has changed over the past several months?

This is Scott.

Frankly, that is news to me.

From what I read in the press the Europeans and the US regulators are still in discussion about what might be what.

If you have some insight, I would like to hear it, because -- and I'm not faulting anybody.

I think several things have to happen.

The regulators have to get comfortable, and the industry and new investors have to get comfortable with what level of capital is going to be appropriate.

I don't know that it will just be an edict from regulators.

I think we are going to have to feel our way through it.

And I don't think it will ever be as specific as it once was, where you could -- we had certain requirements that were kind of benchmarks for everybody.

I think it is going to be more risk-based, and so each individual company is going to have capital ratios based on that.

And that is going to -- how much that is going to need to be is going to be interpreted by the regulators and by investors.

Until we get to that level -- and what I am trying to say is that when we manage the Company we are focused ROA.

And if the ROA is right when we finally get to a point where we feel like, okay, this is the capital level we need, then we adjust the capital level to that.

And if the ROA is where it needs to be, then the ROE will be where it needs to be as well.

That was the point of what -- and given the expectation of not a lot of asset growth over the next couple of quarters, what I am saying is we're going to manage the assets we've got as effectively as we can.

But we are not going to leverage up the bond portfolio to try to get short-term earnings out of it, and we're not going to make loans that we can't collect later to grow that.

So as we work our way through this we are going to be very focused on growing the profitability of the Company by being very efficient about how we manage the assets that are available to us.

Great, thanks.

Mac Hodgson, SunTrust.

Just two quick questions.

Charlie, did you say there was a $1.6 million gain on an OREO sale in other income?

Yes.

That compared to what in the prior quarter?

It was -- to 700 in the prior period.

700, okay.

Compared to most banks I look at it is a little unusual to get gains.

Is that something you expect to continue to have some small gains going forward as you work through stuff?

I don't know.

This is Scott.

We are certainly not looking at it as a new line of business we want to go into.

How is that?

Then on the advertising or marketing expense, I think you said it was seasonally down this quarter.

What is a good -- I guess, what is a good kind of run rate that we should think about?

I would think about $2.8 million, but it goes up and down constantly.

[You] can see that.

All right.

That is all I had.

Thanks.

Casey Haire, Jefferies.

My question is on -- apologies if I missed this, but my question is on the reserve bleed, which has been slowing down the last couple of quarters.

Should we be thinking about a 2.25 reserve ratio going forward near term?

That is really hard to say, and it is really going to depend on a number of items, including delinquencies, charge-offs, nonperforming levels.

Add the economy into that.

Overall trends on risk ratings and --.

Okay.

Just switching gears to the M&A topic.

Could you just review some of your hurdles for an M&A deal, be it EPS, IRR, and then specifically the level of tangible book value dilution you would accept on a deal?

We have always had the same way we evaluate the acquisitions, and the first one is the effect on earnings per share.

The second one is internal rate of return.

The one after that is dilution to tangible book and how quick it comes back.

We would do two -- if takes a while to build, if we didn't do the acquisition where would we be in X amount of time?

So we would look at two paths, one by ourselves and one with the acquisition and what the long-term effect would be.

Then we also look at the overall effect on our capital ratios.

They would be the four primarily that we look at.

Right, but have you guys put any numbers around that in terms of minimums or thresholds?

Well, this is Scott.

That is deal by deal.

If we see an unbelievably strategic situation as compared to one that would be nice to have, that becomes a different -- and as Charlie said, it is relative to where we would think we would be at the time.

So to say -- to put a number on it and tell you what it is it is hard to do, because pick a day -- October 12 -- we might have a different situation that we do our projections from then.

So it is -- we are going to do acquisitions to create value for shareholders, and that will depend on what the numbers are at the time and what the strategic -- level of strategic importance it is.

Okay, thank you.

At this time I would like to turn it over to Scott Smith for any closing remarks.

Thank you.

I would like to end the call by thanking everyone for joining us today.

And we hope you will be able to be with us when we discuss third-quarter of 2011 earnings on October 19 at 11 AM Eastern time.

Goodbye.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.

You may all disconnect.

Have another great day.