Fulton Financial Corp (FULT) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Fulton Financial Corporation Announces Third Quarter earnings call. This call is being recorded. I would like to now turn the conference over to Ms. Laura Wakeley, Senior Vice President of Corporate Communications. You may begin.

Thank you. Good morning and thank you all for joining us today for our conference call and webcast to discuss earnings for the third quarter of 2012. Your host for today's conference call, 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 that was included with our earnings announcement which was 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 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 which could cause actual results to differ materially from those expressed or forecasted in any forward-looking statements.

Fulton undertakes no obligation other than required by law to update or revise any of the 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 section of the earnings release and we incorporated it into today's 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. It is good to have you with us. After my remarks, Phil Wenger will discuss the loan portfolio and market conditions, and then Charlie Nugent will cover the financial details. And we will be happy to respond to your questions.

As this is my last conference call before I retire at year end and turn the reins over to Phil and his team, I am pleased to tell you that we continue to execute our corporate strategy and business plans very effectively while positioning the Company for the future. I look forward to my continuing role as a Director of the Corporation.

I am also pleased to report we had a good third quarter. We saw a continuation of a number of positive trends that I will review with you. We reported diluted earnings per share of $0.21, a 5% increase over the second quarter. As we stated in previous calls and in our investor presentations, return on assets is a key priority for us. We made progress on that benchmark ending the quarter with an ROA in excess of 1%.

As you may recall from our last call, our goal for ROA is significantly higher than where we are now. The foundation for further improvement is found in all our affiliate banks as asset quality and loan demand improves, particularly at the Fulton Bank of New Jersey and the Columbia Bank who have greater upside potential.

Another positive story this quarter was the solid improvement in our overall credit quality. So we will cover those details in a moment. Because of this nice improvement, we were able to further reduce our provision for credit losses. We believe that lower credit costs and subsequent reductions in the provision provide a good foundation for future earnings growth.

Of course, stronger credit demand leading to more rapid earning asset growth would be helpful as well.

We remain highly liquid and are working to profitably deploy our increasing core deposit base back into the communities we serve through quality loans. While some of the growth in core deposits this quarter was in municipal accounts, a significant portion also came from new business customer acquisition. That indicates to us that we are effectively executing our marketing share goals.

A portion also came from growth in existing customer accounts. Our market research along with unsolicited customer feedback and internal surveys tell us that customers value our brand of personal, professional banking. Strategically, we believe that our superior customer experience is an important competitive differentiator.

Total non-interest income was a significant contributor to our third-quarter results due to continued strong residential mortgage activity. Moreover, we saw a reduction in expenses linked quarter and Charlie will provide more color on expense management, one of our strongest core competencies over the years as seen in our efficiency ratio compared to peers. As you know, spread management in this rate environment is a challenge. I think we did a good job of limiting margin compression during the quarter. However there are challenges ahead and that Charlie will address also in more detail.

A metric we have not talked about a great deal over the past several years is return on equity. With our strong capital position we realize the importance of deploying it both prudently and profitably.

Currently, we are deploying capital in three of the four ways available to us. We are reinvesting back into our branch networks and profitable business lines as well as improving our technology and systems infrastructure. We are implementing our stock repurchase program announced last quarter and we are returning capital shareholders by raising our cash dividend to $0.08 per share, bringing the yield to over 3%. With the right opportunities we will once again acquire banks seeking to realign -- to align with our core values and customer relationship strategy.

In regard to our 5 million share repurchase program announced back in June during the quarter, we bought back 2.1 million shares at an average cost of $9.63 per share. The share repurchase program authorization continues through the end of this year. We may make additional open market purchases under the program from time to time as permitted by securities law and other legal requirements and subject to our assessment of the market conditions and other factors.

In summary, it has been a good quarter and a good year thus far. At this time I would like to turn the call over to Phil to share some details on asset quality, our loan portfolio and market conditions. Phil?

Thanks, Scott. In my comments today I will be providing you with information on our credit quality and loan demand.

First with regard to credit quality, our trend of overall improvement continued this quarter. Total delinquency, non-performing assets, and charge-offs were all reduced. We also saw a reduction in the level of problem accounts primarily from payments and payoffs. Our provision for credit losses was reduced from $25.5 million to $23 million.

Regarding loan demand we are seeing improvement in the level of activity in several of our markets. While capital spending levels are not yet robust, a number of our markets are reporting increased pipelines. Overall, we are quite pleased with our results. Now let me give you the details.

First, on credit quality, overall delinquency declined to the lowest it has been at quarter end since the end of 2008 at 2.58% of loans or $308 million. Emergency delinquency -- excuse me, emerging delinquencies, those accounts under 90 days past due, declined from 0.86% of loans to 0.8%. Commercial loan delinquencies declined. Consumer leasing and home equity delinquency increased slightly. This is not unexpected given the elevated unemployment level in several of our markets, most notably in New Jersey.

Non-performing assets declined by $24 million from $266 million to $242 million. Within this category, nonaccrual loans declined by $18 million, 90-day delinquent loans declined by $3 million and [ORE] declined by $3 million.

We added $39 million in new nonaccruals this quarter versus $55 million in the second quarter of 2012. In addition, we were able to resolve through payments and charge-offs $54 million which, when combined with a $3 million transfer to ORE, drove the improvement in non-accrual loans.

Additions to non-accruals year-to-date total $131 million versus $212 million for the same period last year. We were also able to reduce our exposure to [criticize] in classified assets by nearly $100 million bringing our total reduction to problem assets since this time last year to just over $350 million.

Given these metrics, we were able to reduce our loan loss provision from $25.5 million to $23 million for the quarter. Our year-to-date provision of $76.5 million is $28.5 million lower than our provision through the first nine months of 2011 and $43.5 million lower than the same period for 2010.

We have a reserve modeling approach that takes into account both our portfolio performance as well as the general economic environment. And while we are feeling better about the business climate, some of the economic data we utilized does not yet fully support a sustained recovery.

The allowance to non-performing loans ratio increased to 111% from 101% at the end of the second-quarter 2012. The allowance stands at 1.97% of loans, down slightly from 1.98% last quarter. Total net charge-offs were $25 million or 0.84% of average loans on an annualized basis as compared to $46 million or 1.55% of average loans in the second quarter of 2012. As a reminder, we sold a $44 million pool of non-performing loans last quarter which resulted in higher charge-offs for that period.

Total debt restructuring decreased slightly from $109 million to $106 million. Of this total, $85 million or 80% are accruing loans versus $81 million or 75% last quarter. The $3 million decrease in TDRs was driven by payments and payoffs within this (technical difficulty).

So to summarize our asset quality, we are pleased with our results and the direction in which we continue to move. Obviously there are items such as borrower fatigue and persistent economic challenges which can still impact our overall results. However, we remain confident that general improvements should continue.

Now moving to loan demand and activity, our ending loan balances decreased by just under one half of 1% or $50 million. However, when factoring in the purposeful reduction in problem loans through charge-offs and paydowns, our balances were even with last quarter. Our commercial pipeline also remained fairly even with last quarter, but are up 20% over the same period last year.

In the small-business sector, we continue to face lackluster demand in a business climate in which borrowers are tentative about spending and will likely be so until conditions change. Borrowing usage is down $38 million versus last quarter. However we are replacing runoff including the reductions in non-performing loans with good quality new loans resulting from our consistent calling and prospecting activities.

Certain segments of our portfolio are showing growth, in particular the automobile, the automotive sector where floor plan usage has increased. In a number of our markets, customer sentiment has improved. There are signs that pipeline activity is picking up with closings expected to increase the fourth quarter. We have seen increased opportunities this quarter in New Jersey despite the economic challenges we have mentioned in that state. Further we are seeing good success in the opportunities our lending teams are generating throughout our footprint, particularly in Pennsylvania and Delaware.

Mortgage lending activity continued to be robust during the third quarter. We did make the decision to hold additional mortgage loans in the portfolio. We are holding all 10-year loans and up to $15 million per month of 15-year loans which has resulted in a net growth of $30 million in our residential loan outstandings.

Applications are strong and increased to $840 million -- $849 million versus $824 million in the second quarter, and $712 million in the third quarter of 2011. Purchases comprised 42% of our closed loans, level with last quarter. The mortgage pipeline has shifted to an increasing portion of refinance activity. This trend continued this quarter with 75% of the current pipeline from refinancing. Our current pipeline is $535 million versus $520 million last quarter.

So to summarize, we made good progress again this quarter in our credit metrics, loan outstandings outside intentional runoff are holding steady, and mortgage activity continues to be a highlight.

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

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

As Scott mentioned, we reported net income of $0.21 per share for the third quarter, an improvement of $0.01 or 5% from the second quarter. Net income increased 4% to $41.6 million in the third quarter from $39.9 million in the second quarter.

As always, unless otherwise noted, comparisons are this quarter's results to the second quarter. The growth in our net income results are primarily from a decrease in the provision for credit losses and a decline in other expenses. These improvements were partially offset by lower net interest income and lower security aims.

Net interest income decreased $1.6 million of 1% primarily as a result of a decrease in both interest earning assets and the net interest margin. This decline was partially offset by the impact of one additional day in the third quarter. Our net interest margin declined 4 basis points to 3.74% in the third quarter from 3.78% in the second quarter. Yields on interest-earning assets decreased 6 basis points to 4.42% in the third quarter from 4.48% in the second quarter. Our cost of interest-bearing liabilities decreased 3 basis points to 0.90% in the third quarter from 0.93% in the second quarter.

The decline in the yield on assets was driven by both investment securities and loans with investment yields decreasing 12 basis points and loan deals increasing 6 basis points. Increased prepayments on mortgage-backed securities resulted in amortization of premiums increasing approximately $600,000 compared to the second quarter. This was offset by an increase of approximately $700,000 of accretion on calls of both trust preferred securities and auction rate securities. The total accretion related to redemptions was $1.4 million in the third quarter and $700,000 in the second quarter. This added 20 basis points to the yield on investments and 3 basis points to the net interest margin in the third quarter. Yields on loans decreased 6 basis points from 4.85% in the second quarter to 4.79% in the third quarter. Low interest rates and competition continues to place downward pressure on loan yields.

The cost of interest-bearing deposits declined 5 basis points to 5.7% in the third quarter. This decline was driven primarily by the 7 basis point decrease in time deposit cost. $754 million of time deposits matured at a weighted average yield of 0.94% while $655 million of time deposits were issued at a rate of 0.39%. In the fourth quarter of this year, $726 million of time deposits are scheduled to mature at a rate of 1.05%.

Our projections indicate that we will experience a similar level of compression of the net interest margin in the fourth quarter, and that is from the -- we said 3.74% for the quarter, but if you adjust for that, the accretion related to the redemptions, the margin would have been 3.71%.

Average total in our interest-earning assets decreased $158 million or 1%. Average investments declined $136 million or 4.6% and average loans declined $46 million or 0.4%. Ending loan balances also decreased by approximately the same amount as Phil discussed.

Average deposits increased $228 million with a $362 million or 4.3% increase in demand on savings deposits being partially offset by $134 million or a 3.5% decline in times deposits. Non-interest-bearing demand deposits increased $167 million or 6.3%, all this entirely in business accounts due in part to our focus on acquiring small business relationships.

Interest-bearing demand deposits increased $123 million or 5% almost entirely attributable to municipal accounts and seasonal tax collections. Savings deposits grew $71 million or 2.2% with the increase evenly split among personal business and municipal accounts.

Other income for the third quarter increased $136,000 or 0.3% excluding the impact of security gains. Mortgage banking income decreased $549,000 or 4.9%. A $1.9 million or 17.6% increase in mortgage sale gains was offset by a $2.5 million decrease in net servicing income. Mortgage sale gains increased as a result of a 4% increase in loan commitments to $682 million and a 13% improvement in spreads. The growth in volume was driven by persistent low interest rates throughout the quarter which [decreased] even further at the end of the quarter. The decline in net servicing income resulted primarily from a $2.1 million impairment charge on mortgage servicing rights. Mortgage prepayments are expected to increase as a result of lower rates and the Federal Reserve's quantitative easing plan which resulted in the decline in the fair value of our mortgage servicing rights.

The $1.2 million increase in the other in -- in the other non-interest income category which related to investments in corporate and life insurance which are not expected to recur. In the third quarter net security gains were only $42,000 as compared to $1.5 million in the second quarter. Net security gains during the second quarter were almost entirely realized gains on bank stock sales.

Operating expenses decreased $2.1 million or 1.9% to $110 million for the third quarter. Our efficiency ratio improved to 56.9 in the third quarter as compared to 57.6 in the second quarter. Our efficiency ratio has historically have been much lower than our peers in the largest banks. We expect this to continue.

Salaries and benefits increased $2.1 million or 3.4% due to a combination of normal merit, increases an additional day in the third quarter as compared to the second and an increase in health insurance costs. Staff additions were also made primarily to support residential lending activities, retail banking and compliance.

Other outside service expense increased $520,000 or 11.6% as we continue to incur elevated consolidating fees related to risk management and compliance efforts. A total of $2.3 million was incurred in the third quarter and we currently project $1.6 million remaining likely to be incurred in the fourth quarter.

Equipment expense increased $631,000 or 20% due to certain vendor rebates earned in the second quarter and additional depreciation expense related to hardware upgrades. OREO and repossession expenses were $727,000 and 26% lower. Net losses incurred on sales of properties [where for] valuation adjustments accounted for most of this decrease.

Operating risk loss decreased $651,000 or 32% during the third quarter as losses related to repurchase obligations for mortgage loan sold declined approximately $430,000. Marketing costs declined $1.9 million. This decrease resulted primarily from a significant promotion that occurred in the second quarter. We expect this expense category will increase in the fourth quarter.

The other category of non-interest expense decreased $2 million or 14.5%. This decrease resulted largely from reversals of reserves for state tax positions due to the expiration of the statute of limitations as well as changes in the risk level of certain positions. Our internal projections indicate that our total other expenses should be in the range of $111 million to $114 million for the fourth quarter.

However, certain expenses such as ORE and repossession expenses, mortgage repurchase losses and operating risk loss can experience volatility based on timing or events that cannot always be recently predicted. Such volatility could result in expense levels being higher or lower than projected.

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). Frank Schiraldi, Sandler O'Neill.

Good morning. Just a few quick questions if I could. I wanted to ask first, Scott, on buybacks you obviously continued to build capital. You bought back 2 million shares -- 2.1 million shares in the quarter. Is that a decent run rate do you think for what to expect going forward, say if the economic environment doesn't really change and then let's say again sort of similar to current stock prices?

Well, I guess the answer to that is yes, if nothing changes, but obviously things will. So as I mentioned in my comments, we will be watching the price. We'll be watching the expectation about the economy. And we have certain legal restrictions of how many shares we can buy back in any one day and all those kinds of things. So we did what we did and I wouldn't expect huge changes in our attitude. But market conditions change everyday.

Fair enough. And is there any reason not to believe that you -- I know that the program ends December 31st, but is there a reason to believe that you wouldn't go ahead and say if things sort of remain similar again and continue this sort of buyback progression next year as well with a new program?

Well, that is a Board decision, and the Board will continue to discuss our capital position on a meeting-by-meeting basis. And when we have an announcement, we will make it.

The loan growth, you talked about the pipeline going forward being a bit stronger. Is that approved deals in the hopper too that are stronger? I am just trying to get a sense if the modest contraction we saw in the quarter is representative of what we might expect going forward in terms of loan balances.

When we talk about our pipeline that is all approved loans. So we are seeing a bit more activity in certain areas, and Pennsylvania and Delaware have been showing a little more strength and we are getting some more activity or opportunities in the state of New Jersey.

So things have certainly picked up from this time last quarter then?

Yes, well, I think our pipeline is stronger, as we said. We did have a reduction in line borrowings during the quarter, $38 million. So that could have some seasonal changes to it also.

Great. And then finally wanted to turn to expenses and I had missed one thing that you had said, Charlie, during your comments. There was something that was $1.6 million going forward. I think it had been $3 million this quarter. Can you just run through that quickly again?

Yes, we had incurred about $2.3 million in the third quarter related to elevated consulting fees related to risk management and compliance efforts. And we currently project that that $2.3 million will drop to $1.6 million in the fourth quarter.

Is there any way to extend that out? Is that a tail that should dissipate further in 2013?

We would expect it to continue to drop.

And just correct me if I am wrong. I thought you had given a range of total non-interest expense of $111 million to $114 million for the fourth quarter. Is that right?

That's right.

Okay. And then I'm sorry real quickly on something you had mentioned on the margin, Charlie. I thought you had said that linked quarter you expect the margin -- you expect similar compression to what we saw from 2Q. And given the moving parts, I'm a little unsure what that exactly means. Is that -- I know 3.71 is sort of a better mormalized margin without the accretion in the quarter, so are you saying maybe 4 basis points off of that number is what you are talking about when you are saying similar compression?

I think we were talking about similar compression off the 3.71.

So you're saying --

We went from 3.78 to a normalized to 3.71, 7 basis points. We would expect -- our projections are saying that we will have similar margin compression in the fourth quarter.

Thank you.

Collyn Gilbert, Stifel Nicolaus.

Thanks, good morning. Just a follow-up. I think, Phil, you may have said it or Scott, but surrounding the reserve methodology. You had said that there is economic data that you are utilizing that goes into your allowance methodology. What is that? Specifically, the metrics that you're looking at.

Well, we look at a number of different metrics, but it would include unemployment. And --

In your region? Are at national level or --?

In our region, yes. Asset prices would be another. We did have a couple of states that had unemployments actually ticked up during the month.

Okay (multiple speakers) -- go ahead.

That's fine. No, go ahead.

If you were to -- I mean, as you look at your methodology is it skewed more towards the economic data versus the trends that you're seeing in the portfolio, is it split evenly or how do those -- how do you apply the weightings?

It would be skewed more towards the trend in our portfolio.

Okay. So as you look at your portfolio trends and obviously taking into consideration the economic data, I mean it's -- do you see a level to which you can draw this reserve down. I know I ask it every quarter and I think it just wanted some of the trends that we are seeing at some other banks where they had guided to a higher level and then boom, the next quarter they really dropped the reserve.

So it seems to me as you look at your metrics and as you said all of the credit metrics are improving, and your reserve coverage is 100%, it seems like you should be in a position now where you could really start to drop that reserve. But I'm just trying to --

Yes I would -- I think we expect the revision to -- the way things are right now to continue to decrease. To have a big -- a decrease without a corresponding improvement in those economic data within our market place, I think would be difficult.

We are not a boom company.

Well, no, that is what I am getting at. Is it just your defensive sort of measured approach to the way you run the business why you are just going to see a more gradual bleed of the provision where -- but yet the metrics are -- could suggest you could move at a more rapid clip than you are?

We will be prudent. But it depends -- a lot of good things could happen if we get this fiscal cliff resolved and we might see some really nice activity, but we are just going to hang in there right now.

And is there anything, any of the new non-accruals that have come onto the portfolio this year? How do those non-accruals differ from what is in the legacy portfolio? From either size, type of loan, structure, geography or is it pretty similar, the newer role is pretty similar with what the legacy portfolio looks like?

First off I would say the average size of what is rolling in is smaller than what it has been in the past. There's more coming from the state of New Jersey. There's less construction.

Okay.

I would say they would be the three things that might be a little different.

Would you say that the credit quality of what is rolling in in general or the risk profile is better than what the legacy portfolio looks like?

Boy, that's tough. I don't know that I would be prepared to answer that right now.

Okay. I will leave my question at that. Thanks.

Craig Siegenthaler, Credit Suisse.

Good morning. This is actually Nick Karzon standing in for Craig this morning.

I guess, first question, can you give us some idea in terms of what the new money yield is on the residential mortgage loans that you're holding?

I probably can give you a range, I would say between 2.75 and 3, maybe 3.25.

And I guess, second question was focusing -- looking at the tax rate. And I think you had previously guided to a moderately higher tax rate kind of in the 25% or 26%, 27% range. It was a little lower again this quarter. Is there a fixed tax credit here that we should be thinking about or what is the rate that we should think going forward?

Our normalized rate is about 27% where we are (technical difficulty) obviously as income goes up, our margin tax rate is higher so it is going to go up. During the quarter we mentioned that we had some gains on corporate and life insurance that is not taxable and that moved our [effects] to break down to, I think, 24.9%. So that was the primary reason.

Okay, thanks. And one last one if I can. Is it -- can you give us some color in terms of the commercial loan demand I guess by geography and by segment if possible?

Well, the one segment that I would say we are seeing more strength than others would be the automotive. As far as geography, well, first off, we are also seeing some strength on the owner occupied [BRE] side. And then geography, Delaware is giving us good opportunities right now as is New Jersey and Pennsylvania. And southeastern Pennsylvania, specifically. And then we are -- you know, but this is -- these are market share opportunities not necessarily, you know, new projects for our customers.

Thanks, very helpful. Thanks for taking my questions this morning.

Casey Haire, Jefferies.

Good morning. Just a follow-up on credit quality. I'm just trying to get a little bit more color as to why some of the losses are a little sticky actually up quarter to quarter if you back out the bulk sale last quarter. If you could just give us a little more color on that. Non-accrual inflows are down and real estate seems to be stabilizing, yet the loss rates seem to be a little stickier.

Well, I don't think they were up quarter to quarter. I think they were actually pretty -- charge-offs would have been pretty flat. Would have been flat. So we are trying to continue to be as aggressive as we can.

Okay. And then, Charlie, on the expense guide of $111 million to $114 million. The principal offsets or pressure, if you will, versus third quarter is higher marketing as well as the tax benefit does not recur going forward. Correct?

That's right. The marketing, it is not even quarter to quarter as based on our promotions. We had a big promotion in the second quarter and relatively low promotions in the third quarter. And that is going to go back up in the fourth quarter.

The other thing was related to reserve positions, related to state taxes. You always see it going down in the third quarter because the statute of limitations related to review and returns is over so we reduce that. And then we also, we look at all our risk positions and we have moved them down a little bit.

And just one more (multiple speakers). One more on capital if I may. Just wondering on the M&A environment are you guys hearing any more increased chatter given what is obviously a pretty challenging operating environment? And then also we are hearing stuff, that regulators that are actually pretty down on M&A and comments by Trulow last week, just very down on banks using M&A to get bigger. Just wondering if you are hearing anything on that front?

Not a lot. This is Scott. We are -- I wouldn't say -- there's always some discussions here and there, but I wouldn't say, I wouldn't call it an increase in or trend -- an increasing trend at this point in time. And regulators are being very cautious about everything. So I'm not surprised to hear that one of them might comment on that. But I don't have any sense that the attitude has changed dramatically since last quarter. I think we are all in a very cautious mode. And I think a lot of -- there is still a big difference in opinion between buyers and sellers as to what a bank is worth.

Got you. Thank you.

You're welcome.

Bob Ramsey, FBR.

This is actually Tom Frick for Bob. I just had one question. So it sounds like your NIM guidance is for contraction of somewhere in the range of 6 to 8 basis points. Is there any more room to reprice deposits to fight some of that compression? I know you talked about CD repricing that is available to you. Is there any other room to reprice deposits down?

Yes. You are right. The primary way to the deposits down are in the CDs. We have $726 million coming due, the rates -- the weighted average rate on that is 105. We should keep them at below 40 basis points. That is one opportunity. And we are looking at all our core rates, constantly looking at them all the time and in particular the rates we pay on municipal accounts.

Okay, great. And then on the tax rate you guys might have mentioned this, but we were kind of expecting a number in the 27%, 28% range. What is a good rate to use going forward now?

It is 27%. 27%, 28% is good.

Got you. And then finally you on mortgage banking what was the gain on sale margin for loans sold in the secondary market?

Our margin did go up and it was 1.87.

Great. That is all I had. Thank you.

Chris McGratty, KBW.

Good morning. I want to make sure I have got the margin right. So the 3.74 less the 3 basis points gets you to 3.71. Are you suggesting 4 basis points off of that number or is it the 7, 7 basis points (multiple speakers)?

We are thinking 7.

So 3.66. 3.64, excuse me.

Yes. In that range. It's difficult to project but Chris, [1 down so].

That's fine. I just wanted to make sure I got it right.

On the margin you guys do still have some trust preferreds. You do have some [officially] borrowings. And I asked this question last quarter. Has your mentality or thought process changed at all about looking at this kind of more expensive funding sources to help protect the margin?

We look at it all the time. Talk to different investment bankers about it. But the trust preferred, it is 30-year. And it is a 6.29% to replace it right now. And that is sort of, that is total capital. It's not, it doesn't apply to Tier 1. But we need a bucket in that total capital category. The Basel is 8.5. It is supposed to be like common capital to this weighted average asset certainly. And 10.5 for the total. We think that fits in nicely. And I think before we would buy back the trust preferred, it is my opinion we buy back common stock first because it would give us a better benefit, I think. And the common stocks are a higher cost capital to us.

Just one final question on the balance sheet. How should I think about the size of the investment portfolio?

As we mentioned it was down $136 million on average for the quarter. And right now we don't like the risk reward. We don't like the premiums we pay on the securities we usually buy and we don't like the yields. And that can change. But that is how we feel now.

And how much premium amortization is on the books related to the MBS booked?

I'm not sure. I'm not sure what it is.

All right. I will follow up after. Thank you very much.

Chris, hang on, and I'll give it to you but I don't have it on the tip of my tongue. But I will mention it for you. Sorry.

David Darst, Guggenheim Partners.

Good morning. You've admitted a lot of your deposit growth this quarter is coming from new business customers. Is that also stimulating your loan pipeline? And are you writing loans, writing more lines that are just sort of yet to be drawn?

The growth in those deposits has come from small business acquisitions. So that is in the short term not where we are seeing our loan opportunities. We are hopeful over time that those businesses will be a little more aggressive as far as expansion is concerned. But I don't think that is necessarily true. We did see line borrowings got down as a --. About $38 million and usage dropped by over 1 full percentage point.

Then maybe more on your marketing strategy and some of the parking spend you had in the second quarter and what you are expecting for the fourth. Is it more retail media-focused or is there anything you need or strategic that you are trying to channel those dollars into?

It is primarily a retail core deposits promotion that we did in the second quarter that was pretty successful and we are going to be doing it in the fourth quarter again.

Got it. Is that the -- I guess -- investors of the fund given the info of deposits that you are seeing now in the use of deposits?

Well it is -- I mean we, from a strategic standpoint we believe strongly in growing core households and core deposits and obtaining new customers. And that is really what the whole promotion is geared towards. And then those new accounts help us grow fee income and I think that's evident in a lot of our fee income categories.

Is any of that supporting your mortgage banking effort?

It does to a smaller degree. And hopefully our mortgage banking effort impacts our increase in core deposits also. I think it works both ways.

Great. Thank you.

Could I get back to Chris? This is Charlie, could I get back to Chris? Chris, the unamortized premium on our books related to mortgage-backed securities and CMOs, it's $41.1 million. If you take that as a premium to our book value on the securities, it is a 102. It is an even 102.

We can take our next question.

Russell Gunther, Bank of America.

Good morning. Appreciate the color on the non-interest expense side.

Wanted to follow up. I believe you guys are going to be undertaking a systems upgrade either later in the fourth quarter or 2013. Could you give us a sense for whether or not any portion of that is in that $111 million to $114 million guidance and what that associated cost might be?

So regarding the core conversion, total one-time expenses are going to be $3.9 million of which $1.3 million is in '12 and the balance will be in '13. Most of that will be in the fourth quarter, yes. So that would be in that guidance.

I appreciate that. And then turning back to comments on the M&A front. If you could just give us a sense for whether or not the conversations have picked up and if, where your dialogue is centered, I believe you have a targeted asset range maybe in the $300 million to $2.5 billion in terms of what you might look at. Is there any -- is the conversation around some of the smaller banks or just general thoughts on what you're seeing?

This is Scott. There haven't been a lot of conversations and as I said earlier I don't -- I wouldn't say there is an increase in imposed. There's some folks that have -- that are kind of investigating the market if you will. And I think just kind of preliminary discussions maybe, but the pricing and the -- where the stocks are right now, there just isn't a lot happening quite frankly.

Okay. And then in terms of where you would look and within your footprint assuming those conversations do pick up, do you have a geographical preference for where you might want to (multiple speakers).

Well, I think our preference is to stay in footprint. We have a lot of places where additional critical mass would help our profitability in those markets. But as you know, it's opportunistic. So to say we want to be in this market and then we announce two weeks later we are in that market, we -- you have to look at what is available and what opportunities we have. I mean, we have an ideal situation and we keep to ourselves, but frankly very seldom do you get an acquisition in the exact market that you've named as your highest priority. It just -- they happen, and those, that is the size range, but we consider smaller or larger than that if it is very strategic and it puts us where we want to be in the market.

So, that's a vague answer I know, but until a bank is for sale you really don't know what is going to be possible.

Understood and appreciate your thoughts on that. Just lastly, on the credit policy front, you mentioned the challenges to a Columbia Bank and Fulton Bank of New Jersey that there certainly upside there as things begin to improve. Could you give us your outlook on the credit quality front for those two banks? And when we might expect to see improvement that would flow through?

First off, we are seeing I think we are seeing improvement in credit from all our banks and we just, I think, mentioned New Jersey and Maryland because they are probably the two that we have the most potential to have increase credit quality.

Okay. Thanks.

Rick Weiss, Janney.

I think most of my questions were answered. But let me just flesh out a little bit with the loan growth. And what is competition like? Is there anybody in out there than you are seeing? More aggressive competitors? Or is it weak demand? How do you see the landscape?

Well, demand has been fairly weak. So for the most part, we are all out trying to pick up market share. And it is extremely competitive especially on the C&I side. But it has also become competitive on consumer and CRE. Pricing is extremely competitive.

Is it competitive as well as -- in terms of besides the pricing with regard to underwriting standards?

Yes. There has been more competitiveness in underwriting standards, but I would say that change is to a much lesser degree than pricing.

Is it more competitive today than it was six months ago? The pricing competition.

I would say so. I mean I don't think there's been a lot of change from second quarter to third quarter. But from if you go back to third quarter of last year compared to third quarter of this year, I think it is definitely more competitive.

And then on the deposit growth, is that -- and I know it is coming a lot from the commercial accounts. Is this from new commercial customers or existing ones that are putting more deposits into your bank?

Well, we are growing small-business customers. And I think most of the growth has come in that small business category.

Has this ever happened before, where you are growing the commercial customers through deposits rather than lending?

Well, it has been happening for the last 18 months. And we do anticipate a point in time when those small-business customers that are growing deposits will start growing loans. But I don't think we're there yet.

Rick, this is Scott. We have been doing a lot on branding the last several years and even during the difficult times maintained our efforts to re -- to brand the bank as a community bank with community banking philosophy. And I think some of that is paying off. And there are some -- typically over the year, over my long tenure typically you have got an account because they wanted a loan and they bid it around and whoever got the loan got the account.

So we have seen over the last couple of years people just saying, I want a new bank. And we have been fortunate to pick up I think more than our share of that and I think some of it has to do with the branding and some of it has to do with our style of banking. And there's more appeal to a particular small business to a community bank brand than there are other brands.

So then it is almost a matter of time whenever business conditions improve. And (multiple speakers).

One would think, Rick, yes.

Okay. Got it. Thank you.

Mac Hodgson, SunTrust Robinson Humphrey.

Phil, to clarify, did you say that criticized and classified loans were down $100 million in the quarter?

Assets. Criticized and classified assets were down $100 million in the quarter. $60 million were loans, $40 million were actually on -- out of the investment portfolio.

Okay. And then just one quick one on just on expenses. I want to get your thoughts more on efficiency.

You have obviously got revenue pressures from net interest margin and a lack of growth and you have got expense headwinds given the regulatory compliance environment and your conversion. It seems like you run the risk of losing your efficiency advantage. I mean, you have talked about how you run an efficient operation. Just want to get your thoughts on the need for expense initiative to the more aggressive on the expense side to offset some of these headwinds.

This is Scott. We are confident that we will maintain our relative position as far as efficiency is concerned and we have been involved with this lean process engineering for -- help me, folks, five or six years, 10.

Five.

Five years. And that has resulted in seven-figure savings every year. So we will continue to do those kinds of things and, as we go through our core conversion, we will be looking at a lot of systems again and with a finer toothed comb and looking at ways that we can become more efficient. The technology and infrastructure that we are investing in will help us become more efficient.

So we have been -- and we have had a culture of this for many years. So to expect us to find this $100 million that we can save in expenses out of nowhere is probably not realistic. Because we have been, I think, very good at managing that on an ongoing basis. So we will continue to be more efficient and we have -- and as our systems improve I think we will maintain our relative position.

Okay. Appreciate it. (multiple speakers).

This is Charlie. Just my little comment was everybody is under the same pressure and related to a slow economy and loan growth. Everybody is under the pressure of margin depression because of low interest rates. We can grow at a lower cost than other people and I would expect our efficiency ratio to always be where it is and that is at the top of our peer group.

Yes, I think where I was kind of going is we are starting to see a lot of banks either consolidate branches or announce more programs in response to the environment. And Scott, I know you talked about it is kind of a culture thing for you guys. I was just curious if things are bad enough to where that might change.

If things are bad enough, you have to react. So we will see if it gets there. But I think we don't expect things to get that bad and I think we just -- we will keep doing what we have been doing and if we need to do something drastic, then we will. But my expectation is that will not be necessary.

Appreciate it. Thanks.

Matthew Kelley, Sterne, Agee.

I was wondering if you could just follow up on the loan commentary, just talk about where you are seeing yields on new commercial real estate loans, high-quality office industrial type collateral five to 10 year fixed rate type pricing. Where is that today?

Yes fixed rates on CRE, for the most part we are trying to stay to five years on fixed rates and they would be in the 4's.

Low, mid --?

That depends on the deal. I would say they are -- some are low, some are mid, and some are high 4's.

And in the auto business before planned landing, where are those yields and how big is that portfolio if you can remind us of that?

Most of that would be floating-rate and it would be tied to I would say that they would probably be in the 3's, probably low 3's. And the total of that portfolio is $117 million.

And in the construction portfolio where do you see that stabilizing in terms of total size? Still came down at a pretty good clip sequentially around $600 million. Where do you see that headed?

That has really been fluctuating quarter to quarter. So that can really vary and it could drop a little, but it could go up. I think we are really close to a stabilized level.

And switching tears to the MSR valuation, can you give us a sense of the assumptions that changed, how you are carrying that now and just expectation for additional MSR writedowns going forward. I assume that that is carried at a level that you are more comparable with today, just given [QE3] and the lower environment and where is it carried and what changed and what is going to happen going forward.

MSRs are about $37 million and we have valuation reserves against that of about $3 million. We think we are conservative in measuring prepayment [speeds] and that we have extremely high prepayments speeds factored in there. And unless prepayments increase significantly I don't think we would have any more impairment charges on that.

How much did your assumptions change from Q2 to 3Q just [credit cards], the charge?

It's prepayment speeds by type of mortgage. It is the actual prepayment speeds on the mortgages we are seeing.

Got it. All right, thank you.

Blair Brantley, BB&T Capital Markets.

Good morning. Had a follow-up question on the M&A aspects. Are you looking at any more fee income acquisitions at this point? Getting a little spread if revenues are being pressured and if so what area?

We would be open to that. We have not aggressively pursued that, but would certainly listen with interest if one became available. But I wouldn't say it's imminent.

Is there some area you would focus on if you did pursue something? Certain lines of businesses maybe.

Well, we have a good wealth management business and we like that business. So, that might be one. And then there are other that might be unique kind of businesses that we felt like we could understand and manage the risk. Would prefer frankly to do bank acquisitions, but we'll see what else is out there.

And then on the dividend front, is there a certain [tail ratio] where you are comfortable with and obviously in the face of stress testing next year is there any kind of target that you may have? Given where you increased dividends so far.

I think we are in the 30% to 40% range right now, but that could change with our comfort level about the economy and our capital position. But we feel good there now. But at one point in time we were at 50% and we get back to more normal times, we may get back there again. But right now I think that's (technical difficulty) [rather comfortable].

Thank you very much.

Matthew Keating, Barclays.

I had a question I was hoping you could comment on your normalized goal of 1.3 to 1.5. In the current environment and I know in the past you have mentioned that many of your individual bank subsidiaries are currently operating close to and in some cases above that range. Can you talk about the timeline for achieving that goal and in general what do you think is possible if the current extended low rate environment persists through the middle of 2015, for example? Thanks.

Well, it is obviously going to be very tough for that, but we do have credit leverage available to us and you folks keep asking us when we are going to spend down that reserve. I think we have some opportunity there. Margins -- if margins stay where they are, interest rates state where they are, it is going to prolong that.

But if you look at the credit costs in the two banks we referred to and they get back to more normal, that will help considerably. But we are not going to set the world on fire if we get no loan growth and margin keeps compressing and we have all these headwinds. But I think we feel right now like things are going to get better, but gradually.

And so, and people forget that the Fed -- when the Fed puts out its announcement about interest rates it precedes that with if our forecast is correct. So they are not telling you that interest rates are going to stay low until 2016. They are just saying based on the crystal ball right now that's what it looks like. But we fix this fiscal cliff and a few other things happen, we could be there this time next year.

So we know we have the capacity to do it, but we can't do it with all the headwinds that are there today or we would be there. But I think our history would indicate that we can get to that range and we are still shooting for it. But the timing is anybody's guess.

Thank you for the color.

There are no further questions at this time. I would like to turn the conference back over to Mr. Scott Smith and Phil Wenger for additional and closing remarks.

Well, thanks again for joining us today. After 40 years in the banking industry and experiencing its many rewards and challenges, it is hard for me to believe that this is my final discussion with you. There has been one constant over the last four decades that has made the rewards more satisfying and the tough times a bit easier. It is the people I have worked with and the relationships I have enjoyed with them. That includes all of you.

Our goal has always been and always will be to tell you the facts about our performance so you can represent us as accurately as possible to your colleagues and to current and potential investors. And of course that won't change.

I want to thank you for your support and input over the years and don't forget I will continue to read your research reports as closely after I have retired as I do today.

I am, however, pleased that Phil will be taking your questions in the future. And now Phil will give you details on our next call.

Thank you, Scott, and thank you for your many years of service to Fulton Financial and for your leadership and mentoring to me and all of our team.

I would like to end this call by thanking everyone for joining us today. We hope you'll be able to be with us when we discuss fourth quarter and year end results on Wednesday, January 16.

This concludes today's presentation. Thank you for joining and have a nice day.