Fulton Financial Corporation
Q2 2008 Earnings Call Transcript

Published: 23 Jul 2008

[Operator:]

Good day and welcome everyone to the Fulton Financial second quarter 2008 earnings results conference call. (Operator Instructions) We are going to start today. I'm pleased to turn the floor over to the Vice President and Corporate Communications Manager, Ms. Laura Wakeley. Please go ahead.

[Laura Wakeley:]

Thank you. Good morning and thank you for joining us for Fulton Financial Corporation’s conference call and web cast to discuss our earnings for the second quarter of 2008. Your host for today’s conference call is Scott Smith, Chairman, CEO and President of Fulton Financial Corporation. Joining him is Charlie Nugent, Senior Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information included with our earnings announcement which we released at 4

[Scott Smith:]

Thank you, Laura. Good morning everyone and thanks for joining us here today. After I provide a brief overview for the quarter, Charlie Nugent will discuss our financial results in detail. Despite good results from the core banking operations that I will discuss in a moment, overall second quarter earnings were negatively impacted by three significant events

[Charles Nugent:]

Okay. Thank you Scott and good morning everyone. Unless otherwise noted, comparisons on this quarter are resolved in the first quarter. As Scott mentioned, we reported earnings per share of $0.15 for the second quarter which was $0.09 or 38% lower than the first quarter and $0.08 or 35% below the second quarter of last year. During the second quarter, we reported a $27.7-million non-cash charge related to our bank stock holdings that were determined to be other than temporarily impaired. On the net of tax basis, this write down was $16 million or $0.09 per share. Excluding the impact of the charge our earnings per share were $0.24. This write off reflects the continued weakness of the banking sector as stricter interpretations of existing accounting guidance recently provided by our independent accountants. This area is highly judgmental. In the past, there has been limited objective guidance on how impairment should be assessed. In the adjusted cost basis, the bank stock portfolio is now $62 million with a market value as June 30 of $53 million. Two other notable non-recurring transactions occurred during the second quarter. First in April, we sold our $87-million credit card portfolio resulting on a pre-tax gain of $13.9 million. In connection with the sales, we also entered into a joint marketing agreement with the purchaser under which we will earn a percentage of revenues generated in the future. The net result was a reduction in our consumer credit risk while preserving a future revenue stream. The second transaction was offering − or offering a support to our customers to hold a liquid Ocean Right Certificates or ORCs in their trust accounts and they were with our trust subsidiary and financial advisers. I agree in the purchase of these securities from their accounts. We were required to record the estimated fair value of this guarantee which resulted in a pre-tax charge at two earnings of $13.2 million. Through the end of the second quarter, we had purchased ORCs with par value of $132.5 million from customers at a total cost of $113.7 million. These ORCs are included in our investment portfolio at their estimated fair value of $125 million. ORCs with a par value of $200 million are still held in customer accounts and could be purchased in the future. Net interesting come increased $6 million or 4.8%. Total average earning assets were essentially unchanged but the mix changed as average loans grew $128 million or 1.1% and investment security has declined $125 million or 4%. Our net interest margin for the second quarter was 3.75%, a 17-basis point improvement from the first quarter. Our yields on earning assets decreased 38 basis points, while the cost of interest bearing liabilities decreased 53 basis points. Going forward, we expect that strong deposit competition will put pressure on our net interest margin. A loan growth occurred in commercial mortgages which grew a $150 or 4.2% with 73 million in Pennsylvania, 38 million in Virginia and $33 million in New Jersey. We have been able to generate the additional volume while maintaining our underwriting standards. Real estate construction loans decreased $38 million with declines of $50 million in Virginia, $11 million in Pennsylvania and $7 million in Maryland. Average commercial loans increased $38 million or 1.1% with the growth primarily in Pennsylvania at $50 million, and Maryland $ million. Commercial line of credit usage was approximately 41% at June 30 and March 31 as compared to 37% at the end of last June. Consumer loans declined $97 million at 20% mainly as a result of selling our credit card portfolio which accounted for $70 million of the average balance decrease. Direct and indirect consumer loans also declined $33 million. Home equity loans increased $42 million or 2.7% as a result of our auction line product. This product is primarily generated to our branch network and is generally limited to 85% loan to value ratio. Residential mortgages increased $34 million of 4% with $21 million of that increase in Pennsylvania and $10 million in Virginia and this growth was realized in both traditional industrial rate and fixed-rate mortgages. Investment securities decreased a $125 million as interest rates continued to decline into the second quarter of 2008. We repositioned our investment portfolio through the sale of service securities. We reinvested some of these proceeds and applied the remainder to fund our loan growth. During the 2nd quarter we purchased $93 million of securities, an average yield about 5.25% and sold $383 million and an average yield of 5.09%. The net result of the second quarter activity was a decrease in the average investments outstanding and improved interest rate sensitivity position and a higher overall portfolio yield. At June 30, the net unrealized loss from our debt securities was $25 million compared to a net unrealized gain of $22 million at March 31. Approximately $31 million of this $47 million change was in mortgage backed securities and collateralized mortgage obligation market values. And this resulted from treasury rates increasing and this is partially offset by tightening the mortgage spreads. Additional decrease in the values were seen in the municipal bond portfolio which declined $6.1 million and a trust-preferred and subordinated debt values which decreased $8.7 million due to a decline in the market for a (inaudible 00

[Operator:]

Thank you, gentlemen. (Operator Instructions) And we will take our first question from Ric Weiss at Janney.

[Richard Weiss − Janney Montgomery Scott:]

Hi, I was wondering if you could talk a little a more about − I guess in terms of the charge-offs level at ramped up. Is this something kind of you would expect to see over the second half of 2008?

[Scott Smith:]

Ric, Scott here. It is very difficult to project, as I mentioned in my comments that when I keep hearing from our folks that this is a very individualized situation. In a real estate area its development by development some are selling, some are not. So, it is awfully difficult for us to say well this is − this is a good indicator of the next two quarters. What I will say is, I am not hearing anything anecdotally and I do not have any data from our folks or from published data that would indicate we are at the bottom and that this is over and we are turning upwards and so forth. I also don’t have any end goal information that says things are going to get a lot worse, so, that is as candid as I can be about it. To me it is very difficult to call, we’re − a lot of things happening in Washington, a lot of things happening in Wallstreet, and there’s just a lot of things could impact this one way or the other and our crystal ball is not in any clearly as you are, quite frankly.

[Richard Weiss − Janney Montgomery Scott:]

Now I guess your (inaudible 00

[Scott Smith:]

Its as Charlie mention that some of those healthcare related charge-offs in the first quarter were Pennsylvania and New Jersey, so the real estate market certainly is tighter in the Baltimore, Washington or the Virginia market or some other places, but at this point they are holding up.

[Richard Weiss − Janney Montgomery Scott:]

Okay, let me switch over to the OTTI charge − anyway − I guess first were only a portion of your bank stock portfolio written down and how many bank stocks you have in that portfolio?

[Scott Smith:]

Ric, there is a − we wrote down 25 million and we have about 65 issues that would total between a position of 500,000 and I think our biggest is about two million.

[Richard Weiss − Janney Montgomery Scott:]

Okay.

[Scott Smith:]

(Inaudible 00

[Richard Weiss − Janney Montgomery Scott:]

Okay.

[Scott Smith:]

A little bit of a rally there the last couple of days.

[Richard Weiss − Janney Montgomery Scott:]

Yes, yes. That’s for sure. And also do you hold any trust preferred securities or trust referred pools that may be subject to the OTTI ‘cause we’ve just seen this happening with other banks.

[Scott Smith:]

Yes. We have 96 million in trust preferred, these are straight issues from banks but they are all highly rated. The ones we have, we have Wells Fargo, Bank of America, JP Morgan Chase and the rules right now, sometimes rules change we found out but the rules right now − if you have the intent to hold, the inability to hold these then there is no deterioration in the underlying credit, we would not have to break them down and the only change we had this order was I think that Bank of America was moved out from ‘AA’ to (inaudible 00

[Richard Weiss − Janney Montgomery Scott:]

Alright, so you are not seeing anything sort of potential hit that could impair capital or dividend or anything like that coming?

[Scott Smith:]

Yes, not right now, but as you know all these things are unavailable for sale, all these bonds are unavailable for sale and they are already reflected in our book value and they are already reflected in our capital ratios except for the regulatory capital ratio. Regulatory capital ratio changes in debt are not in there but changes in our bank stock portfolio are.

[Richard Weiss − Janney Montgomery Scott:]

Okay. Alright, good. Thank you very much.

[Scott Smith:]

Thank you, Rick.

[Operator:]

Next we will hear from Collyn Gilbert with Stifel Nicolaus.

[Collyn Gilbert − Stifel Nicolaus & Co.:]

Good morning, guys.

[Scott Smith:]

Hi Collyn.

[Charles Nugent:]

Hi Collyn.

[Collyn Gilbert − Stifel Nicolaus & Co.:]

Just a question on the ARC portfolio and Charlie you had mentioned that there’s 200 million letters still held at customer account that could be repurchased. Under what scenario would you be forced to repurchase those and is there any way we could sort of, or try to assess what the potential mark, would it be on those?

[Charles Nugent:]

Basically the agreement with our customers has been − this is with an account which was in their mind − these were funds to be somewhat liquid. And so what we’ve done is we came this agreement with customers that if they have a legitimate need for liquidity, then we would provide that liquidity since the market sales then wasn’t able to provide that. So, we have − that’s base on our customers need for. And some had immediate need and others as you’ve seen don’t, even though it was a liquid account they did not − they don’t have specific need for it that are immediate. We will manage that with customers that as we look forward.

[Collyn Gilbert − Stifel Nicolaus & Co.:]

Okay. So it’s a kind of hard to assess, I guess, at this point.

[Scott Smith:]

You know, Collyn, what we book in the liability is based on buying or guaranteeing, we will buy that the whole 330 million. So we came up − it’s crucial to let with so we have trouble come up with the market value. We talked to people, we also have valuation expert evaluate what we are to work and what we booked was based on the whole 330 million.

[Collyn Gilbert − Stifel Nicolaus & Co.:]

Okay.

[Scott Smith:]

And then going forward, I would think this would be subject to the other temporary impairment rules again and when we buy them back, we wouldn’t have to take any further adjustments. I am not just changing the credit and all these are act by (inaudible 00

[Collyn Gilbert − Stifel Nicolaus & Co.:]

Okay, great. That was it, thanks.

[Scott Smith:]

Thanks, Collyn.

[Operator:]

Our next question will come from Frank Schiraldi at Sandler O'Neill.

[Frank Schiraldi − Sandler O’Neill & Partners:]

Good morning guys.

[Scott Smith:]

Good morning, Frank.

[Frank Schiraldi − Sandler O’Neill & Partners:]

I just have a couple of questions on, first on the traps (ph 00

[Charles Nugent:]

Primarily banks but there’s − I think one or two Frank, and I will get back to you, if it did have an insurance company.

[Frank Schiraldi − Sandler O’Neill & Partners:]

Insurance. Okay.

[Charles Nugent:]

It’s really all banks but it’s a − there are a couple of insurance companies.

[Frank Schiraldi − Sandler O’Neill & Partners:]

And then when you’re talking about the individual issue trust preferred, you’re saying basically that, and correct me if I’m wrong, I just want to make sure I heard it right that, the fair value of these things has been marked down − they’ve been marked to fair value to equity but there’s just no other than temporary impairment.

[Charles Nugent:]

Right, that’s exactly.

[Frank Schiraldi − Sandler O’Neill & Partners:]

Okay.

[Charles Nugent:]

It goes to our regular accounting, equity ratios, that this will go to our regulatory ratios (inaudible 00

[Frank Schiraldi − Sandler O’Neill & Partners:]

Okay. And you’ve mentioned guidance coming from your accounts, is that something that came very recently?

[Charles Nugent:]

Very recently. It’s not a new though, other than temporary impairment rules that going to round in 20 years and even very subjective and I think you have to see and try to make it more specific in 2003 or 2004 (inaudible 00

[Frank Schiraldi − Sandler O’Neill & Partners:]

Okay And then I was just wondering if you could remind us, just in terms of non-performing − total non-performing assets including the 9 days plus past due, how much of that is resource, repurchases and what those have been written down to?

[Scott Smith:]

In terms of repurchase request, the repurchase requests outstanding are about the same, at $22 million.

[Frank Schiraldi − Sandler O’Neill & Partners:]

Okay.

[Charles Nugent:]

I think we had two or three come in the total million dollars and then we were three that were transferred, and we actually took possession of the near not performing loans down and the − we sold some properties and we have a loss of 200,000 on the sale of those properties and then during the quarter, we also wrote down $800,000 in the value of the properties based on recent appraisals or based on what we thought the sale price of the house will be.

[Frank Schiraldi − Sandler O’Neill & Partners:]

Okay, so, and those are all in, anything you brought back; you brought back in to non-performing asset?

[Charles Nugent:]

Yes, everything we brought back − if it wasn't −, you know, this 90 days past due within to non-performing and send the process of (inaudible 00

[Frank Schiraldi − Sandler O’Neill & Partners:]

Okay, and on the charge-offs, you mentioned there was one bill there that was in the charge-offs, can you tell us where that was, where that builder was located?

[Charles Nugent:]

I think it was in Maryland.

[Frank Schiraldi − Sandler O’Neill & Partners:]

Okay.

[Charles Nugent:]

He was based in Maryland, but he might have some buildings outside of Maryland.

[Frank Schiraldi − Sandler O’Neill & Partners:]

Okay, and finally I was wondering if you can give us a little more color on the home equity program that you're running that's bringing in some pretty good business, is that sales recurring customers and across the footprint?

[Scott Smith:]

Yes. This is Scott. Back in the fall, I think it was re-introduced this home equity product where the customer can − it's a line and if they choose to do so, they can fix the portion of that line, with the interest rate on it. And that's been particularly appealing to folks. And these are all underwritten by our people in our market and it's basically our customers and it's a − one of us mentioned − we're using fairly conservative underwriting standards to do that. So, we're feeling very comfortable about that portfolio and the growth we're getting out of it, because it's a product that not every competitor has and we feel like it's − makes sense (inaudible 00

[Frank Schiraldi − Sandler O’Neill & Partners:]

Okay, actually one last question, just trying for mailing (ph 00

[Charles Nugent:]

Yes. We mentioned in our results that this quarter so far has been 1.1 million (inaudible 00

[Frank Schiraldi − Sandler O’Neill & Partners:]

Okay, great! Thank you.

[Charles Nugent:]

You're welcome.

[Scott Smith:]

Yes, thank you Frank.

[Operator:]

(Operator instructions) We'll hear from Andy Stapp of B. Riley and Co.

[Andy Stapp − B. Riley and Co.:]

Good morning.

[Scott Smith:]

Good morning Andy.

[Charles Nugent:]

Good morning Andy.

[Andy Stapp − B. Riley and Co.:]

The metal equipment, the two loans related to metal equipment that went bad. Can you give me some more color that you would think the medical industry would be more immune to the recessionary environment?

[Charles Nugent:]

This equipment was equipment that's used for testing, and the reimbursement I guess it's from Medicare, changed significantly earlier in the year and as a result of that it changed the cash flow of a lot of this − of this in particular and so, that they had some difficulties paying. Now, we have to charge them off, but we're not done with it yet.

[Andy Stapp − B. Riley and Co.:]

Okay.

[Charles Nugent:]

This is kind of a unique situation where they kind of got the rug pulled out from under them in terms of their reimbursement, the amount they reimbursed per cap, and as a result of that they got themselves − they didn't have the volume, the net cash flow worth.

[Andy Stapp − B. Riley and Co.:]

And how much were the charge-offs for these two loans?

[Charles Nugent:]

One was $1.7 million, and it was in our central area, it was in Pennsylvania and the other one was up in the Lehigh Valley and that was $1.1 million.

[Andy Stapp − B. Riley and Co.:]

1.1?

[Charles Nugent:]

Yes, and they totaled 2.8.

[Andy Stapp − B. Riley and Co.:]

Okay. Can you refresh my memory on your bank stock portfolios, is it primarily public companies or do you have some small community banks in there?

[Charles Nugent:]

They are primarily in the publicly held companies, it’s almost a hundred percent and − we have a combination but primarily it's a more community banks in the areas we operate in.

[Andy Stapp − B. Riley and Co.:]

Okay. And do you have a feel how much was it from valuation decline just − market driven versus deterioration of fundamentals for these community banks?

[Charles Nugent:]

We go through and you know, I think it's a combination of both, to tell you the truth.

[Andy Stapp − B. Riley and Co.:]

Okay.

[Charles Nugent:]

What we did was we go through when − we did − but it was more subjective basis, we go through and look at their financial condition and if they had cut their dividends or if they had cut their dividend or they had significant quality problems, some other problems we would write them down right away. And now, we are on the basic guidelines we are using now is basically how much they are under, and for how long? Our portfolios, I think is doing better than if we compare the overall performance to our portfolios in a different index, I think we are doing better than the general market index.

[Andy Stapp − B. Riley and Co.:]

In a primarily Mid-Atlantic based?

[Charles Nugent:]

Yes, includes Virginia and Maryland, yes.

[Andy Stapp − B. Riley and Co.:]

Okay.

[Charles Nugent:]

We do not want to give out the wrong expression, we wondered out a little bit too. We went outside our area − there are some on these (inaudible 00

[Andy Stapp − B. Riley and Co.:]

Okay.

[Charles Nugent:]

We have a couple − we have one big bank, we have Wells Fargo in there.

[Andy Stapp − B. Riley and Co.:]

Okay. The OTTI guidelines you mentioned, these were provided by your outside auditor and not − this was not an AICPA pronouncement, correct? Charles Nugent \ Still, the way we look at it − if you look at the accounting guidance it is all subjective and −

[Andy Stapp − B. Riley and Co.:]

Okay.

[Charles Nugent:]

Same with the SCP comments and there is (inaudible 00

[Andy Stapp − B. Riley and Co.:]

Okay. Can you estimate the effective tax rate today for a second half of the year?

[Charles Nugent:]

Usually it is 29% to 30%. It is only an unusual adjustment and we are going both ways.

[Andy Stapp − B. Riley and Co.:]

Yes. Alright. Thank you.

[Charles Nugent:]

Hey Andy. Can I just say something on this valuation of the bank’s stock portfolio?

[Andy Stapp − B. Riley and Co.:]

Sure.

[Charles Nugent:]

It was subjective in the past but it was in accordance with the guidelines and everybody is in agreement. And now there is a more specific guidelines that just been − and as for years and we agreed with them in that, we put the base on that.

[Andy Stapp − B. Riley and Co.:]

Yes, understood.

[Operator:]

Our next question today will come from Sandy Osborne − KBW.

[Sandra Osborne − Keefe:]

Good morning, guys.

[Charles Nugent:]

Good morning, Sandy.

[Sandra Osborne − Keefe:]

Firstly, can you please speak to the large increase and other assets? Can you say increase of about like more than doubled since last year? Can you tell us what is in there?

[Charles Nugent:]

It is primarily debt security sales that haven’t settled yet.

[Sandra Osborne − Keefe:]

Okay.

[Charles Nugent:]

Will it be all that. I think it's all that. It’s great.

[Sandra Osborne − Keefe:]

Okay, back to resource. Do you kind of think that you are over the bubble with respect to resource, repurchase request? Would there be anything in decline?

[Scott Smith:]

As Charlie mentioned earlier, we continue to have activity there. We still believe that the reserves that we put aside last year are adequate for that process. It is not over yet and it will be some time that it will work through all of this as we age (inaudible 00

[Sandra Osborne − Keefe:]

Okay, so you would anticipate further requests, you just think they are covered for them.

[Scott Smith:]

Yes, these come in monthly.

[Sandra Osborne − Keefe:]

Okay.

[Charles Nugent:]

Sandy in the quarter, we had three additional repurchase request that they totaled $1 million. It is slowing down from what is said in the past but its kind hard to gauge what is going happen in the future. I will be surprised if it gets any − get more than what we are getting right now.

[Sandra Osborne − Keefe:]

Okay. And on the provision? How much of that increase was driven by construction? And can you just speak of the trends we're seeing in this portfolio?

[Charles Nugent:]

I do not know that we can answer how much was driven by construction and if the − done on a customer by custom basis. We aggregated that way and some of will be coming up with a number. Anyway, let me talk about the trend continue to be as I mentioned earlier. Individualized in market and in some of the market were we have the most concern, there is some developments doing fine. We are also hearing that if there stronger sector of it, it is the low end and the assumption is that it is first time home buyers and they don't have to sell a house so − and they see some bargains, so they're − they're ready to − to buy and they don't have the problem of liquidating the house they're in. So, there are still things to be − there is more strength in − in that − in the market than the others but having said that, there is some high end stuff moving in certain markets and − and (inaudible 00

[Sandra Osborne − Keefe:]

Okay.

[Charles Nugent:]

Anyone saying they want to be − we − in fact, I don't think it's been − (inaudible 00

[Sandra Osborne − Keefe:]

Okay.

[Charles Nugent:]

We're moving up the unallocated where we haven't specifically seen anything relate to − by just increasing our overall unallocated reserves because of what we're thinking just for the general business condition.

[Sandra Osborne − Keefe:]

Okay. That's all (inaudible 00

[Charles Nugent:]

No, the − it's − no, the regulatory standing is hard to judge because we have weigh the assets.

[Sandra Osborne − Keefe:]

Great.

[Charles Nugent:]

But it is kinda hard to judge. I − I, you know the Tier 1 I would think will be had at about 920.

[Sandra Osborne − Keefe:]

Okay.

[Charles Nugent:]

And our total risk base would be 11.8.

[Sandra Osborne − Keefe:]

Alright.

[Charles Nugent:]

The leverage ratio should be about 7.3.

[Sandra Osborne − Keefe:]

I'm sorry. What was that?

[Charles Nugent:]

7.3

[Sandra Osborne − Keefe:]

Okay. Okay. That is all I have. Thanks guys.

[Charles Nugent:]

Welcome.

[Operator:]

David Darst at FTN Midwest, your line is open.

[David Darst − FTN Midwest Securities:]

Great, good morning.

[Charles Nugent:]

Good morning, David.

[David Darst − FTN Midwest Securities:]

(Inaudible 00

[Charles Nugent:]

Yes, that's in there and I − I think we've really been doing well on the other income categories. (Inaudible 00

[David Darst − FTN Midwest Securities:]

Okay, and then − then the non-performing loans, could give the balance (ph 00

[Charles Nugent:]

Yes, the non performing construction loans in there are of the total non-performing − non-performing loans were about a 146 million. Construction is 37 million.

[David Darst − FTN Midwest Securities:]

Okay. And then, within your Oreo. I guess − how do you feel about the way or the movement of properties in the second quarter and pretty more optimistic that you could get things moving this quarter and maybe will we see a decline in net balance in the third quarter?

[Charles Nugent:]

(Inaudible 00

[David Darst − FTN Midwest Securities:]

What about within your non-performing loans. Is there a high percentage of that that you think you can recall in the next three to six months?

[Charles Nugent:]

No, I mean is, it − it's typically that we − we would and again as I said about the overall metrics, I am not here to tell you that those things are going to improve a lot because I am sure are going to see some more going in there.

[David Darst − FTN Midwest Securities:]

Okay.

[Charles Nugent:]

It's just − it's − it's so cloudy it's very hard to tell. I would love to be optimistic and tell you things that earned (ph 00

[David Darst − FTN Midwest Securities:]

Okay. Then − pretty comfortable if with the reserve level today or do you think it will continue to increase and you'll need to build it as (inaudible 00

[Charles Nugent:]

While, we are comfortable − what we know now, where we are now, so I think we are where we need to be as the quarter unfolds we'll see how that all materialize, maybe we’ll get lucky and we‘ll get some pay offs we didn’t expect or all those things that going to happen but there isn’t anything in the information available to us that would indicate indicates that its going to get a lot better in any time soon.

[David Darst − FTN Midwest Securities:]

Okay. Have you given any indication of what you think your charge offs supervision might be for the rest of the year?

[Charles Nugent:]

No, we have not.

[David Darst − FTN Midwest Securities:]

Okay, thanks.

[Charles Nugent:]

Okay.

[Operator:]

At this point, we have no further question in the queue, gentlemen I’ll turn it back to you for any additional or closing remarks.

[Scott Smith:]

I‘d like to end this call by thanking everyone for joining us today, we hope you will be able to be with us again for our third quarter earnings conference call which is scheduled for October 22 at 10