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Edited Transcript of FULT earnings conference call or presentation 18-Apr-18 2:00pm GMT

Q1 2018 Fulton Financial Corp Earnings Call

Lancaster Sep 12, 2018 (Thomson StreetEvents) -- Edited Transcript of Fulton Financial Corp earnings conference call or presentation Wednesday, April 18, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* E. Philip Wenger

Fulton Financial Corporation - Chairman & CEO

* Jason H. Weber

Fulton Financial Corporation - Senior VP & Director of Corporate Development

* Mark R. McCollom

Fulton Financial Corporation - Senior EVP & CFO

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Conference Call Participants

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* Austin Lincoln Nicholas

Stephens Inc., Research Division - VP and Research Analyst

* Brian James Zabora

Hovde Group, LLC, Research Division - Director

* Broderick Dyer Preston

Piper Jaffray Companies, Research Division - Research Analyst

* Christopher Edward McGratty

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Daniel Tamayo

* Frank Joseph Schiraldi

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Joseph Gladue

Merion Capital Group LLC, Research Division - Director of Research

* Russell Elliott Teasdale Gunther

D.A. Davidson & Co., Research Division - VP & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Fulton Financial First Quarter Results Conference Call. This call is being recorded.

I will now turn the call over to Jason Weber. Please go ahead, sir.

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Jason H. Weber, Fulton Financial Corporation - Senior VP & Director of Corporate Development [2]

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Thanks, Ashley. Good morning. Thanks for joining us for the Fulton Financial's conference call and webcast to discuss our earnings for the first quarter of 2018.

We are experiencing some technical difficulties with our webcast. When you sign in, please download the slides and follow along. Click on the Files tab on the bottom left to download the slides. We will not be able to advance the slides on the screen. We apologize for any inconvenience.

Your host for today's conference call is Phil Wenger, Chairman and Chief Executive Officer of Fulton Financial Corporation. Joining Phil Wenger is Mark McCollom, Senior Executive Vice President and Chief Financial Officer.

Our comments today will refer to the financial information and related slide presentation included with our earnings announcement, which we released at 4:30 p.m. yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations, then News. The slides can also be found on the Presentations page under Investor Relations on our website.

On this call, representatives of Fulton may make forward-looking statements with respect to Fulton's financial condition, results of operation and business. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors and actual results could differ materially. Please refer to the safe harbor statement and the forward-looking statements in our earnings release and on Slide 2 of today's presentation for additional information regarding these risks, uncertainties and other factors. Fulton undertakes no obligation, other than as required by law, to update or revise any forward-looking statements.

In discussing Fulton's performance, representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included in Fulton's earnings announcement released yesterday and Slides 12, 13 and 14 of today's presentation for reconciliation of these non-GAAP financial measures to the most comparable GAAP measures.

Now, I'd like to turn the call over to your host, Phil Wenger.

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [3]

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Thanks, Jason, and good morning, everyone, and thank you for joining us. I have a few prepared remarks before our CFO, Mark McCollom, shares the details of our first quarter financial performance and discusses our 2018 outlook.

Overall, first quarter earnings were generally in-line with our expectations despite slower than expected growth in loans and deposits. Positives for the quarter included a 6 basis point increase in our net interest margin, stable credit conditions and the decline in noninterest expenses.

We reported diluted earnings -- or diluted per share earnings of $0.28, an increase of 47.4% linked quarter and 12% year-over-year. Excluding the impact of the tax charge in the fourth quarter of 2017, diluted per-share earnings were flat linked quarter. Our return on average assets was 1.01% and our return on average tangible equity was 11.85% for the quarter.

Average loans increased 0.6% or $101 million linked quarter and 5.4% or $803 million year-over-year. Loan demand is typically softer in the first quarter and both our line borrowings and total originations declined, reflecting this seasonality. Also, a portion of the loan growth we normally see in the first quarter was likely pulled forward in the fourth quarter of 2017 due to the tax change and, as a result, negatively impacted loan growth in the first quarter.

Our average commercial mortgage portfolio increased 1.2% linked quarter and 4.4% year-over-year. Growth was primarily in our Pennsylvania market and, to a lesser extent, in our Virginia and Delaware markets. As we mentioned in prior quarters, our owner-occupied commercial mortgages represent close to half of the overall commercial mortgage portfolio and we remain well within the regulatory guidance on concentrations in commercial real estate lending. We will continue to take advantage of the market opportunities to grow our commercial mortgage portfolio. Consistent with Fulton's underwriting standards, we generally lend to borrowers that have stable cash flow and sizable equity positions.

On average C&I loan portfolio, our average C&I loan portfolio increased 0.6% linked quarter and 2% year-over-year. Growth was spread across a broad range of industries and concentrated in our core Pennsylvania market. Our commercial pipeline increased linked quarter and remains at a level that should allow us to produce mid-single-digit loan growth in 2018.

Our average residential mortgage portfolio increased 1.7% linked quarter and 19.6% year-over-year. Growth in the portfolio moderated this quarter driven by seasonality and, to a lesser extent, by selling more production in its secondary market. We sold 62% of originations in the quarter compared to approximately 50% for all of 2017. Growth was primarily in our Maryland and Virginia markets.

Turning to funding. Deposits declined linked quarter driven by a reduction in commercial and municipal deposits. However, deposits increased year-over-year. Our loan-to-deposit ratio ended the quarter at approximately 101%, within our historical operating range.

Turning to credit. Overall asset quality continues to be stable and delinquencies and net charge-offs continue to be at historically low levels.

Moving to fees. Noninterest income declined linked quarter due to seasonality in some of our products and businesses, mainly in our commercial loan interest rate swap and SBA loan sale fees. Given the current pipeline, we believe fees in these 2 businesses will improve throughout 2018. The efficiency ratio increased linked quarter despite a reduction in noninterest expenses. The efficiency ratio for the first quarter of 2018 was 67.5%, outside our stated goal of 60% to 65%. While seasonally weaker revenues and tax reform were the primary drivers of the increase, we are not satisfied with the overall noninterest expense levels. Expense management is a top priority and we continually look for ways to make our organization more efficient while continuing to invest in our company to support a larger organization.

On the capital front, we increased our quarterly common dividend by $0.01 to $0.12. We did not repurchase any common stock during the quarter. We have approximately $31.5 million left in our current share repurchase program, which is authorized through December 31, 2018.

Turning to regulatory matters. As we mentioned last quarter, during the fourth quarter of 2017, the BSA/AML consent orders issued to 3 of our subsidiary banks were terminated. We are working diligently to achieve a similar resolution with respect to the remaining BSA/AML consent orders. We will have updates throughout the year. With respect to the Department of Justice's ongoing fair lending investigation, we have continued to cooperate with that investigation and have nothing new to report.

Looking forward, I remain optimistic for the remainder of 2018. Our local economies are performing well. Our pipeline is growing and we continue to benefit from rising rates. We believe we can create meaningful earnings growth in 2018.

At this point, I'd like to turn the call over to Mark McCollom to discuss our financial performance in more detail. Mark?

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [4]

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Thanks, Phil, and good morning, everyone. While I've had the chance to meet and/or chat with many of you on the call, I'd like to reiterate how happy I am to be here at Fulton and I look forward to working with you all in the months and years ahead.

Now, turning to our earnings. Unless noted otherwise, the quarterly comparisons I will be discussing are with the fourth quarter of 2017.

Starting on Slide 4. As Phil noted, earnings per diluted share this quarter were $0.28 on net income of $49.5 million. So now, I'm going to dive a bit deeper into each of the components of our earnings and provide some additional color.

Moving to Slide 5. Our net interest income was $151 million, an increase of $1.9 million linked quarter, which exceeded our internal expectations. As you all know, the first quarter has a couple of factors working against many banks, 2 less calendar days and typically slower growth due to seasonality.

Despite those headwinds, we were able to produce linked quarter growth in net interest income by generating a higher net interest margin than our expectations. Our net interest margin expanded by 6 basis points to 3.35% for the quarter and this occurred despite also absorbing the negative hit to our margin related to the presentation of tax equivalent yields for certain loans and investments using a 21% marginal tax rate for the first time. Last quarter, we'd indicated that this tax rate change would likely drive a first quarter decline in net interest margin of 1 to 5 basis points.

There are 2 principal reasons for this positive result to our net interest margin. First, deposit betas remained below our internal expectations for the first quarter as our cost of interest-bearing liabilities increased only 4 basis points. We have seen deposit competition pickup in the back half of the quarter and our expectation for future periods is that deposit betas will likely increase.

Second, our net interest margin improvement was driven by a reduction in short-term investments as those balances ran down in -- late in the fourth quarter of 2017 and into the first quarter of 2018, which in turn reduced the linked quarter balance approximately $270 million. This trend tends to occur each year as our muni deposit inflows typically peak in the third quarter and then ebb in the fourth and first quarters and we maintain higher liquidity to account for that.

So to recap these items, in total, they increased our net interest margin driven by higher interest-earning asset yields, which increased 10 basis points and outpaced the 4 basis point increase in our funding cost. I also want to remind everyone that our balance sheet remains asset-sensitive as 43% of our loan portfolio is variable, 35% is adjustable and only 22% is fixed rate.

With respect to average balances, the decrease in average interest-earning assets reflected the impact of a $100 million increase in average loans offset by the $270 million decrease in short-term investments I just discussed. Average deposits were off $636 million or 4% in the first quarter. Municipal deposit runoff accounted for over half or approximately $330 million of this decline. In addition, some of this decrease was due to a change in customer behavior to use short-term promissory notes in lieu of deposits as this category grew $110 million.

On a point-to-point basis, the deposit decline was less than our average balance decline at $320 million or $210 million after giving consideration to the customer shift to our short-term promissory product. Municipal deposit runoff attributed -- contributed to $140 million of the ending balance runoff. Offsetting this decline, our short-term borrowings increased $210 million primarily in Fed funds purchased.

Turning to credit now on Slide 6. Based on our valuation of all relevant credit quality factors, we recorded a $4 million provision for credit losses in the first quarter, $2.8 million lower than the provision in the fourth quarter of 2017. The allowance for credit losses as a percent of loans remain unchanged from year-end 2017 to the end of the first quarter at 112 basis points. The coverage of the allowance to nonperforming loans was also unchanged at 131%. Annualized net charge-offs to average loans were 10 basis points for the quarter, which is a decrease from the full year 2017 net charge-off rate of 12 basis points and the fourth quarter 2017 rate of 14 basis points. Ending nonperforming loans were essentially unchanged linked quarter at $135 million. Nonperforming loans as a percent of total loans was 86 basis points as compared to 85 basis points linked quarter and 88 basis points a year ago. Delinquencies continued to improve, ending the quarter at 1.19% of total loans as compared to 1.24% at year-end and 1.23% for the first quarter a year ago.

Moving to Slide 7. Our noninterest income, excluding securities gains for the quarter, was $45.9 million, a decrease of $9.2 million linked quarter. Now as a reminder, in the fourth quarter of 2017, we recognized a $5.1 million gain on the settlement of litigation. Excluding this item, the linked quarter decrease was $4.1 million or a little over 8%. The principal declines were in commercial loan swap fees of $1.6 million and gains on sale of SBA loans of $1 million and were tied to slower first quarter growth due to seasonality. Debit card revenues also declined $700,000 and this was an expected post-holiday season outcome. We should also note that our securities gains for the quarter were only $19,000. And given the portfolio repositioning that occurred last year plus recent increases in interest rates, we would not anticipate any meaningful securities gains in the near term.

Moving to Slide 8. Noninterest expenses were $136.7 million, a decrease of $1.8 million in the first quarter. Excluding lower amortization of tax credit investments and a $3.4 million charge we recorded in the fourth quarter of last year for the write-off of certain accumulated technology costs, noninterest expense has increased $3.3 million. Salaries and benefits expense accounted for $2.3 million of this increase and this was largely attributed to a seasonal bump in payroll taxes due to the reset of FICA and state taxes at the beginning of the year. Other expenses -- other expense increases were in professional fees of $1.2 million and a seasonal increase in net occupancy expense of $1.1 million. Partially offsetting these increases was a decrease of $800,000 in FDIC insurance expense.

First quarter expenses also included $750,000 related to the consolidation of 4 of our branches. This was in addition to $250,000 recognized in the fourth quarter of 2017. The expected annual expense reduction from these closures is approximately $1.4 million or a payback of a little less than one year. We will continuate -- we will continue to evalue opportunities to further streamline our branch network and also to manage overall expenses.

Income tax expense decreased $20 million linked quarter due primarily to the fourth quarter reporting of a $15.6 million tax charge. As a reminder, this tax charge is for the remeasurement of deferred tax assets of applying the new 21% federal corporate tax rate established by Federal Tax Reform Law that was enacted in December of last year. For the first quarter of 2018, our effective tax rate was 12.5%, in-line with our guidance.

If you're clicking on, Slide 9 displays our profitability and capital levels over the past 5 quarters. We continue to see increases in both returns on average assets and returns on tangible equity over the periods presented.

In conclusion, we have included on Slide 10 a summary of our outlook for the year. We have made 2 changes to this outlook since last quarter. First, we have increased our net interest margin guidance to be an annual increase of 5 to 10 basis points, up from prior guidance of 2 to 7 basis points. The 2 reasons for this revision are the better than expected first quarter 2018 results we already shared with you plus the positive impact of the March increase to the Fed funds target, which was not assumed in our original guidance. Based on everything we know today, the upper end of our revised net interest margin range feels like where we are heading, but actual deposit and loan betas will factor heavily into that guidance going forward. For the remainder of 2018, our guidance assumes 25 basis point rate hikes in June and December. We've also tightened our guidance on our effective tax rate to be between 11% and 14%. The primary reason for this change is simply the passage of time and working through sweeping tax legislation and assessing its impact on our company.

And with that, I'll now turn the call over to our operator, Ashley, for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Frank Schiraldi of Sandler O'Neill.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [2]

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Just on a -- just a couple of questions. On the contraction in deposit balances linked quarter, you talked about a partially -- obviously, it's just the seasonal nature of the munis -- but you also talked about a change in customer behavior. Just wondering how that change maybe changes your deposit gathering strategies and if you've increased pricing in some other products in response?

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [3]

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Yes, Frank. Good morning. This is Mark. Yes, we are constantly looking at deposits, looking at those -- what those deposit betas have been historically and assessing where we need to be in terms of being competitive going forward. What I will note on that fourth quarter decline is that despite there being a decline in balances on the commercial side, which is where most of -- you saw a decline in actual balances, we actually grew our commercial checking accounts during the quarter. So despite there being a small increase in the number of accounts, the balances came off. So again, as we said in our earlier comments, it feels like part of that was some planning going on with respect to tax reform. But with respect to your question on rates and what we're doing about that, it's something we're thinking about constantly. And again, in my comments on margin, our view is that deposit betas will likely increase in the coming quarters in order to get back on track to deposit growth.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [4]

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Okay. And then, you mentioned the strong pipeline, Phil, on the commercial side. Just wondering how that pipeline -- how the commercial loan pipeline compares on a -- where it stands now on a year-over-year basis?

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [5]

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In a year-over-year basis, it's down slightly. Very slightly.

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Frank Joseph Schiraldi, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [6]

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Okay.

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [7]

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I will add, Frank, that competition for loans right now, I think, is stronger than it's ever been. So that's going to impact our pricing going forward and it also impacts the percent of loans that we get to close.

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [8]

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And, Frank, I would just add that if you think to where we were a year ago where our pipeline was high in the fourth quarter, that ended up driving the 7.8% organic loan growth. Our guidance for this year is mid-single-digit range, which reflects where the pipelines currently stand.

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Operator [9]

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Our next question comes from Chris McGratty of KBW.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [10]

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Phil, maybe a question on capital. You talked about the 31.5% that remains in the buyback and also the kind of the BSAs that are kind of a work in progress. How should we be thinking about using the buyback? Obviously, you haven't been doing it in recent quarters. Is it about the level of the stock? I mean, you are at a discount on a price-to-book to peers. Just interested if that might be a tool that you might be considering?

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [11]

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I would say that at this point, we are starting to consider it more and we have been for a couple of years. And there will be a number of things that factor into it, including how our growth picks up, what level of dividends we want to have for the year, but growth is going to be a big factor in the next 2 quarters as to whether we get back into that again.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [12]

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Okay. Mark, I may have missed it in your comments about the variable rate nature of the book, but did you disclose or can you disclose the proportion that is LIBOR-based given the big move in LIBOR?

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [13]

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Yes. It's -- of our loans that are either adjustable or variable, it is split. I think it's 37% or 38% are LIBOR-based and then another 37% or 38% are prime mix.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [14]

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Okay. And then, maybe last question, I'll hop back. The fee guidance, the $46 million in the quarter, if you were to kind of back into the 2% or 3% full year growth, that would suggest you need to do 51% -- roughly 50%, 51% a quarter. Understanding that swap fees move around and should rebound, what else needs to occur to get to that guide?

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [15]

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Well, we need our investment management and trust area to continue to be strong. We did have good growth year-over-year there. We continue to have growth there. We need mortgage to continue to build as we go through the year. I think they would be the 2 largest factors besides swap and SBA coming back.

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Operator [16]

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Our next question comes from Joe Gladue of Merion Capital Group.

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Joseph Gladue, Merion Capital Group LLC, Research Division - Director of Research [17]

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I guess, just like -- wondering if you could give a little bit more color on the competitive environment on the loan side. Just -- is there anybody being particularly aggressive on -- where people are being aggressive in terms of pricing and terms and maybe a little bit about the -- just where that stands geographically? And I'll just add on to that question. Were there any particular -- were there any significant payoffs during the quarter that, I guess, dragged down the numbers?

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [18]

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Yes. Payoffs were not a whole lot different than they -- than we've been experiencing. So I don't think that impacted the numbers. Our line borrowings were down $22 million. And we are -- we don't really mention names as to who's doing what, but we are seeing banks that are doing longer-term fixed rates than what we're comfortable with and we're also getting a lot of competition now from life insurance companies on the commercial real estate side. So either they're doing much longer fixed rates and much longer amortization periods than we're comfortable with.

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Joseph Gladue, Merion Capital Group LLC, Research Division - Director of Research [19]

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Okay. And just on commercial side, sort of the average yields on new originations, where are they in relation to the sort of the average portfolio yields in that category?

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [20]

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So I think the -- for the quarter, we're about $440 million.

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [21]

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Yes.

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [22]

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And it stopped running off was at $404 million.

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Operator [23]

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Our next question comes from Russell Gunther of Davidson.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [24]

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I just want to follow up on some of the loan growth commentary, maybe parse it a little bit. You mentioned the strength of the commercial pipe, but also the increased competition. So as we think about the average loan growth guide that stayed unchanged, could you give us a sense for what the loan mix of that might look like and as well as particularly strong geographic drivers?

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [25]

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Yes. So I think we're looking at growth this year at C&I, commercial real estate and we'll have some growth in the mortgage portfolio also. So our core Central Pennsylvania market would still provide the most growth in the -- in C&I and CRE. In the mortgage area, we're -- actually our growth is being driven by our Virginia and Maryland markets.

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [26]

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Got it. Okay. I appreciate that. And then, last one for me, just to follow-up on some of the margin commentary. Could you guys maybe help isolate for what the negative impact was from overlaying the new corporate tax rate? And then, you mentioned some of the upside was in deposit betas being lower than you expected. Maybe just give us your thoughts on what you were modeling and what's your model going forward?

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [27]

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Yes. It's -- good morning. It's Mark. So first, the impact of tax reform in the first quarter was about 6 basis points. So -- and that was principally due to both we had about a little over $1 billion in tax-free loans as well as $400 million of municipal loans. So the effective tax reform on the margin was about 6 basis points.

And then, I'm sorry, the second part of your question again?

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Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [28]

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The second part was on the deposit betas. So part of the commentary was the better result was they came in lower versus what you were looking for. Just give us some help on kind of how you were thinking about that and how you're thinking about it going forward?

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [29]

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Yes. I mean, if you go back both for us as well as many other banks in the last time we were in a rate upcycle, deposit betas were generally in the 40s and our specific numbers were in-line with that. So heading into this one, I think the entire industry has been surprised at how low the betas have been able to be thus far. And we had anticipated that you would see a ramp up, not necessarily in the first quarter being that low or being that high, rather, but that you would get to deposit betas approaching 40% as the year goes on. In the first quarter, you didn't see that, but on a go-forward basis, again, our assumption is there is going to be continue to be a ramp up in those deposit betas. And I think that's -- there's kind of 2 factors to that. I mean, that's both customer retention, but also new customer acquisition.

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Operator [30]

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Our next question comes from Brody Preston of Piper Jaffray.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [31]

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I just have a question, I guess, a follow-up on loan growth. You mentioned that the pipeline is down slightly year-over-year. Competition has sort of picked up quite a bit, but the guide remains sort of mid-single-digit. So I guess that, that would imply roughly $800 million in growth throughout the rest of the year. And that quarterly growth rate, I guess, is around $260 million, $265 million per quarter, which is a little bit more than what you've done on a quarter-over-quarter basis over the last 3 years. So I just want to get a better sense for what gives you confidence that you'll be able to hit that number?

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [32]

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Well, in the last 2 years, we've had -- I'd say the majority of our quarters were at or higher than that level. That would be my first comment. And, I mean, we are -- we're going to get more aggressive in our pricing and we continue to have a very active calling program. And so what we see right now, we can -- we believe we can achieve that.

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [33]

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Yes. I would also add that if you go back and look in the first quarter of last year, the first quarter of last year was actually very unusual because we actually had significant loan growth in the first quarter. But if you go back and look over the last decade, that is not typically the trend. So normally, for us, the second or third quarters tend to be where you see the most significant portion of your annual loan growth. And again, I'll reiterate that a year ago, we had 7.8%, which I think when you give sort of a low, mid, high, that would have been high in terms of loan growth. And our guidance for this year is mid, which would be something near the middle of 0 to 10.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [34]

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Okay. That's great. And then, on the being more aggressive on pricing, I guess, one of the early fears in terms of the tax reform is that people would compete it -- compete away some of the benefits that you're seeing through pricing. Is that something that you're seeing throughout your markets?

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [35]

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I would say that yes, we are seeing that.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [36]

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Okay. And then...

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [37]

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And I think what -- no. I was just going to add that when you see the comments on margin guidance, we commented that what's going to impact that going forward is not only deposit betas, but also asset betas to acknowledge your point.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [38]

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Okay. And I...

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [39]

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And...

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [40]

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Yes. Go ahead.

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [41]

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No. Go ahead.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [42]

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I was just going to say -- I was going to switch gears a little bit. On the deposit front, you mentioned it, some seasonality from the munis and some of the -- just customers changing their behavior a little bit to the promissory notes. It looks like you had a similar increase last quarter in the short-term promissory notes. So, I guess, this is a 2-part question, are the customers are switching away from accounts to the promissory notes? And what's the rate differential between sort of, I guess, your average product and the promissory notes.

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [43]

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Yes. Yes. It's -- I mean, really what the customer is doing is that they are just trading off, either having a secure deposit, which is secured by investment securities on our balance sheet, which would carry a lower rate, to an unsecured product that would carry a higher rate. Or in the case of the promissory note, something that would be uninsured by the FDIC and above the FDIC rate, but then also carry a higher rate for the additional risk that the customer is taking. So it's really just the customers saying -- or us suggesting to them, hey, here's different ways that you can get a higher yield today if you're willing to either forgo a secure nature of deposit or if you're willing to forgo FDIC insurance.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [44]

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Okay. Okay. And what is, I guess, maybe the rate differential?

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [45]

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Yes. I don't have that right at my fingertips, but I can certainly follow-up with that online -- or offline, rather.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [46]

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Okay. Okay. And then, on the expense front, some of the uptick you mentioned was related to maybe professional fees from the tax reform. And obviously we can't predict what this now is going to be like. So are you expecting sort of the professional fees to ramp down from here?

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [47]

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Yes. Yes. Yes. I would anticipate in the next couple of quarters for the professional fees number to ramp down a little bit.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [48]

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Okay. And...

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [49]

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And also -- yes -- and I'm sorry. Also back to your earlier question about the rate differential, the promissory note kind of trades in-line with the commercial paper market.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [50]

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That's what I thought. Okay. And then, on the application that you guys filed to consolidate some of your subsidiaries, just wanted to get some of your thoughts on that. Any sense for timing?

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [51]

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And so we filed an application to consolidate our 2 small OCC banks into Fulton Bank. So they are the 3 banks that have had the BSA orders released. We'd anticipate hearing back from that in -- I think it's 45 days from when the application is submitted. So towards the end of May, we'll hear back and hopefully we can proceed. I don't anticipate that there will be a lot of costs driven out by that, but -- and then that -- as the other orders are released, we would continue that consolidation process.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [52]

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Okay. And then, can you just talk about your expectations for CCIL? I know it's a little early, but I just hope to get your thoughts on how you're thinking it will impact things going forward?

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [53]

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I think you are correct that it is very early to be commenting on CCIL. I mean, it's something that -- I will say that we have a lot of people internally. We are focused on it. It's multidisciplinary within our credit team, our finance team. We do have nationally recognized outside third parties assisting with that. But when you look at what the potential impact would be, I'm sure we all read a lot of things out there. I mean, you can drive a truck through those estimates right now. They are very, very wide and I'm not in any position yet to comment on the exposure for them.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [54]

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Okay. And then, just last one for me, just following up on the NIM. I'm sorry if you already addressed this. What happened to the margin this quarter versus initial expectations? I think the guide was for down 1 to 5 basis points on an FTE basis. Was it just the asset mix shift or was there something else going on?

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [55]

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Yes, sure. Yes. You kind of -- a couple of things going on there. One is that we did have an asset mix shift where our short-term investment balance, which tends to be higher in the fourth quarter as we prepare for municipal deposit runoff, it typically adds in the first and fourth quarters, so that came off a little bit. And then, our expectations why we thought it would be down would be due to tax reform was taking away around 6 basis points from our margin due to the impact on tax-free loans and tax-free investments, but the real driver was deposit betas, which you've heard some other comments on here. If you jumped in a little late, deposit betas, for us, came in lower than our internal expectations.

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [56]

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If I could clarify one point for you all. Joe had asked the question, a few folks back about our yields on production compared to what was running off. And I transposed a number and so I want to clarify. But our loans -- our new production, it did have an average yield of 4.4%. I said the payoffs were 4.04% and they're actually 4.4%. I transposed that number. I wanted to clarify.

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Operator [57]

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Our next question comes from Daniel Tamayo of Raymond James.

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Daniel Tamayo, [58]

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Just a quick one. Most of my questions have been answered. But related to the remaining consent orders and then the potential for M&A following that, how quickly do you think you can actually -- or how quickly will you begin to look at potential M&A activity once you're out from the orders and how quick can you actually go through with the deal? Obviously, this is hypothetical, but in terms of how you're thinking about that.

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [59]

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Well, it is hypothetical. And, you know, it's really hard to say. I mean, we haven't really talked to any of our regulators about that process. I've been meeting with folks all along and if a strategic opportunity comes along, we'd be interested, but the timing and all that stuff is really hard to say.

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Daniel Tamayo, [60]

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That's fair. And I'm going to jump back into the NIM here just real quick. I hear what you guys were saying on all the drivers going forward. But with the increase in the guidance there, just kind of near term 2Q and 3Q, was there anything unusual in the first quarter in terms of you mentioned payoffs were similar, but loan fees or nonaccrual recoveries, the day count, anything that would kind of impact the near term NIM coming up here in the next quarter?

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [61]

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They count a little bit. There's obviously 2 less calendar days in the first quarter than the second quarter and you have a positive impact there. And other than that, I mean, it really comes back to the -- in the first quarter, you had the impact. Even though you had a fourth quarter rate move, we didn't see the full effect of that because you had tax reform going on at the same time. So now, for the rate move that occurred in March, you need to take the percent of our balance sheet that is variable, apply that rate move. Now, you've already -- you're working off of a base in the first quarter in terms of your loan yields that already has the full effect of that decline with respect to your tax-free loans and investments.

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Operator [62]

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Our next question comes from Austin Nicholas of Stephens.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [63]

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I think most of my questions have been answered, but -- and you may have answered this question already, I apologize -- but on the tax rate, what drove the tighter outlook there on the low end?

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [64]

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Yes, sure. Really nothing more than just with the passage of time working through -- this is obviously a sweeping tax legislation and just working through that, assessing the impact on the company and assessing the impact of -- as you know, we have a tax credit investment portfolio and assessing where pricing was going in that market, which would in turn assess how much of that we'd be utilizing in 2018 were the principal factors driving the guidance there.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [65]

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Understood. So would it be fair to say that the tax credit business, the pricing is remaining, I guess, stronger than expected and, therefore, allowing you to take some more of those gains and lower your tax rate?

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [66]

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Well, yes. Yes, I think that's fair. I mean, obviously, in that market, the amount to buy a credit today is less than it was pre-tax reform. But for us, it was really just working through the numbers, figuring out how much of it we would need to utilize in 2018.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [67]

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Understood. Okay. That's helpful. And then, maybe just on credit. Obviously, credit was really good. Anything -- any migration you're seeing at all in the book? And maybe how is the agriculture book? I know it's small, but how are -- I guess, how is credit migration looking there?

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [68]

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Yes. Overall, we are really not seeing any negative trends in credit. And I would say that the ag portfolio is -- it's still a concern, but it's not worse than it was. It's steady.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [69]

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Got it. Okay. That's helpful. And maybe just a wider, broader question. As you look at the Dodd-Frank reform bill as it kind of stands today -- I know there's likely to be changes -- what would be the biggest beneficiaries in that bill to Fulton if you've done the analysis and then maybe what would be some concerns?

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [70]

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So in the Senate bill, there really is not all that much that's going to impact us. We won't be required to do a DFAST anymore. That's really the only thing. But it's a process we put in place and I think, while we won't be required, it may be expected from our regulatory agencies as we go forward. But it's a start and we are really hopeful that something can be approved.

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Operator [71]

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Our next question comes from Brian Zabora of Hovde Group.

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Brian James Zabora, Hovde Group, LLC, Research Division - Director [72]

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Sorry if I missed this, but did you indicate how much the municipal deposits were down in the quarter?

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Mark R. McCollom, Fulton Financial Corporation - Senior EVP & CFO [73]

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We did. Just let me find that again. On a -- on average balance basis, they were around $330 million.

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Brian James Zabora, Hovde Group, LLC, Research Division - Director [74]

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Okay, so most of the decrease in the quarter. Just wanted to get your thoughts, I know there's some seasonality, but your loan-to-deposit ratio is a little bit over 100% here. Is there an upper limit? And just how do you think about funding if you're depending on kind of deposit growth in other areas?

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E. Philip Wenger, Fulton Financial Corporation - Chairman & CEO [75]

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Historically, we try to manage between 95% and 105%. There have been periods where we've been higher than 105%, but we really work hard to stay in that range.

Well, if there are no further questions, thank you, all, for joining us today. We hope you'll be able to be with us when we discuss second quarter results in July.

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Operator [76]

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