Jason Weber – Senior Vice President Phil Wenger – Chairman, President and Chief Executive Officer Phil Rohrbaugh – Senior Executive Vice President, Chief Operating Officer and Interim Chief Financial Officer.

Frank Schiraldi – Sandler O’Neill Kelly Motta – KBW Joe Gladue – Merion Capital Group Brody Preston – Piper Jaffray Brian Zabora – Hovde Group.

Good morning, ladies and gentlemen, and welcome to the Fulton Financial’s Second Quarter Results Conference Call. This call is being recorded. I will now turn the call over to Jason Weber. Please go ahead, sir..

Thanks, Andrew. Good morning. Thanks for joining us for Fulton Financial’s conference call and webcast to discuss our earnings for the second quarter of 2017. Your host for today’s conference call is Phil Wenger, Chairman, President and Chief Executive Officer of Fulton Financial Corporation.

Joining Phil Wenger is Phil Rohrbaugh, Senior Executive Vice President, Chief Operating Officer and Interim 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 PM yesterday afternoon.

These documents can be found on our website at fult.com by clicking on investor relation, then on 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 operations 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 on forward-looking statements in our earnings release and on the 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 with Fulton’s earnings announcement released yesterday in Slides 12 and 13 of today’s presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures. Now, I would like to turn the call over to your host, Phil Wenger..

Thanks, Jason, and good morning, everyone. Thank you for joining us. I have a few prepared remarks before our Interim CFO, Phil Rohrbaugh, shares detailed financial information on our second quarter results and discusses our 2017 outlook. When he concludes we will open the phone lines for questions.

We reported diluted per share earnings of $0.26, an increase of 4% linked quarter and 13% year-over-year. Pre-provision net revenue increased approximately $1 million or 1.8% linked quarter and $9.6 million or 18% year-over-year. Our return on average assets was 0.94% and our return on average tangible equity was 11.06% for the quarter.

Overall, we were pleased with the second quarter results. We had strong loan growth with stable credit conditions, continued net interest margin expansion and growth across most non-interest income categories. Average loans increased 1.8% or $270 million linked quarter and 8.3% or $1.2 billion year-over-year.

Loan growth accelerated towards quarter-end. And as a result, period-ending loan balance has increased 2.6% or $383 million linked quarter. This marks the largest increase in period-ending loan balances since the closing of our last acquisition in the fourth quarter of 2006.

We saw growth in most of our loan portfolios linked quarter and year-over-year. Growth was driven primarily by our commercial and residential mortgage portfolios. Our average commercial mortgage portfolio increased 2.1% linked quarter and 10.9% year-over-year. Linked quarter growth was primarily in our Pennsylvania, New Jersey and Delaware markets.

We continued to take advantage of market conditions to prudently grow our commercial mortgage portfolio. As a reminder, our owner-occupied commercial mortgages represent close to half of the overall commercial mortgage portfolio and we remain within the regulatory guidelines on concentrations in commercial real estate lending.

Our residential mortgage portfolio increased 4.3% linked quarter and 22% year-over-year. And growth was spread throughout our footprint, but primarily in our Maryland, Pennsylvania and Virginia markets. Over the past couple of years, we made a strategic decision to retain certain mortgages, driving growth in our residential mortgage portfolio.

Given our strong commercial pipeline, we feel it’s prudent to start moderating growth in our residential mortgage portfolio over the next six months. Our average C&I loan portfolio increased 0.4% linked quarter and 3.4% year-over-year. However, we saw increased activity towards quarter-end.

And as a result, period-ending C&I loan balances increased 1.9% linked quarter. Loan borrowings were relatively stable linked quarter so growth was due to new originations. Growth was spread across a broad range of industries and concentrated in our core Pennsylvania market.

Our commercial pipeline decreased 5.4% linked quarter but was 6.1% higher year-over-year, reflecting our continued focus on adding commercial relationship managers, our continued calling and sales efforts, improved business activity, improved customer sentiment and market disruption.

Turning to credit; overall asset quality remained stable and consistent with prior quarters. Non-interest income growth was strong, both linked quarter and year-over-year, reflecting seasonal growth and higher volumes. We saw growth across most non-interest income categories.

Of note, our SBA, commercial loan interest rate swap and merchant businesses made notable contributions. On the consumer side, debit card income made a contribution as well.

Our commercial loan interest rate swap business continued to benefit from growth in commercial loans, and merchant services benefited from improved customer activity and solid sales production. Mortgage banking income increased linked quarter. Mortgage production improved, but gains on sales spreads declined for a second consecutive quarter.

Investment management and trust income growth is steady pace linked quarter and year-over-year due to both overall market performance and our continued asset-gathering focus. Non-interest expenses increased linked quarter and year-over-year. Phil Rohrbaugh will detail the drivers of this increase in his prepared remarks.

Efficiency ratio for the second quarter of 2017 was 65.3% slightly outside of goal of 60% to 65%, and this compares to 64.2% for the first quarter of 2017. We continually look for ways to make our organization more efficient to drive the efficiency ratio lower while not sacrificing the customer experience.

On the capital front; we paid a quarterly common dividend of $0.11 per share. We did not repurchase any common stock during the quarter. We have approximately $31 million left in our current share repurchase program, which is authorized through December 31, 2017.

Turning to regulatory matters; emerging from the BSA/AML consent orders remains a top priority for us. Although we have no new information to report, we believe we are continuing to make progress towards that objective.

With respect to the Department of Justice’s ongoing fair lending investigation, we have continued to cooperate with that investigation. And again, there is nothing additional to report at this time. And now I’d like to turn the call over to Phil Rohrbaugh to discuss our financial results in more detail..

Thank you, Phil, and good morning to everyone on the call. Unless I note otherwise, quarterly comparisons are with the first quarter of 2017. Starting on Slide 4, as Phil noted, earnings per diluted share this quarter were $0.26, on net income of $45.5 million.

Second quarter earnings reflected an increase in net interest income, an increase in the provision for credit losses, and increases in both non-interest income and non-interest expenses.

Moving to Slide 6; our net interest income improved by $4 million or 3% driven by a $230 million or 1.3% increase in average interest earning assets and a three basis point expansion of the net interest margin, as well one additional day of interest accruals in the quarter.

The increase in net interest margin was driven by higher interest earning asset yields, which increased four basis points, partially offset by the impact of a three basis point increase in the cost of interest-bearing liabilities. However, overall cost of funds increased only two basis points as a result of growth in non-interest-bearing deposits.

During the quarter, we had non-accrual interest income of $840,000, which was about $900,000 lower than the first quarter of 2017. These recoveries improved the net interest margin by three basis points in the first quarter in comparison to only one basis point in the current quarter.

Amortization of premiums on our mortgage-backed investments was unchanged linked quarter, approximately $2.1 million. Our net interest margin for the quarter was within the range we provided on our outlook for the second quarter of 2017. The growth in average earning assets for the quarter was realized mainly in loans which increased $270 million.

This increase was partially offset by a $55 million decrease in average investments. Both average non-interest-bearing deposits and total interest-bearing liabilities were up linked quarter by $86 million or 2% and $118 million or 1%, respectively.

The increase in average interest-bearing liabilities was due largely to $160 million increase in interest-bearing demand and savings deposits. This increase was partially offset by a $43 million decline in time deposits.

Total average net borrowings were unchanged with a $79 million decrease in short-term borrowings entirely offset by the increase in long-term debt. In March 2017, we issued $125 million of senior debt at an effective rate of 3.95%.

A portion of the proceeds from this debt issuance were used to fund the maturity of $100 million of subordinated debt with an effective rate of 5.96% in May 2017.

There was no net change in interest expense in the second quarter of 2017 as a result of these transactions but the quarterly run rate benefit will be approximately $300,000 beginning in the third quarter of 2017.

For the first six months of 2017 net interest income increased $21.2 million or 8.2% driven by a 7% increase in average interest earning assets and a 6 basis point increase in net interest margin.

Yields on earning assets also increased 6 basis points, while the cost of interest-bearing liabilities was flat as the increase in the cost of deposits in the period was offset by the lower long-term borrowing expense due to prior long-term debt refinancing.

Turning to credit on Slide 7, based on our evaluation of all relevant credit quality factors, we recorded a $6.7 million provision for credit losses in the second quarter, $1.9 million higher than the provision in the previous quarter.

This increase was driven mainly by loan growth as credit metrics remained fairly consistent with the first quarter of 2017. The allowance for loan and lease losses as a percentage of loans declined slightly from 1.15% at March 31, 2017 to 1.14% at June 30, 2017 and the coverage of non-performing loans was down from 131% to 129%.

Annualized net charge-offs to average loans remained fairly steady in compression to prior periods at 11 basis points for the quarter, as compared to 9 basis points in the first quarter and 10 basis points for the second quarter of 2016. For the first six months of 2017 net charge-offs were 10 basis points.

Ending non-performing loans increased $4.2 million or 3% to $135.7 million. Non-performing loans as a percentage of total loans were unchanged from the first quarter of 2017 at 0.88% and improved from 0.9% a year ago.

Delinquencies as a percentage of loans continue to improve ending the quarter at 1.2% as compared to 1.23% at March 31, 2017 and 1.3% at June 30, 2016. Moving to Slide 8, non-interest income excluding security gains increased 11.8%. Many components of non-interest income increased linked quarter.

There was a seasonal increase of $920,000 realized in merchant fees, gains on sales of SBA loans grew by $720,000 and commercial loan interest rate swap fees increased $710,000. A steady growth was also seen in investment management and trust services income and debit card fees.

Mortgage banking income grew by $1.5 million largely due to the reversal of $1.3 million evaluation allowance from mortgage servicing rights during the quarter.

For the six months of 2017 non-interest income excluding security gains increased 9%, driven mainly by higher mortgage banking income, commercial loan interest rate swap fees, investment management and trust services income and SBA loan sale gains.

Moving to Slide 9, non-interest expenses increased by approximately 8.5% in the second quarter driven by salaries and employee benefits, outside services and the amortizations of certain tax credit investments.

Beginning in 2017, amortization expense for certain tax credit investments is being recognized in non-interest expense rather than in income taxes. Excluding this amortization expense, which was $3.2 million for the second quarter of 2017 and $1 million for the first quarter the linked quarter increase of non-interest expenses would have been 6.8%.

Salary and employee benefits increased $5.3 million due to higher incentive and stock compensation expense, merit increases and staffing additions to support growth and an additional day of salary accruals in the second quarter.

As you can see from Slide 9, salaries expense was lower in the first quarter, primarily due to the level of 2016 incentive compensation paid out at the end of the first quarter being lower to what was previously estimated by approximately $2.3 million.

Other outside services increased $2.2 million with a little over half of this amount pertaining to pre-bank consolidation work that can be done in advance and efforts to develop more digital online capabilities or to redesign processes to facilitate proportionally more straight through processing.

The remaining portion of the increase is timing related between quarters. For the first six months of 2017, non-interest expense increase 5.3% driven mainly by higher salaries expense, state taxes, other outside service, a recognized loss on the planned sale of the student loan portfolio and tax credit investment amortization.

Excluding the tax credit investment amortization the year-over-year increase in non-interest expenses would have been 3.6%. Including the amortization of tax credit investments, non-interest expenses for the full year of 2017 are expected to be at the higher end of the outlook range.

We anticipate the amortization for the full year to be in the $10 million to $12 million range. However, this impact would be offset by lower tax expense. Income tax expense decreased $4.7 million or 34% resulting in an effective tax rate of 17% as compared to 24% in the first quarter of 2017.

The lower rate reflects the accounting for tax credit investments and the related tax credits earned. In addition, excess tax benefits associated with vesting stock awards contributed to lower tax expense.

Due to the classification of tax credit investment amortization we are lowering our effective tax rate estimate to be in the low 20% for 2017 with the possibility of modest volatility from quarter to quarter. Slide 10 displays our profitability and the capital levels over the past five quarters.

We continue to see increases in both returns on average assets and returns on tangible equity over the periods presented. And in conclusion, we have included on Slide 11, a summary of our outlook for the year, which remains unchanged from the outlook we’ve provided last quarter. And now I’ll turn the call over to the operator for questions..

Thank you. [Operator Instructions] And our first question comes from the line of Frank Schiraldi with Sandler O’Neill. Your line is now open..

Good morning..

Hey Frank..

Hey Frank..

Couple of questions, first, I’m just wondering on comp. Is the second quarter – in the same way that the first quarter was low in terms of accruals, is the second quarter higher? Or is this a reasonable run rate adjusted for I guess additional growth for headcount increases..

I think, looking at the second quarter, it’s a more reasonable run rate. It was a little bit impacted by payroll taxes and you will see – continue to see some volatility for paid accounts period to period..

Okay. And did you say that the expense you now expect guidance – expenses to be at the higher end of your guidance and that’s due to the amortization of tax credit.

Did I hear that right?.

You did. So Frank, just refreshing the prior commentary we said based upon last year’s non-interest expenses levels of $490 million, we provided outlook in the low to mid single digit range.

And certainly if you look at the first six months of the year exclusive of the amortization of the investment tax credit investment you’ll see that’s 13.6% in the first half..

Okay. And then are there any other – I guess is there any other levers on the expense side, you talked I think a little bit about tech related expense or just expanding that question on comp or is it’s a pretty good run rate for expenses going forward..

No, there were some discrete items in the quarter that I commented upon, one pertain to a recognized loss relative to a planned sale where we intent to do of our student loan portfolio, it’s not a large portfolio it’s been around for awhile and that’s about $450,000.

And in addition we had some efforts to really prepare for future bank consolidation and some discrete projects that we were undertaking and that was about $1 million..

All right, okay. I wasn’t sure of that $1 million or something that at least in the shorter term until you get the bank charters consolidated might be something that’s kind of sticky in the expense base..

Well this was something we wanted to because it pertain to – being able to take the database and really compile it as being one bank but keep the individual bank elements distinguishable to be able to continue to model something over the next six months..

Okay. I guess are there other bulky pre-consolidation expense that you are anticipating ahead of charter consolidation..

I think the best way to think about this year for the balance of the year is we are at $255 million of non-interest expense in the first half, which includes the $4 million of amortization of the investment tax credit investments.

And I would be thinking about the balance of the year of $125 million to $130 million per quarter and being on the upper half of that, which is inclusive of the amortization in the third and the fourth quarter..

Okay, fair enough, okay. And then just lastly on NIM expectations. Obviously, you reiterated your guidance for the back half of the year.

I’m just wondering about, if you could maybe talk a little bit about deposit betas, if you’re starting to see betas pickup? And then if that 3 to 9 bps of quarterly improvement assumes continued increase in deposit betas or kind of assumes we stand path where we are currently?.

Okay, Frank. Let me – a little color first from the first to second quarters. As we – as you know, we went from 3.26% to 3.29%. And in my prepared remarks, I indicated that 3.26% included 3 basis points for really interest income or non-accrual loans which is very hard to predict.

So coming off that 3.23%, we went to 3.29% which includes one basis point for interest income and non-accrual loans. So we went from 3.23% – 3.28%, if you exclude something that’s very difficult to project.

As we look forward in the second quarter, we’re coming off an anticipated mid-year rate increase and we would expect that to put us in the middle of that range. While we do have certain deposits that are indexed to rate increases, we are not yet seeing competitive pressures to move on other things. However, we are reviewing that weekly.

So to the extent that, we’re not responding to competitive pressures, we will be in the upper part for that range versus lower. The other thing that’s happening though, we’re doing some promotions of different deposit products and that will have some impact on the third quarter..

Okay.

And you said that – you indicated that the guidance includes or assumes one additional rate hike mid-year?.

It does. And then in the fourth quarter, we were assuming one in the fourth quarter.

But you are talking about the fourth quarter guidance of 3 to 9?.

Yes. Both 3Q and 4Q guidance of a….

So in the fourth quarter, really, that result will be dependent upon the rate hike largely and how much we have to respond to competitive pressures..

Just to be clear, Frank, we got – I think the rate hike that we’re talking about were at the third quarter, we have gotten that rate hike in June..

Okay. Right, okay. So that’s the one you’re talking about mid-year, and then you got another in the 4Q. But I guess that won’t help too much because it will come mid-quarter.

So you won’t get a full quarter benefit?.

Right..

That the way to think about it. Okay, great. And I appreciate it..

And sorry wait for others..

Thank you..

Thank you..

And our next question comes from the line of Chris McGratty with KBW. Your line is now open..

Hi. This is Kelly Motta on for Chris McGratty. I wanted to circle back to loan growth. I think you mentioned in your prepared commentary that you are pulling back on resi mortgage in the near term given the growth you’ve seen there.

What are you thinking in terms of what the prudent run rate over the next couple of quarters there? And how should we be thinking about the ideal mix of that in your loan book?.

So first off, we have obtained some sources to sell some mortgages that we didn’t have before, primarily CRA and some jumbo mortgages. So there’s actually close to $60 million of production that we had in the first six months of the year that we kept on the books that now we would be able to sell and we would sell that going forward.

So part of that moderating of growth is that. And then, we also have a product that we’re probably going to make some pricing adjustments on, that may slow down growth in that area. But I would just emphasize that, overall, our outlook for loan growth is not changing..

Right, okay. So you mentioned that you have more channels to sell certain types of mortgages.

Should we expect we might see a little pick up on gain of sale income understanding that there’s still some challenges in the mortgage market? Or just trying to gauge whether or not we should be anticipate higher mortgage all else equal?.

Given the same level of volume, there should be some pickup..

Thanks..

And our next question comes from the line of Joe Gladue with Merion Capital Group. Your line is now open..

All right, thank you. Good morning..

Hi, Joe..

I guess, I would like to follow up on that last question a little bit. You also mentioned in your prepared remarks today, I guess, in a couple of the loan segments, that growth kind of accelerated towards the end of the quarter.

And just wondering if you expected that to be an ongoing pickup or – and that might be offset by slower growth in the resi mortgage portfolio, or that was just sort of within quarter fluctuation kind of stuff?.

So, Joe, if you look at our pipeline, linked quarter, it is down about 5%, I believe. Year-over-year, it’s up about 6%. So I – if you look at ending loans, I would not anticipate quite a strong quarter in the third quarter, but at least as strong or stronger than what we had in the third quarter last year..

Okay.

And just wondering if you could just touch on, I guess the expectations for the SBA loan product and where gain on sale margins are and what’s happening within there?.

So this is Phil Rohrbaugh. As we indicated before, last year, SBA gains were about $2.2 million and we thought they did trend up this year as we began to fill that program to the $3 million range..

Okay. Thanks, that’s it for me..

And our next question comes from the line of Brody Preston with Piper Jaffray. Your line is now open..

Hi, guys.

How are you?.

How you doing?.

Doing well, thanks. Sticking with the SBA. I think you said you got a little over $700,000 linked quarter growth.

So that would put it at, what, 1.2-ish?.

Yes, a little higher than that. Yes, it’s a little higher than that..

All right. So then we’re – so we are tracking for the full $3 million then for….

That’s correct..

All right, great. And I guess going back to mortgage.

Given the headwinds in the mortgage space and the decreasing gain on sale margin, how nimble can you guys be on the expense side to make sure that, that business fund remains profitable or at least breakeven?.

So first off, we are not seeing declines in our mortgage activity. Where we are seeing declines in is the margin. So given that scenario continuing, volume stays the same or increases, it’s difficult to cut those expenses back..

Okay. And what – I noticed just it was a good quarter for asset quality, but one little tick-up in the C&I delinquency rate, and I was wondering what drove that..

Yes, so as we’ve said in the last couple of calls, you know there is some stress in our Ag portfolio and that is what caused that increase..

All right, great. And then one last one. I know you don’t have any updates on the BSA/AML or the DOJ.

But when all this is done, like when you finish consolidating everything in the Fulton Bank, who will be your ultimate regulator? And if the BSA was to get lifted from Fulton Bank, would you be able to consolidate the rest with all the orders under it into that one and accelerate the process?.

Well, tuning up to your second question. I’m not sure what the answer is. So there are a couple of different opinions there, so we’ll see. The holding company will be regulated by the Federal Reserve. And in all likelihood, the bank would be regulated by the OCC..

All right, great. Thank you very much guys..

[Operator Instructions] The next question comes from the line of Brian Zabora with Hovde Group. Your line is now open..

Thanks, good morning..

Good morning, Brian..

Hi, Brian..

Just a question on the tax rate going forward, thanks for the detail for 2017.

Should we expect similar trends and out to 2018 where it’s where it’s going to permanently result in the tax rate being lower than what we had in the past but you have that added expense?.

So that’s a very tough question because this is really determining what type of investment opportunities come along that allow you to really capitalize on the benefits of them. And we’re always in the market looking for those. But to indicate and protect that into next year is very difficult at this point in time.

We continue to look for affordable housing projects, which go through the tax provision as they do today. And to the extent that would occur, it’s good change..

Thank you. And then just a question on loan pricing.

How – with the yield curve kind of compressing coming down a little bit on the long run, how has loan pricing held up this quarter versus last?.

I think it was actually a little better this quarter than it was last quarter..

Great. All right, thanks for taking my questions..

Thank you..

And I’m showing no further questions. So with that, I’d like to turn the conference back over to Phil Wenger for any closing remarks..

Well, thank you, all, for joining us today and we hope you’ll be able to be with us when we discuss third quarter results in October..

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