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.

Thanks, Vian. Good morning. Thanks for joining us for Fulton Financial’s conference call and webcast to discuss our earnings for the first 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 p.m. yesterday afternoon. These documents can be found on our website at www.fult.com by clicking on investor relation and 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 information included with Fulton’s earnings announcement released yesterday in Slides 11 and 12 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 the details of our first quarter financial performance and discusses our 2017 outlook. And when he concludes we will open the phone lines for questions. We reported diluted per share earnings of $0.25, an increase of 4.2% linked quarter and 13.6% year-over-year. Excluding security gains, pre-provision net revenue increased approximately $5 million or 9% linked quarter and $10 million or 19.8% year-over-year. Our return on assets was 0.92% and our return on tangible equity was 10.93% for the quarter. Overall, we were pleased with the first quarter results. We had solid loan growth with stable to slightly improving credit conditions, an 11 basis point increase in our net interest margin and a decline in our non-interest expenses. And as a result, we generated meaningful positive operating leverage. Loan demand is typically softer in the first quarter. However, improved customer sentiment and a more favorable economic outlook, coupled with the hiring of additional commercial relationship managers in 2016, resulted in increased business activity and meaningful loan growth in the first quarter. Period-ending loan balances increased $264 million in the first quarter of 2017 compared to $32 million increase in the first quarter of 2016. Average loans increased 2.6% or $382 million linked quarter and 7.2% or $1 billion year-over-year. Our average commercial mortgage portfolio increased 3.6% linked quarter and 10.1% year-over-year. That growth was spread throughout our footprint but primarily in our Pennsylvania and Maryland markets. We continue to take advantage of market conditions to prudently grow our commercial mortgage portfolio. As a reminder, our owner occupied commercial mortgages represent nearly half of the overall commercial mortgage portfolio, and we remain within the regulatory guidance on concentrations…

Thank you, Phil, and good morning to everyone on the call. Unless I note otherwise, quarterly comparisons are with the fourth quarter of 2016. Starting on Slide 4 as Phil noted, earnings per diluted share this quarter were $0.25 on net income of $43 million. First quarter earnings reflected an increase in net interest income, a decrease in the provision for credit losses and decreases in both non-interest income and non-interest expenses. Moving to Slide 5, our net interest income improved by $5.3 million or 4%, driven by a $340 million or 1.9% increase in interest earning assets and the 11 basis point expansion of the net interest margin, partially offset by the impact of two fewer days of interest accruals in the quarter. The increase in net interest margin was driven by higher interest-earning asset yields, which increased 12 basis points as funding costs were unchanged in total. During the quarter, we had net non-accrual interest recoveries of about $1.7 million, which were $1.3 million higher than the fourth quarter of 2016, largely attributable to a single account. This increase added 3 basis points to the net interest margin. Amortization of premiums on our mortgage-backed investments decreased approximately $600,000 linked quarter, adding about 1 basis point to the margin. Finally due to our strong first quarter loan growth, there was a shift from lower yielding other interest earning assets to loans that contributed approximately 2 basis points to the net interest margin. Excluding these items, the net interest margin was at the high end of the range we provided in our outlook for the first quarter of 2017. The growth in average earning assets was realized mainly in loans, which increased $380 million. This increase was partially offset by a $108 million decrease in other earning assets as deposits…

[Operator Instructions] And our first question comes from Bob Ramsey with FBR. Your line is open.

Hey, guys. This is Tim Hayes for Bob. Thanks for taking my questions.

Hi Tim.

You gave some good color around kind of what accounted for the higher – the greater margin expansion. But could you just – what are you seeing on the deposit pricing side? Are you seeing some competitive pressure there? And are there any other benefits that you expected put you at the high end of your range or go over again in the coming quarters? And then what is baked into this updated NIM guidance that you guys have in terms of rate hikes? And again, what gets you to the high end versus the low end of the range?

Tim, this is Phil Rohrbaugh. Getting to the high end of the range, obviously, is the fact that we're not having to respond to competitive pricing pressure on deposits. But as that increases, that's going to move you down in that range. So at this point in time, we are not seeing that pressure. And I think we've commented in the past, historically, there's been some lag in increasing deposit rates as rates went up and we continue to see that. But at some point, we need to respond to the competitive environment.

Understood. And then if you could maybe just elaborate on the assumptions in that NIM guidance going forward and in terms of just how many rate hikes you guys have modeled in?

For the second half of the year, there is a 25 basis point increase assumed in the beginning of the third quarter and then one right at the end of the year, which has minimal impact, another 25 basis points.

Great. Thank you. And then just one more for me. In terms of, you'd also given some detail around the drop in salary and employee comp expense. And obviously, first quarter is seasonally stronger, but given the drop – the lower level this quarter, you still expect there to be a drop-off in the second quarter or should it be relatively flat?

I would say it would probably be relatively flat.

Okay. Great. Thanks again for taking my questions.

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

Hey, good morning, thanks for taking the question.

Good morning, Chris.

Hey, Phil. I jumped on late. Could you just review what the impact that the margin may feel from the dropping in loan rates in the past – coming months, with the tenure now at 220, does your guidance, maybe you mentioned it, does your guidance factor in potentially faster premium in?

With the – certainly, with the increase in rates that occurred, the – obviously, the amortization did drop in the first quarter by $600,000, which was mentioned relative to the investment portfolio. And it was running around $2.7 million per quarter as we reported last – in the last call and has dropped off by $600,000 this quarter. We are repriced mostly off the front end of the curve, so I think that's really in line with what we're looking at going forward.

Okay. Great. And then with respect to the regulatory developments. Once these matters get resolved, is the plan still to begin to collapse the charters? And if so, Phil, any thoughts about whether there's any leverage to the bottom line from these strategies? Or is it just kind of what we see it as analysts in the bottom line improvement?

So the plan is to collapse the charters and Fulton Bank actually has gone over $10 billion, so there are some negative impacts to that. So beginning in the second quarter, our FDIC expense will be slightly less than $200,000 more than it was in the first quarter and that will continue. And the dividend paid on our Federal Reserve stock decreases from 6%, I think, 2.4%. Now that was already taken in the first quarter. So the negatives, most of it – those negatives will continue to impact as we consolidate other banks into Fulton Bank. So the FDIC insurance will increase some, not material. And the dividend would decrease some, but I don't think that they're material. We do expect that expense savings, Chris, we haven't put a number on that yet. But all in, our expense savings compared to those negatives, I don't think, will be a material number.

Okay. Phil thanks for the color. I appreciate it.

[Operator Instructions] Our next question comes from Frank Schiraldi with Sandler O’Neill. Your line is open.

Good morning.

Hi Frank.

Just a couple of questions on – just on back to NIM guidance. I guess I'm kind of surprised that NIM guidance accelerates into the back half of the year. I would think you get the March rate hike and you see the full benefit of that in 2Q. And then I would think that would be worth more than a 3Q rate hike where you might assume deposit beta start to creep up. So could you just maybe talk a little bit more about why you get that acceleration in NIM in the back half of the year?

Well, one thing I'll answer the one factor – actually, probably two and then Phil can add anything. But in the third quarter, we'll get the full benefit from the refinance of the subordinated debt. So in the second quarter, we'll still have 30 days of paying interest on both what was on the books or what currently is on the books and $125 million issue that we did. So on May 1, the $100 million gets paid off, so the impact in the second quarter is negligible. We'll get the full impact in the third and fourth quarters, and that is about $300 million.

Per quarter.

Yes, $300 million per quarter. Also, the adjustable rate loans that adjusts during the year, I think it's about $600 million over the entire year. They are going the – as we adjust those rates, they are going on at higher rates than what they're running off at.

Okay. Are those the two main, is there anything else to add for, especially, I guess for 4Q?

No. Other than my earlier comment, Frank, which was that to the extent that we respond to competitive pressures, we would be at the lower end of that range, just to repeat that.

And then Frank, just one other factor. We do have – we still have $700 million of lines of credits that are at their floors and we need 14 basis points to get them over their floors. So we're assuming at July, a rate increase in that guidance. So that $700,000 then is all off the floors and we'll have that $700 million, but that will help increase the margin also.

Great. Okay. Thanks for that. And then just on the revenues tied to SBA, to SBA loan sale gains. Could you maybe break that out where it was in the quarter versus last quarter and remind us what you anticipate being able to ramp up to back half of the year?

So for the year in 2016, our SBA revenues were $2.2 million. I think in the fourth quarter, they were around $1 million. So the first quarter, there is seasonality in the first quarter. So we did $300,000 in the first quarter. That compared to essentially nothing in last year's first quarter. And we would expect that $300,000 as we go through the year to ramp up again like it did last year each quarter. And we do expect for the year to be probably closer to the $3 million number as compared to $2.2 million.

Okay. And I may have missed it then, but in terms of the other income that was down, I think, around $2 million linked quarter. What was the, I guess, the larger driver there? And I guess, as a follow up, how confident are you guys in guidance for the full year of hitting that mid- to high single-digit growth in fee income line?

Yes. In the fourth quarter, we had a number of one-time items, primarily…

Look, in the other income – noninterest income, Frank, you do have the SBA gains in that line item, so that's part of the reduction that you're seeing linked quarter. We also had some branch gains in the fourth quarter relative to the sale of branches.

Okay.

So year-over-year, we were up 8% in the first quarter. And right now, we believe that we can be in that range for the year.

Okay. And then just finally, I know, Phil, you had said that you don't have any further update to give on the BSA/AML that you did – other than what you said in January. If you could just remind us though, is it more at this point that you guys are, in your minds, are compliant with the orders and are just waiting for regulators to react? Or is there still, I guess, work to be done on getting compliant with the orders?

We believe that we have a program in place that meets the needs and we have – it's – the whole process is – it gets complicated because we have six different regulators involved. So we are – actually have one exam going on now, but we would expect over the next four to six months to have probably three more. So – and at the end of the day, it's their decision as to whether they agree with us or not.

Right. Okay, great. I appreciate it. Thank you.

Our next question comes from Matthew Breese with Piper Jaffray. Your line is open.

Good morning, everybody.

Hi Matt.

Just curious on the margin guidance, should we be working off of the headline net interest margin this quarter, the 326? Or I know you went through a number of items that impacted that this quarter or is it something else we should be working off of?

Matt, I think the way to think about that is that within the 326, you do have some impact relative to the interest income on nonaccrual loans. But other than that, I think as you look forward, that would be the way to think about it in terms of that impact on that 326.

And what was that number again?

We said 3 basis points.

3 basis points. So I should basically be working off of 323 in terms of forward numbers?

Again, it's hard to predict the amount of interest income we could have on nonaccrual loans. We don't try to forecast that but that's the element that's in that.

Okay. And then going back to the BSA/AML, the orders, just curious, once these are resolved, can you give us an idea of kind of the top three items that you will – the top two priorities once you're out of them, what does it allow you to do?

Well, the first priority is to consolidate large orders into one. The second priority is to begin branching again. We have not added a new branch in 5 years. The third priority is to begin to consider acquisitions. But just let me remind you that we still have the Department of Justice investigation also and we don't know the timing of that, so that's a factor in all of this also.

And what are the – in terms of corporate strategy, what are the restrictions related to that?

To the Department of Justice?

Yes.

Similar to the BSA.

Okay. Okay. And then once you think about acquisitions, could you just give us an idea of the markets you would consider and the size parameters of any targets?

Yes. So in our 5-state footprint, we operate in 52 counties. And in those 52 counties, we have market share – we have a market in 14 of the 52 counties, we have a market share position. That's either first, second, third, fourth or fifth in 14 of the counties. So from a geography standpoint, our goal would be to look at acquisitions that would increase the number of counties where we have a significant market share. They exist in all five of the states that we operate in.

Got it. Okay.

And from a size standpoint, we would look at our banks from a $500 million to $6 billion or $7 billion.

Okay. And then there's been a lot of increasing number of negative headlines surrounding retail CRE especially big-box and strip mall. What is your exposure to that asset class?

About $400 million.

Okay. And have you seen any deterioration in the quality of those assets?

Not to date, no.

Okay. That’s all I had. Thank you very much.

Thank you.

And I'm showing no further questions at this time. I would now like to turn the call back to Phil Wenger for any further remarks.

Well, thank you, everyone, for joining us today and we hope you'll be able to be with us when we discuss the second quarter results in July. Thank you.

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