Fulton Financial (FULT) in Lancaster, Pa., beat earnings estimates as costs tied to bad loans fell.

The $17 billion-asset company's second-quarter earnings rose 2% from a year earlier, to $40.6 million. Per-share earnings of 21 cents beat the estimates of analysts polled by Bloomberg by 2 cents.

Better credit quality made up for declines in loan and fee income and rising expenses. The loan-loss provision fell by nearly 50% from a year earlier, to $13.5 million. Net chargeoffs fell 64% from the second quarter of 2012, to $17.4 million. The improvement was because of a decline in nonperforming mortgages and commercial loans, the company said. Total nonperforming assets fell 21% from a year earlier, to $210.2 million.

Net interest income fell 4% from the second quarter of 2012, to $132.1 million. The net interest margin compressed by 26 basis points from a year earlier, to 3.52%.

Noninterest income fell 2% from a year earlier, to $52.3 million, because of lower service charges and mortgage banking income. Noninterest expenses rose 5% from the second quarter of 2012, to $117.1 million, largely because of a 6% rise in compensation costs, to $63.5 million. Fulton attributed the rise in costs to hiring, consulting costs and the expense of converting to a new core processing system.

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