Fulton Financial Corp (FULT) 2006 Q3 法說會逐字稿

Good day and welcome to today's Fulton Financial third quarter 2006 earnings conference call and webcast. This call is being recorded. At this time for opening remarks, I would now like to turn the conference over to Ms. Laura Wakeley. Please go ahead.

Good morning and thank you for joining us for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the third quarter of 2006. Your host for today's conference call is Scott Smith, Chairman, Chief Executive Officer, and President of Fulton Financial Corporation. Joining him is Charlie Nugent, Senior Executive Vice President and Chief Financial Officer.

Our comments today will refer to the financial information included with our earnings announcement which we released at 4:30 yesterday afternoon. These documents can be found on our website at FULT.com by clicking on investor information and then on news.

Please remember that during this webcast representatives of Fulton Financial Corporation may make certain forward-looking statements regarding future results or future financial performance of Fulton Financial Corporation. Such forward-looking information is based upon certain underlying assumptions, risks and uncertainties. Because of the possibility of change in the underlying assumptions, actual results could differ materially from these forward-looking statements.

Risks and uncertainties that may affect future results include pricing pressures on loans and deposits, actions of bank and non-bank competitors, changes in local and national economic conditions, changes in regulatory requirements, actions of the Federal Reserve Board, creditworthiness of current borrowers, the corporation's success in mergers and acquisition integration, and customers' acceptance of the corporation's products and services.

Fulton Financial does not undertake any obligation to update any forward-looking statements to reflect circumstances or events that occur after the date on which such statements were made.

Now I would like to turn the call over to your host, Scott Smith.

Good morning, everyone, and thank you for joining us for our third quarter earnings conference call. We trust you've had an opportunity to review yesterday's earnings release and financial summary, and so I'd like to give you a brief overview of the quarter and then Charlie will provide details on our financial results, after which we'll respond to your questions.

We are pleased with the $0.28 earnings per share for the third quarter that translates into a sequential quarter growth of 3.7% and 12% over last year. On a linked-quarter basis, the highlights were strong organic loan growth, 13.1% annualized, moderate growth in deposits, 7.6% annualized, excellent asset quality along with a significant level of nonaccrual interest recoveries, and controlled core operating expenses.

Also, other income increased 10% annualized with a slight decline in investment management and trust revenues offset by strong growth in other fee income categories. Despite the slowdown in residential mortgage lending, our growth of this portfolio was still relatively strong, as was our growth rate in the consumer loan portfolio.

From a business perspective, we continue to experience good growth in cash management-related fees, as well as credit card merchant fees. Funding our loan growth with lower cost core deposits will continue to provide a challenge in the future. Another challenge will be an anticipated rise in the cost of credit.

As we've indicated on previous calls, we believe that it will be increasingly difficult to maintain our extraordinary credit quality into the future.

Compounding the higher cost of credit is continued fierce competition for not only obtaining new loan relationships but also retaining those already on the books, putting additional pressure on loan yields. The competitive environment will continue to create headwinds for both balance sheet and fee income growth.

In regard to funding, loan demand outpaced our ability to generate lower cost core deposits at a commensurate pace. As a result, we continue to experience margin pressure as customers seek higher yields associated with certificates of deposit. Subsequent funding shortfalls were filled by additional federal funds purchased and other wholesale funding sources.

We will continue to see customer balances shift from lower cost DDA in the money market accounts into the certificates of deposit. In an effort to stimulate core deposit and fee income growth across the corporation, we have implemented sales programs in conjunction with each local market affiliate.

Our ability to grow loans and deposits organically by focusing on execution of these business plans is a top strategic priority. I'd like to touch briefly on interest rates and the yield curve. I think it's fair to say we were viewing the flat to negatively sloping yield curve as a relatively short-term trend.

Since the current yield curve could potentially be with us for an extended period of time, we will closely manage the pricing of our loans and deposits, carefully balancing both the needs of our customers with those of our shareholders. Of course, we will continue to closely monitor overall expenses.

We are very pleased with the strong contribution that our newest affiliate, The Columbia Bank, continues to make to our earnings along with the continued strong performance of our two other larger affiliates, Fulton Bank in Pennsylvania and The Bank in New Jersey.

All of our affiliates are focused on and accountable for achieving higher levels of organic growth in their respective markets and for executing their strategic and marketing plan to achieve their required financial contribution to overall holding company performance.

In July, we announced the consolidation of two our of our affiliate banks into larger FFC affiliates. In New Jersey, First Washington State Bank will become part of The Bank and in Pennsylvania, Premier Bank will become a division of Fulton Bank. Both of these consolidations are progressing on schedule and we expect them to contribute to the continued improvement of our efficiency ratio while maintaining local brand value and decision making.

Key to a strong fourth quarter and 2007 will be in our ability to continue to do the basics well, growing quality loans, funding that growth at a relatively reasonable cost, continued close scrutiny of expenses and continuing our corporate emphasis on noninterest income growth. As a result, management is focusing increased attention on how we can ramp up fee income and fee-generating services in newly acquired affiliate markets.

I would now like to turn the call over to Charlie Nugent, our Chief Financial Officer, to provide additional detail regarding our financial performance for the quarter. And when Charlie concludes, we'll respond to your questions. Thank you.

Thank you, Scott, and good morning, everyone. We are happy that you joined us today. Please make a note of any questions that you have as I review our results. We can respond to your questions after I'm finished. Unless otherwise noted, comparisons are of this quarter's results to the second quarter.

Now, as Scott mentioned we reported earnings per share of $0.28 for the third quarter. Net income improved by $1.6 million or 3.5% and this improvement resulted from growth in both net interest income and other income. Net interest income increased $3.1 million or 2.5%.

During the third quarter, we received $3.3 million of interest recoveries on nonaccrual loans compared to $800,000 in the second quarter. This increase in nonaccrual interest recoveries added eight basis points to the margin. The net interest margin declined 12 basis points after adjusting for these recoveries.

Loan yields increased 12 basis points after adjusting for the interest recoveries. Investment yields improved 16 basis points, while deposit costs increased 27 basis points. Average loans outstanding grew $321 million or 3.3% with growth occurring in all categories.

Commercial loans increased $134 million or 4.8%. Construction loans grew $40 million or 2.9%. Commercial mortgage loans increased $74 million, or 2.4%. Residential mortgages grew $34 million and that was 5.4%. And home equity loans increased $30 million, or 2.1%. Now the loan growth occurred throughout all of our markets.

Our asset growth was funded by a combination of deposits and borrowings. Average deposits increased $189 million or 1.9% with a $212 million or 5.2% increase in certificates of deposit. This growth was partially offset by a slight decline in core deposits. As expected, we continue to see our customers being price sensitive. Similar to other banks, we're trying to prudently manage our deposit costs. Attracting and retaining core deposit relationships is a priority for all of our banks.

Additional funding was provided by $84 million in Federal Home Loan Bank advances and growth of $45 million in our cash management accounts. Asset quality continues to be excellent. We generated net recoveries this quarter of $323,000 or one basis point compared to net charge-offs of two basis points in the second quarter and two basis points last year.

The low level of loan loss provision for the quarter is a result of our excellent charge-off experience and our detailed analysis of the loan portfolio. Non-performing assets were 31 basis points of total assets at September 30, compared to 29 basis points at June 30 and 39 basis points last June.

We're currently monitoring a $10 million credit, which was 60 days past due as of September 30. We anticipate that this loan will go on nonaccrual in the fourth quarter. This loan is related to a low-income housing project, which was made for CRA purposes. If this loan had been included in the nonaccrual balance at September 30, our nonperforming assets ratio would have been 38 basis points. At this time, we believe that we are adequately reserved for any potential loss related to this loan.

Our other income improved $870,000 or 2.5% with good growth in most categories. Investment management and trust service revenues declined slightly by 1.9% primarily related to brokerage revenues. We continue to see our customers favoring certificates of deposit over annuities.

Service charges on deposits grew with both overdraft fees and cash management fees showing improvements in excess of 5% and our other deposit service charges increasing 2%. The improvement in overdraft and other deposit service charges related to personal accounts. This growth reflects the impact of both continuous efforts to enhance our fee income and lower customer account balances. The growth in cash management fees is a result of our calling efforts as well as the increased utilization of this product by our customers. Gains on mortgage loan sales increased $293,000, or 5.6%.

Residential mortgage loans sold were $500 million in the third quarter compared to $488 million in the second quarter. The spread on sales improved slightly to 110 basis points in the third quarter from 106 basis points in the second quarter. Operating expenses grew $1.6 million or 1.8%. Our efficiency ratio is 55.0, a slight improvement over both last quarter and last year.

Salaries and benefits grew $1.7 million, or 3.1% with total salaries increasing $1.4 million or 2.9%. Included in this increase was a $500,000 accrual under the new corporate management incentive plan, a $170,000 increase in stock option expense due to the issuance of our options this year on July 1, and an early payout of an affiliate employment contract of $140,000.

Occupancy and equipment expense grew $461,000 or 3.7%. Approximately $150,000 of this increase relates to a volume-related rebate received in the second quarter. Decreases in data processing and advertising expenses relate to the timing of discretionary projects and promotional expenditures. The other expense line declined $305,000 due to a state tax refund and a favorable mark-to-market adjustment on certain interest rate swaps.

Thank you for your attention and for your continued interest in Fulton Financial Corporation. And now we will be glad to answer your questions.

Thank you. [OPERATOR INSTRUCTIONS] We will take our first question from Adam Barkstrom with Stifel Nicolaus.

Hey, Charlie, hey Scott, good morning.

Hey, Adam.

Charlie, if you could, I'm a little confused. Go back through the $3.3 million recovery. I thought you said, you just said on the call, eight basis points margin effect, and the press release says 10, and then I heard 12 after that.

The $3.3 million in interest recoveries added 10 basis points to our margin.

Okay.

But what I was trying to do, Adam, was compare the two quarters and we had two basis points of recoveries in the second quarter, we had 800,000. So I was trying to say the improvement in margin was eight basis points for the third quarter over the second. And if you look at our margin, it went from 390 to 385, if you factor in that decrease in the interest recoveries, the margin decrease was 12 basis points.

Okay.

Are you all right?

Yes, I got it. Okay.

It's confusing. I probably didn't help it.

It's all right. I'm a little slow down here. Hey, Scott, you talked about loan growth outstripping deposit growth, and I was just kind of looking at the balance sheet, sort of dynamics this quarter and noticed that the securities portfolio was up fairly noticeably as well. I guess that begs the question, if you're struggling on the funding side, why ramp up the securities portfolio here, especially given the yield curve environment?

I'll let Charlie address that. We -- it was an expectation about, with a lot of liquidity in our portfolio, with our expectation about the possibility of falling rates next year, we decided to do a little pre-buying.

Our investment portfolio is extremely short, you probably know that. We have a lot of cash flows coming in. We were thinking that rates would fall and because of that we prepurchased some of the cash flows, it was equal to about $250 million. You can't see all of that in our average balances yet, but we bought the $250 million thinking we were going to need those investments and that yields were going to decline and it worked out for us in this case.

Okay. All right, maybe this one is for Scott. Scott, you talk about the credit environment and you guys have been saying this for a while and I think everybody is on the same page that we're in an abnormally benign credit environment and that things can't stay like this forever. Just curious, when do you anticipate the need to start building reserves, I guess, given that statement?

Every quarter I anticipate it's next quarter, but I can't sit here and tell you we're going to have net recoveries for very long. I really do think next quarter we're going to have at least somewhat different scenario than we've got this quarter, although we don't see anything major in the trends in the portfolio or even in anecdotal discussions with customers and lenders and all of that.

And I guess if I would -- to put a guess out there, mid next year is when the industry might starting seeing some more normalized credit costs, but we've got lots of issues out there. It could begin sooner, I don't know. But -- and it could last -- it's just too good to believe, I guess is where I am on it. You know it has to change. But I can't -- we're not getting feedback from our folks that watch it very carefully that there's trouble coming soon.

Yes, I guess I'm just hearing you say that, shouldn't we be building reserves now in anticipation of that, or --?

You know, Adam, under the rules, we're not supposed to build reserves. We would like to, we always had a certain reserve level we kept in the past. But we had net recoveries and we had interest recoveries of $3.3 million. We talked to every one of our banks and every one of our lending groups and asked for a detailed report, and they see slowness in residential real estate lending and in construction, but they don't see any problems. And we can't identify any problems in our portfolio, but where we would be building reserves.

We are looking at it very carefully loan by loan and any place we can justify some kind of reserve, we're doing it. But given the status of the expectations from the accounting community, we're doing what we think is right.

Okay. Last question, Scott. Any commentary on the P&C Mercantile deal?

I think it was a good deal for both parties. It certainly gives P&C a tremendous franchise from Pittsburgh right down through the Washington market. So we've always had a lot of admiration for Mercantile, it's a fine, fine organization. We've benchmarked ourselves against them over the years and I think they got a good price for their company and it will probably be good for both.

I think it's -- I think it's a deal that was well-conceived and we have a lot of respect for both organizations. We'd like to say that there'll be a lot of problems and we'll get a lot of business out of it, but I don't really expect that, but we'll see.

Great. Thank you.

Thanks, Adam.

Our next question, Fred Cummings with KeyBanc Capital Markets.

Good morning, Scott and Charlie.

Good morning, Fred.

Scott or Charlie, can you touch on your exposure to residential developers, particularly within Columbia's markets and resources? Are you seeing developers scale back in terms of new projects? Just give us some feel for how you feel about that segment of your loan portfolio.

We've been hearing from our folks in both of those markets for most of the year now that their developers have been pulling back. We'd like to think we're with, because of our conservative lending standards, that we are with conservative developers. So that's been part of the volume not being what we've seen in previous years because we have smart developers that have anticipated the slowdown and have pulled back somewhat.

I think in most of our markets, what we're hearing from developers is this is an inventory reduction time period where there's just a little excess inventory that they -- and some discounting is going on to get that sold, but we're not hearing panic from any of our folks about the developers we're involved with. They're talking about going back to 2004 levels as opposed to some kind of panic that things aren't -- are going south in a hurry. We're watching it very, very carefully and we're working very carefully with our customers, but no need to push the panic button at this point in time.

Yes, and Scott, with respect to do you have any of your residential developers on the watch list at this time? Talking about pipelines for future problems, does anything jump out at you from that standpoint?

No, not really. I don't have that in front of me, but I'm sure there's a developer or two on the watch list, because in all industries you have folks that have issues and we're pretty quick to put anybody on a watch list. But I wouldn't say there's any significant -- what's the right word? Increase in that portion of our watch list that is related to the development business. Watch list of the major customers on the watch list continue to be a very diverse group of customers from different kinds of industries.

Last question. Can you speak to the robustness of your loan pipeline? C&I portfolio on average, Charlie, is up close to 20% annualized here in the third quarter. How strong is the pipeline looking as we move into the fourth?

I've been told by the lenders it continues to be strong.

Our expectation is, at least for now, it looks like it's about where it's been.

Okay, thank you.

Thank you, Fred.

Our next question, Collyn Gilbert with Ryan Beck.

Thanks, good morning, Scott and Charlie.

Good morning, Collyn.

Kind of a follow on, actually, to a lot of the things that Fred was touching on. Maybe if we could just start with the loan growth, I mean, obviously the trends that you guys saw this quarter were very good. How are you balancing the pricing for the risk in that portfolio? A lot of banks are out there saying, we're not sacrificing on credit terms or sacrificing on pricing, but at the end of the day, how you price the credit is a reflection of the credit quality of it, of the risk of it. How are you balancing that and still getting profitable loan growth on the books?

Well, we're getting profitable loan growth, Collyn, not as profitable as we'd like to see it, frankly. As you know, our lending standards are pretty tight, so we don't have this matrix that does a lot of pricing based on risk. We certainly look at it. I think that's more of a situation of what the market drives, but the flat yield curve and the competition just keeps us from getting what would be traditional yields on particularly term loans now because of the flatness of the yield curve.

And that's the light at the end of the tunnel we're looking for, is if we get some slope to that yield curve, then we could -- because we've got slope to the liability side. It's just not on the asset side. That's really the issue. And as far as quality is concerned, we try to maintain the same standards through all times and that's been the secret to our asset quality over time is to not compete in tight markets when standards start to be some of the reason that folks change banks. So we're trying to be consistent through this and get what price we can get based on competition and what's out there.

Collyn, there has been a change in I think the mix, too. The construction loans have been slowing. We are putting less on the books. They are smaller deals. I think in Columbia their balance are actually going down because they are being more selective, there are tighter underwriting standards, but there has been a change in mix. We have had good commercial loan growth and a lot stronger than we did last year or at the beginning of this year and it seems like our commercial customers are borrowing more and they're utilizing their lines more. And you know what, too? The residential home equity and consumer lending has been pretty strong and that's been close to double-digit growth and we were surprised at that, but that is growing too, but there is a change in the composition, I think.

Okay. Pushing a little bit more on the credit front. What were the circumstances of the low-income housing credit that is causing it to go into potential default?

There was a delay in the completion of construction. So that it is not rented up and the rents are not coming in, and there were some construction overruns. So it slowed the whole project, but we've done a lot of these in the past and they've always worked out for us.

It's a combination of funding from state and local authorities and so forth. It got a little mismanaged, but it's back on track and getting completed now, but we're concerned that the timing of it will work out to the point where it will get current soon enough to keep it out of nonaccrual, but we'll see.

Okay. Maybe, Scott, if you could just comment on some of the recent M&A trends in New Jersey, maybe specifically on the acquisition or the deal with First Morris. Have you guys been involved in some of these transactions that have gone on in New Jersey and is that something you want to further explore, or how have you been looking at that component?

We have seen a lot of opportunities in a lot of markets over the last six months, and frankly the sellers' expectations about value and ours just haven't hooked up. We are still looking at and expect to do some acquisitions going forward, but when we do the math, we can't come up with the numbers that some folks seem to think are appropriate. I think you're going to see continued consolidation. And there always seems to be someone out there willing and able to pay some of the prices that are being paid, but in some of the situations we've looked at, we just have not been able to make the math work for us.

Okay. And then just quickly, finally on the affiliate structure. You had said you're consolidating two of the affiliates. Are there more opportunities there? And then what are the financial implications of consolidating just these two affiliates, if any?

I don't know that they are opportunities as much as just evolutionary processes that happen. We have bought 22 banks, I think, and we have 15 now soon to have 13. So as our banks begin to work with each other and market overlaps occur and they see opportunities to make their marketing and branding activities more effective by hooking up with each other or with a close-by affiliate, we've done that and will continue to do that as the folks in the market think it makes more sense to do it.

It's providing us with some more efficiencies and we'll take advantage of those, but they're not going to move the needle in any huge way. But over time, I think it gives us opportunities to be a little more efficient. But as you know, we believe in our model, it's the decentralized decision-making that provides this community bank feel in the market and that's the brand we're able to promote in a market that gives us the revenue side, a more advantageous growth on the revenue side. That's the primary thrust of all this.

Okay, great. Thanks very much.

We will go next to Steve Moss with Janney Montgomery Scott.

Good morning, Scott and Charlie.

Good morning, Steve.

Most of my questions have been answered. One thing on loan growth, was it strong in all geographic areas, or was it concentrated to any specific area?

Pretty much all the areas. It varied somewhat, but it's been fairly uniform throughout the franchise.

Okay, great. Thank you.

Yes.

Our next question, Wilson Smith with Boenning.

Good morning, gentlemen.

Good morning, Wilson.

On the tail end here, not too much left to ask about. But earlier you said when you prepurchased some of those securities to prepare for falling rates, in your planning, when is it that you're projecting -- I want to know what your crystal ball looks like -- when are you projecting you're going to see some rate cuts?

I want to make sure you understand that we didn't get some crystal ball and have some magic information. What we had was a situation where we have a lot of liquidity in our bond portfolio over the next couple of years. So we figured, even if we guess wrong about rates going down next year, and we're thinking midyear to the end of the year, that we still have a lot of maturities coming through that we can reinvest as well.

So it wasn't a dramatic change in our strategy of managing a fairly conservative bond portfolio. We just had an opportunity where it made sense to hedge a little bit in case rates fell, because if they don't, we're going to have some liquidity to reinvest anyway.

So it wasn't -- if you're asking what we're planning around, we're trying to keep the gap fairly balanced, but we're budgeting for next year with an expectation of some slight decreases in the latter part of the year.

Okay, great. In terms of an interest margin, it looks as though you're telling us, all things being equal, the margins would go down because of those interest recoveries you had in the third quarter. In terms of looking at the margin going forward, is the pressure -- the continued pressure that you're going to be feeling, how much is going to be coming from just repricing of liabilities and how much is going to come from migration as you see some continued shift, probably, from savings into CDs?

That's a tough one, Wilson. We still have -- we still will see some lower cost CDs maturing as the next six to nine months unfold. And so depending on where pricing is at that point in time, there's still a possibility -- or a strong possibility that we'll see some increasing costs of funding as those CDs roll over.

It's hard to guess on what consumers are going to do. My hope is that we've kind of hit that peak where they've drained their DDA and lower-interest savings accounts as far as they're going to drain them and have all converted that to CD money, but that's a tough one to call and we don't really have any models that do that. But I think the pressure is more on the funding side. As we’ve said before, we do have competition on loan pricing, but as long as we can get the kind of growth in volume we've had in lending, I think we'll have opportunities to see some decent revenue growth on that side. But this funding thing is going to be, I think, the issue that's going to be most difficult for us to manage.

Right, right. Okay. Thank you very much.

Our next question, Andrew Collins with Piper Jaffray.

Good morning.

Good morning, Andrew.

On the shift out of DDAs, just wondering as we progress through the quarter, did it accelerate, decelerate, and is it in retail, is it in business, where are we seeing that?

Andrew, our average balances in DDA were down $40 million. It's choppy. There are certain quarters and certain times where we see a bigger drop in DDAs, but it was down $40 million and we were up $23 million in the money market accounts, so the core deposits on average were down about $20 million. And it's mostly in the personal accounts. I think a lot of people are becoming more price sensitive and they're buying certificates of deposits or they're going into the stock market.

Yes, some of your competitors have been saying that the retail market is becoming more rational. Would you back that idea, or are prices still heading higher a little bit?

Rational in terms of --

The competition.

I think we're just getting used to it.

All right.

I think it's -- particularly competition for funding really picked up late last year, I guess it was, and early this year. And so I think a lot of us reacted to that and said the competition is really getting a lot more difficult. I think we've lived with it for six to nine months, so I would say it's more of an acceptance of normality as opposed to changes in how aggressive people are pricing for funding, because they all have the same issues we have and you go to the wholesale markets, there's still some room to increase core deposit pricing and stay under the wholesale market. So I don't expect that to slow down anytime soon.

Yes, that's a fair assessment. What about the pipelines by loan type? You talked about the C&I loan pipeline still being pretty good. What about the construction pipeline, and if you could break that out by residential as well as just traditional commercial real estate construction.

We don't have specific numbers we can give you, but I can tell you from what our folks are saying and what's been happening is that we're expecting a slowdown, a continued slowdown in the real estate development and construction area. And again, just for instance, one of our larger builders said, they're projecting for next year 85% of this year. That's a significant reduction, but that's still probably the third or fourth best year he's ever had. We're expecting a slowdown in those markets and the growth in lending is coming from the commercial side and from the consumer side, which is nice to see. It helps us diversify the portfolios and so we're not totally upset with the way that's all happening.

We like to get a lot of growth, but if we have to have some reduction, it's happening in the areas that have been so robust the last couple of years and have become increasingly larger parts of the portfolio. It will be good for us if we can grow the consumer and commercial C&I portfolios. And I think some of this runoff in DDA is companies spending their cash balances. So our expectation is that the usage will at least continue to be as good as it is which is up somewhat from previous quarters and probably will continue to grow as commercial businesses spend more money and use lines for those purposes.

Just one other question on the consumer outlook, if you look at the national numbers, mortgages and home equity continue to come down. So I guess you're anticipating and have been seeing kind of market share gains in that business. What makes a difference between what you guys are doing and perhaps some of your competitors?

Well, we have been, as we've talked before, we have been very focused on organic growth. And we have been kind of relentless in our pursuit of execution of marketing plans and strategies that our folks have put in place and I think we're just being more disciplined about how hard we go after the quality business that's out there. And I think it's paying some dividends. Our people are very focused of cross sale kinds of activities are being enhanced and more focus given to them. We don't have market share numbers that current, so I can't tell you it's market share or whether it's -- how much is market share and how much is market growth, but I can tell you, we're very focused on it and our folks are working hard to get it.

Great, thank you.

You're welcome.

We will go next to Colin Dunn, Keefe, Bruyette & Woods.

Good morning.

Good morning, Collin.

With respect to share repurchases, it looks like you guys did not buy back many shares, or if any, this quarter. Are you building capital up to a more comfortable level, or giving yourself some flexibility to potentially do some acquisitions?

I guess we've been holding the capital level where it is. We have authority to buy back another million shares under the current buyback program we've had in place, but we haven't purchased anything in the last six weeks.

All right.

We continually look at that.

All right. Did you also mention that there was a compensation expense accrual this quarter that was (multiple speakers) not recurring?

Yes, $500,000.

Thanks, that's all I have.

You're welcome.

We will go next to Matthew Schultheis with Ferris, Baker Watts.

Good morning, guys.

Good morning.

Two quick questions -- actually three, excuse me. Your securities gains, are they taken from your equity portfolio?

$1 million from the equity portfolio and $500,000 from the bond portfolio.

How much in unrealized gains do you have left in your equity portfolio?

It's negative.

Okay.

$600,000 negative.

The mortgage income increase gain on sale, linked quarter, was that driven by an increase in volume or an improvement in spread on sale?

I think it was both. The volume increased from 500 -- from $488 million to $500 million. And the spread increased from 106 basis points in the second quarter to 110 in the third. Usually our third quarter is a real good quarter.

All right. As far as this prefunding of your securities cash flows, when do you expect to start seeing the cash flows come in on the securities, in other words, would we see your securities portfolio start to contract slightly in the fourth quarter?

We are going to continually evaluate that and we look at that and I am not sure.

We have a luxury of lots of flexibility because we have a lot of maturities coming in, so we will on a month-to-month basis evaluate where we think interest rates are going and what is the best use of that.

Okay. Thank you very much.

You are welcome.

I currently have no other questions holding. At this time, for closing remarks I would like to turn the conference back to Mr. Smith. Please go ahead, sir.

Thank you, and I would like to thank all of you for joining us here this morning and for the very interesting questions you had for us today. You will be able be with us again for the fourth quarter and year-end earnings conference call which is scheduled for January 17, 2007. Talk to you then.

Ladies and gentlemen, that will conclude today's teleconference. We do thank you for your participation, and ask that you disconnect your phone line at this time.