Fulton Financial Corp (FULT) 2010 Q2 法說會逐字稿

Good day, and welcome to the Fulton Financial second-quarter earnings call. Today's call is being recorded. At this time I would like to turn the call over to Ms. Laura Wakeley. Please go ahead.

Thank you. Good morning and thank you for joining us for Fulton Financial Corporation's conference call and webcast to discuss our earnings for the second quarter of 2010. Your host for today's conference call is Scott Smith, Chairman and Chief Executive Officer of Fulton Financial. Joining him are Phil Wenger, President and Chief Operating Officer; and 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 relations and then on news.

Please remember that during this webcast, representatives of Fulton Financial may make certain forward-looking statements regarding future results or the future financial performance of Fulton Financial Corporation.

Such forward-looking statements reflect the Corporation's current views and expectations based largely on information currently available to its management and on its current expectations, assumptions, plans, estimates, judgments and projections about its business and its industry and the involved inherent risks, contingencies and uncertainties and other factors.

Although the Corporation believes that these forward-looking students are based on reasonable estimates and assumptions, the Corporation is unable to provide any assurance that its expectations will in fact occur or that its estimates or assumptions will be correct. Actual results could differ materially from those expressed or implied by such forward-looking statements and such statements are not guarantees of future performance.

Many factors could affect future financial results including, without limitation, the factors listed in the Safe Harbor section of yesterday's earnings news release. 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. Accordingly, investors and others are cautioned not to place undue reliance on such forward-looking statements. Now I'd like to turn the call over to your host, Scott Smith.

Thank you, Laura, and good morning, everyone. We appreciate your continued interest in our company. Phil Wenger, Charlie Nugent and I each have a few prepared remarks and then we'll be happy to respond to your questions. Our comments will focus on linked-quarter results unless we specify otherwise.

We reported diluted net income per share of $0.14 for the second quarter, up $0.01 over the previous quarter. While we were pleased with this continued upward momentum, our results were tempered somewhat by a rather slow economic recovery. In the absence of a stronger economic activity we are finding it a challenge to grow our earning assets.

Consumers and businesses appear to have adjusted to lower levels of debt or have not yet reached a level of confidence that is conducive to increased spending and borrowing. As you know, we redeemed our $376.5 million of treasury preferred stock in full last Wednesday, July 14. The cost to carry the TARP funds from the day of our capital raise until the end of June decreased our second-quarter earnings per share by approximately $0.015.

Because the economy is rebounding more slowly than anticipated we did not see the credit quality improvement we had hoped for this quarter, and actually saw some deterioration in our non-performing assets coverage ratio. However, we were somewhat encouraged by a reduction in overall delinquency that we haven't seen in over two years.

Given the continued economic uncertainty we did not feel it prudent to reduce the provision. In short, while we still see some signs of economic rebound on the horizon, the base of that recovery is not progressing at the speed we had anticipated. As a result we think that credit costs will remain elevated in the near term. Phil will provide a more in-depth look at credit in a few minutes.

Since business and individuals are not spending or borrowing they continue to deleverage and save. While these practices put pressure on our net interest income and on our net interest margin, in the long run it will be healthy for everyone, including the banking industry, (technical difficulty).

Deposits showed good growth, particularly core deposits, as a result of our emphasis on building customer relationships. Our new and existing branches continue to attract funding at a very reasonable cost which has helped our margin and enhanced our liquidity. The item that negatively impacted our margin most significantly this quarter was the overnight investment of the TARP funds awaiting repayment to the Treasury that I mentioned earlier.

As we look at our overall investment portfolio our strategy is to stay relatively short in order to protect us against a significant increase in rates and to enable us to redeploy funds from the investments to loans when loan demand picks up.

Incidentally, while we are hearing a great deal about the pressure on municipalities and their debt instruments, we feel we've managed that segment of our portfolio very well and we have not experienced significant problems there.

We were pleased to see a healthy increase in other income of 8.5% during the quarter. We continue to address the changes in overdraft regulations that will occur in the third quarter and Charlie will provide some additional detail on that.

As you know, this is a company that's always controlled its expenses very well. It's a core competency that we have developed over our history and that continues to allow us to perform relatively well compared to peers.

In summary, we feel our current level of operating expenses are appropriate for this economic environment and believe that, as I've said several times over the course of these calls, that we are positioned well for the future.

Another key event in the second quarter was the positive response of the investment community to our $230 million stock offering. In our April 29 news release we made it clear that we intended to use these proceeds to redeem the 376.5 million in treasury preferred stock. Now that the treasury has been repaid we remain a well capital company and our $19 million annual dividend payment to the Treasury (technical difficulty).

As we indicated in our July 14 release, due to the acceleration of the accretion of the remaining discount of $5.5 million, we will see an approximately $0.03 per share reduction in net income in the third quarter. We intend to begin negotiations to repurchase the warrant that was issued to the Treasury at the time of the initial transaction.

I want to say a word about the new financial regulation our industry and the government are just beginning the lengthy implementation process. And although the Dodd-Frank Bill will have an impact on us, I think we are positioned better than some of our competitors. We cannot anticipate the revenue reduction that larger banks may have experienced from having to curtail some of their business lines. And we have the critical mass to absorb the increased cost of compliance better than some of our smaller competitors.

Right now everyone is working to gain a better understanding of the many provisions in the legislation, but until the implementing regulations are developed the exact impact of the law on the banking industry and Fulton cannot be fully understood.

Another gratifying event in the second quarter was Fulton Financial Corporation being recognized by Forbes as one of the 100 most trustworthy companies in the nation. We were the only bank holding company on the mid and large cap (technical difficulty). At a time when the industry as a whole was trying to recover from the broad brush of the negative public opinion, this recognition conducted by an objective third party couldn't have come at a better time. The criteria that Forbes looked at in determining the award included our corporate governance, our accounting practices and our overall financial transparency.

Thank you for your attention and now I would like to turn the call over to Phil Wenger for our credit discussion. Phil?

Thank you, Scott. As Scott mentioned, we continue to work through the challenges that the economy has presented. The strength and speed of the recovery remain unpredictable. Our portfolio performance was impacted by both economic conditions as well as events that occur on specific accounts. These events can include borrower defaults, charge-offs, negotiations or resolutions to name a few. The timing and disposition of these events can impact our quarterly numbers.

Our credit metrics are mixed for this quarter. While delinquencies improved in both the 30- and 60-day categories, our non-performing loan portfolio increased and our charge-offs increased slightly. Given the ongoing impact of the economy on our portfolio, we determined that it was necessary to maintain the provision at the same level as in the first quarter. We continue to dedicate the necessary resources to manage these economic challenges and to work the portfolio closely in order to mitigate potentially difficult situations.

Now I will go through some detail of our asset quality. My comments will be linked-quarter unless I indicate otherwise. Delinquencies came in at 3.63% as of June 30, 2010 as opposed to 3.72% at March 31, 2010, reflecting a 9 basis point improvement. Portfolio outstandings were basically flat with a small $21.5 million decrease. 30-day delinquencies declined 29 basis points or $35 million and 60 day delinquencies declined 7 basis points or $8 million.

Most loan categories reflected decreases in delinquency with the exception of commercial mortgages which increased $6.4 million or 14 basis points. The increase in commercial mortgage delinquency was solely in the 90-day and over category which increased $31 million or 71 basis points. I will cover this shortly, but the increase is primarily comprised of non-performing loans. 30- and 60-day commercial mortgage delinquencies declined 47 and 9 basis points respectively.

Non-performing loans increased from $286 million to $317 million. The increase in non-performing loans was $31 million or 10.8%. This increase is comprised of $31 million in commercial mortgages and, as I mentioned, -- as I've mentioned, and $3 million in residential mortgages, offset primarily by a decrease of $800,000 in commercial loans, a decrease of $2 million in consumer loans and a $400,000 decrease in construction loans. Non-performing loans by type reflect 25% in C&I loans, 32% in commercial mortgages, 25% in construction loans, 14% in residential mortgages, 4% in consumer loans.

The geographic breakdown of non-performers shows 27% in New Jersey, 35% in Pennsylvania, 17% in Maryland, 17% in Virginia and 4% in Delaware.

The primary factors driving the increase in non-performing loans are ongoing economic challenges, guarantor fatigue and weak demand for residential real estate. (technical difficulty) commercial mortgages account for nearly half of the $31 million increase to non-performing loans. Both of these were housed in Pennsylvania, one a condominium development and one a hotel. Other real estate owned decreased $550,000 to $25.7 million.

Troubled bid restructuring increased by $10.5 million from $67.4 million to $77.8 million. $5.6 million of this increase was in residential mortgages which comprised $48 million or 62% of the TDR portfolio. The remainder of the increase was fairly evenly spread among commercial construction and commercial mortgage loans.

Net charge-offs were $28.9 million for the quarter ended 6/30 versus $28.3 million for the quarter ended March 31. The commercial loan net charge-offs were approximately $12 million, construction loan net charge-offs were approximately $8.7 million and commercial mortgage net charge-offs were approximately $3.8 million. The remainder is spread among consumer and residential. In the first quarter construction loans were approximately $20 million of the $28 million total net charge-offs.

The increase this quarter in commercial charge-offs was primarily driven by three accounts in New Jersey. Our allowance to loans came in at 2.35% as compared to 2.25% as of March 31. Our allowance coverage to non-performing loans as of June 30 was 88% compared to 94% as of March 31.

As I said earlier, given the ongoing stress the economy has placed upon our borrowers, we determined it was appropriate to maintain the provision at $40 million for this quarter. We have continued to make good progress in reducing our exposure to the construction segment posting another meaningful reduction of $44 million, bringing the total reduction in that portfolio to $376 million or 30% since the beginning of 2009.

We continue to be very selective in taking on additional business as there are a number of borrowers out looking for alternatives to their current financial provider.

While overall loan demand remains flat, we have been successful in winning good solid new business from well-capitalized borrowers who are weathering the storm well, but are unhappy with their current institution. These are full relationship customers primarily in the C&I sector. The composition of our portfolio has not changed substantially with the exception of the reduction in construction loans. Now Charlie Nugent will cover the financials. Charlie?

Okay, thank you, Phil, and good morning, everyone. Thank you for joining us today. Unless otherwise noted, comparisons are this quarter's results for the first quarter. As Scott mentioned, we reported net income available to common shareholders of $26.6 million or $0.14 per share in the second quarter compared to $0.13 in the first quarter.

The improvement in our earnings reflected a $3.4 million increase in non-interest income, a $3.1 million improvement in net security gains, a slight increase in our net interest income and well controlled operating expenses. The $650,000 or 0.05% improvement in net interest income was a result of a $50 million increase in earning assets, offset by a slight decline in our net interest margin.

The 2 basis point decline in our margin was due to our recent common stock offering. The $226 million in equity raise was invested in short-term funds to be available for our TARP repayment. Had we been able to repay the TARP funds at the same time we did the offering, our margin would have been 3.82%.

During the second quarter the repricing of time deposits and borrowings to lower rates continued. Time deposit costs declined to 1.93% in the second quarter as compared to 2.08% in the first quarter. Our total cost of interest bearing liabilities decreased to 1.60% from 1.70% in the first quarter.

During the second quarter $1.3 billion of time deposits matured at a weighted average rate of 1.71%, while $1.3 billion of certificates of deposit were issued at a rate of 1.2%. In the third quarter $1.2 billion of time deposits are scheduled to mature at a rate of 1.59%.

$75 million of Federal Home Loan Bank advances matured in the second quarter at a weighted average rate of 5.52% with $169 million scheduled to mature in the third quarter at a rate of 4.82%. Offsetting the positive impact of the decrease in cost of funds was a 14 basis point decline in the yield on our earning assets. Without the TARP repayment funds the yield on earning assets only declined 2 basis points.

Total average earning assets increased $48 million or 3/10 of a percent for the first quarter. The increase in short-term funds was offset by decreases in average loans of $13 million or 1/10 of 1% and average investments of $311 million or 9.7%. Sales and maturities of investment securities exceeded purchases by approximately $200 million during the quarter due to the lack of attractive investment options.

Total average deposits increased $306 million or 2.5% from first quarter. While this growth is reflective of the industry trend of consumers and businesses saving, we also believe our customer experience and promotional initiatives have enhanced our growth.

We continue to experience growth in core demand and savings accounts with average balances increasing $388 million or 5.5 -- 5.7%. This growth was partially offset by an $82 million or 1.6% decrease in average time deposits. Savings deposits grew $243 million or 8.5%, of this amount $133 million was in personal accounts while $110 million was in business and municipal accounts.

Non-interest bearing demand deposits increased $107 million or 5.5%, almost entirely in business accounts. Interest-bearing demand deposits grew $38 million or 2% and that was -- that growth was primarily in personal accounts.

Excluding net security gains our other income for the first quarter increased $3.4 million or 8.5%, service charges on deposits increased $1.2 million or 8.5% due mainly to an increase in overdraft fees. These fees historically declined 8% to 10% from the fourth quarter to the first quarter and then increased the same amount from the first quarter to the second quarter.

We know that we will have a negative impact on Regulation [E]. Our total annual overdraft fees from point of sale and ATM channels were approximately $11.3 million in 2009. All our customers have been sent letters regarding this change and we are in the process of personally contacting our customers who opt in.

About 90% of the $11.3 million was generated by 10% of our customer base. We have contacted 40% of that group so far with the 90% opt in rate. We believe that most of our customers want this service and have demonstrated a willingness to pay the related fees.

Our other service charges and fees grew $1.1 million or 12.3%, debit card income increased $420,000 or 14% over the first-quarter levels, which are historically the lowest levels of the year. This income has shown strong growth over the past year as a result of promotional activity and the rollout of a rewards program.

The impact of the financial reform legislation on debit fees is unknown at this point; however, we expect there will be some reduction. Merchant fee income grew due to an increase in customer accounts and volumes. ATM fees went up due to the standardization of fees across our banks. Investment management and trust services income increased $557,000 or 7% namely in brokerage fees.

While the market continues to be uncertain we believe we are benefiting from our transition from a transaction model to a relationship model. Mortgage sale gains decreased $300,000 or 9% as higher volumes were offset by declines in spreads. Total loans sold during the second quarter were $271 million as compared to $234 million in the first quarter. Net security gains were $900,000 in the second quarter as compared to net security losses of $2.2 million in the first quarter.

Other than temporary impairment charges of $3 million on pooled trust preferred securities and $500,000 on bank stocks were more than offset by realized gains on sales of debt securities of $4.4 million. Our investments in pooled trusts preferred securities had a cost basis of $34 million and a carrying value of $13.5 million at the end of the second quarter.

Our operating expenses increased $929,000 or 9/10 of a percent. The most significant increases realized in salary and employee benefit expenses which increased $2.3 million or 4.4% primarily due to the reversal of excess 2009 incentive accruals in the first quarter. The salary benefit increase was offset by decreases in other categories, the most significant being occupancy expense which declined $1.1 million.

Okay, thank you for your attention and for your continued interest in Fulton financial Corporation. Now we will be glad to answer your questions.

(Operator Instructions). Matthew Clark, KBW Investment.

Hey, good morning, guys. Can you speak to the incremental increase in commercial real estate non-accruals up $30 million? Just give us a better flavor as to what's in there, if there's anything lumpy. Maybe also the types of issues there and any detail you can provide on the commercial real estate portfolio that might be of increasing -- of growing concern.

Sure, Matt. It was somewhat lumpy, as you said. We had two accounts that represented close to half of the increase, one was a hotel and the other is a condominium development. But we did have a number of other accounts over $1 million that went on and they were really spread out both geographically and in type.

They vary from a small retail building, office building, two were properties that were related to C&I accounts, they were owner occupied -- a carwash, a development, another hotel, furniture store, horse farm, (inaudible) -- it's really pretty spread out.

I guess we do have some -- the overall delinquency on the commercial real estate side we think is still very, very manageable at 313. The 30- and 60-day CRE delinquency did decrease. So, there are some relatively positive signs there. Did I answer all your questions?

Yes, that helps. Thanks. And on these C&I front, loss content there picked back up. I'm just curious -- I think you had mentioned something about the C&I losses going higher relating to three situations. But just any color there as to the types of situations and the high loss for that?

Yes, one was a printing -- the largest was a printing company; there was actually some fraud involved. A balance is a pretty widespread. Well, yes, that was really half of the C&I losses and the rest was pretty widespread.

Okay. And then just for the Collins Amendment, you guys unfortunately are just above that $15 billion threshold at year-end. And I know you guys raised capital intraquarter and repaid TARP subsequent to that. I'm just curious as to what your thoughts are with the trusts that you have there and the need to replace them over the next I think two and a half years or so.

We have -- Matt, we have $178 million in trusts that we've issued. And they're pretty good rate we think, especially the $150 million we issued in 2006. We still get -- our weakest capital ratio was total risk-based and they're still going to count as capital for total risk-based. And the capital change (inaudible) 2013 and it has phased in. We think we're just going to hold them and keep them there and see what happens.

Okay, that's it for me. Thank you.

And we do our projections too. The ratios would affect the leverage ratio and the Tier 1 ratio. When we project out we think it's only going to affect those ratios by 30 or 40 basis points and that's a guess on the forecast. So, we don't think it's going to be a big thing for us.

That's it for me, thank you.

You're welcome.

Craig Siegenthaler, Credit Suisse.

Thanks, good morning, everyone. Just first on the net interest margin trends; I'm just wondering when we think about a lot of that additional liquidity leaving in early July, not being there in the third quarter, I'm guessing we should probably get a pretty nice step up in the net interest margin. And I know you referenced kind of 14 basis points I believe in a few places, but I'm just wondering how should we think about the sequential step up as TARP was repaid and some of that low yielding securities in cash was moved off the balance sheet?

That's a great -- that's a tough question, a tough thing to estimate. Everything on our balance sheet just about protects our margin. If we adjusted for having the TARP money for an extra two months, having like a double whammy of the common stock raised plus the [Trupp] money that we kept [assured], our margin set at 376 will be at 382. So we think that will be a starting point for you.

And then we try to give you a lot of information in regard to our CDs maturing and we had a nice reduction in cost of funds and, because that was 10 basis points that should -- the cost of funds should continue to go down because we have continued CDs which were in there, $1.3 billion, maturing at a 159 in the third quarter. And we said in the second quarter we've been keeping them at 120. So that should help reduce the cost of funds.

And then we also have $169 million in Federal Home Loan Bank advances maturing that we'll pay off in all probability and the rate on that is a 482. So I think you'll see the margin go up, but not as significantly as it has in the past and it will be driven by reductions in the cost of funds.

You mentioned the 14 basis points and you said that 14 basis points were related to the decline in the yield on our earning assets and 10 basis points of that was related to holding all that money short. And if you factored that out, yield on earning assets declined 2 basis points. And in the last two quarters (technical difficulty) 3 basis points each quarter.

So I think we're going to see slight margin improvement and that's just a forecast and that's just a guess. And it's hard to guess because everything affects the margin. But we're definitely going to see a reduction in cost of funds.

And then when you think about the cyclical deposit trends here, you have really strong demand in non-interest-bearing deposits, you have CD demand -- while not necessarily weaker, but you're running those down. And also CD rates are improving. When do you think we could reach kind of the end of this deposit cost improvement cycle? Do you think we have one or two quarters left or do you think it would be a little longer (multiple speakers)?

I have no idea. We've had strong deposit growth and I think it just has to do -- this is my personal opinion -- that it's based on individuals and companies not -- they don't have confidence in the future a little bit so I think they're saving more than they used to. And until they start spending more I think we're going to keep on having deposit growth. That continues to be very strong. Now, when that ends I don't know. When they start spending I don't know.

I agree. Thanks for taking my questions.

Frank Schiraldi, Sandler O'Neill.

Good morning. Just a question on -- Charlie, you had mentioned the $11.3 million and was that overdraft exclusively or was that also debit card fees?

Of that was both. That was --

(inaudible) overdrafts.

Only overdrafts. Oh, yes, I'm sorry. It was overdrafts.

Oh, okay. And then you mentioned --

(inaudible)

Yes, Frank, it was only on, as we mentioned, pulling the sale in the ATM channels.

Right, okay, okay, that's right (multiple speakers) confused. Okay, so that's the Reg E.

Sorry about that.

No, my fault. And then -- so in addition to that I wonder, could you give us sort of debit card fees? That might be -- I want to talk a little bit about (multiple speakers)

Debit card fees in the second quarter were $2.1 million.

Debit card fees were, I'm sorry, $3.3 million in the second quarter.

And have you done any sort of -- have you estimated at all what sort of business could be lost given the new -- well, I guess the interchange rules aren't necessarily here yet, but --.

Yes, it's kind of -- as mentioned in the comments, we expect it to get [down], but we're not sure how much. I think it's up to the Federal Reserve Bank to determine how much people charge for that. So, we can't even guess at that at this point.

Okay.

Is that your understanding, too?

Well, yes, that's my understanding that the Fed is going to -- has sort of nine months now to come up with the rules and so we're not going to know for a while. But we have seen some companies come out with estimates and I can't remember exactly whether it was -- I know Bank of America had a very high, 70% to 80%, something like that, they thought could be in trouble given potential new rules or whatever the new rules would be.

Yes, we don't know.

Okay. And then going back to overdraft, Charlie, you had mentioned -- I think what you said was you've contacted 40% and 90% of those have opted in? Is that right?

Yes, we were saying that the -- last year we generated $11.3 million in overdrafts from the point of sale in the ATM channel, so that's kind of at risk. We said 90% of that $11.3 million came from 10% of our customers. And we have contacted 40% of that group and so far there's been a 90% opt in rate. But also looking at all of the other people that have not overdrawn their account that much as the 10%, the opt-in rate for those people too are still about 90%.

Okay. And is that -- so of that 40%, is it 90% of that are actually responding or --?

No, that's 40% being contacted and 90% of that 40% has opted in.

Yes, Frank, that's -- we have had personal contact with 40% of those folks, and 90% of them have opted in.

Okay. Okay, that's all I had, thank you.

Rick Weiss, Janney Montgomery Scott.

Good morning. I was just wondering on your expenses, that it seems like they came down from a year ago, but sort of running around $100 million per quarter. Would that be a good run rate to use?

Rick, we missed the beginning of that. Can you --?

Yes, with the expenses, it seemed like -- they're certainly controlled, they're down from a year ago. But now this last couple quarters they've been around $100 million or so. Is that a good run rate to use for modeling?

When you look through all those, Rick, you can see fluctuations in each one of them. But that would be a good run rate I would say.

Okay. And then going back to I guess Matt's original question with the CRE non-accruals. Are the loans that have gone bad, were the seasoned? I mean, how long have you known the borrowers, good customers, are they fairly new -- well, if you can give some color on that portfolio.

Sure, Rick. I would say that the majority of them were season loans.

Okay, so customers have been performing, they just got caught up in the economy?

Yes, that would be correct.

Okay. I guess that's bad news, but it's good to know it. Thank you.

Bruce Harting, Barclays Capital.

Good morning. The statistics you gave on the overdraft are very precise, very interesting. So it was -- but I just want to make sure I understand it, not to beat a dead horse. But 90% of the $11.3 million comes from 10% of your customers. And you contacted 40% of that 10% and 90% opted in. So, we should about $4 million of the $11 million is pretty much opted in. And do you plan to contact the other 60% and then --

Yes.

-- what method -- kind of what method are you using to have such good success?

We set up a special call center. We have a number of individuals who are dedicated to making telephone calls the entire day. We've probably contacted almost everyone, it just takes a while to actually get to talk to someone; you normally don't get them on the first call. And we -- pretty consistently every week we talk to another 3% to 5%.

Okay.

So, we are going to continue that.

Okay. So it's just a matter of human resources and time and just getting around to everybody?

Yes, the biggest impediment -- the biggest impediment is people being available to talk to us.

Okay. And are there obvious offsets that you -- or that you think the banking industry -- it seems like the big BofA announcement last Friday, if you applied that math to your debit volume, would come up with sort of a $0.02 to $0.03 after-tax impact, which is relatively minor.

But it seems like the industry doesn't really want to pick a fight with Congress right now and is not talking about potential offsets. But it seems like the average debit fee per customer is not that high and you could just kind of make that income up with some other checking account fee, is that fair to say?

This is Scott. I think we're going to see a lot of banks experimenting with some different strategies here. At some point in time we need to get paid for providing transaction services. And if the regulations change about how you can do that, then I think you're going to see the industry react a different way. And we'll watch that very carefully and do our own analysis about what works for us.

I think you'll see some packaging, you'll see some folks charging for various activities. We should go back to a debit card fee. There are a lot of options out there and I think once we know what the Fed's decision is we have to all step back and say, you know, how much does this impact us and how -- are there ways to regain that revenue stream.

Okay. I mean it seems like why would the bank industry want to pick a fight right now and make any comments like that when you still have nine months and you don't even know what the Fed is going to do. And our understanding is BofA, because of their goodwill of MD&A had to say something.

But just if I may ask one more. On the provisioning strategy, you continue to build reserves even though charge-offs are pretty flat. There is a lot of moving parts within charge-offs, but it seems like you are -- it seems like the real estate construction NPAs have sort of peaked. I don't know, would you agree with that?

And the two areas that continue to see some NPA increase on a linked month or quarterly basis, so the more of the commercial mortgage. So is there any anything specific you can say about commercial mortgage? I mean do you have a special workout team and are you basically working with developers or the real estate owners and trying to lower rate or are you talking cutting principle or how are you working with them? For the most part, are you trying to keep the owners of the commercial real estate in that seat or are you at a point where a lot of these folks you just have to try to get the real estate away from them?

We definitely have a team that is working on the portfolio. We look at every situation on a deal-by-deal basis. And in some cases, we think it makes a lot of sense to work with folks. In other cases, it doesn't. And we will move fairly quickly.

As far as the individual portfolios, I think we've said over time that there are going to be variances from quarter to quarter. So, I'm not -- I guess we are not totally convinced we are through the whole construction problem. I think there is -- has been some slowdown on the housing side. So, while our success as been pretty good lately, I think that is still out there.

The commercial real estate side, we did have a couple -- obviously, we had increases this quarter. We still feel good about that portfolio, about the underwriting and the overall strength. But in any given quarter, two or three accounts could have an impact in the C&I numbers, could have an impact on the construction, could have an impact on the commercial mortgages. This quarter, it is commercial mortgages.

Thank you.

Collyn Gilbert, Stifel Nicolaus.

This is actually [Travis Brown] on for Collyn this morning. How are you guys doing? I know you said that overall loan demand was pretty much flat. But have any geographies seen more activity than others or was it pretty much flat across the spectrum?

It is pretty flat across the spectrum. I think the one area that we've had -- showed, actually showed some growth has been in Pennsylvania. And our growth, I think, is attributed more to changes with our competitors than it is with a stronger economy. And so in Pennsylvania I think we've made a little more headway in taking market share.

And then maybe you can give us some color on what kind of spreads you're seeing on any new commercial loans (inaudible)?

Yes, the spreads, as we've said, have been much stronger than they were in the past and I think that trend has continued.

And then I know you mentioned the transition from the transaction-based or relationship-based approach on the brokerage side. Could you maybe expand on some of the measures that have specifically helped grow revenues there?

Well, on the growth rate side first off, we have hired -- in the last 12 to 18 months we've hired a number of new brokers. So our headcount of brokers is higher and our brokerage product in general now is much more relationship-based as compared to transactional-based. So, that's helped us. And (multiple speakers) we're encouraged by that growth.

Right. When you say it's not relationship-based, does that mean you're offering kind of a more overarching kind of wealth management structure as opposed to just the one-off brokerage, is that accurate?

Yes.

Okay, and then we should expect to see some continued growth there along that brokerage arm?

I think that's possible.

Okay. And then just finally, can you just give us an update on your municipal bonds -- excuse me, your municipal bond exposure? I know you touched on it before.

Yes, we have $344 million in municipal bonds. And 96% of those are backed general obligation bonds or half of them are (inaudible) backed by the municipality's ability to tax. And right now they are -- the market values net $10 million over the cost. And we look at it very carefully and we don't see any problems there right now.

Great, that's all I have. Thank you, guys, very much.

Gerard Cassidy, RBC Capital Markets.

Thank you, good morning. Can you guys share with us the process -- once you contact your customers to opt in what is the process that they have to go through to legally opt in? Is there a document they have to sign and submit to you guys? Or how does that work?

Yes, they say -- Gerard, if they say yes we sign them up on the phone. If we get them on the phone, and that's been the problem is answering machines. But once we get them on the phone, if they say yes, I want to opt in then we opt them in.

Oh, okay. So there's no legal signature required on a document or anything like that?

No.

Okay. The second question is in terms of your primary regulator, when was the last time that they had come in to see you guys for a safety and soundness exam? Wilmington Trust, for example, has their primary regulator in there right now. And I think prior to that it was late 2008 before they had been in before. When was the last time you guys had your -- safety and soundness exam?

Gerard, this is Scott, I'm not sure we are permitted to give you that date, frankly. We get told very carefully by regulators that all they do with us is confidential. So unless I get some kind of a nod from legal I don't --. What I can tell you is we have eight banks, so we have a lot of primary regulators and they're here all the time. It's very seldom a month goes by that we don't a regulator somewhere in the Company.

Okay, understood. Thank you very much.

David Darst, Guggenheim Partners.

Good morning. Could you speak in a little bit more detail to your New Jersey commercial real estate exposure and any trends that you're seeing there? I guess those were all related to an acquired bank. And then maybe the answer the same question from there on and the construction portfolio. And then you feel like you've turned a point with the acquired bank since you've got your arm around some of the issues that came up earlier in the cycle?

Okay. For commercial portfolio or commercial real estate portfolio in the state of New Jersey is -- represents 28% of the total portfolio. So, I believe our CRE portfolio breaks out 52.7% in Pennsylvania, 28.1% in New Jersey, 9% in Maryland, 7.8% in Virginia, 3% in Delaware. The commercial real estate delinquency in the state of New Jersey is 4.36%. So it is higher in New Jersey than the overall delinquency rate. And what were your other questions?

I guess my -- rather than the numbers I was just more concerned -- or my question was regarding any trends that you're seeing in those portfolios, specifically New Jersey commercial real estate and Maryland construction. Those were items where you had some issues earlier in the cycle. And I wonder if you feel like you're turning a point in those markets and you're seeing more deterioration in your core market, Pennsylvania?

We have turned -- I think the Maryland construction portfolio has turned. The New Jersey CRE portfolio deterioration I think has slowed, but I would not say it's turned. And we have seen some increase in parts of Pennsylvania, specifically suburban Philadelphia.

Okay. And then on the credit resolution front, are you beginning to see any signs that some of the earlier credits that were brought on will be able to move out in the second half of the year?

We're moving some. I'll tell you that the encouraging part is there's a lot more interest -- there's a lot more interest. The part that is frustrating is that it just takes time and so that gets very frustrating.

Okay, thank you.

David West, Davenport & Co.

Good morning. First I wanted to [store] a comment you made, you felt you expected in the short-term credit costs to remain elevated. Do I take that or should we take that as an inference that you spent charge-offs to stay around current levels or possibly increase from current levels?

This is Scott. I guess where we are is as we went through the second quarter, if you just follow the press and the macroeconomic news that was coming out, I think two quarters ago when we budgeted and a quarter ago when we talked we all expected the news to be more positive than it's been.

Now there are still some good things happening, I see the CEOs of major corporations that are ready to spend some of their cash and there are some other things going on as (inaudible) picks up here and there. But the Fed has backed off a its original forecast about 0.05% I think and some others have mixed kinds of economics.

So we're just being cautious here in saying look, this recovery is not as solid I think as it once was, but we still see a recovery coming. And so we're just being cautious in terms of maintaining that reserve [book] at this point in time. But we don't -- I wouldn't say it's specifically done because we think there's going to be a significant increase in charge-offs. But this economy is hard to call and all that's related to the recovery.

Did the relationship from the provision to charge-offs, is that likely to be determined primarily by what you see in future trends on the non-performing assets?

Yes, and the economy, too. What we're seeing specifically in our markets and what we're hearing about the macro economy, it's just -- it's hard to spend down a reserve when folks are still nervous about whether this recovery is for real or not.

Just one more question, I just was curious. Is what you're seeing on your commercial, a lot of credit utilization, is that -- I take from your overall numbers that's probably pretty flat at this point.

Yes, it is flat.

Tanks very much.

(Operator Instructions). Kyle Kavanaugh, Palisade Capital.

Good morning, gentlemen. I just wanted to say, was that -- the hotel and condo development, were they in New Jersey?

They were in Pennsylvania (multiple speakers).

(multiple speakers) in suburban Pennsylvania.

They were in Pennsylvania?

Suburban Philadelphia.

Okay. And I guess -- I mean, the hotel is basically -- occupancy just wasn't there?

Yes.

And then on the condo development, was that brand-new construction?

Yes, it was.

Just on -- how's the market for like selling loans or trading loans right now? Is there anything there?

There's a market, there are huge discounts.

Huge discounts?

Yes.

A lot of comments about the economy and if the economy is not -- if the recovery is much slower than expected what can you do to keep performing situations -- just you mentioned (inaudible) is one of the issues. What can you do -- is there anything you can do other than just waiting for some other credits to fall into NPAs?

Well, we work very carefully with our customers and particularly in this kind of environment to counsel them on things they can do to shore up their businesses or whatever they are. And, Kyle, that's about the extent of it. And I think Phil mentioned, he used the term guarantor fatigue. We have some real solid guarantors in many of our loans. As you know, over the years we've always been careful to do that. But at some point in time they run out of liquidity and when that happens then there's not a whole lot you can do.

But -- I'm not trying to paint too gloomy a picture here, I mean we're still going to see the economy grow at 3% according to the Fed. So I don't think -- we'll see what Bernanke has to say today, but I don't think anybody is predicting a double dip recession. So just the pace is going to be a little slower. So we were on a trend where we were kind of improving a lot of those numbers every quarter.

And as I mentioned in previous calls, life is not so easy that everything is just linear. And unless you're in a recovery the curve just goes straight up, there are going to be some bumps along the way. And our non-performing was one of those bumps this quarter. But I'm not here to tell you that's an indication of what's going to happen in the future. But this economy is softer than we thought.

Thank you, that's all I have.

Matt Schultheis, Boenning & Scattergood.

Good morning. A quick question and maybe it's a little too early given the credit cycle. But obviously you guys feel you have enough capital, you repaid TARP, so clearly you have enough capital to ride through things. And as you said and I think, importantly, you have enough scale to absorb the costs of some of these legislative and regulatory changes that are coming down the pike, whereas some of your smaller competitors may not.

So what does that do for you as far as the M&A picture? Are you actually seeing deals being offered and do you have any interest in doing deals? And if so, in which geographies?

Well, there have been very few FDIC-related deals in our markets. And to date we haven't been interested in any of those. So my suspicion is that that will be the case going forward. We might see a few here and there, but the majority of those are happening, as you know, in other geographies.

We do feel like we have a solid capital base now and our expectations, based on what we're hearing from folks in the industry, is that there will be some consolidation. As you know, we've done a lot of mergers, I think 22 bank mergers over the last several decades. And we think we know how to do that fairly well.

So if there are opportunities I think we will be at least engaged in discussions with some of those banks as they decide to take another strategic option. So, the answer is, yes, we will be interested in discussing acquisitions with folks who are so minded. But it's awfully hard to call when that change of attitude will happen as those banks (inaudible). What I'm hearing from bankers is that not so much this year but more in 2011.

Similar geographies to where you've been focused in the past?

Yes, yes.

Okay. Thank you.

But we still have a lot of good markets where we don't have enough critical mass in the geographies we're in. So that's where we'll be focused anyway.

Okay.

And with no further questions in queue I would like to turn the call over to Scott Smith for any additional or closing remarks.

I'd like to thank you, end the call and thank everyone for joining us today. We hope you'll be able to be with us again on our third-quarter 2010 earnings conference call, which is scheduled for October 20, 2010 at 10 a.m. Thanks again.

And that concludes today's conference call. Thank you for your participation.