Fulton Financial Corp (FULT) 2010 Q3 法說會逐字稿

Good day and welcome to the Fulton Financial third quarter 2010 earnings teleconference. Today's call is being recorded.

At this time for opening remarks and introductions I'd like to turn the call over to Laura Wakeley, Senior Vice President and Corporate Communications Manager. Please go ahead.

Thank you. Good morning and thank you for joining us for Fulton Financial Corporations' conference call and webcast to discuss our earnings for the third quarter of 2010. Your host for today's'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 was 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.

On this call representatives of Fulton may make forward-looking statements with respect to Fulton's financial conditions, results of operations and business. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond Fulton's control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Fulton undertakes no obligation, other than required by law, to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

In our earnings release we have included our Safe Harbor Statement on forward-looking statements. We refer you to this statement in the earnings release and the statement is incorporated into this presentation. For a more complete discussion of certain risks and uncertainties affecting Fulton, please see the sections entitled Risk Factors and Management's discussion and analysis of financial conditions and results of operations set forth in Fulton's filings with the SEC. Now I'd like to turn the call over to your host, Scott Smith.

Thank you, Laura and good morning, everyone. We appreciate your being with us. Phil Wenger, Charlie Nugent and I each have some prepared remarks and then we will respond to your specific questions. Our comments will focus on link quarter results, unless we specify otherwise. We reported diluted net income per share of $0.16 for the third quarter, up $0.02 over the previous quarter and a 10% improvement over the same period last year. We continue this earnings momentum despite the absence of stronger economic activity. During the quarter we saw an increase in residential mortgage lending activity along with an increase in mortgage sale gain income. Our net interest margin also improved.

There were a number of significant events that occurred during the quarter. On July 14 we redeemed our $376.5 million treasury preferred stock in full. Then on September 8 we repurchased the associated warrant from the treasury. We are pleased to have both of these transactions behind us.

Two weeks ago we announced the merger of our Delaware National Bank affiliate into our largest affiliate Fulton Bank. And as we've mentioned in the previous calls, we consider merging affiliates when we believe it makes sense to do so. After this systems conversion in early December, we will be operating with seven affiliates, down from a high of 15 several years ago.

During the quarter preliminary (inaudible) capital guidelines were released. Of course, there will be further definition and clarification of these requirements from the US Regulatory Authorities. However, our current capital appears to be well in excess of the preliminary guidelines. Regulation E overdraft opt in, opt out guidelines became effective on August 15. We have been preparing for this event since the beginning of the year, and as we expected the payment of overdraft does create value for our customers across all channels. We expect to see additional opt in as customers who did not respond initially to our opt in notices do so after having a point of sale or ATM transaction declined for the first time. Nevertheless, we-- and as we expected this quarter, we will begin -- we began to see the impact of new regulations on our non-interest income. Charlie will provide additional information in his comments.

The Dodd Frank Act became law on July 21. In response we've established a committee of senior people to study the applicable titles under the act as well as the many rules and regulations that will be-- we will be required to implement. Dodd Frank could create some potential opportunities for us in the marketplace. With careful planning and strategizing as we believe we are in a better position to absorb the increased compliance costs than many smaller banks.

From a balance sheet standpoint, the third quarter saw a continuation of our strong core deposit growth particularly in the small business sector, one of our high-priority market segments. We were able to reduce our cost of funds during the quarter and believe that we'll be able to further reduce them as certificates of deposit mature and reprice in the fourth quarter. While we are always glad to see an increase in our stable retail deposit base, it is a challenge to deploy those funds profitably in this environment. Over the last 90 days, we see little indication of an economic rebound and little change in business and consumer behavior. Both sectors continue to deleverage and we will likely continue to do so until the overall employment picture improves.

With such strong liquidity position, we certainly would welcome more robust growth in quality loans. However, that is not yet the case. This quarter we were able to offset loan run off and charge-off with quality new loans to the extent that our outstanding loan balances did not show a decline and net interest income increased. However, because of the continued economic headwinds, and as we indicated on our last call, credit costs remain elevated. We experienced an uptick in our nonperforming loans and in overall delinquency. The provision was changed link quarter and we continue to build the loan loss reserve albeit at a slower pace this quarter.

Our economic problems and related credit issues persist. I assure you that we will be persistent in meeting those challenges and getting them resolved. Phil will provide more specifics about credit in a few minutes.

Non-interest income showed a good increase link quarter despite the Reg E impact that I mentioned earlier. And as you've come to expect from us the other expenses were well controlled.

I want to say a word about mortgage foreclosure procedure since the topic has been so prominent in the press. Relatively speaking, our foreclosure activity is minimal. Moreover it is not an assembly line like process, but just like our lending each decision to foreclose is made on a case-by-case basis. In addition, we have talked with our people responsible for handling our foreclosure documentation and we are satisfied that our foreclosures have been and will continue to be processed correctly.

In summary we're still awaiting a more meaningful economic recovery. We along with the industry are challenged on many fronts right now, investment yields, fee income, earning asset growth, increased regulatory burden and persistent credit issues. Despite all of those factors, we were still able to increase our earnings this quarter. I believe that it's a tribute to the resolve and competitive spirit of our 3800 team members, many of whom are also shareholders. Together they have risen to every challenge we've faced in the past and I know they will continue to do so in the future. Thank you for your attention and now I'd like to turn the call over to Phil Wenger for our credit discussion. Phil?

Thank you, Scott. As I said in second quarter, the recovery pace remains slow. During this quarter asset quality pressures persisted. We continued to take an active approach to problem asset management. We're taking actions to deal with situations particularly in residential construction where the ability to amortize within a reasonable time period is in question. As I will discuss, while the economy is impacting several segments of our portfolio to varying degrees, the construction portfolio remains our key challenge. We have worked to reduce this portfolio with the decline of over $435 million since the beginning of 2009 including nearly $60 million in this quarter alone.

Let me give you the specifics with regard to asset quality. My comments will be to the link quarter, unless I state otherwise. First regarding delinquency, as you saw on the chart on page six of the press release, we had a 23 basis point increase in the third quarter of 2010. 30 and 60-day delinquencies were relatively flat. 90 and over accounts were the primary cause of the increase going from 2.65%, or $317 million to 2.87% or $343 million. Driving this work are additions to non-accruals, which I will discuss in a moment.

Regarding the mix of delinquencies we saw a reduction in commercial mortgage delinquency from 3.13% to 2.85%. This reduction was offset by increases in both commercial loans and residential loans. Commercial loan delinquencies increased from 2.58% to 3.08% of the portfolio. Increases were driven by loans with balances of $2 million and under from a variety of industries spread throughout our footprint. This reflects continued economic pressure on small businesses. Residential delinquencies increased from 8.36% to 9.19%

As I mentioned, the increase in overall delinquency was caused by an 8.1% or $26 million increase in nonperforming loans. Total nonperforming loans of $343 million at the end of the quarter up from $317 million as of the end of the second quarter. The nonperforming loan types that reflected the largest increase is construction loans. We moved several larger residential development construction loans to non-accrual. Two of which were current in terms of payment but where the pace of repayment or sales was not occurring at an acceptable level. We also saw increases in both commercial and residential mortgage and nonperforming loans, as noted in the press release, of $7.5 million and $6.4 million. These again are comprised of smaller accounts.

Turn to the geography of our nonperforming portfolio. It has not changed substantially from last quarter. The construction loan challenges remain in the southern portion of our franchise, specifically Virginia and Maryland. Commercial accounts are dispersed throughout the footprint and represent a variety of industries that are stressed given the economic challenges. Other real estate owned increase from $25.7 million to $30.2 million with the increase being driven by the addition of one account that is a residential construction project again in Maryland.

I'd like to make a few comments about our OREO portfolio. Since the beginning of 2010, we have sold 100 OREO properties with gains of $1.607 million and losses of $1.582 million resulting in a net loss position of $25,000, reflecting what we believe is an effective process. The average time a property was in our OREO portfolio during that time period was 7.8 months.

Trouble debt restructuring increased from $78 million to $87 million, decreases in commercial and construction loans offset by an increase in commercial mortgages and residential loans. Net charge-offs increased to $35.5 million from $28.9 million last quarter. $22.9 million of the total were construction loans with $19.4 million coming from four accounts, all of which were in Virginia and Maryland. Given the continued asset quality challenges, we determined it was appropriate to maintain our provision at $40 million. The net increase to our allowance for credit losses was lower than recent quarters reflecting our comfort with our coverage loans.

As Scott mentioned, I would like to provide some additional information about our residential mortgage foreclosure process. Much of the press has been focused on high volume servicing situations where individuals were processing thousands -- several thousand foreclosure actions on a monthly basis. Unlike those situations, our foreclosure actions year-to-date have averaged 32 per month. The foreclosure actions filed by us are on loans that we originate. Our employees are responsible for collecting and reviewing the loan documents, for authorizing the filing of each foreclosure action. We have reviewed our foreclosure process. We are confident that our employees are following that process.

Finally, regarding loan demand, it continues to be weak. Nevertheless we continue to have success in winning new relationships. We do note that despite continued reductions in our construction loan portfolio as well as regularly scheduled amortization, our outstandings have remained stable. Our new loan originations in the third quarter were slightly in excess of $300 million with approximately 30% coming from the C&I sector, where we have focused our calling efforts for the long-term high-quality relationships. These successes have offset our run off. Now, I will pass the discussion over to Charlie Nugent for his comments. 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 second quarter. As Scott mentioned, we reported net income available to common shareholders of $31.5 million, or $0.16 per share in the third quarter compared to $0.14 in the second quarter. The improvement in our earnings reflected a $7.2 million, or 17%, increase of non-interest income and $1 million, or 1%, improvement in net interest income. These improvements were partially offset by a $1.7 million, or 1.6%, increase in non-interest expenses. Our net interest margin was 3.81% for the third quarter as compared to 3.76% for the second quarter.

These reported margins were impacted by the delay between our common stock issuance in May and repayment of our TARP funds in July. The proceeds from the stock offering were invested short term until the TARP money was repaid. Had the offering and the TARP repayment occurred simultaneously, the net interest margin for the third quarter would have been 3.83% compared to 3.82% in the second quarter.

Our total cost of interest bearing liabilities decreased to 1.48% from 1.60% in the second quarter. Time deposit costs declined to 1.82% in the third quarter as compared to 1.93% in the second quarter. During the quarter, $1.2 billion of timed deposits matured at a weighted average rate of 1.59%, while $1.1 billion of certificates of deposits were issued at a rate of 1.14%. In the fourth quarter, $1.1 billion of timed deposits are scheduled to mature at a rate of 1.40%.

Federal home bank loan advances totaling $169 million matured in the third quarter at a weighted average rate of 4.82% with $80 million scheduled to mature in the fourth quarter at a rate of 3.74%. Yields on earning assets declined two basis points to 5.01% in the third quarter as compared to 5.03% in the second quarter. Average earning assets decreased $237 million. However, the majority of this decline, $152 million occurred in low yielding short-term assets. Average investments decreased $94 million while average loans were essentially unchanged.

Total average deposits increased $161 million, or 1.3%, in the second quarter. While this growth was 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 good growth in core demand and savings accounts with average balances increasing $295 million or 4%. This growth was partially offset by $133 million, or 2.6% decrease in average time deposits. Non-interest bearing demand deposits increased $61 million, or 3%, almost entirely in business accounts. Interest bearing demand deposits grew $110 million, or 5.4%, primarily in municipal accounts due to the timing of tax collections. Saves deposits grew $124 million or 4%. Of this amount $86 million was in personal accounts while $38 million was in business and municipal accounts.

Excluding net security gains, our other income for the third quarter increased $7.2 million or 17%. The increase in other income was driven mainly by mortgage sale gains, which increased $9 million or 295%. Mortgage loans sold increased significantly to $405 million in the third quarter from $270 million in the second quarter. Because of favorable market conditions, spreads also increased significantly.

In addition, during the third quarter we reviewed our methodology for determining the fair value of our mortgage banking pipeline, to properly recognize expected gains in the period when mortgage rates are locked in with the borrowers. This resulted in an acceleration of mortgage sale gains in the third quarter totaling $3.3 million, which was $0.01 a share net of tax. Service charges on deposits to create $730,000, or 4.7%, due mainly to the impact of Regulation E which we began to see in August. As we had expected, we are seeing approximately $400,000 to $500,000 reduction in monthly overdraft fee income. Other service charges and fees grew $115,000, or 1%, after increasing over 12% last quarter. Merchant fees were up $123,000 or 6%. Net security gains were $1.8 million in the third quarter compared to $904,000 in the second quarter.

Other than temporary impairment charges of $2.3 million on pooled trust preferred securities, at $480,000 on bank stocks were more than offset by realized gains of sales of debt and equity securities of $4.4 million and $210,000 respectively. Our investments in pooled trust preferred securities have a cost basis of $34 million and a carrying value of $10.9 million at the end of the third quarter.

Operating expenses increased $1.7 million, or 1.6%. Salaries and benefits decreased slightly $121,000, or 0.2%. This was the net affect of a $1.3 million increase in salaries and a $1.4 million decrease in benefit costs. Salaries increased due to the normal merit increases and the impact of our annual stock compensation grants on July 1. Benefits decreased mainly due to lower health insurance costs.

The other expense category increased $1.7 million mainly due to increased repossession and other real estate owned expenses. Our efficiency ratio improved to 51.7% in the third quarter from 53.1% in the second quarter. Okay thank you for your attention and for your continued interest in Fulton Financial Corporation. Now, we will be glad to answer your questions.

Thank you. Today's question-and-answer session will be conducted electronically. (Operator Instructions) And we'll go first to Frank Schiraldi with Sandler O'Neill.

Good morning.

Good morning, Frank.

Good morning, Frank.

Just a couple questions here. First I want to make sure I heard right. Phil I think you had said TDRs went from $78 million to $87 million link quarter?

Correct.

And then what, if you have it, what percentage of that is non-accrual?

One second, Frank.

(Inaudible) actually while your looking for that for Charlie--?

Sorry, Frank. The total TDRs that are non-accrual, Frank are $17 million. And--.

Then the balance--?

Looks like $20 million last quarter.

Got you. Okay, so $17 million non-accrual and $70 million accruing at the end of the quarter?

Yes.

Okay, thanks. And then I wondered if you could just maybe give us a little bit more color on the growth in NPAs link quarter on resi construction just in terms -- because I think you said there were several larger, so in terms of like the size of some of these loans and if it's land, or if it's improved land like whether it's-- if it's residential lots, just a little bit more color on that if you could?

Yes, it was primarily residential developments that -- or improved lots but not selling at a pace that we deemed to be satisfactory. And there were four of those particular developments that totaled $38 million.

Totaled $38 million, those four? Okay.

Yes.

Okay, so those are basically-- what is the size of one of those in terms of--?

Well -- and just to clarify, the four accounts totaled $38 million. The charge-offs against them totaled $12 million. So the net increase was $26 million. And the largest was $13 million and two were -- one was $11 million, one was $10 million and one was $5 million.

And just for example, on that $13 million, do you have any -- the sizes of that lot? Like how many lots are in that one piece?

Off the top of my head, I don't have that. But it's a large development.

Okay. And then I wanted to ask, Charlie, on the--talking about FHLB bonds that are going to mature in the fourth quarter. I mean given securities, what yield you can get on securities out there and the premiums you pay, would you expect to see sort of that $80 million roll off the balance sheet?

Yes, we would. Yes, so that whole $80 million will be repaid.

Okay, and I guess we'd see at least that amount in cash flows on the securities books. So we could assume securities book will continue to fall link quarter, balances?

I'm not sure. It's going to depend on rates and driven by economic conditions. But the investment portfolio did go down $94 million link quarter.

Right.

I wouldn't be surprised if it went down again but I'm not good at predicting.

All right and then I just want to make sure I got a number from you correctly in terms of CDs that mature in the third quarter, did you say those -- could you just go over those numbers again? I think you said 1.26.

In the third quarter, Frank, we had $1.2 billion of (inaudible) deposits mature and the weighted average maturity was 1.59%. We put 1.1 billion back on and they were issued at a rate of 1.14%.

1.14%, okay. That was the number I missed. Okay, great. Thank you.

Hi, Frank. Frank, this is Phil again before you sign off, the TDRs non-accrual at the end of the third quarter was actually $25 million. It went from $20 million to $25 million.

Okay. So we're still talking $87 million total, so minus $25 million, so $62 million is--?

Yes.

Accruing. Got you, thank you.

And we'll go next to Matthew Clark with KBW.

Yes, good morning, guys. On the CD front, can you update us, I may have missed the number if you gave it, the CDs maturing in the fourth quarter and of which rate?

Yes, in the fourth quarter, Matt, we have CDs maturing of $1.1 billion and the weighted average rate is 1.40%.

Okay, and you're issuing somewhere around that 1.14% still?

Yes.

On the construction portfolio, can you offer us some detail within that construction book as to what might be just for land, what might be partially developed, what might be completed and so forth?

What -- our raw land portfolio is now $85 million. Developed lots totaled $372 million. So the total of the two is $457 million. And $91 million of the $457 million is already in non-accrual.

Okay. And then the rest of the balance there I guess to get you to the $860 million something.

Residential and commercial construction, vertical improvement.

Okay. And then can you remind us your exposure to construction-related businesses within the commercial portfolio, how much that is again? And then just maybe talk to us about how that is performing, whether it be from a delinquency and non-accrual perspective or -- if possible?

Well, first off, our problems really have been centered on the land and development side. So the balance of the construction portfolio has performed fairly well. Checking to see if I can get specific numbers for you.

Do you have another question, Matt?

No, that's it for me.

Well, Matt, besides the construction portfolio, we do have C&I loans totaling $350 million to construction-related businesses. And that has been performing pretty well to date. I don't have specific delinquency numbers.

Okay, that's fine. Thank you.

And we'll take our next question from Rick Weiss with Janney.

Hi, good morning.

Good morning, Rick.

Good morning, Rick.

I was wondering if you could talk a little bit more about the mortgage banking? And I'm probably sure I don't really understand fully, but the early recognition. And also why it jumped up so much this quarter and what to expect going forward?

Rick, the -- we had a change in accounting treatment. Our methodology before was we booked our gains when we sold the loans and there was never a material difference between booking it when we sold it and booking it when we locked in the rate with the customers. And we like to do it based on when we sold them because -- just because a customer locks in a rate, we might -- if the rates don't go down, he may not go through with that commitment. But now there's a higher volume so we decided to book it based on when the customer locks in the rate. And that's the way from an accounting standpoint it should be done. And even what it does, it shifts -- we're recognizing the income in our pipeline more quickly and we recognized $3.3 million which was $0.01 net of tax.

And the other part of the mortgage banking income, our volume increased to $405 million from $270 million. We had a 50% increase in volume and our spreads went up to 218 from a 113 which was an increase in spreads of 93%. Pipeline continues to be strong.

Okay, so then as long as the pipeline is strong and you're not actually -- so like the fourth quarter you could still see the early recognition too?

Yes, that's right. Rick, we're just moving it up two to three months faster.

Okay.

And it won't have any negative affect on the fourth quarter unless people walk away from their rate locks. And we assume the pass through rate of 70% would go through with the rate locks, and we think that's pretty conservative.

Okay, got it. And also, was there any change in the economic activity whether it was in terms of deterioration or actually better origination from the beginning of the period to the end? Was there any major changes at all?

In mortgages?

Or no, just like in terms of loan demand or like asset quality. Anything happen over the summer that materially changed from the beginning to the end?

Well, Rick this is Scott. As we have been talking about, this economy just stalled in May. And it hasn't changed significantly since then at least from what we can see anecdotally and from what the numbers we're getting. So as I mentioned in my comments, credit costs stayed elevated because we're in this environment where there just is not enough growth to get things moving again.

Now it is moving in the right direction and we hear positive things here and there about the economy, but none of them add up to what I would call a significant improvement in economic conditions. And as long as we have that slowness, we have concerns about credit. Because it takes a little more momentum than what we've got now to help some of these marginal credits to get themselves in the position to pay again. So there you are.

Okay. And I guess my last question might be a bit more optimistic, and if you could talk about the dividend and when you see like a dividend increase coming?

Well, what I've been saying most of the year, is several things need to happen before we can, in our minds, realistically look at a dividend change. One of those was repayment of the tarp and the associated warrant, that has happened. The other is we need to see some improvement in earnings, that's happened to some extent. So that's a positive sign. We need more clarity on capital. We have some that got issued in September, I guess that gets finalized in November when they all meet and hopefully we will get some fairly rapid response from the US regulators and our regulators in particular about what that all means to us. And the most important thing I think finally is the economy and how it impacts credit. If we get more comfortable -- that this expansion, albeit fairly slow, is in track and will continue going forward that we don't have to be concerned about what it may do to credit and ultimately our capital, then I think we can look favorably toward restoring the dividend.

So I think right now we await a little more clarity on capital requirements and a little more confidence in the economy. We know our shareholders appreciate dividends and we've always been a fairly good dividend payer. Our payout ratio right now is below where our historical standards were in normal times. So those two things get a little more positive and I think you can look toward some improvement. But I don't know -- can't give you a time frame on that.

Okay, fair enough. Thank you.

Thanks, Rick.

And we'll go next to Matt Schultheis with Boenning & Scattergood.

Good morning, gentlemen.

Good morning, Matt.

Quick question for you, can you quantify any potential cost saves that will come out of you taking your two subsidiaries and merging them into one and combining back offices et cetera?

Well, there will be a very little cost savings in that merger of Delaware National. It's one of our smaller banks and we've centralized most of those functions. So there will not be significant cost savings.

Okay, about what I expected but just wanted to make sure. And as far as the mortgage banking is concerned, and I understand that you're not really affected by the big servicer problems that are going on, are you seeing any decrease in requests or closure rates for purchases? Particularly as people may be having some trouble getting title insurance or purchasing OREO properties, any disruption at all or is everything smooth sailing for you guys?

Well, regarding the purchases, there's no question that the percent of the mortgages we are underwriting now is far less for purchases and much higher for refinancing. And that all happened in the May to June time frame is when that started flipping. The first five months 70% of the mortgages that we underwritten were for purchases, 30% were for refinances. And in the last three or four months it's completely changed and 70% are for refinances and 30% are for purchases. I would say the primary reason is a slow down in purchase activity. We do have some situations. Title insurance has not been a problem but appraisals do cause some folks who want to purchase, it causes them not to be able to. I would not say it's significant but it definitely happens.

And do you think this pace of refi activity that you're experiencing, that the industry in general is experiencing, is likely to cause significant prepayments on your mortgage-backed securities portfolio?

Well, it has -- the prepayments have increased and I'm surprised they haven't increased more.

Okay.

The -- I -- we've been holding our earnings asset yields, we mentioned our 501 they were down 2 basis points from the second quarter. They've been holding in there, I'm surprised they haven't been coming down faster.

Okay. Thank you very much.

Thank you.

(Operator Instructions) We'll go next to David Darst with Guggenheim Securities.

Good morning.

Hi, David.

Dave.

Phil, when you gave us the details for the raw land and developed lots you indicated that total was $457 million.

Right.

Were you attributing all of the $91 million of residential construction NPLs that you gave us to that portfolio and not to commercial construction?

Yes, the $91 million that I gave you is specifically to that $457 million.

Okay, so then your commercial construction portfolio is performing relatively well?

Yes, absolutely.

Okay. And then on the residential NPLs, the $52 million, how much of that would you consider Fulton Bank Pennsylvania or -- as opposed to something that was legacy from maybe resource mortgage?

I'd say a large percent. I don't have the exact percent for you but -- or I may in a minute. But it's from a resource mortgage would be our largest percentage.

And is that increase one that you're still purchasing or do you actually have a portfolio of resource on balance sheet?

We have a portfolio on balance sheet.

Can you give us the amount of that portfolio?

Give us a minute, we're checking our number here.

Okay.

Do you have another question, David, that you want to ask while they're looking?

Yes.

Hey, David?

Here we go.

Of the total $52 million, 7 -- or $18 million is from our -- the old resource, the Fulton Bank southern division.

Okay. And what's the amount of the loan balances that are still outstanding from that legacy portfolio?

$181 million.

Okay. And then from the $3.3 million that you pulled forward, can we all get any costs to that this quarter?

Say again, David.

Which $3.3 million?

The $3.3 million from accelerated mortgage banking.

No. No, that'd be recognizing the gains quicker and all the costs would remain the same.

Okay. So that -- but that's not a net number you'll incur compensation costs?

That's already in there. It's just -- the compensation costs are still in there, David and we're just booking to gain sooner. All the costs are the same.

Okay, great. Thank you.

You're welcome.

And we'll go next to Bruce Harting with Barclays Capital.

The CRE portfolio seemed to hold together better in the quarter. Any comments after the couple of loans that went bad in the second quarter there? And in terms of credit line utilization, I think in my notes I have normal is in the 40s, or high was in the 50s, how do you compare that credit line utilization in C&I versus CRE right now and what you're seeing there? Thanks.

Well, most of the credit lines that we have would be C&I. And the usage rates are remain in the low to mid 40s. 43% at the end of the quarter was flat. And help me with the earlier questions, I'm sorry.

Well, we saw a couple of loans, the printing and the vacation--?

Yes, as far as CRE.

And it seemed like this quarter was more of a construction lumpiness, whereas any comments you can make with trends going into 4Q?

Well, again, I would want to be careful because they can be lumpy and you never know what might pop up. But delinquency dropped in CRE and I think that was a good sign. I don't -- we feel I think okay with where we are there right now. But again I want to caution that something large could come back this quarter but right now it looks okay.

And then, Scott, you opened by talking about the opt in affect of August 15. I may have missed, did you give any specific numbers on what you ultimately saw? I think last time we heard your presentation, you said that of the people you were getting on the phone, 90% or so were responding positively. Did you refresh those data points or--?

Phil's got those numbers for you.

Bruce, this is Phil. We continue to get 90% opt in rate with the folks we talk to and we're up to 65% of the heaviest users, over 50% of the next group. If we look just at the month of September and every week it seems to be improving, but if you take our -- the net drop in revenue this September compared to last September, it annualizes to about $4.9 million. We have taken steps to offset that.

We have a three phase plan we've put into place. As far as increasing our fees across all our products where we think we can and still be very competitive, first phase has been put into place. That annual impact is a positive $1 million. Second phase will be put into place shortly. There's another positive $2 million. And then our third phase, we're going to wait and see -- to continue to see what happens on the overdraft side because we do think it's going to improve. And we want to see what the competition does and some other factors. But we have identified the possibility of another $4 million where we believe we could possibly if we need to, increase.

Thanks. And on -- since you seem to have a much more manageable foreclosure process and have that under control, do you have any comments on what you're seeing out in the industry or within your specific experience and database of 32 per month, any light you can shed on what percentage of folks are actually getting current again or is it a very small number? In other words, what percent of borrowers that go beyond say 90 days or 180 days have any chance of getting current again or getting through a loan mod? And is that kind of overstated in the press right now? I mean any light you can shed on that. Because the debate in the marketplace seems to be that there's a lot of folks in the pipeline who are at the bigger banks not being given the chance to get current or mod and just wondering if what you've seen in your experience since you have that under control? Thanks.

We try to be working with our customers before we get to the foreclosure process. Now, the actual properties that we foreclose on that end up at share sale is less than the 32. But I'd hesitate to say that it's a large amount. We're working very hard with customers before we get to that point.

Any ratio you could offer? I mean beyond -- what number of days would you say it's just highly unlikely that they'll be -- ability to become current?

I really, this is Scott, I really don't think that -- first of all because it hasn't been a significant problem, we don't have a real granular analysis of it. And I don't suspect you could project ours into others anyway.

Okay.

Any other questions?

No.

Okay, thanks, Bruce.

Thanks, Bruce.

And we'll go next to David West with Davenport & Company.

Good morning.

Good morning, David.

Just I guess Charlie for you, I guess on the net interest margin, net/net would you think -- it seems like the signs lead to at least stability and perhaps the potential for some increase in Q4?

Well, I'm a bad predictor, I'll tell you. But we tried to give you every number we could. And if I looked at those numbers now, I would say for sure that our costs of funds are going to go down. But I don't know what's going to happen with earning asset yields. I don't know if they're -- they've really been holding very strong and accommodation has produced nice improvement in the net interest margin. I don't know what's going to happen in the fourth quarter. I -- the cost of funds are going to go down and if we continue to hold the earning asset yields, it'll be stable at least, hopefully it'll be up.

You mentioned in Q4 that $80 million of the advances mature. Is there an upcoming quarter that you know of in 2011 where there's a significant number?

No, after that there's a big drop off. In the first quarter, there is -- there's more than I thought, there's -- the first quarter of next year it's $85 million and the second quarter it's $10 million and then it really drops off. You can get these from our (inaudible) numbers in the SEC filings. But there's one more good quarter, and then after that, there's a big fall off.

Very good. Kind of turning to the mortgage backing. You indicated the pipeline is still quite strong, or the spreads you mentioned well over 200 basis points in Q3. Is that type of a spread still available to you?

It's hard to tell. We try to link in the spreads. But that has been high compared to what we've had in other quarters. I would expect that to go down.

And I guess the last thing you mentioned, obviously overall loan demand remains very muted and you talked about some of your problems coming primarily from Virginia and Maryland. Do you see any pockets of lending encouragement ? And I guess particularly curious about any comments on your Pennsylvania and New Jersey markets.

I can't say we have any region that really is -- has any type of demand or new projects. And -- but we are spending a lot of time and effort on picking up market share and I'd say that also is true across the footprint and hopefully we'll continue.

Thanks very much.

Welcome.

Thank you.

And we'll go next with Collyn Gilbert with Stifel Nicolaus.

Hi, this is actually Travis Lan on for Collyn this morning.

Hi, Travis.

Just want to talk a little bit about the average loan yields that you're getting on your originations. I know you said originated about $300 million this quarter and about $90 million of that was in C&I. Just kind of where these yields are coming in?

Travis I think -- I don't have the number exactly but we originate a lot of loans and the yield -- the loan yield was constant between quarters. So I would say they're coming on at the same value as we have -- the same rates we have on the books.

Right. And then I guess just--?

I don't have the details for that $300 million that we originated.

And then can you just kind of compare a little bit about what the yields on these construction loans that are rolling off? I mean what are they kind of -- what are you losing on the earning asset side?

Well, for the -- I'm not sure. The construction loan portfolio, the overall yields are 420 so it's one of our lesser yields. So as that rolls off -- loans replacing would come on at a higher yield.

Okay. And then just two more quick ones--?

Travis, the overall loan yield for the second quarter was 535 and the third quarter was at 532. So the yield it's -- the rates are pretty consistent with what we already have in our portfolio.

Right. Right, okay. On the mortgage banking side, you said the pipeline was strong. Can you kind of give us an idea of how that compares to what it looked like coming into this most recent quarter?

No, I can't.

Okay.

It remains strong. I know how much we have in the warehouse, but I can't remember what it was to begin with.

And just kind of an idea of how long, once you book the loans, how long do you hold them before you actually sell them on average, do you have an idea about that?

I would say two or three months.

Two or three months, okay.

That's not going to be a big thing anymore because we're recognizing the gains right away when we lock in the rate with the customer.

Right, okay. All right, that's helpful. And then just kind of your remaining residential development exposure to Maryland and Virginia. Do you guys have those numbers?

Yes, one second.

Do you have another question?

No, that's actually it.

Okay, just give us a second, please.

Okay. For Maryland, Travis, and this is not broken out between land development and construction, this is just the total, $237 million and Virginia is $233 million.

Okay. Very good. All right, thank you very much, guys.

Thanks, Travis.

And we'll now take a follow up from Frank Schiraldi with Sandler O'Neill.

Hi, Frank.

Hi, just a couple of quick follow ups. I just -- I didn't see in the release, maybe I'm missing it, but was there -- I see 30 to 60-days delinquencies there, is there a 60 to 89-days that you have or you gave?

Well, no, that is the -- when we refer to 30, that's the 30 to 59 and when we say 60, that's 60 to 89.

Okay. So the category, where it says delinquency rate 30 to 60 days that's actually 30 to 89 days, is that what you're saying?

Yes.

Yes, the answer to your question is yes.

Okay. And then just on -- just to follow up on the mortgage banking again. I'm just curious, what drives -- what would drive the margin so much higher link quarter, is it economies of scale or am I looking at it the wrong way?

We're getting better spreads and better execution I would say. That's what normally would do it.

Okay. All right, that was it. Thanks.

Thanks, Frank.

And at this time, we have no further questions from the phone lines. So I'd like to turn the conference back over to Scott Smith for any additional or closing remarks.

Thank you. And I would like to end the call by thanking everyone for joining us today, we are hopeful that you will be able to be with us again in January. Thanks for your being here today.

This does conclude today's conference. Thank you for your participation.