Fulton Financial Corp (FULT) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fulton Financial third-quarter earnings conference call.

(Operator Instructions).

As a reminder, this conference call is being recorded.

And now I will turn the conference over to Laura Wakeley, Senior Vice President.

Please begin.

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 2011.

Your host for today's conference call is Scott Smith.

Scott is 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 announcements, which we released at 4.30 yesterday afternoon.

These documents can be found on our website at www.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 that statement and incorporate that statement into the 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 concessions and results of operations set forth in Fulton's filings with the SEC.

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

Thank you, Laura, and good morning, everyone.

It is good to have you with us.

After some introductory remarks, I will turn the call over to Phil Wenger and Charlie Nugent to discuss credit and financial details.

Our earnings continue to improve in the third quarter.

We reported diluted net income of $0.20 per share, an increase of 11% over the second quarter and a 25% increase over the third quarter of last year.

The number of items and trends we reviewed last time contributed to our solid results again this quarter.

These include our improved ROA, strong non-interest income from mortgage sales gains, a further decrease in the provision for credit losses and a reduction in funding costs due to our stable core deposit base.

We will discuss each of these in more detail.

In our last call, I said that during this extended period of slow economic activity we are focused on managing our assets effectively to generate increased earnings-per-share and not growing assets by taking undue risk.

In the news release, you saw that we increased our return on average assets again this quarter by 6 basis points to 0.97%.

I also mentioned the importance of our return on equity last time.

This quarter we saw improvement in both our returns on common and tangible common equity.

Our capital position remains strong.

We intend to deploy that capital profitably for the right opportunities at the right time.

However, until we see stronger indications that the economy has rebounded and until those right opportunities present themselves, we will build capital through organically generated retained earnings and deploy it prudently to support future organic growth and potential future dividend increases.

Residential mortgage sale gains contributed nicely to non-interest income again this quarter.

The persistently low interest rate environment, along with our excellent reputation as a mortgage lender in our markets, has enabled us to maintain a steady level of both refinance and purchase activity.

Our reputation is also helpful as we seek to attract and hire additional mortgage originators throughout our footprint to help us grow our mortgage business.

You will also recall last quarter we talked about the traction we saw in our investment management and brokerage businesses.

This quarter those lines were negatively impacted by the recent market volatility and by a reduction in new brokerage account activity.

In the credit area, we were pleased to see a reduction in our provision for credit losses this quarter.

In the past we have used the word lumpy to characterize our return to stronger asset quality metrics over time.

We believe that description is still appropriate.

Phil will provide more credit detail in a few minutes.

As you know, we are fortunate to operate in relatively strong markets where our customers provide us with a stable base of core deposits.

As a result of our corporate asset liability focus and reduction of time deposit balances over the last several quarters, we experienced a further reduction in funding costs.

However, at the same time, we saw a reduction in asset yields that lead to a slight margin compression this quarter.

Spread management has been and remains one of our key corporate priorities.

Charlie will provide more financial details later in the call.

A portion of our growth in core deposits throughout the year has come from the small business sector.

Aggressive sales and promotional initiatives have enabled us to grow existing relationships and attract new ones.

Internally generated data indicates that we have grown our commercial customers by over 5% year over year.

On the regulatory front, Dodd-Frank changes to Reg Q now allow financial institutions to pay interest on business accounts.

In response, we introduced a number of new business account options.

However, as we anticipated due to low interest rates, this change has been a non-event.

Another important regulatory matter, after a brief postponement, the Durbin interchange amendment under Dodd-Frank went into effect on October 1.

It will reduce our debit card interchange revenue to approximately one-half of what it was previously.

Changes have been implemented to mitigate some of the impact of this lost income, and these fee increases are one of the many unfortunate unintended consequences of the act.

Other potential changes will depend on actions taken by competitors and consumer response to those announcements.

Over the last several months, we have been working out the details for our upcoming merger of our two New Jersey affiliates, the bank in Skylands Community Bank into the Fulton Bank of New Jersey.

The merger will take place on Saturday, October 22.

Joining these two banks makes us the Garden State's third largest commercial bank, while at the same time reducing our number of affiliates from seven to six and down from a high of 15 several years ago.

Our entire New Jersey team is excited about the prospects of competing under the highly regarded Fulton Bank brand.

While we expect to gain some increased efficiency with this merger in the areas of marketing, media purchase and operating expenses, our already excellent operating efficiency keeps those savings somewhat modest.

Speaking of expenses, you saw that they were up slightly more than you might expect from us this quarter.

Some of this increase was the result of some non-reoccurring items.

I would like to conclude by giving you a capsule summary of our current corporate priorities.

First, we will remain steadfastly focused on ROA improvement.

Second, we will closely monitor and respond to pressure on our net interest margin.

Third, we will leverage the growth opportunities available to us throughout our footprint to increase our base of relationship customers, particularly from the small business sector where our relationship management strategy and high touch personal banking create competitive advantage.

Fourth, we will continue to prudently manage asset quality to reduce the related credit costs.

Fifth, we will continue to build our already strong capital base while remaining poised to deploy that capital profitably.

Finally and ultimately, we will continue our focus on the growth of our earnings-per-share.

Phil and Charlie will provide details on the second-quarter credit progress and on our second-quarter financial results.

When they conclude, all three of us will be happy to respond to your questions.

Phil?

Thanks, Scott.

We saw improvement in several credit metrics this quarter -- nonaccrual balances, additions to nonaccrual loans, net charge-offs and loans modified under troubled restructurings, all declined.

The reductions this quarter reflect our ongoing efforts to reduce problem assets and maximize recovery.

In light of this performance, we reduced our loan loss provision by $5 million for the third quarter from $36 million to $31 million and maintained our levels of allowance for credit losses even with last quarter, both in total dollars and as a percentage of total nonperforming loans.

Now let me give you some specifics.

My comments will be linked-quarter unless I indicate otherwise.

First, with regard to delinquency, as you saw on the chart on page five of the press release, we saw a 12 basis point or $16 million increase in overall delinquency.

31 to 89 day delinquencies increased 14 basis points.

90 day and over delinquencies declined by 2 basis points.

90 day and over accounts include $41 million of loans greater than 90 days past due and accruing and $260 million of nonaccrual loans.

The over 90 day accruing loans increased by $5 million from $36 million with the increase driven by residential mortgages.

Non-accrual loans declined $6 million.

Increases in commercial mortgage and consumer loan delinquency of $12 million and $14 million drove the delinquency increase.

As I mentioned, additions to nonaccrual loans declined this quarter.

In each of the first and second quarters of this year, we added approximately $80 million of nonaccrual loans.

In the third quarter, we added just under $52 million to non-accrual loans.

While the slight increase in delinquency causes some level of concern, we are pleased with this reduction in new non-accrual loans.

Recall that our non-accrual loans are reduced by resolutions, sales and charge-offs.

Net charge-offs were $30.8 million or 1.04% of average loans on an annualized basis as compared to $38.5 million or 1.3% of average loans in the second quarter.

We kept our provision level with charge-offs and maintained our reserve.

Recall that during the first two quarters of this year, we had slight provision releases.

Our provision of $31 million maintained our allowance for credit losses at $268 million and our coverage of nonperforming loans at 86.5%, even with last quarter.

As we have mentioned throughout the last two years, our construction balances have declined considerably from a high of $1,444,000,000 in December of 2006 to $648 million as of the end of this quarter, down from $682 million last quarter.

The pace of decline has slowed from a reduction of 9% last quarter to 5% this quarter.

We may continue to see reductions to our construction loan balances in the short-term given the lack of housing demand.

However, as we mentioned last quarter, we have achieved a construction loan exposure level with which we are comfortable.

Troubled debt restructurings totals declined to $117 million from $121 million.

Of this total, $68 million or 58% are accruing loans versus $77 million or 63% last quarter.

Non-accrual TDRs increased this quarter as a result of entering into a forbearance plan with a $5 million construction account that had already been classified as nonaccrual.

The remaining loan types within our TDR bucket all reflected declines from last quarter.

Now moving to loan demand and activity, loan demand remains quiet as evidenced by our commercial line usage remaining flat with last quarter at 44%.

Average outstanding loans increased by $4 million.

We are replacing our normal runoff, as well as construction loan reductions through new loan generation.

Our year-to-date new loan originations are $1,240,000,000 as compared to $1,160,000,000 last year this time.

This increase is being driven by our teams of seasoned relationship managers taking advantage of market opportunities.

General market conditions remain stable in Pennsylvania, Maryland, Northern Delaware and Virginia.

Conditions remain challenging in New Jersey.

With regard to mortgage activity, applications were up significantly from the second quarter at $713 million versus $477 million.

Closings increased to $375 million from $302 million in the second quarter.

The pipeline is up to $396 million from $215 million last quarter.

71% of the pipeline is refinancing activity.

So, in summary, several of our credit metrics improved.

We remain highly focused on trends and indicators in this somewhat volatile market.

Now I will turn 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 of 2011.

As Scott mentioned, we reported net income of $0.20 per share for the third quarter, up 11% from the second quarter.

Net income was $39.3 million in the third quarter as compared to $36.4 million in the second quarter, a $2.9 million or 8% increase.

The improvement in our net income resulted primarily from increases in both net interest income and other income and a decrease in the provision for credit losses.

These improvements were partially offset by increases in operating expenses and income taxes.

Our net interest income increased by $848,000 or 0.006%, mainly due to one additional day in the quarter.

A slight increase in average earning assets was offset by a decrease in our net interest margin.

Our net interest margin declined from 3.95% in the second quarter to 3.93% in the third quarter.

The total cost of interest-bearing liabilities decreased 1.12% from 1.19% in the second quarter.

The cost of interest-bearing deposits declined to 0.78% in the third quarter from 0.87% in the second quarter with decreases seen in all deposit categories.

During the third quarter, $871 million of time deposits matured at a weighted average rate of 1.08%, while $829 million of certificates of deposits were issued at a rate of 0.63%.

In the fourth quarter of 2011, $780 million of time deposits are scheduled to mature at a weighted average rate of 0.90%.

Yields on average earning assets decreased to 4.80% in the third quarter as compared to 4.88% in the second quarter.

Average earning assets increased $40 million.

Average investments decreased $10 million or 0.004%, while ending balances increased $114 million or 4%.

During the third quarter, purchases of investment securities exceeded payoffs and maturities.

We continuously monitor both our portfolio of holdings and current investment alternatives in making purchase or sale decisions.

Average total loans were essentially unchanged at $11.9 billion.

Increases in commercial mortgages, residential mortgages and commercial loans were offset by a continued decline in the construction portfolio.

Average deposits increased $20 million with $149 million or a 2% increase in demand on savings deposits being largely offset by $129 million or a 3% decrease in time deposits.

Non-interest-bearing demand deposits increased $104 million or 4%, mainly in business accounts.

Interest-bearing demand deposits increased $72 million or 3%, almost entirely in municipal accounts.

Savings deposits decreased $27 million or 1% with a $58 million decrease in personal accounts being partially offset by a $25 million decrease in municipal accounts.

Our other income from the third quarter increased $1.6 million or 3%, excluding the impact of security gains and losses.

Increases in other income included mortgage banking income, which increased $1.9 billion or 31% and service charges on deposits, which increased to $832,000 or 6%.

Mortgage banking income increased primarily as a result of an increase in volume as rates declined during the third quarter, leading to an increase in refinance activity.

The increase in service charges on deposits included a $360,000 increase in overdraft fees and a $345,000 increase in service charges.

The service charge improvement was due to an increase in certain fees.

Certain categories of other income saw decreases in the third quarter as compared to the second.

Investment management and trust service income declined $724,000 or 7% due to lower asset values, lower brokerage transaction volume and a decrease in insurance commissions.

Other service charges and fees decreased $202,000 or 2%.

Other income declined $202,000 or 4%, primarily due to lower gains on other real estate sales.

Total debit card income was $4.5 million in the third quarter.

Under the revised pricing guidelines, which became effective on October 1, this income would have been approximately $2.2 million less.

Operating expenses increased $4.1 million or 4% in comparison to the second quarter.

Salaries and benefits increased $2.9 million or 5%, including a $1.8 million increase in stock compensation expense as a result of our annual grant made in July.

A significant portion of the grant value was expensed during the quarter.

The amount expensed related to employees meeting vesting requirements.

On an ongoing basis, quarterly stock option expense is expected to exceed second-quarter levels by approximately $190,000.

Total full-time and part-time salaries increased $580,000 or 1.5%, primarily representing [earned] increases.

Commissions increased $750,000 due to higher mortgage loan volume.

Other real estate and repossession expenses increased $695,000 or 27%, mainly due to higher carrying costs.

Total losses on other real estate sales were approximately $170,000.

Other real estate gains, which totaled $722,000 for the third quarter, are included in other income.

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).

Frank Schiraldi, Sandler O'Neill.

Just a few quick questions if I could.

I wondered first on interchange fees, Charlie, I'm sorry I missed it, you said $4.5 million for the quarter, and what was the expected run-rate going forward?

Well, if we applied those new pricing guidelines to the third-quarter income, it would have been $2.2 million less.

Okay.

It is hard to estimate the fourth quarter because we don't know what growth is going to be.

But growth has been very strong.

So it has still been running around I think what you gave us before, around $8 million a year in terms of the expected hit from Durbin.

I think you had mentioned before that you had identified 50% in offsets to that.

I'm just wondering how much of that -- of those offsets are now in or were in 3Q numbers?

This is Phil Wenger.

All of them should have been in beginning in September.

Okay.

So it is all in at least the month of September.

And then do you have a sense of how much was in there before that?

Was there very little or --?

I would estimate that a little less than half was in prior to September.

And I guess that is in the form of just overdraft and other fees?

Well, not in overdrafts, but it would be in deposit-related fees, and we also reduced the debit rewards program.

Okay.

So the increase in overdraft quarter over quarter, does that reflect any change or just maybe collecting more of a percentage?

It was probably -- I'm not positive.

It may be a seasonal thing, but there were more overdrafts in the third quarter than there were second quarter.

Okay.

A question on the residential loan side in terms of increased delinquency we saw there.

Can you be more specific in terms of geography?

I think so.

One second.

And I guess I had the same question for municipals in terms of municipal balances that you are adding in the quarter on the deposit side.

Well, the municipal balances on the deposit side, I think, are spread across all geographies.

Okay.

And maybe while you are looking for that, my final question was just for Charlie.

I just wanted to ask about the margin and opportunities there.

I don't know if there is any specific opportunity that you see maybe in the future here in the short-term to pick up some spread through delevering strategy?

That is a tough one, Frank, but we know our cost of funds is going to continue to go down.

The cost of deposits went down 7 basis points.

I think our cost of deposits continue to go down because we know we have $780 million in CDs maturing, and the weighted average rate is 90 basis points.

We think we will keep those CDs between 50 and 60 basis points, so we are going to have a nice reduction in cost of funds.

And the tough one is on the earning assets.

In the quarter, our loan yields were down 7 basis points.

That will probably continue.

And our investment yields were down 12 basis points, and we expect that to continue.

If I had to guess, we are going to have modest margin depression, I would think, similar to that from the second to the third quarter.

You know, I don't have a crystal ball, but I would think we are going to have modest compression again.

And Frank, on the residential mortgage delinquencies, the largest increase was in the state of Virginia.

State of Virginia?

Okay.

Okay.

Great.

Thank you.

Bob Ramsey, FBR.

This is [Tom] for Bob.

I just had a couple of questions.

On the construction runoff, how much of the runoff went into CRE this quarter?

I think last quarter you guys had some transfers into CRE.

This quarter there were very few transfers to CRE.

It was predominantly paydowns on the residential development side.

Okay.

So a lot of that CRE growth was all organic?

That is correct.

Okay.

And then on the expense side, beyond the accelerated stock compensation increase, what is your outlook for the run-rate going forward?

I mean if we back that out and then add the $190,000, you said that gets you to about $57 million on a quarterly run-rate?

For salaries and benefits?

Yes.

Yes, boy, that is more of an art than a science, but the operating expenses for the quarter were $106,600,000.

If I back out what I think is unusual, that would come down to $103,400,000.

I think the run-rate, if I was going to estimate one going forward and it is tough to do, because of a lot of things in here, the ORE expenses, there are a lot of things that really fluctuate.

But if I had to guess, I think a conservative guess would be the run-rate would be between $104 million and $104,500,000.

That would be my guess.

But, you know the ORE expense, a lot of this stuff is just it jumps all over the place.

(multiple speakers).

It is not consistent every quarter.

Craig Siegenthaler, Credit Suisse.

I just wanted to dig a little bit deeper into some of the NIM trends here.

First, just when you think about the loan yields, you know, they were down 6 basis points on the quarter.

I'm just wondering what was the impact there from the lower long end of the yield curve in the quarter, and what was the impact from tighter spreads on new business?

I will let Phil answer the thing about tighter spreads on new business.

I don't think they are tighter.

But, you know, the NIM curve has not come down that much since August.

That meeting August 9, that is when we had the drop in the curve flattened, but even with this operation twist, it has not been affected that much.

So I don't -- it has not been affected much by the yield curve, I don't think.

Is that because your loans are more focused and more tied to the short end of the yield curve?

I think so.

Most of our -- a fixed-rate loan for us would be five years, and a lot of our loans float.

The majority of them.

And maybe while he is getting that, if I could just talk about the CD balances, too.

You threw out some numbers, and I did not get the total results there, but when you think about the fourth quarter, what is the level of CDs repricing, and what yield are those CDs that are coming off?

What is the yield of those CDs?

$780 million in CDs are maturing in the fourth quarter, and the weighted average yield is a 0.90%.

And we would expect that we could keep most of those between 1.5% and 1.6%.

So it is coming off that, you said 1.9%, or is it 0.90%?

0.90%

And you are going to keep them at 1.5% if they are going up?

No, we are going to keep them at 0.5% -- (multiple speakers)

Okay.

Got it.

My question, if the yield is so low that it is coming off 90 bps, why is the consolidated CD yield when I look on your disclosures in the press release 1.49%?

Why is it so much higher?

There is a lot of kind of longer-term CDs on there that are not coming off?

Yes, a lot of the CDs that come off are shorter-term, yes.

Okay.

And then final question was on other interest earning asset growth.

I imagine that your CD growth was good -- I'm sorry, your overall deposit growth was good, better than your loan growth, so you put some of that into short-term liquidity.

Is there any ability to dispense some of that into higher yielding assets?

Yes, you know, a lot has come in in Fed funds.

We had a lot of deposit growth.

If you look ending second quarter to ending third quarter, we were up $367 million in deposits.

A lot of that went into Fed funds, and we are starting to deploy that a little bit.

What we are doing is we are buying more mortgage-backed securities that are 10-year amortization, and that is where it has been.

It is going to be taken out of and it is being taken out of Fed funds and moving it into mortgage-backed securities.

And last question, what is the direction of your securities portfolio now?

Let me look here.

Just give me a second.

I want to give you an exact number.

Do you have another question while we are looking for that?

It is 3.9 years, but it would be [four], and because we usually buy -- in the past we bought 15 and 20-year mortgage-backed securities, we are not doing that anymore.

We are buying 10-year mortgage-backed securities, and those mortgage-backed securities have a 10-year amortization, but the average life will be dropping.

Mike Shafir, Sterne, Agee.

I was just wondering, you guys did show a little bit of loan growth this quarter.

This is the first quarter in 2011 where you have been able to have some net growth.

I'm just curious about the volume that you had on the residential side because that was the loan category that was up the most.

Is that a conscious effort to book some of that and manage rate risk, or I mean how do you think about -- if the pipeline continues and I guess you had mentioned that the pipeline is on pace or at least so far into the fourth quarter on the mortgage side, will you continue to build that particular loan category as well?

If I can answer that, the growth in residential mortgages was all in adjustable-rate mortgages, and we have always kept those.

So all that growth was in adjustable-rate.

Okay.

And then the real question is, as the construction portfolio -- the declines start to slow down a little bit, do you think we could see similar net loan growth next quarter?

You know, that is tough.

I would not say our backlog is -- it is at the same level that it has been in in past quarters.

You know, it is a battle.

It is possible, but I don't think we are optimistic that there is going to be a lot of loan growth.

Okay.

And just for clarity, on the debit card, the $4.5 million, in terms of the line item that that is reflected in, that is under other service charges and fees?

Yes, it is.

Collyn Gilbert, Stifel Nicolaus.

Actually, you know what, guys?

I am set that.

All of my questions have been answered.

Thanks.

Rick Weiss, Janney Montgomery Scott.

Just maybe a little bit more color on the nonperforming assets.

It is relatively stable.

Do you think it is going to stay that way for the foreseeable future?

Just where do you think it is going to go?

Well, I will start from 50,000 feet.

We have been saying forever it seems like it is going to be lumpy.

Given the economic situation we are in, I think it is going to be lumpy.

We don't expect huge swings positive or negatively in the next several quarters.

But there is not enough momentum in this economy to expect a significant improvement any time soon.

Phil, anything to add?

I would agree with that.

We continue to work very hard to reduce it.

But until there is a marked improvement in the economy, I don't know that we are going to see big moves either way.

Okay.

And I guess can we infer that because like the MPAs stay the same, but your provisioning looks like it is still coming down, that you are pretty comfortable where your loan loss reserves are at this level, or would you expect reserves to come in a little bit more?

Given what we know now, we are comfortable.

And we are a conservative company, so we will watch it carefully as the fourth quarter unfolds and make our decisions then.

But we feel like we have adequate reserves right now.

And, Scott, a good way of modeling just to simply match charge-offs to the provisioning going forward since you are comfortable today?

Well, you know, at some point in time, I think we are going -- I hope we are going to feel like we can eat into that provision a little as the economy improves, and our forecasts for charge-offs and problem loans looks better.

So I mean that is an ongoing process that, frankly, we look at monthly.

And it is hard to forecast given what most people predict, and that is this economy just keeps to slug along the way it is going.

And if there is a recession, then look out, but most people don't think there is one coming.

So I think just quarter to quarter.

Okay.

And just to change gears a little bit, with regard to the loan, can you talk a little bit about the competition and what's going on in pricing?

Yes, pricing on the C&I side is very competitive.

So if you want business, you have to be competitive.

It is definitely decreasing.

Still would that be like the main reason why the loan yields are going down rather than the actual curve itself?

Because I think, as you pointed out, most of your loans are five years or less, and that has not really changed.

I would say that that would be true.

Yes.

Mac Hodgson, SunTrust Robinson.

Phil, I wonder if you could elaborate on loan demand.

I know you said demand remains quiet.

Are there any pockets of strength geographically or by industry segment?

Well, geographically Pennsylvania, as we have said, consistently has done better.

I would say there is slightly more demand in Pennsylvania.

New Jersey remands our toughest market, and there is less demand in New Jersey and more problems I would say, and then Virginia and Maryland kind of fall in between.

And was there a second part to that question?

Just industry types that are showing demand like is it coming from healthcare, stuff like that?

On the C&I side?

Yes.

I really could not identify any particular industry that is stronger than another one.

Okay.

Charlie, a couple of questions.

By chance would you have the CD maturities beyond the fourth quarter?

Yes, we do.

And just kind of where they are going on -- (multiple speakers)

In the first quarter of next year, it is $704 million, and the average weighted yield would be [1.07%].

And, in the second quarter, it would be $613 million, and the weighted average yield would be 1%.

And in the third quarter, it is $555 million at a [1.22%].

Great.

Also, next year it comes into play, the advances, the Federal Home Loan Bank advances start maturing, and in the first three quarters of next year, there is $102 million maturing, and the average yield on those is over 4%.

So that will help us, too.

The FDIC insurance costs were a little higher, not a huge deal, but I think $0.5 million higher.

Is this the better run-rate?

You have catchups on that, too, where we fined the calculations.

I would think the run-rate would be about $400,000 less.

Okay.

So that is kind of -- yes, $400,000.

And then not to beat a dead horse, but on the Durbin debit card, I know -- I just want to be sure I understood -- I know historically you had said $8.8 million annual negative hit, which matched what you said this quarter and that you identified $8 million of offsets.

And I just want to be sure I understood how much of the offsets are currently in the third-quarter fee income numbers?

Well, in place about half the offsets are in place.

And are the offsets in the same line item that you report?

Not necessarily.

Not necessarily?

Okay.

Okay.

So basically we could see that the fee income come down $2.2 million, but then maybe slowly come up as you put some of these offsets into place?

Well, we have about half the offsets in place, and I don't anticipate further offsets prior to the first quarter of next year at the earliest.

Okay.

I appreciate it.

Thank you.

Matthew Schultheis, Boenning & Scattergood.

Most of my questions have been answered, so these will be pretty brief.

We talked a little bit about pricing.

How about the covenant side of that equation?

Are we seeing reductions in covenants?

On C&I loans?

C&I, commercial real estate.

I would say slight reductions.

Nothing major.

I think it is terms are remaining pretty steady.

Yes, so compared to, say, 2006 or 2007, they are tighter still?

Yes.

(multiple speakers)

Considerably?

Yes, that would be correct.

And the increase in delinquencies, can you address how much of that is from paper that you have already modified in some way whether classified as a TDR or whether it is not classified as a TDR?

I would say most would not have been classified TDRs.

Okay.

And so was the increase in delinquencies this quarter tied to previously modified loans or were -- (multiple speakers)

No.

(multiple speakers) or was this new?

Okay.

(Operator Instructions).

Casey Haire, Jefferies & Co.

My question is on loan runoff.

I think earlier in the year you guys said said that you guys were running off loans at around $300 million a quarter.

I was wondering if you can give an update on that number?

And then is it a number that is going to grow over time, or is it pretty steady state?

That number varies quarter to quarter.

That was our average last year, $300 million.

This is Charlie.

I don't know what it is right now.

I'm sorry.

Okay.

And then just lastly, could you give us an update in terms of what you guys are seeing and hearing in terms of the M&A market in your environment just given the challenges from low rates and coming regulation?

Is there seller fatigue picking up?

I would say it has been about the same as it has been.

We get an occasional call.

Most of those calls are related to stressed situations.

There has been some talk of -- volatility in the stock prices in August and to date has made the deal discussions, I think, a bit subdued because it is awfully hard to know if you are a seller what you are getting and if you are a buyer what you are paying.

And so I think there is continued volatility in the markets, but with the economy where it is, I think a lot of the healthier banks are on hold.

But having said that, you never know who is calling this afternoon.

Thank you.

This ends the Q&A portion of today's conference.

I would like to turn the call over to Scott Smith for any closing remarks.

Well, I would like to thank you, too, and end the call by thanking you again for joining us today.

We hope you will be able to be with us when we discuss fourth-quarter year-end 2011 earnings on Wednesday, January 18, 2012.

Wow!

It is here already.

Thanks, again.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.

You may now disconnect, and have a wonderful day.