Fulton Financial Corporation (FULT) Q3 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to Fulton Financial Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. And now I'll 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 the 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. On this call, representatives of Fulton may make forward-looking statements with respect to Fulton's financial condition, 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 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 condition 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. It's 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 noninterest income for mortgage sale gains, a further decrease in the provision for credit losses and a reduction in funding costs due to our stable core deposit base. We'll 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 is rebounding 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 refinanced and purchased 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've used the word lumpy to characterize our return to stronger asset quality metrics over time. We believe that description is still appropriate, so we'll provide more credit detail in a few minutes. As you know, we’re 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 yield that led 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. The 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've grown our commercial customers by over 5% year-over-year. On the regulatory front, Dodd-Frank changes to Reg II, and now allow financial institutions to pay interest on business account. In response, we introduced a number of new business account options. However, as we anticipated, due to low interest rate, this change has been a nonevent. Another important regulatory matter, if for a brief postponement, it's the Durbin interchange amendment under Dodd-Frank went into effect on October 1. It will reduce our debit card interchange revenue to approximately 1/2 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 2 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 2 banks makes us the Garden State's third largest commercial bank while at the same time reducing our number of affiliates from 7 to 6, 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. We'd like to conclude by giving you a casual 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 card risk and on our second quarter financial results. When they conclude, all 3 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. 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 5 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. Nonaccrual 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 to nonaccrual loans. In the third quarter, we added just under $52 million to nonaccrual loans. While the slight increase in delinquency causes some level of concern, we are pleased with this reduction in new nonaccrual loans. Recall that our nonaccrual loans are reduced by resolutions, sales and charge-offs. Net charge-offs were $30.8 million or 1.04% of average loans at 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 2 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 2 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 lag 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. Nonaccrual 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 the 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 we'll 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 to 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 0.6% 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 the 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 0.4%. Our ending balance has increased $114 million or 4%. During the third quarter, purchases of investment securities exceeded payoffs in maturities. We continuously monitor both our portfolio holdings and current investment alternatives to 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 continued decline in the construction portfolio. Average deposits increased $20 million with $149 million or 2% increase in demand of savings deposits being largely offset by $129 million or 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 a municipal account. 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 million 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 refinanced activity. The increase in service charges on deposits included a $360,000 increase in overdraft fees at 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 a decrease as 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 of insurance commissions. Other service charges and fees decreased $202,000 at 2%. Other income declined $202,000 at 4% primarily due to lower gains on other real estate sales. Total debit card income was $4.5 million for the third quarter. Under the revised pricing guidelines, which became effective on October 1, this income would have been approximately to $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 is expensed during the quarter, the amount expense 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 more [ph] increases. Commissions increased $750,000 due to a 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] Our first question is from Frank Schiraldi of Sandler O'Neill. Frank Schiraldi - Sandler O'Neill + Partners, L.P., Research Division: Just a few quick questions, if I could. I wondered, first, on interchange fees. Charlie, I'm sorry I missed it, but you said $4.5 million for the quarter, and what was the expected run rate going forward?

Well, if we apply those new pricing guidelines, Frank, to the third quarter income, it would have been $2.2 million less. It's hard to estimate the fourth quarter because we don't know what growth is going to be, but growth has been very strong. Frank Schiraldi - Sandler O'Neill + Partners, L.P., Research Division: So if it's still been running around, I think what you gave us before around $8 million a year in terms of the expected hit from Durbin. Well, I think you had mentioned before that you 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. Frank Schiraldi - Sandler O'Neill + Partners, L.P., Research Division: So it's all in -- in at least the month of September. And then, do you have a sense of how much wasn't there before that? Was there very little, or...

Yes. I would estimate that a little less than half was in prior to September. Frank Schiraldi - Sandler O'Neill + Partners, L.P., Research Division: And I guess that's in -- is that 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. Frank Schiraldi - Sandler O'Neill + Partners, L.P., Research Division: Okay. So the increase in overdraft quarter-over-quarter, is that -- does that reflect any change or just maybe collecting more of a percentage?

It's probably -- I'm not positive, it may be a seasonal thing, but there were more overdrafts in the third quarter than there were at second quarter. Frank Schiraldi - Sandler O'Neill + Partners, L.P., Research Division: Okay. 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. Hang on a second. Frank Schiraldi - Sandler O'Neill + Partners, L.P., Research Division: And I guess I have the same question for municipals in terms of municipal balances that you're adding in the quarter on the deposit side.

Well, the municipal balances on the deposit side, I think, are spread across all geographies. Frank Schiraldi - Sandler O'Neill + Partners, L.P., Research Division: Okay. And maybe while you're 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's any specific opportunity that you see maybe in the future here in the short-term to pick up some spread through delevering strategy.

Well, that's a tough one, Frank, but we know our cost of funds is going to continue to get down. The cost of deposits went down 7 basis points. I think our cost of deposits would 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'll keep those CDs between 50 and 60 basis points. So we're 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 vestment yields were down 12 basis points, and we expect that to continue. If I had to guess, we're going to have modest margin compression, I would think, similar to the -- from the second or the third quarter. I don't have a crystal ball, but I would think we're going to have modest compression again.

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

And next question is from Bob Ramsey of FBR. Thomas Frick - FBR Capital Markets & Co., Research Division: This is Tom Frick 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 in the CRE?

This quarter, there were very few transfers to CRE, it was predominantly paydowns, on the residential development side. Thomas Frick - FBR Capital Markets & Co., Research Division: Okay. So a lot of it -- that CRE growth was all organic?

That's correct. Thomas Frick - FBR Capital Markets & Co., Research Division: 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 backed that out and then add the 190,000 you said, that gets you about $57 million on a quarterly run rate?

For salaries and benefits? Thomas Frick - FBR Capital Markets & Co., Research Division: Yes.

Yes. Well, that's 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. And I think the run rate if I was going to estimate one going forward, it's tough to do because of a lot of things in here, the ORE expenses and a lot of things will really fluctuate. But if I had to guess, I think a conservative guess would be the run rate would be between $104 million and $104.5 million, that would be my guess. But the ORE expenses -- a lot of these stuff has just -- it jumps all over the place -- consistent every quarter or so.

Our next question is from Craig Siegenthaler of Credit Suisse. Craig Siegenthaler - Crédit Suisse AG, Research Division: I just want to dig a little bit deeper into, kind of, some of the NIM trends here. And -- first, just when you think about the loan yields, they were down 6 basis points on the quarter. I'm just wondering what was the impact there from lower long end of the yield curve in the quarter. And what was the impact from tighter spreads on new business?

I'll let Phil answer thing about tighter spreads on new business. I don't think that kind of like...

The NIM curve hasn't come down that much since August. That meeting, August 9, that's when we had the drop in the curve, it flattened. But even with this operation twist, it hasn't been affected that much. So, I don't -- I have just been very -- it hasn't been affected much by the yield curve, I don't think. Craig Siegenthaler - Crédit Suisse AG, Research Division: 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 long fixed-rate loan for us would be 5 years, and a lot of our loans float. Craig Siegenthaler - Crédit Suisse AG, Research Division: And maybe why it's getting that -- if I could just talk about the CD balances. So you threw out some numbers and I didn't get the total results here. But when you think about the fourth quarter, what's the level of CDs repricing and what yield are those CDs that are coming off? What's the yield of those CDs?

Yes, the -- Craig, $780 million in CDs are maturing in the fourth quarter and weighted average yield is 0.90%. And we would expect that we can keep most of those between 1.5%, 1.6%. Craig Siegenthaler - Crédit Suisse AG, Research Division: So it's coming off at -- you said 1.9%? Or is it 0.9%?

0.90%. Craig Siegenthaler - Crédit Suisse AG, Research Division: And you're going to keep them at 1.5% if they're going up?

No. we're going to keep it 0.5% to 0.6%. Craig Siegenthaler - Crédit Suisse AG, Research Division: Okay, got it. Well, my question is, if the yield is so low that's coming off 90 bps, why is the consolidated CD of -- when I look on your disclosures in the press release of 1.49%, why is it so much higher? Is there a lot of, kind of, longer term CDs on there that aren't coming off?

Yes. A lot of the CDs that come off on such a shorter term.

Yes. Craig Siegenthaler - Crédit Suisse AG, Research Division: Okay. And then final question was on other interest-earning asset growth. I imagine now 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 a higher-yielding assets?

Yes. We -- a lot has come in, and Fed funds, we have a lot of deposit growth. If you look ending -- second quarter to ending third quarter, we're up $367 million in deposits. A lot of that went into Fed funds, and we're starting to deploy them little bit. What we're doing is, we're buying more mortgage-backed securities that are 10-year amortization that we -- and that's where it's been -- it's going to be taken out of, and it's being taken out of Fed funds and moving it into mortgage-backed securities. Craig Siegenthaler - Crédit Suisse AG, Research Division: Last question. What's the duration of your securities portfolio?

It's -- let me look here. Just give me a second. I want to give you an exact number.

Craig, do you have another question while we're looking for that?

It's 3.9 years, but it would be flowing -- because we usually buy -- in the past we bought 15- and 20-year mortgaged-backed securities. We're not doing that anymore. We're buying 10-year mortgaged-backed securities, and those mortgaged-backed securities have a 10-year amortization, the average life will be dropping.

Our next question is from Mike Shafir of Sterne Agee. Mike I. Shafir - Sterne Agee & Leach Inc., Research Division: I was just wondering, you know, you guys did show a little bit of loan growth. This quarter, this is the first quarter in 2011 where you've 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 risks? 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 an adjustable-rate mortgages, so we've always kept those. So all that growth was in adjustable rate. Mike I. Shafir - Sterne Agee & Leach Inc., Research Division: Okay. And then -- 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?

Yes. Mike, that's tough. I would not say our backlog is -- it's at the same level that it's been in, in past quarters. And it's a battle, it's passable, but I don't think we are optimistic that there's going to be a lot of loan growth. Mike I. Shafir - Sterne Agee & Leach Inc., Research Division: Okay. And then just for clarity. On the debit card, the $4.5 million in terms of the line item that that's reflected in, that's under other service charges and fees?

Yes. It is.

And next question is from Collyn Gilbert of Stifel, Nicolaus. Collyn Bement Gilbert - Stifel, Nicolaus & Co., Inc., Research Division: Actually -- you know what, guys I'm all set. All my questions have been answered.

And next question is from Rick Weiss of Janney.

I was wondering if you could -- give a bit little more color on the nonperforming assets, and it's relatively stable. Do you think it's going to stay that way for the foreseeable future? Just where do you think it's going to go?

Well, Rick, I'll start from 50,000 feet. We've been saying for forever, it seems like, it's going to be lumpy. And given the economic situation we're in, I think it's going to be lumpy. We don't expect huge swing, positive or negatively in the next several quarters. But there's not enough momentum in this economy to expect a significant improvement anytime 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're going to see big news either way.

And I guess -- can I or can we infer that because, like, the NPA stayed the same, but they're provisioning -- looks like it's still -- it's coming down that you're 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're comfortable.

And we're a conservative company, so we'll 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 would just to simply match charge-offs to the provisioning going forward, 2 things since you're comfortable [ph] today.

Well, Rick, at some point in time, I think we're going to -- I hope we're going to feel like we can eat into that provision a little as the economy improves and our forecast for charge-offs and problems looks better. So, I mean, that's an ongoing process, but frankly, we look at it monthly. And it's hard to forecast given what most people predict, and that's this economy just keeps to slug along -- the way it's going. And if there's a recession, then look out, but most people don't think there is one coming. So I think, just quarter-to-quarter, Rick.

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

Yes. Pricing on the CNI side is very competitive and -- so if you want business, you have to be competitive. It's definitely decreasing.

Well, still -- would that be like the main reason why the loan yields are going down rather than the actual curve itself because the thing, as you pointed out, unless your loans are 5 years or less, it hasn't really changed.

I would say that, that would be true, yes, Rick.

And next question is from Mac Hodgson of SunTrust Robinson.

Phil, if you could elaborate on loan demand. I know you said demand remains quiet. Are there any pocket of strength geographically or by industry segment?

Well, geographically, Pennsylvania, as we have said, consistently has done better. And I'd say there is slightly more demand in Pennsylvania. New Jersey remains the -- our toughest market and there is less demand in New Jersey and more problems, I would say. And then there's Virginia and Maryland, kind of falling between. And was there a second part to that question?

Yes. Just industry types that are showing demand, like, does it from healthcare, stuff like that?

Want the CNI side?

Yes.

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

Okay. Charlie, couple of questions. By chance, would you have the CD maturities beyond the fourth quarter?

Yes, we do, in fact.

And just kind of where they're coming off.

Yes. In the first quarter of next year, it's $704 million, and it's -- the average weighted yield will be 1.07%. In the second quarter, it would be $613 million and the weighted average yield would be 1%. And in the third quarter, there's $555 million at 1.22%. It's also next year, Mac, it comes into play, the advances in Federal Home Loan Bank advances start maturing, and the first 3 quarters of next year is $102 million maturing, and the average yield on those is over 4%, so that'll help us too.

The FDIC insurance costs were little higher, not a huge deal, but up, I think $0.5 million higher. Is this the better run rate?

You have catch-ups on that too where we find the calculations. I would think the run rate will be about $400,000 less.

That's right, that's -- yes, $400,000.

And then on the -- not to beat a dead horse down here, on the Durbin debit card, I know -- I just want to be sure I understood, I know historically you'd said an $8.8 million kind of annual negative which matches with what you said this quarter and that you did identify $8 million of offsets and -- I just want to be sure I understood. How much of the offsets are currently in the third quarter, the 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. So basically, we could see that the fee income come down $2.2 million, but then maybe slowly come up as you, kind of, 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.

Our next question is from Matthew Schultheis of Boenning and Scattergood.

Most of my questions have been answered, so this will be pretty brief. We talked a little bit about pricing. How about the covenant side of that equation? Are we seeing reductions in covenant?

On CNI loans?

CNI, commercial, real estate, yes.

I would say slight reductions, nothing major. I think it's terms on loans are remaining pretty steady.

Okay. So compared to, say 2006 or 2007 they're tighter still considerably?

Yes. That would be correct.

And the increase in delinquencies, can you address how much of that is from paper that you've already modified in some way, whether classified as a TDR, whether it's 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 where the..

No.

[Operator Instructions] Our next question is from Casey Haire of Jefferies & Company. Casey Haire - Jefferies & Company, Inc., Research Division: My question's on loan runoff. I think early in the year you guys had said that it's -- you guys are running off loans at around $300 million a quarter. I was wondering if you could give an update on that number, and then is it a number that's going to grow over time or is it pretty steady state?

Casey, that number varies quarter to quarter. That was our average last year, $300 million. This is Charlie. I don't know what that is right now, I'm sorry. Casey Haire - Jefferies & Company, Inc., Research Division: Okay. And then, just lastly, can 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?

This is Scott. I wouldn't say it's been about the same as it's been. We would get occasional call, most of these calls are related to stressed situation. There's -- have been some talk, the volatility in the stock prices in August and to date, has made the deal -- discussions I think, a bit subdued because it's awfully hard to know, if you're a seller, what you're getting, and if you're buyer, what you're paying, and so, I think this continued volatility in the market -- the economy where it is, I think a lot of the healthier banks are on hold, but having said that, you never know who's calling this afternoon.

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'd like to thank you and end the call by thanking you again for joining us today. We hope you've been able to -- you'll be able with us when we discuss fourth quarter, year-end of 2011 earnings on Wednesday, January 18, 2012. Wow, it's 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.