Financial Institutions Inc (FISI) 2007 Q1 法說會逐字稿

Welcome to the Financial Institution, Inc. First Quarter Earnings Conference Call. There will be a question-and-answer period at the end of the presentation. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded.

I will now turn the conference over to Ms. Linda Margolin of Financial Institutions, Inc. Thank you; you may begin.

Thank you very much, (Diego). Good morning everyone and thank you for your interest in Financial Institutions, Inc. Joining me on the conference call are President and CEO of Financial Institutions, Peter Humphrey; Ron Miller, Chief Financial Officer, and Matt Murtha, Senior Vice President of Marketing and Communications.

Peter and Ron will discuss first quarter results and provide their outlook for the remainder of 2007. Following their discussions, we will open the call for questions.

But before we get started, you should have the press release, which went out yesterday after the market closed. If you don't, you can find it on the Company's website at fiiwarsaw.com.

As you are aware, we may make some forward-looking statements during the formal presentation and the Q&A portion of this teleconference. These statements apply to future events which are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from where they are today. These factors are outlined in the press release as well as in the documents filed by the Company with the Securities and Exchange Commission.

With that, let me turn the call over to Peter to start the discussion.

Thank you Linda, and thank you all for joining us today. We are pleased to report a solid first quarter, where we are beginning the see the results of our efforts over the past year. We reported net income of $3.6 million, or $0.29 per diluted share, 3% below the first quarter of last year. The most important comparison, I believe, is to the fourth quarter of 2006, where we improved net income by $611,000, or 20% on a link-quarter basis, and earnings per share of $0.06 per diluted share, an increase of 26%. The improvement this past quarter was largely due to reduced operating expenses, as well as our unwavering focus on asset quality. As we entered 2007, having marked the 1-year anniversary of our new brands introduction into the marketplace, our objective has been to continue to gain recognition and increased market share in our 10,000 square miles of Western New York.

If you will recall, we began the 2006 first quarter as a newly-consolidated Company. We were still dealing with many open issues associated with the consolidation, including our branding campaign for Five Star Bank and an overriding concern for customer satisfaction and retention as we transitioned into a new Company on January 1 of '06. We were internally focused over the course of the past year as we streamlined our operations, continued to improve the risk profile of our own portfolio, and implemented a compensation structure that is results focused and service driven; 2007 is the first full year we are shifting our focus to business development rather than in account maintenance and retention.

This first quarter we have done a very good job with controlling expenses. We reduced operating expenses by $1.2 million compared to the fourth quarter, and achieved cost saves nearly across the board that will position us for greater efficiency going forward.

Now I'd like to turn the call over the Ron Miller, our CFO for more detail on financials.

Thank you Peter, and good morning everyone.

As Peter stated, we have had a significant decrease in our non-interest expense. For the first quarter of 2007, we are down $1.3 million from the same quarter last year. There is no single area of expense that dominates those reductions, as it has come from nearly all areas. We are down 27 full-time equivalent employees from a year ago, including 6 since December 31. As a result, our total salaries and benefits expense is down $408,000 from the first quarter of last year. Our first quarter last year also had significant expenses relating to re-branding our name, and our advertising costs are down $441,000.

Relative to the fourth quarter, reductions in the first quarter of 2007 includes lower commercial loan and other real estate expenses of $285,000 and lower product-related advertising of $286,000. We believe our existing cost structure supports our revenue initiatives this year, and while we are always looking for cost-reduction opportunities, the most significant cost saves from consolidation activities and asset quality improvement are behind us.

Asset quality is another area where we have made steady progress. At the end of the quarter, our non-performing assets were $17 million, and while unchanged from year-end are down $2.5 million from 1 year ago. The improvement in our asset quality more notable when we compare the levels of our criticized and classified loans. At the end of the first quarter, our total criticized and classified loans were $45 million, which are $33 million or 42% lower than 1 year ago. Included in that reduction is $4 million that has taken place since the end of last year.

In addition, we've experienced low levels of net loan charge-offs. For the first quarter, we had only $134,000 in net loan charge-offs, which represents on an annualized basis only 6 basis points of average loans. This is following our full year 2006 net charge-offs to average loan ratio of 14 basis points.

The first quarter included gross recoveries of $558,000 and all of 2006 included $2.9 million recoveries. The focused efforts of our workout and collection groups have realized those meaningful recoveries from older charged-off assets.

As we assessed our allowance for loan losses, the improved risk profile of the loan portfolio, our charge-off experience, as well as the overall size of our loan portfolio and other environmental factors are taken into consideration. Our allowance for loan losses at the end of the first quarter was $16.9 million.

For the second consecutive quarter, we recorded no provision for loan losses. Our allowance at quarter end was 1.82% of total loans, and our coverage of non-performing loans at 107% was relatively unchanged when compared with the prior year-end of 108% and 1 year ago of 109%.

We expect continued reductions in our non-performing assets as we work through the lengthy disposition process. We believe this is proceeding in an orderly manner.

Turning to revenue, our non-interest income was $4.7 million for the first quarter, down $57,000 for the fourth quarter and down $103,000 for the first quarter of last year. With the sale of our trust relationships in the third quarter of last year, the decline relative to last year is reflective of no trust income in this year's quarter compared with $194,000 last year.

Service charges on deposit accounts represented over half of our non-interest income, and this item was down $376,000 from the fourth quarter, principally the result of slowdown in retail economic activity that occurs in the winter months following the stronger fourth quarter holiday season, and also lower income from fewer overdraft protection transactions. Partially offsetting this decline was $248,000 in income related to appreciation in an investment the Company has in a limited partnership SBIC.

Increases in broker dealer fees and commissions from the fourth quarter were largely offset by a decline in mortgage income as real estate activities slowed.

As we look at our balance sheet, for the first time in several quarters, we had a small but meaningful level of loan growth. Loans at quarter end were $929 million, up $3 million from year-end. We spent much of 2006 creating our business development culture and building an incentive system to reward results. Much of the credit for the first quarter's loan growth can be attributed to this, and the impact of our 2006 calling program that focused on commercial prospects and centers of influence. We ended this quarter with commercial loans of $419 million, up $12 million, or 3% from the fourth quarter, but still below the $438 million we reported for the first quarter of 2006.

The $12 million of commercial loan growth the first quarter offset a $9 million decline in consumer loans. Nearly all of this consumer decline was in our directed home equity loans, which were down $10 million from the fourth quarter, and was only partially offset by a $1.4 million increase in our consumer indirect loans.

One of the areas that we see the potential for growth in is indirect auto lending. Our total consumer indirect loan portfolio was $108 million at quarter end, approximately 88% of which was auto loans. The winter quarter is the slowest of the year, so we have had only modest growth to report in indirect loans since the December 2006 quarter end, but year-over-year, growth has been over $19 million, or 22%.

We are expanding our relationships with franchise new car dealers in our market area, and are selectively acquiring a mix of approximately 35% new auto paper and 65% used auto paper from those dealers. Our credit parameters are the same as for other consumer loans.

Our net interest income was $14 million for the current quarter, down $337,000 or 2% from the link quarter and down $1.5 million or 10% from the first quarter of 2006. These declines are both rate and volume related as we have both a lower level of earning assets and lower net interest margin. Average earning assets are down only modestly from the fourth quarter of 2006, but are down $53 million, or 3% from the average from the same quarter last year. We have a high level of investment assets that we are working to redeploy into loans, and with little spread opportunity available from funding source expansion, we have managed our cost of funds in a manner that has created some shrinkage in our overall size.

The most significant factor contributing the decline in net interest income is a reduced net interest margin. For the first quarter of 2007, our margin was 3.38% down 6 basis points from the fourth quarter and 26 basis points from last year. We, like many of our peers, are faced with the challenges of an inverted yield curve, and a highly competitive environment for both deposits and high-quality loans, particularly in the area of pricing.

For the first quarter of last year, our earning asset yield has risen 27 basis points while our cost of funds has increased 53 basis points. Our current quarter's average cost of funds is 2.68%. Increases for the overall yield on earning assets has been limited not only by pricing competition for loans but from a buying perspective we have seen a $54 million average decline in loans from the first quarter of last year.

From a cost of funds perspective, we have also experienced a shift in the mix of our deposits that has furthered the upward pressure on our cost of funds, as our retail deposits have seen a shift out of lower cost transaction and saving products due to higher cost of time deposits.

Now I'd like to turn the call back to Peter.

Thanks Ron.

It's obvious that the prolonged effect of the inverted yield curve and its impact on our non-interest margin is our primary challenge. Our current strategy is based on focusing our efforts to rebuild and re-grow our loan portfolio in a disciplined manner, which should enhance our net interest income over time. Right now, we have 23 commercial development officers calling on small and middle-market companies in our Western New York footprint.

Our pipeline activities suggest that we should continue to see modest growth in the commercial segment for the remainder of the year.

We also have a large number of retail business development officers actively soliciting in our marketplace for residential mortgages, home equity loans, consumer deposits, as well as indirect auto financing.

As many of you are aware, the residential mortgage market which includes home equity lending is relatively soft. We believe that growth in that segment will be modest to flat this year. Having said that, we believe that we have built a world-class indirect auto finance program that should produce solid growth over the year in spite of the challenging auto sales environment. Our focus is to redeploy our earning asset from investments into higher-yielding loans and in a disciplined low-risk lower cost fashion.

Last year, we built a structure and systems to support these initiatives and now feel more confident in our ability to drive the desired results. Cost control, risk management, and lowering the level of non-accrual loans continue to be objectives that are ongoing elements of our long-term programs in addition to our business development initiatives. In the interim, we want to make financial institutions as attractive investment as possible. We recently increased our common dividend from $0.09 per share to $0.10 per share the first quarter of 2007, and we remain committed to our previously announced stock buyback program. During the first quarter of 2007, we repurchased 77,595 shares, or $1.625 million under our $5 million stock repurchase program.

Going forward, we will continue to build on opportunities, 1 relationship at a time, bringing state-of-the-art community banking to Western New York.

And now, we'll open the call to questions.

[OPERATOR INSTRUCTIONS]. Jared Shaw, KBW.

Hi good morning; very good quarter, there definitely seem like some good trends coming out this quarter. I had a question, could you just give us an update or remind me what you feel the ultimate disposition of some of the NPAs will be; the NPA level remains elevated but as you pointed out, you're pretty well reserved for it. Are you going to be working these loans out or are you looking to, I mean how do you envision seeing the loans in NPA moving off of NPA status? Is it either when they leave the bank or could something else happen to get them off?

It's a little of both Jared; obviously the NPAs are much higher than we would like. I feel confident with the workout team that we have in place that's really done a marvelous job over the last several years that we'll be able to show good progress this next year to reducing that level.

The number of NPAs is below 100, so I'll start there. So it's a relatively small amount that we're actively working, some of which we're hopeful they will be upgraded frankly, and we have a large portion of those NPAs that are current with their principal and interest. But obviously from an accounting standpoint, they're on non-accrual and all payments are applied to principal.

So we think there's a chance that there are some of those non-performers that will be upgraded and will be returned to non-accrual status over the next few quarters.

Also, there are several non-performers, commercial real estate specifically that as you know, you get into lengthy foreclosure process, bankruptcy process and so on, and those are moving through what I call the workout pipeline and believe that we'll have good resolution to many of those before the end of the year.

It's difficult to peg a specific number for the end of the year, but clearly our objective, which I think is realistic, is to significantly reduce that number and as I'm sure you're well aware, in our reserve allocation process, we do feel that all of those non-performers are properly reserved for.

So then when we're looking at the provision going forward, will the, will any increase in the provision be basically driven by increase in new loans as opposed to the way you're looking at your current book of NPAs?

Well, we don't think there are any new surprises that will come out of the current book of NPAs. Obviously, it's somewhat difficult to gauge what new loans will come in the NPAs. However, criticized classified loans is to me a good early indicated and that number, as we've disclosed, has come down fairly dramatically. So if you look at that as kind of an early indicator, I would suggest that we feel pretty confident that we've got a good handle on the current portfolio, and yes obviously we have to properly reserve for new loans going on.

So as you know, it's a mix of all of those factors in the allocation process, so we're hopeful that if we need to increase the provision, it's due to new loan growth.

Okay, thanks and what were Ag loans at the end of the quarter? Ron do you have that?

I think it's about $40 million if you just -- I think we can get back to that one Jared.

Okay, and then I guess just on the margin while you're looking up that, the, you mentioned and spoke a little bit about the margin decline here; should we expect to see a continued pressure and continued decline from here as deposits continue to migrate to time, or do you think that we're getting to a point where it's stabilizing?

Just quick back to the other question, I think it's about $46 million is where we are in Ag loans at the end of the quarter.

Okay.

I think from a margin standpoint, I think the cost of funds will continue under pressure, and if we are successful, as we hope to be in redeploying our investment assets and growing the loans for the balance of the year that will afford some pickup in earning asset yield and potentially some growth in margin if we're successful in the redeployment efforts.

So we could look at the high-330s though as maybe floor unless we see some other change?

Yes and of course this is tempered by where the yield curve goes and the rate level in general.

Okay great, and then this, on that Ag number, do you expect to see that continuing to decline, or will Ag always be sort of part of the bank but a continuing to diminish part of the overall portfolio?

Well, good question; we remain committed to the Ag segment, let me start there. Ag is not an easy segment to underwrite if you will. It could be very volatile, whether it's the price of milk, and I think everyone knows now with a lot of ethanol plants coming on line and the demand increasing significantly the price of corn has come up. But it would appear that the price of corn would be very volatile, and then the real wild card in Ag lending is weather.

So we remain committed to this segment. We have tightened our underwriting standards, I don't think there's any question, and as a result that has caused a decline in the portfolio. My sense that the portfolio is stabilized; the outstandings have leveled out. I'm not sure that we see any large increases at this time to that segment but we're continuing to look for opportunities that fit our underwriting standards.

Great, thanks very much and good trends this quarter.

Thank you.

David Darst, FTN Midwest.

Good morning; Peter I guess when you reference corn prices, you're just referring to that as grain as an input to the dairy industry?

No, corn prices, we've had several ethanol plants come on line in our market footprint, and again that's just supply and demand. So demand has gone up fairly dramatically for corn to supply these ethanol plants while at the same time, as I think you are well aware, this is a very significant are a for the dairy industry; cows need corn for feed. So when you put in the supply and demand factors, the price of corn has gone up dramatically. It's a double-edged sword; it's great if you're growing it and selling it, it's not so great if you're a user of it as an input, if you will to feeding cows and producing milk.

So it has caused volatility in the price of corn, which has caused volatility in some cases positively to the corn grower, but negatively to the dairymen. So we're watching that very carefully.

Okay, and then within your non-performing loans, is the pool stable or did we see some new loans coming in and some coming out during the period?

Well it's always, there's always some coming and in and some going out being resolved, whether they're being upgraded or liquidated. But no major movements I would say.

Okay and then looking at your loan growth on the CNI side can you give us an idea of what markets or industry that growth came from?

We're seeing from a market standpoint good demand in what I would call the Eastern segments of our market, from let's say Binghamton up to Syracuse. Economically we see those regions as a bit stronger and as a result, and due to some very good culling efforts I might add over the last 18 months, we've been able to capture a reasonable share of the market demand in the Eastern part of our footprint.

Western part economically is a bit softer, and as a result our loan production, commercial loan production in those markets have been a bit soft as well. We're seeing some early signs of improvements, if you will, in those regions, but I think it's a little too early to gauge when and how much that will drive commercial loan growth in the Western segment. We're seeing the demand in commercial real estate and some CNI, but it's more heavily segmented, if you will, in the commercial real estate.

Can you tell us what your commercial pipeline is?

Sure Matt, our Director of Marketing communications has some information on that.

As of the end of March it's about $26 million in approved loans waiting to be closed, and our experience on that has been about 70% to 75% that actually materializes in closed loans.

Okay and I guess the payoff and outflows had slowed for you on that commercial side?

Correct, the outflows have clearly slowed and stabilized but I think any banker and any good analyst knows draw down on lines, pay back on lines, early payouts are always an element of the blending business, and so it's somewhat difficult to predict and anticipate what the outstandings will do on those closed loans. I mean Matt talked about the conversion rate of roughly 70% of approved but not closed, and so we closed 70% of those loans but that doesn't necessarily drop to outstandings because several of those are lines, operating lines may or may not be drawn down.

Okay is say $25 or $30 million a good number for total loan growth this year, portfolio growth?

That's a tough one to call. I mean there are so many variables as I just mentioned; line utilization, early payoffs, and what we think will be moderate to pretty good loan production, but the net number, I mean there's just so many variables that go into the net number of loan outstandings it's difficult.

But having said that, we feel fairly confident that we're going to see modest net loan growth in the commercial segment, which is reflected in the results in the first quarter.

Okay, do you think you'll see any net growth in commercial, I mean in consumer or indirect this year?

Indirect we're clearly looking for strong growth in that segment. We've put together what we think is a world-class program there. We have signed up over 140 new car franchise dealers in our 14-county region, good balance, a good mix. Obviously, the auto car business, especially domestic is a challenge right now, but the imports are selling reasonably well. And the market is so large, our relative share is still very, very small, so when you put all that together, we think we have wonderful opportunity to grow the outstandings in the indirect; we have from an asset liability standpoint put plans and parameters in place as to how much of the portfolio that will represent, and in effect we've put a cap roughly of 20% of the loan portfolio and when we hit that, which we think may be at the end of next year, we would look then to securitize the balance to maintain good mix and diversification on the balance sheet of the loan portfolio, and hopefully we'll launch or create some good non-margin revenue from the securitization element of the indirect program.

Other elements of the retail lending, I think everybody is aware the mortgage, the housing market is soft. We project that line of business, which includes home equity which is fairly saturated in our market, to be flat this year. So from a retail lending standpoint, the direct lending, we think, will be fairly flat this year but we do see some good solid growth on the indirect line.

Okay and can you comment on the deposit growth this quarter, and is that municipal or seasonal?

Municipal is very seasonal, and it's very predictable to be honest with you. It's a large part of our funding source, and we think we manage it well. We've been in that line of business for many, many decades, and it's very, as I said, very stable, seasonal, and predictable. But somewhat high cost, so we manage that very carefully.

On the retail deposits, it's extremely competitive out there. We really are in a low to moderate growth market and as Ron mentioned, the mix continues to change into higher-cost deposits coming out of your low-cost savings accounts, typically going into the higher-cost certificates of deposit.

Having said that, we see some modest reductions, if you will, in the higher-cost CDs. I think every bank is feeling the pressure, and as a result, looking for opportunities to at least stabilize cost of funds, hopefully maybe bring them down a bit, but it's extremely competitive.

Okay but, so the deposit growth this quarter was municipal-related?

Yes.

Okay and so what, can you quantify the margin impact that you had from that? Is that a few basis points as you had to build your securities portfolio?

Well, it is a lower margin business, but nonetheless, it is accretive to the net interest income. A lot of it is, are these jumbo CDs that municipalities bid out for short periods of time. We typically try to arbitrage those funds into shorter term securities. Spreads are fairly tight, and Ron if you could just maybe touch on that a little bit.

There are I think about $60 million in period-end growth on the public funds from the yea-rend to the end of the quarter. A fair amount of that money sticks with us during the second quarter, but tends to dissipate out by the end of the second quarter and into the summer months. You might also note that we have over $90 million in Federal funds sold at March from the, and of course the way the curve is working it actually kind of works in our favor from that perspective. We do park the money that we get in from the public, additional public funds into those funds, and I didn't, I have not done an adjustment as to what the margin might be without them, but you might think of an average of 1% to 1.5% spread perhaps on that incremental balance that comes in. And the overall cost of our public portfolio is better than that, but we do take in the higher cost deposits to maintain the entire relationships.

Okay, and my follow-up question is on share buybacks, you referred to some shares this quarter. Can you give u any insight in how aggressive you may be later in the year?

Well again, as we put in the press release we repurchased about 77,000 shares at I think the average price was just under $21 a share. But certainly as you're aware, the way our price has been lower than that in April and so I think that we're still active and as both Pete and (inaudible) have mentioned, we're committed to working the program.

Okay great, thanks.

(OPERATOR INSTRUCTIONS). Chris Buonafede, OZ Capital.

Hi, good morning guys; hey a couple of questions; one just to follow-up on the deposit question that was just asked previously. Given that the balance sheet is still very liquid, I think the loans to deposits ratio is in the mid-50s, it would seem to me that you don't really have to chase retail deposits in terms of pricing, and can you kind of talk about the strategy there in light of kind of the current structure of the balance sheet given the high level liquidity on the balance sheet?

Sure I'll tee it up and then Ron can add some comments. If you recall, about a year ago we significantly shrank the balance sheet, and through Matt Murtha and his marketing group we basically identified what we call the single-service CD, what we call the hot-money type client, and we made a decision to lower those rates fully expecting a lot of those funds to exit the bank, and in fact, they did. So we experienced a fairly meaningful shrinkage about a year ago. So where we're at today is these are multi-service clients that we'd like to retain, that we think are profitable. They just happen to be shifting some of their deposits into higher costs deposits, obviously impacting our cost of funds, shrinking our margin a bit.

We don't think it's in our best interest, and our shareholders longer term, to invite these folks to go elsewhere, and it's a real delicate balance in our pricing and we literally look at it every day, and with our front-line people in our branches, working closely with our marketing people from a customer profitability standpoint. They have discretion in the branch; they have good information available to them to decide whether to, if you will, match a rate and retain a relationship or let it go. And it's a very active process daily and we think that it's again, in our best interest to hold these relationships; it does have a short-term negative impact on the cost of funds, but long term, we think we'll be better for it.

I would agree with that, I just -- so all of the change in kind of CD growth that we would see or any of that stuff is either municipal stuff or existing customers with, or primarily existing customers with other relationships?

Yes, we are not the market leader by any means with our CD rates. We obviously want to remain competitive and we think we are, but we are not chasing hot money for all the obvious reasons. We have more than enough liquidity, and we don't want to, if you will, raise the cost of funds of the existing portfolio any more than we have to.

Okay, and then I think we're somewhat pleased with the increased level of buyback in the quarter, but the Company is still very capital rich, the holding company has plenty of capital, and the bank subsidiary, given the number in the press release are extremely well, above the well capitalized levels. So there seems to be a lot of flexibility with which to either dividend money from the bank subsidiary to the holding company with which to either be more aggressive in terms of capital management. How do you, I mean like you've pointed this out price is obviously down; how do you guys kind of think about of that going forward?

Well, as we've said, I mean we have an active dialog that goes on at the Board level looking at our capital and our capital management plan, and I think recent activities and actions demonstrate our direction, if you will. We've increased the dividend and we have the buyback program in place and are actively utilizing that program. So we basically feel the stock continues to be underpriced frankly, and we think it's in our shareholders best interest to continue to take advantage of our buyback program at the appropriate levels.

So I can assure you that capital management is one of our top priorities, both at the Senior Management and at the Board level.

I think as you pointed out earlier, I wouldn't expect given what you've said about the securities portfolio is going to be obviously used to fund loan growth as, over the course of the year. So the total balance sheet probably won't grow a lot if at all, which is fine, which the margin should probably go up as the asset mix shifts, as the mix shifts on the asset side, which would, if you assume all things are equal by the end of the year, the Company would even have more capital. So there should be, correct me if I'm wrong, I think the capital levels of the bank and the holding company should continue to be, provide you with enough flexibility to do plenty of things on the capital front.

Chris, I wouldn't disagree with that assessment. So that's all factored into our modeling and our capital planning, and I think it's fair to say that we'll continue to be active on all fronts.

Okay thank you.

Julienne Cassarino, Prospector Partners.

Well, I was gratified if not downright excited to see loan growth and some buybacks in the quarter, so thank you very much. Also wanted to ask a couple more questions about your indirect auto program. What is the current size of it right now?

It's approximately $90 million; our total indirect portfolio is $108 million, 88% of which is auto loans.

Okay, $108 million,. 88% is auto loans.

Right.

Okay, and so what's the current percent of the total portfolio and indirect auto?

It would be a little over 10% of the portfolio.

Okay.

Eleven I guess.

Of total loans, and you see potentially going up 20% in a year.

We've put a cap from an asset liability management perspective of 20% of the portfolio, so yes we think we have room to grow that, and as I mentioned, if we hit that level, which we frankly hope we do over time, then we would get into a securitization program, and we're working at this time to be ready for when that hits. We think it's a great opportunity for us to build the portfolio, drive additions to the net interest income, as well as long term, fee income. We think we've build a world-class organization, that we have the systems, the people, the controls in place to manage this line of business appropriately. We have very experienced people that have been in this business for 20, 30, and 40 years, so we're very confident that this should really be a good profitable program within the appropriate risk parameters, and think that we have everything in place to continue that direction.

The 20% cap Peter mentioned would be over a period of time that would not be a cap that we would expect to reach this year.

Correct.

Okay, and how long have you been doing -- it sounds like you've either made some new hires or you've tweaked your proprietary back-office programs or whatnot. Just tell me how long you've been in this business --.

We've been building this for over 2 years. We looked at it in a very careful, disciplined fashion, and it's taken us literally 2 years to get the right people and the systems in place before we really, if you will, turn the spigot on. We accepted it from a risk management standpoint, made sure that our underwriting criteria fit our risk profile and profitability parameters and that we had the right controls in place, reporting in place, collections in place, and then built a dealer network and we think all of that hard work is really starting to show the results; a long-term effort.

Okay so have you been in it for 3 years, or no? You've just been doing it for 2 years?

We've been in the indirect business, if you will, for many, many years, but in a very minor way. We made a strategic decision about 2 years ago to take advantage of what we though was an opportunity of some very experienced people becoming available due to a large bank merger in the Rochester market, so we were able to bring in very experienced people to run this line of business, and they've been working over the past 2 years in building the infrastructure, as I just mentioned, that now is up and running, and frankly, our press release of a few weeks ago of moving a lot of people into this new office in Pittsburgh, which is in Rochester, was to bring all of those people under one roof to gain further efficiencies is really our last major step in having everything in place to really drive what we think should be some reasonably strong growth in this line of business over the next few years.

Okay, and what kind of yields are you getting or expecting and what kind of losses do you think will be your run rate when the portfolio is fully seasoned?

I think that we've kind of targeted in a real broad sense over a full interest rate cycle so that we would expect, our expectations are to get 300 basis over the risk-free point of the curve on our originations. And I think that we expect to have what you would think of as relatively modest exposure to loss, again that the underwriting process is to have, is clearly with a design to have strong credits in the portfolio.

Okay, okay and what else was I going to ask you -- the buybacks that you did in the quarter of 77,000 I'm estimating you have around 169,000 shares left to go; does that sound about right?

I think the math is probably right, but technically the buyback is a dollar program of $5 million, and we'd only done a very nominal amount in the fourth quarter, so the amount that we did in the first quarter is essentially what we've done on the program.

Okay, okay thank you.

There are no further questions at this time; I'll turn the conference back over to management to conclude.

Well I appreciate your comments today, and I think the results speak for themselves. We are working very hard to move this Company forward. We think we have positioned it well to modestly grow the loan portfolio, reduce the risk profile further with our non-performers and to continue to add long-term shareholder value. So I appreciate your comments today, and I hope you all have a great day.

Thank you; ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.