Independent Bank Corp (Massachusetts) (INDB) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Independent Bank Corp's second-quarter earnings conference call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Denis Sheahan the Chief Financial Officer of Independent Bank Corp. Thank you Mr. Sheahan, you may begin.

Thank you, good morning, and thank you for joining us on the call. This morning's agenda will include my review of our second-quarter 2004 earnings release followed by comments by Chris Oddleifson, our Chief Executive, regarding our progress on strategic initiatives and the Falmouth Bancorp acquisition. I will then provide earnings guidance and discuss Rockland Trust's award of new market tax credit. We will then wrap up the call with a Q&A period.

With me on the call today are Chris Oddleifson, President and Chief Executive of Independent Bank Corporation, and Barry Jensen and Rob Cazona (ph) of our finance department. Before I review our second-quarter earnings release, there will be the cautionary statement.

This conference call may contain certain forward-looking statements with respect to the financial conditions, results of operations and business of Independent Bank Corp. Actual results may differ from those contemplated by these statements. Independent Bank Corp. wishes to caution listeners not to place undue reliance on any forward looking statements and disclaims any intent update any forward looking statements whether in response to new information, future events, or otherwise. I will now review the earnings release.

Independent Bank Corp reported net income of $6.6 million, a decrease of 2.6 million from the quarter ended June 30th, 2003. This represents diluted earnings per share of 45 cents to the second quarter of 2004 as compared to 63 cents in the same period a year ago. The second quarter of 2003 was positively impacted by tax assessments (ph) with Massachusetts Department of Revenue, resulting in a benefit of $2.1 million or 14 cents per share in that quarter.

This benefit is captured entirely in the provision for income taxes in that quarter.

The second quarter of 2003 also include security gains of $2 million pretax, recorded as noninterest income and FHLB borrowing prepayment penalties of $1.9 million pretax, recorded in noninterest expense. The total impact of these non-core items was approximately 15 cents per share in the second quarter of 2003.

Moving to 2004. The only non-core item in the second quarter of 2004 is contained in noninterest expense type of merger and acquisition expense, and represents charges associated with the pending acquisition of Falmouth Bank Corp., amounting to $221,000 for the quarter or 1 cent per share.

Balance sheet changes for the quarter. Investments increased by $55 million or 7.5 percent since March 31st. Purchases were concentrated in mortgage-backed securities, collateralized by 15-year mortgages. Loans grew by $70 million or 4 percent for the second quarter; total commercial loans including construction increased by $19 million for the quarter, including the impact of a large C&I loan payoff. The remaining loan increase was in the residential and consumer categories, comprised of adjustable residential loans, home equity lines of credit and in direct auto. Total loan growth year-to-date is strong at 7 percent.

Deposits increased by $146 million or 8 percent for the quarter and $204 million or 11 percent year-to-date. All deposit categories showed improvement, particularly the money market and interest checking categories. As discussed previously, we are focused on deposit growth and have seen great success in municipal business and personal deposit growth, due to a combination of increased marketing presence and new consumer products set that was introduced mid-quarter and our ability to quickly take advantage of changes in the market, due to competitive strategy and larger disruption.

The cost of this more aggressive deposit stance is reflected in increased advertising spend as well as near-term margin pressure as promotional deposit pricing in the market heads upward.

Net interest income. The net interest margin for the second quarter of 2004 was 3.84 percent. This represents the contraction of 30 basis points from the first quarter of 2004, 19 basis points of which is due to the re-class of trust preferred securities from the mezzanine section of the balance sheet to debt per FIN46. The additional compression is due to continued contraction of loan yields and its increased liability pricing.

I will provide an outlook for the net interest margin and the earnings estimate portion of this presentation.

Noninterest income excluding security gains in the same period last year. Noninterest income improved modestly by $130,000 or 2 percent. Increases in service charge revenue were essentially offset by a decline in mortgage banking revenues. The balance of the mortgage servicing aspect with $3.2 million in loan service amounted to $363 million as of June 30th, 2004.

Noninterest expense. Excluding a borrowing prepayment penalty last year, as well as merger and acquisition expense this year, noninterest expense increased by $600,000 or 3 percent in the second quarter of 2004 as compared to the same period last year. Salaries and benefits decreased $270,000 due to lower levels of performance-based incentive compensation and other employee benefits, partially offset by a higher pension expense.

Other noninterest expense increased by $927,000 or 21 percent, primarily due to costs associated with our strategic initiatives and increased advertising business development. Chris will provide an update in the progress of our strategic initiatives, including expense incurred in this second quarter and year-to-date (indiscernible).

Asset quality. Nonperforming assets of $3.3 million represented 12 basis points total assets. And the reserve for loan losses as a percentage of loans was 1.41 percent at June 30, 2004. Reserve coverage in nonperforming assets was 7 times. And net charge-off for the quarter was 280,000. I'll now turn the call over to Chris for a few comments.

Thank you, Denis, and good morning. In many respects this year has been remarkable. While we've exceeded our asset and deposit generation goals and expectations our loan growth at 7 percent and deposit growth of 11 percent of the half-year mark are really outstanding. It's also remarkable that in light of this growth, our net interest income has declined. After adjusting for the re-class of trust preferred by about $400,000 or 1 percent on nearly 2 cents a share.

While our fee income did not meet our expectations we had good expense management especially in light of the investments we're making. As Denis will discuss later we see the margins stabilizing and beginning to expand. Nevertheless all this points to the critical importance of having a disciplined growth plan across the entire enterprise. In previous calls, I've outlined our business growth initiatives and provided a status update and (indiscernible) would like to continue this practice and let you know where we stand on these initiatives on what we have accomplished in some early business returns.

Collectively as I've said before, these set of actions will lead the topline growth in their deliberate investment decisions for this year that will become an important contributor to our 2005-2006 earnings (indiscernible). At this point, we have some early indicators of progress, but (indiscernible) earnings call able to increase the specificity of net (ph) results.

After I review the initiative I will summarize our investment year-to-date, provide you with what we expect (technical difficulty) rest of the year.

The first initiative is focused on commercial lending and expanding commercial lending business development capabilities in investing in process improvement. Specifically, as I mentioned before, we targeted a net three new commercial lenders. Commercial lending is one of ours where we've had success adding one good lender at a time and we have plenty of room to grow to the North and the West and the Southwest, but of course there is ramp up (indiscernible) well knows and posits are generated.

We ended 2003 with 30 lenders and we now have 31. In December we had two expected retirements this year and we've had three hires for net '01. Interesting -- we're seeing a little more movement in the lender market as the mergers begin to move to their implementation stage. In the course of lending area we are wrapping up our work to evaluate our commercial lending and cash manager processes.

As I mentioned in the last earnings call once a commercial lender achieves a portfolio of a certain size the time available for new business development diminishes greatly and, looking for ways to streamline our process can have an effect of increasing the business development time.

Some of the examples of improvements that we are (technical difficulty) consolidating our loans submission process, improving the efficiency of credit committee meetings, the efficiency of loan operations, implementing an improved sales management. As a result of the federal (ph) recommendations we're currently evaluating we are anticipating that the time our commercial lenders will spend on business development or move from less than 20 percent today to 30, 35 percent in the future. That is expecting at least a 50 percent increase. We expect the evaluation process to be complete in the (technical difficulty) months but we are doing a rolling evaluation and some actually implementation planning has started for selected improvements.

Business development in commercial lending is strong. At the end of May our pipeline was the highest it's been in 12 years. And that's -- while we don't have any record to validate it -- to validate this going back that far that's the memory of our senior lender, Bert Kelly. This has resulted in the best booking month on record in June. And average loan size continues to move upward.

Our current pipeline is in the top quartile since January 2000, and while our credit quality remains rock solid we are seeing pressure on yield as Denis indicated.

Our second initiative that we talked about in the past, I will brief you again today, they are establishing a new business banking business division. This is one of our most important growth initiatives and it's a division focused on smaller businesses.

Over the last several years, our commercial lenders are focused on larger and larger relationships on loans and that is translated into larger loan (indiscernible) I just mentioned. We have tremendous opportunity to increase the number of smaller business customers we serve -- that is to the bedrock and the origin of Rockland Trust Company going back all the way to 1997. Our extensive branch network product capabilities are key building blocks, it's probably going to start (indiscernible) small business franchise.

Activity to date in this area as we refine the loan product set, we are in the process of adding capability mortgage commercial mortgage loans from the midst of streamlining our processes we are installing some of the auto decisioning. We still have a gray area in our decisioning about we will have some (indiscernible) as Claire (ph) knows. We are deep in the process and adding originating underwriting capability or examining our product set. And, of course, we are working with the branch network and the business bank division working extensively together as they leverage one another.

Our third initiative has been focused on generating quarter profits here. We made tremendous headway, specifically, we've increased our deposits by $146 million in a link quarter basis or over 8 percent. It's a result as Denis mentioned an aggressive, mystical (ph) business development program; the introduction of our new consumer product line was well timed to coincide with all the merger activity.

And we have increased business deposits as well. We have a number of initiatives underway that facilitate the profit growth in the future. We just on Monday opened up our branch in North Attleboro, we are expecting to open a branch in Raymond (ph) in August. As I mentioned previously we're investing in the process of improving the skill sets across our bench network not only in terms of relationship development skills, but in the coaching and management area we have a new scorecard.

Related to this posit gathering we're looking into an extensive valuation of our branch network. We are looking (technical difficulty) areas and consolidation opportunities, and I should note we did close a small school-based branch during the quarter.

Now I should mention that while we're having success in raising deposits, given the competitive nature of this market, it's come at a high cost and higher than the wholesale funding but we believe that as interest rates rise and we manage the interest expense down that that relationship will shift.

Our fourth initiative is expanding our mortgage banking product sets and investor platform. We've significantly increase a number of product offerings and product investors. Given our extensive branch network and franchise presence we found that we were not meeting our customers needs but we were leaving opportunity on the table and we believe that we can bring the options of a mortgage company to the market from a local bank you can trust.

We are behind on the number of originators that we wanted to have on staff. At the end of the first quarterly we were at 21. We're now at 26. Our goal is to be at 32. I will say our production increased by 45 percent second quarter over first quarter and, interestingly, the production per mortgage originator that we do have on staff is slightly exceeding our expectations. So we can hire mortgage generators they are producing at a greater level than what we had planned.

Our mix that we are originating is a little more portfolio biased than we had anticipated leading to a less fee income but a higher portfolio but of course you earn the income over time rather than more upfront. And I'll say our mortgage pipeline did decline at the end of the second quarter versus the first quarter where we're seeing some pickup activity now in the beginnings of the third quarter.

Now as I mentioned before we have strength in our operations and our processes in this area.

Our fifth strategic initiative is enhancing our investment management group. We -- in this business division we maintained our staffing levels but have allocated how we staff various capabilities. We've increased our capabilities and allocation and manager selection, brought in some more analytically based approaches. We have increased our business development staff and we have reduced the number of custom administration staff and we have also increased some of the retirement service capabilities. Our assets under management or custody have crossed the $500 million mark for the first time. At the end of the quarter it stands at $504 million.

And we have -- we are on the cusp of opening up a new office on Cape Cod, an area which we think has tremendous potential. In fact our first half of the year, we've increased our levels (technical difficulty) levels in that area and with all the M&A activity there we think it's very bright for further business generation.

Our sixth area -- strategic initiatives area is technology improvement. Probably the largest initiative we have under way there is finishing up our core processor evaluation and I expect over the next couple months we will have some news in that respect.

Probably the most timely today is our seventh initiative which is being opportunistic with acquisitions when -- which advanced our strategic goal. And I'm excited to say that we are right this minute in the process of closing Falmouth Bancorp. We're going to convert over the weekend, the signs are going up, the systems have been converted, the integration process is going very very well.

Denis will give you the details on improved guidance relative to this acquisition. And I just -- this I can mention it, the working relationship between Rockland and Falmouth (ph) has been exceptional, a real esprit de corps has emerged. It's a great franchise. A great fit. Everything that we hoped for has really been exceeded. Great customer set and there's just a lot of positive energy around it on both sides of the table.

On our last earnings call, we discussed how we are tracking very carefully the expenditures associated with this growth agenda versus our core business. Of our total expenses in the first quarter we spent about $550,000 or under about 2 1/2 cents a share. In addition compared to the first quarter of '03, we spent about $200,000 more marketing in business development expenses or about a penny a share so a total of about 3 1/2 cents for the first quarter.

Similarly during the second quarter we spent about $600,000 on these initiatives or about 2 3/4 cents per share and in addition, compared to the second quarter of 2003, we spent about an additional $300,000 on marketing business development expenses or about a penny in the quarter. So in total, about 4 cents per share on these growth initiatives agenda activities in the second quarter. So the total of about 7 1/2 cents this year.

And Denis will be giving some guidance on the expenditures for the third and fourth quarter in this regard.

I believe that we are making significant progress on all of our key initiatives. Some are going better-than-expected such as the positive gathering. Some are going not quite as well as expected, such as higher mortgage generators. Others are right on track. On balance, I believe we are proceeding nicely on building our solid set of fundamentals and I anticipate our increasing levels performance in future orders. And in that regard Denis is going to give us some guidance.

I want to talk about three subjects. The Falmouth acquisition, new market tax credit and then formal earning guidance for the rest of 2004. Chris mentioned the acquisition of Falmouth Bancorp will close today. On previous conference calls, we discussed associated with this acquisition as being between 1/2 and 1 penny per share in 2004. We now expect 3 cents' accretion in 2004 and this expectation is based upon saves (ph) originally planned as well as our ability to restructure the securities portfolio (indiscernible) in a higher rate environment.

The third quarter of 2004 will include approximate one-time merger and acquisition charges for the income statement of $250,000 or an additional penny per share as well as an increase to the Company's goodwill asset of approximately $20 million.

New market tax credits. During the second quarter of this year we announced the receipt of $30 million in new market tax credits. This program was enacted in December to design to foster job creation and stimulate economic growth in low-income communities across America. A subsidiary of Rockland Trust Company will make loans to qualify businesses and individuals in low-income communities in accordance with new market tax credit program criteria.

Management will quantify the EPS impact later this year as the finalized award details become available. We are confident that this will represent a significant benefit to the Company and to borrowers in our market area in 2004 and beyond.

Now, earnings guidance. As discussed in our previous earnings conference call, management anticipated EPS growth for 2004 in the 4 to 7 percent range. We now expect to report GAAP diluted earnings per share for 2004 of $1.99. This figure includes approximately 2 cents of one-time merger charges. It also includes 4 cents of security that we realized in the first quarter of 2004.

I also recognize that this 2004 estimate implies material acceleration in EPS from the first half of 2004. Why? The primary reason is improved net interest income generated from the larger balance sheet. The balance sheet grew by 10 percent in the first half of the year and we expect continued growth in the loan portfolio. In addition noninterest expense has peaked for the year. Noninterest income is expected to show a modest improvement and we expect the net interest margin to improved by 5 basis points by year end.

As Chris mentioned, I've given specific guidance on incremental initiative spending and incremental advertising and business development. For the third and fourth quarter, we anticipate a total for both quarters of $590,000 pretax in incremental spending and strategic initiatives. Advertising and business development will be consistent with the same levels in the third and fourth quarter of last year through the majority of our spending -- incremental spending and advertising business development we believe at this point is complete.

This concludes the presentation and I will now open the call for questions.

(OPERATOR INSTRUCTIONS) Jared Shaw with KBW.

I'm sorry. I had to jump off for one second, so if you already went over some of these, I apologize but could you go over the size of the commercial loans you're putting on the average size in your new relationships?

Yes, well, I can't tell that advertising in the new relationships but we can give you some indication of the size of the loan. The relationships -- I don't have the relationship data right at my fingertips.

I think the loan was at 464 (MULTIPLE SPEAKERS)

The average loan size and this is in the back, it's for June the second quarter, the average loan size was just under $.5 million. And this is trended up from the mid $300,000 during '03 and probably the upper $200,000 in '02 sort of by quarter. I would say that's going to be the floor number going forward, Jared, but that's a good indication over the last couple of years how things have moved from 200,000 to 300,000 and now into the $400,000.

And that's just the commercial side?

Yes, that's correct.

And then on the expenses you said the performance pay -- is that mortgage banking related?

No, it's overall. The Company overall incentive compensation, I mean we're looking at the performance year-to-date as compared both to last year compared to peer performance and so we adjusted our incentive compensation accruals accordingly.

Okay and that's Companywide and not department specific?

That's right.

And you just said that the business development (indiscernible) 590 was that per quarter or per year?

Actually and just to clarify that, Jared, the $590,000 first of all was for the second half of 2004, so for both the third and fourth quarter, a total of 590. And that was incremental spend on strategic initiative. Advertising and business development we're going to spend at the same level as last year, we believe, in the second half. There's no additional incremental spending and advertising and business development.

Okay, and then, can you just give an update on the asset sensitivity at the end of the quarter or the interest rate sensitivity at the end of the quarter?

Sure. I mean and I am glad you said the latter because we use net interest income sensitivity as our primary measure, not a GAAP analysis. We believe that in the rising rate environment if we were to assume what's built into (indiscernible) at the moment, which is an additional 50 to 75 basis points between now and the end of the year, we think we can weather that storm very effectively. You know, as you know we have done -- a -- we are very disciplined about adding more adjustable rate assets through this down rate environment so up 100 we think we can lag deposit rates effectively, get the assets to reprice and have a modest improvement assuming rates go up another 50 to 75 basis points. Up 200, you know an immediate shock of 200, there would be greater pressure on deposit pricing so we would expect a modest contraction, 1 to 2 percent in net interest income in the first year. 100, we think we can weather another 100. We believe deposit pricing will continue to increase and we will probably see a contraction of 1 to 2 percent in the first year.

And just finally, when you went through the EPS guidance is it 206 or operating EPS guidance at 199 per GAAP? Could you just go through those numbers one more time?

The $1.99 is GAAP -- is what we expect to report in GAAP EPS for 2004. That includes 2 cents of M&A expense so if you exclude that and that would -- you would arrive at a number of 201. Included in the 201 is 4 cents of security gains. We typically as an organization have not counted security gains as operating so if you excluded those 4 cents you would come to an operating EPS of $1.97. I would point out to you, Jared, that the First Call numbers for independent for 2003 were at I believe $1.93.

That number includes 3 cents of net security gains. That's typically not (ph) how we look at ourselves.

Okay, so when you describe operating you're excluding all securities.

Yes.

Chris Mutascio (ph) with Legg Mason.

A couple quick questions. Chris, given the several strategic initiatives underway over the past I guess couple of quarters, and then the implied ramp up in the earnings guidance that Denis gave, can you provide some thoughts on what initiatives will take hold and provide tangible benefit to EPS growth, first, and then which ones will lag? Might help me out in terms of modeling a little bit in terms of those are six or seven different kinds of initiatives. Which ones you're seeing material or a pretty good impact right out of the gate and which ones will lag a little bit?

I think, probably the one that's clearest is the seventh initiative which is the acquisition initiative but now clearly we have given you specific guidance where that is much improved by product with that No. 1. I would say all the work we've done in deposit gathering, we have very large deposits, deposits have been increasing commercial lending. It's interesting while we've done a lot of work the first half on process improvement I can't say specifically all the processing improvement has led to the best -- one of the best months we've ever had. I think it's probably loosely (indiscernible) but I think that's sort of indicative of an increase in the business of the only time we'll be able to have a good commercial lending year this year. The -- I'd say probably mortgage banking, Chris, I'm looking at a slower ramp up there. Business banking, I think we can say, continuously, they'll be slightly dilutive this year and be accretive next year.

Investment manager improved. While we're making good progress there I don't think that's going to beat a material contributor in terms of improved performance this year (MULTIPLE SPEAKERS) improvement next year.

That will give me an idea of going (technical difficulty) Denis, on the operating expenses in terms of talking about peaking I guess in the second quarter of this year? Is that on a stand alone basis for INDB or does that include Falmouth?

That's a stand alone for INDB. If you want I can provide information on Falmouth. That's standalone for INDB.

I can figure that out for myself, I just want to make sure with some of the initiatives, extensive initiatives somewhat slowing down, I just wanted to make sure I was interpreting you correctly. And then some of the mundane questions. The suspending of the 401(k) matching that I read in the release. Is that providing any type of morale issues at all?

On balance I would say that we are doing just fine. And let me give a little bit of -- and this is a little bit. We've had a lot of conversation about this. One of the things that is sort of mitigating for our potential morale issue is that we've been very clear about the increased pension expense and we are one of the remaining companies, or banks our size that have a defined benefit pension program. As we discussed in previous calls that expense level had been zero over the last few years and it's at what about -- (MULTIPLE SPEAKER) $1.8 million this year.

So when you compare that to the 401(k) match, I think people in the rational moments will understand that that's a good trade-off. I also -- I think, overall, the morale here is very good because people are really clamoring to be a part of building a franchise and taking it to even greater heights. And when there's a lot of the -- quite frankly there's a lot of merger and acquisition activity around you, there's a comfort to know that you work for a company that has a point of view on how they're going to grow and thrive in that marketplace.

Bill McCrystal (ph) with McConnell, Budd and Romano.

Couple of things. One -- going back to the initiative the devaluation of the branch network. What's a timeframe in terms of when you're going to be through with that?

Well, the -- let me answer it in two ways, Bill. First of all, I think it is an ongoing discipline we will have here forever. I mean, always evaluating where we --whether our branches are performing and whether we need to consolidate where we need to add. That's answer No. 1 and the second answer is, it is true that we're taking a very intensive deliberate approach to get that whole process started. I'll anticipate that we would have a flushed out point of view of what incremental opportunity there is to take some network or refinement sense (ph) by the end of the third quarter so I'll be able to share with you some results I hope on our third-quarter earnings call.

In terms of the growth that you've been experiencing, can you give us a sense of whether that -- how much is coming from existing customers? And how much is coming from your taking market share away?

The -- let me speak anecdotally here for a second and then I'll look to some folks here to see whether they have a specific answer to that. Anecdotally, what we're finding is that given the (technical difficulty) are going to the implementations stage with conversion and selling, pending on information. That is as we suspected alerting people as to their new bank and providing us with some -- in some cases -- material opportunity in some regions where we are adjacent to some of those branches to garner new customers.

Our account openings levels have accelerated dramatically over the last 6 weeks and the number of households that we have added between the end of '03 and today has increased, I'm doing some mental math here, by about 3 percent which is done materially good given our historical trends. I would say 6 percent or so household growth trend for the year, which is very good.

Bill this is Denis. On a municipal banking area we're definitely increasing our emphasis. It is a very competitive (technical difficulty) but Chris spoke of the M&A, heightened M&N activity all around us. It leaves us in a rather unique position as being the largest bank headquartered in Massachusetts remaining. So that has helped us a lot in our municipal business. Some of our competitors in their recent M&A conversions have made some missteps. There are others that are yet to convert and we're certainly going to be aggressively waiting, aggressively positioning ourselves not just on the municipal deposit area but also consumer deposit. As we are growing market share in each of our markets, we are taking market share away from some of the other competitors with our new consumer deposit product set. And we are going to be doing more things in the business deposit product set in the latter part of this year.

So things are looking very good in the deposit front. We think, strategically, it is critical.

(technical difficulty)

-- know that liquidity may heighten at some point down the road here and deposit growth will remain a key strategy force.

Can you give us a sense on the new loans been booked? What kind of pricing you're getting? Is it very competitive and how are you -- how are things holding up on that side?

It's competitive, as evidenced by a little bit of our margin compression, it is quite competitive at the moment. Bank of America, Citizens, everybody are calling and we're calling on businesses throughout the region so it is very competitive.

So you are seeing some pressure on that end but you are, as I would assume, you're not willing to compromise on the underwriting?

No. No, we're not. We -- I think if you look at our trend in nonperforming assets etc. very good. We are fortunate in that we have a strong underwriting standard, a good workout group. Seasoned commercial lending staff. And I think those are the things that make a difference for us and we're not looking to compromise in credit at all.

And then just finally going back to the guidance and this could just be trying to write into everything all at once here. I'm going back to $1.93 is basically what we were using as the basis.

Yes that includes 3 cents of security gain. I can even give you a number that includes security gains or excludes security gains.

Where I'm having the difficulty and I am just willing to say it could be my inability to do this quickly is $1.93 you're saying Falmouth is three things I know that your 4 to 7 excluded Falmouth earlier. Increase over '03?

Yes.

But now we're getting more out of Falmouth than originally anticipated.

Yes.

Bill McCrystal And maybe if you can just walk me through that?

Sure. Starting with -- let me just give you -- we're giving guidance and when we give a 4 to 7 percent range clearly we are at the lower end of that range now. The guidance for 2004 GAAP diluted earnings per share was $1.99. That includes Falmouth's 3 cents. Okay. It also includes 2 cents of merger and acquisition charges from Falmouth. So if we start at $1.99 add back 2 cents for the M&A charge (technical difficulty) 201. That number is a 4 percent increase from the $1.93 of last year. That $1.93 of last year included 3 cents of net security gains. If you back the 3 cents out of last year you get to $1.90 of what I would call operating for last year. If you knock out 4 cents from this year you get to $1.97 of operating for this year.

So that's what I'm calling operating earnings per share this year. $1.97, GAAP, $1.99.

That makes it a little clearer for me.

Let me just add a comment. I concluded my remarks by talking about how some things are going better-than-expected and some things are going as expected. I would put the Falmouth very much in the better-than-expected. Falmouth deposits commercial lending and when we look at our strategic initiative portfolio much like, I mentioned, one looks at a stock portfolio you expect -- you don't expect to be exactly right on every single call.

So we're looking -- our portfolio we believe our initiatives is on balance on track and will lead us to the results we're looking for although there are some ups and downs within it.

Kelly Hinkle with Lycos Capital.

Quick question. The Company in recent history has de-emphasized indirect portfolio and now it's seeing some growth there. Could you just expand on that a little? Is there kind of a shift in strategy, a greater comfort level.

Kelly, I wouldn't characterize it as a shift in strategy. We still would expect that indirect portfolio is going to be way down from where we've been historically. There are some -- what we're finding in the marketplace is that given all this mergers and acquisitions activity auto dealers like to have several lenders sort of in an option. Some of their options are consolidating. We are finding that more of our dealers are calling us more frequently. The nature of the portfolio, the characteristics, has not changed. We are not expecting to ramp up this dramatically.

However, we believe sort of given the in market nature of this business and what we know about the performance (indiscernible) portfolio consistent with our balance sheet is a good thing.

And I'd just point out just wanted the average (indiscernible) on the -- our portfolio is going up. And it currently stands at the end of the second quarter at 726, which is very high.

(OPERATOR INSTRUCTIONS) Gentlemen, there are no further questions at this time.

Thank you, everyone, for joining us on the call and we look forward to speaking with you once we announce our third-quarter 2004 earnings.

Thank you very much.

This concludes today's conference. Thank you for your participation.