Independent Bank Corp (Massachusetts) (INDB) 2004 Q3 法說會逐字稿

Welcome to the Independent Bank Corporation third quarter earnings conference call. At this time, all parties are in a listen-only mode and a brief question and answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Denis Sheehan, Chief Financial Officer of Independent Bank Corporation.

Thank you. Good morning everyone, and thank you for joining us on the call. This morning's agenda will include my review of the third quarter 2004 earnings release, followed by comments by Christopher Oddleifson, our Chief Executive Officer, regarding our progress on strategic initiatives. I will then come back on the call to provide earnings guidance, and we will wrap up with a question and answer period.

With me on the call today are Christopher Oddleifson, President and CEO of Independent Bank Corp, and Barry Jensen and Rob Cazone (ph) of our finance department. Before I review our Q3 earnings release I will read the cautionary statement.

This conference call may contain certain forward-looking statements with respect to the financial condition, 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 to update publicly any such 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 $8.3 million, an increase of $744,000, or 10 percent from the quarter ended September 30, 2003. This represents diluted earnings per share of 54 cents for the third quarter of 2004 as compared to 51 cents in the same period a year ago. There are two non-core items in the third quarter of 2004. The Company recognized $461,000 of security gains and incurred $463,000 of merger and acquisition expense in the quarter. These items essentially offset, and the previously mentioned 54 cents earnings per share for the third quarter represents both GAAP and operating EPS balance sheet changes in the quarter.

The acquisition of Falmouth Bancorp closed in the third quarter of this year and represented an increase of approximately $158 million in total assets, as follows -- investments increased by $33 million due to the acquisition; loans increased by $98 million due to the acquisition, as follows -- commercial, 24 million; residential, 57 million; and consumer lending, 17 million.

Goodwill and core deposit intangible as a result of the acquisition is a total of $21 million, other assets of $6 million totaling 158 million. On a liability side, deposits increased at the time of the acquisition by $136 million, other liability is 5 million and equity $17 million, again, for a total of 158.

Investments in total increased by $18 million, or 2 percent, since June 30th of '04. At the beginning of the quarter, as mentioned previously, approximately $30 million of cash from Falmouth Bancorp was invested in near-term U.S. government agencies and mortgage-backed securities backed by 15-year collateral. Later in the quarter, $20 million of other agency securities were sold, resulting in the previously mentioned security gain. Securities represented 28 percent of total assets at September 30th of '04.

Loans grew by $181 million, or 11 percent, in the third quarter of 2004. Excluding the acquisition of Falmouth Bancorp, loan growth was $83 million, or 5 percent, and was contained in the following categories. Commercial lending grew by $49 million, or 6 percent in the quarter. This is the best quarter of commercial loan growth that we have had in the 12 years that our senior lender has been with the Company. It was really an outstanding performance. Residential real estate grew by $14 million, or 4 percent. Consumer lending grew by $20 million, or 4 percent. As I just mentioned, commercial loan growth in particular was strong in the third quarter. This was driven by the low rate environment and the strong pipeline. Much of this quarter's growth was developed late in 2003 and early 2004, resulting in funding in this third quarter.

Loan growth year to date was $296 million, or 19 percent, including the impact of Falmouth Bancorp. Deposits grew by $348 million, or 20 percent year to date. Excluding the impacts of the acquisition of Falmouth Bancorp, deposits grew by 211 million year to date, or 12 percent. Deposit growth has been very good throughout our markets, particularly those markets affected by the merger and acquisition disruption. The introduction of a new consumer product set in the second quarter of this year, and recently, a business deposit product set, as well as a more aggressive marketing presence have contributed greatly to this growth. We will continue to be focused on strong deposit growth. Our government banking and municipal business has also performed effectively this year in deposit gathering and we plan to continue efforts on that front as well.

Now the income statement. Net interest income. The net interest margin for the third quarter of 2004 was 3.88 percent. This represents a modest expansion of 4 basis points from the second quarter of 2004. The expansion is due to assets repricing upward based upon the measured increases in short-term rates without a corresponding increase in liability pricing overall.

Non-interest income. Non-interest income, excluding securities gains from both third quarter comparative periods, decreased by $836,000, or 12 percent. While service charge revenue and investment management revenue improved by 8 percent and 15 percent, respectively, these gains were more than offset by a decrease of $1 million, or 59 percent, in mortgage banking revenue. The balance of the mortgage servicing asset was $3.4 million and loans serviced amounted to $409 million as of September 30 '04.

And now non-interest expense. Excluding merger and acquisition expense in the third quarter of this year, non-interest expense increased by $0.4 million, or 2 percent, as compared to the same period last year. Salaries and benefits increased by $600,000, or 6 percent, due to staffing and salary increases as well as retirement expense, partially offset by lower accruals for performance-based incentive compensation. Chris will provide an update on the progress of our strategic initiatives, including expense incurred in this third quarter and year to date to support those initiatives.

Asset quality. Non-performing assets of $4 million represented 14 basis points of total assets, and the reserve for loan losses as a percentage of loans was 1.35 percent at September 30, 2004. Reserve coverage of non-performing assets was 6 times. Net charge-offs for the quarter were $306,000, representing 8 basis points of loans on an annualized basis.

I will now turn the call over to Chris for comments on our strategic initiatives.

Thanks, Denis, and good morning everyone. Denis provided a good summary of our results for the quarter and year to date. I would like to underline a couple of points he made and then move quickly on to an update on our business growth initiatives.

I am pleased with the overall performance this quarter, delivering 54 cents per share, up from 45 cents in the second quarter. This performance is really enabled by several factors. First of all, our loan and deposit growth continues to be strong. Year-to-date, without the impact of the Falmouth acquisition, loan growth was nearly 13 percent and the liability side of deposit growth on year-to-date without the impact of Falmouth was 12 percent.

The positive impact of our balance sheet growth was, of course, offset by our margin compression we have experienced. As Denis mentioned, the good news in the third quarter is that our -- there's been modest margin expansion, from the 3.84 in the second quarter to 3.88 percent in the third quarter.

The second factor was the successful integration of Falmouth Bank. During the second quarter we completed the purchase and were able to convert the systems immediately. This enabled us to realize a higher level of cost saves than expected. We also restructured the security portfolio, extending the duration somewhat, increasing yield.

The third factor is that we were able to manage our costs well. And as Denis mentioned, excluding M&A charges, non-interest expense increased by about 2 percent, or a little over $400,000 over the third quarter last year. And this also includes, importantly, the spending on strategic initiatives, which I will describe that spending in a moment.

Moving on to the strategic initiatives, collectively, as I've described the last several calls, these initiatives will lead to earnings growth and are deliberate investment decisions for 2004 that will become important contributors to our '05 and '06 earnings performance. Let me go through each of these, as I have in the past.

The first initiative focused on expanding our commercial lending business, investing in process improvement, improving our cash management capabilities. Commercial lending, as the numbers show, continues to be one of our strengths. We now have 34 lenders and we plan to end the year with 33 lenders, expecting one retirement. That's on target with our expectations.

Our process improvement work is on track as well, and as I mentioned on the last call, we are streamlining the loan submission process, we're improving the efficiency of our credit committee meetings, improving the efficiency of loan operations and implementing some improved sales management.

Our work over the last three months has also led us to this conclusion that about 20 percent of the relationships managed by commercial banking would be better served in our new lower-cost platform, our business banking division, which I will describe in a little more detail in a moment. Before our process improvement work began, we surveyed our commercial bankers and estimated that the time allocated to business development was about 18 percent. We anticipate that once all the improvements are in place and they're seasoned, that our business development time will increase to 30 or 35 percent. And we anticipate hitting that level sometime during the second quarter of next year, and we'll conduct a survey sometime during that quarter and report the results.

At this point we're comfortable with the number of commercial bankers; however, we of course will be further evaluating expansion opportunities during the planning process that is currently underway. And the results of this are encouraging. The total increase of total outstandings -- we've increased the total outstanding by 13 percent and increased the outstandings per lender by 3 percent. And with the new adds in the commercial banking, we have, I believe, begun to increase our business development time.

Our pipeline is strong as of the end of August. In fact, it is the second-highest pipeline we've had in the last 57 months. So it's very, very strong. We were awarded $30 million in new market tax credits, which will lead to some new lending opportunities. And our average relationship size continues to trend upward. So all good indicators of our work to date here.

The second initiatives is establishing a new banking business division, as I've discussed on previous calls, but we continue to believe we have a tremendous opportunity to increase the number of smaller business customers we serve. Our extensive branch network, our refined product capabilities, our low-cost processes are key building blocs upon which we can construct a formidable small business banking franchise.

The model we are deploying is not unfamiliar to the banking industry. Business development officers actively seek and secure new relationships; the branch (indiscernible) provides a day-to-day relationship management, including meeting, all servicing and additional financial solution needs; a central underwriting and servicing unit provides underwriting and ongoing portfolio management; and a very active and analytically-based sales and marketing process provides product development, lead generation and sales tools.

The key to our success is that we do have the greatest number of branches in our service area. We will be executing against these -- this model in an excellent fashion. And one example already is the extensive training we have in place and cultivating and expanding these relationships.

We have since our last call hired three additional experienced business development officers, bringing the total to six. We have made significant progress in streamlining our underwriting capability, and we are very, very close to installing auto-decision capability for a segment of our applications. And as I mentioned before, we are in the midst of very carefully, very carefully moving our selected smaller relationships from the commercial banking platform to this lower cost platform.

This new process -- and people are just coming together. These new hires are very recent and some of these changes I mentioned are very recent. So it's too early to report results, but I will expect that I'll be able to do that on our next call.

The third initiative is really focused on generating core deposits, and this year we've made tremendous headway in the area of deposit growth. This is due to a number of factors. The introduction of our new consumer product line was well timed -- not necessarily planned to be well timed -- but well timed to coincide with the merger activity and the disruption that's ensuing. We are investing in our retail relationship development skills and coaching, and that is coming along very, very well. Our scorecard for the branches has been now in pilot for nearly a -- it was in pilots for several branches; then in the last year it's really been in place for all our branches this year. And I anticipate that next year we'll use that scorecard to begin to drive (indiscernible) as well.

As Denis mentioned, we've had an aggressive municipal business development program and we've had an increase in direct mail activity. Our results here are impressive. We have increased core deposits and total deposits, including Falmouth Bank, by 23 percent and 19 percent, respectively. Excluding Falmouth Bank, this was 17 percent and 12 percent, respectively. Very, very solid.

Our average branch size is trending up. The number of new core accounts we're adding -- we added in Q3 versus Q2 more than doubled. Now, this is due to a lot of things that we're doing, but it is also due to things we're not doing but we're simply the beneficiary of, and that is the merger and acquisition activity. So I would not anticipate a more than doubling of (indiscernible) process continue into the -- years in the future, but I would anticipate that continuing for the next several quarters.

A quick point on our branch network. We have -- we're in the process of taking a very careful look at it. We will be consolidating a branch here in Rockland, Massachusetts into our main branch. We announced in the third quarter a sale of a small branch to Cape Cod 5. We closed two branches associated with the Falmouth Bank merger. Two of our branches we kept, therefore, open. We closed a small school-based branch. And I anticipate there is going to be more refinements to our branch network over the quarters, both consolidations and openings.

I would like to also add that we opened our North Attleboro branch in July. That deposit growth is coming along nicely. And in Rainem (ph) we have just opened one a couple of weeks ago.

Our fourth initiative was expanding the mortgage banking product set and investor platform, as I have said before, by increasing (indiscernible) more product offerings and product investors. And given our branch network and franchise presence, we believe we could expand our production. We didn't feel that we were meeting our -- all of our consumers' needs. Our little slogan here is the options of a mortgage company from a local bank you can trust.

We are behind on originators in terms of what we anticipated hiring. We are at 21. We found it very difficult to hire experienced purchase market mortgage originators. The refi mortgage originators are a little more straightforward to find, but in a purchase market it's more difficult. We will continue to endeavor to do that, and we also are taking a slightly different tact in that we are putting together a mortgage banking 101 for skilled salespeople from related and other industries, and we've done this before in other environments. We think that has some good upside as well.

Now, as Denis mentioned, our fee income is down. The glass-is-half-full sort of look at this is that well over 50 percent of our production is from originators that we've hired over the last 12 months. And our production originator is higher them we had anticipated. Nevertheless, overall it's down, and we are working hard to improve that.

Our fifth area that we've talked about before is the investment management group. And as I have previously discussed, we are increasing the capability on a number of areas, namely asset allocation capability and manager selection. And we have expanded our business development capability. In fact, we have been somewhat opportunistic about that as well. One of the new owners of an acquired bank in our market appears to be deemphasizing investment management, and we have been able to hire two incremental, more than we expected, tremendous business development officers from that institution. And that is going well. Our assets now stand at $516 million, an increase of over 7 percent since the beginning of the year. We have also recently opened a new Cape Cod location in Osterville and our Cape Cod asset generation is coming along very, very well.

Our sixth was improving efficiencies through technology improvements, and we're finishing up on our core processor evaluation. I would expect that that would lead to a combination of some modest cost saves plus some increased functionality. But we are -- we don't have -- haven't completed it yet. But by the time we have our next call we'll have more to say on that point. And the last item has been the point of opportunistically acquiring banks, and we have covered the Falmouth Bank status.

In terms of what we are spending on all of these initiatives, and we're tracking very, very carefully the expenditures associated with this growth agenda. Let me review what we have covered the first two quarters. In the first half of the year we spent about $1.1 million on these initiatives, or about 5 cents per share. In addition, we spent about $500,000 more on marketing and business development to take advantage of the disruption in the marketplace, and that's about a 2 cents a share. So in total, the first half of the year we spent about 7 cents per share on these growth agenda initiatives.

Similarly in the third quarter, we spent about $325,000 on the initiatives, or about a penny and a half, and about $250,000 more on marketing and business development expenses, or about a penny. So that's about 2.5 cents in the third quarter. So the total year-to-date spend on these initiatives is about 9.5 cents, or $2.1 million. And we recognize that that's significant, that's material, and we believe, as I have just described, that we're beginning to see some traction here. And that will uptick in '05 and '06.

For the balance of the year, we expect that the incremental spend on these initiatives, including marketing and business development, is about $220,000, or about a penny. So all told it's going to be about 10 cents for the year.

I believe we're making significant progress on all these key initiatives. Some are going better than expected, Such as deposit gathering and some commercial banking improvement. And some are not going as well as expected, as I mentioned in the mortgage originators. And others are right on track. On balance, I believe we're proceeding nicely on building on our solid set of fundamentals. I will add that we are well into the 2005/2007 planning process, and I expect that I'll give you a fresh set of strategic initiatives and goals during the fourth-quarter earnings call in January.

That completes my comments. Denis?

Thank you, Chris. I'll now provide earnings guidance for the fourth quarter and the remainder of this year.

We expect to report GAAP diluted earnings per share for 2004 of $2. This includes approximately 3 cents of onetime merger charges. It also includes 6 cents of security gains. As previously announced, we expect to sell one of our small branch locations, totaling approximately $14 million in deposits, in the fourth quarter. I have not included the impact of this sale in the earnings estimate just discussed. We expect to use a portion of the proceeds of this sale to fund continued process improvement studies in our branch division, as well as to improve the funding of performance-based employee benefit programs. We will provide detail of the sale and use of some of these proceeds in January at our next earnings release and conference call.

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

(OPERATOR INSTRUCTIONS). Jared Shaw, KBW.

Congratulations very nice quarter. Just a few questions for you. On the tax credit that you're receiving from the business development, or the low income business lending, do you anticipate that will be smoothly spread out over the remaining quarters, or would that be a lumpy contributor to the tax revision?

Jared, this is Denis here. I think we mentioned in our earnings release that we -- our tax provision benefited to the tune of about $188,000 in the third quarter. We expect that that will increase somewhat in the fourth quarter, probably to the tune of another penny or so in the fourth quarter. Does that answer your question?

Yes. And then going out through the rest of the -- it's not going to be finished by next quarter, so looking at 2005, it should be pretty much in line with the fourth quarter would you expect?

Yes. It would be about the level that it is in the fourth quarter for the rest of -- each of the quarters of next year. Right Barry?

It really depends upon our level of investment into our CDE. The tax credits are recognized over a 7-year period, and they're predicated upon what we invest in our community development entity. The credits earned is 39 percent of the investment amount, and it's 5 percent in the first three years and 6 percent in the last four years. So you earn the credit over a 7-year period.

So looking I guess at the combined tax rate, if we use the 30.5 percent level for modeling purposes, that's probably accurate for the next few -- for this quarter and next year at least?

No. I think we'll get down below 30, Jared. I think we'll get close to 29.5 or 29 percent.

In terms of the Falmouth acquisition, should we expect any more residual merger charges, or is that all --

No, that should be everything.

Could you tell me, especially with the good growth you're seeing in the C&I portfolio, what percentage of your loan portfolio is tied to an increase in primes? And if we see the short-ends continuing to go up, how much will that help you on the loan side?

First of all, the loan growth that we've had in commercial has really not been in C&I, it's been more on the real estate side. Our C&I balances -- and I think this is right on the face of the balance sheet in our earnings release -- are actually flat to year-end. We do expect that to improve, because there's some seasonality on when our customers draw on the lines. But our C&I balances are actually flat. The areas of our balance sheet that are primarily affected by prime in our loan portfolio are obviously C&I. We have $171 million in C&I. The majority of that is variable. And in the home equity line. We have $176 million in home equity loans. I think 140 or so of that is variable, and those are prime-based.

Those were my main questions. Thanks a lot.

Ryan Kelley, FBR.

Very nice quarter, everyone. Just to follow-up real quickly on one of the questions Jared had on the FCB acquisition. Are there any more cost saves to come out of that?

We have realized all the cost saves. You're not going to see any more lumpiness in terms of cost saves beyond the end of the third quarter.

, Okay. So they're already pretty much all in there, so using that as a base going forward is a good place to start?

Yes.

And then if you could just talk a little bit about the auto portfolio. That has grown from about 240 million at December 31st this year to 285 million this quarter. And by the way, I like the way you broke it out this quarter. That was nice to see. Just wondering if you could give us some details as far as FICO score, what you're putting on the books now, and sort of details you have on new verses used, that kind of stuff?

Let me give a little bit of context. Interestingly, the uptick in our portfolio is not a result of adding business development staff or anything, it's actually more a result of consolidation in the marketplace and dealers who were less active becoming more active. The quality of the portfolio is constant. Our average FICO has actually gone up, but slightly, from an average of at the end of the year last year a little less than 720; it is now at about 727. So quality is going up. We are also doing some work on really understanding where the nature of the embedded loss in that portfolio, based on our historical performance and looking in the future based on what we're putting on. And we're seeing absolutely no degradation in the credit (inaudible) loan expected losses. So we're pretty comfortable. Now having said that, we are very, very sensitive to the amount of our total balance sheet that we allocate to this business. While we think they're good returns, we don't want to have too much of a good thing, if you will. And what are we now in terms of percentage?

15 percent of the loan portfolio is in indirect auto. And Ryan, if you go back to '99, 28 percent of our loan portfolio was indirect auto. While it has grown since the beginning of the year, it's not going to get up to 20 percent of loans again. So that is essentially how we're looking at it. The average life of our indirect auto loan portfolio is 22 months. I think you asked about new verses used. Do we have that, Rob? We can get back to you, Ryan, with information about new versus used. And Chris, I think you shared the FICO. Anything else on that, Ryan?

No. That's great. Just the new versus used would be great. But that's good details. Actually getting back to the first part of your answer, Chris, as far as just the disruption going on in your market. If I look at you guys compared to the rest of New England, it seems to me that you would probably be the -- have the greatest benefit from all the acquisitions going on there. In other words, you've got fleet, CCBT, FAB (ph), Seacoast and Abington, pretty much all in your market. I wondered if you had any way of tracking accounts that were coming over, and if you could just talk about that a little bit?

We can't track the source of funds. We can describe -- we can take a look at the large uptick in accounts and relationship acquisition, and of course there is the anecdotal evidence that we hear all the time. I would say that as I mentioned in my comments, our account opening has more than doubled since the beginning of the year. And if you look at branches around some of the banks you mentioned, they're actually -- there are some examples of account opening quintupling. It's been quite an extraordinary thing to watch. We were well prepared for it. We had a good product set in place. We did a lot of the right things. But I mean we have to be honest with ourselves, it's not our excellent management capability that's producing all those results; some of it is just simply disruption in the marketplace. So I can't give you sort of an exact number, but I can tell you that it is true, a lot of the -- we're getting a lot of benefit from that disruption.

I guess the right place at the right time.

I think so. Back in 1907 when the Bank was founded, they didn't anticipate this, but we do now.

One last question. If you could maybe give a little bit more color on where you stand in the interest rate sensitivity department. I know that you're still showing in your last 10-Q that you're more liability sensitive, but I wonder if that has improved at all?

Ryan, the measured rate increases, these 25 basis points periodically, we will do just fine in that environment if that continues. As evidenced in our third quarter, we've had a couple. We had three fed funds increases, and we haven't had a corresponding increase in liability pricing. Certainly borrowing costs have gone up, but we think that liability pricing had already headed up in advance of Fed funds. So we haven't had to increase our deposit pricing as yet. Some of that is dependent upon what our competitors do and how rational we are as -- all of us -- as rates rise.

So these measured 25 basis point increases we can absorb just fine. We actually think that they will -- if there's another 25 basis point increase between now and the end of the year, that could provide for some further modest margin expansion. However, as you know and we disclose in our SEC filings, if there are dramatic shocks, like 200 basis point, 300 basis point shocks, that's a different scenario for us. A dramatic flattening of the yield curve will hurt. And I think we disclosed in our last 10-Q somewhere between 2.5 and 3 percent. And that 200 basis point parallel yield curve shift, net interest income would drop by that amount in the first year. That assumes a static balance sheet. As you can tell, we have a very good growth engine going here. Assets are up 20 percent year-to-date. So our ability to grow will, we believe, more than offset that negative net interest income compression.

Martin Ji, FTN Midwest.

First just quickly, Chris, I guess you mentioned that you've got the second-highest pipeline over the past 57 months. That's for commercial loans or the total loans?

That's for commercial loans.

Okay, I see. Commercial, i.e. that's CER and C&I?

That's correct.

And the other question is the deposit. I noticed that the linked quarter deposit growth from the second quarter to the third quarter, it's about $8 million. That's a little low compared to the previous few quarters and the same period of last year. Is that due to seasonality, or some more colors on that?

We actually had good retail deposit growth in the quarter. Our municipal business lost about $35 million in the quarter, and some of that is seasonal, yes. The municipal deposit business can be volatile based upon how the municipalities of local towns get in tax revenue and then they spend it. And then they get tax revenue again, and so our deposit base, we expect, will expand there again. But you are right, we had about $8 million of growth from June to December. The retail growth was in the 40-plus million and we lost about $35 million in the municipal area.

That pretty much happens like by this time each year, or this year the numbers are a little higher?

The volatility in the municipal is a little higher because we have grown that business very effectively this year. It's a much larger business than it has been in prior years, so the volatility is a little bit more at this point.

So we'll see like maybe second quarter of next year, the linked quarter growth will be sort of like back to normal, things like that?

I would like to think so, yes. Some of it is -- particularly for that business some of it is dependent upon how towns spend. We have really no way of gauging that. We've had very, very good deposit growth this year. We are also conscious of -- and I'm talking about retail deposit growth as well as municipals -- we're very conscious of the fact that we have benefited from some of the M&A disruption with very good deposit growth. That may slow next year.

Bill McCrystal, McConnell Bud & Romano.

Going back to the consolidation, I wonder where you would think you are in terms of the curve as far as benefiting from the ongoing consolidation? Do you think you are more than halfway through that, or do you see further opportunities from a customer standpoint, and also from taking on some additional employees that may be looking for a community bank?

As I said, we're looking into the crystal ball. Let me sort of -- let me do that for a second and share with you my sort of sense of things. There are -- and I don't really want to get down to naming names. I'll name one name. But we are probably, I would say, in terms of the immediate disruption, 40 or 50 percent through it. We have seen a lot of benefit on the Cape Cod, we've seen a lot of benefit around sort of our immediate -- here around Rockland and so on, due to a couple of acquisitions. The B of A of Fleet -- A, that really hasn't -- nothing has really happened in terms of material consolidation; and B, B of A is very skilled. So I wouldn't anticipate that that's going to be up in ends in any way, shape or form.

There are a couple of conversions that are not complete yet that are upcoming over the next month or two. So we will continue to see that activity. Now, I also believe that we are doing things that are more than just simply waiting for people to walk in the door. I mean, there are -- we have a very aggressive direct-mail campaign that is actually yielding good results. As I mentioned before, our time available for calling efforts, the number of calling officers has increased in the commercial banking arena, the business banking arena, the investment management arena. And despite the fact we're not at goal in terms of the number of originators in the mortgage originator area as well. So we are not -- we are very, very cognizant of the fact that we're going to have to work hard for the business going forward. And the number of things we're putting in place are a dramatic uptick I would say, over the same period of last year, in terms of our ability to do so. So while I think that the thing --if accounts falling from sky will diminish somewhat, I think we'll be able to mitigate that somewhat by the calling efforts we have in place. That is sort of my nonscientific sense of things.

And that's exactly what I was looking for. And maybe you could touch a little bit about expansion. You had talked -- I don't know if it was last quarter or earlier -- about maybe the Rhode Island market. Is there anything out there that is particularly interesting, or what are your thoughts on that?

We really look at it in two different lenses. One is the commercial banking lens and one is the retail banking lens, actually and the mortgage originator lens, too. And we are -- I think the best I can say right now is that we were actively evaluating that, and I would anticipate that we will in 2005 in our plant, which we'll talk about at the next call -- it will include -- if I were to prognosticate, it would include a new market or two with a new branch opening or two, and an incremental commercial lender or two in some new markets. But we actually -- we are fortunate that we have a number of directions in which we can expand. We have the South Coast region, we have West of Boston, we have into Boston. So while we don't -- we want to think about this in an organic fashion, we're not thinking about it as the big bank, we have been successful in doing this one at a time. We'll sort of continue that trend.

One final specific question. I don't know if you addressed it, but the increase in non-performers, is it entirely due to the Falmouth on a linked-quarter basis?

No, Bill, it's not. Falmouth had no non-performers. We're not concerned about the level of NPAs (ph). It's 14 basis points of total assets. There's nothing extraordinary in there. We periodically have fluctuations up and fluctuations down, but we're comfortable that we don't have material issues in either non-performers or delinquencies.

(OPERATOR INSTRUCTIONS). Bryce Rowe, Legg Mason.

I've got two questions for you all. The first question is how do you all actually measure the time officers spend doing business development?

It's using industrial engineering methods of time surveying. We don't have a daily log; it's actually a point-in-time survey, and so it's not exactly precise, but okay.

The second question is -- and I think you all alluded to it somewhat earlier. The growth that you're getting in your core deposits, how is that split between retail and commercial, and has that changed somewhat versus say 12 months ago?

Sure. Rob, do you have that detail?

The majority of our growth has been retail. Certainly earlier in the year, Bryce, municipal growth was strong the first half of the year. We introduced our new consumer product set in April, so our retail deposit growth has taken off since then, and has really grown beyond the level of growth we saw in the municipal area. So it's been sort of a mixed bag. Beginning of the year was very strong in municipal. We were working very hard on getting our retail product set together for introduction at the beginning of the second quarter. And since then, we've had very good growth on the retail side. I don't have the specific split at the moment between retail, commercial, and municipal, but I can certainly get that to you.

Any product in particular that has been the lead product on the retail side?

It's a combination of free checking, interest checking and money markets. And the money market has been the primary beneficiary of the growth.

Gentlemen, there are no further questions at this time.

Thank you, everybody, and we will speak to you again in January following the release of our 2004 earnings.

Thank you, ladies and gentlemen, for your participation in today's teleconference. You may disconnect your lines at this time, and have a wonderful day.