Independent Bank Corp (Massachusetts) (INDB) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-quarter Independent Bank Corp earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Denis Sheahan, Chief Financial Officer and Treasurer of Independent Bank Corp. Thank you. 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 fourth-quarter 2004 earnings release, followed by comments by Chris Oddleifson, our Chief Executive Officer, regarding our progress on 2004 strategic initiatives and a preview of 2005. I will then provide earnings guidance for 2005, and we will end the call with a Q&A period. With me on the call today are Chris Oddleifson, President and Chief Executive of Independent Bank Corp, and Barry Jensen and Rob Cazone (ph) of our Finance Department.

Before I review our fourth-quarter 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 our earnings release. Independent Bank Corp reported net income of $9.2 million, an increase of 1.9 million or 26 percent from the quarter ended December 31st, 2004. This represents diluted earnings per share of 59 cents for the fourth quarter of 2004 as compared to 49 cents in the same period a year ago. Net income for the full year 2004 was a record $30.8 million, representing GAAP diluted earnings per share of $2.03, increases of 16 percent on a net income basis and 13 percent on a diluted earnings per share basis respectfully.

Returning specifically to fourth-quarter performance there is one non-core item in the fourth quarter of 2004. As previously announced, Independent Bank Corp sold one of its branch locations with deposits of approximately $11 million, realizing a gain in sale of $1.8 million pretax. The majority of the proceeds of this sale were used to fund a retail process improvement project, as well as additional accruals to the Company's incentive plan and 401(k) plan.

You will recall neither the branch sale gain nor the use of the proceeds was included in the earnings estimate provided at the last conference call. I will provide details of the use of the proceeds in a moment as I review the change in non-interest expense.

Balance sheet changes in the quarter. Investments increased by $8 million or 1 percent since September 30 of '04. Investments represent 28 percent of total assets at both December 31st, 2003 and December 31st, 2004. Loans grew by $39 million or 2 percent in the fourth quarter of '04. Loan growth was contained in the following categories. Commercial loans $12 million, residential loans $7 million, home equity loans $19 million, and indirect auto, which actually reduced by $1 million for the quarter.

Loan growth year-to-date was $335 million or 21 percent. The Falmouth Bancorp acquisition represents $98 million of this growth. Excluding the acquisition, loan growth for 2004 was $237 million or 15 percent. Deposits decreased by $71 million in the fourth quarter due to the branch sale, $11 million; seasonal business deposit fluctuation, $30 million, and municipal banking deposit outflows of $30 million also.

For the year, deposits grew by $277 million or 16 percent and $140 million or 8 percent excluding the acquisition. Deposit growth in 2004 was very good throughout our market, particularly those markets affected by mergers and acquisition disruption. The introduction of new consumer and business deposit products sets in 2004 and 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.

And now the income statement. The net interest margin for the fourth quarter of 2004 was 3.96 percent. This represents an expansion of 8 basis points from the third 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.

Non-interest income. Excluding the gain on branch sales from the current quarter period and the securities gains from the prior-year quarter, non-interest income improved by $266,000 or 4 percent. Service charges and deposits improved by 9 percent and investment management revenue improved by 8 percent, while mortgage banking income declined by 34 percent as compared to the prior year quarter. The change in mortgage banking revenue is primarily due to the change in fair value of mortgage banking derivatives due to rate increases in the fourth quarter.

On a year-to-date basis, non-interest income increased by 2 percent and was essentially flat when excluding the impact of security gains and the gain on the branch sale. We view this performance as quite good given the decrease in mortgage banking income which fell by 38 percent for the year due to the changing interest rate environment. Deposit service charge revenue and investment management revenue improved in 2004, offsetting the decline in mortgage banking revenue. The balance of the mortgage servicing asset was $3.3 million and loans serviced amounted to $392 million as of December 31st, 2004.

Assets under management and administration in our investment management division were $563 million at December 31st, 2004, an increase of 17 percent from year-end 2003. Non-interest expense increased by 3.2 million or 18 percent in the fourth quarter of '04 as compared to the prior year quarter.

Salaries and benefits, which increased by $2.5 million, represented the largest component of this variance. Of this variance, 1.2 million is due to the previously mentioned incentive plan accrual and 401(k) accruals. The remaining variance is due to normal staffing and salary increases. Occupancy and equipment expense increased by $318,000 or 16 percent due to infrastructure improvements, including the opening of two new branch locations in the second half of the year.

Other non-interest expense increased by $452,000 or 11 percent primarily due to a $280,000 consulting expenditure on a retail process improvement initiative that will bear fruit in 2005, as well as $150,000 additional audit cost associated with the implementation of Sarbanes-Oxley 404.

For the full year 2004, non-interest expense, excluding M&A charges of 684,000 in the current year, as well as $1.9 million of borrowing prepayment penalties in the prior year increased by 7 percent, the majority of which is due to increased salary and benefit expense and other expense associated with the implementation of strategic initiatives. Chris will provide an update on the progress of our strategic initiatives, including expense incurred in this fourth quarter and year-to-date to support those initiatives.

Asset quality. Nonperforming assets of $2.7 million represented 9 basis points of total assets, and the allowance for loan losses as a percentage of loans was 1.31 percent at December 31st, 2004. Reserve coverage of nonperforming assets was 9 times. Net charge-offs for the quarter were $825,000 and $1.9 million for the year.

I will now turn the call over to Chris for his comments.

Good morning. Denis provided a good summary of our results for the year and quarter. I would like to underline several points Denis made, and then move onto an update on the business growth initiatives we will be discussing this year.

First, these results were in an environment of strong headwinds prevent by a flattening yield curve and a declining margin and the costs associated with implementing numerous strategic initiatives. Second, our loan quality and deposit growth, our quality of loan and deposit growth continues to be strong. Loans, including Falmouth, increased 21 percent, nonperforming assets at 9 basis points of total assets and delinquencies at 48 basis points of loans or strong ratios at the end of '04. The deposits including Falmouth increased 16 percent.

Third, the anticipated decline in the net interest margin for the year did prove to be a challenge in '04. However, good progress has been made offsetting this compression through balance sheet growth. The second half of '04 actually experienced a modest net interest margin expansion with the fourth quarter reporting 3.96 percent, an increase from the 3.8 percent reported in the second quarter.

Fourth, during the second quarter, we completed the purchase of Falmouth Bank and executed a smooth and successful integration. This enabled us to realize the high level of cost saves in expected. We also restructured the security portfolio, extending the duration somewhat and increasing yield.

The last point I can make is that non-interest expense increase is 7 percent in '04, excluding M&A charges and barring prepayment penalties in 2003. This increase is higher than I expected in future years and was caused by a large increase in our pension expense, $1 million, about $500,000 from retirement and other departure expense, as well as other expenses to support strategic initiatives.

Elaborating on the use of the branch sale proceeds, as we anticipated we used a portion of the branch sale proceeds to fund almost $280,000 in branch process improvement consulting expense, which we will benefit from this year. Given the excellent growth we experienced, which I will cover some of the metrics in a moment, we used approximately $1.2 million to reinstate a partial contribution to our 401(k) program and to increase the incentive accrual. The total 401(k) and incentive expense in 2004 were significantly less than in 2003 as we mentioned in our release.

Denis will discuss at the end of the call the investments we made in '04 will result in solid operating earnings gains in '05.

Now let me talk about our strategic initiatives. During this year or last year, I started talking about a set of initiatives designed to strengthen the bank and position us for growth over the next several years. Collectively these initiatives were deliberate and disciplined actions that would dilute our '04 earnings, but become very important contributors through '05 and beyond performance. I'm pleased to say that many of these initiatives are well underway and are strong -- coupled with our strong internal controls and give us a sound foundation upon which to build.

Now in short, in other words, we are a stronger company and have greater momentum going into '05 than going into '04. I'm going to review each of our strategy areas and then move onto discuss 2005 strategies and plans.

Our first strategy focused in commercial lending. In commercial we ended the year with 34 lenders. That is one more than we had expected at the end of the third quarter and actually in line with our year's expectations beginning in January. It represents an increase of 10 percent of our lending staff. Our process improvement work is well on track and is expected to lead to increased business development time in '05. Our portfolio was up 13 percent in '04 to $917 million. New commercial loans closed and booked during the quarter or for the year is 29 percent higher than 2003. The average size of our commercial loan commitment is also 29 percent higher than '03, and our commercial pipeline of approved but not closed loans at the end of December is at an all-time high. So things are going well. The transfer of smaller relationships from commercial banking to business banking was completed during the fourth quarter.

And lastly, we did fund our community development entity associated with our new market tax credit by $15 million than we have funded our first two loans. So we have a lot of momentum in that division.

Our second strategy related to the business banking division. Our new business bank division is up and running. It was fully staffed in the fourth quarter. We continue to believe we have a tremendous opportunity to increase the number of small business customers we serve. Our extensive branch network, our refined new product capabilities and lower-cost processes are key building blocks upon which we can construct a very formidable small business banking franchise.

With the division up and running, fully up and running in the fourth quarter, our total business banking portfolio increased by 25 percent and we began to generate some deposit gathering momentum.

Our third strategy related to generating core deposits. The introduction of our new consumer product line was timed well to coincide with all the merger activity in our market. In addition, as I have mentioned in the past, we have invested in retailer relationships, development skill building and coaching. We have a scorecard to back that up. As Denis mentioned, we have a very impressive municipal business development program. Our direct mail activity has increased and is yielding results, and of course, you know well that we opened two new branches and acquired Falmouth during the fourth.

Overall, as I mentioned earlier, deposit growth is only 16 percent with Falmouth bank, including almost 8 percent without Falmouth included.

Another measure of our success in this arena and actually our business overall is the number of households. In 2004 we added 9000 net new households, an increase of 12 percent year-over-year, and our core deposit accounts increased 15 percent.

The FDIC market share data has recently become available, and in Plymouth County, our share increased from 15.7 percent in 2003 to 16.4 percent in '04. In Barnstable County Cape Cod we went from 6.3 percent to 7.3 percent, excluding Falmouth. If you include Falmouth bank acquisition, it went from 6.3 to 9.5 percent. If you look at the market size growth overall, we captured the majority of the market's growth in our counties.

Our next strategy related to mortgage banking. Our division continues to increase the number of product offerings and products investors. As we discussed before, we are behind on originators with 23 at the end of the fourth quarter. We have found it difficult to hire experienced purchase market originators. We will continue to endeavor to do so, but we are also having some success with our internal Loan Officer University where we will be bringing skilled sales and relationship builders -- we bring them up to speed on the fundamentals of mortgage banking. Our first graduation of several lenders occurred in November, and another class will be starting soon. And that is actually already beginning to bear results.

Our production is down in '03, but in the fourth quarter is beginning to trend up. The good news here is the production curve mortgage originations that is on staff is actually ahead of expectations.

Our fifth strategy related to our investment management group, and our investment management division, our improvements in retirement service, asset allocation, manager selection, business development, including a new Cape Cod location in Osterville has increased the performance of this unit. New business generation is up 34 percent in 2004, and total assets under management at the administration at year-end stand at $563 million, up 17 percent year-over-year.

Our sixth strategy related to technology improvements. We completed our core process evaluations, decided to renegotiate our contract with our existing core processing vendor, Fidelity. We expect improved functionality at better pricing over the contract. This increased functionality will also provide an improved customer experience and increased backoffice efficiency opportunities.

Our seventh strategy of '04 was being optimistic with acquisitions, and we did so with acquisition of Falmouth Bank.

In addition to the highlights I have just reviewed within the framework of our stated strategies, there are two more areas of focus worth mentioning that as the year progressed became clear that they were important factors.

First is in our home equity division. We are having some success with direct-mail, which has led to our portfolio of these attractive floating prime-based rate assets, to increase from $133 million to $194 million in '04. While we did not start our year anticipating growth, we did realize growth in the indirect auto portfolio. You know market consolidations provided us with some opportunity to expand existing and establish new relationships. We have also completed a lot of work understanding the losses in this area and now are pricing in a manner that reflects losses by certain loan characteristics.

Now in total, as I described in our previous calls, we are attracting very very carefully the expenditures associated with our growth agenda, the (inaudible) core business. In 2004 the total growth initiative expenses were $2.8 million or about 12 cents a share.

That concludes my discussion on '04. I now want to talk about '05 briefly. During the last quarter of '04, we again completed a planning process that resulted in division level plans, financial targets and key metric targets. Each of these actions of the businesses collectively represent our strategy for generating growth. Again, this year there are no surprises. We're sticking to what we know best. That is being a community-based commercial bank.

Now our success in '05 will not be a function of the brilliance of our strategies, but one of our disciplined planning, which was completed, and our discipline execution and our careful measurement of our progress along the way.

Said another way, last year our strategies included many new initiatives -- commercial banking process improvement, creating a new management banking division, revamping our mortgage banking division, retooling our investment management process and so on. 2004 was about strengthening our foundations. 2005 is all about refining and leveraging what we have and relentlessly executing our strategies.

I will quickly summarize these strategies. In our future calls, you can expect some discussion around the key operating metrics indicating our progress against these items. First is to significantly improve and expand our business development across all business units and channels. That is, for example, leveraging the increased business development time we have in commercial and increase number of business development officers in business banking; the detailed customer contact and call-in programs, and a lot of emphasis on collaboration and growth among our business units.

The second strategies are going to be all about improving the customer experience. We are developing service standards. We are measuring at those service standards. We are improving our processes, (inaudible) product improvement, and we are going to be focusing on improving the appearance of our branch network and expanding hours.

The third is all about people. It is enhancing our college capital, continuing to invest in training and development and using scorecards to measure performance and incentive plans to tie payouts to performance to a greater degree.

The fourth is addressing building and leveraging and enhanced information infrastructure and analysis capability so we can further understand customer and product contribution, (inaudible) direct-mail, credit losses and so on.

They fifth is improving the efficiency and effectiveness with which we operate. We are going to leverage our new technology provided by Fidelity. We are going to continue to examine our branch network. In '04 we started the year with 52 branches. We did open several, bought several, but we also closed a total of five branches. And we will continue to look at consolidation and expansion opportunities to make a more efficient network.

The sixth is our continued relentless focus on compliance and risk management, and the seventh is with the Falmouth foundation we will begin to take a little more disciplined look at both organic and acquisition opportunities within and adjacent to our markets.

I'm enthusiastic about our prospects for '05. We are fortunate to operate in a healthy growing area of Massachusetts. We are fortunate to have a highly capable team, and we are increasing the number of loyal customers who like doing business with Rockland Trust Company. And now I'm going to turn it back to Denis who will give you some specific guidance.

Thank you, Chris. We are estimating GAAP diluted earnings per share for 2005 in a range of 215 to 220, which contains the following assumptions. Loan growth of 11 percent and I will break that down. Commercial and business banking loan growth of 8 percent. Home equity loan growth of 27 percent. Residential growth of 9 percent. Indirect and all other consumer 13 percent. Provision for loan losses is estimated at $4.4 million for the year. Deposit growth we are estimating of 8 percent with a net interest margin of 3.85 percent. Non-interest income is anticipated to be in the region of $27.5 million for the year, representing a decrease from 2004 due to lower security gains and branch sale gains. The 2005 budget includes $500,000 of security gains.

Non-interest expense growth of 5 percent, and this figure excludes the expensing of stock options, which is expected to add $700,000 of expense in the second half of 2005. The tax rate we are estimating at 32 percent, and I want to expand on the tax rate here because as you know the new market tax credit program is an important component of our tax rate.

As discussed in our earnings release, we have invested $15 million in our Community Development Entity and have begun recognizing tax credits. An additional $15 million remains to be invested, and we are planning to accomplish that in 2005. New regulations have been released that make the requirements for borrowers to qualify more stringent, which could ultimately delay the recognition of the additional credits associated with the remaining $15 million of allocation authority. If we are successful in identifying qualifying borrowers with $15 million in credit exposure in 2005 and can, therefore, make an additional $15 million investment in our Community Development Entity, the Company's diluted earnings per share should reach the upper end of the 215 to 220 range. If we are unsuccessful, we would expect to be at the lower end of that range.

I will now review the composition of GAAP diluted earnings per share for 2004 and 2005, beginning with 2004. We reported GAAP diluted EPS of $2.03. I'm going to cover a number of unusual or some of you may consider noncore items that make up that $2.03.

First of all the gain on sale of a branch location represented 8 cents on an earnings per share basis. Merger and acquisition expenses in 2004 represented 3 cents on an EPS basis, and security gains represented 6 cents on an EPS basis. Where you to adjust the GAAP diluted earnings per share reported number of $2.03 for each of those items you would get to an adjusted EPS number of $1.93.

For 2005 I just provided a GAAP diluted earnings per share estimate of $2.15 to $2.20. The only noncore item or only unusual item in 2005 as I already mentioned is security gains of 2 cents. That would result in an adjusted diluted EPS number for 2005 of 213 to 218. I just want to make a quick correction on my '04 number. I said $1.93, it should be $1.92.

Therefore, on a GAAP earnings per share basis, the 2005 estimate represents an increase of between 6 and 8 percent over GAAP EPS from 2004. On an adjusted EPS basis, the 213 to 218 range represents an increase of between 10 and 13 percent from the $1.92 for 2004 that I just mentioned.

My final comment on the earnings estimate is that we are not providing quarterly guidance. I would remind those of you that published quarterly estimates that Independent Bank Corp has traditionally had a reduction in earnings per share in the first quarter of the year, following the fourth-quarter performance. This is due to market seasonality, as well as our traditional expense patterns.

You will recall our 2004 GAAP EPS performance of $2.03 of which 90 cents or 44 percent was realized in the first half of the year. I expect that 2005 will prove to be similar to this trend.

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

(OPERATOR INSTRUCTIONS). Jared Shaw, KBW.

Just a few questions. You said that the average size of the new commercial loan increased. What did that increase to?

429.

429. Is that loan or relationship size?

That is commitment, which would be (multiple speakers) -- relationship.

Okay. And then in terms of the mortgage banking income, I think you addressed part of the reason why it was down. But looking out into 2005 with the new hiring that you are doing there and with the market a little more stable than it was earlier in '04, what do you think that the mortgage banking contribution could be to the non-interest income looking into '05?

Rob, you have been number right. What is mortgage banking revenue for 2005?

For 2005, 4.2 million.

So that is an increase, we had $2.8 million in 2004. We are expecting a material improvement in 2005, not only because you know it is a more stable environment for us. We have more seasoned mortgage originators at this point in time. As Chris mentioned, we are training some of our own originators because we have not had great success as you know in hiring the number of originators that we anticipated.

And the final comment I would make on that is we are going to be directing a lot more of our loan growth for sales in 2005 than we did in '04. We had planned on a much greater degree of loan sales in '04. As you know, the portfolio grew more than we originally anticipated, but we are determined to focus more on for sale in '05 than we were able to do in '04.

Okay and then will that be all originated more within your footprint, or are you expanding what you consider to be your footprint for this program?

It is slightly expanded. I mean, for example, we have a mortgage origination office in Quincy. We do not have a branch presence there. We do have commercial lending there. So it is -- mostly within our footprint with some adjacent areas.

So you're not going outside of, say, Southern New England, though.

No, not even outside of Massachusetts. Just so you understand, Quincy is at the northern fringe of our market. You know it is south of Boston even, so it is really a logical extension for us.

I have a clarification on the numbers we gave you regarding relationship size. The average relationship size outstanding when you have combined a number of loans together by relationship increased to $542,000. Okay? And the average size of a new commitment, not necessarily outstanding, increased to the 429 number I mentioned.

Great, thanks. And then in terms of the salaries and benefits growth, I think you said that 1.2 million of that came from the 401(k) contributions as a result of the branch sale. Is the other growth there just due to the Falmouth acquisition being included for the full quarter?

Yes, it is Falmouth being included for the full quarter. It is also obviously the impact of merit year-over-year, as well as additional staffing increases, and some departure expense, some retirement and departure expense.

And then just finally, Denis, you said that there was $150,000 of Sarbanes-Oxley expense this quarter. Is that pretty much a onetime startup cost to start up that regulatory compliance, or is that an ongoing now continued expense?

That is a subject of discussion and debate. That is a very hot issue. (technical difficulty)--

Sorry about that.

This year is a startup year. There is a lot of learning that both we and the auditing industry is going through, and the extent to which fees continue at that level, I think is a bit of a function on the learning curve we collectively go through in terms of being able to conduct those audits.

I think we will need to count on some level of continuing expense. I would not like to see it be at the same level as 2004 because of the startup nature and the learning curve that Chris mentioned. But you know, we are all as publicly traded companies going through this. I think we are going to come out of it just fine. But it certainly cost a little bit more than we thought it would, and that is just the consequence of it.

Great. Okay. Thank you.

Ryan Kelley. FBR.

I'm sorry. Good morning, guys. I think a lot of the questions have been asked. Just on the expenses, a little clarity there. You said to look for 5 percent growth in the expenses between 2004 and 2005. Is that 5 percent off of the total expenses at 77.7 million, or should we back out this 1.2 million that you have talked about?

You know I would keep -- back out M&A expenses, but keep the $1.2 million in there. You know our incentives accrual, again Chris and I both spoke to it, while it was a large adjustment in the fourth quarter, our incentive accrual is actually less than it was in prior years. So we are certainly hopeful that we will be able to increase performance-based compensation in 2005, and that is reflected in that 5 percent growth number.

So when you're looking at non-interest expense for the whole year, I would suggest you back out the 684,000 of M&A expenses and then grow that number at 5 percent.

Okay. Great. And then just on the deposit side, I want to make sure I had this right. I think you said the $30 million of the decrease in deposit this quarter was due to seasonality. 30 million, of course, was from outflows of municipal deposits and 11 was from the branch sale.

Yes.

Those are the right numbers?

Yes, that is correct.

Okay. And then could you just go on a little bit more about the seasonality, and does that continue to go down next quarter or where that actually comes from?

Well, it is by the nature of our market. You know, we are a good chunk of our market is seasonal in nature. You know Cape Cod is a large vacation area, and even parts of Plymouth County are seasonal in nature. We have deposit flows like any company, and generally in our fourth quarter our deposits will trail down somewhat from midyear levels.

What typically happens for us is we have a tail downward in November and December, which then begins to increase upward again towards the end of the first quarter.

Okay.

What I would also add to that is that we are kicking off a number of new deposit promotions in January to try and kick start that. The seasonality you will learn from us is typical. It is nothing we are particularly concerned about. We are confident that we can grow deposits as we did in 2004.

Okay, great. It was good to see that a lot of the drop was from CDs this past quarter. And then just one last question, your asset quality is impeccable. But this most recent quarter you did have an uptick in the charge-offs. I was just wondering if there is anything particular there, where that was coming from versus the third quarter?

Yes. There's nothing to be concerned there. We have done a lot of work in looking at the delinquency and loss trends in our indirect portfolio, which is really the source of the majority of our losses, and we're right on track with delinquency, right on track with the losses overall.

What we saw in the fourth quarter was a bit of just lumpiness as to how that plays out. We also had one or two business banking loans in our books for a while where we had to charge-off -- nothing alarming.

And I would add to that, Ryan, that we did have a small commercial loan charge-off in the fourth quarter around $200,000. But in the scheme of things, this is the sixth year in a row that we have had net recoveries in commercial loans. So certainly it was a little bit higher in the fourth quarter, but we're not concerned about it.

Great and then maybe one last thing, just maybe more of question for you, Chris, but you talked about just briefly the seventh strategy for '05 looking at organic and acquisition opportunities. Can you just expand a little more on that if you were to look for organic branching where you would be heading? And then also just what you see on the acquisition front.

Well, that actually is the core question. We really spent the last 24 focusing on getting our internal processes solid, building some new initiatives, putting some new leveraging to our internal markets. We now are going to ask ourselves the question you are asking us, which is, okay, now if we want to expand in different markets, what is the priority order in which we do that? Is it South, West or North? And that is going to be based on analysis by market or growth opportunities. And it's a lot about also people, too, (inaudible) about people.

So I will have more to say about that as the quarters roll out, but I cannot give you any specific -- any specifics you're looking for, I do not have right now.

(OPERATOR INSTRUCTIONS). Bill McCrystal. McConnell Bud & Romano.

Good morning. On the Falmouth side, could you just give a sense of what the customer retention has been and whether that is in line with your original expectations?

Yes, thank you for asking. That has exceeded our expectations. We have actually had the deposit on account growth. We have had no loss whatsoever. I mean it was an extraordinary merger. We really spent a lot of time hugging the customers, hugging the employees and making sure that it was very very smooth. And we had excellent results as a result.

And sort of on the same line in terms of retention of their key people?

All key people that we wanted to retain are here productive, and I think on balance delighted to be a part of Rockland Trust Company.

It is a -- that acquisition, Bill, was really perfect for us since we're not an experienced acquirer. It was consistent with our culture. It was small enough where we could get our arms around it and really sweat the details one by one. And as a result, it went smoothly, and we've had very good business results.

I also say one of the branches we acquired is one of our top performing branches right now. They have really moved quickly to the front of the line.

Okay. Then on the loan growth, could you give us an idea of whether it is coming from market share penetration or increased usage of lines and where the growth is coming from geographically?

Sure, Bill. It depends on the product. If I run down through them, commercial lending, we have been a strong commercial lender in the markets in which we operate. We have proven that yet again in 2004. I think we will prove it again in 2005. We have very seasoned commercial lenders who know our market well and continue to put forth, put very strong performance year in, year out.

You know, that business is based upon the growth in the market as well as opportunities that we get from other institutions. You know we just were well-known in the market. We are always at the table when there is a business lending opportunity and whether it be new or whether it be coming from another institution. And so I think that that will continue.

Home equity we have grown quite a bit in the past year. As I mentioned in our estimate, we expect to continue to do so in 2005. And I think part of that growth is really as the refinancing boom has ended, more and more consumers in our market are looking at home equity alternatives, and we are there to satisfy those needs.

Indirect auto, as Chris mentioned, we are the beneficiary to some degree of some of the M&A disruption in the market. As Chris mentioned, we did not expect to have a level of growth in indirect auto in 2004 that we did. Albeit our fourth-quarter indirect auto actually dropped marginally.

So that was I think due to -- we became an alternative as some of the aggressive banks in the market on the indirect auto line were acquired. We became a good alternative.

And I think we have talked enough about residential real estate. We traditionally have not been a very strong residential real estate lender . We are becoming more so as there is an opportunity in the market for us and we grow our origination capabilities. So I hope -- does that answer your question?

Yes, it does. And then earlier you alluded to the increase in the margin being your asset repricing and the liabilities holding up. Could you talk a little bit about what the competitive market is for deposits?

Sure. You know, the beginning of 2004 I think that liability pricing crept up quickly and well in advance of the rise in short-term interest rates. So we had already -- as you know, our margin compressed early in 2004. We have been working for the past number of years on originating more and more adjustable-rate assets, prime-based or other forms of adjustment. And the success of that really led to our margin expansion in the second half of the year, as well as our ability to control liability pricing on the deposit side. I think part of that was the liability pricing had already gone up aggressively in the market in the first half of the year.

Looking forward into 2005, you know our ability to continue to expand the margin or to keep stability in the margin I think will really be dependent upon market deposit pricing. And you know, we are certainly in the mix of it in terms of where our deposit pricing is. We are aggressive. We will continue to be aggressive. So some of it will depend on how the market reacts, how our competitors react and what their aggression well be for deposit gathering, and that will determine how our margin does in 2005.

Okay and then on that same subject, your margin outlook for '05, could you give us some idea of what the assumption is on the yield curve? Would you expect continued flatter yield curve or are you looking for expansion?

We are assuming that the flattening will continue. We assume that if the Fed meets seven times this coming year, it will probably go up 25 basis points each time. But I'm just leaning on other economists market commentary or economic commentary, so I'm expecting flattening, Bill.

Bryce Rowe. Legg Mason.

My question centers around what Bill was asking on the margin. I guess the first question was to understand what the assumptions were behind that 385 number. I think you well answered that. How much confidence do you have in that 385 number? And if you were to give a range of possibilities, what would that range be?

Well, again the level of confidence will depend upon market deposit rates. I think we have done enough on the asset side of our balance sheet in terms of being able to adjust as short-term interest rates adjust to LIBOR or Fed funds or prime that we can absorb a great deal of liability pricing. But if liability pricing becomes somewhat irrational as I might argue it did in the first half of 2004, then we will see greater margin compression than we have built in.

It is sort of our expected numbers. So if we said it is a low, medium, high, I would call it medium. Moderate. I mean it is our best estimate given everything that --

Okay.

Dean Unger (ph). Neuberger Berman.

Good morning. I have a question about your securities portfolio. You have a fairly large I guess portfolio of mortgage-backed securities, especially relative to your tangible equity. I'm just wondering what impact might that have if rates start to go up and you have to take mark-to-market hits on the MDS, how might that impact what you plan to do this year?

Sure. Thanks for your question. We are aware obviously of our tangible equity position and the impact that price depreciation on the portfolio could have on rising rates. If I could just share with you, the duration of our portfolio at December 31st, our AFS portfolio was 3.14 years. And I will give you a range of depreciation of that portfolio in a rising rate environment, if you will bear with me for a moment.

Okay. In -- let me see -- if rates go up, I will give you up 200 basis points and up 300 basis points, and this is obviously a shock. In an up 200 basis point shock, we would experience about 6.9 percent of price depreciation on the portfolio. Up 300 basis points, it would be about 10 percent. And I would point out that that is just about equivalent to somewhere between a three and a four-year treasury security for the same kind of shock.

Okay.

So the impact on our capital ratio would be -- do I have that here? You know, it would be in the range of I think $25 to $45 million of I think after-tax depreciation on the securities portfolio if I have that (multiple speakers). That would be the impact on our equity.

So that means that would be the mark-to-market impact?

Yes, on an after-tax basis.

Okay, and that would bring your ratios to, do you know what level?

That would bring -- I think we are around 532 or so at the moment. That would bring our tangible equity ratio into the mid-4s, about 430 or somewhere in that region, mid to low 4s.

Okay. And if that would happen, would that have any impact on balance sheet growth, and how would that impact what you're doing?

You know, at that level of depreciation, I think is 200 or 300 basis points of depreciation would be pretty dramatic. So it is that kind of a shock all the way across the curve. It could have an impact on our growth, but I think that we have been as an organization in a situation where our tangible equity was below 4 percent before. And that was right after we acquired 16 branches from Fleet Sovereign. And we grew out of that situation rather quickly. But I think that's a fairly extreme scenario at this point.

Okay. Thank you very much.

David Darce (ph). FTN Financial.

You indicated that some of your deposit movements in the fourth quarter are seasonal. Is your federal home loan borrowings increase, is that also going to be seasonal and likely to climb, or are you going to use that to support your growth as you are forecasting higher loan growth?

Yes, the year-end growth in federal home loan bank borrowings, the fourth-quarter growth that you saw is -- much of it is certainly seasonal. So we would expect that to decline in the first and second quarter. And we will be -- you're absolutely right in that our loan growth expectation is somewhat in excess of deposit growth expectation. So by the end of next year, our federal home loan bank borrowings will grow back to the same kind of level they were at the end of '04. But we're certainly going to try to grow deposits beyond even the 8 percent estimate that I provided you.

Okay, and then your trust revenues have been down for the past few quarters. What is going to drive the revenue growth of that group going forward?

We have experienced a great deal of improvement in the new business generation. We expect that trend to continue and to then drive the associated fee income.

Have you lost some accounts in the third or fourth quarter?

Nothing out of the ordinary.

Okay. Thank you.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference back over to your hosts to conclude.

I would just like to say thank you everybody for joining us on the call, and we look forward to speaking with you in April once we released our first-quarter earnings.

Thank you. This concludes today's conference. Thank you all for your participation. All parties may disconnect now.