Independent Bank Corp (Massachusetts) (INDB) 2005 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and thank you for holding. Welcome to the Independent Bank Corp. fourth-quarter 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, Mr. Sheahan. You may begin.

Good morning and thank you for joining us on the call. This morning's agenda will include my review of our fourth-quarter 2005 earnings release and a discussion of the announced stock buyback program, followed by comments from Chris Oddleifson, our Chief Executive Officer. I will then discuss earnings guidance for 2006, and we will end the call with a Q&A period.

With me on the call today are Chris Oddleifson, President and Chief Executive Officer of Independent Bank Corp., and Barry Jensen and Rob Cozzone 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 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 intents 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 $8.6 million, a decrease of $619,000 or 7% for the quarter ended December 31, 2005; a net income of $33.2 million, an increase of 2.4 million or 8% for the 12 months ended December 31, 2005 as compared to the prior-year period. This represents GAAP diluted earnings per share of $0.55 for the fourth quarter of '05 and $2.14 for the fiscal year ending December 31, '05.

On an operating basis, diluted earnings per share increased by 10% and 11% respectively to $0.57 and $2.13 for the quarter and 12-month period ending December 31, '05 from the $0.52 and $1.92 for the same period last year. Operating earnings excludes securities gains, a gain on the sale of a branch, merger and acquisition expense and severance expense resulting from staff reductions from each period.

Now, balance sheet changes in the quarter. The fourth quarter of 2005 represents a continuation of prudent balance sheet discipline, whereby we're focusing on revenue growth from higher value segments, such as commercial lending and home equity and less on lower profitability segments, such as securities, indirect auto and residential portfolio lending. We expect this trend to continue in 2006.

Securities continued to decrease in the fourth quarter, bringing the total decrease for 2005 to $102 million or 12%. Management does not intend to grow the securities portfolio in the current yield curve environment. Securities represented 23.6% of total assets at December 31, '05, a significant decrease from 28% of assets a year ago.

In the loan portfolio, the trends seen earlier in 2005 continued in the fourth quarter as growth was concentrated in the commercial and home equity businesses with less emphasis placed on either indirect auto lending or residential portfolio lending. For the year, total loan portfolio growth was solid at 6.5% with commercial including business banking increasing by 10%, home equity by 29% and the indirect auto and residential portfolio businesses decreasing by 7% and 2% respectively.

Deposits grew by $33 million in the fourth quarter of 2005 and $145 million or 7% for fiscal 2005. Deposit pricing competition remains strong in our markets. We are satisfied with the growth experienced in 2005 and remain committed to deposit generation and are selective in deposit promotion in an effort to control the Bank's cost of funds.

Now, the income statement. The net interest margin for the fourth quarter of 2005 was 3.92%. This represents continued good stability in the net interest margin, an expansion from the first half of 2005. We hope for this stability to continue through the growth of the higher yielding asset categories, such as commercial and home equity, and less emphasis on the lower yielding asset classes discussed previously. This combined with a focus on profitable deposit growth should provide continued net interest margin stability in 2006.

Non-interest income. Excluding a gain on the sale of a branch in the prior-year quarter, non-interest income improved by $558,000 or 9% due to improved mortgage banking revenue, deposit service charges and investment management revenue. While mortgage banking income improved over the prior-year quarter, it is somewhat less than our expectation, primarily due to non-production related charges from mortgage banking derivatives and increased prepayment speeds totaling $250,000.

On a full year basis, non-interest income excluding security gains and the branch sale gain improved by 5.5%.

Assets under administration in our investment management business increased by $116 million to 680 million at December 31, 2005, an increase of 21%. Fee income associated with this business rose $604,000 or 13% for the year. Non-interest expense decreased by 3% as compared to the fourth quarter of last year, primarily due to lower performance-based incentive compensation accruals in the fourth quarter of 2005. You'll recall the Company recorded a large incentive accrual in the fourth quarter of 2004. The fourth quarter of '04 also included higher consulting charges associated with retail process improvement.

On the cost control front, the fourth quarter of 2005 includes a one-time severance charge of $333,000 pretax associated with the elimination of a number of positions in our consumer business banking and technology areas. For fiscal 2005, non-interest expense excluding severance charges and M&A charges increased 4%.

Now, asset quality. Nonperforming assets of $3.3 million represent just 11 basis points of total assets. The allowance for loan losses as a percentage of loans was 1.31% at December 31, '05. Net charge-offs for the quarter were $886,000 or 18 basis points of average loans on an annualized basis and $2.7 million or 14 basis points for the year. As anticipated, charge-offs increased in the fourth quarter due to the new bankruptcy law. We expect some continuation of this into the first quarter of 2006.

Loan delinquency increased from 55 basis points in the third quarter of 2005 to 81 basis points at December 31st. The increase is due to both increased consumer and commercial real estate delinquencies. The increased consumer delinquency generally is a result of expected seasoning of the indirect auto loan portfolio as well as the short-term spike due to the bankruptcy law change. The increased commercial real estate delinquency is primarily due to two credits; both of which we believe are adequately collateralized.

Capital management. The Company and the Bank are well capitalized by all bank regulatory measures at December 31, 2005. The Company's tangible equity-to-tangible assets ratio improved to 5.74% at December 31, '05. On an adjusted basis to account for the deductibility of the majority of the Company's goodwill, adjusted tangible equity improved to 6.23% at December 31, 2005.

As announced yesterday, we plan to execute a stock buyback in 2006 equal to approximately 5% of the Company's common stock or 800,000 shares. We expect 2006 to be a slow growth year for the balance sheet as we continue to decrease the securities portfolio and less profitable loan categories. This implies the generation of capital in excess of our need. For this reason, we have decided to execute a stock buyback that will take place throughout 2006, while maintaining strong capital levels.

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

Good morning. Thank you, Denis. I'd like to spend a few minutes commenting on our performance in 2005 and talk about 2006 as well. I'm pleased with our overall performance for the quarter and for the year on a GAAP and operating basis. I'm particularly pleased with our year-over-year operating earnings improvement in the quarterly trend.

Our operating earnings per share increased 11% year over year. At 2005, quarterly operating earnings performance started at $0.50 per share in the first quarter and ended with $0.57 per share in the fourth quarter. This performance in a challenging banking environment is a result of prudent balance sheet management, disciplined expense control and good execution of our business unit and Company strategies.

Despite a continuing unfavorable yield curve environment, our net interest margin expanded into the 3.90s in the third quarter and remains stable in the fourth. As Denis described in his comments, this improved margin is due to our balance sheet discipline of both the assets and the liability side of the balance sheet.

I'm also pleased with our growth in non-interest income in '05 as a result of increases in our investments, assets under management, mortgage banking production for sale improvement and higher deposit account service charges. Our credit quality remains excellent. Now while careful management expenses is always important, it's especially critical in our view in times of a flattening yield curve.

In 2005, we doggedly examined our businesses and operations for cost-reduction opportunities that would not impact our top-flight customer service and business development efforts. We improved our branch staffing model, so we better match our staff levels at any particular time during the day with customer demand in any particular time during the day. We combined a portion of our operations area. We improved processes in our technology area. Last quarter, as you all know, we reduced management overhead in certain areas.

During '05, we hired an expert in business process redesign so that instead of relying on outside experts periodically, we will review departments, divisions, operational areas and processes on an ongoing basis, looking for additional ways to reduce costs and operate in a more effective customer-oriented manner.

Our non-interest expense increased 3.6 year over year, modest given some of the benefit cost increases, and our operating efficiency ratio in '05 was always at 60.6%, down from 63.2 in 2004.

As you all -- as all the regular participants on our earnings calls know, Rockland Trust has been implementing a company strengthening and growth plan agenda for the last 2 years. I believe our '05 performance really demonstrates how our efforts have taken hold and produced results. Our efforts are built upon the established Rockland Trust regional brand -- first introduced in 1907 -- and now is a dominant market share in our primary accounting.

Now, nearly 100 years later from our founding, we find ourselves in an interesting and increasingly unique position to do all the M&A activity in our area. We are large enough to have a full complement of products and services to market our retail small businesses and commercial customers would expect at a large bank. We are a market dominated really by lower mid-market and small businesses. Yet, we are small enough to be viewed as a community bank with a commitment to high-touch customer service with more convenience in our primary accounting than anyone else.

One performance measure we focus on to evaluate whether our position is compelling in addition to the income statement and balance sheet items we've discussed so far is our household growth. Core consumer checking households have increased 7% this year or over 4,000 households. Our core business checking customers have increased on a 10% annual basis. We believe these are very strong numbers as they outpaced the market growth rates significantly during 2005.

Underlying the performance numbers and growth measures, we have accomplished a great deal to strengthen the Bank during 2005. For example, in our commercial banking business, we introduced a new remote deposit capture product allowing our customers to deposit checks from their office. Our business development efforts are going full-tilt, leveraging our unique positioning there. We fully funded our new market tax credit GDE and are well on our way to fully lending those assets.

We implemented a new credit rating methodology that increases our categories to 10 from 7, allow us to have an even better understanding of the performance of our commercial portfolio -- all this while continuing as Denis described maintaining a very robust credit quality culture.

In our branch banking business, we've made great strides in increasing the effectiveness of our network by providing significant relationship development and sales training for our staff, extending branch hours across the network including Sunday hours in busy retail markets. Interestingly when you first open a branch on Sunday, it is slow. In several of the branches we open over Sunday, they are becoming some of our busiest branches in our network.

We developed new service standards with a goal of creating a best-in-class customer experience. We introduced a quarterly incentive program to more tightly tie branch performance with payouts to reduce that line of sight. We are selectively adding, combining, selling and closing branches, and we are implementing new branch customer experience elements through coffee stations, kids' corners, flat screen -- plasma TVs and a lot of appearance improvements.

In our mortgage and home equity divisions, we continue to add mortgage banking products and streamline our processes. For example, we've implemented a Web-based mortgage application decision engine in conjunction with Fannie Mae. We have made a lot of progress across the Bank on enhancing our people development processes. In addition to our extensive continuing skills training, we've dealt core management curriculum, expanded sales and service training to tellers, continued our mortgage loan office or university and continued our important diversity awareness work.

We continue to push forward on improving our information infrastructure on an analysis capability, which gives us key insights into the performance of our businesses. That was first applied as I think you will recall on our indirect auto lending area, understanding loan performance at a very granular level, leading us to the conclusion that we need to diminish the originations in this business because it was not providing the shareholder return we expect. It's given us the confidence to increase our home equity and deposit origination direct-mail activity. For example, we conducted six major retail consumer deposit marketing programs, resulting in over $90 million in new deposits in 2005.

The information infrastructure is a nontrivial. This is not about ad hoc Excel spreadsheets and Access databases. This is not only a systemic robust way of managing the data, it's the people we have that look at the data, analyze the data, and help us understand what it all means and where we are being successful, where we are not, and leveraging where we are successful.

All these actions plus many more contributed to our success in '05 and strengthened us for what we believe is going to be an even more challenging environment in 2006. I say it's going to be challenging because the flat yield curve has made several of our core earning asset categories less attractive. In addition, the competition for loans and deposits remains intense, and we're seeing some from our point of view illogical pricing behavior in the marketplace.

One result of all this is that we're seeing some softening loan demand. While we ended '04 with an extremely strong commercial loan pipeline, we've ended '05 with a smaller pipeline. We're seeing similar phenomenon on the residential mortgage side. Another example as I have discussed in previous calls is that we're simply letting some of our municipal deposits leave the bank because we are simply not going to meet the above wholesale rates being offered by some competitors.

Despite this challenging picture I've just painted, I'm still confident that we're building a bank with increasing franchise value. Our 2006 strategies are focused on continuing what many will say is basic block and tackling. It is continuing the track we're on.

Specifically in '06, we'll focus on building and enhancing customer relationships. We're going to continue to build our franchise one household and one business at a time. My colleagues at Rockland Trust are much more adept at finding and understanding the needs of our customers and prospects and providing a Rockland Trust solution. We're going to continue to obsess about how we improve our customer service experience. We've spent a lot of time enhancing how our various business units work together, how they collaborate, how they coordinate, the teamwork. The management team is working hard to knock down any signs of organizational boundaries that are evident to customers. We're teaming across the Bank to satisfy customers. This is really what helps us distinguish ourselves from big banks that have a more difficult time doing that. Of course, we will constantly look to evaluate and implement new products and services, and the remote deposit capture is a great example of that.

Rockland Trust is nothing without its people. We have upgraded our people skills. When we hire, we hire excellent, excellent staff. We will continue to aggressively train people in technical, managerial and leadership training. We have continued to emphasize ongoing coaching to improve performance. We also have a very engaging environment by creating a not only fun but challenging and professional culture.

We are going to expand into new markets and opportunistically evaluate acquisition candidates. We're opening a new office in New Bedford for commercial lending, mortgage origination and the new investment management group. We are in the midst of evaluating several very attractive markets for our retail branches, and we will be able to deploy our business model into those markets. But I'm hesitant to mention those markets at this point until that gets a little bit more debt nailed down.

In 2006, we're going to continue to enhance our leverage and leverage our information infrastructure, our analysis capability. We just are really focused on understanding the economics of each business, of each product, of customers and utilizing that information, that insight in acquiring new customers and managing relationships, which will include an increased direct-mail focus in 2006.

We have introduced risk-based pricing on the consumer side last year to better match our pricing with our expected economics, and we will do more of that in 2006. As I mentioned, our direct-mail program is highly information infrastructure dependent and highly based on the understanding of the associated economics. We're having a lot of success using direct-mail offers to convince prospects to try us out. Once they do, the vast majority stay. Our analysis shows that they expand their relationship over time. Part of this information game is keeping track of the tranches of offers and watching how that population of customers within those tranches behave over time, not just whether they respond to the initial offer. We're seeing great results over time of some of the offers that we had in '04 and in early '05.

As I discussed, we're going to continue to be diligent in understanding how we improve our operations efficiency and effectiveness, while enhancing the customer experience I've discussed. Of course, we're continuing to focus on risk management compliance. As Denis described, we are very committed to managing the balance sheet and your capital with great discipline.

Our Board of Directors, as Denis described, approved a 5% share buyback program yesterday. We're comfortable in implementing this program throughout '06 as we view this year as a slow growth year due to the interest rate environment. We have said this discipline manifests itself, [Centery] in particular, on our balance sheet, securities and indirect auto. We're sounding a bit like a broken record, but I think it's worth mentioning again and again that we're unwilling to invest shareholder capital to grow these asset categories in a current interest rate environment. For these reasons, we think it makes financial sense to begin a buyback.

I am enthusiastic about our prospects in '06 and beyond because there is still a write-down, we're fortunate to operate in a very healthy growing area of Massachusetts. We're fortunate to have a highly capable team that's getting better all the time through new hires and through our development activities that enjoys working at the Bank. We have a highly positive culture. Critically important, we like working together, serving our customers. We're constantly asking ourselves how to knock down silos that tend to crop up in any organization.

We're fortunate but it is the level we have a rock solid credit culture and a culture that focuses on the economics of the business we are in and makes shareholder value-oriented decisions, not short-term earnings-driven decisions. Now, we have a business model I believe has proven to attract households at an above market growth rate. Thus, we have an increasing number of loyal customers, who like doing business with Rockland Trust Company.

We've spent the last 2 or 3 years really focusing on getting the fundamentals in line across the Bank and our expansion into New Bedford and the to-be-announced retail market I think is saying we're now ready to deploy that business models over larger geographies. All this combined tells me that we're building an ever improving and enduring franchise and one that will continue to create value for our shareholders. Thank you. Thank you, Denis.

Thank you, Chris. I'll now cover our earnings guidance for 2006. We expect GAAP and operating diluted earnings per share for 2006 of $2.24, equating to an increase of 5% over 2005 performance. This estimate includes expense for stock options and restricted stock awards of $110,000. I would remind those of you that prepare quarterly estimates to remember the seasonality of our earnings stream. Typically, INDB's earnings drop in the first quarter of the year and then build throughout the remainder of the year. I expect that trend to continue in 2006.

In terms of balance sheet growth, I expect securities to continue to decline, ending 2006 at 20% of assets. By the end of '06, this will represent a decrease in the securities portfolio of $200 million since the end of 2004. Loans are expected to grow at 5%, driven by commercial and home equity origination. Deposits are assumed to grow at 4%. We expect to continue our strategy of focusing on core household generation and not top money deposits.

Assuming the current yield curve persists and with a continued management focus in deposit spread and the transition of earning assets into higher yielding categories, I expect the net interest margin to gradually expand in 2006 to the 4% level. Obviously, changes in the shape of the yield curve may affect these projections and will be considered when I update estimates at future conference calls. Collectively, this translates to a slower growth year in 2006 but one where the mix of earning assets is improving from a profitability perspective.

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

(Operator Instructions). Laurie Hunsicker, FBR.

Just a couple questions. First, housekeeping, balance sheet shares at period end, what was that number?

One moment. Capital page there, Barry?

Maybe while you're looking for that, can you also comment on where you all stand as far as additional investments in the CDE or what sort of tax rate we could expect for '06?

Sure. First of all, period end common outstanding is 15,462,174, and we had what is it -- 48,333 in treasuries. So net the two of those to get to net common outstanding.

Secondly was tax rate. I think we are expecting around 32% of the tax rate in 2006. It is up somewhat from the 2005 levels. That's in part because we have less of a securities portfolio. In Massachusetts, many of your securities are held in securities corporations, which have a more favorable tax treatment. So, by changing the mix of our balance sheet to have less securities, it tends to increase the tax rate, so, roughly 32% for '06.

Then, as far as the new market tax credits in our community development entity, we are fully invested at this point in our community development entity. Just to remind you, we received $30 million of new market tax credit allocation. All $30 million as of the end of 2005 is invested in our community development entity.

Right. But, we should point out that it's not fully lended out but will be over the next several quarters.

Then, also in your income statement under the other other income category, it looked like that had jumped up from last quarter that had been running sort of 7, 750. It was 924. Is there anything non-recurring in that number?

No, I think it's nothing unusual that created the increase, just a number of small items.

Then from the standpoint of auto, maybe you can just take us through that a little bit in terms of where you are now as far as your average FICO. And possibly what in terms of the charge-offs that we saw this quarter, the 886,000, how much of that came from the auto portfolio?

Nearly all of it.

Nearly all of it. I mean some of it was on other consumer unsecured or small business banks. But, the majority of our charge-offs come from indirect auto. The FICO, I think is 7 --

Still very high.

Yes, it's 718 as of December 31st for the indirect auto portfolio.

I want to point out too that delinquents -- part of the reason the delinquency is going up is because we are -- there is a speedo -- are you familiar with the speedboat effect? I mean we are not layering on new assets. The denominator is not growing --

The denomination (indiscernible) right?

So the average age of the portfolio is going up. Thus, following your expected delinquencies by tranche -- by origination tranche, you'd expect the delinquency to go up.

Right, that makes sense. I've never heard it called that though, speedboat effect. Okay, when do you sort of foresee that whole portfolio running off? I know the average life of it was running about 2 years.

No, we're not out of the business. I mean, well, that's enough.

You just have deemphasized I guess. Where would you like it to be?

Well, we --

We'd like it to come back to its original state of fabulous profitability. But, barring that, I will let Denis --

You know, we are looking -- there are still segments of the indirect auto business that we find profitable. There are others that are not, and we're paying very close attention to it now. We expect it to continue to decline in 2006. But we're not prepared to say at this point that we are eliminating that business because there still are some profitable -- very profitable categories for us.

What differentiates the profitable categories from the ones that are not?

I'm not sure I want to give away -- I talked a lot about that because it's very --

This is sort of where the proprietary nature of our information-based strategy really, really sort of is where the rubber meets the road. What we've done with our indirect portfolio, we've stratified the losses. So we have expected loss estimates by a number of categorizations -- new, old, by FICO of course and by some other dimensions. That is sort of the secret ingredient to us understanding then the complete economics of an auto loan at the loan level. Then we can say listen for a car of this vintage or this age from this dealership under this sort of reserve methodology, this is our net present value we would expect and is it above or below hurdle. It's from that we focus in on the profitable segments and diminish, reduce the unprofitable segments.

Now, when you add it all up, what that says is that our portfolio has to -- we need to deemphasize the -- we have to come off the level of originations that we were at before. So, is that helpful?

That helps a lot. Also on credit, do you have the breakdown in terms of your nonperforming loan detail? How much is commercial real estate non-performers, how much is consumer, how much is C&I?

Bear with me a second.

Then the two credits that came on, do you expect those to cure in '06, or what's the timeframe for those?

Yes. Yes, we expect them to cure in '06. And that was in -- actually the two credits I was referring to for commercial, that was in delinquencies not in nonperforming.

So the million dollar uptick to non-performers, what primary category was that in?

Residential I think was the primary increase. Just a second. Rather than holding on this, let me get back to you.

Yes, absolutely. Just one other thing, you had mentioned the New Bedford office and possibly several more retail markets that you're looking at. Can you just remind us where you ended the year in terms of number of branches and what we will see in terms of openings?

52 (multiple speakers) --

52 okay. Then your commercial lending centers, 7?

Just before I answer that question, it was 52 branches, 50 of which are full service, 2 are part time. One's a high school branch; one is a part-time branch in a retirement community. Commercial lending centers (multiple speakers) --

How we combined. Combined one, what are we?

It's 7; we are at 7.

Then the investment management offices?

We have three.

Then the residential lending centers still three?

No, we have more than that. We have what, seven or so. You are testing us in the real fundamentals.

Sorry. Can you just give us just sort of generally what your plans are in terms of '06 for openings?

Yes, we're opening up New Bedford. Then the retail opening probably won't happen until very late this year if not into '07, given the site locations, building it out and so on.

Thank you very much and great job on announcing the buyback.

(Operator Instructions). Bryce Rowe, Stifel Nicolaus.

I like the new name. Some people are having a hard time pronouncing it. Two questions for you. First question, Denis, what kind of cash flow are you expecting from the securities portfolio in 2006? The second question is, are you guys targeting an adjusted tangible capital ratio for the deductibility of goodwill? Does the 2.24 estimate incorporate the 800,000 shares of stock buyback?

I guess I will start in reverse order. The 2.24 estimate does include the impact of the buyback. But, it's not -- we're not assuming that we will execute the 800,000 share buyback very quickly. We think it will happen throughout 2006. So we've assumed about half -- about 400,000 shares on average will impact our diluted share calculation in '06.

We're not targeting an adjusted tangible equity ratio. We provide that information to you because we have this unique situation, where the majority of our goodwill is deductible for tax purposes. We do watch the, I guess the traditional measure of tangible equity very closely, which for us was 5.74 at the end of the year. We would not execute on the buyback. We would not buyback tangible equity below 5%.

Really how this buyback is going to be executed is we're going to earn our way into it throughout 2006. As I said in my comment, it's going to be a slow growth year for the balance sheet. So, as we grow retained earnings, we will grow into the buyback.

As far as our cash flow in the securities portfolio, we're estimating in the current rate environment, which certainly can change, in the region of $100 million of cash flow off the securities portfolio in '06.

David Darst, FTN.

Can you give us a little more detail on what's leading to the slowdown in lending and also what your outlook is for mortgage and your gain on sale?

Sure. On the commercial side front first, Ferd Kelley, our Senior Lender, I will essentially parrot what Ferd tells me about the business. And that is that on the commercial side, which we do expect to grow this year, we do see a bit of a slowdown at the moment -- a number of things.

Given the environment that we operate in the South Shore, there's a lot of construction, a lot of construction lending. And that's helped our commercial portfolio grow pretty well over the past number of years. The increase in the short end of the yield curve has affected construction lending. Projects are becoming more difficult for projects to cash flow with the increase in short-term rates.

Secondly, the cost of land. The cost of land we feel has risen fairly extensively, and it also makes it difficult for developers to make those projects in a profitable way. So, that's caused we think a little bit of a slowdown in the construction side and the rate environment as well overall.

The mortgage business and home equity, well, we do have good expectations for home equity this year. But the mortgage business, you know, we expect that there is -- we're seeing already a slowdown in the housing market in this area. We are hopeful that we can continue to be successful. We know we can continue to be successful in the mortgage business. But, we expect it to be somewhat flat over the coming year, if not down because of the overall environment for the mortgage business at this point.

A mitigating factor for us in the mortgage industry, mortgage business is that we have really built up what I would call a pretty robust mortgage banking capability, where we not only have our portfolio products but we have many, many investor products. I guess for those of you familiar with the industries, sometimes, you measure it by the length of your pricing sheets. Our pricing sheets have grown from 4 pages to 19 pages. There are a lot of options that originators are carrying around with them in terms of meeting our customer needs.

The trend in Massachusetts is that the large national players -- WaMu, Countrywide, a couple others -- have really come in and taken a lot of share because they had very robust mortgage banking capabilities as well. We believe we are increasingly better positioned against the big banks and believe that we have a very efficient back office. Our challenge, sort of our limited growth -- because we have a very small market share in Massachusetts -- our limited growth is recruiting mortgage originators. That's a little bit of a journey because banks of our size are not typically known for having the sort of capability we have. Despite the fact that nationally originations are projected to be down -- in Massachusetts, they are projected to be down -- we are sort of staying flat and not seeing a lot of growth. I think there is potential for growth in here that maybe not -- might not meet the eye.

Okay, you are affirmed at flat from the fourth quarter or from the full year?

This is in mortgage banking?

Yes and your gain on sale.

We are expecting the full year mortgage banking revenue, the non-interest income component to be flat at best in 2006.

Then can you comment on what some of the factors are that would lead to your expense growth and what some of your assumptions are there for the year?

Expense growth, I think we are expecting pretty consistent with '05, about 4% in expense growth. You know, we do have the expansion into New Bedford in our commercial area. So we will obviously see some increase in salaries and benefits there. Benefit cost overall is increasing, whether it be medical insurance or pension, factors such as that that are affecting our benefit lines. But, those would really be the primary factors as well as traditional merit increases and salaries impacting '06.

We show no further questions in the queue at this time.

I'd just like to add on -- I have looked up the nonperforming asset information and I want to provide that to everybody based on Laurie's question. Nonperforming assets at December of '05 were $3.3 million. Breaking it down roughly -- commercial loans 250,000; residential real estate, 1.9 million; commercial real estate, 313,000; installment loans and consumer and small business about 660,000. Then, that's total non-accruing. We do have some loans that are 90 days past due and still accruing. All in consumer is $228,000, and that breaks down to 3.3.

I thank everybody for joining us on the call and we will be -- I look forward to speaking with you after our first-quarter earnings announcement. Thank you.

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