Independent Bank Corp (Massachusetts) (INDB) 2006 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Independent Bank Corp. first-quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (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 Treasure of Independent Bank Corp. Mr. Sheahan, you may begin.

Thank you. Good morning, everyone, and thank you for joining us on the call. This morning's agenda will include my review of the first-quarter 2006 earnings release. We will then have comments by Chris Oddleifson, our Chief Executive Officer. And I am happy to say that Jane Lundquist, Executive Vice President of Retail Banking and Corporate Marketing, is joining us on the call this morning. Jane will comment on our retail banking strategy.

We plan to have Ferd Kelley, EVP of Commercial Banking and our Investment Management Group available for the next conference call. I will then discuss earnings guidance for 2006 and we will end the call with a Q&A period.

Before I review our Q1 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 operation, 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. In summary, INDB's performance in the first quarter of 2006 is consistent with management's focus on profitable asset and liability generation in what is clearly a challenging rate environment. This has resulted in a smaller balance sheet -- assets decreased $118 million since year-end 2005 -- yet INDB maintained profitability consistent with the year-ago period.

INDB reported net income of $7.9 million, and earnings per share of $0.51 in the first quarter of 2006, consistent with the same period last year. On an operating basis, which excludes gains and losses from the sale of securities, as well as a gain on a Bank Owned Life Insurance policy, net operating earnings were $7.7 million and $0.50 on a diluted earnings per share basis for both Q1 2006 and Q1 2005, solid performance considering the smaller balance sheet.

Balance sheet changes in the quarter. Securities decreased to $658 million at March 31, 2006, or 23% of assets. This represents a decrease of $60 million since year-end and $166 million from the same time a year ago. Management is not purchasing securities or reinvesting portfolio runoff in the current rate environment. We expect the portfolio to decrease to approximately 19% of assets by the end of this year. The first quarter of 2006 included a sale of $31 million in lower coupon securities, which represented a pre-tax loss of $1.8 million.

Loans were flat to year-end, as increases in commercial and home equity lending were offset by decreases in indirect auto and residential lending. Both commercial and home equity loan origination has slowed due to the higher rate environment, but we remain optimistic regarding prospects for the remainder of 2006.

Deposits decreased by $86 million since year-end due to seasonality, as well as the competitive pricing in our markets. The Company typically experiences seasonality in deposit levels, and that is true of the current period.

The income statement. The net interest margin for the first quarter of 2006 was 3.88%. While this compares favorably to the 3.84 recorded for this same period last year, it represents a decrease from the 3.92 recorded in the fourth quarter of 2005. The primary reasons for this decrease are mix of deposits, lower DDA balances due to seasonality, as well as higher cost of funds.

Noninterest income. Excluding security gains and losses and a gain associated with a Bank Owned Life Insurance policy, noninterest income improved by $543,000, or 9%, due to improved deposit service charge revenue and wealth management revenue. Noninterest expense increased by 3% as compared to the same quarter of last year. Salaries and benefits increased by less than 1%, reflecting good expense control. Other non-interest expense increased by 7% due to recruiting activities, education and training, and debit card fraud detection services.

Asset quality. Nonperforming assets of $4.6 million at March 31 represent 16 basis points of total assets. As discussed last quarter, a $2.6 million commercial credit moved into nonperforming status. Management does not anticipate a loss on this credit. The allowance for loan losses as a percentage of loans was 1.31% at March 31, 2006.

Net charge-offs for the quarter were $643,000 or 13 basis points on an annualized basis of average loans. Loan delinquency improved to 50 basis points at March 31, 2006, as compared to the 81 basis points recorded at year-end 2005.

Capital management. The Company and the Bank continue to be well capitalized by all bank regulatory measures at March 31, 2006. The Company's tangible equity to tangible assets ratio improved to 5.94% at March 31, 2006, and on an adjusted basis, to account for the deductibility of the majority of the Company's good will, adjusted tangible equity improved to 6.44% at March 31.

As announced in January, we plan to execute a stock buyback in 2006 equal to approximately 5% of the Company's common stock, or 800,000 shares. As previously discussed, we expect 2006 to be a slow growth year for the balance sheet. This, coupled with continued good earnings, implies the generation of capital in excess of our need and for this reason we have commenced a stock buyback that will take place throughout 2006, while maintaining strong capital levels. As of March 31, 2006, the Company repurchased approximately 200,000 common shares at a weighted average cost of just under $30.

Tax rate. As mentioned previously, this first quarter's earnings include a non-taxable BOLI gain of $1.3 million that is recorded in noninterest income as part of the overall BOLI revenue of $1.7 million for the quarter. This, combined with a security loss of $1.8 million pre-tax, has reduced the Company's effective tax rate for the year to 31.3%.

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

Good morning and thank you, Denis. I will be making a few comments on the quarter and then Jane Lundquist will be expanding on our efforts in our retail banking business.

I am pleased as well with our overall performance for the quarter in this increasingly difficult yield curve environment and with our smaller balance sheet. I believe we continue to make responsible long-term decisions with respect to the use of our shareholders' capital.

On previous calls, we have said the major unknown for the year would be deposit pricing and overall cost of funds. And as Denis described, our cost of funds is increasing [is] at a rate that exceeded our expectations.

Moreover, as we have discussed in previous calls, we are being very disciplined with the emphasis and pricing of our asset generation. As a result, we're focusing on asset generation in the commercial and the home equity areas. Our security portfolio is decreasing because there is currently little margin in this activity. We're deemphasizing auto loans as a result of poor ROE performance in certain segments of that business, and we're holding steady with our residential asset generation for portfolio. We therefore expect flat earning asset growth in '06.

Another front that I'm pleased with, our growth in noninterest income during the first quarter, a result of increases in our asset investment, assets under management, now within a breadth of $700 million, and higher deposit account service charges. While careful management of expenses is always important, it is especially critical in times of a flattened yield current.

We continue to examine our businesses and operations for cost reduction opportunities that will not impact our top-flight customer service and business development efforts. I believe our nearly flat expense growth on a linked-quarter basis demonstrates the results of our efforts. And as Denis described, our credit quality remains excellent.

As those of you who have followed as closely for the last several years already know, we have done a lot to strengthen our core businesses. We have revamped or broadened our product sets within all our businesses. We have strengthened our business and our risk management processes. We have started up new divisions. We have made great strides in our technology areas in terms of functionality and cost.

We successfully purchased and integrated an acquisition, Falmouth Bancorp. We have hired excellent professionals to add to our team. And, among other things, we have introduced enhanced training and development approaches. In short, we have a solid foundation to base further growth upon.

There are a few first-quarter highlights I would like to mention today. First of all, we have opened a new commercial banking office in New Bedford with two new seasoned lenders from that market joining us in that office. And we are evaluating a couple of excellent opportunities for branch expansion.

We have been fortunate to hire two other seasoned commercial bankers in other markets as well. While an additional four commercial bankers may not seem too large, it actually represents an increase of over 10% of our commercial banker [corps]. Another tough hiring area is the mortgage loan originators, as I have discussed in the past, and we have made some progress here as well, in hiring two new experienced loan originators.

Our strategy is to outservice the competition and deliver a customer experience you don't receive at our competition. Jane will be telling you more about how we're doing that. We have done a number of things to refine our customer survey and mystery shopping approach, among others.

We are in a service business and our people are our most valuable asset. And as I've described before, we invest in developing our people through [teaming] and we offer excellent incentive and compensation programs to pay for performance.

And in this regard, our refined performance incentive plans are actually working as designed. We made our first payout, and there is now more -- greater payout differences between the average and high performers, really increasing a lot of [sight] between performance and pay.

We continue to make great strides in building system and analytical capability to understand sources of shareholder value creation and shareholder value destruction. Our systems allow us to understand our source of loss, the [loan] characteristic level and the profitability of products, customers and business lines.

The insights gleaned and future insights to be discovered based on this work will help us allow to focus on areas in which we create the most shareholder value. And this is really reflected in our decision to pull back from certain segments of indirect auto business and is behind our home equity direct marketing efforts.

We continue to benefit from our market positioning, that is large enough to have a full complement of products and services to market. Our retail small-business and commercial customers have expected a large bank, yet small enough to be viewed as a community bank, with a commitment to high-touch customer service, with more convenience in our primary (indiscernible). And Jane is going to describe this in a little more detail.

To conclude, I would say the Rockland Trust team is enthusiastic about our ability to deliver shareholder value, because we are fortunate to operate in a healthy, growing area of Massachusetts; and we are growing much faster than the state.

We have a trusted community brand nearing its 100th birthday, which we will be certainly taking advantage of during our birthday year 2007. We have a highly capable team across the Bank that enjoys working here. And our customers know us for enjoying actually working together, delivering service to them. We have a rock solid credit culture, a credit culture that focuses on the economics of the business, making long-term shareholder value-oriented decisions with a business model that is attracting households that have above market growth rate. And thus we have an increasing number of loyal customers who like doing business with the Company.

That concludes my comments. I (indiscernible) now introduce Jane, who will be elaborating on some of these points and commenting on our retail strategies and progress. Jane?

Thank you, Chris. Good morning. I am pleased to have this opportunity to describe some of the work we have been doing in Retail Banking and our strategies to continue to drive profitable growth. Our goal in Retail Banking is to be a stellar sales and service organization, with a focus on building profitable relationships.

Key strategic drivers for us include having a passion for excellent service and providing a differentiated experience that customers can't find at any other financial institution, allowing us to create truly loyal customers. An engaged, loyal customer is much more open to listening to other product offers and is less likely to chase a special rate offer from a competitor or, at least before leaving, comes in and talks to the branch manager.

Second, we want to grow core checking relationships with consumers, small businesses and commercial households. We want to be the customer's primary bank and are not interested in chasing hot money. Creating a performance-based culture, where sales and service is measured and strong performances is rewarded is another key driver.

We work to maintain a balance between sales and service. We don't want to be a product of the day bank or have a widget sales culture. We try to make the process fun for staff and customers, with rewards, contests and public recognition, and it includes all employees in the branch and call center. It is our belief that engaged, happy employees are critical to creating engaged, wowed customers.

And a fourth area is maintaining an efficient, profitable branch network. What have we accomplished over the last couple of years? On the efficiency side, we have trimmed our branch network where appropriate, consolidating several locations and selling one branch. We have intensified our use of staffing models and branches and the call center for two reasons. One, to be cost-effective in staffing; and two, to have staff ready and available to meet customer demand, improving our service levels.

Branch staff have been trained and continue to be trained in sales and service skills, with a goal of building strong customer relationships. Last year, retail staff generated over 200 million in closed-loan referrals, over 60 million in new investment management accounts, and 25 million in small-business loans.

Service standards have been developed, including new customer contact programs to enhance retention of new customers. Standards include the 10-minute rule, meaning branches are available for customers who arrive 10 minutes early or come up 10 minutes after closing. A five-minute rule applies to the drive-up.

New customers receive handwritten thank-you notes, a 14-day call to ensure product satisfaction, and a 90-day check-in call. The notes have been so well-received, we often get thank-you notes back from customers thanking us for thanking them.

There is a new focus on the customer experience in the branch, starting with a warm, friendly interior design that includes comfortable waiting areas, coffee stations, TVs and private areas for new account openings. We have renovated several locations in 2005 and have plans to upgrade more branches this year. New ATM surrounds have been installed at all branches to brand our logo and add color to each location.

New mystery shops are being used to monitor sales and service behaviors and are an important tool for coaching staff. Results coaching occurs monthly, working to support each branch manager in meeting their goals.

Quarterly customer surveys are being used to measure customer satisfaction, loyalty, and for use in our performance incentive plans. Scorecards measure performance by each branch against deposit, loan and wealth management referral goals. A quarterly incentive plan rewards staff, including tellers, for hitting sales and service levels. For the first time in 2005, managers earned variable bonuses depending on their results, ranging from zero to a high of 25% of base salary for the top performers.

Our call center has been transformed over the last couple of years from a group that took very limited service calls to one that handles the majority of our service needs and actively sells bank products. Last year, they generated over 20 million in closed loans and recently licensed several reps to support our insurance and investment sales.

The call center has also developed a customer feedback database and monitors to ensure all customer issues are resolved in a timely manner. We recently initiated a partnership with Savings Bank Life Insurance of Massachusetts to begin selling life insurance and fixed annuity products through our licensed branch employees and financial consultants to grow fee income. SBLI has strong brand recognition in our markets as a high-quality provider of low-cost life insurance.

I have probably just used the word "new" excessively, but this is how fast the transition is taking place. We have made tremendous progress towards our vision of being a best-in-class retail network, while maintaining positive, engaged employees.

But every bank says they have great service. So how are we doing? Our service levels are outstanding, and customers give us high marks on our customer feedback surveys. We send approximately 9000 surveys to customers each quarter. We measure how many customers rate us a 7, the highest possible score, on three key questions.

One, what is your overall level of satisfaction with Rockland Trust? Rating us 7 is defined as delighted. Two, what is the likelihood you would recommend Rockland Trust to a family or friend. And three, what is the likelihood you will choose Rockland for your next banking need or product.

Getting the highest possible ratings on all three questions is believed to be a measure of truly engaged loyal customers. To date, we have had over 60% of the customers give us a 7 in all three questions, a remarkable level in banking today and I think a real tribute to the great staff we have working in the branches.

As we look forward, we realize the banking environment in Massachusetts is in a very tough, competitive phase. The opportunity for accelerated core household growth seen from the merger and acquisition activity in the last couple of years is dissipating. Competitors are aggressively pursuing deposit growth by offering 5% and higher rates on CDs, and in the mid-4s on money market accounts. It is our view that the sales and service foundation we have built will be critical for success through this tough, competitive period.

We are not interested in raising deposits with unprofitable rates just for the sake of showing deposit growth. When we market CDs, we price at a level to generate immediate positive spread. If customers are being lured by high rates from competitors, our managers are empowered to counter at certain rate levels to retain customers, but only if it is truly a core checking relationship customer.

We continue to develop marketing programs using targeted direct mail and our refer brand program to grow new core checking households. And with our focus on excellent execution, we are prepared to open a limited number of new branches in selected markets to add to our growth potential, if and when we are able to find the right location.

In the first quarter this year, core checking households grew at an annualized rate of 4%. This is slower growth than we saw in the first quarter of 2005, indicating the end to market disruption from M&A activity, as we expected. A positive in our new household numbers is the growth in core checking business households, where we had growth of 7%.

Business banking continues to be a top priority for us. Branch managers and business banking officers have calling goals and specific activities to focus on retention and growth of business customers. We are currently developing training programs for all branch managers and platform staff to improve their outbound calling skills.

Service charge fee income continues to grow, with the addition of new fees and due to the growth in checking accounts. These fees were 15% higher compared to the same quarter last year. We are focused on generating higher levels of fee income by growing core accounts, from the sales of insurance and retail investment products, and by actively renegotiating contracts with strategic partners to improve our payouts under these agreements.

We have instituted targeted sales activities, where branches are given lists through our [eVantage] customer database that are appropriate targets for certain product offers. The branches understand that to hit their goals, they can no longer wait for the business to walk in. It is all about working smarter to hit our goals.

The greatest competitive advantage we have is our people and their enthusiasm and commitment to the vision and the goals. Yesterday, the staff in our main office branch were dressed in Red Sox shirts and had an Opening Day celebration. I assume you are all Red Sox fans and understand what this means. They gave out hotdogs and popcorn.

Last month, the same branch had a retirement party day for customers, where they dressed in blue jeans and there were balloons and cake in the lobby. When I asked the manager why he had blue jeans on, he said, isn't that what you wear once you retire? This fun activity created the opportunity to talk to customers about preparation for retirement and generated investment referral appointments.

Customers as well as employees enjoy these activities and find it fun. We hear from customers who write comments on our customer surveys and we get a lot of these, and here are a couple samples.

"I love Rockland. They have big bank convenience, yet small town warmth." "My dog especially likes Lauren. She always remembers her treat." And comments like this are really important -- "I refer all my friend to your bank."

Recently, an elderly customer came into one of our branches because her purse had been stolen. After the CSR took care of her banking needs, she took the time to help her get to the police station and to the motor vehicle registry. During the drive, the CSR, asking good questions and listening well, uncovered that this person had trouble paying her bills on time. A few weeks later, an investment account of $600,000 was opened and her bills will now be paid on time by our Investment Management Group.

These are just a few examples of the service levels and employee commitment found at Rockland Trust, an environment that you rarely find in service companies today. This is what makes Rockland Trust special and what I believe will ultimately allow us to compete in today's very tough environment.

Thank you and I will now turn it back to Denis.

Thank you, Jane. I hope everyone can understand from Jane's comments we have a lot going on in Retail Banking and they are doing an excellent job.

I will now speak to earnings guidance. In January, management announced that it expected diluted earnings per share for 2006 to be $2.24, equating to an increase of 5% over 2005 performance. Management still expects to hit this target, but the Company's ability to achieve it will depend upon many factors, including the Company's funding mix and cost of funds.

Aggressive deposit pricing has placed additional pressure on the Company's net interest margin. While the net interest margin decreased to 3.88% from 3.92% on a linked-quarter basis, management currently expects expansion back into the mid to high 3.90s over the course of 2006, due primarily to a lower securities portfolio.

As mentioned previously, deposits decreased since year-end by $86 million. Management expects deposits to grow back to the level that existed at year-end 2005, due in large part to the seasonality of the Company's deposit flows.

In addition, management currently anticipates a trust preferred securities refinancing transaction in the latter part of 2006 that is not included in the diluted earnings per share estimates provided previously. The company's existing trust preferred securities are callable in December of 2006 and April of 2007.

Should the call provision be exercised, management anticipates saving approximately $1 million on an annual basis in interest expense on the debt, beginning in 2007. The Company would write off unamortized issuance costs associated with the existing debt approximating $600,000 after-tax, or approximately $0.04 per share, in both December 2006 and April 2007.

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

Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS) Jared Shaw of KBW.

Good morning. Denis, just had a quick question for you on the tax rate. If we excluded the $1.3 million from the BOLI this year -- or -- I'm sorry, this quarter, I'm coming up with a tax rate excluding that of about 35.3%, higher than we were looking for. Is there anything unique in the quarter or is that just some accruals taking place in the first quarter?

Jared, I have guided the tax rate for the rest of the year at 31.3. And when we record a tax rate, we are recording it not just for this quarter, but as an effective rate for the entire year. So we forecast what pretax earnings are going to be for the entire year, and calculate a tax rate that is effective for the whole year.

So it is difficult to look at one quarter and include or exclude particular items. But I would guide you to the 31.3 for the rest of the year.

Okay, great. I just wanted to check to make sure that the overall guidance really hadn't changed.

No, it hasn't. And you may also recall -- and I don't know if you were counting this in your calculation -- but also we have new market tax credits of $1.5 million this year. So I don't know how you're calculating that in. But I would at this point say to you 31.3 is our rate for the year, and we will update that at the end of the second quarter if anything changes there.

Okay, great. Thanks. Just following up on Jane's comments about branching, and looking at advantageous or opportunistic branch expansion, is there anything planned for '06 in terms of branch expansion or is that more of a general feeling as you look out to the future?

We have identified markets that we are very interested in and are actively looking. But again, it is a challenge to find the right site. So it will depend on when we find the right location, and then that we will move.

We are also looking at opportunities in a couple of markets where we currently have a branch and have some nice funding in that branch, but think if we found a new location, we could see a lot of incremental growth in that particular market. And we are actually looking at those markets also right now.

In terms of looking at the outlook for the year of [$2.24], does that -- could that be changed if there is more branching going on, or does that assume some level of branching.

That assumes some level of branching. I would say to you, Jared, we expect to announce Q2 and Q3, one to two locations. Now chances are, with how long it takes to construct, etc., at least for us, they probably would not open until late 2006 or sometime in 2007. But those are included in the estimate.

Okay, great. Thank you very much.

Laurie Hunsicker of Friedman, Billings, Ramsey.

Good morning. Just to go back to the tax rate for a second. What happened in this quarter that made the tax rate 35%? And then why does it then drop to 31%, give or take, for the rest of the year?

It is not, Laurie, that -- and we have gone through this with KPMG -- it is not -- when we look at the tax rate, we look at an effective rate for the entire year. So some of the benefit associated with the BOLI gain or the security loss, it is not just all about this quarter. It is one rate for the whole year.

Otherwise, you have situations where you have dramatic spikes and reductions in your tax rate. So we book to an effective rate for the whole year.

I see, okay. So even though it's this quarter that we see the 1.2 million one-time BOLI --

Yes.

Because as I look at this, the differential between the tax rate that you all reported and then truly what is a core basis when we readjust the tax rate, you're picking up $0.02 in earnings for the quarter.

I know. But again, I'm guiding to 31.3 for the year, and it is an effective rate for the whole year, not just for this quarter.

Okay. And then to go back to something else you said, the securities that you actually sold, the $31 million, what was the actual yield on that?

They were lower coupon in the 330 to 350 range.

330 to 350? Okay. And are there any other plans to do any kind of modest restructuring of the balance sheet this year?

Nothing that I am prepared to announce, but we always look at opportunities to restructure. As I said earlier, we expect the securities portfolio to drop to about 19% of assets by the end of the year. We may do another restructure, but nothing that I am prepared to announce at this point.

Okay. And then just a couple of things. Circling back on the indirect auto, can you give us the balance at March, the FICO, and then how much of your $643,000 in charge-offs this quarter was related to that?

Sure. First of all, the balance -- bear with me a moment. Okay, the weighted average FICO for indirect auto at the end of March was 719; the balance was $228 million; and charge-offs -- one moment. Our indirect auto net charge-offs for the quarter were $291,000.

Okay, great. And then as we look at your nonperforming loan detail here, I just wondered -- if you have these balances, great; if not, I can call you back -- but the commercial real estate nonperforming loan, the consumer and the C&I. And then if you could just give us some additional detail on that $2.6 million commercial credit.

Sure. Okay. Nonperforming assets are $4.6 million at the end of March. Nonaccruing is a rounded $4.4 million, of which commercial real estate is $2.9 million, residential real estate is $700,000, C&I loans are roughly $300,000, and the remainder is consumer.

Okay.

So consumer is about 400,000 or so. Then 90-day pass-through and still accruing is $267,000, split between home equity, auto, credit card, cash reserve.

As far as the commercial credit, it was part of our delinquency number. Obviously, at December 31 -- our delinquencies at December 31 were 81 basis points. They dropped to 50 basis points at the end of the first quarter. We knew that this credit would move into the nonperforming category. We expect to work out this credit by midyear, and we don't expect loss associated with this credit. We are well-collateralized and don't expect any losses.

Okay. And what type of property is it?

This particular property is a golf course loan.

Golf course. Okay -- that's right. I think you did give us this detail. And it's local?

Yes.

Okay. Great. Jane, just one last question for you. As you were kind of going over everything with the Retail Banking, could you just maybe give us a little bit of guidance in terms of marketing and advertising costs that we might see in 2006 or increase from 2005 or how you guys are looking at that?

Sure, I will be happy to do that. Jane, if you just want to comment generally on our marketing in Retail Banking, and then I will give the full cost number.

Yes, essentially, we are doing very targeted direct-mail, largely, for most of our marketing efforts, where we are targeting households for relationships, using demographics that we would like, and of course, lists generally are around our branches for the deposit relationships.

Home equity, we're going broader; we're going after more prospects now. But again, very targeted, carefully analyzed, to look at the returns from the expense. And, I believe, generally, the marketing is pretty much in line with what we have been doing last year.

Let me just sort of add to that. When Jane talks about it being targeted and sort of analytically based, as I mentioned before, we are way beyond buying a list and sending letters out. I mean, the economics are modeled, we look at the response, we develop response models, we look at the economics by sort of (indiscernible) in the response model.

We look for so what is driving response, whether it is a demographic characteristic, a distance to the branch, a relationship characteristic. And that allows us then to, as Jane said, be a lot more targeted in using the understanding of these economics and therefore make our dollars go further.

Just in terms of advertising, we will be pretty consistent. We spent around $2 million last year; it will be around $2 million again this year.

Okay, perfect. Denis, Chris, and Jane, thank you very much.

(OPERATOR INSTRUCTIONS) David Darst of FTN Midwest Securities.

Good morning. You indicated that the golf course as an increase, that was in the numbers as of year-end, or that was the increase (multiple speakers)?

It was not in the nonperforming numbers at year-end. It was still a performing credit. So it is in nonperforming now; we did have a reduction in our residential real estate nonperformings that partially offset, although we did see modest increase since year-end.

I think we are up -- we were, I think, at 3.3 million at year-end in nonperforming; we're at 4.6 now. So we did have a decrease in residential that offset a good portion of the commercial increase.

Okay. And then what was the amount of interest that you had to reverse that would have affected your loan yields for the quarter?

I don't have that, David, handy. It wasn't very material. $70,000 -- $70,000 or so; it wasn't very material.

Okay. Well, it looks like your loan yields only increased about 2 basis points to 6.42%.

Yes.

Can you give us some more color on that -- what held them down?

Well, that is part of it. And also, it is certainly as competitive on the loan side as it is on the deposit site at the moment in terms of pricing for assets. And you know, our first quarter wasn't exactly -- given that loans were flat, wasn't exactly a very busy quarter for us. Typically, the first quarter is our quietest on the lending side.

And just generally, I think most of you know, from an earnings perspective, this Company typically first and second quarter represents less than half -- somewhere around 45 or 46% of full-year earnings historically. If you went back to 2004 and 2005, you would see that. We really pick up steam into the third and fourth quarter. So there wasn't a lot of business generated in loans in Q1. We would expect the yields to improve in the second quarter.

You do expect the yields to improve in the second quarter?

Yes.

Is that along the lines of more of a -- as we look back to other quarters?

We will also -- assuming the Fed increases rates, we will get some relief from that. We have -- about 35% of our loan portfolio adjusts right away as prime changes, so that should help. And there was an adjustment towards the end of the first quarter, so not -- that will not be fully baked in. We have to wait for a statement cycle to occur for the changes to happen in some of our products, so that will help our second quarter loan yield. It should help our second quarter loan yield.

Okay. And I believe on the last call you indicated a steadily increasing margin throughout the year. Are you seeing that in the second quarter or do you think we'll see some more decline before it gets better in the second half --?

I think we should see it increase in the second quarter. Clearly, as we mentioned, our cost of funds was a little bit more aggressive than we thought it would be. But we still, given that we did a mid to late-quarter sale of $30 million of securities, that is going to help the margin. And we expect it to gradually increase through the rest of year.

But I will qualify that, David, and say, as Jane talked about, we are not running after hot money deposits, but if the rates required for us to retain deposits spiral upward beyond our expectations, that will put further pressure on the margins.

But we do -- everything else being equal, we expect our margin to expand, again because we sold securities, we will let the securities portfolio continue to run down. We will be doing less indirect auto as a percentage of our overall production. So that should help the margin to expand.

Okay. And it looks like you have about $210 million or so of fixed-rate borrowings that will reprice this year. How much of that will be funded from securities and how much of that will you replace with other potentially higher-cost borrowings -- deposits?

Well, it is not -- David, I want to make sure you include -- you need to include our derivatives when you're looking at our borrowing position. We are pretty well turned out on our borrowing line. We occasionally will have some short-term borrowings overnight -- we will occasionally have an overnight Fed funds position.

But when you look at -- you need to look at our interest rate cap -- we have a $100 million interest rate cap at 4%. We have over $100 million of interest rate swaps that term out, borrowings -- if you look just strictly at our borrowings footnotes in the financial statement, you need to also look at the derivatives, because we have termed out all of our funding -- [barring] short-term liquidity fluctuations.

But should -- I would expect our borrowings line to be stable to down for the rest of the year. As the balance sheet reduces in size, we will pay down borrowings when appropriate. But if the incremental cost of raising deposits is greater than our borrowing costs, you know, we will hold on to the borrowings for this short period of time.

Okay, thanks.

We show no further questions in the queue at this time. Do you have any further comments?

Just want to thank everybody for joining us on the call and we look forward to speaking to you after our second-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.