Independent Bank Corp (Massachusetts) (INDB) 2006 Q2 法說會逐字稿

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

Good morning and thank you for joining us on the call. This morning's agenda will include my brief review of our second-quarter 2006 earnings performance and I'll review earnings guidance for the rest of this year. We'll then have comments from Chris Oddleifson, our Chief Executive Officer, and Ferd Kelley, Executive Vice President of Commercial Banking and Investment Management. And we'll wrap up the call with a Q&A period.

Before I review our Q2 performance I'll 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.

Our Q2 performance. In summary, Independent Bank Corp.'s performance in the second quarter of 2006 is consistent with management's focus on profitable asset and liability generation in a challenging rate environment. This has deliberately resulted in a smaller balance sheet. Assets decreased $120 million or 4% since year end 2005, but improved profitability as compared to the year ago period. INDB reported net income of $8.3 million and diluted earnings per share of $0.55 in the second quarter of 2006, an increase of 6% from the $0.52 diluted earnings per share reported in the same period last year.

For the six-month period diluted earnings per share improved by 3% to $1.06. On an operating basis which excludes gains and losses from the sale of securities as well as the gain on a Bank owned life insurance policy, net operating earnings per diluted share were $0.55, up 8% from the $0.51 per diluted share in the second quarter of last year.

Rather than reviewing the full earnings release I thought I would review a number of key takeaways from the quarter. First, 8% operating EPS growth which includes a negative impact of no Federal Home Loan Bank of Boston dividend in the quarter. The Federal Home Loan Bank of Boston anticipates declaring a dividend in the third quarter of this year equivalent to two quarters. This had a negative impact of approximately $330,000 pretax or $190,000 after-tax to Q2 performance. It also impacted the net interest margin for the second quarter. Our reported net interest margin is 389; it would have been approximately 393 including this item.

Second, stock buyback. The pace of the buyback picked up in the second quarter. As of June 30 the Company has repurchased approximately 712,000 shares of common stock at a weighted average price of 30.94 from a total repurchase authorization of 800,000 shares. I expect the buyback will be concluded in the third quarter of this year. As mentioned in previous calls, I expect the Company's tangible equity ratio will be around 6% by the end of 2006.

Third, we remain focused on commercial and home equity loan growth while decreasing other asset categories due to the rate environment and current profitability characteristics of those assets. I would note that our commercial loan growth in the second quarter was somewhat hampered at the end of the second quarter by two large unexpected payoffs amounting to $17 million. Deposit generation in the second quarter was good as we experienced our typical seasonal increase in Q2 particularly in the DDA category. However, on a year-to-date basis deposits are down due to challenging market pricing.

Next, our fee income growth. We grew core fee income growth year-to-date up 11% on a core basis excluding securities gains and BOLI and our expense control has also been very good this year, up only 2% year-to-date non-interest expense. The second-quarter key performance indicators are strong with return on average assets at 1.14% and return on average equity at 14.9%. Asset quality remains strong. Net charge-offs were only $287,000 in the second quarter.

And finally, the Company was awarded an additional $45 million of new markets tax credit allocation which equates to approximately $17.6 million dollars in tax credits that will be recognized over a seven-year period. In summary, management views this as a very good quarter, although with slower growth on the balance sheet but improving earnings quality. I'll now review earnings guidance for the remainder of the year.

Management previously announced that it expected diluted earnings per share for 2006 to be $2.24. We now wish to modestly revise that guidance to a range of $2.21 to $2.23. Affecting this changing guidance are our current expectations of a relatively flat loan and deposit growth for the remainder of this year. In loans we will continue to migrate cash flow from indirect auto and residential lending towards commercial and home equity leading to little net growth for the remainder of the year.

Deposit generation remains challenging due to the combination of pricing as well as a lack of demand for aggressive deposit growth from the asset side of the balance sheet. We did experience our traditional seasonal upswing during Q2, as mentioned previously, particularly in the DDA category. However, competition for deposits is intense and we expect little growth for the remainder of the year in the money market category and possibly the decline in balance is overall.

Not included in the estimate provided are the following two items. First, I have not assumed additional benefit from the recently announced second round of new market tax credit awards in this estimate provided. I will provide guidance on the timing of the recognition of the anticipated $17 million in benefits at the next conference call.

Second, management currently anticipates a trust preferred securities refinancing transaction in the latter part of 2006 that is not included in the earnings per share estimates provided. This refinance, while not an operating event, would impact GAAP earnings. 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 and interest expense on the debt beginning in 2007. The Company would write off the 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. Chris?

Good morning and thank you, Denis. I'll be making a few brief comments on the quarter and then we'll want Ferd Kelley, the Executive Vice President in charge of commercial banking and investment management, to make some comments on those divisions so we want to leave some time for that.

I am pleased as well with our overall performance for the quarter in this increasingly difficult banking environment and with our smaller balance sheet. While our earnings guidance has come down I believe we are making responsible long-term decisions with respect to our use of shareholder capital. Our most significant challenge is generating attractively priced core deposits.

It's simply very competitive in our marketplace as it is across the nation and there are in fact pockets of retail pricing that exceed our wholesale cost of funds that we are simply not meeting. This is a situation that's demanding a lot of our attention and one in which we have concern. On the asset side, as Denis mentioned, we continue to focus in generating commercial and home equity lines and loans and we're finding intense competitive pricing here as well.

Our security portfolio is decreasing as there is little if any margin in (inaudible) and, as Denis mentioned, we're deemphasizing auto loans as a result of the poor ROE performance in certain segments of the business. All in all we expect a modest decline in earning assets in 2006. Our non interest income grow, expense management and credit quality are strong during the second quarter and year-to-date as our earnings release describes. We're very happy with our investment management business which has performed nicely; income is up 20% over a comparable quarter last year.

I thought I'd just mention, since it has gotten a lot of press attention around the nation, a little bit about our residential real estate market. We do keep close tabs on the state of the residential real estate market. And while we're seeing single-family and condo listing volume up significantly it's interesting to note over the last several quarters that average sale prices are either up slightly or flat.

This suggests to us that there may be a lot of people who would like to sell a high price if they could get it, but we're not in a situation where we have sort of a spiraling desperation selling. And for those of you who are not familiar with our market or as familiar, we do not have any large employers that we depend on. Rather we have a set of diversified smaller businesses and we believe that makes our economy more resilient.

I would just like to remind everybody that we focus on the fundamentals in a very tactical -- strategic and tactical specific sort of way. And we're a people business and we hire highly capable customer focused out across the bank and we have a number of programs in their development. As I think probably all of you know, rock solid credit culture which we believe is especially important during these times when charge-offs are at their very lowest. And especially in times when there appear to be -- there does not appear to be any risk premium in pricing. In other words, we are resisting the trend to stretch anything on the credit side.

Our strategy is to deliver our customer experience you don't ever receive at our competition. We're just out there building relationships one at a time, setting service standards, asking for feedback and acting on that feedback. Moreover, as I've discussed on a number of quarters, we continuously look for ways to conduct our business more efficiently and effectively. A couple recent examples -- during the second quarter we may a very difficult decision to freeze our defined benefit plan and enhance our defined contribution of plans to achieve more predictable retirement expenses going forward. As well we recently combined all our loan servicing within one division and location.

We continue to make progress in building system and analytical capability to understand the sources of shareholder value creation and [instruction] based on characteristics of products, customers, programs and business lines. We continue to look for growth opportunities. We have two new branch sites in attractive markets nearly ready for announcement. We have opened a new commercial banking office in New Bedford and as Ferd will talk more about, we have recently been awarded $45 million in new market tax credit by the Community Development Financial Institutions Fund within the Department of the Treasury.

One of the measures we track is new consumer and business household formation, or actually acquisition. Although slowing somewhat, we continue to add households at a pace above the market growth rate. As of June we have added consumer households at a rate of 5% annually and about 7% for businesses. In short we take our stewardship of your capital and your confidence very seriously and we believe we're navigating our way through this very difficult environment and prudent manner and I thank you for your continued support. That concludes my comments and now I'd like to introduce Ferd Kelley.

Thank you, Chris. My name is Ferd Kelley. Good morning, everyone. I'd like to speak about the two lines of business for which I'm responsible, and those are commercial banking and our investment management services. The way I view it the primary objective of both of those areas of the bank are the creation of individualized solutions for our customers' financial needs. Generally speaking, we depend upon three pillars of meeting that objective. Those three pillars are the experience and expertise of our staff, the proximity geographically to our customers, and an emphasis on teamwork throughout the Bank.

First let me speak about the commercial banking division and then I'd like to go on after that to the investment management group. With regard to the commercial banking division, first, I think it's important to speak about our people. We have about 65 people assigned to the commercial banking division and about two-thirds of those people have direct customer contact.

What I think is noteworthy about the division is the seasoned management group we have in the division. We're very fortunate to have seven senior vice presidents who report to me, each with greater than 20 years of in-market experience here. Five of those seven senior vice presidents are responsible for marketing our products and services in the geographic regions assigned to them in our market territory. One of the senior vice presidents is a senior credit administrator for the Bank and the seventh senior vice president is in charge of sales for cash management services.

In addition to that, we have 28 commercial bankers located in eight geographically dispersed banking centers across our marketplace. The average in market experience of those 28 bankers is somewhere around ten years. We believe that the stability of personnel and the in-market knowledge that those individuals possess are the keys to our success. As a result we have tremendous market knowledge which we view as a significant competitive advantage.

Finally, with regard to the staffing side of the commercial division, we've been fortunate in being able to find four new seasoned lenders this year bringing the total number of commercial lenders to 33 people in the division. The fact that we've been able to hire four this year to me is a confirmation of the attractiveness of Rockland Trust and Independent Bank Corp. as a place to work.

I'd like to take a look at the portfolio briefly. We have currently $1.3 billion in commercial exposure to roughly 1,500 customers. During the second quarter of this year our outstanding loan balances averaged $987 million and for the first month of a share average $977 million. The latter figure, $977 million, represents a 7% increase year-over-year from the average outstanding balances for the first six months of last year.

As you probably know, our portfolio has a significant bias toward commercial real estate. Approximately 85% of our commercial banking outstandings are either commercial mortgages on a full payout basis or construction loans. I know the 15% is related to what we call commercial and industrial activity. I might add that in the second quarter of this year we experienced very strong activity, especially in the month of April in the commercial and industrial activity with regard to the use of working capital lines by many of our customers. So we expect that to be a very important part of our business as well.

With regard to the real estate, one point I'd like to make is that although we have a heavy concentration in real estate, roughly 85% of the portfolio as I said, we believe we have a broad diversification in property types and we make sure that we're aware of that by having two sources rely upon to assess the risk in that portfolio. First we have a portfolio risk manager who reports to the previously mentioned senior vice president and senior credit administrator I mentioned earlier.

That risk manager has a team of analysts who look at areas of concentration for us on a very frequent basis, provide us information that's very useful and give us a timely look at our portfolio. In addition to that, for a number of years we've retained an external loan review consultant who performs quarterly reviews on segments of the portfolio and then provides written summaries to both management and the audit committee in the Board of Directors.

I might add that during those reviews on our -- done in a quarterly basis, typically the penetration in the examination done on -- the slice of the portfolio looked at runs at about 70%. So we have a high level of confidence that we have a strong and current awareness of what our portfolio looks like.

I'm going to comment briefly on marketplace conditions and I'd make three points. First, we've seen a leveling off of new construction lending. Construction lending has been an important area for us. In earlier years when rates were lower many large transactions were able to be done which, because of the lower rates, were workable. At higher rates here that's less likely to be the case. While this is probably an industry issue it certainly has an impact on us as the prime rate has been increasing with the 18 different increases that the Fed has chosen to make to the Fed funds rate. And of course, construction lending is primarily a prime based type of activity.

More locally we also face and our developers also face tight and rigorous approval processes in the communities for approvals on the projects that they want to undertake. Additionally, in this part of Massachusetts there is generally a relative paucity of available land for further development.

Another point I'd make with regard to marketplace conditions is that -- probably to no surprise on your part -- competition is fierce. Every new deal seems to bring ever tighter spreads; however, our position has been to be very conscious pricing with a strict adherence to an established methodology that we've used for years.

The third point I'd make regarding marketplace conditions -- that even though I mentioned those two assets above which seem to be somewhat negative, our deal flow continues to be pretty strong. I'm very pleased with it. The last several months we've seen deal flow that has been very good and we look for that to be the case in the future.

Chris mentioned earlier an expansion we've undertaken in the New Bedford market. New Bedford is the fifth largest city in Massachusetts and is about 55 miles south of Austin, closer to us where we sit here today, about 30 miles away and almost contiguous to the marketplace we have dealt with in the southern end of our market for some years. We opened an office there in May hiring two new seasoned in market commercial bankers from other financial institutions. We also expanded the region of one of the senior vice presidents that I mentioned and included New Bedford in that region and moved that individual to New Bedford as well. So we believe we're well-positioned and actually already started to see some business develop in the New Bedford market.

I might add that we also added an investment management financial adviser, which is what we call our salespeople, in that location as well. We selected New Bedford because, as I said, it's fairly close to our existing marketplace at the southern end of Bristol County in the state of Massachusetts. It's the fifth largest in Massachusetts and, most importantly, it's been the site of recent merger activity. In recent years we have found that whenever mergers occur, such as what have occurred in New Bedford, we can benefit from that. We decided with that condition in place we would open a new office in New Bedford with the staffing we have in place we're confident that that will work out to our advantage.

Finally, with regard to the commercial division, I'd add that we have been awarded in June another award -- our second award -- for the New Market Tax Credit Program. This time our award is $45 million. There's not a whole lot we can say on that yet because we've got a new agreement that we will be signing probably sometime early in the fall and the contents of that agreement are yet to be known. So it's hard to say exactly how we'll operate under it and I think we've got to defer any further comment until the future after we've signed it.

I can tell you that with regard to that award we're at $45 million, it represents a 50% increase over the previous award we were provided by the U.S. Treasury. That 50% increase seems to me is a confirmation that they believe we've acted properly and have done a good job in placing approximately $25 million in loans out of the $30 million award. So we look forward to having that as an opportunity for further growth in the market and providing customers a way to grow in ways that are acceptable to them.

I'd like to move on to the investment management group. This is an area we think is particularly attractive because of the demographics we have in our marketplace. We have population growth in this part of Massachusetts which is almost as good as any you'll find on the East Coast. Additionally, the aging baby boom cohort looking to finance their retirements and the prospects of huge intergenerational transfer of wealth combined well with our well distributed branch system to be able to find opportunities for business in this area.

This is a small division; we only have 26 people in the investment management group, but they've done an excellent job in a teamwork approach to other parts of the Bank and outside the Bank. Branch referrals from the retail branches that we have been outstanding. So far this year that group has equaled 80% of closed business on the goal that we established for them this year. So the investment management group, as I like to say, has to stand on the shoulders of other larger divisions, and the branch division with its referrals to the investment management group has been a very strong part of that.

We also, and another avenue we want to pursue is what we call COI, an acronym for centers of influence. Those are accountants and attorneys -- people who are very important when individuals have to make decisions as to where their wealth will be managed. In cultivating relationships with the individuals, those attorneys and accountants have confidence with us is a great way for us to develop further business.

I would note that I think that approach has worked. As you see in the press release, as of the end of June this year our assets under administration in the investment management group have risen to a point where they're 19% greater than they were a year ago. Assets under administration in the investment management group now stand at $716 million, the largest we've ever seen.

Let me just speak for a minute about the nature of that growth. Virtually all of it has come from new business; but more importantly, what we've seen this year is existing accounts bringing in more of their existing funds, which to me represents an affirmation of the work that we have done for us -- for them rather, and satisfaction with us in providing investment expertise for them.

Just a word on our investment approach. We believe asset allocation is very important. We use that as a means of diversification and emphasize that with discussions of all of our customers. As I said earlier, nearness and proximity to the customer are very important. The investment management group is no different. We are located in Hanover, in Plymouth County, in Osterville on Cape Cod and in Attleborough in Bristol County near the Rhode Island border.

Each one of those locations is able to provide investment advice, trust administration and services and we have salespeople located in each of those. As I mentioned earlier, we've added a financial adviser or sales person into our new New Bedford office as well and look for that to be a very important area for us to grow.

Finally, the operating leverage that we've long sought in this business, the investment management business, we thought very desirable and we are now at points where we are achieving levels that we had hoped for. That concludes what I'd like to say. I hope that the presentation I've provided you is important and useful to you and I look forward to any questions you may have.

Thank you, Ferd. This concludes the formal part of the presentation. I will now open the call for questions.

(OPERATOR INSTRUCTIONS). Jared Shaw, KBW.

It looks like it was a good quarter. If the FHLBB dividend was there it would have been -- it looks like a very strong quarter. We should expect to see that the next quarter. Denis, if you could just comment briefly on the competitive environment, especially on the loan side. You had mentioned that you lost a larger loan relationship. Are you seeing those go to other community banks or are you seeing it go to -- are conduits getting involved or larger banks in the market?

This is Ferd Kelley. I'd just like to address the question on the two. Actually it was two relationships that were involved with that $17 million. They were payoffs actually on the 30th day of June which was why one of the reasons I mentioned our average outstandings when I spoke because they were quite good through the whole quarter and the actual last day of the quarter was probably an understatement effectively of what we've seen.

As I said, spreads have been very tight. The two transactions we had, one was a large apartment building which is a very attractive piece of business for those people who are willing to offer loans at very low spreads which is what the case was here, and we elected not to try to compete with that kind of a spread. That's was about a $12 million loan.

We also had a loan on Cape Cod where a small mutual thrift provided financing again at a spread that we would find unattractive and chose not to be involved with either. It's again a question of our discipline with regard to pricing. We're going to follow that discipline and we think in the long run it will pay off. As far as --.

Ferd, could you just mention, without naming institutions, what type of institutions?

With regard to the larger loan, it was a large bank in New England which tends to be very, very aggressive in its rate offerings, probably the most aggressive bank we compete with, a large bank. The second loan, which was $5 million, was a Cape Cod mutually owned thrift.

Okay great, thanks. And then I guess a similar question in terms on the investment management side. Where are you able to attract your customers from? Where are they taking their money out of to put with you in the Bank?

I'd answer it this way -- we have competition primarily against the very large banks which would be Bank of America, Melon, U.S. Trust which now is part of Charles Schwab -- we experience a lot of competition with them. The smaller local banks, we don't see a lot of competition there. We see competition again from the brokers. So money we find is usually going to come from either larger banks, as I said, or brokers.

I wouldn't say that there's any one geographic area that we depend on more than another. As I mentioned, we have three different locations. Our belief is being close to the customer. The advantage we offer is that someone can deal with us and not have to go into Boston which for many people is a real disadvantage. That's an important factor and our business is pretty broad based across the whole footprint that we have.

Okay, great. And then Denis, on the new market tax credits, you said it was $17.6 million of tax credits and you said over a certain period of time. I just didn't get that period.

Over a seven-year period, Jared. We get a 39% credit over a seven-year period. So $45 million at 39% I think comes out to $17.6 million. And as I mentioned and Ferd mentioned, there's an agreement that has to be signed and once that happens we'll have a better sense of how we will be investing in our community development entity. And I expect that at the next conference call to be able to provide better guidance as to when that $17.6 million of credits will be recognized. But it will be over a seven-year period.

Okay. But it may not necessarily be equally over seven years?

Correct.

Okay, great. Thank you very much and, again, a good quarter.

(OPERATOR INSTRUCTIONS). Laurie Hunsicker, Friedman Billings Ramsey.

Really nice quarter. Loved seeing the buyback. Denis, I just wondered, can you give us a little bit more guidance on the loss provision? Clearly your credit looks great. Just wondered if you can take us through your thought process. And then also, of the charge-offs of the 284,000 in charge-offs, how much of that was related to the indirect auto?

Sure. So first of all, provision outlook. Laurie, as you noted, our asset quality, our credit quality is quite good and charge-offs for the quarter were only around $280,000 and we feel that we're adequately reserved right around that 130 to 131 basis point level. So we did let the provision drop in the second quarter. We expect pretty good credit performance through the second half of the year, perhaps not as low in terms of net charge-offs in Q3 and Q4. But our provision for the rest of the year will likely be around the level of net charge-offs.

We expect in the region of $1 million or so of loan loss provision net charge-offs in the second half of the year. And as far as where do the losses come from -- it's all from our consumer business, primarily indirect auto but also some of our direct lending categories and a small amount in small-business banking, but the vast majority of it came from our consumer business.

Okay. And actually the indirect auto portfolio, it looks like it actually upticked from last quarter even though you all were deemphasizing it. Or was that just direct auto somehow that came on?

It could be some direct loans, but no, absolutely our indirect portfolio is down and it will continue to be down. By the end of the year we expect for that consumer auto portfolio to be around 210 million or so.

So last quarter it was 228, your total auto was 234. If you were to sort of take a guess in terms of how much you finished the quarter at -- maybe 220?

Indirect was about 220 at the end of the quarter, yes.

Great. And then do you have a FICO on that as of 2Q?

Sure. 716 in the second quarter.

Okay.

That portfolio was equally strong.

Great. Then I guess Christopher, this is a question to you. The New Bedford branch that just opened, can you give us a little bit more color in terms of how much you've seen in deposits, maybe the breakeven, what you expect the deposit and loan mix to look like and maybe exactly when the commercial bankers came on with respect to what we're seeing there? I mean, I realize it's very early probably for you to be giving us any color on this, but just to have an idea.

I'll say a couple things and Ferd can jump in. Our primary focus is commercial banking. We do not have a depository setup of course or there would be more deposit capture at having a non-physical sort of deposit taking is less of an issue and we are making some inroads there. But I'd say our primary focus right now is developing the loan-based commercial banking relationships and then moving on to deposits. We do have the investment management presence there and we hope to have some residential presence in the future. And I'd say in terms of loan growth I'd probably prefer to hold off. We're holding on to this rather than make any sort of prognostications.

This is Ferd Kelley. Just to be a little more specific, it's not at all a retail branch. For example, we are in downtown New Bedford in an office building on the fourth floor. So if someone were walking down the street we'd be pretty hard to find and that's intentional. The people we have there are seasoned -- we've hired, as I said, two seasoned commercial bankers. We have one of our region heads who's been with the bank about 15 years, a senior vice president located down there. They know the market, they're out in the market and the investment management salesperson is the same way.

I think, since we opened the office May 20th, it's probably a little premature here -- only 60 days or so after that -- to be saying a whole lot about what we've done in terms of generation of business. But we have a small seven figure balance in loans currently and deposits have grown modestly. But remember, the commercial banking business tends to be a longer slower sale and the better business is that way.

So we would expect it to take some time before we can really talk about some numbers that we're proud about. Additionally, the fact that we have that New Market Tax Credit Program is important in New Bedford because that is one of the areas that the New Market Tax Credit Program is focused on. And that should give us something of a competitive advantage as well.

Okay. And when are you projecting this branch will likely breakeven?

Well, it depends on the types of loans we do. And because of the New Market Tax Credit Program, if we do more of those we'll probably be breakeven sooner here. I think if we break even within 18 months we'd be happy.

Okay, great. Thanks very much.

Laurie, just want to follow-up on the auto question. Just to check your numbers -- March 31st our total auto portfolio was 251 million; at June 30th it was 234 million. So we did come down from March 31. And then by the end of the year, I just checked my number, we expect total auto -- that's direct and indirect -- to be around 206 million.

206, okay. Okay, great. We'll go check our numbers too. Thanks very much.

Al Savastano, Janney Montgomery Scott.

Just a quick question on the share repurchase. After you complete it in the third quarter is there room to do another one or is that in the plans at all?

At this point, Al, our tangible equity is down 557 at the end of the second quarter. I want it to grow up to around 6% before we would announce another buyback. But we'd certainly consider one Q4 and into the first quarter next year. It depends on the environment; it depends on if we have a strong use for the capital, we will use it in that fashion. But I have every reason to believe that we could enter into another buyback in the beginning of next year.

Very good, thank you.

David Darst, FTN Midwest.

You commented that line usage was up in April. Were you referencing current lines that were being drawn upon or new lines that were established with accounts?

It was a combination of both. April was the best month we've seen in terms of line usage. Typically what we see -- this is Ferd Kelley, I'm sorry. Typically what we see in our existing base of C&I customers is a heavy usage beginning around September, continuing to the latter part of the year, and stabilizing in December and carrying out to about March and April at the same level. What we saw this year, though, was a considerable uptick in April -- greater than we had ever seen before which helped us an awful lot obviously.

We had some existing businesses which had special projects that they were reliant upon the line for. Those lines have now been paid down. In fact, during the month of May and June we saw heavy paydowns in those lines. As what typically happens for us, during the summer months we have substantial reductions in the usage of those lines just because of the seasonality of our businesses.

I would also tell you, however, regarding the marketplace conditions -- probably the hardest new business to obtain is C&I working capital lines of credit. Everybody wants to hold onto those and they're very, very difficult to take away from someone else.

You said you have one person that focuses on that business.

No, we have 33 people who focus on that business. We have 33 lenders; we do not -- every lender is a generalist and we have no specializations per se.

Okay, I got you.

Maybe you're thinking, David, of the cash management business. There's more than one. There's (multiple speakers) senior vice president in charge of cash management.

I was talking about the senior vice presidents, I was talking about the depth of experience -- I was trying to make that point. But also I might have mentioned that we have one person involved with cash management sales who has a team of four people assigned to the responsibility of developing cash management services and to assist the commercial bankers when it gets to be even more detailed aspects of that effort.

And Chris mentioned something called our remote deposit product which we think will help us in a place like New Bedford where we do not have a retail branch. Those people, the cash management salespeople would be the ones charged with selling that product, marketing that product. Helping the commercial lenders -- as I said, 33 commercial lenders, all of so whom -- any one of them can make C&I loans and all of them do.

Okay, right. And then with your other expenses, is there one item this quarter that drove that higher? (multiple speakers)

The other noninterest expense category, there's a number of items, David. While our debit card interchange revenue is up our expenses associated with debit card are also up. Internet banking expense is up, exam and audit is costing us more unfortunately in the exam and audit line. I think it's costing us and everybody else more on the exam and audit line.

So those are the primary drivers. We did have some fraud losses -- check fraud losses that also had an impact in the quarter. I think our fraud losses for the year are up $250,000 or so.

Okay, thanks.

Gentleman, there are no further questions.

Thank you, everyone, for joining us on the call. We look forward to speaking with you at the end of our third quarter. Thank you.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.