Independent Bank Corp (Massachusetts) (INDB) 2008 Q2 法說會逐字稿

Hello and welcome to the earnings conference call second quarter 2008. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS). Please note, this conference is being recorded.

Now, I would like to turn the conference over to Mr. Christopher Oddleifson, Chief Executive Officer. Mr. Oddleifson, you may begin, sir.

Thank you, Mike, and good morning. I'm Chris Oddleifson,, the President and CEO of Independent Bank Corp. Thank you all for joining us on the call this morning. Independent Bank Corp. continues to perform well, and I'm very pleased with the results for the past quarter. At a time when many in our industry are not responding well to the many challenges, Independent Bank Corp. is faring well, and we've been conservative in our credit decisions and in our new business development. We take a disciplined approach to managing our balance sheet, and have avoided or deemphasized asset classes that we don't find satisfactory.

We continue to make decisions that create long-term value for our shareholders. Our credit portfolio is in good shape, and we still project our earnings to increase from this year from what we accomplished in 2007.

I'm going to turn the call over now to Denis, our CFO, Denis Sheahan, Chief Financial Officer, who review some of the details of the past quarter with you. When Dennis is done, I will make some additional comments and then we will end the call with a question-and-answer period. Denis?

Thank you, Chris, and good morning. Before I review our second-quarter 2008 performance, I will read the customary caution 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 forward-looking statements, whether in response to new information, future events or otherwise.

I will now review our second-quarter 2008 performance. Independent Bank Corp. reported GAAP diluted earnings per share of $0.50 for the second quarter of 2008, an increase of 25% from the $0.40 reported in the same period last year. On a year-to-date basis, GAAP diluted earnings per share was $0.94, an increase of 9% from the comparable prior-year period.

There are a number of non-core items in the various periods detailed in a table in the earnings release. Excluding these non-core items, diluted earnings per share on an operating basis were $0.51 for the quarter ended June 30, 2008, consistent with the prior-year quarter, and $1 for the six-month period, an increase of 2% from last year.

Key takeaways from the second quarter -- we are experiencing strong loan demand, particularly in commercial lending. Our commercial and small-business portfolio grew at an annualized pace of 14% in the second quarter. A portion of the growth in our small business portfolio arises from a reassignment of $9 million in small credits from commercial to small business following the Slades merger we closed on March 1.

In addition, Home Equity showed good growth. We expect the strong growth in commercial lending to continue for the rest of 2008, although Q3 growth may be somewhat offset due to an anticipated large loan pay-off.

Secondly, we've continued strong and stable net interest margin. The net interest margin for the second quarter was 4.01% and 3.96% for the year-to-date period.

Deposits grew by $17 million or approximately 3% on an annualized basis. Deposit growth is challenging, and we are very focused on improving deposit generation across all of our businesses. Core non-interest income growth up 18% for the second quarter and 16% year-to-date remains a key highlight, driven by growth in our Wealth Management business.

Our securities portfolio, which currently amounts to approximately 14% of total assets, does not contain any equity, preferred issues, or direct debt obligations of either Fannie Mae or Freddie Mac. Our securities portfolio is composed of agency mortgage-backed securities of $369 million, private mortgage-backed securities of $25 million, municipal securities, $40 million, and approximately $25 million in the aggregate bank trust preferred securities.

Nonperforming assets at 36 basis points of total assets were stable from March 31 to June 30 at approximately $12 million. Loan delinquency was 1.33% at June 30, 2008. While net charge-off performance is higher than last year, it is still low at an annualized rate of 19 basis points.

The company's reserve for the losses was 1.29% of loans at June 30, consistent with the level at March 31. The company's provision for loan losses was $1.9 million in the second quarter and $3.2 million year-to-date and exceeded net charge-offs by almost 1.4 times on a year-to-date basis.

We closed the sale and lease back of many of our bank-owned premises on May 2. The sale involved 17 properties and resulted in a gain of approximately $13 million to be amortized over the various lease terms. The $32 million in proceeds were invested in securities. This transaction should yield $0.03 to $0.04 to Earnings Per Share on an annualized basis or $0.02 for the remainder of 2008.

Our recent acquisitions of O'Connell Investments and Slade's Ferry Bancorp are meeting performance expectations. We have achieved the cost saves outlined when we announced the Slade's Ferry transaction and remain confident of meeting the earnings accretion expectation. In fact, we are hopeful, based upon activity we are seeing from our lenders in the South Coast region, that loan growth may exceed original expectations.

I will now provide earnings guidance. We discussed, during our last conference call, earnings guidance in the range of operating earnings per share of $2.14 to $2.18. We remain comfortable with that guidance.

I remind you that our earnings pace historically accelerates in the second half of the year. For example, in 2007 through the first six months of the year, we earned $0.98 operating diluted earnings per share, representing 46% of the full-year result of $2.13. We expect the same trend in 2008.

Two key factors have changed since we last spoke. We expect a higher level of loan loss provision, due both to strong commercial loan growth and some increased credit loss. The loan-loss provision is now projected to be $7 million for 2008, while net charge-offs are expected to be $5.9 million. The strong commercial loan growth is expected to essentially offset this increased level of loan-loss provision.

Chris, that concludes my comments.

Thank you, Denis. I would like to first address our credit condition and then make some general comments.

As Denis said, on a consecutive quarter basis, nonperforming assets are stable at $12 million or about 36 basis points of total assets. Our allowance to loan-loss to total loan stands at 129 basis points. Our loan-lost coverage ratio is about 312%.

We continue to be comfortable with the Slades loan portfolio. Overall delinquency stands at 133 basis points, which, while up from 104 basis points from last quarter, is still a relatively low level and we are providing, as Denis pointed out, in excess of not net charge-offs.

Regarding in a little more detail our commercial real estate portfolio, our commercial real estate NPAs dropped this past quarter by just over $1 million to $2.3 million. While our portfolio is largely concentrated in southeastern Massachusetts, it's well-diversified across a number of property types.

An independent third-party reviews different portions of our commercial loan portfolio on a quarterly basis. That review achieved a 70% to 80% penetration of our overall commercial loans each year.

Our construction portfolio, which totals $170 million, is within our market area and is diversified across a number of project types. We finance smaller construction projects by seasoned, reputable developers that have alternative sources of cash flow. It is very rare that we do not have a personal guarantee.

We have virtually no delinquencies in our construction loan portfolio. A minority, less than 10%, of our construction loans have any kind of interest reserves. In those few instances where interest reserves are established, we consider the use of interest reserves during the underwriting process and subject it to our loan-to-value restrictions.

We recently conducted a thorough review of our construction loan folio, including our refreshed appraisal for a number of projects. That review confirmed our comfort level with our construction portfolio.

One of the benefits of being a bank that emphasizes relationships is that our seasoned professionals know the market well, have an excellent handle on the market and the projects, and are supported by a robust credit process.

We've experienced good growth in our commercial portfolio, a benefit of being strong in an environment where others are less strong. We are finding that we can be very selective in credits and can negotiate stronger terms and better pricing.

While commercial NPAs are down, we are seeing a modest elevation in self-identified risk across the commercial loan portfolio and an increase in problem loans. Certain sectors, however, are strong, such as manufacturing, wholesale distribution, healthcare, schools and even fishing. Weaker sectors include restaurants, trades and retail. In total and on balance, when considering all of this in our detailed review, we expect our commercial portfolios to perform very well.

Now, let me turn to our Home Equity, Residential and Indirect Auto portfolios. I'm going to quote FICO and values. These FICOs and values reflect a credit rescoring of the borrower and an updated assessment of value within the last two to three months.

Our Home Equity portfolio totals $374 million. Home Equity NPAs are up only a small amount on a consecutive-quarter basis to $1.4 million. While we do expect some Home Equity losses, we anticipate that they will be in a manageable range and within the forecast Denis provided you.

Our Home Equity portfolio is originated directly to consumers with only a small, low single digit percentage being originated in adjacent markets. We do not originate through brokers or correspondent lenders.

Our Home Equity line portfolio has an average FICO of 757 and a weighted average combined loan-to-value of 61%. Our Home Equity loan portfolio has an average FICO of 748 and a weighted average [inaudible] of 52%. We also monitor these loans very carefully.

For example, following the reevaluation of LTV, or value and credit score, we determined that about 2% of our exposure is in loans with LTVs higher than 80% and FICOs lower than 650. Of course, we are monitoring those very, very carefully.

Over the last six months, we've also tightened our home equity underwriting standards.

Our Residential portfolio totals $417 million. Our Residential portfolio has an average FICO of 726 and a weighted average LTV of 57%. We have identified ARM reset loans that fall into our higher-risk category. We are monitoring them carefully and will be handling them on a case-by case basis if repayment at the higher rate becomes an issue.

Our residential mortgage portfolio NPA is up to $4.5 million and $3.7 million in the first quarter. We've recently completed a loan-by-loan review, including a reassessment of value, and believe we may incur a loss of approximately $200,000 if these loans do not cure.

Regarding our Indirect Auto portfolio, we are comfortable with asset quality of our indirect lending. With an average FICO of 697, our portfolio on average is strong. Losses are tracking slightly higher than we expected, but that's understandable as we've been shrinking the portfolio, and the losses are not at worrisome levels. We recognize, however, the growing stress in the consumer (inaudible) issues such as increased food and energy costs, and we will continue to watch this portfolio closely.

I need to caution that, in auto loan portfolios, there is of course always the possibility that conditions will change, economic conditions will change and that loans which are not an issue now may become suddenly or sometimes suddenly problematic. The best thing we can do is to monitor each loan portfolio very carefully, and that is exactly what we are doing.

Shifting gears a little bit, I'd like to highlight the following. We are seeing good business growth. Organic loan growth during the first six months of the year was $61 million or 6% on an annualized basis. But it is concentrated in the commercial and home equity lending categories, where the residential real estate and consumer categories were reduced.

Commercial loan spreads are strengthening. We've had several excellent commercial bankers join us recently. The number of new core accounts is up year-over-year by 8%. Deposit growth is difficult, as Denis mentioned, but we've seen annualized organic growth of about 3.6%.

The new signage for all of our branches and ATMs is nearly complete. Our newest branches continue to grow and focus on outside business calling.

Our indirect auto production is, by intention, 5% lower, year-to-date, than the same period last year. This is desired and anticipated resulting from recent credit tightening to protect against deteriorating economic conditions and pricing to improve profitability.

Our investment management business is originating new customers at a rate greater than 2007, despite the increased new business. Struggling capital markets have worked against us. As a result, IMG, our Investment Management Group's, assets totaled $1.25 billion at the end of the second quarter, a 2.9% decrease over December 31, 2007.

As Denis mentioned, net interest margin has increased 16 basis points to 4.01% in the second quarter versus the second quarter of 2007. This steepening yield curve caused our cost of funds to decrease at a quicker pace than our earning asset benefited by the strategy to modify the mix of earning assets.

Now, in conclusion, I am pleased with our overall performance for the quarter. Our credit quality is good, strong net interest margin. Good fee income growth generated solid organic loan growth and we have a strong loan pipeline in commercial and in home equity.

Our earnings quality has improved, as evidenced by 61% of the Company's loan portfolio is now in business commercial lending. Our securities portfolio is only 14% of assets. Fee revenue diversity and growth has improved. Non-interest revenue has grown to 25% of total revenue. This has been driven by our improved wealth management revenue and our increased mortgage fee income.

These are uncertain times and we are proceeding cautiously. Clearly, our goal is to grow net income over time, and we've certainly shown our ability to do that over the long run. Our modest growth expectations for 2008 are a reflection of the current overall environment and our prudent approach. We are focused on responsible growth, just as growing our investment management business, adding key selected personnel, (inaudible) we can generate more value, opening branches in attractive markets, critically reviewing our existing branches, and engaging in acquisitions as we can.

That concludes my comments. We are now happy to address your questions.

(OPERATOR INSTRUCTIONS). Damon DelMonte, KBW.

I was wondering, Denis, if you could provide a little color on the margin and kind of what you see for the back half of the year.

Sure. We are hopeful, Damon, we are very happy that the margin has reached 4%. We are very hopeful that can continue and actually expand somewhat in the second half of the year into -- up to as much as the 4.05% region. That is certainly contingent upon what happens in terms of deposit pricing in the market.

One of the things that has benefited us on the asset side is we have had good, strong commercial loan demand and there's improved credit spreads coming in commercial pricing, which is, frankly, a good thing versus the past number of years. So, that's helping as well as we are very focused on controlling our cost of funds. Our cost of funds is strong, I think as you know. So if those factors continue, we could certainly see some margin expansion in the second half of the year as well.

Okay, great. With regard to capital, how do you guys feel about your capital position? I know the tier 1 last quarter was around 8.55%. It dropped down to 7.7%. Any insight as to what might have led the decline in that or kind of I guess what's your total capital level as well?

Total risk-based?

Yes.

Total risk-based is 10.7%, Larry, is that right, about? About 10.7%. We are certainly monitoring it very carefully, Damon, and we are growing at 100% risk-weighted assets but you know, we are certainly content with our capital level at this point.

If we decide to do anything in terms of any kind of a subordinated debt raise or anything of that nature, we will be certain to let everyone know. We have no plans to raise common equity at this point.

Okay, great. Just one technical question with regard to the tax rate going forward -- is this quarter's level of 27% a good run rate?

Yes, that would be about right for the rest of the year. One thing that is sort of lingering out there, that we do have an application for a new market tax credit award that we will likely find out by the end of the year, but chances are that, if we are successful in that effort, there would be no impact, really, for the rest of this year. It would probably be felt in 2009.

Okay, great. Thank you very much.

Laurie Hunsicker, Stifel.

Good morning, Denis and Chris. Just to follow-up on some of Damon's questions, the tier 1 core risk based capital ratio, do you have that handy? Was that 9.5% last quarter?

Total risk-based, or --?

Just the tier 1 core risk-based?

Yes, I may have that here. Hold on a second. These, of course, are drafts until all of the regulatory reports get finalized. Bear with me a second. 9.54%.

9.54%, okay, great. Then to the extent --

Actually, I should correct. Total risk-based is 10.79%. I think I said 10.7%. It's 10.79%.

10.79%, okay, great. Then to the tax-rate question, to the extent you do get the new market tax credit next year, what would your effective tax drop to?

It's hard to say, Laurie, because who knows what we would get in terms of an award? I really couldn't give an estimate of that; that would be so difficult. You know, it depends on the level of award that we got and how quickly we can invest that award. I certainly couldn't give guidance on that. I would assume a similar tax rate going into next year until we know whether or not we are successful in that effort.

Okay, great. Thanks for some of the detail that you provided in terms of, you know, to the extent that you don't own any equity or debt issued by Fannie/Freddie. Obviously, we've seen kind of a nervous market. What is your OCI mark at the end of June in equity?

I think I have this here somewhere. I think it's $8 million or so, Laurie. I have a component of it; I don't have all of it here.

$8 million? Okay, so that increased fairly from $5 million, negative $5 million?

Yes.

Okay, okay. Then just if you could take us through, on the credit side, just a couple of things? You know, I guess, starting with charge-offs, linked-quarter is what I'm looking at. Your charge-offs went from $1.1 million to $1.3 million. Do you have a category breakdown, or is there a particular category that you can point to and say "This is where charge-offs were higher"?

Well, our charge-offs are almost exclusively in consumer. There are some very modest commercial charge-offs there. They are mostly indirect auto and the micro-business category. In the micro-small business category, that category, you know, average loan size, about $50,000, and we are seeing stress, as you can expect, in the small contractor, the plasterer, the electrician, etc. We are seeing stress in that area because of the slowdown in residential development.

Is that showing up in the business banking category or in the C&I category?

Business banking.

In business banking.

-- banking category. The remainder of it really is indirect auto. We have a modest amount of home equity at this point. We would expect the home equity loss to increase in the second half of the year, but we've accounted for all of that in the forecast that I gave you.

Okay, great. Then just sort of backing into your reserve in terms of what happened, Slade's Ferry closed in February, yet it looks like the adjustment to the reserve dollars hit this quarter?

No, no, no. As of March 31, we had -- you know, it closed March 1, the transaction, so the two reserves came together in the first quarter.

Because I guess I'm looking -- or maybe something is not updated here in what I'm looking at, but I've got a period-end reserve at March of 26.8 --

No.

-- jumping to June of 33.2.

No, our reserve at the end of March was 32.6, I believe. At the end of December, it was 26.8, so you can see [multiple speakers].

Okay, you know what? That makes sense. Something is off in my model here, okay. Sorry about that.

Okay, I guess just quickly looking at the nonperforming breakdown that you give, I just wondered if you could comment on a few things. First of all, your commercial real estate nonperformers continue to go down; this is a nice trend. What are you guys doing there?

Well, we have --

I think Chris talked to it earlier in terms of we are very proactive on the commercial side. We have a very strong workout group. We have the workout team here who are real champions in this organization. The same folks that helped work us out from the issues in the early 90s are still here, and they are a big part of the credit administration in this organization and do a fantastic job. I think that's sort of the bottom line of what it is, and as wells as our overall underwriting and credit administration philosophy.

You heard Chris talk about the third-party that we have, loan review consultants. It's a discipline that is here. They report into the audit committee on a quarterly basis. They do about a 70% penetration of the commercial portfolio. It's a disciplined process that we have in commercial that works for us.

Laurie, I think we might have shared with you this in the past. We have a multi-layer rating system where we start, we have a 10-point scale. It starts with the loan officer, our rating; it goes to credit administration. If they say it is something else, they win. It then goes to our third-party review at some point, and if they adjust it, there's really no debate; they win. Then of course, if our external regulatory review suggests an adjustment, there's really no debate; it's adjusted still.

So there's a very, very disciplined multi-layered, multi--review look at the quality at a very in-depth level at each of our loans. I think that really is one sort of indication of the strength of our commercial portfolio.

Another thing I would add to that, Chris, is we have -- most of our lenders have been here for a long time. They know the footprint; they know the people to do business with. That's also very important.

Yes, and just to emphasize, underline one thing Denis said, it's in the market. We are not seeing opportunities in Florida and Texas and sending teams down there to originate loans. It's in the market we know well.

Do you know, off the top of your head, what your average LTV is on the commercial real estate?

It's in the 65% range.

I'm sorry, you said that's 55% or 65%?

65%. The top end in commercial is 70%, 75%. The average is in the low 60s to mid 60s. That's approximate. That's not a -- I don't have a report in front of me telling me that. That's just some analysis we've done in the past.

Okay, great.

That makes sense, given sort of our top in the 70%, 75%.

Okay. Then just to go back to two portfolios that haven't quite performed as well, just to go back to hear the business banking, I noticed, linked-quarter, you are continuing to grow that portfolio?

Yes, and I hope you picked up my comment that $9 million of the growth --

Oh, what's the reclass. I'm sorry, yes, you are exactly right. No, I wrote it down but it didn't register, okay.

When we brought in the commercial portfolio, we brought it all into commercial, and then we looked at it. Then the smaller credits we pushed [multiple speakers].

You reclassed into business banking. Perfect. If you were to sort of say where that portfolio might go in terms of delinquencies, because it's now over 1%, what would be your best guess as we sort of look a year out?

Well, one would hope it's going to stay around this level. It might migrate up another 10 or 20 basis points, hopefully stay there. You know, there is stress on the smaller end. There's stress on the consumer end. When your average loan size here is in that $50,000 range, you are dealing with, in many cases, sole proprietors. Fuel is having an impact; the lack of residential development is having an impact. It's the small retail as well, small restaurants there. You know, it's just general economic conditions are having an impact, so some modest increase in delinquency we would hope.

Okay, great. Then just the last question here, if you could just touch on the specific linked-quarter increase in the residential nonperformers? That was good detail that you gave us in the residential portfolio, but that portfolio is now up over 1% nonperforming with -- any other color you could provide there?

Well, when it is so low, I mean, it's a handful of loans, so there's not a whole lot more color commentary other than the --

Maybe reemphasize what you said in terms of we've looked at them, we have looked at the likelihood of loss, and [multiple speakers] go that far (multiple speakers) --

[multiple speakers] -- if we look -- we've taken a look at each one, where we stand on the value side, made some -- if they were all not to cure, we are exposed to about $200,000. So we have good collateral, but it ranges from mostly income reduction, job loss [that are] factors.

Okay. Did any of this have to do with -- you had mentioned that you had a loan-by-loan review. Was any of the jump because of reclassifications?

No.

Link-quarter? No, it wasn't. Okay. How much of your residential book is end market?

Virtually all of it.

Okay, great. Thanks. I really appreciate it.

Bryce Rowe, Robert W. Baird.

Good morning. Can you guys just touch on I guess the operating expenses? Denis, is this a good run rate for the operating expenses?

Yes, close, you know, if you look at it on a normalized basis, Bryce, I think it's $26 million. Let's see.

Yes, $26.2 million, roughly?

Yes, $26.2 million. We expect to be slightly less then $26 million for the rest of the year, in that $25.8 million, $25.9 million kind of range each quarter. It's a pretty good run rate.

Okay, that's all I've got. Thank you.

[John Stewart], Sandler O'Neill.

Most of my questions have been answered, but I just wanted to go back to one thing you said. You talked about having reappraised all of your residential portfolio in the last, I guess it was three months or so. Can you just kind of give us a sense for pricing and how much those are down from the last time you had done that project? Then kind of, in that explanation, just kind of touch on -- you guys had mentioned, in prior quarters, that there were some negative impact from foreclosures from the national guys. Just kind of talk about what you are seeing and feeling there.

Yes, why don't I just give you a little bit of an overview of the market in terms of what's happened here since our peak? Our was in the -- we peaked earlier than the rest of the nation in the third and the fourth quarter of '05, and our primary, our most dense county, Plymouth County, for single-family homes, the decrease has been about 15% so far. The commentary is a little bit more than that.

If you look at interesting -- that's single-family homes. Interestingly, if you look (technical difficulty) county Plymouth at the condominiums, those prices have stayed stable. We've seen that from the peak in '04, Q4 '05, then looking at Q2 '08, it is actually up just [inaudible] basis points average (technical difficulty) sales price.

Just to add to what you said there, Chris, in Plymouth, which is our primary county, John, the median sales price was actually stable Q1 to Q2. The median sales price for a single family in Plymouth County was $310,000 in Q1; it was $310,450 in Q2, so it's been stable. We believe we are down about overall, since that peak that Chris mentioned, about 15% in Plymouth County, no change from the last time we spoke.

Then moving to Barnstable County, which is in the Cape Cod area, again, bear with me, the peak was in the (inaudible) --

Q4 '05, oh no, let's see, Q2 '06.

(multiple speakers) bouncing around here a little bit. The median sales price has actually been stable the last couple of quarters, but if you take a look at -- what would you say?

Q1 was 358; Q2, 356, so down modestly in Q2. But you know, one would hope that Q2 should be one of your best seasons in terms of selling in this part of the country, so there certainly is some stability and we welcome that. Barnstable County overall is down also 15% from the peak. Bristol County, which is the territory that Slade's Ferry Bancorp was in is down 18% from the peak, and Norfolk County down 10%. So, that gives you some flavor. Generally speaking this quarter, there's been stability, but one would expect that given the time of year, the selling season.

Okay, so you're not seeing kind of marginal pressure from foreclosure activity and things like that, is that right?

Well, foreclosure activity -- foreclosures are up.

Yes.

-- in all counties, and up significantly. There's a large inventory of foreclosures, houses that have been foreclosed, for sale. That is I think one of the primary factors for what we are seeing in the price reductions. There's areas of great supply, and the length of supply, if you take a look at sort of the sales duration, the number of average months of inventory in the market, that sort of has averaged roughly half a year prior to this environment, and it's sort of roughly about a year now, so the duration has about doubled.

The good news about the price decline in the foreclosed properties is that it's actually getting qualified folks who have a lower income into houses, and they can -- we are working our way into a more sort of stable housing environment, going forward.

Okay, thank you for that. Then just on the construction portfolio, the commercial construction, that's about $170 million at quarter end. What's the breakdown between kind of vertical stuff versus land, A&D, in that portfolio?

You mean raw land lending?

Right.

Yes, very little, I mean, most of it's vertical buildings, but it's over a number of project types -- medical office buildings and certain malls and so on.

Okay. What were the LTVs at origination versus what your recent appraisals suggest?

For what? Residential and home equity? Or --?

I thought you had said you did that on the commercial portfolio -- on the construction portfolio as well. Did I misunderstand that?

No, we did appraisals to see whether they were still within sort of our bounds. I don't have the LTVs at my fingertips, but they are well within acceptable ranges. I mean, our conclusion was there's plenty of cash flow to support the loans. The projects are on schedule; the absorption rates acceptable. We do not have a construction portfolio issue. That is a hot button out there that we've heard. People are worried that, for example, interest or reserves are masking delinquency and banks aren't really knowing sort of what's going on in their construction portfolio.

My point today was that, in fact, we do know, we've taken a close look, we've taken a close look at the amount of interest-reserve loans, which are very few, -- and those cases, I mean, they are not masking any issues. So the message is we don't have a construction -- a commercial construction portfolio problem.

Great. Well, thank you very much.

You're welcome.

We show no further questions at this time. I would like to turn the conference back over to Mr. Christopher Oddleifson for any closing remarks.

Thank you very much, everybody, and we look forward to talking to you again for the third-quarter conference call. Have a good day. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.