Independent Bank Corp (Massachusetts) (INDB) 2010 Q1 法說會逐字稿

Good morning and welcome to the Independent Bank Corp. first-quarter earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the call over to Chris Oddleifson.

Good morning and thank you Andrea. Thank you everybody for joining us today. I'm joined by Denis Sheahan, our Chief Financial Officer, who will review our financial performance after my comments. Of course I will begin with the customary cautionary statement.

This call may contain forward-looking statements with respect to the financial conditions, results of operations and business of Independent Bank Corp. Actual results may be different. Independent Bank cautions you against unduly relying upon any forward-looking statements and disclaims any intent to update publicly any forward looking statements whether in a response to new information, future events or otherwise.

Okay, now we'll get started. We just released our first-quarter results after the market closed yesterday and I'm delighted to say were off to a good start for 2010 as we delivered solid performance. Net income for the first quarter came in at $9.2 million. This translated to earnings per share of $0.44. This is ahead of us quarter and well ahead of the prior year.

Once again the strength of our fundamentals really led the way. The first quarter was marked by excellent commercial and home equity loan growth, robust core deposit growth, solid margin improvement and of course expense discipline.

These trends are not a one quarter development. They have been consistently sustained over this downcycle. And we don't have a magic formula here. We just focus on the fundamentals and the basics including, highly important, never, ever wavering from our risk disciplines, sticking to what we know well, the geographies we know well and not chasing the competition.

We win over customers with superior service and responsiveness. We aggressively market and promote the Rockland Trust brand. And of course we appreciate our highly energized staff.

Capital remains in excellent shape as both tangible and Tier 1 leverage ratios are up this quarter and we continue to feel comfortable with the current levels of capital. Likewise, credit quality is in good shape and continues to compare favorably with our peers. Yes nonperforming loans were up a bit from the prior quarter, but net charge-offs actually declined. The ongoing strength of our performance gives us the firepower to continue to prudently add to loan loss reserves.

I think it's really important to mention, since this is a very hot topic, that we have scrubbed our loan portfolio quite thoroughly and estimate potential loss contact under a variety of scenarios. Our long-standing credit discipline has kept us in good stead throughout this cycle and is expected to continue to do so.

Now (technical difficulty) our track record of proponents hasn't gone unnoticed. During the first quarter Fitch raised their ratings outlook on us to positive, citing our solid earnings generation, sound balance sheet, comparatively lower credit costs and ample liquidity.

Turning to the macro environment, we do see the beginnings of in economy on the mend, but we remain cautious on our outlook. Housing values and sales activity are starting to turn the corner. All our counties in which we have branches saw increases in median sale prices in the first quarter. Nationally, foreclosures are still rising. However, locally foreclosure auctions actually declined in all the counties we served in the first quarter -- or last month.

It remains to be seen what the impact of higher mortgage rates and the expiration of tax credits will be. We have all heard the good March jobs report, an increase of 162,000, the highest in three years. Locally we do see some new hiring occurring. Unemployment has stopped increasing but we expect unemployment rates to remain stubbornly high in the foreseeable future. Cities and towns are still struggling with budget deficits as tax revenues remain under pressure.

Although our own region has generally fared better than most of the nation; we're helped by our relatively higher concentration of more resilient industries such as education, healthcare and biotech as well as the constrained housing supply. The Washington DC environment certainly adds to the prevailing uncertainty. And I and we don't have any greater insights than anyone else as to the ultimate shape of these proposed reforms the legislation will take. Of course we're monitoring it very, very closely.

We'll see how all these economic and political factors play out. The good news is we have been able to perform pretty well amidst all of these difficult conditions. And our game plan for going forward is to do exactly what we have been doing, and that is capitalizing on our competitive strengths to attract new customers and expand existing relationships within the geographies we know well, maintaining our credit discipline and balance sheet strength and pursuing growth opportunities.

I would like to end by saying we're always asked about our M&A outlook. And our posture really has not changed. We're not looking or hungry for the next deal as our core business is doing fine. But I've always said we'd like a seat at the table should opportunities arise.

The Slade's Ferry and Ben Franklin deals have both worked out quite well for us and filled out our footprint in important ways. So, we're [hoping for] new opportunities but our screening criteria, as you know, are pretty high as to strategic fit and financial benefits.

We've also frequently cited investment management as an area of M&A interest. But pricing and fit have proven difficult thus far and we've done one acquisition (inaudible) couple of years ago.

In conclusion I would just summarize by saying that the Rockland Trust franchise is in great shape and we like how it is positioned going forward. And now I will turn it over to Denis.

Thank you Chris. First of all I'll review our performance in the first quarter. Independent Bank Corp. reported net income of $9.2 million and diluted earnings per share of $0.44 in the first quarter of 2010 as compared to net income of $9.1 million and diluted earnings per share of $0.43 in the fourth quarter of last year. There were no nonoperating items in either quarter.

This first quarter presented continuing themes of good steady performance, solid asset quality and continued growth in commercial and home equity lending and core deposits. Loan growth continued with good growth in commercial and home [activity] and reductions in the other loan categories.

Deposit growth in the quarter was strong, led by our municipal banking segment. We've targeted this segment for growth and our actions in this segment are really paying off thus far.

Time deposits decreased by $54 million in the quarter as we continue to focus on core deposits, which grew by $153 million or 6% in the first quarter. This was achieved with a continued reduction in the cost of deposits to 72 basis points, down 10 basis points on a linked quarter basis. Core deposits are now up to 75% of total deposits.

The net interest margin was up another 10 basis points to 4.08% in the first quarter as we continue to manage the [comps to] deposits effectively.

Noninterest income was relatively flat on a linked quarter basis. Decreases in other noninterest income due to a number of items recognized in the prior quarter as details on the tax of the earnings release were offset by a lower level of securities impairment. We didn't experience any securities impairment to speak of in the first quarter, and while we think it is highly unlikely to go the rest of the queue without further charges, our remaining exposure to trust preferreds remains quite modest.

Noninterest expense came in largely as expected and just like noninterest income the variance is largely affected by the items in the linked quarter, again detailed in the text of the earnings release. Tangible common equity improved to 6.68% at the end of the first quarter.

I will now spend a little more time on asset quality given investor interest in this topic. Asset quality performance was as expected. Nonperforming loans increased about $6 million to $42 million at March 31, primarily in the commercial categories as we anticipated. The increase in nonperforming loans is simply a result of the weakened economy and any loss associated with these weakened credits is well within the loss estimates for 2010 we provided in the January call.

Net charge-offs were actually better than anticipated at $1.7 million in the quarter or approximately 21 basis points annualized of loans compared to $3.4 million in the previous quarter. The provision for loan losses was $4.65 million and again exceeded the level of net charge-offs, and the reserve to loans ratio grew to 1.33%. Excluding the loans acquired at fair value, the reserve equates to 1.66% of loans at March 31.

Loan delinquency was 1.83% at March 31, up from 1.74% at year end. Importantly early-stage delinquency, 30 to 89 days, continues to be in good shape at 74 basis points of loans. As we said in January, we expect 2010 to bring additional increases to nonperforming assets, delinquency and charge-offs and we continue to believe that to be the case. Importantly we feel three months into the year that all of these increases will be very manageable and within the expectations we laid out in January.

I will now comment on earnings guidance for 2010. We provided an estimate of performance in January for diluted earnings per share in the range of $1.75 to $1.85 per share, excluding any securities impairments. We remain comfortable with this range. That concludes my comments. Chris?

Okay, great. We are ready for questions now.

(Operator Instructions) Mark Fitzgibbon, Sandler O'Neill.

First question I had for you is on the cash position. I noticed your cash position has doubled in the last quarter and I think over the last year it's up about threefold. Is there any particular reason why you are holding a lot more liquidity right now?

It really pertains to our municipal business. We -- you would note if you looked at our period end deposits it was a significant increase from a period end basis that isn't consistent with the average for the quarter. That's because a lot of municipalities their state and quarterly money comes in right at the very end of the quarter.

So that will initially go in and increase short-term investments or cash. And then we will distribute it over the second quarter into either our lending categories or securities or what have you. But it is a spike that happened right at the end of the quarter.

And secondly Denis, I know you said you're comfortable with the full year guidance. Has your view on the margin changed at all given the yield curve environment? Do you still feel as though the margin will hang in this rough range?

Yes. We're feeling pretty good that the margin will be over 4%, somewhere between 4 and 4.10% for the rest of the year. But we continue to take actions to protect ourselves from a rising rate environment which has a dampening impact on the margin in areas like commercial lending, where we are using loan level swaps to get a fixed rate loan to variable. We're feeling pretty good about the margin being around that 4% level for the rest of the year.

And then also we continue to see growth on the commercial side of your loan portfolio and a little bit of shrinkage on the consumer side. How big a percentage of loans are you willing to let C&I and CRE become over time?

Right now when I look at our total commercial book, which we include small business in that, commercial was 67% of loans. We are conscious of that concentration but we're comfortable with it because fundamentally it is what we are very good at.

We would be comfortable in seeing the concentration increase certainly to the 75% level, particularly at this point because we're honestly finding it difficult to maintain the size of our residential portfolio. We would like to at least prevent the residential portfolio from decreasing, but we're not going to do it with 30 year loans on the portfolio.

So at this particular rate environment we will let the residential portfolio run down and then perhaps seek to diversify that concentration in the commercial business when we're in a different environment. To answer your question directly, Mark, we would certainly be comfortable in letting the concentration in commercial grow.

Mac Hodgson, SunTrust.

Just a couple of follow-up questions. Could you give any more color on the municipal deposit strategy of what -- maybe is there a goal of total deposits there and maybe comment briefly on the pricing generally that yields?

The municipal -- our municipal deposits at the end of the quarter were just shy of $400 million and they're going to be in that range. We think the highest that we would allow the business to go to at this point would be about $500 million.

It's -- the strategy is a core deposit strategy for municipalities. We have service offering that focuses on their core operating account business rather than their savings business, their investable deposits. We certainly have some of that, but the majority of it is associated with core deposit business and it has a very effective cost of funds.

And then another guidance related question, I know you kept with your [175 to 185] on the charge-offs [and are they] considerably lower than I think the run rate guidance was. Do you still feel like charge-offs for the year will be in the $15 million to $19 million range?

We're not -- it was a very good first quarter but we're not going to change that guidance at this point. Let's see how Q2 and Q3 move along. But we feel really good right now. But certainly nonperformers are up, so there will be some loss associated with that. We believe that's well within the expectations that we've provided. But we're not prepared to change that guidance at this point.

One last one on the loan growth. Could you give any commentary on generally where the -- I know I can see the growth coming in commercial and industrial, and also commercial real estate. But any other color you could give on the type of demand you're seeing and what types of customers are borrowing and which ones are not?

Our overall demand is -- still remains very, very high. You may recall from previous calls we have talked about our approved but not closed pipeline to being at the highest levels in the history of the bank. We're still seeing very, very high levels. That is a result of demand or really across the board.

We are increasing our C&I activity a bit more than we have in the past. On the commercial real estate it really runs the gamut of the property types we're in right now.

There are a couple of areas we are avoiding since we're at or very near our concentration limits. For example hotels and motels are something we had a concentration of a couple of years ago and we have not been doing new lending. We finance our existing customers as they hit their renewal periods but we're not doing new business there.

The one thing that our senior lender [Jerry Nadeau] is confident on that he's seen in the last month or so, last year it was really dominated by a lot of refinancing, and actually refinancing out of a larger institution. That's what drove our larger volume.

What he is seeing more of now are folks with cash on the sidelines making purchases. It's like (inaudible) and this is just anecdotal and observational, people are making the call that we are at or near the bottom of the market and it's a good time to buy. So we're seeing more activity on new purchases from our customers than we have in the past. Does that help?

Yes, that's helpful. Thanks a lot.

Laurie Hunsicker, Stifel Nicolaus.

Just wanted to follow-up on some credit questions. Do you have a breakdown of the $1.7 million in net charge-offs?

Yes, Laurie, it's actually right in that we've added the table in the earnings release.

Did I miss that? I'm sorry.

That's okay, it's a new table. It's right in there but I'd be happy to go through it for you. $1.7 million in net charge-offs, $500,000 was in C&I, $250,000 in small business, $198,000 in commercial real estate, $135,000 in residential, $234,000 in home equity and $388,000 in other installment, which is our consumer business.

Okay, great. So to that, I guess the charge-offs were lower on the C&I in theory, but linked quarter your nonperformers increased. Do you have any sort of break down as far as the C&I increase of $3 million linked quarter on the CRE increase of $5 million, what those properties were?

The CRE increases, it's largely construction related. We had two developers that are in the high-end construction development category slip into nonperforming. But any loss associated with those credits has been reserved for in our allowance for loan losses. The --

Were those two $2.5 million each or $2 million each?

No. One was -- I think it was two-thirds/one-third, and one of them had about $1 million in C&I, so that gives you a sense of that Laurie.

Okay. And then how far built out were they on their pieces? Can you give us any other detail on them?

No, not really. They're in market commercial development. One of them was in an unfortunate situation that the principal passed away and we're dealing with the whole estate and that sort of thing. These are fairly typical things that you're dealing with today. We're not concerned. We have a good handle on it. We'll deal with it. We'll get through them.

Okay. So to that point, I guess of the $3 million linked quarter increase in C&I, $1 million of it was related to one of the construction properties. And the other $2 million?

It was a big crane. It was a (multiple speakers) (inaudible) it was a company that had one of those huge cranes that build the big buildings and that was impacted by the by the overall construction downturn.

Fair enough. Your total TDRs, and then what amount is included in nonperforming, do you have that number?

Sure. TDRs are $18 million at the end of the quarter, pretty evenly distributed between commercial and consumer. Commercial is $7.6 million. The rest is either consumer real estate or other consumer, auto loans etc. Excuse me -- total TDRs are $19.9 million, say $20 million. TDRs on accrual are $18 million. TDRs on nonaccrual $2 million.

Great. Chris, just to go back to when you are talking about a screaming fit for M&A, obviously -- (multiple speakers)

That comment was for you, Laurie, because I knew you would ask.

Well, to the extent that you have now filed a [shelf] to increase to $75 million to the extent that obviously you did Ben Franklin, and you did it right in your trading up at two times book. I mean not from just a geographic standpoint but also from a currency standpoint, I mean you guys look sort of ripe to do an acquisition. So maybe can you remind us, just everything aside, your target asset size, your target geography that you're looking for?

And then just maybe a comment. To the extent -- obviously you are very comfortable with commercial lending, circling back to Mark's question, but I guess some your other acquisitions have been much less commercial focused, just how it would play out in terms of your mind looking at more sort of a more vanilla company or even some of the demutualized thrift conversions, especially given your currency is up at two times book. Maybe if you would address any or all of that in terms of your M&A outlook.

I will try to address a lot of that. Our past acquisitions really have been characterized by what I would call in the simplest way the map tells the story. We're looking to do acquisitions that are logical extensions of our geographical reach, nothing that looks too out of the ordinary.

We're looking for acquisitions -- with Ben Franklin and Slade's, our product set was one that was favorable and one we could lever up in those franchises. In both of those acquisitions we projected and achieved accretive -- one-year accretion before one-timer expenses. And then both those acquisitions it was a matter of the boards deciding to sell the company and us being at the table and being able to have a conversation about it.

Looking forward, it wouldn't be all that different. We're really -- our strong performance is in large part due to sticking to what we know and know what we know well, and sticking to our knitting and sticking to our markets, and sticking with people we know and doing business with folks we know in markets we know. We're not going to depart from that.

We have been asked and whether we'd do an FDIC assisted transaction in Florida or a geographical jump. That's not something we would consider.

We're still -- we've been saying it's sort of opportunistic for years and we continue to be that way. We're not a roll-up bank. We're focusing very, very hard on our core business and our core strategies. We think there is good growth prospects within what we have right now.

But should another board in a bank, a logical sort of -- within our adjacent markets willing to raise their hands, we would love to talk to them.

On the non-bank side, let me just talk about -- I did refer to the investment management team. The [volume investment] management company, because there have been some accounting changes that makes that more difficult. And you have to be a lot more sensitive to the cultural fit because, there really is no book value. All the values is in the relationships.

And thinking about how one brings on an investment management firm into the culture of Rockland Trust is a very delicate issue, and one that -- we've done one acquisition that has worked out very, very well. We're open to talking to people from time to time. But I wouldn't say we're as active there as we have been in the past. I think I covered a lot of your questions.

Maybe just to the point of -- to the extent that Ben Franklin was a conversion and sold as its 3.5 year mark, does an over capitalized bank that's sort of a little bit more vanilla as it pertains to commercial, does that also have appeal it fits within your logical geographic extension?

I'm not going to answer that specifically. I'll answer it more generally. Within our market, we would like to -- if any boards were to raise their hand we would like to have a conversation. And we would not -- I'm not going to put (inaudible) or delineate precise criteria right now, because you know what, a lot of it is situational. And so I can't tell you yes or no right now.

Fair enough. One last question, Denis, for you; the pooled trust preferreds, the C tranche, can you just remind us -- your amortized cost is right around $4 million?

Yes. It's $3.8 million.

$3.8 million, perfect. Thank you very much.

Damon DelMonte, KBW.

Very thorough set of questions by everybody so far, so pretty much everything has been answered, but just real quick, Denis, could you just kind of refresh our memories on your outlook for the impact on NSF fees with the pending legislation that will be passed this summer?

The good news is Rockland Trust did not allow customers to overdraft at point of sale or ATM. Revenues associated with overdrafts at those two points was zero. And now that the legislation and the consumer protection folks have been real clear about what are the appropriate rules of the game to provide customers with those options, we're exploring an option which we would allow -- give our customers the option to overdraft that ATM or point-of-sale should they elect to.

It's our understanding that our decision was, in terms of not allowing our customers to participate at ATMs or at POS, is that somewhere just shy of 50% of what other organizations are experiencing in overdraft revenue comes from those two sources. So our service charge revenue is somewhat conservative on that basis.

We are looking, as Chris said, at various strategies to provide our customers with that opportunity again on a conservative customer friendly basis. But that said, service charges are struggling last year and this year. I think it is really the customers are being much more cautious of how they are overdrawing their accounts and incurring fees, etc.

So we would not see any benefit to this probably until next year. We're going to study this carefully and begin to implement something in the latter part of this year. And should our customers choose to participate, we could actually see some benefit next year.

I do want to underline a point that we're going to be doing this in a very upfront, clear way. No funny business with the customers here.

Great, thanks, that's helpful. And I guess my other question on mortgage banking income, kind of going forward, what are your views on that?

The mortgage banking --

(multiple speakers) What the rate environment will be.

The Mortgage Banking department is a very important department for us. This time of the year is typically pretty quiet for us. Assuming we're in a consistent rate environment we would expect our second and third quarters to improve. We believe we've got a great team there and are going to execute very effectively. So, we would expect improved revenue there going into Q2 and Q3 because of the seasonality in the markets.

Gerard Cassidy, RBC.

Question, in terms your capital ratios, where does the Tier 1 come in and on the Tier 1 ratio stand at the end of the first quarter?

The tier 1 leverage ratio I have; I don't have the other ones handy at this point. Tier 1 leverage is 8.04%.

And that Tier 1 leverage, I assume, was higher than the fourth quarter Tier 1 leverage. Is that fair to say?

It was 7.87 at the end of the fourth quarter.

Is it fair to say, then, your Tier 1 common, which was 8.1 in the fourth quarter, and Tier 1 was 9.8 in the fourth quarter, we should expect those to rise in the first quarter as well?

Yes, yes.

What are you guys hearing from your primary regulators about these ratios, Tier 1 common and Tier 1, which seem to be the ratios that the regulators are focusing on? And we all know right now that 6% Tier 1 is considered to be well-capitalized and many of the banks, particularly the larger banks, are being asked to carry a much higher ratio. We all expect that officially to be lifted possibly this year.

What are your regulators telling you about these Tier 1 and Tier 2 common ratios, where they expect them to go possibly later this year?

We do keep in touch with our regulators. We have not heard anything more than what we actually read in the press (inaudible) I imagine you see about rumors of what is going on. But there's been -- we have gotten no official word and there has been no guidance with respect to this.

Second question, you mentioned, Chris, that you're really not interested in doing a failed bank deal in Florida. Are there going to be many -- not many but are there going to be a handful possibly of failed bank deals in Massachusetts or Rhode Island that you might be interested in if they actually do fail?

Well, generally the banking industry and the local banks in Massachusetts are relatively in good shape relative to some of those failed bank concentration areas. And there are -- there may be two or three that maybe sort of -- may head that way. And if they're adjacent to our markets or close to our markets we definitely would like to take a look.

Okay. And then finally, if the economy turns out to be stronger than consensus, employment comes back stronger, it forces the Fed's hand to raise rates sooner than consensus. I believe consensus is later this year.

So if we're staring at a June time period where they start raising short-term interest rates, and they do it in increments of 50 basis points, and say we're sitting here with a Fed funds rate at the end of the year of 2%, what would that do to your net interest margin?

Gerard we've actually been very focused on this question for some time. And we pay a lot of attention to our sensitivity to various rate environments. We're somewhat liability sensitive but we manage it aggressively. We use our market share. I think you can see by our cost of deposits that we're very conscious about protecting the margin.

The best way I can answer it for you is if you look back at our history over a number of cycles, if you go back to mid-2004, our margin since then, we've been in the 3.85 to 4% range. We've been able to maintain that through a lot of discipline.

On the asset side we're very focused on turning as much of our fixed rate commercial real estate to variable as we can through the use of loan-level derivatives and we think we're doing that pretty effectively. We will have some exposure certainly, but we think we can manage to it very effectively.

And then finally, circling back to credit, do you guys measure or do you have a sense of the inflows of new nonperforming loans or new nonaccrual loans? Certainly as you pointed out, your nonperforming assets went up this quarter. But is there any gauge that you monitor on a quarterly basis to see the actual new inflow of non-accruals? And if there is, what has that trend been with this quarter's numbers?

I have that. I'm just going to spend a minute and try and calculate it for you.

Because as outsiders, we roughly ballpark it by taking the net charge-offs and adding them back to your current NPAs and compare that to the period end NPAs in the prior quarter, but that doesn't capture paydowns or sales of NPAs and things like that.

Yes, I'll have that in the future Gerard. I've to get my calculator out here and add a bunch of shaded loans. So I would be happy to do that for future periods.

We can talk later about it. Thanks.

John Stewart, Sandler O'Neill Asset Management.

I just have a quick follow-up question on the TDR balances you gave. I believe last quarter your accruing TDRs were about $7 million and I think you said they were $18 million at the end of this quarter. Can you just talk about what has gone in there, how are these loans being modified? And then just kind of remind us, it doesn't look like many of them are actually flowing through into the MPL bucket given the balances last quarter, this quarter as well.

Just kind of remind us at what point you guys will actually move these off of TDRs. Is it six months? Is it something longer? How do you guys deal with that?

Okay, there's a lot in that question John. The -- in terms of what is in TDRs, let me give you a breakdown. I said it is pretty evenly distributed between commercial and the consumer portfolios, whether it is residential or indirect or direct consumer loans.

The -- I would tell you that there is greater consensus around how to capture and measure TDRs every month. There was revelatory guidance that came out in the fourth quarter of last year. The accounting firms are [all of their] opinion now as to what represents a TDR.

So I think there is more being captured, and at the end of our first-quarter there's a firmer definition as to what a TDR was than it was even in the fourth quarter or the third quarter last year. The regulatory definition talks about financial difficulty and financial deterioration and what is and is not a TDR, but the accounting firms are coming down pretty hard on this. And basically, any form of a concession is a TDR. So I think there's a more thorough measurement and reporting of TDRs here at the end of the first quarter than there has been in prior quarters.

The -- what has gone in and how are they being modified? It ranges from a residential real estate loan modification where we have our program for residential modifications. And a borrower would have to provide us evidence of hardship and we go through and evaluate whether or not we will modify that loan.

To commercial TDR that might be an interest only arrangement for a period of time for a borrower that is performing, comes to us and indicates that they have enough cash flow to pay on the loan, but because they're having problems collecting on a receivable with one of their clients they need a break for a period of time. That is a performing credit and we may agree to, for our good borrowers, to an interest only for a six-month period, something of that nature to try to get them through their receivables problem if that happens to be the particular situation.

There was another example of a credit where we had a borrower that was struggling. They brought in another investor. The investor put up a year's cash flow to service the debt, but because we agreed to a $50,000 or $60,000 write off associated with that loan, it is a TDR. So it ranges.

It's hard to make it any kind of a cookie-cutter approach to what is a TDR, whether or not it goes on nonaccrual. But if it is a performing loan that we believe will continue to be a performing loan, it doesn't go through nonaccrual.

I think it's worth also mentioning that we're extraordinarily realistic about all this. There's a lot of commentary out there about these -- (inaudible) pretend and extend. There's none of that here. We're very hard-nosed about whether the restructure is workable or not and we're not going to restructure and hope it's -- rely on hope. It's all fact-based.

Our head of commercial lending and workout have a saying -- your first loss is your best loss, and that is our philosophy. So, when we are entering into a restructuring like this, we do it very carefully.

And then I presume if they are performing under the revised terms for six months or so they would come off of that balance. Is that right?

Yeah, that's right, particularly on the residential side. But if you have a -- let's say you have a consumer loan at a rate that is not, even after a six-month period, if it is not reflective of the current market it remains with TDR.

Okay, thank you. And then, can you just give us the balance for what your 90 days past due bucket was? I think it was about $300,000 last quarter. Has that changed materially?

It's a pretty small number (multiple speakers) -- this is 90 day past due but still accruing, is that what you are getting at?

Yes.

(inaudible) It's a small number. I don't have that in front of me but I can certainly get it for you.

And then finally, was there an MSR write up in the quarter?

I don't know. Barry, can you comment on that?

I believe there was a small MSR write off, couple hundred (inaudible)

It's less than a couple hundred thousand if there was, John.

Okay great, thank you.

David Darst, Guggenheim Securities.

Good morning. Are we reaching a point where you are going to see your loan yields begin to decline at a faster pace given the loan level swaps?

We've been at this program for well over a year now, so a fair amount of that is built-in. But we are clearly going to be doing more of that.

We have seen our yield on our loan portfolio come down. That is likely to continue, both because of the absolute rate environment we are in as well as this program we have to mitigate exposure to the up. But there is room for some modest relief on the deposit side, too, as particularly CDs continue to re-price. And that's why we feel reasonably good about our 4% margin.

What is the new effective loan yield you're receiving on your average loan?

Can you ask that again?

What is the new effective loan yield you're receiving?

Do you want to tell [him from a] commercial range?

On the commercial side (inaudible) the loans that we're swapping, we're currently able to get in the range of LIBOR plus 25 to LIBOR plus [310]. So with one-month LIBOR at (inaudible) basis points, (inaudible) it's pretty low on the swap loans.

On the loans that we fixed we tried to target (inaudible) plus 265 and [home loan bank] plus 300, so on a five-year deal it would be in a range of 5.50 to 6%.

Okay, thanks. Chris, could you comment on what you're seeing in the market? I think you indicated you're seeing more organic loan demand and less marketshare movement. What is the change in the behavior from other banks?

I'm sorry you're kind of muddled. I can't quite make out what you're saying.

You indicated you are seeing more organic loan demand and less marketshare movement.

Yes.

Could you comment on what you're seeing the other banks' behavior is?

The other banks' behavior?

In terms of their lending activities I guess.

Are you talking about loan levels at other (inaudible) -- at other banks?

Yes.

I don't really know.

(multiple speakers) We don't have a number but just in general, David, on smaller credits we see more competition; less than $2 million there is -- competition has increased. Above that it's a little less. Does that answer your question?

Yes, thanks.

I didn't quite know what you were getting at.

(Operator Instructions). Gentlemen we have no further questions.

Great, thank you very much everybody. We look forward to talking to you in three months. Thank you.

This concludes today's conference. Thank you for attending. You may now disconnect.