Independent Bank Corp (Massachusetts) (INDB) 2011 Q4 法說會逐字稿

Good morning and welcome to the Independent Bank Corp. fourth-quarter 2011 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. (Operator Instructions).

Please note this event is being recorded. This call may contain forward-looking statements with respect to the financial condition, results of operations and business of Independent Bank Corp, actual results may be different. Independent Bank Corp. cautions you against unduly relying upon 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 would now like to turn the conference over to Chris Oddleifson. Please go ahead.

Good morning, all, and thank you for joining us today. I am accompanied now as always by Denis Sheahan, our Chief Financial Officer, who will elaborate on our financial results and outlook filing my comments.

The fourth-quarter capped another excellent year for the Rockland Trust franchise. Fourth-quarter net income of $11.2 million or $0.52 per share brought full-year earnings to $45.4 million. This represents growth of 13% over prior-year earnings. Corresponding EPS of $2.12 for 2011 was 12% above prior year. This is on top of the 33% growth in operating EPS we generated in 2010.

Now this is no small achievement in light of the profound uncertainty and economic softness looming over the bank industry. And we haven't been flashy or quirky with anything here, just a track record of consistent, high-quality performances and doing the job for our customers.

Throughout the year and including the fourth-quarter performance has been marked by notable strength in our commercial loan originations, our core deposit growth, home-equity volumes, and new customer acquisitions.

There is no question that our focus on customer outreach, attractive products and service excellence, coupled with our reputation for reliability and local market know-how, has distinguished us in the marketplace.

Similarly, our disciplined and careful approach to risk management has enabled us to strengthen and grow our balance sheet. Our credit quality has been a real point of distinction for us. Our underwriting discipline and problem resolution skills have consistently kept us in good stead. Our loss rate for 2011 was just 26 basis points.

Nonperforming loan levels remained well-contained. Our credit metrics compare quite favorably with peers. Capital represents another reservoir of strength for us. We relied exclusively on organic growth to attain our position. Our capital ratios improved in 2011 and remain well above regulatory thresholds.

Casual book value per share rose by 9% in 2011. And as you know, we have not undertaken any dilutive capital raising. And there has been no disruption given to our shareholders.

Our funding profile is in excellent shape as well. Low cost core deposits have grown to 83% of total deposits, and our reliance on wholesale funding sources is de minimis.

Beyond the financial picture considerable progress was made in 2011 on many other fronts. We accomplished a great deal of strength in Rockland Trust's growth prospects, capabilities and processes and revenue streams. I would like to take a moment to highlight a few of these successful endeavors.

First of all, we made key investments in our commercial banking franchise, a major growth engine for us, to expand its market reach and depth of talent and product offerings, and early returns are very encouraging.

We embarked on a major household growth initiative by an integrated marketing and sales efforts. This proved quite rewarding as we attracted significantly more households in 2011 than in prior year. We also experienced double-digit growth in combined consumer and small-business DVA sales.

We significantly enhanced our electronic banking platform by launching mobile banking and our mobile deposit apps, modernizing many ATMs and upgrading our online bill pay service. We capitalized on our home equity lending prowess with a direct marketing and promotional campaign that led to an over 20% increase in production for 2011.

We continue to focus on our investment management business and it remains a major strategic priority for us. In a very volatile year in the markets we grew assets under management by 5%, joining over 15% revenue growth, and achieved a 99% customer retention rate.

And, finally, we implemented a number of key technology-related initiatives designed to improve efficiency and the client experience.

While all in all 2011 was a good year for us, and looking ahead we really must balance our natural enthusiasm and confidence in our franchise with the macro uncertainty that lingers across the economic, legislative, regulatory and political spectrums. Our industry is still facing meaningful revenue headwinds. Interest margins are clearly under pressure from the Fed's concerted efforts to hold the rates down.

Regarding the economy, the recent improvement in key indicators provide some glimmer of hope for the long awaited recovery, but given all the false starts, we prefer to remain grounded in our assumptions. Between the debt crisis in Europe and the contentious election year in the US there is nothing to be gained by getting ahead of ourselves.

Locally the Massachusetts economy continues to perform better than the nation as a whole. Massachusetts employment (sic - see press release) has dropped to below 7%, its lowest level since December of 2008, and the best of the Boston metro area unemployment rate has dropped to just above 6%.

The state has added more than 55 jobs over the last year. And the Boston area continues to see a pickup in real estate construction projects, especially in multi-family use properties.

The region is benefiting from its concentration of more resilient type industries in medical, biotech and education. The housing picture still remains muddled, however, and continues to weigh on the outlook and overall confidence.

In this setting we simply focus on what we can control. We will remain on the path of pursuing disciplined growth. We will invest our shareholders' capital in value-enhancing strategies. We continue to capitalize on our growing brand recognition to add to our high-quality customer base. We will keep our eye on expenses without compromising critical investments.

So in a nutshell the Rockland franchise is in terrific shape. Much of our success is attributable to incredible energy and enthusiasm that my colleagues bring to work every day. And I wish to thank each and every one of them for their contributions and winning spirits.

So I will conclude my comments in the same way I usually do at the end of every year. We ended the year an even stronger company than we began it. And with that I will turn it over to Denis.

Thank you, Chris, and good morning. As Chris mentioned, Independent Bank Corp. reported net income of $11.2 million and GAAP diluted earnings per share of $0.52 in the fourth quarter of 2011 as compared to net income of $12 million and diluted earnings per share of $0.56 in the third quarter of this year of 2011.

The biggest factor in the linked quarter comparison was the incurrence of prepayment penalties in the quarter amounting to $757,000 pretax or $0.02 per diluted share. We deployed some of our excess cash to pay down higher-cost borrowings.

The quarter also included a higher loan loss provision as we continue to prudently add to reserves. On a year-to-date basis GAAP and operating earnings were $2.12 per diluted share, up 12% from the prior year.

2011 was a year of good, solid performance. Loan, deposit and fee revenue growth and asset quality were all favorable. Expense was well contained when considering the investments made in growth initiatives. Alternatively, the pressure on asset yields, particularly in the latter part of the year driven by Fed actions and global economic uncertainty, constrained the net interest margin.

Key performance ratios were generally solid in the fourth quarter with return on average assets at 91 basis points, return on equity 9.45% and the net interest margin at 3.78%.

We had expected the net interest margin to be a little higher, but we carried a lot more excess cash than anticipated and loan growth and commercial didn't kick in until the very end of the quarter. The impact of the higher cash balance was 4 basis points on the margin in the quarter.

Loans grew nicely in the fourth quarter at 8% on an annualized basis. The commercial loan portfolio once again was the biggest driver with much of the growth emanating from the large new business pipeline we maintained at the end of the third quarter.

We are hopeful this growth will continue into the beginning of 2012 as the approved pipeline ranks fourth highest in the last 12 months.

The home-equity portfolio grew 29% on an annualized basis, benefiting from demand for first position mortgage refinancing. The quality of the home-equity portfolio was strong with 55% of outstanding balances in first position and current average FICO and LTVs of 762 and 55%, respectively.

Deposits also grew in the fourth quarter at 9% on an annualized basis across all three business lines -- consumer and small business, commercial and government.

Importantly, the mix of deposits continued to improve as core deposits crept up to 83% of total deposits. Of particular note, in the fourth-quarter demand deposits grew 6% annualized and by 18% for the year, and now represent almost 26% of deposits.

The growth in households and other initiatives discussed by Chris earlier, including increased marketing spend, contributed to the increase in consumer and small business deposits.

In addition, the emphasis in capturing a customer's full relationship to include deposits by our commercial banking team also contributed nicely to the growth in low-cost deposits. Consequently, the total cost of deposits declined yet again to 31 basis points in the fourth quarter.

Asset quality trends remain excellent. Net charge-offs increased as expected to 30 basis points in the fourth quarter annualized from a very low 15 basis points annualized in the third quarter, and were 26 basis points for 2011 as compared to 43 basis points in the prior year.

Nonperforming assets were stable at $37 million at the end of the year or 75 basis points of assets. Nonperforming loans increased $2.3 million in the fourth quarter, largely due to a single construction-related credit.

Loan delinquency increased to right around 1% -- 1.01% actually at December 2011, and earnings early-stage delinquency was 58 basis points of loans. We continue to feel good about the state of our credit profile.

The net interest margin decreased to 3.78% from 3.84% in the third quarter, at the low end of the range I provided in last quarter's call. All told, the margins declined by almost 25 basis points since the beginning of the year, much of this reduction experienced in the second half of the year.

The significant drop in interest rate indices, particularly in the third quarter, has had a material impact on loan repricing and new loan origination deals. As with the industry, the ongoing runoff of higher-yielding loans and securities weighs on our asset yields as well. In addition, a higher level of excess cash contributed to the reduction in the margin.

Finally, as stated earlier, $28 million of borrowings were prepaid during the quarter, resulting in a prepayment penalty amounting to $757,000 pretax or $0.02 per diluted share. We felt this was a better use of our excess cash position in light of the unattractive reinvestment yield environment.

Noninterest income grew by 16% or $2 million in the quarter largely due to the positive impact of the equity markets on the Company's trading asset, an impact of $800,000, improved mortgage banking income due to the refinancing environments, $650,000, and the loan-level derivatives program, $550,000.

For the full year 2011 noninterest income grew by 12%, driven by deposit fee revenue and growth in the wealth management business. I would like to spend a moment discussing the sustainability of this revenue due to one of the early analyst flash note comments. The gain or loss on a quarterly basis of the trading asset is subject to the whim of the stock market and is not something we count on for performance.

Mortgage banking income is likely to be lower next year due to the duration of this refi market. However, this isn't a strong margin business and expenses will also reduce as a result.

Finally, the loan-level derivatives revenue is not as a result of trading or speculative activity. These represent loan-level swaps that have been important in providing the bank the ability to take fixed-rate commercial loan cash flows and turn them into variable. The sustainability of this revenue is dependent both on the growth of the loan portfolio, borrowers' willingness to enter into the swaps, and the bank's interest-rate risk strategy.

Commercial loans grew 8% in 2011, and we see similar prospects for growth in 2012. noninterest expense increased 4% overall in the fourth quarter, driven largely by the borrowing prepayment penalty previously discussed.

The fourth quarter also included a full quarter of expenses arising out of our recent commercial banking growth initiative. Other noninterest expense also increased in a variety of categories, including loan workout, contract labor, appraisals, etc.

The tax rate increased to 27.4% for 2011, as compared to 23.3% in 2010 due to higher earnings.

And now turning to earnings guidance. We always try to provide you with our expectations of future performance along with updates as the year plays out. For 2011 we actually exceeded our original guidance at the beginning of the year and came in consistent with subsequent guidance.

For 2012 we anticipate diluted earnings per share performance of between $2.05 and $2.15. This would put us pretty much on par with 2011 performance.

In comparing the two years there are two key headwinds we are facing this year that need to be taken into account. One relates to a more compressed interest margin and the other to a higher tax rate. The combined impact in 2012 is approximately $0.15 to $0.20 per share.

We expect to counter that with continued solid organic business growth. As a reminder, our first quarter usually trends notably below the fourth quarter due to a variety of factors, including fewer days, higher employee benefit expense and increased marketing expense.

I will now review a number of key assumptions in our 2012 outlook. First of all, loans. Loans grew 7% in 2011 and we expect a similar level of growth in 2012. The areas of focus will continue to be commercial and home equity lending.

We built good momentum in deposit gathering in 2011 and we expect that to continue in 2012 with growth forecast at 5% with continued focus in the core deposit category.

The net interest margin is expected to range from a high of 3.8% at the beginning of 2012 and steadily declining to a low of 3.65% in the latter part of the year.

In the first quarter $40 million of borrowings were repriced lower by 100 basis points, benefiting the margin at the beginning of the year.

The asset quality outlook is expected to be stable to improved in 2012. As a result, the provision for loan losses is anticipated to be in the range of $10 million to $14 million and loan net charge-offs in the range of $9 million to $12 million.

Noninterest income is anticipated to be flat as improvement in investment management revenue is largely offset by a reduction in mortgage banking income. Noninterest expense will be well-contained and is expected to increase 2% to 3% as we balance overall cost discipline with careful growth investing.

Our tax rate is expected to rise from 27% in 2011 to 29% in 2012, which reflects the expiration of some of our new market tax credits as well as increased pretax earnings.

We expect capital to continue to grow with unadjusted tangible common equity reaching 7.1% in 2012. Reaching 7% in our view provides the bank with much greater flexibility from a capital perspective. So all in all we expect a continuation of solid fundamentals and quality performances.

That concludes my comments. Chris?

Operator, we are ready for questions.

We will now begin the question and answer session. (Operator Instructions). Mark Fitzgibbon, Sandler O'Neill & Partners.

Good morning guys and thanks for providing all that detail, it is helpful. The first question I had, Chris, I think you said you have the fourth-highest loan pipeline that you have ever had. Could you share with us what that is in dollars and what the mix of the pipeline looks like?

Sure, it is Denis. I think it is $190 million. Let me just look that up. One second. I will give you two different -- the approved, which is the category that is further through the analysis process, the approved is $190 million at December 31, the fourth-highest in the last 12 months.

I don't have the breakdown by real estate and C&I, but intuitively I would tell you that we are -- in the fourth quarter I think we closed $85 million of new commercial real estate and $85 million of C&I exposure. Now that doesn't necessarily translate into outstandings, but intuitively I would follow that kind of mix, because we are seeing more and more opportunities, and have emphasized for a number of years now the C&I business. That is where our greatest percentage growth is, not necessarily the greatest growth in outstandings.

Another reference point, for all of 2011 we originated $563 million of commercial loans.

Then on your projections of 2% to 3% expense growth for 2012, does that include any new de novo branches?

No. We have put our de novo plans on hold for the moment, recognizing that revenue was flattening somewhat because of the shrinking margin. And as you know, in this region of the country it is very expensive to have a de novo project in place so we put those plans on hold for the moment.

The value of deposits are very, very low at this point.

Okay. Then in the release you said that assets under management was up in the quarter, but investment management fees were down due to lower mutual fund commissions. Is that because the fee structure changed on the mutual funds you are dealing with or there was just less activity moving assets from fund to fund or something else?

The commissions we refer to is really -- is on the more retail investment that we -- that are originated through a third-party platform, not the -- they don't necessarily going to our Investment Management Division.

So, for example, someone who comes into the branches who may have $40,000 or $50,000 of investable assets it may be more suited to go off through the third-party platform rather than into our Investment Management Division. So there was less activity there for less revenue from that side of the business.

Then, lastly, on some conference calls yesterday for some other New England banks there was a fair amount of talk about M&A activity picking up. I am curious are you seeing it in your markets, and do you think there will be some opportunities in 2012?

As you know, our stance on M&A is very opportunistic. Our organic growth really proves out that we are able to grow organically. I will say that the Slade's acquisition and the Ben Franklin acquisitions were wonderful for us, and have proved out to be very, very good. And we would like to find other opportunities like that, but I have no convictions.

Thank you.

Bryce Rowe, Robert W. Baird.

Just a question, Denis, for you. Any more opportunity for borrowings to get prepaid?

Unlikely, Bryce. We certainly -- the reason we prepaid those borrowings was they were relatively short duration to maturity. They matured in the latter part of 2012 and 2013. The remainder of our borrowings are doing a really good job in managing interest rate sensitivity in our commercial real estate portfolio. That component of it that is fixed rate. We have been doing a lot of work trying to swap our recent commercial real estate origination to variable, but there still is a good chunk of it that is fixed rate and those borrowings are doing a good job of managing that interest rate sensitivity.

They are longer duration borrowings. Our plans right now, I can tell you, are not to prepay them. If that changes we will make sure we let everybody know.

And then within your margin -- I'm sorry, earnings guidance and your margin guidance what is your -- what do you see from, one, a liquidity perspective, kind of where you hold liquidity in 2012? And then can you talk a little bit about pricing pressure on loan yields and just pricing -- or competitive pressures within loan gathering?

So in yields and gathering, okay. I'm just making a note here. All right, from a liquidity perspective, I think it is fair to say we didn't want to carry as much cash as we did in the fourth quarter. But we knew the commercial loan growth was coming, it just came very late. A lot of it came, frankly, in the last two weeks of the year.

If you look at our average balance in commercial versus period-end you see a substantial difference. It tells you that the closings came right at the end of the year. So we carried a lot of cash that affected the margin.

We would rather not carry that level of cash next year. It is just running a hole in our pocket. We are hopeful that we will have some decent loan growth continuing in commercial in the first quarter.

We are at the point in our securities portfolio where we need to buy some securities for a collateral -- from a collateral perspective, so we expect securities to grow modestly. This is not a big leverage play on our part. We have some collateral needs for certain deposit and customer related borrowing positions that we need to fulfill. So we would have to manage that liquidity position in terms of excess cash a little lower this year.

In terms of competition and pricing pressure, yes, absolutely there is pricing pressure. I am sure it is the same situation all over the country. But many of the larger banks are getting healthier. They're fighting more to hold onto transactions. So yields are under pressure. The competition for outstandings has increased significantly.

But I think what we benefit from is we had been there through thick and thin, throughout this cycle for small businesses and larger businesses looking for credit. We had been there and so we have got a very good reputation in the market. There are a lot of companies who are trying to repair their reputation because they walked away.

So we're feeling pretty good. We are assuming the same level of growth, around 8% growth in commercial in 2012. We think that is strong, and hopefully we can fulfill that..

Regarding price, there are a couple of interesting sort of positives, sort of maybe elements to the future. One of which is that we are seeing many of the larger banks are not terribly interested in non-owner occupied real estate, so we are seeing a little more demand and maybe a little less pricing pressure there.

We are also -- something you might need to consider, this is an industrywide phenomenon, is that a lot of the -- there is a huge uptick in conduit lending back 10 years ago, and that is going to be maturing and all that is going to be looking for a home over the next 12 to 24 months. So that is going to be putting more demand into the marketplace too.

So between the factors that Denis commented on and these, we're fairly confident with our projections.

That is helpful. Thank you all.

Laurie Hunsicker, Stifel Nicolaus.

I was hoping that just we could chat on credit here. A couple things -- TDRs included in nonperformers, do you have that number?

Sure. And just bear with me for a moment. I will get that.

While you're looking for that do you also have the OREO write-downs in the quarter?

Yes.

Then while you are looking for that too could you give us any color with respect to the -- within your charge-offs it looks like $1.2 million came from commercial real estate.

One second. OREO valuation write-off in the quarter was $103,000. We did have a loss in sale of OREO of $224,000 as well on the quarter.

TDRs, so total TDRs as of December 31 are $46.4 million. $9.2 million is on nonaccrual, so the remainder is accruing. And if you need to break out by product I can give you that as well. So that was PDRs. OREO -- what was your other question?

Just the $1.2 million that you had of commercial real estate charge-offs, do you have any dollar?

It was -- I think about $800,000 of it was in two credits, generally and the South Coast and multi-family lending properties.

And how is that market holding up?

It depends. It depends on the quality of the projects. Certainly the South Coast and into Rhode Island has seen higher unemployment than the rest of Massachusetts -- you know, a higher rate of real estate depreciation than the rest of Massachusetts.

But, you know, the unemployment picture is improving, both in Massachusetts as a whole and down on the South Coast and into Rhode Island, so that is some positives development, and we hope that continues. But certainly the depreciation in the real estate has been a little heavier there than it has been in other markets.

All in all the projection Denis discussed for 2012 so it reflects the entirety of our view on our markets.

Okay.

Suggests it is all improving. And you know that we are pretty disciplined underwriters and we are really good workout -- have a really good workout team.

Absolutely. Your credit is near pristine. You have got a great track record. Just to go back to TDRs for a second, do you have a breakdown of just how much is commercial real estate of the -- in other words, excluding the piece that is already in nonperforming?

Yes, I --.

Or if you have it any way I can back into it. I'm just curious (multiple speakers).

I have commercial in total. I would assume most of it is real estate, but I don't have the breakout between C&I and commercial real estate. So total commercial is $23.6 million.

How much of that is in nonperformers?

None of it. This is the -- because the nonaccrual component was $9 million in total, so this is the portion that is accruing.

So that is the portion that is accruing. Got it. Okay. So that goes with the $37.2 million. In other words, of the $37.2 million --.

Yes, yes.

Okay, perfect. Okay.

And then the majority of the rest is in residential or consumer small business.

Okay, great. And then just with respect to margin, I know this was touched on, but do you have a month-end margin?

Let me see, I might actually. Hold on a sec. Yes, 3.79%.

3.79%, okay.

That was for December, so a little better than the quarter as a whole.

Okay. Great. Then, just lastly, can you update us on the progress of your Rhode Island branch? And just maybe any other color with respect -- I hear what you're saying on putting de novo branching on hold, but just with respect to how you look at it did any of this also filter in with how Rhode Island is doing or is Rhode Island progressing as you thought?

Rhode Island -- just to clarify, we did not open up a retail branch in Rhode Island, we opened up a commercial banking and wealth management office. And we had a -- and we still do have a commercial lending and wealth management office just on the border in Somerset and Attleboro, Massachusetts.

So we hired two or three folks from the Rhode Island market. Actually a number of folks who are working in our Massachusetts offices, either lived -- have lived in or worked in Rhode Island for most of their careers. So we were able to start with a huge running start in Rhode Island's office.

Having an office in Providence in a prestigious office tower, the GTECH building, really elevates our credibility and presence in the market. As such, we are seeing more deals. We have closed -- we are probably a little bit ahead of what we expected to generate. The business we expect that in 2012 with that operation will be breakeven, which is actually slightly ahead of schedule. So we are very encouraged.

And how much -- and I realize that just opened. It opened right at the very beginning of the quarter, October 6. Where do you stand in terms of deposits and loans?

Well, Rhode Island overall, we had about $500 million in total footings in Rhode Island to begin with. We will have about $200 million in commercial loans, about $200 million in deposits -- $100 million of deposits and about $200 million of assets under management. And we have added to that in the tens of millions of dollars since we opened.

You mean in just one quarter?

Yes.

So tens of -- so like $20 million or $30 million or --?

Think about it in that range. I actually don't have the exact number at my fingertips. I'm just thinking about some of the deals we have done. So that is about right.

That is about right, okay.

I think what we will do is maybe perhaps next quarter we will give you what that region -- how much more that region has grown. Because really rather than looking at this as just -- as single office, you need to look at the benefit to that South Coast region.

Perfect, okay.

So it is -- because the whole region will benefit from the visibility that is in the Providence office.

Perfect. Then just to tandem on a little bit what Mark touched on, can you expand a little bit on M&A to the extent that you have such strong currency now relative to the rest of the community banks in New England, how you look at your currency?

Obviously, you have got that filed shelf that you increased going on two years ago now almost. And we haven't seen you do an acquisition since Ben Franklin. How do you look at that?

An earnings call would not be complete without you asking this question. So I'm delighted you asked. I think -- the one time that I would add, in addition to what I shared earlier, is that we are not going to let the shelf, our capital, burn a big hole in our pocket and DTLs that destroy shareholder value.

So we are very disciplined in looking at the economics of deals, and should deals come up we will take a good look at them. And if it makes sense for our shareholders, we will pursue them. But we are not -- we really are not interested in getting -- doing acquisitions and becoming bigger for just simply to become bigger.

Okay, fair enough. Thank you.

Damon DelMonte, KBW.

A question for you regarding loan growth. I know you guys have had good traction with your home-equity initiatives. How do you see that shaping up as we head into 2012? Do you expect to continue to gain traction in that regard?

Yes, I think we are expecting to continue growth, but not at the pace we had in the fourth quarter. That was a little unusual really to do with the first position refis. And just to be clear on that, we are not putting thirty-year product into the home equity portfolio. This is with borrowers who might qualify for a 15-year or sometimes a 20-year product -- 10-, 15-, 20-year product. And it is a smoother, less costly option for them to refi. We look to do the home equity portfolio. A 30-year product is still typically sold in the secondary market.

So, yes, there was a big burst of growth in Q4 because of that strategy. But we have an ongoing direct mail program for home equity lines that we have proven to be successful at for quite some time and we are going to continue that in 2012. And our hope is that we can continue to maintain good growth in the home equity portfolio. I think the growth we have planned is 11% in 2012, so still a good level of growth.

And are you expecting residential mortgages to continue to run down?

Yes, I think we are expecting them -- the resi portfolio to drop about 9% over the year.

So then the balance of the growth then comes on the commercial side where you obviously have a very strong pipeline already.

Yes, yes.

Okay, great. Then with regards to mortgage banking revenues, obviously, this was a very busy, active quarter for you guys, and your commentary was that you expect that to trail down in 2012. I don't know if you have it on a month-by-month breakout, but like can you give us a little color as to maybe how it was trending during the quarter to give us some pace of guidance as far as how much we should expect it to come down next year?

Let me see. Mortgage banking was -- I think we were roughly $4 million for the year. Let me see, $4.2 million -- yes, $4.2 million for the year. We think we will be down 35% for the year. Yes, we think we will be down about 35% for the year.

The beginning of the year Q1 and Q2 a little better. The pipeline for mortgage in the first quarter is better than we anticipated -- modestly better. So a little heavier if you're doing a spread, a little heavier for mortgage banking income at the beginning of the year and then trailing down.

Okay, that is helpful. Thank you. Then my last question deals with the payout ratio for the dividend. I think during 2011 it was pretty steady in that 34% to 36% range. What are your thoughts on increasing the payout, just given the lower risk balance sheet, the excess capital you're generating and trying to return to shareholders?

We think that is a pretty good range for the payout ratio. But that said, we typically increase the dividend every April. And we didn't for a couple of years there during sort of the depth of the crisis. And I think it is fair to say that has climbed again. So that will bump the payout ratio modestly, but we think all in all that is a pretty reasonable payout ratio target to have.

Okay, that is all I had. Thank you very much.

(Operator Instructions). David Darst, Guggenheim Securities.

Could you give us an update on the asset-based lending team that you brought on board last summer, and maybe an idea of what types of yields you are adding with that portfolio?

In terms of -- I can tell you they have only closed a couple of deals thus far, but the activity is very good. So we are hopeful that in the first half of this year that much of the good work that they are doing in terms of getting out to prospects and trying to grow the business will bear fruit in the first half of the year. So, again, activity very strong; closings only a couple at this point.

Yields, I don't have that information right at hand, but I can certainly try and get that and have it for the next call.

Okay. What are your current commercial real estate yields that you're bringing new loans in on at?

I am not going to get into that, because I think that is providing information that our competitors would like to have. So I am not going to get into that.

Okay. Then how much might you grow the securities portfolio this year? And maybe any thoughts on where you are adding -- what you would be adding there from a perspective of duration or yield?

Well, from a -- first of all from a credit perspective they are vanilla. It is going to be agency -- likely agency mortgage-backed securities, CMOs. What kind of duration, Rob?

Five years.

Maybe five years or less. So we are not -- we're going to try and be very cautious there.

Okay, thank you.

In terms of the amount that we would grow it, it would be modest, $50 million, $75 million, no more than that. But we do have, as I said earlier, we have certain collateral needs for some of our depositors and as deposits grow, we need to add collateral. We are really at a low right now. I think the portfolio overall is about 10% of assets, so we are quite low on the securities portfolio right now. Does that answer your question, David?

This concludes our question-and-answer session. I would now like to turn the conference back over to Chris Oddleifson for any closing remarks.

Thank you everybody for tuning in today and we look forward to talking about our first-quarter results in three months. Have a good weekend.

Thank you. Bye.

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