Independent Bank Corp (Massachusetts) (INDB) 2002 Q1 法說會逐字稿

Good morning. My name is and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Independent Bank Corp conference call. All lines have been placed on mute to prevent any background noise.

And after the speaker's remarks there will be a question-and-answer period. If you would like to ask a question during this time, simply press start then the number one on your telephone keypad and questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key. Thank you.

Mr. Sheahan, you may begin your conference.

Thank you. Welcome to the Independent Bank Corp first quarter 2002 earnings conference call.

The agenda for this morning is I'll give a brief introduction of those that are with me on the call, and I'll review our cautionary statements. I'll then review the first quarter earnings release, followed by comments from Doug Philipsen, our Chairman, Chief Executive Officer and President of Independent Bank Corp. I will then give earnings estimates for the second quarter of 2002 and for the full year.

With me on the call today are Doug Philipsen, our Chairman, Chief Executive Officer, and President, Senior Vice President and Controller, and Vice President of Finance.

The cautionary statement. This conference call may contain certain forward-looking statements with respect to the financial condition, results of operations and business of Independent Bank Corp. Actual results may differ from those contemplated by these statements.

Independent Bank Corp wishes to caution listeners not to place undue reliance on any forward-looking statements. And disclaims any intent to update publicly any such forward-looking statement where in response to new information, future events or otherwise.

I will now give a brief overview of the first quarter earnings release. Independent Bank Corp reported 6.4 million in net operating earnings for the first quarter of 2002, an increase of 38 percent from the 4.6 million of net operating earnings reported in the first quarter of 2001. This represents diluted operating earnings per share of 44 cents for Q1 '02 as compared to 32 cents in the comparable prior year period.

Return on average assets was 1.18 percent. And return on average equity was 18.84 percent for the quarter.

Net operating earnings excludes the write off of the trust preferred securities issuance cost amounting to $738,000 after tax in the first quarter of 2002. And security gains of $747,000 after tax in the first quarter of '01.

In accordance with GAAP, the refinanced trust preferred securities issuance cost write off is charged directly to equity and is not an income statement item. However, it must included in the calculation of earnings per share. I will discuss the trust preferred securities in greater detail later in this presentation.

Net income for the quarter was 6.4 million, the same as net operating earnings, which translates to diluted earnings per share of 39 cents. Again the diluted earnings per share calculation includes the impact of the refinance trust preferred securities issuance cost write off. This compares to net income of 5.4 million for the prior year, an increase of 19 percent.

I'll spend a few moments on the balance sheet changes for the quarter. Investments decreased by 34 million in the quarter. Pre payments in the investment portfolio were heavy, as the full impact of the refinancing bubble of fourth quarter 2001 was felt.

Loans grew by 14 million for the quarter or 4.4 percent on an annualized basis. Seasonality plays a significant part in our load generation at this time of the year. We actually outpaced loan origination from the same period last year when the loan portfolio grew by $8 million for the quarter. Loan growth was well balanced throughout the portfolio and wee are still assuming six percent loan growth for 2002 in our earnings estimates.

Core deposits, we define as non time deposits improved by $55 million or 5.3 percent for the quarter, and time deposits decreased by 23 million or 4.3 percent during the quarter. This contributed to a lower cost of deposits in the first quarter of 2002.

The increase in deposits provided an opportunity to decrease borrowings by $18 million in the quarter. We also lengthened 50 million in borrowings to protect the long-term net interest margin.

I'll now spend more time on the discussion of trust preferred securities. The company called on January 31st, 2002 the $25 million of 11 percent trust preferred securities that were issued in January of 2000. The unamortized portion of the remaining issuance cost were written off during the quarter. As mentioned previously, this write off amounted to $738,000 after tax.

The company closed an additional offering of $25 million in 8.375 percent trust preferred securities on April 12th, 2002. The proceeds to this offering will be used to call in May 2002 the 28.8 million of 9.28 percent trust preferred securities that were issued in May 1997.

This transaction will also result in a write off of the remaining unamortized issuance cost in the second quarter of '02 which will total approximately $770,000 after tax. When the 9.28 percent securities are called, the end result of these financing transactions will be total trust preferred securities of $50 million with a weighted average cost of 8.5 percent. As compared to the $53.8 million with a weighted average cost of 10.08 percent excluding the impact of derivative activities.

In accordance with GAAP the $770,000 after tax will be charged to equity in the second quarter, not to earnings. And will be counted in the calculation of earnings per share.

The net interest margin for the first quarter of 2002 was 4.9 percent, an increase of 30 basis points from the same period last year. The net interest margin did decrease from the fourth quarter of 2001 from 50.6 percent or 5.01 percent excluding the credit quality discount pick up. The intentional lengthening of $50 million in borrowings and shortening of interest rate swaps during the quarter contributed to this reduction.

Non interest income improved by 1.5 million or 35 percent for the quarter, as compared to the same period last year. The primary drivers in this improvement were mortgage banking income up 500,000 service charge and deposits up 400,000 and investment management income which increased by 500,000 for the quarter primarily due to estate and distribution fees.

Non interest expense increased by 1.9 million or a little over 12 percent over the first quarter of 2001. Salaries and benefits increased by $700,000 or nine percent. The components of this change are increased headcount, performance based incentive compensation, mortgage commissions and merit increases.

Other non interest expenses increased by 1.3 million or almost 35 percent in the areas of IT consulting 326,000, advertising 259,000, recruitment 175,000, and the market value write down of a CRA investment 206,000.

Doug Philipsen will now comment on our earnings trend, credit quality and corporate governance.

Thank you Denis.

As just mentioned, net operating earnings in the first quarter 2002 were up 38.3 percent over the first quarter a year ago, and diluted operating earnings per share of 44 cent net analysts consensus. This continues a solid trend of significant quarterly operating increases since the conclusion of our acquisition of 16 branches from Fleet in August 2000.

Our quarterly earnings performance has strengthened in each and every quarter even as we have made significant investments in our franchise, as well as boosted the loan loss reserve in acknowledgment for the downturn in economic activity.

The quarter operating earnings increased progression. Beginning in the first quarter 2001 over the first quarter 2000 is as follows. The first quarter 2001 over the first quarter of 2000, 10.3 percent. The second quarter 2001 over second quarter 18.7 percent. Third quarter 2001 over third quarter 2000 25.5 percent. Four quarter 2001 over fourth quarter 2000 29.0 percent. First quarter 2002, over first quarter 2001, 38.3 percent.

To recap, the last five quarterly operating earnings increases as a percentage over the corresponding quarter of the prior year 10.3, 18.7 percent, 25.5 percent, 29.0 percent and 38.3 percent.

At the same time, quarterly provision has risen from $650,000 in Q1 2001, to a million two in Q1 2002. As a results of the increases in provision coupled with a heretofore favorable quarterly charge off experience, the reserve for loan losses at quarter end 2002, including the credit quality discount covered non performing loans by almost six times and amounted to 1.51 percent of the loan portfolio.

Obviously, no company can continue that fabulous earnings growth rate forever. For as a percentage increase in quarterly operating earnings year-over-year will be at a lesser rate of growth in the coming quarters. We expect that growth rate will be in strong double digit territory.

Loan delinquency continues to be extremely low dropping from 10.3 million .08 zero percent of total loans as of December 31st, 2001 to 6.8 million 0.52 percent of total loans as of March 31, 2002. While this loan delinquency is indeed terrific whiles it lasts this highly favorable experience is not realistically sustainable. While the recent economic downturn has been mitigated by continued strong consumer spending, statistics show that consumer debt has financing a substantial portion of this national spending spree with questionable consequence in terms of future charge offs by lenders.

I believe that the comparatively heavy consumer spending during this recession in contrast to previous downturns is attributable to changed attitudes as a result of September 11th and is not sustainable.

Corporate governance is very much in the news these days as a result of aggressive accounting techniques that are now apparent in several publicly owned companies.

In order to lead the highest standards of quality corporate governance, I recommended in 1992 to the Boards of Directors of INDB and it's old banking subsidiary Rockland Trust Company that it's executive committees be comprised of permanent as well as rotating members. This recommendation was adopted forthwith.

The objective was to ensure that every director had the opportunities to serve for at least a three month period as a member of the executive committee in each calendar year. In order to assure continuity one director rotates off and one joins the committee every month. The function of the executive committee of both companies was defined at that time as serving every purpose of corporate governance except audit.

The audit function is provided by three director's of INDB in accordance with guidance provided by the SEC and the Federal Reserve Board. Three additional directors of the Rockland Trust company provide audit oversight from the perspective of our bank regulators both the FDIC and the common wealth of Massachusetts with special focus on loan review. The audit committees met jointly at least four times per year.

Those functions of our executive committee where an equality corporate governance excludes the CEO such as management, compensation and director nomination exclude me. The obvious advantages of this membership of the executive committee include involvement of all directors in the committee process. No director of both corporations is left behind by virtue of being excluded from membership of this key and important committee.

In 1993, the board of INDB adapted mandatory retirement at age 72 for all directors who had not achieved that age as of adoption date. Since then, three directors have retired from the board of INDB as a result of reaching age 72.

Director William J. Spence, who attains age 72 on May 4th, 2002, announced at our annual meeting of shareholders held last Thursday, April 11th, that he did not intend to abide by our mandatory retirement provisions. Legal counsel has advised us that he has not legitimate basis for his position. And the company is immediately taking appropriate action.

With this exception, it has been my privilege to report to the most knowledgeable and dedicated group of people who comprise our board of directors, the fifth board with which I have been associated over my 30 years in banking.

Denis.

Thank you, Doug. I will now review the assumptions in our earnings estimate. And then provide you with the numbers.

I'll begin by updating you on goodwill. As you're probably aware, the vast majority of Independent Bank Corp goodwill results in the acquisition of 16 branches from fleet and sovereign in August of 2002.

Recent accounting guidance has led to the elimination of the amortization of goodwill for certain types of acquisitions. The most recent guidance proposed by the financial and accounting standards board would retroactively allow the non amortization of goodwill in those instances where a portion of the intangible was assigned to cored deposits.

In accordance with the securities and exchange commission rules on business combinations, Independent Bank Corp did not establish a core deposit intangible. And we will continue to amortize all of the goodwill associated with the branch acquisition.

This accounting treatment suggested by FASB is patently unfair and at best is inconsistent. We will continue in our efforts to have the accounting for goodwill fixed.

With the inconsistent GAAP treatments of banks that acquired branches and banks that acquired entire financial institutions, I again feel compelled to provide you with two estimates of our earnings, those are cash earnings as well as GAAP earnings.

Many of our peers will reflect results in 2002 that do not include the amortization of goodwill. For accurate peer comparison, my expectation, is that Independent Bank Corp should be analyzed versus peers based upon cash earnings due to the inconsistency of the accounting treatment in the goodwill arena.

Some other assumptions in the earnings guidance. Clearly, Independent Bank Corp has benefited significant from a strong net interest margin in 2001. My expectation is that we should be able to maintain the margin in the second quarter of 2002 as we did in the first quarter of 2002.

We expect continued good loan growth during the year in the region of six percent. We also anticipate modest growth in non interest income assuming improved revenues from our investment management division. Non interest expense should be approximately 18 million per quarter. And this includes goodwill amortization of 656,000 per quarter.

Finally, the numbers I am about to share with you, do not include the impact of the write off the issuance cost of the trust preferred debt we expect to call in May. The impact of this write off is five cents per share in the second quarter, or $1.2 million pre tax. And the total impact of trust preferred securities issuance cost write offs for 2002 will be 10 cents per share for the year, $2.3 million pre tax.

The operating earnings estimate for the full year 2002 is in the range of 175 to 180 per share. Second quarter estimate of 41 cents per share. The third and fourth quarters of 2002 should improve from the second quarter as we expect loan growth to pick up in line with prior year seasonality. And we have a strong back load of - strong back log of loans and commercial lending.

The cash earnings estimate, the amortization of goodwill equates to three cents per share after tax per quarter. This results in a cash earnings estimate for 2002 of 1.87 to 1.92 an a second quarter 2002 estimate of 44 cents.

This concludes the presentation and we would be happy to entertain your questions.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause just a moment to compile the Q&A roster.

Your first question comes from .

Good morning, gentlemen, how are you?

Good morning, .

Good morning.

I've got a couple of questions, you can help me out here.

One typically, you've both had seasonal deposit run offs in the first quarter that has been noticeable. You didn't have that - you've actually had very good deposit growth. If you maybe could address that to some degree. I mean to what extent is just the capital markets and the people putting money in the bank as opposed to the capital markets.

Two, trust was probably the strongest quarter that I've seen the company put together since I've followed you. That's going back about five years. Denis, you had mentioned estate - regarding some estate payouts and things of that nature. Is there anything else that was involved in the strong quarter for trust? And what is sustainable going forward using that as a base?

OK. , you're first question pertaining to deposit. There is certainly an amount of our deposit growth. I think like most banks it's attributable to individuals, you know, taking money out of the capital markets and putting them in a bank.

There's also I think in our case, we are perhaps a little different. We really believe that the branches that we acquired, the core deposit growth in those locations has been quite good. So you're - we're starting to see the impact of those branches improve our deposit levels.

If you think back it's only bin a little over 18 months since we acquired those branches. So we are - we expect continued good deposit growth. It's somewhat unknown what will happen when the stock market begins to improve as to will there be significant deposit outflows for us and the rest of the industry?

But we feel pretty good about our deposit growth in the first quarter. You're right in what you pointed out, we generally have a decrease in deposits, but we think the impact of the acquired branches is really beginning to show for us.

OK.

Your second question pertaining to the trust estate and distribution fees, it certainly was a significant increase for us. We were up $500,000 from the same period last year. About 380,000 of that were estate and distribution fees.

I would say going forward, that about 280,000 of that is one time in nature. I mean these things they're never - they're not one time, but you can have a flood of estate and termination fees in any particular period.

So even backing up at 280 it was still a very strong quarter for Trust.

Yeah.

So I take it the performance has been quite well also.

Yeah, our new business generation has been quite good. And we, you know, it's a slow sale in the trust arena. And we expect it to continue to be good.

OK. Thank you.

Again, if anyone would like to ask a question, simply press star, then the number one on your telephone keypad.

We have a follow question from .

All right guys, since I got you two to myself right here for now.

On the mortgage pipeline, I'm looking at - you talked about trust fees being strong in the quarter, it looks like mortgage was also strong. What do you see in the pipeline? How much more, you know, if you look out the next couple of quarters how strong does it - is it in there, in that type of line item? Are you seeing a slow down in the pipeline?

Is it still - are rates still low? And there's some purchase many mortgages to be had out there that you'll maintain a fairly strong quarterly rate?

And then second thing if you can provide me some flavor on the net charge offs during the quarter.

OK. , I assume you're talking to residential mortgages?

Yes.

OK. Residential, you know, we expect to slow for the rest of the year. We're still very focused in that area. You know, it's done very well by us over the past year in particular. But we do expect it to slow. If rates go up, we would certainly expect the originations out of our residential mortgage area to slow somewhat from the craziness that we've seen in the past year or so.

As far as, you know, expectations going forward, we still expect to have some good growth, probably another $20 million of growth in the residential portfolio in the rest of this year. But that's about it. Nothing more than that unless there's another refinancing wave or something of that nature.

Denis, what was the mortgage banking revenues for first quarter as a separate line item versus say fourth quarter?

OK. Mortgage banking was 960,000 for the first quarter of '02.

OK.

Bear with me for a second. Now it's - you're comparing to fourth quarter of '02, correct?

Yeah. Fourth quarter of '01 sequentially, fourth quarter '01 to first quarter '02.

OK. One second. Let me give you net charge offs first.

OK. That's fine.

Net charge offs for first quarter were 310,000. And mortgage banking income fourth quarter of '01 was 882,000.

All right. So you saw an actual improvement in mortgage banking income in the quarter.

Yeah.

OK. Interesting. And so - and when rates going up at some point this year, which - I mean I'm worried on the side that it doesn't actually occur. It occurs later than sooner.

I think some of the estimates out there are, you know, still people some in May, some in June. But say if you were to look out, that we don't get any until August, this quarter run rate would still hold in a decent amount. You may see some drop off but it will still be quite strong here in the next quarter or so.

Yeah, I'd expect it would be strong and, you know, there's a seasonality again that helps the second quarter.

Right.

You have, you know, more home buying that happens here seasonally in the second quarter. So we still expect, you know, a positive trend in mortgage banking income. And so your estimate of a slow down in the third quarter may be appropriate.

OK. All right. Thank you.

At this time, there are no further questions, sir.

OK. Thank you. And we look forward to discussing our second quarter 2002 earnings with you in the near future.

Thank you very much.

This concludes today's conference call. Thank you for participating, you may now disconnect.