Independent Bank Corp (Massachusetts) (INDB) 2005 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Independent Bank Corp. first-quarter earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Denis Sheahan, Chief Financial Officer and Treasurer of Independent Bank Corp. Thank you, Mr. Sheahan. You may begin.

Thank you. Good morning, everyone, and thank you for joining us on the call. This morning's agenda will include my review of our first-quarter 2005 earnings release; then comments by Chris Oddleifson, our Chief Executive Officer, regarding our progress on strategic initiatives, as well as some key performance metrics. I will then confirm earnings guidance for 2005, and we will end the call with a question-and-answer period.

With me on the call today are Chris Oddleifson, President and Chief Executive of Independent Bank Corp., and Barry Jensen and Rob Cazone of our Finance Department.

Before I review our first-quarter earnings release, I will read the cautionary statement. This conference call may contain certain forward-looking statements with respect to the financial condition, results of operations and business of Independent Bank Corp. Actual results may differ from those contemplated by these statements. Independent Bank Corp. wishes to caution listeners not to place undue reliance on any forward-looking statements and disclaims any intent to update publicly any such forward-looking statements whether in response to new information, future events or otherwise.

I will now review the earnings release. Independent Bank Corp. reported net income of $7.9 million, an increase of 1.2 million or 18% as compared to the quarter ended March 31st, 2004. This represents diluted earnings per share of $0.51 for the first quarter of 2005 as compared to $0.45 in the same period a year ago.

Both periods include securities gains as follows. The first quarter of 2005 reported security gains of $343,000, a decrease of 654,000 from the almost $1 million in security gains reported in the same period last year. This represents the only noncore items in either period.

Excluding securities gains, earnings per share would have been $0.50 in the first quarter of 2005, an increase of 22% from the $0.41 for the same period last year.

Balance sheet changes in the quarter. Investments increased by $8 million or 1% since year-end 2004, and investments represent 27% of total assets at March 31st, 2005.

The Company's loan portfolio showed another quarter of good steady growth, particularly in commercial-lending even with the poor weather that dampened business generation. Total loans grew by $38 million or 2% in the first quarter of 2005 and was contained in the following categories.

Commercial-lending grew by $26 million for the quarter, and we continue to have a strong pipeline for new business generation in our commercial-lending division. Business banking grew by $2.5 million, and this category you will notice is broken out separately on the face of the financial statements for the first time as part of our new initiative, and we have broken out some of the loans that were previously in consumer and commercial-lending as part of this new initiative. Our business banking relationships represent those relationships less than $250,000 in credit exposure.

Residential real estate actually decreased by $5 million for the quarter. Home equity lending grew by 12 million. Indirect auto, while it did grow at $3 million, it was less than we experienced last year really due to the flattening yield curve which has dampened indirect auto profitability.

Overall loan generation prospects look good for the remainder of the year with commercial poised for another good year, followed by anticipated strong results from our home equity direct-mail campaigns. The indirect auto loan category may slow down as the competitive landscape has not allowed pricing which is commensurate with the risk inherent in these types of loans. Residential mortgage origination is expected to improve greatly in the coming months as we enter better weather conditions.

Deposits grew by $79 million in the first quarter with core deposits growing by $16 million or 1%. The time deposit category increased by $63 million or 14%. Of this amount, 25 million was in the brokerage CD category as a result of favorable pricing as compared to other forms of wholesale funding. The remaining growth in CDs was due to a successful 13-month CD promotion.

The deposit market remains very competitive, and our growth target of 8% in 2005 may be a challenge. However, the first quarter is not typically a good barometer of full-year deposit generation due to seasonality and poor weather conditions, and we remain hopeful of hitting our target. The second quarter will provide a better measure of our ability to hit our targeted growth.

Now the income statement. The net interest margin for the first quarter of 2005 was 3.84%, an increase in deposit cost as well as the cost of extending borrowings contributed to the decrease in the net interest margin. At this point, we expect a net interest margin to be between 3.8% and 3.85% for the full-year.

Noninterest income. Excluding securities gains from both periods, noninterest income was essentially flat in the first quarter of 2005 as compared to the same period last year. Service charges and deposits improved by 2%, and investment management revenue improved by 15% as assets under administration increased to almost $563 million.

Mortgage banking income grew by 26% as compared to the prior year quarter as a result of improved loan sales and a partial recovery of the impairment valuation allowance in the mortgage servicing asset. The balance of the mortgage servicing asset was $3.3 million, and loan service amounted to 378 million as of March 31st, 2005.

Other noninterest income decreased $467,000 primarily due to decreases in commercial loan prepayment fees. Noninterest expense increased by 4.3% in the first quarter of 2005 as compared to the prior year quarter. Salaries and benefits increased by $826,000 with base salaries representing about half of this increase. The remaining increase is due to increases in medical insurance and payroll taxes, the latter largely due to the payment of incentive compensation in the first quarter of 2005 as compared to the second quarter last year.

Occupancy and equipment expense increased by $307,000 or 13% primarily due to costs associated with snow removal. Other noninterest expense decreased by 214,000 or 5% due to lower consulting fees, partially offset by increased advertising cost.

Asset quality. The level of nonperforming assets of $2.8 million continues to be a strong positive highlight for the Company representing just 9 basis points of total assets. The allowance for loan losses as a percentage of loans was 1.31% at March 31, 2005, and reserve coverage of nonperforming assets was 9 times.

Net charge-offs for the quarter were $622,000.

Asset quality continues to remain strong. Our commercial-lending division representing half of the bank's loan portfolio has reported net recoveries for the past six years -- testament to the strong underwriting culture in that division.

Delinquencies of 48 basis points for the entire loan portfolio, and we do not see negative trends developing.

I will now comment on the Company's capital levels. The Company's tangible equity and tangible asset ratio was 5.21% at March 31st, 2005. The combination of balance sheet growth and securities portfolio depreciation of $12 million pretax since year-end 2004 contributed to the decrease in the ratio from 5.32% at year-end.

When adjusting this ratio for the deductibility of the Company's goodwill associated with the branch acquisition in 2000, the tangible equity ratio increases to 5.71% at March 31st, 2005. In addition, during the quarter, the Company's Board of Directors increased the quarterly dividend in March to $0.15 per share, an increase of $0.01 per share or 7%.

I will now turn the call over to Chris for his comments.

Good morning, everybody. Denis has provided his usual good summary of our results for the quarter. I'm pleased with our overall performance delivering $0.51 per share this quarter, up from $0.45 per share in the first quarter last year.

I would like to underline the point Denis made that back-end security gains from both quarters shows an operating EPS growth of 22% from prior year quarter. Denis will share with you later in the call we expect that our quarterly EPS will increase during the year leading to a 215 to 220 EPS for the entire year as we previously indicated.

The quarter's performance in light of a flattening yield curve and declining margin environment is really a result of a number of business initiatives. I will not dwell too long on these initiatives since I think I have amply covered the topics in previous calls. Nevertheless, I will quickly summarize what we have accomplished leading up to 2005 to strengthen our businesses that really has produced the results.

We have introduced new simplified consumer business product sets. In our investment management group, we've expanded our capability to assist clients with their asset allocation process across multiple asset classes. We established and staffed a new business banking unit, improved policies, processed products and reporting associated with this unit. We successfully integrated Falmouth Bancorp into Rockland Trust. We opened and staffed a new Cape Cod investment management office and new branches in North Attleborough and Raynham. We introduced and trained branch staff to enhance their ability to originate and expand customer relationships, and as important, designed a management and reporting structure to coach on an ongoing basis the branch staff to greater levels of performance.

We did a lot of work improving our commercial banking business processes. We have enhanced scorecard, performance scorecards throughout the Company. We have upticked our aggressiveness in the municipal deposit gathering, and we have increased our direct-mail activity supported by our improving information infrastructure and analysis.

Within this context of a stronger company, we have a number of 2005 focus areas that I described in our last call. I will cover several of those areas today and talk about some results.

First, we are focusing on generating more business volume from the foundation we have built during the last 24 months. I would like to share with you some of our business results.

In our commercial division, the amount of booked commitments increased 27% over first quarter of last year and 11% over the fourth quarter. And as I note, our commercial pipeline at year-end was the highest ever recorded, which means probably the highest ever since before our records our bank was a lot smaller.

We have funded our community development entity created for our new market tax credit by $15 million, and so far we have booked about $11 million in loans and have another 3 million or so in process or on track with that program.

Our business banking portfolio is up about 6% this quarter. The number of new core accounts -- and for the purposes of this statistic, a new core account is defined as a non-term term deposit, non-term deposit account. In other words, not CDs. The number of new core accounts originated during the quarter was up 81% over first quarter of last year. It was down 4% compared to the fourth quarter of last year due to seasonality in the adverse weather, and just as an aside, it was snowing here Tuesday night, big snowflakes. It surprised even me.

The number of new households originated during the quarter was up 69% over the first quarter of last year and again down slightly from the fourth quarter due to the reasons I mentioned above. Home equity production of 84% over the first quarter of last year. It is down compared to fourth quarter due to our direct-mail timing and some weather issues. Our asset gathering production for our investment management group is up almost 20% over first quarter of last year, and we do expect our 2005 overall production will far exceed production in 2004.

Our mortgage production is down on a comparative and land linked quarter. However, the good news is that it is trending up with the weather and the number of originators has increased by about 15%, and we do expect that our production will increase over the course of the year. Our indirect auto production is 20% lower than first quarter of 2004 as margins are tightening significantly in this business.

Now on balance, I believe these really indicate a very positive trend that is a result of our focused initiatives. And moreover, we continue to see added to all our good work is the positive effects of the merger and acquisition environment that continues.

As I think many of you know, we have an established regional brand being in the community since 1907, and we have a dominant market share in our primary accounting. Most importantly, I think we find ourselves in an increasingly unique position, and what I mean by that is that we are large enough to have the full complement of products and services. Our market, our retail small business and commercial customers, we expect that in a large bank it would continue to be viewed small enough to be a community bank with a high commitment to high touch customer service with more convenience in our primary companies than anyone else.

Another key objective of ours is to continue to obsess and improve on the efficiency and effectiveness with which we operate. Our first-quarter operating ratio was 61%. This is an improvement from last year's first quarter of 64%, and we expect the improvement trend to continue.

As you may recall, we successfully renegotiated our contract with our core processing vendor. Now are working very hard to integrate a number of upgraded systems that will reduce expense and improve the customer experience. For example, we are upgrading our online banking. We're installing a deposit origination system in the branches. We're installing an ATM system that is more integrated with our core system. We are upgrading our profitability system. We will have a more automated anti-money laundering system in by the end of June, and we're very close to installing a Web-based mortgage application and decision engine attached to our website.

We also continue to focus on improving the customer experience. A number one, many of the technology improvements I mentioned are going to improve the customer's experience. Moreover, we have made great strides in our branch network institutionalizing many small things that customers notice upon visiting us and intend to create positive reaction and talk. We have built a disciplined process to understand our customer comments and concerns, and we are directly feeding them back into our process improvement. Our CFO has had an interesting experience at that branch, and that was directly set into this system, and we made a process improvement immediately, and we have done that on a number of cases. We have a tight feedback group.

We are also improving the branch look in selected locations and expanding ours selectively as well. We will have more weekend hours, a few more Sunday hours which we think is absolutely essential in improving our customer experience.

A point I would like to make before Denis provides guidance is that I hope you all noted in our recently released 10-K that we received an unqualified 404 opinion from our external auditors. This, of course, is good news in and of itself. However, I think it is really worth mentioning that we did not hire a consultant to build all the major season additional controls. We did it ourselves.

Why is this important? This is important in my view because the intellectual capital that was required to develop those things is staying with us, staying here within the Company, and better positions us for a stable and clean environment going forward.

Lastly, I hope you have all read the press release yesterday announcing two new directors, Eileen Miskell and Donna Lopolito. The entire board is absolutely delighted that these two highly qualified individuals are joining the board. And their first board meeting was yesterday.

That concludes my comments, and now Denis will provide some guidance.

Thank you, Chris. As Chris mentioned in his comments, we continue to expect GAAP diluted earnings per share for 2005 in a range of $2.15 to $2.20, representing GAAP EPS growth of 6 to 8%. On an operating basis, this should be in the region of $2.13 to $2.18, representing low double-digit growth from the prior year.

These figures exclude the expensing of stock options, and at this point, it looks like based on a release from the SEC yesterday that stock option expensing would be delayed until 2006.

A significant assumption in our ability to hit the upperhand of the range is our successful execution of the new market tax credit program. We have invested $15 million in our community development entity and have begun recognizing tax credits. An additional $15 million remains to be invested, and we are hopeful of investing this remaining amount in the latter half of 2005. If this additional investment is achieved, we should be toward the upper end of the range. At this point, we remain optimistic on our ability to accomplish this objective.

This concludes my comments. I would just say that the first quarter was a very strong quarter and puts us well on track to hitting our estimate for 2005. And I will be happy to open the call now for questions.

(OPERATOR INSTRUCTIONS). Ryan Kelley, FBR.

Good morning. Great quarter, guys. Just to follow on the new market tax credit program, the $15 million that you will be potentially putting, investing into this year, that is just for this one part of the program. Can you also get, apply for and receive more tax credit, more potential investments in this type of program?

Yes, I mean we certainly will plan on doing that. However, one's application is unnecessarily improved. You have to make a good case as to why a company or an organization like ours should receive the tax credits. We were successful in that in the past, and hopefully we will be successful again.

You know, I mentioned it is very competitive. I mean we were one of 12 banks awarded this tax credit in the nation. So it is not something to be counted on.

Okay. But for the year, you are still looking for a blended tax rate of about 32%?

That is right.

Okay. Then just looking a little closer at your expenses, they came in nicely this quarter as expected from last quarter. Just not to be too knit-picky, but on the 300,000 extra related to snow removal, which it was a pretty brutal winter, can we expect to see expenses be reduced by that amount at least next quarter?

No. I mean I would say that the snow removal is probably 180 to 200,000 of that variance. So you could assume a certain reduction because of snow removal.

I would tell you we have had a couple of storms already late March into April that will continue to have some snow removal in the second quarter, but nowhere near the level as the first quarter.

Okay. Great.

It is something I have to get used to. We are considering issuing shovels. We count snow removal costs in cents per share. (multiple speakers)

It has been a brutal winter, that is for sure. One other final thing on branching, can you discuss what your plans are going forward in '05?

Not yet. That is something that we're really looking carefully at, and it is a question we are considering in the context of the whole Company -- retail, commercial, small business, mortgage, etc. And we are not prepared to tell you where we are going next. We will say that that is a question we are very aggressively reviewing right now.

Okay. Great. And actually one final question just on capital levels. Where do you feel comfortable with your capital level? And is there any thought that you feel constrained with what your capital level is right now as far as being able to grow how you want to grow?

At this point, no. I mean certainly with our tangible equity level we do monitor securities portfolio depreciation very carefully. You know we watched the duration of our securities portfolio, and we do expect further depreciation as rates go up.

Excluding that depreciation, we would expect tangible equity to grow around 10 basis points a quarter, even with the growth that we have planned this year.

So we have been here before. After we did the Fleet branch acquisition, our tangible equity was just below 4%, and we grew out of it very quickly. So we are not uncomfortable being in this range, and we do expect to grow out of it.

Kelly Hinkle, McConnell Budd & Romano.

A couple of questions about noninterest income. First one, service charges on deposits were down from the prior quarter. Can you talk about that?

Also, I was curious how much of a service servicing asset recovery was in the mortgage banking income line?

Sure. On the service charges first, Kelly, there are a couple of things going on there. First of all, the free checking customers that we brought in are getting more free ATM transactions, so that affects ATM service charge revenue.

The other and more frankly significant contributor to the change from the fourth quarter is the earnings credit rate on business deposits has gone up as short-term rates have gone up. So that has affected service charge revenue.

And on the mortgage banking income line, I think your question was the valuation recovery, and that was $138,000 in the first quarter.

(OPERATOR INSTRUCTIONS). David Darst, FTN Midwest.

Your tax rate, at least your effective rate looks like it was 32 to 33% this quarter, up from the third and fourth quarter of last year. Can you maybe give us some information on that increase, and then if you receive another 750,000 tax credit, you would take all of that in the third or fourth quarter?

Well, actually, David, what happens is once we are pretty certain that we will be doing the additional $15 million investment, which, frankly, we would hope to get to sometime during the second quarter because we have been relatively successful with the initial $15 million investment, at that point we would begin to recognize that to our tax provision for the rest of the year. So we would expect the tax provision to come down somewhat from the 32.5% level I think that we were in the first quarter to get to sort of a weighted average 32 by the end of the year. Does that answer your question?

Yes. What would be the increase from the third and fourth quarter to the first quarter?

You want to comment on that, Barry?

If you recall last year, we recognized a tax credit beginning in the third quarter of the year. So we took kind of an annual impact in two quarters last year. This year on that initial investment, it is spread evenly throughout the year.

Okay. I follow you. And then you indicated that you extended some borrowings? Can you give us the amount and what that might do to your rate, your borrowing rate going forward, the cost of (inaudible)?

Okay. I can give you -- we did an additional $35 million swap where we swapped variable-rate borrowings to fixed-rate. Rob, what was the term of that?

Three years.

To three years. We also put in place $100 million cap that executes as LIBOR goes above 4%, so both of those efforts will help our cost of funds in a rising rate environment which we certainly believe we are in. And we have total interest rate swaps hedging variable rate borrowings at this point of $110 million. So all of those actions will help our cost fund.

Do you have a sense, Rob, of you know projected borrowing costs for the rest of the year based on that swap?

Why don't we just give -- we will give what is the fixed-rate on that $35 million swap. That may help, David. Do you have that?

Total cost of borrowings including trust preferred securities is expected to range in the 350 and excluding our short-term borrowing cost.

And, David, let me get for you -- I have it here. Just bear with me for a moment. I will give you the details on that $35 million swap. That may help you.

We received variable on the swap. We will be paying fixed at 4.06 on that $35 million.

And is that a LIBOR plus --?

Yes, it is FHLB-based. So it is what, Rob, 30 days? Is it 30 days or 90 days?

30.

So 30-day FHLB, which is close to LIBOR, and paying fixed at 4.06. And you can get details of all these derivatives obviously in our 10-Q.

There are no further questions at this time. I will now turn the conference back over to you to conclude.

Thank you and thank you, everybody, for joining us on the call. We look forward to speaking to you after our second-quarter earnings announcement.

Thank you for me as well.

Thank you. This concludes today's conference. Thank you all for your participation. All parties may disconnect now.