Independent Bank Corp (Massachusetts) (INDB) 2005 Q3 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Independent Bank Corp third quarter earnings conference call. [OPERATORS INSTRUCTIONS] It is now my pleasure to introduce your host Mr. Denis Sheahan, Chief Financial Officer and Treasurer of Independent Bank Corp. That you, Mr. Denis 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 the third quarter 2005 earnings release. We'll then have some comments from Chris Oddleifson, our Chief Executive Officer and I'll provide earnings guidance for 2005 and end the call with a Q&A period. With me on the call today are Chris Oddleifson, President and Chief Executive of Independent Bank Corp. and Barry Jensen and Rob Cozzone of your finance department.

Before I review our Q3 earnings release I'll will read the cautionary statement. This conference call my contain certain forward-looking statements with respect to the financial conditions, results of operation and business of Independent Bank Corp. Actual results my differ from those contemplated by these statements. Independent Bank Corp. wishes to caution listeners not to place undue reliance on and forward-looking statements and disclaims any intent to update publicly any such forward-looking statements whether in response to new information, future events, or other wise.

I'll now review our earnings release. Independent Bank Corp. reported net income of $8.7 million an increases of $425,000 or 5% for the quarter ended September 30, 2005. A net income of 24.6 million an increase of 3.1 million or 14% for the nine months ended September 30, 2005, as compared to the prior year periods. This represents GAAP diluted earnings per share of $0.56 for the third quarter of 2005 and $1.59 for the nine month period, ending September 30, 2005.

Excluding securities gains and merger and acquisition expense from each period, diluted earns per share on adjusted basis, improved to $0.56 and $1.56 for the quarter and nine month periods ending, September 30, 2005. Increases of 4% and 11% respectively, for the $0.54 and $1.40 for the same period. A particular note in the third quarter were net interest margin expansion to 3.93%. An increase of 9 basis point and linked quarter basis and strong return on assets in the equity return performance of 1.17% and 15.5%, respectively.

Balance sheet changes in the quarter, securities were intentionally decreased by $12 million in the first quarter or $78 million or 10% year-to-date. Management does not intend to grow the securities portfolio in the current yield curve environment. Security represented 25% of total assets as of September 30, a significant decrease from 28% of assets at year end 2004.

Loan portfolio, growth in the Companies loan portfolio slowed during the third quarter. The intentional de-emphasis of indirect auto lending and residential portfolio lending combined with the slow down of commercial lending due to the rising rate environment led to loan portfolio growth of less than 1% in the third quarter. Consumer home equity loans however, grew by 7% in the third quarter. On a year-to-date loans grew by more than 5% with commercial growing $64 million or 7% and home equity at 50.6 million or 26%.

The home equity portfolio as played an important role in the improving the company's interest rate sensitivity with the majority of origination being variable in the nature. This portfolio is experienced significant growth in the last 18 months and we are very focused on credit risk monitoring. I would like to share with you a few statistics on portfolio.

First of all home equity lines. The outstanding are $209 million that portfolio is an weighted average fico of 743 and a weight average loan to value of 59%. The home equity loan portfolio, which is the smaller of the two, a $36 million weight average fico of 731 and weight average LTV of 50%. I home this provides you a glimpse into the quality of this portfolio.

Majority of the loan production for the remainder of 2005 is expected to continue to be in the commercial lending and home equity lending categories. Deposits grew by $23 million in the third quarter with majority of that growth in the time deposit category. Total deposits grew by $112 million or 5.5% for the nine month period ended September 30, 2005. Deposit pricing competition remains strong in our markets. We remain committed to deposit generation and our selective in deposit promotion in an effort to control the bank's cost of funds.

The net interest margin for the third quarter of 2005 was 3.93%. This represents a 9 basis points expansion from the second quarter and due to more balance interest sensitivity position. We continue to focus on commercial and home equity lending, a lower securities portfolio, and prudent liability management. In the deposit arena we are cultivating core relationships and not playing the deposit pricing game. We are focused on growing core checking households, maintaining market share through growth at a reasonable price, while being sensitive to cost of funds. All of these actions have contributed to expanding net interest margin in the third quarter of this year. I expect net interest margin to continue to be in the 3.9% area for the fourth quarter of 2005.

Excluding securities gains in the comparable quarter, non interest income approved by $870,000 or 14% due to improved mortgage banking revenue, deposits service charges, and investment management revenue. On a year-to-date basis non-interest incomes excluding securities gains improved by 4%. Non-interest expense increased by 6% in the both the third quarter and year-to-date as compared to the prior year periods. Almost 2.5% of that increase on a year-to-date basis is attributable to higher performance based incentive compensation accruals in 2005. The remainder of the variance is detailed in the earnings release.

Asset quality continues to remain strong, non-performing assets of $2.5 million continue to be a strong positive highlight for the Company. Representing just 9 basis points total assets and loan delinquent as a percentage of loans outstanding represent a very manageable 55 basis points. The allowance for loan losses as a percentage of loans, was 1.31% as of September 30, 2005. Net charge-off for the quarter were $665,000 and $1.847 million year-to-date. We expect a modest but certainly not material increase in charge-off in the fourth quarter due to the new bankruptcy law.

Now capital. The company in the bank are well capitalized by all bank regulatory measures as of September 30, 2005. The company's tangible equity to tangible asset ratio improved to 5.68% at June 30, 2005 and on an adjusted basis to account for the deducibility of the majority of the Companies good will, adjust tangible equity improves to 6.18% at September 30, 2005.

I should just want to make one quick correction. I mention that had non-performing assets a percent of total assets were 9 basis points at September 30, they were actually 8 basis points. I'll turn the call over to Chris for a few comments.

Good morning and thank you Denis. Denis provided a good summary of the results of the quarter. I'm pleased with the overall performance delivering $0.56 per share this quarter up from $0.54 per share in the third quarter of last year and $1.59 per share on a year-to-date up from $1.44 since per share year-to-date last year, an increase year-over-year of [INAUDIBLE] $0.0 of 10.4%.

Operating basis delivering strong results $1.56 per share year-to-date up from $1.40 per share year-to-date last year an increase of a little over 11%. As Denis will share with you later in the call we continue to expect to the end the year at a GAAP EPS at $2.16 and operating EPS of $2.13.

This performance in a challenging banking environment is a result as our good execution of business unit and company strategies, good expense control, and prudent balance sheet management. I'd like to highlight a couple point s along these lines, first as Denis mentioned our margin as expanded from 384 in the second quarter to 393 in the third quarter. And this is due to some very disciplined balance sheet actions on our part.

As you know, this environment is not conducive to maintaining much less than increasing our securities portfolio thus we managed our securities portfolio down by almost to 9% at the end of third quarter this year over the same period last year. We are focusing, as Denis mentioned, in commercial and home equity generation and view in the fixed rate residential mortgage business as primarily a secondary market -- fee income opportunity. So all these actions provide a smaller balance sheet, the mix of earning assets is more favorable from a profitability and interest rate perspective. In addition, careful management of deposit pricing has allowed us to keep cost of funds under good control in this rising rate environment.

I will also say looking forward for a moment, that deposit rates remain a bit of a wild card in estimating our margin as there's a great deal of competitive pressure to raise the deposit rates, which I'll talk about more in a moment. These actions, in addition, to effective borrowing management have led to a less liability sense of balance sheet and improved in interest margin stability.

Second, I would point --I would like to mention-- I'm pleased with the strong growth in non interest income this quarter due our increases in investment management fee income, our mortgage banking income and deposit account service charges. Account service fee income continues to grow as we successfully add new core checking relationships to the bank and this fee income increases -- and NSF and ATM debit card activity.

Last part relative to our performance are non-interest expenses increased, as Dennis mentioned, $3.5 million or 6% in the first nine month of this year versus first nine months of 2004. Total revenue improvement, that is net interest income and non-interest revenue excluding security gains during that same period increased over 9%.

On breaking down the expense increases, salaries have increased $1.5 million year-over-year as a result of [merit increases] and select addition to staff to support the strategic initiatives we've been talking about over the last 18 month or so. In sense of comp of increased $1.4 million year-over-year due to improved operating performance. Occupancy and equipment expense increased nearly $900,000 primarily driven by facility rent associated with the bank corp acquisition which closed in mid to ' 04

Expense with branch closing, two de novo branches, a new investment management group office and increased depreciation expense related to our new phone system that we installed in '04. As the regular participants of your earnings calls know, Rockland Trust and Company has been implementing a disciplined company strengthening and growth plan for the last year and a half. We have focused on every aspect of our business. We have continued our strong tradition of commercial banking.

We've by improving your processing--processes adding a community development entity for new market tax credit program. We've strengthened or cash management products and capability. We've introduced a new remote deposit capture product, allowing our customers to deposit checks from their offices and we have not seen anybody in the marketplace with capability, as of yet. It appears we are first in the market and were getting good response. All while maintain a very robust credit quality culture with in our commercial banking division.

In our branch banking business we made great strides in increasing the effect by branch network by providing significant relationship development and sales training for your staff and overlying that with on going management process where we've by introducing a quarterly incentive program tied to branch sales, service and operational goals. By developing new service standards by creating best in class customer experience and by selectively adding combining or selling or closing branches, in addition, we've extended branch hours across our network, including Sunday hours in busy retail markets.

As you heard from the past, we've established and staffed a new business banking and improved the policies there [INAUDIBLE] , introduced new simplified consumer business products. In our investment management group, we expanded capability, without adding to total staff. To assist clients with their asset allocation process across multiple asset classes using open architecture approach and opened the staff in the new Cape Cod office. [INAUDIBLE] Bank corp.

We have improved our information infrastructure and analysis capability, which has given us the insight into the performance of our indirect auto lending at a very glandular level leading, us to the diminishing origination in this business and has given us confidence to increase our home equity and deposit origination direct mail activity. We have upgraded systems and will further realize the efficiency improvements and improved customer experience through additional system enhancements. We have enhances performance score cards, staff development, incentive plans throughout the company.

Our efforts have been rewarded by good earnings growth with a higher quality balance sheet despite declining margin from two years ago. Just to going back to almost two years ago to the beginning of 2004 and just outlining a few things. I said at the beginning 2004, commercial loans are grown by a little over $150 million or nearly 19%, deposits have grown just a little less than $400 million near 22%, our home equity assets have grown nearly 85% with $112 million growth. Consumer assets grew 17% growth of $48 million.

Assets under administration and management grew $170 million, during that time period or 35%. Since the beginning of this year, the good growth continues, commercial loans have grown by 57.4 million or 6.4%, deposits up $112 million or 5.5% year-to-date,home equity up $54.6 million or 26%. Denis mentioned we emphasize our indirect auto origination plus our consumer portfolio has actual has decreased since the beginning of this by $4.2 million or about 1%.

Since the beginning of the year our assets under management as increased $87.9 million or 15.6% year-to-date. On the household growth run, this is very important, through the third quarter of 2005 total core checking households or businesses have increased at a 9% annual rate.

Consumer -- core consumer households have increased at an 8% annuallized rate and core business customers are increased at a 12% annuallized rate. Credit quality remains excellent, pristine, delinquency to loans 55 basis points. Denis mentioned MPA to total assets 8 basis points. Non-performing assets a mire $2.5 million. Allowance to loans 1.31%. Our year-to-date operating efficiency ratio is 61.1% down from 62.9% year-to-date last year we expect positive trend to continue.

Our operating earnings per share are projected to be up 11% over--from last year. I'm encouraged by progress and believe though indicate a very positive trend that is a result of our focus on satisfying customers throughout our region. Having said this I want to point out that competitive environment for loans and deposits is intensifying. We're seeing some from our point of view economically pricing behavior in the marketplace and we're simply unwilling to originate business of that nature using your shareholder capital--for example in the municipal deposit place exceed your wholesale pricing suffered result large reductions in the segment the municipal segment deposit levels.

Consumer households we have a very activity sales calling program for small businesses to grow business relationships and we have increased your staff and capability within the commercial cash management arena. On a similar note we are unwilling to compromise your credit culture or loans in lesser quality--however as my comments have indicated wore intensely focused on quality as well. As reminder -- [inaudible] is an established regional branch having been in the community since 1907. Most importantly we find ourselves in an increasing unique position. We are large enough to have a full compliment of products and services of the market and retail small businesses and commercial customers would expect from the larger competitors. But we're small enough to be viewed as a community bank with a commendment to the high touch customer service with more convenience in our primary -- anywhere else--than --- that concludes my comments.

I'm reviews the earnings guidance. I think Chris coverage much of ground. We expect GAAP diluted earns per share of 2005, $2.16 representing GAAP EPS growth of 6%. And on an adjusted basis diluted earnings per share is expected to $2.13 representing 11% operating EPS growth. The adjusted EPS calculations exclude the benefit of security gains in both 2005 and 2004 and merger and acquisition expenses and the gain on sale of a branch in 2004. This concludes the presentation and I will now open the call for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Ryan Kelley, Friedman, Billings, Ramsey Group, Inc.

Good morning guys.

Good morning Ryan.

Great quarter you provided excellent detail in the call today as well, especially on home equity side. Do you have same type of statistics for indirect auto portfolio, I know you're de-emphase that we do like to keep track of that as well.

Denis is getting that information. We focus on high quality lending -- in excess of average with the average fico in average 700 in the portfolio, as well as new origination.

Okay, the--stay with me a second. I have it right here.

For the average indirect auto for the new production is 727 average fico portfolio it's in the same range. Can you put your fingers on that?

That's average new this quarter or year-to-date?

This quarter. That's up from the first couple of quarter. First couple of quarters it was 710 and 713 third quarter is 727. Full year-to-date is 717.

717, okay. Great. That's great details. And also -- you're trust assets up nicely this quarter too. Do you continue to see this going forward or what are you looking at there?

I would call investment assets related to trust probably most of the new origination are not. Good growth there. We are fine--let me just--let me just use your question as an opportunity to comment on that business a little bit more. We're seeing a very, very good assets growth on the management as a result of couple of things.

First of all, we have over the last two years really increased your capable to--capability to provide an open architecture to your customers coupled with the appropriate staff capability to have and provided advice and council --counsel to customers relative to their asset allocation. That is kind with your ability to--provide high touch service to smaller account sizes, relative to our big competitors. Provide this with the competitive advantage and we find that when we go head-to-head with some of the big names who-- with the sort of service we provide require minimum account sizes of $5 to $10 million, that we do very well. So that's a long answer to we expect that asset growth to continue.

Okay, great. I was just wondering also if you had any update to the new market tax credit program?

Sure, Ryan, we are on track to -- meet our objectives in the new market Tax credit program this year. We have --- of the $30 million award that we received, we have another $10 million to invest in your community development entity and we expect that to be vested in the--invested in the fourth quarter. It's working well for us. We're meeting your expectations with that.

Potential next year we could see your tax rate drop down to the 29 to 29.5% range.

No I wouldn't think so. I would think the 31% level is what we expect going forward because the impact of those credits have been realized throughout this year. So for example it's about 1.5 million of a tax credit this year, it will be right around a1.5 million next year.

Okay, great thanks very much and great quarter.

Thank you Ryan.

Next question from Daimen Delmonte with KBW. Good morning, congratulations on a nice quarter.

Thanks Daimen. Just a couple of questions, with respect to the mortgage banking income. Do you see that sustainable going forward?

I think we'll slow somewhat in the fourth quarter just due to the seasonality. The third quarter was a very strong quarter for us but I would -- getting winter month and expect it slow.

With respect to '06 EPS growth any comments on what you're feeling with respect to that.

Not at this point. We're going through the planning process and budgeting process for next year and would rather wait until January and give you more specific information.

Finally you might have addressed this a while back have you quantitied what the impact to earnings would be with the options expense--options expense starting in the beginning of '06.

I can give you a general sense of it and we're actually very active going through that right now in trying to determine whether Black Shoal, of the [INAUDIBLE] is right approach, it's ballpark $800,000. For options, granted to date is $800,000, you could probably go north to maybe a $1million next year.

Thanks good job on the quarter.

Thank you.

[OPERATOR INSTRUCTION] Our next question is from Al Savastano, Janney Montgomery Scott.

Good morning guys. How you doing?

Good Al.

Quick question on comp and benefits declined in third quarter from second quarter anything special going on there?

The it may be the insensitive accrual, Al. We have.

I wouldn't say there's anything special going on.

No there's not. But it may be the timing of incentive accrual. Al we can get back to you on that. I don't have the specific in front of me.

If it's nothing special don't worry about it. Thank you.

Gentleman there are no further questions in queue at this time.

Thank you very much.

Thank you everybody and we'll talk to you at your next call.

This concludes today's conference. Thank you for your participation. You my disconnect your lines at this time.