Independent Bank Corp (Massachusetts) (INDB) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Independent Bank Corporation second-quarter 2007 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (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 for Independent Bank Corporation. Thank you, Mr. Sheahan, you may now begin.

Thank you, Latanya. Good morning, everyone. I first want to apologize for -- we have been having some technical difficulties in streaming the call, but we believe that that has all been ironed out now.

Thank you for joining us on the call for our second-quarter 2007 earnings announcement. This morning's agenda will include my brief review of our second-quarter '07 earnings and guidance for 2007. We will then have some comments from Chris Oddleifson, our Chief Executive Officer, and we will end the call with a Q&A period.

Before I review our 2007 performance, 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 forward-looking statements whether in response to new information, future events or otherwise.

I will now review our performance in 2007 and particularly in the second quarter. Independent Bank Corp. reported GAAP diluted earnings per share of $0.46 and $0.92 for the second quarter and six months of 2007 respectively representing decreases of 16% and 13% respectively from the same periods in the prior year.

There are a number of one-time items in the reported period, which are detailed in the earnings release. Excluding these one-time items, diluted earnings per share on an operating basis were $0.51 and $0.98 for the quarter and six months ended June 2007, decreases of 7% from the same periods in 2006.

Key takeaways. First, a continued strong net interest margin. The reported net interest margin for the second quarter was 3.85%. When excluding the impact of the write-off of the unamortized debt issuance costs associated with culling the trust preferred securities in the second quarter, the net interest margin was 4%.

Loan growth remained a challenge in the second quarter. Commercial banking has slowed due to slowing real estate developments in our market area. However, our loan pipeline remains strong and we are on track in implementing our new market tax credit program. Total business lending is up 1% year-to-date.

Decreases continued by design in the residential real estate and automobile lending loan portfolios and we expect that trend to continue. Home equity lending and small business banking grew in the first six months at an annualized rate of 8% and 20% respectively. Overall, the Company's loan portfolio is now expected to be down approximately 3% in 2007.

Deposits were down 2% as compared to year-end levels consistent with balance sheet funding needs. We remain focused on controlling the cost of deposits as an important component of maintaining a strong net interest margin.

Stock buyback. We announced a second stock repurchase program in December 2006 amounting to one million shares or approximately 7% of common stock outstanding. We have repurchased 806,000 shares through June 30 at a weighted average cost of $31.39. The Company's tangible equity ratio of 5.94% remained strong at June 30, 2007.

Core noninterest income growth, up 12% this year, remains a key highlight driven by growth in our wealth management revenue, as well as the 1031 exchange business. Noninterest expense increased 6% in the second quarter and 5% year to date driven by investment in growth initiatives such as additional commercial lenders, the 1031 exchange business, retail wealth management and the mortgage business.

Nonperforming assets decreased to $6.2 million at June 30 and represent just 23 basis points of total assets. Net charge-off performance is modestly higher than last year, yet still very low at an annualized rate of 16 basis points. The Company's reserve for loan loss grew to 1.35% of loans from 1.32% of loans at year-end 2006.

Delinquency increased modestly to 85 basis points at the end of June as compared to 72 basis points at year-end 2006. We consider asset quality to be strong. $25 million of junior subordinated debentures were retired in April 2007. As a result, we incurred a charge to interest expense of approximately $1 million pretax in the second quarter. Following this transaction, we have $50 million outstanding at a weighted average cost of 6.52% fixed for a 10-year period.

The second quarter of 2007 represents a continuation of management's strategy to alter the overall composition of the Company's earning assets. We continue to focus on commercial and home equity lending while deemphasizing securities purchases, residential real estate portfolio lending and indirect auto lending. This has led us to shrink our balance sheet somewhat while changing the overall structure of the Company's assets and liabilities. We will also continue to focus on growing fee revenue while maintaining a careful eye on expense growth.

And now I will review earnings guidance. We are well-positioned as we enter the latter part of 2007. We have strong capital levels and are deploying excess capital in the share repurchase program. We have solid interest rate risk positioning. The net interest margin has been maintained in the 3.8% to 3.9% range since mid-2004 and we expect that to continue for the remainder of 2007.

The net interest margin actually had 4% on an adjusted basis in the second quarter of this year. As I said a moment ago, asset quality is strong. While loan growth was softer in the first half of 2007 than we anticipated, we continue to believe we can meet the $2.05 to $2.10 operating diluted earnings per share estimate and this excludes the impact of the junior subordinated debenture cull in the second quarter of 2007 and the early executive retirement costs in the first quarter of '07. Chris?

Thanks, Denis. Denis did his usual thorough job reviewing our performance. I would like to make just a few points of emphasis. We continue to focus on our strategy of disciplined balance sheet management in this challenging operating environment. I would say that earnings quality has improved as evidenced by 56% of our Company's loan portfolio is now in business/commercial lending. This has grown from 52% a year ago. As I mentioned on previous calls, we have hired a number of commercial bankers late last year that will help future growth.

I would also like to say that our fee revenue diversity and growth has improved. Noninterest revenue is growing to 25% of total revenue, up from 21% a year ago. This is very important -- a very important trend. This is driven by our 1031 exchange acquisition, our improved wealth management revenue, our assets under management have almost doubled in the last three years to almost $900 million at the end of June and it is growing at a double-digit pace annually. We have also invested in our mortgage banking operation and recently have hired a new management team and are in the process of expanding our quality loan originators.

Building businesses of this nature requires some investment and you will note that our salaries and benefits are up 9% year to date. This is not our normal pace of expense growth, but it is paying off with enhanced fee revenue growth and we expect these initiatives to continue to pay off in the future.

I would like to highlight also a few points as to what gives us confidence about our future. First of all, we are performing much better than most pure banks in New England on the basis (inaudible) by ROA, ROE and net interest margin.

Second, the management team at Rockland Trust believes we are making decisions in the best interest of long-term shareholder value creation and as Denis described, this means that our balance sheet is shrinking. That also means we have a lot of latent growth potential once the environment improves.

Third, as Denis mentioned, we are in really good shape creditwise across the board. And lastly, and very importantly, we are continuing to make progress strengthening the team, the franchise and the capability of the Company. For example, we have an excellent complement of commercial bankers. We have an excellent pipeline in commercial banking at the end of the second quarter. We have a strong new market tax credit, up pipeline. We have hired a number of seasoned mortgage loan originators, loan officers.

Our investment management business continues to grow nicely and we are continuing to work with an outside firm to identify small to medium-sized investment management firms that may be looking for a partner.

Compass Exchange Advisors is performing above our expectations. We have upgraded our online banking capability. We continue to improve our ability to translate data into information in the [Binzus] insight bar information infrastructure development and our analysis capabilities. We have improved our already excellent training and development processes and I'll add that construction of two new branches in very attractive markets has started finally.

So commenting on the economy, I would just like to characterize the national picture as one where, if I were just to summarize it, consumer spending has moderated somewhat, but will not significantly detract from growth. The housing correction continues with uncertainty, but the broad economic implications of the subprime situation coupled with a large ARM repricing wave --

And I would like to actually digress here for a moment by saying and reiterating that we are not a subprime lender. And also since this is a very hot topic, I need to be clear that there are a very, very, very small number of lower FICO loans in our portfolio with mitigating factors that originated as a part of normal operating business. And we have had a very thin slice of low FICO loans for years. Overall, our consumer, our home equity and residential portfolios have very, very high average FICOs and if someone would like to ask more about that during the Q&A, we certainly can do that.

But back to the economy, both [globally] -- the national economy. Corporate profits appear to be healthy, inventories are being rebuilt. Business sales are encouraging. Trading deficit is declining and consumer confidence is improving. On balance, a pretty good picture despite some uncertainty in there.

On the local front, we are seeing a rebounding Massachusetts economy and we are in an area of Massachusetts that has historically shown greater growth than the overall state. Real estate prices are stabilizing; although the listings remain high. And the overall sluggishness of the local real estate market has led to lower demand for new construction projects affecting some new business development in the near term. We remain confident that our asset quality, as Denis mentioned, is strong and the market has not given us any surprises. Again, a good picture.

My final note, I would like to mention that one of the most significant milestones in the first half of 2007 was the transition of commercial banking leadership from Ferd Kelley to Gerry Nadeau. The transition is proceeding very, very smoothly. Gerry has been with Rockland Trust for over 20 years and he has earned a great deal of respect from his customers, community leaders and his colleagues at Rockland Trust. We are certainly grateful for the leadership Ferd provided over the last 14 years and are delighted Gerry has stepped to this important role. That concludes my comments. Denis?

Thank you, Chris. This concludes the formal presentation and we will now open the call for questions.

(OPERATOR INSTRUCTIONS). Gerard Cassidy, RBC Capital Markets.

Hi, Chris. Hi, Denis. On your net interest margin, you are one of the few banks that actually had a very nice move in that net interest margin when you add back in for the prepayment penalty. At 4%, what drove the sequential increase is the first question. And then the second question is can you see that kind of increase continuing going forward or should we anticipate a stabilization at 4% or will there actually -- or could there actually be pressure on the margin as we go forward into the second half of '07?

Well, Gerard, the increase in the margin was due to -- keep in mind, we had an additional $25 million of trust preferred that we were carrying in the early part of the year. We re-fied the -- overall, we had $50 million of trust preferred in the latter part of last year that was at a weighted average cost of 8.5%. We re-fied that to about -- I think it was [652]. So that has helped the margin.

In addition, our lower yielding asset classes have been running off again by design. We have been very focused on maintaining a solid cost of funds. We are certainly not the most aggressive deposit pricer in the market. So when you add all those factors together, we have been confident for a while that we could be in that 3.8 to 3.9 range in terms of the margin and we have come through that level now up to an adjusted 4% in the second quarter.

We hope that we can maintain the 4% and actually expand it modestly for the rest of the year. We may get up as high as 4.05% to 4.10%, but we also have to understand that I think as we expand the balance sheet in time, I think it will be difficult to hold the 4% margin. But in this environment, we think that where the balance sheet is shrinking modestly, we think that we can hold 4% and hopefully expand it modestly.

Thank you. And the second question has to do with credit. Obviously your exposure is almost nonexistent to the big issues that are out there today, particularly on the subprime, Alt-A, exotic mortgage area. Can you share with us though what the pipeline looks like in terms of watchlist? Is it lower today than three months ago or has it picked up and what are you most focused on in looking at credit quality over the next six to 12 months? Is it the Massachusetts economy or is there something else?

Well, in terms of what we're focused on mostly in terms of credit quality, most of our losses come from our consumer portfolio and that is the indirect auto business and we have been decreasing that business now for the past number of years. So we will expect that probably heading into 2008, losses will fall off from that portfolio significantly because it is continuing to decrease.

In terms of our watch assets, the quality remains good. I mean it does -- it fluctuates from one period to the next. I mean for example, delinquency is I think I said 85 basis points at the end of June. That is a modest increase over year-end, so we will have interquarter fluctuations, but we are not concerned about our level of watch assets.

And then finally is there any opportunity to pick up business from some of the disruption we are seeing in the mortgage origination market or is it a slice of the market that you folks just really don't care to participate in in terms of the Alt-A type of market?

Yes, but for different reasons, Gerard, and let me sort of explain. We're not really interested in becoming a prime originator. That just has reputational risk that is associated. We're not interested in it.

However, there is a lot of disruption in the marketplace even on the prime side and shops that are restructuring and realigning, consolidating backroom operations and that is making some very high quality loan originators think about where they are and that is opening up an opportunity where we have significantly increased the number of loan originators that we have on staff to about -- we have about 32 now. I expect that to be at 34 in a few weeks and that is up from -- let's see, what -- 20 or so about a year ago. And these are fully commissioned folks.

So I mean this is -- aside from some real estate office expense and telephone, I mean it is a 100% commission business that we own. That is where we are benefiting from and not necessarily because a subprime lender has gone out of business and we go in and fill that void.

Thank you.

(OPERATOR INSTRUCTIONS). Jared Shaw, KBW.

Hi, good morning. Thanks for all the detail. Just a question though on the expenses. You were saying obviously that as part of the fee income initiatives, you are seeing some growth there. Should we continue to expect to see that grow at a more rapid pace than we have seen in the past or is it more that we have hit this plateau from first to second quarter and now it will be a more modest growth off of this level?

Are you referring to noninterest income?

No, I'm sorry. Noninterest expense.

Yes, noninterest expense -- it will continue at this level through the rest of the year again because it is both the annualized impact of the commercial lending hires that we made last year. It's the Compass Exchange acquisition at the beginning of this year. It is some change in the retail wealth management origination model. So it will continue at this pace, Jared, for the rest of the year.

Not the pace of growth.

Not the pace of growth, but the --

So it will stay at this --

Right. The absolute level.

Absolute level. Right. Okay, great. Thanks very much.

There are no further questions in queue at this time. I would like to turn the floor back over to management for closing remarks.

Thank you, everyone, for joining us on the call and we look forward to speaking with you following our next quarter's results.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.