Independent Bank Corp (Massachusetts) (INDB) 2007 Q4 法說會逐字稿

Hello and welcome to the Independent Bank Corporation fourth-quarter 2007 earnings conference call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS) Please note this conference is being recorded. Now I would like to turn the conference over to Denis Sheahan. Mr. Sheahan?

Thank you, Joe. Good morning, everyone, and thank you for joining us on the call. This morning's agenda will include a brief review of our fourth-quarter 2007 earnings and guidance for 2008. We will have some comments from Chris Oddleifson, our Chief Executive, and we will end the call with a Q&A period.

Before I review our fourth-quarter 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 fourth-quarter 2007 performance. Independent Bank Corp. reported GAAP diluted earnings per share of $0.56, and $2.00 per share for the fourth quarter and year ended 2007, respectively, representing an increase of 4% and decrease of 8%, respectively, from the same periods in the prior year.

There are no non-core items in the fourth quarter of 2007. There are a number of non-core items in the fourth quarter of 2006 and both full-year periods, as detailed in the earnings release.

Excluding these onetime items, diluted earnings per share on an operating basis were $0.56 and $2.13 for the quarter and year ended December 31, 2007, decreases of 2% and 3% respectively from the same periods in 2006.

Some key takeaways from the fourth-quarter and full-year 2007 performance. Continued strong net interest margin. The net interest margin for the fourth quarter of 2007 was 3.94%. Loan growth was strong in the fourth quarter, led by commercial lending. We shared with you in our third-quarter conference call the commercial loan pipeline was very strong; and that proved to be true with the loan closings experienced in this fourth quarter.

Growth was well diversified and occurred across all commercial categories, C&I lending, commercial real estate, and commercial construction. Among the factors contributing to our fourth-quarter commercial loan growth were the efforts of both our existing lenders and the new lenders hired in 2006; disruption at competitors; the successful deployment of our most recent New Markets Tax Credit program award; as well as disruption in the capital markets. Some of the growth achieved related to deals that typically went to the conduit space.

Deposits were down 3% as compared to year-end 2006 levels from the prior year, 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.

We borrowed in the fourth quarter to take advantage of an opportunity for a modest amount of favorably priced structured funding as a component of managing our interest rate risk.

Core noninterest income growth, up 13% year-to-date, remains a key highlight, driven by growth in our wealth management revenue as well as a 1031 exchange business which we purchased at the beginning of 2007.

With the close of the O'Connell acquisition in November, which added $200 million in assets under management, our Investment Management Group now has a total of $1.3 billion in client assets under management.

Core noninterest expense increased 10% in the fourth quarter and 6% year-to-date, driven by investment in growth initiatives such as additional commercial lenders, the addition of our 1031 exchange business, staff additions in our wealth management and mortgage businesses, and higher incentive compensation and commission program accruals.

Nonperforming assets were $8.3 million at December 31, '07, and represent just 30 basis points of total assets. Loan delinquency was 93 basis points at year-end 2007 as compared to 72 basis points at both September 30, '07, and December 31, '06. Net charge-off performance, higher than last year, yet still very low at an annualized rate of 16 basis points.

The Company's reserve for loan losses was 1.31% of loans at year-end 2007. The provision for loan losses increased in the fourth quarter to $1.4 million, bringing total provision for 2007 to $3.1 million, consistent with the level of net charge-offs for the year and loan growth.

Our effective tax rate for the quarter fell to 20% due to the strong execution of our New Markets Tax Credit program and the reversal of a tax reserve pursuant to a relevant tax court ruling. Our effective tax rate for the full year was approximately 24%.

And now earnings guidance for 2008. I will first discuss what we anticipate for Independent Bank Corp., and then separately provide our current estimate of the anticipated 2008 earnings impact from our pending acquisition of Slades Bank. I will end by providing you with our current combined 2008 earnings estimate.

Independent Bank Corp. on a stand-alone basis expects loan growth to continue during 2008. However, due to the general expectation of a slowing economic environment, we are moderating our growth expectations. We do, however, anticipate that loan growth -- particularly in the commercial lending area, which we expect to increase by about 5% for the year, and to a lesser degree in home equity -- will outstrip reductions in the other loan portfolios such as automobile lending, providing total net loan growth for the year of approximately 3%.

Deposit growth will be challenging in 2008, but we expect to grow deposits by about 2% while remaining very cautious regarding our cost of funds. We will supplement or replace deposit growth with wholesale funding if it proves to be more attractive.

Securities growth will not be a focus for us. We currently expect our securities portfolio to decrease in 2008.

Noninterest income will continue to benefit from a focus on our investment management business and is expected to grow by about 12%. We anticipate that noninterest expense will also grow in 2008 by approximately 6%.

From a credit perspective, we expect net charge-offs to grow especially in the consumer portfolios to a total of $3.7 million; and the provision for loan losses will increase to $4.5 million for the year.

Our tax rate is expected to be 26%; and the net interest margin should be in a range of 3.9% to 4%. We are currently considering the sale and leaseback of some of our bank-owned real estate during 2008, and have retained a broker who has recently begun marketing our properties. We have not included any impacts from a sale leaseback transaction in our earnings guidance.

When we announced the Slades Bank acquisition, we anticipated the transaction would be $0.01 to $0.02 accretive in 2008, excluding onetime charges. We expect to close the Slades acquisition on March 1st of 2008, and continue to anticipate that it will be $0.01 to $0.02 accretive in '08, excluding onetime charges.

After taking the anticipated accretion from the Slades transaction into account, Independent Bank Corp. currently estimates that 2008 diluted earnings per share will on an operating basis be in the range of $2.12 to $2.16. Chris?

Thank you, Denis, and good morning, everybody. I am pleased with our overall performance for the quarter and for the year. We have maintained a stable interest -- net interest margin. We have not had and do not anticipate significant credit issues.

We have generated a responsible loan growth especially during the fourth quarter. We have taken advantage of opportunities such as the O'Connell Investment Services acquisition and the Compass Exchange Advisors acquisition at the very beginning of the year, and the pending acquisition of Slades Bank.

Earnings quality has improved, evidenced by 58% of our Company's loan portfolio is now in the business or commercial lending. Our securities portfolio is now only 18% of earning assets.

Our fee revenue diversity and growth has improved. Non-interest revenue has grown to 25% of total revenue; and this has been driven by improved wealth management revenue and our 1031 exchange business acquisition. The consumer assets under management in our Investment Management Group, as Denis mentioned, are now about $1.3 billion, up significantly since -- in the last year.

All of these positive results come from our focus on the essentials of our business. As we have discussed before, we have really been aggressive in refining and retooling our business models for the past few years, and we are in great shape to leverage this platform.

We have pushed beyond the traditional community banking mold and not only do we have a terrific retail franchise, but we are making working to make the most of the growth opportunities in commercial banking and wealth management. Our customers tell us that they are very loyal and satisfied. We're fortunate that the parts of Massachusetts in which we operate have growth rates that outpace the slower rates in other parts of the state.

Our results, I think, are even more impressive when you consider the extremely challenging economic environment in which we are operating. I don't think I have to remind everybody that we have had a challenging yield curve. We have had a lot of intense loan and deposit pricing competition. When I say housing, (inaudible) housing market pressures that probably understates (inaudible) significant of that. And credit markets are in a bit of a disarray.

And in this tough environment, of course, the easiest thing would be to hunker down and sit back and hopefully wait for the weather to improve. But that is definitely not the path we chose. We decided to take a hard look at where our capital and resources were being put to use. We also resolved not to do anything stupid to produce nominal earnings as we work through these difficult times.

We have taken some specific actions as part of a multifaceted game plan designed to seize on the growth opportunities, improve our balance sheet, and manage discretionary resources intelligently. Such as -- reducing the below hurdle assets in our securities portfolio, our balance sheet, residential mortgage, and auto. We are growing competitively [vantage and loan] businesses. We are growing fee income activities, as I say, especially in wealth management. Improving our funding mix. Managing expenses, core expenses, tightly while also funding, growth initiatives. Adopting an opportunistic and very selective approach to acquisitions.

As you know, we have returned excess capital to shareholders over the last couple years.

We are extending our existing businesses by way of key hires and very selective new branch locations. We have also completed a number of technology-driven improvements in efficiency and effectiveness, such as this loan servicing consolidation, computer support outsourcing, technology organization streamlining, and a number of contract renegotiations that worked out favorably for us, and the improvement in our information infrastructure.

We have also in '07 completed our branding work and implemented our new tagline, Where Each Relationship Matters. We're also investing in our employees in a variety of ways to expand our capacity to create value.

One of the results of, when you add all this up, is that we have consciously sacrificed near-term earnings. This is not an easy thing to do, of course. Our focus, however, has been and continues to be to add long-term value by better positioning us to realize opportunities.

More specifically, with respect our acquisition activity in '07, the Compass Exchange Advisors and the O'Connell Investment Services teams are fully onboard, and it's working out very, very well.

We are extraordinarily excited about the pending Slades Bank acquisition. The Slades franchise is a hand-in-glove fit. It really is truly a great cultural compatibility between our organizations. Integration is proceeding very smoothly and on target for a March 1 closing and integration.

These acquisitions complement our product offerings, our geographical reach, and our earnings.

I would like to spend a little bit of time now talking a little more than usual about credit, given that that is sort of the topic that I think most everybody is focusing on. While non-performing assets grew from $7.2 million at the end of '06 to $8.3 million in '07, a modest growth, a few points are worth noting.

Our non-performing loans to gross loans stands at a modest 37 basis points. Our allowance to loan loss to total loans stands at about -- at 131 basis points. Our loan loss coverage ratio is about 370%. Overall delinquency stands at 93%. And we believe all these measures on the face of them are very strong.

While there may be some -- there is, I am sure, some credit softening in the future, the current status of our loan portfolios is good. We believe our commercial portfolios are in good shape. While we have just had our first annual net charge-off (inaudible) positive in eight years or so, our delinquency is down. I think it's really worth noting that we have no delinquency in our construction portfolio and we have not had any construction defaults since 2004. Credit quality appears to be stable.

We're also very comfortable with the asset quality of our indirect auto portfolio. With an average FICO of 703, and that is based on a recent rescoring of our entire portfolio, our portfolio on average is strong. Our losses in this portfolio have been tracking very well with our forecast over the last several years. We do recognize, however, the growing stress in the consumer from issues such as increased energy costs, and we are going to continue to watch this portfolio very, very closely.

Our residential portfolio has an average FICO of 733 and a weighted average LTV of 54%. I will say that we have identified -- we do have a number of adjustable-rate mortgage loans, a number of those will reset in '08. We have done the analyses to identify the ones that are in the -- are higher-risk category. We will be monitoring them very carefully and handling them on a case-by-case basis if repayment at the higher rate becomes an issue.

Regarding our home equity portfolio, in both our line and loan portfolios we have an average FICO of about 750 and a weighted average CLTV of just over 50%. We're also monitoring these loans very, very, very carefully.

While our loan portfolio metrics are strong, overall economic indicators signals the potentials for troubles ahead. Nationwide and local employment rates -- nationwide unemployment rate is up. Local, our Massachusetts rate is actually down somewhat. Bankruptcies are edging up somewhat. Core inflation seems to be holding steady as we know, giving the Fed some room to move and, as (inaudible) future it is anticipated to move.

While we see -- we only foresee some foreclosure activity in our portfolio, overall mortgage foreclosures in our market were way up -- mostly by national originators of home loans.

Housing weakness has definitely accelerated during the last quarter. Home sales data suggests the median quarterly sales price in Massachusetts, or more specifically our primary county, have fallen nearly 10% from their peak in 2005. While our latest data shows that the Massachusetts economy is actually still growing, we will be watching things very closely as I would imagine you would expect.

In all of our loan portfolios there is always a possibility that conditions will change and that loans which are not an issue now suddenly become problematic. The best thing we do is monitor each loan portfolio very, very carefully; and that is exactly what we're doing.

These are uncertain times and we're proceeding cautiously. Clearly, our goal is to grow net income over time, and we have certainly shown our ability to do this over the long run. Our modest expectations for '08 are a reflection of the current overall environment and our prudent approach.

We're focused on responsible growth, (inaudible) our investment manager business, adding select key personnel, we are going to generate more value opening branches in attractive markets, (inaudible) reviewing our existing branches and engaging in acquisitions as we can, as examples. That concludes my comments this morning, Denis.

Thank you, Chris. Operator, this concludes the formal part of the presentation. We would now like to open the call for questions.

(OPERATOR INSTRUCTIONS) Damon DelMonte, KBW.

Hi, good morning guys. How are you? I was wondering if you could talk a little bit about your commercial construction portfolio. You know, you have had sustainable growth in that portfolio. I was wondering if you could give a little color as to some of the sizes of projects that these loans are for, and kind of what projects they are for. Are they for mixed-use property, medical buildings, office, you know, that kind of thing?

Sure. It's actually pretty well diversified, Damon. Our construction portfolio -- this construction growth for us in the quarter was quite good because our construction portfolio really has been down from '05-'06 levels as construction projects matured. So we were happy to see this growth come in.

Some of it is associated with our New Markets Tax Credit program. You mentioned a medical building. One of the larger spurts of growth in the fourth quarter was a medical building that is part of our New Markets Tax Credit program. Some of it is also residential development, office buildings. The growth in the fourth quarter, a good chunk of it was in the office building category.

Overall, if I was to give you a breakdown of the construction portfolio, the balance at December 31 was $133 million. Of that, about $88 million is in the residential construction category. The remainder in office buildings, medical buildings, that sort of thing.

Okay, great. Thank you. Then also, with respect to the home equity, are all those loans in market? Meaning your greater area of your footprint in Massachusetts? Or do you guys have any non New England exposure?

No, we do not.

No? Do you know what percentage of those loans you guys have the primary loan on?

The prime -- meaning the first or the --?

Like the first?

The first? Not offhand (multiple speakers). We can get that for you, Damon, but I don't have that offhand.

What is the highest combined loan to value that you guys will write to? I know you said the average is like --?

The highest at this point, is 80%. However, we do give -- we also have rescored and have done other -- revalued the real estate through AVMs for the entire home equity portfolio. So we do have loans in there that are in excess of 90%, or up to 90% and sometimes in excess of 90%. The ones that are in excess of 90% are mostly due to housing depreciation, and so we are watching that very carefully.

Okay. Just one final question, this is more of a detailed question for you, Denis. In the noninterest expense portion of the income statement, other noninterest expenses was $5.2 million this quarter. Anything in there that should be excluded for a run rate going forward? Just looking at the linked quarter.

Yes, we had a little bit of an uptick in consulting expenses in the quarter that we wouldn't expect to continue. We also had a $60,000 loss on the sale of one of our branch buildings. So there were some modest expenses that won't continue going forward.

But, Damon, as I mentioned in my comments, we expect overall expenses to grow by 6% in 2008. So if you view that across the categories, particularly salaries and benefits, you should be okay.

Great. Thank you very much, guys.

(OPERATOR INSTRUCTIONS) Sir, it appears there are no further questions at this time.

Okay. Great. Thank you very much.

Thank you, everybody, for joining us on the call and we look forward to speaking to you when we finish our first-quarter earnings. Thank you.