Independent Bank Corp (Massachusetts) (INDB) 2008 Q1 法說會逐字稿

Hello, and welcome to the Independent Bank Corp's first quarter 2008 earnings conference call. All participants will be in 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 Mr. Denis Sheahan.

Thank you, Amy. Good afternoon, everyone, and thanks for joining us on the call. This afternoon's agenda will include a brief review of our first quarter 2008 earnings and then guidance for the remainder of 2008. We'll have some comments from our Chief Executive Officer, Chris Oddleifson, and we will then end the call with a Q&A period. Before I review our first quarter 2008 performance, I will read the cautionary statement. This conference call may contain certain forward-looking statements with respect to the financial conditions, 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 in 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'll now review our 2008 first quarter performance. Independent Bank Corp. reported GAAP diluted earnings per share of $0.44 for the first quarter of 2008 as compared to $0.45 in the same period last year, representing decrease of 2%. There are a number of non-core items in both first quarter periods, particularly in this first quarter of 2008, associated with the acquisition of Slade's Ferry Bancorp which closed in the first quarter of this year. These and other non-core items are detailed in a table in the earnings release. Excluding these non-core items, diluted earnings per share on an operating basis was $0.48 for the quarter ended March 31, 2008, an increase of 2% from the $0.47 per share recorded in the prior year period.

Key take aways from the first quarter. The Slade's Ferry Bancorp integration is on track. The acquisition closed on March 1st and is the primary reason why we're announcing earnings a little bit later than usual, so we could get through the litany of purchase accounting and make sure all of our I's were dotted and T's were crossed. The earnings release provides tables that showed the acquired loan and deposit balances. The majority of the Slade's Ferry Bancorp securities portfolio was liquidated post close, resulting on a pretax loss of the sale of those securities of $742,000. The proceeds of this sale were used to pay down borrowings and delever the balance sheet. Merger and acquisition charges to the income statement were $744,000. We are on track to achieve the 40% in cost savings previously announced and the earnings accretion of $0.01 to $0.02 in 2008. Capitalized after tax restructuring charges are expected to be $8.3 million as compared to the $9.3 million when we announced the transaction. In summary, everything is on track to meet the expectations we outlined last October, with the exception of the security loss, and this was as a result of the widening of credit spreads.

Other key take aways from our first quarter performance. Continued strong net interest margin. The net interest margin for the first quarter was 3.9%. We have, thus far, effectively dealt with the dramatic changes in the interest rate environment. Loan growth, excluding the impact of Slade's Ferry Bancorp, was again solid in the first quarter led by commercial lending, business banking and home equity. Loan pipelines in both our commercial and home equity divisions are very strong, which bodes well for the rest of 2008. Deposits, excluding the Slade's Ferry Bancorp acquisition, grew by $20 million or approximately 4% on annualized basis. We remain focused on controlling the costs of deposits as a important component of maintaining a strong net interest margin. Core non-interest income growth up 14% year-to-date remains a key highlight, driven by growth in our wealth management business. Our investment management group now has a total of $1.3 billion in client assets under management.

Core non-interest expense increased 11% in the first quarter, driven by the Slade's Ferry acquisition, the O'Connell Investments acquisition and normal increases in salaries and benefits, including higher incentive compensation and commission program accruals. Non-performing assets were $11.9 million at March 31st and represent 36 basis points of total assets. Loan delinquency was 1.04% at March 31st, 2008. Net charge-off performance is higher than last year, yet still very low at an annualized rate of 20 basis points. The Company's reserve for loan losses was 1.29% of loans at March 31st, including the absorption of the Slade's Ferry Bancorp loan loss reserve, which was smaller on a percentage to loans basis than Independent Bank Corp. The Company's provision for loan losses was $1.34 million as compared to net loan charge-offs of $1.09 million. While we feel good about our position from a credit perspective, we expect softening to continue throughout 2008.

We recently announced a sale and leaseback of many of our bank-owned premises. This transaction closed last Friday, May 2nd. The sale amounted to 17 properties and will result in a gain of approximately $13 million to be amortized over the various lease terms. The $32 million in proceeds were invested in securities. This transaction should yield $0.03 to $0.04 to earnings per share on an annualized basis or $0.02 for the remainder of 2008. I'll now review earnings guidance for 2008. We announced in January expected operating earnings per share for 2008 in the range of $2.12 to $2.16 and are prepared to adjust that expectation upwards by $0.02 to a range of $2.14 to $2.18. The primary factors influencing the upward guidance are the positive impact of the sale and leaseback equating to $0.02 on an earnings per share basis and also that we feel pretty good about our net interest margin at that 3.9% level and hope to maintain and improve that level. I'll now turn the call over to Chris.

Good afternoon. Thank you, Denis. Denis did a thorough job of reviewing our performance. I would like to make a few points of emphasis. I won't review the state of industry in which we operate, as you are as or more familiar with the facts as I am. It is a difficult period for many financial institutions. Fortunately, our disciplined approach to banking and new business development over the last decade has put us into a position where we are guiding a very slight earnings improvement year-over-year. We have said in the the past that we are very careful and disciplined about how we manage our balance sheet and we believe we are making decisions in the best interest of long-term shareholder value creation. We have avoided asset classes that we know do not meet our hurdle rates or we did not completely understand. Our energies are now focused on opportunities and building relationships rather than on sort of problem resolution that many financial institutions find themselves facing.

Let me just jump to credit right away. Probably the most important focus area. While non-performing assets grew from $8.3 million at the end of '07 to $11.9 million, or to a modest 36 basis points of total assets in the end of the first quarter, a few points are worth noting. First of all, the Slades loan portfolio has been thoroughly reviewed and we're very comfort with the quality and it has met our expectations. All of the numbers, of course, we're quoting include the Slades loan portfolios. The -- our allowance to loan loss to total loans stands at 129 total basis points and our coverage is about 300%. Overall (inaudible) stands just over 1% and we feel very, very strong -- good that these are strong numbers. As Denis said, we're seeing a slight credit softening as reflected in our NPA levels. And of course, our loan loss provision over the last two quarters has been higher than the previous quarters. But we see nothing that indicates significantly adverse trends.

Let me go through a couple portfolios. We are comfortable with the asset quality of our indirect owner portfolio. With an average FICO of 700, our portfolio on average is very strong. Losses are tracking slightly higher than we expected but not at worrisome levels. We recognize the growing stress in the consumer from issues such as increased food and energy costs and we'll be watching this portfolio closely. And I'm sure many of you recall, we've cut way back in production the last couple years and we are -- the portfolio has runoff significantly over the last 24 months. The residential portfolio has an average FICO of 733 and weighted average of LTV 56%. We have identified the ARM reset loans have fallen to a highest risk category and we're monitoring them very carefully. And we'll be handling them on a case by case basis if payment at the higher rate becomes an issue.

Regarding home equity, in both our line and loan portfolios, we have an average of FICO about of about 750, a weighted loan to value of about 55% and as well we're looking at -- we're keeping a very close eye on those -- on that portfolio. While our loan portfolio metrics are strong, overall economic indicators suggest continued caution and conservative lending. I will note that nationwide unemployment rates are up. Bankruptcies are inching up. And inflation seems to be either up or uncertain. However on the local front, the Massachusetts economy is holding up remarkably well in the employment and real estate values relative to the rest of the nation. While we foresee some foreclosure activity -- and foresee some foreclosure activity in our portfolio, overall mortgage foreclosures in our market by -- are way up but that is primarily by national originators, not the state banks or banks located in the state. Home sales data suggests that the median core day sales prices in Massachusetts have fallen 15% from their peak late in '05 and, our latest data shows that our local economy is still growing. Again we'll be watching this very closely.

In all of our loan portfolios, there's always a possibility that conditions will change and loans that are not an issue now becoming sometimes problematic but we don't foresee any of that in the -- as far as we can see, looking very carefully in the portfolio. The best thing we can do is monitor each loan portfolio very carefully and that's exactly what we're doing. So from a credit perspective, we feel strong but cautious. Moving from credit, Denis talked about the Slades' acquisition. Overall, I'm very pleased from several perspectives. First of all, the integration has gone very well from a technical perspective. Secondly, the melding of people from Slades and Rockland Trust is going we having continuity in the people former Slades workers are accustomed to working which is very important and we've been able to accomplish that and bring Rockland Trust benefits to the marketplace. And lastly, we're on track for earnings performance expectation.

So overall I'm pleased with the quarter. We've discussed credit. Denis addressed the margin. We've talked about the income growth we're seeing. We've generated a modest organic loan growth. We have very strong loan pipelines in commercial and home equity. We also have a strong residential loan pipeline, which we originate almost exclusively for sale. Some of you may be interested in the fact we recently submitted an application for another New Markets Tax Credit award and those decisions will be known later this year. I also want to point out that earnings' quality has improved. As evidenced by 60% of the Company's loan portfolio is now in business, commercial lending. Our securities portfolio is only 15% of assets. (Inaudible) revenue and diversity in growth has improved. Non-interest revenue has grown 25% of total revenue and this has been driven by our improved wealth management revenue and our increase in mortgage fees incomes. And as Denis mentioned, our investment management group assets have grown very nicely to $1.3 million.

These are uncertain times and we're proceeding cautiously. Clearly our goal is to grow income over time and we've shown our ability to do this over the long run. Our modest growth expectations for '08 are a reflection of the current overall environment and our prudent approach and focus on responsible growth such as growing our investment management business, adding selected key personnel who can generate more value, opening branches in attractive markets, expanding our commercial lending in areas where you can. We critically review existing branches, engage in smart acquisitions and overall operate the business that we believe in a prudent way that maximizes shareholder value. That concludes my comments. I think we're open to questions now.

Thank you, Chris. This concludes the formal presentation. We'll now open the call up for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from [Tim Bruniller] from KBW.

Hello. Good afternoon. Thank you for taking my call.

Sure.

One quick question for you. It seems before you had guided that non-interest expenses were going to be growing about 6% on an annualized basis. When I look the number for the quarter, excluding the one-off items, it seems significantly higher than that. Can you spike out the seasonality in here this quarter, perhaps give a run rate going forward.

We'll give you a number now in a moment, just what we expect it to be for the year. We do have -- advertising was up in the first quarter. We do have some level of seasonality, particularly in the salary and benefits line. Payroll is very heavy at the beginning of the year, because that's typically when our incentive program is paid out. But give us a moment and we'll give you a revised number for the full year. Of course, keep in mind that the 11% includes the impact of Slade's Bank Corp acquisition. The total impact in 2008 was 13%, including Slades we expect a 13% increase.

Okay, great, and just one more question if I could. Can you please provide a little bit more information on the sale and leaseback. Where is that $0.02 accretion coming from?

Well the gain on sale of the facilities is actually a cash flow benefit. It's not an earnings benefit. In other words, the entire gain doesn't fall to the bottom line immediately. It's amortized in over the lease period. So I guess the different consequences you have is you have the depreciation on that real estate being removed. It's replaced by market-based rent on all of those facilities. It is then offset by -- to some degree, the amortization of the gain, in addition to the reinvestment of the proceeds from the sale. All of that amounts to $0.03 to $0.04 on an annualized basis, but for the remainder of 2008 we say that's about $0.02.

Okay, perfect. Thank you very much.

(OPERATOR INSTRUCTIONS) And it seem we show no further questions. I would like to turn the conference back over to Management for any closing remarks.

Great. Thank you, everybody, for joining us on the call. We look forward to speaking to you in July after our second quarter earnings. Thank you.

The conference is now concluded. Thank you for attending today 's presentation. You may now disconnect.