Independent Bank Corp (Massachusetts) (INDB) 2008 Q3 法說會逐字稿

Hello, and welcome to the Independent Bank Corp. earnings conference call third quarter 2008 conference. 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 conference over to Chris Oddleifson. Mr. Oddleifson, please begin.

Thank you very much and good morning, and thank you, everyone, for joining us this morning. I am joined by Denis Sheahan, our Chief Financial Officer, who will, after my comments, review our current financial performance, credit quality and outlook. And I will begin with a customary cautionary statement. This call may contain forward-looking statements with respect to the financial condition, results of operations and business of Independent Bank Corp. Actual results may be different. Independent Bank Corp. cautions you against unduly relying upon any forward-looking statements, and disclaims any intent to update publicly any forward-looking statements, whether as a response to new information, future events or otherwise.

All right, now I'll begin my comments. The third quarter with a net income of 8.8 million or $0.54 per share was another good one for us. We continued to perform well and make progress on a number of key fronts. But before I discuss that, I would like to first share some observations and thoughts that guide how we are managing our Company during these times. The strong performance of Rockland Trust reflects our strength and stability. Although we are all living through the most severe financial crisis that our country may experience in our lifetimes, Rockland Trust continues to perform well and has avoided the land mines that have beset many others. Our credit and risk disciplines have served us well through this difficult environment, and there is no substitute for thorough knowledge of local markets and customers when making credit decisions. The financial crisis has put the competitive landscape in flux, and has caused profound industry shake out. Rockland Trust is well-positioned to take advantage of the market disruption, and we are already realizing some opportunities. We are not hunkering down and waiting for the storm to pass. We are very much open for business, accepting deposits and making loans, and are busy responding to the needs of new customers who have come to us in search of a safe haven.

We are also, however, well aware of the recessionary forces out there, and we are being very careful in our underwriting. Locally, growth of the real gross domestic product in Massachusetts has slowed in the third quarter, when it was estimated to have grown at an annual rate of 1% according to the Mass benchmark's current economic forecast. Since the beginning of the year, the growth of the state economy has slowed steadily. In the first quarter, the state is estimated to have grown to a 2.1% annual rate ,followed by a 1.4% rate of growth in the second quarter. Encouragingly, overall Massachusetts unemployment stands at 5.3%, supported by our diverse economy, as well as our health care and education sectors. While I do not have any specifics, I suspect that our South Coast region, which is closer to Rhode Island, which has a higher rate of unemployment -- does have a higher rate in that area as well. In our primary county, Plymouth County, median home prices have dropped 14% since their peak in the third quarter of 2005. However, recent quarter median prices are stable. In Bristol and Barnstable, counties, the drop from peak is closer to 20% since the peak quarter, and we expect some downward pressure to persist. Interestingly, foreclosure activity for the state is down when you compare September '07 to September '08, by 12%. And this is after the impact of the state mandated 90day cure period has sort of passed. Although I am not sure what to make of that, we'll be monitoring that closely.

Our franchise is holding up nicely on our position of strength, as a result of a number of disciplined and focused actions we have taken over the past few years. For example, we have been very prudent in conservative loan commercial underwriters for a number of years. Over the last several years, we have significantly reduced Barlow hurdle assets we are growing competitively advantaged loan businesses, we have grown our wealth management business; we have improved our funding mix and we have taken, and are taking, a number of steps to improve our liquidity. We have been managing expenses tightly while also funding growth initiatives. We have completed a number of technology-driven improvements and efficiency effectiveness, ANd we've adopted an opportunistic and selective approach to acquisitions, and have successfully integrated Falmouth Bancorp, Slade's Bank, Compass Exchange Advisors and O'Connell Investment Services. We believe that the cumulative effect of these actions, in tandem with our disciplined management team, is steering us well through the current turmoil, and positions us to be a net beneficiary in the industry fallout.

Having strength allows us to really demonstrate and solidify our market position, and develop more and deeper relationships with our customers. For example, our pipeline in our commercial division has never been stronger. As a result of several big players in the market pulling back on lending, the securitization market being dormant, the smaller players not being able to fulfill needs, we are attracting more commercial relationship proposals. We are attracting excellent new commercial banking officers that are bringing with them some very fine relationships. As simple as it sounds, having an ability to really to focus on customers, select prospects, and the related opportunities rather than on problems is a big advantage. Our loan and deposit growth is, as Denis will explain shortly, strong. In our investment management group, assets under management are holding up well as of the end of the third quarter, despite the plummeting markets. We started the year at $1.29 billion, and we now have $1.26 billion -- only a 2.1% decrease. We have a high touch approach with a team consisting of CFAs and CFPs who were groomed in some of the better known investment management firms in the country. And our core equity portfolio has significantly outperformed the S&P year-to-date.

The turmoil in the market place is creating opportunities in our investment management group, where clients are consolidating their assets with us and we're being introduced to an increased number of prospective clients. Our branch based retail business is likewise strong, and is the hub of many referrals throughout the entire bank. Over the last several years, we have consciously moved to a customer-needs centric model; this has included an enormous amount of training on the nature of relationships -- how to build them, how to grow them. It is complimented by a branch base score card and incentive program; and most importantly, an observation score card on coaching-based management process. We are very encouraged by our third quarter results -- and I would just sort of summarize the highlights as being our net interest margin improvement, growth in a number of loan categories, strong deposit growth; credit quality is in good shape. Net charge offs remain modest -- we do see some pressure on individual credits, but no systemic problems -- but expense control and solid capital position. Now in summary, we are well-positioned to move forward. We are still growing loans and deposits. We are not settled by large charges or troubled exposures. We have ample capital base, including our recent sub-debt issue. We have integrated our acquisitions well, and we are maintaining an active marketing posture.

For companies in our position, it is not simply a matter of surviving this environment, but we intend to thrive by capitalizing on the opportunities presented by the disarray among our competitors to add customers and leverage our strength. And that concludes my comments. I will now turn it over to Denis.

Thank you, Chris, and good morning. First of all, I'll review our third quarter 2008 performance with some key takeaways for the quarter, and then I'll talk about earnings guidance for the remainer of this year. As Chris mentioned, Independent Bank Corp. reported net income of $8.8 million, or GAAP diluted earnings per share of $0.54 for the third quarter of 2008, as compared to $8.3 million or $0.60 GAAP diluted earnings per share for the same period last year. On the year-to-date basis, GAAP diluted earnings per share was $1.34, a decrease of 8% from the comparable period -- prior year period. There are a number of non-core items in the various periods detailed in a table in the earnings release. Excluding these non-core items, diluted earnings per share on an operating basis were $0.51 for the quarter ended September 30, 2008 as compared to $0.60 in the prior year quarter, and $1.43 for the nine month period, a decrease of 9% from last year.

Key takeaways in the third quarter: First and foremost, Independent Bank Corp. and Rockland Trust Company are strong. As Chris stated, we are capitalizing on opportunities. We are lending. We are gathering deposits. We have strong profitability, strong margins, an ample capital base to support growth, and are poised to continue growing our customer base in a typically responsible manner. Loan demand is good. Commercial is up, excluding the loans acquired due to the Slade's acquisition, by $72 million since year end, or 8% on an annualized basis. While year-to-date growth is strong, we, as anticipated, experienced large pay offs in the third quarter -- You will note that our construction portfolio is down $20 million -- that offset organic growth.

As Chris mentioned, our pipeline is remarkably strong in this business. However, we remain selective in the borrowers we choose. Home equity lending continues to see strong growth, up 19% on an annualized basis excluding Slade's, even in a tightened underwriting environment. We originate high LTV, high credit score, loan and lines to primarily customers within our footprint. None of this is brokered lending. We have a continued strong and expanding net interest margin. The net interest margin for the third quarter was 4.09%, and 4% for the year-to-date period, as compared to 3.98 and 3.94 for the comparable periods in 2007.

The stability and expansion of the net interest margin is a result of the continued careful liability management and an outstanding deposit base, combined with our disciplined asset origination focus and growing where we are strong -- commercial banking -- and de-emphasizing where we lack competitive advantage -- consumer automobile lending. Deposits grew by $64 million for the quarter, or approximately 10% on an annualized basis in Q3. On a year-to-date basis, excluding Slade's acquired balances net of anticipated run off of their high priced deposits and brokerage CDs, deposits are up $136 million, or 9%. We are very focused on generating deposits, and see great opportunity as we move into the fourth quarter. Core non-interest income growth, up 20% for the third quarter and 17% on a year-to-date basis, remains a key highlight, driven by growth in our wealth management business. In the third quarter, we took an additional other-than-temporary impairment charge against our portfolio of BBB-rated performing pooled bank trust preferred securities, amounting to a pretax charge of $720,000 or $0.03 diluted earnings per share.

The year-to-date OTTI charge on these bonds amounts to $2.6 million pretax, or $0.11 a share. As you can appreciate, making fair market value and impairment judgements in highly illiquid markets is not easy. But we have treated these charges as core, and include them in our reference to operating earnings. While we have taken a conservative approach by recognizing impairments on these bonds, we anticipate that the intrinsic value of these securities will be greater in a more normalized market environment over the long term. Nonperforming assets were 51 basis points of total assets at September 30, 2008, as compared to 36 basis points at June 30, 2008. Increases on a linked quarter basis were primarily in residential real estate, which was up 2.3 million, and commercial and commercial real estate combined, up 4.3 million. The commercial and commercial real estate increase is associated with a single developer, and we anticipate that we will work out this credit effectively. Net charge offs were $4.4 million year-to-date, or 23 basis points on an annualized basis. The third quarter included approximately $800,000 in charge offs and partial charge offs associated with the home equity portfolio, based upon a thorough review of the underlying collateral on a rescored and revalued basis during the quarter.

As disclosed earlier in the quarter, Rockland Trust issued $30 million of subordinated debt to fund future growth opportunities. We were pleased with the strong investor interest in this issuance, and the speed with which it closed. The debt has a fixed interest rate of 7.02% for the first five years, and is callable at that point. The transaction boosts regulatory capital, and we estimate total risk-based capital at September 30th at around 12%. The recently announced U.S. Government TARP could provide access to additional capital for the Company. We have not yet concluded our evaluation of that program.

And now earnings guidance. Our last earnings estimate called for operating diluted earnings per share in the range of $2.06 to $2.10 for 2008. We now revise that guidance to $1.90 to $1.93 for the following reasons: The additional OTTI charge in the third quarter amounted to $0.03. We are not anticipating additional charges at this point, but it is a difficult area in which to make a judgment at this point. Mortgage banking production fall off accounts for about $0.03 of the reduction in the estimate, as home sales have not met our expectations. Loan work out expense and loan provisioning will equate to $0.02 to $0.03 of the reason for the reduction in the estimate, due to more protracted and increasing loan work outs. Higher deposit costs equate to about $0.02 in the change of the estimate, given the fierce competition in our market by those banks with significant liquidity pressures.

Advertising will cost about a penny more than we anticipated, as we market to attract new customers in an environment with a great opportunity for a strong bank. Wealth management revenue will likely be down by about $0.02 compared to our prior estimate, due to the turmoil in the stock market over the past months. And benefits will account for about $0.02 of the reduction, largely due to the market impact on our frozen defined benefit pension plan. We feel that lowering the outlook is very reflective and in keeping of the very difficult macro environment we are operating in. But we expect to remain solidly profitable, with continued growth in many of the key fundamentals. I will now open the call for questions.

(OPERATOR INSTRUCTIONS). Our first question is from Damon DelMonte of KBW. Please go ahead.

Hi, good morning, guys. How are you?

Morning, Damon.

Denis, could you share with us a little bit your findings of your home equity analysis and kind of what you say for a change of maybe FICO scores, or loan to values, kind of -- a little bit more color as to what led you to make those charge off?

Sure. Just before I do that, I need to make a correction. I said something incorrectly. I said that we originated high LTV. We actually originate low LTV, high credit score loans and lines to customers in our footprint. But we -- Damon, we periodically -- we -- twice a year, we revalue the portfolio. We score it every quarter, but we revalue the portfolio twice a year. We did it most recently after the June quarter. We didn't see significant deterioration, but we -- and I will give you some averages here in a moment for the portfolio. Our -- the -- for the loan portfolio, the weighted average LTV of our home equity loan portfolio is 54%, weighted average FICO 748. The weighted average LTV of the line portfolio is 62%, and the weighted average FICO is 757. When we look at -- specifically at our watch list and our non-performing assets in the home equity area, beyond just doing the revalue -- which is sort of an automated revaluation -- we get broker opinions in certain situations of the value of those assets that are in delinquency. And in certain cases, we do a full reappraisal. Based on that information, you know, where we felt it was appropriate to recognize impairment on loans that are in a -- in either a non-performing forming or in certain cases delinquent, based upon that cases delinquent based upon that information.

(Inaudible).

Yes. Go ahead.

Yes, I mean, what also may have relevance, Damon, is that the -- take the overall portfolio at the end of June, and the home equity was a weighted average LTV of 54. And then with the revaluation work that we did and so on, that -- the portfolio weighted average LTV went up to 57. So that is, I think, may be one of the impacts you are looking for.

Okay. Thank you. And then with respect to the commercial real estate growth that you saw this quarter, could you tell us a little bit about where that came from? Was it owner occupied -- or what drove that?

Well, overall, commercial real estate -- when you are accounting for construction as well -- total commercial real estate was flat for the quarter, as we did have significant pay offs we talked about. The growth that we had, though, excluding that pay off was, you know, across a variety of different industries -- nothing specific to one industry or one loan type. I mean it is -- we're seeing very good demand, as Chris mentioned, because our pipeline is so large -- our approved pipeline is also so large. We are seeing opportunities from other financial institutions that perhaps we wouldn't have seen in the past.

Okay. Okay, that's all I you have for now. Thank you.

Thank you.

Our next question is from Laurie Hunsicker of Stifel Nicolaus. Please go ahead.

Yes, hi. Good morning.

Morning, Laurie.

Just wondered on credit, just looking for a little more detail if you can give it. Do you have a break down of net charge offs by category, or just sort of an approximate?

Sure.

And then while you are looking that up, too, I just wondered if you can give us just a little bit more color on that commercial loan that you mentioned earlier that was associated with the single developer. And then also ,if you have a classified asset number of the problem loans that corresponds with the June number of 49.7 million.

On the latter no, I don't have that, Laurie, but it will be in our 10-Q filing. I just don't have that handy.

Okay, okay, great.

The charge offs for the quarter -- home equity net charge offs were 817,000. Small business, 436; and then all other consumer, 762. And all other consumer is auto, direct consumer lending, you know, consumer lines, that sort of stuff. That's a little over $2 million.

Okay. So, nothing on the commercial real estate side again?

It was peanuts -- actually zero in commercial real estate. C&I for the quarter was actually a net recovery of 5,000.

Oh, great.

On that one commercial credit we mentioned, it is a very long time customer. We know them very, very well. We know the properties well. We are, you know, very well collateralized and just got caught up a little bit on the rate of the absorption and the rate of sales.

Okay. And what is the total number amount of the loan?

It is about 5.5 million. It is across both the C&I category and commercial real estate.

And commercial real estate, okay.

It is a number of loans, Laurie -- it is not one loan -- a number of properties, a number of loans.

Okay, and how much of that is raw land?

None of it.

Yes, I don't think any of it.

And what is -- is this a single family development or is this business development, or is it both?

Single family.

Single family. Okay. And I mean, anything that you can give us color-wise, you know, number of lots or location, or general location?

We can tell you it is 13 separate loans, is our understanding.

Okay.

So I mean that's -- if that gives you an indication of the size of each individual credit. So it is not one large individual loan.

Okay. Okay, and on the commercial real estate piece -- or do you have a break down of what is split between C&I and what is split between commercial real estate?

In what -- in total loans outstanding?

Yes, of the 5.5 million, how that shaped out. Is it basically half and half, or -- ?

No, about $1 million is in C&I. The rest is in commercial real estate.

Okay. And then -- so for the commercial real estate side, do you have a LTV on that?

No, I do not.

If you were to sort of ball park guess on a combined basis?

Very manageable. I mean, we expect this to work out just fine.

Okay.

This is somebody we have known for many years who has just run on some difficult times and we are -- as we do with all of our customers, we are working very effectively with this individual, and we believe we are going be just fine.

Okay. That's great. So obviously if you had had concerns, we would have probably have seen you take charge offs in this quarter --

Yes.

-- proactively? Okay, good. And just one last question here with respect to loan loss provisioning. Your provisioning obviously matched your charge offs. Is your goal to kind of stay at this 129 reserves to loans ratio? Or I mean, what sort of general guidance can you provide on reserves to loan targets or provisioning or how you look at it?

Well, we think our reserve is adequate where it is at this level. And you know, we would envision maintaining that level of adequately. I mean, our intent is not to eat into our existing reserve in any fashion. We would expect, given all of the criteria and the quality of our portfolio, that we would be maintaining it around this level.

And Laurie, we do have a very detailed methodology in which we establish the allowance for a loan loss that really looks at our history all the way back to 1986. So through our -- even our tough times in the late 80s, early 90s. And that's all factored in.

Okay. Okay. Great. And I'm sorry, just had one last question. Net interest margin for the month of September, do you have that number?

I think it was 410 -- (inaudible), just looking it up for you, Laurie.

Okay.

406, Laurie.

Perfect, okay. Great. Thanks a lot, you all.

Yes.

Our next question is from John Stewart of Sandler O'Neill. Please go ahead.

Good morning, guys.

Morning.

Just a little bit more -- excuse me -- clarity on the home equity charge offs of 817,000. How much of that would you attribute to kind of a true up from your analysis this quarter?

650,000.

Okay. Okay. And then, I guess just a little bit more detail on the trust preferreds that you have. I believe the cost basis now is just over 16. What is it, 16 million, is that right? Post the charge taken this quarter -- the OTTI. What are those now marked at, fair value?

When you are referring to, John, the 16 million -- I don't understand your question, 16 million. I mean, we have a portfolio in total of trust preferreds. The current market value is -- let me see. is $19 million of the portfolio. Original par is a little over 30 million. It is 32, $33 million. So are you -- are you referring to, I mean, specifically BBBs?

Yes. I was talking specifically about the BBBs there, yes.

Oh, the BBBs, yes. Okay. We have -- the market value of those bonds is $1.9 million.

Okay.

We have them marked to the original par, is more like $4.5 million.

Okay. And the rest of the -- I guess it is, you know, 17 -- 17 million roughly -- is that -- are those all single issuers?

No. The -- let me just back up and give you some broad information about the portfolio as a whole. The portfolio is 32 -- it is about $33 million in total, okay, of trust preferreds. Of that, we have -- am I right, (Inaudible)? About 14.5 million is individual issued?

Yes.

So 14.5 million is individual issued. About 19 is pooled at par value. It is pooled trust preferreds ranging from [travel] Bs where where we have taken impairment charge, all the way up to travel As. So the 19 is the original par value of those pooled trust preferred. The travel B component of that was 4.5 million, we have written that down to 1.9.

Okay. Can you share the fair market values on the individual piece and the pools in total?

Yes. So you want the price or the actual fair market value?

The fair -- wherever you have them marked to now.

Okay. The pooled is -- let see. The pooled, excluding the travel Bs -- I've already given you the travel Bs -- is 7.9 million. So greater than travel B is 7.9. And then 1.9 for the travel Bs, so you are at 9.8 million in total for the pooled trust preferreds.

Okay. And the individuals?

Individuals, 9.7 million.

Okay. And can you share with us who the issuers are of the individual pools that you -- or the excuse me, the individual issues you own?

No.

Okay. Okay. I think that was all that I had. Thank you very much.

Sure. You're welcome.

Our next question is from Bryce Rowe of Robert W. Baird. Please go ahead.

Thanks. Good morning.

Morning.

Denis and Chris can you guys -- you guys mentioned the opportunity in the fourth quarter to capture deposits, and mentioned already realizing some opportunities from the market turmoil. If you could expand on that. And then second question, Denis, you talked about in your guidance the impact of higher deposit costs. You know, looking at the funding costs for the quarter, it looks like time deposit costs came in considerably on a sequential basis; money market deposit rates were higher versus the second quarter. Is the source of that negative higher deposit cost impact -- is it on anticipated higher money market costs or is it time deposits?

First of all, on the, the opportunity for deposits in the fourth quarter -- and actually, what we have been seeing throughout the third quarter -- is it is a combination of people coming to us -- customers coming to us -- because they viewed the market as strong and healthy relative to what is happening to some other organizations, you know, as much as what has been happening nationally with the large institution -- the Wells-Fargo and JP Morgan, et cetera. That's not in our area. They're not in our area. That doesn't particularly have an impact on us. It is more the regional players that are having difficulties, and we are seeing customers coming in, bringing in deposits. We are able to attract those customers to the organization just based upon our reputation as being strong, a locally based community bank that isn't having the issues that many of the other organizations are. In addition, we are reaching out. We are talking to our communities about our strength. We are reaching out and doing some additional advertising, both about the strength of the Company, as well as recognizing that this is an opportunity to try to and bring in additional deposits. So that is why we believe that Q4 will be quite good from a deposit perspective, and that's why we've had good growth in the third quarter.

In terms of thinking about the cost of those deposits, you know, deposit rates continue to be somewhat irrational, you know, in the marketplace. But it is perhaps understandable when you recognize some of the deposit outflows at those regional players, and they're having to react with significant deposit pricing in order to retain deposits. So if we are in a mode of looking to take advantage of that situation and to raise some deposits ourselves, we are having to compete to some degree. So even though our margin is very strong -- over 4% -- we think there will be some pressure on that into the fourth quarter, and perhaps at the beginning of next year.

Okay. And can you guys quantify -- you talked about the loan pipeline. Can you quantify what that is?

It is several hundred million dollars, Bryce, I mean, of raw backlog. It is the highest that it has been in our history; and then the approved backlog is less than that. But it is a -- we feel pretty good about it. But it is several hundred million dollars.

Okay.

But the (inaudible0 backlog price is sort of on really -- it just has had a very, very preliminary screen -- maybe a conversation or two.

Okay.

But not anything that, I mean, sort of credit analysis.

Okay. Understood. Thanks, guys.

Sure.

And gentlemen, I am showing no other questions in the queue at this time. I can give the instructions again, or you can give your closing remarks.

No, I think we are all set. Thank you very much, everybody. We look forward to talking to you into the new year.

Bye.

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