Independent Bank Corp (Massachusetts) (INDB) 2009 Q2 法說會逐字稿

Hello, and welcome to the Independent Bank Corp. second quarter 2009 earnings conference call and webcast. 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.

At this time I would like to turn the conference over to Chris Oddleifson. You may now begin.

Good morning, and thank you very much, and thank you everybody for joining us. I'm joined today by Denis Sheahan, our Chief Financial Officer to review our second quarter financial performance after my brief comments.

But of course I have to begin with the customary cautionary statement. This call may contain forward-looking statements with respect to the financial conditions, results of operations, and business of Independent Bank Corp. Actual results may be different. Independent Bank Corp. cautions you against unduly or relying upon 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.

Okay. Let's get started. In terms of the numbers, the second quarter was a complicated one with lots of moving parts that one needs to really work through to get a sense of underlying performance. And Denis will be helping us through that later in the call.

Net operating earnings amounted to $6.8 million, or $0.33 per share, inclusive of the special FDIC deposit premium. There were also several nonoperating items related to previously announced events. While these served to depress reported results, they came attached to very positive developments for our franchise, such as the [Ben] Franklin acquisition and the repayment of CPP funds to the Treasury. Denis will cover all this in more detail shortly.

The fundamentals of the company remain in excellent shape as evidenced by the many positives in the second quarter. Double-digit annualized commercial loan growth. Solid growth in various core deposit categories. Robust mortgage originations. An improved net interest margin. Higher wealth management revenues. Stable credit quality. Strong tangible and regulatory capital levels.

Our credit experience continues to hold up well despite the tough environment. To give you some sense of our local economy, a few -- I'll mention a few things. The Case-Shiller Index for Boston shows a relatively good 18% peak to current value decline in our residential real estate values. This is the fourth best major region measured by Case-Shiller.

Interestingly, for the second quarter in a row the median sale price for homes in the -- our primary county are up. I'd like to remind everybody on the call today that our region did not see a frothy commercial real estate market you've seen in other markets. As an indication, while the average asking lease rate for office space in our prime area has declined, it's declined to $19.50 from a peak of $20.50. Neither of these figures are in the stratosphere that you hear in other markets.

Unemployment stands -- in Massachusetts stands at about 8.7%, better than the national average. I also like to remind everyone that our economy is fairly diversified and not dependent on any one industry. Some of you may recall that two major film studios are being planned within our markets, and they're still on track.

One of the major milestones in the second quarter was the closing of the Ben Franklin acquisition in April. It's 11 branches and $700 million of deposits in attractive western suburbs of Boston are a terrific addition to the Rockland Trust franchise. We have fully assimilated Ben Franklin. We fully converted all major systems within a month of closing. All of our branches now bear the familiar blue, white and gold colors of Rockland Trust. We will retain Ben Franklin's front-line staff, providing valuable continuity to our new customers. We engaged in a robust marketing campaign to promote the benefits of the combination, and our customer retention trend thus far has been very encouraging.

Another major milestone for us in the second quarter is our full repayment of CPP funds to the U.S. Treasury. You may know we were among the first in the country to do this, and we did so without raising replacement capital, a measure of our balance sheet strength. We subsequently reached agreement on the redemption of related warrants, and that's to say we have no regrets whatsoever on our decision to repay. The response from all of our various constituents has been universally terrific, and I would say sometimes bordering on close to euphoric.

But most importantly, our remaining capital position is quite strong.

Beyond these developments there were other several factors -- several other factors too that point to the strength of our franchise. In May we were awarded $50 million in tax credit allocation authority under the new markets -- the federal New Markets Tax Credit Program. This program focuses on making credit available to qualified entities and low income communities. We are the only bank in Massachusetts and one of only 30 institutions nationally to receive this designation in this round. And this marks the third time we've received these tax credits since the program's inception in 2000.

Another source of pride for us is the fact that throughout this banking and financial crisis we have been able to provide our shareholders with a steady level of dividends, a track record many other financial services companies could not maintain. Obviously there are no guarantees on this front given the prevailing uncertainty, but shareholder returns are near and dear to our heart.

None of this would be possible without my highly motivated colleagues throughout legacy Rockland Trust and our new Ben Franklin areas who are committed to the company and completely dedicated to the customer service experience. Our recent internal survey indicated 97% of our employee base is satisfied or extremely satisfied with working at Rockland Trust. This is a high-level. This is up from where it was last time we did this survey, and a national trend is actually in the opposite direction.

Our customer satisfaction levels have been consistently scored high, and we continue to attract high-caliber talent to our institution, a real sign that we are viewed as a winning franchise.

To wrap up, I'd like to say, we will continue to execute our strategy and seek to maintain the momentum across our company. The crystal ball on the macro environment remains clouded, and we continue to bring the right sense of caution to the table. But given the strength of our capital position and our disciplined credit approach, we feel we are operating from a position of strength and we are able to play both offense and defense. Challenging times often great opportunities for disciplined companies like us, and we are prepared to capitalize on them.

Thank you. Denis?

Good morning. Independent Bank Corp. reported net income of $660,000 and a loss per diluted share of $0.19 in the second quarter of 2009 as compared to net income of $6.4 million and diluted earnings per share of $0.32 in the first quarter of this year. Including the preferred stock dividend, net loss available to common shareholders was $3.9 million in the second quarter as compared to net income available to common shareholders of $5.2 million in the first quarter.

As Chris mentioned, there were a number of items in the second quarter period of a noncore nature. The largest of these items is a pretax charge of $10.8 million, or $0.43 per share, associated with the Ben Franklin Bancorp. acquisition. This charge is larger than I guided at the end of the prior quarter, when I guided to a charge of $4.3 million pretax.

The difference can best be described as a geography issue associated with the new mergers and acquisitions accounting. There is nothing in the larger charge that was unanticipated. We merely believed some of the costs would be borne by the acquired company prior to closing, and found that not to be the case as we get further into the complexities of the new accounting. Importantly this had no impact on our capital position, as whether the charge is incurred by the acquirer or the acquiree, it makes no difference to consolidated capital, post acquisition.

Second, the deemed dividend to the U.S. Treasury associated with the company's exit of the U.S. Treasury's Capital Purchase Program amounted to $4.4 million in after-tax dollars, or $0.22 per share. It does not include the accrued preferred dividend for the period that the CPP was outstanding during the quarter prior to repayment. This is included in operating earnings.

Third, a decision to pay down $25 million of borrowings during the quarter due to the company's strong liquidity level led to a current period gain associated with the unwinding of interest rate hedge positions amounting to $3.8 million pretax or $0.12 per share. We treat securities gains and items of this nature as noncore. Excluding these items, operating earnings were $6.8 million or $0.33 per share in the second quarter as compared to $5.3 million and $0.33 per share in the first quarter.

Two additional large various items in Q2 which management considers to be operating were a special FDIC deposit insurance assessment of $2.1 million pretax, or $0.07 per share, and a securities impairment charge of $1.7 million, or $0.05 per share.

While this quarter reflects many unusual items that serve to depress reported earnings, there were many positive takeaways in the quarter reflective of the strong core performance of the company. The company's net interest margin improved to 3.88% in the second quarter, up from the 3.57% reported in Q1. A number of actions helped to improve the net interest margin, including managing down a large fed fund sold position that existed at the end of the first quarter, in addition to careful management of deposit costs.

Capital strengthened in the second quarter as the company's tangible equity ratio increased to 6.33% at the end of the second quarter as compared to 5.83% at the end of Q1. I would remind you the ratios provided include the benefit of the tax deductibility of certain goodwill.

Asset quality is stable. Nonperforming loans as a percentage of loans decreased to 93 basis points in the second quarter from 108 basis points at the end of Q1. Loan to net charge-offs were $1.9 million in Q2 or 23 basis points on an annualized basis compared to $3.6 million or 53 basis points on an annualized basis in the first quarter. Despite this, we felt it prudent to increase the provision for loan losses to $4.5 million in the second quarter, improving the reserve to loan ratio to 1.49%, excluding the loans acquired at fair value in the Ben Franklin Bancorp. acquisition.

Loan delinquency is also stable at 171 basis points at the end of Q2 as compared to 175 basis points at the end of Q1.

Commercial lending growth was strong in the second quarter, amounting to $62 million of organic growth or 15% on an annualized basis, driven by C&I lending opportunities. Growth opportunities remain strong as the pipeline is still quite high.

We experienced good deposit growth in the core deposit categories, particularly demand deposits, which grew $36 million. This growth was mitigated by reductions in the time deposit category, as CDs were managed down to help reduce a large excess cash position and to manage our costs of funds.

The Benjamin Franklin acquisition closed in the second quarter and added $1 billion in footings prior to deleverage. The majority of the Ben Franklin securities and borrowings were unwound, resulting in approximately $700 million in loans and deposits added to the company's footings.

You'll note, and as we discussed during the last conference call, the company's reserve to loan ratio decreased following the acquisition to 1.2% as the acquired bank's reserve for loan loss is no longer carried over under new merger and acquisition accounting. The acquired loans are recorded at fair value, consisting of a net premium of $3.7 million, composed of an interest and liquidity mark and a credit discount. This net premium will be amortized over the life of the loan portfolio, and losses associated with the acquired loan portfolio to be charged against the allowance for loan losses.

More importantly, the acquisition integration is well underway, and performance is meeting our expectations.

I'll now provide some earnings guidance for the remainder of the year. And as you can appreciate, there is much uncertainty in the financial services industry regarding individual company performance in 2009 in light of the continued economic weakening. Yet we feel it's important to share our outlook with our shareholders, recognizing it as a fluid exercise and subject to updates throughout the year.

Our best and most current estimate of performance is deluded earnings-per-share on an operating [income] (technical difficulty) basis expected to be in the range of $1.50 to $1.60 per share. This estimate is consistent with the prior estimate, but it now includes the special FDIC assessment of $2.1 million pretax, or $0.07 per share, in both the second quarter just passed and the fourth quarter of this year.

Here are some other key assumptions.

No further securities impairments. There were $1.7 million pretax in securities impairment charges in the second quarter.

Second, loan loss provision was previously estimated to be in the $14 million to $17 million range, including Ben Franklin Bancorp., and we continue to believe in that range, with net loan charge-offs expected to be approximately $12 million.

Tax rate, 26% for the remainder of the year.

And we think the net interest margin can continue to expand and would guide you to a range of 3.90% to 4.00% for the rest of the year.

We expect commercial loan growth to be quite good for the remainder of the year, though mitigated by runoff in the residential and automobile lending categories, resulting in total loans outstandings of approximately $3.4 billion at year end.

That concludes my comments.

I think we can open now for questions.

(Operator Instructions). Mark Fitzgibbon, Sandler O'Neill.

Good morning gentlemen. First question I had, I wonder if you could share with us what you are seeing on your early stage delicacies of 30 to 89 days?

Sure. As of June -- obviously, Mark, this is based on a larger base because of the Ben Franklin acquisition. 30 to 89 day delinquency is thirty -- $31 million. $30.966 million -- to be exact. As a percentage of loans, it's 92 basis points; and just to compare it to the prior quarter period, which was $23.6 million, that was 88 basis points. So it's pretty consistent from March to June, just happens to be a larger base.

I don't think you guys broke out in the release credit metrics at Ben Franklin versus Independent or Rockland Trust. Was there any marked differences this quarter? Or did they both sort of -- I know the overall trend was certainly very good, but anything underneath?

No. I can give you a sense of -- in terms of the increase in our nonperforming assets, I can share with you how much of it was Ben Franklin.

Great.

So overall, our nonperforming loans increased from roughly $29 million to $31.5 million. Of that, Ben Franklin was $5.6 million.

Okay.

The other category that was an increase as a result of the acquisition was in the other real estate owned within nonperforming assets, which you'd note increased from $1.8 million to $6.1. $3.0 million of that was a Franklin property.

Okay.

All within our expectations.

Great. The last question I had was, could you just update us on the timeline for extracting the cost saves out of the Ben Franklin deal?

All of the staffing adjustments have been completed at this point. All of the technology conversion has happened. From now forward, all of the expenses are out, that we had planned.

So just a little bit of residual here in the third quarter?

No. I'd say it's done as of Q2. The conversion was in the very beginning of May. There was certainly some staffing that was retained for the month following conversion. But all of the expense savings have been realized at this point.

Thank you.

Damon DelMonte, KBW.

Good morning guys. Could you just give us a little perspective on your expectations for deposit runoff from the Ben Franklin franchise?

Sure. We acquired $701 million in deposits. The Ben Franklin base right now is about $660 million. So we've had about $42 million runoff thus far. And it was driven by -- there were a couple of large depositors, each in the region of $10 million apiece. And we lost those depositors, and that's basically it. The vast majority of the Ben Franklin base has held in really well. We think the integration is going very smoothly, and we wouldn't expect much further runoff at this point.

And that was within expectations.

Yes. Very much so.

Great. Thanks. And then Denis, the 150 to 160 operating EPS number that you were guiding to, I just want to confirm that that includes the special assessment again in the fourth quarter of $2.7 million?

Up $2.1 million. It does include it, yes, again in the fourth quarter.

It does? Okay.

Yes it does.

And then on the deemed dividend of the $4.5 million this quarter, does that include the quarterly dividend that you would've paid if you held onto TARP?

It includes -- the actual deemed dividend is $4.3 million and change. The difference between the $4.3 million in the $4.5 million is essentially the accrued dividend up until when we paid off the TARP.

Got it. That's all I had. Thank you very much.

Bryce Rowe, Robert W. Baird.

Thanks, good morning guys. Denis, do you have the estimated total risk based capital ratio for the second quarter?

Yes. It's going to be right around 11% for Q2.

And another question, on the margin, 3.90% to 4.00% guidance, can you talk about what the dynamics are, or the assumed dynamics within that estimate are? Is it -- at least on the earning asset yield side and also on the deposit cost side?

It's mostly on our cost of funds, and for -- you may recall, we had a large excess cash position at the end of the first quarter that really depressed the margin. It took us some time through Q2 to eliminate that position, and we still ended up at an average of 3.88%. So we are very close to that 3.90% to 4.00% right now. The month of June was right around 4.00%.

So there's not much work remaining to be done to achieve that range in the third quarter -- for the rest of the year, for that matter. That's subject to change depending on what deposit pricing does from a market perspective. But we think -- we're pretty confident we can hold that range.

Do you still have more room to cut CD rates?

Just as with CDs as they mature, we have -- as CDs roll off that are maybe six months old, they will reprice down into this lower rate environment, and that obviously helps in maintaining the range that I've provided.

Appreciate it, thank you.

Laurie Hunsicker, Stifel Nicolaus.

Good morning. A couple of my questions have been answered, but just to go back to the deemed dividend, do you have the exact amount that is accrued? I know in round numbers it's $200,000, but do you have the exact?

$141,000.

$141,000. Okay. Great. And then back to credit, as I remember, Ben Franklin was running at about $9 million or $10 million in nonperformers. So did you -- I guess with respect to your charge-offs, did a lot of that have to do with Ben Franklin, or did that mark flow through the other side, or can you give us any color? In then the REO out of $3 million? Because I know they had been sitting with like a $5 million or $6 million property, commercial real estate property in Boston. Is that what that is?

Yes. Our charge-offs for the quarter, the $1.8 million, is not reflective of the charge-off associated with that property in Boston. That was taken care of by Ben Franklin prior to the acquisition, appropriately. And that property is now in OREO.

Okay. And I guess with respect to their commercial bucket, is there anything within their book generally that is different than your underwriting standards? Or is that kind of more one-off?

This was a loan that we identified in due diligence. We had very cooperative discussions between our management team and the management team at Ben Franklin. We thought it was a problem. We believe it is. That's why it's in OREO. And we're going to manage that very effectively.

The rest of the Ben Franklin book, we are very content with. Every bank has differences in underwriting standards. But we feel pretty good about the Ben Franklin book.

On balance, there are no surprises, and the guidance we have given is holding up.

Okay. And then just from the standpoint of other commercial real estate, the jump in nonperformers link quarter from $10.8 million to $12.5 million -- how many properties is that? Or is that again related to Ben Franklin?

Well, that's -- remember, we added a whole bunch of -- because it's -- that wouldn't be a (multiple speakers) markets. There would be a little bit -- just a little bit of it then.

In that system, and that is yours. Do you have any color you can add on that, or --?

I can give you the larger credits to give you a sense of them in the commercial nonperformers. One of them is a -- and this is both within commercial real estate and C&I, because it's different components of this one borrower -- is an organization that we have a real estate loan with, but also they have -- they rent equipment in the construction industry. So that is a type of one nonperformer.

How big is that total relationship?

The total is $3 million. About two thirds of it is in real estate. Yes, about two thirds of it is in real estate.

Another one, $1 million is commercial office buildings. So overall, it's -- there is some diversity in it.

A residential developer in southern Plymouth County that we have been working out for quite some time, that's about -- only $1 million left in that one. So no real surprises.

So after $3 million, your next business biggest is $1 million in both the C&I and CRE?

No, the next biggest is a $2 million property that we've already taken some charge-offs on. That would be our next biggest. Then you go down to $1 million.

What kind of property?

It's a commercial construction property.

Okay. Great. And then Chris, maybe you can just give us a little bit more of a macro, now that you've closed Ben Franklin, and I know in the past you've said you probably wouldn't do another deal for a year, year and a half. So now that this is closed, maybe you can just update us on your thoughts on M&A and the landscape you're seeing and what would make you change your mind, or what wouldn't if you are staying the course?

Well, I'll tell you, I've said in the past too that the banks are sold, not bought pot -- meaning we don't have any control over the timing. And there's -- certainly New England has been rolled up by a variety of large organizations in the last decade. So we don't see that there is sort of a -- our strategy is certainly not contingent or dependent on acquisitions.

Having said that, if the Board of Directors in a bank that's within or adjacent to our market decides to raise their hand and say, we would like to have a conversation, we would be ready, willing and able to have that conversation. Right now.

What would be your target asset size?

Well, I think we are still at a size where -- I know some banks say when they get to a certain size, we will never look at banks below X or Y. We don't have that criteria right now, it's more of a criteria -- does it fit strategically? Can we really add value to the franchise that was not there, like bring a lot of robust products in? Are there -- can we achieve pricing and make this accretive in year one after excluding one-time costs? Those are more the things we'd look at than sort of a pure asset size criteria.

Is there a cutoff though in terms of how low you would go? A deal below $200 million or $300 million, does it make sense or (multiple speakers)

To tell you the truth, I haven't thought about it that way. And I suppose that if a deal like a $50 million, $60 million bank comes along, we'd take a quick look at it and make that assessment then.

Just remind me, how far west would you go in terms of the state of Massachusetts? Where do sort of start to lose interest?

It's -- I would say that we are -- I am completely open to any conversations. It all depends. It just really all depends. It depends on the management team, it depends on the franchise, it depends on whether they're leveragable stuff, it depends on the -- whether we can leverage our platforms on the new -- so many what ifs associated with any potential that I think we -- I don't want to box myself in in any way, shape, or manner.

Thanks Chris. Thanks Denis.

Bryce Rowe, Robert W. Baird.

Sorry for the follow-up. Just on capital, I think you guys have said in the past that 11% total risk based may be kind of a benchmark for you all as to whether you think about raising common equity just to give yourself more of a margin for error. Any comments there with respect to total risk based, and especially in light of the stronger loan pipeline? Thanks.

11% is -- we think in this environment we want to be 11% and better. We have confidence that we can grow total risk based pretty effectively over the next six months, even including that good commercial loan pipeline. Part of the reason for that is, we are going to have some -- we've exited the indirect auto business, and there's going to be runoff in that -- continued runoff in that portfolio. That's a like 100% risk weighted asset that will mitigate some of the growth in the commercial portfolio.

In addition, although it's a lower risk weighted asset, we expect residential is likely going to continue to run off. The vast majority of our production is for-sale. So you take those things together, and we think we are going to grow total risk based pretty effectively.

That's helpful, thank you.

(Operator Instructions). Laurie Hunsicker, Stifel Nicolaus.

Quickly, I wanted to go back to FDIC insurance. When we back out the assessment -- and I'm sorry, I meant to ask you this earlier. The 2Q was $1.75 million, $1.752 million, approximately, versus March with $536,000, and obviously you've got Ben Franklin in there. But was there some other reason for the jump? Because it seemed like a big jump to me.

Yes. There is about a $0.5 million catch-up from Q1. The new rates that came out, we thought they were effective April 1. They were actually effective January 1. So there's about a $.05 million catch-up.

So will that run closer to $1.2 million then?

Yes.

Perfect, thanks.

(Operator Instructions). We have no further questions at this time.

Okay. Well, thank you very much everybody. We really appreciate your time and attention, and we look forward to talking to you next quarter. Thank you. Good-bye.

This does conclude today's conference. At this time you may now disconnect.