Independent Bank Corp (Massachusetts) (INDB) 2009 Q4 法說會逐字稿

Good morning and welcome to the Independent Bank Corp. fourth quarter 2009 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note that this event is being recorded. I would now like to turn the conference over to Christopher Oddleifson. Please go ahead.

Good morning and thank you everybody for joining us today. I am joined with Denis Sheahan, our Chief Financial Officer, who will review our fourth quarter and annual results in more detail after my comments. I'll begin with the usual customary cautionary statement. This call may contain forward-looking statements with respect to the financial conditions, results of operations and business of Independent Bank Corporation. Actual results may be different. Independent Bank Corporation cautions you against unduly 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, we released our fourth quarter and full year results after market close yesterday and I can once again characterize our quarterly performance and annual performance as a fundamentally sound one. Our fourth quarter capped what was a very solid 2009, especially in light of the economic environment. In terms of the numbers, net income in the fourth quarter was $9.1 million, or $0.43 per share. On an operating basis, full year 2009 earnings totaled $28 million versus $25.3 million in 2008. Operating earnings per share were down in 2009 $1.43 versus the $1.61 primarily due to increased provisions, a securities impairment and the cost related to the treasury CPP program earlier in the year.

Our results have been consistent consistently marked by exceptional commercial loan activity, robust core deposit growth and very good credit quality. We've remained profitable, avoided the pitfalls that have hurt so many others. We've continued to pay a common dividend and very importantly we've strengthened our capital ratios and we consider this performance very strong during one of the worst economies in our lifetime. In many ways, 2009 represented a year of much progress and accomplishment.

Our core business lines each continued to grow and generate healthy volumes. For example, commercial lending originations grew to $498 million in 09, an increase of about $100 million or 25% over 2008. And this flow is coming from a high-quality client base and in the form of more conservatively structured loans. And moreover, our current pipeline remains really strong and excellent. Commercial loans now comprise two-thirds of our total loan portfolio and we believe the opportunities in this sector continue to remain outstanding.

Core deposits grew strongly in 09 and this is a direct function of our focused relationship-based approach and in line with our emphasis away from higher cost CDs. Core deposits have now grown to 73% of our total deposits. Our investment management business grew assets under management to $1.3 billion at year-end. This is up to just about pre-crisis levels. And this is of course -- this growth is helped by the market performance of course, but we also had significant new sales in this business as well. Home equity has been a strong product for us with solid loan growth last year. Also residential loan originations nearly doubled over the last two years and came in at around $420 million in 09.

For those of you who follow us, you know that we were among the very first in the country to pay back the CPP funds to the treasury when it became clear that it took on what I will call negative imagery in the marketplace and it really lost its healthy bank association. We have fully integrated the Ben Franklin franchise, which extends our banking franchise presence into the attractive western suburbs of Boston. Results to date as to retention and new business generation have been very, very encouraging. In conjunction with our earlier acquisition of Slade's Bank, the Rockland Trust footprint now covers the key corridors from Boston to Providence and way down into Cape Cod.

Now I'm also very pleased to share with you some of you who may not know this, in the recent Boston Globe top 100 places to work survey, we were rated the number one bank or number 13 overall. The Globe surveys about a thousand companies in Massachusetts in total, so coming out as number 13 overall and number one bank is quite an honor. Our own internal surveys found that 97% of my colleagues are either satisfied or extremely satisfied working here and these scores are terribly important as engaged employees are a prerequisite to engaged customers and leads to the results that I have described. We were awarded once again a valuable tax credit from the government's new market tax credit program related to community lending. This is our third such award and also for the third year it in a row, the organization Audit Integrity recognized INDB as one of the top 100 most trustworthy publicly traded firms. Only 10 of the 12,000 public companies they evaluate have been recognized three years in a row.

But perhaps our most -- achievement that is noteworthy in these difficult times has been our overall stewardship of capital. Most honorably, we grew our tangible common by 100 basis points in 2009 and did it in the old-fashioned way, not by resorting to external equity raising. Heading into 2010, the environment is still fairly unsettled. There are early signs of healing are emerging. Although unemployment while downticking in Massachusetts in November showed an uptick in December. So we expect a lengthy period of slow growth.

There was upward pressure on taxes as state and local governments grappled with the large deficits. So far, Massachusetts has fared better than the national experience and that's because of the diversity of our local economy, but we think the recovery will be slow and we're going to be very cautious and monitor it very, very carefully. Although things are changing in Washington nearly every day, there is a lot of potential for more -- there is a more vigilant regulatory environment, no question about it. Examiners are -- examinations are more intense and there is some increased, although perhaps not as much as it was a couple weeks ago, political risk of some heavy handed legislation. And speaking about regulators, there is no question the bar has been raised, especially regarding capital risk exposures and we feel we are very, very prepared for our future exams.

Looking into 2010, we are going to continue to ensure we maintain very strong capital levels and we are going to very, very closely monitor our risk concentrations and migrations NPAs and classified asset levels, which of course the regulators give extra scrutiny these days. In the same vein, we're going to keep as current as possible in key external data critical to credit evaluations and also mull into values, vacancy rates, of course our financial statements from our customers. We have been very, very disciplined and vigilant and we are going to continue to do so. And of course, going to pay very, very close attention to interest-rate risk as there is a consensus growing about a move upward, but it's at some time in 2010.

Now we do feel we are operating from a position of tentative strength. Competitive turmoil still exists in our marketplace and we continue to expect a benefit from it. Our game plan is to continue to pursue careful and intelligent growth by capitalizing on the opportunities presented to ourselves, to us and to look really towards long-term performance, not short-term, short-term gains. And moreover, should a bank in or near our market area be interested in selling, we'd certainly like to take a look and we continue to be interested in expanding our investment management business through acquisition.

Now that completes my comments. Denis?

Thank you, Chris, and good morning. As Chris mentioned, Independent Bank Corp. reported net income of $9.1 million and diluted earnings per share of $0.43 in the fourth quarter of 09 as compared to net income of $6.8 million and diluted earnings per share of $0.33 in the third quarter. There were no non-operating items in the fourth quarter and one small non-operating item in the third quarter as detailed in a non-GAAP table in the earnings release.

The fourth quarter presented continuing themes of good performance, stabilize asset quality and continued growth in the commercial banking area as a result of in market opportunities combined with sound funding management leading to a solid net interest margin. Asset quality performance was as expected. Nonperforming assets decreased to $41 million, down 8% from the prior quarter. Net charge-offs were $3.4 million in the quarter and $12 million for the year, respectively, for approximately 40 basis points of loans consistent with the guidance provided a year ago. The provision for loan losses again exceeded the level of net charge-offs and the reserve for loans grew to 1.25%.

Excluding the loans acquired at value, the reserve equates to 1.56% of loans. Loan delinquency grew to 1.73% at year end, up from 1.58% at September 30, but consistent with the 1.72% reported at June 30. Importantly, early-stage delinquencies -- that's 30 to 89 day delinquency -- is also in good shape at 91 basis points of loans. Loan growth was also good in the fourth quarter, again dominated by the opportunity in commercial lending. Excluding the acquisition, growth in commercial was 12% in 2009. Decreases in most other lending categories resulted in slow 2009 organic loan portfolio growth overall of 2%.

Deposit growth in the quarter was strong, led by our municipal banking segment. We remain focused on core deposit growth rather than absolute deposit growth as we see this remix of deposits a critical component of managing long-term rate exposure in a rising rate environment, something we will continue to work on aggressively in 2010. Excluding the impact of the acquisition, deposits grew by 4% in total. Beneath this number lies tremendous performance in our organic core deposit growth of 15% and a reduction in CDs of 20%.

The net interest margin was maintained above four percent sign in the fourth quarter as we continue to manage the cost of deposits effectively. Cost of total deposits was 82 basis points in the fourth quarter. Independent Bank Corporation recorded a $2.2 million pretax or $0.07 per share securities impairment charge in the fourth quarter, bringing the total for 2009 to $9 million pretax or $0.30 per share, largely on pooled trust preferred securities. Our remaining exposure is limited and we've steadily been writing these down. We have included a table in the press release for your information. As you can see from the table, the total remaining exposure of all pooled trusts preferreds is $8.7 million. The reality continues to be that the underlying issuer banks of these trusts preferreds are under pressure to preserve capital and in many cases are simply deferring dividend payments.

As Chris mentioned, tangible common equity improved to 6.65% at the end of Q4 representing an increase of 100 basis points since year end 2008, totally from internal capital generation. Let me give you some additional thoughts on capital which comes up a lot in our conversations with investors. Currently, we do not feel constrained by the level of capital to pursue our strategy. Any decision to raise capital will first, depend on the level of commercial loan growth that goes beyond our current anticipation of continued strong growth. Second, whether the new regulatory well capitalized environment needs the industry and banks like us to logically set higher bars for capital. And third, whether highly attractive acquisition opportunities would lead us to raise capital.

Furthermore, of course, if the economy stays weaker than expected, and we see stronger migration into nonperforming assets or classified assets, that too, could logically affect how we approach capital. But again, at this point, we feel we are in good shape in terms of capital. I will now turn to earnings guidance for 2010. As you can appreciate, there is much uncertainty in the financial services industry regarding individual company performance in 2010 in light of the economic weakening and evolving regulatory and political landscape. Yet we continue to feel it is important to share our outlook with our shareholders, recognizing that is a fluid exercise and subject to updates throughout the year.

Our key assumptions for 2010 are continued good loan growth of 4% to 7% in 2010 driven by commercial lending growth of 7% to 10% with continued reduction in the other loan categories to somewhat offset this growth. The deposit strategy is expected to remain one of focusing on core deposits in an effort to effectively manage the cost of funds and provide a mitigant to rising rate exposure. This will result in net deposit growth of 2% to 5% in 2010. We anticipate loan net charge-offs of around $15 to $19 million with loan loss provision of $18 to $22 million. The tax rate should be around 24% to 25%. Net interest margin in the region of 4%. None interest income is expected to be in the range of $39 to $42 million with an increase anticipated decrease in mortgage banking income, increase in wealth management revenue and stable service charge revenue. Non-interest expense should grow 5% in 2010 from the 2009 base, excluding merger and acquisition expense. Keep in mind this 5% growth number includes the annualized impact of the Ben Franklin acquisition.

Given the uncertainty that typically surrounds securities impairments, we do not, as a matter of course, include estimates of further impairments in our ongoing guidance. This does not imply further write-downs are impossible; they are just too imponderables to estimate. However, as an effort to provide some guidance on this point, were we to write off the remaining C-tranche exposure of the pooled trust preferreds, such event would equate to a charge to earnings of $0.11 per share. With that, our estimate of performance is diluted earnings per share for 2010 expected to be in the range of $1.75 to $1.85 excluding any securities impairments.

So we expect another solid year in 2010, however, as Chris said, we are very attuned to risk management, especially in the current environment and in that light, we may take steps from time to time to further insulate and protect ourselves from potential risk even if it means giving up a little bit of earnings beyond the range contemplated in the guidance. Regarding interest-rate risk, while we have included some level of interest rate derivatives among other actions to reduce the risks associated with rising rates, we may decide to be even more aggressive on this front.

Regarding credit risk exposures, we may also decide to trim certain exposures such as securities that could potentially lead to a higher level of stressed assets such as non-performing assets or classified assets. In speaking with many of our shareholders, we understand that consistency in performance, a disciplined risk management philosophy and open and honest communication is what they are looking for. This is very much aligned with how we run our company and believe we have a track record to show it and look forward to continuing to demonstrate that to you. Chris?

Okay, thanks Denis. Why don't we open it up to questions.

We will now begin the question-and-answer session. (Operator Instructions). Mark Fitzgibbon, Sandler O'Neill.

Good morning, guys. I wondered if first you could kind of give us a little update on what you are seeing in terms of vacancy rates and commercial real estate pricing trends in your markets.

Mark, as we're looking for the data, I'll remind you that we operate in a region that has never got frothy. Only a portion of our commercial loan portfolio is in Boston. The remaining is in the outlying suburbs throughout Southeastern Mass.

Sure.

Mark, I'll give it to you sort of by our different markets. First of all Metro South. The summary is that vacancy rates, to no one's surprise, are increasing and the average asking lease rates are decreasing, but I'll give you some data the best that we can. For Metro South office, the vacancy rate went from about say Q2 -- I'll give you -- most current data we have is through the third quarter, so Q2 09, the vacancy rates for Metro South was about 17%, Q3 is about 19%.

Average asking lease rate for Metro South is decreased in the same period from 1950 to about 1875.

And it's peaked. The peak was in first quarter of 08 at 21, so never high.

It's not the frothy sort of hundred dollar per square foot Boston market. And industrial space is actually doing a little better, but certainly the trend is similar. Q2 09 for industrial market Metro South is about 14.5%, vacancy has increased to about 15.5%. And then the average asking lease rate has gone from 580 per foot to about 560.

Metro West, which would be the other large footprint for us, the newer footprint associated with Ben Franklin, office statistics, vacancy went from about 15% to about 15.5% from Q2 to Q3 and average asking lease rate went from 23 to 22. Industrial for Metro West went from 18.5% to 18% vacancy and then average asking lease rate went from 675 to 660.

Okay, that's great, thank you. And also I wondered if you could share with us what your 30 to 89 day delinquency delinquencies look like. I don't think they were in the release.

Sure. Bear with me a second, I have that. I think I mentioned the number mark was like 91 basis points. Bear with me a second.

30 to 89 is 91 basis points.

It's 91 basis points. Are you looking for the dollar amount, Mark?

Yes, I can back into it, no worries.

Okay.

And then last question I had -- on the expense front, you said you expected a 5% growth rate in expenses. Is that sort of growing it off of the fourth quarter base or on the full year 09 base?

Full year 09 and then back out the $12 million of M&A expense.

Okay, great. Thank you very much.

Sure. You're welcome.

Laurie Hunsicker, Stifel Nicolaus.

Yes, Hi, Chris and Dennis, good morning. Just wondered if you had some fill-in numbers on the credit side, TDR's?

Sure, TDR's at the end of the third quarter were $10 million. Of that $3.7 million was on non-accrual; the other $6.4 million were accruing. In the fourth quarter, TDRs were $10.6 million, or $3.5 million on non-accrual's, $7 million accruing.

Okay and of the $7 million, what is the majority of that category, just approximately?

Residential.

Residential? Okay. And then on the charge-offs, do you have a breakdown by category of the $3.4 million?

Yes, I do. The largest for the quarter was commercial --.

Commercial as in C&I?

No, some C&I but also commercial real estate -- I'm just adding here -- but $1.8 million was commercial. Home equity --.

So $1.8 million was commercial. So this is the first time we've seen you take any substantial commercial real estate charges in many, many quarters.

Well, in the first quarter, we had $2 million in the first quarter.

Oh, yes, but that was commercial construction, I'm sorry. So the $1.8 million, was that commercial construction or commercial real estate?

A portion was commercial construction and it was related to -- some of it was related to the charge-off we took in the first quarter. We took another charge-off on it.

On it? Okay.

We are working through that credit.

Okay. And then would it be safe to assume the majority of the rest of the charge-offs then were -- except for small in the consumer and auto side were C&I?

No, I mean I'm giving you total commercial of about $1.8 million in the fourth quarter.

So including C&I?

Yes.

Okay.

And then the rest is, you know, in the indirect auto portfolio, small business, some home equity. Home equity was about $600,000. So it's spread across the other products.

Okay. So of the $1.8 million, do you know how much is C&I related?

I don't have that in front of me, Laurie.

Okay, okay. And then just less question on credit. The C&I uptick in non-performers linked quarter from 3.7 to 4.2 --.

Yeah.

Was there any 1 --?

Laurie it's only -- it's only obviously a half $1 million increase. I can give you the largest one in there was a $300,000 minimart and gas station. So you know there's nothing trend wise there that jumps out at us that says the increase of $500,000 is a particular negative trend.

Okay, no, I just wondered because all your other categories had an improvement, which was great. Okay.

It was good stability for sure.

Very good. On the income statement, this sort of goes more to the other other line, both in other other and other other expense. They both looked higher, I mean substantially higher linked quarter. Was there a nonrecurring item there or asked a different way, I guess do they just met each other out or is there anything that we need to know in terms of forward modeling?

Some, yes, nonrecurring, some recurring. In other non-interest income, the biggest categories -- and some of this is in the text of the release Laurie to give you just the exact wording -- other non-interest income was up $1.3 million on a linked-quarter basis. We did gain on the sale of an OREO property of $586,000. We had some tax credits, $400,000 and revenue from our loan level swap program of $300,000. The non-recurring component there would certainly be the gain on the sale of OREO. We would not expect to have that kind of gain every quarter. Certainly the loan level swap program is something that is of a recurring nature, it just happened to be more in the fourth quarter than it was in the third period. And the tax credits that I mentioned, the $400,000, those would not likely recur every quarter but certainly over a 12 month period we can assume that we would have a similar level of tax credits.

Okay.

Other non-interest expense was up $2 million, various components -- advertising was up almost $600,000. That's really timing. Some of our Q3 initiatives and advertising fell into the fourth quarter. That would certainly be of a recurring nature, although not necessarily at that level. Legal loan workout and OREO valuations, revaluation was about $600,000 in the quarter. So that's associated working delinquencies, working nonperforming assets to get them corrected and moved out. Those were the primary variances within that $2 million, a number of other smaller items.

Got it, okay. So it's basically -- okay. I mean -- okay. That makes sense. I guess last question, Chris for you, and I guess we ask this every quarter, but maybe if you could touch on where we sit right now with respect to looking at forward M&A in the New England environment and premiums paid. Obviously haven't seen any FDIC transactions yet. So what's your thought is on paying for premium M&A and any changes you are seeing, any sort of thoughts generally on the landscape would be great.

Well, I'll point out -- it's obvious that so far there haven't been any FDIC failed institution transactions in our area and nor do we really anticipate any that would be in our marketplace. So there has been a lot of excitement about that in other parts of the country. We're just not seeing that here and that is certainly a reflection of everything that we talked about before about how our area really didn't get -- rise to spectacular heights as in other areas of the country. Our position on M&A is that it continues to be opportunistic. We are not a rollup strategy bank, we are not depending on it. We are not looking and hungry for the next deal. I mean our core business, as we described, is doing very well.

We are generating a lot of bid growth or chemically good growth organically with the business model we have. But should somebody raise their hand like they have in the past, like Slade's Ferry and Ben Franklin and Falmouth, we certainly would love to be a good table. And in terms of pricing, from our perspective, as our track record indicates we are not going to be paying what would be characterized as a strategic premium on an acquisition. We are going to price it where we see the value to our shareholders.

Okay, great, thank you.

(Operator Instructions). Damon DelMonte, KBW.

Good morning, guys. This is actually [Timor Brizola] with KBW. Just have a couple questions. Regarding the commercial real estate growth achieved during the quarter, could you just talk about some of the geographies it was achieved in and is there any kind of particular industry that is was focused on?

We continue to lend only in and very adjacent to our market areas. So when you think about our loan growth, you can think about it being reasonably well distributed from just over the border in Rhode Island, the Providence area, through our footprint and into Boston. And so no nothing different than what we've been doing for years. And that would go for the asset types as well, fairly well distributed over a number of asset types. I will say that the -- I'll use your question as an opportunity to also comment on that over the last 12 months, we really have been in a position to structure loans in a much more, what we would believe conservatively, conservative fashion or we have lower LTV's, there's more equity in the deal. We have stronger covenants both in the debt service and liquidity. We look for full relationships where maybe a couple years ago we generate an asset, just an asset. We look for full relationship now. And also interestingly during this difficult time with the conduits and life insurance companies really not being a presence anymore and the larger banks diminishing their presence, we've been able to fill in some of the asset classes that we had not so been so "competitive" in and that would include apartment buildings, medical office buildings for example.

Okay, great. And was much of that growth seen across Ben Franklin's footprint or former footprint?

I would say that probably the -- sort of on a weighted basis, there has been less growth in the Ben Franklin footprint than the remaining footprint, but as we sort of integrate them and gear up there will be probably equal growth going forward.

Okay, great. As far as the reserve levels, you guys have had generally very good asset quality throughout this whole credit cycle and this quarter it actually improved linked quarter. Yet reserves continued to build. How comfortable are you with current levels? Do you expect to continue building the reserves going into 2010? Or should we start to see charge-offs top provision levels going forward?

Well, our plan is -- Timor, this is Denis. Our plan is to -- consistent with our guidance -- is we expect to out provide the level of charge-offs in 2010. I mean our assumption is just as we have done in 09. And just to reiterate, we anticipate charge-offs of $15 to $19 million with a provision of $18 to $22 million so that would imply a modest reserve build.

Okay, great. And one more question on the -- within your non-interest income, the mortgage banking income line item seemed to jump pretty high linked quarter. I realize that last quarter is probably a little low. Is this a sustainable level going forward? Or is there going to be some kind of fluctuation in the coming quarters?

I would say no, it's not a sustainable level going forward. And first of all, the primary reason for the variance in the linked quarter basis was Q3, as one can understand with the amount of refinancing activity, it's been building throughout 2009 and particularly in our third-quarter, we took a charge against our servicing asset, of about $500,000 in Q3. So on a linked order basis, the comparison is somewhat exaggerated. But we expect for the year mortgage banking revenue to be down given, just given, that we don't expect the same level of refinancing activity in 10 as happened in 09.

All right. Okay, perfect. Thank you very much.

Sure, thank you.

Mac Hodgson, SunTrust.

Hey, good morning. Denis, you talked about, at the end of your comments, about risk management and any potential changes maybe to result -- as a result of I guess how you'd managed your interest-rate risk or credit risk. Could you remind us how the company's positioned today for a rising rate environment and what sort of changes you might anticipate making if you guys decide to do that?

Sure, Mac, we've historically been liability sensitive and we still have some liability sensitivity, but we manage our -- we are obsessed about interest-rate risk and I think we manage it very effectively. If you look back to -- from mid-2004 to the present, we've maintained our margin between 3.84% and slightly over 4%. We think that's pretty good given the volatility that has been experienced in interest rates. We're very disciplined in terms of deposit pricing. We lag rates when we have to.

So while there is some modest liability sensitivity, we work very hard. Now that said, I mean obviously the longer that you stay in a low rate environment like this and it's not just that rates are down but they're at an absolutely low-level, every fixed-rate asset you put on the books today is a problem in the future. So we need to be very consciously doing what we can to mitigate that kind of risk when rates rise and we've been through this before and we know we can handle it again. I am merely pointing out here that should this become a really prolonged and lengthier environment of low rates, we need to take more and more actions to protect the company when rates rise. That is simply it and we have protection built into our estimate that we provided you but I'm merely indicating that if it as a year -- a 12 month period is a very long period of time, especially in this type of an economy and we may take further actions from an interest rate risk perspective and also from a credit risk perspective.

Okay, great. One last question, most of mine I think were already addressed. On the capital, you all have done a great job building capital internally and you mentioned your comfort with position now. Remind us if you have -- I don't know if targets the right word, but at what tangible common equity or regulatory ratio level would you feel the need maybe to try to either slow growth or bolster capital a bit through a common raise or something else? Maybe what is the comfort level?

Well, that is certainly a very fluid question in today's environment. It isn't too long ago that 6% plus tangible common equity ratio we would have been talking to you about share repurchases. Now we are absolutely not talking about that today and we are at 665 and we anticipate being in the 700 to 710 region by the end of 2010. We think that's a very comfortable level of capital for us. We think it's very achievable. So we don't think there is a need to supplement our capital base. Aside from the reasons that I laid out as part of my comments on the call. In terms of the downside, clearly if we were for some reason down in the fives, even sub 5%, one would have to be realistic in this environment and say that you'd likely have to slow growth or take some other form of action.

Okay, great. Very hopeful, thanks.

Operator Instructions). This concludes our question-and-answer session. I would like to turn the conference back over to Independent Bank Corporation management for any closing remarks.

Thank you everybody for your interest and support during 2009 and we look forward to talking with you again in three months. Thank you. Bye.

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