Independent Bank Corp (Massachusetts) (INDB) 2011 Q1 法說會逐字稿

Good morning and welcome to the Independent Bank Corp.'s first-quarter 2011 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 also note this event is being recorded.

I would now like to turn the conference over to Chris Oddleifson.

Good morning everyone and thank you for joining us today. I am accompanied, as always, by Denis Sheahan, our Chief Financial Officer, who will elaborate on our financial results following my comments.

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 unduely 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.

I'm very pleased to tell you that we kicked off 2011 in excellent fashion with terrific first-quarter results. As I imagine you all know, net income for the quarter was $11.2 million, which equates to $0.52 per diluted share. This represents earnings growth of 21% and EPS growth of 18% over the prior year.

Our business fundamentals remain as strong as ever and the consistency of our financial performance and ongoing business momentum really gave us the confidence to approve a 6% increase in our dividend last month.

The first quarter was marked by a number of positives. We had solid loan growth, higher net interest margin, increased capital ratios, favorable credit trends, strong core deposit levels, flat expense levels. I will touch on a few of these, and Denis will add further comments.

Once again, our commercial loan activity has been strong. Our commercial portfolio grew at an annualized rate of 9% since year-end. Growth was generated in both the C&I and commercial real estate sectors. And this is not a one-quarter aberration, but rather extends our track record of strong loan growth over many quarters now.

Our loan pipeline remains strong, as we continue to capitalize on our reputation in the marketplace for reliability, service quality and product depth.

Home equity remains another strong performer for us. Loan outstandings grew by over 25% annualized in the first quarter. Origination activity has benefited from our aggressive marketing and product promotion endeavors.

So we feel very encouraged by what we have been able to accomplish in our lending and new business generation efforts over the last few years, especially in an environment where much of the industry, particularly smaller banks, are really struggling for any kind of meaningful volume.

Turning to the balance sheet. It is in excellent shape and a source of considerable strength. Our liquidity position is fine, with core deposits comprising over 80% of total deposits. Our credit posture is strong with net charge-offs declining for the third consecutive quarter, with nonperforming loan levels stable, but over 40% below where they were a year ago.

We continue to prudently grow our loan loss reserves in light of the prevailing uncertainty and to accommodate loan growth. Our capital levels grew nicely in the first quarter, up about 3% since year-end. Tangible book value grew by the same rate as well. Every key capital ratio improved in the first quarter.

I would like to reiterate that throughout the downturn we never felt the need to raise incremental capital, being very sensitive to shareholder dilution, nor do we feel any compulsion to do so now.

Our view on the macro picture is that there is really no dramatic shift in sentiment, but encouraging signs continue to emerge around the edges. National unemployment has improved, and it has at the lowest rate in two years. There was a net job growth in the state. There is no question our basic education, health service and technology-based industries have afforded us a resiliency when contrasted with the national picture.

The housing scenario does remain a mixed bag, with a much more prolonged recovery period being expected that continues to weigh on the collective psychology.

Turning back to our own franchise, we definitely aren't sitting around relying on long-awaited economic recovery to sustain our [additional] momentum. We continue to invest in our priority businesses and look for ways to further engage our customer base.

For example, we recently unveiled an exciting array of mobile banking services that captures the latest in technology and convenience. Our [M] deposit application allows customers to scan checks from their handheld devices to make direct deposits. We are among the first banks in New England to offer such a service, and one of the few nationally to extend it to business customers.

Other features provide for tracking of account activity, transferring of funds between Rockland accounts and creating text alerts.

We are looking to expand our network of commercial banking centers to further exploit our unique presence in the Boston and Providence and down through Southeastern Mass and Cape Cod footprint. These areas are densely populated with numerous small and midsized companies where we can capitalize on our relationship building skills.

We continue to grow our investment management business. Assets under management now total just over $1.6 billion. So all in all I would say the state of the franchise is in great shape. We really like our competitive position within the industry. We are at a nice sweet spot, neither too big nor too small.

Big enough to enjoy the advantages of scale and have the ability to broaden our product set so we can grow with our own customers as they get bigger, but small enough to obtain a local feel and touch of a community bank, which creates enormous loyalty with customers.

We continue to look at ways to grow our franchise and add value, both on a de novo and a M&A basis, but as in the past, we remain very, very disciplined on both fronts.

I think with that I will end it, and I will hand it over to Denis.

Thank you, Chris, and good morning. Independent Bank Corp. reported net income of $11.2 million and diluted earnings per share of $0.52 in the first quarter of 2011, as compared to net income of $11.8 million and diluted earnings per share of $0.56 in the fourth quarter of last year. On a year-over-year basis net income and diluted earnings per share improved 21% and 18%, respectively.

I will review a number of key topics now. We are very pleased with this quarter's performance and believe it sets us up nicely for the year. As I indicated on last quarter's call, our first quarter usually trends notably below the fourth quarter for a variety of factors, and then performance picks up again throughout the year.

Key performance ratios were strong in this first quarter, with return on average assets just a hair under 1%, return on equity over 10%, and the net interest margin rising to 4.02%.

Asset quality trends remain excellent and top decile among banks in the nation. Net charge-offs decreased again in the first quarter to $2 million or 23 basis points of loans annualized. And the provision for loan losses was reduced to $2.2 million while still adding to loan loss reserves.

Nonperforming assets increased modestly in the first quarter to 73 basis points of assets, under more than 30% below where they were a year ago. In addition, delinquency trends were stable, with total loan delinquency at 1.19% of loans, and early-stage delinquencies, the 30- to 89-day bucket, increasing modestly to 71 basis points of loans.

As Chris discussed, loan growth was again strong in the first quarter in both the commercial and home equity portfolios. Commercial loan growth is largely driven by opportunities we see from larger institutions whose customers continue to feel disenfranchised. Our pipeline of new commercial opportunities has rebuilt nicely in the first quarter with the raw pipeline at its highest level in the last 12 months.

We are optimistic this will move forward into the approved pipeline, which is up 18% from year-end, but low relative to most of the last 12 months. In summary, activity is better than we thought it would be coming into the year and could result in good closings in the coming quarters.

Deposits were stable in the quarter, down about 1%, and reflect our fairly typical seasonal declines. Importantly, we kicked off a major advertising campaign at the beginning of the second quarter, focused on increasing our awareness and in capturing depositors tired of the increasing fees leveled by competitors. Our hope is this campaign will serve to bring new consumer and small-business households to the bank. And we will update you on our success in coming quarters.

The net interest margin improved to 4.02% in the first quarter, as we experienced further reduction in the cost of funds. Our total cost of deposits is now down to 40 basis points. Our expectation is we will hold the margin around this level between 3.95% and 4.05%.

Noninterest income decreased 12% on a linked quarter basis due to reduced loan level swap fees, reflective of the robust prior-quarter volume and lower mortgage banking income due to the end of the refinancing wave.

On the positive front investment management revenue grew 9% on a linked quarter basis and 18% year-over-year, as we continue to make great inroads in this important business.

Noninterest expense was flat on a linked quarter basis, with variances seen in higher occupancy cost due to snow removal and lower other expense due to lower loan collection expense.

It should also be noted that the first quarter included the absorption of a higher tax rate, mostly due to the expiration of some of our new markets tax credits. The rate in the first quarter was 27% versus 23% last year.

Tangible common equity increased again to 7.22% at the end of the fourth quarter. And tangible book value also rose to $15.26, continuing its steady growth.

I will now comment on earnings guidance for the year. Based upon the strong first-quarter performance, and an improved outlook for both credit cost and loan growth, we are prepared to increase the annual diluted earnings per share estimate from the $2.02 to $2.12 range established in January to a new range for 2011 of $2.07 to $2.17.

That concludes my comments.

Thank you very much. Operator, I think we are ready to take questions.

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

I was wondering if you could maybe share with us what you think is driving that uptick in home-equity balances? Is it people drawing down their lines or is it new product or some promotion that you're running?

It is primarily driven by the promotion that we are running in the marketplace, and combined with our direct mail efforts.

Then, secondly, there was about a $3 million increase in REO balances. Is that one loan or several loans, or what drove that?

It is a number of credits, both within the commercial category and a couple in the residential area, but it is nothing that we are overly concerned about.

You referenced the pipeline being real strong. Could you share with us the size of the various pipelines?

Sure, I would be happy to. Just on a follow-up, before I do that on your question relative to home equity. The majority of the home equity volume in the first quarter -- and it is also true with the fourth quarter -- was refinance, largely first position home equity loan refinance.

The second-largest category was for home improvement, which is an unusual given the time of the year. There typically is some home-improvement begun here in the first and into the second quarter.

In terms of the size of our pipeline, bear with me a moment. The raw pipeline, this is now not all approved, but the raw pipeline -- I know it is over $600 million. We will have it here for you in a second. Yes, $630 million. The approved, but not closed, is $140 million.

Lastly, with respect to the asset management business, as you continue to grow that, is it more likely that you will do lift-outs of people in teams or is it more likely you will do acquisitions to grow that business?

That is a good question. On the acquisition side is the accounting associated with acquisitions over the last year has just become really onerous. You essentially have to take a capital charge that is the entire price, including any earnout. So it makes it really tough.

We are always looking for good people, both individuals and potential teams. We have -- and we are, I would say, we are working at that. I would probably say we would be hiring people prior to making any sort of acquisition given the economics.

Thank you.

Mac Hodgson, SunTrust Robinson Humphrey.

Denis, on the revised guidance up about $0.05, that is obviously incorporated in first-quarter results and then the higher expected margin. Are there any -- you might have said this, but are there any other changes to the previous guidance metrics you gave in the fourth quarter call?

Certainly we expect loan growth to be up a little better than we anticipated. I think we talked about 2% to 3% loan growth in the first quarter. We are now expecting closer to 4% to 5% for the year. Commercial was stronger in Q1, and we see the way this pipeline has built very nicely -- rebuilt. Because we had such a strong fourth quarter in commercial it chewed up a lot of the pipeline, but our team has done a really good job of rebuilding that. So we feel pretty good about exceeding our original expectations in terms of loan growth.

Then credit cost on -- you know, credit cost will -- I would not say -- we are not going to be at the $2 million level per quarter. Q2, Q3 may be up, Q4 down. The first quarter was extraordinarily low in terms of credit, but we do think that credit cost will be lower than we originally guided. Things are looking pretty good on the credit front.

Yes, it was a great quarter. I think I recall in the release there might have been maybe a change in how you report interchange income.

Yes, that's right. We split interchange income out of service charges. It is consistent with the call report now. We split -- everything was grouped in service charges before. We are now trying to isolate service charges and interchange and ATM fees.

There also was a component of interchange that was net previously that we have now grossed out between noninterest income and noninterest expense. So it is a little difficult on a comparative period basis, but it will make sense going forward.

How much was that, if you have it, that was --?

I think it was $300,000 quarter to quarter of a difference because of the reclass.

Okay, great. Chris, you mentioned you are looking at to expand the commercial banking centers. Are there plans in place to open new offices or plans in place to hire a certain number of new bankers in those markets you mentioned, like Boston, Providence, etc.?

Yes. I don't want to get too specific here, but yes, we have active plans and we are working them right now. And as we open up we will certainly make announcements, but we are working it very actively.

Okay, great, thanks.

We really think -- the comment I made that we are neither too big nor too small, we are -- sort of the [growth] was just right -- the porridge is not too hot, not too cold here -- to really take advantage of some of the marketplace disruption and the confusion that continues today, believe it or not.

Okay, great, that's helpful. Thank you.

Laurie Hunsicker, Stifel Nicolaus.

Just to follow up on the question that was just asked, linked quarter your occupancy had a big jump. Is there -- can you just update us on that? I assume some of that might have been snow removal, but --.

It was largely snow removal.

It was largely snow removal? Okay. Then in terms of your de novo branches, what could we look to see you guys do this year, if you don't find an acquisition?

We are less actually interested in -- we are actively looking for de novo branches, but equally we are also looking for LTOs sites and so on, and potentially nontraditional branches.

The idea of building $3 million or $4 million branches in expensive sites, and having them pay off in five or six years is -- we are going to do that in select locations, but we are also going to be working some other methods as well. And more later.

Then just remind us, in terms of whole bank deals, how far west will you go in Massachusetts?

We are very opportunistic. We look at the population centers, and I think depending on what is available and the pricing, we look at it all. What we probably wouldn't do is go into sparsely populated low growth areas which, you know, there are a lot of in Massachusetts. But when you think about going west, there are a couple that -- if somebody were to raise their hand, we would definitely want to be at the table.

And you definitely have the currency. So another question going back to noninterest expense, with the change in FDIC, what savings are we going to expect in terms of FDIC cost?

Do you guys happen to have that? Let me look at the budget. It is coming down in the second quarter, I think as you know. We will just pull a number out of our budget here.

We are expecting a total for the year of just under $4 million or $3.8 million. Our run rate in the first quarter was almost $1.3 million. It will drop to about $800,000 per quarter for the rest of the year.

That's great. Then just going back to the snow removal for a second, so snow removal costs in the quarter were about $600,000?

$650,000, yes.

We are thinking about issuing shovels next year.

I mean, the back of the envelope you could even pretty easily be above your 2.17 new guidance. I guess you don't really comment on the new guidance.

So one last question, just going back to loan loss provision, because that is the other kind of swing factor here, and obviously the substantial improvement in your credit. It just looks great, low charge-offs. As we look to see that line jump around in 2011, it is still going to probably stay with the 2 handle?

What do you mean stay with the 2 handle? You mean $2 million per quarter?

In other words, right, so it is $2.2 million for the first quarter.

I will give you -- why don't I give you guidance for the provision for the year, if that would be helpful.

That would be great.

We think in the region of $12 million to $14 million is a reasonable range. We are not going to -- the first quarter was very good. But you can have sort of a lumpy commercial real estate credit where you take a charge-off and the charge-offs go up into $3 million, $3.5 million range, perhaps back down again. So we think for the year in the $12 million to $14 million range is reasonable.

Then when you look at the bigger reserves to loans do you have a target in terms of where you would ideally (multiple speakers)?

No, we don't benchmark a target for reserves to loans. It is really -- and you certainly want to account for loan growth, but we are not trying to hit a number there.

Okay. Great, those are all my questions. Nice quarter. Thanks again.

David Darst, Guggenheim Securities.

Could you comment on your funding strategy for loan growth? And I guess how it relates to the marketing campaign, do you think you'll have to use some CD growth at a little bit higher cost to fund some of it?

Well, we certainly are engaged in both managing the cost of our deposits very carefully, but also we think there is opportunity for us to grow deposits. So this time of year is typically a low for us, so we will have the seasonality kick into the second quarter and help us out somewhat with deposit growth.

But, also, we are going to be focused on, both through this campaign which is focused on consumer and small-business deposits, but also in our commercial business very actively with our cash management services. Continuing to grow those really good DDAs. We have a wonderful mix of deposits. That is what really drives our cost of deposit is that DDA that comes out of the commercial business. So we are going to be very, very focused on continuing to grow deposits this year.

Will we grow CDs? That haven't been a strategy for us recently. We certainly have the capacity to do that [with] a very strong distribution network. We know if we want to grow CDs, we can. But that is not a focus for us right now. We are more focused on core deposits.

How about any FHLB advances, or will fund any of the growth with any declines in the securities portfolio?

We have lots of capacity to do FHLB advances, and that is a good way to manage the interest rate risk associated with some of our more fixed-rate loans. We have been choosing to mitigate the interest rate risk in those portfolios through loan level swaps, largely in the last couple of years. But we have plenty of capacity at the home loan bank. We may do that at some point, but we certainly don't feel compelled to it.

We have lots of capacity. We like that capacity there for bursts of growth when it may come, but we are not feeling particularly compelled to do that at the moment.

How about will you fund any of it with the securities portfolio?

No, the securities portfolio, it is around 12% of assets. It is pretty low. We think we will probably maintain it around that level. There's not a lot of room for it to go below that, I think you probably agree.

Right, okay. Then so as you have more commercial and CRA growth should we see more growth in the interest rate derivatives this year?

We would like to think so, yes. But they're -- not all loans and not all borrowers are appropriate for interest rate derivatives. But we like using them. We think it gives us the opportunity to offer a good longer-term fixed-rate credit to our customers and provides the bank the opportunity to get at the variable. So we like that strategy.

But we can't use it in all instances. In the instances that we don't use it, we would consider other forms of funding, whether it be core deposits, or perhaps wholesale funding, to your earlier question, to mitigate interest-rate risk.

(Operator Instructions). Mike Smith, Diversified Capital Holdings.

I had a specific question, maybe you could comment on it. Regarding in January, I think it was towards the end of the month, it looks like there was some filings in the SEC by Polaris Capital and BlackRock.

Yes, filings by BlackRock, yes.

What is your question?

Could you comment on that at all or bring some light to the situation? I believe there was Polaris Capital also out of Boston, could you comment on that?

The filings really does represent their ownership level of Independent Bank Corp. BlackRock as an institution, you may or may not know, they already had a position in us through an acquisition that they did from Barclays of Barclays index business. When you aggregate those two relationships together, now under BlackRock, they become a meaningful shareholder -- a very meaningful shareholder of Independent Bank Corp. -- around the 8% level.

It is as simple as that. And we are not alone in that, both BlackRock and the Barclays funds had significant stock ownership in small-cap financial institutions. When that acquisition occurred there were many institutions where BlackRock bumped up right against the 10% level.

Polaris is over a 5% shareholder in Independent Bank Corp. They also make their filing. There is nothing to read into that. They are both good organizations, and we know them well.

No, absolutely, I wasn't inferring anything. I think, if anything, it is a positive to show what a great job you guys have been doing.

Thank you. Thanks for the question.

Bryce Rowe, Robert W. Baird.

Just to follow up on the deposit campaign, obviously targeting the core deposits, is there a particular product that you are offering? Is there a teaser rate that comes with that? And then what is the cost of that advertising campaign that we should expect later this year?

This is Chris. The real emphasis of the campaign is no fees, and positioning against all the nuisance fees that are coming from the larger competitors. We are finding that really it is highly resonating with folks in our marketplace, and they're opening up a variety of accounts from PDAs to savings and some CDs.

It is early days yet. We just kicked off here in early April, but it is focused, as Chris said, around this notion of the consumers and small businesses being irritated by the fees that are being leveled by particularly the larger organizations.

In terms of cost this is a significant campaign for us. We have budgeted for our advertising expense to be up 73% this year. This campaign is over $1 million in spend associated with this campaign, so it is a big, big campaign for us.

They are great ads.

Good, that sounds good. On the home equity side, can you guys comment on the number of households that have been added? I assume you're taking some marketshare from some folks, as well as having the home improvement increase here in the first quarter. Anything to -- any color around that would be helpful.

I can give you a sense of the -- I don't have the household numbers for home equity. I can give you the number of applications and closings. It is around -- if I just add it up here quickly -- about 800. Does that sound about right? Can you see there? I am just trying to total them up. About 800 different separate loans and line closings in the first quarter.

From a quality perspective it is really good. It is remarkable the quality of the production. In the first quarter the weighted average combined LTV of our production was 56% with a weighted average FICO of 776. So we are targeting here very effectively.

The portfolio overall has very similar characteristics. The total portfolio weighted average combined LTV, 55%, weighted average FICO, 761. And just to remind you, we revalue using automated methodologies twice a year. We last did it in November, and we re-score every quarter. So this has been a really, really strong performing portfolio for us, and we like this business a lot.

Okay, then last question for me. That was very helpful. Last question for me -- you guys talked last quarter, I think about some intensifying competition on the commercial side from some of your larger competitors. Any change in competitive dynamics there or is it still around the same level of competition that you saw over the last six months?

I would characterize it as steady and more intense than six, nine months ago.

And the competition, Chris, is coming on the pricing side of things or is mostly (multiple speakers).

Yes, it is mostly pricing, Bryce. I think some of our banks are waking up and saying they need to have [this] to actually grow. And since they had so much disruption, the one thing they have to offer is price.

But despite all that we have had good growth at prices that we find completely adequate. And we have a strong pipeline. So we are not terribly concerned about it right now. Although it is more -- competition is more present than it was during the really gloomy days.

Thanks, I appreciate it.

Damon DelMonte, KBW.

If you guys could just give us a little color on your commercial real estate growth that you have been experiencing, kind of maybe what industries are you seeing this in, and what is the typical size of the loan?

Sure, I can tell you by industry pretty readily. We have had good growth in retail in both commercial real estate and C&I. Some -- also in commercial real estate non-owner occupied -- I am looking at some of the larger credits here -- also was good in the first quarter. So those are generally the categories that we've had, retail and non-owner occupied real estate.

What is the typical size of the loans that you are writing?

It is all over the map. It ranges from smaller multi-family kind of a loan up to retail plaza anchored by a major supermarket that could be in the $10 million, $11 million range. So it ranges.

Okay, that's helpful. Then with the home equity growth that you experienced this quarter, can you provide a breakout between how much of it was new originations and what percentage was a draw down on existing lines?

I think we have -- most of it was new originations. I can tell you the usage on our lines is up modestly from a couple of years ago, but it is still in that 50%, 55% range. It hasn't grown extraordinarily. Do you happen to have that? No. I can get back to you with that. But it is mostly new originations, not draw down on lines.

That is very helpful. Then, I guess, just lastly, could you guys give us an update on your outlook for the M&A environment in the greater Boston area? I guess for, one, are you seeing more or hearing more chatter, more deal books coming across your desk?

For two, are you guys optimistic that you could participate in something in the future?

Well, [we can comment], you know, Wainwright was sold to Eastern, and Danvers was sold to Peoples. And we would love to be at the table opportunistically should other Boards decide to sell. That is all we really can say right now.

Okay, fair enough. That is all that I had. Thank you.

Bernard Horn, Polaris Capital.

A couple of minor housekeeping items. The first is just on the comment you made earlier with respect to advertising, it sounded like you said it was going to be up about 77% from last year. I think last year it was just over $2 million, if I've got that right. So are you saying that it is going to be a 77% increase on top of that, if that was -- did I get that right?

Yes. That's correct.

Then on the --.

It is 73%, in that ballpark.

73% increase. Okay, then the other question was on the FDIC assessment. It looks like you are still booking about the same level as last year. And do you expect that to change, I think it is after September 1, when the new ratebase starts to rollout, or the new regulations I meant?

We do expect it to come down to about -- from the current level, which is around, I think, $1.2 million, $1.3 million to about $800,000 a quarter going forward.

That will -- but so for this year that will only result in a savings for one quarter at that level.

I think it is actually -- no, I think it is earlier than that. I think it is in the second quarter. End of the second quarter we would begin to see that savings.

Oh, so you will see it in the third and the fourth quarter.

Yes.

So roughly $1.6 million plus the $2 million a quarter for the first two quarters. Yes, about that. Okay, so I will take the first number for the first and second quarter and then $800,000 after that. Okay, that's all I had.

It may even be that the FDIC insurance -- and I can get back to you on this -- I think it starts in the second quarter, the improvement.

It begins in the second quarter?

Yes.

For some reason I thought I read that the invoices don't go out until September or the end of September.

But they are effective -- I think they are effective the second quarter.

I understand now. Okay. It could be more than two quarters is what you are saying.

Yes, and I will doublecheck that, and it is any different I will get back to you. But my understanding is the invoices go out later, but they are effective for the earlier period.

I understand now.

For the second quarter.

Okay, great. That is a big (multiple speakers).

So $1.3 million -- our expectation is $1.3 million for the first quarter and then $800,000 a quarter for Q2, Q3 and Q4.

Okay, that is helpful. All right. Otherwise everything seems good on our side. Thanks very much for a great quarter. And I will talk to you next time.

(Operator Instructions).

Okay, that is it, operator?

That is it. I am going to turn it back over to our speakers for any closing remarks, gentlemen.

Well, we thank everybody for their interest and support, and we look forward to talking with you after the second quarter. Have a good weekend. Bye.

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