Independent Bank Corp (Massachusetts) (INDB) 2011 Q2 法說會逐字稿

Good morning, and welcome to the Independent Bank second-quarter 2011 earnings conference call. All participants will be in a listen only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Mr. Chris Oddleifson. Please go ahead sir.

Thank you, and 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.

But before I start I want to say 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 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, well, we continued our positive momentum into 2011 with another solid performance in the second quarter. Our net income came in at $11.1 million or $0.52 per share. The bottom line did include modest securities gains that contributed $0.02 to EPS, which we generally don't consider a part of operating earnings. Even on that lower basis we came in well ahead of last year's $0.38 per share.

Once again, the quarter was marked by very strong customer volumes emanating in our priority businesses. Our commercial banking unit is continuing its great momentum. Commercial loans grew by a resounding 15% annualized rate in the second quarter. Much of this is driven by the C&I sector, where we continue to add quality names to our client base.

The commercial real estate portfolio grew nicely as well, and we continue to see good, well-structured deals. Our overall commercial pipeline is strong. And this trend is not an aberration, but one in a series of double-digit growth quarters in our commercial portfolio.

And, importantly, I can assure you that our success here is not coming from any relaxation of credit standards on our part, rather it is a direct result of our focused efforts over the last two years to cultivate and grow this business. Our emphasis on serving as a reliable source of credit through thick and thin, maintaining high visibility in the marketplace and adding experienced lenders to our ranks is really paying off.

The commercial business is definitely a competitive strength of ours that we intend to keep investing in and capitalizing on. Towards that end we are contemplating various initiatives, such as expanding our [way] of commercial loan centers into other key markets, adding proven, seasoned lenders or teams to our cadre of relationship managers.

Overall loan growth was also helped by a steady upward trajectory of our home equity portfolio. It grew by over 8% annualized in Q2.

Moving to deposits, the picture in the second quarter was very encouraging. Total deposits grew by nearly 6% unannualized over first-quarter levels. Core deposits lead the way once again and now stand at 82% of the total. Growth came from all segments -- retail, corporate and municipal.

We kicked off our major brand marketing campaign across a range of TV and print media earlier this year. It is generating a terrific response. Its centerpiece is a new word, freeness, meaning that we do not have all of the nuisance charges that customers detest.

We also hired a Chief Marketing Officer, Mark Gibson, to lead our combined branding, marketing, product management and PR activities. Mark brings over 25 years of banking experience from larger financial institutions and he joins our executive leadership team.

Our other high priority business, investment management continues to achieve considerable progress as well. Revenues are up 15% for the first six months and assets under management have reached $1.7 billion.

Turning to the balance sheet, we continue to be in excellent shape here too. NPAs continue their downward trajectory. Net charge-offs and provisions were up in the second quarter, but trends here are inherently lumpy and we have not altered our original assumptions for the full year.

Delinquency rates fell within the quarter as well. Capital ratios are healthy and will remain well above regulatory guidelines. So all in all a good quarter.

Our performance track record has not gone unnoticed. Last week Fitch upgraded our long-term issuer rating, citing that consistency in our financial performance, solid credit quality and liquidity, and our good core funding base. And, needless to say, we were very encouraged by this announcement.

I always have some commentary on the macro picture on these calls. In terms of our overall posture, we remain heavily in the middle between the rose colored crowd and the doom and gloomers. We do stay grounded within our current reality. Fortunately Massachusetts continues to paint a better picture than the nation at large.

Our economy grew at a 4.2% last year. Unemployment for this state [is running] below 8%. And actually the Boston area unemployment rate is below 7%. We are reflecting the resilience of some of our indigenous industries.

We are also seeing the beginning of a revival of some stalled large-scale construction projects in the Greater Boston area. If the housing picture does remain a model and real sustainable growth in our region ultimately depends upon a fundamental improvement in the national picture.

For us we are certainly not waiting around for external environment to get better, we are generating a lot of good momentum. We are focused on growing our customer base and investing in our franchise.

My colleagues are really engaged and doing a fabulous job in enhancing the Rockland Trust franchise. In fact, our most recent internal survey, 98% of my colleagues expressed themselves of either being satisfied or extremely satisfied working at Rockland Trust. And it is an extraordinarily high number.

So on that very positive note, I will end it here and hand it over to Denis.

Thank you, Chris, and good morning. Independent Bank Corp. reported net income of $11.1 million and GAAP diluted earnings per share of $0.52 in the second quarter of 2011 as compared to net income of $11.2 million and diluted earnings per share of $0.52 in the first quarter of this year.

The second quarter, as Chris mentioned, included security gains of $723,000 pretax or $0.02 per diluted share. On a year-over-year basis operating earnings improved by 24% to $1.02 per diluted share.

Key topics in the second quarter. We are very pleased with this quarter and the year-to-date performance and feel we are on a really good track for the year. Loan growth, deposit growth and asset quality trends are exceptional, and I will comment on each of these separately.

Key performance ratios were also solid in the second quarter with return on average assets at 95 basis points; return on equity, 9.78%; and the net interest margin reporting at 3.97%.

Loan growth was strong again in the second quarter with total loans growing almost 3% and commercial lending, again, a standout. Commercial loans are up over 11% year-to-year. And it is fair to say the total loan growth of almost 5% year-to-date has greatly exceeded the expectation we established at the beginning of the year.

The good news is we don't believe the growth is done. We expect growth will continue, albeit at a more modest pace, for the rest of the year through growth in both share and new lender hires due to the continued turmoil in the market.

Deposit growth in the quarter was a real positive due to a combination of our typical seasonality and growth in the municipal and commercial deposit base. Our increased marketing presence in the consumer deposit space is beginning to pay dividend, as new consumer DDA openings are 40% plus ahead of last year's pace.

Asset quality trends remain excellent and top decile among banks in the nation. Net charge-offs were up somewhat in the second quarter as they increased to $3.3 million or 36 basis points of loans. And loan workout expense increased, as reflected in the noninterest expense category. However, these actions resulted in a decrease in non-performing assets to $31 million or 64 basis points of assets, and loan delinquency fell to a low 83 basis points.

Early stage delinquency -- that is the 30- to 89-day bucket -- also fell nicely to 48 basis points of loans. These delinquency trends and level of non-performing assets bode well for the level of charge-offs and provisioning levels for the remainder of this year. We expect charge-offs to be around $11 million for the year and loan loss provision to be approximately $13 million, at the low end of the ranges previously discussed.

The net interest margin decreased to 3.97% from 4.02% in the first quarter. With the higher level of loan growth experienced year-to-date and the continuing prospects of good growth, in addition to our relative inability to further reduce the cost of deposits, we expect this trend to continue with the net interest margin reducing in the second half of the year to a range of 3.90% to 3.95%.

Noninterest income, excluding securities gains, improved modestly in the second quarter due to improved service charge, interchange and investment management revenue, somewhat offset by lower mortgage banking and derivatives fee revenue.

Noninterest expense was up 1% on a linked quarter basis, with the timing variances seen in the other expense category, largely loan workout expense, which is up about $800,000, and marketing up about $800,000 on a linked quarter basis.

And now earnings guidance. At the end of the first quarter we provided an estimate of diluted earnings per share on an operating basis of $2.07 to $2.17. We remain comfortable with that range.

That concludes my comment. Chris.

Okay, thank you very much. Operator, we are ready for questions.

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

First question, could you maybe share with us the size of your loan pipeline right now?

I will give you two numbers and two -- the gross pipeline, which is approved and everything has been received, is very strong. It ranks number 4 out of the last 12 months, so the fourth highest in the last 12 months.

The approved pipeline is low because of all the closings that we had here, both in the first and in the second quarter. It ranks 10th out of the last 12 months. So I guess the way I would translate that is assuming that the gross pipeline, which is very strong, continues to move its way through our process, I think we could expect a decent fourth quarter. But near-term third quarter, with this being 10th out of the last 12 months, third quarter for commercial may be slower.

Then, secondly, and it is sort of related to that, as you see balance sheet growth start to resume here, do you think you have sufficient capital to be able to support that growth or might you need to get some additional capital?

Well, we are feeling -- still feeling very good about our capital levels. One of the great things about this Company is we generate a lot of capital on a quarterly basis. Yes, tangible common equity and tangible assets dropped on a linked quarter basis, but we feel very good about growing it between now and the end of the year.

Then could you just maybe update us on your de novo plans, what you have in process?

This is Chris. The way we approach it was we established what our high priority markets are throughout our region, and are continuing looking for a really good location in high priority markets. So we have a list of 10 or 15 markets we would like to explore entering, but as you might imagine, the gating factor is finding a location.

So we won't go sequentially through that list. But we would anticipate that over the next, hopefully, six to nine months we will find a couple of locations and announce some openings. (multiple speakers).

Definitely, (inaudible) really it is not going to be one of -- you're reading some of these big banks are going -- are building hundreds of branches a year. We are not in a mode. We are very, very careful with our de novo strategy.

Okay, so they would sort of extend out to your existing franchise, you would expect?

Yes.

No leapfrogging to new markets or anything?

Well, I mean, new micromarkets. In terms of leapfrogging into like a -- cities and so on, that is less likely, although still possible.

Okay, thank you.

Damon DelMonte, KBW.

I was wondering if you could talk a little bit about Reg E? I believe you guys were in a position to actually benefit from the implementation of the rule changes. Has that been fully reflected in the numbers yet?

This is Denis. I think to a great degree, yes. But, you know, we were a little late in getting the program rolling out when others were seeing a lot of benefit. I think the third quarter last year we were later than most.

So I think most of it is reflected at this point, but we are going to continue to offer the services associated with Reg E to our customer base and see if there is a greater uptake.

So what we saw this quarter is probably a decent run rate?

Yes.

Okay, great. Then could you just provide a little commentary on some of the pricing trends you are seeing on the commercial lending side?

We talked to our senior lender and we see it. We talk in our Treasury Group with the lending team pretty frequently. It certainly is -- it is becoming increasingly competitive. But to simply -- we are not seeing the kind of credit spreads that existed a couple of years ago, but that is understandable, right? I mean, as banks -- those banks that had issues repair themselves, they are going to get more aggressive on the commercial side and consumer side again, and we are seeing that. But we are very happy with the kind of business that we're booking.

Okay, and who would you say your biggest competitors are? Has the landscape on the competitive front changed? Are you seeing different names enter into the mix now?

Not really. No. It is the same names.

Okay, that is all I have for now. Thank you.

Laurie Hunsicker, Stifel Nicolaus.

I wondered if you could just address the [turning] within the noninterest income. The wealth management was incredibly strong, and I remember that historically Q2 is strong. But I wonder if you could just help us going forward with that line item. Just remind me again why that is strong.

It is strong -- we do a lot of tax prep work in the second quarter, so a lot of that income falls in the second quarter.

So if we were to look at that just say, for example, for third quarter it would likely be back to about 3.2, 3.3 from the 3.6 that it was?

Yes, I (multiple speakers).

Obviously, trending slightly higher, but --.

Yes, trending slightly then 3.3 is a reasonable number to use.

Okay, great. Then just jumping on here to your other, other noninterest expense, at linked quarter you went from $8.7 million to $11 million. And you had some discussion of that in the press release. But I just wonder if you could give us a little more color? Obviously, that includes REO (inaudible) that you also had last quarter. You said the marketing increased $800,000 approximately. Is there anything nonrecurring in that number?

Well, we are not going to have that level of marketing spend continually. This was a real burst in the campaign, so we expect that marketing spend to taper down. Loan workout, to try and get the delinquency and nonperforming numbers that we do, it is sometimes you've got to spend a little bit more on workout. So we wouldn't expect to necessarily have that level of workout expense for the rest of the year either.

(multiple speakers). Go ahead, Laurie.

Just looking at it -- just looking at linked quarter, it was up $2.3 million. So even if I took out the entire marketing spend and the REO cost in full, there is still such an increase to that number. In other words, even if I netted it down to completely zero, you are still $700,000 up linked quarter. Is there anything nonrecurring --?

$300,000 of it was examine audit. Some of that is the annual state assessment. There was an increase in rate in the annual Division of Banks' assessment. That is all -- what happens here is then you have to not only recognize the current period, but go back and accrue current for the increase in rate. That is part of it.

We also had -- in this time of the year we have a number of -- like the 401(k) audit, our new market tax credit area audit. So those things inflated examine audit expense in the quarter as well.

Overall, I can give you a sense, if it will be helpful, where we think total noninterest expense will land in the second half of the year. It will be in the region of -- our current forecast has us at about $35.5 million each quarter for the rest of the year.

Then I guess just going back to Mark's question on de novo, assuming that in the next whenever, six to nine months, you do find locations, do you guys have a cap on how many branches you would open per year so that you are cognizant of drag of earnings, or are you looking at it as this is the expansion opportunity and it could be 2 it could be 6 or (multiple speakers)?

Yes, I think from a practical perspective -- we haven't actually discussed what the cap is, but I think for our practical purpose it would be not more than 2 or 3 a year. (inaudible) Denis.

For a variety of reasons that is about right to manage. And that is the way we talk internally is that kind of growth pattern.

Okay, great. Then, I guess, last question, Chris, to you. And I ask you this every quarter, but we like to get your feedback here. On the acquisition opportunities generally that you are seeing or not seeing or seller expectations, what is your feeling out there? You guys certainly have the currency.

Laurie, we are opportunistic when Boards of Directors raise their hand and say they want to -- they talk -- would love to be at the table. Having said that, two things. We are very disciplined in thinking about this. Our past acquisitions really have demonstrated that. We are going to pay a price that is fair and gives our shareholders an adequate return.

Two, we, as our current last couple of few quarters' growth have indicated, we are not dependent on growing through acquisition. We have lots of opportunity in organic growth and -- well, if our real focus is there, and if an opportunity comes up we would love to engage.

Okay, great. Thanks.

David Darst, Guggenheim Securities.

Could you go over some of the marketing programs that you have put in place, what your -- type of client you're targeting, and the length of the program?

Then do you attribute the DDA growth -- I think you said it was up 40% for accounts above a year ago. Is that in conjunction with this program or is that prior to the launch?

There is a lot in your question. Let's start with the DDA growth rate. The number that I gave, the 40% growth, is growth in consumer DDA. That would not account for all the of the increase in demand deposits that we saw in the quarter.

You know, one of the reasons we have such a good base of DDA is our commercial business. And when we solicit credit from a client we also solicit the deposit business and that is why our DDA growth has been so good. I think you need to relate that back to the lending businesses.

So that growth in 40% DDA, it is in consumer, free checking, so that is not going to account for a lot of necessarily the deposit growth. It is mostly on the commercial side.

As far as the length of the program, we have been running this program for the entire year, but with a much greater emphasis in the second quarter, including TV, print, online, et cetera. That campaign has largely run its course here at the end of the second quarter. And we are evaluating additional strategies in the second half of the year that we may add. Does that answer your question, David?

Yes, and then with the deposit service charges, how much of the growth this quarter is seasonal and how much of it but you attribute to the new account growth? And then what is your impact for interchange that you expect to have, just from a competitive standpoint? Do you think you'll have some pressure or not relative to the bidding at larger banks?

I think -- and, Chris, you can [comment on this]. I think the whole industry is debating this issue of interchange above and below $10 billion, and will it have an effect or won't it. So we think it will have some effect.

You can read expert commentary that argues both sides. The argument that the market will find a lower price and then the argument that the big-box retailers are not going to decline a sale if somebody does not have a debit card from an institution $10 billion or higher. So our sense is that it is not going to have an immediate effect, and we are going to monitor it very closely.

And on the service charges, David, I think there is -- some of it is seasonal in nature, but it is also -- we have seen a pretty steady increase over the past, I guess, the past two and three quarters as a result of this whole opt-in program, and so I wouldn't expect a big fallout in service charges in the third quarter certainly, maybe some in the fourth.

Okay, thanks.

Mac Hodgson, SunTrust.

This is [Althoff Nermohammed] filling in for Mac Hodgson. I just had some questions on the commercial loan growth that you guys saw this quarter. More specifically, if you can tell us if the growth was driven by utilization or if it was new relationships? And, also, if you can talk about the industries and geographies that drove that growth?

Sure. Most of the increase -- most of the growth was new relationships and new business from existing relationships. There certainly was a component of it that was utilization. We believe that the increase due to utilization is around a 40% level. And the rest is new business, as I said, either from existing or new clients.

As far as the kind of industries in C&I, it is consistent with the broad diversification that we have across our entire loan portfolio. It ranges from equipment rental and leasing to medical services industry, manufacturing, computer programming services. It is across the board -- electrical equipment manufacture, medical imaging.

And we deal with businesses that are within our geography, businesses that we know.

Okay, that is helpful. And also in your remarks you had mentioned investing -- continuing your commercial lending focus on investing in it. Just thinking about the M&A and the disruption that has taken place in the Northeast, what is your sense for additional opportunities that may exist for marketshare gain? And are you looking to pursue hiring bankers that may be looking for opportunities to move somewhere else?

We can't get too specific here, but I think you point out two opportunity areas. I mean, with acquisitions comes disruption and some dislocation, both on the customer and the lender side. And we have benefited, and hope to benefit, from that in the future as well.

Okay, a last one on credit. Given, of course, the strong improvement in your nonperformers and also the fact that your inflows into nonperforming were steady, how should we think about reserves going forward, and do you expect provision to continue matching charge-offs?

That is our current thinking, but you know, things can change on a quarterly basis depending on what happens -- nonperforming, delinquency, charge of levels, et cetera. But our current thinking is we would likely be providing in excess of net charge-offs, but it depends on the situation.

Okay, great. Thanks. I appreciate the color.

Bryce Rowe, Robert W. Baird.

Just a couple of questions. Denis, what is the absolute level of the loan workout costs for the second quarter?

I would have to -- I would have to get back. You have to add up a bunch of categories to give you that. So I can get back to you on that, but it is -- let me see.

While you look for that, I will ask another question. If we look at the balance sheet, you had a pretty big spike in cash balances or cash and cash equivalents. Any guidance as to how you deploy that cash? And maybe talk a little bit about the effects of seasonality on deposit flows for the second half of the year.

The cash will be deployed into loans. We don't plan to deploy it into securities to any great degree. We think, again -- you know, you look at our loan growth year-to-date, we knew that we had to get on raising deposits a little bit here because we have had very good growth, and as I said in my comments, we see it continuing, not necessarily at the robust pace of the first half, but certainly some -- a pretty good growth. We see loans for the year being up in that 6% to 7% range. So that cash will get deployed into loans.

As far as the seasonality in deposits, Bryce, if you look at our trends over the years, we typically come up in Q2, it holds in Q3. And then late Q4 begins to dip, and that it continues into Q1, and then it rebuilds. It is the seasonality largely in our business base, but also some consumers that head to Florida or what have you for the good weather. But it is largely in our businesses that that happens and those are the kind of trends that we have seen over time.

Okay, last question. If you could talk -- is there a possibility of attributing loan growth to newer lender hires versus share takeaway?

What is your -- Brycy, sorry, what was the question?

You guys have talked about hiring new lenders over the recent past. Any way to attribute growth to the newer lenders versus just, I guess, existing business and taking share from competitors?

The two overlap, of course. We don't have at our fingertips the new lender -- you're talking about what new lenders generate versus what our existing lenders generate?

Right. I know it is tough to extrapolate, but perhaps you had it there.

I will say this that -- Bryce, we have pretty robust performance management to the system across our bank, including the commercial arena. So we expect good production from all our lenders -- new lenders, existing lenders, younger tenured lenders, longer tenured lenders.

Chris, how many new -- how many lenders have you guys hired in the last year or so?

I don't have that in front of me. I would imagine -- we have a total of about 45 lenders across our system. I would say we probably have hired -- I think probably in the 6 to 8 category over the last 12 to 18 months.

Okay. That is all I have (multiple speakers).

I will give you an estimate of all the different workout categories, because it is contained in a variety of areas -- legal, loan collection, selling an OREO asset at a loss, revaluation of OREO properties. If they sit in OREO for too long, they end up getting reappraised, revalued. And if they -- you occasionally have to write this down. And then foreclosure expenses, taxes, other, et cetera. I would estimate in the second quarter it is in the $1.3 million to $1.5 million all in.

Do the OREO-related costs, do they account for a larger percentage of the loan workout costs for the second quarter?

Yes, there is about $0.5 million between a loss in the sale of a property and revaluing the OREO properties. So those are pretty significant, yes.

Okay, thank you.

(Operator Instructions). I have no further parties in the question queue.

Well, thank you very much, everybody. We look forward to talking to you next quarter.

Thank you.

Have a good weekend. Bye.

Your conference is now concluded. Thank you for attending today's presentation. Please disconnect your lines.