Independent Bank Corp (Massachusetts) (INDB) 2011 Q3 法說會逐字稿

Good morning, and welcome to the Independent Bank Corp's third quarter 2011 earnings call and webcast. 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, this event is being recorded. This call may contain forward-looking statements with respect to the financial conditions, results of operations and business at 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 and forward-looking statements whether in response to new information, future events or otherwise.

I would new like to turn the conference over to Christopher Oddleifson, President and CEO. Mr. Oddleifson, please go ahead.

Thank you, and good morning, everyone, and thank you for joining us today. Sharing the call with me today as always is Denis Sheahan, our Chief Financial Officer, who will provide color on our financial results following my comments.

While in 2011 we continue to perform well, and as you can see from our results, I'm happy to say that we maintained our positive momentum through the third quarter. Net income totalled $12 million, or $0.56 per share. These results were nicely ahead of both prior quarter and prior year earnings levels. We're on track to achieve our original earnings expectations for 2011 which we shared with you at the beginning of the year. Ongoing momentum in our businesses along with success in recent growth initiatives have allowed us to mitigate the pressure in our industry from the challenging external environment.

Our commercial banking business continues to be a real bellwether for us. Loan origination activity mains vibrant as we continue to capitalize on a strong visibility in the marketplace and our highly personalized approach. Reported loan growth wasn't as strong as in previous quarters as we spent much of the third quarter rebuilding the pipeline, which was exceptionally flush in the prior quarter. The good news is that we head into the fourth quarter with a very strong pipeline. Commercial banking and wealth management are real competitive strengths of ours and a key driver of future growth. As such, we're moving aggressively to expand our reach, talent and capability in these businesses.

In just the past few months, we've hired an experienced team of asset-based lending professionals who bring with them valuable experience. We've added a senior CNI lender in the greater Boston market to take advantage of the opportunities we see there. We've opened up a commercial banking and wealth management office in Providence, a market we know well, and a natural compliment to our southeast Massachusetts presence. Our kickoff events two weeks were very well attended by local business leaders and ranking civic officials including the governor of Rhode Island and the mayor of Providence. We expanded our outreach efforts for our retirement plan services to small businesses, resulting in increased accounts and assets under management. And we've begun leveraging financial planning capabilities in our wealth management business with the addition of an experience financial planner. These moves do add a little to our expense base, but we're quite confident it will pay back many times over.

Another high priority business of ours, home equity continues to grow. Total outstandings grew by 10% annualized in the third quarter over the link quarter. We continue to provide home equity products to both new and existing Rockland Trust households, and our offers attracted a lot of additional business.

On the retail side, we see this market environment as one of unprecedented opportunity. As the large banks continue to raise fees and reduce service levels, Rockland Trust value proposition, that is a high customer intimacy and fair, transparent pricing becomes even more attractive to consumers and small businesses looking for a financial partner. We have extended the aggressive branding of customer acquisition program that we began in the spring, and we have been very pleased with the increased level of household and deposit growth throughout the year. These efforts have helped us grow our core deposit basis, which now represents 83% of our total deposit base.

We are also expanding our mobile banking offerings by extending our popular and deposit application to a broader range of smartphone users. Introduced earlier this year, this feature allows both retail and business customers to scan and deposit checks by phone. This capability is available in iPhone, android and Blackberry platforms. We feel the combination of our expanded product offerings and our promotional efforts are focused on the customer, and the operating and competitive environment are serving to differentiate the image of Rockland Trust across our footprint, the primary reasons why customers and businesses view Rockland Trust as a great banking partner.

Turning to our risk profile, the picture remains very encouraging. Our balance sheet continues to be in excellent shape. Credit quality transit consistently compared favorably to the industry and our peers. Net charge-offs declined to modest levels in the third quarter. Nonperforming loans ticked up, but from a very, very low level. Capital levels continue to grow and strengthen.

I usually provide a quick perspective from the macro setting, but frankly, not much has changed. The national picture remains very muddled, a you're all aware. A lack of political consensus on Washington makes it hard to inspire any confidence in a near-term turnaround. The Massachusetts picture, however, continues to be relatively better with an unemployment rate of 7.3%, and this is down from 7.4% just a month ago, versus a national rate of 9.1%. This reflects pockets of strength in various indigenous industries.

The greater Boston market unemployment rate is considerably better at 6.5%, and the construction industry should be receiving a pickup at several large projects in the Boston area that have recently broken ground. But it's hard to be anything other than circumspect in light of the tremendous uncertainty that persist. Our position is on positioning the Rockland franchise to continue to excel, while remaining flexible to adjust to the ups and downs of the economy. The best way to do that is to continue to invest in our strengths, grow our customer base with innovative products and services and motivate and energize our Rockland colleagues to win in the marketplace, and that is exactly what we're doing. I've said before that engaged employees lead to satisfied customers, and I can truly say that my colleagues at Rockland Trust are doing an outstanding job, for which I thank them.

With that, I'll end it here and hand it over to Denis.

Thank you, Chris, and good morning. Independent Bank Corp reported net income of $12 million and GAAP diluted earnings per share of $0.56 in the third quarter of 2011 as compared to net income of $11.1 million and diluted earnings per share of $0.52 in the second quarter of this year. The second quarter included security gains of $723,000 pre tax, or $0.02 per diluted share while the third quarter contained no such gains, making the comparison that much stronger.

On a year to date basis, operating earnings improved by 17% to $1.58 per diluted share over the prior year. We remain pleased with the Company's performance on both a quarter and year to date basis. Key performance ratios were generally solid in the third quarter with a return on average assets at 99 basis points, return on average equity at 10.28% and the net interest margin hanging in there at 3.84%. Loans were flat on a link quarter basis and up over 9% on a year to year basis following 3 quarters of strong growth through June. We did expect the third quarter to be slow as the loan pipeline was in rebuild mode, and the good news is we expect relatively robust growth in this fourth quarter, and possibly into the first quarter of next year as the loan pipeline, as Chris mentioned, is at a record high due to the new lender hires and continued opportunity from dislocation in the market. Both commercial and home equity balances are expected to benefit in this regard.

As Chris mentioned previously, we announced a number of investments in our commercial banking division and wanted to share with you the expected impact. The cost of these new business initiatives add $600,000 pre-tax to operating expense this year and $2.2 million pre-tax in 2012. We conservatively estimate $65 million in additional loan outstandings by the end of 2012 and $150 million in additional loan outstandings by the end of 2013 with the initiatives reaching profitability in that year. Deposits were also essentially flat on a link quarter basis, but mask a continuing story of growth in core deposits, up 4% annualized and an expected reduction in the CD category down 4%. Total cost of deposits declined further to 37 basis points. Asset quality trends remain excellent. Net charge-offs decreased to 15 basis points annualized the third quarter and are 24 basis points annualized for the year to date period. Nonperforming assets increased $5.6 million to $36.6 million, or 75 basis points of assets, and loan delinquency was relatively stable at 89 basis points. Early stage delinquency, that's 30 to 89-day period, was 50 basis points of logs.

Looking ahead, we expect these positive trends to maintain. Although the level of loan net charge-offs will increase somewhat in the fourth quarter and the provision for loan losses will also increase with the higher level of net charge-offs and anticipated loan growth. We expect loan charge-offs to be around $9 million to $10 million for the year and loan loss provision to be approximately $10 million to $11 million below the ranges previously discussed.

The net interest margin decreased to 3.84% from 3.97% in the second quarter. All told, the margin has declined by almost 20 basis points since the beginning of the year, much of this reduction experienced in this third quarter. The significant drop in interest rate indices, particularly in the third quarter, has had a material impact on loan repricing and new loan origination yields. We are hopeful of maintaining a net interest margin in the 3.80% to 3.85% range in the fourth quarter as deposit cuts late in Q3, in addition to CD maturities in Q4 should serve to offset pressure on earning asset yields.

Non-interest income, excluding securities gains, decreased 3%, or $436,000 in the quarter, largely due to the impact of the equity market on the Company's trading asset. Non-interest expense decreased 4% overall, driven largely by lower costs due to advertising down $900,000 and loan workouts down $700,000. This more than offset an increase of 4% in salaries and benefits due to the investment in various revenue initiatives as described earlier.

I'll now discuss earnings guidance for the remainder of the year. Since the first quarter, we've consistently provided an estimate of diluted earnings per share on an operating basis of $2.07 to $2.17 for the full year. With a quarter to go, we expect to come in closer to the middle of that range. This concludes my comments.

Great. Okay, operator, we're ready for questions.

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

You said there was, I think $2.2 million of pre-tax expenses in 2012. Is that all related to that new asset-based lending team?

It's the asset-based lending team and the province initiatives.

You said the pipeline is at record levels. Can you tell us how big that is?

I'll give you 2 components to the pipeline, Mark. The gross backlog, which is before it goes through the entire credit process, it's $700 million; it's the highest ever in our history, and the approved but not closed is $200 million. Those are loans that are through the approval process, but just have not closed at this point. And that is the highest in at least the last 12 months. I haven't gone back much further than that, but it is one of the highest on record.

We should point out, Mark, that approved, not closed, does not necessarily mean they will close. The customer may have a competing offer that they may not land here.

But it's a good indicator of expected growth.

Yes, and it is at the highest in the last 12 months and the highest --

You have fairly low deposit costs. Do you think you have any room left there to drive those down?

Well, just to give you a sense of the margin, because we know -- we certainly know the margin decreased quite a bit here the third quarter. What you don't see, though, is the margin for the month of September was 3.92%. So, we were able to reduce some of our funding cost, both in deposits and in borrowings in the very latter part of the third quarter.

So, that will benefit somewhat heading into Q4, but yields on newly originating earning assets and repricings as loans mature are coming down because of where absolute indices are. That's why we're guiding in the 3.80% to 3.85% range for the fourth quarter. Beyond that, Mark, when you're approaching an overall cost of deposits of 30 basis points now, certainly is challenging to reduce it further. We do have CD maturities, as I mentioned in my comments earlier, coming in the fourth quarter of about $150 million that will benefit us. But it's challenging.

As you try to outrun the NIM challenges by growing the balance sheet, how low would you be willing to take the tangible capital ratio? I think it's 6.72% now.

If your question is inferring are we planning to raise capital, we are not.

No. The question is, would you be willing to take it much lower than sort of 6.72%, or with the earnings that you project that you're going to have, do you think you're going to take that ratio down much?

It may come down modestly on an occasional quarter. For example, in Q4, if we have the kind of loan growth that we expect, tangible capital may drop in Q4, but it will repair quickly thereafter.

On commercial real estate loan pricing, could you share with us what the trends have been like recently?

Competitive, on both ends of the spectrum, both on the lower end, less than $2 million, and it's become significantly more competitive from the larger players above $2 million. So, it certainly is competitive. The benefit we have with the pipeline that we have is that we have a fair amount of demand at the moment, and we can be somewhat selective in the credits that we price.

Damon DelMonte, KBW.

You mentioned that you had about $700 million in your gross backlog for your pipeline and $200 million in the approved-but-not-closed. Is the $200 million included in the $700 million, or that in addition to?

It's included in.

With respect to the securities portfolio, what kind of cash flows are you generating each month? What are the rates that are coming off versus what you're putting it back on at?

Rob can look this up. I'm thinking it's in the region of $10 million a month, Rob. Is that right? And yes, $12 million in the most recent month. So ballpark $10 million, $12 million a month. And the overall yield of the securities portfolio, bear with me a second. Overall, you have the securities portfolio in the third quarter was [3.70%].

And as you know, we have not been buying much of any securities, nor do we plan to other than to support collateral from a liquidity perspective, but one cannot get anywhere near the [3.70%] yield on securities today. So, that alone, the drop in the securities portfolio brought the margin down 2 basis points in the third quarter.

And then with regards to asset quality, it looks like there was a slight uptick in commercial real estate, only $3 million at the most. But was that one particular credit, or there's some moving parts behind that?

It's largely one credit. Yes, it's a construction credit, Rhode Island-based. And it did hit nonperforming in the third quarter.

And what was the actual dollar amount of that?

A touch over $3 million.

Mac Hodgson, SunTrust Robinson Humphrey.

On the margin, Dennis, you mentioned 3.92% in September. When we think about your guidance for the fourth quarter of 3.80% to 3.85%, I could be thinking of it incorrectly, but I think of coming down from 3.92% down to that level. As we look out into 2012, do you have a lot of opportunity to reprice CDs further into '12? Would we expect similar rates of NIM compression? I know it's obviously difficult to -- assumptions there, but just trying to get some more help in 2012.

Mac, as we all know, this is very challenging right now. We will have some opportunity in '12 for further CD repricing, but that book has been running down. There will be some assistance there, but limited. The issue is really on the earning asset side and the yield on new loan originations. We are trying to maintain floors in response to the question earlier about the competitive environments getting more competitive. It's getting tougher to hold those floors in pricing.

In terms of that asset origination in commercial, we're trying to swap a lot of it, get a lot of it to variable because we strongly feel that this is not the time to be making mistakes, that we'll have tough long-term consequences by doing a lot of fixed rate pricing here, so we're increasing our asset sensitivity. That has an impact on the margin when you're not reaching for that fixed rate, but swapping it to variable. That, combined with limited opportunity to reduce our cost of funds, is going to hurt the margin in the coming quarters.

What floors are you able to get? What's the level generally?

That's competitive, Mac, so I'm not going to get into what the floors are, but we are trying to be disciplined here. We are trying to get a credit premium get paid for taking risk, but it's getting more competitive out there.

And on the expenses, the ABL initiative or hires in the Providence expansion --

There's hires in that as well.

And are those -- just trying to think of the expense level, maybe for the fourth quarter, were those kind of fully in? I think they may have been intraquarter, but should we expect expenses to go up in the fourth as a result of --

Modestly. It was about -- of the $600,000, it was about -- let's see. Little less than -- $240,000 was in the third quarter. So, they were there for a good chunk of the third, but not all of it.

(Operator Instructions) David Darst, Guggenheim Securities.

Should we expect to see a pickup in your fee income as you close the pipeline in the fourth quarter?

Possibly. Assuming that we're as successful as we hope we will be in closing those loans, we would like to see a pickup in fee income. But it depends on where those credits go -- if they go floating, straight floating or straight fixed or they are swapped. If they're swapped, that's going to have an impact on fee income; but if they go straight floating or fixed, that really would not. It's a more modest impact.

Is the nature of the pipeline that you have got a lot of fixed rate that you want to swap the floating?

Yes, anything that's of size in the commercial real estate side, we do try to swap. And we think there's a good benefit to our customers where rates are today for them to be looking for longer-term fixed rate for the swap. So, we encourage that, but it takes 2 to tango.

Do you think the commercial construction portfolio runoff is near an end?

I'd like to think so, but as Chris has talked about, there isn't a lot of whole new economic activity. We see some seeds of construction projects. We would certainly like to see more. That will benefit outstandings, but we need more economic activities to drive that. There's a lot of construction activity beginning in the Boston area, and one hopes that will filter through our markets and lead to a pickup in construction lending.

How about with the trading asset, the unrealized loss there? Is that something that should recover?

Yes. It's a small asset, it's in the single million dollars. The asset is there to fund executive retirement benefits; that's the sole purpose of it, and volatility in the equity markets took a bite out of it this quarter. It should recover, yes.

Laurie Hunsicker of Stifel Nicolaus.

Going back to Providence, can you share what your break-even projection is, both in terms of total deposits and timeframe?

I think in my counts I mentioned in 2013.

2013, but I didn't know -- does that also include the asset based lending team? I didn't know if --

Yes. That's them together.

Okay.

Both providence and asset based lending is in 2013.

Is in 2013, okay. And what will you be at in terms of total deposits at that point?

I don't have the deposit number, Laurie. I have a loan number, I think I provided that. But I don't have the deposit number.

Generally, what would be a deposit number for break-even. Not necessarily where you will be at the end of 2013, but what do you look at in terms of saying, hey, with interest rates this low, this is likely. Or you just don't -- okay, fair enough. On the commercial real estate non-performing jump, and you mentioned it was a $3 million construction loan in Rhode Island. Can you tell us a little bit about that loan, how much is it started? What type of construction? When did you actually put it on the books?

It was put on the books, I think in '07, possibly '08 time frame, and it's a construction credit. We've run into some issues on it, and it's in non-performing, and we will work our way out of it. That's really not a lot more to say than that, Laurie.

What type of commercial real estate?

Construction.

I know, is it office, is it retail? Is it --

I'm not going to get into those details, Laurie.

Can you share with us the value of the -- is it partially constructed? Is there LTD on the land, or can you share with us any sort of --

No.

Your credit is pristine, so I'm not trying to pick -- I'm just curious. I'm just trying to get a read.

I think our history on credit speaks for itself, so I'm not going to give any more details around this credit. I think we have a history of showing that we've worked through these credits pretty effectively. Look at our delinquency, our charge off rates. The absolute level of non-performing is very acceptable, so let's leave it at that.

Absolutely, no, I agree. You have got very good credit. Jumping onto REO costs, this just might be the way I have trouble interpreting your press release. I know your REO costs last quarter were $832,000, and I can't tell if it decreased in quarter by $667,000 or it is now down to $667,000 for this quarter. I'm reading that it decreased $667,000, which would put us at $165,000?

Yes, it did go down $667,000. In that cost number is whatever non-interest expense items you have related to REO properties, taxes, maintenance, if there's a valuation adjustment, et cetera. There's a lot of different items that flow into it. And if you look back, our charge-offs were higher in Q2 than they were in Q3. We talked about that we did a lot, we spent a lot on workout in the second quarter, and we've shown here with this third quarter, a significant favorable variance.

So, it's down to $165,000, correct?

It's down $667,000. Do you happen to have the number?

I had it at $832,000 but I'm not 100% sure. Chris, and this is more macro, and I know I ask you this every quarter, but M&A, if you can give us an update. Obviously, your stock currency is one of the strongest running around out there. How you're looking at the world.

Not much has changed, but I'd be happy to summarize. We've made 3 acquisitions over the last several years; they've all worked out really well. Great adds to franchise. They're all opportunistic. We're not depending on acquisitions. As you've seen over the last several quarters, we've been able to clock some really great organic growth; the initiatives we talked about today are going to add to that organic growth.

However, should the board of directors raise their hand and say, now we'd like to sell the bank, now we're not going to be at the table and have a conversation. But as you know, we're very disciplined in our pricing and have the shareholders in mind. And that's sort of where we've been -- where we are today.

What is the most dilution it would take to tangible book in terms of doing a deal? I realize there's a lot of moving components that drive a deal, but it's just become such a sticking point as of late, and I'm just wondering.

Yes, (inaudible) to tangible (inaudible), Laurie. Each situation has its own merits, but we get concerned about tangible book value dilution, and that's as much as we'll say on it.

Yes, instead of the earned -- how much is it, how much do you earn it back, when is crossover point, et cetera. I think we've shown that we're really shareholder-friendly here, and we're not going to do anything that's going to have the -- adversely viewed in the marketplace.

Okay.

Or the shareholders.

And showing no further questions in the queue, I would now like to end the question-and-answer session.

Great. Thank you very much. We look forward to talking to everybody in January, and have a good several months.

Thank you, yes. Bye.

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