Independent Bank Corp (Massachusetts) (INDB) 2012 Q3 法說會逐字稿

Good day and welcome to the Independent Bank Corp. third-quarter 2012 earnings call.

All participants will be 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.

Before proceeding, let me mention that 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 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.

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

Thank you and good morning. Thank you, everybody, for joining us today. Denis Sheahan, our CFO, will elaborate on our quarterly performance following my comments.

Third-quarter results were strong and reaffirmed the success we are having in growing business with customers across our footprint. Core net income came in at $12 million, or $0.55 per share. This is well above the prior quarter. Our performance is being driven by organic growth generated from both new and existing customers. The Rockland Trust brand is unquestionably gaining traction and bringing us increased market share.

In previous quarters, I have talked about our stellar commercial loan growth and this quarter is no exception. Once again, the portfolio grew at a double-digit annualized growth rate. The C&I segment remains a sweet spot for us as we continue to add quality names to our client roster. We are also seeing good growth in the commercial real estate business marked by solid underwriting and attractive properties.

Our strategy to invest in our competitive strength in commercial banking with added talent and breadth of service even during the downturn is proving to be a wise decision. Competition is heating up, but so far we have been able to hold our own and maintain a robust pipeline of approved credits. Likewise, origination volumes in our home equity business have continued at a very healthy pace. All our growth is concentrated in the first position portfolio's strong FICO scores and loan to values. Competition is ratcheting up here as well, especially on the pricing side, but we will not chase the market down and are fully prepared to sacrifice some of our exceptional growth if need be.

Core deposits are another excellent story for us by rising over $50 million in Q3. At over 84% of total deposits, these funds are a great source of low-cost liquidity. Growth in the third quarter came from both consumers and businesses alike.

We continue to be hard at work capitalizing on our growing brand recognition. Our Actions Not Words marketing campaign launched earlier this year has been a resounding success. With our J.D. Power number one ranking in customer satisfaction among New England banks and above peer loyalty scores, we are truly distinguishing ourselves on the competitive front. In fact, we are adding households at the annual rate of around 6% or 7%. This is especially noteworthy in light of the household growth in Massachusetts is about 0.5%.

Our balance sheet remains a great source of strength to us and is especially valuable in the heightened regulatory environment today. Capital continues to build, resulting in strong regulatory ratios and a tangible, position of well above 7%.

Tangible book value has been steadily growing quarter after quarter and is up 9% in the past year alone. Credit quality was excellent in Q3 with lower nonperforming asset levels and an annualized loss rate a shade over 20 basis points. Earnings quality is strong as we continue to add to our loan loss reserves and keeping our strong loan growth.

Looking ahead, planning for the Central Bank acquisition is underway and we look forward to adding its 10 branches in greater Boston market to the Rockland franchise. We have received all required regulatory and shareholder approvals and are processing towards an expected close later this quarter. Our business line and operational areas are busily preparing for Central's assimilation and we fully expect the same seamless integration enjoyed in all our prior acquisitions. Our expectation for solid earnings accretion and returns remain intact.

As for the macro environment, we do try to stay grounded in our outlook amidst the optimists and the pessimists that surround us. The local economy remains relatively better, in relatively better shape than any other region in the country. Massachusetts unemployment came in at about 6.3% in August, materially below the national picture and even lower in the Metro Boston area.

We are also seeing a firming up in the housing market that others are experiencing as well. The strength of our medical, biotech and education sectors are providing a boost to our local building industry. Over 4.7 million square feet of office and laboratory space is currently on under construction in the Boston area compared to just 430,000 a year ago. The retail vacancy rate in Eastern Massachusetts is at its lowest point since the recession.

Yet, with all this seemingly good news, it's hard not to remain a bit cautious, given that New England is a large exporter to Europe and the pace of new hiring locally has slowed somewhat in recent months. This caution also mirrors the prevailing uncertainty towards the US economy, the European debt crisis, slowing growth in China getting a clouded federal deficit and tax outlook in the run-up to the election.

The macro picture is further compounded by the exceedingly low rate environment that is putting fierce pressure on interest margins across the entire bank industry. So our game plan is really quite simple -- keep executing our strategy for disciplined growth and doing the best job we can for our customers. In doing so, we fully expect to continue delivering strong financial performances and build considerable shareholder value. Thank you.

Denis?

Thanks, Chris, and good morning. In the third quarter, Independent Bancorp recorded GAAP diluted earnings per share of $0.53 per share as compared to $0.41 per share in the second quarter. Excluding merger costs in both quarters related to the pending acquisition of Central Bancorp as well as goodwill impairments and proceeds from a life insurance policy, diluted earnings per share on an operating basis were $0.55 in the third quarter as compared to $0.43 in the second quarter of this year.

Key topics -- loans grew at 2% on an unannualized basis with continued strong growth in both the commercial and home equity lending categories. The commercial loan portfolio grew nicely across all categories, up almost 3% unannualized.

The approved pipeline at September 30 remains strong and this should bode well for near-term growth. In addition, both our Providence and asset-based lending initiatives are performing well and running ahead of expectation. First position home equity loans also grew nicely in the quarter, up 4% unannualized.

So, in summary, loan demand remains good. And while level of competition remains strong, the prospect of continued growth in the fourth quarter is good.

Core deposits also grew nicely in the second quarter at 1.6% unannualized. Importantly, the mix of deposits continued to be solid as core deposits are now over 80% of total deposits and demand deposits represent 27% of total deposits. The total cost of deposits declined yet again to 26 basis points in the third quarter.

Asset quality metrics remain strong. Nonperforming assets decreased to $41.5 million in the quarter with overall levels quite manageable at 80 basis points of total assets. Loan delinquency remained very good at 79 basis points at September 30, and early-stage delinquency -- that's the 30- to 89-day bucket -- decreased to 37 basis points of loans. Loan net charge-offs were 22 basis points on an annualized basis in the third quarter, and we expect continued good performance in this area for the rest of the year.

As expected, the net interest margin decreased to 3.72% in the third quarter from 3.8% in the prior quarter, reflecting the challenging interest rate environment. We continue to expect it to drift lower from here, due to the ongoing pressure on earning asset yields facing our industry.

Non-interest income, excluding the tax-exempt insurance policy benefit of $1.3 million, was relatively flat on a linked-quarter basis due to lower revenue associated with the Bank's loan level derivatives program, offset by modest increases in several other categories. Non-interest expense, excluding merger charges and goodwill impairment, increased 2.5%, largely due to a higher incentive compensation accrual.

As discussed in last quarter's call, the Company incurred full goodwill impairment associated with its 1031 exchange subsidiary in the third quarter, amounting to $2.2 million pretax or $1.3 million on an after-tax basis. This goodwill relates to the 2007 acquisition of Compass Exchange Advisors. And while we intend to maintain this service for our customers, the business has not met the objectives we anticipated, largely due to the economic downturn and, in particular, due to the current and anticipated low level of interest rates.

The Central Bank acquisition integration -- we remain on track to close the Central Bank acquisition in the fourth quarter and the systems conversion will take place during the first quarter of 2013. We previously announced 7% accretion in the first year and remain comfortable with that estimate.

I will now cover earnings guidance for the rest of this year. On our last conference call, we anticipated diluted earnings per share performance of between $2.05 and $2.15 for 2012. This original guidance is still intact and we now feel it will be closer to the middle of that range.

Key assumptions in our outlook for the remainder of the year include our prior assumptions for loan net charge-offs to be in a range of $15 million to $16 million with loan loss provision in a range of $16 million to $18 million for the year remain largely intact. The remainder of the guidance is essentially the same as loan growth 7% to 8%, loans are up 7% year to date, and we expect continued good growth. We view that to be achievable, particularly in the commercial category where pipelines are strong.

We expect the First Position home equity business to slow with modest growth for the remainder of the year. We expect the net interest margin to decrease from the current 3.72% level through the rest of the year into the 3.60s% in the fourth quarter due to the continued pressure on earning asset yields.

That concludes my comments and we can now open the call for questions.

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

The first question is on the pipeline. I think you said the pipeline was very strong. Could you share with us how big it is?

Sure. Mark, it's the third-highest in the last 12 months. Let me look it up here. So our proved pipeline at the end of the third quarter was $237 million, third-highest in the last 12 months.

That's commercial?

Commercial, yes.

Commercial, okay. Then I notice the securities portfolio is now down below 10% of assets. Do you feel that like that's at a trough level, or is likely to continue to shrink a little bit from here?

I think we are at or near a bottom in the securities portfolio because we need what we have for collateral purposes on either borrowings or certain government type deposits. So, we are -- I wouldn't expect to see it drift much lower than this level. But as you know, it's challenging to buy securities in this interest rate environment. We would rather not be doing that but we need to for collateral purposes.

Okay. You guys have done a great job building your capital organically. But I guess I would be curious what your current thinking is on your capital position and as it relates to BASEL III.

Yes. We would agree -- first of all, Mark, we would agree with your comment. We've done a good job of building tangible common equity. We are happy to see it over 7% here at September 30. It will dip, I think, as you know, following the Central Bank acquisition, into that 6.40% level or so. But we have -- at this point, we have no plans to raise common equity. We will continue to grow that tangible equity level back very effectively.

We have looked at BASEL III, and we believe we are going to be just fine. The power of this Company is today we still have very good earnings, and that allows us to continue to grow our capital position very effectively. And while BASEL will certainly mean higher capital levels, we think we have it covered.

One of the bigger wild cards, I think, for us and everybody in BASEL is covering the volatility of the securities portfolio. You don't have to today. So we'll watch that very carefully to see how that rule develops through the common period here. But that will obviously mean that all of us have to hold more capital than we otherwise would to cover that volatility.

But as best we can tell in looking at the rules, we don't need to raise capital. We will continue to grow capital nicely at an organic pace that will leave us in a very comfortable position, including the adoption of BASEL III.

Damon DelMonte of KBW.

I was wondering. Could you guys give a little bit of color on the home equity portfolio? I think you mentioned in your prepared remarks the FICO and the LTVs that you are seeing on that paper?

Sure, I'd be happy to do that. Let me just look it up for you. As you know, Damon, most of our origination, particularly over the past year, has been in the First Position home equity product, which is really -- it's a refi product for your typical conventional residential mortgage. But we go through the home equity process because it's convenient for the borrower, it's cheaper for the borrower, and from our perspective it's cheaper to originate.

The quality of the portfolio remains very good. And we rescore -- the data I'm going to give you is we rescore every quarter. We re-value once or twice a year. The last time we valued was Q4 of last year. We will be revaluing again in Q4 here. But I'll just to give you data.

So the portfolio overall -- FICO, average FICO in the portfolio is 763. Average LTV is 57%. And that's for the entire home equity portfolio, both first and second position.

And that has been trending slightly upwards over the last 12 months.

Okay. That's helpful, thank you. And then on the fee income side of things, Mortgage Banking -- could you talk a little bit about what you saw this past quarter as far as volume growth?

You are talking about volume of sales?

Yes, volume of origination that you ended up selling.

Well, the vast majority of our originations are for sale. I don't know if I have that here. Do you have it?

Yes. Total originations in the third quarter were about $111 million.

And very little of that goes into the portfolio, Damon. We would certainly like to originate 3-1, 5-1 ARMs, 10-year product. But that's not what customers are choosing today. They are choosing the conventional, longer-term fixed-rate. And we don't hold that in our portfolio.

Interestingly, that has been the highest quarter in the last year and a half. And how does the pipeline look heading into the fourth?

It also looks strong for Q4. So, we are hoping for a good fee revenue from our mortgage business in the fourth quarter as well.

Okay. Great. And I guess this is the last question. I apologize if I missed this, but did you talk about the tax rate at all for at least the fourth quarter?

No, I did not. So you didn't miss it. The year-to-date tax rate -- use the year-to-date tax rate as your guidance for the fourth quarter. Obviously, the Q3 tax rate was affected by, in particular, the Bank-owned life insurance item as well as the goodwill impairment. So use the year-to-date rate as your guidance for Q4.

Collyn Gilbert of Stifel Nicolaus.

Chris, just to follow-up to get a little bit more color on your comments, you mentioned your 6% to 7% household growth, which is, I think, considerably impressive. Who are you taking it from? Which then also just ties into maybe if you could give us some color on the competitive landscape. You mentioned competition is obviously ratcheting up. Pricing is coming under pressure. Who are you finding you're most successfully taking competition or taking business away from?

It's sort of interesting how it has varied over the last 12 months. We were taking a lot from the company that announced those debit card fees a year or so ago. That has subsided somewhat, but we are now taking it from a couple other of the big-box banks that folks are tiring of some of the nuisance fees they see in their accounts.

We are also finding sort of anecdotally for the first time that folks are moving from the smaller -- smaller community banks are usually the tougher competitor because they can provide a lot of customer intimacy. But our technology offerings, our mobile apps, one which allows you to deposit checks by taking a picture of them, for example, are beginning to attract more households than we have had in the past. So it varies.

We think the driver of all of this is that we really have upticked our advertising and awareness. So we are -- our Chief Marketing Officer, Mark Gibson, is here. Mark, is it safe to say that our awareness at Rockland Trust has increased pretty dramatically over the last 12 months?

Yes. We saw some consultants' data yesterday, and it showed us compared to our competitors. And it looked at the conversion rates, awareness, consideration, and purchase. And I can tell you that there was one competitor that was spending six times what we were, but we were actually getting half of the purchase they were doing. So if you think about the economics of that, our marketing is really, really working right now.

And it helps -- the J.D. Power award really helps. When you are able to tell everybody that you're number one in New England, that actually earns you some incremental business.

Interesting. Okay, that's helpful. And then just on the margin, Denis, the 8 basis points that you talked about, is that just a function of the environment, or is there anything in particular that's going on within the balance sheet?

It's the environment. Look, unfortunately, we have little room to reduce our funding cost with 26 basis points cost of deposits, there's very little room to go down further. And then asset yields just follow the yield curve, whether it's a swap curve, a Federal Home Loan Bank curve, the treasury curve, they are all struggling. It looks like they're going to continue to struggle for a period of time. So, that's why we do expect to fall into the 3.60s%, unfortunately, in the fourth quarter.

Okay, and then just one final question -- I know you mentioned the closing of Central Bank being in the fourth quarter. Do you have a greater sense of the specific timing of that?

November.

Yes, it should be by mid-November would be our expectation.

David Darst of Guggenheim Securities.

Maybe just to follow up on the Central topic, has anything changed with your outlook for the expected accretion?

No, no, it is not. We are still comfortable with 7% accretion next year from Central.

How about anything as far as the investment and the requirements as far as adding people or staff or building out that commercial platform?

The investment will come in a number of forms, one being just in the physical plant. We are -- we do have plans to, before conversion, do some significant renovation in a number of the facilities. So, that's one, and there will be further renovations that continue beyond that. That's just one investment, but there's also people investments on the commercial side. We are looking to make sure that we have adequate resources to cover that market, business banking, etc. So that will continue throughout next year. But we built it into our model; it's not going to be in excess of our model. We will be spending from a marketing perspective in that market.

One of the benefits we have, actually, is a lot of the marketing that our Chief Marketing Officer was referring to a moment ago -- we already cover that market in the general Boston media because we are part of that media today.

Okay. And then looking at the pipeline, is there a healthy mix with CRE that should result in us continuing to see some loan-level derivatives in the fee income or maybe will that grow?

Yes. It's already at a very healthy level, David. If you look on our income statement, the quarterly income statement, you will see that yes, we are down $300,000 on a linked-quarter basis but we are up $750,000 from the same quarter a year ago. So the Q3 level, yes, it was down, but it was at a very healthy pace. So I would be very content with that level of derivatives revenue in the fourth quarter, if we were able to achieve that.

And yes, to answer your question, the pipeline certainly does have a strong commercial real estate element to it. But what we are very happy with is the good, balanced growth that we have been getting between CRE and C&I, including asset base. And now we had, in the last quarter, very good growth in commercial construction. So the growth has been nicely balanced across the different categories for us. I'm very happy about that.

(Operator instructions). Bernard Horn of Polaris Capital.

Could you just restate the guidance on the net charge-offs? I simply missed it. And then I'm assuming that includes the $4 million from the second quarter.

Yes, it does. We expect charge-offs for the full year to be between $15 million and $16 million and loan loss provision to be between $16 million and $18 million.

I see. Okay, and then the year-to-date number -- was that a little bit more than $10 million?

Year-to-date through September was $12 million? Yes, $12.2 million.

Okay. Good quarter, thanks.

(Operator instructions). Showing no further questions, I would like to turn the conference back over to Mr. Oddleifson for closing remarks.

Thank you, everybody, appreciate your attendance and we look forward to updating you on the full year in January.

Thank you, bye.

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