Independent Bank Corp (Massachusetts) (INDB) 2013 Q1 法說會逐字稿

Good morning and welcome to the Independent Bank Corp. first-quarter 2013 earnings conference 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).

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.

Please note this event is being recorded. I would now like to turn the conference over to Mr. Christopher Oddleifson, President and CEO. Sir, please go ahead.

Thank you and good morning; and thank you, everybody, for joining us today. Denis Sheahan, our Chief Financial Officer, will further discuss our quarterly performance following my comments.

Well, we [orchard], and 2013 was another solid quarter. We continue to capitalize on our competitive strengths, expand our customer base, extend the reach of the Rockland Trust brand, and drive organic growth.

Core earnings in the first quarter amounted to $13.3 million or $0.58 per share. This represents healthy earnings growth of 9% over the prior year. Operating fundamentals remain strong.

We generated growth in our commercial portfolio, despite having to rebuild the pipeline after a remarkable Q4 and amidst stiffening competition. We continue to make excellent inroads to the C&I sector as our client base of quality midsize companies steadily grows. And the increase in our construction portfolio illustrates a new economic activity in our area.

The investments we recently made in our commercial business are really paying off, and we are very committed to its future growth. We continue to add seasoned bankers to our ranks in our desire to add depth and greater sophistication to our relationship banking model. We have a large team of commercial bankers enabling us to see many potential deals throughout our footprint.

We've recently also decided to extend our new investment management office about to open in Boston to accommodate commercial banking as well. You may recall a similar effort in our Providence office has proved very successful.

Total loan growth in the first quarter was tempered, however, by continued runoff in the residential mortgage portfolio, where refinancing activity remains high. As many of you know, we sell the vast majority of the residential loans we originate.

Core deposit levels remain in good shape, holding at 83% of total deposits, providing ample liquidity to our Company. It indicates our relationship focus and service excellence approach is working. I should note that we continue to upgrade our online and mobile banking offerings to keep pace with the ever-changing consumer preferences.

We continue to be encouraged by growth in our investment management business. Assets under administration or management have risen to $2.3 billion from $2.2 billion a year ago. Quarterly revenues have gone grown 9% over that same period.

Turning to the balance sheet, credit quality continues as a point of distinction for us. Net charge-offs were a low 11 basis points annualized in the first quarter. Nonperforming asset and delinquency levels did pick up a bit but remain quite manageable, with no change in our provision outlook.

The picture on capital is quite good as well. Tangible common is heading back up again following the Central Bank acquisition, rising by about 20 basis points this quarter. Tangible book value growth has been a consistent story for us. It rose again in the first quarter and sits 4% above where it was a year ago, despite absorbing the goodwill from the acquisition of Central Bank.

Speaking of Central Bank, the integration is proceeding quite smoothly. We completed our branch and major systems conversions during the first quarter. The Rockland Trust logo will now go into nine branches added in attractive Middlesex County, surrounding Boston.

Customers in these communities now have full access to our deepest product set and banking service. We continue to enjoy high levels of customer satisfaction, which will serve us well in these newer markets. We're in an aggressive marketing mode to capitalize on our brand and the added business opportunities there. And we remain fully confident in achieving the financial benefits of this combination.

Turning to the macro picture, it's still hard to gain any conviction as to the future direction of all the ups and downs of the economic indicators and the ongoing political paralysis in Washington. Massachusetts, the tip of the Eastern part of the state, has weathered the recession better than most in the nation. Through February the state regained all the jobs lost this past recession, with unemployment falling to 6.5%.

But Boston area unemployment level fell to a seasonally adjusted 5.7%. Yet the impact of the sequestration cuts have yet to hit our sizable research- and defense-based sectors, other than perhaps curtailing their airline flight plans.

There's no question that the interest margin pressure on the industry is formidable -- no signs of abating soon. While trying hard to seek ways to counter that, not easy in the short term.

So we're going to pursue healthy growth -- loan growth, fee income generation, deposit generation, and intelligent expense control. What we won't do is to take a shortsighted approach by loading up on security -- investment securities. Straying from our credit discipline or taking a slash-and-burn expense program approach will undermine our ability to grow in the future.

Many observers keep expecting industry consolidation to pick up, given all the earnings and regulatory pressure out there. That hasn't seemed to happen yet, but we remain optimistic yet disciplined on that front.

Our game plan is to simply keep our eye on expanding customer relationships and profitably growing share. This is the best way to add future value. We really like how our franchise is positioned in the marketplace; we're in that sweet spot of being large enough to meet today's customer needs and small enough to nimbly adapt to the changing environment.

So I remain confident that were on the right path, and our strength is exemplified by the increase in our quarterly dividend to $0.22 per share, recently approved by our Board. That concludes my comments. Now I'll turn it over to Denis.

Thanks, Chris, and good morning. Independent Bank Corp. reported net income of $12.3 million and GAAP diluted earnings per share of $0.54 in the first quarter of 2013 as compared to net income of $10 million and diluted earnings per share of $0.45 in the fourth quarter of last year. Both quarters included merger and acquisition charges, and was first quarter included severance associated with the outsourcing of the Bank's mortgage operations, as discussed last quarter.

Excluding these items, diluted earnings per share on an operating basis were $0.58 in the first quarter of 2013 as compared to $0.61 in the fourth quarter of last year. Year-over-year diluted earnings per share improved by 4%. I'll now review a number of key topics.

As anticipated, following a robust period of growth in 2012, and in particular a gangbuster fourth quarter, loans were essentially flat to year-end. However, commercial pipelines are rebuilding and prospects for a reemergence of growth look good. Asset quality trends were generally favorable, and as expected, the net interest margin continued to compress. I will expand on each of these items in greater detail in a moment.

Key performance ratios were solid in the first quarter, with return on average assets and return on average equity on an operating basis at 96 basis points and 10.04%, respectively. Commercial loans grew at 5% on an annualized basis. Commercial and industrial continued a respectable growth path. And of note, construction activity is solid, with linked-quarter growth of 12% on annualized and year-to-year growth of 43%.

The growth in construction continues to be driven by a good mix of commercial and residential development, the latter due to limited inventory. Commercial growth was offset by a reduction in the residential real estate portfolio, due to refinancing activity combined with a slowing on the home equity side, as expected. The commercial loan approved pipeline has rebuilt to over $180 million, a 43% increase since last quarter. And we expect good growth to occur, particularly in the second half of the year.

While it is certainly competitive, we have sufficient business development capability to generate the kind of opportunities we like. As an early indication, loans are up 1% already in April. In addition, as Chris mentioned, we plan to open an ING office in Boston later this year, and we have decided to expand that office to include a commercial lending presence.

Deposits were essentially flat in the first quarter, which is not unusual for us due to seasonal fluctuations. We are also seeing the beginning of business customers using excess funds to invest in new activity, which we view as an early sign of an improving economy. While this will negatively affect business deposit levels, it will in time be positive for lending activity. As we begin the second quarter, advertising ramps up, and we are optimistic of improved activity as the quarter progresses.

Asset quality trends remain excellent. Net charge-offs were a very low 11 basis points on an annualized basis. Nonperforming assets increased to $47 million in the quarter, with overall levels quite manageable, at 82 basis points of total assets.

Loan delinquency increased to 1.05% from 82 basis points at year-end. Most of this increase was in the commercial loan category, and we have the credits well under control. Any loss associated with these credits is within the loss estimate for the year we provided last quarter. And finally there, we continue to feel really good about the state of our credit profile.

The net interest margin decreased as anticipated to 3.58% from 3.68% in the fourth quarter. 6 basis points of the compression is due to purchase accounting, which inflated the fourth-quarter number. Although we continue to expect it to drift lower from here due to the ongoing pressure on earning asset yields facing our industry, the pace of compression should moderate such that the average net interest margin for the year will be in the low 3.50%s.

Noninterest income decreased by 8%, largely due to tax credits, loan fees, and income on called securities, all recognized in the other noninterest income category in the prior quarter. We did experience growth in several other categories, most notably investment management.

Noninterest expenses on an operating basis grew 4% due to the inclusion of Central Bank's expenses for a full quarter, as well as snow removal and advertising. The Central Bank integration is well underway. We converted the bank to IMDB systems in February, and we look forward to the potential the market brings.

On the cost savings front, we targeted 40% in cost saves. At this point we've accumulated 43% in saves. Quite honestly, we've been very successful in assimilating the banks we've acquired over the years, and we've learned how to take costs out quickly and efficiently.

In light of the interest rate environment, I thought it be useful to provide greater insight into our interest-rate sensitivity. And we will provide greater detail in our 10-Q, with a range of impacts and various rate scenarios for your information. In summary, we are positioned for rising rates.

Assuming a static balance sheet -- that is, no loan growth, no asset growth -- and the current interest rate environment, net interest income would decrease by 2% over the next year. Alternatively, assuming an instantaneous 200 basis point increase in rates, net interest income would increase 6% over the same one-year period.

It's important to remember these estimates are based upon a static balance sheet. So again, we are positioned for rising rates, as we believe that is appropriate in this operating environment. We feel that any near-term opportunity cost of being so positioned is far outweighed by the greater risk of being on the wrong side when rates move up quickly.

I'll now cover our earnings guidance for the rest of the year. At our last conference call we anticipated operating diluted earnings per share performance this year of between $2.28 and $2.38, which equates to 6% to 10% earnings per share growth. We continue to expect that performance.

There are a few items worth noting as we move forward into the year. Importantly, while loan net charge-offs were particularly low in this first quarter, we expect the full-year guidance of $10 million to $14 million to remain the same. In other words, don't continue to expect 11 basis points charge-off performance.

We expect charge-offs to increase modestly in the coming quarters, ending the year somewhere around 20 to 25 basis points. The provision for loan losses is anticipated to stay in the range of $12 million to $16 million.

The remainder of the full-year guidance is essentially the same. So no doubt the interest rate environment is quite challenging; clearly, with a declining margin, noninterest revenue growth and expense control are paramount. We've spoken frequently of our progress in growing noninterest revenue, but rest assured we are placing a keen eye on noninterest expense and practical steps we may take to reduce the rate of growth in light of our operating environment.

This by no means, to use Chris's words, signals a slash-and-burn efficiency program, which is not our style, but rather commonsense attentiveness to cost in the day-to-day running of the Company. We are fortunate to operate a terrific franchise in great markets and look forward to achieving the growth expected for this year.

That concludes my comments. Now, open the call for questions.

Yes, operator, ready for questions.

(Operator Instructions). Mark Fitzgibbon, Sandler O'Neill Partners.

This is Matt filling in for Mark. Just a quick question. I'm sorry I missed this, but the approved loan pipeline. Did you say, Denis, that it was 183?

Yes. It's up 43% from year-end, and we expect it to continue to build from here. Activity is very good here as we enter into the second quarter.

And how about a weighted average rate?

I'm not going to get into that, Matt. That gets into sort of more competitive pricing. I'm not going to get into what -- how we price our loans.

Okay. And how about the mortgage banking pipeline? Can you give us a sense of that absolute level, as well as the pricing that you're seeing in the secondary market?

I think our pipeline is around $65 million.

No, $70 million.

$70 million. What was the second part of your question?

The pricing you're seeing in the secondary market. I'm trying to get at gain on sale of margins that we can expect.

I don't know that I have that.

Still in the 1.75% to 2% range.

Perfect. And then just broadly, the TC ratio looks like it's on track to accrete to about 7% by year-end, as you guys had projected, and CEVK appears to be integrating smoothly. Currency is strong.

When might you do another deal? And in which direction might you like to extend the franchise? Just broad macro question for you.

This is Chris. I mean, we have said in the past, doing a deal is a completely sort of opportunistic -- and given the number of franchises out there, it's becoming an increasingly sort of random event.

So if a Board of Directors were to raise their hand and say, listen, we want to consider strategic alternatives, we'd like to be at the table. But other than sort of on a national basis, which I predict consolidation nationally, I cannot predict anything locally.

In terms of where we'd like to expand, what we've said is that we believe that the vast majority of the economic activity in Massachusetts is sort of within 495. A little bit beyond 495 East. So we have done well with our acquisition Slade's, Ben, and Central. So looking to expand sort of incrementally out from where we are. It's sort of been our past MO, and that's worked well.

Aaron Brann, KBW.

One of the things that we've heard from many banks this earnings season is that loan pricing, particularly for commercial loans, is intensifying. Are you seeing that as well?

Yes, but it's not -- this is Denis, Aaron. Certainly it's competitive. But we're not at the -- we see the occasional sort of 2005/2006 kind of pricing, but it's not overwhelming.

We still have -- we have enough business development capability that were able to generate the kind of both pricing and underwriting terms that meet our desire. You know, last year we looked at I think $1.8 billion of credit opportunity. We closed just shy of $900 million.

So we are bringing in enough new opportunities in that, I guess, perhaps we can be somewhat selective, but it is competitive. We do see pricing pressure, also the term pressure, but it's not overwhelming like it was back in sort of 2005, 2006.

Okay. And then secondly, I saw on the press release that your securities portfolio expanded in order to strengthen your liquidity position. Do you believe that process is complete? Or should we expect further additions to your securities portfolio?

You shouldn't expect, in the near term, robust changes in our securities portfolio. The portfolio increases now generally for collateral purposes, but also to improve our liquidity position. I think longer term, this Bank will have a bigger securities portfolio.

If you just look at -- from a regulatory perspective, guidance is pushing for greater on balance sheet liquidity. So I think longer term this Bank will have a bigger securities portfolio. But we're not particularly enamored with a big securities portfolio in today's rate environment. You can see that by the way we've managed it. The portfolio is sub-10% of assets. So we're not a big -- not very enamored of a large securities portfolio today.

My final question is your salary and compensation line increased. Obviously, part of that is probably the normal seasonality; part of it is the full quarter of Central Bank core. Could you just quantify what was the seasonal impact on the dollar basis this quarter that may drop off into Q2?

I'm not sure I have that here. Also, keep that in mind there was severance in that category as well. There's about $350,000 of severance associated with our mortgage operation that inflates it, too. And beyond that, it's a payroll tax category, which is a little higher here in the first quarter. I'm not sure I have the detail of the number, but you know. I don't have that level of detail with me, Aaron.

Okay, and I'm sorry -- I do have one more question. I believe in your prepared remarks, you mentioned that you've already realized 43% of the cost saves with respect to the Central Bank core acquisition. Are there more to be had? Or in the months since the deal has closed, have you gotten basically everything now that you think you can get?

We're largely done. There may be some modest saves beyond this, but we work very hard and very diligently right around the time of closing and the time of systems conversion to get out the vast, vast majority of the saves, and that's where we are now.

All right. Well, I appreciate that very much.

Sure.

Mac Hodgson, SunTrust Robinson Humphrey.

Denis, just a question on the guidance. I may have missed this, but just curious if there was any change to the loan guidance, the expense guidance, and the fee income guidance. Given -- relative to what you gave last conference call?

No. We think we'll be ballpark in the same areas in each of those. I think we guided deposit growth 3% to 4%. Loan growth 4% to 5%, if I remember correctly. Look in your notes. Those ballparks.

Loan growth, 4% to 5%, deposits 3% to 4%. That's what we're still thinking. Certainly, we expected what happened in the first quarter. We actually did a 70 basis point reduction in the loan portfolio. And no deposit growth.

So those were expected; no significant variance from what we anticipated. So we still feel good about those loan and deposit numbers. And similarly, on the expense and fee income side, no real surprises.

Okay, great. You continue to have excellent asset quality. There was little bit of an uptick in new nonperformers. I'm just curious if you'd give some color there.

You know, it's a handful of commercial credits that migrated into either delinquency or into nonperforming. We're not concerned about the loss associated with those. We knew there was some weakness there, but overall it's very modest, Mac.

When you look at that level of increase on a $3.1 billion commercial portfolio, it's very modest. Our commercial team is confident that we have them well in control, and any losses associated with it are in the guidance we gave you in January and that we just reaffirmed now in April.

So we're not concerned. We're actually feeling pretty good about what's going on in the consumer side, even though that's a smaller side of our portfolio -- about a third of our loan portfolio is in the consumer real estate side. And that appears to be improving quite significantly. So we're feeling pretty confident relative to the guidance that we provided in January and just reaffirmed today.

Okay, great. Just one last topic -- I was curious, on the Boston office, or just adding the commercial bankers to the Boston investment management office. Just curious, will those be new hires? And will there be any sort of different approach or target business size that you'll be going after? Will it be kind of the same, typical client?

It's going to be a combination. We are -- it's important to sort of, when you open up a new office like that, not to have everybody knew, because you want the Company culture and approach to be sort of present in the office. It will be a combination of both the investment side and the commercial lending side.

Now, we're not going to -- it's not going to be a target office. Much -- we have a good chunk of our commercial portfolio in Boston right now. I think it's, what, 9%? 9% of our commercial loan outstanding. So we're in there now; we just don't have an office. Having an office will give us more of a presence, and we'll have a visible commitment to the city.

Okay, great. Thanks.

David Darst, Guggenheim Securities.

I guess part of the acquisition of Central was that it would require some significant investments in those branches?

Yes.

Is that in the run rate for this year? Or is that something that's been capitalized?

Well, it's generally all capitalized, because it's either lease hold or owned facility improvement. So the vast majority of that would be capitalized unless it was relatively immaterial.

We are not finished with the renovations. We're going to renovate all the facilities in Central. They really needed it. And I think six of the nine are done. The other three are more significant projects that will be done. Two of the three will be done later this year.

The third one might fall into Winter early next year. But six of the nine are done and therefore would be in the current run rate.

And I guess, are you seeing an increase in branch activity in new business development in those six that you've done the renovations?

It's early days.

It's really early days. I think the probably more significant factor is that we have been able to bring our sort of Rockland Trust product services and sort of customer service approach to the market, and that has generated some nice business. Separating -- teasing that apart from having a fresh coat of paint and some new counters and new logos, it's tough to tell. I think it's mostly the people driving the increased activity.

And I would say, let's be clear here. These are early days. You know, we have essentially -- the focus initially is close, convert, cost saves. You have some renovations.

But now it's on growth, and these are clearly early days here. There is lots of opportunity in that footprint, and we want to go after it in a very methodical way. So, activity will increase. We have just begun, for example, across our footprint, but certainly this big emphasis in the newer footprint. We've just begun our Spring marketing campaign. So we feel good about our prospects there, but it's going to take some time to execute it.

Okay. And Denis, as you were talking about your Alco position, it is that a discussion that you're having with regulators? And are they maybe encouraging you or your peers, do you think, to become more asset sensitive?

No. I mean, certainly, we have conversations with our regulators relative to many things, but certainly one of the biggest risks today in banking has got to be interest rate risk. And we think we are managing it pretty effectively. The regulators don't sit down and encourage you one way or the other, but let's just say that our dialogue with the regulators relative to our interest rate position is very good.

So we -- this can -- being asset sensitive here is somewhat painful, but we believe it's the right thing to do. We can't necessarily form an opinion on when rates are going up or if they're going up, but there's a lot of danger that can be created by putting a lot of fixed-rate product on your books today. And that's sort of philosophically how we think about it.

And both of you in your comments used the word slash-and-burn in regarding expense management. Are you seeing other banks more aggressively take that approach? And in doing that, are they withdrawing from the market and from some of their customer service revenues?

I think it's sort of our reaction, or sort of our comment there is really getting at what we have been doing over time. We have accomplished a lot at Rockland Trust over the last several years through operational consolidation, branch closure, branch consolidation, renegotiation of major contracts, rethinking fees -- getting into the swap business, for example, which is good for the customers and good for the fee income line. We've really been very sort of stepwise methodical and careful about this.

We've also deliberately maintained our investment in things like our investment management business development group. We have about 14 people who are focused exclusively in business development. That's why we see an increased performance there.

We are reluctant to cut significantly in the muscle. We have all experienced in our careers, and I'm won't name names, but large organizations that have taken a very significant sort of one-time let's get out 10% of the cost structure. And our experience has been that it completely decimates an organization's ability to grow and serve customers.

So while we recognize we have an expense ratio that needs to be -- needs to come down, and we are looking at a number of ways to do that. Both on the revenue enhancement and expense reduction.

There are other banks who have announced major sort of cost reduction programs and laid out expectations. We're going to continue our MO, which is focusing in a disciplined way how we can incrementally take out costs without impacting the viability and sustainability of our business going forward, and our ability to generate shareholder value. What's the time? More than one year. Denis, what would you --

I think that's absolutely right. That's how we continue to think about it.

Okay, great, good job. Thank you.

(Operator Instructions). Showing no further questions in our queue, this will conclude the question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Great. Thank you very much, everybody. We appreciate your joining us on our call this morning, and we look forward to giving you another update in three months. Have a great weekend.

Thank you. Bye.

The conference has now concluded. Thank you for attending today's presentation. Please disconnect your line.