Independent Bank Corp (Massachusetts) (INDB) 2014 Q4 法說會逐字稿

Good morning and welcome to the Independent Bank Corp fourth-quarter 2014 earnings call. (Operator Instructions). Please also note this event is being recorded.

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. Factors that may cause actual results to differ include those identified in our annual report on Form 10-K and our earnings press release.

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, sir.

Thank you, Rocco, and good morning, everyone, and thank you for joining us today. With me as usual is Rob Cozzone, our Chief Financial Officer. We will be covering our financial results and outlook in more detail following my comments.

We ended 2014 on a high note with our strongest quarter of the year. Core earnings in the fourth quarter rose to $16.6 million or $0.69 diluted earnings per share. This is another well-rounded performance led by strong fundamentals, as Rob will describe in a moment. I would like to focus my comments on the overall year we just completed.

On the financial side we had another great year in 2014 with record core earnings of $59.9 million or $2.50 diluted earnings per share. The key drivers were: operating revenue growth of just about 6% for the full year; solid commercial loan and core deposit growth; strong double-digit increase in investment management revenues; stellar credit quality; rising capital levels combined with double-digit growth in tangible book value per share and good expense control.

And all this was accomplished with a keen eye towards disciplined management of asset quality interest rate risk. Beyond the numbers much was accomplished in moving our franchise forward and laying the groundwork to sustain our momentum.

Among our more notable accomplishments were: continuing to grow our household base at a multiple of the state's growth rate, in large part due to referrals from satisfied customers; capitalizing on our recent expansion initiatives in greater Boston market by way of new business generation and increased brand awareness; reaching agreement to acquire Peoples Federal Bankshares, which affords us our first retail presence in Boston and fits quite well with our historic strength in the business segment and complements our recently opened Boston office, our Central Bank acquisition and our Ben Franklin acquisition.

Collectively these actions give us the opportunity to accrue more experienced bankers and reduce our full product set including mortgage and investment capabilities and grow our brand awareness. We are on target for a Q1 closing and it is still expected to be immediately accretive to both earnings and tangible book value.

Keeping pace in the digital media age by introducing new and improved product offerings along with easier access, especially in the mobile banking side, we launched a completely redesigned website that is much easier to use and incorporates more effective marketing capabilities.

And investing in business intelligence and workflow analysis to help us to further improve our prospecting, cross-selling and service delivery efforts. And continuing to accrue experienced talent into our ranks and developing a committed and engaged workforce.

Looking ahead it is all about continuous improvement by looking for ways to make banking easier and more efficient for our customers and us. Of course we remain committed to our customer focused and disciplined risk management.

The macro picture, both nationally and certainly locally, does appear to be more promising than the years passed. And there is reason for greater optimism toward key catalysts like increased business activity and an ongoing housing recovery. Yet this must be counterbalanced against some other realities. First, the global economy that is struggling a bit.

And more locally, an ever increasing competitive intensity which puts further pressure on our margins already stressed by a low rate environment and creates accelerated payoffs and maybe hampers our origination volume. And Rob will talk more about these factors.

And then lastly, a regulatory environment that continues to introduce added complexity and cost. However, these are not new headwinds. We have faced these before and we continue to believe that we have the right value proposition executed by a fantastic group of colleagues and I remain optimistic about winning in this environment. We know who we are, where our competitive advantages lie and what it takes to win in this marketplace.

Before handing it off to Rob I would like to once again thank my hard-working colleagues for another terrific year. Their passion for excellence is what truly drives our success. It is no surprise then that in the latest Boston Globe survey on the top places to work in Massachusetts we're the top rated bank and fourth overall among the state's largest employers.

And a final note, I'd like to acknowledge the contributions of longtime Board member Ben Gilmore who recently passed away after a lengthy illness. His counsel and stewardship as a director over the last 20 years will be missed. Thank you. And now on to Rob.

Thank you, Chris, and good morning. I will now read the earnings for the fourth quarter and full year in more detail. Following those comments I will provide earnings guidance for 2015.

Independent Bank Corp. reported net income of $16 million and GAAP diluted earnings per share of $0.66 in the fourth quarter of 2014. This compared to net income of $15.7 million and GAAP diluted earnings per share in the third quarter of $0.66.

Both quarters included items that the Company considers to be non-core including $0.03 of M&A expenses in the current quarter along with minor gains on security sales. Excluding those items operating diluted earnings per share were $0.69 in the fourth quarter compared to $0.67 in the third quarter. For the full year in 2014 operating diluted earnings per share improved by 4.6% and reached a record of $2.50.

Performance ratios for the quarter were strong. On an operating basis the return on average assets was 1.02% and the return on average equity was 10.29%. In addition, our core return on average tangible common equity exceeded 14% for the quarter.

Loan origination activity was relatively consistent with prior quarters as we continue to win our fair share of new business. Yet an uptick in competitive driven payoffs and a decrease in line utilization tempered overall loan growth, which came in at an annualized rate of approximately 2% for the fourth quarter.

There is no question that the competitive environment in our region has intensified. But as we have said in the past, we will not do transactions that in our review destroy shareholder value. We continue to believe, however, that we can generate sufficient opportunities to maintain our current growth trajectory.

During 2014 we grew total loans by 5.4% which is slightly above the original guidance we expected and we expect a similar level of organic growth in 2015. Total deposits were 1.7% lower for the quarter as seasonal outflows, reductions in higher cost term deposits and a $36 million reduction in the more volatile 1031 exchange deposit business more than offset new customer acquisition.

With a large cash position at the end of the third quarter there wasn't much need for additional deposit funding. However, core deposit growth for the year was excellent at 7.5% and the total cost of deposits declined another basis point to 20 basis points for the quarter.

Tangible book value per share increased $0.52 during the quarter and now stands at $19.18. Year-to-date tangible book value per share has increased by $2.00. In addition, tangible capital to tangible assets was a healthy 7.44% at December 31, over 50 basis points higher than a year ago.

During the quarter the Company issued $35 million of sub debt in a private placement. The 10-year debt is priced at a fixed rate of 4.75% for the first five years and then resets quarterly to LIBOR plus 298 basis points.

As a result of this issuance and the fact that the $30 million of bank level sub debt has begun to lose both Tier 2 capital treatment, we anticipate paying off the $30 million of bank level sub debt sometime later this quarter. Carrying both issuances temporarily had a negative impact on the cost of funds in the fourth quarter of about 2 to 3 basis points and will have a similarly negative impact on the first quarter.

The net interest margin stabilized in the fourth quarter at 3.42%. The margin has temporarily benefited from the deployment of liquidity and the steadying of asset yields. However, with intense competition and lower medium-term rates we expect asset yields to resume a gradual decline.

Asset quality continued to be excellent. Net charge-offs were 13 basis points for the quarter, nonperforming loans were 55 basis points and nonperforming assets were 61 basis points -- all near post crisis lows. For the full year net charge-offs were only 18 basis points, lower than originally forecast.

Noninterest income on an operating basis increased 7% versus the third quarter with the most notable increases coming in loan level derivative income. Other income also increased as year-end capital gains distributions were realized on certain equity securities and higher income was generated from CRA investments.

We continue to be very pleased with the progress we have made in growing the fee income category over the past two years and it remains a focus for us.

Noninterest expense on an operating basis increased 4% for the quarter reflecting increased performance-based incentive accruals as well as increases in a number of other areas as detailed in the press release.

The full-year efficiency ratio on an operating basis declined 2% from 66% in 2013 to 64% in 2014. This decrease occurred despite continued investment in strategic priorities and is indicative of the benefit from successfully integrating acquisitions.

As Chris mentioned, the Peoples Federal transaction is on track to close in the first quarter. Our financial expectations have not changed. We still expect the transaction to be $0.02 to $0.03 accretive to 2015 and approximately $0.03 accretive thereafter.

In addition, we anticipate a slightly positive impact on tangible capital measures. The acquisition of Peoples Federal will help solidify our position in an important expansion market.

I will now turn to earnings guidance for 2015. As has been our practice, we will describe our anticipated financial performance for the full year and then provide quarterly updates as the year progresses. As Chris alluded to, the estimate we provide incorporates a view of the macro operating environment that may be more conservative than others share.

Including a $0.02 to $0.03 benefit from the Peoples Federal transaction, we anticipate that 2015 operating diluted earnings per share will be in the range between $2.63 and $2.73. I would like to remind you that our first quarter usually trends notably below the fourth quarter due to a variety of factors including fewer days, higher employee benefits expense and increased marketing expense.

In addition, the first quarter of 2015 will include M&A expenses of approximately $11 million in connection with the Peoples Federal transaction.

Key assumptions in our 2015 outlook include the following: a stable rate environment; should short rates rise in the latter half of 2015 both net interest margin and earnings will benefit.

Total loans grew organically by 5.4% in 2014. With only a slightly improving economic environment and with increased competition for loans we expect organic loan growth to be similar to 2015 and are guiding to 4% to 6%. Much of this growth will continue to come from the commercial portfolio.

We are focused on maintaining a favorable deposit mix and we will continue emphasizing core deposit growth over absolute growth. We expect to grow total deposits organically 3% to 4% in 2015.

With continued pressure on loan yields and with the addition of the Peoples Federal balance sheet, the net interest margin is expected to contract slightly in 2015 and we will likely be in the high 330s. And again, substantial relief in the net interest margin won't come until short rates rise.

Following strong performance in 2014 the asset quality outlook is expected to be stable in 2015. As a result the provision for loan loss is anticipated to be in a range of $10 million to $13 million versus $10.4 million in 2014 and net charge-offs are expected to be in the $8 million to $11 million range versus $8.5 million in 2015.

Core noninterest income excluding the addition of Peoples Federal is anticipated to grow 3% to 4% in 2015 as continued growth in the core customer base should lead to moderate growth across most fee income categories. However, as Chris stated, our consistent focus on growing our investment management business is expected to contribute to double-digit growth in investment management related revenue in 2015.

Core noninterest expense will be well contained and is expected to increase 3% to 4% organically. The addition of Peoples Federal of course will add additional growth to -- a few percentage points of additional growth to that number.

We'll continue to look for ways to improve the efficiency ratio via positive operating leverage and we expect 2015 efficiency ratio to be approximately 1% lower than 2014. However, we will also continue to invest prudently in those areas that we anticipate will improve long-term profitability.

We expect our tax rate to be slightly higher than the 28.5% realized in 2014. And finally, we expect capital to continue to grow with tangible common equity increasing to a range of 7.75% to 8% by the end of 2015. That concludes my comments. Chris.

Okay, Rocco, we are ready for questions.

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

Your net interest margin seems to have held up better than you guys had suggested over the last couple quarters. And I wondered if you could talk a little bit about loan pricing in your commercial real estate and C&I portfolios today and what you are seeing from a competitive standpoint out there.

The margin, you are right, has held up a little bit better than we had suggested. I will just remind you that part of the benefit this quarter, Mark, was the reduction in cash balances that contributed about 2 basis points. But certainly loan yields have held up.

And we are able to hold our pricing relatively stable in our overall loan production. It has been surprisingly consistent. I think some of that though is due to the mix of the business, so we tend to get higher yields on construction in some of the C&I deals that we are doing like asset based lending. And so, the overall yield a production has been stable.

If you look at yields by category, there is a decrease especially in the commercial real estate category. And that is largely due to competition. So we do expect loan yields to gradually compress in total. And I think the benefit that we have seen over the last couple quarters is not something that is going to hold up.

And then I was curious, are you seeing any of the bigger banks in your market sort of pulling back at all from any of these lending niches?

We haven't. We actually are seeing -- we actually are seeing BofA more consistently than we have in the past.

Okay. And then lastly -- actually two more questions. Could you share with us what the loan pipeline is today and maybe what the average contract rate is?

We actually don't have the loan pipeline finalized yet, Mark. I usually include that in my comments, I apologize for that. But we do expect the loan pipeline to be lower than what it was in the third quarter due to some of the competitive factors that we talked about. So I don't have that or the yield on that.

Okay. And then the last question is on the effective tax rate. I know in your prepare comments you said you would expect it to be a little bit higher than the 28.5%. I could be mistaken, but I thought at some point earlier in the year you had suggested that sort of the longer-term effective tax rate would be 31%-ish. Is that where the rate will migrate up to do you think (multiple speakers)?

No, it will be close to 29% next year.

Okay, great, thank you.

Laurie Hunsicker, Compass Point.

Rob, I was just hoping for just a little bit more clearly regarding net interest income. Specifically I am looking for the accretion income just comparable September to December. I'm just trying to get to that core net interest earnings (multiple speakers).

Yes, the accretion income was about the same, a little bit less than it was last quarter. So around the $500,000 level, a little more for that.

Then so really on an absolute core basis your core net interest margin increased. So your reported margin 3.42% to 3.42%, but your core margin then went from 3.37% to 3.38%, is that correct?

Yes, but it was benefited -- well, I haven't officially done the calculations and what you call the core margin, Laurie, first of all. But again, we did have a couple of basis points benefit from the deployment of cash. So depending upon whether you include that in your core calculation that (multiple speakers).

Would adjust it. Right. Okay. Yes, good point, okay. And then as we look out this year in 2015 can you give us any guidance -- and obviously there is a lot of moving parts in accretion income. But can you give us some sort of general guidance especially as we see PEOP come over? What the accretion (multiple speakers)?

Yes, we actually don't -- well, as you said, there are a lot of moving parts. But as I had mentioned previously, Peoples had a practice especially in the commercial side of doing 5-1 ARMs in the commercial real estate book. So that would suggest from an interest rate mark perspective that the interest rate mark on their book would be lower than we would have seen with previous acquisitions.

On the credit side their credit is pristine. So we expect minimal credit marks on their portfolio. And so, I would expect the overall accretion from that book to be less than what we've seen with prior acquisitions.

Got it, okay, perfect. And then just sort of one last follow-up. As we look at Peoples everything is on track. Can you just share with us, Chris, your vision for how you think about M&A, what your appetite is for 2015? Thanks.

Certainly. We have had a really great track record over the last number of years in bringing on board quality franchises that have fit very, very well with our legacy -- ever-expanding sort of legacy footprint.

In terms of thinking about M&A going forward, I think our posture will be that we would like to continue if there are opportunities to rise to expand our footprint in adjacent or very near adjacent opportunities going forward.

Having said that, banks are sold, not bought. And our only hope is that if a Board of Directors sort of thinks about that, that we are invited to the table for discussions.

Okay. And in terms of the size of your focus, what -- I guess what is your appetite and how do you think about yourselves as you approach that $10 billion?

Well, that is an interesting question. First of all, as banks come up I sort of think about banks as sales of sort of almost in our region as a random event now since there are so few banks really that are sort of even capable of selling themselves from an ownership perspective, most of them are mutuals. So I would consider a bank of any size.

The $10 billion threshold question is a good one and it as the management team is paying increasingly -- is increasingly focused on it because just our organic growth and a smaller acquisition, it will put us within range. And what we are doing quite a bit of work in understanding sort of as you approach $10 billion, what are the areas that we need strengthen and improve.

Because we know from folks who are on the flight path ahead of us that our regulators are not going to change their stance on a stepwise function, that we are going to be regulated one way at 9.9 and then at 10.1 we are going to suddenly have a completely different set of approach. We are going to be sort of as we hit the $10 billion threshold we will have to have the risk processes in place that are consistent and what are expected with a $10 billion enterprise.

So as a result we are already at the pro forma $7 billion making further investments in, for example, some stress testing capability in Rob's area to really begin to sort of build our capabilities there.

So we are going to be on a -- we are very much looking at this is a sort of a gradual upward flight path from a capability point of view, so there are no, for the lack of a better word, emergencies in terms of capabilities we need to build as we are nearing it. That is sort of long-winded, Laurie, I hope that gives you some color.

It does, thanks. I will let someone else jump in. Thank you.

(Operator Instructions). Collyn Gilbert, KBW.

Rob, I was wondering if you could just give us a little bit more color in your loan growth targets for this year. I guess specifically, how much of that may be coming from assumptions that line utilization improves or kind of the geographic drivers of that or subsector drivers of that. Just trying to understand a little bit more how that growth rate is breaking down in your eyes.

Yes, just the first part of your question. Very little of that is from line utilization increasing. And where, when we talk to our senior lender, the opinion of most of the businesses that we talk to is still that they are not willing to make incremental investments and don't see the need to make incremental investments. And so we do not -- and they are still relatively flush with cash. So we don't expect a meaningful increase in line utilization in 2015.

In terms of the mix of growth, we expect it to be relatively consistent with what we saw in 2014 both across portfolios but also geographically. And we are having a lot of success in Boston and that has been the largest area of production for us, if you compare that to the other cities and towns that we do business in.

But, it is not significantly outsized. We expect it to be pretty well geographically diversified. But, with our enhanced emphasis on the greater Boston market, we expect more production to come from there than from our other territories.

Okay. And any change in expectation on pay downs? And I don't know how much pay downs have maybe dragged on net gross in 2014, but just (multiple speakers) a little bit.

Yes, we -- well, that's a great question and this quarter we did see accelerated pay downs in the commercial book, which is why we were only up 0.5% because our new commitments were consistent with prior quarters. So that is a bit of a wildcard for two reasons. One is the competitive pressures, the other is just lower rates in general. When you have lower rates customers look at opportunities to refinance transactions. So we do expect an elevated level of payoffs heading into 2015.

Okay, okay.

Collyn, I will add that on the origination side that we had a record originations year in the commercial side with about $950 million. And that -- we probably looked at deals that sort of were legitimate enough and [quality] enough to enter into our official sort of pipeline about double that. So we see a lot of volume in our region and we are -- stronger originations which are a [counter wind] of course to the payoffs.

Okay, okay, that's helpful. And I think I ask you guys this every time. To that point, Chris, is there something that you need to see in the broader economy or maybe within these loan structures that would see that sort of pass-through rate on what you are seeing versus what you are actually booking increase?

Yes, I think the -- I mean what were -- stating now there are two reasons we let sort of loans go, one is pricing and one is terms. And we are absolutely adamant about not giving up terms -- no way, no how. And on pricing it is sort of one that if there is tight pricing we sort of take -- we still look at a total relationship and see if there is anything we can do to compromise there.

So what we would have to see is -- this feels a little bit kind of like 2006/2007 where things are getting a little bit looser than we think they ought to be. So what happens if this passes prologue, other folks will have to tighten up a little bit. If that is the case we will see less run off and [be greater] growth rates. Rob, what do you think?

I echo your comments. We just have -- seem to have thresholds that are higher than others in our region.

Okay.

And we think thresholds are prudent.

Good.

Thresholds that our owners appreciate us drawing the distinct line.

Yes, okay, that's great, that is good color. Thank you for that. And then just kind of tying in together again, Rob, your guidance on core operating expense up 3% to 4% and then some of your comments, Chris, just about moderate growth in getting ready for the $10 billion market.

Just curious, in the expense growth numbers, Rob, that you are assuming, can -- have you broken out how much of that is just regulatory related, whether just on day-to-day needs or preparing for the $10 billion mark?

Yes, we haven't broken that out specifically. And as Chris said in his comments, we are trying to take a very incremental approach to preparing not only for just the $10 billion threshold but for the cost of being a larger bank in general.

Just to interrupt for a second. One interesting sidebar here is the cyber security. We made a couple very highly qualified more expensive hires there to sort of deal with that whole arena.

Yes. So that is a perfect is example, Collyn, of an incremental approach. That is one area we have some incremental spend, there is some technology spend that is information/security related. But they are large -- and as Chris said in his comments as well, we are assuming the hiring of somebody in my area to help with capital stress testing. So they're individual numbers that I wouldn't expect add up to much more than a few hundred thousand dollars for 2015 --.

Incremental number.

Incremental, right. But nonetheless are additional investments we are making.

And so, in the past years we have sort of expanded our compliance, we expanded internal audit, we have expanded our BSA. So we feel we have a pretty robust run rate every year and adding a little bit more this year.

Okay, that is great color. Thank you guys very much.

(Operator Instructions). Showing no more questions, this concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Oddleifson for any closing remarks.

Great, thank you very much, Rocco. And thank you, everybody, for joining us today. And we look forward to talking to you about our first-quarter results in three months. Have a good weekend.

Thank you.

Thank you for your time, sir. And the conference is now concluded. We thank you all for attending today's presentation. You may now disconnect and have a great weekend.