Independent Bank Corp (Massachusetts) (INDB) 2015 Q1 法說會逐字稿

Good morning and welcome to the Independent Bank Corp first-quarter 2015 earnings call. 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 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 in 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. Please go ahead, sir.

Thank you and good morning, everyone. Thank you for joining us today. I am accompanied by Rob Cozzone, our Chief Financial Officer, who will take you through our financial results following my comments.

Following a terrific 2014, we carried our momentum into the current year with another solid financial performance. Core earnings for the first quarter came in at $15.8 million or $0.63 per share. While the harsh winter in New England did put a crimp on general business activity, we held our own in generating good bottom-line results. The key drivers on a year-over-year basis were operating revenue growth of 6.8%, solid core deposit growth, strong double-digit increase in investment management revenues, continued stellar credit quality and rising capital levels.

While loan growth and deposit fee income were negatively impacted by the weather in the first quarter, our commercial loan growth was also influenced by competitive pressure which I will address in a few minutes.

I am delighted to say that our completion of the Peoples Federal acquisition went according to plan. We have historically managed the integration process well and I can't remember a smoother one than this. All systems and branches were converted without a hitch on the first weekend and we have hit the ground running. And importantly from our new customers' perspective, they continue to be served by branch managers and the staff they know.

We are also fortunate to retain several key executives from Peoples, Maurice Sullivan, former Chairman and CEO who joins our Board; Jim Gavin, the Peoples Senior Lender joins our Commercial Lending Leadership team; and we welcome Chris Lake, the Peoples CFO as our Director of Risk Management.

Peoples with its eight branches helps unite our expanding Eastern Massachusetts franchise by linking our legacy South Shore network with our more recent Northern presence. (technical difficulty) Boston market is where the vast majority of growth in the region is centered and it is definitely a high priority for us.

We are focused on the opportunity in front of us to bring our deeper product set to Peoples customers and to leverage our new distribution in this robust geography where our brand is already recognized. We are already experiencing solid [originating] activity in this new market.

Overall we are executing our disciplined strategy to achieve measured growth and consistent financial performance and we understand our business model and we stick to it. Our balance sheet remains in good shape, great shape. Capital continues to build nicely providing a platform to support long-term growth. We are especially encouraged by the steady growth in tangible book value, which rose again this quarter inclusive of the Peoples acquisition. And as Rob can attest, we continue to be well-positioned for the much anticipated rise in rates.

On the macro front, the regional picture offers encouragement. The Massachusetts unemployment rate dipped below 5% in March for the first time since 2008. Business confidence reached a 10-year high in March. Although stalled by weather, new construction is booming in Greater Boston and the state's high tech, biotech and educational sectors which helped insulate us during the recession, continue to do well.

One consequence of the improving macro picture has been the heated competitive environment that is unfolding, especially in our lending side. Boston's economic resiliency has not gone unnoticed by community banks, regional banks, national banks, international banks and insurance companies. We see aggressive underwriting trends [keeping back] and we are keeping a watchful eye on this trend. The good news is that we are still very much at the forefront of deal flow and our pipeline is large. But our pullthrough rate in our loan pipeline has been pressured as evidenced by loan growth in this quarter. It's too early to tell where it is going but as you have heard us say many times before, we will not sacrifice our long-held credit discipline that has kept us in such good stead over these years. We will not chase poorly structured or badly priced deals for the sake of short-term optics. Our decision to pull back in 2006 and 2007 in the wake of similar trends proved to be wise on but I want to reiterate it is still a bit premature to make any hard determinations.

Regardless, we remain confident of our ability to continue gaining share and distinguishing ourselves in the marketplace. Our customers are among the most loyal in the industry and our sales and marketing efforts continue to attract new households at a multiple of the market. We believe customer growth will continue to fuel healthy loan growth, deposit and fee income growth.

I am proud of my colleagues and I am thankful for their extra effort to earn new customers and keep the ones we have so happy.

One sign of confidence in our future is evidenced by our Board's approval last month of an 8% increase in our common dividend; steady increases throughout the years reflects our attentiveness to provide a healthier return to our many loyal shareholders.

One final word I would like to say before handing it over to Rob, as many of you know one of our talented executives, Dennis Sheehan, recently left us to become CEO of another local bank. Dennis has been a trusted colleague for many years as CFO and COO and was instrumental in helping us achieve our track record of very disciplined growth and we wish him well. I know he will be very successful in his new endeavor.

In light of that, I would like to emphasize that we place enormous emphasis on succession planning and promoting from within. We've developed great bench strength and have a cadre of executives who can assume greater responsibilities without missing a beat. Dennis himself cultivated a strong and very capable leader such as Rob here who has seamlessly stepped up to keep our momentum going.

And with that, I will turn it over to Rob.

Thank you, Chris. I will now review our first quarter in more detail. Independent Bank Corp reported net income of $9.5 million and GAAP diluted earnings per share of $0.38 in the first quarter of 2015. This compared to net income of $16 million and GAAP diluted earnings per share of $0.66 in the prior quarter. Both quarters included items that the Company considers to be non-core including $0.25 of mergers and acquisition expenses in the current quarter and $0.02 of M&A expenses in the prior quarter. Excluding those and other minor non-core items, operating diluted earnings per share was $0.63 in the first quarter compared to $0.69 in the prior quarter.

As indicated previously, due to seasonal factors such as fewer days and higher employee benefits expense, our first-quarter results typically are well within the linked quarter results. In addition, the quarter just ended also included impacts from weather-related reductions and customer volumes, unusually low net charge offs and an inflated interest margin due to early payoffs of acquired loans, all of which I will discuss in more detail momentarily.

On an operating basis, the return on average assets was 0.97% and the return on average equity was 9.33% for the quarter. As Chris mentioned, the Peoples Federal acquisition closed on February 20 and the branches and systems were fully converted that weekend. The integration has gone very well and cost savings targets have already been achieved. As a result, we are on track to deliver immediate earnings accretion.

Within the press release you will see a summary of the assets and liabilities acquired as well as an additional schedule to help you better understand organic loan and deposit growth rates for the quarter and year.

Our fair value basis, the Peoples loan portfolio was 60% commercial with the remainder being primarily residential real estate and over 70% of the deposit book is core.

Total loans including the acquisition increased 8.5% during the quarter. Organic loan growth however was challenging during the quarter as intense competition and severe weather hindered closing activity in construction line utilization. In addition, low mortgage rates continue to provide incentives for refinancing resulting in higher residential mortgage payoffs.

These factors all contributed to a 1% decline in our loan portfolio excluding the acquisition since year end.

On a positive note, loan pipelines and application activity were very healthy at the end of the first quarter and we anticipate a resumption of organic growth in the second quarter.

The competitive environment, however, does bear watching. As we have repeatedly stated, we will not do transactions that in our view destroy shareholder value. The last time we experienced this sort of competitive environment was in 2006 to 2007 timeframe, a period in which we decided to shrink the balance sheet and return capital to shareholders. A key difference between that period and today, however, is the strength of our position in the market and the breadth of our existing customer base.

Today we are often told that we are at the top of the list for most consumers and businesses in Eastern Massachusetts, which provides us with lots of opportunities. Additionally, our broad customer base continues to be a substantial source of new business. Nonetheless, we now believe that our loan growth for the year will likely be closer to the lower end of the 4% to 6% range provided last quarter.

Total deposits including the Peoples acquisition increased 8.8% during the quarter and were up 0.5% organically. The total cost of deposits increased 1 basis point to a still low 21 basis points due to the addition of higher cost Peoples deposits. With the launching of our spring advertising campaign, we expect deposit growth to accelerate in the second quarter.

During the quarter and as anticipated, $30 million of bank level sub debt was retired and it was within five years to maturity and have begun to lose full Tier 2 capital treatment. You may recall that the Company issued $35 million of sub debt in the fourth quarter at an interest rate of 4.75%. Carrying the two issues for part of the quarter cost us about a basis point of margin.

Tangible book value per share increased by $0.64 during the quarter and now stands at $19.82, 13% above a year ago. In addition, tangible capital to tangible assets was a healthy 7.73% at March 31. Both measures reflect the positive impact of the Peoples transaction.

The net interest margin increased by 8 basis points to 3.5% during the quarter as it benefited from the deployment of liquidity and higher loan yields, which were enhanced by about 5 basis points due to accretion related to the early payoff of some acquired loans. We still expect the core loan yield to gradually decline while the low interest rate environment persists.

The positive asset quality trend continued in the first quarter. Low gross charge-offs and strong recoveries resulted in minimal net charge offs with a 1 basis point loss rate. This loss experience combined with a slightly smaller legacy loan portfolio prompted a reduction in the allowance for loan loss. Although we view the virtually nonexistent loss experience in the current quarter as an anomaly, we anticipate that asset quality will continue to be strong.

Non-interest income on an operating basis decreased 10% versus a very strong fourth quarter, as solid increases in investment management revenue and mortgage banking income were offset by activity related reductions in all other categories. We fully anticipate other fee income categories will rebound as the weather improves in the second quarter.

Non-interest expense was well contained and on an operating basis increased 2% for the quarter reflecting the addition of Peoples, much higher snow removal costs, and as Chris mentioned, the launching of the spring advertising campaign.

The $10.2 million in M&A charges related to Peoples was consistent with expectations.

I will now shift to 2015 guidance. During our last conference call, we provided 2015 operating diluted earnings per share guidance of between $2.63 and $2.73, and now with the first quarter under our belt, we reaffirm that guidance.

In addition, excluding the Peoples acquisition, given the impact of factors cited earlier and as mentioned, we now expect full-year loan growth to be at the lower end of the 4% to 6% range initially provided.

Second, with minimal net charge-offs in the first quarter, we are reducing our full-year guidance for net charge-offs and loan loss provision to $5 million to $8 million and $7 million to $10 million respectively.

Finally, with an inflated net interest margin in the first quarter, we now expect the full-year net interest margin to be in the low 340s versus the high 330s as originally anticipated. The rest of the full-year guidance, which I provided previously, remains unchanged.

That concludes my comments. Chris?

Thanks, Rob. Operator, we are ready for Q&A.

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

First question, you had said that the pipeline was large. I wondered if you could put some numbers around that?

Yes, the commercial pipeline, Mark, ended the quarter at $175 million and if you recall last quarter, we did not have the pipeline number available for the call. Subsequent, we did get the number (technical difficulty) $125 million at the end of the year, so an increase of $50 million.

Okay. And then secondly, I heard your guidance about the full-year for the margin but I wondered if you could help us think about in the second quarter? I know you had some unusual dynamics in the first quarter.

Yes, so the enhancement in the loan yield due to some payoffs of acquired loans had about a 4 basis point impact on the margin. So we don't really expect that to repeat in the second quarter. And then the deployment of liquidity versus the fourth quarter also had a 4 basis point impact. So if we didn't have those two items we would've been flat at about 342 versus the fourth quarter. We do expect good deposit growth in the second quarter but we also expect good loan growth in the second quarter.

We don't anticipate our cash position will change too much from the first quarter to the second quarter and so the most significant impact in the second quarter versus the first quarter will be the 4 basis point reduction due to purchase accounting acceleration.

Is all of the restructuring of any assets or liabilities from the Peoples deal that you plan on doing, is that already done?

That is all done, Mark. And actually we didn't do any restructuring. We held onto the home loan bank advances. They had fairly short maturities and so we are just going to let those run off. We do, however, as I mentioned, we prepaid the sub debt in the first quarter and so we will get about an additional basis point of benefit from the margin by not having that for the full quarter in the second quarter.

Okay. And then there has been a lot of new capital that has come into the market there in Massachusetts, second steps and de-mutualizations, that kind of thing. Is that having much of an impact on loan pricing?

Sure is.

It is?

Imagine.

And then finally, with consumers and businesses continuing to migrate to online channels I am wondering if your view on your branches and the structure of your branch system has changed at all?

Mark, our view hasn't changed markedly since the last time we talked about this. But it certainly has changed over the last several years. Interestingly, research shows that even folks who are heavy users of digital channels choose a bank for local presence availability. So we believe that our branch presence is actually a key factor to our success going forward.

Now the nature of what the branch network is going to look like going forward, that is the interesting question and one that we are diligently looking at. You consider, in fact, we have invested in some capability in terms of analytical capability and executive talent that has experience in this arena and we will look at options and begin testing different formats and ways to structure balances, network branches, physically network branches and staff branches over time.

Thank you.

David Bishop, [Trace Capital]. Collyn Gilbert, KBW.

Just a couple of questions. First on expenses, it looks like your census came in a little bit lower than what we were expecting this quarter. Is that something that is sustainable? Do you have an outlook there for where you see that trending and then obviously taking into consideration the savings from Peoples, etc.?

A couple of things did benefit the expense line item in the quarter, Collyn, that will be reversed in the second quarter. First of all, some hiring has been delayed. Second, our advertising campaign, which I mentioned that did kick off at the end of the first quarter, has not fully ramped as of yet, so we will be spending additional advertising dollars in the second quarter as we typically do. And then some consulting engagements that we have planned were delayed in the first quarter as well.

So we will see an uptick from those items but we will obviously see a reduction in snowplow expense, which was $1.3 million in the first quarter -- in the second quarter and we will see a reduction in some benefits expense, payroll taxes, that sort of thing but we will also see the impact of a full quarter's worth of Peoples expense.

Combining all of those on a core basis we will have an expense increase heading into the second quarter but nothing out of line with what we had anticipated at the start of the year.

Okay. That is helpful. And then just on the loan derivative income, should we assume that that was really a function of the rate environment or how are you thinking about that business line going forward?

I would not suggest it is necessarily a function of the rate environment. It certainly is impacted by closing volumes, which were significantly lower in the first quarter than in the fourth quarter last year, actually any other quarter last year because of the weather. So we expect closings to pick up given where our pipeline is and so that should benefit the swap line.

But also you have borrowers that have had loans on the books with swaps for a number of years and may be looking at extending those transactions and starting to re-swap some deals. So I expect this to be a low point for swap income for the year and we will start to see that increase with both activity as well as likely some more incentives potentially for borrowers to swap transactions if they haven't in the past due to maybe a higher probability or (technical difficulty) at some point.

Okay. Actually to that point on the notion of potentially higher rates, your NIM guidance, is that assuming a rate increase?

It does not.

No rate increase? Okay. Good, that is helpful. And then just a final question, what do you guys think would need to change either from a macro or micro perspective that would cause you to see your pull through rate increase? Is it a pricing issue, a structure issue, just trying to get a pulse on where -- what catalyst you see needing to occur for that to change.

I think both of us will comment on that. First of all, I want to emphasize, given the extensiveness of our franchise and our coverage that we accomplished over the last few years, we are seeing a lot of deals. Our senior lender says that we are seeing the vast majority of potential deals out there, we are taking a look at, so that's the really good news. And as we said, the pipeline is up.

At the end of the day I think what we are going to need to see is a little movement on interest rates from the Fed to signal folks that boy maybe rates aren't going to be down here for a long time because it appears what is happening out there is that people are making a bet that interest rates are going to be down for a while and so far they have been right. And we have not been right.

But it is most prudent to position for a rising rate environment. I think when we see some indications that that is going to help us. Rob, what do you think?

And also that the pull through rate is obviously being impacted by the competition and Mark commented on the new capital that is in Massachusetts and being actively deployed at what we view as pretty aggressive levels. And so until there's a little bit more rationalization there, we will have that impacting our pull through rates.

Okay. Are there any pockets of geographies where you -- where it's not as competitive -- where you are seeing better pricing and better structure?

Both of us will answer that too. I think there are -- first of all, we actually, given our size, have a nice sweeter spot in those loans between roughly $10 million and $20 million, so that is a good area. Also we have expertise in ABL, which is helpful too.

And we have been a long-term construction lender, so I would say it is less about the geography, Collyn. Obviously every bank wants to be in Boston. That is where the economic growth is. That is where the vast majority of economic activity in Massachusetts and a large percentage of economic activity in New England is. So everybody wants to compete in Boston. But there's also a lot of deals in Boston. So the availability of deals relative to the number of banks is probably consistent with the rest of our footprint.

So I wouldn't say any geography in particular is more competitive than another geography but we are able to be more effective on the types of deals that Chris described.

Okay. That's helpful. Thanks, guys.

(Operator Instructions). Lori Hunsicker, Compass Point.

Just a couple of things here. Sale of securities, I see that is not separately broken out. Did you have any this quarter?

We did not.

Okay, great. And then just in terms of Peoples Federal, now that it has successfully closed, can you just remind us how many branches were closed both yours and theirs and just generally I guess your M&A appetite going forward?

On the first, we didn't close any branches. We retained all eight of their locations. We didn't have really any overlap with their locations bar one town and in that town the locations were pretty far apart. So there were no closures with that acquisition.

And our M&A appetite I would characterize as we would be delighted to talk to any Board and management team that has decided that maybe a better option for the future would be a sale of their franchise to somebody like us. So we will talk. No question about it.

Okay, and just remind us geographically how far West in Massachusetts will you head?

We have talked about heading to Worcester, but much further than that is really not in our strategic view at this point. And with a lot of activity out to Worcester and within Worcester in general, so we would be very comfortable moving in that direction but once you get past that on the western part of the state, there is not a whole lot of economic activity.

Or growth.

Okay, great. And then just to go back to your branches for a minute. Pro forma, I was looking at the branches of you all versus POP combined and you would have been at 91 and obviously you finished at 86. So did you close some of your own branches in the last quarter? Or am I just looking at dated information?

Yes, I think that might be dated information. We have not closed any branches. We would be happy to give you a full listing, if you would like.

Okay, perfect. And then one last question, assets under management, where does that number stand and any general thought for this year?

Yes, so it is at about a little bit under -- I wanted to say 2.5, but I guess it rounded as 2.4.

It's almost -- it is getting to a rounded 2.6, I think is what Chris meant to say. So we are a healthy 2.5 and we were a weak 2.5 at the end of the year, so we saw good growth in assets under management -- assets under administration. (multiple speakers)

Sorry, Lori. We missed that follow-up.

Any thoughts generally on how this year is going to unfold? Any new plans, any --?

For investment management?

Yes.

I just want to make a couple of -- we have a really great model on our investment -- we have grown this over the last 10 years from about $400 million to $2.5 billion and the vast majority of that has been organic. We did one acquisition, I think of about put $150 million of AUM. And the vast majority there of the organic comes from our branch network and our commercial lending relationships. We really have cracked the code in how you combine a great investment management group that is very much [oriented] staff with people from your industry and how to combine that with the relationships that we have within our commercial lending and our branch banking. With the acquisition of Peoples, Peoples did not have any investment management capability so we think that that is a really great opportunity for us to provide extraordinary value to all of Peoples customers and our new customers that we earn in that market.

Moreover, we, as you recall, opened up a Boston office and that is doing well. We have a full staff there. We are looking for more and we are slightly head of our plan. So we think that over time we are going to see growth consistent with what you've seen in the past. Is that a fair --?

It is. Yes.

Perfect. Thank you.

David Bishop, Trace Capital.

Dave Bishop, actually Drexel Hamilton. Not sure how they got Trace Capital. Rob, I was wondering if you could update us on the interest rate risk positioning of the Company following the Peoples merger? Has it changed materially following the integration of the balance sheet?

Actually it hasn't changed materially at all, David. The Peoples -- I may have mentioned this previously, but the Peoples' loan portfolio was largely made up of 5-1 ARMS for both their residential book and their commercial book, which is atypical of the converted thrifts that we've acquired in the past. So they were more asset sensitive than your typical converted thrift and therefore -- and also given the size of their balance sheet, less than $600 million. That didn't have a big impact. And their deposit book was largely core, as I mentioned. 70% of their deposit base is core and so it has had a minimal impact on our asset sensitivity position.

Got it. And then just on an organic basis, it looks like you had nice inflows on the DDA side. Anything driving that particularly this quarter, any sort of seasonality?

Not seasonality. It's actually a little atypical for us to see that much DDA growth in the first quarter. Typically we start to see that in the second quarter. I think a little bit of that might have been pre-funding and the seasonality that we do typically see in the first quarter. But we also saw and maybe it was weather-related, lower attrition in accounts than we typically see in the first quarter. So not sure if that will catch up to us or not but it did have a surprising impact on the first-quarter balances.

Got it. And then just a question for you both in terms of you have hearkened back to 2006, 2007. Any similarities or in terms of underwriting frothiness or just loosening standards? I am just curious if there is any parallels you are seeing there specifically maybe draw off some of the parallels from what you are seeing now compared to then relative to [2000]/2007 period.

When you said specifically, you started to phase out so we didn't hear that, but let me just comment and you can follow up. Clearly we're not seeing anything remotely like the residential underwriting phenomena we had in the 2007, that has really tightened up and that is sort of a non-issue. So we don't mean to imply anything along those lines.

What we are seeing though is personal guarantees, more cash outs, higher LTVs, more pricing on the commercial side.

Yes, but with the service ratios -- we are seeing some what we would consider poorly structured asset-based deals being done. So on the commercial side, we are starting to see a little bit of the behavior that we experienced in 2006 and 2007 but certainly the consumer side of things has been really tightened up.

Great, thank you.

Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to our speakers for any final remarks.

Well, thank you everybody for joining us today and we look forward to speaking with you again in three months.

Thank you.

Thank you, everyone, for attending today's conference. Today's conference has now concluded. You may disconnect your lines and have a wonderful weekend. Thank you.