Independent Bank Corp.
Q3 2008 Earnings Call Transcript

Published: 24 Oct 2008

[Operator:]

Hello and welcome to the Independent Bank Corp. earnings conference call, third quarter 2008 conference. All participants will be in a listening-only mode. (Operator Instructions) Please note this conference is being recorded. Now I would like to turn the conference over to Chris Oddleifson. Mr. Oddleifson, please begin.

[Chris Oddleifson:]

Thank you very much and good morning and thank you everyone for joining us this morning. I’m joined by Denis Sheahan, our Chief Financial Officer, who will after my comments review our current financial performance, credit quality and outlook. I will now begin with the customary cautionary statement. 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. Alright, now I’ll begin my comments. The third quarter with a net income of $8.8 million or $0.54 per share was not a good one for us. We continue to perform well and make progress on a number of key fronts, but before I discuss that I’d like to first share some observations and thoughts that guide how we are our company during these times. The strong performance of Rockland Trust reflects our strength and stability. Although, we’re all living through the most severe financial crisis that our country may experience in our life times, Rockland Trust continues to perform well and is awarded the land mines that have withstood many obstacles. Our credit and risk disciplines have served us well through this difficult environment and there is no substitute for a through knowledge of local markets and customers when making credit decisions. The financial crisis has put the competitive landscape influx and has cost profound industry shake out. Rockland Trust is well positioned to take advantage of the market disruption and we’re already realizing some opportunities. We’re not hunkering down or waiting for the storm to pass, we’re very much open for business accepting deposits and making loans and are busy responding to the needs of new customers have to come to us in search of a safe haven. We are also however well aware of the recessionary forces out there and we’re being to be very careful in our underwriting. Locally, growth of our real gross domestic product in Massachusetts has slowed in the third quarter, when it was estimated to have grown in an annual rate of 1% according to the mass benchmarks current economic index. Since the beginning of the year the growth of the state of economy has slowed steadily. In the first quarter, the state has estimated to have grown at a 2.1% annual rate, followed by a 1.4% rate of growth in the second quarter. Encouragingly, overall Massachusetts unemployment stands at 5.3% supported by our diverse economy as well as our healthcare and educations sectors. While I do not have any statistics, I suspect that our stock coast region which is closer to the Rhode Island which has a higher rate of unemployment, does have a higher rate there in that area as well. In our primary Plymouth County, medium home prices have dropped 14% since their peak in the third quarter of 2005. However, recent quarter medium prices are stable. In Bristol and Barnstable Counties the dropped from peak is close to 20% since the peak quarter and we expect some downward pressure to persist. Interestingly foreclosure activity for the state is down when you compare September ’07 to September ’08 by 12% and this is after the impact of the state mandated 90-day care period has sort of past. Although, I’m not sure what the make of that will be; we’ll be monitoring that closely. Our franchise is holding up nicely. Our position and strength is a result of a number of disciplined and focused actions we have taken over the past few years. For example, we have been very prudent conservative commercial loan underwriters for a number of years. Over the last several years we have significantly reduced for our low hurdle assets. We are growing competitively advanced home businesses. We have grown our wealth management business. We have improved our funding mix that we’ve taken and are taking a number of steps to improve our liquidity. We’ve been managing expenses highly, while also funding growth initiatives. We’ve completed a number of technology driven improvements and efficiency effectiveness. We have adopted an opportunistic and selective approach to acquisitions and successfully integrated Falmouth Bancorp, Slade’s bank, Compass Exchange Advisors and O’Connell Investment Services. We believe that the cumulative effect of these actions and tangent with our disciplined management team is doing us well through the current turmoil and positions us to be a net beneficiary in the industry fall out. Having strength allows us to really demonstrate and solidify our market positions and develop more and deeper relationships with our customers. For example, our pipeline in our commercial division has never been stronger. As a result of several big players in the market point back end lending, the securitization market being dominant and the smaller players not being able to fulfill needs, we are attracting more commercial relationship proposals. We are attracting excellent new commercial banking officers that are bringing with them some very fine relationships. Having an ability to really focus on customers, the like prospects and the related opportunities rather then on problems is a big advantage. Our loan and deposit growth is as Denis will explain shortly strong. Our investment management group; assets under management are holding up well as of the end of third quarter, despite the preliminary markets. We started the year at $1.29 billion and we now have $1.26 billion, only a 2.1% decrease. We have a high touch approach of the team consisting in CFAs and CFPs, who have growing as some of the better known investment management firms in the country and our core equity portfolio has significantly outperformed the S&P year-to-date. The turmoil in the marketplace is creating opportunities in our investment management group or clients, who are consolidating their assets with us, are being introduced to an increased number of prospective clients. Our branch-based retail business is likewise strong and is the hub of many referrals throughout the entire bank. Over the last several years we consciously move to a customer needs centric model. This has included an enormous amount of training in each of the relationships; how to build them, how to grow them and has been complimented by our branch-based core kind of incentive program and most importantly an observations core cut and coaching based management process. We are very encouraged by our third quarter results and I would just sort of summarize the highlights of being; our net interest margin improvement, growth in a number of loan categories, strong deposit growth, credit quality is in good shape, net charge-offs remained modest, we do see some pressure on individual credits, but no systemic problems, good expense control and solid capital position. Now in summary we’re well positioned to move forward. We are still growing loans and deposits. We are not settled by large charges or troubled exposures. We have an ample capital base, including our recent sub-debt issue. We have integrated our acquisitions well and we’re maintaining an active marketing posture. For companies in our position it is not simply a matter of surviving this environment, we intent to drive by capitalizing the opportunities presented by the disarray among our competitors, add customers and leverage our strength and that concludes my comments. I’ll now turn it over to Denis.

[Denis Sheahan:]

Thank you, Chris and good morning. First of all I’ll review our third quarter 2008 performance with some key takeaways for the quarter, and then I’ll talk about earnings guidance for the remainder of this year. As Chris mentioned, Independent Bank Corp reported net income of $8.8 million or GAAP diluted earnings per share of $0.54 for the third quarter of 2008 as compared to $8.3 million or $0.60 GAAP diluted earnings per share for the same period last year. On a year-to-date basis, GAAP diluted earnings per share was $1.34, a decrease of 8% from the comparable prior year period. There are a number of non-core items in the various periods detailed in a table in the earnings release. Excluding these non-core items, diluted earnings per share on an operating basis were $0.51 for the quarter ended September 30, 2008 as compared to $0.60 in the prior year quarter and a $1.43 for the nine months period, a decrease of 9% from last year. Key takeaways in the third quarter

[Operator:]

(Operator Instructions) Your first question comes from Damon Delmonte - KBW.

[Damon Delmonte:]

Denis could share with us a little bit of your findings of your home equity analysis and kind of what you saw for a change of maybe FICOs scores or loan-to-values or adding a little bit more colors to what led you to make those charge-offs?

[Denis Sheahan:]

Sure, just before I do that, I need to make a correction, I said something incorrectly. I said that we originated high LTV, we actually originate low LTV, high credit score loans and lines to customers in our footprint. Damon, twice a year we revalue the portfolio. We score every quarter, but we revalue the portfolio twice a year. We did it most recently after the June quarter. We didn’t see significant deterioration and I will give you some averages here in a moment for the portfolio. For the loan portfolio, the weighted average LTV of our home equity loan portfolio is 54%, weighted average FICO 748, the weighted average LTV of the line portfolio is 62% and the weighted average FICO is 757. We look specifically at our watch-list and our non-performing assets in the home equity area, beyond just doing the revalue which is sort of an automated revaluation. We get broker opinions in certain situations of the value of those assets that are in delinquency and in certain cases we do a full reappraisal and based on that information, where we felt it was appropriate to recognize impairment on loans that are in either non-performing or in certain cases delinquent, are based upon that information. Yes, housing needs Damon is that taking the overall portfolio at the end of June in the home equity was the weighted average LTV of 54 net with the revaluation work we did and. That, the portfolio weighted average LTV went up to 57, so that’s I think maybe one of the impacts you are looking for.

[Damon Delmonte:]

And then with respect to the commercial real estate growth that you saw this quarter, could you tell us a little bit about where that came from? Was it owner occupied or kind of what sort of that?

[Denis Sheahan:]

Well, overall commercial real estate when you’re accounting for construction as well, the total commercial real estate was flat for the quarter as we did have some significant payoffs we talked about. The growth that we had though excluding that payoff was, across a variety of different industries, nothing specific to one industry, a one loan type. I mean we were seeing very good demand as Chris mentioned, because our pipeline is so large, our approved pipeline is also so large. We’re seeing opportunities from other financing institutions that perhaps we wouldn’t have seen in the past.

[Operator:]

Your next question comes from Laurie Hunsicker – Stifel Nicholas.

[Laurie Hunsicker:]

I just wondered on credit, just looking for a little bit more detail if you can give us. Do you have a breakdown of net charge-offs by category or just sort of an approximate and then while you’re looking that up to, I just wondered, if you could give us a little bit more color on that commercial loan that you mentioned earlier that was associated with the single developer and then also, if you have a classified asset number, the problem loans that corresponds with the June number of $49.7 million?

[Denis Sheahan:]

On the latter, no I don’t have that Laurie, but it will be in our 10-Q filings. I just don’t have that on hand. The net charge-offs for the quarter, home equity net charge-offs were $817,000; small business 436 and then all other consumer 762 and all other consumer is auto direct consumer lending, consumer lines, that sort of stuff, that’s a little over $2 million.

[Laurie Hunsicker:]

Okay, so nothing on the commercial real estate side again?

[Denis Sheahan:]

It was peanuts, actually zero in commercial real estate. C&I for the quarter was actually a net recovery of 5000.

[Chris Oddleifson:]

Well, that one commercial credit we mentioned, it’s a very long time customer and we know them very, very well. We know the properties we’re very well collateralized and just got caught a little bit on the rate of the absorption, the rate of sales.

[Laurie Hunsicker:]

Okay and what is the total number amount of your loan?

[Denis Sheahan:]

It’s about $5.50 million; it’s a cross both to C&I category and commercial real estate.

[Chris Oddleifson:]

It’s a number of loans Laurie, its not one loan. The number of properties, the number of loans.

[Laurie Hunsicker:]

And how much of that is Rhode Island?

[Denis Sheahan:]

None of its, Laurie

[Chris Oddleifson:]

I don’t think any of it.

[Laurie Hunsicker:]

And is this a single-family development or is this business development or is it both?

[Denis Sheahan:]

Single-family

[Laurie Hunsicker:]

And I mean anything that you can give us color wise, new number of lots or location or general location?

[Denis Sheahan:]

We can tell you that it’s 13 separate loans, is our understanding. I mean that gives you an indication of the size of each individual credit, so it’s not one large individual loan.

[Laurie Hunsicker:]

And do you have breakdown of what’s split between C&I and what’s split between commercial real estate?

[Denis Sheahan:]

In what; in total loans outstanding?

[Laurie Hunsicker:]

Yes, of that $5.50 million. How that shakes out? Is it basically half and half or?

[Denis Sheahan:]

No, about $1 million is in C&I and the rest is in commercial real estate.

[Laurie Hunsicker:]

And then so for the commercial real estate side do you have an LTV on that?

[Denis Sheahan:]

No, we do not.

[Laurie Hunsicker:]

If you were to sort of ballpark guess on a combined basis?

[Chris Oddleifson:]

Very manageable; I mean we expect this to workout just fine.

[Denis Sheahan:]

This is somebody we’ve known for many years, who’s just running some difficult times and as we do with all our customers we’re working very effectively with this individual and we believe we’re going to be just fine.

[Laurie Hunsicker:]

Okay, that’s great and so obviously, if you would have had concerns, you would have probably seeing you take some charge-offs in this quarter proactively?

[Denis Sheahan:]

Yes.

[Laurie Hunsicker:]

So just one last question here with respect to loan loss provision, your provision obviously matched your charge-off. Is your goal to kind of stay at this 129 reserves to loans ratio or I mean what sort of general guidance can you provide on reserves to loan targets or provisioning or how you look at it?

[Denis Sheahan:]

We think our reserve is adequate where it is at this level and we would envision maintaining that level of adequacy. I mean our intent is not to eat into our existing reserve in any fashion. We would expect given all the criteria and the quality of our portfolio that we’ll be maintaining at around this level.

[Chris Oddleifson:]

And Laurie we do have a very detailed methodology, in which we established the allowance for loan loss. That greatly looks at our history growing all the way back to 1986. So seeing where we are in our tough times in the late 80s or early 90s and that’s all factored in.

[Laurie Hunsicker:]

And just a one last question; net interest margin for the month of September, do you have that number?

[Denis Sheahan:]

I think it is 410, just looking it up for you Laurie.

[Laurie Hunsicker:]

Okay.

[Denis Sheahan:]

406, Laurie.

[Operator:]

Your next question comes from John Stewart - Sandler O’Neill.

[John Stewart:]

Just a little bit more clarity on the home equity charge-offs of $817,000. How much of that would you attribute to kind of a true up from your analysis this quarter?

[Denis Sheahan:]

$650,000.

[John Stewart:]

And then I guess just a little bit more detail on the trust preferred that you have. I believe the cost basis now is just over $16 million, post the charge take in this quarter, the OTTI. What are those now marked at fair value?

[Denis Sheahan:]

When you’re referring to John, the $16 million I don’t understand your question $16 million. I mean we have a portfolio in total of trust preferreds. The current market value is $19 million of the portfolio; original par is a little over $30 million, its $32 million, $33 million. Are you referring to specifically BBB’s?

[John Stewart:]

Yes, I was talking specifically about the BBB’s there, yes?

[Denis Sheahan:]

The market value of those bonds is $1.9 million. We have them marked to the original par; it’s more like $4.5 million.

[John Stewart:]

And the rest I guess its $17 million roughly; are those of single issuers?

[Denis Sheahan:]

No, let me just backup and give you some broad information about the portfolio as a whole. The portfolio is about $33 million in total, okay of trust preferreds. Of that we have, rough $14.5 million is individual issue. So $14.5 million is individual issue, about $19 million is pooled at par value; is pooled trust preferreds ranging from BBB’s, where we have taken impairment charge all the way up to AAAs. So, the $19 is the original par value of those pools, trust preferreds. The BBB component of that was $4.50 million and we’ve written that down to $1.9 million.

[John Stewart:]

Can you share the fair market values on the individual piece and the pools in total?

[Denis Sheahan:]

Yes, so you want the price or the actual fair market value?

[John Stewart:]

Wherever you have the market now.

[Denis Sheahan:]

The pooled, excluding the BBB, I’ve already given you BBB is at $7.9 million. So greater than BBB is $7.9 million and then $1.9 million for the BBB, so you’re at $9.8 million in total for the pools trust preferreds.

[John Stewart:]

And the individuals?

[Denis Sheahan:]

Individuals, $9.7 million.

[John Stewart:]

And can you share with us, who the issuers are of the the individual issuers you own?

[Denis Sheahan:]

No.

[Operator:]

Your next question comes from Bryce Rowe - Robert W. Baird.

[Bryce Rowe:]

Denis and Chris, you guys mentioned the opportunity in the fourth quarter to capture deposits and also mentioned already realizing some opportunities from the market turmoil; if you could you kind of expand on that. Then second question Denis; you talked about in your guidance the impact of higher deposit costs. Looking at the funding cost for the quarter it looks like time deposit costs came in considerably on a sequential basis, money market deposit rates were higher versus the second quarter, is the source of that negative higher deposit cost impact; is it on anticipated higher money market costs or is it time deposits?

[Denis Sheahan:]

First of all, on the opportunity for deposits in the fourth quarter and actually what we’ve been seeing throughout the third quarter is it’s a combination of people coming to us, customers coming to us, because they view us in the market as strong and healthy relative to what’s happening to some other organizations. As much as what’s going to happen in nationally with the large institutions the Wells Fargo and J.P. Morgan etc. that’s not in our area. They are not in our area; that doesn’t particular have an impact on us. It’s more of the regional players that are having difficulties and we’re seeing customers coming in, bringing in deposits. We are able to attract those customers to the organization just based upon our reputation as being strong, locally based community bank that doesn’t have any issues with many of the other organizations are. In addition, we’re reaching out we’re talking to our communities about our strength and we’re reaching out and doing some additional advertising both about the strength of the company as well as recognizing that this is an opportunity you try and bring in additional deposits. So, that’s why we believe that Q4 will be quite good from a deposit perspectives and that’s why we’ve had good growth in the third quarter. In terms of thinking about the cost of those deposits; deposit rates continue to be somewhat irrational in the marketplace, but it’s perhaps understandable when you recognize some of the deposit outflows at those regional players and they happen to react with significant deposit pricing in order to retain deposits. So, if we are in a mode of looking to take advantage of that situation and to raise some deposits ourselves, we’re having to compete to some degree. Even though our margin is very strong over 4%, we think there will be some pressure on that until the fourth quarter and perhaps into beginning of next year.

[Bryce Rowe:]

And you talk about the loan pipeline; can you quantify what that is?

[Denis Sheahan:]

Its several hundred million dollars Bryce, of raw backlog; it’s the highest that it’s been in our history and then the approved backlog is less than that, but we feel pretty good about it, but it’s several hundred million dollars.

[Chris Oddleifson:]

The raw backlog price has sort of just had a very, very preliminary screen maybe a conversation or two; not any sort of credit analysis.

[Operator:]

And gentlemen, I’m showing no other questions in the queue at this time. I can give the instructions again or you can give your closing remarks.

[Chris Oddleifson:]

I think we’re all set. Thank you very much everybody. We look forward to talking to you into the New Year. Bye.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.