Company Independent Bank Corp. (NASDAQ:INDB)
Q1 2008 Earnings Call
May 5, 2008 4:30 p.m.
Christopher Oddleifson - President and Chief Executive Officer
Denis K. Sheahan - Chief Financial Officer and Treasurer
[Tim Rozilla - Keefe, Bruyette & Woods]
Hello and welcome to the Independent Bank Corp. first quarter 2008 earnings conference call. (Operator Instructions) Now I would like to turn the conference over to Mr. Denis Sheahan.
Denis K. Sheahan
Thank you Amy. Good afternoon everyone and thank you for joining us on the call. This afternoon’s agenda will include a brief review of our first quarter 2008 earnings and then guidance for the remainder of 2008. We will have some comments from our Chief Executive Officer, Chris Oddleifson , and we will then end the call with a Q&A period. Before I review our first quarter 2008 performance I will read the cautionary statements.
This conference call may contain certain forward-looking statements with respect to the financial condition, results of operations, and business of Independent Bank Corp. Actual results may differ from those contemplated by these statements. Independent Bank Corp. wishes to caution listeners not to place undue reliance in any forward-looking statements and disclaims any intent to update publically any forward-looking statements, whether in response to new information, future events, or otherwise.
I will now review our first quarter 2008 performance. Independent Bank Corp. reported GAAP diluted earnings per share of $.44 for the first quarter of 2008 as compared to $.45 in the same period last year, representing a decrease of 2%. There are a number of non-core items in both first quarter periods, particularly in this first quarter of 2008 associated with the acquisition of Slade’s Ferry Bank Corp. which closed in the first quarter of this year.
These and other non-core items are detailed in a table in the earnings release. Excluding these non-core items diluted earnings per share on an operating basis was $.48 for the quarter ended March 31, 2008, an increase of 2% from the $.47 per share recorded in the prior year period.
Key take-aways from the first quarter. The Slade’s Ferry Bank Corp. integration is on track. The acquisition closed on March 1 and is the primary reason why we are announcing earnings a little bit later than usual so we could get through the litany of purchase accounting and make sure all our I’s were dotted and T’s were crossed. The earnings release provides tables that show the acquired loan and deposit balances. The majority of the Slade’s Ferry Bank Corp. securities portfolio was liquidated post-close, resulting in a pre-tax loss on sales of those securities of $742,000. The proceeds of this sale were used to pay down borrowings and de-lever the balance sheet. Merger and acquisition charges to the income statement were $744,000. We are on track to achieve the 40% in cost savings previously announced and the earnings accretion of .01 to $.02 in 2008. Capitalized after-tax restructuring charges are expected to be $8.3 million as compared to the $9.3 million when we announced the transaction. In summary, everything is on track to meet the expectations we outlined last October, with the exception of the security loss and this was as a result of the widening of credit spreads.
Other key take-aways from our first quarter performance. Continued strong net interest margin. The net interest margin for the first quarter was 3.9%. We have, thus far, effectively dealt with the dramatic changes in the interest rate environment. Loan growth, excluding the impact of Slade’s Ferry Bank Corp. was again solid in the first quarter led by commercial lending, business banking, and home equity. Loan pipelines in both our commercial and home equity divisions are very strong, which bodes well for the rest of 2008.
Deposits, excluding the Slade’s Ferry Bank Corp. acquisition grew by $20 million or approximately 4% on an annualized basis. We remain focused on controlling the cost of deposits as an important component of maintaining a strong net interest margin. Core non-interest growth up 14% year to date, remains a key highlight driven by growth in our wealth management business. Our investment management group now is a total of $1.3 billion in client assets under management. Core non-interest expense increased 11% in the first quarter driven by the Slade’s Ferry acquisition, the O’Connell Investments acquisition, and normal increases in salaries and benefits, including higher incentive compensation and commission program accruals.
Non-performing assets were $11.9 million at March 31st and represent 36 basis points of total assets. Loan delinquency was 1.04% at March 31st, 2008. Net charge-off performance is higher than last year yet still very low at an annualized rate of 20 basis points. The company’s reserve for loan losses was 1.29% of loans at March 31st, including the absorption of the Slade’s Ferry Bank Corp. loan loss review, which was smaller on a percentage to loans basis than Independent Bank Corp. The company’s provision for loan losses was $1.34 million as compared to net loan charge-offs of $1.09 million.
But we feel good about our position from a credit perspective. We expect softening to continue throughout 2008. We recently announced a sale and lease back of many of our bank owned premises. This transaction closed last Friday, May 2. The sale amounted to 17 properties and will result in a gain of approximately $13 million to be amortized over the various lease terms. The $32 million in proceeds were invested in securities. This transaction should yield .03 to $.04 earnings per share on an annualized basis or $.02 for the remainder of 2008.
I will now review earnings guidance for 2008. We announced in January expected operating earnings per share for 2008 in the range of $2.12 to $2.16 and are prepared to adjust that expectation upward by $.02 to a range of $2.14 to $2.18. The primary factors influencing the upward guidance are: The positive impact of the sale and lease back equating to $.02 on an earnings per share basis, and also that we feel pretty good about our net interest margin at that 3.9% level and hope to maintain and improve that level.
I will now turn the call over to Chris for his comments.
Good afternoon. Thank you, Denis. Denis did a thorough job reviewing our performance. I would like to make a few points of emphasis. I will not review the state of the industry in which you operate; you are as or more familiar with the facts as I am. It is a difficult period for many financial institutions. Fortunately our disciplined approach to banking and new business development over the last decade has put us into a position we are guiding out very slight earnings improvement year over year.
We have said in the past that we are very careful and disciplined about how we manage our balance sheet and we believe we are making decisions in the best interest of long-term shareholder value creation. We have avoided asset classes that we know do not meet our hurdle rates or we did not completely understand. Our energies are now focused on opportunities and building relationships rather than on sort of problem resolution that many financial institutions find themselves facing. Let me just jump to credit right away. It is probably the most important focus area. While non-performing assets grew from $8.3 million at the end of ’07 to $11.9, or to a modest 36 basis points of total assets at the end of the first quarter, a few points are worth noting.
First of all, the Slade’s loan portfolio has been thoroughly reviewed and we are very comfortable with the quality and it has met our expectations. All of the numbers, of course, recording including the Slade’s loan portfolios. The ARMs to loan loss, the total loan stands at 129 basis points and our coverage is about 300%. Overall this includes stands just over a percent and we feel very very strong, good that these are strong numbers. As Denis said we are seeing a slight credit softening as reflected in our NPA levels and of course our loan loss provision over the last two quarters has been higher than previous quarters, but nothing, we see nothing that indicates significantly adverse trends.
Let me go through a couple of portfolios. We are comfortable with the asset quality of our indirect auto portfolio with an average FICO of 700. Our portfolio on average is very strong. Losses are tracking slightly higher than we expected but not at worrisome levels. We recognize how with the growing stress in the consumer from issues such as increased food and energy costs and we will be watching this portfolio closely.
I am sure many of you recall that we have cut way back in production in that portfolio the last couple years and we are in a net, the portfolio has run off significantly over the last 24 months.
The residential portfolio has an average FICO of 733 and a weighted average LTV of 56%. We have identified the ARM reset loans have fallen to a higher risk category and we are monitoring them very carefully. And we will be handling them on a case-by-case basis if repayment at the higher rate becomes an issue.
Regarding home equity in both our line and loan portfolios we have an average FICO about 750. A weighted line loan to value about 55%. And as well, we are looking at keeping a very close eye on that portfolio.
While our loan portfolio metrics are strong, overall economic indicators suggest continued caution and conservative lending. I will note that nationwide unemployment rates are up, bankruptcies are inching up and inflation seems to be, depending on who you ask, either up or uncertain. However, on the local front, the Massachusetts economy is holding remarkably well and in the employment and real estate values relative to the rest of the nation.
While we foresee some foreclosure activity in the portfolio, overall mortgage foreclosures in our market by national are way up, but that is primarily by national originators, not state banks or banks located in the state. Home sales data suggest that the median quarterly sales prices in Massachusetts have fallen around 15% from their peak late in 2005. And our latest data shows our economy, our local economy is still growing. Again, we will be watching this very closely.
Now in all of our loan portfolios there is always the possibility that conditions will change and loans which are not an issue now becoming sometime suddenly problematic. But we do not foresee any of that in the, as far as we can see looking very carefully at the portfolio. And the best thing we can do is monitor each loan portfolio very carefully and that is exactly what we are doing. So from a credit perspective we feel strong but cautious.
Moving from credit, Denis talked about the Slade’s acquisition, overall I am very pleased from several perspectives. First of all, the integration has gone very well from a technical perspective. Secondly, the melding of the people of Slade’s and Rockland Trust has gone very well. And having continuity in the people former Slade’s customers are accustomed to working with is very important. And we have been able to accomplish that during Rockland Trust benefits to the marketplace. And lastly, we are on track from an earnings performance expectation.
So overall I am pleased with the quarter. We have discussed credit, Denis addressed the margin, we have talked about good income growth we are seeing. We have generated a modest organic loan growth, but we have very strong loan pipelines in commercial and home equity. We also have a strong residential loan pipeline in which we [inaudible 17:54] it almost exclusively for sale.
Some of you may be interested in the fact that we have recently submitted an application for another new market tax credit award and those decisions will be made known late this year.
Now I also would want to point out that earnings quality has improved as evidenced by 60% of the company’s loan portfolio is now in business/commercial lending. Our securities portfolio is only 15% of assets. Fee revenue diversity growth has improved. Non-interest revenue has grown 25% of total revenue and this has been driven by our improved wealth management revenue and our increase in mortgage fee income. And as Denis mentioned, our investment manager group assets have grown very nicely to $1.3 million.
Now these are uncertain times and we are proceeding cautiously. Clearly our goal is to grow net income over time and we have shown our ability to do this over the long run. Our modest growth expectations for ’08 are a reflection of the current overall environment and our prudent approach for which responsible growth is just growing our investment management business, adding key personnel who can generate more value, opening branches in attractive markets, expanding our commercial lending in areas where we can, we critically review existing branches, engage in smart acquisitions, and overall operate the business that we believe in a prudent way that maximizes your overall value.
That concludes my comments. I think we are open to questions now.
Denis K. Sheahan
Thank you Chris. This concludes the formal presentation. We will now open the call for questions.
(Operator instructions) Our first question comes from Tim Rozilla [ph 19:54] from KBW.
[Tim Rozilla - Keefe, Bruyette & Woods]
Hello, good afternoon. Thank you for taking my call. Just one quick question for you. It seems as though before you had guided that non-interest expenses were going to be growing about 6% on an annualized basis. When I look at the number for this quarter, excluding the one-off items, it seems significantly higher than that. Can you spike out the seasonality incurred this quarter and perhaps give a run rate going forward?
Yes, we will give you a number now in a moment just what we expect it to be for a year. I mean we do have advertising was up in the first quarter. We do have some level of seasonality, particularly in the salary and benefits line, payroll taxes are very heavy at the beginning of the year because that is typically when our incentive program is paid out. But give us a moment here and we will give you a revised number for the full year.
And of course, keep in mind that the 11% includes the impact of Slade’s Bank Corp. acquisition.
Okay, the total impact in 2008 is 13%, including Slade’s, we expect a 13% increase.
[Tim Rozilla – Keefe, Bruyette & Woods]
Okay, great. And just one more question if I could. Can you please provide a little bit more information on the sale and lease back? Where is that $.02 accretion coming from?
Denis K. Sheahan
Well, the gain on sale of the facilities is actually a cash flow benefit, it is not an earnings benefit. In other words the entire gain does not fall to the bottom line immediately. It is amortized in over the lease period. So I guess the different consequences you have is you have the depreciation on that real estate being removed. It is replaced by market based rent on all of those facilities. It is then offset by, to some degree, the amortization of the gain in addition to the reinvestment of the proceeds from the sale. All of that amounts to .03 to $.04 on an annualized basis but for the remainder of 2008 we say that is about $.02.
[Tim Rozilla – Keefe, Bruyette & Woods]
Okay perfect. Thank you very much.
(Operator Instructions) And it seems we show no further questions. I would like to turn the conference call over to management for any closing remarks.
Denis K. Sheahan
Great. Thank you everybody for joining us on the call. We look forward to speaking to you in July after our second quarter earnings.
The conference has now concluded. Thank you for attending today’s session. You may now disconnect.