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Independent Bank Corp. (NASDAQ:INDB)

Q2 2008 Earnings Call

July18, 2008 10:00 am ET

Executives

Christopher Oddleifson - President and Chief Executive Officer

Denis K. Sheahan – Chief Financial Officer and Treasurer

Analysts

Damon DelMonte – KBW

Laurie Hunsicker – Stifel Nicholas

Bryce Rowe – Robert W. Baird

John Stewart – Sandler O’Neill

Operator

Hello and welcome to the earnings conference call second quarter 2008. (Operator Instructions) Now I would like to turn the conference over to Mr. Christopher Oddleifson, Chief Executive Officer. Mr. Oddleifson, you may begin, sir.

Christopher Oddleifson

Thank you, Mike and good morning. I’m Chris Oddleifson, President and CEO of Independent Bank Corp. Thank you all for joining us on the call this morning. Independent Bank Corp. continues to perform well and I’m very pleased with the results up to the past quarter. At a time when many in our industry are not responding well to the many challenges, Independent Bank Corp. is fairing well. We’ve been conservative in our credit decisions and our new business development, we take a discipline approach to managing our balance sheet, and have avoided or de-emphasized asset classes that we don’t find satisfactory. We continue to make decisions that create long term value for our shareholders, our credit portfolio is in good shape, and we still project our earnings to increase from this year from what we accomplished in 2007.

I’m going to turn the call over now to Denis, our CFO -- Denis Sheahan, Chief Financial Officer, who will review some of the details of the past quarter with you. When Denis is done, I’ll make some additional comments, and then we’ll end the call with a question and answer period.

Denis.

Denis Sheahan

Thank you, Chris, and good morning.

Before I review our second quarter 2008 performance, I will read the customary cautionary statement.

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 second quarter 2008 performance. Independent Bank Corp. reported GAAP diluted earnings per share of $0.50 for the second quarter of 2008, an increase of 25% from the $0.40 reported in the same period last year. On a year to date basis, GAAP diluted earnings was $0.94, an increase of 9% 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 June 30, 2008,consistent with the prior year quarter, and $1.00 for the 6 month period, an increase of 2% from last year.

Key take-aways from the second quarter. We are experiencing strong loan demand, particularly in commercial lending. Our commercial and small business portfolio grew at an annualized pace of 14% in the second quarter. A portion of the growth in our small business portfolio arises from a reassignment of $9 million in small credits from commercial to small business following the Slade’s merger we closed on March 1. In addition, home equity showed good growth. We expect the strong growth in commercial lending to continue for the rest of 2008, although Q3 growth may be somewhat offset due to an anticipated large loan payoff.

Secondly, we’ve continued strong and stable net interest margin. The net interest margin for the second quarter was 4.01%, and 3.96% for the year to date period. Deposits grew by $17 million or approximately 3% on an annualized basis. Deposit growth is challenging – we are very focused on improving deposit generation across all of our businesses. Core non-interest income growth up 18% for the second quarter, and 16% year to date, remains a key highlight driven by growth in our wealth management business. Our securities portfolio, which currently amounts to approximately 14% of total assets, does not contain any equity, preferred issues, or direct debt obligations of either Fannie Mae or Freddie Mac. Our securities portfolio is composed of agency mortgage backed securities of $369 million, private mortgage backed securities of $25 million, municipal securities of $40 million, and approximately $25 million in the aggregate of bank trust preferred securities.

Non-performing assets, at 36 basis points of total assets, were stable from March 31 to June 30 at approximately $12 million, and loan delinquency was 1.33% at June 30, 2008. While net charge-off performance is higher than last year, it is still low at an annualized rate of 19 basis points. The company’s reserve for loan losses was 1.29% of loans at June 30, consistent with the level at March 31. The company’s provision for loan losses was $1.9 million in the second quarter, and $3.2 million year to date, and exceeded net charge-offs by almost 1.4 times on a year to date basis.

We closed a sale and lease back of many of our bank owned premises on May 2. The sale involved 17 properties and resulted 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 $0.03 to $0.04 earnings per share on an annualized basis or $0.02 for the remainder of 2008.

Our recent acquisitions of O’Connell Investments and Slade’s Ferry Bancorp are meeting performance expectations. We have achieved the cost saves outline from when we announced the Slade’s Ferry transaction, and remain confident of meeting the earnings acquisition expectation. In fact, we are hopeful, based upon activity we are seeing from our lenders in the south coast region, that loan growth may exceed original expectations.

I will now provide earnings guidance. We discussed during our last conference call earnings guidance in the range of operating earnings per share of $2.14 to $2.18. We remain comfortable with that guidance. I remind you that our earnings pace historically accelerates in the second half of the year. For example, in 2007 through the first 6 months of the year we earned $0.98 operating diluted earnings per share, representing 46% of the full year result of $2.13. We expect the same trend in 2008.

Two key factors have changed since we last spoke. We expect a higher level of loan loss provision, due both to strong commercial loan growth and some increased credit loss. The loan loss provision is now projected to be $7 million for 2008, while net charge-offs are expected to be $5.9 million. The strong commercial loan growth is expected to essentially offset this increased level of loan loss provision.

Chris, that concludes my comments.

Christopher Oddleifson

Thank you, Denis. I would like to first address our credit condition, and then make some general comments. As Denis said, on a consecutive quarter basis, non-performing assets are stable at $12 million, or about 36 basis points of total assets. Our allowance to loan loss to total loan stands at 129 basis points. Our loan loss coverage ratio is about 312%. We continue to be comfortable with our Slade’s loan portfolio. Overall, delinquency stands at 133 basis points which, while up from 104 basis points from last quarter, is still a relatively low level, and we are providing it, as Denis pointed out, in excess of net charge-offs.

Regarding, in more detail, our commercial real estate portfolio. Our commercial real estate NPAs dropped this past quarter by just over $1 million to $2.3 million. While our portfolio is largely concentrated in southeastern Massachusetts, it is well diversified across a number of property types. An independent third party reviews different portions of our commercial loan portfolio on a quarterly basis, and that review achieves a 70% to 80% penetration of our overall commercial loans each year.

Our construction portfolio, which totals $170 million, is within our market area and is diversified across a number of project types. We finance smaller construction projects by seasoned, reputable developers that have alternative sources of cash flow. It is very rare that we do not have a personal guarantee. We have virtually no delinquencies in our construction loan portfolio. A minority, less than 10% of our construction loans, have any kind of interest reserves and those few instances where interest reserves are established, we consider the use of interest reserves during the underwriting process and subject it to our loan to value restrictions.

We recently conducted a thorough review of our construction loan portfolio, including a refreshed appraisal for a number of projects. That review confirmed our comfort level with our construction portfolio. One of the benefits of being a bank that emphasizes relationships is that our seasoned professionals know the market well, have an excellent handle on the market and the projects, and are supported by a robust credit process.

We’ve experienced good growth in our commercial portfolio – a benefit of being strong in an environment where others are less strong. We are finding that we can be very selective on credit and can negotiate stronger terms and better pricing. While commercial NPAs are down, we are seeing a modest elevation in self identified risk across the commercial loan portfolio, and an increase in problem loans. Certain sectors, however, are strong, such as manufacturing, whole distribution, healthcare, schools, and even fishing. Weaker sectors include restaurants, trades and retail. In a total and on balance, when considering all this, in our detailed review we expect our commercial portfolios to perform very well.

Now let me turn to our home equity, residential and indirect auto portfolios. I am going to quite FICO and values, and these FICOs and values reflect a credit rescoring of the borrower and an updated assessment of value within the last 2 to 3 months. Our home equity portfolio totals $374 million. Home equity NPAs are up only a small amount on a consecutive quarter basis to $1.4 million. While we do expect some home equity losses, we anticipate that they will be in a manageable range, and within the forecast Denis provided you. Our home equity portfolio is originated directly to consumers, so only a small, single digit percentage of it originated in adjacent markets. We do not originate through brokers or correspondent lenders. Our home equity line portfolio has an average FICO of 757 and a weighted average, combined loan to value, of about 61%. Our home equity loan portfolio has an average FICO of 748, and a weighted average CLTV of 52%.

We also monitor these loans very carefully. For example, following the reevaluation of LTV – of value and credit score – we determine that about 2% of our exposure is in loans with LTVs higher than 80% and FICOs lower than 650, and of course we’re monitoring those very, very carefully. Over the last 6 months, we’ve also tightened our home equity underwriting standards.

Our residential portfolio totals $417 million. Our residential portfolio has an average FICO of 726 and a weighted average LTV of 57%. We have identified ARM reset loans that fall into our high risk category and we’re monitoring them carefully and are handling them on a case by case basis if repayment at the higher rate becomes an issue. Our residential mortgage portfolio NPA is up to $4.5 million from $3.7 million in the first quarter. We’ve recently completed a loan by loan review, including a reassessment of value, and believe we may incur a loss of approximately $200,000 if these loans do not care.

Regarding our indirect auto portfolio, we are comfortable with asset quality of our indirect lending. With an average FICO of 697, our portfolio on average is strong. Losses are tracking slightly higher than we expected but that’s understandable, as we’ve been shrinking the portfolio - and the losses are not at worrisome levels. We recognize, however, the growing stress on the consumer from issues such as increased food and energy costs, and will continue to watch this portfolio closely. I need to caution that in auto loan portfolios there is, of course, always the possibility that conditions will change -- economic conditions will change and that loans which are not an issue now, may be come suddenly – or sometimes suddenly – problematic. The best thing to do is to monitor each loan portfolio very carefully, and that’s exactly what we’re doing.

Shifting gears a little bit, I’d like to highlight the following. We’re seeing good business growth. Organic loan growth during the first 6 months of the year was $61 million, or 6% on an annualized basis. This is concentrated in commercial and home equity lending categories while the residential real estate and consumer categories were reduced. Commercial loan spreads are strengthening, and we’ve had several excellent commercial bankers join us recently. The number of new core accounts is up year over year by 8%. Deposit growth is difficult, as Denis mentioned, but we’ve seen annualized organic growth of 3.6%. The new signage for all our branches and ATMs is nearly complete. Our newest branches continue to grow and focus on outside business calling. Our indirect auto production is, by intention, 5% lower year to date than the same period last year. This is desired and anticipated, resulting from recent credit tightening to protect against deteriorating economic conditions and pricing to improve profitability.

Our investment management business is originating new customers at a rate greater than 2007 despite increased new business. Struggling capital markets have worked against us. As a result ING’s, our investment management group, assets total $1.25 billion at the end of the second quarter, a 2.9% decrease over December 31, 2007. Denis mentioned the net interest margin has increased 16 basis points to 4.01% in the second quarter versus the second quarter 2007. This steepening yield curve caused our cost of funds to decrease at a quicker pace than our earning asset yield. Denis has a strategy to modify the mix of earning assets.

In conclusion, I am pleased with our overall performance for the quarter. Credit quality is good, strong net interest margin, good fee income growth, generated solid organic loan growth, and we have a strong loan pipeline in commercial and home equity. Earnings quality has improved, as evidenced by 61% of the company's loan portfolios now in business commercial lending. Our securities portfolio is only 14% of assets. Fee revenue diversity and growth has improved. Non-interest revenue has grown to 25% of total revenue – this has been driven by our approved wealth management revenue and our increased mortgage fee income.

These are uncertain times and we are proceeding cautiously. Clearly, our goal is to grow net income over time and we’ve certainly shown our ability to do that over the long run. Our modest growth expectations for 2008 are a reflection of the current overall environment and our prudent approach for focused and responsible growth, just as growing our investment management business penning key selected personnel so that we can generate more value, opening branches in attractive markets, critically reviewing our existing branches, and engaging in acquisitions as we can.

That concludes my comments. We are now happy to address your questions.

Question-and-Answer Session

Operator

(Operator instructions) The first question we have comes from the location of Damon Delmonte with KBW.

Damon DelMonte - KBW

Hi, good morning guys. How are you?

Denis Sheahan

Good Morning. Hi Damon.

Damon DelMonte – KBW

I was wondering, Denis, if you could provide a little color on the margin and, kind of, what you see for the back half of the year.

Denis Sheahan

Sure. We’re hopeful, Damon -- we're very happy that the margin has reached 4%. We’re very hopeful that that will continue and actually expand somewhat in the second half of the year up to as much as the 4 or 5 region. That is certainly contingent upon what happens in terms of deposit pricing in the market. One of the things that has benefitted us on the asset side is, we have had good, strong, commercial loan demand, and there’s improved credit spread coming in commercial pricing, which is, frankly, a good thing versus the past number of years. So, that’s helping, as well as we’re very focus on controlling our cost of funds. And our cost of funds is strong, I think as you know. So if those factors continue we could certainly see some margin expansion in the second half of the year as well.

Damon DelMonte - KBW

Ok, great. With regard to capital, how do you guys feel about your capital position? I know the tier 1 last quarter was around 8.55%, it jumped down to 7.7%. Any insight as to what might have led to the decline in that? Or, I guess, what’s your total capital as well?

Denis Sheahan

Total risk-based?

Damon DelMonte - KBW

Yes.

Denis Sheahan

Total risk-based is 10.7%. We’re certainly monitoring it very carefully, Damon, and we are growing in 100% risk weighted assets. But, you know, we’re certainly content with our capital level at this point. If we decide to do anything in terms of any kind of a subordinated debt raise, or anything of that nature, we’ll certainly let everyone know. But we have no plans to raise common equity at this point.

Damon DelMonte - KBW

Ok, great. And just one technical question with regard to the tax rate going forward. Is this quarter’s level of 27% a good run rate?

Denis Sheahan

Yeah, that will be about right for the rest of the year. One thing that is sort of lingering out there – we do have an application for a new market tax credit award that we’ll likely find out by the end of the year. But chances are, if we are successful in that effort there would be no impact really for the rest of this year. It would be felt in 2009.

Damon DelMonte - KBW

Ok, great. Thank you very much.

Operator

The next question we have comes from Laurie Hunsicker with Stifel.

Laurie Hunsicker – Stifel Nicholas

Yeah, hi, good morning Denis and Chris.

Christopher Oddleifson

Good morning, how are you?

Laurie Hunsicker – Stifel Nicholas

Just to follow up on some of Damon’s questions. The tier 1 core risk based capital ratio, do you have that handy?

Was that 9.5% last quarter.

Denis Sheahan

Total risk based, or –

Laurie Hunsicker – Stifel Nicholas

Just the tier 1 core risk based

Denis Sheahan

Yeah, I have that. Just one second. These, of course, are drafts until all the regulatory reports are finalized. Bear with me a second.

9.54%.

Laurie Hunsicker – Stifel Nicholas

9.54, ok. Great. And then, to the extent –

Denis Sheahan

I should correct, total risk based is 10.79 and I think I said 10.7. It’s 10.79

Laurie Hunsicker – Stifel Nicholas

Ok, 10.8, great. And then, to the tax rate question. To the extent that you do get the new market tax rate credit next year, what would your effective tax rate drop to?

Denis Sheahan

It’s hard to say, Laurie, because who knows what we would get in terms of an award. I really couldn’t give an estimate of that. That would be so difficult. It depends on the level of award that we got, and how quickly we could invest that award. I certainly couldn’t give guidance on that. I would assume a similar tax rate going in to next year, until we know whether or not we’re successful on that effort.

Laurie Hunsicker – Stifel Nicholas

Ok, ok great. And, thanks for some of the detail that you provided in terms of -- you know, to the extent that you don’t own any equity, or that issue by Fannie/Freddie. Obviously we’ve seen kind of a nervous market. What is your OCI mark at the end of June in equity?

Denis Sheahan

I have that here somewhere. $8 million or so, Laurie. I just have a component of it. I don’t have all of it here.

Laurie Hunsicker – Stifel Nicholas

$8 million, ok. So that increased really from $5 million, negative 5 -- ok. And then, if you could take us through, on the credit side, just a couple things. I guess starting with charge-offs link quarter is what I’m looking at. You charge-offs went from $1.1 to $1.3 million. Do you have a category breakdown, or do you have a particular category you can point to and say, “This is where charge-offs were higher?”

Denis Sheahan

Well our charge-offs were almost exclusively in consumer. There’s some very modest commercial charge-offs. They’re mostly indirect auto and the micro business category. The micro small business category, that category, our average loan size is about $50,000 and we’re seeing strapped, as you can expect, in the small contractor, the plasterer, the electrician, etc. We’re seeing stress in that area because of the slowdown in residential development.

Laurie Hunsicker – Stifel Nicholas

And is that showing up in the business banking category, or in the C&I category?

Denis Sheahan

Business bank

Laurie Hunsicker – Stifel Nicholas

In business banking. Ok.

And the remainder of it really is indirect auto. We have a modest amount of home equity at this point. You would expect the home equity loss to increase in the second half of the year, but we’re accounted for all that in the forecasts that I gave you.

Laurie Hunsicker – Stifel Nicholas

Ok. Ok, great. And then, just sort of backing in to your reserve in terms of what happened. Slade’s Ferry closed in February, yet it looks like the adjustment to the reserve dollars hit this quarter?

Denis Sheahan

No. As of March 31, we had -- you know, it closed March 1, the transaction, so the two reserves came together in the first quarter.

Laurie Hunsicker – Stifel Nicholas

Because I guess I’m looking -- maybe something is not updated here, what I’m looking at, but I’ve got a period end reserve at March 26.8 jumping to June of 33.2.

Denis Sheahan

No, our reserve at the end of March was 32.6, I believe. And at the end of December it was 26.8, so you can see –

Laurie Hunsicker – Stifel Nicholas

Ok, so that makes sense. So something is off on my model here. Sorry about that. I guess just quickly looking at the non-performing breakdown that you give, just wondering if you could comment on a few things. First of all, your commercial real estate non-performers continue to go down. This is a nice trend. What are you guys doing there.

Denis Sheahan

Well, I think Chris talked to it earlier in terms of -- you know we’re very proactive on the commercial team. We have a very strong work out group. We have a work out team here who are real champions in this organization – the same folks who helped work us out from the issues in the early 1990s are still here, and they’re a big part of the credit administration in this organization and do a fantastic job. And I think that’s just, sort of, bottom line what it is as well as our overall underwriting and credit administration philosophy. You heard Chris talk about the third party that we have, loan review consultants. There’s a discipline that’s here – they report into the audit committee on a quarterly basis, they do about 70% penetration of the commercial portfolio. It’s a disciplined process that we have in commercial that works for us.

Christopher Oddleifson

We have, Laurie I think we might have shared this with you in the past, we have a multi-layer rating system where we start on a 10 point scale. It starts with the loan officer rating. It goes to credit administration, and if they say it’s something else, they win. It then goes to our third party review at some point and if they adjust it they’re doing a debate. If they win then, of course, if our external regulatory review suggests an adjustment there’s really no debate – it’s adjusted still. So there’s a very, very disciplined, multi-layered, multi-review look at the quality – at a very in depth level – of each of our loans. I think that really is one, sort of, indication of the strength of our commercial portfolio.

Denis Sheahan

Another thing I’d add to that, Chris, is that we have -- most of our lenders have been here for a long time. They know the footprint, they know the people they do business with, and that’s also very important.

Christopher Oddleifson

Yes. And just to emphasize, underline, one thing Denis said. It’s in the market. We’re not seeing opportunities in Florida and Texas and sending teams down there to originate loans. It’s in the market we know well.

Laurie Hunsicker – Stifel Nicholas

Do you know, off the top of your head, what your average LTV is on the commercial real estate.

Denis Sheahan

It’s in the 65% range.

Laurie Hunsicker – Stifel Nicholas

I’m sorry, you said the 55 or 65?

Denis Sheahan

65. The top end in commercial is 70 – 75, and the average is in the low 60s – I think 60. That’s approximate. That’s not a -- I don’t have a report in front of me telling me that. That is just some analysis we’ve done in the past.

Laurie Hunsicker – Stifel Nicholas

Ok, great.

Denis Sheahan

That makes sense given our top end is 70-75.

Laurie Hunsicker – Stifel Nicholas

Ok. And then, just to go back to two portfolios that haven’t quite performed as well. Just to go back to here, the business banking. I noticed link quarter you’re continuing to grow that portfolio.

Denis Sheahan

I hoped you picked up my comment that $9 million of the growth –

Laurie Hunsicker – Stifel Nicholas

Oh, was the reclass. I’m sorry. Yes, you’re exactly right. No, I wrote it down but it didn’t register. Ok.

Denis Sheahan

When we brought in the commercial portfolio, we brought it all into commercial, then we looked at it and into smaller credits we pushed –

Laurie Hunsicker – Stifel Nicholas

You reclassed into business banking. Perfect. Ok, and if you were to say where that portfolio might go in terms of delinquencies – because it’s now over 1% - what would be your best guess as we look a year out?

Denis Sheahan

Well, one would hope it’s going to stay around this level. It might migrate up another 10 or 20 basis points and hopefully stay there. But there is stress on the smaller end – there’s stress on the consumer end. So when you’re average loan size here is in that $50,000 range, you’re dealing with, in many cases, sole proprietors – and fuel is having an impact, lack of residential development is having an impact. It’s the small retail, as well, small restaurants. General economic conditions are having an impact. So, some modest increase in delinquency, we would hope.

Laurie Hunsicker – Stifel Nicholas

Ok. Ok, great. And then, the last question here. If you could you just touch on the specific link quarter increase in the residential non-performers. There was good detail you gave in the residential portfolio, but that portfolio is now up over 1% non-performing. Any other color you can provide there?

Christopher Oddleifson

Well, when it’s so low, it’s a handful loan. There’s not a whole lot more color commentary other than the –

Denis Sheahan

We can reemphasize what you said, in terms of, we have looked at them. We have looked at the likelihood of loss. And if you go that far –

Christopher Oddleifson

We’ve taken a look at each one, where we stand on the value side. If they were all not to cure, we’re exposed to about $200,000. So we have good collateral. It ranges from income -- mostly income reduction, job loss, other factors.

Laurie Hunsicker – Stifel Nicholas

Ok, and did any of this have to do with – you had mentioned that you had a loan by loan review. Was any of the jump because of reclassification?

Christopher Oddleifson

No.

Laurie Hunsicker – Stifel Nicholas

No, it wasn’t? Ok.

And how much of your residential book is in market?

Christopher Oddleifson

Virtually all of it.

Laurie Hunsicker – Stifel Nicholas

Ok, great. Thanks. I really appreciate it.

Christopher Oddleifson

Oh, Laurie, a pleasure.

Operator

The next question we have comes from Bryce Rowe with Robert W. Baird.

Bryce Rowe – Robert W. Baird

Good morning.

Denis Sheahan

Good morning, Bryce. How are you?

Bryce Rowe – Robert W. Baird

Doing well, thanks. Can you guys just touch on the operating expenses. Is this a good run rate for the operating expenses?

Denis Sheahan

Yeah, it’s also -- if you look at it on a normalized basis, Bryce. Yes, 26.2. We expect to be slightly less than 26 for the rest of the year, in that 28.8, 25.9 range each quarter. That’s a pretty good run rate.

Bryce Rowe – Robert W. Baird

Yep, ok, that’s all I’ve got. Thank you.

Operator

The next question we have comes from John Stewart with Sandler O’Neill.

John Stewart – Sandler O’Neill

Good morning, guys.

Christopher Oddleifson

Good morning.

John Stewart – Sandler O’Neill

Most of my questions have been answered, but I just want to go back to one thing you said. You talked about having reappraised all your residential portfolios in the last 3 months or so. Can you just give us a sense, for pricing, how much those are down from the last time you had done that project. And then, kind of in that explanation, just kind of touch on – you guys had mentioned in prior quarters that there was some negative impact from foreclosures from the national guys. Just kind of talk about what you’re seeing and feeling there.

Christopher Oddleifson

Yes, why don’t I just give you a little bit of overview of the market in terms of what’s happened here since our peak. Our peak was in -- we peaked earlier than the rest of banking, in the 3rd and 4th quarter of 2005. In our primary, our most dense, county – Plymouth County – for single family homes the decrease has been about 15% so far. The commentary [inaudible] if you look at interesting, that’s the single family home – interestingly in primary county Plymouth at the condominiums, those prices have stayed stable. We’ve seen, from the peak in 2004 to 2005 and then looking at Q2 2008 is actually up a basis point, the average sales price.

Denis Sheahan

Just to add to what you said there, Chris. In Plymouth, which is our primary county, John, the median sales price was actually stable Q1 to Q2. The median sales price for a single family in Plymouth County was $310,00 in Q1 and it was $310,450 in Q2. We believe that we’re down overall, since that peak that Chris mentioned, about 15% in Plymouth County – no change from the last time we spoke.

Christopher Oddleifson

Moving to Barnstable County, which is in the Cape Cod area, their peak was in the -- the median sales price has actually been stable the last couple of quarters. But if you take a look at the -

Denis Sheahan

Q1 was $358,000, Q2 was $356,000 so down modestly in Q2. But, you know, one would hope that Q2 should be one of your best seasons in terms of selling in this part of the country. So, there certainly is some stability and we welcome that. Barnstable County overall is down also 15% from the peak. Bristol County, which is the territory that Slade’s Ferry Bancorp was in, is down 18% from the peak and Norfolk County down 10%. So, that gives you some flavor. Generally speaking, this quarter there’s been some stability. But one would expect that, given the time of year – the selling season.

John Stewart – Sandler O’Neill

Ok, so you’re not seeing, sort of, marginal pressure from foreclosure activity and things like that?

Denis Sheahan

Well, foreclosures are up in all counties – up significantly. And there’s a large inventory of houses that have been foreclosed for sale. That is, I think, one of the primary factors for what we’re seeing in the price reductions.

Christopher Oddleifson

I mean, there is a great supply. And the length of supply, if you take a look at the sales duration and number of average months of inventory in the market, that’s an average roughly a half a year prior to this environment and so, roughly, about a year now. So the duration has about doubled. The good news about the price decline and foreclosed properties is that it’s actually getting qualified folks who have a lower income into houses and working our way into a more stable housing environment going forward.

John Stewart – Sandler O’Neill

Ok. Thank you for that. And then, just, on the construction portfolio – the commercial construction – that’s about $170 million at quarter end. What’s the breakdown between vertical stuff versus land A&D in that portfolio?

Christopher Oddleifson

Well, it’s mostly raw land lending. Very little, I mean most of it’s vertical buildings, but it’s over a number of project types – medical office buildings and strip malls and so on.

John Stewart – Sandler O’Neill

Ok, and what were the LTVs at origination versus what your recent appraisals suggest.

Christopher Oddleifson

For what? Residential home equity?

John Stewart – Sandler O’Neill

I thought you had said you did that on the construction portfolio as well? Did I misunderstand that?

Christopher Oddleifson

No, we did appraisals to see whether they were still within our bounds. I don’t have the LTVs in my fingertips, but they’re well within acceptable ranges. Our conclusion was, there’s plenty of cash flow to support the loans, the projects are on schedule, the absorption rates are acceptable. We do not have a construction portfolio issue. And that is a hot button out there that we’ve heard. People worry that, for example, interest reserves are masking delinquencies, and banks aren’t really knowing what’s going on in their construction portfolio. My point today was that, in fact, we do know. We’re taking a close look at the amount of interest reserve loans we have, which are very few, and in those cases we’re not masking any issues.

The message is, we don’t have a commercial construction portfolio problem.

John Stewart – Sandler O’Neill

Great, well thank you very much.

Christopher Oddleifson

You’re welcome

Operator

We show no further questions at this time. I would like to turn the conference back over to Mr. Oddleifson for any closing remarks.

Christopher Oddleifson

Thank you very much everybody. We look forward to talking to you again for the third quarter conference call. Goodbye.

Operator

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

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Source: Independent Bank Corp. Q2 2008 Earnings Call Transcript
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