Earnings Labs

Independent Bank Corp. (INDB)

Q3 2008 Earnings Call· Fri, Oct 24, 2008

$77.33

-1.83%

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Transcript

Operator

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

Management

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 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…

Denis Sheahan

Chief Financial Officer

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: first and foremost Independent Bank Corp and Rockland Trust Company are strong. As Chris stated, we are capitalizing on opportunities. We are lending, we are gathering deposits, we have strong profitability, strong margins and ample capital base to support growth and a poise to continue growing our customer base in a typically responsible manner. Loan demand is good. Commercial is up, excluding the loans required due to the Slade’s acquisition by $72 million since year-end or 8% on an annualized basis. Our year-to-date growth is strong, we as anticipated experienced large pay-offs in the third quarter. You will note that our construction portfolio is down $20 million; that offset organic growth. As Chris mentioned, our pipeline is remarkably strong in this business. However, we remained selective in the borrowers…

Operator

Operator

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

Damon Delmonte - KBW

Analyst

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

Chief Financial Officer

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 - KBW

Analyst

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

Chief Financial Officer

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

Operator

Your next question comes from Laurie Hunsicker – Stifel Nicholas. Laurie Hunsicker – Stifel Nicholas: 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

Chief Financial Officer

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 – Stifel Nicholas: Okay, so nothing on the commercial real estate side again?

Denis Sheahan

Chief Financial Officer

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

Chris Oddleifson

Management

Laurie Hunsicker – Stifel Nicholas: Okay and what is the total number amount of your loan?

Denis Sheahan

Chief Financial Officer

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

Chris Oddleifson

Management

It’s a number of loans Laurie, its not one loan. The number of properties, the number of loans. Laurie Hunsicker – Stifel Nicholas: And how much of that is Rhode Island?

Denis Sheahan

Chief Financial Officer

None of its, Laurie

Chris Oddleifson

Management

I don’t think any of it. Laurie Hunsicker – Stifel Nicholas: And is this a single-family development or is this business development or is it both?

Denis Sheahan

Chief Financial Officer

Single-family Laurie Hunsicker – Stifel Nicholas: And I mean anything that you can give us color wise, new number of lots or location or general location?

Denis Sheahan

Chief Financial Officer

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

Denis Sheahan

Chief Financial Officer

In what; in total loans outstanding? Laurie Hunsicker – Stifel Nicholas: Yes, of that $5.50 million. How that shakes out? Is it basically half and half or?

Denis Sheahan

Chief Financial Officer

No, about $1 million is in C&I and the rest is in commercial real estate. Laurie Hunsicker – Stifel Nicholas: And then so for the commercial real estate side do you have an LTV on that?

Denis Sheahan

Chief Financial Officer

No, we do not. Laurie Hunsicker – Stifel Nicholas: If you were to sort of ballpark guess on a combined basis?

Chris Oddleifson

Management

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

Denis Sheahan

Chief Financial Officer

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 – Stifel Nicholas: 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

Chief Financial Officer

Yes. Laurie Hunsicker – Stifel Nicholas: 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

Chief Financial Officer

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

Management

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

Denis Sheahan

Chief Financial Officer

I think it is 410, just looking it up for you Laurie. Laurie Hunsicker – Stifel Nicholas: Okay.

Denis Sheahan

Chief Financial Officer

406, Laurie.

Operator

Operator

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

Chief Financial Officer

$650,000. John Stewart – Sandler O’Neill: 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

Chief Financial Officer

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 – Sandler O’Neill: Yes, I was talking specifically about the BBB’s there, yes?

Denis Sheahan

Chief Financial Officer

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 – Sandler O’Neill: And the rest I guess its $17 million roughly; are those of single issuers?

Denis Sheahan

Chief Financial Officer

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 – Sandler O’Neill: Can you share the fair market values on the individual piece and the pools in total?

Denis Sheahan

Chief Financial Officer

Yes, so you want the price or the actual fair market value? John Stewart – Sandler O’Neill: Wherever you have the market now.

Denis Sheahan

Chief Financial Officer

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 – Sandler O’Neill: And the individuals?

Denis Sheahan

Chief Financial Officer

Individuals, $9.7 million. John Stewart – Sandler O’Neill: And can you share with us, who the issuers are of the the individual issuers you own?

Denis Sheahan

Chief Financial Officer

No.

Operator

Operator

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

Bryce Rowe - Robert W. Baird

Analyst

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.

Denis Sheahan

Chief Financial Officer

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 - Robert W. Baird

Analyst

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

Denis Sheahan

Chief Financial Officer

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

Management

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

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

Management

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

Operator

Operator

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