Brookline Bancorp Inc (BRKL) 2005 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Bancorp Rhode Island 2005 fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions).

It is now my pleasure to turn the floor over to your host, Merrill Sherman, President and CEO. Ma'am, you may begin your conference.

Thank you and good morning. As indicated, I'm Merrill Sherman, President and CEO of Bancorp Rhode Island, Inc. I'd like to welcome you to our fourth-quarter analyst conference call.

With me is the Company's CFO and Treasurer, Linda Simmons. Linda is going to take you through our fourth quarter and year-end financial results. I will then come back and discuss those results, as well as provide some commentary on the upcoming year. And at that point, we will open the floor to questions that you may have.

During this conference call, we may make forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These statements are based on our present beliefs, and are necessarily based on certain assumptions, which are subject to risk and uncertainties. Actual results may differ materially from those discussed here. More information on these risk factors can be found in the Company's filings with the Securities and Exchange Commission. And with that, I will turn it over to Linda Simmons.

Good morning, everyone. The fourth quarter earnings were $2.2 million, or $0.46 per share. This represents a 2% decrease over fourth quarter of 2004 and a 232,000 decrease or 9% over third quarter 2005. Earnings per share for the fourth quarter was $0.46, down $0.08 or 15% from the $0.54 reported in the fourth quarter of 2004, and down $0.04 a share or 8% from the third quarter 2005.

Earnings for the 12-month period were $9.6 million, or $0.024 per share. This compares to the $8.6 million or (technical difficulty) share in 2004. This represents a $955,000 increase or 11% from the 8.6 million reported in 2004, and flat on an EPS perspective, as the Company issued additional shares of common stock in the second quarter of 2005.

Before I talk more about earnings, let me talk a little bit about our balance sheet. Total assets increased $25 million or 2% during the fourth quarter, and $203 million or 16% for all of 2005. Commercial loans grew at an annual comp rate of 9%, and consumer loans grew at an annual rate of 23% for 2005.

On the deposit side of the house, total deposits increased 19 million or 2% during the fourth quarter. And on a year-over-year basis, total deposits increased 100 million or 11%.

During the fourth quarter, the shift towards certificates of deposit continued to happen. We increased them by $26 million or 8%. DDA grew by 9 million or 5%, while savings deposits declined by [60] million or 4%. On a year-over-year basis, certificates of deposit increased by 105 million or 42%. DDAs grew by 17 million or 10%, while savings deposits declined by 22 million or 5%. At year-end 2004, core deposits represent 72% of total deposits compared to 64% at year end of 2005.

On the credit quality side, we continued to have -- total nonperforming loans remained low. Nonperforming loans ended 2005 at 415,000 or 0.03% of total assets. This compared to 733,000 or 0.06% of total assets on December 31, 2004. Net charge-offs for 2005 were 1.14 million, and net recoveries for the fourth quarter were approximately zero. The allowance for loan losses ended the year at $12.2 million, and represent a 1.28% of total loans and over 2,900% of nonperforming loans.

The net interest margin for the fourth quarter was 3.5%, flat on a linked-quarter basis, and 22 basis points below the fourth quarter for 2004. On a full year 2005, the margin was 3.35%, down 9 basis points for the full year of 2004. While the Company strives to minimize interest rate risk, we believe that the difficult economic environment will continue throughout 2006 and will negatively impact the margin.

Noninterest income was 2.2 million for the fourth quarter of 2005, slightly less than the 2.3 million reported for the fourth quarter of 2004. For the full year, total noninterest income was 9.3 million versus 8.6 million for the full period of 2004. This represents a $693,000 increase, or 8.1%. If we exclude gains from sales of securities and buildings, the [year-over-year growth] would have been greater than 14%.

Loan-related fees increased by 483,000 or 89%. Fees related to the sale of loans and leases to third parties also increased by 358,000. Service charges on deposit accounted for an increase of 47,000 or 1%.

Income generated on the sale of nondeposit investment products declined by 124,000 or 12.7% during the 2005 period. Total noninterest expenses increased by 565,000 or 6.3% from the fourth quarter of 2004 to the fourth quarter of 2005. Growth in salaries and benefits increased by 508,000 or 11.3%, and occupancy increased by 166,000 or 25%.

For the full period 2005, total noninterest expenses were 3.4 million or 10.4 higher than the same period during 2004. The net increases [breaks down] as follows. Salaries and benefits increased by 2.4 million, or 14.1% for the full period, as additional staff was added during the past year to support continued growth of the Company. On a year-over-year basis, occupancy increased by $450,000 or 17.1%, and marketing expense increased by 155,000 or 10.8%. The majority of these increases were required to support the opening of our two new branches. In addition, [REO] and workout expenses increased by $107,000 or 97%. On the positive side, loan expenses declined by 124,000 or 11%.

We continue to monitor the situation that Merrill spoke about on our December 16, 2005 conference call. Our [maximum] exposure as of yesterday is below $1.2 million.

This concludes my prepared comments, and at this point I would like to turn the presentation back to Merrill Sherman.

Well, thank you, Linda, and hello again. Let me just give an overview of 2005. As Linda indicated, we had 9% commercial loan growth overall, 11% deposit growth. As you can see from the balance sheet, we've got a decline in savings and NOW account balances. Some of those NOW account balances were a high-yield product we introduced a couple of years ago. And we experienced some solid CD growth at what we would call acceptable rates.

The DDA growth over that period probably looks a little bit better than it actually was, because the average balance growth is more modest. That's a tighter picture at about 3%. Nonetheless, we are experiencing growth in that area, and we are pleased about that.

The commercial growth percentage was lower than it has historically been. We have historically been in the 15 to 20% range. And I would say that a significant portion of the lower rate was driven by proactive portfolio management. There are a number of credits that weren't consistent with our credit philosophy, and were refinanced elsewhere.

The bottom line is while they want to get back to that traditional range of 15 to 20% commercial growth, and we have a very strong emphasis on receiving core account growth, we are satisfied with the progress that we've made this year and our overall earnings in light of the yield curve and in light of our continued investments in the franchise.

I want to talk about those investments as well as 2006. The investments, the significant ones we've made this year are doing well and positioning us well for the future. As you are aware, we started two lines of business -- Macrolease, a small [ticket] equipment leasing company that we acquired on Long Island, and a private bank, a wealth management that creates a private bank within our bank, and the wealth management program for trust management we have formed in alliance with Coastline. Both of those lines are off to solid starts.

Additionally, we opened two new branches in Lincoln and East Greenwich. Those are also off to good starts. While they are more heavily CD-weighted than we originally anticipated, their overall numbers are fine. And we think they are strong additions to our footprint.

I want to say that we continued to invest, and plan to continue to invest, in the franchise, both in its physical aspects and its people. We have deferred opening two branches out of 2006 and pushed them into 2007, but we do plan to open those branches. And we also have the capital base as a result of our offering back in March of 2005 to support that continued expansion.

Equally as important with the physical developments and the lines of business are some of our personnel developments. As you are aware, over 2005, we have redrawn the management team in a positive way, adding financial expertise and technology spend. Additionally, I would say that our local reputation is strong and market changes are helping our recruiting.

We've got some exciting news that we'll be announcing in a more detailed fashion in the next day or so. Our goal is to become the premier commercial bank in the greater Providence area. I would characterize it as trying to being in the mold of what I think of as the old Wachovia. And in order to do that, we need more of the right kind of [spend]. And we have accomplished a mini-carveout of a high-performing business lending team from a major regional competitor.

We'll be announcing the details within the next few days, as I indicated. And these two new additions start Monday as our director of corporate banking, as well as -- the second person would be the head of our business lending group. We consider this quite a coup. It brings us added strength, an entree into a larger market segment.

And additionally, we'll be very pleased to announce that a strong internal candidate will assume our Chief Credit Officer role. This person has been with us since the inception, and I think will really help smooth the transition and present a very strong and solid front, but also represent continuity with our customer base. And I think it will be a successful transition.

Turning to the expense side, we are aware that our efficiency ratio is high compared to our competitors. We are conscious of the expense growth and monitoring our cost. And I can tell you that we are spending where we believe we will get a return on our investment.

Additionally, an operational process review is underway. We need to better utilize our systems and technology. We need to utilize them more efficiently and effectively. And we need to have a scalable framework to support efficient growth. And those are our intentions over the coming six months to a year to improve our operations and our effectiveness and efficiency.

I come back to -- ours continues to be a growth story with a longer-term strategy. We have produced a significant return for our investors over time, with the right investments being made in this franchise and believe we have the pieces in place to responsibly grow this institution. So with that, I will open it for questions.

(Operator Instructions) Anton Schutz, Mendon capital.

When we last talked off the line, I was curious about potentially your instituting a buyback program. Obviously, given your December results and your stock price performance during this year and your excess capital position, as well as deferring your branch openings out into next year, I really would urge you to reconsider that as well. Certainly a tough environment -- some of it's your own doing, some of it is not your own doing. But clearly, I would like you to consider that very strongly.

Additionally, your stock trades at a substantial discount to any sort of take-out price that you could be worth -- a substantial discount. And I think that you should strive to work hard to close the gap, or you should consider potentially looking at putting the Company up for sale.

Very, very disappointed in the December conference call -- obviously, I'm looking forward to some good news from you. Hopefully, these announcements in the next few days will look at having you raise some of your estimates. But I definitely think that you should be buying back stock in the meantime.

Well, on the buy back topic, the Board is aware of prudent capital management practices. And it's something that, like any other situation, we monitor it on an ongoing basis, so thank you for your comments that way.

I am sorry that you are disappointed in the results. I will go back to comparing our results from an investor's standpoint with almost any similar-sized institution in this region. We've produced a very substantial rate of return for our investors, and our intention is to do so on an ongoing basis. And I think we are making prudent investments. We are a very young franchise, and I feel we've got some real legs at this point to positively grow in the future.

Bill McCrystal, McConnell Budd.

First off, Merrill, you alluded to some operational reviews. And I think if I got it right, you said something regarding needing a scalable framework. I'm just trying to get a sense of that relative to -- obviously, just not too long ago, you went through a fairly substantial IT program where you spent a lot of money on that. And I'm just trying to rationalize what you're saying now versus what you've done in the last few years in terms of your processes?

Sure, sure. First of all, we did do a major conversion about two to three years ago. And what we have to do is more effectively and more efficiently apply that technology. And that's what the process, the review is all about. I think there's a tendency in any company to just layer on top of how you used to do something, and then you tweak it for something new. We're going back to a re-engineering from scratch, looking at every process we have and how do you do it more efficiently. Linda, do you want to add to that at all?

Well, we're looking at processes from front to back. We're taking every process from inception and where it finally winds up. And we believe that there is efficiency to be gained from that.

Okay. Are you doing this internally, or are you going to require some third parties?

I think we're going to try to do it -- we are planning at this point to drive it internally. Jeff Angus, who is our new Chief Operating Officer, comes from a very strong technology background. So this isn't a question of redoing the systems as much as applying technology to make us more efficient.

Okay. And on the expense side, obviously, we'll hear some news on these additions to staff. But with all the changes, obviously, some people will be replacing other people. So I'm just trying to get a sense of -- going forward, have the additions that you will be announcing soon -- were they factored into your guidance back in December, and would it have significant impact?

Well, I want to just talk more generally about additions to staff. Our plans are to continue to invest in the franchise. And our payroll will be increasing over this year. And so that is part of our plan. What I said it were going to invest in the places that we think make the most sense.

And so when we looked at how to try to get a little bit more off the table in terms of expenses for the coming year in light of the yield curve what we did is we pushed out the branch development program.

What we are not doing is cutting back on things like our marketing. And we are not anticipating cutting back on growing in selected areas in the payroll, where we think people will either improve our operational processes or, more importantly, add to our business growth. But we had basically built growth projections in with the notion of bringing on additional lending strength to help us to continue to grow our business.

Okay. Have you completed the leverage program at this point? I know it was only a small amount that was basically left at the end of December.

Yes. At this point, it doesn't make any sense to continue -- the opportunity in the marketplace just isn't there. And essentially, we were done.

Okay. So basically the 90 million is where you are?

Yes.

Okay. And on a minor item, but it just sort of stood out -- I know it's not a big component of the deposit base. But the money market -- are you intentionally pricing that so -- the decline seemed to be significant on a percentage basis.

I think that we offer other products that were more attractive that these people have flowed into.

Okay. Where would you say you sit in the -- Merrill, you mentioned the CD growth has been -- I think you said reasonable rates. Where would you categorize yourselves in the market in terms of pricing?

I think the only word is competitive. And we'll pick our spots on the offer and try to cross-sell the customer. I don't think of us as a market leader, I don't think of us as a market laggard.

Okay. And then just sort of finally, it's very vague, but how would you characterize the general, I guess, morale, given all that's gone on in the last, say, few months? Do you feel that people are still energized and ready to go out there and fight the fight?

Oh, yes. I mean, I think morale here is great. If you take a look at other people's announcements, you know, you have $400 million charges for restructuring and things of that nature. It's well-known that the margins in the Northeast are under heavier pressure than they are elsewhere.

And I think that -- we think we have a very solid franchise. We've got a great footprint. The competition here is keen, but the larger institutions grow more remote. And I think that we have a way of capitalizing on that. That's what the business plan is.

And so the morale here is great. And we have just launched a strategic plan. It's a three-year plan. And I think that we're going to be able to give results and continue the growth story that we have traditionally been.

Laurie Hunsicker, Friedman, Billings, Ramsey.

Nice quarter. A couple of question in terms of net interest margin. You had given us guidance at the end of last year that for '06, the margin would probably track around 3 17, and it certainly has held up better than expected. This is just relating to the December 21st earnings guidance conference call you had, where you said for '06 the margin would likely track around 3 17. Are we going to see it down that low, or -- obviously, it will contract a little bit, but --?

Based on what we know today, I still believe that it will be around 3 17.

For the full year of '06?

Yes.

Okay. And then along those same lines, on the guidance call on December 21st, you had indicated that you were comfortable in a range of $1.77 to $1.81 for 2006. And at the time, you all had not done accelerated vesting of your options. Did that not include the vesting of options, or did that include the vesting of options? Because that's about an $0.08 drag.

It did not include the vesting of the options.

It did not, okay. So in theory, then, we could look at this and say that you're somewhere in the range of $1.85 to $1.90 would be where you are comfortable?

We are not going to revise the guidance, okay? In other words, we don't want to undertake continually updating guidance. And so we were -- back then, and I think we're just not going to be in a position of doing that.

Okay. Within your other other expense line, the $1.3 million for the quarter, was there anything nonrecurring in that?

There were some expenses that would not be recurring from the audit line.

From the audit line, okay. And --

We had to outsource some auditing expenses.

And roughly how much is that?

I don't have the number off the top of my head.

Okay. If we were to say a good run rate for that line would be somewhere closer to 1.1 million?

I will not say that.

Okay. On tax rate, your tax rate was lower. We should still use 35%, or did you put some sort of tax [planning] strategies in place that's going to take the number down?

35% is still a good number.

Okay. You also mentioned in terms of asset quality, there were some credits that went elsewhere. What forms of lending are you shying away from? What's making you nervous?

I wouldn't say that there is any particular form of lending that we're shying away from. And credit quality in the portfolio remains very, very strong.

I think that if you go back this year, we had a charge-off in the second quarter -- it was probably the first significant charge-off we had -- of around 1.2 million. And that really represented in effect the entire net loan loss for the year.

And I think we revisited some of the asset-based credits, and tightened up a little bit there. And if we were comfortable with the way some of those companies were operating, we probably encouraged them to find financing elsewhere. But you know, you have situations where you get uncomfortable with management or things change. And fortunately, they were all able to find another home.

Okay. I mean, you all certainly have impeccable asset quality, so I guess I'm just wondering what else would maybe concern you.

There wasn't -- and it's not like an industry segment or any particular line of business.

Okay, great. Just one last thing. I know Anton made some comments on buybacks. We certainly -- we come at it from a different way. We'd love to see some buybacks too. I know you guys did your secondary at 37, so below 34, including dividend yield -- that is just an implied 11% return, whereas you do look at it how Anton looked at it relative to take-out value, that's close to a 45, 50% return on investment, buying back your stock. And I too would just like to say we'd love to see you repurchase your shares.

Thank you for your comments.

Collyn Gilbert, Ryan Beck.

Bill actually asked my question on the leverage, but just to take that a little bit further -- can you give some clarity as to what we can expect from that securities portfolio in 2006, and what your strategy is there -- and then also where you're seeing the spreads on that leverage at this point?

Okay. The investment portfolio will maybe have a little bit of growth, not a lot of growth in 2006. Again, it doesn't make sense to buy investments if you had to fund them through the Home Loan Bank. And so we just keep on watching the markets and looking for opportunities. If those opportunities haven't come, then we will just sit tight.

Okay. So no shrinkage planned necessarily?

It could shrink, and [actually], if the market dictates that.

Okay. And what's the current spread on the leverage at this point or what was it for the quarter?

It was about 70 basis points.

Jared Shaw, KBW.

I just had a couple of questions -- just a follow-up on Collyn's on the securities portfolio. What is the duration on that right now?

The duration is 2.5 years.

And then in terms of the new hires that you're going to be making, will that change your target customer? Or is this to supplement your existing business banking area?

I'm going to say both. We have a substantial presence, we got a lot of [under $1 million] credits. I think we do well in the 1 to $5 million range. And part of our growth plans involve keeping all that business, getting more of it, and then upsizing our credit exposures, as well.

I think -- we've been around for ten years now. There are, we believe, really rich opportunities in this market. And we are comfortable that we can deal with somewhat larger credits and still not take excessive exposure, and frankly, have an expanded capital base to do it with.

In terms of looking at potentially the average large size loan, what range should that be in?

When you get up into the 5 to $10 million range, I think that that's going to be the next level -- maybe slightly over that. But 10 million is a nice round number to have for a comfort zone at this point.

Okay. And then in terms of the Chief Credit Officer position -- is that a new position being created?

Well, it's actually technically an existing position. Don McQueen, who is leaving the bank, will be leaving as of Friday. And so he had been our Chief Operating Officer. When Jeff Angus joined us in November -- I don't want to get my months mixed up, so I'm looking around the room here for people to nod if I'm right -- but when Jeff Angus joined us in November as Chief Operating Officer, Don then re-became the Chief Credit Officer. And so Don has been functioning as that until the end of this week, when we will announce his replacement.

Okay. And then in terms of the announced -- the fraud charge, is there any color that you can give on that? Was that on the lending side, or was that on a different side of the business?

We really are not going to say anything beyond what we've earlier said and disclosed, other than -- what Linda said is that our exposure has been reduced to below 1.2 million.

Okay. And then finally just on the follow-up on Laurie's question about the guidance with the original range and the options, are you saying that -- are you sort of withdrawing guidance, or is it you're keeping the guidance that's out there and not updating it?

Yes, I think the latter is -- what we're trying to say is we don't want to be in a position of continually updating the guidance. And so we do it on an annual basis. And unless our policy changes, then we set out to give you a range before, and we're just not commenting on it.

Okay. So that range you gave before did not include or it assumes that the options would have been expensed in '06?

That is correct.

[Flay] Lewis, [Waybosset] Research.

My question has been answered. It had to do with the level of the Federal Home Loan borrowings and the future of that item.

David Darst, FTN Midwest Research.

Can you comment on your outlook for consumer demand and the consumer lending products? Do you anticipate a slowdown within your markets relative to what you saw in the fourth quarter, or do you foresee growth rates as you saw earlier in '05?

I'm going to say that I don't see material changes. Linda is scribbling some numbers. Do you have any [sense] of that? It's a little less predictable, because some of it is rate driven, some of it is how much can you refinance. And I'm not even sure what we were kind of going to target for this year, so I'll turn it over to you.

I believe that we expect it to slow down a little bit in 2006 as it's not that advantageous to continue to refinance. On the majority of our lending business on the consumer side is in the home equity product, whether it be a line or a loan.

Okay. And then with your purchased mortgage portfolio, do you expect to continue to allow that to run down, or are you going to look for opportunities to make purchases there?

We continue to look for opportunities, but our overall strategy over time is not to depend on purchased assets and to be able to generate the assets internally.

Did you have any purchases in the quarter?

Yes, we did. We had $20 million worth of purchases during the quarter.

Do you have an idea of what that spread was when you added that?

Well, some of that also depends on the types of mortgages you're purchasing, so --

Could you give us the yield, then, on the purchase?

I'm sorry, but I didn't bring that in with me.

(Operator Instructions) [Al Bersunger], Sidoti.

My first question relates to the balance sheet sensitivity. I believe in the third quarter '05, the Company's one-year cumulative gap was a negative 142 million, or 10% of total assets, if I'm not mistaken. Do you have the year-end number?

We have not published that yet.

Okay. And my second question regards to commercial loan side. I think the first single digit loan growth over the past five years -- but it was still a double-digit loan growth, excluding the 10 million exit from several commercial credits in the third quarter.

Well, that number went up as of year end. Beyond that, it is more than double that in terms of some of the transition.

Okay. What would be your expectations for '06 -- single digits versus double-digit loan growth on the commercial side?

Our plan is to go back to the kind of ranges that we've been in historically.

Okay. And my last question regarding the branch openings -- I know there's been a pushback for two branches for 2007. And I was wondering if the entry into the high-growth Bristol County is still in the cards?

Entry into where?

Bristol County?

I'm not sure we had any plans to go to Bristol -- is that where Barrington --is Barrington in Bristol County? At some point, we would like to go to Barrington. And if that is -- Barrington is a very high-end suburb, and sort of the East Bay equivalent of what our East Greenwich location is.

But it won't happen before 2007?

It will not happen before 2007.

(Operator Instructions). There appear to be no further questions at this time.

Well, thank you very much for joining us. And I look forward to chatting with you and end of next quarter. And happy new year to everyone.

Thank you. This concludes today's teleconference. You may now disconnect your lines.