Brookline Bancorp Inc (BRKL) 2006 Q1 法說會逐字稿

Good morning. My name is Lynn and I will be your conference facilitator today. At this time I would like to welcome everyone to Bancorp Rhode Island First Quarter 2006 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a Q&A 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 would like to welcome all of you to our first quarter 2006 analyst conference call. With me is the Company’s CFO and Treasurer, Linda Simmons. Linda is going to take you through our first quarter financial results. I will then return to discuss those results and to provide some commentary. After that, I will open the floor to questions.

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 risks 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 SEC.

With that, I’ll turn it over to Linda Simmons.

Good morning. The earnings for the first quarter of 2006 were $1.5 million or $0.31 per share. This included the one-time pretax loss of approximately $870,000. If we were to exclude that one-time charge, the earnings would have been $0.43 per share, on target with expectations.

The balance sheet declined by $11.4 million since year-end. Investment securities and purchase mortgages declined by $9.4 million, while commercial and consumer loans increased by $10.2 million. Commercial loan growth for the quarter was $3.2 million and below expectations. We have a healthy top line and we expect to see growth in the second quarter. We are still anticipating a double-digit growth for 2006.

We have also experienced a decline in deposits during the quarter. Overall, deposits decreased by $25 million since year-end. Core deposits declined by $20 million and CDs declined by $5 million. For the first time, we accessed the broker’s CD market and purchased $10 million of funds. This was part of the overall strategy which allowed us to re-price the existing fees at a lower coupon, thus managing the overall cost of funds.

Our credit quality remains strong. Nonperforming loans increased by $2.5 million during the quarter to $3 million. This represents 20 basis of total assets and reflects a single credit, which became delinquent during the quarter. This credit is well securitized and we do not expect to take any loss. Our net charge-offs for the quarter were $185,000.

On March 31st, the allowance for loan [lifts] stood at $12.3 million and represents 1.28% of total loans and over 400% of nonperforming loans. Our margin remains stable quarter-over-quarter at 3.25%. In fact, it has been level for 3 straight quarters.

We continue to convert our balance sheet by targeting our growth to internally generate commercial linked consumer loans. During the quarter, we had minimal investments in purchase assets. Going forward, there will be no additional purchases and the portfolio runoff will be redeployed into higher yielding assets or to retire wholesale borrowings.

Competition makes room for all types of consumer deposits. This competition, along with the challenging rate environment, will continue to drive up the overall cost of funds. Margin compression is still very real. We will continue our strategy to convert the asset mix as well as grow commercial assets in core deposits. But we are in an environment where the consumer wants long-term assets and short-term deposits.

Non-interest income was $2.3 million for the first quarter of 2006, compared to $2.1 million on a linked-quarter basis, or up 6%. We had growth in service charges on deposits and conditions related to the sale of non-deposit investments. Total non-interest expenses increased $1.3 million, or 14%, from the fourth quarter of 2005. Excluding the nonrecurring loss, the increase would have been $439,000, or 5%.

The net changes are centered in the following areas. Salaries and benefits increased by $515,000, or 10%, on a linked-quarter basis. There are several nonrecurring items in the first quarter, including recruiting costs, seasonal tax, and 401 contributions. During the quarter, we did add 3 new lenders and a chief auditor.

On the good side, we saw relief on professional services and a decrease of $160,000, or 22%. Our need to outsource audits has been diminished, as we have fully staffed our audit department. The Company’s efficiency ratio for the first quarter of 2006 increased to 81%. Without the nonrecurring loss, the ratio would have been 74%.

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

Thank you, Linda.

Let me begin my comments by addressing the nonrecurring loss we incurred this quarter. Basically, there are 3 points I want to make. First, the loss was due to unauthorized actions of a former employee. Second, both internal audit and our outside auditors have reviewed the matter and found no significant deficiency in our control. Third, we expected a termination from our insurance carrier with respect to the claim we have filed with this by the end of this year. For me to say anything beyond these points would be inappropriate and unadvisable.

I want to turn now to our commercial lending efforts. You are aware that a new corporate banking division head, as well as a new head for our business lending group, joined us in late January. We are pleased to say that they have assumed leadership roles and are integrating nicely. Also, all of our existing lenders remained onboard. Our business lending and commercial real estate lending groups are fully staffed and we have more lenders on the street than ever. The commercial pipeline is building, as Linda indicated, and as she indicated, we anticipate improved growth rates over the coming quarters and are still targeting double-digit growth for 2006 in those portfolios.

The bank’s spring marketing campaign is now in full swing. We’re back on TV and on radio during drive time. We also continue billboard and print advertising. The logo used in the ad campaign features our 10th anniversary and a number of events throughout the year will leverage off of the anniversary theme. Retail and commercial lines are both focused on core deposit gathering and are supported by the advertising campaign.

As you can see, there has been some balance decline in transaction accounts during the first quarter. The conventional wisdom is that deposits experience seasonality with DDA balances building over the course of a year and the first quarter representing the low point.

I believe that in this rate environment people mange their free cash more carefully and increasingly have the tools to do so, such as online banking. As Linda indicated, we have employed a fairly deliberate strategy this quarter with respect to our CD portfolio.

The operational process improvements and the expense control that I talked about in our January call are well underway. We have made significant progress. The team working under our COO has identified over 300 processes and is focused on both streamlining the same and eliminating duplication. We anticipate expense savings in the fourth quarter that will have a larger impact next year. We will be in a better position to quantify some of these savings for you later in the year.

I also want to talk a bit about how the investments we made last year are performing. The private bank is moving forward. We are pleased with its performance as well as how we are doing with our new branches in Lincoln and East Greenwich. These initiatives are not positive financially. All reflect longer-term strategy on our part and we believe represent necessary components to successfully growing the franchise.

For those of you who follow us, I would say that our projections for branch profitability have gone from approximately 2 to 2.5 years to about 5 years. Should the rate environment improve then that would influence the breakeven point with the newer branches. With respect to Macrolease, our equipment leasing subsidiary, I’m happy to report that it met its volume and profitability hurdles for the period ending December 2005. As a result, the management team has earned the first traunch of the stock, the Bank Rhode Island stock, Bancorp Rhode Island stock, forming part of the [year announced].

You can see from the press release that we announced a board of directors vote to put a stock buyback program in place. After due consideration, the board believed it’s in the Company’s best interest to make this tool available to management.

Finally, let me talk a bit about consistency and execution. We’re celebrating our 10th anniversary this quarter. The bank opened in March of 1996. For almost all of those years, we demonstrated real consistency in our growth patterns, both on a period basis, quarter-over-quarter, and year-over-year, as well as on a business basis in deposits and loans and consistently met earnings expectations.

The last two quarters have been a bit choppier. We undertook a large number of initiatives last year and underwent some significant transitions in what is widely acknowledged to be a difficult banking environment. That has made consistency a little more difficult for us. But we knew we could not stand still and we know we must be nimble, proactive, and adaptive to take this institution to the next level.

We have 2 essential positives in place – the great franchise footprint and the right senior team. We are focused on execution, growth, profitability, and delivering value. This is only the first quarter of 2006 and we have a long way to go before this year is in the record books.

With that, I will open the floor for comments and questions.

[Operator instructions.] Ross Haberman, Haberman Funds

Could you go back to your statement on the new branches and you are saying, I guess, give the rate environment, how much longer it’s taking to hit a breakeven. How many are ongoing now? And given 5 years, which you threw out today, is that going to lend any new plans for the moment?

No, I think it would be unrealistic for us not to revisit some of those plans, but we haven’t reached that point yet. And that’s all I can say, we haven’t reached the point of revisiting our current plan. There are 3 branches that we have that have yet to really achieve profitability. Some of the overall deposit numbers are not bad; they are pretty decent. North Kingstown, for example, is probably over $30 million in deposits at this point. What the issue is is the mix and then the spread that we get as a result from the mix. And East Greenwich and Lincoln are both performing nicely. Lincoln is actually doing exceptionally well in terms of its growth. But at the end of the day the margin is just tighter and it will push that profitability point out longer.

And just one further question on the margin. How are you positioned at the end of the quarter, either at the sensitive or liability?

We continue to be liability sensitive at the end of the quarter.

That was Linda.

Okay. Is that the way you want to -- so, again, a great score for a little more. It might put further pressure on the margins.

We expect further pressure on the margin, yes.

Until rates begin to top out and drop?

Until we can get a positive real term environment.

Okay, thank you. The best of luck.

Jared Shaw, KBW

Just a couple of questions. The loss on note receivable on the income statement, is that the loss you were referring to before, the 868?

Yes, that was one that we referred to in the previous conference call.

Okay. And then on the one-time charges on the salary and benefits, could you break out what that recruiting expense was versus the other 2 or 3 items you had mentioned?

I see Linda looking at me and saying no. The answer is that we’re not going to be specific in that breakout.

Okay. But I mean, so looking at some of the other stuff, like benefits and social security and things, those are annual expenses? They are each first quarter though, right?

That’s correct.

Okay. And then the margin was stronger than what we were looking for. It’s actually very good this quarter. Is the 317 number that you guided to on the last conference call still a good number to be looking at for the full year of ’06?

I believe so.

Bill McCrystal, McConnell, Budd, & Romano

Could you give us a sense of what the pricing competition is like on both sides of the balance sheet?

I think the word “fierce” comes to mind. It is a very, very competitive market. And if you open the Sunday paper, which I do open every -- I open the daily paper as well, it is awash in bank ads, particularly intense competition on CD pricing. And then loan pricing has always been competitive, even more so.

Are you noticing any trends on underwriting or are the standards being loosened at all?

No one -- everyone thinks they are maintaining their standards and it’s the other guy who’s not maintaining his. But, frankly, I don’t see anything dramatically different in the underwriting that’s going on.

Or are you seeing some, I’m just trying to get a trend, so you’re seeing some longer-term fixed rate products being offered that just don’t seem to be within your standards?

Not especially. There is desire for some 10-year fixed rate stuff and we will from time to time deal with it. [Batch it, try to fund it.] So I don’t think -- I think a squeeze on the margins, if you wanted to get 275 basis points over, if I go that 5 years, you don’t see that anymore. So the margin is compressed, but we haven’t seen really crazy terms out there when we’re competing.

Okay. And then just to go back, the last quarter you had indicated you wanted to get back to more normal commercial loan growth at 12 to 15% and you said earlier in your comments that you’re looking for double-digit. Is the double-digit below the 12 to 15% or are you still hopeful of getting back to that level of growth?

I think that the lower portion of the double digits is where we’re looking at at this point, but time will tell.

Laurie Hunsicker, FBR

Just wondered if we could go back to deposits for a moment. Can you talk about what happened linked-quarter in the demand line item going from $185 down to $175 million and some of the things that you might be doing there?

Well, we’re watching it closely. I can tell you that from everything we can see it has to do with customers maintaining lower balances more than -- I mean, that’s the primary driver of it. And to address the situation, we are just focusing the marketing and calling efforts on DDA growth. And I don’t mean just, but we’re intensely -- part of it is to drive the deposit balances, especially the DA balances, and I told people for the first time our commercial lenders, in addition to their usual goals for loans and fee incomes and maintenance of credit quality, now have deposit goals and their incentives are tied to deposit growth. So we’re -- it’s something that is a lot of blocking and tackling and we’re out there every day trying to build the deposit base generally and the DDA base specifically. But also note that I think from what I can see, my situation isn’t materially different. It’s just tight in the northeast these days and hopefully the drop is simply seasonal and I know we’re taking the right steps to change our situation for the better.

Okay. And then the 3 branches, I just wondered if you can sort of take us back through the Kingston, the Greenwich, and the Lincoln. Just when they opened, where they are in terms of deposits right now and what the targeted breakeven is now, given the current rate environment? Or just any kind of rough guidance that you can give us in that general category on those 3.

I’ll talk about North Kingston first because that opened in June of 2004 and I’m going to say that you’re looking at probably -- I don’t have this stuff in front of me, so specific branch by branch, but that did open in June of 2004 and then Lincoln was next in May of last year and then came East Greenwich in June of last year. So 2 of them aren’t even a year old at this point. And then the North Kingston branch is a larger -- it’s not only a larger facility physically, but it’s one of our excel model branches that’s open 7 days a week. So the cost structure here is higher. So if you push the profitability on that out a bit further, what that will be is more expensive.

And so would be the targeted breakeven on that?

You are probably looking at 4 years for North Kingston.

And do you look at that on a sort of total deposit gathering basis too?

Primarily, the profitability of the branch is primarily driven by deposits structure, although loans do count in it and, obviously, expenses associated with it.

That would be what? Like a $45, $50 million [voices overlap].

Oh, are you talking about the size of the [voices overlap].

Right. The size to breakeven.

It’s not a size issue, because at $30 million you could be at breakeven in the branch if you had 50% DDA’s, so it’s a mixed issue. I’m sorry we’re not more specific and more helpful, but I did say we were probably looking at about 4 years there.

Okay. And 5 on the other, right. And then how much in deposits right now do the Greenwich and Lincoln branches have?

I don’t think we’ve said anything that -- the FDIC numbers aren’t out yet, but I think they are both probably over about $10 million.

$10 million, okay. And the mix there is more heavily CD weighted?

Everything these days is more heavily CD weighted.

Okay. Just one other question. Your tax rate, you’ve been running that closer to 35%. Obviously, it was lower this quarter. Any comments on where we should be going forward with that?

I think it will return to a little bit more normal level going forward.

Okay, great. Congrats on the buyback. We were delighted to see that.

[Sy Jacobs, Jacobs Assets]

I wanted to ask you about your comments in your presentation about the buyback, where you said something to the effect of the board felt it was a useful tool to have available. Sounds like kind of a tepid endorsement of the idea. So I just wanted to see if my impression is wrong and if you could go into a little more detail about how you look at it as far as its attractiveness on creating shareholder value and accretion and all of that and how aggressive you would like to be in actually completing the buyback authorization.

I’m not going to go in that direction, except to say that the board reviewed the situation and thought it was a reasonable decision to make, which is I didn’t mean to sound tepid or not tepid in my remarks. And I think if you have a full copy of the press release, it goes into the authorized repurchase of 245,000 shares on precisely the terms and conditions that is stated there.

Can you shed a little more color on that? Whether you actually intend to go out and start purchasing the shares in the short-term or is it something you just want to have in your back pocket?

I don’t think it’s appropriate for me to comment beyond saying that it’s a tool that’s available to management and that will be discretionary with management and to when and how it will be exercised.

Bret Ginesky, Ryan Beck

Quick clarification. When Laurie asked you about the North Kingstown branch, you said 4 years to profitability. Did you mean 4 years from when they are opened or 4 more years from now?

I hope not 4 more years from now. The answer is 4 years from when it opened.

Okay. I just wanted to make sure on that. And then, okay, I can’t go with the buyback. And then I guess on commercial and consumer loan yields, are you seeing much growth in that? Could you compare them year-over-year or quarter-over-quarter or are you not giving any visibility on that?

I’m sorry, but we don’t have that in front of us right now. It will probably be available in the Q.

Okay, great. Congratulations on the quarter.

Alper Sungur, Sidoti

I have a question regarding efficiency ratio. The pro forma number was 74%. I know there is a 10th year anniversary this quarter and you guys have major sponsorships coming on this summer, I believe. The U.S. Women’s Open and the Sound Sessions, June and July respectively. What will be the extra expenses regarding those events?

I think that they are part of the overall marketing budget and I don’t think it will look like that much more expense. You just re-shift the pie.

Okay. So they are already reflected in the efficiency ratio for the first quarter or they will be in the second one?

They wouldn’t be reflected in the efficiency ratio, although we have some of the expenses incurred. But at the end of the day, I don’t think it’s going to be a different, materially different, overall marketing expense for us this year compared to last year.

[Operator instructions.] [Anton Chupp, Lindon Capital]

Congratulations on the buyback announcement. I’m pleased to see the announcement. I know you don’t want to comment on it very much, Merrill, but I assume the board announced the buyback because they considered the stock undervalued? Otherwise, they wouldn’t consider that kind of an action. And I would appreciate your commenting on that because I can’t imagine you would announce a buyback if you didn’t consider it undervalued. We, as shareholders, all consider it dramatically undervalued.

Well, I don’t know whether to say I’m pleased that you consider it dramatically undervalued or not. We do take a look at our price to book and the number of ratios and I think from that standpoint you could take the position it’s an undervalued security.

Well, we appreciate that you agree with that and I’d like to see you active in the buyback, hope to see you there. I understand you don’t want to comment further, but I think you see some buy targets on your stock. I think you’ve heard some descriptions in the value of your Company on your last conference call, so we intend to remain a shareholder and happy you’ve announced the buyback. Good luck on your other initiatives. Thank you.

Laurie Hunsicker, FBR

Can you just go back over the nonrecurring items again?

The largest, of course, was the note receivable.

Right.

800, approximately $870,000. And then we had some nonrecurring expenses in the salary line related to recruiting.

And how much were those exactly?

We’re not going to say.

Okay. But -- well, I guess I’ll ask another way. If we were to kind of look at modeling starting in the June quarter, where would you say a good corn on interest expense line would be running?

That would give it away, Laurie.

Well, I guess maybe just from the standpoint of -- to the extent that there are no new branch openings this year. I mean, I guess just to say where we should be seeing this on a baseline basis? There is no other way to give us some form of ground guidance?

No, I’m sorry.

[Operator instructions.] Anton Chupp, Lindon Capital

Just a question on the securities book and your thoughts on it. I don’t know if you can disclose the current spread you’re making on it, but are your thoughts to replace the securities book with loans as time proceeds?

Yes, that’s our intent.

What’s the average life at this point in time and duration?

Duration on the portfolio is 2.4 years.

And has that extended?

No, it has not.

Terrific, thank you.

Thank you. At this time, there appear to be no further questions.

Well, thank you all and I will look forward, if I don’t see you at our annual meeting in May, to talking with you following the conclusion of our second quarter.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.