Brookline Bancorp Inc (BRKL) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Natasha and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Bancorp Rhode Island, Inc. second-quarter analyst 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 am Merrill Sherman, president and CEO of Bancorp Rhode Island, Inc. I would like to welcome you to our second-quarter 2006 analyst conference call.

With me is the Company's CFO and treasurer, Linda Simmons. Linda will take you through our second-quarter financial results. I will then come back to make some comments on those results. Then we will both be available to answer any questions you may have.

During this call we may make forward-looking statements within the meaning of the Securities 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 uncertainty. 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. With that, I will turn it over to Linda Simmons.

Good morning. Earnings for the second quarter of 2006 were $2 million or $0.41 per share. On a linked quarter basis, this was up 481,000, or 32%, but down 554,000 or 19% from the second quarter in 2005.

As you know by now, we were unable to recognize income related to the FHLB stock. The FHLB has undergone changes which has resulted in a new dividend schedule. The bank received, on a pretax basis, $211,000 in the first quarter of 2006 related to this asset. If we were to have received that in the second quarter, our earnings would have increased approximately $0.03 per share to $0.44 per share.

Now let me turn to the balance sheet. Overall, we had great growth in the balance sheet of $35.7 million quarter over quarter. Our big story was our commercial loan growth at 44.6 million or 10.1%. This brings us to the double-digit growth that we had been anticipating. In addition, we also had consumer loan growth of approximately $8.7 million or 4.1%.

We continue to convert this balance sheet by allowing our investments and our purchase loans to climb and use that cash flow to fund the commercial and consumer growth. We also had growth and deposits on a EOP basis quarter over quarter. Total deposits were up $36.4 million from quarter one, and up $11.5 million from year end.

For the quarter, the core deposits grew by $24.3 million and CDs were up 12.1 million. Core deposits as a percentage of total deposits remained flat at 64%.

Our credit quality remains strong. Our non-performing loan increased by $427,000 during the quarter to $3.4 million. We have already talked about a $2.3 million single commercial credit in that portfolio which is very well collateralized. We expect to exit this credit in 2006 without a loss. The remainder of the portfolio is in our purchase residential loans. Our net charge-offs for the quarter were [$261,000].

As of June 30, the allowance for loan losses stood at 12.5 million, and represents 1.25% of total assets and over 367% of non-performing loans.

Now let's turn to the margin. The margin declined from 3.25% to 3.01% in the second quarter. Obviously, the biggest component of that is the flat yield curve. There is no doubt that we are in a difficult yield curve environment.

The second part of that, I would say, is the FHLB dividend. If we had received the dividend, this would have increased our margin by approximately 6 basis points. The largest factor in the change is the cost of deposits. We had several competitors in the market raise savings accounts rates and also CD rates during the quarter. Bank of Rhode Island was forced to follow with these rates or risk a great deal of outflow.

We can honestly say that the market has quieted down over the summer, when we have seen a little bit of quietness in the last couple of weeks. And we hope that maybe we will not continue to grow.

In addition, the Bank entered into a $10 million FHL advance that has an embedded floor. This will provide margin protection when interest rates reverse direction.

Margin compression is still very real. We will continue to convert this balance sheet by growing commercial loans and consumer [assets].

Non-interest income -- the [non-interest] income was 2.8 million for the second quarter 2006 compared to 2.4 million on a linked quarter bases, or up 22%. Some of this was related to Rhode Island tax credits that we received in the second quarter. We also had nice growth in loan-related fees, deposit service charges, and broker-dealer commissions out of our leasing subsidiary.

On the non-interest expense side, we decreased $1.1 million or 10% from the first quarter of 2006. If we had taken out the non-recurring loss in Q1, this decrease would have been $203,000, or 2%.

Salaries and benefits decreased by $306,000, a 6% decrease quarter over quarter. This reflects some seasonality as well as savings related to unfilled positions. REO and [work-up] also decreased $127,000.

Our marketing expenses were up quarter over quarter by $279,000, [because] we had a much more active quarter. We were the proud sponsors of the Women's U.S. Open, and increased our TV and print ads during the quarter. We expect this to return to a more normalized run rate for the remainder of the year. The Company's efficiency ratio remained at 74%.

This concludes my comments. And I would now like to turn this back over to Merrill Sherman.

Thank you, Linda. Let me just add a few remarks. First, we are very pleased with the commercial growth. The $44 million plus increase in commercial outstandings a quarterly record for us. Our new commercial bankers are making a difference as we expand our scale and reach in this marketplace. We are also pleased with the quality and range of the credits.

Those successes have led [the fruit] some of the senior level additions and changes we made last year. The other additions and changes we made are working equally well; it's just harder for you to see and quantify at this point.

In addition to the loan growth, you can see that deposits rebounded nicely as well. They were up on a linked quarter basis by over $36 million. That said, average balances remain a little soft. As Linda indicated, the pricing is highly competitive. And we are in a daily battle on the deposit front.

Finally, I think it is important as we wrestle through this yield curve to keep the Company moving forward. And we're doing just that.

I will now open the call to questions from you.

(OPERATOR INSTRUCTIONS). Laurie Hunsicker, FBR.

Linda, just wondered if I could go back to you. I know you're not giving specific guidance on the margin. I guess if we look at it on an FHLB-adjusted basis, you were right around 3.07 the quarter. Can you give us some sort of a rough guideline, possibly similar to what you did last time? Like, i.e., full-year margin would track 3.17, which obviously is going to be a little bit lower -- but just in light of the heavy deposit pricing competition, just kind of what you might be seeing for the rest of this year, or kind of going into next year?

Laurie, I'm not in a position to make a comment on that this time.

Tax rate, Linda? I know we have been using 35%. The last two quarters, you've been closer to 32.5. Do you have any color for us on that?

I still think that 35% --

-- is a good rate. Okay, great.

And then one other [sort of more] line item. The other other income, 804,000 -- versus last quarter, it was 460,000. Is there anything non-recurring in there?

That would be the Rhode Island tax credit.

I am sorry, I missed that. And how much was that?

We really don't want to publicly disclose that specific number. But I think that that is a seasonal occurrence.

Seasonal occurrence, okay --

Because the tax credit income comes in during the second quarter.

And it is always the second quarter of the year?

Yes. And Laurie, that is the results of our brokering historic tax credits.

Okay. And then one more thing -- it looks like you all did not buy back any shares in the quarter. Am I right on that? And you have any comments on that?

You are right. We have not purchased any during the quarter. There is no question that we have capital to deploy. But at this point, you can see that we had great commercial loan growth. And we raised this capital in 2005. This is the way that we thought that we would use this capital.

Having said that, I will make it clear that we thought it was a valuable tool. We still believe it is a valuable tool, and we will use it as our ongoing evaluation of capital deployment.

Bill McCrystal, McConnell Budd.

On the loan growth -- particularly on the commercial side, given your comments regarding the competitive market, are the loans you're putting on pretty much on your terms? Or are you having to concede certain criteria or even on pricing?

The answer is that it is a very, very competitive market for loans. The pricing pressure exists. And on the whole, we try not to lose a deal to pricing. And I think everybody is saying that. So you are getting a squeeze on the margin on the commercial loan.

Structurally, we have not been that flexible. And I think that they're granted on fairly conventional terms, whatever that means for commercial credits. But I think we're pleased with the quality of the credits. I don't think we have made any major concessions on structure. And we are, like everyone else, on a competitive situation with price.

And as far as the pipeline, as it exists today, how do you feel about that?

The pipeline remains strong. We are in a comfortable position that way as well.

So I would assume that you wouldn't be purchasing much in the way of residential mortgages if the growth is -- given the second quarter growth and maybe just the pipeline that you see?

That is a very good assumption.

And then just briefly on asset quality -- I know the numbers still are very strong, but just a little bit of uptick. Is it anything specific, or is it just the general type of smaller credits that are coming on?

I think other than the one [mature] non-performing commercial asset that we have mentioned, I think the balance of it is a handful of residential first mortgage loans. And that would happen this quarter.

And then I guess in a broader sense, what are your thoughts on the commercial real estate, and even residential valuations up in the market? And how you feel in general about the outlook for credit quality?

I am going to divide that answer into three different parts. I think that the commercial real estate market remains solid. However, I think there are concerns about [toppiness]. And I would almost expect that over time, we might see some softness in commercial real estate lending. If people are not doing a lot of purchasing of real estate -- some financing opportunities dry up, and the purchasing, I think, slows down when people think the market is [toppy].

And then the second aspect of it is that a lot of refinancings have already occurred. So there's not a tremendous amount of commercial refinance left out there. So put that on one side of the equation.

The residential real estate market is decent. The higher end market -- $1 million plus houses in the metropolitan Rhode Island area, metropolitan Providence area, probably are moving a lot -- not probably; they are moving a lot slower than they were before. Houses in the more modest price range, which would, in this state, be around $450,000, seem to be selling okay. But I know that the perceived softness in the Boston-area market -- eventually that rolls towards us. I think that concludes my comments on real estate market.

On the commercial and the business side, and just looking at credit quality overall -- these have got to be stressful times for businesses as their energy costs continue to rise, and how they pass those costs along become more difficult. So we are monitoring the portfolio carefully. There are no obvious widespread weaknesses at this point. But I think business ownership is concerned, and we get concerned along with them.

Mark Maring, Mendon Capital.

A couple of questions. First, I would like to just revisit the share buyback. I guess we were a little surprised that you made the announcement during the quarter, but didn't make any share repurchases. And based on your earlier comment, it sounded like it might have been and either/or decision -- either deploy capital for loans or share buyback. And I'm wondering why, with the amount of capital, it couldn't be both. And just maybe you could talk about how you evaluate the share buyback in terms of an investment.

The answer, I think, is exactly what Linda said -- we don't see it as an either/or. It is a tool that is available to us. And we evaluate it based on the parameters that we set forth in the press release when we initially announced the share buyback. So I don't think I have any further comments on it at this point.

Well, let me move to just a branch strategy, if I can. Can you just tell us what are outlook is over the next 12 to 18 months in terms of new branches? I know you talked a little bit about breakeven, I think, in the past, and maybe how the increased pressure on deposit gathering might impact your breakeven on any new branches, and any that have been open for less than a year?

We are taking a look at the branching strategy. We have got two on the Board that we have deferred to 2007. And we have not made any public comment on those, nor am I going to make any definitive comments on those today.

With respect to the branching, in the new branches, they are moving along nicely. However, the deposit mix is more CD-weighted than we originally anticipated, which reflects the marketplace. And I think we have given some guidance in the past that we are looking at a five-year breakeven as opposed to maybe 2.5 years when we started this strategy three years ago. So the newer branches, of which there are three -- the North Kingstown branch, the Lincoln branch, and the East Greenwich branch still represent a drag on earnings for us, which we had hoped by this time, they wouldn't be, and be opening new branches.

So that's my comments that way -- and just to remind you that part of it is not just the mix of the deposit, but the margin generally, and what you could do with a CD -- two years ago, you could still make a decent spread against it. And that has become a lot more difficult to do.

Bret Gineski, Ryan Beck.

First question was that FHLB Boston dividend -- will that be recouped in this quarter, or what is the status on that?

I think our status on that is like everyone else's status on that. There has not been a definitive timetable, as I understand it, announced for the dividend, nor do people know exactly what the dividend rate will be. And so we are in the same position as all of our colleagues here -- waiting to see what happens.

And then are there any new lenders that were hired in the quarter?

Not in the major business -- I don't call it major business lines -- not in the business lending group, which is our larger credits. But we do have a couple of BDOs that have come onboard over the last quarter.

Yes, that basically covers everything [with us].

Yes, and just when I say BDOs, they are generally looking for what we call the small-business credits -- roughly 250,000 or less. But we've hired a couple more of those.

[David Minkov], Maxim Group.

Nice job in a difficult environment, I guess. It's a pleasure to own this Company.

My question related to the stock buyback as well, so I guess it has really been answered. You said nothing has been bought back of the 245 authorized in the quarter. I guess that assumes that nothing has been bought back since the quarter to date as well. Is that right?

Well, that is true.

So keep up the good work. I have no further questions then.

Jared Shaw, KBW.

I think most of them are answered. I just want to double-check -- in terms of the non-interest income and the non-interest expense, any other onetime charges or anything else that we should exclude from going forward other than possibly the other fee income which was already addressed?

Yes; that is the only onetime, yes.

And then in terms of the salaries and benefits, at what point do you anticipate having those open positions filled and sort of returning to a higher level there?

We are trying not to fill open positions at this point, and kind of putting ourselves on a diet.

(OPERATOR INSTRUCTIONS). David Darst, FTN Midwest.

Could you give us a sense of, if you have it handy, what your loan yields were in your three categories for the quarter?

The consumer portfolio?

I am assuming this would come out in the Q in some fashion, Linda.

Okay, it was 6.02. And our total commercial portfolio was 7.17.

Do you have the mortgage?

5.28.

Okay. Then given some of the senior lenders you hired I guess early in the year or late in '05 to focus on the larger corporate business than you previously focused on, are you seeing any improvement in the loan size?

The answer to that is yes. As you know, they came in late January. And I think that we are penetrating and making better contact in a slightly higher markets. I don't think we're sitting there looking at $25 million credits. But I think we -- solidly in that 5 to $10 million range, I think we're seeing more opportunities that way.

And then your current commercial loans -- what percentage are you adding that are variable rate and fixed rate?

I don't think we have a breakdown for you at this point on that.

Do you know predominately which way it swings?

Yes, I would imagine that it is predominately fixed rate. And I am looking at Linda -- she is nodding her head.

And our definition of fixed could be five years, David, and that adjusts in a five-year period.

Bret Gineski, Ryan Beck.

Just one follow-up question about the costs associated with the U.S. Open. I believe you mentioned you sponsored it. What was [that]? And was that all incurred in the quarter? Was it anything substantial?

The answer is it's part of our marketing expense. I'm not going to go into the nits and nats on the breakdown. It's just that this quarter was a more active quarter, and I anticipate going to a more normalized run rate for the balance of the year.

There appears to be no further questions.

Well, thank you all for listening. And I look forward to reporting to you again at the end of the next quarter.

This concludes today's conference call. You may now disconnect.