Brookline Bancorp Inc (BRKL) 2006 Q3 法說會逐字稿

Good morning. My name is Elsa and I will be your conference operator today. At this time I would like to welcome everyone to the Bancorp Rhode Island Inc. third-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 question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you.

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 you to our third-quarter 2006 analyst conference call. With me is the Company's CFO and Treasurer, Linda Simmons. Linda is going to take you through our third-quarter financial results. I will then come back and discuss those results and provide some commentary on the remainder of the year. After that I'll 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 risk and uncertainties. Actual results may vary 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. The earnings for the third quarter of 2006 were $1.6 million or $0.33 per share. On a linked-quarter basis, this was down $363,000 or 18% and down $824,000 or 33% from Q3 2005. The quarter's earnings reflected $859,000 pretax charge related to the restructuring of the investment portfolio. Without that one-time charge, the earnings would have been $0.2 million or $0.45 per share.

Changes in the market conditions allowed us to sell $62 million of securities and reinvest those securities into higher yielding ones. The Company expects to increase its net interest income by approximately $900,000 over the next 12 months. In addition, we had a staff reduction of 10 positions in the month of September. Merrill will talk more about that later in the call. Finally, the bank received $456,000, of which represented two quarters of the dividend payment related to the FHLB stock.

On the balance sheet side, the overall balance sheet grew by $29.7 million on a linked-quarter basis. Loans grew by $11 million and the remainder is noise related to the investment restructure. Our big story continues to be the growth in loan portfolio. It increased $22 million or 5% on a linked-quarter basis and 16% from year end. Our pipeline remains strong and healthy and we look forward to the fourth quarter.

Deposits declined slightly quarter-over-quarter. Total deposits were down $4.9 million for the quarter but up $6.7 million off the year-end numbers. Core deposits were 63% of total deposits, down from 64% in June.

Our credit quality remains strong. Nonperforming loans decreased by $2.7 million during the quarter to $745,000. We have successfully exited a $2.3 million commercial credit without any loss. Net charge-offs for the quarter were $20,000.

On September 30, the allowance for loan loss stood at $12.3 million and represents 1.22% of total loans and over 1600% of nonperforming loans. Please note that during the quarter the Company established a reserve for unfunded commitments within other liabilities. This was based on a recommendation by the FDIC. The Company reclassed $491,000 from the allowance from the loan loss into this new reserve for unfunded commitments. If we were to compare on this on a consistent basis, the coverage ratio would have been 1.27% in Q3 versus 1.25% in Q2.

The margin increased from 301 to 308 in the third quarter. As I said earlier, the bank received two quarters of the FHLB dividend. If we were to normalize both Q2 and Q3 margins to reflect the level payment of the FHLB dividend, the margin would have declined by 7 basis points. Simply put, the increases in the cost of funds continue to outpace the increase in yields on earning assets.

The deposit market remains very competitive. Consumers continue to exhibit a preference for high yielding accounts. In addition, the yield curve remains flat to inverted and we expect this to continue in the short term.

Noninterest income was $1.5 million for the third quarter of 2006 compared to $2.8 million on a linked-quarter basis. Without the securities loss, the client would have been $413,000 for a decline of 15%. Service charges on deposits increased $66,000 or 5%, but this was offset by declines in conditions on non-deposit products, loan related fees, and broker-dealer commissions on leases, which totaled $245,000.

In Q2, we had received $250,000 of income related to conditions on Rhode Island taxes. The extent of this benefit is generally limited to the Q2 event. Our noninterest expenses declined by $266,000 or 2%. Salaries and benefits decreased by $259,000. This is a 5% decline quarter-over-quarter and includes the charges related to the staff reductions. These charges were less than $100,000.

Professional service increased by $198,000. The majority of this increase relates to fees paid the third-party advisers obtained to advise and consult the Company on investor matter relations. Marketing expenses returned to a normalized expense level of $383,000 for the third quarter.

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

Thank you, Linda. A couple of remarks before I set some general -- make more general remarks. First is as Linda indicated, our commercial growth has been exceptional year-to-date. We have growth of about 16% that is consistent with our historic patterns and I'm very pleased about that. The quality of that growth is good and unlike a lot of community banks, that growth is driven by business lending as well as commercial real estate lending. Our pipeline, as Linda indicated, remains strong.

Second, a comment on the asset quality. Linda also indicated it is strong. We resolved one of our larger nonperforming loans this quarter and with nonperforming assets, $745,000, that is extraordinarily low for an institution of $1.5 billion in total footings.

Deposits remain a challenge. It is a story I am sure you are hearing industrywide. We have been disciplined in our pricing and remain committed to deposit growth at prudent rates. We have had an incredibly busy quarter, putting in place a number of strategic initiatives directed at cost-cutting efficiencies and service improvements. These included a reduction in workforce.

Before I discuss these initiatives specifically, I want to put them into context for you. For those of you who have followed us over the years, not to mention have held our stock, you are aware that we have consistently delivered superior shareholder value. It is our intention to continue to deliver superior shareholder value. In examining the value of Bank Rhode Island, we really see two components, franchises strategic value and its economic value. The strategic value has climbed very steeply over the last ten years. There are three major factors contributing to the climb.

First, the location of the franchises in an urban market in a dynamic capital city, a city which has grown to become the second-largest city in New England and is undergoing an urban Renaissance. The second factor in the value climb is the execution of a business plan that resulted in the achievement of critical mass of $1.5 billion with a high-quality deposit and asset base.

The third factor is scarcity. There simply are not a lot of institutions like us in this market area. We believe that our strategic value can be enhanced through further growth as well as further development of our commercial banking niche. We are attracting larger, more visible businesses. We look to have complete relationships with these customers and the borrowers as well as their principals represent highly attractive customers.

Now I want to turn to the economic value component of our value. That value is predicated on this institution's ability to earn. It is incumbent on the Board and the management team to lever on ten years of investing to drive the earnings as well as the operating performance ratios of this Company. Our focus is on net income growth, EPS growth, and ROE. These are the measures that we regard as key.

As you are aware, at the end of 2005, we announced a deliberate look at our processes. The objectives were twofold. The first was to reduce cost and the second was to do so in a way that structured us to be in a position to grow the bank's size but with a lower expense growth rate than we've had in the past. While we look at -- those processes remain ongoing, we indicated we would begin to have results by the third quarter this year, and we do.

First we have reduced staff. Over the course of a year we removed 14 positions from our payroll. This was done through attrition. Additionally at the end of September we eliminated ten more FTEs. While reducing our staff at the end of this quarter was difficult, we knew it was the right long-term decision for the competitive health of this Company. The 24 positions eliminated were almost all back office positions. The removal will not affect customer service levels which we expect to remain high.

Second, we have announced the reorganization of two of our key business units, the commercial lending area and the retail branch system. This reorganization will be phased in over the remainder of the year and we believe it will produce efficiencies going forward as well as maintain the high-quality, high touch service for which we are known. In the commercial area, our business lending group will now handle relationships of approximately $1 million and up. The commercial real estate group will similarly focus on relationships of approximately $1 million and up and all commercial relationships under that amount whether it's commercial real estate or business lending will be housed in a newly expanded business development unit.

Finally we have created a loan servicing unit that will underwrite and handle portfolio management for all relationships that are serviced by the business development unit. The reorganization will allow us to focus and spend more time with larger customers in the business lending unit. The idea behind the business development unit and loan servicing unit is to streamline our approach to smaller credits. We believe that this method will expand our ability to reach more borrowers with the same number of people as well as achieve improved monitoring of these credits and more efficient processing. The bottom line is we will touch these credits less but do not intend to touch the customers less or to touch fewer customers.

On the retail side, we are moving to a model pioneered by Umpqua on the West Coast. We call it Universal Banker. We will be moving towards one in-branch touch point for all services and seize the split that your traditionally see in banks between the teller and the customer service representative. We're looking to have all your needs serviced by one person. We believe this will create more than efficiencies. It will elevate the service level and put our best foot forward with the customers walking into the branch.

One additional comment on staffing. While we do not anticipate any further reductions, a hiring frost does remain in place.

We were delighted to announce yesterday that Michael McMahon has been appointed to the Board of Directors of Bancorp Rhode Island Inc. While not specifically mentioned in the release, Mike also has been appointed to the Board of Bank Rhode Island. His appointment fills the vacancy created by the resignation of Margaret Farrell. Peggy has been a valued number of our Board since inception and we will continue receiving the benefit of her wisdom, judgment, and experience as she will remain General Counsel to the Company.

Mike represents a terrific addition to our Board. He has extensive Wall Street experience, has served on the Board of a publicly traded company and until recently had served as director of economic development for the current administration. So he is very familiar with the Rhode Island economy and its businesses.

Looking ahead to 2007 and commenting on our current position, we are a young, vibrant franchise. We have increased through personnel additions and changes; our ability to proactively manage our balance sheet; grow our commercial business; and improve our operations.

Linda has given you some guidance on the result of the balance sheet restructure. We're now in the midst of our annual budget process and we really can't provide further guidance until we wrap that process up. I would anticipate providing that guidance next January in our year-end earnings call; however, we believe the announcement today reflects the Board's strategy of approaching decisions with sound business judgment and a longer-term perspective. The result will be to preserve and enhance the broad range of options for this institution and its ability to operate from a position of strength. We remain focused on our most important objective, to continue to create superior long-term value for our shareholders.

With that, I will open this session for questions.

(OPERATOR INSTRUCTIONS) Laurie Hunsicker, Friedman Billings Ramsey.

I just wondered if you can just go back over within the line items of some of the loan categories specifically the commercial real estate growth linked-quarter was very strong but that's in the owner occupied. If you can maybe sort of give us color owner-occupied versus non- owner-occupied and obviously your multi-family was up. I know some people are backing off on that. Just mainly anything that you're seeing in terms of additional color that you can add there.

Laurie, I am unaware -- I've got to get a different set of numbers in front of me. What I can tell you is that we do have some commercial real estate projects that we are funding that would be classified as multifamily products, but I am going to tell you that probably about half the growth in the commercial portfolio was related to business lending growth.

Okay, great. Then just going back to some of the comments you made as far as costs, can you share with us where your efficiency goals stand for next year?

I don't think we have any further guidance to provide for next year and it's not an efficiency goal. We're going to be focused on EPS growth and net income growth goals.

Can you share those goals with us?

No.

We're in the budgeting process now, and so they are not good numbers to share yet at this time.

Okay, then just two other things. Can you just comment in terms of where you stand in terms of buybacks? And then also maybe, Linda, can you just give us clarification in terms of the go forward tax rate? We were at 35% and I realize there's been some noise this year but just where we should be?

Sure, let Merrill handle the buybacks first.

First I am glad you asked about that and I just want to again put that into context. When we announced the buyback authorization in April of 2006, our stock had been trading at about $34.00 a share and generally had a lower daily trading volume than we have been experiencing in recent months. At that time we had a number of scenarios run by an investment banking firm and we reviewed these with the Board. The primary consideration was the impact of the buyback could have on our EPS under a range of conditions. Given that the stock had a relatively low daily trading volume at the time we announced the buyback, if we could have held the price at $34 while affecting the buyback authorized, which may have been doubtful given the trading volume, the impact was pennies per share.

Shortly after the buyback was announced, the price per share began rising and I think we closed at around $34 yesterday. The buyback authorization remains in place and remains a management tool, a valuable management tool that we alluded to earlier. The Board and management continue to investigate ways to utilize our capital to create shareholder value. Linda, if you want to --

On the tax rate, we went from 32.1% in Q2 to about 29.1% in Q3. Basically there were several factors affecting that tax rate. The first one being is that we had a true up in our state taxes that was beneficial to us and the second is basically the securities lost. Based on the new forecast, we were at a different tax rate and just a reminder that BOLI becomes the biggest threat percentage of total earnings as long as you have less earnings. We expect that the tax rate for Q4 would be between 32 and 33%.

Okay, and that's probably a good number to use too for next year?

We will give you better guidance on that when we are done with the budgeting process.

Okay, great. Thanks.

[Richard Lashley], [PL Capital LLC].

I'm glad you brought up the issue of strategic value and economic value. It is a conversation that we had a couple months ago. We are all for the creation of economic value. That is the preferred way. Organic growth is always better than having to do something with the business, but I am sitting here today looking at the numbers, three-month numbers, nine-month numbers for '06. You once again had negative operating leverage. I look at the last 10 years of results, 2006 will be the lowest ROA, lowest ROE, highest efficiency ratio in the history of the bank since you started in '96.

It sounds great to say you're going to create economic value, but I guess two questions. One, why wasn't the Board more incented and focused on this in the last couple of years? Why is it coming up now? And two, it's such a big gap between economic value and strategic value it is literally creating $10 million of pre-tax either revenue or expense reductions to get you back to where you should be. It is such a big gap. How do you close it? Is it realistic to close it?

A couple of comments. First I think that the Board has consistently been focused on improving value both on the economics and strategic front. And if you want to just dial back, you mentioned the last couple of years, before we had done the offering, the capital offering in March of '05, March of 2005, the ROE was about 12.34 and so -- and the earnings had been pretty consistently driven north since inception. And at that time, we elected to do a capital offer and raised about $20 million in new capital. So we knew it would dilute the earnings. We know it would depress the ROE.

Secondly, the earnings reflect the margin headwinds that every institution in this country, virtually all of them have run into, and so we are trying to be as proactive as possible not only improving the margin but lowering our expenses. So that's a second commentary there.

The final item is we are looking and moving towards converting that balance sheet to improve the operating performance by attracting higher yielding, high-quality commercial assets and really addressing what we see as an industrywide issue of deposit [gathering]. So we are focused on it and over the next three, six months we hope to start turning that boat around and really delivering the kind of low-cost funding sources that we have traditionally benefited from and which are getting increasingly difficult to attract.

I appreciate that. I guess you can put me down as a skeptic whether it that is easy to achieve, but --

We did not say it would be easy to achieve. We work really hard every day trying to produce those kinds of results.

Okay, and I guess specifically on the commercial lending, I think it was -- you are over $500 million was the number in the press release I believe.

Yes.

I guess if it is commercial lending in the classic sense, why haven't we seen more asset sensitivity from that lending?

Well, it is commercial lending and a good part of it is commercial lending in a classic sense, but many of our borrowers have term loans and mortgages on the plan in addition to lines of credit and they like the five-year fixed, three-year fixed and this marketplace now is offering ten-year fixed on the commercial side. So it is not as asset-sensitive as we all might wish.

All right, thank you.

Jared Shaw, KBW.

I had just a couple of questions. First on MPA reduction, was that credit removed from the bank or is it just reorganized?

No, it is gone.

So it is no longer involved. Then in terms of the reduced headcount, what will that -- I guess what impact will that have on a full year basis, the 10 that were removed at the end of September?

Linda is just looking at her notes. Jared, while she is -- one comment. Our nonperforming assets are so low and it is such a small marketplace that it becomes increasingly difficult to maintain any degree of confidentiality and talk about them. So we have been pretty specific this time, but going forward, I have got a real hesitation about describing in any real detail the specifics to one credit. The bottom line is you asked, if it has been restructured. It hasn't. It's been exited.

We are not ready to give the guidance on the salary or the benefit line for 2007 but I can say is this. From 2003 to 2004 we increased those lines by 18%. From 2004 to 2005 it was almost 50%. In 2006 we're expecting an annual increase of no more than 10%. This is really a major accomplishment. We'll be feeling the full impact of two new business lines, yet at Macrolease and the one private bank. In addition we added two new branches.

We also have had strong additions to bank security, technology, finance, and audit. Based on our preliminary forecast, because again, our budget process is still going on, we expect single-digit growth for 2007.

Okay, thanks. I guess finally with looking at strategic value and economic value, I think that is a pretty enlightened way of looking at the Company. But by not being active in a buyback right now, does that indicate that you think that we shouldn't be looking at the strategic value for the Company since the buyback I guess at that these levels doesn't made -- doesn't accrete to economic value but it may accrete to strategic value?

I guess with the Company not buying stock here, should we look at or assume that economic value is the primary measure that you are valuing the Company under?

I am not going to suggest to the analyst community how they value us. I would say that we have a very strong franchise value and I think that that's become increasingly recognized and I think that that is an element of our value that should be recognized.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Alper Sungur, Sidoti.

My first question is regarding the loan portfolio. What was the total purchased amount? Was there any purchases?

There was $6.4 million of purchase leases.

Okay and my second question relates to the initiatives that you announced a year ago, Macrolease and alliance with the cost buying trust company. How are those initiatives going to shape up in 2007?

Well, we are pleased with the progress we have made on both of them. Macrolease generates some good short-term relatively higher yielding assets for us and additionally through originating for others can produce fee income and we're looking to maybe utilize it more as a fee income vehicle going forward. That has yet to be finally determined.

One trust private bank also has gotten off to a nice start. We are getting some high net worth individuals attracting their deposits and have consummated a number of successful referrals to [post line], which has a really good local reputation as a high-end money manager.

Okay. And my next question is the additional two branches. Are they still in the cards for next year?

That is a very good question. We have not said anything publicly about it. Our footprint is 15 branches. We love those. The Narragansett location; the Pawtucket branch basically fully built at this point in just hasn't been opened. We are examining whether in this climate it is productive for us to do so and should come to closure on that and make an announcement when we do our earnings call in January.

Like I said, long-term they are there in the immediate future given the deposit climate and the expense climate, we are revisiting those decisions.

And the breakeven, is it five years?

We have not calculated new breakeven points, but I don't think that is an unreasonable timeframe to use.

Okay, and my last question relates to a line item on the earnings, professional services. It was $711,000. Do you expect any more increases in that line item? Would that be a good run rate?

Yes, that is a good run rate.

$711,000, okay. Thanks so much.

Anton Schutz, Mendon Capital Advisors.

I just wanted to check on a statement you made about ten-year fixed-rate lending in your environment. Are you engaging in ten-year fixed-rate lending?

I would say that we have some. We make limited pools available in competitive situations for customers we want to attract. You might see $10 million of it in the course of a year, maybe $20 million -- no more. But we put a number on it and we counted in our -- we count it as part of our ALCO sensitivities.

How do you even go about trying to fund that type of fixed-rate lending?

The FHLB borrowing.

Is there any spread available? It's got to be pretty tough to make any return on that type of lending -- you know, if you could factor in credit risk as well.

We have consistently noted how competitive pricing is becoming and spreads are just tough.

Is there any chance you could sell some of those loans to conduits and take that credit risk or funding risk off the books?

The answer is probably not, but I would also tell you that our credit risk is relatively -- our credit risk over the years, knock on wood, has been pretty benign.

Okay, thank you. Just concerned about continuing funding and continuing to fund growth in your pipeline. Your pipeline is pretty strong, right? Did you disclose that?

Yes.

So are you thinking you're going to have to go borrow again versus increasing deposits to match that pipeline?

We hope to bring in deposits related to those commercial relationships to help with the funding, but we will look for the lowest cost wholesale funding that we can provide the bank.

Okay, well I would certainly love to see you get it in the core basis. Good luck with that.

There appear to be no further questions at this time. I'll turn the floor back over to you for any further or closing remarks.

Well, on behalf of Linda and myself, we would like to thank you for your interest and look forward to talking with you again in January if not sooner.

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