Brookline Bancorp Inc (BRKL) 2006 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Bancorp Rhode Island fourth-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) It is now my pleasure to turn the floor over to your host, Ms. Merrill Sherman, President and CEO. Ma'am, you may begin your conference.

Thank you very much and good morning. As indicated, I'm Merrill Sherman, President and CEO of Bancorp Rhode Island, Inc. I would like to welcome you all to our fourth-quarter 2006 earnings 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 2006 financial results, as well as some projections for 2007. I will then come back and discuss my thoughts on both our 2006 results and the Company's plans and prospects for 2007. 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 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. With that, I will turn the floor over to Linda Simmons.

Good morning. Bancorp Rhode Island reported GAAP earnings of $2.5 million or $0.51 per share in the fourth quarter of 2006. For the full year, GAAP earnings were $7.7 million, down 19% from 2005 earnings of $9.5 million. On a linked-quarter basis, this was up $894,000 or 54%; up $302,000 or 14% from Q4 2005.

This quarter's earnings included $803,000 of a pretax recovery related to the loss recognized in Q1 of 2006. Without this recovery, the earnings would have been $2 million or $0.41 per share. We are very pleased that we were able to close this issue in 2006, and this speaks to the quality of our risk management team.

In 2006, the balance sheet grew by approximately 3%. Overall, our balance sheet continues to strengthen, with organic growth from our commercial and consumer portfolios. We continue to reduce our positions in purchased assets and redeploy that cash flow.

Our primary growth story continues to be our commercial loan portfolio. We had an increase of $11 million or 2% on a linked-quarter basis, and $82 million on a year-to-year basis or 19% growth. On the consumer side, the fourth quarter had a slight decline of 1%, with an annual growth of 7%.

We also had positive results on the growth of our deposit book. Our total deposits increased by $29 million or 3% on a linked-quarter basis, and $36 million or 4% on a year-over-year basis. DDAs were up 8% year-over-year. From the recent announcements that I have seen, especially in New England, this is a very, very positive story.

Our credit quality remains strong. Our non-performing assets did increase by $668,000 during the quarter to $1.4 million. This represents a few residential credits, and we are fully collateralized and do not expect any loss.

Our net charge-offs for the quarter were $24,000. On December 31, our allowance for loan losses stood at $12.4 million; and it represents 1.23% of total loans and over 875% of non-performing loans. The coverage ratio remains flat year-over-year.

On a GAAP basis, the margins decreased from 3.08% in the third quarter to 2.91% in the fourth quarter. We had several onetime items that affected the margin. On a normalized basis, the margin would have declined by 5 basis points from a 3.01% in the third quarter to a 2.96% in the fourth quarter. As you can remember, in the third quarter we had an extra FHLB dividend, and the normalized margin would have been 3.01%.

In the fourth quarter, the Bank recorded a true-up in its entry to its amortization of deferred costs relating to our leasing subsidiary. This was approximately $170,000. After adjusting for this item, our normalized margin for the fourth quarter would have been 2.96%.

The yield on our earning assets continues to grow as we grow our commercial and consumer portfolios and we see the impact of our securities repositioning. But the increase in funds has more than offset this positive benefit. The good news is that we're holding on to our deposits and actually see some good growth. The bad news is that they are more expensive.

We remain very disciplined in the pricing of our deposits; but the market remains very competitive and our consumers continue to exhibit a preference for higher-yielding accounts. In addition, the inverted yield curve is persistent and this continues to have a negative impact on our margin.

On the noninterest income side, the income was $2.3 million for the fourth quarter of 2006. This compared to $1.5 million on a linked-quarter basis and a 51% increase. If you backed out the securities loss in Q3, the noninterest income would have declined by $78,000 or 3%.

On a year-to-date basis, though, we have a positive story. If you were to exclude gains and losses on securities, the noninterest income would have increased by $754,000 or 8%. The drivers of the growth are service charges on deposits, up $494,000. In 2006, management implemented a revenue enhancement program; this went into the third and fourth quarters. This along with the growth in our core checking accounts has resulted in this increase.

We also had an increase in fees for the sale of our leases originated for third parties. This increased by $125,000; and our leasing subsidiary continues to be a good source of additional fee income. On the down side, loan-related fees declined by $330,000. But in general, we have seen less prepayments in 2006, as the market has seen less financing activity.

Noninterest expenses declined by $830,000 or 9% from the third quarter of 2006; but without the recovery in the fourth quarter, expenses would have been flat. Year-over-year, expenses increased by $2.4 million or 7%. $1.2 million of this was related to salaries and benefits. This really reflects the full years of our two new lines of business, Macrolease and the Private Bank. In addition to that, we made some investments. They were in information security, credit, finance, and audit.

Occupancy also increased by $438,000 or 14%. The primary driver of this increase is still the full-year impact of our Macrolease subsidiary and the new branches opened in 2005.

I would like to give some guidance for 2007. On a diluted EPS basis, we are projecting between $1.80 and $1.85 per share. We continue to transform this balance sheet into a more commercial orientation. We are expecting double-digit growth again in our commercial loan book; and we expect high single digits in our consumer growth book. Most importantly, we believe that we can continue to grow deposits. We expect core accounts growth in DDA, NOW, and higher-yielding savings accounts.

On the margin, we expect a slightly better margin than 2006, but we also had expected the Fed to ease in the second quarter of 2007. As the economy continues to show strength, this may be pushed out into later 2007; and this would have a negative impact on our earnings.

Noninterest income will continue to grow. We expect increases in the areas of deposit service charges; BOLI income, as we exercised our 1035 exchange in the fourth quarter of 2006; and we expect higher fees in our leasing subsidiary.

On the expense side, we expect to hold the line on cost. We are expecting an annual growth rate of 5%. This compares to 10% in 2005 and 7% in 2006. I also want to be very clear that these projections do not have any costs related to a proxy fight, which may occur.

We do not anticipate opening the two branches that we have on hold, the Pawtucket and the Narragansett sites. We still believe these are great locations for Bank Rhode Island and hope that we will open them soon.

Our tax rate will be between 33% and 34%. Our provision for loan losses will be consistent with 2006. Our coverage ratio will continue to be the 1.2 range. This concludes my comments at this point. I would like to turn the presentation back to Merrill Sherman.

Thank you, Linda, and just a few additional comments. First, let me address the 2006 deposit loan growth. To reiterate, we are extremely pleased with the 19% overall growth in the commercial loan portfolio. That is nothing short of extraordinary. Our credit quality, from every indication we have and you see, remains superior.

I am particular pleased that the DDAs are up year-over-year 8%, and that is very unusual in this marketplace. I think it shows that our focus on demand deposit gathering and some of the business emphasis that we have is effective and we are executing on it.

Finally, the newer branches are improving. North Kingstown, which is now at the 2.5-year mark, has over $40 million in deposits; and we're seeing positive movement in the mix there. The Lincoln branch, opened midway through 2005, is now at $27 million, and that is ahead of plan. Nice mix coming in there. East Greenwich is on its volume target, but it is reflective of the market with the CD preference. So we are working on our mix there, but it has grown to about $16 million.

Turning now to some of the management transitions we experienced last year, I am delighted with the strength and the energy and competence of the management team here. Linda has just completed her first full year as CFO and is really focused on that balance sheet constructively.

Our Chief Operating Officer, Jeff Angus, celebrated his one-year anniversary in November. We have added depth to the next tier of the management ranks with a new senior vice president and director of corporate banking who joined us in late January; as well as in the fall a new senior vice president of marketing. All of these people have integrated well and, as importantly, are performing well.

Looking ahead to next year, Linda has told you that we're projecting earnings improvement. We're coming out of an earnings trough. We went in early, and hopefully we will come out sooner. We anticipate continued growth of our quality assets and liabilities.

Additionally, the investments we made in 2005 that did not contribute to earnings in 2006 should begin to show more positive results. I mean the new branches, the Private Bank, and Macrolease.

Finally, as Linda indicated, we have a continued focus on expense control. Just a couple of additional comments that way. First, a reminder that our high efficiency ratio is largely driven by the earnings and a function of the yield curve. We are also a young company, and it is not atypical for our expenses to run ahead of revenues as we grow into an infrastructure.

That said, you can see we have slowed the expense growth rate and, in fact, are actively continuing to look for opportunities to reduce expenses. That is uppermost in our mind. We will continue with some of the process reviews, and I think some of the changes we have put in place we will start to show increased results with the passage of time. So with that, I will be opening the floor to questions.

(OPERATOR INSTRUCTIONS) Bret Ginesky with Ryan Beck.

Merrill, I was wondering if you guys bought back any shares in the quarter.

No, we have not.

Okay. I guess that covers all my questions. Thank you.

Laurie Hunsicker with Friedman Billings.

Two questions. The charge-offs for the quarter looked a little bit high at $515,000. Can you just go back through that?

What charge-offs for the quarter?

I'm sorry?

Net charge-offs for the quarter?

No, I'm sorry. The net charge-offs for the quarter.

Were $24,000.

Well, I thought you said that. We are backing into a different number if I use your old reserve of $12.8 million as a starting point; plus provisions; getting to your new reserve of $12.4 million. Was there some other charge that was taken then?

I think there was a reclassification into other liabilities. So you want to address that, Linda?

Sure. We had to move approximately 400 and change into the other liability category for unfunded commitments. I think we talked about that extensively in the third quarter.

Okay, I must have forgotten about that. Okay, so your actual net charge-offs then were $24,000?

Yes.

Okay. Then can you go back over, Linda, what you mentioned in terms of normalizing the margin, just the onetime true-up? What exactly was that to get to the 2.96%?

Sure. As part of FAS 108, we went back and looked at a bunch of things and how we were doing FAS 91. With the addition of Macrolease we have more expenses that we defer because -- with the commission structure that we pay there. As a result of that, we decided that, although not material, that we would do a true-up in the fourth quarter. That equated to about $170,000.

Okay. Then one other thing you mentioned, the 1035 BOLI exchange, what was that?

Basically we had a onetime option to move some of our BOLI asset from one investment to another. We thought that the time was right and we would pick up approximately $100,000 on an annual basis going forward.

Okay. So that is just going to add into your income from BOLI under non-interest income?

That is correct.

So is that -- when we look at $100,000 annually, that is $25,000. Is that $25,000 up from the 212 run rate? Or that is included in that 212 run rate?

I'm sorry, Laurie, I'm not with you. What is the 212 run rate?

Just the income from BOLI in the fourth quarter was $212,000.

You will see a pickup. But it happened throughout the quarter. You would not see the full impact in the fourth quarter.

Okay, okay. So probably that line will then run $230,000?

Yes.

Okay, okay. I think that was it. Thanks very much.

(OPERATOR INSTRUCTIONS) David Darst with FTN Midwest.

Could you discuss how, I guess, Macrolease did during the year; and what might be the volumes that they generated? Then what are expectations for next year; and the same for, I guess, is it Coastal or Coast, which is the wealth management group you formed a partnership with?

It is Coastline Trust Company. Basically, let me talk about the Private Bank first; and then Linda can address some of the Macrolease volume issues. The Coastline Trust Company, we referred a fair number -- a fair amount of trust business over to them. So it will produce some fee income for us. It is modest, okay? And not material.

On the other hand the Private Bank itself has attracted a good number of clients, particular professionals in the medical field. So it has been a very, very helpful loan and deposit gathering vehicle. We haven't broken it out as a line of business. Those numbers are reflected in the overall commercial growth numbers.

When we talk about Macrolease, I am going to ask Linda to give me some volume figures there, but we have not traditionally separated them out. I think our portfolio increased.

Yes, the portfolio increased year-over-year. I think we did about $25 million worth of lease volume this year. Again, it just hasn't been big enough to break out as a separate line of business.

Sure, I just was trying to get an idea of whether they are gaining any traction or not, and whether you are pleased with those results.

I think it is on plan with what we had anticipated, and we look forward to a better year in 2007. We will be selling off some of that production as we will generate fee income by doing so. But we will also be putting some into the portfolio.

David, one indication is that they, like everyone else, is suffering a little bit of margin compression at this point. But basically, we are overall pleased with the results and it is functioning well.

Okay. Then how about your strategy for the balance sheet? Do you expect a relatively stable balance sheet as you use residential cash flows and securities to fund your loan growth?

Yes, we do.

Then on your margin, you're expecting, I guess, a decline in the first half of the year, or maybe some improvement if we get a rate cut in the second half of the year?

That is correct.

Okay, great. Thanks.

Ms. Sherman, there appear to be no further questions.

Thank you all, and I look forward to talking with you again next quarter.

This does conclude today's Bancorp Rhode Island conference call. You may now disconnect your lines and have a wonderful day.