Brookline Bancorp Inc (BRKL) 2007 Q1 法說會逐字稿

Good morning ladies and gentlemen. My name is Jason and I will be your conference operator today. At this time, I would like to welcome everyone to the Bancorp Rhode Island, Inc. first quarter 2007 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 Ms. Merrill W. Sherman, President and CEO. Ma'am, you may begin your conference.

Well, 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 first quarter 2007 earnings 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 come back and discuss those results. After that, I will open the floor to earnings related 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 belief 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 filing with the Securities and Exchange Commission. With that, I'll turn it over to Linda Simmons.

Good morning. Bancorp Rhode Island reported GAAP earnings of $2.2 million, or $0.44 per share for the first quarter of 2007. On a linked-quarter basis, this was down $359,000 or 14%, and up $653,000 or 43% from Q1 2006. As you know, in 2006 we had several nonrecurring items. If we were to adjust for these items, earnings would have been up $163,000 or 8% on a linked-quarter basis, and up $89,000 or 4% on a year-over-year basis.

On March 31, total assets were basically unchanged from year-end, but what we continue to do is change the composition of this balance sheet to a more commercial orientation with commercial loans increasing by $12.7 million or 2.4%. On a year-over-year basis, this portfolio has grown by $90.9 million or 20.6%. The consumer loan growth has slowed, as we have seen a softening in the home equity demand. This portfolio declined by $4.5 million or 2.1% during the quarter. In addition, the residential loan portfolio also declined by $5 million or 1.9%. We have had very positive results in the growth of our deposit book. Total deposits increased by $12.2 million or 1.2% on a linked-quarter basis and we are up $72.5 million or 7.6% on a year-over-year basis.

DDA's are down to $18.8 million or 9.4% from year-end, but this is typical Q1 behavior. Overall, core accounts are up $3.6 million from year-end and we've experienced nice growth in our NOW and savings accounts. The CDs increased $8.6 million or 2.2% and we retired $10 million of brokered CDs. Core deposits as a percentage of total deposits were basically unchanged quarter-over-quarter. Our credit quality remains very strong. Nonperforming loans remains at a nominal level of $1.8 million. This is up $344,000 from year-end. Net charge-offs for the quarter [$inaudible thousand].

On March 31, the allowance for loan loss stood at $12.4 million and represents 1.23% of total loans and over 700% of nonperforming loans. The coverage ratio remained flat year-over-year and quarter-over-quarter. On a GAAP basis, the margin increased from 2.91% in Q4 to 2.97% in Q1. Please remember that in Q4, we had a true up for amortization related to FAS 91. A normalized margin for Q4 2006 would have been 2.96%. We remain very disciplined in our pricing, but the deposit market remains very, very competitive and consumers continue to exhibit preference for higher-yielding accounts. We expect to see further decline in the margin if the Fed does not lower short-term rates.

Non-interest income was $2.6 million for the first quarter of 2007 compared to $2.3 million on a linked-quarter basis, up 10%; and on a year-over-year basis up $257,000 or 11%. From Q4 2006 to Q1 2007, the main driver of the growth is fees on leases originated for third parties which was up $157,000. Loan-related fees were up $41,000, [bowling] income was up $39,000 and reflects the full impact of the 1035 exchange. Service charges on deposits were up $38,000. Total non-interest expenses increased $837,000 or 10% from the fourth quarter of 2006. However, as you were aware, we had a non-recurring loss in the first quarter of 2006 of $868,000 which increased expenses, and we recovered that loss in the fourth quarter of 2006 of $803,000 which reduced expenses. After stripping out these non-recurring items, expenses increased by $34,000 or 0.4% over Q4 2006 and declined $445,000 or 4.5% year-over-year.

I would like to compare Q1 2007 with Q1 2006 so we can best see the trend. Salaries and benefits declined $245,000, a 4% decrease. Professional services are up $236,000 with $185,000 related to investor relations. Loan workout, down $134,000, and we had decreases in equipment expense, data processing, data communication, and printing and supplies which totaled $137,000. Clearly, our initiative to reduce expensing is working.

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

Thank you, Linda. My comments will be brief. I believe that we have posted strong results in a tough environment. These results reflect the successful execution of our strategy and a steady but intense focus on our business. I'm pleased with the growth of our deposit and loan portfolios in what Linda has characterized, and what I would agree, is a highly competitive environment. The commercial pipeline remains solid. You can see our expenses are down and we continue to examine opportunities for further efficiencies. Finally, our credit quality remains strong. For the record, we have never participated in the subprime market and believe we have no exposure in that regard. And with that, I will open the floor to questions about these earnings.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the q-and-a roster. [OPERATOR INSTRUCTIONS]

Our first question comes from Jared Shaw with KBW. Please go ahead, sir.

Thank you. Good morning Merrill and Linda.

Good morning, Jared.

I have just two questions for you. On the expense side, the occupancy and equipment number went down pretty significantly. Could you give us a little bit of detail on that? And then also, on the tax rate, the tax rate was lower than we were expecting. I think last quarter, you were guiding to the 33% to 34% range. Is that still a good number to use for the full year?

I think closer to 33% for the tax rate for the full year. The expense reduction on occupancy and equipment has to be on the equipment side. I'm sorry, I just don't know the answer off the top of my head, but it is certainly not on the occupancy side.

But you know, it was about 25%, so is that reserve an initiative taken this quarter to change anything, or was it just depreciation or--?

I think it's a combination--

It's a combination of factors.

--depreciation and we continue to look at everything we do and if we can have a savings, we are taking it.

So is that a good run rate that we should expect for the rest of the year, the $900,000 level as opposed to the old--closer to $1.3 million level?

I would say probably $1 million. A little bit higher than the $900,000.

Okay, so if we assume 33% tax and $1 million on occupancy and equipment, that's a good rate going forward?

Yes.

Great. Thank you.

Our next question comes from David Darst with FTN Midwest. Please go ahead.

Good morning.

Good morning, David.

It looks like there's still room for you to gain some traction on expense reduction initiatives this year. Do you think you can hold your expense growth to 2 to 3%?

Well, what we are doing is, as Linda said, we're doing everything, and this is an ongoing process. Some of the things that we have implemented have not fully rolled through, and so some of the changes that we've made in our commercial area will help control cost as we go forward with the creation of the LSU, and then we are also looking to kind of better apply our technology and streamline some processes even in SOX-related areas, for example, and to avoid some touching there. So these are all ongoing initiatives.

Okay--

I think--

Sorry.

Go ahead. Sorry.

I'll let you finish.

I think that when we did our guidance at the end of the year, I think we talked more to a 5% to 7% increase in expenses year-over-year. I don't think I'm ready to come off of that yet.

Okay. How about the branches that you have that are currently unoccupied, will those remain that were --

Well--

--this year?

There is only one branch that we have that's unoccupied. We have not opened the Pawtucket branch, and we continue to monitor that situation, and there are no present plans to open it this year. If the situation changes, we will--we try to be flexible on that one. But at the end of the day, as you know, we've got the two branches that we opened in 2005 are taking a little longer for those to come to profitability. I will say that we talked at year end about our three newest branches and I think they're all performing generally well and in fact two of them are performing extra well. It just makes it tough in this environment with the yield curve and with the margin to bring them into profitability as soon as we would like.

Okay. Did you have any proxy fight expenses this quarter?

We had $185,000 related to investor relations.

Okay, and will that increase in the second quarter?

I cannot anticipate what those expenses will be today.

Okay, and how about, will the second quarter--that will include a $250,000 tax credit?

No.

What--

You're talking about the Rhode Island tax credit that we've traditionally had over the years?

Yes.

We--the legislature is taking a look at those credits, and I think that there were fewer of them available this year for sale. So I do not think we will see that income level this year.

Okay. Great. Thank you.

You're welcome.

Our next question comes from [John Palmer] with [PL Capital].

Morning, Linda. Morning.

Morning.

How are you guys? A couple of quick questions for you here. The loans during the quarter, you said the commercial loan portfolio increased by about $12 million, almost $13 million. How much of that increase or how much of those loans were backed by real estate?

I do not have a percentage off the top of my head, John.

But, is it primarily commercial real estate or is it C&I lending? What type of lending is it?

It's a balance between the two, but even within the C&I lending, you will find that you'll have a mortgage on somebody's office buildings or a plant.

And some of those are also leasing.

So some of those are commercial leases?

Yes. I mean [macro] [inaudible] leases, yes.

Okay. When looking at the margin, from the fourth quarter it was up 6 basis points, how much of that is affected by the number of the days in the first quarter? Do you have a feel for that?

Let me just explain this again, I mean the margin really only went up 1 basis point because if we had a true-up in the forth quarter due to FAS 91, so our margin should have been --

2.96% versus 2.97%?

Yes. So we only got 1 point expansion.

Okay. Okay. Now, the deposits, when I look at it, it looks like there was shift out of demand deposits into--more into CDs and savings accounts. Is that something we're going to continue to see, or is that-- do you think you've normalized here, or where do you think we're going there?

Well, generally speaking, what we experience is a year-end buildup in the DDAs and then in the first quarter, they tend to sink and then rise over the course of the year. So I don't think that it's anything different from what was experienced in previous years, and I think if you go quarter-over-quarter, if you compare the first quarter of 2007 with the first quarter of 2006, you'll see the DDA base has increased and I also--we haven't released the average balance figures, but I know the average balance figures are up. So I'm comfortable we're going in the right direction with our DDAs and I'm pleased about that.

Okay. How much of that increase would you say is attributed to interest credit versus organic growth?

Well, if you're going to figure the average cost of funds that disclose, I think that you can do the calculation yourself, but I can tell you that it is very substantial organic growth, simply because we were able to retire the 10 million in CDs and then have the DDAs go down and still be able to post deposit growth. So we had a real solid quarter that way.

Let me go to another area. You have 5,000 shares of treasury stock. Is that stock the Company bought back?

Yes, it is.

Do you know what the average price was on that?

Approximately, $44.

I guess my last question is--it kind of goes to the tax rate here. If I look at the tax rate for the fourth quarter, it looks like 32.65; this quarter is 31.5. If I were to normalize to even to the fourth quarter, which is below the 33% guidance you gave a few minutes ago, and you back out the loss on the note receivable, I kind of come up with earnings being absolutely flat, up $0.01, down $0.01. Is that a fair characterization?

John, I can't do that off the top of my head. I would have to do the math.

I guess, I'm kind of looking at if I go back to the first quarter of 2006 earnings were $1.5 million, of which there is an $868,000 loss on a note receivable.

That's correct.

That's a pretax number. If you tax effect that with the tax rate you used there, you get a bit of an add back and you get back to about a $2.1 million run rate using a 32.65% effective tax rate. If you use that same tax rate in this quarter, you get to about 2.1, about exactly the same number, so it appears as though earnings are pretty much flat year-over-year.

Okay.

I guess, the question is would you agree with that?

We just said we'd have to do the math in more detail, and we'll try to compare it on an operating basis for you.

Okay. Thank you.

You're welcome.

Our next question comes from [Richard Lashley] with [PL Capital].

Morning.

Morning, Richard.

Hi. A couple detailed questions and then a couple big picture questions and comments. The lease income jumped up to, I think it was $238,000 for the quarter, which you mentioned also. Is that a run rate, or is that a unique portfolio that was sold or--?

This quarter--Macrolease originates loans for sale to others and depending upon the timing and how they put the packages together, in this quarter they sold more than they typically sell and it's the question of how much you put on your balance sheet and how much you sell, and that's the determination they made. I don't know if we can read a run rate one way or another into that.

I think it's probably a good run rate.

So the 342 you think is a good run rate? I didn't go back and look at the--all the quarters for last year, but it just jumped up.

Well, Rick, you remember in the fourth quarter we did have that true up of FAS 91 which was the negative to the run rate.

Oh, so the FAS 91 was on the lease portfolio?

Yes, it was.

Okay. The provision for loan loss is $100,000, it's consistent with fourth quarter of '06 but down from kind of the run rate for the balance of '06, which was more in the couple hundred thousand dollar range. Is $100,000 do you think, a reasonable level? Obviously, if credit problems come up, but ignoring extraordinary credit problems, is that a good run rate?

Again, that's a little bit hard to say. We monitor not only the credit quality but overall coverage ratios, so it--sometimes it's a function of how much growth you have, sometimes it's a function of how your credits are migrating. Right now, we're comfortable with the loan loss reserves and feel we're adequate.

Okay, and asset liability positioning. Where are we now, asset sensitive, liability sensitive?

We are still liability sensitive.

Then, I guess on the--going back a little bit on the margin that John asked about. There was a restructuring that I think you guided to $900,000 of pickup in '07 on the net interest income; that comes out about 6 or 7 basis points annualized per quarter. You also had that amortization true up on FAS 91 and then the fewer days; I guess we should presume that the run rate on NIM is going to be a little bit lower than where it was this quarter, all things being equal?

Yes, and I think one other thing happened in the first quarter. FHLB gave us the dividend. We had to retire some stock because we were holding too much, and that gives you a tiny little bump.

Bump up?

Yes.

Okay, and then I guess just the big picture comment on the earnings. You did the restructuring in the investment portfolio that picked up some go-forward income. You did the head count reduction and operating expense initiatives in '06, yet core EPS, plus or minus, is basically flat over the last five quarters. What's the driver to take it to the next level for the next couple quarters? What are the levers that can be pulled?

Yes. We are continuing to monitor the expenses and grow the quality assets, quality deposit, and I think that that's the business plan, and we're not going to comment much further than that. But, this is organic growth, and I think in this environment, those particularly in the Northeast, these are probably some of the better results I've seen posted.

And operating--positive operating leverage in '07?

We are not repeating our guidance. We're not reaffirming it, but if you go back to what it was, I think that we predicted we would earn more income this year than we did last year, which I believe translates into positive operating leverage.

Okay. All right, thank you.

Our next question comes from Alper Sungur with Sidoti & Company.

Hi. Good morning.

Hi, Alper.

Hi, Alper.

As a follow up to Richard's question, the one-year GAAP cumulative number was minus $150 million as of 2006. What's the number right now?

Alper, we haven't released the Q yet, and I haven't finalized those numbers.

Okay. All right, and also you provided like a margin guidance back in the forth quarter of 2005 for '06. Do you have a margin guidance for '07?

No.

And Linda, you said like you expect more contraction in the margin, pressure in the margin if the Fed doesn't lower the short-term interest rates? That's you, right?

That's correct. That is correct.

Okay. All right. Thank you very much.

Our next question comes from James Abbott with Friedman, Billings.

Hi. Good morning. I'm new to the Company so I'll ask a little bit more on the leases if I can. Were those sold at the end of the quarter or the beginning of the quarter? And if they were sold at the end, would there have been net interest income received during the quarter that's included in the net interest margin, etc.?

Most of the leases were sold in the first two months of the quarter, and almost all of the production was sold. When we originate it, we originate it for the thought of selling so we don't carry them for a long period of time.

Okay. Okay, and so production in the month of March was not so strong it sounds like so--?

It was very good, it's just that we needed to put some to the balance sheet. We have a mix of what we sell and what we put to the balance sheet.

Okay. And so, the run rate is--should remain up at that $300,000 level per quarter then?

Yes.

Okay. Okay, and then another question is on the loan yield of the residential portfolio.

Yes.

I'm not looking at an average balance data here; I don't know if you have any of that. I was wondering if there's--how much of that is set to reprice during the year, and what's the weighted average yield of those loans, and what you might originate those again at?

Okay. The residential portfolio is mostly a purchase portfolio, and for the month--the quarter -- let's see -- for the quarter the average was 537. And as to your question about repricing, most of these are [5-1s, 7-1s, 3-1s] and we find that they mostly pay out by the time the repricing comes.

Okay, but are there--is there a bucket, or there's a certain amount that's coming due this year or is close to coming due or likely to prepay because it is approaching its maturity date. And what's the yield on that? Is it in the 4% range? Would it then--you'd be able--

No, it's very similar to what the portfolio mix is.

Okay.

And we're reducing it $5 million to $7 million a quarter [cash flow].

So you don't have any--you don't have the possibility of getting a huge lift on the net interest margin from repricing arms?

I don't believe so.

[inaudible] 7. Okay. That's--maybe I should have asked that, that was my--

Okay.

And then the other question--the other thing that maybe--it's not a major increase, but the securities portfolio went up on a linked-quarter basis and--

Yes.

--a lot of companies are trying to shed securities portfolios right now because of the narrow spread. What's the thought behind the increase there?

I think you noticed that over time we had been reducing that portfolio. With the decline in both the consumer side and the residential, I did put on $20 million worth of securities short-term callable that had a nice yield on them. I expect that they will be called, and it's just a temporary asset for us.

Okay, and on the liabilities on the borrowings, do you have any callable debt in there and what does--if you do, what's the rate on that?

We do have callable debt on the FHLB side, and also there's one wholesale repo of $10 million that's left that is a callable feature as well. I do not know off the top of my head what the average weighted rate is, but I think we'll disclose it in the Q.

Okay, all right. Well those were my questions. Thank you very much for your time.

Thank you.

You're welcome.

Our next question comes from Mark Maring with Mendon Capital. Please go ahead.

Good morning.

Morning.

Thank you for taking my call. A couple questions, one on the efficiency ratio. I think even if I back out the investor relation costs, which I assume are related to the proxy battle, I think linked-quarter expenses are still up around 5%. Can we kind of expect that as a run rate if we back out that extra 580,000, or is there further expense reductions? I'm trying to figure out how we get the operating leverage from, obviously from loan growth and revenue down to earnings.

Okay. Mark, I'm just a little confused, because on linked-quarter basis I thought we were about flat.

I'd have to double check my numbers, but I think I was showing--I thought linked-quarter non-interest expenses were about 8.7. In this quarter, I'm showing 9.5 so if I back out around 500, I'm still up around 300,000-400,000 linked-quarter. But I come up with--

You have to back out the full tax--it's not taxable there, you have to back out 803.

Oh, the 585 is net of tax.

[after] tax, yes.

Okay. So then is that a run rate then that we can expect going forward then, or are we going to see further reductions? In other words, are you continuing to target head count or anything else?

Yes, we continue to look at all opportunities, but I'm not at this point prepared to say that's the run rate.

Okay. Turning to capital and the share buyback. First, congratulations on at least starting the share buyback, it was good to see some numbers in treasury stock there this quarter. I think you announced it last April when the stock was at $33, so I'm trying to understand, you got 25% cash and investments on the balance sheet. You grew -- even with the capital, this little share buyback, you still grew equity, I think, to about 7.7% up from 7.5% in the fourth quarter. So you're growing capital, you've got a lot of cash and investments on the balance sheet. Help me understand what your thought process is in terms of those targets. Are you targeting a 6% capital ratio and 15% cash and investments? It still seems like there's a lot of gunpowder here.

We are well capitalized, and with that, we have some flexibility. But we are monitoring these capital ratios. We had a lot of options exercised over the last year that has added to the capital base and we will continue to do what we think is prudent going forward.

So does that mean--I mean, if the stocks share at $44, should we expect to continue to see share buybacks this quarter?

I don't have a comment on that.

We're approaching this and monitoring it as Linda said and we've got a lot of flexibility there and we'll try to do the right thing.

Okay. Thank you very much.

Our last question comes from Jared Shaw with KBW.

Hi, thanks. Just a quick follow up. Linda, on the expenses, you just said 5% to 7% growth, year-over-year for '07. If we go to the low end of that range at 5%--

Yes.

--that comes out to about 40.5 million. Backing out what we did this quarter, that still gives you a run rate for the rest of the year on a quarterly basis of about 10.3 to 10.4. Is that a good way to look at it?

Yes.

Okay. Thank you.

There appear to be no further questions at this time. I would now like to turn the floor back to Merrill Sherman for any closing comments.

Well, thank you all for joining us this morning and I look forward to talking with you next quarter if not sooner. Bye, bye.

Thank you. This concludes today's Bancorp Rhode Island, Inc. first quarter 2007 earnings conference call. [OPERATOR INSTRUCTIONS]