Brookline Bancorp Inc (BRKL) 2007 Q2 法說會逐字稿

Good morning ladies and gentlemen. My name is Jeanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bancorp Rhode Island, Inc. second 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 great pleasure to turn the floor over to your host, Ms. Merrill W. Sherman, President and CEO, and Linda Simmons, CFO and Treasurer. 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'd like to welcome you to our second quarter 2007 earnings conference call. With me is the Company's CFO and Treasurer, Linda Simmons.

Linda is going to take you through our second quarter financial results. I will then come back and discuss those results. After that, we will both be available to answer any questions you may have. 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 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. And with that, I'll turn it over to Linda Simmons.

Good morning. Bancorp Rhode Island reported earnings of $2.2 million or $0.44 per share for the second quarter of 2007. On a linked-quarter basis, this was up $16,000 or 0.7%, and up $188,000 or 9.4% from Q2 of 2006. As you recall, the FHLB dividend was not received in the second quarter of 2006. This would have been approximately $148,000 on an after-tax basis.

During the quarter the investment portfolio declined by $20.4 million and that cash flow was redeployed into loan portfolio, which grew by $16.8 million or 1.7%. We had growth across all categories. Commercial loans increased by $10.3 million or 1.9%, consumer loans were up by $3.8 million or 1.8%, and the residential loans were up by $2.7 million or 1.1%.

On the funding side, deposits declined by $2.9 million or 0.3% on a link-quarter basis, but we're up $33.2 million or 3.3% on a year-over-year basis. The composition of the book continues to improve. We had DDA growth of $16.8 million or 9.3% since March 31, 2007. Year-over-year, the DDA's are up $13.3 million or 7.2%. Overall, core accounts are up $2.8 million from March 31st. CD declined by $5.8 million or 1.5%, and there were no changes in the growth of deposits.

Core deposits, as a percentage of total deposits, were virtually unchanged quarter-over-quarter. Our credit quality remains strong. Nonperformings were $2.3 million on March 31st; this was up $528,000. Net recoveries for the quarter were up $7,000. Year-to-date charge-offs are $32,000.

On June 30th, the allowance for loan losses stood at $12.5 million and represents 1.22% of total loans and over 549% of nonperforming loans. The coverage ratio was up two basis points year-over-year. During the quarter, we repurchased 10,000 shares of stock bringing our total to 15,000 shares. We expect to be more active in the third quarter.

The margin held flat at 2.97%. The yield on asset remained virtually flat, but we had a slight uptick in the cost of deposit. This was offset by a decline in the cost of borrowed funds. The Providence marketplace remains very competitive for both asset and liability and we remain very disciplined in our pricing. We do expect to see further deterioration in our margin if the Fed does not lower short-term rates.

Non-interest income was $2.7 million for the second quarter of 2007 compared to $2.6 million on a loan-quarter basis, a 4% increases. On a year-over-year basis, we were down $151,000 or 5.4%. In Q2 2006, we received approximately $250,000 in fees related to the sale of Rhode Island historic tax credits. These credits were not available for sale in 2007.

The growth in non-interest income between Q1 and Q2 was driven by the following; service charges on deposits, up $72,000, investment sales, up by $51,000, loan-related fees were down $39,000, and fee from leases originated for third parties did decline by $56,000, but produced over $280,000 in fees for the quarter. The Bank's decision to portfolio -- or to sell leases is based on our overall outsource strategy.

Non-interest expenses increased by $113,000 or 1.2% from the first quarter of 2007. Our run rate on core operations in 2007 is actually down from 2006 as we are realizing the benefits from all our efforts around expense control. We continue to look for new opportunities to continue on this task.

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

Thank you, Linda, and I'll add a couple of comments and observations. First, we began rolling out our Universal Banker grant delivery model over the past quarter. It's going well. We are piloting it in three branches, as you may recall, we're giving customers a single point of contact when they come into the branch. It is getting a strong reception among the staff. We have to admit we are a little leery of the changes and have now embraced it, and it is also getting a very positive response from our customers, so we're pleased.

We believe that Universal Banker model helps us directly on two fronts; it upgrades the service levels that customers receive, and it allows us to be more efficient throughout the branch network. It also allows us to further distinguish ourselves from our competition in this marketplace.

I'm also really pleased to announce that we are going to be opening our Pawtucket Branch in October. We are going to do this in a cost-neutral fashion. In other words, we will not experience any expense increase by opening the branch. In order to do that, we've made adjustments elsewhere in our branch network. We'll be closing the lobby at our Xpress Branch in Plainfield Pike. That's a 600 square foot branch, very small, and on our service corridor, in effect, making that a fully automated self-service branch.

We will continue to have ATM and night deposit services at that branch, but it will not be regularly staffed. Additionally, we'll be tweaking a lot of the hours at some of our other branches, reducing them at one while expanding them at another, in order to make the accommodation to be cost-neutral when we open Pawtucket. The staff time we cleared up at the other locations will be invested in Pawtucket, and we're very excited about getting that branch open and off the ground. We think it's a location that have -- holds a lot of promise for our business model.

And finally, the commercial pipeline. The pipeline remains solid. It's no secret that the competition is intense, and we try to meet it and overcome it everyday. You can see the commercial loan growth rate year-to-date; it's been about 4%. While we don't anticipate growing at 20% rate that we've been able to achieve last year, we do believe that by yearend we will obtain double digit growth rate in the commercial portfolio.

So, that's all the comments that I have, and Linda and I will be happy to respond to questions.

Thank you. (OPERATOR INSTRUCTIONS). Thank you, your first is coming from Mr. Frank Barkocy of Mendon Capital Advisor. Please go ahead.

Thank you. Linda, you mentioned the share buyback in the first and second quarter. Could you repeat what those numbers were?

Sure, the first quarter we bought back 5,000 shares; in the second quarter, we bought back 10,000 shares for a total of 15,000 shares.

Okay. You had indicated that you're going to be more active in the second half of the year. What is the authorization that you have remaining, and could you give a little bit more color to what you mean by "active"?

I think the Board has authorized a 5% buyback. So we have quite a bit that we can still buy, and I'm not going to comment about how many shares that we are looking to buy.

Yes, a 5% buyback remaining?

No, you have to backup the 15,000 shares from the 5%.

Okay. And secondly, the universal banking concept, suggesting that you will become more efficient; your efficiency ratio, as you know, is relatively high, at about 74%, is there a goal that you have to bring that number down, and how much will this program help in moving you towards that goal?

I believe that -- first of all, the efficiency ratio is probably not driven by our branch staffing, okay? It's driven by the investments we've made over the years, and I think that what we're looking to do is continue to look for ways to improve our efficiencies on operational matters, on -- we implemented the loan servicing unit in trying to handle our smaller credits more efficiently and looking for telecommunications savings.

So I think those will be larger drivers than peeling back any personnel in the branch system. What the Universal Banker does, it creates some level of efficiency in the sense that you now have a single point of contact, and people will deal with -- if the customer comes in to open an account, the customer service rep can service all their needs on the spot.

One of the other aspects that cost us in a sort of hidden way is turnover. The teller turnover is one of those positions that in our industry historically is very high turnover, and that's expensive to keep recruiting and training and the like. So that is another area where we can gain efficiency, if we can reduce that turnover.

Does it also serve as a possible means of increased profits in the sense of being able to better cross-sell your services having this concept in place.

We certainly hope so, and we want to upgrade our investment in our people and provide a welcoming point of contact and a better point of contact to our customers.

Good, thank you.

Thank you, your next question is coming from David Darst of FTN Midwest, please go ahead.

Good morning.

Good morning, David.

Good morning.

Linda, you commented that you would expect to see your expenses decline in -- for the full year '07 versus '06. Is that just kind of a marginal decline or do you expect to see some better savings from second half of the year?

Well, David, I'm not going to -- I will say that, we typically have larger expenses in the last half of the year than we do in the first half of the year, because we have projects in place that will start to kick in, in the last half. And that's typically what happens to us over time. What I talked about, I think was core operating. What we backed out of those numbers were simply in the first quarter 2006 we had a loss of $868,000. So you have to account for that.

Right.

As well as you have to account for the expenses related to the proxy contest. In the first two quarters of 2007, we spent approximately $300,000 that I don't believe are core as well. So if you take out the two of those and you look at the run rate year over year, we are doing better than we did in 2006. I can't promise that's the run rate going forward because I know of several projects that we are under way at this time.

Then, which quarter included more of the proxy expense, the second quarter?

The first and second quarter were about $300,000. I think the first quarter was closer to $200,000 and the second quarter was closer to $100,000.

Okay, and then if you're expecting the inaugurals to accelerate, it seems that you would be able to improve your earning asset mix a little faster. Shouldn't that help you support the margin?

Yes, it will.

But you still think deposit pricing and funding costs are going to bring it down?

Well, it remains very competitive here in Providence, and we are liability sensitive. So if we don't get the conversion on the asset side to better yielding assets, we will see a decline in margin.

Great. And then what would be a tangible equity goal, or where would you be comfortable as you buy back stock?

We haven't published a range that we're looking for at this point, but I think our risk weighted capital is about 13.7%, and we clearly have a little excess capital here.

Okay, then Merrill, could you comment on any strategic initiatives you have outside of some of the leasing and the service and service charges to grow fee income as a percentage of revenues?

I'm sorry, David, could you just repeat that question, I didn't quite hear it?

Any broader strategic initiative that you have to grow your fee income as a percentage of total revenue?

The answer is that that is something that we're looking for on an opportunistic basis, but there is nothing else on the horizon now. Hopefully, we'll get some of the historic tax credits back next year, and we've been -- we have a referral arrangement with Coastline that will produce some residual fees at a modest level, but that is something where, I think, we are going to be margin dependent for the foreseeable future.

Okay, thank you.

Thank you. Your next question is coming from [David Minkoff] of Maxim Group, please go ahead.

Yes, good morning ladies.

Good morning, David.

Good morning.

My question also relates to the buyback some of which has been answered. On the 5,000 and 10,000 shares that were bought back, what was the average price paid?

Approximately $44 -- $44 to $42, I'm sorry, I don't have it with me.

On the 5 and the 10 combined?

Yes.

Okay. And I think you indicated in the dissertation that the margins will remain under pressure if the Fed doesn't lower rates. I wonder what your take on the rates are going forward. I realize is it just your conjecture, but it seems to me that with the dollar where it is, as weak as it is against all other currencies, the Fed's in a box here and really can't lower rates, but what's your take on it?

I think you got it right. I don't think we're going to see any reduction in 2007, and hopefully we will see some in the beginning of 2008.

Okay, but I guess that will depend on the economy, so then the margins will remain under pressure if our scenario is correct, huh?

That is correct.

Okay, that's all I've got, thank you.

Thank you. Your next question is coming from Fla Lewis of Weybosset Research, please go ahead.

Hello Merrill, hello Linda.

Good morning, Fla.

I just want to ask you, a few days ago there was a sort of [shockeroo] call from Countrywide Credit indicating that serious credit problems were not confined to sub prime mortgages, and Angelo Mozilla blamed declining house prices on -- for a lot of his troubles; what's your read of the market in Rhode Island, or among the mortgage securities you own that very well may be outside of Rhode Island.

Well, we are comfortable with the credit quality, and believe it remains strong. If I would have addressed our mortgage portfolio as well as our consumer portfolio, our purchase mortgage portfolio is largely seasoned. It was always conventionally underwritten along with the exceptionally -- they met Fannie Mae and Freddie Mac standards with the exception of size, we bought jumbos. When we bought them we always looked at some degree of geographic diversity although I suspect we've concentrated in the northeast and Massachusetts in the purchasing because we had some savings bank sources there over the years. And so I think we have a good quality first mortgage portfolio.

With respect to our own originated mortgages, the $200 million is 95% home equity on our consumer loan side, and we have always gone for traditional conventional 80% loan to value on that. About a third of that portfolio is actually first mortgages. You'll find that some consumers rather than go through the -- and face the hassle first -- if you've ever -- if you've gotten a first mortgage lately, you'll notice that the papers are about 2.5 inches thick and home equity product is much simpler and the turnaround is very quick on that.

So like I said, we think that we have good credit quality. We've never done sub-prime, and we knock on wood as we say those things, but I think it's based on a study of the portfolio.

Have you seen any kind of change in the credit worthiness of your borrowers, either in your -- especially in your retained portfolio?

In the -- no. The delinquencies in the consumer and the home loan and mortgage portfolio are very stable and there do not appear to be any material hiccups.

Good. Thanks very much.

Okay, your next question is coming Jared Shaw of KBW. Please go ahead.

Hi, Good morning.

Good morning, Jared.

Good morning.

Linda, could you just go through again, you mentioned some tax credits this quarter. I missed some of the details on that. If you could just let us know again what that was and what the impact was on the taxes?

The tax credit that I was speaking about was really related to other income. We basically traditionally sell tax credits. We are --

Jared, a couple of years ago the state introduced the historic tax credit program. And we -- I'll use the word "partnered" loosely, but we became the agent for a fund that would buy the tax credits and then resell them, and we would get a commission on that. And in the past -- so we've had some nice fee income out of that over the past couple of years. This year the tax credits, for a variety of reasons, were not available to the fund for resale. So that was the income that Linda referenced as being missing in the non-interest income.

Okay, so that doesn't impact your actual tax rate or your tax estate?

Oh, no, it does not.

It has nothing to do with that.

Okay, and then the taxes this quarter, I calculated are around 32.1%. Last quarter, I think you were indicating that for the full year, to assume 33%, is that still a good rate to use for the full year?

I would use 32% for the remainder of the year.

For the remaining two quarters or --

Yes.

-- for the overall year coming in at 32%.

No, for the remaining two quarters.

Okay, great, and then on the expense side, the last quarter you were looking at core growth on the expenses, so excluding the one-time charge and then also the one-time gain in fourth quarter of 5% to 7%. Is that still a good rate to use for the whole -- or a good assumption to use for the whole year?

Jared, we're not going to give guidance on that again. I think you can use historically -- obviously for the first two quarters, and you've got to pick it up a little bit in the second half of the year related to different expenses that we do have coming.

Okay, so I guess the guidance that you gave last quarter, you're backing away from or not changing?

I never gave guidance last quarter.

I think you said 5% to 7% growth excluding the one time stuff.

That was my original guidance in January.

Okay, so we're -- so you're not using that guidance then anymore.

I guess what Linda's saying is we have a history of not reaffirming the guidance.

Right.

And so looking at it, and I think the most guidance she's provided is that it traditionally kicks up in the second half of the year as more projects come online, but you can see how closely we're watching items, because in this environment it's very difficult to grow the revenue side too. We are trying to maintain a discipline on the expense side.

Okay. I guess I'm just a little confused then that there was -- so there was originally guidance and now there's sort of a general discussion on expenses? I just want to make sure I'm not -- not mixing it.

We're just not in a position to reaffirm the guidance and so, you know, and we're indicating that we can't promise you that the run rate that we had for the first two quarters is going to hold in the second half of the year, but we're not giving any further guidance on that.

Okay.

That --.

Jared, does that answer all your questions?

Yes, thank you.

Thank you.

Your next question is coming from Bret Ginesky, of Stifel Nicolaus, please go ahead.

Hi, ladies, good morning.

Good morning, Bret.

I have a quick question for you regarding the branch that you're planning on opening in Pawtucket. In the past, when you put these branch openings on hold, you said the breakeven time period was four to five years. Does that still stand or do you think that's come in a little bit?

Well, I don't think we're going to change that projection, but what we would try to say is that it's not going to cost us any -- we've tweaked the rest of the branch networks so that at least we are cost-neutral and not adding to the expenses. So we're just going to have one more location without adding to the overall branch space. If we're going to measure profitability on an individual branch basis, then I think that that's a reasonable timeframe to use.

Okay. And I guess also in regards to that, I noticed that Washington Trust, I think they opened a branch in Cranston where they got 13 million deposits within the first quarter. What type of deposit growth are you looking for within the first few quarters of first year at that branch?

We've -- look, you can always get deposits in by running a CD special. So the real question is what is -- what kind of mix are you getting in there, and we think that that location in Pawtucket will have some real business opportunities for us given what the surrounding area is like. If you take -- and I'm going to give you some of the numbers on the other branches that were released last quarter, but I think the Lincoln Branch, which is in a great location has topped 30 million in two years, and it's got a really nice mix going for it; so we are real pleased about Lincoln.

East Greenwich is still under 20 million for its second year, and we really would love to get a branch to 20 million within two years. But like I said, you could get it to 20 million in two weeks if you ran a special at 5.5% on your CD. So I want to be cautious when I give you guidance because if I -- since you will be happy with $5 million in the first quarter, that's true if it were half -- if it were half DDA money, that would be terrific. So that's why I'm not sure that the gross number is that material.

Do you have a target for deposits for a mix between core deposits and CDs at that branch within the first year that you'd like to achieve?

Nothing that we've made public.

Okay, all right, thank you very much, I appreciate it.

Thank you, Bret.

(OPERATOR INSTRUCTIONS). Your next question is coming from Frank Barkocy of Mendon Capital Advisors, please go ahead.

Thank you, just to follow up on my question to the share buyback. With so much excess capital in place, and with the stock selling at $10 a share or less than your purchase price for buybacks in the first half of the year, why hasn't the board taken a more aggressive approach to additional authorization to help the price of the stock and the shareholders?

Well, I'm not going to comment on why the Board hadn't taken a "more aggressive position." But we do have the authority to go in and buy back up to 5% of the stock, and as Linda has indicated to you, our intention is -- our expectation is that we will be more aggressive this quarter.

Okay, are there other plans for that capital, I mean, are you looking at possible acquisitions or the use for those -- for that capital?

I think we've historically said that we are opportunistic and open to a wide range of options for increasing shareholder value, and that's about all I'm going to say on that front. At the same time, we are very aware. If you look at how the Bank is historically run, look at a tier-1 leverage ratio in the area, we were between 5.5 and 6 for a long time and then between 6 and 6.5, and then on a total risk based capital ratio for an institution like us, everybody ran 11.5 maybe and as low as 10.75. So there is clearly room for us to go back to our more historic range on the capital, and that's why we are in a position to be more aggressive on the buyback.

Fine. Thanks so much.

Thank you. At this time there appear to be no further questions, and I would like to turn the floor back to Ms. Merrill W. Sherman for any closing comments, please go ahead ma'am.

Well, thank you for joining us today, and I look forward to talking with you at the end of next quarter.

Thank you. This concludes today's Bancorp Rhode Island Inc. second quarter 2007 earnings conference call. You may now disconnect your lines at this time and have a wonderful afternoon.