Brookline Bancorp Inc (BRKL) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you so much for standing by. Welcome to the Bancorp Rhode Island Inc. fourth-quarter 2007 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today on Thursday, the 24th of January, 2008. I would now like to turn the conference over to Ms. Merrill Sherman, President and CEO of Bancorp Rhode Island. Please go ahead.

Good morning, again and thank you for joining us. As indicated, I am Merrill Sherman, President and CEO of Bancorp Rhode Island Inc. I would like to welcome you to our fourth-quarter and year-end 2007 earnings conference call. With me is the Company's CFO and Treasurer, Linda Simmons. Linda's going to take you through our fourth-quarter and year-end 2007 financial results, as well as provide to you some guidance for 2008. I will then come back and discuss my thoughts on both our 2007 results and the Company's plans and prospects for 2008. 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 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 uncertainty. Actual results may differ materially from those discussed here. More information on these risk factors can be found in the Company's filings with the Securities and Exchange Commission. And with that, I will turn it over to Linda Simmons.

Good morning. The earnings for the fourth quarter of 2007 were $2.4 million or $0.50 per share. On a linked-quarter basis, net income was up $117,000 or 5.1% and diluted EPS was up $0.04 per share from $0.46. This increase was driven by an expansion of margins and a decline in expenses.

Net income for the fourth quarter of 2007 was down $142,000 or 5.6% from the fourth quarter of 2006. However, the fourth quarter of 2006 included an insurance recovery related to a loss the Company incurred earlier in the year. Adjusting for that recovery, core earnings increased 19% from $2 million in the fourth quarter of 2006 to $2.4 million in the fourth quarter of 2007. Diluted EPS increased 22% from $0.41 per share in 2006 to $0.50 per share in 2007. Again, this increase was driven by the expansion of margins, healthy growth in the non-interest income and a decline in expenses. Core earnings for the full year 2007 also increased 7%. The margin declined by 10 basis points from 3.06% to 2.96%, but this was offset by growth in non-interest income and a reduction in expenses.

Overall, the balance sheet decreased by $15.6 million quarter-over-quarter. On a year-over-year basis, the balance sheet was flat. What continues to change is the composition of our assets. Our primary growth story continues to be our commercial loan portfolio. This increased $18.8 million or 3.4% on a linked-quarter basis and was up $53.9 million or 10.4% from year-end. Our pipeline remains healthy.

Total deposits decreased by $4.3 million or 4% on a linked-quarter basis and down $1.6 million or 0.2% on a year-over-year basis. The numbers are a little bit stronger than it looks. During the year, we reduced our brokered deposits by $10 million, leaving only $20 million remaining on our books. Core deposits were 63.1% of total deposits, up from 62.4% at December 31, 2006. All the growth in core accounts was driven by our savings products. This growth was primarily offset by declines in DDAs, NOW and money market accounts.

On the buy back side, as we said in our press release, at 12/31/07, we had purchased 305,200 shares with an average cost of $33.38. As of yesterday, we had purchased 337,100 shares with an average cost of $34.22. There are only 7900 shares remaining under our current program.

Our credit quality remains good. Nonperforming loans increased by $130,000 during the quarter to $4.1 million on December 31, 2007. This represents 28 basis points of total assets. Net charge-offs for the quarter were $153,000, bringing the full year's net charge-offs to $459,000, down slightly from $490,000 in 2006. The net charge-offs for the fourth quarter were across all loan classes.

On December 31, the allowance for loan losses stood at $12.6 million and represents 1.22% of total loans and over 304% of nonperforming loans. The coverage ratio of 1.22 on 12/31/07 compares to 1.23 on 12/31/06. On a linked-quarter basis, the margins increased from 291 to 298. The third-quarter margin included additional expense of approximately four basis points resulting from the Company's redemption of trust preferred securities. The real lift was approximately three basis points. Lower cost of funds was the primary driver of that lift.

Non-interest income was $2.7 million for the fourth quarter of 2007 compared to $2.9 million on a linked-quarter basis, a decline of 5.4%. The third quarter of 2007 included gains on sales of securities of $254,000. Excluding these gains, the growth in non-interest income would have been $101,000 or up 3.9%.

Growth in non-interest income was strong year-over-year. If we were to exclude gains and losses on securities for both years, net interest income would have increased by $684,000 or 6.9%. The drivers of the growth are as follows. Fees on leases originated for third parties were up $617,000. Macrolease generated to $54.4 million on new leases in 2007, of which $21.7 million were sold, generating fee income of $1 million.

Service charges on deposits were up $523,000 or 10%. In late 2006, management implemented a revenue enhancement program. This was a direct result of that program. Our BOLI income was up $253,000. This was the result of the execution of the 1035 Exchange and we increased our position by approximately $3.5 million. Commissions on non-deposit investment products were down $297,000 and this is a direct function of the market condition. Other income was also down by $400,000 with the primary drivers being sales related to Rhode Island tax credits.

Total non-interest expense decreased by $94,000 or 1% on a linked-quarter basis. On a year-to-date basis, year-over-year, we are down $702,000 or 1.8%. Salaries and benefits combined did increase by $223,000 or 1.1%. The salaries was $108,000 and the benefits was $115,000 as we experienced increases in healthcare and retirement expenses. Marketing was down $318,000. Loan servicing down $150,000 and the remaining decline was across all categories.

I would like to give some guidance now for 2008. This guidance was based on the yield curve that projected Fed funds to be 425 from February to December of '08. Obviously, the Fed's actions over the past few days will have an impact on us. The impact of these changes have not been reflected in this guidance and we really need to wait to see how the changes play out in the marketplace.

Our guidance for 2008 is between $1.94 and $1.99. We will continue to transform this balance sheet into more commercial-like. We expect low double-digit growth in our commercial portfolio and we are hoping to maintain the good quality consumer loan portfolio that we have. We believe that we can continue to grow deposits. We expect core account growth in DDA, NOW and higher-yielding savings accounts. We want a slightly better margin than we had in 2007, but this will be very dependent on our ability to lower core deposit rates.

On the non-interest income side, we expect modest growth as we believe we have fully capitalized on our ability to generate fee income related to deposits and the sale of our leases.

Non-interest expense. We are working very hard to hold the line on cost. We are expecting an annual rate growth of 3%. This compares to negative 2% in '07, a positive 7% in '06 and a positive 10% in '05. We need to invest in technical infrastructure of our bank and we continue to invest in the highly qualified personnel that we have.

There are some costs that are just beyond our control such as the FDIC premium and increases in healthcare, which we expect to grow by $700,000 in '08. Our tax rate we will say will be between 32% and 33%, which is our current range and barring any material changes in the environment or credit quality, we expect a modest increase in our provisions.

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

Thank you, Linda. Well, I am going to make some remarks and then we will open the floor to questions. First and foremost, we are pleased with the earnings that we are reporting out for the quarter, as well as for the year. I would say that we have had a solid year and a solid quarter.

Commercial loan growth remains strong at 10% and we expect some $10 million in payouts this month, but the good news is that we are seeing good commercial loan activity and anticipate that we will be able to replace that drop.

Macrolease is another positive story for 2007. We are hitting our stride and as Linda has indicated, it has produced both positive balance sheet growth and fee income.

Finally, we are starting to see increased benefits from expense control go down year-over-year. Expense control remains an area of ongoing focus for us. I would like to point out that the decline that we experienced this year in expenses was accomplished even as we continued to invest in our people, our market and our franchise.

On the capital management side, Linda has updated you on our capital management efforts. We have been effective in executing on the buyback and our total risk-based capital ratio remains very strong at over 12% at year-end.

A few comments on credit quality. We have had unusually low charge-offs in 2006 and 2007. The net charge-offs, we are reporting $59,000 this past year compared to $490,000 in 2006. It is unlikely that that will continue at that level.

Our nonperforming assets were stable quarter-over-quarter. As you are aware, we had one larger credit migrate to nonperforming status during the third quarter. What I can tell you is there is no real trend evident either in the nonperforming assets or our watch list credits. They are really one-offs and each one that has some issues has its own story. We believe our credit quality is solid, but caution that no one is immune from difficult credit in the current environment.

Looking to next year, the focus is on our profitability and on our margin. The margin is controlled more by external factors than our internal efforts and we work it as hard as we can. What I would do is describe us as back to basics, grow our quality commercial assets, pound the street on core deposit growth with an emphasis on DDAs. We will continue our Macrolease effort. We will focus on building brand service and selling efforts. We will continue our expense control efforts with a particular view over the course of the year on technology and utilizing technology to improve efficiencies and finally, we intend to maintain a conservative credit posture and strive to be proactive in addressing any issues that may arise. With that, I will open the call for questions.

(OPERATOR INSTRUCTIONS). Richard Lashley, PL Capital.

Good morning.

Good morning, Richard. Happy new year.

Yes, same to you. I have a couple quick questions. On the Macrolease, when you sell those leases, do you retain any recourse risk or credit risk?

No.

And do you have any residuals on your balance sheet that have to be revalued in the future or are those -- there are no residuals?

No, there are no residuals. I mean there might be one or two, but basically these are --

Not material.

These are financing leases, not operating leases.

Okay. And then the -- I know you said you have to evaluate the impact of the Fed funds reduction in your guidance, but just directionally help us understand which direction do you think falling short-term rates will have on you? Is it a good thing, is it a bad thing?

This quickly, I would say it is probably not a good thing. How damaging it is, I don't know, but we would have preferred to see a gradual decline where we could have reset some of our core deposit rates in a better fashion.

Okay. And do you expect to issue updated 2008 guidance at some point or is it going to be just quarter-by-quarter as you see things unfold?

We have traditionally not updated the guidance during the year and we don't have any present plans to do that.

Okay. And I guess stepping back and just looking at it and listening to the guidance, you guys did a great job holding the line on credit. You did a great job holding the line on operating expenses. You bought back stock. You were disciplined in the stock buyback. You didn't buy it when it was in the 40s. You waited until it was more attractively priced. But now we reach the end of 2007, we are going into 2008 and the future, I step back and say, okay, what did we get from that and we are still kind of stuck at that 8%, 9% return on equity, 71% efficiency ratio, $2.00 -- $1.80 to $2.00 EPS run rate, ROAs in the 60 to 70 basis point range. Good, but not great. And by your own admission in the guidance, it is going to be hard to do better incrementally on credit. It is going to be hard to do better incrementally on operating expenses and then you basically said that you are hostage to external forces on the margin. So I guess, as an investor, how do I get comfort that there's incremental improvements coming in earnings efficiency?

I think that you can see this year is a demonstration of just how far we have come compared to any number of our peers. And I think that what we have said is that we intend to continue directionally going the right way. 8% to 9% ROE in the present environment compared to peers is very respectable and Rich, I'd obviously like to see a 12% ROE, but that is not typical in this environment and given that we are in our 12th year and came from a very [twist-like] balance sheet that we work on converting, I think that what we are doing is both building the earnings and enhancing the franchise value.

In terms of enhancing the franchise value, if the balance sheet did not grow year-over-year and probably, appropriately so, you have not expanded the branch network because of the costs involved, but how do you get incremental franchise value if earnings are not growing, deposit base is not growing and assets are not growing?

Well, I think there is value in the quality in the assets as well. It is not just size and I think that by converting this balance sheet to a very high quality C&I and CRE portfolio brings value to the franchise. There is a time and place for everything and it is not the time to expand on the de novo branching at this point. That doesn't mean that the opportunity will not come again, but there is a time and place for everything.

All right, thank you. I will let someone else ask questions. Thanks.

David Darst, FTN Midwest.

Good morning. How did you fund your loan growth this quarter? Was that through excess liquidity?

Well, basically I think the consumer portfolio declined slightly and we had a little bit of pickup due to the cash flows from the investment portfolio.

Okay, but securities grew on a linked quarter, correct?

Very slightly, David.

Okay. And then how about -- did you provide any details of what your margin assumptions are in your guidance?

No, we did not.

Okay. And then I guess from your previous comments, you are kind of -- you would be hesitant to comment on that?

Yes.

Okay. Great. Thanks a lot.

Thank you, management. There are no further questions. Please continue with any closing comments.

All right, I guess that is the end of the questions. I want to thank you all for joining us and I look forward to talking with you as the weather warms up in the spring at the end of the first quarter. Thank you.

Thank you, ladies and gentlemen. This does conclude the Bancorp Rhode Island Inc. fourth-quarter 2007 earnings conference call. At this time, you may now disconnect. We thank you very much for using ACG conferencing. Have a very pleasant rest of your day.