Brookline Bancorp Inc (BRKL) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Bancorp Rhode Island, Incorporated, First Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded today, April, Thursday, the 24th, 2008.

I would now like to turn the conference over to Ms. Merrill Sherman, President and CEO. Please go ahead.

Thank you and good morning. As indicated, I'm Merrill Sherman, President and CEO of Bancorp Rhode Island, Inc. I'd like to welcome all of you to our first quarter 2008 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 on the line 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. Linda?

Good morning. The earnings for the first quarter of 2008 were $2.3 million or $0.50 per share. On a linked-quarter basis, net income was down $69,000 or 2.9% and diluted EPS was flat at $0.50 per share. Net income for the first quarter of 2008 was up $148,000 or 6.8% from the first quarter of 2007. Diluted EPS increased 14% from $0.44 a share in 2007 to $0.50 a share in 2008.

Overall, the balance sheet increased $13.6 million quarter-over-quarter. On a year-over-year basis, the balance sheet was up $7.6 million. Total loans were down 13.4 million or 1.5%. The commercial loan portfolio increased 3.3 million or .6% since year end, but is still up $44.5 million or 8.4% from March 31st, 2007. We had strong commercial originations, which were offset by high prepayments.

The consumer portfolio and the residential mortgage portfolio declined during the quarter. The consumer portfolio declined by $4.4 million and the residential mortgage portfolio declined by $12.2 million. On the consumer side, we remain very competitive in the marketplace, but there is little demand right now in the home equity arena.

We had solid growth in total deposits this quarter. Deposits increased by $23.5 million or 2.3% on a linked-quarter basis and at $9.6 million or .9% on a year-over-year basis. During the quarter, we reduced our brokered deposits by $10 million. This leaves only $10 million remaining on our books. Core deposits were 63.4% of total deposits, up slightly from December of '07.

We have opened four new branches since 2004. Two of these branches are operating at breakeven and two are still in the red. As of 3-31, these four branches had approximately $102 million in deposits and realized growth of over 9% from year end. Management continues to focus on these branches to grow deposits, thus improving their earnings contributions.

As of 3-31-08, we had completed the Board-authorized buyback. We repurchased 345,000 shares with an average cost of $34.24. We remain well capitalized with total risk-rating capital of approximately 12.5%. We have stated in the past that our target ratio would be north of 11.5%. We are also recognized that the strong capital levels are important in this current economic environment.

The provision for the first quarter of 2008 was $285,000. This compares to $210,000 in the fourth quarter of 2007 and $100,000 in the first quarter of 2007.

Non-performing loans increased by $4.5 million during the quarter to $8.6 million on March 31st '08. This represents 58 basis points of total assets. Net charge-offs for the quarter were $311,000 and were primarily in the commercial real estate and small business portfolios. On March 31st, the allowance for loan loss stood at $12.6 million and represents 1.23% of total loans and over 146% of non-performing loans. The coverage ratio of 1.23 on 3-31-08 compares to 1.22 on 12-31-07.

On a linked-quarter basis, the margin decreased by only 1 basis point from 2.98 to 2.97 and remains flat from one year ago. Given the 200 basis point cut by the Fed during the quarter, we are very pleased with the stabilization of our margin.

During the quarter, the yield on earning assets declined by 25 basis points. This was offset by lower rates on deposits and borrowings. We were able to lower rates across all deposit categories while maintaining balances. In fact, we had increases in total deposits. The cost of funds declined by 31 basis points during this quarter.

We will continue to look for opportunities to lower rates. The full impact of these rate reductions will be recognized if CDs continue to reprice.

Non-interest income was $2.9 million for the first quarter of 2008 and compares to $2.7 million on a linked-quarter basis, a [7.4%] increase.

The first quarter of 2008 included gains on sales of security of $242,000. In addition, we had growth of our commissions on non-deposit investment products of $72,000 and a $21,000 increase in sales on gains of leases. This was offset by seasonal declines in service charges on deposits and credit card commissions.

On a year-over-year basis, non-interest income increased $341,000 for the first quarter of 2007 (sic). Again, gain on sales security were up $242,000, service charges on deposits up $119,000 or 9%, commissions related to sales on non-deposit investment product up $90,000 or 75%, and gains related to sale on leases were down $168,000 or 43%.

Total non-interest expenses increased $62,000 or .7% from the fourth quarter of 2007. Salaries and benefits increased $143,000 from the fourth quarter. We've typically seen increase in the first quarter of every year due to higher payroll taxes. In addition, our healthcare costs also increased by approximately 7%.

The cost of FDIC insurance has also gone up. The cost for the first quarter of 2008 was $100,000 compared to $29,000 in the fourth quarter of '07.

The savings came from all other categories, including expenses related to equipment, marketing, training and recruiting. On a year-over-year basis, the first quarter of 2008 was $51,000 lower than the first quarter of 2007. Salary and benefits, our largest component of non-interest expense, declined by $123,000 from the first quarter of '07. All categories of expenses are down year-over-year with the exception of loan workout costs, which increased by $147,000.

As part of our business plan for 2008, we will invest in technology. In Q1, we began a telecommunications project. We replaced existing communication lines and upgraded our phone system. This will result in expense savings beginning in the second quarter of 2008.

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

Thank you, Linda. The story this quarter is about our ability to hold the net interest margin while growing our deposits. We were really conscious of keeping up with the 200 basis points in rapid Fed rate cuts. Our Treasury area has been proactive in balance sheet management and that, together with some solid efforts on the part of our Retail Group, put us in good stead. You can see that our margin is virtually unchanged from the fourth quarter and identical to that of last year's first quarter.

Deposit growth in this marketplace, or for that matter, almost any marketplace, has not been easy and we're pleased with what we achieved in the first quarter. I think deposit awareness also is being embraced by our Commercial Lending team.

As Linda indicated, our stock buybacks have had a positive effect on the EPS. Additionally, our total risk-based capital is approximately 12.5% at this point. Given the uncertainty of the economic environment, being in a strongly capitalized -- being strongly capitalized is a good position to be in.

I'm not indicating to you that the Board will not review buybacks on an ongoing basis; rather, I am saying that the economic climate is more of a factor to be considered than it was a year ago.

A market like this can present opportunities for an institution such as ourselves. We have the benefit of continued, solid credit quality and a strong capital base. We are beginning to see some asset purchase opportunities and we intend to be both prudent and opportunistic on (inaudible).

And also, we'll comment on the increase we've experienced in non-performers. First, to put it in context, it's in the mid-50 basis points on assets and about 84 basis points on loans. As of year end, our peer group of 1 to $10 billion banks, as reported by the FDIC, was at 1.34% of loans. So we are performing well ahead of peer group.

Without getting too specific on the increase in the non-performing asset category, approximately 1.1 million of it is government leases, which are still accruing. There is no credit issue here. The servicer is simply doing a poor job.

Approximately 1.7 million in residential real estate first mortgages migrated to non-performing status. Those are purchase mortgages which were conventionally underwritten and reviewed by us prior to our purchase of them. Our non-performing assets now include about 2.4 million in residential first mortgages. They are slow to move to foreclosure sale and slow to move off our balance sheet.

Finally, with respect to some of the commercial loans that migrated this quarter, the largest one is approximately $1.3 million. It's well secured and we don't see any significant exposure in that credit. Nothing that migrated on the commercial side was not on our watch list. There's no one industry or sick code pattern to the businesses with credit issues.

Finally, I would note that the overall delinquency percentages have not deteriorated from where they were a year ago. We are mindful of our credits and we try to be proactive in addressing issues.

As Linda indicated, the commercial pipeline remains solid. We've gotten off to a good start in the second quarter, a very strong month of April, and as we indicated in the press release, our bookings in the first quarter were roughly the same as last year. We just experienced an increase in pre-payment.

I think that concludes my prepared remarks and Linda and I would be happy to respond to any questions you may have.

(OPERATOR INSTRUCTIONS). And our first question comes from the line of Damon DelMonte from KBW. Please go ahead.

Hi, good morning. I was wondering if you could talk a little bit about the technology initiative you have as far as kind of quantifying what the expected savings would be starting in the second quarter?

Yes, we won't see the full effect in the second quarter, but by the third quarter, we should be at a net expense reduction of about $40,000 a year.

Okay. And just with respect to the margin and being able to push through the lower deposit costs, what kind of expansion are you expecting off of this quarter's level?

Expansion?

Yes.

Well, it depends on what the Fed does. I'm not going to predict what the expansion would be.

I've seen like as far as -- when you have CDs that are repricing during the second quarter, how much are you anticipating that to benefit your margins going forward regardless of what the Fed does?

Damon, I'm sorry, but I have not quantified that for the second quarter.

Okay. I think that was all. Thank you very much.

Thank you. And our next question comes from the line of David Darst from FTN Midwest. Please go ahead.

Good morning.

Good morning, David.

Good morning, David.

I guess, Linda, back on the margins, I guess in your comments, you indicated that you could still hold the margin steady.

We held the margin steady from the first quarter of 2007.

Okay. But most of the rate cut, 75 basis points, was late in the quarter. Is there any way for you to give us maybe the progression of the margin throughout the first quarter on a monthly basis, or give us the March margin?

I didn't bring that in with me, but the March quarter was better than February. The margin for March was better than February, yes.

Okay. So it's safe to say that your margins are behaving as your ALCO model would indicate --

Yes.

-- from the K? Okay. And then, Merrill, could you comment on maybe the local mortgage market and if there are any opportunities for you to enter mortgage banking or begin originating some mortgages and adding them -- putting them on your balance sheet?

I do not think that's an area, even if there were an opportunity, that we would look at. We tend to be commercially focused and I just don't see a tremendous opportunity for us to enter that line of business. There is a local mortgage market. We do it on an accommodation basis for our customers, so we're available. We have that product available for our customers, but my concern has always been all you have to do is open your Sunday paper and there are 50 other guys who can make you a first mortgage loan on some terms, and that has not changed in this marketplace.

Okay. And then you mentioned asset purchases. Any idea of like a size that fits that you would want to leverage or whether that would be purchase mortgages or --

No, it would be more commercial asset pools and there have been some lease pools that have been offered and we've got a reasonable degree of expertise in the small ticket equipment leasing area. We've had very good results on the credit side with those, so we are prudent, and we would be very cautious when we did it, but if we see pools in an acceptable size range, I think it's an opportunity that we will be able to take advantage of.

Okay. And that's through macro lease, is that correct?

Yes.

Okay. Great, thank you.

Thank you, and our next question comes from the line of Tom Goggins from Fontana Capital. Please go ahead.

Hello?

Good morning, Tom.

How are you?

Fine, thank you.

Good, good. Hey, can you just walk through some of the problems that are presenting themselves at those two branches that continue to lose money? What seems to be the issue? And then at what point do you just say, we don't want to lose anymore money, and you just close them?

Well, first of all, there are no problems presenting themselves at those branches. They're in attractive locations. The Pawtucket branch just opened in October and we've put one of our best branch managers down there and she's out pounding the pavement getting some good business.

The other location is in East Greenwich and a new CVS will be going in next door and they're changing the traffic pattern, so that branch is a decent size at this point. It's knocking on 20 million in footings and we will look to continue to grow there. So I think they're performing decently for this environment. In fact, they're performing better than a lot of the competitors' branches are doing.

Did I mishear you though? In terms of like you opened -- you said you opened up four branches since '04 and you said two were at breakeven and two were in the red.

That's right, since '04, one of them opened in late '07 and the other opened in --

Two opened in '05, one opened in '04.

Okay. And so generally, what do you think is breakeven on these branches, when you open up a branch?

I think the wisdom in the industry now, conventionally speaking, is four to five years to break even. I think we've run ahead of that with the Lincoln branch, which is really a terrific success story for us, and that was open in '05 as well.

What we also see, and it's hard to quantify, Tom, is that all of these branches are not only a form of marketing and visibility, they're touchpoints for our commercial customers. And the lenders now don't come in to us and say, gee, if we only had a branch in this area, we could generate more business. So I think we're pretty comfortable with the locations we've selected. We now have one branch in each of -- at least one branch in each of the state's six largest cities, which no other institution our size can say.

Right.

And I think that this is a good longer term investment.

And just one last question here, Merrill and Linda. What financial goals have you guys set for yourselves this year? Are you thinking of return on assets, return on equity, EPS growth rate, what kind of goals has the Board set out for you guys as senior management?

I don't think we've ever discussed anything in those terms. We've traditionally provided guidance and not updated it and we did that this year back in January and people are free to do the calculations from that point.

Okay. And then any additional comment on the efficiency ratio? I know you talked -- you mentioned a little bit about the technology initiative, but what do you think a reasonable goal on the efficiency ratio is by December 31st?

We continue to examine our expenses. We have ongoing process reviews and as you can see, the expenses went down overall 2% last year and we held the line this year and continue to be engaged that way. And thank you for your questions, Tom.

Oh, thank you.

Thank you. And our next question comes from the line of John Palmer from PL Capital. Please go ahead.

Good morning, Merrill, how are you? Linda, how are you?

Good morning.

Fine, thank you. Good morning, John.

Help me understand. I'm looking at -- excuse me -- I'm looking at the non-performers here. We've got 100% increase in non-performers quarter-over-quarter. We have charge-offs up significantly, up to $311,000 for the quarter. Yet, we only provide $285,000. We're not even covering charge-offs and then we shrink the allowance by not much, basically flat. I'll take that shrinkage, flat. But non-performer is doubling. How do you reconcile that?

Well, we do an extensive review of our loan loss reserve and we have -- we take a hard look at everything and make an assessment as to the risk exposure with the non-performers. You're absolutely right; they've doubled, but they're only $8 million. Fortunately, in this environment, 50 bips-plus on assets is a relatively low cost to carry to it. When you look at the reserves, they're adequate. The accounts review them with them and I think we've got a very good team on it that understands the scope of how to handle these loans.

I can also tell you that the charge-offs that we have run historically -- we said in the fourth quarter, they're just extraordinarily slow and in this environment, we would anticipate they go up. They're still very, very low compared to peer group and industry averages, and so we're in the business of making loans and taking some degree of risk. We think we take prudent risk and we think we're appropriately reserved.

Which I guess leads to the question, is this the tip of the iceberg in your view or how much worse do you think non-performers are going to get? Are we --

I think that what I would say is this. I commented that our overall delinquencies in terms of the delinquencies within the portfolio are roughly the same as they were last year at this time. So that's a good sign. I would anticipate that non-performing asset levels will not go back to what they used to be and it's very difficult to predict, but I think the higher level, such as the one we're running now, is not to be unexpected.

What's the -- would you be comfortable in the view that you may stay flat from here or do you think it's going up marginally or going up significantly?

I would -- I don't think it's going to go up significantly. That's my belief at this point based on what we know and I would hope that it could stay relatively in this range, but time will tell.

Thank you.

Thank you. And our next question comes from the line of Brian [Roman] from Rebecca [Weiss]. Please go ahead.

Good morning. Thanks for taking the questions. On credit quality, which I think John was asking about, I didn't write it down. What is the net charge-off number for this quarter?

$311,000.

$311,000, and what was it in the fourth quarter?

Just about that. No, for the whole year, it was --

The whole year, it was about --

-- 500 -- 459,000 if I remember correctly.

That was for entire --

That was entire '07.

'07, 450,000 (sic), okay. And just can you give us a sense for how the Rhode Island economy is right now? Obviously, it's not Florida, but I suspect it's --

I think most of the trends are negative. We have had a bump up in unemployment to just over 6% and housing sales is slow and there's been some deterioration in housing values.

Okay. The outlook for the margin which was addressed earlier, and you sort of deferred and said, well, it depends what the Fed is going to do. What if the Fed, from this point forward, did nothing? What would be the outlook for your margin?

I think that we would stay relatively flat.

You wouldn't see a --

We see maybe a slight increase towards the end of the year.

Okay. Related question on the deposit side. I think you said you had growth in deposits. What are you starting to see in terms of growth or being able to retain low-cost deposits, such as DDAs and NOW accounts and savings accounts? Has the dynamic changed there at all?

Well, I think we did all right this quarter on the DDAs and people are just managing their money better than they used to, and they have the tools to do it. So it's a tremendous point of emphasis with us. One of the areas that is meeting with a great degree of success in the bank is the cash management area. Every time we sign up a new commercial customer, the odds are pretty good that they will request cash management services. And so that's my comment on that.

We go out there every day, fight toe-to-toe with folks to try to solicit DDA accounts and low-cost funds, but I think that we, as an industry and banks in general, are going to experience a permanently higher cost of funds, as people are just more sophisticated and manage their money.

What are you charging right now -- charging -- paying on a six-month CD?

I think that those are published in the paper and I'm going to refer you -- I don't have the --

Okay.

2.50 to 2.75.

That's fine, that's perfect. Last question, if I look at the sequential balance sheet, there was a positive swing of AOCI of about $1 million. Can you explain where that came from?

I'm sorry. We -- I didn't understand the question.

Sure. If I'm in the stockholders -- shareholders' equity section of the balance sheet accumulated over comprehensive income, AOCI had about a -- almost $1 million positive swing. It was negative 69,000 in the fourth quarter, positive 872,000 in the first quarter. Just maybe elaborate a little bit on why that happened.

I believe that's the increase in my value of my portfolio.

Right. So what's in the portfolio?

Oh, the portfolio is a mixture of agency paper and mortgage-backed securities and obviously, as the rates have come down, those instruments will become more valuable.

Okay. Thank you.

Thank you. And our next question comes from the line of Richard Lashley from PL Capital. Please go ahead.

Good morning.

Good morning, Richard.

Good morning, Richard.

I think we mentioned this about a year ago, but I wonder if, for everybody's benefit, if you could consider releasing the press release the night before or the afternoon before the conference call just to give everybody a little bit of time because this time of year, everybody is busy, and two hours in between the release and the call is a little tight.

We'll take that under advisement. Thank you.

And then the -- would you agree with me that the -- we should think of the core earnings as approximately $0.46 to $0.47 if you normalize the loan loss provision equal to net charge-offs and you back out the gain on sale as non-core. Is that a reasonable assumption?

I think that we look at the GAAP earnings and everyone's definition of "core" is a little bit different, so -- and the GAAP is GAAP and --

Let me ask you a segue.

Go ahead.

Were the gain on sales securities part of some type of ongoing business where you're generating assets and then selling them, i.e., the leasing business or were they just opportunistic sales one time?

It's not a one-time opportunity. We have a nice Treasury function here at the bank and I think all banks use their Treasury function to recognize, based on ALCO guidance, and look what it -- recognize some gains from time to time. And I think this is simply business as usual.

Okay. And then I'm not looking for guidance, specific numerical guidance, but just big picture. When you focus on profitability, for banks it comes through the margin, which is the rate, and it comes through growth, which is the balance sheet. And the combination of those two sometimes rate goes down, but you make it up with volume. Sometimes the volume is flat, but you make it up with rate. I guess I look at the rate side, which is the margin.

And you've done a good job of holding it flat in the face of rate cuts from the Fed, but big picture, when we step back and look at the Company, how should we think of margin going forward because over the last few years that we've been watching you closely, we've been through rate cycles up and down, and the margins basically held flat.

I'm not criticizing; I'm just wondering is this effectively what we have today, what we get in the future? And that's kind of a baseline and if that's true, are we then looking to the balance sheet, the growth side of things, for increased profitability?

Well, I think Linda has responded to the margin question a number of times during this call. One of the other things that we look to do is convert the balance sheet and we've started with a very thrift-like balance sheet and as we grow the commercial aspects, it improves our numbers. So it's not simply an overall asset growth, but it is conversion and it is bringing long term the other lines of business.

And as you know, this cycle that we have been through on the yield curve side probably had the biggest impact of all on the earnings. And so we are -- right now, you're starting to get some slope to the yield curve and I think over time, that will benefit us, but obviously, when the Fed cuts rates 200 basis points in a quarter, you're running the -- you're doing the best you can to keep up with it, and I'm just delighted we did.

I think you look in this environment, a lot of other folks haven't. So I think it's just a testament to Linda's great balance sheet management and the retail side beating the bushes, and keeping up -- holding the deposit and in fact, lowering them really nicely.

Linda mentioned we dropped $10 million of brokerage CDs. We have almost no brokerage CDs left. We did about 30 million a year ago just -- we'd never tried it and we thought it would be interesting. It's just another funding alternative for us, so the real growth is even greater than you see on the balance sheet. So we're pretty comfortable with it.

Okay. So I think what I just heard you say was that over time, there will be benefit from a steeper yield curve and Fed cuts.

That's correct. Well, I don't know about the Fed cut, but the balance sheet should create a better margin over time.

Okay. And then in terms of -- this has probably been asked by others, but I'll try one more time. In terms of yearly goals or multi-year goals, how should we think in terms of the balance sheet growth because, again, margin is a tough thing to control. It's a little bit out of your hands. The yield curve is something you cannot control. What kind of realistic goals should investors think about when they look at the balance sheet potential? Year-over-year, it was basically flat up to 1%.

Well, we haven't commented on that and I don't think we're in a position to issue projections at this point.

All right. You got to give me credit for trying. With the 1% growth on the balance sheet year-over-year and a slightly increased growth rate in the first quarter, it implies that you might have excess capital at the bank level and we talked about this at the Ryan Beck Conference. We talked about the regulatory rules on moving cash back up to the holding company.

The holding company basically has used up its cash at this point. It's in need of a dividend from the bank before it can do anything else vis-à-vis buybacks or increased dividends. Have you thought about what that holding company policy, liquidity policy, will be going forward? And then by extension, what the buyback policy may be in the future?

Well, we -- I just commented on buybacks during the course of the call which is something that the Board takes under advisement and will continue to take under advisement from time to time. We are not concerned about the location of the liquidity at this point. We're aware of it. We don't see any restrictions that are meaningful and so we're pretty comfortable with the position we're in.

I want to re-emphasize that we are very strongly capitalized at this point. We're aware of it, but we think in this environment, that's a good position to be in.

And the last question, without looking for specifics, but just generally speaking, has the Board taken a hard look at the dividend policy and the payout ratios in light of what, for everybody, is a challenging economy and probably subdued growth rates in the next year or two?

That's part of our --

I think that's part of everything that we look at and we have just increased the dividend from $0.15 to $0.16 and the Board will look at that again.

Thank you.

Thank you.

Thank you. And our next question comes from the line of Alper Sungur from Sidoti & Company. Please go ahead.

Hi, good morning, Merrill and Linda.

Good morning, Alper.

Good morning, Alper.

Maybe I missed this earlier, but what was the level of your 30 to 89 days?

We didn't comment specifically on that -- on the delinquencies, you mean?

Yes.

I think we usually put that out in the Q at the end of the quarter.

But you would say like a lower or higher than the 12.6 million level at the end of '07?

What I said was that (unintelligible) delinquencies are consistent with where they were at the end of the first quarter. So I don't think there's been any material deterioration there.

Okay. And you also had a year ago, the first quarter of '07, $185,000 of additional investor relation expenses. What was the amount this quarter?

I'm sorry, I didn't bring that in with me either, but I would say they were comparable.

Comparable, okay. Thank you very much.

Thank you. And ladies and gentlemen, that does conclude our conference. I'd like to turn it back over to management for any closing remarks.

Well, I want to thank you all for joining us and I will look forward to talking with you following our next quarter.

And ladies and gentlemen, that does conclude our call for today. Thank you for your participation and you may now disconnect.