Brookline Bancorp Inc (BRKL) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Bancorp Rhode Island Incorporated's Second Quarter 2008 Earnings Conference Call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (OPERATOR INSTRUCTIONS)

This conference is being recorded today, Thursday, July 24, 2008.

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

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 2008 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 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 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'll turn it over to Linda Simmons.

Good morning.

The earnings for the second quarter of 2008 were $2.2 million, or $0.48 per share. On a linked-quarter basis, net income was down $85,000, or 3.7%, and diluted EPS was down $0.02 per share.

Net income for the second quarter of 2008 was up $47,000, or 2.1%, in the second quarter of 2007.

Diluted EPS increased 9% from $0.44 a share in 2007 to $0.48 a share in 2008.

Overall, the balance sheet was flat quarter over quarter. On a year-over-year basis, the balance sheet was up $23.3 million.

On a linked-quarter basis, total loans were up $35.4 million, or 3.5%. The commercial loan portfolio increased $53.8 million, or 9.3%. Since year-end, commercial loans were up $57.1 million, or 16.2%.

The consumer portfolio and the residential mortgage portfolio continued to decline quarter over quarter. The consumer portfolio declined $5.7 million, and the residential mortgage portfolio declined by $12.7 million. On the consumer side, we remain very competitive in the marketplace, but there is very little demand for this product.

Deposits increased by $2.3 million, or 0.2% on a linked-quarter basis. Core deposits were 63.7% of total deposits, up slightly from December 2007.

Our four new branches continue to grow. As of 6/30, these four branches had approximately $105 million in deposits and realized growth of over 11% from year-end. Management continues to be focused on the growth of these branches.

We remain well capitalized with total risk rate of capital in excess of 12.5%. The board authorized a dividend of $0.17 per share, up $0.01, to be paid to shareholders on record as of August 13. We will continue to annualize [our] capital strategy going forward but recognize the importance of capital given the current economic conditions.

The provision for the second quarter of 2008 was $970,000. This compares to $285,000 for the first quarter of '08 and $100,000 for the second quarter of '07.

Nonperforming loans declined by $1.6 million during the quarter to $7 million on June 30. This represents 47 basis points of total assets. REO as of 6/30/08 was $125,000 and represents one residential credit. Net charge-offs for the quarter were $402,000. Net charge-offs for the second quarter were primarily due to the one to four-family residential portfolio.

On June 30, the allowance from loan losses stood at $13.2 million and represents 1.24% of total loans and leases outstanding and over 188% of nonperforming loans. The coverage ratio of 1.24% on 6/30 compares to 1.22% on 12/31/07.

The margin for the second quarter was 3.24%, up 27 basis points on a linked-quarter basis and on a year-over-year basis. During the quarter, the yield on earning assets declined 26 basis points. This was offset by lower rates on deposits and borrowings. We were able to lower rates across all deposit categories while maintaining our balances. Total cost of deposits declined 73 basis points during this quarter.

The full impact of the rate reductions will be realized as CDs continue to reprice. The average yield on the CD book for the month of June was 3.56%. Based on current market rates, we can expect to see some improvement during the rest of the year. Having said that, the local market has come off its lows, and we have seen more competitive pricing for higher-yielding savings accounts and CDs.

Non-interest income was $2.5 million for the second quarter of '08, and this compares to $2.9 million on a linked-quarter basis, a 14% decline. As you recall, the first quarter of 2008 included gains on sales of securities of $242,000. There were no gains during the second quarter of 2008.

The investment sales group continued to have a great year. Q2 income was $245,000, up $35,000 from Q1. Gains on lease sales were down $119,000 quarter over quarter. Our lease volumes are very similar to that of last year, but our ability to sell leases has slowed considerably considering the lack of purchase power by other financial institutions. We expect this trend to continue for the remainder of the year.

For the six months ending 6/30, non-interest income increased by $169,000, or 3.2%. Again, we had gains on sales of securities in 2008 of $242,000 and no gains in '07.

Our service charges on deposits increased $179,000, or 7%.

Commissions related to sales of non-deposit investments increased $164, or about [456%], and, however, gains related to sale on leases were down $404,000, or 56%.

Total non-interest expense increased $152,000, or 1.6%, in the first quarter of '08.

Professional fees expenses are up $219,000. $55,000 related to the proxy fight. The reminder is spread across legal, internal audit, which is now outsourced, and other outside professional fees.

Salaries and benefits decreased $139,000 from the first quarter.

On a year-to-date basis, we are holding expenses virtually flat to '07. For the first six months ending 6/30, total expenses were down $63,000, or 0.03%. Salaries and benefits declined $408,000. In addition, we had savings in occupancy, equipment, marketing, and loan servicing, which totaled $300,000. This was offset by an increase in professional fees of $237,000 and loan workout expense, which was up $232,000.

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

Well, thank you, Linda.

Linda's reviewed two of the key positives on the revenue side -- margin expansion and commercial asset growth.

With respect to the margin expansion, we're benefiting from a slope to the yield curve and being proactive on deposit pricing.

The commercial asset growth has been strong. It includes a larger purchase participation and a larger government lease, as well as Macrolease assets and other organic growth.

Linda indicated our Macrolease fee income is declining as traditional buyers for small-ticket equipment leases have pulled back, I believe, as a result of capital constraints.

Conversely, the asset growth opportunities we have as a well capitalized institution are very real.

Our capital ratios remain high. As you are aware, our board from time to time will examine [inaudible] buyback opportunities. Given the level of tier-one leverage capital, as well as our total risk-based capital ratio, we are in a position to consider a buyback. You will notice that we have not announced one. From everything we have seen in this environment, capital is considered king, and raising capital is very expensive. Given our longer-term perspective, as well as a view that we will be in a recessionary environment for the foreseeable future, we did not announce a buyback plan. We believe it prudent to sustain a somewhat lower return on equity and the somewhat lower EPS that the excess capital will cause and remain in a very strong position -- in a very strong capital position in the current environment.

With respect to the balance sheet, deposit gathering remains challenging. We have seen statistics indicating that 2004 was the peak of the deposit market for banks. We've continued to devote substantial resources to that effort, and as you can see, we have more than held our ground through June 30.

We've instructed our lenders that asset quality is key. Their bonus includes factors for deposit gathering, as well as portfolio quality. We believe the best credit culture is one that has a prudent intake, and hopefully, we have put ourselves in that position.

Our construction and development loan commitment exposure is about $33 million and is spread among single-family house, condo, commercial properties, and land development loans.

Our consumer loan portfolio, which Linda discussed briefly before, is virtually all home equity loans and lines of credit. About one-third of the home equity loans are in a first mortgage position.

Delinquencies in the HELOC and home equity loan portfolios are about 50 basis points. Commercial loan delinquencies of all types, whether commercial real estate, business lending, small business lending, also remain low at about 1%. Our residential mortgage portfolio delinquencies are about 4%. These delinquency figures include the nonperforming loans referenced before.

As you can see, our nonperforming assets have declined quarter over quarter. I would not read too much into that. We are in a period where virtually all institutions will experience elevated levels of charge-off to nonperforming assets.

Within our nonperforming loans of approximately $7 million, roughly $3.3 million are commercial loans and $3.3 million are residential loans. The commercial nonperformers include one approximately $2.4 million credit that has been in the bankruptcy court for some time.

On the residential side, we now have 10 nonperforming loans aggregating $3.3 million. The properties are located in five different states. As I indicated to you in an earlier call, these loans are difficult to transition from their status as NPLs given a combination of factors, including the slow residential real estate market and the numerous consumer protection laws in place.

Moreover, the overwhelming bulk of our residential portfolio has been purchased over the years from others and is serviced by others. As a result, we do not have as much direct engagement as some in the workout process. We are looking to stay on top of these credits and work proactively with our servicers to achieve as good a possible result. We have allocated additional resources to our workout group for that purpose.

All in all, we're pleased with the outcome of the quarter, and assuming our asset quality holds, I think we will be in a position to capitalize on opportunities going forward. It is my belief that institutions that have strong asset quality and are well capitalized will see increased opportunity in a difficult market.

That concludes my prepared remarks, and Linda and I will be happy to respond to questions.

Thank you, ma'am. Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS)

And our first question comes from Laurie Hunsicker from Stifel Nicolaus. Go ahead, please.

Thanks a lot. Hi, Merrill and Linda.

Just wondered if you could give a little bit more detail on the 3.3 million of commercial nonperformers and what that 2.4 million is and just maybe comment a little bit more on the commercial growth. This was an incredible quarter, like you said, but I'm sure it's not going to continue to run at close to a 37% annualized run rate. Thanks.

Well, the 2.4 million is one particular credit that went to nonperforming -- I'm going to guess sometime this last year, can't remember, but it's been in the bankruptcy court for some period of time.

Laurie, I hate to comment in any detail because it's one credit, and it's a local market, and the story about credit has already been in the paper. It's a Chapter 11 reorganization at this point, and we're working through it. So that's the comment that way.

Which -- can you say this, which category within commercial it falls into?

It's a business loan.

Business loan, okay.

It's a business loan. And the remainder, two or three smaller credits, it's not much to say about them.

The growth has been fairly exceptional. We had a quieter first quarter, so some of it may have gotten pushed into this quarter a bit. The credits we're seeing are good credits. We're very pleased to put them on the books. Yes, it was -- you also commented that you didn't think it would keep up at this pace, and the answer is no, it won't. We don't anticipate it will keep up at this pace, as well. The pipeline is okay at this point, but I think there will be a slowdown in the growth rate, which reflects, in part, what's happening economically.

Okay, thanks.

Okay, thank you. And our next question comes from David Darst with FTN Midwest. Go ahead, please.

Good morning.

Good morning, David.

Merrill, given the commercial growth, even if it doesn't stay at this pace, I would expect that given the changes in the competitive environment in larger banks, you should see decent growth even if the market slows. But does this give you an opportunity or should we expect your earning asset yields to actually increase as you continue to remix the balance sheet?

I think that we would expect as we continue to convert, the asset yield will increase, yes. And, again, we're very pleased with the opportunities we're seeing. There have been a number of institutions which have pulled back in the market. We always like to think of ourselves as selective, and we pass on a fair number of credits, but I think we're liking what we're booking and just want to kind of keep focused on asset quality.

Okay. Could you give us your other comprehensive income loss and the details on the trust preferred exposure?

Sure. The trust preferred, we have two bonds. One, we have about $3 million in total positions. Neither one of them has been downgraded at this point, and we have not [cash] taken other then temporary impairment.

The OCI change quarter over quarter, we saw the market [inaudible] of about $5.7 million, and it was $1 million on bond -- agency bonds and about $4 million in regular MBS [VICS] portfolio.

Okay, thank you.

Okay, thank you. Our next question comes from Anton Schutz with Mendon Capital. Go ahead, please.

Hi, Merrill.

Good morning, Anton.

I just wanted to ask you sort of the thinking you guys went through on your dividend increase. Certainly, returning capital to shareholders is always an important thing to do, but curious as to how you arrived at that decision versus taking that additional capital and maybe buying some stock back at prices that I consider well below your franchise value.

I think that we do want to return value to the shareholders. We're comfortable with the payout ratio and increasing the payout ratio. I think we were probably towards the low end of our peer group, so it seemed appropriate to increase the dividend. We have not ruled out a buyback, Anton --

Oh, okay.

-- because we're very strong and capitalized at this point.

Agreed.

But we want to just take a little bit more of a wait-and-see attitude there.

Certainly, I continue to encourage you to take some of that capital because those 500-share days, where your stock is down 10% or 5% are sort of silly, and I encourage you to be involved in the marketplace.

Well, we like the 700-share days, when it goes up $1.5. It's sometimes -- you know, it's what it is when you're not incredibly liquid.

Yes, I mean I'm certainly curious as to the 25,000 shares short in your stock at this point, as well. Anyway, I would appreciate you weighing your capital decisions and appropriately utilizing the enhanced shareholder value. Thank you.

Thank you for your comments.

Thank you. And our next question comes from Bernard Taradash with Oppenheimer and Company. Go ahead, please.

Good morning.

Hi, Bernie.

Merrill, have there been any changes in the personnel of the loan department recently?

Yes, there have. We lost one of our senior lenders actually today to a local small credit union.

Is that -- how's that going to impact the overall picture there?

Well, he was in the real estate group, and I think that there's probably less emphasis on real estate at this point. It's somebody we didn't want to lose. He's really a great guy. I think he saw a different kind of opportunity to expand his management role, which wasn't an opportunity for him here. So we're shoring up those relationships, and we are out recruiting, and I think that we will be successful on that front over the next couple of months.

Good. Thank you. Any litigation on the horizon that wasn't there before?

I don't really have any comment on that, no.

Thank you.

Okay, thank you. And we have a follow-up question from Laurie Hunsicker. Go ahead, please.

Thanks. Yes, just wanted to go back to the commercial category. The growth that we saw, you said that leases slowed down in the quarter? Is that correct?

No, the volume of leases has remained stable, Laurie. What has slowed down is our ability to sell them for a gain.

Got it. Okay, so where did the categories of growth come within commercial?

I think I commented there were really four areas of growth. The first is we purchased a larger participation. It is just a super credit and at a surprisingly good spread. It was peeled off by one of the institutions who's looking to husband its capital, a larger institution, and we really like the credit.

The second is we have over the years bought government leases as an investment, and there was a larger government lease, and then between Macrolease and our own internally generated assets, that comprises the 53 million.

Got it. Okay. And then within lease categories, just as I've kind of gone back to the call report, in your 30-to-89 days bucket, it's kind of jumped around, and as of March, it was certainly lower. But leases have been kind of one of the hot spots of your past dues. Do you have any comment on that specifically?

The answer is, since you asked, yes, I will comment on it specifically. The credit quality in the lease portfolio historically has been really excellent for us. I think in our shareholder letter at the end of the year, we mentioned that we might have charged off $31,000 over a two-year period for what is a very substantial lease volume, probably about 50, $60 million' worth of volume. However, if they run delinquent, the president of Macrolease, who's been in the business for around 25 years at least and just really good, there are late fees associated with it. So he is -- he knows how to manage those credits. Very few of them actually flip over the line into 90 days, at least historically that's been the case, and so I think that we've seen an uptick in those kinds of delinquencies because of that portfolio, but it's been managed well to date, and I don't have any particular concerns about it as we speak.

Okay, great. That's helpful. Thanks. Just one last question, Linda, if you could address this maybe with respect to the income statement, and I know you guys touched on this briefly, but within noninterest expense, could you give us what would be a good run rate for professional services? I realize this quarter was a bit high.

And then, also, in your other "other expenses" that were $1.3 million, is there anything unusual in that that we should be backing out?

Going forward, professional fees will run at a higher rate because we now outsource some of our internal audits that we used to do in-house. So you're going to see a difference. They should come out of salaries and expenses, and it will go into professional fees. That's going to be about $280,000 a year.

And on the other income side, the increase in the FDIC insurance, that is not going to change. We basically are through our credit, and we have to accrue at that higher level now.

Got it. Okay, it's just -- I'm sorry, going back to the other point, so salaries and benefits, we would expect to see that run about 4.7, 4.8, and professional services, it's growing off a base of 850 or growing off of a base of 600 that the 280's going to add to?

It will grow off of last year's expense run rate.

Okay. So, okay, so you're saying 280 annually?

Yes.

Okay. Okay, so again, just looking at the 854,000 in professional services, how much of that can we [struck] out associated with the proxy fight?

On a year-to-date basis, it is $300,000, and I don't know what the expenses will be for the third and fourth quarter of this year.

Okay, okay. Perfect. Thanks. Thanks a lot.

Okay, thank you, and ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the conference back over to Ms. Sherman for any closing statements.

Well, thank you for joining us, and we look forward to reporting out to you at the end of our third quarter.

Ladies and gentlemen, this does conclude the Bancorp Rhode Island, Incorporated's Second Quarter 2008 Earnings Conference Call. You may now disconnect, and thank you for using ACT Conferencing.