Brookline Bancorp Inc (BRKL) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Bancorp Rhode Island Incorporated Third Quarter 2008 Earnings Conference Call. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Thursday, October 23, 2008. I would now like to turn the conference over to Ms. Merrill Sherman, President and CEO. Please go ahead, ma'am.

Well, thank you and good morning. As indicated, I'm Merrill Sherman, President and CEO of Bancorp Rhode Island, Inc. I'd like to welcome you to our Third Quarter 2008 Earnings Conference Call. With me is the Company's CFO and Treasurer, Linda Simmons. Linda is going to take you through our third 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, we may make forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These statements are necessarily based on our present beliefs, and are necessarily based on certain assumptions which may be subject to risk and uncertainties. Actual results may differ materially from those discussed here. More information on these risk factors can be found in the Company's filing with the Securities and Exchange Commission. With that, I'll turn it over to Linda Simmons.

Good morning. The earnings for the third quarter of 2008 were $2.3 million, or $0.50 per diluted share. On a linked-quarter basis, net income was up $83,000, or 3.7%, and diluted EPS was up $0.02 per share. Net income for the third quarter 2008 was up $46,000, or 2% from the third quarter of 2007. Diluted EPS increased 9% from $0.46 per share in 2007 to $0.50 in 2008. Overall, the balance sheet was flat quarter-over-quarter and year-over-year. On a linked-quarter basis, the total loans were also flat. The commercial loan portfolio increased $8.8 million, or 1.4%. Since year end, commercial loans are up [$65.9] million, or 11.5%.

The residential mortgage portfolio continues to decline, and the consumer portfolio remained flat. Residential mortgage declined by $8.6 million. On the consumer side, we remained very competitive in the marketplace but there is little demand right now for the home equity product.

Deposits decreased by $18.4 million, or 1.8%, on a linked-quarter basis. We are still up from year end by $7.4 million or 0.7%.

Our four new branches continue to grow. As of 9/30, these four branches had approximately $113 million in deposits and have realized growth of over 20% since year-end. Core deposits were 60.2% of total deposits, down from 63.1% on December 31, 2007. Our growth model continues to be that of organic growth, which will lead to franchise value. We believe that there are generally less deposits in our marketplace and that we are getting our fair share of the available deposits.

We are committed to continue to add talent and capacity to the branch system in order to grow and retain our deposit base. The Bank has products in the delivery channels to meet the needs of our customers in these difficult times.

Our goal is to grow and retain the deposit base while maintaining rational pricing in a market that sometimes becomes irrational. As you are aware, the Rhode Island marketplace is dominated by Citizens, and to a lesser extent, Bank of America and Sovereign Bank. Their national and international liquidity needs dictate the pricing in our marketplace. Over the past few months, we have seen deposit rates escalate while the Fed has continued to ease.

We remain very well capitalized with total risk rate of capital in excess of 13%. The provision for the third quarter 2008 was $1.5 million, building the reserve by $1 million since June, and $1.6 million from 12/31/07. This resulted in a cover ratio of 1.34% on 9/30, and this compares to 1.22% on 12/31/07.

Nonperforming loans increased by $4.8 million during the quarter, to an $11.7 million on September 30. This represents 111 basis points of total loans.

REO on 9/30 was $352,000, or 0.02 basis points of total assets. Net charge-offs for the quarter were $477,000. The net charge-offs were all related to one to four-family residential loans.

On September 30th, the allowance for loan loss stood at $14.2 million and represents over 120% of non-performing loans. The margin for the third quarter was 3.34%, up 10 basis points on a linked-quarter basis and up 43 basis points from quarter end, September 30, 2007.

For the nine months ending 9/30, our net interest income was up $2.9 million, or 9.3%, compared to the same period in 2007. During the quarter, the yield on earning assets declined by 3 basis points. This was offset by lower rates on deposits and borrowing. We were able to lower rates across all deposit categories. Total cost of the deposits defined 25 basis points during this quarter.

The recent Fed ease of 50 basis points will most likely have a negative impact on our margin going forward. Non-interest income was $2.3 million for the third quarter of '08 compared to $2.5 million on a linked-quarter basis, a 6.4% decline. An OTT charge of $219,000 was recognized on a $1 million [pretzel bond] originally rated as a BBB. This was offset by gains in sales and securities of $168,000.

The investment sales group continues to have a great year, but income was down quarter-over-quarter by $71,000. Gains on sales of leases were also down $45,000 quarter-over-quarter. Our volume of leases is very similar to that of last year, but our ability to sell leases has diminished. We expect this trend to continue for the remainder of the year and into 2009.

For the 9 months ending 9/30, non-interest income decreased by $354,000, or 4.4%. The gain on sales of securities were different by $156,000. Service charges on deposits were up $262,000 or 6%. Missions related to non-deposit investment products were up $192,000, or 44%. Gains related to the sale of leases were down $644,000, or 63%, and we had an [OTBI] charge of $219,000 from '08.

Total non-interest expenses declined $308,000, or 3.2% from the second quarter of '08. We saw small increases in salaries and benefits, occupancy, loan servicing, and FDIC insurance, which totaled $190,000. This was offset by savings and professional expenses, down $145,000, and the remainder across all expense categories.

Expenses related to the proxy battle were down $47,000 on a linked-quarter basis. However, we did incur approximately $150,000 of additional legal expenses related to the investigation conducted by a special committee of the Board of Directors on claims by PL Capital. As you are aware, on 8/8/08, we filed an 8-K that reported the Committee's determinations based on the results of the investigation. There were no merit to the PL's claims.

For the nine months ending 9/30, total expenses were down $251,000 or 0.9% from the nine months through 9/30/07. Salaries and benefits declined by $657,000 from 2007. Expenses related to the internal audit function are now in professional expenses. We have also experienced a high level of vacancy rates during the year. We are now filling these positions, and expect that this expense will be up in the fourth quarter.

In addition, we had savings in occupancy, equipment costs, marketing, and loan service, which totaled $403,000. This was offset by an increase in professional fees of $500,000, loan workup expense is up $267,000, and an increase of FDIC insurance of $389,000. That concludes my comments, and at this point if I could turn the presentation back to Merrill Sherman.

Thank you, Linda. I think Linda supplied some degree of color with respect to this quarter, and I have a few follow-on comments.

First, I'm really pleased with the results we've posted. We have always known that we are a margin-driven institution, and the expansion of the margin has helped our net income. Year-to-date, the margin expansion has enabled us to improve earnings, notwithstanding the increased provisioning, as well as the shortfall in fee income because of a lesser sales of leases by Macrolease.

As Linda indicated, there is considerable deposit pricing pressure in the market. Despite rates being lowered by the Fed, we see competitors raising short-term rates. As a result, as Linda indicated, we do not foresee further margin expansion and in fact we are concerned that we will begin to experience some contraction next quarter.

Let me make a few observations about the general economic climate in Rhode Island. The unemployment rate is at 8.8% and our state government, like a number of others, is facing serious budgetary issues. Real estate property values here, as elsewhere, also have been negatively impacted. We're just beginning to receive some quarter-end indication from our customers. Prior to a month or two ago, that is before the serious market dislocations experienced both nationally and globally, anecdotal conversations with our customers would indicate that most were having moderately flat to somewhat positive years.

Retail businesses were experiencing issues. Our obvious concern is that the macroeconomic picture will turn increasingly negative, and will have a further ripple effect locally. At present, we do not know what the impact of these macrodislocations will have, and will be at the local level. All of us are concerned about consumer confidence or the lack thereof, and its potential impact.

I want to turn to credit and credit quality. We are giving our lenders a dual message. First, we emphasize, and I want to emphasize, that we are open for business. We have the willingness and the ability to lend to creditworthy borrowers. And I just want to reiterate, there's a lot of talk about a credit crunch. We are desirous of expanding our loan portfolio with people who need credit and are creditworthy. And at present, we are seeing a number of solid credits that some of our competitors who are more capital-constrained are not able to handle. We want to keep our quality assets growing.

At the same time, we have our lenders focused on credit quality and portfolio maintenance. We are comfortable that our business lenders are on top of their credits. They are familiar with their portfolios, the credits are accurately graded, and are being carefully watched for signs of deterioration. As you're aware on the commercial real estate side, our development exposure is limited to around $35 million. There are a number of different buckets that comprise that $35 million. That is, land development, office construction, condo construction, single family house construction.

None of these development credits were rated substandard as of September 30th.

I also want to talk a little bit about our lending services unit or LSU. Basically, we put the bulk of our business lending relationship under $1 million into that group for monitoring. The relationships transferred to the LSU, however, were limited to those with line of credit exposure under $250,000. So, you might see a loan to a company that has a $400,000 loan on its office facility and $150,000 line of credit, for example. In that portfolio, we have a number of indicators that we review regularly to determine whether a borrower is potentially having difficulty. These indicators include percentage of line usage, overdraft activity, loan delinquency, and decline in credit score or the principal.

Our goal is to identify those credits early on, and proactively address any issues with our borrowers. To refresh your recollection, we do not have an automobile loan portfolio or a credit card portfolio. As of September 30th, we had not experienced any significant increase in delinquencies in our consumer home equity loan portfolio and we continue to monitor that portfolio closely.

With respect to our nonperforming loans. You can see that they have increased about $5 million quarter-over-quarter. On nonperforming loans and OREO, represent a relatively modest 81 basis points on assets. The NPL increase is split roughly between $3.5 million of commercial and small business loans, and about $1.3 million of residential loans.

On the commercial side this quarter, we had two larger credits placed into receivership. One involved a fishing vessel and another involved a nursing home.

As we indicated in previous calls, our commercial credits are largely collateralized loans. I have a high confidence level in the group working on our troubled assets. As you're aware, almost all the residential credits are loans that are serviced by others. We had begun to see some activity in resolving these nonperforming loans in the past quarter. We effectuated a short sale on one property and were able to restructure another residential mortgage loan. Hopefully, we will be able to move some of the other distressed residential loans through the pipeline towards resolution in the coming months.

I think that concludes my prepared remarks, and Linda and I will now be happy to respond to questions.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Frank Schiraldi with Sandler O'Neill. Please go ahead.

Good morning.

Good morning, Frank.

I was wondering if you could give us-- as far as on the residential loans that went into -- fell into nonperforming status, are those basically across the country? Is there anything -- are the LTV's basically around 80% or is there anything funky there, or no?

When - these were all substantially conforming loans when they were underwritten, and I think I mentioned in earlier calls we individually due diligence them. When originally underwritten, they were at 80% loan to value. Today, that may not be the case. And so, we have examined all of our exposure by state. We've looked at it by credit score, we're looking at it by date of origin. And really trying to stay on top of it, working with the services to make sure that any borrower is given an opportunity to restructure and stay current with us.

Linda, I wonder if you have the total delinquencies for the one to four family portfolio?

I do. 4.26%.

Okay. Thank you. Just a couple more questions, here. On deposit balances, is there any further color you can give us? I know obviously industry-wide it seems like most banks have lost deposits linked-quarter. Is there any sort of color you can give us further on demand deposits or the money market? Have you seen any of those balances come back post quarter?

I think I'm in DDA side what you're saying is, I think people just generally have less money. And you know, as Linda indicated, I think we get our fair share of deposits in this market. The larger decline was experienced in the savings account category, and that was -- I would say we were literally a handful of larger customers, probably the largest of them changed in management and were solicited based on rates by a competitor. In some of the others, just a variety of circumstances, money used, moving it elsewhere, whatever. So, that's about the size of the color on that.

Okay. So is it fair to say on the DDA that people have less money, the average balances have gone down across the --

I don't know. I haven't taken a look at the average balances, but what I'm going to tell you is I don't think that there's any significant customer loss in there. I think people are just using their funds more judiciously.

Gotcha. And then how would you characterize the loan pipeline currently compared to this time last quarter?

I would say that it's softer. We're getting, you know, we're getting a look at some credits because I indicated in the call that a really good quality credits with some of the competitors, so we're pleased about that. But most businesses are not looking to expand at this point. I think small business is struggling. We had substantial number of applications over the previous quarter, but really, they would just-- were not creditworthy at this point. So, the size of it is, I think the pipeline is softer than it has been.

Gotcha, okay. And then finally, obviously you're very well capitalized here. You spoke of a willingness to grow. Have you -- would you consider, or are you considering, the TARP program, given you know, what looks to be pretty attractive terms there?

Yes, well it's under consideration. The results and ratios that we have posted as of the end of this quarter indicate that no additional capital is necessary. We can see the tier one capital is in excess of 8%, and our estimate is to total risk based capital is that it exceeds 13%, so those are really strong ratios. And I think you said it right, Frank. But we, like others, will examine the TARP program with respect to its capital offering. I know that a number of the stronger institutions are being -- fine institutions like us, I might add, are being encouraged to participate.

At this point, participation does not look inexpensive to us. Given the requirement to issue warrant at current stock price level as well as a lack of clarity as to whether dividend increases would be permitted going forward. The date by which a decision has to be made is not until the middle of November. And we will use this period as an opportunity to review whether we should participate.

Okay. Thank you very much.

Thank you, Frank.

Thank you. Our next question comes from the line of Damon DelMonte, from KBW. Please go ahead.

Hi, good morning.

Good morning, Damon.

Good morning.

Could you just tell us how much of your residential mortgage portfolio is purchased?

I'm going to say 95%? 99%? I mean, it's very high.

Is purchased?

Purchased. Absolutely.

Okay. And --

And that includes purchases -- I think we have loans in there from inception, you know, from '96 forward.

Okay. Of your $11.7 million of nonperformers, how much of that comes from purchased residential mortgages?

The split in the nonperformers is about 4.6 of residential mortgages. And basically 4.3 of it is purchased mortgages that are nonperformers, and then about 6.3 of it is C&I and small business.

Okay. Let me restate my first question a little differently. Of your purchased mortgages, how much of them are out of -- out of market?

I don't have that off the top of my head. There's a very substantial component that's Massachusetts-related, because we -- we bought from a number of Massachusetts sources. And the balance of them are scattered throughout the country.

Okay. Is that-- is a breakdown available of the geographic location, something that you guys just provide to us at some point?

We -- we can make a decision as to whether to provide that, because we do have that. So. We'll take a look at that.

Okay. And then just lastly on the trust deferred security that you took the impairment on. What do you mark the remaining balance at?

That's $0.79.

Okay. And is that rated single-A?

It's a BBB.

BBB. Okay. Thank you.

Thank you. Our next question comes from the line of Laurie Hunsicker from Stifel Nicolaus. Please go ahead.

Yes hi, good morning, Merrill and Linda. Just to follow back on to Frank's question, to the extent that you decide to access the capital markets and I hear that right now you're fine with your ratios, would you be more apt to access a TARP or would you be more apt to raise common as we've seen just two banks recently do in New England?

Well, if you take a look at our capital ratios, there would really be not a great motivation to access the capital markets at this point for common. And, you know, we're not only well-capitalized, we're very strongly-capitalized. And the TARP program would be a different series of considerations.

Okay. Okay. Fair enough. Okay. So just to go back here to nonperformers, for a second. So, you said the residential is 4.6, the commercial is 6.3. And that's C&I and small business. Is there any commercial real estate nonperforming?

I do not believe so.

Laurie Hunsicker? Okay. So then the -- the difference, basically, if we take it then that puts us at consumer of about 800.

No, you've got some macro loose in there, and some other small business. I mean, hey just kind of -- odds and ends, just --

A little bit of [mac release], a little bit small business and a little bit in consumer.

Okay. But consumer, was it, could you say consumer was largely flat, linked-quarter?

I think-- I don't know if we've got $80,000 in consumer loans or something like that.

88.

$88,000.

$88,000, okay. So then.

The consumer loan portfolio at this point is almost all home equity and very low delinquency level at this point.

Okay, and that puts like, the total commercial nonperformers closer to about $7 million? Does that sound right?

That sounds right.

Yeah, in -- and if you take a look at it, but the bulk of it is driven by three credits, one of which we've been talking about for over a year now, which is in a Chapter 11 reorganization at a prescription services company. And then we have the two that I mentioned, that went into nonperforming status this quarter.

Okay. Can you give us a little bit more color on that, the fishing vessel and the nursing home? How big those-- I mean are they about $1.5 million, $2 million each, or what? I mean. Any sort of--

The nursing-- I don't know how much is public record, so you know, I don't want to get too onesey twosey. They're both in excess of $1 million, and you know, they're in the workout area now.

Okay. And -- okay and is the nursing home local?

All of the credits that are in our business lending portfolio are basically local, so yes.

Are basically local.

Local.

Okay. And then just a question coming back over to residential. What is your average loan balance, approximately, on the residential side?

I could not answer that off the top of my head.

Okay. And then the area in Massachusetts where you've seen a substantial increase, where is that, roughly speaking?

What substantial increase did we see in Massachusetts?

We didn't. We didn't say that, Laurie.

Oh, I'm sorry. I misunderstood. I thought from the standpoint of--

We have loans in Massachusetts. We didn't say that the [non-accruals] were related to Massachusetts loans.

Okay, I misunderstood, okay.

That's all right.

Okay.

You know, we-- it's part of a national portfolio.

Okay.

But I think that what we tried to say, is that over the years our purchased residential mortgages were more heavily weighted to Massachusetts.

Okay. Fair enough. And then the substandard number that you gave the classified assets that are substandard, I just wanted to double check that.

I don't think I gave a number for substandard assets that were classified. What I said was that of our development real estate loans, in other words a $35 million in our portfolio that split in various categories in the real estate area for that, that are considered development loans or construction type loans, none of them are substandard as of September 30th.

None are substandard? Okay, great. And do you have a substandard number that you could give relative to in June it was $10.2 million?

I don't think we've ever publicly disclosed our substandard number. I'm not sure if it's in the K, and.

It will be deposed in the Q, Laurie.

In the Q?

Just don't do it in the call.

Okay. And then one other number that I wanted to check, the delinquent loans and the residential portfolio. You had mentioned, Linda, 4.26%. did I hear that correctly?

Yes.

Okay. And so that's the category that's basically 60 to 89 days past due?

No, that's total, performing and nonperforming.

Performing and nonperforming. Right. That-- okay. Okay, great. And then I guess just from the standpoint of I guess two things on the income statement. You know, deposit costs going up again, FDIC deposit costs. Looks like it's going to run you guys about $700,000 per year obviously without having any sort of further thoughts there. Any thought on how you're going to offset that on the expense side? Are you continuing to focus on expense side, is there any guidance you can give us with respect to the expense side of the equation?

Laurie, I look at the expenses every day. And we realize that we're going to have a larger premium in 2009, and we are working very hard to try to offset at least part of that.

Okay. And then with respect to the line item, the other, other expenses, that from June went from 1.3 down to September, 1.069 million. Was there anything unusual in the June quarter that caused that to be higher?

No, I think there might have been a couple little things in the September quarter that were a little unusual. So I don't think that's a really good run rate, if that's what you're trying to get to.

Okay. So, a better run rate is closer to 1.3?

Yes.

Okay, fair enough. Thanks very much.

You're welcome, thank you.

Thank you. Our next question comes from the line of [David Minkoff] with Maxim Group, please go ahead.

Good morning, ladies.

Good morning.

Good morning.

Nice quarter in view of everything that's going on in the financial world these days. I was happy to see that, notwithstanding your cautionary comments going forward. The Fed is reducing rates and yet I'm seeing CD rates in my area or at least in smaller banks rising a little bit. We're up to 4.25 in some local banks here. What are you guys paying on CD rates for, say one year, now?

3.50 to 3.75, but you know, when push comes to shove we can-- we will see 4% rates.

It feels like rates are going higher, notwithstanding what the Fed's doing. You know, people will pay anything to get money I guess, if you need it. Right?

Well we're trying not to pay anything and you can see that our deposit costs declined last quarter. But it is you know, you've got other people with liquidity needs, and they are having -- they're raising rates, you know. They're going in the opposite direction from the Fed move.

Well maybe because the people that need the money can't get those low Fed rates, you know, so they have to pay what they can get. About a quarter ago, on the last conference call, I think you said they suspended the buyback, it was more important to conserve cash and I guess that was prudent. At that time, I think the stock was in the 29-30 range. It's now in the $23.00 range. Is it becoming more compelling to revisit that area, if you don't go along with the Federal program which prohibits buybacks, I think?

I think that in this environment, you're going to keep the capital that you have. So, and if you take a look at the trading volume in recent weeks, it's been very light. So very small-- you know, we're just not that liquid a stock, a very small amount can drive a price either up or down.

So, conserving cash is still the order of the day then, hmm?

Conserving capital.

Conserving capital, right. Would any number change that? I mean, if the stock went into the teens, God forbid, but you know. How do you feel about it?

I don't have any further comment on this, David. You know, it's a Board decision, it's something that we revisit from time to time. But you know, in this environment, I think the phrase is capital is king.

I can appreciate that. Okay. Thanks so much, bye now.

Bye.

Next question comes from the line of Anton Schutz with Mendon Capital. Please go ahead.

Hi, ladies, how are you?

Fine thanks, Anton, how are you?

Good, thank you. I've got a question related to your purchase book. We've certainly seen announcements from many of the major banks that did purchase mortgages, leaving the business. Obviously, most people have had unpleasant experiences with that. What are your thoughts about that, especially given preserving capital, why expand your balance sheets with people you don't know?

We have not purchased mortgages in some time. Basically, we always purchased them as filler. You know, if we couldn't generate our own assets. And as you can see we haven't really grown the balance sheet that much and we've concentrated on converting to more, in effect, home grown assets. Our commercial and to a much lesser extent, particularly in recent years, consumer home equity loans. So that if you look at 2008, I don't know if we purchased any. So, we haven't purchased any mortgages year-to-date. The purchases in 2007 were fairly limited and even the year before that. Just not extensive purchases in recent years.

Our commercial growth has used our liquidity that was available. And that's before we -- it has run down significantly.

Does it make any sense to put it in a discontinued line and actually sort of put it in a bad bank and say, "All right, that's it?" In a runoff mode?

The mortgages that we purchased were not subprime mortgages, and to a large extent over the years, the mortgages were conforming with the exception of size. And even then, I don't know whether we capped it at $750,000. Somebody asked the average loan size and I just couldn't give it off the top of my head. So, and what I did mention, we just wouldn't dial up and buy a portfolio, we actually had our folks look at every loan that we bought, and we would kick loans out of the portfolio. Additionally, until the last couple of years, most of the sources for the purchased mortgages, we -- if you remember the old Boston Fed, you know, we'd buy substantially locally more -- local mortgages, once we had the initial portfolio of completed acquisitions.

Do you expect the pace of nonperformers to keep moving in this purchase portfolio, or do you think you've identified what's going to go bad here?

You know, I think it's just not predictable at this point and I don't want to be misleading one direction or the other.

Okay, thanks.

I'm seeing that there are no further questions at this time. I would like to turn the call back over to Ms. Merrill Sherman.

Well, thank you for joining us and I look forward to talking with you again following year-end. Take care.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation, you may now disconnect.