Brookline Bancorp Inc (BRKL) 2008 Q4 法說會逐字稿

Welcome to the Bancorp Rhode Island, Inc. fourth-quarter and full-year 2008 earnings conference call on 29 January 2009. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator Instructions). I will now hand the conference over to Ms. Merrill Sherman. Please go ahead.

Good morning and thank you. As indicated, I am Merrill Sherman, President and CEO of Bancorp Rhode Island, Inc. I'd like to welcome all of you to our fourth quarter and year-end 2008 analyst conference call.

With me is the Company's CFO and Treasurer, Linda Simmons. Linda is going to take you through our fourth quarter and year end 2008 financial results as well as provide some guidance for 2009. I will then come back and discuss my thoughts on both our 2008 results and the Company's plans and prospects for 2009. After that I will open the phone conference 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 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 before turning it over to Linda, I just want to apologize. There's a little glitch with Business Wire and somehow only part of the press release went out. But I believe that about a half-hour ago, the complete press release with financials has been put on the wire. And I appreciate your patience with that. And now, Linda Simmons.

Good morning. The earnings for the fourth quarter of 2008 were $2.3 million or $0.48 per share. On a linked-quarter basis, net income was down $71,000 or 3.1%, and diluted EPS was down $0.02 per share from $0.50. The decline was driven by a slightly lower margin and increased provisioning.

Net income for the fourth quarter of 2008 was down $142,000 or 5.9% from the fourth quarter of 2007. Diluted EPS decreased 4% or $0.50 per share in '07 to $0.48 per share in '08.

Overall, the balance sheet increased $39 million quarter over quarter, and on the year-over-year basis, the balance sheet was up $51.9 million.

Loans are up 3.8% year over year. Our primary growth story continues to be our commercial loan portfolio. This increased $18.8 million or 2.9% on a linked-quarter basis and $84.8 million or 14.8% from year end. Our pipeline remains healthy.

Total deposits increased by $20 million or 2% on a linked-quarter basis, and up $27.4 million or 2.7% year over year. The consumer preference for deposit has shifted back to a CD, as that is the highest rate in our marketplace.

On December 19, 2008, the Company raised $30 million of preferred stock through the participation in the Treasury's Capital Purchase Program. We also issued approximately 193,000 warrants. We are extremely well capitalized, with an estimated 9.8% tier one Capital ratio and a greater than 15% total risk-weighted capital. We will look to deploy this capital and leverage the balance sheet over the next year. Our plan includes both increased lending as well as securities purchases. We will remain extremely prudent given the current market conditions.

Nonperforming loans increased by $2.6 million during the fourth quarter to $14.4 million on December 31, '08. NPLs at December 31 represented 94 basis points of total assets as compared to 79 basis points on September 30. Net charge-offs were $1.3 million during the fourth quarter and $2.5 million for all of 2008. The provision for loan losses was $4.5 million, exceeding net charge-offs by $2 million, building coverage ratios to 1.36% on December 31, '08 from 1.22% on December 31, '07.

The net interest margin for the fourth quarter was 3.9%, down from five basis points on a linked-quarter basis. This is a result of asset yields declining by 12 basis points and being offset slightly by lower interest cost on deposits. We have not yet felt the full impact of fed funds cuts as it relates our assets.

Year over year, the margin grew 25 basis points from 2.96 to 3.21 in 2008.

Non-interest income was $2.9 million for the fourth quarter of 2008 compared to $2.3 million on a linked-quarter basis. Excluding gains and losses on securities, growth in the quarter would have been $182,000 or 7.6%.

On a year-over-year basis, non-interest income was down $176,000, but there are some large fluctuations in this area. Deeds on leases originated for third parties was down $762,000. Sales were down approximately 50% year over year as buyers have left the market.

Our leasing subsidiary, Macrolease, has performed very well during the year. Originations for 2008 were $68.4 million, and this compares to $54.4 million in 2007. Sales, however -- we only sold $10.9 million in '08, and that compares to $21.7 million in '07.

During the year, we had an OTTI charge of $219,000 related to a trust preferred security. All (inaudible) [income] was also down $165,000. These declines were offset by the gains on sales of securities, which was up $471,000. Commissions on non-deposit investment products, loan-related fees, and service charges on deposits were up a combined $457,000.

Total non-interest expense increased $206,000 or 2.2% from the third quarter of 2008. This was driven by increased credit cost and additional marketing expenses related to an image campaign. On a year-over-year basis, non-interest expense declined by $139,000, another good year of expense control.

Salaries and benefits decreased by $768,000. During the course of 2008, we experienced a high level of vacancies. We do not expect this to continue into 2009. In addition, we moved to an outsourcing model for our internal audit function. This reduction in salaries and benefits is offset by an increase in our professional fee line. Equipment and loan servicing was also down.

Professional fees were up $756,000. As I already stated, the internal audit function is now included in professional fees. In addition, we incurred increased expenses related to the investigation conducted by a special committee of the Board of Directors of claims made by PL Capital. As reported last quarter, the investigation found no merit to PL's claims. Workout expense also increased by $353,000.

Guidance for 2009 -- we are expecting diluted EPS to be between $1.60 and $1.70. Like other institutions, providing guidance for 2009 is rather difficult. There are three or four major areas which will drive our results -- the margin, the provision in charge-offs, the leverage, and OTTI charges. Let's start with the margin.

We are assuming that Fed funds will remain constant throughout 2009. We expect that a margin for the full year of 2009 would be slightly lower than that of 2008. Deposit pricing remains difficult to predict. The dominant players in our marketplace continue to face liquidity issues, and pricing can be irrational at times.

In 2009, we have budgeted similar provisions to that of 2008, as well as the charge-offs. We look for opportunities to invest the proceeds from the TARPs money. Our plan includes both increased lending and securities. The cost preferred stock in 2009 will cost $1.75 million on an after-tax basis. That's $1.5 million related to the 5% dividend, and $250,000 of amortization on the equity discount.

We are assuming there are no additional OTTI charges. We will continue to grow our loan portfolios with commercial growth at low double digits and consumer growth in the high single digits.

Several weeks ago, we launched a home equity loan refinance offer as part of the leverage program. We have experience great results, and expect to achieve our $30 million target during the first quarter of '09.

We believe that we can grow deposits by 4% and non-interest income by 3%. We are budgeting a 6% growth in our expense line in 2009. For the past two years, we have been able to hold expenses but this will not be the case in 2009. We have budgeted for increased credit costs as well as FDIC premiums. In addition, we will continue to make prudent investment in our franchise.

The tax rate will be between 33 and 35%. We have increases related to changes in the [Mass.] tax code and limitations on executive compensation related to the TARPs fund.

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

Well, thank you, Linda. I think Bank Rhode Island, Bancorp Rhode Island has had a very strong year. The increase in the margin, essentially flat expenses and securities gains offset the significant increase in credit cost and the lack of fee income from Macrolease sales. These results reflect almost 13 years of patient invested.

You can see that we have relatively solid investment portfolio quality, and the results we post on our loans indicate good intake control on our credits.

I would point to some of the highlights of this year. Our commercial growth continues. Our cost controls are better and process efficiencies will continue to improve. We have had a real strengthening of our management ranks, and in particular, we look to strengthen our business development capacity.

We have a number of infrastructure projects underway. We have participated in the Capital Purchase Program. And the bottom line is that we are striving to develop what I would call a fortresslike balance sheet.

I would comment on asset quality briefly. In this environment, asset quality deterioration is inevitable. Our portfolio performance remains satisfactory, and distressed assets are at manageable levels. You can see that [our net] charge-offs totaled about $2.5 million for the year. It's about 24 basis points on loans. We were able to expand our loan loss reserve coverage ratio and I just want to talk a little bit, because people ask questions from time to time about -- what your commercial real estate portfolio composition is.

We have approximately $227 million in commercial real estate loans. Those loans represent our non-owner-occupied real estate secured commercial loans. It is a balanced portfolio. We have a relatively low construction loan and land development loan exposure. A commitment position on that is about $35 million, of which approximately $26.4 million is outstanding.

The remainder of the investor real estate portfolio is balanced among multifamily, office, retail, mixed-use, and miscellaneous other types of property, with the largest category being approximately $53 million of multifamily properties.

And in final comment, as I indicated before, in the current environment, it is likely that we, as others, will see an increase in nonperforming assets.

Looking at 2009, I call it the Tale of Two Cities that -- if you remember the opening line from the Charles Dickens novel -- it was the best of times and the worst of times. The macroeconomic picture is troublesome. And the regional and Rhode Island picture are at least as difficult.

We elected to participate in the Capital Purchase Program for [a] reason. It is no secret that we nationally are in a recession, and maybe on the verge of going deeper.

National and international asset quality difficulties remain without a solution. And those issues and difficulty send ripples through the banking system's balance sheets. That is why we at Bancorp Rhode Island wanted to be what I call supercapitalized.

I've covered the worst of times; let's look at the best of times. Bank Rhode Island is well positioned. It has a strong capital base, a relatively low level of nonperforming assets, and a great team.

When we look at our marketplace, it's no secret that we are dominated 80 to 85% by three large national institutions, if not international institutions, all of whom are dealing with either issues at the parent level or issues of their own. And their distractions and concerns are causing a personnel stress in their local marketplace. We're able to see -- we have more applicants for positions that we can pickup, and have picked up some good people to add to our team.

And even as importantly, if not more importantly, the word "customers" comes to mind. We are seeing more and more opportunities in this marketplace to grow our quality book of business.

We are in a position to lend. We have the willingness, stability, desire to lend on both the business and consumer front. And unlike in previous years, we can lead with credit and distinguish ourselves from almost every major player in the marketplace. So we are seeing terrific opportunity to grow our business successfully.

Linda told you we are projecting low double digit commercial loan growth. If we can improve on that, we will seek to do so. She also mentioned a $30 million consumer home equity loan program that we have put in place. It's getting a terrific response, and we are cross selling those loans with deposit accounts.

Historically, banks have had difficulty doing two things at -- once, monitoring and resolving credit issues and growing their loan portfolios. We believe we can do these two things at once.

Linda has provided guidance for 2009. As she indicated, and I will repeat, it is a difficult year to predict for all of the reasons that she referenced. My comment is that we are willing to sustain a lower level of earnings, a lower return on equity, and lower EPS to maintain a prudent profile. Our job is to stay focused, use our capital strength and human talent pool to seize opportunities presented by this environment and come out in two to three years stronger, larger, and more profitable.

The final comment on our stock -- relative to trading price, we've got a high book value and a high tangible book value at just over $20 a share. The dividend results in a strong yield. And I can tell you there are no present plans to decrease the dividend. And we believe we would have no reason to.

That concludes my prepared remarks, and we will be happy to take questions.

(Operator Instructions) Laurie Hunsicker, Stifel Nicolaus.

Just wondering specifically on some of the credit detail, if you could give us a little bit more of a breakdown -- for example, of your $14 million nonperformers, how much was commercial verses resi and consumer?

The residential or nonperforming loans are about $4.3 million. The commercial is the largest segment of it, at $7.9 million. We have one $1 million commercial real estate loan nonperforming and then the rest is small business, Macrolease, and consumer -- in total, they are under $1 million.

And the jump between the 6.9 to the [7.9] -- was that that $1 million commercial real estate loan, or that was just a conglomeration of --?

The change in the quarter, Laurie?

Yes.

The commercial -- the C&I, which is at $7.9 million, is comprised of, oh, I don't know -- probably 9 or 10 credits. And we had one $1.5 million loan migrate in that group I believe from last quarter.

Okay. And then how much do you have in commercial real estate nonperformers?

$1 million.

Oh, $1 million -- okay.

Right. And I can also tell you -- to give the exact number, the small business -- the microloan portfolio is probably about $872 million, and then the Macrolease portfolio is 104 -- excuse me, million. Excuse me -- $872,000, and then the Macrolease portfolio is like $104,000.

Okay. Great. And then do you have a corresponding breakdown for charge-offs? Of your $1.3 million in charge-offs, how much came from commercial verses resi and consumer?

I don't have that handy. I'm sorry, Laurie.

I guess asked another way, are the majority of charge-offs that we saw related to commercial?

I think there was residential and commercial in there, Laurie. I just don't have the numbers in front of me. But there were some charges on the residential side.

Okay, great. And then just two really sort of line items on the income statement that I'm curious about. Your loan-related fees of $360,000 -- just remind me -- why was that so high in the quarter?

We did execute on two swaps during the quarter with our commercial loan customers.

Okay, but that will probably run at about half that rate.

Yes.

And then your REO workout expense -- I understand why that went up. Do you have what an REO reserve is, or do you have an REO target or (multiple speakers) do you not have a reserve [billed], or --?

No; [first] about the amount of OREO we have -- it's under $1 million at this point, and consists of three residential loans scattered around the country. And you cannot have an OREO reserve. You have to mark the property down to what you believe you can sell them for net of expenses.

But these are expenses related to the disposition and the workout.

Okay. So I thought there were some banks creating an REO reserves. I'm wrong about that?

I don't know.

Okay, great. Just one last thing, Merrill. I wonder if you could just comment very generally with unemployment at 10% in Rhode Island. Just any sort of more macro thoughts? I know you made some already. But that is a very high number.

It is a high number, and it is a difficult situation.

Okay, great. Thanks.

Frank Schiraldi, Sandler O'Neill.

Just a couple of questions, on sort of looking out given Linda's guidance on the margin, just wondering, Linda, if you can share with us -- on the funding side, on the FHLB borrowings what the average cost of those were in the quarter? And sort of -- and how you expect those to rolloff -- are they laddered, or is some short-term stuff that's going to rolloff in 1Q?

The FHLB borrowings for the quarter were -- let's make sure I've got the right sheet here -- 422. They tend to be a little bit longer in nature, and that's how we try to control the duration of our liability. How they will come down overtime is if we continue to leverage the balance sheet and we need to borrow, obviously, the new borrowings would be a lot lower than 422.

Okay. And then on the new home equity program, on the release you put out the other day, could you just give us some color on what sorts of -- how you as a borrower get that -- in terms of FICO score, in terms of LTVs?

I don't want to comment too directly on that, Frank. What I will say is that if for people with strong FICO scores, it is at no more than 80% loan to value, and may be lower. What is it?

75%

75% loan to value. That is based on current appraisals obviously. And we're just really excited about it. We're looking to promote it for loans between approximately $150,000 and maybe $440,000 as a cap. And it's for refis, and so it has gotten a very long response in the marketplace, and it is perceived very positively. For us, it's a good asset to add to our balance sheet, and it will help leverage some of those TARPs funds.

So it is both for existing customers and new customers of the bank?

Well, it's for new loans, yes.

Okay. And you said that program has been going well so far? I mean, well, you just introduced it, but you expect to have that basically perhaps all loaned out through the first quarter?

We might not be closed all by then, but we believe that we will have all of the applications by then.

Okay. And then just finally, I just wanted to ask about the securities portfolio. I know you had that OTTI charge last quarter in the trust preferreds. I believe you have a bit of private label MBS. And just wondering how that's holding up, and what sort of -- if there's unrealized losses on that, and how it's holding up basically.

We have approximately $36 million of private label CMOs. The marked-to-market on the whole $36 million is about $2.5 million at this point. We have a couple of securities that were 2006. That's where you would expect any issues at all. And we are watching them very closely. And at this point, they're still holding up very well.

[Tim Brasilia], KBW.

First question -- I think I missed this. What was your guidance for non-interest expense going into 2009?

Interest expense or non-interest income?

Non-interest income. (multiple speakers) Yes, the non-interest expense.

We expect that it might grow 6% in 2009.

Okay. I see that there was solid commercial growth during the quarter. Can you give us some detail as to what categories saw the majority of the growth, or was it kind of spread across all --?

Pretty much across the board, between business lending and commercial real estate lending and leasing. Our Macrolease portfolio grew as well.

Okay. And for the CDs that you guys put out on in the fourth quarter, do you have an average rate that you were paying out on those?

Our ranges of rates go between 2%, I would say, and about 2.75% for the quarter. I don't have the average of new volume. That's what we were offering in the market.

And the last question I had was what was the FDIC insurance premium you guys paid in the fourth quarter and what do you guys see that as a full year number for 2009?

I'm sorry, I did not hear that either --?

The FDIC insurance premium that was paid in the fourth quarter, and what that number is expected to be in 2009?

We expect that the FDIC premium will increase over $1 million in 2009 based on the new fee schedule. And off the top of my head, I believe it was -- I don't want to say what it was [off] the fourth quarter, because I don't remember.

Okay, thank you very much.

We are out of time. That concludes the call. I will now hand back to Mr. Merrill Sherman for closing remarks.

Well, thank you all for listening. And I look forward to talking with you in April, when hopefully it's not as cold and icy as it is here in Providence today.

Thank you. This concludes the Bancorp Rhode Island Inc. fourth-quarter and full-year 2008 earnings conference call. Thank you for participating. You may now disconnect.