Brookline Bancorp Inc (BRKL) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first quarter 2009 Bancorp Rhode Island conference call. (Operator Instructions). This conference is being recorded today, April 23, 2009.

I would now like to turn the conference over to Ms. Sherman, President and CEO of Bancorp Rhode Island. Please go ahead Ms. Sherman.

Well thank you and good morning. As indicated, I am Merrill Sherman, President and CEO of Bancorp Rhode Island, Inc. I would like to welcome you to our first quarter 2009 analyst conference call. With me is the Company's CFO and Treasurer, Linda Simmons. Linda is going to take you through our first quarter 2009 financial results. I will then come on the line and discuss those results and make some comments. After that I will open the floor to questions.

During this conference call we may make forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These statements are based on our present beliefs and are necessarily based on certain assumptions which are subject to risk and uncertainty. Actual results may differ materially from those discussed here. More information on these risk factors can be found in the Company's filing with the Securities and Exchange Commission.

With that, I will turn it over to Linda Simmons.

Good morning everyone. The earnings for the first quarter of 2009 were $1.5 million or $0.22 per common share. On a linked-quarter basis net income was down $790,000 or 35%, and diluted EPS was down $0.26 per share from $0.48. The decline was driven by a lower margin and increased provisioning.

Net income for the first quarter 2009 was down $863,000, or 37%, from the first quarter of 2008. Diluted EPS decreased 56% from $0.50 per share in 2008 to $0.22 per share in 2009.

Overall the balance sheet increased $20 million quarter over quarter. Investment securities were up $30 million on a linked-quarter basis, but on an average basis we were only up $12.5 million.

Our goal was to leverage the balance sheet by $60 million during the first quarter to help offset the preferred stock dividend paid on shares issued under CPP. We remain very prudent in this investing, and we expect it to take several quarters in order to achieve our goal.

Loans are up $27.6 million, or 2.6%, on a linked-quarter basis.

Our primary growth story continues to be the commercial loan portfolio. This increased $28.2 million, or 4.3%, on a linked-quarter basis and is up $109 million, or 19%, from March of 2008. Our pipeline remains healthy.

Consumer loans grew by $8.2 million during the first quarter. During the quarter we ran a home-equity loan promotion. Our target was to close $30 million of new loans. As of March 31 we closed approximately $16 million of loans, and we expect to close another $7 million in the second quarter.

Total deposits increased by $13.7 million, or 1.3%, on a linked-quarter basis and are up $17.6 million, or 1.7%, from March 31. Transaction accounts accounted for 60% of total deposits, and this is up slightly from 59% on December 31.

The provision for the first quarter was $1.6 million. Nonperforming loans increased by $2.4 million during the first quarter to $16.7 million on March 31. Nonperforming loans on March 31 represent 108 basis points of total assets compared to 94 basis points on December 31, 2008.

Net charge-offs were $851,000 for the first quarter. The provision for loan and lease losses exceeded net charge-offs by $759,000, building our coverage ratio to 1.4% on March 31 and 1.36 from -- 1.36% on December 31, 2008.

The margin for the fourth quarter was 3.08%, down 21 basis points on a linked-quarter basis. This is the result of asset yields declining by 35 basis points offset by lower funding costs of 14 basis points. We have become much more [asset] (technical difficulty) sensitive [as] (technical difficulty) [we become] more commercially oriented.

New loans originations are tied to LIBOR or Prime. Both short-term LIBOR rates and Prime rates declined during the first quarter of 2009. At the same time we have had limited ability to lower our retail deposit pricing as pricing continues to be dictated by the three large institutions in our marketplace.

Noninterest income of was $2.4 million for the first quarter of 2009. It was down 18% on a linked-quarter basis and down 19% compared to the first quarter of 2008. The trends that we are seeing are, we've seen a decline in service charges on deposit accounts, and we see decline in fees generated out of our leasing subsidiary. Both of these trends are expected to continue throughout 2009. In addition the first quarter of 2009 had less gains related to the sale of securities.

Total noninterest expense increased $113,000, or 1.2%, from the fourth quarter of 2008.

Salary and benefits increased $268,000, and we typically see an increase in the first quarter due to higher payroll taxes. In addition we saw an increase in healthcare expenses as the bank absorbed a 2% premium increase and more employees enrolled into our plan. Employee vacancies are also down.

The cost of FDIC insurance has increased by $171,000 quarter over quarter. We expect that 2009 cost to be approximately $1.5 million without any special assessment.

During the quarter we extended our contract with our core servicing provider, and we expect annual savings in 2009 of $270,000.

Our marketing expense was also down $192,000.

On a year-over-year basis the first quarter of 2009 was $163,000 more than the first quarter of 2008. Again, this was driven by increased FDIC premiums, and it was offset by savings in our back office.

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

Well thank you Linda.

As you can see, we have experienced our first quarter of lower earnings in some time. What normally are the key drivers of our earnings all worked against us, largely reflective of economic conditions.

First, we are a margin-driven institution. Deposit costs have not come down commensurate with the drop in asset yields. Over the past quarter, as Linda mentioned, we were particularly impacted by the drop in LIBOR and its effect on our commercial portfolio.

Second, credit costs are up. Our provision and net charge-offs were both substantially higher than they were in the first quarter of last year but somewhat lower than the level to the fourth quarter of 2008.

Third, our noninterest income is lagging. Deposit service charge income is lower as people are spending less and overdrawing their accounts less. Additionally, Macrolease has not been able to originate leases for sale to the extent that it has in prior years.

And finally, we have not been able to lever our US Treasury investment funds as anticipated when we elected to participate in the Capital Purchase Program last December. That has negatively impacted our EPS.

As I indicated in our press release, our quarterly earnings reflect to some extent the financial stress being experienced throughout the nation in general and the local Rhode Island economy as well. While our performance is certainly not immune to economic conditions, given our strong capital ratios and excellent customer relationships we remain well-positioned to address these challenges and capitalize on opportunities in our marketplace.

Looking ahead, we believe it's going to take patience and discipline to get through the next quarter or two. I want to talk about what we are doing in terms of our business and then address generally our views about our capital situation, the dividend level, and the outlook with respect to our Treasury funding.

As you are aware, Bancorp Rhode Island is robustly capitalized. Our total risk-based capital ratio is in excess of 15%. That puts us in a position to capitalize on business opportunities and be very comfortable to continue lending to creditworthy businesses, notwithstanding the difficult environment. We had a strong quarter for commercial growth, and I can tell you that our commercial pipeline is as strong as it has ever been.

Banks (technical difficulty) [of course] play a critical role in our nation's economy, and there have been a lot of questions in recent months as to whether banks are landing enough. Fortunately the strong capital position of our institution has enabled us to continue the growth of our commercial loan portfolio, and we continue to lend to creditworthy businesses in our community. We are seeing good opportunities in this market as most of our larger competitors are either not actively lending to businesses or not perceived as actively lending to businesses.

Additionally, this is the first quarter in some time that we have experienced a healthy increase in our consumer loan portfolio. Given the refinancing wave spurred by low mortgage rates, we had more runoff than we would have (inaudible - background noise). However, we have been able to build it back with a successful home equity refi program. The credit quality of these new loans is strong. These are all on a first mortgage position, and last quarter we booked about 76 new credit with an average loan size of $220,000, an average FICO Score of 748, and average loan to values of 64%.

All of the new loans we book, whether commercial or consumer, are opportunities to grow our relationships with customers, and we require that they have checking accounts with us as part of our promotions. It also gives us the opportunity to cross sell to them other products.

From a business credit standpoint, let me talk about why we believe the next quarter or two will be particularly difficult. We are starting to see 2008 financial statements from our customers who have calendar year ends. Our credit department is encouraging our lenders as they analyze customers' results to simply not examine -- to not simply examine 2008 but to focus on the last quarter of 2008. The fourth quarter of last year was particularly difficult for businesses in our region as well as nationally, and I think that businesses are experiencing continued lower activity with no relief expected during this quarter and the next.

Anecdotally, I ran into a friend who is a second-generation owner of one of the largest building suppliers in the state. He told me that they had budgeted to be off 20% this year, and they were in fact down by 30% year-to-date. These are the kinds of pressures that businesses both locally and nationally are under.

And until we see consumer confidence improve, federal stimulus money absorbed, and the national and local economy stabilize, I do not believe many of the businesses we bank will experience improvement. This outlook is consistent with some of the economic forecasts we have seen which predict a bottoming over the next six months or so and modest progress in 2010.

As indicated, our credit costs remain elevated. I believe we are on top of our portfolios, moderating situations appropriately and then working through distressed asset situations with appropriate diligence and speed.

With respect to expenses more generally, we continue to hold the line and look for opportunities to affect reductions. We have spoken with a number of our vendors and are renegotiating contracts. If you look at the quarterly expenses year-over-year or on a linked-quarter basis, the increase really is centered in the FDIC insurance premium. That is a significant amount for us and unfortunately could become an even greater expense in the coming months.

Finally, from a business standpoint we continue to do two things at once, grow our business and manage through credit challenges that this economic environment presents.

Let me now turn to the Treasury or TARP funding. We have not been able to lever the Treasury funding as fully as we would've liked. When we considered the program last November, we thought we could conservatively leverage at a 2% spread and thus offset the cost of the preferred stock dividend. To date that has not been possible. At this point we are keeping our powder dry, electing not to take imprudent risk, and basically are bearing the expense of paying (inaudible - background noise) stock dividend without offsetting income.

Like many institutions that elected to participate in the Capital Purchase Program, we saw both the rules and perceptions shift after electing to participate. As a result we have considered whether we would repay the funds. We do not believe that would be a wise decision in the near term. We believe that the period of greatest economic risk and the period of greatest unpredictability is over the next year to perhaps year and a half. Thus, robust capital levels are appropriate, near term.

Even if we earn at a level commensurate with last year's earnings -- that is between $9 million and $10 million, and we are not earning at that pace currently -- we would not accrete capital sufficient to put us in a position over the next year or so to attain the capital levels that we have today. Put simply, we could not achieve our current, robust capital level through earnings over the near term.

Moreover, the common stock dividend represents about $800,000 this quarter. It is a relatively small amount from a capital growth perspective, so suspending or reducing the dividend is not material to facilitating the repayment of the Treasury's investment.

However, that said, we intend to examine the possibility of a partial repayment or partial repayments after the next quarter or two. What are we looking for? We want to see where the economy is heading, what the business climate is like, and also what the residential mortgage climate is like.

There are too many unknowns, especially with government programs involving mortgage loans and toxic assets as well as discussions about potential cramdowns by bankruptcy courts. I do not believe anyone knows exactly what the fallout will be on residential mortgage portfolios and assets backed by residential mortgages. Any potential fallout in residential mortgages also has an impact on the Federal Home Loan Bank system, and we are mindful of that as well.

So until the picture is clarified both on the business credit and residential mortgage front, I believe that being in a robustly capitalized position is a wise one.

I indicated to you that we don't believe suspending of the dividend would have a material impact on our [prepayment] (inaudible - background noise) of the TARP monies. Our present view is that while we think the next quarter or two may be bumpy, we think we are in a solid position longer-term. And given that perspective, the Board -- as you can see from the press release -- authorized payment of the quarterly dividend.

The Board will continue to reflect on payment of the dividend, as it does every quarter, but my sense is that barring different circumstances, there will be a reluctance to make any adjustments.

The bottom line is that we can and should use these times as an opportunity to grow our business. We are doing so, and I believe that over a two- to three-year horizon our elevated capital position will result in greater value for our shareholders than near-term repayment of Treasury money and a less robustly capitalized position would accomplish.

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

(Operator Instructions). Damon Delmonte, Keefe, Bruyette & Woods.

A question regarding the TARP. Could you just remind us how much TARP initially was going to be dilutive to earnings?

I'm sorry. Could you repeat the question. I didn't quite hear it.

Sure. Could you remind us how much TARP would have been dilutive to your earnings without the leverage program?

When we first modeled, Damon, we believed that we could leverage the balance sheet sufficiently that there would not have been dilution.

Okay. Let me restate this a different way. You said that you're -- it was challenging to implement the $60 million leverage program.

Right. It would be (multiple speakers)

So as a result of not being able to leverage that, how much of a negative impact to earnings would we anticipate?

Well, you can see the dividend that we paid this quarter on the TARP's money. And it's somewhat offset but not fully offset. I don't have a percentage for you on that at this time.

So are you saying also though that you're not going to try to continue this program because spreads have tightened?

Yes. We will continue to pick our points, Damon. It just wasn't as quickly as we thought we could do it.

Fair enough. Then with respect to the increase in NPLs this quarter, could you give us a little color as to what drove the increase?

Yes. It was substantially centered in the commercial loan portfolio, and we had an increase of about -- what, $2.5 million? -- roughly in commercial loans. We had a little bit of an increase also in our Macrolease portfolio of about $600,000 or $700,000, but we are pretty comfortable that the bulk of that increase is guaranteed by vendors and hopefully will resolve itself relatively near-term.

Then just lastly on the margin, have all of your assets reset? Do they now currently reflect the most recent rate cuts by the Fed?

Yes.

Laurie Hunsicker, Stifel Nicolaus.

Just to Damon's question on non-performers, can you give us the exact breakdown between commercial, resi and consumer?

Sure. The residential mortgages were actually lower by $404,000. The consumers were up $123,000. C&I, up about $2.4 million. Small business was down $296,000, and Macrolease was up $700,000.

It -- would -- do you want to read the numbers from the top and (multiple speakers)

Yes (multiple speakers)

Maybe -- in other words, the residential mortgages -- if I do it they won't tally because I will round them off as I talk. But resident -- the resi's were about $3.9 million in the nonperforming category. Consumer loans are approximately $150,000. C&I, approximately $10.2 million. The CRE loans were -- commercial real estate -- $1 million. Small business loans, about $575,000. And Macrolease, just over $800,000.

It probably won't foot to lenders' numbers. I rounded them for you.

The other comment I would make is just because it's a nonperforming business loan, some of those are backed by real estate, so these are loans to companies that are having business issues more than a real estate vacancy problem.

Okay. And then I guess with respect to the C&I I, think it wasn't last quarter but the quarter before, you took us through some of the larger credits there. Any update on any of those credits or just generally any update on some of the larger credits?

I think that you are seeing some issues somewhere on the retail side. We've had a couple resolve and some move on. There is no concentration, or there is no one area that you can point to on the nonperformers that you would say that they were all of a particular type.

And then I guess of your $851,000 in charge-offs, was most of that from the commercial side?

Actually -- have that information somewhere here.

I think $300,000 of that was related to residential and a little bit to small business and the rest to commercial.

Rest to commercial. Okay. And then I guess, Merrill, just kind of a general comment. As we've seen some of the megabanks really report some very deteriorating numbers on the commercial side, both C&I and the CRE, and your primary growth story has been on commercial, can you just remind us kind of of how you see that line item tracking in the next sort of one, two, three years?

Well, I don't have that crystal ball, Laurie. I would say that compared to peer group, I think that these statistics are relatively favorable. If you look at the net charge-offs, there's still 31 basis points on assets (multiple speakers) big numbers.

Right. I guess I mean more in terms of how you plan to grow that commercial line. Will you slow it down just to kind of take a breather and see how things are going?

That's what we're trying not to do. This -- we would be letting an opportunity go wasted if we did not use this as an opportunity to expand our businesses, and so what you try to do is reach out to creditworthy customers, and there are any number of them in this marketplace. And since we have the robust capital position, I think we feel comfortable doing that.

The way I would describe it is, we loan to family businesses. They've been around for the last 40 years. They will be around for the next 40 years. And you've just got to go with management, if they can tighten their belts and get through these times.

(Operator Instructions). Frank Schiraldi, Sandler O'Neill Asset Management.

Just a couple of questions here. Some have been answered. Just wondering, a follow-up to the margin question about the loans having -- loan pricing having caught up to the recent Fed cuts. Do you think, Linda, now we may be at an inflection point for the margin, given that you do have some -- obviously some CD dollars and borrowings that have been locked in that are going to reprice lower?

Yes, I hope so, Frank. I think that we are almost there if not there. We still are pricing competitively in the marketplace. LIBOR plus 250, 300 basis points is still a very low number. And we really need to get a break on some of the deposit pricing in this marketplace because we are still paying in excess of 250 basis points for a CD.

So I hope that we are close to the end on the margin decline. But having said that, as we continue to grow that commercial business, it's primarily LIBOR-based. And with one-month LIBOR being at 44 basis points today, it's hard to make the spread in our deposit pricing.

And as far as -- the resi mortgage portfolio will likely run off here given the refi's. Is there any thoughts to expanding that new home equity program?

The differential between the rates that you can get today on a mortgage compared to the equity is just too great at this point. We are continuing to run the program, but the applications have considerably slowed.

Okay. And did you say you would close about half of that $30 million that you were looking (multiple speakers)

That's correct. And mostly in the month of March. So we didn't see it really in the average balances yet.

(Operator Instructions). Brian Roman, Robeco.

Again on the margin really, and you've touched on -- it's more -- has to do with CD pricing. Are you seeing any relief there? Are you seeing whoever it is who's being more aggressive on CD pricing, are you starting to see any relief? Because I've -- I'm starting to hear from some banks in some small markets around the country that that is in fact happening.

Yes. I think that [there] may be some.

One of the other issues is the -- basically your core funding on your savings account. And it's not atypical to see 2.25 frequently advertised and as low as -- and lower than that would be 2%, and that's very high in relation to -- Prime is at 3.75 now. So it's -- I think that that is tough for us as a CD pricing. And it would be wonderful if that dropped considerably.

If you take a look at -- you compared it to I think a -- like a Fidelity money market fund, I think it's probably about a point and a half. So unfortunately the liquidity needs of some of the larger players have continued to drive that profit -- that one up. And that is a big number for us.

So it's still large probably public companies as opposed to credit unions and mutuals?

80% to 85% market share goes to Citizens, BofA. I mean, they -- 75% market share between the two of them (multiple speakers) Citizens is out there aggressively advertising it -- 2.20, 2.25 now for money market and savings, so --

Got it. So they are the aggressor here. I will read that in your statement.

Okay. Thank you.

I'm seeing no more calls in the queue for questions. I will turn the call back to Ms. Merrill Sherman for closing comments.

Well, thank you for joining us. And I will look forward to speaking with you at the end of our second quarter. Bye.

Ladies and gentlemen, this concludes the first quarter 2009 Bancorp Rhode Island conference call. Thank you for your participation. You may now disconnect.