Brookline Bancorp Inc (BRKL) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter 2009 Bancorp Rhode Island Conference Call. (Operator Instructions). This conference is being recorded today, July 30, 2009.

I would now like to turn the conference over to Ms. Sherman, President and CEO of Bancorp Rhode Island. The call is yours, Ms. Sherman.

Well, thank you very much 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 2009 analyst conference call. With me is the Company's CFO and Treasurer, Linda Simmons. Linda is going to take you through our second quarter 2009 financial results. I will then come on the line and discuss those results, after that I'll 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 uncertainties. Actual results may differ materially from those discussed here. More information on these risk factors can be found in the Company's filings with the Securities and Exchange Commission.

And with that, I'll turn it over to Linda Simmons.

Good morning. Net income for the second quarter of 2009 was $740,000 or $0.07 per common share. On a linked-quarter basis, net income was down $723,000 or 49% and diluted EPS was down $0.15 per share from $0.22. Increased credit cost, the decline in noninterest income and the FDIC special assessment drove this decline. Net income for the second quarter 2009 was down $1.5 million or 67% from the second quarter of 2008. Diluted EPS decreased 85% from $0.48 per share in 2008 to $0.07 a share in 2009.

Having said that, there are a lot of positive things happening within the organization. Strong commercial loan growth, DDA growth, improved net interest margins, continued expense control, and a slowdown of migrating nonperformers. Quarter-over-quarter, the balance sheet grew by $35.6 million. Investment securities were up $19.3 million from 3/31. We saw some opportunities in the marketplace and we took advantage of those.

Loans were up $12.4 million or 1.1% on a linked-quarter basis. Our primary growth story continues to be our commercial loan portfolio. This increased $25 million or 3.6% on a linked-quarter basis and $53.2 million or 8.1% from year-end. The consumer loan portfolio remained flat quarter-over-quarter and is up $8.1 million from year-end.

The residential portfolio continued to decline, as no new product has been added. Total deposits increased $28.8 million or 2.7% on a linked-quarter basis and is up $42.5 million or 4.1% from December 31. During the quarter, DDAs grew by $35.4 million, other transaction accounts were up [10.2], and CDs declined by $16.8 million. Transaction accounts accounted for 62.9% of total deposits on June 30, and this is up from 59.4% on December 31.

The provision for the second quarter was $2.6 million. This funded net charge-offs of $1.1 million, strong commercial loan growth and increased our coverage ratio from 1.4% in March to 1.51% in June. The charge-offs were $500,000 from commercial loans and $620,000 from residential loans. Nonperforming loans and leases increased by $1 million during the second quarter to $17.8 million. Commercial loans declined by $1.1 million and residential loans increased by $2 million. Nonperforming assets at June 30 represent 119 basis points of total assets. The net interest income margin for the second quarter was three-tenths, up 2 basis points on a linked-quarter basis. This is the result of asset yields declining by 14 basis points, but being offset by lower funding cost of 15 basis points. Higher DDA balances also contributed to the higher margin.

Noninterest income remains a challenge, as we earned $2.2 million in the second quarter of 2009. It is down 6.1% on a linked-quarter basis and on a year-to-date basis it is down 15.3%. There are several trends that we continue to see. First, a decline in service charges on deposit accounts. We experienced a little bump in Q2, but on a year-to-date basis, service charges were down $306,000. We believe this to be an industry-wide trend. Secondly, a decline in fees generated in our leasing subsidiary, on a linked-quarter basis, we are down $20,000, but on a year-to-date basis, we are down $230,000. Third, commissions related to nondeposit investments have also declined year-over-year. On a year-to-date basis, they are down $188,000. Having said that, July has been particularly strong, and we may start to see a reversal in this trend during the second half of the year.

In addition, loan-related fees were down $170,000 on a linked-quarter basis and gains related to the sale of securities were down $61,000. Total noninterest expense increased $522,000 or 5.4% from the first quarter of 2009. Excluding the FDIC special assessment of $733,000, expenses for the quarter would have been $9.4 million, down 2.2%. Salaries and benefits were down $227,000 from the first quarter. The majority of this decline is related to the revision of forfeiture rates on stock options.

On a year-to-date basis, expenses were virtually flat, if you were to exclude the FDIC special assessment. In 2009, we have experienced increase in the regular FDIC insurance rates, health care cost and cost related to workout. We have been able to offset these increases with savings related to better vendor management, process re-engineering and consolidation.

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

Thank you, Linda. There are three items of headline news this quarter. The first is that, we've been approved to repay the $30 million investment the United States Treasury made in our Company. The second item goes to continued strength of our financial position. And the third is our ongoing and successful execution of our strategic plan.

Let me talk about the TARP funds first. As to repayment of the TARP funds, given our strong capital position, federal regulators have approved repurchase of the preferred stock investments. In December, we voluntarily involved in this program, as a way to boost our already solid capital position. Moreover, the TARP fund provided us with an added level of confidence to expand our lending capabilities. Today though, the economic environment is nowhere near as difficult as some of the more severe scenarios predicted last November and December. I'm delighted that we are in a position to receive regulatory approval for repayment of the money. We believe it's in the best interest of our shareholders and customers to now repay the Treasury's investment and exit the program. We anticipate the repayment taking place sometime within the next two weeks.

As to our headline item number two, through our disciplined approach, we continue to have a strong financial position. As you can see, we not only continue to grow our quality assets and deposits, both of which I'll discuss a bit further, our allowance continues to grow, our coverage ratio has improved, and in addition, our regulatory capital ratios remain strong.

Our tangible common equity ratio as of June 30, 2009 is 6.9% and our tangible book value per share of common stock also remained tight at $23.56. Yesterday, the Board declared a quarterly dividend of $0.17 a share, payable on September 9, 2009 to our shareholders of record on August 19, 2009. We are proud of our position to be in an institution that continued to pay a dividend without reduction in the current economic environment.

Finally, the third item in headline news is our continued success with execution of our strategic plan to convert the balance sheet to a more commercial profile, as well as the sizeable increase in our transaction deposit accounts.

Turning to the second quarter in more detail, our earnings, as Linda indicated, were negatively impacted by credit cost, as well as the FDIC special assessment that all FDIC-insured institutions experienced this quarter. Once we get past those factors, there were a good number of positives in the quarter, both in terms of our balance sheet growth and our P&L.

Taking a look at the balance sheet first, our commercial loan growth has been very strong, both in the second quarter and year-to-date. Our growth year-to-date if annualized puts us at better than a 16% pace. I'm particularly pleased that we are growing both the larger commercial relationships, as well as our small business lending portfolio. We booked a good number of commercial relationships over $1 million in outstandings this year. Included in those are some real signature accounts in Rhode Island. The growth of our smaller commercial loans reflects the improvement of our small business lending practices.

We recently reorganized our back office and made a number of process improvements that make our products easier to sell. At the same time, we've increased and enhanced the BDO, the Business Development Officer team, adding some really strong players and we provided additional training for our employees. And we are the number one SBA lender in Rhode Island as of June 30, both in terms of the number of loans made, as well as the dollar volume of those loans. I'm very proud of that.

I would also note that all of our commercial loan portfolio growth has been achieved, despite the increased pricing and the better spreads we are now achieving on many of those credits. On the deposit side, you can see that our deposits were up year-to-date and we've improved the mix of deposits to nearly 63% transaction accounts. The commercial loan growth has had positive impact on our deposits.

While in this environment we find it advantageous to lead with credit, in this market willingness to lend remains a valuable commodity. We also use the call as an opportunity to obtain the deposits associated with the business and we try to bank the principles of the businesses. We've had approximately a 20% increase in deposits associated with the commercial loan portfolio since the beginning of the year. We've gone from about $85 million in year-end 2008 to about $102 million as of June 30 of this year. 90% of these deposits are transaction accounts, checking, savings and NOW accounts.

The margin improvement we achieved in the second quarter is a direct result of our balance sheet management, including the continued conversion of the balance sheet to a more commercial profile, our emphasis on core deposit growth and prudent deposit pricing.

As Linda indicated, one of the areas where we are experiencing some softness is in the noninterest income side. We are not getting the benefit of any material amount of Macrolease portfolio sale and I think almost all institutions are experiencing softness in deposit fee income associated with consumer accounts.

Given some of the efficiencies and process improvements we've achieved in the consumer and small business lending areas, we have decided to modestly build out our capacity to originate and sell first mortgage loans to others. That's a first for us and we believe it will help generate fee income. Historically, we had one originator who was in-house and a limited sales program. We now have three mortgage originators and we'll be looking to grow that business line.

We've continued to hold the line with respect to expenses. If you exclude the increase in FDIC deposit insurance costs, our expenses were actually down year-over-year and on a linked-quarter basis. The expense decline has been achieved notwithstanding our continuing to invest in a franchise. We are currently in the midst of a number of technology upgrades. We believe it will lead not only to better service for our customers and facilitate further business growth, but also it will make us more efficient and effective.

With respect to credit quality, as you can see, on a linked-quarter basis the migration of loan to nonperforming status has slowed somewhat. Our portfolio delinquencies, excluding nonperformers, are down modestly from year-end and from the prior quarter. We continue to see minimum delinquencies in our approximately $215 million home equity loan and line portfolio, which are secured by properties located exclusively in Rhode Island and Massachusetts. We are, however, continuing to experience a migration of commercial credits to criticized status.

On a positive note, we are starting to see more activity in resolving commercial nonperforming loans and nonperforming assets. While I am cautiously optimistic despite the local economic conditions, at this point, I am reluctant to predict where the nonperformers would be. I will reiterate how comfortable I am with the portfolio and its performance to date. When you put it in overall context and given the fact that we have had consistent double-digit commercial growth for a number of years and place that in this stressful condition on a macro level, as well as within the State of Rhode Island, it's a very high-quality portfolio.

Our ability to get our arms around that portfolio and understand the credits has facilitated our continued business loan growth. In terms of our commercial loan pipeline, business has slowed down a bit as it usually does in the summer. We still have some transactions that haven't closed from the last quarter that will spill into this quarter, which should lead to continued portfolio growth and hopefully we'll put on a strong finishing cap for the end of the year.

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

Operator: Thank you. (Operator Instructions). Please wait while we poll for our first question. Our first question comes from Damon DelMonte of KBW.

Hi, good morning.

Good morning.

Couple of quick questions for you. First with regards to TARP, now that you have the approval, should we expect you to repay that within the next 30 days?

Yes.

Okay. And then from there I take it you would go into negotiations to dispose the warrants as well?

That is our intention.

Okay, great. Secondly with regard to asset quality, you mentioned that the charge-offs this quarter is about $600,000 for residential mortgages and it looks like nonperformers for residential mortgages also increased on the quarter. Could you give a little color as to where you're seeing that? I think in the past you've mentioned that you've purchased some residential mortgages and are they coming from self-originated in-market loans or are they from something that you've bought in the past?

These are almost all from purchased mortgages and generally they purchased mortgages from more recently purchased mortgages. I think we stopped buying about 2007 or so in that some -- the 2006, 2007, 2008 mortgages are the ones that I believe have a higher delinquency and nonperforming status.

Okay. You also mentioned that commercial delinquencies are increasing.

No, no. Commercial delinquencies --

What is the overall delinquency rate on the commercial portfolio?

I didn't hear the rest of the question because I said commercial delinquencies were actually decreasing.

Oh, decreasing, I'm sorry, I misunderstood you. Okay, that's all that I had. Thank you.

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

Yes, hi. Good morning, Merrill and Linda.

Good morning.

Good morning.

Just a follow-up actually on a couple of things that Damon touched on. Just going back to the CPP, what approximately are you estimating the hit will be through the income statement and balance sheet?

Basically what we have to do is amortize the rest of the discount in the third quarter and that will be approximately $1.2 million, that will be below net income. And the difference in the warrants, whatever they may be, we have no idea, it will just go directly to capital.

Okay, great. And just going back over to credit. So the bulk of the rest of the charge-offs, the commercial charge-offs, approximately $500,000, that was commercial?

Yes.

And do you have a breakdown as to what is CRE versus C&I within that?

I'm afraid I do not, Laurie.

Okay. And then just wondered, can you give us some more color on your lease book and how big it is right now and what the average-sized equipment lease is, what -- I mean just any color you can give us, what is the --

Sure.

Geographic concentration and so forth?

We actually originate through Macrolease, both a little bit of loans and leases, the majority being leases and that's what you see on the balance sheet. It's approximately $64 million at this point. The average lease size in that portfolio is $64,000. There is really no concentration in geographic ranges, the national book of business, but the largest states are New York at 21% and California is 10%.

Okay. And in terms of the focus, is it all different types or is it you know --?

It's all different types, but the fitness is the most concentration, if you will, in the portfolio, which is about 50%.

50%. Okay, great. And this being national this is an indirect portfolio?

We originate really three different ways and -- out of Macrolease. One is, we have in-house sales people, we also originate with a vendor, if you will, and then we buy a very small portion of that portfolio.

Okay. So what percentage is in-house?

64%, about.

Okay.

Yes, exactly.

Okay, great, great details. Okay.

Independent business is --

Really.

In-house too.

And that's another --

[We don't] treat it as a referral from the vendor (inaudible).

And that's another 20%, so 85% is roughly in-house.

Okay, okay, okay. And then of your $17.8 million in nonperformers, is any of that TDR?

We have three TDRs totaling less than $500,000.

And is that included in nonperformers?

It is included in nonperforming assets.

I think they're accruing now.

Okay. They are accruing, okay. (inaudible). Okay, okay. Oh, right, okay. On your $122,000 that's a non-real estate foreclosed asset, what's that?

It's -- it's some kind of -- it's non-real estate. Do you want to say what it is?

It's [above] and it's already actually -- we've already sold it, we've moved through it.

Oh, okay. Okay, great. Okay. And then I guess just, if we could jump over to resi loans, so you now are going to originate and sell, that's good. I mean I guess, can you give us any sort of additional trend and Damon asked this a little bit in his question. But just with respect to the increase in nonperformers, was there a geographic concentration you noticed or any other color you can give us on that?

I think that there's a continued migration on residential mortgages. That's really where the increase came from and that's part of the purchase portfolio. I think we talked in the past about how -- we've got some loans out in Florida and California, but there are loans in Virginia or Arkansas or New York State, so those are the ones that have been migrating. And we indicated earlier that we've assigned additional resources to that area about a year ago to stay on top of the services because those are all service (inaudible) by others and make sure that they are timely handled.

Okay. And the three mortgage originators that you're adding in-house, you're going to be originating all of those within the State of Rhode Island or close by?

Oh, yes, that's local. I mean I don't hesitate to think over the board (inaudible), but basically it's a local portfolio.

Okay, great. And then just sort of -- just one housekeeping thing and then I have one last question there. The loan breakdown, do you have that as of June 30 though, what's CRE, C&I, non-owner-occupied, small business, multi-family and so forth?

Do you want me to read it? I mean what you want me to do?

Can I give it to you offline, Laurie?

Absolutely, absolutely.

Okay.

And then just one sort of more macro question. Now that you are out of CPP or virtually out of CPP, can you talk a little bit about your thoughts on buybacks and just also update us on your thoughts in terms of looking out for acquisitions?

Well, I think that that's -- nothing like that is imminent, we're in a -- we've got a strong capital position and I think we'll seek to maintain it.

In terms of buybacks, okay. And then what about acquisitions, what's your thought there?

Well, I think that we've always said that we are opportunistic and consider all opportunities.

Okay, great. Thanks.

Thank you.

Thank you. (Operator Instructions). Our next question comes from Frank Schiraldi of Sandler O'Neill.

Good morning.

Please go ahead.

Good morning.

Good morning, Frank.

Good morning, Frank.

Just a couple of questions. I wondered on -- Merrill, you had talked about commercial delinquencies going down in -- specifically in nonperformers. We saw C&I balances down linked quarter. Is this something that's a trend, was it just one loan that was the result of that decrease or is it something that you see trending forward?

Well, I would love for it to be a trend, Frank. And I don't know if one quarter makes a trend. What -- I said that we're seeing, if you look at our C&I delinquencies, there are really three credits in the $2 million range that form the bulk of it and I think that with respect to two of them, they're pretty close to positive resolution, there is another one that we're a little -- it will be resolved, but not as positively perhaps than we would like. And then the delinquencies look good. But I did mention there's some migration to criticized status. Now, that doesn't mean that those loans will migrate further.

So we're watching them carefully. I probably said while we're cautiously optimistic, it's too early to predict where the nonperformers will peak. I think most companies around here have tightened their belt and as long as things don't get materially worse, they should make it through in the cycle. So that's kind of my take on it. I hope that's responsive. Is there any other color that I can put on it for you?

No, that's helpful. Thanks. And then on -- my last question was just on the OCI, looked like there was a swing to unrealized losses in the quarter -- linked-quarter. Can you just give us any more color on that?

There's nothing really material there, Frank. I think interest rates were bouncing around and I don't see anything that has deteriorated in that book. It just happened to be where we marked it.

Okay. I know you had some private-label CMOs, but correct me if I'm wrong, those are sort of, of a earlier vintage that's held up pretty well.

We -- they range from 2006, 2005. There may be three bonds that we look at very carefully and we have had no marks on those.

Okay, great. Thank you.

Thank you. (Operator Instructions). Please hold the line while we poll for questions. I'm seeing no more calls in the queue for questions. I will turn the call back to Ms. Merrill Sherman for any closing statements.

Well, thank you very much for participating and I will look forward to talking with you at the end of next quarter.

Thank you. This does conclude today's conference. You may now disconnect.