Brookline Bancorp Inc (BRKL) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Third Quarter 2009 Bancorp Rhode Island Conference Call. A few comments before we get started. This conference call is being webcast on the website and will be archived there following the call. At this time, all participants are in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)

This conference is being recorded today, October 29, 2009. If you have any objections please disconnect at this time. I would now like to turn the conference over to Merrill Sherman, President and CEO of Bancorp Rhode Island. The call is yours Ms. Merrill Sherman.

Thank you. Good morning. As indicated this is Merrill Sherman, President and CEO of Bancorp Rhode Island, Inc. I'd like to welcome you to our third quarter 2009 analyst conference call. With me this morning, is the Company's CFO and Treasurer, Linda Simmons. Linda is going to take you through our third quarter 2009 financial results. I will then come on the line and discuss those results, and after that, we 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 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 would like to turn the call over to Linda Simmons.

Good morning. Net income for the third quarter of 2009 was $2.2 million or $0.17 per common share. On a linked-quarter basis, net income was up $1.5 million or 198% and diluted EPS was up $0.10 per share from $0.07. A higher margin, a lower provision and lower FDIC expenses were the key drivers of this increase.

Net income for the third quarter 2009 was down $121,000 or 5.2% from the third quarter of 2008. Diluted EPS increased 66% -- decreased, excuse me, 66% from $0.50 per share in 2008, to $0.17 per share in 2009. During the quarter, BARI repaid the $30 million of preferred stock and repurchased the warrants from the US Treasury.

The repurchase of the preferred stock resulted in a recognition of $1.3 million of discount accretion and had a negative impact on the Company's EPS of $0.28 per share in the quarter.

The margin expanded by 28 basis points to 3.38% compared to the second quarter. The margin had an upward trend during the quarter with September's margin ending at 3.42%. The provision at $1.9 million was down from $2.6 million in the second quarter and finally non-performing assets declined by $1.9 million or 10%.

There was an OTTI charge of $70,000 from one of our two [special] holdings. The par value of these two securities is $2.9 million. Quarter-over-quarter the balance sheet declined $14.6 million, total investments were down $10 million and loans were down $1 million or 0.1% on a linked-quarter basis. Embedded in the total loan number, is our continued growth on the commercial loan and lease portfolio. This increased $12.8 million or 1.8% on a linked-quarter basis and we are up $66 million or 10% from year-end.

During the first nine months of 2009, we have added 21 new relationships in excess of $1 million. The average of these relationships was $2.9 million and the primary growth is in the C&I portfolio. The consumer loan portfolio declined by $4.8 million to quarter, but are up $3.2 million from year-end.

The residential portfolio continues to decline as no new product has been added. Deposits increased by $7.3 million or 0.7% on a linked-quarter basis and is up $49.7 million, or 4.8% from year-end. During the quarter, we had small increases in all categories, core deposits accounted for 62.7% of total deposit on September 30 and this is up from 59.4% on December 31.

Non-performing loans and leases decreased by $2.9 million during the third quarter to $14.9 million. We were able to dispose of several non-performing loans. Some had been in work out for some time and we were able to resolve them, as a result the specific reserve was reduced by $622,000. Net charge-offs for the third quarter were $2.3 million, up $1.1 million from the second quarter. The increase related to one loan within our C&I portfolio. The coverage ratio on 09/30 was 1.48%, down three basis points from 06/30/2009, but up from 1.36% on December 31.

The REO and non-real estate foreclosed assets on 09/30 was $2 million up $952,000 from 06/30. We resolved two credits for a total of $375,000 and added three new credits for $1.3 million. The margin for the second quarter was 3.8%, up 28 basis points on a linked-quarter basis. This is a result of asset yields replacing by 3 basis points combined with lower funding cost of 34 basis points. Our sales team continues to be focused on gathering lower cost core deposits.

Non-interest income was $2.2 million for the third quarter. This is up slightly on a linked-quarter basis and on a year basically are down $916,000 or 11.9%. We had a nice quarter in commissions related to non-deposit investments which were up $211,000, but this was offset by lower loan related fees and gains related to the sale of securities.

On a year-to-date basis, we continue to see the same trends. We did see a decline in service charges on deposit accounts, year-to-date we are down $379,000 and we believe this to be an industry-wide trend. We also are down on fees related to the sale of leases in our subsidiary, and on a year-to-date basis we are down $261,000.

Non-interest expenses decreased by $333,000 at 3.3% from the second quarter. If we were to exclude the FDIC special assessment in the second quarter of $733,000, our expenses were actually up $341,000 or 3.4%. We had growth in salaries and benefits of $298,000 from the second quarter. We have expanded our lending team adding one new BDO. We also hired two servicing professionals and one auditor. This expense will be more than offset in future savings that we will see in the professional service line over the next 12 months.

There was also approximately $60,000 of one-time expenses related to the personnel turnover. There was also $100,000 of one-time expenses related to the retirement of the TARP funding.

Throughout 2009 management has continued to hold the line on expenses. Year-to-date expenses are up $1.2 million, but year-to-date the FDI premiums were also up $1.6 million. Management has been able to partially offset these increases through very tight expense control. If we were to exclude the FDIC premiums, these year-to-date expenses would actually been down 300 maybe $3,000. That concludes my comments and at this point I would like to turn this presentation back to Merrill Sherman.

Thank you Linda and following on her commentary, I would say that headline news for the quarter is as follows. We completed our exit from the United States Treasury Capital Purchase Program. Our margin improvement is significant and we're positioning ourselves well in this marketplace.

First is, previously announced, we repurchased the $30 million of preferred stock issued to the Treasury and additionally, we repurchased the common stock warrant for 192,967 shares issued to the Treasury as part of the Capital Purchase Program. The warrant was repurchased for $1.4 million.

We're very pleased that we're able to exit the program. We think the program served its intended purpose while we participated and we remain poised to continue the business loan growth as well as general growth of our franchise. As you can see, our capital ratio remained strong. Our total risk-based capital ratio exceeds 11.5% and our tangible common equity ratio is 7.09%. In light of our capital strengths and earnings prospects, the Board determined to maintain our dividend, declaring a dividend of $0.17 per share, payable on December 9, 2009 to shareholders of record as of November 18 this year.

The real story this quarter is our margin improvement. As Linda indicated, it was 28 basis points. The increase in the margin generated sufficient earnings to substantially offset our increased credit cost and help push our net income for the quarter close to on par with last year's third quarter. The margin improvement was achieved through disciplined deposit pricing. We also will add some of the maturing higher priced CDs to either roll off or reprice it at lower rates and we also have been increasing the spread on existing and new credits.

That said, we're starting to see a bit more aggressive pricing from competitors on the loan side and that may be a sign that the market is starting to turn from a liquidity standpoint. We're capitalizing on the current environment to prudently position ourselves for the quarters to come. I indicated in our second quarter earnings call that we're at the top of the SBA lending list in Rhode Island. September 30 was the end of the SBA's fiscal year. By a significant margin, Bancorp Rhode Island was the number one SBA lender in the state of Rhode Island. This ranking has given us a lot of visibility, a lot of good publicity and [looks like start of] commercial lending successes.

In addition, we've launched an extensive television advertising campaign designed to highlight our strong reputation in the local business community and emphasize our business lending capacity. The ads are very interesting and a little funky and we have posted them on our website for viewing. We've got a link on our homepage and I would encourage you to take a look at the ads. You can see how we are marketing this institution as well as what our customers have to say about us.

Besides growing our book of business and promoting our business image, we're also continuing to focus on attracting and retaining talent, improving our infrastructure and deriving further efficiencies over time from these improvements. I indicated to you in our last earnings call that we've begun to develop more of a mortgage origination capacity.

Previously, we had also outsourced our mortgage processing. However, as Linda indicated in the past quarter, we've lost that insight with some additional hires. We are increasing our business development and cash management capacity and also have for the first time, hired in-house counsel. We believe that all of these moves over time will not only improve our business capacity and growth, but will add to our efficiencies.

We've also taken a number of steps to improve our technology and operations. We're completing several system convergence and we're looking to gain back office efficiency, which will then allow us to re-invest in expanding talents. We're also examining and enhancing our product and services, looking to improve our user friendliness and technical capacity, particularly in the online-banking area.

Finally, I'll make a few comments overall on credit. While our net charge-offs exceeded our provision for the quarter, we believe that with a coverage ratio of 1.48% for the portfolio, we remain adequately reserved. As you can see, non-performing assets declined this quarter. We were pleased about that. We've been working very hard to reduce our troubled credit. We are mindful however that one quarter does not make a trend. The economy is still experiencing difficulty and our local marketplace is under stress. Thus I am reluctant to predict that non-performers have either stabilized but will continue to decline.

We're seeing some softening in both our consumer and small business lending portfolio. Delinquencies are mildly elevated compared to previous level, we are watching that closely. I do believe that our credit cost will remain elevated near term, however we will maintain our focus on credit and continue to appropriately address asset resolution. That said all in all, I am pleased with the results this quarter, and I am cautiously optimistic that we can maintain the margin and finish the year well positioned for an improved environment in 2010. And with that I will open the call up to questions.

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

Good morning.

Good morning, Frank.

Good morning, Frank.

Just few quick questions here. Linda, I wondered if you have the margin for the net interest margin for the month of September?

Yes, 3.42.

3.42. Okay and just if you could take a second to talk about how is the balance sheet positioned now in terms of if rates turn around and start rising, are you more liability sensitive than you have been?

No actually we're still asset sensitive, slightly asset sensitive. We have over the years grown our LIBOR portfolio from a commercial side as well as our prime based assets on both home equity and the commercial side. So we have added a lot of sensitivity on the asset side.

Okay. So you still benefit from a rising rate then in short-term?

Short-term rising rates will hurt us, Frank.

Short-term rising rates will hurt you, okay. So you are asset sensitive more like a year out something like that?

No. We are asset sensitive in the next year.

In the next year, okay. And then do you have the 30 to 89 days past due buckets, what they were at the beginning of the third quarter and at the end?

Yes. Do you want to --

Okay. For the bank in totality, the second quarter was 2.71% and at the end of the third quarter we were 2.83% as a percent of the portfolio outstanding.

So at the end of third quarter, 2.83% of the total loan portfolio.

That's correct, loan and lease portfolio.

Okay and finally I just thought Merrill, I know you talked the local marketplace is still under stress. Do you think things are starting to improve out there or do you think you are still sort of in a downward trend in terms of the general economic situation in Providence?

I am not sure there is genuine improvement nor would I say that there is significant deterioration at this point. If you look in your customer portfolio some folks are doing pretty well, they are having good years. And the real issue is for those people who aren't, how long they have to hold on until they get a bump in their revenue line. So I think the jury is out on whether we will see further deterioration. At this point there is not a lot of significant bad stuff that I am aware of in terms of major layoffs in the marketplace or something like that, but I don't think anybody is saying that things are improving.

Okay. So maybe stabilizing?

Maybe.

Okay. All right, well thank you.

Thank you.

Our next question comes from Damon DelMonte of KBW.

Hi. Good morning. How are you?

Good morning. We are fine. Thank you Damon.

Great. I was wondering if you could just elaborate a little bit more on the margin and the sustainability of this level for a run rate? And can you maybe just talk again a little bit more about how you got such large expansion this quarter?

Sure, and I apologize, I think maybe I had my asset liability a little bit backward there with Frank. Basically, we were able to take advantage of lowering our prices both in our CD book of business and across the board in some of our money market and savings accounts as well. Deposits and funding cost went down 34 basis points. We also had some relief on the borrowing side. We took advantage of some wholesale borrowings that are relatively cheap and we put those on as well.

Can we sustain this? I don't think there is much more room. There is a little bit of room on the CD side. I think the average cost of those CDs are about [2.20, 2.25] today. I would see them probably going to a 2% range over the next three to six months. So, I think we are almost at the bottom of the deposit pricing side. And as long as interest rates stay where they are, I think that we can sustain that if interest rates start to rise and we just don't know what's going to happen on that deposit side.

Okay. Speaking about deposits, the money market growth you saw this quarter, are these new accounts or is this more of a shift from current clients into the --?

This is our acquisition for new money and we're priced pretty competitively on that. I think we're priced [1.25, 1.30] on deposits more than $75,000. But that is really kind of new money to the Company.

Okay. And then lastly regarding expenses, I know you mentioned some new hires in the past quarter. Can we expect this level for a run rate going forward?

I think that you haven't seen the full impact of those hires, as Merrill mentioned we did hire in-house legal. You didn't see that in the third quarter, that will be in the fourth quarter. And I believe we expect to put one or two more on commercial type lenders on in the fourth quarter. And you just might see a little pickup in salaries and benefits and it's going to be a little while before we see the offset in professional fees.

Okay. And then just lastly, could you remind us, do you have any shared national credits?

No.

No, Okay. That's all I've for now. Thank you.

I will say that we do have one or two participations but they are basically led here locally and they are with local companies that we in one case had the relationship with, and they got too big for us and so we kept a piece of the deal. So we do have two participations that way but nothing in what you would -- nothing in the shared national credit bucket.

Okay, great. Thank you.

Thank you. Our next question comes from Laurie Hunsicker with Stifel Nicolaus.

Yes. Hi, good morning.

Good morning, Laurie.

Just Linda, can you go over the net charge-offs, the $2.3 million, do you have a breakdown of that?

We do.

Okay, commercial was $1.7 million, residential mortgages was $600,000 and the other ones are too small to mention.

And so within your commercial, that was both C&I and CRE?

That's correct.

And do you've the split there?

I don't have it at my fingertips Laurie.

Okay. And I guess looking at it, as you said, obviously the charge-offs were above the provision. When we sort of look at a going forward provision level, I mean I realize there is a lot that goes into it, but is it safe to assume that you're going to sort of keep your reserves to loan around that 150 level? Is that how you look at that?

The answer is yes and no. I'm going to kind of be a little vague here. We do an assessment every quarter, we watch it very closely, and I think that we said our credit cost will remain elevated, there is still softness in the portfolios, but we don't target 150, 148 or 151 or 135. It all depends on how we see the portfolio moving and what we anticipate in terms of credit migration. I would be surprised if you see a dramatic drop or increase because I think we are comfortable more or less with where we are. I don't know if that's helpful to you Laurie, but I think that -- I don't see any dramatic shift one way or the other going forward.

Okay. I mean I guess asked a different way, so this is the first time in a long time that your charge-offs have actually exceeded your provisions; however, your non-performers went down which is fantastic. I guess probably going forward, we would still see provision in excessive charge-off with it?

I don't think we measure it that way. I think you can see we're comfortable. We believe we're adequately reserved where we are and I suppose what we are really saying is we don't see charge-offs at that level next quarter, but we will see.

Got it. Okay. And then can you just talk a little bit about the three credits that came in?

The three credits that came into REO?

Yes.

$950,000 was one credit. The other two are much smaller and I don't know if we can say much more than that.

Okay, I am sorry, what type of loan was that?

We've got some land exposure in there as well as some smaller houses and everything's under a $1 million basically.

Okay. And then just last question on credit there, the small business loans that you said you're feeling stressed on and certainly are not alone, it seems like a lot of banks made that comment, where do you guys stand on that problem, and I know it's right around 50 million but do you see that portfolio is starting to rundown or would you look to sell some of that or any other comments?

No, when I say some were stressed, I mean the delinquencies, the over 30s kicked up a bit, and by now a lot of them have gone away. They have been brought current. But it was something that we noticed and we will monitor.

Okay. And then tax rate, it went up this quarter. Likely continue to go up for next year, 33, 34, or do you have a better number for us?

I would use 34.

Okay. And then last question, Merrill, for you to sort of more macro, obviously you're well capitalized even though you paid back the TARP. I know there's sort of some question out there that lingers as far as, would you do a [spot raise], so I just wondered if you would comment on that and then just update us on sort of your search for an acquisition and how you're looking at that? Thanks.

Well, first of all in capital, we're comfortable with our capital position, many of you may have seen we put a backup capital commitment in place for $8 million, a very favorable rate for the Company. It would be in the form of a trust preferred and we have the option to draw down on it. It was 18 months from the date we put it in place, I can't remember what the end-date would be at this point. So I don't anticipate at present the need for any capital raise. And on the acquisition front, if something makes sense we would be more than happy to take a look at it and address any capital situation at that time.

Okay. And just remind us your target asset size?

Pardon me?

What's your ideal target asset size, if you were to do an acquisition?

I don't think -- I think that we have a lot of internal capacity and so I think that anything -- our size is smaller is the potential target for us.

Okay, great. Thanks.

(Operator Instructions). Our next question comes from Greg Tomlinson of FTN Equity Capital.

Hey, good morning.

Good morning Greg.

You mentioned your deposit movement was kind of from new money and I was kind of wondering what your deposit pipeline looked like and if you saw some opportunity out there to take market share from some of the bigger players?

I think that we differentiate ourselves from the bigger players based on service, and we're local and we stress that we turn those deposits around and invest them in this marketplace. It is tough slogging to grow your deposit base, it's just tough. There's a lot of competition for those deposits both within the marketplace and also from national players like the Fidelities of world in their money market accounts. Having said that, what we try to do is use our commercial strength to grow deposits. I don't have the numbers for this quarter, but last quarter we really noticed that we're doing very nicely in the deposit growth associated with our commercial product, so that if we bank your Company we not only take those deposits, and but we also try to bank the principals and cross-sell them. So we're leading with our commercial lending capacity to try to grow our deposit base. I think the SBA, being the number one SBA lender, will help us with our small business deposit gathering. [It feeds] reputation and the BDOs that we have out calling are very deposit oriented, they are incented based on deposit gathering. And so that really is where I think we see the greatest opportunity to grow our deposit base.

Okay, and are you seeing any disruption among the bigger banks in your market?

I think that they -- yes there is disruption there. I think they're focused elsewhere. They have any number of issues. A lot of the folks we have hired recently have come out of the larger institutions and bring their skill sets with them. That said people still bank with the brand and inertia is one of the greatest forces in banking. So we not only have some very, very sophisticated well-branded large institutions that dominate this marketplace, we are getting an increasing number of players, the credit unions have come back. They weren't much of a force when we started this bank in the mid-'90s. More and more like the credit unions, you've got some out-of-state banks that are now coming into this market. You have some in-state banks that are coming north. So it's highly competitive to deposits. We get our fair share but it is highly competitive.

Okay. Thank you for the color.

Thank you.

(Operator Instructions). Our next question is from [Dr. Sterling] of Sterling Capital.

Yes. Hi.

Good morning.

Good morning. In view of your interest in making an acquisition, do you have any interest in having a share repurchase program launched again?

It would be very unlikely near-term that we do any share repurchases. We just redeemed the TARP. Capital levels is strong, but I don't think in this market that we have excess capital that would warrant a share repurchase.

Do you have any anticipation given your current level of business when such a time might present itself?

No, I think that would depend more on the economy and more on capital formation out of earnings than anything else.

Okay. Thank you very much.

Thank you.

(Operator Instructions). I am seeing no more questions in the queue, so I will turn the call back to Merrill Sherman for closing comments.

Well, thank you for joining us, and I look forward to talking with you in the New Year when we have our call wrapping up 2009 and have a happy and healthy holiday season ahead of you.

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