Brookline Bancorp Inc (BRKL) 2010 Q1 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by. Welcome to the first quarter 2010 Bancorp Rhode Island conference call.

A few comments before we get started, this conference is being Webcast on the Website and will be archived there following the call. At this time, all participants are in listen-only mode. Following the presentation, the conference will be open for questions.

If you have a question, please press the * key followed by the 1 key on your touchtone phone. For participants using speaker equipment, it may be necessary to pick up your handset before making your selection. Please press * and then 0 for Operator assistance at any time.

This conference is being recorded today, April 29, 2010. If you have any objection, please disconnect at this time.

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

Thank you and good morning. As indicated, I'm Merrill Sherman, President and CEO of Bancorp Rhode Island, Inc. I'd like to welcome you to our first quarter 2010 conference call.

With me this morning is the Company's CFO and Treasurer, Linda Simmons. Linda is going to take you through our first quarter 2010 financial results. I will then come back on the line and discus 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 assumption which is subject to risks 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 would like to turn the call over to Linda Simmons.

Thank you Merrill and good morning everyone. Net income for the first quarter of 2010 was $2.2 million or $0.48 per common share. Compared to Q1 2009, net income was up $756,000.00 or 52% and diluted EPS increased $0.26 per share. On a lean quarter basis, net income was up $1.1 million or 96% and diluted EPS was up $0.24 per share.

We have several highlights for the first quarter. First, the margin expansion, up 44 basis points from a year ago and up ten basis points on a lean quarter basis. This was driven primarily from lower cost to fund. Secondly, the provision of $1.6 million in chargeoffs of $1.5 million.

Our non-performing assets declined by 18% on a lean quarter basis and NPA as a percentage of total assets is 1.03% which is the lowest it has been since the end of 2008.

We had an OTTI charge of $571,000.00 and this was related to one of our (inaudible). This was largely offset by the gain on sale on two mortgage backed securities.

Let's turn to the balance sheet. From yearend 2009, the balance sheet decreased slightly by $3.2 million and increased $38.7 million from the first quarter of 2009. Total loans were up $12 million or 1.1% on a lean quarter basis. The growth in commercial loans was offset by continual declines in the consumer and residential portfolios.

Consumer loan and lease portfolio increased by $19.9 million, nearly 3% from yearend and we're up $65.5 million or 10% from the first quarter of 2009. The consumer loan portfolio declined by $4.7 million or 2% from yearend and is now down $13.4 million or 6% from the first quarter of 2009.

The residential portfolio continues to decline and no new product has been added. We saw deposit growth of 5% in 2009 and as we begin 2010, our deposits continue to grow. Total deposits increased by $8.8 million from yearend 2009.

More important is the growth in our core deposits. We define core deposits as DDA, NOW, money market and savings accounts and this grew by $17.8 million or 3% from yearend 2009. That growth was driven primarily by increases in money market and savings accounts.

Core deposits accounted for 66% of total deposits on March 31, 2010 and this is up from 60% on March 31, 2009. Deposits tied to commercial relationships continue to grow. On 3/31 we were at $124 million of deposits tied to commercial relationships. 92% of these deposits are core.

There are several positive messages with regard to asset quality. First, during the quarter we saw a decline in non-performing loans and leases as well as in non-performing assets. On 3/31, non-performing assets represented 1.03% of total assets, down from 1.26% on 12/31/09.

We also saw a decline in our delinquency rates. Total accruing packaging loans have declined on both a lean quarter basis and compared to Q1 2009.

The division expense for the quarter was also down quarter over quarter. The coverage ratio on 3/31/2010 remained strong at 1.48%. Quarter over quarter our capital increased by $3 million. We continue to support our growth through internally generated capital and remain very well capitalized.

During the quarter our tangible book grew to $24.05. That is up from $23.50 and our tangible common equity increased from 6.86% to 7.08%.

The net interest margin for the first quarter was 3.52%, up 44 basis points from the first quarter of 2009 and up ten basis points on a lean quarter basis. Lower cost of funds was the primary driver.

Growth in core deposits has been our primary driver in lowering our overall cost of funds. The balance sheet is relatively neutral at this point. There is little to no upside potential in the margin and limited downside if rates were to remain at the current levels.

Non-interest income was $2.3 million for the first quarter of 2010 and it's basically flat on a lean quarter basis. During the quarter, the gain on the two mortgage backed securities was offset by the OTTI charge. Total non-interest expenses increased $865,000.00 or 9% on a year over year basis and increased $539,000.00 or 5.4% on a quarter over quarter basis.

On a lean quarter basis as well as a year over year basis, expenses were driven by increases in salaries and benefits and loan workout expenses. The first quarter of 2010 was a bit higher than the 4% that we were expecting but we continue to make investments in the Company that will ultimately lead to increased revenue or overall expense savings.

Over the past year we have completed a tremendous amount of work behind the scenes and we will continue to do so. We have enhanced products, services, and systems which will allow us to meet the demands of our customers and drive long term revenue growth. At the end of the day, the Company had a very solid quarter with positive trends in the margin and improved asset quality. We believe that our investment in people and technology will translate into revenue growth and reduced operating expenses during the remainder of 2010.

At this point I'd like to turn it back to Merrill.

Thank you Linda and thank you again for joining us. I could not be more pleased with the results that we achieved last quarter. There are some real positives underlying the numbers and I would like to review those with you.

The first is the strength of our net interest margin. That reflects our judicious management of our cost of funds combined with improved spreads on assets and the continuing shift of our balance sheet to be a more commercially oriented one.

Second, our core business lines continued to do well. Core deposit account growth has continued. Not only is our retail system generating deposit but our BDO teams and our commercial lenders are fully embracing the importance of checking and savings deposit growth and sell deposit products at every opportunity.

Now let's turn to asset quality and also make some comments on driving shareholder value. As you can see, our non-performing assets have declined and delinquencies are lower than they have been in previous quarters. We still anticipate elevated credit costs for the next few quarters and while I am not prepared to say that this credit cycle is over, I am cautiously optimistic.

Our portfolio has seen very little impact to date as a result of the flooding in Rhode Island that you've heard so much about. We announced a "skip a pay" program for both home equity and small business loan customers of approximately $200 million home equity portfolio. Only three customers asked to take advantage of that program. There were no requests on the small business side.

We have been in touch with all of our larger customers in impacted areas and with one exception, they did not report any flood issues. The exception was a commercial real estate customer who was fully insured and the property, which is an apartment complex, has been reoccupied.

However, the economy remains sluggish and 2009 financials for most of our business customers are now in the process of being received and analyzed so I should have a clearer credit picture for you with respect to our portfolio by the end of the current quarter.

The cautious optimism I just expressed is based on what we presently know. The national economy appears to be recovering and the local economy may be stabilizing. We are not seeing as many delinquencies and when I look at the credits that are being handled in our workout area, there are still a few larger troubled credits but at this point they seem to be stable.

So if we can get past some of those and not experience any influx, significant influx into the critical path of the pipeline then we can start to say maybe the difficulties presented by the cycle have hit their peak and we are starting to see a return to normalcy.

Let me now turn to our continued focus on shareholder value. If you look back over the past year or two, it's been all about capital spend and credit quality. I think this institution has demonstrated capital spend. We remain well above regulatory minimum and at approximately 12% total list base capital and about 7% tangible common equity, we think we are in a comfortable position given our risk profile.

Linda and I have already indicated that for normal business purposes we think we can self generate enough capital going forward to remain comfortably well capitalized.

In terms of credit quality, as you can see, non-performing assets have declined and at about 1% of total assets, the NPAs are manageable and with reserves at 1.48% of loans we believe we are appropriately reserved.

From what we're seeing, a number of financial institutions are starting to gain some traction. We certainly have at March 31st. I think that over the coming months we are going to see the marketplace begin to reward not only capital and credit quality but also some of the other key drivers of shareholder value. Those are EPS, tangible book value, and franchise value. In that regard, I want to emphasize how very well positioned Bancorp Rhode Island is.

Institutions like ours and indeed for many banks, historically tangible book value and EPS were two key drivers of stock price and thus, shareholder value. Our stock closed at $27.90 Wednesday afternoon. That means we're trading at about 116% of tangible book value. Because we have not taken any major chargeoffs over the past few years, or made pricey acquisitions, we have a strong tangible book value. Additionally, we continued to earn during the credit cycle, also adding to tangible book.

Turning to earnings per share, I have to tell you that the hardest way to grow EPS is the organic way but it is working for us and produces long term value. Moreover, we are able to grow our EPS for the benefit of our shareholders because capital level remains strong. We are not, as a result of credit issues, required to do potentially dilutive capital raises and our one acquisition, that of Macrolease, has been accretive to our EPS, indicating that it was appropriately priced and has been appropriately managed by our team.

Finally, some comments on our franchise (inaudible). I believe it is driven by three main elements. First are the core deposits. Next is the size and quality of our customer base and finally, the quality of the commercial assets. Growing these three not only enhances our earnings but offers a really solid way to grow our value as a Company.

We have a business model that works for our customers and for our shareholders. The bottom line is that we have stuck to our knitting throughout this cycle. We will continue to be opportunistic yet prudent in seeking business opportunities and we will continue to put our shareholders first in setting business objectives.

With that, Linda and I will be happy to respond to any questions.

Thank you. If you have a question please press the * key followed by the 1 key on your touchtone phone. Please wait while we poll for our questions.

Our first question is from Damon DelMonte of KBW.

Hi, good morning. How are you?

Good, thank you.

Good morning Damon. We're fine, thanks.

Great. I guess Linda, if I could just start off with a couple questions on the margin. Did you say that you think that you've been able to benefit as much as possible from depositer pricing as of this quarter. Is that correct?

That's correct.

Okay so we should kind of think of a flat margin kind of going out from here?

I think so. Clearly not up, maybe a little bit down as we add new business.

Okay and then with respect to expenses, you had commented that they were a little higher than you were anticipating, kind of reflective of continued investment in the people and operations so from a run rate perspective we can kind of go at this level or do you think that there is some savings you may be able to squeeze out later in the year?

There's a couple things to consider. First, in the first quarter on a lean quarter basis we were always up because you reset FICA and some of the other taxes associated with that. We also had a little bit of one time expenses related to severance payments as we continued to eliminate a job or restructure a position so I think we're a little high in the first quarter. We hope to meet the 4% target for the year on a year over year basis.

Okay great, that's helpful and then how about from a loan pipeline perspective? Are you guys seeing a pickup in line utilization or new customer demand at all?

I think the pipeline is satisfactory. It is not robust at this point and we're really having to work hard to build balances.

Okay, that's all I had for now. I'll jump back in the queue if I have anything else. Thank you.

Thank you.

Our next question is from Laurie Hunsicker, Stifel Nicolaus.

Yes, hi, good morning Merrill and Linda.

Good morning.

Very nice quarter.

Thank you.

Two things, just to go back where Damon was on the expense side, so if we're looking as far as a year over year increase to expenses, I'm basically using the base number for '09 of 39.5 and I'm backing out the FTIC one time assessment which would put me for a full year 2010 somewhere around the $40 million, $41 million mark?

Yes.

Which suggests that expenses will continue to go down maybe and flatten? Is that accurate or am I -- is that a higher number more likely?

I think you're right on.

Okay and then more macro, just to go back to something Merrill you said in the comments right at the end when you were talking about the hardest way to grow earnings is the organic way. Can you just share with us on the acquisition front how actively you're looking, how you look at whole banks versus de novo branching? What geographies appear most interesting to you?

We are in a position to have a broad range of options open to us and as I indicated, we consider ourselves opportunistic. If we were to do an acquisition, something that makes sense from a franchise standpoint is certainly preferable. Looking around the area, staying in the northeast and New England and probably looking more to Massachusetts would make probably the most sense for us. We'd want it to work financially for our shareholders and so it has to be accretive to earnings and basically evaluate things to a three to five year horizon in terms of where we think we're going and what we think we should do. That doesn't mean that we would say it would have to be accretive to earnings only after three years but that's kind of what we're looking for.

Okay and are you more sensitive in terms of earnings accretion or how do you look at tangible book dilution? What's your threshold there?

It's almost inevitable if you're the acquirer to sustain some degree of tangible book dilution.

Right.

And I think that's why you try to look to grow it back over a three to five year period and that's why the acquisition has to be evaluated in a more macro context like beyond what's it's going to do for me over the next three to six months.

Okay and I guess to that point, just one last question. It's been a long time since I've asked this but given that you're hitting it on both cylinders are far as capital and credit and we're starting to see community banks particularly those with excess capital, pick up their share buybacks. Can you just let us know how you're looking at the road? I mean clearly your currency has come back over tangible book and directionally it seems like it should continue to do that but it's still very attractive relative to other bank franchises you might be potentially looking to buy. Can you just share with us how you feel about the share buyback or is it too soon or what your thoughts on that are?

It's something that we do look at periodically. At this point my comment would be that we're still not totally out of the credit cycle and the second factor would be the regulatory rules have yet to fully shake out on what the FDIC is going to demand of institutions and last year the talk was 12% is the new 10% and we're right about 12% now so I think that it's important for us to have clarity on that front before we make any significant changes.

Okay great, thanks.

You're welcome.

Our next question is from David Darst of Guggenheim Partners.

Good morning Merrill. Good morning Linda.

Good morning David.

Good morning David.

This is the loan mix and then the nature of the commercial growth this quarter, are you changing your strategy or changing any of your calling effort? It looks like it's more construction and more CRE non owner occupied (inaudible) that we're seeing.

I think there's a combination of factors involved there, Dave. The first is that this marketplace has presented an opportunity for CRE growth for us and there is a risk exposure involved there but I can tell you that the growth this quarter for example, was generated by three larger credits. One was a very well occupied, well located office building. The second was -- again, the sponsors are very strong. The tenancies are strong, similarly, a mixed use retail office center and finally, a large credit was -- and I think it maybe be reflected in construction. I'm not sure -- is a large AAA single tenant retail facility that we are financing the construction of for lease to a premier national entity so that we're comfortable with the growth in the CRE exposure. If I go back over last year's growth as well you'll see, it's a very blue chip looking portfolio or very strong local sponsors. Again, the marketplace has given us that opportunity.

The flipside is on the commercial side. I think we booked about $60 million in new C&I or business lending commitments last year but we have had some issues in the commercial portfolio which resulted in chargeoff. Initially we had a couple of exits that were good exits for us in that we encouraged people to refinance elsewhere so it's a little bit of a shifting and I would anticipate over time we will go back to what I would hope is very strong business lending growth.

We've had good growth in our small business portfolio but small portfolio is exactly that, small business and it take an awful lot of those $80,000.00 and $280,000.00 loans to make a dent so while that portfolio grows as a percentage, as a healthy percentage basis, through dollar numbers it does not move the dial.

Okay and then looking at the broader loan index, your residential loans are down to 15% from I guess closer to 25% about two years ago. How much further would you like to see that run off? How much more of the mix would you like to have in commercial?

The resi portfolio for us, other than self generated as an accommodation or as a business development tool here has always been regarded as an investment and so that is really more of a treasury function if we can find and start to find packages of well priced loans we certainly have the capital to support it and depending upon the interest rate risk profile, we may look to actually start buying in that area again but that's more of a treasury function so I don't know if Linda wants to comment further on that.

No, 15%, I think that's a good place to be but we would like to keep it at that level so we are out there looking for small portfolios with good quality assets to buy.

Okay great, thank you.

Our next -- pardon me. If you would like to ask a question please press * then 1 on your touchtone phone.

Our next question is from Frank Schiraldi with Sandler O'Neill.

Good morning.

Hi Frank.

Most of my questions have been answered actually but just one question here. Can you share with us restructurings, TDRs, how much of that is in -- how much total there is an how much of that is already in non-accrual?

Okay, we have in total $1.6 million of TDRs. $1.1 is performing and $440,000.00 is non-performing. Excuse me, it's actually flipped. Non-accrual is $1.1 million and performing is $400,000.00.

It's not a material part of our numbers.

Right. Okay, that's all I had. Thank you very much.

I'm seeing no further questions in the queue. Now I'll turn the call back to Ms. Sherman for closing remarks.

I want to thank you for joining us this morning and I will look forward to chatting with you in summer, in July, with the conclusion of our second quarter. Thank you again.

This concludes today's conference. Thank you for joining. You may now disconnect.