Brookline Bancorp Inc (BRKL) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the second quarter 2010 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 call will be opened for questions. (Operator Instructions). This conference is being recorded today, July 22, 2010. If you have any objections, please disconnect at this time.

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

Thank you. Good morning. As indicated, I'm Merrill Sherman, President and CEO of Bancorp Rhode Island, Inc. I'd like to welcome all of you to our second 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 second quarter 2010 financial results. I'll then come back 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 belief and are necessarily based on certain assumptions, which are 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'd like to turn the call over to Linda Simmons.

Thank you, Merrill, and good morning to everyone. Net income for the second quarter of 2010 was $2.7 million or $0.57 per common share. This was the highest quarterly net income we have reported since we formed the Bank in 1996. Compared to Q2 2009, net income was up $1.9 million and diluted EPS increased $0.50 per share. On a linked-quarter basis, net income was up $462,000 or 21%, and diluted EPS was up 19%. Year-to-date, net income was $4.9 million, up $2.7 million and diluted EPS was up $0.76 per share.

Highlights for the quarter was our margin expansion, up 15 basis points on a linked-quarter basis and 57 basis points from Q2 2009. The provision was flat at $1.6 million quarter-over-quarter, but net charge-offs at $779,000 were the lowest level that we have seen since the third quarter of 2008. Our non-performing assets as a percentage of total assets still remain low at 1.04%.

From year-end 2009, the balance sheet increased $24 million and it has increased $27 million since March 31. Total loans up $25 million from year-end and $13 million since March 31, 2010. The growth continues to be in the commercial area. The commercial loans and leases increased by $32 million or 4% from year-end, and are up $12 million from March 31. The commercial portfolio represents 67% of total loans and leases and generates 59% of all interest and dividend income.

The consumer book increased slightly from year-end and is up $6 million from March 31. The residential portfolio continues to decline and we are down $5.5 million from March 31. No purchases were made during the quarter.

We continue to see good growth in our core deposits. On 06/30/2010, we had approximately $53 million of DDAs related to a personal injury litigation the Bank was not a party to. A majority of this money has already left the Bank. Excluding those funds, total deposits still increased $23 million from year-end and $14 million from March 31. More importantly, the growth has been in demand deposits, and this has been offset by a decline in savings and certificates of deposit.

Excluding the funds characterized as temporary, core deposits, which we define as demand deposits, NOW, money market and savings accounts, were up $32 million and represent 68% of total deposits. This is up from 66% on March 31. We attribute our steps in this area to more feet on the street. Deposits tied to commercial lending relations continue to grow. On June 30, there was $129 million of deposits tied to a commercial relationship and 93% of these deposits are core. Our BDO team, our cash management team and the branches are working very hard to expand existing relationships and bring new money into the Bank.

Product quality remained stable during the quarter. Non-performing assets increased $367,000 during the quarter and represents 1.04% of total assets, up 1 basis point from March 31. Net charge-off at $779,000 for Q2 were down 48% on a linked-quarter basis and down $3 million from our peak in the fourth quarter of 2009. On a year-to-date basis, net charge-offs were $2.3 million and represent 41 basis points of average loans and leases. The coverage ratio remains strong at 1.53%. Our balance sheet is strong and it continues to generate internal capital. We have seen an improvement in both our capital ratio and book value.

As I mentioned earlier, the margin for the second quarter was 3.67%, up 57 basis points from the second quarter of 2009 and up 15 basis points on a linked-quarter basis. During the quarter, the Bank recognized $130,000 as interest income related to the recapture of interest on a non-performing loan. This increased the quarterly margin by 3 basis points. The deposit mix and overall cost of funds were the primary drivers of the expanded margins. Higher-costing FHLB advances and CDs were replaced with lower or no-cost deposits. FHLB advances declined by $46.7 million and CDs declined by $17.8 million during the quarter.

The weighted average cost of deposits for the second quarter was 97 basis points and this compares to 103 basis points during the first quarter of 2010. Non-interest income of $2.3 million for the second quarter. This is basically flat on a linked-quarter basis and up slightly from Q2 in 2009. During the quarter, we had a modest gain on the sale of a mortgage-backed security and this was offset by an OTTI charge of $44,000.

Total non-interest expense increased $285,000 or 3% from the second quarter of 2009 and decreased slightly on a linked-quarter basis. Year-to-date, non-interest expense increased $1.2 million and this was primarily driven by an increase in compensation expense and loan workout cost. Offsetting the increase was a reduction in FDIC-related assessments.

Year-to-date, our expense growth of 6% is a bit higher than the 4% that we were expecting, but this has already translated into increased revenue.

During 2009, we built a four-person business development team. To date, this team has generated over $32 million of new deposits for the Bank. In addition, expenses related to loan workout and OREO have often been higher than anticipated. At the end of the day, the Company had a very solid quarter with positive trends in its operating and financial ratios. Asset quality remains solid and the balance sheet remains strong with growing capital ratio.

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

Well, thank you. As you can see from the tone and tenor of Linda's remarks, we're really pleased with this quarter. We believe it's the beginning of a more normalized earnings level for our institution.

I want to focus my remarks today in four areas. I'll be talking a bit about our credit trends, non-performing assets and business pipeline, as well as our perspective on appropriate capital levels.

First, credit trends. We may be seeing the light at the end of the tunnel for credit cost at the elevated level of the past two years assuming a stable to improving economic environment. Our delinquencies have remained largely constant in the consumer portfolio and in the CRE, C&I, small business and Macrolease portfolios. We have not experienced any material up-tick in delinquencies.

For those of you who look at some of the detail attached, you -- it appears that we had a bump in the over 30-day delinquencies in the CRE area; in fact, that's caused by one larger credit where the State of Rhode Island is a principal tenant and the State's rent payments have been slow and hence the borrowers' payments a little slower. We are watching our consumer loan portfolio and our small business loan portfolio closely, as we believe that the current environment has the potential to impact these borrowers the most. There is also some softness in our Macrolease portfolio, which we are monitoring as well.

Besides the stabilized delinquency trends I mentioned, I also note that we have received the bulk of our commercial lending customers' financial statements for 2010. Our credit grades, which we use to set our reserves and also to create our watch list, reflect the lenders' evaluations of credit based on those financials, as well as any first-quarter 2011 information. Additionally, we have inspected virtually every property securing a commercial real estate loan in our portfolio and are in the process of receiving 2010 financial. Nothing we have seen to date gives us new concerns.

In March, I indicated that barring worsening macro conditions, we were cautiously optimistic that we would experience two to three more quarters of elevated credit costs and then perhaps they would begin to abate. We are cautiously optimistic that over the next quarter or two, our provision for loan and lease losses may begin to decline.

Second, I want to turn to non-performing assets. As you can see, our non-performing assets did not decline but appeared to have slightly increased. In fact, when we get under the number, which I will do with you now, we actually experienced a very modest decline. Included in non-performing assets are about $900,000 of government lease paper that is serviced [through us] by a major national corporation. We've had servicing issues with this corporation for years. We do not believe there is any underlying credit problem. These leases are carried on our books as 90-day past due and accruing, and we anticipate they will be brought current in the near term.

That said, the non-performing asset situation is both literally and figuratively a sticky one. If you break down the non-performing loans, there's roughly $7 million or so of commercial workouts, the collateral for which is largely commercial real estate and roughly $4 million of residential mortgages.

On the commercial side, we've entered into structured arrangements with some of the borrowers which call for in effect orderly liquidation over the coming six to 18 months. In some cases, we are receiving modest interim payments, but significant resolution will be sometime in the future. We've concluded that we will be better off resolving these over time rather than forcing sale of assets at a potentially deep discount. As you know, in the current environment, our cost of carry for these assets is relatively low and is one factor in our coming to that conclusion.

Turning to the residential side, delinquent residential real estate mortgages moved painfully slowly. There are approximately 18 of these loans that comprised the $4 million I referenced. They are spread across the country and they are all serviced [through us] by national servicers. It is a very slow resolution process. The implications of what I've said are twofold. One is that the nonperformance we presently have are likely to stay on our books for some time.

As indicated earlier, we did not feel any serious pressure to deeply discount them and believe that over time, we should be able to resolve them in a manner favorable to our institution. The other implication is that, should any other loans go more than 90 days past due, particularly if they are of material size, we could experience an increase in our non-performing asset levels. At this point, we consider these levels manageable and if that changes, then, we may modify our philosophy or approach to [troubled] credits.

The total dollar amount of credits that moved to non-performing asset status in this quarter, if we exclude the approximately $900,000 in government lease paper that I referenced earlier, is $1.8 million. This compares with $3.7 million that migrated to non-performing status in the first quarter. Time will tell but it would appear that the pipeline has slowed down for the foreseeable future.

On the business development front, and echoing what Linda said, deposit business is good. We are meeting with the staff in originating small business loans as well as generating business checking accounts. These increases are a combined effort on the part of our BDOs in our branches and we are really pleased with the results. In the commercial lending area, business has slowed somewhat. Part of it is a reflection of the economy and part of it is a reflection of the summer months. We are hoping that deal flow will pick up as the weather cools. In fact, we are hoping that the weather cools as well.

We are asset hungry and want to grow our balance sheet. However, our philosophy always has been to be conservative and to be patient. Right now, whether it's a loan or an investment, it's difficult to find enough assets of the quality, rate and duration that we find acceptable. We will not reach excessively in any direction, whether it is in our loan portfolio or our investment portfolio. Obviously, it's preferable for us to grow but smart work can't equal growth for the sake of growth.

Finally, turning to our thoughts on capital. Our capital ratios remain healthy. The one we monitor most closely is our total risk-based capital ratio and that's approximately 12.1%. At this point, the economics environment remains uncertain and there is still not complete clarity as to what the regulatory agencies see as acceptable capital level. In a more normal environment, we indicated that a total risk-based capital level at about 11.5% would be acceptable. But we are not yet in a normal environment. Our Board regularly reviews capital levels and potential stock buybacks and will continue to do so. However, given the current environment, we do not presently plan any stock buyback.

That concludes my remarks. Linda and I will be happy to take questions.

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

Good morning.

Good morning.

Good morning, Frank.

First question for Linda, on deposits -- on deposit growth and in terms of -- if you separate out the -- that one-time litigation of deposit that you have at the end of the quarter...

Yes.

The remainder of the DDA growth in the quarter, I mean, do you feel like that's sticky and do you think we're going to continue to see or we should see similar growth going forward?

Well, I got to admit that's a lot of growth in one quarter. It's actually up $34 million if we were to exclude those funds. We're hoping that's sticky. But we do see some fluctuations from some of our biggest commercial customers, if you will. So, we can see that move $8 million to $10 million quarter over quarter. But I think that's sort of exceptional growth for one quarter.

Okay. Have you seen in terms of deposit -- in terms of competition, have you seen that rachet up in terms of pricing at all or no?

Pricing has remained relatively quiet on the deposit side. Where the pricing pressure is starting to come back is on the loan side where people are taking lower spreads again and are aggressively going after quality customers.

Okay. And then on the margin, can you just -- I know you don't give guidance but just in terms of your thoughts on -- for margin, maybe anything the last month of the quarter, if you have the margin for that month and maybe we can extrapolate that forward?

No, of course, that's one number I didn't bring in, but I think that will be between 360 and 365, Frank, the remainder of the year.

Okay. Okay, thank you.

Thank you, Frank.

Our next question comes from David Darst of Guggenheim Securities.

Good morning, Merrill. Good morning, Linda.

Good morning.

Good morning.

Could you give us an idea of the volume of loans that you are actually working out there for the next six to 18 months in the commercial segment?

What do you mean the volume of loans that we're working at, could you just clarify that maybe?

Yes. I guess what percentage of your NPAs do you think will take longer to resolve?

I would say that there is probably around $5 million in there that over the next three to 15 months is really more a target range there.

Okay. And then, on the credit quality within the residential loan portfolio, are you beginning to see any positive trend in those delinquencies?

Linda has the delinquency statistics on those. So, won't take a peek. I think it's too early to predict. What we did do is run some credit scores and I can say since year-end, they really are not material shifts in that portfolio but it's -- in fact, it's probably up a little bit on the delinquency front. So, there is no trend yet there.

Okay. And Linda, do you have any remaining FHLB maturities over the next three to six months?

Not very many.

Okay. And then, you've been improving both the earning asset mix and your liability mix.

Yes.

At what point do you think you've kind of run off some of the less desirable categories and you're going to reach a stable level?

Well, the residential book continues to run off. That was really a purchased portfolio that we had when we started the Bank and I believe that's down to under $200 million, maybe $170 million. Unless we find some new source of those assets, that will continue to run down and the growth will be in the commercial book of business.

Would you anticipate continuing to run down the securities portfolio as well?

I struggle with the securities portfolio. We are down $20 million quarter over quarter. We look for opportunities to buy things but at these rates, I do not want to extend on durations. We've shortened up what we are buying; the yield is really ugly. But I don't want to be in a position two years from now when interest rates really start to soar to have a book that's completely under water. So, we look for opportunities but if they aren't there, that portfolio will run down a bit.

Okay, thank you.

Next question comes from Damon Delmonte at KBW.

Hi, good morning. This is actually Timur Braziler with KBW. Just a couple of questions. The first, with the commercial loan growth that you saw this quarter, was this from new demand or from an increased utilization?

Well, I would say new customers.

Okay. And I think you had made some commentary during the call saying that the commercial demand is still fairly soft. What are some of the strategy that you guys are employing to try and take advantage of this during the latter half of the year when the demand should start to pick up a little bit?

Well, I think that over the years, we've grown our reputation and positioned ourselves as the premier bank for business in the State of Rhode Island. We are clearly differentiated from the larger players in the market that have something in the neighborhood of 80% plus market share. So -- and we offer a team of exceptionally talented lenders, very strong cash management suite and in fact, our core theory has always been to differentiate ourselves based on responsiveness service and [base] local decision-making from the market players in the marketplace. So, that's worked well for us. I think the feet on the street will continue to [count] that work well. And the other thing is, unlike others, we never stop lending. And I think that some of the business that we are starting to pick up reflects the in and out nature of some of the other institutions that were more capital constrained in this environment. So, that's our strategy.

And I just want to add that we continue to invest in technology that will be able to us to deliver the products and the services that more sophisticated commercial customers need. So, we expect to have some new technology out there beginning in the third or fourth quarter of this year that will enhance our product suite.

Okay, thank you. That was very helpful. Just one more question, regarding the pending Reg E, what portion of your service charges on deposit accounts line item would be impacted by the pending regulation? And then, kind of what are some of the things you guys are doing? And maybe you can --

We don't have a definitive answer to that question. So, in terms of -- we can tell you definitively what we're doing there and I will, but we don't have a definitive answer to the -- we can't quantify the impact precise with you. What we've done is reached out to our customers with a letter and we are reaching out to them with more correspondence, we will be placing a special emphasis on people who have been heavy users of this feature to make sure that they understand the implications of the August 15 cut-off date and then, I think we also will plan for those who didn't opt in but ended up having rejected the transaction to reach out to them to see if we can persuade them to opt in. So, I think we are very proactive on that front. We've identified the customer base and we are communicating with it, and time will tell what the results are.

Perfect. Thank you very much.

The next question comes from Laurie Hunsicker at Stifel Nicolaus.

Yes. Hi, good morning. Linda, can we just go back to margin for a minute? You had suggested that the margin for the remainder of the year would be 360 to 365 which is below the 367. Is that correct?

That's correct. The one-time events that happened in the second quarter is really 3 basis points, Laurie. So that gives you down to 364.

Yes.

But -- and I just think that in this environment with loans -- the pricing on loans getting beat up a little bit and we might just see a little bit of a decline.

Okay. But so even though you still have some deposit repricing benefit?

We always take up that opportunity when it comes to us. But [this isn't to] raise the price on something, so we will wait.

Okay, fair enough. Fair enough. Okay. And then, as to your tax rate this quarter, it was just under 32%. We've been running at a higher number, what's the best effective rate to be using?

I still think it's between 33% and 34% because as we make more money, we're going to be in a higher tax bracket.

Right. Okay. All right. Great. And then, Merrill, this question kind of goes out to you, been sort of widely talked about, I guess, if you will, this quarter on earnings but the People's acquisition of LSBX, you all have indicated certainly at some points that you would be interested in going up into Massachusetts, did you all take a look at the LSBX deal?

I really don't want to comment directly on that, but we're where that market is more active at this point and we have a variety of options open to us.

Okay. Let me ask it this way, would you still be interested in going up into the Massachusetts area?

Very much so.

Okay. Perfect. Great, thank you very much. Fantastic quarter.

Thank you.

Thank you.

(Operator Instructions). Our next question comes from [David Menkof] at Maxim Group.

Good morning, guys. Congratulations on a very nice quarter.

Thank you, David.

What rates -- what CD rates are you paying on the one, two and five-year CDs?

We can find out -- we'll have to e-mail you that. We didn't bring that in. I can tell you that the demand for five-year, two-year, three-year is almost non-existent. Anything we've put on our books is less than one month.

Yes.

And mostly less than a year.

Are you at the highest rate in your area?

No. We do not price to the highest rate.

Well, you had indicated earlier that you were looking to raise the level of deposits, I think that's one way to do it. I know in the New York area, consumers are very sensitive to the rate increase -- to the rates that are being paid. So on the five-year, some of the banks had 3%. Astoria, for instance, recently went for 3.05, 5 basis points above and they get a kind of funds coming in. So, if you're really looking to raise the level of deposits, go 5 BPs against -- above the rates in the area, highest rate in your area.

David, when we do look to raise our deposit, but we've always emphasized what we call core deposits. And for us, that checking, NOW, savings and money market accounts. Those are all lower priced than CDs. My perspective on CDs is while they are a funding source and from time to time, we make a lot with a special rate to attract customers for a variety of reasons, anybody with FDIC insurance who slaps a high rate on can raise CD money. So, we've always emphasized lower cost of funds and we talk about aggressively going after deposit. It's putting feet on the street to get checking and savings account. And I think that when you take a look at our deposit mix, since inception, it's always been a shift away from CDs and into lower-cost funds. So -- but when we talk about going aggressively after deposits, we're really talking about checking and saving deposits.

Your point is well taken. I think some of these banks that have the higher rates tie it into a checking or savings, you have to open up a checking as well to get that rate.

But we don't have a margin of north of 3.5% either, so --

All right. That's true. You indicated earlier that you had waylaid or stopped the buyback, I didn't hear the reason for that.

Well, we didn't have one in place that we stopped. We just said we don't have any present plans for one. Basically, we're just over 12% total risk-based capital and we just think the environment remains too unsettled, the macro environment is still too unsettled for us to get aggressive with our capital levels.

You feel like Bernanke does?

Well, if he doesn't know, I don't pretend to know any better than Mr. Bernanke, let's put it that way.

Right. I got you. Okay. Thanks so much. Nice quarter.

Thank you.

Thank you.

(Operator Instructions). I'm seeing no more questions in the queue. So, I'll turn the call back to Ms. Sherman for closing comments.

Well, thank you, all, for joining us and we will look forward to chatting with you again in the fall. Have a great summer.

Thank you for attending. You may now disconnect.