Brookline Bancorp Inc (BRKL) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the third-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 will be open for questions. (Operator Instructions). This conference is being recorded today, October 28, 2010. If you have any objections, please disconnect at this time.

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

Well, 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 third-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 third-quarter 2010 financial results. I will then come back online and discuss those results. After that, we'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 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.

With that, I'd like to turn the call over to Linda Simmons.

Thank you, Merrill, and good morning to everyone. For the third-quarter 2010, we reported record earnings of $2.8 million or $0.60 per common share. Compared to Q3 2009, net income was up $605,000 and diluted EPS increased $0.43 per share. On a linked quarter basis, net income was up $127,000 or 4.7%, and diluted EPS was up 5.3%. Year-to-date, net income was $7.7 million, up $3.3 million from 2009 and diluted EPS was up $1.19 per share.

There are a few things that I'd like to point out. First, our credit quality improved for the third consecutive quarter. Net charge-offs for the third quarter were $459,000, down 41% from the prior quarter and down 80% from the third quarter of 2009. Our delinquency rates were stable to improved; our nonperforming assets as a percentage of total assets declined to 0.96% of total assets.

Our capital position remains very strong and we continue to generate internal capital. The Board has approved an increase in the quarterly dividend of $0.02 per share. ROA was above 70 basis points for the quarter and ROE was above 8.5% for two consecutive quarters.

From year-end 2009, the balance sheet declined by 1% and [increased] $40.2 million from June 30. Remember that the June balances were inflated with temporary deposits. Total loans and leases were basically flat on a linked quarter basis and were up $23.4 million from year-end 2009.

Commercial loan and leases increased by $39.4 million or 5.4% from year-end and were up $7.4 million from June 30. The commercial portfolio represents 68% of our total loans and leases, and generates 59% of all interest and dividend income. The consumer portfolio decreased slightly from year-end and was down $5 million from June 30.

We are currently in the midst of our fall home equity campaign. Our pipeline is strong and we anticipate closing approximately [$15 million] of loans during the fourth quarter. The residential book continues also to decline. It has declined $12.2 million from year-end 2009 and $3.6 million from June 30.

As we reported in July, we have hired three new mortgage originators and their pipeline is beginning to grow. Some of this production will be put into the portfolio. The current pipeline for the Bank's portfolio is approximately $11 million.

Turning to deposits, we continue to see strength in our branch footprint. Based on average balances, 11 of our 16 branches will have average deposits of excess of $50 million. As you may recall, on June 30, we had approximately $53 million of DDA's related to a personal injury litigation the Bank was not a party to. The majority of this money left the Bank within the first week of July.

On September 30, our core deposits, which we call [demand] deposits now, money market and savings accounts, were 68% of total deposits, and this is up from 65% on December 31. We attribute our success in this area to more feet on the street. Deposits tied to commercial lending relationships continue to grow. On September 30, there were $130 million of deposits tied to a commercial relationship and 93% of these deposits were core. This is up 15% on a linked quarter basis.

As I mentioned earlier, our credit quality remains stable to improved during the third quarter. Our nonperforming assets declined $1.6 million during the quarter and represent 0.96% of total assets, down 8 basis points from June.

Delinquencies also showed stabilization. Net charge-offs were $459,000 for Q3 and were down 41% on a linked quarter basis, and down $3.3 million from the peak of the fourth quarter of 2009. The coverage ratio on 9/30 remains strong at 1.6%. Our balance sheet is strong and continues to generate internal capital. We have seen improvement in both our capital ratios and book balances. The Board has increased the quarterly dividend, as I mentioned earlier, by $0.02 a share.

The net interest margin for the third quarter was 3.61%, up 23 basis points from the third quarter of 2009 and down 6 basis points on a linked quarter basis. The yield on interest-bearing assets declined by 17 basis points quarter-over-quarter. This was offset by a decline in deposit expense of 11 basis points. The primary driver in the decline on the asset side deals was the investment portfolio, which declined by 37 basis points. Approximately $50 million of cash flow related to callable bonds and mortgage cash flows were reinvested at a much lower rate. Loans also declined 10 basis points quarter-over-quarter.

Non-interest income was $2.3 million for the third quarter; it is basically flat on a linked quarter basis and up slightly from Q3 of 2009. During the quarter, we had gains on sale of mortgage-backed securities that were offset by OTTI charges of $417,000.

Total non-interest expense increased $538,000 or 5.5% from the third quarter of 2009 and decreased slightly from a linked quarter basis. Year-to-date, non-interest expense are up $1.7 million to 5.7%, and were primarily driven by increase in compensation expense and loans workout-related costs. Offsetting the increase was a reduction in the FDIC-related assessments and professional services, which we expected, as we made decisions to [do] certain functions in-house.

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 ratios.

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

Well, thank you, Linda, and hello again. As you can see from Linda's remarks, we're pleased with the results we achieved this past quarter. The EPS of $0.60 is solid, and notwithstanding our robustly capitalized position, our ROE remained above 8.5%. We're also delighted to have announced the quarterly dividend increase of $0.02 per share for our shareholders. This is a testament towards confidence in our momentum.

Commercial loan growth was modest this past quarter at 1%. I had indicated to you in our last call that the business environment was very quiet this summer. I am pleased to note that the pipeline has become more active and we are getting a look at more deals.

In terms of credit quality, as Linda indicated, the number of the metrics have improved. I'll also say that our coverage ratios are as full as they ever have been. While there are some troubled credits in our portfolio, I am cautiously optimistic that our provisioning has peaked and will begin to decline.

We have reopened our Plainfield Pike branch. That was an express branch. It was started in 2002 as an experiment with an unusually small size branch. We called it Bank in a Box. It did not grow successfully and we converted it to a fully automated branch about three years ago. But it is well located.

Given the growth we've achieved at our other branches and the increase to our average branch size, we have reopened Plainfield Pike as a full-service branch and are now looking to attract deposits to it. That puts our branch footprint -- in our branch network, rather, at 17 in the state. To just put a little more color on what Linda said, our average branch size is now about $67.5 million. As of September 30, we had two branches with over $100 million in deposits; nine others with deposits over $50 million; and with the exception of the Pawtucket branch, which is one of our newest, all other branches have $30 million or more in deposits.

Looking ahead, we are seeing what many other institutions are seeing -- intense competition for assets, flattened yield curves, pressure on consumer fees as a result of regulatory changes, and increases to expenses. What are we doing to counter that in order to sustain our record performance?

We are aggressively seeking to grow our quality assets and are cautiously optimistic that we will be able to do so. First, as I indicated earlier, the activity in our business lending pipeline has increased. Second, we're starting to see an uptick in business in our Macrolease subsidiary. As a reminder, Macrolease is our small ticket equipment financing subsidiary located on Long Island. Its portfolio is a national one.

We look to cap that portfolio at around $100 million of outstandings on our balance sheet. The portfolio has shrunk to about $90 million since the beginning of the year; but this last quarter, the runoff and the growth have been about equal, so the portfolio has stabilized somewhat and business seems to be picking up.

A third area for asset growth is our consumer portfolio. We ran a successful home equity campaign during the third quarter and believe we will benefit from the bookings in the fourth quarter.

And finally, we started, as Linda indicated, to invest in mortgage origination capacity and now have a pipeline of those loans as well.

Let me just talk a little bit more about that. Last quarter, we began to look at first mortgage origination as a line of business and we have three originators on staff who are now beginning to come up to speed. Our intention is to grow that line of business in a way similar to the way we did with BDO, as our Business Development Officers.

We started modestly and added to staff based on success. We're looking to use the mortgage originators to both add to our own balance sheet as well as to generate the income. Here, again, we are cautiously optimistic that, given our ability to provide service and turnaround, as well as our reputation, we will be able to perform successfully in this area and lever off our embedded capacity.

We continue to upgrade our systems and are introducing remote capture to our branch system. This will improve our efficiencies as it eliminates paper processing. Additionally, it improves customer service by pushing back deposit cut-off times. This is just one example of how we are looking to ways to improve our efficiency as well as our service level.

Last, we obtained a few more milestones this past quarter. First and foremost, we once again achieved the number one FBA lending slot in Rhode Island. We are naturally proud of this. This achievement is not possible without a great team effort. It also generates significant positive publicity for the institution as well as goodwill for us as an institution.

With that, I will open the call for questions.

(Operator Instructions). Frank Shiraldi, Sandler O'Neill.

First, I just wanted to ask about the home equity campaign. I wondered if you could just maybe give us some more color on that, as far as, are these -- does that campaign involve new customers only? What sort of yields are you seeing? And is this lines versus home equity?

It is home equity loans, Frank. They are anywhere out to 25 years fully amortizing. And the rate that we have is 4.25%.

And that's a fixed rate?

Yes, it is.

And then -- I'm sorry, did you say -- are they -- is the promotion only for new customers, or --?

No, it was targeted at existing customers but probably with an emphasis on those who don't have current loans with us to try to lever off our customer base further.

And then I wondered if you could just remind us of the total home equity book, how much is -- what percentage of it is lines about? And if you've seen usage increase -- what you've seen year-over-year in terms of usage, if you have it.

I don't think there's any material change in percentage usage. And I'm looking for -- it's probably around 50%. It's a range in that 48% to 50%, so we don't see anything dramatic there. Linda would have to give you the breakdown. Off the top of my head, I would say it it's two-thirds, one-third, but I'm not sure, on the outstanding for it.

It's $120 million is roughly fixed and the rest is lines.

And so the portfolio is about [$202 million] at the end of the quarter?

Yes.

And that's also a portfolio, Frank, that we monitor very closely for credit quality, if that's where you're going with percentage usage. And we're very comfortable with where we are there.

So it's about a 60/40 split, weighted towards loans.

Okay. And then to your point, Merrill, you really haven't seen, I mean, any deterioration in credit quality in that portfolio?

No. And -- no.

Okay. And then I just wanted to ask, to your comments on the commercial pipeline, wondering what the pipeline looks like as we stand today, say, versus three months ago?

The pipeline was very, very thin three months ago. Historically, the summer does see a slowdown but this was exceptionally slow. So would I characterize it as robust? Not yet, but it's certainly got an uptick, so we're cautious -- you know, we'd like to see a little bit more -- obviously, more growth than we saw in the past quarter.

And what we're seeing is, the growth that we had this quarter was more centered in the CRE portfolio. We're seeing a little slowdown there and a pickup in the business lending portfolio.

Great. Okay. Thank you.

Damon DelMonte, KBW.

I was wondering if you guys could talk a little bit about your expectations with Reg E? It looks like your service fees held in pretty well this quarter. What have you done to be proactive and try to cut off the potential shortfall? And what could we expect going forward?

Well, I'll leave it to Linda to comment on some of the numbers that way, because we have seen some impact. What we have done is went to the customers and started -- we have a call program, an email program, to try to proactively get them to opt in. And we've also had a particular focus on people who haven't opted in, who maybe do end up overdrawing. So we are proactive that way. I wish I could tell you that it was getting enormous penetration; it's simply not.

I think, you know, we only have a few weeks of history here, but we think we've been hurt about $25,000 a month with regards to the FERC E customers. Fortunately, for us, we picked it up in other places, so we didn't see a big decline month-over-month. But we expect that that Reg E to be about $25,000 a month going forward.

Okay. Have you developed any new checking programs to maybe generate fees?

I think we have just revamped and revised and streamlined our product set, so we're comfortable [out] there with the right products for our customers.

Okay. And then kind of shifting to the mortgage banking team you were referring to before, are they all located in your general footprint? Or is anybody extending out elsewhere into New England?

No, this is in our footprint.

Just your footprint? And I'm sorry (multiple speakers) --

I would be more -- I mean, our -- I don't want to be that tight. It's Rhode Island, probably slightly over -- do we go over the border of Massachusetts with this?

Yes. They're physically located here in Rhode Island and -- but we may do a mortgage in Massachusetts from time to time.

I was kind of -- I kind of meant, like, did you have somebody in Hartford or somebody in Boston and somebody in Providence, or --? (multiple speakers) Are they kind of just out of Providence, so. No, that answered that. Thank you. And then what's the pipeline look like for that group?

The portfolio is about $11 million for loans that are going to go into the Bank's books.

Okay. Alright. That's all I have for now. Thank you.

David Darst, Guggenheim Securities.

Linda, do you have any borrowings that will be repricing to maybe help offset some of the pressure you're seeing on the earning asset side?

Not enough. I don't have the number in front of me, but it's $5 million, $10 million a quarter -- it's not that big.

Okay. Should we expect to see a similar amount of compression in the fourth and first quarters?

I think we're going to see between 3 and 5 basis points quarter-over-quarter going forward. I don't anticipate a big hit on my investment book again this quarter. We only have $10 million worth of callable bonds and the reset rate is much closer to what they're coming off at. Last quarter was exceptional.

Okay. And then, Merrill, I guess, you made a reference to this being the peak in your provision. Is that based on your watch list plus the level of the relative reserve to loans?

Well, we had some migration to the watch list this quarter and had to do a little bit more in the specific reserve; but I think at the end of a day, we're starting to see some signs of stabilization. So the delinquency numbers were pretty good this quarter. And so the provisions have been down the last three quarters, I think, but we -- and you can see that we provided substantially more of a net charge-off, which is just about the first quarter that's happened in awhile. So, I think we're in a very good position.

Okay. But I guess -- you referenced the peak in the provision (multiple speakers) --

Yes.

Or it should trend lower and maybe closer to matching your net charge-offs?

We're formula-driven so it's not necessarily matching net charge-offs. And then -- but I will say that it would surprise me if we had to keep the provision at this level.

Okay. Do you feel somewhat optimistic that you'll be able to actually see some -- your total net loan growth over the next couple of quarters from the various initiatives?

Yes.

Okay. Great. Thank you.

I'm sorry, [lending period]. When you look at net loan growth, I think we're going to look for commercial loan growth; the consumer portfolio should grow. So, barring substantial runoff in the mortgage loan portfolio, you'll -- we should see some net loan growth.

Okay. Great. Thank you.

(Operator Instructions) Lorie Hunsicker, Stifel Nicolaus.

Linda, do you have your month margin?

Yes, I do. For the month of July, it was [360]; August was [364]; September was [358].

Okay, great. And on tax rate, it's been running a little lower. Can you give us guidance there? Because it certainly moves the needle.

Yes, it's going to be 32% to 33%.

Okay. And just a general question. I mean, obviously, your credit looks great; saw that you increased dividend; capital levels are growing. I mean, things just seem completely on track.

Your dividend ratio, payout ratio, is still a little bit less than, I guess, some of your peers, and maybe that could be, obviously, because they haven't rebounded as much on the earnings side. But can you comment, I guess, on the Board perspective on dividend, payout ratio targets?

And then also, I guess just remind us in terms of share buybacks if we're out of the woods on credit? Your stock is still trading at an attractive level; it's not something we revisited in some time. Can you just remind us what your stance on that is, given the current environment?

I think that we are, historically, in that 30% to 35% payout ratio, so we're probably at the low end of the range. And I think that when the Board takes a look at the dividend, they're clearly looking forward to make sure of it, it's sustainable. So we're comfortable with the $0.02 a share. And this is something that they will continue to revisit, hopefully, as earnings continue to improve.

On share buybacks, at this point, we are around 12.5% total risk-based. That is, for us, a very robust capital position. And so that -- again, that is something that the Board will examine from time to time, but I think the first step was to increase the dividend, and that's the step that they elected to take this quarter.

Okay, great. And Merrill, can you just comment a little bit about the M&A landscape? I know we ask you about that every quarter, but in the last quarter, we've seen a lot of deals -- just even another one yesterday, that we're going to [First Dipswitch]. I mean, did you look at [First Dipswitch] -- just remind us maybe how you're looking at the landscape, where else do you want to be?

A number of years ago, we had had some conversations with [First Dipswitch]. It's not exactly a strategic fit for us and it would not probably be something that would fit the profile of what we would look to do. Any transaction for us would -- if we were to acquire -- I think there's got to be a little bit more of a strategic rationale for the deal. In other words, it's not just a question of improving your economics or your EPS, or what your dilution is; but you've got to satisfy all your finance -- a number of financial metrics, as well as investor desire.

But at the end of the day, it's, are you adding a dimension to your franchise? And I didn't think a [First Dipswitch] would really do that for us.

Okay. And where would you rate your desire to be up in the Boston market place?

Pardon me?

Where would you put your desire to be up in the Boston market place?

I think that if you look -- I wouldn't say Boston market place, I'd say Massachusetts is a logical extension of our franchise for the right reasons. But there are also other ways to extend your lever off of your capacity. In our case, particularly our commercial lending capacity, and look to generate more assets for this franchise and improve earnings. So that is not necessarily in Massachusetts.

Okay. Great. Thank you very much.

John Palmer, PL Capital.

Congratulations, great quarter, guys. (multiple speakers) A question for you. You talked about the fact that your -- you continue to try to grow the commercial loan portfolio. Have you changed your underwriting standards? Have you lagged some? Have you tightened them? And if so, have you -- what have you done? Have you changed LTVs? Have you -- what are you doing to make sure that the new loans getting booked are going to be of the same quality as it appears that the existing loans are?

Well, first, I don't think there's been any material change to our underwriting standards. I think that maybe last year or the year before we tightened up very slightly on some of the LTVs on the consumer side. But that's about the extent of it.

What happens is, even with maintaining the same kind of credit standard, what you'll see is a lot of companies have bumpier years, and so that probably explains some of the lack of deals more than any change in the credit standards.

Okay. And when's the last time you had a regulatory exam? And I guess when are you due for one?

We're probably due for one some time relatively soon, I'd say within the next three to four months.

Okay. That's all I have. Thank you very much.

(Operator Instructions). I'm seeing no further questions in the queue, so I will turn the call back to Ms. Sherman for closing remarks.

Well, thank you for joining us today and I will look forward to talking with you next year following our announcement of 2010 results.

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