Brookline Bancorp Inc (BRKL) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the fourth quarter and full year 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, January 27th, 2011. If you have any objections please disconnect at this time.

I would now like to turn-over the conference 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 fourth quarter and full year 2010 conference call.

With me this morning is the Company's CFO and Treasurer, Linda Simmons. Linda is going to take you through our quarterly and full year 2010 financial results and comment on our outlook for 2011. I will then come back on the line, discuss those results, and make some additional comments. 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 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 filing with the Securities and Exchange Commission.

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

Good morning, everyone.

Net income for the fourth quarter of 2010 was $2.1 million or $0.45 per common share. Net income for the fourth quarter of 2010 was up $993,000 or 87.6% from the fourth quarter of 2009. Diluted EPS was up $0.21 per share from $0.24. Net income was down $682,000 or 24.3% from the third quarter of 2010, and diluted EPS was down $0.15 per share.

Highlights for the year include net income of $9.8 million, a 77.6% increase over 2009. This was the highest net income we produced on an annual basis in BARI's history. The margin was also up 31 basis points year-over-year, and this is being driven by our core deposit growth.

Demand deposits were up almost 30% over 2009, driving our core deposit ratio to 69%. Our provisions at $6.9 million is down 31% year-over-year. Net chargeoffs were also down 41% year-over-year and represents 42 basis points of average loans and leases. Nonperforming assets decreased by 11.9% year-over-year.

Quarter-over-quarter the balance sheet increased by $30 million. Total loans were up $20 million or 1.8% on a linked quarter basis. For the year total loans were up $44 million or 3.9%. The main driver continues to be our commercial loan and lease growth, up $9 million on a linked quarter basis and up $48 million or 6.5% for the year.

The consumer loan portfolio increased by $8 million quarter-over-quarter and is up $4 million year-over-year. The residential portfolio increased $4 million from the third quarter but was down $8 million for the year. This was the first quarterly increase that we have seen since the end of 2007.

We had great success in growing deposits this year. Total deposits increased by $22 million or 2% for the year, but most importantly the DDAs grew by $60 million or 29.4%. The core deposits which we include DDAs, NOW, money market and savings accounts grew by $61 million or 8.6% for the year. Core deposits accounted for 69% of total deposits on 12-31-10, and this is up from 65% on 12-31-09. During 2010 deposits tied to commercial lending relationships grew by $17 million, ending the year at $130 million. This is a 15% growth rate and 94% of these deposits are core.

Overall we are in excellent financial condition. The capital ratios continue to improve as we grow retained earnings. Our tier one capital ratio went from 7.65% to 7.9% during the year, and our total risk rates capital ratio went from 11.97% to 12.4%.

As I mentioned before, nonperforming assets were down year-over-year but on a linked quarter basis they were up $2.5 million and ended the year at $17.6 million. This represents 1.1% of total assets. The provision for the quarter was $2.4 million and net chargeoffs were $2 million. The coverage ratio on 12-31 was 1.61%, up 12 basis points from a year ago. REO on 12-31-2010 was $1.1 million.

The net interest margin for the fourth quarter was 3.49%, down 12 basis points on a linked quarter basis. This is a result of asset yields declining by 18 basis points, offset by lower funding costs of only 8. The asset yield was impacted by declines on both securities and loan portfolios. All cash flows from the securities portfolio are being reinvested at a much lower rate. In addition, loans are coming on to the balance sheet at lower rates than the average. Net interest income grew by $5.1 million or 10.5% from 2009 to 2010.

Noninterest income of $2.7 million for the fourth quarter, it was up slightly from the fourth quarter of 2009. On year-to-date basis it was up $397,000 or 4.3%. During the quarter there was a gain on [record] and sale of securities of $217,000 and there were not OTTI charges.

Total interest expense decreased $415,000 or 4% on a linked quarter basis and is flat compared to the fourth quarter of 2009. Throughout 2010 the Management has continued to hold a line on expenses. On a year-to-date basis we were up $1.7 million or 4.2%. The increase was mainly driven by increases in salaries and benefits, loan workout, and other real estate owned costs. All other expense categories were down year-over-year.

The tax rate for the quarter increased to 39.6% but for the full year we remained in our original guidance between 33% and 34%. During the fourth quarter we needed to book additional tax expense at the bank level due to increased earnings.

There continues to be a great deal of uncertainty around our industry and the markets in which we operate and for that reason it's very difficult to provide guidance for 2011. Based on the best information that I have today we expect to earn between $2.15 and $2.25 per share.

The two most important drivers continue to be credit cost and the margin. We expect slightly lower credit cost in 2011. We expect that our position will be slightly lower and our net chargeoff should remain at 2010 levels.

The margin, as we know, is very dependent on changes in interest rates but we believe that the margin will be in the mid 340s. We have limited ability to lower deposits cost but during the course of the year we had approximately $60 million of borrowings with a maturity during the year and the yield of 4.9%. This will help us to maintain our margin.

Loan growth is expected to be between 3% and 4%, driven by continued commercial loan growth, the consumer portfolio with flat year-over-year, and the residential portfolio will continue to run-off. Our focus remains on core deposit growth and our momentum from 2010 will carry into 2011. We believe that we can grow core deposits by 4% to 6%.

Noninterest income we expect to remain flat, and noninterest expense will be [up] 3% from our 2010 base.

The tax rate is going to be between 34% and 35%.

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

Well, good morning, again, and thank you, again, for joining us. I'm going to divide my remarks into three parts. First my comments on 2010 highlights. Second I have some comments on the fourth quarter. And, third, is a look ahead briefly at 2011.

2010 was a really good year for Bancorp Rhode Island. We posted strong earnings and earnings per share gains, largely driven by margin improvement and decreased credit cost. As you can see from the annual results, we experienced a significant decrease in our net chargeoffs, they dropped by $3.3 million, from $8 million to $4.7 million. We also saw significant decrease in our position level, it dropped by $3 million from $9.9 million in 2009 to $6.9 million in 2010.

In addition, the absolute level of our allowance increased from $16.5 million to $18.7 million at yearend 2010 and, as Linda indicated, our coverage ratio improved from 1.49% to 1.61%. Nonperforming assets also declined on a year-over-year basis. We achieved mid single-digit commercial loan growth and were able to keep our number one SBA ranking.

There's no question that one of the major highlights of 2010 is our demand deposit account growth. It was absolutely incredible. Our balances were up almost 30%. These demand deposit accounts are the most difficult for any bank to attract and retain. We win them and we grow them. Increasing DDAs is the core of an expanding customer relationship. These accounts drive not only our franchise value but also improvements to our earnings.

In 2010 from an operational standpoint we were able to implement numerous projects. We upgraded our bank-wide teller platforms, we installed check imaging and remote capture in all our branches. We switched our customers seamlessly to a new state-of-the-art online banking system and laid the groundwork for introduction this quarter, namely the first quarter of 2011, of a new, more sophisticated state-of-the-art cash management system for our larger commercial customers. Our shareholders benefitted not only from improved earnings and improvement to the franchise but also from a dividend increase.

The balance sheet remained solid. We held our own in the consumer loan area, growing very modestly from $206 million to $210 million year-over-year. Additionally, the fourth quarter, as Linda indicated, represented the first quarter in a very long time when the residential mortgage portfolio hadn't declined. Earlier in 2010 we expanded our capacity to originate mortgages for sale, as well the portfolio. By retaining some of those residential mortgages in portfolio we were able to hold the residential mortgage loan portfolio balances.

As you can see, our C&I loan balances have declined year-over-year. It reflects 2010's slowness in the market, as well as lower line usage by our commercial customers. This was counterbalanced by solid commercial real estate loan growth.

When we look at the fourth quarter it is not as strong as we had hoped. Besides being more challenged on the margin side we had greater than anticipated credit costs, as well as the additional tax accrual Linda referenced.

The credit picture was a bit lumpier than we anticipated. While we are in a better position at yearend from a delinquency standpoint than we were last year our classified assets, namely those we made as special mention as substandard were up modestly from yearend last year. They have risen to just under $50 million from about $46.5 million at the end of 2009, with a somewhat heavier weighting towards the lower substandard seven grade rather than the higher special mentioned grade of six.

I had been more optimistic about the credit picture a few months back but have come to believe that the environment remains difficult, especially for businesses that are Rhode Island focused. They're largely dependent on the local economy, whether it is the retailer product sales or tenants and new properties, and it simply remains a tough environment.

As a result we do not see 2011 credit costs being much reduced from 2010 levels. That said, the overall credit portfolio in the quality, the overall credit quality, and the overall portfolio remains satisfactory and any concerns are manageable.

Continuing to look ahead, we are seeing more commercial business activity and there's a pick-up of deals in the pipeline, more people are looking to do transactions, and we are pleased about that. Hopefully that pick-up will be reflected in an increase in C&I balances in the first quarter as well as the second.

We also have been moving steadily forward on three fronts. One is the mortgage line of business. We now have three originators who have come-up to speed, but will not mean material dollars to our bottom line next year. It is a toe in the water for us in that area.

Additionally, we are growing our Investment Services Group. Again, while the Group is not a material contributor to our bottom line we do have over $120 million under management and we are looking to steadily grow that base. As you may be aware, we sell mutual funds and annuities on a commission basis. We do not receive any fees based on portfolio management.

Finally, we continue to look for cost effective ways to expand our footprint. Recently we opened our original Bank in a Box Branch on Plainfield Pike. That seems to be attracting some business and we're looking for more ways to be visible and fly our flag.

A final comment on our branch network, besides a strong deposit mix as Linda mentioned the branch sizes helps our efficiency. Eleven of our 17 branches are over $50 million in deposits and we've got a couple over $100 million.

So, with that, I will open the floor to questions.

(Operator instructions.)

Our first question comes from David Darst at Guggenheim Securities.

Good morning, Linda. Good morning, Merrill.

Good morning.

Good morning.

Within your loan growth guidance do you expect your commercial trends and then the residential consumer trends to be similar to what we saw in 2010?

Yes.

And then any -- and then you had some fees this quarter, were those related to some closing -- the loan fees this quarter were related to commercial lending closures in the fourth quarter?

Yes, they were related to mostly CRE.

Okay, and were those swaps?

No.

Okay, would we --

No swap income this quarter.

I'm sorry?

There was no swap income this quarter.

Okay, would we expect to see that commercial fee income pick-up in 2010, '11?

I think that's hard to predict, David. It depends on the loans and the type of loans that we're closing.

Okay, and then on the securities portfolio could you comment on what you were purchasing during the quarter and the structure that's used to fund it?

Sure. We're basically reinvesting cash flow that's coming off of that portfolio or basically we had some calls during the quarter, as well. And we're putting them back into callable agencies nothing longer than five years, and we're also buying complete [Finela] mortgage backed securities. We try buying 15 to 20-year paper.

Okay, was there any premium amortization related to the calls?

No.

Okay. Okay, great. Thank you.

Thank you.

(Operator instructions.)

Our next question comes from Frank Schiraldi at Sandler O'Neill.

Good morning.

Good morning, Frank.

Linda, I wonder if you could just go over the guidance for -- I just missed the fee income? I think you gave guidance for fee income, I guess year-over-year in 2011?

We expect it to be flat.

Flat, okay. And the expense base was that expected to be flat, too?

No, up 3%.

Up 3%, okay. And as far as the -- it sounds like even though the margin came down linked quarter that you feel like as long as the interest rate environment doesn't change that sort of can be held at these levels, is that -- that's pretty fair to say?

I think I've got it to the mid 340s, I think we'll still have a little bit of compression. As new volume comes on it is coming on at a lower rate. Some of that will be offset by the fact that we have some higher cost in borrowings coming our way, but it continues to be a little bit of a contraction.

And the borrowings, they're basically just laddered over several years, is that what the portfolio looks like?

Yes.

Okay, and is there any push to lock-in longer term borrowing, maybe push that out a bit? Or is that not the thinking here?

Well, I think one to two years would be the longest we would go on the borrowings. We continue to be asset sensitive, so I can let some of these borrowings come in.

Okay, thank you.

Thank you.

(Operator instructions.)

And our next question comes from Damon DelMonte at KBW.

Hi, good morning. It's actually [Temore Brazilor] at KBW. The first question I have is kind of a broader question. Maybe you could expand a little bit more on the overall economy in Rhode Island? Has the unemployment rate started to come down a little bit? Are you starting to see different kind of demand characteristics from your base?

The answer is that the overall rate has come down very slightly. It's still like 11% or 11% plus, 11.5%, so it's still relatively high. And I think that the economy is challenged in this State. I've said any number of times that we're fortunate in that most, many of our business customers export, they export regionally and nationally, so for that reason they're not totally dependent on the local economy. And I think that that's one of the reasons that our credit results historically have been strong.

There's been some reports of stabilization in pricing, residential pricing has stabilized to increased modestly, but that doesn't mean that the market is regarded as robust. And you're still experiencing higher than historic vacancy rates on certain commercial and retail properties, like office and retail properties.

Okay, and as far as that's going to translate into loan growth, so that 3% to 4% guidance that was provided, any particular category that you think is going to have the most robust growth in the coming year?

Well, we have targeted certainly mid single-digit if not higher commercial loan growth, and particularly an emphasis on business loan growth. So I'd say that we've got any number of customers that are doing well, you know, whether it's a lighting manufacturer or a designer that supplies Target Stores nationally or you can be a valve, a supplier of valves for the oil industry. Now, there are any number of companies that are doing very well.

And we are out there, we find that we can distinguish ourselves quite readily from some of the larger institutions in the market, and for people who want to borrow $3 million, $5 million, $10 million we position ourselves as the bank of choice and with good reason.

The other factor, you know, the economy in Rhode Island is I describe it as tough, it's come back [for a second]. We've got some amazing anchors in the university base and in the hospital base. And Brown has a Medical School that is a source of not only donations in the hundreds of million dollar range to fund its growth but also a recipient of any number of NIH grants. And our local hospital system is an academic medical system so that's a real plus. And then these colleges and universities are huge employers and attractors other kinds of findings and grants.

So there's an enormous stabilization underpinning to the economy and they're also the industries of the future, so long term there's a lot of, you know, there are a lot of nice things about the Rhode Island economy but there's no question that short term it's not the most robust picture.

Okay, yes, that's very helpful. Just a couple more questions. Special mention of substandard loans, I think you said that it was $50 million at the end of this quarter. What was that last quarter?

$50 million -- I'm sorry, yes?

What was that balance last quarter?

I don't have that number handy and --

Okay, and then just one final question, we've seen over the last couple months a real pick-up in M&A activity. Could you just maybe talk about what you're seeing from your end? Has the chatter started to pick-up? We've been hearing in the past that sellers' expectations are still way too high. Have we started to see that gap tighten a little bit?

Well, I think that the New England environment has had a couple of very robust deals, and so the multiple is starting to come back into more of the historic range. And certainly the activity has picked up.

Okay, thank you. That's all that I have. Thank you.

Thank you.

(Operator instructions.)

I am seeing no more questions in the queue so I will turn the call back to Ms. Sherman for closing comments.

Well, thank you for joining us. We're almost snowed in or out, depending upon your perspective, but I managed to get here and I see that some of you down in the New York area did, as well. And we will look forward to talking to you I guess in April at the end of the first -- after our first quarter results are out. And happy new year, and talk to you again soon.