Brookline Bancorp Inc (BRKL) 2003 Q2 法說會逐字稿

Ladies and gentlemen, I would like to welcome you to the Bancorp Rhode Island second quarter earnings conference call. Your host for today is Merrill Sherman. Ms. Sherman, you may begin.

Thank you, again I’m Merrill Sherman, President and CEO of Bancorp Rhode Island Inc. I’d like to welcome you to our second quarter earnings conference call. With me is the Bank’s CFO and Treasurer Albert Rietheimer. He will take you through our second quarter earnings statements then he and I will --- I will be making few comments and then he and I will be available to answer any question that you may have.

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 press release and are necessarily based on certain assumptions, which are subject to risks and uncertainties. Actual results may differ materially from those discussed here. For more information on these risk factors you can consult with the company’s filings with the Securities and Exchange Commission. With that I’d like to turn it over to Al Rietheimer.

Well good morning and thank you very much Merrill. Second quarter earnings were $1.8m which represent an 8% decrease over the second quarter of 2002 but also represents a 5% increase over the first quarter of 2003 on an earnings per share basis that turns out to be 43 cents per share for the second quarter of 2003 which was down 10% from the 48% cents reported for the second quarter of last year and again in comparison to the first quarter of this year we are up 1 cent or 2% from the 42 cents reported then.

Before I talk further about our earnings, I’d like to make a few comments about our balance sheet. Total assets have continued to grow and the company ended June 30th with total assets of $1,048,000,000. This growth was centered in our loan portfolio, with each of the individual loan portfolios going up 11% or 12% for that six-month period. Commercial loans led the way, being up $33.1m, followed closely by residential loans, which were up $32.5m and our consumer loan portfolio, which is primarily home equity related, was up $11.3m.

On the deposit side of our balance sheet, while we did have some outflows in certificates of deposit, core deposits, which we define as checking and savings, grew $22.3m or 4% during the second quarter, bringing the total that they are up for the six-month period to $32.7m or 6% and at June 30th, those same core deposits now represent 73% of total deposit.

Speaking of credit quality, total non-performing assets at June 30th, were $4.7m or 45 basis points of total assets. This was down from the $5.2m or 51 basis points of total assets that we reported at March 31 of this year.

Our allowance for loan losses ended the quarter at $10.8m and represent coverage ratios of 1.45% of total loans outstanding and over 200% of non-performing loans. Net charge-offs for the quarter, were only $5,000 and for the six-month period totaled $65,000.

Switching over to the income statement, despite the continued growth in our earning assets, the current low interest rate environment has affected our net interest margin. The net interest margin decreased four basis points during the quarter but remains slightly above the margin that we had for the fourth quarter of 2002. The actual numbers for the second quarter were 3.29% compared to 3.33% for the first quarter and on a six months total, our margin is at 3.31%.

Non-interest income on a year-to-date basis increased $1.2m or 40% over the same six-month period last year. The increases can be broken down into really two recurring and two non-recurring areas. On the non-recurring side, gains on sales, investment and NBS security were approximately $400,000 higher this year than last year. And in addition, this year the bank received pre payment penalties of approximately $250,000. On the recurring side continued growth in our core deposit account has led to deposit service charges being $228,000 or 13% higher than last year and this coupled with $171,000 of increased income from bank owned Life Insurance rounds out the reasons for the increase in total non-interest income.

Non-interest expenses also on a year-to-date basis increased $2.1m or 17% in the first half of last year with four areas responsible for the majority of these increases. Salaries and benefits increased $790,000 or 13%. That can be broken down into really three areas. Benefit expense continues to rise and that was up approximately $250,000 of that total. Then there were raises to existing positions and then we brought on a number of new positions to support the continued growth of the company. Those new positions equated to about $450,000 of the net increase in salaries and benefits. Those new positions were split almost evenly between what I would describe as front office and back office positions, so our growth is throughout the entire institution.

Occupancy and equipment increased $445,000 over the same period last year and data processing increased $721,000 over the same period last year. The increases in data processing are primarily associated with the conversion that was completed in the second quarter.

Other expenses were up $408,000 and these could be broken down into three larger areas our data communication charges were up $94,000, our recruiting expenses were up $78,000 and expenses associated with our cash management program were up $105,000. That concludes my prepared comments on our financial performance, so I would like to turn the presentation back to Merrill.

Thank you Al and most of my comments will focus on some of the basic aspects of what Al said but not really go much beyond them. In a sense the deposits did pick up, they were a little slower in the first quarter, so we were pleased to see a bit more momentum in the second.

Our commercial loan growth remains very soft, despite the economy and environment we have been able to load that portfolio, typically on the C&I side. We may see that slowing a little on the C&I side but I think that Real Estate group has some significant transactions that are about to come to fruition, so we expect to see continued commercial growth. Finally, to reinforce Al’s comment, our credit quality remains very strong and we’re particularly pleased with it. We are through with data processing conversion, I think we didn’t realize just how much of an internal focus that would result in and hopefully we’re starting to be able to look more outwardly, particularly in the operations group. We still have some clean up issues but, and obviously with any conversion we’ll have accrued acclamations getting use to the system but I think hopefully (inaudible) is behind us. North Kingston is our next branch location probably experiencing a modest delay there, given the nature of construction, and some of the construction demands here, we’re still hoping to have it on line by the end of the year.

The final thing I would note is that we’re particularly excited about some of the growth we’re seeing in our campus mate program. It’s a program where we are basically in electronic back office with colleges and universities, that gets our foot in the door there and we think this is a product with tremendous potential.

We will be announcing either later today or tomorrow that we signed a poor school to Pennsylvania school, so we will be exporting this top side for New England and some of the nice things to us about the product is that it really is an institution of our size foot in the door at major colleges and universities, all of the schools on board are significant institutions, could also has some outer pocket potential for us.

I will issue a word of caution with this product, which is that we’re not currently making any money with it and like any new line of business it has a kind of risk and uncertainties that are inherent in a start up line of business. Having said that I think it’s a real feather in our cap that we taken development this far and we’re very pleased with where we stand with the product.

So with that we will open it up to questions.

Ladies and gentlemen at this time if you would like to ask a question please press the one key on your touch-tone telephone. If your question has been answered and you would like to remove yourself from the queue please press the pound key.

Your first question comes from Mark Moss with FTN Midwest Research.

Good morning.

Good morning

Could you all quickly talk about what kind of trends you’re seeing in the watch-list, and where the 30-day passages, I know the NPA came down one quarter. Which will we see- - the watch list, what you’re seeing?

At the risk of not commenting - - avoiding commenting on this in the future, I will comment on it now which is that we saw improvement in the watch-list over the past quarter. Bear in mind that I don’t - -I - - you know, in a relative sense when I came out of the early 90’s in the banking industry, our watch-list in comparative terms is relatively small, but we actually saw credit improvement there. And the delinquencies in our core portfolios are modest to insignificant, I think insignificant is probably the best word to describe the kind of delinquencies we have with our own portfolio.

Okay. And how much one time expense was incurred in the second quarter relating to finishing up the CT(ph) conversion?

I’ll handle that one. We have approximately $650,000 of one-time, using that term loosely, charges spread over equally both the first and the second quarter. So there was roughly 300-350,000 in each of the two quarters totaling 650.

Okay, and finally, could you just quickly comment - - you said the loan demand was strong in the corporate circuit, what are you seeing out of your best commercial customers today compared to six months ago? Are you seeing more willingness to take out loans or - - what exactly are you seeing trend wise?

I think its still very, very much wait and see in the environment. Most of our business and the business growth doesn’t come from expansion on the existing customer base nearly as much as it comes from generating new customers. And generating new customers in this market place is largely taking the business away from a larger institution.

Thank you.

Kind of follow-up on that comment, because we had a humorous moment in our board meeting yesterday, when one of our board members who runs a very successful company was telling us that he was called upon by a capital equipment salesman and he’s been holding back making a purchase because of the economy. And the salesman told him “well, if you made the purchase the economy would improve”, so I asked whether he was the chicken or the egg, and he claimed to be the chicken on things like this. And I think that you’re still seeing businesses hold back and it’s a very quiet environment out there.

Your next question comes from Bill McKrystal (ph) with McConnell Budd and Romes.

Good morning Merrill and Al

Morning Bill

Good morning Bill

On a residential side, what is the product that you’ve been purchasing? Can you give some of the characteristics of that and the prices?

Well we’ve been purchasing a combination of products here. They are all whole loan jumbo products, we have purchased some 5-1 hybrid arm products, we also have purchased some fixed rate product during this period since the first of the year.

The yields have been compressing, but what we have been seeing is anywhere from 70 to 100 basis points higher yields than comparable securitized product. So if I were to compare the whole loan versus the MBS or CMO equivalent are as close as I could find of that equivalent, what we are seeing in the whole loan product is between 70 and 100 basis points higher yield, assuming similar pre-payment characteristics.

Okay, and on the home equity side, what kind of parameters do you have loan to value and what kind of rate test do you put in terms of the ability to pay in a higher rate market?

The answer is that we are --- in terms of loan to value we are very conventional, it must be the 80% or something like that. We don’t do a 120% (technical difficulties) under written loans for rates you can prepay at any time. And I’m trying to remember what the latest rate on the home equity is. Probably somewhere south of 60% at this point and they generally have a 15% fixed rate.

They’re fixed rate term loans and yeah, I believe Merrill is correct, they’re in the high five at this point in time.

Okay, so they are all fixed rate?

Yeah. Oh yeah, well the home equity line product is a floating rate product. Those are generally priced somewhere between five, five minus a half. It’s basically what the marketplace is here, five minus a half to five minus one I believe, at its lowest point.

And I can tell you that what we saw this past quarter is a very significant jump in the first quarter on the home equity loan, its much more modest growth in the aggregate side of the prices portfolio this quarter. That’s tremendous volume running through there. And there’s been a wave of first mortgage refi. I think a lot of people use that opportunity to refi their home equity loan as well.

So we’re generating real volume there, but we are not getting the balance growth that that kind of volume would normally leave open.

And Bill, just to clarify that, most of the growth that we are seeing this year is in the fixed rate 15-year product opposed to the line.

And then if you could just comment somewhat on the margin going forward. Obviously a lot of it depends on market conditions, how are you set and what your thoughts are? Maybe even a range of ways you could see the margins going?

Well I mean I guess I’d come back first and say what we’ve seen over the last couple of quarters. We have seen our margins come down quite a bit last year because of the precipitous drop in market interest rate. It sort of bottomed out in the fourth quarter at 326, bounced up a little bit in the first quarter at 333, and was 329 for the second quarter of this year.

So we --- while it is definitely still under pressure and we did have a little bit of shrinkage from the first quarter to the second quarter, I guess we are at least hopeful that we are near the bottom, or at the bottom here. But that’s going to really be dependent upon what market interest rates do. And looking at yesterday or this morning’s paper and yesterday’s comments by Mr. Greenspan, I think that if there was further fed cuts that could have still a negative impact on the margin there.

Okay thanks very much.

Your next question comes from Earl Chambers with Three Twenty Corporation.

Thank you I want to stay for a moment on the margin of squeeze. Some of the small banks I’ve been looking at have quite surprisingly increased their margin despite the fact that interest rates have come way down. I guess my question which is probably a bit blunt did you get the direction of interest rate incorrect? Or did you over emphasize the duration of your assets or your liabilities and not keep up a match. What exactly happened I guess is what I’m trying to find out?

Well let me try to answer some of that and --.

It’s tough stuff I know but I --.

You know if we knew the answer we probably could do something different but let me try to take a stab at it and then turn it over to Al for--- he probably has more technical reason. I mean mine is a much more global thing Earl. Which is – the first is that we have is a significant number of purchased mortgages at a variable rate and so over the last year and for this year, although they are running off the (inaudible) of this year. We experienced pressure in two ways because if we have our purchase mortgages being refied at a large rate. The assets that we have either replaced tend to involved claiming more purchase mortgages (inaudible) looked to the lower rate. And then the second thing that happened is that any premium we paid to purchase the portfolio amortizes at a greater clip. And since our formation we have always purchased you know 1-4 families mortgages type in various term to fill out our balance sheet. So that’s one aspect of it.

Second I’m going to say that our market probably has an unusual pricing structure to it in terms of deposit pricing. You’ve got a dominant player in this market place that has an excess of -- in excess of 40% probably closer to 45% market share. And they are progressively growing their franchise in other areas of the country by paying a uniformed price through out their market region. And so that is a result that I think an inability of the institution to bring its deposit cost down quite as much as it would like to in this environment. So it’s a very global comment Earl and I’ll turn it over to Al for more technical --.

Sure thanks

And I guess I would add to what Merrill has said talking about our deposits since a large percentage of our deposits are core deposits, checking and savings. There is a limit to how low you can go. Zero sort of has an artificial floor on how far those rates can go. And in particular because we do have a fair amount of DDA business because of our commercial relationship. A couple of years ago when we were taking in those deposits at 0% and earning 4% in overnight funds compared to today where we are still taking in those deposits at 0% and the overnights markets are paying a about 1%. So there is a tremendous squeeze there. We do have an asset sensitive balance sheet Earl and we will benefit from rising rate environment assuming that they don’t, you know go up too quickly that they out pace any Caps that are on the re-pricing period of our mortgage loans. So I think it’s a combination of a number of factors. But we definitely are and still have a slightly asset balance – assets sensitive balance sheet.

Sure thank you very much.

Thank you.

Again ladies and gentlemen if you would like to ask a question please press the 1 key on your touch tone telephone. I show there are no further questions.

Well thank you all for calling in this morning and we look forward to talking to you next quarter. Bye-bye.

Bye.