Brookline Bancorp Inc (BRKL) 2003 Q3 法說會逐字稿

Good Morning ladies and gentlemen and welcome to the Bancorp Rhode Island third quarter earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Ms. Merrill Sherman, President and Chief Executive Officer of Bancorp Rhode Island. Thank you Ms. Sherman, you may begin.

Thank you and good morning. I am Merrill Sherman, President and CEO of Bancorp Rhode Island Inc. and I would like to welcome you to our third quarter analyst conference call. With me is our Chief Financial Officer and Treasurer, Al Rietheimer, he will briefly take you through our Third Quarter financial results. I'll then come back on to make a few comments and we will as customary both be available to answer any questions that you may have.

During this conference call, we may make forward-looking statements within the meaning of the Securities and Exchange Act 1934. These statements are based on our present beliefs and are necessarily based on certain assumptions which are subject to risks and uncertainties. Actual result 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. And now with that, I'd like to turn it over to Al.

Good morning and thank you very much Merrill. Third quarter earnings were $1.8m, a 7.6% decrease over the third quarter of 2002 but a $23,000 increase over the second quarter of 2003. Earnings per share for the third quarter were 44 cents, which was down 8.3% from the 48 cents reported in 2002 but up 1 cent or 2.3% from the second quarter of 2003.

Net interest income remained relatively the same between the periods as the higher benefits from average earnings, asset increases was offset by a decline in the net interest margin. First, let me talk further about the balance sheet growth and then I'll come back to the net interest margin. After the loan growth during 2003 continued to be strong. Total assets continued to grow and the company ended September 30th with total assets of $1.078b, this is an increase of 2.8% from the first of the year, this growth has been centered in our loan portfolios. The commercial loan portfolio was up $37.3m or 13.3% since the first of the year, presidential loans were up 68.8m or 23.1% and the consumer loan portfolio aided by home equity loan increases was up 12.8m or 13.9%.

On the liability side of our balance sheet, deposits also grew. Core deposits which we defined as checking and savings have grown $59.2m since the first of the year, that represents an 11% increase. As of the end of September, core deposits represented 74.9% of total deposits.

Now coming back to the net interest margin. [Like] the continued growth in our earning assets which were actually up over $90,000,000 more than the third quarter of last year, faster prepayments of both our mortgage and mortgage backed portfolios resulted in adversely affecting our net interest margin. Net interest margin decreased 16 basis points during the third quarter to 3.13 percent and is at 3.26 percent for to year to date period.

Meanwhile, our credit quality remains strong. Total non-performing assets decreased $1.1 million dollars during the third quarter and ended the quarter at $3.6 million or 34 basis points of total assets. This was down from $4.7 million or 45 basis points at the end of June. And this level continues to compare favorably to our peers.

During the third quarter net charge offs were $423,000 as we continue to work through one of our larger non-performing credits. For the nine months period net charge offs were only $488,000. The allowance for loan losses ended the quarter at $10.8 million and represented 1.37% of total loans and almost 300% of total non-performing loans.

On a year to date basis non-interest income increased $1.7 million or 34% from the prior year. And this can be primarily broken down into a few recurring and non-recurring items. On the recurring side continued growth in core deposit accounts has led to deposit service charges being up $192,000.00 for the nine months period. That represents 7% greater than the prior year, and this is coupled with $199,000.00 of increased income from bank-owned life insurance.

On the non-recurring side, gains from sales of investments and MBSs were approximately $750,000 higher this year in the nine months period versus the prior year. And in addition, the bank received prepayment penalties during this nine month period of nearly $300,000.00, which were not present in the prior year. On interest expenses on the year to date basis increased $2.9 million or 15.9% over the preceding period. Continued growth of the company, coupled with the bank's data processing conversion earlier this year, were responsible for the majority of these increases. And these increases were centered in salaries and benefits which increased $1.1 million or 11.5%. Occupancy and equipment which increased $656,000.00 which represents 22.7% and that was driven primarily by the opening of the bank's Lincoln Operation Center. And lastly, our data processing costs increased $820,000 or 57% over the prior year. Primarily as a result of one time charges associated with the conversion.

That concludes my prepared comments and at this point I'd like to turn the presentation back to Merrill Sherman.

Thank you Al. When it came time to prepare this quarter's Press Release and look at the first draft and our counsel called me and said, you know what, it seemed a little exuberant. She had to remind me that we had a decrease in earnings over the prior period last year. And what I really was, was focused on the strength of the growth in our core businesses. Our commercial lending performance has been very, very strong. Year to date I think the growth rate there is around 18% on an annualized basis. Our pipeline is strong, I can tell you I'm very pleased with the credit quality and the kind of penetration and reception that we continue to develop in this market place.

Our deposit grosses are on target notwithstanding delay of our North Kingston Branch, that's nice core deposit gross to date and we are also really leveraging off of our franchise in terms of growing consumer loans. We started last year, we've got some affiliations going that has really resulted in some very solid growth on the home equity side.

We do generate some residential mortgages, post-for-sale and for portfolio, that market is presumably slowing down with a little up- tick in rates and net flow - we are especially pleased with the consumer lending growth.

So, but I think that in the kind of solid numbers we posted on the balance sheet, are not only very pleasing, but I think it holds well for when the interest rate environment changes. As you can see and Al reiterated, we are investing in the franchise, I think that some of the ratios that you see like the efficiency ratio will take care of themselves over time as the earnings increase without corresponding increases and expenses as a result of what we would hope to see is an expanding margin when the rate environment changes. We reiterate that we are really trying to do the right thing over a broader time horizon rather than just focusing on one quarter or one year.

And going back to some of the asset generation that we are experiencing, we are really reaching the first time in this bank's relatively young history, that we are within striking distance of being able to have what I would call home grown assets, come close to utilizing the deposit growth that we are able to generate.

We've always been a very heavy purchaser of residential mortgage loans and even mortgage backs. Al can tell you what we've already purchased

over $200m in the nine months period of residential home loans.

Yeah, and that is pretty extraordinary for an institution our size and specimen to you know, and it's a testament to what prepayment features have been like and I think that over time if, you know - - we've always wanted to reduce our dependence on the purchased mortgages and I think that some of the asset generation that we are seeing, our several business lines are putting us within striking distance of that.

So, with that I want to reiterate you know, - - we are pleased with what we have built. We like our market position and Al and I are very happy to respond to any questions that you may have.

Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants who are using speaker equipment, it may be necessary to pick up your handset before pressing the * key.

Once again, that is *1 to register any questions that you may have. One moment please, while we poll for questions.

Thank you. Our first question is coming from Bill McKrystal of McConnell Z. Romano. Please proceed with you questions.

Morning Merrill and Al.

Good morning.

Hi Bill.

On the margins, can you give a sense of the timing as far as the decline? I mean, was it mostly centered in the first two months and how did - - specifically how some margins - - how did the margin look in September?

Actually Bill, we still experience some pretty fast prepayments in the month of September so that the margin was still compressing in that month. We have started to see some antidotal story or evidence that prepayments are slowing down, but that is still very sketchy and antidotal in nature. So, I cannot say that that decrease occurred early in the quarter. It was continuing throughout the quarter as a result of the prepayments in New England.

Would it be fair to say you'd expect to see continued pressure into the fourth quarter?

The two of us are looking at each other because we have cautious optimism on this side but we've been cautiously optimistic before. So we are ---- the prepayments occur largely in our purchase mortgage portfolio and in our MB assets and that's really what's driving the margin downward and so, you know, all the national services seem to indicate that there is a slow down in the major mortgage origination shops -- cutting back on personnel. So, that leads us to be cautiously optimistic for the next quarter but it still is too early to tell.

Right. And I think especially with some of the securitized products it does take a couple of months for the prepayments to wind their way through the system simply because there are delays in the payment. So, we would expect to see that slowdown first in our residential home-loan portfolio, but it might be another month or two before the securitized products catch up to that same speed of slowdown.

Okay. Then -- without the advantage of having average numbers I'm trying to on a link basis get a sense of the loan portfolio and the growth using period end numbers. Obviously the mortgage portfolio was up significantly and I assume that continues to be mostly purchased.

That is correct.

I guess I'm trying to you know--- I don't get a sense of real organic growth in the portfolio on a linked basis and I don't know if you can comment on that. If they're any circumstances in the market in the quarter that led to that or maybe the pipe line is strong enough that you feel comfortable going forward?

I think when you talk about the organic portfolio you're really talking about the commercial and the consumer portfolio. And at the end of June the commercial portfolio was 314 so it is up $4.2m and the consumer portfolio was 103 so it was up $1.5m. So yes there is growth taking place there but there also have been prepayments, especially because ---I'll take the consumer portfolio as an example with home equity products when people do refinance their first, many times they're wiping out their second and rolling into that first so that we lose the second so that there has been a fair amount of activity but it has been running in place for a period of time there during the quarter. The pipelines do look strong in both of the commercial and consumer portfolios at the present time, so that we are optimistic that growth will be continuing into the future and if the prepayment slowdown will be more evident on the actual outstanding.

Okay. And then just sort of a final note, commenting on the Webster purchase of [Fabb] and how that ---how you view that in your market obviously Webster has a couple of branches in the Providence market. Do you see that as an opportunity to gain from some of the disenfranchised customers or maybe just comment a little on that?

The answer is probably not - first of all their market share is relatively small and it has been pretty lax for the last - for a substantial period of time. So we never perceived them as a major deposit competitor in this marketplace, the kinds of (inaudible) that we're looking for. And the commercial price from time to time, I think we'd see it more often maybe on a real estate loan. So I would imagine that Webster could be a bit more of a formidable commercial competitor but there are options already in this market if you want to bank with a larger out of state institution you've got Sovereign here and Fleet and Citizens they're large and no matter they're home grown this is their own territory. So I really don't get overly concerned. I think we'll see more of them probably a year from now, but we are - we have our position is pretty carefully defined and our reputation knock on wood continues to grow and we're optimistic about our competitive ability.

Very good thank you.

Thank you and our next question is coming from Mark Moss of FTN Financial. Please proceed with your question.

Good morning.

Hi Mark.

If ya'll could comment real quickly on what kind of competitive pressure you're seeing out there in terms of pricing or otherwise today that is different than say three to six months ago? And then also could you comment on in terms of your commercial customers, are they starting to show an interest of maybe going out and adding to the loans or is it more of a market share type gains with your commercial growth?

First on the pricing pressure -- it's there, it's not a high growth market, never has been. So for the good assets that are available there is considerable pricing pressure and we compete. That's about all I can say. Everyone kind of shakes their head -- that it's worse, I don't think it's worse. It's just been there for the last 7.5 years.

The Second part of the question was do we see an expansion? I think that our business has always been in this market price -- more takeaway than business expansion. Having said that for the last 2 years, most of our customers have not experienced material top line growth. Construction industries have done amazingly strong around this area, but most customers have not seen top line growth. I think we are starting to see in the financials we're getting in, moderate top line growth and from time to time a little expansion.

A lot of the companies, we bank largely family owned businesses, and they've been tightening their belts for the last two years, we're starting to see them back in the black and I know our credit quality is in good shape that way, that's not your question but I think you're seeing a little bit of expansion but no one -I saw it quoted in the paper the other day no one is quite doing hand stands yet and I think that's a fair characterization.

Okay thank you.

Thank you our next question is coming from Clay Lewis of the Wheybosset Research and Management. Please proceed with your question.

Good morning Merrill and Al

Good morning Clay.

My main question has to do with your perception of Webster coming into the market place as well, but since you already handled that one -- just two questions: the long term interest rates are up and I guess going higher and the yield curve remains pretty steep, can you talk a little bit more about what that means for your net interest margin not next quarter or anything like that, but going forward? And then could you also explain the line on the balance sheet, the income statement that has to with the bank owned life insurance, what is that and how does that work?

Let me start out with the effect of the steepening of the yield curve. Hopefully what that will mean Clay is a slow down in prepayment speeds, particularly as we mentioned earlier in the mortgage and mortgage backed security portfolios. That should be positive news to our balance sheet.

With the steepness in the yield curve that typically has always been a very good thing for the banking industries. It allows them to take in core deposits and be able to lend them out at reasonable spreads to demonstrate some nice profitability. So I view the steepening as a positive sign, as I mentioned earlier we still have to wait for the prepayments to follow that before it really becomes evident on our balance sheet and our income statements. As far as the bank owned life insurance, what bank owned life insurance is, is a vehicle that financial institutions use to in effect fund some of their benefits by using an insurance wrapper to take advantage of the tax deferred nature attributed to insurance products. So what we have done is invested roughly $15m into bank owned life insurance to take advantage of those tax deferred characteristics in order to fund a number of our employee benefit plans on the expense side of our balance sheet.

That was done last year.

It was done in two steps, the first step was done last year and actually both steps were done last year.

And the earnings that you show on those life insurance policies are those available for use by the bank?

Yes they are. Those earnings show up in non-interest income because what it is, is an appreciation of the cash surrender value of the underlying policy. So it doesn't come through it as cash flow per se. But it does manifest itself as an increase in the cash surrender value of the policy.

Are those funds available for the bank to use or is that an offset of an expense or I mean how exactly does that work to the benefit of the bank?

There is no cash flow coming through, the cash flow actually comes through by either cashing in the policies for the cash surrender value or reaping the cash flow that would come at the death of a covered individual.

Which individuals are covered?

We've covered the senior executives and then the next level of officers. So it is all officers from vice presidents and up that have some coverage. Most of it is centered on our most senior executives and all of them have - are fully aware of the coverages and -

Consented to it?

Consented to it yes.

I think it is actually fairly typical for institutions to have [fully] on their books and it's almost the unusual institution that doesn't.

Okay no janitor insurance?

No janitor insurance.

Okay thanks very much.

Welcome ladies and gentlemen. As a reminder if you do have a question please press star one on your telephone key pad at this time. Our next question is coming from Jared Shaw of KBW. Please proceed with your question.

Good morning this is actually Damon Delmonty how are you?

Good morning Damon.

A quick question for you -- on your non-interest income I noticed there is a slight decrease in service charges on deposit accounts, so I was wondering if you could comment on that? As well as give us an up date on the campus made program and any future plans with that?

The non-interest income dip is a combinations of factors. I'm going to let Al just walk through some of the larger ones.

A couple of the factors affecting deposit service charges -- one there was a settlement earlier this year with the Master Card-Visa fees and that has been passed along in the form of a lower credit to us so that we have seen a decrease in the last two months of approximately $15,000 to $20,000 per month for that, but that is dependent upon volume.

And then the other item is that in - as a result of our conversion we've been going through a number of the coding of our service charges and have found that there were a few items during this past quarter which had not been properly assessed and have since been corrected so that they should be back on line for the fourth quarter.

And I think the final piece is that for what ever reason our customer base didn't over draw their checking accounts significantly during this quarter and you know it's just a combination of factors and hopefully we'll do a little better next quarter. Although I don't think that - in fact I know the mass core income is going to be coming back.

The second part of the question was related to campus made programs. We're installed, we're up and running at both URI and Widener in addition to our two existing accounts. I cannot - it was a lot to bite off in a short period of time so I think we've worked our way through some operational issues. I think the customers are satisfied. The Widener results have been less than anticipated. They had some issues on their side, some personnel transitions. And so on the whole we have done substantially what we set out to do. Profitability is a little more labor intense than we anticipated so we're taking a look at how to stream line that in order to make sure that we're not losing money on the product. And so it remains developmental shall we say at this point.

Great thank you very much.

Thank you at this time we are showing no further questions in queue. I would like to turn the floor back over to management for any additional or closing comments.

Thank you very much for being with us this morning and we look forward to talking to you. So I guess it's year end at the next call. So thank again for your time bye-bye.

Have a great day.

Ladies and gentlemen thank you for your participation. This does conclude today's teleconference you may disconnect your lines at this time and do have a wonderful day.