Brookline Bancorp Inc (BRKL) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Bancorp Rhode Island, Inc. fourth-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. (OPERATOR INSTRUCTIONS) 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, Inc. Thank you. Ms. Sherman, you may begin.

Thank you and good morning. I hope that for those of you who are calling in -- I hope someone is calling in from Florida, because it's certainly cold and snowy in New England. I'm Merrill Sherman, President and CEO of Bancorp Rhode Island, Inc., and I want to welcome you again to our fourth-quarter analyst conference call.

With me is our CFO and Treasurer, Al Rietheimer. He is going to take you through the fourth quarter and year-end financial results. I'll then come back and talk a little bit about our plans and prospects for 2004. And then we will both be available to answer any questions you may have.

During this conference call, we may make forward-looking statements within the meaning of the Securities Exchange Act of 1934. These statements are based on our present beliefs, and are not necessarily based -- and are necessarily based on certain assumptions, which is subject to risk and uncertainty. 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 SEC.

With that, I would like to turn this over to Al Rietheimer.

Good morning, and thank you, Merrill. Fourth-quarter earnings for Bancorp Rhode Island were just under $2 million. That was a 3.5 percent increase over the fourth quarter of 2002, and a $210,000 increase, or 11.8 percent, over the third quarter of 2003. Earnings per share for the fourth quarter were 48 cents, the same as the amount reported for the fourth quarter of 2002, but up 4 cents per share, or 9.1 percent, from the third quarter of 2003. On a year-to-date basis, net income was $7.2 million or 1.7 (ph) cents per share. That is down from the previous year -- 6 cents in net income and 8 cents per share. During the fourth quarter, our net interest margin improved as a result of the slowdown in prepayments on both residential mortgage loans and mortgage-backed security. Those prepayments dropped off significantly during the fourth quarter.

Let me talk a little further about the balance sheet, and then I'll come back to our income statement. Total assets continued to grow for the company, and ended 2003 at almost $1.1 billion. This was up 8 percent from (ph) the beginning of the year. This growth has been centered in our loan portfolios. Our commercial loan portfolio was up 51.3 million, or a little over 18 percent for the year. Our consumer portfolio, which is primarily home equity loans, was up 23.9 million or 26 percent for the year. And our residential mortgage portfolio was up 68.5 million or 23 percent for the year. Fourth-quarter growth for both the commercial and consumer portfolios continued, and for the fourth quarter only, it was 14 and $11 million, respectively, for those two portfolios.

On the liability side of our balance sheet, core deposits -- which are checking and savings -- have grown $58.5 million, or 10.8 percent, since the first of the year. While they continue to grow in the fourth quarter, we did see a little bit of softening in savings growth with some outflows occurring there. But DDA and NOW growth continued. During the fourth quarter, we did start to promote certificates of deposit again. It had been a long time since the bank had done so, and we have brought those balances back over $2 million by year end. Even with the slight growth in CDs at the end of the year, the checking (ph) and savings deposits aggregated just under 74 percent of total deposit.

Coming back to the income statement and our net interest margin, that slowdown in prepayment speed for both the mortgage and mortgage-backed securities reduced the negative impact that the faster prepayment need (ph) had had earlier in the year. Our net interest margin increased 20 basis points from the third to the fourth quarter of 2003. Those specific numbers -- we were at 3.33 percent for the fourth-quarter versus 3.13 percent for the third quarter of 2003. Just to give you a little historical perspective, for the fourth quarter of 2002, our net interest margin was 3.26 percent.

While for the year, our margin was down from the full previous year, we ended 2003 with a margin of 3.28 percent versus 3.48 percent for 2002. The increase during the fourth quarter has returned our earnings capacity to us. It leaves us guardedly optimistic for 2004.

Meanwhile, our credit quality continues to remain strong. Nonperforming assets decreased in the fourth quarter by $1.1 million, down to a level of 2.5 million, or only 23 basis points of total assets. This level continues to compare favorably with our peers.

During the fourth quarter, net charge-offs were $130,000, and for the twelve-month period, they were only $618,000. Both of those numbers compare to provisions of 400,000 in the fourth quarter and 1.6 million for the year to date. At year-end, our allowance for loan losses was at 11.1 million and represented 1.36 percent of total loans and almost 450 percent of nonperforming loans.

Non-interest income for the year increased $1.7 million, or almost 25 percent. This increase can be broken down into a few items. During 2003, the company did take gains on sales of investment and mortgage-backed securities -- approximately $1.1 million more than they had in the previous year. In addition, the bank received approximately $250,000 in prepayment penalties more than it had received the previous year.

On the recurring side, continued growth in core deposits has led to an increase in deposit service charges of approximately 152,000, or 4 percent, for the year. Earlier in the year, we did have a few bumps following the conversion, which had negatively impacted our service charges. Those bumps are behind us now, and as we enter 2004, we believe that we will see continued growth in deposit service charge. Also in 2003, income from bank-owned life insurance increased 155,000 over the preceding year.

Non-interest expenses increased $498,000, or 7.1 percent, from the third to the fourth quarters and are up 3.8 million, or 15 percent, for the full year 2002 to 2003. The continued growth of the company coupled with the bank's investment in its data processing conversion and its operations center earlier in the year were responsible for many of these increases.

Salaries and benefits were up just under 10 percent. Occupancy and equipment were up $880,000 or approximately 29 percent -- again, going back to the opening of the Lincoln operations center along with upgrading our data processing local area and desktop computing.

Outsource data processing was up seven point (ph) -- I'm sorry, $790,000, or almost 40 percent. Much of this was a result of charges associated with training and initial setup of our conversion for data processing that occurred earlier in year.

And lastly, other expenses were up about $600,000, spread really across the board, from things like recruiting -- up about $159,000 (ph) -- to stationery supplies, printed forms, which were up only about 5,000 (ph).

That concludes my prepared comments on the financials. And at this point in time, I'd like to turn the presentation back to Merrill.

Thank you, Al. Just to give you a couple of comments about an overview of what we're thinking about Rhode Island in general and the Providence area in particular. Couple of comments about faces of at bat (ph). Talk about the marketplace a little bit in terms of competition. And finally, talk a little bit about our prospects for next year.

With respect to Rhode Island economy and Rhode Island generally, I think that real estate is -- particularly residential real estate is still in good shape here. One has to question -- when you look around at the amount of development that we're seeing -- whether it's all going to be absorbed at prices that people are anticipating. But on the whole, the development side looks good. And for our single-family homebuilders, we generally don't let them get more than one house ahead of us. But they are doing quite well and selling. And so we are seeing all the residential projects that we have that are construction doing very nicely. But we are a little bit cautious looking forward, just because of how much is going on.

On the commercial side, things are fine. Vacancies are relatively low. But we know that there's some sharpness in the Greater Boston area. And ultimately, that generally ripples through here. So we shall see.

In terms of the economy, I would call it moderate to okay. Rhode Island is very strong on education with Brown and RISD and J&W, all of whom are in the expansion mode -- J&W more out-of-state than here, perhaps. But certainly Brown and RISD -- attracting enormous investment to the state. So I think that bodes well. Especially (ph) in G tech (ph) relocating downtown is a good thing as well. The flip side to that is that the -- with Fleet being acquired during the move, there are a number of (technical difficulty) high-paying jobs here. And clearly, with the long-term impact (indiscernible) two or three years -- (technical difficulty) what's going to be happening.

So, that's kind of an overview from our standpoint. In Providence itself -- down-city looks great. It is a Renaissance city. We had a visit from Andre Duany who is really a nationally pre-eminent planner. And he talks about the three great cities of the Northeast. I don't know who I'm going to offend with this comments, but he talks about three great cities in the Northeast, being New York, Boston, and Providence. And it's a very dynamic, growing, charming small city. So we feel -- on an intuitive level, you feel good about that. Certainly the governmental changes have been for the better here. But we face the same kind of issues as to who is relocating to Rhode Island on a larger scale to help fuel economic growth. So it's got the same fiscal challenges, and certainly the state has the same fiscal challenges that other states and cities. So on the whole, generally positive, but there are some concerns.

In terms of the marketplace, I don't think there's a bank in the marketplace who's not looking to Bank of America and what the impact is going to be. We find an increasingly (ph) competitive marketplace. Citizens is excellent at what they do on the retail side. They are highly visible, highly sophisticated, and a very formidable competitor. And I think that they don't intend to take a backseat to B of A. So (indiscernible) those two giants duking it out. We are starting to see competition -- I don't want to (ph) say competition, but I guess that is the word for it -- a couple of local credit unions that have gotten very large. And they have the advantage of not having to make a profit or pay taxes. So you see them out there advertising far more extensively and aggressively than they had in the past.

So -- you know, Al had alluded to -- it's the first time in a long time we have seen any kind of deposit softness on the savings side. And I think it's a combination of money moving back into the market, maybe some more competition, and also, people are out there with competitive offers on CDs. And so we get dusted off (ph) a CD add or sells in (ph) run run (ph) in about three or four years at least, and have gotten some nice results from that. But that may represent some kind of shift in what the marketplace will give you in terms of your deposit gathering capacity.

And before going on to next year, I just wanted comment on -- Al had talked about commercial growth this year, which is net $51 million. I don't think that begins to reflect the strength of the commercial growth. We had in excess of $20 million of prepayment. The low-rate environment encouraged a lot of refinancing on the commercial side, as well. And so between a couple of credits that we exited, and we end up -- net 51 doesn't begin to reflect the amount of the originations that took place. And we have closed some really terrific NOW and commercial real estate deals. But really nice C&I credits, a lot of asset-based credits. (indiscernible)

And the reputation of the bank continues to grow. I could not be more pleased with what our business lending reputation is and the growth on that side. And I do not see that market niche going away. That's kind of a nice area that we have carved out for ourselves on the lending side. And there's also some really healthy consumer loan growth there. We get a nice niche and a partnership there that is resulting in very strong home equity conventional -- loan (ph) to value, solid credit, home equity term loan business that is very welcome here on our balance sheet, as well.

In terms of next year, what we're going to -- what -- we're thinking that we should be able to return to double-digit net income growth, looking at probably 12 to 15 percent net income growth. I would reiterate all the cautions that we put out at the beginning of the call in terms of forward-looking statements with that. But I can tell you that -- I remind you, rather -- tell you that better than three-quarters of our income comes from the net interest margin. So assuming a stabilized to moderately increasing environment, we should be seeing some improvement there. I was particularly pleased this quarter with the margins popping up and November and December were stronger than October, when we were still comparing (indiscernible) prepayments. So there are things -- so we're just kind of cautiously optimistic that if we -- if conventional wisdom holds, we should be able to maintain and improve that margin. And that's going to be the key to next year.

And with that, I will open it up for questions.

(OPERATOR INSTRUCTIONS) Bill McCrystal, McConnell Budd & Romano.

Good morning, Merrill, Al. Merrill, it's perfect timing, because as you talked about the growth in commercial portfolio, I just looking back in 2003 -- overall loan growth 21 percent, deposit growth 6 percent. You're indicating that the pipeline looks pretty good, that there are a lot of -- you're somewhat optimistic. And I know that some deposit relationships will come as a result of loan growth through compensating balances and so forth. But how do you comment about the loan growth and the relative deposit growth for 2003? And also, what do you look for going forward?

You know, if you take a look at our core deposit growth this year I think it's little slower. But still post (ph) 11 percent. When I say core deposits, I'm talking checking and savings, and not including CDs. We did a split up (ph) to look at the difference between the business account growth at the core and the consumer account growth at the core. And Al, stop me if I'm wrong, because of course, I don't have the figures in front of me. But if I'm not mistaken, we went back five years and looked at business checking, business NOW -- which is limited to kind of nonprofits, and -- at least in the business savings account, as well -- if you considered that business core, and then compared it to your consumer growth. I am going to say that roughly in 1988 (ph) we had something like $45 million in DDAs and savings and NOW on the business side. And that's grown to around 180, 185 million. And then on the consumer side, we had around -- in '98 (ph), we'd been around 215 million. And that's gone to around 415 million.

So what that says to us is that pulling in these commercial relationships -- because it's the exception and not the rule. It's just -- basically speaking, if you're going to bank with us commercially, we expect to be your primary bank of deposit. And that has really -- that combined with the small business checking product that we have has really fueled some growth. I don't know if that's directly responsive, Bill. But the more we grow commercially, it certainly has a very strong spillover effect on the deposit side.

That's fair. I wouldn't expect one year to be indicative of your (multiple speakers) --

And, Bill, the other thing that I guess I would point out is that part of that overall loan growth this past year occurred in the residential portfolio (multiple speakers) which we really view as an alternative to investment. I mean, our mortgage-backed portfolio fell by about 50 million this past year. And we increased the residential portfolio by about 69, 70. So -- five-sevenths of that increase, in our mind, is really viewed as simply looking at what was the best opportunity when we were investing. And we found this past year to be -- in whole loans more attractiveness than in the securitized product. That easily can flip the other way, or could be used as a source of liquidity to fund continued commercial and consumer loans.

Okay. Al, what kind of assumptions in terms of interest rates are you factoring into your internal projections as far as the Fed goes for this year (ph)?

Well, we subscribe to an external service -- Global Insight. And we use that for some of our planning. And then obviously run sensitivities from that. But we're not economists, so we try not to make interest rate projections ourselves.

Excuse me, I'm going to add -- we let other people be wrong about that, okay?

The forecast that we've receive from Global Insight suggests that interest rates will remain stable during the first half of the year and rise in the second half, but probably only to the tune of maybe 75 to 90 basis points. Again, I want to stress the fact that we do run sensitivities against that, because, as Merrill pointed out, just because someone else has forecasted it doesn't mean that it's correct, either.

Okay. And I guess just one little final matter -- any fallout, any implications from the laptop issue? Was that fully resolved at this point?

The answer is there was a little fallout. I mean we had some deposit loss -- I'd call it modest. But it's basically behind us now. Any of you who are not aware of it, our data processing provider, Fiserv, called us and told us that a laptop that contained some of our confidential customer information had been stolen from them. So we went out very early, very public, and very straight up (ph), we dealt with it (ph). And people are real comfortable with the way we dealt with it. And it's behind us. I can tell you that they've closed their investigation, both -- they had private investigator and police look into it. They have a suspect, but he wouldn't take a polygraph. And they think -- they just think it's a laptop -- and opportunistic theft of a laptop. That's the last we heard.

Slade Lewis (ph), Weybosset.

Good morning. They almost got my name right. With the -- since we're resuming growth and these big expenses are apparently behind us, what -- you mentioned a sort of a double-digit type earnings growth rate. Do you have a notion what kind of return on equity we might be looking at going forward? Number one, and number two, tell us about your dividend policy going forward, as well.

Well, let's take return on equity first. Al's sitting here with the calculator. But I can tell that we would (ph) do about 10.5 percent this year. (Multiple speakers)

10 percent in '03, you mean? (Multiple speakers)

It's going to improve next year. But it's still going to be what I would call relatively modest. And it's going to be three to five years out before -- you know, the holy grail is 15 percent. And we're still not -- you know, the bad news is we're not there. The good news is there's still a lot of room for improvement with this institution. (multiple speakers)

I'm sorry, Merrill -- 10.5 percent for '03 or 10.5 percent for '04?

We said 10.5 percent for '03. It should improve next year, assuming we get the earnings growth. But it's still not going to be what I would call a world-beater (ph) type ROE.

In terms of dividend policy, the only thing I can say, Clay, is the board looks at the dividend on a -- you know -- at its quarterly meetings, and makes a reasoned business judgment as to what it should do.

(OPERATOR INSTRUCTIONS) Mark Muth, FTN Financial.

Good morning, Merrill and Al. Could you comment, please, on your thoughts on the reserve and what your thoughts are on that going forward, given the fact that the economy seems to be starting to pick up nationally, and commercial loan growth is strong, and your asset quality is steadily improving?

We're comfortable with where it is. You know, and we're pretty conservative that way within the bounds of judgment. Some of us were involved with troubled institutions and turnaround (ph) management there. So we're generally conservative. But I can tell you that we're very comfortable with the reserve, and very comfortable with the credit quality. So -- Al, do you want to add anything on that one?

You know, we do look at it each quarter, and look at where our internal trending is indicating there maybe problems, or where existing problems exist. And we do take that into consideration as we go from quarter to quarter to quarter. We are cognizant of what the accounting profession and the SEC have both been saying as far as what's appropriate for reserving. And we bear all that in mind on a quarterly basis as we review our reserve.

Okay. And what about capital levels? Is capital a concern for you? Are you comfortable with this giving -- improving prospects here for loan growth?

Overall, we've always have the philosophy to be well-capitalized, but not to be over-capitalized. We expect that we will continue that way, and that our capital ratios will remain above the well-capitalized level. There's a little bit of concern with what's going on with the trust-preferreds of the world, because we have utilized them from time to time over the past few years. But the last I had heard, the regulators still hadn't waited in with a final resolution to that. But we do think that we have access to the markets if we do need to add (technical difficulty)

Kelly Hinkle, Lycos Capital (ph).

I was wondering if the fourth quarter expense number is a good run rate for '04, or if you could possibly give a target efficiency ratio for the year?

We have typically not given that precise of guidance, Kelly. So we're going to refrain from doing that at this point in time. Looking at the fourth quarter, we had some expenses in there that went with what we were doing throughout the year. And again, the only guidance that we'd prefer to give would be the overall guidance of where we think net income will be for next year.

We show no further questions at this time. We'd like to turn the floor back over to our speakers for any closing comments.

Well, thank you all for your interest, and I look forward to talking to you at the end of next quarter. Bye-bye.

Take care.

This concludes today's conference. Thank you for your participation.