Brookline Bancorp Inc (BRKL) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Bancorp Rhode Island, Incorporated First Quarter Earnings Conference Call. [OPERATOR INSTRUCTIONS]

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

Thank you. Good morning. I'm Merrill Sherman, President and CEO of Bancorp Rhode Island, Inc. I'd like to welcome you to our first quarter analyst conference call.

With me is the bank's CFO and Treasurer, Al Rietheimer. Al will take you through the first quarter financial results. I will then come back and briefly make some comments, and then we will both be available to answer any questions you may have.

During this conference, we may make forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These statements are based on our present belief 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.

And with that I will turn it over to Al Rietheimer.

Good morning and thank you, Merrill. I'm going to start off first with our first quarter earnings. They were $2.1 million and represented record quarterly earnings for the company. That also represents a 12, I'm sorry, a 23.4% increase over the first quarter of 2003, and a 3.5% increase over the fourth quarter of 2003.

Earnings per share for the first quarter of 2004 were 49 cents, up seven cents, or almost 17% from the 42 cents reported in the first quarter of '03, and up one cent or 2.l% from the fourth quarter of 2003.

Gross in net interest income was responsible for much of the increase in earnings, and that in turn was a result of the slowdown in residential mortgage loan and mortgage backed security prepayment that began in the fourth quarter of '03, continuing into the first quarter of '04.

Before I talk further about our earnings, let me first talk a little about our balance sheet. Total assets continued to grow and the company ended the first quarter with total assets over 1.1 billion, which were up almost 36 million or 3.3% from the beginning of the year.

That asset growth continues to be centered in our loan portfolios. Our commercial portfolio was up over 16 million, and our consumer portfolio was up over $6 million during the quarter. Both of these represent a 5% growth rate for the quarter or a 20% annualized growth rate.

Meanwhile credit quality continued to remain strong. Total non-performing assets decreased $65,000 during the first quarter, and ended the quarter at 2.4 million or 21 basis points of total assets. At the end of the year, they were 2.5 million or 23 basis points of total assets and this level continues to compare favorably with our peers.

During the first quarter, net charge-offs were $82,000. The allowance for loan losses ended the quarter at 11.3 million and represents 1.37% of total loans outstanding and almost 500% of non-performing loans.

On the liability side of our balance sheet, total deposits increased over 25 million or 3.1% during the quarter with core deposits, which we defined as checking and savings, increasing almost 16 million or 2.6% and CD's increasing 9.6 million or roughly 4.5%. At March 31, core deposits, checking and savings represented 73.4% of total deposits.

Coming back to our income statement, our net interest margin increased nine basis points during the quarter, going to 3.42 for the first quarter compared to 3.33% for both the first and fourth quarters of the last year.

As I mentioned earlier, prepayments speeds for mortgage loans and mortgage backed securities, which flowed significantly during the fourth quarter of '03 remained at their slower speeds for the first quarter, thus having a positive impact on our net interest margin.

The company did experience a slight increase in home equity loan prepayments during March of this year, which may or may not be single of what mortgage and mortgage-backed prepayment speeds will be like in the coming months, but as everyone is well aware the interest rate environment did drop for a couple of weeks towards the beginning of March and we believe that that lead to that slight spike in home equity loan prepayment.

Moving down our income statement to non-interest income, non-interest income was $2 million for the first quarter compared to a million nine for the first quarter of last year. That represents an increase of $82,000 or 4.3%.

This net increase can be summarized as follows: continued growth in core deposit accounts lead to $60,000 of increased deposit service charges over the prior year, and income from credit card activity also increased. It was up $68,000 over the prior year.

Gains on sales of investments and MBS Securities for the first quarter of 2004 were $39,000 higher than in the same quarter the previous year. These three increases were partially offset by a decrease in mortgage origination commission of $92,000 or almost 84%.

Excuse me, non-interest expenses increased $702,000 or 10% in the first quarter of last year to the first quarter of this year, but were only $40,000 higher than the fourth quarter of last year.

Net increase in non-interest expenses can be summarized as follows: salaries and benefits increased $595,000, as additional staff has been added in the past year to support the continued growth of the company. Additionally the 2004 period includes incentive accruals, which the 2003 period did not.

Occupancy and equipment increased $127,000 primarily from the opening of the banks North Kingston's branch, which opened roughly a week and a half ago, along with updating our local area network and desktop computing capacity.

Marketing expenses were up 58,000 quarter over quarter, as the bank is currently in the midst of a marketing campaign targeted to increase bank's exposure in the local market.

All of these were partially offset by a decrease in data processing of $175,000 as the 2003 period contained expenses associated with the data processing conversion that was completed in May of last year and thus, those expenses were not duplicated in the 2004 period.

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

Thank you, Al. Well I think that this quarter our signals we're back on track. From an earnings standpoint, we've historically targeted double-digit earnings growth and that remains our target.

From a business climate standpoint, I think my comments at this point will be directed largely to that. Business climate is good to excellent. There's a real sense of excitement in this marketplace about some of the changes that are taking place. Our internal focus for much of last year and we always try to be both externally focused and even when we are internally focused, try to maintain a back throughout last year, but the reality is between the, you know, moving the op-center, the data processing conversion and then the you know, year-end, and we had the laptop incident, really caused more of an internal focus than we would have desired.

We made that transition and the timing couldn't have been better, just because you know, you have the Fleet Bank of America conversion in this marketplace, and a number of other items, which really have called attention to us in a favorable way, and really I think there's a genuine sense of traction in the marketplace. We've been around for a while. All of our marketing builds on the past marketing, and what I'd like to talk a bit about is what you don't see in the numbers, which is some of the marketing efforts that we're undergoing now.

In a presentation I did earlier this year, I talked about how we like to send out a consistent message and image by being a premier bank, you know, and combining that high touch with a real sense of business knowledge. I think we have a reputation out there in some of the research we've been doing says we've developed a reputation as the bank to do business with as a business bank.

And currently we are, we have undertaken probably the most expensive campaign we've done so far. We've got a combination of image and product advertising on TV. We've done some major TV buys, particularly focused on cable with a little bit of network TV. Very, very warm funky campaign, I think it'll be a prize-winning campaign. Some of our customers are talking about us, and it's just an interesting and presentable campaign, very attractive for us.

At the same time, we have keyed off of that in print with product advertising encouraging people to switch checking business to us, and basically really focusing in on small business checking and our on-checking, which is a consumer product, and that corresponding radio campaign, at the same time, that says switch, switch, switch.

And so that's our famous to switch to Bank Rhode Island, and there also related elements to it, we'll be running some business ads shortly. We consistently run business ads, we'll run some that are specifically keyed off of this campaign, and we got some direct mail going.

So it's going to be very interesting to see for us you know, historically advertising has produced results, but time will tell what this campaign produces, but I know that it's generated some real excitement.

On an anecdotal basis, I can tell you (inaudible) some people this weekend and he is a senior investment officer, a pretty button down guy over at one of the major regional, one of the major recently acquired regionals, we don't have mention them by name, but you know, he told me that he likes the ads, the ads are great and his wife pulls him in from whatever room he's in, you know, Don, Don, you got to come see this one.

And so it really, you know, we're getting a lot of play out of it. All that, we hope, and anticipate would turn into increased business, but we'll take a look at the numbers as the quarters go forward.

The bottom line is that, you know, right now, it's a very good time to be in banking for us. We're very pleased. All the pipelines looks strong. The consumer growth, the commercial growth is good, and we're just looking, you know, we're just really excited about the market position and what we think we can do.

With that, I can take questions and Al will join me in responding to them.

Thank you. [OPERATOR INSTRUCTIONS]

Our first question is coming from Bill McCrystal of McConnell Budd & Romano.

Morning Merrill, Al.

Good morning Bill.

Morning Bill.

I wonder if you could sort of characterize for us the growth, the very impressive growth in loan, particularly C&I and consumer, and whether or not that kind of rate is sustainable throughout the rest of the year. I know you don't like to give guidance, but trying to get a sense of whether the first quarter is indicative of what we can see going forward for the rest of the year.

In terms of the growth rate for the portfolios, I don't think that what we're showing is particularly unusual. I think about 20% growth rate, we've historically been between 15 and 20% on the commercial lending.

So I, the pipeline looks good. I can tell you that you know, the, we've got a great crew of business oriented people in the business lending unit. We have added some staff in the small business lending unit, which is a 250,000 and under, and we'd like to see that grow a bit more, and then at the same time that commercial real estate group, it's just very strong right now.

So subject to all the forward-looking you know, comment disclaimers, I don't see any reason why we should have you know, not produced similar results in, on the C&I side.

On the consumer side, I think we also anticipate posting strong numbers there. We not only generate them internally, but we've gotten affiliation with a regional, another firm that refers its customers to us for home equity loans. So that has been the historic relationship over the last year or two and that has helped us to build that business and we anticipate it will remain strong.

So at the end of the day, best of our knowledge we think that those kind of numbers should (inaudible) you.

Ok, and Merrill, how would you characterize it? Is it more existing customer base or are you taking market share away from others?

No, I think that, we have a very, both. Existing customer base, you know, we have run some statistics and we should, but you know, traditionally a lot of your business comes from having healthy customers who grow and have more demands. So you know, it's a credit committee, we can look at our existing customers and see that they're coming back for increases on their lines, because you know, their business is improving and their receivable base growing and they have to support that kind of growth. But I can also tell you that we are seeing increased business with new customers, every quarter we look at the list of new customers.

I'm particularly pleased the way we grow our business. We are planting solid, mid-sized businesses, developers coming over to us, and when I say it's solid mid-sized businesses, anecdotally, I'll give you an example, and this is part of what we're seeing historically where we just took, well about $2.5 million credit from one of the large regionals, and when you're taking a customer away from someone, and this is a business loan, so it's a combination of a term loan and a line of credit and the like, you call over to the institution for a pay-off balance or pay out or whatever one, pay off sounds tacky, but it's a pay out balance, and that's a real signal that your customer's leaving.

And the guy walked over here and you know, he went out for a drink after the closing and the loan officers told me the man was just shaking his head. That's a second, third generation family business. They've been at Fleet for 36, whoops, they've been at the other bank for 37 years and no one even called. And the reality is a $2.5 million loan over there is in the small business. It's managed by exception, and you know, it's just another credit gone from the books for us.

It's not only a good loan, but as I said, I'm really, really pleased that it's not just these one-shot deals. It's solid, bankable businesses and you know, we make the donuts the old fashioned way. We're not, it's just very solid, middle market lending, and you know, we've got a great, just a primo customer base, and I think that Al looked at some numbers year over year, the DDAs have grown between 20 and 25%, and I think a lot of that is a reflection of, I don't have the breakdown, but we will sort it to the annual meeting of the business personal. But, we're just seeing really nice growth, and this is the first year that we probably could use the bulk of our deposit growth, invest it in loans that we generate. That's always been a goal for us. And our deposit gathering, while it's always been aggressive, is always been checking and savings focused.

So we never even run local CD campaigns until, not never even, I think in our early years we had one or two, and we just did a short one in December and January. I think we're back to the same level of CDs roughly that we had when we opened in '96. So, our deposit gathering options, they're not even fully tapped at this point for quality, local deposits that we crossed out. And I'm just real pleased at the DDA growth, it is that way.

Ok, going back to last quarter, you characterized in this slide, if I wrote it down correctly, you characterized the market as ok. And listening today, your comment was the climate is good to excellent. Am I reading too much into that, or has their been a market change in the outlook or the customers' viewpoint since last quarter?

When I characterized the market is ok, I think it was more of an economic outlook. And so when I'm characterizing the market as good, that's when I'm characterizing on our ability to generate, do business out of this market, at this point. Economically, most of our customers had decent years last year. The numbers are starting to come in, and I think there's business lift going on economically.

That still doesn't mean that I think we're completely out of the woods. And on the real estate side, people keep talking about the softness in the greater Boston area. Again, I'm not an economic prognosticator, so I don't want to kind of get into the dynamics and my opinion and this that and the other thing. But the good news is there's still a huge differential even with a soft Boston market, between what their office space can be leased for and what the price in Providence is.

But, we always look over the border that way to see what we can anticipate, and, so there's some softness there, but I got to tell you, the projects that we're involved with here that are construction based. And again, to go back to, we're very conservative, you have maybe a model or one house that had a sale, very limited stack housing going on. One of our customers who does kind of mid to relatively higher end two bedroom type condo units, usually in a duplex, he opened the project and he sold out literally, he doesn't even advertise, and people have been lining up to buy units. So that there's still a very strong demand for housing in this state, and we've been supporting that.

Ok, and one final question, probably directed more to Al. You talked about some of the dynamics in the overhead. The data processing expense that we saw in the first quarter, now that we're pretty much through the conversion and off center and all that. Is that a reasonable run rate going forward, and I'd also say the same for marketing. I know you've talked extensively about your ad campaign. If you could talk about those two items.

Well, on the data processing, definitely. I would say that the run rate that you saw here in the first quarter is more representative of what you should expect going forward. Naturally, as we continue to grow, we will have to expand those numbers proportionally with the growth of the company. But it doesn't include any one time of conversion type of expenditures as it did last year.

On the marketing, that has its ups and its downs from quarter to quarter, Bill. We normally don't have major campaigns every quarter, and you are seeing some of the costs of this major campaign that we're currently in the midst. So some of it may spill over here into the second quarter, but I don't want to portray the marketing number as, as stable as the data processing number.

And I don't think he wants to imply that it will go down or stay the same either because, you know, we just opened North Kingstown and in doing promotions there and the ad campaign that we have now, we'll be running smooth the rest of this quarter. So we're not providing any real guidance there.

Ok, that's fine, thanks very much.

Our next question is coming from Damon Delmonte (ph) of KBW.

Congratulations on a great quarter.

Thank you, Damon.

Thank you.

I was wondering if you could comment a bit on your interest rate sensitivity, given the recent spike in the tenure.

Well, we've always said that Bancorp Rhode Island is slightly asset sensitive in that we benefit from a modestly rising interest rate environment. As we talk about 2003, a lot of the comments that we made was that we were negatively impacted by the high pre-payment speed that occurred during that year. So that with the slight move up in interest rates in the last couple of weeks, and the slow down of prepayments has started in the fourth quarter, continuing into the first quarter, those are positive signs for us.

Again, interest rates are still relatively low, and on the liability side of our balance sheet, one of the questions is how will rates on core, checking, savings, now account savings type of products to respond. And a lot of that has to do not only with what we would want to do, but with what our competition is going to be doing. So, in a general sense, Damon, we still say that the company is slightly asset sensitive, and will benefit from a slightly rising interest rate environment. But there is a little bit of a wild card there with how the competition will price their core checking and savings accounts.

Would you say that you are more or less asset sensitive now, versus the end of the year?

Versus the end of the year? I would say we're roughly about the same. Over the course of 2003, that number had decreased a little bit. We probably were a little more asset sensitive going into 2003 than we were at the end of 2003. But since the end of 2003, I would say that we are roughly the same.

Ok, thank you very much.

As a reminder ladies and gentlemen, if you do have a question, you may press star one on your telephone keypad at this time. Our next question is coming from Slade Lewis (ph) of Weybosset Research (ph).

Hi, I think you answered my question, it had to do with the broo-ha-ha du jour over interest rates. Thanks very much.

You're welcome, Slade.

We show no further questions at this time, I'd like to turn the floor back over to our speakers.

Well, thank you for joining us, and I hope you'll all be with us at the end of this second quarter, and we will be prepared to comment and respond to your questions then. Again, thank you for your attention.

Thank you.

This concludes today's conference, thank you for your participation.