Brookline Bancorp Inc (BRKL) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Bancorp Rhode Island Incorporated Second 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 star zero 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 CEO of Bancorp Rhode Island Incorporated. Thank you, Ms. Sherman, you may begin.

Thank you. Good morning, everyone. I'd like to welcome you to our second quarter analysts conference call. With me is the corporation's CFO and Treasurer, Al Reitheimer. Al will take you through the first quarter- excuse me, second quarter results, and then I will come back on and make a few brief comments. 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 and Exchange Act of 1934. These statements are based on our present beliefs and are necessarily based on certain assumptions, which are subject to risk and uncertainty. Actual results may differ materially from those discussed here. More information on these risk factors can be found in Bancorp Rhode Island, Inc.'s, filings with the Securities and Exchange Commission. With that, I will turn it over to Al.

Well good morning, and thank you, Merrill. Earnings for the second quarter of 2004 were $2.1m, or 50 cents per share, and represented record quarterly earnings. This also represents a 19% increase over the second quarter of last year, and a 1.5% increase over the first quarter of this year. Earnings per share for last year were 43 cents for the quarter, so we were up seven cents, or 16%. We were also up one cent over the first quarter, or roughly 2%.

Before I talk further about earnings, let me talk a little bit about our balance sheet. We continue to see strong growth in total deposits. Total deposits were up $51.2m, or 6.1% during the second quarter. This growth was centered in core deposits, which we define as checking and savings, which increased $49.7m, or 8.1%, while CDs were up approximately $1m. At June 30th of this year, core deposits represented 74.8% of total deposits, and core deposits have also grown at a compound annual growth rate, since the end of 1999, of 20.6%.

This growth in deposits funded the bank's asset growth, principally in the loan and investment mortgage-backed areas. In the loan areas, commercial loans were up $21.7m for the quarter, which is a 4.9% increase, and consumer, which is primarily comprised of home equity loans, was up $6.3m, or 5.4%.

Commercial loans have grown at a compound annual growth rate of 18.1% since the end of 1999.

In total, or said differently, total assets, reached $1.2b, as of the end of June, which is an increase of 6.2%, or $70.3m during the second quarter.

With all of this loan growth, we were very fortunate that credit quality remained strong -- in fact, improved. Total non-performing assets decreased during the quarter. They ended June 30th at $381,000, or only three basis points of total assets. This compares to $2.5m, or 23 basis points, of total assets at December 31, 2003. During the quarter, we were successful in resolving one large loan that reduced these numbers.

During the second quarter, net chargeoffs were only $21,000, and as of the end of the quarter, the allowance for loan losses stood at $11.5m, representing 1.37% of total loans and over 3,000% of non-performing loans.

The growth in both loans and deposits had some impact on our net interest margin. The margin also was impacted by the successful resolution of the non-performing loan, which had a positive impact but was offset by an increase in pre-payments during the month of April and May, in particular. If you may recall, in the month of March, there was a dip in market interest rates, specifically mortgage rates, and this led to refinancing of mortgage-related products, both residential whole loans and mortgage-backed securities in the months of April and May. We did see a slowdown of those prepayments occurring in June. They have not quite fallen back to the levels that we were experiencing in the first quarter, but they appearing to trend in the proper direction.

So taking the positive of the resolution of the non-performer, coupled with the continuing strong growth in our commercial loan portfolio, and offsetting that by the increase in pre-payments that occurred during the quarter, our net interest margin decreased by two basis points. The margin for the second quarter was 3.40%, compared to 3.42% for the first quarter of this year, bringing the six-month margin to 3.41%.

Looking a little further down our income statement, non-interest income for the quarter was down. The period during 2003 contained a number of items that just simply were not replicated in the 2004 period. These items included a decrease in gains on investment sales, a decrease in secondary market sales of originated mortgage product, and a decrease in prepayment penalties on commercial loan.

On the positive side, net-- sorry, non-interest income increased in the areas of service charges on deposit accounts, which is in relationship to the continued growth of our checking and savings products, along with some enhancements to our NSF program that were implemented earlier this year. We also benefited from receiving approximately $90,000 in commissions from the sales of tax credits, and we also have seen an increase in both debit and credit card activity in the 2004 period.

Continuing down to non-interest expenses, non-interest expenses increased $635,000 versus the second quarter of last year, which is an 8.6% increase. For the six-month period, they were up $1.3m, or 9% versus the same period in prior year. Salaries and benefits accounted for roughly half of that increase during the quarter. They were up $383,000, or 10.2%. Or $978,000 for the six-month period, and are impacted by the continued growth of the company, requiring us to add staff in a variety of different areas. In addition, the 2003 period, as we had stated in the prior year, did not include accruals for incentives. Those accruals have been reinstituted in the 2004 period.

Our marketing expenses were up during the second quarter $122,000 versus the same quarter last year. That's about a 40% increase. We had a fairly extensive marketing campaign taking place during that quarter, and it was geared to be timed with the Fleet/Bank of America transaction that took place earlier this year.

Offsetting some of these increases in non-interest expenses was a decrease in data processing. It was down approximately 10% for the quarter, versus the same quarter last year, and about 15% for the six-month period, versus the six-month period the prior year. Again, the 2003 period contains some expenses associated with our data processing conversion during that year that were not present in the 2004 period.

In addition, since our earnings did improve, the board of directors increased the dividend one cent, from 14 to 15 cents. That dividend will be payable in the month of August.

With that, I'll turn it back to you, Merrill.

Thank you, Al, and normally I have a series of prepared remarks or bullet points to address. I really have very limited comments this morning. I think we had a good quarter. Business is good. Business remains strong. The extensive ad campaign that Al referred to before was a combination of television media, print media, radio, and billboard, some of the fruits of which can be seen in the increased deposit and lending activities, so we're very pleased and we're pleased with the credit quality, and the pipeline is good, business remains strong, so that concludes, really, my prepared remarks, and we will be happy to open it up to questions.

Thank you. [Operator Instructions] Our first question comes from [Flay Lewis] with [Wade Bossett Research]. Please state your question.

Good morning.

Good morning.

And congratulations. We're delighted to see earnings per share growing again, and congratulations on a good quarter. I wanted to ask about the very large number of investment securities on the balance sheet and mortgage-backed securities -- it's getting close to $300m there. Sort of what's up with that, I guess, is the question, and is that depressing the return on assets and the return on equity numbers?

Well, Flay, let me start, talking a little bit about our philosophy with investments in mortgage-backed securities and also purchased mortgage loans. We actually look at purchased mortgage loans as an alternative investment, even though it quote is categorized as a loan on our balance sheet.

Does that-- so that's in the loan quality-- that's in the ``Mortgage-backed securities line?''

That's correct.

But you have got a bunch of purchased loans in the residential mortgage loan?

Most of the ``residential mortgage'' line is purchased residential mortgages, and that on an ongoing basis, what we do is we evaluate the whole loan offerings that are in the marketplace versus the securitized products, such as mortgage-backed securities, trying to look at the differences in yield and the differences in risks associated with it, too. If the spreads warrant, we will normally purchase the residential mortgage because we feel that it is a higher-yielding product that can give us minimal risks. At different times, particularly during this past quarter, those spreads have tightened, so that the incentive to go with the unsecuritized product was not there, and we were primarily purchasing mortgage-backed securities, with some investment securities also, as the alternative, so it-- it really comes down to an ongoing decision of evaluating which one to purchase, based upon the tradeoffs between yields and risks, and the way the markets were during the second quarter, we felt that the residential whole loan did not offer sufficient spread.

I mean, given your druthers, if you have a $1,000 to lend, would you rather put it in-- you would rather put it into a commercial loan, wouldn't you?

Absolutely.

And Flay, it's a nice problem to have, that we're so successful with our deposit gathering that we can't put it all out in commercial loans, at least not the quality commercial loans we like to see. You can see there's a substantial increase in the consumer loans, which, you know, are basically home equity term loans and home equity lines of credit, that are conventionally underwritten. They represent an attractive investment for us, and you know, the more we can put out the doors in commercial loans, and to a lesser extent, consumer loans, the happier we are.

Nice problem to have, but it's still a problem, right?

I'd rather have that problem than the alternative, which would be not being able to gather, you know, low-cost deposits.

Me, too. Well, thanks very much.

Our next question comes from Damen Delmonte with KBW. Please state your question.

Good morning. Congratulations on a nice quarter.

Thank you, Damen.

Good morning, Damen.

Two quick things. One, I was hoping you could comment a bit on the Rhode Island economy, and also, I was wondering if the growth in demand deposits is attributable to the growth in commercial loan relationships? Is there a connection between those?

The answer to that question is yes, and we experienced very substantial commercial deposit balance growth, in the-- since its inception, and it is driven by becoming the bank's principal depositor for your commercial customers. We do have a number of cash management customers and other commercial customers who bank with us for the service and simply have checking accounts and maybe some related commercial balances, or savings. So some of it comes out-- and I don't think we have an exact breakdown for you that we-- we have not publicly provided one, in terms of what comes out of the lending side versus what comes out of, you know, just ongoing business, but the bottom line is, most of our ad campaigns were commercially focused and we do back that particular customer base.

The second-- and the first part of your question, Damen, when to the Rhode Island economy?

Right.

It's generally OK. There's actually been a little softening in terms of some of the statistics over the past month, but I think on the whole it's recovered well. There's still some degree of job growth here, but I don't think anybody would describe this as a Raleigh-Durham area or Phoenix, Arizona.

OK, great. Thank you very much. Again, nice quarter.

Thank you.

Our next question comes from [Bill McCristal] with McConnell Budd & Romano.

Good morning, Merrill, Al.

Good morning, Bill

Al, I wonder if you can talk a little bit about your interest rate sensitivity, average duration of the securities portfolio, and generally the outlook for the margin?

Well, Bill, on our interest sensitivity, we've tried to make ourselves as neutral as possible, so we're not subject to wide swings because of interest rate movements in the marketplace. And over the past year or so, we moved closer to that neutral position.

As far as the duration of our securities, the average duration of our securities is in the three and a half year range. We primarily buy either securities with a five-year final or with an adjustment feature that would not be longer than five years, not to say that we don't buy some longer-term fixed rate securities in there also, but we tend to buy those backed by 15-year collateral, in most instances, so to sort of put a backstop on the extension risk that way. So overall, I would say that the duration is in that 3.5 year to four-year range, 3.5, probably, closer, although I don't have the exact number in front of me.

OK. And going to the still-standing securities, have you been adding to the corporate side of the securities portfolio? Where does that stand, you know--

There have no been significant additions to the corporate portfolio in the last few months. So the percentages that you see in the annual report, if that's what you're using as a reference point, are still representative.

OK. Are you able to comment on-- you talked about the resolution of that one larger loan, on whether that left the bank, was it renegotiated, and still in the company?

The-- it is not on our balance sheet any longer.

OK. And the campaign, the marketing campaign, as it relates to expenses, would you-- are they primarily done now, or would the number that was in the second quarter, would we look to see to that, going forward?

What-- what we typically do is advertise more intensely during the first and second quarters of the year, we take a bit of a break over the summer, then we generally come back in the fall.

OK.

Is that [inaudible] Bill?

Is it too early to measure the results of the campaign, or is there-- have you gotten any sense of how productive it's been?

I think the increase that we're seeing in the deposit base and also the increases in the commercial lending and the consumer lending base are a testament to the results that we're producing in the campaign. On an anecdotal basis, you know, we're eight years old, the name recognition continues to grow. The reputation -- I'd like to knock on some wood here -- is strong. We're a very credible player in this marketplace. And all of it, you know, in effect pays a dividend for us when people go out and make calls, they are well-received, and we keep adding to our book of business. You know, our Kingstown branch is just an absolutely outstanding success, and a lot of that goes to the marketing, the image, the design of the branch, and you know, at our board meeting the other day, Jim DeRentis, who heads the retail area, tells the story, because it's a very suburban, it's a growing suburban community with some degree of business, so we have some businesses coming in for their depositories, but the bulk of that growth has been personal accounts. And Jim told the story of a mother coming in with, you know, kids during the day. They run right over to the play area and sit down and start, you know, throwing the chalk around and using the blackboard and the toys and stuff like that while mom stands and takes care of- or sites, depending upon your choice over there, and takes care of her banking business. So it's a very customer-friendly branch, very different from what you see. It's open seven days a week, and it's not just one of these nominal things. I think people who have competed against Commerce said, ``Oh, well, we had to open on Sunday and it really didn't work.'' That branch is described as ``hopping'' on Sundays, so it really is a different area and we're very pleased with the growth that we've seen there. Again, some of it, people anticipated it. It's a very attractive branch, there's been a lot of PR about it. Some of it was driven by the advertising, and some of it was by the location.

OK. And backtracking just a little bit again, to the loan portfolio, Al, how much of the commercial-- commercial real estate portfolio is tied to prime?

In approximate numbers, I would put it in a quarter to a third range, of the commercial portfolio, Bill.

And are there any issues with floors in there, that these wouldn't reprice for another one or two moves by- moves up in the interest rates, or is that not a--

The majority of our loans that are tied to prime would adjust either as prime adjusts or at worst, would adjust on a quarterly basis, if they may be associated with the SBA in some manner.

OK, very good. Thanks very much.

Thank you.

Our next question comes from Mark Muth with FTN Financial. Please state your question.

Good morning, Merrill and Al. It's Mark Muth with FTN.

Good morning, Mark.

I just had a quick question about capital levels, given that Merrill, if I read you right, it sounds like commercial demand is looking up and loan growth might be ticking up here, if you're comfortable with the current capital levels, looks like tangible equity is about 5.2%, and similar with what we should expect with reserve levels, given increasing loan demand.

I can have Al comment more specifically on capital levels, but in general, we have always run the bank to be well-capitalized, but not over-capitalized. And I think part of the reflection of the conservatism in the credit quality and we grow the portfolio, but our advantage is, we don't have to do every deal. So at the end of the day, the reserves are, we believe, appropriate. Chargeoff history has been modest, and we would hope to continue in that vein, so I'm not concerned about the capital. At some point, you know, we've been adding to our trust-preferred, utilizing trust-preferreds, to add-- enhance our capital position. We still have room to do further offerings that way, and they're really routine at this point. The Fed has been cooperative in terms of how it's, you know, in regards to our preferred securities. So at this point, we feel that we're well-capitalized and we intend to remain that way, and we do not see it as having an impact in any negative way on our commercial growth.

Yeah, I would echo Merrill's comments there, Mark, that the ratios that you saw as of the end of the first quarter really have not changed substantially, as we've gone through the second quarter. And as Merrill mentioned, we do have some remaining capacity for trust preferreds. We've basically done a little bit, just about every year now, for the last three or so years, for trust preferreds.

OK, thanks, guys.

[Operator Instructions] I will now turn the conference over back to your costs to conclude.

Well, I'd like to thank you all for listening in and we look forward to reporting out to you again at the end of the third quarter. Bye.

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