Brookline Bancorp Inc (BRKL) 2005 Q2 法說會逐字稿

Greetings, ladies and gentlemen. And welcome to the Bancorp Rhode Island, Inc. second quarter earnings conference call. At this time, all parties are in a listen-only mode. And there will be a question and answer session following the presentation. If you 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 Chief Executive Officer of Bancorp Rhode Island.

Good morning, and thank you for joining us. I’m Merrill Sherman, President and CEO of Bancorp Rhode Island, Inc. And I’d like to welcome you to our second quarter analysts conference call.

With me is the Holding Company and Bank’s newly appointed CFO, as well as our Treasurer, Linda Simmons. Linda joined our organization nearly a year ago as EVP and Treasurer, after a successful career with [Banc of America], Fleet, and Citizens. Over the past year she’s made significant contributions to Bancorp, including elevating the sophistication of our financial area. We’re very happy to have her assume this expanded role.

In just a moment, Linda will take you through our second quarter financial results. I will then come back and discuss those results. 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 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 & Exchange Commission.

With that, I’ll turn the call over to Linda.

Good morning.

Earnings for the second quarter of 2005 were 2.5 million or $.052 per share, and represented record quarterly earnings. They also represented a 365,000 or 7.4 increase over second quarter 2004, and a 53,000 or a 2.2 increase over the first quarter of 2005.

Earnings per share for the second quarter were up $.02 or 4% from the $.50 reported in the second quarter of 2004 and down $.05 or 8.8% from the first quarter of 2005. The drop from the first quarter was a result of the issuance of additional shares of common stock during the second quarter.

During the quarter we issued 550,000 shares related to the original offering, 78,000 shares related to the Greenshoe, and approximately 7,000 related to the Macrolease acquisition.

Before I talk further about our earnings, let me talk about our balance sheet. Total assets increased 69.6 million or 5.3% during the second quarter of 2005. Commercial and consumer loans had healthy growth, with commercial up 28.2 million or 7%, and consumer up 10.9 million or 6.2%. We also are very pleased with the level of our pipelines at this time.

Investment securities were up 1.4 million, and mortgage backed securities were up 45 million during the second quarter of 2005. Most of this growth was related to the leveraging of our new capital. As you may recall, Merrill was asked during the quarter one call, ‘if the Company intended to leverage the new capital?’ She did not comment at that time.

We have embarked on a leverage program during the second quarter, and have completed approximately 56 million of a 100 million program. The flat yield curve and general marketing conditions have limited our progress, and we will continue to look for opportunities to add to the position. The leverage will partially offset the dilution of the EPS caused by the increase in shares.

Residential mortgage loans continued to decline over the second quarter, down 19.9 million.

Total deposits grew by 32.9 million during the second quarter of 2005. Demand deposits grew by 12.8 million or 7.3%. Now and saving accounts experienced some softness as they decreased a combined 4.1 million or .9%.

Consumer shifted balances to higher yielding certificates of deposit which increased 24.1 million or 8.6% during the quarter.

The Company increased its borrowing from the FHLB and the street by 17.7 million or 6.3%.

Loan growth continued to be achieved while total non-performing assets remained below peer averages. Non-performing loans ended the second quarter at 1.3 million, 4.09% of total assets, compared to 1.7 million or .13% of total assets as of March 31st, 2005.

For the second quarter of 2005 the Company had net charge-off of 1.2 million. Merrill will discuss this further in her remarks. The allowance for loan losses as of June 30th, 2005 hit at 11.4 million and represents 1.23% of total loans and over 890% of non-performing loans.

The net interest margin declined 12 basis points during the second quarter to 3.40% compared to 3.52% for the first quarter of 2005. Changes in deposit mix, the flattening of the yield curve, and competitive pricing pressures were the primary drivers of the decline. We continue to believe that these factors will continue throughout the rest of the year.

Non-interest income was 2.4 million for the second quarter of 2005, compared to 2.2 million reported for the second quarter of 2004, up 239,000 or 10.8%, and up 370,000 or 17.8% over the first quarter of 2005.

Service charges on deposits and commissions on investment products are down 124,000 from the second quarter of 2004. This was offset by increases in loan related fees, cash management income, and commissions on loans originated for others. There was also a onetime commission related to a store credit sales which will have an offset in the non-interest expense line.

Total non-interest expense increased 1.1 million or 14.3 percent from the second quarter of 2004 for the second quarter of 2005. The net increase are centered around the following areas. Salaries and benefits increased 719,000 or 17.4% as additional staff was added during the past year to support the continued growth of the Company, which included the opening of two new branches in the second quarter of 2005.

Professional service increased 166,000 or 46.5%, the primary drivers of the change are: partial outsourcing of our internal audit activity, increased legal cost, ongoing compliance with SOX404, and a onetime commission related to the RI historical tax credit program.

The Company sufficiency ratio for the second quarter of 2005 improved slightly from the second quarter of 2004 and was 69.1%.

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

So, thank you, Linda. I think that Linda gave you some numerical highlights of what had to be the most active quarter in our history. We opened two new branches, consummated our acquisition of Macrolease, which is a small [ticket] equipment leasing company based on Long Island. We announced the formation of a Private Banking Division within the Bank, and an alliance with Coastline Trust Company to provide private banking services. As Linda indicated, we consummated an additional stock offering. And all of this happened while achieving solid growth in our core business line.

Before we review these items in greater detail, I want to take a look at the one month we experienced during the quarter. This quarter we had our first significant individual credit loss. It involved the write-off of approximately 1.2 million of an asset based credit. It was this client that we promptly, once it was discovered, [the client] was less than candid with us. But that we resolved the issue by selling the paper, and effectively have put that matter behind us.

Going back to the positive side, talking about the opening of the Branches. The two new Branches are in Lincoln and [East Greenwich]. Lincoln is an upscale suburb, north of the City of Providence, about 10, 15 minutes north. That Branch opened in May. East Greenwich could be characterized as premiere, a high end residential suburb south of the City. A lot of senior executives living there. That Branch opened in June.

Each of the Branches is receiving a really wonderful reception. Since its opening in May we’ve taken in over $5 million in new deposits in Lincoln, and it started with a little bit of a base because of a relationship we had up there. So, probably over $7 million in deposits at the Lincoln Branch. And I think East Greenwich had hit the $2 million mark by the end of the quarter. So, we’re very, very pleased with the reception they’re getting.

I might also add that we opened two of our other Branches, the East Greenwich and the Park Avenue Branches, both of which are real hub branches for us, on Sunday. So, I think [they] already had Sunday hours, so we now have three Branches opened on Sundays. We’re the only bank in the State that has bank branches open on Sunday, and I think that that’s an effective distinguishing point for us.

In terms of Macrolease, I think many of you may have read the press release, that we acquired, we consummated the Macrolease acquisition in May. And really have spent a substantial portion of this quarter integrating them, trying to make it seamless, setting up communications, the web site, the accounting. And this is our first acquisition, so it’s all new us. We’re pretty friendly. We had the whole Macrolease crew up here. We think highly of their President, Dan West, who is now, remains President of the Division with the Bank. And I think the integration has gone very well to date.

This month we will begin some joint calling efforts that are formalized. And we’ve gotten a very positive response from, [I think] in this marketplace, and people are coming up to us, ‘gee, we see you have an equipment leasing company,’ and they have, they want to talk with us about equipment leasing.

What’s particularly encouraging to me is that we’re looking at what I call the wholesale side of the business, because there are a number of customers that we bank who are equipment vendors. And so they have come to us looking for a leasing programs rather than simply being one-off transactions. We’re not adverse to one-off transactions with our customer base. In fact, we’ll be doing them. But I think the wholesale side presents some real opportunity, so, we will see what happens there.

Similarly, we also announced the formation of a private bank and an alliance with Coastline Trust Company. Coastline Trust Company is a privately held Trust Company. It was fund out of First Fed, post First Fed acquisition by [Webster]. The Trust Company, really the bulk of the assets managed by the Trust Company or held in custody by the Trust Company belong to one of the old line families in Rhode Island. And they were, I guess, not satisfied with what they perceived the service level would be if they remained with Webster. So, they decided to option to purchase the Trust Company. And we thought that our culture was a good fit with them.

So, they have one location, where their offices are, and they basically provide trust custodial services and trust [services]. And we have built a private bank around that, so when people want bank accounts, bank presence, mortgage loans, and the like, we can provide that. We have a branded product suite that we’re very excited about, and we have hired and will be announcing shortly, the hiring of a managing director for the private bank who is already onsite and looking to build a client base. I’m excited about it. It’s gotten a positive reception. I can tell you, we’ve already made a number of referrals. And we’re very, we’re optimistic that this represents an opportunity for both Coastline and ourselves.

I mentioned earlier, we consummated a capital offering, netting over $21 million, which we will, you know, have announced will be used to fund growth.

And, finally, just to comment more generally, I think you can see business was good during the quarter. We’ve seen some continued increase in the DDAs, particularly in the small business checking product. We like that, especially, because that’s what we’ve been advertising. So, presumably the advertising is producing a result. We’ve got a custom business banking product suite out there. It’s also helped boost some of our SBA loan production, solid second place, in terms of number of loans produced for the SBA the past quarter, so that’s a good thing.

Linda has pointed out, we’ve got some declines in the savings balances, those are some higher yield accounts that we had offered a year and two years ago. And we’re seeing some draining of those accounts with a marked dip in CDs. And my great belief is to take what the market will give you, and consumers are looking for CDs now. We are satisfied at the pricing, and, you know, we’re competitive with CD products, but we’re pleased that we’re getting interest in those products.

Commercial growth, real solid this quarter after a slower first quarter. I expect that it has its peaks and valleys, as a pipeline gets filled, close them up. So, that’s looking even moreso. But at this point we’d say that our pipeline remains healthy.

And, finally, I think we are just generally well perceived in the market at this point. The opening of the Branches is taken as a sign of momentum by a lot of people; and momentum counts when you’re trying to generate business.

With that, I will open it up for questions for Linda or myself.

[OPERATOR INSTRUCTIONS.]

Our first question is coming from [Ryan Kelly] of Friedman Billings Ramsey.

Good morning, Merrill. And welcome, Linda.

Thank you.

Just a very good quarter. Just had a couple of questions. First of all, on the branching, can you just give us an update of where you stand on that and what you’re looking for going forward on additional branching?

Well, we’ve got 16 Branches now. And what we’re looking at over the next couple of years is three or four Branches. What we’ve got on tap is a Branch in Pawtucket, which should be opened in the first quarter of next year. Pawtucket is adjacent to the City of Providence. It’s, you know, one of the – if you look at the footprint now, we’re in five of the six largest cities. With Pawtucket we will be in six of the six largest cities. And, as I said, that Branch should be open the first quarter of next year, according to our current plans.

We have also filed for a site in Narragansett, and there’s certain approvals – we’ve got regulatory approval, but I think there’s certain zoning approvals that we’re seeking at this point. And it’s a good site in Narragansett. That would be our second Branch in South County, and we are hoping it receives as positive a reception as the North Kingstown Branch did. So, those are the two immediate sites. And it’s no secret that we’re also looking in Barrington, which is a high end suburb. I think that at some point we should have a Branch there. That’s on the East Bay. But those are the current plans.

Okay. And is there any way you could give us a little guidance, a little help on expenses, you know, for the rest of this year, how they might increase related to those Branches?

It wouldn’t increase related to these Branches out, I mean in 2006, other than ordinary, you know, legal expense or something like that.

Right. I’m sorry, I meant the ones that you’ve opened so far this quarter?

We are fully expensed at this point on those Branches. We are fully staffed.

Okay.

So, they will be in the June numbers.

Okay. And just on the 1.2 million of charge-offs, obviously, you’ve had traditionally just impeccable asset quality, and this is sort of the first hiccup. What, are you taking any sort of extra steps to sort of go through the leasing portfolio to see that nothing – is this just a one-off type thing as far as you can tell?

Well, first of all, this wasn’t in a leasing portfolio, it’s in our normal business lending portfolio. It was an asset [credit]. Second, when something like this happens you’ve got to reexamine your procedures, tighten them a bit in an effort to guard against this happening again in the future.

Okay. And one other just small question. On the average diluted shares for the quarter, Linda, that’s going to run a little bit higher in the next quarter just because of the timing of the offering, is that right?

Yes, that will.

Do you know what that would look like for next quarter?

Well, I see Linda looking at me saying, ‘no, she doesn’t have that number off the top of her head.’ So.

Okay. that’s fine. Great. Well, that’s all of my questions. Thank you.

Thank you, Ryan.

The next question is coming from [Bill McKrusel] of [McConnell Doug Ramano].

Good morning, Merrill. And congratulations, Linda.

Thank you.

Good morning, Bill.

I guess, first off, on the margin, what impact if any in the most recent quarter and also going forward would the leverage program have on the margin?

The leverage program will have a negative impact on the margin going forward, as we are putting on the assets between 70 and 100 basis points on a matched blended basis.

And in the second quarter was there any impact, or was it negligible?

The majority of the assets were put on in May and June, and I would imagine it was negligible.

Okay, fair enough. Merrill, can you give us some sort of guidance or what your expectations are for Macrolease and Coastline, and whether or not we should be modeling, you know, how we should model going forward for those companies?

We haven’t yet, and I don’t think we are prepared to do so. So, the answer is we haven’t, we’re not being cooperative that way, I suppose. But let me think about whether we should put out some guidance on something like that.

At this point, just to get a sense of scale on Coastline, you know, we moved one of our people over internally for sort of a super administrator head, and we’ve hired an outside person. So, that’s – and you have some minor marketing expense, so I don’t know if that’s helpful to you that way.

And I can tell you Macrolease projections, but I didn’t deem them significant enough one way or the other to factor them in. So, I suppose that’s all the guidance we can give. If that’s helpful?

Okay. It is. I mean it’s fair to say then that with the assets that came over with Macrolease aren’t going to move the needle much?

It was, even though we technically called it an asset acquisition, it really wasn’t, you know, it was the human capital that we were buying. They didn’t come with a big leasing portfolio because they had sold most of their leases.

Okay. That’s fine. And maybe, you’ve alluded a little bit to the economic climate, but can you give us some sense, obviously the hot topic right now, is real estate. Whether we’re in a bubble or not? Can you give us some sense of what the commercial, particularly the commercial real estate valuations are like up in the market?

Commercial real estate valuations are generally solid. It’s the residential market that’s very, very hot. And there is, you know, everybody who has been around has confirmed that there is a bubble but nobody sees where the end is. So, I can’t be, you know, there are a lot of positive economic things happening in Rhode Island with the [GTAC] expansion. I think the Governor, I saw him speak the other day, alluded to some good news coming from Fidelity. On the whole we’ve seen some job expansion.

And we are also historically have been fueled, in part, by the Boston market. And given the housing prices in Boston, it has a ripple affect. People find that they can live in a city, like Providence, at 60 percent of what it would cost to live in Boston, and a lot of people who are electing to do that. And some of the northern suburbs, in particular, are very commutable to Boston. So, there’s just very, very strong housing demand.

And, you know, we looked at a project. We’re trying to be cautious about condominiums. But we just looked at a project that we’ll be funding in [Clanceton]. And, you know, you can fund $200,000, $225,000 condominiums, you almost have no competition in the marketplace because that’s the most affordable housing there is. So, it gets a little scary if you’re an employer trying to find, you know, trying to find workers who can move in and afford to live here. But the real estate market is probably as strong as it’s ever been around here. And the question is always, ‘when is it going to stop?’ And nobody knows.

And then just, finally, could you summarize what your views were on that advertising campaign that you did earlier in the year? Did it have a real impact? I mean was that some part of the success in increasing your DDA?

We have positioned ourselves as the bank for business in Rhode Island. And we think that that’s a real sweet spot for us. It’s, you know, we think we’re competitively advantaged because of our hands-on approach with business and the accessibility of our executive management to the marketplace.

So, one of the products we launched was a custom business banking product. And what we try to do is not just sell a checking account but it’s sort of a product suite. It came with a line of credit, you know, and quite a variety of services associated with it. And we’ve invested – that was basically ‘the’ ad campaign we ran was custom business banking, and it was leading with the checking product. And small business checking balances are up. The average balance is up there, so I’d like to think that it had some impact.

Okay. Very good. Thanks very much.

You’re welcome.

Our next question is coming from [Colleen Gilbert] of [Reinbeck].

Thanks. Good morning, Merrill and Linda.

Good morning, Colleen.

Just a question. Merrill, could you just give us a little bit of color on the competitive landscape, and what you all are seeing out there in terms of deal structures? Or if there’s one segment where people are getting much more aggressive than others? I mean you alluded to the fact that, you know, the residential real estate market is very hot. But just in terms of where you see the biggest pressure coming in the next 12 months or so from a competitive standpoint?

Well, generally speaking, you cannot pick-up the paper without seeing a lot of bank advertising. [Diva] has entered the market, but in a sense it’s always, you know, probably 50% market share so they can blanket it with two or three different products. And then there’s all the rest of the guys who see some of the smaller banks and the credit unions starting to advertise more heavily. So, you see a lot of that.

From a pricing standpoint, and staying away from the deposits for a second, taking a look at the loans. I mean it is a – it’s always been a tough market out there for commercial loans. And, you know, there are a lot of long rate, fixed rates, long-term fixed rate products being offered on a swap basis by some of our competitors that we’re looking to address. And, you know, and pricing is just tough. You know, a borrower has come in with, you know, LIBOR plus 50 basis points. We’re getting that at B of A, why can’t we get it from you? And so it’s a tough market to price in, as well, and we try to be competitive.

Okay, okay. And then on the deposit side, anything unusual? Any, I mean I guess they’re all probably running pretty aggressive promotions?

Yeah, you’ll find some aggressive promotions. And people get out there with a higher CD rate here and there, occasionally. You know, I think we had some kind of core savings account product just at the East Greenwich Branch with a premium rate associated with it, and you’ll see that in the papers, that others were doing that, too. We haven’t really seen any big movement in core accounts yet, so we’re all holding our breath.

Okay. Great. Thank you.

Thank you.

Our next question is coming from [David Darce] of FTN Midwest.

Good morning.

Hi, David.

Could you give us some information on the revenue sharing relationship with Coastline?

I’m sorry, could you repeat that, please?

The revenue sharing relationship with Coastline, is that a referral plus some type of trailing fee based on the asset center management you generate?

Yes, yes.

Okay. And then can you comment on your current strategy regarding your loan mix? You’ve been, it looks like you’ve been allowing your residential to continue to run-off? And given the solid commercial growth and consumer growth do you see any change there? You know, does the new capital allow you to accelerate your loan growth rate a little bit from where it’s been running?

Traditionally we have grown our residential portfolio through the purchase of loans. And over the last quarter we saw pricing of whole loans almost on top of the MBSs in the marketplace. So, we could not make a case to continue to buy the purchase loan for the same type of returns and carry the credit risk, as well. So, we have sort of deferred that and put our extra dollars into the MBS portfolio. But we continue to look for opportunities to whole loans when the market will pay us to hold the.

And, you know, what about allowing capital to maybe accelerate the total loan growth? Are you – I guess you answered it with you’re just reviewing mortgages back compared to residential securities options? Is that correct?

David, I never thought our capital particularly held us back from loan growth. We try to book as many good assets as we can. So, and we’ve always been asset hungry. So, you know, if we could find residential mortgages that we were comfortable with the pricing on or MBSs, it’s just a tough market out there because of the shape of the yield curve to finance it, that are attractive and that give you the kind of spread you want to see.

And if we could – nobody here has ever told our commercial guys to hold back, or, you know, your target is 5 million this quarter not 10 million because, you know, the capital situation. They are out there looking for deals and trying to book as many good loans as they can. So, we’re held back more by, you know, what’s available in the marketplace. I wouldn’t call it held back but I mean we’ll take what’s available in the marketplace, and it’s not a capital issue.

Okay. How does your current – you said you’re pleased with your current pipeline. How does that compare to the previous periods?

It’s about the same as it was at the – it’s about the same it was at the end of last quarter, and we’re seeing particular [spend] in the commercial real estate area.

Okay. Thank you.

[OPERATOR INSTRUCTIONS.]

Ladies, it appears there are no further questions at this time.

Well, I would like to thank you all for joining us, and I look forward to speaking with you, if not before, at the end the end of next quarter. Thank you.

Thank you.

Ladies and gentlemen, at this time, the conference has concluded. We thank you for your participation, and ask that you disconnect your lines at this time.