Brookline Bancorp Inc (BRKL) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Bancorp Rhode Island, Inc. 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 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, Inc. Thank you. Ms. Sherman, you may begin.

Thank you and good morning. As indicated, I’m Merrill Sherman, President and CEO of Bancorp Rhode Island, Inc. I’d like to welcome you to our third quarter analyst conference call.

With me, is the Company’s CFO and Treasurer, Linda Simmons. Linda will take you through our third quarter financial results. I will then come back and discuss those results briefly. And then we’ll 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 it over to Linda.

Good morning.

Earnings for the third quarter of 2005 were 2.5 million or $.50 per share. They also represent 289,000 or a 13% increase over the third quarter of 2004 and level reserves over the second quarter of 2005.

EPS for the third quarter were down $.02 or 4% from the $.52 reported in the third quarter of 2004, and down $.02 or 4% from the second quarter of 2005. The drop in the EPS reflects the full impact of the issuance of additional shares of common stock issued during the second quarter.

But before I talk further about earnings, let me talk about our balance sheet. Total assets increased 39.3 million or 2.9% during the third quarter of 2005. Total loans were up 15.9 million or 1.7% on a link quarter basis. Although commercial loans and leases posted a modest growth of 1.4% or $6 million quarter over quarter we were able to exit several deteriorating credits. Consumer loans had healthy growth of $14.2 million or 7.6%. Both the commercial and the consumer pipelines remained strong.

Investment securities were up 8.2 million and the MBS securities were up $6.1 million during the third quarter of 2005. Most of this growth was related to our leveraging of our new capital. We continued to implement the leverage program started in the second quarter and have completed approximately $75 million of a $100 million program. The flat yield curve and general market 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.

Our residential loans continued to decline over the third quarter, down $4.3 million. Asset growth was primarily funded by deposit growth. Total deposits grew by 27.5 million during the third quarter of 2005. Demand deposits and NOW accounts were down a combined $16.1 million or 5.7%, but this was offset by the increase in savings in money market accounts which grew by 19.6 million or 5.3%. Our consumers shifted balance to higher yielding certificates of deposit, which increased $24 million or 7.9% during the same quarter.

The Company increased its borrowings from the Home Loan Bank by $4.3 million or 1.4%. Loan growth continued to be achieved while total non-performing assets remained below our peer averages. Non-performing assets ended the third quarter at 1.2 million or .09% of total assets.

For the third quarter 2005 the Company had net charge-off of $46,000. The allowance from loan losses on September 30th, 2005 stood at 11.76 million and represented 1.25% of total loans and 956% of non-performing loans.

The net interest margin decreased by 15 basis points during the third quarter, 3.25%, compared to 3.40% for the second quarter of 2005. Changes in our deposit mix, the flattening yield curve, and competitive pricing pressures are the primary drivers of this decline. We continue to believe that these factors will be present throughout the rest of the year.

Non-interest income was up 2.6 million for the third quarter of 2005 compared to 2 million reported for the third quarter of 2004. This is up 544,000 or 26.7%, and up 136,000 or 5.6% over the second quarter 2005.

On a YOY basis loan related fees were up 264,000 or 254%. While some of these fees are related to ongoing business, the majority are considered nonrecurring. In addition to that, we recognized $85,000 worth of gain on the sales of MBSs during the third quarter of 2005 compared to no gains for the same period in 2004.

Broker dealer commissions from the sale of leases was $99,000 for the third quarter of 2005, which is a new source of non-interest income for our Bank. Total non-interest expense increased 780,000 or 9.3% in the third quarter of 2004 to the third quarter of 2005. On a linked basis there was a slight increase of 36,000 or .4%.

On a YOY basis salaries and benefits increased 447,000 or 10% as additional staff was added during the past year to support the continued growth of this Company. This growth included the opening of two new branches, the acquisition of Macrolease and the creation of the one private bank.

Also, required to support this growth was an increase of 120,000 or 18% in occupancy expense and an increase in marketing expense of 127,000 or 47%. The majority of these expenses were related to the opening of the new branches.

The Company’s efficiency ratio for the third quarter of 2005 improved slightly and was 68.6%.

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

Thank you, Linda.

A couple of comments more in the line of a business overview. As Linda indicated, we had some shifting in our commercial portfolio during the quarter, and I would say that the commercial growth is stronger than it looks on paper. There were about $10 million in credits that we incurred to refinance elsewhere.

Additionally, some of the commercial numbers that you're seeing reflects the addition of Macrolease, and I would say that that is going generally well and we’re pleased with things on that front.

On the deposit side, you can see that there’s been an increase in our certificates of deposit. You’ve heard us talk over the years about our emphasis on core deposits. That has not changed, but the bottom line is we’ll take what the market gives us. The consumer is evidencing a comfort level and preference for CDs at this point and we are responding.

I can tell you that we’re gathering the CDs at rates that we’re comfortable with. You know, it’s preferable to doing Federal Home Loan Bank borrowings, for example. And so we will continue to grow in that category in this environment, and then also try to cross-sell all those customers who come in the door.

Two new branches are getting a positive reception, and when Linda goes over some of the expense numbers you can see that the opening of the East Greenwich Branch and Lincoln Branch reflects ongoing investments in the franchise. You know, balancing of earnings and investments become more challenging in a compressed margin environment, but we remain committed to building lasting long–term value.

Some of these investments are also facilitating an increase in what I would like to think of as our financial sophistication. We’re becoming more disciplined in our analytical processes, and over time we’ll be improving as well as tightening our interest structure. We’re intent on becoming more finely tuned. And, you know, constantly looking for ways to improve how we run ourselves.

Finally, I’d like to talk a little bit about Jim DeRentis’ promotion to Chief Business Officer. We’re very excited about that. It’s gotten a positive reception in the local market. Jim is visible and well regarded.

And it is consistent with what we see as an evolving strategy. We don’t have a formal name for it. The word ‘convergence’ has been used, and we’d like to find a better name for it. But the notion of aligning our retail bank and our commercial bank to treat the customer as one will form part of our strategy over the coming years. And we are leading with our commercial small business product, our mid-market product, and then looking to cross-sell extensively to capture a greater share of the customers’ assets and financial picture.

So, that’s my comments about where we are. And we would be happy to open it to questions.

[OPERATOR INSTRUCTIONS.]

Our first question comes from Damon DelMonte with KBW. Please state your question.

Good morning.

Good morning, Damon.

I was wondering if you could just quantify how much of the loan related fees in those commercial credits would not be recurring going forward?

Approximately 200,000.

200,000, okay. And you also mentioned that sales leases, I think it was around 90 something thousand?

99,000.

99,000. What category is that classified in?

That’s in other income and the other non-interest income.

Okay, all right. Thank you very much.

Our next question comes from David Darst with FTN Midwest. Please state your question.

Good morning.

Hi, David.

Given that you have encouraged some of your customers to refinance elsewhere and you’ve sold some credits, how does that make you feel about credit quality going forward? And are those changes that have happened late in the quarter or was that something that happened earlier in the quarter?

No, I think it’s happened throughout the quarter. And, you know, it just reflects our ongoing monitoring of the portfolio. I feel very comfortable with our credit quality, and I don’t think there’s been any material change in it.

What about local consumers and the local economy?

The local economy is fine. In fact, you know, looking in downtown Providence there is a bit of a building boom going on. We've got a number of major -- for us -- condominium projects going into the ground with, you know, 17, 19 stories. There’s a 30-story high end condominium tower going up. There are two or three new hotels opening.

And, you know, if I was sitting in the middle of New York City, it wouldn’t seem like much, but in a city that has a population of 160,000, two or three large new hotels being built and the amount of residential condominium development that’s going on down city is pretty extraordinary.

The other thing that’s happening is DTEC (ph) is finishing its headquarters in downtown, which was the first major office building that’s been built in downtown in a number of years. So, I’d say that it’s fairly lively in the City of Providence.

In addition, what you also see, once you get me started on this stuff here, it’s probably more information than you want. But I’m absolutely fascinated by what’s going on with the hospitals and universities here. If you listen to any presentation -- and you get a lot of these, because Brown is constantly trying to raise money from you, or from people in general, and the hospitals, as well -- the dollar amount of the research grants that are coming into the colleges and universities working in conjunction with the hospitals is absolutely staggering. I mean you’re talking hundreds of millions of dollars being invested in research in this community.

So this, it kind of gives you a little bit different sense of the economy. You’re not seeing manufacturing growth. But some of these, you know, kind of newer technologies and advances in science are being fueled by research and those grants are coming into this community and making a difference.

Okay, thank you. One more question is if you were to, say you were to stop the leverage program now. How would you feel about your current margin?

Well, of course, we would like a larger margin and we are encouraging our sales force to sell DDAs and lower cost deposits. The margin would only be negatively impacted by the continuance of the leverage program. But we do believe that we do need a bigger balance sheet going forward.

Okay, thank you.

Thank you. Our next question comes from Bill McCrystal with McConnell, Budd & Romano. Please state your question.

Good morning, Merrill and Linda.

Hello.

Good morning.

Could you give us some of the characteristics of what you’ve been buying with the leverage program and, also, generally what kind of spread you’re getting on that?

On an average basis we’re somewhere around 70 basis points on the entire program. What I’ve been buying is 15-year, 10-year mortgage backed product, as well as a tiny little piece of a CMO, and 5/1 ARMs primarily. So, it’s all mortgage backed product.

Okay. Merrill, intuitively I think this question doesn’t apply to you too much, but the new bankruptcy law is getting a lot of attention with the number of filings. Now, obviously, you’re more of a business bank, but do you see any implications as far as the large number of filings for bankruptcy?

Not that I’m aware of. We don’t expect it. Our consumer portfolio is limited to very conventionally underwritten home equity loans and lines of credit. Basically, it’s probably 98% of the portfolio, maybe 99. So, I don’t think we anticipate much happening that way.

All right. And just finally, what’s the competitive landscape in terms of deposits?

In a word, ‘tough.’ You know, everybody and his brother is out there. I think Rhode Island has gotten a little bit discovered. And you have some smaller out-of-state banks that have decided to open up here. But I continue to say we get our fair share, and I’d like to think more than – everything we get is fair share. But we certainly get, what I’d like to do is get a disproportionate share.

We started focusing about a year or so ago on a product that we call ‘custom business banking’, which is a small business package product. And a key part of that is the DDA, the checking account. And we’ve been very successful in growing that account base, and it’s getting a very good reception in the marketplace. We'll give you a $100 Staples gift certificate if you open the account. And it’s gotten very positive reception, and hopefully those balances will build over time.

Thanks very much.

You’re welcome.

[OPERATOR INSTRUCTIONS.]

Our next question comes from Ryan Kelley with Friedman Billings Ramsey. Please state your question.

Good morning, Merrill and Linda.

Good morning, Ryan.

Most of my questions have been asked already. One question, just on the expense line, is there anything nonrecurring in that? Is that a good run rate to use going forward? And are there any other expenses, significant expenses that you already see in 2006 that we should be adding, i.e., for branches?

Okay, on the expense line you have some nonrecurring expenses in the form of audit expense that we had to outsource this year. Hopefully, by next year we will get back to internal audit and we can reduce that expense.

In addition, we have expenses for recruiting. As you know, we are in the process of looking for a new COO, and also we hired a controller this year, and we’re looking for a chief auditor.

Going forward in 2006 our plan is to open up two new branches, one in the spring and one in the fall.

And what sort of bump to the expense line would we expect to see for each of those branches?

Linda is looking at me with a – you know, I think that a good rule of thumb is that each branch would cost approximately a half million dollars negative on a full year basis. And also would say that on one of the branches, Linda said late fall, the permitting process has gotten pretty sticky there. So we’re hoping for late fall but we just don’t know.

Okay. And then just also along – looking at, you know, the rest of ’05 and looking at 2006, what sort of growth rates are you looking for in your loan portfolio? And is there a continued change of mix that we’ve seen over the last few years, or are you continuing to run down the residential? Or where do you think that’ll go?

I don’t want to give you gross – we’re going through our budget process as we speak. So let’s not get too predictive here. But you will continue to see a commercial emphasis, and I’m not sure that we’re going to look to vary the growth rates. I just don’t want to be predictive at this point on what those growth rates will be. But we will emphasize the commercial product.

And some of the decline you see in the residential -- we still will be purchasing residential mortgage loans. And just bear in mind that we look in the difference in the spread between the mortgage backed product and the whole loan product. So, some of the mortgage backs, for example, that Linda used in the leveraged program, and we would have just as soon bought whole loans to leverage, but their spreads didn’t seem to make sense at the time.

We also are going to encourage organic growth from purchased growth. And as you know, our residential portfolio is primarily purchased.

Okay, great. Thanks very much.

Thank you. There are no further questions at this time. I will now turn the conference back over to your hosts to conclude.

Well, I’d like to thank you for your attention. And we will look forward to talking with you following our year end. Good morning.

Thank you. This concludes today’s conference. Thank you all for your participation.