Brookline Bancorp Inc (BRKL) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. welcome to the first-quarter 2012 Brookline Bancorp conference call. A few comments before we get started. This conference call is being webcast on the website and will be archived there following the call. At this time, all participants are in listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, April 19, 2012. If you have any objectives, please disconnect at this time.

I would now like to turn the conference call over to Mr. Paul Perrault, President and CEO of Brookline Bancorp.

Thank you, Laura. Good afternoon, everyone. We appreciate you joining us today. And welcome to Brookline Bancorp's first ever earnings call in our 140-year history. We will use these calls not only to discuss the Company's financial performance, but to provide some communication of our strategic direction and our progress therefore. Although I do not plan to be in attendance on all future calls, I am here on today's call to introduce to you our Chief Financial Officer Julie Gerschick who will talk about our financial results following a few comments from me. Julie and I are also accompanied today by Bob Rose, the Company's Chief Credit Officer. Before I begin, I need to say that our discussion will include forward-looking statements. Actual results could differ materially from those statements.

Today, I am happy to report another solid quarter for Brookline Bancorp, with our strong operating results that you'll hear about. As I think you would know, the first quarter was nominated by the acquisition on January 1 of Bancorp Rhode Island. A $1.6 million bank holding company operating 17 branches based in Providence, Rhode Island. This resulted in a very solid combined balance sheet, which now stands at $4.9 billion in assets. This deal provides us greater access to the Rhode Island marketplace. And we are thrilled by the addition of a highly-qualified banking team that Bank Rhode Island has provided.

As we look to the future, we remain quite enthusiastic about the growth opportunities in all of our markets. Merger related expenses impacted our bottom line in what was otherwise a quite strong first quarter. During the first quarter of 2012, Brookline Bancorp reported net earnings from operations of $10.3 million, or $0.15 per fully diluted share. After adjustments for merger-related expenses.

I will now turn the call over to Julie to elaborate further on these first-quarter results. Julie?

Thank you, Paul. And welcome, everybody. I now like to review some of the financial highlights from the first quarter 2012 with you. For the quarter, we reported net income of $6.3 million or $0.09 per fully diluted earnings per share. As Paul mentioned earlier, net earnings from operations were $10.3 million or $0.15 per fully diluted share, after adjustment for merger-related expenses of $4 million after tax associated with the Bancorp Rhode Island merger, which was completed January 1, 2012. As we move forward into 2012, we continue to focus on further ways to reduce expenses and gain efficiencies, especially as it relates to the acquisition.

Total assets at March 31, 2012, were $4.9 billion, representing an increase of 59.5% from March 31, 2011, and 47.8% from December 31, 2011. The increase from prior year, as well as prior quarter, were primarily due to the acquisition of Bancorp Rhode Island during the first quarter. Although we experienced dilution to the Company's tangible equity to total asset ratio during the first quarter, this was a direct result of the acquisition, and will improve as we move forward on a combined basis.

Our loan and lease portfolio grew to $3.9 billion as of March 31, 2012. This represented increases of 55.9% from March 31, 2011, and 44.6% from year-end 2011. The increase in the loan and lease portfolio from year-end 2011, was primarily driven by organic growth amongst the commercial real estate and consumer loan categories. The addition of $1.2 billion of Bank Rhode Island's loans and leases to our existing loan portfolio provided the balance of commercial real estate and commercial and industrial loans we were looking for. Also our indirect auto lending business has been very successful in maintaining their portfolio balances despite intense pricing competition in the industry. And our equipment financing arms continue to provide favorable yield enhancement to our overall yield on loans.

The Company continues to enjoy some of the best asset quality metrics amongst our peers. Non-performing assets, at 0.30% of total assets as of March 31, 2012 have increased slightly from year-end 2011, but are down from a year ago. Our annualized charge-offs, which were 0.05% of average loans and leases as of March 31, 2012, are also up slightly from year-end 2011. But again, down from a year ago. Total deposits were $3.5 billion at March 31, 2012, up 63.3% from March 31, 2011, and 53.6% from year-end 2011. This increase from year-end 2011 resulted from organic growth within the transaction deposit account, as well as the addition of $1.2 billion in deposits from Bank Rhode Island.

We continue to focus on our commercial and municipal business lines which continue to drive the improvement in our core deposit ratio, which excludes CDs. A ratio that has improved from 64.2% at December 31, 2011 to 69.3% at March 31, 2012. It's also important to note that the growth in both loans and deposits during the first quarter of 2012 enabled us to improve our loan to deposit ratio. We saw the complete reduction in broker deposits in the first quarter 2012, and the continued reduction in wholesale funding as a percentage of total funding. We will continue to deemphasize reliance on Federal Home Loan Bank advances as a primary funding source.

In connection with the acquisition of Bancorp Rhode Island, we reported goodwill of $93.1 million. $28.4 million in loan discounts. Core deposit intangibles of $19.4 million. Deferred tax assets of $9.3 million. Borrowing-related discounts of $16.3 million. And net discounts on various other assets and liabilities of $3.8 million.

I'd like now to turn to earnings. Net interest income for the first quarter 2012 increased to $43.6 million from $25.9 million in the first quarter of 2011, and $28.5 million in the fourth quarter of 2011. Both the first Ipswich Bancorp acquisition, which was completed on February 28, 2011, and the Bank of Rhode Island acquisition completed in January 1, 2012, contributed to this increase. Our net interest margin at 4.08% at March 31, 2012 increased by 30 basis points quarter to quarter, and 34 basis points quarter over quarter. The increase in margin, quarter over quarter, was in part of function of the acquisition of Bank Rhode Island's loan and deposit portfolios. Our combined ability to maintain low pricing in very competitive markets. The continued restructuring of the deposit base into lower-cost transaction accounts. And less reliance on higher-cost sources of funds.

The provision for credit losses was $3.2 million for the first quarter of 2012. Compared to $1.1 million for the first quarter 2011. And $800,000 for the fourth quarter 2011. The increase in the provision for credit losses was primarily due to provisions on originated loans and leases at Bancorp Rhode Island. The allowance for loan and lease losses as a percentage of total loans and leases, was 87 basis points at March 31, 2012, a decrease from 1.17% at December 31, 2011. The decrease is largely due to the loans and leases acquired in the Bank Rhode Island acquisition being recorded at fair value on the date of acquisition.

We also enjoyed an increase of $2.5 million in non-interest income for the first quarter 2012 and $2.1 million increase from the fourth quarter 2011. The increases can be largely attributed to the acquisitions completed in late quarter 2011, and first quarter 2012.

Moving on now to non-interest expense. The Company recognized $32.6 million of non-interest expense in the first quarter of 2012, which was an increase from the first quarter 2011 non-interest expense of $13.4 million. And an increase from the fourth quarter non-interest expense of $16.5 million. This increase was primarily driven by one-time pretax charges of $5.4 million recorded in the first quarter 2012, associated with the acquisition of Bancorp Rhode Island. And the addition of $12.3 million in Bank Rhode Island non-interest expenses. We are happy with the pace of integration and reductions in Bank Rhode Island expenses realized to date thus far, as reflected in our operating efficiency ratio of 57.6% at March 31, 2012. And are optimistic about our ability to continue to drive that efficiency ratio down further over the course of the next 15 months. As a result, Brookline Bancorp enjoyed operating ROA and ROE of 89 basis points and 6.57%, respectively. And operating EPS of $0.15 for the quarter ended March 31, 2012. The Bancorp announced the 40th consecutive quarter of continuous payments of dividends at $0.085 per share to its shareholders of record on May 11, 2012.

At this point, I will turn the phone call back to Paul Perrault for some closing comments.

Thank you, Julie. As I mentioned earlier, I think the key take-aways from the discussion of our first-quarter financial results, are that we continue to enjoy good overall organic growth across all business units. We continue to have very strong credit quality in all these portfolios across the three banks. And that results in strong core earnings. We are very excited for the rest of the year. And we look forward to reporting back again after the close of the second quarter.

That will complete our prepared remarks. Laura, we can now open the call for questions.

(Operator Instructions) Damon Delmonte at KBW.

A question for you, first off, in the provision expense. You said the $3.2 million provision was in part reflective of the growth in the BARI portfolio during the quarter. Can you break out, historically, the provision at Brookline has been around $1 million or so. Now up to $3.2 million. What was the growth like in the BARI portfolio that would require it to be bumped up to that $3 million plus level?

I think it's a little bit more attached to how the accounting works after an acquisition. I will let my colleagues walk you through that.

This is Bob Rose. Bank Rhode Island, in January, started with zero in loans and they ended up the quarter at $70,300,00 in round numbers. That particular set of growth with the composition of how that came out, using largely Brookline allowance methodology, required a reserve about -- or a provision of about $1.4 million. At Brookline Bank, the normal kinds of things, the growth coupled with the composition of the portfolio, required a provision of approximately $1.8 million. The change at Rhode Island was little or nothing -- I'm sorry, Ipswich, and that would be the $3.2 million.

I'm sorry, the Brookline provision was?

$1.8 million.

That was due, Damon, essentially because of strong loan growth, particularly in the commercial categories which are a little more expensive to reserve against.

So, going forward we should probably look to model something in the $3 million range given the expected growth from both the commercial side of Brookline and the commercial side of Bank Rhode Island?

It's hard to say. Because when a bank is purchased, and it's in the early stages of getting up to its cruising altitude, the way this accounting works is we're reserving for a brand-new portfolio. It tends to be a little unrealistic. A touch heavy in the beginning.

For the near term, I probably would agree with you. The further out you go with that thought, I think the less valid that is, because of how this purchase accounting ends up working when the portfolios begin to roll. I'm practicing accounting without a license here. (Laughter)

That could be dangerous. Okay, great. Then with respect to the margin, obviously a big bump up. In your comments you again referred to the impact from the BARI acquisition. If I recall, BARI's margin was lower than yours. Could you walk us through the dynamic there of how it got to be bumped up by 28 basis points?

That, Damon, is largely -- there's two components of it, from my perspective. One component is the impact of Bank Rhode Island's generally lower cost of funds, as a percentage of the new combined asset base and funding base. So we got some pickup there. The other component of it is, all the impact of the purchase accounting adjustments on Bank Rhode Island, that would, in that sense, bring the overall yield up on their loan portfolio.

Another component of it is, we did have a fairly large prepayment penalty that moved through. As you know, under GAAP accounting, you include prepayment penalties in yield adjustments. So, the first quarter saw a significant prepayment penalty coming through that affected the yield on an overall basis. On an overall basis, I think the impact is in part as a result of lower cost of funds coming in from Bank Rhode Island on an overall basis. But then also this purchase accounting. The impact of purchase accounting, and that bringing up the yield on an overall basis on Bank Rhode Island.

From a modeling perspective, how much was that prepayment penalty worth in basis points on the margin, or even dollars?

It's $400,000.

They all end up there. And we have them all the time. But this one was a little out of the park and that's why it moved it. We wouldn't expect that to be repeated.

Okay. Great. With regards to expenses, can you frame out some expected cost savings in the upcoming quarters? What would be a decent run rate we could try to model in?

What I would say is, I'm not comfortable yet providing you with a good run rate, just from the standpoint that we continue to integrate Bank Rhode Island. Where, as you know, and we've discussed previously, the integration is going to go a little bit more slowly than what we had originally anticipated in the initial deal announcement. Largely because we pushed the conversion out from a risk management standpoint. So we won't be seeing their data conversion, their conversion from their core system, until March of next year.

My expectation is that we will see the full realization of cost savings on the Bank Rhode Island side of the fence by June of next year. And that we will continue to see them going through this 2012 year. What I would say to you is that the expectations we had for cost savings, which I believe were at 20% of Bank Rhode Island's expense basis, we don't think we'll have any problems in realizing that at all.

But just got pushed out of little bit because the conversion was pushed to next year.

It did. We initially thought the conversion would take place late this quarter. Now it's scheduled for first quarter 2013. So, as a result, we will see the last pickup in the savings in the second quarter of next year.

Okay. That's very helpful. Thank you very much.

Matthew Kelley, Sterne Agee.

Just staying on the subject of expenses. I think the 20% was roughly $8 million, if I go back and take a look at the expenses on BARI. Is that the right number that will be coming out over the course of the next 15 months?

I would say that, that is a very safe number.

Okay. Then getting back to the margins, what was the accretion during the quarter?

The total accretion -- let me find the right paper -- ask me the next question, because I have --.

Really getting towards the type of sustainable margin that we should be thinking about going forward.

Let's just talk about the income side of the fence, first, for a second. Accretion on the loans was around the $1 million mark.

For the quarter?

Quarter, right. We should see on an overall basis, the cost -- there was a lot of shifting pieces -- but on an overall basis, the total accretion for the quarter was around the same $1 million. You should see that, give or take. As Paul says, we continue to ride this baby. There's a lot of moving pieces. We are not quite comfortable yet with what their prepayment speeds are. We will continue to wrestle with the SOP-3 versus FAS 91 issues. So, as a result, we're not comfortable in nailing down precisely for the investment analysts the various components yet. But on an overall basis, I think it would be fair to expect around $1 million adjustment on a quarterly basis for 2012. I do want to say, given that information, that we reserve the right, as you know, to modify that going forward, as things change and as more information becomes available to us and the numbers solidify.

Do you think you can maintain a four handle on the margin over the course of 2012?

I'd like to try.

And I agree. I'd like to try.

But a lot of it, Matt, really has to do with this bizarre accounting and this accretion. From a CEO's perspective, it's very hard to get quantitatively very comfortable with all that stuff.

Right. Okay. The average life of the acquired loans, how long would that $1 million a quarter last, Julie?

It varies. They have got quite different durations in their portfolios. Their C&Is could be quite short there, resis could be much longer. I am guessing, I'm going to say, somewhere between two and four years. But, of course, it's going to be changing as time goes on. It's going to be coming down as those shorter-lived portfolios roll off.

Got you. Then a question just on the BARI growth. $70 million is pretty impressive on that portfolio. Maybe just talk about where that was coming from.

Because they're dealing with a lot of fun people like us, now, Matt.

Of that $70 million, $3.3 million came out of the consumer categories. Residential and home equity. $36.8 million came off the C&I side. About $30.1 million was in the commercial real estate portfolio.

Remember, just to make sure we have this right, these are originations. They are not absolute gains in outstandings.

Right. Okay. Gross.

Right.

Paul, could you just talk about your view of M&A in the next 12 months? What you're seeing for deals come across your desk, and activity, and your appetite for transactions?

I don't know how much is going on out there. You probably know more than I because we are very busy. I have a lot of things that we are doing here. So, that is certainly job one and it's probably job two, as well. So, it's kind of a home game for the time being. But we've always got our ear to the ground.

Thank you.

Bob Ramsey, FBR.

I hate to belabor the point on margin. But I am just curious. I appreciate that you all expect to have similar accretion over the rest of the year. But if you take a bigger picture view, over time, will there be a natural pressure on margin as some of the purchase accounting benefits burn off over the life of those loans? We should expect that over maybe a longer time period that this has some natural pressure?

Absolutely. Simply because that's the market rate we're in. That the interest rate environment we're in. So, absolutely. We would be continuing to fight that. Part of our strategy is to continue to bring that loan to deposit ratio down, so that we can pick up some impact in that respect.

Part of it also -- part of the remaining strategy is also, on the cost side of the fence, to continue to move to increase core deposits. Thus bring the cost of funds down. But there's no question that there will continue to be pricing pressure, on yield pressure on the lending side, as the higher-rate loans runoff and we replace them with interest rates borne out of this marketplace.

I will give a little PS to that, because I think it comes in two parts. You look at our history, Bob, our near past history, past year or two. And because of our ability to improve our funding by as much as we have, we have seen pretty good behavior in our fundamental mid interest margin, seeing some level of increase. Went down a little bit here and there, but over the past two years it's really gotten better. We will work to continue to do that. The purchase accounting that Julie describes exaggerates the margin for some time. I agree with her that, that tails off or goes away at some point. But, generally speaking, I am still feeling pretty good about the level and direction of our margin overall.

Right. Bob, just to give you a little bit more color on that, I have the bank yields on Brookline Bank, yields and costs with me. We held fairly steady for the quarter. We were at 4.79% on the yield side of the fence for last quarter, December. At March 31, we were at 4.74%. From my perspective, and what seems to be a continuing intensively competitive marketplace here in Boston, that, to me, is a very positive indication. It's not, obviously, an indication of how we will be able to hold going forward, but the fact that we were able to hold for 5 basis points in the quarter, lose only 5, is, to me, a good sign.

The other piece of it from that quarter is that we had reported a 1.23 cost of funds for the overall portfolio last period. And we have brought that down to 1.16 at Brookline Bank for the quarter. So continuing to bring it, continuing to move in that direction. So on an overall basis, net interest margin for the Bank, which was at 3.78% for December 31, only declined to 3.75%. Again, I'll put all the caveats in that we need to put in that, that is not necessarily indicative of future net interest margin. But I do think it goes to the efforts that we are making to hold it as steady as we possibly can.

Okay. Great. That's helpful. Most of my other questions have been answered. But I did want to ask about your thoughts on tax rate going forward, too. This quarter, it's a little high, but is this a good run rate from here? Or is there any opportunity to bring that down?

I will tell you that it's up at 42% for this quarter because of the impact of the merger-related expenses that you can't deduct for tax purposes. On a blended rate, we should be seeing that come down. As you probably know, Bank Rhode Island was at, I think, 34.5% last year. We were at 41%, so we expect it to come down on a blended basis. We also expect to realize some potential historical tax credits for the new building that we are building, which is eligible for some historical tax credits.

Okay. If you think about 2013, just to move out, where does the tax rate shake out, do you think?

It's hard to predict. The only reason I say it's hard to predict -- this would be a good question for you to ask in the June quarter end -- is because we are spending an awful lot of time looking at that tax rate and the strategies that we might be able to employ to bring that down. As I think I've said to many of you in prior discussions, that tax rate is one of my primary focuses. One of my primary focuses for 2012 from a strategy standpoint. We have a lot on the table right now from a potential strategy standpoint. We have not finalized it yet. So, I think if you asked me that question again at the end of the second quarter, we might be able to have some better guidance for you.

Okay. Thank you. I appreciate it.

Collyn Gilbert, Stifel Nicolaus.

Shifting to the gross component a minute, the growth that you saw in Eastern Funding this quarter, was that all coming out of Brookline? Was there anything that was any relationship to BARI at all in that line? Or that's all Brookline?

BARI would have contributed about $13.1 million to that, through their leasing company called Macrolease. They had a nice quarter. The rest is Eastern Funding.

Okay. On then just on the home equity side -- and this is more targeted again to BARI's portfolio -- can you just give us a little bit of color, for me, maybe everyone else knows this, as to the profile of what BARI's home equity portfolio looked like? The split between first and seconds, maybe just some LTV statistics. Just trying to get a better sense of the underlying credit metrics within that portfolio.

Just one second here. That portfolio has a combination of both open-ended credit and closed-end credit. I would say -- I'm either going to get this right or wrong, Collyn -- it's about 65% closed-end and about 35% open-ended. So home equity lines versus loans. The FICOs are fine, the LTVs are fine. It's just that, that market and that particular bank was in the practice of giving home equity loans that were really loans, not lines of credit. Something that we have not done here at Brookline.

Okay. Do you anticipate that to continue to be a focal point of growth coming out of the Rhode Island market?

They ran pretty hard with it. They had relationships with, I believe, people like AAA down there and stuff like that. I don't know that we will lean on it to the extent that they have historically. We are already feeling that our core competencies in commercial are being helpful to them, and we are seeing very good commercial and commercial real estate growth down there. I would rather see them focus on that. We certainly won't get out of the business, we think it's an important product line. But it's just not the priority.

Okay. That's helpful. Then any more color on where you think maybe the efficiency could go? I know you have said in the past, obviously where Brookline had been running historically was probably too low, and BARI was too high. I know, Julie, maybe you're not going to have more clarity until you do the conversion. But just a rough sense in the next couple quarters or so how much you can bring that efficiency ratio down?

At an operating basis, it's at 56.7%. I don't think that, that is unreasonable to project going -- something in that range is unreasonable to be using. How much we'll be able to bring it down, again, I think, Collyn, this might be a better question for me after the second quarter call when we have an opportunity to see the continued impact. I do think we will be able to bring it down. I think it's a question of how much we bring it down between that 50% and 55% range. What we don't want to do is give you an expectation that we'll realize those cost savings too quickly. But our goal, our threshold, is below 50%. Does that help?

Yes, that helps. That's all I had. Thanks.

Matthew Forgotson, Sandler O'Neill Partners.

I'm filling in for Mark. A quick modeling question for you. Which line item did the $5.4 million in merger-related expenses flow through this quarter, or was it spread across a series of line items?

It was spread across a series. Part of it was in compensation, part of it was professional services. It was across predominantly those two line items.

Got it. Julie, if you could, just in terms of the tax rate, and I know you said you have a slug of things you are considering. Are you leaning in any one particular area? Or can you give us a little bit more color around things that you are considering to drive that down?

There's a number. I don't think it's going to be one huge strategy. I think it's going to be a combination of a number of different things. Part of it may be changing the way that we legally structure certain entities in order to reduce. Part of it may very well be that we relocate certain offices to minimize Nexus issues or to pull out of very high-rate states. So there's a variety of strategies. Part of it is also potentially linked to how we structure some of the investment subsidiaries. There's a couple of other -- whether or not we're eligible for additional tax credits, et cetera. And finally, we do invest in affordable housing and partnerships, in order to realize tax gains from those. In essence, tax losses. Tax-generated losses on those investments. We may increase our investments in those, as well.

If I can try to read into what Mark might be trying to get at there. The current thinking about this, it's not related to our operations per se.

No. That's right.

These are structural in nature. We're not going to get into a business line because we think it's going to help us do this or something like that.

Thank you.

This concludes our Q&A session. I will turn the call back over to Management for closing remarks.

Thank you all for this. Hopefully, we've answered your questions. Obviously if any of you have any follow-up questions, Julie, Bob or I are certainly available to take them. We will look forward to seeing you all in the near future. Bye now. Thank you, Laura.