Brookline Bancorp Inc (BRKL) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Second 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 a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, July 26, 2012. If you have any objections, please disconnect at this time.

I would now like to turn the conference call over to Ms. Julie Gerschick, CFO and Treasurer of Brookline Bancorp. The call is yours, Ms. Gerschick.

Thank you, Laura, and good morning everyone. Before I begin (technical difficulty) today will include forward-looking statements and actual results could differ materially from those forward-looking statements. The Company does not undertake any obligation to update any forward-looking statements to reflect circumstances or events that occur after the date these forward-looking statements are made.

Today, I'm pleased to announce that despite the occurrence of what we consider to be an isolated event, Brookline Bancorp, Inc. had a solid second quarter in terms of both business growth and overall income generation. We continue to report strong growth in loans and deposits despite the challenging economic environment in which we continue to operate. We experienced double-digit annualized growth in our commercial loan and lease portfolio. Core deposits also experienced double-digit annualized growth when compared to the first quarter of 2012. We continue to compete effectively against the national banks in our core market and the Company remains well capitalized.

I'm also happy to announce that the first phase of our core systems conversion was successfully completed in the second quarter. We plan to complete the second phase of our systems conversion during the third quarter of 2012, a systems conversion that will further our ability to realize projected cost savings related to the Bank Rhode Island acquisition that we completed in the first quarter of 2012.

The strength of our business fundamentals, however, cannot mask our disappointment with the turn of events that resulted in the Company reporting a higher-than-expected $6.7 million provision for credit losses and for missing our earnings projections in the second quarter. Included in that $6.7 million provision is a $4.2 million provision on two short-term commercial loans that Bank Rhode Island's made very early in 2012, very shortly after its acquisition by Brookline Bancorp. The impact of this $4.2 million increase to the provision is to reduce fully diluted EPS for the quarter by $0.04.

The Company has moved aggressively to resolve the problem credits, including the liquidation of $2.5 million of liquid collateral against combined loan outstandings of $9.6 million. The Bank continues to pursue other potential sources of recovery for the remaining $7 million owed. However, based upon our review, we believed it prudent this quarter to record a provision of $4.2 million resulting in a net remaining book value of approximately $2.8 million. It's important to note that we do not view this credit problem as indicative of the overall quality of the lending or the portfolio management at Bank Rhode Island or anywhere else within the broader corporation. I would also like to emphasize that we believe that the quality of the due diligence that we performed in the valuations recorded in connection with our acquisition of Bank Rhode Island were appropriate under the Generally Accepted Accounting Principles.

Let me now move on to discuss the loan portfolios in more detail. Excluding this isolated event, we continue to experience asset quality ratios that are well above those of our peers. Our total non-performing loans as a percentage of total loans and leases was 52 basis points, while the total non-performing assets as a percentage of total assets was 48 basis points for the quarter, even with the inclusion of the credits I discussed just a few minutes ago.

While up quarter to quarter, these increases in loans on non-accrual represent the addition of only a small number of credits in certain loan categories that we do not believe represent any significant exposure to the Company. Charge-offs of $3.7 million for the quarter are dominated by the charge taken on the two loans referenced earlier. Remaining charge-offs are in line with prior quarters with the exception of a small uptick of less than $200,000 in consumer charge-offs.

In regard to the broader organization, I'm happy to report that we experienced solid growth in the quarter despite significant competitive pressure. Total assets at June 30 of 2012 grew to $5 billion, representing an annualized increase of 7.8% from March 31. The loan and lease portfolio was up 7.9% to $4 billion on an annualized basis, and the Company continues to benefit from strong growth in its commercial loan and lease portfolios, which grew 11.7% for the second quarter.

At this time, commercial portfolios now comprise 67% of total loans and leases at June 30, consistent with our commercial strategy. This growth in our commercial portfolios was fueled in part by growth in our equipment financing portfolio, which continue to provide the Company with enhanced yield opportunities. Our indirect auto business balances held steady, despite significant pay-downs and increased competitive pressures in this market segment.

Deposit growth kept pace with loan growth in the second quarter as well. As a result, deposits stood at $3.5 billion at June 30, 2012, up an annualized 7.2% from March 31. Core deposits increased at an annual rate of 12.3% in the second quarter and now comprise 70% of total deposits at June 30, up from 64% at December 31.

I'd now like to turn towards earnings. Interest income declined $1.2 million from $53 million to $51.8 million, in part as a result of the movement of the loans of a greater number of loans to non-accrual, including the loans I discussed previously and in part because of continued pressure on lending rates. Net interest income for the second quarter of 2012 decreased slightly from $43.6 million in the first quarter and the interest rate spread decreased by 5 basis points in the same period. We are pleased to report an increase of $500,000 in fee income compared to the first quarter of 2012, an increase equally attributable to both deposit fees and consumer loan application fees.

We also reported gains of $800,000 on sales of debt securities, as we continue to restructure the investment portfolio acquired in the Bank Rhode Island merger in order to minimize the high rates of repayments on mortgage-backed securities and collateralized mortgage obligations in that portfolio. The Company recognized $28.7 million of non-interest expense in the second quarter of 2012. This was a decrease from the first quarter non-interest expense of $32.6 million.

Compensation expense decreased $500,000, but remains a key area of ongoing expense control for the Bank. The net $3.9 million decrease in professional services reflects $5.4 million less of merger-related expenses that were included in the first quarter, offset by an increase in professional fees of $1.5 million associated with various infrastructure improvements and charter conversions. This area is also a key focus for further reduction as management balances the need to build the necessary infrastructure to support our multi-bank holding company structure with a longer-term goal of bringing the efficiency rate down to somewhere in the mid-to-high 50s. The tax rate for the first half of 2012 stood at 38% and reflects the benefit of federal tax credits that we expect to realize on the new corporate offices that will be completed in the fourth quarter of 2012.

Finally, on June 29, 2012, two of the Company's subsidiaries, Brookline Bank and First Ipswich Bank, were converted to state-chartered financial institutions. Bancorp also announced yesterday the 41st consecutive quarter of continuous payment of dividend at $0.085 per share.

In conclusion, I'd like to reiterate that business fundamentals remain strong. We continue to report strong growth in loans and deposits, despite the challenging economic environments. We continue to compete effectively against the banks in our core markets. The first phase of our core systems conversion was a success and overall credit quality remains very strong while the bank also remains well capitalized. We're excited for the rest of the year and we look forward to reporting back again after the close of the third quarter on our results for that period.

This completes my prepared remarks. Operator, we're now open. We're now ready for calls.

(Operator Instructions) Bob Ramsey, FBR.

Hey, good morning guys. This is actually Tom Frick for Bob. I just had a quick question. If you could walk us through the two commercial loans again, you said you have -- the net outstanding was $9.6 million, you have $2.5 million liquid collateral and you wrote down $4.6 million this quarter. And so that leaves a net book value of $2.5 million or something like that?

The original balances on these loans, original outstandings were $9.6 million against which we liquidated approximately $2.5 million, $2.6 million leaving us with a balance remaining of about $7 million. Against that $7 million, we recorded $4.2 million in reserves and provisions -- excuse me, we recorded a $4.2 million provision, of which some of it was the charge-offs, some of it is allowances, specific allowances, leaving us with a balance on the books a net book value of $2.8 million.

Okay, great. That's helpful. Thank you. And then on the restructuring of the securities portfolio, you mentioned, I mean, that's really what drove the 17% decline this quarter. I mean what is your current CPR rate on that portfolio or what was the experience this last quarter?

I don't have that with me. We could get that for you at a later point. I don't have that with me, but the rate was -- the rate of pay-off on MBSs and the CMOs in the Bank Rhode Island portfolio were dramatic and complicated by the fact that there Federal Home Loan Bank advances are out at a longer duration. So we elected to move out of those mortgage-backed securities, a significant portion of those mortgage-backed securities and re-invest in securities mortgage-backed, so we didn't think we'd be paying off at the same speed. What you're also seeing at the quarter end is a timing lag from the time that we sell to the time that some of the re-investments were reported. And so we expect that the amount of cash and short-term investments that are sitting there at the end of June 30 will be lower on an ongoing basis, as we continue to restructure and get that money re-invested.

Okay, great, Julie. Thank you.

You're welcome.

Matthew Forgotson, Sandler O'Neill.

Hi, good morning, Julie. I'm filling in for Mark.

Hey, how are you?

Hey, doing well, thanks. Just wanted to -- on the two loans you mentioned, do you have any remaining exposure to the borrowers?

As I explained, we have a remaining balance of $2.8 million on our books.

I'm sorry, I should have been clear. Just in terms of other loans outstanding.

No, that's the limit of the dollars outstanding.

Okay, great. And I wonder if you could share with us the current balance and complexion of the loan pipeline and potentially just a sense of the weighted average rate on those.

Well, the volume remains strong. I'll focus on the commercial and the C&I for just a minute. Volume remains (technical difficulty) and the pipeline remains strong. And we are looking at -- I'm strong enough that we feel that growth will continue in those pipelines going forward for the next quarter. Indirect portfolio, we believe that we'll be able to continue to hold that portfolio steady despite the fact that there are significant pay-downs in that portfolio. The car sales -- I don't know if you've seen, but car sales for the first six months of the year was some of the best in recent years. And so our options are good there. It is so not without continued price pressure. and everybody else is, in the industry, increasing price pressure in every sector of the portfolio.

On the equipment financing side of the fence, loan volumes -- or pipeline volumes there are also good. That does provide us -- while they also are experiencing some pricing pressures, that does provide us with some offset, if you would, given the higher -- on the yield side of the fence given the higher yields, in general, on that type of financing.

Okay. And then just in terms of funding costs at this point in the cycle. How much room do you think there is to drive down the cost of funds and, in particular, maybe you could just talk a little bit about how you're thinking about the CD and the borrowing books?

We have a number of small levers to push. And when I say that, I'm really talking in terms of the duration of this economic cycle that we're in. The longer that the cycle goes, the tougher that it gets to drive those cost of funds down. Our primary strategy is to keep or I'm attacking that loan-to-deposit ratio and it came down from 120% to 114%, it's held relatively steady from the first quarter to second quarter, [always] to continue to move that downward and that's really the primary strategy from an overall standpoint.

There's probably a little room in other places for some small decreases than great, but the primary driver really, the primary drivers or the primary levers that we can tweak are that loan-to-borrower ratio and to continue to drive an increase in the demand deposit portion of the portfolios. That was -- core in total was up 12% for the quarter to 70% of all deposits. Demand was up 12%. So we still feel like we've got some opportunity there. That said, I'm just going to reiterate, the longer that this cycle goes, the tougher that it is to bring those costs down.

Okay. And then just finally, just trying to get at the core margin here. Ex accretable yield adjustments, where was the margin running and can you remind us where that came in last quarter?

We don't report that. So it does -- what you're seeing is, as part of the -- what I would say is the volatility of some of those rates as what you're seeing is some of the difference coming in on the accounting side of the fence that -- excuse me, the GAAP accounting where it's bumping up and down because of the effect of prepayment speeds changing in the portfolios, but we don't report in general on the yields with and without FAS 91 and SOP 03-3.

Okay. Can you give us a sense in dollars of how much accretable yield you recognized in the quarter?

I would tell you that on an overall basis for all of the various components of purchase accounting, it was about an increase of about $1 million for the quarter.

Okay, thank you very much.

You're welcome.

(Operator instructions) Aaron Brann, Stifel Nicolaus.

Hi, good morning. This is Aaron Brann calling in for Collyn Gilbert. How are you doing?

Very well, Aaron. How are you?

I'm doing fine. Thank you. My question principally relates around credit and the provision expense going forward. I think last quarter you were talking about you needed to build or rebuild the loan book or I'm sorry the provision in the BARI portfolio. Can you elaborate a little bit more on that and what are your expectations as to what is a good reserve level going forward that you think you can normalize at?

Certainly. As you may be familiar with when you acquire a loan portfolio you're required under Generally Accepted Accounting Principles to eliminate the existing valuation allowances at the date of acquisition. And so in essence, they become embedded in the valuations that are ascribed to those loan portfolios. And then when you begin to rebuild, you are rebuilding a portfolio based on the new originations. So in essence, what happens as it relates specifically to the Bank Rhode Island portfolio is that we are putting up loan provisions on a quarterly basis, consistent with what we perceive to be a reasonable allowance for those originations.

The challenge is that when you take the allowance as a percentage of the total portfolio, it appears lower simply because the valuation allowances that existed on the purchased portfolio have been eliminated from the traditional allowance. So we continue -- and so it takes you a while to build back up if you were at 1.25% before acquisition and that's your goal, it takes you a couple of years to get back to 1.25% in that particular portfolio simply because you've got to wait through the cycle of the origination, the pay-down and origination cycle.

So as a result, that is what triggered the decline from 1.17% at December 31 to, I think, it was 87 basis points, 88 basis points -- 87 basis points at March 31. But I think you noticed that we brought it back up to 93 basis points in the quarter ended June 30. So we're on our way back up to what we believe to be on an overall basis an appropriate macro allowance for the entire portfolio, but it will take us several quarters in order to do that just given the nature of Generally Accepted Accounting Principles.

Okay. Okay. So you don't need to over-provide for the new portfolio growth, you just need to provide a level that's commensurate with the possible embedded risk of that production.

Exactly.

Okay. That's all the questions I had. Thank you very much.

Thank you.

(Operator Instructions) Showing no further questions, I will now turn the conference back over to Julie Gerschick for any closing remarks.

Well, with that I'd like to say thank you very much to the listeners and have a great weekend, an early weekend and we'll look forward -- seriously, we do realize what our job is ahead of us and we take that very, very seriously. And we look forward to reporting third quarter results to you in just a couple months. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.