Brookline Bancorp Inc (BRKL) 2012 Q4 法說會逐字稿

Good afternoon and thank you for joining us today. Welcome to the Brookline Bancorp, Inc. fourth-quarter 2012 earnings call. I would like to make 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 call will be open for questions. This call is being recorded today, January 31, 2013. If you have any objections you may disconnect at this time.

Before proceeding let me also mention that this call may contain forward-looking statements with respect to the financial condition, results of operations and business of Brookline Bancorp, Inc. Actual results may 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.

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. Good afternoon and thank you for joining us today. I'm pleased to announce solid fourth-quarter and year-end results, results that reflect strong and continued organic loan growth, pristine asset quality, the ongoing integration of the Bank Rhode Island acquisition and progress in the building out of our infrastructure.

Operating income for the year was $41.1 million, or $0.59 per fully diluted share, up from $28.9 million for the year ended December 31, 2011. Net income for the fourth quarter of 2012 of $11.9 million contributed $0.17 per fully diluted share to these results.

Our banking teams, with their deep expertise and market connections, continue to produce strong results for the Corporation with commercial loan portfolios increasing $59.4 million or 2.1% quarter to quarter and $1.1 billion or 66.4% from December 31, 2011.

Our net interest margin, while still strong vis-a-vis many of our peers, remains under pressure in this highly competitive environment with declines in net interest income offset by increases in other income and reductions in other expense in the fourth quarter of 2012.

We are pleased to have moved into our new corporate offices on October 29 and are enjoying the benefits of working in closer proximity to one another. More importantly, we are excited to find ourselves in a dynamic market in which we have many existing clients and the opportunity to add many new clients. To this end we opened a new branch on the ground floor of our new building.

Similarly, we added a branch in Coventry, Rhode Island and we are happy to report that both branches are off to a great start. We also continue to integrate Bank Rhode Island operations into our shared services group with the final stages of that integration expected early third quarter 2013 after the completion of Bank Rhode Island systems conversion in the second quarter of 2013.

Our goals for 2013 are straightforward -- to continue to grow our commercial businesses and revenues; to successfully convert Bank Rhode Island to our common systems platform late in the second quarter 2013; to complete our overall infrastructure build, an infrastructure build that we designed to support significant additional growth; to maintain a tax rate well below 40%; and to continue to reduce our efficiency ratio toward a longer-term goal of 55%.

With that as background, I'd like now to turn to a discussion of the balance sheet. As reported yesterday, the Bank enjoyed strong organic loan growth quarter to quarter with commercial loan portfolios increasing 2.1% or $59.4 million during the fourth quarter 2012 to reach $2.9 billion at December 31, 2012.

Total loans, excluding loans acquired in the Bank Rhode Island acquisition, increased $290.7 million or 10.7% year to year, to reach $4.1 billion at December 31, 2012. As a result commercial loans now represent 68.3% of total loans and leases, up from 63% at December 31, 2011.

This growth, which has been achieved in a very challenging market, is reflective of the investments we have made in acquiring top loan officers. It also reflects the heightened market awareness of our commercial brand and the lending traction that Bank Rhode Island continues to gain post acquisition.

You have no doubt noticed that offsetting this growth is the $32 million or 5.6% decline in our indirect auto portfolio during the fourth quarter 2012. This decline was purposeful on the part of management and it reflects our unwillingness to lend at what we consider to be exceptionally low interest rates simply to offset loan pay downs.

Turning to the funding side of our balance sheet, I'm pleased to report that total deposits were up 5.4% on an annualized basis as compared with September 30, 2012 and are now over $3.6 billion. Core deposits, a definition which for Brookline Bancorp does not yet at this time include certificates of deposits under $100,000, increased from 70.8% to 72% of deposits quarter to quarter largely as a result of increases in NOW accounts and demand checking accounts.

Asset quality continues to be stable and excellent, reflecting the Corporation's disciplined underwriting standards. Non-performing loans were $22.2 million or 53 basis points of total loans while non-performing assets were $23.7 million or 46 basis points of total assets at December 31, 2012, levels that compare very, very favorably to our peers. Charge-offs as a percentage of average loans and leases had decreased to 8 basis points.

Consistent with prior quarters, our provision continues to exceed net charge-offs as we build -- as we rebuild Bank Rhode Island's and First Ipswich's allowances for loan and lease allowances post acquisition. As a result allowances have increased from 94 basis points of total loans and leases at September 30, 2012 to 98 basis points of total loans and leases at December 31, 2012. If we exclude acquired loans allowances represent 1.33% of total originated loans and leases at December 31, 2012.

Capital remains strong with stockholder's equity to total assets of 11.9% and tangible stockholder's equity to tangible assets at 9.08% at December 31, 2012.

Now let me address the earnings highlights. Net interest income for the fourth quarter 2012 decreased $1.8 million to $44.6 million from $46.4 million in the third quarter of 2012. As you will recall, third-quarter 2012 interest income included $1.4 million or 14 basis points of yield adjustments on acquired loans required under GAAP.

Net interest margin declined 7 basis points quarter to quarter after adjusting for this $1.4 million yield adjustment, with a 6 basis point improvement in the Corporation's cost of interest-bearing funds offsetting that decline in the yield on interest earning assets.

Fee income has become a growing source of revenues with increases in deposit and mortgage-related income. Although the Bank expects to incur modest increases in gains on loans originated for sale in 2013, the fourth quarter benefited from a one-time gain on the sale of portfolio loans of $19 million, producing a $1.9 million gain. This sale was from one of our equipment financing subsidiaries, a sale that we initiated in order to reduce concentration risk to one franchisee.

Compensation increased $1 million, or 7% quarter to quarter, as the Corporation moved into the final phases of its infrastructure build. This increase was offset during the quarter by decreases in equipment and data processing fees of close to $900,000 and professional fees of close to $400,000. These decreases reflect the successful completion of the Brookline Bank systems conversion, the completion of our move into our new headquarters and the completion of other aspects of our shared services consolidation.

We accomplished an enormous amount in 2012 keeping our eyes on high-quality asset growth while at the same time undertaking and completing major components of our infrastructure build. We look forward to 2013, a year in which our bankers will continue their strong performance while those working behind the scenes bring to conclusion the last phases of our Bank Rhode Island integration and the last phases of our platform growth.

That concludes my prepared comments, operator. The call can now be opened for questions.

(Operator Instructions). Bob Ramsey, FBR.

With the indirect auto piece, obviously I know you all have talked about how overly competitive that space is for a while. But it certainly seemed the pace of rundown accelerated this quarter. If market conditions stay as they are, should we continue to expect, give or take, $30 million of rundown a quarter, has anything changed or how should we think about that?

We see this last quarter as having been a little higher than normal. Normally pay downs quarter to quarter run about 24 -- $20 million to $24 million. So it seems to us that last quarter was a little high. That said, we should expect we will continue to see loan rundown over the course of 2013.

We will continue to participate in the marketplace as long as interest rates make sense. But we won't be putting on loans at 1% or 1-plus-percent because it is just not advantageous to the Company. It is better for us to be investing in other components -- other parts of the loan portfolio.

Okay, that makes sense. And then could you talk a little bit about net interest margin? I know you guys came in a little lighter than you were hoping this quarter. What accounted for the variance and how are you thinking about the margin outlook through 2013?

I think probably -- certainly we had the $1.4 million adjustment in the fourth quarter that didn't reappear in the fourth quarter. That said, I think that what we are seeing is a higher -- prepayment fees in prior quarters then we saw in the fourth quarter of 2012. And that remains variable. It's really hard to predict.

On an overall basis I think that looking at something like a 4 to 6 basis point decline quarter to quarter with variations for purchase accounting adjustments and prepayment yields is probably not an unreasonable position at this point in time. We are doing everything that we can to continue to hold those interest rates steady and we are doing everything we can to continue to bring that cost of funds down. But it is a pretty tough pricing environment.

And does that pace of pressure get any easier later in the year as maybe more of the higher-yielding assets have run off? Or do you reach a point where you have fewer offsets on the funding side and you stay pretty constant throughout the year? Assuming rates are as they look today -- obviously no one knows six months out where we will be.

Yes. If rates stay as they are through the 2013 year I think we will see a larger benefit in the cost of funds earlier in the year as we have advances that pay down -- large amounts of advances that pay down come through.

I think that from a pressure standpoint, I think it is -- on the interest rate side of the fence I just think it is going to be relatively constant through the year. And we are not anticipating any easier of a year in that respect than what they experienced, what the bankers experienced on their front lines in 2012.

And what was the swing in prepayment fees? I know you mentioned that was a factor this quarter. I was curious what it was this quarter and last.

It was -- I don't have the exact numbers in front of me, Bob. It was several hundred thousand dollars though.

Okay, great. Thank you, Julie.

Damon DelMonte, KBW.

Just wanted a point of clarification. The sale -- the gain you took on the sale of the leases this quarter, is that a one-time event or are you guys going to be looking to sell off equipment leases in the secondary market going forward?

No, it really was a onetime event. We had loans to a large number of clients who were all franchisees of one company. And as that concentration to that ultimate company, the franchisee or franchisor, grows we just began to feel that it was important to bring that down. And so we had this one time sale.

Okay, that's helpful. Thank you. And how should we think about the provision expense going forward in light of your expectations for loan growth?

I think that now that we are past our blips from the second quarter I think that the provision for the fourth quarter represents a healthy number. We have to continue to grow the provision in conjunction with the growth in the originations at Bank Rhode Island and First Ipswich so the provision will continue to rise as those originations come through.

We really won't see that build stopping for at least another year yet. But that said, we don't -- we certainly anticipating maintaining the same levels of asset quality that we have enjoyed the last two quarters and for all of our history. And so we don't -- aren't anticipating anything unusual from that perspective.

Okay. And then I guess just lastly, you guys posted pretty solid organic loan growth this quarter -- I'm sorry, this year I should say in 2012 -- do you think repeating that level is doable in 2013?

We certainly hope so. That is the goal that we've given everybody. Again, it is a very tough market and so it is certainly our goal. I think that we'll be thrilled at 10%. I think that it would be more reasonable to be looking at 6% to 8% from a standpoint of next year, but we are certainly going to strive for every dollar that we possibly can. Of course all of it being high-quality.

Right. Okay, that is all that I had. Thank you very much.

Mark Fitzgibbon, Sandler O'Neill & Partners.

I was wondering as it relates to expenses, and I apologize if I missed this. But is $28.9 million a reasonably good run rate for operating expenses in early 2013 before any impact from bringing [Barry] over to your system?

I think on an ongoing basis it is not bad. There's going to be a little bit of bumpiness in it over the course of 2013 as we bring Barry on on the systems. We will still have some consulting expense in there, we will still have -- we will have at the end of the year, towards the end of the year once we have got them on we will have some increased data processing costs.

But on an overall basis, I think if you took that rate and you maybe increased it a slight amount you would be probably close to the ball park. And -- yes, so I will leave it at that.

Okay. And then secondly, I wondered, as it relates to acquisitions, when do you feel like you guys will be in a position to do another acquisition and what will you be looking for in future targets? Is it really deposit rich companies or is there a particular lending niche that you might be searching for? Anything as it relates to that.

Okay. So we don't have any plans to go out and acquire an institution at any time this year. If you looked at our strategic plan you would see nothing in it for that. That said, as you know, we are always going to listen to something that might come along that might be favorable. But I think the thing that we would say is we are very, very picky.

And on an overall basis the thing that matters the most to us is that the acquisition creates franchise value for us. That the institution of that we acquire has the same type of commercial orientation, the same kind of customer orientation and just kind of the same overall credit quality and cultural orientation for us.

So for us it doesn't necessarily need to be the type of acquisition where we are just filling in the dots of branches between two communities, but rather needs to be in what I would characterize as contiguous market areas that add franchise value.

Thank you.

Aaron Brann, Stifel Nicolaus.

My first question is actually to clarify something you said in response to a question asked by Damon. Did you say that provision will continue to build throughout at least 2013 or were you talking about your reserve to loan ratio will continue to build throughout 2000 (technical difficulty)?

Our reserve to loan ratio will continue to build. And that may require increases in the provision.

Okay, I appreciate the clarification. And then secondly, your fee income, even if you exclude the lease sale income, increased about 22% quarter over quarter. Were there any seasonal factors in there or was this a new higher run rate than Brookline has historically had?

It reflects the -- it is a higher rate, but what it reflects, Aaron, is the fact that the fees were down in the third quarter of 2012 because of the conversion. In certain circumstances we actually waived fees from a customer service standpoint during the days immediately after the conversion. And so what you are seeing is us coming back to full strength on the fee side of the fence post conversion.

Okay. Well, that is all I had and I appreciate the clarification.

(Operator Instructions). Matthew Kelley, Sterne, Agee.

A question on your tax. I know that in prior calls you've mentioned that you are working on ways to reduce that tax rate or kind of manage that tax rate and just want to get an update on that and what we should be using for 2013.

Well, from a management standpoint probably the most significant mechanisms that we have historically used and then added this year are the historical usages, the use of the investment subsidiaries both in Bank Rhode Island and here in Massachusetts to shield interest income to the extent possible under state law. So that is one piece of it.

The big piece of it though that was additive this year is tax credits and those tax credits came in two flavors -- they were the tax credits generated by the low income housing tax favored investments that we have initiated. That began to reach a fuller strength this year. And secondly, we took a $1.8 million tax credit on Clarendon, the building -- our new headquarters now that we have moved into it.

Our goal for next year is to continue the use of tax credits while we entertain other tax strategies in order to keep that rate somewhere between 36% and -- I'm going to say between 35% and 38%.

Okay, all right, got you. And then in some of your opening comments just when you mentioned the leases that you sold, you suggested that mortgage banking -- more conventional mortgage banking might be part of a strategy going forward. Maybe just elaborate on that or did I hear that right?

We do originate for sale into the market. Our practice here at Brookline is to not hold longer-term mortgages. And so to the extent that there is a market for that in originations and there is a market for purchase of that we do go forward and originate for immediate sale. So that -- it is that business which we think will incrementally increase in the 2013 arena.

Are you adding lenders and new locations to that business? How are you building that out.

We expect just to be more efficient and more focused on it at this juncture.

Okay, got you. And then a question on the margin. What was the accretable yield -- or the accretion, I should say, during the fourth quarter?

During the fourth quarter? Just a second I've got to grab it for the fourth quarter. It was a little over $6 million for the year.

Okay. And for 2013 what are you baking in -- or what do you anticipate for regularly scheduled accretion that we should be thinking about in the margin as we decipher between a core margin and a reported margin now?

Right. We are estimating somewhere between about $5.5 million and $5.750 million. And the only couching that I will give you with that is that it is always dependent -- remember we are an SOP033 reporter under GAAP. And so we are required on a regular basis to re-forecast the accretion on the SOP (inaudible).

Sure, yes.

And so while we today at this point anticipate the rates -- the dollar amounts being somewhere between $5.5 million and $5.75 million the fact of the matter is that GAAP requires you to adjust that and that could change over the course of the year.

Sure. It's roughly 10 basis points though?

Yes, exactly.

Okay. And how long to you anticipate that will last? Is that gone in 2015 or 2014?

2015?

Yes. But how long does that --.

It will taper, it will taper. The Bank Rhode Island piece is the largest piece of it, obviously. And so, we will and joy that through at least 2014.

Okay. All right, thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Julie Gerschick for any closing remarks.

I would just like to thank everybody for your interest and your participation today and I look forward to updating you on the first-quarter 2013 results in April.

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