Brookline Bancorp Inc (BRKL) 2015 Q1 法說會逐字稿

Good afternoon and welcome to the Brookline Bancorp Incorporated first-quarter 2015 earnings conference call. All participants will be listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Marissa Frerk, Associate General Counsel. Please go ahead.

Thank you, Gary. 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 from these forward-looking statements. Factors that may cause actual results to differ include those identified in our annual report on Form 10-K and our earnings press release.

Brookline Bancorp cautions you against unduly relying upon any forward-looking statements and disclaims any intent to update publicly any forward-looking statements whether in response to new information, future events or otherwise.

Please note this event is being recorded. I would now like to turn the conference over to Paul Perrault, President and CEO. Please go ahead, sir.

Thank you, Marissa. Good afternoon all and welcome to Brookline Bancorp's first-quarter earnings call.

I am accompanied today by our Chief Financial Officer and Treasurer, Carl Carlson, who will walk you through our quarterly financial results following my comments.

Yesterday we reported $11.7 million in net income or $0.17 per share for the first quarter of 2015 as compared to $10.9 million or $0.16 per share in the fourth quarter of last year. This represents an annualized 30.5% increase in net income.

Also, I'm happy to report that the Board approved a 5.9% increase in our quarterly dividend to $0.09 per share for our common shareholders. This is the first increase in our regular common dividend since the Company completed the second step conversion in 2002. The investments we have made and the dedication and efforts of our colleagues has created one of the region's leading commercial banks driving our earnings growth and now quite literally, paying dividends.

In December we discontinued the origination of indirect auto loans and in March, we sold over 90% of our automotive portfolio. This accelerates our exit from a low return commodity business and further concentrates our focus on high-quality commercial relationships. At March 31, 2015, commercial real estate and commercial loans and leases made up over 80% of our total loans which represented growth of $93.3 million or 10.3% on an annualized basis from the end of last year. Deposits also continued to grow steadily reaching over $4.1 billion at the end of March 2015.

In the first quarter we continued to grow revenues as margins continue to be challenging in the volatile interest rate environment. We also continue to execute on efficiencies by streamlining many processes while maintaining our outstanding customer service.

I will now turn you over to Carl who will review the Company's first-quarter results in some more detail. Carl?

Thank you, Paul. We had several significant items impacting the first quarter. I will start with the accounting impact of the adoption of ASU 2015-01 as of January 1. ASU 2014-01 is the new accounting guidance for investments in qualified affordable housing projects which requires the initial cost of investments in affordable housing be amortized in proportion to tax credits and other tax benefits received and be recognized as a component of the provision for income taxes. Historically the amortization of these investments were recorded in noninterest income. ASU 2014-01 requires retrospective application which resulted in the cumulative impact of $1.1 million to our beginning retained earnings for 2015.

Another event for the quarter was the sale of $255 million in automobile loans. After transaction costs, we recorded a nominal loss on sale of $11,000 while releasing $1.9 million in loan loss reserves. Excluding the indirect automobile portfolio, loans and leases grew $105.6 million or 9.4% on an annualized basis from the end of the year. This growth continues to be particularly strong in the commercial real estate and commercial loan and lease portfolios with all three of our banks contributing.

Overall deposit balances grew $156.7 million in the first quarter or 15.8% on an annualized basis. Growth was primarily in savings accounts and brokered CDs. At March 31, our loan and deposit ratio dropped to 113% versus 122% at year-end.

Our quarterly average interest-earning assets grew $107.3 million from the previous quarter which drove the linked quarter improvement in net interest income of $952,000. Provision for credit losses for the quarter is $2.3 million which is $539,000 more than the fourth quarter. The components of the $2.3 million quarterly provision consisted of $854,000 were net charge-offs, $1.7 million to cover loan growth, $1.6 million to cover specific reserve for a loan downgraded during the quarter and these were offset by the $1.9 million of release reserves related to the auto portfolio sale.

The Company's noninterest income totaled $4.5 million for the first quarter which is consistent with the fourth quarter. However, the sources of revenue were a bit different.

Gain on sales loans and leases increased $546,000 from the prior quarter offset by a quarterly decrease of $562,000 in loan level derivative income. The increase in the gain on sale was driven by our periodic review and the participation of a pool of equipment leases to manage our concentration risk.

The Company's noninterest expense decreased $1.1 million during the first quarter to $31.3 million. This decrease was driven by a $692,000 decrease in compensation employee benefits and a $233,000 decrease in other expenses. Compensation and employee benefits decreased due to the nonrecurring severance expense incurred in the fourth quarter, fewer workdays in Q1 versus Q4 and a slightly smaller workforce. These benefits were only partially offset by merit increases and other seasonal increases and benefit costs. Other expenses decreased due primarily to lower costs associated with collections and other real estate owned properties.

As of March 31, we have not purchased any stock under our Board approved repurchase plan.

Finally, as Paul mentioned, the Board approved an increase of a quarterly common dividend from $0.085 to $0.09 per share. This will be paid on May 22 to shareholders of record on May 8. The quarterly $0.09 per share dividend represents an annualized yield of 3.41% based on yesterday's closing price of $10.40.

Before turning back over to Paul, I will provide a few comments on our expectations for the second quarter of 2015. Average earning assets will be lower in the second quarter due to the auto loan sale partially offset by our quarterly loan growth. While we continue to see the coupons on newer originations come in lower than our overall portfolio, we expect the yield on our loan portfolio to remain flat to higher based on our portfolio mix going forward.

The provision for loan losses while expected to decline from Q1 will be driven by our loan growth, net charge-offs and continued assessment of our portfolio risk factors.

Noninterest income is projected to be in line with the first quarter and our noninterest expense is expected to be relatively flat from Q1 as we continue our efforts to drive revenue growth while controlling expenses. Last but not least, we expect our effective tax rate to be approximately 36.6% in Q2.

With that I will turn it back over to Paul for concluding remarks.

Thank you, Carl. Brookline Bancorp had a great start to 2015. We are looking forward to continued success in the future and now we will open it up for questions.

(Operator Instructions). Mark Fitzgibbon, Sandler O'Neill.

Good afternoon, gentlemen. Maybe I could just start with one sort of market related question. I know you guys had a good quarter and beat consensus but your stock is up about 7.5%. Is there anything else out there that you are aware of that is causing the stock to really spike and it really just happened this afternoon?

I would say that the earnings release speaks for itself and that is all I am aware of that is out there on it.

Okay. Secondly, I wondered if you could share more detail with us on that one large commercial relationship that had some issues this quarter?

Sure. It was a Bank Rhode Island loan. It was made about a year and a half ago to a well-established company. It has been around for 25 years. It started experiencing some difficulty regarding a foreign contract which really created an overdraft situation or over advance situation that could not be cured so which resulted in a default.

So the company is operating on a breakeven basis and as we review it and look at I would say a worst-case scenario in our minds, we thought it was best to establish a $1.6 million specific reserve against this particular credit. It is a little less than $9 million loan and it really was the driver of the increases in our nonperformers this quarter.

Okay. And then I think you booked about $110 million in brokered deposits this quarter to pay down some borrowings. Are we likely to see that trend continue? Is there a limit where you would sort of feel comfortable with brokered deposits at a certain level?

I'm pretty comfortable where we are now, I think it is about 3% of our total assets. I mean I'm comfortable going up to 5% or so but it is not something that -- I am comfortable where we are now. We look at the market and brokered CDs just happen to be cheaper than our Federal Home Loan Bank advances at the time and so when you see those opportunities you want to take advantage of them. It is just another way of locking in some term funding and also it doesn't require any collateral so it improves the overall liquidity of the company, not that there is any liquidity concerns. But it just overall improves some all of your operating ratios and risk ratios.

Let me just add, Mark, that we obviously have strong origination capability and as such we do have quite a number of deposit gathering initiatives going on that we are hopeful will bear fruit in the not-too-distant future. In the meantime, Carl has done a very nice job of managing the wholesale funding in a way that lets us keep rolling and yet contains our cost of funding.

Great. Just lastly, I wonder if Paul maybe you could make a comment on whether you think acquisition activity in general is likely to pick up in Eastern Massachusetts any time soon? I know a lot of capital has come into that market in the last year or so. Do you see more consolidation coming?

I don't know, Mark. You can line up all the usual suspects and somebody may or may not buy them if they are willing to be sold and I would venture to say you probably have a better guess at that than I would.

Thank you.

(Operator Instructions). Collyn Gilbert, KBW.

Thanks, good afternoon, guys. Carl, could you just follow up a little bit more on your comment on loan yields, your outlook saying loan yields would be flat to higher? It is surprising and impressive certainly given competitiveness within the environment and where interest rates are.

And also too just want to make sure we understand the dynamic that the auto pool sale had on the NIM this quarter just based on the timing of that.

Very good questions on that. I will start with the auto portfolio sale because then it will probably help you do the math as you look at the press release. The auto sale happened right at the end of the quarter so we got the full benefit of those balances during the quarter that we did have. So the sale happened right at the end of the quarter so we won't have those balances in the second quarter and going forward. Naturally our strong loan growth will quickly offset that and naturally all of those loans are at higher yields than what the auto portfolio was providing us.

The second thing is if you look at just our quarterly results for the first quarter, without giving too much away here, and you just take out, take the total and take out the auto portfolio, our yields go up on loans. The remaining loan portfolio if you look at that, it jumps up probably 7, 8, 9 basis points. So that would be if you thought of it as a starting position there.

Now we are continuing to see compression. We are still booking loans at 2 to 3 basis points lower than our portfolio yield and the market is not helping us in any way along those lines. We continue to see a flat, flatter yield curve.

But all of that being said, we are still booking loans at much higher yields than we were before in that sense. On a portfolio, basis, percentage basis. So that is where you are seeing the increase. Once the auto portfolio comes out, the weighted average of the rest of the yields are higher.

Okay.

I don't know if that is clear or not for you but --

It is helpful and you know what, you may have said it and if you did maybe I missed it, what the average yield was for the $255 million that you sold?

It was around 3%.

Okay.

Maybe even slightly higher than 3%, a couple of basis points.

Okay, that is helpful. Okay. Then just on the sorry -- you know what, I think I'm good. That is all I had. Thank you.

Tom Alonso, Macquarie.

Good afternoon, guys. Just real quick, the other loans you guys sold, did you say that was some leases that you sold to reduce concentration risk?

That is correct. We do a lot of the equipment financing business. This was also in this case out of Bank of Rhode Island, particularly the fitness equipment business and a national player in that platform in that sense that we do a lot of lending with. And it is very, very good paper and we have a partner that really likes that paper and so we were able to participate some of that out so we can continue to lend to this particular organization.

Got you. Can you give us a sense of sort of the size and maybe what the yields are on that paper?

Sure, I will give you the ranges. We sold $10.5 million of loans. The yields on that paper were betweem 5% and 6% and the buy rate on that paper was around 3%. So while we say sell, we participate this out. So we will participate anywhere from 50%, 75% of a particular loan out and be able to record that.

So we still manage the origination, Tom, and yet we are able to harvest the yield and continue participating in the growth of the franchisees.

I got you. Any thought to maybe increase that as a way to sort of maybe free up some capacity for something else on balance sheet or given the yields, I assume you like those assets.

We do like the assets but frankly we do have other business lines that have assets that have similar characteristics that we could possibly look into doing some of that. As you may note, we had started doing that in a much smaller way, larger dollars but in a smaller way in our commercial real estate business last year and the year before a little bit. And there are other areas that we could possibly be doing that in.

Got you. Okay. Thanks, guys.

(Operator Instructions). Laurie Hunsicker, Compass Point.

Just wanted to go back to net interest margin here. I was hoping you could help us with two components, specifically accretion income and then also in this quarter, did we see any prepayment penalty fees versus I know we had about 4 basis points in last quarter? Thanks.

Yes, the accretion income purchase accounting associated just with the loans was about $1.2 million this quarter. We were expecting to be about $1 million, came in at $1.2 million. Prepayments, we always have prepayments and I would say it is around $600,000 this quarter. I don't recall exactly what it was less quarter but it was $600,000 this quarter.

And then as we think sort of more to the point on looking forward and I know there is a lot of things that can move around in accretion income but as you look for the next three quarters, what are you expecting accretion income to do in 2015?

I continue to see it declining. We are estimating it to be about $1 million next quarter. We are three years in after the acquisitions, the lower interest rate environments, we are seeing people refinancing or prepaying or refinancing out of their loans. So that accelerates some of the income that you recognize. I continue to see this going down as we go forward. But it is very volatile quarter to quarter, month to month the activities based on the acquired loans. And so it is extremely difficult to estimate what that is really going to be.

Okay, so along those same lines -- and maybe this is as fine-tuned as you can get, but do you have a 2015 accretion income estimate? Or is your best guess $1 million (multiple speakers)

We estimate $1 million a quarter.

Okay, perfect. Thank you. That is helpful.

This concludes the question-and-answer session. I would like to turn the call back over to Carl Carlson for any closing remarks.

Thank you all for joining us. We look forward to talking with you next quarter.

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