Brookline Bancorp Inc (BRKL) 2015 Q2 法說會逐字稿

Good afternoon and welcome to the Brookline Bancorp, Inc., second-quarter 2015 conference call and webcast. (Operator Instructions) Please note this event is being recorded.

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

Thank you, Denise. This call may contain forward-looking statements with respect to the financial conditions, 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 forward-looking statement, 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 call over to Paul Perrault, President and CEO. Please go ahead, sir.

Thanks, Marissa. Good afternoon, all, and welcome to Brookline Bancorp's second-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 $11.9 million of net income, or $0.17 per share, for the second quarter of 2015 as compared to $11.7 million, or $0.17 per share, in the first quarter. This represents an annualized 5.5% increase in net income. I'm excited about this growth considering the intense competition we face in the current market and the near-term revenue headwind we created with the sale of $255 million in indirect auto loans in March.

Our colleagues have worked hard to serve our customers and to make Brookline Bancorp one of the region's leading commercial banks, driving our earnings and returns to shareholders.

At June 30, 2015, commercial real estate and commercial loans made up over 80% of our total loans, which represented a growth of $67.3 million, or 7.2%, on an annualized basis from the end of last quarter. Deposits also continue to grow steadily, reaching over $4.1 billion at the end of June, with growth in demand deposits of $53.4 million in the quarter.

In the second quarter, we also continued to improve by streamlining many processes while maintaining our outstanding customer service. This is evidenced in the continued reduction in our efficiency ratio.

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

Thank you, Paul. We started the quarter positioned with a substantial amount of cash from the sale of the indirect auto portfolio and have been consistently putting those funds to work. By the end of the quarter, loans and leases grew $95 million and our securities portfolio grew $25 million. As Paul mentioned, 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 $14.6 million in the second quarter or 1.4% on an annualized basis. Growth was particularly strong in demand, checking, and NOW accounts, which combined grew over $63 million. Our quarterly average interest-earning assets decreased $91.6 million from the previous quarter. This is a result of the sale of indirect auto loans at the end of the first quarter, partially offset by quarterly loan and securities growth.

The excess liquidity during the quarter and lower overall level of interest-earning assets resulted in a decline in net interest income of $1.4 million from the first quarter. This was more than offset by better performance in the provision for credit losses, noninterest income, and noninterest expense.

Provision for credit losses for the quarter was $1.9 million, which is $350,000 less than the first quarter. The components of the $1.9 million quarterly provision consisted of $501,000 for net charge-offs and $1.4 million to primarily cover loan origination.

The Company's noninterest income totaled $4.9 million for the second quarter, which is $397,000 higher than the first quarter. The increase was driven by $941,000 of loan-level derivative income due to the execution of several loan-level interest rate swap agreements in the second quarter. This increase is partially offset by a decrease of $590,000 in gain on sale of loans and leases.

The Company's noninterest expense decreased $874,000 during the second quarter to $30.5 million. This decrease was driven by a $439,000 decrease in compensation and employee benefits expense and a $340,000 decrease in equipment and data processing expense.

Compensation and employee benefits decreased primarily due to lower payroll taxes and unemployment insurances and thresholds from that. Equipment and data processing expense reductions were due to primarily to lower core processing system costs, resulting from the sale of the indirect automobile portfolio.

Our effective tax rate decreased from 36.6% in the first quarter to 36.2% in the second quarter, due to the recent changes in New York tax laws and investments in municipal securities in the second quarter. We currently project our effective tax rate to be 36.4% for the full year. As of June 30, we have not repurchased any stock under the board-approved repurchase plan.

Finally, as Paul mentioned, the Board approved a quarterly common dividend of $0.09 per share. This will be paid on August 21 to shareholders of record on August 7. The quarterly $0.09 per share dividend represents an annual yield of 312 basis points based on yesterday's closing price of $11.55.

Before turning back over to Paul I will provide a few comments on our expectations for the third quarter of 2015. Average earning assets will increase with the growth of loans in the third quarter. We continue to see coupons on new originations coming in slightly lower than the portfolio and expect the yield on our loan portfolio to be down 3 or so basis points depending on our portfolio mix going forward.

The provision for loan losses will be driven by our loan growth, net charge-offs, and continued assessment of our portfolio of risk factors. Noninterest income is projected to be in line with our second quarter and our noninterest expense is expected to be seasonally higher in the third quarter. We will continue our efforts to drive revenue growth while controlling expenses.

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

Thanks, Carl. Brookline Bancorp had a great first half of the year and I will tell you that we look forward to continuing the success in the second half of the year and into the future. Now we will open it up for questions.

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

Good afternoon, gentlemen. First question I had as it relates to the margin. Carl, I heard your comments about average interest earning assets and the loan pressure -- yield pressure on loans, but how are you thinking about the margin as a whole? Are we likely to see some additional compression in 3Q?

I'm expecting it to come in relatively flat.

Okay. The second question, I wondered if you could share with us the size of your commercial loan pipeline.

We don't really get into the actual size of the pipeline. I would say it continues to be very strong.

It's quite robust, Mark, at all of our banks and as well as the equipment finance subsidiaries.

Okay. Then I know that historically in the first and third quarters, those have been the strongest quarters for the gain on sale of loan line. I guess I'm curious why that is and is it likely to continue in 3Q.

I would say the gain on sale of loans, there's two components to that. One is residential mortgages that we originate and sell, and we pretty much sell anything that is over 10 years. Actually 10 years or above fixed rate. That's typically what we are selling.

We are not big in that business. We're not big mortgage originators, so that's very modest, if anything.

The other thing that's been driving that line is as we look at our portfolio and look at opportunities to participate out loans and manage our exposures, that's what really drives that gain on sale. Macrolease is one of our equipment finance subsidiaries. We participated at about $10.5 million in Q1. I don't anticipate doing any more of that anytime soon, but that's something that comes and goes as the opportunity arises and as we want to manage that portfolio.

What I would add to that, Mark, is that if there is any correlation that you are seeing quarter to quarter, it's purely accidental.

Okay. Then the last question I have for you is sort of more of a macro question. We keep hearing about how frothy the lending environment has become, both from the standpoint of pricing and in terms on particularly commercial real estate and C&I credits.

I guess I'm curious; you guys are an ultraconservative bank so I'm curious as to your thoughts on what kinds of things people are doing out there that really spook you and what kinds of things are you avoiding.

Unguaranteed, very high LTV, long fixed real estate at tiny cap rates. It is exactly, I think, what you would expect. It's certainly frothy selectively, but it's not like that all over the place. It's not like that in every single deal, but you do see some.

Do you see a consistent group of folks that are out there doing those crazy loans? Is it sort of real small banks or midsize banks? Who are the culprits?

I think everybody is a little bit. None of us probably like to admit it, but depending on what the deal is and who it is we are probably all contributors to that view. Probably us less than some, but unlike -- I'm sure you have seen, as I have seen, in other cycles there were some really crazy players that entered into different markets and really were the market leader in stupid stuff. And I don't sense that there is any of that right now.

Thank you.

Collyn Gilbert, KBW.

Thanks. Good afternoon, guys. Paul, just to sort of follow up on that, I guess how does kind of the market -- because it looks -- I think one of your in-market competitors had made the comment that they are completely pulling out of multifamily in Boston, pulling out of multifamily construction. Is there -- given the landscape that you see, what do you think sort of a longer term, longer-term meaning like 2015 or 2016, loan growth rate could be for you guys?

Well, I don't necessarily see any reason why the current patterns, which have been in place really for a couple, three years, maybe even a little more, I don't know why those wouldn't continue absent some macroeconomic impact of rising rates or some other calamity out there.

If someone says that they are pulling out of construction in multifamily, it's kind of understandable in a way in that there is a huge amount of apartment construction going on in Metro Boston. And construction is very risky and expensive, and depending on what kinds of things you do or don't do, you would do that.

Now we are a real estate lender. We don't usually have a very large construction portfolio, but we expect to be there to support our customers to the extent that they are involved in this. Obviously we would feel that in the cases where we would support the customers that they are able to tolerate and buffer any of these macroeconomic events that might happen.

Okay, that's helpful. And then, Carl, just how are you thinking about the reserve? I know you indicated next quarter, but just more in a broader trend, because I think the reserve levels have just kind of been holding in there where you've got peers of yours that are bleeding. Just trying to understand where you think, over time, that reserve -- what's the right reserve ratio I guess for you guys?

I'm not going to get nailed down on a reserve ratio. I think it could potentially move lower over time, but that means everything else is steady-as-she-goes. A lot of this reserve build is as we see loans -- we also have an acquired portfolio and as that acquired portfolio comes down and as we originate new loans, we establish reserves around that. We are seeing very positive moves in our net charge-offs, which is also providing benefits there.

We periodically do a review and look back on loss rates and things of that nature, and so all things are looking positive in that sense. So I can imagine it; I would be leaning towards lower rather than higher from a reserve coverage standpoint.

From a non-practitioner of accounting or allowances, Collyn, I would add that we are sort of right smack in the middle of a fundamental rethinking of allowance methodologies by the accounting practice people. So we're getting familiar with all of that and we will be relooking at the whole thing, but I will echo what Carl says in the sense that we don't have much in the way of losses and we have a tremendous amount in the way of reserves.

Okay, that's great. I will leave it for there now, thanks.

(Operator Instructions) Laurie Hunsicker, Compass Point.

Good afternoon. Carl, if you could just help me with margin. When you were discussing margin were you talking core margin accretion or were you including your accretion in that number? And then secondly, along those same lines, do you have the accretion income for the June quarter?

Sure. When I say core, when I say the margin, I'm talking about the entire margin.

The entire margin. Okay, perfect.

We are right now thinking it's going to be about flat, maybe down a basis point, but I'd say about flat. And that is with the second quarter.

Remember that we had a lot of excess liquidity during the second quarter that wasn't all put to use, so took a little bit of time over the three months to get it into loans, into securities, pay down borrowings, things of that nature. So we will experience that whole benefit in Q3.

But again the loan portfolios, there's still a little pressure, particularly on the pricing side, of where loans are coming in at compared to the portfolio. Now on an overall basis we are putting on loans at a higher coupon than our portfolio, or at least in the second quarter we did, but that was more based on mix. So we are still seeing certain pressures and it depends on the mix that we are putting it on.

And when I say mix I'm talking about not only the type, whether it's equipment finance or commercial real estate or C&I, but also whether it's LIBOR-based or five-year fixed. We've been doing a lot more on the floating rate and LIBOR based, so we are better positioned and continuing to improve our position in a rising rate scenario, but it's also at a lower yield up front.

Now we are seeing some benefit to that with the derivative income as we execute. A lot of our customers are looking for 10-year fixed-rate loans and the way we do it is with a three-month LIBOR on the loan and then executing an interest rate swap for them.

So does that answer your question or you're looking for a little bit more color on --? You wanted to know the --?

That was great color, but I was also looking for, if you have it, accretion income. And then maybe -- and if you don't, I can follow up with you offline. But if you do have it for this quarter, great.

Then if you can give us any kind of direction in terms of the remainder of the year, what we can expect in accretion income.

Sure. Core accretion for Q1 was $1.5 million. That was all the accretion; that includes deposits, borrowings, and loans. Loans was $819,000 of that and that's Q1. In Q2, total accretion was $1.4 million, $1.43 million and of that the loans was $697,000 so we had a significant decline there in the accretion.

Now this number can move around. Right now our projections would be closer to $550,000 for Q3, but that is all dependent on -- now if we get prepayments during the month or a loan gets refinanced and comes out of the acquired portfolio or it goes into the originated, anything that's out there would be recognized. So it is very volatile, but I will give you the numbers that the models currently project of -- am I giving the right number? $545,000.

$545,000. Great, that's really helpful. And then, Paul, just a question to you with your stock currency almost at new highs, can you address how you are thinking about M&A?

I don't connect those --.

Just any general thoughts you can share with us in terms of -- go ahead.

I don't connect those two together the way that question might suggest. We've got plenty to do. We are doing fine. We continue to improve on all fronts. We keep our ear to the ground to see what might be going on in the marketplace, and depending on what comes up, we might be interested, we might not. But that's about it.

Okay. And then just one last question around that. Will you talk a little bit about how big you would potentially go on a deal or just maybe the sweet spot of what you are looking for asset wise? If potentially the right deal fell.

Well, I didn't say I was looking. So --.

Are you not looking?

Well, no, I didn't say that either. I am paying attention and I make a real distinction between actually actively looking to go do a deal and trying to pay attention to what's going on in the marketplace and what kinds of opportunities might be appropriate for us. And it's really in those terms that I think about it. I don't think about it in terms of specific geographies or size of institution or anything like that. So, sorry.

That's okay, very helpful. Thank you, guys.

At this time we will conclude the question-and-answer session. I would like to turn the conference back over to Mr. Perrault and Mr. Carlson for their closing comments.

Thank you, Denise, and thank you, everybody, for joining us. And talk to you next quarter.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect.