Brookline Bancorp Inc (BRKL) 2015 Q3 法說會逐字稿

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

I would now like to turn the conference over to Marissa Frerk. Please go ahead.

Thank you, Andrew. This call may contain forward-looking statements with respect to the financial condition, results of operation, 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 third-quarter earnings call. I'm 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 $12.9 million of net income or $0.18 per share for the third quarter of 2015, as compared to $11.7 million or $0.17 per share in the second quarter. This represents an 8.6% quarter-over-quarter increase in net income.

I'm excited about this growth, considering the intense competition we face in the market and the revenue headwind we created with the sale of $255 million worth of indirect auto loans in March of this year. Our colleagues here have worked hard to serve our customers and our communities, to make Brookline Bancorp one of the region's leading commercial banks, which drives our earnings and our returns to our shareholders.

Commercial real estate and commercial loans continue to be the focus of our business. At September 30, our total commercial loans made up over 80% of our loan portfolio, which represented growth of $90.4 million or 9.5% on an annualized basis from the end of last quarter.

In the third quarter, we successfully maintained the efficiency that we have built in recent quarters by streamlining many processes, while maintaining our outstanding customer service. This, we believe, is evidenced in the promising efficiency ratio trends.

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

Thank you, Paul. While our quarterly average interest-earning assets only increased $35 million from the previous quarter, this reflects the investment of excess liquidity generated from the sale of the indirect auto portfolio at the end of March and higher-yielding loans. As Paul mentioned our loan portfolio continued to have a strong growth, with quarterly average balances increasing $87.6 million or 7.5% on an annualized basis, while the yield on the portfolio increased by 1 basis point.

Net interest income grew $1.3 million during the quarter, helped by additional dividend income from the Federal Home Loan Bank and a special dividend from a restricted equity security. These two additional dividend streams contributed approximately $340,000 to net interest income and 3 basis points to the third-quarter net interest margin.

(technical difficulty) for the quarter was $1.8 million, a decline of $158,000 from the second quarter. It was another solid quarter for noninterest income, which totaled $4.8 million, down $83,000 from the second quarter.

The Company's noninterest expense increased $818,000 during the third quarter to $31.3 million. This was driven by increases in compensation, occupancy, FDIC, and marketing costs in the quarter.

Our effective tax rate decreased to 33.9%, and we currently project our effective tax rate to be 35.5% for the fourth quarter and full year. As of September 30, there has been no stock repurchased under the $10 million Board-approved plan which expires at the end of this year.

Finally, the Board approved a quarterly common dividend of $0.09 per share, which will be paid on November 20 to stockholders of record on November 6. The quarterly $0.09 per share dividend represents an annualized yield of 343 basis points based on yesterday's closing price.

Before turning back over to Paul, I'll provide a few comments on our expectations for the fourth quarter of 2015. We expect continued growth in average earning assets driven by loan growth. Coupons on new originations continue to come in lower than current portfolio, and we currently project the overall margin to be down 5 to 6 basis points from Q3, which also reflects the 3 basis point impact of the restricted stock dividends.

The provision for loan losses will be driven by our loan growth, net charge-offs, and the continued assessment of our portfolio risk factors and trends. Noninterest income is currently projected to be in line with the third quarter, with noninterest expense rising slightly as we open our new Brookline branch in Chestnut Hill as well as the relocation of our Bank Rhode Island branch in East Providence during the fourth quarter.

We expect the effective tax rate for the fourth quarter, 35.5%, and increase to 36.5% for 2016. With that, I'll turn it back over to Paul for concluding remarks.

Thank you, Carl. Brookline Bancorp has had a great year to date, and we are looking forward to wrapping up the year in a strong manner. And now we will open it up for questions.

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

Good afternoon, gentlemen. This is Nick filling in for Mark. First, I just wanted to ask if -- is the commercial lending competition in your market rational? Are other banks compromising on terms and covenants?

It's a little bit irrational, but not rampart. I would say from time to time we do see some deals that make us scratch our heads. But I wouldn't say it's way out of control. I've seen it much worse than this at different -- in different cycles.

Got it; okay. Then second, what sort of pricing are you seeing today in your equipment financing business?

We're having a little trouble with the intermittent sounds out of this call; so if you could repeat that, it would be helpful.

Sure, my apologies. What sort of pricing are you seeing today in your equipment financing business?

Is it -- I think the question was what kind of pricing are we seeing in the equipment finance business? Carl?

In Q3, the originations, the weighted average coupon on originations was about 6.71%.

Perfect, thank you. Then I know you guys mentioned your Chestnut Hill branch, but I wondered if you could talk about your plans to open de novo branches.

We have a mild branching plan that we've had in place for a number of years. There are currently two branches that are in process that will be opened over the next year or so, roughly; and we also typically have one or two other relocations going on, repositioning if you will, at any point in time.

So it's a slow growth, maintain, try to be in the right places doing the right things kind of strategy, not any huge de novo things.

Excellent. Then lastly, we saw that loan-level derivative income remained at high levels again this quarter. I know you've talked in the past about this line item being volatile, but I wanted to get your outlook at this point in the quarter.

It's difficult to project something like that. So far the pipelines look good, so right now my guidance is that we'll probably be at the levels that we are today or experienced in the third quarter.

I'll add a little bit to that, in that is certainly a line item that can be very volatile. It just right now happens that we've had a little run where it was pretty consistent.

But this is -- these are a relatively small number of transactions, and it depends on how our customers are trying to position usually commercial real estate properties in their portfolio. And depending on if everybody's opinions about where rates are going in any given day, you can probably understand how that could be volatile.

Yes, no question. Thanks very much, gentlemen.

Matt Kelley, Piper Jaffray.

I was wondering, what was the purchase accounting accretion recognized during the third quarter, and what should we expect in the fourth quarter?

Purchase accounting on the loan portfolio came in at $820,000, which was significantly higher than I had expected. We did have some refinancings, exit events, and payoffs that drove that number. I was pretty much targeting about $500,000.

Obviously, when these numbers are higher that means in the future it's going to be lower. So right now I would probably estimate about $400,000 for next quarter.

Okay, okay. Got it; got it. Just taking back of the envelope, that looks like that was about 5 or 6 basis points as well.

Yes.

Okay, got it. Then was there any outsize prepayment penalty income recognized during the quarter on loans?

We did have prepayment income, but from the second quarter to the third quarter it was about flat.

Nothing outsized.

Nothing outsize.

Okay. Then on the $340,000 of special dividends on the FHLB stock, what did the FHLB pay during the quarter? And how much excess FHLB stock do you folks have?

That's a good question. They doubled their dividend during the third quarter from a -- the payout was I think 176 basis points; they increased it to 328 basis points. So that payment in the second -- really it was a second-quarter dividend at the end of the day. We had only accrued as a lower rate, so we picked that up in the third quarter as well as the ongoing rate of 328.

We also had another special dividend from another holding that we have that was more annual in nature but also a special dividend. It's not something you tend to count on; and that was about $97,000.

Is that included in the 340?

Included in the 340; that's correct.

Okay, yes.

So we did have excess holdings of stock. Some of that was purchased in the fourth quarter, so that will bring down -- about $10 million? $10 million of stock in the -- of the Home Loan Bank stock was purchased in the quarter.

Okay. Then looking at the multifamily portfolio, down two quarters in a row now, has the pricing there become more intense as the year has progressed, or competition? What's driving that?

Well, I would probably call it competition generally. It isn't necessarily peer banks, if you will, or banks like us; but rather the larger, long-term markets have come back considerably, particularly in Boston and in Rhode Island as well. Everything from insurance companies to private equity to conduits and all the usual stuff.

And a lot of action in the government sector. Places like HUD and other government programs have been very active.

Those are very favorable financings. And although we lose the outstandings we think it makes for a healthy customer who has properly diversified their holdings that way.

Got it. Then as you grow the balance sheet here at 8%, 10% type of rate, which is pretty solid, what do you anticipate for a funding strategy? We've seen the loan-to-deposit ratio creep up a little bit the last two quarters.

What should we expect going forward? And what would you say is the incremental cost of funding on the deposit side?

Let me do the qualitative; I'll let Carl do the quantitative part of that question. And that is that we have been developing and improving the deposit base in the Company since the day I got here, and the loan-to-deposit ratio is in the lowest range that it has been in that whole time.

So we can track back constant improvement, and we will continue to work that deposit base. But operating at these levels is not frightening at all. We've got plenty of liquidity and borrowing capability, and so we intend to keep going.

In a perfect world, we would be gaining on the loan and deposit ratio -- and have, as I mentioned, in recent years. Whether or not that will happen in a smooth way or whether it will be bumpy over the next number of years is a little bit hard to tell. Costs, Carl?

From a cost perspective, as you can see, we've been fairly flat in our cost of funds from an interest-bearing perspective. I'd encourage you to look at the DDA balances as part of that. If you look at the NIM schedules, you'll see some significant growth, not only just linked quarter but year-over-year in DDA balances.

So overall, we're continuing to manage that cost of funds down. We have a lot of different levers to pull. Certainly we want to bring new customers into the Company and grow deposits. Our focus is on commercial deposits and taking care of our customers there, and growing our DDA and operating accounts.

But we also could go to the brokered CD market, or Home Loan Bank borrowings, and take advantage of the very liquid environment and low rates that are available to us. We're not looking to pay up for deposits.

Okay, got it. Thank you.

Collyn Gilbert, KBW.

Thanks. Good afternoon, gentlemen. Carl, just tying back to your deposit comment, has the size of your deposit relationships changed meaningfully as you've been building out this initiative? I guess, how do you think about those deposits, on the DDA side of the business deposits, those balances, as rates rise? Or just the risk of outflow in those deposits?

Collyn, right?

Yes.

It's very, very choppy and I apologize for that, but I think I may have the gist here, so let me take a stab at it answer and feel free to guide me for anything else that you might be trying to get.

We are building this Company and have from the beginning as a brick-by-brick basis in that we are not trying to attract deposits in a gimmicky or promotional kind of way here that might be transitional in nature. We really do work very hard to minimize the turnover, if you will. So once a relationship is established, we do expect that the person or the entity's operating accounts will be here.

We have developed a high-level, very sophisticated and capable cash management and treasury operation. So we can approach bigger operators, middle-market companies, and take care of all of their needs and have been bringing them on through the years, almost as quickly as we can. Even today, we have a very attractive pipeline of cash management people who we're bringing in.

In many cases, we have a lending relationship that's newly established as well. So the evidence of that is, indeed, the DDA increase proportionally and at an absolute level.

I think you can expect us to continue doing those kinds of things. Institutions' operating entities tend to have operating accounts and money market accounts, and that's where the big action has been. The total funding supplemented by a little bit of brokered deposits and then Federal Home Loan Bank borrowings.

But the strategy is consistent and we will continue to employ it, I expect successfully. Whether or not we bring the loan-to-deposit ratio down very much in any given period is a little bit hard to predict -- and doesn't matter that much.

Okay, okay; that's helpful. Then can you just remind us what -- the rate in terms that you're seeing on some of the CRE credits that you guys have been putting on?

CRE? Many firms, it's probably generally in the 4%s. It could be like as low as 4% in some limited number of cases. And if it's a decent credit, it's not likely to be in the 5%s. (laughter)

Okay, okay; that's helpful. Then just finally, Carl, I think you guys maybe were thinking that expenses would be actually higher this quarter than where they came in. I know you've guided higher into the fourth quarter because of the branch openings.

But was there anything in particular that was driving that? Or just thinking about your -- the expense thoughts longer term here.

I believe the question -- did I think the expenses were going to be a little bit higher this quarter.

Yes.

I think I probably did project them to be a little bit higher this quarter. We have been running with some -- quite a few vacancies throughout the summer. It took some time to fill some positions; so I probably was a little bit more conservative in my projections there.

But we're starting to hire up for these branches and get up to complement as we open up at least the Chestnut Hill branch and some of the other areas within the Bank that were shorthanded over the summer.

Okay, great. That's helpful. That's all I had. Thanks, guys.

(Operator Instructions) Laurie Hunsicker, Compass Point.

Yes, hi; good afternoon. I just wondered if you could chat briefly on the nonaccrual drops within the equipment financing, the $12 million down to $8 million. Was this part of that loan relationship that was identified and downgraded in the first quarter? Was this a cleanup of that?

Or was -- and the corresponding charge-off I guess that was elevated in this quarter, $1.3 million; clearly your credit is pristine. Just trying to get a little bit of a better sense here of the movement in the C&I nonperformers.

I'm sorry, you're breaking up pretty bad. I believe the question was you were asking about the nonaccrual loans, C&I nonaccruals?

The C&I, right. The drop in C&I, the drop in the equipment financing. Was that the credit that was downgraded in the first quarter? Was that a cleanup on that?

And the drop, did that correspond to the charge-off that we saw in the quarter?

Both -- so a couple things. It's not the one loan that we took a fairly significant specific reserve on in the first quarter.

Okay.

So it had nothing to do with that one. But it did have to do with some equipment financing loans. One in particular was related to a Hurricane Sandy grocery store that at the end of the day just did not work out.

We had a specific reserve set up for that. It was just a different one than the one you're referring to, and we charged that off, and that was cleaned up.

Okay. Any update on that other loan that was downgraded in the first quarter? Is there any movement coming on that?

Yes, it's been moving through its bankruptcy cycle, and we have probably not reflected in that quarter but we have since seen some proceeds reductions. It's proceeding in a manner very common for middle-market troubled companies that go through this kind of thing. We feel comfortable that we have any risks covered at this point.

It's fully reserved for.

So the resolution will happen over the next number of months, but we don't expect it to have any material effect on our earnings statements -- or balance sheet, for that matter.

Great, and then just one last question. Do you all have a reserve-to-loans target for next year, or a range?

I don't think so. I don't think we're allowed to think about it in those terms any more with loss of merchants periods and CCIL and all that kind of stuff (technical difficulty)

That's correct. It depends on where the loan growth is, what the charge-offs -- all of the things that go into a formula of that nature.

Okay, and actually just one last question. The two categories within C&I, your equipment finance which has been growing and your condo association, how do you think about those in terms of where you would like to see those two portfolios? Do they stay in the same percentage band? Are you looking to make those higher?

Okay, I'm having a little trouble. Condo associations I'll talk about in a second. What was the other category?

And the equipment finance, and that's at banks, yes. Thank you.

Okay, Laurie. Condo association loans we like a lot. It's a pretty small portfolio but we have been putting some effort into it recently. You can see it inching up over the past couple of years. These are supersafe loans that tend to come with nice relationships that are deposit oriented.

And it's a local business for us. Unlike some of the people that participate in that business, we only do it around here with people we know in our footprint kind of thing.

So I would like to see that grow a lot. I don't expect that it will. It will continue to inch up, I believe.

Equipment finance has been going very, very well. I think we still have plenty of capacity there as the different categories have been developing.

A lot of the growth in the past year or two I'd say is really coming from the specialty vehicle, i.e. the towtruck part, which is now in a more mature status as those customers have more completely come over to us from previous lenders. And our fitness equipment continues to plug along at a nice level, and the laundromat business also continues to be pretty strong.

But the spiking in the past couple of years really came out of the towtrucks. So logic would suggest to me that we will continue to do very well, see some nice growth, but probably not at the levels of last year and this year.

Great. Thank you.

Matt Kelley, Piper Jaffray.

Yes, I would like to get -- I wonder if you could give a little bit of commentary on the taxi medallion lending business, and what you're seeing there, and how you think that transpires over the course of the next year for that business.

Sure. We've got about $34 million of taxi medallion loans, so it's not a very large portfolio. It's about 100 relationships.

We have seen two loans go to nonaccrual to date; and that's something that we feel that we're adequately reserved on. We're really monitoring the situation closely.

Okay. Any sense on just where LTVs or values of medallions are in Boston on that collateral?

We have a fair amount of information on the whole industry, as you might imagine. And we can quantify it, in one sense; on the other hand, there have been a very, very limited number of transactions, and the transactions that have happened have tended to be structured.

In a general way, the operating situation seems to be stabilizing. By and large, our portfolio was all carefully one-by-one originated. Those of you who follow us know how conservative we are, and the lending originations in that portfolio were done in that manner.

So we are comfortable that we can continue to manage this thing. It is not -- the wheels haven't fallen off around here. Things are going along okay.

As Carl mentioned, there really is a couple. And from our perspective those two probably had roots in trouble that weren't related to the market, if you will.

Got it. Okay, thank you.

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

Thank you, Andrew, and thank you all for joining us. We look forward to talking to you next quarter.

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