Brookline Bancorp Inc (BRKL) 2015 Q4 法說會逐字稿

Good day and welcome to the Brookline Bancorp fourth-quarter 2015 earnings conference call and webcast.

(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, ma'am.

Thank you, Denise. This call may contain forward-looking statements with respect to the financial condition, results of operation and business of Brookline Bancorp. 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 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 over to Paul Perrault, President and CEO.

Thank you, Marissa. Good afternoon and welcome to Brookline Bancorp's fourth-quarter earnings call. I'm accompanied today by our Chief Financial Officer, Carl Carlson, who will walk you through our quarterly financial results following my comments.

Yesterday we reported $13.3 million in net income or $0.19 per share for the fourth quarter of 2015. That's compared to $12.9 million or $0.18 per share for the third quarter. This is a 3.4% quarter-over-quarter increase in net income and represented a strong finish to an excellent year.

For the year, the Company earned a record $49.8 million or $0.71 per share, an increase of 15% from $43.3 million or $0.62 per share in 2014. During the year we exited the indirect auto business to focus our capital and resources on serving our commercial and consumer relationships. Excluding the indirect auto business we grew loan balances year over year by $476.2 million or 10.6%. And we grew our demand in NOW accounts combined by $121.9 million or 12.7%.

For the year, total revenues grew by $5.3 million while non-interest expenses declined $3.8 million, bringing our efficiency ratio below 60%. Our colleagues have worked hard to serve our customers and our communities, making Brookline Bancorp one of the region's leading commercial banks. I'll now turn you over to Carl who will review the Company's fourth-quarter results in some more detail. Carl?

Thank you, Paul. We had another strong quarter with loan growth and related fees leading the way. During the quarter loans grew $166.4 million or 13.8% on an annualized basis. Weighted average coupon on originations in the quarter was 435 basis points, 2 basis points higher than our total portfolio at the end of Q3.

Our net interest margin at 354 basis points was consistent with the third quarter as higher accretion related to purchase accounting realized in the fourth quarter more than offset lower dividends on federal home loan bank stock. Several loans paid off in the fourth quarter which contributed to the sharp increase in interest income. Total loan interest income from the accretion of purchase accounting in the fourth quarter was over $1.7 million, compared to $820,000 in Q3. The loan accretion for Q4 was roughly 14 basis points on average loans, compared to 7 basis points in Q3.

Our total cost of funds was consistent with the third quarter at 75 basis points as the cost of interest bearing deposits increased 1 basis point, while the cost of borrowings decreased 4. Our provision for credit losses for the quarter was $1.5 million, a decline of $235,000 from the third quarter.

It was also a very strong quarter for non-interest income which totaled $6.1 million, up nearly $1.3 million from the third quarter driven primarily by loan level derivative income and gain on sale of loans. The Company's non-interest expense increased $1.1 million during the fourth quarter to $32.3 million. This was driven by increases in compensation primarily related to incentives, and slightly higher charges for customer losses and write-downs on repossessed assets. Our effective tax rate increased to 37% in the fourth quarter, resulting in full-year effective tax rate of 35.9%.

I noticed that some analysts had modeled in a decline in our share count in 2016 so I want to highlight that no stock was repurchased under the $10 million plan which expired at the end of 2015. Our asset quality continued to improve in the fourth quarter as nonaccrual loans declined $391,000 to $19.3 million or 39 basis points of total loans. Net charges for the quarter declined slightly to $1.4 million or 11 basis points on loans, and at year end our allowance for loan losses to total loans was 114 basis points, compared to 117 at the end of September.

Finally, the Board approved a quarterly common dividend of $0.09 per share. This will be paid on February 26, to shareholders of record on February 12. The quarterly $0.09 per share dividend represents an annualized yield of 337 basis points based on yesterday's closing price of $10.68.

Before I turn it back over to Paul I'll provide a few comments on our expectations for 2016. We expect continued growth in our average earning assets driven by loan growth of approximately $400 million. The weighted average coupon on new originations is projected to come in consistent with the overall portfolio, resulting in minimum spread compression. However, the impact of purchase accounting accretion from acquired loans is expected to be significantly lower next year.

For the first quarter I'm estimating accretion to be $200,000 to $300,000, a significant drop from Q4. This will largely be offset by continued loan growth as well as the net benefit of the increase in the fed funds rate in December, on nearly $1 billion of loans that will reprice during the first quarter. The provision for loan losses will be driven by our loan growth, net charge-offs, the continued assessment of our portfolio risk factors and trends with our coverage ratio likely to remain fairly consistent with year-end.

Quarterly non-interest income is projected to be more in line with our third quarter results, in the $4.5 million to $5 million range, with year-over-year growth of 7% to 9%. First quarter non-interest expense is projected to be relatively flat with Q4, with the year-over-year increase of 3% to 5%. Finally, we are currently projecting an effective tax rate in the range of 36.5% for 2016.

With that, I'll turn it back over to Paul for concluding remarks.

Thank you, Carl. Brookline Bancorp has had great results in 2015 and we continue to be optimistic for this year. And now we will open it up for questions. Denise?

Thank you, Mr. Perrault. We'll now begin the question-and-answer session.

(Operator instructions)

The first question will come from Collyn Gilbert of KBW.

Thanks. Good afternoon, everybody.

Maybe could we just talk a little bit about deposit trends? You put up -- you've been consistently putting up really good deposit growths across the board. What's your outlook for that as we go in to this year Carl, and then how does that play in to your views on managing the loan to deposit ratio?

I'll take that one, Collyn. It's partly a function of how many new customers you sign up, obviously, and since we're 80% almost commercial it tends to be driven in that area in cash management, treasury services and the like. Being so commercial it's also a function of what your customers are up to, if they're piling up cash or they're employing their cash for expansion or more working capital and the like.

But I think that you'll find the trends to be generally consistent as we go forward. I would like to think that we would have a successful -- a year this year as we did last year, but that was a very good year. I'm still quite optimistic that we will do well.

In the retail area, that's a little bit more onesies and twosies. We've been pushing a little bit in that area but the big numbers really come in commercial, professional, and non-profits, those kinds of firms. What was the other part of your question?

If you're managing at all or how you're thinking about the loan to deposit ratio as you're continuing to see good loan growth?

Well, if you look at our history, we've done a great job in reducing the loan to deposit ratio over the years. It has hovered around this level now for a couple of years. I would like it to come down, but I want it to come down for all the right reasons.

Hopefully we continue to develop the BDA and NOW account business and that would offset borrowings, continuing to improve our performance and that's how we're looking forward to getting that improvement in the loan to deposit ratio. But there's no urgency in my opinion. That's why we want to do it brick by brick.

Okay. That's helpful. Then just a breakdown of fees, Carl, I know you had said the jump this quarter was in derivative income, as well as loan sale gains. Can you give us what the split was between the two? I know continued loan sale gains maybe is part of the strategy going forward. Talk a little bit about how you see that business and how you see that fee line. I know you gave guidance on it, but more from a strategic perspective how you're thinking about it?

If you're just going through the fee income categories, we had loan fee income increase quarter over quarter and that was really driven by some additional referral fees associated with some loans we do, particularly around HUD. We don't necessarily do loans but we participate with folks and refer them over and help out with making those loans happen for a lot of our customers.

On the derivative income we just had a lot more activity at the end of last year than we've ever had before. It's difficult to project how -- the volume that's going to happen on a quarter-to-quarter basis. But it's certainly a product that we offer and some of our customers really want to take advantage of that.

It might have been connected, the fact that toward the end of the year, probably not me but I think most people were expecting the fed to raise rates and so the customers, some of them wanted to lock in long-term rates, and we do the long ones with swaps.

So we're putting the floating rate asset on our books, which helps us and the customer is getting a fixed rate loan at the end of the day. So everybody's happy.

And then the sale on loans, we just had a little bit more activity in the residential lending market. We did a few more participations than usual and then we also sold a few loans out of our equipment finance unit at the end of the year to drive that. That's something that's more opportunistic and -- it's really about managing our balance sheet and our exposures, and that's when we'll typically sell loans out of basically our equipment finance units. Participations are something that we're continually doing in our commercial book and commercial real estate book.

That's helpful.

On the point of rates, actually, Paul, you had mentioned, how in your thoughts for this year as you go through the budgeting process, what are you assuming in terms of additional rate hikes if any?

I don't allow us to assume any of that. We basically -- structurally we do it on a constant base to push the numbers around, but we work very hard to not be affected whether rates go up or down and our algo analysis indicates we are pretty neutral. You want to add to that?

That's correct. For the budget this year we didn't forecast any change in rates. We basically budget with a flat-flat rate environment. Then we do our modeling from a sensitivity standpoint to see what the sensitivities may be around that. Naturally a flatter yield curve is not something we would like and so that's something that we'll keep an eye on.

Okay. Then just one final question. It looked like multifamily jumped up this quarter. I know that's generally not an asset class that would necessarily be preferred for you all. Was there anything in particular that was driving that? If you could talk about that and that's it. Thanks.

We had loan growth in that component.

Okay.

I think it was one loan, a $22 million loan. There was a swap associated with that loan, as well. We had the fee income associated with that origination, as well.

Was that locally-based loan?

Oh, yes, everything is locally based.

In Boston proper is more what I'm asking.

It could have been in Rhode Island. I don't know which loan it was, but it's certainly in or near our footprint.

Very good. Thanks, gentlemen.

The next question will be from Mark Fitzgibbon of Sandler O'Neill.

Hello. Good afternoon.

Hi, Mark.

I know you've been making a bigger push to drive derivative income, but I'm wondering is that likely to normalize in the first quarter, or maybe slow down a little bit from what would be perceived as being an elevated level in 4Q?

That's a tough call. I think it's fair to say we're relatively new to the business. We've quickly gained experience. Our customers are more comfortable coming to us.

We're very good at execution, as you know, in most of the things that we do, and I would include this in the current and future environments. And so, whereas in the past our customer might have stayed with us, but if they wanted a fixed rate, they would have gone somewhere else on that particular property. We're now able to keep those in-house. So in a very minor way we're gaining market share, if you will, in the swaps business.

I think it's going to be a function of appetite in the land is going to determine how much of that business that we do. That's why, as Carl mentioned, it's a little hard to predict that number, because we only bill it for our very good customers on good properties and the like, and so now it's going to be a function of their desire to do it.

Okay --

Sorry to be dodging you.

No, no, that's a good answer.

Carl, should we take your comments on the share count to mean that you probably aren't going to buy back stock in 2016? If that's the case, I'm curious why not with the stock down 10% and you having almost a 9% capital ratio. Do buybacks make some sense here?

Without saying they make sense or not, we currently don't have an approved plan to do any stock buybacks. That being said. We're also growing quite rapidly, so that is a good use of our capital versus buying back and that being tangible book dilutive. It is something that we do want to continue to look at. We feel that we're able to get some capital to use and at good returns to our shareholders.

I can remember a well-respected analyst talking about dilution to tangible book value at one time.

We're certainly sensitive to that.

Okay. Then on the equipment finance business, that's been growing nicely. I'm curious as to your outlook for that business and how big you might want this to become as a percentage of the portfolio over time?

I expect it will to continue to grow nicely. Whether or not it matches this year's results is speculative because it was pretty spectacular this year. It's also a function of how much we sell in terms of what sticks on the balance sheet. As I said before that at this point, as long as it's below 20% of our loans, I would continue to be quite comfortable. Our asset quality in that area is much better than one would normally expect in an equipment finance business and the yields are very good and so it's something that brings -- I call it the icing on our margin cake.

Thank you.

Our next question will come from Matt Kelley of Piper Jaffray.

Hello. Just one question on the margin. What was the pre-penalty income that you recognized during the quarter?

It was about $750,000. Right around that.

And that's on top of the 1.7 purchase accounting accretion? Correct?

Exactly. That's not included in the purchase account accretion.

Okay. Got you.

Can we maybe get a little bit of a pulse on the real estate markets in Boston, each of you including Bob Rose in the past has commented on where you think we are in the cycle, where the risks are. I'd love to get a current assessment of commercial real estate, condo, multifamily, things that concern you and where you think we are as we start 2016.

Well, Rose is always supposed to be concerned, which is why he expresses that concern. I'd say in the office market, it continues to be pretty strong, possibly rents maybe even rising in that area. And in the multifamily, we think that perhaps rents have stopped going up. We think that supply is coming on at a pace which is causing a little bit of softness. For example, maybe a couple, three months free rent to go into some of these very expensive areas.

The vacancy is still low, and I'd say one of the other big differences from past cycles here in metro Boston is that the population is growing pretty well and it's growing in areas that provide people, younger people with very strong incomes who can absorb some of the stuff. So it's a bit of a foot race.

We are obviously careful about this and we're not predicting any kind of collapse, but it's probably not as hot as it was a year ago, two years ago. Carl, do you have anything to add?

I think that sums it up. We're looking forward to GE moving to town though. That will be fun.

Got you. And then a question on your swaps business. During the fourth quarter, what percent of your commercial real estate loans had a swap attached to it, of the originations you put in to place? How much of your business are customers swapping out?

It's not much. It's a few percent maybe.

I don't have a good handle on the total swaps we have outstanding today, I think around $250 million. It's about $250 million have been --

It tends to be some of the relatively larger loans, but I see most of the loans of size that go by, and boy, it's not 1 in 15. Maybe it's 1 in 20.

Right. Okay. Thank you.

Our next question will come from Laurie Hunsicker of Compass Point.

Hi. Good afternoon.

Sorry to make you repeat this, but I think I broke up right when you were going over the purchase accretion. The purchase accretion in net income -- net interest income was how much?

$1.7 million.

$1.7 million. Okay.

That compares to $820,000 last quarter.

$820,000 last quarter, right, okay. And then you said going forward that's going to be about $200,000 to $300,000 for the March quarter? Is that correct?

That's my estimate right now. It's such a tough thing to estimate. But we're getting down to the very end. These acquisitions were done a few years ago. We're back basically down to the end of whatever's left for accretion.

And with the acceleration, we've been seeing a lot of prepayments and that's why we've had -- last time we talked I was estimating it to be around $500,000 this quarter. So you go for estimates. We came at $1.7 million. But that's due to a lot of prepayments and pay-offs of loans. Everything has gotten brought forward. Just happened to hit the fourth quarter.

Perfect. On the expense side, can you help us think of this in terms of a going forward basis and maybe also update us in terms of de novo branching plans. I know you just opened Chestnut Hill. Are we still going to see Newport open in the back half of this year, and is expense drag still projected to be about $500,000 a branch, or has anything moved in that area?

It's probably a little lower. The Newport is going to be a little lower than $500,000 per branch, but I think that's a good back of the envelope whenever you look at branches. As far as the expense -- you're right. Newport, we do expect to open that at the later half, later this year.

Do you have a date on that yet? Or not yet?

No.

Okay.

Because will be raising the building and the town wants us to wait till spring to actually begin the construction of the building and I can't define when spring comes.

Neither can we. As we're looking at the Chestnut Hill branch, and that opened in December, correct?

Correct.

Can you just update us on where that stands in deposits if you have it?

As of today, no, I don't have that.

Okay. And what are you projecting those two branches to pull in? Those are your only two branches, really, in terms of new openings, or are there more slated?

We had one relocation earlier last year but that's about it. It's not a branching program. I wouldn't call it that.

The one in Newport, we happen to have a lot of business down there, and we have a lot of friends and family down there and we have no location on Aquidneck Island. A great location came up, and I'm very optimistic what we'll be able to do there. Chestnut Hill is really more in our backyard and nicely completes a grid of our locations in our native areas if you will. So I'd expect that there would be a certain amount of shifting from other branches to use that branch. But also there's a tremendous amount of business in that area and even though it's very competitive, we certainly have been building our reputation in business banking.

Got it. One last question.

Are there any other expenditure plans that are happening in 2016, technology updates or anything else that's going to meaningfully impact your expense line?

Meaningfully -- we're constantly reinvesting in the Company. I can't think of anything that's meaningful in that sense. We're doing a renovation of our State Street branch, which will happen later this year, as well. Hopefully sooner rather than later.

We're constantly doing things, but it's the depreciation expense that's going on, we're just reinvesting. The guidance of 3% to 4%, 3% to 5% increase year over year in expenses. Last year we had a decline in expenses year over year of almost $4 million. A lot of that to do with the indirect lending, but also strong, strong expense controls here. We're continuing to build out the organization.

Great. Thank you.

(Operator instructions)

The next question will come from Brian Horey of Aurelian Management.

Thanks for taking my question. I wonder if you could give us a little update on the credit performance of your taxi loan portfolio.

It's been behaving quite well. We had a couple of foreclosures that were put in with other medallion owners, but that's literally two, and they each had a story behind them that we don't believe were entirely affected by the car services. Our analysis is such that we think that although their revenues have certainly decreased at the taxi level, it's still sufficient to pay the debt and make a living and things seem to have stabilized in the market.

Is that responsive to your question?

Sure. Can you give us a sense as to what kind of provision you've taken against the loan book as a whole?

Well, the loan book itself is only $35 million and it's made up of loans both, medallions both in Boston and Cambridge. And on a combined basis, I think currently we have a reserve of about 12% against that book of business. So we think we're very well reserved against that book.

Thanks very much.

Ladies and gentlemen, at this time we will conclude the question-and-answer session. I would like to turn the conference back over to Carl Carlson for his closing remarks.

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

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