Brookline Bancorp Inc (BRKL) 2016 Q3 法說會逐字稿

Good day, and welcome to the Brookline Bancorp third-quarter 2016 earnings conference call.

(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, Alison.

This call may contain forward-looking statements with respect to the financial condition, results of operations, 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 10K 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.

I would now like to turn the conference over to Paul Perrault. President and CEO. Please go ahead, sir.

Thank you, Marissa. Good afternoon, and welcome to Brookline's third-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 $13.6 million in net income, or $0.19 per share for the third quarter of 2016. That represents a 6% increase from the third quarter of last year. As we face continued uncertainty in interest rates, I remain cautiously optimistic that the relationships our bankers have developed will position us to finish the year with positive momentum. We continue to focus our capital and our resources on serving those customers with the services they need while delivering solid results to our shareholders.

Loans, including those held for sale, increased by $93 million with all categories contributing to the growth. At the end of September loans totaled $5.3 billion and was 10.4% higher than last year. We also experienced solid growth in deposits of $80 million in the third quarter, bringing total deposits to $4.6 billion, which was 10% higher than last year. Perhaps more important is the 14% year-over-year growth in transaction balances, which consists of noninterest bearing demand deposits and NOW accounts. Comparing our third-quarter performance to the same period last year, revenues are up 8% while expenses increased 6.7%, resulting in positive operating leverage with a resulting efficiency ratio of 57.9%. Return on average tangible stockholders' equity was 9.94% on an annualized basis.

Our colleagues continue to work to invest in our customers and their communities, and continue to provide great customer service. This approach has worked well for us and will facilitate our goal of becoming one of the region's leading commercial banking enterprises. I will now turn you over to Carl, who will review the Company's third-quarter results in more detail. Carl?

Thank you, Paul. As Paul mentioned, we had another solid quarter of loan and deposit growth. During the third quarter loans, excluding loans held for sale, grew $73.3 million, or 5.6% on an annualized basis led by commercial real estate which grew $42.9 million, or 6% annualized. And C&I loans, which grew $30.1 million, or 8.4% on an annualized basis. The weighted average coupon, or WAC, on our originations and withdrawals in the quarter was 432 basis points, while amortizations and paydowns were slightly higher, resulting in a 1 basis point decline on the overall WAC of the loan portfolio at the end of the third quarter.

Average interest earning assets grew $120 million from the second quarter, as our net interest margin increased 4 basis points to 340 basis points, resulting in growth in net interest income of nearly $2.1 million. While loan growth drove the increase in net interest income, it was also helped by higher purchase accounting and prepayment fees. Loan purchase accounting was $869,000 for the quarter, up $647,000 from Q2 as a result of payoffs. Prepayment fees were $1.2 million in the quarter, up $249,000 from the second quarter.

Our provision for credit losses for the quarter were up $2.2 million, a decrease of $330,000 from the second quarter due primarily to lower net charge-offs and slightly slower loan growth. At the end of the quarter the allowance as a percentage of loans was 110 basis points. Net charge-offs for the quarter were $520,000, or 4 basis points on average loans, down $3.5 million from Q2. Recall in the second quarter there was a $3.4 million charge-off of a relationship for which we had a specifically reserved $3.3 million in the first quarter of 2015.

The Company's noninterest expense increased $1.1 million from the second quarter to $33.4 million. The increase in expense was driven by compensation and benefits. Approximately $400,000 was due to period charges associated with benefits and management changes. Our effective tax rate declined slightly to 35.4%, resulting in net income of $13.6 million for the third quarter.

Nonaccrual loans increased $4.5 million to $37.6 million, or 70 basis point of total loans. Nonperforming assets to total assets increased 7 basis points to 61 basis points. Continued weakness in the taxi medallion portfolio drove the increase in nonaccrual loans. Taxi medallion portfolio was $36 million, of which half, or $18 million, is classified as impaired. Currently we maintain a $6 million, or 16.5% reserve against this portfolio.

Also the Board approved a quarterly common dividend of $0.09 per share which will paid on November 18 to stockholders of record on November 4. The quarterly $0.09 per share dividend represents an annualized yield of 290 basis points based on yesterday's closing price of $12.40.

Before turning it back over to Paul, I'll provide a few comments on our expectations for the fourth quarter. While we had higher anticipated benefits from loan purchase accounting and prepayment fees which helped in the third quarter, we expect the net interest margin to remain under pressure but would modestly benefit if and when rates rise. Provision for loan losses would be driven by our loan growth, net charge-offs, and the continued assessment of our portfolio risk factors. Our coverage ratio is likely to remain fairly consistent. Noninterest income is projected to be in line with our third-quarter results in the $5 million to $5.5 million range. However this is largely dependent on customer preferences to use interest rate swaps to lock in longer term rates. Noninterest expense is projected to be relatively flat with Q3. And we expect our effective tax rate to be 35.4%. With that, I will turn it back over to Paul for concluding remarks.

Thanks, Karl. Brookline Bancorp continues to deliver exceptional service to our customers and strong results to our stockholders, and we look forward to the remainder of 2016. We will now open it up for questions.

(Operator Instructions)

Mark Fitzgibbon, Sandler O'Neill & Partners.

Hey, guys. Good afternoon.

Hey, Mark.

First I'd wanted to start with deposits. You guys had really good DDA and savings and money market growth recently. I wondered if you could talk about what kinds of strategies or campaigns you're using to drive that growth? Secondly, if you could update us on the timing of the opening of the Newport branch, and if you have any other branches in the cards?

Okay. I would say that the improvement in the transaction accounts is directly related to our gaining new and strong relationships, primarily in lending relationships where inversely every case we require a company's operating accounts to come with that initial transaction. But not in a begrudging way because we feel we have state-of-the-art treasury and cash management services at very attractive prices, and customer feedback has supported that.

We are gaining in reputation and so are getting non-lending relationships to have us handle their cash management and the like. And so I think this is our style, Mark, as you know us. This is brick by brick. There is no big, special program. We are not giving away toasters or anything like that. So it is -- we are gaining new relationships and in some cases that is coming with substantial deposits.

What was the other part of the question? Yes, Newport. Newport will open late this year and we are very optimistic about our positioning in that marketplace. I hope to see that branch. It's well underway. I hope to see it later today or tomorrow. And beyond that, we have some thoughts about another location or two but nothing firmed up at this point.

We do have in our schedules, if you will, as we go into next year to continue modernizing and improving some of the locations, particularly at the [Brookline Island] locations, which are in a little bit in need of that kind of stuff. We had done this at Brookline over the past number of years. So we are trying to put our best foot forward. But there is no major branch expansion plans.

Okay. On the expense front, and I know, Carl, you gave some guidance on expenses for the fourth quarter, which is great. I'm thinking beyond that in 2017 and beyond. How do you think about what is a reasonable expectation for expense growth over time, given the investments that you all plan to make? Or maybe how are you thinking about it from a budgeting standpoint?

Yes. I think in the 3% to 4% range is where we are right now.

Okay, great.

Lastly, outside of medallion lending, is there any types of lending that you are shying away from these days? Anything that gives you pause?

It gives us pause almost by culture and our manner, and that would be construction lending generally. It's something that we by policy always keep very constrained. And so it's not new, but we are being even more thoughtful about any of that that we do.

It's almost always done for long-standing, very able customers who are undertaking reasonable projects within their wheelhouse. But I'm not sure I would say that there's anything new about that. It is an area we are always trying to be careful about.

Thank you.

Collyn Gilbert, KBW.

Thanks. Good afternoon gentlemen. Carl, you may have -- I apologize. But the better NIM performances this quarter, what do you attribute that to?

Really the increases in the loan purchase accounting and the prepayment fees. They were up probably combined almost $900,000 from the previous quarter. So that was a big contributor -- well, it is a contributor to the NIM expansion. Otherwise, we would have -- NIM would have gone down by about 1 basis point.

Okay, okay. Okay, that's helpful. What are you guys seeing in terms of C&I demand? There's mixed results from what we have seen from the bank group so far this quarter. Are you seeing much change in what your commercial borrowers are looking to do as we move into the end of the year and then setting themselves up for next year?

I'd say, Collyn, it all feels generally good. We see many of our enterprises are employing more of their cash in their plans, doing some level of expansion, both fixed and current assets. And we have been successful in signing up a lot of new customers in the C&I world who seem to be doing quite well. And so it at least in our little corner of the world here the situation is pretty pleasant.

Okay. Okay, that's helpful. Paul, what -- and Karl too, obviously. What are the regulators saying to you guys about your CRE levels and concentration levels?

Well, as I point out to them, Collyn, they think of it as concentration. I think of it is an expertise. (Laughter). Let's keep in mind that this is a sort of a legendary business of the old core Brookline Bank and so our having substantial commercial real estate is not a new element.

We've got a tremendous amount of history, a tremendous amount of background, and now more recently a tremendous amount of data to help support our comfort. And those are the kinds of things that we continue to work with our regulators on improving and sharing with them, and making sure that everybody is in the same boat, that we are in a safe harbor even though we are perhaps a bit more leveraged along those lines than the average bear. But it is certainly not adversarial or anything like that.

Okay. As you look out, whether it's market -- changes in market demand, competition, the regulatory environment, do you see the composition of your overall loan growth -- I'm sorry, the competition of your overall loan portfolio changing much as you move into next year?

Probably some. Obviously I think that regulatory concerns, as well as market movements will restrain the growth of real estate as a result of the environment. We have in been recent years looked to expand in our C&I business and we continue to work to improve the profile of our consumer business to some extent. So I think you will continue to see some level of shift in our portfolio mix. And that's probably going to be reflected in lower commercial real estate growth, continued strong growth in C&I, and the consumer business in between.

Okay. Okay, that's helpful. On the medallion front, you said $18 million of it was impaired. Do you have the LTV, the debt service coverage on that impaired portion?

No, I don't have those specific numbers. But $18 million of the $36 million is currently nonaccrual. We've got about $6 million in reserves against the entire book. So the reserves have been improved to about 16.5%.

As part of this process we basically have looked at collateral values in our Boston -- in the Boston market we're using $300,000 as the value as we look at this portfolio and $250,000 in the -- for Cambridge medallions, just to give you a sense there. We have about $22.2 million in Boston medallions and $13.8 million in Cambridge medallion. Just to give you a sense of what we're using.

Now, recent sales prices have been a good 20% above that number. So we have haircut that for our own purposes of doing our reserve and analysis on this portfolio.

Okay.

There are some qualitative things that I think it's important to take away from the analysis of the taxi medallion situation, at least as for us, and I think it might be generally true as well. A, we have taken no charge-offs in this portfolio. B, every single one of our customers is continuing to pay.

Now, half of them, as you heard from Carl, have come in and said, I can't pay what I have contracted to pay you but I want to keep driving, so let's talk about what I can do. So we custom design answers for that questions for each one of these guys, whether it's a single medallion owner or someone who has a small fleet of medallions and vehicles. And so half of them are paying the original note rate and half of them are paying something less than that.

We continue to believe that there is a certain kind of stabilization that is happening. But so far, knock wood, nobody is heading for the hills or throwing the medallions on the table, which suggests that they all still feel that they could make some kind of a living and are going about their business, albeit at reduced cash flows.

Okay. So the $5 million that moved in this quarter, was that a function of the customer coming to you guys and asking for a restructuring, more or less?

That's right.

Yes, more or less.

Okay. All right. That's helpful. One final question. Carl, do you have a range of profitability targets or goals or metrics that you guys are kind of laying out or would like to achieve, either in the near term -- let's go near term. Near term meaning by the end of next year.

I think we still have the two big ones that are important to everybody. One, ROA and return on tangible equity. We're sort of knocking on the door of that pretty consistently a little bit better in Q3. And we're hopeful and optimistic that we keep grinding on it.

Okay. Okay, thank you very much.

Matthew Breese, Piper Jaffray.

Good afternoon, everybody. Staying on the taxi medallion portfolio, could you provide us with an update on how fluid the market is and how many transactions taking place at that level, at that $250,000 to $300,000 level?

Yes. It's a handful. It's not a lot. We can get this information from basically the police department that tracks all of this stuff, and as the medallions change hands and what they change hands at. It's a handful of transactions. Not a lot of transactions.

It's a little more than last year, Matt. In those eight, that is what Carl alluded to. They probably have traded between $300,000 and $400,000, Most -- almost all of them. They probably are connected with some kind of financing.

Somebody moving around some medallions, and those are the values that are ascribed to them. And there are just a very, very small number amount of spot transactions for cash, which are considered considerably less than that, probably under $200,000. But there's very few of those. So it's a little better data, but not a lot to go on. And there is no wholesale trading yet going on.

I guess the question is, if things continue to deteriorate and the substantial portfolio -- amount of your portfolio's impaired, would you consider moving on? Bulk sale? Do you think you could accomplish that in and around the $200,000 to $300,000 level?

Well I'm not ready to go there at all because I don't think I need to. And you are making a big assumption about the situation deteriorating more. I don't know that I see that, because you have to remember that people from the outside, when they think about this and think about the analytics, are probably assuming that the loan devalues on the medallions were all pretty high when this difficulty started, which is not the case. If you had a very seasoned loan on your medallion, if you're a cab driver you had a seasonal loan on your medallion and you bought it some years ago, you might not owe more than a couple of hundred thousand on it, or maybe even less. If you are in that camp, you don't need relief. You are not looking for it and you don't need it.

And so we tend to be conservative in that portfolio just like we are in other portfolios. The people are paying us, as I mentioned. We are using that in the traditional way to reduce the outstanding principal. And so we, fortunately, don't have a very large portfolio. And think we are in an okay place for a difficult situation.

Outside of that, just curious how overall deposit competition has been in Boston? And are you seeing things change? Are they heating up? If so, what do you think about the trajectory of your own deposit costs over the next year or so?

I would say Boston's always been very, very competitive. We are going up against the biggest companies here. And it's just a very competitive market.

I think competition in Rhode Island has gotten a little bit stronger, particularly Citizens has gotten very aggressive on the pricing side of things. So I think in the Northeast, I think many people have pointed this out, loan growth has been a little bit better than deposit growth. So banks are -- have been competing pretty robustly for deposits. I don't see that diminishing at all.

We don't try to chase hot deposits. So we really focus on the operating accounts. But if you bank with us and you have an operating account, there is probably as nobody as competitive as us on everything else. We go after the whole relationship. And I would expect to see deposit rates go up. But we are not chasing hot money and just paying up for it.

Okay. That's all I had. I appreciate it. Thank you.

Laurie Hunsicker, Compass Point.

Good afternoon. To circle back on medallions, how many medallions do you have in your $36 million book?

It's about 100.

Okay. And so --

It's 100 loans. Let me put it that way. I shouldn't say it's 100 --

I think it's more.

I think it's 100 loans but we'll have some loans that have multiple medallions in them. That's not an accurate number to use as a number of medallions.

To use as a -- so it's not $360,000 per. Okay. Let me ask it a different way. If you thought about your whole $36 million portfolio, what is the average LTV back when you were growing this?

It's probably -- the average is in the mid-$200,000s, I'd say.

$200,000?

Right. The average loan size.

The average loan size, okay.

Nobody knows what the loan to value is. That's a problem (laughter).

I got you. I hear you. Okay, good. One last question here. Tax rate. You gave guidance for fourth quarter of 35.5%. Appreciate that -- of 35.4%. Can you help us think about the tax rate for 2017?

I expected it to be a little bit higher than that. But I don't have the number for you right now.

Okay. Perfect. That is all I have. Thanks.

(Operator Instructions)

Brian Horey, Aurelian Management.

All my questions have been answered. Thanks.

Ladies and gentlemen, I am not showing any further questions. I'd like to turn the conference back over to Mr. Paul Perrault for any closing remarks.

Thank you Alison, and thank you all for joining us this afternoon. We will look forward to talking with you next quarter. Have a good day.

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