Brookline Bancorp Inc (BRKL) 2016 Q4 法說會逐字稿

Good afternoon and welcome to the Brookline Bancorp fourth-quarter 2016 earnings release 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, Anita.

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 10-K and our earnings press releases. 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.

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 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 of net income or $0.19 a share for the fourth quarter. For the year, the Company earned a record $52.4 million or $0.74 a share, an increase of 5.2% from $49.8 million and $0.71 a share in 2015. Loan balances grew year over year by $403 million, which is 8.1%, and our demand of NOW deposits combined grew $141 million or 13%.

The challenging interest rate environment contributed to a continued compression in our net interest margin year over year, which declined by 10 basis points to 3.44% for 2016 versus 3.54% the previous year. Despite the significant headwind in 2016, our revenues grew by $11.8 million or 5.5%, while our expenses grew $5 million or slightly less than 4% compared to 2015. This positive operating leverage further improved our efficiency ratio to 57.6%.

Our colleagues have worked hard to serve our customers and our communities, making Brookline Bancorp one of the region's leading commercial banks. We continue to focus our capital and our resources on serving that customer base with the services they need, while continuing to deliver solid results for our shareholders.

I will now turn you over to Carl who will review that fourth-quarter result.

Thank you, Paul. Average interest earning assets grew $77.1 million from the third quarter as our net interest margin declined 8 basis points to 340 basis points, resulting in a decline in net interest income of $496,000. This was driven by a $1.1 million decline from the third quarter in loan purchase accounting and prepayment fees, partially offset by growth in earning assets.

Loan purchase accounting was $242,000 for the fourth quarter, down $628,000 from the third quarter and prepayment fees were $734,000, down $434,000 from the third quarter. Our provision for credit losses for the quarter was $3.2 million, an increase of $1 million from the third quarter, due primarily to higher net charge-offs and loan growth.

At the end of the quarter the allowance as a percentage of loans was 99 basis points, down from 110 basis points at the end of September. The decline is due to the reduction of previously established specific reserves. Excluding specific reserves, our coverage ratios are relatively unchanged quarter to quarter.

Net charge-offs for the quarter were $8.3 million. $6.1 million was related to loans with previously established specific reserves, of which, $4.5 million were taxi medallions. I'll discuss this more when I discuss taxes.

Non-accrual loans increased $2.5 million to $40.1 million or 74 basis points of total loans, and non-performing assets to total assets increased 3 basis points to 64 basis points. Several credits deteriorated further in the quarter driving the increase in non-accrual loans off of very low levels.

The taxi medallion portfolio is $31.1 million, $13.4 million of which is classified as impaired. Currently we maintain a $1.3 million or 4.1% reserve for this portfolio.

The Company's noninterest expense decreased $781,000 from the third quarter to $32.6 million. The decrease in expense was driven by favorable adjustments of the SERP liability due to higher long-term interest rates; lower severance costs, which occurred in Q3; and lower FDIC premiums.

Our effective tax rate declined slightly to 35.1% resulting in a full year effective tax rate of 35.5%. Regarding taxes, there's been a great deal of speculation of how the election might impact federal tax rates in 2017. We don't know the extent or the timing of any reduction in federal corporate taxes, or if there is a change, whether it will be retroactive to the beginning of 2017.

I've been getting questions regarding what the potential impact will be on our deferred tax asset if there was a reduction. First, I'd like to point out that the charge-offs realized in the fourth quarter monetized a portion of our deferred tax asset at the end of the year. Second, our deferred tax asset at the year end is approximately $25 million. Assuming a reduction in the federal corporate tax rate from 35% to 15%, would cut our DTA roughly in half. The $12 million will be recorded in the provision for taxes, unfavorably impacting EPS approximately $0.17 per share. The earn-back due to lower tax rates is estimated to be within nine months.

As Paul mentioned, we finished the year with another solid quarter of organic growth in loans and deposits. During the fourth quarter, loans, excluding loans held for sale, grew $66.6 million or 5% on an annualized basis, led by commercial real estate which grew $35.1 million and C&I loans which grew $24.5 million.

The weighted average coupon on loan originations and draws in the quarter was 461 basis points, resulting in a 5 basis point increase in the overall weighted average coupon of the loan portfolio at the end of the fourth quarter. During the fourth quarter, deposits grew $46.2 million or 4% on an annualized basis. Excluding certificates of deposits, deposits grew organically $111.2 million or 13% on an annualized basis. The NOW deposits finished the year at $900 million or 19.5% of total deposits. This is up from $799 million or 18.6% of total deposits at the end of 2015.

Also, the Board approved a quarterly common dividend of $0.09 per share, which will be paid on February 24 to shareholders of record on February 10. The quarterly $0.09 per share dividend represents an annualized yield of 222 basis points based on yesterday's closing price of $16.20.

Before turning back over to Paul, I'll provide a few comments on our expectations for 2017. We expect continued growth in average earning assets driven by loan growth of approximately $350 million to $400 million.

The weighted average coupons on new originations are projected to come in consistent with or greater than our overall portfolio, resulting in the stabilization of the net interest margin. 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, with our coverage ratio likely to remain consistent with year-end.

Quarterly non-interest income is projected to be in line with recent results in the $5 million to $5.5 million range with year-over-year growth of 4% to 6%. First quarter non-interest expense is projected to be higher than Q4 due to the impact of merit increases and the seasonal reset of benefits costs with a year-over-year increase of 4% to [5%].

Finally we are currently projecting an effective tax rate in the range of 35.5% to 36% for 2017. With that, I'll turn it back over to Paul for concluding remarks.

Thank you, Carl. Brookline Bancorp continues to deliver exceptional service to our customers and exceptional results to our stockholders, and we are looking forward to 2017.

We will now open it up for questions.

We will now begin the question-and-answer session.

(Operator Instructions)

Our first question today comes from Mark Fitzgibbon with Sandler O'Neill & Partners. Please go ahead.

Carl, just following up on a couple of your outlook points, it sounds like based on the actions you took this quarter on credit, provisioning probably comes back down a little bit in the early part of 2017. Would that be fair?

I'd hate to try to guess on that. That's something that we calculate every quarter on what we need depending on loan growth in the quarter as well as any charge-offs that we may see. So I really don't want to opine on what I think is going to happen with provision expense.

Let me just add a little bit to that. The fourth quarter was a little heavy in my opinion. How's that? Does that help?

That does. That does. Then on the margin, could you share with us what you're thinking -- how you're thinking about the margin as we move into this year and what you're baking in for rate assumptions into your modeling?

For budgeting purposes we use a flat rate interest rate scenario, so we're feeling very optimistic about where things are headed. We saw very good -- with the steepening of the yield curve, primarily, particularly in the three to five year area of the curve, that's where we book most of our loans, it's very favorable to us. We're positioned for a rise in rates, so it's -- we're feeling good about it. I'm thinking it might be 2 or 3 basis points to the NIM in the first quarter. But I don't want to go beyond that. We haven't really modeled how many rate increases there may be this year.

Doesn't matter until they happen.

Until they happen. But it takes a little while for those things to happen. But we're feeling good about it.

Okay. And then a question on commercial real estate. Obviously commercial real estate has been a focus of regulators over these last several quarters. Your CRE to risk based capital ratio is about 340%. I guess I'm curious how high you would be willing to let that drift up over time?

Let me start with saying we are at peace with our regulators related to this. We stress test our real estate annually and we have a tremendous amount of information about the portfolio and can show that it is extremely conservative. Now having said that, we do have some more capacity, but it is not unlimited, obviously. So we are doing more participations. We are doing more placements. But we expect to fully participate in the marketplace this year.

Okay. And then lastly, I wonder if you could sort of compare and contrast the loan markets in Massachusetts versus Rhode Island? Is one stronger than the other? Are you seeing anything unique in either market?

No, I don't think one is stronger than the other. The biggest -- the stark distinction is the value of real estate because of the relative immaturity of Brookline Bank in commercial banking, Brookline Bank doesn't have as many manufacturing companies as they bank in Rhode Island. Those would be the two differences I see in the C&I and real estate.

Thank you.

Our next question is from Collyn Gilbert with KBW. Please go ahead.

Thanks, good afternoon, gentlemen. Just back to the NIM, Carl. So your comments about perhaps seeing stability in 2017, how does the prepay accretion component fit into that? Are you thinking about it more off of a core NIM?

Yes. That's more of a off of a core NIM.

Okay. And what was the --

Loan purchase accounting is basically disappearing on us here. There's going to be very minimal impact on that year over year. I think in prepays, that will -- that would be perhaps a negative impact, unsure. But the core NIM is going to be improving.

Okay. I'm sorry, what was the core NIM this quarter?

One second, I'll pull that up.

And while you're doing that, just curious as to what -- you indicated asset yields, loan yields, but what are your thoughts on deposit pricing trends as we look out to the year and just the competitive nature of the market as relates to deposits?

Well, I think it's difficult to look out through the year, Collyn, because as I mentioned a minute ago about another question, the rates don't go up until they go up. But I can say, near term there is considerable pressure in certain CD, sort of intermediate term CDs, and here and there, there are some remarkable money market offerings that I haven't looked behind the curtain to see what you've got to do to get it. There is some noise out there, but it's not overwhelming.

Okay. Do you think you would need to participate in that in order to keep the deposit growth where it is, or do you think you can, from mix shift benefit or something like that, you can hold the line there?

No, we're gaining on our deposit base mostly with commercial, nonprofits, professional firms; people who have operating accounts and need money market accounts and so it is very, very core. I think our CDs probably went down a little bit --

Yes.

-- year-over-year. So I am confident that as long as we can continue to be as effective in the marketplace as we have been over the past few years, we can keep going. Maybe this was an exceptionally year. But I continue to be very optimistic on our mix and on our amount.

Okay.

Getting back to your question, prepayments and purchase accounting total about 6 basis points, so we're talking about a 3.34% core margin.

Okay. That's helpful. And then just -- I know, Carl, you gave guidance for the full year. But just, FDIC expenses were down, it seems like kind of down across the board for a lot of banks in the fourth quarter. Is that a new baseline for you guys or was there something unusual going on there?

The FDIC rates went down.

That was for all banks under $10 billion.

Okay, that's right. Okay. So that will stay? That's not a catch-up or an accrual, that's the real number?

Yes.

That's right.

Okay. And then just the reduction in compensation expense in the fourth quarter. Was there anything unusual that was driving that?

Well, as I mentioned, we had the higher long-term interest rates impact our SERP liability and how we calculate that. So that was a benefit in the quarter. Plus in Q3 we had some severance expense associated with the management change and retirement up at First Ipswich. So we didn't have that again. That's basically it.

Okay. All right. That's helpful. I'll leave it there. Thanks.

Our next question comes from Laurie Hunsicker with Compass Point. Please go ahead.

Hi, Paul and Carl. Good afternoon. I just wanted to follow up on accretion. The actual dollar accretion income that was in this quarter was how much? I know it was $1 million swing but I just didn't know -- I know your September number was about $1.5 million. So was it around $500,000 or --?

You're talking about the loans?

Correct, the accretion --

Loan accretion was $242,000.

Was $242,000. Okay. And so I guess I'm a little confused. In your press release you had said there was a $1 million swing, $1 million drop from the prior quarter. I had the prior quarter at $1.479 million. Was there some sort of a reclassification or --?

No, not at all. When I said $1 million, that was purchase accounting, loan purchase accounting, as well as prepayment penalties.

Rolled together. Got it. That makes sense.

Yes, together, right.

Okay.

And then I did -- okay.

Great. And then I just wanted to follow up on your nonperformers, your C&I nonperformers of $23 million. How much of that was taxi? I got your impaired number. Appreciate that detail. But I feel like the nonperformers might have been higher.

No, it's the same amount. The impaired number is the same.

Same amount.

Right.

Okay. All right. Will you give us a --

$13.4 million.

$13.4 million. Okay. Will you give us an update on your Newport branch, and then how you're thinking about branching going forward?

Sure. I mean, it's been open less than a month and the early returns from three precincts say that there's pretty good activity. And the personnel are out meeting our existing customers on Aquidneck Island and the bankers that we've hired to staff the place are all long-time Newport area bankers, and so they're re-upping their contacts and we're capturing some of that, so it feels good. It's a beautiful branch.

Good. Okay. So, Paul, what are your plans on branching as you think about the rest of the year?

There are some relocations. There are some serious upgrades that need to be done. And that's probably the kind of thing that we'll be doing for the rest of the year.

Okay. So branch count, for the most part, probably stays at current levels?

Yes. Excuse me. I forgot. We are moving into one new branch for First Ipswich in a very exceptionally well located branch that had been vacated by People's United after they acquired Danvers. So if you know the geography here, it's right off route 128 on your way into downtown Danvers. Since we've got a lot of their former employees we figured we'd take one of their former branches.

Okay.

But other than that -- The rest of the activity is, as I say, there's a couple of relocations going on and a couple of rebuilds.

Okay. Great. Paul, maybe just last question, generally how you're approaching M&A here. Your stock price is up. Your acquisition currency is up. How are you thinking about the world differently now? Thanks.

I don't know that I'm thinking about the world differently. I am wondering if the rest of the world is thinking differently about what kinds of premiums banks might expect in the future. So I'm still very cautious. We don't need to go do anything. We keep our ear to the ground. But it will be an interesting question for you if the weighted average normal price for a decent bank in the past was 20 times earnings, with I'll all of us selling at 21 times earnings now, what's the implication? I haven't seen any data yet to understand if there is any or what it is.

Right. Good. And just -- I guess just to sort of further that question, has there been increased activity in terms of chatting with you?

No.

Have you had increased conversations around M&A?

No.

Okay. Great. I'll leave it there. Thanks.

(Operator Instructions)

Our next question comes from Varun Bhandari with Piper Jaffray. Please go ahead.

Good afternoon, guys. Just wanted to ask you guys about commercial real estate in Boston, and what you guys have been seeing in terms of yield coming on post election as rates have moved up?

Well, rates in the relevant part of the curve, which as Carl alluded to before, would be five years, say for us basically, went up and then it went back. So on average, it really hasn't gone anywhere and pricing is maybe slightly more competitive right now than it was over the past six months. But if it's true, it's only slightly and most of the banks have got to be cautious about how much lending in this area they're doing.

In some cases we've actually been able to improve either the quality of the deal or the pricing as deals are trying to get done. Particularly in the end of the market where we play. We don't do big buildings or big hotels and so this is certainly the more affordable level or size level is more comfortable.

Awesome. That's it.

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

Thank you, Anita, and thank you all for joining us. We will look forward to talking with you again next quarter. Good day.

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