Brookline Bancorp, Inc.
Q1 2013 Earnings Call Transcript

Published: 26 Apr 2013

[Operator:]

Good afternoon, and welcome to the Brookline Bancorp, Inc. Q1 2013 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Julie Gerschick, CFO and Treasurer. Please go ahead, ma'am.

[Julie A. Gerschick:]

Thank you. Good afternoon, everyone. Thank you for joining me today. I'm pleased to report that the company has sustained its positive momentum in commercial loan growth, as we continue to focus on the goals we outlined for the year. Despite an extremely competitive marketplace and continued pressure on interest rates, our experience and capable team of loan and banking officers remains enthusiastic about growth opportunities in our markets while remaining committed to maintaining our pristine asset quality. I'd like to review with you now some of the financial highlights from the first quarter. For the first quarter, Brookline Bancorp reported net income of $8.8 million or $0.13 per fully diluted share. The lending teams at our 3 subsidiary banks, Brookline Bank, Bank Rhode Island and First Ipswich Bank, continue to leverage their deep knowledge, networks and expertise in their individual markets to build long-term banking relationships. This tailored, localized approach has helped us grow our commercial loan portfolios by $39.2 million or 5.5% on an annualized basis since year end and $296 million or 11.4% quarter-over-quarter. Our equipment financing loans also grew at an annualized rate of 7.5% to reach $437 million at March 31, 2013. As expected and as previously outlined, our indirect automobile portfolio continues to decrease at approximately $10 million per month. This is primarily due to our unwillingness to lend at the extremely low interest rates now dominating the prime market and our unwillingness to take significant positions in the sub-prime marketplace. Asset quality remains excellent, reflecting our strong underwriting discipline corporate-wide. At March 31, 2013, non-performing loans were $21.7 million or 52 basis points of total loans, while non-performing assets were $22.9 million or 45 basis points of total assets, levels that, we believe, compare very, very favorably to our peer group. Charge-offs as a percentage of average loans and leases decreased to 4 basis points during the first quarter. Consistent with prior quarters, our provision continues to exceed net charge-offs, as we rebuild Bank Rhode Island's and First Ipswich Bank's allowances for loan and lease losses post acquisition. As a result, allowances have increased from 0.98% of total loans and leases at December 31, 2012, to 1.02% of total loans and leases at March 31, 2013. Excluding acquired loans, the allowance now represents 1.34% of total originated loans and leases at March 31, 2013. Turning to the funding side of our balance sheet. Total deposits grew modestly in the first quarter, increasing 1.1% on an annualized basis to $3.6 billion. Core deposits, which Brookline Bancorp currently defines as all deposits other than certificates of deposits, increased from 72% to 72.6% of total deposits quarter-to-quarter, largely as a result of an increase in money market accounts. Capital remains strong with a ratio of stockholders' equity to total assets of 12.02%, and a ratio of tangible stockholders' equity to tangible assets of 9.2% at March 31, 2013. As a result, the company announced yesterday the 44th consecutive quarterly dividend of $0.085 per share to its shareholders of record as of May 10, 2013. Turning to earnings. Net interest income for the quarter of 2000 -- for the first quarter of 2013 decreased $0.9 million to $43.7 million from $44.6 million in the fourth quarter of 2012. The decrease is largely the result of a $1.2 million decrease in interest income on loans and leases, offset by a $0.5 million increase in interest expense. The decrease in interest income on loans and leases is largely driven by continued pricing pressure in the current low rate environment. Interest expense was $7.9 million for the fourth quarter and also continues to decrease, largely as a result of decreased borrowings, as well as the decrease in deposit interest rates, particularly for money market accounts. Our net interest margin of 3.7% remains strong compared with many of our peers. Our equipment financing business continues to grow, which has allowed us to take advantage of the relatively high yields found in that marketplace. Our funding costs continue to trend downward and have fallen 18 basis points since March 31, 2012. Having said that, our margin is likely to remain under pressure in this highly competitive marketplace. Net interest income -- net interest margin decreased from 3.79% for the fourth quarter 2012 to 3.7% for the first quarter of 2013. In addition to rate pressure on the loan and lease portfolios, a decrease in pre-payment penalty continues to compress our margin in the first quarter. In terms of non-interest expense, compensation increased $0.6 million or 3.8% quarter-to-quarter, as we added loan officers and other individuals in key support areas of the company. I would note that growth in this line item was significantly slower than the quarterly growth rates we experienced in the second half of 2012. Professional services, which fell steadily throughout 2012, was stable quarter-to-quarter at $1.5 million. Our effective tax rate was at the low end of the target range of 35% to 38% that I had identified in the fourth quarter 2012 conference call in January. I think the key takeaways from this afternoon's discussion of our first quarter financial results are that we continue to execute our strategy of shifting to a more commercially oriented balance sheet while maintaining our pristine credit quality across all banks. We are working to complete the infrastructure build that we have spoken about in the past and are looking forward to the completion of the final phase of our systems conversion in the second quarter of 2013. We remain very enthusiastic about the rest of the year and look forward to reporting back again after the close of the second quarter. That concludes my prepared remarks. Operator, the call can now be opened for questions.

[Operator:]

Before proceeding with the questions, I would like to read the forward-looking statement. This call may contain forward-looking statements with respect to the financial condition, results of operations and business of Brookline Bancorp, Inc. Actual results may differ materially from those forward-looking statements. The company does not undertake any obligation to update any forward-looking statements to reflect circumstances or events that occur after the date these forward-looking statements are made. Now we will begin the question-and-answer session.

[Operator:]

[Operator Instructions] Our first question is Bob Ramsey from FBR.

[Bob Ramsey:]

I know you talked about some of the issues around indirect auto and sort of how that affects loan growth. I apologize if I missed it, but did you talk about sort of how you're thinking about full year loan growth today, given sort of where we are after the first quarter and the market conditions that are going on out there?

[Julie A. Gerschick:]

We are hoping for good loan growth this year, Bob. I think I'll stop in terms of giving out any kind of specific percentage, [indiscernible] we think that the first quarter was sluggish for many institutions. I mean we're not [indiscernible] a harbinger for the rest of the year, and so we are looking forward [indiscernible] growth during the next 3 quarters. So I'm going to stop sort of putting a percentage out there.

[Bob Ramsey:]

Okay. Growth has been sluggish for many institutions this quarter. Some of them have sort of highlighted their volume, got pulled forward into the fourth quarter and then out of the first, and that had an impact. And several have also really talked about a heightened competitive environment and it's resulting in sort of increased both loan yield pressures, as well as pressures on structure. Just curious, sort of how you would describe the competitive landscape, not only in indirect auto, but across the board right now, and sort of how that factors in?

[Julie A. Gerschick:]

We see it as a very competitive marketplace, very, very, very competitive. And we also -- I would echo or support the comments about the number of transactions that appear to have been pushed into the fourth quarter of 2012 that might have otherwise been first quarter transactions. We think that they were probably, to some degree, motivated by the uncertainty around the tax situation at the end of the year. So we think that, that's affected the portfolios. And the -- and certainly, the competition is just very, very keen and in every footprint, in every type of loan.

[Bob Ramsey:]

Okay, that's helpful. And I guess on the margin front as well, it looks like the purchase accounting adjustments added a little noise this quarter. But as you sort of look at the rest of the year, are you still thinking that the compression will be kind of in a range of 4 to 6 basis points and -- plus or minus, any volatility around pre-payments and purchase accounting?

[Julie A. Gerschick:]

It's hard to say, given how competitive the marketplace is right now. And so we would love that to be the case, but I think that I'm going to have to wait for another quarter, Bob, to just -- we're going take the temperature. This marketplace is, I think, from a competitive standpoint, one of the toughest we've seen. And I think that, although the loan officers feel very confident and they feel very good about their pipeline and they feel very good about their prospects, we've seen deals that we've never seen before from a pricing standpoint. So I think that the potential for that to impact the yields or the net interest margin is too hard to determine right now.

[Operator:]

Our next question is Mark Fitzgibbon, Sandler O'Neill.

[Mark T. Fitzgibbon:]

To follow up on that margin question, I wondered if you could share with us or update us on the borrowings and CDs that you have repricing in the remainder of 2013. I think you've given some of that data last quarter.

[Julie A. Gerschick:]

The -- I don't have that rate at my fingerprint -- at my fingertips, so CDs are largely -- it's predominantly 1 year of a cycle for those. There's -- some roll off past the 1-year mark, but we keep those relatively short. And I don't have the borrowing numbers in -- at my hand -- at my fingerprints, Mark. I can get that to you after the call.

[Mark T. Fitzgibbon:]

Okay. But my recollection last quarter is you said you had a fair amount of repricing in the first part of the year and not so much in the second half, is that still the case?

[Julie A. Gerschick:]

That's very true on the CDs. It's very true.

[Mark T. Fitzgibbon:]

Okay. And then secondly, on the loan pipeline, I wondered if you could share with us the size of the commercial loan pipeline?

[Julie A. Gerschick:]

We don't typically give that information out. It's rebuilding from the fourth quarter -- after the fourth quarter push. And so we see it rebuilding and picking back up. And the commercial, in particular, looks strong. And CRE is looking -- is picking back up and looking good, looking better. So that's just not something that we typically disclose.

[Mark T. Fitzgibbon:]

Okay. And then I noticed from the linked quarter fee income, excluding the impact from that gain on sale, the equipment lease was still down pretty significantly, maybe 25% or so. Any particular reason for that?

[Julie A. Gerschick:]

There's some seasonality in there. The deposit fees and the investment fees reflect some seasonality. We also had a very small decrease as a result of rental income that we had previously received on a quarterly basis from a building that we owned and that we sold in 2012. So that was a little bit of it as well. But I would say it's largely, from our perspective, seasonality and just the conditions in the marketplace.

[Mark T. Fitzgibbon:]

Okay. And then lastly, on the provision line, how should we be thinking about that? I mean, I know your goal is to sort of rebuild the reserves on Bank Rhode Island's portfolio. But given your low level of charge-offs and the fact that loan growth has abated somewhat, should we -- are we likely to see provision levels run at a lower point than what we did last year?

[Julie A. Gerschick:]

It's possible, and knock on wood. But -- knock on wood. I mean, barring any unforeseen events, we are seeing, interestingly enough, in part because the competitiveness of the marketplace, in part because of the interest rate environment as it is. Problem credits or credits we would've considered problems for our portfolio are actually repaying, and we expect to see some of that. And we also expect to see some additional recoveries going forward over the next couple of quarters. So if originations stay moderate, then we'll see that leveling potentially coming down as the recoveries are significantly strong and -- but our goal is to continue to rebuild those provisions for both -- for those allowances for both First Ipswich Bank and Bank Rhode Island.

[Operator:]

Our next question is Matthew Kelley, Sterne Agee.

[Matthew Brandon Kelley:]

On the expense side, so the $31 million that we have this quarter, and you suggested that there's some additional expenses related to the technology upgrade in the second quarter, maybe just talk about the expense trajectory over the next couple of quarters.

[Julie A. Gerschick:]

So we are going to be completing our systems conversion in the second quarter of 2013 and late in the second quarter; and our consolidation of our shared services, which is our back-office consolidation, some time second, third quarter of 2013 as well. As those 2 events come to fruition, and as we finish or conclude other infrastructure building that we have been doing across the organization, we expect to see, not only IT expenses settling, and -- but also comp and professional services. On the IT side of the fence, part of the challenge that we will have or we have right now is just carrying the old system costs. And those will come off, those will run off, and we will move to a reduced maintenance rate on the new computer conversion system once we've got -- excuse me, on the new computer system, once we've got everybody on it. So we expect to see the maintenance start to run at a little bit lower and a more even-keeled basis. We also expect runoff on the consulting dollars that are currently being spent to assist us in that buildout and conversion. So we should see expenses stabilizing, tapering -- beginning to taper in the third quarter as a result of that system conversion and the infrastructure build and the shared service consolidation coming to fruition.

[Matthew Brandon Kelley:]

Okay. So if we look out 1 year from now, so the first quarter of '14, when all of this is behind us, our expense is higher or lower compared to the $31 million this quarter?

[Julie A. Gerschick:]

I'm going to hold back on it. I'm going to hold back on answering that question, and I'm going to wait to answer that question in the third quarter. And that's partly dependent upon us seeing what the savings are as we move to this stronger infrastructure, the finalization of it, but also on the growth.

[Matthew Brandon Kelley:]

Okay, second question. What was the average yield on your commercial originations during the first quarter?

[Julie A. Gerschick:]

We don't typically give that out, but I would say to you that we've seen a number of deals sub-4.

[Matthew Brandon Kelley:]

Okay, got it. And then your multi-family book has been down 2 quarters in a row as well. I mean, have the degree of pressures you're seeing in the auto business, is that carrying over into an asset class like multi-family as well, and you're making a decision to not be quite as active in that business as a result?

[Julie A. Gerschick:]

No. No, not at all. The indirect auto is purposeful, strategic, not choosing to participate at significantly lower interest rates than we think are reasonable to put on to the balance sheet. We're migrating into a sub-prime portfolio to get interest rates that we would find to be desirable. So -- but that has got nothing to do with the multi-family mortgage business at all.

[Matthew Brandon Kelley:]

Okay, got it. And just last one, tax rates, any update on the 35% to 38% range you talked about last quarter?

[Julie A. Gerschick:]

In terms of our target or...

[Matthew Brandon Kelley:]

Yes, any change in...

[Julie A. Gerschick:]

No, our plan is to remain in that range, end the year in that range. And we've come in so far at the low end of that range for this quarter and are hoping and looking forward to doing the same for the rest of the year.

[Operator:]

[Operator Instructions] Our next question is Collyn Gilbert, KBW.

[Collyn Bement Gilbert:]

So a question on the expense side. How much of the BARI cost saves have you actually extracted?

[Julie A. Gerschick:]

We've just extracted about half. And what we expect to see is the remainder of the cost save coming through latter part of this year, early part of next year. But the challenges that we have, Collyn, and the reason why this gets tough from an analyst standpoint, is that those cost saves has been, to some degree, offset by the infrastructure, the increase in expenses coming in for infrastructure build. So...

[Collyn Bement Gilbert:]

Okay. But did -- no, I just want to say, the timeline to achieve those, is -- was that -- was kind of the timeline initially? Or did something cause it to sort of push out, putting the infrastructure investment aside?

[Julie A. Gerschick:]

The timeline extended significantly from the date that it was first announced, in part -- in large part because the deal was delayed. The regulatory approval on the deal was delayed much longer than what we anticipated. That was the first event. And what that triggered, if you remember, was then having to delay their conversion into the second quarter of 2013. You can't do a conversion at year end. And so when the windows lengthened on the approval from the feds, then the -- by default, the date of conversion and, thus, the cost saves got pushed out.

[Collyn Bement Gilbert:]

Got it, okay. Okay, that's helpful. And then the 80 basis points in the drop in the C&I yield just seemed kind of more exaggerated than what we've seen. Was there anything in particular that was driving that?

[Julie A. Gerschick:]

Two components drove it. Some part of that was pre-pay, but a part of it was simply the ups and downs of SOP 03-3 and the re-forecasting that takes place along with that. If you look at it from a -- if you look at it from a quarter-over-quarter basis point standpoint, it looks pretty good. Part of what you're seeing quarter -- if you look at the yields quarter to quarter to quarter, you see it moving up and down, in part, because of the impacts of SOP 03-3 accretion changes resulting from changes in pre-payment fees.

[Collyn Bement Gilbert:]

Okay, okay, that's helpful. And then just one final question on fee initiatives. I mean, obviously, that's an opportunity for you guys, I think, given where your fee is relative to revenues. Is there anything that you're-- that's on sort of the table for what you could do there to try to leverage that? Is that a focus point? Or just maybe talk a little bit about your thoughts there.

[Julie A. Gerschick:]

It is a focus for the retail and business banking groups. And it is a focus, as we look at it from a corporate-wide standpoint and look toward, hopefully, increasing the investments, the income and the deposits fee income to a degree. What I would say is that, given our commercial focus and our relationship focus, we probably are not as deposit fee oriented as a true retail bank might be. Our philosophy is to take good care of the customers and reap the rewards through higher commercial balances and lower deposit costs than it is to try to charge them for every single fee that we could try to charge them for. That said, we do also think we have got a good emphasis going on internally on increased cash management products and customers and are looking forward to the revenue that we can hope to generate from that portfolio as that expands over the next several quarters and several years, frankly.

[Collyn Bement Gilbert:]

Okay. Is there any kind of target that you guys would have in mind in terms of getting fees as a percent of revenues up to?

[Julie A. Gerschick:]

Not at this point.

[Operator:]

Our next question is Mark Fitzgibbon, Sandler O'Neill.

[Mark T. Fitzgibbon:]

Julie, just a follow-up. You had said a couple of times on this call, you were reluctant to give guidance on the NIM expenses and the provision until next quarter. I guess I'm curious, what's going to change between now and then that will give you that additional clarity to be able to make those projections?

[Julie A. Gerschick:]

We will have gone through the majority of the infrastructure build at that point, and we'll have a very clear read, I think, at that juncture, Mark, of exactly the tapering on the increased expense that we're carrying right now for those -- for the infrastructure-related costs.

[Mark T. Fitzgibbon:]

So those will be sort of 99% done, you think, by the end of the second quarter?

[Julie A. Gerschick:]

99% is too high. We expect it to continue to taper into the third quarter. But I'll have a good sense -- I'll have a very good sense at that point.

[Operator:]

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Julie Gerschick for any closing remarks.

[Julie A. Gerschick:]

I'd just like to thank everybody this afternoon for your interest, and I look forward to updating you at the end of our second quarter. In the meantime, take care.

[Operator:]

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