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Brookline Bancorp (NASDAQ:BRKL)

Q4 2013 Earnings Call

January 30, 2014 1:30 pm ET

Executives

Paul A. Perrault - Chief Executive Officer, President, Director, Member of Credit Committee, Chairman of Brookline Bank and Chief Executive Officer of Brookline Bank

Thomas J. Meshako - Interim Principal Financial Officer, Interim Chief Accounting Officer and Director of Finance

M. Robert M. Rose - Chief Credit Officer

Analysts

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Operator

Good afternoon. My name is Denise, and I will be your conference call coordinator today. It is my pleasure to welcome you to the Brookline Bancorp, Inc. Fourth Quarter 2013 Earnings Conference Call. This conference call is being recorded and simultaneously webcast on the Brookline Bancorp website, where it will be archived after the call. [Operator Instructions]

I would now like to remind you that 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 materially from those forward-looking statements. Accordingly, Brookline Bancorp cautions you against undue reliance upon any forward-looking statements and disclaims any intent or obligation to update any forward-looking statements, whether in response to new information, future events or otherwise.

I would now like to turn the conference over to Mr. Paul Perrault, President, Chief Executive Officer; and Mr. Thomas Meshako, Principal Financial Officer of Brookline Bancorp. Please go ahead.

Paul A. Perrault

Thank you, Denise, and good afternoon, all. Welcome to Brookline's fourth quarter earnings call. Like all of the financial institutions in New England, we continue to experience ongoing competitive, economic and regulatory pressures. And while we are starting to see some stability in the economy, the regulatory and competitive pressures remain a significant challenge. I am pleased to report that despite these pressures, we had a solid year in 2013. Our goal of transforming a savings bank to a regional commercial bank is being realized, and we are well positioned for the future.

Needless to say, this transition has required hard work and a great deal of change. As for this past year, first and foremost, we are pleased with our continued strong growth in the company's commercial and Commercial Real Estate loan portfolios. We experienced growth in all components of these portfolios and are especially pleased with the growth in our equipment financing groups. As we consider this past year's solid loan growth, it is important to note that asset quality remains quite strong and, in fact, actually improved from the end of 2012. We could not be more satisfied with this combination of solid loan growth and strong asset quality.

We are also pleased with the continuing growth in our deposit base and, in particular, in our core deposits. Our measured branch expansion over the past few years, combined with our entry into the commercial banking market, is yielding strong deposit growth across the board. As I mentioned earlier, we are very pleased with our position and reputation in the marketplace.

We have worked over the past 2 years to integrate our 2 acquisitions and complete the transition to a commercial bank. This work has established a solid foundation, one which gives us strength and the continued ability to grow and thrive in our selected markets.

And now I'll turn the discussion over to Tom, who will review our results in greater detail.

Thomas J. Meshako

Thank you, Paul. The company reported earnings in the fourth quarter $7.7 million, or $0.11 per share, and earnings for the year of $35.4 million, or $0.51 per share. For the quarter, the company's commercial loan portfolio increased by $85 million, or 11% on an annualized basis. This caps an impressive year of growth, a year in which we saw our commercial loan portfolio increase by $316 million, or 11.1%.

As Paul mentioned earlier, asset quality remains strong. The ratio of nonperforming loans as a percentage of total loans and leases decreased by 15 basis points for the year to 38 basis points at December 31. Just as importantly, nonperforming assets decreased by 12 basis points for the year to 34 basis points at December 31.

Consistent with prior quarters, strong loan growth has been a driver for additional provisioning at all of the company's banks. The company's provision for loan loss -- loan and lease losses increased to $3.8 million for the fourth quarter of 2013, from $2.7 million for the third quarter of 2013. The fourth quarter provision consisted of a $1.7 million provision due to loan growth, $900,000 for charge-off loans, and $1.1 million for deterioration and charge-offs in the acquired loan portfolios. The company's provision for the loan and lease losses decreased to $10.9 million in 2013 as compared to $15.9 million in 2012. The decrease in the company's provision in 2013 was primarily due to lower charge-offs.

At year end, the allowance for loan and lease losses represented a 1.1% of total loans and leases, as compared to 1.08% at September 30, 2013. And 1.32% of originated loans and leases as compared to 1.31% at September 30, 2013.

Total deposits increased by $97 million in the fourth quarter, or 10% on an annual basis, an increase by $218.7 million for the year or 6%.

More importantly, core deposits increased at an annualized rate of 16% in the fourth quarter and by 11% for the year. The company reported a net interest margin of 3.54% in the fourth quarter of 2013, down slightly from 3.56% in the third quarter of 2013.

We are pleased with this stabilization of the net interest margin in the fourth quarter. The company reported a net interest margin of 3.64% in the year ended December 31, 2013, as compared to 3.85% for the year ended December 31, 2012. The company's net interest income increased $400,000 to $43.8 million in the fourth quarter from $43.4 million in the third quarter. For the year, the company's net interest income decreased slightly to $176.2 million from $177.4 million.

The company's non-interest income grew to $3.9 million in the fourth quarter of 2013 from $3.5 million in the third quarter. This growth included a $400,000 gain on sales of securities.

For the year, the company's non-interest income decreased $4.8 million from $18.6 million to $13.8 million at year end. This decrease was attributable to several factors: the inclusion of a gain on sale of loans and leases of $1.9 million in 2012, a decrease of $1.2 million in loan-related sales and fee income, and an increase in the losses on affordable housing projects. The company's non-interest expense of $31.3 million in the fourth quarter of 2013 increased $1.8 million from $29.6 million in the third quarter. This increase is due to compensation-related expenses and remaining system conversion-related expenses.

The company's return on average assets decreased to 58.58% for the fourth quarter as compared to 0.73% at September 30, 2013. For the year, the company's return on average assets decreased to 0.68% as compared to 0.74% in 2012. The company's return on average tangible stockholders' equity decreased to 6.61% for the fourth quarter from 8.27% in the third quarter of 2013. For the year, the company's return on average tangible stockholders' equity was 7.71% as compared to 8.40% for 2012.

This concludes my prepared remarks at this time.

Paul A. Perrault

Thank you, Tom. Denise, we're ready to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question will come from Collyn Gilbert of KBW.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Just a question initially around the loan growth. And I guess, specifically on multi-family, you guys saw a pretty nice jump this quarter. I was curious what was driving that and how that sort of -- how you're thinking about that. Because I think, Paul, you had indicated last quarter that maybe that was one asset class that started getting a little frothy. So I just wanted to sort of understand a little bit of the growth there and kind of what your outlook is for overall loan growth going forward.

Paul A. Perrault

Collyn, I think it's important as a backdrop to remember that multi-family is sort of a legacy strength of the old Brookline Bank in our markets, which is basically, the only place we do multi-family in Rhode Island and Greater Boston North Shore. There has been quite a bit of purchase and sale activity here over the past couple of years. And so there are lots of opportunities for financing. I still stand by my comment that we cast a wary eye about how frothy this may or may not be becoming. But we don't compromise our standards and hopefully, it's our ability and our reputation that's making it such that we can still originate plenty of business on terms that we are very comfortable with. So as I sit here and I think about what's going on early in 2014 and I know the deals that are being worked on at all the banks, we continue to be very optimistic that we could have mid- to high-single digit overall loan growth for this year.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, that's helpful. And then, Tom, just on the NIM. Is there any change, I mean this quarter was certainly better stabilization than what you'd seen in prior quarters. But what is your outlook going forward? I think before, Julie was sort of guiding towards a few basis points a quarter. How should we be thinking about the NIM now?

Thomas J. Meshako

We are seeing a continued decline in the accretion of the purchase accounting, which will impact a couple of basis points a quarter. We also continue to see that the coupon is declining still 6 basis points a quarter as well. But that is being offset by the mix of our loan production. As you know, this year, we had -- in the last quarter, we had $40 million of runoff in our indirect portfolio and that was offset with commercial growth at a higher rate and especially if we do our equipment financing, which gives us a positive spread in between that mix. So that is really helping us maintain our margin where we are. But as our indirect portfolio continues to decline, the runoff will be less, and therefore, that may be less of a positive mix going forward. So we're still anticipating it to decline. We're hoping it stays in this 2 to 3 range, but it could go a little bit more.

Paul A. Perrault

Let me add a couple of things that might not be the obvious but that I think can be helpful, Collyn, and that is that we have, still, a very high and too high loan-to-deposit ratio and we have lots of borrowings, some of which were in the acquired banks that are pretty pricey that should be coming off. And we're able to be generating nice growth in the right kinds of deposits as being very helpful. So I think on a comparative basis, you'd see our overall cost of funding is still pretty high for a mature commercial bank, and we're working on it every day. So I think there is an unusual opportunity for us to continue to reduce our funding costs more than a more traditional or mature commercial bank might.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. Okay, that's helpful. And then just on the expense side. Obviously, with your infrastructure initiatives, perhaps sort of a tail end to that. I know, Paul, you had said last quarter that sort of the timing and when we'll start to see that -- those expense moderations kick in is not always -- you can't predict with precision. But how are you -- how should we be thinking about expenses as we look throughout this -- the rest of this year?

Paul A. Perrault

No one is more tired of spending this kind of money than I am, I assure you. But I think I can see the end zone from here a bit more clearly all the time. And I don't -- we continue to grow. We continue to satisfy regulatory changes. So these things are all a moving target. We open the odd branch here and there. So I think if you -- Tom might kick me here or something, but I think if you think of us as having peaked in core operating expenses, you would be in the ballpark of how I think about it.

Thomas J. Meshako

I would agree with that.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. Okay, that's helpful. And then just one final question. Any update on the CFO search?

Paul A. Perrault

It's going well.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Is there a time that you think you would be able to name an executive?

Paul A. Perrault

I don't want to jinx myself and speculate on that.

Operator

The next question will come from Mark Fitzgibbon of Sandler O'Neill + Partners.

Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division

I wanted just to follow up on Collyn's last question on the margin. When does the purchase accretion burn off and when do you anticipate that will happen?

Thomas J. Meshako

In 2014, it's going to decline about $1 million on the margin. In 2015, we'll see another reduction of $1 million. Now that also depends on how much is used for charge-offs and won't affect -- won't get to the margin as well as prepayments, which have pretty much slowed down or even stopped. So we feel pretty comfortable with those numbers right now that they'll be declining about $200,000 to $250,000 a quarter going forward. And that will run out well past the 2014 to 2016, 3-year strategic plan that I created.

Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division

Okay. Secondly, I wonder if you could share with us the size of the loan pipeline and maybe what the average rate on that looks like today.

Paul A. Perrault

That's a question that I'm asked and I always struggle. It's not that I don't want to answer it because I think pipelines are a bit of morphis [ph], and different of the groups use them very differently. So there's never sort of a likely -- there's different probabilities of likelihood that anything on it will actually close and different of our businesses have very different rate structures. But I think if you look at what's happened in recent quarters, particularly last couple of quarters, it is my expectation that, that pattern will be replicated in all aspects; that is, quantity, sizes, rates. Wouldn't you say, Tom?

Thomas J. Meshako

Yes, I will. I think the fourth quarter was all...

Paul A. Perrault

I'm not trying to dodge you. But the pipelines are strong, they're starting off 2014 better than we started 2013. But Q4 is generally indicative of what it feels like right now.

Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division

And then as you think about the provision, do you sort of feel like the fourth quarter was an anomaly with the magnitude of the provision or, given the loan growth you're seeing and your previously articulated desire to grow that reserve up to sort of the 120, 125 level, are we going to see provisioning something similar to 4Q going forward?

Paul A. Perrault

At the risk of practicing accounting without a license or whatever one needs to do that, we believe -- I believe that there was an anomaly in Q4 that I'm going to have our Chief Credit Officer, Bob Rose, here try to describe to you that we don't think is ongoing or is indicative of the quality of the acquired portfolio, but rather is some of the bad fallout from the practices in the purchase accounting world. Bob?

M. Robert M. Rose

Yes, I think in the 3 years we've owned the Ipswich portfolio, and the 2 years we've owned the BARI, we've observed some of those things that Paul said, that some deterioration and some charge-offs are paid for out of current earnings as opposed to coming out of credit marks. And the $1.1 million that we mentioned in the earnings release was made up of charge-offs of $777,000, and it was made up of deterioration, meaning, downgrades to a handful of credits and some changes in expected losses in some of the loan pools that we observe and are required to keep up-to-date based on current performance. And they are nonrecurring kinds of things. As Paul mentioned, there was one name in particular, that drove those charge-offs, was the largest component. But they will happen from time to time, but they seem to be a little larger this quarter than they were last quarter. Some of the other things behind the added provision, we mentioned that growth cost us $1.7 million. Well, it was $1.4 million last quarter. So part of the addition was for more growth and things like that.

Operator

[Operator Instructions] The next question will come from Matthew Kelley of Sterne Agee.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Tom, I was wondering if you could give us the numbers for what the purchase accounting accretion was during the quarter. And then what the prepayment penalty income was during the quarter, as well.

Thomas J. Meshako

The accretion for the quarter was $2.041 million and the pre-payment penalties and late fees were $444,000. And that was a little better -- that was a little bit better than the third quarter, just to let you know.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Yes. Okay. Got it. Okay, and then in the last couple of conference calls, we spent a little time dancing around the tax rate and what you are working on there. And there was some implication or suggestion that you might be able to reduce the tax rate. Any update on your tax planning strategies and where the tax rate might go over the next year?

Thomas J. Meshako

It's going to be pretty consistent with where we are this year and for the total year. It does depend on our pretax earnings, of course, of what the actual tax rate will be. But we're going to be between the 34.9% and the 35.2% range, is where we're looking at. Now we have a $1.4 million credit due to low income housing tax credits that we'll be picking up next year. And we are going to be moving some interest on loans that is tax deductible into a security corp and be able to reduce the taxes on that interest in 2014. As long as -- I'm saying this is all pending under the current regulations. If the State of Massachusetts changes their tax codes, all these things are...

Paul A. Perrault

That's what...

Thomas J. Meshako

Right, I just want to say that because I think we're all -- we all know what's being proposed right now. We just want to make sure that everyone takes that into account.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

So the 35% includes those benefits you just outlined?

Thomas J. Meshako

Yes, they do.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Okay. And if those -- if there was some change in legislative policy or tax policy in the state, where would the tax rate be without those benefits?

Thomas J. Meshako

It would only move up to, like, 35.4% or 35.6%. It's not significant. It's about $300,000 of interest that we had to pay taxes on this year. But we hope to do more of those tax-free loan [indiscernible]

Paul A. Perrault

If the entire law is enacted if [indiscernible] these corps are thrown out, how much does it change the rate?

Thomas J. Meshako

[indiscernible]

Paul A. Perrault

I don't think we know the technical answer. It's a bit higher.

Thomas J. Meshako

I wasn't thinking, you're right, if all the investments that we currently have in this...

Paul A. Perrault

I think that was his question.

Thomas J. Meshako

Okay.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

And then a question on just how you're financing the growth and the funding profile and getting back to the loan-to-deposit ratio. So you have a pretty solid loan growth outlook that you've outlined and a desire to get the loan-to-deposit ratio down. What's going to change in your deposit marketing and growth strategies to help accomplish that?

Paul A. Perrault

Well, I think we have evidence that the current approach to deposit gathering is paying off in spades. It is generally being offset, if you will, by good robust loan growth. So I don't know that we want to play too much with the underlying formula, because I like the overall effect that this has been having on the balance sheet, which we believe will produce fruit here as we go forward. So I don't think it would be prudent to change it too much but just keep on doing more of what we're doing.

Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division

Okay. So I mean, the current loan-to-deposit ratio, that's acceptable. There isn't really a need to get that down?

Paul A. Perrault

There's no urgency. I would like to, but I like what we're doing in the marketplace and maybe we'll come up with some new strategies to enhance that. I would like to, but I don't think it's the most critical thing that we're doing right now.

Operator

Our next question will be a follow-up from Collyn Gilbert of KBW.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Paul, I just was curious to sort of get your view on MOEs. Obviously the market is seeing an increase in these deals being announced. And I just was curious what your take is in terms of the strategic value and financial value of such a structure.

Paul A. Perrault

High risk, high reward.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And where do you see the risks lie?

Paul A. Perrault

The risks lie in getting the combination to gel right post-closing, more than anything. You could end up, I don't know, sort of like kissing your sister instead of having a good deal. I mean, with the banking history -- I've been around for so long I kind of remember some of these things -- a lot of them didn't work.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Yes.

Paul A. Perrault

Some did but most didn't. And history is instructive, I think.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

Yes. Okay. And when you think about the reward or those that do work, what types of characteristics do you think would be reflective of the type of structure that could work and provide that high reward?

Paul A. Perrault

Totally dependent on the nature of the parties that are coming in. I think -- I've never done one, but if it's going to be a true MOE, one has to think that perhaps a net new culture might be appropriate and not let one side or the other side dominate, if it is truly an MOE. If it's an MOE in pricing only, then one would hope that the proper culture is the one chosen to be the lead culture. But I'm talking here as a professor, Collyn.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division

No. That's fine. That's helpful just to get how you're thinking about it.

Operator

This will conclude our question-and-answer session. I would like to turn the call back over to Paul Perrault for his closing remarks.

Paul A. Perrault

Thank you, Denise. And I want to thank you all. Good questions. Hopefully, we've been responsive. And if anybody feels the need to follow up, Tom and I are available, and we look forward to seeing you over the course of the investor business.

Thomas J. Meshako

Thank you.

Operator

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

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