Brookline Bancorp Inc (BRKL) 2017 Q2 法說會逐字稿

Hello, and welcome to the Brookline Bancorp, Inc. Q2 2017 Earnings Release Conference Call and Webcast. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Lindsey Dattoli of Brookline Bancorp. Please go ahead, ma'am.

Thank you, Keith. Good afternoon, and welcome to Brookline Bancorp, Inc.'s Second Quarter 2017 Earnings Conference Call. This afternoon's call will be hosted by Brookline Bancorp's executive team: Paul A. Perrault, President and Chief Executive Officer; and Carl M. Carlson, Chief Financial Officer.

Before we begin, please note 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 release. 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.

And now I'm pleased to introduce Brookline Bancorp's President and CEO, Paul Perrault.

Thank you, Lindsey. Good afternoon, and welcome to Brookline Bancorp's Second 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 record quarterly earnings of $14.9 million or $0.20 per share for the second quarter of 2017, and this compares to $12.7 million or $0.18 per share for the second quarter of 2016. Loan balances grew by $76 million, and deposits grew by $58 million during the quarter. While the interest rate environment remains volatile and the market very competitive, recent rate hikes have continued to provide a bit of a tailwind. Our net interest margin for the second quarter was 3.59%, which was an increase of 6 basis points from the first quarter.

Noninterest income was $4.5 million in the second quarter, which is basically flat with the first quarter when excluding the securities gain of $11.4 million that we had. Excluding this gain in the first quarter, our efficiency ratio improved slightly in the second quarter to 57.9% from 58.6% in Q1. Our capital and credit are strong, our growth prospects are solid, and we have a great team of employees dedicated to serve our customers and our communities, making Brookline Bancorp one of the region's leading commercial banks.

I will now turn you over to Carl.

Thank you, Paul. For the second quarter, average interest-earning assets grew $103.8 million while average loans grew $67.8 million. Net interest income increased $2.5 million from the first quarter as asset growth and higher short-term interest rates drove interest income while interest expense increased slightly.

Loan purchase accounting was $279,000 for the second quarter, up $118,000 from the first quarter, and prepayment fees were just over $1 million, up $199,000 from the first quarter. The quarter-over-quarter increase of $317,000 contributed approximately 2 basis points to the margin in Q2. Noninterest income was $4.5 million for the quarter, which was consistent with Q1 when excluding that securities gain Paul mentioned earlier.

Our provision for credit losses for the quarter was $873,000, a decrease of $12.5 million from the first quarter. At the end of the quarter, the allowance as a percentage of loans was 117 basis points, down slightly from 121 basis points at the end of the first quarter. Nonaccrual loans declined $2.8 million to $42.3 million or 76 basis points of total loans. The company's noninterest expense increased $1 million from the first quarter to $34.8 million, driven by compensation and benefits. Our effective tax rate was consistent at 35.9%.

As Paul mentioned, during the first (sic) [second] quarter, loans grew $75.6 million or 5.5% on an annualized basis. The weighted average coupon on the loan portfolio increased 8 basis points to 454 basis points, driven by originations and repricings during the quarter. During the second quarter, deposits grew $57.5 million or 5% on an annualized basis.

During this period, the cost deposits increased approximately 3 basis points while the cost of funding increased 1 basis point. Also, the Board approved a quarterly common dividend of $0.09 per share, which will be paid on August 25 to stockholders of record on August 11.

Before turning it back over to Paul, I'll provide a few comments on our expectations for Q3. We expect continued growth in the average interest-earning assets, driven by loan growth of approximately $80 million to $100 million. The weighted average coupon of new originations are projected to come in consistent with or higher than the overall portfolio. Provision for loan losses will be driven by loan growth, net charge-offs and continued assessment of our portfolio risk factors and trends.

Quarterly noninterest income is projected to be in the $5 million range, and noninterest expense is projected to increase modestly from Q2.

I'll turn it back to Paul.

Thanks, Carl. Brookline Bancorp has the resources and potential to continue our sustained growth as we consistently deliver the exceptional service that our customers expect and deserve. We are looking forward to the rest of 2017.

And we will now open it up for questions.

(Operator Instructions) And the first question comes from Mark Fitzgibbon with Sandler O'Neill + Partners.

Can you help us get a sense for the cost and timing of the build-out south of Boston? And I'm curious, could it involve -- I know you said you're going to open one new location south of the city. Could it involve more new locations or branches south of Boston?

Yes, it probably will be more than one location, and it would be very difficult for me to give you any kind of a quantitative estimate of the cost. But the process has begun. We've hired a few. There are a few more in the works. And I'd say there's a reasonable shot there will be some north, some south, and it may or may not involve branches. It certainly wouldn't involve branching in the near term. But there's plenty of ability for people to transact with us without branches these days, particularly with our almost exclusively commercial bet on this.

Is the idea, Paul, to sort of open branches on the South Shore and the Cape eventually? Or is it to sort of follow 95 down and connect the Rhode Island franchise?

No, no, I wouldn't be trying to connect it. It was just -- you know this market somewhat, and the commercial hubs are in the city, north and south and west, obviously. We've got west covered. We're doing a good job in the city. And now this is just to address the Metro Boston north and south areas for commercial activity.

Okay. And then, I mean, you guys have had some really good growth in the C&I and equipment finance business. Who are you taking share from? Or is it existing relationships that are just expanding?

Well, I would be telling secrets out of school if I told you exactly who I'm taking it from. Suffice it to say that it's coming from many.

Is it the bigger institutions or the smaller institutions, would you say?

Well, it's really both, but just the sheer numbers would imply that the larger companies have a lot more at stake. And you know how consolidated the Boston market had become until us young whippersnappers are coming up. It's not just us, there's a few of us around here that have been enjoying that mass market bank consolidation here.

Okay. And then lastly, assuming no acquisitions take place, how long do you think it will take to kind of push the capital ratios back down to maybe that 8.5% kind of a level?

Carl, do you want to take a stab at that?

I really don't want to take a stab at that. We do expect continued accelerated growth going forward.

It's a matter of years. I mean, it's not...

And the next question comes from Collyn Gilbert with KBW.

One thing -- what was -- trying to understand. Your borrowing costs came down in the quarter, and I think that was just in the overnight line. So just, Carl, could you just kind of walk through maybe the nuances of what's going on in the funding side, maybe specifically on borrowing strategy and what may be happening there? And then talk about your deposit pricing positioning and where you see pressure potentially coming in that segment.

Sure. I'll start with the borrowings because that's fairly straightforward. If you look at our balance sheet, a lot of attention gets paid to our loan-to-deposit ratio. Our equipment finance units in both our Brookline Bank and our Bank Rhode Island banks are really the drivers of the borrowings that we need. If you exclude the loans from those units, which are nationwide businesses, very narrowly focused, we're basically 100% loan-to-deposits. So we really use the borrowings to fund those loans and basically match fund those portfolios. So during the quarter, we did have some pay downs. We've also had some -- we did raise the equity, so we used the equity during the quarter to pay down some borrowings as well. So we'll -- and I do expect to start seeing a little bit of pressure on that borrowing line as we move forward and the borrowings come due. Because we basically ladder that out, and as they come due, we'll refinance and ladder them out again. As far as the deposit side, I think from a modeling standpoint, we've been modeling them to be a little bit more sensitive than we've seen so far. So that's something that's more market-based, and we'll see what happens there. We are focused on growing our commercial and core deposit accounts, but we don't ignore our consumer customers and our time account. So we'll see some pressure on that as the market heats up.

Okay. What's your split between commercial and retail deposits? Do you have that?

Well, I'll take a guess. I think we're still probably 30% commercial deposits. But that's up a lot from a few years ago and continues to be the primary building source of our progress.

Okay. Okay, that's helpful. And then maybe could you just comment on the M&A environment, Paul? And in light of, obviously, the capital raise that you guys talked about, maybe that would be put to use on M&A, but just how are you sort of seeing that evolving as a potential use for some of this capital?

Well, it's possible, it's just not probable. I mean, I don't think there's all that much, what is out there right now. About as far as I can go.

Okay. So do you feel -- I mean, I'm just -- the capital, did you think there were going to be more M&A opportunities when you guys raised the capital or that part hasn't changed?

Well, it really hasn't changed. You might recall that I said that we were thinking of a 3-year horizon when we were raising this capital, and we had some plans for some organic things, which we've already talked about a little bit. So I would be hopeful, within that same time frame, the right kinds of opportunities might present themselves. So my first part of my answer was about the current period, but the use of the capital is really in that 3-year time frame. So maybe a year from now, there's a better opportunity. So I wouldn't want to try to contain it too much.

Okay, okay. And then, Carl, just on the fee side, was there anything seasonally or onetime maybe that caused -- that was impacted in the fee line? I know -- I think you had indicated maybe $5 million. You came in just a little bit light this quarter. I know you're looking for $5 million again next quarter.

Yes. There was very little derivative activity, which would have been the major deviant from the last 3, 4, 5 quarters.

Correct.

So for some reason, we don't overly sell that. This is a combination we work with our more sophisticated customers. And for some of the real estate properties, this kind of a product might make some sense. We work with them, and it just so happened that there was very little executed in Q1 -- in Q2.

So what you've seen on the rate side, the steepening of the yield curve and the flattening of the yield curve, we had some borrowers say I'm not -- not necessarily want to lock in at this rate just now and back off from using derivative products and just the overall volume of commercial real estate loans that were actually closed in the first -- in the second quarter. I think more of that pipeline has leaked into the third quarter. So I continue to think that we'll be bouncing up to...

Yes, there's no doubt that the activity is back to the levels that we're used to.

And the next question comes from Matthew Breese of Piper Jaffray.

Carl, I'm sorry if I missed it. You noted there were -- the prepayment penalty fees and the accretable yield in the margin, what were those amounts again?

I got to go back to my notes. So prepayment fees were about $1 million, and that was up $199,000 from the first quarter. And the purchase accounting was $279,000, and that was up $118,000. So if you take just the increases over -- quarter-over-quarter, they total $317,000, which is about 2 basis points in the quarter. We did have those increases.

Okay. And so backing that out...

The combined basis -- if you take the total of those, it's about 8 basis points, but we always have some amount of prepayment fees. It fluctuates.

Right, okay. So backing that out, it looks like the core margin was up around 4 basis points. And I just wanted to get a sense for the next couple of quarters. Does that still have an upward trajectory in your view?

I would say, if you adjust this quarter by 2, you get -- if you're talking about the core, I would think the core may be up 1 basis point, flat to up 1 basis point. I think we'll see some pressure continue on the funding side a bit, which might be getting off -- we'll continue to see the benefit of the rate rises in our continued originations, but we think that the funding side would be a little bit -- will offset that benefit. And of course, I'm hedging my bet there. I may be a little bit too conservative, but that's kind of where I'm thinking.

Right. So it sounds like that's a little bit more cautious guidance than perhaps last time we spoke. And I just wanted to get a sense for is it the deposit market that's getting more competitive? Or was it the flatter yield curve that perhaps dampened your yield prospects?

What do you mean by -- I don't know how that's different from what I've said before. I continue to see benefits on the loan side. But you tell me where the 5-year is going to be, and I will tell you where [the mark] is going to be. We continue to see that bounce around quite a bit, and we do a lot of our pricing off the 5-year. We've got about $1.3 billion of loans that reprice within 90 days, but a lot of the fixed-rate type stuff is off the 5-year. So that's kind of where my head's at.

Okay. And then I just wanted to get a sense for loan growth beyond 2017, given some of the new hires. I know the guidance in the near term is $80 million to $100 million. Is it possible as we go on over the next 6 months or so that it becomes a quarterly run rate of more like $100 million per quarter with the hires?

Yes, I think so.

(Operator Instructions) And the next question comes from Laurie Hunsicker with Compass Point.

I just wanted to go back to what Matt and Mark had touched on, basically the new C&I team with Peter Costa. How much of that team is going to be contributing to your loan growth?

Well, I don't know. I'm hopeful. A considerable amount, but time will tell. It's not all formed yet, but we're well on our way in executing, as we had described before. It's a little difficult to quantify at this point, but I expect that you will visibly see it in our numbers in the next quarter and thereafter.

Okay. And how many people, when it's all built out, will be a part of that team, new hires?

Well, it might not all be one team, but I believe I had said that perhaps something on the order of 6 company-wide would be part of this effort.

Okay. And then just remind us, how big was his last loan book?

Boy, that's probably proprietary information.

It is, okay. Okay, fair enough. And then as far as the capital raised, you now have rightsized your commercial real estate to risk base, and that's been a category that's been somewhat flat. How are you thinking about that going forward? Does the growth in that change?

Well, let me take you back, though. I mean, we were very comfortable, as had been our regulators, with the level of real estate that we've had against the previous capital amount. So this new capital does provide capacity to maintain the same ratio levels, and we expect to begin using that.

Okay. And so if you were thinking about loan growth just within the commercial real estate book, what could we expect that to look like in the next year?

Boy -- well, it hasn't really grown very much this year. I would expect that we will continue to see improvement in that -- in the growth prospects that I would be a little bit uneasy in quantifying it. But the pipelines and deal flow look excellent, and so I think you can expect that, that will rise -- the aggregate amount of real estate loans will rise.

Okay. And just one more question on commercial real estate. Your multifamily book, which is, round numbers, 13% of your loans, where does that go going forward? Does that kind of hang at current levels? Or is that something you would also look to grow?

We would look to grow that. That's a very competitive business, as you know, when we compete with everybody, especially the government as well as life insurance companies and all kinds of players that are operating in this market that aren't necessarily headquartered here or thought to be here. And so it really is one that is probably the most competitive segment of real estate around here as I suspected as in other large cities. But we have a historic important position. It really is the original legacy business of the old Brookline Bank. And so we are well known in it. We have a lot of great customers who are big time operators, and they continue to be active. So I had some optimism about originations. What's a little bit difficult, Laurie, to evaluate is how many of these long-term, long fixed deals do these investors want to take out of their portfolio and give it to somebody else like HUD or the insurance companies or something, which actually makes for a better borrower, in some cases. So it's not a terrible thing, but it does make growing the outstandings a little bit tougher than it does in other businesses.

Okay, okay. And then taxi medallion, can you, Carl, give me just an update? I'm looking for loans, reserves, nonperformers and charge-offs.

Let's just give you a sense on that. The portfolio is about $30.4 million, basically half and half between performing and nonperforming, just a little over $15 million nonperforming, a little under $15 million in performing. We've got a specific reserve of $6.1 million against the nonperforming book and a general reserve of $1.8 million against the performing (inaudible).

Okay. And then what were charge-offs in -- I mean, I assume most of the 2.5 of C&I went to that? Or do you have a breakdown?

I don't have a breakdown in front of me on that exactly. It would be de minimis.

Yes, it's de minimis. There really haven't been charge-offs.

Yes.

There's a lot of reserves.

Lots of reserves, but we're still working with customers on that.

But virtually, everybody is paying something, and we're working with our customers. These aren't bad people. These guys just got caught up in a big time change.

Yes. Got it, okay. Last question, Paul. Your Danvers branch, how's that doing? Do you have a size on that?

It's actually doing -- Danvers is doing quite well because most of the people staffing it were longtime, well-known bankers from the area and they were able to draw in some business from some of these larger banks, as I mentioned, that are nearby. But it's a little bit kind of early to tell because when they open branches like that, they run some specials, and so some of the money is real but we might be paying up for a little bit. But there's plenty of activity.

And how much is that in deposits now? I mean, I know it's only been a quarter, but...

We don't get into details there, but you'll probably see it once we file the FDIC report.

And we have a follow-up question from Collyn Gilbert with KBW.

Sorry, just 2 things. Did you say, Carl, what the tax rate -- you anticipated the tax rate to be?

The tax rate, we anticipate to still be in that 39 point -- 35.9%.

Okay. Okay. Okay. And then I just want to make sure I heard you correctly. On the provision, did you say that you would expect a level in the third quarter comparable to what you put up in the second quarter?

No, no, no. I think -- that would probably go back to more the normal run rate. It's typically charge-offs plus loan growth. The thing is when you have some charge-offs, you already have specific reserves so you don't really have to cover all of the charges. And we saw some nice workouts during the quarter. An improvement overall in our book this quarter, so we saw the lower provision and lower level -- absolute level of the reserve required.

And as there are no more questions at the present time, I would like to return the call to management for any closing comments.

We thank you all very much for joining us, and we look forward to talking to you again next quarter.

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

Thank you, Keith.