Brookline Bancorp Inc (BRKL) 2017 Q3 法說會逐字稿

Good day, and welcome to the Brookline Bancorp, Inc. Third Quarter 2017 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, Andrew. Good afternoon, and welcome to Brookline Bancorp, Inc.'s Third 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 statement whether in response to new information, future events or otherwise.

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

Thanks, Marissa. Good afternoon, and welcome to Brookline Bancorp'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 record quarterly earnings of $15.4 million or $0.20 per share for the third quarter of 2017. This compares to $13.6 million or $0.19 per share for the third quarter of last year. Loan balances grew $102 million and our deposits grew $96 million during the third quarter. Our net interest income and noninterest income both improved over the second quarter as total revenue grew $2.8 million while expenses grew $613,000, resulting in an efficiency ratio of 56.4% as compared to 57.9% in the second quarter.

On September 20, we announced the acquisition of First Commons Bank, which we expect to close in the first quarter of 2018. First Commons is expected to add approximately $250 million in loans and $275 million in deposits. Once we receive all necessary approvals, First Commons Bank will be merged into our Brookline Bank. And we look forward to welcoming the customers and employees of First Commons to the Brookline family. We have a great team of dedicated employees serving our customers and our communities, making Brookline Bancorp one of the region's leading commercial banks.

I will now turn you over to Carl, who will review the company's third quarter results with more detail.

Thank you, Paul. As Paul mentioned, during the third quarter, loans grew $102 million or 7.4% on an annualized basis. The weighted average coupon on the loan portfolio increased 3 basis points to 457 basis points, driven by originations and repricings during the quarter.

During the third quarter, deposits grew $96.3 million or 8.2% on an annualized basis. And during this period, the cost of interest-bearing deposits increased 3 basis points. We also saw average demand deposits increase $17.8 million from the second quarter or 7.9% on an annualized basis. Average earning assets grew $110.2 million while average loans grew $100.4 million from the second quarter.

Net interest income increased $1.3 million from the second quarter as asset growth and higher short-term interest rates drove interest income while interest expense increased modestly. The yield on earning assets increased 6 basis points in the quarter while the cost of interest-bearing liabilities increased 4 basis points.

Loan purchase accounting was $171,000 for the third quarter, down $108,000 from the second quarter and prepayment fees were $792,000, down $228,000 from the second quarter. Combined, the quarter-over-quarter decline of $336,000 impacted the margin 2 basis points in the third quarter compared to Q2. Noninterest income was $6 million for the third quarter, $1.5 million higher than Q2. Driving the increase was greater activity related to derivatives as well as loan sales and participations.

Our provision for credit losses for the quarter was $2.9 million, an increase of $2 million from the second quarter, driven primarily by loan growth, risk factor assessments and charge-offs. During the quarter, net charge-offs were $2 million or 14 basis points on total loans on an annualized basis compared to $2.4 million or 17 basis points in Q2. At the end of the quarter, the allowance as a percentage of loans was 116 basis points, down slightly from 117 basis points at the end of the second quarter.

Nonaccrual loans declined $2.3 million to just under $40 million or 71 basis points of total loans. Of the $40 million in nonaccrual loans, $15.1 million are taxi medallions. Our total taxi medallion portfolio declined $3.3 million during the quarter to $27.1 million at September 30. We had a $7.2 million reserve against these loans. The company's noninterest expense increased $613,000 from the second quarter to $35.4 million, driven by the operating expenses -- driven by other operating expenses and $205,000 in merger and acquisition costs.

Our effective tax rate declined to 34% for the quarter due to a true-up of our year-to-date tax rate to 35.5%, plus the impact of new accounting guidance requiring the excess tax benefit associated with stock compensation be recorded to earnings as a discrete item. The majority of the company's stock compensation events typically occur in the third quarter. Prior accounting guidance require recognition of the excess tax benefit through additional paid-in capital.

Net income for the quarter was $15.4 million or $0.20 per share. And the board approved a quarterly common dividend of $0.09 per share, which will be paid on November 17 to stockholders of record on November 3. The quarterly $0.09 per share of dividend represents an annualized yield of 225 basis points based on yesterday's closing price of $16.

Before turning it back over to Paul, I'll provide a few comments on our expectations. We expect continued growth in average earning assets of approximately $80 million to $100 million per quarter, driven by loan growth. The weighted average coupons on new originations are projected to come in consistent with or higher than the overall portfolio.

The provision for loan losses will continue to be driven by our loan growth, net charge-offs and the ongoing 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 Q3. The effective tax rate for the fourth quarter is projected to be 35.5%.

With that, I'll turn it back over to Paul for concluding remarks.

Thanks, Carl. As we move through this final quarter of 2017, we look forward to seizing all of the opportunities available in our markets. As Carl mentioned, we expect we will continue to grow as we consistently deliver the exceptional service that our customers expect.

With that, I will now open it up for questions.

(Operator Instructions) The first question comes from Mark Fitzgibbon of Sandler O'Neill + Partners.

Just a couple of questions on the deposit front. First, your savings account balances were up, I think, 14% from the linked quarter. What's driving that? Was there -- did you offer some sort of promotion? Or was there something unique there?

I don't know that it's unique and it's not promotional, but that is where deposits are being held for our 1031 business, our real estate tax deferral business that we run. And we did very well in recent quarters in that business.

What are the total footings of the 1031 deposits would you say, roughly?

I don't know if Carl remembers, but it's over $100 million.

Okay. Great. And then secondly, Paul, I'm curious, we've heard from some other banks that reported so far that there's been some banks in the marketplace offering these really aggressive money market rates, 2% or more in some instances. Are you guys bumping into that in your markets at all? Is that putting any pressure on CD and money market rates for you?

It's not widespread, but there is more pressure now than there was last quarter. And I don't recall specifically that we've got anybody here in Boston or Rhode Island doing 2%. But there are special deals that people do that are not advertised sometimes. And all of us in the industry pick our spots as to where we want to try to accommodate people seeking those kinds of returns. But Carl, do you recall anybody that...

I think probably the most we've seen it is mostly on the North Shore with First Ipswich Bank.

Okay. And then Carl, I wonder if you could help us think through sort of the balance sheet dynamics that are going to drive the margin in 2018. Putting any Fed action aside, what do you see as kind of the main drivers as we think about net interest margins for next year?

Well, putting the Fed actions aside and what happens with the yield curve, you want me to opine on the net interest margin. I think it's going to be more of the same. We're going to continue to grow our loan portfolio in the markets that we serve and continue to improve the mix of our deposits. And I think that's really the name of the game here. As you can probably notice, we did not add to our securities portfolio this quarter. That's mostly -- we watch that from a liquidity standpoint. But we're hoping that the yield curve doesn't get any flatter than it is and hopefully starts to steepen a bit. About 1/4 of our loans are within 3 months or floating rate to 3 months and repricing. And the balance of it is inside of 5 years with probably an average duration of around 3.5 years. So we feel we're pretty well matched on the liability side. And while we're a little bit asset-sensitive, that's kind of how we try to position the company.

The loan origination mix has been continuing to be quite favorable in terms of interest rate levels, if you will. And the deposit growth mix is also continuing to be pretty favorable. So I'm not the guy who knows the numbers like Carl, but I'm feeling pretty good about our prospects for our net interest income next year.

So putting sort of macro steps aside, it sounds like slow, steady rise in the margin due to primarily remixing?

Remixing. And if you're just talking about the growth, yes. And then growth would be the thing that's driving net interest income.

The next question comes from Laurie Hunsicker of Compass Point.

Was hoping that you could help us with just a couple of things regarding the taxi book. The charge-offs, the $1.9 million of C&I charge-offs, how much of that was taxi?

I think $1.2 million, $1.3 million. Somewhere between $1.2 million and $1.3 million, Laurie.

Okay. That's great. And then still about half of that nonperforming, half of your total balance?

A little bit more than that is nonperforming right now. So charge-offs were $1.322 million.

Well, I was off. Sorry.

Okay. No, it was close. And then did you have a nonperforming amount?

Sure. Total nonaccrual loans are $15.068 million.

$15 million. Okay. Great. And then just as you think about acquisitions, and we love seeing your First Commons Bank deal, how are you approaching acquisitions going forward? Are you still potentially looking? Are you out of the market until you close this deal? And then just remind us where you are in terms of size as you potentially look going forward.

Well, as I think we've talked about this, I don't really think in those kinds of parameter terms, Laurie. I mean, we keep our ear on the ground. We're opportunists. I don't consider us out of the market, but I don't normally consider us sort of actively pursuing in the market either. So there are always some level of conversations going on. And we are feeling very good about First Commons as an institution, great people. And they're in markets that we are very familiar with, as I think you know. And so we expect that to go quite smoothly. And so if something appropriate for us came along, we'd be prepared to take a good, hard look.

Okay. And then again, just will you remind us, Paul, where you are thinking about in size? What's the sort of smallest you'd look out? What's the largest you'd look at?

I'd say First Commons might be toward the smaller end that we would look at. And that would obviously need to be in market for that to make any sense. And we'd go perhaps as high as a few billion dollars in a net new market.

The next question comes from Matthew Breese of Piper Jaffray.

I just wanted to go back to the margin. Carl, in your opening comments, you noted that asset yields are at or slightly above what's currently on the books right now. And then you noted that we expect some margin expansion. So I just wanted to get a sense for the extent of margin expansion that you're expecting. And then behind the scenes, what are the drivers of that? Do you think you can maintain deposit costs here with higher asset yields? Or will funding cost come down with a better mix? Just wanted to get a better idea of what the factors are.

Yes. And I think all of the analysts are all over this. And that's why we get a lot of questions on deposit pricing in the markets that we operate. We are putting on better yields. I wouldn't say they're better spreads. I would say that the spreads are fairly consistent with what we've been seeing all along on the loan side. So as the yield curve has gotten better, we've been able to put on some higher-yielding assets over and above what our portfolio is. And so I do highlight that. I expect that our -- the loan growth on the portfolio and the yields on those -- on the portfolio and the mix in that portfolio will outrun the deposit cost going up. I may be just optimistic in that sense. But so far, it's been working that way. Now when we do our modeling, we're not as optimistic, let's say. We probably have more sensitivity in our models about deposit pricing. And so in that sense, we've been outperforming what our models might have suggested. So right now, I would expect the margin to perhaps go up 1 basis point or so next quarter, excluding the impacts -- any impacts associated with prepayment fees, which come in and out and go up and down. Hopefully, that answers your question.

No, that's much better detail. And then I was hoping you could talk about the provision a little bit this quarter. It was higher than last quarter. But in the release, you noted that there were some changes to loss assumptions. And I want to get a better idea of behind the scenes what were the moving parts there.

Sure. I think as far as the moving parts are concerned, loan growth is probably the biggest thing that's driving that as the loan portfolio grows. And particularly as acquired loans continue to amortize, you have a little higher growth in your originated portfolio. You're putting provisions or reserves up for that. And then you're covering your net charge-offs in the quarter to maintain that reserve. The other thing that flows through that is what's happening with your risk factors. And I think that's really what you're asking. We do that on all of our portfolios basically on a quarterly basis and there's a historical look at things. So as our activity or as charge-offs are reflected in the formula, those risk factors kind of go up and down. And then there's also some management assumptions that go into that as well. So on our C&I book, we've raised our risk factors on C&I loans a little bit in this quarter. And that kind of also contributed to a little bit higher provision.

At the risk of Carl kicking me, I can probably quantify that in a very general way that 1/2 of the provision was for loan growth, 1/4 of it was for charge-offs and 1/4 of it was for these risk rating changes.

And as usual, Paul can answer a question in one sentence and it takes me 0.5 hour.

Is this kind of level -- and you have the First Commons deal expected to close in the first quarter. Is this kind of level, $2.5 million to $3 million, something you'd expect going forward?

I think the third quarter was a little heavier than normal, a little bit. Carl, do you want to add to that, yes?

And then maybe sticking with the credit discussion, Paul, what are you seeing in the Boston markets, your optimism, pessimistic?

Cranes.

Cranes. So typically, that makes a lot of us nervous. Just wanted to get your sense and optimism for the Boston markets.

Well, we don't finance those big buildings, as you well know, Matt. So you don't have to worry about us along those lines. But we are seeing continuing strong activity in rental and sales of housing in the metro Boston market and in the Rhode Island market as well. And we're seeing an uptick in building on the North Shore as well. I think the guys who run these businesses for us would say that the sale of mid- to high-end condominiums has slowed down, but not stopped by any means. Very high-end properties fly off the shelf right now in our markets. And the rental market is seeing -- I'd probably call it stabilization. The guys weren't able to get the kinds of increases through the September renting season as (inaudible) quite as readily as they had in the past, which is not a bad thing. There's not a vacancy issue. But I'd probably suggest that it could be an affordability issue.

And I'm assuming you're talking about the higher end, kind of top 25% of rent. Is that accurate?

No, that wouldn't be accurate. I'm talking about rent across the board. We're mostly familiar with what you might consider to be mid- to lower mid-level rents. Those tend to be the kind of properties that our customers own. So we're talking about the kinds of things in metro Boston that might go for $1,000 a month per bedroom with the guys who've been trying to get $1,100, $1,200 a month. And that's getting a little bit hard. And it probably goes up to -- our highest-end guys might be $2,000 a bedroom.

(Operator Instructions) The next question comes from Collyn Gilbert of KBW.

Paul, could you just talk a little bit about what you're seeing on your -- some of the dynamics around the loan growth that you're seeing in terms of kind of your borrower behavior and just where are the future demand and future growth is coming and how that's breaking down?

It's probably 50-50 between commercial and real estate is a blanket statement. And then within the commercial segment, it probably breaks down into equipment finance and core market C&I, half-and-half, if you will. So in all of those categories, a sizable proportion is takeaway business from others. But having said that, by and large, our customers who make things and distribute things all seem to be doing quite well, have been expanding their operations. And so there's a little bit more line usage than there was before, a little bit more equipment financing than there was before. We're in the service sector. We happen to have a number of like school bus companies, and so they need to buy new buses when they get stuff. So I'd say that by and large, our view of the economy is that it is quite strong and all of these little pieces come together for us to see this kind of loan outstanding gain. It may be a little bit different in some places that we're not participating in, i.e., a lot of retail and stuff and big malls and what have you. But the small private businesses and savvy real estate investors are enjoying the times.

Okay. Okay. That's helpful. Is there any geography where you're seeing kind of a pickup in demand that would be outside of your core local markets that has you intrigued and enticed at all?

Well, the banks don't go outside of our natural markets. So I wouldn't know what may or may not be going on out there whilst our finance companies are so narrow and so deep that they don't really know what's going on anywhere else except in the laundromat in that area. So it's difficult for us to comment. And we have such tiny market share, Collyn, as you know, that I wouldn't be a very good macroeconomist of this market.

Okay. Okay. That's really -- that's good color.

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

Thanks, Andrew, and thank you all for joining us this afternoon. And we look forward to talking with you again next quarter. Have a good afternoon.

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