Brookline Bancorp Inc (BRKL) 2018 Q2 法說會逐字稿

Good day, and welcome to the Brookline Bancorp, Inc. Quarter 2 2018 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 Marissa Frerk, Associate of General Counsel. Please go ahead.

Thank you, Michelle. Good afternoon, everyone, and welcome to Brookline Bancorp, Inc.'s Second Quarter 2018 Earnings Conference Call. Yesterday, we issued our earnings release, which is available on the Investor Relations page of our website, brooklinebancorp.com, and has been filed with the SEC. This afternoon's call will be hosted by Brookline Bancorp's executive team, Paul A. Perrault and Carl M. Carlson.

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, our most recently filed 10-Q 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. Any references made during this presentation to non-GAAP measures are only made to assist you in understanding Brookline Bancorp's results and performance trends and should not be relied on as financial measures of actual results or future predictions. For a comparison and reconciliation to GAAP earnings, please see our earnings release.

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

Thank you, Marissa, and good afternoon, all. I'm accompanied today by our Chief Financial Officer, Carl Carlson, who will walk you through our quarterly financial results following my comments.

In the second quarter, the company again experienced record quarterly earnings. On June 1, our experienced team successfully executed the systems conversion of First Commons Bank, and we consolidated their offices in Newton Centre in Wellesley into existing Brookline Bank branches. We also opened banking offices in Wakefield and Braintree, Massachusetts to extend our boutique style of commercial banking to these north and south markets of Boston. We reported earnings of $20.8 million or $0.26 per share for the second quarter of 2018. Our loan balances grew by $57 million in the quarter, while deposits grew $7 million.

Our current (inaudible) continued to do the hard work to serve our customers and our communities, making Brookline Bancorp one of the region's leading commercial banking companies.

I will now turn you over to Carl, who will review the company's second quarter in more detail.

Thank you, Paul. As Paul mentioned, during the second quarter, loans grew organically $57 million compared to $122 million in the first quarter. While loan originations remained strong, higher principal reductions resulted in lower net loan growth this quarter.

In the second quarter, we had loan originations in net gross of $467 million, which were $25 million greater than the first quarter. However, principal reductions were also higher, driven by greater loan participations and loan sales as well as containments.

The weighted average yield on the loan portfolio increased 18 basis points, driving the overall yield on earning assets up 17 basis points during the quarter. Deposits grew $7 million as we continue to see solid growth in DDA, offset by net outflows in our 1031 program and significant shifts from money market accounts to time deposits as more rate-sensitive customers started reallocating balances. Money market balances declined $158 million during this quarter, and CDs increased $179 million.

During the quarter, the cost of interest-bearing deposits increased 17 basis points, driven by increases on money markets deposits, up 21 basis points; and time deposits, up 14 basis points. This drove our overall funding cost to increase 19 basis points from the first quarter. While increase in our funding cost compressed our margin 2 basis points during the quarter to 364 basis points, our net interest income increased $3.2 million on a linked-quarter basis due to higher average earning assets.

Included in net interest income is the impact of purchase accounting, which was $442,000 for the second quarter, up $328,000 from the first quarter, and prepayment fees, which were $946,000, up $311,000 from the first quarter. Combined, the quarter-over-quarter increase in new guidance of $639,000 positively impacted the margin 4 basis points.

Noninterest income was $5.5 million in the second quarter, up $520,000 sequentially, excluding the impact of security gains in Q1. This was driven by the higher level of loan sales and participations in the quarter, while the provision for credit losses for the quarter was $1.5 million, an increase of $829,000, driven primarily by loan growth and net charge-offs.

During the quarter, nonaccrual loans declined $486,000 to $25.8 million or 42 basis points of total loans, and net charge-offs were $2.2 million or 15 basis points on loans on an annualized basis. The allowance as a percentage of loans was 94 basis points at the end of the quarter, down from 96 basis points at the end of Q1.

Excluding the impact of merger and acquisition expenses, the company's noninterest expense increased $335,000 from the first quarter to $37.4 million. Net income for the quarter was $20.8 million or $0.26 per share, and the board approved a quarterly common dividend of $0.10 per share, which will be paid on August 24 to stockholders of record on August 10. The quarterly $0.10 dividend represents an annualized yield of 214 basis points based on yesterday's closing price of $18.65.

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

Thanks, Carl. I feel we've had a very nice first half of 2018, and we expect even greater things for the rest of the year. We will now open it up for questions.

(Operator Instructions) Your first question comes from Mark Fitzgibbon from Sandler O'Neill.

Just a couple of quick questions. First, I saw that you guys have an 18-month CD special at 2.5% and a 13-month at 2.25%. Is that where most of these CD flows are coming into those 2 buckets?

Yes.

Okay. And then, Carl, is your outlook for the margin becoming a little more cautious given the deposit pricing pressures that everybody is seeing out there?

I wouldn't say cautious. I'd say if we see it's going down, the margin is moving in the other direction. I think there's a little bit of catch-up that's happening right now. I think probably every bank is experiencing it on the deposit side because if we're seeing it, everybody is seeing it. But -- so I would see the funding pressures continue to advert themselves.

So margin down sort of a few basis points a quarter for the foreseeable future? Is that reasonable, do you think?

I'm not sure if it's in the foreseeable future. I think there's been a large catch-up in rates, I would say, so far. And how much more there's going to be on a go-forward basis, I'm unsure of. So we think about deposit betas. Over time, I think we'll probably normalize out to where a lot of folks have been projecting, in the 30% to 40% deposit beta area. I think we're still a little behind that, even with this quarter's catch-up, so I think we'll probably continue to see those types of pressures. So how much more we're going to see in the next quarter, it's probably going to moderate somewhat.

The other factor I'd throw in, just -- this is probably not as big, but it does impact it a little bit -- we had a fair amount of our portfolio floats pretty tightly with prime and LIBOR. And then we have another big part of our portfolio, which is priced off the 5-year. And so that -- whatever your forecast is for that 5-year, it was going to be originating at that rate, so that will have an impact as well on the revenue side. For better or for worse, I just don't know. Carl has been taking to calling it the yield line, not the yield curve, so I don't know.

I would expect the margin to decline 2 or 3 basis points at least probably in the third quarter. And I wouldn't give too much guidance in the fourth quarter at this point.

Okay. And then it looked like the loan growth was about half of the number that you guys projected last quarter. Was that by design, you slowed loan growth because the deposit flows were tough? Or is the competitive environment out there on the lending side and your market's changing?

No, we didn't slow it down. But as Carl pointed out, I think, in his remarks, that we had exceptional prepayments on things. Guys are selling buildings at staggering prices in Metro Boston is some of it. And we also have been pretty active in our participation in sale of some loans where we pick up the spread. And that's full risk management as much as anything else. So nothing new, just a little more prepayment activity than previously.

Yes. Our originations actually were stronger this quarter than they were in the first quarter. And I would say, our pipeline is stronger still. So it's a mix of things.

It's lumpy, as we say.

Okay. And then on expenses. Should we assume that most of the cost saves in the First Commons deal will come out in the third quarter?

Most of the cost saves are done.

They're done? Okay. Well, I know you did -- this is conversion, I think, in June, so I assume that there would be some incremental costs coming out in 3Q.

It would be very little. And I would say, we're probably projecting -- we're projecting right now that to -- for expenses to be relatively flat.

Okay. And then lastly, on the tax rate, it was a touch higher than the sort of the 24% guidance you guys have been giving. Will it come back down, do you think, in the back half of the year?

I would expect it to come back down at the back half of the year.

The next question comes from Laurie Hunsicker of Compass Point.

Just wonder, Carl, if you can take us through within the loan loss provision and the charge-off line, how much was taxi? And then how should we be thinking about loan loss provisioning with respect to that going forward?

Okay. So the passive portfolio today is about $15.2 million. The reserves against that, $1,756,000, so that's kind of where we stand today. During the quarter, we had over $3 million in charge-offs in the taxi line. And you know that we have the net charge-offs reported as actually -- something like $2 million. So we did also some recoveries on some commercial loans as well, but we had $3 million in charge-offs in the quarter on the taxi line. And one of the things we did during the quarter was we brought down the value of a Cambridge medallion to $20,000.

Okay. And then just the $15.2 million balance, is that net of the $1.756 million reserve?

No. That's what's on the books and not on the reserve.

Okay. And then do you still have the $9 million of commercial real estate that some of those medallions are secured by?

We have one credit that we treat more as a C&I loan because of the real estate collateral associated with that relationship very well. They own quite a few medallions, and there's -- they know what they're doing there and can manage that very well.

And they don't have a lot of other things.

They don't have a lot of other things, right. So that's also part of that $15.2 million, the $9.1 million of which you've more got of a C&I loan.

Okay. So basically, if we're to net the reserve, net the $9.1 million CRE, you're down to a taxi book of $4.3 million net?

If you net it all up there.

Yes, yes, it sounds right.

That's one way to look at it.

Okay, okay. And so I mean, as we think about loan loss provisioning into the September quarter, given that you just, I guess, did this mark on your Cambridge portfolio, I mean, can we be thinking about that more in the run rate of $500,000, $600,000 a quarter, absent any other credit deterioration that it basically will be matching growth? Or how should we be thinking about that?

The way I think about it is about 1% on whatever the incremental loan growth is, plus whatever net charge-offs might be. So the -- charge-offs, it may be higher, net charge-offs may be added into that, it's those recovery goals, all sorts of things, it impacts that as well as whatever is going on in the economy in terms of the economy.

Okay, okay, great. And then just one quick question on deposits. Carl, can you talk a little bit about -- we saw a really big jump in the money markets linked quarter. You went from 59 basis points to 80 basis points. How should we be thinking about that specific line item going forward?

I would say that, that rate has become certainly sensitive to interest rates. I think customers have, I won't say, they've woken up, but they've been really focused on where they want to place their money now. There are other opportunities to place their money. They're looking at CDs and laddering out some of that money into CDs. And so we're starting to see the pressure on all sides there. So I would expect that to be moving up, probably more in line with what historical betas have been. So for quite some time, we had much lower change in interest rates on those types of products. But now you're seeing it more normalized towards in the 30% to 40% betas.

Okay, okay. And then Paul, just last question for you. We obviously just saw a Boston bank taken out yesterday. Can you talk to us a little bit about generally how you're thinking about M&A and how you're thinking about it with respect to your stock currency sitting up here at 2.2x book?

I generally think of it as I usually do. We keep looking around. If something makes sense for us strategically and financially, we'll look to do it. But we're doing fine without M&A obviously, and so we don't feel anything urgent. But we do keep our ear to the ground. Nothing new.

Okay. And then I'm sorry, just one last question. Are there other de novos planned in the coming quarters?

In the banking offices?

Yes.

No, no. And we've got these -- these are about 75% staffed. It's obviously been difficult in the paid market, but we are very, very happy with what's already going on, particularly in Wakefield, and Braintree is shaping up very nicely as well, so -- and given the traffic around here, as you probably noticed, these officers have already become very handy for us institutionally.

(Operator Instructions) The next question comes from Matthew Breese with Piper Jaffray.

Just one quick one for me. Most of the others have been answered. Just wanted to get a sense for the incremental loan yields across the book. Where the -- where's competition that they're eating away spreads the most, where are they least competitive? Maybe, I guess, just give us some idea of where you're seeing some spread compression across your asset classes.

Well, the spread compression is mostly coming from the deposit and funding costs rather than from the loan pricing. I'd say, in the equipment finance world, they have been able to gain some rate through these rate cycles not on a par with fed funds or anything like that, but they've been able to see a little bit better pricing. I'd say top-tier real estate is probably where we have not been able to see as much benefit from rising rates as we might have liked. C&I is okay. That's where it's steady as she goes because it's more floating. That's how I'd explain it. Carl, would you add anything to that?

I'm not sure exactly how much detail you're looking for to be helpful. I mean, the average coupon, the weighted average coupon of everything that was booked in the second quarter was [up] 5.58%. Now that is driven -- that is really driven quite a bit by our equipment financing units. Equipment financing units, out of the $467 million that we booked, $109 million, almost $110 million, was from -- in equipment finance. And equipment finance, the average coupon is 7.90%. So you get, you see, you get a sense on that.

Right, right. And that compares to the average yield of 4.78%. So it's quite a bit -- it's a nice positive roll-on versus roll-off, correct?

Yes, that's correct. So the WAC at the end of the last quarter was 4.76% and finished up. When we look at -- and what I'm talking about, I'm looking at the weighted average coupon on the entire portfolio right at the end of the quarter. So I'm not looking at the effect of purchase accounting, deferred fees and all of that, but the weighted average coupon at the end of the quarter was 4.90%.

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, Michelle, and thank you all for joining us this afternoon. We look forward to talking with you again next quarter. Bye now.

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