Brookline Bancorp Inc (BRKL) 2018 Q3 法說會逐字稿

Good day, and welcome to the Brookline Bancorp, Inc. Q3 2018 Earnings Release Conference Call and Webcast. (Operator Instructions)

Please note, today's event is being recorded. I would now like to turn the conference over to Lindsey Kitchens with Brookline Bancorp. Please go ahead, ma'am.

Thank you, Rocco. Good afternoon, everyone, and welcome to Brookline Bancorp, Inc.'s Third 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 statement and disclaims any intent to update publicly any forward-looking statement, whether in response to new information, future event 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 prediction. 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.

Thanks, Lindsey. 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.

We reported another quarter of record earnings at $22.5 million or $0.28 per share for the third quarter of 2018, and yesterday, our Board of Directors approved a 5% increase in our quarterly dividend. As many of you know, this is the second time this year we have increased the dividend. Loan balances grew by $56 million during the quarter, while deposits grew by $35 million.

Revenues increased $1.2 million in the quarter, while our expenses declined by $400,000. I continue to be pleased by the work of our exceptional team 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 third quarter results in more detail. Carl?

Thank you, Paul. As Paul touched on, during the quarter, loans grew $56 million compared to $57 million in the second quarter. Loan originations were once again strong in the quarter, however, consistent with Q2, strong loan participation activity out to third parties resulted in modest net portfolio growth. In the third quarter, we had loan originations in net gross of $476 million, which were slightly higher than the second quarter, with loan sales and participations out of approximately $78 million.

The weighted average yield on the loan portfolio increased 14 basis points, driving the overall yield on earning assets up 13 basis points during the quarter. Deposits grew $35 million during the quarter as we continued to see solid growth in DDA. Interest-bearing deposits are continuing to demonstrate a migration of customer preferences toward time deposits. During the quarter, money market balances declined $81 million, while time deposits increased $118 million.

During the quarter, the cost of interest-bearing deposits increased 23 basis points and our overall funding cost increased 22 basis points from the second quarter. The increase in our funding cost compressed our margin 7 basis points during the quarter to 370 -- 357 basis points, and our net interest income declined $385,000 on a linked-quarter basis.

Included in net interest income is the impact of purchase accounting, which was $567,000 for the third quarter, up $126,000 from the second quarter, and prepayment fees, which were $859,000, down $87,000 from the second quarter. Combined, the quarter-over-quarter increase in these items of $39,000 essentially had no impact on the margin this quarter.

Noninterest income was $7.1 million in the third quarter, up $1.5 million from Q2. The increase was driven by the higher derivative income activity, while provision for credit losses for the quarter was $2.7 million, an increase of $1.2 million from the second quarter, driven primarily by specific reserves related to taxi medallion loans.

During the quarter, an out-of-state bank successfully auctioned off 26 taxi medallions, with winning cash bids averaging nearly $37,000. Based on this information, we felt it was prudent to increase our specific reserves to reflect loss in taxi medallion collateral at $35,000. There was no change in the $20,000 value we are using for Cambridge medallions. At the end of the quarter, the carrying value of our taxi medallion portfolio was $14.5 million, with reserves of $2.9 million.

During the quarter, nonaccrual loans were basically flat at $25.8 million or 41 basis points of total loans and net charge-offs were $564,000 or 4 basis points on an annualized basis. The allowance for loan losses as a percentage of loans was 96 basis points at the end of the quarter, up slightly from 94 basis points at June 30.

Excluding the impact of merger and acquisition expense, the company's noninterest expense declined $80,000 from the second quarter to $37.3 million. While we estimate our effective tax rate to approximate 24%, we recorded several discrete items during the quarter, totaling approximately $900,000 in favorable tax benefits, which provided a $0.01 nonrecurring benefit to earnings per share this quarter.

Net income increased $1.6 million from the prior quarter and $7.1 million from the prior year to $22.5 million or $0.28 per share. As Paul noted, the board approved a 5% increase in our quarterly common dividend to $0.105 per share, which will be paid on November 23 to stockholders of record on November 9. This was the second time during 2018 the board has increased the dividend, resulting in a 17% year-over-year increase in the payout to shareholders. Currently, the dividend payout ratio is approximately 38%. The quarterly $0.105 per share dividend represents an annualized yield of 286 basis points based on yesterday's closing price.

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

Thanks, Carl. We are very happy to have reported another record quarter for the company, and we expect a strong finish for the balance of the year. We will now open it up for questions.

(Operator Instructions) And today's first question comes from Mark Fitzgibbon of Sandler O'Neill.

I wondered if you could give us a sense for what caused that loan level derivative income to really skyrocket this quarter aside from customer preference was -- was it a function of new people or new products or something else?

No. Really nothing new. Just by its nature, this is the kind of product which is, in our view, an accommodation to a customer's desires and is very lumpy. It tends to be dominated by commercial real estate transactions rather than C&I. And there's really nothing to that market, it's just the -- it's the way they come in.

Okay. And then secondly, that equipment finance portfolio is now, I think, 15% of loans. And I vaguely recall, in the past, you all had talked about sort of limiting or capping that at some percentage of loans. Could you remind me of what that is?

Well, I have said for years that I certainly readily tolerate 20%. If we got to 20%, I would want to sort of take a hard look at what the right positioning is. And as you can tell, from the numbers we just cited, we're still quite a ways from that. So we're very comfortable with that proportionality.

Okay. And then your tangible common equity ratio has crept up a bit. You're back over 10%, I believe. How are you thinking about capital deployment? How long it's likely to take to kind of get that to a 8.5% or 8.75% kind of a level?

We don't have a target on trying to get that to any particular level at this time.

Okay. And then lastly, Carl, I wondered if you could share with us your NIM and expense outlook.

Sure. The expense outlook is probably a little easier, so I'll go with that. So we would -- I would expect continued modest growth in the expense side, anywhere from 2% to 3% a quarter. On the margin side, it's really what happens with deposit cost. But I'd say, we feel that we've seen the big catch-up in the last 2 quarters on -- as far as deposit betas are concerned. So when you think about it through the cycle, I think we're back to around 30% at this point on our interest earning -- or interest-bearing deposits. I think it will settle out in there, maybe a little bit higher for the next quarter. And so that will continue to put a little bit of pressure on the margin. But right now, my modeling suggests it will be maybe 2 basis points down to flat for Q4 and moderating from there.

Okay. And you're still comfortable with that sort of 24% tax rate guidance?

Yes.

And our next question today comes from Matthew Breese of Piper Jaffray.

I just wanted to get a sense for your -- the size of the loan pipeline, your loan growth outlook and anything notable on that front as far as recent hires go.

The pipelines across the board continue to be pretty strong, with the exception maybe of residential, it's a little weaker than it has been historically though. As I'm sure you know, Matt, that's not a major business line for us. Everything else was good, and I think Carl was trying to point out that the kind of volumes that we've seen in recent years continue to exist. The market has been very good to us. But for a variety of reasons, we have done more participations and syndications this year than we had in the past as part of the overall management. So I don't feel that there's going to be any material difference in the near-term activity from what we have seen. We may try to keep a little bit more of it in-house, but the activity is still reasonably brisk. Carl, anything to add on that?

I would just say that we have always guided to about $80 million to $100 million of growth per quarter. I wouldn't change that at this point. First quarter, we had $122 million of net growth organically, the prior 2 quarters in the mid-50s. And just to reiterate what Paul said, originations in our pipeline have never been larger, quite frankly. Third quarter was actually -- we had made more originations in the second quarter. What has been different, I think the mix is a little bit different than what we had originally expected. Commercial real estate's been strong on the origination front, and finance has been particularly strong and a little less so on the commercial C&I side on a net growth basis. I think we were seeing some payoffs that had knocked down a little bit of our net growth on the C&I side. So I would expect more C&I going forward because of the high degree of commercial real estate and not necessarily from a concentration overall in commercial real estate, but on a customer basis, we've done more participations than we would have originally anticipated to make sure that we can continue to take care of all those customers and continue to service those relationships. So that's impacted the net growth on a quarter-to-quarter basis. But over time, these things will work their way out, and I think we're very confident in the continued growth there.

Understood. And then on your syndicated portfolio, can you just give us a sense for the size of that and the footprint as well?

Well, I mean, they're syndications in the colloquial sense, not in the national sense that you might see a large regional or money center bank do. These are still loans that are, probably, they're smaller than $100 million by a fair amount, and they tend to be with friends and neighbors and family, if you will. So they're things that might be a little bit bigger and a little bit different from a standard local participation. They just -- they tend to be a little bit more complex.

Understood. Okay. And maybe just touch on the size of the securities portfolio. It's been coming down. I think it's down to about 10% of total assets. Is there a floor that you're targeting for the portfolio? Or can it continue to wind down here?

I would say there's no floor to it. We use the investment portfolio really for balance sheet, liquidity management and asset liability management. No necessary floor to it that I would state. We constantly look at what's going on with the yield curve. The yield curve has steepened up a little bit from where it was, but we constantly analyze what we want to do on the investment portfolio side, knowing that in our liquidity environment, you basically -- you're funding that with borrowings. So the reason you would do that is mostly for liquidity purposes.

Our next question then comes from Laurie Hunsicker of Compass Point.

Carl, I just wanted to go back. I just wanted to clarify something. On the expense side, you said 2% to 3% a quarter. You meant 2% to 3% a year in expense growth? A year, correct?

Yes. Yes, yes.

Okay. Okay. Good. Are there any de novo plans currently?

You mean for branching?

Correct.

Plans would be a little bit strong. The leaders of our 3 banks, of course, are very keen on improving their footprints, and I'm somewhat accommodating, but not entirely accommodating, to their desires and wishes. And I think I've said to you a number of times that branch systems, to me, just always need to be pruned and traffic patterns change. So sometimes, we might move one here or there, we might add one, we might fix one. But there's nothing major in the works, but there will certainly be some attention paid to each of the 3 branch systems a little bit next year.

Okay. And then, Paul, can you talk a little bit about how you think about share buybacks with your stock at these levels? And then also, maybe address how you think about acquisition and using your stock as currency with it at these levels.

I open that to Carl.

So right now, we do not have a stock buyback in place. That will be something that the board will decide, and we will announce that if and when that became appropriate. As far as using our stock as currency, I think that makes a lot of sense in a lot of transactions. But a lot of folks are also using a little bit of cash, introducing a little cash into that. So that's basically the answer I have on that, so it's subject to what the desires are of the seller as well as how do we want to position the bank going forward and what our capital levels are.

Okay. And then can you just refresh us on how you think about acquisition in terms of size and your approach? Obviously, we're sitting here at $7.3 billion. Your approach to thinking about crossing $10 billion?

Well, I don't worry about the $10 billion threshold at all, Laurie. I assume that Carl worries about it a lot more than I do. But I literally don't think it's a big deal. We do a lot of sophisticated stuff today. We're not a major retail bank. And so the kinds of things that are particularly troublesome for some institutions, I think, apply less to us. And so I wouldn't pass up on a good deal because it takes us there or doesn't take us there or anything like that. In terms of the first part of your question, size. I think it probably has more to do with what the property is, its complexity, how solid it is, its management team. It's more things of that nature than in scale itself. On the lower end, you saw we did a pretty small deal that was very in-market for us. We closed 100% of their branches, and so we enjoy that kind of activity, is very kind to our financial statements. And on the higher end, it's really a much more subjective thing. Other than that new market for us, what does the company look like, does it feel like our neighborhoods? It's more of that than size-limiting.

(Operator Instructions) Today's next question comes from Collyn Gilbert of KBW.

Just a question on the loan and deposit side. Can you just give us a little bit of color as to what -- where you're seeing current loan yields on your pipeline or origination yields on the loan side and then where the costs are coming on, adding incremental deposits?

Starting with the loan side, we talked about the $476 million originations and draws during the quarter. Those came in at a weighted average coupon of 5.69%, so that gives you a sense on that.

Okay. And now on the deposit side, for the new deposits that were added this quarter, the blended cost?

I don't have a good sense of what just is net new. A lot of these things -- a lot of this has to do with -- are much more than just getting into CDs. But what's driving some of this is certainly the repricing of money market accounts particularly, typically higher-balanced customer accounts, folks at -- with $50,000 or more with us in that category. And the bigger impact, I think, is not only the increase in CD rates that we're offering, just to be competitive in the market, but also the movement of funds from money market accounts into CDs. So people have become much more comfortable locking in through CD rates out and going term on those types of things. So probably, if you're looking for a CD today, our best CD right now happens to be at Brookline Bank for 24 months, and that is 2.6%. And Collyn, you'll have to have $5,000 to open that. No, we'll send you that...

Can I be out-of-state? Are you taking out-of-state deposits?

No.

No, we don't focus on that. It's not a strategy of ours, but for you, we more than welcome.

So I think these New Jersey banks are probably paying 100 basis points more than that. So you're in better shape up there. Okay. And then just, I know you had said that you're not necessarily managing or targeting a certain capital level, but just curious what was sort of the strategic decision behind putting up -- you're offering 2 dividends in a calendar year. And obviously, you guys made a point of doing that. So kind of what went into that thought process?

Well, the earnings improvement has been material. It's been core. And although it wasn't specifically put this way, I think it could be one of those things where people were talking about how you're going to spend your tax savings with the new tax bill. Maybe, unconsciously, that's a little bit of what we're doing here because we're keeping our payout ratio at a very, very comfortable level. Capital formation is strong. And as I mentioned a moment ago, this is essentially our call, earnings, and so why not share that with the shareholders.

Okay. Okay. And then just to go back to the question again on expenses. Carl, there's been some movement again if we look kind of historically. But on a -- are you saying, on a core basis, that you would only increase expenses, 2% to 3% per year?

Well, I'm focused mostly on the fourth quarter and how much that might go up. So my current estimates have it going up at a very modest amount. But we're still in the process of working through our plans for 2019.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks.

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

Thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.