Q2 2019 Earnings Call

Good day.

Welcome to the best one Bancorp's second quarter 2019 earnings conference call.

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Now, let's turn the conference over to Lindsey kitchens, or Brooklyn Bancorp. Please go ahead ma'am.

Thank you Rocco good afternoon, everyone and welcome to Brooklyn, Bancorp second quarter 2019 earnings Conference call yesterday, we issued our earnings release, which is available on the Investor Relations page of our website Brookline Bancorp Dotcom and has been filed with the FTC. This afternoons call will be hosted by Brooklyn Bancorp Executive team call April and Carl Allen Carlson.

Before we begin please note that this call may contain forward looking statements with respect to the financial condition results of operations and business of Brooklyn Bank work.

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 Bank Corp. 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 we need to assist you in understanding Brookline Bancorp results and performance trends and should not be relied on as financial measure 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, President and CEO Paul Girl.

Thank you Lindsey good afternoon, all I'm accompanied today by our Chief Financial Officer, Karl Carlson, who will walk you through our quarterly financial results. Following my comments.

I'm pleased to report that we had a solid quarter.

Driven by organic loan growth.

For the quarter loan balances grew $117 million and our deposits increased by $2 million.

While our margin declined from the first quarter, our net interest income slightly improved and we had another solid quarter of fee income.

We reported earnings of $20.5 million for 26 cents per share for the second quarter and yesterday, our board approved a quarterly common dividend of 11 cents per share, which will be paid on August 23rd to stockholders of record on August night.

We are continuing to execute on our plans growing organically in the markets that we serve.

Market competition continues to be very strong and the interest rate environment remains challenging.

Our dedicated employees continue to make Brookline Bancorp one of the reasons, leading commercial banking companies.

I will now turn you over to Karl who will review the company's second quarter.

Thank you Paul and good afternoon.

As Paul mentioned earnings for the quarter were 20.5 million down 2 million from the first quarter.

Oh total revenues improved 1 million from Q1 expenses increased 733000 in the provision for loan loss increased $2.4 million.

We had strong loan growth of $117.1 million in the second quarter were 7.3% on an annualized basis.

Our commercial real estate portfolio grew $83.1 million or 9.7% annualized.

She and I grew $39.8 million.

And consumer loans declined 5.7.

Loan originations and drawdowns in the quarter were $529 million with an average weighted coupon of 5.57%.

The weighted average yield on the loan portfolio for the quarter was.

5.14%, an increase of five basis points from the first quarter as the overall yield on earning assets rose four basis points to 4.8%.

Total deposits grew 1.8 million during the quarter, which strong growth of $31.8 million in demand deposits and $77.2 million in Cds. However, this was offset by declines in now savings and money market balances.

The change in deposit mix and repricing increased our cost of debt.

Interest bearing liabilities by nine basis points.

Higher funding costs caused our net interest margin declined nine basis points from the first quarter to 3.55%.

However, our net interest income improved 135000 on a linked quarter basis, driven by our continued growth in earning assets.

Included in net interest income as the impact of purchase accounting and prepayment fees.

Purchase accounting was 176000 in the second quarter down 137000 from the first quarter and prepayment fees were 947000 down 159000 from the first quarter combined the quarter over quarter changes had a one basis point negative impact on the margin during the quarter.

Noninterest income was 7.5 million in the second quarter of 848000 from Q1.

The increase was driven by strong loan participation activity and a positive mark to market of 357000 on the equity portfolio versus a negative mark of 134000 in the first quarter.

The Companys non interest expense increased 733000 for the first quarter to 39.6 million. The increase was driven primarily by salaries and benefits FDIC premiums marketing costs recruiting expense and higher charges related to Oreo and repossessed assets.

Our provision for credit losses for the quarter was $3.8 million.

An increase of $2.4 million from Q1.

The increase in the provision was driven by strong loan growth and charge offs in excess of six fabulous specific reserves.

The allowance for loan losses of 58.6 million represents 90 basis points on loans.

During the quarter nonaccrual loans declined 1.5 million to $21.3 million or 33 basis points of total loans and net charge offs were $3.1 million or 19 basis points on an annualized basis.

Other real estate owned and repossessed assets also declined $2 million during the quarter.

That concludes our formal statements we will now open it up for questions.

Thank you we will now begin the question and answer session.

To answer your question, we will start with one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys.

So what's your question please fresh frozen too.

Once again, ladies and gentlemen, the stars and Wonder if you have a question.

At this time, we will pause momentarily to assemble our roster.

Today's first question comes from Mark since given our Sandler O'neill partners. Please go ahead.

Hey, guys good afternoon.

Of our Mark.

I noticed that you guys outgrew, the Massachusetts deposit insurance fund I guess I'm curious how important that guarantee is to your customers and do you expect it to have any impact on deposit balances going forward.

Well, we're certainly working hard to make sure it doesn't really much too early to be certain.

But so far it's a pretty common stable environment.

Okay.

And then Carl Im curious as to your thoughts on the net interest margin for the back half of the year and what your assumptions are for for rate cuts.

I think right now we believe that the fed will likely cut rates, whether we we agree with that or not it's different story, but we do think they are going to cut rates 25 basis points at the end of this month.

And we expect right now the margin to likely compress anywhere from five to seven basis points.

Including that including that that cutting right.

So if we have a cut in September do you think there is an additional five basis points compression in the fourth quarter.

I don't want to go there just yet.

Okay.

And then it looked like there was one large net charge offs in the quarter.

What caused.

Was that would credit was that can you give us a little bit of color on it.

Yeah, I can give you some color I mean it.

We we sort of hit a couple of potholes, which is why the results are the way they are sort of unusual for us to have charge offs like that but.

One of them.

The larger one which was like a million bucks or so was from late.

Credit, which is a company run by a guy who committed a lot of fraud not so much against us, but we are collateralized, we've been trying to get our stuff.

From the bankruptcy judge and it's just not going very well and so we thought the better part of valor was to take US strong kit to make sure that we get this thing behind us and we're not really sure when we'll realize on the collateral, but we should be done with the balance sheet aspect of that credit. The other was that we had a.

A multiple medallion colder in the Cambridge market. It has quite a few medallions in Cambridge, Cambridge as bad as New York and Boston have been in medallions, Cambridge is worse.

And it's looking like this guy is beginning to throw in the towel.

And so we took a very sizable hit.

This guy and this literally does I think put the the taxi business behind US. This was the last major one that was left.

And that was little under a million Bucks I think for that Guy.

And then you had a garden variety.

[laughter].

Okay.

Thank you.

And our next question today comes from Matthew Breese with Piper Jaffray. Please go ahead.

Good afternoon.

Just wanted to ferret out the.

In the margin discussion a little bit more.

How much of your loan book is tied to a short duration index like LIBOR or prime.

It's about.

$1.5 billion.

Okay, and so taking apart the margin this quarter to decline how much of that was tied to the move in LIBOR or how much of that was tied to a change in day count.

I don't have that detail at my fingertips. So LIBOR, we have some loans tied to three month LIBOR. Some some tied to one month LIBOR as you know three month moved a lot more than the one month.

But the one month has had a negative impact on on on the loan yields.

For the quarter up.

Day Count always has.

Has a big impact on the margin as you move forward.

And you'll see the same type of impact and we already have that included our numbers too.

Q3.

Okay, and then on the deposit side could you just talk about the gathering environment, how competitive it is and whether or not you've been able to.

Take advantage of some potential opportunities there.

Well I I would I would say that.

In the first and second quarter, there was sort of a.

Running around aspect in a very competitive market lots of stuff going on particularly in Cds as you can see on our balance sheet, and then with others and I think that that that had some level of impact on the margin I am not the.

Accounting Guy So I can't tell you how much but it was a little wild out there and as we have been going through July things have gotten much calmer and those deposit gathering it seems a lot more organized and favorable to us. So I I think we have to get through.

That late fall winter into spring timeframe when rates were jumping around and everybody before they sank and I think the future is a little bit better than the recent past.

Okay, and kind of tying this all into the margin outlook I understand the outlook for next quarter given the fed cod.

Would you expect the same five to seven basis points of decline per fed cut if the departed environment's going to.

Improve for you.

No that wouldn't be in that in that range.

Okay.

Okay. That's all I had thanks for taking my questions.

And our next question today comes from Collyn Gilbert of KBW. Please go ahead.

Thanks, Good afternoon guys.

But just to drill into the deposit component a little bit more on.

Can you just talk about some of the dynamics that you did see this quarter that caused kind of deposit growth to be flat and see some some outflows in some of those segments and then.

What your outlook is for growth going forward again, given you know what may happen here with rates and just the competitiveness that you're seeing in the market.

Sure. It is a lot of these deposits I don't want to just say its seasonality, but we've seen.

It's not like we're losing customers or anything of that nature. It's been movement of money between things. So we've seen municipalities. Some large balances on municipalities move in and out of it out of the company.

Over the quarter or.

D.A. in particular had gone down during the quarter, maybe had to do with taxes paying taxes taxes and all that type of thing and then came back very strong late in the quarter or.

On on the savings account in savings counts, we embarked on our 10 31 product those balances are down considerably from the first quarter as we just haven't seen as much volume in that space and on the money market side, just a very competitive environment, where people are looking for the best rate, whether it's up to the money market or put some of it into a Cds and some continue to see that that dynamic.

Okay, great on the pricing side, we are just we have seen pricing in the markets or backlog quite a bit.

Very weak yeah very recently.

Okay and in terms of the movement just within your own book of US you know customers, maybe moving into higher higher structures do you think that that will continue.

Into the into the back half of the year or how do you how do you sort of manage.

To control that is if you can.

I wouldn't say that we try to manage or control that in any way. We're out there we're very fair rates for our customers, providing a great place to bank and.

With with fair rates I think that's kind of where I would go I mean, we're going to be aggressive on the pricing side.

Intermediate term Cds like all get out and in our new England market people. We're we're bidding those up considerably so the hence our cost of money.

Was moving now that rates have come down when those intermediate rates have come down considerably. There is there doesn't seem to be the rush to move from money market to Cds that we saw before so I think we're going into a period, where we can carefully manage the cost and quality of those deposits.

Okay. Okay. That's helpful. And then just just sort of try not to be over all gross outlook. I mean, you guys had really good loan growth do you think that the loan growth rates will continue to exceed the deposit rates over the next few quarters, just and then elevating that loan to deposit ratio or how should we think about the relationship between the two.

I think.

Despite of all of our efforts we have been within a pretty narrow range in the loan to deposit ratio.

For an extended period of time in any given quarter might jump up and down a little bit, but I I would like to see us lower loan to deposit ratio.

But our loan origination system to be so strong.

That even though we have quite a bit of success in deposit growth, we're just keeping up.

Okay. So if I were modeler of which are not.

I think I would expect that we will be in that one between 1120.

Range.

And maybe just 115 I don't know exactly what it is today or something like that.

Okay. Okay. That's helpful. And then just finally on the Securities book Carl You know, obviously you guys were impacted this quarter by accelerated Prepays in the Securities book are you thinking about.

Managing that securities book any differently as we go into the this you know next couple of quarters or how should we think about kind of your your.

The structure that Securities book.

The Securities book is basically maintain for.

Asset liability purposes, as well as liquidity.

And weve been letting that that portfolio come down in this interest rate environment and I would imagine that will continue to continue to happen somewhat perhaps sort of a bit of a slower pace.

Okay.

Okay that that's good I will I'll leave it there thanks guys.

And our next question comes from Laurie Hunsicker Compass point. Please go ahead.

Hi, Thanks, good afternoon.

Our current if you could just share with me the provision of 3.8 million how much of that was related to taxi.

The loan loss provision.

You mean the charger.

Well, yeah, no both the provision and the you know so I'm looking for.

I'm looking for five things, so where do we stand with a taxi balance now is is that creepy still there is there a specific reserve what where the charge offs. What are the non performers and then what piece of taxi with in your loan loss provision.

Presumably everything you charged off I'd, maybe I should have started the other way I guess, maybe what starting what were your your actual charge offs, you mentioned a million, but I wasn't sure if it was.

A million in charge offs, if it if it was a million dollar relationship.

Okay. So share this yeah.

Sure sure so let's start with the charge offs. So we had a net $3.1 million of charge offs in the quarter.

We had specific reserves about a million against that.

Oh via a million dollars and specific reserves only $224000 were associated with taxes that got charged off in the quarter.

Okay. So actually the specific reserves thing go down much associated with with the taxi medallions up we did have a charge off of $600000.

And in taxi medallions in the quarter.

So that basically we had we had an additional charge of about $377000 or.

Over and above what the specific reserve had already been set.

Got it.

Okay, and then just as far as other like I would say, we probably it we've added more to the specific reserves or.

You know I'm guessing that's probably around $200000.

Maybe something less than that probably around $200000, what we'll have that all in the Q probably likely.

It's gotten so small one of the things. We did was picked the Cambridge medallions down to $10000. We previously we had the collateral value set at 20. So we brought it down to 10. So we had some increases on the on the specific reserves around our existing Cambridge medallions.

So that's that's basically where where we are on that.

And what is that what is the actual taxi balance as of <unk>.

So we think one loan that we don't we don't we don't really consider a taxi I think I've talked about this before it's about a 9 million dollar exposure someone we kind of really figure it's more like CNN as a lot of tracking the guidance. There's also a lot of other collateral.

And then outside of that relationship, we got $2.5 million of taxi medallions out there or.

Loans on the books, Okay and attend reserved at 47% just give us a sense of where that is 7%, okay, Okay and I guess.

I guess sort of asked a different way for thinking about your loan loss provision and your your loan growth is is running mid to high single digits, assuming we don't have any sort of outsize charge offs events like like we just saw is it fair to assume that your loan loss provision is probably running somewhere between about a million and a half and 2 million a quarter.

Is that a good way to be thinking about it.

Well just just for loan growth this quarter, we required $1.5 million of provisional So just to let alone grow so she's in the bulk yes. So then it's everything over anything that's more of a general reserve charge offs. That's kind of that's you filling the bucket and then youre putting up great. That's perfect. Okay tax rate, how should we be thinking about that.

25%.

Okay, Great and then Paul just last question, we've seen a lot of M&A recently.

Year to date.

I'm in the new England marketplace can you just update us on your thoughts around M&A again, just refresh US where you are maybe where youd like to be and how you think about going over 10 billion. Thanks.

Well I don't think for a second about going over 10 or not.

I'm indifferent, if we're under tender overtime, so that doesn't.

Get on the paper.

The.

Desire to continue to have a truly core franchise is very very important to us.

And so in the transactions that might have been potential in the area that could have been done by us.

We have we have tended to view the core as reasonably valuable and the non cores, though.

We don't want to bail for.

Hence just hasn't hasn't really been our kind of thing.

Our growth rates have have shown us to be able to grow sufficiently in order to be successful and so we are not we're not eager to dilute the franchise [laughter].

But well keep our ear to the ground, we have conversations or we are in the play Trust me.

But the the way that things have come out has been okay by us.

Okay. Okay and just last question just can you remind us just or update us on your thinking in terms of how far.

West outside of Boston, you wouldn't venture if you found something interesting.

Oh, I think I I think about the northeast.

As being a potential and maybe even into the middle Atlantic.

We would we would go to places that look and feel like the place currently operate.

[laughter].

Great. Thank you.

Okay and our next question is it sounds from Collyn Gilbert of KBW. Please go ahead.

Thanks, just wanted to check back in on sort of the outlook for fees and expenses you guys have been doing a pretty good job of increasing the fee component and just wonder what your outlook was there and then also check in to see I think in the past Carl you had said, maybe like a 3% to 4% opex growth rate for 19, if that's still in the ballpark.

Oh for sure the on the fee side. The derivative income is probably one of the bigger things that you can add anything and grow up with activity. It's been very very consistent of late and Oh pipelines continue to be very strong and so were very we're optimistic on where where that is that that will be fairly consistent going forward. The other thing is you know basically on loan sales and participations that we do.

That also can even depending on the quarter how much activity goes on there that also looks pretty solid going into Q3, so I'm pretty confident that the guidance here would be fairly consistent fee income.

As far as equity gains and things like that to throw that out of the calculation.

On the expense side, we did have a few items that I consider kind of special. This this quarter are the Oreo expense Oh, we got out of some good properties and read what that that balance down. So I don't expect to see those types of expenses going in.

In Q3, and we've got a couple of other things that might you always have had some higher recruiting costs and things of that nature going through the quarter or so.

I think.

I would guide the expenses to be fairly flat from from a Q2 to Q3.

Okay. Okay. That's helpful. And then if we just tie all of this together.

You know obviously the interest rate environment, it's going to put pressure on numbers for next year and it.

How do you guys think about just broadly generating EPS growth or or kind of driving some performance targets.

Well there are you committed in a way that you would do you know your you want to find offsets to some of this margin compression to try to hold yourselves into that mid single digit EPS growth range or do you look at 2020, and saying listen it's going to be a year, where we're going to be down and it's just the nature of the environment, but just curious kind of more broadly how you're thinking about some of that the financial targets.

Yes, it's difficult to predict the future [laughter]. So I think if we can continue to have.

Reasonably strong loan growth.

And we work every day to continue to improve our funding.

Base.

And I expect that we should continue to be able to make progress now having said that.

The interest rate environment, and how it moves obviously has a big effect on us not the least of which because we have such a high loan to deposit ratio, but the game plan is to work to improve that continue to have the originations get get back to the minimal kinds of charge offs that we're used to.

And I would expect that we could continue to creep up the U.P.S. letter.

Okay. Okay, all right very good thank you.

This concludes our question answer session on let's turn the conference back over to the management team for any final remarks.

Thank you Rocco and thank you all for joining US we look forward to talking with you again next quarter.

Good day.

Thank you today's conference has now concluded and we thank you all for joining todays presentation. You may now disconnect your lines not a wonderful day.