Brookline Bancorp (BRKL) Q4 2018 Earnings Conference Call Transcript

Brookline Bancorp (BRKL 1.00%)
Q4 2018 Earnings Conference Call
Jan. 31, 2019 1:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, and welcome to the Brookline Bancorp's fourth-quarter 2018 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Marissa Frerk. Please go ahead.

Marissa Frerk -- Associate General Counsel

Thank you, Sean. Good afternoon, everyone, and welcome to Brookline Bancorp's fourth-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 conditions, 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.

Paul Perrault -- President and Chief Executive Officer

Thanks, 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. Yesterday, we reported earnings of $21.1 million or $0.26 per share for the fourth quarter of 2018, resulting in record earnings for the year of $83.1 million or $1.04 per share. For the year, loan balances grew by $573 million, 10% higher than 2017, and deposits grew by $583 million or 12%.

While 2018 saw customer preferences shift to time deposits, we also saw strong growth in demand deposits of $91 million or almost 10%. 2018 was also a year of rising interest rates, as well as a volatile yield curve. We have always strived to position the bank to be as neutral as possible to changes in interest rates, and we experienced a 4-basis-point increase year over year in our net interest margin to 3.61%. Excluding the impact of securities gains, revenues increased by $28.7 million year over year or almost 12%.

Excluding the impact of merger charges, expenses increased $11.9 million year over year or 8.5%, resulting in positive operating leverage of 3.2%. 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 enterprises. I will now turn you over to Carl, who will review the company's fourth quarter. Carl?

Carl Carlson -- Chief Financial Officer

Thank you, Paul. Loans grew $75.8 million in the fourth quarter or 4.9% on an annual basis, driven by commercial real estate and consumer. Loan originations and drawdowns were once again strong in the quarter at $509 million, which was slightly higher than the third quarter with loan sales and participations out of $44 million. The weighted average yield on the loan portfolio for the quarter of 504 basis points increased 12 basis points from the third quarter, driving the overall yield on earning assets up 12 basis points.

Deposits grew $220.4 million during the quarter with growth coming in all categories. During the quarter, the cost of interest-bearing deposits increased 15 basis points and our cost of all interest-bearing liabilities increased 14 basis points. Our margin increased 1 basis point during the quarter to 358 basis points and our net interest income increased $827,000 on a linked-quarter basis. Included in net interest income is the impact of purchase accounting and prepayment fees.

Purchase accounting was $384,000 in the fourth quarter, down $183,000 from the third quarter and prepayments fees were $1.1 million, up $211,000 from the third quarter. Combined, the quarter-over-quarter changes offset and had no incremental impact on the change in margin during the quarter. Noninterest income was $6.5 million in the fourth quarter, down $608,000 from Q3. The decrease was driven by the lower derivative income activity and loss on investment securities.

Our provisions for the credit losses for the quarter was $123,000, as charge-offs through the quarter largely went within established specific reserves and favorable workouts and credit trends resulted in allowance for loan losses of $58.7 million, representing 93 basis points on loans. During the quarter, nonaccrual loans declined $1.7 million to $24.1 million or 38 basis points of total loans. And net charge-offs were $1.3 million or 8 basis points on an annualized basis Excluding the impact of merger and acquisition expense, the company's noninterest expense increased $2.5 million from the third quarter to $39.8 million. The increase was driven by higher compensation and other operating expenses.

Compensation expense was driven by higher incentive costs, severance and new hires. Other operating expense was driven by OREO write downs and workout costs. Yesterday, the board approved a quarterly common dividend of $0.105 a share, which will be paid on February 25 to stockholders of record on February 11. And represents an annualized yield of approximately 2.8%.

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

Paul Perrault -- President and Chief Executive Officer

Thank you, Carl. We are very happy to have reported another record year for the company, and we expect a solid 2019. We will now open it up for questions. 

Questions and Answers:

Operator

We will now begin the question-and-answer session.[Operator instructions] Our first question comes from Mark Fitzgibbon with Sandler O'Neill. Please go ahead.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

Hey, guys, good afternoon. I'm wondering if you could share with us the size of your commercial pipeline now and maybe what the blended rate on that looks like?

Paul Perrault -- President and Chief Executive Officer

As you probably recall, I don't like to quantify that exactly. But I can tell you that it is hundreds of millions of dollars and it is as robust as it has been. And I don't know what the weighted average rate of those things might be, because when -- from my perspective, Mark, when something is in the pipeline, it's not always a done deal. We haven't approved it, the customer hasn't accepted it, we may or may not have negotiated a rate.

But I think rates are generally holding pretty steady is my impression in the market that as the yield curve has flattened, intermediate rates have sort of come back down from -- after they went up last fall, there's been improvement generally over the past year in pricing and I think it's holding at that improved level, not rising anymore.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. And then secondly...

Paul Perrault -- President and Chief Executive Officer

Carl, do you want to add anything from what you see...

Carl Carlson -- Chief Financial Officer

Yes, the only thing I would add and just to give you a little -- we're not going to project on what the first quarter might look like at this point. But just so you have a sense of what happened in the fourth quarter, I guess that we originated $509 million of loans, the weighted average coupon. So this doesn't have any FAS 91 and all those adjustments. But just the coupon on those loans and the drawdown is 5 70, so 5.7%.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

Very good. OK. And Carl, what's your outlook for the margin in, let's say, the first quarter even? Can you hold here or maybe even improve a little bit again?

Carl Carlson -- Chief Financial Officer

Well, I'll put it this way, I think, we're seeing some stabilization in the margin at this point. There was certainly amount of deposit funding catch-up in Q3, but now we've seen that kind of normalized a bit. Competition is still a big -- it's a big factor out there. There is a preference more leading toward time deposits, but we're seeing growth -- good growth in all categories.

So I do expect the margin to be relatively stable for where we ended up Q4, probably plus or minus 1 or 2 basis points, so the best projections that we can do. And the margin for the very first quarter might be a little bit better just because of the number day account, things of that nature if you're just trying to pinpoint them. But overall, generally flat.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. And then secondly, just curious, what drove your desire to buy the remaining 16 percentage, just in Eastern Funding that you didn't own previously?

Paul Perrault -- President and Chief Executive Officer

It was actually part of the original deal that this would ultimately be the outcome.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. So it was predetermined, the date and price that you would do it at?

Paul Perrault -- President and Chief Executive Officer

No, not the price and the date, but just the action that we ultimately would buy the balance on a 100%. But it wasn't at a particular date. It was somewhat elective on their part in terms of the date and the pricing's been agreed upon, the market price.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. And then Carl, in the other income line, it looked like it was a little bit higher than usual. Was there anything unusual in there? Or what kind of drove that increase?

Carl Carlson -- Chief Financial Officer

We had a sale of a building in that line of just under $300,000.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. A branch?

Carl Carlson -- Chief Financial Officer

A branch.

Paul Perrault -- President and Chief Executive Officer

That had been relocated in Rhode Island, and we sold the old one.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. And then lastly. As you think about expenses for 2019, if we were to sort of model out a 3% to 4% kind of increase, would we be in the ballpark? Or is there any other unusual items that you anticipate this year really pushing that number one way or the other?

Carl Carlson -- Chief Financial Officer

No, I think that would be my guidance.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

Great. Thank you.

Paul Perrault -- President and Chief Executive Officer

Thanks, Mark.

Operator

Our next question comes from Laurie Hunsicker with Compass Point. Please go ahead.

Laurie Hunsicker -- Compass Point -- Analyst

Yes, thanks.Good afternoon. Just staying with income statement line items here. Any -- are there other expenses, that $4.3 million that was a bit elevated, was there anything onetime in that?

Carl Carlson -- Chief Financial Officer

Well, I hate to call things time onetimers, because -- what I would call -- I would characterize them as off-trend. We did have some -- a large OREO write down in that, which is very unusual for us. And just higher level of workout and recovery expenses. So in that -- those things combined were over $900,000.

So I think that's the big thing driving that number.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And the merger charges of $526,000, were those related to Eastern? Or were those related to First Choice?

Carl Carlson -- Chief Financial Officer

Approximately -- just a little over $200,000 were related to Eastern. And the balance was related to First Commons just getting out of a facility at First Commons.

Laurie Hunsicker -- Compass Point -- Analyst

First Commons, sorry, not First...

Carl Carlson -- Chief Financial Officer

First Commons.

Laurie Hunsicker -- Compass Point -- Analyst

So when do we see merger charges go to zero? Has that closed March 1 a year ago?

Carl Carlson -- Chief Financial Officer

Yes. I think that is a zero -- it should be zero going forward.

Laurie Hunsicker -- Compass Point -- Analyst

And then how should we be thinking about Eastern in terms of merger charges going forward?

Paul Perrault -- President and Chief Executive Officer

Zero.

Carl Carlson -- Chief Financial Officer

It's all done.

Paul Perrault -- President and Chief Executive Officer

It's all done.

Laurie Hunsicker -- Compass Point -- Analyst

OK. OK. OK. And then I just want to make sure...

Carl Carlson -- Chief Financial Officer

And it closed on January 4, but we had accrued all those expenses.

Laurie Hunsicker -- Compass Point -- Analyst

OK, great. And then I just want to make sure I'm think about this the right way. So in terms of Eastern running through the fourth quarter, that $1.022 million now is dropping completely to your bottom line?

Carl Carlson -- Chief Financial Officer

Yes, it's not going to be subtracted, because it was a fully consolidated...

Laurie Hunsicker -- Compass Point -- Analyst

It's not subtracted. Right. OK.

Carl Carlson -- Chief Financial Officer

It's just not going to be subtracted anymore.

Laurie Hunsicker -- Compass Point -- Analyst

OK. It's a round number, is that equating to about $0.05 a share, am I doing the math right?

Carl Carlson -- Chief Financial Officer

Well, also not, because that income is not really part of ours. We haven't been paying taxes on that income either, because it's an LLC, it gets pushed out to the individuals and they were paying their own taxes on that. So we will have to pay our income tax at the statutory rate. So certainly less than that number.

Laurie Hunsicker -- Compass Point -- Analyst

3.5%. OK. Got it. That's helpful.

And then on tax rate, can you just help us think about that for next year?

Carl Carlson -- Chief Financial Officer

Yes, I think it's going to be -- and right now, I'd say between 24.5% and 25%, in that range.

Laurie Hunsicker -- Compass Point -- Analyst

Great. I'll leave it there.

Operator

Our next question comes from Matthew Breese with Piper Jaffray. Please go ahead.

Matthew Breese -- Piper Jaffray -- Analyst

Good afternoon. I just wanted to talk about the funding trends we saw this quarter. FHLB advances came down. We saw CDs continue to increase.

And I guess my question is as we think about 2019, is it more advantageous to fund the balance sheet through CDs or brokered CDs versus the FHLB channel?

Paul Perrault -- President and Chief Executive Officer

Probably.

Carl Carlson -- Chief Financial Officer

Between those channels? I think we have a variety of ways of funding the balance sheet. So -- but brokered CDs are very favorable. Federal Home Loan Bank advances are favorable in certain points and certain tenors, as well as the market these days. So a year or two years ago, I couldn't giveaway a CD.

Now there is quite a bit of appetite, particularly in the markets that we serve. So we're seeing a variety of availability of funding. We just want to try to do it at the right price.

Matthew Breese -- Piper Jaffray -- Analyst

OK, understood. Maybe try it this way. Your borrowings to asset ratio came down to around 12% at year-end from a usual 15%. Do you think that continues to trend downward?

Paul Perrault -- President and Chief Executive Officer

It certainly would be our effort. You see the improvement in DDA and core deposits, as we grow more and more relationships, sell more cash management, treasury services. So that's directionally what we've been trying to do, and we've had actually a fair amount of success over time. But these are long arcs...

Carl Carlson -- Chief Financial Officer

Yes, it's not a quarter-to-quarter...

Paul Perrault -- President and Chief Executive Officer

Yes, we kind of do it the old-fashioned way, brick by brick, I'm sure it will continue. But how much you can read at any given quarter is a little bit hard to predict. But our borrowings are down by $150 million for the year, if that's about right? I think so. That's directionally a very good sign.

And that's, I guess, included in the stat that you spoke about, Matt.

Matthew Breese -- Piper Jaffray -- Analyst

Exactly. That was -- It's kind of my point. We've been trending a little bit lower. This quarter, it was more significant.

And just wanted to get a sense for as the -- so strategy to continue to push that lower. I think I know where your head's at. Just going back to the other OREO expense, you said it was off-trend. Usually, that line item comes in at about $4 million to $4.5 million.

Is the expectation of return to that level in the first quarter?

Carl Carlson -- Chief Financial Officer

Yes, it's not lower.

Matthew Breese -- Piper Jaffray -- Analyst

OK. And then just on the Eastern Funding. Just wanted to understand, now that it's entirely yours, from P&L perspective, how should we treat that? How should we treat that minority interest?

Carl Carlson -- Chief Financial Officer

So from an income statement perspective, when you're looking at the income statement, it is fully consolidated in our income statement already. What happens at the very bottom of the income statement, you'll see a minority -- or noncontrolling interest, that's a reduction to the net income number to show what the net income is to Brookline shareholders? That's the reduction that was coming out for those minority, the members of the LLC. So that goes away. That will turn to roughly -- since it's a January 4 transaction, it could be a fraction of a number in there for the first quarter.

And then that will be zero going forward after that.

Matthew Breese -- Piper Jaffray -- Analyst

Understood. OK. And then at these levels, I saw the other -- the authorization on the buyback, the reup at these levels, is that something that you're interested in?

Carl Carlson -- Chief Financial Officer

I'm not going to pine on, on these levels. I'm going to pine on -- you saw what we did -- the board did approve a $10 million program and it was done probably a lot faster than we ever expected just because the market did what it did. And so we feel we got a very favorable execution on that. And the board felt it was prudent to do another $10 million if, in fact, the market provides those types of opportunities.

Matthew Breese -- Piper Jaffray -- Analyst

All right. That's all I had. Thank you.

Operator

[Operator instructions] Our next question comes from Collyn Gilbert with KBW.

Collyn Gilbert -- KBW -- Analyst

Thanks. Good afternoon, guys.Most of my questions have been asked and answered. I just wanted to clarify Matt's last question on the OREO expense. Sorry, I'm a little confused.

So for the other -- you said that there was elevated workout expenses in the fourth quarter, other expense line at that $4.3 million, right, Carl?

Carl Carlson -- Chief Financial Officer

Yes.

Collyn Gilbert -- KBW -- Analyst

OK. And then -- but then Matt just say that that generally the normalized run rate is $4 million to $4.5 million. And you said, yes?

Carl Carlson -- Chief Financial Officer

No, no, no. So -- just -- let me be a little bit clear. We write down our OREO over $700,000 in the quarter. We also had elevated workout expenses of around $200,000 in various lines.

And so those are -- the write down OREO is not typical. We don't usually have any write down OREO. I'm not even sure the last time we had write down our OREO. And so we'll see how that pans out.

And I expected that we will be moving some of those properties fairly quickly. And hopefully that will be done by the end of first quarter. So I think he was getting back to a run rate of $400,000 in workout, repo, foreclosure expenses and things like that being the trend. And that's what I was responding to.

Collyn Gilbert -- KBW -- Analyst

Got it. OK. OK. That's helpful.

OK. And any -- I'm going to ask it, because it gets asked every time, Paul, but -- I think I know the answer -- but M&A, any change in the environment as it relates to M&A? What you're seeing? What your appetite is? Thoughts there? A lot of capital...

Paul Perrault -- President and Chief Executive Officer

Well, I don't -- I haven't changed my views on it at all. I guess, an observer would say that there are much fewer opportunities in the relevant markets because of the activity in 2018 around here. That's -- but I don't think there's really anything new. Carl?

Carl Carlson -- Chief Financial Officer

I wouldn't add anything to that.

Collyn Gilbert -- KBW -- Analyst

OK. So the capital levels, I mean, you answered the question on buybacks. You've got the dividend. What are your thoughts on managing that capital level? And where do you see that trending, I guess, Carl?

Carl Carlson -- Chief Financial Officer

Well, I think, with the change in the tax law, we are accumulating capital faster than we had originally projected. And the performance of the company continues to be quite good. And we'll just manage those -- we'll be deploying that capital as we see fit. We continue to see opportunities within the market, right now, quite a bit of opportunity just organically.

We've had some nice hires in the fourth quarter. We expect to continue to find -- great athletes continue to present themselves, and we'll see -- we'll see what develops there. But those are long-term deployments of capital into those efforts.

Collyn Gilbert -- KBW -- Analyst

OK. In the more immediate term, I mean, do you think that loan growth, just kind of the momentum that you've been building thus far that you could see loan growth accelerate in 2019, relative to what you put up in '18?

Paul Perrault -- President and Chief Executive Officer

Yes, I think it's possible. We could see better gains in '19 than '18. You might recall, '18 actually started out pretty slow. And then we picked up momentum all the way through the balance of the year.

But on the other side of the ledger, we had a lot of loans pay down or payoff, companies were doing very well, properties are being sold in our markets, left and right. So it was a bit of a footrace. We got some decent balance sheet gains. But given the momentum that we have, I think, it is possible that we can outdo '18.

Carl Carlson -- Chief Financial Officer

Yes. And just to add to that is, we were doing a lot more on the participation side out. So our originations have been quite strong throughout the year, just less so maintaining them on our balance sheet. And then -- and you saw that a little bit in this quarter, our participation to out loan is $44 million, so not quite as much as we had been experiencing.

We do have greater expectations on the C&I side for growth just given the folks that we have brought on and expectations there.

Collyn Gilbert -- KBW -- Analyst

Ok. All right. That's super helpful. Thank you.

Operator

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

Paul Perrault -- President and Chief Executive Officer

Thanks, John, and thank you all for joining us. And we will look forward to talking with you again next quarter. Good day.

Operator

[Operator signoff]

Duration: 25 minutes

Call Participants:

Marissa Frerk -- Associate General Counsel

Paul Perrault -- President and Chief Executive Officer

Carl Carlson -- Chief Financial Officer

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

Laurie Hunsicker -- Compass Point -- Analyst

Matthew Breese -- Piper Jaffray -- Analyst

Collyn Gilbert -- KBW -- Analyst

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