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Brookline Bancorp Inc  (NASDAQ:BRKL)
Q2 2019 Earnings Call
Jul. 25, 20191:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Brookline Bancorp Second Quarter 2019 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Lindsey Kitchens of Brookline Bancorp. Please go ahead, ma'am.

Lindsey Dattoli Kitchens -- Senior Law Clerk

Thank you, Rocco. Good afternoon, everyone, and welcome to Brookline Bancorp's second quarter 2019 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, that 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 A. Perrault -- President and Chief Executive Officer

Thank you, 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. 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, or $0.26 per share for the second quarter. And yesterday, our board approved the quarterly common dividend of $0.11 per share, which will be paid on August 23rd to stockholders of record on August 9th. 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 region's leading commercial banking companies.

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

Carl M. Carlson -- Chief Financial Officer

Thank you, Paul, and good afternoon. As Paul mentioned, earnings for the quarter were $20.5 million, down $2 million from the first quarter. While total revenues, improved $1 million from Q1, expenses increased $733,000, and the provision for loan loss increased $2.4 million. We had strong loan growth of $117.1 million in the second quarter, or 7.3% on an annualized basis. Our commercial real estate portfolio grew $83.1 million, or 9.7% annualized. C&I grew $39.8 million, and consumer loans declined $5.7 million. 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 5 basis points from the first quarter, as the overall yield on earning assets rose 4 basis points to 4.88%. Total deposits grew $1.8 million during the quarter with 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 interest-bearing liabilities by 9 basis points.

Our funding cost caused our net interest margin to decline 9 basis points from the first quarter to 3.55%. However, our net interest income improved $135,000 on a linked quarter basis, driven by our continued growth in earning assets. Included in net interest income is the impact of purchase accounting and prepayment fees. Purchase accounting was $176,000 in the second quarter, down $137,000 from the first quarter, and prepayment fees were $947,000, down $159,000 from the first quarter. Combined, the quarter-over-quarter changes had a 1 basis point negative impact on the margin during the quarter.

Non-interest income was $7.5 million in the second quarter, up $848,000 from Q1. The increase was driven by strong loan participation activity and a positive mark-to-market of $357,000 on the equity portfolio versus a negative mark of $134,000 in the first quarter. The company's non-interest expense increased $733,000 from the first quarter to $39.6 million. The increase was driven primarily by salaries and benefits, FDIC premiums, marketing cost and 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 established specific reserves. The allowance for loan losses of $58.6 million represents 90 basis points on loans. During the quarter, non-accrual loans declined $1.5 million to $21.3 million, or 33 basis points of total loans and net charge-offs with $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'll now open it up for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instruction] Today's first question comes from Mark Fitzgibbon of Sandler O'Neill and Partners. Please go head.

Mark Fitzgibbon -- Sandler O'Neill and Partners -- Analyst

Hey, guys. Good afternoon.

Paul A. Perrault -- President and Chief Executive Officer

Good afternoon, Mark.

Mark Fitzgibbon -- Sandler O'Neill and Partners -- Analyst

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?

Paul A. Perrault -- President and Chief Executive Officer

Well, we're certainly working hard to make sure it doesn't. It's really much too early to be certain. But so far it's a pretty common stable environment.

Mark Fitzgibbon -- Sandler O'Neill and Partners -- Analyst

Okay. And then, Carl, I'm curious as to your thoughts on the net interest margin, you know, for the back half of the year and what your assumptions are for rate cuts?

Carl M. Carlson -- Chief Financial Officer

I think right now, we believe that the Fed will likely cut rates. Whether we agree with that or not is a different story, but we do think they're going to cut rates 25 basis points at the end of this month. And we expect right now the margin to likely compressing within 5 basis points to 7 basis points, including that cut in rate.

Mark Fitzgibbon -- Sandler O'Neill and Partners -- Analyst

So, if we have a cut in September, do you think there's an additional 5 basis points of compression in the fourth quarter?

Carl M. Carlson -- Chief Financial Officer

I don't want to go there just yet.

Mark Fitzgibbon -- Sandler O'Neill and Partners -- Analyst

Okay. And then it looked like there was one large net charge-off in the quarter. What caused -- was that -- what credit was that? Can you give us a little bit of color on it?

Paul A. Perrault -- President and Chief Executive Officer

Yeah, I can give you some color. I mean, 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 $1 million or so, was from a credit, which was 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 a strong hit 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 multiple medallion holder in the Cambridge market. He has quite a few medallions in Cambridge. In 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 on this guy and this literally does, I think, put the taxi business behind us. This was the last major one that was left. And that was a little under $1 million, I think, for that guy. And then, you had your garden variety stuff.

Mark Fitzgibbon -- Sandler O'Neill and Partners -- Analyst

Okay. Thank you.

Operator

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

Matthew Breese -- Piper Jaffray -- Analyst

Good afternoon. I just wanted to ferret out the margin discussion a little bit more. How much your loan book is tied to a short duration index like LIBOR prime?

Carl M. Carlson -- Chief Financial Officer

It's about $1.5 billion.

Matthew Breese -- Piper Jaffray -- Analyst

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

Carl M. Carlson -- Chief Financial Officer

I don't have that detail at my fingertips. So while we have some loans tied to 3-month LIBOR, some tied to 1-month LIBOR, as you know, 3-month moved a lot more than the 1-month. But 1-month has had a negative impact on the loan yields for the quarter. Day count always has a big impact on the margin as you move forward, and you'll see the same type of impact in Q -- and we already have that included in our numbers in Q3.

Matthew Breese -- Piper Jaffray -- Analyst

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?

Paul A. Perrault -- President and Chief Executive Officer

Well, 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 with others. And I think that that, that had some level of impact on the margin. I'm not the accounting guy so I can't tell you how much, but it was a little while out there. And as we have been going through July, things have gotten much calmer and the deposit gathering seems a lot more organized and favorable to us. So I think we have to get through that late fall/winter into spring time frame when rates were jumping around and everybody before they sank and I think the future is a little bit better than the recent past.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. And kind of tying this all into the margin outlook, I understand the outlook for next quarter given the Fed cut, would you expect the same 5 basis points to 7 basis points of decline per Fed cut if the deposit environment is going to improve for you?

Carl M. Carlson -- Chief Financial Officer

That's what -- I'd be in that range.

Matthew Breese -- Piper Jaffray -- Analyst

Okay. Okay, that's all I had. Thanks for taking my questions.

Operator

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

Collyn Gilbert -- KBW -- Analyst

Thanks. Good afternoon, guys. Just to drill under the deposit component a little bit more. 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 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?

Carl M. Carlson -- Chief Financial Officer

Sure. And a lot of these deposits, I don't want to just say seasonality. What 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 the company over the quarter. You know, DDA, in particular, had gone down during the quarter, maybe it had to do with taxes, paying taxes, tax is seasonal, that type of thing. And then came back very strong late in the quarter.

On the savings account -- in savings accounts, we have our 1031 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, it's just a very competitive environment where people are looking for the best rate and whether it's going to be money market or put some of it into CDs, and so we continue to see that dynamic.

Collyn Gilbert -- KBW -- Analyst

Okay.

Carl M. Carlson -- Chief Financial Officer

On the pricing side, we are -- we have seen pricing in the market back off quite a bit.

Paul A. Perrault -- President and Chief Executive Officer

Very recent.

Carl M. Carlson -- Chief Financial Officer

Yeah. Very recently.

Collyn Gilbert -- KBW -- Analyst

Okay. And in terms of the movement, just within your own book of customers maybe moving into higher structures, do you think that, that will continue into the back half of the year or how do you sort of manage to control that if you can?

Carl M. Carlson -- Chief Financial Officer

I wouldn't say that we try to manage or control that in any way. We're out there with very fair rates for our customers providing a great place to bank and with fair rates. I think that's kind of where I would delve with. I mean, we're going to be aggressive on the pricing side as much as we can.

Paul A. Perrault -- President and Chief Executive Officer

I have tried to get to that a few comments ago, Collyn. It feels like it's gotten a lot calmer. When we were going through the winter into the spring, rates had been going up and there was an expectation that they would likely continue to go up, so people were jumping in to intermediate-term CDs and they called get out. And in our New England market, people were bidding those up considerably. So the hands are across the money was moving. Now that rates have come down and those intermediate rates have come down considerably, there's -- 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 the quantity of those deposits.

Collyn Gilbert -- KBW -- Analyst

Okay. That's helpful. And then just sort of tying that to be overall growth outlook. I mean, you guys had really good long growth. Do you think that the loan growth rates will continue to exceed the deposit rates over the next few quarters and then elevating that loan to deposit ratio, or how should we think that the relationship between the two?

Paul A. Perrault -- President and Chief Executive Officer

I think despite 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, it might jump up and down a little bit. But I wouldn't like to see us lower loan to deposit ratio, but our loan originations tend to be so strong that even though we have quite a bit of success in deposit growth, we're just keeping up.

Collyn Gilbert -- KBW -- Analyst

Okay

Paul A. Perrault -- President and Chief Executive Officer

So if I were a modeler, of which I'm not, I think I would expect that we'll be in that between 1.10%, 1.20% range, maybe at 1.15%, I don't know exactly what it is today, but something like that.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay, that's helpful. And then just finally on the securities book, Carl, you know, obviously, you know, you guys were impacted this quarter by accelerated prepays as soon as securities book. Are you thinking about managing that securities book any differently as we go into this, you know, next couple of quarters, or how should we think about kind of your -- the structure of that securities book?

Carl M. Carlson -- Chief Financial Officer

The security book is basically maintained for asset liability purposes as well as liquidity, and we've been letting that, that portfolio come down in this interest rate environment. And I would imagine that would continue to happen somewhat, perhaps at a bit of a slower pace.

Collyn Gilbert -- KBW -- Analyst

Okay. That's good. I'll leave it there. Thanks, guys.

Operator

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

Laurie Hunsicker -- Compass Point -- Analyst

Yeah, thanks. Good afternoon.

Paul A. Perrault -- President and Chief Executive Officer

Hello, Laurie.

Laurie Hunsicker -- Compass Point -- Analyst

Carl, I wonder 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?

Paul A. Perrault -- President and Chief Executive Officer

The provision.

Carl M. Carlson -- Chief Financial Officer

You mean the charge-offs?

Laurie Hunsicker -- Compass Point -- Analyst

Well, yeah. No, both the provision and the -- so I'm looking for 5 things. So where do we stand with the taxi balance now? Is that CRE piece still there? Is there a specific reserve? What were the charge-offs? What are the non-performers? And then, what piece of taxi was in your loan-loss provision? Presumably, everything you charged off -- maybe I should have started the other way. I guess maybe what's -- starting, what were your actual charge-offs? You mentioned $1 million, but I wasn't sure if it was $1 million in charge-offs. If it was $1 million relationship. If you could just share those -- yeah.

Carl M. Carlson -- Chief Financial Officer

Sure. Sure. So let's start with the charge-offs. So we had net $3.1 million of charge-offs in the quarter. We had specific reserves of about $1 million against that. Of the $1 million of specific reserves, only $224,000 were associated with taxis that got charged off in the quarter.

Laurie Hunsicker -- Compass Point -- Analyst

Okay.

Carl M. Carlson -- Chief Financial Officer

So the specific reserves didn't go down much associated with the taxi medallions. We did have a charge-off of $600,000 in taxi medallions in the quarter. So that's -- so basically, we had additional charge-offs of about $377,000 over and above what the specific reserve had already been set at.

Laurie Hunsicker -- Compass Point -- Analyst

Got it. Okay. And then --

Carl M. Carlson -- Chief Financial Officer

As far as other, I would say we probably add -- we've added more to specific reserves, and I'm guessing that's probably around $200,000, maybe something less than that, probably around $200,000. We'll have that all in the Q, likely. It's gotten so small. One of the things we did was take the Cambridge medallions down to $10,000. We -- previously, we had the collateral value set at $20,000, so we brought it down $10,000. So we had some increases on the specific reserves around existing Cambridge medallions. So that's basically where we are on that.

Laurie Hunsicker -- Compass Point -- Analyst

And what is the actual taxi balance as of 2Q?

Carl M. Carlson -- Chief Financial Officer

So we have one loan that we don't really consider a taxi. I think I talked about this before. It's about a $9 million exposure to someone we kind of really figure is more like C&I. There's a lot of taxi medallions, but he has also a lot of other collateral. And then outside of that relationship, we've got $2.5 million of taxi medallions out there, or loans on the books.

Laurie Hunsicker -- Compass Point -- Analyst

Okay.

Carl M. Carlson -- Chief Financial Officer

Reserve's at 47%, just to give a sense of what that is.

Laurie Hunsicker -- Compass Point -- Analyst

47% reserve. Okay. And I guess sort of asked a different way, if we're thinking about your loan-loss provision and your loan growth is running mid to high single digits, assuming we don't have any sort of out-sized charge-off events like we just saw, is it fair to assume that your loan-loss provision is probably running somewhere between about $1.5 million and $2 million a quarter? Is that a good way to be thinking about it?

Carl M. Carlson -- Chief Financial Officer

Well, just for loan growth this quarter, we required $1.5 million of provision, just for the loan growth.

Paul A. Perrault -- President and Chief Executive Officer

So it's seasoned the bulk [Phonetic].

Carl M. Carlson -- Chief Financial Officer

And so, then -- anything over -- anything that's more general reserve charge-offs, that's kind of -- that's -- you're filling the bucket and then you're putting up [Indecipherable].

Laurie Hunsicker -- Compass Point -- Analyst

Great. That's perfect. Okay. Tax rate, how should we be thinking about that?

Carl M. Carlson -- Chief Financial Officer

25%.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. Great. And then, Paul, just last question. We've seen a lot of M&A recently year-to-date 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 you'd like to be and how you think about going over $10 billion. Thanks.

Paul A. Perrault -- President and Chief Executive Officer

Well, I don't think for a second about going over $10 billion or not. I'm indifferent if we're under $10 billion or over $10 billion. 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 tended to view the core as reasonably valuable, and the non-core stuff, we don't want to pay up for. Hence, it just hasn't really been our kind of thing. Our growth rates have shown us to be able to grow sufficiently in order to be successful, and so we are not eager to dilute the franchise. But we keep our ear to the ground, we have conversations. We are in the play, trust me, but the way that things have come out has been OK by us.

Laurie Hunsicker -- Compass Point -- Analyst

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 would venture if you found something interesting?

Paul A. Perrault -- President and Chief Executive Officer

Oh, I think about the Northeast as being a potential, and maybe even into the Middle Atlantic. We would go to places that look and feel like the place we currently operate.

Laurie Hunsicker -- Compass Point -- Analyst

Right. Thank you.

Paul A. Perrault -- President and Chief Executive Officer

Okay.

Operator

And our next question is a follow-up from Collyn Gilbert with KBW. Please go ahead.

Collyn Gilbert -- KBW -- Analyst

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 wondering 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?

Carl M. Carlson -- Chief Financial Officer

So sure. On the fee side, the derivative income is probably one of the bigger things that can ebb and grow with activity. It's been very consistent of late, and pipelines continue to be very strong. And so we're very -- we're optimistic on where that is, that that'll be fairly consistent going forward. The other thing is basically on loan sales and participations that we do, that also can -- 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, I'd throw that out of the calculation. On the expense side, we did have a few items that I consider kind of special this quarter. The OREO expense, we got out of some properties and we brought that balance down. So I don't expect to see those types of expenses going in Q3. And we have a couple of other things that might -- we said, had some higher recruiting cost and things of that nature going through the quarter. So I think I would guide expenses to be fairly flat from Q2 to Q3.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay. That's helpful. And then, if we just tie all of this together, obviously, the interest rate environment is going to put pressure on numbers for next year. How do you guys think about just broadly generating EPS growth or kind of driving some performance targets? Will there -- are you committed in a way that you would -- you're -- 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 the financial targets.

Paul A. Perrault -- President and Chief Executive Officer

It's difficult to predict the future. 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, then 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 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 EPS ladder.

Collyn Gilbert -- KBW -- Analyst

Okay. All right. Very good. Thank you.

Operator

This concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Paul A. Perrault -- President and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Lindsey Dattoli Kitchens -- Senior Law Clerk

Paul A. Perrault -- President and Chief Executive Officer

Carl M. Carlson -- Chief Financial Officer

Mark Fitzgibbon -- Sandler O'Neill and Partners -- Analyst

Matthew Breese -- Piper Jaffray -- Analyst

Collyn Gilbert -- KBW -- Analyst

Laurie Hunsicker -- Compass Point -- Analyst

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