Good day, and welcome to the Brookline Bancorp First Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please note today's event is being recorded. I would now like to turn the conference over to Lindsey Kitchens. Please go ahead..

Paul Perrault and Carl Carlson. Before we begin, please note this call may contain forward-looking statements with respect to the financial condition, results of operations and business of Brookline Bancorp. Actual results may differ from these forward-looking statements.

Factors that may cause actual results to differ include those identified in our annual report on Form 10-K, our most recently filed 10-Q and our earnings press release.

Brookline Bancorp cautions you against unduly relying upon any forward-looking statements and disclaims any intent to update publicly any forward-looking statements, whether in response to new information, future events or otherwise.

Any references made during this presentation to non-GAAP measures are only made to assist you in understanding Brookline Bancorp's results and performance trends and should not be relied on as financial measures of actual results or future 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. I'm pleased to report we had another strong quarter with quality organic growth in loans and deposits.

For the quarter, loan balances grew $85 million and deposits grew by $167 million. Our margin was stable, and we have solid quarter for fee income. Yesterday, our Board of Directors approved a $0.005 increase in our quarterly dividend to $0.11, which represents a 10% increase over last year.

We reported earnings of $22.5 million or $0.28 per share for the first quarter. Adjusting 2018 for some securities gains and merger charges, net income was up 12% year-over-year. We continue to execute our strategies, growing organically in the markets that we serve.

We have a great group of employees dedicated to 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 first quarter..

Thank you, Paul. As Paul mentioned, loans grew $84.7 million in the first quarter, 5.4% on an annualized basis, with growth coming in all major loan categories. Loan originations and drawdowns in the quarter were $392 million with an average weighted coupon of 5.85%.

The weighted average yield on the loan portfolio for the quarter was 509 basis points, an increase of 5 basis points from the fourth quarter. The overall yield on earning assets rose 7 basis points to 4.84%. Deposits grew $166.6 million during the quarter with growth coming primarily in certificates of deposit.

During the quarter, the cost of interest-bearing deposits increased 17 basis points to 1.44% from the fourth quarter. The strong growth in deposits provided the opportunity to reduce our wholesale borrowings by $54.5 million. Our margin increased 6 basis points from Q4 to 3.64%, in part due to the reduced number of days in the quarter.

Our earning assets grew and our margin improved in the quarter while our net interest income declined $160,000 on a linked-quarter basis due to two fewer days in Q1 versus Q4. Included in net interest income is the impact of purchase accounting and prepayment fees.

Purchase accounting was $313,000 in the first quarter, down $71,000 from the fourth quarter, and prepayment fees were $1.1 million, consistent with the fourth quarter. Combined, the quarter-over-quarter changes had no incremental impact on the change in margin during the quarter.

Noninterest income was $6.6 million in the first quarter, up $169,000 from Q4. The increase was driven by positive the mark-to-market of $134,000 on the equity portfolio versus a negative mark of $692,000 in the fourth quarter.

Our provision for credit losses for the quarter was $1.4 million as charges for the quarter largely went against established specific reserves, and favorable credit trends resulted in allowance for loan losses of $58 million, representing 91 basis points on loans.

During the quarter, nonaccrual loans declined $1.3 million to $22.8 million or 36 basis points of total loans. Net charge-offs were $2.1 million or 13 basis points on an annualized basis. Excluding the impact of merger and acquisition expense from Q4, the company's noninterest expense declined $885,000 from the fourth quarter to $38.9 million.

The decline was driven by lower OREO-related expenses and lower incentive-related expense. Yesterday, the Board approved a quarterly common dividend of $0.11 per share, which will be paid on May 24 to stockholders of record on May 10 and represents an annualized yield of 2.96%. That concludes our formal statements.

We will now open it up for questions..

[Operator Instructions]. Today's first question comes from Laurie Hunsicker of Compass Point..

Just a couple of things just quickly on the credit side. Obviously, your credit is pristine. Just hoping you could give a couple of details to update us on the taxi book, which I know keeps winding down.

Just where is the balance? Where's the specific reserves?.

Sure. So our total taxi book is right around $12 million. And just recall there's an $8.8 million relationship there that we consider more of a commercial loan, not necessarily a taxi. There's taxi as collateral, there's other additional collateral around that.

So when you exclude that, look at the true taxi pieces, it's $3.2 million of taxi exposure, and we've got reserves of $1.3 million against that $3.2 million..

Okay. And then your charge-off this quarter, the $2.1 million, I assume that's all taxi..

No. There was a -- $1.1 million of that was taxi..

Okay. Got it.

And then how much is the taxi nonperformers at this point? How much of your $5.7 million? Is most of that the taxi?.

I'd say most of that is the $3 million -- $3.2 million..

Okay. And then just one more question here. The TRs that are accruing, we saw a bit of a jump here this quarter. You went from 12.2 -- $12.3 million last quarter to $28.5 million.

Was there anything that was a standout there? Or can you tell us a little bit about that directional increase?.

We have basically three credits that drove that number that we -- that are basically in workout at this time. And I'd say largely -- majority of that, we have no issue with as far as the ultimate collectibility of those. And they're on -- like you say, they're on accruing status..

I'm sorry, what type of loans are they?.

What type of loans are they? There's some commercial loans -- there's a commercial loan in there and there's also real estate..

Okay, okay. Great. And then just over here on deposit costs. Can you just talk a little bit about your money markets and how we should be thinking about that going forward and just overall, how you're seeing -- I mean your cost of core deposits stayed lower than some in your markets. Just how we should be thinking about that going forward..

I think we've seen a large degree of the movement in rates around the money market and the non-maturity deposits. I don't see that being -- there being as much pressure in that -- in those categories going forward.

If anything, we are actually starting to see some folks come back off of some rates in those products, particularly when specials are being offered. I think the attention has really turned in -- particularly for our customers, have turned to trying to lock in some rates on the CD side..

Okay. All right. Great. And then, Paul, just last question for you. Can you give us a little color around your current thinking on approaching M&A with your stock at these levels or what you've seen in the market, just how you're thinking about it? If you could just refresh us on your thoughts, it would be great..

Well, as before, Laurie, I mean, we don't feel like we're on -- we're going to have to do anything as we're growing pretty well organically. So things are good. We have had exposure to virtually all of the recent transactions that have occurred in our neighborhood, and for a variety of reasons, we are not the purchaser of those.

I think you can expect that we'll continue to be active in the search and pretty conservative in our execution..

And our next question today comes from Mark Fitzgibbon of Sandler O'Neill + Partners..

I noticed that the cash and short-term investment balance have been on the rise for a while. Over the last few quarters, it's gone up pretty significantly. I think it's over $112 million.

What's the plan for deploying that? How much cash do you think you need or should have in terms of short-term need?.

That balance will fluctuate from time to time, but it's something that -- we'll continue to manage that down. And we'd be able to reduce borrowings along the way..

Okay. Secondly, the margin did a bit better than the guidance that you all had talked about last quarter.

What are the big deltas? And how are you thinking about the margin as we look ahead?.

I would say I don't think we anticipated the demand in CDs in our modeling per se. So that was a pleasant surprise, and we've been able to take advantage of that. We've been able to raise funds in a term structure the way we want in our asset -- for our asset liability purposes and been able to replace our borrowings which will cost more money.

And so that was probably the biggest factor in how the margin turned out..

And then going forward?.

Well, I'd like to be able to predict more of the same..

But the market has been good, and so the question is how much more of that is going to happen or did you just see the big waves already. We'll see how that goes. We have seen a backup in rates, so as far as the anticipation of rates may not be going up, they may be going down. As you know, the flat yield curve is going to be tougher.

And so everybody's in the market. It's a lot more fun, I would say, these days. Well, retail folks may not think it's fun, but it's a lot more fun these days where you're not just talking money market accounts, you're actually able to position yourself in the CD market and compete with deposits..

Okay.

And then with Eastern now fully owned, is it likely that growth ramps up there? And how big might you let that business become over time?.

No, I expect that there will be no change. It's the same personnel who have been there for many years who are continuing their good work. They see good growth every year. I expect that, that will continue. And they may inch up proportionally.

I believe they're about 16% of our loan portfolio today, and if history repeats itself, that will go up a little bit over the next year or two. And I have said in the past that I'm very, very comfortable to go to at least 20% of loans. And then if we got that high, I'd revisit that and decide what the right kind of move is..

[Operator Instructions]. Today's next question comes from Matthew Breese of Piper Jaffray..

Carl, I just want to make sure I understand the funding composition, at least the incremental funding.

Should we anticipate similarly high levels of CD growth and, therefore, some pretty high levels of overall deposit growth, with the offset being lower borrowings from here for at least the near term?.

I'll reiterate what Paul said. I'd love to say that, but I'm not saying that..

Okay.

Well, can you give us an idea of where you have seen price reductions?.

Well, what it is, Matt -- Matt, let me see if I can try to bring a little bit of clarity to it. The bad news is we have significant wholesale borrowing, and the good news is we have a lot of wholesale borrowing.

So when you have a rate environment that we've seen here during the late winter and spring where depositors are interested at these rate levels to lock in for some term, Carl is able to work with our brand systems to put out there what are in the marketplace rather attractive rates with terms that work for these guys in the algo methodology.

And because it has displaced the wholesale borrowing, we have been able to attract kind of more than our fair share. Will that continue? I don't know. I mean it might, but it might not and we may go back then to the normal size deposit growth. It's very hard to predict..

Okay. All right. Understood. And then just thinking about the loan pipeline. Loan growth was right in line with where you think this quarter.

Any major changes to the pipeline that would make you more or less optimistic about forward growth?.

Probably a little bit more optimistic. It feels very strong. I've been to loan meetings here in April, and I'm very pleased with what I'm seeing..

Could you give us a little bit more color on where you're seeing it in terms of loan categories, where the activity is?.

It's across the commercial spectrum. Equipment financing continues to be very active, real estate. Obviously, our legacy business continues to be very strong, and we're beginning to see fruit from our expansion of the C&I world over the past year or so.

You've heard us talk about that, the establishment of the two LPOs outside of Boston that are substantially staffed, and they're beginning to produce. And those are C&I. I thought I'd say that. I meant to say that last part..

Right, right. And then just lastly, in regards to CECL, I'm not sure if you can provide any color on the initial true-up reserve and where that might shake out..

I'd tell you it's painful. I don't need financing. I think the work is....

Be careful..

Yes, the work is....

Yes. We're not in a position there or we don't want to be in a position to actually start talking about numbers yet. We're in very good shape as far as the data side, the modeling side, and we've been running some scenarios and more to come..

Just one follow-up there. You're working on the data side.

Just curious, how far back is your historical look back though when you're capturing those historical lost time -- those historical lost numbers?.

What's very nice is Brookline Bank has been keeping very good track of that information for decades, so we have a lot of good historical data there. As you know, how many years ago now, the acquisition of Bank Rhode Island and First Ipswich came into the mix, and so that data hasn't -- has been more recently accumulated.

So we're in very good shape on that. The challenge -- the biggest challenge for Brookline Bancorp is the lack of actual losses.

And so how you calibrate for the market and for the industry and everything else is something that we will continue to be working through because if we actually used our own historical loss data, no one would believe what the reserves should look like. I'll leave it at that..

Uptown problem..

Well, I was looking at that. I mean you have close to 10 years' worth of historical charge-offs in your current reserve.

How do you support bringing it higher under CECL if you have that much already there?.

I'm not going to opine on that right now. I think that's something that we'll be working with our regulators and our accountants on, so....

And our next question comes from Collyn Gilbert of KBW..

Just back on the loan discussion. So this quarter saw some good growth on the commercial construction side. I just was curious what was driving that, kind of what your outlook is there and what type of pricing you're getting on some of those new originations..

As you might recall, by policy, we have historically limited our involvement in construction lending. But I think the increases that you're seeing is really reflecting just how strong these markets are and how confident our customers are in taking on projects that, for us, is kind of medium sized.

And there's a lot of them in Rhode Island and there's a lot of them in downtown Boston and in the nearby suburbs of Boston. The pricing....

So just to give you a sense. During the quarter, our construction portfolio in total, we had originations and draws of a little over $50 million. And so some of that is draws -- the loan may have been closed in Q4, but the draws didn't happen until Q1. And the weighted average coupon on that was 5.71%..

Okay, okay. That's helpful. And then just back to the discussion around the funding side, Carl, and the opportunity that you're seeing on the CD.

So I presume you're getting terms or durations long enough on here to sort of offset the borrowings because I thought part of your borrowing strategy has always been yes, you get terms that allows you to fund sort of the longer-duration asset portion of the balance sheet.

Is that what you're saying, that you're able to get the same longer-duration terms for better rates?.

Absolutely. That's exactly what's happening. As the borrowings mature, we're able to pay those things off..

Okay. Because just looking -- so the CD rate this quarter, the blended rate, it looks like it's over two. So I guess I'm looking at that and thinking, well, there doesn't seem like there'd be that much of a benefit from the shifting from borrowings to the CDs.

But I guess what your point is you're just -- you're getting longer duration on those CDs than what you would get for overnight borrowings..

Correct, yes..

Okay. Got it. Got it. Okay. And then just a question more broadly, capital. I mean you guys, you're building a ton of capital. I know, obviously, you've increased the dividend here year-over-year. Just thoughts on deployment plans from here, the timing on which you would deploy that capital.

Is there any sense of urgency you have there? I think to Matt's point, upcoming -- with CECL and just your historical credit profile has been so strong. I mean anyway you look at it, it seems like you guys have more than enough capital. So just curious as to your thoughts on how you'd start to deploy that..

There's no urgency to feel that we have to put that capital to work in, for instance, an acquisition or something of that nature. We do have a stock buyback plan in place. While it's very modest, it's really going to be used opportunistically.

But something that you're talking about is something that'd be more programmatic, and we have not put anything in place to address that at the moment..

Okay.

Is that -- I mean I guess the easier question is what is your optimal -- what would be your optimal level of capital to operate at on a TCE basis?.

We kind of look at it at a total risk-based basis, that being the most important for us. And that would be -- we would never want to go below 11.5, 11.5. And I know we're well above that at this point..

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

Thank you, Rocco, and thank you all for joining us today. And we will look forward to talking to you again next quarter..

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