Q1 2020 Earnings Call
after today's
Presentation there will be an opportunity to ask questions. Please. Also note that this event is being recorded at this time. I'd like to turn the conference call over to our Aston Martin of Brookline Bancorp, ma'am, please go ahead. Thank you, Jamie and good afternoon everyone yesterday. We issued our earnings release and presentation which is available on the investor relations page of our website where claim bankruptcy and has been filed with the SEC. This afternoon's call will be hosted by Brookline Bancorp executive team call April and Carl Carlson month before we begin please note this presentation is being done from several different locations. So if there is a delay or technical problem, we appreciate your patience and understanding
This call may also contain forward-looking statements with respect to the financial condition results of operations and business of Brookline Bancorp. Please refer to page two of our earnings presentation for our forward-looking statement disclaimer. Also, please refer to our other filings with the Securities and Exchange Commission, which contain risk factors that could cause actual results to differ materially from these forward-looking statements. Any references made during this presentation to non-gaap measures are only made to assist you in understanding Brookline Bancorp see results performance terms 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 own news release.
If you can join us on th three of the earnings presentation, I'm pleased to introduce Brookline Bancorp president and CEO. Thanks Marissa and good afternoon, The quote may you live in interesting times which some consider a blessing in some curse often arises in times of Crisis those of us who have lived during some very interesting times November beginning a middle and an end. We certainly empathize with those who are suffering physically emotionally or financially at this time, but we also recognize and appreciate the outstanding sacrifices commitment and efforts of so many who rise to each challenge every day.
At our last earnings call on January 30th, while the coronavirus pandemic was on all of our radar screens. We were not considering a near complete shutdown of the worldwide economy unemployment claim searching into the Millions on a weekly basis interest rates going sharply to near-zero again and the need for trillions of dollars and fiscal and monetary economic assistance off on February 1st, Massachusetts confirmed its first case of coronavirus a University of Massachusetts student who had just returned from Mulan.
Massachusetts was the second state in the nation to report a case.
On March one would Island confirmed its first two cases which were related to a returning school trip to Italy in February on March 9th Road Island Governor raimondo declared a state of emergency and that was followed by Massachusetts. Governor Charlie Baker on March 10th, as of today both Massachusetts and Rhode Island are operating in the stage at home environment with only designated essential employees permitted to report to work all non-essential retail businesses remain closed and those that are allowed to open are doing show with the systems in place.
I will touch.
Just a few areas and initiatives related to our preparation and response to this pandemic and you can see that on page four in the presentation. The most important thing is to health and safety of our employees and their families. We were able to shift we work from home policy very early on due to our strong the VPN and zoom capabilities, which we were fortunate to have em as well in advance of the current environment. We were made as flexible as possible to accommodate those who have children at home or caring for a family member who may be ill at present approximately 85% of the company's non-retail employees are working remotely and effectively while traffic in the streets is quite low. You wouldn't know it from looking at the drive up that the branches we initiated a bank by appointment approach with minimal Lobby access to further promote social distancing or both the bankers and the customers.
We also staggered Staffing schedules to minimize employee exposure while ensuring business continuity all types of hand sanitizers and disinfectants whites were distributed throughout the organization and enhance cleaning went into Place full time.
All customer-facing employees and those who are required to travel to the company offices have been provided with masked to minimize health risks to both employees and customers we have had no further opposed and have actually been hiring for key positions particularly in our call center and operations.
Our Bankers have never been busier in assisting new and existing businesses and Retail customers with online banking and cash Management Services, but also working to address any near-term cash flow concerns.
Well much has changed over the last couple of months with the institution much has remained the same for our customers. We continue to reach out to ensure. They know we have here for them. The country's culture is an admission of values statement a company's culture is the sum of its actions and attitudes on a day-in and day-out basis of those who make up the organization in good times and bad. I am very proud of our companies culture, which is one of empathy for customers and colleagues and everything we do and what we also call our core four of accountability teamwork adaptability of leadership. They have truly been on display. I will now turn you over to Carl who will review the company's first-quarter results.
Thank you for all our company entered this year in this crisis in a position of strength record 2019 earnings strong growth and Commercial and consumer Banking and a fortress balance define. Excellent asset quality strong reserves in a robust Capital base.
Many ways we were headed for a promising start to 2020 solid loan origination supported by good deposit growth and Franco. We also successfully completed the merger and consolidation of first gets which bank to Brookline Bank in mid February.
soon after
The weekend of our data conversion our preparation and response to the global pandemic became our highest priority.
I'm slight 6 we provided somewhere income statements for the quarter prior quarter and prior year. We recognized a net loss of 17.3 million for the quarter which was driven by a provision for credit losses of 54.1 million dollars.
Significant increase in the provision was due to the potential deep and Rapid decline in economic activity as our communities practice social distancing schools and many businesses closed in nearly all events and activities were cancelled also significance is our decision to continue forward and implement the new accounting standard commonly known as Cecil which shifted from estimating projects losses to estimating losses over the life of the loan using models based on future economic forecasts are pre-tax pre-provision. Net revenue decreased two point six million from a rep on performance in Q4. There's net interest income declined and operating expenses increased driven by higher professional fees FDIC insurance and seasonality associated with compensation and benefits package.
As Illustrated on page seven that interesting come decline 2.2 million as our net interest margin compressed 12 basis points.
Yield on the line portfolio declined 28 basis points as the pricing of over one point eight billion and adjustable rate loans was significantly impacted by the sharp Decline and Prime and Libor rates.
Linked order declines and prepayment fees of 1.3 million and $153,000 and purchase accounting as well as an increase of $337,000 and how much they should have deferred fees contribute ten basis points in the decline in loan yields for the quarter overall. Our cost of interfering liabilities declined 13 basis points, which consisted of an eleven basis point decline in the cost of interest-bearing deposit a 20 basis-point decline in the cost of borrowings.
Could you could follow me to supply it you can reference for comparative that summary balance sheets in the first quarter. We had solid loan growth of $85 million or 5% on an annualized basis with the screw sixty million or 4% annualized.
Also notable is 252 million dollar Grill in the allowance for loan losses and related $16 growth in the reserves for unfunded loans. We also added significantly to our cashiers Securities to prudently position ourselves to meet the potential financial needs of our clients.
Lost in the corner as well as the modest stock repurchase activities reduced our tangible book value per share by 31%
like nine reflects the growth and composition of our significant loan and deposit categories. And the first quarter we continue that strong net-long broke and Commercial Real Estate. Well net deposit growth was driven by 9 a.m. During demand deposit and savings.
From Real Estate which includes both investor and owner-occupied Commercial Real Estate makes up 55% of our loan portfolio PDA represents 20% of our deposit base wage. You follow me to slide ten when you build straight at the near-term impact of the implementation of Cecil and estimating the allowance for credit losses.
You're in or total reserves for credit losses was 62.9 Million representing a reserve coverage of 78 basis points of total funded and unfunded loan commitments.
For two components the allowance for loan losses, which was 61.1 million or 91 basis points of Reserve coverage on loans outstanding and a reserve a 1.9 million for unfunded off.
Accounting rules were based on incurred or probable losses in the portfolio formulated on historical performance.
The new accounting standard which was implemented on January 1st requires estimates for losses to be forward-looking over the life of the loan based on economic forecast. We chose to use Moody's and pyramid Studios as well. As Moody's economic forecasts to develop our estimates. We also chose to prudently calibrate the loan loss models to the performance of a peer group of Northeast Banks wage are historical lost data was considered too and frequent and too low at year-end. We use the economic forecast as of December 14th, 2019 and determine the total Reserve or credit losses also known as the allowance for credit losses or ACL to be 78.5 million or 97 basis points of total funded and unfunded loans. This was an age of fifteen point six million or 25% from the prior accounting methodology.
What's 31st we decided to wait for the most updated movies economic forecast as of April 4th, instead of using the mid-march version, which was less than the calculated ACL was 130.4 Million an increase of 51.9 million from our day one estimate this increased our coverage on total commitment from 9 to 6 basis points for 161 basis points.
Flight eleven we provide details on our Reserve coverage on funded and total commitments by key segments and selected subset of our portfolio page.
The construction component of our commercial real estate portfolio experience the highest change in coverage rising from 148 to 513 basis points at March 31st, Thursday morning an additional ounce of fourteen point seven million in the quarter. We've also provided some of the key economic variables from the forecast driving our loss estimation models illustrate the signal expected deterioration from December to April in the economic forecasts unemployment for the full year was expected to be 3.6% in the December 2019 forecast as compared to 6.3% in the April forecast, which had unemployment peaking at eight point seven in the second quarter before coming down to 6.5 at the end of the year.
the commercial real estate
Price index also showed a significant 14.3% deterioration between the 2020 forecasts.
On flight 12 we provided industry breakdowns for a major loan segments note. We have included owner-occupied commercial real estate and Commercial loans and also reflects $64 million of commercial real estate loans within our equipment Finance business.
That's me commercial commercial real estate of 3.2 billion comprises 47% of our outstanding loans Apartments represent our largest segment. You can provide comprise 29% of our Investment Portfolio followed by office at 20% and Retail at seventeen.
A commercial portfolio is one point two billion or 18% of our portfolio and within commercial food and lodging represents 15% followed by manufacturing at 12 a.m. In the finance at one point 1 billion represents 16% of our portfolio. It's led by a focus on laundry tow truck and fitness equipment Consumer loans at one point five million is a comprised of 1.1 to 4 family residential and home equity loans.
No, we have no direct exposure to Airlines Auto lending consumer credit cards student loans for energy.
We've also included some information in the appendix for the presentation of the presentation providing various metrics and details about the portfolio including loan the values and vintages which illustrate destroy culture of credit underwriting underlying our reputation for asset quality.
Maintain the same portfolio segment on slide thirteen to provide insight into our loan payment deferment activity as well as illustrate our commitment to prudently respond to customer needs during this crisis provided 90-day relief on loan payments. I'm either principal or principal and interest these short-term modifications to have no impact on our internal credit ratings related to these credit approval of Interest or accounting for these assets at this time.
Total loans with outstanding balances of 1 billion dollars for granted a loan payment modification or approximately 15% of the portfolio as of April 17th.
the largest impacted categories were in our equipment financing
We also provided defer payment information by some selected segments we attract as I mentioned earlier Apartments our largest component opponent of our investment commercial real estate portfolio took an area. We paid close attention to we have seen little needs or requests for deferment another category. We provide here is Healthcare also with few requests for permits was that as an example dentist offices are basically closed and only doing emergency procedures at this time. We certainly expect that activity to accelerate as offices will need to catch up on clubs and other procedures.
As a stay-at-home restrictions are lifted. We also expect coffee and donuts.
The bounce back folks to be focused on their health laundries to be busier and unfortunately traffic accidents and breakdowns to resume. I want to highlight these are well-run businesses and we're all in good standing before the economy basically shut down.
We have also been very active facilitating access to the SBA payroll Protection Program for our clients before the first round of funding closed on April 16th, which we show on slide for the company funded its first PPP loan on Friday April 3rd, and as of Friday the 24th, the company has originated 2183 loans with balances of $518 portions of these loans will be eligible for forgiveness over the next several weeks. And we will also be tracking reporting on the activity next quarter. We are very proud of the fact is teamwork adaptability commitment and pure do whatever it takes attitude who saw at every level in every Department across the organization.
And the program reopened on Monday as you would expect we were back at it. However, the volume will be significantly less since we were very successful and helping our customers during the first round.
As shown on slide fifteen the company continues to be very well-capitalized exceeding all regulatory requirements as well as our own internal policies and operating targets and March 31st. We had cap buffer of 2.6% of 183 million dollars over regulatory will capitalize standards.
During the first quarter of the board expanded the previously announced stock buyback plan from 10 million to 20 million the company announced on March 24th. It was suspending any further purchases and at that time I completed the purchase of 848000 shares for ten point four million.
Like sixteen provides a history of our regular dividend payout which continues to this court as the board approved a quarterly dividend of 11/2 cents per share, which was paid on May 29th. Stockholders of fact, I'm a 15 dividend remains constant for the remainder of the Year full year per share dividends would be $0.46 a 4.5% increase over 2019 and currently approximately a 4.4% yield. This concludes my formal comments and I'll turn it back to Paul. Thanks for joining us for the question answer discussion. Today is Robert rowse our chief credit officer and Michael McCarty our chief risk officer and general counsel. Brookline is very fortunate to have the expertise and experience of Old Gentleman particularly during this time, and I'm happy to say they represent the commitment and Leadership. I see across the organization.
I know we will take questions.
Ladies and gentlemen at this time will begin the question-and-answer session. Ask a question. You may press star and then one using a touch-tone telephone to withdraw your questions. You may press star in to see if you are using speakerphone. We do ask you please remove or please pick up your handset before pressing the number of students or the best sound quality. Once again, that is star and then one to ask a question. My name is Sara Lee to assemble the roster.
And our first question today comes from Mark Fitzgibbon from Piper Sandler, please go ahead with your question. Hey guys, good afternoon. I wondered if you could first name guys get great detail on the slide. So thank you. It makes our our life easier. I wondered if you could share with us, maybe the areas or segments of the portfolio where you you're most concerned where you feel as though the birth hours are are most distressed and or you know areas where you think the potential loss content would be greatest.
Hi there, you know it's it's hard to pin quite pinpoint extremely precisely. But when you think of the things that will often turn to health relatively quickly and things that won't in our equipment Finance segment. I would be a bit concerned about a portion of our exercise Studios wage, you know, Planet Fitness and other low-priced components such as why did YMCA S&G JCC's about 50% of that and wow, they tend to not have Fallout in difficult times. It's the middle price and the higher price ones that seem to have that followed. So I would say a segment of the fitness portfolio took the concern us a little bit hour.
Our hotel exposure while modest in size at about one hundred and twenty six million dollars is about 58% vacation oriented Recreation oriented. It is all in New England places where you can get to in a car or a fairy and Thursday we have those customers have observed some cancellations of summer plans, but we are hopeful that they will benefit from people canceling airfare home fly to type vacations where people want to be closer to home and be able to get home quickly. The other part of that portfolio would be business hotels, but they are all in this area there aren't that many of them? So those would be two that stand out. Okay, great. And then and I I know this is very difficult birth.
There's a lot of moving parts and such. But you know, how are you thinking about the provision say in the second quarter and and any guidance you could provide would be super helpful. Well, I'm not a fortune-teller and I'm not a health care expert but we are paying close attention to how long our customers are doing. We are talking with them all the time. We're especially talking with them in the key segments that were highlighted on page thirteen. We've also instituted a program of trying to project forward 90 and 180 days out as to what the customers are thinking. So I really cannot say I I do believe that this level of provisioning that we've hit because we took a very late forecast the latest one we could find I think this this gain and Alta dead
achieved
Will be helpful in common core's I would add a little something to that Mark which is that you know, Cecil is new for everybody. It's new for us and we bought a truck Moody's models as they came through the door and we did not try to match it up with our actual experience in our portfolio and say, you know, we've got these exposures a year which movies is treating harshly but it appears ours are in very good shape. We simply took it as they came with that harsh outcome.
Okay, thank you. And then Paul based on what you know today do you feel like you have enough Capital to you know sort of ride out the storm? Yes, boss.
And then lastly call just to things on on modeling. I'd be curious as to your thoughts about the outlook for the margin and the effective tax rate is. Thank you sure regarding the margin. We've got a lot of internal models that we've been running. There's just so much uncertainty much variability here. I'm not going without with any external guidance on the margin at this time, as you can see we've grown the balance sheet quite a bit with cash Securities. We're also putting on quite a bit in loans and all setting that with a lot of deposits as well. So we will you you can kind of try to work up your own numbers in that but there's a lot of variability job and I'm not really comfortable trying to give you an estimate on what the margins going to be.
That's okay. Tree country is going to be right around 25% We did have a discrete item. That was a benefit this quarter of about $750,000 associated with them, you know, the cares act so we were able to recognize that which had an impact contact with this court.
Thank you.
Our next question comes from Lori hunsaker from compass point does go ahead with your question.
Yeah, hi. Good afternoon. One of the echo echo, This is Jack is amazing. It really appreciate your transparency. It's really helpful. Just one quick question here. I'm kind of looking back and forth between 5:12 and 5:13. I just want to make sure I got this right. So Dunkin Donuts exposure of $165 million. Is that primarily seeing eye.
Yes.
Yes, it is. Okay. And so that's what sound I guess embedded in that hundred and eighty million on page 12 is that correct? Correct food and lodging is dominated by Duncan and I will say to the extent that there's some real estate glorious, you know, sometimes dunking operators the better ones like to buy a little strips for themselves, but the part of that that they operate included in there but restaurant exposure outside of Duncan's is rather small.
Oh Lord. Thank you for the comments on the on the slide deck. But but you did catch something on fly 13, that's that's 78% exposure. It's really more like ninety percent. It represents 90% of the restaurant for food food. Okay, perfect. Thank you.
Once again, if you would like to ask a question, please press star and then one to withdraw yourself from the question. Can you may press star into our next question comes from calling Gilbert from KBW place with your question? Thanks. Good afternoon. Everyone just starting on on the reserve. You know, you guys took a really a really big Reserve belt and it obviously sounds like you took a very conservative stance, which is great, but just wanting to dig into that a little bit more on I guess the one part that I found interesting was just that the situation within the cre, you know, assuming um, you know, the the reserve build on that book what kind of was the thought there and I understand and maybe it was I was just using moods Moody's forecasts. But um, I don't know I just I was surprised by the reserve the reserve Bill specifically was in the Sierra book. If you could just give a little bit more color to the thoughts. They're actually
all right may have been more surprised than you but it's really as simple as you describe the table you want to get a little color there yeah you know it it did surprise us as well and if you notice it's it's a little punitive on commercial on construction and that surprised us I think that they're assuming that when you finish something and offer it needs to be used that no one will come and you'll have to take some form of loss there's nothing particularly odd or difficult in that portfolio took a fact there's about 70 million of it is built for soup it's going to be used by people when it's completed so that part that part I don't think makes a lot of sense as to the other parts of our real estate portfolio when you go through them they appear to be behaving fairly well in rent collection activity log
Which is the part that might be student Department that might be Workforce related the part that might be a and b, you know, the range of collections are close to a hundred percent down to as low as 75% of that Workforce movies. So we're pleased with the way things are holding up the retail segment or the slightly mixed-use segment mixed-use is usually retail and other things beginning to see some requests there. But, you know, we don't think there's anything particularly on done good about our real estate assets calling.
Okay. Okay. That's our Legacy business. You know, we do have a lot of expertise in real estate around here. Yeah. Okay. Okay good. And then any chance you guys have them what the number would have been the reserve differential between adopting the April movies Baseline versus had you adopted the March?
cuz it's
You know most of your peers adopted March. So as you said, you know, you may be able one step ahead of everybody. I'm just curious if if you can quantify what that difference would be. It was virtually it was off of the same as to the January the one one number. That's the middle bar in Carle slide. We were surprised that it hadn't moved much at all,
Okay, okay, and then I guess just to round out the comments. I mean it's interesting so your socks down a fair bit today, but it seems as if if I take a step back that you know, a lot of these disclosures are just a really are erring on the side of you guys being Ultra Ultra conservative even with your as you kind of said, you know where you have industry exposure. That's not necessarily where you're you know, you're seeing trouble.
I think that's I think that's right, And when you when you think about a great fourth quarter a pretty robust first quarter put provisioning aside for a second a little bit of a margin squeeze which is identifiable and manageable as we go forward. Everything is in place to repeat our past performance except for the pandemic and the new kind of provisioning policies that seasonal. Well, that's what's different. Okay. One last question before I get to a name question is with the I'm just looking sorry. I'm just looking through this now, but but I guess perhaps the one area of concern is to how higher education is going to look if we can move into the fall. I mean, you know, you guys are in the hotbed obviously of a lot of academic institutions. Do you have a sense of what what exposure you have to Bath?
Segment. I know you mentioned it on the you know, you're still seeing rent being paid on that part, but just other other exposures you might have to kind of academe a student housing and all of that. Yes. I'm going to I'm going to give you a couple of numbers here, but I'm going to tell you that this is a Dragnet we have looked at the zip codes for Thursday and then around the colleges in Providence Boston Cambridge and Tufts over in Somerville. So it is a pure Dragnet of exposure, and you know that Dragnet exposure would pick up about 220 million dollars worth of apartments in those zips.
And about a hundred million of of so-called mixed-use Cree which would have a retail component to it. So you might call that three hundred and $120 roughly, but I will tell you that that is a pure Dragnet and you know mixed in with students who go to Harvard Square and there are lots of people who live over in Cambridge that have nothing to do with education. So it is not correct to think of that as pure one-to-one exposure, but that's the that is sort of the Nexus of the things that we will watch closely as the year unfolds.
Okay, great. And then just lastly Pearl. I understand you're not really Desiring to give any kind of them guidance, but on the funding side, which seems like you know, one segment that you do have a little more control over. How do you see that training? I mean you guys are still sitting with CDs, I guess at like 2 to 22. It just seems like there'd be a lot of room still to move on the on the deposit side.
Well, that's true. And we'll we'll see that benefit going forward. Certainly. We have a lot of things that are maturing that and will be reprising down.
Okay, do you can you tell us where you're either your CD rates were at the at the end of March or where you're putting on new CDs today 1-year CDs.
When you see days, I think we may be in about 70 basis points in that range.
It may be even lower at this point. We would go up with a little bit of specials here and there but we're not we're seeing the appetite for CDs disappear folks are more or less getting more and more liquid as we look at the posits just to give you a little sense on that. We look at our deposit accounts individual deposit accounts and break it up into decimals and washing basically every category grow significantly, you know since since February and that's really I think you're you're getting a lot of the month the government stimulus money that's coming in as well as as people just being very conservative and saving more in in in there in holding more liquidity back seat people move out of CDs and and basically put it in the money market or savings.
Okay. Okay. That's great. I'll leave it there. Thanks everybody.
And once again, if you would like to ask a question, please press star and one.
And ladies and gentlemen at this time and showing no additional questions. I'd like to turn the conference call back over to Paul pero for any closing remarks streaming and thank you all for joining us today, and we look forward to talking with you next quarter.
Ladies and gentlemen that does conclude today's presentation we do. Thank you for joining. You may now disconnect your lines.