Q4 2022 Brookline Bancorp Inc Earnings Call
Okay.
Good afternoon, and welcome to Brookline Bancorp, Inc. Fourth quarter 2022 earnings Conference call.
Participants will be in listen only after today's presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Brookline Bancorp Jenny Bryant Park. Please go ahead.
Thank you Elizabeth and good afternoon, everyone yesterday, we issued our earnings release and presentation, which is available on the Investor Relations page of our website Brookline Bancorp Dot com and has been filed with the SEC.
Afternoon's call will be hosted by Paul apparel and Carl M. Carlson.
This call may 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'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.
I'm pleased to introduce Brookline, Bancorp's, chairman and CEO Paul apparel.
Good afternoon, everyone and thank you for joining us on today's call.
I am pleased to report, we had a very productive quarter, which capped off a solid year of performance.
As previously announced we received regulatory approval in December on the acquisition of PC SB financial and we were able to close on that deal in January 1st.
Earnings for the quarter were $29 7 million or <unk> 39 per share as our loan portfolio grew $223 million. While also recognizing loan participation income of $2 6 million.
Before I turn it over to Carl to review the company's financials.
I want to make a few comments about the PC SB financial acquisition.
We are very pleased that William Hill agreed to join our board of directors of Brookline Bancorp.
And he actually had his first board meeting here yesterday in Boston.
This morning, I had my first board meeting with the <unk> Bank Board now chaired by the New President and CEO Michael Goldberg.
I also want to recognize the tremendous effort by the teams at both the CSB at Brookline, which are keeping us right on track for the core systems conversion in mid February .
Now I'll turn it over to Carl.
Thank you Paul.
Paul mentioned, the loan portfolio advanced $223 million with growth in all asset classes.
Real estate grew $135 million commercial 42 equipment, finance 41, and consumer $6 million.
In the fourth quarter, we originated $687 million in loans at a weighted average coupon of 647 basis points. This is up 81 basis points from the prior quarter.
This increased the weighted average coupon on the total loan portfolio of 56 basis points during the quarter to 537 basis points at December 31.
Prepayment fees increased $199000 in Q4 to $1 2 million.
The amortization of deferred fees was $1 million, which was 122000 less in Q3.
The combined impact of 321.
Roughly a one basis point benefit on the net interest margin from the prior quarter.
The provision for credit losses was $5 7 million, an increase of $2 9 million from Q3, and an impact of <unk> <unk> per share in the quarter.
Increase was primarily due to strong growth in loans outstanding as well as continued growth in unfunded commitments.
The allowance for loan losses increased $4 million, while net charge offs were 310000 or approximately two basis points on loans on an annualized basis.
The reserve for unfunded credits also increased $2 million from.
From Q3.
Credit quality trends continue to be favorable as nonperforming loan loans declined 19 basis points to total of total loans. However, due to a slight deterioration in economic forecasts the reserve coverage increased slightly to 129%.
During the fourth quarter deposits declined $214 million.
With investment oriented balances flow into higher yielding opportunities.
Deposit betas accelerate into Q4 as total deposit funding increased 43 basis points or 34% of the 125 basis point increase in the fed funds rate.
Our total funding cost increased 65 basis points in the quarter or <unk>, 52% of the increase in the fed funds rate.
As deposits migrate into higher pain products and asset growth was funded with wholesale funding, resulting in a net interest margin remaining consistent with Q3 at three 8%.
Revenues increased $3 9 million.
Including security gains driven by a $2 million increase in the net interest income and an increase of $1 $9 million in noninterest income due.
Due to strong loan participation income, which is reflected in gain on sale of loans.
Operating expenses were up $2 million due largely to true ups for incentive accruals and some non capitalized costs related to software and systems enhancements as well as increases in FDIC assessments.
Merger expenses were 641000 in the quarter a decline of 432000 from Q3.
Pre tax pre provision net revenue was $41 8 million, which was a $2 million increase over Q3.
As Paul mentioned, the board approved a quarterly dividend of $13.05 per share, which represents a 4% yield based on yesterday's closing price the.
The dividend will be paid on February 24 to stockholders of record on February 10th.
This concludes our formal comments, we will now open up for questions.
Absolutely if.
If you would like to ask a question. Please press star followed by one of your telephone Keybanc.
If for any reason you would like to remove a question. Please press star followed by <unk>.
To ask a question press star one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking a question.
We will pause briefly ask questions are registered.
The first question comes from the line of Mark Fitzgibbon with Piper Sandler You May proceed.
Hey, guys happy Thursday.
Thanks Mark.
A couple of quick questions first on <unk>, I guess I'm curious any surprises they are good or bad and.
Are you thinking at all about doing some restructuring post the closing of <unk> doing some balance sheet restructuring.
Okay, let.
Let me start with the qualitative and then ill give it to Carl for the quantitative.
I am seeing certainly no negative surprises I've never seen such an enthusiastic.
Group of acquired people.
So things are proceeding apace, and things are going very well.
Okay.
Yes, certainly on the one of the great benefits of <unk> is the liquidity in the markets. It's in.
Which will provide additional liquidity for the company overall and be able to pay down some borrowings, which is actually better than than actually having having the investments on the balance sheet. So some restructure will be happening in the near term.
Particularly around the investment portfolio. It also provides funding for.
Higher yielding assets such as our equipment Finance unit.
Okay, Great and then I noticed in the balance sheet, you have like $71 4 million of restricted equity securities what exactly are those.
That's primarily investments in.
Federal Reserve Bank members.
There is the stock that you have the whole with the fed at the fed.
Although the fed I should say and then.
Also federal home loan bank.
Membership, Okay. So both in New York and.
That number represents the Boston.
New England.
Federal mall back, but I'm also happy.
New York.
Okay.
<unk>.
Could you maybe share with us how youre thinking about the margin and expenses in the first quarter combined with PTSD help help us triangulate that.
Yes.
Sure.
Directionally.
I believe we'll continue to see.
Deposit betas.
At an accelerated pace.
Particularly as the fed slows just because of the lag and how things get priced so youll see that.
<unk>.
I think deposit flows out of the system will slow I don't think youre going to accelerate from here I think they will slow from here.
But it's still.
Puts pressure on the funding side of things as we rely on wholesale funding to fund additional growth and so we'll continue to see a pretty good pipeline on the growth at least in the near term, we will see what happens as time progresses.
So directionally I see challenges on not challenges, but the.
The margin coming back towards towards.
Down rather than up from here.
<unk> will be very helpful on the margin side.
But it's too early for me to really comment on how much that might be we're still doing a lot of the purchase accounting adjustments on this so I don't want to really.
Really cant give you a good answer on that.
Fair enough and then on the expense side.
Buying maybe $56 million on the expense side.
Go ahead I'm sorry.
No I was going to say is it sort of $56 million.
<unk> a good rough ballpark estimate before all the synergies are extracted.
Yes, I'm not going to comment on the $56 million I would say this quarter, we were a little bit.
We had some true ups to incentives and some other.
I don't like to call them onetime items or nonrecurring items, but I would say non run rate type type items and in our expense base.
Do expect FDIC insurance to accelerate even more so in next quarter due to increases.
In rates at the FDIC.
Bob.
That's industry wide.
But as far as costs once we get get through the first quarter.
We do expect.
We're right on track for conversion.
Mid mid February February .
February 17th that weekend and.
And so we'll have folks through that at that time period. So they will have an impact on the first quarter, but after that right now we're on track for the cost savings that we had projected and a lot of those costs have already come out. So a lot of as you know when we announced the transaction there were aesop expenses surf expenses things like that that were really driving.
There isn't a lot of.
And some executives that were leaving the organization.
There weren't a lot of <unk>.
Staff folks that we're getting impacted.
So not a lot of cost savings associated with that but we do have retention bonuses and things of that nature. As we go through this so once we get through the first quarter will be will be back on track with what we expect.
Initially projected for <unk>.
Savings around that.
Okay and then last question I know you guys are really conservative underwriters, but are you seeing any signs of distress at all in your office book, which is I think a little over $600 million.
We're not seeing any stress in our book.
Don't mean to be cocky, but in.
The Metro Boston area. There is there is occupancy weakness and the old financial district.
Which tends to be bigger older buildings, which we don't have much involvement in.
But it appears that the seaport area. The newer part of Boston is still quite robust stuff is going on here.
Here in the back Bay.
Things are relatively stable.
But no that was good.
Okay. Thank you.
Thank you Mark.
Thank you Mr Fitzgibbon.
The next question comes from the line of Steve Moss with Raymond James.
Pete.
Good afternoon.
<unk>.
Maybe just following up on Steve.
Okay.
Paul.
Maybe just following up on the margin here, just curious maybe a little color around loan pricing.
Just kind of what youre seeing in your market.
As we head into the new year.
So spreads really have not are still are still hanging in there quite nicely.
So of course with the yield curve continuing to move up a little bit.
And the short end, particularly.
Still seeing nice yields in that area.
I think the challenges the inversion of the curve, we've seen that continue to come down in the longer end.
So that kind of bump so spreads are there, but you see in the coupon a little bit.
Get a little bit more challenging, particularly when you are comparing to our funding side, so new loans.
Adding those at a reduced spread to what our net interest margin is at the moment.
In general.
So that's.
Thats something.
That gives you a little bit of color.
On a kind of provided what the waxwork.
The coupons.
The spreads that we booked in the fourth quarter.
So in my comments.
Okay.
Okay got it that's helpful. And then maybe just in terms of just curious on your.
Brookline side of the house, you are seeing any pocket of about 900 million or so in Cds for the quarter with an average cost of 123, just kind of curious.
The remaining average life kind of just how we think about the repricing dynamics there.
So.
We see we see that stuff rolling or repricing at about it's about $75 million a month in Cds, the kind of role on a constant basis.
That reprice.
That's helpful for you.
Okay and kind of just curious maybe where you are your rack rate these days.
What we are booking new production.
Yes.
Yes.
I'd say, it's in the fours at this point.
Okay.
Okay.
And then just in terms of.
Just thinking about loan growth here kind of.
It sounds like Youre still upbeat about business opportunities.
Kind of curious.
How youre thinking about the pace of loan growth going forward here.
Well as of today Steve.
The pipelines are still very strong you saw we had a really big fourth quarter.
We're already.
Seeing very good production so far.
So I am optimistic that.
No.
We will see the kind of historic.
Growth that we've had maybe a little bit better.
Maybe not.
And we're seeing it at all three banks.
Okay.
Great I appreciate that thank you very much.
Okay.
Okay.
Thank you Mr Mas.
The next question comes from the line of Laurie Hunsicker with Compass point you May proceed.
Great Hi, Paul Hey, Karl.
Laurie Yes go.
Going back just going back to expenses.
Want to make sure that I have this right <unk> been running I guess pre everything about $9 million a quarter. So.
Once it's fully phased and call it six and a half or less $6 million a quarter, assuming that 30% cost saves.
No.
About right does that.
Does that Jive with where you guys are.
Yes.
A little bit of an increase because of FDIC insurance and.
And just natural.
Inflation inflation merit increases and things of that nature, but nothing as far as the cost savings using the what you framed out to 96% yes.
Okay, Okay, great and then looking at UCSD their margin was.
Dan Schlanger later.
Than yours was then obviously, you've just said hey, we're probably going to restock. Sir can you help us think about that a little bit more I mean.
Sure.
Obviously very cognizant across the industry of whacking funding pressure and everything else and you guys did a nice job.
Your line, thus far but as we as we look further out we put your keybanc together theres going to be accretion income UCSB, what otherwise drag you down.
I mean can you help us think about it directionally. If we were just to look out even in the June quarter.
What that might look like.
Sure. So as Mark asked are we planning on doing anything on the investment portfolio.
So the investment portfolio gets mark to market when we buy the company and so you own it at market at market yields.
So.
It's actually better for us to sell those securities in the market and pay down borrowings because the yields on the securities isn't even isn't as high as the cost of borrowing.
Particularly when you look at the inversion of the yield curve. So we can pay down short term borrowings at higher yields it costs us more money than what what what.
Holding these holding these securities at that have longer.
Longer duration.
I think youre following that part of it so at the end of the day it makes sense for us to pay down some of the pay down some of those we certainly need securities.
For collateral purposes for liquidity purposes. So we're not you don't liquidate the entire portfolio, but we'll be we'll be reducing that portfolio and then paying down borrowings.
Throughout the organization. So that gives you a sense of how we will be structuring that.
Bob.
As far as the purchase accounting around loans.
That we're still working on so I really can't give you a good insight on that.
And what that needs to yields, but that'll that'll be something we'll factor in what we'll provide that information in an 8-K probably in early March.
A sense of what that looks like.
And so.
Hopefully thats helpful.
Their margin actually was doing better than what we had originally projected when we when we're first doing the analysis back in May.
They do a really nice job of growing loans.
<unk> done actually a fantastic job on deposits in the interim I think it just shows the strength of having this yet another another excellent market.
In the.
Lower Hudson Valley for us to be able to.
Attract.
Posits and growth grow loans in that market I think that's that's something it doesn't happen in 45 days, but its definitely a wonderful long term perspective for this and as we bring.
Additional services, particularly on the commercial side.
But we have a lot of benefits on the consumer side as well, but particularly on the commercial side.
Whether it's cash management.
Enhancements.
In exchange.
We have our own swaps tests that we can help out on the loan side.
There's a lot that we can bring to the table here.
We're very excited about this and they are too.
Yes.
Got it okay.
And just remind me Carl that.
Lee you were closing at the end of the obviously, Turkey closed at the beginning of that question.
The Durban right with the cross happened this year, so does that put us at July 2024, instead of.
July 23, just making sure I got that right.
Youre absolutely right. It was one of the benefits split at Carlin fancy moves it wasn't a fit.
It was.
Not intended that way, but it worked out nicely.
Youre, absolutely right $1 million.
Pat.
It does save us a little less than $1 million.
<unk>.
Just over 12 months of revenue and.
Closing at a little bit later.
The retention bonuses that were going to have to pay for folks and things like that a little bit less.
Some of the contract payoffs were a little bit more because it.
It was a year end type of thing but.
So there's movement in multiple directions.
Some of the merger charges, but.
The largely in line with what we expected.
Got it got it Okay and then.
Maybe just with respect cap pro forma intangibles, then I guess it sounds like you're still marking everything but can you.
Can you give us just a rough estimation of what that can look like.
Yes so.
What's interesting is just just from where the yield curve was at the end of the year.
They are in the process of doing that it was worse than.
The March the interest rate marks in particular that I'll stay with that the interest rate marks on the loan portfolio and the securities portfolio.
First than we originally expected.
I don't have the loan March yet that's still being worked on by folks and as.
As well as the seasonal adjustment is still being worked on.
But the securities portfolio I think it came in around $66 million or something like that.
Underwater at the end of the year.
And if you remember we.
Estimated to be it was $50 million, when we announced the transaction back in.
As materially different.
And so that is a factor.
So new market as of 12 31, so don't be surprised to see security gains in Q1, as we liquidate this because actually the curve.
Verdict further and so these securities are slight gains at this moment.
So it's it's it's one of those things.
Worked through in the accounting stone youll funny on that but.
Yes.
On the loan portfolio I would expect it to be a little bit worse than what we expect our worst I don't know how much.
Then what we originally estimated to be when we first announced the transaction.
CDI may actually be higher so we estimate around 2% CDI and deposits nationally are worth more than ever.
It's moved up.
425 basis points this year so.
Yeah.
It's become worth more.
Actually.
Not necessarily helpful. Because that you have to amortize that as an expense going forward, but it is it is a noncash expense.
Tangible book value goes up as that amortize down.
So that's just another thing for your models.
But I don't have those numbers yet.
It's still being worked on so early after that.
Okay, Great and then just tax rate, how should we be thinking about that going forward.
Yes so.
Did not expect us to close while I knew that we had some things in the pipeline.
On leases that had.
And energy tax credits associated with I thought that was going to be 2023 of that it ended it ended up being a December 2022 event. So we did recognize that benefit in Q4.
I don't know of anything right now in the pipeline long notice Mike.
I will.
My estimate right now is taxes my previous estimates on that.
In the 2000.
He is 24% range.
On taxes.
But.
More will come out of that because <unk> be it.
In New York, So it does have a bit of an impact being in New York.
But they also have a lot of municipal.
Municipal securities that were not planning on selling and so that will have a positive impact on that.
On our tax rate and I think that 24% is my current estimate.
We'll have a better number come end of Q1.
Okay, Great and just one last question just going back to the margin do you have do you have a spot margin for December .
Okay. No. That's okay. Thanks, thanks for all the color I appreciate it thank you and thanks Bob.
Very good.
Thank you Ms <unk>.
The next question comes from the line of Chris O'connell with Keybanc you May proceed.
Great.
Yes.
Yeah.
So I wanted to start off with the interest.
The rate risk slide.
And in your earlier.
Your commentary.
Like ex PSP theres still a bit of.
Core margin compression coming.
And just trying to reconcile all of that looks like the forward implied rates and the NII going up on a flat balance sheet there for that slide.
So maybe if you could just comment on that or kind of connected to.
Sure.
Just to give you a little bit of background on this so we start from a sensitivity standpoint, when we're running our <unk>.
And this is more of a governance and risk management standpoint, and looking at the position of our organization on an ongoing basis and one of the things we say, what's what's the forward curve, suggesting rates, you're going to do and what if our balance sheet doesn't change at all keeping a flat balance sheet and so that gives us a starting point and it's something that we can continue.
To look through time are we getting more sensitive or lessons how are we positioned the balance sheet and this.
Then we can run a lot of different scenarios around what if deposits run off.
$200 million water flows grow $200 million, how is that being funded out what is the impact on that.
So we can run a lot of different scenarios that may become our base case and <unk>.
Sometimes I talked to you guys and tell me tell you what we think our base cases, and what we think our margin is going to be.
And what our projections for the margin is going to be.
That should there is a lot of moving parts and things change and it never happens the way you expect it to that.
I wanted to try at least provide you some guidance with that slide to say this is kind of where we are today.
And our current projections with that and when I say the forward curve as of December 31, that's the forward curve that we use.
And it does include all of our rates. So it includes what do we what are we booking Cds at.
What terms are we expecting Cds to book at things of that nature, what's the rollover in our.
But then we can do models away from that but that gives you our baseline because I know you guys have your own models and how you guys too and I don't know if that's helpful or not for you to understand that but we provide that information and I think on that slide we give you a good sense of what the loan originations were in the quarter and say Hey, This is what's.
The percentage of them that are a better reprice immediately or within three months, what's more of a fixed rate and what's more of a floating.
Floating rate debt re prices, maybe three years or five years.
And then of course with the whole portfolio looks like and the duration of that portfolio. Just so you have a sense of where our risks might be.
Got it.
So just a result of the.
The growth in.
The potential for a little bit of a mix shift on the funding side going forward it sounds like.
Okay great.
For the.
The potential restructuring I know.
Things still being considered.
And that you don't have exact numbers, but do you have like a rough estimate.
Dollar level.
Our securities portfolio that Youre thinking about.
Selling off.
Okay.
Oh.
The total amount that we're going to sell off of that securities portfolio.
Yes.
Yes, I would I would expect the securities portfolio in the $150 million to $200 million range at the end of the day at Tcs feedback.
We like to kind of keep the securities portfolio in the 8% to 12% of total assets.
From a liquidity management standpoint.
And then.
And so sandy balance of that becomes additional liquidity so they.
You had a relatively low loan to deposit ratio.
Say relative.
Northeast back eight 7% as a relatively low number.
And of course ours is significantly higher than that.
Was it the eastern funding.
Business that we have the equipment.
Equipment finance business, we have so the ability for us to fund.
Fund that a little bit less instead of relying on wholesale borrowings is beneficial at the end of the day.
Yes got it.
And.
Yes.
Syed.
The past couple of quarters, you guys have had.
Some nice levels on the loan participations.
It sounds like the overall growth outlook still remains pretty solid from here.
Do you think that.
Are you still seeing kind of a market for that do you think that that's going to continue relative.
Relatively yes.
Solid pace.
Through the first half of 'twenty two.
Yes, it might look more like the first half of 'twenty two.
As we went towards year end.
The amount of activity that we had seem to have accelerated a bit and there was some relatively large transactions in there which of which a rollover a little bit now and even though when it out earlier the pipelines are still strong.
It would not surprise me is as we roll into the year, we get back into a normal.
Or more normal for us what sort of pace where growth might be 67%.
The.
Pace, if you will by the end of the year, but.
We'll try to beat that.
Yes, hi.
Im.
And then I know you guys touched on the office portfolio.
And in general things kind of continue to migrate positive.
From this quarter.
But I mean is there any other pockets or areas of concern that youre seeing as you look through the portfolio.
I know you came out of the PTSD.
In our board meetings.
Anything that they're seeing in their markets of concern.
No all sectors are performing very well within the portfolio and I would point out that the office portfolio.
The legacy Brookline Bancorp is not.
That big it's pretty big but its not an enormous at $650 million or so.
It's well spread out it's not like it's a bunch of stuff in the financial district in Boston.
A lot of that stuff is in the leafy suburbs.
Boston.
And across Rhode Island. So it is very very well diversified and has performed exceptionally well.
Okay.
Alright got it.
I appreciate the time, thanks for taking my questions.
Thanks, Chris.
Thank you Mr Oconnell.
That concludes the question and answer session I will now pass the line back to Paul <unk> for any additional remarks.
Thank you Alexis and thank you all for joining us today, and we look forward to talking with you again next quarter.
Good day.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.
I think thats one.