Brookline Bancorp Inc. Q1 2023 Earnings Call
Good afternoon, and welcome to Brookline Bancorp, Inc. First quarter 2023 earnings conference call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note. This event is being worked.
Great.
I would now like to turn the conference at Ritchie Brookline Bancorp's Attorney at Laura Weil. Please go ahead.
Thank you for them any good afternoon, everyone yesterday, we issued our earnings release and presentation, which is available on the Investor Relations page of our website Brookline Bancorp Dotcom and has been filed with the SEC. This afternoon's call will be hosted by Paul Perrault 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.
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.
If you can join us on page three of the earnings presentation I'm pleased to introduce Brookline, Bancorp's, Chairman and CEO Paul Perrault.
Thank you Laura and good afternoon, everyone. Thank you for joining us for todays earnings call.
Our first quarter results include transaction costs associated with the acquisition of <unk> financial which closed on January one and I am pleased to report our core system conversion was completed very smoothly in mid February .
Special Thanks for their commitment and hard work of both decline in Pcs B teams as well as the folks at.
Technology provider, Jack Henry who help make it happen.
Including one time acquisition related items, we reported net income for the quarter of $7 $6 million or <unk> <unk> per share.
If we exclude those items, we had operating earnings of $23 $3 million net.
Net operating earnings per share of <unk> 27.
During the quarter, our assets grew by $2 $3 billion to $11 5 billion.
Loans grew to $9 2 billion.
Deposits grew to $8 5 billion in equity grew by one two grew to $1 2 billion.
The quarter was also one of disruption as we all know, particularly here in Boston.
From the start our excellent staff was ready to answer questions address concerns and offer solutions to existing as well as potential clients.
We also increased our on balance sheet liquidity, adding to our cash and securities position by $513 million.
While affirming our access to multiple sources of liquidity, if the need should arise.
Our nonperforming loans continue to be at historic lows with net charge offs of four.
<unk> hundred $51000 in the quarter or just two basis points annualized.
Our reserve for loan losses is solid at 131 basis points and we continue to be very well capitalized I will now turn you over to Carl who will review the company's first quarter. Thank.
Thank you Paul.
This quarter, we have quite a few moving parts. Some are unique to Brooklyn somewhere continuation of trends and some are related to the failure of STB and signature bank here at the end of the quarter.
Oh unpack these as much as possible as well as the impact on Brooklyn.
On slide four we have provided summary, comparative income statements.
Net income this quarter was $7 6 million.
Which was $22 1 million lower than last quarter. This was largely driven by factors unique to Brooklyn, particularly the acquisition of <unk> financial on January one, which had one time items totaling $21 4 million on a pre tax basis, which I will talk more about on the next slide.
The decline in net income is also due to lower net interest margin and higher provision for credit losses.
While revenues increased 6 million from Q4, the cost of funding reduced our net interest margin limiting the overall contribution of the growth in assets.
Also higher targeted levels of on balance sheet liquidity were maintained which also had the effect of compressing the net interest margin.
Expenses increased $11 7 million driven by the addition of <unk> as well as the $1 8 million due to core deposits.
Intangible amortization, which is a noncash charge.
The $25 5 million provision for credit losses included in day one.
<unk>.
Included a day, one seasonal provision for acquired loans of $16 7 million as well as provisions to cover organic growth and cover net charge offs of just 451000 in the quarter.
As illustrated on page five excluding the impact of one time items associated with the <unk> acquisition operating income was $23 $3 million.
The noncore items being excluded on the $1 million in security gains $6 4 million in merger charges and $16 7 million in day, one see some provision for acquired loans.
On acquisition Brookline classify the entire held to maturity portfolio of PC SP as available for sale and sold approximately 75% of the portfolio, resulting in a $1 $5 million booked gain on sale, but realized losses for tax purposes.
Brookline currently estimate the normalized effective tax rate of 22, 7%, which is used for estimating operating earnings.
Our operating pre tax pre provision net revenue of $38 9 million or <unk> 45 per share compares to $32 8 million or <unk> 42 per share in the prior year.
Yeah.
Please follow me to slide six and our net interest margin slide.
Yes.
While net interest margin income increased 6 million, our net interest margin declined 45 basis points to 336%.
Yeah.
Interest, earning assets grew a little more than $2 billion in the quarter as yields improved 15 basis points.
Interest bearing liabilities grew a little less than $2 billion and the cost of funds increased 83 basis points.
During the quarter the federal funds rate increased another 50 basis points.
As rates on two years and longer declined, causing a steeper inversion of the yield curve.
In the quarter, our cost of interest bearing deposits increased 75 basis points compared to the 50 basis point change in the federal funds rate result, resulting in a quarterly beta of 150%.
Through the cycle beta on interest bearing deposits has been 34%.
The increase in funding cost is a continuation of the trend we've been experiencing but we anticipate it will slow significantly as we approach a 40% through the cycle data.
Okay.
Slide seven reflects the linked quarter and year over year balance sheet, reflecting growth, primarily driven by the acquisition of <unk> Bank, which Paul highlighted earlier.
We also provided the purchase price allocation on day, one acquired assets and assumed liabilities in our press release and in the appendix of this presentation.
I just want to highlight that due to the recent bank failures in March we added significant on balance sheet liquidity, which increased short term investments and borrowings at the end of the quarter.
Yeah.
You can follow me to slide eight the activity and composition of our loan and deposit categories just provided.
Our loan portfolio increased overall increased $1 6 billion from the prior quarter driven by day, one growth of $1 3 billion from Dcs and strong net organic growth of $265 million.
In the first quarter, we originated $775 million in loans at a weighted average coupon of six 168 basis points.
The weighted average coupon on the core loan portfolio rose 24 basis points during the quarter.
To 548 basis points at March 31.
Total deposits grew $1 9 billion.
Excluding broker deposits deposits increased $1 3 billion.
Excluding the day, one impact of Tcs D deposits declined 289 million.
The decline in deposits is also a continued trends.
We have been experiencing as the positives move money to money market funds from fixed income opportunities frequently with the assistance of our investment professionals.
With the failure failure of STB and signature banks, there was heightened awareness around FDIC insurance. This has not had a meaningful net impact on our banks from a balanced perspective, we've been very active communicating with and providing services to ensure current and new customers are comfortable with the insurance coverage of their deposits.
As shown on slide nine.
The company continues to be well capitalized exceeding all regulatory requirements as well as our own internal policies and operating targets.
At the end of March we had a capital buffer of $240 million over regulatory well capitalized standards.
Company does it makes all securities as available for sale and as of March 31, the negative mark to market on the investment portfolio was.
$52 $7 million.
While this market is included in reported equity it does not impact regulatory capital calculations. If it was it would represent 59 basis points in regulatory capital and the company would still have nearly $200 million in excess capital above well capitalized requirements.
Slide 10 provides a history of the growth in our regular common stock dividend.
Yesterday, the board approved maintaining our quarterly dividend at $13 five per share to be paid on May 26.
The shareholders of record on May 12.
On an annualized basis, our dividend payout estimates of five 5% yield.
This concludes my formal comments and I'll turn it back to Paul.
Thanks Charles.
Now we will open it up for questions.
Certainly if you would like to ask a question. Please press star followed by one on your telephone keypad.
If for any reason he would like to remove that question. Please press star followed by tool again 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.
For asking your question.
Our first question will come from the line of Mark Fitzgibbon with Piper Sandler Mark Your line is now open.
Yes.
Mark.
Carl I'm, sorry about that I was muted accidentally I apologize.
I was wondering if you can understand.
Okay.
Wondered if you could remind us of the timing of.
Durbin and sort of the impact from that.
Oh sure since the acquisition happened on January one.
The Durbin impact.
It won't happen until next July July one of next year 2024.
And how much.
So how much.
That's a good question.
It's about I would say, it's about $1 million a year at.
At this point.
Okay, Great and then secondly, what is the effective tax rate for the combined company going to look like.
Right now its estimated at 22, 7%.
Yes.
Okay.
And Karl can you help us I heard your comments.
On the margin.
Assuming the fed falls the forward curve.
Can you give us a sense for where you think that the bottom of the margin might be and roughly when that happens.
I'm not going to I'm not going to go down that rabbit.
We have a lot of models I can't tell you how many miles we have doing this different different scenarios whether.
Deposit runoff in repricing as well as whatever the fed is going to do.
Right now the pressures going to be negative on a go forward basis.
We expect the through the cycle.
We will be around 40% as far as betas are concerned so I still see accelerated betas.
Sure.
A quarter or so.
But we're also seeing good good repricing on the loan side et cetera, So I see on the asset side some benefit.
So I'm not going to try to guess what quarter its going to be but right now it's.
I don't see a break in three that's for sure.
See some pressure going into Q into Q2, though so a lot of stuff going on thats going to affect that but we just don't know where it is we've got a lot of.
Excess liquidity on the balance sheet, which will open up.
How conditions are and at some point, if we can get rid of that that's very beneficial. We also by the nature of our loan book, We've got two big assets that are re price well, which is the big derivatives book that we have.
That's a floating rate obviously, the cash flow off the equipment finance units.
It comes in very hard and heavy and that gets.
Better right so.
I'm not I'm not trying to get myself in trouble here with my CFO , but I think we'll muddle through here for a little while but I see a little sunshine on the horizon margin wise.
Okay and then.
So were really helpful on slide 18, and 19, where you give some detail on.
Maturities in the office book it looks like almost 20% of your office book is maturing in the next two years.
In a decent chunk of that is in Boston.
Are you are you should we expect some issues as as these loans roll pulp.
Oh.
When we say that.
In Boston, we don't have very much in the <unk>.
Central business district, but.
I would not be surprised if.
Their pops up a problem or two but I would be very shocked if it was broad based.
Because a lot of our stuff in Metro Boston is really in the suburbs and up to 128, if you know the geography.
Those markets.
Behaved pretty well.
And we don't have the really big buildings.
That are suffering in the sublet market, but.
Real estate is going to be tough to get Mark there has been virtually no trades.
And so there really isn't much evidence of it.
How much valuation is that affected.
But we do have a lot of stress testing, we do a lot of.
Updating of.
Tenant list and things like that so we're doing the legwork to make sure that we understand and so far it's feeling pretty good but.
Yeah.
Depending on how things go and how sponsors are feeling.
It would not surprise me if there is a bump in the road here or there but.
But I don't know when.
Okay.
And then my last question I wondered if you could give us an update on Clarendon private how that's going but I guess, it's been a year year and a half or so and was curious any data points that you could share with us there. Thank you.
Sure I'd say.
Very busy.
The challenge here right now is a lot of it is fixed income.
And as you probably know.
Make a lot of revenue all fixed income, but I think the relationships with the customers are building.
The word is getting out about our capabilities and so we're very pleased with the activities and.
That's going on there.
I think it was slightly over $300 million and assets under management at this time and it's yes, there is a lot coming.
On the way and so for the first year market went very very well because the bankers, we're thrilled to have that around and the customers love staying with us and so that was pretty traditional business now they've been busy helping handle the uninsured deposits have a very large depositors.
And that has been very useful as cross border as well as new customers.
Yes.
People from across town didn't want to stay where they work.
Thank you.
Okay.
Yeah.
Our next question comes from the line of Steve Moss with Raymond James.
Your line is now open.
Good afternoon guys.
Maybe just starting and going back to the margin here.
I appreciate the color just curious maybe starting with the broker deposits that you added this quarter kind of what was the term of those deposits and how quickly could that in federal home loan advances go away.
So.
To step back we usually use these.
These avenues to fund our equipment finance units. So we're very comfortable going out two and a half years.
Ladder them out both on the federal home bank side as well.
The broker deposit side.
Over the organization to really fund that the equipment Finance book.
And so.
We did certainly get a great deal of benefit when the PPP money came in but we're kind of getting back to where we used to be as far as <unk>.
Managing that book.
We did add some some more additional.
Borrowings that are relatively short term.
Just for on balance sheet liquidity, but there there's still ladder. It out so it's not something we would we would expect to just be turning on and off switch, but there is a lot of cash flow on a.
<unk> basis that we have we can make decisions and move on.
Okay.
And maybe just.
Another way to think about it here Carl do you happen to have a margin for the month of March or spot margin at the end of the quarter just to kind of get a feel for where things shook out.
Definitely a lot of moves in the ERP numbers here.
For the month of March.
Have that at my figure yes.
Okay.
And then I guess in terms of just kind of.
I hear you on your expectation for the deposit beta.
Just as I think about that.
You're kind of implying.
Deposit beta do you mean total deposits or just interest bearing deposits.
It's just the total interest bearing deposits.
Okay.
And so just as I think about the interest bearing deposit kind of implies like $2 30 ish type cost of funds.
Which is still.
Pretty big gap relative where fed funds is.
Just just curious like if.
If you think about the potential of the fed holds for the next.
5%.
Could you break 3% under that type of scenario for the margin.
Alex I don't think I do.
Don't expect too because we continue to see repricing of our loan book So.
Don't think I saw a model yet.
Breaking 3% that doesn't mean, it can't happen I'm not going to say nothing we don't expect.
When things are this volatile its hard to say anything with any conviction and I know you guys want something that you can you can hold onto.
But we manage this on a day to day basis, and we do the modeling that we can.
No one expected to what happened in March nobody expected what was going to happen in March and so Bob.
And this dynamic.
We're still signing up customers at a pretty good clip, but our cash management and treasury areas are as busy as they can be.
So that's all favorable stuff.
We're the largest because just of the operator.
Yes.
But it's hard to move the needle.
Almost $9 billion of deposits.
I think it's right.
Another thing to highlight is.
The impact of Ics and you don't hear about this much at all in the media.
Quite frankly, you don't hear it from the analysts as well I don't know how many people are up to speed on what <unk> is it's been around for a couple of decades now and they do a fantastic job in helping banks service folks with deposits over 250000, and providing insurance and everybody.
Claiming the depth of the community bank in the regional Bank and I think that's just ridiculous quite frankly.
We've been able to do very very well and maybe maybe we're ahead of the game because we had set this up quite some time ago to be able to do this.
Our staff and our folks are up to speed on it but it's something that we can we have customers.
$50 million right now I think we could go up to $150 we wanted to.
In deposits to be ensured by this network of banks using using that platform and quite frankly, 50% of the banks in the country are part of this platform.
Probably in a couple of quarters, the rest of the 50 or so.
I think it's something people have to start paying a little bit of attention to.
Okay.
That's helpful and maybe just in terms of.
On the loan side here.
Where is loan pricing these days.
New originations and kind of curious as to what your thoughts are on the pace of loan growth you had pretty good organic growth by my numbers here this quarter.
So I do want to I want to cover some of the other questions you had because I didn't have it at my fingertips.
Body else's fingers running around here right now, giving you some numbers. So I'll give you. The March March net net interest margin was $3 22.
And that's being driven.
No we added a lot of liquidity on the balance sheet at the end of light at the end of the quarter. So you won't see as much of that impact in the quarterly numbers, but you see it in that number in particular.
The other number I wanted to give you was between brokered deposits and federal home loan bank advances, it's about $330 million matures.
Over the next 90 days just you have a sense of what gives us the flexibility on the on the liability side and of course, we have a lot of flexibility on the asset side.
And so now your question on what caused or what rates, we have been putting them on I think already mentioned.
We were <unk>.
For the for.
For the quarter. It was 668 basis points was the average coupon.
Of the loans that we booked and we had originations of $775 million in the quarter just to give you a sense of.
The size of the origination book.
All of that I would like to I'd love to highlight eastern funding because I love those guys $118 million in originations at a coupon of 918.
918 basis points.
Okay great.
Great.
Helpful.
And then in terms of just.
Loan growth here going forward kind of curious on with higher rates.
The dislocation we saw kind of whats your loan pipeline and kind of your thought process going forward.
Last two quarters.
We've been running very hard for us the originations.
We're big in Q4 and in Q1, they were big as Karl pointed out it is certainly markedly slowed down.
But we are seeing the displacement.
Around town from the troubles in the industry and we are an attractive alternative and so we have been signing up.
Some of their former customers.
And in some cases, we were sharing customers we've taken over the entire relationships, but it's definitely slowed down.
Obviously in real estate.
Investors are hesitant and we're very careful.
So you're not seeing all that much business, but C&I is not terrible.
Okay.
Great.
All the color. Thank you very much.
Okay.
Chris Thanks.
Great.
Thank you for your question. Our next question comes from the line of Chris O'connell with K B W.
Your line is now open.
Hey, good afternoon.
Chris I was hoping to just start off.
With how.
How much accretion income.
It was in the quarter and then maybe an outlook going forward.
That.
Okay.
So on the loan side very little at all on the accretion income.
The reason behind that was when you Mark when it comes to the purchase accounting on the loans, we had some floating rate loans that were actually priced at a premium.
So that.
Negated any of the discount that you were.
Creating into income during the first quarter. So basically it was a wash on a go forward basis, it's approximately $3 million on the loan side.
Accretion income.
That will be recognized.
Up.
Sure.
<unk>.
On the.
The deposits and borrowings it's not meaningful.
In the securities portfolio since we sold most of the securities that Theyre just at book book yields for most part.
Great.
And then just hoping to get.
Update as to how expenses might trend.
In the second quarter and maybe beyond that.
And what if all of the cost saves have been achieved from the deal.
It's too early to say exactly where we where we are on the cost savings.
We did the acquisition.
January one we did the conversion which went very.
Very smooth.
In the middle of February .
Most of the people we retained through that.
Left early March.
So the cost savings to start you start seeing some of the cost savings in March.
But.
I'd say, we've got the head count.
We sailed it on the head count.
So looking at the salaries and things of that nature, because I think some of those things come in a little higher than we originally anticipated I think that was more because.
Inflation and things of that nature.
But.
I think we're going to be pretty close to those cost savings that we projected which we're estimating about $2 $8 million a quarter I think this number.
And.
That's the goal and that's what we're working towards.
I'm not claiming victory yet.
Yeah.
Yes so.
If im understanding it right.
That imply that.
Maybe two for $2 eight or maybe a little bit shy of that number still so it comes out of the quarterly run rate.
Going forward.
I would love to say, yes, but we also have some headwinds, particularly around FDIC insurance and other other areas of the bank that of alphabet.
Where we are.
Continue to see a little bit outsized growth.
Expenses, so I don't want it related to <unk> and the acquisition, but other areas of the bank, but we're seeing seen some cost pressures.
Okay.
Okay.
And hope.
We're hoping.
You could touch on the C&I NPL.
NPL that came on in the quarter, maybe the size and just any details around it.
Well that's it for us.
Its a medium sized loan if you will it's not real estate. It is it is an operating enterprise.
Which happens to be facing some some very serious issues and it's one of those things that you have that youll see from time to time, where we have set up specific reserves. Because this thing can go either way the whole thing can.
Just be perfect and they can fix their issues or it could it could fail.
So we're we're ready for it either way.
But it's pretty well, it's pretty well deserved.
Got it and do you have the size of it.
Hi.
I guess I don't have it in front of me I will give you the magnitude I think it might be eight 8 million or so.
Something of that magnitude.
Got it.
Do you guys have.
<unk>.
With the reserve held against it is.
Okay.
I don't know if its use will be good into that level.
Detail, but.
I'm told by our credit guys that we're comfortably reserved.
Before a bad outcome.
Which were still hopeful.
[laughter].
Got it.
Im.
And then.
On the fee side.
Really strong quarter I know that.
Guys I have a number of kind of line items that.
Fluctuate quite a bit with business activity.
But just any color.
Dates on kind of the outlook on where things could shake out going forward.
It's a volatile number.
First I can say.
Right now I don't think we have a lot in the pipe a lot of our fee income comes from either the swaps book or from being the lead.
On the origination of the loan that gets sold down to friends and family and the <unk>.
<unk> with activity down the way it is.
It's not likely to be as impressive as it has been in the past few quarters.
Okay got it.
And then lastly.
For me.
How are you guys.
Thinking about <unk>.
Capital levels going forward.
And is there any consideration.
Yes.
To do a buyback at any point.
Our operating targets.
We lay out our operating targets in the deck.
We'd be very comfortable 11, 5%.
Whenever there is a lot of volatility in the market you have to be very thoughtful about buybacks.
Even as attractive as they are.
So we'll talk we talk with the board frequently about this subject.
Whether it's dividends or buybacks and we will.
We keep doing that and we'll keep doing that and will act when we think depends appropriate okay.
Okay great.
Great Thats all I had thanks for taking my questions. Thanks, Chris Okay.
This concludes our Q&A session for today's call I will now pass back for any final remarks. Thank you.
Thank you for them and thank you all for joining us today, and we look forward to talking with you again next quarter good day.
This concludes today's call. Thank you for your participation you may now disconnect your line.