Brookline Bancorp - Q1 2021

Transcript

Speaker 0

Good day, and welcome to the Brookline Bancorp First Quarter 2021 Earnings 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 recorded. I would now like to turn the conference over to Marissa Martin, Associate General Counsel.

Please go ahead.

Speaker 1

Thank you, Betsy, 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, and has been filed with the SEC. This afternoon's call will be hosted by Brookline Bancorp's executive team, Paul A. Perrault and Carl M. Carlson.

Before we begin, please note 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 2 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

Speaker 2

factors that could cause actual results

Speaker 1

to differ materially from these forward looking statements. 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 comparison and reconciliation to GAAP earnings, please see our earnings release. If you could join us on Page 3 of the earnings presentation, I'm pleased to introduce Brookline Bancorp's President and CEO, Paul Perrault.

Speaker 3

Thanks, Marissa, and good afternoon, everyone. Thank you for joining us for today's earnings call. With COVID-nineteen cases case numbers trending down in Massachusetts and Rhode Island and vaccine numbers increasing, we remain quite optimistic for the future. Our branch locations are all fully open with employees providing all services to our customers, while for the most part, our non branch employees continue to work from home. We are following the guidance in both Boston and Providence for employees who would like to return to the office 1 or 2 times per week, and that is an evolving picture here over the next couple of months.

Turning to our earnings, I am pleased to report we had a solid quarter of earnings of $26,500,000 or $0.34 per share as our credit quality remained stable and our net interest margin actually improved. We continue to work with a small segment of our customers who are still facing financial challenges related to the shutdowns and require some additional loan payment deferrals to get to the other side. As of March 31, there were loans of $126,000,000 with modifications under the CARES Act. The company recorded a negative provision for credit losses of $2,100,000 and our reserve loan losses declined 4 basis points to 165 basis points on outstanding non PPP loans. In Q1, we experienced another quarter of significant lending activity as our bankers worked with our customers on the latest round of PPP loans.

We facilitated $133,000,000 of loan forgiveness payments during the Q1 and an additional $248,000,000 of PPP loans were made. Outside of PPP, prepayments continue to offset growing loan demand. We continue to see improving trends and pipelines continue to grow. I'm also pleased to report the Board approved a 4.3% increase in our quarterly dividend to $0.12 per share. I will now turn you over to Carl, who will review the company's Q1.

Carl?

Speaker 4

Thank you, Paul. On Slide 4, we have provided summary comparative income statements. Net income was $26,500,000 driven by higher pretax pre provision revenue and a negative $2,100,000 in the provision for credit losses. Q1 revenues increased $1,500,000 from Q4 and were $2,900,000 ahead of last year and operating costs were $800,000 higher due to seasonally higher compensation related costs. As illustrated on Page 5, net interest income increased $900,000 as funding costs dropped faster than the yield on earning assets.

The yield on interest earning assets declined 3 basis points from the prior quarter as the cost of funding declined 15. If you follow me to slide 6, you can reference our comparative summary balance sheets. In the Q1, the company finished with $8,600,000,000 in assets, down $382,000,000 from Q4. Loans were flat, while cash and securities combined declined $320,000,000 as we used excess liquidity pay down broker deposits and Federal Home Loan Bank advances. The allowance for loan losses declined slightly to $110,000,000 and represents coverage of 165 basis points on loans excluding PPP.

Slide 7 reflects the linked quarter and year over year activity in composition of our significant loan and deposit categories. As I mentioned, the loan portfolio overall was flat from the prior quarter as the growth in PPP loans of 116,000,000 offset declines of 117,000,000 in the rest of the portfolio. Broker deposits were reduced 223,000,000 as we saw non broker deposits grow 179,000,000 in the quarter. We continue to see strong growth in demand in money market deposits and consumers continue to shift funds from CDs to other deposit products. Slide 8 provides a snapshot of the PPP program at each of our banks.

At the end of the quarter, we had over 3,400 loans with $605,000,000 outstanding. Net deferred fees of approximately $14,000,000 will be recognized into income over the life of these loans. As Paul mentioned, we had $133,000,000 in PPP loan satisfactions during the Q1 with most of the activity occurring during March. On Slide 9, we are providing the status of our loan payment deferment activity. As Paul mentioned, of quarter end, 3.41 credits totaling $126,000,000 have a loan modification under the CARES Act, representing 1.7% of total loan balances.

Loan modifications are provided by sector on Slide 10. All loans remain accruing with modifications concentrated in the laundry, fitness and tow sectors. As shown on Slide 11, 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 the quarter, we had a capital buffer of 3.5 percent $239,000,000 over regulatory well capitalized standards. Slide 12 provides a history of our regular common dividend payout.

Yesterday, the Board approved a quarterly dividend of $0.12 per share to be paid on May 28 to stockholders of record on May 14. On an annualized basis, our payout approximates a 3% yield. This concludes my formal comments and I will turn it back to Paul.

Speaker 3

Thanks, Carl. Joining us for the question and answer session is Robert Rose, who is our Chief Credit Officer. We will now open it up for questions. Betsy?

Speaker 0

We will now begin the question and answer session. Our first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Speaker 2

Hey guys, good morning or I guess good afternoon. First, I wondered if you could share with us the size and complexion of your loan pipelines, excluding the PPP loans, any that are in process?

Speaker 3

Robert?

Speaker 5

Well, Mark, it's Bob Rose. I will tell you that business has picked up significantly this quarter, and it's fairly balanced, well balanced between C and I and CRE. We see it in our loan committees. The new to new is up quite a bit in the quarter, and it's actually running higher than new to new. I can tell you that the loan officers across the board are reporting more interest in activity.

And in the equipment world, there is strong demand for laundry in the way of consolidations, equipment refreshes. And in the exercise world, demand is actually rising for acquisitions and the manufacturers there are also pushing equipment refreshes. It is there is a bottleneck in both those latter places, laundry and exercise for equipment, but it is fairly broad and it is an impressive sea change rather quickly.

Speaker 2

Okay, great. And then Carl, could you talk a little bit about your expectations for the margin over the next few quarters, including and not including excluding PPP income?

Speaker 4

We'll continue to see pressure on the net interest income prior to the PPP forgiveness. While we'll still see it all depends really on this loan growth. So I really want to kind of caution that. There is a lot of activity, so it depends on what gets booked during this quarter. But overall, it's going to a lot of it's going to be we'll see a little bit of benefit on the funding side as we continue to see CDs reprice into other loan other deposit products and we continue to pay down brokered funds as well as federal and more bank advances.

So we'll see some relief there, but what I want to caution here is we just put on $250,000,000 of PPP loans. And as you know, these carry a 1% coupon and while they come with a lot of fees, it all depends on how fast those fees get recognized and that really depends on the forgiveness, on the magnitude and speed of the forgiveness. These loans are now 5 year loans. I tried to provide you guys a lot of detail behind that. So the yields of these loans, if they don't get forgiven, are very low.

It's probably in the 160 to 170 area from a yield perspective. So I think a lot of it is going to be the timing of the PPP and of course how fast we book new loans.

Speaker 2

So the core margin, Carl, this quarter was what?

Speaker 4

Yes, I'm not providing a core margin. I'm letting you guys try to figure that out yourself. I said the well, the deferred fees of $1,400,000 related to PPP loans came in during the quarter. So you could take that out and say that well that's the core margin.

Speaker 2

Okay. Next, I was curious if you could update us on your planning for crossing 10,000,000,000 dollars What kind of incremental costs we're likely to see this year, next year? And what if you could just refresh us on the impact that you'd expect from Durbin?

Speaker 3

I'll take half and then I'll give Karl half. We will pass the $10,000,000,000 when we pass it. We're not afraid of it. We're not racing to it. We're not running away from it.

It will happen naturally. We feel we are very, very well prepared and have been for a long time already employing the practices that are required when you're over $10,000,000,000 Everything from Board Risk Committees and model testing and all the other stuff that one needs to do, we've been doing for a long time. So from an operational point of view, I don't see anything at all happening when we cross. As to Durbin, I'll let Karl.

Speaker 4

We estimate that to be somewhere in the $1,000,000 to $2,000,000 range on the Durbin side.

Speaker 2

Okay. And then lastly, kind of a multi part question. Obviously, there's been a lot of consolidation in your backyard recently and Really? Some of those banks have, believe it or not, suggested that scale is really important to be competitive. I guess, part 1 is, do you agree with that?

And part 2, if you could talk maybe a little about the opportunity that you see to steal customers, employees from some of these other banks that are going through consolidation and where you might see the most opportunity. Thank you. I find it funny, Mark, that banks of virtually every size, 100 $1,000,000 to $100,000,000,000 all say that Nirvana is the next size up for them. And so it's

Speaker 3

a peculiar thing. And I think we can appreciate that it seems that in most things in banking economies of scale are reached fairly early on and are not better when you get to be enormous. So I'm not a big believer in it once you're of a certain size. Now having said all of that, the 5 deals sort of around us that have happened here recently, I think are a unique and wonderful opportunity for us. We're big enough.

We're capable. We're in the right business lines. We're not a retail oriented place, we're not a big residential lender or credit cards or things where maybe scale is a bit more important. So I think for the next couple of years, there's going to be a lot of very unhappy people at some sizable institutions that are going to be looking for new friends. It almost feels like it has started, as Bob had reported, that we are seeing a larger content in our new loan approvals with new customers than we've seen in some time.

Speaker 0

Our next question comes from Laurie Hunsicker with Compass Point.

Speaker 6

Hi, good morning.

Speaker 3

Hey Laurie, afternoon by the way. At least where we are.

Speaker 6

Just to follow-up on where Mark was going. Can you just help us think about this a little bit more? So I'm looking at the Boston marketplace and I'm looking at the publicly traded Massachusetts based banks. We obviously have Eastern, they just did a deal. INBB, they just did a deal.

And then there's you. And I guess, for starters, number 1, can you just expand a little bit more on your current approach to M and A, given the fact that you're trading 1.6% the book, how you think about it, how protective you'll be around tangible book, dilution, earn back, how you think about that? And then also point number 2, can you help us think a little bit about geographically where you would want to stay if you thought about M and A? And I guess the last point is, how do you think about asset size? In other words, how small would you go?

Would you entertain an MOE? Just any further comments around that would be super helpful.

Speaker 3

Well, I don't think I've changed my opinion about M and A or what I do or not do in quite a long time. I think it's fair to say that the recent deals announced in this area had a similar characteristic in that in most cases the acquirers had special currencies that they were able to use in order to accomplish some very light damage, if any, at all to capital ratios tangible book and all that kind of thing. And in Eastern's case it was all cash because cash is what was needed to get that deal done. So I haven't changed my mind and in market or near market deals got to make financial sense. We wouldn't go overboard on the solution, as you know, and we would need to be able to see tangible benefits in the relatively near future on earnings mostly, maybe a little product diversification, but that would be about it.

If we went out of town to do something, I don't want to draw a line in the sand, but maybe the smallest that we'd go would be $1,000,000,000 It's got to look and feel like a market that we'd be comfortable with. They have to be in business lines that we would recognize and be able to help them with, and it would need to be a management team that's going to stick around and be helpful, And that's about it. So in terms of did I answer all your pieces?

Speaker 6

Yes, I just maybe one more. Can you comment a little bit

Speaker 2

on the

Speaker 3

I would just add though let me just add that I don't feel under the gun by any means to go do a deal.

Speaker 6

Okay. That's good. And what about an MOE? How would you think about an MOE or somebody like mine?

Speaker 3

I think of an MOE this I would think of an MOE the same way that I would do any deal whether I'm buying or selling. The righteousness, the propriety of the transaction is paramount and it's going to be evident and not speculative and it's going to make sense for everybody.

Speaker 6

Okay, great. Thanks. And Carl, just last question for you. Tax rate was 24.9%, I think I was using 26%. Anything I think about there in terms of tax rate?

Speaker 4

No, 25% is what it looked like for the quarter. That's what we estimated for the quarter, for the full year. It all depends on what happens with taxable income as we move forward based on what the full year look looks like. So 25% is where we are what I would use.

Speaker 6

Okay, great. Thanks for taking my questions and thanks for all of the credit details. Helpful.

Speaker 7

Thank you.

Speaker 0

Our next question comes from Christopher Keith with D. A. Davidson. Please go ahead.

Speaker 7

Hey, good morning, everyone.

Speaker 3

Hi, Chris.

Speaker 7

So I just wanted to ask the CRE loan yields look to be stabilizing linked quarter. Can you share where the new loans are coming on right now?

Speaker 4

Sure. So just in total for the book, a lot of times you guys ask me that question. For the whole portfolio, we booked about $328,000,000 in originations or draws during the quarter, that's excluding PPP loans. And the CRE book, the weighted average coupon, so this excludes fees and things of that nature, but the coupon itself was 3.65.

Speaker 3

Okay,

Speaker 7

great. And then looking over at loan growth and the core commercial loan portfolio, so ex PPP, the contribution looks like it's continued to decline over the last several quarters. So I'm just curious how much of that is driven by lower line of credit utilization, if at all?

Speaker 3

In our case, it's been driven more because we have a very high quality portfolio of family owned and operated businesses, and we've just seen too many of them decide to sell in a market where they're reaping a lot of money and they just pay us off. I can't tell you technically how much less line utilization. Do you know Carl? But I don't think I

Speaker 4

don't think the line we look at those we keep we monitor that and I don't recall that changing much at all. So I think it's mostly just pay downs. Payoffs. Payoffs, sales and things of that nature.

Speaker 3

It's amazing to me what's been going on. Lots of companies are just selling out. Well, it's consolidation.

Speaker 7

Yes. Got it. Well, thank you. That was helpful. And then I guess just looking at the CRE portfolio, I assume pay downs and payoffs are also a headwind or had been a headwind there.

Is there any shifting in the momentum heading into the Q2? Robert?

Speaker 5

I don't think there is. That portfolio shrank by about $35,000,000 $36,000,000 in the quarter. And you've got to add up construction and add up CRE and look at the 2 together. And they pretty proportionately came down in the quarter. But they are people paying, people being careful during this time.

But as I said earlier, there's a lot of stepping out and wanting to do the next thing because a lot of these guys have been dormant during the past 15 months, 12 to 15 months.

Speaker 7

Got it. Got it. Thank you. And then just last one for me. So I think you had maybe somewhere around $370,000,000 in CD maturities during the Q1.

I was curious what the retention is around those maturities and then any if you have any additional color around coming CD maturities?

Speaker 4

Sure. So The new volumes that we had were about $263,000,000 were booked at a rate about 43 basis points and that was the new volumes in the quarter. We had run off about 360 we had pay downs of 365 and then new bookings of 263.

Speaker 7

Okay, got it. That's very helpful. Thank you so much.

Speaker 4

The things that were coming off were coming off at 183, so you have a sense of the change.

Speaker 7

Thank you, Chris. Got it. Thank you.

Speaker 0

This concludes our question and answer session. I would like to turn the conference back over to Paul Perrault for any closing remarks.

Speaker 3

Thank you, Betsy, and thank you all for joining us today, and we look forward to talking to you again in the next quarter. Have a good day.

Speaker 0

The conference has now concluded. Thank you for attending today's presentation. You may now