Brookline Bancorp - Q2 2021

Transcript

Speaker 0

Good day, and welcome to the Brookline Bancorp's Second Quarter 2021 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to Marissa Martin, General Counsel.

Please go ahead, ma'am.

Speaker 1

Thank you, Rocco, and good afternoon, everyone. Yesterday, we issued our earnings release and presentation, which is available on the Investor Relations page of our website, brooklynbancorp.com, and has been filed with the SEC. This afternoon's call will be hosted by Paul A. 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 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 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.

If you can join us on Page 3 of the earnings presentation, I'm pleased to introduce Brookline Bancorp's Chairman and CEO, Paul Kuralt.

Speaker 2

Thanks, Marissa, and good afternoon, everyone. Thank you for joining us for today's earnings call. I'm pleased to report we had record quarterly earnings of $31,600,000 or $0.40 per share as our credit quality has remained stable, our net interest margin and fee income improved, and our stable expense base benefited from a $2,100,000 gain sale of a piece of other real estate owned. We continue to work with a small segment of our customers who are still working through the financial challenges. As of June 30, we had $96,000,000 remaining in modified loans under the CARES Act.

The company recorded a negative provision for credit losses of $3,300,000 and our reserve for loan losses declined 5 basis points to 160 basis points on outstanding non PPP loans. In Q2, we experienced another quarter of significant PPP originations and forgiveness activity. We facilitated $22,000,000 in new PPP loans before the program ended on May 31, and $279,000,000 of PPP loans were satisfied during the Q2. Excluding PPP, our core loan portfolio remained flat, growing $9,000,000 for the quarter. It may be too early to tell if this marks the turning point, but our pipelines continue to be very strong, trends continue to improve, and we remain optimistic.

I am pleased to report that the Board approved another quarterly dividend of $0.12 per share. I will now turn you over to Carl, who will review the company's Q2.

Speaker 3

Thank you, Paul. On Slide 4, we have provided summary comparative income statements. We had record net income of $31,600,000 this quarter, which was $5,100,000 higher than last quarter and $19,600,000 greater than a year ago. Performance was driven by significantly higher pre tax pre provision revenue, lower expenses, as well as a negative provision for credit losses. 2nd quarter revenues increased $3,100,000 from Q1 and were $6,500,000 or 9% ahead of last year.

Operating costs were $2,800,000 lower, reflecting the $2,100,000 gain on sale of other real estate owned as well as lower FDIC assessments. As illustrated on Page 5, net interest income increased $2,000,000 from the prior quarter, driven by lower funding costs as broker deposits and borrowing declined and time deposits reprice or shift to lower cost products. Overall, our net interest margin improved to 3.52 basis points, a 13 basis point increase from Q1. Of the $2,000,000 increase in net interest income from the prior quarter, dollars 800,000 is attributed to the increase in PPP interest and fees with the remaining benefit driven by lower funding costs. On the bottom of Slide 5, we've provided the estimated impact of the PPP loan program on the net interest margin.

Assuming no cost of funding, PPP interest income contributed 15 basis points to the 2nd quarter margin versus 11 basis points in the first quarter. If you follow me to Slide 6, our comparative summary balance sheet. The 2nd quarter finished with $8,500,000,000 in assets, down $98,000,000 from Q1. Loans were down $248,000,000 while cash and securities combined increased $153,000,000 On the funding side, total deposits grew $28,000,000 as borrowings declined $183,000,000 dollars The allowance for loan losses declined slightly to $106,000,000 and represents reserve coverage of 160 basis points of loans, excluding PPP. Slide 7 reflects the linked quarter and year over year activity and composition of our significant loan and deposit categories.

As I mentioned, the loan portfolio overall declined $248,000,000 from the prior quarter, driven by $257,000,000 decline in PPP loans as our core loan portfolio grew 9,000,000 dollars While the growth is very modest, it is a dramatic change from the decline of $170,000,000 our core portfolio experienced in Q1. In the 2nd quarter, we originated over $600,000,000 in non PPP loans at a weighted average coupon of 3 73 basis points. While we had a strong quarter in originations, we also had significant payoffs driven in part by the sale of some very well run family businesses and a very active real estate market. The weighted average coupon on the core loan portfolio dropped 5 basis points during the quarter to 407 basis points at June 30. We continue to experience strong deposit growth and we are using excess liquidity to reducing outstanding broker deposits and borrowings.

Broker deposits declined $210,000,000 and totaled $261,000,000 at the end of the quarter. Our loan to deposit ratio was just under 102% at June 30. Slide 8 provides a snapshot of the PPP program at each of our banks. At the end of the quarter, we had just under 2,000 loans with $348,000,000 outstanding net of unearned fees. Net deferred fees of approximately $10,300,000 remains to be recognized into income over the life of the loans.

We saw PPP loan forgiveness accelerate in the 2nd quarter, and we expect this activity to continue for the remainder of the year and perhaps into early 2022. On Slide 9, we are providing the status of our loan payment deferment activity. As Paul mentioned, as of the quarter end, 151 credits totaling $96,000,000 have a loan modification under the CARES Act, representing 1.4% 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 4.4 percent or $291,000,000 over regulatory well capitalized standards. Slide 12 provides a history of our regular common stock dividend payoffs. Yesterday, the Board approved a quarterly dividend of $0.12 per share to be paid on August 27 to stockholders of record on August 13. On an annualized basis, our payout approximates a 3.4% yield.

This concludes my formal comments, and I will turn it back over to Paul.

Speaker 2

Thanks, Carl. Joining us this afternoon for the question and answer session is Robert Rose, our Chief Credit Officer. And I will now open it up for questions.

Speaker 0

Thank you. We'll now begin the question and answer session. Today's first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Speaker 4

Hey, guys. Good afternoon.

Speaker 2

Hi, Mark.

Speaker 0

Hi, Mark. Carl, just to

Speaker 4

start off, what was the $1,000,000 increase in other non interest income you referenced in the press release?

Speaker 3

What was that attributable to? That's driven by risk participation agreements with parties related to loans that we do with swaps on them. So we have to do a theoretical mark on that that flows to the income statement.

Speaker 4

Okay. And then secondly, I wonder if you could maybe share with us your outlook for operating expenses and whether there might be any need for incremental technology investments, any big tech spend coming up?

Speaker 3

Sure. So as we already kind of referenced, adjusting our quarterly expenses for the $2,100,000 gain in OREO, our expenses would have been $40,100,000 for the quarter, which is very consistent with our overall run rate. As far as technology spend, we're continually spending on technology. So I wouldn't say we have anything big on the horizon there. That's an ongoing thing.

So it's built into our run rate. That would be the best I can tell you right now. I have nothing on the horizon in that regard. And then with the but what I do want to say is with the recent wave of bank consolidations within our market, there's quite a bit of dislocation in both customers and talent, which we will certainly be taking advantage of. So don't be surprised if we see expenses tick up a little bit as we add some particularly good athletes.

Speaker 4

Okay. And then for Bob, Bob, I wondered if you could share with us kind of the size of your commercial pipelines. Are those starting to build in any particular areas of strength?

Speaker 5

The pipelines are growing, and they are particularly strong in commercial real estate. And they have remained quite healthy in equipment, finance, the laundromat, tow truck and exercise. I realize exercise is a smaller portfolio, but everyone is seeing more demand for things and the backlogs reflect it.

Speaker 2

Mark, I would just like to add that we have continuously had very strong originations, as Carl alluded to in his comments, 2nd quarter, which is greater than we probably have had in the past, and that kind of pace continues. What has slowed us down is that we bank very nice little family run companies who are being offered tremendous amounts of money in this very liquid market to be acquired. And so that I hope will slow down. If that slows down, I'm very optimistic for growing the balance sheet.

Speaker 3

Okay. Thank you.

Speaker 0

Our next question comes from Laurie Hunsicker with Compass Point. Please go ahead.

Speaker 6

Yes. Hi, Paul and Karl. Hi, Laurie. Good afternoon. Just wondered actually if we could stay on credit, Bob.

So just very quick question for you. I didn't see it broken out. By the way, the details in your slides are great. But the food ex Dunkin', that loan book was running around $30,000,000 $35,000,000 Just wondered, it wasn't flagged on the potential COVID impact slides. Is that book gone?

Or if you could give us an update what the deferrals are? I know it's a smaller piece, but restaurants have been focused. Thanks.

Speaker 5

Food ex Dunkin' is your question and it's very small and there are no modifications or deferrals in that portfolio that I'm aware of, unless they're just very small business banking. But this is a portfolio of a handful really of family oriented restaurants.

Speaker 2

I think a couple of them were at the initial stages of the deferments, but they

Speaker 3

came back on. So we took it off that sector list. Yes, not

Speaker 5

today. Perfect.

Speaker 6

Okay. And then just any comments around macro lease? I mean, your deferral rates are great. Just anything there? That one is still a little bit on the high side.

Any thoughts?

Speaker 5

Yes. It runs a touch on the high side. I think they're $23,000,000 So $144,000,000 are paying according to term and most of those $23,000,000 I think all of them are interest only. But of the modifications, California dominates. Planet Fitness in California dominates that.

California was the last to drop restrictions and allow full opening, and we had granted some lengthier modifications than other businesses and other industries received. And so they're going to run off a little more slowly. And the balance of them are independents and a handful of other types of exercise. But it's logical that California would dominate that list.

Speaker 2

I would just add to that, Laurie, that the reports out of management at macro leases that the occupancy, if you will, the use of the clubs that are open is full. It's they don't lack for business when they're open.

Speaker 6

Okay. That's helpful. And then Carl, question for you on the PPP, and I appreciate the details on Slide 5. I'm just trying to reconcile them. So the PPP forgiveness that I thought I had last quarter, the March quarter was $1,400,000 And then I'm just trying to reconcile, I think at March, you had $14,400,000 of unamortized fees to take and then that's down to $10,300,000 And so just seems like the majority of that $4,000,000 dropped through and I'm just I'm coming up with a slightly different number.

Just wanted your help. What was the actual dollar amount of PPP income forgiveness in June? And then was my March number right or maybe I had that wrong? Thanks.

Speaker 3

Yes. So the total income for PPP loans was $7,200,000 in the quarter. Dollars 1,200,000 of that was interest, pure coupon interest. And the remaining piece of that $6,000,000 is deferred fees being recognized, both on an amortized basis over the life of the loan as well as additional once if a loan prepays, it gets accelerated in. I don't have a breakout between what's normally amortized and what was specific to a forgiveness loan.

But I think we already gave them it's about $279,000,000 of loans were forgiven in the quarter. And we continue to build we continue to book PPP loans through the Q2. While not a great deal, it was $22,000,000 booked. That does also impact the fees.

Speaker 6

Okay. Okay. That's helpful. And I guess as we look out to 2022, if you could maybe just help us think about margin, your cost of core deposits, 14 basis points can't go much lower, your CDs maybe a little bit of room. I guess stripping out that PPP, if we're thinking about where margin might settle, is it going to be in that sort of 3.25%, 3.30% level as the starting point?

Or how should we be thinking about that? And I know you had accretion income in there and prepays as well. Just trying to sort of net all of that, put all of that together for 2022. Thanks.

Speaker 3

I'll answer that question in 2 parts. But the first my first question my first answer is, I'm not really giving guidance on 2022 at this point. But as far as the 2 parts that I'll talk to is the core portfolio and then the PPP impact. So we expect our core margin to be relatively flat to slightly higher and trying to unpack that a little bit. We continue to see strong deposit balances and we continue to experience margin benefits as it relates to the CDs, the broker deposits and the borrowings repricing.

So we'll continue to see that benefit. On the asset side, all our new production is coming in at coupons which are lower than the existing portfolio, which depending on the growth may partially offset the margin gains on the funding side, but overall will result in higher overall net interest income. Regarding PPP, we have $348,000,000 at the end of the quarter, $10,300,000 of net deferred fees. How that impacts the margin for the next 2 to 3 quarters is really going to be based on the velocity of the forgiveness. But I do expect most businesses will want to get this done by the end of the year, but of course there'll be some carryover.

So I think we probably peaked

Speaker 4

at

Speaker 3

the $7,200,000 contribution to revenues, and I expect that will likely be lower as we go forward as it trails off.

Speaker 6

Got it. Okay. And then just last one on the income statement. How should we be thinking about tax rate going forward?

Speaker 3

Tax rates? Again, I'm not going to give you 2022 guidance. But our year to date effective tax rate is 25.5.

Speaker 2

Aren't you a lot closer to Washington than we are?

Speaker 3

Yes, you should know. You should tell me.

Speaker 6

Is 25% still what we should be thinking about or anything?

Speaker 3

Yes, it ticked off a bit because our revenues are a little bit higher. So there's less tax efficiency going on that things that might have a tax benefit to them. So effectively, our tax rate is 25.2% on a year to date basis. So I'm using that number as a full year number at this point.

Speaker 6

Okay. That's helpful. And then, Paul, last question. There has been a lot of M and A. You mentioned, I think, potentially teams of people.

Can you help us just think a little bit about how you're thinking about full bank M and A right now and your very competitive landscape?

Speaker 2

Well, I haven't changed my thoughts about it, but there seems to be a lot less to think about. It really is getting pretty thin. We do keep our eye on situations regionally as we have made clear in the past that it wouldn't have to be an end market or adjacent situation. But so we have been in some level of conversation in some places, but as we have also said in the past, we are very comfortable with our ability to have strong organic growth. We're big enough to get the job done in the markets that we elect to play in.

And so as interesting and possible benefit could come out of M and A, it's not a requirement for us to execute our plans.

Speaker 0

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

Speaker 2

Thank you, Rocco, and thank you all for joining us today, and we look forward to talking with you again in the next quarter. Good day.

Speaker 0

Thank you, sir. This concludes today's conference call. We thank you all for attending. You may now disconnect your lines, and have a wonderful day.