Brookline Bancorp - Q3 2022

Transcript

Speaker 0

Afternoon, and welcome to Brookline Bancorp Third Quarter 2022 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 recorded. I would now like to turn the conference over to Brookline Bancorp's attorney, Lara Vaughn.

Please go ahead.

Speaker 1

Thank you, Tia, 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. Harold 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.

I'm pleased to introduce Brookline Bancorp's Chairman and CEO, Paul Perrold?

Speaker 2

Thank you, Laura. Good afternoon, everyone, and thank you for joining us on today's call. I'm pleased to report we had near record earnings Our quarterly dividend bringing it to $0.135 per share. Our loan portfolio grew 129,000,000 or 7% annualized and our net interest margin for the Q3 was 3.80, An increase of 24 basis points from Q2. We continue to see good commercial loan and deposit activity in our markets despite the significant rise in short term interest rates.

The teams at both PCSB Bank and Brookline continue to prepare for the

Speaker 3

Thank you, Paul. Net income this quarter was up $4,900,000 from Q2, driven by margin expansion, Solid loan growth as well as the year to date impact of energy tax credits of $2,400,000 related to financing renewable energy investments. These benefits were partially offset by a higher provision for loan losses and merger charges of $1,100,000 in the quarter. Total revenues were up $6,000,000 driven by margin expansion of 24 basis points $29,000,000 of loan growth in all asset classes. Commercial loans increased $49,000,000 commercial real estate 43,000,000 Equipment Finance $27,000,000 and Consumer $12,000,000 In the Q3, we originated $542,000,000 in loans weighted average coupon of 566 basis points.

This is up 68 basis points from the prior quarter. Weighted average coupon on the total portfolio rose 52 basis points during the quarter to 4.81 basis points at September 30. Prepayment fees were $1,000,000 in Q3, flat with Q2, and deferred fees were $1,100,000 or $230,000 less than Q2. The combined impact on net interest margin was a positive one basis point from the prior quarter. Provision for credit losses was $2,800,000 primarily due to the growth The allowance for loans and leases increased $1,000,000 helped by net recoveries of 179,000 and the reserve for unfunded credits increased $2,000,000 Credit quality trends continue to be favorable, resulting in a slight decline in reserve coverage to 1.27%.

During the Q3, deposits declined $158,000,000 with liquidity in CDs and other interest bearing accounts flowing to higher yielding opportunities. Non interest bearing deposits were relatively flat from Q2 and represent 27% of deposits. Increases in short term rates continue to have potential benefit us due to our moderately asset sensitive position. Assuming a flat balance sheet and the forward curve as of September 30, our simulations reflect a 4.4% increase in net interest income over the next 12 months. Our Simulations reflect the historically based product weighted beta of 32% on deposits.

As Paul mentioned, the Board approved a quarterly dividend of 0.135 dollars per share, representing a 4% increase and a 4.2% yield based on yesterday's closing price. The dividend will be paid on November 25 to stockholders of record on November 11. This concludes our formal comments and we will now open up for questions.

Speaker 0

We will now begin the Q The first question is from the line of Mark Fiscilla with Piper Sandler. You may proceed.

Speaker 4

Thank you and good afternoon. Carl, I wondered if you could help us, but just starting with the effective I'm sorry, the 22.5% rate going forward.

Speaker 3

Yes, very good. Thanks, Mark. So the effective tax rate for the year, we expect it to be around 25.2%. We're reviewing the taxes as of End of Q3, there was a lot of activity in the Q3. We're truing up we had some low income housing tax credits and investments there.

So that had a slight impact on it. But the big impact was a lease financing that we did that had associated tax credits with it. We could have taken those tax credits over 7 years. I decided to take them this year. So we did recognize them this year.

The cash benefit It happens this year. We're able to do it on our tax form if that was the right thing to do. And so that was a $2,400,000 impact On a true up as a year to date true up. So we'll still have a little bit of benefit in Q4. So we will have Our estimate right now for Q4 for effective tax rate is 22.9%.

That would not be impacting 2023. I just want to be clear on that.

Speaker 4

So the tax rate would go back to something around 25%?

Speaker 3

Correct. Correct.

Speaker 5

And I

Speaker 3

think we were guiding about 25.5 with the PCSB acquisition.

Speaker 4

Okay, great. Secondly, first that deposit and funding beta chart that you put in the slide deck was really helpful. But would be curious how you're thinking about sort of the magnitude of additional margin expansion in 4Q?

Speaker 3

Yes. So very strong margin expansion this quarter of 24 basis points. We do expect it to go up another 10 to 15 basis points in Q4, and then moderately better next year. But I think It's anybody's guess, quite frankly, on the deposit betas and the flows of funds.

Speaker 4

Okay. And then Paul, I guess I'm curious, are you guys likely to be on the lookout for more acquisitions in Metro New York of smaller banks Kind of bulk up in that market post the closing of the PCSP deal?

Speaker 2

Not necessary to do that, Mark, but we'll certainly Keep our eyes and ears open as we figure out more and more what's going on in that area. We think Putnam It's big enough to make a difference and I think we there's a lot of things we can bring to them that will improve their performance. But as we do in all of our markets, we certainly pay attention.

Speaker 4

Okay. The last question I had, and I'm not sure if he's on the line. Is Bob Rose on the line?

Speaker 2

No, no, he's not here.

Speaker 4

Okay. I was kind of seeing He's

Speaker 2

on his way to semi retirement, as you may know.

Speaker 4

I did know. And I just thought I'd get his perspective because he had such a wealth of knowledge on credit. But thank you.

Speaker 3

Okay, Mark.

Speaker 0

Thank you. The next question is from the line of Laurie Hunsicker With Compass Point, you may proceed.

Speaker 6

Yes. Hi, thanks. Paul and Carl, good afternoon. Maybe, Carl, just starting with you, can you help us think about, we've obviously seen a pretty big move in rates, just what the interest rate mark Will look like with the PCSB merger, whether you can share with us where the rates rate marks have gone or what the pro form a intangibles look like or both, Any color would be helpful. Thanks.

Speaker 3

Sure. As we all know, rates have moved substantially Since we announced the acquisition, at the announcement, we were estimating a $50,000,000 mark on the investment portfolio on a pretax basis. I think PCSB has just put out their earnings and their balance sheet and you can see what The fair value is on those investments are today. And so it has gotten about 40% worse than when we first 40% more, let's put it that way, in the mark on the securities portfolio. We would estimate about the same as securities Yes, interest rate mark on the loan portfolio, similar durations in that sense, not materially different.

So I think that's what you would see there. Offsetting that would be the overall price what the value of the deal. And I don't really know exactly what that will be at closing. But if you did it Today or yesterday, it would have more than offset that mark on so from an intangible standpoint, Basically no change in the goodwill being booked. Offsetting that is the value of the deposits.

Naturally, Deposits are worth far more today than they were just 6 months ago.

Speaker 6

Okay, great. Thanks. And then maybe can you also help us understand pro form a with PCSB, You guys crossed $10,000,000,000 Can you just remind us what that's going to look like in terms of the Durbin impact? And I'm guessing then that that starts in the Q4 of 2023, is that right? Thanks.

Speaker 3

So as far as the Durbin impact goes, my understanding is it starts 6 months after the year end Our company goes over the $10,000,000,000 mark. So we do assume we too still anticipate this deal closing in Q4. So assuming it does and we do get approval, right now I think we'd have to get approval by about November 15 for that to happen. And we'll close by year end. We will be over $10,000,000,000 at this year end.

And so the Durbin impact would impact us Starting July 1, 2023. We estimate the annual impact just related to Durbin to be in the $800,000,000 to $901,000,000 impact on our income on our annual basis.

Speaker 6

Okay. On non interest income. And then in terms of the expense spend, is there anything around that or that's already fully baked?

Speaker 3

It's generally we'll definitely have headcount added here and there. Some of it we've already got on staff Already preparing for it. So I would say nothing materially at this time that we anticipate that would be a

Speaker 6

Great. Thanks so much.

Speaker 2

Okay, Laurie. Thank you.

Speaker 0

Thank you. The next question comes from the line of Chris O'Connell with KBW. You may proceed.

Speaker 5

Hi. Just following up on the PCSP discussion, Given the approvals need to come in by around November 15 or so, just any update there on that process And where you guys are at?

Speaker 2

Well, we're awaiting the approval out of Washington. It's our understanding that all of the questions have been raised and answered satisfactorily to the Fed and their staffs. So we are literally just waiting by the phone.

Speaker 5

Okay. I got it. And then also on PCSB, just given their financials and how they've come in Since the merger announcement and the change in the rate environment, any update as to what their impact will be on the margin?

Speaker 3

I'm not going to opine on that right now. There's a lot of moving parts when you think about the margin going forward. As Laurie kind of just highlighted, the mark on the investment portfolio, the interest rate marks on the investment portfolio And the loan portfolio, they would get accreted back in. So that comes through interest income, quite frankly, and really has a significant impact On the margin as you look forward, naturally we look at the core, what's going on with the core business. And As you can see, they did quite nicely.

Their margin expanded 19 basis points in the quarter. So it's we're very happy with They're performing and we're certainly happy with how we're performing. A couple of good companies getting

Speaker 4

Good to hear some out of that.

Speaker 5

Yes. And then as Yes. I appreciate all the color on the betas and the margin outlook. Just thinking about what you guys are seeing from Competition and in terms of flows and how customers even within the bank are being moved around between products. Yes, how the deposit flows between products and kind of overall growth outlook is going forward?

Speaker 2

I'll start and I'll let Carl get into more detail. But I would say that the major Flows, I mean, we've lost a little bit as was mentioned in the commentary, but a lot of it in terms of the aggregate dollars really comes from customers of ours They have very large liquidity portfolios and when rates very short rates have gone up so much Against what deposit rates look like, those customers take their non operating liquidity and they Buy short treasuries and in a lot of cases or other vehicles like that. The other big bucket that has seen the reduction is Just in the core CD maturities that have been coming down for a long time. So we're not seeing customer losses, we're not seeing the average operating company move All of their liquidity out of the banking products. So I think that this will have played out in the near future and We'll start to grow from there.

Carl? You're involved in the pricing and all that.

Speaker 3

Yes. So just dive a little bit deeper into that is Continued pressure on the CDs as Paul discussed and some of the high liquidity and just folks that have We're very comfortable going into treasuries and we've actually had conversations both in the branches on the investment side, folks that Working the branch as well as Clariant and Private with significant clients on how we could help them In those regards. But you dive into the when we dig into the details on this, We saw a significant decline in IOLTA accounts. And if you don't know what IOLTA accounts are, those are basically lawyer accounts, escrow accounts For lawyers, and that rate is fixed by the state. And that's just a flow of funds in and out.

It has nothing to do with interest Just timing. How it is being sold. Whatever is going on in the escrow world. And so that's not an interest rate thing. It's just a flow of funds thing.

And then we're looking at our 1031 program, which you know about 1031 programs. It's Commercial real estate folks that may be selling a building, they put in 1031, a trust in 1031 and Wait to buy another building. We usually have 6 months to do that. And we do this very successfully locally as well as nationally. And we saw I saw a big shift of funds.

What happened to our we saw a big flow out of savings Into money market accounts. So what's going on? It was just 1031. So we have a savings account product. And as funds came out of the savings account product For these clients, it went into a money market account, a little slightly higher rate, because that's what our customers really wanted was a little bit more rate when they do this.

And so the deposits are there, very attractive pricing, and we continue to serve that need. So, as Paul said, DDA is still very solid. We continue to see growth in customers And activity on the commercial front in all of our markets and time will tell how

Speaker 5

Understood. And then lastly, just wanted to touch on the expenses. Pretty good control on Expense growth kind of all around this quarter. Maybe just an update as to how you're thinking about the Q4 on a standalone basis?

Speaker 3

Yes, operating expenses were actually down about $500,000 in the quarter. We did have $1,100,000 in merger expenses, Which is about $600,000,000 and change higher than Q2. I do expect expenses to Pop back up a little bit. We did have a little bit of benefit on the pension side due to just how actuaries work and rates. Since rates go up, you You get a little benefit on that side.

But overall, our expenses are being well contained, but we continue to invest in the business And I don't think that's going to stop.

Speaker 5

Great. That's all I had. Thanks for taking my questions.

Speaker 2

Okay, Chris. Thanks.

Speaker 0

Thank you. There are no additional questions at this time. I would now like to pass the call over to Paul for closing remarks.

Speaker 2

Thank you, Tia, and thank you all for joining us today. We look forward to

Speaker 0

That concludes today's conference call. You may now disconnect your