Brookline Bancorp Q4 2023 Earnings Call Transcript

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January 25, 2024

There are 9 speakers on the call.

Operator

Good afternoon, and welcome to Brookline Bancorp Incorporated's 4th Quarter 2023 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 this event is being recorded. I would now like to turn the conference over to Brookline Bancorp's Attorney, Laura Vaughan.

Operator

Please go ahead.

Speaker 1

Thank you, Emily, 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.

Speaker 1

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 comparison and reconciliation to GAAP earnings, Please see our earnings release.

Speaker 1

I'm pleased to introduce Brookline Bancorp's Chairman and CEO, Carl Perlz.

Speaker 2

Thanks, Laura, and good afternoon all and thank you for joining us for today's earnings call. 2023 was a challenging year for the banking industry, We had a very productive one for Brookline Bancorp. We started the year with the successful acquisition, management transition and integration of PCSB Bank. In mid February, the systems conversions were completed without incident and the synergies identified were realized. Then in March April, as several banks failed, we were able to assist impacted customers in our markets as they navigated the significant near term see it created.

Speaker 2

In a volatile interest rate environment, we have added bankers to our teams, while continuing to expand and enhance our technology as well as our product and service offerings across our 3 banks with a sharp focus on boutique commercial banking. Geographically, we are excited about the opportunities PCSB Bank provides us in the Hudson Valley of New York. In Massachusetts, Brookline Bank expanded our Wakefield lending office and opened a new lending office in Needham. And in Rhode Island, Banquet Island has new branches in both Cranston and Newport. Eastern Funding, our national equipment finance unit specializing in laundromats, Tow trucks and fitness equipment continue to demonstrate solid growth with enviable industry credit performance, which we attribute to the team's narrow focus and very deep expertise.

Speaker 2

I will now turn you over to Carl, who will review the company's 4th quarter results.

Speaker 3

Thank you, Paul. Yesterday, we reported net income for the quarter of $22,900,000 or 0.26 dollars per share. Total assets finished the year at $11,400,000,000 approximately $200,000,000 higher than Q3, driven by loan growth of $261,000,000 offset by a decline in other assets. We experienced strong loan growth in all categories with commercial growth of $118,000,000 commercial real estate of $95,000,000 equipment finance $41,000,000 $7,000,000 in consumer loans. In the Q4, we originated $792,000,000 in loans at a weighted average coupon of 7 27 basis points.

Speaker 3

The weighted average coupon on the core loan portfolio rose 10 basis points to 5.92 basis points at December 31. On a linked quarter basis, the yield on the loan portfolio increased 17 basis points to 6.01%. On the funding side, Consumer customer deposits were basically flat, while broker deposits declined $13,000,000 and borrowings increased $242,000,000 Deposit growth continued to be focused in higher rate savings and time deposits, offset by declines in DDA and money market products. Total funding costs increased 23 basis points in the quarter to 3 39 basis points. Total average interest earning assets grew $3,000,000 on a linked quarter basis and the net interest margin declined 3 basis points to 3.15 percent, resulting in net interest income of $83,700,000 a decline of $500,000 from the 3rd quarter.

Speaker 3

Non interest income was $8,000,000 which was $2,500,000 higher than the prior quarter, driven by loan level, derivative income, gains on participated loans and higher other non interest income. Expenses were $59,200,000 for the quarter, up 1,500,000 Q3, primarily driven by compensation and benefits. Provision for credit losses was $3,800,000 for the quarter, up $800,000 from Q3. Yesterday, the Board approved maintaining our quarterly dividend of $0.135 per share to be paid on February 23 to stockholders of record on February 9. On an annualized basis, our dividend payout approximates a yield of approximately 5%.

Speaker 3

This concludes my formal comments. I'll turn it back to Paul.

Speaker 2

Thank you, Karl, and we will now open it up for questions.

Operator

Thank you. Our first question today comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead, Mark.

Speaker 4

Hey guys, nice quarter.

Speaker 2

Thank you.

Speaker 4

First question I had for you The first question I had was, loan growth continues to outpace deposit growth. And I know you're opening some new branches and hopefully over time that will catch up. But I guess I was curious with the loan to deposit ratio at 113%, where would you be willing to let that go to as you work hard to bring in new deposits?

Speaker 2

Back in the old days when you started looking at us, we were quite a than this, and I don't think I want to go back to that level, which was like 175. But We're working hard at generating core deposits. The issue really has been that loan generation has been quite strong. So we'll keep with that strategy and we'll see how we can manage the loan to deposit ratio, but I would hate to put A hard number out there, Mark. We know lower is better.

Speaker 5

Okay.

Speaker 4

And then Carl on the margin, it feels like almost every bank is predicting that their margin will decline a little bit more in the first half of this year and then start to rebound when the Fed begins to hopefully ease. Do you share that view For Brookline?

Speaker 3

Our current projections for the Q1 are probably flat to down a A couple more basis points. A lot of our growth in the loan book came near the end of the quarter. So you didn't really see it in the average balances. I saw the ending balances. And of course, that's been funded for the most part right now with as wholesale borrowings.

Speaker 3

So the wholesale borrowings jump up 242,000,000 So that's definitely at a lower spread than our going margin. As Paul mentioned, we're working hard to try those deposits up to improve the margin. So while we might have net interest income up, the margin may be down a little bit. But as we look forward, depending on what the Fed does with rates and what the market does, we do expect the margin to improve going out through 2024.

Speaker 5

Okay. And then, Carl, can

Speaker 4

you help us think about Expense growth given the new branches and people that you're hiring, how that's likely to affect operating expenses in 2024?

Speaker 3

So if you use our 4th quarter run rate, it's a little over $59,000,000 I think We'll only grow maybe 1% or 2% off that run rate. It will pop a little bit in Q1 Because of seasonality factors associated with payroll taxes and incentive accruals for the most part, unless we start getting snowstorms, but so far we've been all right there. And so that's kind of what we usually see in the Q1. And then Yes.

Speaker 2

And the number of branches that we're going to open is very strategic and limited because there'll be some closures And some moving of things.

Speaker 3

See, I don't tell them about the closures, Paul.

Speaker 2

It's not going to change the expense mode very much.

Speaker 4

Okay. And then, in your slide deck on Page 18, You have kind of a breakdown of the office portfolio and the maturities. I guess I was curious if you could share with us any sort of high level thoughts on What the what sort of the occupancy rates look like on those office buildings today?

Speaker 3

I don't have occupancy rates at my fingertips on these loans. I know our guys are looking at that all the time. But we continue to work with our borrowers, anybody that's coming up from maturities on refinancing their loans.

Speaker 6

Paul, you have any more time?

Speaker 3

Thank you. No,

Speaker 2

I would think a lot of it is pretty good because it's mostly outside of the core business district. It's all over the Hudson Valley. It's all over Rhode Island and a lot of it is in suburban Boston, which haven't really seen

Speaker 5

Thank you.

Operator

Our next question comes from Nick Cucharmele with Hovde Group. Please go ahead.

Speaker 7

Good afternoon, everyone. How are you? So I just wanted to follow-up on the accelerating loan growth. Could you provide some color there? Was it simply capitalizing on some good opportunities this quarter and that pace should revert back towards the mid single digits we're used to seeing from you guys?

Speaker 3

I think we're focused on probably growth of 4% to 5% for 2024. We closed certainly closed more loans in Q4 than I was expecting. And so some of that growth probably in Q1 has gotten pulled into Q4. So we're starting the year off very strong. And of course, that's my guys always stand begging me on the budgeting side, but that's another story.

Speaker 3

But we're off to a good start for 2024 and I think some of the pipelines are going to have to rebuild. So Q1 may be on the slower side, but we're projecting 4% to 5% growth for 2024 at this point.

Speaker 7

I appreciate that color. In a related vein, can you give us some color on the lending environment across your markets? Have you seen a pullback or any hesitance from your given the funding and capital challenges?

Speaker 2

I don't think it's because of funding or any other particular challenges, but it feels like the largest banks which dominate our markets have really pulled back in a lot of areas And they are not really participating as much as they had, which is one of the reasons why we are seeing a fair amount of business. And the displacement, there were some of the failed banks were pretty active in all of our markets and that created another level of opportunity. I don't know that there is a liquidity or capital problem at the people who are playing The Boston market, you would have Eastern and you would have Rockland Trust, people like that. The White House, some people in Rhode Island, there's a few banks there, But it's our opportunity.

Speaker 7

And then lastly, can you just help us think about the effective tax rate for 2024?

Speaker 3

Excellent. Tax rate is going to jump back up to about 20 4%. We had some tax efficient investments that we had that phase out at the end of this year, so that or end of 2023. So it'll jump back up to about 24%.

Speaker 7

Thank you for taking my questions.

Speaker 3

Okay. Thanks Nick.

Operator

The next question comes from Steve Moss with Raymond James. Steve, please go ahead.

Speaker 6

Good afternoon, guys.

Speaker 3

Hey, Steve.

Speaker 2

Steve. Just Maybe could you

Speaker 4

talk about a little bit on loan pricing here?

Speaker 6

Just on loan pricing, just curious where are new loans coming on Just color right now.

Speaker 3

Sure. So I kind of told you in my notes, Over $700,000,000 of loans originated in the quarter. 727 basis points was the weighted average coupon on that. Not sure how much more detail you want, but that's Our equipment finance unit does particularly well, close to 10% for those loans.

Speaker 6

I accidentally dropped off. I must have missed that right there. Okay. Appreciate that. And just given the end of period balance sheet, you look more liability sensitive given the borrowings here.

Speaker 6

Just Curious if we get some rate cuts, how you guys are thinking about the margin with rate cuts?

Speaker 3

Everybody's talking about rate cuts. So we're our book is fairly short, but not that short. So if they start cutting rates, We will have assets repricing a little faster than our liabilities. So it may take a little bit for us to catch up with that. But our borrowings, we have That's a benefit of having borrowings and things of that nature.

Speaker 3

They do reprice fairly quickly and it depends on how fast we're able to adjust our market rates on our deposits. But I feel we feel in pretty good shape there.

Speaker 6

Okay. Appreciate that. And then you guys are in good capital position on from a TC standpoint, just kind of curious, probably going to build a little bit this year. What are your thoughts around Deploying the capital with an M and A transaction and maybe how are M and A discussions these days?

Speaker 3

M and A discussions these days. Right now, we have seen M and A pick up a little bit. There's a few more Deals being announced, I'd say the holes are still very big on many of these banks that are in the worst shape with Very low NIMs and huge marks in their loan books and their security books. So I think that Deploying capital into something that is not something that we're particularly anxious to do. I do think there is an opportunity, so there will be opportunities to do strategic deals that really makes sense.

Speaker 3

But More to come on that.

Speaker 2

It's a very difficult environment, Jeff. That's all.

Speaker 6

Okay, great. Well, thank you very much for all that.

Speaker 2

Okay, Steve. Thanks.

Operator

The next question comes from Laurie Hunsicker with Seaport Research. Laurie, please go ahead.

Speaker 8

Yes. Hi, thanks. Good afternoon. Hi, Laurie. Maybe margin, just Spot margin for the month of December, do you have that Carl?

Speaker 3

I do. It was 3.10.

Speaker 8

3.10. Okay. And then What was the accretion income number in net interest income this month?

Speaker 3

For the month or for the quarter?

Speaker 8

I'm sorry, this quarter. Yes.

Speaker 3

So the quarter It was just under $2,000,000

Speaker 8

$2,000,000 Okay. So less than last. Okay. And then non interest income that other category of $3,260,000 that looked outsized by a couple of million. What was that and what's non recurring in that number?

Speaker 3

Yes, that's a number that gets has a lot of volatility in it because there's A category in there is our mark to market on our risk participation agreements, which are really associated with swaps. So as rates change in the market that gets marked every quarter. And so this quarter, it was roughly it was just under $500,000 this quarter and it was a loss of about $1,400,000 in the prior quarter. So it was a big swing quarter to quarter in that number. And then we had some other non interest income items that are that go through that as well.

Speaker 8

Okay. Okay. That's great. And then, same question on the non interest expense line, the other, other category, that $5,500,000 that looked outsized, anything non recurring in that?

Speaker 3

There was about $800,000 there that was non recurring that had to do with write off of Some premises that we were projects that we're working on.

Speaker 8

Okay, great. And then on office, can you update us that $14,800,000 Class B office in downtown Boston that went non accruing last quarter. Can you just give us an update on that? And then do you happen to have a debt service coverage ratio, LTV, occupancy, anything on that particular property?

Speaker 3

Well, we continue to work with the borrower on that. It's a participated loan. So we're also I think it's mostly working with the participant on this as well to get this to the finish line. But the debt service coverage is in the 50s And the LTV is I think around 115%, something like that.

Speaker 8

Okay. And then And then we gave up this voucher.

Speaker 2

Go ahead, Laurie.

Speaker 8

I was just going to say the rest of your office book, can you just help us think a little bit about That $774,000,000 in terms of what's Class A versus Class B and C and you have an average LTV or debt service on your whole book? Sure. So, I'll take one more question.

Speaker 3

Okay. So I'll bet about There's really not a lot of A in there at all. It's mostly Bs and Cs. I'd say mostly the Bs, B category there. The LTV on that is right in the 50s, but that's basically at At origination.

Speaker 3

At origination. So I wouldn't want to try to guess what the recent appraisals are at this point because I think that's just tough to get to. And the debt service coverage is around 1.6.

Speaker 8

1.6. Okay, great. And

Speaker 3

then,

Speaker 8

okay, that's great. And then one more thing, how much of that $774,000,000 is medical, That lower risk medical category.

Speaker 2

100,000,000.

Operator

Our next question comes from Chris O'Connor with KBW. Please go ahead.

Speaker 5

Hey, good afternoon.

Speaker 3

Hey, Chris.

Speaker 5

So just following up on the office line of questions. It looks like in the deck on that slide that the 1Q 24 office maturities from last quarter's deck to this quarter's deck went from like $1,000,000 up to $24,000,000 I know you had a larger credit set to mature in the Q4 here. Just wondering if that was the reason that that gets shifted back A little bit or what was the driver of that kind of change in the maturity schedule?

Speaker 3

I don't know the specifics around what you're trying to the specific question you're asking here. But we did have a maturity that came up that we've done some extensions. I want to say it might have been 2 loans that we did some extensions on to continue to resolve it. So it may just be pushed out 3 to 6 months And as we continue to work with the borrower on. Thanks.

Speaker 3

That might be answering your question. Okay, great.

Speaker 5

Great. That's helpful. And As far as the deposits go, it slowed a bit on a quarterly basis in terms of the pace, but Any read into how much of the non interest bearing mix shift has remaining? I mean, But it's slow between the October December, and what's kind of your Bayside outlook for the next couple of quarters here?

Speaker 3

It's a great question. I wish I had a great answer for you. On the deposit side, we do expect to start seeing some growth in deposits. It may come a little bit later this year than earlier this year. But the deposit outflows we've seen have largely been driven by the higher balance accounts that have been moving their excess balances to Treasury funds seeking higher yields, but that has largely played itself out.

Speaker 3

I think that's kind of all done with. The last Fed hike we had was in July. And while deposit pricing remains very, very competitive, it's fairly stabilized at this point. So we do feel like we're going to start seeing some deposit growth, Albeit, we'll also probably given the level of interest rates, DDA, we may still continue to see a little bit of DDA in the low cost deposits migrate into the higher cost of funds. But even that is that's going on a much slower pace at this point.

Speaker 3

But to give you a precise number, I really couldn't do that.

Speaker 5

Okay. Understood. And for next year, Mid year, I believe Durban starts to hit your fees. Maybe just an update on what that number is?

Speaker 3

So we've been guiding that to be about $200,000 to $250,000 quarter. For the interchange, that's our expectation and that would start happening in July. And so that'll be a negative to the fee income side. But we continue to work very hard on other sources of fee income throughout the organization.

Speaker 2

Great.

Speaker 5

And just circling back to the margin dynamics, can you remind us how much Of the portfolio on the loan side immediately re prices with short term rates? And what how much of the deposit book, I guess, is indexed to short term rates.

Speaker 3

We got a nice little slide. Slide 22 kind of lays out where we are on that. So about 20% of our loan portfolio is floating. So that basically reprices within 2 months.

Speaker 2

And None of the deposits are indexed.

Speaker 3

Yes. Nothing is indexed on the deposit side. We can move rates on The non maturity deposits at will, but that's also very market driven as you can imagine. Our CD portfolio, so CDs we have about $335,000,000 of CDs that are repricing in Q1, and it's around 3.40 345 something like that in yield or cost, and those are repricing up into the 4s, the mid 4s.

Speaker 5

Great. That's helpful. And as far as capital levels go, I mean, you guys have pretty good TC here Should be building going forward. It sounds like M and A is probably set on pause for now. Any appetite for utilizing buyback or kind of holding out for loan growth right now?

Speaker 3

I think from our perspective, Letting capital build at this point and support growth in all of our markets is the right thing to do.

Speaker 5

Great. Appreciate the time. Thank you.

Speaker 2

We're good. Okay, good.

Operator

This concludes our question and answer session. I'd like to turn the conference back over to Mr. Perrott for any closing remarks.

Speaker 2

Thank you, Emily, and thank you all for joining us this afternoon. We look forward to talking with you again next quarter. Have a good day.

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Key Takeaways

  • Brookline Bancorp reported Q4 net income of $22.9 million ($0.26 per share) and the board approved maintaining its quarterly dividend at $0.135 per share (approximately a 5% annualized yield).
  • Total assets ended 2023 at $11.4 billion (up about $200 million from Q3), driven by $261 million of loan growth across commercial, commercial real estate, equipment finance and consumer portfolios, with $792 million in originations at a 7.27% average coupon.
  • Consumer deposits were flat, brokered deposits declined $13 million, and borrowings rose $242 million, contributing to a funding cost increase of 23 bps to 3.39% and a net interest margin of 3.15% (down 3 bps), yielding net interest income of $83.7 million.
  • Noninterest income rose $2.5 million to $8 million (driven by derivative income, participations and other fees), noninterest expense increased $1.5 million to $59.2 million (largely compensation and benefits), and the provision for credit losses was $3.8 million.
  • For 2024 the bank forecasts 4–5% loan growth, modest expense growth of 1–2%, slight NIM compression in Q1 before recovery, an effective tax rate around 24%, and will remain selective on strategic M&A while capital supports growth.
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Earnings Conference Call
Brookline Bancorp Q4 2023
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