Brookline Bancorp Inc (BRKL) 2023 Q4 法說會逐字稿

Good afternoon, and welcome to Brookline Bancorp Inc's Fourth Quarter 2023 Earnings Conference Call. (Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Brookline Bancorp's attorney, Laura Vaughn. Please go ahead.

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, brooklinebancorp.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.

I'm pleased to introduce Brookline Bancorp's Chairman and CEO, Paul Perrault.

Thanks, Laura, and good afternoon, all. 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 and April, as several banks failed, we were able to assist impacted customers in our markets as they navigated the significant near-term uncertainty it created. In a volatile interest rate environment, we have added bankers to our teams, while continuing to expand and advance our technology infrastructure, as well as our product and service offerings across our three 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, Bank Rhode Island has opened new branches in both Cranston and Newport.

Eastern funding, our national equipment finance unit specializing in laundromats, tow trucks, and fitness equipment continued to demonstrate solid growth with enviable industry credit performance, which we attribute to the team's narrow focus and very deep expertise.

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

Thank you, Paul. Yesterday, we reported net income for the quarter of $22.9 million, or $0.26 per share. Total assets finished the year at $11.4 billion, approximately $200 million higher than Q3, driven by loan growth of $261 million, offset by a decline in other assets.

We experienced strong loan growth in all categories, with commercial growth of $118 million, commercial real estate of $95 million; equipment finance, $41 million; and $7 million in consumer loans. In the fourth quarter, we originated $792 million in loans at a weighted average coupon of 727 basis points. The weighted average coupon on the core loan portfolio rose 10 basis points to 592 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, customer deposits were basically flat, while broker deposits declined $13 million, and borrowings increased $242 million. 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 339 basis points. Total average interest earning assets grew $63 million on a linked quarter basis, the net interest margin declined three basis points to 3.15%, resulting in net interest income of $83.7 million -- a decline of $500,000 from the third quarter.

Noninterest income was $8 million, which was $2.5 million higher than the prior quarter, driven by loan level; derivative income; gains on participated loans; and higher other noninterest income.

Expenses were $59.2 million for the quarter, up $1.5 million from Q3, primarily driven by compensation and benefits. Provision for credit losses was $3.8 million 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 annualized basis, our dividend payout approximates a yield of approximately 5%, this concludes my formal comments and I will turn it back to Paul.

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

Thank you. (Operator Instructions)

Mark Fitzgibbon, Piper Sandler.

Hey, guys, nice quarter.

Thank you.

Thanks.

First question I had for you -- the first question I had was on 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?

Back in the old days, when you started looking at us, we were quite a bit higher than this. And I don't think I'd want to go back to that level, which was like 175%. But you know, 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 it a hard number out there, Mark. We know lower is better.

And then, Carl -- okay. 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 some. Do you share that view for Brookline?

Our current projections for the first quarter are probably flat to down 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 it at the ending balances. And of course, that's been funded for the most part right now as wholesale borrowings. So the wholesale borrowings jump up $242 million. So that's definitely at a lower spread than our going margin.

You know, as Paul mentioned, we're working hard to trying to get those deposits up to improve the margin. While we might add 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.

Okay. And then, Carl, can you help us think about expense growth given the new branches and people that you're hiring, how that is likely to affect operating expenses in 2024?

So if you use our fourth quarter run rate, it's a little over $59 million. 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 to get snowstorms but so far we've been all right there. And so that's kind of what we usually see in the first quarter.

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

I'll tell them about the closures, Paul.

It's not going to change the expenditures very much there.

Okay, and then on 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 sort of the occupancy rates look like on those office buildings today?

I don't have occupancy rates at my fingertips on these 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 for maturities on refinancing their loans. Paul, you have any --

Thank you.

No, I would think a lot of it is pretty good because it's mostly outside of the core business. It's all over the Hudson Valley. It's all over Rhode Island and a lot of it is in suburban Boston, which hasn't really seen the occupancy issues that central business district has.

Thank you.

Nick Cucharale, Hovde Group.

Good afternoon, everyone. How are you?

We're good.

So 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?

I think we're focused on a probably growth of 4% to 5% for 2024. We closed -- certainly 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 that're sandbagging me on the budgeting side, but that's another story.

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

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 competition, given the funding and capital challenges?

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 are not really participating as much as they had. And which is one of the reasons why we're seeing a fair amount of business.

The displacement -- there were some of the failed banks were pretty active in all of our markets, and that created another level of opportunity. But I don't know that there is a liquidity or capital problem at the people who are playing, you know, the Boston market that -- you would have Eastern, and you would have Rockland Trust -- people like that. Like us, some people in Rare Island, there's a few banks there. But it's our opportunity.

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

Well, excellent. Tax rate is going to jump back up to about 24%. We had some tax-efficient investments that we had that phased out at the end of this year, so that for end of 2023, so it will jump back up to about 24%.

Thank you for taking my questions.

Sure. Okay, Nick.

Thanks, Nick.

Steve Moss, Raymond James.

Good afternoon, guys.

Hey, Steve.

Hey, Steve.

Maybe could you talk about a little bit on loan pricing here? Just on loan pricing, just curious you acquire new loans coming on, and just color on that?

Sure. So I kind of told you in my notes, we hold $700 million of loans originated in the quarter, 727 basis points was the weighted average coupon on that. Not sure how much more details you want, but our equipment finance unit does particularly well it -- close to 10% for those loans.

Actually, we drop that, but it must be in the spread right there.

Right. Okay. Appreciate that. And just given the end-of-period balance sheet, you look more liability-sensitive given the borrowings here. Just kind of curious -- if we get some rate cuts, how you guys are thinking about the margin on with rate cuts?

Everybody is talking about rate cuts. So, 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, that's a benefit of borrowings and things of that nature. They do reprice fairly quickly, and it depends on how fast we're able to adjust our market rates on our deposits. But we feel in pretty good shape.

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

M&A discussions these days -- right now, we have seen M&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 the security books.

So I think that deploying capital into something like that is not something that we're particularly anxious to do. I do think that there is an opportunity. So there will be opportunities to do strategic deals that really makes sense. But more to come on that.

It's a very difficult environment. Yes, that's all.

Okay. Well, great. Thank you very much for that.

Okay, Steve.

Thanks.

Laurie Hunsicker, Seaport Research.

Yeah thanks, good afternoon. Maybe just spot margin for the month of December. Do you have that Carl?

I do. It was up 310.

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

For the month, or for the quarter?

I'm sorry. This quarter.

So the quarter was just it was just under just under $2 million.

Okay, so less than last. Okay.

And then noninterest income, that other other category of $3.26 million, that looked outsized by a couple of million. What was that, and what's nonrecurring in that number?

Yes, hat's a number that 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 million for the prior quarter.

So it was a big swing quarter-to-quarter in that number. And then we had some other noninterest income items that are it goes to that as well.

Okay. Okay. That's great. And then same question on the noninterest expense line. The other other category, that $5.5 million that looked outsized, anything nonrecurring in that?

Yes, there was about $800,000 there that was nonrecurring that has to do with write off of some of our own premises --

Projects.

Projects that we're working on.

Okay, great. And then on on office, can you update us that $14.8 million 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?

Well, we continue to work with the borrower on that. It's a participated loan. So 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 15%, something like that.

Okay. And then --

(multiple speakers) Go ahead, Laurie.

I was just going to say -- the rest of your office book. Can you just help us think a little bit about that $774 million in terms of what's Class A. versus Class B and C, and do you have an average LTV or debt service on your whole book?

Sure, so --

And then I guess one more question. Oh -- go ahead.

So, of that, about -- there's really not a lot of A in there at all. It's mostly Bs and Cs. I think mostly the Bs -- B category there. The LTV on that is right in the 50s, but that's basically at origination. So I wouldn't want to trying to guess what the recent prices are at this point because I think that's just tough to get to.

And the debt service coverage is around $1.6 billion.

Okay, that's great. And then the one more thing on how much of that $774 million is medical -- that lower risk medical category?

$100 million.

Okay, great. Thanks. I'll leave it there.

Sure. Very good.

Chris O'Connell, KBW.

Hey, good afternoon.

Hi Chris.

So just following up on that on the office line 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 million up to $24 million. I know you had a larger credit set to mature in the fourth quarter here. Just wondering if that was the reason, does that get shifted back a little bit, or what was the driver of that kind of a change in the maturity schedule?

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 may have been two loans that we did some extensions on to continue to resolve it. So it may just be pushed out three to six months as we continue to work with the borrower on things. That might be answering your question.

Okay, great. Great. That's helpful. And then as far as the deposits go, 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, you know, has remaining? I mean, did it fall between the October and December, and what's kind of your baseline outlook for the next couple of quarters here?

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 and seeking higher yields.

But that has largely played itself out. 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're 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 going at a much slower pace at this point.

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

Okay. Understood. And for next year, midyear, I believe there have been [starts] to hit your fees and maybe just an update on what that number is?

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

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

We've got a nice slide -- slide 22,kind of lays out sort of where we are on that. So about 20% of our loan portfolio is floating. So that basically reprices them within months.

None of the deposits are indexed.

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 million of CDs that are repricing in Q1, and it's around $340, $345, something like that in yield. For cost and those are repricing up into the fours -- the mid-fours.

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

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.

Great. Appreciate the time. Thank you.

Thank you.

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

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.

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