Brookline Bancorp, Inc. (NASDAQ:BRKL) Q4 2022 Earnings Call Transcript

Brookline Bancorp, Inc. (NASDAQ:BRKL) Q4 2022 Earnings Call Transcript January 26, 2023

Operator: Good afternoon. And welcome to Brookline Bancorp, Inc.’s Fourth Quarter 2022 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 Vaugh . Please go ahead.

Unidentified Company Representative: Thank you, Alexis, 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 two 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 am pleased to introduce Brookline Bancorp’s Chairman and CEO, Paul Perrault.

Paul Perrault: Good afternoon, everyone, and thank you for joining us on today’s call. I am pleased to report we had a very productive quarter, which capped off a solid year of performance. As previously announced, we received regulatory approval in December on the acquisition of PCSB Financial and we were able to close on that deal on January 1st. Earnings for the quarter were $29.7 million or $0.39 per share as our loan portfolio grew $223 million, while also recognizing loan participation income of $2.6 million. Before I turn it over to Carl to review the company’s financials, I want to make a few comments about the PCSB Financial acquisition. We are very pleased that Willard Hill agreed to join our Board of Directors of Brookline Bancorp and he actually had his first Board meeting here yesterday in Boston.

And this morning, I had my first Board meeting with the PCSB Bank Board now chaired by the new President and CEO, Michael Goldrick. I also want to recognize the tremendous effort of the teams at both PCSB and Brookline, which are keeping us right on track for the core systems conversion in mid-February. I will now turn it over to Carl.

Carl Carlson: Thank you, Paul. As Paul mentioned, the loan portfolio advanced $223 million with growth in all asset classes. Commercial real estate grew $135 million, commercial $42 million, equipment finance $41 million and consumer $6 million. In the fourth quarter, we originated $687 million in loans at a weighted average coupon of 647 basis points. This is up 81 basis points from the prior quarter. This increased the weighted average coupon on the total loan portfolio of 56 basis points during the quarter to 537 basis points at December 31st. Prepayment fees increased $199,000 in Q4 to $1.2 million. The amortization of deferred fees was $1 million, which was $122,000 less than Q3. The combined impact of $321,000 had roughly a 1 basis point benefit on the net interest margin from the prior quarter.

The provision for credit losses was $5.7 million, an increase of $2.9 million from Q3 and an impact of $0.03 per share in the quarter. The increase was primarily due to strong growth in loans outstanding, as well as continued growth in unfunded commitments. The allowance for loan losses increased $4 million, while net charge-offs were $310,000 or approximately 2 basis points on loans on an annualized basis. The reserve for unfunded credits also increased $2 million from Q3. Credit quality trends continue to be favorable as non-performing loans declined 19 basis points of total loans. However, due to a slight deterioration in economic forecasts, the reserve coverage increased slightly to 1.29%. During the fourth quarter, deposits declined $214 million with investment-oriented balances flowing to higher yielding opportunities.

Deposit betas accelerated in Q4 as total deposit funding increased 43 basis points or 34% of the 125 basis point increase in the Fed funds rate. Our total funding cost increased 65 basis points in the quarter or 52% of the increase in the Fed funds rate. As deposits migrated to higher payment products and asset growth was funded with wholesale funding, resulting in a net interest margin remaining consistent with Q3 at 3.8%. Revenues increased $3.9 million, excluding security gains, driven by a $2 million increase in the net interest income and an increase of $1.9 million in non-interest income due to strong loan participation income, which is reflected in gain on sale of loans. Operating expenses were up $2.7 million due largely to true-ups for incentive accruals and some non-capitalized costs related to software and systems enhancements, as well as increases in FDIC assessments.

Merger expenses were $641,000 in the quarter, a decline of $432,000 from Q3. Pretax pre-provision net revenue was $41.8 million, which was a $2 million increase over Q3. As Paul mentioned, the Board approved a quarterly dividend of $0.135 per share, which represents a 4% yield based on yesterday’s closing price. The dividend will be paid on February 24th to stockholders of record on February 10th. This concludes our formal comments. We will now open up for questions.

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Q&A Session

Operator: Absolutely. The first question comes from the line of Mark Fitzgibbon with Piper Sandler. You may proceed.

Mark Fitzgibbon: Hey, guys. Happy Thursday.

Paul Perrault: Thanks, Mark.

Carl Carlson: Good morning.

Mark Fitzgibbon: A couple quick questions first on PCSB. I guess I am curious any surprises there, good or bad and are you thinking at all about doing some restructuring post the closing of PCSB doing some balance sheet restructuring?

Paul Perrault: Let me start with the qualitative and then I will give it to Carl for the quantitative. I am seeing certainly no negative surprises. I have never seen such an enthusiastic group of acquired people. So things are proceeding at pace and things are going very well.

Carl Carlson: Certainly, on the — one of the great benefits of PCSB Bank is the liquidity in the markets it’s in. So it’s right off the back. We will be restructuring the investment portfolio, which will provide additional liquidity for the company overall and be able to pay down some borrowings, which is actually better than actually having the investments on the balance sheet. So some restructuring will be happening in the near-term on — particularly around the investment portfolio. It also provides funding for higher yielding assets such as our equipment finance unit.

Mark Fitzgibbon: Okay. Great. And then, Carl, I noticed on the balance sheet, you have like $71.4 million of restricted equity securities, what exactly are those?

Carl Carlson: That’s primarily investments in — we are a Federal Reserve Bank members, so there’s a stock that you have to hold with the Fed — at the Fed — of the Fed, I should say. And then the also Federal Home Loan Bank membership

Mark Fitzgibbon: Okay.

Carl Carlson: so with both in New York and that number represents Boston, the New England Federal Bank, but then we will also have the New York.

Mark Fitzgibbon: Okay. And Carl, could you maybe share with us how you are thinking about the margin and expenses in the first quarter combined with PCSB, help us triangulate that?

Carl Carlson: Sure. Directionally, I believe we will continue to see deposit betas at an accelerated pace, particularly as the Fed slows, just because of the lag and how things get priced, you will see that. I think deposit flows out of the system will slow. I don’t think they are going to accelerate from here. I think they will slow from here. But it still puts pressure on the funding side of things as we rely on wholesale funding to fund additional growth and so we continue to see a pretty good pipeline on the growth, at least in the near-term. We will see what happens as time progresses. So directionally I see challenges on — not challenges, but the margin coming back towards down rather than up from here. PCSB will be very helpful on the margin side.

But it’s too early for me to really comment on how much that might be. We are still doing a lot of the purchase accounting adjustments on this. So I don’t want to really — I really can’t give you a good answer on that.

Mark Fitzgibbon: Fair enough. And then on the expense side, combined maybe $56-ish million

Carl Carlson: Oh! So on the expense side. Go ahead, I am sorry.

Mark Fitzgibbon: No. I was going to say is sort of $56 million a good rough ballpark estimate before all the synergies are extracted?

Carl Carlson: Yeah. I am not going to comment on the $56 million. I would say this quarter, we were a little bit — we had some true-ups to incentives and some other — I don’t like to call them one-time items or non-recurring items, but I would say non-run rate type items in our expense base. I do expect FDIC insurance to accelerate even more so in the next quarter due to increases in rates at the FDIC and that’s industry-wide. But as far as cost once we get through the first quarter, we do expect — we are right on track for conversion in mid-February. I think it’s February 17th, that weekend and so we will have folks through that time period. So they will have an impact on the first quarter. But after that, right now, we are on track for our — the cost savings that we had projected.

And a lot of those costs have already come out. So a lot of, as you know, when we announced the transaction, there were ESOP expenses, SERP expenses, things like that, that were really driving this. There isn’t a lot of — and some executives that were leaving the organization. There weren’t a lot of staff folks that were getting impacted. So not a lot of cost savings associated with that, but we do have retention bonuses and things of that nature as we go through this. So once we get through the first quarter, we will be back on track of what we expect — what we initially projected for savings around that.

Mark Fitzgibbon: Okay. And then last question, I know you guys are really conservative underwriters. But are you seeing any signs of distress at all in your office book, which is, I think, a little over $600 million?