Brookline Bancorp, Inc. (NASDAQ:BRKL) Q2 2023 Earnings Conference Call July 27, 2023 1:30 PM ET
Laura Vaughn – Attorney
Paul Perrault – Chairman & CEO
Carl Carlson – Co-President & CFO
Conference Call Participants
Mark Fitzgibbon – Piper Sandler & Co.
Stephen Moss – Raymond James & Associates
Christopher O’Connell – KBW
Good afternoon, and welcome to the Brookline Bancorp, Inc.’s Second Quarter 2023 Earnings Conference Call. [Operator Instructions].
I would now like to turn the conference over to Brookline Bancorp’s Attorney, Laura Vaughn. Please go ahead.
Thank you, Alex, 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. We will not be doing a slide flip this quarter. This afternoon’s call will be hosted by Paul Perrault and Carl 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.
Thank you, Laura, and good afternoon, everyone. Thank you for joining us today on this earnings call.
Yesterday, we reported net income for the quarter of $21.9 million or $0.25 per share. Excluding about $1 million in merger choices, non-GAAP operating earnings were $23.2 million with operating EPS of $0.26. As we discussed during last quarter’s call, in the first quarter, we added over $0.5 billion to our on-balance sheet liquidity and in the form of cash and securities.
During the second quarter, we prudently reduced most of this position. Our bankers remain very active in the markets. And while we continue to be prudent and attentive to our existing customers, we are seeing opportunities to bank strong new relationships.
Loan portfolio grew $94 million this quarter and core deposits grew by $110 million. Non-performing assets increased in the quarter off historically low levels and remain less than 0.5% of total assets. Net charge-offs for the quarter were just 5 basis points annualized while the allowance for loan losses increased to 135 basis points of total loans.
I will now turn it over to Carl, who will review the company’s second quarter results.
Thank you, Paul. This quarter, total assets finished at $11.2 billion, which is $316 million lower than Q1. As Paul noted, we reduced cash and securities $419 million in the quarter, after building on balance sheet liquidity to be bought by $513 million in Q1 during market disruption caused by the failure of several banks.
As we began normalizing these positions during the second quarter, we also reduced our combined borrowings and brokered deposits by $453 million. The banking teams generated solid loan growth of $94 million in the quarter, with growth of $120 million split between — evenly split between commercial real estate and equipment finance with declines of $14 million in C&I and $12 million in consumer loans.
In the second quarter, we originated $506 million in loans at a weighted average coupon of 714 basis points. The weighted average coupon on the core loan portfolio rose 20 basis points during the quarter to 568 basis points at June 30. On a linked quarter basis, the yield on the loan portfolio increased 37 basis points to 5.7%.
On the funding side, core deposits grew $110 million and brokered deposits were reduced $49 million for net growth in deposits of $61 million. The growth was in higher rate savings and time deposits, partially offset by declines in DDA, NOW and Money Market products. The average cost of total deposits increased 58 basis points in the quarter to 204 basis points. While total average interest-earning assets increased $193 million on a linked quarter basis, the net interest margin declined 10 basis points to 3.26%, resulting in net interest income of $86 million, which was consistent with the first quarter.
Non-interest income was $5.5 million for the quarter, which is down $5.7 million when excluding the $1.7 million in security gains realized in Q1. The decline is due to lower customer swap activity as well as lower gain on sale related to loan participations. We also recorded a negative $367,000 mark-to-market on risk participation agreements versus a positive $1.6 million mark in Q1, which is reflected in other non-interest income.
Expenses were $57.8 million for the quarter versus $64.8 million in Q1. Excluding the impact of merger charges in both quarters, expenses declined $1.5 million. Compensation and benefits were down $3.1 million as a result of the full quarter run rate of anticipated efficiencies after the PCSB systems conversions were completed in the first quarter as well as lower benefit costs. This was partially offset by higher professional fees and FDIC assessments.
Provision for credit losses was $5.8 million for the quarter versus $1.1 million in net charge-offs, resulting in the allowance for loan losses increasing to $125.8 million, representing 135 basis points on total loans.
Yesterday, the Board approved maintaining our quarterly dividend at $0.135 per share to be paid on August 25 to stockholders on record as of August 11. On an annualized basis, our dividend payout approximates a yield of approximately 4.9%.
This concludes my formal comments, and I’ll turn it back to Paul.
Thanks, Carl. And now we will open it up for questions.
[Operator Instructions]. Our first question for today comes from Mark Fitzgibbon of Piper Sandler.
First question, maybe for you, Paul, we’re sort of 6 months past the PCSB closing. I wondered if you have noticed any surprises with that franchise or in things you’ve come across in that market that are a little surprising positively or negatively?
Mostly positive. I mean, there are no big surprises, Mark, but they are thrilled being part of this company, and we have brought a lot of new modern things to them. They had been sort of behind the 8 balls in terms of technology and things like that. So, they’re enjoying playing with all their new toys and I think we have yet to see the benefit of that as they get used to them and start exposing them to their customers, the broader product lines that we have and things like that. So, I’ve been pleasantly surprised, but not in a bad way, and we’re feeling very good that it has been consolidated very nicely and is operating well.
Okay. And then secondly, Carl, I wonder if you could help us think about the net interest margin in the third quarter. You guys, obviously, had pretty good control and we’re able to sort of control the descent, if you will, of the margin. How are you thinking about it for 3Q?
Sure, Mark. So when it comes to the margin right now, it’s deposits, deposits, deposits, right? So — and basically, I think of that in the 3 drivers. One, the first is pricing. So I think we were largely caught up on the historical betas. But I anticipate betas to be slightly higher this cycle due to the greater convenience customers have to move funds and access more choices. So we expect to continue to see a bit more pressure on the pricing side, but dramatically slower given the environment and also dependent on competition.
Second is the funding mix. So we’ve seen a lot of transfers of funds out of DDA and NOW accounts into savings and CDs. But I also expect that to diminish over the next quarter or so and basically stabilize.
And third is the growth side. And so I’m very optimistic, given everything I’m hearing from our bankers and what they’re working on as well as how busy our cash management folks are. So — and I know it’s a very, very competitive environment, but I feel really good about where things are headed.
So while we’ll continue to see pressure on the funding side, I think it’s going to be largely offset by the repricing of our assets. And so right now, our models reflect, our margin being down as much as 3 basis points next quarter, 3 or 4 basis points or to possibly being flat. So that’s kind of where we are right now. But that being said, I want to highlight there is significant sources of uncertainty around this and particularly around the economic outlook and the competition for deposits.
Okay. Great. And then I wonder if you could share any details on that $9.3 million commercial relationship that went on non-accrual and also the $2.8 million CRE loan. Any — without revealing anything specific on the borrower, would you be able to kind of share what sort of drove those or any characteristics of the loans and what the LTVs look like?
Well, the C&I loan is technically in bankruptcy. So we’re going to start to see some of the proceeds from that liquidation, if you will. And I think it’s very well reserved with specific reserves. And it is an operating company, which the different operating units have joined up with other similar kinds of organizations. So I think it will take its pace, and it will get settled up probably over the balance of this year. The real estate loan is one that is in the Boston Central Business District, and it’s had occupancy problems for some time. It’s under $3 million. It’s got a good owner. I think we’re all going to be exercising a little bit of patience, but I don’t see any major auto crashes there. It’s sort of a foster child of what a smallish business district building would look like.
Our next question comes from Steve Moss of Raymond James.
Maybe just following up on the margin here. Curious, what’s the rate on new originations that you’re receiving these days?
Like I said, during the quarter, we were originating on balance — about 714 basis points on a weighted average amount from a coupon standpoint. I expect that to continue to increase. And we had some things that were — legacy loans that were getting draws on that were lower rates. But a lot of things right now are being originated north of that. So we feel good about that.
Okay. Got you. And then in terms of just post the PCSB merger, curious how much purchase accounting is contributing to the margin, any quantity around there?
So on the loan side, there was about $2.9 million in the quarter associated with purchase accounting on that side. And I think there was about $300,000 to $400,000 on the negative side on the deposits. So net-net, about $2.5 million contributing to the net interest income in the quarter.
Okay. Great. I appreciate that. And then just in terms of expenses here, previously, I think, close to what you guys guided to. Just curious how you’re thinking about the expense here going forward and maybe any areas of investment you all may have?
So we’ve gotten all the efficiencies we had expected out of the acquisition of PCSB that kind of is reflected in this quarter. We still continue to invest in the business. We’re still particularly around the customer-facing side of things. I don’t see a lot more being added in the back office that I’m aware of at the moment. But we’re open — we just opened up a branch at Bank Rhode Island. We still have other activities moving forward.
So we’ll continue to build that out. It’s in our plans, nothing significant that’s going to drive it materially. I think FDIC is going to be running at a higher run rate. I do expect that to be probably in the $2.1 million to $2.2 million range next quarter. We have a little bit of a true-up this quarter for Q1. When we got to bill from the FDIC, it was a little higher than we thought it was going to be. And I think legal and professional fees should moderate as well going forward. We have a couple of items in there. So we feel — we’re keeping a very close eye on expenses.
[Operator Instructions]. Our next question comes from Chris O’Connell from KBW.
I was hoping to just start off with the balance sheet movements this quarter on the securities and cash. Is that more or less finished at this point? And what’s the level of cash and securities that you would look to keep on balance sheet longer term?
Yes. So I’d say it’s — it’s largely done. I’d say we’d probably have $50 million to $100 million that we would let out over time. I’m very comfortable in the 8% to 12% range of securities on the books in a normal operating environment. But there are certain times, we you feel like, hey, we should have a little bit more liquidity on hand just in case if something happens. And that’s more — that’s driven by the market, the environment.
We have tremendous amounts of access to liquidity, quite frankly. But sometimes you need a little bit more on balance sheet, makes regulators happy. It makes analyst happy, it make — I can sleep easier at night, all those types of things. So — but overall, I think we’re happy in the 8% to 12% range. I’d say we’re probably close to 10% at this point right now.
It doesn’t move so much, because the cash on hand is around — you’re earning over 5% of the Fed, and we’re paying around that same amount spend of home loan bank borrowings or brokered deposits. So those are the levers around that.
Yes. And on the deposit side, you guys had really good growth in the savings line. And I think you mentioned in the prepared comments that there is a higher yield savings product out there. Maybe just provide a little color around that.
Sure. So we have very competitive CD rates out there, but there are folks that would like to have something more liquid than that. So we offer a high rate savings product. Minimum balance is $100,000. It really was made to — created to attract new deposits as well as take care of our current customer base. And that is paid — I think we’re paying at the moment on that product. I think when we originally started that product around 4%.
Got it. Got it. And is that ongoing still?
Great. And then around the NIM commentary, it sounds like given the moves this quarter and some of the impacts in deposit rates slowing down a bit, there should be minimal compression next quarter. Does that imply that we start to kind of bottom out here in late 3Q, 4Q based on the current yield curve?
Yes. Based on our current modeling, it suggests that we would be down slightly in Q3 to possibly flat and then actually increasing in Q4 going forward. But I’ll also caution you, there’s a lot of assumptions in that.
Yes. And you mentioned, I believe, in the comments that you expect the beta to be higher this cycle. Is that higher than the 39% beta, I think that’s in the IRR disclosures in the slide deck.
That’s correct. That’s correct. So our IRR disclosures assumes a flat balance sheet, huge assumption right there and the historical betas that we’ve observed over past cycles. And so that’s what the models reflects. And in my comments, we also do a lot of simulations away from that, and that’s what I’m basing my guidance on.
Okay. Great. And I know you mentioned last quarter that given the pipeline you’re seeing, there’d be a little bit less derivative in participation income. Obviously, fees dropped off quite a bit this quarter relative to 1Q and late last year. Any sense in the pipelines there and customer demand on those types of products and where fees can shake out in the second half of the year?
Yes, it’s tough to provide guidance around that. I would say on the swap side, that’s all dependent on the loan volumes and what we’re doing and how we’re structuring those transactions and that can be very lumpy. So we can have them or we can’t or we may not.
On the — sorry, I don’t want to provide — we could see a nice bounce back in that line item. On the participation side, I’m less optimistic on. I think the participation — that’s a market type thing. I think a lot of banks are not participating things in or able to participate things out. And so I think that revenue line is probably going to be hamstringed for a while.
Okay. Great. And then on the capital side, I mean, you guys have had a pretty good capital levels now all around, picked up above 8% on TC. But it sounds like you have a relatively more robust growth outlook than a lot of the industry into the back half of the year. Are you guys considering at all any share repurchases at this time?
No. We continue to prioritize paying a very competitive dividend and funding our organic growth. Right now, we’re not planning any share repurchase at this time.
This concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Perrault for any closing remarks.
Thanks, Alex, and thank you all for joining us today, and we will look forward to talking with you again next quarter. Good day.
Thank you for joining today’s call. You may now disconnect your lines.