Brookline Bancorp, Inc. (BRKL) Earnings Call Transcript & Summary

Good afternoon, and welcome to Brookline Bancorp Third Quarter's 2022 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, Tia, 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 conditions, 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. Good afternoon, everyone, and thank you for joining us on today's call. I'm pleased to report we had near record earnings of $30.1 million or $0.39 per share and that the Board has approved a 4% increase to our quarterly dividend, bringing it to $0.135 per share. Our loan portfolio grew $129 million or 7% annualized and our net interest margin for the third quarter 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 transaction which we anticipate will close in the fourth quarter. I will now turn you over to Carl, who will review the company's third quarter results in more detail.

Thank you, Paul. Net income this quarter was up $4.9 million from Q2, driven by margin expansion, solid loan growth as well as the year-to-date impact of energy tax credits of $2.4 million related to financing renewable energy investments. These benefits were partially offset by a higher provision for loan losses and merger charges of $1.1 million in the quarter. Total revenues were up $6 million, driven by margin expansion of 24 basis points and $29 million of loan growth in all asset classes. Commercial loans increased $49 million, commercial real estate $43 million, equipment finance, $27 million, and consumer $12 million. In the third quarter, we originated $542 million in loans at a weighted average coupon of 566 basis points. This is up 68 basis points from the prior quarter. The weighted average coupon on the total portfolio rose 52 basis points during the quarter to 481 basis points at September 30. Prepayment fees were $1 million in Q3, flat with Q2 and deferred fees were $1.1 million or $230,000 less than Q2. The combined impact on net interest margin was a positive 1 basis point from the prior quarter. Provision for credit losses was $2.8 million, primarily due to the growth in loan commitments. The allowance for loan -- loans and leases increased $1 million, helped by net recoveries of $179,000 and the reserve for unfunded credits increased $2 million. Credit quality trends continue to be favorable, resulting in a slight decline in reserve coverage to 1.27%. During the third quarter, deposits declined $158 million with liquidity in CDs and other interest-bearing accounts flowing to higher-yielding opportunities. Noninterest-bearing deposits were relatively flat from Q2 and represent 27% of deposits. Increases in short-term rates continue to 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 a historically based product weighted beta of 32% on deposits. As Paul mentioned, the Board approved a quarterly dividend of $0.135 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.

[Operator Instructions] The first question is from the line of Mark Fitzgibbon with Piper Sandler.

Carl, I wondered if you could help us just starting with the effective tax rate going forward given those energy tax credits that you have? How is that 28% and change kind of rate, a good run rate going forward -- I'm sorry, the 22.5% rate going forward?

Yes, very good. Thanks, Mark. So the effective tax rate for the year, we expect it to be around 25.2%. We were reviewing the taxes as of end of Q3. There was a lot of activity in the third quarter. 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 happens this year. We get -- we're able to do it on our tax form those, it was the right thing to do. And -- so that -- that was a $2.4 million 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 -- that will not be impact in 2023. I just want to be clear on that.

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

Correct. Correct. I think we were guiding about 25.5% with the PCSB acquisition.

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

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 it's anybody's guess, quite frankly, on the deposit betas and the flows of funds.

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 to kind of bulk up in that market post the closing of the PCSB deal?

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 is 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.

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

No, no, he's not here.

Okay. I wanted to kind of see if he...

He's on his way to semi-retirement, as you may know.

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.

The next question is from the line of Laurie Hunsicker with Compass Point.

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 rate marks have gone or what the pro forma intangibles look like or both? Any color would be helpful.

Sure. As we all know, rates have moved substantially since we announced the acquisition. At the announcement, we were estimating a $50 million 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 a securities interest rate mark on the loan portfolio, the 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 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. But, naturally, deposits are worth far more today than they were just 6 months ago.