Brookline Bancorp Inc

NASDAQ:BRKL

Earnings Call Analysis

Brookline Bancorp Q4 Results and 2024 Outlook

Brookline Bancorp ended Q4 with a net income of $22.9 million or $0.26 per share. Total assets reached $11.4 billion, propelled by substantial loan growth across all categories totaling $261 million, outpacing a flat customer deposit growth and leading to an increased loan-to-deposit ratio. The Board approved a constant quarterly dividend of $0.135 per share. Looking ahead, the net interest margin projection for Q1 is flat to slightly down, as recent loan book growth, funded mainly by wholesale borrowings, yields a lower margin. The team is working on increasing deposits to improve margins, with expectations for margin improvement into 2024. Expense growth is anticipated to be 1-2% above the Q4 run rate of over $59 million, with seasonal increases in Q1.

Overview of Financial Performance

Brookline Bancorp reported a successful quarter, with a net income of $22.9 million, which equates to $0.26 per share, demonstrating an ongoing commitment to returning value to shareholders via dividends, maintaining the rate at $0.135 per share. The bank's total assets grew to reach $11.4 billion, a $200 million increase over the previous quarter, fueled largely by a robust loan growth of $261 million across various loan types. In contrast, there was a slight decline in other assets.

Loan Portfolio Expansion and Interest Income Dynamics

The loan portfolio witnessed substantial expansion in the fourth quarter, generating $792 million in loans and achieving a weighted average coupon increase to 592 basis points. This yield enhancement, coupled with higher loan origination, led to an uptick in the yield on the loan portfolio to 6.01%. However, net interest income showed a minor dip of $500,000 from the previous quarter, settling at $83.7 million. The net interest margin contracted slightly by 3 basis points to 3.15% due to funding costs rising by 23 basis points amid a shifting deposit mix and increased borrowings.

Noninterest Income and Expense Trends

Noninterest income presented a positive picture, increasing by $2.5 million to $8 million, spurred by derivative income and gains from loan participations among other factors. Conversely, expenses escalated to $59.2 million due to rising compensation and benefit costs. The bank also saw a heightened provision for credit losses, which rose by $800,000 from the previous quarter to $3.8 million.

Acquisitions and Growth Initiatives

Brookline Bancorp embarked on strategic growth initiatives, beginning the year with the successful acquisition and integration of PCSB Bank. To bolster their market presence, they have expanded their lending offices and opened new branches, constantly improving technology infrastructure and service offerings. Notably, Eastern Funding, their National Equipment Finance unit, has shown commendable growth and strong credit performance, especially in niche markets like laundromats, tow trucks, and fitness equipment.

Dividend Policy

The bank's dividend policy has been investor-friendly with an annualized yield of approximately 5%, indicating a firm stance on shareholder returns amidst the prevailing market conditions.

Forward-Looking Projections

Management anticipates a modest flattening to a potential decline in net interest margin by a few basis points for the upcoming quarter. However, they are optimistic about margin improvement throughout 2024. The bank is on track for a 4% to 5% growth target for 2024, after closing a higher-than-expected number of loans in the previous quarter. They also flagged that certain tax-efficient investments would phase out by the end of 2023, leading to an increased tax rate of about 24% for the following year.

Expense Management and Branch Strategy

Carl Carlson, an executive of the bank, noted that operational expenses might grow by 1% to 2% from the current run rate, with a small spike anticipated in Q1 due to seasonality and payroll tax impacts. The bank also plans a very strategic and limited number of branch openings, balanced by some closures and reallocations, suggesting a cautious approach to physical expansion.

Loan Portfolio Insights

The bank's loan portfolio is composed of diverse sectors, with significant originations in commercial, commercial real estate, equipment finance, and consumer loans. Importantly, the equipment finance loans have been particularly profitable, fetching close to a 10% weighted average coupon.

Interest Rate and Balance Sheet Management

The bank's loan book, containing about 20% of floating-rate loans, would reprice over 12 months, offering some buffer against interest rate movements. On the liability side, none of the deposits are indexed, giving the bank discretion over rate adjustments, despite being market-driven. The CD portfolio anticipates a repricing of about $335 million of CDs in Q1 at significantly higher rates.

Capital Management and Strategic Priorities

The bank intends to continue building capital to support growth across all markets, implying a focus on organic development over mergers and acquisitions or capital return initiatives such as share buybacks in the near term.

Earnings Call Transcript 2023-Q4

[Operator]

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.

[Laura Vaughn, executive]

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.

[Paul Perrault, executive]

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 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 enhance our technology infrastructure 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, 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 continue 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 it over to Carl, who will review the company's fourth quarter results.

[Carl Carlson, executive]

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, consumer -- customer deposits were basically flat while broker deposits declined $13 million and borrowings increased $242 million. Deposit growth continued to be focused on higher rate savings and time deposits, offset by declines in DDA and money market products.

Total funding cost increased 23 basis points in the quarter to 339 basis points. Total average interest-earning assets grew $63 million on a linked quarter basis, and the net interest margin declined 3 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 an annualized basis, our dividend payout approximates a yield of approximately 5%.

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

[Paul Perrault, executive]

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

[Operator]

[Operator Instructions] Our first question today comes from the line of Mark Fitzgibbon with Piper Sandler.

[Mark Fitzgibbon, analyst]

Nice quarter. First question I have 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?

[Paul Perrault, executive]

Back in the old days, when you started looking at us, we were quite a bit higher than this. And not only 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 high number out there, Mark. We know lower is better.

[Mark Fitzgibbon, analyst]

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. Do you share that view for Brookline?

[Carl Carlson, executive]

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. You saw it at the ending balances. And of course, that's been funded for the most part right now with -- as wholesale borrowings. So the wholesale borrowings jumped up $242 million.

So that's definitely at a lower spread than our going margin. As Paul mentioned, we're working hard to try to get 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, what the market does, we do expect the margin to improve going out through 2024.

[Mark Fitzgibbon, analyst]

Okay. And then, Carl, can 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?

[Carl Carlson, executive]

So if you use our fourth quarter run rate, it's a little over $59 million, I think we'll always 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 first quarter.

[Paul Perrault, executive]

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.

[Carl Carlson, executive]

See how I tell them about the closure...

[Paul Perrault, executive]

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

[Mark Fitzgibbon, analyst]

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 sort of the occupancy rates look like on those office buildings today.

[Carl Carlson, executive]

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 for maturities on refinancing their loans. Paul, do you have any?

[Paul Perrault, executive]

No, I would think a lot of it is pretty good because it's mostly outside of the core business system. It's all over the Hudson Valley. It's all over Rhode Island, and a lot of it has been suburban Boston, which haven't really seen the occupancy issues that [indiscernible] businesses for customers.

[Operator]

Our next question comes from Nick Cucharale with Hovde Group.

[Nicholas Cucharale, analyst]

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?

[Carl Carlson, executive]

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 guide so we stand back and be on the budgeting side, but that's another story. 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 a little on the slower side. But we're projecting 4% to 5% growth for 2024 at this point.

[Nicholas Cucharale, analyst]

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 competition given the funding and capital challenges?

[Paul Perrault, executive]

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, which is one of the reasons why we're 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.

But I don't know that there is a liquidity or capital problem that the people who are playing the Boston market, you would have Eastern and you would have Rockland Trust, people like that. [indiscernible] some people in Rhode Island, there's a few banks there. But it's our opportunity.

[Nicholas Cucharale, analyst]

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

[Carl Carlson, executive]

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

[Operator]

The next question comes from Steve Moss with Raymond James.

[Stephen Moss, analyst]

Maybe could you talk about a little bit on loan pricing here. Just on loan pricing, just curious where are new loans coming on and just color around that.

[Carl Carlson, executive]

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

[Stephen Moss, analyst]

I accidentally dropped out, but I [indiscernible] 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. Just kind of curious if we get some rate cuts, how you guys are thinking about the margin with rate cuts?

[Carl Carlson, executive]

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 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 I feel -- we feel in pretty good shape there.

[Stephen Moss, analyst]

Okay. Appreciate that. And then you guys are in a good capital position 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&A transaction and maybe how are M&A discussions these days?

[Carl Carlson, executive]

M&A discussion 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 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. But more to come on that.

[Paul Perrault, executive]

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

[Operator]

The next question comes from Laurie Hunsicker with Seaport Research.

[Laura Havener Hunsicker, analyst]

Maybe your margin, just -- spot margin for the month of December, do you have that currently?

[Carl Carlson, executive]

I do. It was 3.10%.

[Laura Havener Hunsicker, analyst]

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

[Carl Carlson, executive]

For the month or for the quarter?

[Laura Havener Hunsicker, analyst]

I'm sorry, this quarter.

[Carl Carlson, executive]

For the quarter, it was just under $2 million.

[Laura Havener Hunsicker, analyst]

$2 million. Okay, so less than last. Okay. And then noninterest income that other, other category of $3.26 million, that looks outsized by a couple of million. What was that? And what's nonrecurring in that number?

[Carl Carlson, executive]

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 $1.4 million in 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 go through that as well.

[Laura Havener Hunsicker, analyst]

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?

[Carl Carlson, executive]

There was about $800,000 there that was nonrecurring that have to do with the write-off of some premises that we -- projects that we're working on.

[Laura Havener Hunsicker, analyst]

Okay. Great. And then on office. Can you update us that $14.8 million cost to the office in Downtown Boston that went nonaccruing 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 [indiscernible]?

[Carl Carlson, executive]

Well, we continue to work with the borrower on that. It's a participated loan. So we're -- 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 150%, something like that.

[Laura Havener Hunsicker, analyst]

Okay. And then -- and just the rest of your office...

[Paul Perrault, executive]

It's a very difficult -- go ahead, Laurie.

[Laura Havener Hunsicker, analyst]

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 full book?

[Carl Carlson, executive]

Sure. So...

[Laura Havener Hunsicker, analyst]

And I guess I have one more question -- go ahead.

[Carl Carlson, executive]

Okay. So about -- there's really not a lot of A in there at all. It's mostly Bs and Cs. It's like mostly the Bs, B category there. The LTV on that is right in the 50s, but that's basically at...

[Paul Perrault, executive]

At origination.

[Carl Carlson, executive]

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.

[Laura Havener Hunsicker, analyst]

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

[Operator]

Our next question comes from Chris O'Connell with KBW.

[Christopher O'Connell, analyst]

Chris, 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 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 to that get shifted back a little bit? Or what was the driver of that kind of change in the maturity schedule?

[Carl Carlson, executive]

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 too long that we did some extensions on to continue to resolve it. So it may just be pushed out 3 to 6 months as we continue to work with the borrower on things. That might be answering your question.

[Christopher O'Connell, analyst]

Great. That's helpful. And then 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 noninterest-bearing mix shift has remaining? I mean, did it slow between the October and December? And what's kind of your baseline outlook for the next couple of quarters here?

[Carl Carlson, executive]

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. 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's going at a much slower pace at this point. But to give you a precise number, I really couldn't do that.

[Christopher O'Connell, analyst]

Okay. Understood. And for next year, mid-year, I believe there have been -- starts to hit your fees. Maybe just an update on what that number is?

[Carl Carlson, executive]

Well -- 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. It's a -- 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.

[Christopher O'Connell, analyst]

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 what -- how much of the deposit book, I guess, is indexed to short-term rates?

[Carl Carlson, executive]

We've got a nice little slide. Slide 22 kind of lay this out, where we are on that. So about 20% of our loan portfolio is floating. That basically reprices within 12 months.

[Paul Perrault, executive]

None of the deposits are indexed.

[Carl Carlson, executive]

Yes, nothing is indexed on the deposit side. We can move rates on the nonmaturity 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 million, $345 million, something like that in yield or cost, and those are repricing up into the 4s, the mid-4s.

[Christopher O'Connell, analyst]

Great. That's helpful, and as far as capital levels go, I mean, you guys have a pretty good TC here 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?

[Carl Carlson, executive]

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.

[Operator]

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

[Paul Perrault, executive]

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.

[Operator]

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