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spk09: Hello and welcome to the Brookline Bancorp, Inc. Third Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Marissa Martin, Associate General Counsel. Please go ahead.
spk03: Thank you, Brandon, and good afternoon, everyone. Yesterday, we issued our earnings release and presentation, which is available on the Investor Relations page of our website, brooklinebankcorp.com, and has been filed with the SEC. This afternoon's call will be hosted by Brookline Bancorp's executive team, Paul A. Peralt and Carl M. Carlson. Before we begin, please note this presentation is being done from several different locations, so if there's a delay or technical problem, we appreciate your patience and understanding. This call may also contain forward-looking statements with respect to the financial condition, results of operations, and business of Brookland 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 comparison and reconciliation to GAAP earnings, please see our earnings release. If you can join us on page three of the earnings presentation, I'm pleased to introduce Brooklyn Bancorp's President and CEO, Paul Peralta.
spk01: Thanks, Marissa, and good afternoon, all. I remain cautiously optimistic as we continue to see positive trends in Massachusetts, Rhode Island, and New York as the reopening process and everyday economic activity seems to be slowly recovering. Activity within the cities of Boston and Providence remain mixed, as work from home continues to be the predominant theme. While some schools are open, sidewalk cafes and restaurants are quite busy. We are cautious as the weather cools and rates of infection possibly increasing. The health and safety of our employees and their families continues to be our priority. While not mandatory, we are encouraging non-branch employees to come into the office one or two times a week while maintaining social distancing and safety guidelines in all of our locations. We will continue to work with the small segment of our customers who are still facing financial challenges related to the shutdowns and may require additional deferrals. Since March 1st, we granted 5,422 short-term deferrals on loan balances of $1.2 billion. I'm pleased to say that as of the end of the third quarter, most of these customers have returned to normal repayment status, and there were 910 credits totaling $280 million with loan modifications. We had a solid quarter of earnings at $18.7 million, or 24 cents per share, as our net interest margin stabilized and we maintained our substantial loan loss reserve position. I'm also pleased to report the Board approved another 11.5-cent dividend to stockholders, which will be paid in November, and also approved the resumption of our stock buyback program, which had been suspended in March. I will now turn you over to Carl, who will review the company's third quarter results. Carl?
spk06: Thank you, Paul. On slide four, we have provided summary comparative income statements. Net income was $18.7 million compared to $19.6 million in Q2, driven by stable revenues, higher expenses, and a slightly lower provision for credit losses. Revenues were relatively flat for the quarter as net interest income increased and fee income declined. Fees related to customer back-to-back interest rate swaps are significantly lower as commercial real estate originations are lower. Operating costs were higher due to compensation costs and higher FDIC assessments. While the economic forecasts we used for modeling credit losses have marginally improved, there remains significant uncertainty in volatility related to the COVID-19 pandemic. We maintained our reserve coverage for loan losses with a provision for credit losses of $4.5 million. As illustrated on page 5, Net interest income increased 1.6 million, driven by average earning asset growth of 142 million, as our net interest margin stabilized at 308 basis points. The yield on a loan portfolio declined 13 basis points, as the cost of funding declined 23 basis points. If you could follow me to slide six, you can reference our comparative summary balance sheets. In the third quarter, the company had $9 billion in assets, down $70 million from Q2. Loans declined 12 million and deposits grew 353 million. The allowance for loan losses remained stable at 120 million and represents 176 basis points of loans, excluding PPT loans. Slide seven reflects the growth and composition of our significant loan and deposit categories. The loan portfolio was relatively flat for the quarter with slight declines evenly distributed across the portfolio. Deposit growth was largely driven by broker deposits as we took advantage of favorable rates for non-maturity broker deposits to replace federal home loan bank advances. While demand deposits and CDs declined in the quarter, increases in now savings and money markets offset this decline. On flight eight, we are providing the status of our loan payment deferment activity. As Paul mentioned, as of quarter end, 910 credits totaling $280 million continue to have loan modifications under the CARES Act representing 3.8% of total loans outstanding. On slide nine, loan modification information is provided by sector. All loans remain accruing with a handful of downgrades if there were signs of deterioration. We continue to closely monitor exercise, laundry, and retail sectors as government shutdowns or limitations could have a meaningful impact as we go into the fall and winter months. As shown on slide 10, the company continues to be well-capitalized, exceeding all regulatory requirements. At September 30th, we had a capital buffer of 2.8% for $198 million of regulatory well-capitalized standards. The Board of Directors yesterday approved resuming the stock buyback program we paused in March. We have a remaining $9.6 million in funding, which will be used to opportunistically repurchase shares before year-end. Slide 11 provides a history of our regular common dividend payout, which continued this quarter. The Board approved a quarterly dividend of $0.115 per share, which was paid on November 27 to stockholders of record on November 13. In total, we are paying out $0.46 in dividends per share during 2020, representing a 4.5% increase over 2019, and our payout currently approximates a 5.9% yield. This concludes my formal comments, and I'll turn it back to Paul.
spk01: Thanks, Carl. Joining us now for the question and answer session is Robert Rose, our chief credit officer. We will now open it up for questions. Brandon?
spk09: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one, on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
spk07: Hey, guys. Good afternoon.
spk09: Hi, Mark.
spk07: Carl, I wondered if you could kind of break down for us what the CD maturities look like over the next couple of quarters, what sort of rates those are at.
spk06: Sure. So next quarter, we've got about $300 million in CDs maturing, and this excludes brokered CDs. It's around 2%, a little higher than 2%. I'm going to say about 2.2%. That'll be quite helpful.
spk07: That becomes due in the fourth quarter, Carl?
spk06: That's just in the fourth quarter. Okay.
spk07: And then how about 1Q?
spk06: Okay, because I can't add this up in my head. I'll give you a rundown. $138 million in January, $120 million in February, and $105 million in March, and that's all around $180 to $185. Okay, great.
spk07: And then you mentioned the broker deposits. I guess I was just curious. I think you booked about $350 million of broker deposit this quarter. What kind of rates and terms are those at?
spk06: So, yeah, these are not brokered CDs. These are basically brokered DDA and brokered now accounts with an average cost of around a Meribor plus 10, so right around 20 basis points on average.
spk07: Okay, great. And then, you know, in general, I assume that we probably see a little bit more degradation of the margin in coming quarters, right? despite some of the downward liability repricing? Is that fair?
spk06: Actually, we expect margin to increase going forward. And I know I guided that we thought we were going to see a little bit higher margin this quarter. We just had a little bit more liquidity on hand that put pressure on that. But we still had the same level of net interest income that we were anticipating. just the margin showed a smaller number. But we do expect the margin to increase about five to 10 basis points next quarter.
spk07: Okay. And then lastly, I was just curious if you could comment at all, there was a large demutualization in your market recently, a company with a pile of capital now that is a competitor of yours. I'm just wondering, are they affecting pricing on the loan side in the market? Really, in our market? Okay.
spk01: I don't think so. There's certainly nothing evident that's been going on. Everybody's sort of keeping to their knitting and taking care of business.
spk07: Thank you.
spk09: Thanks, Mark. Our next question comes from Christopher Keith with D.A. Davidson. Please go ahead.
spk08: Good afternoon, gentlemen. How are you? Good. So I'd like to just... get a little more detail on the asset pricing side, if that's all right. Could you give us a sense for where commercial real estate loans are coming on and then maybe just a sense of what's repricing over the next few quarters?
spk06: Yeah, so I'll give you a sense. The entire loan book in the third quarter, new originations were at 394 weighted average. 394 basis points. Commercial state loans themselves are 344 basis points. CNI at 475, and the consumer loans around 345. Just to give you a breakdown of those. As far as repricing, a lot of our commercial book is repricing. So we got about $1.9 billion of loans that repriced but we don't expect those to be coming down at all. So I think a lot of that repricing has already happened earlier in the year. A lot of that is floating rate. Floating three months or in is the definition of that $1.9 billion.
spk08: Got it. That's very helpful. Thank you. And then I guess just looking at loan growth, if you could give me a sense for out of the – buckets that you disclose the commercial real estate uh commercial loans and leases and then consumer loans where are you seeing uh strength in the pipeline and and do you have a sense for a general direction that we're going to be in for 2021 as far as overall loan growth well first uh first christopher let's take the ppp thing off the table because that just
spk01: makes it murky to figure out. We don't know when the forgiveness is going to happen, but we expect it'll be sometime next year, first half, presumably. But if you put that aside, we're seeing what I'd say is modest activity in real estate and in C&I and stronger activity in residential, which is not a huge business for us, but it's more than it has been historically. I expect that that will continue through next year. So I don't think we will have sort of the pattern of high single-digit growth overall that we've seen in recent years. I suspect it may be half of that. But, you know, we're all looking at a rather clouded situation right now. So I'm assuming that things continue to operate reasonably well. In that environment, I think we could do 4% or 5%.
spk08: Okay. That's fair. That's great. Thank you. And then just one more, if I can. You mentioned excess liquidity. I'm curious what, especially given your comments on loan growth, your intent is to work or how to put that excess liquidity to work. Are you looking at the securities market? Do you see anything that fits within your strategy? I know rates are less attractive, but we're seeing a little less in the long end of the curve. So, uh, just any color on your thoughts there would be great.
spk06: No, I think we, we have built up some liquidity, uh, when this crisis first started and, uh, and basically still have that liquidity on our balance sheet. We also put, put securities on basically before rates came down, uh, dramatically. Uh, we do not expect the securities portfolio to grow, uh, from here. If anything, it's going to continue to shrink. Uh, and so, uh, really the cash balances that we have on the balance sheet. We weren't sure if we were going to start getting back funds from the SBA on the forgiveness side. So we'll be monitoring that liquidity and basically paying off broker deposits as well as federal home loan bank advances with that liquidity and any added liquidity around that. Deposits are holding in very, very solid and continue to grow significantly. So that's where I think some of us may have been surprised by that level of growth in deposits.
spk08: Great. And I'm sorry, I know I said last one, but when you brought up deposits, I mean, do you see that waning in the next few quarters? Or, I mean, are we going to continue to see this level of growth?
spk01: Well, I don't think you'll see this level grow. unless there is another PPP 2.0 kind of thing. Again, we have to put that aside a little bit. I will speculate that, I don't know if it's half, but something of that magnitude of order came out of the PPP program for the deposit growth. The rest was attracting some pretty good customers who have a lot of cash balances who were not being treated by their money center bank very well. So, Some portion of it is solid regular growth. The other is the PPP inflation. And I just described if there's another one of those, we might have the same deposit growth. Otherwise, we'll continue to see an upward trend in deposit gathering.
spk08: Got it. Well, thank you so much for taking my questions. I appreciate it.
spk01: Yep.
spk08: Thanks, Chris.
spk09: Our next question comes from Lori Hunsicker with Compass Point. Please go ahead.
spk04: Yeah, hi, good afternoon.
spk09: Hi, Lori.
spk04: Hi, Lori. Love the detail in the deck. I wondered, and maybe, Bob, this is a question for you. If you could help us think about, looks like a third of your deferrals now are laundry. If you've got any additional comments around laundry and maybe also how much of that is planned to resume payment in coming weeks, just any added color on that $94 million. Sure. Or the portfolio.
spk05: Yeah, sure. Hi, Laurie. Um, you know, we expect the majority of that to come back over the next, um, one to three months. I think that we were, we, we erred on the side of, uh, of caution here and we're generous with people in that area. But you know, when, when our people talk with their customers, they don't talk about COVID at all. They talk about acquiring other laundromats, um, in a unique moment in time. So, um, restrictions do affect them. They affect the number of people they can put through laundromats, but it's an essential business. The sites are chosen well, and we expect that to moderate quite a bit into the future, i.e., those resumed payments.
spk04: And do you have a geographic breakdown, or maybe can you just remind us how much of that is sitting in New York City, and if you're seeing any sort of outsized deferrals in the New York market, or just any other color around that?
spk05: Well, the portfolio is in all 50 states. It is concentrated more in the five boroughs of New York and then the large cities throughout the country. It's surprising where you see deferrals. They're not all in New York. They're not all in the boroughs. California has been a difficult place to do business because when they go from closure, they then have forest fires and people are just not out and about. They're pretty well spread around, Laurie.
spk04: Okay. Okay. And then just one more question here on deferrals. So the $280 million that you had as of September 30, do you have a refreshed number as to what that is currently, either an October number or maybe even what that looks like, you know, beginning of November?
spk05: I do not because it takes a few days after the month ends to recalculate this. I can tell you a bit of good news here. That presently macro lease, which has $32 million of deferrals shown here on the 30th of September, that has fallen to $22 million as of the other day. Okay.
spk06: Great. We will refresh that for the queue when we file the queue.
spk04: Okay. Great. This is a fabulous slide. Okay. Great. Carl, quick question for you. The PPP fees, can you just update us? where those are as of September 30. I'm thinking it's 17, 18 million. Just didn't know if you had a more exact number.
spk06: You know, I don't have an exact number at my fingertips.
spk03: Okay, okay.
spk06: The amount of loans? It's probably, it's whatever that number is.
spk01: It's about 560 million.
spk06: Well, we did 582 million, I believe, in loans, and it's on the balance sheet right now. It's at 568. So the difference between those two numbers as of September 30th is the net deferred fees and costs.
spk04: Got it. That's perfect. That's helpful. Okay. Thanks. And then, Paul, last question for you, just kind of dovetailing with Mark's question. Can you talk a little bit about maybe how you see potential for M&A in the Boston marketplace? You know, certainly the bank that Mark mentioned, you know, they've said they're going to be very acquisitive. That's a path that you've taken. How you're thinking about M&A here, does this put a little bit more pressure on you to sort of rethink things? Any color comments you could give would be helpful, especially as you're sitting right here at $9 billion.
spk01: Well, I'd say not much. I mean, I'm not bothered or worried that Eastern, when public and has a war chest and can do something with it, we have a history and plan to continue to play our own game. We're getting it done. We're doing just fine. There are some candidates in the region which somebody like Eastern could go after, but I think it's a very difficult environment to pull off M&A given the pandemic as well as the stock prices right now. Unless there's an unusual circumstance, I don't think you're going to have normal M&A for a while.
spk04: Right. Sure. Okay, thanks so much.
spk09: As a reminder, if you would like to ask a question, please press star, then one. Our next question comes from Colin Gilbert with KBW. Please go ahead.
spk02: Thanks. Good afternoon, gentlemen. Maybe, Carl, if we just start with the NIM, so appreciate the color that you gave going into the fourth quarter, but kind of thinking more broadly as we get through, as Paul, you mentioned, like the PPP mess or whatever, get through 21. I mean, it just seems like the setup for the NIM expansion is pretty robust, as you had mentioned, right? The loan book seems to have repriced to a floor. you still have, you know, meaningfully high funding costs on the brokered side, traditional CD side, whatever the case might be. So just curious how you're seeing that NIM trajectory as we look out to 21 and 22 and maybe where you think kind of a normalized or where funding costs could settle out to.
spk06: Excellent questions there. And I'll try not to answer any of them. But... Well, basically, yeah, as soon as you give guidance, things get thrown at you and you always get curveballs. So everything's always very dynamic. But with that being said, we do continue to see benefits on the funding side going forward into 2021. Modest reductions as basically CDs and federal home loan bank advances continue to come down. and we reprice those and pay some of those things off. To give you an actual NIM on that, I've given guidance that we expect the NIM to go up 5 to 10 basis points next quarter alone. And we do expect the NIM to go a little modestly higher after that into 2021, excluding any impact from PPP. So any acceleration of forgiveness, that would just be additional revenue hitting that line or recognizing that sooner rather than later. That's basically, I don't have a funding cost number that I'm willing to provide.
spk02: Okay. Okay. Okay. All right. I just, no, okay. All right. I'll leave it.
spk06: It's just very, very done.
spk02: I understand. No, no, no, totally. And I guess, nope, I get you, but just kind of thinking, you know, as for, you know, as we go through the cycle, like, would there be anything? I just, I wouldn't think anything structurally that maybe we're missing or missing that, that would impede you guys from getting to say like a 50 basis point cost of funds as you look out. Um, And I guess I'm asking, are there longer duration structures in there? Is there a competitive position that you think you're going to need to sustain in the market that's going to cause you to keep your funding costs perhaps higher than peers? I mean, anything, I guess I'm asking you right, like strategic initiatives that would come into play?
spk06: I think you're right on there. I think the CDs that did actually roll, and a lot of that money is paid is going into other products. But the CDs that do roll are coming in at around 54 basis points last quarter. So that 50 basis point number is a very, very reasonable number at some point in the future, if not less. And we do not have any unusually, we have no long structures, quite frankly, in our book. I think we probably provide a lot of that detail in the cues. It's actually gotten quite short at this time.
spk02: Okay. Okay. Because I know historically you guys have utilized the wholesale funding structure to sort of fund, you know, the equipment finance book.
spk06: That's right. We would use that and ladder that out so that we would closely match that. But over the last several years, we've been really bringing down that duration quickly.
spk02: Yep. Yep. Makes sense. Okay. All right. Okay. And then just shifting to the reserves. Could you give us a little bit of insight as to how you're thinking about that trajectory, you know, if you're foreseeing any more or additional qualitative inputs coming into the fourth quarter, and then how you're thinking about loss risk? And I guess that would be my question maybe for Bob, too, as we look at that deferral slide, you know, what the collateral looks like on some of those buckets. So it's a multi-part question, but centering around the reserve trajectory.
spk05: Well, the reserve trajectory, Colin, is we look at it in a very short-term way. I hate to say that, but given the way things change, and they change rather quickly, we just have to evaluate the facts we have at the time. And for the moment, we're very happy with the level of the reserve today. we've had the opportunity to shift a few dollars around within it. For example, we've increased the reserve levels on the exercise portfolio. It's not a big portfolio, but when you have a business that gets ordered closed by the state or the city, you can't make your payments the same way you could before. So I'm just not going to go out on a limb and say it's going to go up or it's going to go down. I'm going to say that we can keep looking at it and making it appropriate each quarter because of the way things change. Um, the losses that are embedded in these, in these modifications are examined by us all the time. And, you know, we are, we are not seeing areas that are screaming out, um, in the loss area. You know, if you looked at the first one, for example, it's food and lodging. By that we really mean it's not Dunkin' Donuts, it's a handful of family restaurants. And that $10 million, each of those has loan-to-values that are, a couple of them are in the 50% range and another one in the 75-80% range where we could liquidate out of them if we had to. You know, the one that would bother me Out of this the most is what I said, the macro lease fitness equipment portfolio, because liquidating used exercise equipment would have rather high loss rates, despite the fact that we have cross guarantees and we have personal guarantees. It could produce some losses, and we have reserved appropriately, as I stated earlier. So nothing's screaming out at us at the moment other than that particular portfolio.
spk01: Colin, I would just add to that that we are very comfortable with the level of our reserves. We think it's appropriate. We think the future is murky. And even though the CECL modeling for the third quarter showed favorable characteristics to previous modeling, we thought that the better part of valor was to stay the course.
spk02: Okay. Okay, that's helpful. Thank you. And then just lastly on the buyback, what are some of the criteria that you're most closely paying attention to that would determine how aggressive you would or would not be on the buyback?
spk06: The price. It's about it. Share price. That's about it.
spk02: I mean, which would indicate that you would be buying it back like mad right now then, I would assume, if it's share price driven.
spk06: That's correct.
spk02: Okay. Okay. And I'd have to go back and look, and I just don't know. Sorry, I should know this. But just your appetite, I mean, do you foresee, you know, you've got obviously plenty of capital. If share price is, you know, the trigger, could you – be as aggressive in doing multiple, like, 5% repurchase programs back-to-back? Or just curious as to how aggressive your appetite would be, which, again, I guess then takes you to the question of where you want to take your capital.
spk06: We would revisit that likely in December or January.
spk02: After you finish this current authorization? Correct. Okay. Okay, got it. Okay, that's all I had. Thanks, guys.
spk09: Thanks, Ellen. This concludes our question and answer session. I would like to turn the conference back over to Paul Perrault for any closing remarks.
spk01: Thanks, Brendan, and thank you all for joining us this afternoon, and we will look forward to talking to you again next quarter. Bye now.
spk09: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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