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spk04: Good afternoon, and welcome to Brookline-Vancourt Third Quarter 2022 Earnings Conference Call. All participants will be in a 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-Vancourt's attorney, Laura Vaughn. Please go ahead.
spk01: Thank you, Tia, and good afternoon, everyone. Rebecca Sandefur , REL Appalachia County, Yesterday we issued our earnings release and presentation, which is available on the investor relations page of our website. Rebecca Sandefur , REL Appalachia County, brooklynbankport.com and has been filed with the SEC this afternoon's call will be hosted by Paul a peril and Carl m Carlson. Rebecca Sandefur , REL Appalachia County, This call may contain forward looking statement with respect to the financial condition results of operation and business of brooklyn bank work. 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'm pleased to introduce Brookline Baincorp's Chairman and CEO, Paul Peralta.
spk05: 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, over 39 cents per share. and that the board has approved a 4% increase to our quarterly dividend, bringing it to 13.5 cents 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 dollars from q2 driven by margin expansion
spk06: 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 30th. 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 the managed margin was a positive one 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 continued 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. Non-interest-bearing deposits were relatively flat from Q2, and represent 27% of deposits. Increases in short-term rates continue to have potential to benefit us due to our moderately asset-sensitive position. Assuming a flat balance sheet and the forward curve as of September 30th, our simulations reflect a 4.4% increase in net interest income over the next 12 months. Our simulations reflect the historically-based product-weighted beta of 32% on deposits. As Paul mentioned, the Board approved a quarterly dividend of 13.5 cents per share, representing a 4% increase and a 4.2% yield based on yesterday's closing price. The dividend will be paid on November 25th to stockholders of record on November 11th. This concludes our formal comments, and we will now open up for questions.
spk03: We will now begin the Q&A session.
spk04: If you would like to ask a question, please press star followed by one on your touchtone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, Please remember to pick up your handset before asking your questions. We will pause here briefly to allow questions to generate in queue. The first question is from the line of Mark Fitzgerald with Piper Sandler. You may proceed.
spk08: Thank you and good afternoon. 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. Is that 28 and change kind of rate a good run rate going forward? I'm sorry, the 22.5% rate going forward. Yeah, very good.
spk06: 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, you know, end of Q3. You know, there was a lot of activity in the third quarter. You know, we're truing up, you know, 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 seven years. I decided to take them this year. So we did recognize them this year. The cash benefit happens this year. We're able to do it on our tax form. I thought it was the right thing to do. And so 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 be impacted in 2023. I just want to be clear on that.
spk08: So the tax rate would go back to something around 25 percent?
spk06: Correct. Correct. And I think we were guiding about 25.5 with the PCSB acquisition.
spk08: Okay, great. Secondly, first, that deposit and funding beta chart that you put in the slide deck was really helpful. you know, would be curious how you're thinking about sort of the magnitude of additional margin expansion in 4Q.
spk06: Yeah, so, you know, very strong margin expansion this quarter, 24 basis points. We do expect it to go up another 10 to 15 basis points in Q4, and then moderate, you know, moderately better. next year. But it's anybody's guess, quite frankly, on the deposit data and the flows of funds. Okay.
spk08: 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?
spk05: Not yet. 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 in that area we think putnam is 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. Oh, okay. Okay. I was going to see. He's on his way to semi-retirement, as you may know.
spk08: 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.
spk05: Okay, Mark.
spk04: Thank you. The next question is from the line of Laurie Hunsaker with Compass Point. You may proceed.
spk02: Yeah, hi, thanks. Paul and Carl, good afternoon. Sorry. 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. Thanks.
spk06: 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 pre-tax 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, you know, 40% more, let's put it that way, in the mark on the securities portfolio. We would estimate about the same as securities interest rate mark on the loan portfolio, 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, 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. So from an intangible standpoint, basically no change in the goodwill being booked. Offsetting that is the value of the deposits, naturally. Deposits are worth far more today than they were just six months ago.
spk02: Okay, great. Thanks. And then maybe can you also help us understand pro-pharma with PCSB, you guys crossed $10 billion. Can you just remind us what that's going to look like in terms of the Durbin impact? And I'm guessing then that that starts in the fourth quarter of 2023. Is that right? Thanks.
spk06: so as far as the durban impact goes uh my understanding is it starts six months after the year end a company goes over the 10 billion dollar mark so we do assume we we do still anticipate this deal closing in q4 so assuming it does and we do get approval and right now i think we'd have to get approval by about november 15th for that to happen uh and we'll close by year end We will be over over 10 billion at this year end. And so the Durban impact would impact us starting July 1st of 2023. We estimate the annual impact just related to Durban to be in the 800 to 900 million dollar impact on our income on our annual basis.
spk02: Okay, on non-interest income. And then in terms of the expense spend, is there anything around that or that's already fully baked?
spk06: It's generally, we'll definitely have a headcount added here and there. Some of it we've already got on staff, you know, already preparing for it. So I would say nothing materially at this time that we anticipate would be a big, big impact. Paul, is there anything that you...
spk02: Great. Thanks so much.
spk05: Okay, Laurie. Thank you.
spk04: Thank you. The next question comes from the line of Chris O'Connell with KBW. You may proceed.
spk07: Hi. Just calling up on the PCSB. Hey. On the PCSB discussion, Given the approvals need to come in by around November 15th or so, just any update there on that process and where you guys are at?
spk05: Well, we're awaiting the approval out of Washington. It's our understanding that all of the questions have been raised and answered satisfactorily to the Fed and their staffs. So we are literally just waiting by the phone.
spk07: Okay, I got it. All right. And then also on PCSB, just given their financials and how they've come in since the merger announcement and the change in the rate environment, any update as to what their impact will be on the margins?
spk06: I'm not going to opine on that right now. There's a lot of moving parts when you think about the margin going forward. As Laurie kind of just highlighted, the mark on the investment portfolio, the interest rate marks on the investment portfolio and the loan portfolio, they would get accreted back in. So that comes through interest income, quite frankly, and really has a significant impact on the margin as you look forward. And actually, we look at the core, what's going on with the core business. And as you can see, they did quite nicely. Their margin expanded 19 basis points in the core. So we're very happy with how they're performing, and we're certainly happy with how we're performing.
spk05: A couple of good companies getting good things come out of that. Yep.
spk07: And then as, you know, appreciate all the color on the betas in the margin outlook, just thinking about, you know, what you guys are seeing from competition and in terms of, you know, flows and how customers even, you know, within the bank are being moved around between products. Yeah, how the deposit flows between products and kind of overall growth outlook is going forward.
spk05: I'll start and I'll let Carl get into more detail, but I would say that the major flows, I mean, we've lost a little bit as was mentioned in the commentary, but a lot of it in terms of the aggregate dollars really comes from customers of ours that have very large liquidity portfolios. And when rates, very short rates have gone up so much against what deposit rates look like, those customers take their non-operating liquidity and they buy short treasuries and in a lot of cases or other vehicles like that. The other big bucket that has seen a reduction is just in the core CD maturities that have been coming down for a long time. So we're not seeing customer losses, we're not seeing the average operating company move all of their liquidity out of the banking products. So I think that this will have played out in the near future, and it will start to grow from there. Carl? You're involved in the pricing and all that.
spk06: Yeah, so just to dive a little bit deeper into that is, you know, continued pressure on the CDs, as Paul discussed, and some of the high liquidity, and just folks that have are very comfortable going into treasuries. And we've actually had conversations both in the branches on the investment side, folks that work in the branch, as well as Clareton Private with significant clients on how we could help them in those regards. But you dive into the, you know, when we dig into the details on this, we saw a significant decline in IOLTA accounts. And if you don't know what IOLTA accounts are, Those are basically lawyer accounts, escrow accounts for lawyers. And that rate is fixed by the state. And that's just a flow of funds in and out. It has nothing to do with interest rates. It's just timing. Less houses being sold. Whatever is going on in the escrow world. And so that's not an interest rate thing. That's just a flow of funds thing. And then we're looking at our 1031 program, which you know about 1031 programs. It's commercial real estate folks that may be selling a building. They put in 1031, a trust in 1031 and wait to buy another building. And you usually have six months to do that. And we do this very successfully locally as well as nationally. And we saw a big shift of funds. What happened to our, we saw a big flow out of savings accounts into money market accounts. And so what's going on? It was just 1031. So we have a savings account product. And as funds came out of the savings account product for these clients, it went into a money market account, a slightly higher rate, because that's what our customers really wanted, was a little bit more rate when they do this. And so the deposits are there, very attractive pricing, and we continue to serve that need. so uh as paul said you know dda is still uh very solid uh continue to see growth in customers and and activity and on the commercial front in all of our markets and uh time will tell how much how much uh how much the liquidity squeeze and the tightening by the fed will impact us understood um and then lastly uh just wanted to touch on the expenses
spk07: So, you know, pretty good control on expense growth kind of all around this quarter. Maybe just an update as to how you're thinking about the fourth quarter on a standalone basis?
spk06: Yeah, operating expenses were actually down about $500,000 in the quarter. We did have $1.1 million in merger expenses, which is about $600,000 and change higher than Q2. I do expect expenses to, you know, pop back up a little bit. We did have a little bit of benefit on the pension side due to, you know, just how actuaries work and rates. As rates go up, you get a little benefit on that side. But overall, our expenses are being well contained, but we continue to invest in the business, and I don't think that's going to stop.
spk07: Great. Thanks for taking my question.
spk05: Okay, Chris, thanks.
spk04: Thank you.
spk03: Again, to ask a question, please press star 1. There are no additional questions at this time.
spk04: I would now like to pass the call over to Paul for closing remarks.
spk05: Thank you, Tia, and thank you all for joining us today. We look forward to talking with you again next quarter. Have a good day.
spk04: That concludes today's conference call. You may now disconnect your line.
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