Brookline Bancorp, Inc. (NASDAQ:BRKL) Q1 2020 Earnings Conference Call April 30, 2020 1:30 PM ET
Marissa Martin - Associate General Counsel
Paul Perrault - President & Chief Executive Officer
Carl Carlson - Chief Financial Officer
Robert Rose - Chief Credit Officer
Conference Call Participants
Mark Fitzgibbon - Piper Sandler
Laurie Hunsicker - Compass Point
Collyn Gilbert - KBW
Good afternoon, everyone, and welcome to the Brookline Bancorp Incorporated Q1 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please also note, this event is being recorded.
At this time, I would now like to turn the conference call over to Marissa Martin of Brookline Bancorp. Ma'am, please go ahead.
Thank you, Jamie, 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 Brookline Bancorp’s executive team, Paul A. Perrault 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 operation and business of Brookline 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 a 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 Brookline Bancorp's President and CEO Paul Perrault.
Thanks, Marissa and good afternoon, all. The quote "may you live in interesting times" which some consider a blessing and some curse often arises in times of crisis. And those of us who will have lived during some very interesting times know there's a beginning a middle and an end. We certainly empathize with those who are suffering physically, emotionally or financially at this time. But we also recognize and appreciate the outstanding sacrifices, commitment and efforts of so many who rise to each challenge every day.
At our last earnings call on January 30, while the coronavirus pandemic was on all of our radar screens, we were not considering a near complete shutdown of the worldwide economy, unemployment claims surging into the millions on a weekly basis, interest rates going sharply to near zero again and the need for trillions of dollars in fiscal and monetary economic assistance.
On February 1, Massachusetts confirmed its first case of coronavirus, a University of Massachusetts student who had just returned from Wuhan. Massachusetts was the second state in the nation to report a case.
On March 1, Rhode Island confirmed its first two cases which were related to a returning school trip to Italy in February. On March 9, Rhode Island Governor, Gina Raimondo declared a state of emergency and that was followed by Massachusetts Governor, Charlie Baker on March 10.
As of today both Massachusetts and Rhode Island are operating in a stay-at-home environment with only designated essential employees permitted to report to work. All non-essential retail businesses remain closed and those that are allowed to open are doing so with restrictions in place.
I will touch on just a few areas and initiatives related to our preparation and response to this pandemic and you can see that on page four in the presentation. The most important thing is the health and safety of our employees and their families. We were able to shift to a work-from-home policy very early on due to our strong VPN and Zoom capabilities, which we were fortunate to have in place well in advance of the current environment.
We remain as flexible as possible to accommodate those who have children at home or caring for a family member who may be ill. At present, approximately 81% of the company's non-retail employees are working remotely and effectively. While traffic in the streets is quite low, you wouldn't know it from looking at the drive-up at the branches.
We initiated a bank by appointment approach with minimal lobby access to further promote social distancing for both the bankers and the customers. We also staggered staffing schedules to minimize employee exposure while ensuring business continuity. All types of hand sanitizers and disinfectant wipes were distributed throughout the organization and enhanced cleaning went into place full time.
All customer-facing employees and those who are required to travel to company office have been provided with masks to minimize health risks to both employees and customers. We have had no furloughs and have actually been hiring for key positions, particularly in our call center and operations.
Our bankers have never been busier in assisting new and existing businesses and retail customers with online banking and cash management services while also working to address any near-term cash flow concerns. While much has changed over the last couple of months for the institution, much has remained the same.
For our customers, we continue to reach out to ensure, they know we are here for them. A company's culture is in the mission or a value statement. A company's culture is the sum of its actions and attitudes on a day in and day out basis, of those who make up the organization in good times and bad.
I am very proud of our company's culture, which is one of empathy for customers and colleagues in everything we do. And what we also call our core four of accountability, teamwork adaptability and leadership. They have truly been on display.
I will now turn you over to Carl, who will review the company's first quarter results.
Thank you, Paul. Our company entered this year and this crisis, in a position of strength, record 2019 earnings, strong growth in commercial and consumer banking and a fortress balance sheet, defined by excellent asset quality, strong reserves and a robust capital base.
In many ways we are headed for a promising start to 2020, solid loan originations supported by good deposit growth and fee income. We also successfully completed the merger and consolidation of First Ipswich Bank into Brookline Bank, in mid-February.
Soon after the weekend of our data conversion, our preparation and response to the global pandemic became our highest priority. On slide 6 we've provided summary income statements for the quarter, prior quarter and prior year. We recognized a net loss of $17.3 million for the quarter, which was driven by a provision for credit losses of $54.1 million.
The significant increase in the provision was due to the potential deep and rapid decline in economic activity, as our communities practice social distancing, schools and many businesses closed and nearly all events and activities were cancelled. Also significant is our decision to continue forward and implement the new accounting standard, commonly known as CECL, which shifted from estimating probable losses to estimating losses over the life of the loan using models, based on future economic forecasts.
Our pre-tax pre-provision net revenue decreased $2.6 million, from a very strong performance in Q4. And as net interest income declined and operating expenses increased, driven by higher professional fees, FDIC insurance and seasonality associated with compensation and benefits. As illustrated on page 7, net interest income declined $2.2 million, as our net interest margin compressed 12 basis points.
The yield on the loan portfolio declined 28 basis points, as the pricing of over $1.8 billion in adjustable rate loans was significantly impacted by the sharp decline in prime and LIBOR rates. Linked-quarter declines in prepayment fees of $1.3 million and $153,000 in purchase accounting as well as an increase of $337,000 in amortization of deferred fees, contributed 10 basis points in the decline, in loan yields for the quarter.
Overall, our cost of interest-bearing liabilities declined 13 basis points, which consisted of an 11 basis point decline in the cost of interest-bearing deposits. And a 20 basis point decline in the cost of borrowings. If you could follow me to slide 8, you can reference our comparative, bit summary balance sheets. In the first quarter we had solid loan growth of $85 million or 5% on an annualized basis and deposits grew $60 million or 4% annualized.
Also notable is the $52 million growth in the allowance for loan losses and related $16 million growth in the reserves for unfunded loans. We also added significantly to our cash and securities to prudently position ourselves to meet the potential financial needs of our clients. The loss in the quarter as well as the modest stock repurchase activities reduced our tangible book value per share by $0.31.
Slide 9 reflects the growth and composition of our significant loan and deposit categories. In the first quarter we continued to have strong net loan growth, in commercial real estate, while net deposit growth was driven by non-interest-bearing demand deposits and savings. Commercial real estate which includes both investor and owner-occupied commercial real estate makes up 55% of our loan portfolio.
DDA represents 20% of our deposit base. If you follow me to slide 10, we have illustrated the near-term impact of the implementation of CECL, in estimating the allowance for credit losses. At year-end, our total reserves for credit losses was $62.9 million representing a reserve coverage of 78 basis points of total funded and unfunded loan commitments.
There are two components, the allowance for loan losses which was $61.1 million or 90 basis points of reserve coverage on loans outstanding, and a reserve of $1.9 million for unfunded credits. Accounting renewals were based on incurred or probable losses in the portfolio, formulated on historical performance. The new accounting standard which was implemented on January 1st requires estimates for losses to be forward-looking over the life of the loan, based on economic forecast.
We chose to use Moody's ImpairmentStudio as well as Moody's economic forecasts to develop our estimates. We also chose to prudently calibrate the loan loss models to the performance of a peer group of Northeast banks since our historical loss data was considered too infrequent and too low. At year-end, we used the economic forecast as of December 14th 2019 and determined the total reserve for credit losses also known as the allowance for credit losses or ACL to be $78.5 million or 97 basis points of total funded and unfunded loans.
This was an increase of $15.6 million or 25% from the prior accounting methodology. At March 31st, we decided to wait for the most updated Moody's economic forecast, as of April 4, instead of using the mid-March version which was less severe. The calculated ACL was $130.4 million, an increase of $51.9 million from our day one estimate. This increased our coverage on total commitments from 97 basis points to 161 basis points.
On slide 11, we provide details on our reserve coverage on funded and total commitments by key segments and selected subset of our portfolio. The construction component of our commercial real estate portfolio experienced the highest change in coverage, rising from 148 to 513 basis points at March 31 requiring an additional allowance of $14.7 million in the quarter.
We've also provided some of the key economic variables from the forecast driving our loss estimation models. It illustrates the significant expected deterioration from December to April in the economic forecast. Unemployment for the full year was expected to be 3.6% in the December 2019 forecast as compared to 6.3% in the April forecast which had unemployment peaking at 8.7% in the second quarter before coming down to 6.5% at the end of the year. The commercial real estate price index also showed a significant 14.3% deterioration between the 2020 forecast.
On slide 12, we have provided industry breakdowns for our major loan segments. Note we have included owner-occupied commercial real estate and commercial loans and also reflect $64 million of commercial real estate loans within our equipment finance business.
Investment commercial real estate of $3.2 billion comprises 47% of our outstanding loans. Apartments represent our largest segment. You can provide -- comprise 29% of our investment CRE portfolio followed by office at 20% and retail at 17%. Our commercial portfolio is $1.2 billion or 18% of our portfolio and within commercial Food and Lodging represents 15% followed by manufacturing at 12%.
Equipment finance at $1.1 billion represents 16% of our portfolio which is led by a focus on laundry, tow truck and fitness equipment. Consumer loans of $1.2 billion is comprised of one point – 1 to 4 family residential and home equity loans. Note, we have no direct exposure to airlines, auto lending, consumer credit cards, student loans or energy.
We've also included some information in the appendix for the presentation -- of the presentation providing various metrics and details about the portfolio including loan to values and vintages which illustrate the strong culture of credit underwriting underlying our reputation for asset quality.
We've maintained the same portfolio segment on Slide 13 to provide insight into our loan payment deferment activity, as well as illustrate our commitment to prudently respond to customer needs during this crisis. We have provided 90-day relief on loan payments on either principal or principal and interest. And these short-term modifications had no impact on our internal credit ratings related to these credits or accrual of interest or accounting for these assets at this time.
In total loans with outstanding balances of $1 billion were granted a loan payment modification for approximately 15% of the portfolio as of April 17. The largest impacted categories were in our equipment finance units. We also provided deferred payment information by some selected segments we are tracking. As I mentioned earlier apartments are our largest component of our investment commercial real estate portfolio.
It is an area we pay close attention to. We have seen little need or requests for deferment. Another category, we provide here is healthcare also with few requests for deferments where as an example dentist offices are basically closed and only doing emergency procedures at this time. We certainly expect that activity to accelerate as offices will need to catch up on cleanings and other procedures.
As the stay-at-home restrictions are lifted we also expect coffee and donuts to bounce back, folks to be focused on their health, laundries to be busier and unfortunately traffic, accidents and breakdowns to resume. I want to highlight these are well-run businesses and we're all in good standing before the economy basically shut down.
We have also been very active facilitating access to the SBA payroll protection program for our clients before the first round of funding closed on April 16 which we show on Slide 14. The company-funded, it’s first PPP loan on Friday April 3. And as of Friday the 24th, the company has originated 2183 loans with balances of over $518 million.
Portions of these loans will be eligible for forgiveness over the next several weeks and we will also be tracking and reporting on the activity next quarter. We are very proud of the tremendous teamwork adaptability commitment and pure do-whatever-it-takes attitude, we saw at every level and in every department across the organization.
When the program reopened on Monday as you would expect we were back at it. However the volume will be significantly less, since we were very successful in helping our customers during the first round.
As shown on slide 15, the company continues to be very well capitalized exceeding all regulatory requirements as well as our own internal policies and operating targets. At March 31 we had capital buffer of 2.6% or $183 million over regulatory well-capitalized standards.
During the first quarter, the Board expanded the previously announced stock buyback plan from $10 million to $20 million. The company announced on March 24 it was suspending any further purchases and at that time had completed the repurchase of 848,000 shares for $10.4 million.
Slide 16 provides a history of our regular dividend payout, which continued this quarter as the Board approved a quarterly dividend of $0.115 per share which will be paid on May 29 to stockholders of record on May 15. Our dividend remains constant for the remainder of the year. Full year per share dividends would be $0.46 a 4.5% increase over 2019 and currently approximates a 4.4% yield.
This concludes my formal comments and I'll turn it back to Paul.
Thanks, Carl. Joining us for the question-and-answer session today is Robert Rose, our Chief Credit Officer; and Michael McCurdy, our Chief Risk Officer and General Counsel. Brookline is very fortunate to have the expertise and experience of these gentlemen, particularly, during this time and I'm happy to say they represent the commitment and leadership, I see across the organization.
And now we will take questions.
Ladies and gentlemen, at this time we’ll begin the question-and-answer. [Operator Instructions] And our first question today comes from Mark Fitzgibbon from Piper Sandler. Please go ahead with question.
Hey, guys. Good afternoon.
I wondered if you could -- first off you guys gave great detail on the slides. So thank you. It makes our life easier. I wondered if you could share with us maybe the areas or segments of the portfolio where you're most concerned where you feel as though the borrowers are most distressed and/or areas where you think the potential loss content would be greatest.
Hi, there. You know, it's hard to pinpoint extremely precisely. But when you think of the things that will return to health relatively quickly and things that won't in our equipment finance segment, I would be a bit concerned about a portion of our exercise studios. Planet Fitness and other low-priced components such as YMCAs and JCCs are about 50% of that and they tend to not have fallout in difficult times. It's the middle-priced and the higher-priced ones that seem to have that fallout. So I would say a segment of the fitness portfolio would concern us a little bit.
Our hotel exposure, while modest in size at about $126 million is about 58% vacation-oriented recreation-oriented. It is all in New England places where you can get to in a car or a ferry. And we have -- those customers have observed some cancellations of summer plans, but we are hopeful that they will benefit from people canceling airfare fly to type vacations where people want to be closer to home and be able to get home quickly. The other part of that portfolio would be business hotels, but they are all in this area. There aren't that many of them. So those would be two that stand out.
Okay. Great. And then -- and I know this is very difficult to answer. There's a lot of moving parts and such. But how are you thinking about the provision say in the second quarter? And any guidance you could provide would be super helpful.
Well, I'm not a fortune teller and I'm not a health care expert, but we are paying close attention to how our customers are doing. We are talking with them all the time. We're especially talking with them in the key segments that were highlighted on page 13. We've also instituted a program of trying to project forward 90 days and 180 days out as to what the customers are thinking. So I really cannot say. I do believe that this level of provisioning that we've hit because we took a very late forecast the latest one we could find I think this gain in altitude that we've achieved will be helpful in coming quarters.
I would add a little something to that Mark which is that CECL is new for everybody. It's new for us. And we took Moody's models as they came through the door and we did not try to match it up with our actual experience in our portfolio and say we've got these exposures here which Moody's is treating is harshly, but it appears ours have been in very, very good shape. We certainly took it as they came with that harsh outcome.
Okay. Thank you. And then Paul based on what you know today do you feel like you have enough capital to, sort of, ride out the storm?
Okay. And then lastly Carl just two things on modeling. I'd be curious as to your thoughts about the outlook for the margin and the effective tax rate. Thank you.
Sure. Regarding the margin we've got a lot of internal models that we've been running. There's just so much uncertainty and so much variability here. I'm not going with – out with any external guidance on the margin at this time. As you can see, we've grown the balance sheet quite a bit with cash and securities. We're also putting on quite a bit in loans and offsetting that with a lot of deposits as well. So we'll – you can kind of try to work up your own numbers in that, but there's a lot of variability, and I'm not really comfortable trying to give you an estimate on what the margin is going to be.
Tax rate, tax rate is going to be right around 25%. We did have a discrete item that was a benefit this quarter of about $750,000 associated with the CARES Act. So we were able to recognize that which had an impact on taxes this quarter.
Our next question comes from Laurie Hunsicker from Compass Point. Please go ahead with your question.
Yeah. Hi. Good afternoon. Just wanted to echo Mark's comments. This deck is amazing. I really appreciate your transparency. It's really helpful. Just one quick question here. Just kind of looking back and forth between slide 12 and slide 13 I just want to make sure, I've got this right. So Dunkin' Donuts exposure of $165 million is that primarily C&I?
Yes. Yes, it is.
Okay. So that's – okay. And so that's what's found I guess embedded in that $180 million on page 12. Is that correct?
Correct. Correct. Food and lodging is dominated by Dunkin'. And I will say to the extent that there's some real estate Laurie sometimes Dunkin' operators the better ones like to buy little strips for themselves but the part of that that they operate would be included in there. But restaurant exposure outside of Dunkin' is rather small.
Laurie thank you for the comments on the slide deck, but you did catch something on slide 13 that 78% exposure. It's really more like 90%. It represents 90% of our restaurant or food exposure.
Got it. Okay. Perfect. Thank you.
[Operator Instructions] Our next question comes from Collyn Gilbert from KBW. Please go ahead with your question.
Thanks. Good afternoon, everyone.
Just starting on the reserves. You guys took a really big reserve build and it obviously sounds like you took a very conservative stance which is great, but just wanting to dig into that a little bit more. I guess the one part that I found interesting was just the assumption within the CRE assuming the reserve build on that book, what kind of was the thought there? And I understand – and maybe it was as simple as just using Moody's forecast. But I don't know I just – I was surprised by the reserve build, specifically within the CRE book. If you could just give a little bit more color to the thoughts there.
Actually, I may have been more surprised than you. I'll let Bob answer it. It's really as simple as you described. But, Bob do you want to give a little color there?
As you know, it did surprise us as well. And if you noticed, it's a little punitive on commercial – on construction and that surprised us. I think that, they are assuming that when you finish something and offer it up to be used that no one will come and you'll have to take some form of loss. There's nothing particularly odd or difficult in that portfolio. In fact, there's about $70 million of it is build-to-suit that's going to be used by people when it's completed. So that part, I don't think makes a lot of sense. As to the other parts of our real estate portfolio when you go through them. They appear to be behaving fairly well in rent collection activity, the part that might be student the part that might be workforce-related, the part that might be a and b, the range of collections are close to 100% down to as low as 75% in that workforce range. So, we're pleased with the way things are holding up. The retail segment or the slightly mixed use segment mixed use is usually retail and other things, beginning to see some request there, but we don't think there's anything particularly not good about our real estate assets Collyn.
Okay. Okay. That's helpful.
It is our legacy business and we do have a lot of expertise in real estate around here.
Yeah. Okay. Okay. Good. And then any chance you guys have what the number would have been the reserves differential between adopting the April Moody's baseline versus had you adopted the March? Most of your peers adopted March. So as you said, you maybe one step ahead of everybody. I'm just curious, if you can quantify what that difference would be.
It was virtually – it was virtually the same. As to the January – the 1-1 number that's the middle bar in Carl's slide. We were surprised that it hadn't moved much at all Collyn.
Okay. Okay. And then, I guess just to round out the comments. I mean it's interesting. So your stock is down a fair bit today, but yet it seems as if I take a step back that a lot of these disclosures are just -- are really erring on the side of you guys being ultra -- ultra conservative. Even with your -- as you kind of segment where you have industry exposure, that's not necessarily where you're seeing trouble.
I think that's right Collyn. And when you think about a great fourth quarter, a pretty robust first quarter put the provisioning aside for a second a little bit of a margin squeeze which is identifiable and manageable as we go forward, everything is in place to repeat our past performance, except for the pandemic and the new kind of provisioning policies the CECL if you will. That's what's different.
Okay. One last question before I get to a NIM question is, the -- I'm just looking – sorry, I'm just looking through this now. But I guess perhaps the one area of concern is to how higher education is going to look as we move into the fall. I mean you guys are on the hot bed. Obviously you have a lot of academic institutions. Do you have a sense of what exposure you have to that segment? I know you mentioned it on that -- you're still seeing rents being paid on that part Bob. But just other exposures you might have to kind of academia student housing and all of that?
Yes. Yes. Look, I'm going to give you a couple of numbers here, but I'm going to tell you that this is a dragnet. We have looked at the ZIP codes for in and around the colleges in Providence, Boston Cambridge and Tufts over in Somerville. So it is a pure dragnet of exposure. And that dragnet of exposure would pick up about $220 million worth of apartments in those ZIPs and about $100 million of so-called mixed use CRE which would have a retail component to it.
So, you might call that 300 and what $320 million roughly. But I will tell you that that is a pure dragnet and mixed in with students who go to Harvard Square and there are lots of people who live over in Cambridge that have nothing to do with education. So it is not correct to think of that as pure 1:1 exposure, but that is sort of the nexus of things that we will watch closely as the year unfolds.
Okay, great. And then just lastly, Carl I understand you're not really desiring to give any kind of NIM guidance, but on the funding side which seems like one segment that you do have a little bit more control over how do you see that trending? I mean you guys are still sitting with CDs I guess at like two 22. It just seems like there'd be a lot of room still to move on the deposit side.
Well, that's true, and we'll see that benefit going forward. Certainly we have a lot of things that are maturing but -- and we'll be repricing down.
Okay. Can you tell us where your -- either where your CD rates were at the end of March or where you're putting on new CDs today one-year CDs?
One-year CDs, I think we may be in about 70 basis points in that range and maybe even lower at this point. We got with a little bit of specials here and there with the -- we're not even -- we're seeing the appetite for CDs disappear. Folks are more or less getting more and more liquid as we look at deposits. Just to give you a little sense on that we look at our deposit accounts individual deposit accounts and break it up into deciles.
And we're seeing basically every category grow significantly since February. And that's really, I think, you're getting a lot of the government stimulus money that's coming in as well as people just being very conservative and saving more and holding more liquidity. And we're seeing people move out of CDs and basically put it in the money market or savings.
Okay. Okay. That’s great. I’ll leave it there. Thanks everybody.
[Operator Instructions] And ladies and gentlemen, at this time showing no additional questions. I'd like to turn the conference call back over to Paul Perrault for any closing remarks.
Thanks, Jamie, and thank you all for joining us today and we look forward to talking with you next quarter.
Ladies and gentlemen, that does conclude today's presentation. We do thank you for joining. You may now disconnect your lines.