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Brookline Bancorp Inc (NASDAQ:BRKL)
Q4 2020 Earnings Call
Jan 28, 2021, 1:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Brookline Bancorp Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Marissa Martin. Please go ahead.

Marissa Martin -- Associate General Counsel

Thank you, Tom, 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 is 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 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.

If you can join us on Page 3 of the earnings presentation, I'm pleased to introduce Brookline Bancorp's President and CEO, Paul Perrault.

Paul A. Perrault -- President and Chief Executive Officer

Thanks, Marissa, and good afternoon, everyone. As we approached the holiday season in autumn turned winter we saw infections and hospitalization spike higher and the positive trends we were seeing in Massachusetts, Rhode Island and New York reversed themselves as new mandates and recommendations dampened economic activity. We are very optimistic about the promise of the vaccine and the potential impact of the fiscal stimulus provided at the end of the year.

Work from home continues to be the predominant theme in the cities of Boston and Providence. The health and safety of our employees and their families is our top priority. With the spike in infections, we also reversed our reopening efforts and paused encouraging non-branch employees to come into the office once or twice a week until we see a sustained decline in the rate of infections and the benefits of more widespread vaccination becomes evident. This past year was challenging in many respects, and I would like to recognize our employees for their hard work and commitment.

We had a solid quarter of earnings of $26.7 million, or $0.34 per share as our credit quality remained stable and our net interest margin improved. We continue to work with a small segment of our customers who are still facing financial challenges relating to the shutdowns and may require additional loan payment deferrals to get to the other side. As I noted last quarter, we had granted 5,422 short-term deferrals on loan balances of $1.2 billion. I'm very pleased to say that as of the end of the year, there were only 298 credits totaling $90 million with loan modifications.

I'm also pleased to report the Board approved another $0.115 dividend to stockholders, which will be paid in February. And also approved a new $10 million stock buyback program, providing management with the flexibility to repurchase stock prudently when the opportunity presents itself in 2021.

I will now turn you over to Carl, who will review the Company's fourth quarter results. Carl?

Carl M. Carlson -- Chief Financial Officer

Thank you, Paul, and good afternoon, everyone. On Slide 4, we've provided summary comparative income statements. Net income was $26.7 million, compared to $18.7 million in Q3, driven by higher net interest income, lower expenses, and a negative $2.1 million provision for credit losses. Revenues increased $1.7 million from Q3 and were slightly ahead of last year. Gains in net interest income were offset by lower non-interest income due to the lower deposit fees, derivatives and participation fee income.

Operating costs were lower by $900,000 principally due to lower compensation-related costs. Pre-tax pre-provision income of $32.4 million, improved $2.6 million from Q3. It was only slightly better -- slightly behind last year.

As illustrated on Page 5, net interest income increased $2.3 million as funding cost declined and processing fees were recognized on an accelerated basis on forgiven PPP loans, as well as higher loan prepayment fee activity. The yield on interest earning assets improved 4 basis points from the prior quarter and the cost of funding declined 14 basis points resulting in a 15 basis point increase in the net interest margin.

If you follow me to Slide 6, you can reference our comparative summary balance sheets. In the fourth quarter, the Company had $8.9 billion in assets, down $58 million from Q3. Loans declined $127 million and deposits grew $118 million. Allowance for loan losses declined slightly to $114 million and represents 169 basis points of loans excluding PPP.

Slide 7, reflects the linked quarter and year-over-year activity and composition of our significant loan and deposit categories. As I mentioned, the loan portfolio declined $127 million in the quarter, driven by the forgiveness of PPP loans. Excluding PPP loan activity, the core portfolio declined $48 million. Deposit growth in the quarter was $118 million, driven by the growth in DDA, NOW and Money Market products.

On Slide 8, we are providing the status of our loan payment deferment activity. As Paul mentioned, as of December 31, 298 credits totaling $90 million continue to have a loan modification under the CARES Act, representing 1.2% of total loan balances outstanding. Modifications are predominantly in the equipment finance and commercial real estate portfolios.

On Slide 9, 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 the exercise industry as a government shutdowns and limitations could have a meaningful impact.

As shown on Slide 10, the Company continues to be well capitalized, exceeding all regulatory requirements, as well as our own internal policies and operating targets. At the end of the year, we had capital buffer of 3.2% or $219 million over regulatory well capitalized standards. The $10 million stock repurchase program Paul mentioned earlier represents 14 basis points of regulatory capital.

Slide 11 provides the history of our regular common dividend payout, which continued this quarter. The Board approved a quarterly dividend of $0.115 per share, which will be paid on February 26 to shareholders of record on February 12. In total, we paid out $0.46 in dividends per share during 2020, representing a 4.5% increase over 2019. Our payout currently approximates a 3.5% yield.

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

Paul A. Perrault -- President and Chief Executive Officer

Thanks, Carl. Joining us for the question-and-answer session is Robert Rose, our Chief Credit Officer. And we will now open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Hey, guys. Good afternoon.

Carl M. Carlson -- Chief Financial Officer

Hi, Mark.

Paul A. Perrault -- President and Chief Executive Officer

Hi, Mark.

Mark Fitzgibbon -- Piper Sandler -- Analyst

I was wondering, of the $90 million of loans that you have modified, are most or all of those paying interest? And also, could you help us sort of think about the schedule of the maturity of those deferrals and kind of when they come off [Phonetic]?

M. Robert Rose -- Chief Credit Officer

Hi, there, Mark. Virtually all of those are paying interest and at this point, what's been deferred our principal payments. The deferrals that we've granted have been largely 90-day windows at time, there are certain credits, where we have offered different kinds of deferments, which more are like a rewrite, but these are short-term returning to payment soon.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Okay. Great. And then, Carl, I wonder if you could help us think about the core margin. I know you'll have some noise related to PPP stuff forgiveness. But the core margin what the trend might look like? And also, if there is any unusual items that you anticipate in the course of 2021 on the expense front?

Carl M. Carlson -- Chief Financial Officer

Yeah. Certainly, Mark. On the -- from a core margin standpoint, we do expect the margin to continue to improve on a core basis, simply because we still have liabilities repricing lower. So, I do expect the core margin to be probably flat with this quarter's margin for the first quarter before the benefits of PPP forgiveness. So, that's something to take away from. And we do expect PPP forgiveness to be pretty robust in the first two quarters of 2021.

Outside of that is -- as far as expenses go, I would say nothing in particular on the expense side, we're -- there is no major programs to save the expenses in that sense, and we're being very careful in what we continue to invest in and our strategies there.

Paul A. Perrault -- President and Chief Executive Officer

You know what, Mark, just for legacy purposes, you've been with us a long time, this is the lowest by far that the loan-to-deposit ratio has ever been. Year ago, our wholesale borrowings are the lowest that they've been in memory and that pattern continues and that's been very beneficial to helping improve our margin. So, for all the wrong reasons our position at the beginning of this was helpful to get over the rate reduction prices we all faced earlier last year and now we're getting the fruits out of that effort.

Mark Fitzgibbon -- Piper Sandler -- Analyst

And Paul in that same vein, I guess, I'm curious as your thoughts on the branch network in the wake of the pandemic and people moving to a greater degree to online banking. Do you -- are you rethinking some of your physical locations?

Paul A. Perrault -- President and Chief Executive Officer

Not much more than I usually do. You've heard me say many times that I think branch systems need to be pruned from time to time, good locations become less good, you want to be in different places. But we're not a branch heavy company per se, we are thinking about the density of those branches in the inner circle of metro Boston, some of that might be changed. But in this market, we -- there's a lot more branch opening than closing between Providence and Boston metro areas, I think Chase is putting up almost 100 branches. And then moving fast on that, P&C, it seems like they're opening up all over the place. And so, we are making sure that we are a fast follower in digital and other electronic ways of dealing with us, both consumer and commercial. I think we're pretty good at that, and the numbers are all pointing north and the use of those tools. But we also had a very good record of opening accounts, most of that in branches last year.

So, if I wanted to throw rocks at others, I've been heard to say that I think a lot of people are taking advantage of cleaning up their branch systems using the pandemic and saying everything is going electronic, that's not something we need to do aggressively.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Thank you.

Operator

The next question comes from Christopher Keith [Phonetic] with D.A. Davidson. Please go ahead.

Christopher Keith -- D.A. Davidson & Co. -- Analyst

Good afternoon, gentlemen. How are you?

Paul A. Perrault -- President and Chief Executive Officer

Good, Christopher. Thanks.

Christopher Keith -- D.A. Davidson & Co. -- Analyst

So I wanted to start out just with the move in 90-plus days past due, is that kind of a factor of the CARES Act deferrals coming to an end and there is a transition period or is there something in particular driving that?

M. Robert Rose -- Chief Credit Officer

No, there is nothing in particular. They're actually free loans that are in the process of being renewed and their renewal has taken just a little longer than usual. But it's got nothing to do with the CARES Act. It has to do with just getting collateral and organizing ourselves.

Christopher Keith -- D.A. Davidson & Co. -- Analyst

Okay. So presumably all else being equal, then we would see a decline from that level as those loans renewals get completed?

M. Robert Rose -- Chief Credit Officer

That is correct, unless some new one comes along, that is a category with bounces up and down a bit, Chris. That sometimes a loan runs past maturity and the loan officer has some delays in renewing it. And that's usually the case, when you see that bounce around like that.

Christopher Keith -- D.A. Davidson & Co. -- Analyst

Okay. That makes sense. Thank you. Then, I guess, just move to loan growth and stepping back to look at it from kind of a big picture standpoint. When do you expect news like the vaccines and the stimulus that we had recently, when do you expect that to translate into more strong growth and when should we get back to kind of pre-pandemic levels of loan growth?

Paul A. Perrault -- President and Chief Executive Officer

Christopher, I'm afraid that that one is a little bit too hard for me to even try to take a guess at. We've seen lots of prepayment activity. We've seen lots of stuff going on. PPP is not immaterial to us, so that moves around a lot. Originations have been uneven but not terrible. I think we've got pretty good pipelines, but economic activity has certainly curtailed. Generally things are hard to get done. I continue to be optimistic that we can make some positive progress on the balance sheet in loans this year. But it is still only the first inning. So, I don't know how helpful that is, but things are OK. Things are OK, but how quickly all the stuff translates into more activity is speculative at best.

Christopher Keith -- D.A. Davidson & Co. -- Analyst

Okay. Got it. Got it. And then, just looking at the deposit composition, I'm curious, do you expect to see further run down in the CD book.

Carl M. Carlson -- Chief Financial Officer

On the CD side, I do expect the CDs to continue to decline. We've got about $371 million in CDs, that mature in Q1 at 170 basis points. And our offerings out there right now, even specials are between 40 basis points and 55 basis points and people aren't really too excited about locking in their money for a period of time. So, they are choosing to move, but for the most part, it's a general statement, for the most part to either a Money Market account or something more liquid. So, I do expect CDs to continue to decline, but deposits have seemed very sticky, and the more -- the federal government decides to stimulate the economy or help out the economy and those that might need it, we continue to see deposit growth -- substantial deposit growth.

Christopher Keith -- D.A. Davidson & Co. -- Analyst

Got it. That's great. Well, thanks for taking my questions.

Paul A. Perrault -- President and Chief Executive Officer

Okay, Christopher.

Operator

The next question comes from Laurie Hunsicker with Compass Point. Please go ahead.

Laurie Hunsicker -- Compass Point -- Analyst

Yeah, hi. Thanks. Good afternoon.

Paul A. Perrault -- President and Chief Executive Officer

Hi, Laurie.

Carl M. Carlson -- Chief Financial Officer

Hi, Laurie.

Laurie Hunsicker -- Compass Point -- Analyst

[Speech Overlap] if we could go back to margin and I apologize if this was in your comments and I missed it, but the dollars of PPP income that rolled into net interest income this quarter and the impact on margin, do you have those, Carl?

Carl M. Carlson -- Chief Financial Officer

Sure. So, two big pieces, certainly, this quarter. So deferred fees and this is in total. Deferred fees in total were $1.9 million in net interest income this quarter. A $1.4 million of that was PPP forgiveness. And so, in total, deferred fees were up about $1.6 million from the prior quarter. So it just give you sense of the impact of that. So, almost all of that is the PPP forgiveness piece. And then on the prepayment side, prepayment fees in total were $1.5 million and that was about $500,000 more than in Q3. So, both of those together had a meaningful impact on the margin this quarter. And then the balance, really driven by deposit funding and borrowings coming down.

Laurie Hunsicker -- Compass Point -- Analyst

Got it. Okay. And then do you happen to have a calculated margin number on the PPP forgiveness?

Carl M. Carlson -- Chief Financial Officer

That was $1.5 million. I want to say, it was about 7 basis points.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. Thanks. That's helpful. And of your $490 million or so of PPP loans that are remaining, what are the -- what's the unamortized fees around that?

Carl M. Carlson -- Chief Financial Officer

You know what, I think you asked me this last quarter and I didn't have the number at my fingertips. And I still don't have the number.

Laurie Hunsicker -- Compass Point -- Analyst

You know what, I'm sorry. I'll follow up with you offline.

Carl M. Carlson -- Chief Financial Officer

Yeah.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. Great. Thanks. And then, Paul, a question for you. A bigger question, I mean, in the past year you've talked about M&A, obviously, there has been a lot to think about here in the last 10 months, but your stock currency is back up. There's obviously a lot happening in your market. How are you thinking about M&A here?

Paul A. Perrault -- President and Chief Executive Officer

Well, we keep our eye [Phonetic] out of the ground. We would be open to looking to do something. But even though the stock has come back somewhat, that's a relative term, it's not back so strong as to make some of these things easy, particularly given expectations. But I feel about the same way. I think deals are doable. They are just more difficult in this environment and it would be a little bit easier if the stock price were somewhat higher. So, I haven't really changed my opinion. I don't think.

Laurie Hunsicker -- Compass Point -- Analyst

Okay, great. Thanks. I'll leave it there.

Paul A. Perrault -- President and Chief Executive Officer

Yeah.

Operator

[Operator Instructions] Our next question comes from William Wallace with Raymond James. Please go ahead.

William Wallace -- Raymond James -- Analyst

Thanks. Good afternoon.

Paul A. Perrault -- President and Chief Executive Officer

Hi, Wally.

Carl M. Carlson -- Chief Financial Officer

Hi, Wally.

William Wallace -- Raymond James -- Analyst

Hi. I apologize if this question was asked and answered already, my call dropped, so I had to dial back-in. But I caught in the live transcript some conversation about loan growth and I know that you said that it was hard to answer. I'm curious if you can talk about how pipelines have -- had been building, if they've been building or what you're seeing in the pipeline activity?

Paul A. Perrault -- President and Chief Executive Officer

The pipelines have been slowly rebuilding. You got to also remember that besides the pandemic, the early part of the year, particularly in commercial banking is not the most robust by any means, things usually slow down at that point, companies are getting themselves reorganized, getting ready for their taxes and all kind of stuff. But I'm feeling OK about the outlook. What has slowed us down here in Q4 and early this year has more been the prepayments. And the whole picture gets clouded by PPP, which was a lot of the production when you looked at the sort of middle part of last year, the bankers were exceptionally busy doing that. So, I'd say, here we go again, at least for the moment we're working on, I believe it's approximately 1,500 loans already in PPP 3, I heard it's been called. So, Wally, it's -- I'm not trying to dodge you, but I think if you try to model -- modest growth somewhere along the year here, I could probably agree with that.

William Wallace -- Raymond James -- Analyst

Okay. Including the new PPP loans?

Paul A. Perrault -- President and Chief Executive Officer

Yeah. I'm saying, when your net everything out [Speech Overlap]

William Wallace -- Raymond James -- Analyst

[Speech Overlap] ex off then.

Paul A. Perrault -- President and Chief Executive Officer

Kind of when you net everything out, because those PPP loans will have characteristics -- PPP 3 will have characteristics that are likely to be different than 1 and 2. And, I guess, I don't have my head wrapped around those differences might be. How long they might be around? How they might be used? And how they might prepay? So, I'm sort of watching everything in the same bucket and saying, if you saw our balance sheet, show modest growth consistently through the year, I would be OK with that.

William Wallace -- Raymond James -- Analyst

Okay. All right. Fair enough.

Paul A. Perrault -- President and Chief Executive Officer

The PPP 3 it's going to replace PPP 1 and 2.

William Wallace -- Raymond James -- Analyst

Yeah. Yeah. So what is the dollar amount of the applications on Part 3 so far and as you kind of watched the cadence of those applications come in, what might you think you might end up with on the Part 3 PPP?

Paul A. Perrault -- President and Chief Executive Officer

The last part, Wally, is almost impossible to tell, because people are moving more -- in a more paced way than they did at the last one. I think, I was just told, it's about $130 million.

Carl M. Carlson -- Chief Financial Officer

We have $130 million in process right now.

Paul A. Perrault -- President and Chief Executive Officer

In the pipeline, but there's a lot more capacity left in the plan at the federal level and we do know from talking to customers that they are kind of taking their time about it because they recognize that they got more time and capability and capacity this time, whereas last time it was a scramble before the bucket ran dry.

William Wallace -- Raymond James -- Analyst

Yeah. Okay. All right. Great. Well, thanks for helping clarify the same as, I know it's pretty tricky right now. So, we'll see how things play out. Thank you.

Paul A. Perrault -- President and Chief Executive Officer

We're doing our best to be precise, but it's tough.

William Wallace -- Raymond James -- Analyst

Understood.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Paul Perrault for any closing remarks.

Paul A. Perrault -- President and Chief Executive Officer

Okay. Thank you, Tom, and thank you all for joining us, and we will look forward to talking with you again next quarter. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Marissa Martin -- Associate General Counsel

Paul A. Perrault -- President and Chief Executive Officer

Carl M. Carlson -- Chief Financial Officer

M. Robert Rose -- Chief Credit Officer

Mark Fitzgibbon -- Piper Sandler -- Analyst

Christopher Keith -- D.A. Davidson & Co. -- Analyst

Laurie Hunsicker -- Compass Point -- Analyst

William Wallace -- Raymond James -- Analyst

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