Brookline Bancorp(BRKL) - 2023 Q4 - Annual Report

PART I Business Brookline Bancorp, Inc. is a multi-bank holding company offering commercial and retail banking services in New England and New York, significantly expanding loans and deposits in 2023 through the PCSB acquisition - Brookline Bancorp, Inc. is the holding company for Brookline Bank, Bank Rhode Island (BankRI), and PCSB Bank, offering commercial and retail banking services in Central New England and New York's Lower Hudson Valley[88][92] - On January 1, 2023, the Company completed its acquisition of PCSB Financial Corporation, the parent of PCSB Bank, which now operates as a separate subsidiary with 14 banking offices in the Lower Hudson Valley of New York[91] Year-End Financial Highlights (2023 vs. 2022) | Metric | Dec 31, 2023 | Dec 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total Loans & Leases (in billions) | $9.6 | $7.6 | +26.1% | | Total Deposits (in billions) | $8.5 | $6.5 | +31.1% | | Core Deposits (in billions) | $6.1 | $5.3 | +15.3% | | Nonperforming Assets (in millions) | $45.3 | $15.3 | +196% | | Net Income (in millions) | $75.0 | $109.7 | -31.7% | | Diluted EPS (in dollars) | $0.85 | $1.42 | -40.1% | - The company and its subsidiary banks are subject to extensive regulation and supervision by the Federal Reserve Board (FRB), the FDIC, and state banking authorities in Massachusetts, Rhode Island, and New York[115][116] Risk Factors The company faces significant risks from economic conditions, interest rate changes, intense competition, and a concentrated commercial real estate loan portfolio - The business is highly dependent on local economic conditions in the Greater Boston, Rhode Island, and New York metropolitan areas. An economic downturn in these regions could lead to higher loan losses and lower net income[257] - Net interest income is significantly affected by interest rate fluctuations. Rising rates could increase loan defaults, while falling rates may lead to prepayments and reduced net interest income[259][261] - The company faces substantial competition from traditional banks, online banks, and fintech companies. Failure to adapt to technological changes and evolving consumer preferences could result in a loss of market share[263][265] - A significant portion of the loan portfolio (84.7%) consists of commercial real estate and commercial loans, which are inherently riskier than residential mortgage loans and more dependent on business cash flows and economic conditions[273] - The company is exposed to cybersecurity risks, including hacking and data breaches, which could lead to operational disruptions, financial losses, and reputational damage. The company relies on third-party vendors for key infrastructure, adding another layer of risk[337][342] Cybersecurity The company maintains a robust Cybersecurity Risk Management Program, overseen by the CISO and Board committees, to identify, assess, and mitigate evolving cyber threats through assessments, testing, and vendor management - The Cybersecurity Risk Management Program is managed by the Chief Information Security Officer (CISO) and receives oversight from the Board of Directors, the Audit Committee, and the Risk Committee[408][409] - The program is designed to identify, assess, and manage cyber threats through annual risk assessments, regular testing of systems, and continuous monitoring by both an internal team and external vendors[412][454] - The company conducts ongoing reviews of cybersecurity risks associated with third-party vendors, including the review of SOC 1 or SOC 2 reports as part of its Vendor Management Program[415] PART II Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, total assets grew 23.9% to $11.4 billion due to the PCSB acquisition, but net income decreased 31.7% to $75.0 million, driven by higher expenses and credit loss provisions, while net interest margin compressed Executive Overview The PCSB acquisition significantly increased total assets to $11.4 billion in 2023, yet net income declined 31.7% to $75.0 million due to higher non-interest expenses and credit loss provisions, leading to net interest margin compression Key Financial Metrics (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Assets (in billions) | $11.4 | $9.2 | +23.9% | | Total Loans & Leases (in billions) | $9.6 | $7.6 | +26.1% | | Total Deposits (in billions) | $8.5 | $6.5 | +31.1% | | Net Income (in millions) | $75.0 | $109.7 | -31.7% | | Diluted EPS (in dollars) | $0.85 | $1.42 | -40.1% | | Net Interest Margin | 3.24% | 3.67% | -43 bps | | Nonperforming Assets / Total Assets | 0.40% | 0.17% | +23 bps | - The decrease in net income was primarily driven by a $60.0 million increase in non-interest expense and a $29.3 million increase in the provision for credit losses, partially offset by a $39.9 million rise in net interest income[555] Financial Condition As of December 31, 2023, total assets reached $11.4 billion, with loans growing 26.1% to $9.6 billion, but core deposits decreased as a percentage of total deposits, and nonperforming assets increased Loan Portfolio Composition (December 31, 2023) | Loan Category | Balance (in billions) | % of Total | | :--- | :--- | :--- | | Commercial Real Estate | $5.76 | 59.8% | | Commercial Loans & Leases | $2.40 | 24.9% | | Consumer Loans | $1.48 | 15.3% | | Total Loans & Leases | $9.64 | 100.0% | Deposit Composition (December 31, 2023) | Deposit Category | Balance (in billions) | % of Total | | :--- | :--- | :--- | | Non-interest-bearing | $1.68 | 19.6% | | Interest-bearing Core (NOW, Savings, MM) | $4.41 | 51.7% | | Certificate of Deposit | $1.57 | 18.4% | | Brokered Deposits | $0.88 | 10.3% | | Total Deposits | $8.55 | 100.0% | - The ratio of core deposits to total deposits decreased to 71.3% in 2023 from 81.0% in 2022, reflecting a shift towards higher-cost funding sources like certificates of deposit and brokered deposits[483] - Total borrowed funds, including FHLB advances and subordinated notes, decreased by $56.0 million to $1.38 billion at year-end 2023[550] Results of Operations Net interest income increased by $39.9 million in 2023, but a surge in non-interest expenses and credit loss provisions led to a 32.9% decline in income before taxes, reflecting the impact of the PCSB acquisition and rising rates Comparison of Operations (2023 vs. 2022) | Metric (in millions) | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $339.7 | $299.8 | +$39.9 | | Provision for Credit Losses | $38.2 | $8.6 | +$29.6 | | Non-Interest Income | $31.9 | $28.3 | +$3.6 | | Non-Interest Expense | $239.5 | $179.5 | +$60.0 | | Income Before Taxes | $93.9 | $139.9 | -$46.0 | | Net Income | $75.0 | $109.7 | -$34.7 | - The increase in non-interest expense in 2023 was driven by higher compensation and benefits (+$25.4 million), amortization of intangibles (+$7.3 million), equipment and data processing (+$6.2 million), and merger expenses (+$5.2 million), largely due to the PCSB acquisition[61][63][64][65] - The efficiency ratio deteriorated to 64.45% in 2023 from 54.72% in 2022, primarily due to the significant increase in non-interest expenses[62] - For 2022 compared to 2021, net interest income increased by $17.4 million, reflecting a rising interest rate environment that benefited loan yields more than it increased deposit costs during that period[69] Liquidity and Capital Resources The company maintains strong liquidity through deposit inflows and access to wholesale funding, with both the company and its subsidiary banks exceeding all regulatory capital requirements and remaining well-capitalized - Primary sources of liquidity are deposit inflows, loan repayments, borrowed funds, and maturing securities. Deposits represented 86.1% of total funding as of December 31, 2023[146][147] - The company has access to significant wholesale funding, including $1.3 billion in remaining borrowing capacity from the FHLB and $273.0 million from the FRB's discount window as of year-end 2023[149][151] Regulatory Capital Ratios (Company) | Ratio | Dec 31, 2023 | Dec 31, 2022 | Well-Capitalized Minimum | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 | 10.25% | 12.05% | 6.5%* | | Tier 1 Leverage | 9.02% | 10.26% | 5.0%* | | Tier 1 Risk-Based | 10.35% | 12.18% | 8.0%* | | Total Risk-Based | 12.37% | 14.44% | 10.0%* | *Note: Minimums shown are for subsidiary banks to be well-capitalized; holding company requirements may differ slightly but the company exceeds all. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest-rate risk, managed by ALCO, with simulations indicating modest asset sensitivity for net interest income but increased liability sensitivity for Economic Value of Equity in 2023 - The company's main market risk is interest-rate risk, which is managed by the Asset/Liability Committee (ALCO) through strategies like adjusting investment maturities and using interest rate swaps[208][209][210] Estimated Impact of Interest Rate Changes on Net Interest Income (NII) | Rate Change Scenario | Estimated % Change in NII (Dec 31, 2023) | Estimated % Change in NII (Dec 31, 2022) | | :--- | :--- | :--- | | Up 300 bps | +3.9% | +7.4% | | Up 100 bps | +1.0% | +1.5% | | Down 100 bps | -1.5% | -2.0% | Estimated Impact of Interest Rate Changes on Economic Value of Equity (EVE) | Rate Change Scenario | Estimated % Change in EVE (Dec 31, 2023) | Estimated % Change in EVE (Dec 31, 2022) | | :--- | :--- | :--- | | Up 300 bps | -6.3% | +0.3% | | Up 100 bps | -2.2% | +0.8% | | Down 100 bps | +2.1% | -3.0% | - The balance sheet became less asset sensitive in 2023 compared to 2022, as indicated by the reduced positive impact on NII from rising rates. This was attributed to deposit outflows causing a greater reliance on wholesale funding[215][226] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2023, including balance sheets, income statements, and cash flows, with detailed notes on accounting policies, the PCSB acquisition, and asset/liability composition Note 2. Acquisitions The company completed the acquisition of PCSB Financial Corporation on January 1, 2023, for $297.8 million, resulting in $80.8 million in goodwill and a subsequent restructuring of the acquired investment portfolio - The acquisition of PCSB Financial Corporation was completed on January 1, 2023, for a purchase price of $297.8 million[655] PCSB Acquisition Purchase Price Allocation (in thousands) | Item | Amount (in thousands) | | :--- | :--- | | Assets Acquired | | | Cash | $42,373 | | Investments | $366,790 | | Loans (fair value) | $1,336,737 | | Core deposit intangible | $30,265 | | Liabilities Assumed | | | Deposits | $1,570,563 | | Borrowings | $52,923 | | Net Assets Acquired | $216,996 | | Goodwill | $80,795 | - Following the acquisition, the company restructured the acquired investment portfolio, selling $228.3 million of securities and realizing a $1.7 million gain[662] Note 4. Investment Securities Available-for-sale investment securities increased to $916.6 million in 2023, primarily U.S. Treasury bonds, carrying a net unrealized loss of $67.7 million, with significant sales related to the PCSB portfolio restructuring Investment Securities Available-for-Sale (Fair Value) | Security Type | Dec 31, 2023 (in millions) | Dec 31, 2022 (in millions) | | :--- | :--- | :--- | | U.S. Treasury bonds | $444.7 | $331.3 | | GSE debentures | $201.1 | $152.4 | | GSE MBSs | $170.0 | $140.6 | | GSE CMOs | $61.6 | $18.2 | | Other | $38.2 | $14.2 | | Total | $916.6 | $656.8 | - The portfolio carried a net unrealized loss of $67.7 million as of December 31, 2023, compared to a net unrealized loss of $77.2 million at year-end 2022[722] - Proceeds from the sale of investment securities were $230.0 million in 2023, up from $78.8 million in 2022, with the increase primarily related to the restructuring of the investment portfolio acquired from PCSB[2] Note 7. Allowance for Credit Losses The allowance for loan and lease losses increased to $117.5 million in 2023, driven by a $38.7 million provision for credit losses and the PCSB acquisition, with the company utilizing CECL models for determination Changes in Allowance for Loan and Lease Losses (2023) | (in thousands) | Commercial Real Estate (in thousands) | Commercial (in thousands) | Consumer (in thousands) | Total (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Balance at Dec 31, 2022 | $68,154 | $26,604 | $3,724 | $98,482 | | Net Charge-offs | ($1,072) | ($18,584) | ($7) | ($19,663) | | Provision for Losses | $14,328 | $21,537 | $2,838 | $38,703 | | Balance at Dec 31, 2023 | $81,410 | $29,557 | $6,555 | $117,522 | - The general allowance for loan and lease losses increased from $95.4 million to $108.4 million, with the acquisition of PCSB Bank contributing $14.7 million of this increase[37] - The allowance methodology uses third-party models based on the CECL standard, incorporating multiple economic forecasts and qualitative adjustments to account for model limitations and specific portfolio risks[519][522][524]