Q4 2021 Brookline Bancorp Inc Earnings Call

Welcome to today's Brookline Bancorp, Inc, Q4, 2021 earnings call. My name is Jordan and I'll be coordinating your call today, if you'd like to register a question you May do show it by pressing star followed by one on your telephone keypad.

I'm now going to hand over to Marissa Martin General Counsel to begin first so the line is yours.

Thank you Jordan good afternoon, everyone. As a reminder, all participants will be in listen only mode. During today's call and please note that today's call is being recorded.

Yesterday, we issued our earnings release and presentation, which is available on the Investor Relations page of our website Brookline Bancorp Dot com and has been filed with the SEC.

Afternoon's call will be hosted by Paul a Pearl and Carl M. Carlson.

This call may contain forward looking statements with respect to the financial condition results of operations 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, Chairman and CEO Paul Perrault.

Thanks, Marissa and good afternoon, everyone and thank you for joining us for todays earnings call.

I'm pleased to report we had another quarter of solid earnings of 28, and a half million dollars or <unk> 37 per share capping off a record year for earnings of $115 $4 million with EPS of $1 48.

We had strong growth in our core loan portfolio of $315 million.

And deposits, excluding brokered grew by almost $200 million for the quarter.

Our margin was stable and our credit quality in the economic environment continues to improve.

C income was also very strong this quarter as loan activity drove customer swaps and gains on loan participations that we originated.

Cares Act loan modifications dropped to $38 million and P. P. P loans declined by $93 million to end the year at $68 million.

Our pipelines continue to be very strong and trends remain positive as we enter this new year.

I will now turn you over to Carl who will review the company's fourth quarter. Mr. Carlson. Thank.

Thank you Paul.

On slide four we've provided summary, comparative income statements that.

Net income this quarter of $28 5 million was 300000 lower than last quarter, and $1 8 million greater than a year ago.

Performance was driven by solid core loan growth and higher fee income, partially offset by lower revenues related to PPP loans and higher credit loss provisioning and operating expense.

As Paul mentioned Q4 income was very strong this quarter at $10 7 million driven by an increase in the volume of our customer swaps and loan participations out to others.

Total revenues were higher by $5 $9 million, while noninterest expense increased by $2 million, driven primarily by compensation and incentive costs.

As illustrated on page five net interest income increased 700000 from the prior quarter, driven by higher average, earning assets and lower funding costs.

Overall, our net interest margin declined one basis point to 352 basis points.

On the bottom of slide five we've provided the estimated impact of the PPP loan program on the net interest margin.

<unk> revenues were $4 1 million for the quarter versus $5 8 million in Q3.

Assuming no cost of funding PPP interest income contributed 15 basis points for the fourth quarter margin versus 17 basis points in the third quarter.

The net interest margin, excluding PPP and the impact of the federal home loan bank prepayment prepayment penalties in Q3 declined four basis points to 337 basis points.

Please follow me to slide six and our comparative summary balance sheets.

We finished the year with $8 6 billion in assets up $290 million from Q3 loans.

Loans were up $222 million, while cash and securities combined increased $78 million.

Funding side total deposits increased $177 million in borrowings increased 89 billion.

Slide seven reflects the linked quarter and year over year activity and composition of our loan and deposit categories. As I mentioned the loan portfolio overall increased $222 million from the prior quarter driven by a $93 million decline in PPP loans as our loan portal core loan portfolio grew $315 million.

Yeah.

In the fourth quarter, we originated over 837 million and non PPP loans at a weighted average coupon of 358 basis points.

The weighted average coupon on the core portfolio dropped seven basis points during the quarter to 395 basis points at December 31.

Total deposits grew $177 million as broker deposits declined $20 million with growth concentrated in DDA now and savings.

Our loan to deposit ratio was approximately 101% at the end of the year.

Slide eight provides a snapshot of the PPP program in each of our backs at the end of the year. We had 178 loans was $68 million outstanding net of unearned fees.

Net deferred fees of approximately 1.7 million remains to be recognized in income over the life of the loans oil will accelerate on loan satisfaction.

We expect the remaining PPP loans to be satisfied during the early part of this year.

On slide nine we are providing the status of our loan payment deferment activity.

Paul mentioned that as of quarter end 98 credits totaling $38 million have a loan modification under the cares act representing less than 1% of total loan balances.

Loan modifications are provided by sector on slide 10.

All loans remain accruing with modifications concentrated in the fitness and retail sectors.

As shown on slide 11, 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 a capital buffer of four 1% or $286 million over regulatory well capitalized standards.

The copy hasn't approved $20 million stock repurchase plan, which may be used through 2022.

No shares have been purchased under this authorization.

Slide 12 provides a history of the growth in our regular common stock dividend yesterday. The board approved a quarterly dividend of 12, and a half cents per share to be paid on February 25 to stockholders of record on February 11th.

On an annualized basis, our dividend payout approximates a two 9% yield.

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

Thanks, Carl and now we will open it up for questions. Please.

As a reminder, if you'd like to register a question. Please press star followed by one on your telephone keypad. If you change your mind. Please press star followed by two.

Please ensure your Youtube when speaking.

Our first question comes from Mark Fitzgibbon of Piper Sandler marks along as yours.

Thank you and nice nice quarter guys.

Thanks, a lot.

First question I had for you you mentioned that the pipelines are strong I wondered if you could just sort of quantify that for us.

No.

[laughter] no I see it all.

I think I've gone through this before and I think it's a little dicey to try to quantify it because you've got all kinds of flavors of ice screens in those in those pipelines. Some that are assuredly, you're going to get done somewhat will get withdrawn.

All of them will get negotiated.

So I'll just say that on a historic basis, there was healthy as they've ever been.

Okay.

And then Paul I guess I'm curious are a lot of our loan customers coming from in any meaningful way from some of the banks in the area that have been involved in M&A or is it coming from bigger banks or where do you feel like the particularly on the commercial side, where the business is coming from.

Well, we have been pleased to see and welcome customers from the acquired banks or banks that are in the process of being acquired.

That has gone as well as we might have hoped and I would also say that as our reputation continues to grow and our expertise continues to grow both in.

Mass in Rhode Island.

We are a very attractive alternatives for people, who are a little little bit fed up with some of the mass market. Thanks.

Okay, Great and then.

Carl I wondered if you could maybe help us think about your outlook for expenses. This year given some of the wage pressures that everybody seems to be grappling with and also how youre thinking about sort of tech spending 2022 versus 2021.

Sure.

I'm sorry.

Part with the Tech spending I think the tech spending is going to be very consistent.

As we move forward, we continue to look at things that could be very helpful to us.

So I don't think theres going to be any change or acceleration or deceleration in that in those areas.

As far as expenses, we do expect expenses to grow a little faster than they used to so we are projecting to be 5% to 6% growth in core operating expenses year over year.

After you adjust for the gain that we had on the Oreo side in 2021.

Of course as everybody this is being getting driven by inflation.

As well as some of the yearend.

The full year impacts of reopening.

So we are seeing TNA and things of that nature.

No spike back up towards pre pandemic levels and so we do see the full impact of that as well as the full year impact of some of the incremental investments that we've been making.

Alright, just add to that I do expect I'll, just I'll just add to that a little bit is I do expect Q1 s expenses to be in line with Q4, Q4 was a little bit with higher really driven by compensation costs associated with incentives and commissions truing up those those costs.

The end of the year.

Those things will normalize in Q1, we're kicking into Q1 will be the payroll taxes and other other benefit thing said our seasonally.

Jumping up as well as some of the initiatives that we've also taken on the compensation side here at the company.

Okay.

And then could you share with us what the expected impact to net interest income for each 25 basis point hike in rates would look like.

Sure. So we did we did provide a slide on that in the appendix. So I'll ask you to turn to that slide.

For those who can see it my apologies.

So we did provide a new slide slide 21.

That shows by quarter, the impact of basically 100 basis point.

Uh huh.

Rising rates over the year, so for the full year impact to be about 4% increase in our net interest margin.

From a flat rate scenario.

Okay great.

Great I think that is all I have thank you.

Thanks Mark.

Our next question comes from Laurie Hunsicker of Compass point Laurie. Please go ahead.

Yeah, Hi can you hear me.

Clearly.

Oh, hi is that better.

A little better.

Okay, Yep, sorry, Paul Carl I've good afternoon.

Thank you with extensive Carl.

And I'm looking at the other other category of non interest expense of 3.321 million.

Outsized is there anything nonrecurring in that or how should we be thinking about that loan.

I wouldn't say, there's anything nonrecurring in that I think those are some of the trends we're seeing in.

Sure.

Travel and entertainment expenses supplies things are the things that kind of going back to what they were before they are a little bit of Oreo expense going through that but not nothing that's outsized very small.

But nothing Thats unusual.

Okay, and then when you look a little bit farther out as an <unk>.

23 on the expense growth guide how are you thinking about that.

You'll get you'll get a little far out there on that side I think.

So we'll see we'll see what the market provides us.

Okay, Okay, or maybe asked another way how how are you thinking about the $10 billion cross is that.

You know how are you thinking about that.

Oh.

Quite honestly, we don't think a lot about that.

Have an eye on it I think from a theres a few things that happen when you cross $10 billion.

It's the Durbin Amendment is very simple to understand that.

Impacts your debit card fee income today that would impact us about $800000. Our most current estimate.

And then and then it's what are the operating costs that you may have.

To manage the regulatory environment of a 10 billion dollar framework.

And we don't see too much of an impact on that at this point.

Okay. Okay. So just so that I'm clear, you're your 5% to 6% core growth guide doesn't necessarily changed dramatically in terms of thinking about the $10 billion cross because you've already got this.

This operating cost fully baked.

That correct.

When you say fully baked I think there'll be some incremental costs, but I don't think it's going to be dramatic.

Okay. Okay.

That's helpful. Okay and then.

I guess, Paul and Carl This is both to you that the 20 million buyback no shares repurchased in the quarter. Obviously your stock price is higher.

Third quarter, you were pretty active at 14 or how do you think about the price point at which you step up.

Yeah.

Okay.

I think we're very comfortable with our capital levels and the growth opportunities that we have currently so I think we take that all into consideration when we talk about stock buybacks with the board.

Okay, Alright, so no no price point that you say that that's why we're here.

Yeah.

Not that I would probably sure.

We don't like to dilute tangible book value either.

I hear you I hear you okay. So.

One more question on top line net interest income how much was the the prepaid fees that commercial prepay fees in that number.

The corresponding last quarter out 579.

Yes.

So prepayment fees.

Well $1.712 million this quarter, which was up about $133000 from Q3.

Okay. That's helpful. Okay, and then just last question.

Should we be thinking about tax rate, obviously, a little bit larger in the fourth quarter. How do you. How do you think about that for next year.

Yes, we currently expect the full year effective tax rate to be approximately 25, 4%.

Okay great.

Perfect. Thanks for taking my question.

Okay Laurie.

As a reminder for any questions that star followed by one on your telephone keypad.

Our next question comes from Chris O'connell of K B W. Chris The line is yours.

Hey, good afternoon guys.

Hi, Chris Hi, Chris.

Just wanted to start off.

On the fee side.

Pretty big pick up in loan level derivative income and gain on sale lines.

Wondering how you guys are thinking about those going forward for.

Thank you.

Well I'd say that the derivative income by its nature is lumpy.

And it tends to be connected with relatively large loans for us to the more sophisticated borrowers.

And those sometimes take a while to pull together.

So I think we continue to be optimistic about strong derivative activity in this year, but it's hard to simply do it quarter by quarter for the reasons I just outlined.

Q4 was exceptional I would say, but if you sort of look back because it back a number of years you can see that there is a pattern to this.

Gain on sale of loans for us is entirely related to participations that we originate.

Here in our markets, where we sell parts of loans to friends and family.

Where we generate fees or rate differentials for those things.

We don't we don't sell residential loans anymore. So it's entirely commercially oriented.

Both real estate and COO.

Commercial C&I loans are in that pilot.

Okay got it so both kind of tracking for the most part loan origination activity.

Yes.

And then just circling back this was a record quarter at $11 million or $10 $7 million in fee income.

Typically we're in that 7% to $75 million range.

Sometimes higher like you saw this quarter and sometimes a little bit lower depending on the activity, but I think our pipelines in return, we're getting a little bit bought back and returned to normal.

Great that's helpful color.

And then just circling back to the margin.

On a core basis, excluding PDP.

Appreciate the color around.

NII sensitivity in the rate hikes.

As you guys see it you know absent any rate hikes going forward with the core margin is.

At a point, where it's kind of more or less stabilized here.

Let me, let me still a little bit of his thunder on this one because I don't know that he would say this but again the fourth quarter was pretty unusual we had some large loans.

At use derivatives in order to have us end up with.

Floating rates and those rates tend to be pretty soon and so from my perspective despite.

Great originations, we had a fair amount of content in there that drove the the actual rates that we received lower than we might have had an irregular quarter.

If you follow me, but now I'll, let call. It so the question the right way.

That's true we had some very very large loans, which are price center to begin with plus.

Floating rate nature of the loans are.

<unk> to us, but at the time its NIM compressing in the near term, but youre putting more.

Net interest income to the bottom line at the end of the day so.

That's all good so as far as the margins concerned I'll break it up into two parts. The first being PPP impact of PPP. It's almost it's almost all gone not quite all gone, we have $68 million PPP loans, which were projected to be largely satisfied during the first quarter.

What I say, you said 68, but todays 60.

68 at the end of it you can't tell them what is today.

68 million barrels at the end of the year.

So we do expect that largely be gone at the end of the first quarter. So.

Figure, there's an average balance of $30 million to $40 million for the quarter. So you have some interest at 1% coupon so about a $1.8 million of revenue associated with the PPP loans, and then Thats gone so that'll be a nice little bit of frosting, let's say for the margin in the first quarter.

Excluding the impact of PPP. We are currently projecting the net interest margin to be in the $3 42 range for Q1.

And so.

Where rates go after that we'll see.

We have seen a nice steepening of the yield curve, so even going forward.

New loan volumes are getting booked at a little bit higher yield just because if you're pricing something off the five year part of the curve at the two year part of the curve Youre doing better than you were doing in the fourth quarter.

So we're seeing the benefit of that going forward.

Great.

Can you guys give me.

Kind of color around the reserve.

In the deck.

But at the 140 level ex PPP year, so well above the 1% kind of day, one so level.

How do you see the path of that.

Migration going forward.

We're not providing guidance on that because I think it's really driven by what's going on in the economy in the market.

No one anticipated the omicron and what that might mean, we're continuing to keep a very close eye on office and what's going on there while we don't see anything bad right now.

Well I'm not going to try to predict the future right now, particularly when it comes to the research.

Okay understood.

Thanks for the time.

Sure.

We have no further questions on the line, so I'll hand back.

Yeah.

Hey, Thank you Jordan.

And thank you all for joining us and we will look forward to talking with you again next quarter have a good day.

This concludes today's call. Thank you for joining you may now disconnect your lines.

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