Q2 2022 Brookline Bancorp Inc Earnings Call

Yes.

Good afternoon, and thank you for attending today's.

Brookline Bancorp second quarter 2022 earnings call. My name is Danielle and I will be your moderator for today's call.

All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star followed by one on your telephone keypad.

I'd now like to pass the conference over to our host Laura Van with Brookline Bancorp.

The attorney Laura Please proceed.

Thank you Danielle and good afternoon, everyone yesterday, we issued our earnings release and presentation, which is available on the Investor Relations page of our website Brookline Bancorp Dotcom and has been filed with the SEC.

This afternoon's call will be hosted by all a parallel 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.

Please refer to page two of our earnings presentation.

Forward looking statements disclaimer.

Also please refer to our other filings with 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, Bancorp's, Chairman and CEO Paul Perrault.

Thanks, Laura and welcome to you.

Good afternoon, everyone. Thank you for joining us on today's call.

I am pleased to report we had another quarter of solid earnings of $25 2 million or <unk> 33 per share and the board approved a quarterly dividend payment of <unk> 13 per share.

On an annualized basis, our core loan portfolio grew $82 million or four 5% annualized.

And our net interest margin for the second quarter was three 5%, 6% an increase of seven basis points from the first quarter.

We continue to see solid commercial loan and deposit activity in our markets. Despite the significant rise in short term rates.

I'm pleased with all of the progress the teams at both <unk> Bank and Brookline have been making and continue to expect the transaction to close in the fourth quarter of this year.

I will now turn you over to Carl who will review the company's second quarter.

Thank you Paul.

As Laura mentioned, we have provided an earnings presentation on our website and has been filed with the SEC.

We will not be doing a slide.

Flip for this quarter.

Net income this quarter was up half a million dollars for Q1 at $25 $2 million, which also included the impact of 535000 in merger and acquisition costs.

Our revenues were up $3 5 million or 5% and expenses excluding merger charges were up 4%.

Revenue growth was driven by the growth in interest, earning assets an increase in our core margin of 11 basis points and solid.

Solid derivatives and investment volumes.

Expense growth was primarily due to compensation associated with annual merit increases.

The accruals and market adjustments.

Total loans increased $69 million driven by $82 million in core loan growth as PPP loans declined $13 million in the quarter.

A few loans were just over $1 million at the end of the quarter and as of today, we have only 10 PPP loans remaining with the balance.

It's in the $1 million.

In the second quarter, we originated $527 million in loans at a weighted average coupon of 498 basis points up 99 basis points from the prior quarter.

The weighted average coupon on our loan portfolio rose 33 basis points during the quarter to $524 99.

At June 30.

Prepayment fees were $1 million in Q2 down 490000 from Q1 and deferred fees, excluding PPP, we're $1 4 million or <unk> 78000, less in Q1, the combined impact was a negative impact on net interest income 568000, compared to first quarter or approximately.

Three basis points to the net interest margin.

Credit quality trends continue to be favorable, resulting a slight decline in reserve coverage to 128 basis points.

During the second quarter deposits declined $200 million.

Tax payments large real estate purchases and transfers to personal investment accounts drove the decline in deposits.

We continue to see significant increases in short term interest rates as the federal reserve increased the fed funds rate 50 basis points in May and another 75 basis points in June .

Increases in short term rates at the potential benefit us due to a moderately asset sensitive position.

A flat balance sheet and the forward curve as of June 30, our simulations reflect the three 1% increase in net interest income over the next 12 months, our simulations reflect the product weighted beta of 32% on total deposits.

Company remains well capitalized and we repurchased a little over 956000 shares during the quarter before we were required to pause our program.

As Paul mentioned, the board approved a quarterly dividend of <unk> 13 per share representing a 40% payout and a three 7% yield the dividend will be paid on August 26th to stockholders of record on August 12.

This concludes our formal comments and we will now open up for questions.

Yes.

Certainly if he would like to ask a question. Please press star followed by one on your telephone keypad.

If for any reason you would like to remove that question. Please press star followed by two.

To ask a question. Please press star one as a reminder, if you are using a speaker phone. Please remember should pick up your handset before asking your question. We will pause here briefly as questions are registered.

The first question comes from Mark Fitzgibbon from Piper Sandler Piper Sandler Please.

Please proceed.

Thank you and good afternoon.

Hi, Mark Hi, Mark.

I was wondering if you could share with us kind of what youre seeing in.

In the market from a deposit pricing standpoint, and how you think about deposit betas for the second half of the year.

Okay.

Yes.

Sure we're not.

Seeing a lot of activity I think theres a lot of specials that people are offering there is a lot of pocket rates that people can use.

I think the Internet bank.

Banks and other other parties out there are out there with higher rates that are tracking some folks to those those opportunities I think it's more of.

The money market accounts and Treasury Treasury funds I think we're seeing seen people move money towards.

Short term treasuries and things of that nature.

Less so on the deposit front.

Now that could change dramatically at any point, but right now we're modeling right now like I said.

The betas are significantly higher than what we actually saw in the first quarter.

Our second quarter, we saw so on the 125 basis point increase in fed funds rate and I think our cost of funds went up four basis points. So very low beta in the first quarter I do expect that to accelerate in Q3.

Thanks.

Okay.

You think that the margin will continue to add.

Slowly rise is that fair.

Alright.

My guidance on the margin be 15 basis points or better increase in Q3.

15 basis points in Q3, okay.

Okay, Great and then.

I wondered if you could share with us your thoughts on expense growth as well.

Any guidance there would be great.

I think theres, probably more competition for talent. These days than there is on deposit rates quite frankly, it's probably accelerated.

Okay.

So we have seen some.

Strong demand.

For talent and retention and attraction of talent is costing more certainly.

I think we largely seen that.

We raised our minimum early this year, we raised our minimum wage the minimum that we pay.

For a lot of folks to $20, an hour, which was with other market adjustments. So we started seeing a lot of that roll in in Q2 as well.

Our typical merit increases which happened in early March.

You saw the full benefit of full impact of that.

In Q2, and we continue to see things that we have to do to attract talent.

And maintain so I.

I do expect expenses too.

All right.

<unk>, perhaps about $500000 in the next quarter.

Give or take.

One of the big drivers market I think is commercial banking and I say that in the macro sense in that.

Basically everything that we do so.

Deeper and broader than a lot of other places so we're probably pretty juicy looking but people who are planned.

Planning to try to participate more in commercial banking.

But.

Okay.

We'll keep them.

Okay.

Alright, and then I wondered if you could also maybe walk us through what you still need to do to prepare for crossing that $10 billion threshold.

Most of the costs to meeting regulatory burden kind of built in at this point or is there much incremental spending for that.

They are mostly built in.

Of course always be a little bit more resources that we're going to need to.

To address certain things, but not material.

Okay and then.

Okay.

I was just going to fill it and mark a little bit it's probably it's probably on stuff like a little.

A different approach to a little more exhaustive stress testing than we currently do and there is probably there.

It was a little bit more on the audit side, there's a little bit more on being.

Being on top of the regulatory side Thats pretty incremental.

It's a little bits here and there but not significant.

Okay, Great and then lastly.

<unk> updates on <unk> and private.

Assets are up to or we.

Getting close to breakeven.

Youre funny.

So we do expect this to breakeven in three years.

Now it would be two and a half years, they're right on track with where we expected.

Of course, I always wish that there are more than on track, but theyre right on track and doing excellent.

I think that the clients that we're bringing in.

Types of assets in clientele that where we're attracting is exactly what we wanted and it's working extremely well with the banks.

Our lenders our branch managers.

We have really embraced them and.

Teams have been doing a great job together.

So extremely pleased with how things have started out pretty quickly quite honestly right out of the gates because it does take time to build that.

You meet with clients it doesn't happen overnight right. So it's something that we're really seeing a lot of great.

Traction on.

What would you be able to give us a number of how much. The group has an assets under management or advisory at this point.

I could but I'm not going to we do file publicly public reports, but its I don't think its really.

Meaningful.

Okay. Thank you.

Thank you.

Next question comes from Chris O'connell with K B W.

Please proceed.

Hey, good afternoon.

Hey, Chris I was hoping to get.

Yes.

I was hoping to get an update on kind of the loan growth outlook going into the back half of the year here I mean, it sounds like originations were strong this quarter.

And last quarter as well.

The pipeline is strong.

Was there a little bit more of a payoff activity this quarter.

That kept growth both below last quarter and.

How do you see that activity versus originations kind of balancing all I can say well I can all I can say, Chris is I can't wait for people to stop mining our customers.

This has been going on now feels like or over two years. The originations were strong continue to be strong and I expect that they will be that way.

Well into the future and if people can just come down maybe these higher rates will come people down we'll be able to get a little bit better traction, but we're already making some gain nonetheless.

Sure.

It's generally a bright picture now that we have for the private banking capability.

Or at least have something to talk about with the selling families.

Yes.

Gotcha so.

Given given the pipeline outlook.

Growth is expected to be somewhere in the same range I guess is the <unk>.

First in the second quarter going forward.

Yes exactly.

So I think were a little lower than we would have anticipated this quarter of $80 million $80 million of core.

And we did expect it to be a little stronger than that but as Paul said, we've just seen a lot of our <unk>.

Great loan customers, great families, great businesses that have been selling their businesses.

So we like to have at least $100 million a quarter for a gain.

Gain this.

This quarter, we just came up slightly short probably is one one company sale.

Good in there.

<unk>.

Got it.

Makes sense.

And then I'm going to.

Posit side I mean, how are you guys seeing kind of flows and growth I think somewhere in the deck.

There is.

$200 million number.

Called out related to tax payments and purchases.

As well as kind of transfers here.

How are you guys thinking about deposit growth as you get into the back half of this year. I mean is there a lot of movement going towards off balance sheet into money market funds.

I think you can that continue or.

Well I think if you if you really had the raw data you would find that it's really pretty lumpy, particularly so far this year with rising interest rates, we have we manage.

The treasury activities through some rather significant organizations.

Which through the low rate environment ended up having very very significant deposits.

With us as rates have gone up those are the kinds of examples that Carl was elite it was alluding to that move some of that to treasuries for the most part.

When I look at how we're doing with deposit growth I can see new retail accounts open which is not a major business for us, but that those gains some traction a little bit but more importantly is the signing up of cash management and other treasury products and that has been robust so far this year and the pipeline is still strong so.

I think the.

Reduction.

As seasonal.

It was exaggerated because of what I described.

But the underlying activity I think continues to be strong and so with that behind US I think we'll make progress already to date, where we're halfway back to that reduction or some magnitude. It's not it has not continue that has abated, let me put it that way.

Particularly on the DDA side.

Commercial accounts, we've talked to bank presence and things of that nature.

Theyre basically said, we're not losing any customers as just some people.

Being a little bit more thoughtful thoughtful with their funds.

In managing their funds.

Closely and we continue to grow grow grow the customer base, which is which is key.

Great.

And as far I know, it's very volatile line item, but.

Any outlook into <unk>.

Loan level derivative income going forward.

It's kind of just based on.

Customers.

Utilization, whether they are opting to use it or not but maybe you have seen demand for that increase going into the back half of the year.

I think you have a very good handle on that.

Very difficult line to try to project and estimate.

It all depends on what the customers.

Appetite is.

And how they want to structured loans and so really I don't really provide guidance on that I think you can see the trends over time and kind of how what the averages over time.

But it kind of follows loan activity to a large degree.

In my experience scripts customers are kind of funny I mean, just in an environment. When you think you're pretty sure that a particular deal.

Is going to warrant a derivative the customer decides that they don't want to do that.

And vice versa. So it is impossible to predict their behavior.

Got it.

Understood.

And lastly.

Any any update as to the timing of the CSB merger.

Yes.

Everything is on target for Q4, nothing has changed everything's proceeding exactly as we had planned.

So it really nothing nothing new on that front.

Okay great.

Thanks for taking my questions.

Thanks, a lot.

Thank you Nick.

Our next question comes from.

Laurie.

Comes from Laurie Hunsicker.

From Compass point.

Yeah.

Hello, Hi, good afternoon.

Maybe just.

Just staying on the PTSD acquisition.

Paul and Carl can you just give us a refresh now on where we are with interest rates I know you had.

At announcement I may seems like ages ago, you had at $19 million interest rate Mark on my own which I think was.

As of March 31, and then the interest rate Mark on Securities through late May end.

$50 million and then you also had the markup on deposits.

As of March So I don't know if <unk> got a refresh number you concur with that there may be even a refresh number.

In terms of how youre thinking about it at closing.

Actually no.

I keep an eye on it just to have a sense of what's going on with the market and what that might potentially have as far as an impact.

As you can imagine the yield curve hasn't moved all that much when you start going out past.

Two to three years from when we announced.

And so right now I wouldn't say, we're very comfortable with what we provided as far as marks.

As an estimate I have no idea what rate is going to be if anything if anything rates have backed off maybe 15.

The 20 basis points out on the long end from when we when we first announced this.

Everybody is expecting a recession like tomorrow or yesterday or last quarter. So.

We're seeing a lot of volatility in the market as far as rates are concerned.

So really not a big change in how those things have been priced at this point so no real I wouldn't be changing my models as far as purchase accounting is concerned.

Okay, Okay, and then Paul maybe just.

And more general question for you with with PSP now lining up to be a fourth quarter close right on time at your expectation can.

Can you talk a little bit about your appetite to do more.

For M&A, we certainly haven't seen very many banks step back just because of the pain of interest rate Mark.

Can you start with your thoughts how you're thinking obviously youre kind of beat to cross $10 billion.

Dan.

Alright, my appetite really hasnt changed at all through this we still continue to talk with with some people.

So my appetite is not diminished nor increase but of course.

If we look to do something beyond Putnam.

I have karl weighing pretty heavily.

With the effect of.

This interest rate environment would be but.

Fundamentally I haven't changed my opinion.

Okay.

Okay, and then just a few numbers I'm looking for.

Carl can you give us a refresh on where you guys are with Opex and also with leverage lending.

Anything would be helpful. Thanks.

Paul will take care of that yes, the leveraged lending I'll take first because thats simple at zero.

Don't do it never have.

Real estate, we're still very active and the one segment that we're sort of keeping whether I on his office.

In the office portfolio for us.

As material, it's over half a billion dollars little bit over half a billion dollars, but it is very diverse.

It is very strong very high coverage.

It doesn't it doesn't tend to be the big buildings in the financial district.

Boston.

It tends to be within the 128 loop. If you know that area, which is very desirable kind of stuff.

We are we have a lot of stuff in the Beacon Hill West end.

Boston.

But the metro North and South and the West is particularly strong.

The downtown area.

And very very little in other markets and we actually don't have that bigger presence in office in Rhode Island.

So.

We are keeping a very close eye on it but the statistics on it are very comforting.

Terms of loan to value and coverage ratios.

Got it okay, and what do you have your loan to value, where you saw that in your teeth.

Your coverage ratios.

Well.

I mean, they are all they are all over the lot, but I can tell you would be also very comforting to hear that much of it is 50% or less.

Okay.

Okay, and then just of that of the $500 million.

Do you know approximately how much is kind of in that lower risk bucket of medical or maybe score.

Medical health care score.

Okay.

That I don't have any clarity on.

Okay, great. Okay. That's it.

Thanks for taking my question.

Yes, there is some content of medical but it's not over weighted to that its really quite diverse.

Okay, great. Thank you. Thank you Laurie.

Thank you.

There are no additional questions waiting at this time, so I'll pass the conference back over to Paul Perrault.

Closing remarks.

Thank you Daniela and thank you all for joining US this afternoon, and we will look forward to talking with you again next quarter.

That concludes the conference call. Thank you for your participation you may now disconnect your lines.

Okay.

Okay.

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Yes.