Q3 2022 Brookline Bancorp Inc Earnings Call

Sure.

Our loan portfolio grew $129 million or 77% annualized and our net interest margin for the third quarter was 380, an increase of 24 basis points from Q2.

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

The teams at both <unk> Bank and Brookline continue to prepare for the transaction, which we anticipate will close in the fourth quarter.

I will now turn you over to Carl who will review the company's third quarter results in more detail.

Thank you Paul.

Net income this quarter was up $4 $9 million from Q2, driven by margin expansion solid loan growth as well as the year to date impact of energy tax credits of $2 $4 million related to financing renewable energy investments.

These benefits were partially offset by a higher provision for loan losses.

And merger charges of $1 1 million in the quarter.

Total revenues were up $6 million driven by margin expansion of 24 basis points.

And $29 million of loan growth in all asset classes.

<unk> loans increased 49 million commercial real estate $43 million equipment finance $27 million in consumer $12 million.

In the third quarter, we originated $542 million in loans at a weighted average coupon of 566 basis points. This is up 68 basis points from the prior quarter.

The weighted average coupon on the total portfolio rose 52 basis points during the quarter to 481 basis points at September 30.

Prepayment fees were $1 million in Q3 flat with Q2 and deferred fees were $1 1 million or 230000 less in Q2, the combined impact on net interest margin was a positive one basis point from the prior quarter.

Provision for credit losses was $2 8 million, primarily due to the growth in loan commitments.

The allowance for loan.

Loans and leases increased $1 million helped by net recoveries of 179000 and the reserve for unfunded credits increased $2 million.

Credit quality trends continued to be favorable resulting in a slight decline in reserve coverage to one 7%.

During the third quarter deposits declined $158 million with liquidity and Cds and other interest bearing accounts flowing to higher yielding opportunities.

Noninterest bearing deposits were relatively flat from Q2 and represent 27% of deposits.

Increases in short term rates continue to have potential benefit us due to our moderately asset sensitive position.

Assuming a flat balance sheet and the forward curve as of September 30, our simulations reflect the four 4% increase in net interest income over the next 12 months, our stimulations reflect the historically based product weighted beta of 32% on deposits.

As Paul mentioned, the board approved a quarterly dividend of $13 five per share representing a 4% increase and a four 2% yield based on yesterday's closing price.

The dividend will be paid on November 25 to stockholders of record on November 11th.

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

Yes.

Hello.

Okay.

Yes.

Yes.

Yeah.

We will now begin the Q&A session.

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As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking a question.

We will pause briefly to allow questions to generic <unk>.

The first question.

The first question is from the line of Mark Fitzgibbon with Piper Sandler you May proceed.

Thank you and good afternoon.

Carl I Wonder if you could help us just starting with the effective tax rate going forward given those energy tax credits that you have how is that 28 and change kind of rate a good run rate going forward.

I'm, sorry, the 22, 5% rate.

Yes.

Very good.

Thanks Mark.

So the.

Effective tax rate for the year, we expect it to be around 25, 2%.

We are reviewing the taxes as of.

The end of Q3, so there was a lot of activity in the third quarter.

We are truing up we had some low income housing tax credits and investments there so that had a slight impact on it but the big impact was was a lease financing that we did had.

It had associated tax credits with it.

We could have taken those tax credits over over seven years I decided to take them. This year. So we did recognize some this year the cash benefit happens. This year, we get we're able to do it on our tax form or does the right thing to do and.

So that was a $2 $4 million impact on on a true up of year to date true up. So we will still have a little bit of benefit in Q4. So we will have.

Our estimate right now for Q4 for effective tax rate is 22, 9%.

That would not that will not be impacting 2023, I just want to be clear on that.

So the tax rate will go back to something around 25%.

Correct correct.

And I think we were guiding about 25, five with with the <unk> acquisition.

Okay, Great Secondly, first that deposit and funding Beta chart that you put in the slide deck was really helpful.

<unk>.

Would be curious.

How youre thinking about sort of the magnitude of additional margin expansion in <unk>.

Yes so.

Very strong margin expansion this quarter of 24 basis points, we do expect it to go up another 10 to 15 basis points in Q4.

And then moderate moderately better next year.

It's anybody's guess quite frankly on the deposit betas and the flows of funds.

Okay.

And then Paul I guess I'm curious are you guys likely to be on the lookout for more acquisitions in Metro New York of smaller banks to kind of bulk up in that market post the closing of the <unk>.

Yes.

Not necessary to do that Mark, but we'll certainly keep our eyes and ears open, though as we figure out more and more what's going on in that in that area, We think putnam as.

Is big enough to make a difference and I think we there's a lot of things we can bring to them that will improve their performance.

But as we do in all of our markets, we certainly pay attention.

Okay. The last question I had and I'm not sure if he's on the line as Bob Rose on the line.

No no he's not here okay.

Are you kind of see as it is on his way to a semi retirement as you may know.

I did note and I just thought I'd get his perspective, because he had such a wealth of knowledge on credit but.

Thank you.

Okay Mark.

Thank you.

The next question is from the line of Laurie Hunsicker with Compass point you May proceed.

Yeah, Hi, Thanks, Colin Karl Good afternoon, Alright.

Maybe starting with you can you can.

Can you help us think about we've obviously seen a pretty big move in rate.

The interest rate Mark will look like with the PCF merger.

Whether you can share with us where the rates right marks have gone or what the pro forma tangible book like Cabelas any.

Any color would be helpful. Thanks.

Yes.

Sure.

As we all know rates have moved substantially since <unk>.

Since we announced the acquisition.

At the announcement, we were estimating a $50 million mark on the investment portfolio on a pre tax basis.

I think <unk> has just put out there.

Their earnings and their balance sheet and you can see what the.

Fair value is on those on those.

Investments are today and so it has gotten about 40% worse than when we first 40% more of let's put it that way and the mark on the securities portfolio.

We would estimate about the same as <unk>.

Securities interest rate Mark on the loan portfolio similar durations in that sense.

Materially different.

So I think Thats, what you would see there.

Offsetting that would be the overall price.

The value of the deal and I don't really know exactly what that will be at closing, but if you did it.

<unk> our yesterday.

More than offset that that mark so it's from an intangible standpoint.

Basically no change in the goodwill be booked.

Offsetting that is the value of the deposits naturally deposits are worth far more today then.

And they were just just six months ago.

Okay, great. Thanks.

Then maybe can you also help us to understand.

Farmer with PTSD.

You guys crossed $10 billion can you just remind us.

What that's going to look like in terms of the Durbin impact and Im guessing on that that starts in the fourth quarter of 2023 is that right.

Thanks.

So as far as the Durbin impact goes.

My understanding is it start six months after the year end.

Company goes over the $10 billion Mark So we do assume we still anticipate this deal closing in Q4, so assuming it does and we do get approval and.

Right now I think we'd have to get approval by about November 15th for that to happen.

And we will close by year end, we will be over over $10 billion at this year end and so the durbin impact would impact us starting July one 2023.

We estimate the annual impact just related to durbin to be in the $800 million to $902 million impact.

On our income on our annual basis.

Okay on noninterest income and then in terms of the expense spend is there anything around that are that are already fully baked.

It's generally will definitely have a head count added here and there.

Some of it we've already got on staff.

Already preparing for it so.

So I would say nothing materially at this time that we anticipated would be a big.

The big impact.

Zero.

Good.

Great. Thanks, so much.

Okay Laurie thank you.

Thank you.

The next question comes from the line of Chris O'connell with <unk> you May proceed.

Hi.

Just following up on the PTSD.

And the <unk> discussion.

Given.

Approvals.

To come in by around November 15th or so just any update there on on that process and where you guys are at.

Well, we're awaiting the approval out of Washington, It's our understanding that all of the questions have been raised and answered satisfactorily to the fed and their and their staffs.

So we are we are literally just waiting by the phone.

Okay I got it.

Alright, and then also.

On PTSD.

Given.

Their financials and now they've come in and since the merger announcement and in the change in the rate environment.

Any update as to what their impact will be on the margin.

I'm not I'm not going to opine on that right now there's a lot of moving parts. When you think about the margin going forward.

As Lori kind of just highlighted the mark on the investment portfolio the interest rate marks on the investment portfolio and the loan portfolio.

They will get accreted back yet so that comes through interest income quite frankly, and really has a significant impact on the margin as you look forward.

Naturally we look at the core what's going on with the core business and.

And.

As you can see they've stated quite nicely there margin expanded 19 basis points in the quarter.

So it's.

We're very happy with.

How they're performing and we're certainly happy with how we're performing.

Couple of good companies get.

It's come out of that yet.

<unk>.

Yes.

Yes.

And then as.

Yes, I appreciate all the color on the betas and the margin outlook just thinking about what you guys are seeing from competition and in terms of.

Flows and how customers, even within the banker or being moved around between products.

Yes.

How the deposit flows between products and kind of overall growth outlook is going forward.

I'll start and I'll, let carl get into more detail, but.

I would say that the major flows I mean, we've lost a little bit as was mentioned in the commentary, but a lot of it in terms of the aggregate dollars really comes from customers of ours that have very large liquidity portfolios and win rates, which are very short rates have gone up so much against what.

Deposit rates look like.

Those those customers take their non operating liquidity.

By short treasuries and a lot of cases or other vehicles like that.

The other big bucket that has seen the reduction is just in the core CD.

Maturities that have been coming down for a long time.

So we're not seeing customer losses without seeing the average operating company move all of their liquidity out of the banking.

Products.

So I think that this will have played out in.

In the near future and it will start to grow from there.

They are involved in the pricing and all that.

Yes, so just to dive a little bit deeper into that as well.

Pressure on the Cds.

We'll discuss some of the high liquidity and just folks that have are very comfortable going into treasuries and we've actually had conversations both in the branches on the investment side.

Work in the branch as well as cloud private with significant.

Clients on how we could help them.

In those regards.

But you dive into the when we dig into the details on this.

A significant decline in <unk> accounts, and if you don't know what I Ulta account socks. Those are basically lawyer accounts escrow accounts at for lawyers and that rate is fixed by the state and that's just.

Flow of funds in an hour has nothing to do with interest rates, it's just timing.

It is being so whatever is going on in the escrow world and so that's not an interest rate thing thats, just a flow of funds things.

And then we're looking at our $2 31 program, which.

About $2 31 programs.

Commercial real estate folks that may be selling a building they put it into $2 31, a trust and $2 31, and wait wait to buy another building usually six months to do that and we do this very successfully locally as well as nationally and we saw a big.

Shift our funds are well what happened.

Happened to our but we saw a big flow out of savings accounts into into money market accounts. So what's going on it was just 10 31. So we have a savings account product and as funds came out of the savings account product for these clients.

Turning to <unk>.

Money market account little slightly slightly higher rate.

That's what our customers really want it was a little bit more rate when they do this and so <unk>.

Deposits are theyre very attractive pricing.

And we continue to serve that.

Need so.

Paul said DDA still very solid.

You see growth in customers and activity in the on the commercial front and all of our markets.

Time will tell how much how much the liquidity squeeze and the tightening by the fed will impact us.

Understood.

And then lastly.

Just wanted to touch on the expenses.

Pretty pretty good control on expense growth kind of all around this quarter, maybe just an update as to how you're thinking about the fourth quarter on a standalone basis.

Operating expenses were actually down about $500000 in the quarter. We did have $1 1 million in merger expenses, which is about 600 change higher than.

Q2.

I do expect expenses too.

Pop back up a little bit.

We did have a little bit of benefit on the pension side due to due to just how actuaries work in rates as rates go up you get a little benefit on that side.

But overall, our expenses are being well contained but we continue to invest in the business.

I think thats going to stop.

Great.

Thanks for taking my questions.

Okay, Chris Thanks.

Thank you.

Again to ask a question please press star one.

There are no additional questions at this time.

I would now like to pass the call over to Paul for closing remarks.

Thank you Tia.

And thank you all for joining us today, and we look forward to talking with you again next quarter.

Have a good day.

That concludes today's conference call you May now disconnect your line.