Brookline Bancorp - Q2 2022

Transcript

Speaker 0

Afternoon, and thank you for attending today's Brookline's 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. I would now like to pass the conference over to our host, Laura Van with Brookline Bancorp as the attorney. Laura, please proceed.

Speaker 1

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, brooklynbancorp.com and has been filed with the SEC. This afternoon's call will be hosted by Paul A. Perrott 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 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 The 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.

Speaker 2

Thanks, Laura, and welcome to you, and good afternoon, everyone. Thank you for joining us on today's call. I'm pleased to report we had another quarter of $25,200,000 or $0.33 per share and the Board approved the quarterly dividend payment of $0.13 per share. On an annualized basis, our core loan portfolio grew $82,000,000 or 4.5 percent annualized, And our net interest margin for the 2nd quarter was 3.56%, an increase of 7 basis points from the 1st 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 PCSB Bank and Brookline have been making and continue to expect I will now turn you over to Carl, who will review the company's Q2.

Speaker 3

Thank you, Paul. As Laura mentioned, we've provided an earnings presentation on our website and has been filed with the SEC. I will not be doing a slide Let's flip to this quarter. Net income this quarter was up $500,000 from Q1 at $25,200,000 which also included the impact of 535,000 and merger and acquisition costs. Total revenues were up $3,500,000 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 derivatives and investment volumes. Expense growth was primarily due to compensation associated with annual merit increases, incentive accruals and market adjustments. Total loans increased $69,000,000 driven by $82,000,000 in core loan growth as PPP loans declined $13,000,000 in the quarter. PPP loans were just over $1,000,000 at the end of the quarter and as of today, we have only 10 PPP loans remaining with a balance less than $1,000,000 In the Q2, we originated $527,000,000 in loans at a weighted average coupon of 4 98 basis points, up 99 basis points from the prior quarter. The weighted average coupon on the loan portfolio rose 33 basis points during the quarter to 4.29 at June 30.

Prepayment fees were $1,000,000 in Q2, down $490,000 from Q1 And deferred fees excluding PPP were $1,400,000 or $78,000 less than Q1. The combined impact was a negative impact Credit quality trends continue to be favorable, resulting in a slight decline in reserve coverage to 128 basis points. During the Q2, deposits declined $200,000,000 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 Federal Reserve decreased the Fed funds rate 50 basis points in May and another 75 basis points in June. Increases in short term rates have the potential to benefit us due to our moderately asset sensitive position.

Assuming a flat balance sheet and the forward curve as of June 30, our simulations reflect a 3.1% increase in net interest income over the next 12 months. Our simulations reflect a product weighted beta of 32% on total deposits. Company remains well capitalized and we repurchased a little over 956 1,000 shares during the quarter before we were required to pause our program. As Paul mentioned, the Board approved a quarterly dividend of $0.13 per share, representing a 40% payout and a 3.7% yield. The dividend will be paid on August 26 to stockholders of record on August 12.

This concludes our formal comments and we'll now open it up for questions.

Speaker 0

The first question comes from Mark Fitzgibbon from Piper Sandler, please proceed.

Speaker 4

Thank you and good afternoon.

Speaker 2

Hi, Mark.

Speaker 4

Hi, Mark. I wonder if you could share with us kind of what you're seeing in the market from a deposit Pricing standpoint and how you think about deposit betas for the second half of the year?

Speaker 3

Sure. We're not seeing a lot of activity. I think there's a lot of specials that people are offering. There's a lot of Pocket rates that people can use. I think the Internet banks and other parties out there are out there with higher rates That are attracting some folks to those opportunities.

I think it's more of the money market accounts Treasury funds that I think we're seeing 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've actually saw in the Q1 Our 2nd quarter, we saw 125 basis point increase in Fed funds rate and I think our cost of funds went up 4 basis So very low beta in the Q1. I do expect that to accelerate in Q3.

Speaker 4

Okay. But Carl, you think that the margin will continue to slowly rise. Is that fair?

Speaker 3

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

Speaker 4

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.

Speaker 3

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

Speaker 2

It's probably accelerated.

Speaker 3

So we have seen some strong demand for talent and retention and attraction of talent is costing more certainly. I think we've largely seen that. We raised our minimum early this year, we raised our minimum wage the minimum that we paid For a lot of folks to $20 an hour, which with other market adjustments. So we started seeing a lot of that roll in Q2, as well as our typical merit increases, which happened in early March. So you saw the full benefit of the full impact of that In Q2.

And we continue to see things that we have to do to attract talent and maintain talent. So I do expect expenses to rise perhaps about $500,000 in the next quarter, give or take.

Speaker 2

One of the big drivers, Mark, I think is commercial banking and I say that in the macro sense and that's basically Everything that we do. So we're a lot deeper and broader than a lot of other places. And so we're probably pretty juicy looking to people who are Planning to try to participate more in Commercial Banking. But we'll

Speaker 3

keep them.

Speaker 4

All right. And then I wondered if you could also maybe walk us through what you still need to do to prepare for crossing that $10,000,000,000 threshold Are

Speaker 2

most of

Speaker 4

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

Speaker 3

They're mostly built in. They'll of course always be a little bit more Resources that we're going to need to address certain things, but not material. Okay.

Speaker 4

And then finally,

Speaker 2

I was just going to fill it in, Mark, a little bit. It's probably on stuff like a little Different approach and a little more exhaustive stress testing than we currently do and there's probably It was

Speaker 3

a little bit more on the It's a little bit more on being on top of the regulatory side.

Speaker 2

Yes, it's pretty incremental.

Speaker 3

So it's a little bit here and there, but not Significant.

Speaker 4

Okay, great. And then lastly, any updates on Clarington Private? What assets are up to or are we getting close to breakeven?

Speaker 3

You're funny. We do expect this to break even in 3 years or now would be 2.5 years. They're right on track with where we expected. Of course, I always wish that they're more than on track, but they're right on track and doing excellent. I think The clients that we're bringing in and the types of assets and clientele that we're attracting is exactly what we wanted.

And it's working Extremely well with the banks. Our lenders, our branch managers have really embraced them and the 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.

Speaker 4

Would you be able to give us a number of how much the group has in assets under management or advisory at this point?

Speaker 3

I could, but I'm not going to. We do file publicly public reports, but it's I don't think it's really that meaningful.

Speaker 4

Okay. Thank

Speaker 0

you. Thank you. The next question comes from Chris O'Connell with KBW. Please proceed.

Speaker 5

Hey, good afternoon. Hi, Chris. 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 and that the pipeline is strong. Was there a little bit more like payoff activity this quarter That kept growth below last quarter and how do you see that activity versus originations All I can say, Chris, is

Speaker 2

I can't wait for people to stop mining our customers. This has been going on now, it feels like, for Over 2 years, the originations were strong, continue to be strong, and I expect that they'll be that way Well into the future and if people can just calm down, maybe these higher rates will calm people down and we'll be able to get a little bit better traction. But we are making some gain nonetheless. It's generally a bright picture and now that we have the private banking capability, We at least have something to talk about with the selling families.

Speaker 5

Got you. So given the pipeline outlook, is growth expected to be Somewhere in the same range, I guess, as the first and the second quarter going forward?

Speaker 3

Yes, exactly. I think we're a little lower than we would have anticipated this quarter at the $80,000,000 of core. We did expect it to be a little stronger than that, but as Paul said, we've just seen a lot of our great loan customers, great families, great businesses that have been selling their business. And so that's

Speaker 2

We like to have at least $100,000,000 a quarter of gain. And this quarter, we just came up slightly short, Probably is one company sale fit in there.

Speaker 5

Got it. Makes sense. And then on the deposit side, I mean, how are you guys seeing kind of flows in growth? I think Somewhere in the deck, there is like a $200,000,000 number called out related to tax payments and purchases as well as kind of transfers here. How are you guys thinking about Positive growth as you get into the back half of this year, I mean, is there a lot of movement going toward off balance sheet into money market funds and I think continue or

Speaker 2

Well, I think 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 for 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 alluding to That moved 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 does gain 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 their pipeline is still strong. So I think the reduction It's seasonal. It was exaggerated because of what I described, but the underlying activity, I think, continues to Strong. And so with that behind us, I think we'll make progress. Already to date, we're halfway back to that Reduction or some magnitude.

It's not it has not continued. It has abated, let me put it that way.

Speaker 3

Particularly on the DDA side, the commercial accounts. We talked to bank presidents and things of that nature. They're basically saying we're not losing any customers. It's just some people Being a little bit more thoughtful with their funds and managing their funds a little closely and but we continue to grow the customer base, Which is

Speaker 5

Kate. Great. And as far I know it's a very volatile line item, but any outlook into Loan level derivative income going forward, I know it's kind of just based on customers' Utilization and whether they're opting to use it or not, but maybe have you seen demand for that increase going into the back half of the year?

Speaker 3

I think you have a very good handle on that. It's a very difficult line to try to project and estimate. It all depends on what the customers' appetite is and how they want to structure the 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 they what the average is over time.

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

Speaker 2

In my experience, Chris, 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.

Speaker 5

Got it. David, understood. And then lastly, any update as The timing of the PCSP merger close?

Speaker 3

Everything is on target For Q4, nothing's changed. Everything's proceeding exactly as we had planned. So really nothing new on that front.

Speaker 0

Thank you. Next question comes from Laurie Hunsicker from Compass Point.

Speaker 6

Hi, Laurie. Hi, good afternoon. Yes. Maybe just staying on the PCFC acquisition, Paul and Karl, can you just give us a refresh Now on where we are with interest rates, I know you had an announcement and it seems like ages ago, you had a $19,000,000 interest rate Mark on loans, which I think was current as of March 31, and then the interest rate mark on securities was through late May of $50,000,000 and then you also had the markup on deposits, which was as of March. So I don't know if you've got a refresh Number you can share with us or just maybe even a refresh number in terms of how you're thinking about it at closing?

Speaker 3

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 2 to 3 years from when we announced. And so Right now, I wouldn't say we're very comfortable with what we provided as far as Mark's as an estimate. I have no idea what rates are going to be.

If anything, rates have backed off maybe 15 to 20 basis points out on the long end from when we first announced 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 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.

Speaker 6

Okay. And then Paul, maybe just a more general question for you With PTSD now lining up to be a 4th quarter close right on time with your expectations, can you talk a little bit about your appetite To do more M and A, we certainly haven't seen very many banks step in just because of the pain of interest rate marks. But can you share with us your thoughts, how You are thinking obviously you are going to be just across $10,000,000,000 Just where your appetite stands?

Speaker 2

My appetite really hasn't changed at all through this. We still continue to talk with some people. So my appetite has not diminished No increase, but of course, if we look to do something beyond Putnam, I have Carl weigh in pretty heavily on What the effect of this interest rate environment would be. But fundamentally, I haven't changed my opinion.

Speaker 6

Okay. And then just a few numbers I'm looking for. Carl, can you give us a refresh on where you guys are with And also with leverage lending, anything would be helpful. Thanks.

Speaker 3

I'll let Paul take care of that.

Speaker 2

Yes. The leverage lending, I'll take first because that's simple, it's 0. We don't do it, never have. Real Estate, we're still very active. And the one segment that we're sort of keeping weather eye on is office.

And the office portfolio for us is it's material. It's over $500,000,000 a little bit over $500,000,000 But it is very diverse, and it is very strong, very high coverage, and it doesn't tend to be the big buildings in the District of Boston. It tends to be within the 128 Loop, if you know that area, which is very desirable kind of stuff. We have a lot of stuff in the Beacon Hill, West End, Boston, But the metro north and south and west is particularly strong from the downtown area And very, very little in other markets, and we actually don't have that big a presence in office in Rhode Island. So We are keeping a very close eye on it, but the statistics on it are very comforting in terms of loan to value and coverage ratios.

Speaker 6

Got it. Okay. And what do you have your loan to value? Will you share that? And your coverage ratio?

Speaker 2

Well, I mean, they're all over the lot, but I can tell you, you would be also very comforted to hear that much of it It's 50% or less.

Speaker 6

Okay. And then just Of the $500,000,000 do you know approximately how much is kind of in that lower risk bucket of medical or maybe school Medical, healthcare or school?

Speaker 2

That I don't have any clarity on.

Speaker 6

Okay, great. Okay, that's it for me. Thanks for taking my question.

Speaker 2

Yes. There is some content of medical, but it's not over weighted So that is really quite diverse.

Speaker 6

Okay, great. Thank you, Ben.

Speaker 0

Thank you, Laurie. Thank you. There are no additional questions waiting at this time. So I will pass the conference back over to Paul Perrault for Closing remarks.

Speaker 2

Thank you, Donnell and thank you all for joining us this afternoon and we will look forward to talking with you again next