Hello, and welcome to the Brookline Bancorp Third Quarter 2021 Earnings Call. My name is Emma, and I'll be your operator today. [Operator Instructions] This call is being recorded. [Operator Instructions] It's now my pleasure to hand over to Marissa Martin, General Counsel, to begin. Please go ahead..

Thank you, Emma, and good afternoon, everyone. Yesterday, we issued our earnings release and presentation, which is available on the Investor Relations page of our website, brooklinebancorp.com, and has been filed with the SEC. This afternoon's call will be hosted by Paul A. Perrault 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 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 3 of the earnings presentation, I'm pleased to introduce Brookline Bancorp's Chairman and CEO, Paul Perrault..

Thanks, Marissa, and good afternoon, everyone. Thank you for joining us for today's earnings call. I'm pleased to report we had another quarter of solid earnings of $28.8 million or $0.37 per share. As our core loan portfolio grew, our margins slightly expanded and asset quality and the economic environment continued to improve.

The loan modifications under the CARES Act dropped to $56 million. We recorded a $3.1 million release of our reserves, and now have a reserve coverage ratio of 151 basis points on non-PPP loans. In Q3, $187 million of PPP loans were satisfied as our core loan portfolio grew about $100 million or 1.5% from Q2. Our pipelines continue to be very strong.

Trends continue to be positive, and we remain optimistic as we go into the final quarter of this year and into next year. I'm also pleased to report that the Board approved a 4.2% increase in our quarterly dividend to $0.125 per share. This was the second increase this year in our dividend.

As previously announced, we have recently created a new affiliate of Brookline Bancorp called Clarendon Private. Clarendon Private is a boutique investment and wealth management firm led by Marc White.

They are working closely with Brookline Bank and Bank Rhode Island to deliver comprehensive investment advisory and private banking services to individuals, families, endowments and foundations. I will now turn you over to Carl, who will review the company's third quarter results..

Thank you, Paul. On Slide 4, we've provided summary comparative income statements. Net income this quarter was $2.8 million lower than last quarter and $10.1 million greater than a year ago. Performance was driven by solid core loan growth and a slightly better margin, offset by lower revenues related to PPP loans and higher expenses.

Noninterest expense was $2.9 million greater than Q2, due primarily to the $2.1 million gain on sale of OREO in Q2. Expenses were flat with last year.

As illustrated on Page 5, net interest income decreased $400,000 from the prior quarter, driven by a decrease of $1.4 million in PPP-related revenue as well as $890,000 in fees to prepay Federal Home Loan Bank borrowings during the quarter. Overall, our net interest margin improved to 353 basis points.

On the bottom of Slide 5, we provided the estimated impact of the PPP loan program on the net interest margin. Assuming no cost of funding, PPP interest income contributed 17 basis points to the third quarter margin versus 15 basis points in the second quarter.

The impact of the Federal Home Loan Bank prepayment penalties in Q3 on the net interest margin was 5 basis points. Adjusting for the impact of PPP and Federal Home Loan Bank prepayment fees, the net interest margin improved 4 basis points on a linked quarter basis to 341 basis points.

Please follow me to Slide 6 and our comparative summary balance sheets. Third quarter finished with $8.3 billion in assets, down $159 million from Q2. Loans were down $88 million, while cash and securities combined declined $43 million. On the funding side, total deposits declined $22 million and borrowings declined $95 million.

Slide 7 reflects the linked quarter and year-over-year activity in composition of our significant loan and deposit categories. As I mentioned, the loan portfolio overall declined $88 million from the prior quarter, driven by a $187 million decline in PPP loans as our core loan portfolio grew $99 million.

In the third quarter, we originated over $535 million in non-PPP loans at a weighted average coupon of 397 basis points. The weighted average coupon on the core portfolio dropped 5 basis points during the quarter to 402 basis points at September 30.

We continue to experience solid deposit growth, and we are using excess liquidity to reduce outstanding brokered deposits and borrowings. Brokered deposits declined $75 million and totaled $186 million at the end of the quarter. Our loan-to-deposit ratio was just under 101% at September 30.

Slide 8 provides a snapshot of the PPP program at each of our banks. At the end of the quarter, we had 819 loans with $161 million outstanding, net of unearned fees. Net deferred fees of approximately $5.4 million remains to be recognized into income over the life of the loans or accelerate on loan satisfaction.

We saw a strong PPP loan forgiveness, and we expect that activity to continue for the remainder of the year, perhaps a small remaining balance slipping into 2022. On Slide 9, we are providing the status of our loan payment deferment activity.

As Paul mentioned, as of quarter end, 77 credits totaling $56 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 quarter, we had a capital buffer of 4.3% or $287 million of regulatory well-capitalized standards.

The company also purchased 690,253 shares during the quarter, completing the $10 million stock buyback program authorized on January 27, 2021. No shares were purchased in Q1 and Q2. Slide 12 provides a history of our regular common stock dividend payout.

Yesterday, the Board approved a 4.2% increase in the quarterly dividend to $0.125 per share to be paid on November 26 to stockholders of record on November 12. On an annualized basis, our payout approximates a 3.1% yield. This concludes my formal comments, and I will turn it back to Paul..

Thanks, Carl. And now joining us for the Q&A session is Robert Rose, our Chief Credit Officer. And we will now open it up for questions..

[Operator Instructions] Our first question today comes from Mark Fitzgibbon from Piper Sandler..

I was curious if you could maybe sketch out some of the details on Clarendon Private? Maybe what the rough plan looks like? Sort of how big this business is likely to be? How many people, kind of time to break even, those sorts of things?.

Sure. So we currently have about 4 employees. So it's really getting kicked off here in the fourth quarter. We've been talking about this as a seed versus sod strategy. So we're starting from nothing in growing this business. We think we're in an excellent market to do it, and it's the right time to do it for us.

And so it's going to take some time to build this up. We do expect it to grow to breakeven within 3 years. And we approximate -- we'll have to be around $500 million to $600 million with assets under management until we hit that breakeven point as we add people along the way..

These are very, very seasoned people in this area, in this business, Mark. So they are very well known..

Okay. Great.

And then separately, on the deposit front, I guess I'm curious, do you feel like you still have some room to push your deposit costs down from where they are today?.

Very little, quite frankly. We've done quite a bit through our CD portfolio. We have about $235 million that we'll price in the next quarter. The coupon on that is around 65 basis points or so, and things are repricing down in sort of 35 to 40 basis point range. So there's a little bit of room on that side.

But at this point, I think we've largely exhausted that..

I'll just add that we continue to see some pretty good growth in the DDA sector, which is helpful in the aggregate cost of funding..

Okay.

And then on the lending side, I wondered if you could kind of share with us what you're seeing out there from a competitive standpoint in the commercial market as pressures easing up much? And what does your pipeline look like, and maybe the average rate?.

Well, the competitive situation has probably calmed down a bit where we've had a number of meaningful M&A things going on around here. So that certainly distracts people. And so I think it's still very competitive, but it feels not quite as down and dirty as it had been. I think Carl mentioned what the originations were at. Pipeline is very strong..

The pipeline is very strong. We originated $535 million in the quarter. The coupon on that was 397 basis points, right around that 4% rate. And of course, that all depends on the mix on any given quarter. But that's -- and I don't see that going down much from here..

And that was a similar origination level as we saw the previous quarter, but we didn't see quite as many payoffs in Q3 as we did in Q2. And it slowed down some more, I think, in Q4..

Great.

And then lastly, in terms of the reserve coverage, you guys obviously have a really strong reserve, but if loan growth is really starting to pick up, I'm curious do we see maybe another quarter or 2 reserve releases before we sort of get to 0 or maybe even start to provide again?.

Well, I'd say that our reserve is adequate at September 30, Mark..

Our next question today comes from Laurie Hunsicker from Compass Point..

Carl, I'm hoping that you can just give me the actual dollar amount of PPP forgiveness in the quarter? I'm guessing that it's around $4 million.

I'm just hoping you have a more actual number?.

One second. I have that at my fingertips here..

Okay. Great. And then maybe also -- go ahead..

So deferred fees that were recognized during the quarter was $5.152 million on PPP loans. And we had interest income of, I want to say $641,000 of interest income on that. So combined, that's the contribution of the PPP loans during the quarter..

Okay. Great. And I see there's $5.4 million remaining.

And then on prepay fees, do you have that number?.

I'm sorry. I didn't hear the question..

Prepay fees..

Prepays were $1.579 million..

Okay. Okay. And so I just want to sort of put some of your comments together. As we're looking at this PPP in terms of, I guess, how you see the margin play out. It looks like on the funding side and certainly, you referenced it that we continue to see the CD book come down, but your core deposits can't really go anywhere.

So how should we be thinking about margin as we head out into 2022?.

So of course, there's a lot of moving pieces to this. But when you look at -- what I've broken out there on Page 5, I believe it is, excluding PPP, excluding the Federal Home Loan Bank impact, the margin would have been in that 3.41% range.

We see that to be fairly consistent going forward, and that reflects the recent move in the yield curve, the 2-year and the 5-year rates moving a little bit higher. So we do see the margin in the 3.35%, 3.40% or 3.40% plus range for next year..

Okay. That's helpful. And then....

Excluding any impact of PPP. I want to be clear on that. Excluding impact of PPP..

Correct. Correct. Well, there shouldn't be much PPP next year, right? The repurchase that you completed, so all $10 million was done -- all $10 million this quarter. And the share number, you went through that really quickly. Again, I need an approximate number.

Just hoping you could give me that share count that was repurchased this quarter?.

600 -- right around 690,000 shares..

690. Okay.

And then am I right, all $10 million was actually done this quarter?.

The $10 million? Correct. So the average price is a little under $14.50..

Okay. Perfect. And then, Paul, how are you thinking about a buyback refresh? Love seeing a dividend increase.

So how should we think about that here?.

I'm not sure I follow. We've been targeting sort of a core operating earnings payout ratio of maybe 40 or so. The capital build is enough for the sort of mid- to high single-digit growth that we tend to see in a more normalized environment.

Carl and I like to keep the share count contained if we can buy buyback opportunistically because we do annual grants of equity. This is helpful in that sense. So it was kind of all part of capital management.

Carl, if you want to answer, too?.

Just last question. Any comments? We're now a quarter up from when we last chatted about this M&A. Can you help us think about -- there's a lot going on in your marketplace.

Can you help us think about where you are currently? And how you're approaching it into next year?.

Well, we certainly are planning to have our people take advantage of any disruption in the market, which will probably happen between now and the middle of next year, maybe a little bit longer than that, both in people and customers, that kind of thing. And beyond that, I mean, we can keep our ear to the ground. We talk to people.

We will pursue objectively any reasonable M&A opportunity..

We currently have no further questions today. So I'll hand the call back to Paul Perrault for some closing remarks..

Well, this concludes the answer -- the question-and-answer session, I guess. So I'd like to just thank you all, and thank you, Emma, for joining us. And we look forward to talking to you again next quarter..

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