Welcome to today's Brookline Bancorp, Inc. Q4 2021 Earnings Call. My name is Jordan and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Marissa Martin, General Counsel, to begin. Marissa, the line is yours..

Thank you, Jordan. And 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 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. And thank you for joining us for today's earnings call. I'm pleased to report. We had another quarter of solid earnings of $28.5 million or $0.37 per share capping off a record year for earnings of a $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 and the economic environment continues to improve.

Fee income was also very strong this quarter as loan activity drove customer swaps and gains on loan participation that we originated. CARES Act loan modifications dropped to $38 million and PPP 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 you, Paul. On Slide 4, we've provided summary comparative income statements. Net income this quarter of $28.5 million was $300 thousand 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 expenses.

As Paul mentioned, Q4 income was very strong this quarter, $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 non-interest expense increased by $2 million driven primarily by compensation and incentive costs.

As illustrated on Page 5, net interest income increased $700,000 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 5, we provided the estimated impact of the PPP loan program on the net interest margin.

PPP 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 penalties in Q3 declined 4 basis points to 337 basis points. Please follow me to Slide six in our comparative summary balance sheets. We finished the year with $8.6 billion in assets, up $290 million from Q3.

Loans were up $222 million, while cash and securities combined increased $78 million. On the funding side, total deposits increased $177 million, and borrowings increased $89 million. Slide seven reflects the linked quarter and year-over-year activity in 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 -- core loan portfolio grew $315 million. In the fourth quarter, we originated over $837 million in non-PPP loans at a weighted average coupon of 358 basis points.

The weighted average coupon on the core portfolio dropped 7 basis points during the quarter to 395 basis points at December 31st. Total deposits grew $177 million as brokered deposits declined 20 million with growth concentrated in DDA now in savings. The loan to deposit ratio was approximately 101% at the end of the year.

Slide 8 provides a snapshot of the PPP program in each of our banks. At the end of the year, we had 178 loans with $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 will accelerate on loan satisfaction.

We expect the remaining PPP loans to be satisfied during the early part of this year. On Slide 9, we are providing the status of our loan payment deferment activity. As Paul mentioned, 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 4.1% or $286 million over regulatory well-capitalized standards. The company has an 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 $0.125 per share to be paid on February 25th to stockholders of record on February 11th. On an annualized basis, our dividend payout approximates a 2.9% yield. This concludes my formal comments, and I will turn it back to Paul..

Thanks, Carl. And now we will open it up for questions, please..

[Operator Instructions] Our first question comes from Mark Fitzgibbon of Piper Sandler. Mark, the line is yours..

Thank you. And nice quarter, guys..

Thanks, Mark..

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. It's -- I think I've gone through this before and I think it's a little basic to try to quantify it because you got all kinds of flavors of ice cream in those pipelines, some that are assuredly going to get done, some will get withdrawn, some won't get negotiated. So I'll just say that on a historic basis, they're as healthy as they've ever been..

And then Paul, I guess I'm curious, are a lot of the 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? Where do you feel like the -- particular in 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 and Rhode Island, we are a very attractive alternative for people who are a little bit fed up with some of the mass market banks..

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 you're thinking about sort of tech spending 2022 versus 2021..

Sure. So I'll start with the tech spending. I think the tech spend 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 there's 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. We are projecting to be five 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 is being -- getting driven by inflation, as well as some of the year-end – the full-year impacts of reopening. So we are seeing [Indiscernible] and things of that nature 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. To that, I do expect I'll just to add to that a little bit is I do expect Q1's expenses to be in line with Q4.

Q4 was a little, but with higher, really driven by compensation costs associated with incentives and commissions truing up those costs for the end of the year.

Those things will normalize in Q1 but kicking into Q1 will be the payroll taxes and other benefiting things center seasonally jump up, as well as some of the initiatives that we've also taken on the compensation side here at the company..

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. We did provide a slide on that in the appendix, so I'll ask you to turn to that slide for those that can see it..

My apologies..

We did provide a new slide, Slide 21, that shows by quarter the impact of basically 100 basis point rise in rates over the year. For the full year impact, it'd be about 4% increase in our net interest margin from a flat rate scenario..

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..

Hi.

Can you hear me?.

Fairly..

Oh, hi.

Is that better?.

Little better..

Paul, Carl, good afternoon. Sticking with expenses, Carl, the -- and I'm looking at the other category of non-interest expense, that $3.31 million, looks outsized.

Is there anything non-recurring in that or how should we be thinking about that line?.

I wouldn't say there's anything non-recurring in that. I think those are some of the trends we're seeing in travel and entertainment expenses, supplies, things are kind of going back to what they were before. There are a little bit of OREO expense going through that, but not something -- nothing that's outsized, very small. Nothing that's unusual..

Okay. And when you look a little bit further out, as in 2023, on the expense growth guide, how are you thinking about that..

You're getting a little far out there on that side. I think we'll see what the market provides us..

Okay. Or maybe I'll ask it another way.

How are you thinking about the $10 billion costs, is that -- how are you thinking about that?.

Quite honestly, we don't think a lot about that. We have an eye on it, I think from -- there's a few things that happen when you cross $10 billion. It's -- the Durbin amendment is very simple to understand that, that impacts your debit card fee income, today, that would impact us about $800,000 of most current estimate.

And then, what are the operating costs that you may have to add in to manage the regulatory environment of $10 billion framework. And we don't see too much of an impact on that at this point..

Just so that I'm clear, your 5% to 6% core growth guide doesn't necessarily change dramatically in terms of thinking about the $10 billion cross because you've already got this operating cost fully baked; is that correct?.

I wouldn't say fully baked. I think there will be some incremental cost, but I don't think it's going to be dramatic..

That's helpful. And then, I guess Paul and Carl, this is both to you. The $20 million buyback purchased in the quarter, obviously your stock price was higher, but in third quarter you were pretty active at 14.5.

How do you think about the price point at which you step up?.

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. Al; right.

So no price point that you say this is why we're here?.

Not that I would publicly share..

Okay..

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 prepaid fees, the commercial prepaid fees, and that number? Have the corresponding last quarter at 0.579?.

So prepayment fees were $1.712 million this quarter, which was up about $133,000 from Q3..

Okay. That's helpful. Okay. And then just -- last question. How should we be thinking about tax rate? Obviously little bit larger in the fourth quarter.

How do you think about that for next year?.

We currently expect the full-year effective tax rate to be approximately 25.4%..

Okay. Great. Perfect. Thanks for taking my question..

Hey, Laurie..

Thank you..

[Operator Instructions]. Our next question comes from Chris O'Connell of KBW. Chris, the line is yours..

Hey, good afternoon, guys..

Hey, Chris..

Just wanted to start off on the fee side. Pretty big pick up in the loan level derivative income and the gain on sale lines. I'm just wondering how you guys are thinking about those going forward for 2022..

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'd say. But if you sort of look back a number of years, you can see that there is a pattern to this.

The 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 sell residential loans anymore, so it's entirely commercially oriented.

Both real estate and commercial C&I loans are in that file..

Okay. Got it. So both kind of tracking, for most part, loan-origination activity. And just circling back -.

This was a record quarter at $11 million final $10.7 million in the income. Typically, we're in that $7million to $7.5 million range. And sometimes higher like you saw this quarter, and sometimes a little bit lower depending on the activity. But I think the pipelines and return -- but we're getting a little bit back to return to normal..

Great. That's helpful color. And then just circling back to the margin on a core basis, excluding the PPP. Appreciate the color around the -- an added sensitivity in the rate hikes.

As you guys see it after any rate hikes going forward with core margin, is it at a point where it's kind of more or less stabilized here?.

Let me steal a little bit of his thunder on this one because I don't know that he would say this. Again, the fourth quarter was pretty unusual. We had some large loans that use derivatives in order to have us end up with floating rates, and those rates tend to be pretty thin.

And so from my perspective, despite great originations, we had a fair amount of content in there that drove the actual rate that we received lower than we might have had in a regular quarter, if you follow me. But now I'll let Carl answer the question the right way..

That's true. We had some very, very large loans, which are priced in our -- to begin with, plus the floating rate nature of the loans are attractive to us. But at the time, it's NIM compressing in the near-term. But you're 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 margin is concerned, I'll break it up into two parts, right? So we -- the first being PPP, the impact of PPP. It's almost all gone, not quite all gone. We have $68 million PPP loans, which we're projecting to be largely satisfied during the first quarter.

What'd I say?.

You said $68 million, but today is $60 million..

It's $68 million at the end of the -- you can't tell them what it is today. $68 million at the end of the year. And so we do expect that largely be gone at the end of the first quarter. So in figure there's an average balance $30 million to $40 million for the quarter. So you have some interest at 1% coupon.

So about $1.8 million of revenue associated with the PPP loans. And then that's gone. So that'll be a nice -- that will be a little bit of crossing let's say, for the margin in the first quarter. Excluding the impact of PPP, we're currently projecting the net margin to be in the 342 range for Q1 and where rates go after that, we'll see.

But 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 or the two-year part of the curve, you're doing better than you were doing in the fourth quarter.

We're seeing the benefit of that going forward..

Great.

Can you guys give a ton of color on the reserve in the deck, but at the 140 level, [Indiscernible] well above the 1% Day 1 [Indiscernible] 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 and the market. No one anticipated the Omicron, and what that might mean, we'll continue to keep a very close eye on office and what's going on there.

While we don't see anything bad right now, I'm not going to try to predict the future right now, particularly when it comes to reserves..

Okay. Understood. Thanks for the time..

Sure..

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

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..