Good afternoon, and thank you for attending today's Brookline Bancorp Second Quarter 2022 Earnings Call. My name is Daniel, 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.

[Operator Instructions] I would now like to pass the conference over to our host, Laura Vaugh [ph] with Brookline Bancorp as the Attorney. Laura please proceed. .

Thank you Daniel 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 conditions, 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.

I'm pleased to introduce Brookline Bancorp's Chairman and CEO, Paul Perrault..

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 solid earnings of $25.2 million or $0.33 per share and the Board approved a quarterly dividend payment of $0.13 per share.

On an annualized basis, our core loan portfolio grew $82 million or 4.5% annualized and our net interest margin for the second quarter was 3.56%, 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 PCSB 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. I will not be doing a slide split for this quarter. Net income this quarter was up $0.5 million from Q1 at $25.2 million, which also included the impact of $535,000 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 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 million driven by $82 million in core loan growth as PPP loans declined $13 million in the quarter. PPP loans were just over $1 million at the end of the quarter.

And as of today, we have only 10 PPP loans remaining with a balance of less than $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 the loan portfolio rose 33 basis points during the quarter to 429 at June 30.

Prepayment fees were $1 million in Q2, down $490,000 from Q1. And deferred fees excluding PPP were $1.4 million or $78,000 less than Q1. The combined impact was a negative impact on net interest income $568,000 compared to first quarter or approximately three basis points to the net interest margin.

Credit quality trends continue to be favorable resulting in 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 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.

The company remains well capitalized and we repurchased a little over 956,000 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 up for questions. .

[Operator Instructions] The first question comes from Mark Fitzgibbon from Piper Sandler. Please proceed..

Thank you and good afternoon..

Hi Mark..

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?.

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 and 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 actually saw in the first quarter or in second quarter. We're seeing 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..

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

Is that fair?.

I would -- my guidance on margin will be 15 basis points or better increase in Q3..

15 basis points in Q3? 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 there's probably more competition for talent these days than there is on deposit rates quite frankly..

It's probably accelerated..

So, we have seen some strong demand for talent and retention and attraction of talent it costs some 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 pay for a lot of folks to $20 an hour which are 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, we saw the full benefit -- 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..

One of the big drivers Mark, I think is commercial banking and I say that in the macro sense. And that 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 for people who are planning to try to participate more in commercial banking. But we'll keep them. .

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

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

Okay. And then finally, if any update....

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 a little bit more on the audit side. It was a little bit more on being top of the regulatory side....

Yes it's pretty incremental. .

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

Okay. Great.

And then lastly any updates on Clarendon private, what assets are up to or are we getting close to breakeven?.

It's funny. We do expect this to breakeven in three years that would be 2.5 years. They're right on track with where we expected. Of course, I always wish that they are 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..

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

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

Okay. Thank you..

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

Hey good afternoon..

Hi Chris..

I was hoping to get -- just 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 kind of balancing out?.

All I can say Chris is, I can't wait for people to stop buying our customers. This has been going on now. It feels like for over two years the originations were strong continue to be strong and I expect, it'll be that way into the future.

And if people can just calm down maybe these higher rates will comp 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 now that we have the private banking capability, we at least have something to talk about with the selling families..

Got you.

So given the pipeline outlook is growth expected to be somewhere in the same range I guess is the first and the second quarter going forward?.

Yes. Exactly. I think we're a little lower than we would have anticipated this quarter at the $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 great loan customers great families great businesses that have been selling their businesses. And so that's... .

We like to have at least $100 million a quarter of gain and this quarter we just came up slightly short, it's probably one company sale fit in there. .

Got it. Makes sense. And then on the deposit side, I mean, how are you guys seeing kind of flows and growth. I think somewhere in the deck there is like a $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 and have you seen that continue or... .

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 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 alluding to that moved some of that to treasuries for the most part.

When I look at how we're doing the 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 is 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 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. .

Particularly on the DDA side the commercial accounts. We talk to bank presidents and things of that nature they are 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 key. .

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 whether the opportunity use it or not but maybe if you've seen demand for that increase going in the back half of the year?.

I think you have a very good handle on that. That's -- 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 what the average is over time.

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

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. .

Got it. Very good. Understood.

And lastly, any update as to the timing of the PCSB merger close?.

We're everything is on target for Q4. Nothing has changed. Everything proceeding exactly as we had planned. So really nothing new on that front. .

Okay. Great. Thanks for taking my questions..

Thanks a lot..

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

Yes..

Hi, Laurie..

Yes. Hi. Good afternoon.

Yes -- maybe just staying on the PCSB 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 and it seems like ages ago, you had a $19 million 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 million and then you also have the markup on deposits which was as merged.

So I don't know if you've got a refreshed number you can share with us or just maybe even a refreshed number in terms of how you're 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 rates have backed off maybe 15 to 20 basis points out on the long end from 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 rate is concerned. So, really not a big change in how those things, are 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 a more general question for you with PCSB now lining up to be a fourth quarter close right on time with your expectations, can you talk a little bit about your appetite to do more M&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're thinking obviously, you're going to be just across $10 billion.

Just where is your appetite with them?.

My appetite really hasn't changed at all through this. We still continue to talk with some people. So, my appetite is not diminished, nor increased. But of course, if we look to do something beyond Putnam, I had Carl weigh in pretty heavily on what 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 the refresh on where you guys are with office and also with leverage lending? Anything would be helpful. Thanks..

Well, so Paul will take care of that..

Yes, the leverage lending, I'll take first, because that's simple, it's zero. We don't do it. Never have. Real estate was 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 $0.5 billion, a little bit over $0.5 billion, 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 financial 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 of Boston.

But the metro north and south and the 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 in coverage ratios..

Got it. Okay.

What -- do you have your loan to value? Will you share that and your coverage ratio?.

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 is 50% or less..

Okay.

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

That I don't have any clarity on..

Okay. Great. Okay. That’s it from me. Thank you for taking my question..

Yes, there is some content of medical, but I don't -- it's not over-weighted to that. It's really quite diverse..

Okay, great. Thank you very much..

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 for closing remarks..

Thank you, Daniel, 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..