Good afternoon and welcome to Brookline Bancorp, Inc.’s First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to Brookline Bancorp’s Attorney, Laura Vaughn. Please go ahead..

Thank you, Forum 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..

Thank you, Laura and good afternoon everyone, Thank you for joining us for today’s earnings call. Our first quarter results include transaction costs associated with the acquisition of PCSB Financial which closed on January 1 and I am pleased to report our core system conversion was completed very smoothly in mid-February.

Special thanks for the commitment and hard work of both Brookline and PCSB teams as well as the folks at technology provider, Jack Henry, who helped make it happen. Including one-time acquisition-related items, we reported net income for the quarter of $7.6 million or $0.09 per share.

If we exclude those items, we had operating earnings of $23.3 million and operating earnings per share of $0.27. During the quarter, our assets grew by $2.3 billion to $11.5 billion. Loans grew to $9.2 billion, and deposits grew to $8.5 billion and equity grew by – grew to $1.2 billion.

The quarter was also one of disruption, as we all know, particularly here in Boston. From the start, our excellent staff was ready to answer questions, address concerns, and offer solutions to existing as well as potential clients.

We also increased our on-balance sheet liquidity, adding to our cash and securities position by $513 million while affirming our access to multiple sources of liquidity if the need should arise. Our nonperforming loans continue to be at historic lows, with net charge-offs of $451,000 in the quarter or just 2 basis points annualized.

Our reserve for loan losses is solid at 131 basis points, and we continue to be very well capitalized. I will now turn you over to Carl who will review the company’s first quarter..

Thank you, Paul. This quarter, we had quite a few moving parts. Some are unique to Brookline, some are a continuation of trends, and some are related to the failure of SVB and Signature Bank here at the end of the quarter. I’ll unpack these as much as possible as well as the impact on Brookline.

On Slide 4, we have provided summary comparative income statements. Net income this quarter was $7.6 million which was $22.1 million lower than last quarter.

This was largely driven by factors unique to Brookline, particularly the acquisition of PCSB Financial on January 1, which had onetime items totaling $21.4 million on a pretax basis, which I will talk more about on the next slide. The decline in net income is also due to lower net interest margin and higher provision for credit losses.

While revenues increased $6 million from Q4, the cost of funding reduced our net interest margin, limiting the overall contribution of the growth in assets. Also, higher targeted levels of on-balance sheet liquidity were maintained, which also had the effect of compressing the net interest margin.

Expenses increased $11.7 million, driven by the addition of PCSB as well as the $1.8 million due to core deposit intangible amortization, which is a non-cash charge.

The $25.5 million provision for credit losses included in Day 1 CECL – included a Day 1 CECL provision for acquired loans of $16.7 million as well as provisions to cover organic growth and cover net charge-offs of just $451,000 in the quarter.

As illustrated on Page 5, excluding the impact of onetime items associated with the PCSB acquisition, operating income was $23.3 million. The non-core items being excluded are the $1.1 million in security gains, $6.4 million in merger charges, and $16.7 million in Day 1 CECL provision for acquired loans.

Upon acquisition, Brookline classified the entire held to maturity portfolio of PCSB as available for sale and sold approximately 75% of the portfolio, resulting in a $1.5 million book gain on sale, but realized losses for tax purposes.

Brookline currently estimates a normalized effective tax rate of 22.7%, which is used for estimating operating earnings. Our operating pretax pre-provision net revenue of $38.9 million or $0.45 per share compares to $32.8 million or $0.42 per share in the prior year. Please follow me to Slide 6 and our net interest margin slide.

While net interest margin income increased $6 million, our net interest margin declined 45 basis points to 3.36%. Interest-earning assets grew a little more than $2 billion in the quarter as yields improved 15 basis points. Interest-bearing liabilities grew a little less than $2 billion and the cost of funds increased 83 basis points.

During the quarter, the Federal Funds Rate increased another 50 basis points as rates on 2 years and longer declined, causing a steeper inversion of the yield curve. In the quarter, our cost of interest-bearing deposits increased 75 basis points compared to the 50-basis point change in the Federal Funds Rate, resulting in a quarterly beta of 150%.

Through the cycle beta on interest-bearing deposits has been 34%. The increase in funding cost is a continuation of the trend we have been experiencing, but we anticipate it will slow significantly as we approach the 40% through-the-cycle data.

Slide 7 reflects the linked quarter and year-over-year balance sheet, reflecting growth primarily driven by the acquisition of PCSB Bank, which Paul highlighted earlier. We also provided the purchase price allocation of Day 1 acquired assets and assumed liabilities in our press release and in the appendix of this presentation.

I just want to highlight that due to the recent bank failures in March, we added significant on balance sheet liquidity, which increased short-term investments and borrowings at the end of the quarter. If you follow me to Slide 8, the activity and composition of our loan and deposit categories is provided.

The loan portfolio overall increased $1.6 billion from the prior quarter, driven by Day 1 growth of $1.3 billion from PCSB and strong net organic growth of $265 million. In the first quarter, we originated $775 million in loans at a weighted average coupon of 668 basis points.

The weighted average coupon on the core loan portfolio rose 24 basis points during the quarter to 548 basis points at March 31. Total deposits grew $1.9 billion. Excluding broker deposits, deposits increased $1.3 billion. Excluding the Day 1 impact of PCSB, deposits declined $289 million.

The decline in deposits is also a continue of trends we have been experiencing as depositors move money to money market funds and fixed income opportunities, frequently with the assistance of our investment professionals. With the failure of SVB and Signature Banks, there was heightened awareness around FDIC insurance.

This has not had a meaningful net impact on our banks from a balance perspective. We have been very active communicating with and providing services to ensure current and new customers are comfortable with the insurance coverage of their deposits.

As shown on Slide 9, 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 March, we had a capital buffer of $240 million of regulatory well-capitalized standards. The company designates all securities as available for sale.

And as of March 31, the negative mark-to-market on the investment portfolio was $52.7 million. While this mark is included in reported equity, it does not impact regulatory capital calculations.

If it was, it would represent 59 basis points in regulatory capital, and the company would still have nearly $200 million in excess capital above well-capitalized requirements. Slide 10 provides a history of the growth in our regular common stock dividend.

Yesterday, the Board approved maintaining our quarterly dividend at $0.135 per share to be paid on May 26 to shareholders of record on May 12. On an annualized basis, our dividend payout estimates a 5.5% 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..

[Operator Instructions] Our first question will come from the line of Mark Fitzgibbon with Piper Sandler. Mark, your line is now open..

Mark?.

I’m sorry about that. I was muted accidentally. I apologize..

We understand..

Okay.

Wondered if you could remind us of the timing of Durbin and sort of the impact from that?.

Sure. Since the acquisition happened on January 1, the Durbin impact won’t happen until next July, July 1 of next year, 2024..

And how much?.

How much? That’s a good question. It’s about – I’d say it’s about $1 million a year at this point..

Okay. Great.

And then secondly, what is the effective tax rate for the combined company going to look like?.

Right now, it’s estimated at 22.7%..

Okay. And Carl, can you help us – I heard your comments on the margin.

Assuming sort of the Fed falls to forward curve, can you give us a sense of where you think the bottom of the margin might be and roughly when that happens?.

I’m not going to go down that rabbit hole. We have a lot of models. I can’t tell you how many models we have doing this, different scenarios, whether deposit runoff and repricing as well as whatever the Fed is going to do. Right now, the pressure is going to be negative on a go-forward basis.

We expect through the cycle will be around 40% as far as betas are concerned. I’d still see accelerated betas for a quarter or so. But we’re also seeing good repricing on the loan side, etcetera. I see on the asset side some benefit.

I’m not going to try to guess what quarter it’s going to be, but right now, it’s – I don’t see a break in three, that’s for sure. I mean I see some pressure going into Q2 though..

There is a lot of stuff going on that’s going to affect that, that we just don’t know where it is. We’ve got a lot of excess liquidity on the balance sheet which we’re holding on to see how conditions are. And at some point, if we can get rid of that, that’s very beneficial.

We also, by the nature of our loan book, we’ve got two big assets that we priced well, which is the big derivatives book that we have where that’s a floating rate obviously, and then the cash flow of the equipment finance units comes in very hard and heavy and that gets relent at better rates.

I’m not trying to get myself in trouble here with my CFO, but I think we will muddle through here for a little while, but I see a little sunshine on the horizon margin-wise..

Okay. And then your slides were really helpful on Slide 18 and 19 where you gave some detail on maturities in the office book. It looks like almost 20% of your office book is maturing in the next 2 years, and a decent chunk of that is in Boston.

Are you – should we expect some issues as these loans roll, Paul?.

When we say that’s in Boston, it’s – we don’t have very much in the central business district.

But I would not be surprised if there pops up a problem or two, but I would be very shocked if it was broad-based because a lot of our stuff in Metro Boston is really in the inner suburbs and out to 128 if you know the geography, and those markets have tended to behave pretty well.

And we don’t have the really big buildings that are suffering in the sublet market. But real estate is going to be tough to get. Mark, there have been virtually no trades and so there really isn’t much evidence of how much valuation has been affected. But we do a lot of stress testing. We do a lot of updating of tenant lists and things like that.

We’re doing the legwork to make sure that we understand. And so far, it’s feeling pretty good. But depending on how things go and how sponsors are feeling, it would not surprise me if there is a bump in the road here or there. But I don’t know when..

Okay. And then my last question, I wondered if you could give us an update on Clarendon Private, how that’s going. I guess it’s been a year, 1.5 years or so, and I was curious any data points that you could share with us there? Thank you..

Sure. I’d say they have been very, very busy. The challenge here right now is a lot of it is fixed income. And as you probably know, you don’t make a lot of revenue off fixed income.

But I think the relationships with the customers are building and the word is getting out about our capabilities, and so we’re very pleased with the activities and that’s going on there. I think we’re slightly over $300 million in assets under management at this time, and it’s….

There is a lot coming in that’s on the way in too..

For the first year, Mark, it went very, very well because the bankers were thrilled to have that around and the customers love staying with us, and so that was pretty traditional business. Now they have been busy helping handle the uninsured deposits of our very large depositors. And that has been very useful as Carl pointed out..

As well as new customers..

People from across town who didn’t want to stay where they were..

Thank you..

Okay. Mark..

Our next question comes from the line of Steve Moss with Raymond James. Steve, your line is now open..

Hi, good afternoon, guys..

Hi, Steve..

Maybe just starting with going back to the margin here, I appreciate the color.

Just curious, maybe starting with the broker deposits you added this quarter, kind of what was the term of those deposits? And how quickly could that in the Federal Home Loan advances go away?.

To step back, we usually use these avenues to fund our equipment finance units. So we’re very comfortable going out 2.5 years and ladder them out, both on the Federal Home Loan Bank side as well as the broker deposit side over the organization to really fund the equipment finance book.

And so we did certainly get a great deal of benefit when the PPP money came in, but we’re kind of getting back to where we used to be as far as managing that book. We did add some more additional borrowings that are relatively short-term just for on balance sheet liquidity.

But they are still laddered out, so it’s not something we would expect to just be turning on and off a switch. But there is a lot of cash flow on a monthly basis that we can make decisions and move on..

Okay. And maybe just another way of thinking about it here, Carl, do you happen to have a margin for the month of March or spot margin at the end of the quarter, just to kind of get a feel for where things shook out? Definitely a lot of moves in the EOP numbers here..

For the month of March, I don’t have that at my fingertips..

Yes. Okay. And then I guess in terms of just kind of – I hear you on your expectation for the deposit beta.

I guess just as I think about that, you are kind of implying that – on deposit beta, do you mean total deposits or just interest-bearing deposits?.

Interest – the total interest-bearing deposits..

Okay. Just as I think about the interest-bearing deposits, it kind of implies like a 230-ish type cost of funds which is still a pretty big gap relative to where Fed Funds is.

Just curious like if you think about the potential that the Fed holds for the next, at 5%, like could you break 3% under that type of scenario for the margin?.

I don’t expect to because we continue to see repricing of our loan book. I don’t think I saw a model yet that had us breaking 3%. That doesn’t mean it can’t happen. I’m not going to say nothing you don’t expect. When things are this volatile, it’s hard to say anything with any conviction. And I know you guys want something that you can hold on to.

But we manage this on a day-to-day basis and we do the modeling that we can. No one expected what happened in March. Nobody expected what was going to happen in March. And so….

And this dynamic, Steve, we’re still signing up customers at a pretty good clip. Our cash management, treasury areas are as busy as they can be. And so that is all favorable stuff for the margin because we insist that the operating expenses be lower. But it’s hard to move the needle by almost $9 billion of deposits..

I think it’s – another thing to highlight is the impact of ICS. And you don’t hear about this much at all in the media. Quite frankly, you don’t hear it from the analysts as well. I don’t know how many people are up to bit-speed on what IntraFi is.

It’s been around for a couple of decades now, and they do a fantastic job in helping banks service folks with deposits over $250,000 and providing insurance. And everybody is claiming the death of the community bank and the regional bank, and I think that’s just ridiculous, quite frankly. And we have been able to do very, very well.

And maybe we are ahead of the game because we had set this up quite some time ago to be able to do this and our staff and our folks are up to speed on it. But it’s something that we can – we have customers with up to $50 million right now.

I think we could go up to $150 million if we wanted to in deposits to be insured by this network of banks using that platform. And quite frankly, 50% of the banks in the country are part of this platform. And probably in a couple of quarters, the rest of the 50% will be there.

So, I think it’s something people have to start paying a little bit of attention to..

Okay. That’s helpful. And maybe just in terms of on the loan side here, where is loan pricing these days for new originations and kind of curious as to what your thoughts are on the pace of loan growth? You have pretty good organic growth by my numbers here this quarter..

I do want to – I want to cover some of the other questions you had because I didn’t have it at my fingertips, but I have somebody else’s fingers running around here right now getting me some numbers. So, I will give you the March net interest margin was 3.22.

And that’s being driven – as you know, we added a lot of liquidity on the balance sheet at the end of, right at the end of the quarter, so you don’t see as much of that impact in the quarterly numbers, but you see it in that number in particular.

The other number I wanted to give you was, between brokered deposits and Federal Home Loan Bank advances, it’s about $330 million matures over the next 90 days, just so you have a sense. That gives us the flexibility on the liability side, and of course we have a lot of flexibility on the asset side.

Now, your question on what rates we have been putting them on, I think I already mentioned we were – for the quarter, it was 668 basis points was the average coupon of the loans that we booked. And we had originations of $775 million in the quarter, just to give you a sense of the size of the origination book.

Of that, I would love to highlight Eastern Funding because I love those guys, $118 million in originations at a coupon of 918 basis points..

Okay. Great. That’s helpful.

And then in terms of just loan growth here going forward, kind of curious on with higher rates and the dislocation we saw, kind of what’s your loan pipeline and kind of your thought process here going forward?.

Last two quarters, we have been running very hard for us. The originations were big in Q4. And in Q1 they were big, as Carl pointed out. It has certainly markedly slowed down.

But we are seeing the displacement around town from the troubles in the industry, and we are an attractive alternative, and so we have been signing up some of their former customers. And in some cases we were sharing customers. We have taken over the entire relationships. But it’s definitely slowed down.

And obviously in real estate, investors are hesitant and we are very careful, and so you are not seeing all that much business. But C&I is not terrible..

Great. Appreciate all the color. Thank you very much..

Thank you for your question. Our next question comes from the line of Chris O’Connell with KBW. Chris, your line is now open..

Hey. Good afternoon..

Hi Chris..

I was hoping to just start off with how much accretion income was in the quarter and then maybe an outlook going forward for that?.

So, on the loan side, very little at all on the accretion income. The reason behind that was when you mark – when it comes to the purchase accounting on the loans, we had some floating rate loans that were actually priced at a premium.

There were – so that negated any of the discount that you were accreting into income during the first quarter, so basically it was a wash. On a go-forward basis, it’s approximately $3 million on the loan side in accretion income that will be recognized..

For that period?.

Per quarter. On the deposits and borrowings, it’s not meaningful. In the securities portfolio, since we sold most of the securities, they were just at book yields for the most part..

Great.

And then just hoping to get an update as to how expenses might trend into the second quarter and maybe beyond that? And what the – if all the cost saves have been achieved from the deal?.

I would say it’s too early to say exactly where we are on the cost savings. We did the acquisition January 1st. We did the conversion, which went extremely very smooth in the middle of February. Most of the people we retained through that process left early March. So, the cost savings, we started seeing some of the cost savings in March.

But I would say we have got the headcount, we nailed it on the headcount. We are still looking at the salaries and things of that nature because I think some of those things have come in a little higher than we had originally anticipated. I think that was more because of inflation and things of that nature.

But I think we are going to be very close to those cost savings that we projected, which we are estimating about $2.8 million a quarter I think is the number. And that’s the goal and that’s what we are working towards. I am not claiming victory yet….

Yes.

So, if I am understanding it right, does that imply that maybe 2.8 or maybe a little bit shy of that number still comes out of the quarterly run rate going forward?.

I would love to say yes, but we also have some headwinds, particularly around FDIC insurance and other areas of the bank that we will continue to see a little bit outsized growth in expenses. So, I don’t want to relate it to PCSB in the acquisition, but it’s other areas of the bank that we are seeing some cost pressures..

Okay.

And hoping you could touch on the C&I NPL that came on in the quarter, maybe the size and just any details around it?.

Well, I would say for us it’s a medium-sized loan, if you will. It’s not real estate. It is an operating enterprise which happens to be facing some very serious issues. And it’s one of those things that you see from time-to-time where we have set up specific reserves because this thing can go either way.

The whole thing can just be perfect and they can fix their issues, or it could fail. So, we are ready for it either way, but it’s pretty well reserved now..

Got it.

And do you have the size of it?.

I guess I don’t have it in front of me. I will give you the magnitude. I think it might be $8 million or something of that magnitude..

Got it.

And do you guys have what’s the reserve held against it is?.

I don’t know if it’s useful to get into that level of detail, but I am told by our credit guys that we are comfortably reserved for a bad outcome, which we are still hopeful will not happen..

Got it. And then on the fees side, really strong quarter, I know that you guys have a number of kind of line items that fluctuate quite a bit with business activity.

But just any color or updates on kind of the outlook on where things could shake out going forward?.

It’s a volatile number is the best I can say. And right now, I don’t think we have a lot in the pipeline..

Yes. A lot of our fee income comes from either the swaps book or from being the lead on an origination of a loan that gets sold down to friends and family in the neighborhood. And with activity down the way that it is, it’s not likely to be as impressive as it’s been the past few quarters..

Okay. Got it.

And then lastly for me, I mean how are you guys thinking about target capital levels going forward? And is there any consideration to do a buyback at any point?.

Well, our operating targets are – we lay out our operating targets in the deck. We would be very comfortable 11.5%. Naturally, whenever there is a lot of volatility in the market, you have to be very thoughtful about buybacks even as attractive as they are.

So, we will talk – we talk with the Board frequently about this subject, whether it’s dividends or buybacks, and we will….

We will keep doing that..

We will keep doing it..

And we will act when we think the time is appropriate..

Okay. Great. That’s all I have. Thanks for taking my questions..

Thanks Chris. Okay..

This concludes our Q&A session for today’s call. I will now pass back for any final remarks. Thank you..

Thank you, Forum, and thank you all for joining us today, and we look forward to talking with you again next quarter. Good day..

This concludes today’s call. Thank you for your participation. You may now disconnect your lines..