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Operator: Good afternoon. And welcome to Brookline Bancorp, Inc.’s Fourth Quarter 2022 Earnings Conference Call. All participants will be in 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 Vaugh . Please go ahead.

Unidentified Company Representative: Thank you, Alexis, 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 two 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 am pleased to introduce Brookline Bancorp’s Chairman and CEO, Paul Perrault.

Paul Perrault: Good afternoon, everyone, and thank you for joining us on today’s call. I am pleased to report we had a very productive quarter, which capped off a solid year of performance. As previously announced, we received regulatory approval in December on the acquisition of PCSB Financial and we were able to close on that deal on January 1st. Earnings for the quarter were $29.7 million or $0.39 per share as our loan portfolio grew $223 million, while also recognizing loan participation income of $2.6 million. Before I turn it over to Carl to review the company’s financials, I want to make a few comments about the PCSB Financial acquisition. We are very pleased that Willard Hill agreed to join our Board of Directors of Brookline Bancorp and he actually had his first Board meeting here yesterday in Boston.

And this morning, I had my first Board meeting with the PCSB Bank Board now chaired by the new President and CEO, Michael Goldrick. I also want to recognize the tremendous effort of the teams at both PCSB and Brookline, which are keeping us right on track for the core systems conversion in mid-February. I will now turn it over to Carl.

Carl Carlson: Thank you, Paul. As Paul mentioned, the loan portfolio advanced $223 million with growth in all asset classes. Commercial real estate grew $135 million, commercial $42 million, equipment finance $41 million and consumer $6 million. In the fourth quarter, we originated $687 million in loans at a weighted average coupon of 647 basis points. This is up 81 basis points from the prior quarter. This increased the weighted average coupon on the total loan portfolio of 56 basis points during the quarter to 537 basis points at December 31st. Prepayment fees increased $199,000 in Q4 to $1.2 million. The amortization of deferred fees was $1 million, which was $122,000 less than Q3. The combined impact of $321,000 had roughly a 1 basis point benefit on the net interest margin from the prior quarter.

The provision for credit losses was $5.7 million, an increase of $2.9 million from Q3 and an impact of $0.03 per share in the quarter. The increase was primarily due to strong growth in loans outstanding, as well as continued growth in unfunded commitments. The allowance for loan losses increased $4 million, while net charge-offs were $310,000 or approximately 2 basis points on loans on an annualized basis. The reserve for unfunded credits also increased $2 million from Q3. Credit quality trends continue to be favorable as non-performing loans declined 19 basis points of total loans. However, due to a slight deterioration in economic forecasts, the reserve coverage increased slightly to 1.29%. During the fourth quarter, deposits declined $214 million with investment-oriented balances flowing to higher yielding opportunities.

Deposit betas accelerated in Q4 as total deposit funding increased 43 basis points or 34% of the 125 basis point increase in the Fed funds rate. Our total funding cost increased 65 basis points in the quarter or 52% of the increase in the Fed funds rate. As deposits migrated to higher payment products and asset growth was funded with wholesale funding, resulting in a net interest margin remaining consistent with Q3 at 3.8%. Revenues increased $3.9 million, excluding security gains, driven by a $2 million increase in the net interest income and an increase of $1.9 million in non-interest income due to strong loan participation income, which is reflected in gain on sale of loans. Operating expenses were up $2.7 million due largely to true-ups for incentive accruals and some non-capitalized costs related to software and systems enhancements, as well as increases in FDIC assessments.

Merger expenses were $641,000 in the quarter, a decline of $432,000 from Q3. Pretax pre-provision net revenue was $41.8 million, which was a $2 million increase over Q3. As Paul mentioned, the Board approved a quarterly dividend of $0.135 per share, which represents a 4% yield based on yesterday’s closing price. The dividend will be paid on February 24th to stockholders of record on February 10th. This concludes our formal comments. We will now open up for questions.

Operator: Absolutely. The first question comes from the line of Mark Fitzgibbon with Piper Sandler. You may proceed.

Mark Fitzgibbon: Hey, guys. Happy Thursday.

Paul Perrault: Thanks, Mark.

Carl Carlson: Good morning.

Mark Fitzgibbon: A couple quick questions first on PCSB. I guess I am curious any surprises there, good or bad and are you thinking at all about doing some restructuring post the closing of PCSB doing some balance sheet restructuring?

Paul Perrault: Let me start with the qualitative and then I will give it to Carl for the quantitative. I am seeing certainly no negative surprises. I have never seen such an enthusiastic group of acquired people. So things are proceeding at pace and things are going very well.

Carl Carlson: Certainly, on the — one of the great benefits of PCSB Bank is the liquidity in the markets it’s in. So it’s right off the back. We will be restructuring the investment portfolio, which will provide additional liquidity for the company overall and be able to pay down some borrowings, which is actually better than actually having the investments on the balance sheet. So some restructuring will be happening in the near-term on — particularly around the investment portfolio. It also provides funding for higher yielding assets such as our equipment finance unit.

Mark Fitzgibbon: Okay. Great. And then, Carl, I noticed on the balance sheet, you have like $71.4 million of restricted equity securities, what exactly are those?

Carl Carlson: That’s primarily investments in — we are a Federal Reserve Bank members, so there’s a stock that you have to hold with the Fed — at the Fed — of the Fed, I should say. And then the also Federal Home Loan Bank membership

Mark Fitzgibbon: Okay.

Carl Carlson: so with both in New York and that number represents Boston, the New England Federal Bank, but then we will also have the New York.

Mark Fitzgibbon: Okay. And Carl, could you maybe share with us how you are thinking about the margin and expenses in the first quarter combined with PCSB, help us triangulate that?

Carl Carlson: Sure. Directionally, I believe we will continue to see deposit betas at an accelerated pace, particularly as the Fed slows, just because of the lag and how things get priced, you will see that. I think deposit flows out of the system will slow. I don’t think they are going to accelerate from here. I think they will slow from here. But it still puts pressure on the funding side of things as we rely on wholesale funding to fund additional growth and so we continue to see a pretty good pipeline on the growth, at least in the near-term. We will see what happens as time progresses. So directionally I see challenges on — not challenges, but the margin coming back towards down rather than up from here. PCSB will be very helpful on the margin side.

But it’s too early for me to really comment on how much that might be. We are still doing a lot of the purchase accounting adjustments on this. So I don’t want to really — I really can’t give you a good answer on that.

Mark Fitzgibbon: Fair enough. And then on the expense side, combined maybe $56-ish million

Carl Carlson: Oh! So on the expense side. Go ahead, I am sorry.

Mark Fitzgibbon: No. I was going to say is sort of $56 million a good rough ballpark estimate before all the synergies are extracted?

Carl Carlson: Yeah. I am not going to comment on the $56 million. I would say this quarter, we were a little bit — we had some true-ups to incentives and some other — I don’t like to call them one-time items or non-recurring items, but I would say non-run rate type items in our expense base. I do expect FDIC insurance to accelerate even more so in the next quarter due to increases in rates at the FDIC and that’s industry-wide. But as far as cost once we get through the first quarter, we do expect — we are right on track for conversion in mid-February. I think it’s February 17th, that weekend and so we will have folks through that time period. So they will have an impact on the first quarter. But after that, right now, we are on track for our — the cost savings that we had projected.

And a lot of those costs have already come out. So a lot of, as you know, when we announced the transaction, there were ESOP expenses, SERP expenses, things like that, that were really driving this. There isn’t a lot of — and some executives that were leaving the organization. There weren’t a lot of staff folks that were getting impacted. So not a lot of cost savings associated with that, but we do have retention bonuses and things of that nature as we go through this. So once we get through the first quarter, we will be back on track of what we expect — what we initially projected for savings around that.

Mark Fitzgibbon: Okay. And then last question, I know you guys are really conservative underwriters. But are you seeing any signs of distress at all in your office book, which is, I think, a little over $600 million?

Paul Perrault: We are not seeing any stress in our book and I don’t mean to be cocky, but in the Metro Boston area, there is occupancy weakness in the old financial district, which tends to be bigger, older buildings, which we don’t have much involvement in. But it appears that like the seaport area, the newer part of Boston is still quite robust, stuff is going on and here in the Back Bay, things are relatively stable. But no, all is good.

Mark Fitzgibbon: Okay. Thank you.

Paul Perrault: Thank you, Mark.

Operator: Thank you, Fitzgibbon. The next question comes from the line of Steve Moss with Raymond James. You may proceed.

Steve Moss: Good afternoon. Maybe just following up on

Paul Perrault: Good afternoon, Steve.

Steve Moss: Hi, Paul and Carl. Maybe just following up on the margin here. Just curious, maybe a little color around loan pricing, just kind of what you are seeing in your markets as we headed into the New Year?

Carl Carlson: So spreads really have not — are still hanging in there quite nicely. So, of course, with the yield curve continuing to move up a little bit, in the short end particularly we are still seeing nice yields in that area. I think the challenge is the inversion of the curve. We have seen that continue to come down in the longer end. So that kind of — so spreads are there, but you see in the coupon a little bit — get a little bit more challenged, particularly when you are comparing to our funding side. So new loans, you are adding those at a reduced spread to what our net interest margin is at the moment in general. So that’s something that gives you a little bit of color. I kind of provided what the lags were, the coupons and the spreads that we booked in the fourth quarter, so in my comments.

Steve Moss: Okay. Got it. That’s helpful. And then maybe just in terms of, just curious on your — on just the Brookline side of the house, your CD bucket, you have about $900 million or so in CDs for the quarter, with an average cost of 123. Just kind of curious what’s the remaining average life there kind of just how we think about the re-pricing dynamic there?

Carl Carlson: So we see that stuff rolling or re-pricing at about — it’s about $75 million a month in CDs that kind of roll on a constant basis that re-price. I don’t know if that’s helpful for you.

Steve Moss: Okay. And kind of just curious maybe where are your rack rates these days?

Carl Carlson: What we are booking new production at?

Steve Moss: Yeah.

Carl Carlson: It’s in the 4s at this point.

Steve Moss: Okay. That’s helpful. And then just in terms of just thinking about loan growth here kind of it sounds like you are still upbeat about business opportunities, kind of curious how you are thinking about the pace of loan growth going forward here?

Paul Perrault: Well, as of today, Steve, the pipelines are still very strong. You saw we had a really big fourth quarter. We are already seeing very good production so far. So I am optimistic that we will see the kind of historic growth that we have had, maybe a little bit better, maybe not and we are seeing it at all three banks.

Steve Moss: Okay. Great. Appreciate that. Thank you very much.

Paul Perrault: Okay. Yeah.

Operator: Thank you, Mr. Moss. The next question comes from the line of Laurie Hunsicker with Compass Point. You may proceed.

Laurie Hunsicker: Hey. Hi, Paul. Hi, Carl.

Paul Perrault: Hi, Laurie.

Laurie Hunsicker: Just going back to expenses and I just want to make sure that I have this right. PCSB has been running, I guess, pretty everything about $9 million a quarter. So once it’s fully phased in, call it, $6.5 million or low $6 million a quarter, assuming that 30% cost saves is still about right, does that gel with where you guys are?

Carl Carlson: Yeah. With a little bit of increase because of FDIC insurance and just natural

Paul Perrault: Inflation

Carl Carlson: inflation and merit increases and things of that nature. But nothing — as far as the cost savings, using the — what you framed out the $9 million down to $6 million, yes.

Laurie Hunsicker: Okay. Okay. Great. And then looking at PCSB, their margin was substantially lighter than yours was, and obviously, you just said, hey, we are probably going to restructure. Can you help us think about that a little bit more, I mean, I think, we are obviously very cognizant across the industry of watching funding pressure and everything else and you guys did a nice job holding the line that far. But as we look further out, we put your two banks together, there’s going to be accretion income, PCSB would otherwise drag you down. I mean, can you help us think about it directionally, if we were just to look out even into the June quarter, what that might look like?

Carl Carlson: Sure. So as Mark asked, are we planning on doing anything on the investment portfolio? So the investment portfolio gets mark-to-market when we buy the company and so you own it at market yields. So it’s actually better for us to sell those securities in the market and pay down borrowings, because the yields on the securities isn’t even — isn’t as high as the cost of borrowing, particularly when you look at the inversion of the yield curve. So we can pay down shorter term borrowings and higher yields, it costs us more money than what holding these securities that have longer duration. So I think you are following that part of it. So at the end of the day, it makes sense for us to pay down some of those. Now we certainly need securities for collateral purpose, for liquidity purposes and so we are not — you don’t liquidate the entire portfolio, but we will be reducing that portfolio and then paying down borrowings throughout the organization.

So that gives you a sense of how we will be structuring that. As far as the purchase accounting around loans, that we are still working on. So I really can’t give you a good insight on that and what that means to yields. But that will be something we will factor in. We will provide that information in an 8-K, probably in early March, you will get a sense of what that looks like and so hopefully that’s helpful. Their margin actually was doing better than what we had originally projected when we were first doing the analysis back in May. They did a really nice job of growing loans. Deposits, they have done actually did a fantastic job on deposits. In the interim, I think, the — it just shows the strength of having this yet another excellent market in the Lower Hudson Valley for us to be able to attract deposits and grow loans in that market.

I think that’s something that — it doesn’t happen in 45 days, but it’s definitely a wonderful long-term perspective for this. And as we bring additional services, particularly on the commercial side. But we have a lot of benefits on the consumer side as well, but particularly on the commercial side, whether it’s cash management enhancements, foreign exchange, we have our own swap steps that we can help out on the loan side. There’s a lot that we can bring to the table here and we are very excited about this.

Paul Perrault: Yeah. And they are, too.

Laurie Hunsicker: Good. Good. Okay. And just one, Carl, initially, you were closing at the end of the year, obviously, since you closed at the beginning that pushes off the Durbin, right, since the cross happened this year. So does that put us then in July 2024 instead of July 2023, just making sure I got that right?

Carl Carlson: You are absolutely right. That was one of the benefits.

Paul Perrault: One of Carl’s fancy moves.

Carl Carlson: It wasn’t a fancy move. It was not intended that way, but it worked out nicely.

Laurie Hunsicker: Okay.

Carl Carlson: You are absolutely right.

Laurie Hunsicker: It does save the $1 million, is that.

Carl Carlson: It does save us a little less than $1 million in over 12 months of revenue. And closing it a little bit later, the retention bonuses that we are going to have to pay for folks and things like that, a little bit less. Some of the contract payouts were a little bit more, because it was a year-end type of thing. But, so there’s movement in multiple directions on some of the merger charges, but largely in line with what we expected.

Laurie Hunsicker: Got it. Got it. Okay. And then maybe just with respect to pro forma intangibles, and I guess, it sounds like you are still marking everything. But can you give us just a rough estimation of what that’s going to look like?

Carl Carlson: Yeah. So what’s interesting is, just from where the yield curve was at the end of the year, they are in the process of doing that. It was worse than the marks — the interest rate marks in particular, that I will stay with that. The interest rate marks on the loan portfolio and the securities portfolio were worse than we originally expected. I don’t have the loan marks yet, but that’s still being worked on by folks and as well as the CECL adjustment is still being worked on. But the securities portfolio, I think it came in around $66 million or something like that underwater at the end of the year. And if you remember, I — we estimated to be — it was $50 million when we announced the transaction back in. So it was materially different and so that is a factor.

So you mark it as of 12/31. So don’t be surprised to see security gains in Q1 as we liquidate this because actually the curve has inverted further and so these securities are slight gains at this moment. So it’s one of those things that you have to work through in the accounting, a little funny on that. But on the loan portfolio, I would expect it to be a little bit worse than what we expect or worse, I don’t know how much than what we originally estimated to be when we first announced the transaction. CDI may actually be higher. So we estimate around 2% CDI and deposits naturally worth more than ever as rates have moved up 425 basis points this year. So those deposits become worth more, which actually — it’s not necessarily helpful, because that you have to amortize that as an expense going forward.

But it is a non-cash expense. Your tangible book value goes up as that amortizes down. So that’s just another thing for your models. But I don’t have those numbers yet. That’s still being worked on. It’s a little early after that.

Laurie Hunsicker: Okay. Great. And then just tax rate, how should we be thinking about that going forward?

Carl Carlson: Yeah. So I did not expect us to close — well, I knew that we had some things in the pipeline on leases that had an energy tax credit associated with it. I thought that was going to be 2023 event. It ended up being a December 2022 event. So we did recognize that benefit in Q4. I don’t know of anything right now in the pipeline along those lines. So I will — my estimate right now is taxes — my previous estimates on that in the at least 24% range on taxes. More will come out of that, because PCSB, it’s in New York. So it does have a bit of an impact being in New York. But they also have a lot of municipal securities that we are not planning on selling and so that will have a positive impact on our tax rate. But I think the 24% is my current estimate. We will have a better number to come end of Q1.

Laurie Hunsicker: Okay. Great. And just one last question, just going back to margin. Do you have a spot margin for December?

Paul Perrault: Of what?

Carl Carlson: What our margin was for December?

Laurie Hunsicker: Yeah.

Carl Carlson: I am sure, but I don’t, I am like…

Laurie Hunsicker: Okay. No. That’s okay. Thanks. Thanks for all the color. I appreciate it Carl.

Carl Carlson: Yeah.

Laurie Hunsicker: Thanks for all the color.

Carl Carlson: Thank you, Laurie.

Paul Perrault: Okay.

Operator: Thank you, Ms. Hunsicker. The next question comes from the line of Chris O’Connell with KBW. You may proceed.

Chris O’Connell: Hey. Good morning.

Paul Perrault: Good morning, Chris.

Chris O’Connell: So I wanted to start off with the interest rate risk slide and in your earlier commentary, it sounds like ex-PCSB, there’s still a bit of core margin compression coming? And just trying to reconcile that, it looks like the forward implied rates and the NII going up on a flat balance sheet there for that slide. So maybe if you could just comment on that or kind of connect it to?

Carl Carlson: Sure. Just to give you a little bit of background on this. So we start from a sensitivity standpoint, when we are running our asset liability models from and this is more of a governance and risk management standpoint and looking at the position of our organization on an ongoing basis. And one of the things we say is what’s the forward curve suggesting rates are going to do and what if our balance sheet doesn’t change at all, keeping it flat balance sheet. And so that gives us a starting point. And it’s something that we can continue to look through time, are we getting more sensitive or less sensitive? How are we positioning the balance sheet in this? Then we can run a lot of different scenarios around that. What if deposits run off $200 million?

What if loans grow $200 million? How is that being funded? What is the impact on that? And so we can run a lot of different scenarios that may become our base case. And sometimes I talk to you guys and tell you what we think our base case is and what we think our margin is going to be and what our projection for the margin is going to be. Naturally, there’s a lot of moving parts and things change, and it never happens the way you expect it to happen. But I want to try and at least provide you some guidance with that slide to say, this is kind of where we are today and our current projections with that. And when I say the forward curve, it’s as of December 31st. That’s the forward curve that we use. And it does include all of our rates. So it includes what are we booking CDs at?

What terms are we expecting CDs to book at? Things of that nature. What’s the rollover in our loan portfolio? What’s the new loan originations going in at our loan portfolio? But then we can do models away from that. But that gives you our baseline because I know you guys have your own models and how you guys do and I don’t know if it’s helpful or not for you to understand that, but we provide that information. And I think on that slide, we give you a good sense of what the loan originations were in the quarter and say, hey, this is what’s the percentage of them that are re-priced immediately or within three months, what’s more of a fixed rate and what’s more of a floating rate that re-prices maybe in three years or five years, and then, of course, what the whole portfolio looks like and the duration of that portfolio just so you have a sense of where our risks might be.

Chris O’Connell: Got it. So just a result of the growth and the potential for a little bit of a mix shift on the funding side going forward, it sounds like. Okay. Great. And for the potential restructuring, I know things still being considered and that you don’t have exact numbers, but do you have like a rough estimate of a dollar level of their securities portfolio that you are thinking about selling off?

Carl Carlson: The total amount that we are going to sell off in that securities portfolio? I would

Chris O’Connell: Yeah. Yeah.

Carl Carlson: I would expect the securities portfolio in the $150 million to $200 million range at the end of the day at PCSB bank. We like to kind of keep the securities portfolio in the 8% to 12% of total assets from a liquidity management standpoint. And then — and so any balance of that becomes additional liquidity. So they had a relatively low loan-to-deposit ratio and when I say relative, look for Northeast Bank, 8% to 7% is a relatively low number. And of course, ours is significantly higher than that when — because of the Eastern Funding business that we have, the equipment finance business we have. So the ability for us to fund that a little bit less instead of relying on wholesale borrowings is beneficial at the end of the day.

Chris O’Connell: Yeah. Got it. And yeah, on the fee side, the past couple of quarters, you guys have had some nice levels on the loan participations. It sounds like the overall growth outlook still remains pretty solid from here. Do you think that — are you still seeing kind of a market for that, do you think that that’s going to continue at a relatively solid pace compared to the first half of 2022?

Paul Perrault: Well, yeah, it might look more like the first half of 2022. As we went toward year-end, the amount of activity that we had seemed to have accelerated a bit and there were some relatively large transactions in there, which have rolled over a little bit now and even though I pointed out earlier, the pipelines are still strong. It would not surprise me as we roll into the year, we get back into a normal or more normal for us sort of pace where growth might be 6%, 7% pace, if you will, by the end of the year. But we will try to beat that.

Chris O’Connell: Yeah. Okay. And then I know you guys touched on the office portfolio, in general things kind of continue to migrate positively on the credit front this quarter. But is — I mean, is there any other pockets or areas of concern that you are seeing as you look through the portfolio and I know you just came out of the PCSB board meetings. Anything that they are seeing in their markets of concern?

Paul Perrault: No. All sectors are performing very well within the portfolio, and I would point out that, the office portfolio at the legacy Brookline Bancorp is not that big, it’s pretty big, but it’s not enormous. It’s $650 million or so and it’s well spread out. It’s not like it’s a bunch of stuff in the financial district in Boston. A lot of that stuff is in the leafy suburbs of Metro Boston and across Rhode Island. So it is very, very well diversified and has performed exceptionally well.

Chris O’Connell: All right. Got it. I appreciate the time. Thanks for taking my questions.

Paul Perrault: Thanks, Chris.

Operator: Thank you, Mr. O’Connell. That concludes the question-and-answer session. I will now pass the line back to Paul Perrault for any additional remarks.

Paul Perrault: Thank you, Alexis, and thank you all for joining us today. And we look forward to talking with you again next quarter. Good day.

Operator: That concludes the conference call. Thank you for your participation. You may now disconnect your lines.