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Presentation

Operator: Good afternoon, and welcome to Brookline Bancorp, Inc.’s First Quarter 2024 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 Vaughn. Please go ahead.

Laura Vaughn: Thank you, Emily, 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. I’m pleased to introduce Brookline Bancorp’s Chairman and CEO, Paul Perrault.

Paul A. Perrault : Thanks, Laura. Good afternoon, and thank you for joining us on today’s earnings call. At the start of the year, prevailing market sentiment suggested inflation was well contained and the Federal Reserve would implement substantial rate cuts, potentially up to 6 to 7 reductions throughout 2024. However, the economic landscape remains dynamic. Unemployment rates persist at historically low levels, consumer spending remains steady and overall economic vitality endures as inflation remains a persistent concern. Within a matter of months, the market now anticipates only one rate cut for the year with some even speculating no cuts at all. The five-year and 10-year treasury rates have surged over 80 basis points since the end of last year.

Unfortunately, the prolonged period of higher interest rates continues to hinder the anticipated improvement in net interest margins. We remain vigilant in our efforts to navigate this challenging environment. While the New England and New York economies continue to perform well, the impact of rising interest rates on loan demand is evident. Our deposit composition and funding costs further contribute to the strain on the net interest margins and overall revenues. Our goal is to provide boutique commercial banking services to our valued customers efficiently, careful investments in our team of bankers, technology and locations play a pivotal role in achieving this objective. This quarter, we celebrated the grand opening of our relocated PCSB branch in Mount Vernon, New York.

Additionally, our newest Bank Rhode Island branches in Cranston and Newport, Rhode Island are off to a very promising start. I will now turn you over to Carl, who will review the company’s first quarter results.

Carl M. Carlson : Thank you, Paul. Yesterday, we reported net income for the quarter of $14.7 million, equivalent to $0.16 per share. During the quarter, total assets grew approximately $161 million driven by the growth in cash and equivalents of $169 million, with modest loan growth of $13 million distributed across C&I, equipment finance and consumer as commercial real estate experienced a decline of $10 million. In the first quarter, we had loan originations and draws of $435 million at a weighted average coupon of 779 basis points. The weighted average coupon on the loan portfolio rose 4 basis points to 596 basis points with the quarterly yield on the portfolio increasing 2 basis points for the quarter. On the funding side, customer deposits grew $81 million.

Broker deposits increased $90 million and borrowings declined $15 million. Deposit growth centered around higher rate savings and time deposits, offset by decreases in demand deposits and money market products. Funding costs increased 19 basis points in the quarter. Consequently, our net interest margin compressed 9 basis points to 3.06%, resulting in net interest income of $81.6 million a decline of $2 million from Q4. Non-interest income was $6.3 million, reflecting a decrease of $1.7 million compared to the prior quarter. Factors contributing to this change include lower loan level derivative activity, gains on participated loans and a swing in the mark-to-market adjustment on derivatives, which is reflected in other non-interest income.

Notably, due to the sharp increase in interest rates. The mark-to-market adjustment shifted from a positive adjustment of 447,000 in Q4 to a negative adjustment of 358,000 in Q1. Expenses were $61 million for the quarter, up $1.8 million from Q4, due to the seasonality of compensation and benefits and weather related occupancy costs. Provision for credit losses was $7.4 million for the quarter, an increase of $3.6 million from the fourth quarter, increases driven by net charge-offs and reserve build. Net charge-offs were $8.8 million driven by $4.7 million in C&I charge-offs. Previously specifically reserved for, $3.5 million associated with equipment finance and 600,000 associates with exiting two office credits. Non-accrual loans experienced a modest decline in the quarter and our reserve coverage ratio increased to 124 basis points.

Over the past few weeks, the outlook for 2024 Federal Reserve rate cuts has significantly shifted. Longer-term rates have risen notably, client behavior and industry responses continue to adapt to this evolving environment. We face renewed pressure on our deposit mix and funding costs, for the economy remains robust, loan demand has softened. Consequently, we now anticipate our margin and net interest income for the full year to be lower than initially projected. We expect overall loan growth of 1% to 4%, primarily driven by C&I and equipment finance. Although, there appears to be market opportunity in non owner-occupied commercial real estate, our focus remains on serving relationship customers. Hence we anticipate only slight growth in this segment.

Our cash and securities portfolio remained stable, representing 9% to 12% of total assets. On the deposit side, we anticipate growth of 4% to 5%. Given prevailing interest rates, the migration of demand deposit accounts and other lower-cost deposits may persist. Our Q2 margin is currently projected to fall within the range of 300 to 305 basis points and then improved throughout the year. However, this is dependent upon deposit flows. Non-interest income is projected to be in the range of $6 million to $7 million per quarter, although components may vary significantly. We continue to manage operating expenses at $240 million for the full year. However, we are actively reviewing investment plans and evaluating potential cost savings opportunities.

Currently our effective tax rate is expected to be around 24.7% for the balance of the year. Yesterday, the Board approved maintaining our quarterly dividend at $0.135 per share to be paid on May 24th to stockholders of record on May 10th. On an annualized basis, our dividend payout approximates the yield of approximately 6.5%. This concludes my formal comments. And with that I’ll turn back to Paul.

Paul A. Perrault: Thanks, Karl. And we will now open it up for questions.

Operator: [Operator Instructions] Your first question today comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Mark Fitzgibbon: Hi. Good afternoon, gentlemen.

Paul A. Perrault: Hi, Mark.

Carl M. Carlson: Hi, Mark.

Mark Fitzgibbon: Carl, just to follow up on your tax guidance do you plan to replace those tax credits that expire this quarter or it sounds like maybe not?

Carl M. Carlson: We’re always looking at those opportunities but I don’t have any visibility into – so I don’t have a pipeline let’s say…

Paul A. Perrault: If we came across we would do that.

Mark Fitzgibbon: Okay. And then it looked like cash balances were up quite a bit this quarter, which I assume is a function of some deposit flows, but that I would assume is probably weighing on the margin a little bit. How should we think about cash balances moving forward?

Carl M. Carlson: I think it will be fairly stable in that range of 10%.

Mark Fitzgibbon: Okay. And then…

Carl M. Carlson: 10% with securities. Cash and securities around 10% of the balance sheet. That’s kind of where we target.

Mark Fitzgibbon: Okay. And then in your press release you kind of mentioned the fact that yes, there’s been an uptick in expected losses in the equipment finance business. I guess I’m curious, which segment of the equipment finance business is kind of driving that?

Paul Perrault: Mark, the biggest single category would be related to transport things. They finance trucks for contractors for the big package companies like FedEx, UPS and stuff like that. And what’s been happening is that a lot of those guys were carrying stuff for Amazon, and Amazon has developed their own delivery systems so they lose some of that business. And these are small entrepreneurs that don’t have a lot of places to turn to — that’s been the single biggest element. And the trucks are not on the repair — and it’s not a huge portfolio. So I expect there will be some more dribbling in the next couple of quarters, but it’s not a waterfall or anything like that.

Mark Fitzgibbon: Okay. And then lastly, I know you guys didn’t buy back any stock this quarter. And given the environment, maybe you don’t want to. But given the pullback in your stock price today, do you feel like buybacks make some sense here trading comfortably below tangible book?

Carl M. Carlson: We’ll continue to evaluate that, but we have no expectation to do anything near term.

Mark Fitzgibbon: Thank you.

Paul A. Perrault: Thanks, Mark.

Operator: The next question comes from the line of Steve Moss with Raymond James. Please go ahead.

Steve Moss: Hi. Good afternoon.

Paul A. Perrault: Hi, Steve.

Steve Moss: Maybe Carl, just starting up — hopefully, maybe just starting up on the office portfolio here. The two credits that were charged off. Were those resolved, sold, liquidated during the quarter? Was that just a charge-off ahead of an expected sale?

Carl M. Carlson: No, those were two note sales, which 1 was on our balance sheet at the end of the quarter as a loan held for sale and was subsequently closed.

Paul A. Perrault: They were sold a little bit under par, which is what created the small loss, but we got rid of a couple of properties that were a bit troubled.

Steve Moss: Got you. And you guys mentioned in the deck, only two loans maturing of about $23 million represent criticized and classified within office, those are separate of those loan sales, I take it. .

Carl M. Carlson: They were not part of those numbers.

Steve Moss: Okay. And just in terms of like — I realize that’s small, but just curious like what type of properties are they kind of geographically where they located.

Carl M. Carlson: They’re Boston based and one of them that I’m aware of is retail and commercial on the upper floors.

Steve Moss: Okay. Got it. And then turning to the margin here. With the 3% to 3.05% guide, just maybe bottoming out. Just curious like what do you think gives you comfort here that the margin could bottom in the second quarter? And just what if we stay in the higher for longer, how are you guys thinking about the margin beyond the second quarter.

Carl M. Carlson: No, it’s a great question and comfort is a tough word to come by. I think we model a lot of deposit migration. I think in the first quarter, we saw more deposit migration than we anticipated. I do anticipate that it’s going to go down or everything suggests that the bottom migration is not going to continue. Our models right now are coming in around the 3.03% range for a margin not that we’re going to try to be precise. And that was before the rate — just the recent rate increases. We’re using more like March 31 numbers. And so we get a little bit of bump with the repricing of loans throughout the quarter from where the 5 year is now, it’s over 80 basis points higher, almost 90 basis points higher than where it was at the end of the year. I’m not sure exactly much how much high it is from March 31, but it’s helpful. Sub-50 basis points just in the last couple of weeks. So that’s helpful.

Steve Moss: Okay. That’s good color for me. Appreciate. I’ll step back in the queue here. Thanks.

Carl M. Carlson: Thanks Steve.

Operator: The next question comes from the line of Laurie Hunsicker with Seaport Research. Laurie, please go ahead.

Laurie Hunsicker: Yes. Hi. Thanks. Good afternoon. Thanks for all the detail on that real estate that you guys added. That’s super helpful. But actually I wanted to go back to the equipment finance section and I’m looking at Page 14 of your deck and can you just help us think about the $3.5 million in starts off to the specialty vehicle category? Looks like you have tow trucks that wasn’t that — it wasn’t heavy tail or you think it came from sort of that FedEx category of $40 million or the other vehicle category? Or how should we think about that? I guess that’s sort of my first question around equipment finance. What’s your segment that you’re coming from?

Carl M. Carlson: No sure. So, to break that down a little bit so we have about $3.5 million of net charge-offs in the Eastern funding segment overall. And as we said, as Paul was mentioning, $1.6 million of that was just basically in the FedEx transport. In this category, when you look at Page 14, it’s probably mostly in the FedEx and maybe in the other vehicle categories. We have about $800,000 in charge-offs on the tow, $600,000 laundry and about $600,000 in fitness and then we’ve got some net yields and recoveries that are sprinkled throughout.

Paul A. Perrault: For the entire equipment finance portfolio far and away the vast majority of it as you can probably see there is laundromats, which–

Laurie Hunsicker: Got it. Yes.

Paul A. Perrault: So, more — we can do more laundromats if it makes sense

Laurie Hunsicker: It makes a lot of sense. Okay. And so just thinking about equipment finance I mean directionally in the categories that you mentioned very, very small, directionally there’s nothing there that you’re thinking hey we should pull back. We’ve seen a change. You’re still the only are working on. We have we’re feeling good about it. But the guys the guys who run Eastern funding or sort of reevaluating their strategic direction and all of this as we speak?

Carl M. Carlson: Yes, I think the difficulty of getting — when we talk about recoveries, I think they’re very comfortable how they underwrite and things of that nature. But when things don’t go bad you have to recover these vehicles. And I think it’s becoming a little bit more difficult taking a lot more time. And so they’re rethinking about some of that–.

Paul M. Perrault: Some of those loans are pretty small and they become very expensive and the trucks are bad repair. And it’s not a wonderful picture and that’s not something that they’ve done forever either.

Laurie Hunsicker: Yes. Okay.

Carl M. Carlson: The nice thing about the laundry equipment, it’s not going anywhere, right?

Laurie Hunsicker: Yes. And so with that particular revenue right good. Or I guess when you think about that? Yes that’s specialty vehicle bucket that I mean would you potentially look to sell those loans or get out of that? Or how do you think about that does not grow them further?

Paul M. Perrault: Well, the road or meetings concurrent to now that are considering all of those things.

Laurie Hunsicker: Okay. Okay. And then one other question here on the equipment finance you’ve got to you’ve got a category. Yes Kris. So equipment finance to create. What is that? That’s a 166 million barrels. If you’re done, I will follow-up with you.

Paul M. Perrault: That’s when the laundromat owner acquires the building of the laundromat is in — in a lot of cases, it might be a little strip mall, for example, that for days of the guy wants to own, but it’s always attached to a laundry. There’s always a laundromat involved.

Laurie Hunsicker: Okay, got you. Got you. Okay. And then and then one more question and Mark sort of already asked this, but I am just so curious. It would seem you guys have such a plethora of capital that buybacks here you know in the high 70s percentage of book but just be absolutely top of mind. I mean at what point do you say, Oh my gosh we have to pivot and get excited about this?

Carl M. Carlson: Yes. Right, in this environment — I would say still in this environment, we still think capital is very precious and it’s certainly as attractive to buy the stock at this level. There’s no question. But I also think it’s very important to make — keep the capital that you have and continue to use that capital to support the balance sheet and opportunities that present themselves. So that’s kind of where we are.

Laurie Hunsicker: Okay. Great. I’ll leave it there. Thanks.

Carl M. Carlson: Sure.

Paul A. Perrault: Thanks, Laurie.

Operator: Our next question comes from Chris O’Connell with KBW. Please go ahead, Chris.

Chris O’Connell: Hey, good afternoon.

Paul A. Perrault: Hi, Chris.

Chris O’Connell: Staying on the credit front, can you just remind us about the non-equipment finance portion the 4.7 million that was had had some partial reserves for it previously?

Carl M. Carlson: Sure, Chris. So those were fully reserved that specific reserves on those one had to and we talked about this in the past. One was the — it was construction firm that we took the charge-off on as well as a medical group.

Paul A. Perrault: And these are loans that have been dogging us. We pretty well wrapped them up now. But for the past couple of quarters you sort of cite those two loans that was being worked out.

Chris O’Connell: Got it. In on the CRE front I mean outside of the office as you’re looking at the rest of the maturities and throughout 2024. I mean how do you feel about kind of the core CRE or the ex-office and in the credit quality there? And as these maturities come through over the course of the year?

Carl M. Carlson: Yes. So far we feel very good about it not only the maturities but the repricings. As you can imagine we have a lot of commercial real estate particularly multifamily space and other things that reprice they may not mature, but they’ll reprice after five years. They may have a 10-year final balloon. And so they may be repricing up 200 basis — 280 basis points. We prepare to five year to five years ago. And so right now those are those debt service coverage things of that nature are just fine. Our rents have gone up significantly more than that. So we’re in good shape there. I don’t think there’s any issues on that but I think the office even the even office is doing well. I think it’s just the inside of certain properties in certain places that we have to we’ll work with our customers.

Chris O’Connell: Got it. And has the — has the recent increase in rates has that tempered demand or even just the timing of potential pipeline closings and in the CRE book.

Carl M. Carlson: Probably it certainly has tempered demand I guess I don’t know if it’s stopped closings at all. If it did there probably free reading it.

Paul A. Perrault: Yes there’s just not a lot of trades going on in our markets and real estate business does not mean a lot of buyers not a lot of sellers if.

Chris O’Connell: Got it.

Paul A. Perrault: And it’s in rapidly probably due to rates but it’s also probably due to the views on occupancy as an investor that picked rightly.

Chris O’Connell: Yes. And the demand that you’re seeing for loan growth you mentioned C&I and equipment finance kind of leading that in the C&I segment? And what’s the what’s the type of loans that you’re seeing the most attractive demand for?

Paul A. Perrault: Well industrial has been strong. Import/export stuff has been strong, law firms — little of everything that there’s not a particular expertise. Some particularly in our New York operation. Things like private schools and non-profits have been doing quite well and Brookline got involved in some of that as well. So they tend to be very well established, low leverage organizations that have great cash flow and are doing something might be building a generational thing.

Chris O’Connell: Got it. And I know last quarter was pretty light on the M&A discussions. I mean has there been any pickup at all on kind of your general market or discussions since then.

Paul A. Perrault: Yeah. May be maybe a little bit, but it’s not too strong, because it’s so difficult. I mean everybody pushes the stuff around and you get these capital holds. The holes are just way too big to fill from a capital perspective at the moment. Part of the problem is that the investment bankers have nothing to do. So they come up with all these great ideas.

Chris O’Connell: Got it. And just in general I guess going forward, I mean, what are you guys thinking about in terms of a normalized charge-off rate in this type of environment?

Paul A. Perrault: Well, certainly less than we saw in Q1 is where I plan to be headed. It’s a little bit difficult early in the cycle here that I tried to pick a number. But if you look at our charge-off behaviour, in our past, that was a lot more comfortable so that’s where we really tried to get to.

Chris O’Connell: Great. That’s all I had. Thanks for taking my questions.

Paul A. Perrault: Thanks Chris.

Operator: This concludes our question and answer session. I’d like to turn the conference back over to Mr. Perrault, for any closing remarks.

Paul A. Perrault: Thank you, Emily. And thank you all for joining us this afternoon. And we will look forward to talking with you again in the next quarter. Have a good day.