Brookline Bancorp, Inc.

Good afternoon, and welcome to Brookline Bancorp, Inc.' 's third 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 proceed.

Thank you, Ciara, and good afternoon, everyone. Yesterday, we issued our earnings release and presentation. which is available on the investor relations page of our website, booklandbankwork.com, and has been filed with the SEC. This afternoon's call will be hosted by Paul A. Foltz and Carl M. Olson. This call may contain forward-looking statements with respect to the financial condition, results of operations, and business of Bookland Bankwork. Please refer to page two of our earnings presentation for a forward-looking statement disclaimer. Also, please refer to our other filings with the Securities and Exchange Commission, which contain the 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 Bankrupt's results and performance trends and should not be relied on as financial measures of actual results or future predictions. For comparison and reconciliation to the app earnings, please see our earnings release. I'm pleased to introduce Brooklyn Bay World's Chairman and CEO, Paul Gould.

Thank you, Laura, and good afternoon, everyone. Thank you for joining us for today's earnings call. Performance improved in the quarter with net income of $20.1 million and earnings per share of 23 cents. Paul Cecala, Loans grew by a modest $34 million, customer deposits increased $103 million, and our margin increased seven basis points. Paul Cecala, As market rates gradually return to normal, we expect to see our net interest margin continue to improve right through 2025. I will now turn you over to Carl, who will review the company's third quarter results.

Thank you, Paul. During the quarter, total assets grew $42 million, driven by loan growth of $34 million in CNI and consumer, while the equipment, finance, and commercial real estate portfolios declined. In the third quarter, we originated $459 million in loans at a weighted average coupon of 735 basis points. The weighted average coupon on the core loan portfolio declined two basis points during the quarter to 603 basis points at September 30th. On a linked quarter basis, the yield on the loan portfolio increased 15 basis points to 617 basis points. On the deposit side, customer deposits grew $103 million, while brokered deposits declined $107 million. Deposit growth continued to be focused in the time deposits. However, we also saw demand deposits grow $44 million in the quarter. Total funding costs were 367 basis points, an increase of two basis points, as the overall net interest margin improved seven basis points to 307 basis points for the quarter. Total average interest earning assets grew modestly by 36 million on a linked quarter basis, resulting in net interest income of 83 million, an increase of $3 million from Q2. Non-interest income was 6.3 million, which was flat with the prior quarter, as lower deposit fees were offset by higher participation fees and other non-interest income. Operating expenses were $57.9 million for the quarter versus $59.2 million in Q2. In the second quarter, there was an $823,000 restructuring charge as we exited the specialty vehicle business. Excluding this charge, operating expenses declined $500,000 on a linked quarter basis due to lower marketing and other operating expenses, partially offset by higher compensation and professional fees. The provision for credit losses was 4.7 million for the quarter, a decrease of 900,000 from the second quarter. Net charge drops were 3.8 million or 16 basis points on loans annualized. Non-performing loans increased 10.5 million in the quarter due to one eastern funding relationship financing multiple grocery stores. MPAs to total assets increased to 62 basis points total loans. Our reserve coverage ratio increased to 131 basis points. Looking forward, as I mentioned last quarter, client behavior and industry responses continued to adapt to a fairly volatile interest rate environment. In mid-September, the Federal Reserve cut short-term rates 50 basis points. Longer-term rates initially declined significantly, with the 10-year Treasury closing below 375 and the five-year rate around 350. Since early October, rates have more than retraced the decline, and now the 10-year is around 4.2%, and the 5-year is a little over 4. As the yield curve continues to normalize, we will see net interest margin improvements. The modest improvements in the environment suggest our net interest margin will increase 5 to 10 basis points in Q4 and continue to improve throughout 2025. Our net interest margin for the month of September was 313 basis points. We anticipate increases in loan portfolio to be measured for the remainder of 2024 and into 2025 as growth in commercial and consumer loans will be tempered by the runoff of specialty vehicle and continued lower commercial real estate activity. Our cash and securities portfolio will remain 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 lower cost deposits may persist but is anticipated to slow. Our Q4 margin is projected to fall within a range of 312 to 320 basis points and continue to improve. However, this is dependent upon deposit flows and the timing and magnitude of future actions by the Federal Reserve. Nonish income is projected to be in the range of 6 to 7 million per quarter, although components may vary significantly, with growth of 5 to 10% in 2025. Currently, we are projecting overall operating costs to grow in the 3% to 3.5% range for 2025, and our effective tax rate is expected to be in the range of 24.25%. Yesterday, the Board approved maintaining our quarterly dividend at 13.5 cents per share to be paid on November 29th to stockholders of record on November 15th. On an annualized basis, our dividend payout approximates a yield of 5.1%. This concludes my formal comments, and I'll turn it back over

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

If you would like to ask a question, please press star followed by one on your telephone keypad. If you'd like to remove that question, press star followed by two. And if you are using a speakerphone, please pick up your handset before asking your question. Our first question today comes from Mark Fitzgibbon with Piper Sandler. Your line is now open.

Hey, guys. Good afternoon. Hi, Mark. Um, first question, Carl, could you just clarify your comments? I missed them on that one equipment finance loan. Can you give us, share any color on that?

I imagine you're talking about the one loan that went not accrual this quarter, right? So, uh, that was one large loan, uh, at Eastern funding. Uh, and if it finances two grocery stores.

Okay. And any thoughts on timing for resolution?

James Meeker, I don't have I don't have any idea of exactly when that's going to get resolved, and we do have a sizable specific reserve set up for that long. James Meeker, About $5 million we set up this quarter.

Okay, great and then can you share with us what the margin was spot margin September. James Meeker, spot margin was 313. Okay, great. And also was curious about the loan pipelines and the complexion, what those look like today.

We're actually seeing a lot more institutional type things. We've hired some personnel who are from this area specializing in that. And so we're seeing that in all the markets in greater Boston, Rhode Island, and in Westchester County, things like private schools, some colleges, it's all very very good business obviously we're being very very selective in real estate especially vehicles and one-off modes who are not originating there and i'd say that the equipment finance is beginning to pick up a little bit more in their in their traditional supermarket in their laundromats some cni But it is not robust by any means at all, but it is moving forward pretty well, pretty well. So I'll take a stab. I don't think Carl gave a number, but I would be very happy with 4% or 5% gain in 2025 in the loan portfolio.

Okay, great. And then I know you guys like to keep private sort of what's going on at Clarendon Private, but I wondered –

a couple years in now if you could share any metrics on how that's going whether we're you know at profitability and what aum or au are currently sure yeah we're not at profitability yet uh we're seeing the mix of of those assets under management uh change uh so in the early stages we were basically doing a lot of treasury business which we did not make any money on at all but it was good, good introductory business to, to, uh, the clients and being able to help them out. Uh, we're seeing that transition over, uh, to more of a balanced portfolios. Uh, thank goodness, uh, on both counts. Uh, I think they've done quite well in this market and, uh, you know, so we're still around that $350 million in assets under management. Uh, so it's, it's growing, uh, We really like the growth that we've had in it, the customers that we're attracting into that business and able to take care of. Just would like to see it grow a little faster than that.

Impatient.

I'm impatient. Any idea what percentage of the customers are coming from the bank versus outside?

Most.

I'd say most. Probably 70% or so. Okay.

Yeah. In some cases, it's a customer who's selling their business. They might have favored some other Wall Street firm for their money, but they come here now.

Thank you.

Our next question today comes from Laurie Hunsicker with Seaport. Your line is now open.

Yeah, hi. Good afternoon, Paul and Carl.

Hi, Lori.

Just wondered if we could circle back on credit here. So of your $37.2 million of equipment, non-performing loans, how much of that was specialty vehicles?

About $4.6 million is tow. Tow and related specialty vehicles, yep.

Okay, $4.6 million. Okay, great. And then I guess same question on the charge-offs. You had $3.8 million in charge-offs. It was equipment finance. Is that all the spec vehicles that discontinued book, or was that split somehow?

About 2.1 was specialty vehicle of the $3.8 million in charge-offs.

Okay. Great. Okay. And then what is your reserve on your equipment finance book? Or what is your reserve on your spec vehicles?

He's hooking it up.

So I'll give you a little break here. I don't have a total. I have it based on, you know, our Eastern Funding Core. which is about, it's about 128 basis points on that. Specialty vehicle, we have a 224 basis points. And the MAC release portfolio, kind of look at that separately. We include it in core, but we break it out. There's 132 basis points. And that excludes any specific reserves that we may have on a specific, a particular credit. We take that out. So those are the general reserves on those portfolios. Okay, great. I don't have the dollars in front of me.

Okay. Okay. And then with the discontinued spec vehicle, I know you had done a reduction in force, and I guess we're going to see sort of the full results of that come through in the fourth quarter. Is that right, from the expense savings side, or how should we be thinking about that?

You're already seeing it. in basically the second half of Q3. So you'll see it in full force in Q4. It's about $800,000 a quarter in benefit.

In benefit, right. Okay. And so then with respect, Carl, to your guide, your 3% to 3.5% expense growth guide, what base are you using for that? How should we think about that, especially relative to the $800,000 a quarter savings?

I'd use our current quarter, take off a couple hundred thousand for this quarter. That's about it for the fourth quarter, and that would be the run rate. Or $240 million, I would say, on an annualized basis, and 3% to 3.5% off that. Perfect.

Okay. Okay. That's great. Okay, and then office. Can you help us think about maybe just, and you guys have some great slides here, but office non-accruals, how much was that? And then the criticized and classified that you present, if we're helpful, that you present that off maturity, but what is that relative to your total book? So office non-performers.

That's a tricky question now. Okay, so So starting with the off the non accrual loans related to office that hasn't changed that's that's still basically one credit it's about 10.8 million dollars that's in that book I think that's also the number that's crucified in classified loans is the same now. I don't think that has changed. Around about. I think it's Christmas.

Okay, and then just looking at. at your um at your deck here it looks like the way that you're presenting the the office criticized and classified this is just the maturities 137 million right so how do we think about it relative to your 700 million dollar book or is it just that 10 and a half million that's it

I lost where you were going with that, Lori.

Oh, no. Yeah, sorry. Well, so the office non-performers, that's 10.5 million, that's just on the book that's appearing in the next two years. I mean, I love this slide. Slide 18 is great, right, because the maturity wall is really what we care about. That's what's triggering the non-performers. I'm just wondering more broadly what your overall non-performers are on your $700 million, the total office, but not just the part that's maturing in two years. Sorry, I think I'm not asking this right. I'm just looking for what is. The only non-accrual loan.

Yeah, the total non-accrual office is 10.8.

That's all the office non-accrual, sorry.

Yep. Perfect. Perfect. Okay. I know the slides only show two years to focus on the two years, but overall it's still the same.

No, I love this quarterly breakdown. This is super helpful. I wish more people put this in. So that's great. The office reserves, how much is that on your $700 million book?

It's 2% excluding any specific reserves.

Okay, and then what specific reserves do you have, presumably on that $10.8 million?

So we have an additional $2 million in specific reserves. Okay.

That's great. Okay, and then I guess last question, Paul, more for you. Can you talk a little bit about... buybacks below book value, even just to offset your option dilution? How you're thinking about that?

We get this question frequently, which you would expect when you're trading at or below tangible book value. I think we've been very careful to signal that we would be doing anything in the near term, considering the inverted yield curve, the margin and the questionable credit and office environment. I think things have materially changed. In that regard, I think we're starting to see the turn. We've seen the curve start to steepen, or at least flatten to steepen. Credit is improving. We're seeing the NIM turn around. So I think that's going to be more of a conversation going forward with the board about the opportunity to do stock buybacks. We've historically put something in place early in the year But that's something we'll continue to talk about at the board level.

Okay.

Okay, great.

And sorry, just one more question, actually. Paul, can you talk a little bit about M&A? You guys have been active in M&A, and obviously the interest rate environment has not been very favorable, but that's coming back to just how you're thinking about M&A more broadly. And I don't know, any tidbits you can share on that matter?

Well, it's been fairly quiet for exactly the reasons that you cited. And I do think in much the same way that Carl just described the environment through the income statement and balance sheet, I think the same thing is beginning to come around in M&A. And as these rates come down, if they come down, it's easier to deal with the marks. But, you know, in the meantime, it's very difficult. It's very difficult and it's a relatively thin market. There's a deal here and there, but I think it will improve, but it's going to take a little time.

Okay, great. Thanks for taking my questions.

Okay, Laurie.

Our next question comes from Christopher O'Connell with KBW. Your line is now open.

Hey, good afternoon. Chris, I just wanted to kind of keep going on the specialty vehicles in runoff mode. I think you said $2 million and change of the net charge-offs this quarter were related to that. As this portfolio runs off over the next few quarters, do you think that that's within a shooting distance of kind of what you'd expect for future charge-offs there?

Possibly. Possibly. I think there was some catch-up in the past couple of quarters that you've seen in those charge-offs. So I'm hopeful that it'll get better. But it is a portfolio that's still experiencing some level of trouble. You might recall these are small tow truck operators in a lot of cases and delivery vehicle professionals. root owners if you will who have been disenfranchised when stuff moved to amazon when the amazon started doing their own deliveries a lot of these guys were out of business so that's that's kind of behind us and now is it's in a more normal slightly riskier uh portfolio level mode so i think uh i'm i'm hopeful that it will improve and the balances are coming down fast and hard

Okay, great. It's helpful. And then on the on the provision, the you know, the credit for unfunded commitments was, you know, pretty substantial the past couple quarters, like around four and a half million seems kind of above average, relative to, you know, the past is, is there anything specific that's driving that?

Well, it did come down materially this quarter, and I think that's due to the revisiting some of the assumptions that went into particularly home equity lines of credit and the losses that you might experience on those unused lines. So they updated the, you know, the models with some actual data, more current data, which brought that down, as well as the slight change that we've done in the weightings of the economic scenarios. So we did move a little bit away from the recession scenario with the Fed cutting rates and the economic environment improving, things of that nature. It really made sense to move away from the 60% weighting that we had for recession, the recession scenario, towards a more 50-45-5, I believe. Our long-term, what we would consider a neutral environment would be a 30-40-30 mix. And so I think over time, we'll continue to see that if it warrants.

Okay, great. So long-term, you know, the overall kind of reserve ratio and a combination of, you know, the specialty vehicle coming off and, you know, returning to a normal environment, you know, probably settles out a bit lower?

Yeah. We're pretty, I don't want to say aggressive, but we're very responsive to loans that go on the watch or anything that we're looking at that we see there might be some weakness and setting up specific reserves around that. So we have over about $25 million of specific reserves in that allowance for loan losses today. And so when you take that out, that's 131 basis points on total loans, but you take that out, you say, okay, the general reserve's around 110 basis points. I would not be surprised if that goes down over time just as the market continues to improve.

Okay, great. And then I noticed that just on the slide 15 with the CRE LTVs, one is just is the medical category there, is that office? uh and then just noticed that the like the 70 you know plus portion of that you know has kind of gone up over the past year or so you know any color around you know what's driving that i don't i don't have any color on that Okay, great. And then I appreciate, you know, all the maturity schedules, you know, that you guys give on the CRE for the next couple of years. You know, for the CRE that is, you know, set to maturity price, what are generally kind of the yields that those are, you know, coming off at?

One second.

About 6%, a little north of 6%.

Okay, great. And I know you guys gave the blended originations, you know, this quarter. You know, I guess, you know, just breaking it down a little further, do you have, you know, some of the origination yields just for, you know, the CNI versus the, you know, equipment finance in the CRE?

Sure. So I mentioned earlier we originate about $459 million of loans. The coupon on that was about 735. Just trying to break that down, total commercial real estate loans, about $170 million of that at 722. Total commercial loans, which includes equipment financing, about $195 million at about 771. And then we've got some residential mortgages, home equities, and things of that nature, consumer loans at around 684. Awesome.

Perfect. Appreciate it. Thanks for taking my questions. Okay, Chris.

Our next question comes from Steve Moss with Raymond James. Your line is now open.

Good afternoon, guys. I just want to go on the NII and the margin here thought process. Just kind of curious maybe starting with what have you seen in terms of deposit rates coming in here? I hear you guys in terms of margin expansion. Just kind of curious where funding costs are shaking out because I see like in your ALCO disclosure, you know, lower rates hurt NII, but obviously, you know, you guys are signaling margin expansion here.

Yeah, that's a great question, and we debate what we should put in this presentation, quite frankly. But, you know, our asset liability models, we've been holding true to that 40% deposit betas overall for the pricing in the model. We also provide the betas throughout the cycle that we've actually experienced. And so you kind of look at this thing at when rates change, how do the rates change on our individual products? And those kind of drive the beta discussions. But then you have the actual activity of folks moving balances between deposit products, which actually increases your beta on a total funding basis and driving that. So what are we seeing going forward? So when you look at this model, it's more of a flat balance sheet type of environment saying we'll move if the pricing on overall is 40 basis points. Betas are much, much higher. So we did see the Fed cut rates 50 basis points in September 18th. And we basically immediately cut our rates on our CD products and the highest tiers of our savings and money market accounts Uh, by 50 basis points. So you'd say, okay, that's a hundred percent beta that, that you experienced on those particular products. Now, some of the lower tiers, we didn't move the rates, right. Cause they were already fairly, you know, a fairly attractive rates and we it's, it's good money at, at, at those rates. You don't really wanna move that. So, uh, we're, we're being very proactive in moving those rates. We also have a lot of CDs that mature, you know, so we've got CDs, you know, at 413 or so million dollars of CDs maturing in Q4. coming off at a 448 basic coupon. And so that's repricing into the fours, the low fours. Brokered CDs, 140 million of brokered CDs at 540. Those are coming down into the low fours or mid fours. And we got borrowing. We just got $470 million of borrowing Saturday. So a little over five that's coming down into the mid fours. So we're seeing a lot of the movement on the liability side and then the ability to reprice the savings now in money market accounts and continue to be active in that space. I don't think we're seeing any pushback in the market. I think a lot of the competition's doing the same. So it doesn't feel like we're losing out in that regard. And so we feel pretty optimistic that we're able to to meet the decline in market interest rates that we're seeing on our loan portfolio, because we have $2.2 billion of loans that reprices within three months, being able to reprice the liability side to meet that or exceed that.

Okay, great. And then just kind of, so I hear you on the higher deposit beta and, you know, obviously a positive step on the margin with for the upcoming quarter. As you think about 2025 and, you know, if we get 100 base points or a little bit more than that, just kind of curious, where do you think that margin kind of shakes out by the fourth quarter of 2025?

Right now, our models suggest it will be in the 340s. Okay. Great.

That's all my questions. I appreciate all the call here.

Okay, Steve, thank you.

Thank you all for your questions. This concludes our Q&A session. I'd like to turn the conference back over to Mr. Perot for any closing remarks.

Thank you, Ciara. And thank you all for joining us today. And we look forward to talking to you again next quarter.

The conference has concluded. Thank you for attending today's presentation. You may now disconnect.