Brookline Bancorp, Inc.

Good afternoon and welcome to Brookline Bancorp Inc's first quarter 2025 earnings conference call. All participants will be in listen-only mode. After today's presentation, there'll be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to Brookline Bancorp's attorney, Dario Hernandez. Please go ahead.

Thank you, Lydia, and good afternoon, everybody. Yesterday, we issued our earnings release and presentation, which is available on the Investors Relations page on our website, brooklynbankcorp.com, and has been filed with the SEC. This afternoon's call will be hosted by Paul A. Perl and Carl Carlson. This call may contain forward-looking statements with respect to the financial condition, results of operations, and business of Brookland Bancorp. Please refer to page two of our earnings presentation for our forward-looking statement disclaimer Also, please refer to our other filings of 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 Perl.

Thanks, Dario, and good afternoon, everyone. Thank you for joining us for today's earnings call. We had solid core operating results for the first quarter with operating earnings of $20 million or 22 cents per share. On a gap basis, which includes merger charges of $971,000, net income was $19.1 million, resulting in earnings per share of 21 cents. The contraction in our loan portfolio of $136.6 million is intentional as we reduce commercial real estate exposures while maintaining our focus on important customer relationships. We also experienced some planned runoff in our specialty vehicle portfolio following our exit from that business last year, while we continue to increase our participation in the general CNI markets. Customer deposits increased $113.8 million, and our margin increased 10 basis points during the quarter. In January, we expected market rates to gradually return to normal. However, as you all know, the opposite has occurred as uncertainty has become the theme of the day, and markets have become even more volatile. Even with that, we expect to see our net interest margin continue to improve throughout 2025. In December, we announced the planned merger with Berkshire Hills Bancorp, and I'm delighted to tell you it is moving along very nicely. I will now turn you over to Carl, who will review the company's first quarter. Carl?

Thank you, Paul. At the end of the quarter, total assets stood at $11.5 billion, reflecting a decrease of $385.5 million from the end of the year. This reduction was due to a deliberate decrease in both cash equivalents and components of our loan portfolio. Specifically, loans declined by $136.6 million, with commercial real estate and equipment finance dropping by $135 million and $32 million, respectively, while commercial loans saw growth. Owner-occupied commercial real estate fell by $10 million, and the investment commercial real estate portfolio decreased by $125 million, bringing the percentage of investment commercial real estate to total risk-based capital to 375% at quarter end. The decline in equipment finance was primarily driven by the continued runoff of the specialty vehicle portfolio, which decreased by $29 million during the quarter to $267 million. On the funding side, customer deposits increased by $113 million, while broker deposits and borrowings were reduced by $468 million. Stockholders' equity rose by $18 million due to the retained earnings and lower mark-to-market on the available for sale portfolio. with tangible book value per share rising 22 cents to $11.03 from December 31st. The net interest margin improved 10 basis points of 3.22%, driven by lower funding costs. However, this was partially offset by a decline of 50 million in average interest earning assets. Consequently, net interest income reached 85.8 million, an increase of 800,000 from the previous quarter. Lower derivative activity resulted in lower fee income for the quarter, bringing total revenues for the quarter to $91.5 million, consistent with Q4. The provision for credit losses was $6 million, $2 million higher than Q4. We had $7.6 million in net charge-offs, $5.2 million were previously reserved for. The reserve coverage slightly increased to 129 basis points of total loans. The weightings of the Moody's economic scenarios remained at 40% baseline, 35% moderate recession, and 25% stronger near-term growth, which are consistent with the weightings at year-end. We have evaluated the post-quarter-end increase in economic uncertainty and will continue to monitor how this uncertainty is captured by future scenarios and adjust as necessary. Non-interest expense Excluding merger charges was 59 million for Q1, a decrease of 1.3 million from Q4 due to lower compensation and marketing costs. Merger expenses for the quarter were 971,000 and are largely non-tax deductible, contributing to a higher effective tax rate. Excluding merger charges, operating EPS was 22 cents per share. Yesterday, the Board approved maintaining our quarterly dividend at 13.5 cents per share to be paid on May 23rd to stockholders of record on May 9th. Looking forward, the interest rate environment, potential impact of tariffs, and how our customers respond remains uncertain, and the need to continually adapt is greater than ever. While modest improvements to net interest margin are increasingly uncertain, we are currently estimating an increase of four to eight basis points in Q2. This is dependent upon market conditions, deposit flows, and the direction, timing, and magnitude of future actions by the Federal Reserve. We continue to anticipate growth in the loan portfolio to be in the low single digits for the balance of 2025, as growth in commercial and consumer loans will be tempered by the runoff of specialty vehicle and lower commercial real estate activity. On the deposit side, we anticipate growth of 4 to 5 percent, with growth generally favoring interest-bearing accounts. Non-interested income is projected to be in the range of $5.5 to $6.5 million per quarter, although components may vary significantly. We are managing expenses to $247 million or less for the full year, excluding merger-related costs. Our effective tax rate is expected to be in the range of 24.25%, excluding the impact of non-deductible merger charges. Regarding the merger of equals with Berkshire Hills Bancorp, We have added slide 11 into our earnings presentation, providing an update. Regulatory applications have been filed, and we will respond to comments or follow-up questions from the regulators if and as they arise. On April 8th, the S-4 and proxy went effective with the SEC, and mailing commenced to stockholders of both entities. The stockholder meetings for both Brookline and Berkshire are scheduled for May 21st. We anticipate closing the transaction in the second half of 2025, which will include the merger of all four bank charters. While we are encouraged by the recent regulatory approval process experienced by other institutions, we will make no predictions or observations with respect to our own applications. At the time of the transaction announcement, we had not decided on a core banking platform. I am pleased to say the diligence was completed and the core banking platform and related technologies have been determined, with conversion planning well underway. System conversions are scheduled for February. As you can appreciate, we are unable to comment further on the transaction beyond what has been publicly disclosed. This concludes my formal comments, and we'll turn it back to Paul.

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

Thank you. Please press star followed by the number one if you'd like to ask a question, and ensure your device is unmuted locally when it's your turn to speak. If you change your mind or your question has already been answered, you can withdraw from the queue by pressing star followed by the number two. Our first question today comes from Mark Fitzgibbon with Piper Sandler. Please go ahead. Your line is open.

Hey, guys. Good afternoon. Hi, Mark. I was just curious, and this may be a question for you, Carl. You know, trying to get a sense for the impact of a 25 base point fed rate cut, what do you think that means for the margin on a standalone basis, you know, pre-Berkshire Hills?

Well, I think it all depends on what happens with the rest of the yield curve naturally. So if you get that slightly steepening of the yield curve, just cut at the short end, that would certainly be beneficial to us. But again, it's highly dependable on what the market is like and what is going on with the market and why that cut is happening. But generally, you know, just from a modeling perspective, and a cut in short-term rates and longer-term or mid-term rates staying where they are, that's beneficial.

CHAIR POWELL. Okay. For your guidance, though, of 48 base points up, that doesn't assume any Fed rate cuts, correct?

That does not reflect Fed rate cuts in the second quarter.

Okay. Secondly, I wondered if you could give us any color on that $7.1 million commercial charge-off you had. What was the story with that loan? Was that the transportation one that you've talked about in the past?

No, that was a large CNI credit. It was about a $13 million credit, 13 and change, that we had a specific reserve for that was around $5 million already on the books. So there was a little extra provisioning requiring to cover that full charge off. It was a sale of a note.

Okay.

And then lastly, I just wondered maybe at a high level if you could share with us your thoughts on Robert Marlayson, sort of the tariff implications on things like your equipment finance book and and maybe your manufacturing long book, which I think was around 250 million, are you seeing any impact you hearing from customers that it's it's become a significant problem, you know the tariffs or not so much.

Robert Marlayson, But it administration is all over that like a wet blanket and they're they're hearing that people are. not doing very much, but are very uneasy about it. And when we look at new credits, that has become part of the underwriting process to see how that might have affected things. And so it is having a dampening effect on everything as we go forward, but there's nothing tangible yet. Okay. Thank you. Okay, Mark.

Our next question comes from Steve Moss with Raymond James. Please go ahead.

Good afternoon. Hi, Steve.

Hey, Paul. Just maybe on loan pricing here, just kind of curious, you know, what you guys are seeing for loan pricing these days and, you know, as you are also, you know, adding more C&I customers, what's the sentiment with those borrowers and your thoughts around pull-through here?

And my thoughts around what?

I'll pull through of new CNI loans.

Pull through, I think.

Do you think it's going to extend out towards the latter part of the year, or are you reasonably optimistic in your term? Let me put it that way.

I'm reasonably optimistic, but we're obviously going to be very careful, like walking through glue or something. But the pipelines are OK, and the quality of the stuff that's in the pipeline I've been very impressed with. And the pricing has generally been pretty good. It feels like the dominant, very large banks in our markets are pretty tepid about things right now. So we're not being pushed around too much. The smaller banks have tended to be a lot more aggressive, but our full service, paying close attention nature, I think has made us attractive for companies that feel a little bit abused. Um, in this time, so we're going to go carefully, but I'm still optimistic with the numbers that, uh, that calls told you about for the balance of the year.

Just give you a little bit more, get a little bit more specific on pricing. I think it might be helpful. Uh, so we booked about 411Million dollars of originations in the quarter and the weighted average coupon on that book was 718 basis points. Uh. And the weight average coupon of our overall book is about 591 basis points. So it gives you a sense of, you know, how that's, you know, continuing every quarter that goes by. We're still, we're, we're getting a little better of that, a benefit on that. Yeah. Unless the fed cuts and then we think price down, but that's, that's what I had.

Right. Um, okay. That's, that's helpful there. Appreciate that color. And then just in terms of expenses here, um, you know, down quarter recorder compensation in particular, just kind of curious, you know, how are you thinking about expenses for the second quarter? I apologize if I missed that.

No, I think they'll probably be fairly stable with whatever happened in the first quarter. I give guidance for the full year that we have an annual budget that we try to manage towards. And we're doing much better than that at this point. As you probably understand, we've got the merger of equals with Berkshire Hills. So we are being very careful about any hires and things of that nature or even replacing folks as we know that the opportunity to be able to fill those positions on a combined basis will be enhanced when that happens. So that's – and I mentioned the marketing expenses are down quarter over quarter. I think we're just being thoughtful about where we're spending our money, marketing dollars, and keeping some powder dry for the merger.

Okay, great. Those were my primary two questions. I really appreciate the call here. I'll step back in the queue. Okay, Steve. See you.

Our next question comes from Laurie Hunsaker with Seaport Research Partners. Please go ahead.

Yeah. Hi, Paul and Carl. Good afternoon. Just circling back to credit here. So the $7.6 million in... DNI charge of $7.1 million was one loan. Was that a, I guess, what type of loan was that? Was that an equipment finance loan? Was that a grocery store? What was that?

It's in the food manufacturing business, if you will. And it was not entirely the 7-6, but it was primarily that loan. It had been a family business that was subject to a leveraged buyout by private equity firms And things haven't gone according to oil. Okay.

Okay. And then your, your specially vehicle book down to 267 million. That's great. How much were charged us there in the quarter?

Not much at all. Who's the minimus.

Okay. Okay. Okay. Okay. All right. And then just wonder, can you, can you give us an update the, JoAnne Hanrahan, The office, the 11 million office loan that I think is supposed to. JoAnne Hanrahan, I think it's supposed to close and to Q is that still the case.

JoAnne Hanrahan, Yes, it's under p&s and it's imminent to close sometime soon I don't know exactly the timing, but it's fully expected to close it we weren't and we're not anticipating any additional loss associated with that.

Okay, perfect. That was my question. Okay, great. And then I see here, I love that you give this update, you're 95% pass rated on that which is maturing. Where does your whole book stand in terms of pass rated? I think I last had that at around 90%. I don't know if you have that number refreshed or if that's still approximately the number.

It's approximately 95%.

Oh, for the whole book. Okay. Yep. Okay, great. And let me just go up here. Do you have a spot margin for March?

323.

Thank you. Okay. And then I guess just sort of fast forwarding, and I appreciate that you don't want to comment any further on the timing. But just fast forwarding, the Brookline-Brookshire Hills merger is closed. Can you just talk a little bit about sort of two things on a go-forward basis? So number one, obviously, there was that non-binding letter of intent from Company A to potentially acquire you 50% higher. So I guess, how do you think about, you know, what directionally are you going to do as a combined company to get that value from where we are here to sort of 50% higher? That's my first question. And then my second question is, previously you were pretty active in buybacks. You're obviously very well capitalized. Credit looks good. Obviously many, many uncertainties at the moment, but we are seeing companies amp up the buyback, just taking advantage of stock price. Can you tell us a little bit about how you would think about their buyback once this is closed? Thanks.

Sure. Again, we can't talk too much about adding any additional information, but I would certainly refer you back to when we announced the transaction and the benefits associated with that transaction, particularly the operational efficiencies, the results and performance of the organization, excluding purchase accounting, because purchase accounting, as we all know, is moving in many different ways every day. But the benefits of getting the purchase accounting done as well will add significantly to the performance. As you know, a lot of banks in particular have done restructuring of their investment portfolios to enhance the yields going forward and their margins going forward. And here you're taking basically one organization. $11 billion of a balance sheet and doing the purchase accounting on that and getting the benefits of that going forward. So I think you can refer to that to see, hey, what is the returns on this going forward? And of course, we're in the process of doing the conversion and the cost savings. And we feel really, really good about the process so far. Regarding stock buybacks, I'd say it's just too early to talk about that at this point. and uh we'll we'll see what what the capital ratios and how that will you know how how the balance sheet is restructured as we come together and uh and and the board will review what the capital opportunities are there and optimize the capital structure and uh if buybacks are appropriate they'll that'll get uh discussed okay thanks and one more one more question with respect to capital management is it still the intent to take the berkshire hills

you know, pro forma combined company dividend up to a rate that's on par with where Brookline is currently. Is that still the plan?

That's correct.

Okay, great. Thanks. I'll leave it there.

Okay, Laurie.

Thank you. And our next question comes from Chris O'Connell with KBW. Your line's open.

Hi, Carl. Just want to start off on the CRE runoff, you know, which, you know, I know you guys was planned. You know, wondering how much more is kind of earmarked, you know, to be run off over, you know, the next few quarters and if that, you know, will continue after the merger close.

Well, excellent question. So, we did plan for the ICRE We identified certain areas that we would not try to pursue certain customers or certain transactions. I wouldn't want to call them customers, but certain transactions. It was accelerated a bit in the first quarter, a little bit more than we had originally planned. So, outside of that, I don't see a lot of reduction in that space to the magnitude going forward. But that was a planned approach to 2025. On a go forward, after the combination of the two companies, we'll be looking at that and where we stand and what we want to be focused on. I would say we're not focused on participating commercial real estate transactions into the bank. We'd like to do the lead. Occasionally, we'll do that with friends and family, but that's not something that we would want to be doing on a go-forward basis. And we'd be looking at the combined portfolio and looking at those types of transactions and not really pursuing those going forward. So the timing around that and seeing that

we rather uh preserve our capital or funding for for taking care of uh our customers in our in our footprint understood thank you and uh you know appreciate this standalone you know expense guide in the comments you know for flat ish into q2 um you know just rough calculations you know you guys are did a really good job you know here in the first quarter you know, of keeping expenses low, you know, if it's relatively flattened at Q2, you know, that leaves about, you know, 11 million of growth in the back half of the year to kind of get towards that guidance number. Is there any, you know, particular dynamics, I guess, that are, you know, driving up the costs, you know, that much in the back half of the year?

No, not at all. It just was our original budget.

It was the budget.

We're just doing much better. Both companies are doing much better on the expense side as we're very careful on how we're spending money as we're going into this.

Okay, great. And then with the conversion now booked for February 2026, you know, is that consistent with the original timing? I know it was a little bit up in the air at the time of the announcement. And does it change any of, you know, the cost save timings or shift them out a little further?

Only a little bit. It's a little bit later than we had hoped it would be. And this has a lot to do with scheduling with providers and synchronizing all of the stuff that has to happen. And so some of the cost savings are going to be slightly delayed But to the extent that both companies are managing their costs very well in the meantime, I'm not viewing it as having any material effect at that point, even though technically some of the expenses are going to be longer than in the original plan, but at a lower level.

It's going to be harder to cut expenses that you're not even incurring. So Paul's saying at the time, we're kind of front-loading some of those savings savings. And so economically, at the end of the day, I would imagine probably going to be better off.

So. Understood. And then, you know, on the, you know, I appreciate the kind of overall office commentary, you know, was hoping to get, you know, if you had your exposures to, you know, the Cambridge market and your overall lab exposure and just,

know any color around kind of you know what you guys are seeing or what you guys are hearing in terms of uh you know any any you know market developments in those areas it's a pretty small share of our book you know we haven't we haven't done very much in the cambridge uh area uh that i can recall called do you do you have any sense of the numbers It's approximately $50 million in lab. All in Cambridge? No. No, all over. So it's $50 million overall in lab space. So it's pretty small exposure. We just haven't been exposed to that sort of stuff. We tend to bank real estate professionals who really haven't played all that much in the lab space.

Okay, great. That's all I have. Thank you.

Okay, Chris. That is.

This concludes our question and answer session. So I'd like to turn the conference back over to Mr. Perot for any closing remarks.

Thank you, Lydia. And thank you all for joining us this afternoon. And we will look forward to talking with you again next quarter. Good day.

This concludes today's call. Thank you very much for joining. You may now disconnect your lines.