Good afternoon, and welcome to Brookline Bancorp, Inc.'s First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. .

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

Thank you, 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 [Technical Difficulty] 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. .

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 1 rate cut for the year with some even speculating no cuts at all.

The 5-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. .

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. .

Noninterest 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 noninterest 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. The provision for credit losses was $7.4 million for the quarter, an increase of $3.6 million from the fourth quarter. The increase is 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 associated with exiting 2 office credits. Nonaccrual 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. While 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 nonowner-occupied commercial real estate, our focus remains on serving relationship customers. Hence, we anticipate only a 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 improve throughout the year. However, this is dependent upon deposit flows. .

Noninterest 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 of $0.135 per share to be paid on May 24 to stockholders of record on May 10. On an annualized basis, our dividend payout approximates the yield of approximately 6.5%. .

This concludes my formal comments, and I'll turn it back to Paul. .

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

[Operator Instructions] The first question today comes from Mark Fitzgibbon with Piper Sandler. .

Carl, just to follow-up on your tax guidance.

Do you plan to replace those tax credits that expired this quarter? Or it sounds like maybe not?.

We're always looking at those opportunities, but I don't have any visibility into -- sorry, I don't have a pipeline, let's say. .

If we came across we would do them. .

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 it's probably weighing on the margin a little bit.

How should we think about cash balances moving forward?.

I think it will be fairly stable in that range of 10%. Between 10% and with securities, cash and securities around 10% of the balance sheet. It's kind of where we target. .

Okay. And then in your press release, you kind of mentioned the fact that 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?.

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. .

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?.

We'll continue to evaluate that, but we have no expectation to do anything near term. .

The next question comes from the line of Steve Moss with Raymond James. .

Maybe Carl, just starting up -- hopefully, maybe just starting up on the office portfolio here. The 2 credits that were charged off.

Were those resolved, sold, liquidated during the quarter? Was that just a charge-off ahead of an expected sale?.

No, those were 2 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. .

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. .

Got you. And you guys mentioned in the deck, only 2 loans maturing of about $23 million represent criticized and classified within office, those are separate of those loan sales, I take it. . .

They were not part of those numbers. .

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. .

They're Boston based and one of them that I'm aware of is retail and commercial on the upper floors. .

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. .

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. .

The next question comes from the line of Laurie Hunsicker with Seaport Research. .

Thanks for all the detail on the real estate that you guys added. That's super helpful. But I actually, I wanted to go back to the equipment finance section, and I'm looking at Page 14 of your deck. Can you just help us think about the $3.5 million in charge-offs to the specialty vehicle category, it looks like you have tow truck that wasn't that.

It wasn't a heavy tow. Are you saying it came from sort of that FedEx category of $40 million or the other vehicle category? Or just how should we think about that? I guess that's sort of my first question around equipment finance.

What the segment that is coming from?.

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 recoveries that are sprinkled throughout. .

For the entire equipment finance portfolio far and away, the vast majority of it, as you can probably see there is laundromats, which performed exceptionally. We're going to do more laundromats. .

Yes, makes sense. That makes a lot of sense. Okay. And so just thinking about equipment finance, I mean, directionally, 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 it change. You're still... .

Are working on -- yes, we're feeling good about it, but the guys who run Eastern Funding are sort of reevaluating their strategic direction in all of this as we speak. .

Yes. I think the difficulty of getting -- when we talk about recoveries, I think they're very comfortable how they underwrite things of that nature. But when things do 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. .

Some of those loans are pretty small and they've become very expensive, and the trucks are in bad repair and it's not a wonderful picture and it's not something that they've done forever either. .

The nice thing about the laundry -- it's not going anywhere. .

So I guess when you think about the yes, that specialty vehicle bucket then? I mean, would you potentially look to sell those loans or get out of that? Or how do you think about that? Just not grow them further?.

Well, there are meetings concurrent to now that are considering all of those things. .

Okay. Okay. And then 1 other question here on the equipment finance. You've got a category, it's EF CRE, so Equipment Finance CRE. What is that? That's $166 million. .

That's when the laundromat owner acquires the building that laundromat is in. And in a lot of cases, it might be a little strip mall. For example, if the guy that the guy wants to own -- but it's always attached to a laundry. There's always a laundromat involved. .

Okay. Got you. Got you. Okay. And then 1 more question, and Mark sort of have already asked this that I am just so curious, it would seem you guys have such a plethora of capital that buybacks here in the high 70s percentage of book would 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. .

In this environment, I would say, still in this environment, we still think capital is very precious and it certainly is attractive to buy the stock at this level. There's no question.

But I also think it's very important to 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 on it. .

Our next question comes from the line of Chris O'Connell with KBW. .

Staying on the credit front, can you just remind us about the nonequipment finance portion, the $4.7 million that was -- had some partial reserves for it previously?.

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

And these are loans that have been dogging us. We're pretty well wrapped them up now. But for the past couple of quarters, you've heard us cite those 2 loans that were being worked out. .

Got it. And on the CRE front, I mean, outside of the office, as you're looking at the rest of the maturities throughout 2024.

I mean how do you feel about kind of the core CRE or the ex office and the credit quality there as these maturities come through over the course of the year?.

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 our commercial real estate particularly multifamily space and other things that repriced. They may not mature, but they'll reprice after 5 years.

So they have a 10-year final bloom and so they may be repricing up 280 basis points when you compare it to 5-year -- to 5 years ago. .

And so right now, those debt service coverage, things of that nature are just fine. 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. So I think the office -- even office is doing well.

I think it's just the inside of certain properties in certain places that we have to work with our customers on. .

Got it.

And has the recent increase in rates, has that tempered demand or even just the timing of potential pipeline closings in the CRE book?.

It certainly has tempered demand. I don't know if it's stopped closings at all. If it did, they're probably regretting it. .

Yes, they just got a lot of trades going on in our markets in real estate. There's not a lot of buyers, not a lot of sellers -- and it is probably due to rates, but it's also probably due to the views on occupancy as an investor think... .

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, what's the type of loans that you're seeing the most attractive demand for?.

Well, industrial has been strong, import-export stuff has been strong. Law firms. A little of everything there's not a particular expertise. Some -- particularly in our New York operation, things like private schools and nonprofits have been doing quite well and Brookline's gotten 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 gym or something. .

Got it. And I know last quarter, pretty light on the M&A discussions.

I mean has there been any pickup at all in kind of your general market or discussions since then?.

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 holes. .

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. .

Got it.

And just in general, I guess, going forward, I mean, where are you guys thinking about in terms of a normalized charge-off rate in this type of environment?.

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 to try to pick a number. But if you look at our charge-off behavior in our past, that was a lot more comfortable. So that's where we're going to try to get to. .

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

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. .

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