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

Thank you, Allisa, 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 Perrault and Carl 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..

Thanks, Laura, and good afternoon, everyone. Thank you for joining us for today's earnings call. We had a solid quarter of loan and deposit growth across all three of our banks. While our net interest margin declined slightly, it appears to be hitting the bottom as the month of June was higher than May.

This quarter, we decided to exit our specialty vehicle finance business, which is primarily tow trucks. The spreads for this business line have been coming under pressure for some time now as more competitions enter the market. Unfortunately, costs also continued to rise, particularly collection costs, which drove this decision.

We closed our office in Melville, Long Island and had a reduction of staff of 21. The portfolio of $350 million in specialty vehicle loans will run off over time and will be a slight headwind to the overall growth in the equipment finance portfolio. We estimate runoff over the next 12 months to be $115 million.

I will now turn you over to Carl who will review the company's second quarter results in detail.

Carl?.

Thank you, Paul. Yesterday, we reported net income for the quarter of $16.4 million, or $0.18 per share. As Paul just mentioned, we exited specialty vehicle finance business and recognized the restructuring charge of $823,000, which includes severance and other fixed costs.

Excluding the restructuring charge, operating earnings of $17 million and operating EPS was $0.19 per share. During the quarter, total assets grew $92 million, driven by loan growth of $66 million spread across all loan categories. In the second quarter, we originated $491 million in loans at a weighted average coupon of 802 basis points.

The weighted average coupon of the core loan portfolio rose 9 basis points during the quarter to 605 basis points at June 30. On a linked quarter basis, the yield on the loan portfolio declined 1 basis point to 602 basis points, driven by the reversal of interest income due on two large commercial loans going non-accrual in the quarter.

The reversal of accrued interest in quarterly interest foregone on those loans equals 5 basis points in the net interest margin for Q2. On the deposit side, customer deposits $66 million, while broker deposits increased to $48 million. Deposit growth continues to be focused in higher rate savings time deposits.

Total funding costs increased 7 basis points in the quarter to 365 basis points. Overall, the margin declined 6 basis points to 300 basis points. Total average interest assets will basically flat to $10.7 billion on an important basis, resulting in net interest income of $80 million, a decline of $1.6 million.

Non-interest income was $6.4 million, which is basically flat with the prior quarter with lower fees on derivative income were offset by higher participation fees under non-interest income. Operating expenses were $58.4 million for the quarter, excluding the restructuring charge.

This is down $2.6 million from Q1, primarily driven by lower compensation benefits and weather-related occupancy growth. Provision of credit losses was $5.6 million for the quarter, a decrease of $1.8 million from the first quarter.

Net charge offs were $8.4million, driven by a $3.8 million charge on an office building and $4.6 million in C&I charge offs, nearly all of which were related to equipment financing. The charge offs were largely previously reserved. Non-accrual loans increased $20 million in the year, an increase of $27 million in C&I driven by two large credits.

The increase was offset by a decline of $6.7 billion in non-performing commercial real estate. NPAs to total assets increased to 54 basis points. Our reserve coverage ratio increased slightly to 125 basis points. As I mentioned, RAscore client behavior and industry responses continue to adapt to a fairly volatile environment.

Recently, we've seen greater market expectation in Federal Reserve up rates and longer term rates have declined significantly since the end of the quarter, approaching marsh levels. While loan demand is not robust, it is a bit better than we previously anticipated and expect loan growth of 2% to 5% across all segments.

Our cash and securities portfolio remains stable, representing 9% to 12% of total assets. On the deposit side, we anticipate growth of 4% to 5%. Due to prevailing interest rates, migration of demand deposit accounts and low cost of bonds may persist, but at a significantly slower pace.

Our Q3 margins is projected to fall within the range of 310 basis points and continue to improve. However, this is a bit better than deposit growth and the timing of actions by the federal reserves. Non-interest income is projected to be in the range of $6 million to $7 million per quarter, but both components may vary significantly.

We continue to manage operating expenses of $240 million or less than the full year. Exiting the specialty vehicle business, we reduced operating expenses of approximately $800 per bullet. Currently, our effective tax rate is expected to be in the range of 24.5% for the balance of the year.

Yesterday, we were able to maintain our quarterly dividend at $0.135 per share to be paid on August 30 in stockholders of record from August 16. On an annualized basis, on dividend payout approximates the yield of 5.1%. This concludes my follow-up comments. I'll turn back to Paul..

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

[Operator Instruction] First question is from the line of Mark Fitzgibbon with Piper Sandler..

Paul, could you just repeat your guidance on expenses? I missed that. I apologize..

Sure. We still expect to be in the $240 million or less for the full year..

And you said the benefit from an expense standpoint of just getting out of the specialty finance business was how much?.

About $800,000 per quarter..

And then secondly, I know it's been challenging recently from a credit perspective on the specialty vehicle business.

But I guess I'm curious longer term, what were some of the other major dynamics of why you're exiting this business?.

Expense in origination costs, small ticket relative to other kinds of loans that we can do. The collection effort is very big and difficult and you're just dealing with a lot of little pieces that make it unprofitable and you can't get rate in that gig anymore. It was good while it lasted.

It's something we get into about 10 years ago and we were sticking with mostly larger operators for a while. But as time went on, we see that it ended up with more Q1 or Q2 kind of people and it's just very hard to make money at that.

The other piece is mostly for trucks, but the other piece that was affected too is somewhere along the line they got into delivery vehicles mostly for contractors with UPS or FedEx. And when Amazon decided to had its own delivery business, a lot of those guys kind of lost that business and it was kind of stuck without anything.

So it's just not knowing well, so it's time to stop..

And then I wonder if you could provide any color on those two large loans that caused the uptick in non-performers this quarter..

Sure. One's a banker have client -- long-term client that just was restructured. And so there's a deferred. Deferred payments for two quarters. So we just automatically put that on non-accrual and that will go back on accrual status after they paid for two quarters in a row. So we do expect that to happen by the end of this year, early next year..

And that's C&I credit, Carl?.

That's a C&I credit. Correct..

Specialty food companies..

Yes. And the other is a large industrial laundry, basically two laundry nets. The laundry companies..

Industrial laundry..

Industrial laundry. That's staying in the process. They worked out too long..

And then lastly, and I know the size of the portfolios are different, but how would you say asset quality in general is stacking up amongst your three different banks?.

I would probably say that Putnam is the cleanest at this point, then the Rhode island and Boston are probably neck and neck..

We've had a few quarters of a little bit bumpy for us in the asset quality area. I'm optimistic that we've kind of gotten through the worst of it. We've dealt with it and I'm very hopeful that we'll go back to our normal kind of numbers..

Paul, just having been through the cycles, as we both have over a long time, I talked to probably six other banks today that all seem to have one off isolated credit instances.

I guess, I'm wondering, can there be that many one off isolated credit situations or are we seeing a trend here? And just curious as to your thoughts from a big picture not specific to Brookline..

Well, I think that there's a lot of stuff that was tried post pandemic and some of it didn't work. Companies struggled through, didn't make ends meet and things are not as solid as they were before.

But I don't see any big overriding trends that show that there's like a whole industry being in trouble with something, unless, I guess, you're making electric car then.

We don't see inventory problems, we don't see collection problems, real estate knockout wood here, at least in the metro Boston and certainly Rhode Island and Westchester, continues to hold up pretty well. And we've only had the two downtown properties that were an issue and those were relatively unique.

They both have the same background in the sense that they were sea properties that were acquired by very capable, the owners who intended to upgrade them to almost a level and at least a month. And they got caught in the middle with the pandemic and so the burglaries get fixed, but not leased entirely.

And so they -- in both cases, they're looking to hold on and put in more money and kind of wait it out. So I think real estate is okay. And the C&I business, it's a little bit trickier to be successful than it might have been five years ago or something..

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

Just going back to your specialty vehicle portfolio of $352 million, can you share with us what the coupon is on that and then what the non-performers are on that?.

Sure. The coupon on that on the specialty vehicles are forward, well, I'll go to the yield. The yield is around 750 on that book on the entire..

And then the non-performers I mean, I guess your equipment finance non-performers are $27 million.

How much of that is related to this book?.

I'll get back to you. I don’t have that before me, right back then..

And then also the charge-offs for this quarter, the $43 million equipment financing charge-offs, C&I equipment financing charge-offs, was that a specialty vehicle or was that something separate?.

Mostly specialty vehicles. We had some. Carl mentioned that come out of Carl to speak them..

The lion's share..

And then I missed it.

You said you said how many people were terminated on the specialty vehicle side?.

21..

And did that happen did that happen, late in the quarter, middle of the quarter, beginning of the quarter? How should we think about that?.

It's happening right now..

And then, we're also going to see the Durban impact coming through in September. And I had in my notes that roughly, at least on the expense side so, obviously, we know the non-interest income that deducts round numbers, $1 million or something annually.

But on the expense side, I had that impact running about $1.6 million annually to $400,000 next quarter.

Am I thinking about that right, or has that already been reflected? How should we think about that?.

I'm not sure what you're referring to when you talk about the Durban. If I could be misunderstanding it. Durban is really just the amount on the debit card side..

But I thought for some reason that you guys were doing something on the expense side around a compliance build or maybe I got that wrong?.

No. I think when we were first estimating what the impact would be about going over $10 billion, I think we estimated some higher expenses associated building -- adding few people on staff. But that had nothing to do with Durban, that just had to do with building those compliance, making some people need credit, things of that nature, compliance.

But that's already done. That's already done..

And then, on OpEx, the $3.8 million that you had that were net charge-off, how big was that profit credit that you took the charge-off on? Just trying to think about what the right..

It was around $14 million..

$14 million originally. Okay..

And that's correct. And so let me go and give you a little bit more detail on that but we currently are carrying out a $10.8 million. So we're still working through this. And we do have a specific reserve $2.5 million that's about it..

And then where is that located? Is that a downtown property?.

Downtown Boston..

And that's Class A, Class B?.

Class B..

And then just last question on that one.

Is that or what is the vacancy, if you have it on that one?.

I don't think it could be half [indiscernible]..

And then office non-accruals, I appreciate all the detail you've got in your deck here, but it looks like these are just the ones that are maturing.

Do you have what your overall office non-performers are?.

We just have one. We only have the one. Just that one. Just 10.8..

Just the one that's coming due. Okay..

That's correct..

And then I guess, Paul, just last question. There seems to be a little bit more M&A chatter going on.

Obviously, you're one of the few banks who did an acquisition as rates started to go up, can you just share with us your take on how you are thinking about M&A? How you see sort of the pulse on M&A? Any chatter, any directional thoughts?.

Well, I think you said it right. I mean, a little bit more talk, but very little. It's still a very difficult environment with the marks on everything. The difficulties of raising capital and having it all work. I think we're closer to getting to more normal M&A activity, but we're not quite there yet.

And I'm not aware that there's all that much around us anyway..

The next question is from the line of Chris O'Connell with KBW..

Just hoping to start off on some of the margin dynamics going forward. It seems like the deposit mix shifts turned around and slowed this quarter. Are you guys still seeing pressure there at all? Do you expect a little bit slower pace in the back half of the year? I guess, yes, start up there..

Yes. So, we're not seeing the movement between products that we've seen in the past, that people are moving a lot of money out of one product or a lower interest bearing product into a higher interest rate product. Any growth in deposits is basically coming behind your interest, as you attract new customers.

We are starting to see more activity on the DDA side, particularly on the commercial side and the cash management side, which always a bit good to see. And you don't have the outflows that you were seeing earlier, so you start to see some growth there. I would say on the CD side, we're basically priced where the market is right.

So the book is maturing, so we've got about $330 million CDs I that will go off in Q3, and, it's basically going on at similar rates. And wherever possible, we're trying to shorten those durations of the inventory.

We're actually offering a little bit of a higher rate for lower -- we're limiting the curve out there so that people are driving to the bottom lower terms, so not volume handles. And we see that some there's a stake on the downside..

And have you guys been able to test the waters at all, with any reductions in any of the products on the deposit side at all year-to-date?.

Yes, we have. So we have moved rates on the top tier offerings that we might have in money markets and so it's savings I know savings accounts..

The number of quarter is somewhere 10 basis points. Yes. That's a fairly decent problem..

And just with the outlook for the rate environment now shifting a bit to hopefully be a little bit more favorable as you get further along into 2024 to 2025.

Maybe just talk about your strategic priorities in terms of does that make you a little bit more optimistic on loan growth into next year? Or there's still a good amount of broker deposits that are fairly high cost right now that could mix shift or come off the balance sheet.

Is there any kind of strategic priority in terms of growing the assets out of the balance sheet or maybe taking it a little bit slower into next year and reducing some of those high cost broker deposits or even some of the highest cost borrowings?.

Well, we're always looking to try to reduce those wholesale -- the wholesale funding side of things. And I think when rates do start to reverse portion, you'll see more activity in the lending side. I think some people are sitting on the sidelines that they don't have to borrow the inventory, but they get to raise stuff out a little bit.

So all of those things are true. So we’ll be out there..

And just thinking about the margin as we get past the next quarter or so, I mean, how much do you think the dynamic changes depending on the pace of Fed fund cuts, whether they're coming in kind of quickly as we enter 2025 or a little bit more measured than what's been priced in recently?.

Well, as rates come down, our liability is pretty responsive to that. I expect that to be fairly responsive as it goes down. That data would be as immediate as what's the time rate going down or SOFR rate going down, probably not. There will probably be a little bit of a lag there.

We have quite a bit on it, like you said, broker CDs and bank advanced have been retraced fairly quickly. And so we monitor that very closely, of course, and try to match that up with what's in the book. So we do also have a lot of adjustable rate -- floating rate on our loans that would be priced down as well.

Overall, I think it's going to be beneficial..

And if the pace of growth does kind of continue to be relatively tepid, is there a point where capital ratios get high enough where you'd be interested in buying back shares?.

So, we continually look at. So we have to build that with capital. I think that's something that's important..

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

Thanks, Alyssa and thank you all for joining us here this afternoon. We look forward to talking with you again next quarter. Have a good day..

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