Brookline Bancorp Inc

NASDAQ:BRKL

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

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

I would now like to turn the conference over to Brookline Bancorp's attorney, Laura Vaughn.

[Laura Vaughn, executive]

Thank you, Elisa, 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 [Technical Difficulty] the 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 statements.

Also, please refer to other files 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 Perrault, executive]

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 3 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 then 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 Carlson, executive]

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 a specialty vehicle finance business and recognized a restructuring charge of $823,000, which includes severance for non-invasive costs.

Excluding the restructuring charge, operating earnings were $17 million, 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 cabinets.

In the second quarter, we originated $491 million in loans at a weighted average coupon of 802 basis points. The weighted average coupon for the 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 2 large commercial loans going on from year '24. The reversal of accrued interest and early interest foregone on those loans equaled 5 basis points in the net interest margin for Q2.

On the deposit side, customer deposits grew $66 million while broker deposits decreased to $48 million. Deposit growth continues to be focused in higher rate savings client deposits. Total funding cost increased 7 basis points in the quarter to 365 basis points. Overall, the margin declined 6 basis points to 300 basis points [indiscernible].

Total average [indiscernible] assets were basically flat at $10.7 billion on a linked quarter basis, resulting in a net interest income of $80 million, a decline of $1.6 million from Q1.

Noninterest income was $6.4 million, which is basically flat from the prior quarter, with lower fees of derivative income were offset by higher participation in these under noninterest 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 in benefits and weather related [indiscernible].

The 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 $8.4 million, driven by a $3.8 million charge-off of an office building and $4.6 million in C&I charge-offs, nearly all of which were related to corporate financing. The charge-offs were largely previously reserved for.

Non-performing loans increased $20 million in the quarter, a decrease of $27 million in C&I driven by two large credits. The increase was offset by a decline of $6.7 million in non-performing commercial real estate loans [indiscernible] total assets increased to 54 basis points.

Our reserve coverage ratio increased slightly to 175 basis points. As I mentioned last quarter, client behavior and industry responses continue to adapt to a fairly volatile environment.

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

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

Our Q3 margins is projected to fall within a range of 300 to 310 basis points and continue to improve. However, this is [indiscernible] depositors and [indiscernible]. Noninterest income is projected to be in the range of $6 million to $7 million per quarter and 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 will reduce operating expenses of approximately $800,000 per point.

Currently, our effective tax rate is expected to be in the range of 24.5% for the balance of the year. Yesterday, the board approved maintaining our quarterly dividend at $0.35 per share to be paid on August 30 to stockholders of record on August 16. On an annualized basis, our dividend payout approximates a yield of 5.1%.

This concludes our formal comments. I'll turn it back to Paul.

[Paul Perrault, executive]

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

[Operator]

We will now begin the question-and-answer session. Our question is from the line of Mark Fitzgibbon with Piper Sandler.

[Mark Fitzgibbon, analyst]

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

[Carl Carlson, executive]

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

[Mark Fitzgibbon, analyst]

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

[Carl Carlson, executive]

About $800,000 per quarter.

[Mark Fitzgibbon, analyst]

$800,000 a quarter. Okay, great. 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?

[Carl Carlson, executive]

Expensive origination costs, small ticket relative to other kinds of loans that we can do. The collection effort is very big and difficult and it is 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 was 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 1 or 2 truck kind of people and it's just very hard to make money with them.

The other piece, it's mostly for trucks, but the other piece that was affected too is somewhere along the line, they get into delivery vehicles, mostly for contractors with UPS or FedEx, and when Amazon decided to have its own delivery business, a lot of those guys kind of lost that business and was kind of stuck without anything. So it's just not knowing well, so it's got to stop.

[Mark Fitzgibbon, analyst]

And then I wonder if you could provide any color on those 2 large loans that caused the uptick on non-performers this quarter.

[Carl Carlson, executive]

Sure. Once on a client, we put long-term client that just was restructured, incidence that deferred cadence for 2 quarters. So we just ordered that and put that on non-accrual, and that will go back on accrual status after they take for 2 quarters in a row. So we do expect that to happen by the end of this year, early next year.

[Mark Fitzgibbon, analyst]

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

[Carl Carlson, executive]

That's a C&I credit, correct.

[Paul Perrault, executive]

Specialty food companies.

[Carl Carlson, executive]

And the other is a large industrial laundry, basically 2 laundry mats, the laundry companies, I don't know.

[Paul Perrault, executive]

Industrial laundry.

[Carl Carlson, executive]

Industrial laundry, that statement in the process being worked out slow.

[Mark Fitzgibbon, analyst]

And then lastly, and I know the size of the portfolios are different, but how is -- how would you say asset quality in general is stacking up amongst your 3 different bags?

[Paul Perrault, executive]

I would probably say that Putnam is the cleanest at this point and [indiscernible] and Boston are probably neck in 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 worse of it, we've doubled it and I am very hopeful that we'll go back to our normal kind of numbers.

[Mark Fitzgibbon, analyst]

Paul, just having been through the cycles, and we both have over a long time. I've talked to probably 6 other banks today that all seem to have one-off isolated credit incidences. 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.

[Paul Perrault, executive]

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 like a whole industry being in trouble with something unless, I guess, you're in the electric car business.

We don't see inventory problems, we don't see inflection problems. Real estate, knock on wood, here at least in the Metro Boston and certainly where I live in Westchester continues to hold up pretty well. And we've only had the 2 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 then lease them up and they got caught in the middle with the pandemic.

And so the [indiscernible] got fixed, but not leased entirely. And so they've -- in both cases, they're looking to hold on to it, putting more money, they've kind of laid it up. So I think real estate is okay in the C&I business. It's a little bit trickier to be successful than it might have been 5 years ago also.

[Operator]

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

[Laura Havener Hunsicker, analyst]

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 nonperformers are on that?

[Carl Carlson, executive]

Sure, the coupon on the specialty vehicle fulfillment -- well, I'll go to the yield. The yield is around 750 on that, on the entire.

[Laura Havener Hunsicker, analyst]

Yes, and then the non-performers, I mean, I guess, your equipment, finance non-performers were $27 million, how much of that is related to this book?

[Carl Carlson, executive]

I'll get back to you, I'll have that from…

[Laura Havener Hunsicker, analyst]

And then also the charge-offs for this quarter, the $4.3 million equipment financing charge-offs, C&I equipment financing charge-off, was that a specialty vehicle? Or was that something separate?

[Paul Perrault, executive]

Mostly specialty vehicle. We had had some car [indiscernible] that come out of the car sales.

[Carl Carlson, executive]

With a lot of insurance.

[Paul Perrault, executive]

Lot of insurance.

[Laura Havener Hunsicker, analyst]

I missed it, you said how many people were terminated on the specialty vehicle side?

[Paul Perrault, executive]

Twenty-one.

[Laura Havener Hunsicker, analyst]

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

[Paul Perrault, executive]

It's happening right now.

[Laura Havener Hunsicker, analyst]

And then we're also going to see the [ Durbin ] 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, so $400,000 next quarter. Am I thinking about that right? Or has that already been reflected? How should we think about that?

[Carl Carlson, executive]

I'm not sure what you're referring to when you talk about the Durbin. I might be misunderstanding you. Durbin's really just the amount [indiscernible] he hasn't made that statement.

[Laura Havener Hunsicker, analyst]

Right, it's just -- but I for reason that you guys were doing something on the expense side around a compliance build or maybe I got that wrong.

[Carl Carlson, executive]

No, I think when we first were -– when we were first estimating what the impact would be about going over -- over $10 million, I think we estimated some higher expenses associated with build out, adding a few people or staff. But that had nothing to do with Durbin, that just has to do with compliance, and some people in credit, things of that nature, compliance. That's largely -- there was that…

[Laura Havener Hunsicker, analyst]

That's already done. Okay.

[Carl Carlson, executive]

That's already done.

[Laura Havener Hunsicker, analyst]

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

[Carl Carlson, executive]

It was around $14 million.

[Laura Havener Hunsicker, analyst]

$14 million originally. Okay.

[Carl Carlson, executive]

And that's -- yes, correct. Let me give you a little bit more detail on that. We currently are charging out at $10.8 million. So we're still working through this. And we do have a specific reserve $2.5 million.

[Laura Havener Hunsicker, analyst]

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

[Carl Carlson, executive]

Downtown Boston.

[Laura Havener Hunsicker, analyst]

And that's Class A, Class B?

[Carl Carlson, executive]

Class B.

[Laura Havener Hunsicker, analyst]

B, okay. And then just last question on that one. Is that -- or what is the vacancy if you have it on that one?

[Carl Carlson, executive]

I think that it's -- it could be half, could be half. Because it has always has been a favorite [indiscernible].

[Paul Perrault, executive]

Between a third and the half, yes.

[Laura Havener Hunsicker, analyst]

Back there, Okay.

[Carl Carlson, executive]

[indiscernible].

[Laura Havener Hunsicker, analyst]

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?

[Paul Perrault, executive]

We just had the one, we only had one that one -– that exact one, just that what's this [indiscernible].

[Laura Havener Hunsicker, analyst]

Just the one that's coming due, okay. 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 you 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, that would be really helpful thanks?

[Paul Perrault, executive]

Well, I think you said it right. I mean, a little bit more thought, but very little, it's still a very difficult environment with the large [indiscernible] and 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 was all that much around us anyway.

[Operator]

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

[Christopher O'Connell, analyst]

So I was 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 can see a star up there.

[Carl Carlson, executive]

Yes. So we're not seeing the movement between thought 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 bearing product. Any growth in deposits is based on [indiscernible] higher interest as you try and get customers.

We are starting to see more actively on the DDA side, particularly on the commercial side and the cash management side, which is always good to see. And you don't have the outflows that you were seeing earlier -- to see some out there. But I'd say on the CD side, we're basically high [indiscernible] the market insight, so the book is maturing. So we've got about $330 million of CD in settlement, but where we're off in [indiscernible] and it's basically going on at similar rates. And wherever possible we're trying to shorten those durations a little bit more, we're actually offering a little of a higher rate for lower. But we're limiting the curve out there, so that people are trying to take on low returns, so not [indiscernible] there's some stake the debt side.

[Christopher O'Connell, analyst]

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?

[Carl Carlson, executive]

Yes, we have. So we have moved the rates on the top-tier offerings that we might have in money markets and some savings, little saving accounts. [indiscernible]

[Paul Perrault, executive]

[indiscernible] quarter, it's somewhere 10 basis points. That's a fairly recent [indiscernible].

[Christopher O'Connell, analyst]

And just with the outlook for the rate environment now shifting a bit to hopefully be a little bit more favorable as we get further along to '24 to '25. Maybe just talk about your strategic priorities in terms of, I mean, 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 asset side 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?

[Carl Carlson, executive]

Well, we're always looking to try to reduce those wholesale, on the wholesale funding side of things. And I think when rates do start to reverse, of course, you will see more activity on the lending side. And some people sitting outside, like that they don't have to borrow the big inventory stuff down a little bit. So all of those things are true, so we'll be out there.

[Christopher O'Connell, analyst]

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?

[Carl Carlson, executive]

Well, as [indiscernible] we reliably say it's pretty responsive to that. I expect that to be fairly responsive as it goes down [indiscernible] it wouldn't be as immediate as, let's say, the client rate going down. So for rate going down, probably not, and probably a little bit of a lag there. But we have quite a bit going up, like you said, about the CDs in [indiscernible] definitely repriced fairly [indiscernible].

And so we monitor that very closely, of course, and we try to max out, but probably even both. So we do also have a lot of adjustable rate, floating rate, lots that we price down slowly. Overall I think it's going to be a benefit [indiscernible].

[Christopher O'Connell, analyst]

Understood, 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?

[Carl Carlson, executive]

So we continually look at it. So we have to build capital, I think that's something that's been talked of.

[Operator]

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.

[Paul Perrault, executive]

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

[Operator]

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