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Brookline Bancorp Inc
Earnings Call Analysis
Q3-2023 Analysis
Brookline Bancorp Inc
Brookline Bancorp, Inc., known for its focus on relationships and opportunities within its market, showcased resilience in the third quarter of 2023. Despite a competitive and evolving banking landscape, the institution reported a solid net income of $22.7 million or $0.26 per share. The loan portfolio saw a modest growth of $40 million, and customer deposits surged by $88 million. However, a slight increase in nonperforming assets and $11 million in net charge-offs, mostly accounted for in previous reserves, highlighted the need for cautious optimism.
Q3’s loan origination reached $562 million, an aggressive initiative in current market conditions. The weighted average coupon on loans increased to 582 basis points from 726 basis points at origination. While net interest margin saw a slight decline of 8 basis points to 3.18%, management anticipates a further, but smaller, compression of around 5 to 6 basis points in the following quarter. These predictions stem from aggressive deposit moves and shifting market trends which could impact future margins.
Brookline Bancorp remains vigilant, especially within its commercial real estate and office loan segments, which make up a substantial portion of its book. The management mentions an office property in Boston with a nonaccrual status which is 'well owned' and expected to right itself shortly. This focus reveals a detailed approach to risk management, particularly in potentially high-impact areas like the office segment, which constitutes about 8% of its loans.
While overall concerns about loan book stability in contexts such as Equip Finance appear low, management remains proactive in monitoring changes and opportunities, indicating an environment of consolidation and inflation adjustments. Stability in demand deposits was reported despite some runoff, highlighting cautious confidence in the institution's deposit strategy and customer retention.
The bank’s loan pricing has strengthened recently, outperforming previous quarters due to significant movements in interest rates since September. Moreover, deposit pricing remained competitive despite upward adjustments in the market, suggesting a strategic balance between growth and profitability.
The management forecasts a relatively steady expense line, hovering around $57 million quarterly and slightly growing into the next year, reflecting a controlled operational economic environment within the bank.
The risk profile on CRE loans renewing over the next 24 months is anticipated to match the overall high-quality portfolio, pointing to well-underwritten historical loans. Two C&I charge-offs, attributed to poor management on the borrowers’ part, stressed the bank's adept credit quality surveillance.
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Good afternoon, and welcome to the Brookline Bancorp, Inc.'s Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.
I'd now like to turn the conference over to Brookline Bancorp's Attorney, Laura Vaughn. Please go ahead.
Thank you, Alex, 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. We will not be doing a slide flip this quarter. 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 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. Yesterday, we reported net income for the quarter of $22.7 million or $0.26 a share. Our bankers remain active, and we continue to see lots of opportunities to [ bank's strong ]new relationships in our markets.
The loan portfolio grew by $40 million and customer deposits grew by $88 million in the quarter. Nonperforming assets increased slightly in the quarter off historically low levels, and remain less than half of 1% of total assets.
Net charge offs for the quarter were $11 million, which were largely previously reserved for. Net charge offs over the past 12 months represent approximately 14 basis points, while the allowance for loan loss represents 127 basis points of total loans.
I'll now turn it over to Carl who will review the second quarter results.
Thank you, Paul. This quarter's total assets finished the quarter basically flat with Q2, driven by a reduction in cash and securities, partially offset by the growth in loans. The banking teams generated net loan growth of $40 million in the quarter, with growth of $48 million, split evenly between C&I and Equipment Finance, the declines of $1 million in commercial real estate and $7 million in consumer loans.
In the third quarter, we originated $562 million in loans at a weighted average coupon of 726 basis points. This increased the weighted average coupon on the loan -- core loan portfolio 14 basis points to 582 basis points at September 30.
On a linked quarter basis, the yield on the loan portfolio increased 14 basis points to 5.84%. On the funding side, customer deposits grew $88 million and brokered deposits were reduced $39 million for net growth in deposits of $49 million. Growth continued to be in higher rate savings and time deposits, partially offset by declines in DDA now and money market products.
The average cost of total deposits increased 24 basis points in the quarter to 228 basis points. Total average interest-earning assets declined $110 million on a linked quarter basis, and the net interest margin declined 8 basis points to 3.18%, resulting in net interest income of $84 million, a decline of $2 million from the second quarter.
Noninterest income was $5.5 million for the quarter, which was consistent with the prior quarter. Expenses were $57.7 million for the quarter, up $900,000 from Q2 when excluding merger charges recorded in Q2.
Provision for credit losses was $3 million for the quarter, down $2.9 million from Q2. Yesterday, the Board approved maintaining our quarterly dividend of $0.135 per share, to be paid on November 24 to stockholders of record on November 10. On an annualized basis, our dividend payout approximates a yield of approximately 6.3%. This concludes my formal comments, and I'll turn it back to Paul.
Thank you, Carl. We will now open it up for questions.
[Operator Instructions] Our first question for today comes from Mark Fitzgibbon of Piper Sandler.
Carl, I wondered if you could share some thoughts on the net interest margin. The rate of decline has obviously slowed some. Any help that you could share with us on fourth quarter NIM in terms of additional margin compression.
Sure. Again, it's very difficult to estimate what's really going to happen here. Last quarter, we saw July's deposits -- really not a lot of movement on the deposit side that accelerated in August. So I didn't think we are going to have as much NIM compression as we did experience, the 8 basis points.
But right now, we're estimating to be around 5 to 6 basis points next quarter. Again, that all depends on what's going on with deposits. We're kind of modeling some aggressive moves -- continued aggressive moves in deposits. Our bankers are actually suggesting it might be far less than that, but we'll see.
Okay. Great. And then secondly, I wondered if you could share any details with us on that $14.8 million commercial real estate loan that went on nonaccrual.
Office building here in Boston. It is very well owned. It is significantly occupied, but they have not been able to get it over the top and we're working with them to create an environment where they can be helpful and we can be patient. And I'm pretty optimistic that, that will be in the right place fairly soon.
Paul, you say well owned, was there participation with a bunch of other banks?
No, no. It's a property owner and manager who has partners in it with him. I think we may have participant bank to -- on our side. But I was really referring to it's a bunch of investors who own it and it's managed by one very able guy.
Okay. And any color on what the LTV and debt service look like at origination?
I would be speculating. It would look like most of our originations, which would have been a pretty low loan-to-value and a pretty high coverage ratio.
Okay. And then I guess I was curious at a high level, you guys traffic in a lot of different commercial and commercial real estate areas. What areas are you sort of monitoring most closely today or where you have kind of enhanced monitoring. What pieces of the loan book are you most focused on and watching carefully?
Well, I think it's going to be office, which represents about 8% of our loans. We've got maturities coming up over the next few years that don't amount to a whole lot, but we're just trying to monitor what the cap rates are looking like, what trades are happening in the marketplace and occupancy, but it's really been very quiet, particularly in Metro Boston but it's been a little bit more active in Westchester. But most of the loans, as you know, are sort of inside 495.
Okay. And then last question for me. Clarendon Private, any updates there? How are things going or -- and an update on asset under management?
Yes, we're still not reporting that out at this point, still early in the game, but everything is proceeding as we expect.
Our next question comes from Nick Cucharale from Hovde Group.
Another strong quarter for growth in the Equipment Finance division. How high are you willing to take those balances as a percentage of the total loan portfolio? And can you comment on how you're approaching credit risk in that segment considering the higher rates to customers and overall economic environment?
I've long held that I would be comfortable up to as much as 20% of the loan book would be in the Equipment Finance area. We're well below that at this point. And I think that -- they are carrying on business as usual. They are seeing consolidation in a lot of the areas where they operate. So they see opportunities to bulk up for some of our customers. And with the inflation being as it has been, I think that their operators are able to take care of these deals at the higher rates. It really hasn't been a problem. We haven't seen any uptick in delinquencies or anything.
Okay. That's helpful. And then just to follow up on the deposit discussion. At this point in the quarter, are you seeing stability in your demand deposits?
We are. So we're still seeing some runoff but not as aggressive as we've seen in the past. But I would have said that last July, too. So I'll couch that as we go forward.
And it jumps around.
It jumps around. It does jump around, but it's slowing down.
Our next question comes from Steve Moss of Raymond James.
Just curious here if we just talk about loan pricing, [indiscernible] loans are coming on the books and kind of that dynamic.
Sure. What would you like to know?
Where are you pricing today and versus what did you put on in the third quarter? Let's put it that way.
So third quarter numbers are on average for the third quarter. So things are comping in certainly higher than that. As you know, the [ 5-year ] has moved substantially even since September. So I don't have specific numbers to date, but all the pricing is doing much, much better on the loan side. And so we're very optimistic there.
On the deposit side, the funding side, what I'm optimistic about is that we really haven't moved our rates much on the deposit side at all, even though we've seen naturally, the longer part of the curve from 2 out of 10 move particularly around 5 to 10, moved quite a bit. We've not had to move our pricing on our deposit side, and we still consider -- we're still seeing growth -- continue to grow our customer base there. So pretty optimistic in that sense.
Okay. And then in terms of -- just other question related to the margin, just curious what was purchase accounting accretion for the quarter?
Almost $2.7 million on loans.
Okay. And then in terms of just curious on expenses here, how are you guys feeling about expense trends into the fourth quarter, but also just even next year in the current environment.
We feel like we're going to be right around this area, around the $57 million quarter at this point with slight growth going into next year.
And then just one more for me. I saw on the deck, you guys had your maturities, the first CRE over the next 24 months. Just curious kind of what's coming due? Should we think about the maturities having a similar LTV to what you show in the earlier slides as the overall composition of the portfolio? And do you see any stress in that [ theory ] maturity pipeline?
I don't have the maturities by quarter or by the maturity buckets in front of me. But as Paul mentioned earlier, I imagine they're going to be very similar to the overall portfolio. It sounds like we have a lot of -- pretty much steady of what we actually book.
Those loans were well underwritten. They've performed very well. The expectation is that, that will continue. And in terms of current loan-to-value, it's a very difficult environment because there have been so few trades, but it's very hard to pinpoint what something is worth right now.
There have been a few sort of spectacular crashes of things that have been around here, a few buildings here and there. But for the most part, those weren't traditional bank deals are not in the right locations, and they might not have been well owned. So I don't expect that there will be a lot of noise in those renewals.
Our next question comes from Laura Hunsicker of Seaport Research Partners.
I just wanted to go back to commercial credit, please. So starting with your $14.8 million office tree that came over into nonaccrual. Is that a Class A or Class B?
It's probably considered Class B.
Class B. Okay. And then did you have the vacancy on that?
I don't have that in front of me. It's not empty. It is not quite enough.
Yes, that's true of most of Boston, right? And then you didn't have a current debt service on that.
Again, I don't have that in front of me. But it was not terrible. Yes.
Okay. And then is there -- do you have a specific reserve against that $14.8 million credit?
On that one, I don't think so.
Okay. Okay. And then the 2 [indiscernible]
We only take a specific reserve. We only take a specific reserve when we've got a pretty serious situation, and this one is not quite in that category.
Okay. Okay. That's good. Your 2 commercial charge offs, can you give us a little color as to what they were in the quarter?
Yes. Those -- we had big reserves against both of them. These are things that have not been going well for quite some time. One is a medical enterprise and the other is a development enterprise. And in both cases, their demise was self-inflicted wounds. It was not a market driven thing, they were just not managed properly, and things fell apart. So the good news is it wasn't the market. The bad news is that we still lost some money.
So they were both C&I credits.
Correct. Yes.
Okay. Okay. And then just going back to office here, your $747 million book. Just hoping for a refresh on a couple of things. How much of that is lower risk medical?
I don't have those numbers in front of me. Sorry. it is not a big part of our portfolio in the office sense. Sometimes it stands up in the owner-occupied -- it's more in the owner-occupied side of things.
Got you. Okay. And then can you just help us think about of your $747 million, how much is Class A versus B versus C?
We're not big Class A lenders. So it's a small amount.
Okay. And then I know that most what you do is in the suburbs, but can you just help us think about how much of your exposure roughly is downtown Boston?
We provided that in the deck.
You do. Okay. I'll go back and look at that, I missed that. Okay. And then last question on office. I'm sorry to ask you still on the spot here on this. But on Slide 18, it looks like you've got $26 million maturing in the fourth quarter. Any update on that? Have you had any renewals yet? I know we're early in the quarter and maybe just of the $26 million. I guess how much is A, B and C? Or just any color you can give us on what that's looking like.
I don't have any color on the timing of when those are going to get renewed or whether it's A, B or C.
Yes. I don't know either, I haven't seen them yet, but I [ have not heard ] any noise.
Okay. And then, Paul, just last question. Can you help us think about with your stock trading here below book, how you're thinking about buybacks?
Well, I'm thinking about Carl for buybacks.
I think it's an attractive area. I'm sorry, go ahead. Sorry.
No, I was just going to say, Carl, how are you thinking about buybacks?
So it's an attractive place to be buying back stock, but we're also very thoughtful about our capital, and we're preserving capital at this point and we're using it for growth.
[Operator Instructions] Our next question comes from Chris O'Connell of KBW.
I don't think I missed it, but I apologize if I did. Did you guys give what the loan pipeline was that at the end of the quarter in just a breakdown of the categories?
Yes, we don't really provide pipelines. Chris?
It's too hard to define.
Yes. I would say, pipelines are certainly down from previous levels, but we're still very active, more so in the C&I space...
Got it. I guess just more thinking about how are you guys thinking about loan growth going forward, given that the funding pressures are starting to abate a bit as the organic outlook changed? And how are you guys thinking about growth into next year?
So we've always kind of targeted $80 million to $100 million of loan growth. I think that still is a target for us per quarter. And -- but a lot of that does depend on deposit growth. So as long as the deposits are there, we'll be continuing to grow loans. The market is still active. There's still very good customers that we're talking with. So again, it's about the deposit side.
Got it. And as you guys are kind of looking at the market right now and the different dynamics with the Fed tightening, where are you finding the most attractive sectors or subsectors in terms of what type of growth you want to put on the balance sheet at this point?
The equipment and C&I are certainly very attractive and we're very active in all 3 banks in these areas, partly as a result of the displacement of last spring of lots of companies are now banking with somebody that they didn't choose and so that has been providing some opportunities for conversations and proposals. But that stuff takes a little time to harden up and that's kind of the period that we're in now, and that's why we have a fair amount of optimism as we go towards the end of the year.
Some of these companies want to wait until the first of the year for things like treasury services, so there's a good feeling in the [ air ], but it would be in equipment and C&I mostly. And we'll stand by on real estate. We'll take care of our customers as needed, but there's not that much going on in real estate.
Got it. And should you take the NIM comments around another 5 to 6 bps maybe next quarter or potentially better if you see a little less pressure to be that -- that, that could be the inflection point for the margin and start to head up in '24?
That's our current [ modeling ] suggest that.
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, Alex, and thank you all for joining us this afternoon, and we will look forward to talking with you again next quarter. Good day.
Thank you for joining today's call. You may now disconnect your lines.