Brookline Bancorp Q2 2024 Earnings Call Transcript

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July 25, 2024

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to Brookline Bancorp, Inc. 2nd Quarter 2024 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.

Operator

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

Speaker 1

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, brooklynbankmort.com,

Speaker 2

and has

Speaker 1

been filed with the SEC. This call may contain forward looking statements with respect to the financial conditions 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 ProFoundecorp's results and performance trends and should not be relied on as financial measures

Speaker 3

reflect your results in the future completion.

Speaker 1

For a comparison and reconciliation to GAAP earnings, please see our earnings release. I'm pleased to introduce Brooklyn Dayton Forest Chairman and CEO, Paul Quelton.

Speaker 4

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.

Speaker 4

The spreads for this business line have been coming under pressure for some time now as more competition has entered 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 $350,000,000 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 $115,000,000 I will now turn you over to Carl, who will review the company's 2nd quarter results in detail.

Speaker 4

Carl?

Speaker 3

Thank you, Paul. Yesterday, we reported net income for the quarter of $16,400,000 or $0.18 per share. As Paul just mentioned, we exited the Specialty Vehicle Finance business and recognized our restructuring charge of $823,000 which includes severance and occupancy costs. Excluding the restructuring charge, operating earnings were $17,000,000 operating EPS was $0.19 per share. Turning to quarter, total assets grew $92,000,000 driven by loan growth of $66,000,000 spread across all loan capitals.

Speaker 3

In the 2nd quarter, we originated $491,000,000 in loans at a weighted average coupon of 802 basis points. The weighted average coupon of the borrower 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 the end of the quarter. The reversal of accrued interest in quarterly interest borrowed on loans and loans equals 5 basis points in the net interest margin for Q2. On the deposit side, customer deposits grew $66,000,000 while broker deposits decreased to 48,000,000 dollars Deposit growth continued to be focused in higher rate savings and client deposits.

Speaker 3

Total funding costs increased 7 basis points in the quarter to 3 65 basis points. Overall, the margin declined 6 basis points to 300 basis points in the quarter. Total average interest earning assets were basically flat to $10,700,000,000 on a linked quarter basis, resulting in net interest income above $80,000,000 a decline of $1,600,000 Non interest income was $6,400,000 which is basically flat with the prior quarter as lower fees on derivative income were offset by on our participation fees under non interest income. Operating expenses were $58,400,000 for the quarter, excluding the restructuring charge. This is down $2,600,000 from Q1, primarily driven by lower compensation and benefits and weather related financing costs.

Speaker 3

Provision of credit losses was $5,600,000 for the quarter, a decrease of $1,800,000 from the Q1. Net charge offs were $8,400,000 driven by a $3,800,000 charge off of an office building and $4,600,000 in C and I charge offs, nearly all of which were related to equipment financing. The charge offs were largely previously reserved for. Non form loans increased $20,000,000 a year, a decrease of $27,000,000 in C and I driven by 2 large credits. The increase was offset by a decline of $6,700,000,000 in nonperforming commercial real estate loans.

Speaker 3

The NPAs to total assets increased to 54 basis points. Our reserve coverage ratio increased slightly to 125 basis points. As I mentioned last quarter, client behavior and industry responses continue to adapt to a fairly volatile environment. Recently, we're seeing greater market expectation for the reserve fleet up rates and longer term rates have declined significantly since the end of the quarter, approaching large levels. While loan demand is not robust, it is a bit better than we previously anticipated.

Speaker 3

We 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 deposits may persist, but at a significantly slower pace. Our Q3 margins is projected to fall within the range of 310 basis points to 310 basis points and continue to improve.

Speaker 3

However, this is a better number of deposit flows and timing of actions by the firm of research. Non interest income is projected to be in the range of $6,000,000 to $7 per quarter, and both components may vary significantly. We continue to manage operating expenses of $240,000,000 or less for the full year. Exiting the Specialty Vehicle business will reduce operating expenses at approximately $800,000 per foot. Currently, our effective tax rate is expected to be in the range of 24.5% for the balance of the year.

Speaker 3

Yesterday, we drove maintaining 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, our dividend payout approximates a yield of 5.1%. This concludes my formal comments. I'll turn it back to Paul.

Speaker 4

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

Operator

We will now begin the question and answer session. First question is from the line of Mark Fitzgibbon with Piper Sandler. Your line is now open.

Speaker 5

Hey, guys. Good afternoon.

Speaker 3

Good morning, Mark.

Speaker 5

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

Speaker 3

Sure. We're still set to be in the $240,000,000 or less for the full year.

Speaker 5

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

Speaker 3

About $800,000 per quarter.

Speaker 5

$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?

Speaker 4

Expensive 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.

Speaker 4

But as time went on, we seem to have ended up with more Q1 or Q2 kind of people, and it's just really hard to make money at that. Makes sense. The other piece is mostly for the 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 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 time to stop.

Speaker 5

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

Speaker 3

Sure. Once a Beckford Island client, the long term client that just was restructured and so there's a deferred payments for 2 quarters. So we just automatically put that on non accrual and that will go back on accrual status after they pay for 2 quarters in a row. So we do expect that to happen by the end of this year, early next year.

Speaker 5

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

Speaker 3

That's a C and I credit.

Speaker 4

Correct. Specialty food companies. Yes.

Speaker 3

And the other is a large industrial laundry, basically 2 foreign units, the laundry companies. Industrial laundry. Industrial laundry that stayed in the process, they worked out as well.

Speaker 5

Okay, great. 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 banks?

Speaker 4

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

Speaker 5

Okay,

Speaker 3

great. Thank you.

Speaker 4

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.

Speaker 5

Paul, just having been through the cycles as 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 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.

Speaker 3

Well, I can I think that there's

Speaker 4

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 or variety trends that show like a whole industry being in trouble with something of us, I guess, you have the electric car. But we don't see inventory problems. We don't see collection problems.

Speaker 4

Real estate, knock out wood here at least in the Metro Boston and certainly where Ireland and 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 C properties that were acquired by very capable 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 buildings got fixed, but not leased entirely.

Speaker 4

And so they've in both cases, they're looking

Speaker 3

to hold on to them,

Speaker 4

put in more money and kind of wait it out. So I think real estate is okay. And in the C and I business, it's a little bit trickier to be successful than it might have been 5 years ago.

Speaker 5

Thank you.

Operator

Thank you. The next question is from the line of Laurie Hunsicker with Seaport Research. Your line is now open.

Speaker 2

Great. Hi, thanks. Good afternoon, Paul and Carl. Hello. Just going back to your specialty vehicle portfolio of $352,000,000 can you share with us what the coupon is on that?

Speaker 2

And then what the non performers are on that?

Speaker 3

Sure. The coupon on that on the specialty vehicles are probably well, I'll go to the yield. The yield is around 7 $50,000,000 on that, on the entire Perfect.

Speaker 2

Yes. And then the non performers, I mean, I guess your equipment finance non are $27,000,000 How much of that is related to this book?

Speaker 3

I'll get back to you. I'll have that form be right. That's some

Speaker 2

Okay. And then also the charge offs for this quarter, the $4,300,000 equipment financing charge offs C and I equipment financing charge offs, was that a specialty vehicle or was that something separate?

Speaker 3

Mostly. Mostly specialty vehicle. We had some car wash that come out of car. But the line shares. The line shares.

Speaker 2

Got it. Okay. I missed it. You said how many people were terminated on the specialty vehicle side, 2021. And did that happen late in the quarter, middle of the quarter, beginning of the quarter?

Speaker 2

How should we think about that?

Speaker 4

It's happening right now.

Speaker 2

Okay. So it's okay. 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 $1,000,000 or something annually. But on the expense side, I had that impact running about $1,600,000 annually, so $400,000 next quarter.

Speaker 2

Am I thinking about that right? Or has that already been reflected? How should we think about that?

Speaker 3

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

Speaker 2

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

Speaker 3

No, I think when we first were estimating what the impact would be about going over $10,000,000,000 I think we estimated some higher expenses associated with adding few people to staff. But that had nothing to do with Durkin. That just had to do with building also a lot of compliance. Adding some people in credit, things of that nature compliance. But that's largely done.

Speaker 2

That's already done. Okay. Okay. That's great. And then, okay, perfect.

Speaker 2

Perfect. Okay. And then, on office, the $3,800,000 that you had that were net charge offs, how big was that office credit that you took the charge off on? Just trying to think about what the right was.

Speaker 3

It was around $14,000,000

Speaker 2

$14,000,000 originally. Okay.

Speaker 4

And that's correct. Let me give you a little bit

Speaker 3

more detail on that. We currently are charging out a $10,800,000 So we're still working through this. And we do have a specific reserve, dollars 2,500,000 as well.

Speaker 2

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

Speaker 3

Downtown Boston.

Speaker 2

Okay. And that's Class A, Class B?

Speaker 3

Class B.

Speaker 2

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

Speaker 4

It could be half. Could be half. Is it

Speaker 3

lower than the lower?

Speaker 4

Between the third and the half. First

Speaker 1

floor

Speaker 3

is the floor.

Speaker 2

Got you. Okay. Good, good. Okay. 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.

Speaker 2

Do you have what's your overall office nonperformers are?

Speaker 3

We just have the one. We only have the one that's just that one.

Speaker 2

Just the one that's coming due. Okay. Okay. That's correct. Got it.

Speaker 2

Okay. Okay. Very helpful. Okay. And then, I guess, Paul, just last question.

Speaker 2

There seems to be a little bit more M and 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 and A? How you see sort of the pulse on M and A? Any chatter?

Speaker 2

Any directional thoughts? That would be really helpful. Thanks.

Speaker 4

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 and the difficulties of raising capital and having it all work. I think we're closer to getting to more normal M and A activity, but we're not quite there yet. And I'm not aware that they result that much around us anyway.

Speaker 2

Okay, great. Thank you so much for taking my questions.

Speaker 4

Okay, Laurie.

Operator

Thank you. The next question is from the line of Chris O'Connell with KBW. Your line is now open.

Speaker 6

Hey, good afternoon, Paul and Carl.

Speaker 4

Hey, Chris. Chris.

Speaker 6

So 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.

Speaker 3

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 bearing product. Any growth in deposits is basically coming at the higher interest though as you're attracting new customers. We are starting to see more activity on the DDA side, particularly on the commercial side and the cash management side, which is always a bit good to see. And it's that you'll have the outflows that you're seeing early, you see stocks you see out there.

Speaker 3

I would say on the CE side, we're basically priced where the market is, right? So the book is maturing. So we've got about $330,000,000 CDs 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 bank order. We're actually offering a little bit of a higher rate for lower we're eliminating the curve out there so that people are trying to take forward lower terms.

Speaker 3

So not live in the hills. I assume you guys are participating on the downside.

Speaker 6

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?

Speaker 3

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, high yield savings accounts.

Speaker 4

So number of quarter is somewhat 10 basis points. Yes. That's a fairly decent development. Yes.

Speaker 3

Got it.

Speaker 6

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 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 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?

Speaker 3

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

Speaker 6

Got it. 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?

Speaker 3

Well, as rigs come down, we our liability is pretty responsive to that. I expect that to be fairly responsive as it goes down. That data, it wouldn't be as immediate as what's the prime rate going down, sulfur rate going down? Probably not. There will probably be a little bit of a bang there.

Speaker 3

We have quite a bit on it, like you said, of corporate CDs and the loan book bank events that we repriced fairly quickly. And so we monitor that very closely, of course, and try to match that out with funding book. So we do also have a lot of adjustable rate, floating rate on loans that would retrace down slightly. Overall, I think it's going to be a benefit to the segment.

Speaker 6

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?

Speaker 3

So we continually look at. So if we have a build of capital, I think that's something that's going to be talked about.

Speaker 6

Got it. All right. That's all I had. Thanks for taking my questions.

Speaker 3

Thanks, Christian.

Operator

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

Speaker 4

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.

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Earnings Conference Call
Brookline Bancorp Q2 2024
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