Q1 2024 Brookline Bancorp Inc Earnings Call

Participants

Laura Vaugn; Attorney; Brookline Bancorp Inc

Paul Perrault; Chief Executive Officer And Chairman of the Board, Brookline Bancorp, Member of the Board of Directors; Brookline Bancorp Inc

Carl Carlson; Co-President, Chief Financial Officer and Strategy Officer; Brookline Bancorp Inc

Mark Fitzgibbon; Analyst; Piper Sandler Companies

Steve Moss; Analyst; Raymond James

Laurie Hunsicker; Analyst; Seaport Global Securities LLC

Chris O'Connell; Analyst; Keefe, Bruyette & Woods North America

Presentation

Operator

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.

Laura Vaugn

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, Brookline Bancorp.com and has been filed with the SEC. This afternoon's call will be hosted by Paul A., Harold 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 growth.

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 six to seven reductions throughout 2024. However, the economic landscape remains dynamic. Unemployment rates persist at historically low levels. Consumer spending remained steady and overall economic vitality and DOORS as inflation remains a persistent concern. Within a matter of months, the market now anticipates only one 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 high 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 revenue. Our goal is to provide boutique commercial banking services to our valued customers, sufficiently 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.

Carl Carlson

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 from the first quarter. We had loan originations and draws for $435 million at a weighted average coupon of 779 basis points. The weighted average coupon on the loan portfolio rose four basis points to 596 basis points with the quarterly yield on the portfolio increasing two 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 were 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 nine basis points to 3.06%, resulting in net interest income of 81.6 million a decline of $2 million from Q4.
Non-interest income 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 we 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. Provision for credit losses was 7.4 million for the quarter, an increase of 3.6 million from the fourth quarter increases 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 ships specifically reserved for $3.5 million associated with equipment finance and 600,000 associates exiting two 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 2020 for 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 for 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 non owner-occupied commercial real estate. Our focus remains on serving relationship customers. Hence, we anticipate only 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 3.5 basis points and then improved throughout the year. However, this is dependent upon deposit flows. Noninterest income is projected to be in the range of 6 to 7 million per quarter, although components may vary significantly and 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 expect it to be around 24.7% for the balance of the year. Yesterday, the Board approved maintaining our quarterly dividend at $0.135 per share to be paid on May 24th to stockholders of record on May 10th. On an annualized basis, our dividend payout approximates the yield of approximately 6.5% as concludes my formal comments. And with that transactable.

Paul Perrault

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

Question and Answer Session

Operator

(Operator Instructions) Mark Fitzgibbon, Piper Sandler.

Mark Fitzgibbon

Good afternoon, Joe.

Paul Perrault

I'm part of our pump.

Mark Fitzgibbon

Carl, just to follow up on your tax guidance, do you plan to replace those tax credits fire this quarter or it sounds like maybe not we're always looking at those opportunities, but I don't have any visibility into it.

Carl Carlson

So I don't have a pipeline, let's say if I came across to me, we came across it, so we would do that.

Mark Fitzgibbon

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 is probably weighing on the margin a little bit. How should we think about cash balances moving forward?

Carl Carlson

I think it will be fairly stable in that range of 10%.
Okay. Temporary ERP and then you're planning to between 10% and securities cash and securities around 10% of the balance sheet. That's kind of where we target.
Okay.

Mark Fitzgibbon

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

Paul Perrault

there of the biggest single category would be related to transport things. And are 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 would carrying stuff for Amazon and Amazon has developed their own delivery systems. So they lose some of that business. And these these are small entrepreneurs that don't have a lot of places to turn to. That's that's been the single biggest elements and on the trucks are about then repair, then 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 it's not a waterfall or anything like that.

Mark Fitzgibbon

Okay.
And then lastly, I know you guys didn't buy back any stock this quarter and given the environment maybe maybe you don't want to. But given the pullback in your stock price today, you feel like buybacks makes some sense here, trading comfortably below tangible book.

Carl Carlson

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

Mark Fitzgibbon

Thank you.

Carl Carlson

Thanks, Mark.

Operator

Steve Moss, Raymond James.

Steve Moss

Good afternoon.
Best.
As I said, many calls are starting up of crop. Just hoping maybe to start off on some on the office portfolio here. The two credits that were charged off, were those resolve sold liquidated during the quarter? Was that just a charge-off ahead of an expected sale?

Carl Carlson

Of note, those were to note sales of which one was on our balance sheet at the end of the quarter as a loan held for sale and was subsequently closed.

Paul Perrault

Okay, they were sold a little bit under par, which is what created that small loss, but we got rid of a couple of properties that we're a bit troubled guy.

Steve Moss

You guys mentioned in the deck, only two loans maturing on the of about 23 million represent the criticizing classified within Office. Those are separate of those loan sales.

Carl Carlson

I take it.
They were not part of those those those numbers.
Okay.

Steve Moss

And just in terms of like I realize it's small, but just curious like what type of properties are they in kind of geographically?

Paul Perrault

Are they looking?
They're Boston-based Boston banks and one of them that I'm aware of retail and commercial on the upper floors.

Steve Moss

Okay, got you.
And then just turning to the margin here on if that was a 3% to three three or five guide, just maybe borrowing. I'm just curious, like what do you think gives you comfort here that the margin could bottom in the second quarter on just what if we stay in a higher for longer. How are you guys thinking about the margin beyond the second quarter?

Carl Carlson

As you know, it's a great question with an comfort stuff that got tougher 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 only or everything suggests that the deposit migration is not going to continue. Where might they our models right now are coming in around the three oh three range of margin that that would have to be precise, and that was before the rate just the recent rate increases by and we're using more like March, March 31st numbers for and so we get a little bit of bump with the repricing of loans throughout the quarter from where the five year is. Now it's over 80 basis points higher, almost 90 basis points higher than where it was at the end of at the end of the year. While I'm not sure exactly much amortized from from March 31st, but it's helpful Japan was up 50 basis points just just in the last couple of weeks. So that's helpful.

Steve Moss

Right.
Okay, good. That's good color for me. Appreciate Appreciate all out that back in the queue here.

Carl Carlson

Thanks, Dave.

Operator

Laurie Hunsicker with Seaport Research.

Laurie Hunsicker

Your.
Hi.
Thanks.
Good afternoon and thanks for all the detail on that real estate that you guys added.
That's super helpful. But actually, I wanted to go back to the equipment finance section, and I'm looking at page 14 of your deck and can you just help us think about the 3.5 million in starts off to the specialty vehicle category? Looks like you have to check that wasn't that it wasn't heavy tail or you think it came from sort of that Fed Ex category of EUR40 million or the other vehicle category? Or how should we think about that?
I guess that's sort of my first question around equipment finance. What's your segment that you're coming from?

Carl Carlson

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 of that was just basically in the Fenics credit for transport in this category. When you look at page 14, it's probably mostly in the Fed Ex and maybe in the other vehicle categories, we have about $800,000 in charge-offs on the total of 600 laundry and about 600 fitness.

Paul Perrault

And then we've got some net yields and recoveries that are sprinkled throughout the entire equipment finance portfolio, far and away the vast majority of it, as you can probably see there is laundromats which can add up to a cap here.
Yes.
So yes, the more we can do more loan, though, if it makes sense,

Laurie Hunsicker

it makes a lot of sense.
Okay.
And so just thinking about equipment finance, I mean, directionally in 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 a change.
You're still the only are working on. We have we're feeling good about it. But the guys the guys who run Eastern each Eastern funding or sort of reevaluating their strategic direction and all of this as we speak?

Carl Carlson

Yes, I think the difficulty of getting But when we talk about recoveries, I think they're very comfortable how they underwrite and things of that nature. But when things don't 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 some of that.

Paul Perrault

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

Laurie Hunsicker

Yes.

Carl Carlson

The nice thing about the model. It makes no, it's not going anywhere, right?

Laurie Hunsicker

Yes.
And so with that particular revenue, right, good.
Or I guess when you think about that?
Yes, that's specialty vehicle bucket that I mean, would you potentially look to sell those loans or get out of that? Or how do you think about that does not grow them further?

Paul Perrault

Will the road or meetings concurrent to now that are considering all of those things.

Laurie Hunsicker

Okay.
Okay.
And then one other question here on the equipment finance, you've got to you've got a category.
Yes, Kris. So equipment finance to create. What is that? That's a 166 million barrels you Joe. I will follow up with you.

Paul Perrault

That's when the laundromat owner acquires the building of the laundromat assume a lot of cases, it might be a little strip mall, for example, that for days of the guy wants to own, but it's always attached to a laundry is always a laundromat involved basket.

Laurie Hunsicker

Okay, got you. Got you.
Okay.
And then and then one more question and Mark sort of already asked this, but I am just so curious it would seem you guys have such a plethora of capital that buybacks here, you know, in the high 70s percentage of book, but just be absolutely top of mind. I mean, at what point, do you say?
Oh, my gosh, you know, we have to pivot and get excited about this.

Carl Carlson

Yes.
Where are we right now in this environment? I would say still in this environment, we still think capital is very precious and it's certainly as attractive to buy the stock at this level, there's no question, but I also think it's very important to keep 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.

Laurie Hunsicker

Okay, great. I'll leave it there. Thanks.

Carl Carlson

Thanks, Lori.

Operator

Chris O'Connell, KBW.

Paul Perrault

Hey, good afternoon, Chris.

Chris O'Connell

Dan, on the credit front, can you just remind us about the non equipment finance portion, the 4.7 million that was had had some partial reserves for it previously?

Carl Carlson

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

Chris O'Connell

And these are loans that have been dogging us. We pretty well wrapped them up now. But for the past couple of quarters, you sort of cite those those two loans that was being worked out?

Carl Carlson

Yes.

Chris O'Connell

In on the CRE front, I mean, outside of the office, as you're looking at the rest of the maturities and throughout 2024. I mean, how do you feel about kind of the core CRE or the ex office and in the credit quality there? And as these maturities come through over the course of the year?

Carl Carlson

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 commercial real estate, particularly multifamily space and other things that reprice they may not mature, but they'll reprice after five years. They may have a 10-year final balloon. And so they may be repricing up 200 base, 280 basis points. We prepare to five year to five years ago. And so right now, those are those debt service coverage, things of that nature are just fine. Our 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, but I think the office, even the even office is doing well. I think it's just the inside of certain certain properties in certain places that we have to we'll work with our customers.

Chris O'Connell

Yes, it has the has the recent increase in rates, has that tempered demand or even just the timing of potential pipeline closings and in the CRE book, probably it certainly has tempered demand I guess I don't know if it's stopped closings at all.

Carl Carlson

If it did there there probably free reading it.

Paul Perrault

Yes, there's just not a lot of trades going on in our markets and real estate business does not mean a lot of buyers, not a lot of sellers if Got it. And it's in rapidly probably due to rates, but it's also probably due to the views on occupancy as an investor that picked rightly.

Chris O'Connell

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

Paul Perrault

Yes.
Well, industrial has been strong on the import export stuff has been strong law firms, little of everything that there's not a particular expertise, some particularly in our New York operation. I think things like private schools and nonprofits. I've been doing quite well and Brian's got involved in some of that as well. So they tend to be very, very well established, low leverage organizations that have great, great cash flow and are doing something might be building a generational thing.

Chris O'Connell

Got it.
And I know last quarter was pretty light on the M&A discussions.
I mean, has there been any pickup at all on kind of your general market or discussions since then it may be maybe a little bit, but it's not it's not too strong because it's so difficult. I mean, everybody pushes the stuff around and you get these capital holds.
The mean calls 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.
We've got it in the field.
Just in general, I guess going forward, I mean, what are you guys thinking about in terms of a normalized charge-off rate in this type of environment?

Paul Perrault

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 that I tried 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 really tried to get to.

Chris O'Connell

Great.
That's all I had.
Thanks for taking my questions first.

Operator

Yes, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Parod for any closing remarks

Paul Perrault

that 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 and have a good day.