Brookline Bancorp, Inc. (BRKL) Earnings Call Transcript & Summary

Good afternoon and welcome to Brookline Bancorp, Inc.'s Second Quarter 2025 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, Dario Hernandez. Please go ahead.

Thank you, Lydia and good afternoon, everyone. Yesterday, we issued our earnings release and presentation, which is available on the Investor Relations page on 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 Pages 2 and 3 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 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, Dario and good afternoon, everyone. Thank you for joining us for today's earnings call. Our results continued to improve in the second quarter with earnings of approximately $22 million or $0.25 per share. As we have discussed over the last couple of quarters, we have been managing the balance sheet in advance of the merger of equals with Berkshire. The overall contraction of $61 million in our loan portfolio is intentional as we reduced exposures in commercial real estate and specialty vehicles and at the same time, grow our commercial and consumer loan portfolios. We continued to see improvement in our funding as our customer deposits increased $59 million and our margin increased 10 basis points during the quarter. We sold 2 commercial real estate loans during the quarter and recognized a charge of $3.5 million. Additionally, our Boston office portfolio continues to be under stress and we downgraded several credits during the quarter and added to the reserves for these credits. The office portfolio outside of Boston is continuing to perform very well. In May, the stockholders of both Berkshire Hills and Brookline approved the merger and I continue to be pleased with the progress the teams are making. We have been working together over the last few months to ensure a smooth merger and no significant issues have been identified to date. We are looking forward to being 1 bank in the coming months with the combination of our systems in early February, enhancing the products and services for our combined customers. I will now turn you over to Carl, who will review the company's second quarter.

Thank you, Paul. As Paul mentioned, loans declined by $61 million with commercial real estate and equipment finance declining $95 million and $46 million, respectively. While commercial loans grew $53 million and consumer loans grew $27 million. Owner-occupied commercial real estate increased by $15 million and investment commercial real estate decreased by $110 million, bringing the percentage of investment commercial real estate to total risk-based capital to 363% at quarter's end. The decline in equipment finance loans was driven by the continued runoff of the specialty vehicle portfolio, which decreased by $27 million during the quarter to $240 million. Our net interest margin improved 10 basis points to 332 basis points on higher asset yields as well as lower funding costs. Net interest income increased $2.9 million for the quarter to $88.7 million. Fee income was slightly higher at $6 million, bringing total revenues for the quarter to $94.7 million, which is 3% higher than Q1 and 10% higher than 2024. Noninterest expense, excluding merger charges, was $57.7 million, a decrease of $1.3 million from Q1 due to lower expenses in nearly every category, except marketing, which increased $503,000. Merger expenses for the quarter were $439,000 and were largely nontax deductible, contributing to a higher effective tax rate. The provision for credit losses was $7 million, $1 million higher than Q1. We had total net charge-offs of $5.1 million and provided additional credit reserves for selected properties in the Boston office market. The reserve coverage increased to 132 basis points of total loans. Yesterday, the Board approved maintaining our quarterly dividend at $0.135 to be paid on August 22 to stockholders of record on August 8. Looking forward, we continue to anticipate modest improvements to net margin as liabilities continue to reprice lower. We are currently estimating an increase in the margin of 4 to 8 basis points in Q3. This is dependent upon market conditions, deposit flows and the direction, timing and magnitude of future actions by the Federal Reserve. We anticipate growth in the loan portfolio to be in the low single digits for the balance of 2025 as growth in commercial and consumer loans will be tempered by the runoff of specialty vehicle and the gradual pickup in commercial real estate activity. On the deposit side, we anticipate growth of 4% to 5% with growth generally favoring interest-bearing accounts. Noninterest income is projected to be in the range of $5.5 million to $6.5 million per quarter. We are managing expenses, particularly staffing in preparation for the merger with Berkshire Hills later this year. Our effective tax rate is expected to be in the range of 24.25%, excluding the impact of nondeductible merger charges. This concludes my formal comments. I'll turn it back to Paul.

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

[Operator Instructions] Our first question today comes from Mark Fitzgibbon with Piper Sandler.

First question I had for you and I know you don't know this exactly because it's regulatory driven but when are you sort of targeting to close the acquisition? When do you think it's a reasonable guesstimate? And also, do you have a sense for when you're targeting the systems conversion?

Well, it's a merger. It's not an acquisition, a merger of equals. And the systems conversion is sometime mid-February. I don't remember the exact date. But it's...

February 9.

9. And we wait every day for the Fed approval, which then has a little time frame to it. So if we want to be very optimistic and forward-looking, we might say September.

Okay. And then I guess I'm curious, when the 2 companies do come together, in a merger, I was -- I assume there's some opportunity to do bigger loans with existing customers. I guess I was curious how big a credit you'd or relationships you'd be willing to do when the companies come together?

That -- the whole credit administration thing is getting done now. But I would expect that for certain kinds of well-sponsored relationships, it would be perhaps approaching $100 million, maybe a little bit less than that sort of depending on what the categories are. But that would be about it. Yes, it might be $90 million, which is double what each company does now.

Right. And that's related to [indiscernible]

It's below the legal limits. It's a small -- it's a fraction of the legal limit.

Okay. And then I wonder if you could give us any color on those 2 Eastern Funding credits where you took some additional reserves this quarter. Any...

That's basically the color. We're continuing to work with those credits and we've added a little bit more to the reserves for both of those. So the 2 credits you're referring to is the -- we have a commercial laundry as well as a grocery exposure there. We've added basically another $1 million to each one of those for specific reserves against that. We feel good where we are.

Okay. And then, Carl, your guidance of 4 to 8 basis points up in the third quarter, did that assume 1 rate cut or no?

No, no rate cuts in that number.

Okay. What do you guesstimate the impact of a 25 basis point rate cut would be on your NIM?

Again, that's always, as far as timing because we have a lot of assets that do reprice down immediately with that. So the timing in the quarter when that happens. So I think in the quarter, it may be fairly flat for the initial 25 and...

It hits both deposits and loans.

It hits both deposits and loans, it'll. We'll continue -- and a lot of -- we've seen a lot of benefits already. But we do have a lot of CDs and broker deposits as well as borrowings that continue to reprice down as we move forward. Just to give you a little sense on that, CDs, we have about $556 million rolling off at 410 basis points. Last quarter, our CDs that went on the books around $375 million, brokered CDs, about $194 million maturing in the next quarter at 480 basis points and Federal Home Loan Bank advances about $371 million at 477 basis points. So we're still seeing the benefits of those repricing down. The Fed moves 25, they'll reprice down even more. So...

And we've also reduced materially the entirety of wholesale funding which is even better.

Our next question comes from Laurie Hunsicker with Seaport Research Partners.

Just wanted to -- just on margin. Do you have a spot margin for June?

The spot margin for June was 339 basis points.

Okay. And then just going over to credit, I really appreciate all the details you provided. So just looking at your office book, that $647 million, how much of that is in the Boston Central Business District?

$154 million.

Okay. And that includes those 2 credits?

That's not just the Central, that's downtown, that's all of downtown. It's not just central district. So we don't have that kind of concentration. Some of those are in the Back Bay, Newbury Street.

Got you. Okay. And then the $29 million. So great that you resolved the $10.8 million. The $28. 9 million that basically experienced some deterioration this quarter, can you give us a little color on those loans in terms of when you're thinking resolution, what the vacancy is looking like? Do those have [indiscernible]

I think they're all well sponsored properties. They're well-located properties. They have vacancies. They might be at 50% to 70% occupied. Lease-up has been very slow, as you can imagine. But great sponsors, they pay. And so we are exercising some patience but sort of being careful with our reserves as we always are.

Got you. And do any of those come due in the next couple of quarters?

Do you think?

No.

I don't think so.

Okay. Okay. And then just going back over to the jump in the C&I nonperformers, that equipment financing just linked quarter. Can you help us think about that a little bit, going from $33 million to $46 million, the nonperformers in that bucket?

Yes, that was driven by 1 credit at Eastern Funding or at the equipment finance unit related to fitness equipment, little over $11 million.

Okay. Okay. Got you. And then can you help us -- this is sort of, I guess, more broad here. Can you help us think about the FASB's ASU with respect to what it means for pro forma tangible book dilution versus accretion, right? So your tangible book dilution should be a little less, your accretion should be more. Can you help us quantify that a little bit, with respect to the [indiscernible]

Sure. So Laurie, we've known each other a long time. You know, I've hated this for so long. I think the entire banking industry has always questioned why this rule was ever put in place. But they finally said they're going to fix it, the whole double accounting on this. So the whole CECL -- this -- the Day 2 CECL booking. So I'll refer back to -- and we -- I think the presentation that we did when we announced the transaction was very -- provided a lot of good insight there. So I would recommend that if you want to go, go see that. And we lay it out pretty well and I'll refer to that number. So we had estimated that to be $94.5 million when we announced the transaction, what the Day 2 CECL would be. So that charge on an after-tax basis is roughly $71 million after tax. That is not going to flow through the income statement once FASB finally does this -- issues the final rule. Now they said they're issuing it. I've been waiting for it patiently and you know how patient I am. But we'll see when that comes out. Our KPMG told me the other day that they expect it in the -- likely in the fourth quarter. It wasn't going to be a third quarter event. It will probably be a fourth quarter event. So that equates to about $0.84 per share, right? So that's some real money. So it's great for our capital ratios. It will be great for the earnings, $0.84, that represents about 20% of dilution we were talking about. So it does improve how fast, as you know, we announced when we did the deal a 2.9-year earn back. This will make it a lot faster than that. So we're looking forward to that happening. If -- I want to be clear on this, if the FASB does not issue it by the time this deal closes and we release earnings for the third quarter, if it does not happen in the third quarter, we would still have to recognize that Day 2 CECL impact and then it gets reversed basically in the fourth quarter when they do finally issue the final rule. I hope that helps clarify what that might look like.

Yes. Okay. So okay. A couple more questions related to that. So it's also looking like -- assuming, obviously, this goes through, that early adoption will be permitted but you don't necessarily have to do it. Would you all be adopters? How do you think about that?

Absolutely. Absolutely.

Okay. Okay. And then the accretion income is obviously going to go down. So how do we think about that? In other words, this deal when you announced that was -- oh, go ahead.

Right. So when we announced it -- when we announced that, like I just said, $94.5 million would not get accreted back into income over time. But as you can understand, that $94 million would be getting accreted over the life of the loans, which is 5, 6, 7 years, maybe even longer, when you think about it over time. So it will -- it's not as meaningful impact when you think about it that way.

Okay. Okay. All right. So 5 to 7 years. Okay. And then to your point on you'll have more capital, how do you think about -- assuming close this deal September 30, how do you think about repurchasing shares? What's your thoughts there?

I think that will just -- that will take some -- a little bit of time. I think you'll -- we would have to get through the initial couple of quarters and the Board will take that up if they feel that's the right thing to do. I think the first order of business will be addressing the dividend and then we'll address the stock and where our capital levels are. We do -- we've been very clear that we want to get the commercial real estate down to 300% in a fairly short order. And we're well on our way. We've done -- had a lot of progress in that towards that end. And so I think that's going to be the first order of business there.

Okay. Okay. And then just, Carl, last question on the dividend, as you mentioned it. So if we look at Berkshire Hills right now, there are $0.72 annually and you all said you would be adjusting it to make it on par with where you all currently are. So that's suggesting about $1.28 per share. Is that correct? Is that still the thinking?

That's correct.

And next question comes from Steve Moss with Raymond James. This is [indiscernible] on for Steve.

First one for me. How is new loan pricing holding up these days?

It's holding up better than it had been over the years. But I think it's still a very competitive marketplace. And because we are originating much less in real estate, I think we are less exposed to the viciousness that's coming from things like institutional lenders, insurance companies and the like. But in the equipment finance business, those rates are strong. And in the pure C&I business and in the consumer business, they're good but competitive.

Yes. Just to give you a sense during the...

We can give you some numbers...

I'll give you just a quick overview there. So total loans originated in the second quarter were $445 million at a weighted average coupon of 694 basis points, so just shy of 7%.

All right. One more for me. I saw in your deck mentioning of the Mass Housing taking -- takeout being delayed. Can you provide any more color on that?

Yes. So there's a loan that it's in our -- it's basically a considered -- it's a 90-day past due loan because of the maturity date. It's being taken out by Mass Housing. Everything is in order. It's an accruing loan. It's not -- I wouldn't consider anything wrong with the loan at all. It's just that because it's 90 days past due from a maturity standpoint, it falls into that category. We're just waiting for the paperwork to go through and for it to be taken out by Mass Housing. But it's 100% leased up. It's -- the property is in good order. [indiscernible]

I expect that to be out this quarter.

Our next question comes from David Konrad with KBW.

Real quick one for me. I guess, really regarding 3Q on a stand-alone basis. Expenses were really good this quarter. Just your near-term outlook. Is this a good run rate? Or how should we think about that for the third quarter?

Yes, I don't see anything -- if anything, it would be down a bit.

Good run rate.

We're -- been running it. Pretty solid.

We have no further questions. So I'll pass you back over to Paul Perrault for any closing comments.

Thank you, Lydia and thank you all for joining us today and we will look forward to talking with you with you again next quarter. Good day.

Thank you very much. This concludes our call today. Thank you for joining. You may now disconnect your lines.