Brookline Bancorp - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 EPS was $0.25 on net income of $22.0M, up from $0.21 and $19.1M in Q1; operating EPS (non-GAAP) was $0.25 with merger costs minimal this quarter.
• Net interest margin expanded 10 bps to 3.32%, net interest income rose to $88.7M, and efficiency ratio improved to 61.3%, aided by deposit mix and lower funding costs.
• Asset quality was stable: NPL ratio held at 0.65%, NPAs ticked down slightly; net charge-offs fell to $5.1M, largely from sale of two CRE loans with $3.5M combined impact.
• Management guided Q3 NIM up another 4–8 bps and maintained deposit growth (4–5%), low-single-digit loan growth, non-interest income ($5.5–$6.5M), and ~24.25% tax rate; dividend maintained at $0.135/share.
• Merger with Berkshire Hills progressing; FASB’s expected ASU on day-two CECL could avoid ~$71M after-tax charge (~$0.84/share) and accelerate earn-back; combined dividends expected to align to ~$1.28/share annually post-close, per management discussion.

What Went Well and What Went Wrong

What Went Well

• NIM expansion and revenue growth: NIM rose to 3.32% (+10 bps q/q) and net interest income climbed to $88.7M; total revenues were ~$94.7M (+3% q/q, +10% y/y), driven by higher asset yields and lower funding costs.
• Deposit strength and mix: Customer deposits increased $58.3M q/q while brokered deposits fell $8.5M; total deposits up $49.8M q/q and $224.2M y/y, supporting funding cost decline.
• Cost control: Non-interest expense decreased $1.9M q/q to $58.1M, with reductions in compensation, occupancy, and merger expenses, improving efficiency ratio to 61.34%.
• Quote: “Our net interest margin expanded again this quarter despite intentional contraction in our commercial real estate portfolio.” — CEO Paul Perrault.
• Credit charge-offs improved: Net charge-offs fell to $5.1M from $7.6M, and annualized NCO ratio dropped to 0.21% from 0.31%.
• Merger execution on track: Stockholders approved the MOE; systems conversion targeted for early February; management reported no significant issues identified to date.

What Went Wrong

• Provision increased: Provision for credit losses rose to $7.0M (from $6.0M), reflecting stress in Boston office and additional specific reserves on two Eastern Funding credits (commercial laundry and grocery).
• Equipment finance nonperformers rose: Nonperformers in equipment financing increased, driven by a single fitness equipment credit (~$11M), raising watch on C&I and specialty exposures.
• Continued CRE runoff and loan contraction: Total loans/leases declined $60.3M q/q (intentional contraction), limiting balance-sheet growth; CRE investment balances decreased materially.
• Analyst concern: Office exposure (~$647M) with ~$154M in Boston CBD; several credits at 50–70% occupancy; lease-up is slow, requiring patience and reserves.

Transcript

Speaker 2

Good afternoon and welcome to Brookline Bancorp Inc.'s second quarter 2025 earnings conference call. All participants will be in listen-only mode. After today's presentation, there'll be an opportunity to ask questions. 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.

Speaker 1

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 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 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 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.

Speaker 5

Thanks, Dario, and good afternoon, everyone. Thank you for joining us for today's earnings call. Our results continue 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 Hills Bancorp. The overall contraction of $61 million in our loan portfolio is intentional as we reduce 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 two commercial real estate loans during the quarter and recognized the 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 Bancorp and Brookline Bancorp 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 one bank in the coming months with a 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.

Speaker 0

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. Non-interest 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 non-tax 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 charges 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 per share to be paid on August 22 to stockholders of record on August 8.

Looking forward, we continue to anticipate modest improvements to the net interest margin as liabilities continue to be repriced 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 being 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. Non-interest income is projected to be in the range of $5.5 to $6.5 million per quarter.

We are managing expenses, particularly staffing and preparation for the merger with Berkshire Hills Bancorp later this year. Our effective tax rate is expected to be in the range of 24.25%, excluding the impact of non-deductible merger charges. This concludes my formal comments. I will turn it back to Paul.

Speaker 5

Thanks, Carl. We will open it up for questions.

Speaker 2

Thank you. Please press star followed by the number one if you'd like to ask a question and ensure your device is unmuted locally when it's your turn to speak. If you change your mind or your question's already been answered, you can withdraw your question by pressing star followed by the number two. Our first question today comes from Mark Fitzgibbon with Piper Sandler. Please go ahead. Your line is open.

Speaker 0

Hey, guys. Good afternoon. First question I had, hi, Paul. First question I had for you, 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 is a reasonable guesstimate? Also, do you have a sense for when you're targeting the systems conversion?

Speaker 5

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

Speaker 0

February 9th.

Speaker 5

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

Speaker 0

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

Speaker 5

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, depending on what the categories are. That would be about it. It might be $90 million, which is double what each company does now.

Speaker 0

Right. That's relationships that are not.

Speaker 5

Below the legal limits. It's a fraction of the legal limit.

Speaker 0

Okay. I wonder if you could give us any color on those two Eastern Funding credits where you took some additional reserves this quarter. 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. The two credits you're referring to are the 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. Carl, your guidance of 4 to 8 basis points up in the third quarter, did that assume one rate cut or no? No. No rate cuts in that number. What do you guesstimate the impact of a 25 basis point rate cut would be on the new?

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

Speaker 5

It hits both deposits and loans.

Speaker 0

It hits both deposits and loans. We'll continue. We've seen a lot of benefits already, but we do have a lot of CDs and brokered deposits as well as borrowings that continue to reprice down as we move forward. 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 are around $375. Brokered CDs, about $194 million maturing in the next quarter at 480 basis points. Federal Home Loan Bank advances about $371 million at 477 basis points. We're still seeing the benefits of those repricing down. If the Fed moves 25, they'll reprice down even more.

Speaker 5

We have also reduced materially the entirety of wholesale funding, which is even better.

Speaker 0

Thank you. Thank you.

Speaker 5

Okay, Mark.

Speaker 2

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

Speaker 4

Yeah, hi. Good afternoon.

Speaker 0

Hello.

Speaker 4

Laurie and Carl, I just wanted to ask, just on margin, do you have a spot margin for June?

Speaker 0

The spot margin for June was 339 basis points.

Speaker 4

Great. Okay. Just going over to credit, I really appreciate all the details you provide. Just looking at your office book, that's $647 million. How much of that is in the Boston Central Business District?

Speaker 0

154 million.

Speaker 4

Okay. That includes those two credits.

Speaker 5

That's not just the Central, that's downtown.

Speaker 0

All Boston.

Speaker 5

Yeah, Boston. That's all of downtown. It's not just the Financial District. We don't have that kind of concentration. Some of those are in the Back Bay, Newbury Street.

Speaker 4

Gotcha. Okay. 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, you know, when you're thinking resolution, what the vacancy is looking like? Do those have maturity?

Speaker 5

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. Great sponsors. They pay. We are exercising some patience, but sort of being careful with our reserves, as we always are.

Speaker 4

Gotcha. Do any of those come due in the next couple of quarters?

Speaker 5

Do they? No, I don't think so.

Speaker 4

Okay. Okay. Just going back over to the jump in the CNI non-performers, that equipment financing, just late quarter. Can you help us think about that a little bit? You know, going from $33 million to $46 million, the non-performers in that bucket.

Speaker 0

Yeah, that was driven by one credit at Eastern Funding or at the Equipment Finance Unit related to fitness equipment, a little over $11 million.

Speaker 4

Gotcha. Okay. Can you help us, this is sort of, I guess, more broad here. Can you help us think about the FASB ASU with respect to, you know, what it means for pro forma tangible book dilution versus accretion, right? 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 MOA?

Speaker 0

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. They finally said they're going to fix it, the whole double counting on this. The whole CECL, the day-two CECL booking. I'll refer back to, and I think the presentation that we do when we announce the transaction was very, you know, provided a lot of good insight there. I would recommend, if you want to go see that, and we lay it out pretty well. I'll refer to that number. We had estimated that to be $94.5 million when we announced the transaction, what the day-two CECL would be. 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. They said they're issuing it. I've been waiting for it patiently. You know how patient I am. We'll see when that comes out. Our KPMG told me the other day that they expect it likely in the fourth quarter. It wasn't going to be a third-quarter event. It'll probably be a fourth-quarter event. That equates to about $0.84 per share, right? That's some real money. It's great for our capital ratios. It'll be great for the earnings. $0.84, that represents about 20% of the dilution we were talking about. 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. We're looking forward to that happening.

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-two 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.

Speaker 4

Yes. Okay, a couple more questions related to that. 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 early adopters? How do you think about that?

Speaker 0

Absolutely. Absolutely.

Speaker 4

Okay. Okay. The accretion income is obviously going to go down. How do we think about that? In other words, this deal when you announced it was, oh, go ahead.

Speaker 0

Right. When we announced it, like I just said, $94.5 million would not get accreted back into income over time. As you can understand, that $94 million would be getting accreted over the life of the loans, which is, you know, five, six, seven years, maybe even longer when you think about it over time. It is not as meaningful an impact when you think about it that way.

Speaker 4

All right. So five to seven years. To your point on you'll have more capital, how do you think about, you know, assuming you close this deal September 30, how do you think about repurchasing shares? What's your thought there?

Speaker 0

I think that'll just take a little bit of time. I think 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've been very clear that we want to get the commercial real estate down to 300% in a fairly short order. We're well on our way. We've had a lot of progress towards that end. I think that's going to be the first order of business there.

Speaker 4

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

Speaker 0

That's correct.

Speaker 4

Okay. Great. Thanks for taking my questions. I'll leave it there.

Speaker 5

Yeah, Laurie.

Speaker 2

Thank you. The next question comes from Steve Moss with Raymond James. Please go ahead.

Hey, guys. This is Chase on for Steve. Good afternoon.

Speaker 5

Good afternoon.

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. 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. In the equipment finance business, those rates are strong. In the pure CNI business and in the consumer business, they're good but competitive.

Speaker 0

Yeah, just to give you a sense, during the.

Speaker 5

We can give you some numbers.

Speaker 0

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

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

There's a loan that is in our, it's basically considered a 90-day past-due loan because of the maturity date. It's being taken out by Mass Housing. Everything's in order. It's an accruing loan. 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. It's 100% leased up. The property's in good order. I expect that to be out this quarter.

Got it. Thank you so much. Appreciate it.

Sure.

Speaker 2

Thank you. Our next question comes from David Conrad with KBW. Please go ahead.

Yeah. Good afternoon. Real quick one for me. I guess really regarding 3Q on a standalone basis, expenses are 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?

Speaker 0

Yeah, I don't see anything. If anything, it'd be down a little bit.

It's a good run rate.

Been running it, yeah, pretty solid.

Okay. Great. Thank you.

Speaker 2

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

Speaker 5

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

Speaker 0

Good day.

Speaker 2

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