Good afternoon. My name is Gary, and I will be your conference call coordinator today. It is my pleasure to welcome you to the Brookline Bancorp, Inc. First Quarter 2014 Earnings Call. This conference call is being recorded and simultaneously webcast on the Brookline Bancorp website, where it will be archived after the call. [Operator Instructions].

I would now like to remind you that this call may contain forward-looking statements with respect to the financial condition, results of operation and business of Brookline Bancorp, Inc. Actual results may differ materially from those forward-looking statements.

Accordingly, Brookline Bancorp cautions you against undue reliance upon any forward-looking statements and disclaims any intent or obligation to update any forward-looking statements, whether in response to new information, future events or otherwise..

I would now like to turn the conference call over to Mr. Paul Perrault, President and Chief Executive Officer; and Mr. Carl Carlson, Chief Financial Officer and Treasurer of Brookline Bancorp. Please go ahead. .

Thank you, Gary, and good afternoon to you all. Welcome to Brookline's first quarter earnings call. I'm happy to report that Brookline Bancorp experienced a strong quarter and a good start to 2014. Yesterday, the company reported $10.4 million in net income or $0.15 per share for the first quarter.

This compares to $7.7 million or $0.11 for the fourth quarter of 2013 and $8.8 million or $0.13 for the first quarter of 2013..

Our net interest margin hit a high of 3.82% this quarter. This compares to 3.54% and 3.70% for the fourth quarter and first quarter of 2013 respectively. In other words, our earnings and margins have improved quite significantly on both linked quarter and year-over-year basis, and we are very pleased with these results..

I am particularly proud to present these solid earnings because of the environment we operate in. As all of you know, it's a very competitive market with stringent regulatory oversight. And consistent with last year, continued loan growth and strong asset quality are the main drivers of our earnings.

Thanks to our experienced and dedicated bankers, nearly all of our loan portfolios, particularly our commercial and commercial real estate portfolios continue to have strong gains. While our nonperforming ratios went up slightly at March 31, 2014, it is up from a very, very low level.

We expect to continue our track record of stellar asset quality as we move forward in 2014..

Now I would like to introduce you to our new Chief Financial Officer and Treasurer, Carl M. Carlson. He was previously Deputy Chief Financial Officer at Webster Financial Corporation and prior to that, he spent over 20 years at North Fork Bank.

His breadth of experience will serve our company well as we continue to build on our solid foundation and leverage the benefits of all the transitional work that we have done over the past couple of years. Carl is settling in very well with the management team and with the rest of his finance and treasury teams..

I will now turn over to Carl, who will review the company's first quarter results in more detail.

Carl?.

Thank you, Paul. I'm very happy to be part of the team. The company had strong loan growth in the quarter, growing $99.5 million or 9.1% on an annualized basis. This is driven by annualized growth of nearly 13% in commercial real estate and 19% in C&I, offset by the continued runoff in our indirect auto portfolio..

Growth was consistent across all 3 of our banks, with Brookline Bank, Bank Rhode Island and First Ipswich Bank, achieving loan growth of $48 million, $44 million and $7 million respectively. .

The portfolio had net charge-offs of 666,000 for the quarter, representing 6 basis points of average loans on an annualized basis versus 16 basis points in the fourth quarter. Credit quality remains positive, with the first quarter provision for loan losses of $2.4 million due largely to strong growth in loans and leases.

The allowance for loan losses represents 113 basis points of total loans at March 31, 2014 versus 111 basis points at December 31. Perhaps more meaningful is the allowance for loan losses as a percentage of originated loans, which is 133 basis points, up slightly from 132 basis points at the end of last year..

As Paul mentioned, the company reported earnings in the first quarter of $10.4 million or $0.15 per share. The results include accretion related to a reforecast of certain acquired loans, several significant facilities transactions as well as a recruitment expense. Excluding these items, earnings for the first quarter would have been $0.13 per share..

Net interest income was $47.7 million for the first quarter of 2014, compared to $43.8 million for the fourth quarter of 2013. The first quarter net interest income includes $5 million in accretion on loans, deposits and borrowed funds. $2.1 million is related to the reforecast of our single pool of acquired loans.

This compares with the fourth quarter of 2013, which had $2.1 million of accretion. .

The company's noninterest income grew $1.2 million to $5.1 million in the first quarter from $3.9 million in the prior quarter. The first quarter includes $1.5 million of net gains on sales of disposals of fixed assets, as well as a $602,000 gain on sales of loans and leases held for sale.

Excluding these items, noninterest income was $3 million for the first quarter. This is approximately $500,000 less than the fourth quarter of 2013, when adjusted for the $397,000 in investment securities gains and $11,000 in gains on sales of loans.

The decline in noninterest income on a linked-quarter basis is driven by a decline in deposit fee income due to seasonality and an increase in the losses on affordable housing projects..

The company's noninterest expense increased $2.3 million to $33.6 million in the first quarter of 2014 from $31.3 million in the fourth quarter of 2013. The increase is driven by $1.4 million in compensation benefits expense and $1 million in occupancy expense.

The increase in compensation benefits is composed of seasonal items, such as incentives, pension and payroll taxes, as well as recruiting expense. The company had 705 full-time equivalent employees at March 31, 2014, which is up only 6 from the end of the year..

The increase in occupancy expense is due to an $809,000 charge associated with the abandonment of 2 branch locations and an operations center, as well as higher snow removal and utilities expense. While Bank Rhode Island is opening a new branch in Wakefield, Rhode Island in May, we expect occupancy cost to remain in the $3.4 million range..

Before turning it back over to Paul, I'll provide a few comments on our expectations for second quarter. We expect the core net interest margin to continue to compress 3 to 4 basis points per quarter.

The impact on net interest income will be more than offset by the growth in interest earning assets, led by our commercial real estate and C&I portfolios, particularly equipment financing. .

Overall, purchase accounting accretion is projected to be $1.8 million to $2.2 million for the second quarter. However, this can vary significantly depending on the performance of our acquired loan portfolios..

We expect noninterest expense to decline $2.1 million to $2.3 million in the second quarter from the first quarter when adjusting for the special items and seasonal impacts. Our effective tax rate is anticipated to be 35.6% for the year. .

With that, I'll turn it back over to Paul for concluding remarks. .

Thank you, Carl. I'd like to conclude that Brookline Bancorp and its banks remain well capitalized based on regulatory standards. And yesterday, our board approved the payment of a dividend of $0.085 to our shareholders for the quarter.

Brookline Bancorp is well positioned for future growth, and management remains focused on the core fundamentals that we have built. We are very excited for the remainder of the year and look forward to discussing next quarter's results..

And now we will open it up for questions. .

[Operator Instructions] The first question comes from Mark Fitzgibbon with Sandler O'Neill. .

Carl, I wondered if you could just clarify what you said. I just missed part of it on operating expenses going forward. .

Sure. I think, we'll see -- we have some special items going through in the quarter, about $1 million or so in occupancy costs that will not reoccur in the second quarter. So we will have more of a flat outlook there in the occupancy expense going forward.

And then on the salary line and benefits line, a lot of that had to do with some credits that we took in Q4, related to the surp and incentive programs, so there was much lower payout in incentives for 2013. So there was a credit that went in Q4.

And then when we go into Q1, that gets trued up for accruals, you start building accrual for the following year. So there's that linked quarter impacted that, as well as the impact of FICA and unemployment insurance and things of nature that are typically front-loaded in the year.

So we'll see that come out of the numbers as well, so we'll see that come down. So we'll be trending -- the second quarter is going to be looking more in line with what the fourth quarter was last year. .

Okay.

And then secondly, I was just wondering what necessitated that change in the accretion adjustment, was it sort of an annual review of the loans or sort of just taking a fresh look at it or?.

That was something we picked up during the first quarter starting off the new year looking at the loans and doing the assessment on the loans. We do that review on the portfolio basically every quarter and typically on the off month of the quarter that we look at that. We look at the cash flows. .

And then I wondered if you can break out for us what the prepayment penalties were this quarter?.

Sure. .

Yes, we're just getting it out here. .

$133,000. .

$133,000, okay.

So should -- from your comments on net interest income, should we assume that the net interest margin will be a little bit -- net interest margin be a little bit weaker in coming quarters?.

The core interest margin will continue to decline. So what we're seeing is probably 3 to 4 basis points barring any real changes in the mix of the balance sheet. We would see that decline in the core. But again, we have growth in the portfolio. So the growth is more than offsetting that decline.

So if you think about 3 to 4 basis points, if you use 4 basis points on our portfolio, that's net interest coming down about $500,000 in the quarter. The growth in the portfolio and the growth in the overall interest earning assets is more than offsetting that $500,000. .

And Mark, this is one of the few times we really can make it up in volume. .

Okay. And last question I had relates to the -- sort of the -- that line item loss from investments in affordable housing projects.

How do you forecast, or can you, is there always going to be some volatility in that line item?.

Yes, I think there's a little bit of -- there's probably more volatility -- you see more volatility. Again, this is something that happened. It's more a result of what happened in the fourth quarter. We made some investments, additional investments in the fourth quarter, where we actually got to record a gain in the fourth quarter.

So when you go into the first quarter, you're not getting that same gain in the first quarter. So it's more of a run rate of what that expense maybe. But as we get the financial statements from these things, there is some volatility in that. .

And last question, Paul, I wondered if you could comment for us on what you're seeing out there in the M&A marketplace? Are there opportunities? Do you feel like Brookline is ready to get back in the game again?.

Well, I mean, I don't know that there is a lot of opportunities per se. We are managerially and mechanically ready to be able to do something. But as I've said before, I mean we don't feel that we need to do anything.

And it's like anything else, the stuff that you would love to do is probably not doable and the stuff you'll really hesitate doing is quite doable. So we will continue to walk through the globe and be very careful. But I don't see any big shift, Mark, in sort of the temple of things.

There's a deal there and a deal there, but that's -- I don't feel any groundswell of dealmaking coming up. .

[Operator Instructions] The next question comes from Collyn Gilbert with KBW. .

Just to kind of sort of to reconcile, Carl, some of the NIM discussion.

And there was a big jump in the equipment finance yields this quarter, what was driving that? And is that sustainable?.

First, no. It's not sustainable, to the second part of the question. First part is the reason why -- that is really the macro-leased portfolio, the one -- really the impact of the acquired portfolio and the accretion that we recognized in this quarter associated with that.

So it's basically, I hate to say it a one-time event or a nonrecurring event, but it is a very special event. A sense of that, there's only $5 million left of that portfolio, of the acquired portfolio. So that will certainly diminish in the future. .

And that's $5 million in the... .

That $1.8 million to $2.2 million accretion number going forward for all of the accretion. .

Okay.

So the $5 million that you talk about left, that's in total or that's in the leasing portfolio?.

No, no, no. The leasing portfolio was only $2.1 million. And that -- and so that will not continue into the future. .

Okay. Okay. And then so that's the same driver then I presume for the jump in the CRE yield.

And this quarter was also a part of the accretion on the acquired portfolio?.

No. .

No. .

Okay.

So what drove the CRE yield increase, quarter-to-quarter?.

We're just looking that up. I'm not sure that it did go up. .

Oh, okay. It looks like maybe I thought it's in the press release. So a little bit, I mean, I guess just... .

Went up a little bit, but... .

Okay. I mean, your outlook... .

There may be a little bit of purchase accounting in there, but not -- nothing that's... .

You know what my guess is, Collyn? Just a bit of a guess is that we are now at that point in the rate cycle where we have been repricing up. A huge chunk of our commercial real estate is 5-year repricing.

And to the extent that we're sort of through that cycle and versus the low point -- remember rates of the -- sort of the 10 year, it went way up for a little while then it's come down part way, is we hopefully are seeing things flattening out. .

Okay. And that was kind of going to be my question. I guess the yield that your -- the commercial real estate yield looks like it was 460% for the quarter, which seems pretty good. I guess I was just curious how that compared to the origination yield.

So to your point, Paul, does that mean the origination yields are coming in somewhere around that level as well?.

The origination yields for the quarter came in around 417%. .

Okay, okay. Great. That's helpful. .

I say that we have been very general, totally. I don't think it was quite that high but it was pretty good, and here's the guy who has got the number. .

All right, that's good, that's a good hire.

And then my last question, just what are you thinking now kind of as you look at the expectation for loan growth for the year? And seeing how the pipelines are shaking out and what do you think you guys can put up for the year in terms of loan growth?.

Well, I mean, the easy calculation would be take Q1, and just put it times 4. But that would be a very, very good outcome. So that might be sort of a high end of my expectation. The pipelines are pretty good. The business momentum is strong. We're feeling good about the whole thing. But Q1 was really very, very good.

So I'm a little bit reluctant to tell you not to maybe go all the way there but you can go most of the way there. The other thing of note is, I think Carl would agree with this, is that it feels like the reduction in the indirect auto portfolio is tapering off, and so that has had a big backlash effect to the overall growth.

So if we can get that to stop coming down, I think we'd feel pretty good about conditions, broadly speaking. .

[Operator Instructions] The next question comes from Matthew Kelley with Sterne Agee. .

Yes, I hopped on late, so I apologize if this has already been asked.

But what was the total purchase accounting accretion number for the first quarter?.

$5 million. .

$5 million. Got you.

Of which the $2.1 million was related to the reforecast?.

That's correct. .

Okay, got it.

And then what were the payment penalty -- what was the prepayment penalty income for the quarter?.

$133,000. .

Got it. Got it.

And then on your deposit programs, any changes? Any new types of deposit programs to focus on that part of your business and anything changed since the fourth quarter?.

No. I don't see anything has changed where -- we've got everybody else doing what we can do in deposit gathering. But I mean we're trying to do it solidly in for the long haul. I mean there's no point in gathering what might be mobile deposits, if you will, that at the kind of rates that would be needed to attract them.

So that's not -- but that's not a better funding solution than what we're doing. But we're still chipping away. We have got a lot of activity in the cash management area, we still require all commercial borrowers to have their operating accounts with us. We do pursue retail customers in various fairly traditional ways.

But it's important to us to keep that deposit base growing, keep the mix going in the right direction and use that to improve our funding costs. But those are really nothing net new with sort of the same thing we've been doing the past 2 years. .

Got it. And then actually just going back to the prepayments, if you look over the last couple of quarters... .

Matt, let me take you back to the deposit thing in a little bit because I think it's important for people to really understand is that our lead bank, Brookline Bank, really started from the backseat of trying to have a deposit-funded environment and certainly adding any commercial deposits and developing a low-cost deposit base.

So we believe we have made terrific strides in doing that. But when compared to our heroes, like Bank Rhode Island and others that we compete within the marketplace, we have a long way to go in our company overall, which I actually view as an opportunity, to be able to lower our funding costs. So okay, go ahead. .

If you're able to grow loans, call it, 6%, 7%, 8% in 2014, where do you think your loan-to-deposit ratio ends up at year-end '14?.

I wish it would end up at the same place that it started. But obviously, that would require yeoman's work in the deposit gathering success. And I'm not ready to give up, but we know that, that's a big number to grow core deposits by. .

Okay, got it. And then just a follow-up on the prepayment.

So if you look during the 2013 quarters, it had been running between the 4- and 10-basis-point benefit in the margin, and then this quarter fell off quite a bit, where do see that normalizing?.

I think, by and large, we've seen the big ones happen. I think through the cycle, we're kind of done.

There were some breathtakingly attractive deals that were coming to some selective or high-quality borrowers, who just could -- even though it was a nasty prepayment penalty, we even had advised them to take the deal, but that's not happening so much anymore. .

I just want to follow-up with that because we were talking about prepayments and I recall now that the question on the CRE question net on the yield we got from Collyn earlier, it was -- we had a prepayment of a golf course loan.

That was an acquired loan and so that was one of the drivers of the yield in the -- because we had about $300,000 of income that came in off of that loan from a -- it wasn't a prepayment, but it had to do with the purchase accounting accretion that we're able to recognize in the quarter, so that went through CRE line. .

This concludes our question-and-answer session. I'd like to turn the conference back over to Paul Perrault and Carl Carlson for any closing remarks. .

No. I think we're good to go. Thank you, Gary, and thank you all for joining us. And if any of you have any further questions, just let us know. Thank you. .

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..