Paul A. Perrault - Chief Executive Officer, President, Director, Chief Executive Officer of Brookline Bank and Chairman of Brookline Bank Carl M. Carlson - Chief Financial Officer and Treasurer.

Collyn Bement Gilbert - Keefe, Bruyette, & Woods, Inc., Research Division Matthew Brandon Kelley - Sterne Agee & Leach Inc., Research Division Mark T. Fitzgibbon - Sandler O'Neill + Partners, L.P., Research Division.

Good afternoon, and welcome to the Brookline Bancorp Inc. Third Quarter 2014 Earnings Conference Call. [Operator Instructions] This call may contain forward-looking statements with respect to the financial condition, results of operations and businesses of Brookline Bancorp Inc. Actual results may differ from these forward-looking statements.

Factors that may cause actual results to differ include those identified in their annual report on Form 10-K and their earnings press release.

Brookline Bancorp cautions you against unduly relying upon any forward-looking statements and disclaims any intent to update publicly any forward-looking statements, whether in response to new information, future events or otherwise. Please note this event is being recorded.

[Operator Instructions] I would now like to turn the conference over to Paul Perrault, President and CEO. Please go ahead, sir..

Thanks, Andrew. Good afternoon, and welcome to Brookline Bancorp's third quarter earnings call. I'm accompanied today by our Chief Financial Officer and Treasurer, Carl Carlson. who will walk you through our financial results following my comments.

Thanks to our driven colleagues and our customer-focused culture, Brookline delivers another quarter of solid loan growth and strong earnings. Yesterday, the company reported $11.6 million in net income or $0.17 per share for the third quarter.

This compares to $10 million or $0.14 a share for the second quarter of 2014 and $9.4 million or $0.14 per share for the third quarter of 2013. In addition, I'm pleased to report that our Board of Directors have approved a stock repurchase program of up to $10 million over a period of 14 months, ending on 12-31-2015.

We expect to continue to encounter fierce competition, but our strong quarter demonstrates Brookline's capabilities as well as the economic strength of the markets that we operate in. Looking forward, we continue to see favorable trends as we continue to build high-value, lasting relationships with our customers.

I remain confident with our business model as we enter the final quarter of this year. I will now turn you over to Carl who will review the company's third quarter results in more detail.

Carl?.

Thank you, Paul. As Paul mentioned earlier, our EPS was $0.17 this quarter. Included in our results was a $1.4 million litigation settlement. Excluding this item, our EPS would have been $0.15.

Our third quarter performance was driven by strong loan growth, continued excellent credit quality and increased loan and participation fees, which more than offset the continued pressure on the net interest margin in the quarter. Total loans grew $132.1 million from June or 11% on an annualized basis.

Growth was particularly strong in the commercial real estate and commercial loan and lease portfolios, which combined, grew $133 million while consumer loans grew $22.1 million. This growth was partially offset by the decline in our indirect auto portfolio of $23.1 million.

All 3 of our banks contributed with Brookline Bank, Bank Rhode Island and First Ipswich Bank achieving loan growth of $102.5 million, $21.8 million and $7.8 million, respectively. The portfolio had net charge-offs of $793,000 for the third quarter, representing only 7 basis points of loss on average loans on an annualized basis.

Our non-performing loans remain constant at 37 basis points and our non-performing asset ratio increased slightly from the second quarter to 35 basis points. These statistics and our excellent track record are a representation of our strong asset quality in the continuing economic growth in the communities we serve.

The preferred provision for loan loss for the quarter was $2 million, which is $242,000 less than the second quarter, given the strong credit performance and low level of net charge-offs.

The allowance for loan losses remain constant at 112 basis points of total loans at both September 30 and June 30, while the allowance for loan losses on originated loans declined 5 basis points to 126 basis points at September 30. Overall, deposit balances grew on a linked quarter basis, $28.1 million, or 2.9% on an annualized basis.

To fund the strong asset growth, Federal Home Loan Bank advances increased $21.6 million in the quarter. The company also offered $75 million of 6% fixed to floating subordinated notes in September maturing in 2029.

The subordinated notes qualifies Tier 2 risk-based capital for regulatory purposes while providing additional liquidity at the holding company. While the net interest margin declined 7 basis points in the quarter, net interest income increased $890,000 to $47.3 million.

This is the result of increased interest income from the growth in loans and leases, partially offset by increased interest expense. Noninterest income increased $2.4 million during the third quarter to $5.7 million.

The increase is primarily due to a $1.4 million litigation settlement, growth in loan fees of $325,000 from the increased sale of interest rate swaps and gains on the sale of loans of $434,000 driven by the level of loan participations in the quarter. The company's noninterest expense increased $702,000 during the third quarter to $31.9 million.

This increase was driven primarily by a decrease in the discount rate associated with the Supplemental Employee Retirement Plan, which resulted in a charge of $566,000. Finally, I'm happy to announce that yesterday, the board approved the payment of a dividend of $0.085 per common share to our shareholders for the quarter.

Before turning it back over to Paul, I'll provide a few comments on our expectations for the fourth quarter. The full impact of the subordinated debt issued in mid-September will reduce the margin 8 basis points, with the overall margin compressing plus or minus 10 basis points in Q4.

The impact of the compression in margins on interest income is expected to be partially offset by the growth in loans. Purchase accounting accretion is projected to be $1.5 million for the fourth quarter. However, this can significantly change depending on the performance of our acquired loan portfolios.

The credit environment continues to be positive and suggests the fourth quarter provision for loan losses to continue to trend lower. Noninterest income was particularly strong in the quarter and will likely be $300,000 to $400,000 lower excluding the litigation settlement.

Noninterest expense is expected to climb 1% or so in Q4, and we'll continue our efforts to drive revenue growth while controlling expenses. With that, I'll turn it back over to Paul for concluding remarks..

Thanks, Carl. Our results demonstrate the sustained success in growing our institution as a result of the perseverance of our dedicated Brookline colleagues, as well as continued great support from our exceptional customer base. I cannot be more proud. And now, we will open it up for questions.

Andrew?.

[Operator Instructions] The first question comes from Collyn Gilbert of KBW..

Could you just give a little bit of color, Paul, as to the competitive environment, pricing, just kind of an update? I know you're good about giving some color each quarter, and I would love to hear your thoughts on Boston, and even some of the surrounding markets, what you're seeing..

I don't know that it's gotten any more or less competitive in this past quarter than it's been for the recent past year or 2, I'd say. What has, probably, developed a little bit more recently is an increased involvement in, particularly, the commercial real estate area by things like insurance companies and other institutional investors.

Lenders are a little bit back in the market. I'd say that in the C&I business, that has been particularly aggressive in pricing. I suspect, and this is a couple guess on my part, I suspect that as all of us have been waiting anxiously for rates to rise, we think we can get away with a very low ball rate if it's floating.

Okay, does that help?.

Okay.

And just -- on that point, is it -- have -- is your outlook still rates are going to rise in the back half of the year? Or do you have any thoughts as to what the impact has been over the last -- the long end, moving over the last few weeks, months or so may have to the overall business, or just kind of what your opinions and impressions of -- are of that?.

So Collyn, you've known me long enough to know I don't even think about that. I try to run the place absolutely neutral to what happens to interest rates. And Carl has done a great job in continuing to position us that way, but he might have his own opinion on how our rates might move. But we don't make those bets.

Carl?.

So Paul is absolutely right. We're trying to manage the balance sheet to be neutral to slightly asset-sensitive. That's basically where we are..

Okay. And just one follow-up. Paul, back on the competitive discussion, you guys have been gradually reducing your indirect portfolio.

Any updated thoughts there on competition? Or any change in that behavior anticipated in the next coming quarters or so? Are you still looking to, sort of, stay out of that business? Or I shouldn't say stay out of it, but shrink the exposure..

Well, part of it's shrinking the exposure, but the shrinkage has a lot more to do with the industry structure at the current time with lots of new players coming into that space, and the big players becoming ever more aggressive.

At the same time, I think the dealers, my words, not somebody else's, my words, the dealers are taking advantage of the situation by structuring the transactions such that they -- we end up having to, kind of, buy the loans and the net yield to us at the end of the day is at a level that we just don't find that interesting.

It's -- I mean, it's not as though we are funding these things with excessive demand deposits or something where we can enjoy a little bit of margin, given our situation. And given the growth characteristics and prospects for our more lucrative businesses, that's where we'd rather focus..

The next question comes from Matthew Kelley of Sterne Agee..

On the margin, were there any prepayment penalties in the quarter? And was the actual third quarter purchase and accounting accretion? Can we have those?.

Sure. The purchase accounting accretion overall was $2 million for the quarter. And prepayments were very, very modest, about $92,000..

Okay. Got you. And then could you talk a little bit about the, kind of, the core multifamily portfolio and what's going on there? It's been flat now for most of the last year.

What are you seeing in that marketplace for pricing and competitive attributes there?.

HUD and Fanny, Freddie, all that stuff is being -- it's very competitive with us. So it's just hitting a stretch here where the outstandings are flattish, but we're still very bullish on the sector.

With prices, particularly in downtown Boston, are getting frighteningly high by our standards and as a result, in some cases, our customers who are -- tend to be pretty conservative are being very cautious about what they're doing..

Yes. Got you.

And what is the pricing for some of the core multifamily-type loans that you've historically done? Where are those new loans being originated right now?.

Well, during the quarter, we originated about $16.2 million of multifamily at a weighted average coupon of 4.18%..

Got you, got you. We've watched the loan or deposit ratio tick up a little bit.

Can you talk about what the plan is there to fund growth over the next 12 to 18 months on the deposit side?.

Well, we have initiated lots of efforts here this fall to try to improve on that aggregate deposit balance. So we don't lack for activity. We're actually signing up lots of new deposit customers in the Boston bank and Brookline Bank.

One of the things that has buffeted us here in the past quarter or 2 has been that Rhode Island is a much more developed C&I bank that historically has had some generous balances on the part of their customers; who tend to be very successful companies.

And those companies are now participating more in the economic rebound and so are using those cash balances; which is, sort of, an uptown problem, if you will. So we don't expect to be able to change that direction overnight, but we're very aware of it and we're looking at quite a number of initiatives to work away at it..

Okay.

And along those lines of participating in the economic recovery, what was the line utilization on C&I loans during the quarter? And any change sequentially?.

Well, C&I and CRE-loans together, I'd say it's in that -- it's about 32%..

How does that compare to 2Q?.

I think that's consistent..

Okay, got you. And last question. You have been taking the charges there on those affordable housing projects for the last couple of years.

Can you remind us when that goes away and what the implications of that going away would be on the tax rate as well?.

Okay, those are long-term investments that we've made. So that's not going anywhere from a reality standpoint. From an income statement standpoint, there is going to be a change starting next year, and that line will come out of noninterest income and then go into the tax line.

So you'll see our fee income all of a sudden jump up, our noninterest income will jump up, magically, and all of our ratios will change. But our tax rate will also go up slightly. So we'll be talking more about that, probably, in the fourth quarter..

Most of these, Matt, are -- I think they're 15-year transactions that we do. We have been doing 1 or 2 a year for the past number of years. So they'll be around a while. But they're very, very attractive to a company here that when I started here, we were paying over 40% in tax rate.

So it's been beneficial even though it's a little bit ugly on the way down. And as Carl mentioned, he's going to clean that up for us..

Actually, one more, if I could.

How does your loan pipeline at quarter end at 9/30 [ph] compare to the June quarter?.

It's down slightly, but still very healthy..

[Operator Instructions] The next question comes from Mark Fitzgibbon of Sandler O'Neill + Partners..

First question, just to follow-up on that tax rate question.

So Carl, what you were suggesting, that next year there'll be an adjustment to fees and an adjustment to the tax rate and those will essentially offset one other? So bottom line, there won't be any positive or negative impact from the adjustments you're going to make on the bottom line?.

Exactly, exactly. That's yearly. And it's an accounting rule that came out. We had the option to do it this year if we could have gotten it done by January or March, when we first reported the first quarter. But it's -- it will go into effect next year where the accounting will be. It'll go through the tax line.

So tax line would go up by about 50 basis points, and the -- we would no longer have that negative number running through noninterest income..

Okay. And then second question I had relates to your capital ratio. Your tangible capital ratio now is around 8.63%. You've put in place a buyback and obviously, you're -- continue to have strong balance sheet growth.

What is your, sort of, target capital ratio? How low are you willing to take that?.

We're looking at the total risk-based capital ratio and all of the Basel ratios that are -- Basel III ratios that are coming out. And our current policy or operating targets -- I'll start with our operating targets, about [ph] 100 basis points higher than those, that are the fully phased in 2019 Basel III requirements.

And that's, basically, what our operating targets. As you mentioned, we're well above that. The $10 million doesn't really make a big impact on that. Might be 20 basis points if fully executed upon. So that's -- it's a very prudent start to that program..

Okay. And then as it relates to deposit fees, it looked like deposit fees jumped up quite a bit in the third quarter.

Was there any new fees put in place or any unusual items that caused that to jump so much?.

No..

Okay. And then lastly, I guess, Paul, I was just curious what the company's appetite for acquisitions is today, and whether you think there's opportunities out there that could come to fruition in the not-too-distant future..

Well, it's not a priority by any means. As you can see, the company is growing very nicely; is realizing a lot of the investments that we've made in recent years, so we're kind of enjoying the path to improve profitability; tighter management of expenses; realizing on the operating leverage that we had told you we would do.

And besides that, I mean, around here, there really is not very much going on that's all that interesting to me, frankly, but never say never. But we think we can continue to do better as we run this company tighter..

This concludes our question-and-answer session. I would like to turn the conference back over to Carl Carlson, Chief Financial Officer, for any closing remarks..

Thank you, Andrew, and thank you, all, for joining us, and I look forward to talking to you early next year..

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