Marissa Frerk - Associate General Counsel Paul Perrault - President & CEO Carl Carlson - CFO.

Collyn Gilbert - KBW Mark Fitzgibbon - Sandler O'Neill & Partners Laurie Hunsicker - Compass Point Research & Trading Matthew Breese - Piper Jaffray.

Good day. And welcome to the Brookline Bancorp Inc. Second Quarter 2016 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ms. Marissa Frerk, Associate General Counsel. Please, go ahead..

Thank you, Gilda. This call may contain forward-looking statements with respect to the financial condition, results of operations and business of Brookline Bancorp. Actual results may differ from these forward-looking statements.

Factors that may cause actual results to differ, include those identified in our Annual Report on Form 10-K and our 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 statement, whether in response to new information, future events or otherwise. I would now like to turn the conference over to Paul Perrault, President and CEO. Please go ahead, sir..

Thank you, Marissa. Good afternoon, and welcome to the Brookline Bancorp's second quarter earnings call. I'm accompanied today by our Chief Financial Officer, Carl Carlson, who will walk you through our quarterly financial results following my comments.

Yesterday, we reported $12.7 million in net income or $0.18 per share for the second quarter of 2016 which represents a 7% increase from the second quarter of last year. I'm excited about this growth considering the intense competition we face in our markets.

We continue to build on our promise to focus our capital and our resources on serving our customer base while delivering strong results to our stockholders. As a result, commercial and consumer loans increased for the quarter by $129 million with all loan categories contributing.

At June 30, loans totaled $5.3 billion, nearly 11% higher than last year. We also experienced solid growth in deposits in the quarter of $92 million, bringing our total deposits to $4.5 billion, nearly 9% higher than last year. Comparing our second quarter performance to the second quarter of last year, revenues are up 7%.

During the second quarter, we held our efficiency ratio steady at 57.9%, as we continue to maintain expense control. Return on average tangible stockholders equity was 9.4% on an annualized basis.

Our colleagues continue to work hard to serve our customers and our communities in our quest to make Brookline Bancorp one of the region's leading commercial banking companies. I will now turn you over to Carl, who will review the company's second quarter results in more detail..

Thank you, Paul. As Paul mentioned, we had another strong quarter of loan and deposit growth. During the second quarter, loans grew 10% on an annualized basis, led by commercial real estate, which grew $74 million or 10.7% annualized, and C&I loans, which grew $42 million or 12% annualized.

The weighted-average coupon, or WAC, on our originations in draws in the quarter was 445 basis points, 10 basis points higher than our total portfolio at the end of Q1.

While this is certainly encouraging, the coupons related to amortizations and pay downs were slightly higher resulting in a one basis point decline on the overall WAC of the portfolio at quarter-end.

Average interest-earning assets grew $138 million from Q1 as our net interest margin declined one basis point to 344 basis points, resulting in growth in net interest income of nearly $1.1 million. This was helped a bit by higher purchase accounting and prepayment fees, as well as recalls on securities which we owned at a discount.

Loan purchase accounting was $222,000 for the quarter, up $46,000 from Q1. Prepayment fees were $919,000, up $274,000 from the first quarter. And income related to our callable securities was about $125,000 in the quarter. While revenues were up 7% on a year-over-year basis, they were flat from the prior quarter at $55.6 million.

This was driven by lower non-interest income from customer, derivative activity, and gain on sale of loans. Our provision for credit losses for the quarter was $2.5 million, an increase of $167,000 from the first quarter, due primarily to loan growth. At the end of the quarter, the allowance as a percentage of loans was 109 basis points.

Net charge-offs for the quarter were $4 million, up $3.6 million from Q1. Of the $3.6 million increase, $3.4 million was due to the charge-off of a relationship for which we had specifically reserved $3.3 million in the first quarter of 2015.

The remaining $700,000 in net charge-offs represents an annualized -- on an annualized basis approximately 5 basis points on average loans.

The Company's non-interest expense increased $200,000 from Q1 to $32.3 million, resulting in an efficiency ratio of slightly less than 58% for the quarter, which is consistent with Q1 and slightly improved from the second quarter of last year. Our effective tax rate remained at 35.8%, resulting in net income of $12.7 million for the second quarter.

Non-accrual loans were unchanged at $31.9 million or 61 basis points of total loans, as non-performing assets to total assets declined one basis point to 52 basis points. Also, the Board approved a quarterly common dividend of $0.09 per share, which will be paid on August 29 to stockholders of record on August 5.

The quarterly $0.09 per share dividend represents an annualized yield of 312 basis points based on yesterday's closing price of $11.54. Before turning it back over to Paul, I'll provide a few comments on our expectations for the third quarter.

The volatile and flattening yield curve, as well as a very competitive environment, particularly for deposits, is expected to put continued pressure on the net interest margin. The provision for loan losses will be driven by our loan growth, net charge-offs and the continued assessment of our portfolio risk factors.

Our coverage ratio is likely to remain fairly consistent. Non-interest income is projected to be in line with our second quarter results in the $5 million to $5.5 million range. However, this is largely dependent on our customer preferences to use interest rate slots to lock in longer-term loan rates.

Non-interest expense is projected to grow in the 3% range, with a fairly consistent effective tax rate of 35.8%. With that, I'll turn it back over to Paul for concluding remarks..

Thank you, Carl. Brookline Bancorp continues to build upon our strong foundation despite the challenging environment, with a focus on serving our loyal customers. We are looking forward to the remainder of 2016. And with that, we will now open it up for questions..

Thank you, sir. We will now begin the Question-and-Answer Session. [Operator Instructions] Our first question comes from Collyn Gilbert with KBW. Please go ahead..

Thanks, good afternoon, gentlemen. Could you maybe just start off by talking a little bit about the dynamics within the loan book.

Can you give us a little bit of color as to what you're seeing within that commercial construction portfolio, kind of the terms and the loan sizes you're seeing, and what your outlook is for growth there?.

Collyn, this is Paul. We are not a big participant in the construction loan business, and we really do it as accommodations for some of our good customers in the, obviously, the commercial real estate business. And I'm not sure that I can spot anything unusual in it.

They're all -- they're not all, they're essentially properties in metro Boston and Rhode Island and a little bit on the north shore…nothing unusual. We don't tend to do very large projects.

I believe we have done a couple of medium-sized projects, but most of them tend to be small, residential undertakings and a certain amount of commercial undertakings. Some of them are retrofit buildings around metro Boston.

And Rhode Island, as you might imagine, is sort of a repositioning kind of thing, but it is a relatively small book and we keep it that way..

Okay. That's helpful.

And then just -- what about your sort of outlook for commercial real estate, and where you kind of see the migration of that business going forward?.

I don't think I would use the word migration to describe it. We are pretty steady participants. It's obviously the old and backbone business for Brookline Bank. And we certainly have increased Rhode Island's and Ipswitch's involvement in real estate. We are obviously very cautious lenders, looking for low-risk undertakings with professional players.

And we have been watching very carefully for any negative impacts from a lot of what's been going on, with all of the cranes over the past five years, particularly in metro Boston.

But so far, a bit to our surprise, rents have been holding up, sales have been holding up, occupancies have been holding up, which I think is supported by the fact that the underlying economy in metro Boston, particularly, has continued to grow and be strong.

There's a lot of in-migration of people who are getting good jobs and able to occupy these places so, so far so good. But I can assure you that we wake up and worry about it every day..

Okay, that's helpful.

And then what was the nature of the commercial charge-offs that you saw this quarter? I know you tied it back to a first quarter loan, but if you could just give us a little background on that?.

Sure, we had one commercial relationship, it turned out to be a fraud situation, so we had established a specific reserve back in the first quarter of 2015.

It was taken over, I'd say, by a receiver and has started working itself out quite a bit, and this was the right time to actually realize what we -- we got a better idea of what those charges would actually be and so once we understood all that, we have taken the charge.

While I'd cautiously say that we expect some piece of that to be recovered in the future, I don't know when or how much, but this was the time to get this recognized..

Okay.

And then just, finally, any updates on the taxi portfolio? Were there any changes that you made on that portfolio during the quarter?.

No real changes from a reserve perspective, we've -- or no significant changes there. It's about a $35 million portfolio, we did have some additional loans go into non-accrual, about $2.5 million of loans go into non-accrual and about half of those have been our TDRs under re-written notes so they will show up in the TDR category.

And no charge-offs of any kind so far, and I love to say that it's stabilizing, I can't really say that just yet, we are still working with customers and there is still pressure out there..

Okay. Great, I'll leave it there. Thanks guys..

The next question comes from Mark Fitzgibbon from Sandler O'Neill and Partners. Please go ahead..

Good afternoon.

Carl, you had mentioned that you expected expenses to be up about 3% in the third quarter, I guess I'm curious what are the main drivers of that?.

Well, it really -- basically every category you start seeing some pressure on that. We have some are higher, some things of that nature, annual merit increases and things like that, you get full quarter impacts of those things, nothing in particular..

But expenses probably aren't going to grow at that kind of a rate in say 4Q or 1Q next year, is that fair?.

That's probably getting a little too far ahead of us, Mark. I would just add to what Carl said, you can't consistently grow at these kinds of levels and face that kind of regulatory challenges that we all face in accounting challenges and everything, without needing to provide additional support and coverage from time to time.

I think at this point in the year I think Carl is probably seeing and feeling some of that. So there isn't anything unusual about it, I think he is just trying to be clear with you that we're going to probably see some of that stuff to happen a little bit..

Okay. And then just to clarify on the margin, I know you said you expect some pressure as most banks are seeing.

Can you help us think about the magnitude of that pressure? Is it sort of three to five basis points kind of pressure which is maybe a little more than you've seen in recent quarters?.

No, I wouldn't say, I would see it too much more than that over that at that level. I'm probably in -- if I guess and estimated, it's probably in the two to three.

So it would be one, I think -- it all depends on the types of loans we're putting on, a lot of this -- we've seen -- we had some pretty big prepayments this quarter which will help us on the prepayment fees but you're losing some loans that were -- we've had higher yields on them. So it's a big moving target there.

But it's negative pressure there, particularly on the deposit sides we're seeing some pressure. So I'm probably in the two to three basis points..

Okay, great. And then on the equipment finance business, you guys have done a really nice job of growing at and obviously it has very attractive yields to it. I think it's about 14% of total loans now.

Is there a level at which you would be uncomfortable going above with that portfolio?.

Well, I wouldn't call it uncomfortable Mark but I have said in the past that it seems to me that we are very sound up to 20%. At 20% I would probably need to regroup and think about what the implications of going above that might be. But their asset quality has been outstanding. It's a very, very well managed organization.

And so we continually to be comfortable but if you want to pin some number it's 20%, just for working purposes..

Great, thank you..

The next question comes from Laurie Hunsicker with Compass Point. Please go ahead..

Thanks, good afternoon. I just wondered if we could -- Paul and Carl, just go back to taxes I just want to make sure I have got the numbers.

So the total portfolio down from March of 36.1 is now down to 35 or was 35 a round number?.

That's a round number, it's probably closer to 30, I don't have it exactly in front of me but it -- it hasn't moved, let's put in that way..

Okay, and then the reserve at March was 5.4, is the reserve unchanged you said there was no charge-offs, did you add into that at all -- into the specific reserves?.

I don't think so, no I don't think. There is no changes on the reserves on the taxes..

Okay. And then non-performers in that core 8.6, I think it's March, correct me if I'm wrong.

So now they are up to 11.1, is that correct?.

Yes, they are up 2.6, in non-accrual loans..

Non-accrual loans, so 11.2.

And then just to circle back to the relationship you mentioned, was there any part of this relationship that overlapped -- the fraudulent relationship that overlapped in taxes or not at all are related to taxes?.

Totally unrelated..

Totally unrelated, okay.

And same question on equipment finance that the fraud relationship with that in any way she perform touching equipment finance?.

Totally unrelated..

Totally unrelated, okay.

And then just last question here on the equipment finance, so we've seen a creep up in non-performers, obviously that book is still very clean at less than 1% non-performing but any additional color for us there?.

I'll try, it's not really color, I think our Chief Credit Officer would simply describe it to; A, the maturing of the tow-truck business at this point, as well as the length of the economic recovery in the U.S.

being a bit long in the tooth and probably in some parts of the country we're seeing little more weakness that others, but it is as you pointed out from a very, very low level of problems..

Okay, great.

And then just one last question, the Newport branch where is that?.

It is probably four months away, we have been surprisingly delayed, and simply going through the permitting process in Rhode Island, and actually the structure that's on the site right now is going to be demolished next week. So we will be into the construction business any day..

Okay, great.

And then just one last question, any other denovo branches on the drawing board at the moment or how do you think about that as we go into next year?.

There is nothing approved and scheduled, some of the executives in the company have some ideas on things that they would like to do that I have not yet passed on..

Okay, great. Thank you..

[Operator Instructions] Our next question comes from Matthew Breese with Piper Jaffray. Please go ahead..

Good afternoon, everybody. I'm sorry if I missed this in opening comments.

What was the purchase accounting impact on the margin this quarter?.

I have to go back to look at my comments now..

Okay, I'll ask for follow-up while you're digging through that. You've noted that there is some deposit pressure -- deposit process starts to decrease.

Is that a function of more competition in the market or is that a function of the need for core funding to fund loan growth?.

I don't think -- you see a lot of banks in our markets and knowing they generally have very high loan to deposit ratios. And by and large loan growth continues to be strong and has been for a while. So I think that's kind of the core story of it, pretty simple..

More banks chasing your deposits?.

Yes, I think that's right..

Okay. And then Paul, you used a bit more cautious tone on Boston real estate.

What are some of the warning signs you're seeing or think are coming? And what segments have you -- are keeping you up at night?.

No, I didn't mean to sound necessarily more cautious Matt, it's just that this is been quite a run. And it is an unusually strong one for Boston, historically.

And one of the main reasons we are increasingly convinced that Boston is seeing some real core fundamental growth in people, in jobs, in industries that are coming in, and setting up shop, a lot of support for tech and biotech, the schools and the medical areas and like -- it's just that every day that goes by and we don't see any of those weakening signs it leaves us to think well, they must be coming sooner but we really can't see very much.

If anything I would say that to the high-end condo prices have stopped going up and they may have dipped slightly after going up astronomically in recent years, but certainly no collapse. And the occupancy in apartments continues to be very, very strong, even though a lot are coming on stream.

So it is not -- there's not on the ground much evidence of things starting to fall apart at all. It's just old bankers worry when things are good..

And just a follow-up on your apartment commentary, you noted that there is a lot of new supply coming online.

Is there enough supply coming online to, perhaps, dent rental -- monthly rent increases or flat-line monthly rents?.

We have been expecting that for probably three years and we've been modeling accordingly in our underwriting, but to date it really hasn't happened very much. I would probably put it similar to condo prices. Rental increases have slowed materially, but they certainly have not dropped..

Okay. And just going back to my first question.

What was the purchase accounting impact on the margin?.

Sure. So loan purchase accounting was $222,000 for the quarter versus $177,000 last quarter. And then total -- the combined purchase accounting, which includes the impact of securities, and borrowing and things of that nature, was $893,000 for the quarter, compared to $847,000 in the first quarter..

And where do you expect that figure goes over the next couple of quarters?.

For the next couple of quarters, it's usually fairly consistent. It depends on the prepayments of the acquired portfolio. So if we start -- there's not a lot left in that, but if we get some accelerated prepayments, we would be recognizing whatever's left of that. So we've seen that typically be trending down considerably from last year.

This was a little bit of a bump from the first quarter, but where interest rates are now, we may see that pop, but it's going to be choppy..

Okay, that's all I had. Thank you..

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Perrault for any closing remarks..

Thank you, Gilda. And thank you all for joining us. We look forward to talking with you again in the next quarter. Good day..

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