Lindsey Dattoli - Legal Assistant Paul Perrault - President and Chief Executive Officer Carl Carlson - Chief Financial Officer.

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

Hello, and welcome to the Brookline Bancorp Inc. Q2 2017 Earnings Release Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Lindsey Dattoli of Brookline Bancorp. Please go ahead, ma'am..

Thank you, Keith. Good afternoon and welcome to Brookline Bancorp Inc. Second Quarter 2017 Earnings Conference Call. This afternoon's call will be hosted by Brookline Bancorp's executive team, Paul A. Perrault, President and Chief Executive Officer; and Carl M. Carlson, Chief Financial Officer.

Before we begin, please note this call may contain forward-looking statements with respect to the financial conditions, results of operation 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 intents to update publicly any forward-looking statement, whether in response to new information, future events or otherwise. And now I'm please to introduce Brookline Bancorp's President and CEO, Paul Perrault..

Thank you, Lindsey. Good afternoon and welcome to 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 record quarterly earnings of $14.9 million or $0.20 per share for the second quarter of 2017, and this compares to $12.7 million or $0.18 per share for the second quarter of 2016. Loan balances grew by $76 million and deposits grew by $58 million during the quarter.

While the interest rate environment remains volatile in the market very competitive, recent rate hikes have continued to provide a bit of a tailwind. Our net interest margin for the second quarter was 3.59%, which was an increase of 6 basis points from the first quarter.

Non-interest income was $4.5 million in the second quarter, which is basically flat with the first quarter, when excluding the securities gain of $11.4 million that we had. Excluding this gain in the first quarter, our efficiency ratio improved slightly in the second quarter to 57.9% from 58.6% in Q1. Our capital and credit are strong.

Our growth prospects are solid. And we have a great team of employees dedicated to serve our customers and our communities, making Brookline Bancorp one of the region’s leading commercial banks. I will now turn you over to Carl..

Thank you, Paul. In the second quarter, average interest-earning assets grew $103.8 million, while average loans grew $67.8 million. Net interest income increased $2.5 million from the first quarter as asset growth and higher short-term interest rates drove interest income, while interest expense increased slightly.

Loan purchase accounting was $279,000 for the second quarter, up $118,000 from the first quarter; and prepayment fees were just over $1 million, up a $199,000 from the first quarter. The quarter-over-quarter increase of $317,000 contributed approximately 2 basis points to the margin in Q2.

Non-interest income was $4.5 million for the quarter, which was consistent with Q’1 when excluding Massachusetts gain Paul mentioned earlier. Now, provision for credit losses for the quarter was $873,000, a decrease of $12.5 million from the first quarter.

At the end of the quarter, the allowance as a percentage of the loans was 117 basis points, down slightly from 121 basis points at the end of the first quarter. Non-accrual loans declined $2.8 million, $42.3 million or 76 basis points of total loans.

The company’s non-interest expense increased $1 million from the first quarter to $34.8 million, driven by compensation and benefits. Our effective tax rate was consistent at 35.9%. As Paul mentioned, during the first quarter, loans grew $75.6 million or 5.5% on an annualized basis.

The weighted average coupon on the loan portfolio increased 8 basis points to 454 basis points driven by originations and repricings during the quarter. During the second quarter, deposits grew $57.5 million or 5% on an annualized basis.

During this period, deposits increased approximately 3 basis points, while the cost of funding increased 1 basis point. Also, the board approved quarterly time dividend $$0.09 per share, which will be paid on August 25 to stockholders of record on August 11. Before turning back over to Paul to provide a few comments on our expectations.

We expect continued growth in the average interest-earnings assets, driven by loan growth of approximately $80 million to $100 million. The weighted average coupon of new originations are projected to come inconsistent with or higher than the overall portfolio.

Provision for loan losses will be driven by our loan growth, net charge-offs and the continued assessment of our portfolio risk factors and trends. Quarterly non-interest income is projected to be in the $5 million range, and non-interest expense is projected to increase modestly from Q2. Turn it all back to Paul..

Thanks, Carl. Brookline Bancorp has the resources and potential for continued and sustained growth as we consistently deliver the exceptional service that our customers expect and deserve. We are looking forward to the rest of 2017. And we will now open it up for questions. .

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Mark Fitzgibbon with Sandler O'Neill and Partners..

Good afternoon guys. .

Hi, Mark..

Hi, Mark..

Can you help us get a sense for the cost and timing of the build-out south of Boston? And I'm curious could it involve -- I know you said you were going to have open one new location south of the city, could it involve more new locations or branches south of Boston?.

Yes, it probably will be more than one location, and it would be very difficult for me to give you any kind of a quantitative estimate of the cost. But the process has begun. We've hired a few, there are few more in the looks. And I would said those are reasonable shop that will be some north, some south, and it may or may not involve branches.

It certainly wouldn’t involve branching in the near term. But there is plenty of ability for people to transact with us without branch, as we said, particularly with our almost exclusively commercial bank of commerce..

Is the idea, Paul, to sort of open branches on the South Shore in the Cape eventually? Or is it just going to follow 95 down in connect to Rhode Island franchise?.

No, I wouldn’t be trying to connect with this because, you know this market somewhat, and the commercial hubs are in the city north and south and west obviously. We've got the west covered. We're doing a good job in the city. And now this is just to address the metro of Boston north and south areas for a commercial activity. .

Okay. And then -- I mean, you guys just have had some really good growth in the C&I and equipment finance business.

Who are you taking share from? Or is it existing relationships that are just expanding?.

Well, I would be telling the secret side of the school if I told you exactly who I have taken it from. Suffice it to say that it's coming from many. .

Is it the bigger institutions or the smaller institutions would you say?.

Well, it's really both, but just the share numbers would imply that the larger companies had a lot more stake. And you know how consolidated the Boston market had become until young whippersnapper are coming up. It's not just us, there's a few of us around here that have been enjoying that mass market bank consolidations here..

Okay.

And then lastly, assuming no acquisitions take place, how long do you think it will take kind of push that capital ratios back down to maybe that 8.5% kind of the level?.

Carl, you want to take a stab with that?.

I really don’t want to take a stab at that. We do expect continued to accelerating growth coming forward..

Thank you. And the next question comes from Collyn Gilbert with KBW..

One thing. What was – trying to understand. The pure borrowing costs came down in the quarter, and I think that was just in the overnight line. Could you see – Carl, could you just kind of walk through maybe the new launches and what's going on in the funding side.

Maybe specifically on borrowing strategy, what have may be happening there and then talk about your deposit pricing, positioning and where you see pressure potentially coming in that segment?.

Sure. I'll start with the borrowing because fair that's fairly straight forward. If you look at our balance sheet, and lot of attention gets paid to our loan to deposit ratio. Our equipment financing in both our Brookline Bancorp and our Bank Rhode Island banks are really the drivers of the borrowings that we need.

If you exclude the loans from those units, which are nationwide businesses, very narrowly focused, we are basically 100% loan to deposits. So we really use the borrowings to fund those loans and basically match fund, those portfolios. So during the quarter, we did have some pay-downs.

We’ve also had some -- we did raise the equity, so we used the equity during the quarter to pay down some borrowings as well.

So we’ll – and I do expect to start seeing a little bit of pressure on that borrowing line as we move forward and the borrowings come due, because we basically ladder that out, and as they come due, we will refinance and latter them out again.

As far as the deposit side, I think from a modeling standpoint, we have been modeling them to be a little bit more sensitive than we’ve seen so far. So definitely that’s more market based, and we will see what happens there.

We are focused on growing our commercial and core deposit accounts, but we don’t concern ignore our customers and our time account. So we will see some pressure on that as the market hits up. .

Okay.

What’s the split between commercial and retail deposits? Can I have that?.

Well, I will take, I guess, I think we are at still probably 30% commercial deposits, but that’s up a lot from a few years ago and it be continues to be the primary building source of our progress..

Okay. Okay, that’s helpful.

And then maybe could you just comment on the M&A environment, Paul, and in light of obviously the capital raise, and you guys talked about maybe that would be put to use on M&A, but just how you’re sort of seeing that evolving? Is it potentially used for some of this capital?.

Well, it’s possible. It’s just not probable. I mean, I think I don’t think there is, well, that much noise out there right now, but as far as I can go. .

Okay.

Hey, so do you feel -- I mean, on just the capital, did you think there are going to be more M&A opportunities and you guys raise the capital or that part hasn’t changed?.

Well, they really hasn’t changed. You might recall that I said that we were thinking of a three-year horizon when we were raising this capital, and we had plans for some organic things, which we’ve already talked a little. So I would be hopeful within that same timeframe the right kind of opportunities might present themselves.

So first part of my answer was about the current period, but the use of the capital was really in that three-year timeframe. So maybe a year from now there is a better opportunity. So I wouldn’t want to try to contain it too much..

Okay, okay. And then, Paul, just on the fee side, was there anything seasonally or one-time maybe that’s caused – that was impacted in the fee line? I know -- I think you had indicated maybe $5 million came in just a little bit light this quarter. I know you’re looking for $5 million again next quarter..

Yes, there was very little derivative activity which would have been the major deviant firm the last three, four, five quarters. .

Correct..

For some reason, we don’t overly sell that. This is an combination we work with our more sophisticated customers and fore some of the real estate properties, that’s kind of a product makes some sense. We worked with them, and it just all happened that there was very little executed. .

I think what you have seen on the rate side, you steeping a yield curve and the flattening of yield curve had some borrower and not necessarily want to walk in at this rate just now, and back off from using derivative products.

And just the overall volume of commercial real estate loans that were actually closed in the first – in the second quarter, I think more that pipeline has leaked into the third quarter. .

Okay. .

So I've continue to think that we will be do balancing up to….

Yes, there is no doubt that the activity is back to the levels that we are used..

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

Thank you. And the next question comes from Matthew Breese of Piper Jaffray..

Carl, I'm sorry if I missed it. You noted there are the prepayment penalty fees and the equitable yields in the margins.

What were those amounts again?.

The prepayment fees were about $1 million, and that was up $199,000 from the first quarter. And the purchase accounting was $279,000, and that was up $118,000. So if you say just that increases over quarter-over-quarter, they totaled to $317,000, which was about 2 basis points in the quarter. Obviously, don’t have those increases….

Okay, and so that….

On a combined basis, if you take the total of those, it's about 8 basis points, but well we've have some amount of prepayment fees to fluctuate..

Okay. So backing that out, it looks like core margin was up around 4 basis points. I just wanted to get a sense for the next couple of quarters.

Does that still have an upward trajectory in your view?.

I would say projection in this quarter by two, and get -- so if you’re talking about the core, I would think the core may be up 1 basis point or flat to up a basis point. I think we’ll see some pressure continue on the funding side a bit, which might be getting off.

We will continue to see the benefit of the rate rises, and our continued originations, but we think that the funding side would be a little bit or offset that benefit. And of course, I’m hedging like that's there, maybe a little bit too conservative, but that's kind of worked, again. .

Right. So it sounds like that's a little bit more cautious guidance and then perhaps last time we spoke and I just want to get a sense for you.

The deposit market that's getting more competitive? Or was it the flatter yield curve that, perhaps, damping your yield prospects?.

What do you mean by -- I don’t know how that's different from what I've said before. I continue to see benefits on the loan side, but you tell me where the five year is going to be, and I’ll tell you what kind of --.

Okay..

You continue to see that bounce around quite a bit in that, and we do a lot of our pricing of the five year. We've got about $1.3 billion of loans that re-price within 90 days, but a lot of the -- fixed rate type of stuff offer five year, so that's kind of where might have debt. .

Okay. And then I just wanted to get a sense for loan growth beyond 2017 given some of the new hires. I know the guidance in the near term is $80 million to a 100 million.

Is it possible as we go on over the next six months or so that it becomes a quarterly run rate of more like $100 million per quarter with the hires?.

Yes, I think so..

Okay, that all I had. Thank you very much, guys..

Thank you. [Operator Instructions] And the question comes from Laurie Hunsicker with Compass Point..

Yes, hi. Good afternoon, gentlemen. .

Hi, Laurie. .

Hi, Laurie..

I just wanted to go back to what Matt and Mark have touched on.

Basically, the new C&I team of Peter Costa, how much of that team is going to be contributing to your loan growth?.

Well, I don’t know. I am hopeful. A considerable amount, the time will tell. It’s not all formed yet. But we are well on our way in executing as we had described before. So it’s a little difficult to quantify at this point, but I expect that you will visibly see it in our numbers in the next quarter and thereafter. .

Okay.

And how many people, when it’s all built out, will be a part of that team, new hires?.

Well, might not all be one team. So I believe I have said that perhaps something on the order of six company-wide would be part of this effort. .

Okay.

And then just remind us how big was his last loan book?.

Laurie, that’s probably proprietary information..

It is. Okay, okay. Fair enough. And then as far as the capital raise, you now have right-sized your commercial real estate, your risk base, and that’s been a category that’s been somewhat flat.

How are you thinking about that going forward, just the growth in that change?.

Well, let me treat it backfill. I mean, we were very comfortable as have been our regulators with the level of real estate that we had against the previous capital amount. So this new capital thus provide capacity to maintain the same retail levels, and we expect to begin using that. .

Okay.

And so if you were thinking about loan growth just within the commercial real estate book, what could we expect that to look like in the next year?.

Well, it hasn’t really grown very much this year. I would expect that we will continue to see improvement in the growth prospects, but I would be a little bit uneasy in quantifying it. But the pipeline and deal flow look excellent, and so I think you can expect that that will arise. The aggregate amount of real estate loans will rise..

Okay. And just one more question on commercial real estate.

Your multi-family book, which is round number, 30% of your loan, where does that go going forward? Does that kind of hang at current levels? Or is that something you would also look to grow?.

We would look to grow that. That’s a very competitive business, as you know, when we compete with everybody, especially the government as well as life insurance companies and all kinds of players that are operating in this market that aren’t necessarily headquartered here or thought to be here.

And so it really is one that is probably the most competitive segment of real estate around here, as I suspected as in other large cities. But we have a historic important position. It really is the original legacy business of the old Brookline Bank.

And so we are well known in it, have a lot of great customers who are big-time operators and they continue to be active. So I have some optimism about originations.

What’s a little bit difficult, Laurie, to evaluate is how many of these long-term long fixed deals, do these investors want to take out of their portfolio and give it to somebody else, like Hud or an insurance company or something, which actually makes for a better bowl in some cases.

So it’s not a terrible thing, but it does make growing the outstanding is a little bit tougher than it does in other businesses..

Okay.

And then tax medallion, can you, Carl, give me just an update I'm looking for loans, reserves, non-performers and charge-offs?.

I’ll just give you a sense on that portfolio is about $30.4 million, basically half and half between performing and non-performing, just a little over 50 million non-performing, little under 50 million in performing.

We got a specific reserve of $6.1 million against the non-performing book and a general reserve of $1.8 million against the performing book..

Okay. And then what were charge-offs in the -- I mean, I assume most of the $2.5 million of C&I went to that.

Or do you have a breakdown?.

I don’t have a breakdown economy on that exactly. It will be de minimis..

Yes, de minimis. They really haven’t been charge-offs. There is a lot of reserves. .

Lot of reserves, but we are still working with customers on that. .

But virtually everybody is paying something, and we are working with our customers. As these are bad people, we got caught up in a big-time change. .

Yes, go it. Okay, last question, Paul, on your Danvers branch. How is that doing? Do you have….

It's actually doing -- Danvers is doing quite well because most of the people staffing it were a long-term, well known bankers from the area and are able to draw in some business from some of these larger banks, as I mentioned, that are near buy.

But it's a little bit kind of early to tell because, you are right, when they open branches outside, they run some special rhythm. So some of the money is real, but we likely paying up for a little bit. But that is pretty authentic. .

And how much is that in deposits now? I mean, I know it’s not been a quarter, but?.

We don’t get it to details there, but you’ll probably see it once we file the FDIC report. .

Okay, great. Thanks, guys. .

Thank you. And we have a follow-up question from Collyn Gilbert with KBW. .

I'm sorry, just two things.

Did you say, Carl, what the tax rate -- you anticipated the tax rate to be?.

It's approximately -- we anticipate to still be in that 35.9%.

Okay. And then I’m just making sure I heard you correctly on the provision.

Did you say that you would expect a level in the third quarter comfortable to what you put up in the second quarter?.

No, no. I think that would probably go back to more of a normal run rate. That's typically charge-offs both loan growth. The thing is, when you have some charge-offs, you already have specific reserves. You don’t really have to cover all of the charge-offs. And we saw some nice workouts during the quarter and improvement overall in our book this quarter.

So we saw the lower provision and lower level, absolute level of the reserve required. .

Okay, okay. Just I thought I heard otherwise. So that was clear. Okay, thank you very much. .

Thank you. And as there are no more questions at the present time, I would now like to return the call to management for any closing comments..

Thank you all very much for joining us, and we look forward to talking to you again next quarter..

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

Thank you, Keith. .

Thank you..