Lindsey Kitchens - Investor Relations Paul Perrault - President and Chief Executive Officer Carl Carlson - Chief Financial Officer.

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

Good day and welcome to the Brookline Bancorp, Incorporated Q3, 2018 Earnings Release Conference Call and Webcast. All participations will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note today's event is being recorded.

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

Thank you, Rocco. Good afternoon, everyone, and welcome to Brookline Bancorp, Inc.'s third quarter 2018 earnings conference call. Yesterday, we issued our earnings release, which is available on the Investor Relations page of our website, brooklinebancorp.com, and has been filed with the SEC.

This afternoon's call will be hosted by Brookline Bancorp's executive team, Paul Perrault and Carl Carlson. Before we begin, please note, 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, our most recently filed 10-Q 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 statements, whether in response to new information, future events or otherwise.

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.

And now I'm pleased to introduce Brookline Bancorp's President and CEO, Paul Perrault..

Thanks, Lindsey. Good afternoon, all. I'm accompanied today by our Chief Financial Officer, Carl Carlson, who will walk you through our quarterly financial results following my comments. We reported another quarter of record earnings at $22.5 million or $0.28 per share for the third quarter of 2018.

And yesterday our Board of Directors approved a 5% increase in our quarterly dividend. As many of you know, this is the second time this year we have increased the dividend. Loan balances grew by $56 million during the quarter while deposits grew by $35 million. Revenues increased $1.2 million in the quarter while our expenses declined by $400,000.

I continue to be pleased by the work of our exceptional team to serve our customers and our communities making 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 third quarter results in more detail.

Carl?.

Thank you, Paul. As Paul touched on, during the quarter loans grew $56 million compared to 57 million in the second quarter. Loan originations were once again strong in the quarter. However, consistent with Q2 strong loan participation activity out to third parties resulted in modest net portfolio growth.

In the third quarter we had loan originations and net growth of $476 million which was slightly higher than the second quarter with loan sales and participations out of approximately $70 million.

The weighted average yield on the loan portfolio increased 14 basis points driving the overall yield on earning assets up 13 basis points during the quarter. Deposits grew $35million during the quarter as we continued to see solid growth in DDA.

Interest bearing deposits are continuing to demonstrate a migration of customer preferences toward time deposits. During the quarter, money market balances declined $81 million while time deposits increased $118 million.

During the quarter the cost of interest bearing deposits increased 23 basis points and our overall funding costs increased 22 basis points from the second quarter. The increase in our funding cost compressed our margin 7 basis points during the quarter to $357 basis points and our net interest income declined $385,000 on a linked quarter basis.

Included in net interest income is the impact of purchase accounting which was $567,000 for the third quarter up 126,000 from the second quarter and prepayment fees which were $859,000, down $87,000 from the second quarter. Combined the quarter of increase in these items of $39,000 essentially had no impact on the margin this quarter.

Noninterest income was $7.1 million in the third quarter up $1.5 million from Q2. The increase was driven by the higher derivative income activity. Our provision for credit losses for the quarter was $2.7 million, an increase of $1.2 million from the second quarter driven primarily by specific reserves related to taxi medallion loans.

During the quarter an out of state bank successfully auctioned off 26 taxi medallions with winning cash bids averaging nearly $37,000. Based on this information we felt it was prudent to increase our specific reserves to reflect cost and taxi medallion collateral at $35,000.

There was no change in the $20,000 value we are using for Cambridge medallions. At the end of the quarter, the carrying value of our taxi medallion portfolio was $14.5 million with reserves of $2.9 million.

During the quarter nonaccrual loans were basically flat at $25.8 million or 41 basis points of total loans and net charge-offs were $564,000 or 4 basis points on an annualized basis. The allowance for loan losses as a percentage of loans was 96 basis points at the end of the quarter, up slightly from 94 basis points at June 30.

Excluding the impact of merger and acquisition expense, the company's noninterest expense declined $80,000 from the second quarter to $37.3 million.

While we estimate our effective tax rate to approximate 24% we recorded several discrete items during the quarter totaling approximately $900,000 in favorable tax benefits which provided a $0.01 nonrecurring benefit to earnings per share this quarter.

Net income increased $1.6 million from the prior quarter and $7.1 million from the prior year to $22.5 million or $0.28 per share. As Paul noted the board approved a 5% increase in our quarterly common dividend to $0.105 per share which will be paid on November 23, to stockholders of record on November 9.

This was the second time during 2018 the Board has increased the dividend resulting in a 17% year-over-year increase in the payout to shareholders. Currently the dividend payout ratio is approximately 38%. The quarterly $0.105 per share dividend represents an annualized yield of 286 basis points based on yesterday's closing price.

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

Thanks, Carl. We are very happy to have reported another record quarter for the company and we expect a strong finish to the balance of the year. We will now open it up for questions..

Thank you. [Operator Instructions] And today's first question comes from Mark Fitzgibbon of Sandler O'Neill. Please go ahead..

Hey guys, good afternoon..

Hi Mark..

Hi Mark..

I wondered if you could give us a sense for what caused that loan level derivative income to really skyrocket this quarter aside from customer preference was – was it a function of new people or new products or something else?.

No, really nothing new, just by its nature this is the kind of product which is in our view an accommodation the customer desires and is very lumpy.

It tends to be dominated by commercial real estate transactions rather than C&I and there is really nothing to markets has stood, so where do they come in?.

Okay, and then secondly, that equipment finance portfolio is now I think 15% of loans and I vaguely recall in the past you all had talked about sort of limiting or capping that at some percentage of loans, could you remind me what that is?.

Well I have said for years that I certainly readily tolerate 20% if we got to 20% I would want to sort of take a hard look at what the right positioning is and as you can tell from the numbers you just cited we're still quite away from that. So we're very comfortable with that proportionality..

Okay and then your tangible common equity ratio has crept up a bit, you are back over 10% I believe, how are you thinking about capital deployment, how long it is likely to take to kind of get that to 8.5 or eight and three quarters kind of a level?.

We don’t have a target on trying to get that to any particular level at this time..

Okay and then lastly Carl, I wondered if you could share with us your NIM and expense outlook?.

Sure, the expense outlook is probably a little easier, so I'll go with that. So I would expect continued modest growth in the expense side anywhere from 2% to 3% for the quarter.

On the margin side it is really is what happens with deposit costs, but I'd say we feel that we've seen the big catch-up in the last two quarters as far as deposit betas are concerned. So when you think about it through the cycle, I think we're back to around 30% at this point on our interest earning or interest bearing deposits.

I think it will settle out in there maybe a little bit higher for the next quarter. And so that will continue to put a little bit of pressure on the margin, but right now my modeling suggests it be maybe 2 basis points down to flat for Q4 and moderating from there..

Okay and you are still comfortable with that sort of 24% tax rate guidance?.

Yes..

Okay, great, thank you..

Okay Mark..

And our next question today comes from Matthew Kelley of Piper Jaffray. Please go ahead..

Good afternoon everybody. .

Hey Matt..

Just wanted to get a sense for your – the size of the loan pipeline, your loan growth outlook and anything notable on that front as far as recent hires go?.

Pipelines across the board continue to be pretty strong with the exception of maybe residential is a little weaker than it has been historically though as I'm sure you know Matt that it's not a major business line for us.

Everything else was good and I think Carl was trying to point out that the kind of volumes that we have seen in recent years continue to exist. The market has been very good to us, but for a variety of reasons we have done more participations and syndications this year than we had in the past as part of the overall management.

So I don’t feel that there is going to be any material difference in the near term activity from what we have seen. We may try to keep a little bit more of it in the house, but the activity is still reasonably brisk. Carl I think you can add on that..

Yes I would just say that we have always guided to about $80 million to $100,000 million of growth per quarter. I wouldn’t change that at this point.

First quarter we had $122 million of net growth organically roughly prior two quarters in the mid 50s and just to reiterate what Paul said, originations in our pipeline have never been larger quite frankly. Third quarter was actually we had more originations in the second mortgage.

What has been different, I think is a little bit different than what we had originally expected. Commercial real estate has been strong on the origination front, our finances being particularly strong and a little less, so on the commercial C&I side on a net growth basis.

I think we are seeing some payoffs that had marked down a little bit about our net growth on the C&I side. So I would expect more C&I going forward.

Because of the high degree of commercial real estate and not necessarily from a concentrational role in commercial real estate, but on a customer basis we've done more participations than we would have originally anticipated to make sure that we can continue to take care of those customers and continue to service those relationships, so that's impacted the net growth on a quarter-to-quarter basis.

But over time, these things will all work their way out and I think he was very confident in the continued growth there..

Understood and then on your syndicated portfolio, can you just give us a sense for the size of that the footprint as well?.

Well, I mean their syndications in the colloquial sense, not in the national sense that you might see a large regional or money center bank do, these are slow loans that are probably smaller than a $100 million by a fair amount and they tend to be with friends and neighbors and family if you will.

So the things that might be a little bit bigger and a little bit different from a standard local participation there just tends to be a little bit more complex..

Understood, okay, and then maybe just touch on the size of a securities portfolio it has been coming down, I think it's only about 10% of the total assets.

Is there a floor that you're targeting for the portfolio or can it continue to wind down here?.

I would say there is no floor to iton the portfolio really is balance sheet liquidity management and asset liability management. No necessary floor to it that I would state.

We confidently look at what's going on with the yield curve, the yield curve has steepened up a little bit from where it was but we confidently analyze what we want to do on the investment portfolio side. Knowing that and now our liquidity environment you're basically funding that with borrowing.

So the reason you would do that is mostly for liquidity purposes. .

Understood, okay, great. That's all I had thank you..

Hey Matt..

And our next question comes from Laurie Hunsicker of Compass Point. Please go ahead..

Yes, hi. Thanks good afternoon. .

Hi Laurie..

Carl, I just wanted to go back and just wanted to clarify something on the expense side, you said 2% to 3% a quarter you mentioned 3% a year in expense growth a year correct?.

Yes..

Okay good.

Are there any de novo plans currently?.

You mean for branching?.

Correct..

The plan would be a little bit strong. The leaders of our three banks of course are very keen on improving their footprints and I'm somewhat accommodating but not entirely accommodating to their desires and I think I have said to you a number of times that branch systems to me you would always need to be proven and traffic patterns change.

So sometimes we might move one here or there we might add one we might fix one but there's nothing major in the works but there will certainly be some attention paid to each of the three branch systems a little about next year..

Okay, thanks and then Paul, can you talk a little bit about how you think about share buybacks with your stock at these levels and then also maybe address how you think about acquisition and using your stock as currency with that…?.

Well, right now we do not have a stock buyback in place. That certainly as the Board would decide and we would announce that if and when that became appropriate. As far as using our stock as currency I think that makes a lot of sense in a lot of transactions, but a lot of folks are also using a little bit of cash, introducing a little cash into that.

So that’s basically the answer I had on that. So it's subject to what the desires are of the seller as well as how do we want to position the bank going forward and what our capital levels are..

Okay and then can you just refresh us on how you think about acquisition in terms of size and your approach obviously investing here at $7.3 billion your approach to thinking about crossing $10 billion? Thanks..

Well, I don't worry about the $10 billion threshold at all Laurie. I assume that Carl was bothered a lot more than I do, but I literally don't think it's a big deal. We do a lot of sophisticated stuff today, we're not a major retail bank and so the kinds of things that are particularly troublesome for some institutions I think apply less to us.

And so, I wouldn't pass up on a good deal because it takes us there or doesn't take us there or anything like that. In terms of the first part of your question, size I think it probably has more to do with what the property is, its complexity, how solid it is, it's management team, it's more of things of that nature than scale itself.

On the lower end you saw we did a pretty small deal that was very in-market for us.

We closed 100% of their branches and so we enjoy that kind of activity a very kind to our financial statements and on the higher end that's really a much more subjective thing is that a net new market for us, and what does the company look like, does it feel like our neighborhoods, it's more that than size limiting..

Okay, thank you..

[Operator Instructions] Today’s next question comes from Collyn Gilbert of KBW. Please go ahead..

Thanks, good afternoon gentleman.

Just a question on the loan and deposit side, can you just give us a little bit of color as to what where you're seeing current loan yields on your pipeline or origination yields on the loan side and then where the costs are coming on adding incremental deposits?.

I'll start with the loan side, talk about the $476 million originations and draws during the quarter, those came in at a weighted average coupon of around 569, that gives you a sense on that..

Okay and then on the deposit side for the new deposits that were added this quarter the blended cost?.

I don't have a good sense of what just is net new a lot of these things, a lot of this has to do with much more than just getting to CDs. But what's driving some of this is certainly the repricing of money market accounts particularly, typically higher balanced customer accounts, folks with $50,000 or more with us in that category.

And the bigger impact I think is not only the increase in CD rates that we're offering just to be competitive in the market, but also the movement of funds from money market accounts into CDs, So people become much more comfortable locking in CD rates out and going term on those types of things.

So probably, if you're looking for a CD today our best CD right now happens to be at Brookline Bank for 24 months and that is 2.6%. And Collyn you'll have to have $5,000 to open that..

Right, can I be out of state, are you taking on the state deposits?.

No, we don't focus on that. It’s not a strategy of ours but for you we'd more than love….

Oh thanks. So I think these New Jersey banks are probably paying a 100 basis points more than that so, you're in better shape up there.

Okay and then just, I know you had said that you're not necessarily managing or targeting at certain capital level, but just curious what was sort of the strategic decision behind putting up there offering two dividends in the calendar year, obviously you guys made a point of doing that, so kind of what went into that thought process?.

Well, the earnings improvement has been material.

It's been core and although it wasn't specifically put this way, I think it could be one of those things where people were talking about how you're going to spend your tax savings with the new tax bill, may be unconsciously that’s a little bit of what we're doing here because of keeping our payout ratio to a very, very comfortable level capital formation is strong and as I mentioned a moment ago this is essentially all core earnings and so why not share that with the shareholders..

Okay and then just to go back to the question again on expenses Carl, there's been some movement again if we look kind of historically, but are you saying on a core basis that you would only increase expenses 2% to 3% per year?.

I'm focused mostly on the fourth quarter..

Okay..

And how much that might go up, so my current estimates have it going up at a very modest amount and we're still in the process of working through our plans for 2019..

Okay, got it. Okay, that's all I had. Thank you, guys..

Thank you..

And ladies and gentlemen this concludes our question-and-answer session. I’d like to turn the conference back over to the management team for any closing remarks..

Thank you, Rocco. And thank you all for joining us this afternoon. We look forward to talking with you again next quarter..

Thank you Sir. Today’s conference has now concluded and we thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day..