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Edited Transcript of BRKL earnings conference call or presentation 27-Apr-17 5:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Brookline Bancorp Inc Earnings Call

BROOKLINE May 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Brookline Bancorp Inc earnings conference call or presentation Thursday, April 27, 2017 at 5:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carl M. Carlson

Brookline Bancorp, Inc. - CFO and Treasurer

* Marissa Frerk

* Paul A. Perrault

Brookline Bancorp, Inc. - CEO, President, Director, CEO of Brookline Bank and Chairman of Brookline Bank

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Conference Call Participants

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* Collyn Bement Gilbert

Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst

* Laurie Havener Hunsicker

Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst

* Mark Thomas Fitzgibbon

Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal

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Presentation

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Operator [1]

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Good day, and welcome to the Brookline Bancorp, Inc.'s First Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Marissa Frerk, Associate General Counsel. Please go ahead.

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Marissa Frerk, [2]

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

Before we begin, please note that 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 statements, whether in response to new information, future events or otherwise.

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

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Paul A. Perrault, Brookline Bancorp, Inc. - CEO, President, Director, CEO of Brookline Bank and Chairman of Brookline Bank [3]

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Thank you, Marissa. Good afternoon, and welcome to Brookline Bancorp's First 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 $13.4 million of net income or $0.19 per share for the first quarter of 2017 compared to $12.8 million or $0.18 per share for the first quarter of 2016. Loan balances grew $63 million or 4.7% annualized, and our deposits grew $41 million from the end of the year.

We've opened a new branch in Danvers, Massachusetts, and we are very happy with the reception by the community. We are confident that we have the right team in place to grow our brand in that particular market.

Although we are still operating in a challenging interest rate environment, the recent rate hikes in December and March suggest that the headwinds of margin contraction may have finally ended. Our net interest margin for the first quarter was 3.53%, an increase of 13 basis points from the fourth quarter.

Noninterest income grew by $10.5 million from the fourth quarter due to an $11.4 million gain on sale of securities related to the acquisition of Northeast Retirement Services by Community Bank Systems. We received stock and cash in the transaction, and the CBU stock received had been sold by the end of the first quarter.

Excluding this gain, our efficiency ratio increased slightly to 58.6% due to seasonal compensation-related expenses and increased occupancy expenses associated with the opening of the branches in Danvers and Middletown, Rhode Island. We have a great team of employees that come to work every day 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, who will review the company's first quarter results in some more detail.

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Carl M. Carlson, Brookline Bancorp, Inc. - CFO and Treasurer [4]

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Thank you, Paul. In the first quarter, average loans were $71.5 million while total interest-earning assets grew $35.4 million from the fourth quarter.

Net interest income increased $1.2 million from the fourth quarter as loan growth and higher short-term interest rates drove interest income with only modest increases in interest expense.

Changes in loan purchase accounting and prepayment fees offset each other. Loan purchase accounting was $160,000 for the first quarter, down $81,000 from the fourth quarter. And prepayment fees were $820,000, up $86,000 from the fourth quarter.

Noninterest income was $15.9 million for the quarter due to the $11.4 million gain on sale of securities mentioned by Paul. Excluding this gain, noninterest income was $4.5 million. This is down from Q4 due to lower gain on sales, loans and leases.

Our provision for credit losses for the quarter was $13.4 million, an increase of $10.2 million from the fourth quarter due primarily to $6.3 million in additional reserves on taxi medallion loans and a specific reserve of $4.2 million related to 2 commercial credits.

The additional provision for taxi medallion loans was driven by a reassessment of collateral values for our Boston and Cambridge medallions. We lowered our collateral estimates $100,000 to $200,000 for Boston medallion and $150,000 for Cambridge medallion. We also increased our general reserve on our accruing medallion loans, bringing the total reserve on this portfolio to $7.6 million or 24.7% of the $30.6 million in book balances.

Regarding the 2 commercial credits, we established approximately $3.5 million on specific reserves against the $5 million loan, collateralized primarily by medical receivables. This is a long-term custom of the bank, and this situation is particularly volatile. We may lose very little or all of the specific reserve. The other commercial credit is a manufacturer of industrial and residential houses, and we established a specific reserve of approximately $600,000 against this exposure.

At the end of the quarter, the allowance as a percentage of loans was 121 basis points, up from 99 basis points at the end of the year. Net charge-offs for the quarter were $1 million compared to $8.5 million in the prior quarter. Remember, $6.1 million was related to loans with previously established specific reserves, of which $4.5 million were taxi medallions in Q4.

Nonaccrual loans increased $5 million to $45.1 million or 83 basis points of total loans. The company's noninterest expense increased $1.1 million from the fourth quarter to $33.8 million. The increase in expense was driven by several factors, including higher seasonal compensation expense and higher occupancy costs due to the full quarter impact of the Middletown, Rhode Island, branch that opened in December and the new branch in Danvers, Massachusetts, while our effective tax rate increased to 35.9%, driven by the securities gains.

As Paul mentioned, during the first quarter, loans grew $62.9 million or 4.7% on an annualized basis, led by commercial real estate, which grew $32.6 million; and C&I loans, which grew $24.9 million. The weighted average coupon on the loan portfolio increased 8 basis points to 445 basis points, driven by originations and repricing during the quarter.

During the first quarter, deposits grew $40.8 million or 4% on an annualized basis. During this period, the cost of deposits increased approximately 1 basis point while the cost of total funding increased 2 basis points.

Also, the board approved a quarterly common dividend of $0.09 per share, which will be paid on May 26 to shareholders of record on May 12.

Before turning it back over to Paul, I'll provide a few comments on our expectations for 2017. We expect continued growth in average earning assets, driven by loan growth of approximately $80 million to $100 million per quarter. The weighted average coupon of new originations are projected to come in consistent with or higher than the overall portfolio, resulting in a slightly better net interest spread going forward.

The 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 with the coverage ratio likely to remain fairly consistent. Quarterly noninterest income is projected to improve and be in the $5 million range. Noninterest expense is projected to remain consistent with year-over-year increases of 4% to 5%. Finally, we're currently projecting an effective tax rate in the range of 36% for 2017.

With that, I'll turn it back over to Paul for a recap of our common stock issuance earlier this morning.

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Paul A. Perrault, Brookline Bancorp, Inc. - CEO, President, Director, CEO of Brookline Bank and Chairman of Brookline Bank [5]

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Thanks, Carl. Earlier today, we entered into an underwriting agreement, working with Piper Jaffray and Sandler O'Neill to offer and sell 5,175,000 shares at a public offering price of $14.50.

After all related costs, the net proceeds are expected to be approximately $72 million. In conjunction with the public offering, we granted the underwriters a 30-day option to purchase up to 776,250 shares, which has the potential of increasing the net proceeds to approximately $82 million.

The use of proceeds will be for general corporate purposes, including supporting our continued organic growth as well as potentially supporting acquisitions. We continue to be very optimistic about our growth opportunities in the markets we serve and expect to put this opportunistic raise of new capital to work over the next couple of years. Brookline Bancorp has the resources and the potential to continue our sustained growth as we consistently deliver the exceptional service that our customers deserve.

We are looking forward to the rest of 2017. And we will now open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Mark Fitzgibbon with Sandler O'Neill.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [2]

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In terms of the capital raise, I wondered if you could help us think about your priorities for utilizing the excess capital, whether that's organic or acquisitions, and -- maybe start there.

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Paul A. Perrault, Brookline Bancorp, Inc. - CEO, President, Director, CEO of Brookline Bank and Chairman of Brookline Bank [3]

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Okay. It's really parallel, Mark. I mean, I don't -- I can't prioritize them in the sense of what I know will happen, but I don't prioritize them in terms of importance, if you will. Commercial real estate, obviously, our legacy expertise is one that has done well. It continues to do well. Our markets are very, very strong, and it feels to me like we're going to have increasing opportunities as others are less able to participate for regulatory reasons. Secondly, the C&I business, we will double down our effort there, although we've done very well. We are preparing an expansion, if you will, of that business. And I could say similar things about our 3 equipment finance units, which have a history of really growing rather well, and their markets continue to be strong. Again, a parallel answer would be, yes, we would certainly be looking hard at the right potential acquisitions, and all of this capital puts us in a position to do all of those things.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [4]

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And just to sort of follow-up on that, 2 parts. Are you -- have you hired a bunch of new lenders? And in terms of acquisitions, what kind of characteristics would you be looking for in a potential target? Is it liabilities? Is it fees, certain type of lending or something else?

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Paul A. Perrault, Brookline Bancorp, Inc. - CEO, President, Director, CEO of Brookline Bank and Chairman of Brookline Bank [5]

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Okay. Hired bankers, yes, and more to come. In terms of acquisitions, there's probably 2 kinds, if you will, at least from an academic point of view: something in market to our existing banks, could be small, could be medium. They're not -- it's not a long list of possibilities, but there are some there. Those would be cost-cutting-driven deals that would be melded in with 1 of our 3 banks. And the other kind, of which the list is somewhat longer, would be some new market for us. Obviously, it would be contained, at most, to the Northeast.

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Operator [6]

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Our next question comes from Laurie Hunsicker with Compass Point.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [7]

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Just to follow up on Mark's question. And Paul, to your comments on small or medium, how are you defining that in terms of asset size, small and medium? What's too small? And what defines medium for you?

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Paul A. Perrault, Brookline Bancorp, Inc. - CEO, President, Director, CEO of Brookline Bank and Chairman of Brookline Bank [8]

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Well, small to medium, under $1 billion, down to...

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [9]

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Okay. And then when we think about your markets, I mean, we're thinking Massachusetts, Connecticut, Rhode Island, potentially pushing into New York?

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Paul A. Perrault, Brookline Bancorp, Inc. - CEO, President, Director, CEO of Brookline Bank and Chairman of Brookline Bank [10]

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Yes, I think you've got it.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [11]

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Okay. But still not New York City. Is that correct?

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Paul A. Perrault, Brookline Bancorp, Inc. - CEO, President, Director, CEO of Brookline Bank and Chairman of Brookline Bank [12]

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Probably right. You know me, I never say never, but I'd probably agree with you.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [13]

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Okay, okay. And then just one last question on the taxi, which I realize is somewhat of a nonevent now, but -- relative to size, but can you just provide us an update on what nonperformers were within that category?

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Paul A. Perrault, Brookline Bancorp, Inc. - CEO, President, Director, CEO of Brookline Bank and Chairman of Brookline Bank [14]

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$30 million and change is the whole deal. Half of it is nonperforming. Virtually all of them are paying something.

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Operator [15]

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(Operator Instructions) And our next question comes from Collyn Gilbert with KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [16]

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So just to go back on the capital raise. So Carl, what -- how should we think about kind of the near-term proceeds? Because I guess, given your loan growth guidance of $80 million to $100 million, I think that's kind of where we were running anyway. So the acceleration doesn't seem like it'll be coming in the near term. So how should we be thinking about it, just to maybe offset some of the dilution out of the gates in terms of deployment here?

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Carl M. Carlson, Brookline Bancorp, Inc. - CFO and Treasurer [17]

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Yes. It's a little specific, and of course, this is subject to change as the market changes and the environment changes. But initially, the capital will be maintained at the holding company. The capital levels at our banks are -- continue to be strong and would be able to support any near-term growth. But as we see cap -- and we wouldn't -- we would cease doing dividends from the banks to the holding company. I'm not sure how your models are built, but we're able to fund any liquidity needs at the holding company. And we keep this available as we see the growth in the different markets and be able to push it down to the banks as it's needed. Having the capital at the holding company, it'll certainly get pushed as a deposit to the banks, and the banks will be able to put that liquidity to use in the [industry's] portfolio.

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Paul A. Perrault, Brookline Bancorp, Inc. - CEO, President, Director, CEO of Brookline Bank and Chairman of Brookline Bank [18]

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So Carl is using sort of our traditional run rates. And he's obviously -- you know him, he's going to be on my back to get things moving from there.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [19]

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All right. So I guess, just in simple terms, Carl, like the intention would be, I would imagine as these proceeds come in, that you're just going to put it into sureties. I mean, is it kind of keeping short duration, just keeping the cash and liquidity on hand with the expectation that there is a use of proceeds down the pike so we'll see a compression of the NIM? I'm just, yes, trying to think this all through a little bit here.

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Carl M. Carlson, Brookline Bancorp, Inc. - CFO and Treasurer [20]

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Yes, very modest. So we don't focus so much on the NIM in and of itself. We care about net interest income at the end of the day. But -- yes, so we'll put the money to use without taking much risk at all.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [21]

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Okay. And I guess just in a broader -- kind of broader sense and question for both of you maybe, Paul. But just understanding -- I guess, the raise came as a bit of a surprise to myself, certainly, and to the market. What -- it just seems like on the outside, you guys have plenty of capital. You're generating capital, moderate growth historically. And that was a pretty big discount, I guess, at $14.50. I'm just trying to understand. And it seems -- I mean, the messaging has been you guys are good with the regulators. The CRE concentration is fine. You took care of the -- well, part of it, the taxi portfolio. Just -- that would -- just seems like a pretty significant discount for -- on the outside, maybe not necessarily needing it or needing it today. So can you maybe try to connect the dots for me on that?

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Carl M. Carlson, Brookline Bancorp, Inc. - CFO and Treasurer [22]

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I think the discount is -- if you just point at what was our closing price yesterday, yes, it is a steeper discount than anybody would have expected out of the institution. But the stock had run up quite a bit as well as the entire industry has run up quite a bit based on really short-term news and -- so things like that. You've really got to take that into consideration as you're looking at this as people putting significant sums of money to work. We're very happy with the capital raise. We feel it's going to get put to use in the intermediate term, and that's kind of where -- I'll leave it at that. We're very sensitive to return on equity and having a return to our shareholders. So [we thought it was] a very opportunistic time to issue the capital, particularly at the levels we've seen.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [23]

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Okay. And then just, Paul -- so intermediate term -- sorry to hound on this. Intermediate term, is that within 6 months type of time frame?

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Paul A. Perrault, Brookline Bancorp, Inc. - CEO, President, Director, CEO of Brookline Bank and Chairman of Brookline Bank [24]

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Well, it probably takes that long to increase the momentum. This will be mostly involving commercial banking categories. So we'll do it as promptly as is prudent. But when we think about these capital uses and the support for our operations, as I mentioned in my remarks, I mean, I'm thinking out 2, 3 years. And I want to be very comfortable trying to accomplish what we had in mind in that time frame, and this really helps that out. And also, as I said to Mark, in the event that the right kind of acquisition comes along, we've got a lot of flexibility now to deal with how that gets done.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [25]

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Okay, okay. And then just one final question. If the path here is more organic and you start to accelerate your loan growth, how do you see yourselves funding that? I mean, you're at a 1.17 loan-to-deposit ratio. I know it's -- you've got longer funding, and it's well matched and stuff. But just in general, on the incremental funding, how do you see that if you're going to start to ramp up some of the organic growth channels down the road?

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Paul A. Perrault, Brookline Bancorp, Inc. - CEO, President, Director, CEO of Brookline Bank and Chairman of Brookline Bank [26]

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A couple answers. One is that one area of great appeal that I see is the C&I world, where we have done very well in positioning the company from having barely any presence in that business to having a material presence. That business comes with a fair amount of deposits typically. So focusing on that will be helpful along those lines. And we work on cash management, foreign exchange services, and we think that there's an opportunity to even do a little bit better than we've done. Remember, our view on this a little bit, Collyn, in that our current wholesale borrowings essentially support our equipment finance business, which is a nondeposit business. And Carl maintains a tremendous amount of unused wholesale borrowing capability. So for the foreseeable future, we're in great shape to be able to deal with the funding of this. Longer term, if I have a lot of success with this, yes, the next few times that we talk on this call, maybe it'll be a bigger issue. But for now, I don't think it is.

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Carl M. Carlson, Brookline Bancorp, Inc. - CFO and Treasurer [27]

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I would just add. When we talk to C&I folks, their loan book is not the only concern of ours. The deposit book is equally if not more important, just so you understand.

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Operator [28]

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(Operator Instructions) And it appears that no further questions have been submitted. This now concludes our question-and-answer session. I would now like to turn the conference back over to Paul Perrault for any closing remarks.

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Paul A. Perrault, Brookline Bancorp, Inc. - CEO, President, Director, CEO of Brookline Bank and Chairman of Brookline Bank [29]

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Thank you, Ryan, and thank you all for joining us. We look forward to talking with you next quarter.

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Operator [30]

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Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.