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

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

Good afternoon, and welcome to the Brookline Bancorp, Inc. Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Marissa Frerk. Please go ahead..

Thank you, Amy. This call may contain forward-looking statements with respect to the financial condition, results of operations and business 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.

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 Brookline's fourth quarter earnings call. I'm accompanied today by our Chief Financial Officer and Treasurer, Carl Carlson, who will walk you through our quarterly financial results following my comments.

Yesterday, we reported $10.8 million in net income or $0.15 per share for the fourth quarter of 2014, which was in line with our expectations. This was a record year for earnings at Brookline Bancorp at $42.8 million or $0.61 per share, a nearly 21% increase over 2013.

The loan portfolio grew 10.5% to $4.8 billion, and deposits grew to nearly $4 billion. During the quarter, we issued $75 million of subordinated debt to further strengthen our regulatory capital base, while lowering our overall cost of capital and improving our liquidity for the years ahead.

During 2014, we continued to achieve strong, diversified, high-quality loan growth at each of our banks. We grew revenues as margins were, again, compressed in a very difficult interest rate environment.

We continued to execute on getting efficiencies by streamlining our processes, maintaining outstanding customer service and improving our product offerings. We expect to continue to encounter fierce competition, but our consistent performance demonstrates Brookline's capabilities and the economic strength of the markets that we operate in.

We had an excellent December for loan closings, and our pipeline is rebuilding nicely as we continue to see favorable trends for 2015. I will now turn you over to Carl, who will review the company's fourth quarter results in more detail..

Thank you, Paul. As mentioned earlier, our EPS was $0.15 this quarter. Our fourth quarter performance was driven by strong loan growth, continued excellent credit quality and increased customer swap fees, which offset the continued pressure on the net interest margin.

Total loans grew $86.6 million from September or 7.3% on an annualized basis, with all 3 banks contributing. Growth was particularly strong in the commercial real estate and commercial loan and lease portfolios, which combined, grew $110.3 million, while consumer loans grew $12.5 million.

This growth was partially offset by the $36.3 million decline in the indirect auto portfolio. As I've mentioned in the past, we've been deemphasizing the origination of automobile loans and, in early December, decided to cease any further origination.

The total loan portfolio had net charge-offs of $874,000 for the fourth quarter, representing only 7 basis points of loss on average loans on an annualized basis. Compared to the third quarter, our nonperforming loans increased slightly to 38 basis points, and our nonperforming asset ratio decreased slightly to 34 basis points.

The provision for credit losses for the quarter was $1.7 million, which is $310,000 less than the third quarter, reflecting our continued strong credit performance and low level of net charge-offs. The allowance for loan losses decreased slightly to 111 basis points of total loans at December 31.

Overall, deposit balances grew on a linked-quarter basis, $68.9 million or 7.1% on an annualized basis. Growth was primarily in demand deposits of $20.5 million and CDs of $39.3 million. The CD growth was driven by brokered CDs of $62 million, which we initiated in Q4.

While the net interest margin declined 4 basis points in the quarter, net interest income increased $252,000 to $47.6 million. On a linked-quarter basis, noninterest income decreased $1.6 million to $4.1 million. The decrease is primarily due to a $1.4 million litigation settlement recorded during the third quarter as well as lower deposit fees.

The company's noninterest expense increased $539,000 during the fourth quarter to $32.5 million. This increase was driven by an increase in loan-related expenses of $164,000 due to timing in loan volume as well as an additional $171,000 in the collection and other real estate-owned expenses.

We also recognized $250,000 in severance expense and $92,000 in facilities abandonment charges during the quarter. Finally, I'm happy to announce that yesterday, the board approved a payment of a dividend of $0.085 per common share to our shareholders for the quarter.

Before turning back over to Paul, I'll provide a few comments on our expectations for the first quarter of 2015. We continue to estimate the net interest margin will drop 3 to 4 basis points due to margin compression on loans.

As we enter our third year since the acquisitions of First Ipswich Bank and Bank Rhode Island, purchase accounting attrition related to the acquired loan portfolios is projected to decline. We estimate the accretion related to the remaining acquired loans to be in a range of $1 million for Q1.

However, this can significantly vary depending on the performance of our acquired loan portfolios. Credit trends remain positive, and the provision for loan and lease loss is projected to be generally in line with the fourth quarter.

Noninterest income will be in the range of $4.3 million to $4.4 million, as the loss from investments and affordable housing projects will be reported through the provision for income taxes going forward.

Noninterest expense is expected to be flat to down from Q4, as the nonrecurring items in Q4 are offset by seasonal increases related to merit increases and payroll taxes we typically see in Q1. We will 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. 2014 was a great year at Brookline Bancorp. Our results demonstrate that we are realizing on the potential of Brookline Bancorp, and we certainly look forward to the future with tremendous confidence. And now we would like to open it up for questions..

[Operator Instructions] The first question comes from Matthew Kelley at Sterne Agee..

I apologize, I got on a little bit late.

But could I get the prepayment penalty income for the quarter and also the purchase accounting accretion for the quarter?.

You're breaking up a little bit..

Sorry about that. I was wondering if I could get the prepayment penalty income for the quarter and then the purchase accounting accretion for the quarter as well. I apologize if you already reviewed it. I got on a couple minutes late..

Well, I'll start with the purchase accounting accretion. We had a total of $2.2 million or $2,168,000 in purchase accounting accretion. Of that, $1.4 million is related to the loans; deposits, there's $48,000; and on the borrowing side, $698,000. So those -- the deposits and the borrowings are fairly consistent quarter-to-quarter.

It's the loans that can vary quite a bit based on performance and prepayments and things of that nature. On the prepayment side, we recognized $525,000 of fees through the quarter..

Okay, got you. So really, the core margin x those was about $330 million.

Is that right?.

I'd have to do that calculation to get those particular....

Okay. Got you. I just want to make sure that the 3 to 4 basis points of compression would be off of core margin. And then I think you said about $1 million of purchase accounting accretion expected in the fourth quarter.

Is that right?.

The loan purchase accounting is 10 basis points and the prepayments are about 5, 4 to 5..

Okay, got it.

And then could you just walk through, on the tax rate you'd mentioned there on the affordable housing credits, is there a change there in how that's going to be accounted for?.

Sure. I think the tax rate will be close to the 36% for the first quarter..

All right, got you, got you. Okay.

And then just more broadly speaking, how do you stand on your loan pipelines? And what are you seeing for commercial real estate origination yields? And how does that compare to the last quarter?.

Well, they obviously jump around, Matt, a little bit with the level of sort of short to intermediate term rates. So on any given day, they may go up or down a little bit. And I'd say for the latter half of last year, it's probably been operating in a band, if you will. It's been consistent enough. There is still very good volumes in our markets.

We're seeing a lot of activity. Our customers are doing very well, and the loan pricing is probably a little bit more competitive than it had been. But again, I'd call that within a range. It really hasn't changed all that much..

Yes, I would say we're still seeing loans that we're booking today going on at lower yields in the portfolio. But on a linked-quarter basis, they were up 2 basis points. So the originations this quarter were up 2 basis points from the prior quarter. Some of that may have....

See, I can see what's going on, but I can't add, Matt..

And of course, that has to do with mixes as much as anything. But we've also seen a significant drop in market rates, so we're -- always keep an eye on it..

Okay.

And then can you talk about your appetite to buy back shares at these levels?.

We continue to look at it. As I said in the third quarter, the board wants to be opportunistic in how we approach this. It's not a program that we're out there in the market every day buying. It's something we'll be continuing to take a look at. We saw our stock price, since we announced that, trade from a low of $9.29 to a high of $10.15.

So it's -- and if you look at the 3 months prior to that, it was trading from $8.55 to $9.30 or so. So it's something that we're looking at, and we don't want to be in there when it's very volatile. We'll pick our places when we buy back the stock and put the capital to use the best way possible..

It has to do with share issuance, capital management, growth plans, all things that have to do with our core business, and it's not a buyback to prop up stock or something or to go out of our way to use the capital. We are using it, I think, well and prudently.

And this is another arrow in the quiver, as they normally say, that we might use from time to time, as appropriate..

Our next question comes from Mark Fitzgibbon at Sandler O'Neill..

Just to follow up on Matt's question about the margin. So Carl, you were suggesting the core margin will fall 3 to 4 basis points, and it sounds like another, probably, 3 basis points related to lower levels of purchase accounting accretion.

Is that correct?.

Yes, I think that's what's driving it now. It's a less -- a little less on how much the margins are going down on our core portfolio. It's going to be more on the impact of purchase accounting in that aspect. This quarter, we're a little bit on the pleasantly surprised side. We thought it'd be -- remember, we had the subordinated debt.

That was nearly $1 million of additional interest costs that we had this quarter that we didn't have in Q3.

So the growth in the portfolio and the performance overall in the portfolios as well as the purchase accounting helped offset a lot of that cost, where -- so we still had margin or net interest income, linked-quarter increases, which was nice to have..

Okay. And then secondly, commercial real estate and C&I continue to grow rapidly relative to the portfolio. I think in your release, you cited a 75% ratio now.

Is there a level at which you'd be uncomfortable? Or would you be comfortable literally growing the commercial side of the business up to 100% of the loan portfolio?.

Well, in theory, I don't necessarily see that there's anything wrong with 100% commercial as long as that commercial is strong and quite diversified in many ways. But that's not a practical outcome here, so I don't need to enforce an upside limit above the 75%.

But the fact is that I think we are improving our residential lending operations, we are improving our home equity lending operations. You have to remember, you don't have to go back many years when the Boston Bank -- Brookline Bank really didn't participate in home equity lending and was a very nominal player in residential.

So these are programs that we have developed in recent years, and our Bank Rhode Island operation has long been mostly commercial anyway. So it is selectively improving our effectiveness in certain retail markets, but the fact still remains that we are a very diversified commercial banking company..

Okay. And then on deposit fees, it looked like they were down about 7% linked-quarter.

Was there anything unusual in there or maybe something in the prior quarter that propped that up?.

No, just lower overall fees in general on -- not so much on the ACH transactions and things like that, it's more just lower NSF fees that we experienced during the quarter..

Okay. And then lastly on expenses, I guess, I was just curious if you had a target in mind for the efficiency ratio or G&A to average assets or something over time that you're working toward..

For starters, 60%..

Okay.

And when do you think you can get to that 60% level, Paul?.

Well, I'm going to be curious to see what the effect of Carl's reclassification of the affordable housing credits does. I think we ended the year at around 62%. This balance -- this income statement move will be beneficial to that, and we're feeling very good about realizing on the efficiencies that I mentioned.

So I'm not going to give you a date, but we are clearly moving toward it and have plans to keep doing so.

Carl?.

Yes, I would say we don't have a date in mind. It's -- every day, we're just looking to continue to grow revenues while keeping expenses down and continue to find efficiencies that way. And as long as we have the operating leverage going in the right direction, we'll get there, hopefully sooner rather than later..

The next question comes from Collyn Gilbert at KBW..

I just wanted to get a little bit more color, if we could, on the suspension of your indirect auto business, what's driving that and what that really -- what that means..

Sure. Well, there's a couple reasons that went in -- things that went into that decision. We really specialized or focused on the prime and super-prime market in indirect auto.

And at these rates, and with all of the regulatory requirements and things that go into that, it just got too expensive to do and to make any money, particularly when we had the opportunity to put capital in our funding towards the other parts of our portfolio.

And we have equipment finance, the C&I loans as well as the commercial real estate loans with much better spreads. And so that was really the focus. It continues to be in that market, you're seeing people go into the near-prime and subprime markets to make any money.

And even in those markets, you're seeing yields come down as it gets more and more competitive. And that's not a place where we wanted to be, that's not where we operate. So we thought, at the end of the day, the best thing was for us to close it down.

So right now, at this time, that portfolio is in a runoff mode, and we let go of the origination staff. So we have a few folks still helping with the servicing of that portfolio..

Okay. Just 2 things on it.

So you when you mentioned the regulatory requirements, what in particular are you referring to for that business?.

I'm not going to get into particulars on that..

Okay, okay. And then, I guess, just my final question on that, would you guys consider selling that portfolio? I mean, you've got -- it seems like you're surrounded by folks that are -- have been putting on that asset class like mad.

Is that something you would consider just selling and being done with it altogether?.

I think we consider everything..

Okay, okay. Okay, and I apologize if you guys covered this, but just in general, I think I heard you sort of touch on some of this, but you guys have put on really great loan growth this year.

Do you think those growth rates can kind of continue, and taking the implication of the direct auto, out of it, but just kind of what you're seeing on the straight commercial side?.

There's plenty of business around. We'll keep going..

[Operator Instructions] And our next question comes from Laurie Hunsicker at Compass Point..

Just to follow back on the thought on capital management/sub-debt. So share repurchase, I understand, where you're coming from.

Can you talk a little bit then about how you potentially think about M&A or how you even think about share issuance? If you were to do an acquisition, would you be more inclined to use cash or potentially even issue your shares here? What's your thought?.

I'd much rather use our shares in an acquisition, but sometimes an acquisition can only be done for cash. So those are the things you're always looking at. That's basically how we're looking as far as the stock buyback and how much capital we have on hand. If opportunities come up and that's the best use of our capital, that's what we'll do..

Okay.

And geographically, where is your still ideal focus? Is it current markets? Or how far west would you go from Boston?.

It really depends on the transaction. I think when we look in the markets that we're in, they're very strong markets right now. We're growing a bank acquisition every 12 months. So it's something that we're very happy on the asset generation side. We're in excellent markets. Almost every market we look outside of is something less than what we're in.

I think if we can find an attractive franchise on the deposit side, which would be the dream, I think we'd go pretty far forth if that created an opportunity for us. I think our business model lends itself to that. We do like dense markets.

So if we can find a nice dense market that we have an excellent management team in place that's executing both on the asset and, particularly, on the liability side, I think that's something we'd be very interested in..

Okay.

And how -- I mean, how far would you travel? Would you travel down to New York?.

Well, it's an impossible question..

Yes, it's -- yes..

Okay, fair enough. To go back here to commercial real estate for a minute, obviously, within your commercial real estate mix, it looks like construction fell.

Is that an area you're deemphasizing as well?.

I apologize. You're really breaking up bad..

Okay. On the construction side, it looks like that has been deemphasized.

Can you comment a little bit about is that just a blip or is that a line item that you are deemphasizing as well?.

I wouldn't say it's deemphasized. We're certainly in that market. It just rises and falls with the activity..

It's one of the riskiest portfolios in banking. We're very careful who we do it with. And as a result, there's not much..

Sure, great. Okay. And on just the commercial real estate side, the $1.7 billion book, I mean, this quarter alone, you were up 17% annualized.

Can you just tell us what your -- the new steps that you're putting on? What is your average LTV or approximate LTV on that?.

The LTV on the....

On the new commercial there..

I don't have that at my fingertips..

Okay, okay.

And then one last question, just going back to the purchase accretion, do you have a full year 2015 purchase accretion estimate?.

I don't have a full year, but we have something in our plan right now, but nothing that I would really share right now. We're expecting it to be about $1 million for the first quarter and continue to decline. But again, it all depends on purchase account -- how the loans react. We -- about $4 million in the plan. Let's put it that way..

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Paulson (sic) [Mr. Perrault] and Mr. Carlson for any closing remarks..

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

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