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

Collyn Gilbert - KBW Mark Fitzgibbon - Sandler O’Neill Matt Kelley - Piper Jaffray Laurie Hunsicker - Compass Point Brian Horry - Orelian Management.

Good day and welcome to the Brookline Bancorp Inc Fourth Quarter 2015 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [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, ma'am..

Thank you, Deniece. This call may contain forward-looking statements with respect to the financial condition, results of operation 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 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. Please note this event is being recorded.

I would now like to turn the conference call over to Paul Perrault, President and CEO..

Thank you, Marissa. Good afternoon all and welcome to Brookline Bancorp’s fourth 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 $13.3 million of net income, or $0.19 per share, for the fourth quarter of 2015 as compared to $12.9 million, or $0.18 per share for the third quarter. This is a 3.4% quarter-over-quarter increase in net income and represented a strong finish to an excellent year.

For the year, the Company earned a record $49.8 million or $0.71 per share, an increase of 15% from $43.3 million or $0.62 per share in 2014. During the year we exited the indirect auto business to focus our capital and resources on serving our commercial and consumer relationships.

Excluding the indirect auto business, we grew loan balances year-over-year by 476.2 million or 10.6% and we grew our demand on NOW accounts combined $121.9 million or 12.7%. For the year total revenues grew by $5.3 million while non-interest expenses declined $3.8 million bringing our efficiency ratio below 60%.

Our colleagues have worked hard 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 fourth quarter results in some more detail.

Carl?.

Thank you, Paul. We had another strong quarter with loan growth and related fees leading away. During the quarter loan grew 166.4 million or 13.8% on an annualized basis. Weighted average coupon on organizations in the quarter was 435 basis point 2 basis points higher than our total portfolio at the end of Q3.

Our net interest margin of 354 basis points was consistent with the third quarter as higher accretion related to purchase accounting realized in fourth quarter more than offset lower dividends on federal home loan bank stock. Several loans paid off in the fourth quarter which contributed to the sharp increase in interest income.

Total loan interest income from the accretion of purchase accounting in the fourth quarter was over $1.7 million compared to 820,000 in Q3. The loan accretion for Q4 was roughly 14 basis points on average loans compare to 7 basis points in Q3.

Our total cost of funds which consistent with the third quarter at 75 basis points as the cost of interest bearing deposits increased 1 basis point while the cost of borrowings decreased 4.

Our provision credit losses for the quarter was $1.5 million, a decline of 235,000 from the third quarter, it was also a very strong quarter for non-interest income which totaled 6.1 million, up nearly $1.3 million from the third quarter driven primarily by loan level derivative income and gain on sale of loans.

The company's non-interest expense increased 1.1 million during the fourth quarter to 32.3 million. This was driven by increases in compensation primarily related to incentives and slightly higher charges for customer losses and write downs on repossessed assets.

Our effective tax rate increased to 37% in the fourth quarter resulting in a full year effective tax rate of 35.9%. I noticed that some analysts had modeled in the decline in our share count in 2015 so want to highlight that no stock was repurchased under the $10 million plan which expired at the end of 2015.

Our asset quality continued to improve in the fourth quarter as nonaccrual loans declined $391,000 to 19.3 million or 39 basis points in total loans.

Net charge-offs for the quarter declined slightly to 1.4 million or 11 basis points on loans and at year end our allowance for loan losses to total loans was 114 basis points, compared to 117 at the end of September.

Finally the board approved a quarterly common dividend of $0.09 per share, this will be paid on February 26th to shareholders of record on February 12. The quarterly $0.09 per share dividend represents an annualized yield of 337 basis points based on yesterday's closing price of $10.68.

Before turning back over to Paul I'll provide a few comments on our expectations for 2016. We expect continued growth on our average earnings assets driven by loan growth of approximately $400 million. The weighted average coupon on new originations is projected to come in consistent with the overall portfolio resulting minimum spread compression.

However the impact of purchase accounting accretion from acquired loans is expected to be significantly lower next year. For the fourth quarter I'm estimating accretion of the $200,000 to $300,000, a significant drop from Q4.

This will largely be offset by continued loan growth as well as the net benefit of the increase in the Fed funds rate in December on nearly $1 billion of loans that will be priced during the first quarter.

The provisions for loan losses will be driven by a loan growth, net charge-offs, the continued assessment of our portfolio of risk factors and trends with our coverage ratio likely to remain fairly consistent at year end.

Quarterly noninterest income is projected to be more in line with our third quarter results in the $4.5 million to $5 million with year-over-year growth of 7% to 9%. First quarter non-interest expense is set to be relatively flat with Q4 with the year-over-year increase of 3% to 5%.

Finally, we're currently projecting an effective tax rate in the range of 36.5% for 2016. With that I'll turn it back over to Paul for concluding remarks..

Thank you, Carl. Brookline Bancorp has had results in 2015 and we continue to be optimistic for this year. And now, we will open it up for questions.

Deniece?.

Thank you, Mr. Perrault. We will now begin the question-and-answer session [Operator Instructions] and the first question will come from Collyn Gilbert of KBW. Please go ahead..

Could we would just talk a little bit about deposit trends, you guys have put up -- you've been consistently putting up really good deposit growth kind of across the board.

So, maybe what's your outlook for that as we go into this year Carl and then how does that play into your views on managing the loan-to-deposit ratio?.

I'll take that one Collyn. This is Paul. It's partly a function of how many new customers you sign up obviously and we're simply sort of 80% almost commercial, but tends to be driven in that area and cash management treasury services and the like and being so commercial it's also a function of what your customers are up to.

If there is piling of cash or they're employing their cash for expenditure or more working capital and the like. But I think that you will find the trends to be generally consistent as we go forward. I would like to think that we would have a successful year this year as we did last year, but that was a very good year.

I'm still quite optimistic that we will do well. In the retail area that's a little bit more onesies and twosies and we had been pushing a little bit in that area but the big numbers really come in commercial, professional and non-profits, those kinds of firms.

What was the other part of your question?.

I just asked if you're managing it all or how you're thinking about the loan-to-deposit ratio as you continue to have pretty good loan growth..

Well if you look at our history we have done a great job in reducing the loan-to-deposit ratio over the years, it has hovered around this level now for a couple of years, I would like it to come down, but I want it to come down for all the right reasons.

Hopefully we continue to develop the DDA and NOW account business and that would offset borrowings continuing to improve our performance and that's how we're looking forward to getting that improvement in these loan-to-deposit ratios, but there's no urgency in my opinion. That's why we want to do it brick by brick..

Okay that’s helpful. And then just on the -- just a breakdown of fees, Carl, I know you said that the jump this quarter was in derivative income as well as long-term gain, can you just give us what the split was between the two and then I know continued sort of loans sale gains maybe as part of the strategy going forward.

Just talk a little bit about how you see that business and how you sort of see that fee line, I know you kind of give guidance on it but just more on a strategic -- from a strategic perspective how you're thinking about it?.

So just going through the fee income categories, the loan fee income increased quarter-over-quarter and that was really driven by some additional referral fees associated with some loans that we do particularly around HUD, don't necessarily do loans, but we participate with folks and refer them over and help out with making those loans happened, for a lot of customers.

On the derivative income we just had a lot of more activity at the end of the year than we've ever had before, it's difficult to project how the volumes that's going to happen on a quarter-to-quarter basis, but it’s certainly a product that we offer and some of our customers really want to take advantage of that..

It might connected to the fact that towards the end of the year probably not me but I think most people were expecting the Fed to raise rates and so the customers some of them wanted to lock in long-term rates and we do the long ones with swaps..

We’re putting the floating rate asset on our books which helps us and the customers getting a fixed rate loan at the end of the day, so everybody is happy.

And then the sale on loans, as we said a little bit more activity in the residential lending market we did few more participations than usual and then we also sold a few loans out of our equipment finance unit at the end of the year to drive that.

That was something that was more opportunistic and I will say it’s really about managing our balance sheet and our exposures and that's one we'll typically sell loans at basically our equipment finance units. Participations are something that we're continually doing in our commercial book and commercial real estate book..

Okay that's helpful and then on the point of rates actually Paul you've mentioned, how in your thoughts for this year as you guys coming in through the budgeting process, what are you assuming in terms of additional rate hikes, if any?.

I don't allow us to assume any of that Collyn. We basically -- I mean structurally we do it on a constant base to push the numbers around, but we work very hard to not be effected whether rates go up and down.

And our Algo analysis indicates the we are pretty neutral, do you want to add to that?.

No, that's correct. So for the budge for this year we didn’t forecast any change in rates, we basically budgeted a flat rate environment and then we do our modeling from a sensitivity standpoint to see what the sensitivities maybe around that. Naturally flatter yield curve is not something we would like, so that's something that we'll keep an eye on..

Okay and then just one final question, it looks like I think multifamily jumped up this quarter and I know that’s certainly not an asset class, would necessarily be preferred for you, was there anything in particular that was driving that or if you could just talk about that? That's it thanks..

We had loan growth in that component. I think it was one loan, a $22 million loan and there was a swap associated with that loan as well so we had the fee income associated with that origination as well..

Okay and was that locally based loan?.

Oh, yes, everything is locally based..

Okay like even Boston proper I guess is more what I am asking..

It could have been in Rhode Island, I don't know which loan it was, but it’s certainly in or near our footprint..

Your next question will be from Mark Fitzgibbon of Sandler O’Neill. Please go ahead..

I was wondering I know that you have been making a bigger push to drive derivative income but I am wondering is at likely to normalize in the first quarter or maybe slowdown a little bit from what would be perceived as being an elevated level in 4Q?.

That's a tough call, I mean, I Think it's fair to say we're relatively new to the business, we have quickly gained experience. Our customers are more comfortable coming to us.

We are very good at execution as you know in most of the things that we do and I would include this in the current and the future environments and so whereas in the past our customer might have stayed with us but if they wanted a fixed trade they would have gone somewhere else on that particular property.

We are not able to keep those in-house, so in a very minor way we're sort of gaining market share if you will, in the swaps business and I think it's going to be a function of appetite and [Indiscernible] is going to determine just how much of that business we do.

That's why as Carl mentioned, it's a little hard to predict that number because we only do it for our very good customers, on good properties and the like and so it's going be a function of their desire to do it..

Okay and then --..

Sorry to be dogging you but that’s --..

No, no, that's a good answer.

Carl, should we take your comments on the share accounts to mean that you probably aren’t going to buy back stock in 2016 and I guess if that's the case I'm curious why not with the stocks down 10% and you guys having almost a 9% of capital ratio that -- do buybacks makes some sense here?.

Well, without saying they makes sense or not we currently don't have an approved plan to do any stock buybacks. That being said, we're also growing quite rapidly, so that is a good use of our capital versus buying back and that being intangible book dilutive.

So, it's something that we do want to continue to look at, we feel that we are able to put some capital to use and good returns for our shareholders..

I can remember the world respected analyst talking about dilution to tangible book value on turn..

Well we're certainly sensitive to that..

And then on the equipment finance business, that's being growing nicely, I guess I'm curious as to your outlook for that business and how big you might want this to become as the percentage of the portfolio over time?.

I expect that it'll continue to grow nicely, whether or not it matches this year's results is speculative because it was pretty spectacular this year and it's also a function of how much we sell.

In terms of what sticks on the balance sheet but I would say, as I’ve said before that at this point as long as it's below 20% of our loans I would continue to be quite comfortable. Our asset quality in that area is much better than one would normally expect in an equipment finance business and the yields are very good.

So, it is something that brings -- I call it the icing on our margin cake..

And our next question will come from Matt Kelley of Piper Jaffray. Please go ahead..

Just one question on the margin.

What was the pre-penalty income that you recognized during the quarter?.

I think it's about $750,000, around about that..

And that's on top of the 1.7 purchase accounting accretion growth?.

Exactly, that's not included in the purchase account accretion..

Can we maybe get a little bit of a pulse on the real estate markets in Boston, each of you including Bob Rose in the past has commented on where you think we are in the cycle, where the risks are.

I'd love to get a current assessment of commercial real estate, condo, multifamily, things that concern you and where you think we are as we start 2016?.

Well, Rose is always supposed to be concerned which is why he expresses that concern. I'd say in the office market, it continues to be pretty strong, possibly rents maybe even rising in that area and then in the multifamily we think that perhaps rents have stopped going up.

We think that the supply is coming on at a pace which is causing a little bit of softness, for example maybe a couple of three months free rent, to go into some of these very expensive areas.

The vacancy is still low and I'd say one of the other big differences from past cycles here in metro Boston is that the population is growing pretty well and it's growing in areas that provide people -- younger people with very strong incomes who can absorb some of this stuff. So it's a bit of a foot race.

We are obviously careful about this and we're not predicting any kind of collapse, but it's probably not as hot as it was a year ago, two years ago.

Carl you have anything to add?.

I think that's about it. That sums it up. We're looking forward to GE moving to Canada [ph], it will be fun..

And then a question on your swaps business.

During the fourth quarter, what percent of your commercial real estate loans had a swap attached to it, of the originations that you put into place? How much of your business are customers swapping out?.

Well it's not much, I mean its a few percent, maybe..

I don't have a good handle on the total swaps that we had outstanding today, I think they are around $250 million. It's about $250 million have been --..

It tends to be some of the relatively larger loans but I see most of the loans of size that go by and boy it's not one in 15 or maybe it's one in 20..

Our next question will come from Laurie Hunsicker of Compass Point. Please go ahead..

Sorry to make you repeat this, but I think I broke up right when you were going over the purchase accretion.

The purchase accretion in net income interest was how much?.

1.7 million. And that compares to 820 [ph] last quarter..

And then you said going forward that's going to be about $200,000 to $300,000 for the March quarter, is that correct?.

That's my estimate right now, it's such a tough thing to estimate, but we're getting down to the very end.

These acquisitions were done few years ago and we're back rightfully down the end of whatever is left for accretion, and with the acceleration we've seen a lot of prepayments and that's why we've had -- last time we talked I was estimating it to be 500,000 this quarter, estimate stay overestimates, and we came in at 1.7, but that's due a lot of prepayments and payoffs of loan and so everything has gotten brought forward, just have to hit the fourth quarter..

Got it, okay perfect. And then on the expense side, can you help us think of this in terms of a going forward basis and maybe also update us in terms of De Novo branching plans. I know you just opened Chestnut Hill.

Are we still going to see Newport open in the back half of this year, and is expense drag still projected to be about $500,000 a branch, or has anything moved in that area?.

It's probably a little lower than 500 -- the Newport going to be a little lower than 500,000 per branch but I think that’s a good back of the envelop whenever you look at branches. As far as the expense -- and you're right, Newport we do expect to open at later half, later this year..

Do you have a date on that yet? Or not yet?.

No..

Okay..

No, because we will be raising the building and the town wants us to wait till spring to actually begin the construction of the building and I can't define when spring comes..

Neither can we, so as we're looking at the Chestnut Hill branch and that hoped in December, correct?.

Correct..

Can you just update us on where that stands in deposits if you have it?.

As of today, Laurie, I don’t have that..

Okay and what are you projecting those two branches to pull in? And those are your only two branches really in terms of new openings, or are there more slated?.

We had one relocation earlier last year but that's about it and it's not a branching program, I didn't call this, the one is Newport we happened to have a lot of business down and we have a lot friends and family down there and we have no location on Aquidneck Island, a great location came up and I am very optimistic with what we'll be able to do there.

Chestnut Hill is really important, our backyard and nicely completes a sort of grid of our locations in our native areas if you will.

So I would expect that there will be a certain amount of shifting from other branches to use that branch, but also there is tremendous amount of business in that area and even through it's very competitive, we certainly have been building our reputation in business banking..

Got it.

One last question, are there any other expenditure plans that are happening in 2016, technology updates or anything else that's going to meaningfully impact your expense line?.

Meaningfully expect, we're constantly being investing in the Company, so I can't think that anything that's meaningfully, in that sense we're doing renovation of our Stage 3 branch which will happen later this year as well hopefully sooner rather than later.

We're constantly doing things, but it's kind of the depreciation expenses that’s going on, we're just reinvesting to keep the guidance of 3% to 4%, 3% to 5% increased year-over-year in expenses.

Last year we had a decline in expenses year-over-year of almost $4 million a lot of that to do with the indirect lending, but also strong expense control here, and we're continuing to build out the organization..

[Operator Instructions] The next question will come from Brian Horry of Orelian Management. Please go ahead..

Thanks for taking my question. I wonder if you could give us a little update on the credit performance of your taxi loan portfolio..

It's been behaving quite well, we had a couple of foreclosures that were put in with other Medallion owners, that's literally true and they each have a little story behind them that we don't believe we’re entirely effected by the car services.

Our analysis is such that we think that although their revenues have certainly decreased at the taxi level, it's still sufficient to pay the debt and make a living and things seem to have stabilized in the market.

Is that responsive to your question?.

Sure.

Can you give us a sense as to what kind of provision you've taken against the loan book as a whole?.

Well, the loan book itself is only $35 million and it's made up of loan both, Medallions both in Boston and Cambridge. And on a combined basis I think currently we have a reserve of about 12% against that book of business, so I think we were very well reserved against that book..

And ladies and gentlemen, at this time we will conclude the question-and-answer session. I would like to turn the conference back over to Carl Carlson for his closing remarks..

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

Ladies and gentlemen, the conference has not concluded. Thank you for attending today's presentation. You may now disconnect your lines..