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

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

Welcome to the Brookline Bancorp First Quarter 2016 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Marissa Frerk, Associate General Counsel. Please, go ahead..

Thank you, Allison. 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 statement, 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, all. Welcome to the 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 $12.8 million in net income or $0.18 per share for the first quarter of 2016.

That is a 9% increase from the first quarter of last year. This represents a solid start to 2016. We continue to focus our capital and resources on serving our commercial and consumer relationships. As a result, we have solid loan growth for the quarter of $135 million, with all loan categories contributing.

At March 31, loans totaled $5.1 billion, nearly 11% higher than last year. We also experienced solid growth in deposits in the quarter of $87 million, bringing total deposits to $4.4 billion, nearly 7% higher than last year.

Comparing our first quarter performance to the first quarter of last year, revenues are up a little more than 5%, with expense growth up 2.3%, creating positive operating leverage of 2.7%. This performance also translates into an efficiency ratio of 57.6% and a return on tangible equity of 9.7% for the quarter.

Our colleagues continue to work hard to serve our customers and our communities in our quest to make 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 first quarter results in some more detail.

Carl?.

Thank you, Paul. As Paul mentioned, we had another solid quarter with loan growth and related fees leading the way. During the quarter, loans grew $134.9 million or 10.8% on an annualized basis, led by commercial real estate which grew $102 million.

The weighted-average coupon on originations in the quarter was 439 basis points, 3 basis points higher than our total portfolio at the end of Q4. While revenues were up on a year-over-year basis, they declined $469,000 from the prior quarter.

This was largely driven by the prepayment of several acquired loans in Q4 and the accelerated recognition of purchase accounting associated with them as well as simple lower purchase accounting accretion as we enter the 5th year since our acquisitions.

Our first quarter net interest margin at 345 basis points was 9 basis points lower than the fourth quarter as accretion related to purchase accounting on loans declined substantially from $1.7 million in Q4 to $177,000 in Q1. This represented 11 basis points in margin compression from the prior quarter.

The headwinds of lower purchase accounting were partially offset by continued growth in average interest earning assets which grew $137 million from Q4, resulting in a decline in net interest income of $875,000.

It was another solid quarter for non-interest income which totaled $6.5 million, up $406,000 from the fourth quarter driven primarily by loan level derivative income and gain on sale of loans.

Our provision for credit losses for the quarter was $2.4 million, an increase of $858,000 from the fourth quarter principally due to loan growth as net charge-offs for the quarter were $400,000 or only 3 basis points on loans. At the end of the quarter, the allowance as a percentage of loans was 114 basis points, the same as yearend.

The Company's non-interest expense declined $276,000 from Q4 to $32.1 million. This was driven by lower losses related to fraud and write-downs on repossessed assets. Our effective tax rate declined slightly to 35.8% in the fourth quarter from the 2015 full-year effective tax rate of 35.9%.

Overall, net income was $12.8 million for the quarter which was down $515,000 from Q4 and up $1.1 million or 9.5% from the same period last year. Non-accrual loans increased $12.6 million to $31.9 million or 62 basis points of total loans. The increase was largely due to the restructure of $8.6 million in taxi medallion loans during the quarter.

Finally, the Board approved a quarterly common dividend of $0.09 per share which will be paid on May 20 to stockholders of record on May 6. The quarterly $0.09 per share dividend represents an annual yield of 316 basis points based on yesterday's closing price of $11.39.

Before I turn it back over to Paul, I'll provide a few comments on our expectations for the second quarter. The weighted-average coupon of new originations is projected to remain fairly consistent with the overall portfolio, resulting in minimal spread compression as we expect minimal impact from purchase accounting going forward.

The provision for loan loss will be driven by our loan growth, net charge-offs and the continued assessment of our portfolio risk factors and our coverage ratio is likely to remain fairly consistent. Non-interest income is projected to be more in line with our third quarter results of last year, projecting the $5 million range.

However, this is largely dependent on customer preferences to use interest rate slots to lock in longer term loan rates. Second quarter non-interest expense is projected to be relatively consistent with Q1. Finally, we're currently projecting an effective tax rate in the range of 35.8% for 2016.

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

Thanks, Carl. Brookline Bancorp experienced a great start to 2016. We continue to be optimistic for the remainder of the year. Now, I will open it up for questions..

[Operator Instructions]. And our first question will come from Mark Fitzgibbon from Sandler O'Neill & Partners. Please go ahead..

I was wondering, Carl, just to follow-up on some of the comments you just made about the future.

I guess, I'm curious on provisioning, in that $2.4 million you had in provisioning this quarter, was some of that related to the taxi medallion business that won't be there in future quarters? So therefore, should we assume that provisioning will run at a lower level in 2Q?.

No. None of the provisioning this quarter have to do with the taxi medallion loans. We had taken a reserve in Q4 for that. If you recall, we're about 12% of our portfolio, we have a reserve against. That's generally 15% for our Cambridge loans and 10% for our Boston medallion loans. So this quarter, that was not really an impact.

It's really just that the growth in the portfolio and the mix in the portfolio..

So, Mark, almost all of the provisioning this year as it related to that loan growth -- as each category of loan carries a factor. As you just said, it's a mathematical process and you just add to the reserve, when there are no other external changes..

Okay. And then secondly, I wondered if you could share with us what the loan pipeline's look like? Paul, maybe share with us some color on sort of the lending environment in Metro Boston today.

What you're seeing with pricing and terms out there?.

I would call it quite stable compared to the best. I think our bankers would say it is extremely competitive. But the pipelines remain strong as they have been certainly for the past couple of years for us. As Carl mentioned, we kind of see the continuation of the state of affairs as we see now. Do we see some crazy deals from time to time, yes.

But that's been the case for quite a number of quarters for a while, as we feel that the economy is not headed down at this point, but we do worry about it..

I'm also curious, if your appetite for commercial real estate lending has eased at all, given the regulatory focus on concentrations in commercial real estate?.

It has not, Mark, because it is the legacy business of the old Brookline Bank from back in the day. So we're big players of it generally and we're very conservative underwriters. Our lending groups as well as our credit administration area go to great lengths to make sure that we completely understand the portfolio.

It is as conservative as we expect it to be. We know it will get a lot of scrutiny from the regulators but they are comfortable with it. So I see no reason to back off from doing some good business.

On the other hand, we work hard at developing some of the other portfolios to bring better balance in the balance sheet that the Company had in previous years..

Okay. Then lastly, on the fee category, I think, Carl, you said that fees would look more like they did in the third quarter which was $4.8 million.

So, is it across the fee categories things look pretty similar? Or are there any single items that account for that sequential decline?.

Again, this is basically the loan derivative income and the gain on sale of loans. We did sell some loans out of our equipment financing units during the quarter which is not something that we typically do. We do this periodically just to balance our exposures. So, it's not something we constantly budget for and expect to do.

On the derivatives side, it's based on volume. That's something that is very difficult to budget for and project. It all depends on what closes in any given quarter and what--.

Q1 was quite strong in that..

Customer strong. We had a very strong fourth quarter and a strong first quarter. Now, that may continue. So, I don't want to guide people to expect that..

And then your comments on minimal spread compression implies that you think the rate of decline in the margin is slowing? Is that the right way to think about it?.

Absolutely. As I look forward, we've got the purchase accounting which was pretty volatile and could saw us up and down on the margin. That's largely behind us. They said there was only $177,000 this quarter. I don't expect it to be much different from that.

What we're currently originating is at a better margin, a couple of basis points here and there, than our current portfolio. So, I would expect that to be fairly consistent..

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

Just a question on the loan level derivatives income.

How much of that is truly uncertain, where you don't know what the customer is going to want in terms of a structure for their loan versus what you guys want in terms of selling some of that product? Is there any of that element to this that you guys want to keep pushing those and introducing those types of products versus simply what the customer wants when they walk through the door?.

With us, it is not something that we encourage people to go sell. It is a tool that we use among many others that we try to accommodate what a customer is trying to accomplish typically in a real estate transaction. It is to provide them with good, long term fixed rates at a time when that's available to them.

But it's certainly not pushed, not too many qualify. We're very picky about for whom and with whom and what kind of property that we would do this with..

Okay. Then a little bit more in just the local commercial real estate markets. I'm curious kind of how Bob Rose might be scoring some of the asset classes or markets? Get a little more granular in terms of areas that maybe you think are getting a little bit too overheated or over built, there's too much supply.

Just talk a little bit more about individual markets or property types where maybe things have just evolved over time?.

I would say in the core Boston market, there has been a tremendous amount of building, as you know, in small, medium and large types of things. We have seen a little bit of evidence in the large things not leasing up quite as quickly as they might have a year or two ago.

I can't be certain if that's just a function that a lot of them are coming on stream at the same time right now. So absorption is bound to be a little bit slower even if the market itself is just as strong as it has been.

And then we compare that, if you will, to the Metro area properties which by and large have been performing quite well, consistently well, as they have been in recent years, as those properties are a bit more affordable than in the core.

Here in Rhode Island, occupancy of multi-family things and the limited amount of condominium things that go on here have seen consistently reasonably strong absorption. So, I can worry about it. We're not involved in the big things in the core Boston market. They will impact the other things.

It's like it's as always been, the right people, the right properties, conservative loan to values. If the markets do slow down which I emphasize, Matt, that they don't seem to have been slowing yet and in any tangible amount. We believe that the portfolio will be ready for that..

Okay. Then just a housekeeping item for the model.

What were the prepayment penalty -- what was that income in the quarter recognized?.

Let me look that up. $644,000, that compares to $750,000 last quarter..

Our next question will come from Collyn Gilbert of KBW. Please go ahead..

Kind of a big picture question, I guess, it's tied to the fees, Carl and Paul too if you want to sort of chime in on this. You run a really low efficiency ratio and it could be even lower if the fee component was there. I understand that your comment on the derivative income, maybe some activity starting to slow a bit.

But just kind of in a bigger picture, how do you see that sort of fee line moving? I know you've been opportunistic in terms of selling from the portfolio.

Is it going to be kind of more of the same? Is there anything that you're looking at that could meaningfully change sort of the complexion of your fee base?.

I would say -- when you break down all the fees that we currently -- that fall into that category, the gain on sale of loans is something that I don't really consider as a fee. Those are, I don't want to say opportunistic, but as they happen. It's something that happens.

On the derivative fee income, I don't want to say it's going to slow, I just don't know what the timing on that. So I'm not trying to provide robust numbers from a budgeting standpoint because that's largely based on what our customers are trying to accomplish. But overall, I would expect to see this fee income continue to grow.

We continue to focus very strongly on our cash management. Every day that continues to improve. We don't see a dramatic improvement here, but it's moving in the right direction. We continue to invest in other opportunities..

I would add to that, Collyn, maybe a little history and then a little forward on fees generally. The legacy Brookline Bank started this commercial banking adventure with virtually zero in fees. So it does not have a historic retail operating account base that might of been collecting overdraft fees or service charges or anything like that.

So we have built a lot of that from scratch and things like cash management which have been going very, very well. Earnings credits are the nature of payment, if you will. So that ends up being reflected in a better deposit mix, if you will, growing in deposit mix.

The other thing that we've been working on that should affect us in the longer run is other value-added on commercial activities that will be in support of our growing customer base, both in real estate and in C&I as we continue to sophisticate the franchise, if you will..

Okay. All right, that's helpful. I presume, Carl, there's not necessarily a target that you have sort of a near term target in terms of the feed of revenue number? To your point, Paul, yes, it's improved considerably over the years. But do you think you can get that to a 12% level? Or a 15% a year--.

Yes, I think I do. I would hate to give you a timeline. We work on it every day. We've come a fair way -- we might be at 10% level..

But we're doing very well on the margin, we're not going to slow that down. We really focus on revenue. We just focus on our customers. We target the types of customers we're after in the markets that we're in and taking care of them..

We will broker fees as quickly and as safely as we possibly can..

Okay. Just one final question is -- this may be kind of a dumb question. But on the taxi portfolio, it's just interesting. I know you guys took a reserve in the fourth quarter. But for the most part, it's been fairly quiet industry wide on the taxi side.

Then yet, this quarter we're starting to see banks finally step up and start to take some additional reserves or whatever the case might be. You obviously restructured a group of loans. Why now? Obviously, the taxi business has been under pressure for probably over 1 year, 1.5 years..

Let's separate the past from the present a little bit, okay? Recall, as Carl pointed out, we took substantial allowances in our loan loss reserve last quarter.

Okay?.

Yes..

What happened this quarter is that a small portion of our medallion holders have come in seeking some help. They're not throwing them on the table saying we're done. They are experiencing reduced cash flows and so they are looking for some relief.

Virtually all of our medallion holders continue to pay, most of them the originally agreed to payment, a handful of them somewhat reduced payments. So I think it's because this has been going on for some time, these things have become relatively illiquid for the owners, for the borrowers, if you will.

Depending on their individual situations, some of them are stepping forward and saying, you've got to help me out here. In some cases, we agree..

Okay.

So this wasn't that their terms were up or it was a renewal period or anything like that? They are coming to you ahead of that just looking for restructurings?.

I don't know for certain, Collyn, but some of them maybe at renewal but nobody is going to take us out. I don't know that's necessarily important. My guess is most of them would just be guys that are coming in and saying, hey, I can't make everything meet here, on what is going on..

Our next question will come from Matt Kelley from Piper Jaffray. Please go ahead..

I know it's not a big portfolio, but just on the taxi stuff -- out of curiosity, when those drivers come in and they want some relief, what type of pressure are they having on their revenues and the cash flows of their business over the course of the last 12, 18 months? How much of their revenue is going down? How much of a pinch are they in -- are you seeing in their financials?.

You don't really get real financials from guys like this. But we do have our ways to get some amount of information in this industry. Bob Rose, who many of you know and his colleagues have done some calculations that we believe that on an annualized basis, the medallion guy's revenues down about 20%..

Year-to-date 2016 you said?.

What's that?.

Over what period it's down 20%?.

This would be information for last year versus maybe a year or two ago prior to that. We're not sure, but it's possible that the whole situation is stabilizing. But that's speculation a little bit on my part..

Is there any other evidence that might support that view of stabilization or just anecdotally?.

I think it's anecdotal. You listen to the taxi guys, the Uber guys, the Lyft guys and everybody's sort of scrambling for drivers. It's kind of a drive down for everybody. So, I interpret that to mean maybe it's sort of a stable on the revenue side. It's probably not as stable on who are you driving for side..

[Operator Instructions]. Our next question will come from Laurie Hunsicker of Compass Point. Please go ahead..

Just to follow-up on the medallions.

Of the $15 million you have in commercial non-performers, how much of that is taxi medallion?.

I'd have to get back to you on that. I know it increased $8.6 million this quarter. I'm not sure how much it was in the prior quarter..

It was a little bit lower..

There was a little -- so maybe $9 million or $10 million in total, is that--.

That sounds right..

And then, just in terms of how the regulators are viewing this.

At your last exam, did you chat with them about this at all? Or did they have any thoughts? Or how are they approaching it?.

On the taxis?.

Yes..

You have to remember this is about a 0.5 of 1% of our portfolio..

No, I agree I think. I am out there -- I think this is a non-event. I'm just trying to--.

It doesn't get a lot of attention -- regulators, I don't think they'd -- no, no, I just don't think the -- it hasn't been something that the regulators have been overly concerned with. As Paul said, these folks, nearly all of them are paying. We did restructure some loans that are on non-accrual status.

If they continue to pay for six months or so, we will -- and continue to perform, we think that they'll still be a TDR, a troubled debt restructure, but it would be an accruing one. So we continue to work with our customers..

No, I am in agreement. It's a $35 million bump on your balance sheet that's much, much bigger. Just going on to buybacks, you all reauthorized in February which I was delighted to see. But you didn't repurchase any in the quarter.

Can you just share with us your thoughts on buyback? How you're going to approach that going forward?.

Sure. I think the Board really wanted to be opportunistic, so we've seen a pretty volatile stock market. So they approved a $10 million buyback or up to $10 million. So that's really for use at certain -- if we see an opportunity to buy back the stock.

Right now, we're sensitive to tangible book value dilution on all those things, but -- we did not buy anything back during the quarter..

Okay.

And then last, on the Chestnut Hill branch that opened in December, can you update us in terms of were all of the costs baked in? Then how that's doing performance wise? Maybe if you have total deposits or loans or any other data points you can give us?.

I really don't, it's just too new--.

All the costs are in. It's open for business, all the investments in, the people are in. The people probably were in, in the third quarter or in the fourth quarter, I mean because we hired up ahead of time. We wouldn't share deposit data on that out-of-the-box anyway..

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Perrault and Mr. Carlson for any closing remarks..

Thank you, Allison. Thank you all for joining us. We look forward to talking to you next quarter..

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