Marissa Frerk - Associate General Counsel Paul Perrault - President and Chief Executive Officer Carl Carlson - Chief Financial Officer.

Mark Fitzgibbon - Sandler O’Neill and Partners Collyn Gilbert - KBW Laurie Hunsicker - Compass Point Varun Bhandari - Piper Jaffray.

Good afternoon. And welcome to the Brookline Bancorp Fourth Quarter 2016 Earnings Release Call. 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 Ms Marissa Frerk, Associate General Counsel. Please go ahead..

Thank you, Anita. 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. 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 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 in net income or $0.19 a share for the fourth quarter.

For the year the company earned the record $52.4 million, or $0.74 a share, an increase of 5.2% from $49.8 million and $0.71 a share in 2015. Loan balances grew year-over-year by $403 million which is 8.1% and our demand and now deposits combined grew $141 million or 13%.

The challenging interest rate environment contributed to a continued compression in our net interest margin year-over-year, which declined by 10 basis points to 3.44% for 2016 versus 3.54% the previous year.

Despite the significant headwind in 2016, our revenues grew by $11.8 million or 5.5% while our expenses grew $5 million, or slightly less than 4% compared to 2015. This positive operating leverage further improved our efficiency ratio to 57.6%.

Our colleagues have worked hard to serve our customers and our communities making Brookline Bancorp one of the regions leading commercial banks. We continue to focus our capital and our resources on serving that customer base with the services they need, while continuing to deliver solid results for our shareholders.

I'll now turn you over to Carl who will review that fourth quarter results.

Carl?.

Thank you, Paul. Average interest-earning assets grew $77.1 million from the third quarter as our net interest margin declined 8 basis points to 340 basis points, resulting in decline in net interest income of $496,000.

This was driven by $1.1 million decline from the third quarter in loan purchase accounting and prepayment fees, partially offset by growth in earnings assets. Loan purchase accounting was $242,000 for the fourth quarter, down $628,000 from the third quarter and prepayment fees were $734,000, down $434,000 from the third quarter.

Our provision for credit losses for the quarter was $3.2 million, an increase of $1 million from the third quarter, due primarily to higher net charge-offs and loan growth. At the end of the quarter, the allowance as a percentage of loans was 99 basis points, down from a 110 basis points at the end of the September.

The decline is due to the reduction of previously established specific reserves. Excluding specific reserves, our coverage ratios are relatively unchanged quarter-to-quarter. Net charge-offs for the quarter were $8.3 million, $6.1 million was related to loans with previously established specific reserves of which $4.5 million were taxi medallion.

I'll discuss this more when I discuss taxes. Non-accrual loans increased $2.5 million to $40.1 million or 74 basis points of total loans, and non-performing assets to total assets increased 3 basis points to 64 basis points. Several credits deteriorated further in the quarter driving the increase in non-accrual loans often very low levels.

The taxi medallion portfolio is $31.1 million, $13.4 million of which is classified as impaired. Currently we maintain a $1.3 million or 4.1% reserve for this portfolio. The company's noninterest expense decreased $781,000 from the third quarter to $32.6 million.

The decrease in expense is driven by favorable adjustments to the SERP liability to higher loan term interest rate, lower severance costs which occurred in Q3 and lower FDIC premiums. Our effective tax rate declined slightly to 35.1% resulting in a full year effective tax rate of 35.5%.

Regarding taxes, there has been a great deal of speculation of how the election might impact federal tax rates in 2017. We don't know the extent or the timing of any reduction to federal corporate taxes or there is a change whether would be retroactive to the beginning of 2017.

I will be getting questions regarding what the potential impact would be on our deferred tax assets if there was a reduction. First, I'd like to point out that the charge-offs realized in the fourth quarter monetize the portion of our deferred tax assets at the end of the year.

Second, our deferred tax asset at the year end is approximately $25 million. Assuming a reduction in the federal corporate tax rate from 35% to 50% would cut our DTA roughly in half. The $12 million will be recorded in the provision for taxes unfavorably impacting EPS approximately $0.17 per share.

The earned back due to lower tax rates is estimated to be within nine months. As Paul mentioned, we finished the year with another solid quarter of organic growth in loans and deposits.

During the fourth quarter, loans excluding loans held for sale grew $66.6 million, or 5% on an annualized basis led by commercial real estate which grew $35.1 million and C&I loans which grew $24.5 million.

The weighted average coupon on loan origination and draws in the quarter was 461 basis points resulting in a five basis point increase in the overall weighted average coupon of the loan portfolio at the end of the fourth quarter.

During the fourth quarter, deposits grew $46.2 million, or 4% on an annualized basis, excluding certificate of deposits, deposits grew organically $111.2 million, or 30% on annualized basis. The net deposits finished the year at $900 million, or 90.5% of total deposits. This is up $799 million, or 80.6% of total deposits at the end of 2015.

Also, the Board approved the quarterly common dividend of $0.09 per share, which will be paid on February 24 to stockholders of record on February 10. The quarterly $0.09 a share dividend represents an annualized yield of 222 basis points based on yesterday’s closing price of $16.20.

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 $350 million to $400 million.

Weighted average coupon on new originations is projected to come in consistent with or greater than our overall portfolio resulting in the stabilization of the net interest margin.

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

Quarterly noninterest income is projected to be in line with recent results in the $5 million to $5.5 million range with year-over-year growth of 4% to 6%. First quarter noninterest expenses is projected to be higher than Q4 due to the impact of merit increases and the seasonal reset of benefits costs with the year-over-year increase of 4% to 5%.

Finally, we are currently projecting the effective tax rate in the range of 35.5% to 36% for 2017. With that I'll turn it back over to Paul for concluding remarks. .

Thank you, Carl. The Brookline Bancorp continues to deliver exceptional service to our customers and exceptional results to our stockholders and we are looking forward to 2017. We will now open it up for questions. .

[Operator Instructions] Our first question today comes from Mark Fitzgibbon with Sandler O’Neill and Partners. Please go ahead. .

Hey, guys, good afternoon. Paul just following up on a couple of year outlook points. It sounds like based on the actions you took this quarter on credit, provisioning probably comes back down little bit in the early part of 2017.

Would that be fair?.

I hate to try to guess on that. That's something that we calculate every quarter on what we need depending on loan growth in the quarter as well as any charge-offs that we may see. So I really don't want to opine on what I think is going to happen with provision expense. .

Okay. Let me just add a little bit today. The fourth quarter was a little heavy in my opinion.

How is that? Does that help?.

That does. That does.

And then on the margin, could you share with us what are you thinking, how are you thinking about the margin as we move into this year? And what you are baking in for rate assumptions into your modeling?.

For budgeting purposes we use a flat rate interest rate scenario. So we are feeling very optimistic about where things are headed. We saw very good with the statement of the yield curve primarily particularly in the three to five years area of the curve, that's where we book most of our loans. It's very favorable to us.

We are positioned for a rising rate. So we are feeling good about it. I am thinking it might be two or three basis points of NIM in the first quarter. But I don't want to get beyond that. We haven't really modeled how many rate increases are may be this year. .

Looking better until they happen.

Until they happen. But it takes a little while for those things to happen but we are feeling good about it. .

Okay. And then a question on commercial real estate. Obviously, commercial real estate has been focus of regulators over these last several quarters, your CRE to risk based capital ratio is about 340%.

I guess I am curious how high you will be willing to let that drift up over time?.

Well, let me start and say that we are at peace with our regulators related to this. We stress test our real estate annually and we have a tremendous amount of information about the portfolio. And can show that it is extremely conservative. Now having said that we do have some more capacity but it is not unlimited obviously.

So we are doing more participation. We are doing more placements but we expect to fully participate in the marketplace this year. .

Okay. And then lastly I wondered if you get sort of comparing contrast the loan markets in Massachusetts versus Rhode Island.

Is one stronger than the other? Are you seeing anything unique in either market?.

No. I don't think one is stronger than the other. The biggest --the stark distinction is the value of real estate and because of the relative immaturity of Brookline bank and commercial banking, Brookline Bank doesn't have as many manufacturing companies of the banking Rhode Island. Those will be the two differences I see in the C&I and real estate. .

Our next question is from Collyn Gilbert with KBW. Please go ahead. .

Thanks. Good afternoon, gentlemen.

Just back to the NIM, Carl so your comments about perhaps seeing stability in 2017, how does kind of the prepay accretion component fit into that? Are you thinking about it more off of a core NIM?.

Yes. That's more off of a core NIM. Loan purchase accounting is basically disappearing on us here. This can be very minimal impact on that year-over-year. I think in prepays that will -- that would be perhaps a negative impact, don't sure but the core NIMs going to be improving. .

Okay.

I am sorry what was the core NIM this quarter?.

One second, I pull that up. .

And why are you doing that? Just curious as to what you indicated kind of asset yield loan yield but what are your thoughts on kind of deposit pricing trends as we look at the year and just the competitive nature of the market as it relates to deposits?.

Well, I think it's difficult to look out through the year Collyn because you know as I mentioned a minute ago about another question, the rates won't go up until they go up but I can say near term there is considerable pressure in certain CD sort of intermediate term CDs and here and there, there are some remarkable money market offerings that I haven't looked beyond the curtain to see what you are going to do together but there is some noise out there but it is not overwhelming.

.

Okay.

Do you think you need to participate in that in order to keep the deposit growth where it is or do you think you can from mix shift benefit or something like that you can hold the line there?.

No. We are gaining on our deposit base mostly with commercial non profit professional firms, people who have operating accounts and need money market accounts and so it is a very, very core. I think our CDs probably went down a little bit year-over-year.

So I am confident that as long as we continue to be as effective in the marketplace as we've been over the past few years, we can keep going, maybe this was an exceptional year but I continue to be very optimistic on our mix and on our amount. .

Okay. .

Getting back to your question prepayments and purchase accounting total about six basis points. So total amount of 334 core margin net accretion. .

Okay. That's helpful. And then just I know Carl you gave guidance for the full year but just FDIC expenses were down, it seems like kind of down across the board for a lot of banks in the fourth quarter.

Is that a new sort of baseline for you guys or was there something unusual going on there?.

FDIC rates went down..

That was all for banks under $10 billion, Collyn for this year. .

Okay. So that's a new, that will stay, that's not a catch up or accrual, that's the real number. .

Yes. That's right. .

Okay. And then just the reduction in competition expenses in the fourth quarter.

Was there anything unusual that was driving that?.

Well, as I mentioned the higher long-term interest rates impact our SERP liability and we calculate that so that was a benefit in the quarter. Plus in Q3 we had some severance expense associated with the management change up and retirement up at for SERP switch. So didn't have that again. So that's basically it. .

Our next question comes from Laurie Hunsicker with Compass Point. Please go ahead..

Yes. Hi, Paul and Carl. Good afternoon. I just wanted to follow up on accretion. The actual dollar accretion income that was in this quarter was how much? I know it was a $1 million swing but I just didn't know, I know your September number was about $1.5 million, was it around 500 or --.

Are you talking about the loans?.

Correct. [Multiple Speakers].

Loan accretion was $242,000. .

Was $242,000, okay. Okay and so I guess I am little confused. In your press release you had said there was $1 million swing, $1 million drop from the prior quarter and had the prior quarter at 1.479. Was there a some sort of reclassification or --.

No, not at all. When I said $1 million that was purchase accounting, loan purchase accounting as well as prepayment penalties..

Rolled together, got it, that makes sense..

Together, together, right. .

Great. And then I just wanted to follow up on your non-performers or C&I non- performers of $23 million, how much of that was taxi? I got your impaired number, appreciate that detail but I feel like the non-performers might have been higher. .

No. It's a same amount. Impaired number is the same, yes. .

Okay, all right..

13.4.

13.4, okay and then can you give us an update on your Newport branch and how are you thinking about branching going forward?.

Sure. I mean it has been open less than a month and the early returns from three precincts, I'd say there is pretty good activity.

And the personnel are out, they are meeting our existing customers on Aquidneck Island and the bankers that we've hired to staff the place are long time Newport area bankers and so they are re-upping their contacts and we are capturing some of that so it feels good. It is beautiful branch by the way. .

Good. Okay.

Well, so Paul what are you plans on branching as you think about the rest of the year?.

There are some relocation, there are some serious upgrades that need to be done and that's probably the kind of thing that we will be doing for the rest of the year. .

Okay. So branch count for the most part probably stays at current level. .

Oh yes that -- excuse me I forgot to -- we are both moving one into one new branch for First Ipswich in a very exceptionally well located branch that had been vacated by people's united after they acquired Denver, so if you know the geography here it is right off route 128 on your way into down town Denver, and since we've got lot of their former employees, we figured we'd take one of their branches.

But other than -- so that's activity as I’d say there is a couple of relocations going on and a couple of rebuilds.

Okay, great. Then Paul maybe just last question generally how are you approaching M&A here, your stock prices up, your acquisition currency is up, how are you thinking about the world differently now? Thanks. .

I don't know that I am thinking about the world differently. I am wondering if the rest of the world is thinking differently about what kinds of premium banks might expect in the future. It's like I am still very cautious.

We don't need to go do anything, we keep our ear to the ground, but it would be an interesting question for you if sort of weighted average normal price for a decent bank in the past was 20x earnings, with all of us selling at 21x earnings now, what's the implication. And I haven't seen any data yet to understand if there is any and what it is. .

Right.

Got it and just I guess just sort of further that question, has there been increase activity in terms of chatting with you? Have you had increased conversations around M&A?.

No..

[Operator Instructions] Our next question comes from Varun Bhandari with Piper Jaffray. Please go ahead..

Good afternoon, guys. Sorry about that. Just wanted to ask you guys kind of about commercial real estate in Boston.

And what you guys have been seeing in terms of yield coming on post election as rates have moved up?.

Well, rates in the relevant part of the curve which is Carl alluded to before would be five years say for us basically went up and then it went down. So on average it really hasn't gone anywhere and pricing is maybe slightly more competitive right now than it was over the past six months.

But if it's true, it is only slightly and most of the banks have to be cautious about how much lending in this area they are doing.

So in some cases we've actually been able to improve either of the quality of the deal or the pricing as deals are trying to get done, particularly in the end of the market where we build two big buildings or big hotel and so this is sort of the more affordable level or size level is we are comfortable. .

This concludes our question-and-answer session. I would like to turn the conference back over to Paul Perrault for any closing remarks. .

Thank you, Anita. And thank you all for joining us. And we will look forward to talking with you again next quarter. Good day. .

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