Marissa Frerk - Associate General Counsel Paul Perrault - CEO, President & Director Carl Carlson - CFO and Treasurer.

Mark Fitzgibbon - Sandler O'Neill + Partners Laurie Hunsicker - Compass Point Research & Trading Matthew Breese - Piper Jaffray Companies Collyn Gilbert - KBW.

Good day, and welcome to the Brookline Bancorp Fourth Quarter 2017 Earnings Release 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..

Thank you, Phil. Good afternoon, everyone, and welcome to Brookline Bancorp, Inc.'s Fourth Quarter 2017 Earnings Conference Call. Yesterday, we issued our earnings release which is available on the Investor Relations page of our website, www.brooklinebancorp.com, and has been filed with the SEC.

This afternoon's call will be hosted by Brookline Bancorp's executive team, Paul Perrault and Carl Carlson. Before we begin, please note, this call may contain forward-looking statements with respect to the financial conditions, 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, our most recently filed 10-Q and our earnings press release.

Brookline Bancorp cautions you against unduly relying upon any forward-looking statement and disclaims any intent to update publicly any forward-looking statement whether in response to new information, future events or otherwise.

Any references made during this presentation to non-GAAP measures are only made to assist you in understanding Brookline Bancorp's results and performance trends and should not be relied on as financial measures of actual results or future predictions. For comparison and reconciliation to GAAP earnings, please see our earnings release.

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

Thanks, Marissa. Good afternoon, 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 quarterly earnings of $6.8 million or $0.09 a share for the fourth quarter of 2017.

Excluding the impact of the Tax Cuts and Jobs Act, net income would have been $15.8 million or $0.21 per share and this compares to $13.3 million or $0.19 a share in the fourth quarter of 2016. During the quarter, loan balances grew $91 million and deposits grew by $66 million.

Our total revenues grew by $656,000, while expenses declined $256,000 from the third quarter, resulting in an efficiency ratio of 55.4% compared to 56.4% in the third quarter. You might recall on September 20, we announced the acquisition of First Commons Bank, and their shareholders have now approved that transaction on January 17.

We expect to close the transaction this quarter. First Commons will be merged into our Brookline Bank and add approximately $260 million in loans and $280 million in deposits. We are all looking forward to welcoming the customers of First Commons to the Brookline family.

We have a great team of dedicated employees serving our customers and our communities, making Brookline Bancorp one of the region's leading commercial banks. And now I will turn you over to Carl, who will review our fourth quarter..

Thank you, Paul. We had a very solid quarter with reflected pretax earnings of $26.5 million, which capped off a very solid year. As Paul mentioned, we were required to remeasure the accounting value of our deferred tax asset and investments in low income housing in light of the Tax Cuts and Jobs Act, which is enacted on December 22.

Right now, our net deferred tax asset was approximately $9 million, which is reflected in the provision for Income Taxes section of the income statement.

While this was a significant charge in the fourth quarter, our preliminary estimate for the 2018 effective tax rate is approximately 24%, down from 34.5%, and we expect the $9 million charge will be recaptured through lower federal taxes in the first 9 to 10 months of 2018. Turning to loans.

During the fourth quarter, our loan portfolio grew by $91.2 million or 6.5% on an annualized basis. This is consistent with our guidance of $80 million to $100 million of quarterly earning asset growth.

At the end of the quarter, the weighted average coupon on the portfolio was 464 basis points, a seven-point increase from the prior quarter, driven by repricing activity and originations. During the fourth quarter, deposits grew by $65.7 million or 5.5% on an annualized basis.

During this period, the cost of interest-bearing deposits increased five basis points. We also saw average demand deposits increased $15.6 million from the third quarter or 6.8% on an annualized basis. The yield on earning assets increased four basis points in the quarter, while the cost of interest-bearing liabilities increased three basis points.

Loan purchase accounting was $174,000 for the fourth quarter, up $3,000 from the third quarter and prepayment fees were $1.1 million, up $270,000 from the third quarter. Combined, the quarter-over-quarter increase of $273,000 represents half of the quarterly increase in the yield on earning assets or two basis points.

Noninterest income was $5.8 million for the fourth quarter compared to $6 million in Q3. The slight decline was due to lower customer derivative revenues and loan sales. Our provision for credit losses for the quarter was $1.8 million, a decrease of $1.1 million from the third quarter, driven by a favorable loan workout.

The charge-off was simply less than the previously established specific reserve we have established in Q1. During the quarter, net charge-offs were $8.5 million, $7.2 million were related to taxi medallion loans.

At the end of the quarter, the allowance for loan losses as a percentage of loans was 102 basis points, down from 116 basis points at the end of the third quarter. Nonaccrual loans declined $12.7 million to just under $27.3 million or 48 basis points of total loans. Of the $27.3 million of nonaccrual loans, $7.8 million are taxi medallions.

Our total taxi medallion portfolio declined $7.4 million during the quarter to $19.7 million, with specific and general reserves of $3.8 million. The company's noninterest expense decreased $256,000 from the third quarter to $35.2 million and included $206,000 in merger and acquisition costs.

In closing, the board approved the quarterly common dividend of $0.09 per share, which will be paid on March 2 to shareholders of record on February 16. The quarterly $0.09 per share dividend represents an annualized yield of 2.25% based on yesterday's closing price of $16. With that, I'll turn it back over to Paul for concluding remarks..

Thank you, Carl. As we move through this first quarter of 2018, we look forward to the opportunities presented to our organization. With our resources in place, we have the potential to continue our growth as we consistently deliver the exceptional service that our customers deserve. We will now open it up for questions..

[Operator Instructions]. The first question comes from Mark Fitzgibbon with Sandler O'Neill..

First, if you could update us on what remains of the taxi medallion loans and what you're carrying those at..

Yes. So right now, we have, on the books, $19.7 million in taxi medallion loans. And so we've got reserve against that of $3.8 million. And of the $19.7 million, there's one particular credit that we really treat as a C&I loan for all intents and purposes because the repayment of the loan is really not based on the taxi medallions themselves.

There is substantial assets behind that individual, and that's about $9.3 million piece of that. So that's basically how we look at it. So when we think about the taxi medallion exposure itself, we kind of look at it more in the $10 million range as you....

$3.5 million against..

$3.5 million against that..

And Mark, in the marketplace, it's still murky as hell, but it hasn't really changed much in recent quarters.

Virtually, all of them are still making their payments at some level, some at 100%, some other agreed upon amount, and we have been fortunate to be able to be very, very aggressive in charging off a lot of these balances so that we take advantage of the times and reduce the exposure.

But there's really no clarity in the marketplace to indicate what values might be. But I think it's coming, I think it's coming. The big thing that's missing is real market financing for somebody acquiring one..

Okay.

And then I think, if I heard correctly, you said you're going to close the acquisition late in the first quarter, is that right?.

Yes..

Could you help us think about operating expenses with the acquisition in there and also kind of an organic growth as we look ahead this year?.

Yes. I think we expect to close in the first quarter of that transaction, and we'll do the conversion of the systems later in second quarter. So we'll start seeing the cost savings really start seeing 100% of those cost savings in Q3. So you'll see cost savings certainly in the second quarter and more so in the third quarter as far as run rates.

I think just looking at our expense growth this year, I think it will be very similar next year as we continue to grow the company. So that's basically where I am on the expense growth and the operating costs. And on the loan growth and things of that nature, I'm sticking with the $80 million to $100 million of quarterly growth going forward..

$80 million to $100 million of quarterly loan growth, you said?.

Yes..

Yes..

Okay. And then lastly, your margins moved up nicely as you continue to remix. You guys have done a good job controlling funding cost.

How are you thinking about the margin this year, more of the same?.

More of the same. So I'm expecting, and of course, there's a lot of moving parts in this, as you all know. We expect probably around, for the full year, about 3.65% margin..

And that is some a couple of rate rebate hikes in there?.

Correct, correct. The fourth rate hike doesn't help much..

The next question comes from Laurie Hunsicker with Compass Point..

I just wanted to go back to margins. So I'm assuming that the delta, because if I'm just stripping off, you just gave us the prepay fees. If I just take off the prepay fees, linked quarter, you are flat at 3.52% to 3.52%.

And so as that jumps in to the 3.65%, is that accretion income from the deal? Is that right?.

No, no, no. So just you know, we have not factored any purchase accounting into our forecast so far..

So that's just right?.

We actually close the deal. Right. So that is not included in the deal at all. Now....

Do you have an accretion -- I'm sorry, go ahead..

We expect that to be very little..

Okay. Great. And then just back on the question of expenses.

The tax win following reinvestment expense, can you talk to us a little bit about how we should think about that in terms of just raw dollars?.

I couldn't give you a dollar amount right now..

Okay.

What about any plans for de novo branching in 2018?.

The banks have some ideas, but it certainly wouldn't be a major. It would probably be some pruning and relocations, but no major expansions involved. We're in the process of wrapping up one in Rhode Island, which is a relocation and rebuild of a successful branch within an old branch that's not in the right place anymore from what we're doing.

And so we do a lot of stuff like that, but there's no major plans. I think we have a couple under consideration for this for 2018..

Okay. Okay, great. And then, Paul, just one last question.

Obviously, now that you're really close to your -- to closing First Commons, can you share with us how you're thinking about M&A for maybe the back half of 2018 or just how you're perching it now?.

No change in my thinking. We look at appropriate opportunities that come along. And if they make sense, we pursue them. If they don't, we go back to doing what we were doing..

The next question comes from Matthew Breese with Piper Jaffray..

Just on the margin.

The 3.65% guidance, that was on the total margin, right?.

That's for the full year, that's correct..

Full year. Okay.

And then could you just help me understand, within that, what your expectations are for prepayment penalty income?.

I'd say it's fairly consistent with what we've always been doing. A lot of that prepayment income comes to our equipment finance group actually. So I think it's fairly consistent..

Activity is in what it once was..

Right. And then as far as trajectory, I would just imagine that we're some place over that 3.65% by the end of the year.

That's the way to think about it, right, and average it out?.

Yes. I think the way we look at the margin, we look at the margin on a quarterly basis. We do on an actual basis. I'm not sure how you guys have focused on, you probably do more like a [indiscernible]. But we'll start out of the year pretty robust. You'll see a big jump just because of the number of days in the first quarter.

So that's one thing just to keep in mind as we move forward. But on a full year basis, we think that will be, in general, 1 to 2, 3 basis points every quarter increasing. And that also is a lot very dependent on what happens with deposit pricing.

We can manage the -- our volumes pretty well and the financing around that, the timing of that, the lathering of that, but the deposit side is really based on what's going on in the market..

Great.

And could you talk about that? How deposit has been -- deposit beta has been more recently and if you really had to get out there and drive in deposits, what is the incremental cost of funds, do you think?.

Well, it depends what kind of deposits. I mean, we do see plenty of specials, particularly in the CD area and some of the nonbranch-based banks advertised in the money market area. So there is building pressure in a qualitative way, and we've seen a little bit in a quantitative way, but not excessively so yet. We kind of knock on wood.

We're able to progress and continue to build relationships mostly with nonretail who are slightly less sensitive, but they're not stupid either. And so we do expect that if these rate hikes come up, then we'll see our deposit cost go up and will manage that as we need to..

Do you think at some point we have to increase rates for the core group, the depositors, that maybe haven't seen interest rate increases to the extent of the incremental deposits? You're getting a small marks -- money market special.

Where do you think that tripping point happens?.

I think the answer is yes. And we may be a point or two away from a serious relook at the money market accounts, which is our single largest bucket. And again, it has a lot to do with who the sponsoring entity is and what kind of entity it is and what other business you have with someone as to whether you'll be accommodating in that account.

So a lot goes into it..

And I would say that, historically, we've been a little higher payer in the markets that we have all branches in for a lot of our deposit products, and so....

The large banks..

Within the large banks, and we continue to be a little bit higher. There may be some catching up there eventually, but we keep a very close eye on that and we compete against the biggest banks here.

And I think the biggest threat are, they typically not been a big player in the rate wars in the past and the question is because of LCR and all these other different things, regulatory things, we like to encourage them to be much more proactive on the retail front. We haven't seen it yet, but that doesn't mean it's possible.

So we're constantly looking at those things. But we're also taking care of our customers, and that's key as well..

Got it. Okay. And just my last one, I know the loan growth outlook is unchanged, but I just wanted to get a sense for the breakdown and where you see that incremental dollar coming from and the segments within your portfolio that we might see more robust growth out of in 2018 and 2017..

I think if you look at 2017, it would be representative and directionally consistent with what I think 2018 is going to be, which is like 80-plus percent commercial. Half the commercial is real estate and the other half is equipment and C&I.

And as you heard me talk about some of our plans on previous calls, I'm trying to bend that curve that have a stronger bias in C&I.

And even though I've been successful at developing more and more C&I business, the real estate guys and our reputation in our markets and our history and context, belie that gain, and in fact the 50-50, I think the last couple of three years. But I'm not giving up..

[Operator Instructions]. The next question comes from Collyn Gilbert with KBW..

Just as sort of follow-up on that, Paul, can you offer a little bit of color as to what your borrowers' appetite is right now, given where we are on the market, given the tax bill and then just sort of tying that into some color around the paydowns that you've seen in the portfolio and maybe of your $80 million to $100 million of targeted loan growth for '18, like what you're assuming in the way of just paydowns in those portfolios as well?.

I honestly have not really heard very much out of the marketplace about what they may or may not do as a result of the tax bill. It's really kind of early on. We don't have such a vast C&I business that we would be representative of what the macroeconomic impact might or might not be.

But it does seem to me that most of our customers that I'm aware of, which would tend to be the larger ones, has been enjoying a lot of market success and have been spending money prior to the tax bill, be it on plant equipment, inventory expansion and all the normal kinds of business growth, things that feels like that will continue.

And whether it accelerates or not, time will tell, right? It's almost hard for me to envision it truly accelerating at our level. That might be more very large company stuff who would move the needle..

Okay. Okay, that's helpful.

And that was good color that you guys offered on the deposit pricing side and just some of the trends you're seeing there, but what about overall deposit growth? Is the intention or the plan to still try to grow deposits at a similar rate as loans?.

Well, I'd like to be even better than that. But given our loan growth in recent years, we've struggled to even get up near that. But we are continuing to develop new and improved strategies to keep the deposit growth going and ideally even better than we have in the past..

Okay, that's helpful. And then I guess, just lastly....

Keep in mind, Collyn, let me just add that we are strong and patient, and so we have purposely not improved our loan-to-deposit ratio by buying deposits. We've been building it brick by brick and having the patience to hang in there, which is why our margin is what it is, and we're proud of that.

We're not going to change our stripes along those lines, but we can develop more efforts and more ideas..

Okay. Okay, that's helpful. And then I guess just lastly on credit. I mean, you talked about the taxi book.

But just outside of the taxi, are there areas where you're seeing any kind of stress? Or how should we think about that provisioning and the reserving going forward?.

Knock wood, I mean we've continued to enjoy very, very good credit. We are paying a bit more attention to government medical-related enterprises because of how the government changes the rulebook and pay or doesn't pay. We've seen a few hiccups in recent years. That hasn't resulted in huge disasters, but it has caused us a little heartburn.

So we're paying closer attention to that. Carl, is there any other sort of general -- I mean, we're paying very close attention to retail occupancy in commercial properties.

But so loan to value -- low loan to value, focused and diversified occupancies that our stress test, if you will, show that we could absorb serious problems, and therefore -- example, the South African company Steinhoff that owns the mattress company, Sleepy's and all of that in our markets.

We have a material number of commercial properties we finance that have a Sleepy's. So we've tested all the things like that. And the good answer is, that in every case, we're well over one-to-one coverage without Sleepy's. And I don't think they're going anywhere, but that's a company in the world that hurt, and so we watch these stuff.

We really don't finance the big traditional malls, which are seeing the big holds, see here it's Kmart, whoever else is out there. So we don't have that risk, it rises more of a localized risk.

And other than that, Carl, can you think of any areas that the other guys would point out?.

We've not talked about that -- heard any noise around any, particularly weak..

Okay.

And then I guess if we assume that the bulk of the taxi losses are hopefully behind you, then does that provision start to normalize back to $8 million range or $8 million to $10 million range? Or should it stay even elevated beyond that?.

Well, I think when I look at this on a very high level, we basically say we have to cover whatever the growth is in the portfolio. So the portfolio is growing $80 million to $100 million a quarter, you're expecting about 1% on that, if not a little bit more depending on the mix of those loans. And then you're covering your charge-offs.

So whatever the net charge-offs on a quarterly basis are, excluding taxi is natural because those are basically specific reserves and then we're really well reserved there. So that's how I would be looking at it. Obviously, $8 million might be on the low side. I think it will be a little bit better than that..

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

Thank you, Phil. And thank you all for joining us, and we will look forward to talking with you next quarter. Bye now..

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