Good day and welcome to the Brookline Bancorp's Fourth Quarter 2018 Earnings Conference Call. All participations will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note today's event is being recorded.

I would now like to turn the conference over to Marissa Frerk. Please go ahead..

Thank you, Sean. Good afternoon everyone and welcome to Brookline Bancorp's fourth quarter 2018 earnings conference call. Yesterday, we issued our earnings release, which is available on the Investor Relations page of our website, brooklinebancorp.com and has been filed with the SEC.

This afternoon's call will be hosted by Brookline Bancorp's executive team, Paul A. Perrault and Carl M. 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 statements and disclaims any intent to update publicly any forward-looking statements, 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 a 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 and good afternoon all. 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 earnings of $21.1 million or $0.26 per share for the fourth quarter of 2018, resulting in record earnings for the year of $83.1 million or $1.04 per share. For the year, loan balances grew by $573 million, 10% higher than 2017 and deposits grew by $583 million or 12%.

While 2018 saw customer preferences shift to time deposits, we also saw strong growth in demand deposits of $91 million or almost 10%. 2018 was also a year of rising interest rates as well as a volatile yield curve.

We have always strived to position the bank to be as neutral as possible to changes in interest rates and we experienced a four basis point increase year-over-year in our net interest margin to 3.61%. Excluding the impact of securities gains, revenues increased by $28.7 million year-over-year or almost 12%.

Excluding the impact of merger charges, expenses increased $11.9 million year-over-year or 8.5%, resulting in positive operating leverage of 3.2%. I continue to be pleased by the work of our exceptional team to serve our customers and our communities making Brookline Bancorp one of the region's leading commercial banking enterprises.

I will now turn you over to Carl, who will review the company's fourth quarter.

Carl?.

Thank you, Paul. Loans grew $75.8 million in the fourth quarter or 4.9% on an annual basis, driven by commercial real estate and consumer. Loan originations and drawdowns were once again strong in the quarter at $509 million, which was slightly higher than the third quarter with loan sales and participations out of $44 million.

The weighted average yield on the loan portfolio for the quarter of 504 basis points increased 12 basis points from the third quarter, driving the overall yield on earning assets up 12 basis points. Deposits grew $220.4 million during the quarter with growth coming in all categories.

During the quarter, the cost of interest-bearing deposits increased 15 basis points and our cost of all interest-bearing liabilities increased 14 basis points. Our margin increased one basis point during the quarter to 358 basis points and our net interest income increased $827,000 on a linked-quarter basis.

Included in net interest income is the impact of purchase accounting and prepayment fees. Purchase accounting was $384,000 in the fourth quarter, down $183,000 from the third quarter and prepayments fees were $1.1 million, up $211,000 from the third quarter.

Combined, the quarter-over-quarter changes offset and had no incremental impact on the change in margin during the quarter. Non-interest income was $6.5 million in the fourth quarter, down $608,000 from Q3. The decrease was driven by the lower derivative income activity and loss on investment securities.

Our provision for credit losses for the quarter was $123,000, as charge-offs through the quarter largely went within established specific reserves and favorable workouts and credit trends resulted in allowance for loan losses of $58.7 million, representing 93 basis points on loans.

During the quarter, non-accrual loans declined $1.7 million to $24.1 million or 38 basis points of total loans and net charge-offs were $1.3 million or eight basis points on an annualized basis. Excluding the impact of merger and acquisition expense, the company's non-interest expense increased $2.5 million from the third quarter to $39.8 million.

The increase was driven by higher compensation and other operating expenses. Compensation expense was driven by higher incentive costs, severance, and new hires. Other operating expense was driven by OREO write-downs and workout costs.

Yesterday, the Board approved a quarterly common dividend of $0.105 per share, which will be paid on February 25th to stockholders of record on February 11th and represents an annualized yield of approximately 2.8%. With that, I'll turn it back over to Paul for concluding remarks..

Thank you, Carl. We are very happy to have reported another record year for the company and we expect a solid 2019. We will now open it up for questions..

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mark Fitzgibbon with Sandler O'Neill. Please go ahead..

Hey guys, good afternoon..

Hi Mark..

I wonder if you could share with us the size of your commercial pipeline now and maybe what the blended rate on that looks like?.

As you probably recall, I don't like to quantify that exactly. But I can tell you that it is hundreds of millions of dollars and it is as robust as it has been. And I don't know what the weighted average rate of those things might be, because when -- from my perspective, Mark, when something is in the pipeline, it's not all a done deal.

We haven't approved it, the customer hasn't accepted it, we may or may not have negotiated a rate.

But I think rates are generally holding pretty steady is my impression in the market that as the yield curve has flattened, intermediate rates have sort of come back down from -- after they went up last fall, there's been improvement generally over the past year in pricing, and I think it's holding at that improved level, not rising anymore..

Okay. And then secondly--.

And Carl, do you want to add anything from what you see--.

Yes, the only thing I would add and just to give you a little -- and we're not going to project on what the first quarter might look like at this point. But just so you have a sense of what happened in the fourth quarter, I guess that we originated $509 million of loans, the weighted average coupon.

So, this doesn't have any FAS 91 and all those adjustments. But just the coupon on those loans and the drawdown is 5.70, so 5.7%..

Great, okay.

And Carl, what's your outlook for the margin in, let's say, the first quarter even? Can it hold here or maybe even improve a little bit again?.

Well, I'll put it this way, I think; we're seeing some stabilization in the margin at this point. There was certainly amount of deposit funding catch-up in Q3, but now we've seen that kind of normalize a bit. Competition is still a big -- it's a big factor out there.

There is a preference more leaning towards time deposits, but we're seeing growth -- good growth in all categories. So, I do expect the margin to be relatively stable for where we ended up Q4, probably plus or minus one or two basis points, so the best projections that we can do.

And the margin for the very first quarter might be a little bit better just because of the number day account, things of that nature if you're just trying to pinpoint them. But overall, generally flat..

Okay.

And then secondly, just curious, what drove your desire to buy the remaining 16 percentage just in Eastern Funding that you didn't own previously?.

It was actually part of the original deal that this would ultimately be the outcome..

Okay.

So, it was predetermined, the date and price that you would do it at?.

No, not the price and the date, but just the action that we ultimately would buy the balance 100%. But it wasn't at a particular date, it was somewhat elective on their part in terms of the date and the pricing's been agreed upon, market price..

Okay. And then Carl, in the other income line, it looked like it was a little bit higher than usual.

Was there anything unusual in there? Or what kind of drove that increase?.

We had a sale of a building that went in that line of just under $300,000..

Okay.

A branch?.

A branch..

That had been relocated in Rhode Island, and we sold the old one. Nothing fancy..

And then lastly.

As you think about expenses for 2019, if we were to sort of model out a 3% to 4% kind of increase, would we be in the ballpark? Or is there any other unusual items that you anticipate this year really pushing that number one way or the other?.

No, I think that would be my guidance..

Great. Thank you..

Thank you, Mark..

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

Yes, thanks. Good afternoon..

Hi Laurie..

Just staying with income statement line items here, any -- are there other expense? That $4.3 million that was a bit elevated.

Was there anything one-time in that?.

Well, I hate to call things time one-timers, because -- what I would call -- I would characterize them as off-trend. We did have some -- a large OREO write-down in that, which is very unusual for us and just higher level of workout and recovery expenses. So, in fact, those things combined were over $900,000.

So, I think that's the big thing driving that number..

Okay.

And the merger charges of $526,000, were those related to Eastern or were those related to First Choice?.

Approximately -- just a little over $200,000 were related to Eastern. And the balance was related to First Commons, just getting out of a facility at First Commons..

First Commons, sorry, not First Choice..

First Commons..

So, when do we see merger charges go to zero because that closed March 1st a year ago?.

Yes, I think that is a zero -- it should be zero going forward..

Okay.

And then what -- how should we be thinking about Eastern in terms of merger charges going forward?.

Zero..

It's all done..

It's all done..

Okay. Okay. And then I just want to make sure--.

I mean it closed on January 4th, but we had accrued all those expenses..

Okay, great. And then I just want to make sure I'm thinking about this the right way. So, in terms of Eastern running through the fourth quarter, that $1.022 million now is dropping completely to your bottom-line..

Yes, [Indiscernible]. It's not going to be subtracted, because it was a fully consolidated--.

It's not subtracted, right. Okay..

It's just not going to be subtracted anymore..

Okay.

It's a round number, is that equating to about $0.05 a share, am I doing that math right?.

Well, we're also not, because that income is not really part of ours. We haven't been paying taxes on that income either, because it's an LLC, it gets pushed out to the individuals and they were paying their own taxes on that. So, we will have to pay our income tax at the statutory rate. So, it's going to be slightly less than that number..

3.5%. Okay, got it. That's helpful.

And then on tax rate, can you just help us think about that for next year?.

Yes, I think it's going to be -- and right now, I'd say between 24.5% and 25%, in that range..

Great. Thanks. I'll leave it there..

Our next question comes from Matthew Breese with Piper Jaffray. Please go ahead..

Good afternoon..

Hey Matt..

Hey Matt..

I just wanted to talk about the funding trends we saw this quarter. FHLB advances came down. We saw CDs continue to increase.

And I guess my question as we think about 2019, is it more advantageous to fund the balance sheet through CDs or brokered CDs versus the FHLB channel?.

Probably..

Between those channels? I think -- well, we have a variety of ways of funding the balance sheet. So, -- but brokered CDs are very favorable. Federal Home Loan Bank advances are favorable in certain points and certain tenors as well as the market these days. So, a year or two years ago, I couldn't give away a CD.

Now, there's quite a bit of appetite, particularly in the markets that we serve. So, we're seeing a variety of availability of funding. Just want to try to do it at the right price..

Okay, understood. Maybe try it this way. Your borrowings to asset ratio came down to around 12% at year end from a usual 15%.

Do you think that continues to trend downward?.

It certainly would be our effort. You see the improvement in DDA and core deposits, as we build more and more relationships, sell more cash management, treasury services. So, that's directionally what we've been trying to do and we've had actually a fair amount of success over time. But these are long arcs--.

It's not a quarter-to-quarter--.

Yes, we kind of do it the old-fashioned way, brick-by-brick, I'm sure it will continue. But how much you can read at any given quarter is a little bit hard to predict. But our borrowings are down by $150 million for the year, is that's about right? I think so. That's directionally a very good sign.

And that's, I guess, included in the stat that you spoke about, Matt..

Exactly. That was -- it's kind of my point. We've been trending a little bit lower. This quarter, it was more significant. And just wanted to get a sense for as the -- so strategy to continue to push that lower. I think I know where your head's at. Just going back to the other OREO expense, you said it was off-trend.

Usually, that line item comes in at about $4 million to $4.5 million.

Is the expectation of returns to that level in the first quarter?.

Yes, it's not lower..

Okay. And then just on the Eastern Funding.

Just so I understand, now that it's entirely yours, from P&L perspective, how should we treat that? How should we treat that minority interest?.

So, from an income statement perspective, when you're looking at the income statement, it is fully consolidated in our income statement already.

What happens at the very bottom of the income statement, you'll see a minority -- or non-controlling interest, that's reduction to the net income number to show what the net income is to Brookline shareholders? That's the reduction that was coming out for those minority -- the members of the LLC. So that goes away.

That will turn to roughly -- since it's a January 4th transaction, it could be a fraction of a number in there for the first quarter and then that will be zero going forward after that..

Understood. Okay.

And then at these levels, I saw the other -- the authorization on the buyback, the re-up at these levels, is that something you're interested in?.

I'm not going to pine-on on these levels. I'm going to pine-on -- you saw what we did -- the Board did approve a $10 million program and it was done probably a lot faster than we ever expected just because the market did what it did. And so we feel we got a very favorable execution on that.

And the Board felt it was prudent to do another $10 million if, in fact, the market provides those types of opportunities going forward..

Okay. All right. That's all I had. Thank you..

You bet..

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

Thanks. Good afternoon guys..

Hey Collyn..

Hey Collyn..

Most of my questions have been asked and answered. I just wanted to clarify Matt's last question on the OREO expense. Sorry, I'm a little confused.

So, for the other -- you had said that there was elevated workout expenses in the fourth quarter, other expense line at that $4.3 million, right, Carl?.

Yes..

Okay. And then -- but then did Matt just say that, that generally the normalized run rate is $4 million to $4.5 million.

And you said, yes?.

No, no, no. So -- just -- let me be a little bit clear. We will write-down our OREO over $700,000 in the quarter. We also had elevated workout expenses of around $200,000 in various lines. And so those are -- the write-down OREO is not typical. We don't usually have any write-down OREO.

I'm not even sure the last time we had to write-down our OREO and so we'll see how that pans out. And I expected that we will be moving some of those properties fairly quickly. And hopefully that will be done by the end of the first quarter.

So, I think he was getting back to a run rate of $400,000 in workout, repo, foreclosure expenses, and things like that being the trend and that's what I was responding to..

Got it. Okay. Okay, that's helpful. Okay. And any -- I'm going to ask it, it gets asked every time, Paul, but -- I think I know the answer -- but M&A, any change in the environment as it relates to M&A? What you're seeing? What your appetite is? Thoughts there? A lot of capital..

Well, I don't -- I haven't changed my views on it at all. I guess, an observer would say that there are much fewer opportunities in the relevant markets because of the activity in 2018 around here. That's -- but I don't think there's really anything new.

Carl?.

I wouldn't add anything to that..

Okay. So, the capital levels, I mean, you answered the question on buybacks. You've got the dividend.

What are your thoughts on managing that capital level? And where do you see that trending, I guess, Carl?.

Well, I think, with the change in the tax law, we are accumulating capital faster than we had originally projected and the performance of the company continues to be quite good. And we'll just manage those -- we'll be deploying that capital as we see fit. We continue to see opportunities within the market.

Right now, quite a bit of opportunity just organically. We've had some nice hires in the fourth quarter. We expect to continue to find -- great athletes continue to present themselves and we'll see what develops there, but those are long-term deployments of capital into those efforts..

Okay.

In the more immediate term, I mean, do you think that loan growth, just kind of the momentum that you've been building thus far that you could see loan growth accelerate in 2019 relative to what you put up in 2018?.

Yes, I think it's possible we could see better gains in 2019 than 2018. You might recall, 2018 actually started out pretty slow. And then we picked up momentum all the way through the balance of the year.

But on the other side of the ledger, we had a lot of loans pay down or pay off, companies were doing very well, properties are being sold in our markets left and right. So, it was a bit of a footrace. We got some decent balance sheet gains. But given the momentum that we have, I think, it is possible that we can outdo 2018..

Yes. And just to add to that is, we were doing a lot more on the participation side out. So, our originations have been quite strong throughout the year, just less so maintaining them on our balance sheet.

And then -- and you saw that a little bit in this quarter, our participation to out is only $44 million, so not quite as much as we had been experiencing. We do a have greater expectation on the C&I side for growth, just given the folks that we have brought on and expectations there..

Okay. All right. That's very helpful. Thank you..

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

Thanks John and thank you all for joining us. And we will look forward to talking with you again next quarter. Good day..

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