Good day, and welcome to the Brookline Bancorp Fourth Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Marissa Martin, Associate General Counsel. Please go ahead..

Thank you, Andrew. Good afternoon, everyone, and welcome to Brookline Bancorp’s fourth quarter 2019 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 condition, results of operation and business of Brookline Bancorp.

The 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 you to 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.

We reported earnings of $22.2 million or $0.28 per share in the fourth quarter of 2019, resulting in record earnings for the year of $87.7 million or $1.10 per share. For the year our loan balances grew by $434 million, an increase of almost 7% from 2018 and deposits also grew about 7% or $376 million.

2019 was also a year of rising and then falling interest rates with a relatively flat yield curve, which actually inverted at one point. We try to position the banks to be as neutral as possible to changes in interest rates.

However, we did experience a 10 basis point decrease year-over-year in our margin to 3.51%, due to that flat yield curve and customer preferences for certificates of deposit later in the year. Excluding the impact of securities gains, revenues increased $1.2 million year-over-year or 1.8%.

Also excluding the impact of merger charges related to the First Ipswich Bank merger into Brookline Bank, expenses decreased $941,000 year-over-year or negative 2.4%, which resulted in positive operating leverage.

The work we do serving our customers and our communities would not be possible without the exceptional team of people that we have in place. I continue to be pleased by their dedication, which helps make Brookline Bancorp, one of the region's leading commercial banking companies.

I will now turn you over to Carl, who will review the fourth quarter results..

Thank you, Paul. We had loan growth of $91 million in the fourth quarter or 5.5% on an annualized basis. Loan originations and drawdowns in the quarter was $614 million with an average weighted coupon of 481 basis points.

The weighted average yield on the loan portfolio for the quarter was 499 basis points, a decrease of nine basis points on a linked-quarter basis, as the overall yield on earning assets declined 10 basis points to 473 basis points.

Total deposits grew $101 million during the quarter with growth of $35 million in demand deposits, $91 million in NOW accounts and $35 million in savings, money market and time accounts.

Our net interest margin declined two basis points from the prior quarter to 3.43%, while our net interest income improved $695,000 driven by growth in earning assets. Non-interest income was $7.8 million in the quarter, down $173,000 from Q3.

The decrease was due to slightly lower loan fees, gain on sales loans and our operating income offset by a gain on investment securities of $133,000 versus the loss of $116,000 in the prior quarter. The company's non-interest expense declined $1.4 million from the third quarter to $38.8 million.

Including the $1.1 million restructuring charge in Q3, expenses declined on a linked quarter basis $251,000. The linked quarter decline was due to lower costs related to compensation equipment and advertising. Our provision for credit losses for the quarter was $3.6 million, an increase of $2.7 million from Q3.

Net charge-offs were $1.6 million or 10 basis points on an annualized basis versus two basis points in Q3. The allowance for loan losses increased $1.9 million in the quarter to $61.1 million and represents 91 basis points on loans versus 89 basis points at the end of September.

During the quarter, non-accrual loans declined $2.2 million to $19.5 million representing 29 basis points of total loans and repossessed assets increased $499,000 during the quarter to $2.6 million. The Board approved a quarterly dividend of $0.115 per share, which approximates 3% yield based on yesterday's closing price.

This concludes our formal statements. We will now open it up for questions..

[Operator Instructions] The first question comes from Laurie Hunsicker of Compass Point. Please go ahead..

Hi, thanks. Good afternoon.

Just was hoping Carl that you could give us what prepay fees and accretion income were for the quarter?.

Sure..

And then also, just wondered how we should be thinking about day two loan loss provision under CECL given that there's a little bit of a wider range here with consensus. Just hoping you could help us think about that and taking that down? Thanks..

Sure. Purchase accounting was $317,000 and prepayment fees were $2.1 million in the quarter..

Okay, great..

On the CECL side, we've been running parallel for several quarters now. We're going to see an impact of plus or minus 25%. A large -- it will be heavier to -- heavier weighted to the unfunded commitments, so you won't see it all in the allowance.

Part of that will be in the reserve for unfunded commitments, but that's what the numbers are shaping up to be. We're in the final stages of documentation and model validation and that sort of thing..

Okay.

And then can you help us think about loan growth going forward? How you're looking at that for full year 2020?.

I think we're going to still be steady at $100 million or so a quarter. We'll be plus or minus that..

Okay.

And then how should we be thinking about buyback?.

Very opportunistically..

Okay. Okay. And then just last question on your tax rate.

How should we be thinking about that?.

We're estimating -- we're still budgeting with the 25%, but it's been trending a little bit lower than that, so probably in that 24.5% to 25%..

Okay, great. Thanks..

The next question comes from Collyn Gilbert of KBW. Please go ahead..

Thanks. Good afternoon guys..

Hi, Collyn..

Carl just on the loan growth the $100 million a quarter as you're sort of seeing it. Can you just talk a little bit about how you're seeing the mix evolve and then also how you're seeing loan yields trending this year? And then that just part -- one other question that then goes to part two on the NIM, which I'll ask you about after that..

I would say it's going to be more of the same. It's very consistent with what we're doing. I do expect C&I to tick up a bit as part of that mix. But then as that grows, we may also see the total loan amounts grow. So I don't see a big change in the mix going forward of where we are now.

Right now new originations are going on slightly lower than what our portfolio yields are. So we'll see. And a lot of our production is shorter in duration, so you'll see the impact of that as well..

Okay.

Just on that point, where are you seeing some of the best pricing or the better spreads within your business segments?.

Well I'd call it, I would say it's the equipment finance units that get the biggest yields, but that's nothing new and not uncommon..

Yes. I mean you're not seeing the dynamic -- the competitive dynamics change within that business. I guess that's part of it too. Just as many banks are kind of shifting more to having that be a focus, I didn't know if you're seeing pricing start to compress or spreads start to compress in any of the loan categories because of competitive dynamics..

Well yes. I think in recent years, it's been a little bit of compression in equipment finance due probably to what you're describing. It's more competitive than it has been in the past, but it still provides opportunities that yield higher than the core banking stuff at the quality level that we like..

Okay. Okay.

And then are you finding you're able to -- as you look at the growth is this -- how much of this is coming from new customers versus current customers kind of building their own businesses or building their own mines?.

I mean a totally unscientific answer to that would be half and half..

Good answer. Good answer. Okay. All right.

And then Carl just shifting to the NIM maybe could you just talk about how you're seeing sort of some of the deposit pricing trending maybe where your new offering rates are in deposits and sort of the outlook for NIM for this year?.

Sure. I would say deposits continue to be very competitive, but we are seeing benefits on our pricing efforts on the deposit side. As far as the NIM is concerned, we're projecting about 3.45% or so in that range for Q1. Last quarter we gave guidance around 3.50% or so a little bit higher than 3.50 for the full year.

We're still seeing that -- we still have some visibility to that as we continue to revisit our pricing, but we also know that the -- we've seen LIBOR continue to come down and then we're seeing a very flat yield curve at present.

So we'll see how long that lasts and if that continues to put additional pressure on our loan yields and we'll adjust on the deposit side. There'll be a lot -- there'll pricing in Q1 and Q2 so we see some relief there..

Okay.

And your -- the 3.50% NIM guide that you had given for the full year is that including any kind of rate cut throughout the year?.

No, no. That's a flat environment safe environment..

Okay. And I know you touched on -- and I may have missed a part of it and I apologize in the beginning.

I think some of the swap activity that you saw, I know that's hard to predict, but any thoughts just in terms of your own internal kind of business development efforts as it relates to that line or where you see the customer demand going in 2020 for how you think that the swap income can trend?.

Every quarter has been very solid. I've always been very cautious on this and our lending teams continue to pleasantly surprise me and pipelines look good. But I'm not going to try to guess on what's going to close and what particular quarter and customer appetite continues to be as robust as it is.

With a long yield -- with such a flat yield curve and where the 10-year treasury is today, I would say customer appetite for long-term funding is pretty -- is not going away and that's how we accommodate that is through swaps so we'll see..

Okay.

And then I guess my last question just maybe on -- just Paul a little bit more broadly for you as you manage the business and obviously there's something -- so much volatility in the markets over the last year or so, but if there's -- a specific metric, financial metric that you would point to that sort of -- you kind of measure yourselves against in terms of where you're being successful or where you're not.

What would be the financial metric that we should monitor in terms of how you would be measuring your success?.

EPS. Our EPS has grown. I mean, it's pretty basic stuff..

In isolation? Like on an absolute basis, on a relative basis or -- I mean -- and I guess that points to the fact that -- do you try to manage to EPS growth growing year-over-year more than it did the prior year? Just trying to....

We'll keep it going north. Maybe, I'll try to answer a little bit differently. Carl is a great preacher around the company about operating leverage and I guess, I'd say that if we can consistently produce operating leverage quarter after quarter, then all of the other indicators probably are going in the right direction..

Okay..

So, there isn't any singular -- I mean I'm half joking when I say EPS, but this is a balancing act of a whole bunch of things as you know and our job is to keep an eye on all of them and keep them all in good stead..

Okay. That is all I had. Thank you..

Okay. Thank you, Collyn..

[Operator Instructions] The next question comes from Mark Fitzgibbon of Piper Sandler. Please go ahead..

Hey guys, good afternoon..

Hi Mark..

Hi Mark..

I was curious first that the provision was quite a bit higher than I anticipated this quarter especially given you guys have really strong credit quality and had relatively modest charge-offs and loan growth. I would've thought it would have been a lower number.

And so, I'm just curious as to -- was there something else there that was unique that caused you sort of bump up the provision to the level it was?.

I would say, first start with the charge-offs right since the charge-offs were a little bit higher at $1.6 million. We had loan growth of $90 million. Yet, we had reserve coverage for that as well. And then, you have whatever activities that's going on with you truing up all your loss factors and things of that nature that go into it.

And then of course, there's risk migration. See, I think we probably have a few more credits get -- the risk ratings go down versus up. So, you go through this process throughout the quarter, throughout the year that loans give..

That's a great observation, Mark. I mean, it was for us, yes probably a little bit more in there than normal in the fourth quarter, a little more noise than we typically will have. But we don't see it as anything trending..

Okay..

You saw our comps go up by two basis points, yes..

And then on the expense front, you guys looked like you made some good progress on cost there this quarter.

Is that sustainable absent sort of the normal first quarter uptick you have related to a variety of small items or -- just curious as to your thoughts on expense growth for 2020?.

Yes. I thought I would say -- so a couple of things to keep in mind. We are -- a few things to keep in mind let's put it that way. The FDIC, we had some relief on FDIC insurance that you really saw in the third and fourth quarters. So, you'll have that expense coming back in the first quarter.

Like you said already on the employee benefits and taxes and things like -- that nature you usually get a pop associated with that in the first quarter. And I think -- those are probably the big things that would be driving that. As you know we're also working on the First Ipswich consolidation into Brookline Bank.

That will happen in February so we'll see some benefit of that. But that you really won't -- start really seeing the benefit of that into Q2. You'll see some of it in Q1, but most of that in Q2. And we're just very focused on costs as well -- as Paul mentioned as long as revenues are growing we have no problem investing.

Where we stop -- if we come across a great athlete to join the team we're very open to those opportunities so -- but we want to keep revenue growing faster than expenses..

Okay. And then lastly, I know on and off there's been some talk of bringing back rent control to the Boston, Cambridge market.

I'm just curious as to how likely you think that is to come to pass?.

I'd say the odds are against it. There's low-level noise about it, but I don't really see anybody at a serious level pushing it at this point..

Thank you. .

Okay..

The next question comes from William Wallace of Raymond James. Please go ahead. .

Thanks. Good afternoon, guys. .

Hi, William.

Just a quick follow-up on the expense line of questioning.

Once the Ipswich conversion is done what's the benefit that you anticipate on a quarterly or annual basis?.

I think on an annual basis, I was estimating about $2 million of benefit on an annualized basis..

Great. And then last question you had said in response to an earlier question that you will be opportunistic as it relates to a buyback. I'm curious if you were in the market early in January when the stocks sold off.

Or if you'd be willing to give us a general price range where you feel like it opportunistically makes more sense?.

I'm not willing to give you that price range..

Fair enough..

We'll comment on the fourth quarter..

Yeah. Thanks. That’s all I had. Appreciate it..

You bet..

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

Thank you, Andrew and thank you all for joining us. We look forward to talking with you again next quarter. Good day..

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