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Edited Transcript of BHLB earnings conference call or presentation 25-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Berkshire Hills Bancorp Inc Earnings Call

PITTSFIELD Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Berkshire Hills Bancorp Inc earnings conference call or presentation Tuesday, April 25, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allison P. O'Rourke

Berkshire Hills Bancorp, Inc. - EVP of Finance - Berkshire Bank

* James M. Moses

Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank

* Michael P. Daly

Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank

* Richard M. Marotta

Berkshire Hills Bancorp, Inc. - Senior EVP and President of Berkshire Bank

* Sean A. Gray

Berkshire Hills Bancorp, Inc. - Senior EVP and COO of Berkshire Bank

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Conference Call Participants

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* Collyn Bement Gilbert

Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst

* David Jason Bishop

FIG Partners, LLC, Research Division - SVP and Research Analyst

* Laurie Havener Hunsicker

Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst

* Mark Thomas Fitzgibbon

Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal

* Matthew M. Breese

Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the Berkshire Hills Bancorp Q1 earnings release conference call. (Operator Instructions) Please also note that today's event is being recorded. At this time, I would like to turn the conference call over to Ms. Ali O'Rourke, ma'am, please go ahead.

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Allison P. O'Rourke, Berkshire Hills Bancorp, Inc. - EVP of Finance - Berkshire Bank [2]

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Thank you, good morning, and thank you for joining this discussion of first quarter results. Our news release is available on the Investor Relations section of our website, berkshirebank.com, and will be furnished to the SEC. Our discussion will include forward-looking statements, and actual results could differ materially from those statements. For detailed on related factors, please see our earnings release and most recent SEC reports on Forms 10-K and 10-Q. In addition, certain non-GAAP financial measures will be discussed on this conference call. References to non-GAAP measures are only provided to assist you in understanding Berkshire's results and performance trends and should not be relied upon as financial measures of actual results or future projections. A comparison and reconciliation to GAAP measures is included in our news release. With that, I'll turn the call over to CEO, Mike Daly. Mike?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [3]

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Thank you, Ali. Good morning, everyone. Thanks for joining us this morning for our first quarter call. I'll provide an overview of the quarter, and then I'll turn it over to Jamie Moses, our CFO. He will walk you through some of the specifics in our financials. We'll discuss our outlook and our guidance, and then I'll wrap it up. So with a strong start to the year, we executed on our planned initiatives. We delivered $0.55 in core EPS, and we completed the conversion and integration of First Choice. We benefited from double-digit commercial loan growth and expanded net interest margin and good revenue contributions from our newly acquired operations. Let me start with loan growth. As I said, we had another solid double-digit commercial loan growth quarter with the 15% annualized growth coming primarily from C&I and our New York and Connecticut markets. Importantly, line utilization was up 2% this quarter as well. That equates to a 14% annualized increase in outstanding. And I think, this sort of activity bodes well for the state of the economy in our markets and the general optimism that continues to spread through the region. Total loan growth came in at 6% annualized for the quarter, and we anticipate this to be a little lower next quarter as we continue to balance our overall asset growth objectives. We also remain committed to our secondary market strategies across several product lines and evaluating market opportunities as we see them. We did recruit 2 strong commercial bankers for our mid-Atlantic market this quarter, Maryann Lewis from Flushing Bank is our new commercial regional leader and Ken Kaestner from PNC is our new ABL regional leader. And both come with extensive experience in the region and they have managed sizable books of business in their previous roles. On the deposit side, we had 2% annualized growth in the first quarter. Demand deposits and balances were primarily impacted by seasonal outflows tied to commercial operating accounts. This is consistent with prior years, so we expect to see those balances come back over the course of the year. And in the second quarter, we anticipate low to mid-single-digit total deposit growth. And this should match overall loan growth and include higher DDA balances. Of note, we've been successful in retaining more deposit accounts from First Choice than we anticipated, and we're seeing early results from rightsizing some of the products offered in our mid-Atlantic region along with driving better penetration in transaction accounts. As we announced in our last call, we opened our first branch in downtown Boston this quarter. We're happy with the reception we've gotten, positive reaction to our virtual teller technology and our early successes with new account gather. We've talked a little about the over $1.5 billion asset base we've quietly built up in the Boston area, but I also think it's important to highlight that we have a little over $200 million in deposits from that market as well. And we continue to think there's real opportunity in this market for a disciplined regional player, and we anticipate continuing to add resources as warranted. We completed the previously announced consolidation of 3 branches during the quarter. We also identified an additional branch, 2 lending offices and a few more leaseholds for consolidation in the back half of this year. Bank savings associated with the new restructuring will be about $1.6 million a year. Let me turn to fee income. We posted significant growth here as we absorbed the full -- first full quarter of First Choice. Our fee income to total core revenue ratio is now back over 30%, providing good diversity of revenue streams. We continue to see positive results out of our SBA teams and steady production from wealth management and insurance. As you know, mortgage banking revenue is highly seasonal, and we expect the first quarter will continue to be the slowest. The new team met our expectations for the quarter and is optimistic about the opportunities over the remainder of the year. They delivered nearly $400 million in originations during the quarter and importantly, almost 70% of those were purchase loans. As a reminder, we've taken a conservative stance on forecasting the mortgage fee revenue and raw material from an origination standpoint, this line still only represents a few cents a quarter to the bottom line. In total, we expect 15% to 20% higher fee revenue in the second quarter as mortgage banking and SBA activity picks up. Now while some of this revenue is expected to be offset by corresponding expenses, it certainly will have a positive impact on earnings.

Now with that, I'm going to turn it over to Jamie, who will give you some additional financial detail, and then I'll wrap it up. Jamie?

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James M. Moses, Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank [4]

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Thanks, Mike, and good morning, everyone. This was a good quarter and a strong start to the year. We continue to be focused on disciplined growth, improving profitability, tight expense management and driving shareholder returns. Core EPS was $0.55 for the first quarter and GAAP EPS came in at $0.44, mostly reflecting the impact of noncore merger charges associated with the First Choice acquisition. Average earning assets grew 10%, including the fourth quarter impact of First Choice. Our net interest margin was $3.33 for the quarter and $3.15 excluding purchase loan accretion. The increase in margin this quarter was primarily due to the positive effect of the recent rate hikes, coupled with impacts from the First Choice acquisition. For the second quarter, we expect a stable margin, excluding purchase loan accretion with the benefits of the March rate hike mostly offset by balance sheet management as we continue to extend funding durations and manage our assets to help maintain our asset sensitive profile. Purchase loan accretion for the first quarter came in at $3.7 million with about half of that due to recoveries. We expect total purchase loan accretion to come back down below $3 million in the second quarter. The provision was $5.1 million in the first quarter, exceeding net charge-offs and in line with loan growth. We expected to be generally in that rate for the second quarter. Moving onto expenses. The increase in core noninterest expense in the first quarter was primarily tied to the full quarter impact of the First Choice acquisition. The efficiency ratio ticked up to 61.9% as expected, again, due to the impact of the acquisition but would have otherwise remained below 60% organically.

We are about 70% of the way there on achieving our targeted cost saves from the First Choice acquisition and expect to fully recognize the rest by midsummer. Overall, higher costs are expected in the second quarter associated with increased SBA and mortgage originations. I think it's worth mentioning that the way we account for the mortgage revenue and expenses is slightly different than the way First Choice was doing it. This has the effect of lowering their mortgage banking origination fees by about 25% with an equivalent reduction to operating expenses and you can see that in our reported first quarter numbers. Our core tax rate for the first quarter was 31%, including the benefit of some small tax credit investments. Our GAAP tax rate was 30%. We were unaffected by the IRS guidance on share-based transactions due to our early adoption of those rules in 2016. We reiterate our guidance of 25% to 30% for the 2017 full-year core tax rate.

For the second quarter, we're forecasting a rate in the 25% to 27% range, including tax credit investments, which will have a corresponding charge of approximately $2.5 million. Looking at the big picture, we expect to deliver second quarter core EPS in the $0.50 to $0.60 range, then moving through that level modestly in Q3 with full-year core EPS growth of 5% to 7%.

Our GAAP earnings for the second quarter should be within a few cents of our core earnings. We had a number of noncore activities in Q1 that merit discussion. We booked $5.9 million in pre-tax deal charges related to the conversion and integration of First Choice, bringing the total to $19 million. We do expect an additional $2 million in merger-related charges in the second quarter inside of our original forecast. As discussed on our last call, we locked in $12.6 million of equity gains during the quarter. We also terminated $300 million in cash flow hedges at a cost of $6.6 million. We were able to do this while maintaining our asset sensitive profile through balance sheet management. Lastly, as Mike mentioned, we took a hard look at our real estate and found the opportunity to streamline some of our locations. The charge for this restructuring was $5.7 million during the quarter, and we anticipate that action to pay back in about 3 years. Aside from the remaining First Choice acquisition charges, all of the other noncore activity was net neutral to our earnings. At quarter end, tangible equity was 7.6% of tangible assets. Tangible book value grew to $18.97 per share and book value grew to $30.77 per share. Our core return on assets was 85 basis points and GAAP ROA was 68 basis points. Core return on tangible equity remained above 12%, and of course, GAAP ROE reflected the impact of our noncore activity. Overall, we're pleased with our performance this quarter and our prospects for delivering solid result this year. Our financial condition is good, and we expect to continue to make progress towards our profitability goals. With that, I'll turn it back over to Mike.

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [5]

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Thank you, Jamie. So our core EPS guidance translates into 6% to 9% EPS growth next quarter, with strong improvement to our profitability metrics as well. As Jamie said, that means closing in on $0.60 a quarter and moving the ROA closer to our stated goals. Our local region continues to show signs of optimism, and we're looking to capitalize on that opportunity, while maintaining our credit discipline. Our immediate goals are ensuring we get the most out of our newly acquired operations, managing our balance sheet, continuing to develop our revenue channels and driving positive operating leverage to achieve our profitability goals. Credit remains strong across our franchise, so we're in a good place, with people and infrastructure in place to deliver on our promise to shareholders. We expect to see strong results over the next couple of quarters and that momentum should take this company to another level benefiting all of our constituents. With that, I'm going to open it up to any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today, come from Mark Fitzgibbon from Sandler O'Neill.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [2]

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Mike, I wonder if you guys could update us on where you stand in terms of preparation plans for crossing $10 billion?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [3]

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Sure, we're probably as far ahead of the game as we've been. As you know, Mark, we started actually several years ago, getting prepared. So I would say that at this point, we're 90%-plus prepared, and when and if we cross, of course, we've, I think, estimated maybe an additional $0.5 million to $1 million a year in DFAST cost.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [4]

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Okay, and then secondly, with those swaps coming off the balance sheet, what is the rate sensitivity position of the balance sheet looks like, Jamie?

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James M. Moses, Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank [5]

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Mark, we still are asset sensitive, and we'll continue to be that way. We'll continue to maybe extend durations on the funding side of things and do other sorts of balance sheet management to maintain that profile. We're committed to being asset sensitive.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [6]

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Okay, and then with the new branch that you just opened in Boston, and it sounds like you're going to make a bigger push there. Have you determined how many branches you might open in the Metro Boston area, and over what period of time?

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Sean A. Gray, Berkshire Hills Bancorp, Inc. - Senior EVP and COO of Berkshire Bank [7]

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Mark, Sean here. Our philosophy is lead with the commercial teams, lead with our private banking and our My Banker programs. As Mike mentioned in his script, we've got over $200 million in deposits in the Boston area already. So there's no real need to be pushing de novo or more branches. As we grow that number and those clients need servicing and we think there will be economies of scale and additional gains from that, we'll place branches.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [8]

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Okay, and then lastly, at a high level, I wondered if you can just generally comment on M&A, are you sensing the conversations out there picking up and there are more opportunities or fewer ?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [9]

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I think that the conversation is picking up, Mark. I think that activity is good. I'm certainly spending my fair amount of time discussing potential partnerships with a number of different potential partners. It'll come down to the same thing as it always has with us. And we need to find partners that understand fixed exchange ratios and that don't necessarily are fixated on 1-day premiums and have an interest in enjoying the upside for both sets of shareholders. I think those opportunities are as good today as they've ever been, but on the other hand, we're prepared to have conversations and walk if those numbers don't work. There is no urgency for us at this point, and we're going to be disciplined about how we look at any additional partnerships.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [10]

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And then lastly, on the mortgage banking side. It sounded like you are pretty upbeat about the volumes in the second quarter. Could you share with us the size of the mortgage pipeline?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [11]

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Sure, Mark. From FCLF, the legacy mortgage piece is about $352 million and Berkshire Bank's legacy pipeline is about $120 million.

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Operator [12]

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Our next question comes from David Bishop from FIG Partners.

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David Jason Bishop, FIG Partners, LLC, Research Division - SVP and Research Analyst [13]

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Mike, you noted, obviously that the strong C&I growth, 30% plus annualized. Just curious, and it sounded like there was more New York, Connecticut. Anything in particular this quarter that sort of rebounded from a business demand or optimism perspective to drive that, just curious what you're seeing in terms of just overall business conditions withing those markets and maybe holistically overall?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [14]

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Sure, I'll -- Sean, you can amplify what I say, but one of the things that I thought was very encouraging was the line utilization, and when we look at the line utilization, these are some of our better companies that are actually putting additional capital into their business and growing, and I felt like that was a good sign regionally. And I know you've made a push to have some of our lenders that had historically taken their commercial real estate road and really transformed them into a better C&I lenders. We've hired some good C&I lenders and that has been a strategic push for us. You want to...

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Sean A. Gray, Berkshire Hills Bancorp, Inc. - Senior EVP and COO of Berkshire Bank [15]

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Sure, we restructured our lenders to be specifically focused on C&I or real estate based on their skill set. So I think that focus helped, and I think, we've talked about it for a long time, the benefit of multiple regions allows us to cast a wider net, continue to keep our discipline from a credit and pricing perspective, but lean on a specific region where needed. So no industry-specific movement. But good diversity of region and then a restructure from an organizational perspective.

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David Jason Bishop, FIG Partners, LLC, Research Division - SVP and Research Analyst [16]

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Got it. And then within the First Choice legacy deposit portfolio, anything -- any opportunities that we've been able to maybe reprice that at all or I'm just curious what you're seeing on the pricing side within that market?

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Sean A. Gray, Berkshire Hills Bancorp, Inc. - Senior EVP and COO of Berkshire Bank [17]

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Sean here, again. We're very pleased in what we've seen. By our ability to bring in multiple products and really focus on relationship has improved our penetration of demand deposit, which has brought down our overall cost of funds from the deal. So we're pleased in where that is trending, and I think we can continue to trend that the right way.

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David Jason Bishop, FIG Partners, LLC, Research Division - SVP and Research Analyst [18]

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Got it. And then one final question, I know there's been a lot in the press about auto lending as of late, just curious what you're seeing in terms of the auto book in terms of credit trends on a quarter-to-quarter basis?

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Sean A. Gray, Berkshire Hills Bancorp, Inc. - Senior EVP and COO of Berkshire Bank [19]

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We've seen it flat. And I think that's another byproduct, multiple regions, we will not compromise our credit discipline, our average FICO is still remaining in 730 range, so we've seen flat credit trends and I think that's a byproduct, because I'm aware of what's going on nationally. We don't do any subprime, which is a little bit different than what you may see nationally. And our ability to pull for multiple regions allows us to maintain those credit disciplines.

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Operator [20]

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Our next question comes from Collyn Gilbert from KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [21]

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So maybe just sort of, Sean, if I can go back to your comments on just the commercial loan activity and the optimism you're seeing there, can you guys talk a little bit about what the plan is maybe for the mid-Atlantic region. Mike, you'd mentioned obviously hiring those 2 lenders, but kind of how much you see that book growing and just kind of talk a little bit more about that initiative?

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Sean A. Gray, Berkshire Hills Bancorp, Inc. - Senior EVP and COO of Berkshire Bank [22]

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Sure, Mike talked mainly about our ABL hire. We've got a fantastic team out of Boston with all the infrastructure and systems, able to manage a more national type product. So our ability to go into new regions, i.e., the mid-Atlantic, get the best of breed people, put them in place and put them within our processes, is what we're looking to do. That individual specifically had managed a book of business and a team that was over $500 million, so there is incredible opportunity over time where appropriate. And our other commercial leader will manage our more core relationship oriented business, which tends to be C&I. We like the prospects of the fee income and the cash management fees that come with that, it's more oriented to deposits and positive liquidity. So we see that individual growing that book at the same pace we grow our other regions, which we look for double-digit core relationship-oriented C&I growth.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [23]

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Okay, and just -- will they work out -- when you talk about mid-Atlantic, are you guys going to be using kind of -- First Choice location as kind of a hub to develop that part of the business?

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Sean A. Gray, Berkshire Hills Bancorp, Inc. - Senior EVP and COO of Berkshire Bank [24]

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Yes.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [25]

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Okay, and then just shifting gears to mortgage banking and just fee changes. I know you guys sort of touched on, but can you just explain again, Jamie, what happens in terms of the discrepancy between the way First Choice was reconciling fees and expenses and how you guys are and what the impact is going to be, again?

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James M. Moses, Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank [26]

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Yes, so we have, I guess, I'll call it a better way of tracking the fees and expenses over time. And so we're able to net those things together, so the corresponding decrease in expenses is 25% along with the -- decrease in the fees of about 25%. So if you're thinking about it in terms of your model, when you're going back to First Choice's Q4 and last year, you can think of it in that way. And so there -- right where we thought we would be even though even accounting for this change.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [27]

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Okay, okay, that's helpful. And just to clarify, you said on a linked quarter basis, you expect fees to go up -- total fees to go up 20% to 25%?

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James M. Moses, Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank [28]

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Yes, we -- 15% to 20% in revenues, yes.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [29]

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Okay, okay. Okay, and then I know -- optimism on the mortgage side. But is there other -- I guess, loan fees were down, I'm assuming kind of just transaction swap, derivative income type of component there? Or just maybe walk through some of the other trajectories on why fees are going to grow so much in the second quarter?

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James M. Moses, Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank [30]

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Yes, so I think the main driver of those growing fees is our SBA, pipeline looks really strong, and we should grow that pretty well hereon in Q2. We think it'll be probably like a positive million dollar second quarter.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [31]

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Swing?

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James M. Moses, Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank [32]

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Yes. (inaudible) yes.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [33]

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Okay. What were the SBA fees in the first quarter?

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James M. Moses, Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank [34]

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$1.4 million.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [35]

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Okay, okay, that's helpful. And then just also to Jamie, on the security side, so obviously, you guys sold securities this quarter, but then did you rebuilt the portfolio, I take it.

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James M. Moses, Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank [36]

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Yes.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [37]

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Just maybe talk a little bit about what your strategy is on the security side, I know you said you're extending duration on funding, but how you're managing the securities book?

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James M. Moses, Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank [38]

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Yes, we're trying to manage that in the overall context of the balance sheet management, right? So we think that we're at a good size right now on the securities portfolio. Cash flows are coming off at about 250, the reinvestment rate is about 250, so we think we're going to be relatively stable here in the 330 range -- 330, 335 range on the securities portfolio. Wouldn't expect too much deviation from the size that we're at right now.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [39]

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Okay, that's helpful. and then just -- sorry, I keep doing, but I think this is last one. On the borrowing side, you'd said you're extending, can you just talk a little bit more specifically about what you're doing there?

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James M. Moses, Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank [40]

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Yes, so, I guess, that's all tied into our guidance for NIM in Q2 to being stable. We expect to have a few basis points or 2 accretion to the margin because of the rate hike, but again, when rates rise, it gets a little more difficult to stay asset sensitive. And so we anticipate engaging in some longer-term borrowings in order to maintain that profile, so that's why the guide to a flat NIM even though a rate hike.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [41]

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Okay. And I said that was maybe a last one, but I have one more. Charges, okay, you indicated maybe $2 million more of charges coming in the second quarter. Is that it? Anything else that we can expect on that line throughout the remainder of the year?

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James M. Moses, Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank [42]

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I think that's it as of right now. We're always looking to streamline operations and things like that. But there's nothing imminent in that line and in particular, on the merger side of things, it's $2 million and will be done.

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Operator [43]

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Our next question come from Laurie Hunsicker from Compass Point.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [44]

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Just a follow-up on merger charges. So the $2 million then would put you up at $21 million for First Choice, versus you had $23 million projected. So you're done at $21 million, so you're ahead of the curve?

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James M. Moses, Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank [45]

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Yes.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [46]

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Okay, and then the restructuring charges. These are related to your branch closures and your termination of leases?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [47]

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Yes, so it's mostly termination of leases. It's 1 branch and then there are 4 other loan offices that we're -- that we've gotten out of leases on.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [48]

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Okay, and does that $5.7 million lying in the first quarter, does that then go essentially to 0 in the second quarter and beyond? Or how are you thinking about that?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [49]

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Again, we will always look to restructure things when we can, but there is nothing imminent, so for now, I see it as going to 0 in Q2.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [50]

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Okay, and that's great. And so in December, that was $1.1 million. Was the $1.1 million related to the branches that you closed in the quarter as well?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [51]

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Yes.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [52]

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Okay. So when we think about that, you're basically -- you paid round numbers on the $7 million, but you're saving $1.6 million going forward?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [53]

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That's just for this quarter. It -- so it's a little bit more when you include all the restructurings that we did in Q4 as well.

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Allison P. O'Rourke, Berkshire Hills Bancorp, Inc. - EVP of Finance - Berkshire Bank [54]

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Laurie, just to add it, for a second, the other -- the 3 branches that we've talked about in the last call is $1 million of savings going forward at the run rate. These 5 things that we've talked about on this call is an additional $1.6 million.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [55]

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Is another $1.6 million, okay, okay, great, all right. So back over to C&I. Can you share with us within C&I, what the asset base lending component was? And then also just give us an update on Firestone in terms of what your outstanding were? What your new production was? What your nonperformers were? And what your charge-offs were?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [56]

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Yes, you can take that, Sean (inaudible).

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Richard M. Marotta, Berkshire Hills Bancorp, Inc. - Senior EVP and President of Berkshire Bank [57]

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Sure. Laurie, this is Richard. I could start with the Firestone piece. We started the quarter about. We had originations of about $34, paydowns of about $18, and we ended the quarter at about $222, which is about an 8% growth quarter-over-quarter. Our forecast for 2Q is going to be flat. So we anticipate that 222, give or take, that where we're going to end up in 2Q. From an NPL perspective, we're about 80 bps for the quarter, up from about 50 bps, so about $1.7 million at the end of the first quarter versus $1 million in the fourth quarter. And charge-offs remained around 31 bp quarter-over-quarter. The segment that drove the NPL was the fitness segment. It was 1 franchisor that we had a cap on. We no longer do business or we'll not finance that franchisor anymore.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [58]

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Okay, and just so I'm clear. In December, I had your nonperformers at $900,000, you're saying they were $1 million or they were $900,000?

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James M. Moses, Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank [59]

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They were $952,000, to be exact.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [60]

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This year, okay. Okay, is there anything else with that 1 fitness credit, but you're still doing fitness generally?

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Sean A. Gray, Berkshire Hills Bancorp, Inc. - Senior EVP and COO of Berkshire Bank [61]

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Yes, we're the -- of the 222, about 70 is fitness. All of the other fitness franchisors have provided and performed spectacularly. Just this one and that right now we have about $3.5 million with that franchisor all of which except for the part that is nonaccrual is performing to terms.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [62]

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Okay, and then in terms of your 2Q leaving at flat. I mean, is that by design? Or you back stepping away from this a little bit or...

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Sean A. Gray, Berkshire Hills Bancorp, Inc. - Senior EVP and COO of Berkshire Bank [63]

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No, that's just the seasonality, that first quarter is normally very good and then second quarter kind of flattens a little bit. So it's not by design, they are still doing the businesses that they are doing.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [64]

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Okay, that's great. and then do you have what your asset base lending component was?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [65]

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Sure, we -- $352 million for ABL, the growth from the quarter perspective was about $23 million, which was a combination of line and just good normal business.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [66]

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Okay, great. And then just going back over here to margin. When in the quarter did you actually terminate your fixed rate swaps?

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James M. Moses, Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank [67]

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February.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [68]

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In February, okay. And then, by the way love the accretion detail, but so as we look obviously, this is your first full quarter with First Choice, 18 basis points of accretion, that accretion income will start to run off. I appreciate the guide that you gave us on $3 million for 2Q, but as we look forward to 2018, obviously, the accretion will start to come way down, assuming you don't do another acquisition. What would your accretion number be looking like for full year '18? And I realized there's some moving components, but just as we're thinking about reported margin.

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [69]

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Yes, I don't have a 2018 guide for accretion ex recoveries at the moment. So I can maybe get back to you on that, Laurie.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [70]

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Okay. And then, I guess, last question here, just jumping back over to M&A. And Mike this is for you. As you're thinking about M&A, and as you said, your conversations have picked up, what is your lowest that you would go, what's the lowest yield that you would entertain in terms of assets at this point? I guess, what's the highest that you would entertain in terms of a bank that you would be willing to acquire? How are you thinking about that?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [71]

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I probably have not put a collar around the size of an institution. When we get calls or we call on somebody and we develop a relationship, it's based on the financial parameters. So in fact, if there is $1.5 billion or $2 billion bank, and we believe that there is a like-minded atmosphere with respect to a fixed exchange ratio that provides us the kind of accretion that we need in order to absorb some of the Durban loss and DFAST cost, and we talk about it. If it's $6 billion and it still works, then so be it. So I haven't really put a collar around size of an institution. I think, generally speaking, it would be reasonable to assume that some are between $1 billion, $1.5 billion and $3 billion to $4 billion institution is most likely. But again, it's really hard to, I think, put any kind of limit on what the size of the institution is. It's more about direct combination of what the financials look like subsequent to cutting the deal.

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Laurie Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - SVP and Research Analyst [72]

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Okay, that's helpful. And then just one last thing. I wanted to get back to mortgage banking. Jim, you had mentioned that you're able to obviously break it out more clearly. What -- where were the corresponding expenses with the $12.7 million of mortgage banking fees?

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James M. Moses, Berkshire Hills Bancorp, Inc. - CFO, Senior EVP, CFO of Berkshire Bank and Senior EVP of Berkshire Bank [73]

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We don't -- we're not going to give that kind of guidance on it, Laurie. I mean -- generally speaking, it's -- you can see based on Q4 to Q1, you would be able to, I guess, work that in your model. We're just not giving that guidance right now.

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Operator [74]

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Our next question comes from Matthew Breese from Piper Jaffray.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [75]

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I just wanted to talk about the swap termination. When those were put on, can you just remind us of what the original intent of putting the swaps on were? My understanding from a lot of folks were that it was to provide some protection if rates would go up and with that kind of being the outlook, I just wanted to get a sense for why now is the right time to get out of those?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [76]

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Yes, it's a great question, Matt. And you're right, that was the reason for putting the swaps on a few years ago, a year and half ago, whenever it was. But today, our profile changed, with there is -- we had -- we've done a branch deal, we've done the FCLS and FCB acquisition, along with some of the things that we've done in terms of managing our balance sheet with season mortgage sales and things like that, that allow us to remain asset sensitive without the $300 million of swaps on the books and so they were on it at $239 fixed rates that we're paying. And so it feels like it was just a little excessive to keep paying for that when we don't really need it anymore.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [77]

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Okay, and then in terms of going forward, you guys have mentioned some continued balance sheet management. How much longer until you -- where you want to be? And what's the right borrowings to asset ratio, if that's the intend to increase that?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [78]

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Yes -- no, I mean, I think we are where we want to be, Matt. The ongoing balance sheet management relates to maintaining the position that we're in. And so as rates rise, it becomes a higher bar to remain asset sensitive. And so that's where we're continuing to want to be and we expect to be there and so if rates do rise a little bit, we may have to engage in some longer-term borrowings in order to mitigate the effects of that rate rise.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [79]

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Okay, and then can you talk a little bit about the new blended loan yield you saw this quarter versus what's existing. What's the gap between those 2 figures?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [80]

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So, you're talking about the -- like roll-on, roll-off, Matt?

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [81]

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Exactly.

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [82]

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Yes, Okay. so, we're getting closer and closer here. Just on a broad base look at commercial, it's coming on in the mid-4s and also rolling off in the mid-4s as well. So we are really close to the point where the NIM is sort of going to be unaffected by roll-on roll-off, and maybe even start to accrete as we move forward. So that's where we're at, at the moment. That goes right in line with our sort of guidance of kind of a flat NIM here in Q2.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [83]

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Okay, and then Mike, you mentioned towards -- working towards your longer-term profitability goals and making progress this year towards reaching them. Can you just remind us of ultimately what you're looking to accomplish? And then roughly speaking, over what time frame you want to do that?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [84]

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Well, we've always kind of felt, Matt, that in order to really be considered a higher performing institution, we needed to be operating at a 1% ROA or better. And that has been one of the primary objectives of this company. I think we take large steps towards that this year, maybe, exponentially faster than we have in the last couple of years. Our double-digit ROE, obviously, harder to attain because we've got some intangibles, but those are really the metrics. We operated at an efficiency ratio under 60%, that was a longtime goal that will tick up a little this year based on some of the inefficiencies of the mortgage operation. And so we would like to see that back down under 60%. I'm not sure whether that's a year or 1.5 year or 14 months, but it's within sight. We're operating at a 12% return on tangible equity right now, and I think, the longer we do that, the easier it will be to see a double-digit ROE as well.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [85]

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Yes, that's helpful. And then my last one is, you talked quite a bit about M&A and the metrics, and I just wanted to get a sense on given your geography, which is expands Western Massachusetts, a little bit into Upstate New York, Boston and now into mid-Atlantic. If you had to kind of rank those geographies in terms of where you want to be more, how would it go?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [86]

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Well, I probably wouldn't rank them just based on strategy. I mean, one of the benefits of this company is that we are regional and so we get benefits. There are strengths in almost every one of these regions that we're in. And so, if we're looking the way we've done the last 8 deals at the financial metrics of a deal and how that can be helpful to us, we really could do those in any one of those 4 or 5 areas and provide the same kind of lift for the company. Again, it's the benefit of having a regional footprint and so, I wouldn't rate them -- rank them necessarily by geography as much as I would the deal that makes the most sense for us from a financial standpoint.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [87]

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Got it. I'm sorry, just one more from me. You noted that potentially the inefficiency in the mortgage could impact the efficiency of the whole company for the year. I think last call, you had indicated you could maybe break below 60% in back half of '17. Is that still on target?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [88]

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Well, we would like to get close to that by the end of the year.

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Operator [89]

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Our next question comes from David Bishop from FIG Partners.

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David Jason Bishop, FIG Partners, LLC, Research Division - SVP and Research Analyst [90]

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Yes, Mike. I just had a quick follow-up. There has been a lot of headlines in terms of the shift to online retailing, several high-profile closures like Payless, Bebe stores and such. Have you guys done any sort of dive in terms of exposure for some of these retailers that might be hemorrhaging and maybe any sort of commercial real estate exposures to your projects that have those as tenants, just curious to know how you're (inaudible) there.

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [91]

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The answer is yes. And Mr. Marotta, you can give a little color on that.

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Richard M. Marotta, Berkshire Hills Bancorp, Inc. - Senior EVP and President of Berkshire Bank [92]

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This is Richard. Our total book from a commercial perspective that is tied to retail is about $450 million, $460 million are very, very diverse. We play with a lot of -- I'll call regional credit and credit tenants. None of which drive more than 5% or 6% of the overall square footage from a dollar perspective. So we're very, very diversified. We don't really have any, I'll call a department store or retail. So the ones who are into more staples like grocery stores, pharmacies and those kind of things. So we have seen no hiccup, we're watching it, we have a whole limit in place and all of that, so we've seen none of that or had been affected by any of it.

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David Jason Bishop, FIG Partners, LLC, Research Division - SVP and Research Analyst [93]

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Got it. And I don't know if you have it off at your fingertips. Do you know what's your CRE concentration ratio was at the end of the quarter compared to last quarter?

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [94]

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Didn't get it? Unchanged?

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Allison P. O'Rourke, Berkshire Hills Bancorp, Inc. - EVP of Finance - Berkshire Bank [95]

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Yes. I think it's -- sorry, it's Ali. It's basically unchanged and about 270%.

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David Jason Bishop, FIG Partners, LLC, Research Division - SVP and Research Analyst [96]

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270%, great.

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Operator [97]

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And ladies and gentlemen, at this time, we've reached the end of today's question-and-answer session. I'd like to turn the conference call back over to Mike Daly for any closing remarks.

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Michael P. Daly, Berkshire Hills Bancorp, Inc. - CEO, President, Director, CEO of Berkshire Bank, CEO of Greater Berkshire Foundation, President of Bank Foundation and Director of Berkshire Bank [98]

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Great. Well, we want to appreciate and thank everybody, appreciate joining us. Look forward to speaking with you again in July. At that time, we'll discuss our second quarter results.

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Operator [99]

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Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.