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Edited Transcript of BHLB earnings conference call or presentation 24-Jul-19 2:00pm GMT

Q2 2019 Berkshire Hills Bancorp Inc Earnings Call

PITTSFIELD Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Berkshire Hills Bancorp Inc earnings conference call or presentation Wednesday, July 24, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Erin E. Duggan

Berkshire Hills Bancorp, Inc. - IR Manager

* George F. Bacigalupo

Berkshire Hills Bancorp, Inc. - Senior EVP

* Georgia Melas

Berkshire Hills Bancorp, Inc. - Senior EVP & Chief Credit Officer

* James M. Moses

Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR

* Richard M. Marotta

Berkshire Hills Bancorp, Inc. - President, CEO & Director

* Sean A. Gray

Berkshire Hills Bancorp, Inc. - Senior EVP

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Conference Call Participants

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* Broderick Dyer Preston

Piper Jaffray Companies, Research Division - Research Analyst

* Collyn Bement Gilbert

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

* David Jason Bishop

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Laurie Katherine Havener Hunsicker

Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst

* Mark Thomas Fitzgibbon

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

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Presentation

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Operator [1]

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Good morning, and welcome to the Berkshire Hills Bancorp Q2 Earnings Release Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Erin Duggan, Investor Relations Manager. Please go ahead.

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Erin E. Duggan, Berkshire Hills Bancorp, Inc. - IR Manager [2]

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Good morning, and thank you for joining this discussion of second quarter results. Our news release and a presentation outlining our ongoing strategic review, which we will discuss today, is available on the Investor Relations section of our website, berkshirebank.com, and will be furnished to the SEC.

Our remarks will include forward-looking statements, and actual results could differ materially from those statements. For detail 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.

And with that, I'll turn the call over to CEO Richard Marotta.

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Richard M. Marotta, Berkshire Hills Bancorp, Inc. - President, CEO & Director [3]

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Thank you, Erin. Good morning, everyone, and thank you for joining us today for our second quarter earnings call. With me this morning are Jamie Moses, our CFO; Sean Gray, our President; Georgia Melas, our Chief Credit Officer; and George Bacigalupo, our Commercial leader.

I'll begin the call today with a high-level overview of the quarter and then turn it over to Jamie, who will dive deeper into our results and provide an update on our ongoing strategic review.

We had a good quarter. Our earnings were in line with our expectations as we completed our acquisition of SI Financial and made good progress on our strategic initiatives.

In the second quarter, we delivered $0.65 in core EPS and $0.52 in GAAP EPS, the difference being outlined in earnings release table. Our NIM came in at 3.19% and included 11 basis points of benefit from purchase loan and time-deposit accretion.

The integration of SI Financial operations has started smoothly for us and remains on plan. We've been impressed with the talent and customer-focused manner at which they operate as well as their enthusiasm to expand their businesses. We continue to deploy resources to work with their teams prior to our system's conversion, which is planned for October.

SI Financial added approximately $1.7 billion in assets to our balance sheet with 18 branches in Eastern Connecticut and 5 in Rhode Island. We've experienced positive deposit growth in those markets thus far, and we look forward to capitalizing on new opportunity markets and teams provide us and anticipate to achieve our projected cost savings on schedule.

As Jamie will discuss shortly, we've continued to move forward with our strategic initiatives and have begun to see results from our efforts. We plan to continue to build on this momentum and to meet the goals we set forth last quarter. Overall, we're pleased with the progress we've made towards our financial and strategic goals for 2019.

I talked a lot about our culture and core values over the past few quarters, and we are beginning to see the untapped potential of diversity. Building trusting relationships with all of our communities will help us bank the growing numbers of millennials and people of color throughout our footprint. In the second quarter, we officially launched our Be FIRST internal values as well as our Be FIRST commitment to the communities we serve.

We are invested in not only our outward-facing products and work but also in building our internal capacity in diversity. Through our Be FIRST programs, we have established our concept for community store fronts to be based on our MyBanker success, develop new community deposit loan products and established a bank-level diversity and inclusion committee.

I am proud to say that, during the second quarter, Berkshire Bank was named the 2019 recipient of the North American Employee Engagement Award for Social Responsibility and work. Berkshire beat out global companies across many industries in winning this honor, a true testament of the strong work environment dedicated to service and culture.

Now I'm going to turn the call over to Jamie. Jamie?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [4]

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Thanks, Richard, and good morning, everyone. I'm going to begin with a few comments around the second quarter and then give an update on our strategic initiatives, at which time I'll direct my comments to the presentation that was posted to our IR website.

As Richard said, we delivered $0.65 in core EPS and $0.52 in GAAP EPS with the difference coming from our SI Financial acquisition and restructuring efforts. During the quarter, we saw improvement to our capital and liquidity metrics. At this point, we are roughly 60% through our projected SI Financial merger costs with the remainder of those expected to come through in the back half of the year. This merger strengthens our balance sheet as we move forward with our plan. The economics of this deal remain strong.

We had expansion in our core profitability metrics as core ROA was 101 basis points, up from 92 in the first quarter, and return on tangible common equity was 12.2%, up from 11.4% in the first quarter. GAAP ROA was 79 basis points, and GAAP ROE was 6.1% due to the impact of merger-related and other noncore charges as you would expect. Our efficiency ratio improved to 56% from 60% in the first quarter.

Loans to deposits were 94% at the end of the quarter as we move forward with our planned deleveraging. SI Financial loans and deposits came on at roughly a 100% loan-to-deposit ratio.

On the loan side, we reclassified our aircraft portfolio to held for sale during the quarter. Prior to this reclass and excluding SI Financial, commercial loans were down 1% for the quarter as we exited some nonstrategic commercial loans as planned.

Turning to revenues. Fee income was down from first quarter results primarily in our loan-related income, tied to 2 items. First, recall that we had $1 million in additional SBA fee income in the first quarter related to the government shutdown delaying revenues from fourth quarter 2018. Second, we took a $700,000 fair value mark on our back-to-back swap book due to the steep decline in rates quarter-over-quarter. Moving forward, we expect fee income returning to a more normalized run rate.

On the expense side, overall, we're pleased with the discipline quarter-over-quarter as we execute on the strategic plan. That being said, professional services showed an increase quarter-over-quarter that we expect to move back in line going forward. This was primarily tied to an indemnification claim on a prior acquisition.

Overall, we're pleased with our progress and execution during the quarter as we continue to take step toward repositioning and optimizing our balance sheet, developing high-quality, sustainable earnings and driving efficiencies through targeted cost reductions while maintaining and enhancing products and services.

Turning to the slides and beginning with Slides -- 3, our balance sheet optimization is on track. The indirect auto portfolio continues to run off as planned, and our securities portfolio continues to naturally run off. And as I just mentioned, we have moved our aircraft portfolio balance of $178 million to held for sale.

Turning to Slide 4, as you can see in our earnings release, the First Choice Loan Services operations had a good quarter, taking advantage of a boost in the refi market due to lower rates. As we've said in the past, this is a team of good operators, and we continue to receive interest in the operations from potential partners where the strategic fit makes sense.

Moving on to Slide 5, we take in key steps in our expense management initiatives, evidenced by our 56% efficiency ratio. We have enacted company-wide policy changes, reduced our full-time organic FTE count by 6% year-to-date and have additional expense management initiatives that will be enacted in the back half of the year. We continue to see improvement as we remain on target to maintain an efficiency ratio in the mid-50s by the end of the year.

Moving on to capital management on Slide 6. We received regulatory approval for share repurchases in mid-June. As of last night, we repurchased 310,000 shares and plan to remain active as a purchaser, again, subject to market conditions. We have modeled our average share count to be around 51.5 million in the back half of the year, again, that is subject to market conditions. And as a reminder, our Board-approved share repurchase authorization includes 2.4 million shares and expires on March 31, 2020.

Shifting gears and looking at the broader picture for a moment, based on the forward curve, we expect further rate cuts, and we've already begun to see the impact of lower short and long-term rates. In this updated environment, we anticipate our reported NIM to remain relatively stable, subject to the timing of purchase loan accretion. We remain on track to meet our full year core EPS targets due to the overall benefits of the SI merger and our strategic initiatives. At this time, we cannot provide GAAP EPS guidance due to the impact of noncore items, which includes FCLS.

I'll turn it back over to Richard now for closing remarks. Richard?

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Richard M. Marotta, Berkshire Hills Bancorp, Inc. - President, CEO & Director [5]

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Thank you, Jamie. Picking up the discussion on Slide 7 of the deck and to reiterate what Jamie said, we remain on track to meet our targeted performance goals. This includes a $2.60-plus core EPS, and a core ROA above 1% for 2019 with a focus on improving ROTC over time.

During the quarter, we welcomed 3 new members to our Board of Directors: Baye Adofo-Wilson, Rheo Brouillard and Bill Hughes. These additions provide deeper insights into our newer markets and bring enhanced (technical difficulty) and new perspectives into our boardroom, including expertise in cybersecurity and community development financing.

In addition, during the quarter, we officially welcomed Malia Lazu to our management team as our newly appointed Executive Vice President, Chief Experience and Cultural Officer. This position will be instrumental in building on the momentum of our diversity inclusion initiatives.

We also appointed Jackie Courtwright to the position of Senior Vice President, Chief Human Resource Officer. Jackie brings more than 25 years of human resource experience to the position as she leads all aspects of the human resource function.

We're moving forward on all fronts. We expect to see strong results in the next several quarters as our initiatives come together to drive value. As we meet with the new networks within our communities, we are beginning to understand the value of inclusion. We're excited to explore the growth potential of our new programs. Our teams are energized and fully engaged within our markets as they continue to focus on building relationship-oriented business.

There's a lot of opportunity ahead with the SI Financial expansion, and our Be FIRST efforts have been met with optimism from our communities and our employees. We're taking key steps in order to fortify our franchise and truly define what it means to be a 21st century community bank.

With that, I'll open it up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Brody Preston from Piper Jaffray.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [2]

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I had a quick question meeting up -- I guess, are you guys hearing a bit of an echo, too?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [3]

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Not on our end.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [4]

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Okay. All right, well, that's fine then. I guess I just want to get a sense on the core NIM. Jamie, you said that it would likely be, I guess, sort of flat moving forward just given the outlook for the forward curve?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [5]

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Yes. So the reported NIM we expect to be relatively flat for the back half of the year. And again, that's going to include purchase loan accretion and CD marks, things like that, in the back half of the year.

Our core NIM, we expect -- with rates being cut, we expect that will decline a little bit in the back half of the year, maybe in total, 5, 6, 7 basis points, something like that. Again, depending on timing and when and if those rate cuts happen.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [6]

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Okay. All right, I appreciate that. And then I guess as we look to -- as I looked at fee income -- excuse me, if I missed it, I hopped on a few minutes late. Jamie, you said you expect fee income to normalize moving forward. What would that run rate look like?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [7]

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I think we look at that as probably 20-plus when you include SIFI in this deal. So we're pretty confident that that's going to go to the $20 million number.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [8]

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Okay. And is the impact from Durbin still anticipated to be about $5 million a year?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [9]

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Yes. Yes, we think it's right around there.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [10]

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Okay. Great. And then, I guess moving to loan growth -- I understand that you moved the aircraft portfolio held for sale. I guess even adjusting for that, loan balances came in a little bit lower than what I was looking for. So could you help me sort of explain or help me understand what drove the delta and what you would expect for loan growth moving forward? Should we expect maybe a slower pace in growth to continue?

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George F. Bacigalupo, Berkshire Hills Bancorp, Inc. - Senior EVP [11]

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Brody, this is George Bacigalupo. So for the second quarter, our core regional lending was flat. The reductions, as Richard had mentioned, were almost totally in our nonrelationship and syndicated lending assets. And so as we move into the third quarter, we're looking to -- despite some additional payoffs associated with those noncore transactions, we're looking at a range of probably 2-or-so-percent upward from second quarter. And specifically, we have some good momentum in our business banking in New York and Eastern Mass ABL as well as Eastern Mass commercial real estate. So we're fairly bullish on the next quarter.

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Richard M. Marotta, Berkshire Hills Bancorp, Inc. - President, CEO & Director [12]

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Yes. Brody, if I could -- this is Richard, if I can just add one thing. I guess the way I would look at it is our pipeline is strong and robust as it has been. I think we're just being very selective when it comes to the relationship and also the rates on the loans.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [13]

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Okay. And then I have a question surrounding, I guess, maybe some of the recent hires that you've made. I think -- forgive me if I'm mispronouncing her name, but I think it's Malia Lazu.

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [14]

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Malia Lazu.

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Broderick Dyer Preston, Piper Jaffray Companies, Research Division - Research Analyst [15]

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Malia. Okay. I just wanted to better understand -- I understand that she sort of has a separate business that is focused around sort of I guess diversity and inclusion. I wanted to better understand what some of the -- I guess maybe some of the key things she's bringing to the organization in terms of like key steps that she's going to implement moving forward?

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Richard M. Marotta, Berkshire Hills Bancorp, Inc. - President, CEO & Director [16]

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Yes. I guess the -- as we kind of look at -- into the future and to being a 21st century bank, part of that whole aspect is to deal with the communities that we service. And part of that, those communities or a major part of those communities are people of color and just overall diversity. And Malia has built a strong business, and she's a 20-year vet in the Boston -- not only Boston but nationally. So what she brings is just the ability to take our vision and then to tie it and pick it and tie it back to the communities that we serve.

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Operator [17]

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The next question comes from Laurie Hunsicker with Compass Point.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [18]

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I just wanted to go back to your comments on noninterest income, I guess what Brody was asking, and I just wanted to make sure I heard this right. As you look forward, you're thinking that run rate is $20 million a quarter?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [19]

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Yes. Yes, that's right. We think we'll be north of that.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [20]

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North of that. Okay. So maybe can you help me think about it to just some -- looking this quarter, it's $17.5 million. SIFI comes over, they were running at $2.9 million. I'm taking out $400,000-and-change for Durbin, so $2.3 million, half a quarter impact. SIFI should only be adding a little over $1 million for your fully baked run rate. I guess what else -- so I look at it going from $17.5 million to, round numbers call it $18.5 million, even $19 million. I guess what am I missing here?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [21]

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Well, I don't think -- you may not be necessarily missing anything. In that fee income line, though, we had decline based on the fair market value of our swaps that we don't -- typically, you're not going to see much movement in that quarter-over-quarter. And so we had this dramatic decrease in rates from end of Q1 to end of Q2. So we had to take a mark on that, so you would add -- you sort of just re-add that back in and (multiple speakers)

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [22]

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The $700,000 back? Okay, got it. And that's showing up in that...

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [23]

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Loan-related income line.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [24]

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Loan-related income. Got it. Okay.

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [25]

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And we also expect to do better in SBA fees going forward in Q3 and Q4. We've made some investments in that business that we really like, and we expect to see the payoffs, and those start to happen in back half of the year.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [26]

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Okay. Great, thanks. And then just to go back to your comments on margin, can you help us think about -- so if the core margin is contracting 4 or 5 basis points, that's suggesting that your accretion income in your model is running higher than we were the other quarter at $3.2 million? What -- how are you thinking about accretion income just the last 2 quarters of '19? And I realize that number can move around.

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [27]

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Yes. The timing on that is a tough one. We don't know for sure. But in our model, we're sort of having the purchase loan accretion remain relatively flat. That's about $2.2 million or so. But then we also had a mark on the acquired CD portfolio that's contributing to the reported NIM as well. So that added about 3 basis points or so this quarter. It should add roughly double that in Q3 and Q4. And so the accumulation of those purchase loan accounting and deposit marks should keep us relatively stable back half of the year while the sort of underlying balance sheet is contracting somewhat based on the forward curve.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [28]

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Okay. Great. And then tax rate, what should we using going forward?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [29]

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Yes. I think 20% for the back half of the year plus 20% for the full year seems about like a good number for us.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [30]

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Okay. All right, great. And then can you just update us, I guess, where we are with the taxi book?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [31]

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Sure. Yes, I'll kick that over to Georgia. She can help you out with that.

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Georgia Melas, Berkshire Hills Bancorp, Inc. - Senior EVP & Chief Credit Officer [32]

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Laurie, it's Georgia. Balances are just under $26 million. There's really no material changes to the overall credit of the portfolio. I mean it's continuing to perform along our expectations. Delinquency did tick up a little bit from last quarter. However, when we adjust for matured loans that are current with their payments, it was actually flat. So it's continuing to perform.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [33]

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I'm sorry. What is the delinquency number?

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Georgia Melas, Berkshire Hills Bancorp, Inc. - Senior EVP & Chief Credit Officer [34]

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Well, it is at 68%, but that includes loans that have matured that are current. So if you were to back those out, it falls back to where we were last quarter, which is roughly around the 60% range.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [35]

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Okay. Great. And then were there any charge-offs this quarter?

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Georgia Melas, Berkshire Hills Bancorp, Inc. - Senior EVP & Chief Credit Officer [36]

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No. Not in the pooled portfolio, no.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [37]

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Okay. Great. And then same question. Can you just update me on the Firestone book, just the loan balance, origination, nonperformers and charge-offs?

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Georgia Melas, Berkshire Hills Bancorp, Inc. - Senior EVP & Chief Credit Officer [38]

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Yes. Balances are up slightly from last quarter at $270 million. I think it was up about 2% quarter-over-quarter. NPLs are just under $2 million, which were down from last quarter, and delinquency is at 1.3% or roughly 3 basis points of the total loan portfolio and minimal charge-offs.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [39]

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And minimal charge-offs? Okay. And what were the originations this quarter?

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Georgia Melas, Berkshire Hills Bancorp, Inc. - Senior EVP & Chief Credit Officer [40]

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I've got that somewhere.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [41]

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Maybe when you're looking for that too, do you have what is substandard, as we sit, as of June 30, total substandard? And then also what piece of that is C&I?

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Georgia Melas, Berkshire Hills Bancorp, Inc. - Senior EVP & Chief Credit Officer [42]

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Okay. Well, $36 million in Firestone originations for the quarter. And I'm sorry, your question on criticized, was that specific to Firestone or...?

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [43]

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No, I'm sorry, just overall what your substandard is currently running? I guess is that comparable? At March it was $152 million. And then also, I'm looking for the piece that's substandard C&I only in comparable -- at March, it was around $55 million?

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Georgia Melas, Berkshire Hills Bancorp, Inc. - Senior EVP & Chief Credit Officer [44]

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The substandard is flat. It was roughly $157 million at March 31, but it's $158 million at June 30.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [45]

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$158 million? Okay. And then do you have the piece of that, that is C&I?

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Georgia Melas, Berkshire Hills Bancorp, Inc. - Senior EVP & Chief Credit Officer [46]

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I do not have the breakout.

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [47]

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We can follow up with you on that, Laurie.

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

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Okay. That sounds good. Okay, and then just 2 more questions. I guess when we're looking more broadly at your income statement, you guys are putting a lot into restructuring, and some of these are charges I think that other banks would just consider a part of operating course of business. Can you help us think about when that line goes to 0 and then how we should be thinking about restructuring expenses for the remainder of 2019?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [49]

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Yes. So that line should go to 0 after the fourth quarter of this year, right? So this is -- I would say that the restructuring charges that we're putting through this line are related to our strategic review, are moving forward with different lines of businesses and getting out of certain lines of businesses, that sort of thing. So we should have that completed by the end of the year. So I think first Q 2020, that line should be 0 along with the sort of merger and acquisition line as well.

Our conversion happens in Q4, so we're sort of stuck with charges that will tail off into Q4 this year, but those numbers should go to 0 in Q1. And again, I just want to remind that we are likely to have some more branch closures that happen in Q4 as well, but we will likely call that a restructuring charge.

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

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Okay. And how many branches are you closing?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [51]

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So probably somewhere between 2 and 3. Still trying to identify which ones and where, but we're -- we think that's probably the right number.

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

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Okay. And then that goes into the number. Okay. So then again, as we're looking forward, assuming you don't do another acquisition, 1Q '20 March, we're going to see your first clean quarter in terms of restructuring and merger charges in like a decade? Is that the right way to be thinking about this?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [53]

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I think that is the right way, Laurie. Yes, that (multiple speakers)

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [54]

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Okay. That's great. That's great. One more question and then -- sorry, I've taken up a lot of time here. The aircraft leasing sale that's expected, can you share with us if that's a gain or loss?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [55]

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I don't feel real comfortable talking too much about that right now in terms of whether it's a gain or loss, but you'll see the impact on the next call, hopefully, or over the -- a release that -- when the thing closes, we'll let you know what the impacts will be.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [56]

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Okay. And that's also probably going to run through your restructuring line as well?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [57]

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I don't think so. I don't think that will run through the restructuring line.

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

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Okay. Great. And I'll follow up with you on substandard after.

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [59]

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Perfect. Thanks, Laurie.

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Richard M. Marotta, Berkshire Hills Bancorp, Inc. - President, CEO & Director [60]

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Thanks, Laurie.

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Operator [61]

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The next question comes from Collyn Gilbert with KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [62]

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So maybe just starting, Jamie, with the NIM discussion, and I appreciate the color through the back half of this year, but then as we look at 2020 and if we just assume no rate -- no change in the rate environment from the 4Q '19 position, can you just confirm what percent of accretion income will go away in 2020? And then, very broadly, how you think that core NIM can trend in 2020?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [63]

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So almost all of the accretion income will go away in 2020. What's going to remain is an interest rate mark on acquired portfolios, which is a very small piece of the overall loan accretion. And in the first quarter and in a small piece of the second quarter, you're also going to get mark income that comes through on that acquired CD portfolio that we have.

And again, this quarter, that was worth about 3 basis points on the reported NIM. And we expect that will roughly double as in the full run rate here in Q3, Q4 and Q1. That was a -- not to get too technical around it, but we have that as like an 11-month straight-line runoff. And so at month 11, that income goes to 0 on that. So then you'll -- there will be almost, I will call it, no noise in the reported NIM versus what we would describe as our adjusted NIM. The delta would only be what's in the interest rate mark, and we would expect that to be a minimal number and roughly stable and running off over time.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [64]

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Okay. Okay, that's helpful. And then, just generally kind of how you're seeing the core NIM or maybe more sort of the way the movement in the core NIM through 2020 and tying into like strategies on SIFI and all that kind of stuff.

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [65]

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Yes. So as we've talked about before, I mean the part of the balance sheet restructuring that we're doing is to try to protect our NIM as best as we can. We are at the moment a slightly asset-sensitive bank, so the initial rate movements down are going to impact our assets quicker than they will our liabilities. We expect that to abate by Q1 next year. And then we would expect that -- last time, we talked about sort of grinding higher basis point by basis point, couple basis points here quarter-over-quarter based on balance sheet restructuring, and I think that's what we'll see starting in 2020. We would expect that -- that core NIM to sort of just rise slightly and slowly over time.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [66]

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Okay. That's helpful. And then you had indicated -- so a 20% tax rate. Can you just give us color as to what that would assume in terms of future tax investments and just where you guys are positioning that for the remainder of this year and into next?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [67]

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Yes. So you were breaking up a little bit there, Collyn, but I think your question is around the tax rate and where we're looking at going forward in those investments in general?

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [68]

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Correct.

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [69]

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Okay. So in the quarter, you'll note -- in F-9 in this statement, you can see the actual breakout of the charge related to the income -- the tax credit and the income associated with it. So this quarter, we had about $440,000 net benefit to the bottom line because of the tax benefits this quarter.

We continue to look at these as relationship deals where we know the operators who are going to do a -- for example, a commercial real estate deal that historic tax credits might be involved in. We think it's good business. If it makes sense from an ROE perspective, we'll do both the loan and the tax credits. And so we think that's good business for us, and we'll continue to do those types of things. We do not do any solar tax credits. And I think Richard, did you have something...

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Richard M. Marotta, Berkshire Hills Bancorp, Inc. - President, CEO & Director [70]

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The only thing I would add, Collyn, is just to highlight the point Jamie just made. I mean these are relationship that are in our footprint. We don't do anything national, and we're not just out there chasing tax credits for the sake of tax credits. These are part of an overall relationship we have with the entity or the person.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [71]

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Okay. Okay, that's great. That's helpful. And then -- and I missed it you guys. I'm sorry. I hopped on the call late. If you answered this already, I apologize, but can you just update us on how you're thinking about buybacks and what your appetite is there?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [72]

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Yes, absolutely. So we got approval mid- to late June for -- Fed approval to do buybacks. We did about 110,000 in Q2 over those, say, 10-or-so trading days. We have done 310,000 in total as of yesterday. We will continue to be in the market as long as nothing crazy happens on -- in terms of stock price. We'll continue to be in the market. We have 2.4 million authorization from our board, number of shares. That expires in Q -- at the end of Q1 next year. We continue to believe that we will use that entire authorization. And of course, the pace of those things will depend on market conditions.

And then, the last thing I guess I would say about that is that we really think that this is a sort of best use of the excess capital that we have. And we will continue to do that over time.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [73]

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Okay. That's really helpful. And then, I thought that was going to be my last question, but I forget. I think I have 2 more. Just really quickly, on the indirect auto, the $500 million that you're running down -- or well, it's about $450 million left, is there any sort of seasonality to the way that's going to run off?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [74]

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The only -- I don't think -- seasonality is probably not the right way to think about it. But since they are amortizing loans, the runoff will accelerate over time. I think that's -- so less seasonality and more just the structure of those loans.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [75]

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Okay. That's helpful. And then just finally, how are you guys thinking about some of the consolidation that's occurring in your market? Do you see that as an opportunity to take customers, to take lenders, or anything that you're seeing kind of on an offensive strategic positioning as it relates to some of your market areas?

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Richard M. Marotta, Berkshire Hills Bancorp, Inc. - President, CEO & Director [76]

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Yes. Collyn, the answer to those question is yes and yes. So any time there is a merger or an acquisition or whatever, there's always disruption. And disruption, if you play it right, is opportunity. And so we are looking for the clients that aren't happy with the new regime and/or employees that are not happy. So yes, we are strategic in that regard.

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [77]

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I'd also just add that when competitors are eliminated, that naturally reduces the sort of competition that you have, so that should help on both sort of the asset generation and the liability side of things in those markets.

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Operator [78]

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The next question comes from David Bishop with D.A. Davidson.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [79]

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A quick question -- I mean, I haven't asked you this, but in terms of the First Choice Loan group, given what's happened in the mortgage market, is there a potential for a gain in terms of the divestiture of that segment?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [80]

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Not real comfortable talking too much about that. We're in discussions at the moment, so I probably would leave that one alone.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [81]

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I got it. Saw an uptick in terms of commercial loan NPAs, just curious, some color around that and maybe the outlook for the provision as we head into the back half of the year, maybe 2020?

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Georgia Melas, Berkshire Hills Bancorp, Inc. - Senior EVP & Chief Credit Officer [82]

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It's Georgia. Yes, we did see -- it was about a $5 million increase in NPLs. That's primarily due to one single C&I relationship in our Vermont market. I mean overall, though, the nonperforming loans as a percentage of total loans is basically flat quarter-over-quarter, inclusive of SIFI, at about 36 basis points. We don't really see anything else going into nonaccrual, at least not in the near future. So I think it's -- like I said, it's due primarily to that one loan. And we continue to work off, obviously, a lot of the smaller loans.

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Richard M. Marotta, Berkshire Hills Bancorp, Inc. - President, CEO & Director [83]

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And Dave, this is Richard. The only thing I would add is that, that one transaction seems to be adequately collateralized at this point.

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [84]

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And Dave, I guess I would also add on the provision. I would expect you would see the provision go up commensurate with the size of the balance sheet moving higher as well into Q3 and Q4.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [85]

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Got it. And then on the core deposit front, looked like some decent growth in noninterest-bearing, or maybe just talk about some of the core deposit trends you're seeing within the markets and maybe on the pricing front as well.

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Sean A. Gray, Berkshire Hills Bancorp, Inc. - Senior EVP [86]

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Dave, we're seeing good growth in our MyBanker and our private banking franchise. We closed 6 branches, deployed our MyBankers and actually grew deposits post the closing of those branches. So we're seeing that as an incredible value proposition and an alternative to traditional banking. And we think it will give us flexibility going forward.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [87]

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Got it. Then on the pricing front, just curious what you're seeing on -- from a competitive standpoint in terms of your markets?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [88]

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Yes. I mean we continue to see that less pressure from competition and rates as the -- there's a rate cut started to be anticipated. We saw competition sort of reduce their specials. We've reduced our specials ahead of that as well. We've come down probably 15 or 20 basis points or so over the past, say, 15 or 20 days. And with anticipated continued rate cuts, I imagine that what we'll see is less and less competition, better and better rates over time.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [89]

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Got it. Then one final question in terms of the organic loan growth. Just curious, I mean some of the core markets in the newer markets like Boston, Worcester, what you're seeing on the commercial loan front there?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [90]

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We're seeing good activity and opportunity in Eastern Mass, Boston in general. And we're -- we have a very robust pricing model that we adhere to, and we're being selective in our deals. But we certainly have good deal flow, and we feel optimistic about winning our share of transactions.

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Operator [91]

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The next question comes from Mark Fitzgibbon with Sandler O'Neill.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [92]

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Just one clarification question on noninterest expenses. I assume you're going to extract the SIFI or begin to extract the SIFI cost synergies in this upcoming quarter. Should we look for noninterest expense to (inaudible) down a touch from what we saw in 2Q?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [93]

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So Mark, the right way to think about that is Q4 is where you'll see the full benefit of the expense saves come in. That when conversion happens. So you'll see a rise in expenses in Q3 relative to Q2. And then the decline would have been there in Q4 afterward.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Principal & Director of Research [94]

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Okay. And then just to clarify, your guidance in the slide deck says you're projecting core EPS of $2.60 to $2.65. Does that assume any additional restructuring or merger charges or any other nonrecurring items in the third and fourth quarters?

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [95]

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No. It doesn't include any restructuring charges or anything like that in the third quarter or fourth quarter.

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Operator [96]

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This concludes the conference for this morning. Thank you for attending today's -- it concludes the question-and-answer session. I would like to turn the conference back over to Berkshire for any closing remarks.

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James M. Moses, Berkshire Hills Bancorp, Inc. - Senior Executive VP, CFO & Head of IR [97]

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Yes, thank you for joining us today. We look forward to speaking again in October for our third quarter call. Thank you.

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Operator [98]

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Thank you for attending today's presentation. You may now disconnect.