Good morning, and welcome to the Berkshire Hills Bancorp Q4 Earnings Release Conference Call. [Operator Instructions]. Please also note today's event is being recorded. At time I'd like to turn the conference over to Ms. Erin Duggan, Investor Relations Manager. Please go ahead..

Thank you. Good morning, and thank you for joining this discussion of fourth 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 remarks will include forward-looking statements and actual results could differ materially from those statements.

For detail and related factors, please see our earnings release in most recent SEC reports on Form 10-K and 10-Q. As a reminder today's discussion is not intended as a proxy solicitation. 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..

Thank you, Erin. Good morning everyone. Thanks for joining us today for our fourth quarter call. This is my first earnings call as CEO, I intend to present our perspective simply and directly, and of course, I want to be responsive to your question.

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. We're going to begin today with some high-level remarks around 2018 and Jamie will provide a financial overview of the fourth quarter.

Afterwards I'll discuss the strategic review we're currently engaged in, we'll provide some additional concluding remarks and then of course we'll open it up for questions. So let's begin. 2018 was a good year.

We fully integrated our commerce operations, delivered solid organic growth, improved our profitability metrics, announced our agreement to acquire Savings Institute in Connecticut and launched the diversity and inclusion initiatives that we'll look to expand on in 2019.

We delivered the core bottom-line in accordance with the plan that we set out at the start of the year. We ended the year with $2.71 in core EPS, core ROA above 1% and efficiency ratio below 60. Core return on tangible common equity improved to 13.5% and return on equity improved to 8.1%. Our loan portfolio grew 9% year-over-year.

Our deposit base increased by 3%. We remain disciplined with operating expenses. Our asset quality remain strong with a credit metrics further strengthening in the final quarter of the year.

We're moving forward together with a renewed focus on profitability and organic operations and I'll speak to more to this after Jamie provides you with some financial update.

Jamie?.

Thanks Richard and good morning everyone. We delivered $0.63 in core EPS for the fourth quarter, a 9% increase year-over-year. We reported GAAP EPS of $0.31 due to the impact of non-core charges which I'll go over in a minute. Core EPS for the year was $2.71 with GAAP EPS coming in at $2.29 and GAAP ROA of 90 basis points.

Now on our last call we had guided core EPS down from the third quarter and we met our bottom-line guidance before the impact of the federal government shutdown which delayed some revenue recognition in our SBA operations.

Our margin had the benefit of higher purchase loan accretion and we recorded higher expenses related to various initiatives we had in progress. I'll move into those numbers now to help unpack the quarter for you. Our NIM came in at 3.41%, which included 30 basis points of purchase loan accretion.

Our workout team was able to bring in some unexpected larger recoveries before year-end that may have otherwise been recorded in 2019. Measured before accretion, the NIM came in at 3.11% which was down four basis points from the prior quarter. This reflected the higher average borrowings that funded our solid loan growth in the fourth quarter.

Our cost of deposits increased in line with our expectations at about the 40% beta level. The increase in net interest income offset much of the revenue impact from lower fee income. In addition to normal seasonality, we continue to see revenue headwinds in mortgage banking reflecting industry conditions.

We adjusted our mortgage expenses and have seen a rebound in revenues so far in 2019 as long-term rates have adjusted back down. Turning to SBA, we gave up approximately $1 million in gain on sale as we were unable to sell a portion of the originated loans in our normal model, due to the government shutdown.

Also the third quarter was exceptionally strong in volumes and margins tightened some in the fourth quarter as we expected. Overall 2018 was a record year for volume and income in this line of business and we're feeling good about what we have done and where we're headed there.

Turning it over to expenses, we had an increase in total expenses due to both core and non-core activity. So looking at core expenses, we were up quarter-over-quarter in compensation and professional fees.

Fourth quarter compensation bounced back to a more normalized level from the third quarter, which had gone down a little bit due to the timing impact of some accrual adjustments that we made. Professional fees reflect legal and consulting across several fronts, due to the various initiatives we have been working on.

While we don't view these as reflective of our current run rate in to the first quarter of 2019, improvement here will tend to be offset by the normal seasonal increase in benefits expense in the first quarter as payroll taxes reset at the start of the year.

As we have previously reported, we have six branch consolidations in progress which we expect to complete in the coming months and we are also adjusting certain branch operating hours to more efficiently serve customers as retail traffic becomes more digital. Moving to non-core expenses.

The biggest piece was an $8 million charges related to a strategic restructuring of our technology provider relationship. During 2018, we conducted an extensive strategic technology review including a core systems RFP, due diligence and competitive vendor proposals.

This came to a completion in Q4 in the form of restructured master contract that gives us new flexibility in managing our technology development and service providers along with a better cost benefit formula as we scale our enterprise.

The project included some consulting as we pursued the best of breed solutions and we are confident that this investment that we've made will have an earn back within three years based on lower marginal costs to support our growth in product development. In addition to that systems cost, we had charges related to the CEO transition.

The transition involves the separation payment and also included the forfeiture of certain existing accrued benefits. The net expense impact was about $2 million, which we recorded in the fourth quarter and there is no further obligation related to the former CEO.

We also had a $3 million charges for the settlement of a purported class action claim, which we have previously reported as pending litigation in our SEC filings. We also recorded $3 million in merger-related charges during the quarter due to the pending Savings Institute acquisition.

So turning back to the broader picture, as Richard stated in his opening, we delivered our core EPS for the year in line with our guidance and we did good work in managing profitable organic growth, while integrating our new Eastern Massachusetts operations and keeping to our efficiency targets.

We now look forward to more opportunity in 2019 to strengthen our franchise, while bringing Savings Institute on board. Most of the earnings accretion from that acquisition, just to remind you, is not expected before 2020. As we look forward at our organic operations, we are entering a new phase in managing the franchise that we have assembled.

As an acquiring bank, purchase loan accretion has contributed significantly to our revenue stream and our workout team has further strengthened our credit profile by resolving these acquired impaired loans. As we noted in our last call, accretion income will be down by at least 50% in 2019.

Before accretion, in the first quarter, we expect to see a modest revenue pickup from loan growth, a steady NIM, a seasonal rebound in fee income, and flat expenses. Core EPS is expected to decrease from Q4 including the impact of the change in accretion.

Our team, led by Richard, is working on a full strategic review to examine various operational and financial structuring options as we move forward. This includes structural balance sheet options including capital management and the possibility of stock buybacks as a potential way to improve capital returns.

Now, I'm committed to working with Richard and our team to assess the opportunities in front of us with his leadership and strong focus on profitability and shareholder returns. At this time, I'd like to note that the company will be filing for the renewal of our universal shelf registration in the coming weeks.

This is done every three years in order to keep the shelf available. This is a routine filing and is not tied to any present plans for the issuance of securities under the shelf.

In addition, our acquisition of Savings Institute continues on schedule and we anticipate filing the S4 proxy statement prospective with the SEC for the proposed acquisition in the coming weeks. With this in mind, we will not be as granular in some of our forward-looking statements today. With that, I'll turn it back over to Richard..

Thank you, Jamie. Jamie has just brought you up-to-date for what we did for the fourth quarter and comment on the factors that we face in the current environment. The most significant factor is that our accretion revenue will go down by about $15 million in 2019. We had accelerated recoveries in 2018 due to the excellent work by our workout team.

This level of purchase loan accretion has benefited shareholders and had the compounding effect of immediate credit quality improvement, but these levels are not repeatable in 2019. In addition, there are continued revenue challenges in the mortgage banking.

We will continue to execute on expense efficiencies in order to offset those revenue challenges, which should essentially neutralize the impact of that business on the bottom-line. In order to move ahead of these challenges, we're focusing on further developing clean and sustainable earnings streams.

I'm a strong believer in driving profitability and a strategic review is the first logical step in that process. I am leaving this review with input and participation from our Executive team and the support of our Board.

The review will address the following; the size and composition of our balance sheet, business line profitability, organizational expense structure, and capital management practices, including the potential for share buybacks.

Our goal for this review is to support 2019 earnings at the same level as 2018 moving to a clean, sustainable earnings growth thereafter. I will provide more direction on this front on our next earnings call. I'm grateful for the support of the Board of Directors through the leadership transition.

I've spoken with some investors and our analysts and plan to be visible and accessible along with Jamie and Sean as we move forward. I am encouraged by the support of the management team and the initial progress of the plan I just outlined. We're poised to move forward together in 2019 and deliver on the promise of this franchise.

With that, I'm going to open it up to any questions..

[Operator Instructions] Our first question today comes from Mark Fitzgibbon with Sandler O'Neill Partners. Please go ahead with your question..

Hey guys, good afternoon or good morning I should say.

Jamie I wonder if you could run through the guidance you gave on purchase accretion and the NIM for this year? I kind of missed part of that?.

Yes, sure. So as we guided to purchase loan accretion on our last call that we'd -- our expectations were that in 2019 we'd have half or maybe even less than half of the purchase loan accretion that we had in 2018. And so, here in the fourth quarter we pulled some of that accretion. We had some unexpected larger recoveries happen in the fourth quarter.

So that kind of move those things into 2018 where they may have happened in 2019 before. So our updated guidance on this is that, we expect to have about $15 million less in accretion in 2019 than we did in 2018..

Okay, great.

And then secondly Richard when do you expect the strategic review to be completed and start to implement actions from that?.

We are in the process, we’re probably 30% or 40% of the way through. The game plan is to get this in front of the Board for final approval and then talk about it at our next earnings call..

Okay. It would seem with the stock down as much as it was last quarter that buybacks would make a lot of sense.

Do you -- I can't recall, do you have a buyback program in place today where you could begin executing immediately?.

So we have a very minimal buyback program in place right now, but we are unable to execute on that at the moment, given the pending acquisition of Savings Institute in Connecticut there..

Okay. And then on expenses, I know you mentioned you expected them to be flat for the year.

So if you sort of take out some of the unusual items if you will this quarter, it's sort of a normalized expense run rate in that sort of $70 million, $71 million kind of doable do you think this year?.

I think, I guess what I'm going to say to you Mark is that, we're in the middle of a proxy vote. And so it's tough to give kind of granular guidance like that into next year. What I can offer in terms of guidance that we do -- we expect similar EPS this year in 2019 as we had in 2018. I guess, I'll leave it at that in those terms..

What I would add to that it's going to be cleaner more sustainable earnings stream and that is reliant on recovery income..

And then lastly, the $3 million legal settlement you mentioned it related to a class-action what specifically did that entail?.

It was a purported class action. It's been in our SEC filings the Qs and Ks over the past year. And so you can take a look at it in those documents..

Thank you..

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

Hey good morning. I just wanted to go back to the question on accretion income.

So that puts us for full year 2019, you're going to around $8 million to $9 million, does that include SIFI?.

Yes, it does..

It does. Okay.

And so, as we think about what full year '20 looks like, that's probably somewhere in the $11 million to $12 million range on accretion income?.

It's pretty far out to take a look at that. But in 2020, I'll remind you Laurie CECL comes into play. And so the effect of purchase loan accretion is going to be sort of diminished in the accounting guidance on that..

Great, thanks. Okay. And then just to sort of put all of that together, looking at your core deposit costs have gone up a little bit.

So on our reported margin basis, if we see something like the 3.15 to 3.20 range for reported margin that sounds about right for full year 2019?.

I think for full year 2019, I think what we're going to -- what we're saying right now is that, we expect sort of a flat NIM guidance for the year right now. We don't expect to see any rate hikes in 2019. If we take a look at the expectations in the market I think that's kind of where we're at.

So at this point in time with us being, what I would describe as neutral in terms of interest rate risk, I think a flat NIM guidance for the year is probably about, right..

Okay.

And that's core NIM that you're talking about the 3.11?.

Yes..

Okay, perfect. Great.

And then tax rate, how should we be thinking about that?.

So again, I guess you should think about it this way. Similar to 2018. I think in Q1, we're going to be somewhere between 20% and 22%. And of course actions that we may or may not take as part of the strategic review could impact that as we go forward. But Q1, I think it's pretty safe to say 20% to 22%..

Okay. Great.

And then merger charges the $2.8 million which bank acquisition was that associated with?.

That was the Savings Institute acquisition..

So you're already taking charges there?.

Yes. We accrued for our expenses for the fairness opinion and the Piper Jaffray's work for us as part of that..

Okay, great. And then just, again thinking about combined expenses and I appreciate that you're in the process of doing a review. But just wondered if you could help us in terms of the items that have been announced i.e.; the branch closures, the technology restructure and so forth and overlaying SIFI into that, pre-SIFI, post SIFI.

If we could think about a clean run rate, pre-SIFI is $70 million, $71 million a quarter, post-SIFI is $79 million to $80 million, just with what you have announced, is that a right number or am I missing something there?.

I think that is about right given what we have announced and said in the past Laurie. I think you're in the right track there..

Okay. Great.

And then can you talk a little bit about where the Hermitage club loan currently sits?.

Good morning Laurie, it's Georgia. There is not much to add from last quarter on the Hermitage loan, I mean other than the fact that we remain on due-course and we are actively working towards a resolution this year..

Okay.

And then can you talk a little bit about we saw the CNI non-performers uptick, was that in Taxi or was that in Firestone or do you have those numbers?.

Well, I mean the slight uptick is tied to obviously Hermitage. I mean our asset quality numbers did come in good quarter-over-quarter, they are down and year-over-year they are stable..

Okay.

Do you have what the Taxi currently is?.

Well, outstandings are just under $27 million.

Is that what you're looking for?.

$27 million net. Okay.

And then charge-offs in the quarter for Taxi, what were those?.

There were no charge-offs on the acquired medallion portfolio..

Okay.

And then what is the non-performing on the $27 million net?.

Laurie, this is Richard. Yes. Again as we've talked in the past, we're actively pursuing alternatives in that portfolio. And so I think what I would say is that it's under $27 million. There has been no losses above and beyond the mark and it continues to stabilize from a credit perspective..

Okay, great.

And then Richard can you just run us through what the Firestone numbers are, both in terms of the balance, the originations this quarter and the charge-offs?.

Yes, Laurie, the portfolio has grown to about $265 million. We did about $44 million in new loans this year.

There was a slight uptick in the fourth quarter for non-performing not unexpected as we will see uptick seasonally from time-to-time about 100 basis points, but overall, it was about three basis points of the overall loan portfolio, so immaterial as far as our loans go..

Okay.

I'm sorry and charge-offs in that book?.

Charge-offs were up slightly about $500,000 this quarter..

Okay, great. Thanks. I'll leave it there..

Thank you..

Our next question comes from Collyn Gilbert from KBW. Please go ahead with your question..

Thanks. Good morning guys. So, I understand not wanting to give kind of granular guidance at this point.

So, my questions are just sort of high-level, starting with loan growth and kind of where you're seeing demand, origination volume just kind of given the environment broadly, and if you -- I know you've got a lot of things on your plate right now, but just trying to get a sense of where you see loan growth going because this quarter put up -- you guys put up pretty good number this quarter?.

Yes. So, we're pretty happy -- Collyn, this is Jamie. We're pretty happy with the loan growth this quarter. We had 16% annualized C&I growth in the quarter. So, that's always good news. I think that where we are seeing is sort of all over the footprint. We're seeing it in all of our different lines of businesses as well.

I guess, I'll kick it over to George to see if anything else you want to add into that charge..

Thanks Jamie. Yes, Collyn we had a solid quarter and a pretty good year for loan growth both C&I and CRE. We especially got good production out of our new teams in Central Mass and primarily Boston's CRE Group really did very well because of the prior relationships they had, because of the good spot we have in the middle market to deliver on that.

And I think we're able to win some relationships not only on the asset side, but also bring in some wealth management accounts and some cross-sells. So, we have good momentum heading into 2019 as well. We also hired some new teams in New Jersey. We had some good production out of upstate New York. So, on CRE side, we're seeing some good growth.

We had some payoffs that were projected in construction which muted the growth a bit, but we have a good backlog of construction going into 2019. And on the C&I side, we -- ABL had a very strong year and that's not only the Boston market, but the New Jersey market where we have a team of folks that are doing very well.

And we also on the C&I side, saw good growth throughout three areas. And as previously mentioned, Firestone, 44 Capital, all contributed positively to what we see. So we expect 2019 will be a continuation, that we usually get a little slowness in the first quarter due to weather-related stuff. But backlog still is healthy, over $250 million.

So we feel we have a good start for 2019..

Okay. That's helpful. And then just on the mortgage side, you had indicated Richard, I think, or Jamie, whatever, on the SBA, right, slowdown or government shutdown impacted SBA this quarter, but you still feel really good about the outlook for 2019.

So it sounds like you're still very much committed and encouraged by what that business can bring you in terms of opportunity for next year, or this year, is that right?.

Yes, that's right. That's right, Collyn. We really do like that business. We have what we call it, best-in-class shop, down outside of Philadelphia. They are a preferred government lender down there. So we're still able to originate these loans throughout the government shutdown.

It's just that, the final little piece which is a formality for a preferred lender, need to have a stamp on it that allows to be sold into the secondary market. And so we anticipate that as soon as the shutdown is over, we will get those stamps and we'll be able to sort of move forward with the sales..

Yes. And Collyn, the one thing I would add is that, I was talking to the guys and the buyers are actively waiting for the government to open up to consummate the sale. So there's no weakness at all in that process right now..

Okay. That's helpful. And then just in terms of mortgage, obviously, as you guys indicated slowdown in revenue, as you've adjusted on the expense side, you continue to adjust on the expense side and I think you said, kind of neutral impact on earnings.

Again, is that still a business that you continue to be committed to and feel like you can sufficiently weather the storm, even if we go through kind of maybe a cyclical slowdown in that business? Or I just – again, curious how committed you still are to the mortgage side?.

Collyn, I'll say it this way. We think that the guys and gals at FCLS have – they're very experienced. They've been through these cycles before and they know how to operate through them. So when we take a look at a $6 million origination income in the fourth quarter here, that's – certainly it's disappointing.

But as we move forward into 2019, as Richard said, I think what we're looking to do here is to manage those expenses as tightly as we can. We're going to continue to manage those expenses as tightly as we can in order to push through this downturn that we have right now.

And frankly, it didn't meet our expectations in Q4 and we're doing everything we can to boost those expectations going forward..

Okay, okay. That’s helpful. Okay. I'll leave it there. Thanks, guys..

Thanks, Collyn..

And ladies and gentlemen, at this time I'm showing no additional questions. I'd like to turn the conference call back over to Richard Marotta for any closing remarks..

Yes. Thanks for joining us. We look forward to speaking with you again in April for our first quarter earnings call. Thank you..

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