Beacon Financial Corp (BBT) 2012 Q4 法說會逐字稿

Good day, and welcome to the Berkshire Hills Bancorp Q4 earnings release conference call and webcast. (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to Mr. David Gonci, Investor Relations officer. Mr. Gonci, the floor is yours, sir.

Thank you. Good morning. Welcome to America's Most Exciting Bank, and thank you all for joining this discussion of fourth-quarter results.

Our news release is available in 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 a discussion of related factors, please see our earnings release and our most recent SEC reports on forms 10-K and 10-Q.

Now, I'll turn the call over to Mike Daly, Chairman and CEO.

Thank you, David. Good morning, everyone. Welcome to our fourth-quarter conference call. With me this morning are Kevin Riley, our Chief Financial Officer, and, of course, other members of our management team.

We released our year-end earnings last night. I am pleased to report that we delivered on our guidance of $0.54 in core earnings per share for the fourth quarter. This brings us to $1.98 in core EPS for the year, and that does exceed our original guidance.

Now that is a 29% increase for the year, and we maintained double-digit momentum through the end of the year with a 15% annualized increase compared to the linked quarter. We expect to maintain our double-digit core EPS growth momentum in the new year, and you will hear a little bit more about that later in the call.

We achieved record core and GAAP earnings. Our annualized core EPS run rate reached $2.16 a share, and if you include amortization of intangibles, we're really nearing a record run rate of $2.40 a share in generating tangible capital from operations, and that number is also moving north at a double-digit rate. So, positive news.

Now at these levels, we are starting to hit some important profitability metrics that we've been targeting, including core return on assets, which moved over 1%; core return on equity, which moved over 8%; core return on tangible equity, now over 15%; and an efficiency ratio which is below 60%.

I will have a few comments about our recent investor day later in the call, but as I noted on that occasion, these levels are what we're viewing as a base and we plan to keep improving these metrics from here.

We expanded our franchise nicely during the year and we increased our market share in our existing footprint. We also diversified our products and revenue streams, and I believe that we made solid progress in the value that we offer to our markets and in the value of the franchise we are building for shareholders.

Now the numbers flow from a pretty busy quarter. We completed the acquisition of Beacon Federal in October. That added more than $600 million in loans and deposits and seven new branches. Now this gives us a nice foothold in the Syracuse MSA that has a population, as I have said before, totaling about 700,000.

We hired a seasoned commercial leader recently for the Syracuse market, and this is always an important part of our strategy for effective market penetration. The Beacon acquisition, of course, further strengthened our Rome market presence, and now the Syracuse and Rome markets will comprise our central New York region.

We also acquired our first eastern Massachusetts office in Chelmsford with this transaction, which will contribute to the presence that we have outside of Boston.

Now we do expect our cost saves and merger costs to fall right within our targets, and it's important to note that our tangible book value per share was only diluted by $0.30, or 2%, during the quarter in which we recorded this acquisition, and we expect to have fully recouped that dilution by around Valentine's Day.

We'll also have accreted tangible book value over the trailing four quarters, even while absorbing two earnings-accretive bank mergers and paying a 3%-plus dividend yield.

Other accomplishments during the quarter included opening two new offices in the Albany area, bringing our Albany total to 17 as we close in our goal of 20-plus offices there.

And I'd also note that we redesigned and reopened our flagship office in Pittsfield, and it is really a terrific showcase of our retail brand.

We completed the conversion of the CBT systems in November. Now that had been delayed until we completed our own system conversion in September, and with our director and spokesman, Geno Auriemma, recently back from coaching Olympic gold, we hosted a very successful reception at the Connecticut Convention Center in Hartford, and we're moving forward with the redesign and the relocation of our West Hartford office to be our first AMEB-designed branch in that market.

Now speaking of core system conversions, the fourth quarter was the first full quarter of our operations on our new systems. This conversion has gone very well. Our teams are starting to mine its capabilities, and I'd also note that we relocated many of our Pittsfield operations in the second half of 2012 as we gained further efficiencies near our headquarters.

And lastly, we generated a record $400 million in residential mortgages and we were named among the top 10 residential lenders in Massachusetts and Rhode Island. Our team worked a lot of overtime to step up to the increased mortgage demand as we assisted our markets and taken advantage of improving real estate and capital market conditions.

With a close focus on our markets, we are pushing strong organic growth, and I'm going to turn to that now. I will start with deposits, which is a little more straightforward growth story with 5% organic growth for the year and 30% total growth, including acquired balances. The organic themes were similar throughout the year with an emphasis on lower-cost relationship accounts, both commercial and retail. And as I have discussed before, we try to balance volume and price objectives as we continue to pursue market-share growth to improve our scale and our wallet-share advantages.

Our de novo branch growth continues to do well, and we continue to gain commercial-deposit share as a result of our C&I loan growth. Our commercial deposits now fund about two-thirds of our commercial loan book. Our release headlined our strong demand deposit growth in the quarter and near 30% for the year.

Meanwhile, our fourth-quarter cost of deposits decreased to 59 basis points from 73 basis points on a year-over-year basis and from 66 basis points compared to the prior quarter.

Organic loan growth -- of course, it has been led by commercial business loans. Now they were up 25% for the year as our commercial teams have continued to have good success competing against the national banks.

Now this is very solid business for us at this point in the cycle, with growth coming from account acquisition and, frankly, better utilization. And as I mentioned, we brought in a commercial leader for our Syracuse market in January, and very soon we are going to be announcing another team in Middlesex County in eastern Massachusetts, which will complement our Westborough and Woburn teams. Now this is, by the way, the most populous county in New England.

So I think we've got a great opportunity to augment our strong commercial momentum in these markets.

Residential mortgage originations have also contributed to organic loan growth during the year, and, of course, this is related to the higher business volumes that I spoke about earlier, together with the benefit of our expanded eastern Massachusetts lending operations.

So based on strong ongoing business development, we continue to manage runoff of targeted commercial real estate as we build a balanced and diversified portfolio. And this is where we are going to see some lumpiness in net balances quarter to quarter. For instance, this quarter we reduced the old Legacy Bank national portfolio again, which, by the way, now is a half of what it was at the beginning of the year. And Pat, you can give some additional color on this during the Q&A, if needed.

And that is what we are doing. We are pruning acquired loans that we have marked and nonrelationship CRE loans, and we're offsetting that with 25%-plus growth in relationship-based C&I loans. And that's good business. And that gives us more opportunity to further drive profitability and quality.

Now as I noted last quarter, we have multiple levers we are working for volume and margin management, and changes in any one quarterly component may not reflect our forward macro outlook. And Kevin will address this and some other items when we get to him in just a minute.

Our objective is to deliver on our planned bottom-line growth while building our franchise share and protecting the long run margin, net of credit costs, and there were no changes in the fourth quarter in our confidence in executing that strategy.

So to conclude my remarks on revenues, our release noted our near-record quarterly wealth management fees. They were up 13% year over year, with business generation during the year accounting for 11% of the portfolio at year-end. Quarterly insurance revenues were also up 20% year over year, primarily due to the improved seasonality and revenue flows, with commercial insurance revenues up 5% on the year, excluding seasonal influences. And we will end the year, frankly, with a very robust new business pipeline in that business line.

Our total fee income was 27% of our combined margin of fee income, and as you know, this ratio does decrease when we acquire smaller banks, but future revenue synergies are expected to help offset what is inevitably a decrease in mortgage volume, and ultimately, this will keep us on track for our goals, which is income contributing more than 30% of our total revenues.

Now let me take a pause here. I will ask Kevin to provide some more details on the quarterly results and also on our forward-looking guidance, and then I will wrap up. Kevin?

Thank you, Mike, and good morning, everyone.

As Mike has just mentioned, our core earnings for the fourth quarter came in at $0.54, and for the full year, they were $1.98. Our GAAP earnings for the quarter and for the year were $0.38 and $1.49, respectively.

As you know, our GAAP earnings include noncore income and expense items relating to our mergers and our core system conversion. These non-core items equated to about $0.16 in earnings for the fourth quarter and $0.49 for the full year. These costs are now mostly behind us; however, there will be some final charges as it relates to the final system integration of Beacon, which is planned for the end of the first quarter.

Now let's look at the balance sheet. With Beacon being added in the fourth quarter, loans increased by 17% and deposits increased by 19%.

We continue to have momentum in our organic business development, which in deposits resulted in them growing at a 3% annualized rate for the fourth quarter, excluding Beacon.

As Mike mentioned, on the loan side, we offset new loans with the sale of our mortgage loan production and the repositioning of our commercial loan book post-Beacon.

For the quarter, our net interest margin came in at 3.67%. As in prior quarters, the realization of purchase accounting fair-value marks has moved the margin higher or lower to our expected core run rate. This quarter, the impact was estimated to be about a positive 18 basis points. So net of this, our underlying margin for the quarter came in around 3.50%, as we projected.

As with other banks, we are experiencing pressure on the margin as deposit rates near zero and loans and securities continue to reprice in this low-rate environment.

Looking forward, we do expect to see our loans and deposit growth rates to be in the mid-single digit range on an annualized basis. This is similar to the organic results of 2012. There could be some fluctuation in this rate of growth from quarter to quarter, as we have seen in the past.

So for 2013, we are projecting that our margin will stay in the range of 3.40% as we continue to stay slightly asset sensitive in case rates start to move higher. Margin pressure will persist as long as we stay in this low-rate environment.

Our growth in C&I lending has helped fuel strong growth in interest-free demand deposits, which has allowed us to let some higher-cost CD money go. We continue to focus on our product pricing and balance-sheet management in order to minimize margin erosion.

For the first quarter, our outlook for net interest income is around $41 million and then growing thereafter.

Our fee income for the fourth quarter came in at $15.8 million and was what we expected with the operation of Beacon being added. For 2013, we are expecting fee revenue growth to be in the range of growth of that of the balance sheet, mid to high single digits. But we do expect the revenue mix to change slightly during the year with mortgage fees slowing and the commercial fee revenue picking up with some speed.

For the fourth quarter, we also recognized about $1.4 million in net security gains. The majority of this gain came from our preacquisition investment in Beacon and the benefit was recorded upon merger date. We continue to maintain a managed portfolio of bank securities in our region, and over the years, this portfolio has provided us with strong dividend yields and a significant noncore benefit when institutions have become merger partners.

Our loan loss provision for the quarter was $2.8 million, which exceeded our guidance.

Overall, credit metrics continued to be positive and our provision continues to exceed our net charge-offs as we grow the allowance to cover loan growth and the acquired portfolios due to bank acquisitions and the impact of loan purchase accounting.

Our allowance now stands at 83 basis points of total loans. If you compare the allowance for loans not acquired through acquisition, which has their own credit marks, it stands around 1.26% as of year-end. Our portfolio of quality metrics continue to remain favorable and are projected to further improve in 2013.

So at this time, we are anticipating our provision to be around $10 million for the year, with some variability by quarter. We believe this provision will cover both net charge-offs, as well as coverage for our new loan production.

Moving onto noninterest expense, our GAAP numbers included some remains of our core system conversion spent, as well as expenses associated with the Beacon merger, which these costs have come in below our original expectation. Our targeted cost saves of 30% relating to the Beacon merger are on track to be fully realized upon their system conversion, which will occur in March.

Our core expense for the quarter was $35.4 million. This was larger than we expected and caused our efficiency ratio to back up a bit. We feel most of this increase is temporary and only fourth quarter related. We feel we have some running room to improve this metric as we move through 2013 with merger cost saves, efficiencies from our new core system, and the benefits of increased scale.

So we are looking to keep our core expense growth to the low single digits for 2013. This will continue to allow us to produce positive operating leverage as we have in the past.

Our core tax rate came in at 30% for the year, and this was up from the 27% we anticipated at the start of the year. This increase was mainly due to increased earnings.

Our fourth-quarter core tax rate was 29% as we trued up our annual rate following the Beacon merger. For 2013, we expect our core tax rate to be in the range of 32% to 33%. This is due to revenue growth and the tax preferred items having a smaller impact.

So for 2013, we are estimating our core earnings per share to be in a range of $2.27 to $2.32 per share, and for the first quarter, we are expecting $0.54 in earnings per share of core earnings, due to the shortness of the quarter and the full benefits of the Beacon acquisition not yet being fully realized, which, when realized, will increase quarterly earnings per share thereafter.

Future noncore charges for Beacon yet to be incurred should be less than $4 million, and most of it should be completed by the end of the first quarter.

As Mike has discussed, we have guided our profitability measures to new levels and we plan to improve on them further in 2013. We look for our return on equity rate to be approaching 9% by year-end and we are looking for the growth in core earnings per share to be closer to 15% or better.

As I described at our investor day, we are focused on the metrics that we think are most important in building our franchise value and the value of our stock. In 2013, we will be constantly working on the -- build on the foundation that we laid in 2012.

With that, I'd like to turn the call back over to Mike.

Thanks a lot, Kevin.

So our guidance shows continued strong growth and profitability improvement, and it is in line with the guidance we provided a couple of months ago at our investor day. Now we are pretty focused on the challenges and opportunities in front of us in the new year. I think the industry challenges are pretty widely agreed on -- margin pressure due to low rates and business volume uncertainties due to an uneven economy. But by positioning ourselves strategically and reacting flexibly, we believe that we are prepared to deal with those challenges.

Our greatest opportunity is to add revenues in the markets that we have invested in in 2012 -- eastern Massachusetts, northern Connecticut, and central New York. We have recruited the right leadership in these markets to bring in business, and I think we have got a track record of delivering revenue from this kind of market expansion. And as I mentioned, we have already started the new year with further recruitment to augment our penetration in these markets.

Our other opportunity is to work the levers and mine the information that we have at our new scale to flexibly deliver topline and bottom-line accretion from our infrastructure investments. We've brought in new talent, we've expanded our product set, and we've converted our systems to much more capable technology.

I've made comparisons to the character of [Jonah Marcus] in the Moneyball movie. And we intend to run our business with this same kind of clear-eyed and incisive decision-making. We're combining this approach with the Six Sigma disciplines that we've been using for years, disciplines that sharpen processes, improve service, enhance teamwork, and ultimately increase profit.

Now we've moved our efficiency ratio into the high 50s and we're quite focused on keeping this moving in the right direction. At our investor day, we set out new long-term objectives -- to maintain the double-digit pace of EPS growth and to move the ROE into double-digit territory. Now this would get us to a $3 EPS run rate by the end of 2015 and, as a result, a tangible book value per share approaching $19 or more.

And as always, we also talked about our brand and our culture at investor day. And I think it's going to take a passionate, focused, and committed team to reach those targets. I think that is the kind of team that we have built here, a team, frankly, that delivered nearly 40% revenue growth and a 29% increase in core EPS in 2012.

Now the market cap of the Company has recently climbed over $600 million due to these efforts, and the total return on our stock was nearly 11% in 2012. We're focused on the drivers that will propel customer preference in our markets and the results that shareholders value.

Now we enter 2013 with confidence in our condition, our prospects, and our strategy. And I will conclude my remarks as I did in New York. This team is in. It is all in, and we are going to give you everything we have to deliver the guidance and the value that we have set out here this morning.

Now this does conclude my prepared remarks, and I now invite the operator to open the lines for questions.

(Operator Instructions). Mark Fitzgibbon, Sandler O'Neill & Partners.

Mike, the first question I had related to Greenpark. I wondered if you could share with us what the volume of loans they originated this quarter was and what the gain on sale margins look like?

Sean, you got those numbers?

Sure. The net gain on margin is running in that 110 to 115 basis-point range. And Greenpark has been averaging about 75% to 80% of overall production.

Of the Company's overall production?

Correct, the Company's overall mortgage production.

Okay. Secondly, on the bank stock portfolio I wondered if you could share with us how big that portfolio is and roughly how many positions it entails?

We can give you a general idea. It runs around -- we run it somewhere between $20 million and $25 million, and it probably has -- I don't know -- a couple dozen banks.

Okay. And then, lastly, on acquisitions, I wondered if you feel ready to do an additional bank acquisition with Beacon having just closed recently. And also, you have been sort of quiet on the insurance and asset management acquisition front for a while. Is it likely that we will see some transactions in that space in 2013?

I would say this, Mark. We are in the same position we have always been in with respect to acquisition ready.

I would tell you this. Our guys are pretty jazzed at the moment of seeing if they can get from a Two Sigma to a Three Sigma to a Four Sigma in all of their areas right now, and so process improvement is on the front burner. If acquisitions become available, we will do the same thing we always do. We will take a look and make sure that they match up to our parameters.

And as far as insurance and wealth management goes, I know, Pat, you have had conversations and you have talked to people on both the insurance and wealth management standpoint. So if the numbers work, we would do something, but if the numbers aren't working, we won't. So I don't think that we have any burning desire to run out and do something just to do it.

Thank you.

Damon DelMonte, KBW.

My first question has to do with the margin. Kevin, you mentioned in your comments about roughly 18 basis points of benefit this quarter from accretable yield. So should we look at the starting point for the first quarter's modeling perspective of around 3.50% then, and from there have it trend down to the lower 3.40%s throughout the year?

Damon, I think that's a good estimate, yes.

Okay, okay, great. And then, with regard to the expenses, I think you mentioned $35.4 million is your core operating expenses for the quarter. You also talked about some additional noise in there, I think from the timing of the BFED system conversion, and then you talk about low single-digit growth for the year. So, what's a good starting point for the expense base to build in that low single-digit growth for the year?

Somewhere around $34 million.

Okay, all right. So you expect to be able to get that savings from $35.5 million or so down to $34 million in the first quarter, and then from there it will build just normally over the year?

That is correct.

Okay. All right, that's helpful. Thank you. And then, my last question, could you just talk a little bit more about the targeted runoff of some of the CRE loans and maybe what you expect to see in the way of volume on a quarterly basis?

Yes, Pat, you've got some detail on that. Why don't you give us a little update?

Sure. Damon, Pat here. How you doing?

Good, Pat. How are you?

Good, good. Just to give you guys a little color on the quarter, I think that is -- because there was a lot of different moving parts here, let me talk about Beacon and CBT first, okay?

Beacon, we acquired in roughly mid-October. We had some runoff in the fourth quarter, and that was related to loans we had marked that we moved out. So there is some decrease in that portfolio. We are optimistic as we move into 2013 with our new leader, Chris Papayanakos, and enhancing our team up in Syracuse that will grow that market on a modest basis. And again, it will be a C&I-type focus, primarily.

In Connecticut, we acquired Connecticut the end of April, and pretty much our portfolio has stayed flat to down a little bit through normal amortizations, and that is what we experienced in the fourth quarter.

I think the big numbers that you focus on is what was the core bank, including our central and eastern Massachusetts operations, including ABL. And in the fourth quarter, we grew our C&I loans another 2.5% from September to December. And in the CRE loans, we are off about by about $10 million. So effectively, we were about flat all in for the quarter when you take and you add up those four pieces.

A lot of our runoff in the fourth quarter was two things. A lot of it was some hospitality loans. We have been gradually reducing our hospitality exposure as we have acquired markets that had hospitality exposure. And the second thing is when we acquired Legacy, we had about $70 million of out-of-market commercial real estate loans, primarily investor-owned income-producing properties. We saw that reduced by roughly half and we probably saw half of that decrease in the fourth quarter.

That is the summary of how we got (multiple speakers)

Now your pipeline, Pat, is strong, but again, there may be lumpiness in a quarter during the year.

I think we will end the year on a net basis. I think we gave 5% guidance for loan growth on a net basis. Again, that is going to include continuing to move out some of the national loans, some of the CRE loans, and some of the marked loans that we have. That is what we are supposed to do and that is what we will do (multiple speakers), and we'll replace it and we'll offset it with growth in the new C&I stuff.

And the thing I would say positive, Damon, another positive thing is that last year we increased our commercial commitments 43% year over year, and probably 70% of that was in the C&I space. And as you build that out throughout the year, again, you will start seeing use building or outstandings, and that is another (multiple speakers)

So I will anticipate another question is going to come up, and that is pipeline.

Pipeline is --

Thanks, Mike.

Pipeline is sitting today at about $100 million, fairly solid, as we move into this (multiple speakers)

So it's actually up. That is the only other questions I can think to ask for you, Damon.

I appreciate it. With that, I will say thank you and enjoy the rest of the week.

Collyn Gilbert, Stifel Nicolaus.

So just a follow-up on the loan discussion. So in terms of moving out some of these nonrelationship CREs, is this just fixing things as you go along or is there more of a larger strategic move going on here?

It's both. We stated about a year and a half ago, maybe a little longer, that diversifying the portfolio, rebalancing the portfolio was important to us. We needed to reduce our commercial real estate outstandings and increase our C&I [things] for a lot of reasons, including profitability and relationship gathering.

And when we do buy a bank, Collyn, we'll mark the portfolio, and the first thing we look at is, okay, if we mark a portfolio and we pick up some loans that we really don't want long term, how fast can we get them out of the bank?

And so between those two things, we're going to continue to recalibrate. We're getting to a point where, I'd say, at the end of next year from a CRE and C&I standpoint we will probably be where we want to be strategically or close to it. But anytime we do an acquisition, we are going to pick up loans that don't fit our model. It is going to be important for us to get rid of them as quick as we can.

Okay, and that feeds into my next question. As you look at potential acquisition targets, I would assume that most of the banks that would be available for sale would be more real estate oriented, whether it is commercial real estate or resi. So I just didn't know if that would deter you at all or you're fine doing it and you'll just, as you said, recalibrate as you go?

I think we're fine doing it and re-calibrating as we go. We've shown the ability to do that.

I just think it's important that everybody understand the numbers as we go, and it's important to look, as I said before, at the complexion of our numbers. So if we have a quarter or we have two quarters where even on the deposit side -- let's say deposits don't look like they're growing. You look underneath it and you say, well, hell, you had 20% increase in your DDA. You want that.

It is the same thing with the loan portfolio. If we are putting on C&I loans and C&I relationships at 22%, 23%, 24% on an annual basis, but it's netting to zero or to 4% or 2%, we don't necessarily care about that because it's giving us a decent calibration of the portfolio and it's where we want it to be.

Great, okay, that makes sense. And then, does this movement at all change the guidance you guys had given, I guess, of looking at average loans, I think you said, of $4.4 billion for 2013?

No, actually, I think we're really hitting the sweet spot now, and frankly you'll hear more about this team we just hired for Middlesex. They come right in on that level, don't they, Pat? These guys are middle market right down the middle for us.

Right down the middle, Mike. Collyn, these are -- if you really look at the new team we just recruited and will officially (multiple speakers)

You have to get this announcement out today, after we are talking about it this much.

Yes. But their average loan is very similar to our central Mass team, slightly under our ABL team. It is middle-market, middle-market type relationship.

It is good stuff.

It is good stuff.

Okay, okay. But I mean in terms of total loans target for the year?

Our total loans, we're going to continue to aim right for what we have given for guidance, which was, I think, a 5%, Kevin, is that what you gave?

Yes.

Okay, okay (multiple speakers)

Should have been. If you didn't, that's what it should have been.

Okay, okay, that is helpful. And then just one final question, the movement in the securities and borrowings, did you just see some cash flows from the securities to pay down some borrowings in the quarter, or just give us a little bit of color as to what was going on there?

Similar to the repositioning of the commercial loan book, we looked at the securities and the low rate environment. As we -- we got Beacon securities at the lowest rate environment, so we mark them that -- at that rate, we felt that some of these securities we didn't want for the long haul. So we jettisoned them.

We did some, also, borrowing re-do at that lower-rate level, too, so we looked at -- it was time to get out of some of these securities because they just -- some of them were actually yielding almost a negative yield. So we just felt it was good to reposition our investment portfolio to have stronger earnings on it.

Okay, great. And then just one final question, the charge that you guys took, the merger charge of the $7 million, I think it was less than the $14 million that you had talked about, is that because part of that ended up flowing through Beacon or should we expect more charges going forward?

As I just mentioned, Collyn, in the first quarter we are expecting about another $4 million (multiple speakers)

Sorry, okay.

speakers) pick up some of the costs of that merger.

Okay, sorry about that. All right, thanks, guys.

Collyn, one other thing, and I just want to add. Everybody has asked the same question and I hope we have answered it adequately on the whole loan growth question.

But this really does go to the heart of what we are trying to do in the Company with mining and data mining, and making sure that when we take a resource and we put that resource to work, that that resource is getting us back the best return we can on that investment. And so, these moving parts and the recalibration across the Company will probably continue every time we do an overall Six Sigma project, and that is the basis of where we are headed.

Okay, that is helpful. All right, thanks so much, guys.

Matthew Kelley, Sterne, Agee.

So just to stay on that subject, so you end the year at $4 billion in loans. 5% growth gets you to $4.2 billion by year-end. It's an average of $4.1 billion. That is a difference versus the $4.4 billion average loan balance you talked about at the investor day. So what is that -- how do you make that up?

We will stay with those numbers because those are the numbers we're giving you. If we do better than that, then good for us.

But again, the loans that we would be putting on are better margin loans for us, number one, and two, they bring with it additional fee income. So if you take down two non-relationship type real estate loans or some loans with a national portfolio and you jettison those, and you replace that with a solid middle-market C&I loan outside of Boston or in central New York, and we pick up the wire fees and the cash management fees with that, we will make that up on the bottom line. That is what we have calculated.

So I don't know if anybody here wants to debate me on that or agree or disagree, but basically that is the premise for our bottom-line driven approach.

Got it. So just so I'm clear, the offset that allows you to keep your current guidance range is more fee income and potentially an improvement in the overall asset yield in the mix shift? Is that really what I am hearing?

Perfect.

Okay, all right. And then, the total securities balance, is that going to stay right around the same level throughout the year? I assume you're not adding anything or re-levering in any way?

We will probably add some more during the year, as we go forward. As we have seen, there is a positive time to do some investments, but we will be adding to the portfolio. So we do see that increasing a little bit over the year.

Okay. Pat, can you just give us a little sense on what the C&I loan yields are looking like in the origination pipeline right now?

Gross or net?

Both.

Both. I would say that the average margin is between [250] and [300] over LIBOR. Then you see fees that go on the unused commitment and fees up front. They (multiple speakers)

Yes.

-- generally run 0.50 and 0.25, so that is typical in the market. And probably the gross coupon is in the mid 4s, if you take in some of the fixed-rate loans we make that average out.

Okay, okay. And then, is there going to be a runoff of the remaining $30 million, $40 million of the Legacy out-of-market CRE this year?

That is where, Matt, you get into some of the lumpiness of it. Because those loans all have prepayment penalties, which is good, so we pick up fee income when they pay out.

So the question is, are we going to run the rest of that off over the course of the year? And the answer to that is (multiple speakers)

Probably not.

We don't know.

We don't know.

Because we can't jettison them just because we want to.

Correct. (Multiple speakers).

Yes.

Kevin, question for you. The 3.40% margin guidance, how much accretable yield benefit does that include?

It includes about $1 million to $1.1 million, and we believe that accretable yield will be stable throughout all quarters of 2013.

$1.1 million for (multiple speakers) the year? Or for quarterly? (Multiple speakers). Quarterly, then, I assume, right?

Per quarter (multiple speakers). And the reason why we looked at the increase of 18 basis points, that was unexpected over that run rate. We believe that run rate will continue through 2013.

Okay, and then what about as you look out into 2014? How much accretable yield do you project then?

It starts decreasing. I got to tell you, it is out there -- I don't know as we move through 2013, that loan payoff, that changed the accretable yield level. So I will stay with what I got for 2013 and recalibrate as we move toward 2014.

Okay, and then a last question. In Greenpark, in the mortgage operation, what are the gain on sale margins currently? And could you just quantify pipeline or rate lock at September 30 versus 12/31 to give us a sense of the volume change?

From a pipeline perspective, we are looking at about $125 million, and that is bank-wide based on the percentages that I talked about prior. Three months ago, we were probably looking at the $175 million range, three months ago.

From an execution perspective, from a net basis, we are looking at 110 bps to 115 bps. From a gross basis, we're in that 150 bps to 160 bps range.

That's what you're doing currently?

Yes.

Okay, and what was that during the 3Q peak?

That stayed about -- that has stayed pretty consistent.

Okay, got you. All right, thank you very much.

It appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Michael Daly, President and CEO. Sir?

Thank you very much. This does conclude the call. And of course, I want to thank everyone for joining us, and, of course, we look forward to speaking with all of you again in April when we have a chance to discuss our first-quarter results.

And we thank you, sir, and to the rest of management for your time. The conference is now concluded. We thank you all again for attending today's presentation. At this time, you may disconnect your line. Thank you and take care.