Beacon Financial Corp. (BBT) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Berkshire Hills Bancorp Fourth Quarter Earnings Release Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Ally O'Rourke, EVP of Investor Relations. Please go ahead.

Good morning and thank you for joining this discussion of fourth quarter results. Our news release is available on the Investor Relations sections 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. With that, I’ll turn the call over to Mike Daly, CEO. Mike?

Thank you Ally, good morning everyone. Thanks for joining us this morning for our fourth quarter call. I’ll provide an overview of the quarter and the year and then I’ll turn it over to Josephine Iannelli, our Chief Financial Officer. She will take you through some of the details in our financials and then I’ll wrap it up. I will start with our performance in 2015. It was a solid year for us. We recorded 13% core revenue growth, 16% core EPS growth, and double-digit loan and deposit growth. We expanded our margins and we posted significant improvements in our profitability ratios so, a good year. For the fourth quarter core EPS came in at $0.54, that's a 13% increase year-over-year. Core revenue grew 2% quarter-over-quarter and 17% over the same period last year. And I think these results reflect a healthy combination of disciplined growth, expense management, and continued solid credit quality. Total loans grew at a 4% annualized pace in the fourth quarter and 8% for the year excluding of course the impact of acquisitions. And this included 9% organic growth in commercial loans and 13% organic growth in the residential portfolio for the year. Overall commercial loan growth was 3% annualized in the fourth quarter as some originations did fall into the first quarter and we continued to execute on some additional sales and runoff tied to our margin strategy. We continued to see above average originations from our Eastern Massachusetts and Albany, New York market and I do anticipate commercial loan growth will be back in the mid to high single-digit range and on that basis for the first quarter and I will talk a little bit more about that little later. I do think though this team has done just a great job executing on our balance sheet strategy and as a result we were able to stabilize and grow our margin in a competitive market and we are able to drive our ROA and our ROE metrics toward our goals. The continued runoff of super prime indirect auto loans is a piece of that along with disciplined originations of commercial and residential loans and the sale of some participations of good but lower yielding loans. Firestone's diverse portfolio has also been a benefit and the integration of that team has gone very well. With respect to deposits we posted 6% annualized growth this quarter and again 10% for the year, of course exclusive of the Hampden acquisition. We continue to focus on relationship based DDA growth and those balances grew by 8% in the fourth quarter and a very healthy 25% for the year. We completed the sale of the Tennessee branch in December and we ended the year with 93 branches in our footprint. And as we’ve said before, we continue to evaluate the overall branch network to ensure we are meeting customer demand at the appropriate level and at the appropriate cost. And this includes potential new offices in high traffic areas and further consolidation where the economics have changed. We also recently introduced a unique instant feedback tool for our customer's that’s going to be available in all of our branches across the footprint. Now this simple interface allows each customer to rate their experience in real time and it allows us to better track service levels and customer engagement. And we anticipate the rollout to take place over the next several months and the data should lead to even better decision making at the branch level. Now with that I am going to turn it over to Josephine. She’ll walk you through some more of the detailed financials and then I’ll conclude. Joe?

Thanks Mike. Good morning folks. This was another strong quarter for us and a solid way to finish the year. We demonstrated disciplined growth, solid expense management, and positive shareholder returns. Core EPS came in at $0.54 for the fourth quarter and $2.09 for the year compared to $0.48 and a $1.80 for the same periods in 2014. Our corresponding GAAP EPS was $0.52 and $1.73 in 2015 reflecting the non-core charges mostly related to the recent acquisitions. We had solid loans and deposit generation this quarter. Our effort to shift the balance sheet mix towards higher yielding commercial loans and away from lower yielding assets and to evaluate opportunities at the relationship level continues to benefit our margin and profitability metrics. Our loan yields improved and we avoided the modest margin compression before accretion that we were anticipating. Our net interest margin ended the year at $3.35, a 12 basis point improvement over the fourth quarter of 2014. The margin before loan accretion remained steady at $3.22 this quarter and represents a 10 basis point improvement over the fourth quarter of 2014. We expect to continue to keep loan yield compression to a minimum in 2016 even with the continued low rate environment. I anticipate the overall margin to remain steady for the first quarter. As a reminder, our forward starting balance sheet swaps begin to roll on in 2016 and will add incremental cost to the margin. We continue to examine the swap strategy, the overall cost in today’s market for asset sensitivity, and view it as insurance against a future rate spike. Given the uncertainty in the environment we will remain nimble and continue to actively evaluate this position. Purchase loan accretion for the fourth quarter totaled 2.4 million. We moved out some additional acquired impaired loans during the quarter and recorded more recoveries than we were initially anticipating. As you’ve heard me say in the past, I expect the recoveries to continue to be bouncy in future quarters as we work through the Hampden and Firestone acquisitions. Scheduled accretion came in under 0.5 million as expected and should remain in that range next quarter. Total purchase loan accretion including recoveries should come down however. Overall net interest income for the first quarter in 2016 is expected to be generally flat, maybe up a little quarter-over-quarter. Fee income grew at 19% annualized pace in Q4. Specifically we were pleased with the growth in the loan category which included stronger swap fee income as we closed the year. I expect fee income to show further improvement in the first quarter, including seasonal improvements in insurance and wealth management and solid loan-related income. Now taking into account the improvement in non-interest income, we expect overall core revenue to be up in Q1. The provision came in at $4.4 million in the fourth quarter, exceeding net charge-offs and reflecting continued growth. We expect the provision to remain in that range or slightly below for the first quarter to match our loan growth expectations. As we look at expenses, I'm pleased with the progress we continued to make here. Core non-interest expenses were up 2% quarter-over-quarter, allowing for the full impact of the Firestone acquisition. At this point, we feel we've achieved the 35% cost savings expected from the Hampden deal. We may continue to see some additional benefits as the year goes on but we've hit our target. We continued to make additional investments in developing our business lines throughout the quarter. This included the expansion of our wealth management and small business teams, as well as further developing revenue synergies with Firestone. Our efficiency ratio came in at 60.6% and we're targeting to improve on that as we move through 2016. We expect non-interest expenses to remain generally flat in the first quarter or even come down a little as we continued to look for more opportunities. Our core tax rate for the fourth quarter was 16%, in line with our guidance. Our GAAP tax rate was 12%, which reflects the tax benefit related to the non-core charges. Looking at our expected tax rate for 2016, we've committed to some new tax advantages to investments with more in the pipeline for later in the year. We anticipate that the full-year core tax rate will be in the 20% range and that the tax benefits will be more back loaded in the second half of the year, due to timing of the underlying projects and the mechanics of the tax accounting. In the first quarter, we expect our core tax rate to be closer to 30%. Now I would also note the related charge that gets recorded to non-interest income will also decrease in the first quarter, offsetting some of the impact of the higher tax rate. This charge will increase in subsequent quarters as additional tax benefit credits are recorded. So as we look to Q1, we expect to deliver $0.54 in core EPS. This would result in an 8% increase year-over-year with stronger revenue growth offsetting a higher tax rate. Our profitability measures are similarly expected to show good improvement year-over-year due to the benefit of our operating and acquisition strategies. Non-core charges for the fourth quarter totaled $1.1 million and were primarily tied to the recent acquisitions. Our core return on tangible equity came in at 12.7% to end the year. That’s a 6% improvement over the fourth quarter of 2014. At quarter end, our tangible equity was 7.4% of tangible assets, up from 7% in the prior year. Tangible book value per share ended the year at $17.84, a 4% improvement year-over-year, despite the addition of Hampden and Firestone. We continue to focus on disciplined, profitable growth in diversifying our revenue sources. Credit remains very strong and we intend to remain selective, emphasizing margins, profitability, and relationships above all out. You combine this with our diligent expense management, and I believe our team is poised to do very well in 2016. With that, I’d like to turn it back over to Mike.

Thanks, Josephine. That was a lot and you did a great job. So as Joe said, we think $0.54 is a good number for next quarter and we're pleased with how 2016 is starting. And if there's any question about the effectiveness of last year’s reinvestment strategy, this is good evidence of it. Now we're expecting to deliver a $0.54 quarter with a 30% first quarter tax rate and lower purchase loan accretion. Now let me just go back to something I talked a little bit about earlier, which is an important component of our 2016 strategy. I think we demonstrate we can grow this company successfully both organically and through acquisition. We have the ability to be nimble and to diversify, we are gaining share in our footprint, and we are extending our reach, we are executing on our balance sheet strategy that addresses margin pressures and firmly adhering to our credit disciplines in an uncertain market. We are steadily growing our earnings and our shareholder value and we’ve made improvements to our profitability ratios. These improvements of course could be better. And 2016 is about continuing to get the ROA, the ROE, and the efficiency ratio more in line with our high performing peers. To that end we are making further adjustments to our balance sheet strategy. So while we intend to grow our business volumes, our first focus will be on profitability and diversifying our revenues. And we expect that our commercial loan originations will remain robust. But we do expect to sell more of that loan production going forward. Combined with the continued development of our SPA and financial institution businesses this is expected to translate into further fee income growth. So loan balances on a balance sheet our expected to increase in the low to mid single-digits in 2016, of course depending on market conditions with deposit growth to match. Now this focus on further improvement to fee income revenues should move us closer to our goal of a fee income to total revenue ratio of 30% and move the needle on our returns. Now I am sure you saw the Board voted to raise the dividend by another 5% this year, that keeps the dividend yield close to 3% for our shareholders. We also posted a double-digit improvement in our core return on equity this year and ended the year with a core return on tangible just below 13%. Total shareholder return in 2015 was over 10% and that’s good performance in an otherwise flat market. So looking ahead we will remain focused on developing the revenue channels we see in front of us and closely monitoring our expenses. And I believe this discipline will give us the long-term positive operating leverage we need to continue to improve our profitability. And while the economic and geopolitical issues are way out of our control, we have learned to act with flexibility, taking advantage of those areas that can be most beneficial to our growth and profitability, and this I believe will create a strong, consistent level of franchise value for our shareholders. Now with that I’ll open it up to any questions.

[Operator Instructions]. And the first question will come from Casey Haire of Jeffries.

Hi, good morning guys.

Casey, how are you?

Good, Mike just wanted to follow up on your latest comments there, just on the -– it sounds like you guys are going to be -- the originations are going to continue at a pretty good clip but you are going to be looking to sell more of it, is that why we saw the loan related fees tick up nicely this quarter and we should expect that to sort of stick as you sell more of the production going forward?

Yes, I mean that is the beginning of a strategy that we think could be helpful to us and as you know, the fastest way for us to improve that ROA is to increase the fee income revenues as a percentage of overall revenues. Joe, did you want to add to that?

We also had strong swap originations in the fourth quarter too.

Okay, so alright. So there were some capital markets activity as well. Okay, and then Joe on the forward starting swaps I believe its 300 million, can you just refresh us on when that comes in and what kind of Fed policy do we need for those to be in the money? And then it sounds like you guys are navigating or monitoring that and you mentioned being nimble in the event we do get a lower for longer Fed policy, what can you guys do to offset that pinch to NIM, its coming I believe next quarter?

Sure Casey, so it is 300 million there in three equal tranches. They start to phase in, in the first quarter towards the end of the quarter and then they gradually phase in and they will be fully implemented at the end of the Q3. So they provide a three-year coverage if you will and the average weighted coupon is 230. They’re hedging our short-term borrowings. And as it relates to being nimble, we actively managed the balance sheet both from yield and duration and to the extent that our -- bouncing it with our mortgage portfolio and durations from there, we’ll continue to monitor them and make sure that we stay between asset-sensitive and neutral as we navigate it.

So Joe, I think that when we look at our levers, it is one of the reasons that we’re taking the tact we are with increasing our fee revenues. We've got the lower tax rate and the lower -– the second half of the year. I think there are lot of levers. Because, that protection to me is critically important and we just don’t know anymore where rates are going to go and when, so we just have to be prepared for whatever environment gets thrown at us.

Okay. Understood, I mean it will -– I mean, so if I look at your average borrowing cost, just under 1%, this will -- I mean this -– the 230 coupon will obviously tick that up. So I mean, we will start to see the funding cost ratchet up in the next couple of quarters, if you guys do not mitigate this current position?

That’s a fair statement, yes.

Okay. Alright, and then just lastly on the M&A front obviously you guys got two deals under your belt last year. Obviously, in the New Year with the pricing coming in, I’m just wondering if you guys are seeing any opportunities that are of interest?

I actually think that 2016 is going to be a very tough year for a lot of banks. We've got a pretty good strategy in place, we feel pretty good about executing on that strategy and the more we execute on our strategy, the more strength we get in our stock. I think the opportunities will be there for us to help and to partner with companies that are going to struggle. So if I had anything in the pipeline I wouldn’t tell you Casey, but I just think that as we head into 2016, if the environment stays the way it is, I think there will be opportunities for us to do some partnering.

Excellent, fair enough. Thanks.

Thank you.

And the next question comes from Mark Fitzgibbon of Sandler O’Neill.

Good morning.

Hi, Mark. How are you?

Terrific, thanks. Josephine, I wondered if you could help us think through the margin, some of the purchase accounting adjustments are going to be running off during the course of 2016 and I know that you said the reported margin would be fairly stable in 1Q, but is it likely we’ll see the reported margin declining modestly during the remainder of 2016 as those purchase accounting adjustments run off?

Yes, I would say if there is no rate change we would expect to see pressure on the margin throughout the remainder of the year. We’ll look to minimize it. You will have the impact of the swaps and as you said, the lower purchase loan accretion. But given all the ground work we've laid here in 2015 with our margin strategy, we’ll be looking to manage that in a very disciplined approach.

Okay. And then secondly, I heard what you said on the tax rate and you indicated the other income line would be less negative. Could you help us, sort of give us a sense for rough timing on those, how it will flow through during the course of the year?

Yes, so if you look at where we were in 2015 and F9 does a nice job of reconciling the other income line with our tax rate, you can get a sense for the bottom-line impact. You can back into it, Mark, if you're assuming a 30% tax rate and again, it’s good of a proxy as any for 2016 in proportion to how much less charge you’ll see flowing through in the other income item.

Okay. And then lastly, I wondered if you could share with us the size of the commercial loan pipeline and also, how much -– I know you're making a big push in equipment financing, how much of that stuff you booked in the fourth quarter?

Mark, this is George. Our pipeline is holding steady at a $150 million and we're getting a good mix of that between commercial real estate, C&I, ABL and really a strong construction backlog as well. So we feel pretty good about 2016.

About the equipment financing, it’s a….

The equipment financing primarily through Firestone really had a good end of the year. There is a little bit of a seasonal business and December is generally a good month for them, right.

Well, just curious in total volume how much did you book in Firestone in 4Q?

Its approximately $30 million. Their transactions move off very quickly Mark. So that 30 million bucks basically less than flat quarter-over-quarter.

Great, thank you.

Thank you.

And the next question comes from Broderick Preston of Piper Jaffray.

Yes, hi it’s Matt Kelly. Great, just to stay on the C&I balances, you know was down sequentially what did you sell out of the C&I portfolio during the quarter or was it a runoff?

We sold a fair amount of C&I loans, non-relationship loans really finishing up what we had in our margin strategy. These are non-relationship C&I loans.

So if we had commercial loans on our books in 2015, we looked for those that were transactional in nature and that relationship based and we put together a strategy to move those out. And in the fourth quarter we actually executed on a few of the lower yielding non-relationship based transaction type commercial loans that we had been looking to do. They actually came a little quicker. I think there were people that were hungry for some loans. So those moved out in the fourth quarter.

And so what was the dollar balance of what was sold and what was the gain that was booked in fee income that 2.7 million of total loan related fees, how much of that was the gain that we saw in the C&I loan sold?

Matt, give me a second I’ll look it up for you.

Okay. And then the other question that I had just while Josephine is looking for that is on the forward starting swaps, is the right way to think about that is about a 130 basis point drag on 300 million buck, so it is about 6 basis point standalone drag on the margin, am I thinking about that right?

Yes, it’s probably somewhere between that 6 and 8 basis point drag on the margin.

Assuming rates are right where they are today.

Assuming we are in flight [ph] back.

And what is the fair value of that 300 million in notional, what is the fair value of that today?

I can tell you with the volatility we’re seeing in the market Matt, at 12.31 they were out of money by about 8.5 million. It is probably up from there just given some of the last couple of weeks volatility but it has been bouncing around.

And with what you were just talking about earlier being nimble would you ever consider taking a charge to get rid of those if it looks like we are going to be on a lower for longer type of environment or you like keeping that protection on the balance sheet?

It is part of our active balance sheet management. It is something we look at every month as part of ALCO and it is really -- it is just a function of wanting to maintain our asset sensitivity position and looking at how we are growing and bouncing it from there.

I wouldn’t get worried about getting rid of them.

Okay and do you have that balance of what was sold.

Yes Matt, let me get back to you on that. I am not finding it.

Okay, and then just one last question on the tax rate, do you feel like in a way you might have got yourself on a little bit of a treadmill here. We have to keep these tax credits going and its introduced some volatility to the earning stream clearly. Longer term is there something that you are committed to as we think about the next couple of years.

Yes, here is how I would tell you my thoughts are on the tax credits right. I think its providing us solid shareholder returns. We’ve been able to take advantage of opportunities on our developers, our relationship based customers, and invest in these projects and we are able to lower the tax rate which drops bottom line EPS and we are using that bottom line EPS to reinvest in our feed businesses. And we are seeing that here in Q1. So as Mike said, as you heard me say we are looking to deliver $0.54 with a much higher tax rate. And that should pretty much tell you the benefit of what we’ve been able to lay in 2015. Now as I look to 2016, we're going to continue to look for those opportunities. We've had some already closed. We're looking at a pipeline where there's more scheduled. But the way the mechanics work, you don’t really snap those into your effective tax rate until they’re closed, so it’s really just a mechanical thing, and yes, it does create some volatility. But at the end of the day it’s a smart strategy and it is something that benefits the shareholders.

I think the way that we have approached it too has been disciplined -– in a disciplined manner. So when we look at the beginning of last year and we talked about having these tax advantages, we were very specific about the fact that we were going to take some portion of those benefits and reinvest it in the company so that we would increase the core run rate of the company without them, and I think we’ll continue to do that.

Okay, fair enough, thank you.

Thank you.

The next question is from Collyn Gilbert of KBW.

Thanks. Good morning, everyone. Just wanted to ask a little bit about the -- your strategy, your thoughts on residential mortgage growth. Is it -– it grew a bit this quarter, just how are you thinking about that and what are the kind of mortgages that you're putting on your balance sheet?

Hey, Laurie, Sean here.

It’s Collyn, Sean.

Sorry. Hey, Collyn.

That’s okay.

We want to replace any of the amortization that we do have. We look to sell more than we're going to be putting back into portfolio. We're keeping that ratio, we're selling approximately 60% to 70% right now and it depends on that amortization. We are seeing that what we are putting back into the portfolio as we move to a purchase market is more of our jumbo fixed and that is still -– that product still remains in that 30 year fixed bucket predominantly, although we do produce in the arm space as well. We see this as a balance. Joe and I are talking through ALCO with the whole ALCO committee in regards to how do we use the product to balance from a borrowings perspective, from a pledging to the federal home loan bank. So we don’t see, although we did see a quarter of growth, we don’t see it as a big growth strategy or a long-term, but we do like it as it replaces our amortization, continues to produce fee income as we look to sell from our secondary channels, and then use it as a complement to anything we're doing big picture within ALCO.

Okay. That’s great, that’s helpful. And then, Sean, while we've got you just, if you could talk a little bit about the deposit initiatives, I know you guys did a promotion this quarter, money market rates were up. It looks like deposit costs have been migrating slightly higher. Just sort of how you're thinking about that trending longer term? I know, Joe, you gave us color around the drag on the swaps coming into 2016, but just how should we think about the all-in deposit costs as we roll into 2016?

Sure. I think we're seeing all-in deposit costs, it will be pretty flat maybe a little bumpy if you go up a basis point or two or down a basis point or two. Any of our promotions, we are really looking to drive the core DDA or the demand product, so any of the promotion i.e., the money market rate or the money market growth has to come with the checking growth in that core new relationship back to the bank. So we're going to use those promotions on that basis only. So, we also do a look back. We will look to see how much of that business is retained from a new business perspective, and any of the promotional things we're not doing on a long-term basis. So short-term promotion, use it as a leading driver to a new relationship, then we measure and we have good discipline in regards to looking at how do we keep that new relationship at the bank and we create thresholds for ourselves to make sure those customers are staying. And we won’t be doing any promotional elements that are going to be long-term or have any really long-term volatility to the deposit costs.

Okay. That’s helpful, and then Joe, just a question on expenses. Marketing professional fees were up a fair bit this quarter, just sort of how are you seeing those lines trend again as we look out through the year?

Yes. Marketing was somewhat elevated in the fourth quarter. We did see some additional marketing around Firestone and some of the whet programs that we ran in the fourth quarter. I see that flat to slightly down as we go forward in Q1.

And professional fees?

Professional fees too were up and in some of that Collyn, it has to do with legal fees at the end of the year and also, quite honestly, it’s part of the tax strategy. We whetted that out as we looked to 2016 and those come with the cost as well. So those are slightly elevated too. They should come down slightly too.

Okay, and then just one final question. Mike, you made the comment, one of the strategic objectives is trying to get that fee to revenue in that 30% range, was there a timeline that you had in mind for that or…?

Yes, you know Col, I hate to give timelines but I think that if we do this right 2016 is going to be a good year to move that north. I don’t know if we get there by the end of 2016, but we start to get closer to that mark and as you know the closer we get to that mark the better effective -- more effective it is going to be on the ROA.

Okay, great. I’ll leave it there. Thanks guys.

Thank you.

And the next question is from Laurie Hunsicker of Compass Pt.

Hi, good morning. Just wondered if we could go back just to follow up on a question that Mark asked regarding the accretion income and I realized that’s a bouncy line but can you help us think about the accretion income that you have projected for 2016?

Yes, and we look at it in two parts, right. There is this scheduled accretion and I’d say that that’s generally going to be 0.5 million or less. And then as it relates to the recoveries, our guys actively work them out. It is harder to predict Laurie. I do expect them to be down in Q1 but again a little bit difficult to predict the exact amount.

Okay, so if we were right about 1.5 million or so per quarter and again I realized that’s jumpy but that would be potentially the right level?

That would be a safe zone. We had 2.4 in Q4, we expected to be less. There is 500 in schedule so less than 2.4 in 1.5 here in that range.

Okay, great. And then George I just wanted to follow back up so the balance on Firestone as of December 31st, was about 190 million?

Yes.

I think it was actually 183 but again as we said good originations but also the portfolio amortizes fairly quickly so although we are happy with originations balances haven't moved significantly.

Okay great and then within your non accruals within C&I, C&I non accruals of 8.3 million, how much of that was Firestone?

I think it was 2, Laurie it was about $200,000.

$200,000 okay and that compares to 500,000 last quarter? Okay and then can you just update us on, as Collyn mentioned the residential growth was strong what is the construction balance in the resi portfolio as of 12/31 and then also on commercial real estate what is the construction balance there and how are you thinking about construction lending going forward?

Looking that up.

Okay and then maybe while you are looking that up just to clarify something with Hampden I thought expenses were still going to continue to roll through in the March quarter, you are saying all of that is not fully baked?

Yes Laurie we’ve hit that 35% mark. You may see some additional synergies but at this point we feel pretty comfortable we realized those savings.

Okay, great. And then your assets under management, do you have an updated number on where that stood at 12/31?

Laurie, this is Ally. It is actually relatively flat to where we were. So right around 1.4 billion.

Okay. Maybe I’ll just ask one more question as we are waiting, Mike you made some comments right at the start of the call that you were looking to do new offices in high traffic areas and maybe closed on that has economically changed, can you just give us a little color around where is the high traffic areas you are focused on?

We still believe that Eastern Mass and Albany, even maybe Syracuse area, those are areas that we continue to look at how to further service customers. That’s not to say that there aren't branches in some of those areas that the economics aren't good. So Sean does a really good job of making sure pretty much every week, he goes through every single branch and if something is not hurdling it gets put on a list and we believe it is not going to hurdle it will be one of the ones we look to consolidate. At the same time we know that we are going to have to add branches and I guess the three markets that I mentioned might be the markets that we would look at, at some point Boston, Albany. So just maybe even Connecticut because Connecticut is doing very well at this point as well, that be fair, Sean?

Yes, we want to improve our penetration in growth markets and we've got a very formal branch profitability model that we review with executive management to help us make those decisions and redeploy if needed.

Is that helpful, Laurie?

Great. Thanks. And were you able to find the construction numbers or should I just follow up?

Yes, from a -– no, from a residential perspective it’s anywhere between $25 million and $30 million, so very immaterial and commercial is – sure, Joe, do you have commercial?

Yes. Sure, commercial outstanding at the end of the quarter was about $250 million.

That’s about 9% of our commercial book and that’s been holding steady for last several years.

Okay, great, thank you.

Thank you.

And our next question is a follow up from Broderick Preston of Piper Jaffray.

Actually, Matt Kelley again.

Hello, Matt.

So year-to-date we're seeing a pretty big sell off in the bank stocks, broader market’s increasing fears, I would say, across the system. How would you characterize the economy and the conversations with your commercial lending customers today versus the last time we spoke in October?

Look, I think that the uncertainty across the globe with respect to the economy is something that we're just all going to have to continue to deal with. I like the markets that we do business in, Matt, because they’re much more stable than they are in some of the high growth areas around the country. And there was a time when people yawned when I said that, today it’s a form of stability. So when we look at the way that we're generating our commercial business for instance, its still -- the lion’s share of the commercial business that we generate is by grabbing market share from the six or eight large banks across our footprint. And these are second and third generation businesses in many cases, rural areas that would be with us forever. I don’t see any let up in that pipeline or the ability to continue to grab that business. There are literally billions of dollars worth of loan portfolios across our footprint from Syracuse to Boston that is owned by six or seven large banks and I just don’t see any let up there. I see our guys continuing to be able to pound away and grab some of that good business. So while the economies in these are always important, and I’d say that if you looked at the Eastern Mass and the Boston economy, you would say it is as hard as a pistol, you go across the rest of our footprint, its stable and its better. But it’s never really gotten terrible and it’s never really gotten red hot. So I get your question, and I think it’s a good question, but it’s less material to our strategy because our strategy has been and continues to be taking market share. Richard, is there something you might add?

Yes, I guess and just as in the side, I mean we operate in New York, our primary footprint is in Albany, which is the capital of New York. It’s a very stable environment. And Massachusetts, Boston is the capital of Massachusetts, again very stable, not a lot of movement or nor bust.

Okay, fair enough. And then just a quick follow up. During the quarter the regulators were out with some inter-agency guidance on commercial real estate in particular, kind of raising the yellow flag, telling banks to be careful. What is your interpretation of how the industry is going to respond to that and what are your thoughts on that?

Well, I'm going to let Richard, you handle that, but again, I think it goes to the heart of the real value proposition of this company. We're not in Downtown Boston financing a high rise, we're not in some of the highest growth markets, and I think that’s going to insulate us in some respects. But Richard, do you want to add to that?

Yes, I guess just from a – from the inter-agency -– we already do that. So we look at transactions, we already do specific loans and values and this debt service coverage on deals. We already have a third party that gives us market intel and market studies, and we always have looked at global cash flows in many of our underwritings. So from a transactional perspective we're already there. We take it a step further, we look at things holistically in a portfolio level and so we start to look at concentrations either from an industry perspective, from a risk based capital perspective. So we already have the things in place and which has been in place for three or four years to really monitor the portfolio. And so when we look at these things we are hopeful that other banks do this because I guess a smart competition is a good competition.

Don’t you also think that while none of us are going to be exempt from the problems of bill collapse in that sector, transactions versus relationship based loans will make a difference. And we have done an awful lot of work to ensure that we move out transactional types of product and some of that was commercial real estate related to relationship based products.

And that goes to the point we brought up before about how we are kind of looking at originating and then starting to move things up bouncier and it gets to what Michael just said, you got to kind of weed out the transactions which gets done over the last year or so and then you have to take care of relationships. And having said that, again we have hold limits in place based on risk based capital, so as we get a relationship client that keeps everything with us we then have to find room in order for us to properly base the risk on our balance sheet.

Okay, and just -- go ahead.

No.

One last quick one for Sean, on deposit services. You are going to end the year roughly flat running about the same levels as 2014 despite the fact that average deposits are up a good chunk, some of that due to organic growth, some of that due to acquisitions. Are we finally at the inflection point in deposit services relative to your average deposit balances or has that continued to drift down in 2016?

I don’t think it continues to drift down. I think as an industry we now have to reexamine how we look at this deposit service fees. A big portion of this has been overdraft from an industry perspective and so the growth in that category with some of the new regulation you are just not going to see it. So, but I do think I know we are internally we will be looking at anything from an innovative perspective, we will be looking to see how our competitors and market start changing, we will implement new fees. So, this category should remain flat to grow but you are right, some of the robust growth that you had seen in the past that was driven largely from an ODC income perspective is probably not there.

Got you, alright, thank you very much.

So, did we get back to everyone with questions.

I have one question to Matt which we will follow up.

Great.

Okay so this concludes our question-and-answer session. I would like to turn the conference back over to Mike Daley for any closing remarks.

Okay, well I appreciate everybody joining us today and of course we look forward to speaking with all of you again in April when we will discuss our first quarter results.

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