Beacon Financial Corp (BBT) 2007 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Berkshire Hills Bancorp third quarter 2007 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions.) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Dave Gonci, Corporate Finance Officer. Thank you, sir. You may begin.

Good morning. Thank you all for joining this discussion of third quarter results. Our quarterly news release is available in the Investor Relations section of our website, berkshirebank.com, and will be furnished to the SEC.

Our discussion may 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 annual report on Form 10-K, along with our most recent filing on Form S4 related to the Factory Point acquisition.

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

Thank you, Dave. Good morning, everyone, and welcome to our third quarter conference call. I'm Mike Daly, President and Chief Executive Officer, and with me this morning are Kevin Riley, our Chief Financial Officer, and other members of our management team. It's a pretty exciting time to be here in New England as the Red Sox and the Patriots and Boston College are all operating on full throttle, so we obviously feel the pressure to execute as well, as America's most exciting bank. I think this last quarter shows that our team is moving forward and delivering on the promise of our franchise. In any event, in this morning's call, I will comment on our third quarter results, and Kevin will provide some financial detail for the third and fourth quarters. I will conclude with further comments on our plans and our earnings guidance, and then we'll be happy to take questions from our callers.

We issued our earnings release yesterday, and as you saw, it was a busy quarter for us. There were a number of non-core items, all of which will produce a stronger and more profitable Company going forward. These non-core items resulted in GAAP EPS of $0.10 in the third quarter, and I'll be commenting further on them in a few moments. But it's very important that I point out to you the positive core operating leverage that we generated during the quarter and the good quality of sustained growth that we're continuing to produce.

I'm pleased to report that we generated core earnings per share of $0.49 in the quarter. This was the consensus estimate and was off by just a penny from our previous guidance. During the quarter, we worked hard to complete the Factory Point merger, which was completed a little more than four months after the announcement date. I'm pleased with the efficiency of this process, and we continue to feel that this is an excellent strategic combination for us.

Despite devoting time and resources to the merger, I feel we made good progress in improving our operating leverage. And I want to point out that in the second quarter, we produced core earnings per share of $0.52, which included seasonal insurance revenue of about $0.07 per share after tax, giving us a $0.45 run rate going into the third quarter. And as I know that in our last conference call, we expected to offset this by increasing our net interest income, increasing fee income, and of course decreasing non-interest expenses. And we accomplished all of these objectives in the third quarter, and the results of these actions, along with the Factory Point acquisition, was to increase our quarterly core EPS to $0.49 from that $0.45 run rate.

So I'm pleased to report that in this difficult environment, our year-to-date core earnings per share were up 3%, and our third quarter core EPS was up 2% before the cost of new branches that we opened earlier this year in New York. And while these growth rates are lower than our long-term targets, I feel that they're good results in this banking environment with the challenges of interest rate conditions and competitive pricing pressures that we've seen for really most of the year. And I'm confident that we now have the components in place to sustain additional core earnings growth.

Currently the key event for us in the third quarter was the completion of the acquisition of Factory Point, which adds seven stores in the southern Vermont market. And for some time, we've identified this area, as you know, as an important strategic objective. And this acquisition, frankly, was an attractive way to enter this market. The merger was completed as planned, and with a lot of hard work and attention by both companies, it was completed on schedule.

Factory Point has a strong performance history. It's a strong franchise, and it's got a strong customer base, and I just as feel as though it was a great business combination, a great bid for us. And the Factory Point team, they've been enthusiastic and they've responded to the merger, and amortization is going well, and we're going to complete that before the end of the year. I'd say we're now certain that we will achieve or exceed our goal of 25% cost saves and that we will exceed the $0.04 annual EPS accretion that we were targeting. And with the benefit of our expanded product set, I really feel we can look forward in the next several years to achieving a double-digit cash return on equity for this investment.

As we noted in our release, we anticipate great synergy between our regions in Berkshire County, the New York capital region, and the southern Vermont market. We see crossover marketing opportunities in the residential markets, the leisure and recreational living markets, and the commercial markets. And as I've also indicated before, we feel that this area holds great potential for real growth in the future, and we intend to be well positioned to profit from that growth. So we view this acquisition as a major and timely step forward for the Company.

As we noted in our release, we recorded non-core integration charges of about $0.08 per share after tax and expect another $0.03 to $0.05 in charges in the fourth quarter. And that's consistent with our original projections last quarter. Our direct charges for the merger, which we'll record as the goodwill, were about $4 million. This was a little below our original estimate, so I feel good that our overall costs for this acquisition were reasonable.

I want to add that we've come to know and appreciate the quality of leadership that Guy Boyer, Factory Point's President, has brought to our organization. And as a former CPA, he's run a quality operation, he's built a well-regarded market profile, not only in southern Vermont, but also including the Berkshire and New York regions that I mentioned earlier. So I'm very pleased to announce that Guy has joined our management team, and in addition to helping guide the Factory Point integration, we look forward to his future contributions in building our overall regional franchise.

And we also noted other important executive changes in the earnings release. Our CFO, Kevin Riley, officially joined us on August 1, and he's already added value, and I'm pleased to welcome him today at his first conference call. And Kevin has met some of our investors. We certainly look forward to introducing him to more investors in the coming months. His background and his experience in profitably growing a franchise have provided a new energy and, frankly, a direction to our team.

We also announced that John Millet, our former Controller, has accepted the role of Chief Operating Officer of Berkshire Insurance Group. John did a great job for us as interim CFO, and we're confident that he will make significant contributions to our important and growing insurance business line.

We're also pleased to announce that in September Steve Souky joined us as our Controller. Steve is a CPA. He's had many years' experience, first in public accounting at KPMG, then at NBT Bancorp, where he was Senior Vice President of Finance and managed all their accounting functions. So you can see, these executive changes, combined with our existing long-term executives, are really continued steps in building a management team with the credentials and the passion to move this Company to another level of market reach and earnings performance.

I'd like to add that we welcomed Susan Hill to our Board at the completion of the merger. Susan has given many years of service as a member of the Factory Point Board. In addition to being a CPA, she's a principal in the accounting firm of Hill and Thompson in Manchester, Vermont, which specializes in serving the hospitality industry in New England. She therefore not only brings us a perspective of our southern Vermont market, but she's also well acquainted with our whole region and with the special features that make our region a preferred destination.

As we put together the balance sheets of Berkshire Bank and Factory Point, we also felt that it made sense to deleverage the combined bank to strengthen our assets, liquidity, and interest rate risk measures. Kevin's going to discuss this in more detail in a few moments, and he'll also discuss income and expense in more detail.

But I want to make a couple of general comments about our core income first. In our last conference call, I indicated that we were initiating a project for expense reductions and fee enhancements. And I stated it would take several quarters to obtain the full benefit of these results--or these efforts. Well, I'm delighted to report good progress on these initiatives in the third quarter, and we anticipate further benefits in the next couple of quarters. Now, these include pricing adjustments that became effective near the end of the quarter and system changes that are currently in process. We also reported after-tax non-core charges of about $0.03 per share related to the net impact of some of these programs, including severance, contract terminations, and systems write-downs. And while I do not anticipate significant future non-core charges from this restructuring program, I do anticipate further expense reductions and income gains from it in the coming quarters.

Now turning to the balance sheet. We recorded good progress with our growth initiatives in the third quarter. Annualized organic loan growth was 5% despite some attrition in commercial loan balances as we continue to be more selective in originating and retaining commercial credits in this environment. We reported on our high commercial loan pipeline last quarter, and it continues to be relatively high at $65 million. And we are seeing that some loan closings are taking longer than they were, and we attribute this to some more conservative behavior by customers in our commercial markets. And I also feel that the pace of market growth is off in the current market conditions, and we intend to remain disciplined in our loan originations. Nevertheless, we continue to see ongoing commercial loan demand, and we believe that the reduction in interest rates is going to support this demand.

Now moving to look at deposits. We really feel that we turned the corner in the third quarter, reflecting our emphasis on core accounts and de-emphasizing time CD promotions. The result included an 11% annualized organic growth in transaction account balances, a 5% annualized organic growth of total core deposits, a 2% annualized organic growth of savings account balances--which had been declining for really a number of quarters--and a 36% annualized growth of core deposits in New York, really demonstrating the positive momentum of our de novo branch program there.

Now, our core deposit growth offset a decline in time deposits, and we continue to see time deposit competition in some of our markets which, frankly, we think is uneconomic. And we're really willing to let some of these balances decline, particularly since we're not generating double-digit loan growth in this environment. Now, during the third quarter we also sharpened our deposit pricing strategies, and the very significant benefit of these moves was the increase in our net interest margin from 3.15% to 3.20% in the current quarter.

As you might remember, we indicated in our last conference call that we felt that we were close to a bottom, the margin, but that there was still some potential for further modest attrition. And I believe that we accomplished a major turnaround in this regard in the third quarter, and we're now poised to benefit from further potential Fed fund rate cuts. And then, of course, we expect significant margin benefit, both from the higher margin Factory Point balances and from our deleveraging. And Kevin's going to have more to say on this in just a few minutes, but it's all very good news.

So all in all, and I feel this was a very solid quarter for our net interest income, and this extended to our fee income, where we reported a healthy 9% linked quarter increase in banking fee income. With the addition of the Factory Point business, our assets under management increased by almost 60% to $783 million, so we're a step closer towards achieving a $1 billion benchmark in our wealth management business line.

And I'd also note that while we had a seasonal decline in insurance revenues, we remain on track to exceed our insurance revenue budget this year. And just as important, we continue to see good results in the integration of our insurance and banking sales reps. And interestingly, we made some office changes here in Pittsfield so that our commercial lenders and our commercial insurance team can share the same facility. So we remain very optimistic and enthusiastic about the cross-sales that we can develop in that commercial market.

Now let me move on to address asset quality. And I'd like to begin by reflecting back that it was really last year in the third quarter when we made an adjustment to the loan loss allowance, because we felt that the benign credit environment was behind it. And I think market conditions that we've seen over the last year have certainly borne out that judgment.

I still feel that our markets are more insulated than many of the other markets nationally, which have seen more aggressive escalation of home prices and certainly more prevalence of subprime lending practices. And as you know, neither Berkshire nor Factory Point have operated subprime lending programs or held subprime and mortgage-backed securities. Our conventional lending programs for both mortgages and home equity lines have remained with maximum LPVs of 80%, and our FICO scores for both mortgage and consumers continue to exceed an average of 730.

So we continue to feel that our markets are generally sound. We don't feel like we have any systemic changes in our portfolio, and we have seen some increases in delinquency and non-performers over the last year. But these have been mostly concentrated in a handful of commercial credit, and I continue to feel that as long as our numbers reflect just a handful of commercial situations, then this indicates that the overall portfolio is in pretty good condition.

Our mortgage and consumer portfolios continue to perform reasonably well. There were no surprises for us in the Factory Point portfolio, which has performed very well in recent years. Our construction lending activity is moderate and reasonably well diversified, and we've not had any significant performance issues there.

We had one larger commercial loan go on to non-accrual in the third quarter. It's adequately secured based on a current appraisal, and we're moving forward with demand for payment. We also had one larger commercial loan go over 30 days delinquent during the quarter. This, too, is adequately margined based on current appraisal and has strong signers and guarantors, so we're aggressively pursuing payment here as well.

We had several small problem assets that were resolved during the quarter. We had our first substantial foreclosure sale in many quarters. It actually netted a price in excess of our full balance, so no real surprises for systemic issues to report. And we're going to remain aggressive about collection, we're going to remain aggressive about recognition when and if they do arise, and I want to assure you that that will remain a strategic hallmark for this Company.

In that regard, we did record $1.5 million charge-off on one of the large commercial non-performing loans that we've talked about in the past. This reduced the balance of this asset to $4.7 million. We had previously reserved $1 million for this credit, which is operating in bankruptcy. And as I noted in our last conference call, this business has progressed in its recovery this year. But the bankruptcy process has lengthened, and due to the disruption in the markets in the third quarter, we determined that the value of the collateral has likely been reduced due to the tighter credit markets. And so we determined that this write-down was appropriate at this time. And we're working actively with the trustee to find ways to getting cash receipts for the collateral, but this one charge-off really doubled our annualized year-to-date run rate of net loan charge-offs from about 12 basis points to about 23 basis points. So excluding this loan, our annualized run rate of net loan charge-offs was only nine basis points for the current quarter.

Now, we reported that we ended the quarter with the allowance running at 114 basis points compared to total loans, which was up from the 111 basis points at the end of the second quarter. This increase reflected the impact of the Factory Point acquisition, and it also reflects the benefits from the sale of $50 million in residential mortgages as part of the balance sheet deleveraging. And this ratio is the same as it was at the start of the year, and I feel that this is really a reasonable level based on the current performance of the portfolio.

So that completes my review of some of the quarter's highlights. I'd now like to invite Kevin to tell us some more about the financial details and our guidance for the coming quarter. Kevin?

Thanks, Mike. This is my first conference call for Berkshire Bank. I'd like to start by saying how pleased I am to join this team. The energetic environment I have witnessed here at the Bank gives me great confidence for the potentials for this union's franchise appreciation as we focus on the growth of earnings and the value for our shareholders. I'm excited about having the opportunity to work with this team and help this Bank achieve its full potential as a top-tier regional bank.

As Mike discussed, we had a number of non-core items during the quarter. However, before I discuss those, I would like to discuss our core operating performance. As we have mentioned to you previously, we have been clearly focused on improving revenues and cutting expenses. I'd like to report that we've seen some early signs of progress. After adjusting for the seasonal decline in insurance earnings in the second half of the year, this quarter's net interest income was up, our fee income was up, and our expenses were down.

For the quarter, our seasonally adjusted core operating profits have improved by roughly $0.03 per share after tax, or around 7%. Factory Point and the balance sheet deleverage will only add to this in the fourth quarter. The speed at which these benefits have been created is a testament to the Company and how all the employees participate in making this Company successful.

Let's take a minute to talk about non-core charges for this quarter. As mentioned, we took a $3.5 million after-tax charge, or $0.38, relating to the balance sheet deleveraging strategy, our expense restructure, and the costs associated with the integration of Factory Point. When we looked at our combined balance sheets of Factory Point and Berkshire, it became apparent that a little balance sheet pruning would go a long way in setting our combined companies on a course for success. In a nutshell, we reduced the balance sheet by $82 million and repositioned some assets. It reduced our interest rate risk by removing longer durationed assets that were not sufficiently covered by liabilities. The deleverage also helped us improve our capital and liquidity ratios. Our margin will improve, and our quarterly EPS should benefit by about $0.01 per share going forward due to these changes.

Part of our non-core charges also included the impact of costs associated with our Factory Point merger and system conversion. This amounted to $1.1 million in the third quarter. We see an additional $500,000 to $800,000 in these kinds of costs in the fourth quarter as we complete the merger process. As we mentioned in the announcement of the deal, we expect our new southern Vermont region to contribute at least $0.01 per share in quarterly EPS in each of the quarters going forward.

Now let's talk about core earnings for the quarter and some guidance for the fourth. Our net interest income for the quarter increased about $440,000 when comparing it to the second quarter. Net of the offsets of Factory Point, the increase was about $200,000. This was fueled by our margin increasing from 315 basis points to 320, which showed the reversal of a gradual erosion which we have been experiencing in the previous quarters.

Our loan yields tightened a little this quarter, but we feel that the primary factor for the improvement in margin was our approach to deposit promotions and pricing. We've reduced the use of high-cost borrowings and reduced the cost of deposits by three basis points when comparing to the prior quarter. With the addition of Factory Point, we expect our net interest income will increase in the fourth quarter to an area of about $18.3 million. We expect additional benefits in the fourth quarter from the Fed cuts and the deleverage of the balance sheet and the addition of Factory Point. With average earnings assets being projected about, to be about $2.2 billion, we anticipate our margin to be in the high 330s.

In the fourth quarter, we assume single-digit loan growth. We expect moderate deposit growth with continuing change in the mix toward non-maturity accounts and away from CDs.

Moving to the loan loss provision, our guidance is for the provision to be about $500,000 to $750,000 in the fourth quarter. We anticipate that this will not only cover loan charge-offs but will keep the allowance at roughly the same level in proportion to our loan portfolio.

Excluding one-time restructuring charges, our core non-interest income was about $6.3 million in the third quarter. This was down compared to the second quarter, but after taking into account the seasonal fluctuation of insurance revenue, we posted increases in all of our fee categories. We believe we will see more fee income increases in the fourth quarter due to many of the fee changes not taking effect until late in the third quarter. As we noted in the press release, our linked quarter banking fee income grew by 9%.

For the fourth quarter, our guidance is that we'll see core non-interest income in the area of $6.8 million, which includes the benefits of Factory Point. We expect our insurance revenue will be flat to a little down from the third quarter, as the fourth quarter is historically the lowest on a seasonal basis.

Turning to non-interest expense, our core non-interest expense was about $14.9 million in the third quarter. This was down from the previous quarter, even with the inclusion of $100,000 in salary expense from our new Factory Point employees. The benefit of the new expense-conscious culture started to take hold as we saw non-interest expense rates declining as the quarter progressed. With the addition of Factory Point, we expect our total core non-interest expense to be in the area of $16.4 million for the fourth quarter.

Finally moving on to income taxes. We had no income tax expense provision in the third quarter, as our non-core charges reduced GAAP income to a level which was exceeded by our tax-exempt income on securities and bank-owned life insurance. We expect our core tax rate to be around 32% for the fourth quarter, which is consistent with the guidance we've given you earlier.

This completes my review of the components of income. I have one more comment before I turn it back to Mike. The efficiency ratio--this ratio increased to 64% in the last two quarters. We had noted that our insurance acquisition would increase this ratio due to the different margin structure associated with that business. The bank was able to hold this ratio at 64% in the third quarter, even without the seasonal insurance revenue that we received in the second quarter. Based on our guidance for the fourth quarter, we expect this ratio to decline to a range of 60% to 61%. We believe the drop further shows improved earnings strength from the Bank's profitability initiatives and the acquisition of Factory Point.

Now I'll turn this discussion back over to Mike.

Thanks, Kevin. Nice job. You know, we expect this progress to continue, and our guidance is that our fourth quarter core earnings will come in around the consensus estimate of $0.50 per share, and that would be a 4% increase over last year's fourth quarter. It would also result in a linked quarter annualized growth rate of 8%. And this is consistent with our stated objective to be moving back towards double-digit annual growth in core EPS. I'm going to provide further guidance on next year's operations in our next conference call.

I need to comment that we were a little disappointed that the merger-related SEC regulations kept us on the sidelines for stock buybacks for most of the last several months, even while we saw our stock price decline to levels that were extremely attractive to us. But once again the window will open for Treasury's stock purchases beginning next week. We have a standing authorization for repurchase of up to 270,000 shares.

We continue to view our stock as very attractive. We do expect to resume some stock repurchases, and despite the economic uncertainties that we all face, we are working to grow our business deliberately and profitably in any case. We feel the overheating and the cooling that we see in some national markets is just another reason why our franchise is located in a comparatively attractive area. And we aim to have a major market position in our four-state primary market area, and we expect to be consistently more focused than larger competitors who may be reaching to do things elsewhere in the nation.

Now, as Kevin and I have explained in this call, we became a better Company in the third quarter, with better operations, better expense control, a better pricing culture, and really laser focus. And of course, being from New England, we understand that the expectations are high these days, and I can assure that we intend to deliver. I want to thank you for joining the call, and we'd be pleased now to answer any questions.

Ladies and gentlemen, we will now be conducting our question-and-answer session. (Operator Instructions.) Our first question comes from the line of Ross Haberman of Haberman Funds.

Good morning, gentlemen. How are you?

Good morning, Ross. How are you?

Okay. Could you talk about the different markets as well as your new ones in terms of strength? Which are the strengths, which are the strongest, which are the weakest in terms of loan demand?

Well, New York still, I think, remains the strongest with respect to commercial loan demand. There's still, I think, a strong growth there. With the nanotech, there's some vulnerability with some of the larger companies, so we seem to think that there's a good pipeline of small to medium business in New York. Berkshire County kind of chugs along at the same rate always. You know, when there's deals to be done in Berkshire County, we're usually the first at mind because of the dominance we have.

The Pioneer Valley's a little more competitive in that we do some deals in the periphery of Springfield. On the outside of Springfield we'll do some larger deals. I think it's going to be a little bit more difficult to see large, small, to medium business growth in the Pioneer Valley. Small business growth in Vermont, we're pretty excited about it. They've got a pretty good program in Vermont, and we're actually going to use their small business program company-wide. Anything, I will tell you the residential and consumer loans across the board are pretty consistent in all four of the areas. Is this going to help a little bit?

Yes, just one follow-up, one other question. Did you say you were liability sensitive? Did I understand that correctly?

Well, we're slightly liability sensitive at this point.

Thank you.

You're welcome. Thank you.

Our next question comes from the line of Mark Fitzgibbon with Sandler O'Neill Asset Management.

Hi. Good morning, and thank you for providing all that detail on the acquisition. Mike, I wondered if you could share with us what your target tangible capital ratio is first?

Well, we're about 6.5% now. We've been down a little lower than 6% in the recent past due to acquisition. I think that from a target standpoint, Mark, I'd say that the 6% level's a good target for us. There's always going to be opportunities that come our way that would give us good reason to go a little bit below the 6%. I think if we run it below 6%, we perhaps put ourselves in a position not to be able to take advantage of some of those opportunities, so I think 6% range, give or take a positive and negative, is a good range.

Okay. And then secondly, you talked about your cost reduction program. I'm wondering if that's going to have any implications for your de novo strategy and maybe if you could share with us how many branches you plan to open up in the coming quarters?

It's a great question. The earnings momentum that we have certainly is going to be a part of the branch strategy, no question about it. I'm not sure I'd say that it's going to interrupt our branching program, but one of the things that we're putting an awful lot of time and effort into now, Mark, is our delivery channels. We have opportunities with remote capture, we've got some opportunities with pods and insurance combinations, and we've got to take a look at the whole delivery channel for '08 to determine what goes into bricks and mortar and what goes into these other delivery channels. We will do some branching next year, because there's some holes that we need to fill in some of the market areas that we have. I'd be a little premature, I think, in delineating exactly what those are today, but I'll certainly have a good handle on that at the next conference call.

Okay. And then next, I wondered if you could share with us how the retention's been going with your producers in your insurance business now that we've sort of, we're about a year from when you closed those transactions. If you could give us maybe some update on that, it would be great.

Yes, another great question. I appreciate the question, actually, because that's one of the things we're really most excited about. We found that there was a tremendous overlap, certainly between the customer base we had in Berkshire County and the customer base our insurance group had in Berkshire County. And I'm going to say that we're less than a few percent overall on the loss of business. We certainly have gained significantly more business than we've lost, and so the retention has been excellent.

Okay, and then a last question, I guess, for you, Kevin. You detailed the netex margin will be up in the high 330s range this quarter. How much of that 15- or 20-basis-point increase is a function of the acquisition of Factory Point, and how much is due to the deleveraging or benefit from the Fed cuts, would you guesstimate?

The (inaudible) effects had, very little was due to the Fed cut. The next Fed cut would give us some, but we look to the deleverage to give us back 10 basis points and the remaining coming from Factory Point. But you've got to remember, some of that improvement is due to the fact that a better pricing with regard to our products.

Thank you.

Thanks, Mark.

Our next question comes from the line of Jared Shaw with KBW.

Hi, good morning.

Hey, Jared. How are you?

Good, thanks. Just a follow-up on Mark's question on the margin. Are you assuming, I guess, what are your assumptions for the Fed cuts for fourth quarter?

In that margin that we forecasted, we do not forecast a Fed cut.

All right. So that's not dependent upon any other.

No, that would only be additional accretiveness to the net margin.

Okay. And then in terms of the, on the asset quality, you said you charged off $1.5 million, that you had a $1 million provision against. Do you still have a specific provision--sorry about that--still have a specific provision against that $4.7 million left?

No. We took down a little more than we were provisioned and felt as though if we wrote it down to that level at this point, we were in a position to not have to provision any more at this juncture.

Okay, and then in terms of the, I guess sort of the other, you said the group of smaller commercial loans that won't increase your CRE NTAs, can you give a little detail on them? Are they in one of your three markets, or are they spread out, or any type of concentration there?

We've got a couple in New York and we've got one in Berkshire County. I don't think we have really any in the Pioneer Valley, and it's a handful of loans are really the ones we're working on, so I wouldn't say that they're really concentrated. I'd say that from a dollar standpoint, we're likely to see when a loan in New York hit the delinquency, it's probably a bigger impact, because the loans in New York are just bigger loans.

Right. And then in terms of sort of going into the credit cycle that we're industry-wide heading into now, you think that that 114 level is still strong enough?

Yes, you've got to remember. We don't do a lot of pure asset-based lending. We don't do any subprime. We're always going to have a few accounts that pop up that we're going to have to work out of, so I think the 114, which is up significantly from where it was, is a good level for us. And Shep's here. Do you have anything that you'd like to add to that, Shep?

No, I think we're comfortable with that level, Jared, at this point. As we look out going forward, there's a few things percolating along, none of which gives us any indigestion.

Okay, great. And then finally, if you could just give a little update on the wealth management. Obviously, the revenue there has been going very well. Sort of your thoughts going forward? Is that an area of emphasis for you, and I guess, what do you envision that could ultimately be for the Bank?

That's a great point, Jared, and I appreciate your bringing it up. Wealth management continues to be at the forefront of some of our strategic discussions. I think in the wealth management area, you could see us, we've had good 15%, 20%, 20-plus percent organic growth, but we're taking a look at the possibilities of other small shops that we could wrap in. I think that we'll try and grow that wealth management both by means of organic growth and acquisitions, and I think it's going to be one of the primary drivers of income for the Company. It's a nice, safe way to make money in this environment.

Great. Thanks very much. Thanks for the detail.

Thanks, Jared.

Our next question comes from the line of Mike Shafir with Sterne, Agee & Leach.

Hey, good morning, guys.

Hey, Mike. How are you doing?

I'm doing well, thank you. I'm just wondering if you can go back to the provision for a minute. I guess with the 114 coverage ratio, it implies relatively very little loan growth. Is that kind of a correct assumption?

You mean if we were to stay at the 114 and $0.5 million charge-off?

Sure, absolutely.

That's a good calculation. That could change next year. I think for the remainder of this year and certainly into the early quarter of next year, we don't see any double-digit growth rates on commercial, and of course the residential and consumer loans would require a little less in reserves. So I think that's a pretty good calculation.

Okay, and then kind of going forward into next year, you guys did say you were comfortable with that 114. Obviously, you're going to see some additional provisioning expense going into 2008, kind of the credit cycle turning?

I think that we're going to continue to look at quarterly and monthly provisions, and there will be some quarters where we will have some significant growth, and we'll have to provision for the growth, and there will be some quarters where we'll have charge-offs that are a little higher than other quarters, and we'll have some provision for that. So I certainly believe that we'll continue to provision on a quarterly basis as we have been.

Okay, and then just one final question. In terms of the guidance for the operating expenses going into the fourth quarter, that excludes the amortization expense. Right?

No, I don't think it does.

Oh, that's all-inclusive. That's all-inclusive, and maybe you could just give me that number one more time, please?

Sure. Kevin?

$16.4 million.

Okay. Thanks a lot, guys. Appreciate the detail.

Mike, thank you.

Our next question--seeing as there are no further questions--oh, we do have one more question. It comes from the line of Julienne Cassarino with Prospector Partners.

Hi. Can you tell me exactly how many shares you did buy back in the quarter?

Well, we didn't buy any, because we were in a blackout period.

Okay. You had told me at the KBW Conference that August 28, the blackout period ended and that you were going to be in the market aggressively for buying back your shares. Did something happen to change that?

Well, the thing is, we tried to go into the market to buy back some shares, and we did buy up very small portions, but I think that was 800-something. We didn't get that many shares, but we tried to go back in. So we did do what we said we'd do, but there wasn't that much volume on our stock, so we couldn't buy that much back.

Well, and this is Dave Gonci. I would note that we really accelerated a little our acquisition of Factory Point, and so we had another 10-day blackout that we needed to observe prior to closing the deal, and we had expected to have a little bigger window in the third quarter, but because we were looking to close that acquisition, we lost most of that window.

So we were only, Julienne, we were only, I think, available to buy in this past quarter four days or five days, maybe--it was a very short window.

Okay. Thanks.

We have a follow-up question from the line of Mark Fitzgibbon with Sandler O'Neill.

Mike, just a follow-up. When do you think Factory Point will be fully integrated, and you'd be in a position to be able to do additional future acquisitions?

Well, I think certainly by the end of this year, we're going to be in pretty good shape. I think we can say that in the next several weeks, we expect to be fully integrated, and if we were approached with an opportunity early to mid next year, I think that we'd be in a position to do something.

Okay. And then somewhat related. I wondered if you could give us a sense for whether the small banks in your region are struggling. Are there a lot of small companies out there that are grappling with credit issues?

You know, in our region, I think that small amounts of credit issues can look like big problems for some of the smaller companies, so I don't think it's helping. I think that the biggest issue that some of the smaller banks in our areas are having is perhaps they're a little over-capitalized. They're trying to find ways to put money out. Deals are a little harder to come by. I think there was a propensity to flood the market with some higher CD rates in order to gain deposit share. So I think there are really some earnings issues that are going to affect some of the smaller banks. We'll see what credit issues start to emanate, but I wouldn't put that at the top of the list for issues of the smaller community banks in the region that we operate in, Mark.

Great. Thank you.

You're welcome. Thank you.

Okay, we will now close the question-and-answer session of today's call. I'd like to turn the call back to management for any concluding remarks.

This concludes the call. We thank you all for joining us, and we look forward to speaking with you again next quarter.

Ladies and gentlemen, this concludes today's teleconference. Thank you all for your participation.