Beacon Financial Corp (BBT) 2008 Q2 法說會逐字稿

Hello and welcome to the Berkshire Hills Bancorp Q2 Earnings Release Conference Call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS). Please note this conference is being recorded.

Now I would like to turn the conference over to David Gonci, Corporate Finance Officer. Mr. Gonci, please go ahead.

Thank you. Good morning and thank you all for joining this discussion of our second 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 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 SEC reports on Forms 10-K and 10-Q.

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

Thank you, Dave. Good morning, everyone. Welcome to our second quarter conference call. I am Mike Daly, President and Chief Executive Officer, and with me this morning are Kevin Riley, our Chief Financial Officer; Shep Rainie, our Chief Risk Officer, and other members of the management team.

We released our second quarter financial results yesterday. Today we will discuss our results and our outlook for the current year and at the conclusion of our prepared remarks, we will take questions from our callers.

I must say, I am pleased to be able to provide another strong quarterly earnings report. We are producing solid earnings growth, driven by strong revenue growth, and positive operating leverage as a result of lower core expenses and modest credit related charges.

Our loan performance actually improved during the quarter and our comparatively low problem loan measures improved further as a result. We posted a 6% increase in earnings per share with second quarter EPS of $0.55, which was up $0.03 from the $0.52 in the prior year. And for the first six months, EPS was up 6% to $1.13 this year, compared to $1.07 last year.

I think it's also important to point out that our pre-provision core earnings growth in the second quarter -- since we had an unusually low provision last year related to portfolio changes in that period -- actually our pre-tax, pre-provision, core EPS growth was 15% in the second quarter, compared to the prior year. We do expect to have generally higher normalized provisioning this year, but I think this is the measure that shows some -- a good underlining earnings momentum.

Some of the key highlights included 24% revenue growth for the quarter; a 3.45% net interest margin, and that's the highest quarterly level since the year 2003; 13% annualized commercial loan growth in the first half of the year; 14% growth in consumer non-maturity deposit balances for the first half year; and an 18% annualized growth in wealth management new business bookings in the second quarter.

As I've said before, our goal is to build shareholder value through core earnings growth. Now we are going to discuss our strong asset quality shortly, which of course remains the foundation of our business, but earnings growth is our basic mission. And we are as focused now as we have ever been on sustaining that growth in this environment.

And I say that in part because strong earnings, in addition to capital, are major underpinning to bank safety and soundness. And our 18% return on tangible equity provides, I think, significant support to our capital base. And I would also add that we continue to diversify our revenue sources and this also contributes to the growth and the strength of our earnings base.

Now let me turn to the balance sheet results and then I will come back to discussing revenue impact in just a few minutes.

We had a strong second quarter for commercial loan originations. We closed some business that was in the pipeline in the first quarter. So our annualized commercial loan growth was 13% in the first half of the year. And this is due to large part because we are seeing good deals that, at one time not that long ago, were uneconomical, because of national land lenders and conduits who were much more active in our markets.

Now we continue to be very selective in rate and underwriting. But we are able to take advantage of our foothold as the largest local institution headquartered in our market to [do] good quality new business and, more importantly, to acquire new relationships. Now the number of new quality, new deals in our market is finite and there is still some very stiff local competition. But we still pass on a fair number or deals because our emphasis is on quality and it is on spread. And I feel pretty good about the overall mix of price and quality that we are getting.

Our residential mortgages and home equity loans are growing at 7% annualized rate, and right now I think that is a fair number for us. This is exclusive by the way of our residential construction portfolio, which actually declined by $12 million in the quarter. Nothing terribly unusual there other than loans that were in the construction phase that slipped to permanent mortgages. And, naturally, growth has slowed due to the economy and real estate markets. But we are pretty comfortable with this pace.

We continue to let our auto-loan balances run down, as I previously indicated. And as a result, our total portfolio growth was [9]% annualized in the second quarter. And I actually expect this may slow to low single digits in the second half of the year and, again, I am okay with, that as we manage our volume, to support the net interest margins and our profitability ratios.

Now we did produce very strong 14% annualized growth in our consumer non-maturity deposits in the first half of the year, which represents growth in our New York de novo region, as well as gains in our other regions. Now, excluding brokered CDs, we also grew our time deposits in the first half. And the key ingredients for this success are leveraging our brand as America's most exciting bank, which is going very well, and as I said to many of you, both internally and externally.

Packaging key loan and deposit accounts with checking accounts and targeting price promotions, [initially] to build money market accounts and now as I said, we are blending in more time deposits. And I've also introduced to you before, Sean Gray. He is our energetic retail exec. He uses this very detailed score cards throughout the entire retail network. He keeps very close tabs on how we deliver these ingredients to the market and I think it's really produced results.

Now total deposits did decrease in the second quarter and I indicated in our last conference call that we were going to allow some run-off of higher cost of balances, particularly in the municipal sector. Now this run-off accounted for much of the second quarter change, including the run-off of brokered CDs.

Also frankly, I think, we are seeing signs of less liquidity in the commercial sector in our markets, which is not surprising based on economic conditions. Importantly though, we still were able to grow the number of commercial checking accounts at a 5% annualized pace in the first half. And that is an important metric at this time.

So as you can see, we have taken very deliberate steps in managing our loans and deposits. The result was a 3.45% net interest margin in the second quarter and together with higher loan balances, this drove a $350,000 linked quarter increase in our net interest income and of course that was key to our earnings growth for the quarter.

Now turning to fee revenue, we made solid progress here as well. And after a seasonal dip in the first quarter, our deposit fee income increased by 15% in the second quarter. The run rate of our wealth management fees this year is up about 8% over the fourth quarter of 2007, and this was the first quarter that did include our acquired Vermont operations.

We have a very strong 18% annualized organic growth rate based on new business originations in the second quarter. And at mid year we have got a very strong pipeline and new business opportunities for the second half of the year.

Now as you know, most of our wealth management fees are tied to stock performance, stock market performance, and so this did impact second quarter revenues and it may very well impact revenues in the second half of the year, and so we will have to see how that goes. Nonetheless, we are building strong new relationship volume, which as I said, continues to add, I think impressively, to shareholder value.

I want to mention that we receive a trust performance report that's produced quarterly and ranks banks nationally by trust performance. Our wealth management function was rated 14th out of 400 institutions in terms of gross return on assets in this most recent ranking. And that was the highest rating among New England institutions. And as you know, we expanded into New York in January with the acquisition of the Center for Financial Planning in Albany. And the outlook for growing our business in that large market, I think, is promising.

Our insurance revenues were up a little over 1% for this first six months of the year compared to last year, and this is a little lower than our target for the year. But virtually all segments of property and casualty markets are going through a bit of a softening phase. And with that the result that renewal premiums are often down by 10% or 20%, even more on some of the bigger accounts, and that does hold back our revenue growth. And we have held the line on our expenses, so that insurance earnings have not been negatively impacted.

We've reorganized our sales management, and we've increased our bank sale across sale referrals with the goal of boosting revenue, our growth going forward. And, again, the metric here is growing new business, because insurance does have cycles and if the market comes back, I think this is going to provide, again, strong long-term earnings potential.

In addition to producing revenue growth by market penetration, we are also working on product development initiatives.

In the last quarter, we introduced our Express Business Checking product. Now, this ties electronic delivery channels along with an attractive pricing structure. So we continue to focus on building business transaction accounts as part of our overall relationship banking approach.

And we've also -- we've got some initiatives under development in our retail division right now [that're] very exciting. And I'll be able to discuss those with you in the very near future, and I am looking forward to that.

Let me also say that some of the optimism here at Berkshire Bank is related to our attractive local markets. Now we are enjoying a good summer season this year. It's boosting tourism business in Berkshire County and Vermont and elsewhere in our franchise, but more fundamentally our markets have been comparatively steady. Our growth has been measured, and lenders in these regions did not promote the aggressive practices that were more commonplace in other parts of the country.

Now all areas are experiencing some real estate softness. That's inevitable. But it's been much more pronounced in other areas of the country. Now in a review of May foreclosure activity, we've seen that New England markets had relatively low foreclosure rates compared to the nation; and foreclosure activity in our footprint has been lower when compared to coastal and urban communities in New England.

So, we do view our markets as sound and we are participating in that growth. This geographical strength is also evident in our long performance measures, which moved in a favorable direction in the second quarter.

Our non-performing assets, delinquent loans, and net charges-offs all declined from the prior quarter. And these measures were at pretty modest levels at the beginning of the quarter anyway. Generally speaking these indicators came back down to the same level they were at in the second quarter a year ago. Our non-performing asset ratio dipped to 42 basis points in total assets.

Our accruing delinquent loans decreased to 37 basis points total loans. And our annualized year-to-date net charge-off ratio fell to 15 basis points, compared to loans.

Since the beginning of the year, we have not had a delinquent loan over $1 million. Our total foreclosed real estate also remain nominal at a $1 million in mid-year.

And I would also note, we have no non-performing construction loans. We have no construction loan charge-offs and our residential mortgage and home equity performance continues to be very good.

So, it's a good quarter for overall loan performance. And at our last conference call Shep Rainie, our Chief Risk Officer commented that we had a lot of sonar buoys in the water to sound warnings of potential credit risk. And he is here again and he can give us some additional color on that during the Q&A, if necessary.

We do recognize that economic issues that have emerged in the national markets -- and as you recall nearly two years ago, we took the initiative to boost our loan loss allowance in anticipation that the benign credit environment was ending. And we've pretty much maintained the allowance at this higher level since that time.

Our systemic loan losses did increase from negligible levels, but they remain modest overall. And I do feel that we are adequately reserved based on current conditions, and at this time our outlook is that loan performance should remain good and net loan losses should remain modest.

Now I am going to ask Kevin to provide some more detail on the second quarter, our results, maybe some guidance. And then I'll come back and I'll sum things up. Kevin?

Thank you, Mike, and good morning, everyone. The second quarter was another strong quarter with $0.55 earnings per share, as Mike has stated. This was up 6% over the prior year and in line with our guidance.

We did have some non-core items during the quarter. These are both on the positive-negative side. And in sum total they are offset one another.

So, our core earnings per share were the same as our GAAP results. For the first six months we are $1.13 per share. This was also up 6% over the prior year. With these results, we feel we have a great start to completing the year with solid earnings growth.

The revenue trends in the second quarter were strong. We were particularly pleased with the improvement in our net interest margin, which was up [from] 3.41% in the first quarter to this quarter's 3.45%, especially during these economic times.

With this, net interest income came in better than we expected. Loan bounces were up, deposit balances were down. The decrease in deposits primarily targeted the run-off of higher cost accounts like brokered CDs and large municipalities. Core customer accounts were up strong. Loan losses were modest and core expenses were down, compared to linked quarters.

Before I get into more detail, I think it's important to note that the results also include earnings from our acquisition of Factory Point so the year-to-year comparisons of revenue and expenses are affected. Also our revenue for the first and second quarter includes seasonally high insurance [contingency] revenue.

Our second quarter net interest income rose by 2% or $350,000, compared to linked quarters. This exceeds our expectation, both due to high volume and higher margin. Our annualized commercial loan growth increased by 13% for the first half, as Mike has noted. We expect that the second quarter effects will help us maintain a net interest margin at around a 3.45% mark for the third quarter.

We expect total loan growth in the low single digits for the balance of the year with commercial loan growth offsetting the auto-loan runoff. Therefore we expect our net interest income will continue to grow in the third quarter toward the $19 million level.

Also worth noting are the efforts to protect our margin and our net interest income stream. Our interest rate sensitivity at this time is neutral to slightly asset-sensitive. We do expect short-term rates to increase at some time in our future and we wanted to be ready. We have entered into interest swaps and are promoting time deposit to help us manage our sensitivity. We feel we are well positioned to manage through any interest rate movement at this time.

Turning to non-interest income, this totaled about $8.5 million during the second quarter. This was a little bit less than our guidance, due to softer stock and insurance markets. These market conditions had a negative impact on our wealth management and insurance piece. Our underlying business continues to grow as Mike has mentioned.

Our deposit fees, as we mentioned in the first conference call, [quarter] conference call, are seasonal. And they did pick up in the second quarter as we had expected.

In the third quarter we anticipate total non-interest income of about $7.3 million, which includes insurance fees of about $2.6 million, which will be seasonably down from the $3.7 million recorded in the second quarter, and will be about even with the results in the third quarter of 2007. Our loan loss provision was $1.1 million for the second quarter, which covered net charge-offs and provided allowance coverage for the growth in the loan portfolio.

We ended the quarter with an allowance of 1.14% of total loans, and that is the same level that we had in the last previous three quarters. Our annualized net charge-offs dipped to 13 basis points for the second quarter, which is lower than our expectation for the year. We expect our provision there to remain around $1.1 million for the third quarter and we feel this is adequate to cover charge-offs and lower loan growth projections.

Turning to non-interest expense we accomplished a 1% reduction in core non-interest expense to $17.9 million in the second quarter. And we are targeting to keep these expenses at or below this level in the third quarter. We are expecting an effective tax rate of 30.5% in the third quarter, which will be just a little higher than the 30% normalized rate we had in the second quarter.

As we anticipated, our efficiency ratio was around 61% in the second quarter. And this is expected increase slightly over 62% in the third quarter, due to the seasonal decline in insurance revenues.

During the quarter, we had offsetting non-core items as mentioned earlier. And as a result, there was no difference in our core earnings and our GAAP earnings. We had non-core benefits due to reduction of our tax asset valuation allowance, which reduced the GAAP effective tax rate to 23% for the quarter, compared to the 30% quarter rate. This is offset by non-core charge relating to miscellaneous severance write-offs of some deferred loan costs and the write of some late fee receivables.

None of these items were related to the current year operations and non of them are expected to be repeated. And we do not anticipate any non core items going forward in to the third quarter and fourth quarter.

During the second quarter we repurchased 100,000 shares of stock and we still have less than 100,000 shares remaining in our current authorization. Our average diluted shares for the third quarter are expected to be at about the same levels as the second quarter.

In conclusion, we expect the third quarter earnings per share to be in the range of $0.50 to $0.51. This will be seasonally down from the first half run rate, but will be higher than the $0.49 core run rate of EPS reported in 2007. Where we end up in this range will depend further on the directions of the stock and insurance markets, since they impact the level of wealth management and insurance fees.

I would like to note that we have built the first of five sources of revenue over the last few years, allowing the positive of one source to offset the negative of another. This will help us to ensure stability of earnings over time.

To change the subject, let me take a moment, and touch on our security portfolio. We have no common or preferred equity securities issued by government agencies, except for the Federal Home Loan bank stock. Our total equity securities of all sorts are less than $3 million and there is no significant impairment issues there.

Our corporate debt securities including trust preferred securities totaled $14 million and all are performing and are investment grade-rated. We don't anticipate any significant performance issues with them either.

The rest of our investment securities are conforming mortgage-backed government agencies, along with some municipal securities and industrial revenue bonds.

We do not see any reason to have any significant credit concerns on any of our portfolio at this time. We sold a limited amount of municipal securities that we had that were backed by insurers, from bond insurers that lost their investment-grade rating. We view our investment portfolio as traditional and conservative, and we are not actively adding to it.

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

Thanks, Kevin. Nice job. Our expectation for the third quarter is to continue to grow revenues and to maintain or reduce our expenses, so we can continue to produce positive operating leverage in year-over-year earnings growth. We expect to grow earnings while we're also booking higher year-over-year normalized loan loss provisions, related to modestly higher charge-offs, and I think that's just being realistic.

As Kevin stated, our third quarter guidance is for earnings per share $0.50 to $0.51, depending primarily on how market fluctuations affect our fee income. We are working hard to stay on course with the consensus estimate of $2.15 for full year EPS, and we continue to target our original $2.16 EPS goal for the year, and this would give us full year core EPS growth of about 13% of that.

And our tangible capital improved to 6.3% of total assets at midyear and our tangible book value per share improved to $14.36. As Kevin said, we have got almost 100,000 shares left in our current stock buyback authorization. And we do view our current stock price as undervalued, but we also hope to find other undervalued investment opportunities particularly wealth management and insurance operations that would be a strategic fit for us.

So, we will continue to evaluate our investment opportunities with the ongoing objectives of finding the best means to enhance long-term shareholder value. We will also continue to be active in considering bank acquisition opportunities. Now we would consider situations that might be accretive either to earnings per share or book value per share. But we always feel there has to be a strategic fit and an appropriate long run return on investment in any acquisition situation. And frankly we intend to be patient in finding and acting on any appropriate opportunities.

So I am very pleased to report positive business fundamentals in this environment. And I think this reflects a lot of hard work by our team and a lot of motivation to keep the top line moving forward. The success of our brand as America's Most Exciting Bank was recently featured in a report in The American Banker. And I believe success does breed success and our whole team gets energy and motivation from this.

In May, we were named one of the top 100 performing companies in Massachusetts by the Boston Globe and this was the eighth consecutive year that we received this commendation and I feel that attaining this kind of long run high performance, it involves a balance of both adherence to long-term business disciplines and a willingness, frankly, to constantly reinvent ourselves to adjust to changing conditions. And providing new challenges for our staff and of course offering new benefits for our customers.

And we believe these results will continue to generate strong earnings growth, which we think makes our stock a very attractive investment.

And with that, I am going to conclude my prepared remarks and, of course, invite questions from all our listeners.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Mark Fitzgibbon of Sandler O'Neill. Please go ahead.

Good morning. Actually this is Alex Twerdahl from Sandler O'Neill.

Hi, Alex, how are you?

Good. How about yourself?

Very good, thanks.

My first question is, I was wondering if you could share with us the monthly net interest margins for the quarter?

Sure, Kevin, you must have that or Steve.

Hang on Alex.

No problem. And you said that for 3Q the net interest margins going to go to around 3.45% again?

Yes, we think it will be pretty steady in the third quarter from where it is today.

We have in April it was [3.35%], May [3.43%] and June [3.51%].

3.51%. Great. And then, my second question is, in the insurance revenue line, do you still see that coming at around 60% in the first half of the year and 40% in the second half of the year or do you think that might change a little bit just with the fall off in the second quarter?

No, I think that will be primarily the same because the contingency income is what drives that, Alex, and that's really in the bag at this point.

And then my last question is, if you could share with us from which parts of your franchise the commercial real estate growth is coming from?

That's a good question. It's actually been pretty spread out and we've actually done some business in Berkshire County that we've been chasing for a long time. And we got some big deals here right at home, that some of the big guys had for a long time. And our Pioneer Valley region has a bit of a stretch. That will go into Northern Connecticut and some areas further down in Western Massachusetts because they have their own group there in the Pioneer Valley and they were able to put on some big deals as well.

Frankly I think the fact that the conduits and some of the big guys have kind of walked away from the markets here gave us an opportunity to get some business that we might not otherwise have gotten.

Great, thank you. That's it from me.

Great, thank you.

Thank you. Our next question comes from Damon Delmonte of KBW. Please go ahead.

Hi, good morning guys. How are you?

Hi, Damon, how are you?

Good, thanks, very nice quarter. My question is, Mike, could you provide a little color on your thoughts on the M&A market and if opportunities were to arise what geographies you'd be looking at? Would you look to expand your footprint? Or do you feel bolstering your in-market footprint is a better way to go?

It's a good question and I'm not sure I can give you a definitive answer, Damon, only to say that the opportunity has to be the right opportunity. I think there's some opportunities in our footprint. I think there is some opportunities around our footprint. And it always come down to the strategic, [Fed], it come down to price, it comes down to the willingness for both the buyer and the seller to compromise on a deal situation.

So, I think we would look at both and it is something I'm going to jump over to areas like Pennsylvania but certainly in and around the areas that we do business are areas that we have interest. And there are so many components that go into getting a deal done. It will be hard to say which of any would come first.

Okay, great. You guys are very thorough on the call. That is the only question I had. Thank you.

Mike Daly Thank you, Damon.

Thank you, our next question comes from Laurie Hunsicker of Stifel Nicholas. Please go ahead.

Hi, good morning, Mike and Kevin, Dave and Shep.

Laurie, welcome back. It's great to have you.

Thank you. Just a couple of things. Your OCI mark, where does that stand?

At December, it was a little over a $1 million and as of June we are about $200,000 negative.

Great. Okay. And then just kind of going back to credit a little bit. Just wondered if you could sort of touch on that? You saw improvement just in every single line item. Did you have any sort of non-performing sale of any kind? Or how are you carrying it?

I am going to actually let Shep make some comments on this but the answer is no. We did not sell any loans. I think one of the things we have said for some time, Laurie, is that we are going to be very aggressive. And when something comes up, we are very aggressive about jumping on it.

And there is going to be quarters where we are going to see some reduction in some of our non-performing and delinquent loans. And we will have some others come into the pipeline. I think there is going to be some variation up and down.

I think this was an exceptionally good quarter. We all are pretty happy with it. But, Shep, you must have some color on where we are. I know you have done some additional digging and now would be a good opportunity to share that with Laurie.

Sure Mike. Hi, Laurie. The headline for us was between upgrades and collections and resolutions that totaled a little bit over $2 million this quarter. That was the single biggest change.

Then we had additions and things that moved off to OREO about in balance and then there were just under $300,000 of charge-offs in the portfolio. So those were the key elements.

Okay, great. And in terms of your potential problem loans, I know at March that was $18.8 million going down from the $23 million at December. Do you have a corresponding number for June?

I am sorry. For what component?

The potential problem loans?

Sure. So you're talking sub-standard?

Exactly. In other words the corresponding number in March was $18.8 million. I guess that primarily is consisting of the commercial business and commercial real estate?

Is that up around 22 -- Kevin, do you have a number there?

Kevin Riley It's around $30 million.

So, it's about $30 million.

It's around $30 million.

Yeah.

Okay. Any sort of thought on the jump there between March and June or not?

We are continuing to plow through our portfolio through a series of reviews that we now run every quarter, looking for problems. So we are pretty active about moving things into a watch-list status. So they get worked a little more aggressively early on. A couple of them were construction loans, where we have a strong guarantor.

So the project may be slow but we put the project on guarantor paid interest. And so, there are not often delinquent but we are certainly watching them more carefully and making sure that we are getting paid currently. That is pretty typical of what we are trying do to stay ahead of this.

Okay, great and then, I just wondered, within your commercial business portfolio. That is about $200 million or $198 million. How much of that is loans to sort of the various small one-off type business, one-off restaurant, one-off trade, small retail? People that might be hurt in a deeper recession, I guess. I am just curious.

Right. It's hard for me to give you a firm number on that. It's, I would say, if you broke it down into a small number of large loans, and a large number of small loans, that's probably how it would work. It's probably close to the 80-20 rule, 80% of the loans or 20% of the balance, and 20% of the loans or 80% of the balance.

Got it.

Laurie, we can provide you some additional color on that if you want offline.

That's perfect. Okay and then just one last, one last question here. Mike, to the extent that you've stated you would look at under, under-valued investments in other sectors -- wealth management, insurance and so forth, and bank acquisitions, and I guess just to follow up a little bit on Damon's question too. I mean, how big would you consider on the bank side, what's too big to look at asset wise?

It's a great question, Laurie, but again I think a lot of it depends on the complexion of the deal. So, if you are looking at a deal that has capital accretion to it, there is -- you could do a bigger deal and actually enhance the tangible book of the Company. So I think, it's hard to say.

You usually try to pin me down pretty close, I am going to say that some thing, somewhere between a $500 million and $600 million deal is good. And if it's capital accretive it could be as high as a $1.5 [million -- billion] to $2 billion and a lot of that depends on I think the way that you put a deal together.

And, we are not adverse to partnering with like companies that feel so we can move our agenda forward in the New England area.

Okay and then in theory where would you stand in terms of being on the other side, not that there are a lot of acquirers out there. But where would you, what are your thoughts on potentially selling?

Well, again, I think we have taken a lot of time and a lot of effort to put together a group that's starting to demonstrate that the results are in the forefront of our activities here through New England. And it would have to be, I think, a heck of a deal to move us off of that momentum.

It doesn't mean that there aren't opportunities for us to share in management as we move forward, if the right deal comes along. So I think we are poised to take a look at partnering with people and also taking a look at acquisitions that enhance our tangible book and also accrete to earnings.

Okay, great. And just one last quick question, your assets under management on the wealth side. Where does that stand?

Go ahead (inaudible).

Good morning Laurie. We are about $700 -- a little under $800 million at this point primarily due to the equity market in the first and second quarters.

Great, okay. Perfect. Thank you all so much.

Well, thanks Laurie.

Thank you. Our next question comes from Mike Shafir of Sterne, Agee & Leach.

Hey. Good morning, guys.

Hi Mike. How are you?

Doing well. I'm just curious, in terms of the loan growth projections. I am assuming that a lot of -- or the reduction of loan growth projection is really offset in terms of the run-off in the indirect data on the consumer loan portfolios.

You know it is, and there is another point to that, Mike, that I should share, and that is we have had a couple of a major commercial deals. One right here in Berkshire County, where we financed the construction of the Dick's Sporting Goods and when that was put on, it was our thought that, at the time that it was completed, that would probably go to a conduit or to one of the big guys for permanent financing.

And we found that at the end of the day there was an opportunity for us to do the deal. So in the first half of the year we closed on a couple of pretty good-sized commercial real estate deals that, frankly, we didn't anticipate. So, not only will the, I think, indirect auto run-off affect the amount of loan growth we will see in the second half. I just think that there may be less robust commercial real estate activity in the second half because of that as well and if anybody disagrees with me here just shout.

This is Shep Rainie. I think that's true, but I think it will be counterbalanced to some degree by product that's coming out of the construction book that we will probably retain on a mini firm basis.

Yes, it's a good point. Does that help, Mike?

Yes, absolutely. And also I was just wondering, you guys have spoken a lot to the conduits going away, but what about I guess the local competition? There is certainly a lot of commercially focused institutions in your markets with a significant amount of capital that they are trying to deploy as well. So, just wondering, who are you seeing on a competitive basis?

I think for a lot of the larger deals, we're still seeing more of the larger banks as far as competition goes. One of the things that hamstrings some of the smaller competitors, even if they have a lot of capital is they'll look to do one of the larger deals and then look for participating partners. While that can be good, sometimes it does have some inability to get the deal done with the borrower.

So, I'd say that, on the medium-size deals, there is certainly some pressure to do deals from some of the smaller banks on our footprint. But some of the larger deals we are still really competing with the big guys [TDs] and Bank of Americas.

Well, thank you for that clarity. And also the one that really comes to mind is, I think [Sovereign's] kind of problems have been well-advertised and so forth. And I know that they still have some semblance of institutions from their fleet acquisition back in the day in your markets.

Do you guys see them as well or do you seen any opportunity to maybe acquire, maybe some branch divestitures or with them shrinking their balance sheet, is that something you would look at?

Well, I think we'd look at that. We actually hired the Senior Executive from Sovereign in our Pioneer Valley not that long ago, so we certainly have seen some additional opportunities there in the Pioneer Valley. But it's the same, I think, answer as I give when we talk about acquisitions, Mike, and that is, we are certainly willing to look at opportunities to expand. But it really takes a willing seller to get a deal done, and then it has to be a willing seller that's willing to sell at a price that's reasonable and that we can get a return on.

So, we are going to be opportunistic and we'll keep our options open and we'll look at every opportunity. But it's got to be the right one.

Well, thanks a lot for that detail, guys.

Mike, thank you.

Thank you. Our next question comes from Ross Haberman of Haberman Funds. Please go ahead.

Good morning, gentlemen. How are you?

Good, Ross. How are you?

I just wanted to go back to, you touched upon your investments, and I didn't quite understand whether you did specifically or did not have any Freddie Mac or Fannie Mae preferreds and/or subordinated debt?

We have no Fannie Mae or Freddie, and we have absolutely no subordinated debt either, right?

(multiple speakers) For those two. Yes.

Okay, zero.

Do you own -- own any other general bank trust preferreds?

Yes, we do own a couple of those.

What's your general thoughts about those today? Are you keeping them, are you selling them? I'm just curious what your posture is there.

Well, right now, not all of them are investment grade. None of the banks that they are concerning it that might be on the market. So right now even though they are investment grade and good quality trust preferreds, as you know the market is not a market that you want to sell into.

And just from accounting standpoint, is the -- when you mark this market on a quarterly basis, do you run it through the income or just the equity section?

We run it through OCI.

Okay. Thank you, guys. The best of luck.

Thanks Ross.

Thank you. Our next question comes from [John Stewart] of Sandler O'Neill.

Good morning, guys.

Hi John. How are you?

I am good. How are you doing?

Just a quick numbers question. I believe, just what was the renegotiated loan balances this quarter? I think -- I apologize if you have already mentioned that, but I think it was $2.4 million last quarter. Do you have that number for this quarter?

Looking right now.

$2.6 million.

Okay and what was the linked quarter annualized loan growth in New York? I know you had talked about the growth kind of coming all across the footprint, but I am just curious specifically what it was in your New York markets?

We will look at that but I would tell you that it was probably less than 25% of the overall commercial growth. Now that is not to say there is not a pipeline there. But as far as deals closing, I don't think we had -- they weren't a significant factor in the growth in the first half. Is that right, Shep?

Yes.

Okay and, then, how do you guys kind of view the -- Citizens just sold, I believe it was 15 to 20 branches up there. Does that kind of present an opportunity for you guys? Or are they too far north for that to affect you at all and kind of what are you thinking about seeing that, as far as that goes?

Well, frankly, I would have liked to seen a little look at those branches but we did not get a look. I am not so sure we would go this far north as all those branches reach.

But, I think there is going to be opportunity to look at branch acquisition in and around Albany and perhaps to Pioneer Valley. We will take a good look, and again as long it's priced right and it makes sense, we would be interested.

And then [note were] a couple of quarters or almost a year I suppose into the Factory Point acquisition. I was just curious, if you could kind of give us some color on how that is going, kind of employ retention, deposit retention, things like that.

I believe Guy Boyer has left or he is planning on leaving. Can you just kind of talk about that a little bit?

Sure, Guy actually had come to Pittsfield and the Senior Commercial Officer really took over as our regional guy right from the beginning. And he has really done a remarkable job in Vermont, keeping I would say well over 95% of all the employees that were there when we first made the acquisition and there are some positives, I think from a commercial standpoint.

We just closed the largest deal that Factory Point had ever closed. It was a $4 million or $5 million deal and it was a great deal. So it gave us an opportunity to get some traction in the commercial side. Deposits are actually up in the Manchester and in [Rutland] region in the core areas that we want.

Asset management is kind of holding its own. I wouldn't say that's, we are not shooting the lights out there, but we've got some things underway to move that forward. And of course we really haven't done much insurance there, but we intend to.

So we are pretty happy with what we are seeing. I would like us to accelerate what we can do there to add to that kind of revenue. But all in all, there really has not been any fallouts. It's been mostly positive in the Vermont region.

Okay, great. Thanks.

All right, John. Thank you.

Thank you. We show no further questions at this time. I would like to turn the conference over to Mr. Mike Daly for any closing remarks.

Well, thank you, operator, and I want to thank everyone for being here today. And let me just conclude with these comments.

Our strategy has been, it will remain pretty simple -- sound credit quality no sub-prime, no Alt-A programs, careful management of our net interest margin, a strong organic growth based on our brand and our market position, without question a motivated work force and diversifying our revenues and adding to our product sets, and of course good expense control. I think, if we have the right business values, then we set the right results for our shareholders.

So, I want to thank all of you for your continued support in the Company, and I certainly look forward to speaking with you again at next quarter end.

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