Beacon Financial Corp (BBT) 2008 Q4 法說會逐字稿

Hello, and welcome to the Berkshire Hills Bancorp, Inc. Q4 earnings release conference call and webcast. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions).

Now I would like to turn the conference over to David Gonci. Mr. Gonci, you may now begin.

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

Our discussion 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 Daley, President and CEO.

Thank you, Dave. Good morning, everyone. Welcome to our fourth-quarter conference call. I am Mike Daley, President and Chief Executive Officer, and with me this morning are Kevin Riley and other members of our management team.

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

We also prepared some slides today, which we posted in the Investor Relations section of our website at www.berkshirebank.com. We will be commenting on those slides during our discussion this morning, and we invite you to access them during the call.

Now we are pleased to report that we produced $0.44 of earnings per share in the fourth quarter. This is in line with consensus estimates and with the guidance that we previously provided, taking into account the $0.06 in dilution from our common stock offering.

For the year, we produced earnings per share of $2.06, and this is a record level for us. Adjusting for the $0.07 dilutive impact of the common stock offering, the adjusted EPS totals $2.13, which is just a little shy of the $2.16 guidance that we gave at the start of the year. This reflects some headwinds in the latter part of the year, but I do feel that this was a very solid accomplishment for our Company.

Now before discussing our results for the quarter, I do want to comment that in December, we issued $40 million of preferred stock in the Treasury's capital purchase program, which is also referred to as the TARP. This was in the middle of the allowed range, and today it is mostly invested in short-term mortgage securities. Our plan is to expand credit, but that will depend on market and credit conditions, and we don't expect to rush this process. We are willing to accept some short-term EPS dilution in 2009 while we assess our investment opportunities, and many of you and our analysts have already recognized this.

But I would also note that Congress is debating changes in the TARP program. And frankly, this creates uncertainty for us in terms of how we plan to utilize this capital or how long we intend to keep it. And I'm hopeful that these issues will be settled soon.

We also opted to stay in the FDIC temporary liquidity guarantee program and to sign up for unlimited FDIC insurance on all of our transaction deposit accounts. Our position has been to, as much as possible, participate in these new government programs, which are trying to give the highest assurances to the markets about the stability of the financial system.

I acknowledge the concerns that have been raised about the extent of these government programs, and we hope that the need for them will dissipate and we look forward to the time when our participation in them is completed. Until then, as the largest locally-headquartered regional financial services company, we intend to take abundant precautions to make sure that we have the resources to meet the needs of our markets and to protect the Company for our stockholders and our customers.

Our total consolidated capital level is now over 15% of our assets and our tangible capital is over 9% of our assets. And we haven't had such a high equity-capital ratio since the time we went public. We provided about $30 million in capital to the bank. We are currently holding the balance at the holding company. The Bank's risk-based capital ratio was around 12% at year end, and this is a level that we expect to maintain going forward.

Now, let me comment on a couple of other recent developments. We opened our 39th bank branch in the fourth quarter in the town of Dalton in Berkshire County. And this is the first time we've had one store location that offers not only full-service banking, but also insurance services. We also continue to attract top talent.

We hired Jim Keyes to be our Vermont regional commercial executive. Jim's banking career extends over three decades; it includes large and small banks. He is very well-known in the state, a very capable and experienced commercial banker, and a guy that I think is going to give us a greater presence in Vermont.

We also entered into a consulting contract with one of our directors, a gentleman by the name of David Farrell. David was an executive with TJX. He is the former CEO of Bob's Stores. It is a well-known apparel retailer here in the Northeast. And we are pleased and think he is going to be able to apply his extensive business knowledge to what I think are great potential opportunities in our fee-based businesses.

Now, let me turn back to our full-year financial results. I will ask Kevin to walk through some of the fourth-quarter numbers in a few minutes. But it was a good year for us. We produced 8% growth in core EPS despite some factors that were working against us. These included the decision we made early in the year to discontinue originations of indirect auto loans and to let that portfolio move into runoff. I think this was the right decision from a risk management perspective, but it removed an earnings source that was a benefit to earnings in earlier years.

The stock market contracted in the latter part of the year, and this reduced our wealth management income. That was down $400,000 in the fourth quarter compared to the prior run rate. And soft pricing conditions in the insurance market. We had lower renewal premiums on most of our insurance lines, and we really had to work uphill in insurance all year.

But even in these circumstances, the Company was able to generate EPS growth in every quarter. And this success was based on a number of steps that we took to deal with the changing conditions, including the following. I think through our pricing disciplines we produced a 3.44% net interest margin. That was the highest margin that we've had since 2003. We produced quality commercial mortgage growth of 15%, taking advantage of new lending opportunities which became available due to the pullback in national lenders from our markets. We did drive fee income growth where we had the opportunity.

We introduced a commercial loan interest rate swap program. And despite the unsettled capital markets, we did bring in 15% new money into our wealth management book. And this kept our fee income to about 28% of total revenues in 2008. And I'd also mention we had good expense control. And we held the ratio of our core tangible noninterest expense to tangible assets nearly flat from year to year, and we came in a little under our initial guidance. And the Bank's efficiency ratio improved to 59%.

These operating factors were essential to accomplishing the 8% growth in core EPS that we produced, along, of course, with the continued strong performance of the loan portfolio. Our loan loss provision totaled $4.6 million for the year. This was an increase from the $4.3 million in the prior year. Our loan loss allowance stayed at 1.14% of total loans at both year-ends, and it provided six times coverage compared to the 2008 net charge-offs.

Our loan performance ended the year pretty well. Our charge-offs remain modest, totaling less than 20 basis points for the year. Our nonperformers stayed below 50 basis points compared to total assets. And our accruing delinquent loans were right around 50 basis points compared to total loans.

We continue to have negligible foreclosures and loan losses on our residential mortgages and home equity lines. Our consumer real estate lending portfolio really isn't showing any significant signs of stress. The only component of the retail lending portfolio which is generating regular charge-offs is the indirect auto portfolio, but as you know that portfolio, is in runoff and we expect that the amount of these charge-offs will be declining as we go forward.

Our commercial loan charge-off rate remained at a modest 20 basis points for 2008, which included one commercial loan write-down of $650,000 in the fourth quarter and, frankly, this accounted for a third of the year's total commercial charge-offs.

We've prepared some slides about our loan portfolio in the supplemental information that we posted at the website. And as I mentioned at the start of the call, this information is in the Investor Relations section of the website. So I'm going to walk through those. I'll start with slide 2. And slide 2 in this file shows that our loan performance remained comparatively strong throughout the year and at year-end. But while our experience to date has been favorable, we could see loan performance begin to reflect recessionary conditions. I think that is a reasonable perspective. What I don't see is a dramatic change.

Our markets are geographically conservative. And while loan losses may reduce current period earnings, we do have a strong return on tangible equity, with earnings that can absorb moderately higher loan charges if they do emerge. And we also expect that there will continue to be opportunity for good quality credit expansion, particularly, as I said, national lenders pull back from our markets.

The next slide 3 looks at our construction loan portfolio. Around the country, construction loans have typically been the segment first hit by softer economic conditions. Fortunately, we do not have a large construction loan portfolio. At year-end, our commercial construction loans comprised only 6% of our total loan portfolio. As you can see from the slide, our commercial construction exposure is diversified among a variety of loan types. At year-end 2008, we had only two commercial construction loans totaling less than $3 million which were nonperforming, and we're working aggressively to resolve those. And none of our other construction loans were delinquent.

Turning to slide 4, this shows that our commercial loan portfolio is also well-diversified amongst industry types. And while commercial real estate loans make up around 80% of our total commercial loans, they are diversified among a variety of borrower and property types. Our nonperforming commercial loans were only 1% of the commercial portfolio at year-end, and the performing loans delinquent 30 days or more were only about 0.5% of the portfolio. Our performing troubled debt restructurings remain modest at 60 basis points of the portfolio.

So I think you can see that at this point we have a strong capital position and we've got strong asset quality. And I think this is critically important as we head into the new year.

I'm going to ask Kevin to fill in a few more details on the fourth-quarter performance, and then I'm going to come back and I'm going to talk about next year's guidance.

Thanks, Mike, and good morning, everyone. Earnings per share for our fourth quarter was $0.44, net of the $0.06 dilution impact of our common stock offering. This total was in line with our previous guidance. However, we got there a little different than we expected. We generally achieved our net interest income goal of $19.5 million; however, our margin was lower. We had expected a quarterly net interest margin of around 3.45%. However, the actual margin came in at 3.41%.

We had predicted that the margin would contract in the fourth quarter. However, we did not anticipate the Federal Reserve to reduce the fed fund rate to 25 basis points, causing the Bank to run into some market floors on its deposit pricing. During this period, we remained committed to our deposit pricing discipline, even though we saw some unreasonable deposit pricing from national and local competitors.

We did produce a 4% annual growth in average loans and deposits when compared to linked quarters. This growth, along with the benefit from our preferred stock proceeds, helped us achieve our net interest income goal.

Our noninterest income of $6.4 million was below our $7.5 million guidance. As Mike mentioned, a key miss was our wealth management income, which is tied to the markets. All other business lines seem to have suffered due to this market turmoil.

Our $1.4 million loan loss provision was just a little over our guidance. Despite the news of losses from around the nation, the behavior of our loan portfolio continues to be well within ranges anticipated for our loan loss allowance, which stands at 1.14% to outstanding loans at year-end.

Turning to noninterest expense, we brought this in below our expectation, with total non-interest expense of $17.3 million, compared to our guidance of $17.8 million. This was primarily due to a reduction in incentive compensation. We also benefited from a 28% effective tax rate, which was lower than our guidance of 32%, due to the benefit of some additional tax-advantaged investments.

I would also like to note that our investment portfolio continues to perform well and we had no write-downs during the year. All of our rated debt securities are investment grade and the only unrated debt securities are about $40 million in municipal and economic development bonds. Our mark to market on our available-for-sale securities was relatively modest at $3 million at year-end, and this impairment is viewed as temporary.

That is my overview of the quarter, and I will turn the call back over to Mike.

Thanks, Kevin. Now I would like to turn to the subject of our guidance for the current quarter and for the year. I would like to address some of the key issues we've been dealing with, and then I'm going to again ask Kevin to provide some detail on the comments that I make at this point.

This has been the most challenging budget season that many of us have ever faced. And as you know, we view it as important to provide guidance to the investing public and to have communications that are comparatively high-level and transparent. Now, we've got a pretty good track record here, and we've met or exceeded our guidance in most recent quarters. We expect to continue to provide guidance, but I do want to caution that we are going to allow ourselves a little more latitude for revisions of the annual outlook as we proceed through the year. None of us can accurately predict how the current financial and economic circumstances are going to affect our business prospects. And also, if charge-offs do become elevated, they typically don't show up in even amounts, and they can introduce volatility to quarterly results.

On our last conference call and in discussions with investors, I had commented on some of the issues we were facing in 2009. So let's turn to slide 5 where these are outlined, and I will start taking you through them.

We've identified several of these items as baseline adjustments, and Kevin is going to explain in detail how our adjusted baseline was calculated. But the idea of these adjustments is to identify the several major factors which are related to actions relating to our strength as a depository institution and to look at how these have impacted our running rate going into 2009.

So let's start with stock dilution. We issued more common shares with our common stock offering, and we will have a 5% coupon to pay on the preferred stock. These will both have some dilutive effect on our 2009 EPS, which has generally been recognized by the analyst community. As we have previously noted, we would like to keep our tangible equity to assets over 7% going forward, and we are also likely to keep the Bank's risk-based capital at 12% or higher as well. And of course, this is well above the 10% threshold to be in the well-capitalized category.

Now, we've not made any specific plans to leverage our new capital, but we will be evaluating this as we go through the year. And our guidance does anticipate some additional leverage, as Kevin is going to explain. Clearly, our new capital gives us a stronger capital base and it also gives us the means to expand credit. And our new common equity gives us an ability to expand by acquisition as circumstances may allow. We will not, however, move in an undisciplined manner in our effort to leverage the capital, and our first concern will always be to operate in a safe and sound fashion and to maintain strict disciplines on our asset quality.

Let's talk about the higher loan loss provision. Our loan loss provisioning has been pretty stable for the last two years. We do anticipate it could be higher in 2009. We also anticipate there could be a similar increase in net charge-offs. Now, our charge-offs have remained below 20 basis points compared to total loans. If it were to double in 2009, we still wouldn't view this as unduly high for a recessionary environment. I believe it is appropriate planning to anticipate potentially higher charge-offs, and we've done that.

As far as FDIC insurance goes, like many banks, we have had minimal FDIC insurance expense in recent years. The basic premium is increasing to around 12 basis points in 2009, plus we will be paying for the incremental cost of unlimited transaction and account insurance. In general, we can't pass these costs on to the customers in the current pricing environment, and so they become an element of additional cost for us to absorb in the short term.

In addition to these baseline adjustments, I would also comment on two other challenges that we've addressed while budgeting. Margin pressure. Kevin has commented on the pressures on the net interest margin in the fourth quarter. The latest Fed moves were late in the quarter, so we will have a full quarter's impact beginning in the first quarter. In our planning, we've assumed no change in interest rates for the balance of the year. We plan to continue to maintain a modestly asset-sensitive position so that we will benefit when rates start to rise, as we think they must in the future. We are hoping to see this happen before the end of the year, but we are conservatively assuming that our margin will be under pressure all year.

In regard to our local economies, we expect to achieve volume growth in most business lines, but will be fighting for good business in a recessionary environment as we do it. We also anticipate some recovery in the capital markets.

These are the key factors affecting our outlook for 2009, and when you put them all together, they produce an adjusted baseline running rate of $1.36 per share, and we're targeting to push earnings up another 10% from this level to a total $1.50 per share in 2009.

Now, I am going to ask Kevin to walk through some of these numbers in a little more detail, and then I will return and I'll conclude our presentation.

Thanks, Mike. I will put some detail behind Mike's comments on guidance and add some color to the baseline adjustments. We will start with slide 6, which shows the impact for 2009, and then follow with slide 7, which shows the impact for the first quarter of 2009.

We start with a baseline EPS of $2.06 for 2008. We show that there is a $0.17 dilutive impact from our common stock offering and the $0.14 dilutive impact from the TARP preferred stock offering. This analysis assumes that we have invested the offering proceeds and securities with short-term durations averaging yields in the range of 3% to 4%. As Mike has said, we will be patient in assessing further investments and leverage [incision] regarding the capital, and we will wait for regulatory guidance on how to report our planned loan growth in relation to the TARP capital. So our adjusted 2008 baseline after the capital dilution is $1.75.

We next show the impact of our estimated loan loss provision of $10 million, which is a little more than twice the amount of our 2008 provision. As Mike has indicated, this is to cover estimated charge-offs and portfolio growth. This would cost us an additional $5.4 million, or $0.30 per share.

Our next adjustment is for FDIC insurance costs, which estimated to be $2.4 million, or an additional $0.09 per share change from 2008. That brings us down to $1.36 baseline for 2009.

As Mike has stated, we are announcing earnings guidance for 2009 of $1.50 per share. I will discuss some of the details on this in a moment. This is a 10% increase over the baseline, and we expect to produce this increase through revenue growth, while holding operating expenses close to flat.

The next slide, slide number 7, shows a similar analysis for the first quarter of 2009, starting with 2008 baseline of $0.58 earnings-per-share, arriving at a $0.35 2009 baseline, using the adjustments that we have already discussed.

For the first quarter, our guidance is that we will produce earnings of $0.36 per share, which is $0.01 above this baseline. This reflects where we are right now in terms of the margin squeeze and the current market conditions. For the year, as we noted, we plan to produce 10% earnings growth above our adjusted baseline, but we will be starting close to our baseline in the first quarter and are planning to produce incremental growth in each exceeding quarter in order to reach our goal.

Now that we've looked at the components of our adjusted baseline, we can turn to slide 8, which shows the components of our earnings guidance for 2009. You can see that we are projected that net interest income will be up approximately 3% at $78.1 million, with our net interest margin to be in the area of 327 to 332 basis points. This reflects the deposit pricing pressure we have discussed. We are hoping to see higher loan rates, but will also experience pressure in the loan portfolio yields if there is a pickup in nonperformers.

On the deposit side, we are expecting about 3% growth in average deposits, and we are expecting an increase of about the same amount in loans. And this growth is expected to be around 6% ongoing with the runoff of our indirect auto portfolio. We also plan to leverage our new capital to the tune of about $40 million in the coming months.

Turning to non-interest income, this is where we expect to post most of our revenue growth, with a total increase of a little more than $3.6 million, which is a little more than an 11% increase. We are expecting double-digit growth in our wealth management fees and our deposit and loan-related fees. Despite the drop in the market, our wealth management function has drawn increased interest based on its investment track record and our high level of client interaction, which is particularly valued in this environment. Regarding deposit fees, we are looking for volume growth and new product introduction, along with fee adjustments in certain areas.

On the loan side, we expect higher secondary market income and continued success with commercial loan interest rate swaps, which brought in more than $400,000 in new income in 2008. We also expect a slight increase in insurance revenue. We expect these initiatives to provide approximately 6% growth in total revenue in 2009.

On the expense side, as we have discussed, our expectation is for higher loan loss provision and a higher FDIC insurance expense. As we have stated, we are looking to hold the line on all other operating expenses. We expect a tax rate of around 30%, and we are estimating that all-in after-tax costs of the preferred stock, including warrants, will be around 6.4%, although our expense in 2009 will be a little less than this since the first dividend will not reflect the full quarters outstanding.

We project our diluted common shares will be in the area of 12.2 million for the year. As you can see on slide 8, the total projected income for the year is around $18.3 million or $1.50 per share.

I won't spend much time on slide 9, which provides our guidance for the first quarter. As you know, we had unseasonably high insurance revenues in the first quarter. We are projecting earnings per share of $0.36 in the first quarter, which is $0.01 higher than our adjusted baseline of $0.35. We expect our revenue enhancements to come in onstream over the course of the year, and we do not project much benefit from them in the first quarter, which is typically a slow quarter for new business and a shorter calendar quarter.

We had $19.5 million in net interest income for the fourth quarter of 2008 and we are seeing that come down to $18.9 million in the first quarter. Our net interest margin was 3.41% in the fourth quarter of '08, and we are seeing that coming down to about 3.27% to [3.30%] in the first quarter of '09, and the improvement slightly over the remainder of the year. We penciled in a loan loss provision of $2.2 million in the first quarter, and the actual results could come in higher or lower depending on how things develop in our loan portfolio.

In summary, you can see that we are expected to start a little above our baseline in the first quarter and to complete the year about $0.14 above the adjusted baseline. So we are generally expecting to pick up about $0.04 per quarter throughout the rest of the year as we build higher revenue while keeping our general operating expenses flat.

This completes my discussion on the detailed earnings guidance, and I'll turn the call back over to Mike.

Thanks, Kevin. Nice job. So to summarize, we are providing guidance of $1.50 for 2009 EPS and $0.36 per share for the first quarter. This is the first time I've ever provided guidance for lower earnings, and the changes here are significant.

The key elements going into the adjusted baseline, the stock dilution and provisioning and FDIC premiums all have to do with our safety and soundness and maximizing our depositor protections, and we are willing to sacrifice some near-term EPS in order to achieve these results. We will hope that conditions settle down and that we will have a clearer ability to assess our investment options and to profitably leverage earning capital to produce higher EPS. And of course, we continue to evaluate acquisition opportunities, and we will consider banks and insurance agencies and wealth management opportunities as they arise during the year. And we hope that we will produce further EPS growth due to acquisitions before we complete the year.

So while we will be hoping to improve on these results, I would stress that this is our best guidance for the year. And I would encourage everyone to understand our reasoning and not to set out expectations that the results will be different from this. I think we've got a pretty strong handle on the direction of the first quarter, and I think $0.36 is the best we can do in the quarter. And as Kevin has discussed, we've already built in expectations for baseline earnings growth after the first quarter, and we are going to be challenged to meet or beat those targets.

Before I close my remarks, I want to reiterate our strong results for 2008, which are summarized on slide 10. We had 8% growth in core EPS. We had 12% growth in tangible book value per share. We had 9% dividend growth. As we've shown, we expect to carry this momentum forward in 2009 with a 10% growth over our adjusted baseline. This will be solid improvement in the long-run earnings stream of the Company.

The baseline adjustments represent additional adjustments that we need to absorb in the short term while we incur the costs of maintaining a fortress-like balance sheet. Our earnings will be down, but the Company will be healthier.

Now, we have been preparing for this environment for the last several years with important investments in our people, our geographies, our technology, our earnings growth and our capital position. So I believe the decisions we make now will have a real impact on how we will come out of this environment in better shape and better-positioned as one of the most attractive investment opportunities in our marketplace.

Now with that, I am going to conclude my prepared remarks, and we will invite questions from our listeners.

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

Good morning. And, gentlemen, thank you for providing all this detail. It is helpful.

Thanks, Mark. Nice to have you with us.

Just a clarification on a couple of points that you made, first with respect to the margin. Kevin, I think you said that you expect the margin to be in a range of 3.27 to 3.32. Was that for the first quarter or for the full year?

For the full year.

Full year, okay. And then secondly, you alluded to double-digit growth in deposit fees and wealth management. In this environment, that seems like an aggressive assumption. What is going to drive that?

I'll give you a couple comments on that, Mark. One of the things we were pretty encouraged with is a strong pipeline and a strong growth in asset management towards the end of the year. Now, there is some risk here that the markets remain in the area that they are or even go down further in the first half of the year. But I think our hope and our speculation is that with the 15% to 20% increase in the overall business and new customers that we've garnered in wealth management, any uptick in the market should increase the fees exponentially.

Okay. And then on your home equity portfolio, I wondered if you could give us a sense how the utilization rates are tracking. Are you seeing much of an uptick in those?

Shep is here, our Risk Manager. So Shep, why don't you give us -- I know you've done a lot of deep dives on that.

Hey, Mark. The answer is utilization has ticked up from the last time we talked about it. It was as of September 30 and it was around 45% at the time. Today, it is around 47%. We have looked a little bit at where that is coming from, and it is actually some of our more relatively recent borrowers. And we think that the issue there may simply be the fact that the cost of home equity debt is a heck of a lot cheaper than the cost of a credit card or other alternative borrowing venues for our customers.

Okay. And then the last question is sort of a macro one for you, Mike. Could you talk a little about the acquisition environment? Today, do you think the opportunities are more attractive in banks or asset managers or insurance? And then within the bank sphere, would you be willing to buy a very troubled company or is your focus going to be on sort of generally clean companies?

It is a great question, Mark. Let me start with the opportunities across the board. I think that clearly, we anticipate that there may be additional opportunities in all, wealth management, insurance and in banks, in some of our geographies, hopefully at better prices than they may have been a year ago. So we are going to be strategic in that regard.

I think with respect to troubled banks, there is no question we are going to keep our eyes open. We are on the list with the FDIC with respect to being alerted to any banks that they feel we can be helpful with. But I would add this. If we were to do something with a troubled bank, it would have to be something that we spend a lot of time looking at and doing our due diligence. Because one thing I don't want to do is put this Company in a situation where we are spending all of our time dealing with somebody else's problems rather than moving forward on the agenda we have.

So it is not out of the question, but it's going to have to be something that has some efficiency to it and something we can make a lot of money if we were going to do it.

Thank you.

Laurie Hunsicker, Stifel Nicolaus.

Thanks. Good morning, Mike and Kevin. Just wanted to also second Mark's comments -- thanks for the very detailed breakdown on earnings guidance. Appreciate that.

Just wondered -- kind of more focused on credit here. Noninterest expenses that you are projecting of $73.8 million -- roughly how much of that number would be designated to REO expense?

Anybody have that number? We're going to get it for you right now, Laurie.

Okay. And maybe just along those same lines, if you could comment generally -- your loan loss provisions matched your charge-offs this quarter. Do you anticipate keeping your reserves to loan targets the same, as we are kind of trying to back into what you are looking at for charge-offs? Or maybe asked another way, what are you forecasting for charge-offs for '09?

We can answer both of those questions. Shep, do you want to give us some color?

Clearly, we don't have a specific target on what our loan loss reserves are. I think the critical factor is we build our estimates from the bottom up, looking at, obviously, what new loan volume we did and how we are provisioning that, and then developing our pool loss rates and our impaired loss rates from there.

That is -- what we are expecting is a higher level of charge-offs -- or what we are anticipating is the possibility of a higher level of charge-offs this year, just simply because of the downward migration in our loan portfolios.

Laurie, one of the things I would add to that is, it has always been my experience and I know the experience of many others that it is loans you don't know about that usually surprise you and cost you some money. So I think we have taken, in an abundance of caution, a good provision number. I'm not suggesting that we won't use it. I'm hoping we don't use all of it.

But I think with everything that is happening around us, the economy being what it is and our own internal look at loan migrations, it makes an awful lot of sense to increase the provision and take current-period earnings and keep capital where it is.

Okay.

And Laurie, on your question in regards to ORE, or loan expense, we are increasing from [685] in 2008 to $1.310 million in 2009.

Okay, great. Thanks for the detail on that. And then specifically as it pertains to your commercial real estate, could you just take us through a little bit -- linked-quarter, your nonperformers went up from $6.2 million to $7.7 million, and obviously charge-offs in the quarter a big component at $900,000. Can you just to take us through that?

Shep, this is -- we are talking about one loan, two loans. Why don't you give us some color?

Yes, it is actually -- the $900,000 in charge-offs is really two loans. One is a construction and development loan, where the principal is not able to continue to maintain payments, as many of our other borrowers are doing. This is one that we are probably going to be taking more aggressive action on in the coming quarter. And it just seemed prudent at the time as we did our analysis to look very hard at what we thought the value was. It is very hard to estimate the value, as you can imagine, of permits and a development in this environment. But appraisers are taking a very cautious approach, and we are trying to do the same.

The second was a loan that is moving toward a foreclosure, and we are a little uncertain as to the realizable value on that one. And so we prudently took a proactive hit on that, and we are continuing to try to determine where that is likely to come out. The foreclosure on that loan is probably going to occur in the first quarter, so we will have resolution on it before the end of March.

How big are both of those loans?

One loan was $3.2 million and the other loan was $2.6 million.

And what percentage are they, sort of land versus developed?

The loan that is moving toward foreclosure this quarter is a fully-developed property. It was not in the development book. It was in the commercial real estate book.

Okay.

The loan that we took a charge on this quarter that is in the development book, it is probably -- in terms of value, it is probably 50-50 built and permits at this point. It was -- there is a heck of a lot of unbuilt permits in that property and a small number of built units. Is that responsive to your question?

Okay. Yes, that does. And then with respect to the linked-quarter increase in nonperformers in the commercial real estate, the $6.2 million to $7.7 million? Did most of that increase relate -- well, actually, not the one in foreclosure -- I guess did most of that increase relate to that construction and development loan?

Yes.

Okay. And then just within your commercial construction book of $130 million, you mentioned that there are two nonperformers in there less than $3 million. I guess really it would be mostly that one, that construction and development, for $3.2 million?

Yes.

I would mention the other one actually came down during the fourth quarter. So we had some progress on that one.

Okay, great. And then just the last question on this portfolio, what percentage is that land versus built?

In the whole portfolio?

Yes, in the whole portfolio, just really rough.

Land, unimproved and improved, is about 12% of the construction portfolio.

Okay.

And the rest is built. And it's, as you saw in the slides, relatively well-diversified among hotels, offices, retail, etc.

Okay. So in the commercial construction book of $130 million, roughly 12% land, okay. Great. And then just one last general question, Mike, for you, just to follow up on what Mark was asking you in terms of the acquisition landscape. Geographically, given how things are shaking out, you're seeing massively different unemployment in different MSAs. Where is the sweet spot of where you would like to be if you did a bank acquisition?

Albany, New York.

Okay, great.

Just to be fair and put a little color behind that, all of the markets we are in we are happy with, we like and we think generally they are stable. New York has got a little bit more than stability. They still have some real upside. And so we view that market as very advantageous for us across the board.

Okay, great. Thanks very much.

[John Stewart], Sandler O'Neill Asset Management.

Good morning, guys. I guess maybe just to follow up on that last question, is there -- just with some additional color on the M&A -- is there kind of a target size range for an acquisition on the bank side that you would be looking to do, maybe relative to the Factory Point deal?

It is a good question, and we probably would have been able to be more specific several months ago. I think there generally will be more opportunities. In fact, we've looked at several opportunities in the last several months and we've passed on a good number of them based on credit quality issues.

I think somewhere between $200 million and $1.5 billion. And I hate to give you such a big range, but there are pockets in some of our geographic areas, John, where we would pick up a small acquisition if we thought it was a good place to add branches and to acquire branches, to a larger bank that we thought from a partnership standpoint made a real strategic difference to us.

Okay. And again, the focus, you said -- you were suggesting was Albany, New York. Is that right?

I think Albany, New York. I wouldn't outrule Connecticut; northern Connecticut is an area we've been trying to get into. And I think north and south of Albany, so that we can round that out. And of course the Pioneer Valley and Worchester area are other areas that we've taken a look at and certainly had some people garner our attention.

Okay, great. And then just a couple numbers questions. What was the renegotiated loan balance this quarter? I think it was $6.6 million last quarter.

Yes, it was $6.1 million of performing TDRs at year-end, and that was down a little from $6.7 million at the end of the third quarter.

Okay. And then finally, what was the FDIC insurance cost in the fourth quarter? I know you've given the detail for the first quarter as [54]. What was it in the fourth quarter?

John, we missed the question. We had a volume issue here.

Pardon me, gentlemen. He actually disconnected his line.

Can you get him back:

If we can get him back, I will put him back in. In the process, would you like to move on to the next question?

Sure. We will take Damon's question; we will come back to John.

Damon DelMonte, KBW.

Good morning, guys. How are you? Just a point of clarification. On your commercial construction book, are any of those loans out of market? In other words, are they a part of a shared national credit program?

No.

No, okay. Do you have any loans at all, regardless of the category, that are outside of your marketplace?

Boy, I would say we've got some that are outside of our market. If there are some that are outside of our branch network, then they are in the New England area in and around our markets. And I don't think we have anything really outside of that geographic area, do we, Shep?

No, and I think in general, our focus, Damon, has been always to deal with people that we know. So even if we went down to Boston area, it is always with a developer we know from our region.

I guess my question was more directed towards like, Florida, Arizona, California.

That's what I thought. And so the answer is unequivocally no.

Thank you. Lastly, could you just provide a little color on what you're seeing? We read the headlines and we see that in the Albany market there have been job losses and throughout Massachusetts and now into Connecticut there have been job losses. Are you guys seeing signs of stress from your small business customers, or are things still holding up pretty well?

The answer is we are seeing some signs of stress. I think it would be unrealistic for us to say that there weren't companies in and around our market area that were laying people off. We've got some smaller companies in the area that are reducing salaries across the board in order to make ends meet.

So I think there is stress. I think there is stress in all of our market areas. I don't think Albany is the one I would pinpoint as the most dangerous with respect to layoffs, because I think they have a better opportunity to replace those jobs with some of the new companies that are coming into the technology space. But yes, we are seeing signs of stress, no question about it.

Thanks. Most of my other questions have been answered. Thank you.

(Operator Instructions)

Operator, we were never able to get John back on the phone?

Actually, he has just rejoined. One moment.

Sorry about that. I'm not sure what happened there.

Can you repeat your question to us, because we didn't hear it?

Okay. I was just curious about the FDIC insurance costs in the fourth quarter. You've disclosed what it was for the first quarter, but I didn't see it for the fourth.

It was around $300,000.

Okay. That was my only other question, so the rest have been answered. But thank you very much.

Mike Shafir, Sterne Agee & Leach.

I was just wondering -- I know that you guys said that loan growth was going to be somewhat mitigated this year in terms of you guys being a little bit more selective in the stuff you want to put on your books. And maybe you could give a little guidance on the commercial side.

Sure. My hope is we will do better with respect to the amount of commercial business that is available to us. What we are seeing today is simply everyone chasing after what seems to be very good credit, and at times, pricing at levels that we are not willing to price at.

I think we are looking at this point somewhere around 8% or 9% commercial loan growth. And I'm hoping that we can push that up to double-digit, if my guys don't kill me for saying that. But I would really like to see us do 8% to 10% commercial loan growth. I think there is some good business to be had, and I think we just need to be selective and aggressive about it.

Okay. Thanks a lot, guys.

Okay. Thanks, Mike.

Gentlemen, we show no further questions at this time, and I would like to turn the conference back over to Mr. Daley for any closing remarks.

Great. It was a pleasure having everyone here today. We tried to be clear and concise with our message. We thank you all for joining us, and we certainly look forward to speaking with you all again next quarter.

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