Beacon Financial Corp (BBT) 2009 Q3 法說會逐字稿

Hello and welcome to the Berkshire Hills Bancorp Q3 earnings release conference call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the call over to Dave Gonci. Please go ahead, sir.

Thank you. Good morning and thank you all for joining this discussion of our third-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'll turn the call over to Mike Daly, President and CEO.

Thank you, Dave. Good morning, everyone. Welcome to our third-quarter conference call. I am Mike Daly, President and Chief Executive Officer. With me this morning is Kevin Riley, our CFO, along with other members of the management team.

We released our third-quarter financial results yesterday. Today, we will discuss those results. We will take a look at the near future. And of course, at the conclusion of our prepared remarks, I will take questions from our callers.

So let me start with our earnings. We had solid revenue growth in most of our business lines in the third quarter, and before one discretionary charge we produced $0.22 in earnings per share from our basic operations. We had provided guidance on our last call that we were targeting $0.20 in EPS, and our revenue growth was generally consistent with our expectations.

As we noted in our earnings release, we also produced these results while increasing our loan loss allowance to 122 basis points of loans from 116 basis points at the start of the quarter. As I stated on our last call, we could have situations where we would do a quick sale of problem assets, and such situations could produce bounciness in quarterly results.

As we reported in our release, we encountered that very situation in the third quarter. We have a nonaccruing loan which is secured and guaranteed. We were approached by an interested buyer, and we decided to accept a discount of about 22% to liquidate the asset. We recorded a charge equivalent to $0.08 a share after tax to write down the loan, which we expect to liquidate in the fourth quarter. Due to the charge, our GAAP earnings per share were $0.14 for the quarter.

Now, I will have more to say about asset quality in a few minutes, but I would first like to comment on our balance sheet growth. While our total loans and deposits increased at a 3% annualized pace, in line with our guidance, we did produce double-digit annualized growth in some strategically important areas that we were targeting. This helped to offset the impact of our planned runoff of indirect auto loans and the anticipated runoff of maturing time deposits as we lowered rates to reflect current market conditions.

Our 12% annualized commercial loan growth was actually strongest in our Pioneer Valley region, which included the benefit of commercial real estate activity in Connecticut and Eastern Mass. Berkshire County in Vermont also produced solid new business this quarter. And our New York team contributed some very sound new C&I business based on their extensive contacts in that market.

So all in all, we had good commercial growth in our markets, reflecting the strength of our lending teams and our competitive advantage in the middle market segment attracting borrowers from larger lenders who are certainly less focused on this region.

We've included [force] in a number of our new commercial loans. We've also provided interest rate swaps to larger borrowers looking for fixed rate protection. And we're now seeing average lending spreads well over 3% on our commercial loan originations. And of course, this is critical to improving the net interest margin. Our commercial pipeline remains strong, so I feel we've got some ongoing momentum to maintain double-digit growth in this sector.

On the retail side, we originated $82 million in residential mortgages in the third quarter, bringing our total originations to about $230 million for the first nine months. We've been very busy, as you might imagine, responding to the refinancing demand out there as a result of lower interest rates. But we decided to hold some of our new loan originations this quarter in order to stem the runoff that we were seeing in the first half of the year. And since we have strong variable rate bookings in other portfolios, our overall asset sensitivity remains steady.

Our home equity outstandings grew at a 5% annualized rate in the third quarter. This is down from the 15% annualized rate we ran in the first half of the year, which is partly seasonal, but also the result of some terrific promotions we ran in certain markets in the first two quarters. Our average home equity line usage continues to run at around 53%, and the portfolio continues to perform very well. And of course, we limit our LTVs to 80%.

Now turning to deposits, a real strong story here. We reported 16% annualized growth in nonmaturity deposit balances, which included a 6% increase in checking account balances compared to linked quarter. Now, much of our deposit growth in the first half was produced in our New York region branches, which as you know were open through de novo expansion. We did have growth, however, in all our regions in the third quarter, with particularly strong results in Vermont, which produced 12% growth of nonmaturity deposits. So, nice job in Vermont.

We had $215 million of time deposits mature in the third quarter. The rates on those deposits reflected the higher rates in the market before the financial crisis. So we lost some of those deposits as we reset rates down in the third quarter. But as I said, we were able to more than offset these with very good growth in core nonmaturity accounts. By pursuing these growth strategies, we produced higher net interest income in the third quarter, and I'm going to ask Kevin to give a little more color on that in just a few minutes.

We also reported in our earnings release that we had a 36% improvement in our banking and wealth management fees compared to linked quarter. We actually had improvement in all categories, with the improvement in wealth management fees following after three quarters of lower income due to the decline in stock prices.

The only major revenue category that fell below our expectations was insurance revenues. These revenues decline seasonally every year between the second quarter and the third quarter, as you know. And I would expect these revenues to be soft through year end. But they also reflect tighter pricing conditions in most of our markets and a reduction in insured risk by commercial clients due to the impacts of downsizing and other recession impacts.

Now, we have several initiatives underway in this business line to improve revenues and reduce expenses. As I announced last quarter, Dave Farrell joined our team as Executive Vice President of Integrated Services, and he is responsible for both the insurance and wealth management business lines. Now, with his career background and six Sigma discipline, he's working with our team to employ a lean Sigma to improve customer service, while building a competitive model [geared] for growth and integration using existing resources.

And while this work is going on, we're also moving ahead on the following insurance initiatives -- colocation, combining our insurance offices into our branch offices in certain markets; internal referrals -- the volume of personal and business referrals from bank staff has increased dramatically all year, and for me this is the real litmus test for success in these integrated products, and it is going very well; Web integration through a redesigned virtual bank homepage that is going to be unveiled very shortly; and product development, including expansion into business benefits plans and new insurance financial products that we can offer jointly with our wealth management team.

Now, it's going to take some months for these initiatives to play out, so I look forward to sharing more about this with you in future calls. Early results, though, indicate we will start seeing benefits from these initiatives beginning in the first quarter of 2010. And remember, as we build market share and a larger insurance customer base, we also expect that the insurance market will ultimately harden, leading to better commission schedules when that occurs.

In most quarters, I've been able to share some good news about the development of our regional teams. Last quarter, we announced the new commercial leadership which has joined us in New York, and we're very pleased with the results of this team in their first few months with us. This is a particularly important component of our growth strategy. We're hearing from best-of-breed players and teams at this point who are eager to join our Company, and I expect I'm going to have a lot more to say about that in the very near future.

Now, this quarter, we were pleased to announce the opening of our new Springfield regional headquarters, which we celebrated just last week. This headquarters enjoys an excellent location and visibility, and we will be opening our branch at this location in November. This will be our first branch in the city of Springfield and our first de novo branch in the Pioneer Valley since we acquired Woronoko Savings back in 2005.

This location is very convenient for our service to a wider area, reaching south on I-91 towards Hartford and north on I-91 toward Vermont and east on I-90 towards Wooster and Boston. And based on the heavy competition in the Pioneer Valley region, I think it is important that we have a Springfield presence to extend our reach to the surrounding areas.

So let me turn back now, and I will comment on our asset quality. Our performance metrics continued to be strong in the third quarter. Our accruing delinquent loans actually declined to 42 basis points. We did have two condominium construction loans become nonaccruing in the third quarter, and in both cases these projects were affected by circumstances beyond the slower rate of unit sales in the current market.

As I noted at the start of this call, we discounted one of these loans by about 22% to take advantage of an indication of interest to purchase the asset, and we expect that this loan will be liquidated in the fourth quarter. For the other loan, we recorded a combination of charges and reserves equal to about 15% of the balance, and this borrower has resolved some issues, and several unit sales are now in process.

Our ratio of nonperforming assets was 85 basis points of total assets at quarter end, and it measured 60 basis points, excluding the loan being liquidated. These two construction loans accounted for the only substantial charge-offs that we took in the quarter, and our annualized year-to-date charge-offs remain modest at 52 basis points.

And I'd make this comment. People will say that our NPAs doubled, but we're starting from a pretty low base. So any event could cause a large percentage increase. And I think our overall NPAs are still at a favorable level relative to the industry. I'm not sad about that.

Our residential mortgage and home equity portfolios continued to perform very well. Losses on car loans declined in the third quarter as the balance of these loans decreased through run-offs. This portfolio will be nearly gone by the second half of 2010.

Considering the broader picture, except for these two construction loans, for the first time in a while, we saw deceleration in the emergence of criticized assets in the third quarter. Adjusting for these two loans, the weighted average risk rating of our commercial portfolio was nearly unchanged from the prior quarter, and the amount of potential problem loans declined.

We are working with a number of borrowers who are liquidating assets as needed and making other adjustments to deal with this difficult business climate. And while I'm heartened by these efforts, I do remain concerned about the continuing impact of the recession in our markets.

Unemployment in our markets has climbed, although it remains below the national average. We don't know when business conditions will improve. We don't know how much they may worsen before they bottom out in our areas. And for some of our borrowers, their capacity to adjust may not be sufficient if conditions worsen or do not improve in the next several quarters. In recognition of this, we increased our loan loss allowance to 122 basis points of total loans in the third quarter.

Now, this is the point in the year when we receive updated financial statements from many of our customers, and we'll be evaluating all of this information as a result. I do think it is appropriate to be mindful of our relatively modest annualized level of charge-offs of 52 basis points and remain cautious and aware that talk of the end of this recession will not magically save borrowers who are struggling.

Now, we intend to continue our vigilance in recognizing potential weakness in certain sectors and taking appropriate actions. This is not something we're currently in a position to quantify, but we've got a lot of hands at work. We intend to continue to stay out in front of these events.

I've previously noted the geographic conservatism that has benefited banks in our region, and we don't believe that our markets will become anywhere near as strained as they have in so many other regions. We've got a strong focus on identifying and addressing credit issues as they arise. We will continue to be aggressive in identifying potential problem situations. And we will record charges and reserves as appropriate, as well as keeping constant attention to resolving and liquidating nonperforming assets that do arise. What we won't do is be sidetracked from continuing to take advantage of market conditions that allow us to gain market share and grow profitably.

Now, I'm going to ask Kevin to give a little more detail about the third-quarter earnings, guidance for the fourth quarter and expectations, and then I will return to finish up. Kevin?

Thanks, Mike, and good morning, everyone. I would like to discuss the third-quarter results and give you some color on what you might expect for the fourth quarter.

As Mike has already stated, we reported GAAP earnings per share of $0.14 for the third quarter, and this result was after taking a large charge on a loan for its expected disposition and adding $1.4 million to the allowance for loan losses.

For the third quarter, revenue was where we expected it to be. Our net interest margin improved to 2.96%, up from 2.91% in the second quarter. The margin improved every month in the quarter, with September's margin being 3.03%. These increases, as well as the balance sheet growth, which I will cover next, allowed us to increase net interest income over the second quarter by $400,000.

During the third quarter, as Mike has mentioned, we had good balance sheet growth in both loans and deposits. This growth was accomplished despite our aggressive efforts to price our deposit rates down and our loan spreads up. Liquidity continues to be strong, and we remain prudent on putting excess monies to work due to this rate environment.

Looking forward to the fourth quarter, we expect to see our margin to increase to around 3.05%. Since we anticipate our liquidity to remain strong, our strategies of the third quarter will continue. That will be to hold the line on deposit and loan pricing. We expect the balance sheet growth to slow somewhat due to seasonal trends anticipated in the fourth quarter, so we expect net interest income to increase $600,000 or a quarterly amount of $17.7 million.

Our third-quarter noninterest income totaled $7.3 million. This was slightly under our expectations for the quarter. However, for the quarter, we saw growth in most major income categories. Wealth management income improved as the stock market prices improved. Service charge and deposit accounts increased as deposit relationships increased, led by strong swap fee income, which was approximately $500,000 for the quarter. Loan fees were up sharply.

As Mike noted, our insurance income for the quarter came in below our expectations. As we revamp our insurance business model to compete for insurance in the future, this revenue will be soft. So for the fourth quarter, we continue to see softness in our insurance revenue, which is also seasonally lower, and swap income not being as strong as in the third quarter. So we are projecting noninterest income to be about $6.5 million, which will be down as compared to the third quarter, however, up over the prior year's fourth quarter.

Our third-quarter provision for loan losses exceeded our expectations and came in at $4.3 million. This miss was largely due to $1.9 million loss recognized on a potential disposition of a large construction loan previously mentioned. Also, we added to the allowance for loan loss $1.4 million to increase our coverage for 1.16% to 1.22% of loans outstanding.

We are pegging our fourth-quarter provision to be around $2.6 million, which is what we originally budgeted for the fourth quarter. However, during these times, with an eye to resolving issues sooner than later, losses may fluctuate. We believe this is our current running rate for the past few months and our best projection for the fourth quarter why we are evaluating updated loan information.

Our third-quarter noninterest expense was $18.9 million. This was down from the second quarter due to our noncore items and the special assessment from the FDIC reported in that quarter. Our quarter's noninterest expense was approximately $500,000 higher than we expected. This was primarily due to the higher than expected professional service costs as we spent some money to improve future performance of the Company and to provide resources to our risk management to help manage asset quality.

Loan collection expense increased as we worked on resolving problem assets. Compensation expense did increase during the quarter. This was mainly caused by a conservative accounting treatment toward deferring mortgage origination costs, which we implemented midyear. We are anticipating the fourth quarter to resemble the third, so we're projecting noninterest expense to come in around $19 million.

Our tax rate -- we previously expected our tax rate to be 23% for the second half of the year. Due to the additional third-quarter loan charges, we're projecting our annual pretax income to decrease. Thus, we're expecting our annual tax rate to be 15%. In truing this rate up in the third quarter, it provided a tax benefit of $700,000. This reduced rate is a product of our tax-advantaged revenue being a larger percentage of our overall pretax revenue. We project our fourth-quarter rate to equal our annual rate of 15%.

With that said, we expect to earn $2.1 million in the fourth quarter or about $0.15 per share. This is not exactly where we want to be, but that is where we are.

Before ending my comments, I would like to conclude by pointing out a few things. The Company is very well capitalized after the issuance of 1.6 million common shares in the second quarter. This is currently costing us in our quarterly EPS. However, it positions us well for these times and for future long-term growth.

While we intend to put this capital to good use, we will be judicious and patient. We remain asset-sensitive, and again, while there is a short-term cost of being asset-sensitive, it protects our long-term earnings.

As I mentioned, our liquidity is strong to support future growth, and our security portfolio remains clean except for one trust-preferred security that we have mentioned in the past, which still performs according to contract, and our analysis supports its value. I am confident that we are well positioned to create strong shareholder value as we move through these unusual times.

This concludes my comments, and I will turn the call back over to Mike.

Kevin, thank you for that review. It was very good. I'm told that some people at the webcast had a hard time hearing Kevin. We certainly didn't do that on purpose, and we will be glad to answer any questions in the Q&A if you missed anything.

As Kevin indicated, we do expect near-term seasonal factors to limit our earnings improvement in the fourth quarter. This gives rise to our $0.15 EPS guidance for that quarter. This is below the $0.20 target that I would like to see us at, and we're going to be working hard, I promise you, to achieve a higher result.

Additionally, our quarterly results could be bouncy, pending credit factors, including the dispositions of problem assets. As we did in this quarter, we will explain any such situations if they occur.

Now, looking ahead, it is clear that we can benefit our shareholders by maintaining access to the capital markets. Accordingly, we do plan to move forward in filing the renewal of our shelf registration in the amount of $150 million to replace our original $125 million shelf registration, which expired last month. We used our original shelf registration a couple of times in the last year for common stock offerings, and we've clearly benefited from the ability to access the capital markets on a timely basis under the appropriate circumstances.

We have no immediate plans to utilize the shelf registration. In fact, we didn't use our original shelf for the first two years it was in place. We had a shelf registration that expired, and this filing is simply to renew the registration. We are currently well capitalized with 9.3% tangible equity to assets, and we felt well positioned to be able to take advantage of opportunities that may arise. We're also keenly focused on our goals of accreting our earnings and tangible book value per share, and we intend to be wise stewards of our public capital.

Now, let me finish with this. These are difficult times for bankers. We expect to stay ahead of credit issues, never pretending that they will improve on their own. It is also, however, one of the most opportunistic times we've seen in decades. If we stay focused and we take advantage of the energy and experience of the best-of-breed players that are being drawn to this Company, we grow our market share and use our capital judiciously, we will provide our shareholders the superior returns they expect, and we commit to deliver it.

Now, I'm going to ask our callers and I will invite any of them to ask questions. We will give you the best answers we can.

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

This is actually [Alex Tordahl]. My first question is, with your new regional headquarters in Springfield, how far east do you feel comfortable branching?

Well, we've got -- branching, are you asking me, or doing business?

Both, how about?

Well, we've been able to do business in other part of Eastern Massachusetts, Wooster and even outside of Boston, because many of the people we've hired that work out of the Pioneer Valley region have past experience in those markets. So I don't think there is a limit on what we can do out of that regional headquarters. Obviously, from a deposit standpoint, it makes it more difficult; you use remote capture rather than having branches.

So, from a business standpoint, there is no limitation. From a branding standpoint, we're to have to see in the future how much business we do further east before we consider throwing up more de novo branches.

And then secondly, can you share with us what markets geographically those two CRE construction loans that were added to nonaccrual were in and when they were originated?

Both in Massachusetts, and both of them probably two years ago -- Mike, three years ago?

Okay. And then finally, as earnings pick up in 2010, should we see the tax rate also pick up in 2010?

Yes.

Do you have a -- can you quantify that? Do you have a run rate that we should be using in 2010 or --

Why don't we wait until the next quarter to give you a definitive run rate, unless, Kevin, you want to give him a ballpark?

Around 25%.

25%.

Okay, great. Thank you. That's all my questions.

Damon DelMonte, KBW.

I was wondering if you could give us a little color on the types of commercial real estate loans you've been adding to the portfolio. I guess basically what kind of industries, average loan to values, things like that?

Sure. Mike Oleksak is here. Mike, why don't you answer that question?

Sure. From a credit perspective, our loan to values are typically in the 60% to 75% range. Debt service coverage is in the 120 to 140, and no two loans look the same. So many times, our cash flow is supplemented by interest reserves, cash reserves up front.

With respect to the type of loans, our four regions are very different. And we're seeing different types of opportunities in each region. I would say in general, we are seeing our larger loans or more institutional business, colleges and medical centers, where they have projects going on that the capital markets have not been as open to financing them as they were in the past. So that is giving us some great opportunities.

And then in the Pioneer Valley in New York, because of the additions to staff that we have there, with their experience, we're seeing some nice in-markets C&I opportunities.

Great. With respect to capital, you guys, your [CCE is] at 9.3%. I think it gives you guys a leg up compared to some others with your ability to deploy that capital. Could you just share some thoughts with us as to I guess geographically and sizewise as to what you could do with that? Would you look to stay in the greater Massachusetts area? Would you be opportunistic for an FDIC-assisted transaction that was maybe outside of your markets? Just maybe some color on those, that would be great.

Sure. Both good questions, Damon. I would say this. Geographically, the areas we are in now, which is that Massachusetts, Vermont, maybe Connecticut, New York region, that region there are areas that we would look for potential partners and potential acquisition opportunities. And I think that, as I said before, $0.5 billion to as much as $1.5 billion is probably a sweet spot.

And with respect to FDIC-assisted transactions, if it was an FDIC-assisted transaction and it were right in our footprint, we would be interested. I suspect that we feel strongly enough about the region we're in and our ability to grow in the region we're in that we would not have interest in doing an FDIC-assisted transaction out of market.

Okay, great. And then just lastly, did you have any TDRs this quarter?

Yes. Actually, we had two TDRs this quarter, Shep, didn't we?

Yes, we did. We had two additions to the TDR list. One was a construction loan and the other was an operator of hospitality properties in the region.

Okay. And what was the amount of both of those?

The hospitality was just under $7 million, and the construction loan was about $2 million.

Okay. So what is the total amount at the end of the third quarter?

$27.3 million.

Okay, and how did that change from second quarter?

Second quarter, it was at $19.6 million.

19.6. Okay, great. Thank you very much.

Laurie Hunsicker, Stifel Nicolaus.

Just to circle back on James' question on TDRs, how much of the $27.3 million is in nonperforming?

$3.3 million.

$3.3 million. And how did that compare to second quarter?

$2.4 million.

$2.4 million, okay. And then I guess in second quarter, both of your commercial construction were in TDR at that point, correct or no?

No, they were performing as of June.

They were fully performing, okay. Okay, great. Can we just go back to the commercial construction, these two condo ones? What was the original balance?

Which one are we talking about?

I'm sorry, so the $6.6 million, I assume -- so you charged of $1.9 million in the quarter. I assume the original balance was $8.5 million, but I just wanted to double-check that.

That's correct.

And then the other one that was $5.1 million, it looks like the net charge-off there was $400,000. So that original balance was $5.5 million?

Correct.

And can you give us any details about that, what percentage built it is, how many units?

Yes. I will give you a little color, and then, Mike, you can fill in any details you think I missed.

The larger one, as I said, they're both Massachusetts loans. The larger one was -- we were a participant with one other bank. And this was a loan that had a 25% LTV when it was originated. It had 35% increased sales, which would have reduced the balance by 50% when executed. We had about $10 million worth of borrowers' cash in the deal. And the developer found himself in difficult situation with another project that we were uninvolved in, and this one slowed, and I believe it is now 85% to 90% completed. So we have an offer to purchase and complete, and I think it's probably the right thing for us to do.

Okay. And do you know, where does the other bank stand on this loan?

Right with us, same exact place.

Okay. And so -- I'm sorry, how many total units is it?

30, Mike?

30.

30. Almost half were presold.

And half were presold. Okay. And with respect to -- I mean, I guess in terms of -- you said you were approached by an interested buyer, so you didn't actually market this yet? They approached you, is that correct?

That's correct.

Okay, and so that -- I mean, you feel very comfortable it is going to close in the fourth quarter?

Feel pretty comfortable.

Okay. And then the other one, the other $5.1 million loan, can you give us any details on that one?

Again, Mike, fill in any details, but this was a situation where this wasn't a problem with finding people to buy units. This was an issue that occurred between existing unitholders and the developer. And there was a lawsuit that was put in place that slowed down the progress of it. So that put us a little behind the eight-ball, and we figured the best thing to do was to recognize where we were at. And I think that is back on track at this point. The lawsuit has been settled, and there's several sales that are now pending. Is that correct?

Actually, we have four sales in October.

In October?

Yes.

Four sales in October, okay. And is this a participation or is this just yours?

Just us, just us.

And so how many units is this one?

There are 32 units, plus another portion that can be developed at a later date.

Okay. And so how many total have been sold?

In this particular segment, there has been 11 sold.

11 sold. Okay. And do you have any other exposure to either of these borrowers in any other part of your loan book?

No.

Okay. And can you give us maybe a little more color on your $120 million commercial construction book, how much of that is condo?

Yes, we can do that. Shep?

Yes, the condo piece of that is about 21%, so totaling around $31 million today, book balance.

$31 million. Okay. And then I was just sort of digging around and looking. So when we look at for where you stood at June 30, you had $1 million in condo construction, $1 million in a condo construction loan that was actually written down to 60% of original balance -- this is just out of your 10-Q. I guess can you just give us a little color in terms of --

Yes. That was another one where we sold the note prior to the foreclosure, and so we wrote it down to the balance we thought we were likely to receive. It was at a much earlier stage of construction, and therefore we incurred a larger loss percentagewise.

Okay. And I guess sort of to ask maybe a back-in question here, so of your $31 million, how much would you potentially look to sell in that portfolio, or you feel comfortable with it?

Right now, of what remains, there are four credits that are rated substandard totaling about $8 million. And that is excluding the two that are -- I'm sorry, that $31 million included the two that we just put on nonaccrual. So if you really look at what is left other than those two, there's $17 million. Four of the projects are all in Berkshire County or Central Mass in the Pioneer Valley. They are rated substandard, and all of them are supported by strong liquid guarantors where we do not expect any further erosion in value, but they're having difficulty selling units at the moment, so we rated them substandard on that basis. All are current and performing as agreed. All of them are paying interest out of pocket. And we're working to resolve them as quickly as we can.

Okay, great. Very helpful, thanks. Just one other thing; Kevin, this is for you. If you could just go back to expenses, you said expenses in the quarter included $500,000 in professional fees. Essentially, I guess that is somewhat nonrecurring, but that will stay largely intact for fourth quarter? Or I guess in terms of your guidance, maybe why doesn't fourth-quarter noninterest expense fall by that $500,000?

Well, the $500,000 was the miss to our forecast for the third quarter. Part of the professional -- it's not all professional fees that has caused that overage. Like I said, it is also in regards to the change in the accounting methodology with regards to compensation.

And some of that professional fees, we are spending some more money with regards to looking at things, especially like retooling insurance, as well as looking at market potentials and where strategically we should put resources in the future in regards to the Company. So we are spending a little money, but again, that should fall off. And you're right, it's not recurring. And that should go down, but the accounting change is recurring.

And that was a more conservative accounting change that we took, Kevin.

Yes, I just want everybody to understand what that accounting change was, is that what we did is, for - to protect future earnings, we reduced the way under FAS 91 we deferred origination costs. So really, the run rate of compensation did not increase. It's just the amount of costs that we're deferring to recognize over future years. So it really is going to help the net interest margin and the yield on those loans going forward.

Okay, great. And then just one last question, Mike, this is for you, kind of going here off of Damon's original question on acquisition. To the extent that you said you were interested in FDIC if it's in footprint, it doesn't seem as if there's probably going to be a lot in your footprint. So can you just comment how you look at how you are weighing whole bank acquisitions, again, that fall into that range, that $0.5 billion to $1.5 billion that you mentioned, versus de novo branching? And if you were to de novo branch, maybe what would be your target areas and how you weigh that against each other?

Yes, that's a good question. Let me answer it this way. I think there is real opportunity. And I think that there will be more opportunity as we as turn the year and head into 2010. I think there will be interested partners, and I think there is a chance that we could get some stuff done on the acquisition front in the early to mid part of 2010. I can never be certain about that, but I think the opportunities will be more available. And those are likely in the areas that I mentioned -- any of the Massachusetts, New York, Connecticut areas.

With respect to de novo branching, we use some analytics here that delineate where and when branches should go up based on S-curve analysis and the amount of business that you have in a certain area. And I would probably suggest that de novo branching will occur in the New York region. That is where we have a foothold. That is where additional branches should be able to become profitable quicker. And so de novo branching probably in New York, and if we were to do something in other areas, it's not to say we would never de novo branch, but those are more likely to come through partnering.

Okay, great. Thanks.

Is that it, Laurie?

That's it. Thank you very much.

Mike Shafir, Sterne, Agee.

Hey, my questions have really all been answered, but thanks for the time.

Well, it's always nice to hear from you.

John Stewart, Sandler O'Neill Asset Management.

Mike, I just wanted to go back just to clarify one thing. On the larger of the two condo loans that you were talking about earlier, did you say the original LTV was 25%?

Yes. The underwriting on the loan was pretty good from both the banks. And every once in a while in an environment like this, something happens to slow a project. That is what happened to this one.

So is the V in that LTV, was that completed -- well, estimated completed valuation, or was that cost?

No, that was as completed.

Okay. And you're taking a 22% mark.

Correct.

So that would suggest the value of that project is 20%, roughly, of what it was?

Yes.

So what happened there? That seems like an awfully big mark for a Massachusetts condo project.

Well, I think that the problem is that there's no market for condos right now. And so it is very difficult. You either have to hang on until the market comes back and there are people -- and these are high-end condos. So I think there is likely a issue where people are waiting and they are still not assuming that they are at the bottom. And so time kills in a project like this.

And so, yes, it is a pretty dramatic swing, but I don't think there was anything wrong with the appraisal at the time. I don't think there's anything wrong with the project today. Values are holding in better areas of real estate, but the condo market is one that I think has slowed to a point where you really can't determine value as well as you can in other sectors.

But even 20% of what you thought it was worth two to three years ago seems awfully draconian.

It does.

There was no sort of legal issues --

None.

-- involved. Okay. You don't think that is at all indicative of the value drop for the rest of your book, do you?

No, absolutely not.

Okay, thank you.

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

Thank you all. I know you have other companies that you need to cover today, so I very much appreciate your time and your questions today. And we look forward to seeing you again on the next call.

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