Oct 24, 2008
Executives
David H. Gonci – Corporate Finance Officer.
Michael P. Daly – President, Chief Executive Officer & Director Kevin P.
Riley – Chief Financial Officer, Executive Vice President & Treasurer
Analysts
Analyst for Mark Fitzgibbon – Sandler O’Neill & Partners, LP Laurie Hunsicker – Stifel Nicolaus & Company, Inc. John Stewart – Sandler O’Neill Asset Management Company Mike Shafir – Stearne, Agee & Leach Damon Delmonte – Keefe, Bruyette & Woods
Operator
Welcome to the Berkshire Hills Bancorp Q3 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’d like to turn the conference over to David Gonci.
David H. Gonci
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 www.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 Form 10K and 10Q.
Now, I’ll turn the call over to Mike Daly, President and CEO.
Michael P. Daly
Welcome to our third quarter conference call. I’m Mike Daly, President and Chief Executive Officer and with me this morning are Kevin Riley and other members our management team.
We released our third quarter financial results yesterday and today we’ll discuss our results and our outlook for the current year. At the conclusion of our prepared remarks we’ll take questions from our callers.
As you’ve seen in the press release we had another strong quarter and remain on pace for records earnings and earnings per share. There’s a lot of good news in this release that I look forward to sharing with you in this conference.
Before I get in to the third quarter details however, I would like to address our capital raise that we announced this month. A major accomplishment for our company was our $36 million capital raise which we sold on two of the worst market days that we’ve seen on Wall Street until today maybe.
While we were there talking with investors, one of them asked a very pointed question to me and the question was this, if we weren’t reading the newspapers and watching the endless TV reports, would we have the same kind of panicked impression of economic and financial events in our communities that we’re hearing about in the media? Well, I can honestly respond that for the most part today we don’t.
For the most part, things are going along reasonably well. I will comment a little later about some of the highpoints but the general pace of life and of business is not noticeably different to us at this time.
Sure, we see some signs of real estate slowdown and we’ve had a restaurant here or there close up and we’re managing potential problem credit aggressively without over reacting. For the most part we’re taking in deposits, we’re making loans and we’re collecting loans at a reasonable rate.
A little slower than before but business is moving forward and there are opportunities in our markets. I’ve said before that our markets have been geographically conservative and that our banking practices are and have been disciplined.
We did not operate subprime lending programs. We did not purchase high risk securities.
We did not rely on risky funding sources and we replenished our tangible equity at a rate of more than 15% per year based on our earnings. So, for the most part the turmoil in the financial markets and the clear economic problems in other regions have not impacted us and for the most part we remain focused on running and growing our business as reasonably usual as we can.
Now, with that being understood we did decide in October to go to the market with a common stock offering. We offered $30 million in stock and we received investors for substantially more than that and we increased and completed the offering at $36 million.
But why did we do this? Well first and foremost I think it’s fair to say that with all this going on we wanted to build more of a capital base in our company to reassure our constituents of our safety and our soundness and our capacity to deal with whatever adversity does develop in these extraordinary times.
Our sound earnings base does give us a strong measure of protection in the event of higher credit related charges but, we also felt that higher credit levels, capital levels, would support our sense and your sense of confidence in our safety and soundness. Another reason we did this is because we felt we could.
In fact, there was a receptiveness that hadn’t been evident before. As a growing company we look for opportunities to supplement our capital and we felt the markets were there for this.
We also felt that the capital raise allows us to be opportunistic. Our game plan is to grow organically and by de novo expansion and by potential acquisition.
We do feel that there has been a fundamental shift in the strategic landscape and that all banks and particularly local banks could see more loan and deposit business coming their way in the next few years now that the landscape of competing non-bank providers has contracted so significantly. As the largest locally headquartered regional financial services provider we want to be ready to take our share of this new business.
As a company with a successful track record for acquisition and integration we also want to be ready to be an active participant in the industry consolidation so many analysts are predicting. The capital raise brought our tangible equity to assets up to 7.7% and our tangible book value per share climbed to $15.57.
Our tangible capital ratio has been in the low 6% range over the last year and now we generally expect to see it staying above 7% despite potential uses in the future. Those were our thoughts in doing the stock offering and we were encouraged that a number of existing and new investors agreed with this overall rational and wanted to take part and we particularly welcomed those who are new investors in our company.
We take very seriously the challenge to make this a financially rewarding investment and when we turn to discussing guidance I’ll address the near term earnings impact of the stock offering and our thoughts about the investment of the proceeds. I’ll also provide some perspective on the Treasury Departments’ capital purchase program which was announced after we completed our stock offering and our views on participating there as well.
Now, turning to the third quarter we posted a 4% increase in core earnings per share turning in $0.51 EPS which was at the top end of our previous guidance for the quarter. It was a clean quarter with no non-core items and our GAAP and core earnings are the same for the year-to-date as they have been for every quarter this year.
For the first nine months we posted core earnings of $1.64 per share which was also up 4% over the prior year result. We accomplished this while provisioning at higher levels and increasing our loan loss allowance coverage.
Now, looking at core earnings per share pre-tax and pre-provision this measure was up 9% for the year-to-date which shows the underlying earnings momentum that we’re carrying through the year. Our earnings are driven by strong revenue growth and positive operating leverage.
In the third quarter, our key revenue driver was net interest income which increased at a double digit annualize rate compared to the prior quarter. There were several key components to this growth.
First, our commercial loans grew at a 4% annualized rate in the third quarter. These are quality relationships in and around our market.
This growth is primarily due to increase market share taken from national lenders. These lenders have pulled back from our markets presumably due to liquidity and capital and credit issues that they’re dealing with in our regions of the company so we’re able to propose on more of these loans and the competitive spreads have started to return.
We’ve also begun to offer interest rate swaps on the larger loans so that we can book a variable rate asset and a customer can fix their borrowing costs. This was another area where national competitors had an advantage in the past.
Since commercial mortgages has produced most of our loan growth and they tend to have higher yields, these loans have been a key driver of our revenue growth. These loans are secured with strong collateral and the borrowers are solid and well regarding with a track record in this area and significant invested equity and substantial additional resource.
These are the relationships that are going to be with us long after we get through this tough environment. We also had some growth in our home equity loan balances.
We’ve had this since we began offering a relationship base promotion on these loans in the first half of the year. This growth mostly offset the $16 million quarterly plan run off in our indirect auto portfolio.
An important point here is that this growth in home equity balances mostly represents new loan volume rather than increased usage on existing lines. While these loans are priced at a lower yield of prime minus one, they are an important adjustable rate component of our asset liability mix and a part of our retail relationship strategy.
These are quality assets, underwritten to a maximum of 80% LTV with conforming debt service coverage and FICO scores over 700 and they also develop long term relationships with good customers which are at the core of our future growth. Additionally, our timed deposits grew at a 14% annualized rate in the third quarter.
For the most part, many of the retail timed account promotions are also relationship based. We’re hoping these accounts offset the increase in higher cost Jumbo CDs and money market accounts along with broker deposit accounts.
Finally, we continue to be very disciplined in our loan and deposit pricing. We’ve been managing all of the loan and deposit pricing margins carefully.
This diligence helped us to boost our net interest margins to 348 in the third quarter which is up from 345 in the second quarter and which was the highest quarterly net interest margin that we’ve achieved since the year 2003. You can see we’ve been working on several fronts in order to produce this double digit annualized linked quarter growth in the third quarter.
On the fee side we produced 13% annualized linked quarter growth in our bank fee income. This included growth in our deposit service fees and we recorded growth in our swap fee income due to the new commercial loan swap program that we introduced.
This fee income growth offset a decrease in our wealth management fees which of course was attributable to lower stock prices. Our insurance fees declined seasonally as expected from the second quarter and we’re down slightly from the third quarter of last year due to the impact of lower renewal premiums in the currently soft property casualty market.
As you know, these fee based businesses give us more revenue penetration in our regional markets and meaningfully diversify our income statements from a higher dependence on net interest income. So, we had double digit annualized link quarter growth and net interest income and bank fee income.
Alongside this growth we produced a 4% annualized link quarter decrease in non-interest expense and we reported linked quarter decreases in most major expense categories. With revenues up and expenses down we again achieved positive operating leverage in the third quarter.
Our results here have also benefited from the maturation of our new branches in New York under our de novo branch program there. Our improved efficiency shows in out 62% third quarter efficiency ratio which is improved from 64% in the third quarter of 2007.
In the third quarter we combined solid earnings performance with solid loan performance. Our earnings release highlighted our continued solid loan performance with non-performers at 44 basis points compared to assets, accruing delinquent loans at 48 basis points compared to loans and annualized net charges offs at 19 basis points for the third quarter.
In our release we noted we had only two seven figure non-performing loans and two seven figure accruing delinquent loans totaling only $6.8 million. I’ve commented before, we continue to increase our risk management resources and focus and we have been more focused on identifying potential problem loans early and hopefully achieving resolutions early before loans become non-performers.
In the third quarter we increased our loans designated as substandard but still performing from around $30 million to around $50 million. This was primarily due to three commercial mortgage relationships and none of these loans are impaired.
Our fundamental objective here is that early identification leads to early resolution. In the third quarter we resolved about $7 million of these potential problem loans.
Now, we do encounter individual situations where business expansion is taking more time to achieve targeted cash flows but overall we continue to see new investment happening in our markets, although probably at a slower rate. As we noted in our release, the most prominent news continues to come from our Albany market.
We’d previously noted that the planned $4.5 billion AMD chip plan which will be the largest industrial investment in the history of the State of New York and in recent weeks AMD announced that it has developed an ownership and financing structure for this facility which includes new foreign investments and this constitutes a green light for this large project which will lead to thousands of jobs in the New York market. Now, this announcement and other technology developments are establishing New York’s tech valley as one of the world’s premier centers for semiconductor and nanotechnology innovation and production.
As we noted in our earnings release we had a 42% annualized deposit growth in New York in the third quarter. We’re very pleased with this result and we continue to have strong response to our offerings including the 100% deposit insurance offered through the Massachusetts Deposit Insurers Fund.
Now, this market remains an important priority for us as we access our future expansion plans. I’m going to ask Kevin to give some further detail on the quarter and our outlook and then I’ll return with some concluding remarks.
Kevin P. Riley
This quarter came in as we expected which met our earnings guidance that we gave you at the end of the second quarter which produced a 4% growth in core earnings per share. This was accomplished by growth in our revenue while maintaining good expense control.
Also helping our results was that our credit costs remain at modest levels. As Mike has mentioned, our third quarter net interest margin increased to 348 which is our fifth quarter of increasing margin.
As I’ve mentioned before, this has been accomplished through careful pricing both on the loans and deposits. With this pricing discipline, our balance sheet both on a loans and deposit side grew in mid single digits annualized which we are comfortable with in these economic times.
We also during the year focused on our interest rate sensitivity which has moved from a liability sensitive position to a neutral or slightly asset sensitive position. This will also allow us to perform in any interest rate environment.
We have given up some spread opportunity to achieve this but feel it is the right thing to do at this time. Our guidance for the second half of the year was to have loans and deposits grow in single digits.
We are accomplishing that deposit the planned run of our indirect auto loan portfolio and our planned run off of high cost deposit accounts. We expect our loan growth would remain at this pace throughout the remainder of the year.
As we’ve seen in previous years, deposit growth picks up in the fourth quarter. So far in October our deposit growth has been strong as customers move funds out of the stock market and other investment vehicles.
We offer our customers full insurance coverage on all their deposits through our participation in the Massachusetts Deposit Insurance Fund. This has been an important feature for our customers looking for safety in the current environment.
As Mike has mentioned, we sold $36 million in new capital from our common stock offering. We expect the proceeds to be held in short to medium term investments during the fourth quarter.
Now, to give you some earnings guidance for the fourth quarter. We have predicted and expect our net interest margin to decline slightly in the range of 344 to 346 which would result in a modest increase in our net interest income to around $19.5 million.
This margin compression is caused by two factors, the first being the 50 basis point cut in Fed funds rate in October and the second is due to some floors being hit in regards to our deposit pricing. We are doing everything we can to mitigate the impact and to ensure our margin continues to be strong.
We expect our fourth quarter loan loss provision to remain around $1.3 million level which we provided in a previous quarter. While we are currently in the process of developing our 2009 budget with regard to our loan loss analogy, at this time we are not expecting any significant change in our charge off rate for the fourth quarter and we do not expect any significant change in the level of our allowance for loan loss ratio.
We anticipate that a provision will cover charge offs along with modest growth in our loan portfolio. Turning to non-interest income our non-interest income for the third quarter was $7.2 million which came in a little below our guidance we gave you at the end of the second quarter.
While loans and deposit related fees were strong in the third quarter, wealth management and insurance revenue came in a little less than forecasted due to the softness in the stock and insurance markets. During the third quarter our loan related fees were bolstered by our new interest rate swap program which we offered to our commercial customers.
We expect for the fourth quarter our non-interest income to come in a range of $7.5 million assuming no significant change in the stock or insurance markets. Moving on to non-interest expense, as we provided guidance at the end of the second quarter, we were able to reduce our level of expense in the third quarter with reductions in most expense categories.
We anticipate our expense to increase slightly in the fourth quarter to around $17.8 million. This is due to investment in personnel and technology and seasonal factors which drive up occupancy expense.
We continue to be very cost conscious and we expect the fourth quarter efficiency ratio to come in the area of about 62%. With all that said, we are expecting our bottom line earnings to be in the range of $5.2 to $5.4 million.
This is with a slightly higher tax rate of 32% in the fourth quarter due to a higher level of pre-tax income driven by our stock offering proceeds. Our guidance for the fourth quarter earnings per share is in the range of $0.44 to $0.45 due to our common stock offering which has a dilutive impact of approximately $0.06.
As you know, we issued $1.5 million new shares in our stock offering and we expect to have average dilutive shares of about $11.9 million in the fourth quarter. We feel that this common stock offering dilution impact will decline as we put this capital to use with possible acquisitions or balance sheet growth.
We intend to use this capital prudently and we are willing to accept near term earnings per share dilatation to achieve long term opportunistic benefits from this equity. Before I conclude my remarks, I would like to reiterate that we have not recorded any charges to income relating to the impairment of our investment securities.
In our last conference call I reviewed this portfolio which mostly consists of low risk agency mortgage backed securities and municipal obligations. We do not own any Fannie Mae or Freddie Mac equity securities.
All of our corporate debt obligations are of an investment grade and are performing. We noted that in our earnings release that our unrealized mark-to-market loss was $3.1 million after tax.
We view this as temporary and relate it to unsettled pricing conditions in the securities market. I also would like to state that we continue to have strong liquidity.
There have been many news reports that bank-to-bank lending has been frozen. Berkshire Bank does not routinely borrow from other banks.
Normally, our other bank borrowings are from the Federal Home Loan Bank and we currently have not short term borrowings outstanding with them. Our deposit growth is strong and keeping pace with our loan growth and our liquidity has also been boosted by the stock offering so we feel very well positioned in regards of this going forward.
With that, I’ll turn the call back over to Mike.
Michael P. Daly
As Kevin stated, our fourth quarter earnings guidance is $0.44 to $0.45 per share and this is net of dilution of about $0.06 per share due to the common stock offering so our EPS outlook excluding this dilution is $0.50 to $0.51 per share for the fourth quarter. We therefore feel that we continue to run at or ahead of last year’s normalized core earnings.
We reported $1.64 in earnings per share for the first nine months of the year. We therefore anticipate that we will produce full year core EPS of $2.14 to $2.15 per share before the impact of the stock offering.
This should keep us on our current pace to produce 4% growth in core EPS over last year’s $2.06 in normalized core results. Including the impact of the stock offering, we still expect to be up over our normalized EPS last year and we should be up near double digits over our reported core EPS of $1.90 last year.
We’re pleased to be on a pace to improve earnings per share this year when so many others are reporting lower earnings or losses. A lot of this is attributable to the revenue and earnings benefits we’re harvesting from our previous investments in growth and expansion and we’re targeting to have half of our de novo New York branches operating at or above breakeven by the end of this year which still leaves us some running room in 2009 and beyond as we grow our earnings stream from these branches.
Similarly, we’re still early on in achieving revenue enhancements in our Vermont market and in our insurance operations and these should also support our ongoing momentum for earnings. We haven’t completed our 2009 budgeting and I’m not currently in a position to talk in more detail about our 2009 outlook.
We do expect to provide that guidance as we have in the past after we complete the current year. We’re mindful of the issues that we’re going to be wrestling with as we go through this budgeting process.
We’re expecting significantly higher FDIC premiums and we’ll be initially facing more margin pressures than we had anticipated due to fourth quarter interest rate changes. We may find that we want to budget higher for charge offs just as we did this year.
These and other factors will challenge us as we develop our plans for earnings growth and I will get back to you just as soon as I reasonably can with some color on that. In addition to customary operating items, we are going to need to address how we will invest our new capital to minimize EPS dilution and to achieve EPS accretion with this capital.
Frankly, we expect that a portion of the capital will not be invested in growth and will be maintained in the form of higher capital ratios, a concept which has been referred to as widening the moat. So, there will be some dilutive impact that we will not be trying to mitigate specifically through reinvestment of the proceeds.
Nonetheless, we do expect that we will have more lending opportunity and more acquisition opportunities but in all cases, we will be judicious about how and where we invest these growth opportunities. Now, about the TARP, we had barely completed our capital offering when we were confronted with the Treasury Departments’ announcement of its TARP preferred capital program.
We addressed our capital needs the old fashion way through the securities market but nonetheless we are giving this program significant scrutiny and of course we have been encouraged by the regulators to participate as have other strong banks. We still have some questions about the program and how it will operate and we haven’t arrived at any conclusions this moment but we are gravitating towards at least a minimum of 1% which is $20 million which would top off our common stock offering to a total of around $60 million or perhaps more.
Interestingly this total is about the same as the 3% maximum under the TARP program but for us most of the new capital will have been from the markets rather than the government. We’ve heard a lot of commentary that earnings are no longer in vogue and that there can never be too much capital.
I recognize and we’re responding to the factors that warrant higher capital levels. However, we will always be vigilant about delivering reliable and growing earnings returns to our shareholders.
But, we’re going to make our best judgment about balancing capital and earnings and as we stated before, we believe that strong earnings are one of the most important assets of capital adequacy and in the long run we view our earnings strength as the fundamental driver of our company’s value. As in many other things, as we deal with the current events, we want to be organized, not paralyzed and we’re going to be completing our assessment of this government’s capital program in a very short period of time in the next coming days.
I should mention that when we were offering our stock to investors we showed why we feel it is undervalued based on earnings and multiples of our peers. We’re hopeful that our accomplishments and growing earnings and supporting out tangible book value will contribute to a higher price for BHLB going forward.
Now, before I open it up for questions, I just want to add that I am confident that we’re ready for the challenges and opportunities that await us in this changing environment. But, the time to prepare for challenging time is during the good times.
During the last few years we have brought in new talent and we’ve invested in infrastructure and diversified our revenues and we feel we have the capacity to deal with an economic downturn and take advantage of opportunities that will develop. We have strong earnings, we’ve got strong capital, we’ve got a disciplined management team and we’ve got a strong and active board and most of all we do have the will to further develop or attractive franchise and deliver a superior value to our shareholders.
With that I am going to conclude my prepared remarks and we will invite questions from our listeners.
Operator
(Operator Instructions) Our first question comes from Mark Fitzgibbon – Sandler O’Neill & Partners, LP.
Analyst for Mark Fitzgibbon – Sandler O’Neill & Partners, LP
I was wondering if you could talk a little about the types of deposits you’re seeing coming in to the New York region.
Michael P. Daly
We’ve actually as early as the beginning of this year put a big push on core deposits and relationship type deposits. What occurred early on when we started our de novo branching program over there is that we were seeing some hot money.
In the recent months we’ve been able to turn that tide and generate a significant amount of core deposits. We believe that’s one of the reasons we’re heading towards breakeven or profitability in those branches as quickly as we are.
Kevin, you may have some additional comments on this.
Kevin P. Riley
Yes. One of the strongest growth areas is actually in demand deposits in New York which quarter-over-quarter grew at about a 16% average rate, I’m talking about average balances quarter two to quarter three.
So, we are seeing some growth and actually as Mike said, core deposits. And we are, as Mike said growing the bank but through some higher cost hot money CDs and we have repriced those down to reasonable levels, we’ve retained those deposits and actually our deposits in the CD area has also maintained and gone up a little bit
Michael P. Daly
I’ll add one other thing Alex, we still do offer that dip insurance in New York and that’s depositors’ fund insurance. Clearly, some people don’t understand it entirely but, when you put $10 million in our bank, no matter what it is it is insured for $10 million.
As that word gets out I think we’re going to see continued momentum in the deposit gathering in New York.
Analyst for Mark Fitzgibbon – Sandler O’Neill & Partners, LP
I was wondering if you could just address the decline in the C&I loans this quarter?
Michael P. Daly
I don’t think there’s any trend there that really speaks to anything. We’ve got some lines out there that people have paid down and I don’t think it’s significant enough at this point for us to delineate that there’s any trend or that we’re managing it any different way.
Operator
Our next question comes from Laurie Hunsicker – Stifel Nicolaus & Company, Inc.
Laurie Hunsicker – Stifel Nicolaus & Company, Inc.
Just a couple of things to sort of follow up with the last question on deposit pricing, can you just give us your month end September margin?
Kevin P. Riley
The actual net interest margin?
Laurie Hunsicker – Stifel Nicolaus & Company, Inc.
Just for the month if you have it.
Kevin P. Riley
It was 350.
Laurie Hunsicker – Stifel Nicolaus & Company, Inc.
One other thing, your OCI mark in equity, where did that stand at the quarter end? The other comprehensive interest cost line?
Kevin P. Riley
We recorded 3.1 but I think it was almost close to –
Laurie Hunsicker – Stifel Nicolaus & Company, Inc.
So it was a $200,000 loss at June reflected in equity.
Kevin P. Riley
Actually with taking the investment portfolio and swaps it stands at $4.6 million.
Laurie Hunsicker – Stifel Nicolaus & Company, Inc.
At $4.6 million loss?
Kevin P. Riley
Yes.
Laurie Hunsicker – Stifel Nicolaus & Company, Inc.
Then I just wondered if you could give a little bit more color with respect to credit sort of just in a couple of the areas. With respect to your commercial real estate non-performers if you could just talk about the increase?
Then on the C&I non-performing side the decrease and, I’m just talking about linked quarter? Then also, do you have a potential problem loan number that corresponds with in June with $27.2 million?
David H. Gonci
With regard to non-performing assets, commercial mortgages went up to $6.2 from $5.3 million. We did add one relationship that was about a $1 million relationship, a small single family home developer.
It looks like we’ve got about a $400,000 home sale going forward there so we’re hopeful that will be coming down here in the fourth quarter. It was a mix of resolutions that brought our non-performing commercial business loans down from $3.1 million to $2.2 million as well as charge offs that contributed to that during the quarter.
With regard to potential problem loans, as you mentioned it was a little less than $30 million at the end of June. It was around $50 million at the end of September and there was a handful of loans that were the bulk of that and as Mike commented we have no impairment on those.
Laurie Hunsicker – Stifel Nicolaus & Company, Inc.
What category was the biggest increase link quarter?
David H. Gonci
Those are commercial real estate relationships.
Kevin P. Riley
Those three loans represented pretty much the bulk of the increase.
Operator
Our next question comes from John Stewart – Sandler O’Neill Asset Management Company.
John Stewart – Sandler O’Neill Asset Management Company
I just wanted to follow up on the New York market. You guys gave some color on the deposit side.
I was just curious if you could comment on the growth on the loan side, maybe a little bit of detail what buckets that is coming in and what the size of that loan portfolio is in New York now?
Michael P. Daly
The color on the loan side frankly is that the sweet spot I guess is what you’re looking for John in New York is probably the $2, $3 million loan size. I don’t think there is robust, we’re not seeing robust loan growth in New York right now, we’re being pretty selective.
Some of the loan growth we are seeing however is available to us through the entrenchment of some of the guys that were competing with us with a little bit more energy here in the last several months. The size of the portfolio is about $130 million.
Was there another part of your question I could help with?
John Stewart – Sandler O’Neill Asset Management Company
Then I just wanted to follow up on the margin, Kevin you gave some guidance 344 to 346 I believe it was. Did you say that guidance included the 50 basis points that we saw earlier in the month?
Kevin P. Riley
Yes.
John Stewart – Sandler O’Neill Asset Management Company
Does it assume that there’s any further impact for an additional however many basis points we may get at the end of this month?
Kevin P. Riley
No, we didn’t put any more in. We just assumed the impact of the 50 basis points.
John Stewart – Sandler O’Neill Asset Management Company
Then I guess, you mentioned that the proceeds from the offering were invested in short to medium term assets. Will you be able to pick up enough yield there to offset any potential dilution to the margin from that?
In other words will you be able to hold the margins all else equal?
Kevin P. Riley
Well currently we see some of the investments that could help the margin a basis point or two when looking at it. Right now we’re just trying to be cautious with the use of that capital and not get too aggressive.
John Stewart – Sandler O’Neill Asset Management Company
So you think you would be able to at least pick up the current spread that you have.
Kevin P. Riley
That’s correct. And, as in the past, I try to be reasonable with my margin predictions.
Operator
Our next question comes from Mike Shafir – Stearne, Agee & Leach.
Mike Shafir – Stearne, Agee & Leach
I was just wondering Kevin you said the tax rate was going to be around 32% for the next quarter. Is that about where it should be for the following year as well or going in to 2009?
Kevin P. Riley
Yes it will be. As our pre-tax earning has increased a little bit it should take our tax rate up closer to 32% level.
Mike Shafir – Stearne, Agee & Leach
Maybe you could just talk about kind of the CRE loan growth a little bit more in terms of the detail of some of the relationships. I did notice that there was a big uptick in the NPAs this quarter in that bucket.
David H. Gonci
The non-performing commercial mortgages we spoke to a little earlier, it went up to $6.2 million from $5.3 million and that included a $1 million relationship we commented on.
Mike Shafir – Stearne, Agee & Leach
Then also the big increase in the residential non-performers, is a lot of that pretty granular?
David H. Gonci
Yes. It did go up from around $800,000 to around $1.3 million but that’s just a small number of loans.
We continue to have minimal problems and foreclosure activity in our residential portfolio.
Operator
Our next question is from Damon Delmonte – Keefe, Bruyette & Woods.
Damon Delmonte – Keefe, Bruyette & Woods
It seems like we got some good color on the New York market, could you provide a little bit of color on the Pioneer Valley and what you’re seeing from competition in that market? We know that a lot of people have a lot of excess capital and do you know how that was impacting competition these days?
Kevin P. Riley
Pioneer Valley is still pretty competitive with respect to some of the IPO banks, no question about it. We do in fact however get looks at some deals in the Pioneer Valley that some of the IPO banks don’t necessarily get a look at where we’re competing with some of the larger banks.
The fact that we brought in Tom Creed who really was heading up the Sovereign Bank for Connecticut and the Pioneer Valley has given us an opportunity to get some good looks. Now, we haven’t closed on a lot of those yet but I think the basic premise here is we’re getting invited to the table on some deals that we hadn’t been in the past.
So, I think we may see some further opportunity in the Pioneer Valley more so than we’ve seen in the past.
Damon Delmonte – Keefe, Bruyette & Woods
Are these looks that you’re getting as you being the lead lender or are you being included in participations from some larger institutions.
Kevin P. Riley
Both.
Damon Delmonte – Keefe, Bruyette & Woods
Any thought on, I know you guys have I think had some success coming in to the Northern Connecticut market, any thoughts about expanding the footprint down in to Connecticut.
Michael P. Daly
Well, we always have thoughts, it’s all going to come down to pricing and availability and opportunity Damon. We continue to do some business in that area from our Pioneer Valley offices.
We’re in the process at this point of prioritizing and making sure that when we make an investment it’s the right one and it’s in the right place. So, we’re always going to keep that in mind but there’s nothing imminent to share with you on that.
Operator
We show no further questions at this time. I’d like to turn the conference over to Mr.
Daly for any closing remarks.
Michael P. Daly
Thank you all for joining us today. I can say this, you can all know that your management team here is staying focused on operating your company, to do some sound business and to pursue the opportunities that are going to allow us to expand this franchise and meet the needs of our markets and provide a superior return to our shareholders.
I want to thank all of you for your continued support of our company and we certainly look forward to speaking to you next quarter.
Operator
The conference is now concluded. Thank you for attending today’s presentation.
You may now disconnect.