Jan 27, 2009
Executives
David H. Gonci – Corporate Finance Officer Michael P.
Daly – President & Chief Executive Officer Kevin P. Riley – Executive Vice President, Chief Financial Officer & Treasurer Shepard D.
Rainie – Executive Vice President & Chief Risk Officer
Analysts
Mark Fitzgibbon – Sandler O'Neill & Partners, LP Laurie Hunsicker – Stifel Nicolaus & Co. John Stewart – Sandler O’Neill Asset Management Damon Delmonte – KBW Mike Shafir – Stearne, Agee & Leach, Inc.
Operator
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). Please note this conference is being recorded.
Now, I’d like to turn the conference over to David Gonci. Mr.
Gonci, you may now begin.
David H. Gonci
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’ll turn the call over to Mike Daly, President and CEO.
Michael P. Daly
Thank you, Dave. Good morning everyone, welcome to our fourth quarter conference call.
I’m Mike Daly, 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’ll discuss those results and our outlook for the current year. And at the conclusion of our prepared remarks, we’ll 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, taken 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. Now this was in the middle of the allowed range and today it's mostly invested in short-term mortgage security.
Our plan is to expand credit, but that will depend on market and credit conditions. And we do not 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'd 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. Acknowledged, 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 talents. We hired Jim Keyes to be our Vermont Regional Commercial Executive.
Jim’s banking career extends over three decades, includes large and small banks. He is very well known in the state.
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, gentlemen by the name of David Farrell.
David was an Executive with TJX. He is the Former CEO of Bob's Stores, it’s 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. And 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.
And we produced 8% growth in core EPS, despite some factors that were working against us. Now, these included the decision we made early in the year to discontinue originations of indirect auto loans and to let that portfolio move into run off.
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 contracts 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 344 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 of 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% in 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 non-interest 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 approved 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 to total loans at both year-end and it provided six times coverage, compared to the 2008 net charge-offs. Our loan performance ended the year pretty well.
Our charge-offs remained modest totaling less than 20 basis points for the year. Our non-performers 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. And 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 run-off 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 writedown of 650,000 in the fourth quarter and frankly that is accounted for a third of the year's total commercial charge-offs. We 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 am going to walk through those.
I will start with slide two. And slide two 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 do not see is a dramatic change.
Our markets are geographically conservative, and while loan losses many 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 opportunities for good quality credit expansions, particularly as I said, national lenders pullback from our markets.
The next slide three, now 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 comprise only 6% of our total loan portfolio. As you can see from the slide, our commercial construction exposures 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 non-performing and we are working aggressively to resolve those and none of our other construction loans were delinquent. Now, turning to slide four.
Now, 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're diversified among a variety of borrower and property types.
Our non-performing commercial were only 1% of the commercial portfolio at year-end and the performing loans delinquent 30 days or more were only about 0.5% or 1% 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, we have got strong asset quality and I think this is critically important as we head into the New Year. Now, I am going to ask Kevin to fill in a few more details on the fourth quarter performance and then I am going to come back and I am going to talk about next year's guidance.
Kevin?
Kevin P. Riley
Thanks Mike and good morning everyone. Earnings per share for the fourth quarter was $0.44 net of the $0.06 dilution impact of our common stock offering.
This total was inline 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 expected the quarterly net interest margin of around 3.45%. However, the actual margin came in at 3.41%.
We have predicted that the margin would contract in the fourth quarter, however, we did not anticipate the Fed 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 non-interest 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 market.
All of our other business lines seemed 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 non-interest 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 is primarily due to a reduction in incentive compensation.
We also benefited from a 28% effective tax rate, which is lower than our guidance of 32%, due to the benefit of some additional tax advantage investments. I’d 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 plans. 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'll turn the call back over to Mike.
Michael P. Daly
Thanks Kevin. And now I’d 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 to 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. Now 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 five, where these are outlined and I will start taking you through them. Now, 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.
Now, we issued more common shares with our common stock offering and we will have a 5% coupon to pay on a preferred stock. Now, these both have some dilutive effect on our 2009 EPS, which has generally been recognized by the analyst community.
As we previously noted, we’d like to keep our tangible equity to assets over 7% going forward. And we're 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 have not made any specific plans to leverage earnings 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. Now, clearly our new capital gives us a stronger capital base, 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 efforts to leverage the capital and our first concern will always be to operate in a safe and sound fashion and to maintain disciplines on our asset quality. Now, let’s talk about the higher loan loss provisioning.
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 they were to double in 2009, we still wouldn't view this as unduly high for a recessionary environment. I believe it's appropriate planning to anticipate potentially higher charge-offs and we have done that.
Now, as far as FDIC insurance goes, like many banks, we've had minimal FDIC insurance expense in recent years. Now, the basic premiums increasing to around 12 basis points in 2009, a plus we will be paying for the incremental cost of unlimited transaction account insurance.
In general, we can't pass these costs onto the customers in the current pricing environment and so they become an element of additional cost for us to absorb in the short-term. Now, in addition to these baseline adjustments, I would also comment on two other challenges that we have addressed while budgeting.
Margin pressure. Now, Kevin's 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 have assumed no change in interest rates for the balance of the year.
And 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. Now, 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 we will be fighting for good business in a recessionary environment as we do it.
We also anticipate some recovery in the capital markets. Now, 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 a $1.36 per share and we are targeting to push earnings up another 10% from this level to a total of $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'll return and I will conclude our presentation.
Kevin?
Kevin P. Riley
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 six, which shows the impact for 2009, and then follow with slide seven, which shows the impact for the first quarter of 2009. We start with the 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've had invested the offering proceeds and securities in the short-term durations averaging yields in the range of 3 to 4%.
As Mike has said, we will be patient in assessing further investment and leveraging decision regarding the capital and we will wait for a regulatory guidance on how to report our planned loan growth in relations to the TARP capital. So, our adjusted 2008 baseline after the capital dilution is a $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 2.04 million or an additional $0.09 per share, changed from 2008.
That brings us down to $1.36 baseline for 2009. As Mike has stated, we are announcing earning guidance for 2009 of a $1.50 per share.
I will discuss some of the details on this in a moment. This is 10% increase over the baseline and we expect to produce in this increase to revenue growth, while holding operating expenses close to flat.
The next slide, slide number seven 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 I 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 we are right now in terms of the margin squeeze in 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 succeeding quarter in order to reach our goal.
Now, we look at the components of our adjusted baseline, we can turn to slide eight, which shows the components of our earnings guidance for 2009. You can see that we have 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 we are also experiencing pressure in the loan portfolio yields if there is a pickup in non-performers.
On the deposit side, we are expecting about a 3% growth in average deposits and we are expecting an increase about the same amount in loans. And this growth is expected to be around 6% ongoing with a run-off 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 a 11% increase. We are expecting double-digit growth in our wealth management fees and in 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 through 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 revenues.
We expect these initiatives can drive 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 the tax rate of around 30% and we are estimating that all in after-tax cost of a 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 quarter's outstanding. To project our diluted common shares, will be in area of 12.2 million for the year.
As you can see on slide eight, the total projected income for the year is around $18.3 million or a $1.50 per share. I won’t spend much time on slide nine, we provided the guidance for the first quarter.
As you know, we had feasibly high insurance revenues in the first quarter. We are projecting earnings per share of $0.36 in the first quarter, which is a $0.01 higher than our adjusted baseline of $0.35.
We expect our revenue enhancements to come in on stream over the course of the year and we do not project much benefit from them in the first quarter, which is typically a slower 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 is slightly over the remainder of the year. We penciled in a loan loss provision of $2.2 million in 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 high revenue, while keeping our general operating expenses flat.
This completes my discussion on the detailed earnings guidance and I will turn the call back over to Mike.
Michael P. Daly
Thanks Kevin, nice job. So, to summarize, we’re providing guidance of a $1.50 for 2009 EPS and $0.36 per share for the first quarter.
And 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 in maximizing our depositor protections and we’re willing to sacrifice some near-term EPS in order to achieve these results.
And we’ll hope that conditions settle down and that we will have a clear ability to assess our investment options and to profitably leverage our earnings 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’ll 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’d encourage everyone to understand our reasoning and not to set out expectations that the results will be different from this. I think we have got a pretty strong handle on the direction of the first quarter, and I think 36 is the best we can do in the quarter.
And as Kevin discussed we’ve already built-in expectations for baseline earnings growth after the first quarter, and we’re going to be challenge to meet or beat those targets. And 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. And as we’ve shown, we expect to carry this momentum forward in 2009, with a 10% growth over our adjusted baseline.
Now, this will be solid improvement in the long run earning 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
Thank you. (Operator Instructions).
Our first question comes from Mark Fitzgibbon of Sandler O’Neill & Partners. Please go ahead.
Mark Fitzgibbon – Sandler O’Neill & Partners, LP
Good morning. And gentlemen thank you for providing all those details, it’s helpful.
Michael P. Daly
Yeah thanks Mark, nice to have you with us.
Mark Fitzgibbon – Sandler O’Neill & Partners, LP
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 327 to 332, was that for the first quarter or for the full year?
Kevin P. Riley
For the full year.
Mark Fitzgibbon – Sandler O’Neill & Partners, LP
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’s going to drive that?
Michael P. Daly
I'll give you a couple of 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, 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.
Mark Fitzgibbon - Sandler O'Neill & Partners, LP
Okay. And then on your home equity portfolio, I wondered if you give us a sense how the utilization rates are tracking, are you seeing much of an uptick in those?
Michael P. Daly
Shep is here, our Risk Manager. So, Shep, why do not you give us, I know you have done a lot of deep dives on that.
Shepard D. Rainie
Hey, Mark. The answer is utilization has ticked up from the last time we talked about it was as of September 30 and it was around 45% at the time.
Today, it's around 47%. We've looked a little bit at where that is coming from and it's 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.
Mark Fitzgibbon - Sandler O'Neill & Partners, LP
Okay. And then the last question is a sort of a macro one for you Mike.
Could you talk a little bit about the acquisition environment, today do you think the opportunity is more attractive in banks or asset managers or insurance? And then within the banks sphere, would you be willing to buy a very troubled company or is your focus going to be on sort of generally clean companies?
Michael P. Daly
Yeah, it’s 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 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’re going to be strategic in that regard.
I think with respect to troubled banks, there no question we’re going to keep our eyes open, we’re on the list with the FDIC with respect to being alerted to any banks that they feel we can be helpful with. But I’d add this, if we were to do something with the troubled bank, it would have to be something that we spent a lot of time looking at and doing our due diligence, because one thing I do not want to do is put this company in a situation where we’re spending all of our time dealing with somebody else’s problems rather than moving forward on the agenda we have.
So, it’s not other 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.
Mark Fitzgibbon - Sandler O'Neill & Partners, LP
Thank you.
Michael P. Daly
You’re welcome. Thank you, Mark.
Operator
Thank you. Our next question comes from Laurie Hunsicker, Stifel Nicolaus.
Please go ahead.
Laurie Hunsicker - Stifel Nicolaus & Co.
Yeah. Hi, thanks.
Michael P. Daly
Hi, Laurie.
Laurie Hunsicker - Stifel Nicolaus & Co.
Good morning, Mike and Kevin. Just one I had also a second Mark’s comment.
Thanks for the very detailed breakdown on earnings guidance I appreciate that. Just wondered, kind of more focused on credit here, non-interest expenses that you’re projecting of $73.8 million.
Roughly, how much of that number would be designated to OREO expense?
Michael P. Daly
Anybody has that number, we’re going to get it for you right now Laurie.
Laurie Hunsicker - Stifel Nicolaus & Co.
Okay. And then maybe just along those same lines, if you could comment generally, your loan loss provisions, master charge-offs this quarter, do you anticipate keeping your reserves to loan targets the same as you are kind of trying to back into what you’re looking out for charge-offs, or maybe asked another way, what are you forecasting for charge-offs for ’09?
Michael P. Daly
We can answer, both of those questions. Shep, do you want to give us some color?
Shepard D. Rainie
Clearly, we do not have a specific target on what our loan loss reserves are. I think, the critical factor is we built our estimates up from the bottom up, looking at obviously what new loan volume we did and how we’re provisioning that.
And then, developing our approval loss rates and our impaired loss rates from there. That is what we are expecting as a higher level of charge-offs or what we are anticipating as a possibility of a higher level of charge-offs this year, just simply because of the downward migration in our loan portfolios.
Laurie Hunsicker - Stifel Nicolaus & Co.
Sure.
Michael P. Daly
Laurie, one of the things I would add to that is, it's always been my experience and I know the experience of many others, that it's loans you do not know about that usually surprise you and cost you some money. So, I think we've taken in an abundance of caution, a good provision number.
I’m not suggesting that we won’t use it. I’m hoping we do not 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.
Laurie Hunsicker - Stifel Nicolaus & Co.
Okay.
David H. Gonci
And Laurie on your question regards to OREO loan expense. We are increasing from $685 in 2008 to a $1.310 million in 2009.
Laurie Hunsicker - Stifel Nicolaus & Co.
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 non-performers went up from 6.2 to 7.7 and obviously charge-offs in the quarter, big component at 900,000. Can you just take us through that?
Shepard D. Rainie
It’s Shep. This is, we are talking about one loan, two loans.
Mike could give us some color?
Michael P. Daly
Yeah it's 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 payment 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’s very hard to estimate the values you can imagine that permits in 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.
Laurie Hunsicker - Stifel Nicolaus & Co.
Okay, great. And how big are both of those loans?
Michael P. Daly
One loan was $3.2 million and the other loan was $2.6 million.
Laurie Hunsicker - Stifel Nicolaus & Co.
$2.6 million. And what percentage are they sort of land versus developed?
Michael P. Daly
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.
Laurie Hunsicker - Stifel Nicolaus & Co.
Okay.
Michael P. Daly
The loan that we took a charge on this quarter that is in the development book, it's probably, in terms of value it's probably 50-50 build and permit at this point, it was due to heck of a lot of unbuilt permits in that property and a small number of built units.
Laurie Hunsicker - Stifel Nicolaus & Co.
Okay.
Michael P. Daly
Is that responsive to your question?
Laurie Hunsicker - Stifel Nicolaus & Co.
Okay. Yeah, that does.
And then with respect to the linked quarter increase in non-performers in the commercial real estate the $6.2 million to $7.7 milllion, 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?
Michael P. Daly
Yes.
Laurie Hunsicker - Stifel Nicolaus & Co.
Okay. And then just within your commercial construction book of a $130 million, I mean you mentioned that there are two non-performers in there less than $3 million.
I guess really it would be mostly that one, that construction and development for $3.2 million?
Michael P. Daly
Yeah.
Laurie Hunsicker - Stifel Nicolaus & Co.
Okay
David H. Gonci
Yeah. This is Dave Gonci, and I would mention the other one actually came down during the fourth quarter and so we had some progress on that one.
Laurie Hunsicker - Stifel Nicolaus & Co.
Okay, great. And then just a last question on this portfolio, what percentage is that land versus built?
Michael P. Daly
In the whole portfolio?
Laurie Hunsicker - Stifel Nicolaus & Co.
Yeah, in the whole portfolio, just really rough?
David H. Gonci
Land, unimproved and improved is about 12% of the construction portfolio.
Laurie Hunsicker - Stifel Nicolaus & Co.
Okay.
David H. Gonci
And the rest is, is built and as you saw on the slide, relatively well diversified among, hotels, offices, retail, et cetera.
Laurie Hunsicker - Stifel Nicolaus & Co.
Okay. So, in the commercial construction book of a $130 million roughly, 12% land okay.
Great, and then just one last general question Mike for you, just a follow-up on sort of what Mark was asking you in terms of the acquisition landscape, geographically given how things are shaking out, you are seeing massively different unemployment and different MSAs, I mean where is the sweet spot of where you would like to be if you did a bank acquisition?
Michael P. Daly
Albany, New York.
Laurie Hunsicker - Stifel Nicolaus & Co.
Albany, New York. Okay, great.
Michael P. Daly
That is right. Just to be fair and put a little color behind that, all of the markets we're in we are happy with we like, and we think generally they are stable.
New York's got a little bit more than stability there, you still have some real upside, and so we view that market as a very advantageous for us across the board.
Laurie Hunsicker - Stifel Nicolaus & Co.
Okay, great. Thanks very much.
Michael P. Daly
Thank you, Laurie.
Operator
Thank you. Our next question comes from John Stewart with Sandler O’Neill Asset Management.
Please go ahead.
John Stewart – Sandler O’Neill Asset Management
Good morning guys.
Michael P. Daly
Hey, John how are you?
John Stewart – Sandler O’Neill Asset Management
Good. I guess maybe just a follow-up on that last question, is there just 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?
Michael P. Daly
It's 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 and in fact we have looked at several opportunities in the last several months and we passed on a good number of them based on credit quality issues.
I think somewhere between (200.5) billion and I hate to give you such a big range, but there were pockets in some of our geographic areas, John, where we'd pickup 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.
John Stewart - Sandler O'Neill Asset Management
Okay. And again the focus you said, you were suggesting Albany New York, is that right?
Michael P Daly
John Stewart - Sandler O'Neill Asset Management
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?
Kevin P. Riley
Yeah, 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.
John Stewart - Sandler O'Neill Asset Management
Okay. And then finally what was the FDIC insurance cost in the fourth quarter, I know you gave the detail for the first quarter as 54, what was it in the fourth quarter?
Michael P. Daly
John, we missed the question, we had a volume issue here.
Operator
Pardon me, gentlemen. He actually disconnected his line.
Michael P Daly
Can you get him back?
Operator
We can get him back I will put him back in the process, would you like to move on to the next question?
Michael P. Daly
Sure, we’ll take Damon’s question, and we will come back to John.
Operator
Our next question is from Damon DelMonte of KBW.
Damon DelMonte – KBW
Hi, good morning guys. How are you?
Michael P. Daly
Good Damon. How are you?
Damon DelMonte – KBW
Good thanks. Just a point of clarification, on your commercial construction book, are any of those loans out of market, in other words, are they part of a Shared National Credit Program?
Michael P. Daly
No.
Damon DelMonte – KBW
No. Okay, do you have any loans at all regards to the category that are outside of your marketplace?
Kevin P. Riley
Boy, I would say we’ve got some that are outside of our market, if there is some that are outside of our branch network then they are in the New England area in and around our markets. And I do not think we have anything really outside of that geographic area.
Do we Shep?
Shepard D. Rainie
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's always with a developer we know from our region.
Damon Delmonte – KBW
Okay. I guess my question was more directed towards like Florida, Arizona, California and Vermont?
Kevin P. Riley
Right, so, the answer is unequivocally no.
Damon Delmonte – KBW
Shepard D. Rainie
Damon Delmonte – KBW
Okay thanks. Most of my other questions have been answered.
Thank you.
Shepard D. Rainie
Thank you, Damon.
Operator
Thank you. (Operator Instructions).
David H. Gonci
Operator, we were never able to get John back on the phone.
Operator
Actually, he has just rejoined, let me put him into the top list. One moment.
John Stewart - Sandler O'Neill Asset Management
Hi guys, sorry about that.
Operator
Thank you. And you're welcome back.
Michael P. Daly
Hey John. Thanks for coming back on.
John Stewart - Sandler O'Neill Asset Management
I am not sure what happened there, but…
Michael P. Daly
So, can you repeat your question to us because we didn’t hear it?
John Stewart - Sandler O'Neill Asset Management
Okay. No, I was just curious about the FDIC insurance cost in the fourth quarter, you have disclosed what it was for the first quarter, but I didn't see for the fourth?
David H. Gonci
It was around $300,000.
John Stewart - Sandler O'Neill Asset Management
Okay. That was my only other question.
So, I’m pleased to be resumed and answered, but thank you very much.
Michael P. Daly
All right. Thank you.
Operator
We have a question from Mike Shafir of Sterne Agee & Leach. Please go ahead.
Mike I. Shafir - Sterne Agee & Leach, Inc.
Hey good morning guys.
Michael P. Daly
Hey Mike.
Mike I. Shafir - Sterne Agee & Leach, Inc.
I was just wondering, I know that you guys said that the loan growth was going to be somewhat mitigated this year in terms of you guys being a little bit more selective and the stuff you want to put on your books, and maybe you could give a little guidance on the commercial side?
Michael P. Daly
Sure. And my hope is that we will do better with respect to the amount of commercial businesses available to us.
And what we are seeing today is simply everyone chasing after what seems to be a 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 am hoping that we can push that up to double-digit if my guys do not kill me for saying that, but I 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.
Mike I. Shafir - Sterne Agee & Leach, Inc.
Okay. Thanks a lot guys.
Michael P. Daly
Okay. Thanks Mike.
Mike I. Shafir - Sterne Agee & Leach, Inc.
Okay.
Operator
Gentlemen, we show no further questions at this time. I’d like to turn the conference back over to Mr.
Daly for any closing remarks.
Michael P. Daly
Great. Now, it was a pleasure of 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.
Operator
This conference is now concluded. Thank you for attending today's presentation.
You may now disconnect.