Oct 29, 2013
Executives
Allison O’Rourke – Investor Relations Officer Michael P. Daly – Chairman, President and Chief Executive Officer George Bacigalupo – Executive Vice President, Commercial Banking Josephine Iannelli – Principal Accounting Officer Sean A.
Gray – Executive Vice President, Retail Banking David H. Gonci – Corporate Finance Officer
Analysts
Matthew Forgotson – Sandler O’Neill & Partners, L.P. Collyn B.
Gilbert – Keefe, Bruyette & Woods, Inc. Matthew Kelley – Sterne, Agee & Leach, Inc.
Operator
Good morning and welcome to the Berkshire Hills Bancorp’s Third Quarter Earnings Release Conference Call and Webcast. All participants will be in listen-only mode.
(Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Ms. Allison O’Rourke, Investor Relations Officer.
Please go ahead.
Allison O’Rourke
Good morning and welcome to America’s most exciting bank. Thank you for joining us in this discussion of 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 will include forward-looking statements and actual results could differ materially from those statements.
For a discussion of related factors, please see our earnings release in our most recent SEC reports on Form 10-K and 10-Q. With that, I will turn the call over to Mike Daly, President and CEO.
Michael P. Daly
Thank you, Ally. Good morning everyone.
Welcome to our third quarter conference call. With me this morning are several members of our management team frankly they look all look a little tired from World Series defeat but as I’ve said to them just like our website just we keep swinging the bat, we look for opportunities on the basis, we’ve got once in a while when you guys is going to go yard at some point put us right back into the series.
Now having said that as you know we released our third quarter earnings last night, and it was a good quarter and I’m happy to report that we made good progress in both net loan growth and expense reductions. Earnings per share came in at $0.43 slightly ahead of our $0.42 guidance and our GAAP results included non-core charges primarily related to our restructuring initiatives and of course we’ll get into some more detail on that in just a few minutes.
There were a number of moving parts in our third quarter earnings. But the resumption of 8% annualized commercial growth and a 4% expense saves are really key to understanding the positive a fundamental progress that we achieved.
After running into some unexpected headwinds in the second quarter, I’m proud of the way this team has responded and they should be proud of what they’ve done because I think we are now in a much better place today to take advantage of future growth opportunities. We had 16% annualized net loan growth during the quarter this is after a few quarters of moving out acquired CRE loans that didn’t fit our pricing and credit standards.
This resulted in total net loan growth turning positive for the year. Commercial business loans which have consistently been strong continued this trend again this quarter increasing another 16% and at a 15% annualized rate for the year.
I think it’s a good number and they represent strong fundamental value. This has been the major lending focus for us as you know and you can see we maintained our strong momentum there.
At this point, however our lending pipelines do remain strong and we expect to continue to produce net loan growth through the rest of the year, I’m going to ask George Bacigalupo, our new Commercial Executive to speak to this in just a minute. But before I go on, I want to make just a couple of more comments.
We also saw a good progress in our prime and direct loans that drove consumer loans up in annualized 21%. And this had a lot to do with our Syracuse consumer lending team that joined us through the Beacon acquisition and we’re now leveraging that across the entire footprint.
On the flip side, we’ve seen a steep drop off in residential mortgage demand like so many evidenced. And we’re promoting adjustable rate mortgages that certainly provide better value to customers today and those are the ones that we hold in our portfolio.
As you saw, this resulted in a solid growth in our residential mortgage portfolio at this point. High sequence of this of course is that our income from secondary market sales declined.
So we have to be willing to set some near-term softness in EPS. To maintain our market positioning and to grow our balance sheet particularly as we look ahead towards the New York branch acquisition.
And finally from the credit quality perspective, we continue to see very good numbers with 58 bps of non-performing assets. As I mentioned, we announced the promotion of George Bacigalupo as our Executive Commercial Banking earlier this month.
George came to us from TD Bank few years ago and he has been leading the credit function for us. He has a strong background in commercial lending.
He has experienced building in managing ABL and other niche middle market lending businesses and he is pretty well known in our markets. I’d particularly like to track that he is credit savvy, he is thoughtful and he gives up the depth we need at this level in the organization.
He also has a pipeline of additional thoroughbreds who will continue to have interest in us and that’s the strategy as you know that’s been very successful for us. So at this point, I’ll turn the call over to George.
And George, you could give us quick update on our commercial strategies.
George Bacigalupo
Thank you, Mike. I’m excited to be taking on the leadership of our growing Commercial Business.
I’ve spent the majority of my 30 year banking career in commercial lending and I see a lot of opportunity for us. We’ve built up a solid footprint across New England and New York and have done a great job of bringing on strong teams, significant talent in each of our regions.
I’m particularly happy to be working with Jim Curran and his teams in Central Mass and Pioneer Valley; as well as Mark Foster, Head of the ABL team, a long-term colleague of mine. I’m also very pleased with the appointment of Mike Carroll, the Chief Credit Officer.
Like me, Mike has a strong background in both lending and credit and I have no doubt that he will be very successful in his new role. We’re fortunate to have strong leaders across our footprint including, Chris Papayanakos from M&T Bank in Syracuse; Sheryl McQuade from Bank of America in Hartford; and Mike Ferry, our long-term leader, long time leader in Berkshire County.
With Mike Carroll moving to Credit, we will look to fill the New York regional commercial leader role with either an individual all possibly another full lending team. Between both Carroll and myself, we already have a number of accomplished lenders that want to come to work for us, so stay tuned on that front.
Looking at the overall business, I think we have a significant opportunity to grow on middle market lending operations in our newest markets Syracuse and Northern Connecticut to continue the momentum that we’ve created in Eastern and Central Massachusetts and to take advantage of experimenting some of our niche businesses. Two examples of this are ABL, which had been very successful in Eastern Mass.
But it’s very well presence in New York right now and we think which is a new business for us. But I have a lot of personal experience with having to manage the business line for TD Banknorth.
We’re pleased to have Glenn Mason, heading up our Leasing Business. Eastern Mass continues to be the biggest growth opportunity in our footprint and I’m happy to report that with the addition of Brant McDougall in the C&I team from TD earlier this year, along with the continued success of the ABL Group, we made huge inroads into this market and our brand is starting to take off there.
Our commercial banking success is also a function of the product depth that we offer, including cash management, insurance and wealth management. This is part of our success in taking share from large national banks and our teams operate without silos to deliver the right relationship solutions to customers and to diversify our impetus stream that fee revenues.
As you’ve heard, we picked up momentum in the third quarter and I look forward to delivering the franchise positioning and investor returns that we expect from this franchise. As Mike mentioned, we continue to take serious competition both on a rate and structural basis, but we will stay disciplined.
I’ll manage our credit process for few years now and we’ll reiterate what you’ve heard in previous calls that we had accepted significant run-offs of lower grade acquired loans and commercial real estate loans while maintaining our disciplines. I believe that’s a majority of this is behind us and we are looking to maintain an overall annualized loan growth run rate in the mid to high single-digits going forward, while continuing to improve the credit, profitability profile of our commercial relationships.
With that, I will turn it back over to Mike.
Michael P. Daly
I believe our recent results continue to reflect good underlying momentum in our branch teams. We’re also making good progress with our Bank of America branch acquisition in New York.
We expect to complete this transaction early next year and still expect to use the acquired funding to retire some volumes including prepaying some higher cost term funds and to build total earning assets, which did grow at a 5% rate this quarter in advance of the acquisition. Turning to expenses, as I mentioned at the beginning of the call, we’re pleased with the progress we have made on the expense front.
Total core non-interest expense decreased by 4% this quarter, in line with the 4% to 5% guidance we gave. As we said last quarter, we reorganized and we did reduce head count and expect to see additional net benefit from this going forward.
We also conducted a reassessment of our fixed assets in which we identified nine properties for consolidation. And we also continue to utilize our Six Sigma project team to identify and remedy any additional operational inefficiencies.
Well I am happy with the 4% expense reduction but we can’t deduct. I expect us to continue to chip away at this number over the next couple of quarters, balancing the need for growth resources with smart expense management as the goal and part of our target for an efficiency ratio back below 60%.
I believe our recent results continue to reflect good underlying momentum in our branch teams. We’re also making good progress with our Bank of America branch acquisition in New York.
We expect to complete this transaction early next year and still expect to use the acquired funding to retire some volumes including prepaying some higher cost term funds and to build total earning assets, which did grow at a 5% rate this quarter in advance of the acquisition. Turning to expenses, as I mentioned at the beginning of the call, we’re pleased with the progress we have made on the expense front.
Total core non-interest expense decreased by 4% this quarter, in line with the 4% to 5% guidance we gave. As we said last quarter, we reorganized and we did reduce head count and expect to see additional net benefit from this going forward.
We also conducted a reassessment of our fixed assets in which we identified nine properties for consolidation. And we also continue to utilize our Six Sigma project team to identify and remedy any additional operational inefficiencies.
Well I am happy with the 4% expense reduction but we can’t deduct. I expect us to continue to chip away at this number over the next couple of quarters, balancing the need for growth resources with smart expense management as the goal and part of our target for an efficiency ratio back below 60%.
I believe our recent results continue to reflect good underlying momentum in our branch teams. We’re also making good progress with our Bank of America branch acquisition in New York.
We expect to complete this transaction early next year and still expect to use the acquired funding to retire some volumes including prepaying some higher cost term funds and to build total earning assets, which did grow at a 5% rate this quarter in advance of the acquisition. Turning to expenses, as I mentioned at the beginning of the call, we’re pleased with the progress we have made on the expense front.
Total core non-interest expense decreased by 4% this quarter, in line with the 4% to 5% guidance we gave. As we said last quarter, we reorganized and we did reduce head count and expect to see additional net benefit from this going forward.
We also conducted a reassessment of our fixed assets in which we identified nine properties for consolidation. And we also continue to utilize our Six Sigma project team to identify and remedy any additional operational inefficiencies.
Well I am happy with the 4% expense reduction but we can’t deduct. I expect us to continue to chip away at this number over the next couple of quarters, balancing the need for growth resources with smart expense management as the goal and part of our target for an efficiency ratio back below 60%.
With that, I’m going to turn it over to Josephine. Joe?
Josephine Iannelli
Thanks Mike and good morning folks. As you’ve heard, we’ve recorded $0.43 core EPS in the third quarter, which was a penny above our expectations.
Net interest income came in stronger than expected, which more than offset lower fee income. Total revenue was the highest for the year and core revenue was just slightly below the prior quarter as balance sheet grows advance.
This growth was weighted towards the second half of the quarter, so we have a higher run rate coming into the fourth quarter. Mike commented on the strong loan growth.
Our earning asset growth also included a nearly $120 million in from Berkeley’s [ph] an investment securities as we took advantage of the improved yields on short and medium term mortgage backed securities during the quarter. Our GAAP net interest income included a $2.2 million out of period credit for purchase loan accretion that was described in the earnings release.
We have ongoing finance process improvement initiatives and recognized this additional revenue as a result. In order to be conservative in our reconciliation table, we adjusted the out of period amount out of core earnings for the fourth quarter and year-to-date, so our core EPS measure does not count that income.
Our goal is to build a high quality transparent core income stream and our team is delivering on this as we continue with our initiative. Our net interest margin of 393 basis points included all loan accretion including the non-core accretion.
We also measured the margin excluding this accretion. On this basis, the margins tie into 321 basis points due to ongoing yield compression along with the higher mix of investment security.
Looking forward, we expect middle mid single-digit average earning asset growth in the coming quarter. Excluding loan accretion, we expect the compression of the underlying margin to small in the fourth quarter with this measure moving between 315 and 320.
As a result, we expect low single-digit growth and underlying net interest income before loan accretion. We are hopeful that the run rate of the margin will stabilize by the end of the year and then turn positive, so the volume growth would produce additional forward revenue momentum before loan accretion as we enter 2014.
We also expect a margin benefit from the branch acquisition based on current market conditions. Focusing on loan accretion for the fourth quarter, we expect total loan accretion to contribute $2 million or more to net interest income, which is lower than the run rate for the last several quarters.
As we saw in the most recent quarter, this can be a large and unpredictable influence in our results and we have continued to benefit from favorable asset resolution strategies, which has generated significant value as a result of our business combinations. In 2014, we expect loan accretion to continue to decline as an element of our revenue due to the seasoning of these portfolios and our goal is that our revenue sources will provide overall positive operating leverage as we move through the year.
On the funding side, our cost of deposits picked up slightly in the third quarter due to some short-term promotions. We have found that these are effective in building business volume in new markets with good balance retention after the promotion period.
We expect deposit cost to tick back down in the fourth quarter and we expect them to move down further after the branch acquisition early in 2014. Moving on to fee income, mortgage fees continued to move south, something that has been widely reported by others in this business due to the sharp falloff and refinancing demands.
As we noted in our release, this falloff has accounted for nearly all the decrease in our core EPS, compared to the linked quarter and to the prior year third quarter. In the most recent quarter, the revenue decline included both volume and margin component, a key factor for us was our decision to promote adjustable rate portfolio mortgages.
And as a result, we had significantly less in secondary market activity generating fee revenue. We expect that mortgage revenues will remain under $0.5 million in the fourth quarter.
This is a significant change from the $5.9 million that we reported in the fourth quarter of last year. There is much more of drop-offs than we had anticipated and Mike has discussed our work in right-sizing as we adjust to compensate for these changes.
Other loan and deposit fees were lower in the third quarter due to timing factors that made prior period loan fees higher and current quarter deposit fees lower. We have a good pipeline of swap fee income.
But actual closings can be variable depending on year-end conditions. As we look to the fourth quarter, we expect total core non-interest income to be up in the low to mid-single digits from the third quarter.
The provision picked up a bit in the third quarter, but there has been no material change and we don’t expect any significant change in the fourth quarter. Our loan quality metrics remain good.
Our allowance reflects the fact that many of our loans were mark-to-market in recent bank acquisitions. And the allowance coverage of the portfolio has picked down a bit as overall portfolio risk metrics continue to improve.
Moving on to core non-interest expense, Mike has commented on the 4% core cost saves, which we achieved in the third quarter. We plan to achieve another 3% or better in core cost saves in the fourth quarter.
This will include the benefit from our restructuring, which I’ll comment on shortly. We expect that our core tax rate will remain between 33% and 34%.
If we achieve our volumes and fee and cost targets, we expect our core EPS to remain at or above $0.40 in the fourth quarter. This would include the core revenue growth, and cost reductions before loan accretion.
The earnings foundation that we are building will support future core earnings accretion even as we absorb the impact of decreased loan accretion. In the third quarter, we recorded net non-core items, totaling $0.10 a share, just a little higher than our guidance.
This included severance related items and branch acquisition costs. It also included facilities, restructuring costs, which were mostly offset by the oddest period revenue recognition, net of taxes and variable compensation.
Our facilities restructuring involves nine properties that we’re exiting to improve our operating efficiency. We are consolidating two branches in the fourth quarter and as we noted in our release, we will have consolidated 7% of our branches in total this year as we moved forward deliberately to consolidate operations in our expanded footprint.
We have additional restructuring possibilities that we are examining and together with branch acquisition expenses these may add an additional nickel or more to non-core charges in the fourth quarter. We targeted to keep our core ROA above 80 basis points in the third quarter, and we achieved 81 basis points for this period.
Our profitability measures are expected to decline slightly in the fourth quarter, so we expect to move back north in 2014 as we execute on our growth and efficiency goals. I would add that we continue to view the branch acquisition metrics as attractive and after we absorb acquisition costs, we plan on accelerated tangible book value growth.
We are currently going through our budgeting process and look forward to sharing more specific items on our next call. With that I’ll turn the call back over to Mike.
Michael P. Daly
Josephine thanks an awful lot. We really have been focused on internal discipline.
Making sure we’re working from a clear and stable and transparent base. As Josephine done a job and we’re certainly delighted that she is with us.
So as you’ve heard if we fit all our targets, we expect to keep our core EPS north of $0.40 in the fourth quarter. And we’re still going to be going through a transitional stake in the next two or three quarters, as we bring out the accretive benefit of the new branches, we realized further net loan growth and continue to architect our infrastructure.
Excluding the effects of loan accretion, which will continue to wind down; this represents a return to positive operating leverage and the solid growth base that our shareholders expect from us. I feel good about the continued solid loan growth in this environment.
And as I said, we’ll continue to work hard on expenses. We hit the metrics.
We thought we would for the quarter and discipline is the key here. As we move through the coming months, we’ll continue to focus on strengthening our platform and establishing a clear path for 1% ROA and 10% ROE, which commensurate tangible book value accretion.
This is our focus. Quarterly progress that may have some unevenness along the way, because we’re not going to forecast [indiscernible] form and in these market conditions, opportunities could vary from quarter-to-quarter; but I think we’re well positioned to develop profitable business as we build out this franchise, but we’re going to be profitable.
We’re going to take our time and we’re going to add business that creates solid shareholder value. As you would expect, we will remain capital efficient during this process.
We reduce our shares outstanding by 140,000 shares during the quarter and the stock buyback program we announced earlier this year. We continue to have capacity under the program and we’ll consider further repurchases depending on our circumstances and of course market conditions.
Our tangible book value continues to grow, which is a function of our core return on tangible equity, which came in a little over 11% for the quarter. So with this we’re also maintaining a dividend yield here 3%.
We also continue to closely monitor the interest rate sensitivity of our balance sheet to maintain the asset sensitive bias that has been a long standing discipline. The branch acquisition of course is expected to contribute further to this.
Now turning to M&A for a minute; as I’ve clearly heard from our peers, the pipeline is not very robust right now. There were a few things we wanted to get done in the first half of the year and I saw the potential for one or two sensible business combinations getting done and they did now see us putting a lot of energy into M&A at this time, but I’d like to track where I’m right now.
Now that said, we obviously we won’t ignore good partnering opportunity as one should develop, but I’m looking forward to getting through the integration of the Bank of America branches and we’re pretty happy with the success we’re having right now bringing our team and growing organic. Wrapping up, I’m confident in our ability to continue to grow revenue organically and take advantage of our established market position.
And I’m proud to assess this team has taken to reduce expenses and maintain our momentum in earning asset growth.
We won’t do that that will just heard us later on. So our teams will continue to pound away and eke out the growth we need without compromising for principal.
I like where we are at as a Company. Our teams are focused, they’re motivated and I think opportunities are available in a good diversified geography and while current earnings aren’t running at the rate we’d like, I think the foundation for their acceleration rates are equal.
With that, I will open it up to questions.
Operator
(Operator Instructions) And our first question is from Matthew Forgotson of Sandler O’Neill.
Matthew Forgotson – Sandler O’Neill & Partners, L.P.
Hi, good morning everybody.
Michael P. Daly
Hey, Matt. How are you?
Matthew Forgotson – Sandler O’Neill & Partners, L.P.
Doing well, thank you. So just a quick question here on the marketplace, like it sounded like you are bit more upbeat this quarter than you were last.
Where is pricing pressure easing up, can you talk to us a little bit about that landscape? Where is that hardest?
Where is it lining up?
Michael P. Daly
Well I wanted George, you can jump in here. The consistency of the C&I and ABL has been terrific and we really didn’t see any downturn in that over the last several quarters.
We did see some real softening in our commercial real estate activities, much of that had to do with the fact that there was such fierce competition from a rate standpoint but it didn’t make sense to put loans on and structure them in ways that we’re going to be profitable to us. George why don’t you talk a little bit, how where our hotspots or maybe our current yield and where you see competition?
George Bacigalupo
Sure, thanks Mike and thanks Matt. I think we’re seeing that pricing is still competitive everywhere.
I think in the commercials business as well as the ABL business, pricing is less of an issue. It’s still competitive, but I think the market is that one based on not just pricing, but overall competency reputation commitment to the business et cetera.
So I think we’re getting adequate margins. But we’re not winning transactions or relationships based on pricing.
It’s based on relationship orientation, products had experience in other, I think tangible things that we bring to the table that allow us to I think to compete and win. And if the deal becomes too competitive, although we deal with successful margins, we’ll move on.
Matthew Forgotson – Sandler O’Neill & Partners, L.P.
Okay.
George Bacigalupo
We’ll be there for the next time.
Michael P. Daly
And George is it fair to say that with the consistency of the C&I 12%, 13%, 15%, 16% every quarter over the last several quarters, the beauty of that is that on a long-term basis, most of that stuff is going to flow with rates. The hard part is that in the short run that can have somewhat of detrimental effect to the existing margins.
But that’s the kind of thing that really keeps us full in the standpoint of balancing our asset sensitivity.
George Bacigalupo
Yeah, I agree Mike. 80% of our outstandings in the ABL Group and our C&I Group is revolving lines of credit that are floating and so we will get the benefit of long-term and rates do rise.
Matthew Forgotson – Sandler O’Neill & Partners, L.P.
Okay. And just a follow-up on that, can you tell us what the complexion the absolute dollar value and say the blended yield that the loan portfolio was at quarter end?
Michael P. Daly
George, take that and just look at that.
George Bacigalupo
Yeah, the total yield on commercial loans at quarter end was $586 and that was up due to the accretion impacts that I can report that our yields on commercial loans originated in the quarter picked up as compared to the prior quarter and we think that reflected some improved opportunities as well as the uptick in rates and the benefit of seeing some CRE deals.
Matthew Forgotson – Sandler O’Neill & Partners, L.P.
And the absolute dollar value of the pipeline deal that handy?
David H. Gonci
As a dollar value of the pipeline was about a $175 million. George?
George Bacigalupo
That’s correct, Dave yeah.
Matthew Forgotson – Sandler O’Neill & Partners, L.P.
Okay. And then just last one from me the 3% OpEx reduction, Mike as you said that do you have still left to do.
Is that half of the 3Q base or is that half of the 2Q base that you had identified originally?
Michael P. Daly
Of the 3Q base, right?
Matthew Forgotson – Sandler O’Neill & Partners, L.P.
Okay.
Josephine Iannelli
Correct.
Michael P. Daly
Yes.
Matthew Forgotson – Sandler O’Neill & Partners, L.P.
Great, thank you very much.
Michael P. Daly
Thank you, Matt.
Operator
And our next question comes from Collyn Gilbert of KBW.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc
Thanks, good morning guys.
Michael P. Daly
Hey, Collyn. How are you?
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
I’m good, thanks. So just to go back to the loan yield discussion, Dave what was the blended origination yield?
I know you had said that C&I yields picked up a bit. What was the origination yield for the whole portfolio for the quarter?
David H. Gonci
The blended origination yield was in the mid to high 3s. So we had that 350 or above and of course some of the one-off is that higher yield.
So net-net we were experiencing some of that margin compression. But we are happy to see the yield that spread margins going up a bit.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
That’s helpful okay and you had said on some of that has been because of some of the CRE deals you’re doing, what is kind of the structure the CRE deals is allowing you to keep that pricing better or the yield pricing better?
Michael P. Daly
And George, you can speak to that and some of that is the reduction in CRE that we are losing as well as some CRE that we are putting on and we structure those historically, we do some swaps.
George Bacigalupo
Yeah we’re trying to do swaps on ever we can, we have five year, seven year we try not to go beyond that, we try to keep our structure in place on discipline, so five and seven years is where we are most competitive in our rate on quality real estate loans. So I know we have been doing having some runoffs, I think we started to see some uptick in maybe the market now that we are very interested in quality real estate originations.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc
Okay so you’re doing the five and seven and then you’re swapping out on top of that so the effective duration is even shorter than that as we are saying?
George Bacigalupo
That’s correct
Michael P. Daly
Yeah.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
And the cost so just trying to think about that the cost of the swap would bring the yield down to what? The loan yield down to what then when you net it all out?
Michael P. Daly
I will be passing to [indiscernible] right.
George Bacigalupo
Yes.
Michael P. Daly
Some of them will be in the high twos depending on the situation and the swaps tend to involve the larger ones where is the blended yield involves lot of the smaller ones that we do around our footprint.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Got it. Okay, okay that’s helpful and just on the residential mortgage side this quarter you had portfolio you said majority of ARMs, how are you thinking about the resi mortgage portfolio at this point, I mean will you continue to grow that, do you want to continue it as certain percent or you’re balancing more the yield within that portfolio than anything else?
Sean A. Gray
Hi, Collyn. This is Sean.
I do think it’s a combination. We’re looking at monthly originations from $30 million to $35 million.
If we see ARM type products, if there is jumbos, where we like the yields, we’re looking to portfolio that. So in any given months, we’re looking to sell 60% to 85% of the overall production while we portfolio others, and it really depends on the originations that we see.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay. Okay, that’s helpful.
Michael P. Daly
It goes to the higher count of conversation that we’ve had and as we’ve got to replace income from what was a pretty enormous secondary market fee income and we got to replace some of the income from the loan accretion that’s going to wind down. So our view is we got to start to build the balance sheet back up and we’ve got to cut expenses.
We got to create real positive operating leverage to replace that.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay, that’s helpful. And then just two more quick, how should we be thinking about the deposit service charges coming over with the branch acquisition, generate run rate, we should be thinking about?
Sean A. Gray
I don’t have that run rate Collyn, we can circle back with you to be of a fee structure is one that higher than our base slightly. So I can get to the details on that.
It’s heavily deposit, core deposit DDA oriented deposits. So I can get you more detail on that, but from a global perspective, slightly higher fee income base than we see within our traditional deposits.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay, that’s helpful. And then just one last question, I just want to confirm.
Josephine, you’d said that the core NIM and excluding all accretion income, all recovery income would be in that $315 to $320 range and was that just for the fourth quarter or how do we should be thinking about for next year?
Josephine Iannelli
Yeah, Collyn that was just for the fourth quarter.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay. Okay.
Are you in a position yet where you want to give any thoughts as to what might happen next year?
Josephine Iannelli
Yeah, I think we can get into that further on our next call.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay. Okay, that’s all I had.
David H. Gonci
We noted that that we’re hoping for the compression to stabilize by the end of the quarter and see pick up in the branch acquisition should also give us improvement. But we want to get a little further with our budgeting before we provide more guidance on that.
Collyn B. Gilbert – Keefe, Bruyette & Woods, Inc.
Okay, that’s great. All right, thanks guys.
Michael P. Daly
Thank you, Collyn.
Operator
And the next question will be from Matthew Kelley of Sterne Agee.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Yeah, hi. I was wondering if you could give a little bit more detail on just the securities that were added and where you see that securities to earning asset ratio headed over the next four quarters, I mean will there be more bills in that from that quarter.
Michael P. Daly
Who is going to take that? I mean we’ll have some more, if we got it...
George Bacigalupo
Yeah, sure. So we added $100 million, $120 million in securities in the third quarter.
The yields were around little over 2% to 15% and durations a little bit under four years. I mean going forward it’s certainly one of the things we’re continuing to look at as we obviously get the deposits from Bank of America.
We’re going to be opportunistic with what the rate environment is. We’ve seen that come back down a little bit here in the fourth quarter.
So I think we’ll just pay attention what’s going on and look at the overall options for us the banks…
Michael P. Daly
But basically it had singles and doubles not exciting…
Matthew Kelley – Sterne, Agee & Leach, Inc.
Great; and the plan is still to take the Bank of America deposits pay down some of your borrowings that still on track?
Michael P. Daly
Correct, yes.
George Bacigalupo
Yeah.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Okay, gotcha. And then on the reclassification is like a new line item in the P&L, just looking at loan related fees that $1.3 million.
I think you’re going to bucket that out of what headwind including mortgage banking and they are separating those two. The loan related fee income line, what is in there?
Is there any residential mortgage banking running to that or not?
David H. Gonci
Yeah, this is Dave commenting. We try to keep all of our secondary market revenue in the mortgage banking fee line.
The loan related fees include swap income and if we noted in prior year quarters, we had some season loan sale gain numbers in there, and it also does include value of some mortgage servicing and some redeemed line fees, commercial line fees, which is a growing portion of our income as well. So we’re looking for growth as we go along with our C&I growth.
Sean A. Gray
George Bacigalupo
Yeah.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Okay, gotcha. Where you sit today the Bank of America branch deal, how does that impact your core margin, the 315 to 320 that you have outlined to the fourth quarter?
What type of accretion basis point benefit do you see relative to that 315, 320?
Michael P. Daly
I appreciate the question. We’re not trying to provide the granular guidance on that at this time and it’s going to depend on conditions when the deal closes and to a certain extent, we’ve got some things that are coming out in the fourth quarter that will be in advance to that.
So we’ll be looking through that. We do expect it to be accretive, but how it hits and exact amount is something that we need a little time to work out.
George Bacigalupo
That’s going to help. But I think we need to at least cut that fully, Joe, before we put the number out there right.
Josephine Iannelli
Yeah.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Are there any additional fixed cost that you can bring out of the mortgage banking operation with volumes down so hard or is that’s been paired back out easily?
Michael P. Daly
Sean, I’m going to let you if you want talk to that. But you’ve taken a lot of expense out of there to-date.
And I think the mortgage business is still business that we can do and do very well. So we’ve been careful, I think not to cut muscle in this Company.
I think we’ve done a really good job and everyone here out to the product. There wasn’t easy, but to look at the entire organization and not get out of cost saves are anyone particular areas.
So there maybe some more, Sean, but I’d like to back that guys are looking at finance and good loan production right now.
Sean A. Gray
We’ll examine it. We have a responsibility to do examine it.
But one thing worth noting is 80% to 85% of our production is Massachusetts based. So we have an opportunity to recruit New York and recruit in Connecticut now more heavily.
And we most recently hired some sales managers on the mortgage side of the business in those areas to do that. And we’ve seen the gross gain on sales come back to a more normalized place in the end of September or October.
So we feel comfortable in that type of recruitment. But with that said, as we look at volumes, we will continue to monitor that.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Okay. And then last question, the tax rate guidance of 33% to 34% that’s up a little bit from the 32% that you mentioned in July in the second quarter call, anything going on there?
Michael P. Daly
There is nothing going on.
Josephine Iannelli
It’s really just a mix, nothing specifics that would have driven it given where we expect it to happen here in Q4.
Matthew Kelley – Sterne, Agee & Leach, Inc.
Okay, thank you.
Michael P. Daly
Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mike Daly for any closing remarks.
Michael P. Daly
Okay. Well, thank you very much.
This does conclude the call. I want to thank everyone for joining us.
I closely look forward to speaking with everyone again in January, to discuss the final results of the year. And I can assure you that we will continue to give the same kind of effort going forward as we have in the last four weeks.
Thank you.
Operator
The conference is now concluded. Thank you for attending today’s presentation.
You may now disconnect.