Duncan Smith – Chief Financial Officer
Frederick Peters – Chairman, CEO
Joseph Keefer – Chief Lending Officer
David Darst – Ftn Midwest
Jason O'Donnell – Boenning & Scattergood
Bryn Mawr Bank Corporation (BMTC) Q4 2008 Earnings Call January 30, 2009 8:30 AM ET
I would like to welcome everyone to Bryn Mawr Bank Corp. fourth quarter and year end 2008 earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Duncan Smith, Chief Financial Officer.
Thanks everyone for joining us today. I hope you had a chance to review last night's press release. If you have not received our press release, it is available on our web site at bmtc.com or by calling 610-228-2140. Ted Peters, Chairman, CEO of the Bryn Mawr Trust Company has some comments on the quarter, our strategic initiatives and a view of the competitive landscape.
After that, we'll take your questions. The archives of this conference call will be available at Bryn Mawr Bank Corp. web site or by calling 800-642-1687 and entering conference pin number 79869786. A replay will be available approximately two hours after this call concludes.
Before we begin, please be advised that during the course of this conference call management may make forward-looking statements which are not historical facts. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include the words believe, expect, anticipate, intend, plan, target, estimate or words of similar meaning.
Forward-looking statements by their nature are subject to risks and uncertainties. A number of factors, many of which are beyond the corporation's control could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. Forward-looking statements speak at of the date they are made. The corporation does not undertake to update forward-looking statements.
Now I'll turn the call over to Ted.
Thank you everyone for joining us today. As you've probably read by now, last night we reported fourth quarter 2008 net income of $1 million or $0.12 per diluted share compared to net income of $3.1 million or $0.36 per diluted share in the fourth quarter last year.
At first glance, a disappointing quarter, but perhaps a non unexpected conclusion to a year of unprecedented turbulence in the financial markets. Upon closer inspection however, it was really a quarter and a year of steady progress for our growth plan that leaves us confident in both our strategy and our future.
Most importantly, Bryn Mawr remains well capitalized for regulatory capital purposes at both the corporate and bank level, and in fact, exceeds well capitalized levels by over $10 million. Our fundamental banking and wealth businesses are healthy and we are in excellent financial condition.
Our loan portfolio is growing and we are seeing an influx of new deposit relationships, and we are cautiously expanding with the opening of our Westchester Regional Banking center, and the Bryn Mawr Trust Company of Delaware in Wilmington.
Over the long run, our strong financial position, growth in loan and deposit relationships and expanded range of product and service offerings make us one of the best positioned, most competitive financial institutions in our markets.
In the fourth quarter, our loan and lease portfolio continued to expand at double digit rates. Total loans and leases at year end 2008 were almost $900 million, up 12% from the previous year and also up $21 million sequentially. We are seeing strong activity in the refinance and home equity loan market where rates are approaching historic lows.
Compared to a year ago, home equity loans and lines increased 25.4% and residential mortgage balances were up 9.3%, reflecting continued demand in our fluent market where real estate values have remained relatively stable compared to many other areas. Both of these loan types are also up from the third quarter of 2008, suggesting demand has remained constant despite the recessionary environment.
Commercial and industrial loans increased 10.6% and commercial mortgages grew by 11.2% over the past year. Again, both balances were up nicely from September 30, 2008.
While the demand for high quality loans remained constant throughout 2008, we are beginning to see the effects of the weakening economy on the quality and quantity of lending opportunities even in our fluent market.
Obviously the home and commercial construction markets have slowed significantly. Reductions in our construction loan portfolio over the last 12 months reflect the conversion of completed projects to a permanent status and the intentional scale back of new construction projects by our existing residential home building experts.
On the brighter side, the opening of our new West Chester Regional office puts us in another affluent market with good growth potential.
Turning to the leasing portfolio, balances at the end of the fourth quarter are up from the third quarter end a year ago, although the rate of growth has intentionally be slowed and is expected to remain static or decline in 2009. As mentioned in previous quarterly earnings calls, we have implemented tighter underwriting standards over the past 12 months in our leasing area.
At this time we are now writing only A quality leases. However, it takes time for these efforts to affect the quality of our lease portfolio. Consequently, during the fourth quarter, we increased the provision for loan and lease losses by $1.7 million, primarily due to our leasing portfolio's performance.
While we believe leasing provides diversification and high yielding assets that improve the performance of our overall loan portfolio, we are taking a more conservative to new leasing originations. As the portfolio ages, tightening underwriting standards take hold and the mix of leas originations changes, we will continue to evaluate the degree of our participation in the leasing market.
Overall the allowance for loan and lease losses at year end 2008 stands at $10.3 million or 1.15% of portfolio loans and leases, up 12 basis points and 14 basis points respectively from September 30, 2008 and the end of the year 2007.
The fourth quarter provision of $2.9 million compares with net charge offs for the quarter of $1.6 million, substantially all charge offs related to the leasing portfolio which is national in scope. Credit experience in the corporation's traditional loan portfolio has performed much better since it is centered in our traditional, local Philadelphia market area where economic conditions have generally been better than the overall national economy.
Our non-performing loans rose from $2.2 million at September 30, 2008 to $5.8 million as of the end of the year primarily due to one loan relationship. This relationship is a collateralized residential multi-home construction project for which we have implemented actions to minimize our exposure.
Overall, non-performing assets represent 65 basis points of the total loans and leases portfolio at the end of the year 2008 compared with 24 basis points at September 30. On a net basis however, excluding the 30 basis points for the one aforementioned loan, our non-performing assets at the end of the year were 30 basis points, which is only a six basis point increase from September 30.
As loan growth was strong again this quarter, pricing for our targeted premium credits remains highly competitive, limiting the overall yield on our asset base. After stabilizing margins over the previous few quarters, the overall yield on our asset base decreased 31 basis points from the third quarter to 5.63%, with a net interest margin in fourth quarter trending downward by 27 basis points to 3.63%. We expect our net interest margin to stabilize and slightly increase in 2009.
A large factor contributing to the decline in the earning asset yield during the fourth quarter of 2008 was the disruption of the inter-bank lending market and the rapid drop in interest rates. These conditions significantly impacted our ability to earn an attractive yield on excess cash balances which averaged over $45 million during the quarter with a yield of only 54 basis points.
Safety and liquidity were the primary factors for us when placing overnight funds during the quarter. While the conditions have improved from the fourth quarter, the ability to earn any type of yield on excess cash without taking undue risk is still challenging.
In the fourth quarter we grew our relatively low cost of projects through effective marketing in our trade area. Aggregate average quarterly balances of interest bearing checking, money market and savings balances rose to $334.9 million in the quarter of 2008 from $313.8 million in the third quarter of 2008 while our new IND program for deposits from brokerage accounts rose nearly $20 million from the third quarter to $29 million.
Fourth quarter 2008 average non interest bearing deposits declined slightly to $143.9 million from $145.7 million in the third quarter of 2008. In addition, we reduced our use of wholesale deposits in the fourth quarter by $16 million from the previous quarter, and this was partially offset by an increase in average borrowed funds of $7.2 million.
Overall, our cost of interest bearing funds during the quarter decreased only five basis points. We are exercising discipline in our pricing of deposits despite evidence that some larger troubled institutions that operate in our market continue to chase deposits with irrational pricing. We are also optimistic our new West Chester Regional office will be a net provider of funds in 2009.
An area of strength in the fourth quarter was our investment portfolio. As discussed last quarter, our portfolio is comprised of U.S. Agency bonds, mortgage backed securities, municipal bonds and corporate bonds. As of December 31, the portfolio had an unrealized gain of $1.1 million. As you know, many other banks are experiencing large losses in their investment portfolio, and some are incurring impairment charges.
For the fourth quarter, we saw a slight drop in non interest income of $80,000 relative to the prior quarter and $135,000 decrease compared to a year earlier quarter, mainly attributed to our lower interest rate floor income and the lack of BOLI income.
Fees for wealth management services in total for the fourth quarter of $3.7 million were up relative to the $3.5 million in both the third quarter of 2008 and the fourth quarter of 2007. The increases are attributable to Lau Associates, our recent acquisition in July. Organic fees for non Lau Wealth Management Services were reduced due to the decline in the financial market valuations.
Total assets under management, administration, supervision and brokerage at year end 2008 were $2.1 billion compared to $2.7 billion at September 30. To help strengthen our Wealth Management Business we recently opened the Bryn Mawr Trust Company of Delaware.
Non interest expense for the fourth quarter of 2008 was $10.6 million, up 17.6% from the fourth quarter of 2007. Expenses in the quarter included a write down of mortgage servicing assets of approximately $640,000 due to the recent decline in the long term performing mortgage rates. Excluding the mortgage servicing charge non interest expense in the fourth quarter of 2008 decreased 3% from the third quarter of 2008.
As disclosed in our third quarter 10-Q, the Bryn Mawr Trust Company elected not to participate in the Federal Government's TARP program for several reasons, the most significant being our existing strong capital position and also the uncertainty surrounding the constantly changing conditions of the TARP program.
As previously stated, the capital ratios for the bank of the corporation are considered well capitalized by regulatory standards. As of December 31, the bank and corporation had tier one capital to risk weighted assets ratios of 8.5% and 8.8% respectively. Tier two ratios were enhanced by the purchase of $15million of subordinated debt in the third quarter of 2008 and exceed well capitalized minimums by at least $10 million at year end 2008.
Overall however, capital ratios are lower than prior year figures due to the approximately $10 million in intangible assets relating to the acquisition of Lau Associates in addition to normal balance sheet asset growth. However, we remain focused on maintaining the appropriate level of capital to support asset growth acquisitions and to maintain the well capitalized regulatory standards. In addition, we remain focused on asset quality and liquidity.
There a few key topics for 2009 that I would like to mention. First, the cost of FDIC insurance in 2009 will rise substantially above the rate we are currently paying. At a minimum we anticipate that FDIC insurance in 2009 will be 175% to 200% higher than the 2008 expense of $472,000. This number could be even higher depending upon how the FDIC ultimately treats federal home loan bank borrowings in their assessment formula.
Second, we currently anticipate our 2009 qualified and non qualified defined benefit plan costs to increase by $1.5 million compared to our 2008 costs primarily due to the weakness of the stock and bond markets and its affect on the value of our frozen qualified defined benefit plan assets.
Third, the bank surrendered its BOLI insurance contract effective August 2008. This $15.6 million asset will be returned to the bank in early February 2009, increasing our liquidity and assets available to earn interest.
Fourth, Federal Home Loan Bank of Pittsburg voluntarily suspended its dividend and capital stock repurchase program on December 23, 2008 until further notice due to their earnings and investment issues. The bank and thousands of other banks around the country are monitoring the situation closely.
The immediate impact is that the bank has an $8 million investment in the Federal Home Loan Bank of Pittsburgh's stock that no longer earns a dividend and cannot be redeemed. The bank earning $186,000 on this stock in 2008 which is included in other income. At the end of the year 2008 the bank had maximum borrowing capacity of $344 million with usage of the line for direct borrowings and letters of credit totaling $202 million.
Fifth, management continues to closely evaluate all non interest expenses.
Sixth, residential mortgage refinancing activity due to lower rates increased significantly in December 2008 and has continued through 2009. We anticipate this will be one of our bright spots in 2009 as long as rates remain at current levels.
And finally seventh, Bryn Mawr Trust Company of Delaware and our West Chester Regional office positions the bank into two new affluent markets with good growth potential, further diversifying our asset base and client accounts.
In summary, Bryn Mawr is fundamentally sound, profitable and has the flexibility and agility to respond to the opportunities afforded by a strong capital base, asset quality and liquidity. We have a strategy in place that will create significant value over time and in 2008 we achieved a number of our strategic growth objectives.
It was a challenging year and we are proud that our disciplined approach to the market, regardless of the conditions, has enabled us to remain secure throughout. The weak economy and a prolonged disruption in the financial markets will be challenging again in 2009. However, the Bryn Mawr Trust Company for over 120 years through numerous periods of economic prosperity and diversity has succeeded by providing outstanding banking and wealth management services.
Before closing, I am pleased to announce that the corporation's Board of Directors declared a quarterly dividend of $0.14 per share payable March 1, 2009 to shareholders of record as of February 9. This is our 65th consecutive quarterly dividend.
With that, we will open the lines for any questions.
(Operator Instructions) Your first question comes from David Darst – Ftn Midwest.
David Darst – Ftn Midwest
Can you go over your funding mix this quarter? It looks like you had pretty good DDA growth and you're talking about actually a decline.
Yes. I'll turn it over to Duncan in a second for the specific numbers. We have noticed really going back to September a sharp increase in the number of new transaction deposit accounts that we have opened. They are primarily coming from some of the larger, more troubled institutions in our area as there appears to be a slight dequality.
But we are opening up approximately three times the number of transaction accounts that we might normally open up. As you mentioned, client accounts are a little bit of a plug figure so if we need money, we might raise rates, so we don't look at time accounts too much increasing or decreasing as a bell weather of how we're doing on deposits.
Duncan, I'm not sure if you have any specific figures here other than I know we're pleased where we are on what we call core transaction accounts.
We're just continuing to look at all our different funding sources and to diversify and not put all our borrowing capabilities in any one institution. For example, home loan banks, we mentioned we're at $202 million. We're actually taking steps to reduce home loan bank exposure over the next six months.
We've also recently taken some assets, commercial and industrial loans that were not accepted as collateral by the home loan bank and we placed them in the Fed discount window program, essentially giving us some additional borrowing capacity in the lines of about $70 million. So that was just set up in the last couple of days. So that's a very positive development there.
So we continue to look at all our sources and try to get a nice balance and mix through wholesale CD's, federal home loan bank borrowings, Fed and also core deposits. We are seeing some fall out from the bigger financial institutions getting new deposit relationships from some of their key customers. So we hope that's good news for us.
David Darst – Ftn Midwest
Could you run back over your leasing strategy? It sounds like you're still committed to the business and growing the portfolio.
I'm going to turn it over to Joe Keefer in a second. Basically we started a leasing company about two and a half years ago where we hired a very experienced group to come in and run a small ticket nationwide leasing company. This group had a very documented track record with a business model which they had.
Unfortunately with the national economy quite frankly in a lot more trouble than the Philadelphia area, we're experiencing a lot more losses in that portfolio than we would like to see. We've been spending a huge amount of time on leasing to try to quantify the issue and stabilize it, and I think I mentioned in my comments there that we were not going to grow this portfolio in 2009 and we might even shrink it somewhat.
So let me turn it over to Joe Keefer, our Chief Lending Officer who oversees this part of the business.
We throughout late 2007 and into 2008, we drastically tightened credit. When we first began this model, we were essentially an A, B, C shop where these professionals had demonstrated prior performance that they could run a portfolio like that and perform very well. Well, as we got into an economy that was deteriorating, we quickly changed that strategy and now we are a totally an A shop, so we're only booking A credits where we expect on a go forward basis, we will experience significantly less credit losses.
However, as we do that, we're still going to have to work through the leases still on our books that were written prior to a change in strategy. But we really drilled down in the portfolio. We identified certain segments that were under performing and we exited certain brokers where our experience was not satisfactory.
I think on a go forward basis, we'll be good, but we'll still have to work through some issues before we tighten credit.
David Darst – Ftn Midwest
When you were going through you capital ratios, did you mention what you expect your total risk based capital to be?
I don't think I did. Duncan is looking for that number right now. As I say, our capital, we're still well capitalized. We feel very comfortable where we are. The ratios have declined a little bit over the last couple of years; one because of the strong growth in the bank. I think we know in 2007 the bank grew over 20% in banking assets.
And of course the primary thing here is the Lau Associates acquisition where we have made payments to former owner. That pretty much goes right into good will, which hurts us in some of our ratios.
I should make a note before I turn it over to Duncan here that Lau Associates acquisition has been a real bright spot for us. It was accretive to earnings in 2008. It's going to be much more accretive in 2009. The company is performing very well. They have a great founder and CEO in July Lau who's working very closely with the bank.
So we're pretty excited about this acquisition, so even though it's hurt some of our capital ratios a little bit, we're really pleased that we made this acquisition last July. Duncan, do you have some numbers of the capital ratios?
In the press release, in the data schedules, there is a whole section on Capital showing the five periods, but at December 31, 2008 the total tier two capital ratio was 10.99 at the bank and it was 11.3 at the holding company. The tier one was 8.5 at the bank and 8.82 at the holding company.
Your next question comes from Jason O'Donnell – Boenning & Scattergood.
Jason O'Donnell – Boenning & Scattergood
Can you give us a little bit more color on the rationale behind the change in leadership at the Wealth Management Division? I saw you put out a press release and just wondering if you could give us some color on that change there.
We opened up the Bryn Mawr Trust Company of Delaware. We received our charter last summer. We were physically down there in third quarter. We're in Wilmington, Delaware. We have a staff there of Wilmington people.
Our wealth head at that time was Matt Waschull and Matt is from Delaware, has lived there for 13 years, had worked for Wilmington Trust Company and was very well versed in Delaware trust law and what we call the Delaware advantage.
We see the Bryn Mawr Trust Company of Delaware as a major initiative for the bank and when we started down there making calls, Matt and myself, and quite frankly started bringing in business fairly rapidly, we saw that Matt should be spending 100% of his time down there because he just is so good at it and he knows it so well.
So we decided to put Matt down. He is the President, Chairman and CEO of Bryn Mawr Trust Company of Delaware. Concurrently with that, we were very fortunate that one of our directors was available to join us, Frank Leto. Frank is an attorney in the area. He's been a director of the bank for six or seven years, extremely bright, very, very well known in the community and has a lot of experience in the wealth area, and Frank is currently the acting head of the wealth area and probably will become the permanent head of the wealth area as we go forward.
We think the change has really strengthened the bank. It's strengthened us in the Philadelphia market and our wealth business up here in new business development, and it's definitely strengthened us down in Delaware with our new initiative down there.
Once again, I just want to mention our Delaware subsidiary which is a major initiative for us, is off to a very, very good start.
Jason O'Donnell – Boenning & Scattergood
In terms of the, to stay in the wealth management business for a moment, obviously the assets under management and administration and so on have come down given the declines in asset values. I'm just wondering have you see a good deal in the way of account attrition or is that just really a function of asset values?
It's almost 100% asset values, and with the market going down so much. We are fortunate that with our Lau Associates acquisition, as Lau Associates charges a flat fee per account. They don't charge assets under management, so Lau Associates has not seen the revenue go down a penny.
But quite frankly, it has affected us quite a bit on our traditional wealth business where we price assets under management and as you can see from the numbers, if you have hundreds of millions of dollars less in assets under management, you're revenue down there is going to fall.
We are projecting a slight increase in wealth revenue next year but once again, we're a little bit held captive by the markets and what they do.
Jason O'Donnell – Boenning & Scattergood
Do you have any plans to sort of switch that model and adopt some of what they're doing in terms of the pricing?
No, not on the pricing. I think most companies are price on assets under management. Lau Associates is a very heavy financial planning inter-generational wealth strategy, tax shop, and because of that fixed rates pricing sort of lends itself more to that model as opposed to what we're doing, sort of managing trusts and investing people's money and so forth.
Jason O'Donnell – Boenning & Scattergood
In terms of the credit quality, just looking at the reserves to loans ratio in the loan/loss, can you give us a sense of what you're outlook for that is over the near term. I' not asking for an '09 view, but certainly over the first quarter, any sense of what you're going to do with that reserves to loan level and what you're outlook is on the provision?
I want to turn it over to Joe Keefer or Duncan to comment on that. We're going to keep those loan loss provisions. I hate to say on the conservative side, but that's a little bit of a trite word now. I think we're going to make sure that we stay fully reserved.
Joe, do you want to comment on the loan portfolio in general and our reserve?
On the traditional banking assets, I think our strong credit culture has served us well in 2008. You can see that charge offs after recoveries were pretty diminuous and so we're quite crafty. We're proud of that.
We're watching our site developers very closely. We have one issue there that we're working, we're paying very close attention to and we feel we're adequately reserved against that. If you look at the rest of our builders which is a very small percentage of our portfolio, they had a lot of sales already or ground loans if you will down very low, and we feel that they have significant assets that they'll be able to weather this storm.
The rest of the consumer portfolio, we anticipate will perform okay. We're in a very affluent market basically centered in three counties, Chester, Delaware, Montgomery county and so far we haven't seen anything.
However, there will be some hiccups. This economy we expect will continue to stay in a deep recession so quarter to quarter, Duncan and I will get together. We'll look at what's happened. We'll assess the current reserves and we'll make adjustments as needed.
We have, as most banks do a very complex procedure and process here to do our loan loss provision. I think our report that comes out on a quarterly basis is probably 14 or 15 pages on this with a lot of detail. But going back to what Joe said, I think any bank, the real risk in its normal portfolio would be its site development loans which are residential site developments, and that's where a lot of banks around the country are really experiencing a lot of problems.
Our site development loans, residential are less than $45 million now, somewhere in that area and they are down from the previous year, and that's a conscious decision by ourselves even before this stuff happened to kind of lower a little bit.
We have $900 million in loans and $45 million is about 4% of that, so it's a very small portion of our overall loan portfolio and we continue to monitor it very closely.
Jason O'Donnell – Boenning & Scattergood
In terms of the equipment lease business specifically, do you have a target that you feel comfortable with in terms of where you want to get to or from a percentage standpoint of the total portfolio?
We initially said we never wanted to get more than 10% of the portfolio and right now it's approximately 6% of the portfolio, something like that. We think this year it will shrink down to be probably 5% of the portfolio by the end of the year. What we're doing on this is, we're literally watching this day to day, week to week, month to month.
So for us to know where it will be say 2010, 2011, depends upon two things. One is the performance of that portfolio this year, and the second thing is what the national economy is. This is a national leasing company, so we have leases in almost every state in the union including unfortunately Florida, California, and some of the other states that are seeing some issues here. We all know what's happening is some of those other areas.
So once again, it's something which we watch very closely but it will definitely be a smaller and shrinking portion of our overall loan portfolio, certainly in the 18 months.
Jason O'Donnell – Boenning & Scattergood
On the impairment to the value of your mortgage servicing portfolio, could you just quantify for me or rather qualify what you view as the risk going forward? There's probably $2.2 million in assets on that remaining, I'm wondering what your sense is given what's happened here in refinance activity of the impairment risk over the near term.
Impairment on your mortgage surging rights portfolio is really dictated by long term mortgage rates and then we give this to an outside firm that actually evaluates it. Rates have dropped so sharply so quickly in the mortgage area that any firm basically with a mortgage servicing portfolio is going to take a hit.
We don't have a very big mortgage servicing portfolio. It's only about $400 million so it's not even that particularly large, but once again, we have to take a charge on it.
I should note that this is a temporary charge. It's a temporary charge and if for some reason at some point in time rates move up and these pre-payments speeds decline, then we probably would be able to recover that $640,000. If however, rates do drop sharply again and we get down to mortgages in the 3% range, yes then in fact at some point it would probably be another impairment charge.
The converse of this though is that our mortgage origination business has been very strong. As you know we have a very good mortgage company. In recent years, we've been doing $110 million. We have done as much as $650 million going back to 2003 or so, so we have the ability to do residential mortgages and sell them in the secondary market primarily to Fanny and Freddie as well as Wells and Chase.
So it's a little bit of a double edged sword. If rates drop, we may see more impairment. On the other hand, if drops rate we're going to be much, much stronger in our mortgage origination area.
The value of the mortgaging servicing rates dropped on our books from 112 basis points to about 65, so it did take quite a big reduction there. So we are in at a much lower value per dollar than we were so 112 down to 65. The value actually dropped from the value of the portfolio was $3.7 million and dropping to $2.2 million, and we had it on the books at $2.8 million.
So we thought we were reasonably conservatively valued and we are now even more conservatively valued on these things. So if rates stay the same, we might see a little bit of come back on the value at the end of the next quarter, but who knows?
And we have made a conscious decision not to hedge that portfolio. Hedging is a very inexact science. A lot of the big companies countrywide in past years in other years who hedged their portfolio all ended up having some real problems because of mis-hedging. So we've decided because the portfolio is not particularly large, that we would just sit where we are on it.
At this time there are no further questions. Are there any closing remarks?
Yes, I'd just like to thank you on behalf of Joe Keefer and Duncan Smith for joining us today. We look forward to having you as continued investors in the company and answering your questions going forward. Thank you very much.
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