Brookline Bancorp Inc (BRKL) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Bancorp Rhode Island Inc. third-quarter earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Merrill Sherman, President and Chief Executive Officer of Bancorp Rhode Island Inc. Thank you, Ms. Sherman, you may begin.

Good morning, everyone. As indicated I am Merrill Sherman, President and CEO of Bancorp Rhode Island Inc., and I would like to welcome you to our third-quarter analyst conference call. With me is the Company's CFO and Treasurer, Al Rietheimer. Al will take you through our third-quarter results, I will then come back on the line and discuss those results. Then we will both be available to answer any questions you may have.

During this conference call we may make forward-looking statements within the meaning of the Securities Exchange Act of 1934. These statements are based on our present beliefs and are necessarily based on certain assumptions which are subject to risk and uncertainties. Actual results may differ materially from those discussed here; more information on these risk factors can be found in the Company's filings with the Securities and Exchange Commission. With that I will turn it over to Al Rietheimer.

Thank you, Merrill, and good morning to everyone. Bancorp Rhode Island reported earnings of $2.2 million for the third quarter or 52 cents per share. That represented a 22 percent increase over the third quarter of 2003 and a 4 percent increase over the second quarter of 2004. On an EPS basis we were up 8 cents over the linked quarter of last year or 18 percent, and we were up 2 cents or 4 percent from the second quarter of this year. Our nine months earnings were over $6.3 million or $1.50 per share, and this represented a 21.4 percent increase in earnings from the nine month period last year and a 16 percent increase in earnings per share.

When we look at our balance sheet, our balance sheet continued to grow. It was up almost 1 percent or $11 million during the third quarter and now exceeds $1.2 billion. But more importantly, we've continued to change the mix of our assets. Both our commercial and consumer loan portfolios grew during the quarter. Commercial was up 21.8 million, and consumer was up 19.7 million. Part of that commercial loan growth was attributable to the purchase of a package of leases in the month of September. Those leases approximated $10 million, but even after backing out that purchase we continued to experience strong growth in the commercial portfolio.

And again, those leases are government leases with various agencies of the U.S. government. On the liability side of our balance sheet, total deposits decreased during the third quarter $1.8 million. When we look at the breakdown of deposits, core deposits, checking and savings were actually up $3.2 million during the quarter. But CDs had runoff of approximately $5 million. Third quarter for us has traditionally been a slower quarter for deposit growth, and that was definitely evident in this most recent quarter.

To augment that, we did increase some of our borrowings during the quarter, and as mentioned earlier, we funded much of our commercial and consumer loan growth with a remixing of our asset structure taking away from our cash and residential loan portfolios and investment portfolio. After considering or even considering the growth in commercial and consumer, our total nonperforming assets remains low. Total nonperformers were $790,000 or 7 basis points of total assets as of the end of September. Both of those numbers are down from the end of last year but are up slightly from the second quarter of this year.

During the third quarter, net charge-offs were only $2000. And at the end of the quarter, our allowance for loan losses totaled $11.7 million and represented 1.34 percent of total loans and nearly 1500 percent of nonperforming loans. What really led to the improvement in our bottom line was an increase in our net interest margin. Our net interest margin increased 5 basis points during the quarter to 3.45 percent, compared to 3.40 for the second quarter of this year and was up 32 basis points from the third quarter of last year at 3.13. What drove the increase in our margin was a couple of factors.

There have been a couple of increases in market interest rates, prime rate in particular this year. We've been fortunate in that we've reaped some benefit on the asset side while being able to maintain the cost of our liabilities. At the same time, prepayment activity for mortgage related assets was very slow during the third quarter of this year as opposed to the third quarter of last year where prepayment activity was considerably higher.

And lastly, we do benefit from the growth in the commercial and consumer portfolios because both of those yield us higher returns than the other assets available to us. I'm talking a little bit more about the consumer loan growth. That is primarily in home equity product. A combination of both term product, primarily, 10, 15, with some 20-year product and line of credit, which is a floating-rate product.

Looking further down our income statement at non-interest income, non-interest income was $2 million for the third quarter, which was down from $2.2 million for the third quarter of last year and for the nine month period it totaled 6.2 million, also down slightly from the 6.5 million reported for the 9 months of 2003. The differences between 2003 and 2004 can really be summarized in a couple of areas. One, during 2003 we did realize some gains from sales of our investment in mortgage-backed portfolios. In particular, during the third quarter of 2003 we realized approximately $360,000 of gains from those sales. We did not see similar activity in the third quarter of 2004.

Also, commissions on the sale of residential mortgages into the secondary market were considerably lower. Last year, third quarter to this year third quarter they dropped $160,000 or a little over 90 percent from their level a year earlier. On the positive side, though, we continue to see growth in service charges on deposit accounts, primarily these are checking products that give rise to these, and in particular we had A) then assess (ph), B) enhancement product, which processed earlier this year, which led to most of this growth and that service charges were up $199,000 from the third quarter of last year to the third quarter of this year.

Also, our non deposit investment product also has seen new growth. It was up $92,000 or a little over 40 percent from the third quarter of last year to the third quarter of this year. On the non-interest expense side of our P&L non-interest expenses increased $1.3 million or roughly 19 percent from the third quarter of last year to the third quarter of this year and were $400,000 higher than the second quarter this year. On a nine-month basis they are up 2.7 million or roughly 12 percent than the same nine-month period last year. These net increases can be summarized as follows.

Salaries and benefits for the third quarter of this year versus last were up $869,000 or roughly 23 percent as additional staff have been added in the past year to support the continued growth of the company. Additionally, the 2004 period includes bonus accruals, which if you have followed our story, the 2003 period did not. Occupancy and equipment was up 10 percent or $100,000 for the quarter versus the third quarter of last year, and that is primarily due to the opening of the bank's north Kingstown branch earlier in 2004 and updating of the bank's computer networks.

Marketing expense also was up slightly $35,000 to roughly 15 percent for the third quarter, and the bank has increased its marketing efforts to correspond with Bank of America's acquisition of Fleet earlier this year in an attempt to maximize our exposure. Lastly, professional services were up $223,000 quarter-to-quarter as the bank has increased its management training effort, along with augmenting its internal audit resources in this current environment where internal audit and controls are under increased scrutiny.

That concludes my prepared comments. And at this point, I would like to turn the presentation back to Merrill.

Thank you, Al. Just to kind of give you a little bit of an overview of both the past quarter and where we are now, the commercial pipeline remains healthy. Deposits as Al indicated during the quarter were relatively flat. We do have a couple of campaigns going on currently. We've kind of go quiet during the summer and a bit more active in the fall. But I can tell you there's a lot of what I call noise in the marketplace. I have never seen so many bank adds and credit union ads in one place. But we over the long run are very comfortable with our positioning and our strategy.

I think the real story this quarter some of the people changes that we made in the institution. Don McQueen who has been with the bank since inception, in fact, prior to inception and just has done a wonderful job historically has been promoted to title of Chief Operating Officer and another division added under his wing. We brought Linda Simmons in as EVP and Treasurer. She is really responsible for our balance sheet management and is a seasoned ALCO and treasury professional out of Fleet, but for the Bank of America Fleet merger, I don't think we would see the kind of talent pool available and accessible to us. Because there are any number of people who live in what I call the greater Boston area, an area between Boston and Providence who don't what to go down to North Carolina and have kind of become more available to us.

And the name of the game for us is something like 80 percent of our income comes from that margin. And so we've got to really focus on it over the next few years. I don't think in this environment anybody is anticipating -- I shouldn't say that about everyone -- but I think it is going to be difficult environment going forward margin wise. I am very glad Linda is on board, and certainly over the long-term that is the name of the game for us is to get back to what looked like more historic margins.

We have a new chief lending officer, Steve Gibbons, has just really stepped to the plate. He is terrific. He is the former head of our real estate group and we are recruiting for a new head of that group. Steve has taken over that position that Don had previously filled but with the title of chief lending officer. And in addition, in July we had a new Senior Vice President for human resources join us.

So we are really focused on having the talent in place to succeed with a larger institution. And as we grow in size it becomes more complex and demand is more extensive. And I just want to make sure we have the right people in place. And so, I think we do. Morale here is high. Reputation in the marketplace continues to grow, and we are pleased with this quarter. We would be happy to take any questions you may have.

(OPERATOR INSTRUCTIONS) Ryan Kelley with FBR.

Good morning, Al and Merrill, and great quarter. Just a couple questions. I wonder if you can give us an update, Al, on the interest rate sensitivity position.

Basically our balance sheet is neutral. We are exposed to rising interest rates from the standpoint of core deposits being susceptible to increases that way. But we've done what we believe to be a good job in trying to minimize that exposure. But at one time if you were to look back and ask this question, we would have responded that we were slightly asset sensitive. We would respond today that we are more neutral in our overall interest rate position.

So not much change from June 30th in other words?

No significant changes from June 30th.

Okay. Then also just wondering if you can get in a little bit more just the phenomenal loan growth that you've been seeing. What is sort of driving this? In the past year -- has it also been related to loan officers that you've picked up? And actually tying into that just in the salaries and benefits line, the increase from last quarter to this quarter of about 400,000, was that due to any new personnel or was it due to what you discussed already as far as accrual of bonuses?

Let me address the commercial growth, first. I think that we are, we have some real traction here. There is a reputation that we have developed over 8.5 years as a good place to bank. And so we also have knowledge of the market, and we have a changing marketplace. I can go back to a global theory on it, which is that Rhode Island is different from most other places. When you look at the Fleet merger, for example, Fleet may have been the bank people loved to hate, but at the end of the day they were a Rhode Island bank. When you get up to Massachusetts, the truth is that Fleet acquired Shawmut probably what, in '95, which is when they really started and they had some failed saving loans that they may have picked up prior to that. But Fleet was not a Boston bank. I hear stories when guys went down to meet with Bank of America someone was surprised that Fleet started in Providence. So that with the removal of -- with the change that is going on at Fleet -- with the change in the key players, I think that Fleet had for years stolen the march on what was the old hospital trust, it then came back Boston, then its now Sovereign. And they were the feisty Irish guys who just really took market share from an old line blueblood bank in that was the reputation that the old hospital trust had here. And so when you see that kind of shift going on in the marketplace, it creates opportunities for us as a commercial player. We are seeing a lot of small business activity generated out of the ad campaigns that we run. It is generated out of the calling efforts; at the same time I think that we are more and more seeing companies that bank with the larger guys. And Citizens does a great job on the retail side, but at the end of the day a lot of their top talent is now being moved out to the Midwest to deal with the Charter One situation. So we are nicely positioned in this marketplace on the commercial side, and we look to emphasize it and would like to think we know what we are doing when we put those credits on the books. So that is my explanation for the overall commercial growth. We are hiring some new people because of some changes and transitions but at the end of the day its not like we have gone out and recruited four leader Citizens guys to come in here or people. So that accounts for that. The consumer loan growth has been very strong, as well. We have some alliances there that have helped kind of build that book of business. In terms of the compensation, some of it reflects our staffing up. Some of it reflects the fact we have new hires and fees and sign-ons associated with that. And finally, if you remember last year basically everyone -- we did not pay bonuses to the executive management group, the senior management group, in a very limited kind of formulaic bonuses to others. So the real bump in that line was due to -- was a result of starting to put bonus accruals in to get us back to a more normalized compensation level.

And just to clarify, was any accrual going on last quarter, the June quarter of this year?

Probably.

Yes, but at a lower rate.

Okay, great. And maybe just touch on some de novo expansion branching plans that you might have with the North Kingstown and maybe a little -- after the North Kingstown branch and just how that is going so far.

North Kingstown is going just great. It was over 20 million at the last quarter. It has continued to build. If I had an accurate number I would give it to you, but its a good couple million higher than it was before. So we are very pleased with that. We announced about a quarter ago that we would be looking at something like 6 new branches in certain designated locations over the next 3 to 5 years. And in fact, plans are underway now in Lincoln. I've seen the designs we should be breaking ground there shortly and also anticipate an announcement shortly as to another branch location that we settled upon.

Okay, great. I think that's all questions I have. Thanks very much, and great quarter.

Bill McCrystal with McConnell, Budd & Romano.

Al, maybe could you give some more specifics on the leases that were purchased? What kind of spread and whatever other information you could provide on it?

They are relatively short-term leases, as I mentioned earlier they are all with agencies of the U.S. government. Typically they are just a couple of years in terms, and offer us attractive spreads. I would rather not give a specific rate. One, because I don't have one at the tip of my tongue, and two, we normally don't quote specific rates on individual loans or relationships.

Bill, just to follow on, this is not a new relationship for us. We have purchased leases from this entity over I guess over the last five years. And the opportunity came up to buy a roughly 10 million, 11 million, maybe even 11 (multiple speakers) $11 million of leases at what we considered a good spread. And I think the final maturity on them is three years. And if you look at our balance sheet I think there is going to be a focus on our part on getting particularly in this kind of interest rate environment more short-term assets on the balance sheet. So the opportunity came up because of our relationship with the entity that (indiscernible) and we are comfortable with them. And we thought it was a very attractive opportunity for us.

And I would assume that that would, why you won't quote the spread, it was an attractive spread over alternative investments?

Absolutely.

You alluded somewhat to the, Merrill, to the large amount of advertising and campaigns going on in the deposit side. Could you talk a little bit about the competitive market on deposits, particularly on deposits with all of the activity going on in consolidation? Probably Bank of America trying to retain some of its customers?

I'm laughing. The answer is two words, intense. There is a very large amount of activity out there. Citizens is just spending lots of money. I'm sure they are doing it throughout the region. And they are advertising both on the deposit side and on the loan side. I think you see some advertising coming out of Fleet at this point. A number of the smaller players are advertising. I don't see that much -- I see some from Sovereign, but it is not at that level. Just everyone and is brother is out here. The word is, on the checking is free, free, free, and you just see an enormous amount of free checking ads. Largely consumer driven, although occasionally business as well.

While you stated that the third quarter is typically a slow deposit quarter do you see that you are going to have to be more aggressive going forward on the deposit side?

I think that we plan to be aggressive on the deposit side. I also think that we are looking internally. Really focusing the message, and I am not saying the message isn't focused now, we treat your business like the business has been our mantra. We've got some great advertising campaigns going. But I think that kind of getting above the noise is something that we wrestle with here, and so we are working through that now. Like I said before, I can't necessarily predict month-to-month through the quarter for the -- but I can say that long-term we are just sort of comfortable. We know we are well positioned. We are getting -- we are running campaigns now essentially hitting the targets that they plan to hit. And we will see how it shakes out.

And how do you think your strategy of being much more relationship driven and not -- I'm going to assume not sort of price driven and your customers -- you think they will continue to respond to that basically what I am trying to say is that they are willing to maybe sacrifice better yields from competitors with the willingness to work -- have the relationship on a longer-term basis?

First of all, the answer is that we are comfortable with the relationship-oriented strategy. I don't want you to walk away with the impression that we don't have to be competitive on pricing. There is only so far that your good looks will get you, and you absolutely have to be competitive on pricing. But I think that for the business customer when they look at their relationship as a whole, they are -- they don't take the last nickel off the table. They know that they are going to want the service. They are going to want to know -- to whom they are speaking, they want to be able to call someone consistently if they have to go over line or put an addition on the plant or they want that relationship. They want to know who they are calling and who's calling the shots. And I think that that is something that we offer them that the larger institutions have difficulty.

And maybe just one final sort of macro question. Merrill, could you comment on the general economic environment in your market and then specifically could you address housing, prices both on the retail and on the commercial side? If there is any sort of evidence either vacancy rates and so forth that can give us an idea of how things are doing out there?

General economic climate is (indiscernible). I don't think anybody thinks that things are great; on the other hand, they are not terrible. It is kind of a middling environment out there, Bill. I don't think people are worried but I think they are working hard and watching their expenses. I think good business people actually always worry, but they are not unusually worried at this point is a better way to put it. If you look at housing prices that probably one of the biggest issues we have in Rhode Island is that housing prices are absolutely skyrocketing, and I don't have it at my fingertips the percentage increases, but it is a very difficult situation to attract particularly the lower end of the wage scale into the State.

I'm sorry, is that particular to your, the Providence market or is it a broader --?

It is a Rhode Island syndrome, period. We are financing a project in the southern part of the state, which is a condo conversion. And these are "affordable housing units" practically. They are the lowest end units in the marketplace and these two bedroom things are going for just over $200,000. That is, to me, is not affordable housing to me is a $120,000 house and even that given my age sounds like a lot of money. But there is a genuine issue there. Part of it is that there is an older housing stock. It is very difficult to develop in this state. Kind of walk through, you get the people coming out of Boston, Providence without traffic is maybe a 50 minute drive from downtown Boston. So if you are working in a Boston suburb, either south or west, it is very easy to take a ride from anyplace in Rhode Island and get there, then you get the drop in the housing prices, so you get this bill over here. I'm going to talk a little bit about some of the good stuff happening in Providence in a minute on the housing side, but it is more the upper side type housing -- I will get to that in a second. But if you look at overall, it is very difficult to develop. If you want to do a project in this state, you have to jump through hoops in almost every town. I know (indiscernible) for instance as an example in commercial projects, but you know if we wanted to put 20 units in someplace that had to start from scratch, you would get the same Chinese water torture from the local planning board. Everything requires 3, 4, 5 different layers of approval. It is not -- on the economic development site its not a development-friendly state as much as we want it to be. And you can see it when you go to put housing in because it just is very, very hard to get approval between DEM and Coastal, and then it is not an efficient process. And part of it is driven by the fact that the towns are happy the way they are, and they don't need any more kids in their school system. So they will put the brakes on you that way. So it is an economic development issue.

On the other hand, people who own houses in the state and are already in the market, you know, they have been very solid investment, put it that way. And also, if you look at the way we finance development, even for these tremendously deep-pocket borrowers that we get from primo real estate developers, I think we let them do one ahead of presale. So the market also has changed. If you go out to Colorado and somebody is throwing 250 houses out on pads, you just don't see that in Rhode Island, so the housing stock did not grow adequately.

Now what's interesting is, if you look at downtown Providence, it is really and truly a Renaissance city. And what is going on downtown is a significant number of older buildings that used to be -- really it would be nice to call them C class office space. It would be in C class office space, at best. They are all being rehab'ed, ground-floor retail or some other similar function, and then I'm going to say well over 200, 300 units going in downtown. That has caused some absorption of a lot of really mediocre office space.

At the same time, one of the larger older buildings in town, which is the former Hospital Trust Tower, maybe 12 stories which for us is a pretty good-size building -- that big wide footprint, as well -- was acquired by Rhode Island School of Design turning into graduate dormitories. So that has blotted up a bunch of the space, and so I think that while there is some vacancy, the reality is there's almost no class A space available in town. G-Tech is coming downtown and putting in a headquarters building, and there's all kinds of stories when they will start. It's more probable than not that the building will get off the ground. There may be hotels associated with that.

We've got probably not only the highest occupancy rate in hotels, we have one of the highest hotel costs in the nation. And if you look at the number of people that come in to visit Brown and some of the corporations in town, it causes significant hotel demand. We've got the Convention Center. So hotels are in good shape, and there are a couple of them on the drawing board. Downtown housing is increasing, but again, that is not affordable housing. That is for people who were either -- sort of people more like young employees of the bank who would like to live in an urban environment and a kind of hip lifestyle. So that is going pretty well.

Very good. Thanks for the update.

Mark Muth with FTN Financial.

Good morning, Merrill and Al. I just wanted clarity that the 11 million of leases was the only loans purchased this quarter; is that correct?

The only commercial or consumer loans. I believe there was one package of residential loans that was purchased also, but runoff in the residential portfolio easily exceeded the size of that purchase.

If you look at our residential portfolio, the bulk of it is purchase, and that has been true since inception, Mark. The consumer portfolio is homegrown. That is -- we generate that ourselves. And probably the only -- we've bought leases over the years, but the reason we are calling it to your attention is if it was something over $20 million of commercial growth there, I didn't want you to think that that was all homegrown. So that is why usually we don't point out the lease growth during the quarter, because you buy 2 or $3 million of leases and it's just not material in relation to the growth.

Okay. Charge-offs are still negligible here, but with loan growth starting to pick up and you sounding more optimistic about commercial loan growth, are we likely to see you start to build the reserve again or see a change in reserve level?

First of all, I don't think that loan growth -- well, loan growth has been strong. I don't think it's picking up again. We have done between 15 and 20 percent, closer to 20 percent historically on commercial loan growth. So we have always positioned ourselves, even when other people nationally were experiencing flat to declining portfolios, we always had that growth. And I think it is less economically driven here and more we're different from the big 3 players in the marketplace. They've got 80 percent market share, and we just try to keep nibbling away at it.

Second, Al and I are always of 2 minds when it comes to what we say about the loan portfolio. I can tell you that we have no present plans to build the reserve. We always caution that -- we always say as the portfolio grows and matures or if economic conditions worsen, we're likely to see a greater level of nonperformers and charge-offs, and knock on wood, it hasn't happened yet. So we always keep saying this time we really mean it. We have a loan portfolio; there are customers in that portfolio who have issues. There have always been customers who have issues. We seem to work through the problems with the overwhelming bulk of them.

What I can tell you from our experience is that loans with which we've experienced most difficultly in seeing going to nonperforming and had charge-offs with are largely management-related issues. If you have good management, on the whole we bank family businesses. They've been around for 40 years; they'll be around for the next 40 years. They go through tougher cycles. The owners tighten their belts and generally manage to work through it. But I think it is a function of being able to be selective also in the kind of credits that we bring into the bank.

Number one, we are selective in who comes in. We're not the bank for everyone. And second, you go back to this whole notion of market share, as much as we want to grow and we do grow, at the end of the day the deposit stats in the greater Providence area put Fleet, now Bank of America, Citizens and Sovereign have 81 percent market share. You have to assume that the commercial somewhat reflects that, and so we don't have to be the bank for everyone. Our market share at least deposit-wise is still just under 6 percent in Providence and Kent County. So we like to think we are selective in bringing people in as much as we want to grow and emphasize growth.

And just to follow up on Merrill's comment about how much commercial loans have historically grown, the compound annual growth rate since the end of 1999 is 18.5 percent for the commercial portfolio.

Okay, great, thanks.

Jared Shaw with KBW.

Good morning. It was a pretty comprehensive question, but I guess the only thing I have left is you said that the margin improvement was a result of being able to keep -- partly a result of being able to keep the deposit rates lower. How long do you think that you can keep deposit rates low in a rising rate environment?

Do you really think I know the answer to that, Jared?

Well, you've seen the end of it, seeing how the rate moved. Do you think you're going to have to move the deposits with that?

You know, I don't know the answer to that. Obviously, we would like to keep them as low as possible and as long as possible. What I am -- we are not the market leader that way. Citizens in this market is the market leader with something like 45 percent deposit share. And, you know, if they start moving rates, I think it is inevitable that people follow. But they've -- on the whole they are pretty sensible, and they've got a lot of other fish to fry in terms of demands on their time and resources. So we will just have to wait and see. Same thing with Bank of America is a pretty rational payer, and I don't think they are known for attracting customers through paying up on deposits. So those really are your 2 market leading institutions, and we watch what they do.

The other thing I will remind you about -- and I don't know whether we will go back to these days or not. I certainly would hope that we would, but I don't -- when we first were formed back in '96, I can remember that Fed funds were around 6 percent, and the top tier of savings accounts were paying 2 percent. So as a deposit attraction vehicle, we went out with a 4 percent savings rate, and we practically had to educate the marketplace as to why that was an attractive product. And right now, we've got and have had a dislocation for the last couple of years where the upper-end tiers on bank savings products were not only twice or more what you could receive on Fed funds, but they also substantially outpaced the brokerage money market fund.

Now that is -- whether we can go back to historic proportions and what the implications are remain to be seen. I think that that's so far from where we are now that it's not realistic. But I think that part of the heel dragging that you're seeing on the part of all the banks in terms of raising floor rates are that they were artificially high in relation to reinvestment rate, and they're really trying to hold back, which is why you'll probably see also more of a shift to CDs because there will be an increasing gap between what you can get on a CD and what you can get on a liquid account.

Muth: So, like you said, Citizens is the driver of the pricing and not so much the mutual or the credit union that may go out with a special?

No, the name of the game is what Citizens and to a lesser extent B of A does.

And then the growth you had in the savings accounts, is that as a result of the promotions?

Yes. On the whole, it is a result of the promotions, yes.

Great. Thank you.

(OPERATOR INSTRUCTIONS) Paul Roukis with Sidoti & Co.

Good morning, Merrill. Good morning, Al. My question really revolves around with the cost of service appearing to increase, you talked about the enhanced marketing initiatives and your stand to build the infrastructure through new hires. Has anything changed strategically from your point in terms of opportunities for efficiency gains and kind of the progression of efficiency gains going forward?

I think that we have some initiatives in place that will result in our being able to use machines and technology more than people. And our goal is to try to hold the growth, particularly the back-office staff, and kind of try to focus on allocating resources to income producers. That's the goal. From time to time, there are things that cause bumps in getting there. And to give you an example, we ended up purchasing some very expensive antifraud software. It takes somebody all day long to run the software and look at it. So that's a back-office function, but I think it is a smart business function that sort of saves us money in the long run, but you can't point to here is $100,000 you would have written off because somebody would have been hiding these checks on you or something like that.

So I think that that is a longer-term strategy there, but we really -- we'll probably take a look at some studies on some of the noninterest expenses this year to see if we can do some saves there. And I don't think I've been entirely responsive. I had one other thought, Paul, but I'll probably think of it after the call and then respond to it.

I guess, Paul, how I would respond to you is that our efficiency ratio has been running right around 70 percent. We hope to bring that below 70, but because of the growth mode that we are in and some of the other initiatives, we are trying to balance the growth of the Company with trying to reduce that efficiency ratio.

The efficiency ratio, which is high -- I mean it hovered around close to 70 percent -- you know, the only -- it is not caused by excess people. If we could experience a 40 basis point increase in the margin, our efficiency ratio would look terrific. And that increase in the margin isn't the function of hiring another 20 people that is repositioning your balance sheet in some way. So if you look at margins in the Northeast, they are materially different from where they are in the rest of the country. So I don't want -- I do not believe that we are inappropriately staffed. There are always ways that we can look to save money, but as Al said, we do try to balance the growth in the earnings.

And finally, a second question on an unrelated topic. You talked about or you characterized the commercial loan pipeline as healthy. Can you kind of elaborate a little bit on that, and would the second-quarter pipeline, was that healthy then when you look back a quarter ago?

Yes, I think we've seen it stronger than it is today. The real estate side is a little stronger than the commercial side at this point, but I anticipate having a solid quarter for the fourth quarter. So we are well on track to hit that 15 to 20 percent animalized growth target.

Very good. Thank you very much.

There are no further questions at this time.

All right, well, thank you all for listening, and I look forward to doing a year-end wrap-up with you when we speak next. Have a good holiday season in the interim.

Thank you all.

This concludes today's conference. Thank you all for your participation.