Bank of Marin Bancorp (BMRC) 2011 Q1 法說會逐字稿

Thank you for joining us for Bank of Marin Bancorp's first-quarter earnings call for the quarter ending March 31, 2011. (Operator Instructions). As a reminder, this conference is being recorded Monday, April 25, 2011.

Let me turn the call over to Russ Colombo, President and Chief Executive Officer of Bank of Marin. Please go ahead, sir.

Good morning. Welcome to the call. This is Russ Colombo, President and CEO of Bank of Marin. I will be presenting this morning along with Chris Cook, CFO of Bank of Marin. You may also access the information from the press release, which went over the wire at 6 AM Eastern time this morning, and on our website at bankofmarin.com where this call is being webcast.

I will turn it over to Chris briefly now.

Good morning. Before we get started, I would like to emphasize that the information that we discuss on this call is based on information that we know as of today, April 25, 2011, and it may contain some forward-looking statements that involve certain risks and uncertainties. The actual results could differ materially from those that we set forth in the statements. So for a discussion of these risks and uncertainties, please review the forward-looking statements disclosure in the earnings release that was issued today,

Now following our prepared remarks, we will be available for questions. And now I would like to turn it back over to Russ.

Thank you, Chris. We are pleased to report our first-quarter earnings of $4.5 million, a new record for Bank of Marin. We completed the FDIC-assisted acquisition of certain assets and liabilities of Charter Oak Bank and Napa on February 18, 2011, which contributed to our strong earnings. This acquisition is significant in that it is the first acquisition for Bank of Marin in our 21-year history. Our expansion into Napa aligns well with our long-term plans, and we're very happy with the financial results and smooth transition that is underway for our new Napa Valley customers.

Bank of Marin now operates 17 branch offices in Marin, San Francisco, Sonoma and Napa counties.

Now I would like to walk you through a few highlights of our quarterly results. First, let me clarify that it is not necessary to raise any capital to acquire Charter Oak Bank. Our strong profitability and capital levels provided adequate funding, and the acquisition is immediately creating shareholder value. Earnings were up 53% from $2.9 million in the first quarter of 2010 and up 15% from the $3.9 million in the fourth quarter of 2010. These results include the activity related to the acquisition of certain assets and liabilities of Charter Oak Bank.

Diluted earnings per share were $0.84, up $0.11 from the fourth quarter of 2010 and up $0.28 from the same quarter a year ago.

I would now like to turn it over to Chris Cook to talk more about the details of our results.

Our net interest income of $15.9 million in the first quarter increased $1.8 million or about 12.9% from the prior quarter and increased $2.8 million or 20.9% from the same period last year. The increases primarily reflect the accounting for acquired loans of the former Charter Oak Bank, which resulted in accretion to interest income on these loans totaling $1.3 million, which added approximately 47 basis points to the first-quarter margin.

The increase in net interest income is also due to a reduction in the cost of deposits, partially offset by a reduction in the yield on investment securities. Through the acquisition, we purchased $61.8 million of loans and assumed $93.9 million of deposits both at fair value, and we recorded an $85,000 acquisition gain after taxes.

As I mentioned, the acquired loans were recorded at their estimated fair values as of the acquisition date, so we have not provided significant reserves for loan losses on the acquired loans in the first quarter. Now we will continue to monitor and provide for losses if appropriate as the loans season.

Loans in total grew $58.6 million or 6.4% over a year ago. The loan growth from the acquisition was partially offset by payoffs related to some higher credit risk loans, as well as a few prepayments that we saw of certain large credits given the low interest rate environment. Deposits grew $101.1 million or 10.2% over a year ago. Now included in the net growth were decreases in CDARS time deposits. And I should also mention that the Internet time deposits that we acquired are now at zero as of quarter-end.

During the first quarter, we incurred initial acquisition related costs of approximately $348,000, and we do expect that there will be some additional one-time related costs in the second quarter of approximately $600,000. We anticipate the systems integration to be completed in June, and the remainder of the integration-related expenses to be finalized in the second quarter of 2011.

You saw that our return on assets and return on equity increased significantly in the first quarter. ROA is 1.44% in the first quarter compared to 1.04% a year ago, and ROE is 14.74%, which is up from 10.75% a year ago, driven by the higher income, including the accretion on the acquired loan.

So let me now turn it back over to Russ to discuss our credit quality and some additional details from the acquisition.

Thank you. We are pleased to report that our credit quality remains solid through the first quarter with nonperforming loans, which excludes purchase credit impaired loans of 0.92% of total loans. Our risk-based capital ratio is 13%, and it continues to be well above industry requirements for a well-capitalized institution.

Net charge-offs in the first quarter of 2011 decreased to $372,000 from $682,000 in the prior quarter and $1.5 million in the same quarter a year ago. The provision for loan losses of $1.1 million remained the same as the prior quarter and decreased $500,000 from $1.6 million in the same quarter a year ago. We are proactively working on loans that are 30 to 90 days past due in the amount of $22 million, negotiating positive solutions without losses on any of these loans. We attributed the strength of our credit quality to disciplined lending practices and proactive management of the portfolio, which has kept loan charge-offs at a low level. We will apply the same active credit management standards to the acquired loan portfolio as we manage and expand these relationships.

We are currently in the process of going through every loan in detail of the acquired portfolio at designated appropriate risk grades to meet our credit standards.

I would now like to address our strategy for the year ahead. We view 2011 as a year of opportunity, beginning with the expansion of our franchise into Napa. To that end, we will be opening two new branches later this year. We will open a full service branch in Santa Rosa in early June with our office in Sonoma to follow in late summer. This aligns very well with our strategy to operate in all major business markets in the North Bay. We view the North Bay comprised of Marin, Napa and Sonoma County as a single economy, all reliant on each other and very important for us to serve the entire region.

We are adding staff in all these areas, including new hires in Santa Rosa, Napa and Sonoma. Bank of Marin remains the number one community and business bank in Marin County, and we have received important local and industry awards.

In summary, our success is built on three core principles which has driven us since the bank started -- disciplined lending standards, strong relationships with our customers, and a commitment to the communities where we operate.

I thank you for your time this morning. We will now open it up to answer any of your questions.

(Operator Instructions). Jeff Rulis, D.A. Davidson.

A question on the margins. I'm just trying to get into a go forward level. You mentioned the accretion benefit did decline gradually. If we were to assume flat core margins, what would that do -- would that decline on a 5 basis point per quarter, or how could you -- I guess without giving straight guidance, could you provide any commentary on margin levels going forward?

Sure. The margin is going to be affected by several factors going forward, including -- and the biggest factor is going to be the accretion that you discussed. We know that is $1.3 million. That individual factor based on our estimates could go down by half or slightly more than half in the next quarter before it normalizes to a lower level later in the year. There are certain other factors such as changes in expected cash flows on these loans that we acquired. A certain population of these loans were going to be required to re-estimate cash flows every quarter, and changes in those estimated cash flows will flow through the margin.

In addition, it is possible for us to see that there are loans that we brought on at a zero balance or that had a significant credit mark that are paid off -- that is another factor -- that could influence the margin. Aside from those factors, which add a lot of volatility to the margins kind of getting to the core margin, we would hope that we would try to at least maintain our core margins through deposit pricing if not improve it through liquidity management, and we are sitting on a lot of liquidity right now, and we will be looking at that over the next few weeks. We were hoping to just kind of see what happened with the Charter Oak and deposit runoff. We are not really seeing that, so we are going to be looking at deploying more liquidity going forward.

The only other thing I would add to that, Jeff, is that there is certainly in the market, as in most markets these days, there is not a lot of strong loan demand. And so what that does is for whatever loan demand there is, you get squeezed on the margin. So I'm not going to tell you what our margin is going to be, but it on an ongoing basis, it is a challenge every day just to maintain -- you know, we have been running around 5%. It is a challenge to maintain that because of those factors, things that Chris mentioned. We have a lot of liquidity, which, frankly, reinvesting that relatively low 25 basis points, something like that. So that impacts that number, but we are working real hard to keep our net interest margin intact.

That is good detail. I guess in a related sense if I could follow-up on operating expenses. You discussed the $600,000 in one-time upcoming costs, but assuming you have got Charter Oak, are those operations running now for a full quarter? Do you have any ballpark kind of run-rate on non-interest expense outside of those one-time costs? Is this level of the $9.1 million in the ballpark, or if you have got those operations for a full quarter, if we should see a slight increase in that on a core basis?

What I would say, Jeff, is that we are still -- you are not going to see a normalized number for at least for another quarter because we still have employees that are temporary that are working through the integration date. And we still have -- their CFO still works with us, is helping us through this. So I don't think that the expense side is going to normalize for another quarter.

Now, as you know, we announced that we would close one of the branches, so we are going to be saving the expense on that. But that still is in the numbers because that actually closed as of April 29 is our last day of operation. So we are still making lease payments on that, but those will go away. And then the related employees that would have been needed to staff that location will go away.

So I think you will probably see normalized numbers around the third quarter. So it is hard for me to give you numbers. The only thing I can say is the biggest cost of it all, other than interest expense, is certainly employee salaries and related costs. We are going to end up with, I don't know, 12 employees or something like that out of 28. So, as you can see, there is quite a savings there, but we are not to that number yet.

Right. Okay. And then the backdrop would be also adding the couple of branches you mentioned. There could be some offsets towards the back half of the year?

That is correct. There is going to be -- yes, we are adding branches, and then we closed that one and, frankly, in the existing facility in Napa, we don't think we will use all the space there either. So we are still in the middle of that negotiation.

Tim Coffey, FIG Partners.

Just a housekeeping question, did you have any OREO in the quarter?

No.

Okay. Russ, you mentioned a little bit about it is gaining traction on the loan side right now. But even before the Charter Oak deal, you had done some hiring. What is the pipeline looking like right now from the Legacy Bank of Marin standpoint?

We have got pretty decent pipeline both in San Francisco and in Santa Rosa. Here is the problem that we have. I should not say it is a problem, but we have continued runoff of our construction portfolio, which is actually a positive thing as those loans get paid off. But when you have that running off, in our construction portfolio, it was not that big. But it is down to maybe $80 million now. Two years ago that was at $120 million or $125 million. So you are having to replace that just to stay even. So we have got a pretty good pipeline, but we are just replacing a lot of the -- we are replacing with C&I in owner occupied and also commercial real estate loans to replace the construction.

So it is kind of an ongoing battle just to keep up with the payoffs on loans, frankly, which are good things if they get paid off. We had an -- (inaudible).

Yes, there was about $10 million to $11 million of payoffs of problem credit. This is Kevin Coonan. I'm the Chief Credit Officer. Actually we are achieving some resolutions on problem credits that are also included in that, which explains to some degree why there was a decline in the non-accruals.

Okay. Thanks, Kevin. Russ, the Charter Oak thing is done. You guys have got a pretty good handle on it. Have you thought about doing more acquisitions as they come up?

Gosh, we just did this one.

It was a good success.

Well, you know, I think I said at the very beginning of my presentation. This is a year of opportunity. We are certainly open to opportunities as they present themselves in and contiguous to our markets. We look at ourselves as -- you know, we look at the bank and we look at the North Bay as being our market, and depending on how you define the North Bay, you know it is Marin, Sonoma, Napa, maybe Solano County, maybe Alameda County, there are potential opportunities in those markets. If the right situation came and presented itself to us, we would not hesitate to do something.

Just like with Charter Oak, we were planning eventually to go to Napa. It was a situation arose, and we took advantage of it. So the answer I guess is yes, we would look at opportunities if they fit into our strategy.

Okay. The flip side of that is, have you thought about -- what are your thoughts about increasing the dividend?

We look at that every quarter.

Okay, good. Those are my only questions. I appreciate you doing the conference call.

Don Worthington, Raymond James.

Just a couple of things. One, on the 30 day, 90 day delinquencies, I know those popped up in the press release. You said several of those have been resolved already. But what types of loans are those typically?

Construction, almost all of them, and we have been working with our borrowers, and we have resolved them. I can probably have Kevin give you a little bit more color. But we have resolved a number of them where we have been brought current, and we feel that we have collateral. We continue to re-appraise these things. We continue to have adequate collateral to cover the loans. We don't anticipate significant losses out of that portfolio at this point. We feel pretty good about it. Kevin I think is going to jump in here.

The largest portion of that is to one, LLC that has five pieces of property that are all in San Francisco, and the difficulties from the LLC stem from a disagreement inside of that LLC between the LLC members. And so we're working with them to allow them time to resolve those issues and repay us.

Okay. Great. Thanks. And then one other question. In terms of TDRs, do have any that you would consider performing that are not in the NPAs?

Yes, we do, and those are typically small TDRs, mobile homes.

We have a small portfolio of mobile home loans.

Okay. All right. Thank you.

Tim O'Brien, Sandler O'Neill Partners.

Just to follow up on the margin questions that Jeff asked, so the discount accretion that you guys benefited from this quarter. It started on February 18, so less than half a quarter's worth. And yet you had a pretty good pop year, and it's going to come down. Was the benefit due to, I guess, an acceleration of accretion based on paydowns in the quarter of loans beyond interest payments?

A certain -- the majority of what drove that is revolving lines of credit that were scoped into our FAS 91 pool, which meant that even though we took significant marks on some of these because of the risk rating because they had very short maturities, that discount got accreted into income over a one or two or three-month period. So it relates to a small number of loans that had fairly large discount where we were just according to the accounting rules having to accrete that back in.

And as far as that is concerned, that was one time in nature, I guess?

Yes.

Yes, over -- as I said, it will roll into next quarter a little bit and should normalize around the third quarter.

Okay. Great. And then the $600,000 in additional anticipated one-time costs associated with the acquisition, does that include the cost of systems integration? You also mentioned the July date for recognition of that, so that would obviously be in the third quarter. Could you just give -- just clarify --

Most of it is in the second quarter, and yes, the biggest part of that is the cost of our core processors FIS, and that cost is in the second quarter.

Okay. Great. So just may be a nominal true-up in the third quarter kind of --?

Yes. There may be a little bit that kind of falls over to the third quarter, but most of it is in the second.

Exactly. There might be a couple of employees that are helping through, for example, for financial reporting through July, but it will not be significant.

Okay. Great. And then as far as branch openings are concerned, you do have commercial lending staff boots on the ground in Sonoma now that you have brought in fairly recently. Can you give a little narrative on success as far as loan generation is concerned? You know, what these guys are hopeful at doing.

Sure. They are in Santa Rosa, and we have a team of five people in Santa Rosa. We brought in -- it is headed by a gentleman by the name of David Brown, who has a long history in Sonoma County, spent many years with Exchange Bank and also spent time with a couple of other banks. But David is a well-known entity in Sonoma.

We also brought in two other people -- a business development officer and a commercial lender. Both of those two people came from Exchange. And then we have -- we transferred one of our lenders who was here in Novato up there, a very experienced lender who happens to live up there now, and she is working out of that office. And then we had a private banker who we had hired from Sonoma Bank probably a year prior, and he is now working out of Santa Rosa also.

So we have a team of five. They are working out of the loan production office now until the branch is open in June, and they have got a pretty good pipeline there. They have generated some business that is on the books now, and we have -- I know of a number of letters of intent that are out, one fairly large transaction in particular that we are working on. So they are definitely busy and working real hard. As you know, it takes time in terms of generating commercial and industrial loans, which is their primary focus. It takes time to get those things on the books because you are moving full relationships. But they are busy. So we're excited about that.

So now we have -- in Napa we have a couple of lenders there that are managing the portfolio, and we're hoping to further staff that up with a significant person to manage the team.

Thanks for the color on that. And then last question, just a follow-up on Don Worthington's question about the construction 30 day to 90 day past-due. Are those -- are there finished buildings there? It is a vertical instruction, I'm assuming? And then are there additional construction-related loans in your book that are coming up for renewal or that are maturing that kind of a similar situation might arise that it is going to require a tension and could have some timing-related issues?

The loans that -- the bulk of the loans -- and, again, going back to this one LLC -- are land loans, and some of these properties are entitled; some are not. They are all in good areas of San Francisco. And so we're expecting that there is going to be a resolution to these. There is increased activity in San Francisco, and so the expectation is that we will have, if I can say, hopefully a resolution within a reasonable amount of time.

Our other construction loans in San Francisco typically are loans for conversion of apartments to tenancy and common loans, and those are selling through as expected. So we don't anticipate that is going to be a problem going forward.

Sure appreciate all the color. Thanks, guys.

Jackie Chimera, KBW.

I've just had a quick question on the 30 to 89 days. I'm wondering how much of just the uptick between linked quarters has to do with the March 31 date being an arbitrary date to measure that at, and how much of that is kind of a flow that happens -- you know, just the normal course of business?

I'm not sure I -- I'm not sure I --

So, I guess what I'm asking is, so at March 31 you had the $21 million, but then we are only three weeks into the quarter and you have already had a resolution in 10 of those. So the uptick, is it more due to kind of some construction issues that you're seeing start to tick up, or is it more due to just that happens to have been a bad date of measurement? If the measurement was May 30 versus March 31, would we have seen the same sort of uptick?

It is primarily the result of this one entity that is having difficulty internally trying to resolve their issues, and we are having to manage that. So it is just the timing of the expiration of those loans and just working through trying to have them resolve it.

Okay. And you had mentioned then in your comments and I know in the press release that you had some larger payouts during the quarter. Were those rate-driven? Some of the lumpy (multiple speakers) credits.

A couple were. Actually we had -- like I said, the loan demand out there is weak, and there is a lot of competition for deals. And we had a couple that were payouts for very aggressive rates elsewhere, and we chose not to compete for those at those levels.

We also had some resolutions of issues that were paid off. So I would say it is kind of a 50-50.

So are you still seeing some of the larger banks entering areas that they did not use to be in with some rates that you could say are far lower than most of the Community Banks would be willing to book at?

Yes, the ones we got refinanced out of they were at larger banks.

Okay. And then my last question is just a clarification. So the $9 million, was that all of the Internet deposits from your acquisition?

Yes.

And then the linked-quarter runoff in the CDARS portfolio, was that just a natural progression, or was any of that intentional?

It is -- yes, we had two customers, and I think the -- one customer in particular had investment opportunity. They had money -- they had a lot of cash sitting in the bank, and so they took the money out and used it for opportunities that they are involved in. Those were -- they did in -- I think we are seeing the value of CDARS starting to diminish because the nervousness and hysteria about the banks has slowed down quite a bit. And so our CDARS balances in general have been dropping. And we do have these two customers who took money out for investment not because they took them elsewhere. It was not a situation where they took the money out and put it in a different bank. They were not using the money for their businesses.

Okay. Great. That was all my questions. Thank you.

(Operator Instructions). Joe Stieven, Stieven Capital Advisors.

Almost all my questions have been answered, so I will just finish it up on this one. If you go back to the acquisition of Charter Oak, you acquired on fair value $61.8 million of loans. What was the mark that you took on that portfolio?

$17.4 million.

Okay. $17.4 million. It's a funny way to look at it. It was almost a $79 million loan book that you're taking a $17.4 million reserve on, so.

That is right.

Okay. Well, everything else was answered. Very good quarter. Thank you.

Jeff Rulis, D.A. Davidson.

One follow-up on the core deposit intangibles. You did not have a prior balance there prior to this quarter? Is that correct?

We did not.

Okay. So, in terms of goodwill and/or CDI, this is the first quarter of that? I just wanted to confirm.

Yes.

(Operator Instructions). Tim O'Brien, Sandler O'Neill & Partners.

I apologize also, but following up on Joe Stieven's question, how much of the acquired loan book paid off this quarter? Would you be able to provide that?

I don't know that -- I can't give you the number because I don't know the number, but I don't think there was -- if anything paid off, it was a de minimis amount.

Yes, I know it was $200,000 on the one part of the portfolio, but it is not really -- (multiple speakers)

We are not seeing runoff in either the loan or deposit categories from what we acquired through this acquisition.

Okay. Great. Thanks.

Mr. Colombo, there appear to be no further questions at this time. I would like to turn the call back over to you.

Okay. If there are no other questions, I want to thank everyone for attending the call this morning, and I appreciate your interest in Bank of Marin. Thanks so much.

Ladies and gentlemen, this does conclude the conference call for today. Thank you for your participation, and I ask that you please disconnect your lines.