Bank of Marin Bancorp (BMRC) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and thank you for joining us for Bank of Marin Bancorp's second-quarter earnings call for the quarter ending June 30, 2011. During the presentation all participants will be in a listen-only mode. After the call we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Monday, July 25, 2011. Now let me turn the call over to Russ Colombo, President and Chief Executive Officer of Bank of Marin Bancorp. Please go ahead, sir.

Thank you. Good morning and welcome to the call. I will be presenting this morning along with Chris Cook, our CFO. Kevin Coonan, our Chief Credit Officer, is also on the call. You may access the information discussed from the press release which went over the wire at 9 a.m. Eastern Time this morning and on the website at BankofMarin.com where this call is also being webcast. I'll turn it over briefly to Chris now.

Good morning. Before we get started I want to emphasize that the information discussed on this call is based on information that we know as of today, July 25, 2011; it may contain forward-looking statements that involve risks and uncertainty. Our actual results may differ materially from those set forth in those statements.

And for a discussion of these risks and uncertainties please review the forward-looking statements disclosure in the earnings press release that we issued today, as well as Bank of Marin Bancorp's SEC filings. Following our prepared remarks we'll be available for questions. Now I'll turn it back over to Russ.

Thank you, Chris. We're pleased to report solid second-quarter earnings of $3.4 million. We successfully completed the system conversion and integration of our Napa operations this quarter and we are pleased with the financial results and the smooth transition that is underway for our Napa Valley customers. Bank of Marin now has 17 offices in Marin, San Francisco, Sonoma and Napa counties.

Now I'd like to walk you through a few highlights of our quarterly results. Earnings were up 3% from $3.3 million in the second quarter of 2010. Our earnings this quarter reflect the impact of both the recently acquired Charter Oak portfolio and growth in our pre-acquisition portfolio.

Earnings for the six-month period ended June 30, totaled $7.9 million, up 26% from the $6.3 million in the same period a year ago. Diluted earnings for the six -- earnings per share for the six-month period totaled $1.48 per share, an increase of $0.29 from $1.19 for the same period a year ago.

Our earnings obviously reflect the positive impact of the recently acquired portfolio and the associated one-time acquisition costs. And while this has created uncharacteristic fluctuations in our earnings for the first half of the year, we expect those to be reduced over the next several quarters. I'd now like to turn it over to Chris Cook to talk about more of the details of our results.

The tax equivalent net interest margin was 5.51% in the second quarter compared to 5.01% in the same quarter last year and 5.44% in the first quarter. The accretion on acquired loans recorded to interest income in the second quarter totaled $887,000 compared to $1.3 million that we saw in the first quarter of 2011. The current level of accretion is expected to continue to decline over the next several quarters.

Our acquisition-related third-party costs were $642,000 which was $0.07 of EPS in the second quarter and $348,000 or $0.04 of EPS in the first quarter. We do not expect to incur significant one-time acquisition-related third-party costs going forward.

We saw our loan portfolio grow $47.3 million to $986.6 million or about 5% growth over year ago including the loans that we purchased as part of the acquisition. The modest growth was in line with our expectations based on current market demand and a conscious effort to de-emphasize certain product lines.

Deposits grew $139.7 million or 14% over year ago. The higher level of deposits reflects growth in most deposit categories and the assumption of the $93.9 million of deposits at fair value of the former Charter Oak Bank. Now this growth was offset by decreases in CDARS, time deposits and the disposition of Internet time deposits [that] were part of the acquisition.

In the quarter we made a conscious effort to deploy excess liquidity and grew our investment portfolio by $59.3 million primarily in agency security. So let me now turn it back over to Russ Colombo to discuss our credit quality.

Thank you, Chris. We are pleased to report that our credit quality remained strong and healthy through the second quarter and our risk-based capital ratio of 13% continues to be well above industry requirements for a well-capitalized institution. Non-performing loans decreased to $8.7 million or 0.88% of the Bank's loan portfolio, down from $9 million or 0.92% at March 31 and $10.8 million or 1.15% a year ago.

Net charge-offs in the second quarter of 2011 increased to $2.1 million compared to $372,000 in the prior quarter. The net charge-offs reflect the write-down of two unsecured commercial loans totaling close to $1 million, about $905,000, and declines in the value of the real estate collateral securing one problem commercial loan and one problem construction loan that resulted in the write down of approximately $670,000.

Embedded in these numbers is resolution of non-performing loans, some of which resulted in partial repayment. We're proactively working on loans that are in the 30 to 90 days past-due resulting in a dramatic reduction to $763,000 at June 30 down from $21.9 million at March 31.

We attribute the strength of our credit quality to be disciplined lending practices and the proactive management of the portfolio which has kept our loan charge-offs at a low level. We are applying the same active credit management standards to the acquired loan portfolio as we manage and expand these relationships.

Now I'd like to address the strategy over the next six months. We continue to view 2011 as a year of opportunity beginning with the expansion of our franchise into Napa. We also opened our full-service Santa Rosa branch this quarter and we have started construction of our office in downtown Sonoma, scheduled to open in early fall. These are all elements of our strategy to operate in all major business markets in the North Bay.

We view the North Bay, comprised of Marin, Napa and Sonoma counties, as a single economy, all interrelated and dependent on each other's success. It's very important for us to serve the entire region. We have added highly experienced local managers and staff in all of these areas including Santa Rosa, Napa and Sonoma.

Bank of Marin remains the number one community and business bank in Marin and we have received important local and industry awards including our ranking of number 43 on the US banker list of top 200 community banks out of more than 1000 organizations assessed. We have been included on this list for five consecutive years and we are one of only nine banks in all of California and one of only three banks in Northern California to be in the top 200.

In summary, our success is built on three core principles that have driven us since the Bank started -- disciplined lending practices, strong relationships with our customers and a commitment to the communities where we operate. Thank you for your time this morning. And we will now open it up to answer any of your questions.

(Operator Instructions). Tim Coffey, FIG Partners.

Thank you. Good morning, Chris, good morning, Russ.

Good morning, Tim.

Good morning.

I was wondering what the -- if you had the breakup of the dollar value of unsecured credits that are currently classified.

I'm just looking at Kevin Coonan to see if we have that specific number.

I don't have that at my fingertips, no.

Oh, okay, okay. I can follow up later. Can you give me a general idea; are there more unsecured credits out there?

We do -- you know unsecured lending is part of what we do; it's not that we don't do anything unsecured. The vast majority of what we do is secured, but there are some credits that are unsecured. We do have some commercial loans that we've made over time which don't -- would necessarily have collateral.

You're probably referring to the fact that we had a couple of charge-offs of commercial loans, close to $1 million. And they were unfortunately -- we had worked with one client, we had some collateral but it had to be classified as an unsecured credit. And unfortunately we've been working with this client and things in the last quarter kind of unraveled and so we took a full charge on it.

Okay.

And (multiple speakers) need more --. Go ahead.

Yes, I was going to say about -- the level of early-stage delinquencies seem like it got back to normal. Is that an indication that your charge-offs this quarter were kind of a one-off event?

Yes, I mean I think so. There was two loans in that charge-offs number that were sizable. And one of them, we actually thought that there was going to be a favorable resolution and then there was behavior on the borrowers' part that caused it to deteriorate. So I think that the classified credits we have now I believe that we are adequately reserved for. And I'm hoping that we'll continue to have good resolutions.

Yes, okay. (Multiple speakers) information; yes, sorry, go ahead, Russ.

No, go ahead.

I was going to ask if you can give me any more information on what these two credits were about.

One of the loans was a loan that had been in the portfolio for a number of years and it was a -- to an individual that was essentially a hard asset lender. And the majority of his collateral, which we had a security interest in the receivables but not the underlying collateral itself, the downturn of real estate values obviously affected him more than the others. And one of the things that happened was that he started getting sued by some of his investors and he started dealing.

Okay.

You know, the other big one we had was a $400,000 write-down of a property -- a land loan that we had that we had consistently written down I think over the last -- how any years --?

Over the last three years.

Three years. And ultimately we took a $400,000 charge, which was the entire amount. It tells you something about land values in Sonoma County that it was written down substantially.

That particular loan also had some ancillary impacts to it because of eminent domain. It's near a freeway and there's an on-ramp being constructed. And so the size of the parcel was going to be reduced and there was also some mitigations in regards to certain types of wildlife. So there was a number of things that caused the value of that property to decline that was not part of just the general market in Sonoma County.

Okay, that's helpful, thanks. And then you talked about it in the press release, but I don't see a dollar figure attached to it, what the amount of reserves were related to FAS 114 reviews?

Well, our total reserves are about $13 million, is that what you're referring to?

The portion that (multiple speakers) yes, specific reserves for impaired loans.

-- are about $2.7 million.

Okay, great, thanks. And then last question, do you have a target percentage of securities to earning assets that you'd like to maintain or is that just not relevant right now.

We are mostly thinking about it in terms of our liquidity levels. Right now I think our securities are about 15% of total assets at the end of the quarter, but we increased that not trying to maintain a certain percentage of assets, but really just looking at the high level of liquidity that we had.

Okay, okay. Great, thanks, Chris. All right, thanks, everybody.

Thanks, Tim.

Thanks.

Don Worthington, Raymond James.

Good morning, everyone.

Good morning, Don.

A couple things. One, it looks like you had some good growth in the non-interest-bearing deposits and also the interest bearing transaction accounts. Would you characterize that as new customers versus increases in balances among your existing customers or if there's a breakdown between that?

I don't have a specific breakdown of where it's coming from, but we've had a sizable amount of increase both with new customers, but we've also had a lot of -- we've been successful in growing new customers, new deposit customers and a lot of that is demand because those are [early] relationships. So our demand deposits have grown to over 30% which is obviously quite good because of that speaks to relationships that we're growing. But I don't have -- Don, unfortunately I don't have a breakdown of actual new accounts versus existing customers.

There was (multiple speakers).

What's that, Chris?

But there was one large depositor that came on. So we know that a good percentage of it is going to be related to new customers.

Okay, great.

One in our (inaudible) region we had one good size customer.

Okay. And then do you have any TDRs that are not included in your NPAs?

We do and they tend to be -- and this is kind of the same as in the past, they tend to be smaller loans that are mobile home loans.

It's about $1.5 million.

Okay, great. Okay, thank you.

Tim O'Brien, Sandler O'Neill.

Hi, just one question for you guys. You guys had a little bit of a jump in interest earned on your corporate CMO securities, could you -- was there anything one time in nature on that?

No, nothing unusual. We added a few, but we're always -- at the end of every quarter we're looking at prepayment speeds and so sometimes that can cause a little bit of a fluctuation in the yield when we adjust to current expected prepayment speeds.

All right, that's it for me. Thanks, Chris.

(Operator Instructions). Jackie Chimera, KBW.

Hi, good morning, everyone.

Good morning, Jackie.

I have a question regarding the loan yields. As I'm calculating it, it looks like there was a good jump linked-quarter. I know that that's affected by the acquisition since it did come into play only halfway through the quarter. But I was just curious since the accretion was lower this quarter than last quarter, can you just explain a little bit why that yield was up?

Sure. We had some loans that we acquired at a discount that paid off. So we had about $1.2 million in gains that ran through the interest income on loans in the quarter (multiple speakers) that increased that. So that was about 20 basis points of the margin -- year-to-date margin.

Okay. And then you had talked about the $701,000 in credit deterioration post the acquisition. Is that in -- and how it was excluded from the purchased credit impaired loans? Is that included in the $8.7 million in NPAs in the quarter?

No, because all peak -- oh, wait a second.

That's a PCI, isn't it?

Yes, that's a PCI.

There was a -- in parentheses on page two of the press release.

Right, so non-performing loans excludes all the PCI's, right. Except the 700, sorry, yes. So the non-performing loans excludes all purchased credit impaired except the 700 because they showed deterioration post acquisition.

Okay. So if I look at the originated portfolio it would be about $8 million?

Right.

Okay. And then were any of -- the charge-offs that drove the higher provision in the quarter, were any of those not in the early-stage delinquencies last quarter? The 30- to 89-day past due?

No, I don't believe any of them were in the early-stage delinquencies.

Okay, so they had all -- they were all performing and not past due last quarter then and then during the second quarter?

When you say early-stage delinquencies, they could also be more delinquent. And so the ones that were charged off were more delinquent than (multiple speakers).

Oh, okay. Okay, so they had a -- there wasn't anything that was charged off this quarter that wasn't in some way, shape or form past due -- I'm sorry, I'm not saying that very well. Everything that was charged off this quarter was in some way, shape or form past due last quarter?

These were all -- these weren't -- in other words you're asking were these surprises because they were performing and all of a sudden we wrote them off? And the answer is, no, they weren't performing, they were problems that we knew about and we wrote them off.

Exactly.

Okay. Great, that was all my questions. Thank you very much.

Thanks.

Jeff Rulis, D.A. Davidson.

Good morning.

Good morning, Jeff.

Hey, Russ. Chris, I had a question on the -- what was the quarter-to-quarter benefit on the accretion -- $887,000 this quarter, but what was it the prior quarter?

$1.3 million.

Okay. And so do you have a core margin-to-margin comparison if you backed out the accretion by quarter?

I know -- see 40 on a year-to-date basis -- let's see, here. I don't have -- if you take it over to interest (multiple speakers).

Just under 5.

Oh, no --.

You're talking about net interest margin. That's what he asked.

Yes, exactly. So the 5.51%, what is core of that? And if you take Q1's 5.44%, if you could just go core to core on both those numbers if you had it.

Yes, so, if you look at let's say the year-to-date margin of 5.48%, 36 basis points is related to accretion. And then the -- defining core is a little tricky because how do you define core? Because there was gains on the payoffs of loans, so we've got to be careful about what we call core. But we had 36 basis points of the year-to-date margin related to accretion and then the remainder is we had the lower deposit costs, higher loan yields, which includes the payoff. We have a shift of the mix and the assets to investment securities as we deployed some liquidity. So that's kind of what's going on in the margin.

But your question (multiple speakers) if you took accretion out and maybe the gains on early pay-off and things like that, then that's what you're looking for, correct?

Yes, I mean, I can kind of back into it with the numbers you gave me unless you had them just core to core -- quarter to quarter, not year-to-date. If you don't have it, no big deal. Moving on, I guess on the provision line item, you mentioned some of that for newly identified reserves on acquired loans. Is that only on acquired loans or any pickup in the provision on strain on non-acquired or some new loans?

No, the specific reserves that increased was primarily related to acquired loans. There were no -- net-net when you're looking at the change in the quarter for specific reserves on the legacy portfolio did not increase.

Okay. And so in other words, Q2 a bit of an outlier per se, I mean would you expect the provision, all things being equal, back in the $1 million to $1.5 million level as you had been?

Well, Jeff, -- we can't tell you what our provision is going to be for the quarter. Those -- the too large -- larger charge-offs that we had which totaled, between the two of them, one 800, one 400, do I expect to have another one like that? No. Both of those are gone now, both of those credits.

So certainly we hope that our provision is more in-line with history in the third quarter than it was in second quarter. I think that's -- we had a few things that kind of came in on the second quarter and do I expect it to be there again next quarter? No, but I can't give you a number right now.

Okay. And then on the expense line outside of the -- you mentioned the merger-related costs or acquisition costs were one-time and expected to stop going forward. I guess longer-term, looking for an expense run rate -- on the efficiency ratio do you guys expect low 50s or to improve upon that maybe even high 40s? You've mentioned some strategic things that you want to do as well, but maybe some commentary on where costs relative to this quarter are going?

Sure, first of all, you know we had -- the one-time costs were related primarily to the integration with our core processor, FIS. And so those are primarily done; there may be a few dollars in the third quarter but it's basically done. Do I expect our efficiency ratio to get in the 40s? No. We just opened an office in Santa Rosa, we're opening an office in Sonoma and those costs are -- those are -- you're not going to make money right out of the chute on those new offices.

So we're investing in our growth and so I -- when you're talking about efficiency ratio, our historical levels are more likely than certainly getting into the 40s, we're not going to get into the 40s. And historically we've run in the mid-50s. And I think that's a realistic target for us to keep as we go forward.

Got it. Okay, I had one final question on the loan growth in terms of what you're seeing, some good growth in the C&I and commercial real estate segments. How is the pipeline there looking? (Technical difficulty) get a sense if that's increasing, decreasing, how's the flow?

Yes, it's increasing. Here's the challenge that we have as a bank. Our construction portfolio is declining substantially. And so if you looked at our construction portfolio a couple years ago it was $120 million and I think it's in the $70 million something now.

Low 70's.

Low $70 millions. So part of the challenge that we have -- not that that's a bad thing, it's a good thing actually. But the challenge is to just replace what's running off. And it continues to run off and we're not seeing many opportunities in construction, again not that we want to necessarily.

So we do have a pretty good pipeline. Santa Rosa and San Francisco have good pipelines of new business opportunities, primarily in C&I, but some commercial real estate. I think Napa, now that we've got it integrated.

And we've hired -- we hired a leader for that office, a woman by the name of Kathi Metro who was with Umpqua and before that Vintage, 22 years. And she's a very well-known commodity in the Napa Valley. And I think that now that she's on board she can lead that team and we can see some good growth out of that market.

That's why we're pretty excited about Napa because not only what we acquired, the portfolio we acquired, but what we think we can do. Many of those customers, when they were banking with Charter Oak they had a pretty small lending limit and I think we've got the opportunity to expand our relationship quite a bit in that market.

So I'm pretty optimistic about the loan growth in the next six months. The pipeline looks good. But it still is a challenge just replacing what runs off in the construction portfolio.

Right, okay, understandable. Well, thanks for the questions -- or the answers I should say.

Sure.

Tim Coffey, FIG Partners.

Hey, Russ, I just had one more question. You've done a number of hiring on the loan side the last couple quarters. I was wondering if you can kind of give me your ideas of how it's going so far and if you're pleased with the progress or if you would have expected more progress at this point.

Did you say the hiring of people, is that what you said?

Yes.

(Inaudible).

Yes. It's gone very well. I mean we hired a team in Santa Rosa, a fellow by the name of Dave Brown who's been in Sonoma County for most of his career. He's leading that team. We just opened the branch office; we had the loan production office opened for a little while. And he has a pretty solid team, a business development Officer by the name of Joe Scaramella who came from Exchange, another woman by the name of Kim August, also from Exchange.

So we have some real solid lenders that we brought in from outside who know the market. And C&I business takes time. They have a very good pipeline, we've brought in some business, but it takes time. I really expect over the next six to 12 months to see some pretty significant growth out of that market.

Down in San Francisco where we've been now for about four years we're really starting to see some acceleration of their business. And Tim Myers who leads that team has four people and they're doing a lot of -- they have a very strong pipeline and I'm very confident about that. And Marin County, our lending teams here in Marin; it's more challenging because we have a very large market share.

In the business side we have about 25% of the business deposits here in Marin. So it's more challenging to grow the portfolio. That's why Santa Rosa, Napa and San Francisco become so important going forward in terms of our growth and why we've made sure that we've gone out and built these loan production offices.

Okay, great. Thanks, those are all my questions.

Okay, thanks, Tim.

We have no further questions at this time. I would like to turn the call back over to you, Mr. Colombo. Please proceed with your presentation or closing remarks.

Okay, well I just think everyone for attending this morning and if you have any follow-up questions you forgot about and wanted to call any of us, please feel free. But thank you for your attendance.

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