Bank of Marin Bancorp (BMRC) 2011 Q3 法說會逐字稿

Good morning and thank you for joining us for Bank of Marin Bancorp's third-quarter earnings call for the quarter ending September 30, 2011. My name is Malin Clark. I am the Senior Vice President and Director of Marketing for Bank of Marin.

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 on Monday, October 24, 2011.

Presenting this morning will be Russ Colombo, President and CEO of Bank of Marin, along with Chris Cook, Chief Financial Officer, and Kevin Coonan, Chief Credit Officer.

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 our website at BankofMarin.com, where this call is also being webcast.

Before we get started, I want to emphasize that information discussed on this call is based on information we know as of today, October 24, 2011, and may contain forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, please review the forward-looking statements disclosure in the earnings press release we issued today, as well as Bank of Marin Bancorp's SEC filings.

Following the prepared remarks, our team will be available for questions.

Now, I'd like to turn over the call to Russ Colombo, President and CEO of Bank of Marin.

Thank you Malin. Good morning and welcome to the call.

We are pleased to report third-quarter earnings of $4.6 million, a 26% increase from the same quarter a year ago. Earnings this quarter were driven by our continued emphasis on strong credit quality and the impact of our recent Napa acquisition.

This quarter, we have also officially opened our new branch in the town of Sonoma. With pre-opening business development, this office has already generated $1.8 million in deposits and $2.4 million in new loans. We are pleased with these initial results and the positive reception we have gotten so far from the Sonoma community and local businesses. We now have 17 full-service branches 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 26% from $3.4 million in the second quarter of 2010 and $3.4 million in the second quarter of 2011. Our earnings this quarter reflect the positive impact of the recently acquired Charter Oak portfolio, which contributed $1.6 million to pretax earnings this quarter and loan and deposit growth across our existing markets.

Earnings for the nine-month period ended September 30 totaled $12.2 million, also up 26% from $9.6 million in the same period a year ago. Diluted earnings for the nine-month period totaled $2.26 per share, an increase of $0.44 for the same period a year ago.

Total loans reached $992.6 million, an increase of $6 million over last quarter.

As we look ahead, we are optimistic about the future for a number of reasons. With three commercial banking offices in San Francisco, Santa Rosa and Napa, we are building new relationships and our outlook for lending is very good. Deposits continue to grow and this quarter we exceeded 10% market share in Marin County for the first time in our history. Our deposit mix is also very good as we continue to build our franchise.

We are also pleased to announce an increase in our dividend this quarter to $0.17 a share, up from $0.16. This is the 26th straight quarter we have paid a dividend.

I'd now like to turn it over to our CFO, Chris Cook, to share additional insights about our results.

Thank you Russ.

Let me start with some details about our margin, which continues to be very healthy. The tax equivalent net interest margin was 4.76% in the third quarter compared to 4.88% in the same quarter last year and 5.51% in the prior quarter.

There's three main factors affecting our margin in the third quarter. 28 basis points of the decline from the prior quarter relates to a prepayment penalty of $924,000 that we paid on a $20 million FHLB advance that was fixed at 2.54% and was scheduled to mature in December of 2013. 25 basis points of the decline relates to fewer gains on the payoff of purchased credit impaired loans compared to last quarter. Gains of $448,000 represented 14 basis points in the current quarter, and that's compared to 39 basis points last quarter. 16 basis points of the decline relates to a lower level of discount accretion on acquired loan. The creation of $405,000 represents 12 basis points in the current quarter compared to 28 basis points last quarter. So combined, these three factors account for 69 basis points of the 75 basis point decline from the prior quarter.

Now, going forward, as it relates to the margin, the accretion we've seen has leveled off and is expected to approximate between $200,0000 to $250,000 in the fourth quarter. We expect to continue to see the yield on our investment portfolio experience some pressure as we reinvest at lower market rates.

Now, on the upside, our loan pipeline is strong. We hope to reduce excess liquidity through loan growth which would positively impact the margin. You've seen that we've proactively managed liquidity this year by repaying the FHLB advance this quarter and by growing investment securities by $59 million in the second quarter.

Now let me share some additional details about our deposit growth. In the third quarter, our deposits grew $37.6 million, or 3.3%. The increase was across most branches and primarily relates to non-interest-bearing accounts and to a lesser extent money market accounts. Demand deposits totaled 31.8% of total deposits at September 30, which is up from 30.4% in the prior quarter.

As we've expanded our operations, we've kept a close eye on expenses and we continue to look for ways to create efficiencies that offset the cost of growth. Examples of this include office space lease renegotiations. As our leases have come up for renewal, will we've pursued and negotiated lower market rates, which is providing significant cost savings to help offset the costs of our new branch openings.

We are also working to automate processes which will create capacity for growth without adding staff, as well as provide added value to our customers. For example, we'll be automating our wire process late next quarter or early fourth quarter.

With that, I'd like to introduce Kevin Coonan, our Chief Credit Officer, who will discuss our credit quality.

Thank you Chris.

Our credit quality remained strong through the third quarter. Nonperforming loans are $10.7 million or only 1.08% of the total loan portfolio. Also, as credit quality continues to improve, we need to add less loan loss provision to cover losses.

Our net charge-offs were only $1.2 million for the quarter, a decrease of $900,000 from the prior quarter. We attribute the strength of our credit quality to disciplined and consistent lending practices and proactive management of the portfolio which produces consistent results. The rigorous practices we use allow us to identify problems early and then actively manage the problems to maintain a healthy portfolio. We apply the same active credit management standards to the acquired loan portfolio in Napa as we manage and expand these relationships.

Russ will now talk about some of our current initiatives.

Thank you Kevin.

We are very optimistic about Bank of Marin's future and the opportunities that lie ahead. We are in excellent financial condition, we have a great team and continue to invest in top talent, and we're in the optimal locations where we can create and take advantage of opportunities.

The two engines that are fueling our growth are also working very well together. First, our branch locations are generating strong core deposit growth and are building long-term relationships with local businesses and the broader community. Secondly, our three commercial lending offices are in the hub of business activity in San Francisco and the North Bay, and provide a perfect complement to our branches to build full banking relationships with businesses in the bay area. As an example, our San Francisco office opened just four years ago. It has generated nearly $75 million in loans outstanding and has made a significant and positive impact on earnings for the Bank.

We are well-positioned for the future with our businesses -- business built on three core principles which have driven our success since the Bank started -- disciplined lending practices, strong relationships with our customers, and a commitment to the communities where we operate.

I want to thank you all for your time this morning. We will now turn -- we will now open it up for questions that any of you might have.

(Operator Instructions). Jackie Chimera, KBW.

Good morning everyone. I just wondered if you could go a little bit more detail into the growth that you had in the investor CRE portfolio. Is it only coming from the new offices? Are you seeing that across the board from most offices? Just a little bit of color would be great there.

I'm going to have Kevin Coonan, our Chief Credit Officer, answer that question.

During the quarter, there was an increase that primarily came from San Francisco actually, and so that's essentially where the growth in the investor real estate came from.

Great. Hopefully, some people are clearing up some of our empty storefronts that we have here. That would be nice to see. What has competition been like for rates on those loans?

The competition continues to be -- continues to be pretty aggressive, but we compete. Frankly, where we have been able to maintain -- as you can see, our margin has shrunk a little bit, which is a direct reflection of a couple of things. First of all, the investment portfolio which was really market-driven and so those rates are coming down, but also the loan portfolio.

But the good news on our loan portfolio is even though we've had competitive pressures, we don't necessarily have to be the lowest one in town to maintain the business. That's our whole business model, which is -- which drives value from what we do as opposed to strictly rate. But there are some lenders out there that are being very, very aggressive in commercial real estate.

So you're seeing customers be receptive to the quality of your service versus a lower rate at, say, one of the larger banks?

Yes, that's definitely the case. Certainly not always the case. We've had, this year we've had some prepayments because of the lower rates, but we try and compete where we can or where we want to or where we have a real strong relationship. When it's strictly a price deal, then we probably won't compete because what's the point? We look for full relationships.

Great. I will step back now. Thank you. Good quarter.

Jeff Rulis, D.A. Davidson.

Thanks. Good morning. Chris, I had a question on the margin. It's kind of noisy and there's a lot of factors in there, but maybe if you're comfortable with kind of getting to a core margin based on the FHLB item this quarter, and given the acquisition noise as well. Is there a number that you'd could kind of point us to as to what the core is today?

As I mentioned, if you look at some of the things that happened in the third quarter, we had our margin of 4.76%. If you back out the accretion of 12 basis points, the gains on the payoff of PCI loans -- because we don't know what that's going to be going forward, that's 14 basis points. The FHLB prepayment penalty is 28 basis points. That' brings you to about 4.78%. If you compare that to the prior quarter backing out the same things, that compares about 4.84%. It's a little bit of compression.

As we mentioned, going forward, there's a lot of little factors that are probably going to offset each other. We'll have some loan growth that should be positive, but we might see some compression on the rates and on the investment portfolio, a little bit lower accretion. So I hope that helps.

Chris, as you say, those sort of factors of maybe some loan growth but maybe some securities pressure net, I mean it sort of looks like a treading water type environment, given the pressures that are out there (multiple speakers).

Not necessarily. It's going to really depend on that loan growth. That's going to be the that biggest factor of all of those factors.

You have to remember we've got a lot of money that's sitting in investments at 25 basis points, so that's driving that margin down. Our margin is -- has remained pretty strong relative to the market. If you pull out the investment portfolio, which is -- that's 100% market driven. As things come up, as they mature, then we have to reinvest at lower rates. There's nothing else you can do there. There's no relationship on those dollars.

So then the excess liquidity that we have, which is not a bad thing, but being reinvested at 25 basis points, that's driving the margin down a little bit.

The loan portfolio itself has remained remarkably strong in terms of our margin. We look at it over time, and if you segregate out those numbers, our loan portfolio, it really does speak to the relationship nature of the way we do business. We've maintained a pretty high strong margin.

But there is -- as you said, there is a bit of noise there because of all the things that went on relative to the prepayment and accretion and prepayments of loans, things like that. It's hard to kind of cut through to the real number.

Do you view -- you still have excess liquidity, like a similar announcement going forward, is that -- any other borrowings you'd like to retire early?

We do have two additional FHLB borrowings. One for $20 million at 2.29% is going to mature by the end of January. So we're not going to prepay that but it will mature at the end of maturity, so that will be an annualized 4 or 5 basis points probably. Then there's another one for $15 million at 2.07%, but that is puttable and it doesn't mature until the year 2018 and we don't have any plans to prepay that either.

That's helpful. Then Russ, I wanted to follow-up on you've got some branch openings and you mentioned some hiring initiatives of staff or lending personnel. I guess any comment on costs from here? Have you sort of taken a lot of investments upfront and from here we could see improved efficiency or would you expect some growth in the expense line?

We do see additional hirings that we are going to be making, which will be not inexpensive, let's put it that way. We're looking to add to our credit administration staff not at the very senior level, but senior enough that it's going to be expensive. We also look to improve and add to our operations area. That will be a fairly senior level. As then as we add, as we build our commercial lending offices in Napa, Santa Rosa and San Francisco, as we add staff, it's typically fairly expensive people. But relatively speaking, I always say that good people are not expensive at all because they are going to be generating -- those people in those branches initially are costly, but ultimately, if they're good, they're going to pay for themselves many times over. So we might see a little bit of it on the salary side, we might see some increases.

As far as branches go, we've opened Santa Rosa and Sonoma as well as the Napa acquisition. We don't have anything to add at this time in terms of new branches. So we've gotten into the door. We opened three offices -- well, including the acquisition and the two offices we opened, we opened three offices this year which is the first time in our history we've opened three at a time in one year. So we're absorbing -- we're able to absorb -- because the Bank has grown, we're able to absorb more expense than we have historically. But our efficiency ratio is still staying at a pretty good number.

So it's safe to say expenses flat to up from here, from Q4 level or Q3 level?

Yes, I can't -- I don't see anything that would bring them down. Let's put it that way.

I'll step back. Thanks.

Don Worthington, Raymond James.

Good morning everyone. Just a couple of things -- I guess more on the credit side. Any color on the increase in the 30 to 89 days this quarter, a large loan here or there, or anything in particular?

That was primarily one loan that was in the process of extension, and the extension was predicated on getting current financial information, so that was substantially all of it, actually.

Okay. I thought it was just maybe a timing issue there. Then I think last quarter you said TDRs were maybe about $1.5 million of mobile home loans. Has that changed at all?

Our TDR loans, as you know, this quarter, there's a new accounting standard that's effective and it's requiring companies to go back to 1-1 of this year and review all their credit actions and the modifications that they made during the whole first nine months of the year. We're currently going through that process, so we're going to reporting our TDR numbers later in the week when we file our call report on Thursday. But because we're still going through that process, we can't estimate at this point what that number will be.

Thank you. Lastly, in terms of the charge-offs, the $1.2 million, any color on the composition of that?

It was primarily in -- you know, actually it's interesting. It was kind of spread amongst all of the different note types. Comparatively to last quarter, there was a -- there were several loans that we had charged off at once. That was I think unusual this size. So comparatively, it's less, but it's sort of spread across most of the note types.

The only thing I'd add, Don, is that the loan portfolio, in terms of charge-offs, we've had, in the past we've had a few quarters where we had, for us, relatively larger charge-offs. This quarter was just -- there was a few things, but they were all pretty small, and so we had obviously at $1.2 million, $900,000 less than last quarter, feel pretty good about the portfolio right now. It's performing very well.

Okay. Thank you very much.

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

Hi, good morning. Just to follow on Jackie's question, regarding the investor on commercial real estate, were you able to price that -- what kind of yields were you able to book those loans at, ballpark, kind of generically speaking? Maybe you can give it to me relative to what market prices for aggressive lenders are out there or something. How much are you able to price those up?

We're actually getting pretty good yields on these deals. Let's put it this way -- the yields on those loans that we talked about were in excess of our current net interest margin.

That's great.

How's that? That's better.

Incrementally, relative to the existing book, it's a little lower than that I'd imagine just because that's the environment, right?

Yes, I mean you've got -- the existing book is spread across and you obviously have some pretty high yielding assets in there. But relative to what you're seeing in the market these days, which is -- I've heard of deals in the high 3s% and low 4s%. We're doing better than that.

Good, that's great. As far as what your clients are interested in, what kind of product term structure are they looking for and are you able to generate these days in that [I/O] CRE?

I think we're seeing, because of the outlook for a low interest rate, I think you're seeing a lot of borrowers interested in longer terms. You're getting requests for -- a lot of requests for a seven- to ten-year, some even longer than that.

Our attitude has been, over ten years, we've been -- we typically will do some kind of a swap or something like that to make sure that we lock in our yield. But you're seeing a lot of requests and a lot of interest in longer-term financing because there's an awfully good interest rate environment.

So that's the kind of loans you been put on there this quarter?

No, no, no, I'm not saying that's we put on. I'm saying you're seeing a lot of interest like that. Most of the transactions we're doing are, when it's commercial real estate, are five-year fixed with a 20- or 25-year amortization with a ten-year maturity. (multiple speakers)

So you're able to steer them into that with -- offering some attractive rate or kind of structure that makes them amenable to that?

Yes, there's lots of factors under which borrowers may want certain types of financing. But yes, we're -- our portfolio is not changing from a five-year to a 10- or 15-year maturity. It's more fixed. We're trying to keep our interest rate exposure. Five -- we do from time to time go a little longer than that. But our standard product is still a five-year fixed with a ten-year maturity and a 20- or 25-year amortization.

Then on the construction that you saw some pay downs on, could you -- a little bit of color? How many loans was that and was that kind of expected and it's just due to maturity and completion of projects and such?

It was almost all due to completion and maturity of projects. Actually, it's indicative of the market in, certainly in San Francisco, which has been and continues to be relatively healthy. And so the projects are completing, the units are sold. We also had one project that was a high-end single-family dwelling in Marin County that sold within days of completion and listing. So it's showing that these construction loans are paying through.

How big was that Marin loan?

I think -- I'm not going to guess at it. I don't know offhand, but it was sizable.

What's that Russ?

I was going to say you can see our construction portfolio is only $55 million now.

I know. It's come down nicely and it keeps coming down. You guys have kind of suggested that it's going to continue to come down I guess, that you're steering clear of that a little bit.

You know, you don't -- obviously the point with construction is that, in 18 to 24 months, it should be gone, right?

Yes, it should.

It should be. Obviously, when you look at our losses that we've incurred over the last few years, most of it comes from that portfolio. But the portfolio now is performing pretty well. As Kevin mentioned, we've had -- the projects we have on there that are building through and they're selling or refinancing longer-term financing, it's working the way it's supposed to. But there's just not a lot of demand for construction these days. While things are getting paid off, they're getting paid off a lot faster than we're seeing new opportunities. So I would expect that to decline somewhat over time.

Make sense to me. Then the last question -- and you talked about this, the three branches that you've opened. Do you feel like you've got pretty good footings now in Sonoma County, Russ, or are there additional markets up there that you could better cover through maybe an LPO or something like that? How -- what's the growth strategy, de novo branching strategy look like going forward?

In Sonoma County, I don't anticipate any other LPO because that's what we have in Santa Rosa. We have a team of commercial lenders. So now we've got a branch in Sonoma which is primarily a retail small business location.

If I look at Sonoma, we have five branches now. I would think there will be other opportunities for us to grow in Sonoma County and add offices, within Santa Rosa possibly. We have three in Petaluma, only one in Santa Rosa. If we want to fill that market out, it seems to me that there will be a need to add locations in and around the Santa Rosa -- City of Santa Rosa, maybe as far south as Rohnert Park.

So I don't think we're finished in Sonoma, and we're just starting -- Santa Rosa has only been open a short time, and Sonoma just opened. So time will kind of tell as to how we do, but I'd anticipate additional offices in Sonoma County.

Then other counties, or other markets, are you -- have you guys had your meeting, your strategic meeting, with the Board for next year and kind of figured out what 2012 you're going to try to make that all about?

We have had our strategic planning meeting with our Board which was actually on Friday. If you look at where we are and you can see, in Napa, we have one office, and strategically we decided to close one of the offices we acquired. But over time, there may be, as we build our market share and we build our reputation, it may make sense to expand in that market. Don't know for sure right now, but maybe. We're open to, as we said specifically with investors or wherever, we think that we need to be a bank that covers the North Bay. We want to be the premier bank and community bank in North Bay. We already out of San Francisco we make calls in the East Bay, and there's a chance I suppose at some point that we could do a loan production office in the East Bay. But we're kind of keeping our of options open right now. We don't have anything that is planned immediately for 2012.

I like flexibility. Thanks a lot. Nice quarter. I'll step back.

Jeff Rulis, D.A. Davidson.

Just a quick one on we've kind of beat up the loan portfolio by segment. But one, I wanted to know about, on the C&I side, it's been sort of inconsistent, some runoff this quarter but had some growth the previous quarter and then the quarter before that some runoff. I'm just wondering what's happening within that loan segment, and maybe how the pipeline looks going forward.

I can say that, in the C&I portfolio, the problem with that is that we -- the good news is we continue to add customers. We're not losing customers there. The problem exists with C&I side, there's not a lot. We might add a new C&I customer, which has a loan, a line of credit. There's not a lot of utilization these days. Utilization from quarter-to-quarter can vary, so you might have bumps up and down. I think we're making exceptionally good progress in C&I side in Santa Rosa and San Francisco. Now that we have a team in Napa with -- since we hired [Kathy Metra], I'd expect to see growth out of that too.

Once again, though, the problem with all three of those offices is that we put on new business and we may or may not see full utilization of the line. So you're going to see some bumps quarter-to-quarter, but we're very happy with the progress we've made adding C&I customers.

Okay, so no real trend that you're seeing on the utilization front. You're growing customers but nothing to say that we've actually seen new customers start to draw on those lines, or there's no trend there yet?

No, the customers we have now are utilizing their lines less. It's just the problem is that it's the same problem as we have across the board in the country. There's just a lot -- the business community is a little bit skittish right now, and I just don't see a lot of growth in the business community, so our portfolio reflects that. So I don't expect a lot -- I expect to see the same type of inconsistency in that portfolio over the next two quarters.

Thanks Russ.

Jackie Chimera, KBW.

I just had one quick little technical question. I know for -- this is probably for Kevin -- in the last quarter, the nonperforming assets included $701,000 of acquired loans that were on NPL status that weren't part of the PCI loans. I wanted to see what that number would be for the current quarter.

I'm not sure. Restate the question. I'm not sure I even understand what you're asking.

So the last quarter, there were $7.9 million of credit impaired loans, but I know roughly $700,000 of that was on -- it wasn't part of the PCI impairment loan; it was included in the nonperforming loan segment. So of the $8.7 million, $0.7 of that was from acquired loans. So I wanted to see, of the $10.7 million in the current quarter, if any of that was from the acquired portfolio.

Actually, I don't know the answer to that. We're going to have to do a little research and get back to you on that one. Sorry -- off the top of my head. But we'll call you back on that.

Okay, thank you.

I'm showing no further questions from the phone lines at this time.

All right. If there's no other questions, I want to thank everyone for attending the call this morning. We appreciate your questions and your interest in the Bank. Thank you very much.

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