Bank of Marin Bancorp (BMRC) 2011 Q4 法說會逐字稿

Good morning, and thank you for joining us for Bank of Marin Bancorp's earning call for the quarter and year ended December 31, 2011. My name is Malin Clark, and I am the Senior Vice President 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 Friday, January 20, 2012.

Presenting this morning will be Russ Colombo, President and CEO, 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 5.00 AM Pacific 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 that we know as of today, January 20, 2012 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. And now, I would like to turn the call over to Russ Colombo, President and CEO of Bank of Marin.

Thank you, Malin. Good morning. Welcome to the call.

Let me start by saying that Bank of Marin is in exceptionally good shape, and I am extremely optimistic about the year ahead. Our core earnings and a demand underlying fundamentals are strong. Our loan portfolio is in excellent shape. And although there has been some noise around the Charter Oak acquisition, overall, it has been very positive. In our opinion, we are right now better positioned than any other community bank in Northern California.

Now I'd like to walk you through a few highlights of our year-end and quarterly results.

We're pleased to report record annual earnings of $15.6 million, an increase of $2 million or 14.8% from a year ago. Earnings for the quarter totaled $3.4 million as compared to $3.9 million in the fourth quarter of 2010. Results were driven by lending in our commercial real estate, commercial and industrial and home-equity portfolios and deposit growth in our core markets.

Fourth-quarter 2011 earnings include the effect of $2.5 million provision for loan losses, which primarily reflects $1.3 million related to loans acquired in Napa. Despite this and some portfolio cleanup issues, the acquisition is performing exceptionally well.

For the year, loans are up 9.5% or $89.8 million and we achieved the milestone of $1 billion in loans. Loans also increased $38.5 million in the fourth quarter or 3.9%.

And we're pleased to announce the continuation of our dividend this quarter at $0.17 a share. This is our 27th 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 by giving you a little more information on the core deposit and tangible write-offs. [An] acquisition we recorded a core deposit intangible asset of $725,000. After amortization, the intangible was on our books at $683,000 in December.

Now the main driver of this CDI write-off was a significant decline in rates on long-term FHLB borrowings, which is considered to be the alternative funding source.

The decline took place between the February 18 acquisition date and December 31. From an accounting perspective, since it is now less expensive to fund our earning assets with borrowing than it is to maintain the deposit, there is no accounting value to the asset, so we wrote it off.

The write-off reduced diluted earnings per share by $0.07. However, I will add that core deposits in our opinion cannot be replaced by alternative funding sources and are the true value of our franchise.

We saw some great momentum in deposit growth this year for the bank with growth of $187.2 million or 18.4% over a year ago. The increase was across most branches and primarily relates to non interesting-bearing accounts and, to a lesser extent, money market accounts. Demand deposits comprised 29.9% of total deposits at December 31, which is up from 27.8% a year ago.

Our net interest margin remained very healthy. For 2011 our tax equivalent net interest margin was 5.13% compared to 4.95% in 2010. But for the quarter our tax equivalent net interest margin was 4.97% compared to 4.76% in the prior quarter and 4.92% in the same quarter last year.

And there's a few factors affecting our margin in the fourth quarter compared to the prior quarter. The impact of accretion in the fourth quarter was to increase the margin by 7 basis points compared to 12 basis points in the prior quarter. Gains on the payout of purchased credit impaired loans increased the margin by 6 basis points in the fourth quarter compared to 14 basis points in the third quarter. And also remember the FHLB prepayment penalty in the prior quarter reduced the third-quarter margin by 28 basis points, so combined, these factors account for a 15 basis point increase from last quarter, but we can see the margin increased by only 3 basis points.

And this is because the margin was also affected by lower yields on investment securities as maturing securities are reinvested at lower current market rates as well as lower yields on loans.

Now going forward, as it relates to the margin, the accretion has leveled off and is expected to approximate about $200,000 each quarter or 600 basis points of the net interest margin.

The maturing of a $20 million FHLB advance at 2.29% that will take place on January 23 next week is expected to positively impact the 2012 margin by about 3 basis points.

And we expect to continue to see the yield on our investment portfolio experience pressure as we reinvest at lower rates.

Our loan pipeline is strong, and we hope to reduce excess liquidity through loan growth, which would positively affect the margin, partially offset by some loans continuing to reprice to those floors and lower market rates on new loans.

Now, with that, I would like to introduce Kevin Coonan, our Chief Credit Officer, who will discuss our credit quality.

Thank you, Chris. Bank of Marin's credit quality remained strong through 2011. And as credit quality continues to improve, the need to provision high levels to cover loan losses we believe will be reduced. For the quarter our loan loss provision increased $1.5 million compared to the fourth quarter of 2010, primarily related to the provision for loan losses on acquired loans, as well as an increase in general reserves due to loan growth.

Today, ALLL provides a solid 122% coverage of nonperforming loans, considered very strong by industry standards and up from 96% from last year. Net charge-offs were $4.8 million or 0.49% of average loans for the year compared to 0.38% from last year.

Our belief is that strong credit quality results from disciplined lending practices consistently applied and augmented by ongoing account management. This philosophy has kept our loan losses at manageable levels and helped achieve consistent results. We proactively manage the portfolio to help anticipate and identify problems early, which leads to early intervention in order to resolve issues.

We apply the same active credit management to the acquired Napa loan portfolio and expect to minimize losses as we expand these relationships.

Our success is a result of the consistent application in these practices. And we believe our approach to underwriting and portfolio management will stand the test of time.

Russ will now talk about our 2012 outlook.

Thank you, Kevin. As we look ahead, we are very optimistic about 2012 for a variety of reasons. We are better positioned financially than many of our competitors to take advantage of new opportunities. We are aggressively growing our market share by building relationships throughout the North Bay and San Francisco. And with the momentum from opening three new offices and completing our first acquisition in 2011, we have proven we can execute.

We are well poised for another acquisition if there is a good opportunity. We have the capital and the expertise to do it, although our growth is certainly not dependent on it.

We are the right size. We are not a bank that is too big to fail, and we are not a bank that is too small to survive. And it is particularly unusual for a community bank to have the expertise and sophistication of our commercial lending team that we have at Bank of Marin, especially at the executive level.

Overall, we have a tremendous momentum coming into 2012. We are in excellent financial condition. We have a great team. And we continue to attract top talent because of our success. We're also in optimal locations where we can create and take advantage of opportunities.

We look forward to a great year ahead. Thank you for taking your time this morning. And now, we will open it up to answer any of your questions.

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

Good morning.

Good morning, Jeff.

Maybe this question is for Kevin on the loans past-due, 30 to 90 days. If you could characterize the primary driver of the increase, either within a loan segment or geography?

Well the primary driver is actually one loan. And this loan has been a management -- I want to say problem for the bank, only from the standpoint that the borrower is taking the proceeds from rents and using them for other opportunities. And in the past we've always been able to keep this current, but -- at the last minute. But this time around, he was unable to bring the loan current at the end of the period.

So as a consequence, we are going to -- we're contemplating taking a little more forceful action to be sure that this thing stays current.

This underlying property that is a commercial real estate loan, the underlying property has helped cash flows. So there is no diminishment of value or the ability to pay.

Is this -- could one assume this is also a driver of -- now you mentioned the increase in provision was partly due to organic growth, but some of that due to this one lo? Or I guess if you could speak to the overall credit quality in the region, just what are the trends?

The provision has nothing to do with that (inaudible) loan.

Okay.

If we were to -- one of the actions that is available to the bank is to force it into a (inaudible) ship so we can take the rents directly into the cash flow.

The fact of the matter of that particular property we understand is in contract for sale at the back end of the 1031 exchange, so the chances are that it in fact will be paid off within the next 30 days. And we're trying to confirm that.

Overall credit quality is good. You know the majority of our loans and collateral are in the Bay Area, which is I think -- has been a good solid performer, even during the downturn.

So if you had to characterize -- I don't know if you would break it out by percentage of the provision, the $2.5 million from what you're saying I guess a lot of that was due to organic loan growth? Or was there some credit statistics that you were also monitoring that drove that increase?

The provision that was driven you know over the prior year -- I think as we said was due to the acquired loan.

I guess I'm looking to sequentially; I'm sorry if I wasn't that clear. $500,000 in Q3 last quarter versus $2.5 million -- what had changed in 90 Days to drive that increase?

There's a lot of ins and outs in that number. And I can't give you a specific answer.

Well there was one loan that was part of the acquired portfolio and the property was being sold. And the first -- right?

Yes, but there is the series of ins and outs in that particular -- in the reserving that affected that. And so, you know, you obviously have to keep track of this, but I'm looking at 10 or 15 entries here.

I guess from our perspective, not having the books in front of us, could you give us any indication of going forward? Russ, you gave us the 2012 outlook; any idea of provisioning level? Or should we go forward that that's going to be $500,000 to $3 million, as it was in 2011?

You know, Jeff, I can't give you an exact number of what we're going to provision each quarter. However, if you look at 2011 when you have -- we have this acquired portfolio, which frankly, we've had some surprise gains and we've had some surprise losses. And I guess that's what happens when you buy something that you didn't create. I'm not complaining about that, because frankly, on the net has worked out exceptionally well. But we've had a few things that have popped up in the fourth quarter in the acquired portfolio, which impacted us and caused us to provision a higher level in the fourth quarter.

You know, I think we have that portfolio in pretty good order now, the acquired portfolio. It's not huge. It's only $60 million-plus.

So, going forward, do I expect it to be $2.5 million each quarter? No. Could things pop up? Sure, but I'm comfortable after just about a year since we acquired Charter Oak that we have a good handle on it. But the first three or four quarters, there's some management that you have to do of these accounts.

And we've learned about some things that -- frankly there's one account that was performing pretty well, as I mentioned, was sold -- we had a potential sale; the owner turned it down and then the whole thing fell apart. And, frankly, we had to take a provision on that one. But it's that kind of stuff.

And it's the type of loan that frankly we wouldn't have made, but it's ours now. So, as I look forward to 2012, I am just not seeing huge provisioning going on because we have a pretty good handle on our portfolio. Frankly the $60 million compared to $1 billion in total loans, we know the loans we made, and that portfolio is relatively small compared to the rest. So I have a pretty positive outlook about the provisions that we're going to be making in 2012.

Got it. Okay, that's helpful. I guess it's -- so in essence, the provision driven by some of the acquired stuff this quarter is the increase.

Yes, without a doubt, it was. And you know we had -- the interesting thing was in the third quarter we had some positive things that happened because of the acquired portfolio, which impacted earnings and gave us a boost. This quarter it kind of nets out.

We look at -- when we were looking at this year, I tried to step back from the whole year and say how did this go in total? And really it went very well. You can see we had a really great year, 15% earnings growth, but it's a little bumpy because of a lot of things -- provisioning, because of the accretion.

So we've had -- just the way these FDIC deals work. And now I think as you look forward into 2012 the accretion levels are much lower and they're going to be much smoother as we go out this year. And so you'll see a much more consistent and predictable earnings stream from the bank.

Got it. And one final quick one for maybe Chris on, what is the total intangible asset figure now following that CDI write-off? What's the --?

It's zero.

Okay, so you have no (multiple speakers)

We wrote it completely off.

Right. So you have no intangibles in total now?

No; we have no intangibles.

Got you. Thank you. That's it for me.

Jeff, kind of an interesting thing that I will mention on this, the [CEI] is that they are comparing against interest rates and evaluating core deposits at zero is humorous to me because, as Chris said in her remarks, that's really the value of our franchise. And it clearly is the value. And of course interest rates are low now, but as interest rates rise, it is nice to have 30% core or non-interest bearing deposits.

Sure, yes. Accounting fun. No, thank you, guys.

Accounting fun, right.

Tim O'Brien, Sandler O'Neill.

Good morning. Hey, a question for you, Chris, on loan yields, sequential decline in loan yields. It looks like it was about -- I want to say a little over 30 basis points. But on a dollar basis it looks like it was about $400,000. Is that entirely made up of the change in accretable yield on the acquired book and then also accelerated interest on prepaid loans from that book? Because it looked like those numbers were at about $400,000 each last quarter and $200,000 this quarter. Is that why the yield was down?

Yes. The accretion last quarter was $405,000; this quarter it is $241,000. And there were the gains on payoff. Last quarter was $448,000; this quarter it was $208,000, so about half.

And so on a dollar basis it looks like that accounts for the difference. And obviously you had some loan growth; average balance of loans was up this quarter as well.

So kind of on a go-forward basis, my 50,000-foot take away is that you're comfortable enough with -- it sounds to me like that yield number is going to be more stable going forward as far as it relates to the acquired portfolio?

Yes, that's true.

Okay, great.

Because definitely from an accretion standpoint, we really can't predict when the gains on payoffs will happen, but definitely from an accretion standpoint, it's expected to be about $200,000 now in 2012, each quarter.

And then in order to be successful growing your loan book the way you showed the growth this quarter, what kind of pricing are you guys required to make to offer to compete in the marketplace these days?

You know, Tim, it's a good question, but fundamentally the way we operate is not price driven.

Good.

If you look at our -- even though our net interest margin has declined over time, if you look at our loan yields, our loan yields have been pretty slow. Sure, rates are down; we have to be more aggressive when we did, but if we get into a discussion with a customer and it's strictly rates, it's probably not the right customer for us, because they're not getting the value of the franchise.

We really have to -- we have to impress upon our customers the value that we bring to the relationship is not just price. I would kind of break down these numbers to loan yields versus NIM.

Net interest margins, you know, when you've got $200 million of liquidity and you're investing that at 25 basis points, that's going to have a pretty negative impact on the net interest margin. And the investment portfolio is declining. The most important one is the loan yield, and that one has stayed pretty strong -- clearly is down but has been pretty strong and healthy throughout this all. It speaks to the relationships that we have with our clients.

It sounds like you guys have got some confidence there as far as defending that yield, I guess.

We clearly do. There are banks that are just throwing money around at extremely low rates. I think it's a bit of a quarter-to-quarter approach; we try to take a little bit more of a long-term look at the way we do business. And doing a 10-year deal at under 4%, which we've seen out there from some banks, we just won't compete. We'll just say good luck. Have fun with that. That's going to have an impact short-term, but if and when rates increase, I'm not sure the banks that are holding that paper are going to be that happy with their yields.

You know sticking with loans just for a moment, Russ, can you give a little color on your success in growing that portfolio this quarter? And is that indicative of I guess borrowers starting to get more comfortable with the idea of taking on leverage now? Or was it just an exceptional quarter that's kind of stand-alone in basis? How does that portend for 2012?

I think it's basically the loan growth is coming in two categories. It's commercial real estate and it's C&I. And I think during the year, commercial real estate were 18%; C&I, 14% or 15%, which is -- which are good numbers.

We've had a decline in our construction portfolio. That portfolio was down to $52 million. It was at $120 million at one point. The good news is that most of it got paid back.

So we've had good success. San Francisco is doing really well. And I think our strategy of bifurcating what we do as an organization -- the branch network, which is doing a tremendous job of generating the deposits, core deposits, which are based on relationships; and our commercial banking office of San Francisco -- and now we have a team of lenders in Napa and in Santa Rosa. And San Francisco is kind of ahead of the game in terms of their growth but those three offices are going to drive a lot of loan growth, C&I and some commercial real estate for our bank.

And so I'm pretty optimistic because what we bring to middle-market customers is something that they don't get from a lot of banks these days, which is a relationship, attention, dialogue, a financial -- I wouldn't say a financial partner, but really the ability to help them with their business. That's been our strategy -- frankly that's been the way we've operated for 22 years, and it's more important now than ever.

Great. That's great color, thanks. And then last question on kind of the changes or shifts in your securities book. I saw AFS was down and HTM was up.

And Chris, you said there was quite a bit of calling going on or payoffs of securities. And is that something that is going to carry into the first quarter of this year? Or was that kind of exceptional in nature? Are there a lot more securities on your book that are callable right now and that would be attractive to the counter parties?

Yes, we do have some callable securities. So we're definitely going to be -- continue to be faced with not just the cash flow from our MBS portfolio, but then some securities getting called.

We did add about $23 million during the fourth quarter. Our goals are really to just try to keep the securities short and maximizing the yield as much as possible while minimizing the risk.

There is not a lot of opportunity in the agencies right now. So what we added in the fourth quarter was small amounts of private-label CMOs on short-term taxable MUNIs. It's primarily short-term taxable MUNIs and one corporate bond. But I think the average maturity for what we added in the fourth quarter was just a little over three years with a yield of about 2.6%.

Okay, great. I'll step back. Thanks.

Jacque Chimera, KBW.

Hi. Good morning everyone.

Hi Jacque.

I just want to understand that I understand the accounting perspective behind the CDI write-down. So, essentially because the borrowing costs are so low, it decreased the value of the CDI and so it was forced to write down to zero.

That's correct.

Am I understanding that correctly?

Yes.

Okay, now is that something that -- I'm sorry, go ahead Chris.

Well, I was just going to say, because essentially it's less expensive to go out and borrow all the money instead of maintain your branches and maintain your customer accounts, and that is the accounting theory behind it.

Okay, yes, that makes sense.

Then the drop was --.

And then --.

Go ahead.

I was just going to -- is that something that was driven by your accountants, or was that more of an internal decision?

We looked at it at the end of the year as just part of our routine review of our intangible assets.

Okay. And then if I did my calculations correctly, I'm calculating of your purchase credit impaired loans that you have, that you had the $3.4 million that are accruing and then $2.6 million that are included in the NPA number. Is that correct?

We have $6 million in total, and then we have $3.4 million as accruing.

Yes, that's right.

Okay. Of that provision, the $1.3 million that relates to the acquired portfolio, does any of that transfer to those PCI loans, or is that part of the acquired portion of the portfolio that is not PCI?

That's hard to say, because sometimes it could have been provided for in other periods, so I don't know if we have all that detail.

I don't know.

I just -- the base of what I'm wondering is how much of the deterioration in the acquired portfolio that was provisioned for in the current quarter, how much of that is loans that formerly were doing very well, and how much of it was loans that were already on your radar?

Without getting into the -- trying to reconcile the book, we did have one loan that we -- when we did our due diligence, there was obviously a set ofloans that we identified as being weaker than others. And there was particularly one loan that we had identified as being an issue. And in fact part of that loan was charged off in a prior period and we ended up with a remainder that we thought that the borrower could continue to make payments on. And that loan -- actually we were informed by the borrower that they were no longer able to keep the same payment schedule that they had previously had.

Then there was another loan that was sizable that we had a pending sale and the borrower felt that they could get a better deal and did not follow through with the sale. As it turns out, the borrower was unique, and after they were off the hook on the contract decided that that wasn't something they wanted to do.

Okay, no, that's very good color, thank you. And just my last question is I wanted to see if there was any OREO in the quarter.

No.

No OREO.

Okay, great. Thank you. Those are all my questions.

Thank you, Jacque.

Don Worthington, Raymond James.

Hi. Good morning, everyone.

Hi, Don.

A couple things. In terms of the TDRs, you show that at $6.3 million in terms of accruing the TDRs. What is the composition of that group of loans?

I don't have the actual breakdown. The breakdown is what they are. I mean the TDRs increased during the period because the application of the clarification of the accounting standard for TDRs. You know, previously it was primarily mobile homes where we had actually made a concession on the pricing or loan skips. And subsequent to that, because of the application of the standard, any -- practically any substandard loan that we had touched became a TDR. So I would say that it's a mix of commercial and commercial real estate.

Okay, thanks. And then in terms of the linked quarter reduction in non-interest-bearing deposits, I get a net reduction of about $14 million. Was there anything in particular there in terms of a large account or losing anything from acquired deposits, anything along that line?

Don, you know, it's interesting, our portfolio, it swings day to day, and it just happened to be a -- we get $10 million to $12 million in swings in the demand deposits daily. And because it's operating accounts, in many cases you have -- we didn't lose any big accounts. And, in fact, we continue to see growth in the demand deposits as we go into 2012. There is nothing to be read into that at all.

Okay, that is helpful. And then I guess my last question, linked quarter reduction in personnel costs. Again, is it more last quarter being elevated or anything in particular there for the linked quarter reduction?

Well, we did have some true-ups, so probably third quarter is a better quarter to look at for run rate for the salaries and benefits line.

For the true-up from the Charter Oak stuff?

No, just salaries and accruals for incentives, and the -- things like that. So there is always some adjustments in the fourth quarter (inaudible), so it's a little bit low in the fourth quarter.

We did keep a number of the Charter Oak people through July, a couple of them even into the third quarter. And then they're gone. So I don't know what else to tell you there. You know, we've made some significant hires in the last quarter or so, which has been important. The last couple of quarters, we've brought some -- we're building a really nice team up in Napa with a couple of people. We're bringing on this quarter -- the person to run the cash management for us is coming in on Monday. And so really -- and we're in the search for a CIO.

So there is some significant people we've got going on which are all positive because, as I mentioned in my comments, we're getting much more interest -- because of our success we're getting interest from lots of very, very qualified people. It's really been nice to see, and I think that going forward the level of the quality of the staff continues to get even better.

Okay, great. Thank you.

Thanks.

(Operator Instructions) Tim O'Brien.

Sorry, just a quick follow-up. No gain on sale of securities or no securities sold this quarter, right?

Correct.

All right, thanks.

And there are no other questions at this time.

Okay, that concludes Bank of Marin Bancorp's fourth-quarter earnings call. Thank you for joining us this morning and we will talk to you again next quarter. Thanks for your attention.

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