Bank of Marin Bancorp (BMRC) 2012 Q1 法說會逐字稿

Good morning and thank you for joining us for the Bank of Marin Bancorp earnings call for the quarter ended March 31, 2012. My name is Malin Clark. I am the Senior Vice President of Marketing for Bank of Marin. Joining 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, April 23, 2012.

Presenting this morning will be Russ Colombo, President and CEO, and Chris Cook, Chief Financial Officer. You may access the information discussed from the press release which went over the wire at 5 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 exercise that information discussed on this call is based on information that we know as of today, April 23, 2012, and may contain forward-looking statements that involve risks 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'd like to turn the call over to Russ Colombo.

Thank you, Malin. Good morning and welcome to the call. Let me start by saying that we had a really good quarter. Our loan portfolio is in excellent shape and we made no new loan provisions. Operationally, the structure and processes we have in place across all of our 17 offices is working well and is scalable, and our efficiency ratio continues to be very strong at 55%. Loan demand has been soft and we have also seen some runoff.

It is a very competitive environment right now and our teams are being -- but our teams are being very proactive. Although we are making loans and winning our share of new business, we are also being diligent not to compete on price and we will go after the right opportunities. We are seeing some banks make long-term loan at extremely low rates which may look good now, but are not good for long term. We are not going to mortgage the future of the organization for short-term results.

Overall, we are on track and on plan and we are very pleased with how we are starting the year. We are focusing our efforts on growing our commercial loan offices and we are gaining momentum in these markets.

Now I would like to walk you through a few highlights of our quarterly results. We reported another record quarter with earnings of $4.9 million, a 46% increase from last quarter and a 9.6% increase over the first quarter a year ago. Results were mainly driven by our commercial real estate, commercial and industrial, and home-equity loans and deposit growth in our core markets.

For the quarter, total loans are holding steady at $1 [billion] with non-performing loan also fairly consistent at 1.4% of the total portfolio as compared to 1.16% last quarter.

We're pleased to announce the continuation of our dividend this quarter at $0.17 a share. This is the 28th straight quarter we have paid a dividend.

By market here are some of the highlights. In Marin, we are seeing positive results across all of our offices with a significant increase in deposits in southern Marin. This is due in part to seasonality, which affects some of our biggest customers. In San Francisco, we are pleased with our continued success, and last quarter we made a significant hire to lead our commercial deposit services -- our deposit services group based in San Francisco with our commercial lending team. We are also in the process of moving our office to a new downtown location at 345 California St., giving us more square footage to accommodate our growing team.

In our newest markets, we are seeing steady loan growth in Santa Rose. In Sonoma we are mainly focused on acquiring deposits and are exceeding expectations thus far. And in Napa, a relatively new market for us, we are pleased with our progress to date, including the strong team we have in place.

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

Thank you, Russ. We are continuing to experience strong deposit growth with an increase of 3.5% from last quarter. We are seeing growth in demand now and savings, and we are generating increases in both business and consumer accounts across most of our markets.

Non-interest-bearing deposits totaled 32.9%, compared to 29.9% at the end of the prior quarter. Our net interest margin remains very healthy. For the quarter, our tax accrual equivalent net interest margin was 4.97% compared to 4.79% in the prior quarter.

The increase reflected a higher level of gains on payoffs of loans acquired at a discount and a reduction in funding costs. Gains on payoffs of loans acquired a discount represented 16 basis points in the first quarter compared to 6 basis points in the prior quarter. Also, rates on various money market deposit plans were reduced in December between 5 and 15 basis points, and CD rates were reduced in November between 5 and 25 basis points.

Also in January, a $20 million fixed rate FHLB advanced matured, which had a rate of 2.29%. Our cost of funds in the verse quarter is all of 23 basis points.

Going forward, we expect to see pressure on the margins as low interest rates are expected to continue. So, as higher-yielding loans and securities mature they are replaced at market rates.

However, deployment of excess cash into securities and loans will help to offset some of this compression.

With that, I'd like to turn it back over to Rust to discuss our credit quality.

Thank you, Chris. With the absence of newly identified problem loans, Bank of Marin's credit quality remains strong and healthy. Our existing problem loans are well secured and we believe we are adequately reserved.

TDRs totaled $29.3 million at March 31, of which $25.6 million is accruing. Net charge-offs were modest at $1.1 million for the quarter and the majority of these charge-offs had been reserved for as of December 31 our strong credit quality results from disciplined lending practices consistently applied and augmented by ongoing account management. Bank of Marin success is a result of the consistent application of these practices which has kept our loan losses at manageable levels.

As we look forward, we are very optimistic about the year ahead. We are in excellent financial condition and, overall, we are off to a great start for the year.

I want to thank you for your time this morning and now we will open it up to questions.

(Operator Instructions). Tim Coffey with FIG Partners.

Good morning, everybody. Chris, I know you are on the call [a little bit later], but did you cover what kind of payoffs you are going to see in the forward quarters? If it is going to be any greater than what you saw in the first quarter? I'm talking from the loans you bought at a discount.

We don't know what the loans payoffs are going to be going forward.

Okay. (multiple speakers). I'm sorry.

Are you asking about next quarter or are you asking about fourth -- first quarter compared to fourth?

No. I'm asking in forward quarters if the trend is going to be greater or lower than what we saw this past quarter.

Yes, we don't know.

Yes, it is hard to guess that, Tim. The problem is, as I mentioned, there is a lot of pressure from a number of banks offering significantly lower interest rates than we would be -- we would find acceptable.

So we are working with our clients to -- if we -- need to be the case to adjust those loans to lower levels but not to the levels that they are being offered, and we try to maintain those relationships sometimes. Most times we can, sometimes we can't. So that is when we have some runoff.

But it has been interesting. Because we did have some good loan volume this past quarter. Unfortunately we had runoff because of exactly what I just mentioned.

Right and that is on the organic portfolio, right?

That's correct.

Okay. Are you more willing to going to entertain a rate of reduction on a relationship where you have multiple products to it?

Of course. Yes. We -- and we try to be proactive. Frankly we are trying to go to customers that we think might be vulnerable, that we have a big relationship, that we might go to them first and say, we can adjust this rate but then we lock in for a number of years and we put prepayment penalties so that we maintain those relationships going forward. And certainly, if we have a customer where we have multiple products that we sold, obviously we want to maintain that, because it is a profitable relationship.

Then looking at credit quality, what was the big difference between the first quarter and the fourth quarter of 2011? Was it just the limited number of inflows into nonaccrual loans?

We just -- we didn't have -- I mean, the first quarter there just wasn't anything much. We had $1 million of writeoffs which were reserved. We had reserved for those in the fourth quarter, and so we wrote them off in the first period. I mean, that was it.

There is, you know, we don't have -- the things we've had in the past have been related to primarily construction and development, and land loans and things; and all those are pretty much either gone or we've written them down to a level that we are feeling pretty comfortable.

In fact, new appraisals are showing that we are, in fact, in most cases we have good collateral value versus what we have it on the books for.

Okay. And then, the -- your feelings about the credit card that is in the acquired portfolio. Does it seem that it has improved from last quarter?

I would say it's interesting because we have actually gotten some payoffs of -- from the acquired portfolio where we've had, I think Chris mentioned that in her comments, and so I think it is stable. We are feeling pretty good that we have our arms around that portfolio. We have proper reserves in place and I don't expect a huge amount of write-offs in that portfolio at this point.

Now the trick in Napa isn't so much dealing with the existing portfolio, because I'm confident we have that in hand. The trick now is to build our business there and that is what our focus is, in trying to take what we've got now, we have a base level, and grow it and we have hired people to do that and so we are looking forward to this year as being a growth year for Napa.

Those are all my questions. Thank you.

Kevin Reynolds with Wunderlich Securities.

Good morning. I have got a couple of questions. I too was on the call a little bit late so you may have already addressed this. But Russ, could you talk about business conditions today after, across your footprint and maybe what the outlook for -- what you think the outlook for commercial on-demand or business activity might be.

Second, do you have any sort of commentary on line utilization rates, whether they are -- are they continuing to take down? Are they going up or stable.

I guess a third question maybe for Chris is, have you done a roll forward of your interest rate risk position? I mean in a up 100. up 200 basis point environment, what would your margin look like if we were to look out into the out years but based on where you are today?

Okay. I'll start, I guess. As far as the environment in our markets, Marin itself, which is obviously our biggest market, the environment is actually good. I mean, the unemployment rate is the lowest in this county in the state. That is the positive.

The negative is that there's not -- this is not a big C&I type of market. So where we are going to see our growth in C&I will be in San Francisco and in Santa Rosa and in Napa. So I am -- with those three businesses and with those three offices that we have and we have them staffed with good people, we are looking for significant growth out of those 3 markets. And I think this is this year it's stable.

I wouldn't -- you kind of have rolled into the question you had about line utilization. I wouldn't say that the market is booming but it is certainly stable, and I would -- line utilization seems to be just not changing a lot. It is kind of staying where it has been but not going down anymore. So that is good news for us.

In terms of the shocking of the interest rate risk, yes we do shock in 100, 200, all the way through 400 basis points and, basically, we are slightly asset-sensitive. So in a rising rate environment we should see the margin improve. We have a little over $100 million that would just -- that are tied to prime that would adjust immediately when interest rates start to rise.

We would see somewhat of a boost with the first 100 basis points rise but we would really start to see the loans lifting off the floor once we got to about 200 basis points. I think that is when we're going to see more movement with the margin.

Okay but I mean, we are still as far as that goes it's nothing until -- we are sticking with Fed commentary 2014 or later before we do anything?

Right.

All right. Thanks a lot. Good quarter.

Thank you.

Tim O'Brien with Sandler O'Neill.

Good morning. Russ, could you give a little bit more color on the TDR work that you guys did this quarter? You guys had a pretty good jump there.

We had -- we mostly had two loans. It was related to two relationships. One for $6.6 million commercial and [$11.3 million] CRE. But the LTVs are very low. We don't feel there's any losses. They are accruing. So it's mostly just two relationships that caused the increase.

Yes. We don't -- we have those both of them we are 100% comfortable on collateral values and they are actually paying down over time. One of those big relationships is in San Francisco and the market in San Francisco you do it -- I think Kevin earlier asked about the markets. San Francisco market is extremely good right now and particularly in real estate.

So, one of those two relationships is a San Francisco relationship that we expect over the next period of time we will get paid down on that without any losses. In both of those, we won't have any losses at all. We are highly confident.

So, how big is the (inaudible) relationship? Is there a C&I component and a real estate component to the San Francisco loan?

It's all real estate.

Multiple, though.

But it's multiple. It's multiple projects.

On real estate.

Multiple projects. Yes. The other is in Marin and it's collateralized by residential properties, and those are paying off over time and we, again, we are very well collateralized to have good margin on the collateral and we are expecting full payout on both of those two relationships.

And what did the restructuring involve? What kind of concessions did you make?

If you have a substandard loan and you extend it, that is a concession.

Is that what you did, Russ?

Yes. We did. We (multiple speakers) interest rate.

No principal forgiveness.

No principal forgiveness. No interest rate changes. All they were is extending the loans for a period of time.

Got it. And then, as far as the PCI payoff boost to interest income, could you give a little color on what tipped that into -- I guess they were credit-impaired but they were performing. So they were accruing interest all along and the payoffs were just additional interests that got booked in NII. Is that correct?

The gains on payoffs, these are loans that completely paid off that we acquired with the Napa acquisition, and we acquired them at a discount, and the way the accounting rules work is when those loans pay off you bring that discount into the margin.

Got it. And do you --? Is your outlook that that portfolio is going to continue to to get worked and you will see additional payoffs this year hopefully? Or would you like to see that? Or are you expecting that or kind of looking forward --?

It's possible.

It's possible.

We never know much in advance when there is going to be a payoff of one of those loans but it is possible that there will be future gains that we will continue to work the portfolio. So it is possible. But we really can't predict (multiple speakers).

But you just --

When or how much.

You would also just as soon keep the clients I guess, too, if they are good clients probably, right?

Yes. Clearly, if they are good clients we would like to keep them and work the relationships. If it is a problem and we get paid off, that is a good thing. So it is a combination thereof. Like I said earlier, Tim, the portfolio, we have got after now a little over a year with that portfolio, we have a pretty good handle on what we have there and the ones we want to keep we know. And the ones we don't want to keep we also know. We are working pretty hard to either expand relationships or see if we can get paid off.

But we have a much better handle than we did a year ago on that portfolio, and I think if you go forward, as I said before, the key is trying to build the portfolio as opposed to get it -- to get payoffs on these things. Financially it has been obviously very good for us, but the key to the acquisition is, can we build this market and that is why we've brought in some new people and we are really trying to work the market to build the numbers and build the portfolio.

Great. And if I read the release right, it looked like the carrying value of PTIs went up sequentially in the quarter by a little bit, maybe like $0.5 million or something, Chris, is that --? Am I right there or did I miss something?

In total, I think it was about the same. $6 million in December and $6 million in March. But the accreting, those that are accreting interest did go up. So maybe that is what you were looking at.

That's what I am looking at, yes.

Yes. Because when we reach estimate cash flows every quarter basically what that is saying is there are -- we expect to -- there are more loans that we were able to accrete interest on. We stop accreting interest when we can no longer estimate the cash flows. Perhaps because the cash flows are dependent upon a sale of a property and we don't know when that is going to take place. So as we get more information and we are able to estimate the cash flows, then we can start accreting interest.

Got it. Then last question. Any hiring this quarter, Russ?

Yes, actually. We have a couple of significant hires that we are looking at. We haven't -- can't announce the name yet but we do have a new person on the compliance area that is coming in. We are also in the process of looking for a CIO which, we feel very confident in this quarter, we will bring that person in. We don't have anything to report yet.

We are always -- and we brought in, we actually have a new person in the -- up in Napa Sonoma area, a person who will be a commercial lender and business development officer for the wine business. We haven't made that announcement yet, so we can't do that either. But you'll see something soon.

So, I'm excited about some of the people we are bringing in. We are really looking to bolster the lending team and business development team in the North Bay, because that really is a market that, to us, we have some real opportunities.

Appreciate all the color.

Jacque Chimera with KBW.

Good morning, everyone. Just as a quick follow-up on some of the hirings that you have been doing. And I apologize if I ask you questions you have already talked about. I had a few technical difficulties dialing and this morning.

I'm assuming then that since you have already hired the compliance person that they would be incorporated in the 1Q expenses. Would that be accurate?

We had a compliance person leave. Her last day was March -- end of March. Then, this person is going to be starting May 10. So there will be a little bit of a benefit, I suppose, in the second quarter, but not much.

Not much and it is basically pretty equivalent salary so there is not a lot of change there.

Okay, and then just probably a slight gradual increase in the comp lines over some of the new hiring that you are doing throughout the year?

I think that is probably right. Because we are hiring, we are going to be hiring some significant people like the CIO that we are trying to hire. So -- either hopefully when you hire business development people they -- the revenues they generate are substantially more than the cost of those people. But that remains to be seen. There's always a ramp-up period for those type people.

No, definitely understood. Then if I am looking at the nonaccrual loans for the quarter, I noticed that most of the categories remained flat or decline. But do you have an increase in the investor CRE? Did that flow from --? I know that I have in my notes that last quarter the early stage delinquencies included one particular loan. Did that flow into NPAs in the quarter with that, what the increase was?

Yes. Yes. It is a virtual real estate project that we financed, about $6 million. It's -- here's a little color on that particular project. The collateral value is very good, 61% loan to value. The tenants are all paying. Unfortunately, those payments aren't making their way to us.

So, we have got -- we are --. It became nonaccrual and we are taking action at this point. We will not lose a nickel on this one.

Okay. Great. Thank you for the clarity.

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

Good morning. Just a follow-up on the comp line. You had some sort of true up in Q4 and, then, I think you alluded to that would bounce back in Q1. You have got these hires. I just wanted to -- so this is a good base level at $5.6 million and then looking to grow throughout as you add these hires. Just wanted to confirm.

Yes. The only thing in there that you should consider is there was about a $100,000 bonus true-up that made the first quarter higher than fourth quarter, and then also remember that, in the first quarter, we tend to have more a 401(k) match and more taxes and such. So that tends to trend down over the year.

We did have a lot more loans booked in the fourth quarter than the first quarter and we do defer fees. Some of these expenses I should say get capitalized. So we had more of that in the fourth quarter than we did in the first quarter, about [150,000] more.

Appreciate the color. That helps. Thank you. And then, Chris, maybe just a question on the margin. So if we were to back out just looking at core margin if you just strip out the gains on the PCI, what was that in Q4 versus Q1 quarter to quarter core margin?

Sure. Well, we had, like I said, we had 16 basis points related to gains on payoffs of PCI loans in this current quarter versus 6. So if you just backed out that factor you are looking at 4.75 this quarter versus 4.66 last quarter. You know I think that the accretion is pretty constant at this point so you can expect that to be in the 6% range. Our 6 basis point range I mean.

Circling back to your comments, just the expectation that pressure on margins expected going forward, on your prepared remarks.

Yes, there are new pressures -- there definitely will be pressure but we are always going to be looking at ways that we can manage the margin. We actively manage the margin. So we will be looking for opportunities to improve our funding cost possibly for the reduced rate and, of course, looking to deploy some of our excess cash into loans, and if we determine it's appropriate, also into securities.

Part -- also just part of the problem is that we have, it is a quality problem, I suppose. Our deposits continue to grow and so the reinvestment rate on that is 25 basis points. So when you look as the investment portfolio continue -- you know, it is market-driven. And so that continues to decline. So what we can control which is the loan portfolio, we are working really hard to maintain that margin. But the overall margin is declining because of those other two factors. Investment portfolio and the cash that we're just putting out at 25 basis points.

So -- and on the loan portfolio itself, we continue to get as I mentioned in my remarks, there is an awful lot of pressure from a number of banks who are throwing around a lot of very long-term, very low-rate loans. So, it is a challenge every day just to compete with that and not get sucked into the desire to keep a customer. But doing the longer deals we have done, we have done swaps. But it is hard to avoid that kind of competition.

But there are some banks that are doing some pretty -- I think -- things that will in the long run be pretty negative to their numbers. So we try to avoid it as much as we can.

So, Russ, if I read you right you coupled the competition comments and I think in the opening remarks you also said demand was soft and you are facing some runoff. It seems that your comments have maybe put up some decent growth in 2011.

Going forward this year, does it look like it's going to be tough to match what you did in 2011 or what are the prospects there?

Well, I'm not saying we are not going to match it. I'm -- you know, we are pushing really hard in our loan production offices because I think that is the area where we are going to see the growth. If we can show growth in those markets and stay close, even or slightly up in the core markets of Marin and southern Sonoma counties, then you'll see some good growth.

Got it.

It's just a challenge. Most of our -- most of the targets that we have had at our customers have been Marin County-based companies or real estate investors, things like that. So I'm still -- I'm still enthusiastic and encouraged about the possibility of growth each year. It's -- I think our value statement that we give to our clients still resonates and it will translate into loan growth. But what that will be, I don't know at this point. But we are certainly pushing hard to be out and try and convince those prospective customers of the value of doing business with Bank of Marin, and we can't --.

As I said before, we are not going to mortgage the future of this bank with very -- throwing out really low interest rates to try and bring in a customer. We have to convince them of the relationship and it goes back to the three things we always say -- relationship, discipline lending, and really making an impact in our communities, and that seems to resonates with an awful lot of our borrowers. And we continue to do that and we will -- in 2012, that is not going to change.

So year over year you would say you would characterize the lending climate as better or worse than you were last year at this time?

I would say it was about the same. The difference is your -- the demand side is about the same. The supply side, however, is a little more challenging because of what I would consider to be irrational lending behaviors by some banks. But that's their choice. We just have to stay disciplined.

Got it. I will step back. Thank you.

At the present time, there are no further questions from the phone lines. Please continue with your presentation or closing marks.

Okay. That concludes Bank of Marin Bancorp's first-quarter earnings call. We'll be holding our annual meeting on Tuesday, May 15 at the Civic Center in San Rafael. Please refer to our website for more information.

Thank you all for joining us this morning and we will talk you again next quarter. Thank you very much.