Bank of Marin Bancorp (BMRC) 2012 Q2 法說會逐字稿

Good morning and thank you for joining us for Bank of Marin Bancorp's earnings call for the second quarter, ended June 30, 2012. My name is Malin Clark; I'm 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 July 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 emphasize that information discussed on this call is based on information that we know as of today, July 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. 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 we had another strong quarter, and once again, we reported record earnings. Our loan portfolio continues to be in very good shape as credit quality remains strong.

We believe our strategy of positioning commercial loan officers in key markets to build loan volume is the right approach for the current lending environment. We've made several strategic decisions, including hiring two commercial loan officers based in Napa and Santa Rosa and hiring a new commercial loan team leader in Marin.

We've also recently announced the appointment of Michaela Rodeno as a new Board member. A priority for us has been to increase our lending to wine-related businesses, and she has more than 40 years of experience in the wine industry, having most recently been CEO of St. Supery Winery in Napa and a former board member of Silicon Valley Bank.

Now I'd like to walk you through a few highlights of our quarterly results. We reported another record quarter with earnings of $5 million, a 44% increase over the same quarter a year ago. Our results have benefited from stable credit quality with minimal loan loss provision required. For the quarter, total loans are holding steady at $1 billion with nonperforming loans also fairly consistent at 1.4% of the total portfolio. Accruing loans past due 30 to 89 days totaled $9.8 million at June 30, 2012, compared to $1.8 million on March 31, 2012 and $763,000 a year ago. This increase in past due loans in the second quarter of 2012 primarily relates to two loans which are adequately collateralized and no significant loss exposure is expected.

We are also pleased to announce the increase of our dividend this quarter to $0.18 per share. This is the 29th straight quarter we have paid a dividend. Here are some of the highlights from a few of our key markets. In San Francisco, where we just celebrated our fifth year in business, our loan pipeline has increased significantly, which has us optimistic about future loan growth. In Napa, loans increased $4.7 million or 8.1% from last quarter excluding $1.9 million in problem loan payoffs, a positive sign for the momentum we are generating in the market. Finally, in Sonoma, we have more than doubled our deposits in six months to nearly $19 million.

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

Thank you, Russ. Deposits were $1.2 billion at the end of the quarter. The deposit decline in the quarter reflect a decrease of $25 million in demand deposits due to a situation with one customer that involved a modification in the payment and reimbursement process that they rely on for funding from the federal government, and this decline was partially offset by other deposit growth. At quarter end, demand deposits were still strong at 32.5% of total deposits.

Our net interest margin remains very healthy. For the quarter, our margin was 4.94% compared to 4.97% in the prior quarter. This slight decrease reflected lower level of gains on payoffs of PCI loans in the current quarter, partially offset by a slightly lower cost of funds which is currently at 21 basis points.

Going forward, we expect to see pressure on margin as low interest rates are expected to continue. As the higher-yielding loans to securities mature, we expect them to be replaced at lower market rates. In a conscious effort to deploy excess liquidity, the bank did grow our investment portfolio by $36.6 million in the quarter and we purchased primarily government-guaranteed mortgage-backed securities, collateralized mortgage obligations and corporate bonds.

We also continue to be very well-capitalized with a total risk-based capital ratio of 13.9%, which is up from 13.6% in the prior quarter, keeping us well above industry requirements.

With that, I'd like to turn it back over to Russ 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 loan loss provision totaled $100,000 in the quarter and for the first half of the year, down significantly as compared to $4.1 million for the first half of 2011. Net charge-offs were also minimal at $187,000 for the quarter as compared to $1.1 million for the first quarter. Our strong credit quality results from a disciplined lending practice consistently applied and augmented by ongoing account management. Bank of Marin's success is the result of consistent application of these practices, which has kept our loan losses at manageable levels. As we look forward, we are very optimistic about the rest of the year.

Finally, we will be ringing the closing bell at NASDAQ and Wednesday, August 1, in New York and we hope we'll see a few of you there. I thank you for your time this morning and now we'll open it up to answer any of your questions.

(Operator instructions) Tim Coffey, FIG Partners.

I was looking at the cash balances that you had at period end, and it seems like they are starting to come down. Is it your intention to start investing more in earning assets, given that the liquidity that you historically have held on the balance sheet just recently has been a little bit higher than you have in past quarters?

Yes, that's exactly right, Tim. Like I said, we made a conscious effort to deploy some of the excess cash into investment securities, given the low level of loan growth that we had. And we'll continue to evaluate that going forward. At this point, though, we don't have any immediate plans to continue to invest at a higher level, but we will see how the next quarter goes and we'll reevaluate at that point.

(inaudible) Federal Home Loan Bank borrowing that we paid off -- is that first quarter or second?

In January.

In January. So we consciously have tried to reduce the higher cost of dollars that we have.

And then, Chris, what were the yields on the securities that you bought during the quarter?

It's a little painful, but we were at about 1.7%.

Okay, so short, then?

Yes, a little bit longer than our average portfolio, but not much. We kept the average maturity of our portfolio pretty consistent with what it's been.

And then, Russ, if you concentrate on the wine industry, I'm wondering what part of the industry are you targeting -- are you targeting the premium or the second tier?

The fact is, we're really focused on not just the wineries, but also the wine-related businesses. And there's a lot of banks that are in that market and really focused on the wine business. We would be focused -- let me go through the list. If you're talking about the wineries themselves, smaller premium wineries, number one; probably not the lower tier, high-volume wineries because that's not our real expertise. But second to that and probably an area where we've already had success is those companies that serve the industry, such as wine storage; we have some wine storage businesses that we bank. We have a couple companies that we bank that are actually bottling, kind of mobile bottling companies. So they have these trucks that go around to the small wineries and have a whole bottling line that's on the truck. And we've financed a couple of those trucks, and so things like that, and businesses that are serving the industry.

And so we think that there's a tremendous opportunity for our bank in those types of areas, in addition to the wineries. Michaela will add a lot to that because that's certainly her background and she knows a lot of those businesses. So we're counting on her to help us just in introductions in that business.

Okay. And my last question has to do with noninterest expenses. As a percentage of average assets, that's come down nicely in the last, say, five quarters or so. Do you feel you have more room there to lower operating cost?

Yes. Actually, we have a couple of things that it's going on that will offset each other a little bit. But overall, I think we can bring it down a bit. We recently negotiated our FIS contract, so we should see data processing come down, and that is effective July 1. So that will be a significant savings. But we have been making some hires of new lenders, as Russ had mentioned, so that will offset some of that. But I think there's a little bit more savings that could be realized.

The only thing I'd add to that is there certainly -- like Chris says, we've been adding some people and we're still in the process of looking for a CIO. That's going to be a significant higher. We've talked to lots of people and we've had some real good candidates, but we haven't quite found the right one yet. And the FIS contract -- it's a 6.5 year contract which we renegotiated early and we are able to add significant cost savings from that. That's obviously a very large cost to us. The FIS contract is our single non-employee-related expense, largest expense. So you're going to see some nice improvement in that in cost.

Okay, thank you, those were all my questions.

Tim O'Brien, Sandler O'Neill.

Okay, just to kind of follow on Tim's last question, are you going to file that contract and 8-K?

We have; we filed it last week.

Okay, great.

However, we did have a confidential section as related to the pricing, which we agreed upon. Unfortunately, with FIS, they did not feel comfortable having us disclose that, so --

I've seen another contract that was similar, you know -- it doesn't have pricing in it. And that's all we would have looked at, but that's okay.

And then another question for you is, can you give any -- I know you don't give guidance, Chris. That said, give some color on purchased loans directionally, kind of their contribution? That was a very nice table, by the way, that you guys put in this quarter. That's helpful and easily accessible information, so I appreciate that. Can you give us any color on how that book is trending relative to what your expectations have been on a run rate basis?

Well, we saw the accretion on the non-PCI loans level off. They recently ticked up a little bit in the current quarter because we had a payoff, so there's a little bit of a gain running through. So you could probably look at last quarter as more of a run rate going forward, unless, of course, there's more payoffs. Accretion on the non-PCI loans -- that's going to depend on the quarterly re-estimation of cash flow, although I don't think we expect there to be a lot of fluctuation in that going forward, too. I think they will just both slowly trend down slowly unless we see some big payoff.

Okay, great. And then as far as the announcement of hiring and the addition to the board is concerned, this is, again, kind of following on Tim's question about the Napa focus of the business that you guys highlighted this quarter. Will you guys be making any production loans? I know that you are focused on servicing industries to the wine industry or servicing business to the wine industry. Will you make any production loans or any vineyard loans for property, those sorts of things? Is there some opportunity there?

It's highly unlikely that we'll make vineyard loans. We're not ag lenders. And so our focus on the wine industry is financing the production process, the wineries themselves. We may make loans against -- may make a term financing against the winery itself, and typically a working capital line for receivables and inventory for the winery (multiple speakers).

And equipment loans,

Pardon me?

And equipment loans, possible, like the (multiple speakers)

Yes, that kind of thing. But it's pretty unlikely that we would consider a vineyard loan unless we had a very, very strong guarantor. And it's kind of questionable whether we'd even do it. We're just not at lenders, but we're comfortable with the production process. The people we've brought on have a lot of experience. In addition to that, our Chief Credit Officer, Kevin Coonan was -- he's got a lot of background in the wine business, lending to the wine business. The actually worked for B of A in their wine group in Santa Rosa for a number of years prior to his time here. So we've got some in-house expertise, as well as Cheryl Cinelli, who works in our middle market team. Her background is a lot of winery lending. So we've got the ability to do that, and it's just a matter of now executing on that ideal.

Thanks, Russ. And then last question -- the delinquent loan ticked up this quarter. Was that timing issue-related?

We've got a couple of credits that were past due. We're highly confident there's -- the loan to value on one of them is 59%; the other one is 67%, and these are recent appraisals. So we're highly confident that we will get 100% of our dollars back. But there are issues. One of them is -- well, both of them are situations where I think that we just had to go ahead and press them because things were happening. So we're highly confident that we will get our money back on that. One of them we actually have noticed on event of default, and we're in that process.

So have both entered workout, kind of the workout process?

Yes. When they're past due, they're in a workout mode. So we're working hard with our clients to try and get repaid, and we're confident. Like I said, we didn't have a big provision this quarter because we have very strong collateral on all of our -- what you would call or I would call problem credits. And so I think, over time, those will both get resolved.

But the issue is not a matter of a lost check in the mail or something, it's a little bit more substantial than that?

Yes.

That leads you to take a look at underlying collateral and such?

Yes, it's not a check lost in the mail.

Thanks a lot, you all. Nice quarter.

Jacque Chimera, KBW.

I had a question. I also was very grateful for the new table in the press release. Just a quick question on that. In the past, the early payoff on the PCI loans and then the accretion on the non-PCI loans, I was able to track that. But the accretion on the PCI loans was a new piece for me. I wondered if you had what amount that contributed in the third quarter and the fourth quarter from last year.

It was very minimal. The reason we really didn't start talking about it, because it wasn't part of the story until, really, last quarter it started to become material. We didn't really talk about it. We thought it might have been an aberration, but then it continued for second quarter, so we highlighted here. But it was nominal. I don't know the exact numbers, but it was very minimal in the prior -- before last quarter.

Okay. And then, if I'm doing my calculations correctly, when I strip out the early payoff in the accretion income, it looks like the core loan yield increased on a linked quarter. What would have been the driving factor behind that?

We did have fewer interest reversals. That's one piece of it. I think that's the only other thing. I know that there were a few basis points related to fewer interest reversals.

I don't have, really, anything to add to that.

Okay, no, that makes sense. And then looking to the comp expense, it was down a little bit more than I had expected. Was there anything unusual in there, any sort of reversals or anything like that?

Yes, prior quarter had a $100,000 incentive bonus accrual. So we have a lower expense in the current quarter by about $100,000 related to that. Then also, there's less payroll taxes and less 401(k) matching as we move throughout -- you know, into the year. So there's about $170,000 less just due to less payroll taxes and 401(k) matching.

Okay, and then just one quick question on the tax rate. Was that just due to the higher income, or is that a new run rate going forward?

No, it is primarily due to the higher income. We did also reduce our assumptions for tax-exempt loans and security income, to a certain extent. So both of those, kind of three factors. Going forward, you could probably use something a little bit lower than the current quarter, maybe 38.5, 39. We're in the process -- we're undergoing an audit by the California Franchise Tax Board, and so that's why we adjusted our assumptions on the tax exempt loan income. So our best guess for a tax rate going forward, until we have that audit finalized, is somewhere in that range.

Okay, great. Thank you very much for taking my question. It was a really nice quarter.

Jeff Rulis, D.A. Davidson.

Just to follow up, Russ, on -- well, sort of a loan growth outlook. You've had six consecutive quarters of growth until Q2. And I guess, thoughts on is this kind of the outlier this quarter, kind of when referencing your comments about being optimistic for the second half and you've got some momentum, the pipeline building in San Francisco, maybe some broad thoughts on growth expectations?

Sure. I think if you look at our loan growth going forward, it's going to be all about the commercial loan offices we have in San Francisco, Napa and Santa Rosa. We have to get growth out of those offices in order to show growth overall. Marin -- we've done such a good job here, it's kind of a good news/bad news, I suppose. We've done such a good job and we've got such a strong presence that I don't expect loan growth here in Marin to be very strong, maybe a couple of percent. But the other offices is where we see it.

In San Francisco, we have a tremendous pipeline, and so I'm very optimistic about our ability to grow in San Francisco our loan portfolio. And they've done a really good job. It's been five years now, and they've been building a team and building really a strong pipeline. And I'm expecting over the next six to 12 months you're going to see some pretty strong growth out of that office.

We've now added people in Napa and Santa Rosa because we also believe that those are offices that we need to see growth out of to be successful. Napa was a great acquisition, but in my mind, if it doesn't show growth, then it's only a financial deal. But we need to be a market that is producing substantial loan volume. And so that's why we've added people, that's why it's really important to us. That's why we added a board member from that market, because we really want to have an impact. And so we're optimistic about that.

That being said, the new offices, particularly Santa Rosa and Napa, it doesn't happen overnight. It takes time to build teams. And C&I business, this doesn't just happen. Commercial real estate, you can have bigger hits quickly. But C&I business takes time, and that's why San Francisco now is starting to show the results of their long, they're calling over the last number of years, where it's going to take some time in Napa and Santa Rosa.

All that being said, we booked a lot of business this past quarter, but we had some significant payoff. We've been kind of fighting the battle in terms of refinances because of price, and there are a couple of banks in the market who are being quite aggressive with very, very low, long-term financings. And so we'll do a pretty good volume of new loans. And unfortunately, we've had some things that have gone out the other back door, so to speak. So we're working real hard (multiple speakers) pardon me?

I was just going to ask, is the pricing pressure coming from larger banks or on the community bank level?

No, larger banks, larger banks.

Got it.

And so we really do not want to lose any deal for a price, and so we're being pretty aggressive in committing dollars to compete so that we don't lose those types of deals. And part of that is just making sure that we are really close to our customers because we don't want to get a call in the afternoon one day and say, by the way, we're going to be paid here and get paid off tomorrow. So we are really pushing our loan officers to be out there with clients and to make sure we're proactive about those situations and identify them upfront as to ones that might be vulnerable. And so that's what's going on, and I'm confident and optimistic because I see a pipeline and it's just a matter of making sure we don't lose stuff on the other side while we are building new business.

Sure, okay, sounds pretty positive. One last question, and this is more broad, just kind of interested in your view on the California economic outlook. You've seen some bankruptcy announcements in some California cities; it's stranded, not in footprint. But I guess any perceived residual effects of those bankruptcy announcements, or it doesn't even have to particularly relate to that. I guess your outlook on the state economic outlook and, particularly, your market.

Well, our market is -- Marin County has the lowest unemployment rate in the state at 6.6%. The state outlook is still pretty difficult because there's a deficit in the budget not being balanced, and the only way -- there's a tax measure that they're trying to pass which -- I'm not confident that it's going to get passed, and so there's going to be more cuts. I think you'll see more municipalities file bankruptcy in the state because -- and the overwhelming burden that they have are the pension obligations, which if they don't get the returns at CalPERS and SERS and the like are projecting, then the difference has to be made up by the other municipalities. And they don't have it, and so what do they do? So I think they're using the (inaudible) bankruptcy. They will use the bankruptcy option as a way to open up those contracts.

But that being said, we've got this economy that's a very large, strong economy. We just have some fundamental problems in the structure, structural problems, which we have to deal with. I think our markets -- the great news about -- you've got all that going on, but the markets that we operate in in Marin, Sonoma, Napa and San Francisco are in pretty good shape. I think Sonoma is more challenged than Marin. But Napa is doing very well, and they've done a very good job of really kind of merging hospitality and the wine business. So I'm confident about the future of that county as well as Sonoma County, even though they've been more challenging because there was a lot more construction, residential construction out there.

So all the state issues are one thing, but our local markets -- I'm pretty confident that we'll be in better shape than most of the state.

Sounds good, I appreciate the comments. Thanks.

(Operator instructions) Kevin Reynolds, Wunderlich Securities.

Great quarter. Most of my questions have been answered, but I just wanted to talk conceptually, if you could. I know you increased your dividend this quarter. You've been building up capital because the balance sheet growth hasn't been as strong as your profit generating capacity. The question is, would you consider doing -- deploying your capital more in buybacks as opposed to -- I heard the angst in your voice, Chris, about buying securities at these yields? Or, Russ, going back to some of the comments you made, do you expect at some point before too long that loan demand will accelerate enough to where it will absorb your excess capital that's been building up on your balance sheet? What are your thoughts on that?

We certainly are optimistic about loan growth. And we're not considering a buyback right now, just because we think that if we get the organic loan growth, fantastic; that's the best news. Continue to be interested in acquisitions in and contiguous to our market. The problem with acquisitions is that the reality of the market is that people -- different banks may be trading at 60% of book, but those banks think they're worth two times book. So deals are difficult to get done.

Well, perhaps they're worth two times markdown book.

(laughter) maybe so. So I'm not -- if acquisitions happen, they happen. I'm not optimistic about that. I am optimistic, however, about continuing to build our loan pipeline and portfolio and hiring the people to build that portfolio, because I think we -- given our current financial condition, we're an attractive place to work. And we're in conversations with lots of different lenders to try to bring them over. It's all about people. Lenders can come in, and they certainly don't bring their entire portfolio, but they certainly have a good in to a lot of great companies. So that's our real focus, just to try and continue to build the team.

Thanks a lot and, and again, good quarter.

Tim O'Brien, Sandler O'Neill.

Hey, Russ, Jeff kind of alluded to this in the discussion about the lending prospects and such. Do you have the origination dollar amount of production that you guys did in the second quarter, by any chance?

Is, I think Chris has that number.

Yes, we boarded about $29 million in loans, in new loans.

Great, thanks a lot.

(Operator instructions) Brian Zabora, Stifel Nicolaus.

Just a question on construction balances -- they were down in the quarter. I was wondering if -- are you hitting it maybe -- are you getting kind of close to a point where you're hitting a floor, or could we see those balances continue to trend lower?

We certainly have seen a lot of runoff in the construction portfolio. Interestingly enough, we're starting to see a few new deals, particularly in San Francisco where the market is very, very strong with all the technology, and it's just -- there's only so much space. Right? So I'm thinking that the construction portfolio will -- is at a floor. There are situations, however, that come up that we have -- that these things are flowing through and paying off. We've seen much faster from start to the finish of the project and sell-through recently than we had in the last couple of years. So that's why we've seen some rundown. But we're hoping that we can replace some of that business with new opportunities, primarily in San Francisco. And if that's the case, I would expect that we would be more flat on the construction side going forward.

Great, thanks for taking my question.

Currently, there are no further questions on the phone lines. I will turn the conference back to you.

Okay, well, that concludes Bank of Marin Bancorp's second-quarter earnings call. Please refer to our website for more information if you would like to watch the webcast. Thank you for joining us this morning and we'll talk to you again next quarter. Thank you.