Bank of Marin Bancorp (BMRC) 2012 Q3 法說會逐字稿

Good morning, and thank you for joining us for Bank of Marin Bancorp's earnings call for the third quarter ended September 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 October 22, 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 A.M. 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, October 22, 2012, and may contain forward-looking statements that involve risks and uncertainties. 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 would like to turn the call over to Russ Colombo.

Thank you. Good morning and welcome to the call. Let me start by saying that our underlying fundamentals remain strong and our results this quarter resulted in a right down of one borrower of $2.1 million that we will share more details about later in the call. In addition, our deposits are growing consistently and our loan pipeline is strong. As we near year-end, we are confident in our ability to deliver very positive annual results.

Now I would like to walk you through a few highlights from our quarterly results. Net income for the quarter was $3.2 million. Our results this quarter reflect a $2.1 million provision in charge-off related to one commercial real estate foreign relationship. We view this as a unique case. Throughout our history, we have successfully managed our real estate portfolio with minimal losses. Unfortunately, for this credit, the property value in the third quarter declined significantly based on an appraisal we received in August. This resulted in a $2.1 million provision and ultimately a charge-off for the impaired amount. The property securing this loan is in the process of foreclosure.

Nonperforming loans totaled $19.2 million or 1.9% of the Bank's loan portfolio at September 30, 2012, compared to $14.3 million or 1.4% as of June 30, 2012. This increase in nonperforming loans from the prior quarter primarily relates to two borrowing relationships totaling $7.2 million, of which we expect $3 million to be paid off before the year-end. The remaining $4.2 million of the increase is expected to be paid down gradually as the borrower continues to liquidate the collateral in an orderly fashion.

I would now like to take a few minutes to discuss our loan payoffs and funding during 2012. In the first nine months of the year, we have funded $56.4 million of new loans, of which $31.8 million was in the third quarter. However, we have had over $73 million in payoffs and I wanted to give you some more detail on those. I'm going to go through each category one by one.

Number one, problem loans -- We've had $18.6 million of problem loans resolved and paid off during the period. Construction loans, we had $8.6 million paid off as scheduled and then refinanced sales (inaudible) when the project was completed.

We've had cash sales of properties that we finance. These were properties that were performing and were sold. $20.1 million of those cash sales.

We've had $6.4 million of TIC loans paid down during the quarter -- or during the nine months. This is a combination of both normal monthly payments as well as some refinancing. There is some liquidity in the TIC market which had not been the case prior, and so there are a couple of refinancings that we have had happen during the quarter.

We had $10.5 million of loans repaid where we had decided to exit the relationship. And these are primarily two relationships that we decided to exit, and those loans were repaid. This was actually a good thing because these we consider to be potential significant problems and they were paid off, refinanced elsewhere.

And finally, we had $8.9 million of refinancings which were primarily pricing-driven transactions where we decided we did not want to compete on the price that they were being refinanced at, and we did not want to sacrifice the margin as great as the refinanced -- or low as the refinanced number was.

Now this number -- total payouts are $73 million. This number may seem high, but we believe the majority of these payoffs are for reasons that are not going to be major factors as we go forward.

Now, we'd also like to -- we are pleased to announce the continuation of our dividend this quarter at $0.18 per share. This is the 30th straight quarter we've paid a dividend to our shareholders.

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

Thank you Russ.

Net interest income totaled $14.9 million in the third quarter of 2012 compared to $16.3 million in the prior quarter. And the tax equivalent net interest margin was 4.44% this quarter compared to 4.94% prior quarter. Unfortunately, margin compression is a reality for banks in this extended low interest rate environment and we are no exception.

The third-quarter change in margin is primarily related to the downward repricing of loans and rate concessions, as well as a lower level of accretion on purchase loans. In addition is we see securities paid down and our calls are being replaced at lower current market rates.

In a conscious effort to deploy excess liquidity and reduce the cost of funds this quarter, we did redeem a $5 million subordinated debenture which had a rate of one month LIBOR plus 2.48%.

Going forward, we expect the margin to be positively impacted by loan growth in the fourth quarter and our pipeline is strong, as Russ mentioned, and we will continue to actively manage the margin with additional security purchases in the fourth quarter and management of deposit rates. And we expect that these factors will help to minimize the impact of the lower market rate on repricing loans and securities.

From a capital standpoint, we continue to be very well capitalized with a total risk based capital ratio of 14.0%, which is up from 13.9% in the prior quarter, keeping us well above industry requirements.

With that, I'd like to turn it back over to Russ.

Thank you Chris. As I mentioned in the beginning, we are confident in our ability to deliver very positive annual results. And following, I will give you a snapshot of what we see in each of our markets.

In San Francisco, our loan pipeline is very strong, which has us optimistic about future loan growth and year-end results. After five years in this market, we have a solid team with great momentum and expect significant growth in the fourth quarter.

In Napa, loans increased $13.5 million or 22.2% in the third quarter of 2012, a very positive sign for that market. Lending to the wine industry is also gaining the momentum and we have added several experienced lenders to help build business in the Napa region.

In Marin County, according to most recent FDIC deposit market share report as of June 30, we grew our market share from 10.1% to 10.8%. In addition, we also grew our business core deposits market share to over 25%, which is the number one in the market. As in all of our markets, we recently completed a reorganization to improve relationship management, import more senior people closer to the customers, positioning ourselves for increased loan growth in this core market of the Bank.

In Sonoma County, I'd like to highlight Petaluma where we have had offices for over 10 years and where our overall deposit share is now 6%, up from 5% just a year ago. Business core deposits are estimated to be 16% of the market, up from 13% a year ago, as our team continues to focus on businesses in southern Sonoma.

In addition I'd also like to mention the town of Sonoma. We have, now have as of 9-30, we had deposits of $20.4 million, with only one year in the market and continue to successfully build relationships with business owners and community organizations that will help generate positive results as we move forward.

Overall, Bank of Marin fundamentals are solid and our credit quality remains healthy, despite the large charge-off this quarter. The loan pipeline is very strong and we anticipate it will result in positive loan growth year-over-year by the end of 2012.

Thank you for your time this morning. We now open it up to questions.

(Operator Instructions). Jeff Rulis, Davidson Company.

Good morning.

Good morning.

Good morning.

Russ, just a couple of comments on the credit side of things. First, I guess any -- are there other loans with similar characteristics to the one that you took the charge-off in size or similar characteristics, or as you said was somewhat unique?

We have a lot of commercial real estate, as you know. This one was, when we had -- we had talked about in previous calls that we had the loan that was nonperforming, but we anticipated that we would get repaid in full. Unfortunately, we had -- we got an appraisal on that, and in August, the value dropped significantly from where we saw it. Only last February this particular loan had gotten an offer significantly above the loan value. And the loaner turned it down. For whatever reason, it all fell apart. And then we got an appraisal and the appraisal came in significantly lower, so we had to take the charge.

Do I think there are others out there? I don't think so. We manage our portfolio pretty closely. This is really the first large charge-off we've had in commercial real estate in our history. Up until this time, our charge-offs totaled $200,000, $300,000 in total for the commercial real estate portfolio. So obviously this is -- we think it's an aberration because it's the first and we certainly hope the only one.

Where was this -- where was the property geographically?

It's in the Bay area.

Okay. And just trying to understand inflows/outflows to the nonperforming loans number, the two large loans added $7.2 million, but net quarter-to-quarter it was only up around $5 million. So I guess, excluding those, you had some reductions in nonperforming loans. Is that --

Well there was the charge-offs --

Sure, okay.

-- the $2.2 million.

Yes, $2.2 million, that's the difference (multiple speakers)

Got you.

in these two, one of them we have -- we expect a repayment of $3 million, and we expect it sometime in November.

Got you, okay. And then Chris, just a couple of questions on the margin. Any other -- could you maybe talk about a little more specific impact to margin, given the sub-debt redemption? Anything you could characterize? You mentioned a positive impact, but I'm trying to get my hands around that.

In terms of that redemption, I mentioned really only to show you that we are actively managing the margin down to the basis point really where we can. There was -- it's not a significant impact, probably just a basis point or so, maybe a couple of basis points going forward. But we have the excess liquidity. There was really no reason to hold it.

We are also been very active in managing the deposit rates. First week of October, we did look through the deposit rates and saw that there was some opportunity to reduce rates there. So we will see almost a full quarter -- basically a full quarter impact of that in the fourth quarter. I think annualized that's going to be around $300,000 in net interest expense that we will save. So, it was really just to show you that we are very actively managing the margin.

Are there more redemptions available, or do you just continue to be sort of managing that as they come up?

Yes, there's really only one other fixed-rate long-term obligation that we have. But right now, we probably are not going to pay that one off early just because the prepayment penalty is so significant.

The only thing I would add is that we're talking about margin, and I think that it's significant to note that obviously our margins have been compressed, as all banks are. We continue to have a margin that is significantly higher than the market. But we are working -- we are working really hard. We manage our relationships very closely, and the fact of life is that margins are going to be compressed all across the industry. The same is happening. Yes, we are repricing some loans in -- both proactively and sometimes in response to competition. But we are trying to make sure we take care of our clients and keep our relationships. So, we basically have a philosophy that we shouldn't lose good relationships due to pricing. So, we are being pretty active in managing and working with our clients on the margin. There's not a lot of places to go. The deposit rates are getting close to the bottom, close to zero. So as with every bank probably now, you can only -- there's only one side that's getting impacted, and that's the loan side.

Got you. Okay. Thank you.

Tim Coffey, FIG Partners.

Good morning folks. If we could stick on the NIM question for a little bit more, the new loans that you're bringing on the books right now, where is pricing in relation to the average loan yield from the third quarter?

What are the new loans coming on at?

The new loans are probably -- on average they're probably coming in at, on average, in the mid 4s% is my guess. That's it. But when you look at her relationship, it's not just -- typically it's not just the loan. It's deposits too. So in total, our margin should be in the 4.5% to 5% range because of not only the loan volume -- loan margin, but also the deposits that we get. But the reality of life these days is that they are out there, banks out there offering sub 4% rates for 15-year deals. So it's a pretty competitive commercial real estate.

No doubt at all. Given that your deposit growth has exceeded your loan growth on average per quarter the last couple of quarters, have you any thoughts of slowing down the deposit growth?

You know what? I always have gotten that question before. But we are not being aggressive at all in terms of rates, so most of the deposit growth is in demand deposits. It's relationship-based, and you have to take a little bit longer-term approach to this. The value of the franchise is the deposit base, is the core deposit base. And even in this market when you're looking at rates that are so low, ultimately we believe when rates rise, and I don't say -- I say when, not if -- but when they rise, our organization is going to be in an excellent position. At 32% demand deposits, we will certainly season slide in that down. But historically, we've always had 25% or greater on the demand deposits. And when rates rise, that will serve us very well, particularly with our fixed-rate loan portfolio. And I think that banks that have a more volatile demand deposit base, which isn't relationship-based, are going to see a lot more runoff and their margins are going to get hit because they're putting these long-term fixed-rate loans on. So we are not trying to slow that up, and we just -- it's part of being consistent in the market. You've got to always be working on building both sides of the business.

What about the balance of cash and equivalency you have on the balance sheet right now? Any plans to reduce that balance and invest them?

Yes, I mentioned we have a very strong loan pipeline, so there is that growth that we hope to see in the fourth quarter. And then we do plan to increase our securities purchases in the fourth quarter.

And Russ, your comments about the loan originations in the quarter. What was that number again?

For the third quarter were -- 30 point -- let's see, where is it? Yes, $31.8 million in the third quarter, and $56.4 million for the nine months. So, we had good loan origination during the third quarter. We just had a continuation of some of these payoffs. But we look forward -- I can tell you we are looking forward, as we look forward to the fourth quarter, we are projecting loan payoffs and projecting loan fundings, and fundings aren't fundings until the money goes out the door. But with a fairly high degree of probability, we see significant loan growth from where we are today by the end of the quarter, because even with the -- there's definitely some payouts which are anticipated, we know about, whether it's construction projects that are completed or otherwise, but our loan fundings will far exceed the loan payoffs in the fourth quarter.

Okay. One final question from me. What was your performing TDR totals?

Performing TDR, let's see -- I think that's right in the press release actually. In the footnote on Page 4 -- $15.7 million, Footnote 2 on Page 4.

I'll look at it. Thank you.

Brian Zabora, Stifel Nicolaus.

Good morning. A question on -- any sense on what classified loans did in the quarter?

We had -- I have some information on substandard, and we did have a reduction on substandard loans of $12.9 million. The rest of the information we are pulling altogether will be in the 10-Q. We disclose that in a couple of weeks, we will have our 10-Q issued so there will be more information. But our substandards need to improve.

Okay. And then on the provision expense, it sounded like the entire $2.1 million was related to the one credit. How do you look at the provision going forward with the expectation of loan growth and proving and where your reserve to loans are around about 1.3% of total loans?

I think the 1.3% probably won't change much. We will have some (technical difficulty) provision if we have the loan growth that we anticipate for the quarter. As far as potential charge-offs as of this point, it's hard -- it's always hard to project that. But the credit quality looks very good right now.

Thank you for taking my questions.

Jacque Chimera, KBW.

Good morning everyone. I had a question about the appraisal that you received. Was there anything different in the method that the appraiser used? Looking at how the method is used in other appraisals that you receive versus what the appraiser did with this particular loan or property.

No, appraisers are pretty conservative these days. They are planning cap rates which are pretty conservative, and so you can't necessarily argue with it. We think that there is -- we think the property is worth more than the appraised value. I guess. And we'll find out when we finalize -- when we foreclose and sell it. But we think that it was pretty conservative.

Okay. And so assuming that it is conservative, and that an offer were come in on the property that's similar to its value, say, last February, the offer that it received, that would then potentially result in a gain on sale once that foreclosure is moved out to (multiple speakers)?

Yes, if we got a valley that was above the appraised value, it would. Yes.

Yes, okay. And then with the loan yields within the quarter, were there any interest reversals included in that? (multiple speakers) NPAs?

Yes.

Do you know about how much?

We had interest reversals of -- it was about 3 basis points of the margin versus 1 basis point last quarter.

Okay. Great. That was all I had. Thank you.

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

Good morning Russ and Chris. So did you guys see any inflows of C&I commitments this quarter?

During the third quarter? I don't have detail on the new relationships in front of me. I will say that in the fourth quarter I am looking at the pipeline right here. And there's a number of C&I relationships that are included. The problem of C&I relationships -- the good news about C&I, it's full relationship. The bad news is you can never get very clear about how much the fundings are going to be, because it's working capital type facilities. So -- but we do have -- as I look down the list, there are a number of C&I relationships in the fourth quarter that we anticipate we will fund.

And Chris, do you happen to have the utilization date on your C&I for the quarter relative to last quarter?

Let's see here. About 38%. Is that right?

38%?

Just on lines of credit, yes, 38%

(inaudible) measurable, whatever you guys keep track of typically.

Pardon me?

Whatever the number is -- whatever that ratio is you guys kind of monitor, I'm sure you guys have a benchmark that you follow.

That's a bit down from historical.

Yes.

It was in the 40s% before. So I think utilization downwards is not -- I don't know what that's a sign of that business is down, or that people have a lot more cash than they did historically. But utilization is a bit lower than it's been. And that's the challenge of C&I business. You may have a lot of new relationships, but your utilization in your lines may be 30% or 40%. Now, that's not going to translate into the kind of earnings that you might get. You know, the commercial real estate loan is funded 100%.

yes, And then last question -- go ahead.

I'm just going to say, but the positive point about them is that building full relationships and you get deposits, and so ultimately it's the kind of the relationships you want to build the Bank on.

I understand that, you bet. Last question. The C&I credit that you guys talked about that you're having some problems with, what kind of collateral is behind that? What is the nature of that collateral?

We have -- are you talking about the one that's in (multiple speakers)

(multiple speakers) nonaccrual.

No, that's not the $3 million, $4.2 million. $4.2 million.

Chris Cook; You're right.

Yes, it's collateralized by a number of single-family residences primarily in Marin County. And those are being liquidated kind of one by one. So (multiple speakers)

So when one is (multiple speakers) another one is going to get prepared and put on the market Sort of thing?

Right. And they are in similar neighborhoods. I don't want put them all in the market at the same time. So we are having -- at least most of them. But we are fully confident that we have enough collateral to fully cover that loan. And that will be (multiple speakers)

(multiple speakers)

Go ahead.

Was it a builder, or -- how does somebody own --

(multiple speakers)

-- properties that are classified as C&I, and these -- was this secondary collateral I guess to a C&I line?

Yes.

Okay. And so from a timing standpoint, by the end of next summer sales season or something, are you thinking that's probably when a lot of this stuff is going to be cleared out?

I think that by sometime next year in summer that the whole thing will be gone.

Got it. Thanks, I appreciate it.

It will take six to nine months. Sure, no problem.

[Joe Stephens], [Stephens] Capital.

Hi Russ, hi Chris. I joined unfortunately a couple of minutes late, but let me ask you. Obviously you talked about the increase in the NPAs, so we understand that. But correspondingly, you did have a pretty sharp decrease in the 30 to 89s. Was that more -- was that sort of a shift out of one a little bit into the other? Because you had a pretty --

Yes, directly correlated.

Then the other thing is just confirm you did had also a pretty sharp reduction in your TDRs, about $10 million -- but that wouldn't have anything to do with it I'm assuming then. That's just a normal reduction then on the TDR side.

We did have $4 million pay off in the construction TDR. But that was about the decrease.

Okay. And then the second thing, Chris, it's good to hear you guys talking about growth coming on this fourth quarter. But not that I tried to hang on every word, but unfortunately I do. You said, Russ, I think you said you expect you said significant growth in the fourth quarter. Can you hang just a little bit more as far as $10 million is not significant, but you guys said the word "significant" several times. Is that $30 million, $40 million, $50 million of growth we could see in the fourth quarter? And without trying to paint you into a corner, can you put a little bit more information out there for us?

Never I said, I know you're going to call me at the end of the quarter and see if it's the right number, right? Well, I'll tell you this. We anticipate that the loan totals at year-end, now they are down -- how much are they down?

$17 million.

Down $17 million. We will have positive loan growth year-to-year at 12-31.

Okay. You've got some good stuff coming.

So we've got some good stuff coming. It will be positive.

Then this is more of a global question. Is the reason you're getting this better loan growth in this fourth quarter, is it a little bit just of timing, or is it because the economy is improving slowly, or is it because you're taking more business from competitors? And I know you probably can't give a precise answer, but can you sort of give some color commentary on those three aspects? Then I'll quit asking questions.

Maybe it's because I'm all over the lenders these days.

Okay.

That's a joke. A lot of it is timing. We have a number of transactions in San Francisco in particular that are just taking a little longer to close than we had anticipated. And so then we had the payoffs, a lot of payouts which have come for a lot of different reasons, as I went through. Were you there when I went through all the detail of that?

I just joined right when you were finishing up.

Okay, well, we had a lot of loan payoffs, and so all of this is timing. We are pretty confident about this fourth quarter because these particular -- the number of deals that we have, and this is not just three or four -- it's a number of deals -- just have taken a little longer than we anticipated to close. But we are working hard to make sure we get them closed by year-end. It's kind of funny how year-end sometimes is the driver.

Don Worthington, Raymond James.

Good morning Russ and Chris. Just I guess one question. You've mentioned the lending to the wine industry. Just curious in terms of how that's going and what kind of a ramp up you're expecting, particularly with the new lenders added on there.

We have $10 million. So we right now are starting to track that information, and we do have about $10 million loaned out in the winery and wine related industry.

We have a bunch of deals that we've been talking to. We have a young man that we hired in (inaudible) Napa and Sonoma counties and his background is all wine related lending. And he is raising a number of different deals. We thought we had one deal that we are going to close, and the audit didn't go too well. So we didn't do that one. But we have a few others that we are working on, and I'm pretty confident that next year is going to be a real good year in the wine business because we now have the infrastructure in place and more importantly the people in place that know the business and can grow it.

Okay, great. Thank you.

We have no further questions at this time. Please continue with the presentation or any closing remarks.

Other questions? Okay. I would like to thank everyone for joining this morning. This concludes Bank of Marin's third-quarter earnings call. Please refer to our website for more information if you'd like to watch the webcast. Thank you for joining us this morning, and we will talk to you again next quarter for a discussion of the year-end results. Thank you very much. Bye.

Ladies and gentlemen, that does -- (technical difficulty)