Bank of Marin Bancorp (BMRC) 2012 Q4 法說會逐字稿

Good morning and thank you for joining us for Bank of Marin Bancorp's earnings call for the fourth quarter and year ended December 31, 2012. 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 January 22, 2013.

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 site 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 22, 2013, 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 Malin. Good morning. Welcome to the call. Let me start by saying that 2012 was the most profitable year in Bank of Marin's 23-year history. We reported record annual earnings of $17.8 million. In addition, we had significant loan growth in the fourth quarter of $60.2 million. This growth came mainly from our Marin and San Francisco markets. Deposits continued to grow at a healthy rate and contributed to our overall strong performance. As always, expense control continues to be a high priority and our efficiency ratio remained a solid 55% for the year.

Like most banks, we are feeling the effects of margin compression. Given the prolonged competitive rate environment we are operating in and will continue to operate in for the foreseeable future, we are making every effort to maintain our good relationships and not lose business due to price. We are competing well because of our strong relationship we have built with businesses in our markets. We have also taken positive steps to offset compression through an aggressive lending effort, a successful investment strategy and several new loan programs we are initiating in 2013. We will share more details during the call.

Now I'd like to walk you through a few highlights for the quarter. Net income was $4.7 million, an increase of 45.8% from the third quarter. Net loan growth was $60.2 million, our strongest quarter of the year. Overall loan growth in 2012 was driven by Marin, Napa, Santa Rosa and San Francisco markets, which continue to perform at a high level.

Our fundamentals continue to be strong. And we are committed to maintaining our same high-quality credit standards which we are doing consistently.

Nonperforming loans were down $1.6 million in the quarter to $17.7 million. There are three pieces driving most of this change. The first is a payoff of a $3 million construction loan that went into nonaccrual -- went on to nonaccrual status in the third quarter which we discussed on our last call. I said that we expected to pay it off in the fourth quarter, and it has.

Second, there was a $600,000 pay down by a commercial borrower as we work with them to liquidate collateral on multiple properties in an orderly fashion. These declines were partially offset by the addition of $3.1 million in commercial real estate loans related to the same borrower where loans are adequately secured. The property securing these loans will also be liquidated in an orderly fashion, and we expect full repayment. Accruing loans past due 30 to 90 days totaled $588,000, down significantly from $2.1 million at September 30 and $7.4 million a year ago.

Classified credits were $36.9 million, down from $42.6 million last quarter. For the year, deposits increased 4.2% or $50.3 million, reflecting a favorable shift in overall deposit mix, including planned runoff of higher-cost nonrelationship deposit accounts. At year-end, demand deposits comprised 31.1% of our overall deposits. The Bank's loan-to-deposit ratio also reached 86%, a very healthy level that reflects the improved utilization of our funding sources.

Here's a snapshot of what is happening by market. In Marin County, we experienced robust loan growth in the quarter which we believe says a lot about the relationships we have built. We continue to stay focused on our core market, Marin, as we have expanded and will continue to do so, especially during this prolonged low rate environment.

In Marin, we also moved our Strawberry branch in Mill Valley to Tiburon. In addition to expanding geographically to a new location, we also downsized the branch space considerably to help drive operational efficiency.

In San Francisco, our team has been aggressive -- very aggressive building business and their efforts are paying off. (technical difficulty) continues to be very strong and healthy, which has us optimistic about the year ahead.

In Napa, loans are up 29.8%, or $16.8 million for the year, a very positive sign in that market. Lending to the (technical difficulty) gained momentum. We've added several experienced lenders to (technical difficulty) business. Our Sonoma office in downtown Sonoma continues to exceed expectations for deposit growth. We're also pleased to announce a dividend this quarter of $0.18 a share. This is the 31st consecutive quarter we have paid a cash dividend.

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

Thank you Russ.

Net interest income totaled $15.8 million in the fourth quarter compared to $14.9 million in the prior quarter. And the tax equivalent net interest margin was 4.62%, an increase from 4.44% for the prior quarter. The table on Page 3 of the release has a fair amount of detail which will help to reconcile the margin change from the third to the fourth quarter.

The current quarter did include a $1.022 million gain on the payoff of a credit impaired loan that was purchased at a discount. And this gain increased the net interest margin by 29 basis points in the fourth quarter.

We are excited about the level of loan growth that we saw at the end of the year. The timing of the growth was weighted towards the latter part of the fourth quarter, so the full impact of the growth will be reflected in 2013.

We had a conscious effort to deploy excess liquidity, and we grew the investment portfolio by $52.1 million in the fourth quarter and $98.6 million for the year. Our objective was to maximize yield, so primarily we purchased municipal and corporate bonds in the fourth quarter. Our goal was to keep the average maturity of the portfolio relatively constant, so as not to extend the total average life.

We also actively managed the margin by lowering deposit rates at the beginning of October. Going forward, we expect that our margin will be positively impacted by loan growth and our pipeline is strong, which helps to offset the compression from asset repricing and rate concessions. We do not expect to continue the security purchasing at the level we saw last quarter as we have effectively utilized the majority of our excess cash. We expect that loan growth will be funded by deposit growth and security runoff.

From a capital standpoint, we continue to be very well capitalized with a total risk based capital ratio of 13.7%. This ratio is down slightly from 14.0% in the prior quarter due to the very robust loan growth.

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

Thank you Chris. Our loan pipeline is very strong and deposits, primarily non-interest-bearing deposits, are growing at a steady rate. We are optimistic about the opportunities for continued loan and deposit growth in 2013 supported by efforts to expand home equity lines of credit and reinstate our tenant and common and floating home loan programs. While we put several of these programs on hold during the recession, we believe they now represent opportunities for new loan volume with good quality credits. The additional loan volume from these programs will also be a buffer to replace any loan runoff during the year. And continued growth of our commercial loan portfolio will help to counteract margin compression.

Overall, Bank of Marin's fundamentals are strong and our credit quality remains very solid. Given the aggressive lending environment we are operating in, we are relentless about maintaining our high standards of credit quality. I want to thank you all for your time this morning and we'll now open it up to answer any of your questions.

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

Good morning. Russ, to follow up on that sort of loan pipeline discussion, you also said in the release sort of predictability is difficult, but you sounded rather bullish. I think in the Q3 call, you were pretty bullish on your future loan growth. So on a relative basis, it seems like a lot of this production you're expecting to continue in 2013.

On a relative basis, yes. I think we do have a strong pipeline but, as you know, it's difficult to predict long-term how that's going to go. We had great loan growth in the fourth quarter, and we expect loan growth will continue, but sometimes things get delayed. Even the loan growth we had, we had things that fell over to the first quarter. So it's always difficult to predict exactly, but we feel pretty good about the loan volume and the pipeline that we have in place right now.

Do you sense any change in your customers on let's call it C&I line utilization, sort of post-election and for now post fiscal cliff?

I don't. We haven't seen anything. Utilization remains under 50% of C&I lines of credit. I don't see that changing much. I haven't seen anything that would lead me to believe that it's going to dramatically increase.

Got it. And then a question on the cost side of things, operating expenses up I guess just a modest 1% year-over-year. Any reason to believe that will change? You've mentioned a couple sort of things you're doing with the branch account, but in terms of the coming year, any large expenditures, or is that run rate pretty sustainable?

I think the realities of being in this business today make it more expensive to operate a bank. And we've had to hire people to add to our compliance area. I don't expect that decline in the future. I think that will increase. Accounting compliance, the reporting requirements of a bank today are dramatically higher than they were a few years ago. And so I don't think that's going to change the cost side.

Also, we're going to be bringing in a CIO this year. We said that -- I think we said that a year ago too. But we've gone -- we've been talking to a lot of people. We are getting very close to bringing on a CIO. That's going to cost some dollars. And we do want to continue to build our line business and bring in a lender or two to help on that side. But revenue-producing people pay for themselves many times over.

So on the bigger side, it's kind of the operational administrative side that costs dollars, and there's going to be some costs there. I think that you would find that at just about any bank today.

Got you. Then maybe one for Chris. On the margin, I appreciate the breakout of the accretion and gains on margins. I guess any -- and then you even sort of alluded to the core margin movement on the benefit of loan growth. I guess I'm just trying to gauge the -- any rough color on how kind of the non-core -- how that plays out in the coming year. Are you expecting the benefit to fade somewhat on the accretion and gains as we go forward?

Yes, definitely. We probably will see 10 basis points on the accretion for the full year. But in a way, it comes to things like the nonrecurring things you mentioned like the gain on sale. We don't necessarily anticipate or expect that that will recur, although it is possible. But it's not something we can predict.

Okay. And did I read you right? On the core margin, you sounded optimistic that, with sustained loan growth, you could actually grow margins, or what is the correct read on that?

I think that, in terms of the loan growth, we are going to see good impact from all these loans that we made right at the end of 2012. And that's going to have a positive impact on next year's margin, probably in the neighborhood of 15 basis points or something if you compare kind of the average for third -- for the fourth quarter and then what we had at the end of the year. But in terms of loan growth, there's definitely going to be some offset for repricing and rate concession.

In terms of the margin, we may see some compression on the margin. But we hope with the volume to increase net interest income.

The only thing I would add there is we are being pretty aggressive with our customer base to make sure we don't lose, as I mentioned earlier, to lose -- we don't want to lose customers for price. And not that we are going to be price -- the low price bank, but we are protecting our territory. And so we have been out there working really hard to build loan volume and we will continue to do that this year because margin compression is not going away. I don't think there's any bank in the country that could say that margins are going to grow this year. It's a fact of life, and so the reality is one has to deal with that, and the way to deal with it is to increase volume. And we are working really hard to increase volumes in the Bank.

Thanks for the comments. That's it.

Brian Sapporo, Stifel Nicolaus.

Good morning. A question on salaries. Can you -- what you might be looking at for 2013 but could you provide some details on what drove the decline in salary balance -- salary expenses in the fourth quarter?

In the fourth quarter the decline was almost all related to a reversal of bonus -- incentive bonus. So that would be a one-time reversal.

Okay. And then just your thoughts on capital deployment. You've got a strong TC ratio. Any thoughts on the potential for M&A and if maybe that's unclear or maybe that doesn't materialize, thoughts on a buyback or dividends?

I'll talk about the M&A market. I think -- I probably said the same thing last year, but you will see some M&A at smaller banks. I just believe that.

The question is -- it continues to be the reality of what banks are worth and what they think they are worth. And we are going to maintain our discipline on that; we don't want to overpay. I think every bank that you talk after they bought another bank, if they say what's the one thing you do different, they would always say we paid too much. We don't want to pay too much. That may -- if that means we don't buy someone, so be it, because we're going to make sure we maintain our discipline.

That being said, we are actively out there looking at and talking to banks, and if something comes around that would be great because I think it can either add to our existing footprint or be contiguous to. And that's where we are looking, and that's what we've said all along. So that would be the best, in my mind, the best utilization of capital.

As far as a buyback or increased dividend, there's nothing planned right now. We are keeping our capital ratios high because of the risk of having too much capital, if an update opportunity presents itself, we want to be prepared.

Thank you for taking my questions.

Tim Coffey, FIG Partners.

Good morning Russ. Good morning Chris. As we talked about reducing the liquidity at the Company -- or the excess liquidity on the balance sheet, do you have any plans to pay off the broker deposits in full near-term?

That's something we are considering actually.

Okay. And then looking at -- I'm sorry?

You're talking about the brokered, (inaudible) brokered they are really the CDAR deposits. The CDAR deposits we have which are listed as brokered are with our customers. We don't know out seeking brokered money through that program. It's really an alternative to give customers who want or like the fact that we have 100% FDIC insurance. But that's been running down. We haven't been aggressive about that.

And what about some of the average balances of cash and equivalents? That seems to still be a little bit high. Do you have any interest in running that down, making it a smaller piece of earning assets?

The average is pretty high. But if you look at period end, we really have pretty much utilized the excess cash. We do need to maintain some cash on the balance sheet. So I think that we have run down what we can.

Okay. And you talked a little bit about looking at loans in the HELOC area or the TIC. I'm wondering, what are some of the yields on those?

In the TICs, you still get a premium over what would be an equivalent residential mortgage, because there are very few banks in that market. It's all San Francisco, and the market there is very strong.

The interesting thing about TIC is one of the reasons we kind of backed away from that is that the recession hit us. We weren't sure what the result and what the performance of that portfolio would be. The fact of the matter is the performance has been stellar and you get a little bit of a premium. Now we are seeing other banks come in. We're seeing some refinancing going in, so that tells me there's liquidity in that market, which is a good thing. So we are anticipating reentering that market sometime this part of -- the first part of the year. So in yield, I can't speak to it at this point now.

On the home equity loans, we typically put floors on that. And it's typically a price, something 1.5% or something like that, 1% to 1.5% with a floor. So it would probably be in the 4% to 4.5% range for the home-equity lines. The other loan area where we are interested in restarting our program is called -- we refer to them as [float] loans, but it's loans for floating homes in Sausalito. And those houseboats out in Sausalito, we've historically been one of the few lenders that have lent to those. We've had great success. Performance has been terrific and the yields are much higher than residential mortgages. But they look like residential mortgages. So, that would be probably more in the 5% range is where those would come in. And we are not going to get huge volumes from those three areas, but the good news about those three areas is they could probably replace a loan run off we're going to see out of our portfolio. So if you just use that to kind of keep ourselves at zero, then the rest of the loan volume, whether it's C&I or commercial real estate, can provide the growth for our portfolio during 2013.

Sure. I think you kind of talked about runoff or pay downs in the loan portfolio. Are you expecting a big bump in the first six months this year or are you talking more about kind of over the course of the year you're anticipating pay downs?

We just have them. There's normal amortization of loans. There's occasionally property sell. We don't anticipate a big bump; it just happens. Properties that we finance get sold. Hopefully, we don't have a lot of refinancing out of the Bank, but things happen and we have prepayments and repayments. So we look at history and there's always a certain percentage of that, so we are trying to replace that.

All right. Thanks, those are my questions.

Jackie Chimera, KBW.

Hi everyone. Good morning. One quick housekeeping item. Was there any OREO at the end of the quarter?

No.

Didn't think so. And then secondly, and this may just be my interpretation, but in the past, I feel like you've centered on the San Francisco market in particular as an area of growth, and then it seems like Marin is starting to pick up as well. Could you talk about your different markets and how you're looking at the pipeline and where you see growth just generally speaking in 2013?

Sure. Marin has been remarkably strong. We did a good percentage of the volume which came from Marin, and that was because we decided to compete in terms of price with our customers, and so we've gotten a lot of growth there, which is somewhat unexpected. As we did our own budgeting, we kind anticipated Marin, given the fact that we have 11% market share in Marin, that it's going to be relatively slow growth because of how big of an impact we have. That being said, what's happened is we've really worked on the relationships, and as opportunities have come up, we've gotten our share or better in Marin.

San Francisco continues to be strong. We have a really good pipeline. We actually thought there was going to be more in San Francisco at the end of the year, but some of the things they're working on got pushed over to first quarter. And we really think that San Francisco will be maybe our top performer in terms of volume for the first quarter of this year.

Napa has -- the thing I really said about Napa when we bought that bank there, there's two parts to that acquisition. There's, number one, the financial gains that we got from that, which have turned out to be very, very strong. But that only works if you continue to -- if you start building that market. And that -- because otherwise then you're going to start seeing accretion fall off as we've seen and it's going to be a drag on earnings. So what's been great about Napa is that we have in place now a really strong team and we are seeing loan growth. And that is very, very encouraging for the future. So that's probably the three strongest markets. Santa Rosa has been a bit slower, but still has shown some solid growth in 2012.

And is most of the growth that you're seeing in Napa, is that driven by the wine lending team or is it more across the board?

It's kind of across the board but there are -- we are showing -- we are actually having some good success with wineries. And that's been -- and wine-related business. And so it's not just the winery. It's some of those businesses that feed the wine business.

I know you've talked about mobile bottling and that in the past. Okay, great. That's wonderful color.

We have some new wineries that we brought on during the quarter, which is really encouraging.

Okay, so we could see something where, as the team continues to gain traction, you could get more and more wineries and just broaden the scope of the vendors that service those.

Yes. And we are looking -- one of the questions was about increased cost. But we are looking to add another wine lender, a person who has got background in the wine business, to our team during this first part of the year.

And has a board member been as much of a help as you had thought that would be?

Michaela has been very good in terms of helping us in the industry understand the industry, direct us to things. I wouldn't say there are a lot of wineries we could point to that says she has direct involvement in their growth, but I think she's been a big help in terms of educating, helping educate the Board, helping educate the Bank in terms of the opportunities up there. And she's been a good addition to the organization, and will be probably more in the future than even up to this point.

Great, thanks. I appreciate all the color.

Tim O'Brien, Sandler O'Neill and Partners.

Good morning Russ and Chris. Just to follow up on Brian's question, clarification, you said 15 basis points of loans improvement, or loan yield improvement relative to -- I didn't catch that. Could you clarify what you were saying there?

Sure. If you just look at the average loans compared to what we had at period end and do the math, you can calculate that there would be roughly 15 or so basis points improvement just to that loan growth that all came in at the end of the year impact to 2013.

So 15 basis points of improvement in the interest loan interest collected?

Right. Because they would be there the full year versus two weeks, let's say, of the year.

Okay, got it. I understand how the end of period versus the average balance stuff kind of works out. But approaching it a different way, the production you guys put on this quarter, first of all, was it -- what was the mix or can you characterize how much was to new clients versus existing clients?

I think it was about 40%.

Yes, they're around 40% new, 60% existing. I will say that a big percentage of that was in December, a big percentage. Actually there people here working between Christmas and New Year's who were working on deals. So we had a very, very strong finish and the full impact -- there really was no impact other than the totals. It really didn't impact our fourth-quarter results. You will see the impact in the first quarter.

It was quite a remarkable growth number you put up there. As far as -- I can't imagine any of that was purchased. I can only think that all of that was originated by Bank of Marin, right?

That's correct. We don't do purchase loans (multiple speakers)

Yes, I figured that.

That's not part of our deal.

Yes, it makes sense. And I mean, it's such a good number that other banks have resorted to that, but not you guys.

And then another question. As far as yields were concerned or concessions on pricing that you alluded to a couple of times in this call, can you characterize what market rates are like out there now, and what you guys were able to put on the books in order -- at decent prices? What kind of pricing were you able to afford to make those loans at?

Tim, there's a lot of factors that go into pricing a loan. And it's (multiple speakers) borrow a property if you are doing financing, loan-to-value, so there's a big range from 4% to 5% in terms of -- and there's a range from 5 to 10 years that's typical in the financings that we do. And occasionally, you'll do longer. Occasionally -- we didn't do too much below 4% but it kind of depends. You might do lower if it's a shorter term. There are so many factors.

Sure.

But you know, the important point is that we have been working with our clients. And the last thing we want is our good clients that we've banked for many years to say gee, I -- this is such an unusual environment right now because in the past you've had, when prices -- when rates were higher, there is some flexibility in terms of our customer base in terms of pricing because we could work with our own cost of funds and reduce prices and all. But cost of funds basically are at zero. And prices have gotten to where everybody is offering the same types of -- the same prices. So you have to compete or you lose customers.

So, we have been pretty aggressive. We are very confident about our funding sources and the fact that we have such a strong core deposit base that we can do this type of financing and protect our customer base. So, that's what goes into it, and I think if you don't do that, you end up seeing runoff and loan volumes shrink.

What was the largest -- do you recall what the largest loan was that you put on the books this quarter?

I think it was $10.8 million.

Was -- can you characterize -- was it simply that you guys showed a greater willingness to be more aggressive competing this quarter that prompted a lot of existing and new clients to come over, or are there some other factors going on in the market such as was there an increase in property purchases and such this quarter? Is this -- is all the business you generated this quarter in part reflective of something happening in the real estate economy and the real estate market that you saw this quarter that's different from past quarters?

No, I think that our willingness to adjust in the past has been -- we viewed the pricing as aberration from -- kind of aberrations from different organizations that were out there. The reality was everybody was doing the same. You've got to compete. And so we don't like to think of ourselves as a price shop. But our customers are coming to us and saying we're going to do this or this, we're going to buy this or we're going to refinance this property, we want to stay with you. But these three organizations are offering this price. And as much as you hate to be in that kind of a situation, that's the market right now. And so we have been pretty aggressive with our customer base in terms of supporting them, and you know, we've done a little bit bigger deals than we have done in the past. And I think some of our customers have said gee, maybe you can't do a deal of more than $5 million. We've done a couple that have been a little bit bigger.

Now, loan to values are very strong. There's a lot of liquidity from our customer, and so there's lots of factors that go into why we would do something. But we have taken the stance that we want to build loan volume, not give up credit quality, and stay competitive in the market.

I think it's important to note, too, but we did not undercut other banks in pricing to get these loans that we are actually at or in most cases slightly above.

That makes sense, given who you are. And then last question, Russ, can you characterize -- was there any concentration by property type of the production that you guys did this quarter?

It's really all over the place. (multiple speakers)

(multiple speakers) industrial and office, etc.

It's an interesting mix. There's across the board. It wasn't just industrial. It wasn't just office building. It wasn't just multi-family stuff. It was kind of everywhere. And so we felt good about that too because it wasn't just one product type.

Yes, I'm looking at (multiple speakers)

One last question, Chris, what was the rated average yield on the securities that you guys added this quarter? Do you have something in the ballpark of what that was?

Sure. It was about 1.6%. (multiple speakers) the maturity about 3.7 years.

Thanks very much you guys. Nice quarter.

There appears to be no further questions at this time.

Actually, I guess there was a question from the webcast. So I'll go ahead and read that and then I'll answer it. The question that came in from the webcast was West America is very vocal about the overly competitive lending environment, and is allowing their loan book to shrink given what they consider to be less than appropriate returns. Please elaborate why BMRC views the lending environment differently.

We kind of just talked about that. It's because we don't want our loan volume to shrink, we don't want customers to seek financing elsewhere because of this environment. And we are supporting our customer base, and we can do it because we have such a strong core deposit base as I've talked about. So we are supporting our customers. We're being aggressive about out there making sure we are taking care of their needs. And that's what you have to do in this environment in our opinion. Okay.

One thing -- and I would make one more comment. One thing that didn't come up today is where we are with the TAG program. In our view on TAG was that its going away at the end of the year is a good thing. We are returning to pre-2007 times when FDIC insurance was $250,000, and we think that's good because what TAG did is it leveled the playing field for banks that weren't as financially sound as we are, and we worked very hard to get where we are. And our customers support us and are comfortable with our safety and soundness. In fact, we reached out to most of the customers who were going to be affected by TAG when it was clear it was going away. And basically the reaction was no problem.

The only customers who actually have to think about what they do is some of the nonprofits have policies about insurance on their deposits because they're trying to protect them. But we can work with them on that and put things in CDARs or something like that. So I don't view TAG going away as having any impact on us at all. I know that some banks, or some smaller banks have anticipated that TAG going away meant that banks -- that customers were going to move their money to the big banks, to the too big to fail banks. But that goes contrary to why people are banking with Bank of Marin. So, I don't believe that's going to have really any mark -- any change at all on our numbers.

So with that, that concludes Bank of Marin Bancorp's third-quarter earnings call. Please refer to our website for more information if you'd want to watch the webcast. Thank you for joining us this morning and we will talk to you again next quarter for a discussion of our year-end -- for a discussion of our first-quarter results. Thank you.