Bank of Marin Bancorp (BMRC) 2013 Q1 法說會逐字稿

Thank you for joining us for Bank of Marin Bancorp's earnings call for the quarter ended March 31, 2013. My name is Malin Clark. 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 April 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 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, April 22, 2013, 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 would like to turn the call over to Russ Colombo.

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

We started off the year with a good quarter, delivering solid results, given the environment. Our first-quarter earnings of $4.9 million were up from the fourth quarter, and we continue to perform well in what is a highly competitive market.

In particular, I'd like to point out our continued strong and improving credit quality and the decrease in nonaccrual loans attributed to our proactive portfolio management. We are managing the business strategically for long-term sustainability in a challenging environment with continued margin compression for the industry. We are also making every effort to retain our existing relationships and build new ones while maintaining high credit standards.

Now, I'd like to walk you through a few highlights for the quarter. We funded $28.6 million in new loans in the quarter driven mainly by commercial loans and commercial real estate financing in Marin, and also by Santa Rosa where loan balances are 24% in the first quarter compared to year-end with a significant portion attributable to our focus on the wine industry. The new loans funded were offset by $25.3 million in loan payoffs in a combination of greater loans be managed out, completed construction projects, properties being sold off and paid in full, and SBA bridge financing.

Approximately $6 million of the payoffs were due to price-driven competition. Another $3 million were due to decreased usage of revolving lines and pay downs on term loans. Total loans remained flat at $1.1 billion from the prior quarter.

Our underwriting fundamentals continue to be strong and we are committed to maintaining our same high-quality credit standards and proactive portfolio management in this competitive environment. Nonperforming loans totaled $15.3 million or 1.43% of our loan portfolio at March 31, compared to 17.7% or 1.64% at 12-31. The decrease in nonperforming loans from the prior quarter primarily relates to a commercial loan that is being paid down gradually as the borrower liquidates collateral and pay downs on two commercial real estate loans.

Our ratio of cost side loans to Tier 1 capital plus the allowance for loan loss reserve has improved from 23% at 12-31 to 19% at March 31. At its peak, in September of 2010, this ratio was 53%.

We've had an increase in the first quarter in accruing loans 30 to 89 days past due to $8.1 million as compared to $588,000 at year-end. This primarily relates to four loans totaling $7.1 million that are in the process of renewal and/or renegotiation. As a result of the release of specific reserves due to improved collateral values related to the receipt of updated appraisals, net recoveries, and a lower level of nonperforming loans, $230,000 of the provision for loan losses were reversed in the first quarter.

In the quarter, deposits were down 1.7% to $1.2 billion as compared to $1.3 billion at year-end. This was anticipated because of our continued strategy of decreasing interest rates while keeping relationship deposits. Non-interest-bearing deposits increased to 39.5% of total deposits as compared to 31.1% in the prior quarter. This is primarily due to the reclassification of an interest-bearing consumer product as interest was discontinued on the product. Our cost of deposits in the first quarter was 12 basis points with our total cost of funds at 17 basis points.

We are pleased -- we are also pleased to announce another dividend this quarter at a $0.10 per share. This is the 32nd consecutive quarter where we have paid a cash dividend.

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

Thank you Russ. Net interest income totaled $14.8 million in the fourth quarter compared to $15.8 million in the prior quarter, and the tax equivalent net interest margin was 4.48% compared to 4.62% in the prior quarter.

The table on Page 2 of the release has a fair amount of detail in it, which will help reconcile the margin change from the fourth quarter of 2012 to the current quarter. And you can see the decrease primarily relates to a lower level of gains on payoffs of purchased credit impaired loans, and a lower level of accretion on these loans.

In addition to the information on the table, the margins positively benefited from higher average loan balances due to the growth that we saw late in the fourth quarter, which displaced excess cash. This benefit was partially offset by the impact of rate concessions and the downward repricing on loans, reflecting the continued pressure on margins that the industry is experiencing.

Going forward, the level of the margin will depend on the volume of loan growth and as we know, the timing of that can be uncertain. Rate concessions, repricing, and the degree of gains on payoffs of loans will also have an impact on the margin going forward.

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 13.7% at the end of the year. And the tangible common equity to tangible assets increased to 10.99% at March 31, which is up from 10.58% at the end of the prior quarter and 9.85% a year ago. Also, our loan-to-deposit ratio improved during the quarter to 87% at the end of March.

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

Thank you Chris. Our loan pipeline is strong, and we are optimistic about the opportunities for continued loan growth in 2013, which also brings with it relationship deposits. We have a number of initiatives focused on growing different parts of our lending portfolios. We have renewed our focus on marketing HELOCs, and we've already seen the effects of this with our first-quarter application volume doubled compared to the first quarter of last year.

Last week, we relaunched our fractional tenants in common loan program in San Francisco, focusing both on new loans as well as refinancing existing TICs with expiring terms. In the first week, we've already seen strong demand in a market where the competitive environment is less intense. Wine money in Sonoma and Napa Counties, where we are seeing good opportunities in both wineries and wine-related industries and have new loan commitments of over $4 million in the first quarter.

Over the past few quarters, we have discussed our search for a CIO, chief information officer. We are proud to announce that we have hired Jim Burke, who has significant experience in the financial services industry, including BofA, Visa, and Schwab. As the Bank continues to grow, it is even more critical that our information processes and systems keep pace with our business needs and the needs of our customers. Jim has the right experience to support our growth and our product development, providing tangible value to our customers.

Overall, Bank of Marin's fundamentals are strong and our credit quality is solid. Given the aggressive lending environment we are operating in, we are relentless about keeping our existing relationships and building new ones as well as maintaining our high standards of credit quality.

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

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

Thanks, good morning. A question on just following up on your comments on the loan pipeline, I guess a strong Q4. And I just -- did perhaps some of that strength in the previous quarter cannibalize some growth in Q1? You talked about some pay downs, but how is that building, relative to Q2, or I guess so far in April, what you've seen?

It's always a question. Sometimes there is a desire to make sure you get things done in the end of the fourth quarter. Whether it cannibalized, I don't know. It's always good to fund deals sooner as opposed to later. We do have a very strong pipeline, which I am looking at right now, and even with the anticipated payoffs we have, just normal payoffs and things like that and refinances and things like that, we expect significant growth in the second quarter. And I can't give you exact numbers, but I can assure you that the growth in the second quarter will be (technical difficulty)

And Chris, just appreciate the table in there on the margin. If I were to exclude the payoffs, accretion, interest recoveries and reversals, it looks like your core margin was up 12 basis points. Is that correct?

Right. And like I said, we had the benefit of that fourth-quarter growth, which was really in the last few weeks of the year. So, we had that, and then that was somewhat offset by the repricings and the rate concession and actually better utilization of cash. Cash went down more than just our loan growth.

So maybe the margin strength in the quarter benefiting from those items. Going forward, you sort of allude to it's going to be a battle at this point from the pressures that are out there. How do you feel on margins?

We know that there will be pressure on the margin because of ongoing loan repricing, new loans coming on at lower rates, so it's really going to depend on that loan growth to maintain or expand the margin, and also gains on payoffs of loans because that contributed 9 basis points.

I'd add that every -- as I look at our pipeline, everything, everything is under pressure in terms of price. I think you hear that from anyone in the industry, and there's a lot of deals being done at extended margin -- extended terms and very low margins. And so the only way that manifests itself is in lower margin overall. It's the problem with the industry, there is nowhere to go. We are at 12 basis points on our cost of deposits. How much lower can you go? Not much (multiple speakers).

It's pretty rare to see the core margins going up, so I guess some of the benefits that you saw -- okay, fair enough. And then just one quick one on the compensation costs up sequentially. I don't know if that's just a normal seasonal adjustment for Q1, if you could provide any color on the comp line.

Sure. In the first quarter, we typically see a higher level of payroll taxes and 401(k) matching. So that line was up probably about $350,000 just due to those two items. But we did also have a reversal, just kind of a true-up of extended bonuses that offset that $350,000. That was about $160,000, so there were those things going on.

Okay, so this level --

(multiple speakers) that increase isn't as much as it shows here. It's probably more like $100,000.

Got it. Okay, thank you.

Jacque Chimera, KBW.

Good morning everyone. I wanted to touch base on the new deposit account that you have and what the interest level was that you were paying on the deposits that were reclassified.

Sure. It was an account called Checking 55, which was paying 1 basis point.

Okay.

And there's nothing -- I mean it was so low there was nowhere to go, so we just eliminated -- in the product, we just eliminated the interest payment for those.

Okay. So there shouldn't be any switching of accounts, or consumers basically won't even realize there was a difference essentially.

No. It's a matter of getting $0.03 or 0.

Okay, not much of a difference, no.

Not much of a difference.

It sounds like my savings account. And also, just looking to the -- you had the great cash deployment that helped the NIM in the quarter. Is this a level of cash that you're comfortable with, or would you be comfortable going lower from here?

I would say this is about the level where we expect to stay.

Okay. That was all I had.

The only thing I would add to that is that we have a pretty large investment portfolio, so that -- just having this cash level is fine, because our investment portfolio throws up a lot of cash flow, and as we have loan growth, we still have the ability to reduce that investment portfolio.

So in a more normalized environment when you have more of the securities in the loan book, you might keep a little bit higher cash balances?

I don't know about that.

I think we're (multiple speakers)

(multiple speakers)

We try not to have any too much excess cash and I think, right now, we are at a pretty good level.

Okay. Great, thank you. It was a really nice, clean quarter.

Thank you.

Timothy Coffey, FIG Partners.

Thanks, good morning everybody. I had a question about the reserve release. Was that a one-time event, or if things were to transpire like they did this quarter, could we see another reserve release at another point in time?

The reserve release primarily related to we received some appraisals, and the values were higher, so we were able to release the reserve. Whether that would happen going forward, I don't think we can say.

Okay, related to specific (multiple speakers) loans?

(multiple speakers) loans.

Right, I was wondering if this is -- if the exact same situation were to happen again. I mean would this occur again?

We hope the value of all the collateral goes up.

And it could. We still have specific reserves on the books, so theoretically --.

Theoretically, it could, but we don't see anything right now.

(multiple speakers) we don't necessarily expect it.

Okay. And then you talked about a little bit, at the beginning you talked about you working off the NIM compression. You've answered some of those questions here in the Q&A. I'm wondering. Are there three things that you're absolutely targeting to help win with that compression or give us insight of what the game plan is?

I think the compression is kind of a fact of life. And the reality is, in this environment, the way to make up for the compression is to increase your volume. And we are just really working hard to build the loan portfolio and grow it. Like I said, we were pretty flat the first quarter, but we do have a good pipeline and everybody is really focused on building volumes while maintaining credit quality, of course. But that's the best way to deal with margin compression.

You can't do anything about the rates. They are what they are. And so we're just working real hard to build relationships and build volume. And that's why we've instituted -- one of the good points there is that's why we've brought back kind of three of our programs to try and build loan volume in the areas where we haven't done much in the last three years. And that's HELOCs, where we had great success, good credit quality, so we put it -- we have a new program where -- at the branches where we are pushing the HELOC product. Like I said, we had double the volume of applications the first quarter versus last year.

The other one is the TICs. We've never had a default. We've had one renegotiation. We have never had a default in any of our TIC loans in San Francisco. That volume over the last year or so has gone from -- the totals have gone from $57 million down to $45 million. So if we can just maintain that, if we can build new volume to just stop the decline of the totals, that's going to help our margin too, because all the other loans that we grow will be additive as opposed to replacing the runoff of that. And I believe, because there is a relatively limited numbers -- number of banks that are in the TIC market, that we will be able to build that, instead of have it slide the way it is, start building volume there. And it's a great product. It's been extremely successful for us, so we would like to see some growth out of that.

And then we also -- there's another product for floating home loans, which is loans for houseboats in Sausalito, which one might say that's kind of a narrow market. It is, but there's only one financial institution that actually does lending there. We also have had great success with that over the years and so we are reinstituting that program. So those won't be huge contributors, but they'll be enough -- we believe they will be enough to offset the loan run off. And then so new loans will be additive.

Okay (multiple speakers) (inaudible). Was there anything else?

That's it.

I'm sorry. Did I cut you off?

No, that's fine, that's it.

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

Good morning Russ and Chris. First question -- do you guys have unfunded commitments in construction in C&I and relative to the end of the year 2012?

Yes. I think Chris is looking at the number. I think it's somewhere in the 48% utilization.

Utilization, yes.

Utilization is about --

We are going to see 4% utilization.

I'm sorry Chris. I missed that. What was that?

I think that whole unfunded commitments, utilization is about 48%, so about 52% is unfunded.

yes.

And that's been relatively stable, although maybe down a little bit. But we've always run close to 50% utilization of our unfunded commitments. Interestingly enough, we are starting to see some volume; we are starting to see some volume of construction activity, and we are seeing some opportunities in San Francisco and in Marin County for single-family type deals and the city for a couple of different projects. So, we are very cautious, obviously, about that, but that's good news also.

Yes, that's great. Is that I guess owner -- what is it? Not spec, it's presold probably, or is it both?

(multiple speakers). I think they are both, and I think they are spec but I think most of the spec stuff has got some -- it depends on what kind of project it is. If it's -- there's one project we are kind of in the middle of that's a condo project. It's not presold, but condos in the city are pretty strong right now, and so the ability to sell out the project is likely.

Go ahead Russ.

I was just going to say it's slow. There's not a lot of activity, but we are seeing certainly more. We've had this continued decline in our construction portfolio, which has been, frankly, a good thing in a tough environment. But going forward, we are starting to see some life there, so our construction portfolio was, at the end of the quarter, was $32 million -- $33 million. At the peak, it was $120 million. And most of it is because we got paid off as opposed to charged.

Yes, you bet. That's great.

Pretty careful there.

As far as kind of broadly speaking, so you see pretty good near-term opportunity on the construction lending front, even beyond the TIC lending. And is the production team pretty filled out there and ready to go and all that, or would you be looking to possibly add folks in that segment?

Construction?

Sure.

We are not adding people in construction. It's basically the team we had in place, and they have been kind of collection people up until recently. Now, they are out there making loans again, so that's good. They worked really hard with their clients and done a great job working through projects and getting them done, and refinance or paid off or whatever. And now we are starting to see some new life the other way, and that's great. But we haven't added people; we're not planning on adding. We can always change that but right now there's no plan to add people to construction.

Okay, great. Thanks for the color there. Then kind of more high-level, Russ, I know you probably keep pretty close tabs on what's going on in the Bay Area housing scene. Can you give us a little bit of color? What's your take on that? And do you have -- what do you think about the lack of inventory availability out there and how that might affect your business here through the end of the year potentially? I know I'm making a reach there as far as connecting that to your business. But what is your incentive?

There is a definite connection, and I think if you go back three or four years when we were talking about the Bay Area and residential housing, we said at the time it's going to take two or three years to kind of work through inventories.

The Bay Area has done better than other areas, particularly the closer into San Francisco you are, because there is no -- there's been no residential development. And that's why the TIC program is attractive to us, because residential housing in San Francisco is so tight. And we believe that the TICs, as they -- the history has shown, the performance has been very strong and they're value continued to grow. It didn't decline that much during the recession.

In Marin County, the growth has been incredible in terms of the prices. There was an article in the Marin Independent Journal last week about prices are up like 25%. It's unbelievable. And you're seeing that throughout the Bay Area. As you go farther north, it gets a little slower, but even Petaluma, where we have three branches, the prices have recovered very quickly because there is no inventory. And I think the areas where there's no inventory, you're going to see quick recovery, and the areas like Stockton and Sacramento and Merced, tons of inventory. It's going to take a lot longer to absorb that.

But where we -- our market area, San Francisco, Marin, Sonoma and even Napa Counties look pretty strong. And that's a good -- that's good news whether we're into home lending or not because of our HELOCs and because of -- which now we are seeing a lot of demand for because the prices are up and appraisals are higher and they have capacity in their homes to get a HELOC. So --

Do you feel like kind of going forward, do you feel like the market is going to be stymied this year by maybe a lack of lots, platted lots, and that the entitlement process is a multi-year process to reach you. How do you view that? Also, is there another opportunity there for you guys to maybe provide some development loans?

Number one, on the market being stymied, the -- at least in the North Bay, the development process is very tough. It's very expensive; it takes a long time; it costs a lot for permits. So the answer there is yes because it's just archaic the way the process goes.

Development loans. Where we had problems in the past, if you look back to the 2008, 2009, 2010, if you look at the charges we did take, and we didn't take very many, but the ones we did, they were all in land development for residential track type developments. So, it's likely we won't get involved in the future.

Where we had great success was the one-off deals, the high-end residential development of the one or two or three houses in a few lots in southern Marin, or in the TICs, as we mentioned, in the city, or even condo projects in San Francisco. Those types of things we think we will continue to look positively at. I just don't see us doing a big track development in Santa Rosa.

But A&D could go up on that -- the higher end viable -- there's some viability there.

Yes, there's no question. You look at places like Tiburon, Mill Valley, Belvedere, even Corte Madera and San Rafael, there's definitely development there. If you can get the permits and you can get something built, the chance of selling through on that is very good in this environment.

And the last question real quickly, do you know what was your quarter-end specific reserves and how much did it change from the end of 2012?

The reserves were $13.7 million at the end of the year, $13.4 million at the end of March.

Great. Thanks a lot. I'll step back.

Yes, most of that was the difference was the release of the specific reserves we spoke about earlier.

So $13.7 million in specific reserves at year-end, $13.4 million for the quarter.

No, no, no, that's total reserves.

Yes, sorry. What was the specific? Yes, thanks Chris.

It was about $2 million.

$2 million.

Yes.

Both at year-end and at the end of the quarter?

It down (multiple speakers)

(multiple speakers) hundred in total.

Down $100,000. Thanks.

$400,000.

$400,000.

Down $400,000. Thank you.

All right.

Don Worthington, Raymond James.

Good morning Russ and Chris. A couple of things. The Wealth Management fees were up linked-quarter. Just wondering if that's new accounts versus changes in the market.

Primarily new accounts. They've actually done very well in bringing in a number of new relationships. So, we are actually seeing some growth there, which is just additive. It's terrific.

Great. And I just wanted to clarify. You were talking about the 30 to 89 past dues. It sounds like a timing issue where those will either renew or I guess pay off and those balances will go down appreciably.

Yes. Most of them are just timing issues. There's one that we are in a negotiation, but we anticipate we will get that renegotiated and recapped out.

Okay. And I guess lastly, any outlook on M&A, either in general, buyer/seller expectations, or specifically where you might be looking for opportunity?

Sure. We continue to look for opportunities. And I think you're going to start seeing -- you're going to start seeing more of that because it's kind of anticipated over -- it's been anticipated. I think sellers' expectations and buyers' expectations have to get closer aligned. But I think the smaller banks, I think, in this year, you're probably going to see a few deals. We continue to be interested. We continue to talk to lots of different banks. But who knows if anything is going to -- we have certainly nothing to report at this point.

Okay. Thank you.

We have no further questions from the phone lines at this time.

Okay. Okay. That concludes our first-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. We'll talk to you again next quarter. Thank you.