Bank of Marin Bancorp (BMRC) 2013 Q2 法說會逐字稿

Thank you for joining us for Bank of Marin Bancorp's earnings call for the quarter ended June 30, 2013. 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 22, 2013.

Presenting this morning will be Russ Colombo, President and CEO, and Beth Reizman, Senior Vice President and Senior Credit Administrator. 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, July 22, 2013 and may contain forward-looking statements that involve risk 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. Welcome to the call. As you saw in our release this morning, our earnings this quarter were $3.1 million compared to $4.9 million in the first quarter. The earnings reflect the new specific reserve of $1.2 million related to a $4.8 million nonperforming land development loan. We'll give you more detail about this later in the call, but let me just say that this is an isolated situation and not a reflection of the portfolio quality overall.

While we are obviously disappointed in the results this quarter, we believe the underlying fundamentals of the Bank are very healthy and we have continued confidence in the strength of our loan portfolio. Earlier this month, we announced that we have entered into a definitive agreement to acquire NorCal Community Bancorp, parent company of Bank of Alameda. It has been a part of our long-term strategic plan to expand into the East Bay and this acquisition comes at a great time. It provides new lending opportunities and a deposit franchise which gives us a strong foothold in East Bay. Bank of Alameda has four offices, two community bank branches in Alameda, and two commercial loan offices located in Oakland and Emeryville. As of March 31 , total assets were $265 million with deposits of $229 million and loans of $171 million.

Given the increased regulations and competitive environment, this acquisition makes great strategic and financial sense. Assuming all necessary regulatory and shareholder approvals are received, our target is to close this transaction in the fourth quarter. You can find more detail about the acquisition on our website, including the press release and SEC filings.

Now, I'd like to walk you through some additional highlights of the quarter. We had net loan growth this quarter of $19.6 million, an increase of 1.8% from the last quarter. This was primarily driven by commercial real estate loans from new and existing relationships throughout the Bank. It should be noted that almost a third of these new commercial real estate loans are owner-occupied, not investment properties, behaving more like C&I loans.

While deposits remain relatively flat from last quarter, non-interest-bearing deposits continued to increase and comprised almost 41% of total deposits at the end of the quarter. Our costs of deposits in the second quarter was 11 basis points with our total cost of funds at 14 basis points.

Before I give you some further financial details, let me mention that while I cannot announce a new CFO today, we are getting very close. In the meantime, we are operating with an interim CFO, our former controller, who served until 2011 when he retired.

In regards to the detailed financials, net interest income totaled $14.3 million in the second quarter compared to $14.8 million in the prior quarter and is a reflection of the continued pressure on rates. The tax equivalent net interest margin was 4.3% compared to 4.48% for the prior quarter. We continue to see margin pressure, a fact of life in this rate environment.

The table on Page 3 of the release has a fair amount of detail which will help reconcile the margin change from the first quarter of 2013 to the second quarter.

While our efficiency ratio looks high this quarter at 60.7, it is adversely affected by several unusual items. Number one, the special reserve mentioned earlier, higher noninterest expenses in the form of legal fees relating to the acquisition as well as higher professional fees relating to hiring for several senior positions, including CFO.

From the capital standpoint, we continue to be very well capitalized with a total risk-based capital ratio of 14%. The tangible common equity to tangible assets was 11.1% at June 30, 2013.

We are also pleased to announce that we will be paying a dividend to our shareholders this quarter of $0.18 per share. This is the 33rd consecutive quarter we have paid a cash dividend.

As you may recall, we announced in February that our current Chief Credit Officer, Kevin Coonan, will be retiring in the fourth quarter of this year. With me on the call today I have Beth Reizman, Senior Vice President and Senior Credit Administrator. Beth has recently been designated by the board as the new Chief Credit Officer effective November 1. Beth has a long and successful career in commercial lending, including time with Crocker Bank and Bank of California. For the past 17 years, she has been with Bank of Marin starting off as a commercial lender and progressively taking on more responsibilities. Most recently Both served as our Commercial Banking Manager reporting directly to me since 2009. I am very pleased that Beth will move into the role of Chief Credit Officer, ensuring the smooth transition for our team and for our customers.

To replace Beth, we promoted Tim Myers in May to take on the role of Senior Vice President and Commercial Banking Manager. Tim has been the manager of our successful San Francisco Commercial Banking office from the opening in 2007.

With that, let me hand over to Beth -- let me hand it over to Beth for additional insights about our credit portfolio.

Thank you Russ. I am very much looking forward to taking on my new role towards the end of the year. And while it is a new role, I have been working very closely with our current chief credit officer for many years, living and breathing the disciplined credit culture of Bank of Marin.

Given the large provision this quarter, let me give you some additional detail regarding the $4.8 million land development loan that resulted in a $1.2 million specific reserve. This is a property that has been in development since 2005 with a developer who has been a customer for over 20 years. We have financed many successful projects with this borrower. The property had been in escrow three times with two different buyers. When it fell out of escrow and interest reserve was depleted in April, it prompted us to request a new appraisal. The appraiser indicated that it was very difficult to find comparable sales given the slow market conditions. The appraisal showed a significantly reduced value compared to the recent offers. We reacted appropriately to this new information and established the reserve. That said, the owner has continued to actively market the property and it is currently back in escrow. We don't anticipate that we will take a loss.

You may recall that we had another isolated incident in September of 2012 where we charged off $2.2 million for a commercial property. While each situation is different, we did not anticipate any loss on that loan either, and in fact it is current and paying as agreed.

Nonperforming loans totaled $18.5 million, or 1.69% of our loan portfolio at June 30, compared to $15.3 million or 1.43% at March 31. The increase in nonperforming loans from the prior quarter primarily relates to the land development loan mentioned previously. Also reflecting the new specific reserve, the allowance for loan losses increased to 1.32% of loans at June 30 from 1.25% at March 31.

Net charge-offs in the second quarter totaled $177,000 as compared to net recoveries of $3000 in the prior quarter. Classified loans continued to trend downward to $27.6 million at the end of the second quarter compared to $31.1 million at March 31.

Accruing loans past-due 30 to 89 days totaled $566,000 at June 30 as compared to $8.1 million at March 31. The change in nonperforming loans and past-due loans primarily reflects the land development loan that went on to nonaccrual status during the quarter.

Our loan pipeline is solid and we are optimistic about the opportunities for continued loan growth in the second half of 2013, which also brings with it relationship deposits. And further on, we are very encouraged by the opportunities in the East Bay with the addition of Bank of Alameda. We see great opportunity in that market, including C&I lending.

We can also provide an update on a couple of our current initiatives. We are seeing significant interest from consumers generated by our renewed focus on marketing home equity lines of credit. In the first six months of 2013, we have book loan commitments of $24 million, up 162% compared to the first six months of 2012.

This past quarter, we also relaunched our fractional tenants-in-common loan program in San Francisco. We are focusing on both new loans and refinancing existing TIC's with expiring terms that would otherwise roll off our books.

We are seeing strong demand in a market where the competitive environment is less intense. In the second quarter, we have received loan applications for $9 million of which $2.5 million is for clients new to the Bank.

Let me also share a couple of market-specific highlights. Our Commercial Banking office in San Francisco passed the major milestone of more than $100 million in loans outstanding at the end of June for the first time with balances at $103 million. While loan volumes at our Commercial Banking office in Santa Rosa have remained fairly flat this quarter, we have just hired a new senior vice president and regional manager to head up our team in this market. His name is Glen Stanley, a Santa Rosa resident with more than 34 years of banking experience, the last 17 years with Citibank. We are confident that this will accelerate the growth.

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

Thank you Beth. As mentioned, we are in the process of making several strategic new senior hires, including the recent higher in Santa Rosa and also in San Francisco as well as a new CFO. We are also organizing our team to handle the acquisition of Bank of Alameda and putting together a plan for the period up to the close of the transaction as well as the integration.

We are currently preparing the necessary regulatory applications with the FDIC and the California Department of Business Oversight, and the SEC. We have hired a project manager for the integration, and identified the lead individual in each of the various sub-teams.

Our credit team and our operations team have already met with our counterparts to get to know and understand their business practices. While we cannot actively manage any of these areas before the transaction closes, we are putting the necessary oversight in place.

I'll not go over the transaction in detail as we did in the call on July 1, but I will highlight just a couple of reasons why we think this is an outstanding opportunity for the Bank. It provides us with an entrance into the attractive East Bay market. The financial metrics are excellent with an expected 4% EPS accretion in 2014, and 8% in 2015, together with strong pro forma capital ratios.

Our two organizations have complementary business banking models with strong core deposit bases, 41% and 32% respectively. The transaction is a good use of our capital and will enhance Bank of Marin's long-term shareholder value.

To summarize this quarter, we experienced some challenging results in large part due to some unusual items but 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. The net loan growth that we are starting to see in the planned acquisition are both great news for our shareholders.

I want to thank you all for your time this morning, and we will now open it up to answer any of your questions.

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

Thanks. Good morning. A question on the expenses. So outside of these one-time events, what's a good run rate I guess sort of pre-Alameda? Do you think you return to that $9.5 million to $10 million per quarter run rate?

We don't give guidance on that. But I can tell you in the first -- second quarter, we had a couple of really significant numbers. We had legal fees of $128,000 related to the acquisition. We had some significant dollars that we spent for Professional Services and those were for hiring of a CFO for San Francisco, -- I mean for Santa Rosa, not for San Francisco yet. But -- and I can't -- because we don't share that information -- (multiple speakers)

If you ball up one time this quarter then, what does that amount to? If you were to say those are largely one-time, or elevated versus normal?

I'd say they're probably close to -- pretty close to $400,000 in expenses in the second quarter that are unusual.

Got you. Thank you. And then just on -- a couple of credit things have popped up. You alluded to the one in Q3. I guess these are, as you say, isolated. Is there any thought of sort of redoubling efforts or re-examining the process as these are sort of sizable hits to earnings? Granted I know you guys don't smooth earnings, but any thought on sort of the reserve policy, or anything on that?

Yes, I certainly understand what you're saying. We looked at -- this one in particular was difficult because it was in escrow. And so to justify a reserve when it was in escrow for an amount that was going to be more than adequate to repay us was a problem. How do you reserve against that? It fell out of escrow three times. It's actually back in escrow. They have made a nonrefundable deposit, but until that's sold, you can't count it. And so that's the problem.

This project in particular goes back to 2005. So it's not like we are out making land loans these days. This was one that we felt pretty good that was going to work through. And then the other one in the third quarter, same thing, of last year. There was no reason. It was performing. That one wasn't a development loan. That was an existing commercial real estate loan for a center over in here in the Bay Area. And all of a sudden we started having problems with it. It got -- went in default, borrowers having their own personal issues. It's all now -- so we actually had an appraisal and we had to take a charge. The borrower brought it back to current, so all the payments have been made. We still have it on nonaccrual, but it's -- a repayment has been made through June 30. So I'm not sure what you do beyond that when these kinds of situations occur. But I certainly understand. Can we start maybe taking reserves so that we don't have these bumps like this? But this one was not anticipated, I will tell you that.

Okay. There are truly unique items that, again, when you say isolated, there's no expectation that there's other related credits.

No. In fact, if you look at all of the issues we've had over the years, which are not many, but most of them came in land development, as is the case with most banks. But in total right now, we have a total of about $9 million of land development loans, of which some of them are already -- those are deals that have already gone on nonaccrual long ago. So we -- and the others are primarily in San Francisco. So, when you talk about land development in San Francisco, they are building condos or whatever they are building, it's just not a lot of money that's out there in land development. So, I really can't even say we should reserve against this one or this one. But I think we're in pretty good shape. These two situations were unique, not to say that something is not going to pop up in the future where somebody stops paying. But we are pretty close through our relationships and feel pretty good about the portfolio. And as you can see, the nonperforming and -- not so much nonperforming as classified continues to drop. So our portfolio is as clean as it has been in a number of years.

Okay. Thanks, Russ.

Okay, thanks.

Tim Coffey, FIG Partners.

Good morning Russ. If we could just stick on the land development loan one more time, the appraisal that you had done, how conservative was that?

Pretty darn conservative. I'll let Beth Reizman answer that, but it was pretty conservative because you're basing it on a market where there had been a lot of weakness.

The appraiser actually indicated they had a difficult time obtaining comparables because when the market's slow and you're trying to find comparable sales and there aren't any, it makes it very difficult to appraise the property. So it was definitely not an aggressive appraisal at all.

Thanks Beth. And would there be an expectation that when this property -- if the property stays in escrow and is sold, that there could be a gain?

We have taken a reserve. We have not taken a charge off.

Yes, but the reserve could be, I suppose if it was sold and it paid the loan off, we would take that reserve back in earnings. So it could because it's $1.2 million reserve that's sitting there. Technically it hasn't been charged off yet, and we frankly don't anticipate it. That's why we take a reserve as opposed to a charge.

Okay.

Based on the offer, we do not anticipate any loss.

Okay, thanks Beth. And then Russ, about the loan yields going forward, you saw some I think it was a 10 basis point compression quarter-over-quarter. Is that kind of what you're seeing in the market right now is continuing lower loan yields going forward?

Every one I've -- every bank I have looked at that has been reporting has shown continued compression. It's kind of a way of life every deal you look at. There's just -- there's so little loan demand that when there is an opportunity that the competition pushes prices down. So everything we are seeing is that yields are going down. We are at 430, gosh, you see banks in the 2s. I hope we don't get there. I don't think we are going there. But it's a tough market. Yields and margin compression continues.

Competition on pricing hasn't alleviated as the yield curve has started to steepen?

We haven't seen it yet.

Great, thanks. Those are all my questions.

Jacque Chimera, KBW.

Good morning Russ. I just want to make sure that I understood you correctly. This may actually may be a question for Beth. So as I look at the specific reserve of $1.2 million, so essentially what I am inferring from that is that absent that loan you would have actually potentially had a reverse provision in the quarter? Is that the right way to think about that?

Yes.

That's right.

So overall the credit in the remaining portfolio excluding this loan is doing exceptionally well.

That's correct.

Okay, I just want to make sure I am thinking about that properly.

Then my other question, the $128,000 that you mentioned in legal charges related to the acquisition, was that all of the merger-related charges or was there a few other scattered in other expense items?

There's other, because our accounting firm and there was some both from our -- primarily from our tax accountants because there is a deferred tax item that Bank of Alameda has that we had to get some work done. So those were the primary initial costs related to that.

Do you have kind of a roundabout estimate of what merger-related charges in the quarter would've been, or were?

What's that?

Just if I -- when I look at estimates, I always pull out the merger-related charges.

Right, oh, I see what you're saying, yes.

Yes, so I just wanted to see if you knew roundabouts what those were.

Yes, it's about, it's somewhere in $130,000 to $135,000 range of just accounting and legal. The accounting was a little bit -- not a lot, primarily it was legal. The other related charges like investment banking fees and things like that haven't been recognized at this point.

Okay, so those will be in future quarters?

Right, right.

And then I guess just lastly, the loan yields that are pressured, which is very understandable, how much of that is new loan development and how much of that is competition that's trying to take your borrowers away so you are fighting to keep the loans that you have?

It's a combination thereof. We are getting both. Everything we do -- obviously, we want to build the deals that we are doing, we are building big prepayment penalties into them to protect to a certain extent. But we are getting pressure both from our existing portfolio where we are getting competition and we are actually in some cases proactively going out and rewriting deals at lower prices just anticipating, in many respects anticipating that we are going to have competition on it. So it's kind of a combination.

The new ones are extremely competitive, and then there are really good relationships where we are trying to be as proactive as possible, not that we go out and just lower everybody's rates. But if we think something is vulnerable and the prepayment penalties are low, then we go out and try and work with our customer to make sure that we have -- we lock them in for a longer period of time. So, you're getting some of that too. It's across the portfolio.

And are borrowers receptive to the prepayment penalties? Do you ever get any pushback on that?

They always say --

(multiple speakers)

-- it's not like they have any prepayment penalties. But we say --

Yes.

-- of course they always are pushing back and they never want as big a fee as we do. But at these rates, you have to say that's the way it is. The problem is sometimes we are getting competition from banks that say no prepayment penalties, which is really difficult to compete with.

Yes. That's understandable. Okay. That was all I had. Thank you for the color.

Tim O'Brien, Sandler O'Neill.

Thanks. A question regarding the land credit. You alluded to the fact that it's fallen out of escrow three times. Is there some -- is it a special purpose property or something that has caused that? And what's the color behind why that's happened? It's obviously not a house, I'm assuming, because the market is hot there and there's no comp issues on housing right now.

It's a property that's contiguous to a hospital. And it's -- the property is to be used for medical-type facilities. So (multiple speakers)

What County is it in, Russ?

It's in southern California, unfortunately. It's a county -- it's a deal we did in 2005.

I thought about how I was going to ask that question. I thought, well, if I ask it county-wise, then, you know --

The reality is you are in the Bay Area. We haven't gone out of our market often. And this is a customer who is a Marin-based developer and has done some work. We actually finance some properties for them down -- it's actually down in the desert. And we had done successful projects for them in southern California. You had liquidity, and this one just kept going on and on and on, 2005, it's eight years in development. And he got into escrow, like I said, three times. He is in escrow again. He has received a nonrefundable deposit. We are kind of keeping our fingers crossed on this, but we had -- obviously we had to take a reserve on this, got an appraisal and what it is. (multiple speakers)

Yes, the $9 million you said total left in land and development, does that include this $4.8 million?

Yes. Yes, it does -- no, no, no. The $9 million is different than the $4.8 million.

Got it, okay.

In the $9 million, of the $9 million, just looking at the location, primarily 95% is -- 90% is in Marin or San Francisco.

Okay. Great. And then did you take any -- did you reverse any interest on the loan when you downgraded it?

Yes we did.

So that affected (multiple speakers)

About $17,000.

So not much. But I'm a little bit negative headwind on your margin.

YEs, a little hit on the margin. I'm confident. I talked to the borrower just last week, and he is working hard to move this. And I think we're going to have some positive development over the next quarter. Until it's done, it's not done, so that's why we took the real conservative approach and took the reserve. But it is what it is.

How long is the escrow lock-up typically on something like this?

This one is 90 days. All cash.

90 days. And was it something that occurred earlier in the quarter? I guess it's going to come off potentially or that deal will settle this quarter, the third quarter. Right? The 90 day lock-up?

Yes. That 90 days will occur in the third quarter. But it was closer to the end of the quarter. I think it was something end of sometime in June if we actually -- if this thing fell out of escrow.

And then last question -- go ahead, sorry Beth?

It actually went back into escrow last week.

When he fell out of escrow and the other one we got the reserve. We got the appraisal I think in June. Because it went out of -- it fell out of escrow. We ordered the appraisal I think in April and then we got the appraisal to us in June.

We'll all wait patiently and look forward to that close of the escrow.

Thank you Tim. So will I.

One other question. On the securities side of the business, you talked about a muni security that I guess it was booked at a discount that you saw some accelerated prepayment on. And that had a negative hit. Do you have other securities, munis, in that position? It's kind of a CFO curveball question. Sorry about that.

That one was called early. So we had to pay the premium for it, and so we had (multiple speakers)

Okay. Do have other securities in that position?

I don't think there's much at all. There is very little of that that could cause us to be called and have a negative hit on us.

Okay. That's it. Thanks.

Thank you.

(Operator Instructions). There are no questions at this time.

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